Triumph Group, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our third quarter fiscal year 2021 results. 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 your pop-up blocker is disabled if you're having trouble viewing the slide presentation. You are currently in a listen-only mode. There will be a question-and-answer session following the introductory comments by management. On behalf of the company, I would like to read the following statements. 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 risk 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. Please note that the company's reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release, which can be found on their website at www.triumphgroup.com. In addition, please note that this call is property of Triumph Group, Inc., and may not be recorded, transcribed, or rebroadcast without explicit written approval. At this time, I'd like to introduce Daniel J. Crowley, the company's President and Chief Executive Officer, and James F. McCabe, Jr., Senior Vice President and Chief Financial Officer of Triumph Group, Inc. Go ahead, Mr. Crowley.

Thank you, Kevin, and welcome everyone to Triumph's Q3 earnings call. I hope you're all safe and well. Today, we reported our third quarter results for fiscal year 2021, trying to achieve positive free cash flow due to our progress in improving profitability and managing working capital across all levels of the organization. As our pivot to military sales accelerates, we delivered sequential improvement in our operating margins in EBITDA, and we expect to build on that through the fourth quarter. The commercial aviation recovery is progressing, albeit slowly. Our customers saw higher freighter utilization and increasing levels of air traffic, which has resulted in increasing MRO demand for the 12 repair centers across Triumph. After months of rate cuts, OEM production has stabilized, with commercial narrow body volumes expected to increase at both Boeing and Airbus over the next year, offsetting commercial wide body volume declines. When combined with these favorable macro trends, our actions to improve our cash flow and restore margins generate positive momentum and position triumph to close out our fiscal year on an upswing as we did last year pre-COVID. After managing through the commercial downturn in the first half, we delivered quarter-over-quarter improvements in our core operations driven by favorable trends in systems and supports, military helicopter, and engine content. and strengthening Airbus narrow-body production rates. This is an example of the hidden value we see in Triumph's diverse capabilities. Triumph supplies flight-critical components, usually based on our design and under sole-source contracts, that are replaced multiple times over the life of an aircraft with a substantial aftermarket tail. Despite pressures on commercial wide-body aircraft, We continue to see modest growth in backlog in systems and support as orders on commercial narrow body and military platforms expand. Overall, Triumph's third quarter results are either in line with or above our expectations, keeping us on track to meet our full year objectives. Let me walk you through some of the highlights as summarized on slide three. First, we generated positive free cash flow through tight working capital management. Second, Margins improved in both business units as we continue to drive operational improvements and enhance the quality of our backlog. Third, with the exit of our Hawthorne, California 747 factory and planned exit of the Grand Prairie 747 plant in June, we continue to progress towards our future state. Last, we've maintained nearly half a billion dollars in liquidity while contributing 40 million in stock to our pension plan, which lowers future cash obligations. Together with the pending divestitures, we have the liquidity to fund the company through this historic downturn. We now have a line of sight to break even free cash flow in Q4 after all debt and advance repayments and expect cash used in operations and free cash used for the full fiscal year to be on par or moderately better than current year-to-date levels. Our third quarter results are a story of progress on two parallel tracks. First, Within our core systems and support business, we continue to improve operations as evidenced through the second consecutive quarter of sales growth and improving operating margins. Systems and support reset capacity to match lower levels of production with improved efficiencies and enhanced margins on programs that were previously challenged and or underperforming. For example, our landing gear actuation business in Yakima, Washington, which supports the 737 MAX, amongst other platforms, improved its Q3 operating income year-over-year by 18% through productivity gains and favorable contract renegotiations. As the MAX rates recover, our lower cost basis will benefit margins, another indication of the hidden value in our proprietary components across systems and support. On the second track, our structures business continues to achieve success in completing and exiting legacy programs. We finally achieved break-even cash on the completion of the G-280 and are within two quarters of completing our applications on the 747-8 program. Now let me touch on each of the drivers for the third quarter as outlined on slide five. Military sales now comprise 56 percent of our volume in systems and support, helping to offset the impacts of the commercial aerospace market headwinds. Military platforms such as the V-22, CH-47, and E-2D contributed to the sequential sales growth in our core systems and support business unit, driving a 33% increase to our military sales year over year. By shedding the legacy cash-consuming programs such as the G-280 and ramping down our 747 content, our margin profile has improved overall. In structures, we eliminated all red programs and will be green across the board by March. Structures was modestly profitable in Q3, and absent program shutdowns and advance repayments was cash positive. We expect to continue to improve quarter over quarter and drive consistency in future periods. Q3 cash use on sunsetting programs was lower than expected, in part due to the push out of the 747 by one quarter. We have less than three shipsets remaining to deliver on the program. In Q3, we generated over $30 million in free cash flow due to working capital management and proving margins. We expect Q4 cash to be breakeven to positive based on the actions we've taken to date. We remain on track to start fiscal year 2022 in our future state configuration as a largely pure play systems and support provider to military and commercial customers with interior structures capabilities as well. On slide six, I want to drill deeper into the sources of Triumph's hidden value. Listed here are the products and services that we provide unseen to the eye underneath the skin of the fuselage that are so critical to the safety and efficiency of the aircraft. Whether it's cockpit controls, actuators, the nose wheel steering, landing gear, fuel pumps, hydraulics, or the services we provide for wheels and brakes, nacelles, and engine accessories, These products and services are important to the customers and to Triumph's financials, and they represent the future of the company. I'd like now to share my perspectives on the path to recovery for the commercial aviation industry as summarized on slide seven. Aviation industry metrics remain largely stable. Numbers of flights, TSA throughput, load factors, and utilization all remain stable on a global basis. However, Like in many industries, the effective rollout and distribution of the vaccine and containment of new variants is key to unlocking the aviation industry recovery. Like the rest of you, I'm pleased to see the progress that's being made and will continue to closely watch the ongoing efforts. Industry-wide, in 2020, 723 commercial transport aircraft were delivered. In the quarter, Airbus delivered 225 aircraft, while Boeing recommenced deliveries of the 737 MAX. In December, 112 aircraft were delivered to customers, ending the year on a high note. OEM production rates have stabilized, and order adjustments have been flowed down to triumph. Canada, the U.S., Europe, and China are all making great progress on certifying the MAX to return to service. Three quarters into this crisis, we're able to look back and recall the unprecedented impact to the industry while recognizing Signs of Recovery Today. Slide 8 depicts the early impact of Triumph's core systems business in Q1 as orders declined due to cancellations and reschedules. At that time, Q1 book-to-bill dropped to .15, driving backlog down 14%. Undeterred and coming off a good fiscal year 20, Triumph continued to execute on our strategic objectives, pivoting to military and freighter end markets and executing on our cost control measures. Despite reductions in commercial traffic and OEM rate adjustments, military sales are up more than 30%. Grenade sales are down 25% overall, but in Q3, backlog once again began to rise, as booked a bill for Q3 was 1.02. Today, systems and support backlog is 55% military, and looking forward, The systems and support pipeline is 73% military, reflecting our continued focus in this area. Turning to slide nine, Triumph closed $400 million in new wins for the quarter across OEMs, Tier 1s, and carriers. Slide 10 touches on three key wins, including the renegotiation and extension of several of our largest commercial transport contracts, a CH-53K helicopter ward, and a host of MRO awards driven by Triumph IP. The CH53K is a key platform for Triumph with IP-driven content in excess of $2 million per ship set. Note that also Q3 marked the first time since the onset of the crisis that Triumph sales and repairs, overhauls, and spares grew quarter over quarter. In summary, Q3 was a good quarter. and the actions we have taken through the unprecedented crisis have positioned us for a return to profitable growth as we look forward to Q4 and the new fiscal year. With that, Jim will now take us through more results for the quarter. Jim?

