Triumph Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 11 speakers on the call.

Operator

Good day, and welcome to the Triumph Group's Second Quarter Fiscal Year 20 24 Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note today's event is being recorded. I would now like to turn the conference over to Thomas A.

Operator

Quigley, III, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you. Good morning, and welcome to our Q2 fiscal 2024 earnings call. Today, I'm joined by Dan Crowley, the company's Chairman, President and Chief Executive Officer Jim McCabe, Senior Vice President and Chief Financial Officer of Triumph.

Speaker 2

As we review the financial results for

Speaker 1

the quarter, please refer to the presentation posted on our website this morning. We will be discussing our adjusted results. Our adjustments and any reconciliation of non GAAP financial measures to comparable GAAP measures are explained in the earnings press release and in the presentation. Certain statements on this call constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements involve known and unknown risks, uncertainties and other factors, which may cause Triumph's actual results, performance or achievements be materially different from any expected future results, performance or achievements expressed or implied in the forward looking statements.

Speaker 1

Dan, I'll turn it over to you.

Speaker 2

Thanks, Tom. Triumph closed the first half Fiscal year 2024 with expanding backlog, sales and margins as we focus on profitable growth and building on our success in the aftermarket. We are entering the second half of the year from a position of strength and raising our fiscal 2024 sales, earnings and cash guidance. Our year to date performance, increasing commercial aircraft build rates and growth in defense spending supports our updated outlook for the year. During the Q2, we met or exceeded our expectations, delivering strong sales And our 6th consecutive quarter of year over year growth as well as predictable profitability.

Speaker 2

Our deleveraging plan is on track, including over $60,000,000 in debt reduction since the start of the fiscal year, which will yield approximately $5,000,000 in annualized interest savings. As I reflect on the quarter, I'm pleased with our ability to execute on our short We remain very excited about the long term financial and operational opportunities for Triumph. In particular, our performance serves as evidence that we continue to accelerate our future towards the targets we discussed at our September Investor Day. Turning to Slide 3, I'll summarize the highlights for the quarter. Year over year organic sales growth was 16%, driven by improving MRO demand, accelerated above Q1's 14% growth and above our original guidance.

Speaker 2

Aftermarket sales increased year over year accounting for a robust 43% of our Q2 sales, roughly double since the start of our restructuring. Recall our interiors business started the year slow, With slower ramps in sales, supply chain delays, inflationary pressures and unfavorable foreign exchange headwinds, The team began executing on our recovery plans and exited September at breakeven on increasing volumes and growing backlog. And last, we grew our total company backlog by 15%, above market growth rates as Triumph benefits from strong representation across a broad array of platforms, customers and end markets. We continue to benefit from growing commercial travel demand, up 28% through August year over year and increased MRO demand As aircraft return from peak summer use, commercial transport aircraft new orders more than 2,000 year to date And planned OEM rate step ups. Book to bill is 1.37 year to date And $1,800,000,000 of reportable backlog is up 16% year over year, even as past due backlog has been driven down by $17,000,000 or about 18% this fiscal year to date.

Speaker 2

In the military market, there is a robust U. S. Defense budget in place and expectations for it to remain at similar levels for the next few years. Given multiple regional conflicts, Budgets are likely to grow beyond current forecast. Triumph is currently engaged in an unprecedented number of Military OEM Opportunities, including over 30 classified RFPs year to date.

Speaker 2

We are in discussions on hydraulic systems, fuel pumps, Landing gear systems, thermal systems, gearboxes, door actuation and more, all driven by expanding Triumph's intellectual property. In Q2, Triumph's commercial OEM shipments were up 70% year over year, while commercial aftermarket revenues rose 48 Military OEM sales were consistent with prior year, while military MRO rose 24% year over year on the strength of many programs led by V-twenty two pylon conversion actuators. As we shared at a recent Investor Day, Triumph enjoys significant content on Boeing 787 aircraft With just over $1,000,000 in ship set value benefiting both the OEM and MRO sales across 6 Triumph factories, This is a great aircraft with more than 1800 orders since 2013 and a backlog of nearly 800 aircraft, 235 of which were ordered in 2023. So demand is robust and Boeing is working to increase rate as rapidly as possible. Orders in our portal support the move to rate 5.3 per month in our fiscal year, up nearly 2 times from the start of our year And 787 shipments for the Q2 were up 142%.

