Triumph Group, Inc.

Welcome to Triumph Group's third quarter fiscal year 2024 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to introduce Tom Quigley, Triumph's Vice President of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to our third 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'll discuss 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.

Thanks, Tom, and welcome to Triumph's third quarter call. I'll open my remarks by covering the strategic action we took with the product support sale and the significant benefits it will provide. then Jim and I will discuss our Q3 performance and the primary factors impacting our results and our expectations for record Q4 results to end the fiscal year on an upswing. I'll wrap up with the growth drivers which instill confidence in our multi-year outlook. Overall, I'm excited about Triumph's future and our ability to deliver expanding levels of profitability and cash flow. This is our first opportunity to discuss the recently announced sale of our product support business, which remains on track to close this quarter. For Triumph, this is a game-changing transaction, one that will provide both financial and strategic benefits. During our September 2023 Investor Day, we communicated Triumph's priorities and path to accelerating value creation in line with our stakeholder priorities. De-levering our balance sheet has been a top priority. This transformative divestiture will significantly accelerate our delivering progress by reducing our net debt by over 40% and materially reducing our interest carry as early as this March following transaction closure. On Tuesday, we provided a conditional notice on the repayment of certain of our bonds. Jim will provide more color on this later. As summarized on slide three, the divestiture truly represents a win for both our shareholders and bondholders. And it's entirely consistent with our strategic plan to focus on differentiated components and systems of our own design and to own our aftermarket tail. We combine with expanding free cash flow and earnings from our remaining operations. This transaction positions triumph to enter a recursive cycle of financial improvement with higher free cash flow and lower debt to accelerate our growth and shareholder value creation. As shown in slide four, post-closing, Triumph will compete in four primary business areas. Actuation products and services with 12 sites focused on hydraulic and electric actuation and mechanical controls. Systems and engine controls with three sites servicing the fuel and thermal control markets. Beard solutions with two sites providing power transmissions integrated gearboxes and loose gears, and interiors with five sites producing thermal acoustic insulation systems, composite ducting, and cabin components. These are competitive businesses, which benefit from our lean transformation and diversity of customers and platforms. Post-closing, substantially all of Triumph's sales will be IP-based and or sole-sourced. We are taking immediate steps to right-size the remaining company with an optimized cost structure that builds on the operational improvements implemented during our transformation and ensures we are well positioned to achieve our long-term financial and operational targets. To be clear, we expect to continue our steady progress towards 20% EBITDA margins and free cash flow conversion of 10% of sales or better over the medium term on the strength of Triumph's IP-based product portfolio. As I reflect on the third quarter that ended in December, there were clearly challenges. However, I'm pleased with our ability to generate seven consecutive quarters of organic sales growth and to achieve positive free cash flow. Turning to slide five, I'll summarize the highlights from the quarter. Triumph generated year-over-year organic sales growth of 13%. driven by increasing commercial OEM production rates. Even excluding our discontinued third-party MRO results, our aftermarket sales increased year over year, with spares and repairs accounting for a robust 26% of our Q3 sales. MRO sales will continue to be a valuable financial driver for Triumph after the sale. We grew our total company backlog by 20%, above market growth rates, as Triumph expands its participation in a broad array of platforms, customers, and end markets. Our year-to-day book to build for Triumph was a very strong 1.34. And as part of the mentioned right-sizing efforts, we initiated $40 million in cost reduction actions across the company to mitigate any short-term margin dilution from the product support sales and to achieve the long-term earnings and cash metrics we presented at our investor day. While Q3 sales were strong, earnings and free cash flow came in below expectations as a result of delayed shipments due to a finite set of supply chain shortages and continued margin weakness in our interiors business. I'll cover both topics head on and provide facts supporting our confidence in our full year forecast. First, on the delayed deliveries, Although our overall supplier on-time delivery in full metric improved from 90% to 92% sequentially over Q3, we still experienced shortages, which held up higher margin deliveries and contributed to our working capital balance. The specific late deliveries in Q3 were primarily machine components, electronics, castings, and bearings. Triumph staff are onsite at these suppliers, expediting shortages and developing alternate sources for the future. I've been in touch with the CEOs of these firms to secure their commitments to make their fourth quarter deliveries, and we're seeing the results early in Q4. January deliveries were solid, with monthly sales of approximately 100 million, which supports our Q4 forecast. We expect over 50 million of inventory to be relieved in Q4. In many cases, we've already completed all Q4 products and are waiting on customer approvals to ship and collect. Customer demand is firm, meaning there's no new orders that are needed to close the fiscal year. Interior sales increased by 26% in the quarter, so only 15% of Triumph's total sales. That said, Interior's profitability in the quarter and free cash flow continue to lag expectations in Q3, due to the previously mentioned headwinds of labor and material inflation and the peso exchange rate. However, these results are about to change. We expect interiors to generate mid- to high-teens EBITDA margins in RQ4 as a result of the following actions. Contract price adjustments where customers have specified sole source material callouts and developing alternative sources for those products where suppliers have raised their input prices. Increased labor productivity from the lead events we initiated earlier this year to offset the minimum wage increases affecting all companies doing business in Mexico. I encourage you to view the videos of the two plans posted in Triumph's website or LinkedIn page to see some of the improvements and the 2,000 plus men and women behind them. And then lastly, overhead absorption benefits from additional work we have been asked to take on from our competitors who are not supporting the OEM ramps, a sign of our customers' loyalty and Triumph's ready capacity. As we have done with our actuation and engine controls businesses, both of which are on paths to generate EBITDA margins above 27%, interiors can and will be restored to prior levels of profitability and free cash flow. Similarly, our geared solutions business is on track to deliver double-digit margins in fiscal 24 after years of work to retire red development programs and transition them to production. Turning to page six and looking ahead to our fiscal 24 year end, the combined tailwinds of deferred Q3 sales, inherent seasonality, incremental price increases, and selected IP sales puts us on track to have a record Q4 that will translate into year-over-year margin expansion. Our updated guidance adjusts for the sale of product support. We have a clear line of sight across our RemainCo to deliver over 20% EBITDA margins in Q4, compared to 16.7% for fiscal 23. As with the commercial OEMs who posted robust aircraft deliveries in their Q4, we are very busy with product shipments and cash collections in our Q4. As noted, January deliveries were strong as we conduct daily delivery assurance calls to close out our fiscal 24 with year-over-year improvement expected across all financial measures, including over $100 million of free cash flow improvement from prior year. We look forward to providing fiscal 25 guidance after the product support transaction closes with our year-end results during our next earnings call that reflect the combined contribution of our portfolio actions, cost takeout, and lower interest payments. Jim will now take us through our third quarter results and updated outlook for fiscal 24 in more detail. Then I'll return to discuss our end market outlook and growth drivers. Jim?

