Triumph Group Inc (TGI) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group Conference Call to discuss our Fourth Quarter Fiscal Year 2019 Results.

This call is being carried live on the Internet. There's 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 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 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 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.

Thank you, Kevin, and good morning. We're pleased to report that Triumph Group had a solid fourth quarter and a successful close to the fiscal year, exceeding the midpoint on all annual guidance ranges for sales, earnings per share and free cash flow.

Triumph generated organic growth in net sales across our Integrated Systems and Product Support business units while continuing to reshape our Aerospace Structures business. We are also pleased with the strong year-over-year growth in our systems and support segments for fiscal 2019.

Integrated Systems reported a 5% organic increase in net sales for the fourth quarter, driven by content growth and volumes on narrowbody programs. Quarterly organic revenues also expanded for Product Support over the prior year, reflecting our customer's recognition of our improving quality and turnaround times. As a result of our portfolio reshaping and our continued focus on operational efficiency, Integrated Systems and Product Support both achieved mid- to upper teens operating margins in the fourth quarter.

GAAP losses in the quarter were largely associated with the exit of noncore programs and unprofitable structures programs. As we complete our transformation and programs continue to ramp-up in our Integrated Systems business, we're confident in our ability to increase profitability year-over-year.

Consistent with our expectations, we achieved positive free cash flow in Q4 for the first time in the last 7 quarters, underscoring the benefits of the restructuring completed thus far and validating our strategic focus and value creation strategy.

Looking ahead, we expect our cash performance to strengthen as a result of the recent resolutions on cash-intensive structures programs, operational efficiencies and the pursuit of higher margin new business opportunities.

Importantly, we anticipate FY '20 to be net cash positive despite cost from program transitions and advance repayments. Our ability to deliver on each of our financial commitments in the quarter was enhanced by improved controls and forecasting and our increasing ability to achieve operational milestones. This predictability is indicative of what investors can expect as we complete our restructuring. We are gaining airspeed as we move closer towards our future state.

Our improved operational performance is a direct result of our portfolio derisking strategy and Triumph Operating System deployment. On April 3, we announced an agreement with Israel Aerospace Industries for the transition of the G280 wing manufacture. Working closely with IAI, we developed detailed plans to enable a seamless transition of work. Our contract with IAI will terminate upon completion of this transition.

For the structures business, the G280 transition represents another step on our path to value as we ensure work is performed at the optimal location, improving our free cash flow. We also entered into an agreement to formally assign the contract to manufacture structural components for the Embraer E2 program to Aerospace Technology of Korea.

Triumph will continue to support ASTK by producing composite control surfaces and providing program engineering support. Following similar actions on the G650 and Global 7500, the G280 and E2 transitions are consistent with our strategy to focus on our core systems in aftermarket segments and our complex structures in interiors business. The remaining structures business is well positioned to compete in growing A&D markets.

Now that we've divested 10 of our original 47 operating companies, helping to delever our balance sheet, completed 6 of 8 factory consolidations and repositioned several structures programs, we're winning roles on both military and commercial new start programs.

This significant derisking progress and strengthening backlog in our Aerospace Structures business enabled us to announce on April 4 that we are exploring strategic alternatives for this segment as part of our long-term focus on systems, interiors and MRO markets.

By announcing this strategic review, we are able to involve customers and suppliers in the process, which we believe will help maximize the value of this business. I note there can be no assurances that the review process will result in one or more transactions or other strategic change or outcome. Beyond these remarks, we do not intend to comment further on this front until the Board has approved a specific course of action or the company has otherwise determined that further disclosure is appropriate or required.

As a reminder, we have not set a specific timeline for the conclusion of this process. My leadership team and I are excited that Triumph is emerging from 3 years of restructuring, better positioned to serve customers and create value for our shareholders.

We began fiscal year '20 in April as a financially stronger organization, focused around our core Integrated Systems, interiors and Product Support offerings. We will continue to invest in advanced manufacturing and higher intellectual property systems and product offerings for both OEM and aftermarket customers.

This focus on our core is evident in our new business win rate, which is steadily improving as evidenced by the 4% year-over-year growth in our backlog. Triumph wins exceeded $450 million for the quarter and $2 billion for the year.

Our improved competitiveness and greater selectivity in pursuing new opportunities will benefit backlog profitability and cash flow.

Fourth quarter new wins included an agreement to provide engineering services to a commercial aircraft manufacturer in support of its next-generation aircraft programs. Other wins included support to a major military UAV program, and long-term MRO agreements with Asian and European carriers.

