Triumph Group Inc (TGI) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Triumph Group's Conference Call to discuss our first quarter fiscal year 2019 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 your pop-up blocker is disabled, if you're having trouble viewing the slide presentation. (Operator Instructions)

On behalf of the company, I would 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 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. and may not be recorded, transcribed or rebroadcast without explicit written approval.

At this time, I'd like to introduce Daniel J. Crowley, the company's President and Chief Executive Officer; and James F. McCabe Jr., Senior Vice President and Chief Financial Officer of Triumph Group. Go ahead, Mr. Crowley.

Thanks, Kevin, and good morning. During the first quarter of fiscal 2019, we continue to execute on our turnaround and demonstrate progress on our operational and financial objectives. Key takeaways from the first quarter on Page 3 are top line growth, decreased use of cash and significant risk retirement on our structures programs, allowing us to enter the final phase of our transformation on a growth trajectory. We're maintaining full year EPS, and given our clear line of sight, we're providing cash guidance with reduced cash use year-over-year. We're confident we're taking the right steps to advance Triumph on a path to value.

Turning to Page 4, total net sales for the first quarter were up 7% and organic net sales were up 3%, both year-over-year, excluding divestitures and the impact of ASC 606, with all 3 segments showing organic growth. The organic sales increase of 6% in Integrated Systems was due to accelerating Apache helicopter component deliveries as well as ramp rates on the A320 and 787. While Product Support increased 13% year-over-year, enabled by strong KC-10 fleet support for accessories and thrust reversers and C-17 nacelle overhauls. And Aerospace Structures revenue benefit from initial production deliveries on the Global 7500. Our top line growth in the quarter is a leading indicator that our operational turnaround is delivering results. It reinforces that fiscal year '18 was a trough year for revenue, and that we anticipate returning to top line growth this year.

We expect improved cash and earnings to follow in the second half of FY '19 and to expand in FY '20. While growing the top line, we are doubling our efforts to enhance margins through price improvements and reductions in overhead and SG&A. Aerospace Structures' adjusted operating margins also was up versus the first quarter last year, reflecting the positive impact of our restructuring activities.

We've essentially completed development spending on the Global 7500 program, accelerated our facility consolidations, only 2 of which remained at the company level, and renegotiated contracts to further de-risk our backlog.

On the growth front, we're taking a disciplined approach to competitive wins to ensure we fill our backlog with high-quality orders that will contribute to better margin performance.

On Page 5, backlog for the first quarter was up 5% over the prior year. Orders were traditionally nonlinear given award timing. And when we view the year-over-year improvement as -- in backlog is a really positive step forward.

During the first quarter, Triumph Airborne Structures was awarded a 3-year contract to provide engine nacelle component repair and materials services for military cargo aircraft. As announced during this year's Farnborough Airshow, Triumph Integrated Systems was awarded a contract with Saab for Gripen Airframe Mounted Accessory Drives.

At Farnborough, Triumph held more than 200 meetings and shared our progress with customers, advancing partnerships and new business opportunities. It's clear, there's growing desire in the industry to engage Triumph as a preferred MRO partner, as a systems provider with strengths and actuation fuel hydraulics and gearing solutions and as a complex structure supplier.

Triumph's new business pipeline remains robust at $12.8 billion, of which $6.8 billion is military. We look forward to the eminent awards of the U.S. Air Force's T-X Trainer competition where we are teamed with Boeing Defense Systems and the Navy's MQ-25 refueling drone where we are supporting all 3 competitors.

We anticipate opportunities with long-term value north of $3 billion to be decided in the second quarter. As such, we expect bookings and backlog to pick up throughout the fiscal year.

On Page 6, Triumph's focus for growth remains on our core areas where we can provide higher value and differentiated offerings to our customers through innovation and IP.

In Integrated Systems, for example, our recent agreement at Farnborough with GE Additive to broaden Triumph's use of additive manufacturing technology is indicative of our investment priorities and our partnerships. Our additive R&D will advance our prototyping and design competencies and accelerate our ability to design and build optimized system components for our customers.

We are investing in proprietary processes for thermoplastics used in structural applications to reduce weight, cost and lead time while improving impact resistance. Not susceptible to moisture or aircraft fluids, thermoplastics don't require the autoclaves and clean rooms of the past while enabling large unitized structures.

In Q1, we announced our strategic collaboration with Quickstep, Australia's leading independent manufacturer of advanced carbon fiber composite components, to expand our position within growth markets and provide high performance and differentiated products to commercial and military OEMs. The latter are just 2 examples of what we're doing to reinvent our structures business.

The commercial narrow-body jet remains an important growth platform and one that continues to ramp up. We have strong positions on system components on both the A320 and Boeing 737 and are in discussions with Boeing and Airbus to expand our content as they develop their new aircraft versions. We met with the top leaders from both firms at Farnborough and are aligning our portfolio and R&D efforts with their supply chain needs.

