Q4 2021 Triumph Group Inc Earnings Call
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Ladies and gentlemen, thank you for standing by looking for the Triumph Group conference call to discuss our fourth quarter of 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 <unk>.
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A question and answer sessions logged introductory comments by management on <unk>.
Behalf for the company I would like to read the following statement.
Certain statements on this call constitute forward looking statements within the beating of the private Securities Litigation Reform Act of 1095.
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 any 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. This call is property of Triumph Group, Inc. And may not be recorded transcribed or rebroadcast without explicit written approval at this time I'd like to introduce date on J Crowley, the company's chairman and Chief Executive Officer, and James F. Mccabe Junior Senior Vice President and Chief Financial Officer Group, Inc. Go ahead, Mr. Crowley.
Thank you, Kevin and welcome everyone to Triumph Q4 earnings call I hope that you're all safe and well earlier today, we reported our fourth quarter and full year results for fiscal year 2021 I.
I am pleased to share the triumph delivered positive free cash flow for the second consecutive quarter, driven by improving profitability and effective working capital management, all while we continue to recover from the pandemic and execute on our portfolio transformation.
Furthermore, our team achieved these results despite the severe weather that impacted our sights of people across the southern U S. In February.
We saw encouraging macro trends this quarter on multiple fronts.
The continued progress on vaccine distribution and declining COVID-19 cases in the U S fueled steady increases in demand for commercial aviation, which translated into higher orders for maintenance repair and overhaul work.
Triumph is 1 of the first companies to report higher MRO demand, which provides faster financial impact versus longer cycle programs.
And contributed to quarter over quarter improvement in our core operations as we begin to put the commercial downturn behind us.
I will touch on this more later.
Favorable trends in systems and supports military helicopter and engine programs and strengthening Airbus narrow body production rates were key contributors to our recovery and reinforced the hidden value of triumph diversified customer base and platform content, which has been masked by the pandemic and the portfolio optimization.
Actions, we've taken over the last few years, we are optimistic that this upward trajectory will continue.
These tailwind coupled with our comprehensive actions to improve cash flow and enhanced margins create positive momentum as we enter fiscal 2022.
We're going to grow our company sustainably and responsibly.
Triumph, we believe in the power of and that means we'll continue to work hard to achieve financial success and enable the safety and prosperity of the communities, we serve and in which we live.
Overall, we're pleased with triumph fourth quarter results, which are either in line with or above our expectations, enabling us to meet our full year objectives.
Let me walk you through some of the highlights summarized on slide 4.
First we generated positive free cash flow through strong deliveries collections and effective management of working capital net.
Next our core systems and support business achieved its third consecutive quarter of sequential organic growth with 14% revenue growth and expanding margins, we continue to drive operational improvements and enhanced the quality of our backlog.
Third with the closure of our large structures divestitures and ongoing 747 closeout, we continue to execute on our commitments and remain on track towards our future state configuration.
Last we took several actions to strengthen our balance sheet and improve our liquidity position Inc.
<unk> raising approximately $145 million through an at the market equity offering during the quarter and reduced our debt.
Years of streamlining our portfolio and upgrading our talent and processes help try to weather the pandemic last year.
The value of the triumph offers is showing through in our results and will become more apparent as we continue to execute our future state strategy.
As we near completion of our transformation to a stronger company centered on our profitable core we kicked off our fiscal 2022 in April with a renewed focus on driving growth and greater operational efficiencies, while continuing to emphasize sustainable shareholder value creation.
So the macro trends are positive we recognize that the market recovery will continue to be uneven over the next several quarters. As a result, we're prudently maintaining our cost savings austerity measures from last year with intentions to reverse them as the market continues to improve.
Our actions combined with OEM and MRO rate increases will support expanded margins and cash flow, putting us on a path to delever the company year over year.
On slide 5 by summarize the drivers for this quarter's results first within our core systems and support businesses. We continued to improve operations as evidenced by the third consecutive quarter of sales growth and improving operating margins.
Systems and support revenues increased across all end markets in both OEM production and MRO quarter over quarter.
Systems and support also reduced inventory by $30 million in the quarter through increased efficiencies expanded relationships with distributors and raise margins on programs that were underperforming before.
1 example, our mechanical controls and components business in the U S and Europe provides a broad range of proprietary products across both aircraft and shipboard platforms.
They improved both our Q4 revenues and operating margin quarter over quarter by 10%.
Triumph grew our distribution network for both commercial and military OEM products and adjacent infrastructure markets.
The breadth and depth of our proprietary products and distribution channels across diversified end markets and customers are further indications of the hidden value in our systems and support business as summarized on slides 6 and 7.
Fiscal 'twenty 1 was the first year since 2010, when revenue from our systems and support business exceeded that of our structures business.
We win new systems content and run out of our legacy structures programs Q.
Q4 cash use on sunsetting programs was lower than expected in part due to continued improvement on the 747 program.
We will deliver our final 747 structures and our second quarter at which point tranquil fulfilled our program obligations. We will then close down the second of 2 large factories dedicated to the 747, ending a long period of losses.
Military sales now comprised 51% of our turnover in systems and support.
Helping to offset the impacts of the commercial aerospace market downturn.
Recall I set a goal to expand our military revenue from 20% of sales in 2016% to 30% at the company level.
We are now at 38%.
And we are up 25% in terms of absolute dollars as we grow our military content across the lifecycle from development to production to Sustainment.
Military platforms, such as the <unk> V 22, and CH 47 contributed to the sequential sales growth in our core systems and support business units driving a 22% increase in our military sales year over year.
Shedding the legacy cash consuming programs and stabilizing performance across all of the structures allowed them to be modestly profitable in Q4 on an adjusted basis.
Absent program shutdowns in advance repayments.
<unk> generated positive cash flow.
And so on update on our exit of our non core structures businesses on may 10th we announced the completion of our sales of our composites and military structure sites to Arlington capital partners.
