Triumph Group, Inc.

Welcome to Triumph's third quarter fiscal year 2023 results conference call. This call is being carried live on the internet. There's also a Slack presentation included with the audio portion of the webcast. Please ensure that your pop-up blocker is disabled if you are having trouble viewing this live presentation. All participants will be in listen-only mode. Should you need assistance, please send over 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 in 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 property of Trim Groups, 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 third 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. As we review the financial results for the quarter, please refer to the presentation posted on our website this morning. we will be discussing our adjusted results. Our adjustments in any reconciliation of non-GAAP financial measures to comparable GAAP measures are explained in the earnings press release and in the presentation. 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. Dan, I'll turn it over to you.

Thanks, Tom. For the quarter, Triumph delivered strong sales in our operations that were up both sequentially and over the prior year. We grew our backlog at double-digit rates. On our last earnings call, I discussed the supply chain constraints delaying deliveries in our second quarter, mostly impacting our defense programs. Intensive management of our supply chain enabled us to improve supplier on-time and full deliveries from 77% to 87%, reducing the impact of these headwinds on triumph. This enabled our defense sales to improve 5% sequentially, up to $112 million. We anticipate the pickup in commercial volume we saw this quarter, particularly in the aftermarket, will continue to improve. We forecast our Q4 top line and profitability to be materially higher sequentially and year over year as OEM and MRO deliveries accelerate. Accordingly, we are increasing our revenue and our full year adjusted EPS guidance. As we committed, we also remain on track to be cash positive in the second half of the year and in fiscal 24. Overall, I'm pleased that we delivered our Q3 results in line with or above our expectations, positioning us well for Q4. I want to thank our employees. Like many others, we've experienced a few years of volatility. Internally, Triumph leveraged our experience from the pandemic to create a new deal, a new social contract and value proposition for employees who work at our company for more than a paycheck, extending the empowerment and flexible work environments which helped us get through the pandemic. On slide three, I'll summarize the quarter's highlights. First, we generated organic sales growth of 21% quarter over quarter and 13% year over year driven by improving commercial OEM and MRO demand. Triumph's exit of the legacy structures business was done at less than half of the budgeted costs. Q3 margins stepped up, returning to prior year levels and are expected to increase in Q4 with year-end shipments. Backlog is up 12%. as Triumph and our customers benefit from our diverse platforms and end markets. Beyond higher MRO receipts and OEM rates, new wins in the space market and for products supporting the war in Ukraine contribute to our goal to generate 25% of our sales from new products and markets. With a pipeline of over 9 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. Turning to Q4, we expect strong positive free cash flow made possible by material reductions and past due backlog, inventory, and working capital. We have high confidence in our Q4 and year-end outlook for several reasons. Triumph entered Q4 with higher levels of inventory as a result of deferred demand on certain programs and substantially all orders to be delivered in Q4 are now in hand. Legacy commercial aircraft MRO demand has increased as older aircraft remain in service pending new aircraft deliveries from Boeing and Airbus. Military MRO orders, which were seasonally delayed with the October end of the government's fiscal year, are now funded. Military customers supporting the war in Ukraine and replenishment of U.S. inventories have requested quick turn and or early deliveries with favorable cash terms. We completed a thorough review of all of our supply chain requirements for planned deliveries and have sufficient parts on hand or in transit to support planned deliveries. And supplier shortages are improving as we resource and dual source work to domestic and low cost sources. So overall, we feel good about the quarter and the ramp is upon us. We saw a month-over-month improvement during Q3, which we expect to benefit Q4 and our fiscal 24 forecast as we increase cash flow from operations year over year. Consistent with our track record, we're not standing still. Against a stronger and more promising operating environment, we've been turning our attention to strengthening our balance sheet and addressing near-term maturities, which is one of our top priorities. We have a comprehensive deleveraging plan that builds on our operational improvement. As one component of this plan, Triumph announced distribution of warrants in December. When the warrants are exercised, the benefits of this action are anticipated to be twofold. It will lower our debt while increasing equity for the benefit of our investors through a cost-efficient transaction. We distributed the warrants Given our confidence in our business results and growth outlook, the warrants are one lever we're pulling as we prepare to refinance our upcoming 2024 debt maturities with the assistance of outside financial advisors. Of course, timing is an important consideration. Our team has been agile in our refinancing approaches, which allowed us to bridge through the pandemic and market downturn. We are confident in our ability to secure the financing we need to fund our growth and that of our customers. Our improving results also support expanded reinvestment in CapEx and IRAB and enhance the value we deliver to all stakeholders. We're always looking at ways to manage cost in support of our future state. As we exit our structures business and retire REDD programs, we are targeting reductions in overhead and SG&A. This enables continued margin expansion as our strong backlog growth translates into higher sales year over year. We are confident in the proactive steps we're taking to even better position Triumph for the future. Jim will now take us through our third quarter results and detailed outlook, and then I'll provide some comments on the market.