Speaker 2

We also anticipate emerging sustainment requirements for the 7 Devin, as the oldest aircraft in this fleet are just beginning to exceed 10 years in service. As these aircraft enter their landing gear maintenance cycle, Triumph will begin overhauling increasing numbers of our landing gear actuation components, including extend and retract actuation, truck positioning, Nose wheel steering and door actuation. New wins for the quarter included CH-forty seven engine controls, A UH-sixty gear package and an accessory repair package for Atlas Air as well as personal service units, cruise seats and starters for Delta Airlines. While only 10% of our sales, performance at our interiors business remains a focus area As an unfavorable sales mix driven by OEM delays and supplier shortages along with margin impacts from inflationary pressures on materials and labor And foreign exchange changes created headwinds to start the fiscal year. We're running additional Triumph operating system lean events offset these external headwinds and we're starting to see positive developments.

Speaker 2

These include events drive down cycle time and improve efficiencies and productivity. As production demand increases, we are working closely with our customers to de risk the supply chain by securing alternate sources where necessary To keep costs competitive and to in sourcing more work as rates continue to ramp, which will provide added absorption benefits. Interiors is on a path to recover to mid to high single digit margins this fiscal year and to enhance their confidence in their long term earnings targets. Value pricing remains a key strategy that Triumph is Towards our margin expansion goals. This includes the implementation of our expanded commercial playbook, Expanding our commercial risk reviews and implementing new processes.

Speaker 2

Given the evolving market environment, This has included exploring shorter duration supplier and customer contracts, incorporating inflation clauses Tied to indices or specific material pass through clauses and focusing on aftermarket premiums and market access. Previously, we highlighted that 80% of our contracts have terms of 6 years or less, providing a near flow of opportunities to optimize value based on our technical solutions, capabilities and IP, And our recent wins include examples of these efforts. We remain on track with the pricing objectives laid out during the recent Investor Day. Jim will now take us through our Q2 results and updated outlook for fiscal 2024. Jim?

Speaker 2

Thanks, Dan, and good morning, everyone. Triumph's 2nd quarter results exceeded our expectations with significant revenue growth over the prior year period. On Slide 5 are the consolidated results for the quarter. Revenue was $354,000,000 For the continuing business, excluding divestitures and exited programs, organic revenue increased 16% over the prior year quarter. Organic revenue growth primarily benefited from increased aftermarket volume and pricing on our largest programs.

Speaker 2

While demand across most of our end markets improved during the quarter on a year over year basis. Prior year revenues included $16,000,000 Non recurring benefit from the sale of non core IP, absent which revenue growth would be 23%. Adjusted operating income for the quarter was $37,000,000 representing 11% margin, a 60 basis point increase over last year. Adjusted EBITDA for the quarter was $46,000,000 representing a 13% EBITDA margin, which is on track to our full year guidance. Sequentially, adjusted operating margin was up 300 basis points and adjusted EBITDA margin was up 2 20 basis points over Q1, driven by higher revenue and a favorable mix with an increase in aftermarket sales from 41% to 43% of total revenue.

Speaker 2

In the quarter, we incurred $1,900,000 of restructuring costs to retire our last structures IT contract as our transition services agreement ended and a $1,300,000 charge associated with potential environmental costs at a legacy structure site. Slide 6 shows our military revenue. For the quarter, military revenue was $117,000,000 representing 33% of total revenue. Military OEM sales were strong and on par with last year as increased sales on CH-fifty three ks and V-twenty two offset expected lower sales on E-2D and A-sixty four programs. Military aftermarket sales in the quarter were up 24% compared to last year and up 17% sequentially on increased demand for spares and repairs.

Speaker 2

Slide 7 shows our commercial market revenue. For the quarter, commercial revenue was $227,000,000 representing 64% of total revenue. Commercial OEM sales were $131,000,000 and absent the sale of non core IP, we're up 17% in the continuing business. This growth was driven by increases in both volume and price in key programs, including Boeing 787 and 737 programs. Commercial aftermarket sales of $96,000,000 grew 49% in the continuing business on strong demand for commercial aftermarket spares and repairs.

Speaker 2

This is our highest quarterly commercial aftermarket sales since fiscal 2017. Remaining 3% of our revenue is non aviation, which is profitable, Represents about $9,000,000 of sales in the quarter. It's up 24% over last year. Our continuing sales mix trend towards more aftermarket is having a positive On margins and cash flow. As Dan mentioned, total aftermarket sales represented 43% of our quarterly revenue.

Speaker 2

This was up from 36% in the prior year quarter. The breakdown of our aftermarket sales and MRO capabilities is on Slide 8. Our free cash flow walk is on Slide 9, which shows our Q2 and year to date cash use. Our $37,000,000 of cash use this quarter included $74,000,000 in semiannual interest payments, as well as planned investment in our net working capital in support of increasing second half sales volume. This is consistent with our expectations and the quarterly free cash flow guidance we previously gave.

