Q3 2021 Triumph Group Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by the Triumph Group conference call to discuss our third quarter fiscal year 2021 results. This call is being carried live on the Internet.
There's also a slide presentation included with the audio portion of the webcast.
The show your pop up blocker is disabled if you're having trouble of you in the slide presentation. You are currently in a listen only mode there'll be a question and answer session plumbed introductory comments by management.
On behalf of the company I would like to read the following statement certain statements on this call constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 East.
These forward looking statements involve known and unknown risks uncertainties and other factors, which may cause <unk> actual results performance or achievements to be materially different from when you expected future results performance or achievements expressed or implied in the forward looking statements.
Please note that the company's reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release, which can be found on their website at www Dot Triumph group Dot Com. In addition, please note that this call is property of Triumph Group, Inc. And may not be recorded transcribed or rebroadcast without the splitting the explicit written approval at this time I'd like to introduce Daniel J Crowley the company's press.
And Chief Executive Officer, and James F. Mccabe Junior Senior Vice President and Chief Financial Officer of Triumph Group, Inc. Go ahead, Mr. Crowley.
Thank you, Kevin and welcome everyone to Triumph Q3 earnings call.
Hope, you're all safe and well.
Today, we reported our third quarter results for fiscal year 2021 true.
And to achieve positive free cash flow due to our progress in improving profitability and managing working capital across all levels of the organization.
As our pivot to military sales accelerates, we delivered sequential improvement in our operating margins and EBITDA, we expect to build on that through the fourth quarter.
The commercial aviation recovery is progressing, albeit slowly.
Our customer saw higher freighter utilization and increasing levels of air traffic, which has resulted in increasing MRO demand for the 12 repair centers across trials.
After months of rate cuts.
The and production of stabilized with commercial narrow body volume is expected to increase at both Boeing and Airbus over the next year offsetting commercial wide body volume declines.
When combined with these favorable macro trends our actions to improve our cash flow and restore margins generate positive momentum in.
And position trying to close out our fiscal year on an upswing as we did last year pre COVID-19.
After managing through the commercial downturn in the first half we delivered quarter over quarter improvements in our core operations driven by favorable trends in systems and support military helicopter and engine content and strengthen the Airbus narrow body production rates.
This is an example of the hidden value, we see in triumph diverse capabilities.
Brian supply of flight critical components, usually based on our design and under sole source contracts that are replaced multiple times over the life of an aircraft.
With the substantial aftermarket tail.
Despite pressures on commercial wide body aircraft, we continue to see modest growth in backlog and systems and support as orders on commercial narrow body and military platforms expand.
Overall triumph third quarter results are either in line with for.
For above our expectations.
Keeping us on track to meet our full year objectives.
Can you walk you through some of the highlights the summarized on slide three for.
First we generated positive free cash flow through.
Through tight working capital management.
Margins improved in both business units as we continue to drive operational improvement and enhanced the quality of our backlog.
Third with the exit of our Hawthorne California's of 747 factory and planned exit of the Grand Prairie 747 plant in June.
We continue to progress towards our future state.
Last we've maintained nearly <unk> 5 billion in liquidity, while contributing $40 million in stock to our pension plan, which lowers future cash obligations.
Together with the pending divestitures we.
We of the liquidity to fund the company through the historic downturn.
We now have a line of sight to breakeven free cash flow in Q4, after all debt and advance repayments.
And expect cash used in operations of free cash used for the full fiscal year to be on par or moderately better than current year to date levels.
Our third quarter results of our story of progress on two parallel tracks.
First within our core systems and support business, we continued to improve operations as evidenced through the second consecutive quarter of sales growth and improving operating margins.
Systems and support reset capacity to match lower levels of production with improved efficiencies and enhanced margins on programs that were previously challenged and of our underperforming.
For example, our landing gear actuation business in Yakima, Washington, which supports of the 737 Max amongst other platforms improvements Q3 operating income year over year by 18% through productivity gains and favorable contract renegotiations.
As the Max rates recover our lower cost basis will benefit margins.
The other indication of the hidden value in our proprietary components across systems and support.
On the second track our structures business continues to achieve success in completing an exiting legacy programs.
We finally achieved breakeven cash from the completion of the <unk> and are within two quarters of completing our obligations on the 747 eight program.
Now, let me touch on each of the drivers for the third quarter as outlined on slide five.
The military sales now comprise 56% of our volume and systems and support.
Helping to offset the impacts of the commercial aerospace market headwinds mill.
The military platforms, such as the V 22, CH, 47% and <unk> contributed to the sequential sales growth in our core systems and support business unit driving of 33% increase to our military sales year over year.
By shedding the legacy cash consuming programs such as the <unk> hundred 80, and ramping down our 737 content. Our margin profile has improved overall the structures, we eliminated all red programs, who will be green across the board by March.
Structures was modestly profitable in Q3 and absent program shutdowns in advance repayments was cash positive.
We expect to continue to improve quarter over quarter of drive consistency in future periods Q.
