Triumph Group, Inc.

fiscal year 2023 results conference call. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast. Please ensure that your pop-up blocker is disabled if you are having trouble viewing the slide presentation. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. In addition, please note that this call is the property of Triumph Group, Inc. and may not be recorded, transcribed, or rebroadcast without explicit written approval. I would now like to introduce Tom Quigley, TRIUMPH's Vice President of Investor Relations, Mergers and Acquisitions, and Treasurer, who will provide a brief opening statement.

Thank you. Good morning and welcome to our second quarter fiscal 2023 earnings call. Today I'm joined by Dan Crowley, the company's Chairman, President, and Chief Executive Officer, and Jim McCabe, Senior Vice President and Chief Financial Officer of TRIUMPH. During our call, we'll be referring to the supplemental slides which are posted on our Certain statements on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause Triumph's actual results, performance, or achievements to be materially different from any expected future results, performance, or achievements expressed or implied in the forward-looking statements. Please note the company's reconciliation of non-GAAP financial measures The comparable gap measures is included in the press release, which can be found on our website at triumphgroup.com. Dan, I'll turn it over to you.

Thanks, Tom. Earlier today, we reported our second quarter results for fiscal year 2023. Completing the first half of fiscal 2023 marks a long-anticipated inflection point for Triumph as we transition from years of cash use to positive cash flow in the second half of the year. In addition, we delivered solid organic growth driven by a backlog expanding at double digit rates as commercial volumes return. Supply chain constraints continue to be a headwind, leading to delays in sales in the quarter. This headwind was concentrated in our defense programs, but the active management of our supply chain has enabled us to mitigate the impact on Triumph. Our continued focus here, as well as our visibility in our backlog, and pipeline allows us to remain confident that we are able to achieve our current full-year guidance. Overall, our Q2 results were in line with our expectations, with pieces of our business exceeding them. More to come on that. On slide three, I summarized the quarter's highlights. First, we generated organic growth of 6 percent sequentially and 13 percent year-over-year driven by improving commercial OEM and MRO demand. Induction of parts for MRO stepped up 11% sequentially in Q2 as both narrow and wide-body flat hours recovered. As a result of supply chain shortages, Q2 margins were level with the prior year quarter and are expected to step up in our Q3 and Q4 sequentially with year-end shipments. We have a clear line of sight on parts availability, support, planned shipments, and maintain the high end of our revenue guidance. Backlog is up 11% as Triumph realizes the benefits of our diverse products and markets and customers. With a pipeline of over $11 billion in opportunities, strategic wins on new platforms, and increasing R&D expenditures on differentiating technologies, We anticipate strong revenue increases over our planning horizon of fiscal 24 to 28. We expect to be cash flow positive over the balance of fiscal 23 and beyond, with material reductions in past due backlog, inventory, and working capital anticipated in Q3 and Q4. Now, I'll provide my perspective on the industry and how it relates to Triumph, starting with the supply chain and then OEM rates. Triumph continues to proactively mitigate supply chain challenges, which has lessened the impact on Triumph relative to the market. Let me share what we're seeing and what we're doing. On build rates, Triumph has received firm purchase orders from the OEMs, which support our full-year outlook. We remain in close communications with the OEMs on out-year build rates to optimize our working capital levels. Supplier shortages resulted in deferred sales of approximately $22 million in Q2 and associated margins in cash. That said, our efforts to dual-source work from low-cost sources has softened but not fully mitigated shortages. We track supplier on-time and full, or OTIF, which is a measure of kit completeness so that top-level assemblies can be completed on time. OTIF was as low as 74% in April and has improved month over month to the mid-80s. We are focused on critical shortages, impeding deliveries, and anticipate achieving OTIF levels of greater than 90% by the end of the fiscal year, which supports our full-year guidance. Last year, we revised our policies to provide 24 months demand forecast to our primary suppliers as well as strategic order coverage beyond lead time to secure allocation to protect our most critical programs. While our suppliers are not yet achieving 100% on-time performance we expect, this incremental progress will enable Triumph to burn down approximately 40 million of past due backlog by the end of fiscal 23. Castings and foraging providers have been the largest sources of shortages. As such, we are expanding our additive manufacturing applications on items such as housings, actuators, and heat exchangers to reduce our long-term dependency on these long lead and capacity constrained sources. Our top supply chain priority remains to secure near-term delivery assurance to ensure we achieve our fiscal 23 revenue plan. We continue to partner with our customers and suppliers to ensure continuity and affordability. On the cost side, we continue to work with our suppliers to mitigate potential price increases while also sourcing from alternative suppliers with lower costs where possible. Along these lines, Triumph awarded contracts to new suppliers in India and Thailand in the quarter as these countries expand their investment in A&D. As a result, these increases have typically totaled less than 2% of sales and we expect any impact to be immaterial to our results. Prime's cost reduction plans go beyond our supply chain. We set a goal to generate $49 million in cost savings in fiscal 23, $42 million of which are related to internal costs. Year to date, we've generated $40 million in savings. Looking at OEM rates, the commercial aviation market continues to recover. although paced by the ability of suppliers to support desired ramp rates. Travel demand continues to strengthen. The global commercial fleet has returned to 91% of pre-COVID levels, with 96% of single-aisle aircraft and 