Triumph Group, Inc.

Good morning, and welcome to the Triumph Group fourth quarter fiscal year 2023 results conference call. All participants will be in a listen-only mode for the duration of the call. And should you need any 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 one on your telephone keypad. And to withdraw a question, please press star, then two. Please also note that this event is being recorded today. I would now like to turn the conference over to Tom Quigley. Please go ahead, sir.

Thank you. Good morning, and welcome to our fourth 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. Triumph ended fiscal 2023 in Q4 on an upswing with strong margins and positive cash flow, positioning the company for success in fiscal year 2024 and beyond as demand accelerates. We met or exceeded our full-year financial targets, delivered organic sales growth, materially expanded profitability, and in our fourth quarter, generated 52 million in positive free cash flow. Q4 was an encouraging finish to a solid fiscal year that marked year-over-year improvement in both earnings and free cash flow. Over the past two years, Triumph doubled our adjusted EBITDA margins from under 7% in our fiscal 21 to 14% in fiscal 2023. As we go forward, We expect this momentum to continue and are guiding to further margin expansion and top line growth in fiscal 24 as we seek to enhance shareholder value in a rapidly improving demand environment. Deleveraging remains a top priority as we continue to optimize our capital structure over time. We recently extended our debt maturities, providing additional liquidity and flexibility as Triumph returns to consistent cash flow generation in fiscal 24 and beyond. Our four-point strategy remains on track. First, reposition the company as a systems and aftermarket company, which we've done. Two, improve operations and grow our proprietary and aftermarket sales and margins. Three, return to positive free cash flow to help de-lever the company. And four, generate the shareholder returns our investors expect. Triumph is a stronger company today as a result of our actions. allowing us to compete successfully in the market against larger and more valuable peers. Turning to slide three, I'll summarize the highlights for the quarter. First, we generated organic sales growth of 21 percent over the prior year quarter, with increased sales reported across all our end markets. Year-over-year sales growth was 14 percent, driven by improving commercial OEM and MRO demand. Note that aftermarket accounted for 41% of our Q4 sales, while military programs account for 37, both up from prior years. Key drivers for the increased Q4 revenue included higher volume on the Boeing 737 and 787, OEM and spares for military rotorcraft, GE LEAP gearbox shipments, and nacelle overhauls. All tailwinds on growth platforms, which we expect to continue in fiscal 24. Profitability for the quarter materially exceeded prior year levels. On a fiscal year basis, we achieved our highest margin percentages since 2014 as a result of our strong execution and improved business mix. Key profitability drivers for the year included higher spare sales, cut-in of previously negotiated price increases, development program transition to production, higher sales at our MRO sites, and lower SG&A and overhead costs. Our cost reduction results enhance our operating leverage. In other words, we won't have to add back support costs as volumes increase. What's encouraging here is we saw higher EBITDA margins across all our primary product lines year over year, from actuators to engine controls, gearboxes to product support. We grew our backlog by 11% as Triumph continues to benefit from our broad representation across platforms, customers, and end markets, and as our differentiated solutions gain traction with our customers who are helping to fund our R&D efforts. Our backlog improvements in size, diversity, and profitability are rooted in our investments in new products and technology, portfolio changes, and pricing initiatives. In addition to the long-term agreements, which we secured in recent years across all our businesses, backlog renewal is key to Triumph's sustained long-term growth. Beyond higher OEM rates and MRO receipts, new wins in the space market and for products supporting the war in Ukraine enabled us to exceed our goal of generating 25% of our sales from new products and markets. Turning to cash flow, we generated strong positive free cash flow to end the year, benefiting from over $120 million in unlevered free cash flow in Q4 as we accelerated product shipments, cash collections, and reductions in working capital. We are on track to generate positive free cash flow on a full-year basis for fiscal 24 and beyond, while expanding our CapEx investments and funding working capital in support of the commercial ramp. Taken together, the momentum in our end markets Our operational and pricing improvements and expanding backlog lay the foundation for our fiscal 24 guidance. Triumph made great strides this year operationally across the enterprise, including achieving world-class safety levels with 12 or half of our