Triumph Group - Q4 2022

Transcript

Speaker 0

Welcome to Triumph's 4th Quarter and Fiscal Year 2022 Results Conference Call. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast. Please ensure that your pop up blocker is disabled if you're having trouble viewing this slide presentation. All participants will be in listen only mode.

After today's presentation, there will be an opportunity to ask Please note this event is being recorded. In addition, please note that this call is the property of Triumph Group Incorporated and may not be recorded, transcribed or rebroadcast without explicit written approval. I would now like to introduce Tom Quigley, Triumph's Vice President of Investor Relations and Controller, who will provide a brief opening statement.

Speaker 1

Thank you. Good morning, and welcome to our Q4 fiscal 2022 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. During our call, we'll be referring to the supplemental slides, which are posted on our website. Certain statements on this call constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward looking statements involve known and unknown risks, uncertainties and other factors, which may cause Triumph's actual results, performance or achievements to be materially different for many expected future results, performance or achievements expressed or implied in the forward looking statements. Please note that Triumph's reconciliation of non GAAP Financial measures to comparable GAAP measures is included in the press release, which can be found on our website at www.triumphgroup.com. The The format of the call today will be slightly different. Dan will open with color on the quarter and operating environment. Then Jim will walk through the results for the quarter year.

Dan will then discuss actions we are taking to support revenue growth and deliver improved margin performance with Jim returning to provide our outlook before opening up to Q and A. Dan, I'll turn it over to you.

Speaker 2

Thanks, Tom. For the Q4 Triumph delivered on our strategic commitments and generated positive free cash flow And strong margins for the 2nd consecutive quarter in our core Systems and Support segment. And we did so in a challenging macro environment, while positioning for increasing demand. Growth in our MRO and freighter end markets helped offset headwinds from Omicron and 787, along with timing delays to the small number of military and legacy structures programs that are expected to fully recover in early fiscal 2023. We have better clarity on near term and multiyear OEM and MRO demands than we've had in the past 2 years and we like what we see.

All markets beyond wide body commercial continued to improve and Triumph is positioned to realize the benefits of our diversification strategy. We are able to provide guidance for fiscal 2023 that reflects increasing core revenue and improving profitability and cash flow. We will also provide color on our multiyear outlook that gives us confidence in the sustained aviation recovery. Triumph expands our profitability and cash flow year over year. We are maintaining our goal to double profitability over fiscal years 2022 to 2025, driven by improved OEM production rates, expanded MRO volumes, enhanced pricing from recent contract extensions and lower cost structure as a result of our transformation.

As we stabilize operations and our balance sheet, our focus is pivoting to growth. In the fiscal year, we secured over 2,200,000,000 and new orders across the company, which reinforces that our backlog has begun to grow. On Slide 3, I summarize the quarter's highlights. First, we generated free cash flow of $29,000,000 driven by our improving operations and reduced working capital. A more favorable sales mix yielded a 19% EBITDAP margin in our Systems and Support segment as the benefits of cost reductions and lean events flow to the bottom line.

Like many of our peers, our organic sales declined slightly due to short term order deferrals on commercial widebody and a few supply chain driven shipment delays, though partially offset by strong increases and MRO orders. We expect this temporary flat spot in the recovery to abate early in our fiscal 2023. That said, our actions to mitigate supply chain constraints lessen the impact on Triumph as we partner with our customers and suppliers to ensure supply continuity and affordability. Despite the mentioned headwinds, sales in our Q4 in our OEM and MRO end markets are up 18% 21% sequentially as compared to Q3. MRO part number inductions, A key measure of total volume coming into our shops is up 34% quarter over quarter and 16% sequentially.

Increased flight activity, especially in North America, is benefiting Triumph's commercial airline sales to operators, which are up 57% sequentially and 66% year over year. In our freighter segment, Sales were up 60% sequentially and 9% year over year. Slide 4 depicts OEM and MRO sequential sales for both commercial and military segments. Notably, commercial OEM sales are stable with increasing MRO sales driven by commercial transport and cargo, while military OEM sales are up on the strength of V-twenty 2 and CH-fifty three ks shipments with similar increases in overall work on the C-seventeen and FA-eighteen aircraft. Expanding on the health of our supply chain, a vast majority of our 3,000 suppliers came through the pandemic and are now preparing for increased levels of production.

While ongoing inflationary pressures impact fuel, freight, metallic products and labor For both Triumph and our suppliers, whose purchase materials make up 2 thirds of our cost of sales, we are focused on solutions, not excuses. We commenced senior level discussions with our top 10 customers last year to get ahead of these challenges and held a supplier conference With over 240 suppliers in our Q4, active communication, advanced forecasting, AI based risk management, Innovative staffing approaches along with dual sourcing and disciplined price management will help us manage the current inflationary environment The war in Ukraine commenced during the quarter. Triumph suspended the small amount of business we do in Russia and Belarus, which totals less than 0.5% in total sales. While the direct financial impact is not material to Triumph, We are closely monitoring the broader impacts across the global economy. The impacts of China lockdowns have been similarly small on Triumph revenue.

So we are through the transitionary year that was fiscal 2022 and looking forward to a sustained recovery and the payoff for our transformation efforts. Before I share the actions Triumph is taking to drive revenue growth and improve margins over fiscal 2023 to 2025, Let me turn the call over to Jim to cover our Q4 fiscal year in more detail. Jim? Thanks, Dan, and good morning, everyone. As I review the financial results for the quarter fiscal year, please refer to the presentation posted with our earnings release today.