Jim? Thanks, Dan, and good morning, everyone. I'm pleased to report year over year profitable growth this quarter. Triumph's third quarter results met or exceeded our expectations and we are on track to achieve our full year financial objectives. Our consolidated results for the quarter are on slide four. Revenue of $329 million reflects increasing demand from our commercial, military, and MRO customers. Excluding revenue from divested businesses and sunsetting programs, we grew consolidated revenue 21% organically over the prior year quarter. Adjusted operating income for the quarter was $36 million representing an 11 percent margin, which is up over the prior year. Systems and Supports segment results and highlights are on slide five. Organic revenue was up 21 percent in the quarter. Commercial market demand was the largest driver of the revenue growth in this segment, especially commercial MRO demand. More details on revenue by end market will be in our 10Q. Systems and Supports operating income was $43 million, or 15 percent margin, in the quarter. This is up from the prior year, excluding a licensing transaction and the benefit from the Aviation Manufacturing Job Protection Act last year. The results from our structure segment are on slide six. The continuing business in this segment is the interiors, insulation, and ducting business. Excluding divestitures and sunsetting programs, revenue of $44 million was up 21% organically. Increasing production rates on the 737 and 787 programs and interiors are driving the strong organic growth. Operating income improved over the prior year on the higher revenue. Our free cash flow walk is on slide seven. Our $5 million of cash use this quarter included about $11 million of working capital growth supporting the planned ramp and Q4 deliveries. In Q4, we expect working capital to contribute to free cash flow as inventory and accounts receivable decrease from higher Q4 shipments and cash collections. We expect strong free cash flow in Q4 in line with our new full-year guidance. We expect capital expenditures to be approximately $25 million for the year, and substantially all of that capital is investment in our systems and support segment. The schedule of our net debt and liquidity is on slide eight. At the end of the quarter, we had $1.5 billion in net debt. We had about $127 million of cash and availability, which is more than sufficient for our projected needs. We expect to be profitable and cash positive in Q4, consistent with our new full-year guidance. We're continuing to reduce our leverage, as planned, by expanding EBITDA and free cash flow in our continuing businesses. Dan and I remain confident in our ability to reduce our leverage, improve our capital structure, and address our debt maturities with a series of timely and thoughtful actions. In December, we took one of those actions when we distributed warrants per round to Triumph shareholders. The warrants give Triumph shareholders a valuable security and the choice of how to realize that value. Warrants that are exercised will help reduce triumphs leverage, reduce debt and interest expense, and increase free cash flow and liquidity. Regarding refinancing of our 2024 maturities, we remain opportunistic and continue to pay close attention to the improving capital markets. We see the window of opportunity opening, and we look forward to reporting progress in this area in the coming months. For our full year guidance, turn to slide nine. We now expect FY23 revenue to be up from prior guidance to a range of $1.3 to $1.35 billion. We expect GAAP EPS to be in the range of $1.59 to $1.79 per diluted share. We're increasing our adjusted EPS guidance range to $0.48 to $0.68 per share, up from $0.40 to $0.60 previously, based on higher expected deliveries in Q4. We continue to expect cash taxes and net of refunds received to be approximately $7 million for the year. We expect interest expense to be about $130 million, and that includes $125 million of cash interest. For the full year, we expect to use $30 to $40 million of cash from operations, with approximately $25 million in capital expenditures, resulting in free cash use of $55 to $65 million in fiscal 23. That's a $5 million improvement over prior guidance. In summary, the profitable year-over-year growth in Q3 met or exceeded our expectations, and we are increasing our full-year revenue, earnings, and free cash flow guidance to reflect our expectations for a strong Q4. Now I'll turn the call back to Dan. Dan?