Thanks, Dan, and good morning, everyone. Nine months ago, as the pandemic persisted across the globe, we had not yet bounded its impact on our revenue and operations. Despite that uncertainty, We provided full-year sales guidance and continue to hold that guidance through today. We reacted quickly to reduce our cost of working capital to the lower demand and to secure our liquidity. We amended our revolver to maintain covenant compliance. We renegotiated customer advance repayments. And then we raised $700 million in a bond offering to pay off our revolving credit facility, which eliminated our maintenance covenants and put substantial cash on the balance sheet to enhance and secure our financial flexibility. In the first half of the year, we used about $250 million of cash as we were reducing our expenses and honoring our inside lead time purchase commitments while we adjusted purchase orders to reduce customer demand. Now in the third quarter, Triumph is cash positive again, sooner than we had planned. We exceeded our third quarter cash flow and earnings plans and are on track to achieve our full year objectives. I will discuss our consolidated and business unit performance on an adjusted basis. So please see our press release and supplemental slides for the explanation of our adjustments. On slide 11, you'll find our consolidated results for the quarter. Planned reductions from sunsetting and transitioning programs in our structure segment drove our decreased sales compared to last year. Despite the headwinds, adjusted operating income was $38 million this quarter, and our adjusted operating margin was 9 percent, up sequentially from $21 million and 4 percent last quarter. We're gradually improving profitability on an adjusted basis quarter over quarter. With respect to the segment results, on slide 12, net sales in our systems and support segment were up 4% sequentially, including a 10% increase in sales on Airbus commercial platforms. This segment's sales were about 55% military this quarter, up from only 31% in the prior year quarter. Adjusted operating margin for systems and support was 16.6%, which is comparable to last year and up sequentially over the last quarter. The $24 million impairment of rotable inventory related to customer fleet retirements and our $1 million of restructuring costs impacted the segment's margins this quarter by approximately 935 basis points. Summarized on slide 13, third quarter organic net sales for our aerospace structure segment were down as anticipated due to planned sunsetting and transitioning programs, as well as declines in commercial programs. Aerospace structures achieved three consecutive quarters of favorable cumulative catch-ups due to strong performance and effective program closeouts. This group's actions to aggressively reduce costs resulted in $3 million of restructuring costs in the quarter. Excluding those costs, operating margin was consistent with last year at 5%. The only lost program of significance left is the 747, which were focused on closing out as efficiently as possible. Production is ending in about six months, and then we will close and clean up the leased facilities. Turning to slide 14, as discussed in prior quarters, in the first half of the year, we experienced a temporary increase in our working capital as we adjusted our supply chain to the new lower demand. Our $38 million of cash flow in the third quarter was better than planned and driven by a net decrease in working capital. Q3 cash flow includes $10 million of advance repayments. and we have approximately $180 million of advances outstanding to be liquidated over the next few years. Restructuring costs were $4 million in the quarter and $33 million year-to-date. The G280 and 747 programs were breakeven in the third quarter and have used $50 million year-to-date. Completion of aerospace structure sunsetting programs, primarily 747, is expected to use $20 to $25 million in the fourth quarter and an additional $50 million in FY22. Capital expenditures were $8 million in the quarter, including upgrading equipment in our core systems and support segment. We remain focused on aggressively managing our cash and liquidity. We anticipate being breakeven to slightly cash flow positive in Q4. On slide 15 is a summary of our net debt and liquidity. Our net debt at the end of the quarter was approximately $1.6 billion, and our combined cash and availability was about $489 million. In the quarter, we contributed $40 million of stock to our defined benefit pension plan, creating a funding credit towards FY22 required contributions, resulting in an estimated $18 million of FY22 cash funding required. We forecast to have ample liquidity even before any further liquidity-enhancing actions. SG&A expense this quarter is 26 percent lower than last year, reflecting our continued cost reduction initiatives. We also have an excess of $300 million of deferred tax assets that continue to create value through reducing cash taxes. Based on anticipated aircraft production rates, and including the impacts of pending program completions, for FY21, we continue to expect revenue to be approximately $1.8 to $1.9 billion. We expect free cash use for the full year to be on par with, or moderately better than, the nine months ended Q3, with break-even deposit free cash flow in the fourth quarter. Our backlog is up slightly in our core systems and support segment and more balanced with higher military content. Our focus on our operating system, coupled with our cost reduction actions, improves our competitiveness and adds value for our customers. We are forecasting strong liquidity and continue to evaluate additional actions to further enhance our liquidity and our capital structure. The measures we are taking to manage this downturn are making us a stronger and more competitive company moving forward. Now I'll turn the call back to Dan. Dan?