Thanks, Dan. Good morning, everyone. The sale of our product support business, which is on track to close this quarter, will transform Triumph's balance sheet. The net proceeds of approximately $700 million will reduce Triumph's outstanding debt by over 40%, and will reduce annual cash interest expense by approximately $56 million. Net leverage will reduce to approximately four times adjusted EBITDA by our fiscal year-end next month. This lower leverage will improve our credit profile and create the opportunity for a lower cost of debt and even more interest savings moving forward. The product support business is now reported as discontinued operations in all periods presented, current and historical. It is important to note that we are in a transitional period for financial reporting. Triumph's continuing operations in Q3 have not yet benefited from the expected $56 million of annual interest savings from the debt reduction from the transaction proceeds, or from the planned $40 million of fixed cost reduction as we manage the continuing business to achieve our consolidated margin and cash flow targets. On slide seven is our net debt liquidity. As of December 31st, we had just under $1.5 billion of net debt, and our cash availability was approximately $218 million. During the quarter, we purchased $31 million of our 2025 unsecured notes in the market. We purchased those notes at a discount to par, resulting in a $1 million gain. We intend to use the net proceeds for the sale of the product support business to delever and strengthen our balance sheet. To that end, yesterday, we provided our first lien bondholders with a conditional notice of redemption to redeem $120 million of the first lien 2028 notes at 103. We also provided our unsecured 2025 bondholders with a conditional notice of redemption to redeem all of our unsecured notes at par. Both redemptions are conditioned on the closing of the sale, and the unsecured redemption will only occur after we conduct an asset sale offer to the first lien note holders. Diversely notes are currently trading above par, which should impact the holder's decision whether to tender their notes at par. Proforma for the expected $700 million of divestiture proceeds, Triumph's net debt is less than $800 million. Triumph's third quarter results reflect significant revenue growth and cash generation improvement over the prior year period, partially offset by softness and results in interiors and in our geared solutions business and systems and support. On slide eight are the consolidated results for the quarter. Revenue was $285 million. For the continuing business, excluding divestitures and exited programs, organic revenue increased 13% over the prior year quarter. Organic revenue growth primarily benefited from increased commercial OEM volumes and commercial aftermarket repairs and spares, while demand across most of our military end markets slightly declined during the quarter on a year-over-year basis. Adjusted operating income for the quarter was $20 million, representing a 7% operating margin. Adjusted EBITDA for the quarter was $28 million, representing a 10% EBITDA margin. We expect fourth quarter revenue margins to be significantly higher, as you will see in our guidance. Slide nine shows our growing commercial market revenue. For the quarter, commercial revenue was $180 million, representing 63% of total revenue. Commercial OEM sales were $141 million, and were up 26% in the continuing business. This growth was driven by increases in both volume and price in key programs, including the Boeing 787 and 737 programs. Commercial aftermarket sales of $39 million grew 26% in the continuing business on strong demand for commercial aftermarket spares and repairs. Slide 10 shows our military revenue, which is down slightly. For the quarter, military revenue was $97 million, representing 34% of total revenue. Military OEM sales were down 3% versus prior year. As expected, lower sales on B-22, E-2D, and AH-64 were partially offset by growth on the CH-53K program. Military aftermarket sales in the quarter were down 6% compared to last year, on unfavorable timing for demand of spares and repairs. The remaining 1% of our revenue is non-aviation, which is profitable, represented about 3 million of sales in the quarter, and it's down slightly over last year. Our free cash flow walk is on slide 11. We generated $22 million of free cash flow in Q3, even with working capital using $23 million of cash in support of increasing fourth quarter sales volume and increasing free cash flow generation. Our fiscal 24 guidance begins on slide 12. Our guidance is being updated to exclude product support since it is now reported as discontinued operations. Based on anticipated aircraft production rates, we expect organic growth of 12% to 14% in fiscal 24, with revenue in the range of $1.17 billion to $1.2 billion. Our adjusted EBIDAP guidance is in the range of $157 million to $167 million, indicating up to a 14% consolidated EBITDA margin in fiscal 24 in the continuing business. Proforma for the debt reduction interest savings, we continue to expect our continuing operations to be solidly cash positive in Q4, consistent with prior year seasonality, driven by working capital liquidation on the fourth quarter sales surge, reduction in past due backlog, and increased inventory turns. We will continue to include product support in our year-end cash guidance, given the uncertainty around the closing timing, and update investors no later than our next earnings call in May. Interest expense is expected to be $151 million, including $145 million of cash interest, and we expect $7 million of cash taxes. This is prior to the anticipated $56 million of annual interest savings from debt reduction following the closing of the sale of the product support business. Organic margin expansion, cash generation, and debt reduction are expected to drive our net leverage from 7.6 times last fiscal year end to approximately four times at the end of fiscal 24 next month. We are updating our operating plans as we do this time each year and expect to provide FY25 guidance on our next earnings call. With the product support business now classified as discontinued operations in all periods presented, you have current and historical results for the continuing business, including sales by end market. all excluding product support. Please also consider the $56 million of annual interest savings from debt reduction with the divestiture proceeds and the $40 million of fixed cost reduction actions being taken. In summary, third quarter results included solid organic revenue growth and positive cash generation, yet lower than planned EBITDA operating margin due to the impact of industry-wide supply chain constraints and inflation, both of which we are actively addressing. Triumph's fundamentals remain strong, as we continue to focus on our OEM components, IP-based spares, and MRO business. Now I'll turn the call back to Dan. Dan?

