Triumph Group, Inc.

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. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Thomas A. Quigley III, Vice President of Investor Relations.

Please go ahead. Thank you. Good morning and welcome to our second quarter fiscal 2024 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 and 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.

Hey, thanks, Tom. Triumph closed the first half of fiscal year 2024 with expanding backlog, sales, and margins as we focus on profitable growth and building on our success in the aftermarket. We are entering the second half of the year from a position of strength and raising our fiscal 2024 sales, earnings, and cash guidance. Our year-to-date performance, increasing commercial aircraft build rates, and growth in defense spending supports our updated outlook for the year. During the second quarter, we met or exceeded our expectations, delivering strong sales and our sixth consecutive quarter of year-over-year growth, as well as predictable profitability. Our deleveraging plan is on track, including over $60 million in debt reduction since the start of the fiscal year, which will yield approximately $5 million in annualized interest savings. As I reflect on the quarter, I'm pleased with our ability to execute on our short-term performance targets and remain very excited about the long-term financial and operational opportunities for Triumph. In particular, our performance serves as evidence that we continue to accelerate our future towards the targets we discussed at our September Investor Day. Turning to slide three, I'll summarize the highlights for the quarter. Year-over-year organic sales growth was 16%. driven by improving MRO demand, accelerated above Q1's 14% growth, and above our original guidance. Aftermarket sales increased year over year, accounting for a robust 43% of our Q2 sales, roughly double since the start of our restructuring. Recall our interiors business started the year slow, with slower ramps in sales, supply chain delays, inflationary pressures, and unfavorable foreign exchange headwinds. The team began executing on our recovery plans and exited September at breakeven on increasing volumes and growing backlog. And last, we grew our total company backlog by 15% above market growth rates as Triumph benefits from strong representation across a broad array of platforms, customers, and end markets. We continue to benefit from growing commercial travel demand, up 28% through August year-over-year, and increased MRO demand as aircraft return from peak summer use, commercial transport aircraft new orders more than 2,000 year-to-date, and planned OEM rate step-ups. Book to bill is 1.37 year-to-date, and $1.8 billion of reportable backlog is up 16% year-over-year, even as past due backlog has been driven down by 17 million or about 18% this fiscal year to date. In the military market, there is a robust U.S. defense budget in place and expectations for it to remain at similar levels for the next few years. Given multiple regional conflicts, budgets are likely to grow beyond current forecasts. Triumph is currently engaged in an unprecedented number of military OEM opportunities, including over 30 classified RFPs year-to-date. We are in discussions on hydraulic systems, fuel pumps, landing gear systems, thermal systems, gearboxes, door actuation, and more, all driven by expanding Triumph intellectual property. In Q2, Triumph's commercial OEM shipments were up 17% year-over-year, while commercial aftermarket revenues rose 48% year-over-year. Military OEM sales were consistent with prior year, while military MRO rose 24% year-over-year on the strength of many programs, led by V-22 pylon conversion actuators. As we shared at a recent Investor Day, Triumph enjoys significant content on Boeing 787 aircraft with just over $1 million in ship set value, benefiting both the OEM and MRO sales across six Triumph factories. This is a great aircraft with more than 1,800 orders since 2013 and a backlog of nearly 800 aircraft, 235 of which were ordered in 2023. So demand is robust and Boeing is working to increase rate as rapidly as possible. Orders in our portal support the move to rate 5.3 per month in our fiscal year, up nearly two times from the start of our year, and 787 shipments for the second quarter were up 142%. We also anticipate emerging sustainment requirements for the 787, as the oldest aircraft in this fleet are just beginning to exceed 10 years in service. As these aircraft enter their landing gear maintenance cycle, Triumph will begin overhauling increasing numbers of our landing gear actuation components, including extend and retract actuation, truck positioning, nose wheel steering, and door actuation. New wins for the quarter included CH-47 engine controls, a UH-60 gear package, and an accessory repair package for Atlas Air, as well as personal service units, crew seats, and starters for Delta Airlines. While only 10% of our sales performance at our interiors business remains the focus area, as an unfavorable sales mix driven by OEM delays and supplier shortages, along with margin impacts from inflationary pressures on materials and labor and foreign exchange changes, created headwinds to start the fiscal year. We're running additional Triumph operating system lean events to offset these external headwinds, and we're starting to see positive developments. These include events to drive down cycle time and improve efficiencies and productivity. As production demand increases, we are working closely with our customers to de-risk the supply chain by securing alternate sources where necessary to keep costs competitive and to insourcing more work as rates continue to ramp, which will provide added absorption benefits. Interiors is on a path to recover to mid to high single-digit margins this fiscal year and to enhance the confidence in their long-term earnings targets. Value pricing remains a key strategy that triumph is deploying towards our margin expansion goals. This includes the implementation of our expanded commercial playbook, expanding our commercial risk reviews, and implementing new processes. Given the evolving market environment, this has included exploring shorter duration supplier and customer contracts, incorporating inflation clauses tied to indices or specific material pass-through clauses and focusing on aftermarket premiums and market access. Previously, we highlighted that 80% of our contracts have terms of six years or less, providing a near constant flow of opportunities to optimize value based on our technical solutions, capabilities, and IP. And our recent wins include examples of these efforts. We remain on track with the pricing objectives laid out during the recent investor day. Jim will now take us through our second quarter results and updated outlook for fiscal 2024. Jim?

