Q2 2022 Triumph Group Inc Earnings Call
Yes.
At this time I would like to introduce Daniel J Crowley, the company's chairman 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 triumphs Q2 earnings call I hope, you're all safe and well.
Earlier today, we reported our second quarter results for fiscal year 2022.
I am pleased to share that trial demonstrated both strong margins and improving cash flow companywide.
Following us to maintain full year financial guidance, all while we continue to come through the pandemic and strengthen our portfolio and balance sheet.
Demonstrated by our new wins and announced partnerships our focus in Q2 continued to be on improving and organically growing our core business, while closing out several nonrecurring cash uses.
Our cost reduction actions continue to boost our results as the market recovers.
We continue to see promising macro trends this quarter on multiple fronts.
While organic sales declined slightly due to short term widebody platform headwinds increases in demand for commercial aviation translated into higher orders for maintenance repair and overhaul work both in terms of volume and favorable mix.
In fact staffing in our engine accessories MRO business has surpassed pre pandemic levels.
Overall, we're pleased with <unk> second quarter results, which are either in line or above our expectations, enabling us to meet our objectives.
On slide four I summarize some of the quarter's highlights our 20% increase in the quarter and MRO services continues to be the company's leading indicator of the commercial market recovery.
Prior cost reductions lean events and earlier than anticipated retirement of programmatic risks yielded an 18% EBITDA margin in our systems and support segment.
Our pivot towards growth as reflected in our wins and strategic partnerships announced in the quarter.
Portfolio actions continue to reduce debt, we have sufficient liquidity and flexibility to meet debt obligations in the normal course of business.
And last supply chain pressures are being proactively managed in collaboration with our customers to ensure supply continuity and affordability.
Jim will go into more detail on the quarter's results.
As observed across the A&D industry the market recovery will continue to be uneven over the next several quarters.
There are enough tailwind however to allow try them to relax our cost savings austerity measures from last year as the market continues to improve to retain our experienced workforce in anticipation of the ramp up will unlikely to be paced by talent and manpower capacity.
<unk> is complying with the U S executive order regarding vaccinations and is seeing a declining rate of new cases, we.
We do not expect significant impacts from our compliance we will continue to make keeping our people safe our first priority.
As we come out of the pandemic triumph is entering into a new deal with its employees.
Revisiting the value proposition to include greater flexibility and career opportunities for both salary and hourly team members.
Over the last 20 months, our employees demonstrated that they can be extremely productive and overcome life-and-death challenges without the historical command and control management culture and restrictive policies of the past.
By accelerating the adoption of empowered cross functional teams across the company.
We anticipate higher levels of engagement and productivity than before the pandemic.
And we believe that will be a preferred place to work going forward.
Triumph, we value our employees and intend to break new ground on this front in my view this new deal will be one of the silver linings of the pandemic.
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.
Few comments on the macro environment the.
The commercial aviation market recovery continues to progress with global capacity now running just 30% off 2019 levels.
Worldwide, 86% of single aisle and 64% of twin aisle aircraft are now in active service.
Recently carriers recorded two consecutive weeks, where traffic across all regions improved relative to 2019 levels.
Global travel is at the highest point since the crisis began.
Notably there was evidence of compensatory domestic schedule increases in response to the curtailment of international travel.
Which helps explains why China's domestic schedule is expected to be up nearly 30% from 2019 levels by the end of November in the U S. Domestic schedule is expected to exceed 2019 levels in the same period.
Long haul markets are down 55% to 75% to 2019, depending on region, but the good news here is that there are announcements from Singapore, removing restrictions for vaccinated travelers as of October 19th.
<unk> resumed international travel November one.
In the U S removed restrictions for vaccinated European International travelers from November eight.
All of these together should result in near term benefits as Trans Atlantic travel is expected to rise to two thirds of 2019 levels by the end of November with accelerated recovery to follow.
We'll provide additional MRO opportunities triumph over time.
Global revenue passenger kilometers, which had been hovering around $200 billion a month for the six months ending in February.
Since doubled to approximately $400 billion a month, a welcome improvement, which will drive an increased triumph MRO revenues.
Cargo demand has been very strong and currently exceeds 2019 levels in all regions, Excluding South America.
Through the first three quarters of the calendar year cargo flights are up 75% between Asia, and North America, 110% between Asia, and the EU and 97% between the EU and North America.
<unk> cargo related revenue is up 41% year over year.
