Triumph Group Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 17, 2023

There are 13 speakers on the call.

Operator

Good morning, and welcome to the Triumph Group 4th Quarter Fiscal Year 2023 Results Conference Call. All participants will be in a listen only mode for the duration of the call. After today's presentation, there will be an opportunity to ask questions. Please also note that this event is being recorded today. I would now like to turn the conference over to Tom Quigley.

Operator

Please go ahead, sir.

Speaker 1

Thank you. Good morning, and welcome to our Q4 fiscal 2023 earnings call. Today, I'm joined by Dan Crowley, the company's Chairman, President and Chief Executive Officer and Jim McCabe, Senior Vice President and Chief Financial Officer of Triumph. As we review the financial results for the quarter, please refer to the presentation posted on our website this morning. We will be discussing our adjusted results.

Speaker 1

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 to be materially different for many expected future results, performance or achievements expressed or implied in the forward looking statements. Dan, I'll turn it over to you.

Speaker 2

Thanks, Tom. Triumph ended fiscal 2023 and Q4 on an upswing with strong margins and positive cash flow, Positioning the company for success in fiscal year 2024 and beyond as demand accelerates. We met or exceeded our full year financial targets, delivered organic sales growth, materially expanded profitability and in our 4th quarter generated $52,000,000 in positive free cash flow. Q4 was an encouraging finish to a solid fiscal year that marks year over year improvement in both earnings and free cash flow. Over the past 2 years, Triumph doubled our adjusted EBITDA margins from under 7% in our fiscal 2021 to 14% in fiscal 2023.

Speaker 2

As we go forward, we expect this momentum to continue and are guiding to further margin expansion and top line growth in fiscal 2024 as we seek to enhance Shareholder value in a rapidly improving demand environment. Deleveraging remains a top priority as we continue to optimize our capital structure over time. We recently extended our debt maturities, providing additional liquidity and flexibility as Triumph returns to consistent cash flow generation in fiscal 'twenty four and beyond. Our 4 point strategy remains on track. 1st, reposition the company as the systems and aftermarket company, which we've done 2, improve operations and grow our proprietary and aftermarket Sales and margins 3, return to positive free cash flow to help delever the company and 4, generate the shareholder returns our investors expect.

Speaker 2

Triumph is a stronger company today as a result of our actions, allowing us to compete successfully in the market against larger and more valuable peers. Turning to slide 3, I'll summarize the highlights for the quarter. First, we generated organic sales growth of 21% over the prior year quarter, with increased sales reported across all our end markets. Year over year sales growth was 14%, driven by improving commercial OEM and MRO demand. Note that aftermarket accounted for 41% of our Q4 sales, while military programs account for 37, both up from prior years.

Speaker 2

Key drivers for the increased Q4 revenue Included higher volume on the Boeing 737 and 787, OEM and spares for military rotorcraft, GE LEAP gearbox shipments and Nacelle overhauls, all tailwinds on growth platforms, which we expect to continue in fiscal 2024. Profitability for the quarter materially exceeded prior year levels. On a fiscal year basis, we achieved our highest margin percentages since 2014 as a result of our strong execution and improved business mix. Key profitability drivers for the year included higher spare sales, cut end of previously negotiated price increases, Development program transition to production, higher sales at our MRO sites and lower SG and A and overhead costs. Our cost reduction results enhance our operating leverage.

Speaker 2

In other words, we won't have to add back support cost as volumes increase. What's encouraging here is we saw higher EBITDAP margins across all our primary product lines year over year From actuators to engine controls, gearboxes to product support, we grew our backlog by 11% as Triumph continues to benefit from our broad representation across platforms, customers and end markets and as our differentiated solutions gain traction with our customers who are helping to fund our R and D efforts. Our backlog improvements in size, diversity and profitability Are rooted in our investments in new products and technology, portfolio changes and pricing initiatives. In addition to the long term agreements, which we secured in recent years across all our businesses, backlog renewal is key to Triumph's sustained long term growth. Beyond higher OEM rates and MRO receipts, new wins in the space market And for products supporting the war in Ukraine enabled us to exceed our goal of generating 25% of our sales from new products and markets.

Speaker 2

Turning to cash flow, we generated strong positive free cash flow to end the year, benefiting from over $120,000,000 In unlevered free cash flow in Q4 as we accelerated product shipments, cash collections and reductions in working capital. We are on track to generate positive free cash flow on a full year basis for fiscal 2024 and beyond, while expanding our CapEx investments and funding working capital in support of the commercial ramp. Taken together, the momentum in our end markets, our operational and pricing improvements and expanding backlog lay the foundation for our fiscal 2024 guidance. Triumph made great strides this year operationally Across the enterprise, including achieving world class safety levels with 12 or half of our sites recording 0 injuries in the last year, Reducing RED programs by over 75%, which reduces financial risk establishing over 100 high performance teams To streamline our execution, reducing quality defects by 20%, with 11 sites achieving world class levels of less than 1% cost of poor quality and improving supplier on time delivery performance from the mid-70s percentages to the low 90s to free up captive inventory. We remain encouraged that both OEM and MRO markets continue to recover as commercial revenue levels are on track to exceed 2019 levels this calendar year.