Triumph Product Support continues to perform well under traditional repair contracts as we transition towards a more partner-based business model using joint ventures and performance-based programs such as power-by-the-hour and performance-based logistics. Awards in the quarter for nacelle component MRO, from a domestic 737 NG operator as well as an A320 operator in the Asia Pacific region reflect our success in reducing turn times and costs.

We are engaged in a number of parting discussions with Boeing Global Services, Bombardier and Airbus, building on our success with China Southern Airlines. Triumph continues to engage engine OEMs, an important market for us as we supply fuel pumps, metering, controls, actuation gearboxes, acoustic panels and high-temperature composites inducting on new applications. Our investments in additive, thermoplastics, digital factory and automation will increase our market value within the space.

In June, the U.S. Navy procured its first 53 CMV-22 Ospreys for use as carrier onboard delivery aircraft as part of a $4.2 billion contract MOD announced by the Pentagon. We congratulate team Osprey for this achievement. And Triumph is a key member of this team, providing critical actuation gearing and structures.

We continue to expand our efforts to broaden our scope of military programs and continue to target 30% of revenues to be generated for military end markets over the next 3 years. T-X, MQ-25, Light Attack and multiple aircraft light extension programs will help us meet our targets.

We're using our footprint in Europe on 2 recently announced sixth-gen fighter programs, Tempest and the Future Combat Air System, combat platforms aimed at replacing existing fighter aircraft in European air forces. As we win, we will enhance margins through price improvements and cost efficiencies. We are deploying the Triumph operating system to deliver increased revenues and lower staffing levels. In Q1, we made further progress in reducing supply chain costs using low-cost countries as we did in FY '18, and we will pursue outsourcing on structure programs opportunistically.

Moving to Page 7, I want to highlight our cash improvement efforts during the quarter and provide an update on key programs. We are increasingly confident that we are nearing the point at which we will begin to generate positive cash flow as we retire program risks. While we are seeing compelling growth in our Aerospace Structures, we're also actively addressing our cash usage, particularly on the Global 7500 program.

As you know, Triumph's Aerospace Structures design, develop and produces the advanced wing for the Global 7500 program in collaboration with Bombardier. Awarded in 2011, both firms worked together through challenges to meet enhanced performance requirements, which have now been satisfied and validated through rigorous flight testing. The joint team has completed virtually all wing development milestones in support of entry into service. This is a huge technical and cash risk retirement.

Our supply chain is ramping up and moving to work to lower-cost sources. The factory in Red Oak, Texas has now supplied 18 production wing boxes, which will come out of inventory as wings complete and aircraft deliver this year. That said, the cost to complete these wings with Bombardier's final assembly line has been much higher than anticipated in the last year's settlement and is the primary contributor to Triumph Aerospace Structures' cash use over the last several quarters.

To give you a general sense of the outsized impact of the program, its impact on our cash usage, in the first quarter, Global 7500 alone used more than 100% of the total Triumph Q1 cash use. Without these costs , Triumph would have been cash positive in the first quarter.

We believe that further concurrency will peak in the first half of this year and expect spending to decrease in the second half of FY '19 as the program completes wings in-station and comes down the learning curve.

Bombardier and Triumph continue to have amicable programmatic and commercial discussions on the wing scope of work and are jointly analyzing the most cost efficient supply chain arrangement to ensure continuity of supply and enable Triumph to return to more predictable cash flow and profitability. While we can provide no assurances of a successful outcome to these discussions, we expect any changes from the baseline to enhance Triumph's shareholder value, and we'll provide updates when we have greater clarity.

Elsewhere, we are on track to transition the G650 assembly work from our Tulsa and Nashville facilities to Gulfstream's co-production facility in Savannah while retaining overall program management and supply chain responsibilities. The G650 is now cash positive for the first time since the transfer from Spirit.

Planning for the transfer of the E2 program from our Red Oak plant to Korea's ASTK facility is well underway and progressing well. Our continued participation in programs like these enables us to maintain revenue with significantly improved cash and margin profiles. Note that we're also working with the G280 customer, IAI, to determine the optimal supply chain arrangement as well given its historical cash use.

And last, our transition of the Boeing 767 structures from Texas to Florida is proceeding well, with the first articles coming off the new tools below targeted hours.

Moving to Page 8, as we clean up our program portfolio, we are making equal progress on our operating company portfolio. During Q1, we signed agreements to divest 2 noncore businesses. And once completed, we expect these asset sales to positively impact our profitability and cash flow in the subsequent quarters and years. Jim will provide more color on our progress here.

So looking back on the last 2 years, we've simplified our company's organizational structures, improved underperforming businesses to position them for sale and in some cases, for growth as part of Triumph. We now have 20 operating companies today, which is less than half the 47 that we had in 2016. Over the same 2-year period, we reduced the number of Triumph sites to 56 from 74 and occupancy by over 1 million square feet. And once all of these consolidations are complete, these actions will support sustainable profitable EBITDA growth.

