Q4 2022 Triumph Group Inc Earnings Call
Welcome to triumphs fourth quarter and fiscal year 2022 results conference call.
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Broadcast without explicit written approval I would now like to introduce Tom Quigley Triumph, Vice President of Investor Relations and controller, who will provide a brief opening statement.
Thank you good morning, and welcome to our fourth quarter and fiscal 2022 earnings call today I'm joined by Dan Crowley, The company's Chairman, President and Chief Executive Officer, Jim Mccabe, Senior Vice President and Chief Financial Officer try it.
I'll call, we'll be referring to the supplemental slides, which are posted on our website.
Statements on this call constitute forward looking statements within the meaning of the private Securities Litigation Reform Act 1995.
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 try and reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release, which can be found on our website at www Dot triumph group's dot com.
The format of the call today will be slightly different and we will open with color on the quarter and operating environment.
Jim will walk through the results for the quarter and year.
Dan will then discuss actions were taken to support revenue growth and deliver improved margin performance with Jim returning to provide our outlook before opening up to Q&A, Dan I'll turn it over to you.
Hey, Thanks, Tom for the fourth quarter trying to delivered on our strategic commitments and generated positive free cash flow and strong margins for the second consecutive quarter and our core systems and support segment and.
And we did so in a challenging macro environment, while positioning for increasing demand.
Growth in our MRO and freighter end markets helped to offset headwinds from omicron and 787, along with timing delays, there's a small number of military and legacy structures programs that are expected to fully recover in early fiscal 2023.
We have better clarity on near term and multiyear OEM and MRO demands than we've had in the past two years and we like what we see.
All markets beyond wide body commercial continue to improve the triumph is positioned to realize the benefits of our diversification strategy.
We were able to provide guidance for fiscal 'twenty, three that reflects increasing core revenue and improving profitability and cash flow.
We will also provide color on our multi year outlook that gives us confidence in the sustained aviation recovery.
Brian expands our profitability and cash flow year over year, we are maintaining our goal to double profitability over fiscal years 2022 to 2025.
Driven by improved OEM production rates.
Banded MRO volumes enhanced pricing from recent contract extensions and lower cost structure as a result of our transformation.
As we stabilize operations and our balance sheet, our focus is pivoting to growth in.
In the fiscal year, we secured over $2 2 billion.
New orders across the company, which reinforces that our backlog has begun to grow on.
On slide three I summarize the quarter's highlights first we generated free cash flow of $29 million driven by our improving operations and reduced working capital.
A more favorable sales mix yielded a 19% EBITDA margin in our systems and support segment as the benefits through cost reductions and lean events flow to the bottom line.
Like many of our peers, our organic sales declined slightly due to short term order deferrals on commercial wide body.
<unk> supply chain driven shipment delays.
So partially offset by strong increases in MRO orders.
We expect this temporary flat spot in the recovery to abate early in our fiscal 2023.
That said our actions to mitigate supply chain constraints lessened the impact on trial as we partner with our customers and suppliers to ensure supply continuity and affordability.
Despite the mentioned headwinds sales in our Q4 in our OEM and MRO end markets are up 18% and 21% sequentially.
As compared to Q3.
MRO part number inductions, a key measure of total volume coming into our shops is up 34% quarter over quarter and 16% sequentially.
Yeah.
The increased flight activity, especially in North America is benefiting triumphs commercial airline sales to operators, which are up 57% sequentially and 66% year over year and our <unk>.
Greater segment.
Sales were up 60% sequentially and 9% year over year.
Slide four depicts OEM and MRO sequential sales for both commercial and military segments.
Notably commercial OEM sales were stable with increasing MRO sales driven by commercial transport and cargo while military OEM sales are up on the strength of V 22, and CH 53, K shipments with.
With similar increases in overall work on the C 17, and FAA 18 aircraft.
Spending on the health of our supply chain.
<unk> majority of our 3000 suppliers came through the pandemic and are now preparing for increased levels of production.
While ongoing inflationary pressures impact fuel freight metallic products and labor for both triumph and our suppliers, whose purchase materials make up two thirds of our cost of sales.
We are focused on solutions not excuses.
We commenced senior level discussions with our top 10 customers last year to get ahead of these challenges and Hello supplier conference.
With over 240 suppliers in our Q4 <unk>.
Active communication advanced forecasting AI based risk management.
Innovative staffing approaches along with dual sourcing and disciplined price management will help us manage the current inflationary environment and coming ramp up.
The war in Ukraine commenced during the quarter.
<unk> suspended the small amount of business, we do in Russia, and Dolores, which totals less than one half of 1% and total sales.
While the direct financial impact is not material to triumph, we are closely monitoring the broader impacts across the global economy, the impacts of China Lockdowns have been similarly small on triumph revenue.
So we're through the transition of your year that was fiscal 2022 and looking forward to a sustained recovery in the payoff for our transformation efforts.
For our share of the actions triumph is taking to drive revenue growth and improve margins over fiscal 'twenty three to 'twenty five.
Let me turn the call over to Jim to cover our fourth quarter and fiscal year in more detail Jim.
Thanks, Dan and good morning, everyone.
