Q2 2021 Triumph Group Inc Earnings Call

[music].

Ladies and gentlemen, thank you for standing by welcome to the track Group Conference call to discuss our second quarter fiscal year 2021 results. This call is being carried live.

Sales on military and cargo platforms and tight working capital management.

Our operating margins and EBITDA stabilized in the quarter and we expect both to improve through the balance of the year.

We made tangible progress in Q2 to position the company towards its future state.

Trends in air traffic and MRO demand indicate the aviation recovery is progressing at a positive if measured pace.

OEM production rates remain stable and repair receipts are improving month over month.

Combined with these macro trends our actions to reduce cash use and restore margins generate positive momentum into the second half of our year and give us enhanced confidence we will achieve our full year targets.

After managing through the severe commercial downturn in our Q1, we delivered quarter over quarter improvement in our core operations.

Given by favorable trends and systems and supports military helicopters and engine content and strengthening Airbus narrow body production rates.

Triumphs second quarter results are summarized on slide three let me walk you through the highlights first based on the consistency of our build rates and improving aftermarket order book commercial aerospace demand appears to have stabilized in the starting to recover.

Second our Q2 results, while obviously down from the prior year are either in line with or above our expectations and keep us on track to meet our full year objectives.

Third we are yielding greater efficiencies from the triumph operating system across all levels of the enterprise with an emphasis on working capital reduction.

Fourth we remain on track with the last of our structures programs transitions and factory exits, while continuing to complete our planned divestitures.

And last.

Our recent refinancing transaction asset sales and pension related actions support our return to cash flow generation.

We exited Q2 on an upward swing using less cash with a line of sight to positive free cash flow in Q4 and are committed to following through in the second half of the year consistent with our prior guidance.

Now, let me touch on each of the drivers for the second quarter as outlined on slide five.

Ill recap the Tailwinds and headwinds we encountered thankfully most of the headwinds in Q2 are nonrecurring.

Cobot related impacts in Q2 included OEM production rate reductions from prior periods.

Excess commercial inventory as we align material receipts with demand.

Chris related clean ups and facility exit costs.

Our team acted aggressively to reduce footprint and cost to the exit of our Arlington, Tulsa and Atlanta facilities overall, we reduced SGN a expenses by $10 million in the quarter.

Q2 cash use on sunsetting programs was heavy but is on track to complete this fiscal year.

Our structures team delivered the final gtwenty components from our Tulsa facility. This quarter, we have less than four ship sets of 747 components remaining to deliver.

In Q2, we used $47 million through these combined causes as demonstrated from Q1 to Q2, we expect cash used to decrease in our third quarter with positive cash flow generation in the fourth quarter.

In addition, during the quarter, we successfully completed the sale of the G 650 wing Kitting and engineering services program to Gulfstream.

The sale of our two composite structures businesses.

Remains on track to close in Q3 as part of our game plan to exit all remaining cash consuming structures programs this fiscal year.

We plan to exit fiscal 21 in our future stay configuration as a pure play systems and support provider.

Military and commercial customers.

I'll now comment on the favorable tailwinds in Q2 and year to date.

Military sales increased in both systems and support and aerospace structures, helping to offset the commercial declines for example, our stablex in UK actuation business has seen military sales more than doubled year over year growing from 14% to 32% on a path towards 40% as they replace loss commercial volume.

Overall military content comprises 52% of the backlog in systems and support.

Our ability to pivot to freighter and military content as a reminder of how valuable triumphs backlog diversity is especially as we continue to work through the commercial downturn.

As mentioned.

We saw repair receipt starting to pick up month over month led by aviation recovery in Asia.

We are recording higher receipts across eight of our 10 MRO repair centers on a weekly basis include.

Including net increases at those sites in excess of 38% compared to Q1.

As expected we benefited from our early and aggressive austerity measures.

Over these in detail in a moment.

Collectively these initiatives further de risk our balance sheet and support improved profitability cash generation in fiscal 22 and beyond.

I want to characterize how the overall market trends are effecting trial slide six references data over the past quarter span.

Global logistics and freight operators are preparing for the greatest product rollout in history.

One, which will strain freighter fleets and drive utilization rates to record levels.

Quarter recording winds on 70 work packages amounting to $381 million in value with a 70% win rate by dollar value.

Notably triumphed factory shipments in the quarter with 35% military.

TSS reportable backlog remained stable at $1.25 billion, indicating that further increases in our military mix or on the horizon.

Terry MRO shipments were up 12% from Q1.

Are summarized on slide eight our.

Our ability to win work in an increasingly competitive market reflects well on our capabilities and we will be key to growing topline after years of shedding non-core programs insights.

With that Jim will now take us through more results on the quarter gym.

Thanks, Dan and good morning, everyone our.

Our second quarter results were driven by sequential growth with sales in our court systems will support business increases.

Increases in the military and market and commercial sales to Airbus drove the improvement.

Margins improved across the enterprise as we continued exiting lossmaking programs and realizing the benefits are cost reduction actions.

Consequently, our second quarter results met or exceeded our plan and we are on track to achieve our full your objectives.

Production Bill rates remain stable and aftermarket demand is improving.

The demand profile, we're seeing as in the range of what we had planned and we anticipate continued improvement in cash flow and margins as the year progresses.

I will discuss our consolidated in business unit performance on adjusted basis. So please see our press release and supplemental slides.

For the explanation of our adjustments.

On slide nine you'll find our consolidated results for the quarter.

Planned reductions from some setting in transitioning programs in our structure segment drove or decreased sales compared to last year.

