Q4 2020 Earnings Call
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This time I'd like to reduce they all day Crowley, the company's President and Chief Executive Officer, and James Mccabe Junior Senior Vice President Chief Financial Officer, Triferic warhead, Mr. Gross.
Thank you, Kevin and welcome everyone to our Q4 earnings call.
To all joining us this morning, I hope that you and your families are healthy and safe and remain that way.
Earlier. This morning, we report strong fourth quarter results for fiscal year 2020 inline with our expectations.
We successfully delivered positive free cash flow for the first time in three years on sales of 2.9 billion.
Increased earnings year over year.
We actually the cash consuming structures programs the integration of our systems in aftermarket businesses expanded top and bottom lines.
And we continue to win new programs increasingly on the defense side to help offset commercial declines.
All these accomplishments will benefit F., why 21 and beyond.
On slide three I provide the big picture on Triumph group.
All right for 20 results demonstrated the benefits of our multiyear transformation.
We ended up for 21 with positive year over year momentum.
We're protecting our people and company during this historic pandemic.
And rapidly rightsizing triumph to reflect the market reality.
So commercial demand is down or are we emirates provide a safety net were strong defense opportunities.
Actions, resulting from our strategic review of structures are on track to finish enough why 21.
We are taking immediate and deep actions to conserve cash while maintaining our liquidity at over $550 million.
And are well positioned for this environment.
To be clear, what we feel good about the quarter and full year I want to acknowledge the covert 19 has clearly impacted the markets in which triumph operates.
Especially commercial aviation some of the sites that support the commercial market have seen 40% or more reductions in volume in our first quarter.
In contrast, those that support freight carriers in the military had been largely unaffected.
As we managed to this crisis.
Our entire team has adopted three key imperatives that will guide us through to recovery. The first one is keeping our people say.
The second is keeping our company safe by conserving cash.
The third is collaborating with our customers for mutual benefit.
Coming off the strong Q4, I was looking forward to this earnings call and despite the large declines in commercial volume I still am.
The reasons for this are twofold first.
First we've taken actions to ensure the Trump comes out of this period and a better position for the long term.
And second I'm encouraged by the early signs of recovery, we are saying, even as we size the business for the current realities.
Let me now provide a few specifics on each of these imperatives.
Because of our central status, a majority of our factories were operational during our fourth quarter two the early waves of the virus.
Earlier this week, we reported that all 36 of our factories have returned to operational status.
After overcoming cobot 19 cases.
Customer plant closures government mandates.
And supplier shortages.
As noted on slide four keeping our people say if includes protecting the physical health and economic welfare of our employees.
We have gone beyond adopting CDC recommended best practices, you all know about.
Our factories quickly turn from building aircraft blankets to producing face coverings to augment the ones that we were able to purchase with over 100000 now distributed across the company.
We expanded support programs for affected employees.
During that they have adequate access to care.
Decreasing paid time off and providing hardship payments for employees impacted most by the crisis.
As we continue to work to keep our factory soap and support our customer demands trough is doing our part to help others.
We're providing P P to safeguard and support our local communities that were hit hard by the virus.
From our Isle of Man employees, who produced ventilator valves to our Red Oak, Texas, Atlanta, Mexicali, and Hot Springs, Arkansas teams.
Who made fabric masks tribe team members are pitching it.
And the tribe Group Foundation is providing donations to organizations like fill abundance food back project tone.
Operation Homefront, the Red Cross and the United Way I'm very proud of the way our team has stepped up as weve navigated the crisis their performance sacrifice and perseverance have been inspiring.
With our factories operational we're now beginning to return those salaried employees, who have been working remotely to their workplace.
These employees will return to the office over the next few months in phases, while continuing to leverage the flexibility remote working.
Ensuring the safety of all of our employees.
Our second imperative keeping our company say, it's about ensuring the company's health by conserving cash and maintaining adequate liquidity.
This is key given our expected cashews and the first after the year due to the virus impacts and lost program Closeouts.
As noted on slide five before the pandemic, we forecasted strong revenue and earnings growth in fiscal year 21.
The new fiscal year will now become both a rightsizing year as the commercial aviation industry contracts and the transition year.
To more favorable freighter and military contracts.
After a recovery we fully expect to continue our journey towards pure like EBITDA margins.
Free cash flow conversion.
Benefiting from our belt tightening, we expect to gain enduring cost efficiencies as we downsized.
For fiscal 21, we're taking aggressive measures on all fronts to contain cost and size the business accordingly.
As noted on slide six we have many levers at our disposal to manage cost and preserve cash.
We're treating every cost is variable and of scrub cost accounts and taken down or discretionary spend.
We implemented a difficult workforce adjustments and austerity measures to ensure that we can weather the storm and come out stronger, resulting in the furlough or layoff of almost half of our workforce.
Additional cost reduction actions are detailed on slide.
Our austerity measures started with over 120 million a near term indirect cost savings to bridge the gap to recovery the self help efforts will reduce cashews.
And help drive avoid additional headcount reductions.
In addition in partnership with our Bank group, we recently amended our revolving credit facility to ensure that we have the required liquidity to sustain us through the recovery period.
This provides us breathing room to during the downturn.
Finally to resolve its long time use of cash we remain on track to complete our disposition of our structures business this year, but to date certain and in some cases accelerated program exits.
Having sold 12 of our original 47 operating companies.
We are pursuing additional divestitures and F why 21 to reduce debt.
Jim will provide more color on this amendment and our overall cash and liquidity position shortly.
Triumph also benefited from improved cash terms from our defense customers as part of the do you have these commitment to support the extended supply chain.
