Triumph Group Inc (TGI) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our first quarter fiscal year 2018 results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast. Please ensure that your pop-up blocker is disabled if you're having trouble viewing the slide presentation. (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 the property of Triumph Group, Incorporated, and may not be recorded, transcribed or rebroadcast without explicit written approval.

At this time, I would like to introduce Mr. 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 Incorporated.

Please go ahead, Mr. Crowley.

Okay. Thank you, Amanda. Good morning, and welcome to our conference call and Triumph's first quarter results.

Triumph made significant progress in Q1, stabilizing performance, resolving problem contracts, strengthening our backlog and balance sheet. Together, these actions set the foundation for both top and bottom line growth in the future.

The news this quarter is our settlements. Updating the contracts that were driving our higher-than-normal cash flow over the last few years added over $600 million of cash payments and advances to Triumph to fund operations and pay down debt. More importantly, we negotiated over $1 billion of increased contract value and pricing adjustments across 6 separate programs so far. Substantially, all of which are not reflected in our FY '18 financial outlook. We expect to complete all major contract settlements this year. These are a key enabler to our turnaround and driver of shareholder value. The process of updating our contracts forge stronger relationships with each OEM, allowing us to put the past behind us, so we can jointly focus on execution and growth. Triumph is in a fundamentally better place with our customers today than last year. It starts with performance, which enable us to sign partnering agreements with customers who a year ago were preparing to go elsewhere. We move from being part of the problem to being in part of the solution and their future.

Our transformation is on track, as we further implement the strategic operational and cultural changes critical to the turnaround in our long-term value creation.

Operationally, Triumph's overall on-time delivery performance across our 4 business units was up year-to-date to 94%, towards our goal of 100% on-time delivery. Our quality levels continued to improve, as we reduced the cost of poor quality to less than 2% of sales year-to-date. We launched an initiative in Q1 to measure all of our operations against Motorola's Six Sigma criteria to further raise the bar on delivery quality.

We're also on track to have our best safety record year in FY '18, with the lowest recordable injury rate of the last 4 years.

As a result of these improvements, our relationship with our customers continued to strengthen in Q1, as reflected in new wins and opportunities, with both backlog and trailing 12-months book-to-bill growing in Q1.

Triumph generated $782 million of revenue in the first quarter and reaffirms our sales guidance for the year of $3.1 billion to $3.2 billion. As backlog programs ramp up, we expect revenue to increase in the out years.

Operating income was $36.8 million, excluding restructuring, reflecting an adjusted operating margin of 5%. And adjusted earnings in the quarter were $0.24.

Our plan is back loaded in FY '18, and we expect to see higher earnings as the year progresses, as we rebalance our mix of development and production programs and expand our cost reduction efforts.

Triumph forecasts a profitable year in FY '18, with adjusted earnings of between $2.25 and $2.75 per share. This forecast benefits from a vigorous bottoms up review of all programs and reflects short-term declines in legacy program build rates.

While the results of our settlements are not yet evident in our top and bottom line, we continued to position the company for sustained growth, profitability and cash flow generation.

Now Jim will cover our segments in more detail, but in short form, our Integrated Systems business generated higher year-over-year operating margins, while Product Support saw lower revenue in earnings associated with divestitures and deferred MRO orders. Precision Components op income is down, in part due to the 777 rate reductions and step down pricing on 787 and in part due to higher restructuring costs. And Aerospace Structures saw lower revenue on sunsetting C-17 and G450 programs, partially offset by increases on Airbus and Northrop Grumman programs.

Free cash use in the quarter was $111 million. Full year, we forecast free cash use of $450 million to $500 million, but this includes $275 million of customer advance burn off and $200 million of working capital cost to prime the pump on our structured programs entering production. Absent these uses of cash, we would have been close to cash neutral for the year, not including proceeds from any divestitures or further customer advances we may receive.

Turning to Slide 4.

Our focus on cost reduction continues into FY '18 after FY '17's strong results. We have identified $86 million of candidate cost reduction opportunities in Q1, towards our FY '18 goal of $96 million of run rate savings. Roughly half of our $300 million 3-year cost reduction goal comes from our supply chain spend, while factory efficiencies, consolidations and headcount reductions make up the balance.

