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Triumph Group Inc  (NYSE:TGI)
Q3 2019 Earnings Conference Call
Feb. 07, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our third quarter fiscal year 2019 results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast. Please ensure your pop-up blocker is disabled if you're having trouble viewing the slide presentation. You are currently in a listen-only mode. There will be a question-and-answer session following the introductory comments by management.

On behalf of the Company, I would now like to read the following statement. Certain statements on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. (technical difficulty) 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. Go ahead, Mr. Crowley.

Daniel J. Crowley -- President and Chief Executive Officer

Thanks, Kevin, and good morning. The key takeaway from today's call is that Triumph is executing on its fiscal 2019 plan and positioning the Company for return to profitability and positive cash flow with a mix shift toward higher value, more profitable businesses. Over the past few weeks, we announced a series of divestitures that are game changers of Triumph. These delevering actions, combined with the operational and business development progress leading up to this point, improved the future state of the Company, both structurally and financially. Importantly, the payout for our restructuring investments that we've made over the last three years accelerates in our fiscal year '20, which begins this April.

I'll share more about these actions in a moment, and I encourage you to refer to the supplemental slides we have on our website as Jim and I review the quarter and discuss Triumph's path forward as a more focused and efficient company.

Overall, the quarter met our expectations, while reinforcing our strategy to exit non-core programs and businesses. In the third quarter, we advanced on key financial and strategic objectives. We reaffirm our fiscal year 2019 sales, earnings and cash guidance.

Integrated Systems and Product Support once again generated organic sales growth on a year-over-year basis. When accounting for divestitures, Aerospace Structures also generated year-over-year organic sales growth. This is the third consecutive quarter of top line growth for the three segments. Integrated Systems reported 6% organic increase in sales for the quarter, driven by content growth and rate increases on narrow body programs. Quarterly organic revenues also expanded for Product Support by over 5% over the prior year and by 8% in our structures and interiors business.

Operating margins on an adjusted basis increased sequentially across all three segments of our business, enabled by the strategic actions we took across our portfolio and our continued focus on operational efficiency.

We forecast positive cash flow in Q4, which will be the first time in the last seven quarters. Cash used was better than expected this quarter due in large part to improved working capital, mainly due to the timing of payables, and partially offset by additional spending on the Global 7500 program, which will now cease following the divestiture. More on this shortly.

Key components of the transformation we launched in 2016 included divesting non-core operations, fixing the program backlog, reducing costs and upgrading talent. We advanced on all of these enablers in Q3. We assembled a management team that took control of Triumph's future with the last two P&L executive positions filled in Q3. At the most basic level, we enhanced efficiency, instilled focus and discipline into all that we do, and built a pipeline of higher value opportunities to create a future company that can achieve profitable growth. We charted our path to value to Triumph 2.0.

We undertook a $300 million cost reduction initiative with the goal of completion by the end of this year, which we are on target to achieve. The purpose of this effort was threefold: enhance competitiveness, drive margins and fund growth. Since that time, we divested 10 companies with approximately $570 million in combined revenues with a minimal loss of EBITDA. Collectively, we streamlined the Company by reducing the number of sites from 74 to 40 and shedding over 4 million square feet. When combined with planned headcount reductions in Q4, we will have reduced total headcount from over 15,000 to just over 10,000. We fully expect these actions will benefit our margins in the upcoming periods.

Regarding the recent divestitures, the decision to transition the Global 7500 back to Bombardier and sell our fabrication and machining businesses are critical to our transformation. We are positioning Triumph for the future. We want to focus on our core Integrated Systems and Product Support business units that have higher value-added, higher margins and better cash generation.

On the Global 7500 program, we mentioned on prior calls that Triumph and Bombardier have been engaged in programmatic and commercial discussions on the wings scope of work. Having matured the wing design and supply chain and delivered over 25 production wings to Bombardier's final assembly line, triumph's performance was a clear enabler to the Global 7500's entry into service in December of 2018. We're proud of our work on the state-of -the-art wing, and our recently announced agreement with Bombardier marks the successful conclusion of our work on the program.

Specifically, Triumph is transitioning the wing manufacturing operations and assets to Bombardier who will continue operations in the Red Oak, Texas factory. While we are not to receive any proceeds for this transition, exiting the program frees Triumph from further investment, significantly de-risks our portfolio, improves free cash flow, and expands margins in FY '20 and beyond.

In reviewing our options on where to invest our cash, we concluded that the expenditures needed to bring the program through to profitability in the years ahead are better spent in our core business areas. We are pleased to have reached this resolution, which enables Triumph's return to positive cash flow and profitability. More broadly, in our industry today, we are seeing OEMs and suppliers work together to optimize their global supply chains, and in some cases, in-source items that were previously procured outside. At the same time, these OEMs are sourcing work to Triumph that's a better fit with our capabilities and strategies.

Additionally, we announced the planned divestiture of our fabrication and machining operating companies from our Aerospace Structures business unit. The impact of divesting these two non-core manufacturing businesses results in a reduction in our site count by 11 and our square footage by 1.7 million square feet. These businesses combined generated approximately $310 million in trailing 12 month sales. The combined effect of these transactions will be neutral to margins in FY '20 and beyond.

In total, the gross proceeds from all the FY '19 transactions; which include the sale of 11 machine shops, two metal finishing facilities, six fabrication sites, as well as our residual engine APU repair line in Thailand; were $220 million subject to customary closing adjustments and transaction fees. The proceeds will support our delevering initiative.

These Q3 announcements, combined with the preceding transactions and initiatives, reposition our portfolio away from commercial build-to-print and contract manufacturing work to our core Integrated Systems, which benefits from higher IP and aftermarket sales. They leave us with a portfolio of businesses more able to consistently generate cash with lower risk and higher growth potential.