I will discuss Triumph's adjusted results. So please see our earnings press release and the supplemental slides in the presentation for the explanation of our adjustments. Triumph was cash positive again this quarter. On Slide 5 are our consolidated results for the quarter. Revenue of $387,000,000 reflects increased revenue Narrow body and business jet platforms offset by short term headwinds on 787 and the delivery timing on our military program in our Geared Solutions business.

Our revenue continues to shift towards our core, with systems and support revenue now making up 74% of total revenue in the quarter, up 10 percentage points from 64% a year ago. Adjusted operating income of $43,000,000 represents 11% operating margin, up from 7% a year ago. Systems and support generated substantially all the operating income this quarter. Our adjustments this quarter include a $4,000,000 gain on the sale of assets as we settle working capital adjustments on prior divestitures, dollars 5,000,000 of restructuring costs from previously announced facility closures and reductions in SG and A and overhead. Separately, we annuitized some of the smaller pension liabilities to reduce costs resulting in a $32,000,000 non cash pension charge in the quarter.

Turning to Slide 6, you'll find our fiscal 2022 results. As expected, our net sales declined with planned divestiture in sunsetting programs, while our mix of sales included sizable MRO growth. Our full year adjusted operating income was $135,000,000 representing adjusted operating margin of 9%, up 3.49 basis points over the prior year. Turning to Slide 7. You'll see our systems that support results and highlights.

Revenue in the quarter include higher narrow body and BizJet Systems content. Systems and Support operating income was $49,000,000 or 17% for the quarter, which is a 408 basis point increase over last year. Systems and Support EBITDAP was $55,000,000 or 19%, a 4 20 basis point increase over last year, another step towards our goal of doubling EBITDAP over the next 3 years. Commercial MRO sales were a significant source of growth, up 17% in the quarter and 14% for the year. This sales strength, along with the benefits of the Aviation Manufacturers' Job Protection Program enhanced our margins while ensuring Triumph retains critical talent to support the expected OEM production ramp later in the calendar year.

On slide 8, you'll find the results of our Structures segment. Structures revenue of $100,000,000 was up 3% organically over last Excluding divestitures and sunsetting programs. 7 37 production rate increases in interiors contributed to the organic growth. Structures now contributes 26% of total revenue as we continue to see the revenue mix shift towards systems and support. The sale of our Stewart Structures facility is expected to close in the first half of this calendar year.

Required government and customer approvals are completing on plan. This divestiture marks the comprehensive exit of our build to print and contract manufacturing businesses, leaving only closeout of residual 747 structures deliveries from inventory and divested site transitions in FY 2023. On the divestiture, systems and support is expected to approach 85% of consolidated sales, Volantiers will grow over time with the projected commercial OEM rate increases. Slide 9 provides our free cash flow walk for the quarter year to date. We generated $29,000,000 of free cash flow in the quarter as we continue to reduce non recurring cash uses.

As expected, free cash flow this quarter included $25,000,000 of non recurring cash drivers comprised of $21,000,000 of advanced liquidations and $4,000,000 for previously accrued 747 losses and shutdown costs. Our full year results included a total of $164,000,000 of non recurring cash uses as detailed on the slide. These non recurring impacts are on a steady decline as we achieve Predictable financial performance. Excluding these items, we're $7,000,000 cash positive for FY 2022. Capital expenditures were $4,000,000 in the quarter and $20,000,000 in the fiscal year with higher capital investments forecasted over our planning horizon as we invest in our Systems and Support segment.

On Slide 10 is a schedule of our net debt and liquidity. Our efforts to strengthen the balance sheet are paying off. At the end of the quarter, we had about $1,400,000,000 of net debt, down 2% from a year ago. We also had about $300,000,000 of cash availability, which is more than sufficient for our projected needs. During the fiscal year, we paid down our 1st lien notes by $137,000,000 from proceeds from divestitures.

We also extended the maturity of our AR securitization to November of 2024 and increased its capacity from $75,000,000 to $100,000,000 It serves as a low cost source of contingent liquidity. Our next debt maturity is over 2 years from now. We will continue to delever by expanding EBITDAAP and free cash flow in our continuing businesses. Our target leverage ratio is 3 to 4 times adjusted bank EBITDA. Now I'll turn the call back to Dan for more color on end market expectations and our recent wins, all of which are factors in our outlook for fiscal 2023 and beyond.

Thanks, Jim. Building on our incremental operational and financial progress year over year, I'll recap our recent wins and share how we are positioning Triumph in the macro environment for fiscal 2023 beyond. Prime continues to win in a competitive marketplace on the strength of our platform incumbency, innovative engineering and IP. As noted, we won more than $2,200,000,000 of new orders in fiscal 2022, the highest in the last 6 years. Turning to slides 11 to 12, wins for the quarter are diverse, spanning OEM and MRO markets and comprised of military and commercial awards over helicopters, fighters, eVTOL aircraft, passenger to freighter cargo conversions, Commercial transport and business jets.

Speaker 1

We are

Speaker 2

finding new applications for our existing IP across a wide variety of products and services and market segments. Recent strategic awards include another win in the growing passenger to freighter conversion market, expanding content with Boeing Global Services and an agreement with Safran to overhaul actuators on VistaJet Business Jets. Recall we set an internal goal to generate sales from new products, platforms and customers by 25% over the next 3 years and we're well on our way. Slide 13 references fiscal 2022 full year new business results. Excluding follow on awards, the value of new orders is up more than 60% from prior year as our efforts to engage new and existing customers with our full portfolio of capabilities gain momentum.

