Triumph Group Inc (TGI) 2020 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 2020 results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast. Please ensure your pop-up blockers is disabled if you're having trouble viewing the slide presentation. (Operator Instructions) There will be a question-and-answer session following the introduction of comments by management.

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 and 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 this call is property of Triumph Group 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. Go ahead, Mr. Crowley.

Thank you, Kevin, and welcome, everyone, to our Q4 earnings call. To all joining us this morning, I hope that you and your families are healthy and safe and remain that way. Earlier this morning, we reported strong fourth quarter results for fiscal year 2020 in line with our expectations. We successfully delivered positive free cash flow for the first time in 3 years on sales of $2.9 billion and increased earnings year-over-year. We exited cash-consuming structures programs. The integration of our systems and aftermarket businesses expanded top and bottom lines, and we continue to win new programs increasingly on the defense side to help offset commercial declines. All these accomplishments will benefit FY '21 and beyond.

On Slide 3, I provide the big picture on Triumph Group. Our FY '20 results demonstrated the benefits of our multiyear transformation. We entered FY '21 with positive year-over-year momentum. We're protecting our people and company during this historic pandemic and rapidly rightsizing Triumph to reflect the market reality. Though commercial demand is down, our OEM rates provide a safety net with strong defense opportunities. Actions resulting from our strategic review of structures are on track to finish in FY '21. We are taking immediate and deep actions to conserve cash while maintaining our liquidity at over $550 million and are well positioned for this environment.

To be clear, while we feel good about the quarter and full year, I want to acknowledge that COVID-19 has clearly impacted the markets in which Triumph operates especially commercial aviation. Some of the sites that support the commercial market have seen 40% or more reductions in volume in our first quarter. In contrast, those that support freight carriers in the military have been largely unaffected.

As we manage through this crisis, our entire team has adopted 3 key imperatives that will guide us through to recovery. The first one is keeping our people safe. The second is keeping our company safe by conserving cash. And the third is collaborating with our customers for mutual benefit.

Coming off a strong Q4, I was looking forward to this earnings call, and despite the large declines in commercial volume, I still am. The reasons for this are twofold: First, we've taken actions to ensure that Triumph comes out of this period in a better position for the long term. And second, I'm encouraged by the early signs of recovery we are seeing even as we size the business for the current realities.

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

As noted on Slide 4, keeping our people safe includes protecting the physical health and economic welfare of our employees. We've gone beyond adopting CDC-recommended best practices you all know about. Our factories quickly turned from building aircraft blankets to producing face coverings to augment the ones that we are able to purchase with over 100,000 now distributed across the company. We expanded support programs for affected employees, ensuring that they have adequate access to care, increasing paid time off and providing hardship payments for employees impacted most by the crisis.

As we continue to work to keep our factories open and support our customer demands, Triumph is doing our part to help others. We're providing PPE to safeguard and support our local communities that were hit hard by the virus. From our Isle of Man employees who produced ventilator valves to our Red Oak, Texas; Atlanta, Mexicali and Hot Springs, Arkansas teams who made fabric masks, Triumph team members are pitching in. And the Triumph Group Foundation is providing donations to organizations like Philabundance Food Bank, Project Home, Operation Homefront, the Red Cross and the United way. I'm very proud of the way our team has stepped up as we've navigated the crisis. Their performance, sacrifice and perseverance have been inspiring.

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

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

As noted on Slide 5, before the pandemic, we forecasted strong revenue and earnings growth in fiscal year '21. The new fiscal year will now become both a rightsizing year as the commercial aviation industry contracts and a transition year to more favorable freighter and military contracts. After recovery, we fully expect to continue our journey towards peer-like EBITDA margins and free cash flow conversion. Benefiting from our belt tightening, we expect to gain enduring cost efficiencies as we downsize.

For fiscal '21, we are taking aggressive measures on all fronts to contain costs and size the business accordingly. As noted on Slide 6, we have many levers at our disposal to manage cost and preserve cash. We are treating every cost as variable and have scrubbed cost accounts and taken down our discretionary spend. We implemented difficult workforce adjustments and austerity measures to ensure that we can weather the storm and come out stronger, resulting in the furlough or layoff of almost half of our workforce. Additional cost reduction actions are detailed on the slide.

Our austerity measures started with over $120 million in near-term indirect cost savings to bridge the gap to recovery. These self-help efforts will reduce cash use and help Triumph avoid additional headcount reductions. In addition, in partnership with our bank group, we recently amended our revolving credit facility to ensure that we have the required liquidity to sustain us through the recovery period. This provides us breathing room during the downturn.

Finally, to resolve its long-time use of cash, we remain on track to complete our disposition of our structures business this year with date certain and, in some cases, accelerated program exits. Having sold 12 of our original 47 operating companies, we are pursuing additional divestitures in FY '21 to reduce debt. Jim will provide more color on this amendment and our overall cash and liquidity position shortly.