Q3 cash use on sunsetting programs was lower than expected in part due to the push out of the 747 by one quarter.
We have less than three ship sets remaining to deliver on the program.
In Q3, we generated over $30 million in free cash flow due to working capital management and improving margins.
We expect Q4 cash to be breakeven to positive based on the actions we've taken today.
We remain on track to start fiscal year 2022, and our future state configuration is the largely pure play systems and support provider the.
For the military and commercial customers with interior structures capabilities as well.
On slide six.
Wanted to drill deeper into the sources of triumph hidden value.
Listed here are the products and services that we provide.
Unseen to the eye underneath the skin of the fuselage that are so critical.
To the safety and efficiency of the aircraft.
Whether it's cockpit controls actuators.
Of the nose wheel steering.
Landing gear.
Fuel pumps hydraulics for the services, we provide for wheels and brakes in the sales and engine accessories. The.
These products and services are important to the customers and to triumph financials and they represent the future of the company.
I'd like now to share my perspectives on the path to recovery for the commercial aviation industry as summarized on slide seven.
Aviation industry metrics remained largely stable numbers of flights TSA throughput load factors and utilization of all remained stable on a global basis. However, like in many industries of the effective rollout and distribution of the vaccine and containment of new variance is key to unlocking the aviation industry recovery.
Like the rest of you I am pleased to see the progress that's being made and will continue to closely watch the ongoing efforts.
Industry wide in 2020 723 commercial transport aircraft were delivered.
In the quarter Airbus delivered 225 aircraft while Boeing.
Recommence deliveries of the 737 Max and.
In December of 112 aircraft were delivered to customers ending the year on a high note.
OEM production rates of stabilized.
And order adjustments have been flow down to trial.
Canada, The U S Europe, and China are all making great progress on certifying the Max to return to service.
Three quarters into this crisis, we're able to look back and recall the unprecedented impact to the industry, while recognizing science of recovery today.
Slide eight depicts the early impact of <unk> core systems business in Q1 of those orders decline due to cancellations and reschedule.
At that time, Q1 book to Bill dropped to <unk>, five driving backlog down 14%.
Undeterred and coming off of good fiscal year 'twenty.
<unk> continued to execute on our strategic objectives pivoting to military and freighter end markets and executing on our cost control measures.
Despite reductions in commercial traffic and OEM rate adjustments.
Military sales were up more than 30%.
Year to day sales are down 25% overall, but in Q3 backlog once again began to rise as book to Bill for Q3 was 1.0 to.
Today systems and support backlog is 55% military.
And looking forward the systems and support pipeline of 73% military reflecting our continued focus in this area.
Turning to slide nine triumph closed $400 million of new wins for the quarter for cross Oems tier ones and carriers.
Slide 10 touches on three key wins, including the renegotiation and extension of several of our largest commercial transport contracts.
The CH 50, <unk> helicopter award.
And a host of MRO awards, driven by triumph of IP.
The CH 53, K is of key platform for triumph with IP driven content in excess of $2 million per ship set.
Note that also Q3 marked the first time since the onset of the crisis, the triumph sales and repairs overhauls and spares.
Grew quarter over quarter.
In summary, Q3 was a good quarter and the actions we have taken through the unprecedented crisis have positioned us for a return to profitable growth as we look forward to Q4 in the new fiscal year.
With that Jim will now take us through more results for the quarter Jim.
Thanks, Dan and good morning, everyone.
Nine months ago as the pandemic persists across the globe, we had not yet found and its impact on our revenue and operations.
Despite that uncertainty we provided full year sales guidance and continue to hold that guidance through today.
We reacted quickly to reduce our cost of working capital for the lower demand and to secure our liquidity.
We amended our revolver to maintain covenant compliance, we've renegotiated customer advance repayments and then we raised $700 million of bond offering to pay off our revolving credit facility, which eliminated our maintenance covenants and put substantial cash on the balance sheet to enhance the secure our financial flexibility.
In the first half of the year, we used about $250 million of cash as we were reducing our expenses and honoring our inside lead time purchase commitments will be adjusted purchase orders to the reduced customer demand.
Now in the third quarter price is cash positive again sooner than we had planned.
We exceeded our third quarter cash flow and earnings plans and are on track to achieve our full year objectives.
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 11, you'll find our consolidated results for the quarter.
Planned reductions from sunsetting of transitioning programs and our structures segment drove the decrease sales compared to last year.
Despite the headwinds adjusted operating income was $38 million this quarter and our adjusted operating margin was 9% up sequentially from $21 million and 4% last quarter.
We're gradually improving profitability on an adjusted basis quarter over quarter.
With respect to the segment results on Slide 12, net sales in our systems and support segment were up 4% sequentially, including a 10% increase in sales on Airbus commercial platforms.
This segment sales were about 55% military this quarter up from only 31% in the prior year quarter.
Adjusted operating margin for systems and support was 16, 6%, which is comparable to last year and up sequentially over the last quarter.
The $24 million of impairment of Rotable inventory related to customer fleet retirements, and our $1 million of restructuring costs impacted the segment's margins this quarter by approximately 935 basis points.