Thanks, Jim. In summary, we maintain momentum through Q3 by generating positive free cash flow, and we remain on track to achieve our full-year objectives. Stability in OEM production rates with early signs of recovery in MRO demand give us confidence the worst of the pandemic is behind us. Cost reduction actions and the exit of loss-making programs have led to improving margins across the enterprise, We continue to forecast quarter-over-quarter growth in systems and support and further recovery in margins. As we exit non-core operations and move to our future state, the hidden value of our core will become more evident as we drive revenue growth, margin expansion, sustainable cash flow generation, and enhance our win rate. This is something you'll hear me talk about in future quarters. Our balance sheet and portfolio transactions enhance our liquidity and bridges us to the other side of the pandemic. The reduced market volatility gives us confidence we can be more predictable in our cash generation. Though uncertainty remains, we are committed to continuing to improve profitability and cash flow as we become a more predictable business. The Triumph team has repeatedly overcome challenges and got the job done through restructuring, contract renegotiations, portfolio reshaping, refinancing, and now through managing through the pandemic. Fortunately, we entered the fiscal year with solid momentum from which to build, and that's exactly what we've done. I'm confident Triumph will come through this crisis as a stronger company. Kevin, we're now happy to take any questions.

At this time, the officers of the company would like to open the forum to any questions that you may have. We ask that you limit yourself to one question and one follow-up to give everyone the opportunity to participate. If you're using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star 1 on your push button phone. Should you wish to withdraw your question, please press the pound key. Your questions will be taken in the order received. Please stand by for our first question. Our first question comes from Robert Spengar with Credit Suisse.

Hi, good morning. Good morning. So, Dan, just at a high level, when we think about the structures business and the wind down there, could you just refresh us? You said the 747, I guess, is the only loss-making program that you still need to exit. Is everything else in there non-loss-making and a keeper at this point? How do we think about where this business goes from here?