Taken together, these path to value actions move us closer to achieving our goal of improved margins and reduced debt as we de-lever the company and swing from high cash use to positive cash from operations over the next year. And having achieved greater stability in the business and de-risked our structures contracts, we're now able to provide cash guidance. Just as we've done in the past 2 fiscal years, we will continue to explore all paths to meet our financial targets.

Jim will now provide more specifics on Q1 and our outlook for the full year. Jim?

Thanks Dan, and good morning, everyone. Our first quarter results were largely as we anticipated. More importantly, we continue to set the stage to grow our sales and improve our profitability and cash flow moving forward.

On Slide 9, you'll find our consolidated results for the quarter. Our net sales were up compared to the prior year first quarter with all 3 of our segments generating organic top line growth, and this is our second consecutive quarter of organic growth. Operating margin adjusted for the impact of the pension accounting change, restructuring costs and a loss on assets held for sale increased 130 basis points to 4%.

With respect to segment results on Slide 10, sales in our Integrated Systems segment increased nearly 6% organically after accounting for our Embee divestiture last year due primarily to increased volumes on several commercial programs noted on the slide. Integrated Systems operating margin was approximately 15%, down from last year due to a favorable settlement of customer insertions in fiscal '18, combined with higher costs this year related to the consolidation of businesses within this segment. We expect these consolidation costs to be behind us in FY '19, which will allow us to return to historical levels of profitability. Integrated Systems expanded its backlog for the sixth consecutive quarter with a book-to-bill ratio of just over 1:1.

Turn to Slide 11. First quarter sales for Product Support segment were up 13% on an organic basis after accounting for last year's divestiture of the engine and APU businesses, driven by stronger demand for structural component repairs and accessories. Product Support operating margins were down slightly compared to last year as we come down the learning curve on a new repair program. We expect to return to normal segment margins going forward.

Aerospace Structures results were summarized on Page 12. After accounting for the divestiture of Long Island's build-to-print machining business, segment sales were up 12% organically as we ramped production on the Global 7500 program. Aerospace Structures operating margin adjusted for the adoption of the new pension accounting standard as well as restructuring costs was 2%, a year-over-year improvement driven by the actions we've taken over the past 2 years. Aerospace Structures had a book-to-bill ratio of 0.84:1, which is reflective of the significant revenue growth of the segment in the quarter as we increase deliveries, particularly against our Global 7500 backlog, coupled with the timing order flow.

Turning to Slide 13, Free cash used was $78 million during the quarter. This was a significant improvement on both a year-over-year and sequential basis. And while we have much left to accomplish, we are pleased with the steady progress we're making towards predictable free cash flow. Capital expenditures were $12 million in the quarter. We used $4 million for restructuring and $81 million on the Global 7500 program, $10 million of which was development expense.

On Slide 14 is a summary of our net debt and liquidity. Our net debt at the end of June was approximately $1.5 billion. In July, we negotiated and executed an amendment to our revolving credit facility, which has enhanced our compliance margin, while we progress with certain cash-consuming programs, particularly the Global 7500 program. With this amendment in place, we have increased financial flexibility with availability of about $543 million, and we are in compliance with our financial covenants.

Slide 15 is a summary of our FY '19 guidance. Based on anticipated aircraft production rates, we continue to expect fiscal '19 revenue to be approximately $3.3 billion to $3.4 billion, which represents a year-over-year increase of approximately 5% at the midpoint of our guidance range. Our guidance assumes a 17% effective tax rate for the year. Cash taxes will be about $11 million for the year, and we're expecting capital expenditures in the range of $50 million to $60 million. We're expecting free cash use for the full year to be between $200 million and $250 million.

If you turn to Slide 16, you'll see the first quarter included repayment of advances received in prior years of $53 million and the Global 7500 program, $81 million. Adding these items back to our reported cash use results in pro forma positive free cash flow of $56 million in the quarter.

For the fiscal year, our expectations for free cash use, which we currently forecast to be in the $200 million to $250 million range, assumes liquidation of $180 million of advances and net spending on the Global 7500 program of $130 million. Adding these items back to our guidance, our pro forma free cash flow guidance is between $60 million and $110 million positive for the year. We expect to use cash through the third quarter and be cash positive in Q4.

As you can see on this slide, the actions taken to date and currently underway in our Aerospace Structures' cash-consuming programs through outsourcing, contract negotiations and operational improvements have given us confidence in achieving our cash flow objectives.

After the end of the quarter, on August 1, we announced the sale of Triumph Structures East Texas, another build-to-print machining business. We anticipate divestitures will generate cash this year. We have announced divestitures totaling approximately $130 million of annual sales, and we have another $300 million of annual sales of divestitures in the pipeline for this year.