Thanks, Jim. Let me provide some insights about the market to put our guidance into perspective. But first, I want to acknowledge the success of our OEM customers and the airline carriers in overcoming the challenges of the last three years and returning to pre-pandemic levels of air traffic and production. Our customer partnerships are stronger. We're collaborating in new ways that are leading to better coordination of supply and demand and faster resolution of the challenges inherent to our industry. The commercial transport segment ended the 2022 calendar year on a solid recovery trajectory with an increase of over 32% more fourth quarter aircraft deliveries and 20% more on an annual basis. Orders for new aircraft also rose year-over-year, as Boeing and Airbus both booked over 800 net orders each. Airline demand continues to recover, as evidenced by a nearly 70% increase in 2022 global RPKs versus 21, with China's new COVID policies expected to accelerate this year-over-year traffic increase, benefiting our third-party MRO operations in particular. The onus is now on the supply chain to ramp aircraft and engine production to satisfy that demand. Increasing demand will enable Triumph to burn down approximately 40 million of past due backlog by the end of fiscal 23. Triumph is producing Boeing 737 components at rates between 30 to 31 per month, depending on the factory, while Airbus A320-321 related production levels are 47 to 48 per month. Triumph's Boeing 737 backlog is up 28% and the A320 backlog is up 12%. Triumph recently received new production forecasts from both OEMs which reaffirm our Q4 deliveries and increase year-over-year deliveries thereafter. While these forecasts reflected minor adjustments in production profiles, The facts are that rates are headed north, which will benefit all Triumph OEM factories. We're encouraged by these signals and look forward to providing our fiscal 24 guidance with our fiscal 23 year-end results in May. Overall, this is translating into growth for Triumph. Sales for the quarter were up 20%, with the OEM sales up 17% and MRO up 24%. The commercial segment rose 32 percent and military, seven. Our year-to-date book-to-bill is 1.21. Bookings increased 23 percent year-to-date. On the MRO front, inductions of new parts across our third-party MRO businesses are up 35 percent for the quarter and 29 percent year-to-date. Spares and repairs backlog across the entire business, both OEM and third-party MRO, are up 36% for the quarter. Across Triumph, backlog is up 12% year over year, with commercial backlog rising 17%, while military grew 6%, aided by programs like the C-130, F-35, Black Hawk, CH-47, Apache, and the FAA team. We're pleased that year to date, 45% of Triumph's awards are associated with new products and or new customers. Competitive wins for the quarter, totaling $130 million, can be seen on slides 11 and 12. These wins are driven by Triumph IP on products ranging from airframe-mounted gearboxes for the next-gen military platforms to landing gear systems for both Sierra Space and a leading eVTOL aircraft to a thermal system solution for the General Atomics UAV. In the quarter, the fiscal 23 top-line defense bill came out, reflecting a $75 billion increase year-over-year, benefiting key programs in the Triumph portfolio, including the F-15EX, Black Hawk, CH-53, the B-21, 6th Gen fighters, the KC-46, and the E-2D. The bill incorporated decreases in the V-22 OEM production from the prior year. However, V-22 is transitioning to an MRO sustainment program for which Triumph maintains significant content and repair volume. We delivered 18 shipsets of V22 pylon conversion actuators in our third quarter. The recent FMS announcement of 12 CH-47s to Egypt and the U.S. Navy's decision to approve the CH-53K for full-rate production are welcome news as Triumph provides and maintains significant content on these platforms, including engine fuel controls, fuel pumps, actuation, and heat exchangers. Triumph has also got content on the recently revealed B-21 bomber and is pursuing work share across the sixth generation fighters in early development. Our path to value through exiting lower margin build to print work in favor of proprietary and sole source positions across ramping and new start programs is reflected in the new wins on new platforms. Turning to slide 13, Triumph is bringing new capabilities to the market. These include fuel pumps and actuators for GE's new military adaptive cycle engine, a new high-capacity vapor cycle cooling system for next-gen military platforms, and the complete landing gear system for both the Sikorsky Raider and the Raider X vehicles, as well as the Sierra Nevada Dream Chaser space vehicle. We are working to implement additive solutions across all these product lines. Partnerships have been a key enabler to our MRO growth. Our JV with Air France for nacelle repairs on newer aircraft and our planned JV in the Middle East with Mubadala's Senned will provide access to the region's MRO markets and enable us to accelerate growth in engine accessory repairs. Taken together, Our growing backlog and improving mix of OEM and aftermarket business keeps us on track to be cash positive in the second half of fiscal 23 and beyond, and to raise our guidance for the full year. As a board and management team, we look forward to improving markets and stronger financial performance, and to renewing our capital structure in support of our growth. Jim and I are happy to take any questions you have.

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 1 on your telephone keypad. If using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2.

At this time, we will pause my material to sum up our roster.

