Triumph Group Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 23, 2024

There are 12 speakers on the call.

Operator

Good day, and welcome to the Triumph Group First Quarter Fiscal Year 20 24 Results Conference Call. All participants will be in listen only mode. Please note today's event is being recorded. I'd now like to turn the conference over to Thomas Quigley. Please go ahead, sir.

Speaker 1

Thank you. Good morning, and welcome to our Q4 fiscal 2024 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 and full fiscal year, please refer to the presentation posted on our website this morning. We'll discuss 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 from any 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, and welcome to Triumph's 4th quarter call. Before we get into the details of the quarter, I'd like to start by recapping the full fiscal year results. Fiscal 2024 was a successful year for Triumph. We achieved or exceeded our strategic and financial objectives despite market dynamics, while improving safety and quality to all time highs for the company. Here are a few supporting facts.

Speaker 2

Triumph sold our 3rd party maintenance business for 14.5x EBITDA to allow us to focus on our core systems and OEM MRO business. We reduced total debt by over $700,000,000 and accelerated our deleveraging by 2 years. We retired our outstanding warrants generating $100,000,000 in net proceeds. Triumph increased aftermarket revenues by 19%, which carries strong margins and we improved systems and support adjusted EBITDA margin by 70 basis points, while improving our free cash flow by $60,000,000 We also held a successful Investor Day with over 200 in person attendees and provided multiyear targets. And last, we met or exceeded all of our internal sustainability goals on our journey towards our long term ESG objectives.

Speaker 2

Overall, Triumph's strong fiscal results in a challenging market environment positions us to accelerate its profitable growth over what we expect to be the next aerospace and defense super cycle in the coming years. As we post our results for the Q4 that ended in March, I'm pleased to report that we delivered our 8th consecutive quarter of organic sales growth, while generating positive free cash flow. Turning to Slide 3, I'll highlight key accomplishments from the quarter. We closed the sale of our product support business and used the proceeds to retire over $550,000,000 in debt. We generated year over year organic sales growth of 11%, driven by seasonally strong aftermarket demand.

Speaker 2

We grew our total company backlog by 22%, which is above market growth rates as Triumph expands its participation in a broad array of platforms, customers and end markets. We achieved non aviation sales of 6% on increasing maritime and artillery demand. We also executed $40,000,000 in cost reduction actions across the company to reduce short term margin dilution and enhance our out year profitability. These actions will also help us to achieve the long term earnings and cash metrics we presented at our Investor Day, which Jim will update for our post product support portfolio. While overall Q4 sales and free cash flow were strong as were system and support earnings, Overall earnings were impacted by $5,000,000 in restructuring charges along with continued margin weakness in our interiors business.

Speaker 2

Let me provide some perspective on interiors and update the actions we are taking to improve its profitability. Interiors demand is coming back as demonstrated in the 22% volume increase in the quarter from prior year. Profitability and free cash flow continue to lag expectations due to the previously mentioned external headwinds. While interior sales represents less than 15% of Triumph's total sales, we are committed to restoring its historical levels profitability and free cash flow through the following actions. 1st, winning additional work from Boeing, Airbus, Spirit and KHI to generate increased cash and profit and help absorb their fixed overhead.

Speaker 2

We are in final negotiations to transfer 787 ducting work supplied by a competitor to our world class Zacatecas, Mexico plant, a sign of the trust our customers have in Triumph and their need for ready capacity. 2nd, we put in place hedges for the peso that cap further margin erosion. 3rd, we identified a second source for the raw material provider who raised prices last year and have initiated the qualification effort. 4th, we continue to drive labor productivity through lean events to offset the minimum wage increases affecting all companies doing business in Mexico. We are confident that with the anticipated rate recoveries on the 7 37 and 787, additional work scope, price increases and labor productivity increases, we can bring Interiors margins back to historical levels.

Speaker 2

As we start the 2 to 3 year trajectory for Triumph, we remain very optimistic about the positive underlying growth drivers in play across our markets, which include rising commercial aftermarket spares and repair demand, recovering commercial transport aircraft volume, and a strong and stable military budget including many new military programs in development. Triumph's backlog rose more than 22% year over year with orders driving a book to bill of 1.28 on the strength of our product offerings and focus on customer engagement. Both military and commercial backlog grew by 10% 22% year over year respectively, which will benefit Triumph's top line going forward. As shown on page 4, the top 5 programs in our backlog are all growing in rate over our planning horizon and are made up primarily of systems content. Note that the 6th to 10th programs in backlog are all military platforms that are exclusively systems content.

Speaker 2

Starting with our aftermarket sales, Triumph continued its multiyear trend of increasing demand in fiscal 2024 as noted on Page 5 and received new MRO orders in Q4 for the following products: the V-twenty 2 pylon conversion actuators, the Navy's SH-sixty engine control upgrades, the A380 landing gear overhauls and CH-forty seven spares. There are several long term dynamics at play here as new aircraft fleets such as the A320neo and 7 37 MAX aircraft are heavily utilized, driving spares activities, while the older 787 and A380 fleets are increasingly entering their landing gear overhaul cycle where we supply hydraulics and actuators. Turning to Slide 6, I provide a case in point on our aftermarket growth where Triumph is the OEM provider of the entire landing gear actuator suite on both the 787 and the A380 aircraft. Landing gear actuation overhaul activity is rising rapidly and we're allocating more capacity to accommodate the MRO demand. These aftermarket programs carry margins which are often 2 to 3 times our OEM margins as we supply spares and repair services to keep commercial and military aircraft in the air.