As I review the financial results for the quarter and fiscal year. Please refer to the presentation posted with our earnings release today.
I will discuss tramps adjusted results. So please see our earnings press release and supplemental slides in the presentation for the explanation of our adjustments.
Triumph was cash positive again this quarter.
On slide five of our consolidated results for the quarter revenue of $387 million reflects increased revenue from narrow body and business jet platforms offset by short term headwinds on 787 is delivery timing on a military program and are geared solutions business.
Revenue continues to shift towards our core with systems and support revenue now, making up 74% of total revenue in the quarter up 10 percentage points from 64% a year ago.
Adjusted operating income of $43 million represents 11% operating margin up from 7% a year ago.
Systems and support generated substantially all of the operating income this quarter.
Our adjustments this quarter include a $4 million gain on the sale of assets as we settle working capital adjustments on prior divestitures.
$5 million of restructuring costs for previously announced facility closures and reductions in SG&A and overhead.
Separately, we know tie some of the smaller pension liabilities to reduce costs, resulting in a $32 million noncash pension charge in the quarter.
Turning to slide six you'll find our fiscal 'twenty two results as expected our net sales declined with planned divestiture and sunsetting programs, while our mix of sales included sizeable MRO growth.
Our full year adjusted operating income was $135 million, representing an adjusted operating margin of 9% up 349 basis points over the prior year.
Turning to slide seven Youll see our systems to support results and highlights revenue.
Revenue in the quarter include higher narrow body and biz jet systems content.
Systems and support operating income was $49 million or 17% for the quarter, which is a 408 basis point increase over last year.
Systems and support EBITDA was $55 million or 19% of 420 basis point increase over last year, another step towards our goal of doubling EBITDA over the next three years.
Commercial MRO sales were significant source of growth up 17% in the quarter and 14% for the year. This.
This sales strength, along with the benefits of the aviation manufacturers job protection program enhanced our margins, while ensuring trying to retain critical talent to support the expected OEM production ramp later in the calendar year.
On slide eight.
The results of our structures segment.
<unk> revenue of $100 million was up 3% organically over last year, excluding divestitures and sunsetting programs.
137 production rate increases and interiors contributed to the organic growth.
Structures now contribute 26% of total revenue as we continue to see the revenue mix shift towards systems and support.
The sale of our Stewart structures facility is expected to close the first half of this calendar year.
Required government and customer approvals are completing on plan.
This divestiture marks the comprehensive exit of our build to print and contract manufacturing businesses, leaving only closeout of residual 747 structures deliveries from inventory and divested site transitions in FY 'twenty three.
Following the divestiture system support is expected to approach 85% of consolidated sales, while interiors will grow over time with a projected commercial OEM rate increases.
Slide nine provides our free cash flow walk for the quarter and year to date.
We generated $29 million of free cash flow in the quarter as we continue to reduce nonrecurring cash uses.
As expected free cash flow. This quarter included $25 million of nonrecurring cash drivers comprised of $21 million of advanced liquidations and $4 million for previously accrued 747 losses and shutdown costs.
Our full year results included a total of 164 million of nonrecurring cash uses as detailed on the slide these nonrecurring.
The impacts are on a steady decline as we achieved predictable financial performance excluding.
Excluding these items were 7 million cash positive for FY 'twenty two.
Capital expenditures were $4 million in the quarter and $20 million in the fiscal year with higher capital investments forecasted over our planning horizon as we invest in our systems and support segment.
On slide 10 is a schedule of our net debt and liquidity.
Our efforts to strengthen the balance sheet or paying off at the end of the quarter, we had about $1 $4 billion of net debt down 2% from a year ago. We also had about $300 million of cash availability.
Which is more than sufficient for our projected needs.
During the fiscal year, we paid down our first lien notes by $137 million from proceeds from divestitures.
We also extended the maturity of our AR securitization facility to November of 2024, and increased its capacity from $75 million to $100 million.
It serves as a low cost source of contingent liquidity.
Our next debt maturity is over two years from now we will continue to delever by expanding EBITDA and free cash flow in our continuing businesses.
Our target leverage ratio is three to four times adjusted Bank EBITDA.
Now I'll turn the call back to Dan for more color on end market expectations and our recent wins all of which are factors in our outlook for fiscal 'twenty three and beyond.
Thanks, Jim Bill.
Building on our incremental operational and financial progress year over year I'll recap of our recent wins and share how we are positioning triumph in the macro environment for fiscal 'twenty three and beyond.
Prime continues to win in a competitive marketplace on the strength of our platform incumbency innovative engineering and IP.
As noted we won more than $2 2 billion of new orders in fiscal 'twenty two the highest in the last six years.
Turning to slides 11 to 12 wins for the quarter, our diverse spanning OEM and MRO markets and comprised of military and commercial awards.
Helicopters fighters E VTOL aircrafts passenger to freighter cargo conversions commercial transport and business Jets.
We are finding new applications for our existing IP across a wide variety of products and services and market segments.
<unk> Strategic awards include another win in the growing passenger to freighter conversion market expanding content with Boeing global services and.
And an agreement with safran to overhaul actuators on Vista jet business Jets.
Recall, we set an internal goal to generate sales from new products platforms and customers.
