Triumph Group, Inc.

Good day and welcome to the Triumph Group First Quarter Fiscal Year 2024 Results Conference Call. All participants will be in listen-only mode. So, if 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 today's event is being recorded. I'd now like to turn the conference over to Thomas Quigley.

Please go ahead, sir. Thank you. Good morning and welcome to our fourth 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 and full fiscal year, 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 tribes' 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 fourth quarter call. Before we get into the details of the quarter, I'd like to start by recapping the full fiscal year results. Fiscal 24 was a successful year for Triumph. We achieved or exceeded our strategic and financial objectives, despite market dynamics, while improving safety and quality to all-time highs for the company. Here are a few supporting facts. Triumph sold our third-party maintenance business for 14.5 times EBITDA to allow us to focus on our core systems and OEM MRO business. We reduced total debt by over $700 million and accelerated our deleveraging by two years. We retired our outstanding warrants, generating $100 million in net proceeds. Triumph increased aftermarket revenues by 19%, which carry strong margins. And we improved systems and support adjusted EBITDA margin by 70 basis points, while improving our free cash flow by $60 million. We also held a successful investor day with over 200 in-person attendees and provided multi-year targets. And last, we met or exceeded all of our internal sustainability goals on our journey towards our long-term ESG objectives. Overall, Triumph's strong fiscal results in a challenging market environment positions us to accelerate its profitable growth over what we expect to be the next aerospace and defense super cycle in the coming years. As we post our results for the fourth quarter that ended in March, I'm pleased to report that we delivered our eighth consecutive quarter of organic sales growth while generating positive free cash flow. Turning to slide three, I'll highlight key accomplishments from the quarter. We closed the sale of our product support business and used the proceeds to retire over $550 million in debt. We generated year-over-year organic sales growth of 11%, driven by seasonally strong aftermarket demand. We grew our total company backlog by 22%, which is above market growth rates. as Triumph expands its participation in a broad array of platforms, customers, and end markets. We achieved non-aviation sales of 6% on increasing maritime and artillery demand. We also executed 40 million in cost reduction actions across the company to reduce short-term margin dilution and enhance our out-year profitability. These actions will also help us to achieve the long-term earnings and cash metrics we presented at our investor day, which Jim will update for our post-product support portfolio. While overall Q4 sales and free cash flow were strong, as were system and support earnings, overall earnings were impacted by $5 million in restructuring charges along with continued margin weakness in our interiors business. Let me provide some perspective on interiors and update the actions we are taking to improve its profitability. Interior's demand is coming back, as demonstrated in the 22% volume increase in the quarter from prior year. Profitability and free cash flow continue to lag expectations due to the previously mentioned external headwinds. While Interior sales represents less than 15% of Triumph's total sales, we are committed to restoring its historical levels of profitability and free cash flow through the following actions. First, winning additional work from Boeing, Airbus, Spirit, and KHI to generate increased cash and profit and help absorb their fixed overhead. We are in final negotiations to transfer 787 ducting work supplied by a competitor to our world-class Zacatecas Mexico plant, a sign of the trust our customers have in Triumph and their need for ready capacity. Second, we put in place hedges for the peso that cap further margin erosion. Third, we identified a second source for the raw material provider who raised prices last year and have initiated the qualification effort. Fourth, we continue to drive labor productivity through lean events to offset the minimum wage increases affecting all companies doing business in Mexico. We are confident that with the anticipated rate recoveries on the 737 and 787, additional work scope, price increases, and labor productivity increases, we can bring interiors margins back to historical levels. As we chart the two to three year trajectory for Triumph, we remain very optimistic about the positive underlying growth drivers in play across our markets, which include rising commercial aftermarket spares and repair demand, recovering commercial transport aircraft volume, and a strong and stable military budget including many new military programs in development. Triumph's backlog rose more than 22% year over year with orders driving a book to build of 1.28 on the strength of our product offerings and focus on customer engagement. Both military and commercial backlog grew by 10% and 22% year over year respectively, which will benefit Triumph's top line going forward. As shown on page four, the top five programs in our backlog are all growing in rate over our planning horizon and are made up primarily of systems content. Note that the sixth through the tenth programs in backlog are all military platforms that are exclusively systems content. Starting with our aftermarket sales, Triumph continued its multi-year trend of increasing demand in fiscal 24 as noted on page five. and received new MRO orders in Q4 for the following products, the V-22 pylon conversion actuators, the Navy's SH-60 engine control upgrades, the A380 landing gear overhauls, and CH-47 spares. There are several long-term dynamics at play here, as new aircraft fleets such as the A320neo and 737 MAX aircraft are heavily utilized, driving spares activities. while the older 787 and A380 fleets are increasingly entering their landing gear overhaul cycle where we supply hydraulics and actuators. Turning to slide six, I provide a case in point on our aftermarket growth where Triumph is the OEM provider of the entire landing gear actuator suite on both the 787 and the A380 aircraft. Landing gear actuation overhaul activity is rising rapidly and we're allocating more capacity to accommodate the MRO demand. These aftermarket programs carry margins, which are often two to three times our OEM margins, as we supply spares and repair services to keep commercial and military aircraft in the air. We're also expanding our foreign military sales in the aftermarket as well. There are several positive developments on the military side of the business. as Triumph has engaged in a number of new development programs with Northrop Grumman, Boeing, Lockheed Martin, Kratos, Anduril, GE Aerospace, and others in support of the NGAD and collaborative combat aircraft. Turning to slide seven, six of our top wins in the quarter were for military platforms. We annotated the slide on the right where these are sole source awards, based on Triumph IP and or new product introductions. Note that Triumph's backlog supporting military rotorcraft rose 30% year-over-year on the strength of our substantial IP content on the CH53K, which rose 94% year-over-year to $165 million, more than offsetting the expected run-out of V22 OEM backlog. Regarding the commercial market, Airbus production rates remain strong and growing, with 10% increase in A320 family rates this year based on published information. Recall the A320 family is Triumph's third largest program in backlog. Similarly, A350 rates are forecasted to increase, and Triumph has been asked to support higher rates of A220 production and expanded work scope. We are aware of Boeing's recent public statements concerning a delay in their planned rate increases, which have not been formally communicated to the supply chain yet. As you can imagine, the actual adjustment in build rate for a given product is a function of delivery rates, aircraft and component finished goods inventory, and the supply chain's ability to flex output down and back up. Given the uncertainty on Boeing commercial transport programs, Triumph adopted a conservative fiscal 25 plan, reducing our prior internal rate assumptions between 20% and 30%, depending on the Boeing platform. This has the net effect of reducing our fiscal 25 sales guidance by approximately $70 million, or 6%, from prior targets. We will update all stakeholders as Boeing finalizes their production needs, and we'll continue to hustle while we wait for Boeing's ramp-up and increase market share through takeaways and second sourcing across their commercial platforms. We remain fully committed to protecting Boeing's requirements and supporting future rate increases as they drive towards rate 50 for the 737 and rate 10 plus on the 787 by late 2025, 2026. We have high confidence that our operating plan for the next two years is sufficiently de-risked to support our multi-year financial targets. Jim will now provide further detail on our fourth quarter results, fiscal 25 guidance, and updated long-term outlook.