Thanks, Jim. Turning to page 13, I want to share more detail on the growth outlook and the product investments that underpin our excitement in Triumph's future. Both global passenger travel demand, which we measure in RPKs, and airline revenues were at or above 2019 levels in 2023. This demand is expected to rise another 10% in 2024, lifting roughly two-thirds of Triumph sales. The strong recovery in airline financials is reflected in higher commercial transport aircraft orders. Airbus finished 2023 with record net orders of 2,094 aircraft, and Airbus production rate projections are largely holding as reflected in their supplier portal. Prime's main Airbus narrowbody content on the A320-321neo family, now at rate 60 per month, includes the LEAP engine gearbox, engine cowl door actuation, valves, landing gear uplocks, and a hydraulic transfer pump. On the A350, now at rate 6 per month, our content includes cabin insulation, pumps, utility actuation, and control valves. so profitable content on ramping Airbus programs. Boeing secured 1,314 net orders, including the second highest year of 787 orders at 301 since program launch, which gives us confidence that rates of 10 a month or higher are increasingly likely. Note that the Dreamliner is Triumph's highest ship set value program at $1 million per aircraft. Together in 2023, Airbus and Boeing posted 709 twin aisle orders. This is good news for Triumph as we have substantial twin aisle content. Year over year, Triumph's fiscal 24 revenue on the top four commercial aircraft programs is up 40% in aggregate, while backlog rose another 32%, even as shipments rise substantially. Regarding the recent headlines on the 737 MAX production rate, we are aligned with Boeing, who are maintaining component build rates of approximately 38 per month in their supplier portal. We do not expect any impact to our multi-year projections due to the recent FAA announcements. We are fully supporting Boeing's supply chain-wide quality improvement efforts as well. In summary, Triumph's commercial OEM sales are up 18% year-over-year. despite the supply chain challenges impacting the industry and expected to continue to increase with the production ramp of both wide-body and narrow-body aircraft. On the military side, we're seeing a rotation of platform investments as OEM demand for legacy aircraft such as the V-22 and UH-60 decline, while development programs such as the T-7A and CH-53K transition to production. and next-gen platforms such as the Army's future vertical lift and next-gen air dominance get started. On slide 14, key wins for the quarter included additional GE military engine field hydraulic actuators, Betas CX300 EVTOL nose and main landing gear shock struts, and a DARPA sprint program gearbox design, all solutions based on Triumph IP. Now 38% of our sales, we expect our mix of military business to continue to turn over with new starts replacing legacy programs. And this is where Triumph's work on product innovation will generate long-term value and new aftermarket streams. Turning to slide 15, Triumph has embarked on a modular solutions approach whereby core products and engine controls, thermal cooling, actuation, and gearboxes find application on both commercial and military platforms. Often developed with customer funding, these core products will be the engine of growth over our planning horizon and a strong source of competitive advantage. A case in point, Triumph has been selected for GE's next-gen engines for critical actuators and Honeywell's APUs on the strength of our modular digital controls that are scalable, redundant, cyberproof, and affordable. Once qualified and on wing, we expect these core products to generate significant top and bottom line growth in the years to come. On slide 16, I also want to highlight the recent opening of Triumph's new state-of-the-art thermal solutions development center at West Hartford in partnership with the state of Connecticut. As aircraft electrical and thermal loads increase, aircraft designers need ways to get that heat off board. And this lab will provide new capabilities to our growing thermal customer base, helping to develop next-gen thermal components and integrated system solutions. We are particularly excited about our solution for the F-35 power and thermal management system, known as PTMS, where Triumph is one of three firms down-selected by the F-35 Joint Program Office to compete for the Phase I development effort. We're competing against incumbent Honeywell and Raytheon Technologies to be the integration lead and offering an 80 kilowatt advanced vapor cycle cooling capability for the Lightning II that will be validated in our new West Hartford Thermal Development Center. We are engaged on other thermal solution programs with Northrop Grumman, Sikorsky, Bell, and General Atomics. So in summary, if you combine steadily improving commercial OEM demand with Triumph's strong position on next-gen military platforms, our high-margin aftermarket sales, and improving balance sheet and cost takeout actions we initiated in Q3, and you've got a recipe for strong follow-through in Q4 in the years ahead. Despite supply chain delays in our third quarter, my team and I are excited about the future for our company and are set up for a very strong Q4. Triumph's actions to accelerate our deleveraging Demonstrates our commitment to value creation and will create the right conditions for success in fiscal 25 and beyond as the combined benefits of our growing backlog and lower interest expense fuels our IP-based OEM and aftermarket business. We look forward to updating our investors in May and 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 you are 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 momentarily to assemble the roster. And our first question will come from Seth Seifman of J.P. Morgan. Please go ahead.