Book to bill for fiscal 2022 is 1.16. In organic growth trend, we expect to continue over our planning horizon. Looking at the broader markets on Slide 14, We see strength in the military, freighter, narrow body and MRO demand all at the same time with wide body MRO increases now appearing as fleet retirements slow. Military sales now comprise 35% of Triumph's revenue, up from 20% 5 years ago. President's most recent 2023 DoD acquisition budget reflects a top line increase of 3.8 percent to 813,000,000,000 with Triumph's supported programs benefiting from strong support.

Triumph is well positioned on military platforms Across the lifecycle, on the front end Triumph has substantial and growing content on new platforms such as the future vertical lift with Invictus and Raider X, the MQ-twenty five refueling drone and the C7A Red Hawk trainer. In mid cycle, we supply critical content on existing production programs such as the CH-fifty 3 ks, F-thirty 5 and V-twenty 2. We're engaged in multiple campaigns to supply fuel, thermal and hydraulic components and expect to add more F-thirty 5 content in the near future. On the tail end of the lifecycle, we continue to expand aftermarket offerings across platforms such as the UH-sixty, The Ah-sixty four, the F-fifteen, F-sixteen, C-seventeen and all versions of the FAA team. Overall, we expect military end markets to grow modestly over the next few years and for Triumph's military sales to keep pace or exceed this growth rate.

On the commercial front, recent global flight activity increased to 68% of 2019 levels Despite very low levels of flight activity in China and Russia, U. S. Flight activity is at 84% of 2019 levels, followed by 75% recovery in Europe, 71% in the Middle East and Africa, 66% in Asia Pacific. Of note, transatlantic flights between the U. S.

And EU are up 37% over the last month to 80% of 2019 levels, indicating a strong upswing in international travel. This increased flight activity benefits Triumph in 2 ways. 1st, through increased commercial MRO volumes and second, the new OEM aircraft order activity is gaining momentum and will drive single aisle rate increases. Airbus' recent Qantas order There's a good example as it included single aisle orders for the A220 and the A320 in addition to A350 twin aisle orders. Slide 15 shows anticipated rate increases for key commercial programs indexed to fiscal 2019 production rates and the incremental revenue contribution over our planning horizon.

737 MAX rates have started to rebound. While 787 production remains at low rates, Boeing anticipates increases later this fiscal year. 7 37 MAX, 787, A320 family and the A350 are some of Triumph's largest programs and collectively are expected to increase Triumph sales by over $300,000,000 from fiscal 2022 to fiscal 2025. We're excited about the freighter conversion markets as well. Freighted conversion orders are projected to double from COVID's consumption of passenger jet belly capacity and the increase in e commerce.

Triumph is well positioned to capitalize on this demand with hydraulic power packs and actuation to drive cargo doors and cabin acoustic installation and ducting which are required in the conversion effort. Over the last few quarters, we won conversion content on the signed Draco and Mammoth programs and expect others to follow. Last, collaborations such as our joint venture with Air France KLM called Accel Americas and Honeywell Channel Partnership will generate MRO opportunities on growing platforms earlier in their life cycle than our competitors. We plan to expand these partnerships throughout key markets, including the Americas, Europe, Asia Pacific and the Middle East, where Triumph will be represented at next week's Global Aerospace Summit in the UAE. Before Jim presents our guidance, I want to talk about the company Triumph and our brand.

Shown on Slide 16, We started fiscal 2023 by launching a new brand identity for the company that reflects our significant transformation. Triumph has transformed from a decentralized holding company to a pure play provider of high performance systems and value added aftermarket services. For this reason, we removed the word group from our brand name as we now embrace a 1 company, many solutions operating philosophy. Triumph's new logo features a sleek, modernized version of our company's classic T symbol, a nod to Triumph's progress and forward velocity. Operationally, we removed a layer of overhead to better serve the needs of our broad customer base.

And while we will continue to report in 2 segments, We are now organized around our core operating companies, which places our P and L leaders closer to the customer and senior management and improves internal alignment. As we move forward, Triumph is powered by diversity where our competitive strength comes from a complementary blend of people, products, platforms and end markets. This broader take on diversity helps Triumph to be more resilient and to perform at higher levels so that we can remain differentiated in the market and deliver enhanced shareholder value year over year. With our recent wins, market trends and company relaunch as a backdrop, Jim will now walk you through the details of our fiscal 2023 guidance. Thanks, Dan.

To set the stage for where Triumph is going, let's reflect on how far we've come. Slide 17 demonstrates that over the past 5 years, by design Triumph shrunk to its profitable core overcoming the pandemic and improving financial performance. Over the same period, Triumph's EBITDAP margin percentage has more than doubled as we pivoted to more IP based content with a stronger mix of military and commercial sales, while driving out cost to match a smaller but healthier business base. Free cash improved also as the proceeds from recent divestitures allowed us to reduce debt and leverage, while the remaining portfolio continues to improve its cash conversion. This all results in a more predictable financial future.