Speaker 2

Triumph is benefiting From a 52% increase in global revenue passenger kilometers to 88% of pre pandemic levels, the primary driver for both new aircraft orders, Production rate increases in MRO spend. Similar growth in the international travel is benefiting our wide body MRO sales. Robust commercial demand helped increase Triumph's fiscal year 2023 bookings 31%, including $171,000,000 in new contracts in March alone, our highest of the year. 6 of our 24 factories will benefit from Ryanair's recent order for 300 MAX 10s and those from United Airlines. Turning to slide 4.

Speaker 2

New wins totaled $205,000,000 for the quarter $743,000,000 for the year. Important military wins for the quarter Included content on the CH-fifty three helicopter, including the blade fold and blade damping system and engine oil coolers And an F-thirty 5 drag chute actuator. We also received a large order for the M777 howitzer magazine components. Increasing volume is our biggest enabler for top and bottom line growth. Boeing and Airbus continue to forecast higher OEM production rates And recall the Triumph typically steps up our rates 8 to 10 months ahead of the OEMs due to product lead times.

Speaker 2

As shown in Slide 6, we anticipate the Boeing 737 MAX rate to step from the current Rate 31 to Rate 38 this summer and then rate 42 by March. The A320 family achieved rate 46 in March with plans to move to rate 49 before the end of our fiscal year. Airbus also plans to increase the A220 rate From the current 7.5 per month to 9.2 and then to 10 within our fiscal year, recall that Triumph On or before Triumph's Q4, the Boeing 787 We'll move from the current rate 4 to rate 5, while the Airbus A350 will move from rate 5.6 to rate 6. Prime supplies the entire 787 landing gear hydraulic system, cargo door actuation system and interiors components. Regarding the military outlook, the U.

Speaker 2

S. Defense budget rose approximately $60,000,000,000 in $23,000,000 and the 2024 request is up another $26,000,000,000 signaling demand stability over the next 2 years. Prime's total military sales were up 18% year over year and 34% sequentially with platforms such as the CH-fifty three helping to drive our fiscal 2023 results. Finally, aftermarket inductions across military and commercial platforms for maintenance, repair and overhaul are up 24% year over year to over 35,000 components. Together, these OEM and MRO increases across all our end markets to support our fiscal 2024 guidance and long term business outlook.

Speaker 2

So overall, very good news on demand trends. I want to share an update relative to our proprietary product development efforts in the systems area and its importance to our value generation efforts. For fiscal 2024, approximately 72% of our sales are for proprietary products, excluding our 3rd party MRO business. Our technical staff maintain robust product roadmaps, so that intellectual property, technology and product development investments are directed towards emerging customer needs. We are targeting new starts as well as takeaways on existing programs.

Speaker 2

By partnering with our customer to solve their most difficult challenges, we received over $30,000,000 in customer funded contract research and development commitments in the last 12 months to augment our self funded R and D. Turning to slide 7, you can see some of the positive results of these joint R and D efforts. New applications include next gen landing gear systems, military gearboxes, electric aircraft components, Fuel pumps, fuel hydraulic actuators, thermal vapor cycle compressors and engine controls, all products with valuable aftermarket demand. I'm particularly happy to have content on GE's new LM-twenty 5NX military engine and new solutions for 6th gen fighters. This customer engagement was made possible by our customer focus teams, who are shaping future requirements and identifying takeaway opportunities to expand our backlog.

Speaker 2

Triumph's strong financial and operational close to fiscal 2023 along with our proprietary products and end market growth Our key enablers to enhancing our long term value. None of this would have been possible without the Triumph team members whose engagement and accomplishments in fiscal 'twenty three make it possible for the company to achieve its potential. Together, the culture we've created at Triumph helped us manage through the last 3 years and positioned the company to sustainably execute our profitable growth strategy in the years to come. Jim will now take us through the Q4 results and our detailed outlook for fiscal 2024. Jim?

Speaker 3

Thanks, Dan, and good morning, everyone. Triumph's 4th quarter results exceeded our expectations with significant revenue and margin growth over the prior year period. On Slide 8 are the consolidated results for the quarter. Revenue was $393,000,000 For the continuing business, excluding divestitures and exited programs, organic revenue increased 21% over the prior year quarter. We benefited from organic sales growth in our largest programs and in our end markets.

Speaker 3

Adjusted operating income for the quarter was $60,000,000 representing a 15% margin, an increase of over 400 basis points from 11% in the prior year period. Adjusted EBITDA for the quarter was $68,000,000 representing a 17% EBITDA margin, which is a 500 basis point improvement over the prior year period. Increased demand in all our markets, especially the aftermarket was a key driver for the significant margin improvement over last year along with pricing and cost reductions. Triumph's full year results for fiscal 2023 were also strong with higher operating income and higher margin. On Slide 9 are the annual consolidated results.

Speaker 3

Revenue was $1,379,000,000 For the continuing operations, Organic revenue increased 14% over the prior year. Adjusted operating income for the year was $159,000,000 and 11% operating margin, up over 200 basis points from the prior year. Adjusted EBITDA for the year was $196,000,000 That is a 14% EBITDA margin, which is a 200 basis point increase over the prior year. Our segment tables are attached to the press release and please note that the segment formerly known as Structures is now called Interiors. This name change more accurately reflects the ongoing focus of that business following the completion of our efforts to reposition the segment.