Our first question will come from Seth Seisman with JP Morgan. You may now go ahead.

Hey, thanks very much, and good morning, everyone. I wonder if you could talk a little bit about the structures business and the profitability there in the quarter. I think, you know, the core interiors piece, I think we talked last quarter about being about breakeven, and then there were some closeouts related to 747. Should we think about this level of sales and profitability with kind of a low jeans margin as being the go-forward margin from here for the core interiors business? Or was there some lingering goodness from the 747 in the December quarter as well?

Yes. Thanks, Seth. I'll start. This is Jim. Before the pandemic, that was a 20% business, and it still has the potential to go there again. It got hurt by the max, but the max is recovering now. So actually last quarter, it was modestly profitable and cash positive. So going forward, it's just going to grow from there. And it got hurt a little bit by the 787, but when that comes back, that's going to help even more. So it's a very good business. It is a continuing operating business in there. It is profitable and cash positive now, and it can get back up to 20% margins.

Okay, but when we're thinking about sort of Q4 here, that's kind of like a 10% to 15% margin business now in interiors?

Not yet. It's ramping. It's in the single-digit margins now, but it will ramp further as Max continues to help it out with extra volume and as 787 comes back. We actually finished the consolidation of our Spokane facility operations into there. So we're starting to see the benefit from the cost reductions there as well. So, no, it's not in the teens yet.

On a full-year basis, but quarterly, it's in that range that you described because it's on a very steep slope.

Okay. Okay. Thanks. And then just the strong MRO growth in the S&S business, thinking about the difference there between kind of product-related growth and your repair-related growth. How would you characterize any differences between those two markets right now?

Right now, they're both on the upswing. When you look at the OEM rates like Airbus, they're delivering about 45 a month on the narrow body, but they're headed to 58 at year end with similar increases out of Airbus. And we're also on the A220. That's going up from about 7 a month to 10 a month. So we're seeing strong OEM rates, but what's leading us out of the pandemic is the MRO growth. I mentioned the increase in inductions. So we stand there and watch for parts coming in from the engine side. We do overhauls of gearboxes, engine accessories, and then the cells, thrust reversers, structural repair, even some interiors MRO. It's all going up. And this is a reflection. just how much volume the carriers have. I mean, American had their highest full-year revenue in the company's history in 22. Delta had revenue that was higher in Q3, Q4 than 2019. And you read about United's big orders for 787 and 737 MAX, as well as Southwest. They also surpassed 2019 levels. And they're all triggering new orders. So in the short term, the demand for MRO for both The legacy fleet, which they're keeping in operation until the new aircraft arrive, and then their newer fleet is quite high. So that's been a big tailwind for us because the MRO space has shorter cash payments and cash to cash, and it's also profitable.

Great. Thank you very much. Thanks, Seth.

Our next question will come from Peter. Armin with Baird.

You may now go ahead.

Yeah, thanks. Good morning, Dan and Jim. Hey, Dan, you mentioned positive free cash flow, you know, thinking about that, not only for the fourth quarter, but fiscal 24. Jim, I wonder if you could just maybe, I know you're going to give us more detailed guidance on that in May, but just kind of some of the bigger moving pieces that are going to improve, like when we think about working capital this year, which is a big drain, just some of the key pieces that you're looking at. Thanks.

So first, only cash use this quarter was $5 million, and it's really to fund the growth in the fourth quarter, which is above what we expected. And in fourth quarter, if you look at the midpoint of the range, I think you're in the $60 million cash generation roughly in Q4. So it's a nice, solid finish and good trends going into next year. So for next year, obviously the volume that we're seeing, the growth in both MRO and OEMs, is contributing to the cash positive next year. And the absence of one-timers. You know, we did exit some businesses that were working capital users earlier in the year and maybe not as profitable as the rest of the business. So we've improved the portfolio. We've reduced our costs. We talked about rationalizing some of the SG&A overhead with the smaller business. Those are the key drivers. But as you said, I look forward to give you a lot more specifics when we give guidance next quarter.

Okay, and just as a follow-up, Dan, it's great to see the structures business turn up, and obviously you talked about an improving run rate there and a steep run rate. Is this business still considered core, just given how you've reshaped the systems business for the long term, just having a lot of aftermarket-related IP versus this business? Maybe you could just describe it, how it fits into the portfolio. Thanks.

