Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group Conference Call to discuss our Fourth 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 would like to introduce Daniel J. Crowley, the company’s President and Chief Executive Officer and James F. McCabe, Jr., Senior Vice President and Chief Financial Officer of Triumph Group, Inc. Go ahead, Mr. Crowley..

Thank you, Kevin and welcome everyone to our Q4 earnings call. To all joining us this morning, I hope that you and your families are healthy and safe and remain that way. Earlier this morning, we reported strong fourth quarter results for fiscal year 2020 in line with our expectations.

We successfully delivered positive free cash flow for the first time in 3 years on sales of $2.9 billion and increased earnings year-over-year. We exited cash consuming structures programs. The integration of our systems and aftermarket businesses expanded top and bottom lines.

And we continue to win new programs increasingly on the defense side to help offset commercial declines. All these accomplishments will benefit FY ‘21 and beyond. On Slide 3, I provide the big picture on Triumph Group. Our FY ‘20 results demonstrated the benefits of our multiyear transformation. We entered FY ‘21 with positive year-over-year momentum.

We are protecting our people and company during this historic pandemic and rapidly rightsizing Triumph to reflect the market reality. Though commercial demand is down, our OEM rates provide a safety net with strong defense opportunities. Actions resulting from our strategic review of structures are on track to finish in FY ‘21.

We are taking immediate and deep actions to conserve cash while maintaining our liquidity at over $550 million and are well positioned for this environment. To be clear, while we feel good about the quarter and full year, I want to acknowledge that COVID-19 has clearly impacted the markets in which Triumph operates especially commercial aviation.

Some of the sites that support the commercial market have seen 40% or more reductions in volume in our first quarter. In contrast, those support freight carriers in the military have been largely unaffected. As we manage through this crisis, our entire team has adopted three key imperatives that will guide us through to recovery.

The first one is keeping our people safe. The second is keeping our company safe by conserving cash. And the third is collaborating with our customers for mutual benefit. Coming off the strong Q4, I was looking forward to this earnings call and despite the large declines in commercial volume, I still am. The reasons for this are twofold.

First, we have taken actions to ensure that Triumph comes out of this period and are better positioned for the long-term and second, I am encouraged by the early signs of recovery we are seeing even as we size the business for the current realities. Let me now provide a few specifics on each of these imperatives.

Because of our essential status, the majority of our factories were operational during our fourth quarter through the early waves of the virus. Earlier this week, we reported that all 36 of our factories have returned to operational status after overcoming COVID-19 cases, customer plant closures, government mandates and supplier shortages.

As noted on Slide 4, keeping our people safe includes protecting the physical health and economic welfare of our employees. We have gone beyond adopting CDC recommended best practices you all know about.

Our factories quickly turned from building aircraft blankets to producing face coverings to augment the ones that we are able to purchase with over 100,000 now distributed across the company.

We expanded support programs for affected employees, ensuring that they have adequate access to care, increasing paid time off and providing hardship payments for employees impacted most by the crisis. As we continue to work to keep our factories open and support our customer demands, Triumph is doing our part to help others.

We are providing PPE to safeguard and support our local communities that were hit hard by the virus. From our Isle of Man employees who produced ventilator valves to our Red Oak, Texas, Atlanta, Mexicali and Hot Springs, Arkansas teams who made fabric masks, Triumph team members are pitching in.

And the Triumph Group Foundation is providing donations to organizations like Phil Abundance, Food Bank, Project Home, Operation Homefront, the Red Cross and the United Way. I am very proud of the way our team has stepped up as we have navigated the crisis their performance, sacrifice and perseverance have been inspiring.

With our factories operational, we are now beginning to return those salaried employees who have been working remotely to their workplace. These employees will return to the office over the next few months in phases, while continuing to leverage the flexibility of remote working and ensuring the safety of all of our employees.

Our second imperative keeping your company safe is about ensuring the company’s health by conserving cash and maintaining adequate liquidity. This is key given our expected cash use in the first half of the year due to the virus impacts and loss program close-outs.

As noted on Slide 5 before the pandemic, we forecasted strong revenue and earnings growth in fiscal year ‘21. The new fiscal year will now become both a rightsizing year as the commercial aviation industry contracts and a transition year to more favorable freighter and military contracts.

After recovery, we fully expect to continue our journey towards peer like EBITDA margins and free cash flow conversion. Benefiting from our belt tightening, we expect to gain enduring cost efficiencies as we downsize. For fiscal ‘21, we are taking aggressive measures on all fronts to contain cost besides the business accordingly.

As noted on Slide 6, we have many levers at our disposal to manage cost and preserve cash. We are treating every cost as variable and have scrubbed cost accounts and taken down our discretionary spend.

We implemented difficult workforce adjustments and austerity measures to ensure that we can weather this storm and come out stronger resulting in the furlough or layoff of almost half of our workforce. Additional cost reduction actions are detailed on the slide.

Our austerity measures started with over $120 million in near-term indirect cost savings to bridge the gap to recovery. These self-help efforts will reduce cash use and help Triumph avoid additional headcount reductions.

In addition, in partnership with our bank group, we recently amended our revolving credit facility to ensure that we have the required liquidity to sustain us through the recovery period. This provides us breathing room during the downturn.

Finally, to resolve its longtime use of cash, we remain on track to complete our disposition of our structures business this year with date certain and in some cases accelerated program exits. Having sold 12 of our original 47 operating companies, we are pursuing additional divestitures in FY ‘21 to reduce debt.