sites recording zero injuries in the last year, reducing REDD programs by over 75%, which reduces financial risk, establishing over 100 high-performance teams to streamline our execution, reducing quality defects by 20%, with 11 sites achieving world-class levels of less than 1% cost of poor quality, and improving supplier on-time delivery performance from the mid-'70s percentages to the low-'90s to free up captive inventory. We remain encouraged that both OEM and MRO markets continue to recover, as commercial revenue levels are on track to exceed 2019 levels this calendar year. Triumph is benefiting from a 52% increase in global revenue passenger kilometers to 88% of pre-pandemic levels. The primary driver for both new aircraft orders, production rate increases, and MRO spend. Similar growth in the international travel is benefiting our wide-body MRO sales. Robust commercial demand helped increase Triumph's fiscal year 2023 bookings 31 percent, including $171 million in new contracts in March alone, our highest of the year. Six of our 24 factories will benefit from Ryanair's recent order for 300 MAX 10s and those from United Airlines. Turning to slide four, new wins totaled $205 million for the quarter and $743 for the year. Important military wins for the quarter included content on the CH-53 helicopter, including the blade fold and blade damping system and engine oil coolers, and an F-35 drag chute actuator. We also received a large order for the M-777 howitzer magazine components. Increasing volume is our biggest enabler for top and bottom line growth. Boeing and Airbus continue to forecast higher OEM production rates, And recall the triumph typically steps up our rates eight to 10 months ahead of the OEMs due to product lead times. As shown in slide six, we anticipate the Boeing 737 MAX rate to step from the current rate 31 to rate 38 this summer, and then rate 42 by March. The A320 family achieved rate 46 in March with plans to move to rate 49 before the end of our fiscal year. Airbus also plans to increase the A220 rate from the current 7.5 per month to 9.2 and then to 10 within our fiscal year. Recall that Triumph supplies cabin insulation, floors, and mechanical controls on the A220. On or before Triumph's fourth quarter, the Boeing 787 will move from the current rate 4 to rate 5, while the Airbus A350 will move from rate 5.6 to rate 6. Prime supplies the entire 787 landing gear hydraulic system, cargo door actuation system, and interiors components. Regarding the military outlook, the U.S. defense budget rose approximately $60 billion in 23, and the 2024 request is up another $26 billion, signaling demand stability over the next two years. Prime's total military sales were up 18% year-over-year and 34% sequentially, with platforms such as the CH-53 helping to drive our fiscal 23 results. Finally, aftermarket inductions across military and commercial platforms for maintenance, repair, and overhaul are up 24% year-over-year to over 35,000 components. Together, these OEM and MRO increases across all our end markets support our fiscal 24 guidance and long-term business outlook. So overall, very good news on demand trends. I want to share an update relative to our proprietary product development efforts in the systems area and its importance to our value generation efforts. For fiscal 24, approximately 72% of our sales are for proprietary products, excluding our third-party MRO business. Our technical staff maintain robust product roadmaps so that intellectual property, technology, and product development investments are directed towards emerging customer needs. We're targeting new starts as well as takeaways on existing programs. By partnering with our customer to solve their most difficult challenges, we received over $30 million in customer-funded contract research and development commitments in the last 12 months to augment our self-funded R&D. Turning to slide seven, you can see some of the positive results of these joint R&D efforts. New applications include next-gen landing gear systems, military gearboxes, electric aircraft components, fuel pumps, fuel hydraulic actuators, thermal vapor cycle compressors, and engine controls, all products with valuable aftermarket demand. I'm particularly happy to have content on GE's new LM25NX military engine, and new solutions for 6th Gen fighters. This customer engagement was made possible by our customer focus teams, who are shaping future requirements and identifying takeaway opportunities to expand our backlog. Priam's strong financial and operational close to fiscal 23, along with our proprietary products and end market growth, are key enablers to enhancing our long-term value. None of this would have been possible without the Triumph team members whose engagement and accomplishments in fiscal 23 make it possible for the company to achieve its potential. Together, the culture we've created at Triumph helped us manage through the last three years and position the company to sustainably execute our profitable growth strategy in the years to come. Jim will now take us through the fourth quarter results and our detailed outlook for fiscal 24. Jim?