Speaker 2

We expect to be solidly cash positive in Q3 And in Q4, in support of full year cash flow guidance, which is up to $40,000,000 to $55,000,000 On Slide 10 is our net debt and liquidity. As of September 30, we had $1,500,000,000 of net debt and our cash availability was approximately $230,000,000 During the Q2, we purchased $19,000,000 of our unsecured 7.75 percent senior notes due in August of 'twenty 5, We purchased an additional $29,000,000 so far in the Q3. We purchased these notes at a discount to par resulting in gains. When combined with the $14,000,000 in bond redemptions in the Q1, we reduced annualized interest expense by about $5,000,000 We also have over $300,000,000 of deferred tax assets that continue to create value to reduce cash taxes moving forward. Our fiscal 2024 guidance begins on Slide 11.

Speaker 2

We are increasing our fiscal 2024 guidance for revenue, adjusted EBITDAS and cash flow and updating our operating income guidance. Based on anticipated aircraft production rates, we expect organic growth of 10% to 13% in fiscal 2024, with revenue in the range of $1,430,000,000 to $1,470,000,000 Aftermarket volume is the largest component of the increase Followed by OEM volume, pricing and an increase in non aviation revenue. The aftermarket is expected to grow at 11% rate for the fiscal year. Commercial OEM revenue growth is driven by production ramps on Boeing 737 and 787 programs and the Airbus A320 family, even while supply chain and gear turbofan repairs are considered. Non aviation sales are expected to increase driven by the previously announced work supporting Howitzer sustainment.

Speaker 2

We increased our adjusted EBITDA guidance consistent with the increased sales guidance to a range of $247,000,000 Our adjusted EBITDA margin guidance continues to indicate up to a 16% consolidated EBITDA margin in fiscal 2024, representing roughly a 200 basis point improvement over last year. We increased our cash flow from operations and free cash flow guidance ranges by $5,000,000 for fiscal Including second half working capital improvements. We continue to expect solid cash generation in Q3 and strong cash generation in Q4, consistent with prior year seasonality. This is driven by working capital liquidation on the second half sales surge, reduction in past due backlogs increased OEM inventory turns. Interest expense is expected to be $151,000,000 including $145,000,000 of cash interest And we expect $7,000,000 of cash taxes.

Speaker 2

This is after the cash interest savings from $49,000,000 of bond purchases completed to date. Organic margin expansion, cash generation and debt reduction are expected to drive our net leverage from 7.6 times at the end of last year to between 6.1 and 6.3 times at the end of this fiscal year. As we discussed at our Investor Day, We are on a path to reduce leverage into the range of 3.5 times no later than the end of fiscal 'twenty six through EBITDA expansion and free cash flow generation. However, Triumph continues to explore alternatives to accelerate deleveraging through business and product line portfolio actions. In summary, the 2nd quarter's results are in line with or ahead of our expectations and support the increased full year guidance.

Speaker 2

We're reducing debt and interest expense by purchasing bonds in the market, growing EBITDA and generating free cash flow this year. We're executing our multi year plan to continue to grow revenue, margins and free cash flow, reduce leverage and increase shareholder value. We remain on track to achieving the targets established at our Investor Day in September. Now I'll turn the call back to Dan. Dan?

Speaker 2

Thanks, Jim. Triumph's performance in the Q2 of fiscal 'twenty four highlights the strength of the new Triumph, A stronger systems and aftermarket driven company with a growing IP portfolio and backlog yielding steadily improving financial results year over year. We expect improved financial and operational performance to continue throughout the fiscal year as our expanding mix of aftermarket and IP driven OEM sales Gives us confidence in our updated fiscal 2024 guidance and long term outlook. Jim and I are happy now to take any questions you have.

Operator

Today's first question comes from Seth Seifman with JPMorgan. Please go ahead.

Speaker 3

Thanks very much. Good morning.

Speaker 2

Good morning.

Speaker 3

Good results. I wanted to ask In terms of the improvement in the overall outlook, was there any change to the outlook for the structures business Sorry, the interiors business now. I guess, in other words, should we think that interiors, maybe there are some more challenges there and that was more than offset By the goodness that you see in S and S?

Speaker 2

Yes. That's how I see it, Seth. We had Printed 13% in the quarter despite being breakeven in interiors. And let me characterize interior's revenue Profile for the year. They started the Q1 of the year with monthly sales of 10 to 11.