For context, the portfolio now shifts from where historically almost two-thirds of revenue came from structures to less than 50% over the planning horizon. We expect this trend to continue. While the divestitures and Global 7500 transition will result in potential one-time losses, we anticipate significant margin expansion in FY '20 and beyond. To assist you in modeling Triumph going forward, Jim will provide pro forma trailing 12 month financials reflecting these business decisions.

Turning to other cash users in the quarter, we now have a line of sight to address the two remaining cash-intensive structures programs, namely the G280 and E2. We're driving to resolve both of these contracts by the end of our fiscal year '19. These actions are not yet included in the pro forma results. To rationalize the Company and meet our $300 million cost reduction goal, we identified an additional 600 headcount reductions beyond the divestitures to improve our EBITDA by $50 million to $75 million, beginning in FY '20. As we approach our future state configuration, we believe these actions will position the Company to optimize the opportunities that lie ahead.

Turning to new wins in Q3, we entered into a key strategic channel partnership agreement with Honeywell on the T55 engine program. Integrated Systems benefits by extending our contract for electronic controls through 2023, which will allow us to expand our aftermarket business. Our Product Support business has been selected to supply repairs to Honeywell under a long-term agreement across multiple platforms.

Integrated Systems received follow-on orders for the C-130H propeller pumps in support of the Japanese navy. And finally, Integrated Systems Mechanical Solutions, our business in France, was awarded a contract extension for legacy mechanical controls through 2022 on Airbus's commercial fleets. We were also awarded a three-year contract with a major domestic airline for MRO support of heat transfer products, and we significantly extended our nacelle and flight control overhaul coverage to an existing agreement with a major freight carrier. Last, we were awarded a contract for electro-hydraulic power generation and actuation content on a major U.S. Military drone program.

In summary, we are maintaining our full year guidance. Work remains in Q4 to close the year. We're committed to reducing inventory and past due backlog in Q4, so we can enter fiscal year '20 with momentum and fewer headwinds.

On our Q4 earnings call in May, we will provide guidance for FY '20. However, to assist you in modeling the new Triumph, we provided pro forma trailing 12 month's financials in our materials this morning. Directionally, these changes benefit all three segment margins and free cash flow over the planning horizon, while avoiding the capital spending required in metallic components and the large negative cash investments required for commercial structures programs.

So overall, Q3 was an important step on our path to value. We are rapidly approaching our future state portfolio, and after achieving inflection points on revenue in FY '18 and cash used in FY '19, we look forward to improving margins and free cash flow generation in the years ahead.

Jim will now provide more specifics on our Q3, our portfolio actions and the outlook for the full year. Jim?

James F. McCabe -- Senior Vice President and Chief Financial Officer

Thanks, Dan, and good morning, everyone. Overall, it was a solid third quarter for our core operations, and our cash flow was better than we expected. More importantly, the recently announced divestitures of the Global 7500 program and our build-to-print machining and fabrication businesses will improve our cash flow and profitability going forward, as we planned. Our full year sales, profitability and cash flow remain on track to meet our guidance.

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

On Slide 9, you'll find our consolidated results for the quarter. Net sales were up 4% compared to the prior year third quarter, and all three of our segments generate organic top line growth. This is our third consecutive quarter of year-over-year organic growth across all three segments. Adjusted operating income was $38 million this quarter and our adjusted operating margin was 5%, consistent with the prior year.

With respect to the segment results, on Slide 10, sales in our Integrated Systems segment increased about 6% organically, due primarily to accelerating volume on several narrow body commercial programs noted on the slide. Margins for Integrated Systems reflected higher OEM sales in the quarter relative to the prior year and reflects costs related to our consolidation of our Connecticut facilities, which we anticipate will be complete by the end of the fiscal year. These consolidation costs reduced our margin by approximately 47 basis points. Sequentially, the margins improved another 50 basis points from Q2.

Turning to Slide 11, third quarter sales for our Product Support segment were up 5% on an organic basis, driven by stronger demand for accessories and structural component repairs. The Product Support operating margins reflect increased sales on next-generation platforms compared to last year. Sequentially, the margins were stable. We expect to improve the profitability on newer repair programs as we exit FY '19 to be more in line with historical performance.

Aerospace Structures results are summarized on Slide 12. After accounting for the previously disclosed divestitures, segment sales were up roughly 8% organically. The operating margin included a net unfavorable cumulative catch-up of $47 million for the programs we are exiting. This includes a $40 million forward loss charge on the Global 7500 program, $9 million forward loss on the E2 Jet program, and $3 million on the G280 program. On adjusted basis, TAS operating margin was breakeven.

Turning to Slide 13, free cash use was approximately breakeven at $6 million used during the third quarter and $228 million used year-to-date. The performance this quarter reflects the repayment of customer advances and additional cash investment in the Global 7500 program. This was partially offset by a benefit from timing of payments to suppliers. This benefit drove the lower cash used in Q3. We still anticipate Q4 to be free cash flow positive and to meet our full year free cash flow guidance.

Capital expenditures were $11 million in the third quarter and $35 million year-to-date. We invested approximately $18 million in restructuring and $214 million in working capital. Year-to-date working capital use was driven mainly by $177 million of repayments of customer advances and $206 million in the Global 7500 program, partially offset by the benefit of higher accounts payable due to $125 million in customer advances not currently tied to deliveries.

On Slide 14 is a summary of our net debt and liquidity. Our net debt at the end of the quarter was approximately $1.6 billion and our cash availability was approximately $417 million, an increase of 8% over the prior quarter. The proceeds from the divestitures will be used to reduce our net debt. We are in compliance with our financial covenants.

Slide 15 is a summary of our FY '19 guidance. Based on anticipated aircraft production rates and excluding the impacts of pending divestitures, we continue to expect fiscal '19 revenue to be approximately $3.3 billion to $3.4 billion, which represents a year-over-year increase of approximately 5% at the midpoint of our guidance range.