We have closed or transferred 377,000 square feet of operation so far, and another 830,000 square feet are underway or planned for consolidation this fiscal year. And we expect similar levels of headcount reductions in FY '18 as last year.

We've now employed 220 lean change agents across all 20 of our operating companies and conducted over 225 lean events in the first quarter alone. They're enabling our improved operational results. Our goal is over 600 lean events for FY '18.

We are now working closely with Bombardier to supply Global 7000 wings per the Bombardier plan in support of their entry into service. As mentioned on the last call, resolution of our contracts issues occurred in late May and resolves all outstanding commercial disputes. It resets the relationship between our companies. It allows both firms to better achieve our business objectives going forward.

We reached a preliminary omnibus agreement with Gulfstream across the many programs that we support, which will be implemented in the second quarter, which will ensure program deliveries are met, while creating the conditions for long-term profitability on their programs.

We're implementing last quarter settlement with Boeing. And as announced yesterday, we concluded a second contract settlement for system components, such as hydraulic and mechanical actuation assemblies for legacy and NexGen aircraft, including the 737 MAX and 777X. Note that 737 is our largest program in Integrated Systems. These awards are a direct result of our recent partnering MOA with Boeing, and we look forward to adding new contracts from Boeing Defense and Global Services as well.

Price increases in contracts extensions, the majority of which are not reflected in our Q1 results, our FY '18 guidance or the backlog forecast, will benefit future cash and operating margins as we make deliveries.

Conservative with -- consistent with the conservative accounting principles, we will maintain low booking rates on programs transitioning from development to production until we've retired remaining development risks and increased rate. We also negotiated performance incentives across individual contracts that provide further cash and profit pickups when we make deliveries within customer need dates and the capture of such incentives are not included in our FY '18 forecast, but represent upside in the future. In the quarter, we also amended our bank agreement in cooperation with our bank group, providing the flexibility to complete our restructuring at the lowest possible borrowing cost.

On Slide 5, I provide an update on our third imperative, driving organic growth.

Our success in winning dual source and takeaway programs enabled us to increase our backlog by 5.4% in the quarter to $4.2 billion, despite wind down on legacy programs. Our average competitive win rate is now above 50%. And as mentioned, our overall trailing 12 months book-to-bill is 1.1, with Integrated Systems achieving a book-to-bill of 1.2 in the quarter.

Competitive wins included Pratt & Whitney's F-135 complex composite engine ducts, machined details for GE's commercial and military engines, and the CH-47 helicopter frame details for L-3.

Building on our strategy of replacing incumbents to accelerate revenue, we won several key takeaways which are expected to exceed $90 million in value from Lockheed Martin for the development and qualification of key F-35 system components and from United Technologies for key engineered components for the A320neo. And the V-22 multiyear contract was a key follow-on award for the quarter for our Structures business.

We also recently signed an LTA with Safran to provide thrust reverser cowl opening actuators for the A320neo LEAP-1A engine nacelle. This is an important LTA for our fluid power and actuation operating company. This is financially the strongest company in our portfolio.

As we win short-cycle contracts, we're also actively engaged on the longer-cycle new starts. We're supporting prime bids on the T-X Trainer, the MQ-25A refueling drone and the OA-X light-attack aircraft, as well as several undesignated black programs.

Turning to Page 6.

The tailwinds for FY '19 through '21 are encouraging, after several years of headwinds for the company. FY '18 is our trough year for revenue, cash flow and margins. FY '19 through '21 will be follow-through years that benefit from the hard work to improve operational and business development performance.

Starting with orders, we expect follow-on awards across all 4 business units and new long-term agreements in the aftermarket space in support of the OEMs and operators. Programs already in our backlog will generate year-over-year revenue, with new wins accelerating this trend.

Sales will benefit from the Embraer E2 Global 7000 and new Gulfstream programs, as they transition from development to production, even with conservative ramp up assumptions.

Note that 4 out of 5 of our largest programs: The 737, 767, 787 and the A330, are increasing in rate, with only the 777 declining in rate. We're also planning for increasing rates on the Global Hawk/Triton programs and the A320neo over the next 3 years.

