Triumph Group, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group Conference call to discuss our fourth quarter fiscal year 2021 results. This call is being carried live on the internet. There's 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 the slide presentation. You are currently in a listen-only mode. There'll be a question and answer session followed by introductory comments by management. On behalf of the company, I would like to read the following statement. 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 this call is property of Triumph Group, Inc. It 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 chairman 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 Q4 earnings call. I hope that you're all safe and well. Earlier today, we reported our fourth quarter and full year results for fiscal year 2021. I'm pleased to share that Triumph delivered positive free cash flow for the second consecutive quarter, driven by improving profitability and effective working capital management, all while we continue to recover from the pandemic and execute on our portfolio transformation. Furthermore, our team achieved these results despite the severe weather that impacted our sites and people across the southern U.S. in February. We saw encouraging macro trends this quarter on multiple fronts, The continued progress on vaccine distribution and declining COVID-19 cases in the U.S. fueled steady increases in demand for commercial aviation, which translated into higher orders for maintenance, repair, and overhaul work. Triumph was one of the first companies to report higher MRO demand, which provides faster financial impact versus longer cycle programs, and contributed to quarter-over-quarter improvement in our core operations as we begin to put the commercial downturn behind us. I'll touch on this more later. Favorable trends in systems and supports, military helicopter and engine programs, and strengthening Airbus narrow-body production rates were key contributors to our recovery and reinforced the hidden value of Triumph's diversified customer base and platform content, which has been masked by the pandemic and the portfolio optimization actions we've taken over the last few years. We're optimistic that this upward trajectory will continue. These tailwinds, coupled with our comprehensive actions to improve cash flow and enhance margins, create positive momentum as we enter fiscal 2022. We're going to grow our company sustainably and responsibly. At Triumph, we believe in the power of and. That means we'll continue to work hard to achieve financial success and enable the safety and prosperity of the communities we serve and in which we live. Overall, we're pleased with Triumph's fourth quarter results, which are either in line with or above our expectations, enabling us to meet our full year objectives. Let me walk you through some of the highlights summarized on slide four. First, we generated positive free cash flow through strong deliveries, collections, and effective management of working capital. Next, our core systems and support business achieved its third consecutive quarter of sequential organic growth With 14% revenue growth and expanding margins, we continue to drive operational improvements and enhance the quality of our backlog. Third, with the closure of our large structures divestitures and ongoing 747 closeout, we continue to execute on our commitments and remain on track towards our future state configuration. Last, we took several actions to strengthen our balance sheet and improve our liquidity position. including raising approximately $145 million through an at-the-market equity offering during the quarter and reduced our debt. Years of streamlining our portfolio and upgrading our talent and processes helped Triumph to weather the pandemic last year. The value that Triumph offers is showing through in our results and will become more apparent as we continue to execute our future state strategy. As we near completion of our transformation to a stronger company, centered on our profitable core, we kicked off our fiscal 2022 in April with a renewed focus on driving growth and greater operational efficiencies while continuing to emphasize sustainable shareholder value creation. Though the macro trends are positive, we recognize that the market recovery will continue to be uneven over the next several quarters. As a result, we're prudently maintaining our cost savings austerity measures from last year with intentions to reverse them as the market continues to improve. Our actions, combined with OEM and MRO rate increases, will support expanded margins and cash flow, putting us on a path to deliver the company year over year. On slide five, I summarize the drivers for this quarter's results. First, within our core systems and support businesses, we continue to improve operations as evidenced by the third consecutive quarter of sales growth and improving operating margins. Systems and support revenues increased across all end markets in both OEM production and MRO quarter over quarter. Systems and support also reduced inventory by 30 million in the quarter through increased efficiencies, expanded relationships with distributors, and raised margins on programs that were underperforming before. One example, our mechanical controls and components business in the U.S. and Europe provides a broad range of proprietary products across both aircraft and shipboard platforms. They improved both their Q4 revenues and operating margin quarter over quarter by 10%. Triumph grew our distribution network for both commercial and military OEM products and adjacent infrastructure markets. The breadth and depth of our proprietary products and distribution channels across diversified end markets and customers are further indications of the hidden value in our systems and support business as summarized on slides six and seven. Fiscal 21 was the first year since 2010 when revenue from our systems and support business exceeded that of our structures business as we win new systems content and run out our legacy structures programs. Q4 cash use on sunsetting programs was lower than expected, in part due to continued improvement on the 747 program. We will deliver our final 747 structures in our second quarter, at which point Triumph will have fulfilled our program obligations. We will then close down the second of two large factories dedicated to the 747, ending a long period of losses. Military sales now comprise 51% of our turnover in systems and support, helping to offset the impacts of the commercial aerospace market downturn. Recall I set a goal to expand our military revenue from 20% of sales in 2016 to 30% at the company level. We are now at 38%, and we are up 25% in terms of absolute dollars as we grow our military content across the life cycle from development to production to sustainment. Military platforms such as the E2D, V22, and CH47 contributed to the sequential sales growth in our core systems and support business unit, driving a 22% increase in our military sales year over year. Shedding the legacy cash-consuming programs and stabilizing