Triumph Group Inc (TGI) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our second 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, 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, Inc. and may not be recorded, transcribed or rebroadcast without explicit written approval.

At this time, I would now 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.

Please go ahead, Mr. Crowley.

Thanks, Kevin, and good morning. Welcome to our conference call on Triumph's second quarter results. Triumph had a solid second quarter, marked by improving profitability and new business wins. Now 18 months into our turnaround, Triumph is improving our program margins and balance sheet strength, generating organic growth and in doing so, solidifying the foundation for the future.

Our transformation remains on track and is yielding results in operational performance and customer satisfaction. Since working with our customers to resolve significant (inaudible) year, our actions to address loss-making contracts and refinance our debt have improved our financial strength and flexibility. As we continued to improve operational performance, we saw positive program cume catch-ups in the quarter, a leading indicator of improving profitability.

Looking at Page 3. When we account for restructuring, divestitures and refinancing costs, our adjusted our earnings per share were $0.52. We're maintaining our full year adjusted earnings per share guidance of $2.25 to $2.75 and are focused on delivering stronger earnings quarter-over-quarter. Revenue of $745 million in the quarter supports our previous guidance of full year revenue of $3.1 billion to $3.2 billion. Free cash use of $211 million in the quarter covered the liquidation of customer advances; $33 million of development program spending; and inventory investments, primarily on the Global 7000, as we transition into production. We are maintaining our full year cash use guidance of $450 million to $500 million and applying disciplined controls on CapEx and working capital.

A bright spot in our transformation is restoring Triumph's entrepreneurial spirit and relearning how to win after decades of growth by acquisition. A more robust strategic planning process has focused our product development and new business pursuits, and our upgraded business development team and capture strategies have helped us to increase our pipeline to $12 billion, our book to bill and our 2-year backlog by 7% year-to-date.

In prior calls, I mentioned our goal to increase military business. Specifically, I want to increase defense revenue from 20% to over 30% of our sales in the next 3 years. Our total pipeline of $12 billion contains over $6 billion of defense opportunities and doing so will help Triumph balance its market segment exposure and cash demands. At a time when many suppliers are at odds with the Tier 1 OEMs, the partnerships we announced with Boeing and Northrop Grumman have opened new doors to follow-on business, which will help Triumph reverse our revenue contraction in the years ahead.

Turning to Slide 4. We continue to drive cost reduction across the company with lean-related efficiency savings now starting to catch up with supply chain savings. Year-to-date, we conducted over 800 lean events, which typically take 30% to 40% of the cost of a given activity out while improving quality and span times. This is a long journey, but my visits to many of our 60-plus sites allowed me to see the transformation happening firsthand and where more improvement is needed.

We expect to achieve our FY '18 cost reduction goal of $96 million, building on last year's savings of $69 million. We're roughly halfway towards our $300 million savings goal in the areas of supply chain and headcount reduction and are accelerating our cost-reduction efforts and operational efficiency as noted.

In Q2, we completed the closure of our Basildon, U.K. site and the consolidation of our 3 Connecticut sites. We announced the consolidation of our thermal systems Maryland business into West Hartford and began to wind down our Farnborough, U.K. site. Since last May, this brings the total announced closures to 9 sites, plus 3 divestitures, reducing the total number of sites from 72 to 60 so far and reducing our footprint by 1.3 million square feet. So now we have 17 operating companies in our portfolio, down from 47 last year. We divested our Embee metal processing facility in September, generating net proceeds of $65 million for debt reduction, and we have a few more divestitures in process that will fulfill our target of selling noncore businesses worth up to about 10% of our revenue to reduce debt and fund growth.

We implemented our settlement on the Global 7000 program early in the quarter and are working closely with Bombardier and our suppliers to ramp up production wing deliveries. We are applying the resources needed to bring Global 7000 and the G650 into profitable production. And taken together, these restructuring actions enhance our competitiveness, and as we reduce program cost growth will show up in the bottom line.

