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.

Dan? Thanks, Jim. I'm pleased with our second quarter and first half results, and we're looking forward to delivering a strong second half of the year. Increases in our MRO services and higher OEM narrow-body production rates give us confidence that the worst of the pandemic is behind us. We've pivoted to growth through new wins and strategic partnerships that should benefit triumphant stakeholders going forward. Consistent with our full-year guidance, We'll build momentum quarter over quarter by continuing the track record of growth and margin expansion in our core business and drive to positive free cash flow over the balance of the year. Triumph is becoming a leaner, more profitable and cash positive company. We continue to make strides towards our future state configuration. We're unlocking the hidden value in our business, improving our win rate and delivering benefits for all stakeholders in a responsible and sustainable way. Kevin, We're happy now 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 withdraw your question, 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 Miles Walton with UBS.

Hey, good morning. I was wondering if I could pick up where you left off on the EPS guidance. And I think you mentioned higher risk retirements. Just to get to that level of EPS for the full year, are you thinking of this as idiosyncratic margin uplift from risk retirements you can see? and or what is the other income that you're currently looking for that's looking like it might be a little bit of a help to you for the year as well?

Yeah, sure, Miles. Thanks, Jim. You know, risk retirement, we have a lot of programs that are long-running, and they come up with estimates for cost to go. And as we improve the estimates through actions, through better sourcing, through efficiency, we're able to reduce costs. the costs that are estimated for the rest of the year. And that's what's going on. That combined with the changes in the market, whether demand on programs or lower margin goes down, higher margin demand goes up, that all adds to the mix in our margin improvement.

It's just a lot, though, Jim. The high end, $0.70 implied for the back half versus the $0.19 in the first half. Is there anything else? Is the other income line running better? above that $45 to $50 million level you gave in August? Is there any other color you'd want to give? It just seems to imply a pretty, pretty healthy step up in margins.

So it's really primarily the larger programs' risk retirement. So whether it be 4.7 or some of the other large platforms where we have a cost that we're estimating to be much higher, we'd be able to close them out at a better rate. I think if you look in the queue in the MD&A, you're going to see a lot of the description there. There's a number of programs. The majority of them are positive adjustments. There are some negative. But overall, it's net risk retirement is really the driver.

Okay.

All right. I'll leave it at one. Thanks.

Our next question comes from Sheila Coggle with Jefferies.

Hey, good morning, guys. Thank you for the time. Maybe if we could talk about stewards.

Jim, we started talking about that a little bit, that you guys are still in the active process, kind of where do we go from here, what's the timing like, and then what do we think about next steps from the company once it's divested and what the structure of business looks like?

Sure. I mean, as I mentioned, we're in discussions with several strategic parties on Stuart. The important thing about Stuart is not that one potential transaction. It's really the overall journey we've been on to transform the company. And what's left in structures is the interiors business, a little bit of 747, and then Stewart, which is primarily 767, but there's some G650, there's some 777 in there as well. Structures has become a smaller part of the business. And if you look back over the first half of last year, we were 50% structures, sales, and 50% systems. This year for the first half, we're two-thirds systems, and in fact, More than two-thirds of the profitability of the company comes from systems now. So structures has become a smaller part of the business. Stewart's a profitable, valuable business, and we're going to continue to run it until its future is determined.

And just to follow up on that, for the second half, what do we think about profitability for the structures business? You know, it seems to imply, you know, maybe high single, double digits, margins. Is that correct? Is that how we should think about it?

Yeah, the margins are a little lumpy there because they are longer-term contracts that have estimates involved in them. But I think we've been looking at kind of lower single-digit margins in that segment that's been the baseline.

Okay, thank you.

Our next question comes from Peter Arment with Baird.

Hey, good morning. I actually have Eric Rudin on the line for Peter today. Maybe if I could, just looking at pre-cash flow here, kind of in the quarter and through the balance of the year, you know, separating out some of the noise you had, $11 million of non-recurring uses this quarter, which looks like it's going to step up in the back half when advanced payments return at $21 million a quarter, still have $31 million to go on 747 closeout at And you mentioned the higher CapEx, too. So I guess the question is, what is driving the material improvement in the back half here, and call it the core free cash flow, to get to positive free cash flow on a reported basis overall, even with these significantly higher one-time usages than we just saw in the second quarter?