Summarized on slide 13.
Third quarter organic net sales for our aerospace structures segment were down as anticipated due to planned sunsetting and transitioning programs as well as declines in commercial programs.
Aerospace structures achieved three consecutive quarters of favorable cumulative catch ups due to strong performance and effective program Closeouts.
This group's actions to aggressively reduce costs result in $3 million of restructuring costs in the quarter.
Excluding those costs operating margin was consistent with last year at 5%.
The only loss program of significance left of the 737, which were focused on closing out as efficiently as possible.
Production is ending in about six months and then we will close and clean up the lease facilities.
Turning to slide 14 as discussed in prior quarters and the first half of the year, we experienced the temporary increase in our working capital as we adjusted our supply chain to the new lower demand.
Our $38 million of cash flow in the third quarter was better than planned and driven by a net decrease in working capital.
Q3 cash flow includes $10 million of advance repayments.
And we of approximately $180 million of advances outstanding to be liquidated over the next few years.
Restructuring costs were $4 million in the quarter and $33 million year to date.
The <unk> hundred 80, and seven for seven programs were breakeven in the third quarter and of used $50 million year to date.
Completion of aerospace structures sunsetting programs, primarily seven for seven is expected to use 20% to $25 million in the fourth quarter and an additional $50 million in FY 'twenty two.
Capital expenditures were $8 million in the quarter, including upgrading equipment in our core systems and support segment.
We remain focused on aggressively managing our cash and liquidity, we anticipate being breakeven to slightly cash flow positive in Q4.
On slide 15 is the summary of our net debt and liquidity.
Our net debt at the end of the quarter was approximately $1 6 billion.
Our combined cash and availability was about $489 million.
In the quarter, we contributed $40 million of stock to our defined benefit pension plan, creating of funding credit towards the FY 'twenty two required contributions, resulting in an estimated $18 million of FY 'twenty two cash funding required.
We forecast to have ample liquidity in before any further liquidity enhancing actions.
SG&A expense this quarter is 26% lower than last year, reflecting our continued cost reduction initiatives.
We also have an excess of $300 million of deferred tax assets that continue to create value through reducing cash taxes.
Based on anticipated aircraft production rates and including the impacts of pending program completions for FY 'twenty. One we continue to expect revenue to be approximately one eight to $1 9 billion.
We expect free cash use for the full year to be on par with our moderately better than the nine months ended Q3.
With breakeven to positive free cash flow in the fourth quarter.
Our backlog is up slightly and our core systems and support segment and more balanced with higher military content.
<unk>.
Our focus on our operating system, coupled with our cost reduction actions improves our competitiveness and adds value for our customers.
We are forecasting strong liquidity and continue to evaluate additional actions to further enhance our liquidity and our capital structure.
The measures we are taking to managing this downturn are making us the stronger and more competitive company moving forward.
Now I'll turn the call back to Dan Dan.
Thanks, Jim in summary, we maintained momentum through Q3 by generating positive free cash flow and we remain on track to achieve our full year objectives.
The stability in OEM production rates with.
With early signs of recovery in MRO demand.
It gives us confidence the worst of the pandemic is behind us.
Cost reduction actions and the exit of loss, making programs the led to improving margins across the enterprise.
We continue to forecast quarter over quarter growth in systems to support and.
And further recovery in margins.
As we exit non core operations and move to our future state the hidden value of our core will become more evident as.
As we drive revenue growth margin expansion and sustainable cash flow generation and enhance our win rate.
This is something you'll hear me talk about in future quarters.
Our balance sheet and portfolio transactions enhanced our liquidity and bridges us to the other side of the pandemic the.
The reduced market volatility gives us confidence we can be more predictable in our cash generation.
The uncertainty remains we are committed to continuing to improve profitability and cash flow as we become a more predictable business.
The triumph team has repeatedly overcome challenges and.
And got the job done through restructuring contract renegotiations portfolio reshaping refinancing and now through managing through the pandemic.
Fortunately, we ended the fiscal year with solid momentum from which to build and that's exactly what we've done and I am confident triumph will come through this crisis as a stronger company.
Kevin We're now happy to take any questions.
At this time the option of the company would like to open the forum to 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 youre using a speakerphone. Please pick up the handset before pressing any numbers should you of a question. Please press star one on your push-button firm.
Should you wish to withdraw your question. Please press the pound key.
<unk> will be taken of the order receipts. Please standby for our first question.
The first question comes from Robert Spingarn with Credit Suisse.
Hi, good morning.
Good morning.
So so Dan.
For the high level, when we think about the structures business and the wind down there could you just refresh US you said the 747 I guess is the only loss, making program that you still need to exit is everything else in there.
Non lossmaking in the keeper at this point, how do we think about where this business goes from here.
That's right we've exited the programs that werent contributing value the.
Bombardier Global 7500, the <unk> hundred 80 of the G 650 of the Embraer E. Two except for a small sub contract and now seven for seven seven for seven made money in years past when the rate was seven a month.
But.