And we're working with state and federal governments to access aviation industry and workforce financial support where available.
We are benefiting from 16 million a payroll tax deferrals.
We will provide updates on these initiatives as there are adopted.
A few specifics on how our customer collaboration is benefiting both triumph and the Oems.
As commercial Oems in the airlines pause operations and reduce their demand forecast over the last 11 weeks.
These relationships helped us stay aligned on pipeline inventory and build rates and to slow our cash burn.
We are adjusting demand internal capacity and supply chain signals quickly exiting legacy programs and reaching settlements with our OEM customers.
Demand rates for many of our core platforms held and select cases increased following production pauses.
Moreau demand for freighters and military continued to be strong.
While airline MRO remains low pending a broader returned to flight.
We recently received or confirmed purchase orders from Boeing commercial airplanes.
For the 7677477 to seven Max 77, and Triple seven.
To maintain economical production levels and protect our lower tier suppliers.
Several cases these PEO rates are higher than boeing's internal build rate as Boeing partners with suppliers to protect continuity of supply.
We also resolve several open claims with Boeing the deferred the majority of our advanced repayments out of fiscal year 2021.
Both of which will fit our plan cash liquidity and covenant profile this year.
We reached agreement with Israel Aviation industries to accelerate the transfer the GE Twoeighty wing program to I in Korea, and Aerospace industries by July 2020.
Only two completed wings.
Remain to be delivered from Tulsa at which point until so factory will be closed.
All designed support and scheduled warranty obligations will be transferred to IR.
We partnered with Gulfstream and reached agreement in principle to sell our GE 650, G 700 wing business to Gulfstream.
Which will conclude our obligations on the program.
Also result opened commercial issues and secured price increases on work we retain.
Transaction is expected to close in early fiscal year 2021.
Helped to reduce our debt and inventory levels.
Taken together these customer settlements improve our F. Why 21 cash profile by about $50 million.
Reduce plan program Cashews and help us bridge through the downturn.
This brings me back briefly to our fiscal 2020 results on slide seven.
Trial met or exceeded its full year revenue adjusted earnings and free cash flow guidance.
We previously announced the implementation of an enterprise quality system and processes.
We achieved our best ever levels of safety and quality this quarter, which aided in the recertification of all our major factories to ask 9100 or related standards.
We also successfully consolidated our heat transfer and interiors MRO businesses into new facilities.
And that's reported we transitioned work on the two fuselage GE 650 wing assembly the divested our Nashville large structures business and that's why 20 as part of our structures strategic review.
Bottom line.
Our transformation efforts enabled our strong fiscal 2020 performance and tribe entered the crisis with positive momentum.
Which will help us overcome the commercial downturn.
Moving on I summarize the current commercial market conditions on slide eight.
Given the grounding of most of the commercial aviation fleet and reductions in air travel and OEM production rates we.
A reduction of approximately 30% to 40% in commercial OEM production.
For the balance of the calendar year and reduced commercial and MRO activity.
We are encouraged by the early return of domestic travel in some of the markets. We serve an inflection points on aircraft returned to service.
MRO orders for engine and accessory parts from freight providers GPS Fedex and Atlas have continued to come in providing critical base at sites that have lost airline MRO volume.
While we are faced with declining commercial demand in the first half of fiscal 21, we've engaged other commercial and military customers to pull forward new orders as we collectively work towards recovery.
Traps, providing essential services for their military cargo and medical transport missions.
An example is our park city, Utah, and West Hartford, Connecticut plants, where military demand has allowed them to maintain 90% or more of prior year revenue.
To be clear in the first half of fiscal 21, we anticipate higher uses of cash to fund planned exits of the structures programs, primarily 747 and she twoeighty.
But these uses of cash have a date certain and near term and during fiscal 21, and our accommodated within our credit facilities.
So the question is when do we expect to see a commercial recovery.
While it's too early to know with certainty as noted on slide nine we're tracking the leading indicators of recovery, including.
Airline reservations and daily flights, both of which are increasing week over week.
Aircraft returned to service utilization in load factors, the latter which is up 100% in the last month.
Airline liquidity and aircraft orders and acceptance rates.
OEM build rates and MRO demand and new defense opportunities and payment terms.
The last trend is especially important triumph systems and support has 35% of the revenue comes from defense applications.
Well preliminary the trends are positive and support our forecast for recovery in our second half of fiscal 21.
We've adopted conservative production and MRO rate assumptions.
To size, our workforce and supply chain demand to limit working capital expenses, while retaining the ability to increase output.
Recovery first more quickly than anticipated Conversely, we pressure tested our forecast for the downside cases, you can quickly make further reductions and capacity and cost if needed.
As with most of our peers will differ providing financial guidance until we see follow through on these initial signs of recovery.
However, we do expect to see increasing revenue free cash flow and earnings in the second half of fiscal 21 as airlines returned to service and we finished program closeouts and structures in the first half of the year.
On slide 10, the diversity of triumphs platform content comes through.
We see continued support for freighter and tanker versions of the 767.
We have content on the new military programs in development.
And we support several military upgrade programs, especially for helicopters.
We have key roles on next Gen commercial aircraft and cargo and military MRO demand remains strong.
Last our IP and systems gives us an edge in both retaining and gaining work.
Overall triumph continues to benefit from strong backlog, despite the softness in commercial demand.
We are continuing to win new work and take advantage of our customer in platform diversity on slide 11.
Fiscal 20 tribe secured 76% of all competitive bids we pursued.
The wins or across a broad set of customers and platforms and include fleet upgrades new technology assertion.
Sales to independent MRO providers.
Military MRO remains healthy and we're working to accelerate our successful military emerald programs, including parts for the V 22, F 18 and F 15.
