Triumph Group - Q2 2024
November 7, 2023
Transcript
Operator (participant)
Good day, and welcome to the Triumph Group's second quarter fiscal year 2024 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then one on your telephone keypad. To withdraw your question, please press Star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Thomas A. Quigley III, Vice President of Investor Relations. Please go ahead.
Thomas A. Quigley III (VP of Investor Relations)
Thank you. Good morning, and welcome to our second quarter 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, please refer to the presentation posted on our website this morning. We will be discussing our Adjusted Results. Our adjustments and any reconciliation of non-GAAP financial measures to comparable GAAP measures are explained in the earnings press release and in the presentation. Certain statements on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may cause Triumph's actual results, performance, or achievements 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.
Dan Crowley (Chairman, President, and CEO)
Hey, thanks, Tom. Triumph closed the first half of fiscal year 2024 with expanding backlog, sales, and margins as we focus on profitable growth and building on our success in the aftermarket. We are entering the second half of the year from a position of strength and raising our fiscal 2024 sales, earnings, and cash guidance. Our year-to-date performance, increasing commercial aircraft build rates, and growth in defense spending supports our updated outlook for the year. During the second quarter, we met or exceeded our expectations, delivering strong sales and our sixth consecutive quarter of year-over-year growth, as well as predictable profitability. Our deleveraging plan is on track, including over $60 million in debt reduction since the start of the fiscal year, which will yield approximately $5 million in annualized interest savings.
As I reflect on the quarter, I'm pleased with our ability to execute on our short-term performance targets and remain very excited about the long-term financial and operational opportunities for Triumph. In particular, our performance serves as evidence that we continue to accelerate our future towards the targets we discussed at our September Investor Day. Turning to slide three, I'll summarize the highlights for the quarter. Year-over-year organic sales growth was 16%, driven by improving MRO demand, accelerated above Q1's 14% growth, and above our original guidance. Aftermarket sales increased year-over-year, accounting for a robust 43% of our Q2 sales, roughly double since the start of our restructuring. Recall our Interiors business started the year slow, with slower ramps in sales, supply chain delays, inflationary pressures, and unfavorable foreign exchange headwinds.
The team began executing on our recovery plans and exited September at break even on increasing volumes and growing backlog. Last, we grew our total company backlog by 15%, above market growth rates, as Triumph benefits from strong representation across a broad array of platforms, customers, and end markets. We continue to benefit from growing commercial travel demand, up 28% through August year-over-year, and increased MRO demand as aircraft return from peak summer use, commercial transport aircraft new orders, more than 2,000 year-to-date, and planned OEM rate step-ups. Book-to-bill is 1.37 year-to-date, and $1.8 billion of reportable backlog is up 16% year-over-year, even as past due backlog has been driven down by $17 million or about 18% this fiscal year-to-date.
In the military market, there is a robust U.S. defense budget in place and expectations for it to remain at similar levels for the next few years. Given multiple regional conflicts, budgets are likely to grow beyond current forecasts. Triumph is currently engaged in an unprecedented number of military OEM opportunities, including over 30 classified RFPs year to date. We are in discussions on hydraulic systems, fuel pumps, landing gear systems, thermal systems, gearboxes, door actuation, and more, all driven by expanding Triumph's intellectual property. In Q2, Triumph's commercial OEM shipments were up 70% year-over-year, while commercial aftermarket revenues rose 48% year-over-year. Military OEM sales were consistent with prior year, while military MRO rose 24% year-over-year on the strength of many programs, led by V-22 pylon conversion actuators.
As we shared at our recent Investor Day, Triumph enjoys significant content on Boeing's 787 aircraft, with just over $1 million in ship set value, benefiting both the OEM and MRO sales across six Triumph factories. This is a great aircraft, with more than 1,800 orders since 2013 and a backlog of nearly 800 aircraft, 235 of which were ordered in 2023. So demand is robust, and Boeing is working to increase rate as rapidly as possible. Orders in our portal support the move to rate 5.3 per month in our fiscal year, up nearly 2x from the start of our year, and 787 shipments for the second quarter were up 142%.
We also anticipate emerging sustainment requirements for the 787, as the oldest aircraft in this fleet are just beginning to exceed 10 years in service. As these aircraft enter their landing gear maintenance cycle, Triumph will begin overhauling increasing numbers of our landing gear actuation components, including extend and retract actuation, truck positioning, nose wheel steering, and door actuation. New wins for the quarter included CH-47 engine controls, a UH-60 gear package, and an accessory repair package for Atlas Air, as well as passenger service units, crew seats, and starters for Delta Air Lines. While only 10% of our sales, performance at our interiors business remains a focus area, as an unfavorable sales mix, driven by OEM delays and supplier shortages, along with margin impacts from inflationary pressures on materials and labor and foreign exchange changes, created headwinds to start the fiscal year.
