Q2 2020 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the transcript conference call to discuss our second quarter fiscal year 2020 results.
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This time I'd like to introduce Daniel J. Crowley, the company's President and Chief Executive Officer, and things that became junior senior Vice President and Chief Financial Officer first.
Go ahead Mr. probably.
Thank you Kevin did welcome everyone to our Q2 earnings call.
Earlier. This morning, we reported strong second quarter results for fiscal year 2020.
In line with our expectations, providing momentum as we head into the second half of the year.
Organic revenue was up year over year across all three business segments.
Noted on slide three.
With organic revenue up 13% in the core.
Sales growth benefited from increasing aftermarket volume.
Higher narrow body engine deliveries.
Growth in engineering services.
And expanded opportunities in Asia.
Free cash flow any P.S. performed inline with our expectations.
As planned we had moderate cash used in the quarter.
And remain on pace to deliver positive free cash flow for fiscal year 20, as we guided.
Cash used for the quarter improved year over year by 119 billion in large part due to the exit of loss, making structures programs and improving cash flow from operations.
Liquidity remains healthy and stable at approximately 400 million.
As with revenue our year over year operating margins improved in all three business units in the core.
Integrated systems performance is steadily improving with margin sequentially, increasing 500 basis points, and 270 basis points higher than prior year.
Similarly, our product support businesses improved their margins sequentially and year over year to 18% in Q2.
Well aerospace structures swung from negative to positive margins in Q2.
Midway through our fiscal year, we can measure our progress during the first six months compared to our prior year.
As noted on page five.
First half revenue was up 10% year over year.
We saw gains in EBITDA of 47 million to 127 million.
By growing our EBITDA.
We reduced our leverage from 6.8 times to 4.7 times.
Cashews improved 194 million from the same period last year.
This improvement was enabled by a more favorable sales mix strong internal and supplier performance and ramping production rates on both commercial and military programs.
We are well positioned to extend these gains throughout the second half of the year.
Across triumph, our teams are improving efficiency through cost reduction initiatives better inventory management and use of our triumph operating system.
We've been on a journey the last few years to upgrade our systems and processes standardize the where possible to reduce cost.
At our larger plants, we recently completed S&P ERP system upgrades to reduce operational risk and enable increase productivity and cost reduction.
Six of our smaller factories upgraded their ERP systems in the first half of fiscal year, 20, allowing improved visibility to procurement and manufacturing processes.
We implemented the enterprise quality system to reduce our cost of quality, which has already less than 1% of sales.
We are working with our customers to retire our remaining red programs.
With a focus on lower tier supply chain performance.
Having completed all but one of our plan plant consolidations.
And divested 12 of our original 47 operating companies.
Management bandwidth is dedicated to continuous improvement margin expansion.
Cash generation.
I will touch on our strategic review of the aerospace structures business shortly.
Our program transitions are on track, which will benefit future quarters.
We continue to win this quarter, especially in our integrated systems business, which posted a 1.2 book to Bill in Q2.
As noted on slide six growing our backlog remains a top priority for trial with an emphasis on our higher margin integrated systems and product support content.
These two business units are now collaborating on a regular basis to recapture more of our aftermarket tail with MRO sales up 16% in Q2 over Q1.
We're executing our strategy to increase our competiveness and selectively pursue new work to strengthen our backlog.
And position the company for sustainable long term growth.
We continue to evolve from transactional customer relationships to strategic partnerships with Oems and carriers and our results from the quarter approved just that.
Our product support business has a diversified global customer base and provides over 30000 MRO services to over 800 customers supporting aircraft operations and over 60 countries.
Recently at the MRO Europe Conference, we announced the launch of primes, new customer support center.
This one triumph center provide single point access for customers 24 seven.
The center will field, all customer request from spares for aircraft on ground to part inquiries to overall services.
Our partnership with Air France, KLM is creating new opportunities with the airlines, who recognize our combined value proposition.
Our teams are jointly working on several proposals with content from both our product support and integrated systems divisions, including power by the hour agreements, which bringing together the best of triumphant Air France KLM.
Our Q2 wins in product support included a two year willing break overall contract from startup airline star locks.
Her athree hundred Twentyneo fleet.
This work will be completed and our Thailand MRO Depo.
We're adding engine accessory repair capabilities, including for the high volume Athree 20 power transfer unit supporting our growth agenda in the Asia Pacific region.
The MRO Europe , we announced plans to expand our aftermarket presence with the launch of erodible trading business.
This new venture will sell spare parts and components to meet the large market demand for used serviceable parts.
The market for global commercial aircraft aftermarket parts.
Is growing at a CAGR of 6.6% through 2026.
We're excited by the opportunity to link our repair and roadable strategies to speed turnaround times and lower costs.
One of our best business is electronics and controls a former Goodrich plant we acquired at the time of the you Tc Goodrich merger.
You can see provides full authority digital engine controls and multi platform high speeds and tropical fuel pumps.
And be spoke heat exchangers and vapor cycle cooling solutions.
The core of this business is a fielded fleet of tribe solutions with our IP, including over 30000 fuel pumps and electronic engine control units.