74% of twin-aisle aircraft returned to active service. There were other encouraging signs in the quarter for the twin-aisle segment as Boeing booked orders for 60 twin-aisle aircraft including 16 787s from China Airlines. Further, Boeing resumed deliveries of the 787 in August, handing over nine in the quarter, while Airbus delivered 13 A350s in the quarter. We anticipate rate increases on the 787 to follow. This is welcome news given Triumph's substantial ship set content on these platforms, which includes the entire suite of hydraulics and actuation for the 787 landing gear system. We are currently delivering 787 at rate 2 to 2.5 per month, with a ramp to rate 4 anticipated early next year. Boeing forecasts a return to rate 5 in late calendar year 2023 and rate 10 in 2025. After large increases in OEM narrow body build rates from pandemic lows, the commercial OEMs recently delayed the next step up in production rates by six to nine months to let the supply chain catch up. Triumph had already lowered demand forecast for narrow body deliveries in our internal plants. Most of our plants are producing max components at 26 to 31 ship sets per month and 45 to 48 per month on the A320 family, which has been key to organic sales growth I mentioned. Engine delivery pushouts in Q2 on programs such as GE LEAP have already started to reverse as OEM supply chains catch up as a result of prudent slowdowns, which will benefit our second half of the year. Short-term increases in inventory are expected to burn off in our second half, benefiting free cash flow. While we look forward to even higher OEM rates, the recent rate stability and gradual supply chain recovery reinforce the bottom is in for our commercial and markets We look forward to providing our fiscal 24 revenue guidance with the latest OEM rate increase profiles. This macro backdrop, Triumph continues to see increasing demand across our markets as the aviation market recovers. Areas of strength include recovering OEM rates, strong MRO demand, and partnerships. Q2 saw our systems and support segment book to bill up 34% year over year, with Q2 bookings up 15%. This is primarily driven by increases in commercial OEM and MRO and markets, while military backlog was also up a more modest 4%. I'll touch on military more in a moment. Triumph's backlog growth is the best leading indicator of top and bottom line expansion. Across Triumph, backlog is up 10% year over year. with Boeing 737 backlog up 40%, F-35 up 60%, and the CH-53K backlog up in excess of 100%. MRO inductions are up as air transport and freight traffic expands, and we continue to progress to expand our market reach geographically, securing industry-leading aftermarket partnerships. We recently announced our partnership in the Middle East with Mubadala Senate, which will provide in-country access to the region's MRO markets and enable us to accelerate growth in engine accessory repairs. We expect this partnership to provide incremental sales starting early in fiscal 24. Beyond forecasted increases in demand, enhanced pricing from recent contract extensions are starting to cut in, especially where we are the design authority, which applies to about 70% of our products or where we are sole source, which is the case for 90% of our products, excluding our third-party MRO business. Taken together, our growing backlog and improving mix of OEM and aftermarket business support our goal of doubling profitability over fiscal years 2022 to 2025. Let me provide supporting facts on where we are on winning and how it affects our product mix. We set a goal in fiscal 21 to generate 25% of our revenue from new customers and solutions. Since that time, 40% of Triumph's awards are associated with new products and or new customers. Wins for the quarter totaling more than 200 million can be seen on slides four and five. These wins are driven by Triumph IP on a number of products, including airframe mounted gearboxes for the next gen military platforms, hydraulic control valves on future vertical lift helicopters, turboprop engine controls, thermal pump packs, and rotorcraft digital engine control upgrades. Priam's MRO businesses are growing, with new inductions up 26% year-over-year and recent awards across platforms in both military and commercial programs. New MRO customers added year-to-date include DHL Bahrain, Jetstar, BBAM aircraft leasing, Irish Air Corps, and Goodrich Foley, Alabama. The military market, which expanded during the COVID downturn, is stable with continued US government demand. While military sales were down in the quarter, backlog is up, bolstered by geopolitical events and subsequent FMS sales, including 96 AH-64s to Poland, 35 F-35s to Germany, and 24 F-35s to the Czech Republic. Additionally, we are experiencing resurgent orders for the M-777 Howitzer, a British vehicle towed artillery for which Triumph supplies magazine assembly components. Triumph is actively developing IP in support of new military platforms in the form of next generation gearboxes, valves, fuel pumps, actuators, landing gear systems, and vapor cycle cooling systems on multiple platforms currently under development. These upgrades are needed to address aircraft electrification, higher fuel efficiency demands, and the higher heat loads associated with electronic warfare. In the quarter, Triumph secured roles on the next-gen engines, the digital series fighters, and the Army's new helicopter platforms that will benefit our fiscal 24 to 28 planning horizon. Watch for triumph orders as OEM's prime awards for these new systems are announced. Fiscal 23 also marked an increase in the breadth of electric aircraft ventures beyond the eVTOL or air taxi space. We are actively engaged in five programs providing a mix of gearbox solutions, insulation, landing gear solutions, and actuation for freight, regional transport, and urban mobility segments. Landing gear, actuation, and gearbox components remain essential to electric aircraft, playing to Triumph's strengths. We'll share more information on these programs as they mature. Bottom line, despite short-term flat spots in commercial rates and timing issues caused by supply chain shortages, Triumph continues to deliver on our commitments to our customers and to meaningfully grow backlog. We remain on our path to value, through this dynamic A&D cycle. We kept our momentum going during the downturn and expanded our partnerships, products, and services, which are now forming the foundation for our future growth and margin expansion. Jim will now take us through results for the quarter in more detail. Jim?