Thanks, Dan. And good morning, everyone. Triumph's second quarter results exceeded our expectations with significant revenue growth over the prior year period. On slide five are the consolidated results for the quarter. Revenue was $354 million. With the continuing business excluding divestitures and exited programs, organic revenue increased 16% over the prior year quarter. Organic revenue growth primarily benefited from increased aftermarket volume and pricing on our largest programs, while demand across most of our end markets improved during the quarter on a year-over-year basis. Prior year revenues included a $16 million non-recurring benefit from the sale of non-core IP, absent which revenue growth would be 23%. Adjusted operating income for the quarter was $37 million, representing 11% margin a 60 basis point increase over last year. And adjusted EBITDA for the quarter was $46 million, representing a 13% EBITDA margin, which is on track to our full year guidance. Sequentially, adjusted operating margin was up 300 basis points, and adjusted EBITDA margin was up 220 basis points over Q1, driven by higher revenue and a favorable mix with an increase in aftermarket sales from 41% to 43% of total revenue. In the quarter, we incurred $1.9 million of restructuring costs to retire our last structures IT contract as our transition services agreement ended, and a $1.3 million charge associated with potential environmental costs at a legacy structure site. Slide six shows our military revenue. For the quarter, military revenue was $117 million, representing 33% of total revenue. Military OEM sales were strong and on par with last year. as increased sales on CH-53K and V-22 offset expected lower sales on E-2D and AH-64 programs. Military aftermarket sales in the quarter were up 24% compared to last year and up 17% sequentially on increased demand for spares and repairs. Slide 7 shows our commercial market revenue. For the quarter, commercial revenue was $227 million, representing 64% of total revenue. Commercial OEM sales were $131 million. In absence, the sale of non-core IP were up 17% in the continuing business. This growth was driven by increases in both volume and price in key programs, including Boeing 787 and 737 programs. Commercial aftermarket sales of $96 million grew 49% in the continuing business on strong demand for commercial aftermarket spares and repairs. This is our highest quarterly commercial aftermarket sales since fiscal 2017. The remaining 3% of our revenue is non-aviation, which is profitable and represents about $9 million of sales in the quarter. It's up 24% over last year. Our continuing sales mix trend towards more aftermarket is having a positive impact on margins and cash flow. As Dan mentioned, total aftermarket sales represented 43% of our quarterly revenue. This was up from 36% in the prior year quarter. The breakdown of our aftermarket sales and MRO capabilities is on slide eight. Our free cash flow walk is on slide nine, which shows our Q2 and year-to-date cash use. Our $37 million of cash use this quarter included $74 million in semiannual interest payments, as well as planned investment in our net working capital in support of increasing second-half sales volume. This is consistent with our expectations and the quarterly free cash flow guidance we previously gave. We expect to be solidly cash positive in Q3 and in Q4 in support of full-year cash flow guidance, which is up to $40 to $55 million. On slide 10 is our net