Which we continue to actively support maintained an upgrade driving sustained growth and margin enhancement within this business.
Recent awards include a five year idea Q for the GE Ttseven hundred enhanced digital engine control unit from the de La and.
And Rolls Royce Award for both engine control unit replacement and fuel pump metering units for the Cts 800 engine.
By leveraging this fielded fleet, we support global operators with rolling performance enhancements.
We see additional opportunities to apply our fuel pump expertise to new applications such as engines for the air Force's New T. seven a trainer.
Our IP and thermal solutions supports next generation high density electronics and directed energy weapons.
We recently consolidated the former Fairchild controls business in Maryland.
Into the electronics and control, Connecticut facility.
Lowering costs, while expanding our technology base and cooling systems.
And finally, our mechanical solutions business Mark several milestones in the quarter first our sensor feel module a key component of the fly by wire kit, which provides tactile feedback to a pilot simulating the feel of existing you age 60, Blackhawk mechanical flight control systems flu wants it.
Core skis optionally piloted Blackhawk recently.
Second we delivered the throttle control system for the ex be one boom supersonic demonstrator aircraft.
Consisting of the cockpit throttle quadrant telescopic control assembly hybrid cables engine throttle gearbox and pressure bulk at assembly.
As you recall from last quarter, we're focused on expanding our aftermarket presence.
I'm pleased to report that our efforts in this regard are producing measurable results.
This collaboration resulted in an award from you I.E. based regional MRO provider Gal, which includes not only and integrated systems content provides product support entry for incremental third party MRO content.
This work Recaptures leakage from several competitors and brokers and serves as another Great example of the power of our one triumph solutions.
Integrated systems reported revenue growth and I'm, our ROE and aftermarket sales of 16% versus the prior year quarter. Another sign that we are driving topline growth in this key area.
Our aerospace structures business continues to perform well the strong organic growth, helping to offset the revenue associated with exited programs and a return to profitability in Q2.
We completed the two fuselage transferred to create a SDK and the second quarter and are working towards the close out of fund those deliveries.
On the GE to 80 work transfer we successfully loaded the first article wing at the new supplier K ATI, where the work is progressing on schedule.
Our last factory consolidation the transfer of our 767 structures work from Texas to Florida is well underway, we're ramping up right.
I'm confident in our ability to successfully complete all of these transitions on time and on budget.
Our interiors team was awarded several programs related to composite ducting.
And we're very pleased with the continuing market leading performance in this core business area.
Deteriorates team also reached a milestone of 100% on time delivery to Boeing.
And our Thailand composites business recorded 100% on time delivery was zero defects for the fifth consecutive month.
I want to provide an update on the strategic review process for our structures business, we launched in April .
The review is focused on the non core assets in our aerospace structures segment.
Which represented 1.2 billion the sales enough why 19 and excludes our interiors business.
We have now assess each of the 11 sites within the review perimeter.
Have a game plan to close sell restructure or retain each side.
In Q2, we exited the first of two Tulsa factories. Following our completion of the GE 650 wing box Assembly contract.
And anticipate exiting the second plant now producing the GE twoeighty in mid calendar 2020.
We closed a small stretch forming facility in California, having produced the last 747 skins towards fulfillment of our contractual commitments.
These skins go into the last 747 fuselage panels to be delivered from our large structures plan and Hawthorne, California in the spring of 2020.
This plant will close in late 2020.
Similar wind down plans are underway at our Grand Prairie, Texas structures plan.
We recently announced the agreement to sell our Nashville side, a 2 million square foot factory, which first opened a 1938 detect the buyer of several of our machine shops earlier this year.
We estimate the sale will close by the end of the calendar year.
This transaction is the fourth divestiture from our structures business of sites identified as non core operations.
Based on the responses from strategic buyers, we have met with over the last six months, we anticipate making other announcements in the coming months, where such transactions are accretive to our shareholders following consultation with our customers.
As we pursue our future state, it's our goal to position our non core assets with firms who are focused on those markets, while ensuring our customers have continuity of supply and our employees have continued career opportunities.
Doing so we'll enhance triumph shareholder value.
Allow us to focus on and invest in fewer businesses, where we can add the most value.
We anticipate having clarity on all of our structure sites by the end of our fiscal year 2020.
Before I turn it over to Jim I want to comment on the recent news regarding 77 rates in the 737, Max having just met with the senior Boeing officials last Friday in Seattle.
First we were staying in lockstep with Boeing as they consider a rate reduction on the 77 from 14 to 12 per month in 2020.
We do not anticipate that such a change will have a material impact on trying financials.
Our expectation is that margins would be impacted less than revenue.
Regarding 737, Max we're encouraged by the progress Boeing is making on the returned to service and we continue to support the program across four of our 41 factories at a rate of 42 a month.
Capacities in place to support Boeing's rate increases following returned to service.
As we noted previously the Max program Historically has contributed a single digit percentage of our annual revenue.
We continue to expect fiscal year 20 revenue impact to be less than 2% of sales with similar impacts to operating income and cash.
As such we do not anticipate any changes to our guidance related to the Max at this time.
A return to flight and ramp up will provide a tailwind going into F. why 21.
