Q3 2023 Triumph Group Inc Earnings Call
Yes.
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Welcome to trend third quarter fiscal year, 2023 results conference call.
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I would now like to turn I would now like to introduce Tom quickly.
<unk> Vice President of Investor Relations.
Merger and acquisition and Treasurer, who will provide a brief opening statement.
Thank you good morning, and welcome to our third quarter fiscal 2023 earnings call today I'm joined by Dan Crowley, The company's Chairman, President and Chief Executive Officer, and Jim <unk>, Senior Vice President and Chief Financial Officer of trial.
As we review the financial results for the quarter. Please refer to the presentation posted on our website. This morning.
We will be discussing our adjusted results are.
Our adjustments and any reconciliation of non-GAAP financial measures to comparable GAAP measures are explained in the earnings press release and in the presentation.
Certain statements on this call constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 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.
Dan I'll turn it over to you.
Thanks, Tom for the quarter trying to delivered strong sales and our operations there were up both sequentially and over the prior year.
Grew our backlog at double digit rates.
On our last earnings call I discussed the supply chain constraints delaying deliveries in our second quarter, mostly impacting our defense programs.
Intensive management of our supply chain enabled us to improve supplier on time in full deliveries from 77% to 87%.
Reducing the impact of these headwinds on trial.
This enabled our defense sales to improved 5% sequentially up to $112 million.
We anticipate the pickup in commercial volume, we saw this quarter, particularly in the aftermarket will continue to improve.
We forecast, our Q4 top line and profitability to be materially higher sequentially and year over year, as OEM and MRO deliveries accelerate.
Accordingly, we are increasing our revenue and our full year adjusted EPS guidance.
As we committed we also remain on track to be cash positive in the second half of the year and in fiscal 'twenty four.
Overall Im pleased that we delivered our Q3 results in line with or above our expectations.
Positioning us well for Q4.
I want to thank our employees like many others, we have experienced a few years of volatility.
Internally try and leveraged our experience from the pandemic to create a new deal a new social contract and value proposition for employees, who work at our company for more than a paycheck.
Standing the empowerment and flexible work environments, which helped us get through the pandemic.
On slide three I'll summarize the quarter's highlights.
First we generated organic sales growth of 21% quarter over quarter, and 13% year over year, driven by improving commercial OEM and MRO demand.
<unk> exit of the legacy structures business was done at less than half of the budgeted costs.
Q3 margins stepped up returning to prior year levels and are expected to increase in Q4 with year end shipments.
Backlog is up 12% as trials and our customers benefit from our diverse platforms and end markets.
Beyond higher MRO receipts, and OEM rates, new wins in the space market and for products supporting the war in Ukraine contribute to our goal to generate 25% of our sales from new products and markets.
With a pipeline of over $9 billion and opportunities strategic wins on new platforms, and increasing R&D expenditures on differentiating technologies, we anticipate strong revenue increases over our planning horizon, a fiscal 'twenty four to 'twenty eight.
Turning to Q4, we expect strong positive free cash flow made possible by material reductions in past due backlog inventory and working capital.
We have high confidence in our Q4 and year end outlook for several reasons.
Triumph entered Q4 with higher levels of inventory as a result of deferred demand on certain programs and.
And substantially all orders to be delivered in Q4 now in hand.
Legacy commercial aircraft MRO demand has increased as older aircraft remaining in service pending new aircraft deliveries from Boeing and Airbus.
Military MRO orders, which were seasonally delayed with the October end of the government's fiscal year are now funded.
Military customers supporting the war in Ukraine, and replenishment of U S inventories every.
Have requested quick turn <unk> early deliveries with favorable cash terms.
We completed a thorough review of all of our supply chain requirements for.
Planned deliveries and have sufficient parts on hand or in transit to support planned deliveries.
The supplier shortages are improving as we resource and dual source work to domestic and low cost sources.
So overall, we feel good about the quarter and the ramp is upon us.
We saw a month over month improvement during Q3, which we expect to benefit Q4, and our fiscal 'twenty four forecast as we increase cash flow from operations year over year.