Triumph also benefited from improved cash terms from our defense customers as part of the DoD's commitment to support the extended supply chain. And we are working with state and federal governments to access aviation industry and workforce financial support where available. We are benefiting from $16 million of payroll tax deferrals. We'll provide updates on these initiatives as they're adopted.

A few specifics on how our customer collaboration is benefiting both Triumph and the OEMs. As commercial OEMs and the airlines pause operations and reduce their demand forecast over the last 11 weeks, these relationships helped us stay aligned on pipeline inventory and build rates and to slow our cash burn. We are adjusting demand, internal capacity and supply chain signals quickly, exiting legacy programs and reaching settlements with our OEM customers. Demand rates for many of our core platforms held and in select cases increased following production pauses. MRO demand for freighters and military continue to be strong, while airline MRO remains low pending a broader return to flight.

We recently received or confirmed purchase orders from Boeing Commercial Airplanes for the 767, 747, 737 MAX, 787 and 777 to maintain economical production levels and protect our lower-tier suppliers. In several cases, these PO rates are higher than Boeing's internal build rate as Boeing partners with suppliers to protect continuity of supply. We also resolved several open claims with Boeing and deferred the majority of our advanced repayments out of fiscal year 2021, both of which will fit our planned cash, liquidity and covenant profile this year.

We reached agreement with Israel Aviation Industries to accelerate the transfer of the G280 wing program to IAI and Korea Aerospace Industries by July 2020. Only 2 completed wings remain to be delivered from Tulsa, at which point the Tulsa factory will be closed. All design support and scheduled warranty obligations will be transferred to IAI.

We partnered with Gulfstream and reached agreement in principle to sell our G650, G700 wing business to Gulfstream, which will conclude our obligations on the program. We also resolved open commercial issues and secured price increases on work we retain. The transaction is expected to close in early fiscal year 2021 and will help to reduce our debt and inventory levels. Taken together, these customer settlements improve our FY '21 cash profile by about $50 million, reduce planned program cash use and help us bridge through the downturn.

This brings me back briefly to our fiscal 2020 results on Slide 7. Triumph met or exceeded its full year revenue, adjusted earnings and free cash flow guidance. We previously announced the implementation of an enterprise quality system and processes. We achieved our best-ever levels of safety and quality this quarter, which aided in the recertification of all our major factories to AS9100 or related standards. We also successfully consolidated our heat transfer and interiors MRO businesses into new facilities. And as reported, we transitioned work on the E2 fuselage G650 wing assembly and divested our Nashville large structures business in FY '20 as part of our structures strategic review. Bottom line, our transformation efforts enabled our strong fiscal 2020 performance, and Triumph entered the crisis with positive momentum, which will help us overcome the commercial downturn.

Moving on, I summarize the current commercial market conditions on Slide 8. Given the grounding of most of the commercial aviation fleet and reductions in air travel and OEM production rates, we expect a reduction of approximately 30% to 40% in commercial OEM production for the balance of the calendar year and reduced commercial MRO activity. We are encouraged by the early return of domestic travel in some of the markets we serve and inflection points on aircraft return to service.

MRO orders for engine and accessory parts from freight providers, UPS, FedEx and Atlas have continued to come in providing critical base at sites that have lost airline MRO volume. While we are faced with decline in commercial demand in the first half of fiscal '21, we've engaged other commercial and military customers to pull forward new orders as we collectively work towards recovery. Triumph is providing essential services for their military cargo and medical transport missions. An example is our Park City, Utah and West Hartford, Connecticut plants, where military demand has allowed them to maintain 90% or more of prior year revenue.

To be clear, in the first half of fiscal '21, we anticipate higher uses of cash to fund planned exits of the structures programs primarily 747 and G280. But these uses of cash have a date certain and near term end during fiscal '21 and are accommodated within our credit facilities.

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

Aircraft return to service, utilization and load factors, the latter of which is up 100% in the last month. Airline liquidity and aircraft orders and acceptance rates, OEM build rates and MRO demand and new defense opportunities and payment terms. The last trend is especially important to Triumph Systems and Support as 35% of their revenue comes from defense applications.

While preliminary, the trends are positive and support our forecast for recovery in our second half of fiscal '21. We've adopted conservative production and MRO rate assumptions to size our workforce and supply chain demand to limit working capital expenses while retaining the ability to increase output if recovery occurs more quickly than anticipated. Conversely, we pressure-tested our forecast for the downside cases and can quickly make further reductions in capacity and cost if needed.

As with most of our peers, we'll defer providing financial guidance until we see follow-through on these initial signs of recovery. However, we do expect to see increasing revenue, free cash flow and earnings in the second half of fiscal '21 as airlines return to service and we finish program closeouts and structures in the first half of the year.