Thanks, Dan, and good morning, everyone. FY24 was a great year for Triumph, highlighted by the improvement in our balance sheet. The proceeds from the vesture of the third-party MRO business had a healthy 14.5 times EBITDA multiple, combined with the use of some of our substantial tax assets. enabled us to meaningfully reduce net leverage from 7.6 times at the beginning of the year to 4.9 times at year end. The $548 million gain from the divestiture is evidence of the significant hidden value in Triumph's assets that are carried at historical cost on our balance sheet. On slide eight is our net debt, net leverage, and liquidity. In Q4, with the proceeds from the completed sale of the product support business, we retired the remaining $436 million of 7.75% senior notes due in 2025, clearing the runway of our next debt maturity. We also redeemed 10% or $120 million of our 9% first lien notes due in 2028. Earlier this week, we issued a second redemption notice for an additional 120 million of our first lien notes that will be complete this month. The combined debt reduction of over $670 million will yield 55 million of annual interest savings. We've reduced our net debt by more than half over the last year from about $1.5 billion to $700 million. We now have significant financial flexibility with our next maturity not until 2028. Another balance sheet improvement to note is our pension liability of $283 million at FY24 year end. It is down $76 million or 21% from FY23. Our cash and availability totaled $437 million at year end. including $393 million of cash. This is prior to the announced redemption of $120 million of the 2028 first lien notes this month. On slide nine are the FY24 consolidated results. We achieved 13% organic sales growth, driven by strong aftermarket volume. We delivered $1.192 billion of revenue, $115 million of adjusted operating income, and $144 million of EBITDA, representing a 12% EBITDA margin. During FY24, we grew our aftermarket revenue by 19% over FY23. Military aftermarket revenue was up 10%, and commercial aftermarket revenue grew 30%. This aftermarket revenue in the continuing business and the growing installed base of products we manufacture was 29% of revenue in FY24, up from 26% in FY23, and continues to grow. It is a profitable, diverse, and valuable revenue stream that benefits when the OEM new aircraft delivery rates are down because the aging fleet and service needs more spares and repairs. Remember that our reported backlog only includes purchase orders with delivery dates within the next 24 months. Our backlog grew 22% during FY24 from $1.55 billion to $1.9 billion. Approximately $1.15 billion of that backlog is scheduled to be shipped in FY25. We've also increased our customer diversity over the last two years. In FY22, sales to Boeing were 37% of our revenue, but in FY24, sales to Boeing are only 23% of revenue. No other customer is over 10% of revenue, and within the Boeing revenue, we have platform and program diversity. On slide 10 are the fourth quarter results, which shows solid growth in revenue, operating income, and margins. 33 million more revenue, representing 11% organic revenue growth, 9 million more adjusted operating income, 16% adjusted operating margin, up from 14% last year, and 16% EBITDA margin on the higher revenue. Aftermarket revenue was 34% of revenue and growing, up from 28% in Q4 last year. Our Q4 commercial revenue is on slide 11. Commercial OEM revenue of $140 million was down $5 million, which was more than offset by the more profitable commercial aftermarket revenue, which was up $18 million on sustained demand for spares. including on multiple business jet platforms and legacy 737 aircraft. Our Q4 military revenue is on slide 12. Military aftermarket revenue of $65 million was up $11 million or 21% over Q4 last year, which offset the military OEM revenue declines. Cash flow is on slide 13. For the full year, we generated $9 million of cash flow from operations, and after $22 million of CapEx investment, had free cash use of $12 million. For Q4, as expected, we generated significant positive free cash flow. $78 million cash flow from operations and $72 million of free cash flow. Working capital reduction contributed about $19 million of cash flow in the full year and $122 million of cash flow in the quarter. A comprehensive cash flow walk is in the appendix on page 27. For FY25, consistent with prior year seasonal working capital cycles, We expect growth in Q1 in the range of the amount of the reduction in Q4, followed by working capital reduction in the second half of FY25. On slide 14 is our FY25 guidance. Our guidance includes the benefit of the recent $40 million of cost reduction actions that have anticipated inflation. These reductions were necessary to right-size fixed costs in the continuing business and are enabled by the standardization and efficiency work that has been done over the last several years and is ongoing. We've assumed less than the current Boeing purchase order demand in our guidance based on our expectation for a temporary shift in demand, which varies by site. We are committed to meeting our obligations to Boeing and to being prepared to support future rate increases. This assumes temporary demand shift primarily impacts FY25 and is not expected to impact our longer term demand from Boeing or our longer term financial targets. Our guidance also includes approximately $75 million of price increases in FY25 over FY24, three-quarters of which are already agreed and under contract. These actual and planned price increases reflect consideration of the current and forecast cost environment, and most importantly, the value that our complex and unique products deliver to our OEM and aftermarket customers. For the balance sheet, following the announced $120 million 2028 note redemption this month, We assume $960 million of the 2028 notes remain outstanding during the year. We also assume cash funding for the forecast pension payments in FY25 of $23 million. We expect net sales of approximately $1.2 billion. We expect operating income of approximately $140 million, which is about a 22% increase over FY24. We expect approximately $182 million of EBITDA, which is a 26% increase over FY24. and 15% EBITDA margin, which is a 300 basis point increase over 12% EBITDA margin in FY24. For free cash flow, we expect $10 to $25 million based on our conservative OEM demand and working capital assumptions. We expect CapEx of $20 to $25 million, interest expense of $95 million, cash interest payments of $90 million, and cash income taxes of $12 million. On slide 15 is a graphic of the recursive cycle of deleveraging benefits, which is upside to our longer-term targets. As we continue to reduce debt and increase EBITDA, our credit ratings will improve. This will lead to opportunities to refinance our remaining lower debt at lower rates and reduce interest expense. Less interest expense means more free cash flow to reduce debt, and the cycle repeats. We expect opportunities to improve our capital structure that are not assumed at our longer-term financial targets. The longer-term financial targets of the continuing operations are on slide 16. Sales, EBITDA margin, free cash flow yield on sales, and net leverage are presented for FY20 for actual, FY25 guidance, and FY26 and FY28 targets. The EBITDA expansion is robust, and along with the free cash flow generation, drives the net leverage reduction, even without the benefits of lower interest expense from potential capital structure improvements, which is not assumed. We conservatively assume the $960 million of our 2028 notes remain outstanding to maturity. However, we will continue to consider capital structure improvement opportunities as they become available to reduce interest and accelerate cash generation and deleveraging, which would deliver upside to these targets. We assume cash funding in the pension plan as detailed by year in the appendix on slide 23. We have substantial tax assets that continue to minimize U.S. federal cash taxes for several years. On slide 17 are the relative size of the key drivers of the multi-year growth. EBITDA margin and free cash flow are expanding more rapidly than revenue, driven by the contribution margin on the incremental volume, price increases, favorable mix for military and aftermarket revenue growth, and cost efficiencies. In summary, fourth quarter results included solid organic revenue and operating income growth, operating margin expansion, cash generation, and a significant reduction in our net leverage. Brian Fenner's FY25 with a stronger balance sheet, a profitable and diverse $1.9 billion backlog, tailwinds from the recent cost reductions, and previously negotiated price increases. The multi-year plan includes rapid margin and cash flow expansion to drive shareholder value, with upside opportunities including a lower cost of debt. Now I'll turn the call back to Dan. Dan? Thanks, Jim.