Consistent with our track record, we're not standing still.
Against a stronger and more promising operating environment.
We've been turning our attention to strengthening our balance sheet and addressing near term maturities, which is one of our top priorities.
We have a comprehensive deleveraging plan that builds on our operational improvement.
As one component of this plan triumph announced distribution of warrants in December .
When the warrants are exercised the benefits of this action are anticipated to be two fold it will lower our debt, while increasing equity for the benefit of our investors through a cost efficient transaction.
We distributed the warrants given our confidence in our business results and growth outlook.
Warrants are one lever, we're pulling as we prepare to refinance our upcoming 2024 debt maturities with the assistance of outside financial advisors.
Of course timing is an important consideration.
Our team has been agile and our refinancing approaches which allowed us to bridge through the pandemic and market downturn.
We are confident in our ability to secure the financing we need to fund our growth and that of our customers.
Our improving results also support expanded reinvestment in Capex in Iran, and enhance the value we deliver to all stakeholders.
We're always looking at ways to manage cost in support of our future state.
As we exit our structures business and retire red programs, we are targeting reductions in overhead and SG&A.
This enables continued margin expansion as our strong backlog growth translates into higher sales year over year.
We are confident in the proactive steps, we're taking to even better positioned triumph for the future.
Jim will now take us through our third quarter results and detailed outlook and then I'll provide some comments on the market Jim.
Dan and good morning, everyone.
I am pleased to report year over year profitable growth this quarter.
<unk> third quarter results met or exceeded our expectations.
And we are on track to achieve our full year financial objectives.
Our consolidated results for the quarter on slide four.
Revenue of $329 million reflects increasing demand from our commercial military and MRO customers.
Excluding revenue from divested businesses and sunsetting programs.
We grew consolidated revenue, 21% organically over the prior year quarter.
Adjusted operating income for the quarter was $36 million.
Representing an 11% margin, which is up over the prior year.
Systems and support segment results and highlights are on slide five.
Organic revenue was up 21% in the quarter.
Commercial market demand was the largest driver of the revenue growth in this segment, especially commercial MRO demand.
More details on revenue by end market will be in our 10-Q.
System that supports operating income was $43 million or 15% margin in the quarter.
This is up from the prior year, excluding our licensing transaction and the benefit from the aviation manufacturing job protection last year.
The results of our structure segment are on slide six.
The continuing business in this segment as the appears insulation Inducting business.
Excluding divestitures and sunsetting programs revenue of $44 million was up 21% organically.
Increasing production rates on the 737 and 787 programs in interiors are driving the strong organic growth.
Operating income improved over the prior year on the higher revenue.
Our free cash flow walk is on slide seven.
Our $5 million of cash use this quarter included about $11 million of working capital growth supporting the planned ramp in Q4 deliveries in.
In Q4, we expect working capital to contribute to free cash flow as inventory and accounts receivable decrease from higher Q4 shipments and cash collections.
We expect strong free cash flow in Q4 in line with our new full year guidance.
We expect capital expenditures to be approximately $25 million for the year and substantially all of that capital is investment in our systems and support segment.
The schedule of our net debt and liquidity is on slide eight.
At the end of the quarter, we had $1 5 billion net debt.
We had about $127 million of cash availability, which is more than sufficient for our projected needs.
We expect to be profitable and cash positive in Q4, consistent with our new full year guidance.
We're continuing to reduce our leverage as planned by expanding EBITDA and free cash flow in our continuing businesses.
Dan I remain confident in our ability to reduce our leverage improve our capital structure and address our debt maturities with a series of timely and thoughtful actions.
In December we took one of those actions can be distributed warrants per ready to drive shareholders. The warrants give drive shareholders' valuable security and the choice of how to realize that value.
Warrants that are exercised will help reduce tramps leverage reduced debt and interest expense and increase free cash flow and liquidity.
Regarding refinancing of our 2024 maturities, we remain opportunistic and continue to pay close attention to the improving capital markets.