On Slide 10, the diversity of Triumph's platform content comes through. We see continued support for freighter and tanker versions of the 767. We have content on the new military programs in development, and we support several military upgrade programs especially for helicopters. We have key roles on next-gen commercial aircraft, and cargo and military MRO demand remains strong. Last, our IP and systems gives us an edge in both retaining and gaining work. Overall, Triumph continues to benefit from a strong backlog despite the softness in commercial demand.

We are continuing to win new work and take advantage of our customer and platform diversity. On Slide 11, in fiscal '20, Triumph secured 76% of all competitive bids we pursued. The wins are across a broad set of customers and platforms and include fleet upgrades, new technology insertion, and sales to independent MRO providers. Military MRO remains healthy, and we are working to accelerate our successful military MRO programs including parts for the V-22, F-18 and F-15.

As noted on Slide 12, Triumph was awarded the design and build of distributed hydraulic system on the Bell Invictus and design and build of a landing gear system on another Future Vertical Lift aircraft. Triumph is well positioned for this program with substantial engineered product and systems content on all 4 competing platforms. Other wins in the quarter include multiyear awards for the F-35 hydraulic utility actuation valves and the CH-14 transmission air-oil coolers.

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

Last, Triumph continues to develop differentiating IP and manufacturing processes for thermoplastics, including thermoplastic forming, welding and anti-ice solutions. In the quarter, we delivered a thermoplastic wing rib for the Airbus Wing Of Tomorrow program. Overall, our backlog remains stable at $3.2 billion, and the diversity of our customers' programs and products remains key to working through the industry and market downturn.

On Slide 13, I profile our core Systems and Support businesses. During the fourth quarter, we completed the combination of our legacy Integrated Systems and Product Support businesses to accelerate our aftermarket growth rate while simplifying our structure for lower cost. Systems and Support is a $1.4 billion sales business with a diverse mix of end product and consistent allocation of both OEM, production and MRO aftermarket with EBITDA margins higher for MRO. Systems and Support is also a solid cash-generating business unit.

In the near term, due to COVID-19, Systems and Support is forecast to experience between a 30% to 35% reduction in commercial OEM production and about a 45% to 55% reduction in MRO activity. We are adjusting capacity accordingly. While our small interiors MRO business has seen a significant drop, we have less exposure to heavy maintenance and consumable aftermarket demand than other firms, and we focus on accessories and structural repairs which continue to support freighter, medical and defense missions. While we work through lower narrow-body build rates and commercial MRO declines in fiscal '21, longer term, our core programs and Systems and Support will enable revenues to return to fiscal '20 levels with improved margins up to previous year targets of 19% over the next 3 to 4 years.

Let me now turn to our Aerospace Structures business, which continued its improved performance through fiscal '20. As shown on Slide 14, structures is a $1.6 billion revenue business with planned declines in revenue from divestitures and sunsetting programs, such as the 747, G280 and G550. EBITDA margins expanded in fiscal 2020 as prior program volatility has largely been eliminated. We assume step-downs in interiors revenue from 737 MAX production rate reductions of 30% to 35%. The interiors factory in Mexicali has resumed production but is not expected to return to prior rates until about 2022. We've aggressively reduced headcount in the interim.

As reported, we made strong progress executing our planned exit legacy programs in the Aerospace Structures business, a key initiative that will benefit Triumph in fiscal '21 and beyond. Firm military end market and 767 program rates coupled with the cost reduction initiatives allows structures to target consistent EBITDA margins in fiscal '21. Longer term, our actions to rightsize the operations provide opportunity to improve margins further.

Tooling is now in place to start production of the T-7A Red Hawk EMD aircraft for which we are contracted to build the wing and empennage. Our Red Oak, Texas and Milledgeville, Georgia plants were both down selected by Lockheed Martin for composite manufacturing work on the F-35. These programs will shift the backlog of structures from its historical commercial emphasis to defense work.

On Page 15, I provide a recap of the progress we've made on our structures strategic review. As reported yesterday, we've exited most of our build-to-print contract manufacturing factories and sold 1 of our 4 remaining major structural assembly plants with the divestiture of Nashville last year. Fiscal '20 also marked the exit of our loss-making structures programs including the Bombardier Global 7500 wing, G650 wing and the Embraer E2 fuselage. All were successfully transferred to their OEM owners or strategic buyers. We remain on track to complete the exit at the other 3 major structural assembly plants this year: Tulsa, Oklahoma; Hawthorne, California; and Grand Prairie, Texas. Transfer of our profitable 767 program from Grand Prairie, Texas to our lower-cost Stuart, Florida facility will be completed this calendar year and fiscal '21 will be the last year of such transitions and associated cash use.