Jim will provide more color on this amendment and our overall cash and liquidity position shortly. Triumph also benefited from improved cash terms from our defense customers as part of the DoD’s commitment to support the extended supply chain.

And we are working with state and federal governments to access aviation industry and workforce financial support, where available. We are benefiting from $16 million of payroll tax deferrals. We will provide updates on these initiatives as they are adopted. A few specifics on how our customer collaboration is benefiting both Triumph and the OEMs.

As commercial OEMs and the airlines pause operations and reduce their demand forecast over the last 11 weeks, these relationships help to stay aligned on pipeline inventory and build rates and to slow our cash burn.

We are adjusting demand, internal capacity and supply chain signals quickly exiting legacy programs and reaching settlements with our OEM customers. Demand rates for many of our core platforms held and the select cases increased following production pauses.

MRO demand for freighters and military continue to be strong, while airline MRO remains low pending a broader return to flight. We recently received or confirmed purchase orders from Boeing commercial airplanes for the 767, 747, 737 Max, 787 and 777 to maintain economical production levels and protect our lower tier suppliers.

In several cases, these PO rates are higher than Boeing’s internal build rate as Boeing partners with suppliers to protect continuity of supply.

We also resolved several open claims with Boeing and deferred the majority of our advanced repayments out of fiscal year 2021, both of which will fit our planned cash, liquidity and covenant profile this year.

We reached agreement with Israel Aviation Industries to accelerate the transfer of the G280 wing program to IAI and Korean Aerospace Industries by July 2020. Only two completed wings remain to be delivered from Tulsa at which point the Tulsa factory will be closed. All design support and scheduled warranty obligations will be transferred to IAI.

We partnered with Gulfstream and reached agreement in principle to sell our G650/G700 wing business to Gulfstream which will conclude our obligations on the program. We also resolved open commercial issues and secured price increases on work we retain.

The transaction is expected to close in early fiscal year 2021and will help to reduce our debt and inventory levels. Taken together, these customer settlements improve our FY ‘21 cash profile by about $50 million, reduce planned program cash use and help us bridge through the downturn. This brings me back briefly to our fiscal 2020 results on Slide 7.

Triumph met or exceeded its full year revenue, adjusted earnings and free cash flow guidance. We previously announced the implementation of an enterprise quality system and processes. We achieved our best ever levels of safety and quality this quarter, which aided in the recertification of all our major factories to AS9100 or related standards.

We also successfully consolidated our heat transfer and interiors MRO businesses into new facilities. And as reported, we transitioned work on the E2 fuselage, G650 wing assembly and divested our Nashville large structures business in FY ‘20 as part of our structures strategic review.

Bottom line, our transformation efforts enabled our strong fiscal 2020 performance and Triumph entered the crisis with positive momentum, which will help us overcome the commercial downturn. Moving on, I summarize the current commercial market conditions on Slide 8.

Given the grounding of most of the commercial aviation fleet and reductions in air travel and OEM production rates, we expect a reduction of approximately 30% to 40% in commercial OEM production for the balance of the calendar year and reduced commercial MRO activities.

We are encouraged by the early return of domestic travel in some of the markets we serve and inflection points on aircraft return to service. MRO orders for engine and accessory parts from freight providers, UPS, FedEx and Atlas have continued to come in, providing critical base at sites that have lost airline MRO volume.

While we are faced with declining commercial demand in the first half of fiscal ‘21, we have engaged other commercial and military customers to pull forward new orders as we collectively work towards recovery. Triumph is providing essential services for their military, cargo and medical transport missions.

An example is our Park City, Utah and West Hartford, Connecticut plants, where military demand has allowed them to maintain 90% or more of prior year revenue. To be clear in the first half of fiscal ‘21, we anticipate higher uses of cash to fund planned exits of the structures programs, primarily 747 and G280.

But these uses of cash have a date certain and near-term end during fiscal ‘21 and are accommodated within our credit facilities.

But the question is when do we expect to see a commercial recovery? Well, it’s too early to know with certainty as noted on Slide 9 we are tracking the leading indicators of recovery, including airline reservations and daily flights, both of which are increasing week over week.

Aircraft return to service, utilization and load factors, the latter of which is up 100% in the last month.

Airline liquidity and aircraft orders and acceptance rates, OEM build rates and MRO demand and new defense opportunities and payment terms, the last trend is especially important to Triumph systems and support as 35% of the revenue comes from defense applications.

While preliminary, the trends are positive and support our forecast for recovery in our second half of fiscal ‘21.

We have adopted conservative production and MRO rate assumptions to size our workforce and supply chain demand to limit working capital expenses, while retaining the ability to increase output if recovery occurs more quickly than anticipated.

Conversely, we pressure tested our forecast for the downside cases and can quickly make further reductions in capacity and cost if needed. As with most of our peers, we will defer providing financial guidance until we see follow-through on these initial signs of recovery.

However, we do expect to see increasing revenue, free cash flow and earnings in the second half of fiscal ‘21 as airlines return to service and we finished program closeouts and structures in the first half of the year. On Slide 10, the diversity of Triumph’s platform content comes through.

We see continued support for freighter and tanker versions of the 767. We have content on the new military programs in development and we support several military upgrade programs, especially for helicopters. We have key roles on next-gen commercial aircraft and cargo and military MRO demand remains strong.

Last, our IP and systems gives us an edge in both retaining and gaining work. Overall, Triumph continues to benefit from strong backlog despite the softness in commercial demand. We are continuing to win new work and take advantage of our customer and platform diversity.