Thanks, Dan, and good morning, everyone. Triumph's fourth quarter results exceeded our expectations, with significant revenue and margin growth over the prior year period. On slide eight are the consolidated results for the quarter. Revenue was $393 million. For the continuing business, excluding divestitures and exited programs, organic revenue increased 21% over the prior year quarter. We benefited from organic sales growth in our largest programs and in all our end markets. Adjusted operating income for the quarter was $60 million, representing a 15% margin, an increase of over 400 basis points from 11% in the prior year period. Adjusted EBITDA for the quarter was $68 million, representing a 17% EBITDA margin, which is a 500 basis point improvement over the prior year period. Increased demand in all our markets, especially the aftermarket, was a key driver for the significant margin improvement over last year, along with pricing and cost reductions. Triumph's full year results for fiscal 23 were also strong, with higher operating income and higher margin. On slide 9 are the annual consolidated results. Revenue was $1.379 billion. For the continuing operations, organic revenue increased 14% over the prior year. Adjusted operating income for the year was $159 million, an 11% operating margin, up over 200 basis points from the prior year. Adjusted EBITDA for the year was $196 million. That is a 14% EBITDA margin, which is a 200 basis point increase over the prior year. Our segment tables are attached to the press release, and please note that the segment formerly known as structures is now called interiors. This name change more accurately reflects the ongoing focus of that business, following the completion of our efforts to reposition the segment. We are encouraged by the progress we have made and would note that interiors is benefiting from a strong backlog and growth forecast. We also expanded our disclosures over the last year to include revenue by end market, including commercial and military, and then OEM and aftermarket under each. Slide 10 shows our commercial market revenue. For the quarter, commercial revenue of $237 million was 60% of total revenue. Commercial OEM sales were $141 million and grew 35% in the continuing business. This growth was driven by increases in both volume and price in key programs, including the Boeing 737 and 787 programs. Commercial aftermarket sales grew 51% in the continuing business, on strong demand as commercial air travel has continued to ramp. Slide 11 shows our military revenue. For the quarter, military revenue of $144 million was 37% of total revenue. Both military OEM and aftermarket revenue grew compared to last year. as supply chain recovery benefited this market. Remaining 3% of our revenue is non-aviation, which is a growing and profitable business, represented about 12 million of sales in the quarter. Our sales have exchanged towards aftermarket as having a positive impact on margins and cash flow. In the quarter, total aftermarket sales represented 41% of our revenue, up from 31% in the prior year. Our portfolio actions and our growing aftermarket demand have both contributed to this positive mixed change And we expect this trend to continue as we move through fiscal 24. Our free cash flow walk is on slide 12. Our $52 million of cash generation this quarter included a $70 million reduction in our net working capital driven by the fourth quarter sales volume. As supply chains continue to improve, we've been able to reduce the inventory we've been carrying. We also incurred an additional $14 million in interest payments in the quarter due to the timing of our refinancing. On slide 13 is our net debt liquidity. During the fourth quarter, we completed the refinancing of a substantial portion of our debt, issuing new 9% first lien notes and retiring two series of notes that were due to mature in 24. This transaction extended those maturities to 2028, providing additional liquidity, enhancing our financial flexibility, including the ability to prepay a portion of these new notes at a reasonable premium. On March 31st, we had just under $1.5 billion of net debt, and our cash availability was approximately $287 million. Our next maturity is the $499 million of notes due over two years from now in August of 2025. These bonds are currently designated bonds that can be used to exercise our outstanding warrants for stock to reduce this debt. In the quarter, we received $4 million of proceeds from warrant exercises and retired $1 million of these designated bonds. Our fiscal 24 guidance begins on slide 14. The bridge of our FY23 to FY24 revenue is at the top left. Adjusting for approximately $78 million in fiscal 23 sales from exited businesses, and based on anticipated aircraft production rates, we expect organic growth of 7% to 10% in fiscal 24. Aftermarket volume is the largest component of the increase, followed by OEM volume, pricing, and an increase in non-aviation revenue. The aftermarket is expected to grow at a solid 9% rate, driven by continued expansion of overall air travel domestically and internationally. Commercial OEM revenue growth is driven by production ramps on programs such as Boeing 737 and 787 and the Airbus A320 family. Non-aviation sales are expected to increase, driven by the previously announced work supporting howitzer sustainment. The top right chart shows our EBITDA growth over the last three years and guidance for FY24. We're proud of this positive trend. Our adjusted EBITDA margin has improved from about 7% in fiscal 21 to 12% in fiscal 22 to 14% in fiscal 23. And our guidance indicates up to a 60% consolidated EBITDA margin in fiscal 24. This EBITDA margin expansion has been driven by a number of key factors, including the reshaping of our portfolio, increasing operational efficiencies, improving the pricing in terms of our contracts, and from increased demand from higher OEM production rates and a ramping aviation aftermarket. The bottom left chart shows our improving quarterly free cash flow cadence for the last two years and the anticipated cadence in fiscal 24. We expect to generate positive free cash flow in fiscal 24, including normal seasonality with working capital growth using cash in the first half, to support higher deliveries and resulting cash generation in the second half. The bottom right chart is our unlevered free cash flow bridge from fiscal 23 to fiscal 24, which shows our free cash flow before interest. As previously noted, fiscal 23 included $24 million in non-recurring cash uses and $32 million in net working capital increases. We anticipate a modest net working capital improvement over fiscal 24. And our largest driver is earnings growth, which is expected to drive just over half of the unlevered free cash flow improvement. Turning to slide 15, you'll find our detailed fiscal 24 guidance. We expect revenue of 1.39 to 1.42 billion, that's 7% to 10% growth in the continuing business, and cash from operations of $60 to $80 million. After $25 to $30 million of capital expenditures, We expect to generate $35 to $50 million of free cash flow in FY24. That's up to $123 million improvement in free cash flow for fiscal 23. We expect $165 to $180 million of operating income and $210 to $225 million of adjusted EBITDA, representing up to a 16% EBITDA margin. Interest expense is expected to be $154 million, including $148 million of cash interest, and we expect $7 million of cash taxes. Our pension funding forecast is on page 19. $15 million is the estimated required contribution in FY24. We've used stock for required contributions in the past and may elect to do so in the future. We would note that estimates after the first year can change significantly, as we have seen in the past few years. In summary, it was a strong finish to a solid year and with fewer one-time items than past years. We complete our portfolio actions and are clearly positioned as an aerospace systems and aftermarket company. We extended our debt maturities, grew revenue, expanded margins, and improved free cash flow. For fiscal 24, we're focused on executing on our plan to continue to grow revenue, margins, and cash flow and increase shareholder value. We're in the planning process for an investor day in the fall and look forward to sharing our multi-year targets and bridges at that time. Now I'll turn the call back to Dan.