On Slide 5, you can see a few of our wins in the quarter, including our support of American Airlines, Vietnam Airlines and Virgin Atlantic on the A320, V2500 engine thrust reversers out of our product support business. We also won critical internal gearbox components for Snecma CFM56 from our Integrated Systems business. We received follow-on awards from Boeing defense on the V22 in precision components for composite Sponson's fuselage panels and from Boeing Commercial for over 175,000 environmental ducts and 65,000 floor panels used across most commercial platforms.

Last year, you heard about Triumph's role in Northrop Grumman's Navy Triton low-rate initial production award. The T-X trainer partnership we announced with Boeing on September 15 signals where we are going with Boeing defense systems. Our efforts to stabilize and improve the performance of our aerospace structures business are paying off in terms of new bid opportunities and awards. On the F-35 program, we continue to see interest from Lockheed Martin in dual sourcing on the systems side, and we're supporting L-3's efforts on the CH47 for structures content. Our pipeline of military opportunities continues to grow, including the T-X program, the MQ-25 refueling drone, the OAX, and multiple fighter SLEPS programs and takeaways, and we expect defense revenues to increase across all 4 business units.

Turning to Page 6. I want to provide my take on the market trends that will influence Triumph's longer-term revenues. My colleagues and I from AIA recently met with senior Pentagon officials, and we're encouraged to hear of the unified leadership now in place at the DoD. With some help from Congress, on the soon-to-be-released budget, defense spending is set to increase from $549 billion to $632 billion, excluding overseas contingency operations. For Triumph, this means increased funding in revenue growth for both existing defense programs and new starts, in some cases, above the President's budget request for programs such as UH60 and the FA18.

Triumph is currently on or is pursuing opportunities on most new DoD programs. We're bidding system components for JSF and B21 as well as structure, systems and components for the MQ-25, and we're supporting the life extension plans for the T-38 and F15. Military and civil rotorcraft and engine programs are targeted sources of growth after declines in oil and gas in the prior years. Triumph has substantial systems content on the CH-53K, systems and structures on the Bell 525 and main rotor and tail rotor gearboxes for MD helicopters. We recently congratulated our MD 530 customer on their U.S. Army and Afghan Air Force awards of up to 150 helicopters.

Now turning to engines. In addition to strong content on both the CFM56 and LEAP, where GE is one of Triumph's largest customers, we are engaging on a number of next-gen engine development programs, where increased temperatures and pressures require advanced materials, controls and actuation solutions. I recently met with the President and CEO of Bell Helicopter to review our work in support of the Bell 429, 525, V-22 and AH-1Z programs. We supply the main shaft and main rotor gearbox and flight control equipment for the 429, the hydraulic power pack and composite panels for the 525 and engine controls for the AH-1. We also did the pylon conversion actuator and metal bondments for the V-22, and we look forward to continuing our close relationship on emerging programs such as the V-280.

On the commercial side, passenger growth and freight traffic are both up this year, about 7% to 8% with demand for commercial aircraft over the next 2 decades forecasted to exceed 40,000 aircraft. In this year alone, Airbus and Boeing have combined to deliver over 1,000 aircraft year-to-date and have over 12,000 aircraft in backlog. For Triumph, this means increased Integrated Systems sales on the A320 and the Boeing 737 narrowbodies, 2 of our top programs in Integrated Systems, and TIS will benefit from planned rate increases on both of these programs going forward. Boeing's consideration of a 787 rate increase, where we provide landing gear, extend and retract in cargo door actuation, among other systems, would drive additional growth. For Airbus, we supply machine components on the A350, which is forecasted to increase the rate from 7 to 12 a month in the next 3 years. And on the A330neo, which is also ramping up, we have significant content, including major wing structures and valves and actuators on their landing gear systems.

The demand for e-commerce from Amazon and other online retailers has our premier cargo customers, FedEx and UPS, demanding exceptional availability rates and fast MRO turns. And after a period of deferred maintenance, our product support business saw a 9% increase in organic revenue. Demand for business jets, where Triumph holds sole-source positions for wings on the long-range platform segment for Bombardier and Gulfstream, is forecasted to grow by more than $3 billion through 2020 or 25%, where long-range jets are expected to garner more than half of the market value. And as used aircraft availability declines, our customers anticipate increased new aircraft orders, which is good for business jet OEMs and it's good for Triumph.