In summary, Triumph delivered positive momentum in Q4 and positive free cash flow for the first time in 3 years. The actions we've taken, both before and since the crisis, including the divestiture of noncore businesses and transitioning of sunsetting programs, cost reduction and the increase in military programs have all resulted in positive margin trends and reduced our cash use so we can manage through this painful downturn.

As we manage through to recovery, we are focused on the safety of our employees, have the required liquidity and cash position and are collaborating with our customers. We will size the business to the new commercial realities while growing our business in healthier markets. We appreciate the partnerships of our customers and lenders to weather the storm and to come out as a stronger company. We anticipate entering our fiscal '22 next May with a tighter cost structure and in our future state portfolio.

With that, Jim will now take us through the financial results for the quarter and the year. Jim?

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

As we increase our focus on protecting our cash and liquidity, we've already taken a number of actions over the past few years to strengthen the company, including exiting underperforming programs and businesses and improving free cash flow from a use of over $200 million in fiscal 2019 to positive cash flow of over $50 million in FY '20. Our fourth quarter net sales, EPS and cash results all met or exceeded our expectations despite the overarching market headwinds. I'm proud of the efforts of our teams to deliver on their commitments and overcome these challenges of these uncertain times.

I will discuss our consolidated and business unit performance on an adjusted basis. So please see our press release and supplemental slides for the explanation of our adjustments.

On Slide 16, you'll find our consolidated results for the quarter. Organic net sales decreased 6% over the prior year quarter. Both business units experienced organic declines in part due to the 737 MAX production cuts. Adjusted operating income was $44 million this quarter. And our adjusted operating margin was 6%, down about 100 basis points from last year's fourth quarter due to the reduced volumes.

Turning to Slide 17, you'll find our fiscal 2020 results. On an organic basis, our net sales increased 5% year-over-year driven by production rate increases on the 787 program and military platform volumes. While the military market presents opportunities, the recent 787 trends are not expected to continue given the current market environment and updated build rates. Our full year adjusted operating income was $209 million representing an adjusted operating margin of 7%, which is about 225 basis point increase over the prior year. This improvement was driven by operational efficiencies instituted over the last few years.

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

With respect to the segment results. On Slide 19, FY '20 fourth quarter organic net sales in our Systems and Support segment decreased slightly compared to the prior year as aftermarket opportunities helped to offset the known headwinds from the 737 MAX program. Adjusted operating margins for Systems and Support were down slightly due to decreased organic sales. The margin reflected a 2% increase in MRO and aftermarket sales in the quarter relative to the prior year, improved operational efficiencies and cost initiatives partially offset by decreased organic sales.

Goodwill from the legacy Product Support reporting unit was deemed to be impaired at year-end due to the sharp declines in expectations around MRO over the near term and the uncertainty on the timing and pace of recovery resulting in a noncash charge of $66 million in the quarter. Restructuring actions impacted the segment's margins this quarter by approximately 180 basis points. These restructuring costs will help to keep margins near fiscal 2020 levels in fiscal '21 despite the expected revenue declines.

Summarized on Slide 20. Fourth quarter organic net sales for our Aerospace Structures segment were down 11% due to transition programs partially offset by increases in legacy programs. Aerospace Structures operating margins were unfavorably impacted by $7.7 million from changes in estimates associated with the effects of COVID-19-related closures and production rate reductions. Excluding these effects, operating margin would have increased 170 basis points reflecting the benefits of the portfolio shaping and cost reduction actions we have taken as part of our transformation efforts. The group is executing on the program transitions, having recently completed primary manufacturing of the 747 program at 1 of 2 sites and are on track to complete production at the end of the calendar year.

Turning to Slide 21. Our $45 million of cash generation in the fourth quarter was in line with our expectations. This is a $53 million improvement over the same period last year and reflects our portfolio and program changes, cost reduction actions and working capital management across our businesses. We remain focused on aggressively managing our cash and liquidity. Capital expenditures were $12 million in the quarter. We reduced working capital by approximately $55 million in the quarter from strong cash collections and cash management despite cash headwinds of $18 million from the sunsetting G280 program.

On Slide 22 is a summary of our net debt and liquidity. Our net debt at the end of the quarter was approximately $1.3 billion. Our combined cash and availability was strong at about $568 million, and we are in compliance with all our financial covenants. Recently, we amended our revolving credit facility to ensure access to our liquidity and maintain covenant compliance as we weather the crisis and expected cash headwinds associated with the program exits. Also in May, we agreed with a key customer to reduce the liquidation of advances to $40 million during fiscal '21.

We're not providing financial guidance for fiscal '21 at this time due to the uncertainty around the ultimate impact of COVID-19 on the global market and economic conditions. Unrelated to COVID '19, the company currently expects cash outflows related to the completion of certain previously announced sunsetting programs within Aerospace Structures including approximately $47 million for the completion of the G280 work statement by our second quarter and $35 million for the completion and exit of the 747 program.