On Slide 11, in fiscal ‘20, Triumph secured 76% of all competitive bids we pursued. The wins are across a broad set of customers and platforms and include fleet upgrades, new technology insertion, and sales to independent MRO providers.

Military MRO remains healthy and we are working to accelerate our successful military MRO programs, including parts for the V22, FA18 and F15. As noted on Slide 12, Triumph was awarded the design and build of distributed hydraulic system on the Bell and Victus and designed to build of a landing gear system on another future vertical lift aircraft.

Triumph is well-positioned for this program with substantial engineered product and systems content on all four competing platforms. Other wins in the quarter include multiyear awards for the F-35 hydraulic utility actuation valves and the CH-47 transmission air oil coolers.

As aircraft retirements accelerate during the COVID pandemic, the strategic value of our partnership with Air France KLM has increased. This partnership provides access to first maintenance cycles of new aircraft platforms not normally serviced until the second or third maintenance cycles.

Last, Triumph continues to develop differentiating IP and manufacturing processes for thermoplastics, including thermoplastic forming, welding and [indiscernible] solutions. In the quarter, we delivered a thermoplastic wing rib for the Airbus Wing of Tomorrow program.

Overall, our backlog remains stable at $3.2 billion and the diversity of our customers programs and products, remains key to working through the industry in market downturn. On Slide 13, I profile our core systems and support businesses.

During the fourth quarter, we completed the combination of our legacy integrated systems and product support businesses to accelerate our aftermarket growth rate, while simplifying our structure for lower cost.

Systems and support is a $1.4 billion sales business with a reverse mix of end product and consistent allocation of both OEM production and MRO aftermarket with EBITDA margins higher for MRO. Systems and support is also a solid cash generating business unit.

In the near-term due to COVID-19, systems support this forecast to experience between the 30% to 35% reduction in commercial OEM production and about a 45% to 55% reduction in MRO activity. We are adjusting capacity accordingly.

While our small interiors MRO business has seen a significant drop, we have less exposure to heavy maintenance and consumable aftermarket demand than other firms and we focus on accessories and structural repairs, which continue to support freighter, medical and defense missions.

While we work through lower narrow-body build rates and commercial MRO declines in fiscal ‘21 longer term, our core programs and systems and support will enable revenues to return to fiscal ‘20 levels with improved margins up to previous year targets of 19% over the next 3 to 4 years.

Let me now turn to our aerospace structures business which continued its improved performance through fiscal ‘20. As shown on Slide 14 structures is a $1.6 billion revenue business, with planned declines in revenue from divestitures and sunsetting programs, such as the 747, G280 and G550.

EBITDA margins expanded in fiscal 2020 as prior program volatility has largely been eliminated. We assume step-downs in Interiors revenue from 737 Max production rate reductions of 30% to 35%. Interiors factory in Mexicali has resumed production, but is not expected to return to prior rates until about 2022.

We have aggressively reduced headcount in the interim. As reported, we made strong progress executing our planned exit legacy programs in the aerospace structures business, a key initiative that will benefit Triumph in fiscal ‘21 and beyond.

Firm military end-market and 767 program rates coupled with the cost reduction initiatives, allows structures to target consistent EBITDA margins in fiscal ‘21. Longer term, our actions to rightsize the operations provide opportunity to improve margins further.

Tooling is now in place to start production of the T-7A Red Hawk EMD aircraft, for which we are contracted to build the wing and empennage. Our Red Oak, Texas and Millersville, Georgia plants were both down selected by Lockheed Martin for composite manufacturing work on the F-35.

These programs will shift the backlog of structures from its historical commercial emphasis to defense work. On Page 15, I provide a recap of the progress we made on our structures strategic review.

As reported yesterday, we have exited most of our build-to-print contract manufacturing factories and sold 1 of our 4 remaining major structural assembly plants with the divestiture of Nashville last year.

Fiscal ‘20 also marked the exit of our loss-making structures programs, including the Bombardier Global 7500 wing, G650 wing and the Embraer E2 fuselage. All were successfully transferred to their OEM owners for strategic buyers.

We remain on track to complete the exit at the other three major structural assembly plants this year, Tulsa, Oklahoma, Hawthorne, California and Grand Prairie, Texas.

Transfer of our profitable 767 program from Grand Prairie, Texas to our lower cost Stuart, Florida facility will be completed this calendar year and fiscal ‘21 will be the last year of such transitions and associated cash use. In summary, Triumph delivered positive momentum in Q4 and positive free cash flow for the first time in 3 years.

The actions we have taken both before and since the crisis, including the divestiture of non-core businesses, transitioning of sunsetting programs, cost reduction and the increase in military programs have all resulted in positive margin trends, have reduced our cash use so we can manage through this painful downturn.

As we manage through to recovery, we are focused on the safety of our employees, have the required liquidity and cash position and are collaborating with our customers. We will size the business to the new commercial realities while growing our business in healthier markets.

We appreciate the partnerships of our customers and lenders to weather the storm and to come out as a stronger company. We anticipate entering our fiscal ‘22 next May with the tighter cost structure and in our future state portfolio. With that, Jim will now take us through the financial results for the quarter and the year.

Jim?.

Thanks, Dan and good morning everyone. We are experiencing unprecedented times as a result of this crisis. Our nimble and lean structure as well as our culture of continuous improvement and cost reduction positioned us well to face these challenging market conditions.

As we increase our focus on protecting our cash and liquidity, we have already taken a number of actions over the past few years to strengthen the company, including exiting underperforming programs and businesses and improving free cash flow from a use of over $200 million in fiscal 2019 to positive cash flow of over $50 million in FY ‘20.