You bet. There's certainly customer synergies. In the last year, interiors booked about a billion dollars of backlog that's going to keep them in business for 10 years without the need to win a lot of new work, and yet they're still winning. I mentioned the A220. They've got key interiors work on that now. So it's contributing to us financially. It has an absorption benefit. It's one of our better operations in Mexico. They do a great job with their lean performance. There's not a lot of product synergies in the sense that we we bundle interior solutions with systems. So in that sense, there's not a big connection, but it is an important business to us. I will say, you know, we look at every one of our businesses every year in terms of its trajectory and contribution triumph and how fast we can grow it and make that decision about whether we retain it or manage it for cash. You know, right now it's about re-ramping that interiors business to the level of sales and profit they've had in the past, and we're confident we can do it.

Appreciate the call. Thanks, Dan.

Thanks.

Our next question will come from Sheila with Jefferies.

You may now go ahead.

Sure. Good morning, Dan and Jim, and thank you for the time. Jim, my first one's for you. How do you think about the range of outcomes in terms of the debt refinancing? I know you're not going to the bank and asking for 12% debt. What are the sort of potential options here, and how much cash do you need on the balance sheet to operate?

Thanks, Sheila. Well, with the businesses we divested, those were the biggest cash volatile businesses. They had a lot of working capital associated with them. So as we change the portfolio, we find less and less need for cash moving forward because there's less volatility. And right now we have $127 million of cash availability, and that's sufficient for what we need, especially with the strong cash generation we expect in Q4. We talked about our confidence in refinancing, and if you watch the markets, you start to see them open up again. These high-yield markets were shut down for the last quarter, and they're just starting to open up, and we're seeing opportunities for us to go back. We still have well over a year before the first maturities are due in 24, and we continue to work with the advisors, and without I'll give you details of the exact plans. We do have plans and contingency plans around the refinancing of those as we get closer to them going current. But we see markets opening and we see opportunities to refinance them at favorable rates and not 12%.

She asked about cash as well.

I mentioned we have $127 million right now, which is sufficient. And I don't see a need for a lot more than that going forward, except for growth initiatives. We continue to invest our capital. in our existing technologies alongside of our customers who are investing with us to take our technologies onto their new platforms. So we do want to keep reinvesting cash to keep the business sustained and growing. And then eventually we'll look outside after we get that reduction down for opportunities to grow externally.

Yeah, Sheila, you've been a close follower of our stock for many years and You know, you remember two years ago we were about an 8% EBITDA business. You know, last year we were 11. This year we're about 14. And we're headed north from that in the coming years. And so, you know, we've been on a path to deleverage just through earnings and cash flow pre-pandemic. And I remember briefing the board and we were, I think, three or four quarters away from achieving our leverage goals. So now we're resetting for that. And we enjoy a lot of interest and support from the investment banks and bondholders. So, you know, we're confident we can get refinanced.

No, that makes a lot of sense. Thank you for that. And maybe just a shorter follow-up. I think, Dan, in your prepared remarks, you mentioned $130 million of new ones, but the backlog went up $20 or $30 million. Can you maybe square that a little bit?

So, I'm going to, Tom, quickly...

respond on that issue as you recall our backlog is really only the next two years of orders uh so that's things that we've received firm orders on whereas the contract win may be a five year or beyond orders and we're taking into account what we expect to earn of course of that contract got it thank you so much thank you our next question will come from david strauss with barclays you may now go ahead

Thanks. Good morning. Just wanted to ask about working capital. It looks like if my math's right, you're assuming like $50 million in positive working capital in the fourth quarter. Is that correct, Jim? And then your comment around getting deposit-free cash flow in 2024, fiscal 24, what are you assuming for working capital in there?

Yeah, so directionally, as I mentioned, working capital is going to be contributing to cash flow in Q4. It'll be a meaningful part of the $60 million generation because we are shipping out a lot of products in the fourth quarter, both seasonally and from the stronger demand. We don't have specific working capital assumptions for next year, but what's happened with working capital is our on-time and full has improved substantially. I think it was about 10-point improvement just over one quarter, and that's a leading indicator to working capital coming down. We've seen working capital be a little higher because of supply chain disruptions, but that's improving, and we're looking forward to that improving into next year as well. And with a new portfolio, we should be a little less working capital dependent than we were in the past.

Okay. And any sort of early thoughts on pension for next year, both from a – I guess from an income standpoint and whether you'll need to make any cash contributions?

Yeah. Too early to say what the year-end valuation is going to say, but we have put disclosure language in there about the risk with the assets, depending on how the markets do and how interest rates are. There could be some increased funding in the out years, but next year should not be material at all.

Okay.