As noted on slide 12, Trump was awarded the design and build of distributed hydraulic system on the Bell and Victus and designed to build Atlantic your system on another future for vertical lift aircraft.
Trough is well positioned for this program with substantial engineered product and systems content on all four competing platforms.
Other wins in the quarter include multiyear awards for the F 35, hydraulic utility actuation valves and the CH 47 transmission air oil coolers.
As aircraft retirements accelerate during the call good pandemic strategic value of our partnership with Air France KLM has increased.
This partnership provides access to first maintenance cycles of new aircraft platforms, not normally service until the second or third maintenance cycles.
Last triumph continues to develop differentiating IP manufacturing processes for thermoplastics.
Hi, good thermoplastic, forming welding and anti solutions in the quarter, we delivered a thermoplastic wing risk for the Airbus wing of Tomorrow program.
Overall, our backlog remained stable at 3.2 billion and the diversity of our customers programs and products remains key to working through the industry market downturn.
On slide 13, I profile, a core systems and support businesses.
During the fourth quarter, we completed the combination of our legacy integrated systems.
Product support businesses to accelerate our aftermarket growth rate, while simplifying our structure for lower cost.
Systems and support is a 1.4 billion dollar sales business with a diverse mix of end product and consistent allocation about OEM production and MRO aftermarket.
With EBITDA margins higher for a morrow.
Systems to support is also a solid cash generating business unit.
In the near term due to covert 19 system support this forecast to experience between 30% to 35% reduction and commercial OEM production.
And about a 45% to 55% reduction in MRO activity, we are adjusting capacity accordingly.
While our small interiors MRO business seemed a significant drop we have less exposure to heavy maintenance and consumable aftermarket demand then other firms.
And we focus on accessories, and structural repairs, which continue to support freighter medical and defense missions.
While we work through lower narrow body build rates and commercial MRO declines in fiscal 2001 longer term, our core programs and systems and support will enable revenues to return to fiscal 2000 levels with improved margins.
Up to previous year targets of 19% over the next three to four years.
Let me now turn to our aerospace structures business, which continued its improved performance through fiscal 20.
As shown on slide 14 structures is a 1.6 billion dollar revenue business with planned declines in revenue from divestitures and sunsetting programs such as the said 47 GE to 80 Mg Pie 50.
EBITDA margins expanded in fiscal 2020.
As prior program volatility has largely been eliminated.
We assume step downs interiors revenue from 737, Max production rate reductions of 30% to 35%.
Deteriorate factory Mexicali has resumed production, but it's not expected to return to prior rates until about 2022.
We've aggressively reduced head count in the interim.
As reported we made strong progress executing our planned exit legacy programs in the aerospace structures business.
Key initiative that will benefit triumph in fiscal 21 and beyond.
From military end market and 767 program rates, coupled with the cost reduction initiatives allow structures to target consistent EBITDA margins in fiscal 21.
Longer term our actions to rightsize the operations provide opportunity to improve margins further.
Tooling is now in place to start production of the T. seven a red Hawk MD aircraft for which we are contracts to build the wing and empanage.
Our Red Oak, Texas, and Milledgeville, Georgia plants were both down selected by Lockheed Martin for composite manufacturing work on the F 35.
These programs will shift the backlog of structures from its historical commercial emphasis to defense work.
On page 15, I'll provide a recap of the progress we made on our structures strategic review.
As reported yesterday, we've exited most of our build to print contract manufacturing factories and sold one of our four remaining major structural assembly plants with the divestiture of Nashville last year.
Fiscal 20 also mark the exit of our loss, making structures programs, including the majority of global 7500 wing.
Gee 650 wing and the Embraer Etwo fuselage, all were successfully transferred to their OEM owners for strategic buyers.
We remain on track to complete the exit.
At the other three major structural assembly plants this year Tulsa, Oklahoma.
Also in California, and Grand Prairie, Texas.
Transfer of our profitable 767 program from Grand Prairie, Texas to our lower cost to our Florida facility will be completed this calendar year.
In fiscal 21 will be the last year of such transitions and associated cash use.
In summary, trapped delivered positive momentum in Q4 and positive free cash flow for the first time in three years the actions we've taken both before and since the crisis.
Moving to divestiture of noncore businesses and transitioning of sunsetting programs.
Cost reduction and the increase in military programs have all resulted in positive margin trends.
Reduced our cashew so we can manage through this painful downturn.
As we manage through to recovery, we are focused on the safety of our employees have the required liquidity and cash position and are collaborating with our customers.
We will size the business to the new commercial realities, while growing our business and healthier markets. We appreciate the partnerships of our customers and lenders to weather the storm and to come out as a stronger company.
We anticipate entering our fiscal 22 next may with a tighter cost structure and our future state portfolio.
With that Jim will now take us through the financial results for the quarter and the year Jim.
Thanks, Dan and good morning, everyone.
We are experiencing unprecedented times as a result of this crisis or nimble and lean structure as well as our culture of continuous improvement and cost reduction position us well to face these challenging market conditions.
As we increase our focus on protecting our cash and liquidity, we've already taken a number of actions over the past few years to strengthen the company, including exiting underperforming programs and businesses and improving free cash flow reuse of over $200 million in fiscal 2019 to positive cash flow of over $50 million enough why 20.
Our fourth quarter net sales EPS and cash results, all met or exceeded our expectations. Despite the overarching market headwinds.
I'm proud of the efforts of our teams to deliver on their commitments and overcome these challenges and these uncertain times.
I will discuss our consolidated and business unit performance on an adjusted basis. So please see our press release and supplemental slides for the explanation of our adjustments.
