Q1 2023 Triumph Group Inc Earnings Call
On slide three I summarize the quarter's highlights first we generated organic growth in our continuing operations.
Driven by improving commercial OEM and MRO demand.
With the sale of its Stuart, Florida plant, our 16th and final divestiture.
<unk> has exited its large structure business consistent with our strategic plan.
Backlog is up 7% with expanding book to Bill and new partnerships.
<unk> is well positioned to realize the benefits of our diversification strategy.
Our actions to mitigate supply chain constraints have lessened the impact on trial as we continue to partner with our customers and suppliers to ensure supply continuity and affordability.
With years of heavy cash used now behind US we are updating our revenue and earnings guidance and reiterate our cash guidance for fiscal 'twenty, three reflecting improving sales and cash flow.
Q1 marked an inflection point for the company on cash.
We retired obligations of over $100 million from our legacy structures business improved cash use from a year ago and expect to be cash flow positive over the balance of the fiscal year.
All of the enablers for value creation and deleveraging are headed in the right direction.
The time and energy of our team that allowed us to execute on our multi year restructuring have shifted to organic growth and expansion of our products services and customer base.
All of which enhance our financial forecast and predictability.
Coming off a productive Farnborough Air show.
Our team is excited for the future.
Bottom line, our first quarter results keep us on track with our goal of doubling profitability over fiscal years 2022 to 2025.
Driven by improved OEM production rates.
Expanded MRO volumes enhanced pricing from recent contract extensions.
And lower cost structure as a result of our transformation.
As we pursue expanded margins, we're also focused on growth.
In the first quarter, we secured over $422 million in.
New orders across our continuing business.
Backlog is trough and begun to grow after years of top line contraction.
Commercial backlog and try them systems and support business is up 24% for the quarter paced by an 80% increase in 737 Max backlog.
Partially offset by a modest decline in military backlog.
Total company and systems and support book to Bill ratios for the quarter were approximately $1 five.
Both MRO receipts and new RFP volume remained very high.
The triumph delegation just returned from the 2020 to Farnborough International Airshow.
In person events since 2018 were more than 15000 exhibitors met signaling a return to a normalized aerospace market.
I met with the Ceos of <unk>.
More than 20 of our key customer organizations and our team met with over 100 suppliers Indus.
Industry participants were optimistic temporary with some concern around the supply chain ability to support the anticipated ramp rates.
In the last week, Boeing Airbus and GE signaled short delays in the timing of production ramps step ups typically three to six months.
Which will not have a material impact on the narrow body ramp or triumphs financial outlook.
Our collective challenge remains how quickly can we get to rates far greater and achieved prior to the pandemic.
In the quarter Triumph announced plans to partner with <unk> Senate engine overhaul business in the UAE to play a larger role in MRO expansion in the middle East.
We view this formative partnership is complementary to our recently launched joint venture with Air France, KLM called Excel.
Both accelerate our capabilities and footprint.
And provide early life access to engine component MRO.
Client incentives will jointly established in region capabilities to improve turnaround time and support to customers such as GE and Rolls Royce.
Bryan also announced an agreement with Moog and which we combined our respective 787 landing gear and flight control actuator offerings under a power by the hour contract for an Asian carrier.
You can expect trying to pursue more partnerships and new channels to market to expand our reach in topline.
Lasse triumph is collaborating with Lockheed Martin to jointly develop components and subsystems for future aircraft thermal management systems is.
As aircraft electrification advances.
New ways to dissipate heat will be needed.
And we are creating IP to support these demands.
Other wins for the quarter can be seen on slides four and five.
Despite short term supply chain pressures that air travel market and carrier financial health both continue to recover.
The improving travel demand is aiding industry profitability.
Which coupled with higher fuel prices.
Kris has the prospect for new aircraft orders and rate increases.
On July one IATA forecast North American operators.
We posted a profit for 2022, while global operator are posting near breakeven profitability a.
The substantial turnaround since the losses of 2020.
This air traffic recoveries reflected in <unk>, MRO revenue, which is up 95% for the quarter and 38% sequentially.
Cargo revenues declined 21% for the quarter, but was still operating at levels above those of 2019.
As commercial transport belly capacity returns.