On the aftermarket front, Triumph is one of the few third-party providers with significant capabilities in both accessories and structure support. Our integrated systems and product support business units together have over $500 million in aftermarket revenue, and we are aligning our business development efforts to drive partnerships and deal closure. For example, we're accelerating our investments in rotables and accessories, especially in Asia, where we are increasingly supporting Asian carriers. Recent agreements on B-2500 as noted support early progress here. And recall that Triumph has 2 operations in Thailand with over 600 employees, building composites and providing MRO support to Asian carriers. And as Thailand stands up their new MRO Center at U-Tapao Economic Corridor, we'll be there to expand our presence and capabilities in the region.

Last, there're some macro changes, particularly on the commercial segment, whereby some OEMs are vertically integrating, continuing to move work to low-cost countries and increasingly interested in owning IP. Triumph is closely monitoring these trends, adapting and pursuing similar strategies at our level. So after a period of improving our portfolio and strengthening our balance sheet, we look forward to returning to acquisitions and integrating them into the Triumph operating system, not operating them as standalone companies.

In conclusion, Q2 allows Triumph to take another step forward in our turnaround, as we do what we said we would do, and leverage our improved operational performance into new wins.

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

Thanks, Dan, and good morning, everyone. Our second quarter results were largely as we planned. More importantly, we continue to set the stage to grow our sales and improve our profitability and cash flow next year.

On Slide 7, you'll find Triumph Group's consolidated results for the quarter. We generated $745 million in net sales, which as anticipated, was down compared to the prior year quarter due to the end of production on 2 large legacy programs and the gradual wind-down of several others. Adjusted operating income improved sequentially to $51 million or 7% on $745 million net sales. Our revenue is on track with our plan, and we expect earnings to ramp up in the second half, primarily in the fourth quarter.

With respect to our segment results on Slide 8. Integrated Systems earned 18% operating margin on $234 million of net sales. On an organic basis, excluding our divestitures of Newport News and Embee, segment sales were down approximately 2%, largely due to rate reductions on the 777 and 8380 and the timing of deliveries on certain programs. Excluding $1 million in restructuring costs, operating margin was a solid 19% similar to the prior-year quarter. Integrated Systems continue to expand its backlog by 7% during the quarter, driven largely by the Boeing Apache program and other military programs. The segment's year-to-date book-to-bill ratio was 1.3 to 1, driven in part by awards such as our agreement with Safran to provide certain actuators for the A320neo and with Boeing for actuation systems through a broad range of legacy programs as well as the 777x and most recently, on the C-5 Galaxy as a sole-source supplier of aftermarket rotary actuators. Integrated Systems is a reliable cash generator with steady margins and on the path to growth.

Turning to Slide 9. Product Support segment, excluding our divestitures of the engines and APU repair businesses, delivered strong organic sales growth of 9% as compared to the prior-year quarter. Recovering from a period of deferred maintenance in our fiscal first quarter, robust demand for accessory components by OEM customers drove organic sales higher during the quarter. Profitability remained healthy at Product Support with an operating margin of close to 17%, similar to the prior-year quarter. And on a sequential basis, margins significantly improved from the first quarter due to the higher volumes and operational efficiencies driven by our transformation initiatives.

During the second quarter, Product Support won 2 new deals with operators in the U.S. and Asia to conduct MRO work on Nacelles on V2500-A5 engines, which, as many of you, is a widely used engine found on large programs such as the A320. We expect the work associated with these new agreements to become a meaningful contributor to Product Support sales and profits. Product Support is a solid, growing double-digit margin business segment with good cash generation.