Thanks, Dan, and good morning, everyone. As I review the financial results for the quarter, please refer to the presentation posted on our website this morning. I will be discussing our adjusted results. Our adjustments are explained in the earnings press release and in the presentation. Triumph's second quarter results met our expectations, and we are on track to achieve our full-year financial objectives. Our consolidated results for the quarter are on slide 8. Revenue of $308 million reflects increased volume from narrow-body platforms, offset by decreased military rotorcraft volume compared to last year. Excluding revenue from divested businesses and sunsetting programs, and despite the current market environment, we grew consolidated revenue 13% organically over the prior year quarter. Adjusted operating income of $30 million represents a 10% margin, up from 8% a year ago, and includes the impact of decreased military rotorcraft sales more than offset by a favorable closeout of legacy programs, a sale of certain non-core IP, and tailwinds from commercial narrowbody production rate increases. Adjustments this quarter include $104 million gain on the sale of businesses, primarily from the Stewart divestiture that closed on July 1st, and $2 million of restructuring costs from an aftermarket product line we exited in the quarter. Systems and support segment results and highlights are on slide 9. Organic revenue is up 13% in the quarter, including decreased military rotorcraft sales, primarily from supply chain delays, but more than offset by higher commercial narrowbody volume and a sale of certain non-core IP. Systems that support operating income was $43 million, or 16% margin, which is up slightly from the prior year. As Dan noted, we benefited from the commercial market upswing, with commercial OEM sales up over 30% in the quarter over last year. Results for our structure segment are on slide 10. The continuing business in this segment is the interiors, insulation, and ducting business. Excluding divestitures and sunsetting programs, Structure's revenue of $33 million was up 14% organically. 737 production rate increases in interiors contributed to the organic growth, partially offset by lower wide-body sales, which are expected to rebound. Operating income improved with the favorable closeout of certain 747 obligations and volume-driven recovery in the interiors business. Our free cash flow walk is on slide 11. Our $24 million of cash use this quarter included $17 million of working capital growth to support the ramp in our second half sales. As for our quarterly cash flow cadence, we expect our usual seasonality with approximately break-even cash flow in Q3 and strong cash generation in Q4 in line with our full year cash flow commitment. We continue to expect capital expenditures of approximately $30 million for the year as we upgrade and expand our capacity for efficiency and to support new programs and future growth. The schedule of our net debt and liquidity is on slide 12. At the end of the quarter, we had just under $1.5 billion of net debt. We had about $150 million of cash and availability, which is more than sufficient for our projected needs as we pivot to positive free cash flow generation. We expect to be profitable and cash flow positive for the balance of the year. We are continuing to reduce our leverage, as planned, by expanding EBITDA and free cash flow in our continuing businesses. We are currently benefiting from our below market fixed rate debt in this rising interest rate environment. Of course, we regularly review our capital structure with our advisors and board. We're paying close attention to the capital markets and remain nimble and opportunistic for when the windows open to approve our balance sheet before our next bond maturity in June of 2024. Consequently, we are confident in our ability to reduce our leverage, improve our capital structure, and address our debt maturities with a series of timely, balanced, and constructive actions that I look forward to sharing as we announce and execute them. For our full year guidance, turn to slide 13. Based on expected aircraft production rates and the resulting demand on each of our facilities, we expect FY23 revenue to approximately $1.3 billion. We are increasing our GAAP EPS guidance by 15 cents to $1.66 to $1.86 per diluted share. we are increasing our adjusted EPS guidance range by 12 cents to 40 cents to 60 cents per diluted share due to a higher pension income estimate. We continue to expect cash taxes, net of refunds received, to be approximately $7 million for FY23. And the interest expense is expected to be $129 million, including $123 million of cash interest. For the full year, we expect to use $30 to $40 million of cash from operations with approximately $30 million of capital expenditures, resulting in free cash use of $60 to $70 million in fiscal 23. In summary, despite some temporary supply chain challenges, we were able to identify and execute actions to meet our commitments, and our Q2 results are in line with our expectations. We remain on track to achieve our full-year guidance and our multi-year financial objectives. Now I'll turn the call back to Dan. Dan?