performance across all the structures allowed them to be modestly profitable in Q4 on an adjusted basis. Absent program shutdowns and advanced repayments, structures generated positive cash flow, As an update on our exit of our non-core structures businesses, on May 10th, we announced the completion of our sales of our composites and military structure sites to Arlington Capital Partners, demonstrating continued progress on portfolio reshaping. The proceeds from these transactions will be used to pay down debt. These divestitures represent an important milestone to reconfigure the business. Over the last few years, we've sold or closed 42 facilities out of 75. An enormous achievement considering that many of these actions were completed in the midst of the pandemic. We're now down to just a handful of facilities and programs left to address. I want to recognize the Aerospace Structures team for their dedicated work to simultaneously navigate the crisis, improve operational performance, and exit non-core operations. In Q4, we generated over $16 million in free cash flow due to improving margins and prudent working capital management, with further improvement in inventory turns possible. During the quarter, we successfully accessed the equity markets and raised $145 million by selling shares through an at-the-market offering, and we applied a portion of these proceeds to retire some $64 million of senior notes due in June of 2022 below par. We recently called the remaining outstanding June 2022 notes and expect those to settle by the end of Q1. Together, these actions further strengthen our balance sheet and extend our material outstanding debt maturities to 2024. We remain on track to achieve our future stakes figuration as a largely pure play systems and support provider to military and commercial customers with interior structures capabilities. I'd like to go into more detail on the path to recovery for the commercial aviation industry as summarized on slide eight and its expected benefit to triumph. As COVID cases have declined in many parts of the world, our airline customers have expanded routes and flights primarily in the U.S. and China. Flight bookings improved from prior quarter and are now 46% of 2019 levels. On May 4th, TSA throughput reached 1.6 million passengers, a new high since the start of the pandemic. Flight traffic numbers are improving, where load factors have stabilized around 75%, a number which allows operators to begin nudging pricing towards sustainable profitability. Global capacity and park fleets are also moving in the right directions, and we're encouraged by what we're hearing from our customers in terms of anticipated ramp-ups. OEM production has remained stable despite temporary disruptions due to the 787 structural inspections and 737 MAX electrical modifications. Commercial narrowbody volumes are expected to increase at both Boeing and Airbus over the next year, and we're prepared for this ramp in calendar 2022. While our MRO inputs in the quarter were affected by the weather impacts, the mix of orders across Triumph was biased towards more extensive overhauls, such as the KC-10 tanker refueling boom. As the aviation industry continues to recover, we expect to see increased bookings, higher load factors, and more sustainable fare levels, and additional aircraft return to service, all of which will drive improved MRO demand. Turning to slide 9, Triumph's military and government end markets outperformed again, with revenue up 22% in Q4, mitigating commercial aviation volume declines. Triumph's military and commercial MRO sales both experienced sequential improvements of 25% and 33% respectively. Recall MRO is a fast-turned business where we book and ship within a 30 to 45-day cycle, so it's a good early indicator of an emerging aviation recovery. We believe our profitable MRO business will lead Triumph's financial recovery. The business is well-positioned to capitalize on returning demand, including MRO support to our OEM equipment content across all end markets. We continue to expand our independent third-party MRO business with new proprietary repairs as a designated engineering representative. This is another example of Triumph's hidden value as we address the entire lifecycle of an aircraft. A comparison of sequential quarters highlights encouraging signs in commercial traffic. Shipments on all Boeing commercial transport platforms rose from Q3 to Q4 in aggregate by more than 30%. A positive signal is inventories and buffer stock benefit from stable production. No doubt the pandemic has impacted demand in the short term. TSS backlog declined in the quarter, consistent with the decline in production rates. To the good, military and government end markets account for more than 50% of systems and support sales and 55% of their backlog. Turning to slide 10, Triumph closed $350 million in new wins for the quarter across OEMs, Tier IIs, and operators. GE awarded us the afterburner fuel pump contract for the T7A trainer, where we already have strong ship set content. While we're known for our helicopter fuel pumps and hydraulic pumps and engine controls, we have a very strong franchise in military fighter fuel pumps, designing and building main engine gear pumps and centrifugal fuel pumps, for multiple platforms. We're also hard at work developing high performance pumps for the next generation military fighter engines. Triumph was also selected to design and build the landing gear system for the Sikorsky Raider X next gen helicopter. We've expanded our existing content through an award to design and build weapon bay door actuators as part of our support to both future vertical lift development programs. This new business chart highlights the diversity of our customer base, capabilities, and platforms. Turning to slide 11, I highlight strategic awards on the T7A Trainer, as well as recently completed renegotiations for high-performance gearboxes on the CH53K and Bell 429, where we are the sole source provider. These wins underscore our position as the largest independent source of complex gear solutions to both military and commercial end markets. As highlighted on slide 12, our core systems and support business had a strong fiscal 2021 with over a billion in sales from a balanced mix of production and MRO work across both military and commercial end markets. Longer term, we forecast a return to pre-COVID-19 levels of sales with margins of over 20% and strong cash conversion. To summarize, We stabilized the company and balance sheet after the pandemic last year. We grew margins quarter over quarter and generated solid cash flow in the second half of what was no doubt the company's most challenging year. We expect to continue to grow our core organically and expand margins through fiscal 2022 and beyond due to continued cost reductions, operational efficiencies, anticipated changes in product mix, and new pricing opportunities. We will continue to invest in our people, operations, and products to enhance shareholder value year over year. With that, Jim will now take us through the results for the quarter in more detail. Jim?

