Triumph Group, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our second quarter fiscal year 2022 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 that your pop-up blocker is disabled if you are 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 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 that 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 Q2 earnings call. I hope you're all safe and well. Earlier today, we reported our second quarter results, for fiscal year 2022. I'm pleased to share the triumph demonstrated both strong margins and improving cash flow company-wide, allowing us to maintain full-year financial guidance, all while we continue to come through the pandemic and strengthen our portfolio and balance sheet. Demonstrated by our new wins and announced partnerships, our focus in Q2 continued to be on improving and organically growing our core business, while closing out several non-recurring cash uses. Our cost reduction actions continue to boost our results as the market recovers. We continue to see promising macro trends this quarter on multiple fronts, while organic sales declined slightly due to short-term wide-body platform headwinds, increases in demand for commercial aviation translated into higher orders for maintenance, repair, and overhaul work, both in terms of volume and favorable mix. In fact, staffing in our engine accessories MRO business has surpassed pre-pandemic levels. Overall, we're pleased with Triumph's second quarter results, which are either in line or above our expectations, enabling us to meet our objectives. On slide four, I summarized some of the quarter's highlights. Our 20 percent increase in the quarter in MRO services continues to be the company's leading indicator of the commercial market recovery. Prior cost reductions, lean events, and earlier than anticipated retirement of programmatic risks yielded an 18% EBITDA margin in our systems and support segment. Our pivot towards growth is reflected in our wins and strategic partnerships announced in the quarter. Portfolio actions continue to reduce debt. We have sufficient liquidity and flexibility to meet debt obligations in the normal course of business. And last, Supply chain pressures are being proactively managed in collaboration with our customers to ensure supply continuity and affordability. Jim will go into more detail on the quarter's results. As observed across the A&D industry, the market recovery will continue to be uneven over the next several quarters. There are enough tailwinds, however, to allow Triumph to relax our cost savings austerity measures from last year as the market continues to improve to retain our experienced workforce in anticipation of the ramp-up, one likely to be paced by talent and manpower capacity. Triumph is complying with the U.S. executive order regarding vaccinations and is seeing a declining rate of new cases. We do not expect significant impacts from our compliance, but we'll continue to make keeping our people safe our first priority. As we come out of the pandemic, Triumph is entering into a new deal with its employees. revisiting the value proposition to include greater flexibility and career opportunities for both salary and hourly team members. Over the last 20 months, our employees demonstrated that they could be extremely productive and overcome life and death challenges without the historical command and control management culture and restrictive policies of the past. By accelerating the adoption of empowered cross-functional teams across the company, We anticipate higher levels of engagement and productivity than before the pandemic, and we believe that we'll be a preferred place to work going forward. At Triumph, we value our employees and intend to break new ground on this front. In my view, this new deal will be one of the silver linings of the pandemic. Our actions, combined with OEM and MRO rate increases, will support expanded margins and cash flow. putting us on a path to delever the company year over year. A few comments on the macro environment. The commercial aviation market recovery continues to progress with global capacity now running just 30% off 2019 levels. Worldwide, 86% of single aisle and 64% of twin aisle aircraft are now in active service. Recently, carriers recorded two consecutive weeks where traffic across all regions improved relative to 2019 levels. Global travel is at the highest point since the crisis began. Notably, there's evidence of compensatory domestic schedule increases in response to the curtailment of international travel, which help explains why China's domestic schedule is expected to be up nearly 30% from 2019 levels by the end of November, and the U.S. domestic schedule is expected to exceed 2019 levels in the same period. Long-haul markets are down 55 to 75 percent to 2019, depending on region, but the good news here is that there are announcements from Singapore removing restrictions for vaccinated travelers as of October 19th. Qantas resumed international travel November 1st, and the U.S. removed restrictions for vaccinated European international travelers from November 8th. All these together should result in near-term benefits, as transatlantic travel is expected to rise to two-thirds of 2019 levels by the end of November, with accelerated recovery to follow, which will provide additional MRR opportunities for triumph over time. Global revenue passenger kilometers, which have been hovering at around $200 billion a month for the six months ending in February have since doubled to approximately $400 billion a month, a welcome improvement which will drive an increase in TRIUMS MRO revenues. Cargo demand has been very strong. It currently exceeds 2019 levels in all regions excluding South America. Through the first three quarters of the calendar year, cargo flights are up 75 percent between Asia and North America, 110 percent between Asia in the EU and 97% between the EU and North America. Triumph's cargo-related revenue is up 41% year-over-year. Our leading indicator for MRO job inductions are up 49% in FY22 year-to-date over the prior year and up 10% sequentially. The defense budget for FY22 remains in process with three of four legislative committees posing a $778 billion top line, and the House Appropriations