By 25% over the next three years and we're well on our way.
Slide 13 references fiscal 2022 full year new business results.
Excluding follow on awards the value of new orders is up more than 60% from prior year as our efforts to engage new and existing customers with our full portfolio of capabilities gained momentum.
Book to Bill for fiscal 2022 is 116 and organic growth trend, we expect to continue over our planning horizon.
Looking at the broader markets on slide 14, we see strength in the military freighter narrow body and MRO demand all at the same time with wide body MRO increases now appearing as fleet retirement slow.
Military sales now comprise 35% of <unk> revenue.
Up from 20% five years ago.
<unk>, most recent 2023 Dod acquisition budget.
Flex a topline increase of three 8% to 813 billion with trials supported programs benefiting from strong support.
Yeah.
<unk> is well positioned on military platforms across the lifecycle.
On the front end triumph is substantial and growing content on new platforms, such as the future vertical lift with Invictus and Raider X. The MQ25, refueling drone and the T <unk> Red Hawk trainer.
The mid cycle, we supply critical content on existing production programs such as the CH 53, K F 35 and V 22.
We are engaged in multiple campaigns to supply fuel thermal and hydraulic components, we expect to add more F 35 content in the near future.
On the tail end of the lifecycle, we continue to expand aftermarket offerings across platforms, such as the UAE 68.
64, the F 15 F 16 C 17 in all versions of the FAA team.
Overall, we expect military end markets to grow modestly over the next few years for <unk> military sales to keep pace or exceed this growth rate.
On the commercial front recent global flight activity increased to 68% of 2019 levels. Despite very low levels of flight activity in China and Russia.
U S flight activity is at 84% of 2019 levels, followed by 75% recovery in Europe , 71% in the Middle East and Africa.
66% and Asia Pacific.
Yes.
Of note Trans Atlantic flights between the U S and EU are up 37% over the last month to 80% in 2019 levels, indicating a strong upswing in international travel.
This increased flight activity benefits triumph in two ways first through increased commercial MRO volumes and second the new OEM aircraft order activity is gaining momentum and will drive single aisle rate increases.
Airbus has reached the Qantas order.
A good example is it includes single aisle orders for the <unk> hundred 20, and the <unk> hundred 20. In addition to <unk> hundred 50 twin aisle orders.
Slide 15 shows anticipated rate increases for key commercial programs indexed to fiscal 2019 production rates and the incremental revenue contribution over our planning horizon.
737, Max rates have started to rebound.
While 787 production remains at low rates.
<unk> anticipates increases later this fiscal year.
737, Max 787, <unk> hundred 20 family and the <unk> hundred 50, or some of <unk> largest programs.
Collectively are expected to increase <unk> sales by over 300 million from fiscal 'twenty to fiscal 'twenty five.
We're excited about the freighter conversion markets as well.
Freighter conversion orders are projected to double from Cove, its consumption of passenger jet belly capacity.
The increase in e-commerce.
<unk> is well positioned to capitalize on this demand with hydraulic power packs and actuation to drive cargo doors and cabin acoustic insulation, inducting modifications, which are required and the conversion effort.
Over the last few quarters, we want conversion content on the signed <unk> in mammoth programs.
We would expect others to follow.
Last collaborations such as our joint venture with Air, France, KLM called Excel Americas.
And Honeywell channel partnership will generate MRO opportunities on growing commercial platforms earlier in their lifecycle than our competitors.
We plan to expand these partnerships throughout key markets, including the Americas, Europe Asia Pacific and the Middle East where triumph will be represented at next week's global Aerospace summit and the UAE.
Before Jim presents our guidance.
I want to talk about the company triumph and our brand.
Shown on slide 16, we started fiscal 2023 by launching a new brand identity for the company that reflects our significant transformation.
Triumph has transformed from a decentralized holding company to a pure play provider of high performance systems in value added aftermarket services.
For this reason we removed the word group from our brand name as we now embrace a one company many solutions operating philosophy.
<unk> New logo features a sleek modernized version of our company's classic T symbol, a nod to try and progress in forward velocity.
Operationally, we removed a layer of overhead to better serve the needs of our broad customer base.
We will continue to report in two segments.
We are now organized around our core operating companies, which places our P&L leaders closer to the customer and senior management and improves internal alignment.
As we move forward.
Triumph is powered by diversity, where our competitive strength comes from our complimentary blend of people products platforms and end markets.
This broader take on diversity helps trying to be more resilient and to perform at higher levels. So that we can remain differentiated in the market and deliver enhanced shareholder value year over year.
With our recent wins market trends and company relaunched as a backdrop, Jim will now walk you through the details of our fiscal 'twenty three guidance.
Thanks, Dan.
To set the stage for where triangle is going let's reflect on how far we've come.
Slide 17 demonstrates that over the past five years by design Tramp shrunk to its profitable core overcoming the pandemic and improving financial performance.
Over the same period.
EBITDA margin percentage has more than doubled as we pivoted to more IP based content with a stronger mix of military and commercial sales, while driving out cost to match, the smaller but healthier business space.
Free cash improved also as the proceeds from recent divestitures allowed us to reduce debt and leverage while the remaining portfolio continues to improve its cash conversion.