We expect adjusted EPS of $1.50 to $2.10. Our guidance assumes an approximate 17% effective tax rate for the year. Cash taxes, net of refunds received, are assumed to be zero for the year. We expect capital expenditures to be in the range of $50 million to $60 million. We continue to expect free cash use for the full year to be between $200 million and $250 million.

Slide 16 is a free cash flow walk showing the key drivers from our year-to-date to full year free cash flow. Our advanced repayments and our Global 7500 program cash use are both substantially complete through Q3. We don't anticipate any significant impacts in Q4.

I'd like to take a moment to discuss the Global 7500 transaction. We do not anticipate a material impact to our FY '19 guidance as a result of this transaction. As you recall, we were anticipating cash breakeven a few years out at chipset (ph) 75 to 100. We estimate that this transaction will result in approximately $100 million to $150 million less cash use in FY '20 and approximately $75 million to $125 million less cash use in FY '21. This reduction in support of our stated plan to be free cash flow positive in FY '20 and beyond.

Additionally, this program was at a forward loss position and was dilutive to our margins. We anticipate annualized FY '20 margins to benefit by approximately 200 basis points as a result of this transaction. We continue to focus our efforts on optimizing working capital throughout the Company. This is a key area for us as we drive toward positive free cash flow in Q4 and beyond.

To summarize, for the fiscal year, we continue to expect free cash use in the range of $200 million to $250 million.

On Slide 17 is the pro forma trailing 12-month financials when accounting for the divestitures during the fiscal year and the transfer of the Global 7500 program. On a pro forma basis, TGI consolidated trailing 12-month sales were approximately $2.8 billion, adjusted EBITDAP was $186 million and free cash flow use was $72 million.

On a segment level, pro forma financials are as follows: Aerospace Structure sales of $1.5 billion and adjusted EBITDAP of $55 million; Integrated Systems sales of $1 billion and adjusted EBITDAP of $165 million; and Product Support sales of $288 million and adjusted EBITDAP of $50 million. This results in adjusted EBITDAP margin improvement of approximately 270 basis points on a trailing 12-month basis. We are providing this information to assist you in understanding the financial makeup of the business because of the actions we have taken. These pro forma results do not include the impacts of future rightsizing activities or any resolution of open program actions we are undertaking. We'll provide any relevant updates on these initiatives and any potential impact on the financials along with our view of FY '20 when we release our FY '20 guidance on our fourth quarter earnings call.

Following the filing of our 10-Q, we will be issuing an 8-K providing the pro forma financial statements for the nine months ended December 31st, 2018 and the fiscal year ended March 31st, 2018. As we move through FY '19, we remain confident that we will achieve our cash flow targets. We continue to aggressively manage our cash through outsourcing, contract negotiations and operational improvements.

In closing, we remain solidly on track with the goals we set headed into the year. We are pleased with the cost reduction and portfolio reshaping actions we've been taking. We are increasingly optimistic and confident in our prospects for profit generation and positive free cash flow.

Now, I'll turn the call back to Dan, then we'll take your questions. Dan?

Daniel J. Crowley -- President and Chief Executive Officer

Thanks, Jim. In summary, the actions we've taken and those still under way underscore the determination of the Triumph team to deliver on our commitments, complete our turnaround and deliver enhanced shareholder value. There's more work to be done as we close out the year, but we are firmly on track for a cleaner FY '20.

With that, Jim and I will now take your questions. Kevin?

Questions and Answers:

Operator

At this time, the officers of the Company would like to open the floor to any questions that you may have. (Operator Instructions)

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

Krishna Sinha -- Vertical Research Partners -- Analyst

Hi, thank you. Can you just help me with the guidance? You said -- you reiterated guidance and you said it's excluding any of the divestitures. Can you outline exactly what you're excluding from guidance? Is it -- are you excluding the Global 7500 divestiture and excluding the machining and fabrications work that you divested? Or are you just talking about future divestitures that you could make in the fourth quarter?

James F. McCabe -- Senior Vice President and Chief Financial Officer

Sure, Krish. This is Jim. The Global 7500, which closed yesterday, is included in the guidance but doesn't have a material impact for the balance of the year. So without that, we're still within the guidance range. The fabrication and machining divestitures which have been announced have not closed yet. So we anticipate they're going to close before the end of the quarter. But because of the short period between closing and the end of the year, we don't anticipate a material impact from them either.

Krishna Sinha -- Vertical Research Partners -- Analyst

Okay. So there's no implicit change in the guidance based on -- if those were to close -- so in other words, if those were to have closed already, you would have changed the guidance. Is that correct?

James F. McCabe -- Senior Vice President and Chief Financial Officer

Well, they haven't closed, so we haven't changed the guidance. I don't think it would have had a material impact either way. They're important actions, but they're really taken for their full year effect and not for the short-term effect this quarter.

Krishna Sinha -- Vertical Research Partners -- Analyst

Okay. And then can you just talk about the -- I see that your top 10 programs have changed over time with these divestitures and you've got like a lot of narrow body content that's now shifted upwards. Can you just talk about your exposure on MAX and neo, versus the NG and the CL?

Daniel J. Crowley -- President and Chief Executive Officer

Yeah. Triumph has got content on both, I'll call, the legacy variants as well as the new variants. The new variants in some cases are not as high, but the story is not fully written because the OEMs continue to compete subsystems. And we are picking up work incrementally. So I would say, check back with us as those systems mature and get into production to get, what I call, steady state content on platform. We did lose some structures content, for example, some of the flaps and control surfaces, Boeing decided to in-source, but we're getting more on the actuation and systems content.

Krishna Sinha -- Vertical Research Partners -- Analyst

Okay. And then one last one. Is there any more divestitures that you have planned? I think the Global 7500 one was a bit of a surprise. So can you just talk about what else you could be negotiating with the OEMs or with any other potential acquirees out there?