Demonstrating continued progress on portfolio reshaping the proceeds from these transactions will be used to pay down debt.
These divestitures represented an important milestone to reconfigure the business.
Over the last few years, we have sold or closed 42 facilities out of 75.
On an enormous achievement considering that many of these actions were completed in the midst of the pandemic.
For now down to just a handful of facilities and programs left to address.
I want to recognize the aerospace structures team for their dedicated work to simultaneously navigate the crisis improve operational performance and exit non core operations.
In Q4, we generated over $16 million on free cash flow due to improving margin and.
And prudent working capital management with further improvement in inventory turns possible.
During the quarter, we successfully accessed the equity markets and raised $145 million by selling shares through an aftermarket offering and we applied a portion of these proceeds to retire some $64 million of senior notes due in June of 2020 to the low par.
We recently called the remaining outstanding June 2022 notes and expect those to settle by the end of Q1 together. These actions further strengthened our balance sheet and extend our material outstanding debt maturities to 2024.
We remain on track to achieve our future state configuration is a largely pure play systems and support provider to military and commercial customers with interior structures capabilities.
I'd like to go into more detail on the path to recovery for the commercial aviation industry as summarized on slide 8 and as expected benefit to triumph.
As Covid cases have declined in many parts of the world our airline customers have expanded routes and flights primarily in the U S and China.
Flight bookings improved from prior quarter and are now at 46% of 2019 levels.
On may 4th TSA throughput reached $1.6 million passengers on new high since the start of the pandemic.
Flight traffic numbers are improving where load factors for stabilized around 75%, a number which allows operators to begin nudging pricing towards sustainable profitability.
Global capacity and parked fleets are also moving in the right directions. We.
But we are encouraged by what we're hearing from our customers in terms of anticipated ramp ups.
OEM production has remained stable despite temporary disruptions due to the 787 structural inspections and 737, Max electrical modifications commercial narrow body volumes are expected to increase at both Boeing and Airbus over the next year and we're prepared for this ramp in calendar 2022.
Yeah.
While our MRO inputs in the quarter were affected by the weather impacts the mix of orders across triumph was biased towards more extensive overhauls such as the KC 10 tanker refueling boom.
As the aviation industry continues to recover we expect to see increased bookings higher load factors and more sustainable fare levels and additional aircraft return to service all of which will drive improved MRO demand.
Turning to slide 9 triumph military and government end markets outperformed again with revenue up 22% in queue for mitigating commercial aviation volume declines.
<unk> military and commercial MRO sales in both experienced sequential improvements of 25% and 33% respectively.
Recall MRO is a fast turn business, where we book and ship within a 30% to 45 day cycle. So it's a good early indicator of an emerging aviation recovery.
We believe our profitable MRO business will lead triumph financial recovery, the business is well positioned to capitalize on returning demand, including MRO support to our OEM equipment content across all end markets.
We continue to expand our independent third party MRO business with new proprietary repairs as a designated engineering representative.
This is another example of triumph hidden value as we address the entire lifecycle of an aircraft.
The comparison of sequential quarters highlights encouraging signs in commercial traffic shipments on all Boeing commercial transport platforms rose from Q3 to queue for an aggregate by more than 30%.
A positive signal as inventories and buffer stock benefit from stable production.
No doubt the pandemic has impacted demand in the short term TSS backlog declined in the quarter consistent with the decline in production rates.
For the good military and government end markets account for more than 50% of systems and support sales and 55% of the backlog.
Turning to slide 10, triumph closed $350 million of new wins for the quarter across Oems tier twos and operators GE.
GE awarded us the afterburner fuel pump contract for the T..7 8 trainer, where we already have strong ship set content.
While we're known for our helicopter fuel pumps and hydraulic pumps and engine controls we have a very strong franchise in military fighter fuel pumps, designing and building main engine gear pumps and centrifugal fuel pumps for multiple platforms. We're also hard at work developing high performance pumps for the next generation military.
Terry Fighter engines.
Triumph was also selected to design and build the landing gear systems for the Sikorsky Raider X Nextgen helicopter.
We've expanded our existing content through an award to design and build weapons Bay door actuators as part of our support to both future vertical lift development programs.
This new business chart highlights the diversity of our customer base capabilities and platforms.
Turning to slide 11, our highlight strategic awards on the T..7 day trainer as well as recently completed renegotiations for high performance gearboxes on the CH 53, K and Bell for 2.9.
Where we are the sole source provider.
These wins underscore our position as the largest independent source of complex gear solutions to both military and commercial end markets.
As highlighted on slide 12, our core systems and support business had a strong fiscal 2021 with over $1 billion in sales from a balance mix of production in MRO work across both military and commercial end markets.
Longer term, we forecast a return to pre COVID-19 levels of sales with margins of over 20% and strong cash conversion.
To summarize we stabilize the company and balance sheet. After the pandemic last year, we grew margins quarter over quarter and generated solid cash flow in the second half of what was no doubt the company's most challenging year.
We expect to continue to grow our core organically and expand margins through fiscal 2022 and beyond due to continued cost reductions operational efficiencies anticipated changes in product mix and new pricing opportunities.
We will continue to invest in our people operations and products to enhance shareholder value year over year with that Jim will now take us through the results for the quarter in more detail Jim.
Thanks, Dan and good morning, everyone.
We ended our fiscal year with another solid cash positive quarter.
Reflecting on the past 12 months, we entered FY 'twenty, 1 with strong momentum from the prior year into a period of significant market uncertainty.
Commercial air travel was at its lowest rates in recent memory.
Oems, we are rapidly reducing production rates across the board and trying for space and the constraints of its financial debt covenants.
In keeping with our values, we acted with velocity to ensure the safety and welfare of our work force.
To aggressively reduce costs.
To amend our debt covenants to maintain compliance and to accelerate actions from noncore and underperforming assets and programs.