Yeah, thanks. There's a number of drivers for the free cash flow, and thanks for highlighting the non-recurring ones, because it's important to back those out if you really want to understand what's going on in the core. You know, sales are going to be higher in the second half of the year. We gave guidance in the 1.5 to 1.6 range. I think the first half sales were only about 47% of that. And fourth quarters always are very strong quarters seasonally as well. So volume increases are a key part of the driver. Our working capital initiatives are paying off too. Inventory is stable and declining. We've been burning off excess inventory that had grown during the pandemic, and we've gotten more efficient as well. as we've been able to take our excess resources and put them to work in efficiency programs. Cost outs as well, and that's all part of the efficiency programs. Price ups, because we've had contracts that have been up for renewal. We've been able to reestablish pricing to create fair margins. And less restructuring. We were much higher in restructuring last year, and the benefits of those restructuring is falling through. And our portfolio changes are another element of it. We've eliminated lost programs, either through fixing them with new contracts or exiting them, and we've been able to grow the more profitable programs. So it's no one thing. It's a concerted effort, and it's sustainable. So we're pleased with the progress we're making on cash. As I mentioned, in the first half, we used $193 million of cash. We said we'd be around cash break-even roughly in the third quarter, and that would imply in the fourth quarter, to hit our guidance range, we'd be about 43 million cash used to maybe 58 – I'm sorry, 43 million cash generation to 58 million cash generation, which are referred to as solidly positive cash flow. So cash is very important. We're focused on it, and we've got a lot of good drivers as tailwinds.

Okay, thanks. And just a follow-up on that, since you mentioned the price increases, can you just give us an update on where we stand on the LTA negotiations? I was understanding we shouldn't really be expecting those to flow through until we get closer to exiting the year, just maybe any color on sizing that in fourth quarter and into 2023?

Yeah, there's a number of contracts that we saw recently announced. Some of those include price adjustments. We did mention previously that there are some contracts we did earlier in the year that are going to kick in price increases in the fourth fiscal quarter for us, which starts in January. So that's the beginning of some important and meaningful price increases. And that's part of the improvement in profitability and cash moving forward. But there's no one big contract. And, again, diversification of those contracts enables us to address costs and pricing on an ongoing basis. Contracts can range from five to seven years. So we have opportunities all along the way to continue to improve profitability.

Okay. I'll just add, Jim, that – Yeah, we're pretty well positioned between the OEMs and the suppliers. The suppliers tend to supply commodity items that we can compete, you know, get competition on. And we have more of the IP that gives us pricing power with our OEMs. But at the same time, we're seeing these volume increases. And that's also helping us on margin expansion because we took a lot of cost out during the pandemic. We don't need to add that back as the volumes return.

Appreciate it. I'll hop back in, too.

Our next question comes from Seth Blackman with JPMorgan.

Jim, I just wanted to follow up some of the questions earlier about the profitability, especially in structures. If we look at the profitability in the quarter and the team adjustment that benefited structures in the quarter, when we think about the core structures business that will remain post-Stewart, is that profitable right now?

So we don't break out the two pieces in structures. It's not... Structures are profitable. I would say the rest of the business is in the break-even range at the moment. But as Max in particular returns, we're going to see rapid acceleration in profitability and cash flow there. The overall company is not impacted materially by Max, but interior business and one of our other shops, Valencia in California, is more impacted. So that's where it stands in structures.

Right. Okay. Okay. And then? When you spoke earlier about where that margin was going in the second half, it sounded like some of the reserve releases that you expect will be on some of those bigger sunsetting structures programs, which would think that that would bring the margin up in structures in the second half. Is that fair?

We're not really forecasting any reserve releases. I think what we've seen is improvement in reduction reserves in the first half of the year. It's possible we could continue to de-risk them, but at the moment, our estimates for costs moving forward are what they are for second quarter. So we don't forecast that they're going to go down further.