Turning to the future on Slide 18, specifically within our Systems and Support segment, the approximately $1,000,000,000 in FY 2022 sales with split 57% OEM production and 43% aftermarket and military sales comprised 50% of segment sales. As noted, short term growth in this segment is expected to be driven by ramping OEM production rates. As a result, we expect growth in this market to between 18% 22% in FY2023. 2 thirds of system that supports FY2022 profitability came from aftermarket. We expect growing MRO sales to yield segment EBITDAP margins just over 20% for the year.

As we look beyond FY2023 to FY2025, We expect revenues will exceed FY 2020 levels with segment margins expanded into the low to mid-twenty percent range. Systems and support provides a strong foundation for solid organic growth, which should continue to yield improving margins and cash flow year over year. Turning to Slide 19 for our full year guidance. Based on anticipated aircraft production rates and assuming a Q1 closure on the pending Stewart facility sale, We expect FY2023 revenue of $1,200,000,000 to $1,300,000,000 which assumes organic growth of our core business of 8% to 12%. We forecast EPS of $0.40 to $0.60 per diluted share.

Our earnings expectations take into account certain supply chain and inflationary pressures and updated actuarial assumptions under our pension plan as noted in the appendix. Cash taxes net of refunds received are We expect to be approximately $7,000,000 for FY 2023. Interest expense is expected to be $129,000,000 including $123,000,000 of cash interest. For the full year, excluding the impacts of the actions and structures, we expect to generate $30,000,000 to $45,000,000 of cash from operations, with approximately $30,000,000 in capital expenditures, resulting in core free cash flow of about breakeven to $15,000,000 in fiscal 2023. Our structures actions include the liquidation of advances and the remaining closure and or sale of facilities and programs.

As of March 31, We have $104,000,000 remaining in advances and the timing and nature of these liquidations is still to be determined. The closure and or sale of legacy facilities and programs Are expected to use between $70,000,000 to $75,000,000 of cash in fiscal 2023 with $30,000,000 anticipated to be in Q1. As with our results over FY 2018 to FY 2022, our goal of doubling our continued FY 2022 EBITDA by FY 2025 remains our focus and is expected to be achieved primarily through commercial OEM production rate increases, MRO expansion, contractual pricing improvements and increased efficiencies from prior cost reduction actions. In addition, over our 4 year planning horizon, we are targeting a consolidated EBITDA margin of approximately 20%, along with a free cash flow conversion of over 10% of sales. We look forward to reporting on our progress on each of these initiatives quarterly as we approach fiscal 2025.

Now I'll turn the call back to Dan. Dan? In summary, I'm pleased with our year over year improvement, providing us with solid momentum as we enter fiscal 2023. And I'm further encouraged by the near term market recovery. In a challenging macro environment punctuated by supply chain constraints, rising fuel costs, labor shortages, Triumph achieved 2 consecutive quarters The positive free cash flow and strong margins in our core systems and support business.

Short term order deferrals and delivery timing issues are Expected to abate in our fiscal 2023 and are being offset by our new contract wins. Our actions this quarter combined with OEM and MRO Rate increases will support our expanded margins and improved cash flow, putting us on a solid path to deliver growth, while deleveraging the company year over year. Pivoting to growth, having exited build to print structures and winning new business are at the core of our path to value. Powered by diversity, our company is poised to expand top and bottom lines year over year. I look forward to reporting on our progress as we continue the efforts to further unlock the hidden value across our business and to deliver value for the benefit of all of our stakeholders.

We're happy now to take any questions.

Speaker 0

We will now begin the question and answer session. Our first question comes from Peter Arment from Baird. Please go ahead.

Speaker 1

Hi, good morning, Jim and Dan. Jim, could you maybe give us a little more color on working capital, just Sort of how that trends as this transformation continues with the company, how should we it's obviously seems like it's a headwind this year, but doesn't start to become at some point either neutral or a tailwind as the business It takes on more volume and we start to see it kind of overall different mix.

Speaker 2

Yes. Thanks, Peter. Working capital has been high So as we exit structures, it naturally is coming down. So, and it has also been because of advanced liquidations, which are ending. So the non recurring cash uses and that were previously accrued like 747 and liquidation of advances, but then in the past, we're going to see improving working capital.

And the business that remains is less working capital intense. And our goal has been to fund with working capital efficiency improvements in the core business, the growth that we expect in the coming years. So I think you're going to start to see, working capital be neutral and then be a tailwind for us moving forward.

Speaker 1

Yes, it's helpful. And just as a follow-up, just as a clarification on the liquidate, on the advances, is that you said you've not decided what What you're doing with the proceeds of Seward sale?

Speaker 2

So for our outlook, we've assumed that those are settled in the transaction. So we're not including advanced liquidations and outlook. In the quarter, we just reported there was $21,000,000 of Advanced Liquidations.

Speaker 1

Appreciate the detail. Thanks, Jim.

Speaker 3

Thank you.

Speaker 0

The next question comes from Myles Walton from UBS. Please go ahead.

Speaker 4

Thanks. Good morning. Jim, to maybe go back To the cash flow for just a second, your 10% conversion target versus what's implied, I guess, in fiscal 2023 is pretty neutral conversion. Two questions. One, why is it not more year on year improvement in cash flow?

I think you said the core cash flow last year was 7,000,000 That's pretty much what you're guiding for this year. And then conversely, why is the conversion go from basically 0% to 10% in the next couple?

Speaker 2

Yes. Thanks, Miles. So there's a lot of moving parts in last year. In fact, we did divest some businesses, if you remember. We had some cash generation from businesses like Red Oak, Milledgeville, Thailand, Staverton, all which were divested out of last year.