Thanks, Danny. Good morning, everyone. We ended our fiscal year with another solid cash-positive quarter. Reflecting on the past 12 months, we entered FY21 with strong momentum from the prior year into a period of significant market uncertainty. Commercial air travel was at its lowest rates in recent memory, OEMs were rapidly reducing production rates across the board, and Triumph was facing the constraints of its financial debt covenants. In keeping with our values, we acted with velocity to ensure the safety and welfare of our workforce, to aggressively reduce costs, to amend our debt covenants to maintain compliance, and to accelerate exits from non-core and underperforming assets and programs. After the trough of our fiscal Q1 last year, when we used over $200 million of cash, we were reducing expenses and honoring our inside of lead time purchase commitments while we adjusted purchase orders to the lower customer demand. 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. Since then, we've delivered quarter-over-quarter improvements in key metrics in our core systems and support business, exited work in the G650 and G280 wing programs, and moved closer to the end of our obligations on the 747 contract. We exceeded our fourth quarter cash flow and earnings forecast and achieved or exceeded our full year objectives. Fiscal 21 was an eventful year, and I'm incredibly proud of the work we have done to navigate the pandemic and position Triumph for continued improving performance headed into FY22. 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 13, you'll find our consolidated results for the quarter. Planned reductions from sunsetting and transitioning programs in our structure segment led to lower sales compared to the prior year. Despite the headwinds, Q4 adjusted operating income was $33 million. Adjusted operating margin was 7%, up 138 basis points from the prior year. We continue to improve profitability on an adjusted basis quarter over quarter. Turning to slide 14, you'll find our fiscal 21 results. Our net sales were impacted by our sunsetting and transitioning programs, and our mix of sales included sizable military and market growth. Our full-year adjusted operating income was $108 million, representing an adjusted operating margin of 6%, down slightly from the prior year. With respect to the segment results, on slide 15, net sales and systems and support were up 14% sequentially. including a 31% increase in sales on Boeing commercial platforms and benefited from adjacent market captures and infrastructure. This segment sales were 52% military this quarter, up from 23% in the prior year quarter. Adjusted operating margin for assistance and support was 14%, which is comparable to the prior year and up sequentially over last quarter, excluding one-time items. Summarized on slide 16, Fourth quarter net sales for structures were in line with expectations, driven by planned sunsetting and transitioning programs, as well as reduced demand on commercial programs. Despite the headwinds, net sales increased 2% sequentially. Structures now has four consecutive quarters of favorable cumulative catch-up adjustments due to strong performance and effective program closeouts. Our actions to aggressively reduce costs resulted in $16 million of restructuring costs in structures in the quarter. Excluding these costs, operating margin was 2%, up slightly from the prior year quarter. Aerospace structures revenue will be lower, but higher quality moving forward due to the divestitures, the business jet program exits, and the end of the 747 program. Turning to slide 17, at the start of the year, we experienced a temporary increase in our working capital as we adjusted our supply chain to the new lower demand. Our $17 million of cash flow in the fourth quarter was better than forecast and driven by a net decrease in working capital in the quarter. Q4 cash flow included $10 million of advance repayments and approximately $10 million of cash use on the 747 program. In Q4, we incurred $20 million of restructuring costs, which were accrued in the quarter but will largely impact cash flow in Q1 fiscal 22. In addition to the cash restructuring costs, other key drivers impacting our FY22 cash flows are listed, including expected advance repayments, 747 spend, and certain customer settlements. Capital expenditures for the full year of $25 million included $15 million in systems and support to continue to enhance productivity and competitiveness. We anticipate approximately $30 million of capital expenditures in FY22, including $22 million in systems and support. We remain focused on aggressively managing our working capital. On slide 18 is a summary of our net debt and liquidity. Our net debt at the end of the quarter was approximately $1.4 billion, and our combined cash availability was $624 million. In the quarter, we received $145 million in net proceeds under our at-the-market equity offering and retired $63 million of our 2022 bonds at slightly below par value. Lastly, through the American Rescue Plan Act of 2021, we benefited from the changes to the required funding for our pension plan, reducing the FY22 obligation from $18 million to about $2 million. The reduction in required pension funding over the next four years exceeds $150 million. The updated required pension funding estimates are approximately $1 million per year from FY23 through FY26. Our net debt increased by less than 4% for the year, far below the net debt increase at many other A&D companies and airlines. After our fiscal year end, following the completion of our structures divestitures, we announced the mandatory pay down of approximately $113 million of our first lien notes. In addition, we have called the remaining $236 million of outstanding 22 notes. These transactions are expected to be completed during our first quarter. Together, they will reduce our debt by approximately $348 million and reduce our cash interest expense by about $22 million per year. We also have over $500 million of deferred tax assets that continue to create value through reduced cash taxes moving forward. Regarding guidance, due to the uncertainty of the inflection points in the commercial aviation recovery, we are deferring providing guidance until later in the year. Our focus on our operating system, coupled with our cost reduction actions, improves our competitiveness and adds value for our customers. FY20 saw Triumph making the turn. Through the first half of FY21, we managed the commercial downturn, and through the second half, we have done even better, as we delivered on our commitments and achieved quarter-over-quarter improvements in our core operations. We believe that FY22 is a bridge year. The prior cost reductions and operational efficiencies will help us continue to improve margins as volumes gradually and sometimes unevenly expand. The measures we have taken and are taking to managing this downturn are making us a stronger, more competitive, and sustainable company moving forward. Now I'll turn the call back to Dan.