Our leading indicator for MRO job inductions are up 49% in FY 'twenty two year to date over the prior year and up 10% sequentially.
The defense budget for FY 'twenty two remains in process with three or four legislative committees proposing a $778 billion top line.
And the House Appropriations Committee supporting the President's request at 753 billion.
This will be resolved in December conferences is likely to result in a final year budget around 778 billion, an increase to FY 'twenty, one $741 billion of approximately 37 billion.
Providing program stability year over year.
Slide five provides an approximation of U S defense platform positions on our lifecycle curve with new programs in the pipeline and then development on the left and sunsetting programs to the right.
<unk> is well positioned on mature production programs and on those entering their MRO phase, where we are actively engaged on both OEM MRO and third party MRO content.
The programs and the development of gross stages will be key to the future.
We are actively securing ship set content on all future vertical lift programs next generation adaptive cycle engines.
And next generation air dominance programs.
Well as the B 21.
Programs currently in the introduction phase, including the <unk> MQ25, and the CH 53 K.
And trying to build a significant ship set content on these platforms. I recently attended the first delivery of the CH 50, <unk> helicopter to the Marine Corps.
It does of course skews facility, Connecticut, and it was a well organized an exciting event.
Congratulations to the Marines and Lockheed Martin Sikorsky team as well as their entire supply base.
Our warfighters need this amazing aircraft and track is proud to provide key systems, such as the blade fold and damping system for the rotors for which we recently signed an agreement spanning <unk> three to six.
Ramping military fleets include all of that 35 variance and the KC 46 tanker, where we have existing content and are working to increase share through technology insertion and takeaways.
Commercial transport build rates are stable and the Oems are making plans for single aisle rate increases.
<unk> recently attended the Airbus supplier conference, where in Airbus shared plans to increase production of the <unk> hundred $23 21 from <unk> 45 to 65 by mid 2023.
And even higher to 70 in 2024 and <unk> 75 in 2025.
As well as increases in the production of the <unk> hundred 20 through 2025.
This is good news for the industry to try and to Airbus sales for the quarter reflect the improving Airbus single aisle outlook as our systems and support <unk> hundred 20 family sales increased 22% quarter over quarter and sequentially.
As expected the twin aisle segment recovery lags the.
The single aisle.
Boeing is implementing production fixes on the 787 and the recent decision to move to rate too for several months.
Temporary headwind to the supply base.
We continue to follow this closely and look forward to return to higher production rates and international travel.
As a result of reduced 787 shipments <unk> sales for the quarter down 6% sequentially.
However, bookings were up 57% sequentially.
Turning to slide six for the quarter Triumph recorded 67, new wins valued at $125 billion, including several large Boeing contracts for thermal acoustic insulation composite ducting and hydraulic products across multiple Boeing platforms.
Brian is a global market leader in commercial transport thermal acoustic insulation systems in this long term contract ensures that we retain that position far into the future.
New MRO wins include an agreement with Honeywell to provide support for leap engine starter components.
<unk> seven gearbox overhauls for Sabena technics.
And <unk> hundred 80 landing gear overhaul work for Collins, We also signed contracts for a multi ath chapter repair contract with Fedex and an agreement with ATSG for 737 integrated drive generators repair.
New triumph IP driven wins include orders for <unk>, H 64 fuel control upgrades, our nose wheel steering system for a classified Lockheed program.
And the aforementioned CH 53, K multiple L. Rep awards for blade Folden damping systems.
I also want to mention that in the quarter, we delivered our first <unk> hundred 20, XLR landing gear up lock flight test units to Airbus.
<unk> is a market leader in <unk> and this new innovative design provides active confirmation of up and locked position a safety enhancement.
And finally I want to highlight the recently completed joint venture between Triumph and air France, KLM known as excel.
Which will enable excel to service new fleets, such as the 787 and 737, Max which normally wouldn't transition to third party repairs for another 10 years or more.
Announced at last month's MRO Europe show, we are very excited about this transformative joint venture.
We're excited to grow this business with our partners Air France KLM.
While the current market environment includes cost to supply chain pressures.
We continuously assess our cost for labor materials and overhead.
This week I am supporting our supply chain team and hosting our top 50 suppliers with the goal of identifying capacity constraints and mitigation actions derisk the expected ramp in commercial OEM production.
We're also securing a greater level of contractual protections against increases in material costs as we renew contracts and are aware of potential inflation in some commodities.
Some examples include back to back contracting agreements with suppliers on short to medium term agreements.