Moving on to Slide 10. Our Precision Components segment sales reflected the impacts of continued lower production rates and pricing on the 777 and lower pricing on the 787. Notably, during the second quarter, we were selected by Boeing to continue to provide environmental control systems ducting and floor panels for several large commercial programs, which contributed to this segment's backlog. Segment margins were modestly negative and lower relative to the prior quarter because of restructuring costs and inefficiencies due to lower production volume. Those headwinds may have some positive developments and progress in Precision Components. This progress was evident in the segment's sequential improvement over the first quarter, reflecting the benefits of our cost-reduction initiatives.

As indicated on the slide, 2 of our major TPC facilities have recently received favorable performance ratings from several major customers, including Boeing. The year-to-date book-to-bill ratio is a positive 1.1 to 1, indicating customers' continued support as our restructuring paves the way to growth in sales and profitability in this segment.

Aerospace Structures, as indicated on Slide 11, posted sales of $249 million in the second quarter and benefited from rate increases on the 767 tanker and Global Hawk programs. Headwinds during the period were as expected and include the completion of and continued rate reductions on certain Boeing and Gulfstream programs. Aerospace Structure's year-to-date book-to-bill ratio was a strong 1.3 to 1, driven by the Global 7000 and 767 tanker programs.

During the second quarter, we had a net favorable cume catch-up adjustment of $8 million over 24 programs, reflecting both our improved performance and our enhanced customer relationships. Segment operating margin increased materially on a sequential basis as transformation initiatives continue to take hold. We are increasingly encouraged by where our Aerospace Structures operation is headed. We continue to see a rotation in the business base into engagements where we're working together constructively with our customers and have confidence in our ability to execute profitably on a sustainable basis.

On Slide 12, you'll find our free cash flow walk. We continue to manage our cash along our targeted trajectory of approximately breakeven free cash flow in fiscal '19 in the range of $200 million in fiscal 2020. There will be a number of cash risk and opportunities to manage along the way, but we see the drivers of the free cash flow swing from our expected cash usage in the current fiscal year toward our 2020 goal. The drivers are stabilization of customer advances, less new program inventory build, less development costs and less restructuring costs, coupled with the sales growth and margin benefits of those investments.

With respect to our recent cash performance, free cash used was $211 million during the quarter. As we've discussed in our last 2 calls, over the course of this year, we'll be working down the majority of the customer advances that we received last year, which is an expected temporary headwind to our cash flow as we move through the year. Cash usage in the quarter was largely as planned. We are maintaining our cash guidance for the year. We expect cash use will continue to remain high in Q3 and will reduce in Q4.

Our balance sheet metrics are summarized on Slide 13. In all, we completed a $500 million bond offering, used $300 million to pay off a secured term loan and amended our revolver, which increased our secured borrowing capacity and liquidity. Last Friday, we extended the maturity of our accounts receivable facility 3 years. These actions provide us with greater financial flexibility and liquidity to execute our turnaround strategy.

Regarding our outlook, on Slide 14. We're maintaining our previous guidance, with the one change being a reduction in our CapEx range for the year from $80 million to $90 million down to $50 million to $60 million, consistent with our year-to-date run rate and current full year expectation. We expect the third quarter tax rate of approximately 15% and a full year tax rate of approximately 6% with the potential for the rate to be lower through deferred tax benefits from prior divestitures and adjustments to the valuation allowance.

So to sum up, our fiscal 2018 is unfolding in very much the way we anticipated when we began the year. Our transformation continues to make forward progress with cost reductions, operating performance improvements and divestitures in noncore businesses, and we've been successful in securing new awards and follow-on orders, which are reflected in our backlog growth. Collectively, these achievements are setting the stage for the emergence of Triumph Group as a growing profitable company consistently delivering positive free cash flow and generating value for shareholders.

At this point, I'll hand it back over to Dan to wrap up. After which, we'll welcome your questions.

Okay. Thanks, Jim. So closing out our remarks on Slide 15. Triumph is shifting from surprises and disappointment to more predictable performance as our continuous improvement culture roots out the remaining areas of performance challenges. The focus now is on executing our renegotiated contracts and new wins, and we look forward to getting to the other side of the restructuring, consolidation and divestitures in FY '19 and demonstrating follow-through on our new strategies as we sell into an increasingly strong commercial business jet and defense markets.