Dan? Thanks, Jim. Triumph's performance in our fourth quarter and fiscal 23 underscores that we're a stronger systems and aftermarket driven company with a larger and more profitable backlog and financial results that are steadily improving year over year towards the targets we set in fiscal 21. We entered our fiscal 2024 with an optimized portfolio of businesses, programs, and products at a time of accelerating customer demand. Our increasing mix of aftermarket and IP-driven OEM sales gives us confidence in our fiscal 24 guidance and long-term outlook. Jim and I are happy to take any questions you have.

We will now begin the question and answer session. Again, to ask a question, you may press star, then 1 on your telephone keypad. If you're using your speakerphone, please pick up your handset before pressing the keys. If at any time you would like to withdraw your question, please press star, then 2. We ask that you please limit yourself to one question and one follow-up on today's call. You may rejoin the queue if you have additional questions. At this time, we will take our first question, which will come from Sheila Kyoglu with Jefferies. Please go ahead with your question.

Thank you so much, and good morning, Dan and Jim. First off, can I get the Excel backup data behind slide 14? That'd be great. if we could get that precise. So I appreciate those slides. That's super helpful. I guess I wanted to go actually to the next slide because the supplementals, but in terms of the pension items you mentioned becoming a significant headwind in fiscal 25 with the contributions there, how do we think about, you know, those numbers in the context of your free cash flow generation? And maybe that's something you'll discuss in the fall.

Yeah, thanks, Sheila. And I'll look for that Excel spreadsheet and let you know. But I think pension is an interesting one because it's volatile in the out years. And as you know, last year, at the same time last year, we had only a million dollars or so per year funding forecast. It's only the next year that really matters because after that, it can change dramatically based on market conditions, interest rates, returns. So what we're focused on is the $15 million in the coming year. If you look at the pension liability on the balance sheet, It went from up about $58 million only. So, but the funding went up a lot more than that. And some of it has to do with elections, which we're going to revisit and consider before the next year. But in the fiscal 24, we have $15 million to deal with, which we're planning for.

Got it. Okay. And then just a quick follow up on the interiors margins. You know, this is like one of the, as you guys mentioned, the best quarters you guys have had. adjusted EBITDA margins of 7.6% in the quarter. Is that sort of the baseline we should be thinking that for profitability?

Could you repeat the number you just said?

Oh, 7.6%, I believe, was the adjusted EBITDA margin.

Right, right. Look, margins are going to continue to improve. And you've seen, I went through the consolidated EBITDA margin, which doubled from 7% to 14%, and we're projecting up to 16% next year. The margins across the business are going to continue to improve from leverage on additional revenue. So we've got gross margin falling through without increasing fixed expenses. So the trends are positive across the board in all the markets, including interiors.

OK, great. Thank you. And our next question will come from Peter Arman with Baird. Please go ahead with your question.

Thanks. Good morning, James. Hey, just thanks on all the details you guys have given, and congrats on finishing up on a strong note for the year. On the organic sales outbreak, you mentioned the aftermarket was up 9%, 7% to 9% for the year, or 7% to 10% for the year. Is it I'm surprised it's not stronger just given the trends that you're seeing. Is there something that's offsetting that or maybe just timing or up against tough cops? Any color on that, Dan, would be appreciated. Thanks.

You bet. We track the inductions that come into all of our MRO sites month over month, and they steadily increase through the fiscal year. Roughly started out the year below $2,000 a month. And they were hitting 3,000 by the time we got to March. So a 50% increase through the course of the year. So we're encouraged by the return to service of aircraft. Internationals opened up, as you know. China is going to expand our TASA site, which is in Thailand, is seeing increased traffic. So aftermarket is going to continue to drive. Where we really want to extend our aftermarket is in spares. Spares came down in prior years as people Just went to the boneyard and extended service intervals now sparing is starting to pick back up and spares carries stronger margins than even overhaul so we're optimistic about aftermarket and we're hiring at those plants that support that and We're continuing to join ventures with our partners at Air France So we're excited about the future in aftermarket Appreciate that and then just

Tim, just as a follow-up on kind of the free cash flow finally turning positive, which is great, it's about 2.5% to 3.5% of sales on kind of your guide. We've long talked about kind of getting that to mid to high single digits. How do you think about that, some of the bigger drivers? Is it just the cash interest coming down, working capital improvement, or some of the things that you're looking for there? Thanks.