debt and liquidity. As of September 30th, we had $1.5 billion of net debt, and our cash availability was approximately $230 million. During the second quarter, we purchased $19 million of our unsecured 7.75% senior notes due in August of 25. and we purchased an additional $29 million so far in the third quarter. We purchased these notes at a discount of par, resulting in gains. When combined with the $14 million in bond redemptions in the first quarter, we reduced annualized interest expense by about $5 million. We also have over $300 million of deferred tax assets that continue to create value through reduced cash taxes moving forward. Our fiscal 24 guidance begins on slide 11. We are increasing our fiscal 24 guidance for revenue, adjusted EBITDA, and cash flow, and updating our operating income guidance. Based on anticipated aircraft production rates, we expect organic growth of 10% to 13% in fiscal 24, with revenue in the range of $1.43 billion to $1.47 billion. Aftermarket volume is the largest component of the increase, followed by OEM volume, pricing, and an increase in non-aviation revenues. The aftermarket is expected to grow at an 11% rate for the fiscal year. Commercial OEM revenue growth is driven by production ramps on Boeing 737 and 787 programs and the Airbus A320 family, even while supply chain and gear turbofan repairs are considered. Non-aviation sales are expected to increase, driven by the previously announced work supporting howitzer sustainment. We increased our adjusted EBITDA guidance consistent with the increased sales guidance to a range of $216 million to $231 million. Our adjusted EBITDA margin guidance continues to indicate up to a 16% consolidated EBITDA margin in fiscal 24, representing roughly a 200 basis point improvement over last year. We increased our cash flow from operations and free cash flow guidance ranges by $5 million for fiscal 24, including second half working capital improvements. We continue to expect solid cash generation in Q3 and strong cash generation in Q4, consistent with prior year seasonality. This is driven by working capital liquidation on the second half sales surge, reduction in past due backlog, and increased OEM inventory turns. Interest expense is expected to be $151 million, including $145 million of cash interest, and we expect $7 million of cash taxes. This is after the cash interest savings from $49 million of bond purchases completed to date. Organic margin expansion, cash generation, and debt reduction are expected to drive our net leverage from 7.6 times at the end of last year to between 6.1 and 6.3 times at the end of this fiscal year. As we discussed at our Investor Day, we are on a path to reduce leverage into the range of 3.5 times no later than the end of fiscal 26 through EBITDA expansion and free cash flow generation. However, Trask continues to explore alternatives to accelerate the leveraging through business and product line portfolio actions. In summary, the second quarter's results are in line with or ahead of our expectations and support the increased full-year guidance. We are reducing debt and interest expense by purchasing bonds in the market, growing EBITDA, and generating free cash flow this year. We are executing our multi-year plan to continue to grow revenue, margins, and free cash flow, reduce leverage, and increase shareholder value. We remain on track to achieving the targets established at our investor day in September. Now I'll turn the call back to Dan.