I'll turn you to slide 18. I provide a few supporting facts for our bullish outlook. First, fiscal 25 is the first year when previously negotiated price increases on long-term agreements begin to cut in with full effect. As Jim noted, we estimate that over 75 million of gross price increases will become effective this year, contributing to a 300 basis point year-over-year increase in EBITDA margins. The inability of the OEMs to satisfy the high and rising demand for new aircraft has led to a growth in the average fleet age over the last five years of approximately 18 months. This, coupled with rising global travel demand, is accelerating Triumph's spares and repair business, which has experienced a 9% CAGR over the last three years as aftermarket sales finished the year at 347 million. To be clear, Triumph's aftermarket business is generated by OEM and IP within systems and support and does not include sales from the recently divested third-party maintenance business. Triumph's commercial transport production revenue grows more than $200 million from fiscal 24 to fiscal 26 if Boeing and Airbus meet their publicly shared targets for the A320 family, 737 MAX, A350, and 787. Turning to slide 19, I provide additional color on Triumph's geared solutions business which has been on a steady recovery path, leveraging the Triumph operating system. This business is attractively positioned for a strong IP-driven future. Today, Geared Solutions' MRO business is driven predominantly by products developed in the 1980s, including the V22 pylon conversion system and the FAA-18 C&D airframe-mounted accessory drives, or AMADs. Looking ahead, we have five new gearbox applications that will transition to production over the next two years, including a new Saab Gripen AMAD, the Boeing T7A AMAD, several new gearboxes on the B-21, and a new AMAD for South Korea's new KF-21 aircraft. In fact, we received our first production gearbox orders for the KF-21 aircraft in the quarter. As these aircraft transition to production, their deployment will generate spares and repairs volumes, ensuring that Geared Solutions participates across all phases of the product lifecycle, renewing Geared Solutions backlog. They are also increasingly engaged in additive manufacturing to replace costly and long-lane castings and in the electric vehicle space as they are sought out for their expertise in the drivetrain, which connects electric motors to rotors and propellers. France is extremely active in new product innovation, particularly modular components and subsystems that have multi-platform application and allow us to compete at the next level of the supply chain. This is important to expanding and maintaining our content on future aircraft and creates retrofit opportunities on legacy planes. Turning to slide 20, we provide a current snapshot of Triumph's innovation flywheel, including new gearboxes, fuel pumps, a new high-capacity thermal compressor, an entirely new product line of engine internal actuators, and digital engine controls featuring high-speed cyber-protected processors. These new product developments are financially sponsored by leading customers and are a source of long-term shareholder value as our IP-based solutions address our customers' most difficult challenges. In summary, fiscal 2024 was a successful year for Triumph. We have positive momentum into fiscal 25, driven by our aftermarket expansion, even with conservative assumptions on the Boeing commercial rates. Building on the excellent performance of our flagship system and electronic controls, and actuation businesses, we fully expect to have all four of our operating companies hitting on all cylinders as we progress through fiscal 25. We are taking necessary actions now to reduce our spend in the short term to offset the financial contribution of our divested third-party MRO business that will put us back on the trajectory we presented at the investor day, having accelerated our deleveraging by two plus years. The medium and long-term fundamentals for Triumph remain strong and reflect what we believe is the start of the next aerospace and defense super cycle. The encouraging outlook for our industry, our unique and focused market position, and our commitment to performance, this is well positioned for continued success. My team and I are excited about the future for our company, one with lower debt and interest carry, an improving credit outlook, growing backlog, and an improving market demand. We're happy to take any questions you have now.