Yeah, so you see the 24 guide at 35 to 50 million of free cash. That's just the beginning. Obviously, we're going to ramp and our goal is to be up in the high single digits on a free cash flow as a percentage of sales. And the cadence will be, you know, we're in the low single digits in 24 and then we'll move kind of into the mid single digits in 25 and then the higher single digits in 26.

Appreciate it, Collin. Thanks, guys. And our next question will come from Miles Walton with Wolf. Please go ahead with your question. Thanks, Morty.

I was hoping you could maybe give us a couple of the moving parts from an EPS perspective. I think you've given us most of them, but when you put it all together, and obviously you've got the warrant issue as well that I think has an interest adjustment, is the EPS for fiscal 24 somewhere closer to 50 cents? Is that about the right ballpark?

So I think we're trying to give you the building blocks. The reason we didn't guide the EPS is because of the moving share count, as you mentioned. Share count skewed by pro forma warrant accounting, which has to assume that all of them have been exercised. And then there's exercises. So during the period, we had, you know, $5 million worth of warrant exercises, some of which increased shares and reduced debt. So we're going to give you all the components. And I think probably in the follow-up call, we can talk you through each of them, and you can make your own assumptions about the number of shares outstanding. And so that's the intent there. We're going to get back to EPS guiding as soon as the warrant's exercised.

Okay. And what is the outlook for that to sort of be realized at this point?

Well, Lawrence, in the quarter, there was $5 million worth exercised, about $1 million of debt retired, and that was tendered for shares, and then $4 million of cash was raised. So the market will dictate when they transact. They expire in December.

Okay. One of the slides I thought was interesting on slide three, this sort of implied what the margin guidance is between the OEM, the aftermarket, and that 12%, I guess, implied OEM margin and the 25% implied aftermarket margin. Are those sort of improving in tandem? Is there more of an improvement you're seeing in one side or the other, just more color there, both this year and into next year, if you can?

They're both improving. Aftermarket's improving more than OEMs. And our mix went from 31% to 41%. So the mix alone drove more profitability. But even within that 41%, we're seeing higher margins because there's just a flow through from the operating leverage as sales increase and we don't increase fixed costs. Okay. Okay.

And then, Dan, you've had that $300 million EBITDA target out there for fiscal 25. Is Is the trajectory you're putting up for 24 enough to maintain that for 25 at this point?

We think so. It's a quarter-to-quarter measurement. Although it's a multi-year goal, we're tracking the OEM rate so closely. As Jim mentioned, volume is our number one lever along with aftermarket to hitting that number. And the direct conversations I had with Boeing and Airbus in the last week give us confidence that those rate step-ups that they're advertising are going to happen. There's no doubt there's a lot of hand-to-hand combat on shortages, but as I mentioned in my script, the percentage of on-time delivery with suppliers has improved in the quarter to the low 90s. We want to get it to mid-90s or higher so that you're really only working shortages on an exception basis. As Spirit recovers on their repairs, Boeing's ramp rate is going to ramp up. They're confident in those step-ups. And that's the biggest lever for us to hit the $300 million. So we'll continue to update you on that. And at the investor day that Jim mentioned, we'll give more color in the bridges on both profitability, revenue, and free cash flow.

Okay. Thanks so much. Thank you. And our next question will come from Ron Epstein with Bank of America. Please go ahead with your question.

Hey, good morning, Dan. Good morning. So we got the free cash flow positive, right? That's great. You know, check, you know, the business cleanup is going. I guess a big picture question, you know, where to from here? When you think, you know, we've kind of gone through, you know, kind of the worst of, you know, the downturn and how disruptive it was on the company and so on and so forth. But when you look out five years from now, 10 years from now, I mean, what's your vision for where Triumph could be?