Speaker 2

In the Q2, that went to $10,000,000 to $12,000,000 For Q3, we're looking at $11,000,000 to $14,000,000 per month And then in Q4 2015 to 2019, so very strong second half sales. We also Jumped on it with a return to green program to drive productivity. We saw about 10% improvement in productivity through the months of September October. These are really 2 well run plants in Mexico. The challenges have been external, both foreign exchange and input cost,

Speaker 1

and we're addressing both.

Speaker 2

On the input cost, we're On the input cost, we're competing with suppliers that have raised prices so that we have alternatives. And on foreign exchange, I'll let Jim address what we're doing there. Just to break down interiors a little bit further, it's really 3 businesses within one business. Even though it's only 10% of sales, It is a small contributor to Triumph overall. The insulation piece, which is the biggest piece, is a 20% margin plus margin business.

Speaker 2

And cabin production, parts that we make to support the cabin is sort of high single digits. Where we've been losing money is in composites, which is mostly ducting. So we're taking some actions to automate that plant. We just opened a new clean room there and we're doing additional lean events to drive that. But overall, the plants are quite well run.

Speaker 2

It's just dealing with these external headwinds. But yes, we have a strong second half And we are counting on to be part of the overall trajectory of the company on both sales, cash and profit. Jim? Yes. And there are external drivers like inflation and FX or challenges and they wax and wane, but Reality is we have to get our costs down and then we have to exercise the rights of the contracts for adjustments where we have them.

Speaker 2

And then where we don't, we have to go negotiate when the new contracts come up, Adjusted prices to cover those costs, but the team is very active on remediating the challenges there. But I think you're exactly right that the system strength, Which is so important, is more than offsetting the interior's challenges.

Speaker 3

Okay, great. And then maybe just one follow-up, if that's okay. If we think about the military OEM business And just maybe because on the OEM side, you think maybe there's a little more visibility in terms of the content you have and Expected build rates for the platform, it seems like maybe this year can be up a little from last year, which is $260,000,000 to $270,000,000 of sales in the military OEM side. How does that evolve going forward and where are The drivers, because I know there's probably some legacy rotorcraft that you're on and but also some growth opportunities. So how does that piece of the business evolve?

Speaker 2

Yes, we really do have a strong presence in helicopter especially out of our West Hartford Fuel controls, engine controls business and thermal products, but also gearboxes and heat exchanger. When you look at the rates, we just got the award for the LRIP 7 and 8 Lot for CH-fifty 3 from Sikorsky. That's a program that's been building at about 0.8 aircraft per month and it's ramping up to over the next 3 years to double that. So that's a nice tailwind for us. MH-sixty is also growing and rate modestly.

Speaker 2

We do a lot of gears for the age sixty four Apache and that rate goes up about 10%, maybe 15% over the forecast. While it's not a doubling sort of build rate increase, unlike last year where we were marking down OEM rates were finally swinging into positive and I'm very encouraged about the new starts on military. We're getting pulled into lots of Bids, FARA, FLARA on the helicopter side are two examples, but also on the next gen fighters as well. So we see our competency in helicopter components being strength for the company. I would also Point you to Page 14.

Speaker 2

So we have the backlog there by program. That will give you more flavor over what's in the next 2 years and military programs there from F-thirty 5, which is 2% of backlog right now, CH-fifty 3 is 8% of backlog. And half those programs are rising in rate, half of them may be reducing in rate There's some stable ones, but it's a good balanced portfolio of military OEM work.

Speaker 1

Great. Thank you very much.

Speaker 2

Thank you.

Operator

Thank you. And our next question today comes from Ellen Page at Jefferies. Please go ahead.

Speaker 4

Hi, thanks for the question. Just going back to interiors, you had called out FX as a headwind and it was a headwind in Q1 as well. How much of the loss was due to the peso? And how do we think about reaching mid to high single digits In fiscal H2. Just what are the kind of moving pieces there?

Speaker 2

Sure. Thanks, Ellen. Roughly estimated About $500,000 per month would be peso at the current rate. As you know the peso strengthened to some all time highs against the dollar, but that will change over time and we'll have the opportunities to reprice and address cost structure to help mitigate that. That's the piece that's FX related.

Speaker 2

But Dan talked about some of the actions we're taking, which are going to increase the 2nd half, I think volume is one of the biggest drivers. So really expecting a lot more volume in the second half. The mix changing back towards installation, which is more profitable than the ducting is And some of the cost mitigation actions we're taking as well.