Our responsibility has been the wind that down it's now at roughly 0.5 per month and the two large factories that support as mentioned in Los Angeles that plants closed and we'll close the one of Grand Prairie. So what remains in structures, whether it's the V 22, <unk> or the <unk> seven a trainer for.
For the work that we do for our Gulfstream on the <unk> hundred 600 for the Pratt and Whitney.
F 35 engine Ducks are all favorable contracts that will add value over time.
I see and then just on the military side I think you've talked about military sales being up 37% in the quarter.
The stable backlog so.
Is there any sales pull forward going on there is Dod tries to protect its supply chain and if so does that create a pressure point to growth in 'twenty, two or am I reading that wrong.
Theres been a acceleration of cash payments from the Dod the tier one price and that was it at the Dod's directive they flowed money down so payment terms would improve to let's say 10 days of <unk>.
For <unk> in particular has been helpful in programs like the global Hawk and the <unk>.
But we've not seen sales pull ahead of what we've seen as volume increase.
And we're well positioned on a number of upgrade programs helicopter engine upgrade programs as an example, and so that money, which has been in the pipeline program by the Dod for reliability improvements to the to the fleet is now hitting triumph. So I don't see it as a pull ahead so much as.
For the ramp up as budgets of.
Flow down to suppliers.
Just quickly with the F 15, and F 16 coming back into production.
Production is there anything that debt.
You have there in terms of content that we should be focused on.
Yes, we do a lot of content on the F 15 legacy and the <unk> share of the configuration is areas that we support on the F 16 I mentioned.
Page nine of the deck that Theres, an ISR pod that we're supporting with Collins.
And there are some.
Re competes they are running on the F 16.
Under sub systems like landing gear that we're looking at so we think we will get more content out of that but as I mentioned before it's really about the diversity of our platform for them.
So any any one program goes up or down were somewhat buffered from and we've had good engagement across both the tier ones and the tier twos, such as calling from safran and as they integrate and upgrade.
Systems, we get content for them and.
Honeywell as well I should've mentioned of Honeywell, they're really good customer.
Okay. Thank you Dan.
Okay.
Our next question comes from Cai von <unk> with Cowen.
Yes. Thank you very much so I think you mentioned somewhere in your release about.
The sort of having some extended contracts or new contracts on existing platforms with Boeing can you comment on those how far out to day go and is the pricing acceptable in terms of making money and maybe a little more generous than it's been in the past.
It turns out that number of our long term agreements that were signed.
Seven to 10 years ago are coming up for renewal in multiple businesses.
And multiple customers not just Boeing.
And so what typically happens is the Oems look out one to two years in advance of those LTA is expiring in the engage suppliers like triumph and they renegotiate and we may have been on a.
Price step down agreement under the prior LTA, but.
If the volume should changed or raw material cost of gone up.
For some assumption related to <unk>.
Commercial.
Versus military of the mix has changed and we will factor that in our pricing and so we have received favorable pricing where those lta's reset.
And they typically are for anywhere from five to seven years extended into the future and so far we have not lost any work.
Byproduct of the LTA renewal.
Terrific. Thank you very much and could you update us on your efforts to.
To sell Red Oak and Stuart.
So we've been working with.
Investment banks for better part of six months now and we have interested parties in both facilities.
Can't comment on the state of negotiation with those parties, but what I'll say is that we've not seen any.
Degradation in interest and our expectation is that we will make announcements in due course.
Once those have been inked one thing Thats true of these these agreements as they are fairly complicated you've got.
Asset purchase agreements sales agreements.
Transitional support agreements so it's mostly around the.
The work of finalizing those documents before they're either announced or close Jim anything you'd like to add yes, I think that the important thing to remember too is that the loss programs have been addressed there. So really it's just the 737 months left we have the stable to growing business.
But we're still working the strategic plan the continuing to address this non core assets.
And I'll comment that the steward in particular has benefited as the 767 freighter in tanker of provider of the.
The large win carries restructure with favorable cash flow and margin. So it's not a business that we're anxious to to unload and red oak with the with the <unk> got a good future ahead.
Terrific. Thank you very much.
Thank you our next group.
Our next question comes from Myles Walton with UBS.
Thanks. Good morning, I was wondering if maybe you could touch on on the.
The cash flow working capital, obviously better the.
Lossmaking programs, obviously slightly better than your full year projection of previously as well.
I am curious as you look to 'twenty two.
You mentioned of $180 million of customer advances Tilda runoffs.
What kind of headwind is it in 'twenty, two and also from a working capital perspective.
Is there opportunity in 'twenty, two or do you have some of these progress payment reversals and it's kind of done everything you cannot of working capital in 'twenty one.
Yeah. Thanks Myles.
For this quarter working capital was beneficial and I think it was of fall through to what we talked about the last couple of quarters is it takes a while to change your supply chain to the new demand and we're now seeing that.
We're working through inventory that we paid for in previous quarters.
So we have less cash going out to pay for that inventory and it's just the beginning I think we're going to continue to see improvements in working capital efficiency moving forward.