Dan? Thanks, Jim. Triumph's performance in the second quarter of fiscal 24 highlights the strength of the new Triumph, a stronger systems and aftermarket driven company with a growing IP portfolio and backlog, yielding steadily improving financial results year over year. We expect improved financial and operational performance to continue throughout the fiscal year, as our expanding mix of aftermarket and IP-driven OEM sales gives us confidence in our updated fiscal 2024 guidance and long-term outlook. Jim and I are happy now to take any questions you have.

Thank you. If you would like to ask a question, please press star then 1 on your telephone keypad. If your question has been addressed and you'd like to remove yourself from queue, please press star then 2. Once again, ladies and gentlemen, that's star then 1 if you have a question. Today's first question comes from Seth Seifman with J.P. Morgan. Please go ahead.

Thanks very much. Good morning. Good morning. Good results. I wanted to ask, in terms of the, you know, the improvement in the overall outlook, was there any change to the outlook for the structures business, or sorry, the interiors business now? I guess, in other words, should we think that interiors, maybe there are some more challenges there, and that was more than offset by the goodness that you see in S&S?

Yeah, that's how I see it, Seth. You know, we had a, you know, printed 13% in the quarter despite being breakeven in interiors. And let me characterize interiors revenue profile for the year. They started the first quarter of the year with monthly sales of 10 to 11. In the second quarter, that went to 10 to 12. For Q3, we're looking at 11 to 14 million per month. And then in Q4, 15 to 19. So very strong second half sales. We also jumped on it with a return to green program to drive productivity. We saw about 10% improvement in productivity through the months of September and October. And these are really two well-run plants in Mexico. The challenges have been external, both foreign exchange and input cost, and we're addressing both. On the input cost, we're competing the suppliers that have raised prices so that we have alternatives. And on foreign exchange, I'll let Jim address what we're doing there. Just to break down interiors a little bit further, it's really three businesses within one business. Even though it's only 10% of sales, it's a small contributor to Triumph overall. The insulation piece, which is the biggest piece, is a 20% margin, plus margin business. And cabin production, parts that we make that support the cabin is sort of high single digits. Where we've been losing money is in composites, which is mostly ducting. So we're taking some actions to automate that plant. We just opened a new clean room there, and we're doing additional lean events to drive that. But overall, the plans are quite well run. It's just dealing with these external headwinds. But, yes, we have a strong second half that we are counting on to be part of the overall trajectory of the company on both sales, cash, and profit. Jim?

Yeah, and there are external drivers like inflation and FX are challenges, and they'll wax and wane. But the reality is we have to get our costs down, and then we have to exercise our rights under the contracts for adjustments where we have them. And then where we don't, we have to go negotiate when new contracts come up, adjusted prices to cover those costs. But the team is very active on remediating the challenges there. But I think you're exactly right that the system's strength, which is so important, is more than offsetting the interior's challenges.

Okay. Okay, great. And then maybe just one follow-up, if that's okay. You know, if we think about the military OEM business, And just, you know, maybe because on the OEM side, you think maybe there's a little more visibility in terms of the content you have and the expected build rates for the platforms. You know, it seems like maybe this year can be up a little from last year, which is, you know, $260 to $270 million of sales on the military OEM side. How does that evolve going forward and where are the drivers? Because I know there's probably some legacy rotorcraft that you're on, but also some growth opportunities. So how does that piece of the business evolve?

Yeah, we really do have a strong presence in helicopters, especially out of our West Hartford fuel controls, engine controls business, and thermal products, but also gearboxes and heat exchangers. When you look at the rates, we just got the award for the LRIP 7 and 8 lot for CH-53 from Sikorsky. That's a program that's been building at about 0.8 aircraft per month, and it's ramping up over the next three years to double that. So that's a nice tailwind for us. MH-60 is also growing in rate modestly. We do a lot of gears for the AH-64 Apache. And that rate goes up about 10%, maybe 15% over the forecast. So, you know, while it's not a doubling sort of build rate increase, unlike last year where we were marking down OEM rates, we're finally swinging into positive. And I'm very encouraged about the new starts on military. We're getting pulled into lots of bids. You know, FARA, FLARA on the helicopter side are two examples, but also on the next-gen fighters as well. So we see our competency in helicopter components being a strength for the company.

I would also point you to page 14. So we have the backlog there by program. And I'll give you more flavor over what's in the next two years and the military programs there from F-35, which is 2% of backlog right now, up to the CH-53 is 8% of backlog. And half those programs are rising in rate. Half of them may be reducing in rate. There's some stable ones. But it's a good balanced portfolio of military OAM work.

Great. Thank you very much. Thank you.

Thank you. And our next question today comes from Ellen Page at Jefferies. Please go ahead.

Hi. Thanks for the question. Just going back to interiors, you had called out FX as a headwind, and it was a headwind in Q1 as well. How much of the loss was due to the PAYSO, and how do we think about reaching to high single digits in fiscal age, too. Just one of the kind of moving pieces there.

Sure. Thanks, Ellen. Roughly estimated about 500,000 per month would be peso at the current rate. As you know, the peso has strengthened to some all-time highs against the dollar. But that will change over time, and we'll have the opportunity to reprice and address cost structure to help mitigate that. So that's the piece that's FX-related. But Dan talked about some of the actions we're taking, which are going to increase the second half. I think volume is one of the biggest drivers, so really expecting a lot more volume in the second half. The mix changing back towards installation, which is more profitable than the ducting is. And some of the cost mitigation actions we're taking as well.