And then the assumption that Stuart won't be there either moving forward is part of the mix of year over year change in cash flow. But the remaining core business is cash flow positive. And as we reduce overheads and non recurring cash uses, we're going to rapidly recover to that 10 plus Number of cash conversion that we're targeting at the end of our 4 year planning period. Working capital is an element of that, but I think the change in the portfolio is a bigger driver. Hope that's helpful.

I'd like to answer your question.

Speaker 4

Yes, that's helpful. I just want to clarify the 4 year planning, does that line up with fiscal 2025 or are we talking about

Speaker 5

a different 4 year cycle?

Speaker 2

Yes, that's 26. So what we said is we're going to double our continuing EBITDA. And just to give you some numbers on that, our EBITDA last year It's about $169,000,000 I think you'll see in the press release. And if you exclude the Stewart piece of that and some of the other divested businesses, It's more than $150,000,000 to $155,000,000 range. So that's what we're looking to double by FY 2025.

So you're talking $300,000,000 to $310,000,000 in the 3 year period. Our planning horizon goes out to FY 'twenty six. So when I was referring to our 20% plus on Consolidated EBITDA margin and 10% or more of cash conversion on sales, that's in FY 2026.

Speaker 4

Okay, okay. Got it. And then just a clarification, the sale divestiture proceeds, are you at a point where you can size those For us, either net of the advances that would go with it or gross, just any color given you're pretty much there?

Speaker 2

Yes, not yet. When we close, we'll disclose what's necessary on the transaction, but we're just not there yet with the exact details.

Speaker 3

Okay. All right. Thanks.

Speaker 0

The next question comes from Seth Seifman from JPMorgan. Please go ahead.

Speaker 5

Thanks very much.

Speaker 4

You guys mentioned

Speaker 5

a little earlier the expectation to continue reporting in 2 segments. Just kind of curious, if you considered kind of Giving a different look at the business, and kind of why, given that So much of it is gone. What's the importance of having the core structure piece as a separate segment going forward?

Speaker 2

Yes, sure. Seth, this is Jim. I think what we're trying to do, we took feedback from investors and analysts. They want to see more market information and they want to see continuity in the existing segments. So that was the majority of the feedback.

So that's what we're planning to do It has not changed segments, but to give more market detail within the segments is more meaningful. So that would commercial military and non aviation and then aftermarket and OEM. So look forward to that in the coming quarters.

Speaker 5

Okay. And then, I guess in terms of the 7 what you're thinking about for 787 in the upcoming year, and how sensitive your outlook is to that? Is that kind of the delta in the 8% to 12% organic guidance? Or What are you kind of baking in for 787 recovery?

Speaker 2

This is Dan. I'll jump in. So we used to produce 14 a month of the 787 and then it trailed off to 10 and then 8, 6, 4 and we're running at about 2.5 a month right now. And I'm confident that Boeing is going to achieve their certification and return to higher rates. We believe it's going to happen in the latter part of the summer.

And so we're stepping that back up. It won't go all the way back up to 14, but as you look at this over The planning horizon, we see a path to getting back to the 8 shipsets a month sort of rate, maybe even 10 a month by fiscal 2024. So it's one of many important programs to Triumph. It did contribute some softness in our second half of last year, But we've derated the build rate now, make sure we keep our working capital matching the rate that Boeing needs and we're looking forward to the recovery in the years ahead. Great.

Speaker 5

Thank you very much.

Speaker 2

Thank you.

Speaker 0

Our next question comes from Sheila Kahyaoglu from Jefferies. Please go ahead.

Speaker 6

Hey, good morning, guys. Thank you for the time. I wanted to talk about Slide 14 a little bit. So thank you for putting that out there as The business has sort of changed form. How do we think about the growth rate for Triumph's business?

I know those are market growth rates for commercial And military and how what we could think about your planning assumptions for you just touched upon 787 and maybe the MAX.

Speaker 2

Yes. Can do, Sheila. Thanks. We put this chart in, it's one similar that we provided to our Board of Directors to What underlies our multiyear outlook? What's the commercial narrow body, wide body, military?

And although it's not shown on the chart, freighter market as well. And so our growth rate is a composite of these four segments. Narrow body looks very good. And despite some of the certification challenges on certain variants of MAX, Boeing is ordering at rates above 30. And we see that rate going up into the mid-40s over our planning horizon.

Same thing with Airbus. You look at Airbus' Build rates in the 40s headed in for mid-60s. And the message we get from these supply chain calls is Get ready, what are you doing on labor? Are you putting capacity in place as your lower tier suppliers? So we think single aisle is solid.

And even if they only achieve 90% of their outlook, it's still robust recovery. Twin Isle, it's the reason we show a high CAGR is Starting from the low build rate today, so over the planning horizon, it's like our interiors business. It was way down because of the MAX, but it's one of the fastest growing operating companies we have because of rate recovery. And you can see, we are counting on 787 coming back and 777, we have a big role on the legacy 777. So even if the 777X is pushed to the right, we expect demand for 777 to continue.

And then there'll be additional freighter demands as well. Military, we show that more flattish, but it's at a high level. And what's encouraging is we have a lot of ships that content with Sikorsky on the CH-fifty 3. So that program as it goes through its low rate production will benefit us. F-thirty five, although the rate may not be going up a lot, we're increasing our work share content on that.