Revenue declined organically in both segments due to production rate decreases and commercial programs and aftermarket demand, partially offset by an increase in military revenue.

Margin would have been slightly higher than last year.

These cost reduction actions will benefit margins and cash flow in fiscal 2021 and beyond.

Turning to slide 12 as discussed last quarter, we are experiencing a temporary increase in our working capital as we adjust our supply chain to the new lower demand.

Pension plan to preferred method, which is expected to increase our income about $6 million this year.

Based on anticipated aircraft production rates and including the impacts of pending program completions for FY 21, we continue to expect revenue to be approximately one $8 billion to $1.9 billion.

We expect free cashews for the full year to be moderately higher than the first half with less cash use in Q3 as compared to Q too and positive cash flow in the fourth quarter.

Our backlog is down slightly from Q1, but stable and more balanced with military content.

This is an important strength in today's operating environment. It makes our revenue more stable and predictable.

Our focus on our operating system, coupled with our cost reduction actions improve our competitiveness and add value for our customers, especially with the intellectual property and our core businesses.

We forecast strong liquidity and continue to evaluate additional actions to enhance our cash position and capital structure.

And trough will come through this crisis as a stronger company Kevin.

Kevin We're now happy to take any questions.

At this time be off through the company would like to open the floor for any questions. You may have we ask that you limit yourself to one question and one follow up to give everyone the opportunity to participate.

If you are you guys using a speakerphone please pick up the handset before pressing any numbers should you have a question. Please press star one on your push button phone should you wish to withdraw your question. Please press the pound key.

Our first question comes from Sheila Kahyaoglu with Jefferies.

Hi, Good morning, Dan and John.

Good morning.

Thank you.

You are.

Free cash flow moving parts.

In terms of lost contracts and you know the 280.

Is behind US now having shipped last chipset within the past quarter. So it's really just four seven that's left there you've been with US This whole journey and you can remember back to the Bombardier program. The E. Two program.

The <unk> and now 747, and <unk> 50, eventually as well and.

We now can see it at the end of the line on these programs and the cashew. So we're we feel good about where we are we got that as a deterministic outcome at this point there's not.

Uncertainty around the closeout a 747 Scott.

Hopefully turning a corner okay. Thanks, guys. Thank you. Thank you.

Our next question comes from fresh start soon with J P. Morgan.

Good morning.

Okay. So <unk>.

Jim mentioned, we shipped the last few to empty. So that program was behind US now in terms of the losses.

And it's only the 747 run out that remains.

Okay, great. Thank you.

Okay.

Our next question comes from Ken Herbert with <unk>.

Hi, good morning.

Okay. Okay. That's helpful. As you think about.

The pension and some of the assets sales.

Less so in structures, we don't do a lot of 77 structures and the the rate that Boeing has talked about a six month next year and will follow their trend and.

The importance of the military work that Jim described as an offset.

What we're saying strong interest from both engine MRO engine Oems as well as air framers on the on the defense side. So.

The diversity of our backlog and platform participation helps us offset any one program.

And 787 is also a program where we are.

Doing some amount of contract renegotiation with Boeing to make sure we're earning a fair return for the products that we produce that will also benefit.

Even as volumes drop.

So, but the 787 second I guess biggest programming structures backlog, but it's not a big revenue contributor is that is that the message Sir.

I think I'm messages that there's so many different programs that even the second biggest one doesn't have a major impact on the slab. This you shouldn't cross or talk programs.

Also do thrust reversers on programs like C 17.

Exchangers, while the Efifteen.

84% so as those.

The services drive towards availability, we're benefiting from those expenditures on freighters.

The demand is very high and.

Seeing increases and then plan for that and for the holidays that are.

333 50.

So there is some about a rebalancing between the Oems and then having.

Having right size the business now to the expected demand as programs recover like the 737 I mentioned earlier.

We'll do it from a lower cost basis.

And I think ultimately we will be more profitable than we were pre covid for a given level of production.

And then the second is defense when it started this journey here triumph, we were 20% defense.

And that number is now about 33% and we expect it to continue to grow as.

As we exit legacy programs like 747.

Exit the G 650, the Gulf stream and a quarter. So the rebalancing of the portfolio is part of it and then the recovery of commercial when it comes.

Will both be tailwind trial.

Thank you that's helpful.

The facilities and close out the program.

That's the last of our loss, making programs at GE to Eddie just completed.

Last quarter, we have two large plants that produce 747 structures typically that.

The cylindrical.

Cylindrical sections of the fuselage major panels.

Being it means mid teens EBITDA margin is a reasonable goal.

Great. Thanks, guys. Thank.

Thank you the Q.

Our next question comes from Scott Gerber Kyle.

Yeah. This is to Cai von Rumohr from Cowen.

So you mentioned you know you have positive cash flow in the second half Oh excuse me, yes, so but.

Can you talk about next year at one point you were going to you know repay borrowing $20 million per quarter. It's 10 million. This quarter. If you go back to 20 million next year can you be cash positive next year.

Thanks, Todd as Jim on Yeah.

Of course, we use 205 million of cash in the first quarter this year.

This concludes trimesta second quarter fiscal year 2021 earnings call.

This call also has a replay that will be available today at 11 30 M.

Eastern standard time and run through 13th at 11 59 Eastern standard time, you can access the replay by dialing one 800 585, Athree six seven and entering access code 5669, 003 again to access the replay you can dial one 800, 505, athree six seven and enter and exit.

Code 56692 years or three again. This concludes today's conference call you may all disconnect and have a wonderful day.