The use of customers right to buy agreements for raw materials.
API adjustments based on the industry indices <unk>.
Specific protections where supply chain sources, our customer specified such as casting and IP parts.
And general protections against material price changes above a certain threshold level.
We've held 10 joint problem solving calls with our OEM customers to mitigate anticipated supply chain constraints expected over the next 12 to 18 months and.
And have been encouraged by their willingness to participate in joint problem solving.
In summary, our markets are improving and our pivot from restructuring to growth is underway.
We expect this trend to continue as commercial production rates increase into next year.
Prime grew margins in the quarter in our core systems to support business and retired several nonrecurring cash uses allowing us to maintain our financial guidance for fiscal 'twenty, two with improving cash outlook quarter over quarter and year over year.
We remain focused on our goal of doubling our profitability over our planning horizon, while deleveraging the company through the combined lift of cost reductions volume increases more favorable pricing and new products and services.
We will continue to invest sustainably in the development of our people as part of our employee new deal.
Our operations and our new 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.
Our core business continued on its path to value by growing backlog expanding margins investing sustainably retiring risks and realizing the benefits of our operating system.
Our performance through the first half coupled with the diversification of our businesses enabled us to maintain our guidance and we expect to generate positive free cash flow for the balance of the year.
We continued to execute on our plans to pair the few remaining non core businesses and product lines to decrease debt maintain liquidity and focus on our profitable core businesses.
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 eight you'll find our consolidated results for the quarter were.
We continue to improve profitability on an adjusted basis quarter over quarter.
Due to the enhanced quality of our backlog.
And net favorable reserve adjustments realized through our focus on efficiencies and retirement of certain loss contract liabilities.
MRO services continues to lead the recovery and mostly offset the short term headwinds associated with the 787 production pause.
As a result sales were down 2% organically, while the impacts of our recent divestitures and sunsetting programs and structures led to lower sales compared to the prior year.
Q2, adjusted operating income was $28 million and adjusted operating margin was 8% up 339 basis points from the prior year.
With respect to the segment results on slide nine net sales in systems and support included a 20% increase in third party MRO sales and improving commercial narrow body build rates.
Set by headwinds for the production pause on 787 and reduce spares orders.
This segment sales by end market were consistent as a percentage of sales this quarter compared to the prior year quarter with military representing just over 50% of sales reinforcing trials program portfolio diversity.
Operating margin for systems and support was 15% of 367 basis point improvement from the prior year and benefited from increasing MRO demand and net favorable reserve adjustments.
Subsequent to quarter end on October one we completed the sale of our fabrics and UK facility and licensing of certain legacy noncore product lines.
Annual sales from this business were approximately $30 million and earned below segment level average margins. This divestiture did not have an impact on our financial guidance for the year.
Summarized on slide 10 second quarter net sales for the aerospace structures segment after adjusting for divestitures and the Sunsetting 740, <unk> hundred 80 programs decreased 2% due primarily to the production pause on 787.
The continuing structures business is stable and improving as evidenced by the 7% adjusted operating margin compared to 4% in the prior year.
The recent contract win an extension with Boeing and our interiors business secure future demand expanse capabilities and provides for continued operational efficiencies as the team continues to recover from the pandemic.
Our large structures facility in Stuart, Florida remains a profitable business and we are in active discussions with several strategic parties about its future.
Turning to slide 11 and.
In the second quarter, we retired $11 million of discrete cash obligations related to settlements and the wind down of 737 production.
Excluding these sunsetting uses of cash we used $16 million of cash in the second quarter on modest working capital growth in support of anticipated production rate increases primarily on commercial narrow body platforms.
We remain focused on aggressively managing our working capital with several initiatives across the enterprise targeted to improve our inventory turns.
Capital expenditures will accelerate over the second half as we anticipate investment in our core systems and support segment in support of Ryzen, OEM and MRO demand and sustainable supporting infrastructure improvement.
On slide 12 is a summary of our net debt and liquidity.
Our net debt to EBITDA leverage ratio improved by 10% year to date at.
At the end of the quarter, our net debt was approximately $1 4 billion and our combined cash availability was about $220 million.
In connection with the sale of our <unk> facility in October we paid down approximately $24 million of our first lien notes for the proceeds.
Our next debt maturity is not until 2024 as we continue executing our deleveraging actions to strengthen our cash flow and improve our credit.
Slide 13 is a summary of our fiscal 'twenty two guidance.