We're running additional Triumph Operating System Lean events to offset these external headwinds, and we're starting to see positive developments. These include events to drive down cycle time and improve efficiencies and productivity. As production demand increases, we are working closely with our customers to de-risk the supply chain by securing alternate sources where necessary, to keep costs competitive and to insourcing more work as rates continue to ramp, which will provide added absorption benefits. Interiors is on a path to recover to mid- to high single-digit margins this fiscal year and to enhance the confidence in their long-term earnings targets. Value pricing remains a key strategy that Triumph is deploying towards our margin expansion goals. This includes the implementation of our expanded commercial playbook, expanding our commercial risk reviews, and implementing new processes.
Given the evolving market environment, this has included exploring shorter duration supplier and customer contracts, incorporating inflation clauses tied to indices or specific material pass-through clauses, and focusing on aftermarket premiums and market access. Previously, we highlighted that 80% of our contracts have terms of six years or less, providing a near constant flow of opportunities to optimize value based on our technical solutions, capabilities, and IP. Our recent wins include examples of these efforts. We remain on track with the pricing objectives laid out during the recent Investor Day. Jim will now take us through our second quarter results and updated outlook for fiscal 2024. Jim?
Jim McCabe (SVP and CFO)
Thanks, Dan, and good morning, everyone. Triumph's second quarter results exceeded our expectations, with significant revenue growth over the prior year period. On slide five are the consolidated results for the quarter. Revenue was $354 million, with a continuing business excluding divestitures and exited programs. Organic revenue increased 16% over the prior year's quarter. Organic revenue growth primarily benefited from increased aftermarket volume and pricing on our largest programs, while demand across most of our end markets improved during the quarter on a year-over-year basis. Prior year revenues included a $16 million non-recurring benefit from the sale of non-core IP, absent which, revenue growth would be 23%. Adjusted Operating Income for the quarter was $37 million, representing 11% margin, a 60 basis point increase over last year.
Adjusted EBITDA for the quarter was $46 million, representing a 13% EBITDA margin, which is on track to our full-year guidance. Sequentially, Adjusted Operating Margin was up 300 basis points, and Adjusted EBITDA margin was up 220 basis points over Q1, driven by higher revenue and a favorable mix, with an increase in aftermarket sales from 41%-43% of total revenue. In the quarter, we incurred $1.9 million of restructuring costs to retire our last Structures IT contract, as our transition services agreement ended, and a $1.3 million dollar charge associated with potential environmental costs at a legacy structure site. Slide six shows our military revenue. For the quarter, military revenue was $117 million, representing 33% of total revenue.
Military OEM sales were strong and on par with last year, as increased sales on CH-53K and V-22 offset expected lower sales on E-2D and AH-64 programs. Military aftermarket sales in the quarter were up 24% compared to last year and up 70% sequentially on increased demand for spares and repairs. Slide seven shows our commercial market revenue. For the quarter, commercial revenue was $227 million, representing 64% of total revenue. Commercial OEM sales were $131 million, and absent the sale of the non-core IP, were up 17% in the continuing business. This growth was driven by increases in both volume and price in key programs, including Boeing 787 and 737 programs.
Commercial aftermarket sales of $96 million grew 49% in the continuing business on strong demand for commercial aftermarket spares and repairs. This is our highest quarterly commercial aftermarket sales since fiscal 2017. The remaining 3% of our revenue is non-aviation, which is profitable and represents about $9 million of sales in the quarter. It's up 24% over last year. Our continuing sales mix trend towards more aftermarket is having a positive impact on margins and cash flow. As Dan mentioned, total aftermarket sales represented 43% of our quarterly revenue. This was up from 36% in the prior year quarter. The breakdown of our aftermarket sales and MRO capabilities is on slide eight. Our free cash flow walk is on slide nine, which shows our Q2 and year-to-date cash use.
Our $37 million of cash use this quarter included $74 million in semiannual interest payments, as well as planned investment in our net working capital in support of increasing second half sales volume. This is consistent with our expectations and the quarterly free cash flow guidance we previously gave. We expect to be solidly cash positive in Q3 and in Q4 in support of full year cash flow guidance, which is up to $40 million-$55 million. On slide 10 is our net debt and liquidity. As of September thirtieth, we had $1.5 billion of net debt, and our cash availability was approximately $230 million.
During the second quarter, we purchased $19 million of our unsecured 7.75% senior notes due in August 2025, and we purchased an additional $29 million so far in the third quarter. We purchased these notes at a discount to par, resulting in gains. When combined with the $14 million in bond redemptions in the first quarter, we reduced annualized interest expense by about $5 million. We also have over $300 million of deferred tax assets that continue to create value through reduced cash taxes moving forward. Our fiscal 2024 guidance begins on slide 11. We are increasing our fiscal 2024 guidance for revenue, Adjusted EBITDA, and cash flow, and updating our operating income guidance.