After the trough of our fiscal Q1 last year, when we used over $200 million on cash we were reducing expenses and honoring our inside of lead time purchase commitments, while we adjusted purchase orders to lower customer demand.
And we raised $700 million on a bond offering to pay off our revolving credit facility, which eliminated our maintenance covenants and put substantial cash on the balance sheet to enhance and secure our financial flexibility.
Since then we delivered quarter over quarter improvements in key metrics on our core systems and support business exited work on the G 650, <unk> hundred 80 wing programs and moved closer to the end of our obligations on the 7 for 7 contract.
We exceeded our fourth quarter cash flow on earnings forecast and achieved or exceeded our full year objectives.
Fiscal 'twenty, 1 was an eventful year and I'm incredibly proud of the work we have done to navigate the pandemic and position triumph for continued improving performance headed into FY 'twenty 2.
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 13, you'll find our consolidated results for the quarter.
Planned reductions from sunsetting and transitioning programs in our structures segment led to lower sales compared to the prior year.
Despite the headwinds Q4, adjusted operating income was $33 million and adjusted operating margin was 7% up 138 basis points from the prior year.
We continue to improve profitability on an adjusted basis quarter over quarter.
Turning to slide 14, you'll find our fiscal 'twenty 1 results.
Our net sales were impacted by our sunsetting and transitioning programs and our mix of sales included sizeable military end market growth.
Our full year adjusted operating income was $108 million, representing an adjusted operating margin of 6% down slightly from the prior year.
With respect to the segment results on slide 15, net sales and systems and support were up 14% sequentially.
Including a 31% increase in sales on Boeing commercial platforms and.
And benefited from adjacent market captures and infrastructure.
This segment sales were 52% military this quarter up from 23% in the prior year quarter.
Adjusted operating margin for systems, and support was 14%, which is comparable to the prior year and up sequentially over last quarter, excluding 1 time items.
Summarized on slide 16 fourth quarter net sales for structures were in line with expectations, driven by planned sunsetting and transitioning programs as well as reduced demand on commercial programs.
Despite the headwinds net sales increased 2% sequentially.
Structures now has 4 consecutive quarters of favorable cumulative catch up adjustments due to strong performance and effective program Closeouts.
Our actions to aggressively reduce costs resulted in $16 million of restructuring cost and structures in the quarter.
Excluding these costs operating margin was 2% up slightly from the prior year quarter.
Aerospace structures revenue will be lower but higher quality moving forward due to the divestitures the business jet program exits and the end of the 7 for 7 program.
Turning to slide 17 at the start of the year, we experienced a temporary increase in our working capital as we adjusted our supply chain to the new lower demand.
Our $17 million of cash flow in the fourth quarter was better than forecast and driven by a net decrease in working capital in the quarter.
Q4 cash flow included $10 million of advanced repayments on approximately $10 million of cash use on the 7 for 7 program.
In Q4, we incurred $20 million on restructuring costs.
Which were accrued in the quarter, but will largely impact cash flow in Q1 fiscal 'twenty 2.
In addition to the cash restructuring costs.
Key drivers impacting our FY 'twenty 2 cash flows are listed including expected advance repayments 7 for 7 spend and certain customer settlements.
Capital expenditures for the full year of $25 million included $15 million in systems and support to continue to enhance productivity and competitiveness.
We anticipate approximately $30 million of capital expenditures in FY, 'twenty, 2 including $22 million in systems and support we remain focused on aggressively managing our working capital on slide 18 is a summary of our net debt and liquidity our net debt at the end of the quarter was approximately $1.4 billion and our combined cash availability was 624 million.
Yeah.
In the quarter, we received $145 million in net proceeds under our aftermarket equity offering.
And retired $63 million of our 2022 bonds at slightly below par value.
Lastly through the American Rescue Plan Act of 2021, we benefited from the changes to the required funding for our pension plan, reducing the FY 'twenty 2 obligation from $18 million to about $2 million.
The reduction in required pension funding over the next 4 years exceeds $150 million.
The updated required pension funding estimates are approximately $1 million per year from FY 'twenty 3 through FY 'twenty 6.
Our net debt increased by less than 4% for the year far below the net debt increase at many other A&D companies and airlines.
After our fiscal year end following the completion of our structures divestitures, we announced the mandatory pay down of approximately $113 million of our first lien notes.
In addition, we have called the remaining $236 million of outstanding 22 notes.
These transactions are expected to be completed during our first quarter.
Together, they will reduce our debt by approximately $348 million.
Reduce our cash interest expense by about $22 million per year.
We also have over $500 million on deferred tax assets that continue to create value through reduced cash taxes moving forward.
Regarding guidance due to the uncertainty of the inflection points in the commercial aviation recovery, we are deferring providing guidance until later in the year.
Our focus on our operating systems, coupled with our cost reduction actions improves our competitiveness and adds value for our customers.
FY 'twenty, so I'll try and for making the turn.
Through the first half of FY 'twenty, 1 we manage the commercial downturn and through the second half we have done even better as we delivered on our commitments and achieved quarter over quarter improvements on our core operations.
We believe that FY 'twenty, 2 as a bridge year prior cost reductions and operational efficiencies will help us continue to improve margins as volumes gradually and sometimes unevenly expand.
The measures we have taken and are taking to managing this downturn are making us a stronger more competitive and sustainable company moving forward.
Now I'll turn the call back to Dan.
Dan.
Thanks, Jim in summary, coming out of this difficult commercial downturn, we built momentum quarter over quarter by generating organic growth and expanding margins in our core business and driving to second half positive free cash flow.
We continue to take the hard actions to position triumph for the future, including cost reduction the exit of loss, making programs and divestitures.
We achieved our full year objectives and continue to forecast organic growth in systems and support and further increases in margins from.
From an industry perspective stability in OEM production rates with continued signs of MRO recovery.
Give us confidence that the worst of the pandemic is behind us, but we also recognize that the overall recovery will likely be uneven I'm.