Speaker 2

We're also expanding our foreign military sales in the aftermarket as well. There are several positive developments on the military side of the business as Triumph has engaged in a number of new development programs with Northrop Grumman, Boeing, Lockheed Martin, Kratos, Anduril, GE Aerospace and others in support of the NGAD and collaborative combat aircraft. Turning to Slide 7, 6 of our top wins in the quarter were for military platforms. We annotated the slide on the right where these are sole source awards based on Triumph IP and or new product introductions. Note that Triumph's backlog supporting military rotorcraft rose 30% year over year on the strength of our substantial IP content on the CH-fifty three ks, which rose 94% year over year to $165,000,000 more than offsetting the expected run out of V-twenty two OEM backlog.

Speaker 2

Regarding the commercial market, Airbus production rates remain strong and growing with 10% increase in A320 family rates this year based on published information. Recall the A320 family is Triumph's 3rd largest program in backlog. Similarly, A350 rates are forecasted to increase and tribes have been asked to support higher rates of A220 production and expanded work scope. We are aware of Boeing's recent public statements concerning a delay in their planned rate increases, which have not been formally communicated to the supply chain yet. As you can imagine, the actual adjustment in build rate for a given product is a function of delivery rates, aircraft and component finished goods inventory and the supply chain's ability to flex output down and back up.

Speaker 2

Given the uncertainty on Boeing commercial transport programs, Triumph adopted a conservative fiscal 2025 plan reducing our prior internal rate assumptions between 20% 30% depending on the Boeing platform. This has the net effect of reducing our fiscal 2025 sales guidance by approximately $70,000,000 or 6% from prior targets. We will update all stakeholders as Boeing finalizes their production needs and we'll continue to hustle while we wait for Boeing's ramp up and increase market share through takeaways and second sourcing across their commercial platforms. We remain fully committed to protecting Boeing's requirements and supporting future rate increases as they drive towards Rate 50 for the 737 and Rate 10 plus on the 787 by late 2025, 2026. We have high confidence that our operating plan for the next 2 years is sufficiently derisked to support our multi year financial targets.

Speaker 2

Jim will now provide further detail on our Q4 results, fiscal 2025 guidance and updated long term outlook. Thanks, Dan, and good morning, everyone.

Speaker 3

FY 2024 was a great year for Triumph, highlighted by the improvement in our balance sheet. The proceeds from divestiture of the 3rd party MRO business had a healthy 14.5 times EBITDA multiple, combined with the use of some of our substantial tax assets, enabled us to meaningfully reduce net leverage from 7.6 times at the beginning of the year to 4.9 times at year end. The $548,000,000 gain from the divestiture is evidence of the significant hidden value in Triumph's assets that are carried at historical cost on our balance sheet. On slide 8 is our net debt, net leverage and liquidity. In Q4, with the proceeds from the completed sale of the product support business, we retired the remaining $436,000,000 of 7.75 percent senior notes due in 2025, clearing the runway of our next debt maturity.

Speaker 3

We also redeemed 10% or $120,000,000 of our 9% first lien notes due in 2028. Earlier this week, we issued a second redemption notice for an additional $120,000,000 of our first lien notes that will be complete this month. The combined debt reduction of over $670,000,000 will yield $55,000,000 of annual interest savings. We've reduced our net debt by more than half over the last year from about $1,500,000,000 to $700,000,000 now have significant financial flexibility with our next maturity not until 2028. Another balance sheet improvement to note is our pension liability of $283,000,000 at FY 2024 year end.

Speaker 3

It is down $76,000,000 or 21% from FY2023. Our cash and availability totaled $437,000,000 at year end, including $393,000,000 of cash. This is prior to the announced redemption of $120,000,000 of the 20 28 first lien notes this month. On slide 9 are the FY twenty twenty four consolidated results. We achieved 13% organic sales growth driven by strong aftermarket volume.

Speaker 3

We delivered $1,192,000,000 of revenue, dollars 115,000,000 of adjusted operating income and $144,000,000 of EBITDAP representing a 12% EBITDAP margin. During FY 2024, we grew our aftermarket revenue by 19% over FY 2020 3. Military aftermarket revenue was up 10% and commercial aftermarket revenue grew 30%. This aftermarket revenue in the continuing business from the growing installed base of products we manufacture was 29% of revenue in FY 2024, up from 26% in FY2023 and continues to grow. It is a profitable, diverse and valuable revenue stream that benefits when the OEM new aircraft delivery rates are down because the aging fleet in service needs more spares and repairs.

Speaker 3

Remember that our reported backlog only includes purchase orders with delivery dates within the next 24 months. Our backlog grew 22% during FY 2024 from $1,550,000,000 to $1,900,000,000 Approximately $1,150,000,000 of that backlog is scheduled to be shipped in FY 2025. We've also increased our customer diversity over the last 2 years. In FY 2022, sales to Boeing were 37% of our revenue. In FY 2024 sales to Boeing are only 23% of revenue.

Speaker 3

No other customers over 10% of revenue and within the Boeing revenue we have platform and program diversity. On slide 10 of the 4th quarter results, which shows solid growth in revenue, operating income and margins. $33,000,000 more revenue representing 11 percent organic revenue growth $9,000,000 more adjusted operating income 16% adjusted operating margin, up from 14% last year and 16% EBITDA margin on the higher revenue. Aftermarket revenue was 34% of revenue and growing, up from 28% in Q4 last year. Our Q4 commercial revenue is on Slide 11.