Thanks very much and good morning everyone. So the first question I had on the aftermarket, I thought it was kind of interesting. In the release it talks about aftermarket sales including both repair and overhaul and spare parts and I assume that's excluding the product support business. So in terms of the aftermarket, how would you describe the split between repair and overhaul versus spare parts within the aftermarket and remaining triumph? And is it significantly different between commercial and military?

Thanks, Seth. It's Jim. You're correct that all the presentation excludes product support for the end market analysis. So it's roughly 50-50 of MRO versus spares in that business. In the quarter, aftermarket business was about 27%, around $73 million. But obviously, it's a higher margin than the OEM business. And it's all based on our IP, too. So that's one thing I want to make people understand is that we are still in the aftermarket, but we're in the aftermarket with our intellectual property spares and repairs.

So think about the repairs piece of it as being IP-based as well. Correct. Okay, great. And then just a follow-up question in that same vein, the level of profitability margin rate between commercial aftermarket and military aftermarket, is there a very significant difference there?

Over time, no. On specific programs, yes, but I think that they're comparable levels of profitability because they are based on RIP.

We do see a premium for foreign military sales. That's where we tend to command a bigger premium because these foreign countries haven't invested in the development costs that the U.S. government has on the platform, so they pay a premium for those products. And that tends to be more lumpy or cyclical. We've had quarters where that's really contributed. This wasn't – obviously, Q3 wasn't one of them, but when we get the FMS spares, it benefits us greatly.

Okay. Excellent. Appreciate it. Thanks very much.

The next question comes from of Jefferies. Please go ahead.

Good morning, Dan and Jim, and thank you for the time. I wanted to maybe ask about systems and support, just given the support, you know, send off there and great job on that. But what do we think about systems margins underlying longer term? I think you made a comment that you're keeping your long-term free cash flow target, but the lower interest is offset by margin dilution. So if you can maybe right-size us on what systems profitability looks like going forward.

Yes, Sheila. Thanks for the question. Historically, you can see that when you pull out the products of port business, disc ops, that our margin for this year is around 14% instead of the 16% we were forecasting before. So the product support business was slightly higher than our average margin. That's what we're referring to in terms of the consolidated margins being down a little bit in the current year when you pull out product support. But the rest of the business still has the same growth characteristics, still has the same margin targets, and is still very strong and growing. So system support is just now more IP-based, and we'll have higher margin in the aftermarket.

As you can imagine, Sheila, when you take a business that's generating 20% plus EBITDA margins, out of the portfolio you'll see a short-term dip. But that's the mandate to me and my management team is to get interiors and geared solutions to levels of profitability they've been at before. In fact, one of my directors on the board mentioned, he said, gears used to be our most profitable business. But we went through a period of winning and working through these development programs that have reduced their margins and those are now coming back and we're going to get interiors turned around as well that used to be a 20 business so when all four of our businesses actuation engine controls interiors and gears are hitting on all cylinders you're going to see follow through on margins okay great um and then maybe to follow up on your free cash flow guidance for the year you bracketed it depending on the timing of the divestiture closing

So is it kind of fair to assume that support was 100% free cash flow conversion or about $55 million of free cash flow annually?