While Triumph's Product Support business is well known as a successful independent third-party MRO provider, our Integrated Systems business also operates 8 Part 145 certified repair stations. Together, these 2 business units comprise more than $500 million of high-margin aerospace, MRO and spares support.

By taking advantage of synergies across our businesses and facilitating the transfer of best practices, we're confident that Triumph can maximize MRO revenues related to our OEM products.

Over the past 12 months, Triumph has increasingly focused on partnership initiatives across the global MRO market. And as a result, our MRO pipeline has risen 60% and our average opportunity size has risen by over 120% year-over-year.

To translate these partnerships into sales, cash and profit, we continued to deploy our Triumph Operating System and lean culture in FY '19. This commitment to continuous improvement helps us better control operating and support cost, reduce inventory and promote standardization and efficiency across all of our 50-plus factories.

In conclusion, we enter fiscal year '20 with the momentum that we set out to achieve and expect it to be a year in which we generate organic growth from our core, improve margins and EPS and positive free cash flow on an annual basis.

Before I turn it over to Jim, I want to touch on the recent developments surrounding the Boeing 737 MAX. We closely monitored those tragic events and extend our condolences to the victims' families.

As we disclosed in the filing with the SEC in early April, we do not anticipate a material impact on Triumph's financial performance or forecast as a result of production rate adjustments planned by Boeing over the next several months on the 737 MAX. The program historically has contributed a single-digit percentage of our annual revenue, and we expect higher rates of production over time. We will continue to work with our suppliers to actively manage internal and supplier delivery schedules. And given the shorter production spans of the component factories that support the 737 MAX, rate adjustments can be accommodated with normal operational capacity with minimal adjustments to working capital, shop utilization and overtime levels. We'll use the next several months to further de-risk any potential areas of concern in the supply chain.

With that, Jim will now take us through more detailed financial results and our FY '20 guidance. Jim?

Thanks, Dan, and good morning, everyone.

Our annual results are evidence of the improved predictability across our business, with net sales, EPS and cash coming in within or above our guidance ranges for the year.

As anticipated, we generated positive free cash flow for the quarter, indicating that the actions we've taken in the areas of cost reduction, process improvement and portfolio reshaping have begun to yield favorable results and position us for significant improvement in profitability and cash performance in fiscal '20.

I'll be discussing our consolidated and business unit performance on an adjusted basis, so please see our press release and supplemental slides for the explanation of our adjustments.

Before I begin discussing our performance, on Slide 7, we provided an update to the pro forma financials we introduced last quarter, reflecting all the actions we executed in FY '19.

Slide 8 provides you with a summary of our fiscal '19 actuals on a pro forma basis for our core business, which is comprised of our Integrated Systems and Product Support segments, and the interiors business of our Aerospace Structures segment.

More detail on these pro forma FY '19 results is included on Slide 29. This information provides greater insight into the actual and planned performance of these key pieces of our portfolio and their financial characteristics.

On Slide 9, you'll find our consolidated results for the quarter. Net sales were comparable on an organic basis to the prior year fourth quarter. Adjusted operating income was $64 million this quarter, and our adjusted operating margin was 7%.

Turning to Slide 10. You'll find our fiscal 2019 results. On an organic basis, our net sales were again comparable year-over-year. With respect to the segment results on Slide 11, FY '19 fourth quarter sales in our Integrated Systems segment increased just over 5% organically compared to the prior year, driven primarily by growth on narrowbody platforms such as the A320, 737, 787 and modest increases in aftermarket sales.

Margins for Integrated Systems reflected higher OEM sales in the quarter relative to the prior year, and reflect costs related to severance, consolidation of our Connecticut facilities, which is essentially complete, and investment in military development program work.

These costs, which position the business better for the future, reduced our margin by approximately 270 basis points in the quarter.

Sequentially, the margins improved another 100 basis points from Q3. We continue to see opportunities to expand our segment aftermarket revenues, including through partnering efforts with our Product Support business.

Turning to Slide 12. Fourth quarter sales for our Product Support segment were up approximately 1% on an organic basis as a result of increased growth in Asia, partially offset by domestic sales. The Product Support operating margins were comparable year-over-year, and reflect cost reduction benefits and improved product mix, offset by severance costs.

Excluding the severance costs, the operating margin would increase by approximately 260 basis points in the quarter.

Aerospace Structures' results are summarized on Slide 13. Segment sales were down approximately 5% organically due to lower revenue on business jet programs, mainly G650. Last year, we entered into an agreement to transfer the production of the G650 wing to Gulfstream, and continue to manage the supply chain and provide kits to Gulfstream. The operating margin included a net unfavorable cumulative catch-up of $11 million, mainly due to programs we are exiting and severance cost.