Jim and I would be happy to answer any questions you have.

(Operator Instructions) Our first question comes from Michael Ciarmoli with SunTrust.

Maybe, Jim, just on the free cash flow outlook. You cut the CapEx there, and I think you've been accounting for the proceeds from Embee. I would have thought there would have been maybe some room for improvement on the CapEx. Can you just maybe elaborate as to why the kind of range was reaffirmed the $450 million to $500 million?

Yes, so we did cut -- we reduced the CapEx to the current run rate, and it was necessary to stay inside the range. We want to keep the CapEx where we are now. The cash flow has a lot of moving parts, risks and opportunities. It is a little lumpy, but we still -- we have a balance of risks and opportunities that are going to keep us in that range for the year. In terms of the proceeds, Mike, from the divestiture, that's not included in our free cash flow, so we don't count that as free cash flow. That did reduce debt. It was about $65 million from Embee in September.

Got it, and then just a follow-up on there. In terms of keeping the CapEx consistent, with some of the wins, as you look forward, I mean, are you eventually going to have to spend a little bit more to catch up? Are you effectively under-investing now for some of the future program growth? Or how should we think about CapEx going forward?

I think we'll see increased CapEx in years ahead. But for this year, we made some discrete choices on programs that we're going to outsource that had fairly high capital bills, and we felt we could achieve a better business case by sourcing that works rather than [facilitizing] internally. So we're not starving our more attractive businesses where we're investing to grow.

Our next question comes from Sheila Kahyaoglu with Jefferies.

So just on the Aerospace Structures margins, they've been the most volatile. Maybe can you elaborate on some of the moving pieces in terms of profit? And how do we think about a normalized operating margin for this business?

Thanks, Sheila. We saw improvement, as expected, from some of the programs like Global 7000, like some of the Legacy Boeing programs that we have efficiency improvements on, and we're happy that we're seeing a balance. In this quarter, it was actually positive of cume catch adjustments from our cost-reduction activities and efficiency improvements. Going forward, as we said, this is not typically a high double-digit business, it's more of a high single-digit business. But we're looking for every opportunity to continue to improve margins there.

I'll just add, Sheila, that -- Jim used the word rotation in the business base. I think it applies here because we had those really strong programs V-22, C-17, 450. Those have come to an end. And what we are performing now in TAS is either programs that are in loss positions like 747 or they're in the development phase like Global 7000. So we've got upside once we lay those programs flat and we transition on them to profitable production, and we sunset loss-making programs. And as we grow defense work, which tends to have more stable margins, we expect to see upside as well.

Jim, just a follow-up on the point about the Global 7000. So is it a positive? It's not yet a positive earnings contributor. Will it be in fiscal '19?

Well, it's not yet a cash contributor, but it can contribute to earnings as we firm up our cost going forward.

Our next question comes from Myles Walton with Deutsche Bank. Our next question comes from Sam Pearlstein with Wells Fargo.

Last quarter, you had talked about a normalized kind of cash flow level and where you could take the company. I just wanted to know how do you feel about that normalized level now. And can you just kind of highlight some of the big moving pieces? I know on Slide 19, you showed the restructuring spend will be down about $33 million from '18 to '19. But just trying to think about the other big buckets of outflows that will go away and how you get to that call it, $200 million level?

Sure. Thanks, Sam. I feel just as strongly as I did a quarter ago about this. We still have targets to be about breakeven, hopefully, a little positive next year, and then we're targeting $200 million as a go-forward reasonable free cash flow level, or that range. It's a target, and we're working on plans to continue to achieve that. But the big drivers, as you know, are the things that have ends to them, like the stabilization of the advances we have. We got $324 million of advances at the end of last year. We're burning through approximately $275 million this year. And it's been pretty consistent, so about $140 million in the first half and the balance over the rest of the year. That's one headwind that we're going to overcome. It's going to naturally go away. We always hope that we can achieve more advances in negotiations with customers, but we don't count on those. And then the inventory build, particular on the Global 7000 and to a lesser extent on the E2 and some other smaller programs. We said that's about a $200 million headwind this year, and that shouldn't repeat itself once we establish the base level of inventory for that program moving into production.