Speaker 3

We are encouraged by the progress we have made and would note that Interiors is benefiting from a strong backlog and growth forecast. We also expanded our disclosures over the last year to include revenue by end market, including commercial and military and then OEM and aftermarket under each. Slide 10 shows our commercial market revenue. For the quarter, commercial revenue of $237,000,000 was 60% of total revenue. Commercial OEM sales were $141,000,000 and grew 35% in the continuing business.

Speaker 3

This growth was driven by increases in both volume and price in key programs, including the Boeing 737 and 787 programs. Commercial aftermarket sales grew 51% in the continuing business on strong demand as commercial air travel has continued to ramp. Slide 11 shows our military revenue. For the quarter, military revenue of $144,000,000 was 37% of total revenue. Both military OEM and aftermarket revenue grew compared to last year, A supply chain recovery benefited this market.

Speaker 3

Remaining 3% of our revenue was non aviation, which is a growing and profitable business, represented about $12,000,000 of sales in the quarter. Our sales of exchange towards aftermarket is having a positive impact on margins and cash flow. In the quarter, total aftermarket sales represented 41% of our revenue, up from 31% in the prior year. Our portfolio actions and our growing aftermarket demand have both contributed to this positive mix change and we expect this trend to continue as we move through fiscal 2024. Our free cash flow walk is on Slide 12.

Speaker 3

Our $52,000,000 of cash generation this quarter included $70,000,000 reduction in our net working capital driven by the 4th quarter sales volume. As supply chains continue to improve, we've been able to reduce the inventory we've been carrying. We also incurred an additional $14,000,000 in interest payments in the quarter due to the timing of our refinancing. On Slide 13 is our net debt and liquidity. During the Q4, we completed the refinancing of a substantial portion of our debt, issuing new 9% first lien notes and retiring 2 series of notes that were due to mature in 2024.

Speaker 3

This transaction extended those maturities to 2028, providing additional liquidity, enhancing our financial flexibility, including the ability to prepay a portion of these new notes at a reasonable premium. At March 31, we had just under $1,500,000,000 of net debt and our cash availability was approximately $287,000,000 Our next maturity is the $499,000,000 of notes due over 2 years from now in August of 2025. These bonds are currently designated bonds that can be used to exercise our outstanding warrants for stock to reduce this debt. In the quarter, we received $4,000,000 of proceeds from warrant exercises and retired $1,000,000 of these designated bonds. Our fiscal 2024 guidance begins on Slide 14.

Speaker 3

The bridge of our FY2023 to FY2024 revenue is at the top left. Adjusting for approximately $78,000,000 in fiscal 2023 sales from exited businesses. And based on anticipated aircraft production rates, we expect organic growth of 7% to 10% in fiscal 2024. Aftermarket volume is the largest component of the increase, followed by OEM volume, pricing and an increase in non aviation revenue. Aftermarket is expected to grow at a solid 9% rate, driven by continued expansion of overall air travel domestically and internationally.

Speaker 3

Commercial OEM revenue growth is driven by production ramps on programs such as Boeing 737 and 787 and the Airbus A320 family. Non aviation sales are expected to increase driven by the previously announced work supporting howitzer sustainment. The top right chart shows our EBITDAAP growth over the last 3 years and guidance for FY 2024. We're proud of this positive trend. Our adjusted EBITDA margin has improved from about 7% in fiscal 2021 to 12% in fiscal 2022 to 14% in fiscal 2023.

Speaker 3

And our guidance indicates up to a 60% consolidated EBITDA margin in fiscal 2024. This EBITDA margin expansion has been driven by a number of key factors, including the reshaping of our portfolio, increasing operational efficiencies, improving the pricing in terms of our contracts and from increased demand from higher OEM production rates and a ramping aviation aftermarket. The bottom left chart Shows our improving quarterly free cash flow cadence for the last 2 years and the anticipated cadence in fiscal 2024. We We expect to generate positive free cash flow in fiscal 2024, including normal seasonality with working capital growth using cash in the first half to support higher deliveries and resulting cash generation in the second half. The bottom right chart is our unlevered free cash flow bridge from fiscal 2023 to fiscal 2024, which shows our free cash flow before interest.

Speaker 3

As previously noted, Fiscal 2023 included $24,000,000 in non recurring cash uses and $32,000,000 in net working capital increases. We anticipate a modest net working capital improvement over fiscal 2024 and our largest driver is earnings growth, which is expected to drive just over half of the unlevered free cash flow improvement. Turning to Slide 15, you will find our detailed fiscal 2024 guidance. We expect revenue of $1,390,000,000 to $1,420,000,000 at 7% to 10% growth in the continuing business and cash from operations of $60,000,000 to $80,000,000 After $25,000,000 to $30,000,000 of capital expenditures, We expect to generate $35,000,000 to $50,000,000 of free cash flow in FY 2024. That's up to $123,000,000 improvement in free cash flow for fiscal 2023.