Thank you. Can we just go over the moving pieces to the free cash flow guide? You raised OCF by $5 million, I believe. What were the key drivers there?

The key driver is really the sales, which is driving profitability, partially offset by the increased working capital needed to supply the higher sales in the second half of the year. It's a modest increase, but it's an important one, and it's consistent with those higher sales.

What we've been watching very closely, in fact, at the board level, is the reduction of past due backlog and working capital because there's been multiple currents within the working capital flow. We've been investing in working capital for the rotables, for MRO. That's helped us drive our strong MRO sales. And then also protecting OEM ramps by buying more. But at the same time, we want to increase turns on the MRO or on the OEM side. So what we saw in September, October were improvements in both measures, both the past due burndown and the OEM turns. So that's the leading indicator we need to see to have confidence that we're going to improve working capital in the second half of the year.

Great. Thanks for that. I'll leave it there.

Thanks, Ellen.

Thank you. And our next question today comes from David Strauss with Barclays. Please go ahead.

Thanks, Maureen. Morning. On interiors, would you expect it to get to EBIT or EBITDA positive in Q3?

So we're exiting breakeven in September. So yes, we expect to be breakeven to Q3. positive in Q3 and solidly positive in Q4 to get back to the mid to high single digits for the year.

Okay. And Jim, on free cash flow, I think, you know, if I go back to the bar chart that you had in the Q4 slide deck, it looks like Q2 was a little bit weaker than what you were anticipating there if I just compare it to prior years. If so, what was... you know, kind of where was the miss relative to your internal plan on cash flow. And, you know, that bar chart implied a pretty big Q3 pre-cash flow number. I know you said positive, but I just wanted to see if we could revisit kind of the sequential growth in pre-cash flow you're expecting Q3 and Q4.

Sure. At the end of the fiscal year, we reported we put out the chart with the cash flow cadence for the four quarters. that you're referring to. But actually, after Q1, I updated that, and I said 30 to 40 million cash use, if you look at the transcript for Q1. And at the investor day, I reiterated that. And the real driver for slightly higher cash use was the higher sales we're seeing. There was some impact from supply chain and from demand changes, but it was really the higher sales for the second half. So 30 to 40 use, I guess we came in at 37 use this past quarter. And we should be positive in that range for Q3, in the $30 to $40 million cash positive. And then the balance to get to our full year guidance would be in Q4. So very strong Q4, as we've had in prior years. But with this higher aftermarket percentage at 43%, we see even more seasonality. And with the ramping production rates, I think we're going to have a stronger Q4 than we've ever had before.

And taken together year over year, it's a swing of about $120 to $130 million in cash flows. for the full year. So we feel very good about the trajectory on cash.

Okay. That's helpful. And Jim, just the net working capital that you're assuming now for the full year, how much of a use are you anticipating?

You know, I don't have it broken out to that level. It's obviously going to be coming down the second half of the year. And I'd have to follow up on that and look forward to giving you more information about that moving forward, the absolute working capital level. I can tell you that we are driving turns down. And we have a concerted effort on inventory management to get the turns down to improve the working capital moving forward. And it's the right time to do it with ramping sales because we have lots of inventory and we have lots of opportunities to be more efficient with it. We're trying to find the right home for inventories, working with vendors and customers who may have lower cost of capital than us. for vendor-managed inventory, customer-owned inventory. So, the direction is positive, and we're going to be liquidating working capital second half of the year. Great. Thank you very much. Thank you. Thanks, David.

Thank you. And our next question comes from Kai Von Rumer with TD Cowen. Please go ahead.

Yes. Thank you very much, and impressive results. Your aftermarket business was strong in the second quarter and a very good sequential gain. Based on what you said about the year, it looks like the rate of growth in aftermarket sales will be much more modest in the third and fourth quarter. Could you give us some color on what you expect commercial and military aftermarket to do sequentially in the third and fourth? And if that's the case, which it looks to be, the mix would look like it would be a little bit leaner, and yet, you know, your adjusted EBITDA numbers seem to assume very good margin improvement sequentially with a mix shifting toward more OE. Help us understand that if you could.