I would add, Sam, that we already generate $200 million a year in cash flow today out of systems and aftermarket. It's offset by cash uses and structures and components. So we've just got to fix those 2, and we've demonstrated that we can generate the cash positive.

And I'll add too, Sam, because some people have asked me about settlements. We don't get into details of them, but the settlements were a positive -- were a tailwind this year. And they're going to be offset by benefits in working capital reduction and efficiencies and profitability improvements going forward. So we do have them all captured in our internal planning, and I feel very confident about where we're headed.

That's great. And just one last question, you mentioned the $33 million on the development programs, which is about flat with the last quarter. When does that start to tail down? Does that happen over the course of this year?

Yes, during the second half, Sam, that will tail down. I think we said 65 to 100 was our range for the full year, so it will be in the higher end of that range.

The next question comes from Robert Stallard with Vertical Research.

Dan, you highlighted some of the contract wins you've achieved this quarter and this obviously, was going on last quarter as well. How would you characterize some of the terms on these new wins versus what you've seen in the past? Are you seeing a more favorable cash situation perhaps than what you signed up to in the past? What about the overall profitability?

Okay, great. The programs that we've been winning are smaller ones that are more in our wheelhouse, whether it's -- for the C5, we won some rotary gear actuators. We're doing gearboxes for the MD helicopters. We're adopting floor panels for Boeing. Those kinds of the deals, we know how to do, we know how to make money, and they are cash positive. So we're not adding risk to our backlog. In fact, the level of scrutiny now that any big development programs get is at my level, with my whole leadership team, and making sure that we start programs right so they don't get on the wrong track. So we've done forensics as to how we get into trouble on past development programs that really -- that are now weighing down our cash and profitability, and we're not going to repeat those mistakes.

Okay. And then just secondly, on the cash flow front, you mentioned that Q4 is when you expect it to turn quite positive. Is there any underlying reason for why your final quarter is so different from what you've seen from the previous 3 quarters?

It's probably mostly inventory driven, as we're -- the production inventory build is going to slow down in that quarter. It's not due to the advances which were pretty steady throughout the year. And it's also the working capital achievements where we're trying to get our inventory down. It's a lumpy process. We've done a lot of training. We've got metrics in place, and we're looking towards getting some of the benefits in the fourth quarter.

And we're starting to generate revenue-bearing deliveries on Global 7000, whereas before, it was all negative cash in both development and in priming the supply chain.

As the Global 7000 starts to ship in Q4, should we expect less of this like stream seasonality in '19 and '20?

Yes, I believe that's true. This is a unique program that's large. And as it moves into production, we're seeing the headwinds on inventory build. Inventory will come down as we ship, and we'll have to do less building of initial inventory.

Our next question comes from Cai Von Rumohr with Cowen and Company.

So you've gone over the Global 7000. Maybe give us some color, if you would on where are you with the E2 in terms of profitability and cash and similarly, how are we doing on the Gulfstream programs?

Sure. So on the E2 program, we continue to make the early deliveries. Embraer did look at their build rate and made some adjustments, which have reduced some of the front end of the ramp-up, and we are assessing our sourcing strategy for -- where that hardware is built in coordination with the customer that will allow us to improve our long-term business case on the E2. On G650, after we did the transition, we're now going through kind of a wholesale review of the whole build process at both our Tulsa and Nashville plants to improve quality and also reduce labor hours and span times. And so whereas today, G650 is not profitable, we are delivering wing boxes and wings every week to Gulfstream. And so we're able to achieve the throughput, the output, but we want to get the cost down. So it's getting a big chunk of our lean focus, and we're driving out cost ship over ship. So I'd say watch G650 over the next year as we reach that crossover point between cost and price and begin to be profitable and generate cash.