Lower sales require less working capital and we've gotten more efficient in our internal processes to make sure we have only what we need.
In terms of of the other drivers Dan mentioned one.
It's not the largest but the military.
The first tiers of paint us a little faster, which is nice in the quarter.
Some of that will reverse but I think next year the big drivers for cash next year.
We look forward to giving you guidance wondering finished our planning process is of course of events liquidations and we don't have guidance yet to give of how much will liquidate exactly next year, but we look forward to providing that we do all of the 737 closeout that's about $50 million.
The next year.
We have pension, but we address that with our contribution of stock largely there's a small amount of cash that may be due next year and we'll give you guidance when we close out the year on that.
Working capital is still going to be a tailwind for us.
I think the volume is important and we're looking forward to the increase in volumes, we're seeing slow but steady increases in volume.
The backlog is higher quality now two and some more military content more steady margins.
And in the full year effect of our cost reductions that we incurred this year is kind of benefits next year.
So lots of levers and you got an experienced management team and look forward to executing on those next year.
Okay, two clarifications, if I hit the road of bowls breakdown.
Is that of specific to a contract and has that inventory.
<unk> been disposed of in some way or is that potentially going to come back through the P&L and likewise on the write down of the assets for sale.
Should we interpret that as lower proceeds than previously expected or anything else that changed that.
Yes.
Chairman of the inventory, that's rotable inventory related to the legacy.
Fleets.
The <unk> is one of them that have been taken out of service. So the recognized as lower value with the noncash impairment charge. So we still have the material and should demand increase in the future. We may be able to get more out of it. So that's just the reserve it's not cash in the period.
Assets and the second piece of the asset held for sale, we did recognize the $45 million reduction in.
The loss or the increase of the loss of the assets held for sale.
Thanks to the decrease in the value of that.
We have determined in that held for sale assets, it's not necessarily reduction of proceeds although it probably has a small production. It's just an estimate right now and when we close the transaction, we'll true it up.
Thanks.
Our next question comes from Peter Arment with Baird.
Yes, good morning, Dan and Jim.
Dan.
On your systems and support you mentioned the OEM was down I think 51% versus the prior year can you maybe talk about where you are at least for you in terms of sinking up with the kind of of the planned production rates either of the recovery of Boeing.
The or 707, obviously trending down 787 coming back, but how are you in terms of any inventory that you have to work off.
Yeah. Thanks, Peter so unlike some of our peers. We werent built ahead of multiple ship sets at our plants would typically.
Maybe one or two months ahead of.
Although we did have agreements with suppliers that might stretch out six to nine months and so we spent much of Q1 and Q2.
Burning off that excess inventory is the rates fell faster than we could.
Slowdown suppliers, but the good news is that Airbus has firmed up their narrow body demand I mentioned all of the.
The two Oems together delivered 125 aircraft in December and the monthly average for the whole year was 60, a month so to exit the monthly average. So you are definitely on the upswing they've asked Airbus has asked us to protect grades higher than for.
And we are doing that in partnership with our suppliers.
Certainly it's been a difficult time.
For the 787 with the reduction from 10 down to five we've adjusted Accordingly, but we are looking for to the 737, Max recovery and I mentioned the return to service the <unk>.
<unk> that have now been adopted the Canada, Europe and the U S.
So they've put a forecast out there that gets them back to the 30, plus a month in 2022 and that'll be a big tailwind not only for our our interiors business, which does all of the blankets.
For panels, but for some of our actuation businesses in the Yakima in Valencia Clements that support the platform.
Today, the $700 of Max's, perhaps three percentage of revenue and we expect it to go back up to where it was pre COVID-19, 7% to 8%.
So the net of those is if you had to have a rising tide.
Having it on the narrow bodies of both Airbus and Boeing is going to offset the decline in the 787 and on the Triple seven we have more content on the legacy Triple Seven then the Triple seven X.
No thats really not an impact to us and then the 767 remains flat at three a month and the <unk>.
<unk> to look of demand for freighters and tankers and that May go to for months at some point. So we are in lockstep with the Oems on rates.
Although we've got another year to work through and ramp up on the Max We are excited about what it will do for triumph in 'twenty and from our fiscal 'twenty three.
I appreciate the color I'll leave it at one thanks, Dan Thank you.
Our next question comes from Greg Konrad with Jefferies.
Good morning.
Good morning.
It seems aftermarket has outperformed peers on the downturn what was commercial aftermarket down specifically in the quarter, whereas the down 28% just commercial and then just thinking about your prior push to increase aftermarket content are you seeing share opportunities as the market resets.
At these lower levels.
Okay. Thanks.
No.
We measure <unk>.
Moro.
At both the.
I'll call it the upstream early indicators like receipts.
And then how many repair orders, we push out in the and that translates into sales as we are paid for the us so the upstream measures of receipts occur.
Across all of our 12 MRO were up 11% from Q2 to Q3, we went from about 600 repair orders to 850 for so a nice quarter over quarter increase theres little latency and the receipts into delivered.