Thanks very much. Our next question will come from Miles Walton with Wolf Research.

You may now go ahead.

Thanks. Good morning. Dan, I was hoping to maybe go back to something you said in the past, which is the doubling of EBITDA. I think 310 million is implied for 25. And sort of two questions. One, is there a margin target? You mentioned 14% is about what you're going to do this year. Is there a margin target embedded in that 310? And then should we think about it as a linear improvement projection from here to fiscal 25? Thanks.

Yeah, we have that very discussion in our own meetings and with the board, Miles, and we've been on a fairly linear percent margin improvement over the last three years. As you can imagine, it gets a little harder as you go, but what we did is a composite of our peers, and we looked at everybody from TransDime and HICO at the high end to other peers at the lower end, took the average, said that's where Triumph needs to be, at least at a peer-like level. earnings multiple, which is between 18 and 20. And we believe that's achievable, but more important than the percentage of the absolute dollars. That's why Jim and I were setting a target to get above $300 million. It's because you can't delever with percentages. We need earnings and cash generation in the amounts that are sufficient to achieve our capital structure goals, and we're confident we can do it. When we provide our guides for fiscal 24, we'll give you more color on that for next year, and we're contemplating an investor day in our next fiscal year as well that we can give you more insight on the multi-year outlook.

Okay. All right. And then, Jim, I just wanted to make sure, I think in Seth's question, it sounds like there were some one-times in structures, maybe a few million. Is that right, as kind of final cleanups?

I think there's around a million of cleanup there, continuing maintenance under the TSAs. The catch, I think, was less than a million and a quarter, so it's getting to minimus as we don't have that many ESE programs left.

There was a number of investors that reacted adversely to a reserve we'd put up for a closeout of TAS, about $75 million, and what we found is we don't need anything like that to... wrap up the work at those sites and disposition tooling and shut them down. So we're more confident in the close-down cost there than we were earlier in the year.

Okay. All right. Thank you.

Thank you.

Our next question will come from Pete Osterland with Truist Securities. You may now go ahead.

Good morning. I'm on for Mike Ciamola this morning. Thanks for taking our questions. First, just wanted to ask on systems and support margins. You mentioned the prior year period benefits there, but it looks like margins were down there on a sequential basis as well despite higher sales. So, I was just wondering what's driving the margin pressure there. Did product mix have a negative impact in the quarter or was it more on the cost side?

So, compared to last year you mentioned first, there were some one-timers. I called that in there last year. Aviation Manufacturing and Job Protection Act money we got in. We had an IP license sale in conjunction with a legacy product line sale. But there was a modest IP sale in Q2 of this year, a small one, which benefited us as well. This quarter is very clean. There's not a whole lot of one-timers this quarter. So when you look at this quarter moving forward, we're going to grow from there. I mean, the EBITDA margin, which is another way to look at it in the quarter for TSS, was – 17.5% in Q3, and that's up from 17.3% a year ago. So we're pleased with the progress there. The mix does change from time to time. Some of the spare sales can be lumpy, but the overall trend is positive, and we're pleased with it.

Yeah, when you take out those one-timers that Jim mentioned that we had prior, and we didn't have any this quarter, it was clean earnings from operations, the rate of profitability growth in TSS was higher than the revenue growth. You mentioned revenue growth, 21%. So the core earnings growth was in fact higher. And that's what we intend to demonstrate again in Q4.

All right. That's helpful. Thank you. And then just as a follow-up, how are conditions for you in the labor market currently? Are you seeing any elevated attrition? And do you have the hires in place that you need to meet the growth that you're anticipating into fiscal 24? We do.

You know, we look at our head count every week across all the sites. And, you know, there's been a few pockets of touch labor where getting specialized skills like gear grinding has been harder. But generally, our attrition levels are better than our peers. And I attribute that to this new deal I mentioned. My comments, you know, we can't throw money at all of our employees, but we can address all of their needs, which include flexible work hours, and support to their development plans. We did some things on giving cash stipends during the summer of last year because of gas prices. And people really appreciated that. And we've done a lot to engage employees and our community involvement. And we just want to be an employer of choice. And that's gone a long way. But where we've seen labor challenges has mostly been at the lower tier supply chain. where they haven't been able to get the kind of experienced mechanics and casting houses in particular, they've struggled. So that's a watch area for us, but internal triumph, we're actually in good shape.

A couple of colors, thank you.

Thank you.

Our next question will come from Kai Von Rumor with Cohen.

You may now go ahead.