That sounds a little high because we have CapEx and other working capital movements within the periods. So it is important to note that for cash flow purposes, you don't exclude this continued operations. And we did footnote on the guidance slide there that includes product support, but sales and profitability do not. So because we don't know the exact timing of the transaction closing, we just included the cash flow for the whole business, including product support in that forecast. But it might be less or more depending on the timing.

It turns out that product support carries more inventory because they have a big rotable balance and the cash conversion in our other OEM component businesses is in fact higher.

So is the right way to think about it, that $10 million delta you have in your guidance for free cash flow, just annualize that, so sorry, it's closer to $40 million then?

That's a reasonable approach.

Okay, thanks.

Thanks, Sheila.

Next question comes from Peter Arment of Baird. Please go ahead.

Good morning, Dan and Jim. Dan, you called out interiors and kind of your confidence of the margins kind of turning higher in the fourth quarter, and it sounds like that seems sustainable. Maybe you could just give me a little more color around the contract price adjustments. You said just confidence around increased labor productivity, and I think obviously overhead absorption as rates increase, but you also mentioned some red development programs. Maybe if you could just peel back some of the moving parts here.

Yeah, in interiors, there are no development programs. They're all mature production programs, not just Boeing. We do a lot on 737, 787, but also for Airbus and A220. And those programs are all ramping in rate. So it's a matter of getting the volumes up in the plant, which has absorption benefits. The main issues I talked about on interiors are external forces. Mexico has raised the minimum wage again. We're dealing with hopefully the last blast of the peso exchange rate. And then we've had some suppliers raise input costs. But the mandate to us remains the same, which is how do you get margins up? So we're doubling down on the productivity initiatives. I do encourage you to check out those videos of the two largest plants in Mexico, because you get a sense of just how much automation we already have in those plants. And some of the input materials, like the resins that we use to make up These insulation blankets have gone up significantly in price, so we're working on that. Within interiors, there's three components. There's insulation, there's composite ducting, and there's cabin components. It's mostly been the composite ducting that's really held us up. So we're in discussions with our customers on pricing for that. What's been encouraging is that our customers have come to us and said, hey, other suppliers of these commodities are not performing, and they're not ready to ramp. They don't have the staffing. And we want you to take on that work as early as Q4. So that's when we're going to see the combined contributions of these productivity initiatives and volume offset the external drivers.

Appreciate that, Colin. And just as a follow-up question, you called out that you're still confident kind of approaching your total company EBITDA margin of 20%. And I assume over the medium term, that still is kind of targeting the fiscal 26, which you laid out in your investor day. Is that still fair?

So we're doing our planning right now. So we're not reiterating the exact timing, but that's still the target. So the timing can move slightly, but it's very much achievable. And we were on a pace of growing 150 to 200 basis points a year. And so we hope that that pace is going to continue as we finish our planning process. The volumes are a little different in each of the segments. And But with the overhead reduction and the efficiencies we're able to enable that overhead reduction, we're looking forward to 20% very soon.

One of the factors, Peter, that gives us confidence is that we're running hotter on year-over-year sales growth than the market. And we've been asked by analysts, hey, your book-to-bill sounds great, but when are we going to see it translate into sales? And the answer is it is now. We're seeing it across markets. commercial and MRO accounts. So now it's a matter of getting margins up, which we're focused on doing in Q4. And in Q3, we had some shipments that were held up that were higher margin deliveries. It was a disappointment. When you don't have the bearings or the castings that are critical to certain high-value components and you can't ship them, it's really impactful. So we've got to get those in. Many of those have already been delivered in Q4, and we're confident we can do it. But on the path to 20%, I would say performing at a higher revenue growth rate than the market is going to provide lots of lift for all the businesses.

Thanks so much, Dan. Appreciate it. Thanks, Peter.

The next question comes from Miles Walton of Wolf Research. Please go ahead.

Thanks. Good morning. I was hoping, Dan, maybe you could dig into the $40 million and corporate costs or overhead direct fixed costs removal that you're doing and is it how much of that is directly related to the 20% reduction in underlying size of the company because the product and support how much of it it was already planned if you can just dig a little bit deeper certainly so we spend about almost 500 not quite 500 million in SG&A

overhead it's a big number and it pays for things like updating our IT systems improved controls research and development you know engineering product development and you know that's really how you drive long-term growth and you know when I was at Raytheon that's what that was really the strength of our portfolio was the investments we made in platforms like Patriot and We've done enough now on that, that as we take out one of the five operating companies, there's the automatic gets smaller by that percent that you cited. But we've been doing enough investment in the infrastructure of the company and common process, common IT, that we can now start to scale back some of those investments and run the company in a leaner, more agile function or fashion. So we're confident we can do it. It's not just labor. There's also non-labor costs that we'll take out. And this is going to help us maintain our margin progression. These reductions have been in work. They build on reductions we've made in the past. You've been following our story a long time. So you remember when we had six EVPs over six segments plus 47 presidents. We entirely eliminated the EVP and segment level and consolidated those 47 presidents down to five. Now with the sale of TPS down to four, we're looking at further reductions there. So those are enablers. The last enablers is we've matured the team. We have a really strong leadership team that's not just focused on backlog execution, but they have a much stronger profit orientation. looking at contracts, pricing, value claiming, and we're now more comfortable having centralized a lot of our processes, going back to a little bit more of a decentralized model, and that allows us to take out costs at headquarters. So that's the overall context for the $40 million.