In summary, triumph maintain positive momentum in Q2 positioning us to generate organic growth from our core and improve margins Dps.
We're on track to achieve positive free cash flow on an annual basis for the first time in three years.
Perhaps is executing our path to value strategy and the actions. We took during the first half of the year are producing results year over year.
As we strengthened our already robust backlog, we look forward to sustainable long term growth and more profitable product lines in partnership with other firms and our customers.
With improved liquidity strengthening balance sheet to.
Declining leverage and improved operational performance.
I'm confident that our customers and shareholders will benefit from triumphs transformation.
With that Jim will now take us through more detailed financial results for the quarter Jim.
Thanks, Dan and good morning, everyone.
Our second quarter results continue to demonstrate improved predictability across our business with net sales EPS and cash results all meet your expectations.
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 seven you'll find our consolidated results for the quarter.
Net sales increased 13% on an organic basis over the prior year quarter.
All three business units generated organic growth.
Adjusted operating income was $59 million this quarter and our adjusted operating margin was 8% up about 350 basis points from last year's second quarter.
With respect to the segment results on slide eight that's why 22nd quarter sales and our integrated system segment increased approximately 10% organically compared to the prior year quarter.
Driven primarily by growth and narrow body platforms, Andrew components and military rotorcraft sales in addition to aftermarket MRO recapture.
Margins for integrated systems were significantly higher when compared with the prior year quarter, the margin reflected higher MRO and aftermarket sales in the quarter relative to the prior year improved operational efficiencies and cost reduction initiatives, partially offset by some restructuring actions.
These restructuring costs, which will help to sustain the margin improvement as the year progresses impact that integrated systems margin this quarter by approximately 200 basis points.
The grid systems second quarter margins sequentially increased approximately 420 basis points over last quarter.
We anticipate maintaining this margin expansion in Q2.
And continued improvement for the second half of F., why 20 with margins in the high teens.
Turning to slide nine.
Second quarter sales for our products, a port segment Rep, approximately 4% on organic basis due to accessory component repairs in the U.S.
And structural component repairs and increased parts trading in Asia.
The product support organic operating margin was stable year over year and reflects cost reduction benefits and improved product mix offset by timing of removals and onsite services of the active fleet due to the 737 Max grounding.
Aerospace structures results are summarized on slide 10.
Segment sales were up approximately 16% organically due to ramp up on legacy programs. In addition to new engineering service offerings.
Aerospace structures operating margin of 3% reflects the benefits of our portfolio shaping and cost reduction actions, we've taken as part of our transformation efforts.
As Dave noted the group is executing on their program transitions.
Turning to slide 11 are $25 million cash used in the second quarter was inline with our expectations. This is $119 million improvement over the same period last year reflects our portfolio and program changes cost reduction actions and working capital management across all of our businesses.
We continue to expect to be cash positive in the second half of the year.
We remain focused on being our objective of generating positive free cash flow. This year and are confident that we will deliver on that commitment.
Capital expenditures were 9 million in the second quarter.
We used approximately 36 million of cash in the quarter for working capital.
Which in aerospace structures included $20 million for advanced liquidations and $90 million for the GE to 80 program.
The 6 million of restructuring expenses this quarter were in our integrated system segment.
Cash usage also included $10 million of additional interest paid this quarter due to the timing of our refinancing.
Working capital reduction is expected to generate cash in the second half.
On slide 12, as a summary of our net debt and liquidity.
Our net debt at the ended the quarter was approximately $1.5 billion, our cash availability, we're strong in about $418 million and we are in compliance with all our financial covenants.
In the quarter, we took advantage of the strong debt capital market to cost effectively extend our maturities.
We issued $525 million of new senior secured notes due in 2024.
We use the proceeds to redeem our $375 million of 2021 notes and the balance to reduce our revolving credit facility, which we extended to 2024.
Also during the quarter, we negotiated agreements, which reduced our other post employment benefit liabilities and related future funding obligations.
These agreements will not have a material cash impact and therefore 20, but we'll reduce future benefit plan funding obligations and estimated $5 million to $8 million per year.
Slide 13, as a summary of RF, why 20 guidance, which reaffirms the guidance we provided last quarter.
Based on anticipated aircraft production rates and including the impacts of pending program transfers for 420, we continue to expect revenue approximately $2.8 billion to $2.9 billion.
We maintain our expectation for adjusted EPS $2.35 to $2 in 95 cents.
Our guidance assumes normalized 21% effective tax rate for the year, which has the potential to be reduced in Q4 due to a partial release of the valuation allowance.
Cash taxes net of refunds received our soon to be approximately $10 million in the year.
We anticipate the cash used in the first half of the year to be more than offset by cash generation. The second half with strong cash generation in Q4.
We continue to expect free cash flow for the full year to be between zero and $50 million.
We continue to expect capital expenditures to be the range of approximately $50 million to $60 million.
Slide 14 provide some additional detail, but our cash guidance tripwire 20, we expect cash flow from operations of $50 million to $110 million, which includes the liquidation of customer advances of approximately $80 million in the year.
With the first half of that point 20 behind US we are increasingly confident in our ability to generate cash and profitable core growth. This year as we reduce our leverage we will continue to invest in our core businesses to accelerate that profitable growth and drive meaningful increases in shareholder value.