Thank you. If you'd like to ask a question, please press star then 1 on your telephone keypad. If your question has already been addressed and you'd like to remove yourself from queue, please press star then 2. Once again, that's star then 1 if you have a question. And today's first question comes from David Strauss with Barclays. Please go ahead.

Hi, good morning. Thanks for taking the question. This is actually Josh Koren on for David. I wanted to ask about the longer-term forecast. We thought interest savings could be greater than what you lost with the divestiture. So why the free cash flow conversion, or I'm sorry, the free cash flow percent of sales forecast went down? Thanks.

Sure, Josh. It's Jim McCabe here. In the multi-year, we conservatively assumed that we're going to keep the current first lien notes outstanding. They're 9% notes, and after the earlier announced $120 million additional pay down that will happen this month, they'll be down to about $960 million. So we're going to be opportunistic about capital structure improvements. They may occur, but we don't want to lean forward on that. We're trying to put a reasonable conservative assumption in moving forward on the balance sheet, especially for FY25. But I do believe over the multi-year period, there will be opportunities for improvement in cap structure, and we will see it. In fact, I put that recursive cycle slide in because we're getting some of that feedback from investors, too, saying, hey, you should be able to lower your cost of capital with your higher EBITDA, your lower leverage, improved credit, and we're looking forward to doing that.

Thank you. Just one for me.

Thank you. And our next question today comes from Noel Poponic with Goldman Sachs. Please go ahead.

Hey, good morning. Good morning. Hey, Jim, just staying there. So at the investor day, you had the fiscal 26 free cash flow, $100 million target. The slide here, $1.4 billion revenue times or multiplied by a 4% free cash flow margin is $56 million. So it's a pretty significant reduction. I hear what you just said there on, you know, how, you know, product support comes out and then you're maybe layering in the interest expense reduction. So can you just break out or bridge the pieces from 100 million to 50 million? How much product support came out? How much interest expense came out but could come out later? How much is just less profitability in interiors? What are the actual specific moving pieces from the 100 to the 50?

Yeah, thanks, Noah. The effect of the divestiture was to substantially reduce the leverage. It did substantially reduce debt as well. So interest goes down, but we did give up a business that was slightly above the midpoint of our margins, and it was higher growth because it's a commercial aftermarket, albeit third party. So what we saw was a slowdown in the sales growth, and we started from a lower base on EBITDA, but we get up to 20% just a year or two later, and the cash flow follows. Working capital assumptions may be a little more conservative moving forward, given some of the uncertainty around the Boeing OEM rates. And we haven't assumed any of our improvements in capital structure. So I don't have exact reconciliation back to the investor day, but I think what we traded was a little bit of growth deferral and margin expansion for a better portfolio that has higher IP content. but much lower leverage, much lower credit, and we cleared the runway of any maturities until 2028.