So to wrap up, one quarter into our fiscal '19, we are tracking with our expectations heading into the year. We are pleased with our revenue growth and are confident that with the cost reduction and portfolio reshaping actions we've been taking, profitability and positive free cash flow will follow.

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

Thanks, Jim. So as we enter the follow-through phase, we're really focused on profitable growth and positive cash flow. We're executing our plans, de-risk the programs that Jim mentioned, with the financial benefits resulting from consolidations, divestitures, investments starting to come in. We are confident our actions are helping us to achieve our goals.

Our restructuring and transformation efforts are paying off in top line growth. This sets the stage for year-over-year cash improvement and return to historical margins over our planning horizon. While progress is not linear, we are on an upward trajectory, and I want to thank the men and women of Triumph Group as they overcome our customers' hardest challenges. Our team is up for the last push on the transformation this year, and we expect to be in a stronger, competitive and financial position in FY '20.

As Triumph employees celebrate our 25th anniversary this year, we look forward to completing our turnaround and accelerating our strategic plan to deliver enhanced value to all of our stakeholders.

Kevin, I'll now open the call for Q&A.

(Operator Instructions) Our first question comes from Robert Spingarn with Crédit Suisse.

I want to (inaudible) for the last couple of innings of this turnaround, as you're filling the (inaudible) you have (inaudible) themes that stood out for me today in reading your materials and listening to your monologue is that Triumph is sometimes finding a better outcome when work gets transferred, either between factories or to the customer: 650 to Savannah, the E2 to Korea, the 7500 up to Canada, in what is turning out to be very expensive traveled work. Are you -- and then you mentioned the 767 moving internally. What's going on in these facilities to cause these issues? And is this an argument for more insourcing at the customer level and -- or at least co-location of your work with the prime?

So thanks, Robert, and I didn't catch the beginning of your question, but I got the second half. So I'll try to cover it. Getting the right work in the right place is so important. And sometimes work, when it's originally bid years ago, these are multiyear programs. They have assumptions of what base would be in a certain facility or what their cost structure would be. And by the time it gets through development, you conclude there's a better way to do it, potentially moving the work offshore. In case of the E2, ASTK already makes all the fabricated details that go into fuselage, so having them assemble it and ship it to Brazil is so much a lower cost option. So just as water finds its own level, we're making sure that each of these programs is performed at the right location. In the case of 767, we had 2 facilities. Our facility in Grand Prairie is a leased facility. We'll be exiting that over the next 2 years. And the facility in Stuart, Florida does the 767 wing center section already. So combining that work gets based benefits and rates. We haven't made any decisions yet on Global 7500. We're continuing to execute. It's true that the costs of doing traveled work were much higher than doing it in-station. So ship over ship, we're reducing that traveled work content, and that's part of how we're going to reduce cash. As far as insourcing to the prime, I think many of the primes have concluded that having the wing close to their factories and having design control of the wing is to their advantage. In some cases, they've decided that they may have outsourced too much. They're bringing it back. But they're still coming to Triumph where it makes sense. For example, on the T-X offering for the new trainer, we are the source of the wing fuselage and the empennage, and it's the right answer for Boeing Defense. So it's not a one-size-fits-all.

Yes. But does this mean that your current -- your new business, you're thinking this way with the location of development production, so that you don't repeat what seems to be happening on an awful lot of programs?

So I think we're being more thoughtful about where we place work in terms of long-term cost structures. And the world has changed a lot, from, let's say, 5 or 10 years ago when the legacy Vought business had 7 factories in different locations, many of them higher cost areas, and so we're dealing with that in a direct way.

Okay. And then just lastly, for Jim, I just wanted to see if you could give us a little bit more detail. You've talked about it all morning, but how does the 7500 cash burn -- you say it improved sequentially throughout the year, but can you put some numbers around that?

Well, the numbers we have are actually what happened in the quarter, which was $81 million of usage, of which $10 million is development expenses; the balance is inventory, primarily. For the full year, we've said $130 million. Don't have a particular spread, but the trend is down. So full year...

So the draw straight line? Or maybe it's an accelerated line down?

I think it's going to improve more dramatically in the second half and certainly, the fourth quarter.

And did you say which unit you become cash positive?

We haven't said that. And we've said before that in between 75 and 100 is when you'd see a typical program become cash positive.

Our next question comes from Seth Seifman with JPMorgan.

Good quarter. So just wondering, as we think about the Aerospace Structures business, longer term, when we're done with the divestitures, let's put on hold a second some of the new opportunities that are out there, are we thinking about that being, let's say, a $1.7 billion business in terms of sales? And what kind of EBITDA margin do you think you can do there in the future when you're through the transformation?