Yeah, thanks, Ron, and you deserve to ask that question because you've been with us for the whole journey. You know, I've looked at our product lines, and we've got great content, and we talked about the IP expansion. And, you know, five to ten years, what you're going to see is Triumph as a market leader in fuel pumps and heat exchangers, gearboxes, and actuation. And as the fleet evolves towards a more electric fleet, you're going to see us adapt our products to meet that need. And the reason I know this is happening is because our customers are funding us to do the R&D right now for the platforms that'll be fielded in that five to 10 year window. Whether it's Airbus doing an electric regional jet that requires a gearbox to transfer electrical power to the propellers, or whether it's additive manufacturing that will replace the current castings on gearboxes, we're making those investments. We're helping on the next gen you know, variable bypass jet engines. I mentioned GE, the LM25NX. We've got key roles on those fuel pumps. So we can tell that the pipeline of technology and products is going to be transitioning into new starts and then production. So, you know, we don't have to guess what the future is going to look like because we're already working on it. And I think you'll see us in aftermarket expand our services, the FAA, ATA chapters, So Triumph will continue to be, you know, supply as we do today, thrust, reverser, overhaul, and engine accessories, but we'll branch into other products. And the investments we're making in partnerships will make us a more global company in five years, especially in Asia and the Middle East. So, you know, think of Triumph as a company that's even has a stronger portfolio than we had in 2010 when Triumph went down the path of structures. We're going to have a mix of business that's comparable to the Moogs, the Parkers, the Eatons, with a much bigger footprint in terms of global markets.

And then how much of the mix do you think will be defense? I mean, what's your goal for that between defense and commercial, like ultimately?

So when we started, we were 80-20 commercial defense, and we're now 37%. And we're getting to the point where there's enough balance and diversity in our mix of business that we can be more selective on what we pursue based on its contribution to cash flow generation and debt reduction. So we have plenty of both now. And it's a good position to be in because, as mentioned, the budgets are strong on the defense side. So ultimately, we may level out at 40% to 45% defense, but that number is less important than the contribution of the individual programs to our financial goals. Everybody on the management team is focused on debt reduction and free cash flow generation. And you're already seeing top line is now starting to grow in the core, and earnings are coming up. Now the focus is on cash.

Got it. And if I may, just one quick follow-up. In the current market, and I'm certain you guys are seeing this, there's virtually no usable spare parts, USM parts out there. There's nothing out there. There's been a bigger push in the PMA because airlines are just looking for parts. Is there anything medium-term you guys can do to kind of grow the spares business?

In our OEM businesses, we've got depots that are embedded in the production plants And so recapturing our aftermarket tail is definitely a priority, whether it's hydraulic fuses or all the consumable holdback bars for the military. Every time an FAA team goes off the deck, it's a Triumph holdback bar. So we've got factories that are really focused on extending the aftermarket sale for the OEM products that we have. You know, I understand your point on used serviceable materials. For us, it's the regional expansion and aftermarket. So Asia, Middle East, potentially Latin America, these are markets that we don't really play into a great extent. So we'll see volume growth through regional expansion.

Gotcha. Thank you very much.

Thank you. And our next question will come from Michael Cermoli with Truist. Please go ahead with your question.

Hey, good morning guys. Thanks for taking the questions and congrats on getting to the free cash flow here. Maybe again, just to stay on that topic, I think it's been, you know, kind of six years or kind of Ron's original question on that topic, six years since you've been here, you know, you've got the renamed interior structure. I mean, is there any more portfolio shaping left? I mean, do you have the core businesses now? And I guess, you know, specifically, do you think interiors has a long life in that five to 10 year look for Triumph?

Yeah, thanks, Michael. First, remember that the structures business is less than 10% of our sales and metallic structures now is out of the portfolio entirely. So what's left is interiors. And remember, we posted these numbers for Q4 fiscal 23 with our interiors business being largely breakeven. So we've got a lot of upside here. That business was a 20% business in the past. We expect the volume to double over our planning horizon. And it's a really good plant. We've consolidated all the work down into two factories in Mexico. It's very cost competitive, very lean. So we're bullish on interiors, and we think it's going to be a big tailwind to margin expansion and cash flow in the future. And it's a business that we do well. You know, we are market leader in that space, whether it's insulation or cabin floors, ducting, those are all strengths for us. So we're excited about it. But overall, you know, the six years we've been coming to Triumph has led to the portfolio we've got today. And although we may do some minor product line exits, we have the business we need now to deliver on the restructuring and transformation.

Got it. Helpful. And then, Jim, just on that, on the free cash flow, you know, ultimately grinding that to mid single digits and then high single digits. Can you give us more color maybe behind the mechanics there? Is it going to be just managing that cap structure and kind of paring down that interest drag? Is there any more optimization of working capital? Should we even think about, as you guys look at the cap structure and maybe the warrants come to a close here, do you contemplate any sort of equity offerings to sort of manage that interest burden?