Based on anticipated aircraft production rates, we expect organic growth of 10%-13% in fiscal 2024, with revenue in the range of $1.43 billion-$1.47 billion. Aftermarket volume is the largest component of the increase, followed by OEM volume, pricing, and an increase in non-aviation revenue. The aftermarket is expected to grow at an 11% rate for the fiscal year. Commercial OEM revenue growth is driven by production ramps on Boeing 737 and 787 programs and the Airbus A320 family, even while supply chain and Geared Turbofan repairs are considered. Non-aviation sales are expected to increase, driven by the previously announced work supporting Howitzer sustainment. We increased our Adjusted EBITDA guidance, consistent with the increased sales guidance, to a range of $216 million-$231 million.
Our Adjusted EBITDA margin guidance continues to indicate up to a 16% consolidated EBITDA margin in fiscal 2024, representing roughly a 200 basis point improvement over last year. We increased our cash flow from operations and free cash flow guidance ranges by $5 million for fiscal 2024, including second half working capital improvements. We continue to expect solid cash generation in Q3 and strong cash generation in Q4, consistent with prior year seasonality. This is driven by working capital liquidation on the second half sales surge, reduction in past due backlog, and increased OEM inventory turns. Interest expense is expected to be $151 million, including $145 million of cash interest, and we expect $7 million of cash taxes. This is after the cash interest savings from $49 million of bond purchases completed to date.
Organic margin expansion, cash generation, and debt reduction are expected to drive our net leverage from 7.6x at the end of last year to between 6.1x and 6.3x at the end of this fiscal year. As we discussed at our Investor Day, we are on a path to reduce leverage into the range of 3.5x, no later than the end of fiscal 2026, through EBITDA expansion and free cash flow generation. However, Triumph continues to explore alternatives to accelerate deleveraging through business and product line portfolio actions. In summary, the second quarter's results are in line with or ahead of our expectations and support the increased full year guidance. We are reducing debt and interest expense by purchasing bonds in the market, growing EBITDA, and generating free cash flow this year.
We are executing our multi-year plan to continue to grow revenue, margins, and free cash flow, reduce leverage, and increase shareholder value. We remain on track to achieving the targets established at our Investor Day in September. Now I'll turn the call back to Dan. Dan?
Dan Crowley (Chairman, President, and CEO)
Thanks, Jim. Triumph's performance in the second quarter of fiscal 2024 highlights the strength of the new Triumph, a stronger systems and aftermarket-driven company with a growing IP portfolio and backlog, yielding steadily improving financial results year-over-year. We expect improved financial and operational performance to continue throughout the fiscal year, as our expanding mix of aftermarket and IP-driven OEM sales gives us confidence in our updated fiscal 2024 guidance and long-term outlook. Jim and I are happy now to take any questions you have.
Operator (participant)
Thank you. If you would like to ask a question, please press star then one on your telephone keypad. If your question has been addressed and you'd like to remove yourself from queue, please press star then two. Once again, ladies and gentlemen, that's star then one if you have a question. Today's first question comes from Seth Seifman with JP Morgan. Please go ahead.
Seth Seifman (VP and Equity Research Analyst)
... So, thanks very much. Good morning, and-
Dan Crowley (Chairman, President, and CEO)
Good morning.
Seth Seifman (VP and Equity Research Analyst)
Good results. I wanted to ask in terms of the, you know, the improvement in the overall outlook, was there any change to the outlook for the structures business, or sorry, the interiors business now? I guess, in other words, should we think that interiors, maybe there are some more challenges there, and that was more than offset by the goodness that you see in S&S?
Dan Crowley (Chairman, President, and CEO)
Yeah, that's how I see it, Seth. You know, we had, you know, printed 13% in the quarter, despite being breakeven in interiors. Let me characterize interiors revenue profile for the year. They started the first quarter of the year with monthly sales of $10 million-$11 million. In the second quarter, that went to, you know, to $10-12 million. For Q3, we're looking at $11-14 million per month, and then in Q4, $15-19 million. So very strong second half sales. We also jumped on it with a Return to Green program to drive productivity. We saw about 10% improvement in productivity through the months of September and October. These are really two well-run plants in Mexico. The challenges have been external, both foreign exchange and input cost, and we're addressing both.
On the input cost, we're competing with suppliers that have raised prices so that we have alternatives. And on foreign exchange, I'll let Jim address what we're doing there. Just to break down interiors a little bit further, it's really three businesses within one business. Even though it's only 10% of sales, it's a small contributor to Triumph overall. The insulation piece, which is the biggest piece, is a 20% margin, this plus margin business. And cabin production, parts that we make that support the cabin is sort of high single digits. Where we've been losing money is in composites, which is mostly ducting. So we're taking some actions to automate that plant. We just opened a new clean room there, and we're doing additional lean events to drive that. But overall, the plants are quite well run.
It's just dealing with these external headwinds. But yes, we have a strong second half that we are counting on to be part of the overall trajectory of the company on both sales, cash, and profit. Jim?