Daniel J. Crowley -- President and Chief Executive Officer

Yeah. In my remarks, I mentioned that the E2 and the G280 were programs that we were looking at. So we are in discussions with the customers on those two programs. And then, we're also looking at a couple of more operating company divestitures that could potentially close in Q4 or in Q1 of FY '20. But we're really getting toward the end of the portfolio reshaping, both programmatically and from an opco point of view.

Krishna Sinha -- Vertical Research Partners -- Analyst

Yeah, that's great. Thank you.

Daniel J. Crowley -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Sheila Kahyaoglu with Jefferies.

Sheila Kahyaoglu -- Jeffries LLC -- Analyst

Hi, good morning, guys, and thank you for the time. I guess just, Dan, to follow up on that last question, how do you think about the Aerospace Structures business evolving as you divest some of these programs? And then, just given some of your recent wins within Aerospace Structures, how do you bridge that to expanding profitability from 3% today to, I think, 12% in '21?

Daniel J. Crowley -- President and Chief Executive Officer

Good morning, Sheila. So there is no doubt that structures is evolving and we're big contributors to revenue in the past like 747 and C-17, V-22, G450, those have sunsetted or are in the process of closing out. And in some cases, they are still loss making programs. So the evolution of structures is toward its more profitable core, which is based on the G650 now renegotiated, the work we do on G500 and G600, and military structures. Our T-X program, it's early in its development, but over time, that will add value. We're now winning content on some of the new start programs such as military drones. And then we have our program in support of Northrop Grumman on the Global Hawk, which has been awarded the Navy Triton variant follow on. So you'll see a shift from commercial wide-body to more military structures and some business jet structures as well.

And within the structures business is our interiors. That's where we do insulation of deducting. That's a very profitable, positive cash flow business that supports commercial aircraft. We do over 1 million blankets a year from our factories, as well as thousands of different ducting and air plenums that distribute air within the aircraft. And so that's a really good business for us and it's going to help drive the margin improvement over time in structures.

Sheila Kahyaoglu -- Jeffries LLC -- Analyst

So it's just like a shift away from large fuselages or wings to more interiors?

Daniel J. Crowley -- President and Chief Executive Officer

That's right.

Sheila Kahyaoglu -- Jeffries LLC -- Analyst

That's really driving the profitability?

Daniel J. Crowley -- President and Chief Executive Officer

That's true. We're still a solid player in the 767, for example. But in that case, we build a very complex wing center body, which is difficult to produce. Other structures that we do typically, I'll call it, barrel section fuselages, those could be done in other locations that are more cost competitive, and over time, we will exit that type of work.

Sheila Kahyaoglu -- Jeffries LLC -- Analyst

Okay. Got it. Thank you very much. I'll go back in the queue.

Daniel J. Crowley -- President and Chief Executive Officer

Okay. Thanks, Sheila.

Operator

Our next question comes from Seth Seifman with J.P. Morgan.

Seth M. Seifman -- J.P. Morgan Securities, LLC -- Analyst

Thanks very much. Good morning.

James F. McCabe -- Senior Vice President and Chief Financial Officer

Good morning.

Daniel J. Crowley -- President and Chief Executive Officer

Good morning.

Seth M. Seifman -- J.P. Morgan Securities, LLC -- Analyst

I guess maybe staying on structures, the kind of targets you talk about, if we assume revenues fairly stable, it looks like about $180 million or so of EBIT there in fiscal '21. How do we think about how that converts to cash and what's remaining as a cash drag at that point?

James F. McCabe -- Senior Vice President and Chief Financial Officer

So Seth, as you know, the programs that we've divested, including Global 7500, have been the biggest users of cash in the Structures segment. And the businesses that remain are much more working capital efficient. So I think you're going to have a high conversion rate on the EBIT. And we'll give you more indication of that when we come out with our FY '20 guidance, but with less volatility, more stable steady profitability, and less working capital needs in Structures going forward.

Seth M. Seifman -- J.P. Morgan Securities, LLC -- Analyst

Great. And then when you think about, in Integrated Systems, return on sales going from the 15% this year to 20% plus, how much would you say that the -- I guess, costs related to your transformation efforts are weighing down the margins in integrated systems this year?

Daniel J. Crowley -- President and Chief Executive Officer

I think it's -- the reduction from our, I'll call it, historical levels of profitability, 19% to 20%, is probably half related to restructuring and half related to some performance issues in two of the 15 factories that we're laser focused on to fix. And once those factories catch up with the backlog -- they are both shops that are ramping up quickly with rate and they've taken on a lot of new work, and so we've spent more money to recover that past due backlog and that's been a contributor to margin erosion as well. But it's a fixable challenge that we're all over with our customers. And then the other part is the restructuring, which will sunset in the next six to 12 months.

James F. McCabe -- Senior Vice President and Chief Financial Officer

And I think we're going to see an increase in the aftermarket piece. We're going to be growing as a percentage of our total over time, and that's going to help enhance margins as well.

Seth M. Seifman -- J.P. Morgan Securities, LLC -- Analyst

Great. Thank you very much.

Daniel J. Crowley -- President and Chief Executive Officer

Thanks, Seth.

James F. McCabe -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

Our next question comes from Michael Ciarmoli with SunTrust.

Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst

Hi, good morning, guys. Thanks for taking the questions. Maybe just a follow-up right on that point on the Product Support and aftermarket. I think Dan, you may have mentioned improving margins on some of the new repair programs. What are you guys doing differently to drive that margin expansion there? Is it just more efficient? Does it have to do with the contracting terms? Maybe if you could just elaborate on that.

Daniel J. Crowley -- President and Chief Executive Officer

Sure. So we have a new EVP we hired for that business, Bill Kircher, and he is really helping a lot. He came from Pratt & Whitney. He ran their Asian MRO business. And as we've looked at how we supply products to customers, we decided to invest cash and rotable inventory that we can quickly turn toward their on-demand repairs.