It's Jim. We've said that we've got $130 million sales worth of divestitures we've announced this year, and $300 million more that are targeted for this year. And I would say that more than half of those are in that segment. We said for this segment, structures, in general, is kind of a high-single digits normalized margin, and that's what we would look for. You can do the math, but $1.7 billion is in the reasonable range for adjusted sales post divestitures.

Okay, okay. And then following up on the G650, is there incremental improvement in the cash flow on G650 as we look out to 2020 relative to the improvement? I assume there's a decent amount of improvement baked into fiscal '19 versus fiscal '18.

There was a big swing in cash from '18 to '19. And in part, because of our negotiation and payment terms with the G650 and also because we've continued to come down the learning curve on the operation at Tulsa and in Nashville. So we're confident about the performance of the program we move forward, and we expect the cash performance to continue to be strong in FY '20 and beyond. And we're on that program for the long term. Gulfstream has very good prospects for the platform and continues to look at derivative aircraft, and we'll be part of that success.

Great. And maybe just finally, I just want to confirm, the $180 million of cash advance burn this year, a, that's a net number; and b, you've kind of talked in the past about advances being a logical way to finance the business, which, I think, does make a certain amount of sense. And has you're thinking on that evolved at all? Or is it still the same?

I think some of the larger discrete advances we had in prior years have become just changes in terms, getting paid quicker, have modest smaller advances on a number of programs. The $180 million is a gross number because we don't have any other big advances right now. So that's the gross burn-off of prior years' advances during the year. But we're continuing to seek advances, but they're not that large in magnitude, and they're more built into the terms of contracts.

And I think the range that I estimated a couple of quarters ago, $100 million to $200 million of sort of nominal advances this year still rings true. It's still episodic and tied to new awards or extensions, or if they ask us to take on work from another supplier, we may ask for an advance to facilitate that. So it's not linear smooth, but it's on that order of magnitude.

Our next question comes from Sam Pearlstein with Wells Fargo.

Just to follow up on that last question, after the advances you repaid this year, are there any debts lingering into 2020? Or are they complete once this year's done?

Yes. There's a modest amount that lingers into 2020. I don't know the exact amount, but it's nowhere near this year's payback. Majority is paid back this year.

Okay. And earlier in the year, if I remember right, I think it was Jim, you have said that there was going to be no significant increase in net debt this year, which implied that, I guess, the divestitures would offset the free cash outflow. Can you just update us here on -- you talked a lot about the sales that you're going to divest, but just in terms of the proceeds, how should we think about the proceeds relative to the free cash outflow?

We don't have the proceeds yet because we're in the process with some of the ones that are in the pipeline. But the nature of these businesses are that they're build-to-print businesses. We're finding strategic owners for them that will pay a premium because they have synergies. So I think you just have to look at the market value of build-to-print businesses that -- with that kind of sales. As we get closer and we have more clarity around that, we'll certainly disclose the amounts that we expect. But that was the premise for the offset to the operating cash use was some of the proceeds from the divestitures.

But it doesn't sound like just based -- if they're build-to-print businesses and the sales you talked about, it would seem like it's not going to be sufficient to offset all of the free cash outflow. Is that fair?

Sam, as I said, we don't know how much we're going to be able to get yet. We don't say that we're going to sell something definitely. We explore sales. So if we don't get the proper amount, then we're not going to follow through with those sales, but we have multiple opportunities for sales in the pipeline.

We have sufficient pipeline to exceed that number.

Our next question comes from Krishna Sinha with Vertical Research.

Just on your restructuring, can you just talk about how much restructuring -- or how or when do restructuring will flow through to the margins or how much you've already taken on that? I'm just trying to get a sense now that rev rec has come and disaggregated the pension, how much sequential improvement are we going to see in margins? And how much more is good to go in terms of restructuring and flowing through the margins?

Let me -- hey, let me first thank my finance team because they've all had serious brain cramp for the last 4 months, dealing with both pension accounting and rev rec, and they got through it very cleanly with the help of E&Y. So we're really looking forward to our FY '20 forecast as being a clean year. And FY '20 is when we expect to see the contribution of the savings from the consolidations. Most of them took about 12 to 18 months to do and have paybacks within a similar period, 18- to 24-month payback. So that's the first year we see a benefit. We did get some savings in the first 2 years, but most of it went to pay for price concessions and cost growth on Red programs. And we're disappointed about that, but we're glad we did the savings initiative, otherwise we wouldn't have been where we were. Jim?

Yes. In the quarter, we saw $4 million of restructuring. The majority of that, over $3 million, was in the structures group, and the balance was in the Integrated Systems. It's consolidation of facilities, and the costs go beyond the out-of-pocket cash cost. There's also the setup and start-up costs of a new facility and getting the new teams to work together. So we moved 3 facilities to 1 last year in Integrated Systems. We're consolidating another facility this year in Integrated Systems. And we're seeing some of the benefits of the prior year actions. But they're all embedded in the margin trends, which we expect to be positive in both of those segments.