Jim McCabe (SVP and CFO)
Yeah, and there are external drivers like inflation, and FX are challenges, and they, they'll wax and wane, but reality is we have to get our costs down, and then we have to exercise our rights under the contracts for adjustments where we have them. And then where we don't, we have to go negotiate, when the new contracts come up, adjusted prices to cover those costs. But the team is very active on remediating the challenges there. But I think you're exactly right, that the system's strength, which is so important, is more than offsetting, the interiors challenges.
Seth Seifman (VP and Equity Research Analyst)
Okay. Okay, great. And then maybe just one follow-up, if, if that's okay. You know, if, if we think about the military OEM business and just, you know, maybe because on the OEM side, you think maybe there's a little more visibility in terms of the content you have and the expected build rates for the platforms. You know, it seems like maybe this year can be up a little from last year, which is, you know, $260 million-$270 million of sales on the military OEM side. How, how does that evolve going forward, and what are the drivers? Because I know there's probably some legacy rotor craft that you're on and, it, you know, but also some growth opportunities. So how, how does that piece of the business evolve?
Dan Crowley (Chairman, President, and CEO)
Yeah, we, we really do have a strong presence in helicopters, especially out of our West Hartford fuel controls, engine controls business and thermal products, but also gearboxes and heat exchangers. So you know, when you look at the rates, we just got the award for the LRIP 7 and 8 lot for CH-53 from Sikorsky. That's a program that's been building at about 0.8 aircraft per month, and it's ramping up over the next three years to double that. So that's a nice tailwind for us. MH-60 is also growing in rate modestly. We do a lot of gears for the H-64 Apache, and that rate goes up about 10%, maybe 15% over the forecast.
So, you know, while it's not a doubling sort of build rate increase, unlike last year, where we were marking down OEM rates, we're finally swinging into positive. And I'm very encouraged about the new starts on military. We're getting pulled into lots of bids, you know, FARA, FLRAA on the helicopter side are two examples, but also on the next-gen fighters as well. So we, we see our competency in helicopter components being a strength to the company.
Jim McCabe (SVP and CFO)
Yeah, I'd also point you to page 14. So we have the backlog there by program, that'll give you more flavor over what's in the next two years. And the military program is there from F-35, which is 2% of backlog right now, up to the CH-53's 8% of backlog. And half those programs are rising in rate, half of them may be reducing in rate. There's some stable ones, but it's a good balanced portfolio of military OEM work.
Seth Seifman (VP and Equity Research Analyst)
Great. Thank you very much.
Dan Crowley (Chairman, President, and CEO)
Thank you.
Operator (participant)
Thank you. Our next question today comes from Ellen Page at Jefferies. Please go ahead.
Ellen Page (Equity Research Associate)
Hi, thanks for the question. Just going back to interiors, you had called out FX as a headwind, and it was a headwind in Q1 as well. How much of the loss was due to the peso, and how do we think about reaching mid to high single digits in fiscal H2? Just what are the kind of moving pieces there?
Jim McCabe (SVP and CFO)
... Sure. Thanks, Ellen. Rough estimate, about 500,000 per month would be MXN at the current rate. As you know, the Mexican peso strengthened to some all-time highs against the US dollar. But that will change over time, and we'll have the opportunities to reprice and address cost structure to help mitigate that. So that, that's the piece that's FX related. But Dan talked about some of the actions we're taking, which are gonna increase the second half. I think volume is one of the biggest drivers, so we're really expecting a lot more volume in the second half. The mix changing back towards insulation, which is more profitable than the ducting is, and some of the cost mitigation actions we're taking as well.
Ellen Page (Equity Research Associate)
Thank you. And can we just go over the moving pieces to the free cash flow guide? You raised OCF by $5 million, I believe. What were the key drivers there?
Dan Crowley (Chairman, President, and CEO)
The key driver is really the sales, which is driving profitability, partially offset by the increased working capital needed to supply the higher sales in the second half of the year. So there's... You know, it's a modest increase, but it's an important one, and it's consistent with those higher sales.
What we've been watching very closely, in fact, at the board level, is the reduction of past due backlog and working capital because there's been multiple currents within the working capital flow. We've been investing in working capital for the rotables, for MRO. That's helped us drive our strong MRO sales, and then also protecting OEM ramps by buying more, but at the same time, we wanna increase turns on the MRO or on the OEM side. So what we saw in September, October, were improvements in both measures, both the, past due burn down and the OEM turns. So that's the, that's the leading indicator we need to see to have confidence that we're gonna improve working capital in the second half of the year.
Ellen Page (Equity Research Associate)
Great. Thanks for that, I'll leave it there.
Dan Crowley (Chairman, President, and CEO)
Thanks, Ellen.
Operator (participant)
Thank you. And our next question today comes from David Strauss with Barclays. Please go ahead.