Good. And then just two clarifications if I could. One is The implied margins removed from the guidance were about 23%, but I think the first half product support margins were about 16% on an EBITDA basis. And then the other clarification, just on that dashboard you have at the end where you have an increased percentage of aftermarket and an increased percentage of military, by definition it implies a decrease in commercial OE, which is a little counterintuitive.

Thanks, Miles. I think I'm going to have to follow up with some of that with the public data when the queue gets filed this afternoon. You're going to see in the queue the disclosure of discontinued operations broken down, so I think you'll get some of your answers in there. But remember, there is seasonality in product support, so the fourth quarter is one of the stronger quarters, and that may be what you're seeing in the numbers.

And then, sorry, the dashboard with the percentage growth in military and aftermarket implying that its percentage declines, and OE is a little counterintuitive.

So I think it's slide 13 you're referring to with the positive growth outlook slide?

Yeah, correct. The bottom left two charts show percentage increase of revenue in military and after.

If we had gone back a few years on military revenue, you'd see that it started at 20%. You know, when I started the restructuring transformation And then we built it up into the high 30s during the pandemic when the aircraft fleet was stood down and the military shot up. And then now commercial's resurging. So this number moves around. But what this reflects is the growth of those platforms that I mentioned that are transitioning to production and coming into development. And we're spending the money now on the product development to support those next gen. You know, we do see a tick up, but I think this sort of 60-40 split of commercial OEM will be the average. It'll move around from year to year. And then on aftermarket, we're going to continue to drive that. And I want that to be really clear messages that even as TPS exits the portfolio, we have significant opportunities on the aftermarket. And almost every one of our OEM plants has an embedded depot. where they do the repairs and overhaul. So you'll see that continue to grow as a percent of our sales. Okay, thank you. Thank you.

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

Hey, good morning, guys. Thanks for taking the questions. Maybe just back to the longer-term targets and tied into Sheila's question. I think you had free cash flow conversion, you know, kind of at 6% of sales in the 26-time period, moving to 10%. How should we think about those? I mean, it seems like the near-term interest savings, you know, could potentially drive some upside. So just any more color on the cash targets?

The targets are still the same. I think there are Our steady state target was 10% plus on cash flow conversion and 20% plus on margins. And we did have that waypoint that we put out there in September. But we're revisiting that, and maybe we can bring that in. It could move a little bit at the point, but it's still going to just be modest timing differences. And those remain the same, and the continuing business has the potential to deliver those. I think our cost outs are only going to enhance our ability to deliver those and maybe a little bit earlier.

Okay, got it, got it. And then just you called out in the press release the revenue headwind. Just to reconcile, I mean, you know, the difference between what got moved into support, what was the magnitude of the revenue headwind that you saw this quarter? And, I mean, it sounds like you're going to obviously pick all that up and get some pretty good inventory tailwinds next quarter. But can you kind of detail the revenue pressure?

Yeah, so, I mean, the exact magnitude – I don't think I have in total. What we have is the themes behind it, because what we're seeing is delayed shipments that are mostly going to be delivered in January or in Q4. And they're related to, for example, the one I was just looking at last night was military was down slightly. Well, that was driven by some electronic supplier shortages that are going to ship out in Q4. And we could ship more if we get more of these electronics. So we have people working closely with that supplier. That's one example. Then there's other parts they referred to that are waiting for final approval. They're done. We just have to go through that process. So we put a chart in there of quarter over quarter so that you can see year over year that what the shortfall is in third quarter is being made up in whole or part in fourth quarter. But the fourth quarter is not unrealistic based on historic seasonality. It is a big quarter. It will be record quarter. And we've done a lot of work on it. weekly we talk about what has to get done to make sure we hit our numbers for the month. In the first month of the quarter, we already hit $100 million of sales, which is consistent with our plans for the quarter.

I would say that the shortage has probably paced maybe $20 million of revenue in the quarter, if that helps, Michael.

Okay, got it. Perfect. Thanks, guys. I'll turn it back to you.

The next question comes from Kaivon Rumer of TD Cowen. Please go ahead.

Yes, thank you very much, guys. So it looks here like if we use the midpoint of your guidance, you're looking for around $350 million in sales. You're looking for, it looks like, margins of 23% adjusted EBITDA margins in the systems business area. And you mentioned 100 million in January, so a very big step up in February and March. Are you assuming any kind of supplier slips? Because basically this has been an environment where slips are more the norm rather than, you know, catch-ups. Are you assuming any? Is there sort of any, you know, assumption of some slip so that, you know, you would hit the number even, you know, if that occurred?