Yeah, what's encouraging about the max is the rates are already up above 20, and they're headed to 30 to 40 and to 50 over the next three years. And so interiors, which is part of structures, was a profitable business pre-pandemic. They've been hit pretty hard. They were a drag on earnings through the pandemic, and now they're starting to come back in volume. And with this long-term agreement that Jim mentioned in our remarks, that's only going to give us more certainty as to margin recovery in structures and interiors in particular. Okay.

And then, Dan, just as we think bigger picture about the industry you mentioned meeting with suppliers and talking about mitigating some of the pressures that may be ahead over the next several quarters. Can you talk a little bit about what are the areas that are the most challenging right now in the supply chain? Thinking about it more just from an overall industry perspective?

Yes. So we have some of the same constraints that existed during the ramp-up in 2018-2019 today that we had then. Raw materials, castings, forgings, some specialty items like bearings. And then you add to that all of the commodities that are in short supply because of the overall pandemic, chemicals, liquid nitrogen, resins. So it's in some ways we've got this perfect storm of rising demand in freight, military, and commercial against a backdrop of short supply and a cash-strapped supply chain who hasn't had the dry powder to invest in capacity or expand. So by meeting with our suppliers and our customers outside of lead time, what we're doing is we're defining what has to happen now so that in 12 to 18 months, when the rate really hits us, we can be ready. The first part is communicating the rates with confidence because if people de-rate the production rates, They don't believe them. They won't hire. They won't add on capacity. Number two is shore up those areas of short supply that are known capacity constraints. And that may be dual sourcing. It may be developing new sources in low-cost countries. But we know what those likely constraints are going to be. And number three is put better measurement systems in place to know which suppliers are at risk and where is the inventory you know, the digital threat from the lowest tier supplier all the way up to the OEM. All those things together are going to help us mitigate. There will still be some shortages and stockouts, but our risks are going to go down because we're starting early.

Great. That's very helpful. Thank you.

Our next question comes from David Strauss with Barclays.

Thanks. Good morning. Would you expect systems and support to grow year over year in the second half?

Yeah, we have a back-loaded revenue plan for our Q3, Q4, and then beyond that, fiscal year 23 to 26, because of the OEM rates, you know, strong military budgets. We're looking at high single-digit growth for systems business over our planning forecast, and some of the operating companies will be double-digit growth rates. So, It's a much better place to be than March of 2020 when we were staring into an abyss of unknown demand. And the numbers I rattled off related to commercial aviation just reinforced that. I've been one of the more bullish CEOs about the timing of an international business travel recovery. A lot of folks said, hey, it's going to be 24, 25. I see it sooner. And I think with the borders reopening, we'll have data to support that.

Okay. And then, Dan, I guess overall the outlook on defense, you know, we heard from a number of the primes here recently about, you know, flat, maybe even down next year for their defense businesses. You know, obviously you have, I think you mentioned systems supporters about 50% defense. How do you feel about, you know, your defense exposure and the ability to grow as we look out into next year?

The key is what platforms are you on. So I described the top line defense budgets, which are growing, but you want to be on those platforms that are being protected in the budget and are tied to critical mission gaps like tankers, MQ-25. There's a new tanker, as you know, that Lockheed Martin and others are competing for. And then just building out the fighter cadre of F-35s. Now there's new versions of F-15 that are being introduced. And there's money going into this digital century series of fighters. And then the Army's modernization of future vertical lift. And we feel very good about our positioning on that. There's two separate programs there. There's one called FARA, the Future Attack Reconnaissance Aircraft, and then one called FLARA, future long-range attack aircraft, and we're supporting Bell and Sikorsky on FARA, and then the Bell versus Sikorsky Boeing team on the FARA contact. We have content, different content on each program, but those programs appear to be protected in the defense budget. So depending on the OEM or the prime you talk to, they're going to have different exposure, and we feel confident that we're going to see the continued support for our platform. So I'm not concerned about it.

All right. Thanks very much. You bet.