David Strauss (Managing Director of Equity Research)
Thanks. Morning.
Jim McCabe (SVP and CFO)
Morning.
David Strauss (Managing Director of Equity Research)
On interiors, would you expect it to get to EBIT or EBITDA positive in Q3?
Jim McCabe (SVP and CFO)
So we're exiting break even in September. So yes, we expect to be break even to positive in Q3 and strong, solidly positive in Q4 to get back to the mid to high single digits for the year.
David Strauss (Managing Director of Equity Research)
Okay. And, Jim, on free cash flow, I think, you know, if I go back to the bar chart that you had in the Q4 slide deck, it looks like Q2 was a little bit weaker than what you were anticipating there, if I just compare it to prior years. If so, what was... You know, kind of where was the miss relative to your internal plan on cash flow? And, you know, that bar chart implied a pretty big Q3 free cash flow number. I know you said positive, but I just wanted to see if we could revisit kind of the sequential growth in free cash flow you're expecting Q3 and Q4.
Jim McCabe (SVP and CFO)
Sure. Yeah, David, in Q4 at the end of the fiscal year, we reported, we put out the chart with the cash flow cadence for the four quarters that you're referring to. But actually, after Q1, I updated that, and I said $30-$40 million cash use, if you look at the transcript for Q1, and at the Investor Day, I reiterated that. And the real driver for slightly higher cash use was the higher sales we're seeing. You know, there was some impact from supply chain and from demand changes, but it was really the higher sales for the second half. So $30 million-$40 million use, I guess we came in at $37 million use this past quarter, and we should be positive in that range for Q3, in the $30 million-$40 million cash positive.
Then the balance to get to our full year guidance would be in Q4. Very strong Q4, as we've had in prior years, but with this higher aftermarket percentage at 43%, with even more seasonality and with the ramping production rates, I think we're going to have a stronger Q4 than we've ever had before.
Dan Crowley (Chairman, President, and CEO)
Yeah, and taken together year over year, it's a swing of about $120 million-$130 million in cash flow for the full year. So we feel very good about the trajectory on cash.
David Strauss (Managing Director of Equity Research)
Okay, that's helpful. And Jim, just the net working capital that you're assuming now for the full year, how much of a use are you anticipating?
Jim McCabe (SVP and CFO)
You know, I don't have it broken out to that level. It's obviously gonna be coming down in the second half of the year, and I'd have to follow up on that. I look forward to giving you more information about that moving forward, the absolute working capital level. I can tell you that we are driving turns down, and we have a concerted effort on inventory management to get the turns down to improve the working capital moving forward. And it's the right time to do it with ramping sales because we have lots of inventory, and we have lots of opportunities to be more efficient with it. We're trying to find the right home for inventories, working with vendors and customers who may have lower costs of capital than us, for vendor managed inventory, customer-owned inventory.
So the direction is positive, and we're gonna be liquidating working capital the second half of the year.
David Strauss (Managing Director of Equity Research)
Great. Thank you very much.
Jim McCabe (SVP and CFO)
Thanks, David.
Operator (participant)
Thank you. Our next question comes from Cai von Rumohr with TD Cowen. Please go ahead.
Cai von Rumohr (Managing Director)
Yes, thank you very much, and impressive results. So your aftermarket business was strong in the second quarter and a very good sequential gain. Based on what you said about the year, it looks like the rate of growth in aftermarket sales will be much more modest in the third and fourth quarter. Could you give us some color on what you expect commercial and military aftermarket to do sequentially in the third and fourth? And if that's the case, which it looks to be, the mix would look like it would be a little bit leaner, and yet, you know, your Adjusted EBITDA numbers seem to assume very good margin improvement sequentially, with a mix shifting toward more OE. Help us understand that, if you could.
Jim McCabe (SVP and CFO)
Yeah, certainly, the commercial aftermarket is the strongest driver of the growth. We've seen outperformance year to date, and we expect that to continue in the second half. The visibility, that's not as... It's harder because you're looking at market data. You're not getting the actual orders in. It's not a backlog business. We may only have 45-60 days worth of orders and visibility for that. So I think there may be a little conservatism on what the mix will be. We know what OEM rates are. They can change, but the aftermarket mix, I think it's stable moving forward. Commercial's still strong. Military usually has a big surge in Q4. We see a lot of spares orders in our fiscal Q4. But we don't provide guidance by market segment.
We like to tell you the trends, but sometimes one segment outperforms, that helps cover underperformance in other segment. That's the benefit of our balanced diversification.
Cai von Rumohr (Managing Director)
Basically, you're saying that the mix should be the same going forward, or is the mix shifting toward OE net net?
Jim McCabe (SVP and CFO)
I don't think it's going to shift towards OE because the aftermarket is stronger in the fourth quarter, particularly both for military-
Cai von Rumohr (Managing Director)
Mm-hmm
Jim McCabe (SVP and CFO)
- and commercial. So, I guess the year is probably going to be at more aftermarket in the second half of the year, but it depends on the OE, OEM rate ramps. At the moment, I think aftermarket is probably going to overtake and continue to be stable to increasing as a percentage of our sales.