So we'll see revenue growth from there. A few legacy programs will come down B-twenty 2, but we see strength in the fighter segments. So and then probably the most encouraging sign in Short term is the MRO recovery. Although the overall market CAGR is 3% to 5%, we're seeing this big rate in inductions Month over month, 7%, 8% a month growth. So the quarter was up, I think, 35% deduction.

So It's really an encouraging trend and because they're not retiring the wide bodies any further, Those as they up their flight volume, we're seeing both nacelle and engine accessory induction. So I'd say our growth rate is high single digits to maybe low double digits across this composite of the market.

Speaker 6

Okay. And maybe just a follow-up to that. On Slide 13, you have a list of new business wins that you've had over the past year. How do we think about those incremental opportunities or what to watch out for? It seems like it's mostly on the defense side for now.

Is that fair? What should we look out for basically?

Speaker 2

Yes. We feel good about our defense strategy we put in place a few years ago. What's encouraging about this chart is the amount of IP based wins, whether it's nose wheel steering or it's hydraulics or actuation, These are products that we design and build and then many of these products have frequent replacement to the life of the aircraft, so there's a good MRO tail. On the commercial side, we expect that to recover with as LEAP orders go up. We met with GE last week and they're very bullish about the outlook for LEAP.

And we're seeing this freighter market as mentioned, freighter conversion. So today, we're seeing more orders in the military, but we expect that to pivot back to commercial in time.

Speaker 6

Great. Thank you.

Speaker 1

Thank you.

Speaker 0

The next question comes from Michael Ciarmoli from Truist Securities. Please go ahead.

Speaker 5

Hey, good morning, guys. Thanks for taking the question. Maybe, Jim, just back To free cash flow, I want to make sure I heard you correctly. Is there $70,000,000 to $75,000,000 of cash used in additional facility closings this year? And If so, can you elaborate on that?

It seems to be maybe higher than expected.

Speaker 2

Yes, there is $70,000,000 to $75,000,000 in our forecast for non cash Non core cash uses, and it relates to the structures wind down. Structures is a capital intense business and a lot of infrastructure. These are the previously accrued expenses related to close out of legacy programs, include things like 747. It will be the cash use of programs that are businesses that are being divested before the divestiture completes. It also includes infrastructure wind up like IT systems and teams that are supporting and dedicated to that group when we complete the divestiture.

Michael, these are this is it. This is the last year. These are bounded. It's deterministic. We know both the scope of those run outs and the timing.

There's actually more opportunity to reduce that than there is risk that it will increase, but we have to put the forecast for a baseline.

Speaker 1

Okay. Okay. Is this the first

Speaker 5

time you've disclosed that? I was under the impression, I guess, maybe that we were looking at the end

Speaker 3

of the

Speaker 5

747 Maybe it's just seem a little bit higher.

Speaker 2

Yes. The fourseven production ended last year, but the wind up goes beyond production. And we haven't given any specifics for the coming Some of this is deferred from previous years as things have taken longer. But yes, that is the outlook for this year. It's reconciled in the schedule in the back of the presentation.

Speaker 5

Okay. And then last one, I guess, if we just look at sort of the implied Guidance on that you've got on Slide 17 there. I mean, you've got the good growth in systems and I think you called that out at 18% to 22%. I can't really make out what structures is going to be, It seems to be a pretty small number. I always thought that the interiors was running around $120,000,000 $130,000,000 And if That's growing.

What's the did we have that wrong? Or what's the level of structures in the interiors business next year?

Speaker 2

It is growing from that level. It is faster growing as Dan indicated because it was relying on narrow bodies in particular 737. So as that recovers, It will grow and it's got new work, new programs like A220 that is just 1. It just secured a lot of backlog with a big The contract continued its business last year. So we did a 10 year LT with Boeing for all of their aircraft and we just signed A220, which is a great Aircraft, neurobody aircraft, and we expect that volume in that business to effectively double over the Planning horizon.

So it went way down. We had at the peak, I think we had 2,500 employees That we're supporting that business and with the MAX cut that went down to less than half of that and now it's on a path to recover And we'll do it more efficiently than we did before. The experience, although difficult of going through the pandemic, Our team down in Mexicali did a great job of rightsizing the plant and driving productivity initiatives. So It will be more profitable year over year.

Speaker 3

Okay.

Speaker 5

So is it about a $50,000,000 to $75,000,000 run rate next year? I mean, just given Yes, the consolidated guide is 1.2 to 1.3 and systems and support is basically going to be 1.2?

Speaker 2

Yes, that's a little bit low.

Speaker 1

Okay.

Speaker 2

Why don't we get back to you, give you the firm

Speaker 5

number. Okay.

Speaker 2

So on Page 19 is the guidance, Mike, so $1,200,000,000 to $1,300,000,000 is our consolidated guidance. That includes interiors as well. Yes, it should be north of $100,000,000 on revenue.

Speaker 5

Okay. Right. Yes, I'm just trying to reconcile it with the chart on the prior page, 17, that shows PSS and TAS. Okay. We can be configured offline.

Thanks, guys.

Speaker 0

The next question comes from Cai von Rumohr from Cowen. Please go ahead.

Speaker 7

Yes. Thanks so much. So I guess your total cash flow guide is minus 35 from ops, The CapEx, so it would be a negative $65,000,000 I know that number includes the one time $75,000,000 windup. Does it also include the full $104,000,000 for Boeing or kind of are you assuming that that Might be pushed out.