Repair the items and therefore sales. So there is a lag there, but the leading indicators favorable and as you look across all of our plants.
The trend quarter to quarter.
Of the 12 that we did 10 were up in two words that from quarter over quarter of the two that were down were.
Atlanta, where we do interiors refurbished the very small operation nobody's, bringing their planes and for interiors. So we've decided to close that plant.
And then one was near breakeven and the others were favorable so those are the the metrics that we watch in terms of taking market share away from others.
We're looking at those the smaller MRO providers that don't have the.
Of the Rotable inventory or the the cash resources, the trying to pass to pick up share a lot of the carriers. The southwest as an example has gone out to market with the large RFP packages to compete MRO work and we're supporting those as well and will benefit fiscal 'twenty two.
Nothing necessarily in the short term. So overall, we're encouraged I mean at the at the trough MRO demand was down by about half and now we've seen that recover and we expect it to continue as flight hours.
Respond recovered.
Okay, and then just one.
Follow up which is more on the military I mean, you mentioned and improve competitiveness of some of the costs have come out and that the $4 5 billion pipeline is the majority on the military what are you seeing in terms of new opportunities or are these mostly newbuild of retrofit programs.
Some of them more takeaway wins versus new starts.
Okay.
The categories takeaways Newbuild.
And.
The starts I would say the biggest driver is retrofits and upgrades.
<unk>.
Helicopter, whose engine controls maybe of become obsolete or they want a gain.
Some margin on performance.
And we will go and work with each of the depot or with the Oems to improve the reliability of those components and thats happening.
Frequently at our West Hartford, Connecticut.
Right.
But we're also on the new platform some of them are still low and rate like the <unk>.
To say on the on the Boeing Defense T. Seven day that the promise of full size determinant of whole essentially of collect together wing is being realized right now.
And having worked for this industry in the factories that were.
For us of tooling, where you can hardly see the aircraft now of these structures are coming together with essentially a window frame fixture.
A really good sign for the future.
The ability of aircrafts.
The tolerance side and on the piece parts and I just.
For the click together.
We're also in the MQ 25, Thats early and Bill.
And we are have roles on two primes for the future vertical lift with the army.
We will supply of landing gear in the hydraulics. So we've got good positions on new builds but they're not contributing significantly to today's revenue as much we are getting some lepton recurring production programs at <unk>.
The F 35.
And we're positioning for some technology.
And certainly the assertion on the F 35, where the refreshing.
The components midway through the ramp.
But.
And then MRO demand we've covered so.
What we try to do is as plot.
Where are you in the lifecycle of an aircraft and make sure you have programs in all phases, you want programs and R&D one of them in.
The new product introduction, you want them in the recurring production and then of the Sustainment phase sort of.
The atrophy index.
Plot that across all of our programs to make sure we're not over weighted.
And mature production programs and therefore, we're going to have a bathtub of the future and we're not overweighted in development programs, where margins are low you want to have a renewal of your of your backlog and that's what we're focused on doing.
Thank you.
Thank you.
Our next question comes from the seasonally with J P. Morgan.
Hey, Thanks, very much good morning.
I guess as you.
Think about.
The military piece of of systems and support.
Going out on a multiyear basis.
The flattening budget.
Do you still see potential for growth on the on the military side or would you think about the military side sort of flattening out with the budget and the commercial recovery.
Becoming the growth driver there.
With flatter declining military sales.
Yes, I don't have any data that supports the flattened the Dod budget yet.
And I think history supports that for the.
The first year of two Theres, a lot of inertia and momentum around it.
Programs of record the bond administration is expected to put out their budget in the April timeframe. It would normally be in January with the with the new administration. The the delay that a few months.
There may be some changes of priority well aligned to those but we're not expecting a downturn of defense spending the world remains an unsafe place for.
Of the recent news.
About the U S and series as an example.
Yes.
Because we play such a broad role from from.
Tankers the helicopters to fighter aircraft.
Two.
We support of land vehicles as well, we don't talk about that much but we do.
So we're not exposed to any single platform should there be of change and priorities.
And we'll adjust per tonne.
I am confident that we won't see it turn down at least in the first of one to two years.
Okay, Great and then on the.
Just going back to the MRO comment you made earlier the <unk>.
11% increase was that commercial only.
Or was that across all of MRO.
Across both military and commercial aftermarket okay. Okay, and then during the pandemic as you look to in the aftermarket outside of the MRO and the proprietary aftermarket.
During the pandemic with the things kind of quieter in terms of repair work in terms of production has that been more of an opportunity.
For you to push forward on that effort or has it been the period where.
There isn't as much opportunity and we should look for that to pick up more in the future ads.
As volumes of activity pick up.
Let me give a little color on where were seeing increase in MRO demand China during the last quarter quarter to quarter was up 23%. So the support we provide the China Southern China Airlines, China Eastern all very large airlines is up substantially Asia in general is up 17%.
And Malaysia in particular, Europe is up 16%.
And part of that is our partnership with Air France.
We decided to enter into this joint venture to get on the the.