Our fourth quarter net sales, EPS and cash results all met or exceeded our expectations despite the overarching market headwinds. I am proud of the efforts of our teams to deliver on their commitments and overcome these challenges in these uncertain times. 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 16, you will find our consolidated results for the quarter. Organic net sales decreased 6% over the prior year quarter. Both business units experienced organic declines in part due to the 737 Max production cuts.

Adjusted operating income was $44 million this quarter and our adjusted operating margin was 6%, down about 100 basis points from last year’s fourth quarter due to the reduced volumes. Turning to Slide 17, you will find our fiscal 2020 results.

On an organic basis, our net sales increased 5% year-over-year driven by production rate increases on the 787 program and military platform volumes. While the military market presents opportunities, the recent 787 trends are not expected to continue given the current market environment and updated build rates.

Our full year adjusted operating income was $209 million representing an adjusted operating margin of 7%, which is about 225 basis point increase over the prior year. This improvement was driven by operational efficiencies instituted over the last few years.

On Slide 18, you can see that over the last 3 years we have improved EBITDA and free cash flow by exiting and divesting non-core and cash using programs and businesses. We entered this crisis with positive momentum, which will help us navigate through it and exit even stronger.

With respect to the segment results, on Slide 19 FY ‘20 fourth quarter organic net sales in our systems and support segment decreased slightly compared to the prior year as aftermarket opportunities helped to offset the known headwinds for the 737 Max program.

Adjusted operating margins for systems and support were down slightly due to decreased organic sales. The margin reflected a 2% increase in MRO and aftermarket sales in the quarter relative to the prior year, improved operational efficiencies and cost initiatives partially offset by decreased organic sales.

Goodwill from the legacy product support reporting unit was deemed to be impaired at year end due to the sharp declines in expectations around MRO over the near-term and the uncertainty on the timing and pace of recovery resulting in a non-cash charge of $66 million in the quarter.

Restructuring actions impacted the segment’s margins this quarter by approximately 180 basis points. These restructuring costs will help to keep margins near fiscal 2020 levels in fiscal ‘21 despite the expected revenue declines.

Summarized on Slide 20, fourth quarter organic net sales for our aerospace structures segment were down 11% due to transition programs partially offset by increases in legacy programs.

Aerospace structures operating margins were unfavorably impacted by $7.7 million from changes in estimates associated with the effects of COVID-19 related closures and production rate reductions.

Excluding these effects, operating margin would have increased to 170 basis points, reflecting 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 recently completed primary manufacturing of the 747 program at one of two sites and are on track to complete production at the end of the calendar year. Turning to Slide 21, our $45 million of cash generation in the fourth quarter was in line with our expectations.

This is a $53 million improvement over the same period last year and reflects our portfolio and program changes, cost reduction actions and working capital management across our businesses. We remain focused on aggressively managing our cash and liquidity. Capital expenditures were $12 million in the quarter.

We reduced working capital by approximately $55 million in the quarter from strong cash collections and cash management despite cash headwinds of $80 million from the sunsetting G280 program. On Slide 22 is the summary of our net debt liquidity. Our net debt at the end of the quarter was approximately $1.3 billion.

Our combined cash and availability was strong at about $568 million and we are in compliance with all our financial covenants. Recently, we amended our revolving credit facility to ensure access to our liquidity and maintain covenant compliance as we weather the crisis and expected cash headwinds associated with the program exits.

Also in May, we agreed with a key customer to reduce the liquidation of advances to $40 million during fiscal ‘21. We are not providing financial guidance for fiscal ‘21 at this time due to the uncertainty around the ultimate impact of COVID-19 on the global market and economic conditions.

Unrelated to COVDI-19, the company currently expects cash outflows related to the completion of certain previously announced sunsetting programs within aerospace structures, including approximately $47 million for the completion of the G280 work statement by our second quarter and $35 million for the completion and exit of the 747 program.

For FY ‘20, we delivered on our commitments to achieve year-over-year improvements in organic revenue, free cash flow and earnings. The austerity measures we have taken will help us to stabilize margins during the downturn as we pivot to military and expanded MRO opportunities, specifically in systems and support.

We believe we have adequate liquidity based on current market estimates and continue to make difficult, but necessary decisions to eliminate costs and will consider additional sources of liquidity as necessary. Expected divestitures in aerospace structures will reduce our debt and drive meaningful increases in shareholder value.

Now, I will turn the call back to Dan.

Dan?.

Thanks, Jim. I want to leave today’s call with these takeaways. Triumph entered this unprecedented aviation crisis with positive momentum. Our Q4 and fiscal ‘20 results demonstrate that we are realizing the benefits of our restructuring and transformation efforts. We are protecting our people and the company during this historic pandemic.

We continue to act with velocity to right-size the operations to reflect the market reality and position for the future state of the company.

Our strategic actions for aerospace structures are on track to be complete this fiscal year and firm production estimates and our ability to win and expand military opportunities will provide stability to aid in the company’s recovery coming out of the COVID-19 crisis.

We have a solid cash position with many levers at our disposal and I remain confident in Triumph’s ability to compete, win and deliver value creation over the long-term. We are now happy to take any questions..

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

Hi, good morning..

Good morning..

Thank you for all of that color, Dan. I mean, that’s you have obviously accomplished a lot. It seems like you just gotten into the red zone here and they extended the field another 50 yards. And so I wanted to ask you a near-term and a long-term question.

First from the near-term perspective, what is your aftermarket business’ exposure to USM?.