Speaker 3

We expect $165,000,000 to $180,000,000 of operating income and $210,000,000 to $225,000,000 of adjusted EBITDAP, representing up to a 16% EBITDA margin. Interest expense is expected to be $154,000,000 including $148,000,000 of cash interest and we expect $7,000,000 of cash taxes. Our pension funding forecast is on Page 19. Dollars 50,000,000 is the estimated required contribution in FY 2024. We view stocks for required contributions in the past and may elect to do so in the future.

Speaker 3

We would note that estimates after the 1st year can change significantly as we have seen in the for the past few years. In summary, it was a strong finish to a solid year and with fewer one time items than past years. We completed our portfolio actions and are clearly positioned as an aerospace systems and aftermarket company. We extended our debt maturities, Grew revenue, expanded margins and improved free cash flow. For fiscal 2024, we're focused on executing on our plan to continue to grow revenue, margins and cash flow and increase shareholder value.

Speaker 3

We are in the planning process for an Investor Day in the fall and look forward to sharing our multiyear targets and bridges at that time. Now I'll turn the

Speaker 2

call back to Dan. Dan? Thanks, Jim. Triumph's performance in our Q4 fiscal 'twenty three underscores that we're Stronger systems and aftermarket driven company with a larger and more profitable backlog and financial results that are steadily improving year over year towards the targets we set in fiscal 2021. We entered our fiscal 2024 with an optimized portfolio of businesses, programs and products At a time of accelerating customer demand, our increasing mix of aftermarket and IP driven OEM sales Gives us confidence in our fiscal 'twenty four guidance and long term outlook.

Speaker 2

Jim and I are happy to take any questions you have.

Operator

We will now begin the question and answer session. At this time, we will take our first question, which will come from Sheila Kahyaoglu with Jefferies. Please go ahead with your question.

Speaker 4

Thank you so much and good morning Dan and Jim. First off, can I get the Excel backup data behind Slide 14, that'd be great, if we could get that precise? So I appreciate those slides. That's super helpful. I guess I wanted to go actually to the next slide because the supplementals, but in terms of the pension items you mentioned Becoming a significant headwind in fiscal 2025 with the contributions there, how do we think about those numbers in the context of your free cash Flow generation and maybe that's something you'll discuss in the fall.

Speaker 3

Yes. Thanks, Sheila. And I'll look for that Excel spreadsheet and let you know. But I think pension is an interesting one because it's volatile in the out years. And as you know last year, at the same time last year, we had only $1,000,000 or so per year Funding forecast.

Speaker 3

It's only the next year that really matters because after that it can change dramatically based on market conditions, interest rates, returns. So what we're focused on is the $15,000,000 in the coming year. If you look at the pension liability on the balance sheet, it went from up about $58,000,000 only. So but the funding went up a lot more than that. And some of it has to do with elections, which we're going to revisit and consider before the next year.

Speaker 3

But in the fiscal 2024, we have $15,000,000 to deal with, which we're planning for.

Speaker 4

Got it. Okay. And then Just a quick follow-up on the interior's margins. This is like one of the, as you guys mentioned, the best quarters you guys have had. Adjusted EBITDA margins of 7.6% in the quarter, is that sort of the baseline we should be thinking that for profitability?

Speaker 3

Could you repeat the number you just said?

Speaker 4

7.6%, I believe, was the adjusted EBITDA margin.

Speaker 3

Right, right. Look, margins are going to continue to improve. And you've seen I went through the consolidated EBITDA margin, which doubled from 7% to 14% and we're projecting up to 16 next year. The margins in across the business are going to continue to improve from leverage on additional revenue, Right. So we got gross margin falling through without increasing fixed expenses.

Speaker 3

So the trends are positive across the board in all the markets, including interiors.

Speaker 4

Okay, great. Thank you.

Operator

And our next question will come from Peter Arment with Baird. Please go ahead with your question.

Speaker 5

Thanks. Good morning, Ed, Benjamin, Tom. Just on thanks on all the details you guys gave and congrats I'm finishing up on a strong note for the year. On the organic sales outbreak, you mentioned the aftermarket was up 9%, 7% to 9% is the guide for the year or 7% to 10% for the year. I'm surprised it's not stronger just given the trends that you're Is there something that's offsetting that or maybe just timing or up against comps?

Speaker 5

Any color on that, Dan, would be appreciated. Thanks.

Speaker 2

You bet. We track the inductions that come into all of our MRO sites month over month They steadily increased through the fiscal year, roughly started out the year below $2,000 a month And they were hitting 3,000 by the time we got to March, so a 50% increase through the course of the year. So we're encouraged by the return to service of aircraft. International has opened up. As you know, China is going to expand our TASTA site, which is in Thailand, is seeing Increased traffic, so aftermarket is going to continue to drive.

Speaker 2

Where we really want to extend our aftermarket is in spares. Spares came down in prior years as people just went to the boneyard and extended service intervals. Now, sparing is starting to pick back up And spares carries stronger margins than even overhaul. So we're optimistic about aftermarket and we're hiring at those plants that support that. And we're continuing to do joint ventures with our partners in Air France.

Speaker 2

So we're excited about the future in aftermarket.