Based on anticipated aircraft production rates and excluding the impacts of potential divestitures for FY 'twenty. Two we continue to expect revenue of one five to $1 6 billion.
We now expect adjusted EPS of <unk> 68 to 88.
27, <unk> increase from our prior guidance of 41 to 61.
Driven by program risk retirement.
Cash taxes net of refunds received are expected to be approximately $5 million for the year $1 million higher than prior guidance. While we continue to expect interest expense to be approximately $140 million, including approximately $137 million of cash interest.
After approximately $42 million of free cash use in the quarter, we expect to generate free cash flow over the balance of the year with approximately breakeven free cash flow in Q3, and solidly positive free cash flow in Q4.
For the full year, we continue to expect to use a $110 million to $125 million of cash from operations.
With approximately $25 million in capital expenditures, resulting in free cash use of $135 million to $150 million.
We continue to achieve our goals and have made significant progress in improving the predictability of our profitability and cash flow.
Margins improved in Q2, and we expect to be cash positive over the balance of the year.
Our cost reductions operational efficiencies improved pricing and increases in volume will all contribute to improving margins moving forward.
Measures, we are taking are making us a stronger and more competitive and sustainable company moving forward.
Now I'll turn the call back to Dan Dan.
Thanks, Jim I am pleased with our second quarter and first half results.
And we're looking forward to delivering a strong second half of the year.
Increases in our MRO services and higher OEM narrow body production rates gives us confidence that the worst of the pandemic is behind us.
We pivoted to growth through new wins, and strategic partnerships that should benefit triumph and its stakeholders going forward.
Consistent with our full year guidance will build momentum quarter over quarter by continuing the track record of growth and margin expansion in our core business.
And drive to positive free cash flow over the balance of the year.
Triumph is becoming a leaner more profitable and cash positive company.
We continue to make strides towards our future state configuration.
We are unlocking the hidden value in our business, improving our win rate and delivering benefits for all stakeholders in a responsible and sustainable way.
Kevin We're happy now to take any questions.
Okay.
At this time the officers of the company would like to open the formed any questions that 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 have a question. Please press star one on your push button.
Should you wish to withdraw your question press the pound key questions will be taken in the order received please standby for our first question.
Our first question comes from Myles Walton with UBS.
Hey, good morning.
I was wondering if I could pick up where you left off on the EPS guidance and.
I think you mentioned higher risk retirements, just to get to that that level of EPS for the full year.
Or do you think of this as idiosyncratic margin uplift from risk retirements.
E <unk>.
<unk> what is the other income that you are currently looking for that.
Looking like it might be a little bit of a help to you for the year as well.
Yes, sure well cyclists Jim.
Risk retirement, we have a lot of programs are long running.
And they can they can come up with estimates.
For cost to go and as we improve the estimates through actions through better sourcing through efficiency, we're able to reduce.
The cost estimate for the rest of the year and Thats whats going on that combined with the changes in the market where the demand on programs that are lower margin goes down higher margin demand goes up that all adds to the mix and our margin improvement.
Okay.
So Jimmy <unk> 70 <unk>.
The high end 70 implied for the back half versus the 19% in the first half.
Is there anything else.
Is the other income line.
Running above that $45 million to $50 million level you gave in August.
Any other color you would want to give this just seems to imply a pretty pretty healthy step up in margins.
Okay.
So.
It is really primarily the larger program's risk retirement, so whether it would be $4 seven or some of the other large platforms.
Where we have cost the rest of it would be much higher and we'd be able to close the amount at a better rate.
If you look in the Q and the MD&A youre going to see a lot of the description there theres a number of programs. The majority of them are positive adjustments there are some negative but overall.
It's net risk retirement is really the driver.
Okay, all right I'll leave it at one thanks.
Our next question comes from Sheila <unk> with Jefferies.
Good morning.
Thank you for the time maybe.
If we could talk about alright, Ken are you talking about that a little bit that you guys are still in the process kind of where do we go from here, what's the timing lag and then what do we think about next steps for the company Wednesday basketball.
And what the structure looks like.
Sure.
As I mentioned, we have we're in discussions with several strategic parties on Stewart and the important thing about Stewart is it's not that one potential transaction. It's really the overall journey, we've been on to transform the company.
And what's left in structures as the interiors business, a little bit of 74, 7%.
And then <unk>.
<unk>, which is <unk>.
Primarily 767, but there's some <unk> there is some triple seven in there as well.