Speaker 4

Thank you. And Can we just go over the moving pieces to the free cash flow guide? You raised OCS by $5,000,000 I believe. What were the key drivers there?

Speaker 2

The key driver is really the sales which is driving profitability, partially offset by the increased working capital needed to Apply the higher sales in the second half of the year. So there's it's a modest increase, but it's an important one and it's consistent with those higher sales. What we've been watching very closely, in fact, at the Board level is the reduction of past due backlog and working capital Because there's been multiple currents within the working capital flow, we've been investing in working capital for the rotables MRO that's helped us drive our strong MRO sales and then also protecting OEM ramps By buying more, but at the same time, we want to increase turns on the MRO or on the OEM side. So what we saw in September, October were improvements in both measures, both the past due burn down and the OEM turns, so that's the leading indicator we need to see to have confidence that we're going to improve working capital in the second half of the year.

Speaker 4

Great. Thanks for that. I'll be there.

Speaker 2

Thanks, Ellen.

Operator

Thank you. And our next question today comes from David Strauss with Barclays. Please go ahead.

Speaker 5

Thanks, Maureen. Good morning. On interiors, Would you expect it to get to EBIT or EBITDA positive in Q3?

Speaker 2

So we're exiting breakeven in September. So yes, we expect to be breakeven to Positive in Q3 and strong solidly positive in Q4 to get back to the mid to high single digits for the year.

Speaker 5

Okay. And Jim, on free cash flow, I think if I go back to the bar chart that you had In the Q4 slide deck, it looks like Q2 was a little bit weaker than what you were anticipating there, if I just compare it to prior years. If so, what was kind of where was the miss relative to your internal plan on cash flow? And that bar chart implied a pretty big Q3 free cash flow number. I know you said positive, but I just want to see if we could revisit kind of the sequential growth in free cash flow you're expecting Q3 and Q4?

Speaker 2

Sure. Hey, David. At the end of the fiscal year we reported we put out the chart with the cash flow cadence for the 4th quarters That you're referring to, but actually after Q1, I updated that and I said $30,000,000 to $40,000,000 cash use if you look at the transcript for Q1. At the Investor Day, I reiterated that and the real driver for slightly higher cash use was the higher sales we're seeing. There was some impact from supply chain and from demand changes, but it was really the higher sales for the second half.

Speaker 2

So 30 to 40 use, I guess we came in at 37 use this past quarter And we should be positive in that range for Q3 in the $30,000,000 to $40,000,000 cash positive. And then the balance to get to our full year guidance Would be in Q4. So very strong Q4 as we've had in prior years, but with this higher aftermarket percentage at 43%, We see even more seasonality and with the ramping production rates, I think we're going to have a stronger Q4 than we've ever had before. Yes. And taken together year over year, it's a Swing of about $120,000,000 to $130,000,000 in cash flow for the full year.

Speaker 2

So we feel very good about the trajectory on cash.

Speaker 5

Okay. That's helpful. And Jim, just the net working capital that you're assuming now For the full year, how much of the use are you anticipating?

Speaker 2

I don't have it broken out to that level. It's obviously going to be Coming down in the second half of the year and I have to follow-up on that and look forward to giving you more information about that moving forward, the absolute working I can tell you that we are driving turns down and we have a concerted effort on inventory management to get the turns down to improve the working capital moving forward And it's the right time to do it with ramping sales because we have lots of inventory and we have lots of opportunities to be more efficient with it. We're trying to find the right home for inventories working with vendors and customers who may have lower cost of capital than us for vendor managed inventory, customer owned inventory. So the direction is positive and we're going to be liquidating working capital second half of the year.

Speaker 5

Great. Thanks very much.

Speaker 2

Thanks, David.

Operator

Thank you. And our next question comes from Cai von Rumohr with TD Cowen. Please go ahead.

Speaker 6

Yes. Thank you very much and impressive results. So Your aftermarket business was strong in the 2nd quarter and a very good sequential gain. Based on what you said about the year, it looks like the rate of growth And aftermarket sales will be much more modest in the 3rd Q4. Could you give us some color on what you expect commercial and military aftermarket to do Sequentially in the 3rd and 4th.

Speaker 6

And if that's the case, which it looks to be, the mix would look like it would be a little bit leaner and yet Your adjusted EBITDA numbers seem to assume very good margin improvement sequentially with a mix Shifting toward more OE, help us understand that if

Speaker 7

you could.