Speaker 3

Commercial OEM revenue of $140,000,000 was down $5,000,000 which was more than offset by the more profitable commercial aftermarket revenue, which was up $18,000,000 on sustained demand for spares, including a multiple business jet platforms and legacy 737 aircraft. Our Q4 military revenue is on Slide 12. Military aftermarket revenue of $65,000,000 was up $11,000,000 or 21% over Q4 last year, which offset the military OEM revenue declines. Cash flows on Slide 13. For the full year, we generated $9,000,000 of cash flow from operations and after $22,000,000 of CapEx investment had free cash use of $12,000,000 For Q4, as expected, we generated significant positive free cash flow, $78,000,000 cash flow from operations and $72,000,000 of free cash flow.

Speaker 3

Working capital reduction contributed about $19,000,000 of cash flow in the full year and $122,000,000 of cash flow in the quarter. A comprehensive cash flow walk is in the appendix on Page 27. For FY 2025, consistent with prior year seasonal working capital cycles, we expect growth in Q1 in the range of the amount of the reduction in Q4, followed by working capital reduction in the second half of FY twenty twenty five. On Slide 14 is our FY twenty twenty five guidance. Our guidance includes the benefit of the recent $40,000,000 of cost reduction actions, net of anticipated inflation.

Speaker 3

These reductions were necessary to right size fixed costs in the continuing business and are enabled by the standardization and efficiency work that has been done over the last several years and is ongoing. We have assumed less than the current Boeing purchase order demand in our guidance based on our expectation for a temporary shift in demand, which varies by site. We are committed to meeting our obligations to Boeing and to being prepared to support future rate increases. This assumes temporary demand shift primarily impacts FY 2025 and is not expected to impact our longer term demand from Boeing or our longer term financial targets. Our guidance also includes approximately $75,000,000 of price increases in FY 2025 over FY 2024, 3 quarters of which are already agreed and under contract.

Speaker 3

These actual and planned price increases reflect consideration of the current and forecast cost environment and most importantly, the value that our complex and unique products deliver to our OEM and aftermarket customers. For the balance sheet, following the announced $120,000,000 20.28 note redemption this month, we assume $960,000,000 of the 20.28 notes remain outstanding during the year. We also assume cash funding for the forecast pension payments in FY 2025 $23,000,000 We expect net sales of approximately $1,200,000,000 We expect operating income of approximately $140,000,000 which is about a 22% increase over FY 2024. We expect approximately $182,000,000 of EBITDA, which is a 26% increase over FY 2024 and 15% EBITDAP margin, which is a 300 basis point increase over 12% EBITDAP margin in FY 2024. For free cash flow, we expect $10,000,000 to $25,000,000 based on our conservative OEM demand and working capital assumptions.

Speaker 3

Expect CapEx of $20,000,000 to $25,000,000 interest expense of $95,000,000 cash interest payments of 90,000,000 dollars and cash income taxes of $12,000,000 On Slide 15 is a graphic of the recursive cycle of deleveraging benefits, which is upside to our longer term targets. As we continue to reduce debt and increase EBITDAP, our credit ratings will improve. This will lead to opportunities to refinance our remaining lower debt at lower rates and reduce interest expense. Less interest expense means more free cash flow to reduce debt and the cycle repeats. We expect opportunities to improve our capital structure that are not assumed in our longer term financial targets.

Speaker 3

Our longer term financial targets of the continuing operations are on Slide 16. Sales, EBITDA margin, free cash flow yield on sales and net leverage are presented for FY 2020 for actual, FY 2020 5 guidance and FY 2020 6 and FY 2020 8 targets. The EBITDA expansion is robust and along with the free cash flow generation drives the net leverage reduction even without the benefits of lower interest expense from potential capital structure improvements, which is not assumed. We conservatively assume the $960,000,000 of our 20 28 notes remain outstanding to maturity. However, we will continue to consider capital structure improvement opportunities as they become available to reduce interest and accelerate cash generation and deleveraging, which would deliver upside to these targets.

Speaker 3

We assume cash funding in the pension plan as detailed by year in the appendix on slide 23. We have substantial tax assets and continue to minimize U. S. Federal cash taxes for several years. On Slide 17 are the relative size of key drivers of the multiyear growth.

Speaker 3

EBITDAP margin and free cash flow are expanding more rapidly than revenue, driven by the contribution margin on the incremental volume, price increases, favorable mix for military and aftermarket revenue growth and cost efficiencies. In summary, 4th quarter results included solid organic revenue and operating income growth, operating margin expansion, cash generation and a significant reduction in our net leverage. Bryan Fender's FY 2025 with a stronger balance sheet, a profitable and diverse $1,900,000,000 backlog, tailwinds from the recent cost reductions and previously negotiated price increases. The multi year plan includes rapid margin and cash flow expansion to drive shareholder value with upside opportunities including a lower cost of debt. Now I'll turn the call back

Speaker 2

to Dan. Dan? Thanks Jim. Turning to Slide 18, I provide a few supporting facts for our bullish outlook. First, fiscal year when previously negotiated price increases on long term agreements begin to cut in with full effect.

Speaker 2

As Jim noted, we estimate that over $75,000,000 of gross price increases will become effective this year, contributing to a 300 basis point year over year increase in EBITDAP margins. The inability of the OEMs to satisfy the high and rising demand for new aircraft has led to a growth in the average fleet age over the last 5 years of approximately 18 months. This coupled with rising global travel demand is accelerating Triumph's spares and repair business, which has experienced a 9% CAGR over the last is generated by OEM and IP within systems and support and does not include sales from the recently divested third party maintenance business. Triumph's commercial transport production revenue grows more than $200,000,000 from fiscal 2024 to fiscal 2026 if Boeing and Airbus meet their publicly shared targets for the A320 family, 737 MAX, A350 and 787. Turning to Slide 19, I provide additional color on Triumph's Geared Solutions business, which has been on a steady recovery path leveraging the Triumph operating This business is attractively positioned for a strong IP driven future.