Now I'll turn the call back to Dan Dan.
Thanks, Jim today triumph is defined by our close customer relationships a pipeline of increasingly profitable programs.
A talented committed employee base.
In an integrated organization structure better equipped for execution.
Our Q2 results demonstrate that our restructuring and transformation efforts have position triumphant success.
As we move through the year, we look forward to executing on our programs.
And growing our already strong backlog.
We are guided by a clear strategic plan and I remain confident and triumphs ability to compete succeed and deliver value creation over the long term.
We're not happy to take any questions.
At this time through the company would like to open the forum to any questions. You may have we ask that you limit yourself to one question 112 to give everyone. The opportunity to participate if you're using speakerphone. Please pick the had said before first thing any numbers should you have a question. Please press star one when you push button phone. So Jewish remove your question. Please press the pound key.
Our first question comes from Robert Spingarn with Credit Suisse.
Hi, good morning.
Good morning morning.
Just going back to your strategic moves and structures and the 1.2 billion at that you called out of non core I guess, that's everything except for the interiors.
Yes, what we think about selling versus closing that revenue, how how does that up.
Split up.
So we're looking at.
Known closures that already been announced so the toll society as I mentioned, a California plans, there's two there.
And then there is one and Texas in the Dallas area. So those those five are already in and process in terms of divestitures versus restructuring retaining I don't want to get into that in detail, but we're having ongoing discussions with potential strategic buyers. So the nice thing at this point is that we're now.
Out under the liquidity pressure, we were in prior years, where there was a lot of pressured to divest assets now we can be more opportunistic in terms of value, but in terms of the ratio of dollars and net revenue of closure to divestiture.
Yeah, we expected to be sort of in the.
Probably in the 50 50 range, but that's that's all dependent on the results of our final decisions.
Okay, and then on the margin side, there and structures you have the sequential improvement you're doing better than last year, Jim how do we think about that margin on a forward basis at least.
Yeah, the profitability of the businesses that you wouldn't necessarily close it's it seems like everything is trending up but are we there or is there more to come.
Yeah, there's definitely more to come I think we had a slate cume catch loss in the quarter, but it was balanced we had the just as many of the programs that were catch gains and losses.
Yes. This is businesses tend to 12% on a stable.
When it stable and we still have some loss programs are working through some plant closures to do.
The margins do tend to be a little more volatile in the segment because of the long term contract accounting.
And we so think about 9% margin last quarter.
So I think we can look for single digit margins approaching 10% as we stabilize and look at our options for this group.
Okay, and thank you and just a clarification on the lower corporate expenses is that just the adjustments running through or is there something else there.
No, we're managing down corporate expense in a lot of onetime things go through corporate.
And there is lot of discretionary expenses there. So we're managing them down and they'll continue to stabilize at lower levels go forward a key component of that is the restructuring costs, which are coming down quickly a year over year.
As we finish all these plant consolidations and put a new process and I see so that's one of the big enablers of lower corporate expense.
Okay. Thank you very much.
Thank you.
Our next question comes from satisfaction with JP Morgan.
Hey.
Good morning, this has actually been arnstein on for South.
Good morning, everybody.
I guess I wanted to ask about systems here and for the first time I'm not going to ask about margins, but.
We saw some pretty good organic growth in the quarter and you raised the guidance.
Perhaps slide 20 after you know just.
Just a quarter ago pretty significantly I guess.
Can you maybe talk about like what's driving that and how you think about the organic growth.
Beyond beyond this year.
Sure.
The systems business.
Reflects the high demand that we see for both ramping production programs as well as retrofit of new systems contents on existing fleets and we're starting to win more work in the engine area Rolls Royce G.E.
When the are all key customers for us and if we had more capacity they buy it.
An example is in our gear box business, we have two plants that produce loose gears and gearboxes.
Their revenue was up 36% from the first after the year to this coming second half of the year. So it's the diversification of our portfolio as well as the kind of the dual tailwinds of new developments and ramping production programs.
I guess the died that the aftermarket percentage is growing this quarter as well so we're starting to see some.
Benefits of our collaboration between TPS until yes.
Great. Thanks, and is there anything to note about maybe just like the quarterly cadence of sales and earnings at the company.
Wide level as we think about kind of Q4 Q3 in Q4.
So you were or core businesses following a seasonal trend or the second half is generally stronger than the first half and the fourth quarters, a strongest quarter in the second half. So I didnt mention that cash flow is forecast to be strongest in the fourth quarter. We didn't have a seasonal working capital build in the first half.
You can't have sales growth without without more working capital.
Getting more efficient with working capital use but we did have a group as a ramp up inventories for the second half.
Okay. Thanks.
Thank you.
Our next question comes from Ronald Epstein with Bank of America Merrill Lynch.
Hey, good good morning, guys.
Morning did maybe backup big picture question.
As we continue down the path you read.
Say like redefining triumph.
If you look out five years from now 10 years from now.
Should we think about the business I mean, how much of the business at that point do you think dues.
More aftermarket services related.
So the businesses defense right, what's the what's the ultimate goal.