The cumulative catch-up includes a $27 million forward-loss charge on the G280 program, partially offset by a $4 million forward-loss reduction on the E2 program.

On an adjusted basis, the Aerospace Structures' operating margin was 5%. The Aerospace Structures business continues to leverage its structural engineering expertise to assist commercial manufacturers in design and development programs through certification.

Turning to Slide 14. As we anticipated, we generated positive free cash flow during the quarter of approximately $7 million. For the full year, we used $221 million of cash, within our guidance. The favorable performance this quarter reflects the impact of the divestitures of noncore businesses we've executed over the past several quarters, the transition of cash-consuming programs back to certain customers and the substantial cost reductions we've made in our path to value.

Capital expenditures were $12 million in the fourth quarter and $47 million for the full year. We invested approximately $13 million in restructuring in the fourth quarter and $31 million for the year. Working capital provided $26 million of cash in the quarter and we used $197 million for the year.

FY '19 working capital use was driven by increased inventory on the Global 7500 program in support of ramping programs in our Integrated Systems business.

On Slide 15 is a summary of our net debt and liquidity. Fourth quarter FY '19 divestitures generated over $200 million in net proceeds with little impact to EBITDAP. This has helped restore Triumph's liquidity to over $500 million, which is sufficient to meet our ongoing working capital requirements.

Our net debt at the end of the quarter was approximately $1.4 billion, and our cash availability was approximately $547 million. We are in compliance with all of our financial covenants. Looking forward, Triumph expects to continue to take actions to further delever the company in FY '20.

Slide 16 is a summary of our FY '20 guidance. Based on anticipated aircraft production rates and including the impacts of pending program transfers, for FY '20, we expect revenue to be approximately $2.8 billion to $2.9 billion. We expect adjusted EPS of $2.35 to $2.95.

Our guidance assumes a normalized 21% effective tax rate for the year, which will be consistent for the first 3 quarters and has the potential to be reduced in Q4 due to the partial release of the valuation allowance.

Cash taxes net of refunds received are assumed to be $10 million for the year. We expect free cash flow for the full year to be between $0 million and $50 million. We anticipate that cash used for the first half of the year is more than offset by cash generation in the second half. We expect capital expenditures to be in the range of $50 million to $60 million.

Slide 17 drills into the cash guidance in more detail, and shows that for FY '20, we expect cash generated from operations of $50 million to $110 million, which would include the liquidation of customer advances of approximately $80 million.

As we move forward into FY '20, we are enthusiastic and confident about our prospects for delivering financial results that reflect the favorable impacts of the restructuring program we've been executing over the past 3 years. As we strengthen our liquidity position, we can continue to invest in efficiencies and growth and drive meaningful increases in shareholder value.

Now I'll turn the call back to Dan. Dan?

Thanks, Jim. With much of the restructuring work behind us, Triumph is positioned for a much cleaner fiscal year '20. We look forward to executing on our core programs, investing in new capabilities and continuing to grow our backlog. Guided by our clear strategic game plan and benefiting from the actions we've taken, we are confident that we are well positioned to compete, succeed and drive value creation over the long term.

We're happy take any questions you have at this time.

(Operator Instructions) Our first question comes from Seth Seifman with JPMorgan.

So I wanted to ask initially about profitability in Integrated Systems, and maybe if you could talk about the path between what we saw this year and what you're anticipating for fiscal '21. And kind of what the steps are to get there? How far you go in fiscal' 20? And kind of what changed about the '21 outlook from 3 months ago?

Seth, it's Jim. We had some margin depression this past year as we went through some consolidations in Integrated Systems and we dealt with some ramping program challenges. We brought some new capacity online. We're completing the consolidations. And as you can see, we're moving back towards historic rates during FY '20. I think we'll see some normal margin progression with seasonality during the year. But most of that is behind us now, and we're looking forward to getting back to the high teens to the low-20s in margin.

Yes, I'll add in, give you an example. Our geared solutions business, which has 2 factories that produce precision gears, loose gears and gear boxes, they saw a 34% ramp-up in revenue in the year. And they'll see another 14% this year in revenues. So we've been spending money on both equipment and on talent and expediting. That expediting cost did come at an expense of some margins in the year. But as we recover the full capacity required to meet the ramp, we'll see those margins return.

Great. Thanks, Dan. And then as a follow up, you just -- the cash flow guidance for this year, you talked about the advance burden that's in there. How much advance burden is left after fiscal '20? And if we thought about the amount of cash burn that's in fiscal '20 that you have to absorb through the G280 transition and the E2 transition, which I think is underway until January, maybe, basically stuff that's going to go away by fiscal '21, how much is that?