Speaker 2

No, the assumption is that that's resolved in the transaction. It's not the 104 liquidation is not included in guidance.

Speaker 7

It's not included so basically, just so I understand, so Okay. It's taken out in the guidance. But so how much cash do you think net of all of this is going to be available It's going to be available to reduce debt. It sounds like not much. It sounds like you're still negative.

Speaker 2

Yes. So as I mentioned earlier, we're not giving the exact transaction value, but there will be value in reduction of the advances through the transaction That's going to improve cash flow moving forward. You can see the detail, Cai, on Page 26,

Speaker 7

the 30 to 40

Speaker 2

of use, the 30 to 45 of generation then after the 70, so 0 to 15, but that's correct. There's a substantial portion of proceeds that will be used to satisfy the advances in our assumption.

Speaker 7

And so what about you have substantial debt coming due in the latter part of 2024 and 2025. What's your thinking kind of once you get through all of this? How are you going to deal with that?

Speaker 2

Yes. The debt maturities are over 2 years away. We have good interest rates right now and most of our debt is fixed. In fact, substantially all of it is. So we continue to monitor the markets.

And as we continue to improve EBITDA but reduce our leverage, We'll be in a better position to execute and get better rates on refinancing moving forward, but we have over 2 years.

Speaker 7

Thank you very much.

Speaker 0

The next question comes from Ron Epstein from Bank of America. Please go ahead.

Speaker 3

Hi. Hey, guys. This is actually Andre Madrid on for Ron. Wanted to Go back a bit. I know it's been touched on slightly, but I kind of wanted to talk just about those projected rates on Slide 14.

777, 78787 seem pretty aggressive and I just want to ask continued issues at Boeing like with all that going on, what makes the team confident that You guys could actually hit these objectives through 2026.

Speaker 2

We talk directly to both Airbus and Boeing on a daily basis. We get their latest Schedule releases. We also watch the actual orders to see if the forecast matches the near term orders. And both companies have been meeting their commitments to us on rate step ups. That's the first thing is, I think with my personal opinion having Boeing leaders on the 787 is the recent news coverage around 787 certification It's been overdone and that they know what they need to do and they're diligently working through the FAA submittals.

It's a great airplane. There's over 1,000 out there in service. Passengers love it. It's been a it's got a great fuel efficiency. So The 787, there's a place for it in the market and with time there'll be a greater demand for it.

So we do have confidence in it. I know There's different views on that, but Boeing is really doing what's required. They may not be getting credit for it And the coverage, but dealing with their supply chain, they have monitored their commitments on rate step ups on the MAX. And we appreciate that. It's helped a number of our plans and we think the same will happen in 787.

And Dan, also in addition to our commercial rate confidence, Our mix of business has changed. So we're now, 1 third of our business is aftermarket. It used to be only a quarter of our business, now it's up to a third And military is up to 36%. So commercial is still meaningful part of our business, but it's a smaller piece than it was a couple of years ago. Yes.

And on Airbus, you probably saw they opened a 3rd line at Mobile in support of their rate increases and we get the We're on quarterly supply chain calls with them about rate readiness on the upswing. So same story there. They're really pressing. And there'll be some constraints in supply along the way, but nothing that I think will impair those rate step ups.

Speaker 1

Okay. That's helpful color. Thank you. If I

Speaker 3

can actually follow-up, you said on the military side about 36% of the portfolio now. What other opportunities are you guys seeing on new programs and for legacy work as well? And following on that, how do you So the exposure shaping up down the line maybe 5 years out?

Speaker 2

Well, although I've worked in defense For my whole career, I'm not going to handicap 5 years out. What I can say is that the conflict in the war in Ukraine has triggered the DoD to ensure readiness of all their platforms and that's translating into a request for MRO and for spares. And then the new starts, whether it's So, future vertical lift or the 2 7A or MQ-twenty 5, even as they go through development challenges, which are common, The demand for those platforms is high and we see the F-thirty five continuing to be an area where we can expand work share, if not rate per month. So we view the defense area as a solid component of our business base. And what I'm encouraged by is, As the OEMs say, we either have a reliability issue on a given component or we want more affordability On these certain products, they're coming to Triumph and they're competing the incumbents.

So even if the rates don't materially go up, We expect to gain share as well. So we're confident in our ability to sustain and grow our military business over time. And we have an aftermarket component in military too, which gets more valuable when it gets into the foreign military sales. So we have

Speaker 0

The next question comes from Noah Poponak from Goldman Sachs. Please go ahead.

Speaker 8

Hi, good morning everyone. Good morning.

Speaker 2

Good

Speaker 8

morning. Dan, on 787, you stated you're confident Boeing will achieve the certification and return to higher rates. And then you said you think that will happen in the latter part of the summer. Do you think the certification is

Speaker 2

in the latter part of

Speaker 8

the summer or that the move to higher rates

Speaker 2

I won't speak for Boeing on the timing of those events. I'm just giving you my opinion as a supplier to Boeing That I think the coverage on that has been overstated to the negative and that they are closer to achieving their certification goals. And just because the underlying demand for the platform, we see the rates coming back. So I won't comment on the specific timing. But if you take the long view, which is what we're presenting with our multiyear guidance, there's no doubt the 787 is going to be back up and right.