Yes, thanks so much. Maybe walk me through sort of the thinking behind the warrants which are sort of priced at strike at $12.35 and the stocks under that. I guess it makes sense if someone wants to buy and use the 2025 maturities to exchange them that there's a positive arbitrage. But what are you seeing there and what do you expect in terms of retiring debt by those warrants?

Thanks, Guy. The warrants provide optionality to shareholders. And in the past, you've seen us raise equity through an ATM. And that really didn't give an option to our shareholders. And some of the feedback was, you know, we'd like to have the choice. So what the warrants did was give shareholders something of value. They got equity security. It's trading over a buck now. And they can choose to sell that into the market and get money that way and realize their value that way. they could go buy bonds and use those to exercise warrants to get stock, and they could hold that stock or sell the stock. Or they could just hold onto it for the term, and when the time comes, maybe they want to exercise for cash because the stock's trading above that point. So it provides optionality and value pro rata to our existing shareholders. And we're pleased to be able to do that. It's just one component of an overall de-leveraging strategy, right? We're de-leveraged naturally through EBITDA expansion and our portfolio changes to get higher margins. We'll go and provide that optionality, but it doesn't solve all problems. It just provides one avenue for value for shareholders. We're still going to go through a refinance on the best terms possible at the right time, our maturities before they come due.

But if I look, you basically have five quarters to get this done. And unlike other high-yield candidates like Bombardier or Spirit, your debt is bigger than your revenues. In their case, it's like twice as big. And while you're probably not going to pay 12%, like Sheila said, you're clearly going to have to pay a whole lot more than 7.5% unless the market changes very substantially. So that basically a refi will really increase your interest or costs. And your margins are not that bad. Your margins are pretty good. But the percentage increase you can get in those margins kind of looks like it limits the adjusted EBITDA growth. And so, I mean, do you feel like you're potentially in sort of a spiral where higher interest costs eats up most of the incremental adjusted EBITDA margin? Or is there a point where you see basically the adjusted EBITDA goes up and you can really deal with the interest expense so you can really generate the type of value that I think your shareholders would like?

Yeah, thanks. Thanks, Guy. I think what our Q3 results show is the underlying value of our business absent the debt, but your question is a fair one. First, let's start with the dividend warrant. At full execution, that should reduce our interest carry by about $20 million. When we refinance the first and second lien, the average rate of those two is about 7.5 percent. And yes, the 2025s are trading at a lower price, Triumph is viewed favorably by the bondholders in terms of our ability to service debt. And we are seeing an opening of credit in the high-yield markets in the last few weeks. It gives us a lot of confidence that we're not going to pay, as you said, a whole lot more than 7.5. So I would say watch that space, first of all. And any debt we do, we'll have the option to refinance it a couple of years in. and reduce any interest carry that comes along with that debt on a short-term basis. And during that period, I think you'd agree all the projections for the A&D market are favorable. By 2024, 2025, we're all looking forward to full exit from the pandemic and be at rates that were higher than 2019 level. And the things we've done during the period, this downturn period, really do position us to have these stronger earnings and cash generation. We're confident that we can get refinance. We're confident that we can get our interest carried down. Recall, we retired all of the Boeing advances. We've shed the businesses that were sources of cash use, and we're getting our mix right between OEM and aftermarket, which benefits earnings as well. So a long answer, but an important question, and we're dealing with it head on.

Terrific. Thank you very much.

Our last question will come from Noah Poppenack with Goldman Sachs. You may now go ahead.

Noah Poppenack Hey, good morning, everybody. You had provided the slide of where you saw the major airplane production rates going 2025 before Boeing's investor day. Can you just square me up on what your internal plans now have for the MAX and the 8-7 in that period of time compared to what you were thinking previously?

Yeah, we've gotten the latest schedule from Boeing that gives us bill rates. I mentioned our current delivery rate is 30 to 31 a month. They put a marker out there to be around 50 into 2024, and so it will ramp up incrementally between now and then at some logical step points. What I've observed about Boeing's rate changes is that with each new schedule we get, there's a smaller adjustment. So the ball is bouncing less high with each bounce. They're really dialing it in. They put a lot of people on the road, as have we, chasing those supplier shortages. And as they fix them, there's fewer and fewer ones to remedy that are constraints on the ramp. You read about Boeing opening the fourth line for 737, what they call the north line. That's going to help a lot. All the recent orders reinforce the need for that. So we're staying in lockstep with them. We're not building at rates above them. I will say part of our higher working capital in Q2 and Q3 was a flat spot that we saw on engine production. and Boeing's build rate as well. And now that we've got clarity to the rate going up this year and next year, we're going to burn that inventory off quickly. So we're excited. Even on the LEAP, we do a lot of gearboxes for the LEAP. There had been some deferral of orders mid-year this year that got restored in our fourth quarter, so now we're scrambling to deliver them. And As they update their profile, we'll adjust, but we expect those adjustments to be smaller and generally in the direction of going from 30 to 50 on the narrow body.