Sure, Seth. Our guidance for free cash flow is $0 million to $50 million next year. It does include us liquidating $20 million a quarter of advances. We have about -- around about $300 million of advances. This is going to happen over several years. And within this, you also have the transition of the programs that we're exiting. The net cash use of those programs is approximately $60 million in the year. So $0 million to $50 million would be $80 million higher if we weren't liquidating advances, and would be $60 million higher if we didn't have transitioning programs, which will end in 12 to 18 months.

Our next question comes from Krishna Sinha with Vertical Research Partners.

I think Seth touched on this a little bit earlier, but you -- 3 months ago, you released pro forma fiscal year '21 targets for your 3 segments assuming that you keep Aerospace Structures intact as it is. And now you've changed those pro forma margin targets somewhat. So can you just walk through why those pro forma margin targets changed? And maybe give us a walk of how you get there from -- given where you are currently in profitability?

Sure. So the margin estimates are off our planning process. We have a rigorous bottoms-up planning process. It's done annually. It starts in the summer. It just ended a few weeks ago. And this is a result of that, but there's many drivers. So I'm not going to be able to provide a walk piece-by-piece. But I'll tell you that I think there's a little more conservatism than we had in last year's plan -- in this year's plan. And these updated numbers reflect this year's plan, which is our best estimate of cost and revenue going forward.

Okay. And specifically on Aerospace Structures, you're targeting a move from 3% to 10% in EBITDAP margins. How much of that is just driven by 747-8 going away? And if you could just kind of size that, what would your current EBITDAP margin be in that segment if you excluded 747-8?

So I don't have the specifics of the 747-8, because that's just one piece of it. I think the bigger driver is probably the Global 7500 program that we exited this past quarter. That was using a lot of cash, and it actually generated some losses last year, significant losses.

I think what you're seeing is that, absent the loss-making programs that we have been spending funding on like G280, Global 7500, E2 and 747, the core business has got some good franchises: 767, which supports both Tanker and Freighter variants; 787; our military structures, V22, C-17; business jet work, G500, G600. These programs have always had better margins. And they've been masked by the spending on the loss-making programs. So a lot of the recovery of the 10% EBITDAP margins is just the core of that business shining through. It's good to be getting beyond some of those programs that have been a drag on margins.

Our next question comes from Robert Spingarn with Crédit Suisse.

It's actually Scott on for Rob. Just on the Aerostructures business review. Would you expect any change there in terms of potential buyer interest in light of Bombardier's recent announcements to divest its own Aerostructures business? Or do you maybe not see much overlap in terms of the potential buyers there?

So we've looked at what Bombardier has announced. And certainly, I'll defer to them on what they hope to accomplish in their process. But there's overlap but they are not highly similar businesses. They have a stronger presence in nacelles and regional jets. We have a stronger presence in military structures and large commercial structures. Their plants are in different geographic regions. They support a different customer mix. So they're really different entities. We're excited about what we've been able to achieve operationally in the structures business. 3 years ago, they really struggled to deliver on programs like 747 and 767 or the Global Hawk. Now we are in a much better place, our customers are happy with our performance. And we're going to see what the options are. There's a really broad set of options for the business. We're talking to lots of people, and we expect to have more updates in the future. But it's a business that's far healthier now and, we think, has more diversified portfolio programs than maybe other assets that are out there in the market.

That's helpful. Then just on CapEx. Looks like you're guiding to a step-up next year. But I'm just trying to square that with your Aerostructures business now being slimmed down quite a bit and that having historically been the main user of CapEx. So if you just -- if you can offer a flavor in terms of which business segments are taking in that CapEx? And then what programs they are supporting?

Sure. So we are spending a little bit more CapEx or planning to in the coming year. We've already committed to some of the projects. Many of them now are -- we have a growing CapEx in Integrated Systems. And we also are working on efficiency programs. So a lot of the prior CapEx that was in structures was just sustaining. We are moving away from that and more towards efficiency and growth. For example, we're doing -- on a 787 program, we're doing some automation down at Milledgeville, Georgia, and that's several million dollars that's going to pay off. And we're investing in new capacity for the ramping programs in narrowbody in Macomb with new grinding equipment.