We see the window of opportunity opening and we look forward to reporting progress in this area in the coming months.
For our full year guidance turn to slide nine.
We now expect FY2023 revenue to be up from prior guidance to a range of $1 three to $1 35 billion.
We expect GAAP EPS to be in the range of $1 59.
To $1 79 per diluted share.
We are.
Leasing our adjusted EPS guidance range to 48 to <unk> 68 per share up from $40 60 previously.
Based on higher expected deliveries in Q4.
We continue to expect cash taxes net of refunds received to be approximately $7 million for the year.
We expect interest expense to be about $130 million and that includes $125 million of cash interest.
For the full year, we expect to use $30 million to $40 million of cash from operations with approximately $25 million in capital expenditures.
Resulting in free cash use of $55 million to $65 million in fiscal 'twenty three.
$5 million improvement over prior guidance.
In summary, the profitable year over year growth in Q3 met or exceeded our expectations and we are increasing our full year revenue earnings and free cash flow guidance to reflect our expectations for a strong Q4.
Now I'll turn the call back to Dan Dan.
Thanks, Jim.
Let me provide some insights about the market to put our guidance into perspective, but first I want to acknowledge the success of our OEM customers in the airline carriers in overcoming the challenges of the last three years and returning to pre pandemic levels of air traffic and production.
Our customer partnerships are stronger where.
Collaborating in new ways that are leading to better coordination of supply and demand and faster resolution of the challenges inherent.
To our industry.
The commercial transport segment ended the 2022 calendar year on a solid recovery trajectory with an increase of over 32% more fourth quarter aircraft deliveries and 20% more on an annual basis.
Orders for new aircraft also rose year over year, as Boeing and Airbus both booked over 800 net orders each.
Airline demand continues to recover as evidenced by a nearly 70% increase in 2022 global our pks versus 'twenty, one with China's new Covid policy is expected to accelerate this year over year traffic increase.
Benefiting our third party MRO operations in particular.
The onus is now in the supply chain to ramp aircraft and engine production to satisfy that demand.
Increasing demand will enable triumph to burn down approximately $40 million of past due backlog by the end of fiscal 'twenty three.
Triumph is producing Boeing 737 components at rates between 30 to 31 per month, depending on the factory, while Airbus <unk> hundred <unk> hundred 21 related production levels are 47 to <unk> 48 per month.
<unk> Boeing 737 backlog is up 28% and the <unk> hundred 20 backlog is up 12%.
Triumph recently received new production forecast from both Oems, which reaffirm our Q4 deliveries and increase year over year deliveries thereafter.
While these forecast reflected minor adjustments in production profiles. The facts are that rates are headed north which will benefit all triumph OEM factories.
We are encouraged by these signals and look forward to providing our fiscal 'twenty four guidance with our fiscal 'twenty three year end results in may.
Overall this is translating into growth for trial.
Sales for the quarter were up 20% with the OEM sales up 17% in MRO up 24%.
The commercial segment rose, 32% and military seven.
Our year to date book to Bill is one to one <unk>.
Bookings increased 23% year to date.
On the MRO front inductions of new parts across our third party MRO businesses are up 35% for the quarter and 29% year to date.
Spares and repairs backlog across the entire business.
Both OEM and third party MRO are up 36% for the quarter.
Across triumph backlog is up 12% year over year with commercial backlog rising 17%, while military grew 6% aided by programs like the C. 130 F 35, Blackhawk CH 47, Apache and the FAA team.
We're pleased that year to date, 45% of Trump's awards are associated with new products and our new customers.
Competitive wins for the quarter totaling $130 million can be seen on slides 11 and 12.
These wins are driven by triumph IP on products ranging from airframe mounted gearboxes for the Nexgen military platforms to landing gear systems for both Sierra space, and a leading E VTOL aircrafts.
Two a thermal systems solution for the general Atomics UAV.
In the quarter the fiscal 'twenty three topline defense Bill came out reflecting a $75 billion increase year over year.
Benefiting key programs in the <unk> portfolio, including the <unk> Blackhawk CH 53, the B 21 sixth Gen fighters.