Secondly, there are certain products that we can overhaul and repair parts and take parts from used thrust reversers, for example, or landing gear that are serviceable, and in doing so, meet the mission requirement but do it at a lower cost and higher margin. And customers are fully on board with that sort of approach rather than buying all brand-new parts when serviceable parts will meet the need.

And then the last piece of margin expansion is increasing revenue with existing customers. We do a lot with FedEx, UPS, Southwest, American, but we could do more. And the cost -- the incremental cost of supporting their repair needs are lower than acquiring new customers. So it's all those things together, but it's taking, I'll call it, a traditional repair overhaul business and taking new approaches to the actual inventory, repair approach and then partnering with the carriers.

Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst

Got it. That's helpful. And then just one more on this sort of margin walk that you detailed on Slide 7 into fiscal '21. Should we think about a linear progression there? I know you didn't give fiscal '20, but are there any items, more restructuring spending or adjustments we should be thinking about in fiscal '20? Or is it just going to be sort of some of those existing programs you have, you take out costs, should we just expect sort of a continuous margin improvement toward those '21 targets you've laid out?

Daniel J. Crowley -- President and Chief Executive Officer

Yeah. I think it's a fairly linear trend. As we put the restructuring behind us, we get more momentum from our operational improvements. There is not a single step function where an individual contract suddenly becomes the dominant contributor. Jim, your thoughts?

James F. McCabe -- Senior Vice President and Chief Financial Officer

Yeah. There's diversification and the actions we're taking, so I think it will be smooth improvement over time.

Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst

Got it. Okay. I'll jump back in the queue, guys. Thanks.

Daniel J. Crowley -- President and Chief Executive Officer

Thanks, Mike.

Operator

Our next question comes from Robert Spingarn with Credit Suisse.

Robert Spingarn -- Credit Suisse -- Analyst

Hi. Good morning. Jim, you gave us the cash flow relief figures for 7500 for next year and the year after. But how should we think about advanced payments during that period given that they were a big drag in '19? And then are there any other major moving pieces cash flow-wise that we should think about as we -- longer term?

James F. McCabe -- Senior Vice President and Chief Financial Officer

Yeah. Thanks, Rob. And we have benefited from advances and the support from our customers, which we appreciate. The current expectation is that advance repayments will be about $80 million next year. And there will be about $62 million in the following year. And then, I mentioned, we have another $125 million of advances that we haven't scheduled repayment of yet. But the customers have been very supportive and flexible with us on the repayment schedule. We are cash flow positive assumes that we're going to repay that $80 million next year.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. And then Dan, on the strategic side, just curious, your exit from machining, I'm trying to reconcile that with your largest competitor in structures building that business, or are they just very different businesses? I wanted to just understand the logic there.

Daniel J. Crowley -- President and Chief Executive Officer

Sure. So -- and I know which competitor you're referring to. When I came here and I looked at the portfolio of 75 locations and I looked at where we could afford to do the modernization and capital upgrades, and candidly where there was macro trends toward offshoring and also consolidation, I concluded that build-to-print contract manufacturing really wasn't Triumph's forte, it wasn't going to be an area we could be competitive at. And yet, there are a lot of companies out there that this is their mission and this is what they do well and they have the capital to invest and upgrade these machines over time. So we've exited it.

In the case of the competitor you're referring to, they largely do that work now, I believe, in Malaysia. It's a vertical integration play, so they can provide to feed to their own shops. Many of these shops that we had were merchant suppliers. They were competing broadly across lots of platforms, not predominantly feeding into Triumph's facilities. So our need to maintain them in the portfolio, I think, was lower than other competitors.

So the owners of these new facilities are the right owners. In many cases, they already own a lot of shops. They're going to gain scale benefits and are committed to investment and supporting the customer base, including Triumph, for these suppliers to us. But doing this, it allows us to reduce our debt and then begin to reinvest in systems and aftermarket. And systems hasn't been invested in at the levels we would like over the last few years because of the money going into structures, and we're looking forward to reversing that trend.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. Thank you very much.

Daniel J. Crowley -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Myles Walton with UBS.

Myles Walton -- UBS Securities -- Analyst

Thanks, good morning.

Daniel J. Crowley -- President and Chief Executive Officer

Good morning.

Myles Walton -- UBS Securities -- Analyst

And thanks for all the detail in the slide deck. It's really helpful. Just starting the fiscal '20 cash flow being positive. I think you prior to the G7500 had talked about it, also being positive and then you obviously mentioned that your previous plan had $100 million to $150 million of cash use on the 7500 in fiscal '20. So I'm just curious, is $100 million to $150 million kind of now the new baseline or did other things move against you?

James F. McCabe -- Senior Vice President and Chief Financial Officer

Yeah, thanks, Myles. We have to take actions to achieve our plans and these actions, including the 7500 transition, were all in support of our plan to be cash positive. So it's not incremental to it, but these are necessary actions and they are going to get us to cash positive.

Myles Walton -- UBS Securities -- Analyst

So when you had previously talked about cash positive, you had already considered the disposition of the 7500 in that?

James F. McCabe -- Senior Vice President and Chief Financial Officer

That was one of the options to get there. There could have been a lot of other outcomes here, but this is the one, the path we took.

Myles Walton -- UBS Securities -- Analyst

Okay. And then the payables benefit that you put in the Slide 13, I guess it was, is that something that reverses fully on you in any way? Or is it just something that's in absence of that benefit we should think about going forward?

James F. McCabe -- Senior Vice President and Chief Financial Officer

Yeah. Included in the payables is the $125 million of unplanned advances that will be repaid at some time in the future, probably a few years out. So we benefited this year on that, and we don't expect any more of that going into next year. But that's what's -- why payables is increasing during the year.