I am confident that the talent of triumph team members and the value of our core will only become more evident as we drive revenue growth margin expansion sustainable cash flow generation and improve our win rate.
Fortunately, our balance sheet and portfolio transactions enhance our liquidity and position us well for the future.
For the strides we've made over this past year have placed us even closer to our future state configuration. We're now turning our focus to driving organic growth unlocking the hidden value in our business and delivering benefits for all of our stakeholders in a responsible and sustainable way.
To try and team continues to meet and overcome challenges and get the job done I'm proud of what we've achieved.
We have solid momentum for which we will build and continue to make an even stronger triumph.
Kevin We're happy now to take any questions.
At this time the officers of the company would like to open the Forum Tony question that she may have we ask that you limit yourself to 1 question and 1 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 have a question. Please press star 1 on your push button phones should you wish for.
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Questions will be taken on the order receipt. Please standby for our first question.
Our first question comes from Robert Spingarn with Credit Suisse.
Hi, good morning, and congrats on another positive cash flow quarter.
Dan or Jim.
Given that we have a good sense of what OE production rates are on the commercial side.
The military business is fueling is the reason not to guide just uncertainty around MRO and aftermarket.
I think that's fair yeah, we're not concerned about guidance, we have our own internal models for debt that run not only in fiscal 'twenty, 2 but 3.4 and 5.
And if you read the same debates about the inflection points.
I think had we seen.
And opening of international borders.
Through the course of.
Calendar Q1, we'd be much more comfortable putting guidance out there, but the uncertainty around our guidance is pretty pretty tight.
We're not we're not concerned about it Germany income instead, I think like many of our peers. We just would like to see a little more follow through on before put guidance out there, but we're looking forward to it in the near future.
Okay, and then just with regard I think you said you're prepared for an OLED ramp in 'twenty 2 or are you not seeing.
On a narrow body ramp.
This year, we're already on Max relative to what Boeing has talked about it looks sounds like early in DC. This year going for about 7 months to somewhere around 20, a month by the end of the year or are you tracking that and then the last question I have is just with regard to low.
But longer term do you on slide 12.
If you could.
Talk about when you would expect to reach 2019 levels on most metrics.
Each year, especially since you do have something it sounds like about it for a 5 year plan.
Yeah first let me agree that a blanket statement that ramps not going to happen till 'twenty twos is not.
It's not really representative what's already happening Airbus.
As ramped up smartly, if you look at across all of their day.
320 family.
For the 46 a month.
Our fiscal 'twenty, 2 and then it goes up into the sixties over on our forecast for so their ramp is already well underway.
They are having great great success in the market on the XLR.
On Boeing.
We are at rates on the order of 7 a month, but it varies by factory, but in aggregate that's about right and we are tracking with rates that go towards 'twenty and then into the Thirty's next year. So when I say getting ready for the ramp in 2022 calendar on mostly talking about Boeing and also the 787, you've heard about the recent on.
<unk>.
And although the rate's been down on the 5 ish range of late they forecast getting back up to 10 over the planning forecast so.
It's mainly the Boeing ramp that we're talking about in terms of the wind on page 12.
So it really is tied to the recovery of wide body.
We do a lot of work on 787.
Shedding those last remaining structured programs like 7 for 7 this year in our fiscal 'twenty..2 we have still for some remaining run out of costs on that so to get to 20% margins or better that has to be out of the portfolio Jim.
I think the restructuring actions, we've taken have some inefficiencies with them to that arent hard dollars.
And as we get.
Up to speed on the new structure with lower costs and volumes come back.
We're going to see increases in margins faster I think than we are.
Anticipating but for now we're being conservative and we're not ready to put a stake in the ground of exactly when they'll come back, but certainly we've been there before and with the cost reductions and the contracting opportunities. We have a we're going to get there again as soon as possible most of the Oems are telling us.
Get ready for the ramp and I think you know you've been in this industry a long time Robert.
The pendulum can swing pretty quickly and then we're all competing against the finite capacity at sub tier suppliers in and outside processing suppliers like paint and heat treat and we were there 2 years ago pre COVID-19 and.
And getting getting ready for that again, making sure. We can support these higher rates as part of the planning we're doing now.
Okay. Thank you for the color you bet.
Our next question comes from Peter Arment with Baird.
Hey, good morning, Dan Jim.
Nice results.
Hey, could you give us an update I know you've been hard at work.
Reshaping and doing a lot of portfolio shaping.
An update on your.
Kind of what's remaining and where what the status is there and then Jim If you could also just talk a little bit about.
Expectations around working capital for fiscal 'twenty, 2 and and yes.
I'll just leave it there.
Okay. Thanks Peter.
So on the on the structures business, having sold the Red Oak plan and then the 2 composite plants in Georgia and Thailand.
The only large structures plants, we have left are in Grand Prairie, Texas on 787, and Thats within weeks now of completing its work and it will close this year and then we have our Stuart, Florida plant, which is profitable and cash positive. It does the tanker and freighter when carriers restructure and that the plant debt.
It is it's contributes to the company's financials, but it really is non core in the sense that there may be a better owner for it and so we are in discussions.
Potential buyers are on that facility, but.
We don't have to sell it. So that's the good thing about the work we've done the balance sheet and our cash liquidity is we're not a seller under duress.
But if it's the right thing for Boeing and for triumph for someone else to on it.
Certainly something we'll consider and then we've got our interiors business and.
This year our focus on is on consolidating that it was 1 of the factories in Mexico that was most impacted by the Max rate and so we have 2 plants within our family of about 6 interiors plants that we're going to close and then the remaining ones 1 large 1 in Mexico, and some small ones in Europe.
We will decide what the best path for us on that but right now it's about getting ready for the recovery and rate and interiors.
That business also was profitable pre COVID-19.
And it's 1 of our latest operations really good team there.
Their end and having come through the pandemic get that rates backup on Max they'll do fine.