Construction has just become a smaller part of the business and if you look back over the first half of last year.
We're 50% structures sales and 50%.
Systems this year for the first half or two thirds systems and in fact more than two thirds of the profitability of the company comes from systems. Now so structures has become a smaller part of the business Stuart's a profitable and valuable business.
We're going to continue to run it.
Until it's futures determined.
And just to follow up on that for the second half what do we think about profitability for the structures business.
So Sam Hi, mobile high single double digit margins does that is that correct is that how we should think about it.
Yes, the margins are a little lumpy there because they are longer term contracts that have estimates involved in them, but I think we've been looking at kind of lower single digit margins in that segment has been the baseline.
Okay. Thank you.
Okay.
Our next question comes from Peter Arment with Baird.
Hey, good morning actually her her accrued normal line for Peter today.
Maybe if I could just record free cash flow here kind of in the quarter and through the balance of the year.
Operating out some of the noise you had $11 million of call. It nonrecurring users this quarter, which is looks like it's going to step up in the back half what advance furnace return of $21 million a quarter. It's still have 31 now on seven core southern Closeouts and you mentioned the higher Capex too. So I guess the question is what is driving the material improvement in the back half.
And call it the core free cash flow I think it's a positive free cash flow on a reported basis overall, even with the significantly higher onetime usage has been we just won in the second quarter.
Yes. Thanks.
A number of drivers for the free cash flow and thanks for highlighting the nonrecurring ones because it's important to back those out if you really want to understand what's going on in the core.
The sales are going to be higher in the second half of the year. We gave guidance in the one five to one six range I think the first half sales were only about 47% of that.
Fourth quarter is always a very strong quarter.
Seasonally as well so volume increases are a key.
Part of the driver.
Our working capital initiatives are paying off to inventory is stable and declining we've been burning off excess inventory.
And grown during the pandemic and we've gotten more efficient as well as we were able to take our excess resources and put them to work and interest in these programs.
Cost outs as well.
And Thats all part of the efficiency programs price ups, because we've had contracts that have been up for renewal, we're enabled to reestablish pricing to create fair margins.
And less restructuring.
We were much higher restructuring last year.
And the benefits of those restructuring is falling through in our portfolio changes are another element of it.
We've eliminated loss programs, either through fixing them with new contracts or exiting them.
And we've been able to grow the more profitable programs. So it's no one thing it's a concerted effort and sustainable. So we're pleased with the progress we're making on cash as I mentioned in the first half we used 193 million of cash we said it would be around cash breakeven roughly is in the third quarter.
And that would imply in the fourth quarter to hit our guidance range would be about $43 million cash used to maybe 58, I'm sorry, $43 million cash generation to 58 million cash generation, which I referred to are solidly positive cash flow.
So cash is very important we're focused on it and we've got a lot of good drivers as tailwind.
Okay. Thanks, and then just a follow up on that since you mentioned the price increases can you just give us an update on where we stand on the LTA negotiations I was understanding we should really be expecting those to flow through until we get closer to exiting the year, just maybe any color on sizing that.
Fourth quarter and enter 2020.
Yes, there is a number of contracts that you saw recently announced some of those include price adjustments.
We did mentioned previously that there are some contracts we did earlier in the year.
That are going to kick in price increases in the fourth fiscal quarter for us which starts in January so thats, the beginning of some important and meaningful price increases and that's part of.
The improvement in profitability and cash moving forward, but there is no one big contract and again diversification is contracts enables us to address costs and pricing on ongoing basis contracts can range from five to seven years. So we have opportunities all along the way to continue to improve profitability.
Okay.
I'll just add Jim that.
We're pretty well positioned between the Oems and the suppliers the suppliers tend to supply commodity items.
That we can compete gay competition on it and we have no more of the IP that gives us pricing.
Power with our Oems, but at the same time, we're seeing these volume increases and that's also helping us on margin expansion because we took a lot of cost out during the pandemic, we don't need to add that back.
As the volumes return.
I appreciate it I'll hop back in queue.
Okay.
Our next question comes from Seth Basham with J P. Morgan.
Okay.
Jim I just wanted to follow up some of the questions earlier about the <unk>.
<unk> ability.
Especially in structures and so.
If we look at the profitability in the quarter.
Thanks, Kim adjustment.
That benefited.
Structures in the quarter.
When we think about the core structures business that will remain post Stuart.
Is that profitable right now.
Okay.
So we don't break out the two pieces in structures.