When you get there.
Yes, Thanks, Ron you've been following the story.
Certainly for the time that I've been here.
So it's totally appropriate you asked so tribes aftermarket business is growing at today, it's about 500 million across integrated systems and product support and we think there's there's upside to that number.
Even without a return to M&A just organically, we think we could grow that number two x.
I think within a five year horizon that that's a reasonable expectation and one of the things that we did in the quarters advancing this partnership with air France.
That's going to get us on some of the new aircraft some of the newer narrow body and 77 that have not really started to go into the third party MRO contracts. So that's that's one of the accelerants that we have for growth.
In terms of systems content.
We've got the strong verticals and gears as I mentioned and electronic controls and actuation, we're interested in expanding that into other verticals within the system space. In fact, we just went through our strategic review and we will present that to the board shortly.
And we think theres opportunities between product R&D and.
You know some niche product line M&A to accelerate that as well our goal is to grow back trial.
To the size of company, we were historically, but it would be.
Systems and aftermarket interiors focused.
We don't want to stay a smaller company. This is a temporary phase for us as we exit some of the noncore businesses, but it will help us.
Including you know as today absorption for us to grow back to a larger company.
The main things, we want to be known as a customer I mean to supplier that solving our customers harvest problems.
And.
In terms of defense you asked about defense spending we set a goal to increase that from 20% to 30% and as we exit more and more of the these structures and commercial concept, you'll see that number come up.
As well.
It is it something where when you look out.
Way down the road I mean could the company be.
Approaching 50% defense.
I think thats, probably a little high course, theres some uncertainty on defense budgets with with the administration change but.
I was just down at the.
DC yesterday and meeting with the defense officials and they're they're push continues to be for.
During the fleet up to a high state of readiness, which triumph can be a partner and today. We do for example, refuel refueling boom overhauls for substantial MRO efforts, we're supporting the V 22 C 17.
Helicopter fleet.
We're excited about the army's future armed reconnaissance aircraft competition. We're on several of those teams. So as long as defense funding continues to be strong we'll see it grow I think more reasonable target is probably 30% to 35% maybe not 50, but thats just a preliminary.
Got you okay. Thank you very much.
Thanks, Ron.
Our next question comes from Sheila Kahyaoglu with Jefferies.
Hey, good morning, Gannon Genon. Thank you for the time.
Dan I guess following up on that Ron's question, you mentioned growing aftermarket 510 billion that 15% crab cake or how do we think about what steps you have to take to grow the business double after double air traffic Air France partnership is one you mentioned what else shipping Rockefeller.
So it's.
A key enabler is higher participation and narrow body because of the rapidly growing fleet size.
And the shift to Asia of the fleet needs to be accompanied by a shift in the MRO support.
Infrastructure.
In the quarter I was over in Singapore studying the.
MRO hub that they have their there's over 100 companies that are supporting Asia from Singapore, and Thailand is now.
Launching similar hub, it's called who to power and we're already there in Thailand. So in my remarks, I talked about expanding from just doing structural repair and Thailand to doing engine accessories.
That's an example of trying to get ahead of need so that'll be one of the enablers to growth.
As with integrated systems, there are other verticals within our MRO today, we're pretty limited, we mainly due engine accessories and structures and little bit of interior work. So theres lots of subsystems, we can do.
In partnership with their France.
We will do narrow body in white body.
And we'll expand and or other.
MRO content.
And support the repair of other People's equipment, not just integrated systems, So thats, a tailwind and as Jim mentioned, we havent recapture all of our own aftermarket. So I'd say, there's a regional strategy and pivot to Asia Theres, a product offering the service offering expansion and then just more of these partnerships.
Including with Boeing Global services, we signed an award in Q2 with them.
We're excited about supporting them as they broaden their era sustainment reach.
30000 repair services that we offer that's grown about 5000 last three years. When I started it was 25000. So they continue to grow repairs, which is repair services as a key to that this this roadable trading strategy, we announced in the quarter is also a component.
When customers bring back an aircraft, let's say it was damaged by hail or by a truck that hit the cell fairing.
They need to turn it right away and so by having rotable inventory and being a value added.
Rotable supplier, we can buy something used on the market used serviceable upgraded replay replace the where items and then provide quick turnaround time and.
And we think thats another way to compete.
Okay. Thank you that's very helpful and then.
Maybe one for you and nice job, taking leverage down in the quarter background EBITDA.
So some of the businesses national being one is how do we think about cash proceeds or is there a target leverage for the business that you're thinking about.
So were higher than we want to be I think we hope to be under three times on leverage.
Let me just a measured different ways.
Putting the where bank measures that Thats, where we went from 6.8 to 4.7.
In the queue, we'll disclose I think it's about 125 months worth of assets that we sold there.
And I think that.
So the proceeds will be to disclose when we actually complete the transaction was expected to be in this current quarter.
But.
Suffice to say that.
Text as a good buyer and their strategic buyer and we got fair value for that asset.
Great. Thank you.
Our next question comes from kind of on her with Cowen and company.
Yes. Thank you very much so Dan you talked about.