Dan? Thanks, Jim. In summary, coming out of this difficult commercial downturn, we've built momentum quarter over quarter by generating organic growth and expanding margins in our core business and driving to second-half positive free cash flow. We continue to take the hard actions to position Triumph for the future, including cost reduction, the exit of loss-making programs, and divestitures. We achieved our full year objectives and continue to forecast organic growth in systems and support and further increases in margins. From an industry perspective, stability in OEM production rates with continued signs of MRO recovery give us confidence that the worst of the pandemic is behind us, but we also recognize that the overall recovery will likely be uneven. I'm confident that the talent of Triumph's team members and the value of our core will only become more evident as we drive revenue growth, margin expansion, sustainable cash flow generation, and improve our win rate. Importantly, our balance sheet and portfolio transactions enhance our liquidity and position us well for the future. The strides we've made over this past year placed us even closer to our future state configuration. We're now turning our focus to driving organic growth, unlocking the hidden value in our business, and delivering benefits for all of our stakeholders in a responsible and sustainable way. The Triumph team continues to meet and overcome challenges and get the job done. I'm proud of what we've achieved. We have solid momentum from which we will build and continue to make an even stronger Triumph. Kevin, we're happy now to take any questions.

At this time, the officer 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 one 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 Spengard with Credit Suisse.

Hi, good morning and congrats on another positive cash flow quarter. Dan or Jim, Given that we have a good sense of what OE production rates are on the commercial side and what the military business is doing, is the reason not to guide just uncertainty around the MRO and aftermarket?

I think that's fair. We're not concerned about guidance. We have our own internal models that run not only in fiscal 22, but 3, 4, and 5. And you read the same debates about the inflection points I think had we seen an opening of international borders through the course of calendar Q1, we'd be much more comfortable putting guidance out there. But the uncertainty around our guidance is pretty tight. We're not concerned about it. Jim, any comments to add?

Yeah, I think like many of our peers, we just would like to see a little more follow-through before we put guidance out there. But we're looking forward to it in the near future.

Okay. And then, and just with regard, I think you said you prepared for an OE ramp in 22. Are you not seeing a narrow body ramp this year? And where are you on max relative to what, you know, Boeing's talked about, which sounds like early in this year, going from about seven a month to somewhere around 20 a month by the end of the year. Are you, are you tracking that? And then the last question I have is just with regard to the, the longer-term view on slide 12, if you could talk about when you would expect to reach 2019 levels on most metrics, you know, which year, especially since you do have something that sounds like about a four- or five-year plan.

First, let me agree that a blanket statement that RAMP's not going to happen until 2022 is not really representative of what's already happening. Airbus has ramped up smartly. If you look across all of their E3 20 family, they're on the order of 46 a month, our fiscal 22, and then it goes up into the 60s over our forecast period. So their ramp is already well underway. They're having great success in the market on the XLR. On Boeing, we are at rates on the order of seven a month, but it varies by factory. But in aggregate, that's about right. And we are tracking with rates that go towards 20 and then into the 30s next year. So when I say getting ready for the ramp in 2022 calendar, I'm mostly talking about Boeing and also the 787. You've read about the recent orders. And although the rate's been down in the five-ish range of late, they forecast getting back up to 10 over the planning forecast. So it's mainly the Boeing ramp that we're talking about. In terms of the when on page 12, It really is tied to the recovery of wide body. We do a lot of work on 787 and shedding those last remaining structured programs like 747 this year. In our fiscal 22, we have still some remaining run-out costs on that. So to get to 20% margins or better, that has to be out of the portfolio.

Jim? I think the restructuring actions we've taken have some inefficiencies with them, too, that aren't hard dollars. as we get up to speed on the new structure with lower costs and volumes come back, we're going to see increases in margins faster, I think, than we're anticipating. But for now, we're being conservative, and we're not ready to put a stake in the ground of exactly when they'll come back. But certainly we've been there before, and with the cost reductions and the contracting opportunities we have, we're going to get there again as soon as possible.

Most of the OEMs are telling us, get ready for the ramp. And I think, you know, you've been in this industry a long time, Robert. The pendulum can swing pretty quickly, and then we're all competing against the finite capacity of sub-tier suppliers and outside processing suppliers like paint and heat treat. And we were there two years ago, pre-COVID, and getting ready for that again, making sure we can support these higher rates is part of the planning we're doing now. Okay. Thank you for the color. You bet.

Our next question comes from Peter Arment with Baird.

Good morning, Dan, Jim. Nice results. Hey, could you give us an update? I know you've been hard at work reshaping and doing a lot of portfolio shaping. An update on what's remaining and what the status is there. And then, Jim, if you could also just talk a little bit about expectations around working capital for fiscal 22 and Yeah, I'll leave it there.

Thanks. Okay, thanks, Peter. So on the structures business, having sold the red oak plant and then the two composite plants in Georgia and Thailand, the only large structures plants we have left are in Grand Prairie, Texas on 747, and that's within weeks now of completing its work, and then it will close this year. And then we have our Stewart, Florida plant, which is profitable and cash-positive. It does the tanker and freighter wing carry-through structure. And that's a plant that, you know, it contributes to the company's financials, but it really is non-core in the sense that there may be better owners for it. And so, you know, we're in discussions with potential buyers around that facility, but we don't have to sell it. You know, that's the good thing about the work we've done on the balance sheet in our cash liquidity is we're not a seller under duress. But if it's the right thing for Boeing and for Triumph or someone else to own it, that's certainly something we'll consider. And then we've got our interiors business, and this year our focus is on consolidating that. It was one of the factories in Mexico that was most impacted by the max rate, and so we have two plants within a family of about six interiors plants that we're going to close, and then the remaining ones, one large one in Mexico and some small ones in Europe, We'll decide what the best path forward is on that. But right now, it's about getting ready for the recovery and rate in interiors, because that business also was profitable pre-COVID. And it's one of our latest operations, really good team there. And having come through the pandemic, get the rates back up on max, they'll do fine. Jim?