<unk> engine customer revenues rose, 23% for the quarter driven by single aisle leap engine gearboxes.
<unk> anticipates flattened demand over the next few months as the supply chain prepares for the ramp.
But we remain confident in the longer term outlook.
Military spending remains strong with the presence fiscal 'twenty three defense Department, a request of $773 billion expected to benefit from both house and Senate appropriation committees recommended increases of approximately 37% to 45 billion.
The platform supported by tribe, which are enjoying strong budget support include the CH 53, K the CH 47.
15, <unk> and joint strike fighter.
That said <unk> military end market was off 20% for the quarter driven by prior year orders on the <unk> hundred 30 <unk>.
Though these declines were offset by commercial end market improvements.
This is primarily a timing issue and we expect military revenues to recover.
Normalize over the course of the year.
Brian continues to proactively mitigate supply chain issues.
Deliveries from suppliers, where 80% to 90% on time in full in Q1.
We put strategic order coverage in place to secure allocation of resources and protect our most critical programs.
Brian has very little exposure to supply chain impacts from the war in the Ukraine.
While our suppliers are not achieving the 100% on time performance we expect.
We were able to meet our sales targets in Q1, and anticipate recovery quarter over quarter with over $40 million of past due backlog expected to be retired by the end of fiscal 'twenty three.
We are working to offset potential price increases directly with suppliers and aggressively adding alternative suppliers where possible. As a result. These increases are typically totaled less than 2% of sales.
And we expect any impact to be immaterial to our results.
Our top supply chain priority remains securing near term delivery assurance and available capacity from our suppliers as the industry recovers.
In the quarter, we issued our sustainability and annual report, which includes our recently developed five and 10 year sustainability goals.
We look forward to solidifying our path to meet these targets, which are essential drivers to our sustainability programs in the years ahead.
As noted in the report trial 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 perform at higher levels, so that we remain differentiated in the market.
We are committed to creating value in a sustainable way investing in our people and processes and improving our quality productivity and agility.
With that Jim will now take us through the results for the quarter in more detail Jim.
Thanks, Dan and good morning, everyone.
As I review the financial results for the quarter. Please refer to the presentation. We posted this morning.
I will be discussing adjusted results. So please see our earnings press release and the supplemental slides in the presentation for the explanation of our adjustments.
<unk> first quarter results exceeded our plan.
And we are on track to achieve our full year objectives. In fact, we are trending towards the high end of our previous revenue guidance and we expect positive free cash flow over the balance of the year.
Our consolidated results for the quarter are on slide eight.
Revenue of $349 million reflects increased volume from narrow body platforms offset by decreased military rotorcraft volume compared to last year.
Excluding revenue from divested businesses and sunsetting programs and despite the current market environment, We still grew revenue organically 1%.
Adjusted operating income of $33 million represents a 9% margin up from 8% a year ago, including favorable closeout of legacy programs.
Adjustments. This quarter include a $17 million revenue reduction for consideration payable to a customer related to the Stewart divestiture and $700000 of restructuring costs from facility closures and reductions in SG&A and overhead.
Systems and support segment results and highlights are on page nine.
Organic revenue was up 1% in the quarter, including higher commercial narrow body volume, which was partially offset by decreased military rotorcraft sales primarily from above average military spare sales in the prior year period.
Systems and support operating income was $33 million or.
We're 13% margin.
It was down slightly from the prior year due to sales timing and mix.
Commercial OEM sales were a significant source of growth in this segment up over 30% in the quarter.
Results for our structures segment are on slide 10.
Excluding divestitures and sunsetting programs structures revenue of $95 million was up 2% organically.
737 production rate increases and interiors and 767 delivery timing contributed to the organic growth, partially offset by lower wide body sales.
Operating income improved with the favorable closeout of 767 production blocks and favorable settlements on certain 747 obligations.
With the Stewart divestiture on July one we've completed our planned exit of the large metallic structures business.
The previously announced exit of our Spokane interiors facility is also now complete.
The continuing business in this segment as the interiors insulation Inducting business.
Our free cash flow walk is on slide 11.
Our $96 million of cash use this quarter included $21 million of nonrecurring cash drivers.
These drivers included $4 million for previously accrued $7 7 million legacy structure shutdown costs and.