The new newer aircrafts, so think of 737 and 787 those are just getting into the more intense.
The phases of support.
And the partnership with Air France under license from Collins allows us to do so.
North America is up about 13%.
And thats driven by cargo carriers.
The only market that is really down with South America.
And that has to do with softness with.
Some of our engine accessory of work down there, but that's the smaller contributor to MRO. So it looks like Asia is coming back strong and.
We expect the Europe and the North America, the continue to steadily ramp up.
And then defense MRO spending is also favorable.
Okay. Okay. Thanks, very much thank you.
Our next question comes from Michael ceremony with true of Securities.
Hey, good morning, guys. Thanks for <unk>.
Taking the question maybe just go back to I think what what Kai was asking on the contract renegotiations and renewals do you expect.
The newer extension to provide some margin tailwind versus the.
It sounded like you.
You had the opportunity to.
Review and reset some of the price breaks raw materials other discounts in there, but do you expect these to be margin accretive versus the prior contracts.
Yes.
And to elaborate triumph when they acquired a number of companies.
The head contracts that were lossmaking for which the adjusted the.
The acquisition price and then established of fair market value reserve and unwind.
Unwind that reserve as products were delivered but it was a.
Cashless profit.
Because of the programs were in the loss position so as the LTA is renewable.
We've had to explain to Oems that we can't sell silver dollars for for 25.
And they are they are realistic about it they know they have benefited from.
Years of.
Cost advantage.
The discount on some of these products.
We do enter into discussions with the primes about what can be done to drive affordability or their design simplifications can we give them some of the content back.
And source it through their suppliers, so the answer of where possible we'd like it to make it worth of cost comes down but margins are enhanced but the answer to your question is yes, we expected to be of tailwind for margins.
Got it and then just one more on the <unk>.
Think about the remain co company within the structures you called out some of those some of the content on the day 22 of the Gulfstream The F 35 of the trainer.
And then obviously you've got the interior of the blankets. The installation can you give us a sense is there a big margin difference between.
Those those various offerings and maybe can you give us a sense of what the what the split look like between those between those revenues.
So there is the difference in margin based on where they are in their lifecycle. The obviously the T. Seven day as an example is not a.
High margin program in its development phase, but.
The volume is.
Large hopes for the program not only with the Air Force the Navy and foreign military sales and when you get into Fms the margins improve.
V 22 is more than the production mature production base margins are stronger there.
As Jim reported task it was about a 5% operating profit business when you take out things like.
747 shutdown so.
Not stellar but it's positive in that regard and we have an end in sight to the closeout of 747. So what remains is the smaller structures business, but a much healthier one.
Better lead.
Better processes better quality that our on time delivery Thats my comment about no more red programs.
Some of you who have been with me for the journey here at Triumph remember when we started said we're going to eliminate all of the red programs and it took longer than we would have liked but we're there on structures.
I would like to give a shot out to that management team.
It's good business good capabilities.
It may not be aligned with our long term vision for the for the company, but there are people who want to focus on structures.
The last time I check you can fly the aircraft without primary structure.
Got it great. Thanks, a lot guys I'll jump back in queue.
Our next question comes from Ken Herbert with Canaccord.
Yes.
Yes, hi, good morning.
Just wanted to first ask on the.
On the TSA net margins in the quarter can you go into a little bit more detail on what drove the sequential improvement relative to the second quarter.
Hello.
Sure.
So good question, Ken I think.
There is a little bit of volume going on but there's a lot of cost reduction as well.
We can continue our austerity measures and reducing our fixed costs from our SG&A is down in the mid 20% lower than a quarter ago and.
And the mix has improved as well, we see more military mix, which is more stable high margin business.
Unless of the commercial which can be volatile in terms of margins.
But overall.
The margins in that core business.
The north and more towards our longer term goals and we're taking all of the actions necessary to accomplish that.
Okay, and then Jim that's perfect can you just remind us what are sort of the longer term goals I know you've outlined them in the past, but has that changed for how do we think about segment margins margins for this business in 'twenty, two and beyond and what's the potential.
Yes.
Like everybody in the industry, we're trying to see into the future of its not as clear as it was maybe a couple of years ago. So the direction is clear that we're going to continue to improve those the opportunity.
Holding as part of our planning process and as the market starts to recover.
But there's no reason that these can't be back up into the <unk> and the normal pre COVID-19 market.
Okay, and if I could just one final question, Dan maybe for you I like the details you provided on slide six with your hidden value as we think about this business moving forward, what's the the mix of.
For the the TSA net business the mix of what you manufacture where you own the IP relative to say build to print.
Moving forward.
Yeah. Thanks, Thanks, Ken So first on the revenue side the quarter ago, We were roughly 50 50 on the contribution of structures versus systems in the Q3 Youll see this in the 10-Q, which now of $62 38 split.
We're seeing rapid.
The acceleration in the to the weighting of systems versus structures as we exit programs and we grow on the military side.
In terms of IP versus build to print.
Already exited.
The majority of the build to print business and structures machining fabrication metal finishing.