I'll just add, Noah, that when we had the investor day, Boeing was looking at a more robust year-over-year rate recovery. So we've been conservative in our fiscal 25 and 26 volume assumption, as you noted. But the good news is, you know, book-to-bill and backlog are up, and as those orders drop and we convert them to sales, cash will follow. Okay.

Um, yeah, I mean, I, I, that all makes sense. Um, but the revenue, I guess the revenue adjusted for product support, isn't terribly different in that 26. Um, it's just a little hard to reconcile that, I guess, on the working capital piece, it, uh, the, the 25 numbers you provided EBITDA minus cash interest, cash tax, CapEx pension. That doesn't get me to the 25, so it sounds like there's working capital use in 25 as well. I guess what's going on with working capital that it's going to be maybe a larger source of cash than you were expecting? Because I understood it as you had some pretty meaningful working capital improvement initiatives.

Yeah, we do have working capital needs, and we have to protect the ramp, which we see coming, although it may be slipping several quarters from where we thought it was going to be. So the incoming inventory is still there, and we're going to be prudent about balancing that. I think a slide that might be helpful to you is slide 17, because what we did there was we bridged the cash flow from FY24 on the bottom to show how it's increasing through 26 and what the major drivers are. So you have the EBITDA expansion, which is that first large bar. It's offset by working capital usage, that's the orange bar, and pension funding. And then the interest savings is the blue bar. And there's a little bit of tax in there too. So those are the components of 24 to 26 cash. And we could give you more public information. We could follow up with it and point out to you the components.

Okay, great. And then just last thing I want to ask about. I know you gave, I heard you give some detail there on the interiors margin and the corridor and going forward, I guess. You know, the projection there was much higher for the quarter, and you provided that a month into the quarter when you reported your fiscal third quarter. I guess, how was that able to be so much lower than your forecast with a lot of the quarter already behind you? And can you just circle back to what the actual fundamental drivers of the performance are?

No, there's no doubt it was disappointment. And we thought they'd do better on cash and earnings, but they did deliver the sales. So we've got a new leadership team in place there, intensively going through all of their costs, making sure that they're working to fill the factory. Recall, there's two big factories down there in Zacatecas. One is empty. One is full, running ducting. That's why we've been engaging with Boeing. fill that factory that will help us with absorption so that's going to be a a key lever for us returning that business we know it makes money with volume and we've done some things on the cost side as well here that we hadn't done before operationally it's a really good plant quality is outstanding on-time delivery is outstanding but if we're going to get it back to where it was we're going to have to do more on cost and more on volume. So, yeah, disappointing financial results in the quarter, but I think the key signal is sales are coming up in interiors, and we're doing the actions required to address the earnings and cash. Okay.

Thank you. Thank you. And our next question today comes from Peter J. Armand with Baird. Please go ahead.

Good morning, Dan and Jim. Hey, Dan, on the $75 million in pricing that you highlighted for this year that starts to cut in, do you still highlight what's available in terms of new pricing opportunities for Triumph going forward?

Yeah, it's a question we often get, and every new LTA that resets presents an opportunity for us. I'll remind you that we negotiate these LTAs outside of lead times, because if we can't reach agreement with an OEM, they may choose to source this elsewhere. Sometimes they don't get around to negotiating it, and there really is no alternative but to stick with the incumbent. And we have gone through, I'd say, roughly half of our contracts. But the thing is, it doesn't end. It renews. as contracts extend. Because the average contract LTA duration is about five years. We have some 10-year ones. We have some three-year ones. Five years for the typical. And rather than viewing it as it runs out as a source of opportunity, it's something that we continue to schedule. This is something we review with the board. We have a list of all of our contracts. And when LTA is reset, And we don't always wait for the LTA to reset. There may be some reasons why we need to see price ups in the middle of one of those longer term because of changes in the underlying assumptions or customers' rates have dropped or changed so that we get another bite at the apple. So although I would say we're about halfway through the initial complement of LTAs, there's more ahead, it doesn't end.

That's helpful. And then, Jim, could you maybe just, from just a modeling perspective, you've given us the annual guidance, but how you're thinking, like, maybe first half versus second half, whether you want to comment on the top line or just, you know, pre-cash flow cadence. Thanks. Sure, Peter.

Yeah, I mentioned in my prepared remarks that the cash used in the first quarter, we build working capital every first quarter. It's going to be the same this year. And the cash used is going to be in the $100 million range for first quarter. But then we're going to be neutral in the second quarter and kind of cash generation in Q3, excuse me, and Q4 strong cash generation again. So the same profile we've seen in prior years, driven primarily by working capital, but some aftermarket demand is stronger at the end of the year as well. So that's the cash profile, and it could improve if the Boeing rates are higher than our discounted forecast. In terms of the cadence, as I know people like to know the margin cadence, in terms I'll talk about the system of support in particular, because that's most of the business. Similar margins in the first quarter to last year, and similar expansion of margins quarter over quarter, with 100 to 150 basis point per quarter improvement, with the fourth quarter being the strongest, but a continuous ramp through the year of margins. So the Canadian business, and now you've got the history by quarter that we've posted previously, so you can see the comps, and they should be favorable moving forward, and with some Good strong aftermarket continuing, and with some luck on the Boeing rates, we could do better than our forecast. Appreciate it. Thanks, guys.