To use serviceable material?.

Yes, use serviceable..

Yes. It’s not that high. We have – a lot of our aftermarket is uses the OEM parts either that we made or we buy from companies like Honeywell and there is a strong demand from some customers to go with, I’ll call it, OEM quality parts rather than use serviceable material.

Now having said that, we are starting to see opportunities like on structural repair to do more USM and we bought some notable inventories, because in this current budget environment, if someone can get a thrust reverser overall for less money through the use of USM.

So, we are starting to increase our use of it, but we are not saying I will call it cannibalization of our core MRO markets because of USM..

Okay.

And then from a longer term perspective with all the puts and takes and maybe this is for Jim, is fiscal ‘22 or fiscal ‘23 your next cash flow positive year and I am kind of thinking that Boeing and Airbus stay at the rates they have targeted, so Max at 31, 87 at 7 and the Airbus rates we have talked about? And then if you could just also give us some color on that big pension payment that I think is in the $80 million neighborhood Jim in fiscal ‘22.

So how do we think about sort of the next cash flow positive year?.

Yes, sure. I mean, we came out – the first cash flow positive year was last year. I am very proud of that and it’s so easy to forget that, but there is a lot of hard work that went into that. So, we ended this year coming off a cash flow positive year. We hit the headwinds.

We are going to be a cash user at least in the first half of the year and we are optimistic about recovery in the second half although we are not ready to give guidance at this point..

Right..

Certainly. If the OEM schedules are out there, we should be back to being cash positive very soon and FY ‘22 is not out of the question although we are not giving guidance at this point. Certainly, there is another factor which is the pension funding.

Fortunately, we did some pre-funding with the discretionary contribution last December of about $50 million and that enable us to really not have any significant pension payments due in the next 12 months, but after that, there is a forecast and it’s in our presentation in the back, I think it’s around $80 million of funding required in the following year..

Right..

That can change as returns on assets changes and interest rates change, but there is some cash funding headwinds coming up. We have been planning for those. It’s a little higher than we originally planned for, but it’s manageable with our financing. So the pension, the GAAP liability went up, but the funding is what’s more important as you know.

So we will continue to watch that. The near-term, the current year we are okay with the pension and OPEB funding.

I think it’s only a total of about $7 million and next year, we hope that we are going to see returns in the market and that we are going to see interest rates improve in our favor, but we do have $80 million of cash funding coming up the following year. We can still be cash positive despite that with a market recovery..

Okay.

So, all baked in, it sounds like the real year to look for normal is fiscal ‘23?.

That’s a fair assumption..

Okay. Thank you, guys..

Thank you..

Our next question comes from Sheila Kahyaoglu with Jefferies..

Good morning, Dan and Jim and thank you again for that comprehensive deck. That was super helpful.

Dan, I think you slipped in or Jim it was you, you talked about systems being flat margins year-on-year potentially despite the expected decline, I am guessing largely in the first half, how do we think about profitability of that business in the free cash flow conversion?.

So, there is a number of factors that enable that business to adjust quickly. Overall, as a company, remember that we have over half of our cost is variable, it’s material. So, we are able to adjust quickly to downturns and maintain our percentage of cost of sales and that’s what our internal targets have been.

We have been driving people to say maintain your cost as a percentage of your sales.

And you have got all these levers to pull including working with the supply chain and with customers, but we do have opportunities for pricing coming up in the future that helps and we also have a high military content, including military spares in that business which is helpful to maintain margins through the downturn..

Okay, that’s helpful color.

And then just a follow-up on Slide 15 where we talked about pending fiscal 21 divestitures can you go over the cash puts and takes for programs such as the G280 and 747 and whether that's 21 or the outer years?.

Sure. So in FY ‘21 the current year the G280 program and we just announced our agreement to exit that is $47 million of cash use as expected and we'll be shipping the last units in July and I think we will be closing the factory in September of this year.

In terms of the 747 our estimate for the cash to complete this year is $35 million and that's in the calendar year..

And that's it going forward in terms of program forward losses for fiscal ‘21 through 2023?.

That's right. I think there is maybe 5 million of close out that’s already accrued for the facilities for the 47 but that's it for the program this year..

Okay. Thank you..

Thank you..

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

Hey good morning. It’s Gavin on for Noah..

Morning, Gavin..

Morning..

You mentioned that pricing opportunities and being a little margins in both segments and can you just flush that out a little bit on how the pricing works if you have further contractual step downs I know you mentioned some, positive pricing in the press release yesterday as well just how that works on the higher volume versus lower margin there is higher versus lower volume and price increases or decreases? Thanks..

Sure.

Many of our contracts particularly in systems have been on long term agreements, LTAs for a decade or more and some came in a loss position from prior acquisitions like a GE Smith which is our Yakima site and so those are coming up for renewal in the next few years and we're in discussions with our customers about what's the market price for these products many of which are proprietary there's always an affordability mandate so we work with customers to figure out if we can do things so in terms of sourcing a redesign but the key is to improve margins with each LTA renegotiation some new contracts.

For example the Airbus A320 XLR we produce the legacy parts.

But we're awarded the new XLR parts and we redesigned them added more functionality reduced weight and improved profitability over the legacy so sometimes even an iteration of the design for the next gen provides a pricing reset opportunity or margin reset opportunity so we are going to use both of those expiring LTAs as well as new bids that we win to look to continue to improve margins out of systems and support..

How much of a headwind there has been over the past years I mean do have you have positive pricing in aftermarket?.