In summary, our second quarter results achieved in a challenging macro environment position us to deliver positive free cash flow and expand top and bottom lines in the second half of our fiscal year. This in turn will provide a strong jumping off point for fiscal 24. While it can't come fast enough, the commercial market recovery is happening with rapidly improving MRO uptake closely followed by OEM rate increases. Our systems and support backlog meaningfully grew in the quarter and our strong book to bill of 1.31 year to date confirms that our go to market strategies and pursuit of new customers, products and services are working. Triumph remains on track to achieve our full year objectives. I look forward to reporting on our progress as we continue to unlock the hidden value across our streamlined business and to deliver value for the benefit of all our stakeholders.

We're happy now to take any questions.

We will now begin the question and answer session.

We ask that you limit yourself to one question and one follow-up to give everyone the opportunity to participate. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.

And our first question will come from Seth Seifman of JPMorgan.

Please go ahead.

Thanks very much, and good morning, everyone. I wonder, Jim, if you could quantify two things. I guess, first of all, from the slides, the IP sale in systems and support, how much earnings that provided, and then also, you know, how you think about the go-forward margin in structures, because it was almost 20% in the quarter, which is actually better than systems, even at the low production rates we're at now. And so anything that might have been unusual there and how to think about that going forward.

Sure, Seth. Thanks. So on the IP sale, we did have the opportunity to monetize some IP. It was a legacy program, so it was strategic for us to do that. It was about 15 million of sales. And it was high profit because a lot of expenses were incurred in prior periods. So the profit was probably in the low teens. So that's one way we closed the quarter. And we have leavers to pull every quarter. So we're pleased to be able to do that to meet our commitments for this year and this quarter. In terms of the margins and structures, yes, we did have good margins. We continue to work through the remaining vendor liabilities on legacy programs. And so there was a keen catch in there. I think the overall income catch for the company was about $8 million positive for the quarter. And the majority of that was related to favorable closeout of those legacy liabilities. There's not a lot more of that left. But also in the background, as interiors continue to perform in that segment. So we're seeing an upswing based on some 3.7 max volumes going through there. As they were kind of break-even-ish, they're turning to profitability. And they have a very strong growth forecast for next year in the interiors segment.

Great. Great. Thanks. And then maybe as a quick follow-up, you mentioned being nimble with regard to the capital structure. Can you talk a little bit about how you balance the desire to see some more improvement and positive cash flow before addressing the capital structure versus kind of the need to take care of that sooner rather than later and how you're thinking about balancing those two things?

Yes. Well, you know, I mentioned we pay close attention to the markets because you have to go to the market when the market's ready, not necessarily when you want to. So you have to look for windows. Our next step maturity is not until June of 24. And we're enjoying very low fixed rates right now, which we want to enjoy as long as possible. We want to be positioned to refinance. Our forecast has us improving our cash flow, improving our profitability. So we're going to naturally deleverage over time. and we're going to look for those windows, and we're getting good advice, and we have good plans in place with multiple options to execute.