Speaker 2

Today, Geared Solutions MRO business is driven predominantly by products developed in the 1980s, including the V-twenty two pylon conversion system and the FAA team C and D airframe mounted accessory drives or AMADs. Looking ahead, we have 5 new gearbox applications that will transition to production over the next 2 years, including a new Saab, Gripen AMAD, the Boeing T-7A AMAD, several new gearboxes on the B-twenty 1 and a new AMAD for South Korea's new KF-twenty 1 aircraft. In fact, we received our 1st production gearbox orders for the KF-twenty one aircraft in the quarter. As these aircraft transition to production, their deployment will generate spares and repairs volumes, ensuring the geared solutions participates across all phases of the product lifecycle, renewing Geared Solutions backlog. They are also increasingly engaged in additive manufacturing to replace costly and long lead castings and in the electric vehicle space as they are sought out for their expertise in the drivetrain, which connects electric motors to rotors and propellers.

Speaker 2

Triumph is extremely active in new product innovation, particularly modular components and subsystems that have multi platform application and allow us to compete at the next level of the supply chain. This is important to expanding and maintaining our content on future aircraft and creates retrofit opportunities on legacy planes. Turning to Slide 20, we provide a current snapshot of Triumph's innovation flywheel, including new gearboxes, fuel pumps, a new high capacity thermal compressor, an entirely new product line of engine internal actuators and digital engine controls featuring high speed cyber protected processors. These new product developments are financially sponsored by leading customers and are a source of long term shareholder value as our IP based solutions address our customers' most difficult challenges. In summary, fiscal 2024 was a successful year for Triumph.

Speaker 2

We have positive momentum into fiscal 2025 driven by aftermarket expansion even with conservative assumptions on the Boeing commercial rates. Building on the excellent performance of our flagship system and electronic controls and actuation businesses, we fully expect to have all 4 of our operating companies hitting on all cylinders as we progress through fiscal 2025. We are taking necessary actions now to reduce our spend in the short term to offset the financial contribution of our divested third party MRO business that will put us back on the trajectory we presented at the Investor Day, having accelerated our deleveraging by 2 plus years. The medium and long term fundamentals for Triumph remain strong and reflect what we believe is the start of the next aerospace and defense super cycle. The encouraging outlook for our industry, our unique and focused market position and our commitment to performance as is well positioned for continued success.

Speaker 2

My team and I are excited about the future for our company, one with lower debt and interest carry, and improving credit outlook, growing backlog and an improving market demand. We're happy to take any questions you have now.

Operator

And today's first question comes from David Strauss with Barclays. Please go ahead.

Speaker 4

Hi, good morning. Thanks for taking the question. This is actually Josh Koren on for David. I wanted to ask about the longer term forecast. We thought interest savings could be greater than what you lost with the divestiture.

Speaker 4

So why the free cash flow conversion or I'm sorry, the free cash flow percent of sales forecast went down? Thanks.

Speaker 3

Sure. Hi, Josh. It's Jim McCabe here. In the multi year, we conservatively assumed that we're going to keep the current 1st lien notes outstanding. They're 9% notes and after the earlier announced $120,000,000 additional pay down that will happen this month, will be down to about $960,000,000 So we're going to be opportunistic about capital structure improvements.

Speaker 3

They may occur, but we don't want to lean forward on that. We're to put a reasonable conservative assumption in moving forward on the balance sheet, especially for FY 2025. But I do believe over the multiyear period, there will be opportunities for improvement in the cap structure and we will see it. In fact, I put that recursive cycle slide in because we're getting some of that feedback from investors too saying, you should be able to lower your cost of capital with your higher EBITDA, your lower leverage, improved credit and we're looking forward to doing that.

Speaker 4

Thank you. Just one for me.

Operator

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

Speaker 5

Hey, good morning.

Speaker 6

Good morning.

Speaker 5

Hey, Jim, just staying there. So you at the Investor Day, you had the fiscal 20 26 free cash flow, dollars 100,000,000 target. The slide here, dollars 1,400,000,000 of revenue times or multiplied by a 4% free cash flow margin is $56,000,000 So it's pretty significant reduction. I hear what you just said there on how product support comes out and then you're maybe layering in the interest expense reduction. So can you just break out or bridge the pieces from $100,000,000 to $50,000,000 How much product support came out?

Speaker 5

How much interest expense came out, but could come out later? How much is just less profitability in interiors? What are the actual specific moving pieces from the 100 to the 50?

Speaker 3

Yes. Thanks, Noah. The effect of the divestiture was to substantially reduce the leverage. It did substantially reduce debt as well. So interest goes down, but we did give up a business that was slightly above the midpoint of our margins and it was higher growth because it's a commercial aftermarket albeit third party.

Speaker 3

So what we saw was a slowdown in the sales growth, and we started for a lower base on EBITDA, but we get up to 20% just a year or 2 later and the cash flow follows. Working capital assumptions may be a little more conservative moving forward given some of the uncertainty around the Boeing OEM rates. And we haven't assumed any of our improvements in capital structure. So I don't have exact reconciliation back to the Investor Day, but I think what we traded was a little bit of growth deferral and margin expansion for a better portfolio that has higher IP content, but much lower leverage, much lower credit and we cleared the runway of any maturities until 2028. I'll just add Noah that

Speaker 2

when we had the Investor Day, Boeing was looking at more robust year over year rate recovery. So we've been conservative in our fiscal 2025 and 2026 volume assumption as you noted. But the good news is book to bill and backlog are up and as those orders drop and we convert them to sales, cash will follow.