<unk> 46 in the <unk>.
The Bill incorporated decreases and the V 22, OEM production from the prior year. However, V 22 is transitioning to an MRO Sustainment program.
For which drive maintained significant content and repair volume. We delivered 18 ship sets of V 22, pylon conversion actuators in our third quarter.
The recent Fms announcement of 12, CH 40 Sevens to Egypt, and the U S. Navy's decision to approve the CH 53 K for full rate production are welcome news is try and provides and maintained significant content.
On these platforms, including engine fuel controls fuel pumps actuation and heat exchangers.
Brian has also got content on the recently revealed 21 bomber.
And is pursuing work share across the sixth generation fighters in early development.
Our path to value through exiting lower margin build to print work in favor of proprietary and sole source positions across ramping a new start programs is.
As reflected in the new wins on new platforms.
Turning to slide 13, triumph is bringing new capabilities to the market.
These include fuel pumps and actuators for GE as new military adaptive cycle engine, a new high capacity vapor cycle cooling system for Nexgen military platforms.
And the complete landing gear system for both the Sikorsky Raider and the radar X vehicles as well as the Sierra Nevada Dream Chaser space vehicle.
We are working to implement additive solutions across all of these product lines.
Partnerships have been a key enabler to our MRO growth, our JV with air France for nacelle repairs on newer aircraft and our planned JV and the middle East with Mubadala scented will provide access to the region's MRO markets.
And enable us to accelerate growth in engine accessory repair is.
Taken together, our growing backlog and improving mix of OEM and aftermarket business.
<unk> is on track to be cash positive in the second half of fiscal 'twenty, three and beyond and to raise our guidance for the full year.
As a board and management team, we look forward to improving markets and stronger financial performance and to renewing our capital structure in support of our growth.
Jim and I are happy to take any questions you have.
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.
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At this time, we will pause momentarily to assemble our roster.
Our first question will come from Seth <unk> with J P. Morgan you May now go ahead.
Yes, thanks very much.
Everyone.
Great.
I Wonder if you could talk a little bit about the structures business.
And.
But the profitability there in the quarter I think the core interiors piece I think we talked last quarter about being about breakeven and then there were some closeouts related to 747.
Should we think about this level of sales and profitability with kind of a low teens margin as being.
The go forward margin from here for the core interiors business or was there some lingering.
Goodness from the 747 in the December quarter as well.
Yes, Thanks, Seth I'll start this is Jim.
Before the pandemic that was a 20% business and it still has a potential to go there again.
It got hurt by the Max but the Mac is recovering now so actually last quarter. It was modestly profitable and cash positive. So going forward, it's just going to grow from there.
And you guys have heard a little bit by the 787, but when that comes back that's going to help even more so it's a very good business. It is the continuing operating business in there it is profitable and cash positive now and it can get back up to 20% margins.
Alright, okay.
Thinking about sort of Q4 here that kind of that kind of like add.
10% to 15%.
Margin business now.
Carriers.
Not yet it's ramping it's a single digit margins now, but it will ramp further as Max continues to.
Helping out with extra volume and at a 77 comes back.
We finished the consolidation of our Spokane facility operations into there. So we're starting to see the benefit from the cost reductions there as well.
So no it is not in the teens yet.
On a full year basis, but quarterly it's in that range that you described because it's on a very steep slope.
Okay. Okay. Okay. Thanks, and then just.
The strong MRO growth and.
The asset business.
Thinking about the difference there between kind of product related growth in your repair.
Related growth.
<unk> characterize any differences between those two markets right now.
Right now both on the upswing when you look at the OEM rates like Airbus.
They deliver theyre.
We're delivering about $45 a month on the narrow body, but theyre headed to 58 at year end.
With similar increases out of Airbus and we're also in the <unk> to 'twenty, that's going up from about seven a month to 10 a month.
So we're seeing strong OEM rates, but whats leading us out of the pandemic is the MRO growth.
I mentioned the increase in induction so we stand there and watch for parts coming in from <unk>.