Myles Walton -- UBS Securities -- Analyst

Okay. Got it. And there is one last one on margins, just a clarification. So the 1,000 basis points of EBIT margin expansion that's implied over the next two years, is that likewise going to drop through on EBITDA margins? I know, obviously, you could have contract liabilities or other things moving around. So if you can just kind of clarify or confirm that?

James F. McCabe -- Senior Vice President and Chief Financial Officer

Yeah, it's too early to give you a good information on that. Look for May, when we give our guidance, we'll try to provide more clarity on the drop-down of that.

Myles Walton -- UBS Securities -- Analyst

Okay. All right. Thanks guys.

James F. McCabe -- Senior Vice President and Chief Financial Officer

Thank you.

Daniel J. Crowley -- President and Chief Executive Officer

Thank you.

Our next question comes from Cai von Rumohr with Cowen.

Jeff Molinari -- Cowen & Company -- Analyst

Good morning, Dan, Jim. This is Jeff Molinari on for Cai.

Daniel J. Crowley -- President and Chief Executive Officer

Good morning.

Jeff Molinari -- Cowen & Company -- Analyst

I'd like to ask -- good morning. I'd like to ask about the remaining cash losing programs within structures? Can you walk us through the expected drags for the G280, the Boeing 747 program and E2? What do you expect that drag to be going forward? And how you will get those to be positive? Or when do you expect to exit those? Thanks.

Daniel J. Crowley -- President and Chief Executive Officer

Yeah. I'll start with 747. At one point, Triumph made, I think, seven fuselages per month, and I think you all know that rate has dropped to about one or less per month. And we have line of sight now to completion of our contract obligations on that, and we're fully supporting Boeing. In fact, we're building a little bit ahead of need in order for them to maintain a buffer stock and for us to exit the facilities where the work is performed today. So the cash remaining on that program are some incremental recurring losses, but -- and then cash wind up, shutdown of the facilities, and we have that bounded in our forecast.

On E2 and G280, we did the outsourcing decision with Korea's ASTK on E2. That's going very well. They just conducted a review with the Embraer customer. It went very well. We'll continue to evaluate the best long-term owner for that program. But we are fully supporting them and excited about the progress that Embraer is having an interest in the platform. G280, it's a program that was known to be a loss-making program when it was transferred from Spirit. We've done all we could to reduce that loss. We delivered quality wings to IAI, who's the end-user and customer. And we're in discussions again with that program, given Triumph's shift away from, I'll call it, large commercial structures toward our systems and aftermarket, what's the best plan for that because it's my understanding that IAI and Gulfstream have big plans for that platform longer term. So you reach points periodically on programs where you reassess based on the future forecast, is the current arrangement optimal, or is there something that's better. So I'd say, look for feedback on that in the next quarter.

Jeff Molinari -- Cowen & Company -- Analyst

Okay. And if you were to exit those, what would kind of the benefit be from removing those drags? Could you quantify that in any way, either altogether or separately?

Daniel J. Crowley -- President and Chief Executive Officer

So on 747, I think when we provide our FY '20 forecast, that will give more visibility to the run-out on that program. And on E2 and G280, those transactions are different, and so the financial consequences will be different. And I'd ask that you just give us time to complete them and then announce the results, but you could expect them to help us reduce cash losses and generate proceeds as well.

Jeff Molinari -- Cowen & Company -- Analyst

Okay. Thank you.

Daniel J. Crowley -- President and Chief Executive Officer

All right. Thanks, Jeff.

Operator

Our next question comes from David Strauss with Barclays.

David Strauss -- Barclays -- Analyst

Thanks. On the G-7500 transfer, is there any compensation for the working capital that was in place, that was in flow? Or is that all included in the net zero proceeds?

James F. McCabe -- Senior Vice President and Chief Financial Officer

Yeah, Dave, so during the last couple of quarters, we talked about how we had favorable payment profiles and progress payments we were getting, and we get to keep all those as part of the process. But there was no consideration at closing for any of the working capital. But we did get paid for a good portion of that as progress payments leading up to it.

David Strauss -- Barclays -- Analyst

Okay. And so do I interpret the pro forma cash use $330 million actual versus $72 million pro forma -- so including that, it looks like there's about a $50 million, if I just exclude the 7500, the businesses, the divestitures in total, the cash use is kind of in the $50 million range?

James F. McCabe -- Senior Vice President and Chief Financial Officer

Yeah, that's roughly correct. I think what you're going to find in our 8-K is you'll get more clarity around the historic impact from these, both for the nine months ended this December and the full fiscal year last year. So we'll file an 8-K with pro forma financials, taking out not only G7500 but the pending divestitures as well. And you'll get to see that in the next day or so.

David Strauss -- Barclays -- Analyst

Okay. So are the pending divestitures in this pro forma $72 million burn or not?

James F. McCabe -- Senior Vice President and Chief Financial Officer

Yes, they are.

David Strauss -- Barclays -- Analyst

Okay. And then last one I had on pension. How are you thinking about I guess, your returns year-to-date, fiscal year-to-date, how you're thinking about potential -- the potential pension contribution in fiscal '20? What are your kind of contemplating?

James F. McCabe -- Senior Vice President and Chief Financial Officer

Yeah, we're doing end-of-year review of the plan, so getting prepared for our fourth quarter disclosure where we'll give a new five-year funding forecast. So you can see in the supplemental data table, Page 22 of the presentation, our cash pension contribution is $5 million and the OPEB contribution is $12 million for FY '18, and it went down to $2 million and $12 million in '19. And going forward, I think you looked at last year's disclosure, there's some increases in the funding, but it's very manageable. And we don't pay attention to short-term changes in the assets because the fact is, the assets can change, but also the liability changes, so we have to wait for the actuaries do their work annually. And then we'll see what the funding forecast is going forward. But it's not something that we're concerned about.