I'd add to that list. The 3 big bets that we've made in the last couple of years is compression molding composites, where we can manufacture our own substrate material and make all kind of different parts from it. That's now in active production at our Spokane facility, supporting Airbus programs. 3D printing, we announced that last year for both aluminum and titanium. And then as Jim mentioned, our composites automated lay-up and NDT equipment for Milledgeville, and that's to support higher rates of production on the 787. The other category is thermoplastics. And we've been investing in both, I'll call it, welding technology, and you can use that term for thermoplastics, as well as the automation to position noncontact heads over composites and perform these welds on blind joints and joints of different thicknesses. It's a breakthrough technology that both Airbus and Boeing are certifying our processes to support their future aircraft. So those are examples of playing in the structures space or composite space in a different way than Triumph has done in the past.

In infrastructure, we continue to invest in IT to standardize and upgrade our systems so we can get more synergies out of the whole group.

Our next question comes from Myles Walton with UBS.

First off, thanks for the pro forma color. I know it's tough to make a presentation of core and then noncore and then pro forma for divestitures may or may not happen. So it's really a help to have that level of disclosure. Now in terms of the expenses that are not in this segment though, can you lay out -- of the, call it, $70 million corporate expense, how much of that can be pared back under your leaner core business?

Well, last year, in fact in Q4, we did about a $50 million reduction in SG&A and overhead cost. And that was tracked with the divestiture of machining and fab, and just a need to make the overall company smaller and more cost competitive. Now that we're going through our trade studies on structures, we're looking at different additional cost reductions. And then the structures business itself is taking cost out as they close down plants in Tulsa and over time in Grand Prairie, Texas and in California. So we're not waiting for the outcome of any strategic review to attack cost. The biggest contributors to cost reduction in the first 3 years were supply chain. That was about half. Now you're going to see that more and more come out of overhead, SG&A and operational savings.

Our corporate overhead is scalable, though, in general. Most of it's variable. I look at all expenses as variable. But we can scale down if we go down in size, which we have year-to-year with the programs we've transitioned.

Yes. Jim mentioned IT investments in response to the CapEx question. This is our last year to do wholesale upgrades to the current versions of SAP and other ERP systems. Triumph had, I think, 42 different ERP system across our portfolio. And we're standardizing around 2. And these 2 versions, 1 is for the larger plants, 1 is for the smaller plants. They are going to allow us to do better planning, forecasting, execution. And once those nonrecurring costs of refreshing those systems are [in place], that will also help us pull down our corporate cost.

Okay. But just so I maybe put a circle around it. The corporate and elim [elimination] line that you have to get from your segment EBITDAP to your EBITDA -- EBIT to your operating profit runs about $75 million. And that's gone up over the last few years as the business has gotten smaller. So where can you take that $75 million, kind of that underlying corporate and elim line today?

Yes. I don't think we can give a specific target but I can tell it is very scalable. There's a lot of nonrecurring onetime expenses in there for transformation that are reducing overtime. And there's departments that have multiple people that are going to be reduced as volume goes down in the companies that they are serving.

All right. And then, maybe a question on cash, on the cash tax front. So $10 million this year. When do you think is the next time you'd have to pay material cash taxes in the future? Imagine if you got some pretty good carries?

I think the latter is true. We have some pretty good carries. We have significant tax assets. And I think we said next year's cash taxes, we guided was not a lot more than that. So we're not a federal taxpayer for the next several years.

What we're really excited about is, 2 years ago, we used $331 million in cash. The year that just ended, we used $221 million. Now we're finally able to forecast positive cash flow. In spite of doing a couple of more transitions, program exits and repayment of advances, we're still getting that positive cash flow. We really worked hard to get there. We have some additional levers on cost reduction we can take. But we're in a much better place than we were 2 years ago.

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

So you mentioned $300 million to go in advance repayments. $80 million this year. Is there any offset to that in terms of new advances coming in so that the net change would be less than $80 million this year?

So. A good question, Cai. There is no planned advances. So conservatively, we decided not to plan for any, although we've gotten advances every year the last 3 years. So it's our normal course when we're entering new contracts and settlements to look for opportunities for advances, especially when our customers have lower costs of capital than us. But we're not planning any, conservatively. So the guidance does not assume any new advances.

And then secondly, in your assumption of cash flow turning positive in the second half, maybe give us some of the details on when do you expect to be out of the G280? And how much is the cash going to -- burn going to be in the first half? Same for the E2 and same for the 747.

So of the 3 of those, the 280 is the one that's using the most cash through transitions. And I said for the full year, it's about $60 million. And I don't think there's any quarterly spread that I can give you that would be different than evenly right now.

The 280 has more tail to it because we're building more units in transition. With E2, that transition happens faster to ASTK. And on 747, the costs in FY '20 are actually pretty modest because of price negotiations and improved performance. We do have some shut-down cost, though, coming in the following year, and so Jim's got that in the forecast.