The engine.
Side, we do overhauls of your boxes engine accessories, and then the cells thrust reversers structural repair.
Even some interiors MRO, it's all going up and this is a reflection just how much volume that the carriers have American had their highest full year revenue.
Through the company's history, and 22 Delta had revenue that was higher in Q3 Q4 in 2019 and you read about United's big orders for 787 and 737 Max.
As well as southwest.
They also surpassed 2019 levels and Theyre, all triggering new orders so in the short term the demand for MRO for both.
The legacy fleet, which they're keeping in operation until the new aircraft arrive and then there are newer fleet is quite high so.
That's been.
Big tailwind for us because the MRO space shorter cash payments.
Cash cash in.
It is also profitable.
Great great. Thank you very much.
Thanks, Ed.
Our next question will come from Peter Arment with Baird.
You May now go ahead.
Yeah. Thanks, Good morning, Dan and Jim.
Again, you mentioned positive free cash flow.
Are you thinking about that not only for the fourth quarter, but fiscal 'twenty for Jim I Wonder if you could just maybe I know you're going to give us more detailed guidance on that in may, but just kind of some of the bigger bigger moving pieces that are going to improve like when we think about working capital. This year, which is a big drain just some of the some of the key pieces that you are looking at thanks.
Sure Pierre.
First only cash issues this quarter was $5 million and it's really to fund the growth in the fourth quarter, which is above what we expected.
And in the fourth quarter. If you look at the midpoint of the range. I think you are in the $60 million cash generation roughly in Q4. So it's a nice solid finish in good trends going into next year.
For next year, obviously the volume.
But we're seeing the growth in both MRO and OEM is contributing to the cash positive next year.
And the absence of one timers, we did exit some businesses that work.
Working capital users early in the year and maybe not as profitable as the rest of the business. So we've improved the portfolio will reduce our costs and as we've talked about rationalizing some of the SG&A overhead with a smaller business.
Those are the key drivers, but as you said and look forward to give you a lot more specifics when we give guidance next quarter.
Okay, and just as a follow up Dan.
It's great to see the structures business.
Turn up and obviously you talked about an improving run rate there and a steep run rate is this is this business still considered core just given how you've reshaped the systems business for the long term just having a lot of aftermarket and related IP versus this business, maybe you could just describe it how it fits into the portfolio.
You bet, there is certainly customer synergies.
Last year interiors booked about $1 billion of <unk>.
Backlog, that's going to keep them in business for 10 years without the need to win a lot of new work and yet there are still winning I mentioned, a $2 20, they've got key interiors work on that now.
So it is contributing to us financially it as an absorption benefit.
One of our better operations in Mexico, They do a great job with their performance.
Theres not a lot of product synergies in the sense that we we bundle interior solutions with system. So in that sense, there's not.
A big connection, but it is an important business to us I will say, we look at every one of our businesses every year in terms of its trajectory and contribution to triumph and how fast we can grow it and make that decision about whether we retain it or manage it for cash right now it's about re ramping that interiors business.
As to the level of sales.
They've had in the past and we're confident we can do it.
Appreciate the color thanks, Dan.
Thanks.
Yes.
Our next question will come from Sheila <unk> with Jefferies. You May now go ahead.
Sure.
And Dan and gentlemen, thank you for the time.
Jim My first one is for you.
How do you think about.
That range of outcomes in terms of the debt refinancing I know youre not going to the bank and asking for 12% debt. So what are the sort of potential options here and how much cash do you need on the balance sheet to operate.
Thanks Sheila.
With the businesses, we divested those were the biggest.
Cash volatile businesses had a lot of working capital associated with them. So as we change the portfolio, we find less and less need for cash.
Going forwards because there's less volatility and right now we have $127 million of cash availability and thats sufficient for what we need, especially with the strong cash generation, we expect in Q4.
And we talked about our confidence in refinancing and as we watch the markets you start to see them open up again these high yield markets were.
Shut down for the second.