Out year cash flow will benefit from reduced development spending, which is already forecasted to come down from $200 million last year to less than half that amount this year. And customer advance repayments will also be lower over the FY '19 to '21 time frame.

And finally, we forecast increasing operating margins as we complete factory and organizational consolidations, transition from 0 margin development programs to production margins, and see the full benefit of the Triumph operating system.

So in conclusion, Triumph's 3 imperatives of delivering on commitments, becoming predictably profitable and driving organic growth continue to guide everything we do.

Jim McCabe will now provide further details on our current performance and full year outlook. Jim?

Thanks, Dan, and good morning, everyone.

Our first quarter results were largely as we anticipated. More importantly, we continued to set the stage to grow our sales and improve our profitability and cash flow next year.

On Slide 7, you will find our consolidated results for the quarter.

As expected, our net sales were down compared to the prior year first quarter, due to the end of the production on 2 large legacy programs, C-17 and the G450, and the gradual wind down of several others. Our revenue is on track with our plan and earnings ramp up in the second half of the year.

With respect to the segment results.

On Slide 8, sales in our Integrated Systems segment were 7% lower than the prior year quarter, due in part to the impact of our Newport News divestiture, which contributed $5 million to last year's first quarter. Additionally, rate reductions on the 777 and the A380 and the timing of deliveries on certain programs contributed to the year-over-year sales decline.

Integrated Systems operating margin increased 130 basis points to 20%, despite lower sales, due in part to the favorable resolution of open assertions with several customers.

Integrated Systems continues to expand its backlog during the first quarter, with a book-to-bill of nearly 1.1:1, driven in part by awards to provide additional content for the A320neo and F-35 joint strike fighter.

On Slide 9, first quarter sales for our Product Support segment were down 6% on an organic basis, which excludes the impact of the divestiture of the APU businesses. The organic decline relative to last year was driven by deferred maintenance on the part of some of our major customers. We expect to see that volume later this year. Margins were negatively impacted by the restructuring costs, sales mix and by two-step closing of the divested APU business, which resulted in revenues related to that business being included in the quarter's results at 0 margin.

Turning to our Precision Components segment on Slide 10.

Sales were down 7%, with continued lower production rates and pricing on the 777, as well as lower pricing on the 787. The segment book-to-bill was 1.02:1, reflecting increased orders for the F-35.

Precision Components margin modestly improved over the first quarter of fiscal '17 and included the benefits of our cost reduction initiatives, which involved 2 site closures that were completed ahead of our initial schedule. These benefits were temporarily offset by restructuring expenses. Our restructuring efforts will continue throughout 2018 as part of a process that we have been carrying out in conjunction with our customers who fully support our plans.

On Slide 11, sales in our Aerospace Structures segment declined 17% year-over-year, in line with our expectations, with the completion of the C-17 and G450 programs and continued rate reductions on the 747-8 and G550 programs. Segment book-to-bill was 1.1:1, supported by follow-on awards for the V-22 at our Red Oak facility. Aerospace Structures posted an operating loss in the first quarter, primarily driven by loss fixed cost absorption on the lower volume.

Turning to Slide 12.

Free cash flow use was $111 million during the quarter. As we discussed on our fourth quarter call, over the course of fiscal '18, we will be working down the majority of the $324 million in customer advances that we received last year, which is a planned headwind to our cash flow as we move through the year.

Capital expenditures were $12 million in the first quarter. With respect to other cash uses during the quarter, we used $18 million for restructuring and invested $32 million for development programs.

Development spending is down 41% compared to our first quarter of fiscal '17 as we complete development of the Global 7000 Embraer E2 programs. We expect cash use to continue to decline as we move towards the production phase of these programs.

On Slide 13 is the summary of our capitalization, leverage and liquidity.

Our net debt at the end of June was approximately $1.3 billion, and our senior secured leverage ratio was 2.15x, well within our 4x covenant limit. Our cash liquidity are sufficient for our needs at about $600 million.

On Slide 14 is the summary of our FY '18 guidance.