Thanks. I think it's important to note that I'm not relying on capital structure improvements for the cash flow. This is really operating cash flow coming from volume increases from demand in OEM and aftermarket. And as our growing installed base, we're going to have a bigger percentage of aftermarket moving forward. But we're pretty conservative in our capital structure assumptions. So that's only upside for us if we can find ways to optimize that, which we will work on. But we're not counting on that for our cash flow guidance. In terms of working capital, Last year we used, I think, 32 million roughly of working capital, and we're going to generate in the single digits of working capital in 24 is our plan. And that's because of stabilization of supply chain and really our own internal efficiencies as well. So that's going to contribute, but it'll be a modest contributor because, of course, even though we're generating a little bit of cash by reducing working capital, we still are supporting growth with the remaining inventory and working capital. So it's operationally driven, not capital driven. Got it. Perfect. Thanks, guys.

I'll jump back in the queue. Thanks, Michael. And our next question will come from Jack Ayers with TD Cowan. Please go ahead with your question.

Hi, thanks. Good morning. This is Jack on for Kai today. Congrats on the quarter. So, yeah, so I wanted to just start on Q4. Obviously, really, really strong improvement with margins growing sequentially. And I just wanted to just make sure we're calibrated here. I know you called out that IP transaction on the commercial OEM side. I'm not sure if that was from a previous quarter, just any color there and just the associated earnings of that would be really helpful. Thanks.

Yeah, thanks, Jack. That was a couple quarters ago. That was in Q2 that that transaction happened. Fourth quarter was very clean. No material at one-timers.

Okay.

Got it.

Got it. That makes sense. And then lastly, I just kind of wanted to ask about military and new programs you're watching here as we look out over the next few years. And I know Boeing called out the T-7 sort of delays here. for a couple years and I know you guys have pretty good content there. I just want to hear your perspective on that issue and then just any broad color on new programs in military. Thanks.

You bet. So we're focused on the mature programs that are in production now like F-35 and we've been approached by Lockheed Martin to develop content that would upgrade the aircraft in areas like cooling, heat rejection, actuation. So That's our first place to start. Then we're on the emerging programs like MQ-25. We do have a small content on T7A. It used to be bigger when we had the structures, but we exited that. So T7A is not a big driver. But on the 6th Gen fighters that are now getting funded, we've got content across the different OEMs. two-engine competitions are pretty well understood. So we're excited. I'd say Rotocraft is a very strong area for Triumph. So as CH53K gets their LREP awards, we go up in volume. We have significant ship set content on that platform. And then they're working on the Army's future vertical lift platforms. We're on both of those teams for FAR and FLARA. And it's a time when Our customers are also doing tech refresh to their existing fleet. Think Apache. We do a lot of heat exchanger work for the Apache. We do gearboxes for that as well. Even though the Army's starting modernization, they're going to operate their legacy fleet for a long time. They're putting fixes in the components that we do, especially at our engine control business, to refresh them and increase their reliability. For us, you know, military is a broad, diverse set of platforms. One area that we've had more inquiries of late is in classified programs. And whether it's Northrop Grumman or Lockheed Martin, we've had more inbounds on that. So we've been working with Lockheed on the digital thread capability, which they'd like to have all their suppliers put in place to provide improved data sharing, whether it's engineering or manufacturing data. And we're collaborating with them on supply chain as well. So I feel like the defense business gives us all sorts of ancillary benefits. The cash terms are good. The customer funds a lot of the R&D. And they're pulling us in in the early phases. So I'm happy to have expanded our defense work. And it's going to benefit us going forward.

That's great. Thanks, guys. Thank you. And as a reminder, if you have a question, please press star then 1 to join the queue. Our next question will be a follow-up from Miles Walton with Wolf. Please go ahead with your question.

Thanks for letting me back in. I did have just one quick one I forgot to ask. I realize you had sold the 767 facility to her in the middle of last year, but I'm curious, is there any liability you all have to carry for the Boeing facility? quality issues that were discovered in the 767 fuel tank. Don't know if there's anything that predated the sale that might be a liability you're carrying today.

No, not at this time. Recall, we sold this business in July of last year, and at that time, we had Boeing consent, and there was no material issues that were outstanding, material manufacturing issues related to any of the programs there. And we continue to support Boeing at Boeing, both defense and commercial, across the board. You know we've done 15 divestitures. We've not had to reach back from prior asset sales. And we're committed to quality. I'm very proud of the performance that I mentioned in my comments about cost of poor quality. So we'll support any inquiries that we've received in the future. And we'll update investors as appropriate. But right now, it's not a concern.

OK, perfect. Thanks. And our next question will come from Noah with Goldman Sachs. Please go ahead with your question. Hey, good morning, everyone.

Good morning. I wanted to talk about or ask about slide six where you've laid out the OEM rates. You've had a slide like this for a little while now that, you know, maybe like a little bit more optimistic than some of the others in the space. I guess there's been a lot of short-term noise and movement, but maybe the 24 and the 25 that you've had all along we're getting closer to. I don't know. I was just curious to hear your level of confidence in these. Is there one or two that look a little bit more of a long putt to you than the others? I guess specifically the max, you know, maybe has the most questions right now with the fittings issue. How confident are you in that 38 and 42? And then overall, Dan, I think you said it, I think you quoted an eight to 10 month lead time. And so the right side of this chart is about eight to 10 months from now. Are you at most of these rates now?