Yeah, thanks. So in terms of working capital, Peter, I think the divestitures went with a lot of working capital and the more volatile types of working capital. So the remaining businesses are less volatile and leaner on the needs for working capital. In the quarter, we did see cash generated from working capital coming down, from inventory coming down on a core basis. And then we, of course, have our non-recurring items, which I tried to get some insight on page 17. You can see the advanced liquidations. So we're expecting $21 million a quarter in this coming year. And we have the 747 closeout, which was lower than expected in the fourth quarter. We were expecting about $20 million. We only spent $10. So next year it's going to be $60 million in FY22. And most of that will be in the first half of the year as we finish building out that program. We have some customer settlements, which are going to benefit the long term. That's around $30 million in the first quarter. And then I mentioned that the restructuring, which again is going to have great benefits moving forward, We did accrue 20 in the fourth quarter, and most of that cash will go out in the first quarter. So in terms of working capital trends and cash flow trends for the coming year, without giving guidance, we've tried to give you insight into what we do know. And if you look at last year, we were a cash user in the first half of the year and a generator in the second half of the year. I think you'll see a similar trend going forward, just less magnitude. And it's really a transition year. That's why I say it's a bridge year. We're going to get out of a lot of those advances. We're going to get the 747 behind us. and we're going to see increasing volumes and the benefits of restructuring actions moving forward from there.

That's helpful. And just, Jim, if I could just to follow up on the – did you give us the pension underfunded status where you ended the year? Thanks.

Yeah, it's about $360 million on a gap basis, but more importantly is the cash funding requirements, which due to several actions we took, but also in large parts of the – the Rescue Act of 2021, our pension funding is only a million a year for 23 through 26. And next year, I think it's about $2 million. So it's come down substantially. So that burden is off of us. And the liability has gone down because the asset returns have been so good this last year. The reason it was higher at the end of last year was because it was a really difficult measurement point at the end of last March when the markets were very depressed. And as they recovered our funding, our net liability went down. And so we expect that to stay down there.

Appreciate all the details. Thanks. Thanks.

Our next question comes from David Strauss with Barclays.

Thanks. Good morning, guys. Good morning. In terms of our modeling for aerospace systems, is that around $100 million per quarter kind of revenue run rate going forward based on the divestitures that were just completed?

So you said systems, but you meant structures. And I think that your estimate is in the ballpark. I think you'll have more detail in the 10K you'll be able to see from the divested businesses, but that is about correct.

Okay. And so, Jim, you went through the, you know, kind of non-recurring items that you have in, you know, in fiscal 22 from a cash flow perspective. So is it safe to assume that all in fiscal 22 is another free cash flow burn year? And at this point, if you look, I know it's a ways out, but it would appear most of these non-recurring IRMs, I guess maybe other than the advances, will be done with come fiscal 23. So it's safe to assume that, you know, fiscal 23 should be a free cash flow positive year.

So I think I gave you insight into some of those significant cash uses that are non-recurring, and you just recited those. So I could see where you would come to that conclusion. And although we're not ready to give guidance, I do appreciate that view and hopefully use the information that we've given you. So I can't argue with your conclusion, but we're not ready to give the exact guidance. Certainly through the next couple years when advances are gone, 4.7 is gone, restructuring is done, and we're seeing the benefits. We're seeing the benefits of our new contracts. It should be a very good year compared to this bridge year that's coming up.

Okay. And where does the advance balance sit as of today?

Okay. As of March 31st, it's about $187 million. All right.

Thanks very much.

Our next question comes from Kyle Bonner. We're with Kyle.

Yes. Thanks so much. So maybe give us some color on what those customer settlements are. And secondly, you know, you've paid down some debt here. How much net cash do you think you need from this point forward to run the business?

I'll start on the first question on the settlement. So it was maybe just a bit of timing lock that we had a number of five- to ten-year long-term agreements, what we call LTAs, that came up for renewal in the last six months. And these are contracts that typically we negotiate six to 12 months before they expire. And because we have intellectual property property. We have a lot of manufacturing domain know-how. There's a cost of switching, and there's a cost of requalification. The OEMs that we worked with recognize that it's in everybody's interest for us to remain on those programs and to extend those LTAs. So whether it was hydraulic components at our actuation business in North Carolina, or it's steering and locking actuators at our plant in Valencia, California. These support Boeing and other OEMs. We're not done. We still have probably another six or so LTAs that we need to renegotiate over the next quarter or two. And what we found is that there's been a recognition that some of those older LTAs that had negative escalation in them or maybe they were negotiated as part of an M&A action that Triumph took back in the day. Like we had one contract on the 787 that was a former GE Smith's contract that was taken on board at Triumph in a lost position, and a Ford reserve was set up for that. Well, 10 years later, now that LTA has expired, and we can't continue to sell that product at the prices that were previously in place. So Hopefully that gives you some color for the kind of extensions and pricing negotiations we've had.

Yeah, thanks, Dan. In conjunction with that, Kai, and I think you may be referring to some of the cash use related to those settlements, we've got to settle the old claims, some lingering old claims over the life of the old contracts in order to enter the new contracts. So these are going to benefit us. We're going to take care of those claims. This is an estimate we put in the quarter, but we're down the path with a lot of these negotiations. That's going to enable us to get the better margins moving forward with new contracts when they take effect in the coming quarters and coming years. In terms of the cash, from the divestitures, and we put an AK out there so you could see the net proceeds of the recently closed divestiture was $155 million. That will repay about $113 million of our first lien debt, and that will help us with interest there and reduce our debt. And then we also gave notice – to redeem the remaining balance of the 22 bonds. It's about $236 million after the $64 million we had bought back last quarter. Combined, those will save us $12 million of cash interest per year. In terms of the pro forma cash availability afterwards, it will be just under $300 million, which is more than sufficient for our projected needs.

Great. And just one follow-up. Dan, you mentioned you have six more contracts left. to go, can you comment, are there any settlements associated with that? And or, you know, usually if you're renegotiating, you know, given where we are, do you have, I mean, a lot of, several other suppliers have said now that there are no brand new 787 programs, A350s to chase, basically the suppliers have a little more leverage in the discussions. How should we think about those six more to renegotiate? How big are they as a percent roughly of your business? Do you have any settlement claims you might have to come and deal with? And what sort of change in profitability should we look for? Thanks.