Based on current aircraft production rates, we continue to expect fiscal '18 revenue to be approximately $3.1 billion to $3.2 billion and to increase in fiscal '19, as production of backlog growth more than offset sunsetting programs.

We also announced additional guidance in our press release earlier this morning, which is summarized on Slide 14.

Based in part on our assessment of the impacts of our recent customer contract settlements and excluding the impact of any potential divestitures, we expect fiscal '18 adjusted earnings per diluted share to be in the range of $2.25 to $2.75, and free cash use for the year of $450 million to $500 million, which includes $275 million related to the burn-off of customer advances and $200 million of Aerospace Structures working capital. Excluding these 2 items, we are forecasting to be cash neutral in FY '18.

The pro forma free cash chart on Slide 14 represents, in our view, a more accurate picture of our FY '17 and FY '18 free cash flow.

In FY '17, we received $324 million of advance cash payments from customers. These were effectively deposits for future product we would ship to them. This increased reported cash flow in FY '17. In FY '18, we will deliver product to our customers and the invoices will be offset by $275 million of advanced payments, thus using our deposits from customers. In FY '18, we'll also be ramping up production on those 2 programs we mentioned, which will increase our inventory by $200 million.

As you can see, when you adjust for these activities, our free cash flow is in a better position in '18 than it was in '17, and that's before any restructuring costs.

Our guidance assumed a 26% tax rate for the interim quarters and 6% rate for the year. Cash taxes will be about $10 million for the year. And we're assuming capital expenditures in the range of $80 million to $90 million, which includes not only sustaining investments, which are about half of that, but investments in operational efficiencies, new technologies and growth. We expect earnings to be higher in the second half of the year, due in large part to ramping production programs and second half tax benefits.

To conclude, with one quarter of fiscal '18 behind us, our financial performance is tracking with the expectations we had headed into the year. And we continue to move the ball down the field with our transformation process. We are particularly pleased with the progress we've been making in resetting our customer relationships to enable us to better support them across a variety of major aircraft programs. And we appreciate their willingness to work with us as long-term partners.

With the growing profitable backlog and cost reduction initiatives progressing throughout our operations, we're confident that we're laying the groundwork for profitable organic growth and sustainable positive free cash flow.

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

Yes, thanks, Jim.

Our Integrated Systems had a strong quarter, and we expect both Integrated Systems and Product Support to quickly grow back the revenue associated with last year's divestitures. And both business units enjoy strong customer pull on our -- a strong source of op income and cash for the company. However, results in our Components and Structures business must and will improve. I recently announced our new EVP for Precision Components, Pete Wick. Under his leadership, the Components team will stabilize performance this year and continue their consolidation and cost reduction efforts to enhance competitiveness. Our Aerospace Structures business, having worked through rate cuts and development program challenges for the last several years, is now positioned for positive financial performance in the future based on the strength of our operational improvements and updated contracts.

After 2 divestitures in FY '17, we expect to make further changes in our portfolio, consistent with our prior plans that will reduce debt, improve our overall margins, and allow us to allocate more time and resources to our core businesses.

As our growing backlog translates into sales, the operational improvements associated with Triumph operating system will drive both cash and margin performance.

In summary, we made great strides in Q1 dealing with issues from the past, and we are setting the foundation for the future. And at this point, we are happy to take any questions you have. Amanda?

(Operator Instructions) Ken Herbert.

Canaccord. Dan and Jim, hey, I just wanted to start off and ask, obviously, you've done a great job, Dan, of setting expectations in terms of the contracts with your customers, and it sounds like reaching agreements across most of the major programs. Can you just reset again where you stand in terms of what might still be outstanding in terms of the negotiations that we should expect for this year? And how that could potentially impact the guidance, specifically, the free cash flow for the year? And then, as a second part of this. Specifically, with Boeing, with the agreements you've just announced yesterday, can you provide or -- this week, can you provide any more details on what the puts and takes are for those for you in terms of the long-term visibility? But maybe what some of the trade-off might have been around those in terms of the work scope?