Not.
Structures are profitable I would say the rest of the business is.
In the breakeven range at the moment.
But as Max in particular returns, we're going to see rapid acceleration of profitability and cash flow there because as the overall company is not impacted materially by Max but in tears business and one of our other shops Valencia, California is more impacted so.
That's where it stands and infrastructures.
Right, Okay, Okay and then.
When he spoke earlier about where that margin was going in the second half it sounded like some of the reserve releases that you expect will be on some of those bigger sunsetting structures programs.
Which I would think that that would bring the margin.
Up and structures in the in the second half is that is there.
That fair.
We're not really forecasting any reserve releases I think what we've seen is improvement and reduction reserves.
In the first half of the year.
Okay Hospital, we can continue to derisk them, but at the moment our estimates for cost moving forward are what they are for the second quarter. So we don't forecast that theyre going to go down further.
What's encouraging about the Max is the rates are already up above 20, and they were headed to 30 to 40 to 50 over the next three years.
And so interiors, which which is part of structures was a profitable business pre pandemic they've been hit pretty hard they were a drag on earnings through the pandemic and now they're starting to come back in volume and with this long term agreement that Jim mentioned.
In our remarks.
That's only going to.
Give us more certainty as to margin recovery and structures and interiors in particular.
Okay, and then Dan just as we think bigger picture about the industry.
You mentioned meeting with suppliers and talking about mitigating some of the pressures.
That may be ahead over the next several quarters can you talk a little bit about what are the areas that are the most challenging right now in the supply chain thinking about it more just from an overall industry perspective.
Yes.
So we have some of the same constraints that existed during the ramp up in 2018 2019.
Today than we had than raw materials.
Costings forging some specialty items like bearings, and then you add to that all of the commodities that are in.
Short supply because of the overall pandemic chemicals liquid nitrogen.
Resins. So it's in some ways. We've got this this perfect storm of rising demand and freight military and commercial against the backdrop of short supply and a cash strapped supply chain, who hasnt had.
The dry powder to invest in capacity or or expand.
So by meeting with our suppliers and our customers outside of lead time, what we're doing is we're defining what has to happen now so that in 12 to 18 months when the rate really hits us we can be ready. The first part is communicating the rates with confidence because of people day rate the production rates.
And I believe them.
It won't hire they won't add on capacity number to us.
Sure up those areas of short supply that are known.
Past few constraints.
And that may be dual sourcing maybe.
May be developing new sources and low cost countries, but we know what those likely constraints are going to be and number three is put better measurement systems in place no, which suppliers are at risk and whereas the inventory.
Digital thread from the lowest tier supplier all the way up to the OEM all those things together are going to help us mitigate this there'll be some some short term shortages in stock outs, but our risk or to go down because we are starting early.
Great. That's very helpful. Thank you.
Our next question comes from David Strauss with Barclays.
Okay.
Thanks, Good morning.
Okay.
When would you expect systems and support to grow.
Year over year in the second half.
Yes, we have a back loaded revenue plan for our Q3 Q4, and then beyond that fiscal year 23 to 26 because of the OEM rates strong military budgets, we're looking at high single digit growth for systems business over our planning forecast as some of the operate.
Companies will be double digit growth rate so.
It's a much better place to be than March of 2020, we're staring into a <unk>.
<unk> of unknown demand.
And the numbers I rattled off related to commercial aviation just reinforced that I've been one of the more bullish.
<unk> is about the timing of a international business travel recovery a lot of folks that hey, it's going to be $24 25, IC it sooner.
I think with the borders reopening we'll have data to support that.
Okay.
And then Dan I guess overall the outlook on defense.
We heard from a number of the primes.
Recently about.
Flat, maybe even down next year for their defense businesses. Obviously, you have I think you mentioned systems support is about 50% defense. How do you feel about your defense exposure and the ability to grow as we look out into next year.
So the key is what platforms are you on so.
I've described the topline defense budgets, which are growing.
But.
You want to be on those platforms that are being protected in the budget and are tied to critical mission gaps like.
Tankers MQ25, there is a new tankers, you know that Lockheed Martin and others are competing for.
And then just building out the fiber cadre of about.
35% and others new versions of F 15.
Theyre being introduced and there's money going into this digital <unk>.
Century, a series of fighters.
So and then the army's modernization of future vertical lift we feel very good about our positioning on that theres two separate programs there.