Well, thanks, Guy. That's a lot of questions, and I'm going to put you on our negotiating team because you've got your finger on the pulse of what we're doing. The answer is yes. These contracts extensions do involve settlements on price. The answer is also yes, that some of the traditional incentives that might have been offered to suppliers like higher volume on current contracts or rolls on new starts are not there today in the short term. You know, longer term, you know, we'll see ramp-ups happen and we'll see new starts, and there may be trades that suppliers like Triumph make on current work in order to secure future roads, but that's not really the case today. So we've got a weighted cost capital we need to clear, and we also want to ensure that all of our customers have supply continuity, and we buy a lot of our parts. So when you come up within lead time, to extend these contracts, all of the lower tier suppliers are wondering, hey, is this going to get extended so they can plan? And having that certainty of supply against a forecast of rising rates is important to the OEMs, and so we've been able to secure price increases to ensure that continuity.

Thank you. Our next question comes from Greg Conrad with Jefferies.

Good morning. Good morning. In slide 12, you called out stable military end market. I mean, how does that apply to TGI's military business, given recent growth and some of the contract wins we saw in fiscal year 21? Is there an offset to some of those recent program wins, just thinking about the military growth profile?

Well, certainly the cut in the rate of the 787 over the last couple of quarters is has been impactful, and we mentioned that our backlog was down because of that. So getting this military work, both MRO, I mentioned the KC-10 refueling booms, we delivered seven of those in the last fiscal year, and they're huge and they're quite involved. So getting that kind of work in has helped to offset some of the OEM rates. The challenge is it's usually not the same factory that saw the OEM rate that benefits from the MRO. So the work tends to shift around within the company. But we see strong defense demand. There hasn't been any signals of using the DoD as a bill payer for domestic spending. And then you combine that with the fact that there are still platforms within the DoD that are not at their readiness levels. They would like to see, I won't name them, but there's a number of aircraft They would like to see higher readiness rates. I just returned from visiting some of the Air Force air logistics centers and talking to the leaders of the depots, and they're looking to industry to help them get that readiness up. So I think military MRO demand will continue to be strong. And then there seems to be no decline in the cards for freighters on the commercial side. Just e-commerce and expansion of consumer spending is, is really fueling a demand for those. So we're expecting to continue to support FedEx, UPS, Atlas, and other carriers as well.

And then just as a follow-up, for systems and support, I mean, sticking to slide 12, you talked about long-term recovery to fiscal year 20 levels. I mean, how do you think about mix as the business recovers? I mean, it seems like MRO leads growth, but are there any structural changes where you can actually grow that above peak And does OE get fully backed just given some of the wide body weakness? Just thinking about some of the aftermarket initiatives that you've done over the years that really trying to strengthen and expand that business.

You know, Greg, I'll remind everyone that pre-COVID, we were talking about going on commercial narrow body rates to much, much higher rates, like the max from 40 to 57 and even higher. So, I think very soon this whole conversation around getting back to 19 is going to be overcome by events, and it's going to be how much higher than 19 are we going to go. Now, I'm not saying that there's not continued headwinds with the pandemic and international travel on the wide body, but on the narrow body, we could see rates that are greater than 19, and that's part of why we're planning now for the ramp and making sure that all of the supply that we buy can support it. Now, we're not going to get ahead of the market and acquire inventory betting on the come, so it's contingency planning consistent with the rates that the OEMs have published. But I think 19, we're going to eventually blow through that, and we'll be at higher rates than we were pre-COVID. Thank you.

Our next question comes from Ken Herbert with Canaccord.

Hi, good morning, Dan and Jim.

Good morning.

Hey, I just wanted to, in the quarter, you called out on slide nine 33 percent sequential growth in your commercial MRO business. And I'm wondering if you can parse that out at all by sort of the repair services and parts, and if you saw a significant difference between either of those in the quarter.

Yeah, I don't have the data here on the call, so that may be one we have to take offline. But we saw a demand for both spares and MRO. If I had to handicap it, I would say more on the repair side. During the trough, our plants that do accessories, so they rebuild air cycle machines and generators, gearboxes, they had to lay off half their staff. It was terrible. I was in one of those plants last week. And it was encouraging to see people coming back because it's high-skilled work. I mean, when they lay out a generator on the table, it's like a watch. It's got like 300 parts in it, springs and small bearings and whatnot. And so the skilled mechanics that do this work and they're certified are really valuable to have. We're not doing quote-unquote wrench turning. We're doing the higher-end work. And because we can use serviceable material, we can often offer lower costs for the MRO and then do faster turnaround time because we're not having to deal with all the lead times of buying all new. So it is rewarding to see these employees starting to come back and the repair side is leading it. There's definitely some spares demand, but I'd say it's more repairs.

Okay. That's helpful. As we think about, I mean, you've signed a number of contracts recently on the aftermarket, and it sounds like on the repair side in particular. As you think about that sort of 60-40 mix that you call out, repair services to spare parts, with a lot of the recent contracts you've signed and joint ventures, does that mix change significantly? Do you start to see spare parts maybe in the recovery account for a bigger piece of the mix, maybe beyond 22, but 50%? but into 23 and 24?