Thanks, Ken. So we're down to the end of the last few contracts that we need to update. I'd call it the larger ones that were the most problematic, both for the OEM, as well as for us, are done. And I'm looking forward to closing out the last few, they're smaller, and we don't expect them to have big swings on free cash flow up through the balance of the year. However, they will improve us -- our out year margin performance because some of these remaining contracts are still loss-making, so fixing them is important. In terms of the Boeing settlements, of course, all the OEMs have asked that we not provide specifics about their individual settlement. That's why I talked in aggregate about how much cash and contract value and price adjustments we got. What I will say is that Boeing was happy to do a second settlement after the one we did in April. And the second settlement that was just announced, it expanded the number of programs. It went from a focus on Structures more into Integrated Systems. And it allowed a multiyear contract extension on the 2 programs that I mentioned. And yes, we have to contribute to partnering for success, but these programs are still profitable for us. And we're glad to be a partner with Boeing going forward. Jim, anything?

No, I think that covered it. Thanks.

Our next question is from the line of Sam Pearlstein.

Wells Fargo. I'm surprised, because you had announced that Bombardier settlement post I guess the end of the last fiscal year, that it doesn't look like there was any financial benefit in terms of cash or advances or anything. I know you don't want to talk about each individual one, but is there something different about that? Or did something kind of end up in the March quarter that we didn't see here?

So nothing in the March quarter. Our settlement was reached after Q4 ended. And again, we've been asked by our OEMs not to provide specifics. What I can say is that we had a fulsome robust negotiation. And we addressed issues of the past, the present and the future. And we addressed pricing, as well as cash, as well as deliveries. And I can assure you that Bombardier has high expectations for Triumph now that we've resolved our disputes. And we also did some things that really helped us create a joint program office so that we run this program through its completion, I think, in a more efficient and effective way for the 2. That's what I'm most encouraged about, because the first years of the contract, I don't think that we were operating as efficiently as either party wanted. So there's more in there than just the dollars. But Jim, anything to add?

Thanks, Dan. Sam, the impact of our settlements obviously spans multiple periods. It's not just in any one quarter. And most of the impact of our settlements is not even in this year, it's in backlog. But within the quarter, any customer settlement impacts, any reduction in customer advances, any bill or production inventory, it's all included on the change of working capital usage. So on Page 12, there's a number of $79 million of usage. That would all be in the mix in there. But as Dan said, we're not calling specific impacts of any one contract. So rest assured that the overall settlements did give us the business cases we needed over the long term.

Okay. And relative to the remaining negotiations, if you get to the point where you'll get to those agreements, and you net it all together, should fiscal '19 be a cash positive year?

Our goal is to be cash positive in fiscal '19.

Our next question is from the line of Cai Von Rumohr.

This is Bill Ledley on for Cai from Cowen. Just a question on the $275 million of advances. Do those relate entirely to the advances from last year, or is the Bombardier settlement included in the $275 million?

The $275 million is the reduction in advances that we received last year exclusively, but we're not...

Okay. And what was the impact to the quarter from the advances of the $79 million?

That's in the mix in the working capital usage, but we didn't call the specific amount out.

And the next question comes from the line of Myles Walton.

Deutsche Bank. Maybe to ask on the cash flow side. So the underlying cash flow, you point to breakeven, and I think if you talk about the kind of cash conversion being maybe in line with adjusted EBITDA less CapEx. And so I'm just curious, it looks like adjusted EBITDA is probably a couple of hundred million dollars for this year; is that the right ballpark? And what's the walk to get to 0 versus the couple of hundred million dollars of adjusted EBITDA?

Yes, that's a good question. Some people asked me about what's normalized cash flow. So I would say that normalized cash flow is in the range of $200 million when we take the pieces all apart. That's when we're coming out of the restructuring, that's what we're looking for in the base of cash.

I'll add to that, Myles. I think one thing you can count on with the new Triumph leadership is that we're going to find ways to get there at year-end. And we did that last year, working hard to get cash. This year, the focus is on execution on all these settlements. Although we are showing a high use of cash this year, I mentioned that many of those causes were coming down year-over-year. And we're looking forward to getting past these 2 years of up and down sources and uses of both cash and profit restructuring and whatnot, so we can get to a cleaner financial forecast, and that's something that we know you all want. It makes it difficult to model a company, and we're looking forward to getting there soon.