Speaker 2

Yes. Certainly, the commercial aftermarket is the strongest Driver of the growth we've seen outperformance year to date and we expect that to continue in the second half. The visibility that's not as It's harder because you're looking at market data. You're not getting the actual orders in. It's not a backlog business.

Speaker 2

We may only have 45 days to 60 days' worth of orders and Visibility for that. So I think there may be a little conservatism on what the mix will be. We know what OEM rates are, they can change, But the aftermarket mix, I think it's stable moving forward. Commercial is still strong. Military usually has a big surge in Q4.

Speaker 2

We see a lot of spares orders in our fiscal Q4. But we don't provide guidance by market segment. We like to tell you the trends, But sometimes one segment outperforms this helps cover underperformance in other segment. That's the benefit of our balance of diversification.

Speaker 6

So basically you're saying that the mix should be the same going forward or is the mix shifting toward OE net net?

Speaker 2

I don't think it's going to shift towards OE because the aftermarket is stronger, in the Q4, in particular, both for military and So I guess you're going to probably going to be at more aftermarket in the second half of the year, but it depends on the OEM rate ramps. At the moment, I think aftermarket is probably going to overtake and continue to be stable to increase as a percentage of our sales.

Speaker 6

Thank you very much.

Operator

Thank you. And our next question today comes from Myles Walton with Wolfe Research. Please go ahead.

Speaker 8

Hey, thanks. So just actually a clarification on Kai's question. So the Slide 8, is that referring to the 11% growth in Fiscal 24, is that referring to the whole channel of MRO or the commercial channel in isolation?

Speaker 2

It's a whole channel. So we have about $152,000,000 I think of sales And that's the breakdown in the quarter of sales by aftermarket. It's broken into 3rd party MROs Where it's not our IP necessarily and the spares, which obviously can be the highest margin and then the 3rd piece is our IP, which are higher margin typically Then repairs on 3rd party.

Speaker 8

Got it. Okay. And then, go ahead.

Speaker 2

I'll just say, Miles, on the bottom of the page, you can see we have the Q2 and the year to date breakdown for all those components.

Speaker 8

Yes. No, that's helpful. Thanks for that transparency. You mentioned the portal showing a 5.3 per month on the 77. Could you also share what it's looking at for the 37?

Speaker 8

And maybe Dan that big growth you're anticipating in interiors, I imagine that's primarily inflation driven on the 37. Is that correct?

Speaker 2

It's one of the largest programs in the Terious for sure, but it's certainly not the only one. We have A220 work out of Airbus. We do 787 work, so it's a mix of programs, but it is the largest. On the OEM rates, Boeing has Talk quite publicly about their step up to 38, whether it's going to come in the calendar Q4, the following quarter. But we're building at rates that are approaching that now and we're typically on average about 1 quarter setback from them.

Speaker 2

So as they ramp up, we're already delivering into the pipeline sometimes to intermediaries and then Products that flow to Boeing. So our factories are building at rates 30 to 35 a month right now And in priming for rates that go up into 40 next year, our fiscal 2025. So that's the general Mac or 737 outlook for us. Airbus is a similar story. We're building it at rates that are In the high 40s and planning for rates for the 50s next year 60s thereafter.

Speaker 8

Okay. Just one last quick one. When you mentioned portfolio actions in terms of pursuit of the balance sheet improvement, Could you elaborate on the size of any potential pruning you might be looking at or business lines that you might be thinking about from that perspective? Thanks.

Speaker 2

We really can't. It's one of these things every year we're looking at every business trying to make sure we're managing the portfolio for Shareholder value, but deleveraging is our top priority, debt reduction. And so we've had inbounds for several of our businesses. And one of the challenges is because we're on a ramp across OEM and MRO, what's the value of these businesses? You could understand that people would come calling when the rates have been depressed and we're on the sort of, I'll call it, the base mountain climb Of OEM and MRO rates.

Speaker 2

So people who have interest in these businesses have to properly value them, But we'd want them to be needle movers for deleveraging, not just around the margin.

Speaker 8

Okay. Thanks again.

Speaker 9

You bet.

Operator

Our next question today comes from Michael Ciarmoli with Truist. Please go ahead.

Speaker 10

Hey, good morning, guys. Nice results. Thanks for taking the question. Just to maybe go back, the Details are pretty solid here on Slide 8. And it looks like, I mean, spares were up 37% sequentially.

Speaker 10

I mean, can you maybe Parse that out for us. Was it more commercial? Was it more military? And kind of what you're seeing out there and what drove that level of spares activity?