That's right. We've exited the programs that weren't contributing value. the Bombardier Global 7500, the G280, the G650, the Embraer E2, except for a small subcontract, and now 747. I mean, 747 made money in years past when the rate was seven a month. But our responsibility has been to wind that down. It's now at roughly 0.5 per month. And the two large factories that support it, as mentioned, in Los Angeles, that plant's closed, and we'll close the one in Grand Prairie. So what remains in structures, whether it's the V-22 Empennage or the T-7A Trainer or the work that we do for Gulfstream on the G500-600 or the Pratt & Whitney F-35 engine ducts are all favorable contracts that will add value over time.

I see. And then just on the military side, I think you talked about military sales being up 37% in the quarter with a stable backlog. So Is there any sales pull forward going on there as DOD tries to protect its supply chain? And if so, does that create a pressure point to growth in 22, or am I reading that wrong?

There's been an acceleration of cash payments from the DOD Tier 1 primes, and that was at the DOD's directive. They flowed money down. So payment terms would improve to, let's say, 10 days. Northrop Grumman in particular has been helpful in programs like the Global Hawk and the E2D. But we've not seen sales pull ahead. What we've seen is volume increase. And we're well positioned on a number of upgrade programs, helicopter engine upgrade programs, as an example. And so that money, which has been in the pipeline, programmed by the DoD for reliability improvements to the fleet, is now hitting triumph. So I don't see it as a pull ahead so much as a ramp up as budgets have flow down to suppliers.

Okay. Just quickly, with the F-15 and F-16 coming back into production, is there anything that you have there in terms of content that we should be focused on?

Yes. We do a lot of content on the F-15 Legacy and the EX. We'll share the configuration in some areas that we support. On the F-16, I mentioned on page 9 of the deck that There's an ISR pod that we're supporting with Collins. And there are some re-competes that are running on the F-16 under subsystems like landing gear that we're looking at. So we think we'll get more content out of that. But as I mentioned before, it's really about the diversity of our platform role. So any one program that goes up or down, we're somewhat buffered from. And we've had good engagement across in both the Tier 1s and the Tier 2s, such as Collins and Saffron. And as they integrate and upgrade subsystems, we get content through them. And Honeywell as well. I should have mentioned Honeywell. They're a really good customer.

Okay. Thank you, Dan. Thank you.

Our next question comes from Kyle Vonner with Collins.

Yes, thank you very much. So I think you mentioned somewhere in your release about sort of having some extended contracts or new contracts on existing platforms with Boeing. Can you comment on those? How far out did they go? And is the pricing acceptable in terms of making money and maybe a little more generous than it's been in the past?

It turns out that a number of our long-term agreements that were signed seven to ten years ago are coming up for renewal in multiple businesses and multiple customers, not just Boeing. And so what typically happens is the OEMs look out one to two years in advance of those LTAs expiring, and they engage suppliers like Triumph, and they renegotiate. We may have been on a price step-down agreement under the prior LTA, but if volumes have changed or raw material costs have gone up or if some assumption related to commercial versus military, the mix has changed, we'll factor that in our pricing. And so we have received favorable pricing when those LTAs reset, and they typically are for anywhere from five to seven years extended into the future. And so far, we've not lost any work as a byproduct of an LTA renewal.

Terrific. Thank you very much. And could you update us on your efforts to sell Red Oak and Stewart?

So we've been working with investment banks for the better part of six months now, and we have interested parties in both facilities. And I can't comment on the state of negotiation with those parties. but what I'll say is that we've not seen any degradation in interest, and our expectation is that we'll make announcements in due course once those have been inked. One thing that's true of these agreements is they're fairly complicated. You've got asset purchase agreements, sales agreements, transitional support agreements, so it's mostly around the work of finalizing those documents before they're either announced or closed.

Jim, anything you'd like to add? Yeah, I think the important thing to remember, too, is that the lost programs have been addressed there. So really it's just a 747 that's left. We have a stable to growing business, but we're still working the strategic plan to continue to address those non-core assets.

Yeah, and I'll comment that if Stewart in particular is benefited as the 767 freighter and tanker provider of the a large wing carry-through structure with favorable cash flow and margin. So it's not a business that we're anxious to unload. And Red Oak with the T7A has got a good future ahead.

Terrific. Thank you very much.

Thank you. Our next question comes from Miles Walton with UBS.

Thanks for your morning. I was wondering if maybe you could touch on the cash flow, working capital obviously better, The loss-making program's obviously slightly better than your full-year projection previously as well. I'm curious, as you look to 22, you mentioned $180 million of customer advances still to run off. What kind of headwind is it in 22? And also from a working capital perspective, is there opportunity in 22, or do you have some of these progress payment reversals and you've kind of done everything you can on working capital in 21?