So Jim, what is the EBITDA as defined or as adjusted for the year in terms of guidance?

I don't think we've given adjusted EBITDA guidance. The guidance we have given is in the press release and in the presentation, which was the EPS of $2.25 to $2.75, and that's adjusted EPS, which would be adding back restructuring charges.

The next question is from the line of Sheila Kahyaoglu.

It's Jefferies. So can I just clarify one quick thing on the $600 million that you stated on Page 4 in terms of the contract settlement. Does that include the $324 million of cash advances last year? And does the settlement show up as a cash number eventually? Or I think you're just trying to say it shows up in backlog in margin productivity going forward.

So the $600 million included advances, catch-up payments that were for deliveries already made for which we hadn't been paid, and additional cash payments for settlements. So it's all of those in aggregate. And I want to make clear that both those numbers, $600 million and $1 billion, are only for the settlements that we achieved to date, and we still have additional settlements to go, so we expect that number to grow, and they don't reflect our preliminary agreement with Gulfstream.

Okay. And then just on the Global 7000 or just -- on the Global 7000 specifically, is the total development spend and the inventory spend $200 million, or the production build-up is separate from that $200 million? And then just more broadly speaking, over the medium-term, what do you think about your consistent level of development spend or R&D that's required?

So I'll start, and Jim, please add in. So it's separate. We have development spending that's ramping down rapidly. This is really the last big year of closing out the certification documents. The aircrafts are fine. The feedback we've gotten from Bombardier is very positive. Now they've got 3 aircraft in the air. And what's exciting about the program is the next few aircraft have the full interiors and have all the advanced features that are in the design, and Bombardier is giving us positive feedback on the performance of the wing. The big chunk of spending we're doing now is to prime the pump for the ramp up. So you go out and you let fairly large lot quantity purchase orders that are still higher on the price curve. The early purchase orders are higher, and then you have price step downs with all the suppliers. So there's sort of an unusual bubble of spend now that the design is matured and you're releasing POs in support of the ramp. So we don't expect that same sort of level. It will come down, both in volume and in price per supplier. And then it will go up in time as the rate increases, but the 2 -- the $2 are separate.

Yes. And Sheila, we said last year was about $200 million of development spend. This year, it's going to be less than half of that. I'd say $65 million to $100 million range on the development spend to complete the programs. And then the $200 million is independent of that, and that's primarily inventory, but it's over working capital, a little bit of receivables in there that's specific to growing those programs that are shifting into production, primarily Global 7000, but E2 as well.

Our next question is from the line of Peter Arment.

Baird. Dan, could you kind of give us an update on kind of the -- lease or quantify the size of what the divestitures or expected proceeds, you've had an ongoing kind of overall plan. But is there any kind of a way to offset that in terms of what the cash drain is this year?

So we still expect the divestitures in this first wave, of which we had 2 last year and then a few more this year, to be less than 10% of revenue. And it's mainly focused on non-core underperforming businesses, so we'll see what the market brings for assets as we go to market. We've engaged investment bankers. Right now, as you know, there's a pretty strong market for A&D properties. We're looking for those businesses that are better positioned with others. That was the case last year with the Engine APU, a divestiture that went to a private equity buyer, and the same with the engineering services company we sold. So we'll give more clarity on this as these deals roll out. And then, longer-term, we're going to -- our focus is to increase the value of all of our remaining 20 operating companies. And we'll make choices over time, but right now, our focus is increasing the value of what we've got.

Our next question is from the line of David Strauss.

UBS. It's actually Matt on for David. Still on Global, I guess you're -- so your settlement with Bombardier, assuming that the terms are a little bit better there in that program, is there any chance that could potentially be in a position to reverse some of the prior forward loss you've taken on that program, or is that not something that we should expect?

Well, we don't get to recognize income on that program until we go into production, and we're just starting production now, and that's part of the driver for our second half improvement is when we start to go into production, pre-production costs are primarily all capitalized. So there was a reversal, I think it was a year ago, there was an accrual for forward losses on that. And I guess I don't think about reversing forward losses. I think about recognizing what we have in revenue relative to the cost on the books. So no, I don't anticipate any reversal of forward losses.