This all results in a more predictable financial future.
Turning to the future on slide 18, specifically within our systems and support segment. The approximately $1 billion in FY 'twenty two sales were split 57% OEM production and 43% aftermarket and military sales comprised 50% of segment sales.
As noted short term growth in this segment is expected to be driven by ramping OEM production rates.
As a result, we expect growth in this market to be between 18 and 22% in FY 'twenty three.
Two thirds of system that supports FY 'twenty two profitability came from aftermarket.
We expect growing MRO sales to yield segment EBITDA margins just over 20% for the year.
As we look beyond FY 'twenty three to FY 'twenty five we expect revenues will exceed FY 'twenty levels with segment margins expanded into the low to mid 20% range.
Systems and support provides a strong foundation for solid organic growth, which should continue to yield improving margins and cash flow year over year.
Turning to slide 19 for our full year guidance.
Based on anticipated aircraft production rates and assuming a Q1 closure on the pending Stuart facility sale.
We expect FY 'twenty three revenue of one two to $1 3 billion.
Which assumes organic growth of our core business of 8% to 12%.
We forecast EPS of 40 to 60 per diluted share.
Our earnings expectations take into account certain supply chain and inflationary pressures and updated actuarial assumptions under our pension plan as noted in the appendix.
Cash taxes net of refunds received are expected to be approximately $7 million for FY 'twenty three will interest expense is expected to be $129 million, including $123 million of cash interest.
For the full year, excluding the impacts of the actions and structures, we expect to generate $30 million to $45 million of cash from operations with approximately $30 million in capital expenditures, resulting in core free cash flow of about breakeven to $15 million in fiscal 'twenty three.
Our structure is actions include the liquidation of advances and the remaining closure and where sale of facilities and programs.
As of March 31, we had $104 million remaining in advances and the timing and nature of these liquidations is still to be determined.
The closure and sale of legacy facilities and programs are expected to use between $70 million to $75 million of cash in fiscal 'twenty, three with $30 million anticipated to be in Q1.
As with our results over FY 18 to FY 'twenty two our goal of doubling our continued FY 'twenty two EBITDA by FY 'twenty five remains our focus is expected to be achieved primarily through commercial OEM production rate increases MRO expansion.
Actual pricing improvements and increased efficiencies from prior cost reduction actions.
In addition over a four year planning horizon, we are targeting a consolidated EBITDA margin of approximately 20% lower free cash flow conversion of over 10% of sales.
We look forward to reporting on our progress on each of these initiatives quarterly as we approach fiscal 'twenty five.
Now I'll turn the call back to Dan Dan.
In summary, I am pleased with our year over year improvement, providing us with solid momentum as we enter fiscal 2023.
I am further encouraged by the near term market recovery.
The challenging macro environment punctuated by supply chain constraints rising fuel cost labor shortages.
<unk> achieved two consecutive quarters of positive free cash flow and strong margins in our core systems and support business.
Short term order deferrals and delivery timing issues are expected to abate in our fiscal 'twenty, three and are being offset by our new contract wins.
Our actions this quarter combined with OEM and MRO rate increases will support our expanded margins and improved cash flow, putting us on a solid path to deliver growth while deleveraging the company year over year.
Pivoting to growth, having exited build to print structures and winning new business are at the core of our path to value.
Powered by diversity, our company is poised to expand top and bottom lines year over year.
I look forward to reporting on our progress as we continue the efforts to further unlock the hidden value across our business and to deliver value for the benefit of all of our stakeholders.
We're happy now to take any questions.
We will now begin the question and answer session. We ask that you limit yourself to one question and one follow up to give everyone the opportunity to participate.
To ask a question you May press Star then one on your telephone keypad.
Youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Peter Arment from Baird. Please go ahead.
Hi, Good morning, Jim Dan.
Jim could you maybe give us a little more color on working capital just sort of how that trends at this transformation continues with the company how should we it's obviously it seems like it's a headwind this year that doesn't start to become at some point in their mutual are a tailwind.
And some business.
Well take on more volume in the <unk> kind of our overall mix.
Yes, Thanks Peter.
Working capital has been high and because of the structures business in the past so as we exit structures naturally is coming down so and it has also been because of advanced liquidations, which are ending.
So the nonrecurring cash uses.
Previously accrued like 7% or 7% elimination of advances with them in the past, we're going to see improving working capital.
And the business that remains is less working capital intense and our goal has been to to fund with working capital efficiency improvements in the core business. The growth that we expect in the coming years. So I think youre going to start to see working capital being neutral and that would be a tailwind for us moving forward.
That's helpful and just as a follow up just as a clarification on the on the liquidate on the advantage is that you said you had not decided what youre, what youre doing with the proceeds of sewage sale.
So for our outlook, we've assumed that those are settled in the transaction. So we're not including advanced liquidations and outlook in the quarter. We just reported there was $21 million of advanced liquidations.
Appreciate the detail thanks, Dan Thank you.
The next question comes from Myles Walton from UBS. Please go ahead.
Thanks, Good morning.