And you mentioned the target $200 million in 2020 in cash flow and moving back to considering M&A. Maybe give us some color in terms of what sort of M&A and what do you need to see to actually start doing some deals.

Sure. So we have authority within our current revolver and bank agreements to do M&A now, albeit small deals. And so we're doing our strategy reviews and looking at candidates, especially in the aftermarket and integrated systems. And sometimes, it's product line bolt-ons or small companies. We're not in a position to do anything big now. But I need to see the discipline from inside Triumph that we can do these consolidations and divestitures before we turn the ratchet and start to do acquisitions. And when we do, the past practice of putting up a Triumph sign but operating them as standalone with a different supply chain and management controls, we're not doing that anymore. So the time is right having done these 9 consolidations and 3 divestitures to say, "Okay, what might be attractive areas?" And we see the supply chain in particular for aftermarket being very fragmented and inefficient. And just as Boeing and others are looking at ways to increase the efficiency of aftermarket, so is Triumph. So that's one area. And then on systems, we're very interested in expanding our working in areas that support the electrification of the aircraft, electric brakes, actuation flight controls and also, different technologies that enable increased efficiency and fuel performance. And then I mentioned these higher-temperature materials, and we'll be adopting additive manufacturing in that area as well. We're in partnership with some of the top companies that supply that equipment now to help drive out cost. So I'd watch for acquisitions small in that area and then over time, more transformative ones.

And then I'll also add we actually have an event in the next couple of days to review our M&A process and improve it, so we have our Lean people facilitating review of how we do M&A to make sure we're ready when we have those opportunities.

Our next question comes from Robert Spingarn with Credit Suisse.

So I wanted to talk about 2 things. First is revenue. You said you should -- you're hoping to grow next year. And just looking at the quarter, you have positive book-to-bill over 1 in 3 segments and then organic growth in the fourth. And I don't have all of the book-to-bill numbers in front of me for the trend but I wanted to ask you, Dan, what kind of growth are we talking about? Is this going to be a squeaker where you have a little tiny bit of growth because you're inflecting and you still have programs rolling off? Or should we start looking at these a book-to-bills, which imply higher growth at some point, and start to anticipate some real serious growth here?

Okay. So some of the growth will come from programs already in our backlog, such as Global 7000 and G650 and the derivative airplanes that Gulfstream is working on as well as programs that are ramping up like GE LEAP. The reason the fourth business unit doesn't track book-to-bill, is today aftermarket is largely a product line without backlog and that's...

It's a book and burn business, I assume.

It is although we're seeking longer-term partnerships with both the carriers and the OEMs. It's part of kind of reinventing that business from transactional to long-term partnerships. So I think modest growth is the right term. I don't expect to see double-digit growth in FY '19. As we reshape our portfolio and we get back to M&A over time, that will help us accelerate our growth.

Okay. And then I wanted to ask for clarification on something. You talked about $3 billion in upside in BizJet industry revenue, I think, is the way you characterized it, by 2020. And I just want to get a better understanding of where you see that coming from, from an industry that while there are new programs coming in for you, this is an industry that has consistently booked below -- their book-to-bill is below 1.0 forever and just has not managed to properly respond from a production rate perspective. So I'm talking about the industry there, not Triumph. And then the last thing I wanted to ask you and it goes back to an earlier question is, with this dual sourcing strategy and the fact that you're taking a piece of a program, how do you get the return on invested capital to meet your hurdle rates? And how are these things margin accretive?

Let's start with business jets. I recently attended the NBAA business show in Las Vegas and all of our customers were there: Cessna, Honda Jet, Bombardier, Gulfstream, and Embraer. And they all had their full product lines on display, and the metrics that they're watching are both used aircraft availability, which is starting to dry up. And although prices have remained soft, they expect used prices to begin to get support. And then they see a return to higher levels of sales. The traffic through all of the displays was very high at both the fixed display and in the show. And they're looking for a return of economies in Asia and Russia, and elsewhere, that would help fund the growth. So I'll leave it to them to handicap it but the numbers...