On slide 16, you'll find our consolidated results for the quarter.
Organic net sales decreased 6% over the prior year quarter.
Both businesses experienced organic declines in part due to the 737 backs production cuts.
Adjusted operating income was $44 million this quarter and our adjusted operating margin was 6% then about 100 basis points from last year's fourth quarter due to the reduced volumes.
Turning to slide 17, you'll find our fiscal 2020 results.
On organic basis, or net sales increased 5% year over year, driven by production rate increases on the 77 program and military platform volumes.
While the military market presents opportunities. The recent 77 trends are not expected to continue given the current market environment and updated build rates.
Our full year adjusted operating income was $209 million, representing an adjusted operating margin of 7%.
Which is about 225 basis point increase over the prior year.
This improvement was driven by operational efficiencies Institute over the last few years.
On slide 18, you can see that over the last three years, we've improved EBITDA and free cash flow exiting and divesting noncore and cash using program some businesses.
We entered this crisis with positive momentum, which will help us navigate through an exit even stronger.
With respect to the segment results on slide 19.
24th quarter organic net sales in our systems and support segment decreased slightly compared to the prior year as aftermarket opportunities helped to offset the known headwinds for the 737 Max program.
Adjusted operating margins for system to support were down slightly due to decreased organic sales.
The more to reflect the 2% increase in MRO and aftermarket sales in the quarter relative to the prior year improved operational efficiencies and cost initiatives, partially offset by decreased organic sales.
Goodwill from the legacy product support reporting unit deemed to be impaired at year end to the sharp declines in expectations around MRO over the near term and the uncertainty on the timing and piece of recovery, resulting in a noncash charge of $66 million in the quarter.
Restructuring actions impacted the segment's margins this quarter by approximately 180 basis points.
These restructuring costs will help to keep margins near fiscal 2020 levels in fiscal 2001, despite the expected revenue declines.
Summarized on slide 24th quarter organic net sales for our aerospace structures segment were down 11% due to transition programs, partially offset by increases in legacy programs.
Aerospace structures operating margins were unfavorably impacted by $7.7 million from changes in estimates associated with the effects of cobot 19 related closures and production rate reductions.
Excluding these effects operating margin would have increased 170 basis points, reflecting the benefits of the portfolio shaping and cost reduction actions, we've taken part of our transformation efforts.
The group is executing on the program transitions have recently completed primary manufacturing of the seven for seven program. One of two sites and are on track to complete production at the end of the calendar year.
Turning to slide 21.
Our $45 million cash generation in the fourth quarter was inline with our expectations.
This is a 53 million dollar improvement over the same period last year reflects our portfolio and program changes cost reduction actions and working capital management across our businesses.
We remain focused on aggressively managing our cash and liquidity.
Capital expenditures were $12 million in the quarter.
We reduced working capital by approximately $55 million in the quarter from strong cash collections and cash management, despite cash headwinds of $18 million from the sunsetting GE to 80 program.
On slide 22 is a summary of our net liquidity our net debt at the end of the quarter was approximately $1.3 billion. Our combined cash availability was strong at about $568 million and we aren't compliance with all our financial covenants.
Recently, we amended our revolving credit facility to ensure access to our liquidity and maintain covenant compliance as weve, whether the crisis and expected cash headwinds associated with the program exits.
Also in May we agreed with the key customer to reduce liquidation of advances to $40 million during fiscal 2001.
We're not providing financial guidance for fiscal 2001 at this time do the uncertainty around the ultimate impact of Cobrand 19 on the global market and economic conditions.
Unrelated to cover 19, the company currently expects cash outflows related to the completion of certain previously announced sunsetting programs within aerospace structures, including approximately $47 million for the completion of the GE to 80 work statement by our second quarter and $35 million for the completion and exited some for seven program.
Yeah.
Terrific 20, we delivered on our commitments to achieve year over year improvements inorganic revenue free cash flow and earnings.
The austerity measures, we have taken will help us to stabilize margins during the downturn as we pivot to military and expanded MRO opportunities specifically in systems and support.
We believe we have adequate liquidity based on current market estimates and continue to make difficult, but necessary decisions to eliminate costs and we'll consider additional sources of liquidity as necessary.
Expected divestures and aerospace structures will reduce our debt and drive meaningful increases and shareholder value.
I'll turn the call back to Dan Dan.
Thanks, Jim I want to leave todays call with these takeaways triumph entered this unprecedented aviation crisis with positive momentum.
Our Q4 in fiscal 20 results demonstrate that we are realizing the benefits of our restructuring and transformation efforts.
We're protecting our people and the company during this historic pandemic.
We continue to Aquas velocity to rightsize the operations to reflect the market reality and position for the future state of the company.
Our strategic actions for aerospace structures were on track to be complete this fiscal year.
And from production estimates and our ability to win and expand military opportunities.
Provides stability to aid in the Companys recovery coming out of the covert 19 crisis.
We have a solid cash position with many levers at our disposal.
I remain confident and triumphs ability to compete when and deliver value creation over the long term.
We're now happy to take any questions.
Okay.
At this time be officers of the company would like to open. The form 20 question that you may have we're such a limit yourself to one question on the follow up to give everyone. The opportunity to participate if you are using speakerphone. Please pick up they had said before pressing any numbers should you have a question. Please press star one on your push cooking foam should you wish to withdraw your question press the balance sheet your questions will be taken in order to receive.
Please stand by for our first question.
Our first question comes from rubber spend garden with credit Suisse.
Hey, good morning.
Thank you for all of that color, Dan I mean, that's you've obviously accomplished a lot. It seems like you just gotten into the Red zone here and they extended the field another 50 yards.