Yes. I'll add to that, that these facility moves are not for the faint of heart . You have to build ahead. It dries up your working capital. You usually have a sawtooth in the learning curve, so temporarily, things cost more. But then you get the benefits. So I really want to get to a stable number of sites. I mentioned 56 sites now in our notes. When we're done with our divestitures, that number could drop by at least 10 or 15 more. So we're going to get down to a smaller, more manageable company, one that we have more IP and more proprietary process and candidly, can manage better.

And then just a quick follow up, so how close would you say, now that pension has been disaggregated, your P&L sort of operating EBIT is to your cash EBIT? I mean, is there -- are there other moving pieces now because of the way the accounting is done? And I know you've taken some contract amortizations, so I'm just trying to get a sense of how close underlying EBIT is to cash EBIT.

Yes. It isn't clear always because of the long-term programs. And as you know, we have EACs that you have to do estimates for longer periods, and there's certain income that you're booking that you're not receiving the cash yet. So there's not a one-for-one relationship to that. And that's why, really, when I came in here, and it's been 2 years now today, I said, let's look at cash. Let's not continue to look at EPS and OI. Let's focus, as our primary objective, to beat the cash flows here because, ultimately, the EBITDA has got to turn to cash. And that's what we've been doing. And that's why we thought our programs, the simplest way to look at them is what's the cash flow from that program and when is it going to go positive again. And yes, we have to do the GAAP accounting, but it just gets more complex with ASC 606 where we're setting up these contract assets, recognizing revenue before we're getting paid for it. So you have to look through to the cash. I don't think there's a direct relationship we can give you or take a percentage in a particular period for EBIT. You've got to consider both. And then look at our commentary in the MD&A about what's been driving the cash relative to the book income.

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

So for the first time, you mentioned cash flow in fiscal '20, and the only thing you said was that you expect the cash drain in structures to decline. You did talk about the fourth quarter being cash flow positive. Should we be cash flow positive in 2020, both a cash flow -- on ops basis and a free cash flow basis?

So Cai, yes, I said that we are forecasting to be cash positive in the fourth quarter of this year. And we do intend to be cash positive in FY '20. We haven't given any specific guidance to the magnitude yet, but that is our plan. And the fourth quarter is going to be a launching point for that.

Got it. And then so when you say cash positive, do you mean cash flow from ops or cash -- free cash flow after CapEx?

I would look at free cash flow because that's what we're reporting.

Okay. Super. And then so if we look at the -- it looks like below the line of the $78 million, that there was a use of about $6 million, what did you get for proceeds of the divestitures in the first quarter? And the East Texas, what do you expect to get from that?

So East Texas is very modest, but in our press release, we said it was only $20 million of sales in that business. So it's not a material impact on the cash received from that. It's really about divesting in noncore business that draws attention and modest cash. So the other part of your question was the divestitures. So we announced 2 divestitures of around the time of last earnings call. They haven't closed yet. They're -- we expect them to close this quarter. And then when we do, we'll disclose the amount of that.

Our next question comes from David Strauss with Barclays.

Could you -- on the Global 7500, can you give us any sense of your learning there? What kind of learning curve you're achieving? Maybe adjusting for all the traveled work, what kind of learning you're seeing? And what kind of learning you're assuming from here -- within your $130 million cash burn forecast for this year?

So I'll talk in general terms. The problems typically run a sort of compound learning curve, steeper in the first 50-or-so shipsets, and then it tends to flatten out, with automation making that even flatter; the more you automate, the less you get. And you tend to get step functions as you put new automation in. Right now, the program has a, I'll call it a bit of a disrupted learning curve because we finished the wings to about 80%, a little slightly higher percent of completion at the Red Oak Facility, and then we ship them up to Bombardier's Toronto facility. And up there, they continue to install components and hang control services and whatnot. And do it on a noninterference basis after they've made the wings and fuselage. And we're in lockstep with Bombardier on driving that back to the left, driving it upstream, because the premium you pay for doing that work out of station can be as high as 7 to 10x as much as you do it in-station. So it's in everybody's interest. It has benefited the program because it's allowed aircraft to flow and -- from Bombardier to ramp up and retire risk on the final assembly line, but it's come at a cost, and we disclose that. So our goal -- and now we've walked that traveled work now down to essentially just the external control surfaces, which can be installed at less of a labor of our premium. So we know our learning curves. We're tracking them. When we get to a completely clean build in Red Oak where the wing is 100% complete, we expect to be running curves that are in the front end of the line that are in the 70% to 80% range, and then those curves will flatten out over the later shipsets.

When you shift the wing sets to Bombardier at this point at 80% completion, do they come off your books and go on Bombardier's books? Or how -- are you still holding them on your books until they reach some sort of level of completion out there?