But they have not gotten it right, Dan. They've gotten it wrong for 8 years.

Yes, that's true, and I know they've adjusted their throughput downward. But we don't count on their, I'll call it, the full high end of their range when we do our revenue and capacity plans. We de-rate them but because we're on the leading platforms, the ones that are garnering the most interest right now that are changing the segments and the ones that are maintaining strong aftermarket price support. We're glad to be where we are. So I don't know that we're going to have much success at the lower end of the business jet market, but we are going to do -- win our fair share at the long-range segment.

Okay. And then just on the ROIC and the margins.

Okay. So let me start on dual sourcing, and Jim can jump in. We want to dual source. We're going to win dual sources on programs that are large enough to justify dual source like F-35, like 737, like A320, 330. And so we look at the economics of our share of the work, which often can be increased if you perform well on schedule and delivery. They tend to shift work split between the 2 sources. And so we do the math on what the nonrecurring might be, the cost of switching. Do we have to pay that, the cost of switching? Is that part of the business case? And we only enter into it if there is uplift, the case is favorable and we have some aftermarket participation as well.

Yes, Dan, I think you said it right. We're very careful and we have good control over the business case. We've got to make sure we're going to get a return when we look at the cash flows as well as the initial investment, and we look for the customer and help fund some of the investment where possible through advances or owning some of the tooling or equipment. The thing with dual sourcing is it's not just about getting lower prices, right. They need continuity of supply, so they're willing sometimes to pay a little more to get someone set up. So they have a dual source.

How good is your volume visibility relative to the other guy?

When you say volume, what do you mean?

Well, if you're dual sourcing, right, so you're sharing the program with someone who's already there. So is there something about the dynamics of that that we need to understand better? Because it would seem to me that's the issue. Do you get enough volume so that your investment is recovered?

Sure. They usually give us a minimum quantity, and then there's a variable quantity based on performance that you can win away. And then if you give price step-downs or if you give -- you differentiate on quality or on-time delivery, they give you more. So we run the business case based on what we think is the expected quantity. We don't assume the upside. That tends to just enhance the business case over time.

Our next question comes from Matt McConnell with RBC Capital Markets.

Just following up on the $200 million normalized free cash flow number. So how much of that would come from better EBITDA margin? So I understand the customer advances, on a recurring issue, you'll have lower development spending. But it seems like you would have to have higher EBITDA to get to that kind of $200 million-ish type number. So is there an assumption either for incremental margins when volume returns or restructuring savings or any other visibility into that part of the forecast?

Yes. Thanks, Matt. You're absolutely right. We do need to improve our margins. We're not counting heavily on that but enhanced margins are part of it. That's enabled by our restructuring activities and our operational efficiency programs. But the bulk of it is just the advances not having to be repaid and the inventory not having to be built. That alone would get us back to a breakeven kind of scenario, and then we do have to offset the settlement tailwinds that we had. But beyond that, we've got not only higher margins from the efficiencies but we're going to have higher volume. And albeit modest growth, we're looking to gross revenue again, so there's flow-through of that additional volume that helps as well.

Okay. And so is the assumption that structures would be cash flow breakeven within that $200 million normalized forecast?

We don't give cash by segment and I don't have that handy, but I'm not counting on structures for all the cash generation. The cast generation is coming from our -- segments that are shorter cycle really. It's Integrated Systems and Product Support are the big cash drivers at the moment and probably will be for the next year or 2.

And since there are no further questions, this concludes the Triumph Group Second Quarter Fiscal Year 2018 Earnings Conference Call. This call will be available for replay starting today at 11:30 a.m. Eastern Standard Time by dialing phone number 1 (800) 585-8367 and using access code 1599357 or you may also dial 1 (855) 859-2056 and also the same access code is 1599357 or you may also dial (404) 537-3406 and the same access code is 1593357.

Thank you all for participating, and have a nice day. All parties, you may disconnect now.