Great. Thank you very much.

The next question comes from Sheila Kayoglu of Jefferies.

Please go ahead.

Good morning. Thank you guys so much. I wanted to maybe ask about free cash flow, you know, Jim, you've been very good about talking about it and how we think about the sequential improvement here. I think it was 21 million free cash flow clean for the first half. How do we get to the full year, and how do we think about just any one-time items in that otherwise?

Thanks, Sheila. Yeah, we've had a lot fewer one-time items than previous years and even previous quarters. Year to date, we did have $17 million of cash use in Q1 from the Stewart business, which is now gone. And we had $4 million of cash shutdown costs in Q1 as well. We really don't have any in this quarter. That's why you'll see on the slide, I didn't call any out for the quarter. So they're behind us. It's a pretty clean quarter. Seth did mention the sale of the IP. That only brought $5 million of cash in the quarter. But we have those kinds of things. We're in the business of developing and selling IP, whether it's directly or as part of our product. So in terms of cash flow cadence moving forward, we're looking at breakeven issue in the third quarter and solidly cash positive because of the trends in the business, but also because of our seasonality in Q4. So 50 to 60 million of cash generation in Q4, and that gets us into our range of using only 60 to 70 for the year. And then moving forward, we're looking to be cash positive every year going forward. There'll still be some seasonality, but we're on the right track. We're excited about pivoting to growth in cash flow and profitability.

Great. Thanks for just reiterating that. I'll jump back in the queue.

The next question comes from Miles Walton of Wolf Research.

Please go ahead.

Thanks, Maureen. Jim, I was hoping to just follow up on that for a second. I think the original guidance had about 70 million of one-time or non-recurring items in it, and you've got 21 year to date, is there still anticipated to be 50 in the back half? Or are the one times less vicious and you're reiterating the full year free cash flow?

Yeah, thanks, Miles. I guess the way you said it is the one times are less vicious, and that's true because we've been mitigating them. And that's part of the pickups we're talking about in our structure segment is these lingering liabilities and being able to negotiate them down and reduce them. So they're a lot less. And right now, especially with the advances gone, remember they're all gone with the structured divestiture, there's really very little non-recurring moving forward for this year.

So is there something in the operations that's offsetting the goodness of the non-recurring going away?

Right now, in terms of cash flow, I would say it's the inventory growth because of supply chain challenges. And you saw we had 87, I think, million in the first half of the year of working capital growth. Now, that was only $17 million in the past quarter, and it will reverse itself for the second half. Now, that's our normal cadence anyway because of seasonality, but it's been exasperated by the supply chain challenges. We're working through them, and we think we're as good as, if not better than others in mitigating supply chain challenges. We have a great organization doing that globally, and we know we're going to be able to manage them.

Okay. Dan, one question for you. If you look at the defense portfolio, there are a couple of programs in there that maybe not next year or some setting, but certainly over the next few programmatically look like they do. So for something like the V22, can you describe the sort of flexibility and the cost structure you're planning for so that you have an off-ramp as those programs naturally wind down and whatever new business comes along?

Yeah, thanks, Miles. The cadence on V22 is really high, both on OEM and on MRO programs. NAVAIR, who acquires the spares and repair units in the aftermarket, has a lot of orders queued up with us. In the short term, we're busy. And there's some mods that are happening to improve the ability of those actuators to work in a high-dust, dirt environment that we're cutting as well. So the platform's got a lot of life. We're diversifying the makeup of the work at our gearbox business. We're on new starts like the T7A where we do the accessory-mounted drive, gearbox drive, and we're on LEAP IGBs on the commercial side, and we're winning content on the new future vertical lift alternatives. So even though V22 may come down in the future, we're not worried about it. We're busy now, and we're on the new platforms.

All right. Just to clean up one, a pension, Jim, is there any outlook on funding requirements there? I know there's been obviously movement on discount rates and asset returns, but is there a look that funding will be required sometime in the near future or no?

Yeah, so annually we do the funding forecast at every fiscal year end, and there was no material funding over the next four years, and we did that at the end of March. As we all know, the world's changed in terms of asset returns and interest rates during that time period. So the next firm calculation we'll be doing is at the end of this fiscal year. But we did note that we do expect there will be some funding based on current market conditions and current interest rates if they don't change before the end of the fiscal year. So there is a headwind on pension funding should things not change, but not in the near term. Next year's not going to be significant. It's really the out years, years two, three, and four that might be impacted. But we'll know more specifically at the end of this year.