Yeah. Yeah. Thanks, Guy. We do allow for less than 100% on time and full. That's always the goal, but you don't get it. And so what we've done is we've prioritized every shipment for Q4. We know every part that has to go out the door, the cash payment terms of that part, and whether or not we need a customer consent to ship. And these daily assurance, delivery assurance calls that I chair, we go through each OPCO one a day, five days a week, And we know what we have to do to finish the year. It does not assume a hundred percent parts availability, but we know the mix of parts that have to ship, what they bring in terms of sales, cash and earnings and tying out to the Q4 financials. So the answer is we got a plan, but it does not assume perfection in the supply chain. It's interesting because we're down to this, what I call four finite commodity groups, really almost four individual suppliers. I won't name them on the call. that are pacing us. But if you don't have circuit boards and you don't have bearings, for example, and they go in lots of different products, then you can't ship a lot of product. And so we've gotten commitments in priority. These are vendors that supply the whole aerospace food chain. And so sometimes you have to be the squeaky wheel to get your prorated share. And we're getting those commitments. And in January, we started to get the products So that's what's giving us confidence that we can still hit these big step-ups in Q4 even without 100% on time in full.

Terrific. Thank you very much. And a second one, where are we with the Daher suit?

So the Daher suit has been going on for some time. We entered into a settlement agreement with the buyer in June of last year that resolved a working capital dispute. And so we do have an ability to resolve issues with the HER, and that also resolves some claims related to accounts payable at the time. We were surprised, but in December, they filed litigation against the company seeking additional indemnification related to 767 on the fuel tank issues. And this is an issue that was not, you know, known to, you know, triumph or I should say is not viewed as an issue at the point of sale to Boeing, our customer. So it's a large amount, but we've worked through similar types of claims in the past. We intend to vigorously defend, you know, the claims against our company for that. You know, the fact is they bought an operation in July of 2022. and they have responsibility for it. We take seriously our commitment to delivering quality products for our customers. And this site was sold as part of our portfolio transformation. And this has really been the only time where we've had these kind of reach back issues. So we have caps in place that limit our liability. There's two caps. There's a general cap at about $19 million. about nine of which has already been decremented because of the June settlement I mentioned, and then another cap related to our reps and warranties. So there's really nothing new out there from a Triumph perspective. It's a difficult issue. Boeing has already resolved it. They've contained the issue on their side. They're continuing to deliver products. I'll point you to the 10Q where we lay all this out.

Excellent. Thank you very much.

The next question comes from David Strauss of Barclays. Please go ahead.

Thanks. Good morning, everyone. Good morning. Did you actually, you know, if you adjust for the divestiture, did you actually cut your EBITDA, absolute EBITDA forecast for the year? I wasn't quite sure. Is it kind of unchanged or adjusting for the divestiture?

So you broke up a second there. I think you're asking, did we adjust our EBITDAB?

Exactly, yeah. Sorry, the absolute number if you adjust for the divestiture.

Yeah, we just removed product support.

Okay, so it's unchanged for that.

Yeah, it should be materially unchanged.

Okay. And a couple people I think have asked around this on free cash flow. you know, as it relates to divestiture and interest savings. Jim, is it fair, I mean, it seems like this is accretive, you know, the divestiture is accretive to go forward free cash flow. Is that correct?

That's correct. So, you know, the interest savings is definitely accretive to cash flow moving forward. You know, the $40 million part of that's related to allocated overhead. Part of it is just normal course moving forward to harvest efficiencies. But those are all cash positive. And when you compare it to the cash generation of the divested business, it's accretive to the continuing business.

Okay. And then why wouldn't the free cash flow margin targets then be higher going forward, given that you're stripping out revenue and your free cash flow is higher?

Well, 10 plus has higher provided for in there. So as we go through the planning process, I'm going to be saying the same thing to our team. And it's logical that that's That flows through. And not only the interest savings now, but I alluded to it in my comments, was with the improved credit profile, when we go to refinance our remaining debt, we should get better rates and better terms for that with improved credit. So that's going to be accretive to cash flow over the multi-year period as well.

That's really that recursive cycle that I mentioned where debt comes down, credit ratings go up, cost of borrowing goes down. And then we expand free cash flow from operations, which accelerates the rate of debt reduction on debt that can be refinanced that lowers rates. It becomes a nice virtuous circle of cost reduction, which we haven't been able to crest that hill until now with this transaction. Most of the divestitures we've done, although we got on average 13 times earnings, over the 17 or so divestitures, they weren't really deleveraging. They just helped to stop, stem the tide of bleeding in the structures business. With this transaction, it's meaningfully different.

Great. Thanks very much.

The next question comes from Ronald Epstein of Bank of America. Please go ahead.

Good morning. A lot's been covered so far. So maybe just a bigger picture question. Where do you expect to see Triumph in five years? What's the long-term plan for the company? With the sales division, it almost feels like you're at a turning point where you could just keep getting smaller or you pivot here and try to build the business in a different direction.