Yes, certainly the commercial aftermarket is the strongest driver of the growth we've seen outperformance year to date, and we expect that to continue in the second half visibility that's not as it's harder because you're looking at market data you're not getting the actual orders in it's not a backlog business we may only have 45 to 60 days worth of orders and visibility for that so i think there may be a little conservatism on what the mix will be we know what oem rates are they can change but the aftermarket mix i think it's stable moving forward commercial still strong military usually has a big surge in q4 we see a lot of spares orders in our fiscal Q4. But we don't provide guidance by market segment. We like to tell you the trends, but sometimes one segment outperforms that helps cover underperformance in another segment. That's the benefit of our balanced diversification.

So basically you're saying that the mix should be the same going forward, or is the mix shifting toward OE net-net?

I don't think it's going to shift towards OE because the aftermarket is stronger in the fourth quarter in particular, both for military and commercial. So I guess you're probably going to be at more aftermarket in the second half of the year, but it depends on the OEM rate ramps. At the moment, I think aftermarket is probably going to overtake and continue to be stable to increasing the percentage of our sales.

Thank you very much. Thank you. And our next question today comes from Miles Walton with Wolf Research. Please go ahead.

Hey, thanks. So just actually a clarification on Kai's question. So the slide eight, is that referring to that 11% growth in fiscal 24? Is that referring to the whole channel of MRO or the commercial channel in isolation?

It's a whole channel. So we have about 152 million, I think, of sales. And that's the breakdown in the quarter of sales by aftermarket. It's broken into third-party MRO, where it's not RIP necessarily. And the spares, which obviously can be the highest margin. And then the third piece is RIP, which are higher margins typically than repairs on third party.

Got it. Okay. And then... Okay, go ahead.

On the bottom of that page, you can see we have the Q2 and the year-to-date breakdown for all those components.

Yeah, no, that's helpful. Thanks for that transparency. You mentioned the portal showing you 5.3 per month on the 787. Could you also share... what it's looking at for the 3.7. And maybe, Dan, that big growth you're anticipating in interiors, I imagine that's primarily inflation-driven on the 3.7. Is that correct?

It's one of the largest programs in interiors for sure, but it's certainly not the only one. We have A220 work, out-of-air bus. We do 787 work, so it's a mix of programs. But it is the largest. On the OEM rates, Boeing is – talked quite publicly about their step up to 38, whether it's going to come in the calendar Q4, the following quarter. But we're building at rates that are approaching that now, and we're typically, on average, about one quarter setback from them. So as they ramp up, we're already delivering into the pipeline, sometimes to intermediaries and then products that flow to Boeing. So our factories are building at rates 30 to 35 a month right now and in priming for rates that go up into 40 next year, our fiscal 25. So that's the general 737 outlook for us. Airbus is a similar story. We're building at rates that are in the high 40s and planning for rates for the 50s next year and 60s thereafter.

Okay. Just one last quick one. When you mentioned portfolio actions in terms of pursuit of the balance sheet improvement, could you elaborate on the size of any potential pruning you might be looking at or business lines that you might be thinking about from that perspective? Thanks.

We really can't. It's one of these things every year we're looking at every business trying to make sure we're managing the portfolio for shareholder value, but De-leveraging is our top priority, debt reduction. And so we've had inbounds for several of our businesses. And one of the challenges is because we're on a ramp across OEM and MRO, what's the value of these businesses? You could understand that people would come calling when the rates have been depressed and we're on the sort of, I'll call it the base mountain climb of OEM and MRO rates. You know, people who have interest in these businesses have to properly value them, but we'd want them to be needle movers for deleveraging, not just around the margin. Okay, thanks again. Good.

Our next question today comes from Michael Ceramoli with Truist. Please go ahead.

Hey, good morning, guys. Nice results. Thanks for taking the question. Just to maybe go back, the detail is pretty solid here on slide eight. And it looks like, I mean, spares were up 37% sequentially. I mean, can you maybe parse that out for us? Was it more commercial? Was it more military and kind of what you're seeing out there and what drove that level of spares activity? Okay.