$70 million of free cash use from the recently divested Stuart Florida business.
The Stewart divestiture completely relief trial for the remaining advance repayment obligations and we expect to be cash flow positive over the balance of the year.
As for the quarterly cash flow cadence, we expect our usual seasonality with a modest use of cash in Q2.
Breakeven to slightly positive cash flow in Q3 and strong cash generation in Q4.
We continue to expect capital expenditures of $30 million for the fiscal year as we invest in efficiency improvements and profitable growth.
A schedule of our net debt and liquidity is on slide 12.
At the end of the quarter, we had just under $1 5 billion of net debt we.
We had about $200 million of cash availability, which is more than sufficient for our projected needs.
We're continuing to reduce our leverage as planned by expanding EBITDA and free cash flow in our continuing businesses.
We regularly review our capital structure and our options to continue to improve it before our next maturity in June of 2024.
For our full year guidance turning to slide 13.
Based on expected aircraft production rates and the resulting demand on each of our facilities. We expect FY 'twenty three revenue to be at the high end of our previous guidance range of one two to $1 3 billion.
We are raising our GAAP EPS guidance by $1 11.
The $1 51 to $1 71 per diluted share.
Primarily due to the expected Q2 gain on the Stewart divestiture and related accounting impacts and a reduction in expected noncash pension income.
Our updated adjusted EPS guidance of 28 to <unk> 48.
It reflects a 12% reduction in expected noncash pension income compared to prior guidance.
Cash taxes net of refunds received are expected to be approximately $7 million for FY 'twenty three.
And interest expense is expected to be $129 million includes.
Including $123 million of cash interest.
For the full year, excluding the impacts of the actions and structures, we expect to generate 30% to $45 million of cash from operations.
Approximately $30 million in capital expenditures.
Resulting in core free cash flow of breakeven to $15 million in fiscal 'twenty three.
We're on track with our plan to double our continuing FY 'twenty to EBITDA to approximately $310 million by fiscal 'twenty five.
This was fueled by increasing demand pricing opportunities cost efficiencies and improved mix of business from our portfolio actions.
For fiscal 'twenty six we have planned for a consolidated EBITDA margin of over 20% of.
Our free cash conversion rate on sales of over 10%.
And our leverage ratio between three and four times adjusted EBITDA.
In summary, our Q1 results exceeded our plan and we're on track to achieve our full year and multiyear objectives.
The sales Stewart completed our exit from the large metallic structures business and relieves us from the advanced obligations, we expect to be profitable and cash positive for the balance of the year.
Now I'll turn the call back to Dan Dan.
In summary, I am pleased with our first quarter results achieved in a challenging macro environment.
And to be done with our restructuring plan.
And years of heavy cash use.
Both provide us with solid momentum as we progress through fiscal 2023.
I'm also encouraged by the commercial market recovery.
With rapidly improving MRO uptake.
Closely followed by OEM rate increases as our backlog grew meaningfully in the quarter.
Our strong book to Bill of one five coming out of Q1 confirms we are winning new business and our company is poised to expand top and bottom lines year over year.
The last two plus years in our industry have not been for the fate of heart.
Despite the pandemic supply chain constraints rising fuel cost of labor shortages.
<unk> remains on track to achieve our full year objectives.
I look forward to reporting on our progress as we continue our efforts to further unlock the hidden value across our business and.
And deliver value for the benefit of all our stakeholders.
We're happy now to take any questions.
We will now begin the question and answer session.
I ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two in.
In the interest of time, please limit yourself to one question and one follow up at.
At this time, we will pause momentarily to assemble our roster.
And our first question will come from Seth Sigman with Jpmorgan. Please go ahead.
Okay. Thanks, very much good morning.
Great.
I Wonder if you could give us a little more color on kind of what the structures.
Segment is going to look like going forward when its just interiors.
How should we think about the sales and EBITDA in the quarter that just passed and then when we think about going from Q1 to Q2.
The adjusted EBITDA in that segment was about $17 million.
Where does that go in the second quarter when its chest style and it's just interiors.
Let me, let me start out first of all <unk> is a business with a high growth rate.
<unk>.
Be down to the Max.