One called far the future attack reconnaissance aircraft, and then wound called flora future long range attack aircraft and we're supporting Bell and Sikorsky on pharma and then the bill.
Versus the Sikorsky Boeing team on the far contact we have.
We have content different content on each program, but that those programs appear to be protected in the defense budget. So depending on the OEM and the prime you talk to they're going to have different exposure.
And we feel confident that.
We're going to see the continued support for our platform so I'm not concerned about it.
Alright, thanks, very much you bet.
Okay.
Our next question comes from Ron Epstein with Bank of America.
Yeah, Good hey, good morning, guys.
Maybe just following up on the supply chain question. What are you seeing on labor right and you're in your own businesses and when you look down into your suppliers.
So.
Starting with at triumph.
We furloughed, a large percentage of our workforce during the pandemic and the take rate for <unk> is about 50%. So a lot of folks that went off to other industries, let's say.
Amazon logistics, they didn't come back.
<unk> to improve now a little bit.
Some of the.
U S subsidies.
<unk> ended in September we're starting to see more folks come back in fact that our Grand Prairie engine accessories plan, our head count now is higher than it was pre pandemic and they suffered a big hit.
Midway through the downturn.
But labor is a topic, that's getting lots of discussion at AIA.
Formed a civil Aviation leadership Council that was key to sponsoring the jobs Protection Act for aerospace workers lots of things happened for the airlines early on nothing was happening for our contractors like triumph in and our peers. So the money that is now flowing out to preserve.
<unk> is helpful.
But we're thinking of new channels of where to get folks the tech schools, even down to the high schools pipelining.
And we're putting in.
New engagement programs around lean so that we can get more output with with fewer employees and we're investing in capital equipment to get higher.
Machine productivity, so it's not going to be one lever that offset.
Labor capacity constraints.
One thing Thats true about the defense industry aerospace as well as.
We've gone through such boom and bust cycles.
So through the decades that we know how to re grow our workforce, it's a proven capability new people come in.
And Theres certainly a lot more automation that we had back in the eighties when I started so.
Although it is going to be a constraint, it's something we're working on and I. Appreciate the government support we're seeing on this front.
Got it got it got it and then changing gears a little bit.
What are you seeing in.
Space and the space business, you Havent talked heck of a lot about that.
I think you guys recognize that as a growth area.
What potential do you see there for China.
Yes, I spent a big chunk of my early career and space on both launch vehicles in satellites and so I know it well and when we came into.
When I came to triumph, we even renamed our structures business to be arrows aerospace structures rather than.
The traditional aircraft focus.
For triumph, we see the opportunities and actuation.
And power.
We're investing in electric actuation replace hydraulics hydraulics are not really part of the space picture.
On one hand reusable launch vehicles as you.
Reduces demand for consumable products, but on the other hand, the volume of constellations that are going up whether it's.
Elon boss scored Spacex.
Or bezos venture that the volumes are going up so we're going to find niches, where we can support.
Yes.
Precision high reliability products are needed.
Im a little bit more excited about industrial applications than space.
<unk> nuclear actuation.
That's something that most people are not aware of and we're trying to grow that business, especially in mechanical good controls that help monitor.
The status of the reactors.
As money goes into infrastructure, we're going to be working hard to grow our mechanical controls business, which is one of our most profitable so you'll probably see more press releases on that.
Ron and Youll see on space.
Great. Thank you very much.
Beth.
Okay.
Our next question comes from Taiwan or with Cowen.
Yes.
Hi. Your line is open you can ask your question.
Okay.
Your line is muted could you. Please on mute your line.
Do you want me to just move on to the next question.
Okay.
Yes. Please.
Our next question comes from micro ceremony with truest.
Hey, good morning, guys. Thanks for taking the questions.
Maybe just to go back I think to miles from SaaS and get some clarity on second half margins would structure I guess, you had $7 6 million give or take a positive.
Favorable adjustments in the quarter and as we look to second half it doesn't sound like there is any more risk retirements or reserve releases. So I mean are we just looking at a kind of a sustained core improved margin level for second half.
On the programs within within structures.
At any point in time, we're not forecasting to improve beyond the estimates for costs, we have but as soon as we take actions to become where it's likely not to be realized then we're going to show improvement. So the opportunities certainly exist and I can tell you we're driving towards continue to reduce the cost of closeout cost in particular on.
Programs or anything like $4 seven so there is the opportunity there, but that's not in our forecast right now.
But still overall is solidly profitable in the single digits with our current estimates.