Jim Yes, so in terms of working capital Peter I think the divestitures went with a lot of working capital in the more volatile types of working capital. So the remaining businesses are less volatile and leaner on the needs for working capital.
In the quarter, we did see cash generated from working capital coming down from inventory coming down on a core basis and then we of course have on our nonrecurring items.
Which I tried to give some insight on page 17, you can see the advanced liquidations.
So we're expecting $21 million a quarter.
In this coming year.
And we have the 7 for 7 closeout, which was lower than expected. This in the fourth quarter, we were expecting about $20 million. We only spent 10. So next year, it's going to be $60 million in FY 'twenty, 2 and most of that'll be in the first half for the year as we finish building out that program.
We have some customer settlements, which are going to benefit for long term that is around 30 million in the first quarter.
And then I mentioned that the restructuring, which again is going to have great benefits moving forward. We did accrue 20 in the fourth quarter on most of that cash will go out in the first quarter.
So in terms of working capital trends cash flow trends for the coming year without giving guidance. We've tried to give you insight into what we do know and if you look at last year, we were a cash user in the first half of the year and.
And generator in the second half of the year I think youll see a similar trend going forward just less magnitude.
And coming in it's really a transition year on so I'd say, it's a bridge you get out of a lot of those advances we're going to get the 74.7 behind us.
And we're going to see increasing volumes and the benefits on restructuring actions moving forward from there.
That's helpful and just Jim if I could just to follow up on the <unk> could you give us the.
The pension underfunded status.
Where you ended the ended the year.
Yeah.
It's about $360 million on a GAAP basis, but more importantly is the cash funding requirements.
<unk> due to several actions we took but also in large parts of the.
The rescue act of 2021.
Pension funding is only $1 million a year for.
For 'twenty 3.
Through 2006, and next year, it's I think it's about $2 million so its come down substantially.
So the burden is all from us.
The liabilities gone down because the asset returns have been good. So good. This last year. The reason it was higher than last year was because it was a really difficult measurement point at the end of last March when the markets for very depressed as they recovered our funding.
Our net liability went down so we expect that to stay down there.
I appreciate all the detail thanks.
Thanks.
Our next question comes from David Strauss with Barclays.
Thanks, Good morning, guys.
Morning.
In terms of our modeling for aerospace systems is that around 100 million per quarter kind of revenue run rate going forward based on the divestitures that were just completed.
So you said systems, but you meant structures and I think that your estimate is in the ballpark I think you'll have more detail.
On the 10-K LLC for the divested businesses, but that is about correct.
Okay.
And so Jim you went through the kind of nonrecurring items that you have in <unk>.
In fiscal 'twenty 2 from a cash flow perspective. So is it is it safe to assume that.
All in fiscal 'twenty, 2 as a as another free cash flow burn year.
And at this point as you look I know, it's a weight weighs out but it would appear most of these nonrecurring items I guess, maybe other than the advances will be done with fiscal 'twenty 3 so safe to assume net.
Fiscal 'twenty 3 should be a free cash flow positive year.
So I think I gave you insight into some of those significant cash uses that are nonrecurring and you're just recite of those so I can see where you would come to that conclusion, and although we're not ready to give guidance I do appreciate that view and hopefully use the information that we've given you.
So I can't argue with your conclusion, but we're not ready to give the exact guidance certainly through the next couple of years when advances are gone for 7 is gone.
The restructuring is done and we're seeing the benefits, we're seeing the benefits of our new contracts.
It should be very good year compared to <unk>.
This bridge that's coming on.
Okay, and where does the advanced balance it as of today.
As of March 31st it's about $187 million.
Alright, thanks very much.
Our next question comes from cargo on Irma with Cowen.
Yes. Thanks, so much so maybe give us some color on what those customer settlements are and secondly, you've paid down some debt here.
How much do you net.
Net cash do you think you'd need from this point forward to run the business.
Yeah I'll start on the first question on the settlement so.
It was maybe just a bit of timing lock that we had a number of 5 to 10 year long term agreements that we call. It <unk> that it came up for renewal in the last 6 months.
These are contracts that typically.
Yes.
Negotiate 6 to 12 months before they expire.
And because we have intellectual.
The property, we have a lot of manufacturing domain knowhow.
There is a cost of switching and there's a cost of re qualification.
The Oems that we worked with.
Recognize that it's in everybody's interest for us to remain on this programs and to extend those LTA. So whether it was hydraulic components at our actuation business in North Carolina.
Or it's.
Staring in locking actuators at our plant in Valencia, California.
These support Boeing and other Oems.
We're not done we still have probably another 6 or so LTA is that we need to.
Renegotiate over the next quarter or 2 and what we've found is that there is.
Theres been a recognition that some of those older L. T A's that had negative escalation and or maybe they were negotiated.
As part of a.
On.
M&A action that triumph took back on the day like we have 1 contract on the 787. It was a former GE Smith contract that was to.
Take it onboard at triumph in a loss position and afford reserve was set up for that while 10 years later now that LTE is expired in it and we can't continue to sell that product at the prices that were previously in place. So hopefully that gives you some color for the kind of <unk>.
Tensions and pricing.
Negotiations, we've had yes, thanks Dan.
Conjunction with that kind of I think you maybe referring to some of the cash use related to the settlements we got to settle the old claims some lingering on claims over the life on the old contracts in order to enter the new contracts. So these are going to benefit us we're going to take care of those claims. This is an estimate we put in the quarter, but were down the path with while these negotiations that's going to enable us to get better margins.
Moving forward with new contracts when they take effect in the coming quarters and coming years.
In terms of the cash flow.
For the divestitures and we put a naked on out there. So you can see the net proceeds of the divested the recently closed divestiture was $155 million.
That will repay about $113 million of our first lien debt.
And that will help us with interest there.
And reduce our debt.
And then we also gave notice.
To redeem the remaining balance of the 22 bonds, that's about $236 million. After the 64 million, we had bought back last quarter.