Okay. That's helpful. And just digging in a little further on the MACs in the shorter term, their stated production rate there has been about the same for a while, and the monthly delivery number bounces around, but it's sort of been in the same zone for a while. It sounds like you're saying that's firming up or that at least you're seeing a higher contribution from the max. And, you know, like you said, they're pointing to the fourth line. And is it the correct read that that is stabilizing and now evaluating going higher sooner than later? Or is that too ambitious and there's still a lot to clean up?

I think their delivery rate over the last four quarters supports it. In their first quarter, they delivered 95 aircraft total. And their max deliveries were in the 27 to 35. Then they went up to 43 by June. And then they ended the year with 53 maxes in December. So there's real quantifiable increases in output out of Boeing. And their total delivery in December was 69, 53 were maxes. So it's definitely happening. We've got people there in their plant observing the production. We supply a lot of hardware on the max. It is an important program for us. And as the rate comes back, it's benefiting not only interiors, but a number of our actuation plants. So we are aligned with them. As we continue to diversify our customer base, I mentioned all the Airbus content. We had some press releases in the quarter about new wins with Airbus. But the MAX is going to be a tailwind for us as well. Jim, anything to add?

Some of the plants had some inventory that Boeing was burning through. So that's why we may be ramping, kind of trailing their ramp, and we're still going up. Some of our places are near just in time, and some are not. So I think that's the difference there is that we're ramping as they burn off inventory.

Okay. Last one, you just referred to some new wins you announced. You know, the investor presentation with the earnings now, you know, every quarter in a row for a while has a slide or two on strategic initiatives and new wins. And, you know, this quarter you described some clean sheet new products and we see a lot of announcements. Is there any way to quantify that? You know, the organic revenue growth has started to pick up. Obviously, the end market's picking up. But, I mean, how many new products are you adding as a percentage of the existing portfolio? Or how much outgrowth do you see? Or any other way you could frame that? Because it seems pretty encouraging. I mean, you're pointing to multiple new things there.

Yeah. First of all, I'll take... I'll take that challenge to quantify the contribution of our new wins on maybe a product-by-product basis for our investor day that's coming up. But in my script, I talked about how we set a goal of 25% of revenue coming from new customers and suppliers. And we're seeing that. The new wins are on the order of 40-plus percent of the volume. And our goal is to be throughout the product lifecycle. So on early development programs, think 6th gen fighter. On new current development programs, B21, we can't talk about specific content, but we are on that platform. And then we want to be on low rate programs that are transitioning into production like CH53. And then we want to be on mature programs like the F35 and the C5, C130. C-130 was plussed up in the president's budget. The V-22, they got plussed up, five aircraft as well. The Apache got plussed up. There's a budget for 35 aircraft. So if you have, and then we want to be at the very end, which is the tail end, the sustainment phase of mature aircraft. Today, V-22 is an example. Chinook, these are good programs for us in the aftermarket. If you get gaps in any part of that arc from early development through sustainment, you get these swings in your mix and in your financials. And Triumph had that problem five years ago. They had a lot of late-life production programs like 747, G650, C17, and that was good while it lasted. A big gap opened up in the pipeline, and now we've achieved, I think, a stability across those. So let us take the action to give you specifics on how they're contributing. But the real leading indicators, whether it's backlog growth or book-to-bill, are very favorable, and they have been month over month. We look at each of our operating companies, vision controls, gears, actuators, aftermarket, And they all have booked a bill greater than 1.0. So it's a consistent level of growth across all of our operating units.

Okay. Thanks very much.

Thanks, Noah.

This concludes our question and answer session and Triumph Group's third quarter fiscal year 2023 earnings conference call. This call will have a replay that will be available today at 1130 a.m. Eastern Standard Time through February 8th at 1159 p.m. Eastern Standard Time. You can access the replay by dialing 1-877-344-7529. Again, that's 1-877-344-7529 and entering access code 2140903. Again, it's 2140903. Thank you for attending today's presentation. You may now disconnect.