Last quarter and Theyre, just starting to open up and we're seeing opportunities for us to go back and we still have well over a year before the first maturities are due in 'twenty four and we continue to work with advisors and without I will give you details of the exact plans, we do have plans and contingency plans around the refinancing of those as we get closer to them going current.
But we see markets opening and we see opportunities to refinance debt at favorable rates and not 12%.
Asked about cash as well how much cash essentially $127 million right now with a sufficient with and I don't see a need for a lot more than that go forward.
Except for growth initiatives, we continue to invest our capital in our existing technologies alongside of our customers who were investing with us to take our technologies on their new platforms. So we do want to keep and reinvest in cash.
To keep the business sustained and growing.
And then eventually we'll look outside after we get debt reduction down.
For opportunities to grow externally.
Yes, Sheila you've been a close follower of our stock for many years.
You remember two years ago, we were about 8% EBITDA business last year. We were at 11. This year, we're at about 14, and we're headed north from that.
In the coming years and so.
We have been on a path to Delever, just through earnings and cash flow pre pandemic and I remember briefing the board and we were I think three or four quarters away from achieving our our leverage goals. So now we're resetting for that.
And we enjoy a lot of interest and support from the investment banks and bondholders. So we're confident we can get refinanced.
No that makes a lot of sense. Thank you for that and maybe just a shorter follow up.
I think Dan in your prepared remarks, you mentioned $130 million of new wins, but the backlog went up.
30 million can you maybe square that a little bit.
So I'm going to turn.
Tom quickly or respond on that issue as you recall, our backlog was really over the next two years of orders so.
I think that we have received firm orders on where the contract win maybe a five year beyond the orders we're taking into account what we expect of course of that contract got it. Thank you so much.
Thanks Sheila.
Okay.
Our next question will come from David Strauss with Barclays, even though got it.
Thanks, Good morning.
Good morning.
Just wanted to ask about working capital it looks like if my math right Youre, assuming like $50 million in positive working capital in the.
In the fourth quarter is that correct, Jim and then your comment around <unk>.
Getting to positive free cash flow in 2020 for fiscal 'twenty four what are you assuming for working capital in there.
Yes, so directionally as I mentioned working capital is going to be contributing to cash flow in Q4, it will be a meaningful part of the $60 million generation.
Because we are shipping out a lot of products in the fourth quarter, both seasonally and from the stronger demand.
Don't have specific working capital assumptions for next year, but what's happened with working capital as our on time in full has improved substantially I think it was about 10 point improvement just over one quarter and that's a leading indicator to working capital coming down we have seen working capital be a little higher because of supply chain disruptions, but that's improving and we are.
Looking forward to that improving into next year, as well and with new portfolio, we should be a little less working capital dependent than we were in the past.
Okay.
And any sort of early thoughts on.
On pension for next year both from the.
I guess from an income standpoint, and whether youll need to make any cash contributions.
It's too early to say what the year end evaluation is going to say, but we have put disclosure language and thereabout.
The risk with the assets, depending on how the markets do and how interest rates are that could be some increased funding in the out years, but next year it should not be material.
Okay. Thanks very much.
Okay.
Our next question will come from Myles Walton with Wolfe Research you May now go ahead.
Thanks, Good morning.
Dan I was hoping to maybe go back to something you said in the past, which is the doubling of EBITDA I think $310 million is implied for for 25.
Two questions one.
Is there a margin target you mentioned, 14% is about what youre going to do this year is our margin target embedded in that 310, and then should we think about it as a linear improve.
Improvement projection from here.
Fiscal 'twenty five.
Yes, we have that very discussion in our own meetings and with the board.
We've been on a fairly linear percent margin improvement over the last three years.
As you can imagine gets a little harder as you go but.
What we did is a composite of our peers and we looked at.
Everybody from Trans time in HEICO at the high end to other peers at the lower end took the average.
That's where <unk> needs to be at least at a peer like.
Earnings multiple which is between 18 and 20.
And.
We believe thats achievable, but more important than the percentage of the absolute dollars, that's why Jim and I.
We're setting a target to get above $300 million.