Garo structure sales, excluding interiors of a billion to and 19 that implies the C. Interiors business like eight to 900 million is that the actual size and what kind of profitability and what's kind of the game plan for for that sector going forward.
So interior says about 300 million and that's outside of the 1.2.
And the profitability is strong double digit.
And it's.
We benefit from having a very good operation in Mexico Alley that does over a million blankets a year floor panels.
It's one of our best lean operations and so it's offered cost advantages to bode well Airbus spirit and to Boeing.
And then within that 1.2 billion that we're looking at under the strategic review.
We will do as I mentioned plant closures, we'll do some divestitures we may retain.
Some businesses.
We're looking at the case by case basis.
We will know a lot more by the end of our fiscal year I'm excited about what we're doing.
Both interiors and and structures and thermoplastics.
Today, if you went to our interiors plant in Spokane, you'd see almost 800 parts today coming off an automated line that go into the Airbus Athree hundred 50.
And were posing the use of thermoplastics for the new Joe on TV tall, offering as well as.
For retrofit opportunities on commercial aviation, especially on.
Replacement items like control surfaces. So we're still doing great things in that business and we'll know more shortly about final disposition.
Thank you very much and just a quick another one on aero structures. So.
It looks like your contract liabilities amortization went up in the quarter, how calm and then if you take that out on a consistent basis. It looks like Youre basically in the red after being in the black excluding that in both the fourth on the first quarter. Thanks. So much so that's correct.
So the the contracts amortization did increase because of the increase in the volumes on certain programs, including the GE to 80, which was one that we were losing money on.
Set up a fair values or I'm, sorry, the second for your question.
So if you take that out I mean, if you know it looks like actually Aerostructures was in the Red I mean lost about three 4 million. If you take issue kind of take that out since it's a non cash plus is that is that representative.
Correct.
Yeah, I think that's only one of many moving parts throughout that.
The structures group and there wasn't there's 20 programs that had cume catch adjustments within the period and they were pretty balanced yeah. The big picture is now we're counting month to exiting the some 47 program, which has been lossmaking in recent years that used to be profitable when the rate was much higher and the GE to 80 program by next May So those have been the big.
As margin.
Tailwinds or headwinds for us and structures once were free of those the residual business 767.
Interiors defense programs are profitable.
Thank you.
Sure.
Our next question comes from Ken Herbert with Canaccord.
Hi, good morning.
Morning.
Our first just wanted to ask within the integrated systems, that's very strong growth within within MRO and spares can you parse that out for us in any more detail how much of the growth was from MRO relative to spares or maybe.
The relative contribution from a revenue standpoint from the MRO activity and spares.
Yes spares was.
Leading contributor to growth in the quarter versus overall and repair.
But overhauling repairs is coming.
The reason that one lags. The other is one is an instant spot by of parts off the shelf. The other you have to go in there and create the capability and get it proved to supply. It you may have to become the designated engineering repair source for that product. So theres. There is some lead time.
And growing the overhaul part of the business.
One of the exciting things that happened in the quarter as our Thailand facility was approved by.
Airbus as a designated repair center, we have the engineering expertise as well as production to support their fleet and we're in competition for a number of large Asian carrier.
M. or opportunity so that was who fly Airbus. So that was a big deal for us in the quarter, but I'd say spares is the lead and MRO coming behind it now. These 14 demos that we have the part 145 repair centers.
They've tended to be a secondary priority to OEM deliveries from those factories and now they're getting a new lease online and collaborating to figure out how to grow together and we're excited about what it will do for us in future.
And then if I could.
That's very helpful. Dan if I could as you look at you called out the 500 million dollar.
Run rate today growing to a billion for total aftermarket or services can you just help us think about what kind of investment in dollar terms, you're making today to support this business because I I can appreciate building up spare pools, and Roadable said a lot of the MRO footprint, you're putting in place obviously requires some capital so how do we think.
About the investment you're putting into the broad aftermarket today, maybe how that how that moves over the next couple of years to support the topline growth and and when does it become I guess, a much more maybe meaningful tailwind from a cash standpoint.
Yes. Thanks.
Product support has always been a good cash conversion business for us.
And it had strong cash performance in the quarter. The two areas of investment that will help fuel the growth is road doubles, and then port partnerships, including the joint venture, we're setting up with air France, and so there's a certain amount of administrative cost and priming the pump.
Rotable inventory, so that when the demand, especially for those I'll call. It newer fleets and they go into a MRO cycle. We've got the products available. So it's mostly working capital.
Partnering with operators and with Oems. They can also have rotable pools that they contribute as part of partnerships. So we look for ways to keep capital to a minimum so that we can keep the cost down and continue to grow that business, we're expanding our grand Prairie, Texas accessories business. Its busting at the seems to building has been expanded two or.
Three times incrementally we looked at building a new building there.
And.
We have so much work that we don't want to go through a risky transition while we're ramping so we'll be adding on to that building. So there's some brick and mortar that goes along but nothing that that is a big expense for us. It's all will be able to maintain our cash conversions as we go through the ramp.
Great. Thank you very much.
Q.
Our next question comes from David Strauss with Barclays.
Hi, guys. This is actually capitals on for David.