Thank you. And our next question today comes from Seth Seisman with J.P. Morgan. Please go ahead.

Thanks very much, and good morning. Good morning. I wanted to check in on the expectations for Boeing rates beyond 25%. in the long-term plan. And I think in the response to Noah's question, it sounded like there was still some conservatism baked into fiscal 26. But in the prepared remarks, you talked about beyond this year, Boeing and Airbus getting to their published rates. So just kind of curious, what kind of 737 and 787 rates do you have baked into that fiscal 26?

Yeah, thanks. So there's three programs that we track closely with Boeing. The 787, they're about to drop a new schedule. We've done some messaging in the media about what that might look like. The 777, they have dropped a new schedule called U80, and we've digested that. That's a very modest change. In fact, I toured the 777, 777X line Seattle in the quarter, and it's very encouraging to see the level of build that's happening on that program. It really took me back because the program quickly shifted from building flight test aircraft to building deliverable aircraft. The 737, they have a new schedule that's coming out. We don't have it yet, so we have to go with our own best estimates on that. And as mentioned, when we take all the Boeing programs together, and we adopt, I think, a higher degree of conservatism than we have in the past, it's about a $70 million revenue hit. Now, we may find that the 737 rates that are, let's say, in the low 30s in fiscal 24 that we're entering, we're forecasting to get into the 40s in fiscal 26 and hit 50 in fiscal 27. We'll see how that plays out, and we'll update all of our investors and analysts as we go. But I'd ask that you give us until next quarter to see these revised schedules on the 737 and 787 so that we can more accurately update our forecast. I also want to add that I spent a full day at the Boeing supplier conference out in Seattle with Stephanie Pope and Esan Manoor and all of their leaders, the heads of every one of their programs. And I listened to them describe in detail their plans to address the FAA concerns, the quality metrics that they are tracking to that would provide the basis for raising their rates. And it's all very straightforward, very credible. It's the sorts of things that you I think any reasonable person would look at and say, if you improve on those metrics, it makes sense that you're cleared to continue to increase production. So I have confidence in doing the right things. I started my morning this morning watching Michael Whitaker on the news talking about this very issue. And I think his comments were spot on that it's really the beginning of a journey where Boeing really does track these metrics. And I'm also confident, I should say, the things they're doing with Spirit. It was very encouraging to hear them report out the very detailed process level engagement, improvement in tooling, automation, workforce engagement that's happening there. I know the folks on the phone here don't get to hear that. I do. As a member of the Aerospace Quality Forum that that Boeing has launched. I'm on monthly calls with the CEO of BCA. So I know what they're doing. And I think once they get through that FAA gate, they'll be able to provide more clarity on the 737 demand. But the most important thing that I'd like you to take away from this call is that we've adopted conservative assumptions. And we don't expect to have to come back to investors and analysts and say, hey, it's actually worse than and we've got a hole in our forecast.

Okay. Thank you. That's very helpful. That's a very helpful caller. And then as a follow-up, and I apologize if I missed this during the prepared remarks, but in terms of the end market growth rates that are baked into the sales forecast for this year, can you run through this?

The growth rates that are baked into the revenue top line, is that what you're asking?

Yeah, in terms of the commercial OE aftermarket, the military OE aftermarket.

Sure. Hey, Seth, it's Jim. We didn't give the details of exactly which markets are growing by exactly what rate, but I would tell you that the long-term trends and certainly the trend in FY25 is continued growth in the aftermarket overall. And that's important because aftermarket, even though it's a third of our sales, it's two-thirds of our profits. and therefore cash flow. So while OEM rates are important, two-thirds of our sales, they're only a third of our profitability. So strong aftermarket growth, and I think we see continued improvement in military as well, even on the OEM side as some of the production starts to ramp.

Okay, excellent. That's very helpful. Thank you. Thank you.

And our next question today comes from Kyle Von Ermer with TD Cowan.

Please go ahead. Yes, thanks so much. So you mentioned 75 million price hike. How much of that actually hits fiscal 25? And what is the net impact of that? Because obviously folks are giving you that because your inflation is higher. So how much of it hits and what's the net impact?

All of the gross savings, the price ups hit in the fiscal year. That's a fiscal year number. It's not a number that... that lays out over multiple years. There'll be further savings on price or further price ups that lay in over the out years. And then the net contributions reflected in our 300 basis point margin expansion. Jim, anything to add?

Yeah. As Dan said, the 75 is the year-over-year price improvement from FY24 to FY25 gross. And as you alluded to, Kai, there is inflation that offsets some of that, but not all of that. And that, coupled with the $40 million of annual price or costing reductions we've made, is the reason we're able to expand margins from 12% to 15%. Largely, all of that can be accounted for by the cost decreases alone. But there are offsets to the price. Price is necessary, but it's also accretive to margins, as shown by that 300 basis point improvement.

Terrific. And then, you know, while, you know, you can't tell exactly yet where Boeing is going to take some of these rates, can you give us some color? Like, where are you today on the 787, the A350, excuse me, 787 and 737? And what's your inventory position? I mean, do you have lots of them sitting around? Give us some color on that. We can make the guess in terms of where, you know, you might be going.