Okay got it and then Jim just on the.
The cash flow.
Obviously ex all the onetime items looking at this this kind of second half rate, even the exit rate in the fourth quarter I mean, I don't want to take that quarterly in.
Kind of I guess $40 million to $50 million, but I don't want to run rate that but I mean looking into fiscal 'twenty three I mean, it seems like we shouldnt have any more onetime items. It seems like you guys should be solidly cash flow positive whether that's.
100, $200 million I mean is there anything else beyond needs. These final closeout costs, one time allowance payback or anything else, we should be thinking about as we move into 'twenty three for cash.
We're pleased with the progress we're making this year when really kind of focused on the second half of this year and the closeout that's going on we are in the planning phases for next year. So it dependent on what actions taken decisions, we make including strategic planning and our budgeting is going to tell how we're going to do for next year's cash flow. So I'm not ready to give any guidance for next year's cash flow, but certainly exit.
This year.
And there is some seasonality there too we're going to see a strong fourth quarter and as you mentioned in the range of $50 million.
And all of those tailwind that we've talked about do continue.
Whether it's volume increasing the opportunity to reprice.
Cost continued to be contained.
Less restructuring and a better portfolio are all going to add.
<unk> momentum going into next year.
Okay, great. Thanks, guys.
Okay.
Our next question comes from Myles Walton with UBS.
Thanks.
[laughter] might go at this a little bit of a different way than on the last call. I think you talked about doubling EBITDA by fiscal 'twenty five off of the base here being this year 'twenty two.
It sounds like from Jim's comment based on your EBITDA is going up on the basis of margin performance.
Are we still doubling this higher level of EBITDA in 'twenty two into your twenty-five forecast are or do you want to put a specific number around that.
Okay.
So I think the key is that.
We get early returns on this this this commitment to double margins and we're seeing that.
Quarter year over year.
Our Q2 results. So we're feeling good about it to be out of the gates quickly on margin expansion and this was before the volume effect really kicks in.
Even with 787 rate cuts down we were able to expand margins in our assistance and support.
And we're meeting with our teams next week to go through there.
Our strategies and growth plans for our fiscal 'twenty three to 26, which is our planning horizon.
And we've done two passes of this and the numbers are very encouraging.
We don't want to provide multiyear guidance yet but.
We don't need a lot of new wins, there is not a big wedge of unidentified work to support the volume increases that we seek and then combined with the cost reductions.
And the efforts to retire cash using unprofitable businesses.
We're going to have a lot of tailwind going into there can we get there in 2000.
Five can we get to double in 2006, that's still in the uncertainty band for the for the forecasting we're doing but when I come back in our next earnings call.
<unk> locked down our fiscal 'twenty three plan to be able to talk more about that.
So I'd say look at what we're doing in the short term which is encouraging.
Then look at the macro trends on both.
Both.
Exited lower lower.
Quality lower profitability programs volume increases and they are all enablers to the margin growth that I described Jim you want to add anything.
I think our goal remains to double.
EBITDA dollars is what we're targeting but it's a goal in our planning process. So as we do strategic planning, we're going to look at all the opportunities to do that and the risk associated with those.
Dan said that process is ongoing but we look forward to telling you more about it I think the trend is clear it's just magnitude we're working on now.
Okay, and maybe just one clarification I think.
In the slides and our remarks, he talked about the 787 is being a shortfall for revenue.
It did look like military was down and I don't know if that's F 35, as we've seen in other companies during this earning season or other disruption on the defense side, but defense revenues show up as you expected in the second quarter.
It was slightly down in the second quarter, mostly due to one program. We built some complex actuators for the V 22, and that program was held up in the quarter due to some supply chain.
Delays and those products are now starting to ship early in Q3 that we expect to have a strong second half of the year. So there's no.
Larger platform.
Our concern related to military growth. It was a short term timing on deliveries, we know what drove it and we're fixing it.
Okay. Thank you.
You bet.
Since there are no further questions at this time. This concludes triumph group's second quarter fiscal year 2022 earnings conference call. This call. So has the replay that'll be available today at 11 30 am Eastern standard time through the 23rd at 11 59 PM Easter standard time, you can access the replay by dialing one eight.
<unk> five <unk> five a 367 and entering access code 706 to $95 five again to access. The replay you can dial one 800, <unk> five <unk> hundred 67, and entering the access code 706 to 90 515.
Thank you all for participating and have a nice day all parties may disconnect now.
Okay.
[music].