Jim to maybe go back to the cash flow for just a second your 10% conversion target versus what's implied I guess in fiscal 'twenty three is pretty neutral conversion two questions. One why why is it not more year on year improvement in cash flow. I think you said the core cash flow last year was $7 million, that's pretty much what you're guiding for this year.
And then Conversely.
Why is the conversion go from basically zero to 10% in the next couple.
Yeah. Thanks Mark.
So there's a lot of moving parts in last year. In fact, we did divesting businesses. If you remember we had some cash generation.
This is Blake.
At Oak Milledgeville, Thailand.
<unk> divested out of last year, and then the assumption that Stuart won't be there either moving forward as part of the mix of year over year change in cash flow.
But the remaining core business is cash flow positive and as we reduced overheads in nonrecurring cash uses were going to rapidly recovered to that 10 plus.
Number of cash conversion that we are targeting at the end of our four year planning period.
Working capital is an element of that but I think the change in our portfolio is a bigger driver.
I hope that's helpful to your question, Yes. That's helpful. I just want to clarify the four year planning does that lineup for fiscal 'twenty five or are we talking about a different for <unk>.
26. So we said is we're going to double our continuing EBITDA and just give me some numbers on that our EBITDA last year, that's about 169 million I think youll see in the press release.
If you exclude the.
Stuart piece of that and some of the other divested businesses, it's more than 150 to 155 range.
So thats what were looking to double by FY 'twenty five so youre talking $303 10 in the three year period.
Planning horizon, because at the FY 'twenty six so what I was referring to our 20% plus on consolidated EBITDA margin and 10.
10% or more of cash conversion on sales thats in FY 'twenty six.
Okay. Okay got it and then just a clarification the sale divestiture proceeds are you at a point, where you can size those for us either net of the advances that would go with it or gross just any color given youre pretty much there.
Not yet.
When we close we'll disclose.
It's necessary.
On the transaction, but we're just not there yet with the exact details okay.
Okay alright. Thanks.
The next question comes from Seth <unk> from Jpmorgan. Please go ahead.
Okay. Thank you very much. Thank you you guys mentioned, a little earlier the expectation to continue.
Reporting in two segments, just kind of curious.
If you considered kind of giving a different look at the business.
And kind of why.
Given that so much of it is gone.
What's the importance of having the core strategy.
As a separate segment going forward.
Yes sure.
This is Jim I think what we're trying to do and we took feedback from investors and analysts they want to see more market information and they won't see continuity in existing segments. So that was the majority of the feedback. So that's what we're planning to do is not.
<unk> not changed segments, but to give more market detail within the segments that were meaningful so that would mean.
Commercial military.
And non aviation and then aftermarket and OEM.
So look forward to that in the coming quarters.
Okay. Okay. Okay.
And then.
I guess in terms of.
Seven.
What youre thinking about for 787 million in the upcoming year.
And how sensitive your outlook as to that is that kind of.
The delta in the 8% to 12% organic I'd answer.
Can you kind of baking it occur.
For 787 recovery.
So Stan I'll jump in so we used to produce 14, a month at the 787% trailed up 10 and then.
864, and we're running at about two and a half a month right now.
I am confident that Boeing is going to achieve their certification.
Return to higher rates, we believe it is going to happen in the latter part of the summer.
So we're stepping that back up it will go all the way back up to 2014, but.
As you look at this over the planning horizon, we see a path to getting back to the <unk> chipsets amongst sort of rate, maybe even 10, a month by fiscal 'twenty four so yes, it's one of many important programs to trial it.
It did contribute some softness in our second half of last year, but we've de rated.
Build right now and make sure we keep our working capital.
Matching the rates that Boeing needs and we're looking forward to the recovery in the years ahead.
Great. Thank you very much thank you.
Again, if you have a question. Please press Star then one.
Our next question comes from Sheila <unk> from Jefferies. Please go ahead.
Hey, good morning, guys. Thank you for your time.
I wanted to talk about slide 14, a little bit so thank you for putting that out there.
Well the businesses change form how do we think about the growth rate for China business, I know that the market growth rates for commercial and <unk>.
Military and how.
We could think about your planning assumptions there.
Can you just touched upon.
And maybe the Mac.
Okay.
Yes can do Sheila thanks.
Put this chart in its one similar that we provided to our board of directors to show what underlies our multiyear outlook, what's the commercial narrow body wide body.
Military and although it is not shown on the chart the freighter market as well and so are our growth rate is a composite of these four segments narrow body looks looks very good and despite some of the certification challenges on certain variants of the Max Boeing is ordering at rates above 30% and we see that right.
Going up into the mid Forty's over our planning horizon.
Same thing with with Airbus you look at Airbus as build rates in the 40% headed into the mid Sixty's and.
The message we get from the supply chain calls is <unk>.
Ready what are you doing on labor are you putting capacity in place as your lower tier suppliers. So we think single aisle is solid and even if they only achieved 90% of their outlook, it's still a robust recovery.
Twin aisle.
The reason we show a high CAGR is starting from a low build rate today, so over the planning horizon.
It's like our interiors business.
Way down because of the Max but it's one of the fastest growing operating companies, we have because of rate recovery and you can see we are counting on 787 coming back and Triple seven we have a big role in the legacy Triple seven so even if the triple <unk> pushed to the right. We expect demand for triple seven to continue.