Cai von Rumohr (Managing Director)
Thank you very much.
Operator (participant)
Thank you. Our next question today comes from Myles Walton with Wolfe Research. Please go ahead.
Myles Walton (Managing Director)
Hey, thanks. So just actually a clarification on Cai's question. So the slide eight, is that referring to that 11% growth in fiscal 2024? Is that referring to the whole channel of MRO, the, or the commercial channel in isolation?
Jim McCabe (SVP and CFO)
It's the whole channel. So we have about $152 million, I think, of sales. And that's the breakdown in the quarter of sales by aftermarket. It's broken into third-party MRO, where it's not our IP necessarily, and the spares, which obviously can be the highest margin, and then the third piece is our IP, which are higher margin typically than repairs on third party.
Myles Walton (Managing Director)
Got it. Okay.
Jim McCabe (SVP and CFO)
And so-
Myles Walton (Managing Director)
Oh, go ahead.
Jim McCabe (SVP and CFO)
Just say, Myles, on the bottom of the page, you can see we have the Q2 and the year-to-date breakdown for all those components.
Myles Walton (Managing Director)
Yeah. No, that's helpful. Thanks for, thanks for that transparency. You mentioned the portal showing you 5.3 per month on the 787. Could you also share what it's looking at for the 737? And maybe, Dan, that, that big growth you're anticipating in interiors, I imagine that's primarily inflation driven on the 737. Is that correct?
Dan Crowley (Chairman, President, and CEO)
It's one of the largest programs in interiors, for sure, but it's certainly not the only one. We have A220 work out of Airbus. We do 787 work, so it's a mix of programs, but it is the largest. On the OEM rates, you know, Boeing has talked quite publicly about their step up to 38, whether it's going to come in the calendar Q4 or the following quarter. But, you know, we're building at rates that are approaching that now, and we're typically, on average, about one quarter setback from them. So as they ramp up, you know, we're already delivering into the pipeline, you know, sometimes to intermediaries and then products that flow to Boeing.
Our factories are building at rates 30-35 a month right now, and in priming for rates that go up into 40 next year, or fiscal 2025. That's the general MAX or 737 outlook for us. Airbus is a similar story. You know, we're building it at rates that are in the high 40s and planning for rates for the 50s next year and 60s thereafter.
Myles Walton (Managing Director)
Okay. Just one last quick one. When you mentioned portfolio actions in terms of pursuit of the balance sheet improvement, could you elaborate on the size of any potential pruning you may be looking at or business lines that you might be thinking about from that perspective? Thanks.
Dan Crowley (Chairman, President, and CEO)
We really can't. You know, it's one of these things. Every year, we're looking at every business, trying to make sure we're managing the portfolio for, you know, shareholder value, but deleveraging is our top priority, debt reduction. And so we've had inbounds for several of our businesses, and one of the challenges is, because we're on a ramp across OEM and MRO, what's the value of these businesses? You know, you could understand that people would come calling when the rates have been depressed and we're on the, sort of, I'll call it the base mountain climb of OEM and MRO rates. So, you know, people who have interest in these businesses have to properly value them, but we'd want them to be needle movers for deleveraging, not just around the margin.
Myles Walton (Managing Director)
Okay. Thanks again.
Dan Crowley (Chairman, President, and CEO)
Good.
Operator (participant)
Our next question today comes from Michael Ciarmoli with Truist. Please go ahead.
Michael Ciarmoli (Managing Director)
Hey, good morning, guys. Nice results. Thanks for taking the question.
Dan Crowley (Chairman, President, and CEO)
Thanks.
Michael Ciarmoli (Managing Director)
Just, just to maybe go back, the details pretty solid here on slide eight, and it looks like, I mean, spares were up
... 37% sequentially. I mean, can you maybe parse that out for us? Was it more commercial? Was it more military? And kind of what you're seeing out there and what drove that level of spares activity?
Jim McCabe (SVP and CFO)
Yeah, Mike, I'll start. Sure. It was more commercial this quarter, and that's why, I think the margin impact is a little less than you might see, from some of the military spares. But, it's lumpy business, as we've talked about before. We're fortunate with surge this quarter, and the fourth quarter is typically when we see the biggest surge in spares. And there are opportunities to increase spares volume, which we continue to work on, and increase spares pricing to cover increasing costs and enhance margins moving forward.
Dan Crowley (Chairman, President, and CEO)
Yeah, we-
Michael Ciarmoli (Managing Director)
Got it.