So yes, I won't discuss the specifics of our contract payment profile. What I will say, it's been part of our commercial discussions with them. And until the wing is fully certified, we retain oversight of the wing. But because as we're working as an integrated team up there on the line, they know exactly where we are on every wing. Its status multiple times a day. And -- but once it has a certificate of compliance, then it's officially turned over to Bombardier.

From accounting standpoint, it's -- when title transfers is after the certification at the end of the line up in Toronto, so even though it's shipped , it's still in our WIP then .

And that's been part of why our working capital has grown over the last 4, 5 quarters is we prime the line up in Toronto, and then we've had wings flowing in Red Oak. But they don't get bought off and shipped until aircraft deliver offline, and that's looking much better now for the second half of the year.

Okay. That's helpful. Last question I have, the $130 million of cash burn that you're forecasting for the full year on Global 7500, so another $50-or-so million, are you assuming any adjustment in contract terms or some sort of settlement with Bombardier within that number? Or are you assuming what you have today in terms of contract terms hold?

We're assuming what we have today in terms of contract terms. It's that simple. And we'll look to improve it, but that's where we're at.

Our next question comes from Noah Poponak with Goldman Sachs.

It's Gavin, on for Noah. I think you'd said you weren't going to give fiscal '19 cash guidance until you had more visibility on the contract terms. And I think, following a bit on David's question, it still shows Global 7500 and G280 in negotiations on the deck, but it sounds like those are done for the year. So is there a potential upside to fiscal '19 cash guidance from further contract negotiations for the year? Or is that -- is there upside in fiscal '20? Or are those locked in for this year?

So I view it more as upside for FY '20 than '19 only because when you negotiate a change in approach, you do the agreement, the planning and then the implementation done over a longer period. For example, on the transition of Tulsa to Savannah on G650, that's a year-long transition. Now in that particular case, we did improve our cash terms, so that helped us in the current year. So it'll be a function of what the specific conditions are of a given transfer, but it tends to be -- the benefits tend to come in the second year after the agreement. But every case is different, Gavin.

And given you do have a bit better visibility now, but you also have the divestitures coming out, you've had some restructuring, can you give us an update on what you think normalized free cash flow ex advances is?

Well, I don't think we've given anything other than insight into the cash flow, and so people can make their own judgment around what normalized is. But what we've presented on Page 16, the pro forma free cash flow in the quarter of $56 million positive is the most recent period's adjusted normalized free cash flow. It just takes out the repayment of advances of $53 million and the Global 7500 cash burn, which is not going to go on forever. So for the full year, you see that we have a range of $60 million to $110 million of normalized, taking out those 2 adjustments.

Okay. And then last one for me, the fiscal '20 number, is that ex advances or with advances, free cash?

Yes. So we didn't give a number. We just said we wanted a positive free cash flow next year as a planning target. So we're not giving guidance for '20, but it will be free cash after everything, including advance repayments.

Our next question comes from Peter Arment with Baird.

Dan, maybe you can just -- on the divestitures and the consolidation program, you gave us a lot of color, and there's been a lot of progress since fiscal '16. But can you help me square kind of the -- where the facility consolidation efforts kind of -- you've disclosed, I think, you've reduced footprint by 1 million square feet, but in the 10-K, you've kind of got a much larger footprint target out there. Maybe you can just give me a little more color on when the timing is on that.

Sure. So the 747 occupies 2 facilities: 1 in Hawthorne, California and L.A.; and the other is in the Grand Prairie, Texas. And as those 2 programs, those sites complete the 747 program over the next 2 years, we plan to exit those sites. The teams there know that. They're working incredibly hard, even though they know it will eventually come to an end. We'll fulfill our contract obligations, and we're certainly going to follow Boeing's lead on the timing for that. But they've allowed us to build ahead to maintain a more economic production rate. And our quality and on-time delivery continues to be very strong. So when those facilities are vacated, then we'll eventually step down another roughly 1 million square feet beyond what we've done.

Got it. That's helpful. And then just a clarification, Jim, on the debt levels kind of -- did you say that debt levels remained relatively stable throughout fiscal '19? Or should we expect them to kind of continue to rise a little bit, and then you'll offset them with any proceeds on the asset sales?

Yes. I think the latter is a better characterization. We have $1.5 billion of net debt at the end of last quarter. And moving forward, we've given you $200 million to $250 million for the full year of cash use. And the divestitures, while we closed on the ones we announced, we're planning closing this quarter, and the balance of divestitures will close near the end of the year. So it will go up a little bit before it comes down from divestiture proceeds.

Our next question comes from Michael Ciarmoli with SunTrust.

Maybe, Dan, can you just talk back on the facility consolidations? You've kind of mentioned on this supply chain, I guess, how you're looking at some of these your arrangements. You're moving work out of your current facilities. How much excess capacity are you looking to free up? And then, what are you doing with that free capacity? Are some of those facilities looking to be consolidated? Or are you targeting -- kind of you mentioned the $13 billion pipeline. I'm sure there's some big programs in there. But maybe can you just speak to some of the capacity you're freeing up with the supply chain arrangements and what the plans are there?