So it varies by factory, but yes, we're seeing pickups in our feeder plants to support it. And it's not just on airframe components. It's also on engines. After the quarter closed, we received the largest contract that's been awarded to Triumph on my watch over eight years for a GE LEAP engine gearboxes. And we'll put out a press release on that tomorrow. But that's a signal of GE's confidence in demand for LEAP engines for both the MAX and for the A320 family. And if you recall, in the middle of fiscal 23, there was a bit of a slowdown as GE allowed the supply chain to catch up. And we finished Q4 with a very high volume of output because demand is coming back. So there's leading indicators not only with Triumph as a sub-tier supplier, but also the engine providers that the rates are coming up. And I've been watching this space a long time. I remember touring Boeing's plant when the 777 was initially rolled out, the first all-digital aircraft. I've been through their plants when they did the 787, which really broke the mold on composites and new supply chain approaches. And then the MAX line I've been down many times, which is very automotive in its style. So they have the capacity to ramp up the line. Yes, park constraints are real. Boeing is putting a tremendous amount of people out in the field. to expedite any shortages and capacity that was under invested in during the pandemic is starting to ramp up. So I have confidence in the rates. There seems to be no shortage of end market demand. You know, you've read about the orders for these. So the backlog is growing. And the step ups on 787 from rate four to rate five, you know, we were at 14 on that before. And the demand for that platform is very high. If we can get that back to 10 as Boeing is advertised by 2025, 2026, that's a huge tailwind for Triumph because we have a lot of content on the 787. So I agree it can't happen soon enough, but these sort of rates are achievable and we believe will happen in the next two years. So as we lay out our multi-year forecast, which is key to getting back to like $2 billion in revenue, and generating the kind of cash conversion that you all expect, these rates make that possible.

Okay.

Can you estimate, I know you explained it's different by facility, but can you estimate the enterprise-wide max rate that you're sending out of the company at this moment?

So why don't we take that as an action? We can address it offline. I don't want to do it you know, from the hip, but we know it by plant. And because, as I mentioned, six of the 24 plants support the max, we have interiors content, actuation content, controls, and engine gearboxes through GE LEAP CFM. So it's a broad array of plants, and I'd rather get it right and do it. But I can tell you it's coming up. We've made significant CapEx investment in our gear manufacturing business to support the ramp, and that was key to winning this GE lead follow-on contract. It helped us support the volume and maintain pricing. So it's a coming attraction for sure. Okay.

And so then to follow on all that in your bridge on slide 14 and kind of to Sheila's point about asking for the Excel, that net OEM volume liver looks pretty small relative to slide six. Why is that? And could you also just say what that number is in that blue sliver there in millions of dollars?

So, Jim, I don't have that sliver quantified in front of me, but it is smaller than the aftermarket volume. And in fact, remember, OEM sales are not as profitable as aftermarket sales. So in terms of generating profit and free cash flow, the aftermarket are actually more important. The OEM volume has a lot of different programs. I think the best way to see what might be in there would be to look at our slide 18, which is the top programs and backlog. And you'll see a mix of military and commercial. Now, you'll see the 3-7, which is 15% of our two-year firm backlog. It's actually more like 10% or 11% of our total sales, because all of our sales aren't backlog. There's a lot of book and ship. The diversity of the mix here is why the exact rates of any one program can be mitigated by rate changes in the other direction of another program. So it is a balanced growth with aftermarket leading it, and right behind it is the OEM.

No, you can appreciate we're trying to be conservative here and not get ahead of the OEM rates or assume faster recovery than what they've advertised. So our guidance is consistent with that mindset. Okay.

All right. Thanks so much. Thank you. And our last question will be a follow-up from Michael Cermoli with Truist. Please go ahead with your question.

Hey, guys. Thanks for taking the follow-up. I guess just to – I was going to hone in on where Noah was going there, but specifically on the A320 rate in regards to what Airbus has said. I know they're dealing with some supply chain issues, but, you know, they're still targeting, you know, that kind of 65 by the end of 24 and 75. So, how do we think about that rate 49 with that 8 to 10 month lead time?

So, I'm going to refer you to Airbus because I don't want to speak for them, but if you saw their month-over-month deliveries, they came up very quickly in the month ending March. And so, yeah, they are also working supply chain issues, but you have to look at very timely data in order to project the future revenues, the future build rates from there.

Okay. Okay. Fair enough. Thanks, guys. And this concludes our question and answer session and also concludes today's conference call. We would like to thank you for attending and participating in today's presentation. You may now disconnect your lines.