Committee supporting the President's requested $753 billion. This will be resolved in December. Conferences is likely to result in a final year budget around $778 billion, an increase to FY21-741 billion of approximately $37 billion, providing program stability year over year. Slide five provides an approximation of U.S. defense platform positions on a lifecycle curve with new programs in the pipeline and in development on the left and sunsetting programs to the right. TRIUMPH is well positioned on mature production programs and on those entering their MRO phase where we are actively engaged on both OEM MRO and third-party MRO content. The programs in the development and growth stages will be key to the future. We are actively securing ship-set content on all future vertical lift programs, next-generation adaptive cycle engines, and next-generation air dominance programs, as well as the B21. Programs currently in the introduction phase, including the T7A, MQ25, and the CH53K. And Triumph has built significant ship-set content on these platforms. I recently attended the first delivery of the CH-53K helicopter to the Marine Corps at Sikorsky's facility in Connecticut, and it was a well-organized and exciting event. Congratulations to the Marines and the Lockheed Martin Sikorsky team, as well as their entire supply base. Our warfighters need this amazing aircraft, and Triumph is proud to provide key systems, such as the blade fold and damping system for the rotors, for which we recently signed an agreement spanning LRIPs three to six. Ramping military fleets include all F-35 variants and the KC-46 tanker, where we have existing content and are working to increase share through technology insertion and takeaways. Commercial transport build rates are stable, and the OEMs are making plans for single aisle rate increases. Triumph recently attended the Airbus supplier conference wherein Airbus shared plans to increase production of the A320-321 from rate 45 to 65 by mid-2023, and even higher to 70 in 2024 and 75 in 2025, as well as increases in the production of the A220 through 2025. This is good news for the industry, and Triumph's Airbus sales for the quarter reflect the improving Airbus single aisle outlook as our systems and support A320 family sales increased 22 percent quarter over quarter and sequentially. As expected, the twin aisle segment recovery lags the single aisle. Boeing is implementing production fixes on the 787, and the recent decision to move to rate two for several months is a temporary headwind to the supply base. We continue to follow this closely and look forward to return to higher production rates and international travel. As a result of reduced 787 shipments, Triumph sales for the quarter are down 6 percent sequentially. However, bookings are up 57 percent sequentially. Turning to slide six, for the quarter, Triumph recorded 67 new wins valued at $1.25 billion, including several large Boeing contracts for thermal acoustic insulation, composite ducting, and hydraulic products across multiple Boeing platforms. Bryant is a global market leader in commercial transport thermal acoustic installation systems, and this long-term contract ensures that we retain that position far into the future. New MRO wins include an agreement with Honeywell to provide support for LEAP engine starter components, the CT7 gearbox overhauls for Savina Technics, and A380 landing gear overhaul work for Collins. We also signed contracts for a multi-ATA chapter repair contract with FedEx and an agreement with ATSG for 737 integrated drive generators repair. New Triumph IP driven wins include orders for Triumph's AH64 fuel control upgrades, a nose wheel steering system for a classified Lockheed program, and the aforementioned CH53K multiple LREP awards for blade fold and damping systems. I also want to mention that in the quarter, we delivered our first A320 XLR landing gear uplock flight test units to Airbus. Triumph is a market leader in uplocks, and this new innovative design provides active confirmation of up and locks position, a safety enhancement. And finally, I want to highlight the recently completed joint venture between Triumph and Air France KLM, known as Accel, which will enable Accel to service new fleets such as the 787, and 737 MAX, which normally wouldn't transition to third-party repairs for another 10 years or more. Announced at last month's MRO Europe show, we are very excited about this transformative joint venture, and we're excited to grow this business with our partners Air France KLM. While the current market environment includes cost and supply chain pressures, we continuously assess our cost for labor, materials, and overhead. This week, I'm supporting our supply chain team and hosting our top 50 suppliers with the goal of identifying capacity constraints and mitigation action to de-risk the expected ramp in commercial OEM production. We're also securing a greater level of contractual protections against increases in material costs as we renew contracts and are aware of potential inflation in some commodities. Some examples include back-to-back contracting agreements for suppliers on short- to medium-term agreements, the use of customers' right to buy agreements for raw materials, API adjustments based on industry indices, specific protections where supply chain sources are customer-specified, such as casting and IP parts, and general protections against material price changes above a certain threshold level. We've held 10 joint problem-solving calls with our OEM customers to mitigate anticipated supply chain constraints expected over the next 12 to 18 months and have been encouraged by their willingness to participate in joint problem-solving. In summary, our markets are improving and our pivot from restructuring to growth is underway. We expect this trend to continue as commercial production rates increase into next year. Friant grew margins to the quarter in our core systems and support business and retired several non-recurring cash uses, allowing us to maintain our financial guidance for fiscal 22 with improving cash outlook quarter-over-quarter and year-over-year. We remain focused on our goal of doubling our profitability over our planning horizon while deleveraging the company through the combined lift of cost reductions, volume increases, more favorable pricing, and new products and services. We will continue to invest sustainably in the development of our people as part of our employee new deal, our operations, and our new 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, Dan, and good morning, everyone. Our core business continued on its path to value by growing backlog, expanding margins, investing sustainably, retiring risks, and realizing the benefits of our operating system. Our performance through the first half, coupled with the diversification of our businesses, enables us to maintain our guidance, and we expect to generate positive free cash flow over the balance of the year. We continue to execute on our plans to pair the few remaining non-core businesses and product lines to decrease debt, maintain liquidity, and focus on our profitable core businesses. 