And what remains is good content.
As we've discussed previously.
On IP I think we are at about 80% IP for our products.
And systems and support.
And where it is not our IP for example, let's say we manufacture we do manufacture gears for the Apache transmission gears.
Some of them.
Our <unk> plant makes over 80000 gears per year typically takes 12 months to manufacturer of single gear. So the pipeline of inventory going through or going through there and thats, where a lot of the capex that Jim mentioned has been invested into.
New.
Of this tolerance grinding equipment.
But thats not IP, but it's sticky sole source in fact, we took the Apache contract after another supplier.
I had gone chapter 11.
And we've been able to recover from what was a big past due position.
Two supporting the Apache line and the Boeing defense is recognize that improvement very difficult to do over the last few years, but we did so our focus is going to continue to be on IP and will keep the other print.
We can earn good returns and support the customer.
IP is our preferred.
The model and Youll see us do that in the.
Of the gearboxes engine controls the exchanges just.
One other area that we're excited about that was out of our Seattle R&D Center last month.
And we're finally getting some traction on additive starting to print parts.
Our flight hardware critical for.
Youll pump housings.
Interest starter housings.
And we're trying to find those products.
That are a good fit with the technology not just replace subtractive manufacturing.
So we're learning we're early in the journey, but we're learning how to use additive.
That's another area, where our IP can come through we'll redesign of the parts differently to take advantage of out of it's a small percentage of revenue now but.
I'm excited about what it can do.
Great. Thanks for all of the detail.
Okay. Thanks, Scott.
For the last question comes from Ron Epstein with Bank of America.
Yeah.
Hey, good morning.
Good morning.
A longer term question here, when we think about triumph.
And the say five years.
As a benchmark period.
How do you think the company overlook when we think about how much of the company is going to the defense versus commercial services versus product.
Versus aftermarket.
So if we take a little bit of of longer term view what's.
Whats your goals there.
Great. Thanks, Ron.
<unk> been with the triumph for many years, it's the great questions and on with our with our longer term view.
First of all not in five years, but within two years, we won't be having these in the.
The discussions about unwinding red programs and restructuring.
Repaying advances to Boeing those will all be retired so we're excited about finally getting the part where we've got clear error.
<unk> true.
Youre going to see triumph.
<unk>, it's MRO offerings.
So I won't hazard of percentage today.
Today.
Marrero was about a half of $1 billion.
All of our sales of call. It a quarter I think it will definitely be higher I won't put a number on it but we've done the half of 1 billion through mainly three commodity areas into the accessories.
Structures structural repair and interiors deterioration is going to be less of the contributor.
We're looking at new.
Classes of product to provide aftermarket for that build on what we do.
In the engine components and structures.
And then on defense versus OEM.
You recall, we started this journey, we were 2080 defense commercial.
Okay now we're at about 35%.
Percent.
And I think it's reasonable to think we will end up at 40% to 45%.
You remember Ron when we were heavily weighted towards business jets.
And regional and we've reversed that now and those two together I think for less than 9% Tom in our of our revenue combined so it's with.
With us we've decided it's just not an attractive market for triumph in the things that we do there are a few niches we do.
Tech deposits for example.
The complex, leading edges, but but not large structured wings. So that will continue to decline and then you asked about OEM.
Versus aftermarket.
Yes.
And Thats.
I don't expect the big shift in that mix OEM work is still good work.
As volume you can count on MRO tends to be more cyclical for.
For example, all of the freighters that went out in flu the wings off to deliver all of the holiday gifts.
We didn't get any of <unk>.
The whole traffic and now they're all coming back in the.
The catching their breath in there they're doing updates so.
It's nice to have the mix of the two I think that's the key word is.
As balance of diversification of customers of.
Life cycles of the program of.
Of regions I mentioned the growth in Asia versus the U S. That's.
That's the key for triumph to be predictable over time, so five years, we certainly want to re grow our topline.
We just looked at the the <unk>.
Five year forecast with all of our leaders and it's a nice top line CAGR.
And an even better margin CAGR.
So if we can get some lock here on the the pandemic recovery.
Sustain the very high defense budgets, we've seen.
There is no reason why triumph can't finally, the free of I'll call. It the.
The the.
Of the programs that have been a drag on the company and we really are getting back to the the.
The company's core from 1996 through 2010 and the.
14 years of they built up.
Portfolio of systems and aftermarket companies.
And that's where we'll be at the end of this journey with the broader set of offerings does that help.
That's great. Thank you very much you bet.
Thanks, Ron.
Ladies and gentlemen, so of all the time of year for questions. Today. This concludes triumph group third quarter fiscal year 2021 earnings Conference calls.
There is the replay available for todays conference that starts at 11 30 am Eastern standard time to the 18th at 11 59 PM Eastern standard time.
Can access the replay by dialing one 805, <unk> hundred 67, and entering pass code 235 for a slide nine again, you can dial one $805 five of $8 six seven and entering passcode 235 for each five nine.
Thank you all for participating have a nice day all participants may disconnect now.