Thanks for the questions.

The next question comes from Calvon Rimmer of Cowan.

Please go ahead.

Yes, thank you very much. I guess to follow up with Seth's question about how you're thinking about refi, you make the point that basically a refi would likely be done at a considerably higher rate And given the level of your cash flow, it looked like a refi just in terms of the ongoing outlays would take a fair bite out of that. So is it fair to assume that given your business prospects look like they're getting better, that you're more inclined to kind of wait and see and enjoy the current lower interest rates you've got?

Yeah, thanks, Kai. Yeah, I don't think it's a foregone conclusion that our rates would be higher. That's part of being measured in your approach and look at your timing. And we do have time. We have about 18 months before our next maturity. And we are enjoying and improving business. So with our cash going positive and our profitability increasing, we're going to look for those windows and execute in a balanced way the refinancing that's necessary to continue the business. So I hope that answers your question.

Okay, now that's very helpful. And then Spirit basically had a situation where their OE customers asked them to slow down deliveries because they are not producing at their indicated line rates. Is that a risk for you? I mean, your rates look like they're a little lower, but it seems like things are bouncing around all over the supply chain. So is that something we should be concerned about?

We went ahead and marked down the OEM rates to what we have firm orders for, and I mentioned the ranges of output. They vary by plant depending on what's the channel inventory between us and the OEMs, but to have Airbus producing at 47 a month in queue, to headed to 55 within you know six months and then going to 65 six to nine months after that i mean to have the max at 31 yeah they did push it to the right but you know it should step to 38 and you know maybe second quarter of 23 calendar and then on the way up into the 40s in 24. so for us you know we're starting to see the benefit of that and the benefits are absorption on sgna and overhead Our supply chain, we're going to burn off that excess inventory that Jim mentioned. Even the 787 rates, we've taken them down to approximately two a month. We used to do 14. So when that program gets back to five or 10, it's going to be a huge upside for Triumph. We are watching engines. There was a slowdown in the quarter on engine deliveries, and those are starting to come back. We got signals from the OEMs that said, looks like we've done enough de-risking. go ahead and start ramping up again. So I think there's some give and take between engines and air framers, but our rates are, we have confidence in our rates.

Thank you very much.

Thank you.

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

hey uh good morning guys thanks for uh taking the questions here can i just go back to the the free cash flow jim i want to make sure i understand last quarter you had core free cash flow of break even of 15 million and that included roughly 70 million of one-timers now you think the one-timers are down to 20 million you don't talk about core free cash flow you just have 60 to 70 so Should we think about the apples-to-apples, zero to 15, as now negative 40 to negative 50 on inventory? Or just help us reconcile what the apples-to-apples is, the last quarter to this quarter.

So we temporarily used that term cork-free cash flow when Stuart was still in the portfolio. And now that Stuart's out, we went back to what we've always used, which is consolidated free cash flow. All our businesses are continuing, including the interiors business that's in the structure segment remaining. So we include all that cash flow. So we're no longer breaking out core versus non-core. Our businesses are continuing right now. So I hope that answers the question, but happy to entertain a follow-up.

Yeah, I mean, so did the cash flow weaken then? I mean, I'm just trying to get an apples to apples here.

I think the one time is associated with the legacy businesses that have been reduced have been offset with growth and inventory. due to deferred shipments, primarily related to supply chain, but a little bit on wealthy demand.

Okay. And then how long do you think it takes to unwind that inventory? I mean, I know you talked about positive second half and then positive in 24. You know, is that inventory, that working capital, hold through second half here? Do we get more of a burndown as we move into fiscal 24? How should we think about that?

Right now we're forecasting it will burn down over the next two quarters. by the end of the year. And remember that our business now has quicker cycle times because we used to be 69% systems business. Now we're 88% of our sales are from the systems business. So we're truly a systems company and that turns a lot quicker than the long, the big metallic structures businesses we used to be more in. And also the diversity is helping us so that no one problem becomes too big of an issue. Our largest customer used to be, last year, 36% of our sales. Now it's down to 29%, and that still includes some of the best of business this year. So we'll be in the mid-20s in terms of our concentration by customer. When you look at the diversity across programs and customers, it's easier to attack them and not have one big problem.