Speaker 5

Appreciate that. And then just, Jim, just as a follow-up on kind of the free cash flow finally turning positive, which is great. It's about 2.5% to 3.5% of sales on kind of your guide. We've long talked about kind of getting that to mid to high single digits. Mode.

Speaker 5

How do you think about that, some of the bigger drivers? Is it just the cash interest coming down, working capital improvement or some of

Speaker 6

the things that you're looking for there?

Speaker 7

Thanks. Yes.

Speaker 2

So you

Speaker 3

see the 2024 guide of $35,000,000 to $50,000,000 of free cash flow. That's just the beginning. Obviously, we're going to ramp and our goal is to be up in the high single digits on our free cash flow as a percentage of sales. And the cadence will be we're in the low single digits in 2024 and then we'll move kind of into the mid single digits in 2025 and then the higher single digits in 2026. Mode.

Speaker 8

Appreciate the color. Thanks, guys.

Operator

And our next question will come from Myles Walton with Wolfe. Please go ahead with your question. Thanks.

Speaker 7

Good morning. Good morning.

Operator

I was hoping you could maybe give us

Speaker 9

a couple of the moving parts From an EPS perspective, I think you've given us most of them, but when you put it all together and obviously you've got the warrant issue as well that I think as an interest adjustment. Is the EPS for fiscal 2024 somewhere closer to $0.50 Is that about the right ballpark?

Speaker 2

So I think we're trying to give

Speaker 3

you the building blocks. The reason we didn't guide the EPS is because of the moving share count as you mentioned. Share count skewed by pro form a warrant accounting, which has to assume that all of them have been exercised. And then there's exercises. So during the period, we had $5,000,000 worth of warrant exercises, some of which increase shares and reduce debt.

Speaker 3

So we're going to give you all the components and I think probably in the follow-up call we can talk you through each of them And you can make your own assumptions about the number of shares outstanding. So that's the intent there. We're going to get back to EPS guiding as soon as the warrants exercise.

Speaker 10

Okay.

Speaker 9

And what is the outlook for that to be realized at this point?

Speaker 3

Mode. Well, Lawrence, in the quarter, there was $5,000,000 worth exercised, about $1,000,000 of debt retired and that was tendered for shares and then $4,000,000 of cash was raised. So the market will dictate when they transact. They expire in December.

Operator

Okay. One of the slides I thought

Speaker 9

was interesting on Slide 3, Sort of implied what the margin guidance is between the OEM and the aftermarket and that 12% I guess implied OEM margin and the 25% implied aftermarket margin. Are those sort of improving in tandem? Is there more of an improvement you're seeing mode in one side or the other, just more color there both this year and into next year if you can.

Speaker 3

Yes. They're both improving. Aftermarket is improving more than OEM. And our mix went from 31% to 41%. So the mix alone drove more Profitability, but even within that 41%, we're seeing higher margins because there's just a flow through from the operating leverage as sales increase and we don't increase call.

Speaker 9

Okay. And then, Dan, you've had the $300,000,000 EBITDA target out there for fiscal 'twenty five. Is Is the trajectory you're putting up for 2024, enough to maintain that for 2025 at this point?

Speaker 2

So we think so. It's a quarter to quarter measurement. Although it's a multiyear goal, we're tracking the OEM rate so closely. As Jim mentioned, volume is our number one lever along with aftermarket to hitting that number. And the direct conversations I had With Boeing and Airbus in the last week give us confidence that those rate step ups that they're advertising are going to happen.

Speaker 2

There's no doubt There's a lot of hand to hand combat on shortages. But as I mentioned in my script, the percentage of on time delivery with suppliers This improved in the quarter to the low 90s. We want to get it to mid 90s or higher, so that you're really only working shortages on an exception basis. Mode. As Spirit recovers on their repairs, Boeing's ramp rate is going to ramp up.

Speaker 2

They're confident in those step ups And that's the biggest lever for us to hit the $300,000,000 So we'll continue to update you on that. At the Investor Day that Jim mentioned, we'll give more color and the bridges On both profitability, revenue and free cash flow.

Operator

Okay. Thanks so much.

Speaker 11

Thank you.

Operator

And our next question will come from Ron Epstein with Bank of America. Please go ahead with your question.

Speaker 11

Hey, good morning, guys.

Speaker 8

Good morning.

Speaker 11

So we got the free cash flow positive, right? That's great. Mode. Jack, the business cleanup is going. I guess a big picture question, where to from here?

Speaker 11

When you think Yes, we've kind of gone through kind of the worst of the downturn and how disruptive it was on the company and so on and so forth. But When you look out 5 years from now, 10 years from now, I mean, what's your vision for where Triumph could be?

Speaker 2

Yes. Thanks, Ron. And you deserve to ask that question because you've been with us for the whole journey. I've looked at our product lines and we've got great Content and we talked about the IP expansion. In 5 to 10 years, what you're going to see is Triumph is a market leader in fuel pumps And heat exchangers, gearboxes and actuation and as the fleet evolves Towards a more electric fleet, you're going to see us adapt our products to meet that need.