Yeah, thanks, Myles. For this quarter, working capital was beneficial, and I think it was a follow-through to what we talked about the last couple quarters, is it takes a while to change your supply chain to the new demand. And we're now seeing that we're working through inventory that we paid for in previous quarters, so we have less cash going out to pay for that inventory. And it's just the beginning. I think we're going to continue to see improvements in working capital efficiency moving forward. Lower sales require less working capital, and we've gotten more efficient in our internal processes to make sure we have only what we need. In terms of the other drivers, Dan mentioned one. It's not the largest, but the military first years are paying us a little faster, which is nice in the quarter. Some of that will reverse, but I think next year, the big drivers for cash next year, and we look forward to giving you guidance once we've finished our planning process, is, of course, advanced liquidations. And we don't have guidance yet to give how much we'll liquidate exactly next year, but we look forward to providing that. We do have the 747 closeout. That's about $50 million next year. We have pension, but we address that with our contribution of stock. Largely, there's a small amount of cash that may be due next year, and we'll give you guidance when we close out the year on that. Working capital is still going to be a tailwind for us. I think volume is important. We're looking forward to increasing volumes. We're seeing slow but steady increases in volume. And it's a backlog that is higher quality now, too. It's more military content, more steady margins. And then the full-year effect of our cost reductions that we incurred this year is going to benefit us next year. So lots of levers, and you've got an experienced management team. Let's look forward to executing on those next year.

Okay. Two clarifications, if I could. The rotables write-downs. Is that specific to a contract, and has that inventory been disposed of in some way, or is that potentially going to come back through the P&L? And likewise, on the write-down of the assets for sale, should we interpret that as lower proceeds than previously expected or anything else that changed that? Thanks.

On the impairment of inventory, it's rotable inventory related to legacy fleets. like the MD-88 is one of them, that have been taken out of service. So they're recognized as lower value. It's a non-cash impairment charge, so we still have the material. And should demand increase in the future, we may be able to get more out of it. So that's just a reserve. It's not cash in the period. And the second piece was the asset held for sale. We did recognize the $45 million reduction in the loss or the increase in the loss of the assets held for sale. It relates to the decrease in the value that we've determined in that health for sale assets. It's not necessarily a reduction in proceeds, although it probably is a small reduction. It's just an estimate right now. And when we close the transaction, we'll true it up.

Thanks. Our next question comes from Peter Arment with Baird.

Yes. Good morning, Dan, Jim. Dan, On your systems and support, you mentioned the OEM was down, I think, 51% versus the prior year. Can you maybe talk about where you are, at least in terms of syncing up with the kind of the planned production rate to the recovery of Boeing, or 787 obviously trending down, 737 coming back? But how are you in terms of any inventory that you have to work off?

Yeah, thanks, Peter. So unlike some of our peers, we weren't built ahead multiple ship sets at our plants. We typically were maybe one or two months ahead. Although we did have agreements with suppliers that might stretch out six to nine months. And so we spent much of Q1 and Q2 burning off that excess inventory as the rates fell faster than we could slow down suppliers. But the good news is that Airbus has firmed up their narrow body demand. I mentioned All the two OEMs together delivered 125 aircraft in December, and the monthly average for the whole year was 60 a month, so 2x the monthly average. So they're definitely on the upswing. Airbus has asked us to protect rates higher than 40, and we are doing that in partnership with our suppliers. Certainly it's been a difficult time for the 787 with the reduction from 10 down to 5. We've adjusted accordingly. But we are looking forward to the 737 MAX recovery. And I mentioned the return to service arrangements that have now been adopted in Canada, Europe, and in the US. So they've put a forecast out there that gets them back to 30 plus a month in 2022. And that'll be a big tailwind, not only for our interiors business, which does all the blankets, the floor panels, but for some of our actuation businesses. and Yakima and Valencia and Clemens that support the platform. Today, the 737 MAX is perhaps 3% of revenue, and we expect it to go back up to where it was pre-COVID, you know, 7% to 8%. So the net of those is if you had to have a rising tide, having it on the narrowbodies at both Airbus and Boeing is going to offset the decline in the 787 MAX. And on the 777, we have more content on the legacy 777 than the 777X, so that's really not an impact to us. And then the 767 remains flat at three a month, and they continue to look at demand for freighters and tankers, and that may go to four a month at some point. So we're in lockstep with the OEMs on rates, and although we've got another year to work through and ramp up on the max, we're excited about what it will do for Triumph in our fiscal 23.

Appreciate the call. I'll leave it at one. Thanks, Dan. Thank you.

Our next question comes from Greg Conrad with Jefferies.

Good morning. Good morning. It seems, you know, aftermarket has outperformed peers on the downturn. You know, what was commercial aftermarket down specifically in the quarter, or is the down 28% just commercial? And then just thinking about your prior push to increase aftermarket content, are you seeing share opportunities as the market resets at these lower levels.