Combined this will save us $12 million of cash interest per year in terms of the pro forma cash availability afterwards, it will be just under $300 million, which is more than sufficient for our projected needs.
Great and just 1 follow up Dan you mentioned you have 6 more contract.
To go can you comment are there any settlements associated with that.
And or you know usually if youre renegotiating.
You know given where we are do you have I mean, a lot of <unk>.
Several other suppliers have said now that Theyre no brand, new 787 programs <unk> hundred Fifty's to chase basically the suppliers have a little more leverage in the discussion how should we think about those 6 more to renegotiate how big are they as a percent roughly of your business.
Do you have any settlement claims you might have to come and deal with and what sort of change in profitability should we look for.
Well, thanks, Scott that's a lot of questions and I'm going to put you on our negotiating team.
Because you really you've got your finger on the pulse of what we're doing the answer is yes. These contracts.
On extensions do involve settlements on price.
The answer is also yes that debt.
Some of the traditional incentives that might've been offered to suppliers like higher volume on current contracts or rolls on new starts are not there today in the short term.
Longer term, we will see ramp ups happen and we will see.
New starts and there may be trades that suppliers like triumph make on current work in order to secure fiercer Roes, but that's not really the case today. So.
We've got a weighted cost of capital we need to declare.
And we also.
Want to ensure that all of our customers have.
Supply continuity and and we buy a lot of our part so when you come up within lead time to extend these contracts all of the lower tier suppliers are wondering hey is this going to get extended so they can plan and having that certainty of supply against day.
Our forecast of rising rates as important that the Oems and so we've been able to secure price increases.
To ensure that continuity.
Thank you.
Our next question comes from Greg Konrad with Jefferies.
Good morning.
Good morning.
On slide 12, you called out stable military end market I mean, how does that apply to TGI is military business given recent growth in some of the contract wins, we saw in fiscal year 'twenty..1 is there an offset to some of those recent program wins, just thinking about the military growth profile.
Well certainly the cut on the rate of the 787 over the last couple of quarters.
It has been an impactful and we mentioned that our backlog was down because of that so that getting this military work both MRO I mentioned, the KC 10 refueling booms, we delivered.
7 of those in the last fiscal year and they are quite they are huge and they're quite involved so getting that kind of work and has helped to offset some of the OEM rates.
The challenge is it's usually not the same factory.
So the OEM rate that benefits from the MRO. So the work tends to shift around within the.
The company, but.
We see strong defense demand there hasnt been any signals.
Of using the Dod as a bill payer for domestic spending.
And then you combine that with the fact that there are still platforms within the Dod that are not at their readiness levels.
We'd like to see I won't name them, but theres a number of aircraft that they would like to see higher Roe.
As rates I, just returned from visiting some of the Air Force Air logistics centers and talking to the.
On the leaders of the debt Bose and Theyre looking to industry to help them get that readiness up so I think military MRO demand will continue to be strong and then there seems to be no.
The decline in the cards for freighters on the commercial side.
Just e-commerce and the expansion of consumer spending is really fueling a demand for those so we're expecting to continue to support Fedex EPS Atlas and other carriers as well.
And then just as a follow up for systems and support sticking to slide 12, you talked about long term recovery to fiscal year 'twenty levels. I mean, how do you think about mix as the business recovers I mean, it seems like MRO leads growth, but are there any structural changes where you can actually grow that above peak.
And as we get fully back just given some of that.
Body weakness just thinking about some of the aftermarket initiatives that you've done over the years that really China strengthen and expand that business.
Greg I'll remind everyone that pre COVID-19, we were talking about going on commercial narrow body rates to much much higher rates like the Max from 40 to 57 and even higher.
So I think very soon this this whole conversation around getting back to 19.
Be overcome by events and it's going to be how much higher.
19 are we going to go.
Now I'm not saying that.
That.
Theres not continued headwinds with with the pandemic and international travel on wide body, but on the narrow body.
We could see rates that are greater than 19, and that's part of why were.
Planning now for the ramp in making sure that all of the supply that we buy can can supported now we're not going to get ahead of the market and acquired inventory betting on the come so its contingency planning consistent with the rates that the Oems have published but.
I think 19, where we're going to eventually blow through that and we will be at higher rates than we were pre COVID-19.
Thank you.
Our next question comes from Ken Herbert with Canaccord.
Hi, Good morning, Dan and Jim Good morning.
Hey on.
I just wanted to in the quarter you called out on slide 9.
33% sequential growth in your commercial.
Borrow business and I'm wondering if you can parse that out at all by sort of the repair services and parts and if you saw a significant difference between either of those in the quarter.
Yeah, I don't have the data here on the call. So that may be 1 we have to take offline but.
We saw demand for both spares and MRO, if I had to handicap it I would say more on the repair side.
During the trough.
Our plants that do accessories, so they rebuild air cycle machines and generators gear.
Gearboxes, they had to lay off half their staff it's terrible.
And 1 of those plants last week and it was encouraging to see people coming back because it's high skilled work I mean, when they lay out a generator on the table, it's like a watch 300 parts and springs.
Small bearings and whatnot and so the debt.
Our skilled.
Mechanics, who do this work.
And they are certified R.
On a really valuable to have we're not doing quote unquote wrench journey, we're doing the higher end work and because we can use used serviceable material, we can often offer lower.
Cost for the MRO and then do.
Oster turnaround time, because we're not having to deal with all the lead times are buying all new so it is.
Rewarding to see these employees starting to come back and the repair side is leading it there's definitely some spares demand, but but I'd say, it's more repairs.
Okay.
That's helpful and as we think about I mean, you've signed a number of contracts recently on on the aftermarket and it sounds like on the repair side in particular as you think about that sort of 60.40 mix that you called out repair services to spare parts with a lot of the recent contracts you've signed in joint ventures does that.
Mix changed significantly do you start to see spare parts baby in the recovery account for a bigger piece of the mix maybe beyond 'twenty, 2 but put into 'twenty 3 'twenty for.