Speaker 2

And the reason I know this is happening is because our Customers are funding us to do the R and D right now for the platforms that will be fielded in that 5 to 10 year window, Whether it's Airbus doing an electric regional jet that requires a gearbox to transfer electrical power to the propellers Or whether it's additive manufacturing that will replace the current castings on gearboxes, we're making those investments. We're helping on the next gen variable bypass jet engines. I mentioned GE, the LM-twenty 5 NX. We've got key roles on those fuel pumps. So we can tell that the pipeline of technology and products It's going to be transitioning into new starts and then production.

Speaker 2

So we don't have to guess what the future is going to look like because we're already working on it. And I think you'll see us in aftermarket expand our services, the FAA, ATA chapters. This is a triumph. We'll continue to be supply as we do today, thrust reverser overhaul and engine accessories, but we'll branch into other products. And the investments we're making in partnerships will make us a more global company in 5 years, especially in Asia and the Middle East.

Speaker 2

So You think of Triumph as a company that's even has a stronger portfolio than we had in 2010 When Triumph went down the path of structures, we're going to have a mix of business that's comparable to The Moogues, the Parkers, the Eaton's, with a much bigger footprint, in terms of global markets.

Speaker 11

Mode. And then how much of the mix do you think will be defense? I mean, what's your goal for that between defense and commercial, like ultimately?

Speaker 2

So when we started, we were eightytwenty commercial defense and we're now 37%. And we're getting to the point where there's enough Balance and diversity in our mix of business that we can be more selective on what we pursue based on its contribution to Cash flow generation and debt reduction. So we have plenty of both now and it's good position to be in because as mentioned, the budgets are strong on the defense side. So ultimately, we may level out at 40% to 45 Percent defense, but that number is less important than the contribution of the individual programs to our financial goals. Everybody on the management team is focused On debt reduction and free cash flow generation, and you're already seeing top line is now starting to grow in the core and And earnings are coming up.

Speaker 2

Now the focus is on cash.

Speaker 11

Got it. And then if I may, just one quick follow on. Mode. In the current market, I'm certain you guys are seeing this. There's virtually no usable spare parts, I mean, USM parts out there.

Speaker 11

There's nothing out there. There's been a bigger push in the PMA because of airlines are just looking for parts. Is there anything medium term you guys can do to kind of grow the spares business?

Speaker 2

In our OEM businesses, we've got depots that are embedded in the production plans. And so recapturing our aftermarket tail is definitely a priority, whether it's hydraulic fuses or All the consumable holdback bars for the military, every time an FAA team goes off the deck, it's a Triumph holdback bar. So we've got factories that are really focused on extending the aftermarket sale for the OEM products that we have. Mode. I understand your point on used serviceable materials.

Speaker 2

For us, it's the regional expansion and aftermarket. So Asia, Middle East, potentially Latin America, these are markets that we don't really play into a great extent. So we'll see volume growth through regional expansion.

Speaker 11

Got you. Thank you very much.

Speaker 3

Thank you.

Operator

And our next question will come from Michael Ciarmoli with Truist. Please go ahead with your question.

Speaker 7

Hey, good morning guys. Thanks for Taking the questions and congrats on getting to the free cash flow here. Maybe again just to stay on that topic, I think it's been Kind of 6 years or kind of Ron's original question on that topic, 6 years since you've been here. You've got the renamed Interior structure, I mean, is there any more portfolio shaping left? I mean, do you have the core businesses now?

Speaker 7

And I guess, Specifically, do you think Interiors has a long life in that 5 to 10 year look for Triumph?

Speaker 2

Mode. Yes. Thanks, Michael. First, remember that the structures business is less than 10% of our sales And metallic structures now is out of the portfolio entirely. So what's left is interiors.

Speaker 2

And remember, we posted these numbers for Q4 fiscal 2023 with our interiors business being largely breakeven. So we've got a lot of upside here. That business was a 20% business In the past, we expect the volume to double over our planning horizon and it's a really good plant. We've consolidated all the work down into 2 factories in Mexico. It's very cost competitive, very lean.

Speaker 2

So we're bullish on interiors and We think it's going to be a big tailwind to margin expansion and cash flow in the future. And it's a business That we do well. We are market leader in that space, whether it's insulation or cabin floors, Adopting, those are all strengths for us. So we're excited about it. But overall, the 6 years we've been coming to Triumph Has led to the portfolio we've got today and although we may do some minor product line exits, We have the business we need now to deliver on the restructuring and transformation.

Speaker 7

Got it. Helpful. And then Jim, just on that on the free cash flow, ultimately grinding that to mid single digits and then high single digits. Mode. Can you give us more color maybe behind the mechanics there?

Speaker 7

Is it going to be just managing that cap structure and Kind of pairing down that interest drag, is there any more optimization of working capital? And Should we even think about as you guys look at the cap structure and maybe the warrants come to a close here, do you contemplate any sort of equity offerings to to sort of manage that interest burden.

Speaker 3

Thanks. I think, it's important to note that I'm not relying on capital structure improvements for the cash flow. This is really operating cash flow coming from volume increases from demand in OEM and aftermarket. And as our growing installed base, we're going to have a bigger percentage of aftermarket moving forward. But we're pretty conservative in our capital structure assumptions.