We have combining our systems and aftermarket business we found a lot of low hanging fruit I mentioned before we have these FAA part 145 repair centers and many of them that were captive to OEM shops and systems they really worn out exploiting their capability in extending their MROs.

So in Q4 part of our margin improvement and systems and support was just improving our go to market plans and the speed of turns inventory turns at the repair centers within integrated system so there are short term headwinds related to commercial aftermarket but defense continues to be strong I mentioned West Hartford they're upgrading electronic engine controls very quickly we did a recent press release on that.

So it’s about those two offsetting, military offsetting commercial in the short term but that the combination of those two businesses is going to help both..

Got it.

And just a quick clarification does your 30% to 35% decline OE production include Max?.

It does.

One of the nice things about Max and we've been in lockstep with Boeing is that they have allowed us to produce at much higher rates than their building in their factories so we are all very excited about yesterday's announcement the Max has returned to production the Boeing company has invested in supply chain they are going to take additional deliveries at rates that are 15% to 20% range, which is certainly higher than what they are producing today and each factory has a different inventory position, but on average, we will be producing with an ice, what I call sustaining production rate to keep our factories going and that includes interiors.

At one point, we had 3,000 people building blankets at the ship set, at 40 ship sets a month sort of rate.

So, when that rate dropped and then was paused, that was obviously a big impact, but we have reduced our staffing from 3,000 down to about 1,100 that gives you a sense for how quickly we have jumped on the rightsizing and will be efficient at that level and support Boeing’s needs and then as their rates tick up over the next 18 months, we will get back to where we want to be on volume..

Great, thank you..

Thank you..

Our next question comes from Seth Seifman with JPMorgan..

Thanks very much and good morning, guys..

Good morning..

Question just first of all real quick clarification when you say holding margins in each of the two segments, is that at the full year EBITDA for full year fiscal ‘20 or more fourth quarter?.

In FY ‘20, so full year is what we are targeting..

Okay, got it.

And then based on the, I guess market forecasts you gave and the mix of businesses for systems and support, it would seem like looking for something in the billionish range of sales, if those market forecast holds at billion plus?.

Understand the question, but we are not giving guidance at this point. I think you have to look at each of the programs and make your own determination. Going forward, we are going to see as soon as we get some clarity we are going to give guidance. We just don’t have it right now..

Okay.

And then maybe Dan, when you thought about combining the product support and integrated systems businesses, how did your eventual strategic plans for either Triumph, the company plans that in terms of eventual longer term strategic outcomes for Triumph when you thought about marrying up MRO with the more product oriented business?.

Yes, great question. And certainly, there is different ways we could have played that. We could have got out of third-party maintenance. There was interest at one point and others acquiring that business.

We concluded that there was upside to both businesses by combining it that we could do more MRO of products that we were the OEM for out of our Triumph product support business.

And we could expand the volume of aftermarket from the OEM side by learning how the third-party business goes to market, they are hungry, they are very fast moving, they operate with limited backlog. So they have got a hunt what they kill and move quickly.

They have more direct relationships instead of receiving purchase orders as a follow-on to what they have built originally, the third-party maintenance team. They are out there with FedEx and UPS and Atlas and all those customers, American and Delta everyday. So, the customer relationships played into it.

Right now, it’s temporarily decreased demand and third-party maintenance, but we still believe it’s the right thing to do strategically and we have combined the management teams and all the financial reporting now into one team..

Okay, thank you very much..

Thank you..

Our next question comes from David Strauss with Barclays..

Thanks. Good morning..

Good morning..

Wanted to ask about this agreement with Boeing where you said you have reached economic goal production levels, is that what you are reflecting when you callout expected production declines of 30% to 35%?.

So, yes, what volume did is they came out with rate guidance and they did it on their earnings call across all their platforms. So, 767 was maintained at 3 a month and that’s good for us, because we have content on both structures and systems for freighter and tanker variants. They provided slightly lower guidance for 787 on the order of 8 to 10.

We are not going to adopt the high end of those ranges. We will always shoot low and then if there is upside then that will benefit from that. We got guidance from Airbus for about 40 on the narrow body no we're using a de-rated number from that again for conservatism on the 737.

As I mentioned rates between 15 and 20 per month is what we're planning on so it is it is down to your point from no pre COVID but it's still enough for us to keep flow going through the factory and sustain to lower to your suppliers so and they were still doing 1 month on 747 to run that out then we are working with them on 777 and 777x transition and I will let Boeing speak to their the details there but overall we're lockstep with them it is lower there's no denying that its over the pre COVID its all about managing through the downturn and getting back to higher rates overtime and we're making permanent reductions in cost consistent with that demand reduction so we can maintain the margins as Sheila inquired about..

Okay.

Just following up on that I thought you said Dan that the rates that you agreed to with Boeing or above their own internal rates is that correct or did I misinterpret that?.

Yes I mean when I say they are internal rates I mean they are delivery rates of Aircraft out the door and that is that's public information in terms of what they're shipping but they've made a decision to not only for Triumph but for other suppliers to trigger purchase orders that are in excess of their internal bill it’s a phasing issue.

If lots of suppliers went idle during the pause that they had at future sound factories or Charleston then there's restart cost and sometimes a loss of critical supply and so they I think smartly said hey we are going to keep these suppliers running at higher rates and will burn it off over time once they come out..

Okay.

Jim, a question for you obviously you have the program close-out costs are going to be impacting cash limits in the first half but could you give us some help on how you think kind of underlying working capital layers what it's going to look like as rates come down here how much of a potential tailwind kind of underlying working capital could be to cash flow?.