I think so. I think the answer is yes, and I'll tell you why. You know, we signed up with Thai Aviation for repair services, but also spares, a little bit of training. We signed up with Triman for distribution of products through military MRO demand. That will be more weighted towards spares. We signed up with VSC. and we're close to completing our joint venture with Air France KLM, which will be support to the newer fleet, 787 MAX. And these partnerships are all part of a recognition that Triumph doesn't, we don't win alone, and we don't have a huge business development staff that can touch every customer, and these distributors do. In fact, when I went out to see the Air Logistics Center at the Air Force I mentioned, I brought the CEO of Trimen with me. And we traveled together and did the call together. And that's not something in my career I've typically done is brought my teammates with me to make customer calls, but it was much more effective. And he had a command of the customer's needs down at a part number level, and we sort of understood it at a capability level. And ultimately, I think we're going to faster so and I do think spares will play a bigger part of that and and also OEM parts you know we sell a lot of parts from our systems and support business and and we're not on all platforms weren't a lot and I'm challenging the team to expand our platform participation and sell similar products gear boxes or hydraulics or fuel pumps and to platforms we don't support, and our distributors can help us do that.

Great. Thank you very much.

Our next question comes from Seth Leifman with J.P. Morgan.

Thanks very much, and good morning. I was wondering, another question on slide 12 where You talk about in the near term in systems and support reinvestment in operations and R&D. I think I might have missed the number when you gave it, Jim, but I think you spoke about CapEx coming up this year. And then maybe when you think about the R&D side, you know, what does that statement kind of imply about investment levels coming up in fiscal 22? What is that investment for? And then where does it go beyond 22? Okay.

You know, for much of the last, you know, 10 years since the Vaught acquisition, the CapEx was weighted towards structures, in part because of the scale, you know, building new products, and in part because some of the equipment that was moved in from the older Vaught location to where it's at the end of life. So we're glad to be beyond that point. And now when you look at the profile, I think Jim mentioned 15 million of CapEx we did last year in systems. You're seeing... you know, high-end gear grinding equipment. You're seeing test rigs for hydraulics and fuel pumps. Those things contribute more to our core. And, you know, just as the revenue now is flipped from structures to systems, the CapEx is as well.

Jim? Yeah, thanks, Dan. And you're right. Of the $25 million we spent last year in FY21, $15 million of it related to systems and support, which was a change from the prior year where structures was more. What we anticipate this coming year is $30 million of CapEx of which 22 will be in systems and support. But beyond the CapEx, we're spending a lot on R&D as well. And there's tens of millions being spent on R&D. And most of it is actually customer funded because we're just developing next generation of our existing technologies on platforms we're already installed on. It's a good place to invest. It's high return and low risk. So we'll make sure everyone knows that's going on. That's going to feed our future.

Okay. And then maybe as a follow-up, you know, Dan, on the flip side of, you know, the point that was made earlier, which is a valid one certainly, is that, you know, there's a little more leverage for the suppliers here in negotiations with the OEMs. But, you know, thinking another way, I know in the past, you know, you've looked to take share. So to the extent that, you know, others might be looking to be more aggressive on price Are you seeing opportunities to take share from others in the market, particularly perhaps even in the aftermarket?

So we are seeing that dynamic. I won't say it's the dominant dynamic. I'll give you an example. FedEx and UPS are re-competing some of their MRO aftermarket. And so that includes reconvening our work and reconvening others. So we've had to sharpen our pencil on the support to the freighters. But I'd say on the OEM side, there's been less of that. And the takeaways have been more around performance. For example, we're developing a couple of products to go on the F-35 that provide more performance, reliability, over the original design, which worked in the early LREP aircraft. But now that they've got the fleet out there, they're saying, hey, this part could be more robust, or the aircraft generates a lot of heat. Can you up the capacity of the thermal cooling system? And the answer is we can. In those competitions, the takeaways link more to engineering and technology and less to pricing and it's, you know, a race to the bottom and on price. So I'd say we're seeing a little bit more price sensitivity on MRO and more about value on the OEM.

Okay, excellent. Thanks very much, guys.

Our next question comes from Michael Ceramoli with Truro Securities.

Hey, good morning, guys. Thanks for taking the questions. Maybe just to stay on some of Seth's line of questioning there. For systems and support, looking at margins in fiscal 22, is some of that R&D and the customer funded going to be a bit of a drag along with maybe some of the new military programs? Are they going to be dilutive? Just trying to get a sense of what we should be expecting for the margin trajectory there as commercial volumes recover as well.

Yeah, thanks, Mike. We do it in a... a planned way. So it shouldn't be overly dilutive in any one period, but we certainly are investing. And yeah, if we didn't invest, margins could be higher. We have been investing in the last couple of years. We are going to accelerate a little more this year. I think the goodness of it is that we're getting customers to fund it and they're getting the benefit from it. So our contribution net of customer contributions is not as great, but we'll get the benefit of the total R&D we've spent. Okay, okay.

Any color on the margin trajectory? I mean, it looks like it's kind of been bouncing around, but should we expect it to gradually climb with kind of commercial volumes?

Yeah, as volume returns, margins should improve. As I said, we're not going to see any big lumps in R&D. It's going to be pretty consistent throughout the year. So that's the answer. Okay.

Got it. And then just on, on cash, any planned cash restructuring in, in 22, any, any thoughts about, um, equity offerings or, or even, you know, continuing negotiations to get that advanced repayment, uh, down from 21 million or, or is that going to be a firm number?

Yeah, right now that's the scheduled advanced liquidation. So, and there's no plans for any other equity raises right now. Um, So, I'm sorry, at the beginning of your question, could you repeat that?

Sorry, cash restructuring. Any further restructuring?

Yeah, so there's always a little bit of restructuring going on, but I think it's largely behind us. The cash is going to carry over from fourth quarter into first quarter for the large restructuring we did in Q4, but it should be substantially less moving forward. Got it.

All right. Thanks, guys.

I'll jump back in the queue.