Speaker 5

Okay. Yes, I mean, that all makes sense. But the revenue I guess the revenue adjusted for product support isn't terribly different in that 26. It's just a little hard to reconcile that. I guess on the working capital piece, it the 25 numbers you provided EBITDA minus cash interest, cash tax, CapEx, pension, that doesn't get me to the 25.

Speaker 5

So it sounds like there's working capital use in 2025 as well. I guess what's going on with working capital that it's going to be maybe a larger source of cash than you were expecting? Because I understood it as you had some pretty meaningful working capital improvement initiatives.

Speaker 3

Yes. We do have working capital needs, and we have to protect the ramp, which we see coming, although it may be slipping several quarters from where we thought it was going to be. So the incoming inventory is still there, and we're going to be prudent about balancing that. Think a slide that might be helpful to you is slide 17, because what we did there was we bridged the cash flow from FY 2024 on the bottom to show how it's increasing through 2026 and what the major drivers are. So you have the EBITDA expansion, which is that first large bar.

Speaker 3

It's offset by working capital usage, that's the orange bar and pension funding. And then the interest savings is the blue bar and there's a little bit of tax in there too. So those are the components of 24 to 26 cash and we could give you more public information we could follow-up with and point out to you the components.

Speaker 5

Okay, great. And then just last thing I want to ask about. I know you gave I heard you give some detail there on the interiors margin in the quarter and going forward. I guess the projection there was much higher for the quarter and you provided that a month into the quarter when you reported your fiscal Q3. I guess, how was that able to be so much lower than your forecast with a lot of the quarter already behind you?

Speaker 5

And can you just circle back to what the actual fundamental drivers of the performance are?

Speaker 2

No, there's no doubt it's disappointment. And we thought they'd do better on cash and earnings, but they did deliver the sales. So we've got a new leadership team in place there, intensively going through all of their cost, making sure that they're working to fill the factory. Recall there's 2 big factories down there in Zacatecas, one is empty, one is full running ducting, that's why we've been engaging with Boeing to fill that factory, that will help us with absorption. So that's going to be a key lever for us returning that business.

Speaker 2

We know it makes money with volume and we've done some things on the cost side as well here that we hadn't done before. Operationally, it's a really good plant, Quality is outstanding, on time delivery is outstanding. But if we're going to get it back to where it was, we're going to have to do more on cost and more on volume. So, yes, disappointing financial results in the quarter, but I think the key signal is sales are coming up in interiors and we're doing the actions required to address the earnings and cash.

Speaker 5

Okay. Thank you.

Operator

Thank you. And our next question today comes from Peter Jay Arment with Baird. Please go ahead.

Speaker 7

Good morning, Dan and Jim. Dan, on the $75,000,000 in pricing that you highlighted for this year that starts to cut in, where do you can you still highlight what's available in terms of new pricing opportunities for Triumph going forward?

Speaker 2

Yes. It's a question we often get and every new LTA that resets presents an opportunity for us. I'll remind you that we negotiate these LTAs outside of lead times because if we can't reach agreement with an OEM, they may choose to source this elsewhere. Sometimes they don't get around to negotiating it and there really is no alternative but to stick with the incumbent. And we have gone through, I'd say roughly half of our contracts, But the thing is, it doesn't end.

Speaker 2

It renews as contracts extend because the average contract LTA duration is about 5 years. We have some 10 year ones, we have some 3 year ones. 5 years sort of the typical and rather than viewing it as your it runs out as a source of opportunity, it's something that we continue to schedule. This is something we review with the Board. We have a list of all of our contracts and when LTAs reset.

Speaker 2

And we don't always wait for the LTA to reset. There may be some reasons why we need to see price ups in the middle of one of those longer term because of changes in the underlying assumptions or customers' rates have dropped or changed so that we get another bite at the apple. So although I would say we're about halfway through the initial complement of LTAs, there's more ahead, it doesn't end.

Speaker 7

That's helpful. And then, Jim, could you maybe just from just a modeling perspective, you've given us the annual guidance, but how you're thinking like maybe first half versus second half, whether you want to comment on the top line or just free cash flow cadence? Thanks.

Speaker 3

Sure, Peter. Yes, I mentioned in my prepared remarks that the cash used in the Q1, we build working capital every Q1, it's going to be the same this year. And the cash used

Speaker 8

is going to be

Speaker 3

in the $100,000,000 range for Q1. But then we're going to be neutral in the 2nd quarter and kind of cash generation in Q3 excuse me and Q4 strong cash generation again. So the same profile we've seen in prior years driven primarily by working capital, but some aftermarket demand is stronger at the end of the year as well. So that's the cash profile and it could improve if the Boeing rates are higher than our discounted forecast. In terms of the cadence, I know people like to know the margin cadence, in I'll talk to system and support in particular because that's the most of the business.

Speaker 3

Similar margins in the Q1 to last year and similar expansion in margins quarter over quarter with 100 basis points to 150 basis point per quarter improvement with the 4th quarter being the strongest, but a continuous ramp through the year of markets. So, the continuing business and now you've got the history by quarter that we posted previously. So you can see the comps and they should be favorable moving forward. And with some good strong aftermarket continuing and with some luck on the Boeing rates, we could do better than our forecast.

Speaker 6

Appreciate it. Thanks guys.

Operator

Thank you. And our next question today comes from Seth Seifman with JPMorgan. Please go ahead.