Dan Crowley (Chairman, President, and CEO)
I know you have, I know you have models for air traffic, but the ones we watched showed the first 10 months of U.S. traffic, TSA volumes were above 2019 levels by 1.4%. But more importantly, September and October, traveler throughput was up 5.7% over the 2019 levels. So it's definitely ramping, and that's driving the carriers to invest in spares and repairs. And the timing, you know, you all commented on the strong MRO, commercial MRO sales. As Jim mentioned, these fleets are coming out of service. They hit their peak volume, TSA volumes in July, so they're bringing them in for maintenance, and we're benefiting from that.
Michael Ciarmoli (Managing Director)
Got it. And then just the—I mean, you had been forecasting, I think, 4%-6% aftermarket growth. It's now 11%. Any—can you give us any of the underlying military commercial? Is it more spares? I mean, the IP sales look pretty flattish, but maybe just what really drove that increase? And I would imagine, you know, with the Pratt issues, you know, airlines flying some of these older planes longer has to help.
Dan Crowley (Chairman, President, and CEO)
Well, we've been in touch with Pratt about ways we can help, and it's been a productive dialogue. I would say right now, repairs are outpacing spares on the military side, and that is gonna, I think, revert as the depletion of U.S. stockpiles to support the various conflicts leads to orders for new spare hardware to replace those. So, these things tend to swing in their own cycles, repairs and spares, but thanks for the recognition, the progress on spares. You know, last year, the spare sales were softer, so we're encouraged to see them coming back.
Triumph does a lot of line replaceable units, and that's really the beauty of the new portfolio is, if you tour our plants, you see these actuators and heat exchangers and gearboxes, and these are the items that are used up, you know, consumed during operation and typically replaced, not at heavy maintenance, but at frequent checks.
Jim McCabe (SVP and CFO)
In terms of the mix of, of the driver of the increase in growth, as you can see, 2/3 of our aftermarket is repairs, 1/3 spares. So it's, it's more repairs than spares, and it's probably a little more commercial than military for the back half of the year.
Michael Ciarmoli (Managing Director)
Got it. Thanks, guys. I'll jump back in the queue here.
Dan Crowley (Chairman, President, and CEO)
Thanks, Michael.
Operator (participant)
Thank you. And our next question today comes from Ronald Epstein with Bank of America. Please go ahead.
Ronald Epstein (Managing Director)
Hey, guys. Yeah, good morning.
Dan Crowley (Chairman, President, and CEO)
Morning.
Ronald Epstein (Managing Director)
Just trying to understand what happened with the interiors ductwork and the composite, if you can kind of go in more detail. Like, it seems like as of maybe last quarter, this sort of came out of nowhere. And I guess what I'm worried about is, could this happen in another business or not? Or, I mean, how should we think about that?
Dan Crowley (Chairman, President, and CEO)
Yeah, and, you know, I'm giving lots of inside baseball on interiors more than we ever have in the past, but on composites, recall, we used to build these products, these ducts, at our Spokane, Washington plant, and we moved them to Mexico. At the time, you know, condition of transfer with Boeing is that we produced them in the same manner, and we really missed an opportunity to relay out the line, add more automation. From their point of view, it was to avoid any changes that might lead to quality issues. But now that we've stabilized production in Mexico, we're going back through the line with Boeing in partnership to take out further cost. And I'm highly confident that we're gonna see the sort of productivity gains in composites that we saw that we do see today in installation.
So that's one change. This business has been a 20%+ business before, and, you know, we're focused on getting it back there, and we plan to exit this year with, you know, strong margins that are double digits on operating margins, and then get it back into higher margins over our planning horizon.
Jim McCabe (SVP and CFO)
Yeah, and I would add that obviously, the cost challenges are multifaceted. There's inflation down there that's been higher than we've experienced in other countries. There's the FX headwind with the peso strengthening, and then there's directed supplier costs that we continue to work on because they have some sole source directed suppliers. And we have opportunities sometimes through adjustment clauses to recover that. Sometimes we need to develop second sources or work to pass through the prices. So there's lots of levers. It was a challenge, and it was a bit of a surprise in Q1, but we're all over it, and we're gonna improve it for the balance of the year.
Ronald Epstein (Managing Director)
Yeah, got it. Got it, got it. And then, Jim, how are you thinking about, I mean, really, the, the refinancing that has to happen given where interest rates are now? I mean, what, what... You kind of alluded to, there's maybe some creative things you could do. Could you give us a hint to what, what you're thinking?
Jim McCabe (SVP and CFO)
... Well, as you know, we're opportunistic, so we continue to monitor the markets, and if there's an opportunity to refinance at good cost and terms, we would consider doing that. But we're also improving the business dramatically, positive free cash flow, this year, improving our credit. So we don't want to move too fast, so we don't get the benefit of, our improved credit. You know, as you might have recently seen, I think Moody's upgraded our corporate, family rating as well as our, 25 bonds. At the same time, we're buying back with excess, cash, the bonds. We bought them back at a discount, so we create a gain. We reduce our interest expense. We're going to continue to do that as we can with excess cash, from cash flow from operations, from working capital liquidations.