And so I wanted to ask you a near term in a long term question.
First from the near term perspective, what is your aftermarket business has exposure to us.
To use arrivals serviceable material used serviceable, yes, yes, it's it's not that high Weve a lot of our aftermarket is.
As.
Uses the OEM parts, either that we made we buy from companies like Honeywell and there's a there's a strong demand from some customers.
Go with.
I'll call. It OEM quality parts used serviceable material now having said that we're starting to see opportunities like I'm structural repair to do more USM and we bought some rotable inventories.
Because in this current.
Budget to environment, if someone can get a thrust reverser overhaul for less money.
Through the use of USM. So we're starting to increase our use of that but we're not seeing I'll call cannibalization of our core and MRO markets because of USM.
Okay, and then from a longer term perspective with all the puts and takes.
Maybe this is for Jim is its fiscal 22.
Fiscal 23, your next cash flow positive year, I'm kind of thinking that Boeing and Airbus stay at the rates. They targeted so Max at 30 187 to seven and the Airbus rates, we've talked about and then if you could just also give us some color on that big pension.
Payments I think is in the $80 million neighborhood, Jim in fiscal 2002, So how do we think about sort of the.
The next cash flow positive year.
Yeah sure I mean, we came out the first cash flow positive year was with last year I'm very proud of that and it's so easy to forget that but theres lot of hard work that went into that so we entered this you're coming off a cash flow positive year, we hit the headwinds we're going to be cash user at least the first half of the year and we're optimistic about.
Recovering the second half, although we're not ready to give guidance at this point.
Certainly if the OEM schedules are out there we should be back to being cash positive very soon and if why 22 is not out of the question, although we're not giving guidance at this point.
Certainly there's another factor, which is the pension funding. Fortunately, we did some prefunding with the discretionary contribution last December about $50 million.
And that enable us to really not have any significant pension payments due in the next 12 months.
But after that there is a forecast and it's in our presentation in the back I think it's around $80 million of funding required all year right.
That can change as returns on assets changes and interest rates change.
But there is some cash funding headwinds coming up.
We've been planning for those it's a little higher than we originally planned for but its manageable with our financing so.
The pension the gap liability went up but the funding it's what's more important as you know so we'll continue to watch that the near term the current year, okay with the pension and OPEB funding I think it's only a total of about $7 million.
And next year.
But we're going to see returns in the market and that we're going to see interest rates improve in our favor.
But we do have 80 million of cash funding coming up following year.
Can we can still be cash positive.
Despite that with the market recovery.
Okay, So all baked and it sounds like really geared at to look for normal its fiscal 2003.
That's a fair assumption.
Okay.
Thank you guys.
Thank you.
Our next question comes from Chicago with Jefferies.
Good morning, Dan and gentlemen, thank you again for that comprehensive Daqo Super helpful.
Dan I think you flip then or.
Talked about systems.
Flat margins year on year potentially despite the expected decline I am guessing.
First half how do we think about.
Profitability of that business and the free cash flow conversions.
So there's a number of factors that enable that business to just quickly.
Overall as a company remember that we have over half of our cost is variable. It's material. So we're able to adjust quickly to downturns and maintain our percentage.
Cost of sales and Thats, what our internal targets have been we've been driving people to say maintain your cost as a percentage of your sales and you've got all these levers to pull including working with supply chain and with customers.
But we do have opportunities for pricing coming up in the future that helps.
And we also have high military content, including military spares and that business, which is helpful to maintain.
Margins through the downturn.
Okay.
That's helpful color and then I'm just a follow up on slide 15, where we talk about.
Pending this call 21 divestitures can you go over the cash puts and takes for programs such as the GP Radian 747.
Whether thats 21 or the outer years.
Sure.
So in for 21, the current year, the GE to 80 program and we just announced or agreement to exit that is 47 million of cashews as expected and we will be shipping. The list units in July and I think we'll be closing the factory in September of this year.
In terms of 74, seven or estimate for the cash to complete this year is 35 million and that's in the calendar year.
And that's it going forward in terms of.
A program.
Forward losses for fiscal 21 20 to 23.
That's right I think Theres, maybe 5 million of close out that's already accrued for the facilities for the four seven but thats. It for the programs. This year. Okay. Thank you.
Thank you.
Our next question comes from North America Goldman Sachs.
Hey, good morning, and get an order Noah.
Hi, good morning.
You mentioned pricing opportunities and being able to hold margins in both segments can you just.
Let's set out a little bit on.
Pricing works. So if you go further contractual step downs I know you mentioned some some positive pricing in the press release yesterday as well just how that works on the higher volume versus lower margin higher versus dollar volume and price increases or decreases. Thanks.
Sure many of our contracts, particularly in systems have been on long term agreements LTAC for a decade or more and some came in a loss position from prior acquisitions like GE, Smis, which is our Yakima side and so those are coming up for renewal in the next few.
Two years and we're in discussions with our customers about what's the market price for these products many of which are proprietary.
There is always an affordability mandate. So we work with customers to figure out if we can do things in terms of sourcing redesign.
But the key is to improve margins with each LT a renegotiation.
Some new contracts.
For example, the Airbus Athree hundred 20.
XLR, we produced the legacy parts.
But were.
We were awarded the new XLR parts, and we redesigned them added more functionality reduced weight and improve profitability over the legacy so sometimes even a an iteration of the design for the next Gen provides a price you reset opportunity or margin reset opportunity. So we're going to use both of those.
Expiring LTL ways as well as new bids that we win.
Look to continue to improve margins out of systems in sport.
How much of the Edwin as that then over the past years and I mean do you have you had positive pricing in aftermarket.