Production pause and now with add back of <unk> 31, a month, it's coming up plus their win on the <unk> hundred 20.
Which is a program that's going to more than double in rate over the next three years. So they've got a good backlog of business and we've.
We've used the time during the soft the flat spot in that business to consolidate from our Spokane operation Ducting.
Blankets down into Mexicali, So that plant now is going to have more scale and more.
<unk>. So we've got two plants that can take us in Mexicali, plus our operations that report based in Europe to support Airbus.
And we're optimistic about the recovery Jim Yes.
Yes, as you mentioned this quarter of course, we had favorable closeout on the programs.
737, and some pickups on some 47 as we mitigate those end of life liabilities, but going forward what the continuing business is interiors, it's around $120 million run rate business, but it's increasing faster than most of the businesses as narrow body business comes back.
Benefiting from the 737 Max ramp.
And when 787 picks up again, it'll benefit us well it had been hovering around breakeven.
In the second half of the year will be profitable and generating cash.
So we'd like to prospects, we have a good backlog and we're market leader in that business.
Okay.
So just to follow up on that real quick and then I'll wrap up.
When we think about the EBITDA going from Q1 to Q2.
There is probably something like.
A $15 million headwind.
Essentially it quarter on quarter from the.
Stuart going away as well as.
$5 million or south from the AAM JP, so quarter on quarter next quarter, Thats, probably about a $20 million sequential EBITDA headwind.
So I think there's still opportunities to close out the 747 and other legacy cash obligations that we adjusted out for the core cash and to extent, we can get them for less than their forecast that might be opportunities for pickups, moving forward, but otherwise you're correct, all things being equal the closeouts or onetime in acute in Q1.
But there are additional opportunities for the balance of the year as we get out of the legacy businesses.
Okay got it thanks very much guys.
Thank you.
Our next question will come from Peter <unk> with Baird. Please go ahead.
Yeah. Thanks, Good morning, Dan Jim Congrats in getting Stuart obviously, not a lot of work there.
Okay.
Jim maybe if you could just update us on your updated thoughts on the stranded costs that are still kind of lingering and youre looking to settle I know you had mentioned on the last call that was upwards of 75 million potentially but just maybe if you could just give us some updated thoughts there that would be great.
Yes, Thanks Peter.
70% to 75% is what we identified in our guidance as being.
And you are calling a stranded cost, but the legacy cost to exit the structure segment.
And there is more opportunity than there is risk and mitigating those going forward in the first quarter, we spent $21 million.
17 million of that was cash use in the Stewart business, which has gone with this divestiture.
There is.
There is some.
<unk> 4 million.
Of structured shutdown costs outside of Stuart.
But going forward Youre looking at about $50 million left roughly over the balance of the year I think that's going to be a little more backend loaded and all of those are opportunities for negotiation as theres assertion both ways with some of these vendors and we can work out settlements below what we had estimated.
We worked hard at which we are so that's the opportunity as I referred to assess is to mitigate those moving forward, but they are one time. So it's important to identify those they're not something that's going to recur past this year.
And just as a follow up to that Jim do you. When you look now at the business and pro forma steward.
Bill the negotiations and what Youre thinking about 'twenty four and beyond it seems like a lot of these onetime issues will be gone is that correct.
Yes, absolutely and Thats why we put out the multiyear guidance. So that you can see where we think we're headed it's the most frequent question I get is about what is normalized margins normalized free cash flow. So we have this bottoms up plan, which I referred to again that we're going to be 20% plus on a consolidated EBITDA margin out there in 'twenty six with three to four times leverage with the current port.
Slowly moving forward.
And free cash flow conversion in excess of 10% of sales.
But thats going to happen faster than.
And then we think because Stewart behind this is the last divestiture and we have good <unk>.
<unk> and volumes pricing opportunities cost efficiencies from the actions, we've already taken and with this new portfolio, we have a higher margin business with more IP and more aftermarket.
Terrific. Thanks, so much.
Our next question will come from Sheila <unk>.
Al Glu with Jefferies. Please go ahead.
Good morning, Dan and John .
Wanted to follow up on the last question, then maybe a little bit shorter term can you walk us through.
Cash flow for the year, John you mentioned modest you operate.