Okay, thanks. So, we measure MRO, you know, in both the, I'll call it the upstream early indicators like receipts, and then how many repair orders we push out, and then that translates into sales as we're paid for those. So, the upstream measures of receipts across all of our 12 MRO, we're up 11% from Q2 to Q3. We went from about 1,600 repair orders to 1,854, so a nice quarter over quarter increase. There's a little latency in the receipts into delivered, you know, repaired items and therefore sales, so there's a lag there, but the leading indicator's favorable. And as you look across all of our plants, The trend, quarter to quarter, of the 12 that we did, 10 were up and two were down. The two that were down were Atlanta, where we do interiors refurb. It's a very small operation, and nobody's bringing their planes in for interiors. So we've decided to close that plant. And then one was near break-even, and the others were favorable. So those are the metrics that we watch. In terms of taking market share away from others, We're looking at those smaller MRO providers that don't have the rotable inventory or the cash resources that Triumph has to pick up share. A lot of the carriers, Southwest as an example, has gone out to market with large RFP packages to compete MRO work, and we're supporting those as well. They'll benefit fiscal 22, nothing necessarily in the short term. So overall, you know, we're encouraged. I mean, at the trough, you know, MRO demand was down by about half, and now we've seen that, you know, recover, and we expect it to continue as flat hours recover.

And then just one follow-up, which is more on the military. I mean, you mentioned improved competitiveness as some of the costs have come out and that the $4.5 billion pipeline is majority on the military. What are you seeing in terms of new opportunities? Are these mostly new builds or retrofit programs? And, you know, are some of them more takeaway wins versus, you know, new starts?

Okay. Three different categories. Takeaways, new builds, and new starts. I would say that the biggest driver is retrofits and upgrades. Takeaways. a helicopter whose engine controls maybe have become obsolete or they want to gain some margin on performance. And we'll go in and work with either the depots or with the OEMs to improve the reliability of those components. And that's happening frequently at our West Hartford, Connecticut site. But we're also on the new platform. Some of them are still low in rate, like the T7A. I want to say on the defense T7A that the promise of full-size determinant holes, essentially a click-together wing, is being realized right now. And having worked in this industry and factories that were forests of tooling where you could hardly see the aircraft, now these structures are coming together with essentially a window frame fixture, and it's a really good sign for the future affordability of aircraft. The tolerance tightened on the piece parts, and they just essentially clicked together. We're also on the MQ-25. That's early in build. And we have roles on two primes for the future vertical lift with the Army, where we'll supply landing gear and hydraulics. So we've got good positions on new builds, but they're not contributing significantly to today's revenue as much. We are getting some lift on recurring production programs, F-15s. the F-35, and we're positioning for some technology insertion on the F-35 where they're refreshing certain components midway through the ramp. And then MRO demand we've covered. So what you try to do is plot where are you in the life cycle of an aircraft and make sure you have programs in all phases. You want programs in R&D, you want them in new product introduction, you want them in recurring production, and then in the sustainment phase, sort of the atrophy index. And we plot that across all our programs to make sure we're not overweighted in mature production programs, and therefore we're going to have a bathtub in the future. And we're not overweighted in development programs where margins are low. You want to have a renewal of your backlog, and that's what we're focused on doing.

Thank you.

Thank you. Our next question comes from Seth Seifman with JP Morgan.

Thanks very much. Good morning. I guess as you think about the military piece of systems and support going out on a multi-year basis and the flattening budget, do you still see potential for growth on the military side or You know, would you think about the military side sort of flattening out with the budget and the commercial recovery, you know, becoming the growth driver there with flatter declining military sales?

Yeah, I don't have any data that supports a flattening DOD budget yet. And I think history supports that for at least the first year or two, there's a lot of inertia momentum around programs of record. The Biden administration is expected to put out their budget in the April timeframe that would normally be in January with a new administration. They delay that a few months. There may be some changes of priority, and we'll align to those, but we're not expecting a downturn in defense spending. You know, the world remains an unsafe place. The recent news about the U.S. and Syria is an example. And, you know, we're – because we play such a broad role from – tankers, to helicopters, to fighter aircraft, to, you know, we support land vehicles as well. We don't talk about that much, but we do. And so we're not exposed to any single platform should there be a change in priorities. And we'll adjust, but I'm confident that we won't see it turn down, at least in the first one to two years.

Okay, great. And then on the Just going back to the MRO comment you made earlier, the 11% increase, was that commercial only or was that across all of MRO?

Across both military and commercial.

Okay, okay. And then, you know, during the pandemic, as you look to in the aftermarket outside of MRO and the proprietary aftermarket, you know, during the pandemic with things kind of quieter in terms of repair work, in terms of production, has that been more of an opportunity for you to push forward on that effort? Or has it been a period where, you know, there isn't as much opportunity and we should look for that to pick up more in the future as, you know, as volumes and activity pick up?