For FY '20, we delivered on our commitments to achieve year-over-year improvements in organic revenue, free cash flow and earnings. The austerity measures we have taken will help us to stabilize margins during the downturn as we pivot to military and expanded MRO opportunities specifically in Systems and Support. We believe we have adequate liquidity based on current market estimates and continue to make difficult but necessary decisions to eliminate costs and will consider additional sources of liquidity as necessary. Expected divestitures in Aerospace Structures will reduce our debt and drive meaningful increases in shareholder value.

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

Thanks, Jim. I want to leave today's call with these takeaways: Triumph entered this unprecedented aviation crisis with positive momentum. Our Q4 and fiscal '20 results demonstrate that we are realizing the benefits of our restructuring and transformation efforts. We're protecting our people and the company during this historic pandemic. We continue to act with velocity to rightsize the operations to reflect the market reality and position for the future state of the company. Our strategic actions for Aerospace Structures are on track to be complete this fiscal year. And firm production estimates and our ability to win and expand military opportunities will provide stability to aid in the company's recovery coming out of the COVID-19 crisis. We have a solid cash position with many levers at our disposal. And I remain confident in Triumph's ability to compete, win and deliver value creation over the long term.

We're now happy to take any questions.

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

Dan, I mean that's -- you've obviously accomplished a lot. It seems like you've just gotten into the red zone here and they extended the field another 50 yards. And so I wanted to ask you a near-term and a long-term question. First, from the near-term perspective, what is your aftermarket business exposure to USM?

To used serviceable material?

Yes, used serviceable.

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

Now having said that, we're starting to see opportunities like on structural repair to do more USM. And we bought some notable inventories because in this current budget environment, if someone can get a thrust reverser overhaul for less money through the use of USM. So we're starting to increase our use of it, but we're not seeing, I'll call it, cannibalization of our core MRO markets because of USM.

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

Yes. Sure, Rob. I mean we came out -- the first cash flow-positive year was last year. I'm very proud of that. And it's so easy to forget that, but there's a lot of hard work that went into that. So we entered this year coming off a cash flow-positive year. We hit the headwinds. We are going to be a cash user at least in the first half of the year. And we're optimistic about recovering in the second half, although we're not ready to give guidance at this point. Certainly, if the OEM schedules are out there, we should be back to being cash positive very soon. And FY '22 is not out of the question, although we're not giving guidance at this point.

Certainly, there's another factor, which is the pension funding. Fortunately, we did some prefunding with the discretionary contribution last December of about $50 million, and that enabled us to really not have any significant pension payments due in the next 12 months. But after that, there is a forecast, and it's in our presentation in the back. I think it's around $80 million of funding required in the following year. That can change as returns on assets change and interest rates change, but there is some cash funding headwinds coming up. We've been planning for those. It's a little higher than we originally planned for, but it's manageable with our financing.

So the pension -- the GAAP liability went up, but the funding is what's more important, as you know. So we'll continue to watch that. In the near term, the current year, we're okay with the pension and OPEB funding. I think it's only a total of about $7 million. And next year, we hope that we're going to see returns in the market and that we're going to see interest rates improve in our favor. But we do have $80 million of cash funding coming up the following year. We can still be cash positive despite that with the market recovery.

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

That's -- it's a fair assumption.

Our next question comes from Sheila Kahyaoglu with Jefferies.

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

So there's a number of factors that enable that business to adjust quickly. Overall, as a company, remember that we have -- over half of our cost is variable. It's material. So we're able to adjust quickly to downturns and maintain our percentage of cost to sales. And that's what our internal targets have been. We've been driving people to say maintain your cost as a percentage of your sales and you've got all these levers to pull including working with the supply chain and with customers. But we do have opportunities for pricing coming up in the future that helps. And we also have a high military content including military spares in that business, which is helpful to maintain margins through the downturn.

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

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

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

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

That's right. I think there's maybe $5 million of closeout that's already accrued for the facilities for the 47, but that's it for the program this year.

Our next question comes from Noah Poponak with Goldman Sachs.

It's Gavin on Noah. You mentioned pricing opportunities and being able to hold margins in both segments. I mean can you just flesh that out a little bit on how the pricing works, if you have further contractual step-downs? I know you mentioned some positive pricing in the press release yesterday as well. Just how that works on higher volume versus lower margin versus higher versus lower volume and price increases or decreases?

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

Some new contracts, for example, the Airbus A320XLR, we've produced the legacy parts, but we're -- we were awarded the new XLR parts and we redesigned them, added more functionality, reduced weight and improved profitability over the legacy. So sometimes even an iteration of the design for the next-gen provides a pricing reset opportunity or margin reset opportunity. So we're going to use both of those expiring LTAs as well as new bids that we win to look to continue to improve margins out of Systems and Support.