We have.
Combining our systems and aftermarket business, we found a lot of low hanging fruit.
I mentioned before we have these.
Hey, part 145 repair centers and many of them that were captive to OEM shops and systems, they really weren't out exploiting that capability in extending their MRO. So in Q4 part of our margin improvement and systems and support was just improving our go to market plans and the speed of.
Turns inventory turns at the repair centers within.
Integrate system so.
There are short term had turret headwinds related to commercial aftermarket, but defense continues to be strong I mentioned west Hartford, they're upgrading electronic engine controls very quickly. We did a recent press release on that so it's a balance those two offsetting.
Military offsetting commercial in the short term.
But the combination of those two businesses is going to help both.
Got it and then just a quick quick clarification does your 30% to 35% decline OE production include Max.
It does.
It does and what are the one of the nice things about Max and we've been in lockstep with Boeing as they have allowed us to produce at much higher rates than they are building their factory. So we're all very excited about yesterday's announcement, the Max has returned to production.
The the Boeing company has invested in supply chain, they're going to take.
Additional deliveries at rates that are no 15 to 20 range, which is certainly higher than what they're producing today and.
Each factory has a different inventory position, but on average will be producing with an ice what I call.
Sustaining production rate to keep our factories going and that includes interiors.
One point, we had 3000 people building blankets shipset.
At 40, Shipsets, a month sort of grade so when that rate dropped and them was paused I was obviously, a big impact, but weve reduced our staffing.
Hum.
3000 down to about 1100 that gives you a sense for.
How quickly we have jumped on the.
On the Rightsizing and we'll be efficient at that level and support boeing's needs and then as their rates tick up over the next 18 months, we'll get back to where we want to be on on volume.
Great. Thanks.
Thank you.
Our next question comes from specified Seth Seifman with JP Morgan.
Thanks very much.
Good morning, guys.
[music].
Question, just first of all real quick clarification, when you say holding margins and each of the two segments is that at the full year EBITDA App for full year fiscal 20 or more fourth quarter.
For 2000, so full year is what we're targeting.
Okay got it got it.
And then based on the.
I guess market forecasts, you gave and the mix of businesses for for systems and support it would seem like looking for something in the and the billion Billionish range of sales if those market forecasts hold a billion plus.
Okay.
Yes.
Understand the question, but we're not giving guidance at this point I think you have to look at each of the programs and make your and determination.
Going forward, we're going to see as soon as we get some clarity we're going to give guidance. We just don't have a right now.
Okay and then.
Maybe Ken.
When you thought about combining the product support and integrated systems.
This is how did your how did your eventual strategic plans for.
Try on the company plants that in terms of.
Ventral longer term strategic outcomes for triumph.
When we thought about marrying up MRO.
With that the more product oriented business.
Yes, great question and certainly there's different ways. We could have played that we could have got out of third party maintenance.
There was interested at one point and others acquiring that business. We concluded that there was upside to both businesses by combining it.
That we could do more MRO of part products that we were the OEM for.
Out of our trying products port business.
And we could expand the volume of aftermarket from the OEM side by learning how to third party business goes to market. There are hungry they very fast moving.
They operate with limited backlog, so they've got to.
What they would they kill and move.
Quickly that more direct relationships instead of.
Receiving purchase orders.
As follow on to what they built originally.
The third party maintenance team, they're out there with Fedex and GPS and Atlas and all those customers American Delta everyday so the customer relationships played into it.
Right now its its temporarily.
Increased demand and third party maintenance.
But we still believe it's the right thing to do strategically and we've combined the management teams.
And.
All the financial reporting now into one team.
Okay. Thank you very much Q.
Our next question comes from David Strauss with Barclays.
Thanks.
[music].
Good morning, one it to task about this agreement with Boeing.
Reach economical.
Production levels is that what you reflect dean.
Call out expected production declines of 30% to 35%.
So so yes, well bowling did as they came out with rate guidance and they did it on their earnings call across all their platforms. So 767 was maintained at three a month and that's good for us because we have content on both structures and systems for freighter and tanker variance.
They provided slightly lower guidance for 787.
No on the order of eight to 10.
We are not going to adopt the high end of those ranges will always suit low and then if theres upside than will benefit from that.
We got guidance from Airbus for about 40 on the narrow body, we're using a de rated number from that again for conservatism.
On the 737.
As I mentioned.
Rates between 15% 20.
Per month is what we're planning on so it is it is down to your point from.
Pre cobot.
But it's still enough for us to keep flow going through the factory and sustained lower tier suppliers. So.
And then we're still doing one month on 747 to run that out and then.
We're working with them on Triple seven and Triple Sevenx transition and I'll, let Boeing speak to there.
The details there, but overall were lockstep with them. It is lower there's no denying that it's a slower the pre covet, it's all about managing through the downturn and getting back to higher rates over time, and we're making permanent reductions in costs consistent with that demand reduction. So we can maintain the margins as.
As Sheila inquired about.
Okay and just following up on that I thought you had said Dan that the right.
Two with going or above their own internal rates is that correct.
Misinterpret that yes, well, let's say their internal rates I mean their delivery rates of aircraft out the door and that's public information you in terms of what they're shipping.
But they've made a decision to.
Not only for trial for other suppliers to trigger purchase orders that are in excess of their internal built its a phasing issue.
If if lots of suppliers went idle.
During the pause that they had at.
Puget sound factories or Charleston.
Then, there's there's restart cost and sometimes losses of critical supply and so they I think smartly said they were going to keep these buyers running at higher rates and will burn it off overtime.
Once they come up.
Okay.
Jim a question for you.
You have the.