Yes. So in the first half it’s a headwind and the reason is that we have to adjust our supply base in our POs.

So there is a lag there and we are still receiving material some cases in excess of what demand is from our customer but we are aggressively adjusting that so in the second half it will become a tailwind which should offset the headwinds in the first half it is important because we have a lot of working capital and we are focused on managing it but it’s a good point besides the close outs to the programs and advance liquidations we are having a working capital swing we use in the first half of the year and looking forward to generating cash from working capital reductions in the second half..

Okay thanks very much..

Thank you..

Our next question comes from Ken Herbert with Canaccord..

Hi good morning Dan and Jim..

Morning..

Morning..

I just wanted to ask you on your on site I think it's site 8 for your MRO activity you guided sort of down 70% through, at least for transports or broader activity through the looks like through the first second quarter, I guess but then a sort of a full year down call it 45% are you which implies some really nice sequential improvement as you go through the year are you seeing sort of quote and maybe booking activity to support that kind of sequential increase as we go through the rest of calendar ‘20?.

So first of all we give these numbers on our forecast in our fiscal year so we expect to see MRO recovery start picking up in our Q3 Q4.

So that's October and on so October through March not always not fully in the calendar year as you said but yes the short term commercial MRO is definitely down yes we have seen fewer orders and people like Delta Tech ops even [indiscernible] and all that are also down, but we also as I mentioned because we're not doing have you made some consumables we're still seeing some residual engine MRO work come through that was already in flow so our factories didn't go idle but we have had to reduce staffing that some of our component and interiors plants, so consistent with the sort-term demand.

So, for us it’s mostly a first half of the year forecast and we will update all the analyst investors at each quarter as to how that’s sticking up..

And is there a way to think about your aftermarket exposure sort of maybe engine by component or another broad categories or how should we think about that business?.

No, let us take that for action. We – today as we – as I am canvassing all of our plants in my mind, thrust reversers, we are a leading provider. So, cell parts for the pylons, we do a lot in that area. We do some amount of structural repair. And then on the engines, we are doing fuel pumps, generators and air cycle equipment.

So, we are – we have a lot of engine consumable parts that they are expensive to overhaul. Less of the, I’ll call it filters and the clips and brackets type parts, but more of the parts that cost tens of thousands overall rather than hundreds of thousands. So, we do have a lot of engine content.

I think we can come back on a future call and maybe break it down by part of the aircraft. But I would say it’s weighted towards engines and the cells followed by structures and then other systems on the aircraft like actuators and hydraulics..

Great. Thank you very much..

You bet..

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

Thank you very much. So, you indicated that you are going to sell the G657 under wing business to Gulfstream and that will resolve issues and secure price hikes on work and help you reduce debt and inventory.

So, what’s the cash impact of that and when should we expect the benefits?.

So, we are going to – we reached agreement with them in principle, the senior levels and now they are just doing their due diligence to complete the inventory true-up between Triumph and Gulfstream. We expect that to close early in fiscal ‘21 hopefully in the first quarter. There is both the cash benefit and an inventory relief benefit.

I don’t think we are going to disclose it on today’s call the dollar amounts. We are going to wait till we complete the agreement with them and all of the verification of the inventory levels, but then we will provide follow-up information on it. But it’s a good deal for both parties.

You all know we used to have two factories that built the 650 wing in Nashville and Tulsa and we transitioned both of those back to Savannah. And then secondly, we kept this supply chain contract and design services and warranty liabilities.

And in the second transaction we are doing now, they will take those up and that’s consistent with Gulfstream’s long-term supply chain strategy and it’s consistent with where Triumph is going. Our value-added was lower now that we didn’t produce the wing.

It was a profitable program for us, but we think in the long-term, it’s better to reposition that with Gulfstream and use those proceeds for corporate uses..

Great.

And so you have done a good job of kind of getting rid of the leader programs, maybe tell us about the remaining structures business, I guess you are going to keep the interiors, but of the rest, what is the rest that you are still going to sell and what kind of interest I think is obviously valuations in those kind of businesses are down?.

So, let me answer that by saying what’s left and I am not going to disclose side by side what we are taking to market, but I will describe what’s left. So, we have got to close out of Tulsa, as Jim mentioned, on G280 that will be shutdown, that’s not going to be divested.

Then, we have our Stuart, Florida plant that makes the 767 large structures, our Red Oak, Texas plant, which makes both composites and military structures, the Arlington headquarters, where we do design and the supply chain support for all of our structures and then we have got two legacy 747 plants in Grand Prairie, Texas and Hawthorne.

Those two will be shutdown as we finish 747 and we have two composites manufacturing facilities in Georgia and in Thailand.

So, a subset of those plants are being marketed through Lazard, as mentioned, they are fairly far along in the process and we expect to have updates in our Q1 call on the progress there, but in terms of interest what we've seen is because these are strategic assets that only come up for sale maybe every 10 years people look beyond the short term impact of COVID and if the rates are being maintained and you're making a long term bet on either access to U.S.

market or particular set of technologies we are still having strong response to our solicitation so we're not saying COVID put M&A on hold..

Is it fair to say I mean given you are dealing with T7 and you have the future vertical lift programs that Red Oak and Arlington probably are keepers as well as interiors and its really steward n the two composite plants who are more likely to be more to be on the market?.

It is probably best if I just don’t be specific but as these transactions are completed we will let everybody know and hopefully our track record as I mentioned in the press release yesterday of getting these things done provide some confidence to investors that we can pay down debt and reposition towards our systems and aftermarket..