David Strauss -- Barclays -- Analyst

Okay. Thank you very much.

Operator

The next question comes from Peter Arment with Baird.

Peter J. Arment -- Baird & Co. -- Analyst

Yes, good morning, Dan, Jim. Dan, given the pro forma kind of reset that you provided, and thanks for all the details, the kind of the $2.8 billion, how are you thinking about kind of organic growth from that going forward, just given all the changes?

Daniel J. Crowley -- President and Chief Executive Officer

The organic growth that we have been focused on since I got here is really starting to follow through. If you looked at some of the early slides in the deck, we showed the quarter-over-quarter and year-over-year growth across all three segments. And we're especially excited about (technical difficulty) bookings in our Integrated Systems business, because that's the leading edge for us and it's our biggest source of value. But Page 4 in the deck, you can see in the quarter, we were 5% to 8%, depending on the business unit and growth, and for the full year, those ranges were 4% to 9% with the higher ranges being in Integrated Systems.

So we think we can sustain that. And one of the side benefits of this portfolio shaping is management bandwidth and the ability to focus on the residual business. We put a tremendous amount of time and energy in to resolving contractual issues and pricing challenges in the structures business for the last three years. And with the reduction in the number of sites from 75 down to about 40 and fewer operating companies and fewer loss making programs to work through with our customers, our ability to pivot back to our growth agenda and to our margin expanding -- expansion agenda is going to be greatly enhanced, and we're all excited about that for FY '20.

Peter J. Arment -- Baird & Co. -- Analyst

Appreciate the color. And just a clarification. You mentioned, I guess, it was $220 million in total proceeds? Or it's still -- is that tied to the $570 million in revenue that you kind of had mentioned on the divestitures? Or are those numbers different?

Daniel J. Crowley -- President and Chief Executive Officer

The $570 is all divestitures in the last 12 months or so. The $220 million is just for the most recent transactions we've done, which are machining, fabrication, our Thailand RPL facility. So gross proceeds -- the net proceeds will be a little bit less, but it's still the right thing to do. We really had no reduction in EBITDAP to speak of as we exit that business, and it's the right thing for Triumph and our shareholders.

Peter J. Arment -- Baird & Co. -- Analyst

Appreciate the comments. Thanks.

Operator

Our next question comes from Ken Herbert with Canaccord.

Kenneth G. Herbert -- Canaccord Genuity -- Analyst

Hi, good morning.

Daniel J. Crowley -- President and Chief Executive Officer

Good morning.

James F. McCabe -- Senior Vice President and Chief Financial Officer

Good morning.

Kenneth G. Herbert -- Canaccord Genuity -- Analyst

I just wanted to follow up on one of the earlier questions. When you start to provide some of your pro forma '21 margin assumptions or opportunities, how much of that on the revised base of the business is captured in -- the improvement is captured in the contracts you're signing now versus how much is maybe based upon sort of incremental cost reductions? I guess, I'm just trying to get at, with the new business you're announcing now and the wins you're pulling through both in structures and obviously Integrated Systems and across the board, are those materially supporting the margin expansion? Or is there really further things from a restructuring, you just -- cost take-out push you need to execute on?

Daniel J. Crowley -- President and Chief Executive Officer

Yeah. That's -- you're asking me to integrate a lot of data across lots of contracts, but it's a great question. And I would say that a lot of the follow-on work that we're winning already carries good margins. And when we talk about narrow-body ramp rates, that's mainly extending work that we already have, for which the development has been completed, and they in rate production. So that's a big tailwind for us for margin expansion, especially as we put the restructuring cost behind us. And then you asked about are we also doing cost take-out that enhances margins? Absolutely. In Q3 in my comments, I mentioned that we'll be doing a 600 person reduction, which is on the order of 6% of our workforce in the next 60 days or so. And that reduction, although painful, helps position the remaining company after these divestitures for improved margin performance over the forecast period.

Last contributor -- yeah, just one last contributor is, Triumph historically has had a higher contribution of spares in aftermarket sales as I've worked with our new leaders to look at recapturing more of our tail -- our aftermarket. We're now doing more collaboration between Product Support and Integrated Systems to go after, not only their products that we produce for the OEM for, but other manufacturers' parts. And this Honeywell partnership we announced in the period allows us to do MRO on other manufacturers' hardware as well. So look for aftermarket to also contribute to margin expansion.

Kenneth G. Herbert -- Canaccord Genuity -- Analyst

Okay. That's helpful. And Dan, strategically, it sounds like you're talking about a shift toward more -- when I think about new business, certainly more on the military side, certainly more maybe on the business Jet side selectively. How much are you strategically de-emphasizing, certainly wide-bodies or even commercial transport as just part of that mix moving forward? How should we think about sort of the capture rate in those areas relative to military, for instance?

Daniel J. Crowley -- President and Chief Executive Officer

So the wide-body businesses has largely been sourced. There is no new starts other than potentially, 797. It's mostly contract extensions with existing suppliers. So when we look at our -- call it our annual operating plan horizon, we just don't see any new big wide-body programs that would change Triumph's fortune. And candidly, if they were out there, we wouldn't necessarily be producing in the U.S. just because of the trends and labor costs. But the team we have is doing a great job executing the backlog. We do have good wide-body content on 767 as I mentioned, and now with the successful roll-out of the first two tankers at Boeing, we expect those rates to go up, as well as for the freighter variant.

But you're right. Strategically, we're focused on military and complex structures that don't require the level of non-recurring investment that we had to do for programs like Bombardier or in the past 747. So that's our stated strategy. And now that are revenue is trending toward 50-50 systems and aftermarket versus structures, that trend will continue toward -- a bias toward systems and aftermarket.

Kenneth G. Herbert -- Canaccord Genuity -- Analyst

Great. Thank you very much.