Program closed out costs impacting cash on the first half but.
Could you give us some help on how you think kind of underlying working capital is what it's going to look like as rates come down how much about potential tailwind.
Kind of underlying working capital could be to cash flow.
Yes, so in the first half its a headwind and the reason is that we have to adjust our supply base in our peos. So theres a lag there and we're still receive material some cases in excess of what demand as from our customer, but we are aggressively adjusting that so in the second half it will become a tailwind which should offset the headwinds in the for.
Steph.
It is important because we have a lot of working capital and we're focused on managing it but it's a good point besides the close outs of the programs.
And events Liquidations, we havent working capital swing would be user in the first half of the year and looking forward to generate cash from working capital reductions in the second half.
Okay. Thanks very much.
Thank you.
Our next question comes from Ken Herbert with Canaccord.
Hi, Good morning, Janet Jim.
Good morning.
I just wanted to ask you on your.
On slide I think its site aid for your MRO activity, you've tried to sort of down 70% through at least for transports were broader activity through the.
Looks like through the first second quarter, I guess, just any sort of a full year down couple of 45% are you.
Implies some really nice sequential improvement as you go through the year are you seeing sort of quote and maybe booking activity to support the kind of sequential increase as we go through the rest of calendar calendar 20.
So first of all we give these numbers.
On our forecast in our in our fiscal year. So.
We expect to see MRO recovery start picking up in our Q3 Q4.
So thats October and on so October through March so not always not fully in the calendar year as you said, but yes. The short term commercial MRO is definitely down we've seen fewer orders and people like Delta Tech ops tons and all that are also down.
But.
We also as I mentioned, because we're not doing.
Heavy maintenance and consumables were still seeing some residual engine emo MRO work come through that was already in flow. So our factories Didnt go.
Idle, but we have had reduced staffing at some of our component and interiors plants to consistent with the short term demand. So it's for US it's mostly a first half of the year forecast and we'll update all the analyst investors, we each quarter as to how that's ticking up.
And is there a way to think about your aftermarket exposure sort of maybe engine by component or another broad categories or how should we think about that business.
Let us take that for action.
Today.
As we as we.
Canvassing all our plants my mind thrust reversers, where a leading provider so the cell parts.
For the pylons, we do a lot in that area, we do some amount of structural repair and then on the engines were doing.
Fuel pumps generators and.
Air cycle equipment. So we are we have a lot of engine consumable parts that are expensive to overhaul.
Lessen the I'll call it filters anda.
Clips and brackets type part more of the parts of the cost tens of thousands overall rather than.
Hundreds or thousands.
So we did have a lot of engine content I think we can come back on a future call and maybe break it down by part of the aircraft.
But I would say, it's weighted towards engines and the cells followed by structures and then.
Other systems on the aircraft like actuators.
Hydraulics.
Great. Thank you very much.
Our next question comes from kind of on the run with Cowen.
Thank you very much.
So you indicated that the.
Youre going to sell the GE 650, 700 wing business to Gulfstream and that will resolve issues and secure price hikes on work and then help you reduce debt inventory so what's the cash impact of that.
And when should we expect.
Okay.
So so we're going to.
We reached agreement with them in principle senior levels and now they're just doing their due diligence to complete the inventory true up between triumph.
And in Gulfstream, we expect that to close early in fiscal 21, hopefully in the first quarter.
Theres so both the cash benefit and an inventory relief benefit I don't think we're going to disclose it on todays call the dollar amounts.
We're going to wait till we complete the agreement with them and all of the.
The verification of the inventory levels, but then we will provide follow up information on it but it's a good deal for both parties.
You all know we used to have two factories that built 650 wing in Nashville, and Tulsa, and we transition both of those back to Savannah.
Then.
Secondly, we kept us supply chain contract and design services and warranty liabilities.
And in the second transaction, we're doing now.
They'll take those up and thats consistent with gold streams.
Long term supply chain strategy and is consistent with where triumphs going.
Our value added was lower now that we didnt produced the wing.
It was a.
Possible program for us, but we think in the in the long term it's better to.
Reposition that with Gulfstream and use that those proceeds for our.
Our corporate uses.
Great and so you've done a good job was kind of getting better leader programs, maybe tell us something remaining structures business I guess, you're going to keep the interiors.
The rest what is the rest that you're still going to sell and what kind of interesting because on.
You know valuations and those kind of businesses.
So let me answer that by saying, what's left and I'm not going to disclose side by side what were.
Taking a market, but I will.
Just describe whats left so we've got to close out a pulse as Jim mentioned RG to 80 that will that will be shutdown, that's not going to be divested.
We have our Stewart, Florida plant makes a 767 large structures are red Oak, Texas plant, which makes both composites and military structures.
The Arlington headquarters, where we do design and supply chain support for all of our structures.
And then we've got two legacy 747 plants and Grand Prix, Texas and Hawthorne those two will be shutdown as we finish sub 47, and we have to composites manufacturing facilities in Georgia.
And in Thailand, So a subset of those plants are being marketed through Lazard as mentioned there they are fairly.
Far along in the process.
And we expect to have updates in our in our Q1 call on the progress there, but in terms of interest what we've seen is because these are strategic assets that only come up for sale. Maybe every 10 years people look beyond the short term impact of Covance and if the rates are are being maintained.
You're making a long term bet on either access to use market or particular set of technologies.
We're still having strong response to our.
Our solicitation, so we're not seeing cobot.
Put M&A on hold.
Is it fair to say I mean, given your during the T. seven on the future verticals programs that red Oak in Arlington, probably are keepers as well as interiors and it's really steward and the two composite plants, whom are more likely to be.