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

Yeah, good morning, guys. Maybe just following up on the supply chain question, what are you seeing on labor, right, in your own businesses and when you look down into your suppliers?

So starting with InTriumph, we furloughed a large percentage of our workforce during the pandemic, and the take rate for rehires is about 50%. So a lot of folks that went off to other industries, let's say Amazon Logistics, they didn't come back. That's starting to improve now a little bit. Some of the U.S. subsidies have you know, ended in September. We're starting to see more folks come back. In fact, at our Grand Prairie Engine Accessories Plant, our headcount now is higher than it was pre-pandemic, and they suffered a big hit midway through the downturn. But labor is a topic that's getting lots of discussion. At AIA, they formed a Civil Aviation Leadership Council that was key to sponsoring the Jobs Protection Act for aerospace workers. Lots of things happened for the airlines early on. Nothing was happening for contractors like Triumph and our peers. So the money that's now flowing out to preserve jobs is helpful. But we're thinking of new channels of where to get folks, the tech schools, even down to the high schools, pipelining. And we're putting in new engagement programs around lean, so that we can get more output with fewer employees. And we're investing in capital equipment to get higher machine productivity. So it's not going to be one lever that offsets the labor capacity constraint. One thing that's true about the defense industry aerospace as well is we've gone through such boom and bust cycles through the decades that we know how to regrow our workforce. It's a proven capability. New people come in. and there's certainly a lot more automation than we had back in the 80s when I started. So although it's going to be a constraint, it's something we're working on, and I appreciate the government support we're seeing on this front.

Got it, got it, got it. And then changing gears a little bit, what are you seeing in space, in the space business? You haven't talked a heck of a lot about that. I think you guys recognize it as a growth area. What potential do you see there for Triumph?

Yeah, I spent a big chunk of my early career in space on both launch vehicles and satellites, and so I know it well. When I came into Triumph, we even renamed our structures business to be aerospace structures rather than the traditional aircraft focus. For Triumph, we see the opportunities in actuation and power We're investing in electric actuation to replace hydraulics. Hydraulics are not really part of the space picture. On one hand, reusable launch vehicles reduces the demand for consumable products. But on the other hand, the volume of constellations that are going up, whether it's Elon Musk or it's SpaceX or Bezos venture, the volumes are going up. So we're going to find niches where we can support where precision, high reliability products are needed. I'm a little bit more excited about industrial applications than space. Triumph does nuclear actuation. That's something that most people are not aware of, and we're trying to grow that business, especially in mechanical controls that help monitor the status of the reactors. As money goes into infrastructure, we're going to be working hard to grow our mechanical controls business, which is one of our most profitable. So you'll probably see more press releases on that, Ron, than you'll see on space. Great. And thank you very much. You bet.

Our next question comes from Kyle on the room with Kyle. Kyle, your line is open. You can ask your question. If your line is muted, could you please unmute the line? Do you want me to just move on to the next question?

Yes, please.

Our next question comes from .

Hey, good morning, guys. Thanks for taking the questions. Um, maybe just, um, to go back, I think to, to miles and Seth and get some clarity on, on second half margins with structures, I guess you had 7.6 million, give or take a positive, uh, favorable adjustments in the quarter. And as we look to second half, it doesn't sound like there's any more risk retirements or reserve releases. So, I mean, are we just looking at a, a kind of sustained core improved margin level for, for second half on a, on the programs within structures.

At any point in time, we're not forecasting to improve beyond the estimates for cost we have, but as soon as we take actions that become more likely not to be realized, then we're going to show improvement. So the opportunities certainly exist, and I can tell you we're driving towards continuing to reduce the cost, the closeout cost in particular on the programs that are ending like 4.7. So there's the opportunity there, but that's not in our forecast right now. But still, the business overall is solidly profitable in the single digits with our current estimates.