In Q3, and then a big Ram just given the $75 million of core free cash bonds one.
What really from firsthand payables.
During the quarter can you just help us.
That first of all thank you Mark.
Sure Sheila.
There's normal seasonality in our business absent the divestitures.
We increased working capital in the first quarter.
And then we kind of have a stable to Q.
Q2, and Q3 and then we have a very strong Q4, just the nature of the industry. We're in and the programs. We're on so the cash use in the first quarter is generally a pay off of the payables from the strong fourth quarter. We had at the end of last fiscal year, and then a ramping of inventory for the balance of the anthem deliver out through the balance of this fiscal year.
So working capital is the biggest driver there and cashews in terms of the cadence.
And you mentioned core free cash flow, so I'll speak to that we used $75 million of core free cash flow in Q1.
We're going to be a modest user in the tens of millions.
Yes.
It's roughly let's say $20 million to $30 million of cashews, maybe in Q2 could be better and then about an equal amount of positive in Q3, and then a strong generation in Q4 as we have in the past.
So it's going to be a lot cleaner lot more predictable and we have a good handle on it and that's why we can give guidance with a lot of companies though.
So it's a lot of the working capital moves rather than a big ramp you have them.
Perfect.
That's correct.
When there's changes in delivery rates from Oems, we still have production rates that lag that so we know our production rates.
We have frozen windows. So we have a good view for the rest of the year looks like.
Great. Thank you.
Okay.
Our next question will come from Ron Epstein with Bank of America. Please go ahead.
Yes, hi, good morning, guys.
Quickly.
What's the strategy you guys are using to deal with inflation, both raw material costs and labor costs, and then you got to be seeing it from your own raw material suppliers and then Youre. Your sub system suppliers, what are you doing to mitigate that.
So thanks, Ron there is about 12 categories of commodities, we track and we looked at the most recent average requested price up.
And most of them are single digit but the.
The ones that stick out or the cost of machine products, and raw materials and composites to a lesser extent, but a lot of what we spend money on on.
Chemicals, and logistics and castings and forgings haven't gone up a lot.
And we've been able to mitigate those cost risk through a variety of levers one we can sometimes pass it through to the customer.
Sometimes our contracts allow for.
Yes.
A sharing of cost with the supplier.
We've done a lot more dual sourcing and we've expanded our low cost country sourcing.
<unk> Korea, which was a big push over the last two years and to India and other countries. Because there is capacity out there that will help keep people and check on price up so we've been able to mitigate about two thirds of.
The increase which.
Which has been on average about a 6% increase that's why I mentioned about 2% of sales there is the impact.
We don't really buy from.
Suppliers that are in or near your supply in the Ukraine.
And we're starting to see some costs that have been high lately like shipping cost come down just in the last month.
Costs for things like containers pullback in fuel costs are starting to trend down. So long term. We expect this to linger through calendar 'twenty three but we don't see it as a big impact.
Yes, I would add that I think generally we own a lot of IP on our products.
The vendors that are sole source and that have IP that we need are a small percentage of the total procurement spend about $800 million. This year on materials and we've done some good strategic sourcing.
Pass through where necessary materials.
And we have dual sources wherever possible to make sure we remain competitive so we've done a good job managing it. So that's work that was done in previous years, we're benefiting from and some of it is fixing ourselves going forward to make sure. We're.
Inflation proof, but inflation resistant.
Got it thank you.
Thanks, Rob.
Our next question will come from Michael Karmali with Truest. Please go ahead.
Hey, good morning, guys. Thanks for taking the questions here just back to.
First question on the.
The structure, so just to be clear, we can assume something around $30 million quarterly run rate going forward and then just to be clear is that are those profitable revenues at this point from an operating margin standpoint, and can you give us kind of the range of where that profitability is.
Yes sure Mike.
They are profitable for the full year.
Probably a little.
Unprofitable in the first half and they are more profitable second half the ramp of the narrow bodies is helping out a lot, but right now they are low single digit profitability.
Over the multi year horizon, theyre growing into the teens and Thats, where they've been historically, so we even at 20.
<unk> in that business.
Profitable business and because we did a lot of cost takeout during the pandemic.
Our margin upswing should be good.