And then there'll be additional freighter demands as well.
Military we show that more flattish, but at a high level.
And what's encouraging is we have a lot of ships that content with Sikorsky on the CH 53, So that program as it goes through its low rate production will benefit us F 35.
Though the rate may not be going up a lot.
Producing our workshop content on that so we will see revenue growth from there a few legacy programs will come down by 22, but we see strength in the fiber segments. So and then probably the most encouraging sign in the short term is the MRO recoveries, although the overall market CAGR is 3% to 5%.
We're seeing this big rate and inductions month over month, seven 8% a month.
So the quarter was up I think 35% deduction, so it's really an encouraging trend and.
Because they are not retiring the wide bodies.
Any further those as they as they up there.
The flight volume we're seeing.
Both nacelle and engine accessory induction so I'd say our growth rate is high single digits to maybe low double digits across this composite of the market.
Okay, and maybe just a follow up to that on slide 13, you have elected.
New business wins that you've had over the past year.
How do we think about those incremental opportunities or what to watch out for it seems like it's mostly on.
On the defense side for now.
So.
What should we look at <unk>.
Yes, we feel good about our defense strategy, we put in place a few years ago, what's encouraging about this chart is the amount of IP based wins.
Whether its nose wheel steering or hydraulics or actuation. These are products that we design and build and then many of these products have.
Frequent replacement through the life of the aircrafts, so theres a good MRO tail.
On the commercial side.
We expect that to recover with as leap orders go up.
We met with GE last week and they are very bullish about the outlook for leap.
And we're seeing the freighter market as mentioned freighter conversion. So today, we're seeing more orders in the military but we expect that to pivot back to commercial in time.
Great. Thank you. Thank you.
The next question comes from Michael <unk> from <unk> Securities. Please go ahead.
Hey, good morning, guys. Thanks for taking my question.
Maybe maybe.
Jim just back to free cash flow I want to make sure I heard you correctly is there $70 million to $75 million of cash use an additional facility closings. This year and if so can you elaborate on that it seems to be maybe higher than expected.
Yes, there is 70% to 75% and our forecasts for noncash none core cash uses.
It relates to the structures wind down and the structures of the capital intense business had a lot of infrastructure. These are the previously accrued expenses related to closeout of legacy programs include things like 747, it will be the cash use of programs that are businesses that are being divested before the divestiture completes it also includes infrastructure why.
Up like it systems and teams that are supporting and dedicated to that that group when we complete the divestiture.
Michael These are this is it this is the last year. These are bounded deterministic we know.
<unk> of those run outs and the timing.
And there's actually more opportunity to reduce that than there is risk that will increase but we have to put the forecast for our baseline.
Okay. Okay. This is the first time, you've disclosed that I was under the impression I guess, maybe that we were looking at the end of the 747.
Maybe it's just seem a little bit higher.
Yes of course, I mean production ended last year, but the windup goes beyond production.
We havent given any specifics for the coming year. Some of this is deferred from previous years as things have taken longer.
But yes that is the outlook for this year is reconciled in the schedule in the back of the presentation.
Okay, and then last one I guess.
If we just look at sort of the implied.
Guidance on.
<unk> got on.
Slide 17, there I mean, you've got the good growth in systems and support I think you've called that out at 18% to 22% I can't really.
Make out what what structures is going to be but it seems to be a pretty small number I always thought that.
The interiors was running around 102000 $130 million.
That's growing whats did we have that wrong or what's the level of structures in the interiors business next year.
It is growing from that level. It is faster growing as Dan indicated because it was relying on narrow bodies in particular 737, so as that recovers it will grow and it's got new work new programs like <unk> to 'twenty that is just one.
Just secured a lot of backlog with a big <unk>.
Contract continuing its business last year. So we did a 10 year old with Boeing for all of their aircraft.
Signed a $2 20, which is a great.
Aircraft narrow body aircraft.
And we expect that volume.
Volume in that business to effectively double over the planning horizon. So.
It went way down we had at the peak I think we had 2500 employees.
That we're supporting that business and with the Max cut.
That went down to less than half of that and now it's on a path to recover.
And we will do it more efficiently than we did before.
Experience, although difficult to go through the pandemic our team down in Mexicali did a great job.
<unk>.
Right sized in the plan and driving productivity initiatives, so there'll be more profitable year over year.
Okay. So we did about $50 million to $75 million run rate next year, I mean, just given that.
But the consolidated guidance one two to one three systems and support is basically going to be one two.
Yes, that's a little bit low.
Okay.
Why don't we get back to you to give you the firm okay.
<unk> 19, as the guidance like so one two to one three as our consolidated guidance that includes interiors as well.
Yes, it should be north of 100.
On revenue.
Okay, Alright, yes, I am just trying to reconcile it with the chart on the prior page 17 that shows TSS and task. Okay. We can be configured offline. Thanks guys.
The next question comes from Cai von <unk> from Cowen. Please go ahead.
Yes. Thanks, so much so I guess your total.
Cash flow guide is minus 35 from ops capex. So it would be a negative 65 I know that number includes the onetime 75 wind up does it also include the full $104 million for Boeing or kind of are you assuming that.