Speaker 6

Hey, thanks very much and good morning.

Operator

Good morning.

Speaker 6

Wanted to check-in on the expectations for Boeing rates beyond 25 in the long term plan. And I think in the response to Noah's question, it sounded like there was still some conservatism baked into fiscal 2026. But in the prepared remarks, you talked about beyond this year Boeing and Airbus getting to their published rates. So just kind of curious what kind of 7 37 and 787 rates you have baked into that fiscal 2026?

Speaker 2

Yes. Thanks, Scott. So there's 3 programs that we track closely with Boeing. The 787, they're about to drop a new schedule. They've done some messaging in the media about what that might look like.

Speaker 2

The 777, they have dropped a new schedule called U-eighty and we've digested that. That's a very modest change. In fact, I toured the 777, 777X line, Seattle in the quarter and it's very encouraging to see the level of build that's happening on that program. It really took me back because the program quickly shifted from building flight test aircraft to building deliverable aircraft. The 7 37, they have a new schedule that's coming out.

Speaker 2

We don't have it yet. So we have to go with our own best estimates on that. And as mentioned, when we take all the Boeing programs together and we adopt, I think a higher degree of conservatism than we have in the past, it's about a $70,000,000 revenue hit. Now we may find that the 7 37 rates that are, let's say, in the low 30s in fiscal 'twenty four that we're entering, we're forecasting to get into the 40s in fiscal 'twenty six and hit 50 in fiscal 'twenty seven. We'll see how that plays out and we'll update all of our investors and analysts as we go.

Speaker 2

But I'd ask that you give us till next quarter to see these revised schedules on the 737 and 787 so that we can more accurately update our forecast. I just I also want to add that I spent a full day at the Boeing Supplier Conference out in Seattle with Stephanie Pope and Eason Manor and all of their leaders, the heads of every one of their programs. And I listen to them describe in detail their plans to address the FAA concerns, the quality metrics that they are tracking to that would provide the basis for raising their rates and it's all very straightforward, very credible. It's the sorts of things that you would I think any reasonable person would look at and say, if you improve on those metrics, it makes sense that you're clear to continue to increase production. So I have confidence in doing the right things.

Speaker 2

I started my morning this morning watching Michael Whittaker on the news talking about this very issue. And I think his comments were spot on that it's really the beginning of a journey where Boeing really does track these metrics. And I'm also confident, I should say, the things they're doing with Spirit. It was very encouraging to hear them report out the very detailed process level engagement, improvement in tooling, automation, workforce engagement that's happening there. I know the folks on the phone here don't get to hear that, I do.

Speaker 2

As a member of the Aerospace Quality Forum that Boeing has launched, I'm on monthly calls with the CEO of BCA. So I know what they're doing and I think once they get through that FAA gate, they'll be able to provide more clarity on the 7 37 demand. But the most important thing that I'd like you to take away from this call is that we've adopted conservative assumptions and we don't expect to have to come back to investors and analysts and say, hey, it's actually worse and we've got a hole in our forecast.

Speaker 6

Okay. Thank you. That's very helpful color. And then as a follow-up, just and I apologize if I missed this during the prepared remarks. But in terms of the end market growth rates that are baked into the sales forecast for this year, can you run through those?

Speaker 2

The growth rates that are baked into the on a revenue top line, is that what you're asking?

Speaker 6

Yes, in terms of the commercial OE aftermarket, the military OE aftermarket?

Speaker 3

Sure. Hey, Seth, this is Jim. We didn't give the details of exactly which markets are growing by exactly what rate, but I would tell you that the long term trends and certainly trended FY 2025 is continued growth in aftermarket overall. And that's important because aftermarket, even though it's a third of our sales, it's 2 thirds of our profit and therefore cash flow. So while OEM rates are important, 2 thirds of our sales, they're only a third of our profitability.

Speaker 3

So strong aftermarket growth and I think we see continued improvement in military as well even on the OEM side as some of the production starts to ramp.

Speaker 6

Okay, excellent. That's very helpful. Thank you. Thank you.

Operator

And our next question today comes from Kyle Von Rumohr with TD Cowen. Please go ahead.

Speaker 8

Yes, thanks so much. So you mentioned $75,000,000 price hike. How much of that actually hits fiscal 2025? And what is the net impact of that? Because obviously folks are giving you that because your inflation is higher.

Speaker 8

So what are the how much of it hits and what's the net impact?

Speaker 2

All of the gross savings, the price ups hit in the fiscal year. That's a fiscal year number. It's not a number that lays out over multiple years. There'll be further savings on price or further price ups that lay in over the out years. And then the net contribution is reflected in our 300 basis point margin expansion.

Speaker 2

Jim, anything to add?

Speaker 3

Yes. As Dan said, the $75,000,000 is the year over year price improvement from FY 2024 to FY 2025 gross. And as you alluded to, Kai, there are there is inflation that offset some of that, but not all of that. And that coupled with the $40,000,000 of annual price or costing reductions we've made is the reason we're able to expand margins from 12% to 15%. Largely all of that could be accounted for by the cost increases alone.

Speaker 3

But there are offsets to the price. Price is necessary, but it's also accretive to margins as shown by that 300 basis point improvement.

Speaker 8

Terrific. And then while you can't tell exactly yet where Boeing is going to take some of these rates. Can you give us some color like where are you today on the 787, the A350 excuse me, 787 and 737? And what's your inventory position? I mean, do you have lots of them sitting around?

Speaker 8

Give us some color on that and we can make the guess in terms of where you might be going?