So we're going to keep chipping away till it gets to a point where we can consider whether there are some delevering actions we can take with the portfolio, which we talked about, or whether we want to refinance. These aren't due until August of 2025, so they don't go current until next August next year. But we're keenly aware of it, and we're watching the markets. So it's not a big concern about refinancing, but we do want to delever, so it'd be best if we could just reduce that debt altogether and not have to refinance.
Ellen Page (Equity Research Associate)
Got it. All right, cool. Thanks.
Jim McCabe (SVP and CFO)
Thanks, Ron.
Operator (participant)
Our next question today comes from Noah Poponak with Goldman Sachs. Please go ahead.
Noah Poponak (Managing Director)
Hey, good morning, everyone.
Jim McCabe (SVP and CFO)
Morning.
Noah Poponak (Managing Director)
What is assumed in your 2025 and 2026 margin plan for the interiors margin?
Jim McCabe (SVP and CFO)
I'm hesitating, Noah, because I don't want to get into the margins of the segments, which we have given. We said that this has been a 20% margin business in the past. I've said that this is easily back to the mid-teens on a normalized basis. So you can imagine if we're just coming out of September and breakeven-ish, we're looking to expect for the full year, have mid to single high digit on EBITDA percentages, so you can expect to be into double-digit percentages during those periods.
Dan Crowley (Chairman, President, and CEO)
Yeah, what... Noah, what I'm most excited about is the growth in actuation and engine controls. Actuation is going to hit, I think, $500 million in sales this year, and just, you know, 20%+ on business with great aftermarket. And engine controls is one that's getting a lot of that military MRO work and new wins on helicopters. So even though Interiors is getting a lot of headlines, it's, again, still 10% of the business. We know the drivers, we're fixing it. But the core parts, what I'll call the crown jewels of the company, actuation, engine controls, are really performing well.
Noah Poponak (Managing Director)
Okay. Jim, the release and the presentation discuss debt—recent debt reduction, but I'm seeing a few different numbers. I'm seeing a different number for the 2025s than I thought was left there. Can you just level set me on what did you pay down in the quarter? What have you paid down since the end of the quarter, and what's left on the 2025s?
Jim McCabe (SVP and CFO)
Yeah. In the quarter, we paid down $19 million for the bonds. Subsequent to the quarter, we paid down another $29 million for the bonds. Back in Q1, there was, with the warrants, $14 million of debt was retired for that process, so.
Noah Poponak (Managing Director)
Okay.
Jim McCabe (SVP and CFO)
Take that off the $500. That's where we're going to be right now.
Noah Poponak (Managing Director)
I see. And it looks like you're saying on slide nine that that action reduces interest expense and that flowed to the free cash flow guidance. Is that correct?
Jim McCabe (SVP and CFO)
So it does reduce interest expense for the balance of this year, but on a full year basis, it's $5 million. So that's not in the year. That's a full year.
Noah Poponak (Managing Director)
That's a full year. This year is a piece of that and then a piece of just core business operations?
Jim McCabe (SVP and CFO)
Correct.
Noah Poponak (Managing Director)
Okay. And then I guess related to that, that's a positive, but you've got the big Q4, where you're citing volume, which makes sense because of what's happening with, you know, sort of planned volumes. But you continue to operate in these end markets where the planned volumes are shifting around. And so, I guess I was a little surprised you raised it, given that, but at the same time, you're giving us these numbers halfway through the quarter here. So I don't know, what's the level of confidence in that number, or where is there risk of something sliding out of the end of your year and into next year on that free cash flow plan?
Jim McCabe (SVP and CFO)
Yeah, we're highly confident in our numbers, and we have a very detailed bottoms-up forecasting process by program, by site. The risks come in the demand in the aftermarket, which we don't have long-term visibility to, and then, of course, OEM rates, but I think it's less on OEM rates as much as we talk about those, you know, with aftermarket being growing so much and being so important to the fourth quarter, that's where the risk is, it's just demand. And that demand is so diverse, that I think it's lower risk than a particular OEM rate schedule might be.
Dan Crowley (Chairman, President, and CEO)
Yeah, and working capital certainly is a big swinger, and we're highly focused on that. We ran dozens of lean events in October. We're going to continue those through the second half of the year. And, you know, we're doing all the kinds of analysis on our material planning and work in process and finished goods and safety stocks and rotables and things that drive working capital. So the rates do affect inventory burndown because the rates help us to draw upon the what's on the shelf, but that's one of the swingers as well, but we're confident we're going to make it.
Noah Poponak (Managing Director)
Okay. Appreciate your time. Thank you.
Jim McCabe (SVP and CFO)
Thanks.
Dan Crowley (Chairman, President, and CEO)
Yeah, thanks, Noah.
Operator (participant)
Thank you. And ladies and gentlemen, this concludes today's question and answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.