Yes. So the 280 will go into next year, about 6 months into next year. I think the E2 will be done this year. And 747, next year.

So am I correct that the 747, I thought there was like $40 million in shut-down cost at some point? And how much is the E2, we're talking $10 million to $20 million? Or is it a bigger number?

So there is some shut-down cost for the 747 program, but it's not in this year. It would be in next year. And the E2 is only in the tens of millions and that's mostly this year.

The next question comes from Sheila Kahyaoglu with Jefferies.

This is actually Ray on for Sheila. Just wondering how should we think about working capital usage on a segment level, just the 3 segments today, and potential drivers of improvements, certainly Global 7500. But just, how should we think about segment basis working capital usage?

So there is, I guess -- starting with Integrated Systems. We got some good initiatives to reduce our inventory in Integrated Systems, yet we have ramping programs. So there is going to be some offset to our reduction efforts, through ramping programs needing to have inventory support. But on the whole, we're looking first to inventory reduction net out of Integrated Systems. On Product Support, we continue to invest in rotable pools. So I think we're going to see a little more working capital there to grow that business, especially we're working with partnerships with airlines, they want to have rotable pools local, and that's how we get the repairs. With -- in the structures business, you're going to see a decrease because of the transitioning programs over time. So this is the kind of direction.

Let me take it up one level. When we started our attack on inventory about 18 months ago, we were at about $1.6 billion. And through divestitures and program exits and just better working capital through a lot of actions on program startup, material planning, procurement, managing our factories, we're able to work that $1.6 billion down to less than $1 billion. I think we ended the year around $ 930-or-so million. For this year, we're setting a goal to reduce working capital to between $800 million and $850 million. And we think that can happen by just continuing the work we're doing on -- internal to our factories and supply chains. And that doesn't rely at this point on divestitures of assets to continue to do it. And rather than set targets by business unit, we are setting them by operating company because they all have different turn expectations. Some of the businesses have fast turns, the small commodity component facilities. Others have a slower turns, like in structures. But we're expecting all of them to reduce about 10% year-over-year in working capital.

Our next question comes from David Strauss with Barclays.

Jim, you mentioned that you're going to take further actions to delever the company in fiscal '20. Are you speaking to anything beyond what you may or may not do with Aerospace Structures?

I'm speaking primarily about the increase in EBITDA. So our debt will come down through some cash flow generation that we are forecasting, so positive free cash flow. We're not forecasting any divestitures in our guidance, although that's always a possibility as we review actions. It's really about the EBITDA increasing, and that's going to reduce our leverage. So if you think about our EBITDA -- and it's in the disclosure there. I think we're at $196.7 million for last year. So round about $200 million with $1.4 billion of net debt. So we're about 7x on that basis. If we just went up to 10% EBITDA margin, got up to, say, $280 million, you're down to 5x. So we're going to reduce our leverage through profitability improvement.

Okay. Got it. And I think cash flow benefited in '19, you mentioned this on the last call, by about $125 million on the -- some -- an advance, I guess, running through payables. Is that $125 million still sitting out there? And when do you expect to have to pay that back?

No. As you know, we repaid about $180 million worth of advanced liquidations last year that more than offset that. That $125 million has now been rolled into an advance that's part of the $300 million that's being repaid at $20 million a quarter.

Okay. So it's pushed out in the future as well?

Correct.

Our next question comes from Michael Ciarmoli with SunTrust.

Just as we look at the potential core business going forward, I know you've got the structures kind of process ongoing, but what should we be thinking of for normalized free cash flow? And I know you kind of laid out the puts and takes this year with the burn and the repayments. But how should we look at the Integrated Systems and Product Support core cash flow power, if you would?

So I think the best way to look at it is to look at history and then what we've guided to this coming year. And that's why the pro forma we gave you -- it's on Page 29 of the deck that we're also filing in an 8-K -- takes you from our actual results last year to pro forma for all the divestitures and transfers we did. And you can see that on a pro forma basis, pulling out all the businesses that we either sold or transitioned the product line, we were cash positive last year at $16 million. And then if you take out the noncore operations, which had a lot of the losses related to the transactions in it, we were $104 million on core business profitability historically. So then you move forward into this coming year that we just guided, and you look at the $0 million to $50 million guidance we gave, and you recognize that we're liquidating advances of $80 million. And then on top of that, you know that transferring programs and legacy programs are using about $60 million in the year. The $60 million plus the $80 million plus $0 million to $50 million, you're looking at a range of $140 million to $190 million, adjusting for those items, in '20. Now, future years, we haven't given guidance for but that's what it looks like right now. Progressing from core business of a $100 million to our total business this year, end up $140 million to $190 million on an adjusted basis.