Sure. In many cases, the facilities we're going to vacate are going to be closed. So Tulsa is an example, and our facilities, and I mentioned in L.A. and Grand Prairie, eventually, those will be closed. And that has savings, and we'll offer employees jobs at other plants if they have that interest. There are a few plants that we have moved work between locations. For example, our Spokane facility does interiors. We moved some of that work down to our facility in Mexico. That's a very high-performing organization, great lean activities, great cost structures. As products go up in volume, they tend to do a great job at that work. And then we backfilled Spokane with more automation. Some of our investments in thermal plastics and actually manufacturing your own extrusions using -- starting with plastic pellets, and that investment on automation went into the Spokane plant to better use the workforce and talent there, and then -- and we're seeing a lot of interest from Airbus and Boeing in that capability. So I'd say on the structures side, it's more of net decrease in capacity, but in the component and systems side, it's allowed us to improve the capabilities of a given site. Our new facility in Windsor, Connecticut, although we're having some start-up issues there, is going to be a much better facility than the 3 we closed in order to save money last year.

Got it. That's helpful. And then just on the -- that pipeline, that 13 -- roughly $13 billion, are there any programs in that pipeline that would require a significant amount of cash for starting up a new program? Or are you just going into these opportunities with an entirely new mindset where you're going to look for those customer advances? Just trying to calibrate if there's any programs that you win that could change the cash flow profile one way or the other.

It's the latter. The days of Triumph throwing long bombs with negative cash on commercial structures programs are over. And we're going to both have a more diversified business base, and as we pivot to defense, I mean, if I look at the defense portfolio, there's 15 programs we're going after that are over -- worth over $100 million each. And those programs, they have nonrecurring, but often, you can bid the nonrecurring or amortize it over the deliveries. In the cash, well, it tends to be a small fraction of the total contract value. And that's by choice because prime just doesn't want to go back to where we've been in the last 2 years on high cash usage on programs. And so I'd say when I talk about the discipline and capture process, Jim and I, that's one of the first things we look at in the deck. I brought from Raytheon and Lockheed, a very structured gated approach to business development. And we've brought the big ones up to corporate review, whereas a lot of contracts in the past were bid locally. And some of them have bid us and our customers. So fixing those but at the same time, putting in process, so we review them. And we flip to the cash burn page, and we asked, under what conditions could we reduce this cash use profile, price trade with the customer, potentially share it with our supply chain, but it's an active part of our discussions. And you won't see us do big negative cash programs going forward.

Our next question is a follow-up question from Cai Von Rumohr with Cowen and Company.

Actually, a follow-up to that. Given what you've said about OEs probably in the future are going to have greater control design, control over their wings, does that imply that you're essentially getting pretty much out of the wing design and build? You're just going to be build-to-print shop? And if so, does that also apply to other aerostructures?

So no, it doesn't imply that, Cai. For example, on some of the new start programs, T-X, MQ-25, we're a design build partner with the OEMs. And often, we're integrating system components. For example, MQ-25, when it operates on the carrier deck, it's got a folding wing, and we do folding wings and actuators and uplocks routinely already. For example, on the V-22, we do the conversion mechanism. It swings the pylons into the vertical orientation. So where we have expertise, this has not happened in the past, cross-selling and join offerings to customers. They don't always buy that way. Sometimes they just buy pure structures. But it's -- our goal is to promote offers to customers where they see the value added to Triumph, and it's not simply a low-cost structure because that work is increasingly moving offshore. But where there is advanced materials or embedded mechanisms, Triumph can be a good fit with their needs.

Our next question is a follow-up question from Noah Poponak with Goldman Sachs.

I know it's probably too early to comment, but just given the importance of the E2 program, I was just wondering how you're thinking about the potential Boeing and Embraer tie up and how you're planning for that.

So we have talked to both Embraer and Boeing, know all the senior leaders there. They had a great show at Farnborough, very excited about the prospects for the platform, John Slattery and Paulo Silva. The closure on the relationship with Boeing, I understand, is still many months away. But they are thinking through how they work together in the interim. And Triumph, knowing both customers, is going to align with that. And we think we're ahead of the power curve by already moving some of this work to low-cost countries and doing it at the front end of the ramp. So that as they have success in the market, we're not having to move the program all that's underway. But we look forward to working with them once they come and join forces.

Since there are no further questions in the queue, this concludes Triumph Group's First Quarter Fiscal Year 2019 Earnings Conference Call. There will be a telephone replay of the conference that will start today at 11:30 a.m. Eastern, and it'll end on the 15th at 11:59 p.m. Eastern Standard Time. To access the replay, you can dial 1 (800) 585-8367 and enter in code 2361117. All parties may now disconnect.