Okay, got it. And then just on the cash flow, you know, obviously, you know, X all the one-time items looking at this kind of second half rate, even the exit rate in the fourth quarter. I mean, I don't want to, you know, take that quarterly and, you know, of kind of, you know, I guess 40 or 50 million, but I don't want to run rate that. But, I mean, looking into fiscal 23, I mean, it seems like we shouldn't have any more one-time items. It seems like, you know, you guys should be solidly cash flow positive, you know, whether that's, you know, 100, 200 million. I mean, is there – Anything else beyond these final closeout costs, one-time allowance paybacks, anything else we should be thinking about as we move into 23 for cash?

We're pleased with the progress we're making this year. We're really kind of focused on the second half of this year and the closeout that's going on. We're in the planning phases for next year, so depending on what actions to take and decisions we make in the strategic planning and our budgeting is going to tell how we're going to do for next year's cash flow. So I'm not ready to give any guidance for next year's cash flow. But certainly exiting this year, and there's some seasonality there, too. We're going to see a strong fourth quarter, as you mentioned, in the range of $50 million. And all those tailwinds that we talked about do continue, whether it's volume increasing, the opportunity to reprice, cost continues to be contained, less restructuring, and a better portfolio. We're all going to add to our tailwinds by the amount I'm going into next year.

Okay, great.

Thanks, Gus.

Our next question comes from Miles Walton with UBS.

Thanks. I might go at this a little bit of a different way. Dan, on the last call, I think you talked about doubling EBITDA by fiscal 25 off of the base year being this year, 22. It sounds like, from Jim's comment, base year EBITDA is going up on the basis of margin performance. Are we still doubling this higher level of EBITDA in 22 into your 25 forecast, or do you want to put a specific number around that?

So I think the key is that we get early returns on this commitment to double margins, and we're seeing that quarter year over year in our Q2 results. So we're feeling good about it. to be out of the gates quickly on margin expansion. And this is before the volume effect really kicks in. Even with 787 rate cuts down, we were able to expand margins and our assistance and support. And we're meeting with our teams next week to go through their strategies and growth plans for our fiscal 23 to 26, which is our planning horizon. And we've done two passes of this, and the numbers are very encouraging. We don't want to provide multi-year guidance yet, but we don't need a lot of new wins. There's not a big wedge of unidentified work to support the volume increases that we seek. And then combined with the cost reductions and the efforts to retire, you know, cash using unprofitable businesses, we're going to have a lot of tailwinds going into there. Now, can we get there in 25? Can we get to double in 26? That's still in the uncertainty band for the for the forecasting we're doing. But when I come back at our next earnings call, we'll lock down our fiscal 23 plan and be able to talk more about that. So, I'd say look at what we're doing in the short term, which is encouraging, and then look at the macro trends on both exit of lower quality, lower profitability programs, volume increases. And they're all enablers to the margin growth that I described. Jim, you want to add anything?

You know, I think our goal remains to double the EBITDA dollars is what we've been targeting. But it's a goal in our planning process. So as we do strategic planning, we're going to look at all the opportunities to do that and the risk associated with those. And as Dan said, that process is ongoing. But we look forward to telling you more about it. I think the trend is clear. It's just magnitude we're working on now.

Okay. maybe just one clarification i think you in the slides and in the in the remarks you talk about the 787 as being the shortfall for revenue um it did look like military was down and i don't know if that's f-35 as we've seen in other companies during this earnings season or other disruption on the defense side but did defense revenues show up as you expected in the second quarter

was slightly down in the second quarter mostly due to one program we we built some complex actuators for the v22 and that program was held up in the quarter due to some supply chain delays and those products are now starting to ship early in q3 and we expect to have a strong second half of the year so there's no larger platform

uh concern related to military growth it was a short-term timing on deliveries we know what drove it and we're fixing it okay thank you since there are no further questions at this time this concludes tribes group second quarter fiscal year 2022 earnings conference call this call also has the replay that will be available today at 11 30 a.m eastern standard time through the 23rd at 11 59 p.m eastern standard time You can access the replay by dialing 1-800-585-8367 and entering access code 7629515. Again, to access the replay, you can dial 1-800-585-8367 and enter the access code 7629515. Thank you all for participating and have a nice day. All parties may disconnect now.