Got it. Got it. Okay. That's helpful. Dan, just one more if I could. You mentioned, obviously, the challenges which we're aware of on castings and forgings, and I think you talked about using some additive manufacturing for housings, heat exchangers. Can you just elaborate how long does that process take for you guys? How long does it take to get qualified? You know, just maybe a little bit more color there.

Yeah, it's certainly a multi-year process, but the key is customers saying that the material properties and surface finishes of additives meet the requirements of the product. We'll start out in less stressed components. Secondary actuation usually has lower loads than, let's say, primary actuation like you do for flaps and rudders. We can cut it in on some of the metal structures that are used in those actuators. Heat exchangers are very because most heat exchangers are still made sort of in a tube and fin design that goes back to the 1800s. And now you can print those. So we're going through, we've got a first flight hardware on those sort of products and use now. And then we'll just get customers to adopt them incrementally. There's weight savings, there's cost savings. So the value proposition is pretty compelling, but it does take years to cut it in. The point being is that we're not just wringing our hands about the shortages in the supply chain between low-cost sourcing and our efforts on additive, we're going to do permanent solutions to what's been a chronic problem. You may recall in the last ramp-up, 2018-2019, pre-pandemic, these were the same bottlenecks we had back then. And, you know, to my understanding that casting and forging providers had serious loss of talent, specialized knowledge that's taking some time to rebuild, so we're not going to count on that coming back fully.

Got it. Perfect. Thanks, guys.

Thank you.

Again, if you would like to ask a question, please press star, then 1.

And our next question will come from Ron Epstein of Bank of America. Please go ahead.

Hey, yeah, good morning. I actually was going to follow up on that question that Michael just asked on the additive manufacturing. I mean, realistically, I mean, to get that stuff certified, so on and so forth, that could take a real long time. And is that something you'd want to do internally or is that stuff that you'd be working with an additive manufacturing partner? That's pretty specific domain knowledge to do that. I mean, is that an area of investment for you guys or not? I mean, how are you thinking about that?

So we invested several million dollars in partnership with GE, I want to say three years ago, and we bought a few of the machines. More importantly, we talked to them about material selection, the powders, the best applications, and Triumph didn't acquire the machines to get into the printing business. You know, the future is you design for additive, you upload the designs to the cloud, and then the parts are, you know, dropped by drones, you know, by the dock. I mean, it's It's going to be something you can source. But so many of our products will benefit from it. So having an organic capability allows you to learn how to design for it. So right now, fuel pumps, actuator housing, gearbox housings are all right applications for this. So our engineers are excited, especially the younger ones coming into the company. Because most universities now have 3D printing you know, core curriculum, and they want to do that when they get out in practice. So we're partnering with the agencies that have the strongest voice and certification, like Wright-Patt. We went up to the Air Force technology labs. We showed them, you know, what we're doing and the analysis that we've done on the strength of the parts, and they're helping us with the cut. And the same thing will be required with NAVAIR, you know, very deep technical ranks. And then our military customers will will follow suit. And on the commercial side, they'll also benefit from what's happening already on the engines. GE taught us a lot about what they've been able to achieve on commercial jet engine additive, as an example. So long term, I'm confident in it. We'll try to find a way to provide more quantification of its adoption for the investors.

I got it. Got it. You mentioned earlier about moving some work to India and Thailand. Where was that work currently done? Was it done here or was it done in another low-cost market like China?

We got out of China pre-pandemic. Triumph had a plant there and had more partnerships. There were some legacy 747 parts that are made, but we had almost no impact from supply chain coming out of China. We had some demand reductions as, you know, MRO went down because they were flying less, but not on the supply side. So there was more parts that were being sourced from U.S., Europe, other markets that were higher cost. And, you know, I sent my head of supply chain there, and he came back and said, you wouldn't believe the level of investment that India is putting into A&D in serious capacity. So we're going to ride that wave. We already have a plant in Thailand. one of our best plants, MRO plants. And so we have some experience in that market, and they're sourcing locally there. So it's just the natural progression of ways to take cost out, and we're going to follow it. I also want to say that more manufacturing done closer to the end markets is the trend. So the partnership with Movado, Ascendant, and the UAE is going to support not only the Middle East region, but India, since a lot of air traffic is going to go through the Middle East into India. And by having a presence in Thailand, as China reopens, we expect to get a tailwind there. And we look forward to expanding our Air France JV from the Americas into Asia.