Speaker 8

And on that longer view, the rates you have laid out versus the index to fiscal 2019, Your fiscal 'twenty five, the math there, it implies about 9 a month, and that would be calendar 'twenty four. I mean, is that an indication from the OEM or is that your best guess? I mean, that's a substantially faster recovery than I think most in the market expect on the widebody side.

Speaker 2

Yes. I think it's our estimate. The stated rates that we've seen are a little bit lower than that, but It's a platform that is produced, as I mentioned, at rates as high as 14 a month, and they do have a backlog of orders. So You and I will see together, Noah, how it plays out, but Triumph Triumph is going to be prepared for higher rates On the 787.

Speaker 8

Okay. And then could you also elaborate on 737 on that chart because If the pre pandemic pre grounding your fiscal 2019 index is the 52 a month that they were at, which the 0.6 for fiscal 2022 would get you to the 31. Then again, you've got it Above pre pandemic pre grounding in your fiscal 2024, which is calendar 2023, that recovery looks Pretty healthy, I think, compared to what we're all looking for. If you can give us some more details on the numbers implied on the MAX there.

Speaker 2

Yes, we're thinking rates for our planning purposes, I'm not speaking for Boeing, of course. We're thinking rates in the 45 a month range in our fiscal 2024. So it would be higher than where they were pre pandemic. They were headed into that territory. As you recall, We're all doing planning to go from, I think it was 42 to 57 pre pandemic.

So it's really getting back to jumping off point That was pre pandemic and then going beyond that, achieving those sort of 57 rates out there in 2026, again, our forecast. And Boeing is very good about giving shorter term forecast that we can within our procurement lead times and we know what to go out and buy. But they have thousands of aircraft in backlog. There's certainly demands for the platform because of its fuel efficiency. And so we think again there's a market pull that once they get through their certification there's also a strategy in ramp up.

You want to do it in steps that are manageable, so that everybody is adjusting, moving the chains on capacity in a coordinated way and their rates support that. That helps to derisk the ramp.

Speaker 8

Interesting. Okay. And just one more one on what you're selling into. You mentioned widebody MRO picking up. Maybe just if you could provide a little more color there.

I mean is that just off of an incredibly low base or is that better than we Thank you. What are you seeing in that piece of your business?

Speaker 2

So the freighter passenger to freighter conversion It's very encouraging. We have a chart. We showed our Board that how much those rates step up effectively. It's a non linear increase after and I'm going to get the

Speaker 1

I don't want to go off the cuff

Speaker 2

on the numbers, but after a fairly steady rate year over year on Freighter conversions, it's suddenly going up at a high rate. And I'll give the numbers to Jim for the 1 on 1 calls. So that's encouraging. We sell hydraulics, We sell actuators, we do installation, and then plus the engine accessories and thrust reversers that we do as well. On the wide body demand for freighters, I'm going to leave that to the OEMs.

There's a lot of moving parts between Airbus and Boeing, but you and I, I think, would agree on the sort of unending demand for e commerce and products. And if you believe there's going to be continued GDP growth and that will track with that. So I refer you to them.

Speaker 8

What are you seeing in your wide body aftermarket outside of the freighter conversion, just a normal course of?

Speaker 2

What we saw last year was a huge downdraft where the wide bodies were largely grounded the last 2 years. And we thought there would be continued retirement of wide bodies and that's slowing. And as that slows and they put them back into service To meet the growing demand, I mentioned how much international travel has just picked up in the last 90 days. They have to get them back ready. A lot of these parts, they're both time based replacement and cycle based and are flying our derived replacement cycle.

So they're coming to us and ordering legacy parts for wide body that didn't get ordered in the prior 2 years. So there may be a point at which more fuel efficient wide bodies Come back into play and they retire those, but in the short term we're benefiting.

Speaker 1

Okay. Thanks so much.

Speaker 2

Thank you.

Speaker 0

Our last question is a follow-up from Myles Walton from UBS. Please go ahead.

Speaker 4

Thanks. Just a couple of clarifications. 1, when I look at your fiscal 2023 sales guidance and I try to reconcile against The Slide 15, is that Slide 15 growth of segment revenue implied, is that indicative of what you're Putting into your guidance and if not, what's sort of the offset to that versus the $100,000,000 plus that's implied in that bottoms up analysis.

Speaker 2

So the incremental contribution, the red dash line, It is reflected in our 2023 sales revenue. It talks about how these new OEM rates are going to benefit us in sales volume over time. So we see on the order 300,000,000 and volume sales volume expansion over the next 3 year horizon because of that. So that if you call it $100,000,000 a year, That first year is reflected in our 2023 guidance.

Speaker 4

Yes. That $1,200,000,000 to $1,300,000,000 includes $100,000,000 of organic growth?

Speaker 1

Yes.

Speaker 4

Okay. And then, another clarification, any, American Jobs Protection Act benefit in fiscal 2023 that we should know about?

Speaker 2

There is a small portion of it. I think it's about $7,000,000 in Q1 of recognition and maybe a little more in cash. I think the cash may be coming in 9 or 10.

Speaker 4

Okay, got it. And then just a quick one, Jim, do you have a targeted leverage in either your 3 year or your 4 year fiscal 25 or 26 that you'd want to share?

Speaker 2

Yes. We target 3 to 4 times adjusted bank EBITDAAP at the end of FY 'twenty six, so the end of our planning period, so 3 to 4 times. Okay. Thanks again. Thank you.

Speaker 0

This concludes our question and answer session in Triumph Group's 4th quarter fiscal year 2022 earnings conference call.