So on 787, our full up rates were around six last year, and we were headed to 10 in fiscal 27. I think Boeing can still make that sort of rate that the issues that they're working through now are all readily solvable. But in the short term, there'll be a decrement, and that's why we've adopted that conservatism. On 737, again, Kai, it does vary by factory, and it varies based on the working process and finished goods inventory levels. But think last year, we ended the year kind of in the low 30s, and we were headed into a year that's the mid-30s, getting to about 50 in fiscal 27. That was the prior assumption. And now we're adopting, you know, conservatism around that number of, you know, on the order of 20 to 30%. I think that's more conservative than how it will play out. But we've really listened to our investors and the analyst that says, you know, Triumph, you really need to have a plan that you can hit with confidence over the next two years. How it affects working capital is And we typically order parts six to 12 months in advance. So that's why we were ordering to that higher profile in the middle of last year. And that contributes to part of what's called the build and working capital that we reported over the last few quarters. Now we're putting our brakes on to slow that incoming material to reflect that more conservative assumption. while working with our suppliers to make sure that we can reverse that and spin up to the higher rates once Boeing gets the green light to the FAA. Does that help?

Yes, that is helpful. Thank you. And I guess my last one is, you know, it's a two-part question. What's the status of, you know, the hair suit regarding their acquisition of Steward? And, you know, what's your answer? I mean... As we look at this cash flow, you're talking 56 million free cash flow in 26. And so if we look at 25, 26, that's really not a huge cushion, you know, if something goes wrong, if we have sort of an exogenous event. Any thoughts about any additional actions you guys would take to kind of improve your flexibility more?

So that's a multi-part question, but I'll take a shot at it. Okay. So there's really no update on the, the, her litigation, you know, that's working its way through the legal process. We continue to vigorously defend ourselves. As you recall that the fact is the buyer has been responsible for Stewart operations since the business was sold in July of 2022. And it was part of our larger portfolio transformation. And that sale agreement included terms that limit our potential exposure as well as the amount claimed by Daher. So there's not really anything new there. I'll point you to the 10Q on how we lay that out. And we take our commitment to quality seriously. And when we've had issues in the past with Boeing, you know, we've resolved those. This happens to be with Daher, not with Boeing, because they took the business. Structures is a complex business, and it takes – level of experience and close attention to detail. But we've actually done that business and we're going to work to continue to cap off the legacy liabilities in the structures area. So, but we don't expect any, I'll call it, major financial impacts in our fiscal year from a DAHR litigation. That's the bottom line.

And the last one about, you know, yeah, the flexibility.

So you're saying if something adverse were to happen, how would we fund that?

Yeah, Kai just on financial flexibility. We came down from 7.6 times to 4.9 times on leverage. And by 26, we're at 2.6 times. So we have room on the balance sheet should we ever need to raise more capital for any purposes. We don't expect it for that purpose. And we don't have any maturities until 2028. And we have solid availability with positive cash flow with the conservative forecasts. So we feel confident in our ability to fund any needs of the business, whether it's from the existing balance sheet or if we need to raise more capital, we could.

Got it. Thank you. Thank you.

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

Hey, good morning. You've got Lou Fedow on for Miles.

Morning. Morning.

So maybe if I just start with the 40 million cost reduction actions, is that something you expect the whole amount to, to sort of be a benefit in fiscal 25?

That's the gross amount low of the reductions. So year over year, net of inflation, you probably see something in the $25 to $30 million range of benefit. And we were targeting all of our SG&A and overhead, all our fixed costs. So year over year, we're looking for $40 million gross reduction, which net of inflation is probably going to be the $25 to $30 million range.

Okay, and are there, you know, you took $5 million, you know, cost in the quarter, any additional costs to think about to achieve this this year?

Not, I think most of it has been actioned already that has severance associated with it. And the rest of it, a lot of it is third party costs that we're able to reduce without having those restructuring charges. Yeah, there could be some, but I don't anticipate anything large.

Yeah, I would look at that cost reduction number in tandem with the conservatism we've adopted on rates. That way we don't have to go back and do another sweep through in cost because the rates have fallen further. We're watching the portals where Boeing loads their demands very closely to make sure that our assumptions that we base those cost outs on are holding, and so far they are. In fact, some of the early inputs that Boeing's putting in the portal are better than our conservative assumptions, but we're going to stick to those until the formal schedules are released.

Okay, and I know this was asked earlier, but I guess I still wasn't fully clear on just sort of interiors and exactly what happened. Sales weren't too far off, so just to understand if some of these higher margin sales didn't drop through, was there something on the cost side that completely came off bounds that surprised from the mid to high teens down to sort of 2%?