A couple of my questions on your plans for a asked on so could you clarify that you pretty much fun to sell or close everything you consider noncore and that we should pretty much assumed that asked will be interiors going forward and then I would think that there's a substantial portion of kind of long term contracts and commitments still within that noncore buckets. So.
How do you plan to get out of those and how long would that take and then lastly is there any sort of estimate that you have for proceeds that you're expecting from these divested plant. Thanks.
Sure.
So.
As mentioned is about 11 plants, we're looking at and we'll make a decision on the case by case basis. So although we've identified them is non core we're at a better positioned to sell them for valuations that reflect their their financial value.
And if those.
Strategic buyers show up and.
And demonstrate that and valued at that level.
We will divest them, if otherwise, we'll retain them and continue to grow and continue to test the market on periodic basis, but.
We've been very clear what our intent was and we demonstrated through the first for divestitures out of that space and ability and willingness to take those actions on the other hand, as we've improved operational performance in that business.
It's no fire sale.
These things are good teams with better management and better process.
We're clearing out the backlog of loss making programs.
So.
Just returned to my comment that by the end of our fiscal your will have clarity on each besides.
As far as long term contracts.
We have a good site picture as to the run out of all the contracts there if they happen to be performed at the site. This divested our customers are mainly focused on continuity of supply.
They they know there's a consolidation happening in the structures industry.
The goal is to.
Help these sites good position with companies that are really investing in this market and can invest in the long cycle structures programs.
And for triumph.
We're going to support those customers through those transitions.
Okay, great. Thanks, and then I guess, one more if I may on so I think after the refinancing annualized interest looks about 10 million higher and then today that and then refinancing cost. This year and then the 737 Mac. So is it fair to say that trends could be trending toward the lower end at that free cash flow guidance range.
No no I think we're holding a range.
The ranges around our expectation so theres no movement in the cash we have risks and opportunities were seizing on so you mentioned a couple of the risks, but there's less opportunities in there for reduction in working capital and other cash generating activities.
We're really glad to be have made the progress we've made over the last three years.
Two years ago, we used over 330 million a year ago, we used $220 million an hour.
Forecasting to be cash positive and will build on that in subsequent years. So we've come a long way and.
No it's been difficult for analyst and investors to model our cash shoes.
And were.
Stability, we're now getting in our performance is going to make it easier for us to give that guidance.
Okay, great. Thanks, guys.
Good.
Our next question comes from Myles Walton with you've yes.
Hey, good morning.
I was hoping to just start with some of the target margins you provided.
A couple of three quarters ago.
On a pro forma business, what kind of where you where you're going to get too and it looks like integrated systems, you had a 19% EBITDA margin it looks like you're actually running ahead of that probably due to spares.
You are probably making progress towards their products Court margins and then you have this aerostructures margin target of 10% I just wonder I think that was predicated on 1 billion and a house.
Pro forma business and obviously, you're talking about now making the moves.
A more definitive.
And scaling that back what is the now targeted aerospace structures EBITDA margin is it a mid teens.
So so we havent handicapped in provided future year guidance.
For the structures business, assuming the divestitures were provide we provided that guidance with the business as it exists today.
If we exit if we exit additional.
Operating companies within that business will provide updated margin guidance, but I think you can assume it would be improved.
Okay.
Would it still be below the other two segments most likely just given the aftermarket presence in the other two.
That tends to be the trend is the structures is.
There's a little lower doesn't have that aftermarket upside.
I think thats a fair assumption.
And there's a pretty wide gap between your adjusted EPS in your GAAP, Yes, obviously, the first half is only about a dime, but to the full year gap is pretty wide can you elaborate on what that is and where how that's going to flow through.
Yes, I think thats, primarily a book losses on divestitures, so noncash losses.
Okay that you already kind of know about given.
Pending sales.
Yes that was slugger, Okay got it and then.
You know on Dan on 77.
It looks to bring down the rate from 14 to 12 is it fair to think about kind of your proportional exposure revenue wise of the to the eight seven similar to the three seven so we can kind of.
Think about those tune dynamics.
Yeah, you know order.
Folio so diverse now.
No single program really impacts us in terms of.
Rate adjustments, we go with the flow and we generally have more ups and downs, but if they step that down by two shipsets.
Our shipset content for 77 is.
It's about maybe 1.3 billion and so we're not going to see big swing materials swings in revenue because of it.
And I think I think Boeing has still has a bright.
Plans for the 77, and we'll look at rate step ups.
And we're excited about 767 or having deliberations about.
How high they want to go and 767, especially now that they're making progress they've got to freighter.
And the tanker.
Now.
You know.
The mature configuration.
That sounds good and then just one last one on the Gulf stream portions of this G. 700 was rolled out my understanding is the wing is is the same wings of 650 I know you're works. Your work statement is obviously changed there over the years. Just curious has died in upper tier profile are you already under contract.
Excuse me on that program.
So we are going to support both the 650 in the 700 there are similarities the weighing I'll, let Gulf stream speak to the nature of the designs, but we were at a wed folks at Las Vegas, when it was rolled out it was really exciting.
I think full stream as demonstrated track record of evolving their aircraft and we look forward to supporting them as they continue to grow their fleet and I'll, let them speak to the rate projections on both 650 and 700.