You recall, we booked a $1 billion worth of business and in tears. It gives us a 10 year run rate that we can go optimize around so we're optimistic on the margin outlook for that business.
Got it and then just how are you planning for the production rates on the 787 for the remainder of this year and maybe how it might impact that interiors business yes.
Yes, there's been a lot.
News on 787, just in the last week.
We're we're thankful that Boeing appears to be close to the FAA approvals that will allow them to resume shipping.
We've been delivering at rates around two to three.
Our months of late and remember we were at 2014 before the rates started to decline.
And with the outlook of burning off.
Boeing's.
Deliveries, they're 120 aircraft that are in storage roughly half of which they plan to burn off in the next year or two.
Deliveries are expected to ramp up to somewhere around seven a month.
And that helps us because about five or six of our plants.
Our.
Gordon actuators suppliers on the 77% so it's going to be a tailwind for us now that they are close to resuming production.
And we're confident.
The backlog of this pro.
Graham it's almost 500.
Outstanding orders for the 787.
And the increasing demand for wide body.
A lot of folks predicted.
International travel wouldn't pick up till 'twenty four 'twenty five well, it's already back within 20% of 2019 levels.
And ramping steadily so I think we're going to hit 2019 levels in the calendar year, and then blow through that in 'twenty three 'twenty four so.
We're bullish on this we'd like to be back in 2014.
We're not there yet, but we'd be happy with seven.
I would add that we did reset our contract with the beginning of the year. So we'll get good pricing based on current costs moving forward.
As the volume increases and put in perspective 77 is only about 4% of our backlog right. Now you can see our backlog backlog breakdown on page 16 of the presentation, but our largest program right. Now is 737, which is 16% of our backlog is attributable next few years. So it is an important driver for us, but that diversification is helping us out to 37%.
A bigger driver right now.
Got it perfect. Thanks, guys.
Thank you.
Yes.
Again, if you have a question. Please press Star then one our next question will come from David Strauss with Barclays. Please go ahead.
Thanks, Good morning, good morning good.
Good morning.
The.
Can you just comment on the margin it systems and support.
I think the EBITDA margin was around 16%, which is lower than what we've seen lower than what you're targeting can you just talk about that and how <unk>, how we should expect to.
You see that margin progress as we go through the year.
Sure I think first quarter, we mentioned the sales mix change last year, we benefited from some above average sales of spares foreigner foreign military sales and another OEM program that was higher volume last year.
Normalized moving forward. So it was really a tough comp against last year.
Moving forward, we're going to see the increased expansion of margins.
Typically the first quarter is our lowest margin period for the business over that segment. So I think the split slight increases over the next two quarters and then a strong margin in Q4 as volume increases and then of course.
Going forward, we're still headed towards that multi year goal of doubling our profitability by FY 'twenty five and out there youre going to be in the range of 20% margins for the overall business, which means even higher for our systems and support.
And Jim on them, when you say double profitability.
What is the comparable number the clean ton of EBITDA.
Number that we should be thinking about in terms of doubling yes.
Yeah, David Thanks for that question, because I tried to point that out because it kind of get a little foggy with the divestitures, but last year, our continuing businesses had EBITDA about $155 million. So that's what we're talking about FY 'twenty two continuing EBITDA from $1 55, doubling and I mentioned in my earlier remarks $310 million of ebay.
<unk> is the target for FY, 'twenty, five which is a doubling of that FY 'twenty two number.
Okay.
That's helpful. Thanks, and if I am I apologize I apologize if I missed this were there are there any net cash proceeds from Stewart or is it just the payoff of the advance of balance.
Stuart.
Besides being a strategically important.
Biggest benefit was the advance.
Relief. So the advances were integral to that business they need to be resolved as part of the transaction they were.
Over $104 million of cash flow that would have gone out this year that.
Was released as part of the transaction.
And we are.
Exited the business, which is better owned by someone else because it is longer cycle more capital intense doesn't really have any aftermarket it doesn't have a lot of IP.
Others.
<unk> fits their model it didn't fit ours. So we're happy to complete that transaction on good terms.
Alright, thanks, very much thanks, David.
Sure.
This concludes our question and answer session. The conference has now ended thank you for attending today's presentation. You may now disconnect.