With that Mike.
Sure.
Might be.
Pushed out.
The assumption is that that's resolved and the transaction. It is not the 104 liquidation is not included in guidance.
It's not an.
So basically just so I understand so.
Okay, it's taken out in the guidance, but so how much cash do you think net of all of this is going to be available is going to be available to reduce debt it sounds like not much.
It sounds like Youre still negative.
Yes so.
Earlier were not given the exact transaction value, but there will be.
Value and reduction of the advances through the transaction and thats going to improve cash flow moving forward you can see the detail Cai on page 26.
The 30% to 45% of generation and then right. After the 70 <unk> to <unk>, but thats correct. There is a substantial portion of proceeds that will be used to satisfy the advances in our assumption.
Okay.
So what about you have substantial debt coming due in the latter part of 'twenty four 'twenty five what's you're thinking kind of once you get through all of this how are you going to deal with that.
Yes, the debt maturities or over two years away. We have good interest rates right now in most of our debt is fixed in fact substantially all of it is so we continue to monitor the markets and as we continue to improve EBITDA, but reduce our leverage will be in a better position to execute and get better rates on refinancing moving forward, but we have over two years.
Thank you very much.
Again, if you have a question. Please press Star then one.
The next question comes from Ron Epstein from Bank of America. Please go ahead.
Hey, guys. This is actually Andre Madrid on for Ron.
Wanted to go back a bit I know, it's been touched on.
Lately, but I kind of wanted to talk just about <unk>.
Projected rates on slide 14.
777 seem.
Pretty aggressive and I just wanted to ask you know continued issue that Boeing like with all of that going on what makes it seem confident that you guys could actually hit these objectives through 2026.
We talked directly to both Airbus and Boeing on a daily basis, we get their latest schedule releases.
We also watch the.
Actual orders to see if the forecast matches, the near term orders and.
And both companies have been meeting their commitments to us on rate step ups. That's the first thing is.
I think my personal opinion, having talked to Boeing leaders on the 787 is the recent news coverage around 787 certification has been overdone.
They know what they need to do and they are diligently working through the FAA some middles.
It's a great airplane, there's over 1000 out there in service.
Passengers love it it's been a.
Got a great fuel efficiency, so the 787.
There is a place for it in the market and with time there'll be a greater demand for it. So we do have confidence in it I know, there's there's different views on that but.
Yes, Boeing is really doing whats required they may not be getting credit for it in the end.
The coverage, but dealing with their supply chain they have.
Out of their commitments on rate step ups on the Max.
We appreciate that it's helped it helped a number of our plants.
And we think the same will happen to <unk> 77.
Dan also addition to our commercial real confidence.
The business has changed so we're now.
One third of our business is aftermarket it used to be only a quarter of our business now it's up to a third and military is up to 36%. So commercial still a meaningful part of our business, but it's a <unk>.
Piece and it was a couple of years ago.
And on Airbus you probably saw they opened a third line at mobile and supported their rate increases and we get the.
Ron quarterly supply chain calls with them about rate readiness on the upswing So same story there.
They're really pressing and there'll be some constraints in supply along the way but.
Nothing that I think we will impair those rates.
Ups.
Okay. That's helpful color. Thank you if I could actually follow up you said on the military side about 36% of the portfolio now.
What other opportunities are you guys seeing on new programs for legacy work as well and following on that.
Do you kind of see the exposure shaping up down the line maybe five years out.
Well.
I've worked at and defense for my whole career, I am not going to handicap five years out, but I can say is that.
The cops selected award.
In the Ukraine has triggered the Dod to ensure readiness of all their platforms and that's translating into a request for MRO and spares.
The new starts whether it's future vertical lift or the <unk> or MQ25, even as they go through development challenges, which are which are comment the demand for those platforms is high and we see.
The F 35, continuing to be an area, where we can expand work share if not.
Our rate per month.
We view the defense areas of solid component of our business space.
What I am encouraged by us.
As the Oems say, we either have a reliability issue on a given component or we want more affordability.
Certain products that are coming to triumph and they're competing the incumbents.
So even if the rates don't materially go up.
We expect to gain share as well so.
Yes.
Confident in our ability to sustain and grow our military business over time, and we have an aftermarket component of military to it gets more valuable when it gets in the foreign military sales so.
We have products in military throughout the lifecycle, including the aftermarket and that makes us more predictable and balanced.
Alright awesome. Thank you guys.
The next question comes from Noah <unk> from Goldman Sachs. Please go ahead.
Hi, good morning, everyone. Good morning.
Dan on 770 stated Youre confident Boeing will achieve the certification and return to higher rates.
And then you said you think that will happen in the latter part of the summer.
Do you think the certification is in the latter part of the summer or that the move to higher rates is in the latter part of the summer.
I won't speak for Boeing on the timing of those events.
Just giving you my opinion as a supplier to Boeing.
But I think the coverage on that has been.
Overstated to the negative.
They are closer to achieving their certification goals.
And just because of the underlying demand for the platform.
We see the rates coming back so I won't comment on the specific timing, but if you take the long view, which is what we're presenting with our multiyear guidance. There is no doubt to 787 is going to be back up in rate.