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 eight, you'll find our consolidated results for the quarter. We continue to improve profitability on an adjusted basis quarter over quarter due to the enhanced quality of our backlog and net favorable reserve adjustments realized through our focus on efficiencies and retirement of certain lost contract liabilities. MRO Services continues to lead the recovery and mostly offset the short-term headwinds associated with the 787 production pause. As a result, sales are down 2% organically, while the impacts of our recent divestitures and sunsetting programs and structures led to lower sales compared to the prior year. Due to adjusted operating income was $28 million, and adjusted operating margin was 8%, up 339 basis points from the prior year. With respect to the segment results, on slide 9, Net sales in systems and support included a 20% increase in third-party MRO sales and improving commercial narrow-body build rates, offset by headwinds from the production pause on 787 and reduced spares orders. This segment sales by end market were consistent as a percentage of sales this quarter compared to the prior year quarter, with military representing just over 50% of sales, reinforcing Triumph's program portfolio diversity. Operating margin for systems and support was 15%, a 367 basis point improvement from the prior year, and benefited from increasing MRO demand and net favorable reserve adjustments. Subsequent to quarter end, on October 1, we completed the sale of our Staverton UK facility and licensing of certain legacy non-core product lines. Annual sales from this business were approximately $30 million, and it earned below segment level average margins. This divestiture did not have an impact on our financial guidance for the year. Summarized on slide 10, second quarter net sales for the aerospace structures segment after adjusting for divestitures and the sunsetting 747 and G280 programs decreased 2% due primarily to the production pause on 787. The continuing structures business is stable and improving as evidenced by the 7% adjusted operating margin compared to 4% in the prior year. The recent contract win and extension with Boeing in our interiors business secures future demand, expands capabilities, and provides for continued operational efficiencies as the team continues to recover from the pandemic. Our large structures facility in Stewart, Florida remains a profitable business, and we are in active discussions with several strategic parties about its future. Turning to slide 11, in the second quarter, we retired $11 million of discrete cash obligations related to settlements and the wind down of 747 production. Excluding these sunsetting uses of cash, We used $16 million of cash in the second quarter on modest working capital growth in support of anticipated production rate increases, primarily on commercial narrow-bodied platforms. We remained focused on aggressively managing our working capital with several initiatives across the enterprise targeted to improve our inventory turns. Capital expenditures will accelerate over the second half as we anticipate investment in our core systems and support segment in support of rising OEM and MRO demand and sustainable supporting infrastructure improvement. On slide 12 is a summary of our net debt and liquidity. Our net debt to EBITDA leverage ratio improved by 10% year to date. At the end of the quarter, our net debt was approximately $1.4 billion, and our combined cash availability was about $220 million. In connection with the sale of our Staverton facility, in October we paid down approximately $24 million of our first lien notes for the proceeds. Our next step maturity is not until 2024, as we continue executing our deleveraging actions to strengthen our cash flow and improve our credit. Slide 13 is a summary of our fiscal 22 guidance. Based on anticipated aircraft production rates and excluding the impacts of potential divestitures, for FY22, we continue to expect revenue of $1.5 to $1.6 billion. We now expect adjusted EPS of 68 cents to 88 cents, a 27-cent increase from our prior guidance of 41 cents to 61 cents, driven by program risk retirement. Cash taxes, net of refunds received, are expected to be approximately $5 million for the year, $1 million higher than prior guidance, while we continue to expect interest expense to be approximately $140 million, including approximately $137 million of cash interest. After approximately $42 million of free cash use in the quarter, We expect to generate free cash flow over the balance of the year, with approximately break-even free cash flow in Q3 and solidly positive free cash flow in Q4. For the full year, we continue to expect use of $110 to $125 million of cash from operations, with approximately $25 million in capital expenditures, resulting in free cash use of $135 to $150 million. We continue to achieve our goals and have made significant progress in improving the predictability of our profitability and cash flow. Margins improve in Q2, and we expect to be cash positive over the balance of the year. Our cost reductions, operational efficiencies, improved pricing, and increases in volume will all contribute to improving margins moving forward. The measures we are taking are making us a stronger and more competitive and sustainable company moving forward. Now I'll turn the call back to Dan.