To be on the market.
It's probably best if I just don't be specific but as these transactions are completed we'll let everybody know and hopefully our track record as I mentioned in the press release yesterday of getting these things done provide some confidence to investors that weekend pay down debt.
And repositioned towards our systems and aftermarket.
And then.
The Boeing advances I think you paid down 40 melia.
What did you have.
Is it like to try the left to go at the end of the fiscal year 40 of which gets paid in.
In fiscal 2000, along.
That's correct.
Okay, and then you know I used to be the went up 22, and 23 million fair amount to go.
To get back to two two bonds.
Question I mean, if you got to go up to 80 million fiscal 22, and then presumably one three the kind of.
Pension contributions of trees.
Wait I mean.
Is there no basically a lot to cash flow pressure. So it's hard to be significant generator in 20 to 23.
So as we can get a clear picture 21 will be able to talk more about 20 to 23 I think you know the big drivers. The pension is one of them events liquidations, but also the increase in the margins when volume comes back if we're able to maintain margins with volume going down.
We're going to have a nice tailwind when volume comes back and we have a stronger portfolio and will be executing on the pricing opportunities that between there and all the cost reductions. We're doing now we're going to hold onto those moneys as we can as volume comes back. So we're optimistic about our ability to get back to cash flow positive just like we were last year.
Got it and so you said that 80 million insulin mechanisms for 70 to 80, and then working capital all sorts of negative those being merged.
Which would suggest no pretty heavy outflow in the first half.
And body.
Turning positive in the second half.
So from what you're saying and full year is more likely still to be.
I think thats what remains to be seen we do see improvements from all the indicators Dan.
Laid out, but we don't know to what extent, we're going to see that imprimis second to I think the good the good news there guys that we.
We see the end of the cash burn you another analyst on this call and certainly our investors have been patient and watching us unwind structures business, which really had a number of programs that were coming down in rate and with high fixed cost 747.
Being the number one and then to 80, which has always been loss, making program. When it came over with 650. So to get these done this year is a big deal.
Allows us to to move forward and 22 and beyond without those that.
Those stones in our sample.
Thank you are last question comes from Michael Ciarmoli with Suntrust.
Hey, good morning, guys. Thanks for taking the questions.
I guess danner, Jim just looking at sort of the end markets the optimism for sure.
Second half recovery I mean, certainly looks like it's going to be a multi year.
Downturn for sure I guess aftermarket MRO, usually washes out over a four to six six quarter period with year over year declines I mean, you're talking about you know I guess, you've got purchase orders that are higher than both build rates pulling forward some borders and MRO.
No.
How do we reconcile even maybe.
Kind of inventory in the channel it would seem like if you're producing a head on Max you know you might have some headwinds in future periods. If these rates China.
Stabilizer or don't increase just just trying to get a sense on.
To be optimism going to recovery I mean, I guess, it's more we've hit bottom here in April and May So we'll come up off of this but but just trying to get a sense.
Pulling forward and introducing ahead of schedule, how that might impact future periods.
Sure. So first of all we're not assuming.
A big.
Great recovery in the second half of the year, we're using de rated versions of what the Oems have put out we don't ever get ahead of them.
Except on the Max where I've described the they've agreed to sustain economical rate so in our and our forecast. If you look at our second half production rates, there's still quite modest, but they still but they support our financial.
Requirements for the company and when we provide guidance I think that will be more clear.
The MRO demand is harder to predict.
That's why we're pivoting to military wherever we can.
And the announcements of late I think reinforce that we do have opportunities for.
Helicopter upgrades engine upgrades hydraulic controls those are all still flowing through.
No I flown twice recently and on commercial aircraft.
And the first time I flew in April Theres, only five of us on the plug and so I had a lot of concern about what does this recovery look like last time I flew.
Flight was about two thirds fall and.
And the airport was about half full.
Versus it goes down the first on its very anecdotal, but what I, what I've seen so far as people are getting more comfortable.
I shared some metrics on aircraft coming out of storage.
Utilization factors.
We're all watching the same data so Michael I think as we update our forecast.
We will reflect the aviation recovery and provide guidance to the.
Investors and analyst around that but we're not assuming a call today a steep recovery the second half the year, we're maintaining conservative forecast and Thats still enough to do what we need to do.
What about what about your customers and how are you framing that risk I mean in your and your slide deck you call out Latam Airlines for Athree 20 engine panels I mean, they just filed for bankruptcy certainly I think we're on the front end of airline bankruptcies, how does how does that factor into the outlook or how you guys handicap.
Financially strange customers.
So we're watching both suppliers and customers their financial health certainly the carriers acts support to the airlines that helped a lot now we're listening for feedback from Boeing on how that's translating into aircraft acceptance.
And or cancellations.
We have a little bit of exposure to Asian Airlines in terms of accounts.
Receivables, but it's in the low single digit millions kind of exposure so.
As as those suppliers struggle.
We may see some modest modest it's there but.
Overall.
I mentioned, we're tracking to suppliers as well we started out with a thousand critical suppliers.
The peak 100 of them had we're on hold for the cover 90 that numbers down to 10. So the recovery the supply chain is coming along and we haven't seen bankruptcies, yet that would give us exposure. There. So we feel good about supply chain, although we're watching it very closely on the customer side, it's still too early I think we'll.
No more in September October timeframe.
Got it helpful. Thanks, guys.
Thank you.
And ladies and gentleman has all the comedy of QNX today and this also concludes todays conference call. There's a replay scheduled to begin today at 11 30 am Eastern standard time and went through June 4th at 11, 59, P.M. standard time, you can access the replay by dialing one 805 567 and entering access code five.
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