Speaker 2

Yes, Mike, I'll start. Sure. It was more commercial this quarter and that's why I think The margin impact is a little less than you might see from some of the military spares. But it's lumpy business as we've talked about before. We're fortunate with surge this quarter and the 4th quarter is typically when we see the biggest surge in spares.

Speaker 2

And there are opportunities to increase Spares volume, which we continue to work on and increase spares pricing to cover increasing costs and enhance margins moving forward. Got it. I know You have models for air traffic, but the ones we watched showed the 1st 10 months of U. S. Traffic TSA volumes were 2019 levels by 1.4%, but more importantly September October traveler throughput was up 5.7% over the 2019 levels.

Speaker 2

So it's definitely ramping and that's driving the carriers to invest in spares And repairs and the timing, you all commented on the strong MRO commercial MRO sales. As Jim mentioned, these fleets are coming out of service. They hit their peak volume TSA volumes in July. So they're bringing them in for maintenance and we're benefiting from that.

Speaker 8

Got it. And then just,

Speaker 10

I mean, you had been forecasting, I think, 4% to 6% aftermarket growth, it's now 11%. Any can you give us any underlying military, commercial, is it more Spares, I mean the IP sales look pretty flattish, but maybe just what really drove that increase? And I would imagine With the Pratt issues, airlines flying some of these older planes longer has to help.

Speaker 2

We've been in touch with Pratt about ways we can help and it's been a productive dialogue. I would say right now repairs are outpacing Spares on the military side and that is going to I think revert as the depletion of U. S. Stockpiles to support the various conflicts leads to orders for new, spare hardware to replace those. So These things tend to swing in their own cycles for spares and spares, but thanks for the recognition of the progress on spares.

Speaker 2

Last year, the spare sales were softer. So we're encouraged to see them coming back. Triumph does a lot of line replaceable units. That's really the beauty of the new portfolio is if you tour our plants, you see these actuators and heat exchangers And gearboxes, and these are the items that are used up and you're consumed during operation and typically replace not a heavy maintenance, but at In terms of the mix of the driver of the increase in this growth, as you can see 2 thirds of our Aftermarket is repairs, 1 third spares. So it's more repairs than spares and it's probably a little more commercial than military For the back half of the year.

Speaker 10

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

Speaker 2

Thanks, Michael.

Operator

Thank you. And our next question today comes from Ronald Epstein with Bank of America. Please go ahead.

Speaker 7

Hey, guys. Good morning. Good morning. Just trying to understand what happened with the interior's ductwork and the composite, if you can kind of go in more detail. Like It seems like as of maybe last quarter, this sort of came out of nowhere.

Speaker 7

And I guess what I'm worried about is could this happen in another business or not? Or I mean how should we think about that?

Speaker 2

Yes. And I'm giving lots of inside baseball on interiors more than we ever have in the past. But on composites, recall we used to build These products, these DUCs at our Spokane, Washington plant and we moved them to Mexico. And at the time, Condition of transfer with Boeing is that we produce them in the same manner and we really missed an opportunity to relay out the line, Add More Automation, from their point of view, it was to avoid any changes that might lead to quality issues. But now that we've stabilized production In Mexico, we're going back through the line with Boeing in partnership to take out further cost.

Speaker 2

And I'm highly confident We're going to see the sort of productivity gains and composites that we saw that we do see today in installation. So that's one change. This business has been a 20% plus business before and we're focused on getting it back there and we plan to exit this year with Strong margins that are double digits on operating margins and then get it back into higher margins over our planning horizon. Yes. And I would add that obviously the cost challenges are multifaceted.

Speaker 2

There's inflation down there that's been higher than we experienced in other countries. There's the FX headwind with the peso strengthening and then there's directed supplier costs that we can continue to work on because they have some sole source directed And we have opportunities sometimes through adjustment clauses to recover that. Sometimes we need to develop second sources or work to pass through the prices. So there's lots of levers. There was a it was a challenge and it was a bit of a surprise in Q1, but we're all over it and we're going to improve it for the balance of the year.

Speaker 8

Yes, got it. Got it. Got it. And then, Jim, how are

Speaker 7

you thinking about, I mean, really the refinancing that has to happen given where interest rates are now? What you kind of alluded to, there's maybe some creative things you could do. Could you give us a hint to what you're thinking?

Speaker 2

Well, as you know, we're opportunistic. So we continue to monitor the markets. And if there's an opportunity to refinance at good cost and terms, we would consider doing that. But we're also improving the business dramatically, positive free cash flow this year, improving our credit. So we don't want to move too fast that we don't get the benefit of our improved Credit.