I think so I think the answer is yes, and I'll tell you why.
We signed up with Thai aviation for repair services, and but also spares a little bit of training.
We signed up with <unk> and for distribution.
Of products for military MRO demand.
That will be more weighted towards fares, we signed up with vse and we're close to completing our joint venture with Air France KLM.
Which will be support for the.
On the newer fleet 787, Max and these partnerships are all part of.
The recognition that.
Triumph doesn't.
We don't win alone and we don't have a huge business development staff that can touch every customers and these distributors do in fact, when I went out to sea.
The Air Logistics Center at the Air Force I mentioned I brought the CEO of <unk> and with me.
And we traveled together and did the call together and Thats not something.
My career I've typically done is brought my teammates with me to make customer calls, but it was much more effective.
And he had a command.
Customers' needs down on our part number level and we we sort of understood at a capability level.
And ultimately I think we're going on we're going to grow together faster so.
And I do think spares will play a bigger part of that.
And also OEM parts, we sell a lot of parts.
From our systems and support business.
And we're not on all platforms, we're in a lot and I'm challenging the team to expand our platform participation and sell similar products.
Gearboxes or hydraulics or fuel pumps.
Platforms on support and our distributors can help us do that.
Great. Thank you very much.
Our next question comes from Seth <unk> with J P. Morgan.
Yes.
Okay. Thanks very much on.
Good morning.
Another question on slide 12, where.
Can you talk about in the near term and systems that support reinvestment in operations and R&D I think I might have missed the number when you gave it but I think you spoke about capex coming up this year and on maybe when you think about the R&D side, what is that that statement kind of imply about investment levels coming out there.
Fiscal 'twenty Q1 does that investment for and then where does it go beyond 'twenty 2.
For <unk>.
Much of the last 10 years since the Bard acquisition that Capex was weighted towards structures in part because of the scale building new products.
In part because some of the equipment that was moved in from.
On volume locations.
So we're glad to be beyond that point and now when you look at the profile I think Jim mentioned $15 million of Capex, we did.
Last year.
Systems Youre seeing high end gear grinding equipment, Youre seeing test rigs for hydraulics and fuel pumps.
Those those things contribute more to our core and.
As the revenue now is flipped from structures to systems, the capex as well Jim.
Thanks, Dan you're right on the 25 million, we spent last year in FY 'twenty $115 million of it related to systems to support which was a change from the prior year were structures was more.
We anticipate this coming years $30 million of Capex of which 22 will be in systems and support but beyond the capex, we're spending a lot on R&D as well and there's tens of millions being spent on R&D.
Most of it is actually a customer funded.
Because we're just developing next generation of our existing technologies on platforms were already installed on it's just it's a good place to invest it's high return and low risk.
So we'll make sure windows, that's going on that's going to feed our future.
Okay, and then maybe as a follow up.
On the flip side of that.
The point that was made earlier, which is a valid 1 certainly is that theres, a little more leverage for the suppliers here.
In negotiations with your average but.
Thinking in other way I know in the past.
You would look to take share.
So to the extent that others might be looking to be more aggressive on price or are you seeing opportunities.
To take share from from others in the market.
Particularly perhaps EBITDA.
In the aftermarket.
So.
We are seeing that dynamic I won't say, it's the dominant dynamic I'll give you. An example, Fedex and EPS are re competing some of their MRO aftermarket and so that includes 3 competing our work in re competing others. So we've had to sharpen our pencil.
On the support to the freighters.
But on I'd say on the OEM side.
Been less of that and the takeaways have been more around performance. For example, we're developing a couple of products to go on the F 35 that provide more performance reliability.
Over the the original design, which worked.
Any early.
For a aircrafts.
Now that they've got the fleet out there, they're saying hey, this part could be more robust store.
The aircraft generates a lot. He can you up on the capacity of the thermal cooling system and the answer is we can in those competitions. The takeaway is linked more to engineering and technology and less too.
Pricing in the us.
A race to the bottom on price so.
We're seeing a little bit more price sensitivity on MRO and more about value on the OEM.
Okay excellent thanks, very much guys.
Okay.
Okay.
Our next question comes from Michael <unk> with true Securities.
Hey, good morning, guys. Thanks for taking the questions maybe just to stay on some SaaS line of questioning there for for <unk>.
Systems and support.
Looking at margin.
In fiscal 'twenty, 2 is some of that R&D and the customer Columbia is going to be a bit of a drag along with it.
Maybe some of these new military programs are they going to be dilutive just trying to get a sense of what we should be expecting for the margin trajectory there.
Commercial volumes recover as well.
Yes, Thanks, Mike we do it in a.
A planned way so it shouldn't be overly dilutive in any 1 period, but we certainly are investing and if we didn't invest margins could be higher we have been investing in last couple of years, we are gonna accelerated a little more this year I think the goodness of it is that we're getting customers to fund it and theyre getting the benefit from it so our contribution net of customer contributions as non.
It's great, but we'll get the benefit of the total R&D spend.
Okay, Okay any color on the margin trajectory I mean, it looks like it's kind of been bouncing around but should we expect it to gradually climb with what's kind of commercial volumes.
As volume returns margins should improve.
As I said, we're not going to see any big lumps on R&D, it's going to be pretty consistent throughout the year. So okay.
Yes.
Got it and then just on cash any planned cash restructuring in 'twenty to any any thoughts about.
Equity offerings or even <unk>.
Negotiations to get that advanced repayment down.
Down from $21 million or is that going to be a firm number.
Yeah right now that's the scheduled advanced liquidation so and there is no plans for any other equity raises right now.
So I'm sorry at the beginning of your question could you repeat sorry.
Sorry, cash restructuring cash flow.
Restructuring.
So theres always a little bit.
Restructuring going on but I think it's largely behind us the cash is going to carryover from fourth quarter into first quarter for the large restructuring we did in Q4, but it should be substantially less moving forward.