How much of a headwind has that been over the past years in OEM? Have you had positive pricing in aftermarket?

We have. Combining our systems and aftermarket business, we found a lot of low-hanging fruit. I mentioned before, we have these FAA Part 145 repair centers. And many of them that were captive to OEM shops and systems, they really weren't out exploiting that capability and extending their MRO. So in Q4, part of our margin improvement in Systems and Support was just improving our go-to-market plans and the speed of turns, inventory turns, at the repair centers within Integrated Systems.

So there are short-term headwinds related to commercial aftermarket, but defense continues to be strong. I mentioned West Hartford. They're upgrading electronic engine controls very quickly. We did a recent press release on that. So it's about those 2 offsetting -- military offsetting commercial in the short term, but the combination of those 2 businesses is going to help both.

Got it. And then just a quick clarification. Does your 30% to 35% decline in OE production include MAX?

It does. It does, and one of the nice things about MAX, and we've been in lockstep with Boeing, is that they've allowed us to produce at much higher rates than they're building in their factories. So we're all very excited about yesterday's announcement. The MAX has returned to production. The Boeing Company has invested in the supply chain. They're going to take additional deliveries at rates that are 15 to 20 range, which is certainly higher than what they're producing today. And each factory has a different inventory position. But on average, we'll be producing with a nice, what I call, sustaining production rate to keep our factories going. And that includes interiors.

At one point, we had 3,000 people building blankets at ship set -- at 40 ship sets a month sort of rate. So when that rate dropped and then was paused, that was obviously a big impact, but we've reduced our staffing from 3,000 down to about 1,100. That gives you a sense for how quickly we've jumped on the rightsizing. And we'll be efficient at that level and support Boeing's needs. And then as their rates tick up over the next 18 months, we'll get back to where we want to be on volume.

Our next question comes from Seth Seifman with JPMorgan.

Question or just, first of all, real quick clarification. When you say holding margins in each of the 2 segments, is that at the full year EBITDA for full year fiscal '20 or more fourth quarter?

FY '20. So full year is what we're targeting.

Okay. Got it. Got it. And then based on the, I guess, market forecast you gave and the mix of businesses for Systems and Support, it would seem like looking for something in the billion-ish range of sales if those market forecasts hold a billion-plus?

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

Okay. And then maybe Dan, when you thought about combining the Product Support and Integrated Systems businesses, how did your eventual strategic plans for Triumph the company play into that in terms of eventual longer-term strategic outcomes for Triumph when you thought about marrying up MRO with the more product-oriented business?

Yes. No, great question. And certainly, there's different ways we could have played that. We could have gotten out of third-party maintenance. There was interest at one point in others acquiring that business. We concluded that there was upside to both businesses by combining it, that we could do more MRO of products that we were the OEM for out of our Triumph Product Support business, and we could expand the volume of aftermarket from the OEM side by learning how the third-party business goes to market.

They're hungry. They're very fast moving. They operate with limited backlog. So they've got to hunt what they kill and move quickly. They have more direct relationships. Instead of receiving purchase orders as follow-on to what they built originally, the third-party maintenance team, they're out there with FedEx and UPS and Atlas and all those customers, American and Delta every day.

So the customer relationships played into it. Right now, it's temporarily decreased demand in third-party maintenance, but we still believe it's the right thing to do strategically. And we've combined the management teams and all the financial reporting now into one team.

Our next question comes from David Strauss with Barclays.

I wanted to ask about this agreement with Boeing, where you said you've reached economical production levels. Is that what you're reflecting when you call out expected production declines of 30% to 35%?

So yes. What Boeing did is they came out with rate guidance, and they did it on their earnings call across all their platforms. So 767 was maintained at 3 a month. And that's good for us because we have content on both structures and systems for freighter and tanker variants. They provided slightly lower guidance for 787 on the order of $8 million to $10 million. We are not going to adopt the high end of those ranges. We'll always shoot low and then if there's upside, then we'll benefit from that.

We got guidance from Airbus for about 40 on the narrow-body. We're using a derated number from that, again, for conservatism. On the 737, as I mentioned, we're -- rates between 15 and 20 per month is what we're planning on. So it is down, to your point, from pre-COVID. But it's still enough for us to keep flow going through the factory and sustain the lower-tier suppliers. So -- and then we're still doing 1 a month on 747 to run that out. And then we're working with them on 777 and 777X transition.

And I'll let Boeing speak to their -- the details there. But overall, we're in lockstep with them. It is lower. There's no denying that it's lower than pre-COVID. It's all about managing through the downturn and getting back to higher rates over time. And we're making permanent reductions in cost consistent with that demand reduction, so we can maintain the margins as Sheila inquired about.