Alright, thanks, guys.
Thank you.
Our next question comes from no profit Goldman Sachs.
Hey, good morning, everyone.
Good morning.
Yeah, just alluded to you know the analyst and Investor.
Efforts to.
Sort of solve the puzzle of the free cash flow statement in recent periods and.
For sure.
What we hear from investors is an effort to calibrate that moving forward. So.
Jim I thought about asking about a few pieces, but maybe this is too broad way to ask it but.
Without not asking for 21 guidance, but you know the possible to just kind of give us a fresh update on the handful of largest year over year changing pieces in 21, I mean, I know, we know there's a handful of programs that change a lot pension matters capex matters aggregate working capital matters.
Is that something we could do today.
So if of course, you mentioned, we have 420 guidance out there and that's all we're given at the moment, but you can see from our disclosures that we.
We have a couple of different drivers next year one of them is the ending of the loss programs like the GE to 80 and.
And I think we.
For seven May get shipped out next year as well so we'll have that those forward losses that have been accrued.
You have been liquidating and in this quarter, we had $19 million 30 to 80 those will be gone. So that's that's a tailwind for us.
And then I think you've got the pension forecasted you can see in our 10-K ones here, we update that.
But.
Really the current years. The one we had the most insight to we're going through a plane process for for next year, but if you look at the free cash flow. This year zero to 50 million as our range, but within that we've got $80 million of liquidation advances it will be going away in the future not next year, but next couple of years.
And then you get the forward loss payments, it's about $15 million a quarter on that you to 80 and.
And then I think we still have some cash to go into some four seven as well.
So theres balance and we've done that we found more balance in our cash.
Recent opportunities that's why I see steadier cash flows go forward and the final outcomes on our disposition infrastructures business will also affect our fiscal year 21 for cash forecast.
Do you expect to grow free cash flow year over year in 2021.
So we're given that's why 20 guidance at the moment for 21, but appreciate the question certainly our goal it with all of our actions is to improve the cash flow and value of the company over time.
Okay and.
And then just last one from me.
To get into the revenue guidance range you would need.
The organic so ex the pieces moving out to.
To decelerate pretty significantly back half first first half and I think even if I have the.
The divestitures calibrated correctly, a different seasonality than.
You've had in the past is there do you have space in the in the guidance for incremental divestitures or is there something else in there that I'm missing.
Divestures or have an impact on on the sales guidance for the second half as well as winding down of contracts to so there's no. There's no. One you can point to and I think we would trends.
On the high end of the range right now, but we do have divestures that could close in the quarter.
Our second half the year is not out of family to other years prior years in terms of revenue upticks.
Okay. Okay. Thank you.
Q.
Our last question comes from Microsoft remotely with Suntrust.
Hey, good morning, guys. Thanks for taking the questions.
Maybe I can just go back to Ron.
Kind of bigger picture question, you kind of talked about maybe getting a defense up to 30% to 40%.
What's sort of the view our expectation in the near term. If you look at your top programs you know you've certainly God Apache Blackhawk V 22 should know.
Both Army Air Force looking to potentially curtail a lot of these programs I know you've got some positions you've said on future vertical lift, but do you think some of these legacy programs as they see cuts create a little bit of pressure on defense in the near term before some of the new stuff ramps you know just maybe if you could talk about how.
Well, it's your positioning for for what the D. is looking at strategically over the next five years or so.
Sure Great question.
So a lot of people have lost a lot of money betting on the end of various legacy programs a 10 at 16.
Yeah, there's a reason for that there's a lot of inertia and momentum and high cost of switching and upgrading and not only in that in the platform itself, but training.
And Sustainment. So these platforms tend to go on for longer and longer.
The C 130 is the longest running industrial project in the U.S. I think it.
The launch in the sixties unlock he's done a great job of continuing to have all that.
Our growth and military.
Is across all of our customer fleet, so were partner with Northrop on the global Hawk and the Triton we were key to.
Northrop achieving the milestone C low rate initial production award on on Trident, because we got the wing production back on track.
We're supporting.
Boeing Defense is one of our largest defense customers you named the platforms.
They've got great Fms prospects for their their programs, we're a big Sikorsky.
Supplier not just in structures.
But also in systems content.
And we have interest in offload work on F 35, where the rates are ticking up.
And we're competing for some of I'll call. It the sub system upgrades that they do to improve reliability and reduce costs as part of their blueprint for affordability and then you've got the new starts.
M Q2 5.
The bomber.
And the.
The new Air Force helicopter.
You mentioned the army future vertical lift so you know it it's a robust time to be in the defense space and we intend to win our fair share.
Got it helpful. And then maybe just one last one Jim.
If I heard correctly integrated margins, excluding the restructuring look to be 20% I mean, it sounds like you've got great drops or from the spares, but.
That is that kind of margin level, maybe not every quarter, but if thats something we should think about it at the potential that segment going forward.
But in that range. The we have 19% was our target out there enough 21. It was a good quarter and the mix of El Morro spares are going to change quarter to quarter, but we're confident in the high teens for margins go forward got it perfect. Thanks guys.
Thank you.
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