Got it. And then just one more, to go all the way back to kind of the comments on the pro forma for '21. Just on the Integrated Systems, you had been at a 21% margin. And I don't know if that was an EBITDAP margin, but now you're at 19% EBITDAP margin. It sounds like over the past 30 days, just new programs rolling on and more refinement of that drove that 200 basis points down-tick on that margin. And was that apples-to-apples? Was that 21% EBITDAP versus the 19% EBITDAP now?

It is EBITDAP. And it is a fine-tuning of our AOP, which completed in the last month. We're investing in new programs. I think maybe they weren't all in the plans a year ago. And we're also probably a little more conservative as we want to make sure we hit our numbers.

Our next question comes from Ken Herbert with Canaccord.

Jim or Dan, I just wanted to ask on the fiscal '21 for the core business. You sort of guide to all-in sort of top line growth of core of about 6%. I'm just wondering if you could provide some commentary specifically around Integrated Systems and Product Support, sort of what kind of growth you would expect there through '21? And how we should think about that top line relative to the individual segments?

That top line reflects the markets that they -- in which they compete. Defense has got some good tailwinds, lots of new starts we won in the last year, whether it's digital engine controls out of our West Hartford plant, and that supports Black Hawk and Apache, as an example; they're on the T-X now, I'm sure you've read, both hydraulics and accessory drives, those kind of programs. Plus MQ-25, the refueling drone; and A320neo. We won some key actuation contracts with A320. We're benefiting from both the defense and the commercial market growth. And that's -- depending on who you read, you hear projections of 3% to 5% growth. So we're signing up to a slightly higher growth rate in TIS than some of the market data that we are seeing. And in aftermarket, similarly, after divesting our APU overhaul business and our fuel services business, that business has historically grown 8% to 9% every year and helping to offset the effect of those divestitures. The big push there is expanding more in Asia. That's where the center of gravity is shifting from narrowbody MRO, especially Thailand, where we have 2 facilities. And we're signing up more partnering agreements, whether it be with Honeywell or carriers. We're supporting the depots on MRO, and those partnerships give us more annuity business rather than one-off transactions that we've traditionally done in Product Support. So we think the growth rates are supported by market data and our past performance.

And if I could, I think you mentioned this, but how does Integrated Systems split between aftermarket and OEM across both military and commercial?

So it's about a $1.1 billion revenue business, and they do about $250 million of aftermarket when you combine it with our third-party MRO business. We do over a $0.5 billion in MRO. And that work is growing, and part of the way for growing it is to have those 2 businesses work together. Historically, they went to the market separately and we didn't capture all of our own OEM work out of Integrated Systems. I mentioned in my remarks that we have 8 Part 145 maintenance centers that that carry the FAA certificate, and those really weren't fully utilized. And so I have asked -- I've got 2 new leaders now of Product Support and Integrated Systems. I asked them to take a fresh look at how we go to market in MRO. And they're finding great opportunities. I think we didn't pursue core. So look for more growth in that segment. And as you know, it's quick-turn work and it's good-margin work with a good cash profile.

Our next question comes from Seth Seifman with JPMorgan.

Thanks very much for the follow-up. I just wanted to ask -- I thought you guys put out an interesting release last week about some work you've won in structures helping to develop a new aircraft. And I just wanted to ask, kind of, with this contract in particular and other opportunities out there, how you're kind of able to win work in structures given sort of the fact that you've identified this as being outside the core? And second of all, when you identify the work here as a commercial aircraft program, want to just verify that it's not a business jet and next-generation aircraft program, that it's not a variant of an existing platform.

Okay. Great. First of all, we haven't taken a shingle down in structures. We're still continuing to execute on our commitments and bid new work, whether it's commercial starts -- this happens to be a commercial platform and the customer has asked that we not identify it yet. That will happen in due time. But the reason they came to Triumph is we have a core group of engineers that can do structural design, finite element analysis, thermal analysis, wing-bending moment structural analysis, we do drop tests. In fact, we won a new drop test in the quarter, where you build a huge cage over a structure and verify its integrity. There's very few people who can do that. And when I discussed with the OEMs that we had this group of people rolling off a couple of legacy contracts, where did the design on E2 and we did the design on Bombardier, I had multiple OEMs show up and say, we want to buy that capacity. And so we were able to negotiate a contract that's significant and to do it without a large investment. Traditionally, you have to commit to, as we did on the Global 7500, a big investment with the hope that maybe someday you'll make it back. Because of the shortage of competency in this engineering design and analysis, we are able to support that and with a good business case. And we'll talk about it more publicly in the months ahead.