Operator

Our next question comes from Noah Poponak with Goldman Sachs.

Noah Poponak -- Goldman Sachs -- Analyst

Hi, good morning, everyone.

Daniel J. Crowley -- President and Chief Executive Officer

Good morning.

James F. McCabe -- Senior Vice President and Chief Financial Officer

Good morning.

Noah Poponak -- Goldman Sachs -- Analyst

So if I'm looking at Slide 16 with the 2019 free cash flow breakdown, and if I just sort of -- everything that's in the zone of $200 million, if I just round it to $200 million to make the question here a little easier. So a use of $200 million for the year as reported, if I add back the advances a little less than $200 million, but just call it $200 million, it gets to breakeven. And then if I add back the Global 7500, a little more than $200 million, but call it $200 million, gets me to I think a positive $200 million, which for some time you had been discussing as a normalized level ex-advances.

And so I had read that slide as I should take that level and then have a view on things that grow or decline in the future. But your answer to Myles' question kind of confused me in saying that the 2020, just being positive, included the release of the Global 7500. Does that imply that something is worse elsewhere in the business? Or do you see what I'm saying there? I can't square those two items.

James F. McCabe -- Senior Vice President and Chief Financial Officer

Sure, Noah. It's Jim. There is a lot of onetime items in the last couple years, and there's fewer and fewer of them in this last quarter and there will be going forward. So we did benefit from things like increases in payables during the year, as we talked about earlier today. But what I'm telling you is that our goal to be cash positive next year, the actions we took with the Global 7500 and divestitures were all actions that were necessary to get to that goal, and they weren't incremental to do it. So there is no one thing I can point out. There is a lot of moving parts. I think we can help you with your modeling questions subsequent to this, but the data is all there. We're going to put our FY '20 guidance in May. I think if you go back to the core operations and build up from a zero base, you're better off than trying to role forward from the years that had a lot of noise in it. So wish I can give you a more crisper answer to that, but it's not a simple story.

Noah Poponak -- Goldman Sachs -- Analyst

Is there a new number that you think of as the normalized ex-advances recurring free cash flow of the business that's associated with the '21 numbers you've given today?

James F. McCabe -- Senior Vice President and Chief Financial Officer

Not yet, I think that's something we're going to save for May because we still have actions going on to achieve our plans going forward. Our plan is not approved yet. We have a draft plan we're working on. And as we develop it to actions, we want to come back to you with guidance that we have high confidence in, in May.

Daniel J. Crowley -- President and Chief Executive Officer

The good news is, Noah, that we don't have some of the big swingers on cash that have really made it difficult for us to answer that question on recurring, the loss-making programs, restructuring costs, advance repayments. And as those things are damping out, I think, all of your modeling is going to become easier.

Noah Poponak -- Goldman Sachs -- Analyst

Right. You are narrowing your range of outcomes, I suppose.

Daniel J. Crowley -- President and Chief Executive Officer

Yeah. That's right.

Noah Poponak -- Goldman Sachs -- Analyst

Just one other thing I wanted to -- one other thing I wanted to ask you. In a few of the sales and divestitures you are making, you've made a comment of finding a better owner or the company that's taking it being a better owner. In the case of the 7500 win, do you think the OEM is a better owner? Do you think they'll have a better chance of continuing the cost there as they take over that product?

Daniel J. Crowley -- President and Chief Executive Officer

Well, first of all, the division of Bombardier that's buying our Red Oak facility in the program is their aero structures business from Belfast, which has a track record of structures development and production that is very good. And their leaders are on-site now in our plant having closed the transaction yesterday. They've got a seamless transition plan. And so I think they are going to bring a lot of capabilities. They also -- because they are buying for their legacy business jets at a very high rate, they have economies of scale and supply chain scale that allows them to negotiate material prices also very tightly. And then as they evolve the design, being the design authority as well as the production source, they can incorporate change without going through the arm's length transactions that they've had to with a third party.

So there are several things that I think position them to be successful. But I'd ask you to pose that question to Bombardier. But we're not concerned at all about the transition. We're proud of what we've done. This program three years ago was really in a place where success was not a given, it's an outcome, and for us to work together to certify the wing and get entry into service and ramp up the production line, Triumph worked to ensure we protected our customers just as we've done with G650, E2 and another programs. And that's part of our customers' value in Triumph is that we don't leave them hanging, we support them. And if we're going to make a transition, we get into a natural break point and then we do a deal that's acceptable to both parties.

Noah Poponak -- Goldman Sachs -- Analyst

Thank you so much.

Operator

Ladies and gentlemen, this is all the time we have for questions today. This concludes Triumph Groups' third quarter fiscal year 2019 earnings conference call. This call is scheduled with a replay. It will begin today at 1:30 PM Eastern Standard Time and run until the 14th of February till 11:59 PM Eastern Standard Time. You can access the replay by dialing 1800-585-8367 and entering access code 9986125. Again, you can access the replay by dialing 1800-585-8367 and access code 9986125.

And ladies and gentlemen, you may now disconnect.

Duration: 58 minutes

Call participants:

Daniel J. Crowley -- President and Chief Executive Officer

James F. McCabe -- Senior Vice President and Chief Financial Officer

Krishna Sinha -- Vertical Research Partners -- Analyst

Sheila Kahyaoglu -- Jeffries LLC -- Analyst

Seth M. Seifman -- J.P. Morgan Securities, LLC -- Analyst

Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst

Robert Spingarn -- Credit Suisse -- Analyst

Myles Walton -- UBS Securities -- Analyst

Jeff Molinari -- Cowen & Company -- Analyst

David Strauss -- Barclays -- Analyst

Peter J. Arment -- Baird & Co. -- Analyst

Kenneth G. Herbert -- Canaccord Genuity -- Analyst

Noah Poponak -- Goldman Sachs -- Analyst

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