Thanks, Michael.

Our next question comes from Miles Walton with UBS.

Thanks. Good morning. Thanks for sliding me in. I was wondering if we could touch on the margins of the systems. I think sequentially, Jim, the margins, if I exclude the rotables impairment last quarter, it actually went down on the sales increase. Can you give some color as to why there wasn't more leverage in the business? And then also on slide 12, It talks about near-term growth for systems and support, and it sort of backs into an 8% implied growth from that middle near-term. Is that effectively what you're looking for for fiscal 22 sales growth?

So I'll start, and Jim, you can add in on the margins. The sales growth year over year, if you take out some of the 787 work that we were counting on, the higher number, than 8%, but year over year, it's probably a little lower than 8%. So that did create a little bit of a trough for us in the short term, but as they deliver out aircraft from inventory and raise back up, we'll see that recovery. So it depends on what's in your baseline. But with the rates that we know about today, we have a pretty healthy growth rate. I've given the challenge to all of our operating company presidents to have double-digit growth rates over the planning forecast, and we should. You know, we will have several tailwinds. We've also got pricing tailwinds. And so getting both revenue growth and margin growth happening, you know, in parallel, we think is achievable. Jim?

Yeah, thanks. So in terms of margins, you know, they can be lumpy, Usually it's based on spares, and I have to go back and look at the mix, but we may have had a higher spares mix last quarter. Dan mentioned the MRO was stronger in Q4. Q3, it may have been more spares. But I think there was also a factor where there was a little bit of inefficiency from the massive restructure we did. We took a lot of costs out during this period. It caused a little bit of disruption to normal efficiency. So moving forward, we look to increasing margins.

Was there restructuring in the systems business that was significant, or was it just on the structure side?

It was across the company. It was company-wide. Okay.

And one just clarification, I guess it's been asked a couple of ways, but I'll ask it this way. So if I took out the one-timers that you've put, or the non-recurring-ish things you've put on slide 17, is the underlying business, EBITDA allows cash taxes and, excuse me, cash interest and CapEx, is it positive in fiscal 2022?

So we're not giving guidance yet, but I think you can look at the drivers and see that there's a lot of cash headwinds in 22. Okay. All right, thanks.

Thanks, Miles. Our next question comes from Ron Epstein with Bank of America.

Hey, good morning, guys. How should we think about the normalized cash flow conversions You know, once we get out beyond 22 and things, you know, presumably the world sort of gets back to normal or totally gets back to normal, how should we think about that cash flow conversion?

I'll start, Jim, and you can add that we're looking forward to not having to be servicing advances and to not have the number of loss-making programs, not only in structures but also in systems, as I mentioned, some of those LTAs. So if you chop away the underperformers at the bottom, and then you extend your profitable contracts, and then you get rid of the cash drains, we can finally get to a cash conversion that is consistent with our industry peers. And we think that's going to happen within two years, maybe sooner. Jim?

Yeah, I would love to give you our forecast because I'm excited about them and the team's working towards them. We're just not ready to commit externally to them. I can tell you that, you know, cash conversion at some structures companies is in the high single digits. So for systems companies, it should be in the teens. And we're looking forward to getting there as we get through the next couple of years.

When I mean when it should be better than the teens, I would hope, right? And free cash conversion through a typical supplier through a cycle is, you know, maybe 80%, 90%, right? I mean, sometimes it's over 100% conversion and sometimes below it, depending on what you're doing with working capital. So maybe you didn't understand my question. It's got to be better than teens, right?

Yeah, so I'm talking as a percentage of sales.

As a percentage of sales. Okay, got it. Okay, cool. And then, you know, what gives you confidence that rates will get back, will get above 2019 as we go out? Is it just... Is it led by retirements, or how are you guys thinking about that?

So I've stayed in contact with the airline CEOs. I know most of them, and they're looking at a much more fuel-efficient fleet, lower cost on the MRO side. It's amazing how much of their budget is consumed by MRO today. So if they can get a newer fleet, that's a competitive advantage. And, you know, whether there's government incentives for them to retire legacy aircraft or, you know, not just domestically, but, you know, internationally in Europe tied to the environment, you know, you know, we'll see, but there's a lot of economic incentives to do so. Um, and then some of the underlying, um, drivers for the ramp that was occurring pre COVID, you know, expansion of the middle classes and, uh, in Asia. The demand for travel in China in particular, I mean, they're already above the 2019 levels domestically. It's already happened. They broke through. And, you know, I know Boeing is anxious to get approvals to start selling again and shipping aircraft into China, and assuming that that happens, that'll be another tailwind. So I think there are reasons, and I don't really believe that the pandemic created a permanent decrement and travel greater than maybe single digits. That's my opinion. Certainly, we've all learned to work remotely, and some trips will forego business trips and maybe travel within companies, but one of my favorite quotes is about the first company that loses a major order to a competitor who's willing to travel, he'll start traveling again. And then the demand for leisure. I still fly commercially, and And the airports are all full now. So I think it's going to happen. And plus, there's been a bit of a production gap of two to three years of fewer aircraft were produced. And just that regression to the main on volume will help as well. So I'm optimistic. It may not happen in 22, but 23, 24, I can see it happening.

Thank you, ladies and gentlemen. This is all the time we have for questions today. This concludes Triumph's fourth quarter fiscal year 2021 earnings conference call. This call will have the replay that will be available starting today at 11.30 AM Eastern Standard Time until June 4th at 11.59 PM. You can access the replay by dialing 1-800-585-8367 and access code 3660826. Again, you can dial 1-800-585-8367 and enter an access code 3660826. Thank you all for your participation. Have a nice day. All parties may now disconnect.