Our next question comes from Cai von Rumohr from Cowen and Company.

Thanks very much for taking a follow-on. So in the very useful kind of segmentation of pro forma numbers, noncore operations had a long -- had sales for about $1.2 billion and cash flow use of a little under $90 million. I mean, what's in there? I mean, how much was the loss of the 280, the E2? Did that absorb any of the advance repayments? So what's the core underlying profitability of that business, if you're going to try to get rid of it, that we can say it should carry a value of X or Y?

So you're talking about the fourth column of our non-GAAP disclosure. So quickly...

Exactly. Exactly. That's exactly right.

So if I understand the question you're asking, what are the adjustments to the adjustments to the pro forma on Page 29?

Yes, no, roughly. Yes, exactly.

But Cai, I think you're exactly right, that it's these programs that we have transitioned out of that were using the cash and creating the losses. And I referred earlier to losses we had in Global 7500 last year. We had losses on E2 last year. Those are what's in there. But we're not providing the specific adjustments, but underlying that, there is a core profitable business. It's -- that Dan talked about earlier. There is some really good commercial programs generating cash and there's a military business that's generating cash too, and an engineering services business that's generating cash. So without going through adjustments to that column, those were largely nonrecurring events that caused the loss of cash.

But wasn't the -- the 7500 was in divestiture. That was the big one. And so you've given -- roughly, what were the losses -- we know what they are. They are the 280, they are the E2, they are the 747. Just roughly, if you put them all into one bag, how big are they? And roughly on $1.2 billion of revenues, what's rough order of magnitude, the kind of ongoing profitability?

Yes. So I guess I would just add to what I said, that there's actually advances being repaid out of there as well. So we had the -- already advance repayments and then there's net of the $125 million of payables that got transitioned. So the advances alone are a substantial portion of that cash. But I can't give you the adjustments to that column.

So Cai, what I'd ask you to consider is that FY '20 is a transitional year for structures to exit those programs. And as we think about the core value that -- you're asking, what's the core value? It's really an FY '21 question. It's, what will this business generate? And that's why we provided a forecast that we can get to a 10% EBITDAP margin in the business. once we've flushed out the programs that we entered into in 2010 to 2015.

Yes, well said.

And last one, you show about $319 million of kind of core Aerostructures business with a reasonable profit. What is that? What are you keeping in Aerostructures?

Sure. I will take that. It's the interiors business. This is the installation, ducting, flooring business. Very stable steady business. We have high market share, and it's profitable.

So we have plants in Spokane and Mexicali is a large plant. We do all of Boeing's cabin interiors and we're bidding on Airbus cabin interiors. We do 40% of all of the composite ducting for Boeing today. That's the plant where I mentioned we're doing the compression molding technology. We do floor panels, so as you walk down the aisle, you're walking on a Triumph floor, the composite floor panels in aircraft. So it's a good business and it's one that we anticipate keeping for the long term.

Our next question comes from David Strauss with Barclays.

Thanks for taking my follow-up. So couple of questions on pension. It looks like pension liability grew a bit, just based on what we see on the balance sheet. When -- I thought, based on last year's K, you were going to have to make some contributions this year. But how are you thinking about contributions going forward? And how do you -- in terms of potentially divesting a significant chunk of Aerospace Structures, would you anticipate the overwhelming majority of the pension liability to have to go with that divestiture?

So first on the funding. So yes, our liability did go up this year based on the new assumptions or returns during the year. That doesn't change the funding a lot in any given year because the change in that liability gets spread out over 7 or more years. We did provide on Page 22 of the presentation the pension income, the pension contributions. So we had about $5 million to all our plans during the course of FY '19. We're anticipating $2 million during FY '20. Additionally, we have an OPEB liability, the post-retirement benefits. We funded $12 million in '19. We're funding $11 million in '20. In terms of the pension, it is sponsored by the structures group, but we have joint and several liability at the parent because we have more than 80% of the structures group. There is no "have to" with the pension plan. It's under review and it could go in any kind of transaction, if one resulted. It may not. It could remain. So there's no "have to" with the pension plan. And it's well funded, so 80% or more funded. And our payments coming up are not substantial at all.

Ladies and gentlemen, this is all the time we have for questions today. This concludes Triumph's Group Fourth Quarter Fiscal Year 2019 Earnings Conference Call. This call has a replay scheduled that will begin today at 11:30 a.m. Eastern Standard Time and run until the 16th of May till 11:59 p.m. Eastern Standard Time. To access the replay, you can dial 1 (800) 585-8367 and enter an access code 4465019.

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