And then on the seventh on the Boeing advances I think you paid down $40 million what did you have, is it like to 220 left to go at the end of the fiscal year, 40 of which gets paid in fiscal ‘21?.

That's correct..

Okay.

And then it used to be that the top ones popped in ‘22 and ‘23 and it was a fair amount to go so to get back to Bob Springarm’s question I mean if you got to go up to $80 million in fiscal ‘22 and then presumably ‘23 to kind of get it done on the pension contributions, a pretty heavy weighted, I mean is there basically a lot of cash flow pressure so it's hard to be a significant generator in ‘22 and ‘23?.

So as we can get a clear picture of ‘21 we will be able to talk more about ‘22/23 I think the big drivers the pension is one of them events liquidations but also the increase in the margins when buying comes back if we are able to maintain margins with volume going down we are going to have a nice tailwind when volume comes back and we have a stronger portfolio and we will be executing on the pricing opportunity between there and all the cost reductions we are doing now we are going to hold on to as many as we can as the volume comes back so we are optimistic about our ability to get back to cash flow positive just like we were last year..

Got it.

And so you said $80 million is negative on the 747 and G280 and then working capital is negative those being in the first half which would suggest pretty heavy outflow in the first half and why we’ve hopefully turned positive in the second half I mean I assume from what you are saying the full year is more likely still to be in the red?.

I think that’s what remains to be seen.

We do see improvements from all the indicators then laid out but we don’t know to what extent we are going to see that improve in second half I think the good news there guys that we see the end of the cash burn you and other analysts on this call certainly our investors have been patient and watching us online in structures business which really had a number of programs that were coming down in right with high fixed costs 747 being the number one and then 280 which is always have been a loss making program when it came over was 650 so to get these done this year is a big deal and it allows us to move forward in ‘22 and beyond without those stones in our saddle..

Thank you. Our last question comes from Michael Ciarmoli with SunTrust..

Hey, good morning guys. Thanks for taking the questions.

I guess Dan and Jim just looking at sort of the end markets the optimism for a second half recovery I mean this certainly looks like it's going to be a multiyear down turn for sure I guess aftermarket MRO usually washes out over 4 to 6-quarter period with year over year decline to mean you're talking about I guess you've got purchase orders that are higher than Boeing build rates pulling forward some orders in MRO how do we reconcile even maybe what kind of inventory in the channel it would seem like if you are producing ahead on Max you might have some headwinds in future periods if these rates kind of stabilize or don’t increase just trying to get a sense on sort of the optimism and recovery.

And I mean, I guess it’s more we have hit bottom here in April and May.

So, we will come up off of this, but just trying to get a sense of pulling forward and producing ahead of schedule how that might impact future periods?.

Sure. So first of all, we are not assuming a big great recovery in the second half of the year. We are using de-rated versions of what the OEMs have put out. We don’t ever get ahead of them, except on the Max, where I described that they have agreed to sustain economical rate.

So, in our forecast, if you look at our second half production rates, they are still quite modest, but they support our financial requirements for the company. And when we provide guidance I think that will be more clear. The MRO demand is harder to predict.

That’s why we are pivoting to military wherever we can and the announcements of late I think reinforced that we do have opportunities for helicopter upgrades, engine upgrades, hydraulic controls those are all still flowing through.

I have flown twice recently in commercial aircraft and the first time I flew in April there is only 5 of us on the flight. And so I had a lot of concern about what does this recovery look like? The last time I flew the flight was about two-thirds full and the airport was about half full versus that goes down the first time. It’s very anecdotal.

But what I have seen so far is people are getting more comfortable. I have shared some metrics on aircraft coming out of storage utilization factors. We are all watching the same data.

So Michael I think, as we update our forecast will reflect the aviation recovery and provide guidance to the investors and analysts around that, but we are not assuming, I will call it a steep recovery in the second half of the year. We are maintaining conservative forecast and that’s still enough to do what we need to do..

What about your customers and how are you framing that risk, I mean in your slide deck, you call out LATAM Airlines for A320 engine panels.

I mean they just filed for bankruptcy, certainly I think we are on the front-end of airline bankruptcies, how does that factor into the outlook or how have you guys handicapped financially strained customers?.

So, we are watching both suppliers and customers, their financial health. Certainly, the CARES Act support to the airlines helped a lot. Now, we are listening for feedback from Boeing on how that’s translating into aircraft acceptance and/or cancellations.

We have a little bit of exposure to Asian airlines in terms of accounts receivables, but it’s in the low single digit millions kind of exposure. So as those suppliers struggle, we may see some modest hits there. But overall, I mentioned we are tracking the suppliers as well.

We started out with the 1,000 critical suppliers, at the peak a 100 of them had – were on hold for the COVID-19. That number is down to 10. So the recovery of the supply chain is coming along. We haven’t seen bankruptcies yet that would give us expose there.

So, we feel good about supply chain although we are watching it very closely on the customer side, it’s still too early. I think we will know more in September, October timeframe..

Got it. Helpful. Thanks guys..

Thank you..

And ladies and gentlemen, this is all the time we have for Q&A today. And this also concludes today’s conference call. There is a replay scheduled to begin today at 11:30 a.m. Eastern Standard Time and run through June 4 at 11:59 p.m. Eastern Standard Time. You can access the replay by dialing 1-800-585-8367 and entering access code 5396837.

Again, you can access the replay by dialing 1-800-585-8367 and entering access code 5396837. And thank you for your participation, ladies and gentlemen. You may all disconnect..