Got it, got it, got it. And then maybe just one quick question on the balance sheet. As you all look into 2024, and there's been this open question about refinancing, Have you had any change of thoughts there? I mean, that's a question we frequently get from investors is, you know, how will Triumph do the refinancing and so on and so forth? And I don't know if there's anything that's changed on that front since the last quarterly call.

Really nothing's changed other than we continue to develop our specific strategies and the criteria in which we'd execute them. So we're looking for those windows to open up in the market. Right now the high-yield market is pretty closed. and we don't have to go to market right now because we have a runway of 18 months. So we're going to continue to improve the underlying business with better profitability and cash flow, so we'll get the best rating and the best terms of execution when the time comes. But nothing's really changed. It's going to be opportunistic on execution, and we're going to continue to improve the business, so time's on our side.

Got it. All right. Thank you.

The next question is a follow-up from Sheila of Jefferies.

Please go ahead.

Thank you, guys. Sorry, I was sticking to one question. In terms of just the inventory usage year-to-date, I was just wondering, what are you guys using inventory on? Is it just pre-buying raw materials that you're seeing lead time stretch in to, or is it just wiring or semiconductors? If you could give some clarity around that and just how that unfolds, and is it for maxes or just where is that being strained or is it for defense because you see the supply chain having issues there? And then I noticed payables is not a benefit for you guys, but it is for some of the other suppliers. Are you worried at all about smaller tier three, tier four suppliers not getting enough advances in cash funding? Are you guys watching that in your supply chain at all? Thanks.

Yeah, thanks. Great question. So on inventory, we started our year in April, we were working to a higher set of 787 and GE LEAP rates as an example. And then there was some markdown of those rates. And of course, you place these orders six to 12 months in advance of need. And so that was a bit of a whipsaw on demand versus supply. So now we're going to burn that off on both programs. We're not ahead of the game on max. closely matched to the OEM's rates there. So we're not impacted by any temporary flat spot on the max. So I would say that would be the biggest area. It's less raw materials. I think that only accounted for about seven million of inventory growth in the quarter. It's more about work in process. So it's parts that we have and we're waiting for the last few parts from the supply chain to complete a kit. So we can ship a product, ring the bell, book the sales, get the cash. So that's the biggest component, you know, that was up maybe 30 million. In the quarter. And when we say we're going to burn it off in the second half of the year, as those last few remaining parts, what I call on time in full, uh, come in, we'll complete those assemblies, ship the product, and then deliver the sales. You know, we, we looked at our second half of the year as to whether it's meaningfully higher than prior year and it's single digit. increase over prior year on revenue and earnings and cash. It's not a huge step up. So we can do it. And I think everybody I've talked to in my peer group is seeing the same thing in terms of slow, incremental improvement of supply chain. It's not getting worse, but it's not going to be solved overnight. On payables and tier three suppliers, we've done two things. One, we started giving them longer horizon forecast Two, we started giving them longer lead authorization. And three, we worked with them to help them with additional roles within the company, other programs they can support. And we haven't had any bankruptcies. We've had a couple of suppliers that were at quality issues. So we've had to deploy teams into them to help them get back on track. Again, castings and housings tend to be a constraint. There hasn't been a financial. Impedient barrier for them to form Jim.

Yeah, thanks dad. I think you covered it pretty well. It's for if you're a purely financial perspective, it's the whip, so the working process has gone up. But if you look at what's the root cause, it's the on time in full. Just waiting for that last few parts to fill out the bill of materials, but we haven't seen very dramatic growth in raw materials. It's really in our working process, so we have to balance. We are working with suppliers that are challenges, and we're making progress. So looking forward to burning. I think we have about 40 million of pests due.

We're expecting to burn down by the end of the year. Just one last point, Sheila. To the question that Kai asked earlier about rates, and you mentioned V22, if you look at page 16 in our backup data, five of the top six programs in our backlog are all going up in rates. And between volume and new pricing that we've secured, we feel very good about this being the core driver of volume to drive inventory burn-off and then cash and margin expansion.

Great. Thank you guys so much.

Thank you.

This concludes our question and answer session in Triumph Group's second quarter fiscal year 2023 earnings conference call. This call will have a replay that will be available today through November 15th at 1159 p.m. Eastern Standard Time. You can access the replay by dialing 1-412-317-0088 or 1-877-344 and entering the access code 1319709. Thank you for attending today's presentation and you may now disconnect.