Speaker 2

You might have recently seen Moody's upgraded our corporate family rating as well as our 25 bonds. At the same time, we're buying back with excess cash, the bonds, we bought back the discount, so we create a gain, we reduce our interest expense. We're going to continue to do that as we can with excess cash from cash flow from operations, from working capital liquidations. So we're going to keep chipping away till it gets to a We can consider whether there are some delevering actions we can take with the portfolio, which we talked about, or whether we want to refinance. These aren't due until August of 'twenty five.

Speaker 2

They don't go current until next August next year, but we're keenly aware of it and we're watching the markets. So it's not Big concern about refinancing, but we do want to delever. So it'd be best if we could just reduce that debt altogether and not have to refinance.

Speaker 8

Got it. All right. Cool. Thanks.

Speaker 2

Thanks,

Operator

Ron. And our next question today comes from Noah Poponak with Goldman Sachs. Please go ahead.

Speaker 9

Hey, good morning, everyone.

Speaker 2

Good morning.

Speaker 9

What is assumed in your 2025 2026 Margin plan for the interiors margin.

Speaker 2

I'm hesitating, Noah, because before we get into the margins of the segments, which we have given, We said that this has been a 20% margin business in the past. I've said that this is easily back to the mid teens on a normalized basis. So you can imagine if we're just coming out of September and breakeven ish, we're looking to expect for the full year have mid to single High digit on EBITDA percentages, so you can expect to be in the double digit percentages during those periods. Yes. What I'm most excited about is The growth in actuation and engine controls, actuation is going to hit I think $500,000,000 in sales this year And 20% plus strong business with great aftermarket and engine controls is one that's getting a lot of that Military MRO work and new wins on helicopters.

Speaker 2

So even though interior is getting a lot of headlines, it's again still 10% of the business. We know the drivers. We're fixing it. But the core parts, what I'll call the crown jewels of the company, actuation, engine controls are really performing well.

Speaker 9

Okay. Jim, the release and the presentation Discuss debt recent debt reduction, but I'm seeing a few different numbers, Seeing a different number for the 2025s and I thought was left there. Can you just level set me on What did you pay down in the quarter? What have you paid down since the end of the quarter? And what's left on the 25s?

Speaker 2

Yes. So in the quarter, we paid down $19,000,000 for the bonds. And subsequent to the quarter, we paid down another $29,000,000 for the bonds. And back in Q1, there was with the warrants, dollars 14,000,000 of debt was retired as part of that process.

Speaker 8

Okay.

Speaker 2

Take that off the 500, that's where we're going to be right now.

Speaker 9

I see. And the it looks like you're saying on Slide 9 that, That action reduces interest expense and that flow to the free cash flow guidance. Is that correct?

Speaker 2

So it does reduce interest expense for the balance of this year, but on a full year basis, it's $5,000,000 So that's not in the year, that's a full year?

Speaker 9

That's a full year. So this year is a piece of that and then a piece of just core business operations?

Speaker 2

Correct.

Speaker 9

Okay. And then I guess related to that, that's a positive, But you've got the big 4Q where you're citing volume, which makes sense because of what's happening with Sort of planned volumes, but we you continue to operate in these end markets where the planned volumes are shifting around. And so I guess I was a little surprised you raised it given that, but at the same time you're giving us these numbers halfway through The quarter here. So I don't know what's the level of confidence in that number or where is there risk of something Sliding out of the end of your year and into next year on that free cash flow plan?

Speaker 2

Yes. We're highly confident in our numbers and we have a very detailed bottoms up Forecasting process by program, by site. The risks come in, the demand in the aftermarket, which we don't have long term visibility to. And then of course OEM rates, but I think it's less on OEM rates as much as we talk about those with aftermarket being Growing so much and being so important to the Q4, that's where the risk is. It's just demand.

Speaker 2

And that demand is so diverse that I think it's lower risk And in particular OEM rate schedule might be. Yes. And working capital certainly is a big swinger and we're Highly focused on that. We ran dozens of lean events in October. We're going to continue those through the second half of the year.

Speaker 2

And we're doing all the kinds of analysis on our material planning and work in process and finished goods And safety stocks and rotables and things that drive working capital. So the rates do affect Inventory burn down because the rates help us to drop on what's on the shelf, but that's one of the swingers as well, but we're confident we're going to make it.

Speaker 9

Okay. Appreciate your time. Thank you.

Speaker 2

Thanks, Noah.

Operator

Thank you. And ladies and gentlemen, this concludes today's We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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Earnings Conference Call
Triumph Group Q2 2024
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