Okay. And just following up on that, I thought you had said, Dan, that the rates that you agreed to with Boeing are above their own internal rates. Is that correct? Or did I misinterpret that?

Yes. I mean when I say their internal rates, I mean their delivery rates of aircraft out the door. And that's public information in terms of what they're shipping. But they've made a decision to -- not only for Triumph but for other suppliers to trigger purchase orders that are in excess of their internal build. It's a phasing issue. If lots of suppliers went idle during the pause that they had at Puget Sound factories or Charleston, then there's restart cost and sometimes a loss of critical supply. And so they, I think, smartly said, "Hey, we're going to keep these suppliers running at higher rates and we'll burn it off over time once they come up."

Okay. Jim, a question for you. Obviously, you have the program closeout costs that are going to be impacting cash flow in the first half. But could you give us some help on how you think kind of underlying working capital is, what it's going to look like as rates come down here? How much of a potential tailwind kind of underlying working capital could be to cash flow?

Yes. So in the first half, it's a headwind. And the reason is that we have to adjust our supply base and our POs. So there's a lag there. And we're still receiving material, in some cases, in excess of what the demand is from our customer. But we are aggressively adjusting that.

So in the second half, it will become a tailwind which should offset the headwinds in the first half. It is important because we have a lot of working capital, and we are focused on managing it. But it's a good point. Besides the closeouts of the programs and advanced liquidations, we have a working capital swing. We'll be a user in the first half of the year. And we're looking forward to generating cash from working capital reductions in the second half.

Our next question comes from Ken Herbert with Canaccord.

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

So first of all, we give these numbers on our forecast in our fiscal year. So we expect to see MRO recovery start picking up in our Q3, Q4. So that's October and on, so October through March. So not always -- not fully in the calendar year, as you said. But yes, the short-term commercial MRO is definitely down. We've seen fewer orders and people like Delta TechOps and (inaudible) and all that are also down.

But we also -- as I mentioned, because we're not doing heavy maintenance and consumables, we're still seeing some residual engine MRO work come through that was already in flow. So our factories didn't go idle. But we have had to reduce staffing at some of our component and interiors plants consistent with the short-term demand. So it's -- for us, it's mostly a first half of the year forecast. And we'll update all the analysts and investors each quarter as to how that's picking up.

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

Let us take that for action. We -- today as we -- as I'm canvassing all of our plants in my mind, thrust reversers, we're a leading provider of. So nacelle parts for the pylons, we do a lot in that area. We do some amount of structural repair. And then on the engines, we're doing fuel pumps, generators and air cycle equipment. So we are -- we have a lot of engine consumable parts that are expensive to overhaul. Less of the, I'll call it, filters and clips and brackets-type parts but more of the parts that cost tens of thousands overhaul rather than hundreds or thousands.

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

Our next question comes from Cai von Rumohr with Cowen.

So you indicated that you're going to sell the G650, 700 wing business to Gulfstream and that will resolve issues and secure price hikes on work and help you reduce debt and inventory. So what's the cash impact of that? And when should we expect the benefit?

So we're going to -- we reached agreement with them in principle at the senior levels. And now they're just doing their due diligence to complete the inventory true-up between Triumph and Gulfstream. We expect that to close early in fiscal '21, hopefully in the first quarter.

There's both the cash benefit and an inventory relief benefit. I don't think we're going to disclose it on today's call, the dollar amounts. We're going to wait until we complete the agreement with them and all of the verification of the inventory levels, but then we'll provide follow-up information on it.

But it's a good deal for both parties. You all know we used to have 2 factories that built 650 wing in Nashville and Tulsa. And we transitioned both of those back to Savannah. And then secondly, we kept this supply chain contract in design services and warranty liabilities. And in the second transaction we're doing now, they'll take those up.

And that's consistent with Gulfstream's long-term supply chain strategy, and it's consistent with where Triumph is going. Our value-added was lower now that we didn't produce the wing. It was a profitable program for us. But we think in the long term, it's better to reposition that with Gulfstream and use that -- those proceeds for corporate uses.

Great. And so you've done a good job of kind of getting rid of the bleeder program. Maybe tell us about the remaining structures business. I guess you're going to keep the interiors. But of the rest -- what is the rest that you're still going to sell? And what kind of interest are you having? Because obviously valuation for those kind of businesses are down.

So let me answer that by saying what's left. And I'm not going to disclose side by side what we're taking to market, but I will just describe what's left. So we've got the closeout of Tulsa, as Jim mentioned, on G280. That will be shut down. That's not going to be divested. Then we have our Stuart, Florida plant that makes the 767 large structures, our Red Oak, Texas plant, which makes both composites and military structures. The Arlington headquarters, where we do design and supply chain support for all of our structures. And then we've got 2 legacy 747 plants in Grand Prairie, Texas and Hawthorne. Those 2 will be shut down as we finish 747. And we have 2 composites manufacturing facilities in Georgia and in Thailand.