Speaker 2

So on 787, our full up rates were around 6 last year and we were headed to 10 in fiscal 20 27. I think Boeing can still make that sort of rate, that the issues that they're working through now are all readily solvable. But in the short term, there'll be a decrement and that's why we've adopted that conservatism. On 7 37, again, Cai, it does vary by factory and it varies based on the work process and finished goods inventory levels. But think last year, we ended the year kind of in the low 30s and we were headed into a year that's the mid-30s getting to about 50% in fiscal 20 47%.

Speaker 2

That was the prior assumption. And now we're adopting conservatism around that number of on the order of 20% to 30%. I think that's more conservative than how it will play out, but we really listen to our investors and the analysts that says Triumph, you really need to have a plan that you can hit with confidence over the next 2 years. How it affects working capital is, we typically order parts 6 to 12 months in advance. So that's why we were ordering to that higher profile in the middle of last year and that contributes to part of, I'll call it, the build and working capital that we reported at over the last few quarters.

Speaker 2

Now we're putting our brakes on to slow that incoming material to reflect that more conservative assumption, while working with our suppliers to make sure that we can reverse that and spin up to the higher rates once Boeing gets the green light of the FAA. Does that help?

Speaker 8

Yes, that is helpful. Thank you. And I guess my last one is, it's a 2 part question. What's the status of the hair suit regarding their acquisition of Steward? And what's your answer?

Speaker 8

I mean, as we look at this cash flow, you're talking $56,000,000 free cash flow in 2026. And so if we look at 20 25, 20 26, that's really not a huge cushion if something goes wrong, if we have sort of an exogenous event. Any thoughts about any additional actions you guys would take to kind of improve your flexibility more?

Speaker 2

So that's a multipart question, but I'll take a shot at it, okay? So there's really no update on the HER litigation that's working its way through the legal process. We continue to vigorously defend ourselves. As you recall, the fact is the buyer has been responsible for Stewart operations since the business was sold in July of 2022 it was part of

Speaker 3

our larger

Speaker 2

portfolio transformation. And that sale agreement included terms that limit our potential exposure as well as the amount claimed by Daher's. So there's not really anything new there. I'll point you to the 10 Q on how we lay that out. And we take our commitment to quality seriously.

Speaker 2

And when we've had issues in the past with Boeing, we've resolved those. This happens to be with her, not with Boeing because they took the business. Structures is a complex business and it takes a level of experience and close attention to detail. But we've exited that business and we're going to work to continue to cap off the legacy liabilities in the structures area. So, but we don't expect any, I'll call it, major financial impacts in our fiscal year from a Dahir litigation.

Speaker 2

That's the bottom line.

Speaker 8

And the last one about, yes, the flexibility?

Speaker 2

So you're saying if something adverse were to happen, how would we fund that down? Yes.

Speaker 3

Kind of just on flexible flexibility. We came down from 7.6 times to 4.9 times on leverage and by 26 we're at 2.6 times. So we have room on the balance sheet should we ever need to raise more capital for any purposes. We don't expect it for that purpose. But and we don't have any maturities till 2028.

Speaker 3

And we have solid availability with positive cash flow with the conservative forecast. So we feel confident in our ability to fund any needs of the business, whether it's from the existing balance sheet or if we need to raise more capital, we could.

Speaker 8

Got it. Thank you. Thank you.

Operator

Our next question today comes from Myles Walton with Wolfe Research. Please go ahead.

Speaker 9

Hey, good morning. You've got Lou Fettol on for Myles.

Speaker 2

Morning. Good morning.

Speaker 9

So maybe if I just start with the $40,000,000 cost reduction actions, is that something you expect the whole amount to sort of be a benefit in fiscal 2025?

Speaker 3

That's the gross amount, Lou, of the reductions. So year over year, net of inflation, you probably see something in the $25,000,000 to $30,000,000 range of benefit and we were targeting all of our SG and A and overhead or fixed costs. So year over year, we're looking for $40,000,000 gross reduction, which net of inflation is probably going to be the $25,000,000 to $30,000,000 range.

Speaker 9

Okay. And are there you took $5,000,000 cost in the quarter, any additional cost to think about to achieve this year?

Speaker 3

Not I think most of it has been actioned already that has severance associated with it. And the rest of it, a lot of it is third party costs that we're able to reduce without having those restructuring charges.

Speaker 2

There could be some, but I don't anticipate anything large. Yes. I would look at that cost reduction number in tandem with the conservatism we've adopted on rates. That way we don't have to go back and do another sweep through in cost because the rates have fallen further. We're watching the portals where Boeing loads their demands very closely to make sure that our assumptions that we base those cost outs on are holding and so far they are.

Speaker 2

In fact, some of the early inputs that Boeing is putting in the portal are better than our conservative assumptions, but we're going to stick to those until the formal schedules are released.

Speaker 9

Okay. And I know this is asked earlier, but I guess I still wasn't fully clear on just sort of interiors and exactly what happened. Sales weren't too far off. So just trying to understand if was some of these higher margin sales didn't drop through? Was there something on the cost side that completely came off found that surprised from the mid to high teens down to sort of 2%?

Speaker 2

So they had they were in we were transferring work from our Spokane plant down to Zacatecas in Mexicali and some of their estimating on the cost of moving that work was off and therefore their predictions of earnings and cash was off. Now we've fixed that and we'll have accurate EACs going forward for the interiors business. And we've also gone in and established those hedges that I mentioned and adopted alternate sourcing actions. Those things we would have liked to have cut in sooner and they didn't in fact. So we saw a continued drag on margins and cash.