Yeah, Mike, I'll start. Sure. It was more commercial this quarter, and that's why I think the margin impact was a little less than you might see from some of the military spares. But it's lumpy business, as we've talked about before. We're fortunate with surge this quarter, and the fourth quarter is typically when we see the biggest surge in spares. And there are opportunities to increase spares volume, which we continue to work on, and increase spares pricing to cover increasing costs and enhance margins moving forward.

I know you have models for air traffic, but the ones we watched showed the first 10 months of U.S. traffic, TSA volumes were above 2019 levels by 1.4%. But more importantly, September and October, traveler throughput was up 5.7% over the 2019 levels. So it's definitely ramping. And that's driving the carriers to invest in spares. and repairs. And the timing, you know, you all commented on the strong commercial MRO sales. As Jim mentioned, these fleets are coming out of service. They hit their peak volume, TSA volumes in July. So they're bringing them in for maintenance, and we're benefiting from that.

Got it. And then just, I mean, you had been forecasting, I think, 4% to 6% after market growth. It's now 11%. Can you give us any of the underlying military commercial? Is it more spares? I mean, the IP sales look pretty flattish, but maybe just what really drove that increase? And I would imagine, you know, with the PRAT issues, you know, airlines flying some of these older planes longer has to help.

Well, we've been in touch with Pratt about ways we can help, and it's been a productive dialogue. I would say right now repairs are outpacing spares on the military side. And that's going to, I think, revert as the depletion of U.S. stockpiles to support the various conflicts leads to orders for new spare hardware to replace those. So these things tend to swing in their own cycles. repairs and spares, but thanks for the recognition, the progress on spares. Last year, the spare sales were softer, so we're encouraged to see them coming back. Triumph does a lot of line replaceable units, and that's really the beauty of the new portfolio is if you tour our plants, you see these actuators and heat exchangers and gearboxes, and these are the items that are used up consume during operation and typically replace not at heavy maintenance but at frequent checks.

In terms of the mix of the driver of the increase in growth, as you can see, two-thirds of our aftermarket is repairs, one-third spares. So it's more repairs than spares, and it's probably a little more commercial than military for the back half of the year.

Got it. Thanks, guys. I'll jump back in the queue here. Thanks, Michael.

Thank you. And our next question today comes from Ronald Epstein with Bank of America. Please go ahead.

Hey, guys. Good morning. Good morning. Just trying to understand what happened with the interior's ductwork and the composite, if you can kind of go in more detail. It seems like as of maybe last quarter, this sort of came out of nowhere. And I guess what I'm worried about is could this happen in another business or not? I mean, how should we think about that?

Yeah. And I'm giving lots of inside baseball on the interiors more than we ever have in the past. But on composites, recall we used to build these products, these ducts, at our Spokane, Washington plant. And we moved them to Mexico. And at the time, a condition of transfer with Boeing is that we produce them in the same manner And we really missed an opportunity to relay out the line, add more automation. From their point of view, it was to avoid any changes that might lead to quality issues. But now that we've stabilized production in Mexico, we're going back through the line with Boeing in partnership to take out further costs. And I'm highly confident that we're going to see the sort of productivity gains in composites that we saw, that we do see today in installation. So that's That's one change. This business has been a 20% plus business before. And we're focused on getting it back there. And we plan to exit this year with strong margins that are double digits on operating margins, and then get it back into higher margins over our planning horizon.

Yeah. And I would add, obviously, the cost challenges are multifaceted. There's inflation down there that's been higher than we experienced in other countries. There's the FX headwind with the peso strengthening. And then there's directed supplier costs that we can continue to work on because we have some sole source directed suppliers. And we have opportunities sometimes through adjustment clauses to recover that. Sometimes we need to develop second sources or work to pass through the prices. So there's lots of levers. It was a challenge, and it was a bit of a surprise in Q1. But we're all over it, and we're going to improve it for the balance of the year.