Got it alright, thanks, guys I'll jump back in the queue.
Thanks, Michael.
Our next question comes from Myles Walton with UBS.
Yeah.
Thanks, Good morning, Thanks for thanks for Simon.
Was wondering if we could touch on the March the systems I think sequentially.
Jim.
Margins, if I exclude the variables.
Last quarter, it actually went down on.
The sales increase can you give some color as to why there wasn't more leverage in the business and then also on slide 12. It talks about near term growth for our systems and support and it sort of backs into an 8% implied growth.
From that middle near term is that effectively what you're looking for for fiscal 'twenty to sales growth.
So I'll start in for Jim you can add in on the margins that the sales growth.
Year over year.
If you take out some of the 787 work that we were counting on the higher number.
Then that 8%, but year over year, it's probably on the lower than 8%.
<unk>.
Did create a little bit of a trough for us in the short term but is that.
They deliver out aircraft from inventory in the range back up we will see that recovery. So it depends on what's true what's in your baseline.
But with the rates that we know about today, we have a pretty healthy growth rate now given the challenge to all of our operating company presidents.
Double digit growth range over the.
On the planning forecast than we should.
We will have several tailwind.
We've also got pricing tailwind.
So getting.
Both revenue growth and margin growth happening in parallel we think is achievable.
Yeah. Thanks, so in terms of margins they can be lumpy, usually it's based on spares and I have to go back and look at the mix, but we may have had a higher spirits mix last quarter. Dan mentioned, the MRO was stronger in Q4 Q3 of them had been more spares and I think there was also a factor where there is a little bit of inefficiency from the massive restructuring. We did we took a lot of costs out during this peer.
Weird it causes a little bit disruption to normal efficiency. So moving forward, we look to increasing margins.
Was there was a restructuring in the systems business that was significant for it was it was just on the structure side.
It was across the company this company 1 okay.
Okay, and 1 just clarification I guess, it's been asked a couple of waves, but I'll ask it this way so if I took out the 1 timers.
You've put on or the nonrecurring ish things you put on slide 17, as the underlying business.
EBITDA less cash taxes, and cash interest and Capex is it positive in 'twenty fiscal 'twenty 2.
So we're not giving guidance yet, but I think you can look at the drivers and see that there's a lot of cash headwinds in 'twenty 2.
Okay alright. Thanks.
Thanks for months.
Our next question comes from Ron Epstein with Bank of America.
Hey, good morning, guys.
Right.
How should we think about the normalized cash flow conversion.
Once we get out beyond 'twenty, 2 and things you know, presumably the world sort of gets back to normal.
For total <unk> gets back to normal.
How should we think about that cash flow conversion.
Yeah, I'll start on GM and you can add that.
We're looking forward to not having to be servicing advances.
And to not have that number of loss, making programs not only in structures, but also in systems as I mentioned some of those LTA.
So if you if you chop away the underperformers at the bottom.
And then you extend.
Youre profitable contracts.
And then you get rid of the cash range.
We can finally get to.
Cash conversion that as is consistent with our industry peers, and we think thats going to happen within.
2 years, maybe sooner.
Yes, I would love it to give you a forecast because.
Excited about them on the team is working towards them. We just written up ready to commit externally to them I can tell you that cash conversion at some structures companies is in the high single digits. So for systems companies that should be in the teens and we're looking for it to getting there as we can.
Through the next couple of years.
But I mean, when it should be better than the teens I would hope right.
And free cash conversion for a typical supplier.
Through a cycle as you know.
Maybe 80% to 90% right I mean, sometimes it's over 100% conversion and sometimes below it depending on what youre doing with working capital. So maybe you Didnt understand my question is it's got to be better than teens right.
So I'm talking as a percentage of sales as a percentage of sales okay got it okay cool.
And then yes.
What gives you confidence debt rates or get back we will get above 2019.
As we go out is it just.
Was it led by retirements or how are you guys thinking about that.
So I have stayed in contact with the airline Ceos I know most of them then.
They're looking at a much more fuel efficient fleet.
More.
Lower cost on the MRO side, it's amazing how much of their budget is consumed by MRO today. So if they can get a newer fleet that's a competitive advantage.
And whether there is government incentives for them to retire legacy aircraft on not just domestically but.
Internationally in Europe tied to the environment.
We'll see but there is a lot of economic incentives to do so.
And then some of the underlying.
Drivers for the ramp that was occurring pre COVID-19 expansion on the middle classes in Asia.
The demand for travel in China in particular, I mean, they're already above.
2019 levels domestically.
Already happened they broke through and I know Boeing is anxious to get the.
Approvals to start selling again and shipping aircraft into China, and assuming that happens that'll be another tailwind. So I think there are there are reasons and I don't really believe that the pandemic create.
Created a permanent decrement and true.
Travel greater than maybe single digits, that's my opinion.
Certainly we've all learned to work remotely and some trips will forego business trips.
That may be travel.
Travel within companies, but.
1 of my favorite quotes is about.
The first company that loses a major order to a competitor who is willing to travel and start traveling again.
And then the demand for leisure.
Comply commercially.
And the airports are all for now so it's I think it's going to happen and plus just the.
Yeah, there has been a bit of a.
So there'll be a production gap of 2 to 3 years of.
With fewer aircraft were produced in gist.
That regression to the mean on volume will help.
As well so.
I'm optimistic it may it may not it may not happen.
And 'twenty, 2 but $23.20 for I can see it happening.
Thank you ladies and gentlemen, this is all the time here for questions. Today. This concludes transfused fourth quarter fiscal year 2021 earnings Conference call. This call will have a replay that'll be available starting today at 11.30, a M Eastern standard time until.
June 4th.
11, 59 P. M. You can access the replay by dialing 1.805 80.583, 6 and access code 366, 0826 again, you can dial 1.805 85867.
And then for an access code 366 yearly 2.6.
Thank you all for your participation and have a nice day all parties may now disconnect.
Okay.