Got you. Okay. And then could you give us the way to sort of think through this 747 cash burn as that program went down. How will that sort of trend here going forward?

Just programmatically, we're supporting Boeing's build rate plans for 747. The program is performing well, meeting schedule and quality. We've had some pickups in the last few quarters based on that performance. And it's part of our agreement with them, we're maintaining a slightly higher than planned build rate that allows us to operate more efficiently. Now at some point, when we fulfill our contract obligations on the program in the out year, we will have costs associated with closing those factories, but that's still years away. So in the near term, the focus is on just delivering on the commitments.

I don't think there's a significant cash drain from that program this year. When we get to the out years, we can start to talk about the breakdown of this -- that outlook.

The next question comes from the line of Seth Seifman.

JPMorgan. This is actually Ben on for Seth. Just one more question about Global 7000. Is there any color that you guys can give about maybe building a deferred balance or reaching kind of cash flow positive on the program down the road?

So I don't think we can give any specific numbers yet. I'll describe the knobs and levers that affect that. So in order for us to be cash flow positive, 2 things have to be true. We have to reduce material costs on the bill of material; as each block of parts are released to the supply chain, we've got to negotiate better prices. And then we've got to come down a learning curve on the labor assembly that we do to build the wing. And we have to do both of those things on a profile that's lower than the prices that we've agreed to with Bombardier. And so because we're early in our deliveries, we're starting to make production once the ability to say the confidence in our role is so wider around learning curve performance. But what I will say is that we've started to attack the supply chain costs, the material costs. And this quarter, we had a pickup associated with that. And as we release more purchase orders, we expect to further improve our business case, starting with the supply chain part. And then as we deliver more wings off the line, then we can dial in the EAC for the labor portion, which then allows us to reduce cost lower than the prices that were paid and therefore generate cash. So as I mentioned, it's still early, and we're going to maintain low booking rates on the program until we step up. In fact, we're maintaining right now 0 booking rate, and then over time, we can step that up as we make deliveries.

Our next question is from the line of Matt McConnell.

It's RBC Capital Markets. How much of the restructuring savings that you're generating go to EBITDA improvements versus -- you know, allowing you guys to bid contracts more aggressively or maybe some of it gets passed on to customers as savings? But is there a way that we should think about how much of the restructuring actually drops down to your bottom line?

We always say that, internally, is that if we didn't do it, we wouldn't get any of it, so 100% of it drops to the bottom line. But I understand your question because there is competitive pressures that are making us bid a little bit lower and drive our costs down for our customers. So a rule of thumb that I've used before is I can expect about 1/3 of that to get -- make its way to the bottom.

Okay. And then, separately, on the senior secured leverage ratio, 2.15. Now where does that go under your planning assumptions for fiscal '18?

Well, we have sufficient liquidity for fiscal '18 right now. So I don't have the exact amount, but it will be less than the 4x.

Our next question is from the line of Michael Ciarmoli.

SunTrust. Maybe just more on the free cash flow guidance. Jim, are there any asset sales assumed in the cash flow guidance for this current year?

No. Excellent question, but there are not. This is before any potential divestitures.

Okay. And then just -- you mentioned that normalized $200 million. That implies something substantially higher if I looked at a net income to cash conversion. I mean how do we think about -- you call out the production build of $200 million, but the nature of this business presumably is going to have ongoing working capital investment. I mean can you give us any more maybe a longer-term guidepost in terms of maybe what conversion this business could be, accounting for as you guys look at the sales funnel, if there's new programs that are going to require future investment? I mean what do you guys think a realistic conversion rate is for cash on this business?