Speaker 2

So it's a bit of a timing thing. The thing I'd like you to take away from on interiors is we know how to get 20% out of that business. We've been there before and we've done it when the volumes were higher. We have a clear path to higher rates once Boeing gets past the current challenges. We're using the time now to negotiate increased scope on programs like 787, not just with Boeing, but with Spirit, the KHI and others, Airbus on the A220.

Speaker 2

So, we're doing all the underlying actions to get back to where we used to be. And with the cost advantages that we have in operating in Mexico, the strong quality, strong on time delivery, it is one of the largest factories in the world that produces these type of installation and ducting products, we're confident we can get back to where we were.

Speaker 6

All right. Thank you very much.

Speaker 3

Thank you.

Operator

And our next question today comes from Sheila Kahyaoglu with Jefferies. Please go ahead.

Speaker 10

Hey, good morning, guys. I have a few questions, if you don't mind, just to play clean up here. Dan, you mentioned you're being conservative on the MAX rates and you're going to 30% cut internally versus where you thought you'd be producing, which I think is in the mid-30s or high-30s. So does that imply your guidance assumes 30 a month or so on the MAX? And on the working capital item for free cash flow, are you assuming $20,000,000 of usage in fiscal 2025 and is that all max in 787?

Speaker 2

So, I'll start on the rates and Jim can hit the working capital. The rates I know it's tricky for us because unlike Spirit that has largely discrete product in the fuselage, we've got 7 different factories that are supporting it at different build rates and because Boeing is historically, they've allowed us to run at rates that are higher than their consumption rate because they don't want the supply chain to go idle and then turn around and ramp back up to 40% to 50%. So we're waiting to see what they're proposing by commodity, by product. But it's not 30% across the board lower rates on the MAX. Some of the factories we are assuming in our fiscal 'twenty five guidance about a 20% reduction, not a 30%, but it does vary.

Speaker 2

Once we get clarity from Boeing, we'll provide it to you and to others, So you can see how we handicapped it, did we handicap it right. But I think we've done the right thing, Jim.

Speaker 3

And Sheila, on the working capital, there's an assumed usage in the $20,000,000 to $25,000,000 range for the full year and that is largely driven by having inventory and lower shipment rates forecast. So we have to still maintain that inventory for our contracts and we'll be ready for rate ramps. But that's part of the reason for some working capital usage.

Speaker 2

Yes. Just a little bit more color there, Sheila. It's a negotiated process product by product with Boeing because some products lend themselves to rate cuts without implication to the supply chain and Triumph's workforce more than others. We can pull back the throttles in some plants more readily and we partner that decision with Boeing so that we don't cause problems later whether there is supply or price as the ramp comes back. So we need to get through this process, they need to give clarity to the supply chain, we need to sit down, go through commodity by commodity and then we'll be in a position to say here's what we're building at.

Speaker 2

But I've given you today the sort of aggregate numbers.

Speaker 10

Sure. And then maybe on the margin for fiscal 2025, when you talk about 300 basis points, you mentioned 25 net productivity. So does that imply net price is about 1% off the 6% gross price?

Speaker 3

I don't have the exact number for the contribution, but there's a positive contribution net of the inflation and material cost in particular. That sounds in the range of reasonableness for an assumption.

Speaker 10

Okay. And then last question, just to level set everyone. So on the long term guidance, is there an organic top line and margin change outside of the divestiture of product support?

Speaker 3

So, no,

Speaker 2

there really isn't. Yes, we're still striving towards the same financial objectives and our goal is to be a 20% or better on EBITDA margins and profile to get there is it's been set back slightly because of TPS, but we're still on a very good trajectory to hit 15 this year. Again, we think that's a conservative assumption, but that's our number. We're sticking to it and we're going to work like hell to beat it, but that's the guidance for the year. And then the profile to get back to 'twenty or on to achieve 'twenty is laid out in Jim's slides.

Speaker 10

Okay. Thank you.

Speaker 2

Thank you.

Operator

And our next question today comes from Sam Stryker with Truett Securities. Please go ahead.

Speaker 11

Hi, good morning guys. On for Mike Tramoula this morning. Good morning. Good morning. You pointed to potential improvement within military OEM following a little bit of weakness this quarter.

Speaker 11

Could you potentially provide any detail on kind of maybe the timing of that next year in the cadence?

Speaker 2

I think we're going to have to do that offline in the sense that there's different programs that contribute to the military recovery and we only gave sort of aggregated numbers and then the new wins in that space. So we may have to take that for action. But if you go back to the backlog chart and it shows the rate changes that we have, I mentioned that program 6 through 10 in our backlog are all military programs and they're all the rates are generally stable. F-thirty five, what I'm hearing on that is that they are expected to go to 20 a month. GAO would support that once they finish some of their software updates.

Speaker 2

That will be a tailwind for us right now. We're looking for additional scope on the F-thirty 5. We're in the public about our pursuit of their power thermal management system, which is a large subsystem that provides cooling on the aircraft as well as APU functionality and engine starter generators. So and then the ramp up of programs that are transitioning from development to production, we mentioned the Saab, T7A, the KF-twenty one, they all have their own timeline for recovery. So I think if I it'd be better off if we provide some summary of the individual components of the military recovery rather than answered off the cuff.

Speaker 11

That's very helpful. Thank you, guys.

Speaker 2

Thanks, Dan.

Operator

Thank you. And our final question today comes from I apologize, it comes from Ron Epstein. Actually, it looks like we've lost Mr. Epstein's connection. So at this point, we're going to close the question and answer session and today's conference call.

Operator

Thank you 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 Q4 2024
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