Ron, it's the latter. I don't want to get smaller. You know, this 40 million cost takeout is necessary and achievable, but there's a point at which, you know, the cost to run a public company and do the things we want to do become more difficult below a certain level of sales. The good news is this TPS comes out of the portfolio and we level off around 1.2 billion in revenue. We can accelerate our top line. organically, as I said, higher than the market growth rates to replace that. And then we could begin to look at other options for the company. But our first priority remains deleveraging. We're happy about going from 7.5 down to 4. That's good news. In terms of where we're going as a company, we think that the value gap between Triumph and companies like Woodward and Moog is unjustified. But we've got to prove it. We've got to go show that we can generate the earnings in cash and really go through that recursive virtuous cycle so that investors see the payoff for the time they've spent investing in our company, the money they've invested. That's why we're excited about the future. When I go through those modular solutions on our new business front, those are the things that generate long-term value. They have We're getting paid for the non-recurring. We're getting paid for contract research and development. We're going to enjoy good OEM margins because they're discriminated solutions, and then they'll have good aftermarket. This is a long game. I've been in this business a long time. I know how value is created, and it's becoming fun now. And you've been with us through the whole story, Ron. So it wasn't any fun dismantling the structures business. But we've done it. It's been repositioned with the right owners. And now we've got a business with product support that's positioned with a very strong partner in AAR who also has a distribution arm and heavy maintenance that can feed these plants. So that's the right transaction. But what it leaves Triumph with is this really crown jewels of actuation and engine controls and gearboxes. And yes, interiors. Interiors will be better. the future so in five years time what i think you'll see your point about pivoting now is to building on that core portfolio expanding our products expanding their reach on platforms and then driving the the cash and earnings that this business is capable of doing got it got it thanks thanks for that and then maybe just a more short-term question how are you are you guys really thinking about the the impact of the max in your business

It's about, what, 18% of the backlog, so it's material. And there's so much volatility and uncertainty around that program, particularly in the short term. How do you think about managing that?

So, you know, I'm close to this. I remember walking the 777 line at Boeing in 1994, and I've walked their line ever since, including the 737 line. And I'm on monthly calls with Stan Deal and his team focused on things we can do as a combined industry team, because it takes everybody. You know, Boeing can't do it alone if suppliers are generating escapes to them that they have to deal with. In terms of percent of our sales, it has gone up to about 14%. Nominally, we shoot for no one program to be greater than 10, but the max is just a huge, important program with a big backlog. I do have confidence that they will fix the issues they've got. It's a difficult time for them, but we're supporting them in every way we can. And I think this is a really important inflection time for Boeing and for the entire supply chain. You know, one of my conversations with Stan, I said, you know, about every seven years, we all have to relearn certain disciplines in the aerospace industry. whether it's twerking fasteners or crimping connectors or FOD awareness. And that's driven by two dynamics. One is changes in make or buy where you have the supply chain, where you have new players coming in that are less familiar. And the second is a change in the workforce makeup. And we've certainly had that coming out of the pandemic, where companies like Spirit and Boeing and others have had a large influx of new employees. So The key is to put the controls in place and the culture that allows those newer employees and arm them with the tools to ensure quality. And that's exactly what Boeing's doing. And I'm confident they're going to get there. Until all the fixes are in place, you'll read about issues on the program. That shouldn't be a surprise, but the additional attention and inspection levels that the aircraft is getting will help catch those. And the partnership with the FAA will help. And there'll be a time when they get over it. And then it's going to be, as Airbus has demonstrated, a steady progressive ramp. And Triumph's going to benefit from both of those.

Got it. Thanks. Thank you very much.

Thanks.

The last question is a follow-up from Miles Walton of Wolf Research. Please go ahead.

Thanks. Sorry, just a quick one. I think in the comments you talked about the fourth quarter benefiting from price increases and selected IP sales. I just wanted to make sure that that IP sale comment, is that similar to sort of the IP sales you've had in the past, like second quarter of last year, where it's pretty chunky in terms of drop through to margins? Exactly. You have a size for that?

You know, I'd say 10 to 13 million. You know, it's a series of smaller ones. In the past, you know, Triumph didn't prune the tree either at the operating company level or at the product line level. But the reality is, you know, products run their course. And I think Honeywell is probably a good benchmark for this. They do a good job of looking at every product line and saying, hey, which ones are worth more to others than they are to us and monetizing them. And in Q2 of last year, you know, there was a dip because GE pushed out a lot of the LEAP deliveries and then they turned the throttles on and we had a very strong Q3 and Q4. I think you're going to see the same thing in our Q4 where, you know, we have a lot of pent-up demand and carryover from Q3. And I expect all of my presidents to bring these items forward. If they're not, it suggests that they're not questioning and really scrutinizing their portfolio. And they're carrying products that are either aged out or no longer profitable or require a disproportionate level of resources. So that's the contribution. And you can count on us to continue to do that opportunistically in fiscal 25. Okay, thanks again.

This concludes our question and answer session and Triumph Group's third quarter fiscal year 2024 earnings conference call. Thank you for attending today's presentation and you may now disconnect.