Yes, it's a good question. I haven't looked at it on a conversion rate basis. But what I can say about it is I did look out to see -- once we stabilize through the restructuring, we've completed most of the restructuring, we have a clean year. Our first clean year would look to be in the $200 million free cash flow range. So to me, that's what normalized was. The programs that we're bidding on now don't have anywhere near the cash requirements. And we're structuring them purposely to make sure that they're diversified and balanced and have modest cash investments with quick recoveries because we just can't afford to make big bets like we have in the past. So we do feel that, that $200 million is sustainable coming out. And as we grow, that's only going to increase. And there's levers we can pull. As I mentioned, CapEx is -- $80 million to $90 million is our guidance for the year. We haven't been spending that much. And maintenance is probably 1/2 of that amount. So we can adjust how much CapEx we spend, so that some of the growth CapEx may be funded by customers. And that's what we're looking for, is finding ways to increase our cash flow through negotiation and positioning of the businesses.

Yes. On the last earnings call, I talked about our inventory reduction program. We set a goal of $100 million of improved working capital, and that will help to be an offset to what we spend on ongoing supply chain costs. We're not as efficient as we need to be on working capital yet, so that's a key focus area for us.

Our next question is from the line of Krishna Sinha.

Vertical Research Partners. Specifically, on the Aero Structures business, you talked about some fixed costs absorption there. I guess a 2-part question would be, what are your volume assumptions going forward on that? And maybe on the fixed costs side, how much fixed costs -- or are you planning on taking more fixed costs out of that side of the business? I'm just trying to get a sense of what the underlying sort of profitability and growth can be in that part of the business.

Yes. The short answer is volume going up, fixed costs coming down. The business had 7 locations. In fact, if you go back further when Triumph first acquired it, they had a huge facility in Dallas that had over 3 million square feet. And we're going to continue to rightsize that business. As development program spending comes down, that will also help lower costs. And we're deploying lean. They were sort of doing fledgling efforts on lean deployment, and now it's getting a majority of our focus, whether it's Global Hawk or G650 or Global 7000. And those programs drive the volume over time. So it is a trough year for them on revenue, but it will go up. Jim, any comments?

No, we're -- obviously, we talked about taking costs out, and we're going to aggressively doing that to adjust for the decline in volume. It just can't happen instantaneously because we do have to wind down these programs.

I guess, yes. Just more specifically on that, I guess the real question is, are you building anything in on build rates that's more conservative than the OEMs? And then, on the fixed costs, just can you give us relative sizing on how much you think remains to be taken out of that business when it's all said and done?

Yes. We take what the OEMs give us. And for the purposes of factory planning, we count on that rate. But for the purposes of financial forecasting, we discount it. And people have different handicaps of various commercial and military programs, and we do that internally as well, so that if there are small pullbacks, we still can make our numbers. But we also don't want to be caught short in capacity should those quantities realize. I'll tell you, we just came back from the Paris Airshow. And the theme of the show was, support our ramps, and there was no end in sight to the current extended cycle of commercial demand. You all have read about the announcements from Boeing and Airbus and others. So at the same time we hedge their forecast slightly, we also want to be ready for the ramp up. That's why we've invested so much in working capital and in fixed assets for structures for the ramps.

We do have a follow-up question from the line of Cai Von Rumohr.

I just had a couple of follow-ups. Is it possible to provide the restructuring expenses by segments? I think you called out it impacted a few of the segments, so I was just wondering the magnitude of each of those.

We did disclose that. And restructuring by segment, so it was $18 million in the quarter. Corporate was about $10.5 million. There's about $4.5 million in Precision Components, about $1.4 million in Aerospace Structures, $1.2 million in Integrated Systems, and about $0.8 million in Product Support. But this will all be disclosed in the Q that will be filed by the end of the week.

Okay. And then just on the effective tax rate of 6%, is that -- does that include the adjustments for restructuring, or is that more of a GAAP number?

I'm sorry, could you -- oh the 6%?

The 6% tax.

Yes.

Yes. It's a GAAP number. The way our taxes work, we can't realize the full year benefit until the fourth quarter. We have to use a normalized tax rate during the interval quarters, so -- but it is a GAAP number.

And since there are no further questions, this concludes the Triumph Group First Quarter Fiscal Year 2018 Earnings Conference Call. A replay will be available July 26, 2017, at 11:30 a.m. Eastern Time until August 1, 2017, at 11:59 p.m. Eastern Time. To access the replay, please dial (800) 585-8367 or (404) 537-3406. Thank you all for your participation, and have a nice day. All parties may now disconnect.