Let me give a little color on where we're seeing an increase in MRO demand. China during the last quarter, quarter to quarter, was up 23%. So the support we provide to China Southern, China Airlines, China Eastern, all very large airlines, is up substantially. Asia in general is up 17%, and Malaysia in particular. Europe's up 16%, and part of that is our partnership with Air France. We decided to enter into this joint venture to get on the The newer aircraft, so I think 737, 787, those are just getting into their more intensive phases of support. And the partnership with Air France, under license from Collins, allows us to do so. North America is up about 13%, and that's driven by cargo carriers. The only market that's really down was South America, and that had to do with softness with aircraft. some of our engine accessory work down there, but that's a smaller contributor to MRO. So it looks like Asia is coming back strong, and we expect Europe and North America to continue to steadily ramp up. And then defense MRO spending is also favorable.

Okay. Thanks very much. Thank you.

Our next question comes from Michael Ceramoli with Truer Securities.

Hey, good morning, guys. Thanks for taking the questions. Maybe just go back to, I think, what Kai was asking on the contract renegotiations and renewals. Do you expect these newer extensions to provide some margin tailwind versus the – it sounded like you had the opportunity to review and reset some of the price breaks, raw materials, other discounts in there. But do you expect these to be margin accretive versus the prior contracts?

Yes. And to elaborate, Triumph, when they acquired a number of companies, had contracts that were loss-making for which they adjusted the acquisition price and then established a fair market value and they would unwind that reserve as products were delivered, but it was a cashless profit because the programs were in a lost position. So as these LTAs renew, we've had to explain to OEMs that we can't sell silver dollars for 25 cents. And they're realistic about it. They know they've benefited from years of a cost advantage, a discount on some of these products. We do enter into discussions with the primes about what could be done to drive affordability. Are there design simplifications? Can we give them some of the content back and source it through their suppliers? So the answer, where possible, we'd like it to make it where cost comes down but margins are enhanced. But the answer to your question is, yes, we expect it to be a tailwind for mortgage.

Got it and then just 1 more on the, if we think about the remain Co company within structures, you called out some of those, some of the content on the 22, the Gulf streams, the 35, the trainer. And then obviously you've got the interior, the blankets, the insulation. Can you give us a sense, is there a big margin difference between those various offerings and maybe can you give us a sense of what the split would look like between those revenues?

So there is a difference in margin based on where they are in their life cycle. Obviously the T7A as an example is not a high margin program in its development phase, but Boeing has large hopes for the program, not only with the Air Force, but the Navy and foreign military sales. And when you get into FMS, the margins improve. V-22 is more in the production. Mature production phase margins are stronger there. As Jim reported, TAS was about a 5% operating profit business when you take out things like 747 shutdown. So, you know, it's not stellar, but it's positive in that regard. And we have an end in sight to the closeout of 747. So what remains is a smaller structures business but a much healthier one, better lead, better processes, better quality, better on-time delivery. That's my comment about no more REDD programs. Some of you who have been with me for the journey here at Triumph remember when we started and said we're going to eliminate all the REDD programs and it took longer. and we would have liked, but we're there on structures, so I'd like to give a shout-out to that management team. It's good business, good capabilities. It may not be aligned with our long-term vision for the company, but there are people who want to focus on structures, and last time I checked, you can't fly the aircraft without primary structure. Got it. Great. Thanks a lot, guys. I'll jump back in. Thank you.

Our next question comes from Ken Herbert with Canaccord.

Yes, hi, good morning. I just wanted to first ask, on the TSNS margins in the quarter, can you go into a little bit more detail on what drove the sequential improvement relative to the second quarter?

So, good question, Ken. I think there's a little bit of volume going on, but there's a lot of cost reduction as well, as we continue our austerity measures and reducing our fixed costs. Remember, SG&A is down. in the mid-20%, lower than a quarter ago. And the mix has improved as well. We see more military mix, which is more stable, a high-margin business, and less of the commercial, which can be volatile in terms of margins. But overall, the margins in that core business are headed north and more towards our longer-term goals, and we're taking all the actions necessary to accomplish that.

Okay, and Jim, that's perfect. Can you just remind us what are sort of the longer-term goals? I know you've outlined them in the past, but has that changed? Or how do we think about segment margins, margins for this business in 22 and beyond? And what's the potential?

Yeah, you know, like, like everybody in this industry, we're trying to see into the future. And it's not as clear as it was maybe a couple years ago. So the direction is clear that we're going to continue to improve those the opportunity is unfolding as part of our planning process and as the market starts to recover. But there's no reason that these can't be back up in the 20s in a normal pre COVID market.

Okay, and if I could, just one final question, Dan, maybe for you. I like the detail you provided on slide six with your hidden value. As we think about this business moving forward, what's the mix for the TSNS business, the mix of what you manufacture where you own the IP relative to, say, build to print moving forward?