yeah got it got it got it and then jim how are you thinking about i mean really the the refinancing that has to happen given where interest rates are now i mean what what you kind of alluded to there's maybe some creative things you could do could you give us a hint to what what you're thinking well as you know we're opportunistic so we continue to monitor the markets and if there's an opportunity to refinance at good cost in terms we would consider doing that but we're also improving the business dramatically

deposit-free cash flow this year, improving our credit. So we don't want to move too fast so we don't get the benefit of our improved credit. You might have recently seen Moody's upgraded our corporate family rating as well as our 25 bonds. At the same time, we're buying back with excess cash the bonds. We bought them back at a discount, so we create a gain. We reduce our interest expense. We're going to continue to do that as we can with excess cash from cash flow from operations, from working capital liquidations. So we're going to keep chipping away until it gets to a point where we can consider whether there are some de-levering actions we can take with the portfolio, which we've talked about, or whether we want to refinance. These aren't due until August of 25, so they don't go current until August next year. But we're keenly aware of it, and we're watching the markets. So it's not... a big concern about refinancing, but we do want to de-lever. So it would be best if we could just reduce that debt altogether and not have to refinance.

Got it. All right. Cool.

Thanks.

Thanks, Ron.

And our next question today comes from Noah Poponic with Goldman Sachs. Please go ahead.

Hey, good morning, everyone. Morning. What is assumed in your 2025 and 2026 margin plan for the interiors margins?

I'm hesitating, Noah, because I don't want to get into the margins of the segments, which we haven't given. We said that this has been a 20% margin business in the past. I've said that this is easily back to the mid-teens on a normalized basis. So you can imagine if we're just coming out of September and break-even-ish, we're looking to expect for the full year, have mid to single high-digit on EBITDA percentages. So you can expect to be in the double-digit percentages during those periods.

What I'm most excited about is the growth in actuation and engine controls. Actuation is going to hit, I think, 500 million in sales this year, and 20% plus for on-business with great aftermarket. And engine controls is one that's getting a lot of that military MRO work. and new winds on helicopters. So even though Interior's getting a lot of headlines, it's, again, still 10% of the business. We know the drivers. We're fixing it. But the core parts, what I'll call the crown jewels of the company, actuation, engine controls, are really performing well.

Okay. Jim, the release and the presentation discuss recent debt reduction issues. But I'm seeing a few different numbers, seeing a different number for the 2025s than I thought was left there. Can you just level set me on what did you pay down in the quarter? What have you paid down since the end of the quarter? And what's left on the 25s?

Yeah, so in the quarter, we paid down $19 million for the bonds. And subsequent to the quarter, we paid down another $29 million for the bonds. And back in Q1, with the warrants, $14 million of debt was retired for that process. Okay. Take that off $500,000. That's where we're going to be right now.

I see. And it looks like you're saying on slide 9 that that action reduces – interest expense and that flow to the free cash flow guidance. Is that correct?

So it does reduce interest expense for the balance of this year, but on a full year basis, it's $5 million. So that's not in the year. That's a full year.

That's a full year. So this year is a piece of that and then a piece of just core business operations. Correct. Okay. And then I guess related to that, that's a positive thing. But you've got the big 4Q where you're citing volume, which makes sense because of what's happening with sort of planned volumes. But you continue to operate in these end markets where the planned volumes are shifting around. And so I guess I was a little surprised you raised it given that. But at the same time, you're giving us these numbers halfway through the quarter here. I don't know, what's the level of confidence in that number, or where is there risk of something sliding out at the end of your year and into next year on that free cash flow plan?

Yeah, we're highly confident in our numbers, and we have a very detailed bottoms-up forecasting process by program, by site. The risks come in the demand in the aftermarket, which we don't have long-term visibility to, and then, of course, OEM rates. But I think less on OEM rates, as much as we talk about those, You know, with aftermarket being growing so much and being so important to the fourth quarter, that's where the risk is. It's just demand. And that demand is so diverse that I think it's lower risk than a particular OEM rate schedule might be.

And working capital certainly is a big swinger, and we're highly focused on that. We ran dozens of lean events in October. We're going to continue those through the second half of the year. And we're doing all the kinds of analysis on our material planning and work in process and finished goods and safety stocks and rotables and things that drive working capital. So the rates do affect inventory burndown because the rates help us to draw up on what's on the shelf. But that's one of the swingers as well. But we're confident we're going to make it.

Okay. Okay. Appreciate your time. Thank you. Thanks, Noah.

Thank you. And ladies and gentlemen, this concludes today's question and answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.