Speaker 3

So that's only upside for us If we can find ways to optimize that, which we will work on, but we're not counting on that for our cash flow guidance. In terms of working capital, last year we used, I think, $32,000,000 roughly of working capital and we're going to generate in the single digits of working capital in 2024 is our plan. And that's because of Stabilization of supply chain and really our own internal efficiencies as well. So that's going to contribute, but it will be a modest contributor because of course Even though we're generating a little bit of cash by reducing working capital, we still are supporting growth with the remaining inventory working capital. So, it's operationally driven, not capital driven.

Speaker 7

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

Operator

And our next question will come from Jack Ayers with TD Cowen. Please go ahead with your question.

Speaker 12

Hi, thanks. Good morning. This is Jack on for Kai today. Congrats on the quarter. So yes, so I wanted to start on Q4, Obviously, really strong improvement with margins growing sequentially.

Speaker 12

And I just wanted to just make sure we're calibrated here. I know you called out that IP transaction on the commercial OEM side. I'm not sure if that was from a previous quarter, just Any color there, and just the associated earnings of that would be really helpful. Thanks.

Speaker 3

Yes. Thanks, Jack. That was a couple of quarters ago. It was in Q2 that That transaction happened. 4th quarter was very clean.

Speaker 3

No material one timers.

Speaker 12

Okay. Got it. Got it. That makes sense. Mode.

Speaker 12

And then lastly, I just kind of wanted to ask about military and new programs you're watching here as we look out over the I know Boeing called out the T7 sort of delays here for a couple of years and I know you guys have Pretty good content there. I just want to hear your perspective on that issue and then just any broad color on new programs in military. Thanks.

Speaker 2

You bet. So we're focused on the mature programs that are in production now like F-thirty 5 and We've been approached by Lockheed Martin to develop content that would upgrade the aircraft in areas like cooling, heat rejection, Actuation, so that's our first place to start. Then we're on the emerging programs like MQ-twenty five. We do have a small content on T7A. It used to be bigger when we had the structures, but we exited that.

Speaker 2

So T7A is not a big driver. But on the 6th gen fighters that are now getting funded, we've got content across The different OEMs and I mentioned GE's new military engine, the LM25 NX, which has a lot of advantages and the benefits of 2 engine competitions are pretty well understood. So we're excited. I'd say rotorcraft is a very strong area for Triumph. So as CH-fifty 3 ks gets their LRIP awards, we go up in volume.

Speaker 2

We have significant ship set content on that platform. And then, they're working on the Army's future vertical lift platforms. We're on both of those teams For Far and Flora, it's a time when our customers are also Doing tech refresh to their existing fleet, so think Apache, we do a lot of heat exchanger work for the Apache. We do gearboxes for that as well. And even though the Army is starting modernization, they're going to operate their legacy fleet for a long time.

Speaker 2

And so they're putting fixes in the components that we do, especially at our engine control business to refresh them and increase their reliability. So for us, military is a broad diverse set of platforms. One area that we've had more inquiries of late is in classified programs and whether it's Northrop Grumman or Lockheed Martin, We've had more inbounds on that. So we've been working with Lockheed on the digital thread capability, which they'd like to Have all their suppliers put in place to provide improved data sharing, whether it's engineering or manufacturing data, And we're collaborating with them on supply chain as well. So I feel like the defense business gives us all sorts of ancillary benefits.

Speaker 2

The cash terms are good. The customer funds

Speaker 3

a lot of the R

Speaker 2

and D and they're pulling us in the early phases. So I'm happy to have expanded Our defense work and it's going to benefit us going forward.

Speaker 12

That's great. Thanks guys.

Operator

Our next question will be a follow-up from Myles Walton with Wolfe. Please go ahead with your question.

Speaker 9

Thanks for letting me back in. I did have just one quick one I Got to ask, I realize you had sold the 767 facility to her in the middle of last year, but I'm curious is there any liability You all have to carry for the Boeing quality issues that were discovered in the 767 fuel tank. I don't know if there's anything that predated the sale that might be a liability you're carrying today.

Speaker 2

No, not at this time. Recall, we sold this business mode. In July of last year and at that time, we had Boeing consent and there was no material issues that were outstanding, Material manufacturing issues related to any of the programs there and we continue to support Boeing At Boeing, both defense and commercial across the board, you know we've done 15 divestitures. We've not had reach back from prior asset sales And we're committed to quality. I'm very proud of the performance that I mentioned in my comments about cost of poor quality.

Speaker 2

So We'll support any inquiries that we've received in the future and we'll update investors as appropriate, but right now it's not a concern.

Speaker 12

Okay, perfect. Thanks.

Operator

And our next question will come from Noah Poponak with Goldman Sachs. Please go ahead with your question.

Speaker 7

Hey, good morning, everyone.

Speaker 3

Good morning.

Speaker 10

I wanted to talk about or ask about Slide 6, where you've laid out the OEM rates. You had a slide like this for a little while now that maybe like a little bit more optimistic than some of the others in the space. I guess there's been a lot of short term noise and movement, but Maybe the 24 and the 25 that you've had all along are we're getting closer to. So, I don't know. I was just curious to hear Your level of confidence in these, is there 1 or 2 that look a little bit more of a long putt to you than the others?