Yeah, thanks. Thanks, Ken. So first on the revenue side, A quarter ago, we were roughly 50-50 on the contribution of structures versus systems. And in Q3, and you'll see this in the 10Q, it's now a 62-38 split. So we're seeing, you know, rapid acceleration in the weighting of systems versus structures as we, you know, exit programs and we grow on the military side. In terms of, you know, IP versus bill to print, we've already exited. The majority of the build-to-print business and structures, machining, fabrication, metal finishing, and what remains is good content, as we've discussed previously. But on IP, I think we're at about 80% IP for our products and systems and support. And where it's not our IP, for example, let's say we manufacture, we do manufacture gears for the Apache, transmission gears, thousands of them. Our Macomb plant makes over 80,000 gears per year. It typically takes 12 months to manufacture a single gear. So a big pipeline of inventory going through there, and that's where a lot of the CapEx that Jim mentioned has been invested is into new post-tolerance grinding equipment. But that's not IP, but it's a sticky sole source. In fact, we took the Apache contract after another supplier had gone Chapter 11. And we've been able to recover from what was a big past-due position to supporting the Apache line. And Boeing Defense has recognized that improvement. Very difficult to do over the last few years, but we did. So our focus is going to continue to be on IP, and we'll keep Build to Print where we can earn good returns and support the customer. But IP is our preferred model, and you'll see us do that in the gearboxes, engine control, speed exchangers. Just one other area that we're excited about, I was out at our Seattle R&D Center last month, and we're finally getting some traction on additive. We're starting to print parts that are applied hardware, critical fuel pump housings, engine starter housings, and we're trying to find those products that are a good fit with the technology, not just replace subtractive manufacturing So we're learning. We're early on the journey, but we're learning how to use additive, and that's another area where our IP can come through. We'll redesign the parts differently to take advantage of additive. It's a small percentage of revenue now, but I'm excited about what it can do.

Great. Thanks for all the detail. Okay. Thanks, guys.

Our last question comes from Ron Epstein with Bank of America.

Hey, good morning, everyone. Good morning. a longer term question here when we think about triumph in say five years as a benchmark period how do you think the company will look when we think about how much the company is going to be defense versus commercial services versus product OE versus aftermarket so if we take a little bit of a longer term view what's your goals there great thanks Ron

And you've been with Triumph for many years. It's a great question to end on with our longer-term view. First of all, not in five years, but within two years, we won't be having these in-depth discussions about unwinding RET programs and restructuring and repaying advances to Boeing. Those will all be retired. So we're excited about finally getting to the part where we've got clear air to fly through You're going to see Triumph expand its MRO offerings, and so I won't hazard a percentage. Today, you know, our MRO is about a half a billion of our sales, so we'll call it a quarter. I think it will definitely be higher. I won't put a number on it. But we've done a half a billion through mainly three commodity areas, engine accessories, structures, structural repair, and interiors. Interiors is going to be less of a contributor, but we're looking at new classes of product to provide aftermarket for that build on what we do in the engine components and structures. And then on defense versus OEM, you recall we started this journey. We were 2080 defense commercial. Now we're at about 35%. And I think it's reasonable to think we'll end up at 40% to 45%. You remember, Ron, when we were heavily weighted towards business jets and regional, and we've reversed that now. And those two together, I think, are less than 9%, Tom, of our revenue combined. So it's those we've just decided it's just not an attractive market for triumph in the things that we do. There are a few niches we do higher. High-tech composites, for example, complex leading edges, but not large structured wings. So that will continue to decline. And then you asked about OEM versus aftermarket. And that's – I don't expect a big shift in that mix. OEM work is still good work. You know, it's volume you can count on. MRO tends to be more cyclical. For example, all the – freighters that went out and flew their wings off to deliver all the holiday gifts. We didn't get any MRO traffic, and now they're all coming back, and they're catching their breath, and they're doing updates. So it's nice to have the mix of the two. I think that's the key word is balance, diversification of customers, of life cycles, of the program, of regions. I mentioned the growth in Asia versus the U.S. You know, that's the key for Triumph to be predictable over time. So five years, we certainly want to regrow our top line. And we just looked at the five-year forecast with all of our female leaders, and it's a nice top-line CAGR and an even better margin CAGR. So if we can, you know, get some luck here on the pandemic recovery, sustain the very high defense budgets that we've seen, There's no reason why Triumph can't finally be free of, I'll call it, the programs that have been a drag on the company. And we really are getting back to the company's core from 1996 through 2010. In that 14 years, they've built up a portfolio of systems and aftermarket companies, and that's where we'll be at the end of this journey with a broader set of offerings. Does that help?

That's great. Thank you very much.

Thanks, Ron.

Ladies and gentlemen, this is all the time we have for questions today. This concludes Triumph's group third quarter fiscal year 2021 earnings conference call. There's a replay available for today's conference that starts at 11.30 a.m. Eastern Standard Time to the 18th at 11.59 p.m. Eastern Standard Time. You can access the replay by dialing 1-800-585-8367 and entering passcode 2354859. Again, you can dial 1-800-585-8367 and entering passcode 2354859. Thank you all for participating. Have a nice day. All participants may disconnect now.