So they had, they were in, we were transferring work from our Spokane plant down to Zacatecas in Mexicali. And, you know, some of their estimating on the cost of moving that work was off and therefore their predictions of earnings and cash was off. Now we've fixed that and we'll have, you know, accurate EACs going forward for the interiors business. And we've also, gone in and established those hedges that I mentioned and adopted alternate sourcing actions. Those things we would have liked to have cut in sooner, and they didn't, in fact. So we saw a continued drag on margins and cash. So it's a bit of a timing thing. The thing I'd like you to take away from our interiors is we know how to get 20% out of that business. We've been there before. And we've done it when the volumes were higher. We have a clear path to higher rates once Boeing gets past the current challenges. We're using the time now to negotiate increased scope on programs like 787, not just with Boeing, but with Spirit, the KHI, and others, Airbus on the A220. So we're doing all the underlying actions to get back to where we used to be. And with the cost advantages that we have in operating in Mexico, the strong quality, strong on-time delivery. It is one of the largest factories in the world that produces these type of insulation and ducting products. We're confident we can get back to where we were.

All right. Thank you very much.

Thank you.

And our next question today comes from Sheila Keoglu with Jefferies. Please go ahead.

Hey. Good morning, guys. I have a few questions, if you don't mind. Just to play clean up here. Dan, you mentioned you're being conservative on the max rates and you're going to 30% cut internally versus where you thought you'd be producing, which I think is in the mid 30s or high 30s. So does that imply your guidance assumes 30 a month or so on the max? And on the working capital item for free cash flow, are you assuming 20 million of usage in fiscal 25? And is that all max in 787?

So I'll start on the rates, and Jim can hit the working capital. The rates, and I know it's tricky for us because, you know, unlike Spirit that has largely a discrete product in the fuselage, we've got seven different factories that are supporting it at different build rates, because Boeing is historically they've allowed us to run at rates that are higher than their consumption rate because they don't want the supply chain to go idle and then turn around and ramp back up to 40 to 50. so we're waiting to see what they're proposing by commodity by product but it's not 30 across the board lower rates on the max we some of the factories we are assuming in our fiscal 25 guidance about a 20 percent a reduction not not a 30 but It does vary. Once we get clarity from Boeing, we'll provide it to you and to others so you can see how we handicapped it, did we handicap it right. But I think we've done the right thing, Jim.

And Sheila, on the working capital, there's an assumed usage in the $20 to $25 million range for the full year. And that is largely driven by having inventory and lower shipment rates forecast. So we have to still maintain that inventory for our contracts and we'll be ready for rate ramps. But that's part of the reason for some working capital usage.

Yeah, just a little bit more color there, Sheila. It's a negotiated process, product by product with Boeing, because some products lend themselves to rate cuts without implication to the supply chain and Triumph's workforce more than others. We can pull back the throttles and some plants more readily. And we partner that decision with Boeing so that we don't cause problems later, whether they're supply or price, as the ramp comes back. So we need to get through this process. They need to give clarity to the supply chain. We need to sit down, go through commodity by commodity, and then we'll be in a position to say, here's what we're building at. But I've given you today the sort of aggregate numbers.

Sure. And then maybe on the margin for fiscal 25, when you we talk about 300 basis points. You mentioned 25 net productivity. So does that imply net price is about 1% off the 6% gross price?

I don't have the exact number for the contribution, but there's a positive contribution net of the inflation and material cost in particular. That sounds in the range of reasonableness for an assumption.

Okay. And then last question, just to level set everyone. So on the

long-term guidance um is there an organic top line and margin change outside of the divestiture of product support so no there really isn't yeah we're still striving towards the same financial objectives and you know our goal is to be a 20 or better on ebitda margins and um you know the the profile to get there is uh It's been set back slightly because of TPS, but we're still on a very good trajectory to hit 15 this year. Again, we think that's a conservative assumption, but that's our number. We're sticking to it, and we're going to work like hell to beat it, but that's the guidance for the year. And then the profile to get back to 20 or to achieve 20 is laid out in Jim's slides.

Okay. Thank you.

Thank you.

And our next question today comes from Sam Strusiker with Truist Securities. Please go ahead.

Hi, good morning, guys. I'm from Mike Tramola this morning. Good morning. You pointed to potential improvement within military OEM following a little bit of weakness this quarter. Could you potentially provide any detail on kind of maybe the timing of that next year in the cadence? Sure.

I think we're going to have to do that offline in the sense that there's different programs that contribute to the military recovery, and we only gave sort of aggregated numbers, and then the new wins in that space. So we may have to take that for action. But if you go back to the backlog chart, and it shows the rate changes that we have, I mentioned that programs 6 through 10 in our backlog are all military programs, and they're all The rates are generally stable. F35, you know, what I'm hearing on that is that they are expected to go to, you know, 20 a month. GAO would support that once they finish some of their software updates. That will be a tailwind for us right now. We're looking for additional scope on the F35. We're in the public about our pursuit of their power thermal management system, which is a large subsystem. It provides cooling on the aircraft as well as APU functionality and engine starter generators. And then the ramp up of programs that are transitioning from development to production, we mentioned the Saab, T7A, the KF21, they all have their own timeline for recovery. So I think it'd be better off if we provide some summary of the individual components of the military recovery rather than answer it off the cuff.

That's very helpful. Thank you, guys. Thanks, Sam.

Thank you. Thank you. And our final question today comes from, I apologize, it comes from Ron Epstein. Actually, it looks like we lost Mr. Epstein's connection. So at this point, we're going to close the question and answer session and today's conference call. Thank you for attending today's presentation. You may now disconnect your lines and have a wonderful day.