And on that longer view.
The rates you have laid out versus the index to fiscal 19.
Your fiscal 'twenty five.
There it implies about nine a month.
And that would be calendar 'twenty four.
I mean is that an indication from the OEM or is that your best guess.
Prop substantially faster recovery than I think most in the market expect on the widebody side.
I think it's our estimate the stated rates that we've seen.
Or a little bit lower than that but.
It's a.
It's a platform that is produced as I mentioned at rates as high as 14, a month and they do have a backlog of orders so.
You and I will see together Noah how it plays out but.
<unk>.
Drive is going to be prepared for higher rates on them on the 787.
Okay, and then could you also elaborate on 737 on that chart because.
If the if the pre pandemic pre grounding your fiscal 19 index is the 52 a month that they were at.
The <unk> six for fiscal 'twenty, two would get you to the 31.
Then again.
You've got it above pre pandemic pre grounding in your fiscal 'twenty, four which is calendar 'twenty three.
Recovery looks.
Pretty healthy I think compared to what we're all looking for if you can give us some more details on the numbers of implied on the Max there, yes, we're thinking rates.
For our planning purposes, I'm not speaking for Boeing of course.
We're thinking rates in the 45, a month range in our fiscal 'twenty four.
It would be higher than.
Where they were pre pandemic that we're headed into that territory. As you recall, we're all doing planning to go from I think it was 42% to 57 prepaid.
Pre pandemic, so it's really getting back to jumping off point.
That was pre pandemic and then going beyond that achieving those 57 rates out there.
And 26 again our forecast.
Both Boeing is very good about giving.
Short term forecasts that we within our procurement lead time, so we know what to go out and buy.
But they have thousands of aircraft in backlog there is certainly demand for the platform because of its fuel efficiency.
And so we think again theres a market poll that once they get through their certification Theres also a strategy and ramp up you want to do it in steps that are manageable.
So that everybody is adjusting moving the chains.
On capacity.
In a coordinated way in their rates support that.
Helps to Derisk the ramp.
Interesting, Okay, and just one more one on one more on what you are selling into you mentioned.
Wide body MRO picking up.
Maybe just if you could provide a little more color. There I mean is that just off of an incredibly low base or.
Is that better than we think.
What are you seeing in that piece of your business.
So the the freighter passenger to freighter conversion very encouraging we have a chart. We showed our board how much those those rates step up effectively.
A non linear increase after and I'm going to get the I don't want to go off the cuff on the numbers, but.
After a fairly steady rate year over year on freighter conversions at satellite going up at a high rate and then I'll give the numbers to Jim for the one on one calls.
So that's encouraging we saw hydraulics, we sell actuators, we do installation.
And then plus IV engine accessories, and thrust reversers that we do as well.
On the wide body.
Demand for freighters I'm going to leave that to the Oems. It's there's a lot of moving parts between Airbus and.
And Boeing but.
And I think would agree on the sort of unending demand for E Commerce.
In products and if you believe there's going to be continued GDP growth that will track with that so I'd refer you to them.
What are you seeing in your wide body aftermarket.
Outside of the freighter conversion.
Normal course of what we saw last year was a huge downdraft, where they wide bodies were largely grounded the last two years.
<unk>.
We thought there would be continued retirement of wide bodies and that's slowing.
As that flows and they put them back into service to meet the growing demand I mentioned, how much international travels just picked up in the last 90 days.
They have to get them back ready.
A lot of these parts.
Time based replacement in cycle base.
R R.
Driving replacement cycle so.
They are coming to us and ordering legacy parts for wide body that didn't get ordered in prior two years. So.
There may be a point at which more fuel efficient wide bodies come.
Come back into play and they retire those but in the short term we're benefiting.
Okay. Thanks.
Thanks, so much.
Thank you.
Our last question is a follow up from Myles Walton from UBS. Please go ahead.
Thanks.
Just a couple of clarifications, one when I look at your fiscal 'twenty, three sales guidance and I tried to reconcile against the.
Slide 15.
Is that slide 15 growth of segment revenue implied is that indicative of what you're putting into your guidance and if not.
Whats sort of the offset to that.
Versus the 100 million plus that's implied in that in that bottoms up analysis.
So the incremental contribution.
The Red Dash line.
It is reflected in our 23 sales revenue and it talks about how these new OEM.
Rates are going to benefit us in sales volume over time, so we see on the order of $300 million.
<unk> volume sales volume expansion over the next three year horizon because of that so if you call. It 100 million of year at first year is reflected in our 'twenty three guidance.
Yes at one two to $1 three includes $100 million of organic growth.
Yes.
Okay, and then another clarification any.
American jobs Protection Act benefit in fiscal 'twenty, three that we should know about.
There is a small portion of it I think it's about $7 million.
In Q1 of recognition and maybe a little more in cash I think the cash may be coming in.
Nine or 10.
Okay got it and then just a quick one Jim do you have a targeted leverage in either year three year or four year fiscal 'twenty five 'twenty six that you'd want to share yes.
We target, 3% to four times adjusted Bank EBITDA at the end of FY 'twenty six so the end of our planning period.
Three or four times.
Thanks again.
Thank you.
This.
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