So a subset of those plants are being marketed through Lazard as mentioned. They're fairly far along in the process, and we expect to have updates in our Q1 call on the progress there. But in terms of interest, what we've seen is because these are strategic assets that only come up for sale maybe every 10 years, people look beyond the short-term impact of COVID. And if the rates are being maintained and you're making a long-term bet on either access to U.S. market or a particular set of technologies, we're still having strong response to our solicitation. So we're not seeing COVID put M&A on hold.

Is it fair to say, I mean given you're doing the [T-7] and you have the Future Vertical Lift program that Red Oak and Arlington probably are keepers as well as the interiors and it's really Stuart and the 2 composite plants who are more likely to be on the market?

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

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

That's correct.

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

So as we can get a clear picture of '21, we'll be able to talk more about '22, '23. I think you know the big drivers, the pension is one of them, advanced liquidations, but also the increase in the margins when volume comes back. If we're able to maintain margins with volume going down, we're going to have a nice tailwind when volume comes back. And we're going to have a stronger portfolio, and we'll be executing on the pricing opportunities in between there. And all the cost reductions we're doing now, we're going to hold on to as many as we can as the volume comes back. So we're optimistic about our ability to get back to cash flow positive just like we were last year.

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

I think that's what remains to be seen. We do see improvements from all the indicators Dan laid out, but we don't know to what extent we're going to see that improve in the second half.

I think the good news there, Cai, is that we see the end of the cash burn. You and other analysts on this call and certainly our investors have been patient in watching us unwind the structures business, which really had a number of programs that were coming down in rate and with high fixed costs, 747 being the #1, and then 280, which has always been a loss-making program when it came over with 650. So to get these done this year is a big deal. And it allows us to move forward in '22 and beyond without those that -- those stones in our saddle.

Our last question comes from Michael Ciarmoli with SunTrust.

I guess Dan or Jim, just looking at sort of the end markets, the optimism for a second half recovery, I mean this certainly looks like it's going to be a multiyear downturn for sure. I guess aftermarket MRO usually washes out over a 4- to 6-quarter period with year-over-year decline. I mean you're talking about -- I guess you've got purchase orders that are higher than Boeing build rates, pulling forward some orders in MRO.

How do we reconcile, even maybe what's kind of inventory in the channel? It would seem like if you're producing ahead on MAX, you might have some headwinds in future periods if these rates kind of stabilize or don't increase. Just trying to get a sense on sort of the optimism and recovery. And I mean I guess it's more -- we've hit bottom here in April and May, so we'll come up off of this. But just trying to get a sense of pulling forward and producing ahead of schedule, how that might impact future periods?

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

So in our forecast, if you look at our second half production rates, they're still quite modest, but they support our financial requirements for the company. And when we provide guidance, I think that will be more clear.

The MRO demand is harder to predict. That's why we're pivoting to military wherever we can. And the announcements of late, I think, reinforce that we do have opportunities for helicopter upgrades, engine upgrades, hydraulic controls. Those are all still flowing through.

I've flown twice recently in commercial aircraft. And the first time I flew in April, there's only 5 of us on the flight. And so I had a lot of concern about what does this recovery look like. The last time I flew, the flight was about 2/3 full and the airport was about half full versus it goes down the first time. It's very anecdotal, but when I -- what I've seen so far is people are getting more comfortable. I shared some metrics on aircraft coming out of storage, utilization factors.

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

What about your customers? And how are you framing that risk? I mean in your slide deck, you call out LATAM Airlines for A320 engine panels. I mean they just filed for bankruptcy. Certainly, I think we're on the front end of airline bankruptcies. How does that factor into the outlook? Or how have you guys handicapped financially strained customers?

So we're watching both suppliers and customers, their financial health. Certainly, the CARES Act support to the airlines helped a lot. Now we're listening for feedback from Boeing on how that's translating into aircraft acceptance and/or cancellations. We have a little bit of exposure to Asian airlines in terms of accounts receivables, but it's in the low single-digit millions kind of exposure. So as those suppliers struggle, we may see some modest hits there.

But overall, I mentioned we're tracking the suppliers as well. We started out with 1,000 critical suppliers. At the peak, 100 of them had -- were on hold for the COVID-19. That number is down to 10. So the recovery in the supply chain is coming along, and we haven't seen bankruptcies yet that would give us exposure there. So we feel good about the supply chain, although we're watching it very closely. On the customer side, it's still too early. I think we'll know more in September, October time frame.

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

We thank you for your participation, ladies and gentlemen, and you may all disconnect.