Speaker 10

I guess specifically the MAX maybe has the most questions right now with the fittings issue, how confident are you in that 3842? And then overall, Dan, I think you said it I think you quoted an 8 to 10 month lead time. And so the right side of this chart It's about 8 to 10 months from now. Are you at most of these rates now?

Speaker 2

So it varies by factory, but yes, we're seeing tick ups in our feeder plants to support it. And it's not just on airframe components, it's also on engines. After the quarter closed, we received the largest contract that's been awarded to Triumph on my watch over 8 years For a GE LEAP engine gearboxes and we'll put out a press release on that tomorrow. But That's a signal of GE's confidence in demand for LEAP engines for both the MAX and for the A320 family. And if you recall, in the middle of fiscal 2023, there was a bit of a slowdown as GE allowed the supply chain to catch up.

Speaker 2

And we finished Q4 with a very high volume of output because demand is coming back. So there's leading indicators not only with Triumph is a sub tier supplier, but also the engine providers that the rates are coming up. And I've been watching this space a long time. I remember touring Boeing's plant when the 777 was initially rolled out, the first all digital aircraft. I've been through their plants When they did the 787, which really broke the mold on composites and new supply chain approaches and then the MAX Line, I've been down many times, which is very automotive in its style.

Speaker 2

So they have the capacity to ramp up the line. Yes, park constraints are real. Boeing is putting tremendous amount of people out in the field to expedite any shortages And capacity that was under invested in during the pandemic is starting to ramp up. So I have confidence in the rates. There seems to be no shortage of end market demand.

Speaker 2

You read about the orders for these, so the backlog is growing. And the step ups on 787 from grade 4 to rate 5, we were at 14 on that before and the demand for that platform is very high. If we can get that back to 10 as Boeing is average sized by 2025, 2026, that's a huge tailwind for Triumph. We have a lot of content on the 787. So I agree it can happen soon enough, but these sort of rates are achievable And we believe will happen in the next 2 years.

Speaker 2

So as we lay out our multi year forecast, which is key mode. Getting back to like $2,000,000,000 in revenue and generating the kind of cash conversion that you all expect, These rates make that possible.

Speaker 10

Okay. Can you estimate I know you explained it's different by facility, but can you estimate the enterprise wide max rate that you're sending out of the company at this moment?

Speaker 2

So why don't we take that as an action and we can address it offline. I don't want to do it from the hip, but we know it by plan. And because as I mentioned, 6 of the 24 plants support the MAX, we have interiors content, actuation content, Controls, so and engine gearboxes through GE, LEAP, CFM. So it's a broad array of plants and I'd rather get it right and do it, but I can tell you it's coming up. We've made significant CapEx investment in our gear manufacturing business to support the ramp and that was key to winning this GE LEAP follow on contract It helped us support the volume and maintain pricing.

Speaker 2

So it's a coming attraction for sure.

Speaker 10

Okay. And so then to follow on all that, in your bridge on Slide 14 and kind of to Sheila's point about asking for the XL, that net OEM volume liver looks pretty small relative to Slide 6, why is that? And could you also just say what that number is in that blue sliver there in 1,000,000 of dollars?

Speaker 3

Thanks. So, Jim, I don't have that sliver quantified in front of me, but it is smaller than the aftermarket volume. And in fact, remember OEM Sales are not as profitable as aftermarket sales. So in terms of generating profit and free cash flow, the aftermarket are actually more important. The OEM volume has a lot of different programs.

Speaker 3

I think the best way to see what might be in there would be to look at our Slide 18, which is the top programs in backlog. And you'll see a mix of military and commercial. Now you'll see the 3.7%, which is 15% of our 2 year firm backlog. It's actually more like 10% or 11% of our total sales because all of our sales aren't backlog. There's a lot of book and ship.

Speaker 3

Diversity of the mix here is why the exact rates of any one program to be mitigated by rate changes in the other direction of another program. So It is a balanced growth with aftermarket leading it and the right behind it is the OEM volume.

Speaker 2

No, you can appreciate we're trying to be conservative here and not Get ahead of the OEM rates or assume faster recovery than what they've advertised. So our guidance is consistent with that mindset.

Speaker 10

Okay. All right. Thanks so much.

Speaker 2

Thank you.

Operator

And our last question will be a follow-up from Michael Ciarmoli with Troost. Please go ahead with your question.

Speaker 7

Hey, guys. Thanks for taking the follow-up. I guess just to I was kind of hone in on where no is going there, but specifically on the A320 rate mode. In regards to what Airbus has said, I know they're dealing with some supply chain issues, but they're still targeting mode. That's kind of 60, 65 by the end of 20 24 and 70 5.

Speaker 7

So how do we think about that rate 49 with that 8 to 10 month lead time?

Speaker 2

So I'm going to refer you to Airbus because I don't want to speak for them. But if you saw their month over month deliveries, They came up very quickly in the month ending March. And so, yes, they are also working supply chain issues, but they're mode. You have to look at very timely data in order to project the future revenues mode. The future build rates from there.

Speaker 7

Okay. Okay. Fair enough. Thanks, guys.

Operator

And this concludes our question and answer session and also concludes today's conference call.

Remove Ads
Powered by Quartr
Earnings Conference Call
Triumph Group Q4 2023
00:00 / 00:00
Remove Ads