Because you can delever with percentages.
We need an earnings and cash generation and the amounts that are sufficient to.
To achieve our.
Capital structure goals, and we're confident we can do it.
When we provide our guidance for fiscal 'twenty four.
We'll give you more color on that for next year, and we're contemplating an investor day.
And our next fiscal year as well that we can give you more insight on the multi year outlook.
Okay, Alright, and then Jim just wanted to make sure I think in <unk> question. It sounds like there were some one times in structures may be a few million dollars is that right is kind of a final cleanups.
I think there is around $1 billion of.
A cleanup there continuing.
Maintenance under the TSA is there was some cash I think it was less than $1 million in the quarter. So it's getting de minimis as we don't have that many EIC programs left.
A number of investors reacted.
We reacted adversely.
Our reserve, we put up for closeout of past about $75 million and what we've found is we don't need anything like that too.
Wrap up the work at those sites and disposition tooling and shut them down. So we're more confident in the closedown costs there than we were in the earlier in the year.
Okay alright, thank you.
Thank you.
Our next question will come from Pete Osterlund with choice Securities You May now go ahead.
Good morning, I'm on for <unk>. This morning, Thanks for taking our question.
First just wanted to ask on systems and support margin you mentioned in the prior year period benefits there, but it looks like margins were down there on a sequential basis as well despite higher sales. So was just wondering what's driving the margin pressure there.
Product mix had a negative impact in the quarter or was it more on the cost side.
Yes.
So compared to last year, you mentioned first there were there were some one timers I called out in their last year. The aviation manufacturing job Protection Act money. We got in we had an IP license sale in conjunction with the legacy product line sale.
But there was a modest IP sale in Q2 of this year, a small one which benefit us as well this quarter is very clean there's not a whole lot of one timers. This quarter. So when you look at this quarter moving forward, we're going to grow from there I mean, the EBITDA margin, which is another way to look at it in the quarter for TSS was.
17, 5% in Q3, and Thats up from 17, 3% a year ago.
So we're pleased with the progress there the mix does change from time to time some of the spare sales can be lumpy, but the overall trend is positive and we're pleased with it.
When you take out those one timers that Jim mentioned.
That we had in prior year and we didn't have any this quarter was clean earnings from operations the.
The rate of profitability growth in TSS was higher than the revenue growth you mentioned revenue grow 21%. So the core earnings growth was in fact higher.
And that's what we intend to demonstrate again in Q4.
Alright Thats helpful. Thank you and then just as a follow up.
Our conditions for you in the labor market currently or are you seeing any elevated attrition and do you have the hires in place that you need to meet the growth that youre anticipating into fiscal 'twenty four.
We do we look at our head count every week.
All of the sites.
And there's been a few pockets of touch labor.
We're getting specialized skills like gear grinding.
Has been harder, but generally our attrition levels are better than our peers and I attribute that to this new deal I mentioned my comments triumph, we can't throw money at all of our employees, but we can address all of their needs which include flexible work hours.
And support to their development plans.
We did some things on giving cash stipends during the summer of last year because of gas prices.
And people really appreciated that and we've done a lot to engage employees.
Our community involvement and we just want to be an employer of choice and that's gone a long way, but we're.
We've seen labor challenge has mostly been at the lower tier supply chain, where they haven't been able to get the kind of experienced.
<unk> and casting houses in particular, they've struggled so that's a watch area for us, but internal trials, we're actually in good shape.
Okay. That's helpful color. Thank you.
Okay.
Yes.
Our next question will come from Cai von <unk>, which.
You May now go ahead.
Yes, thanks, so much so.
Maybe walk me through that.
Thinking behind the ones, which are sort of priced strike at $12 35 in the stocks.
Under that I guess, it makes sense, if someone wants to buy and use the 2025 maturities to exchange them that there is a positive arbitrage, but what are you. What are you seeing there and what do you expect in terms of.
Retiring debt is by those clients.
Thanks Scott.
The warrants provide optionality to shareholders and in the past you've seen us raise equity through an ATM and that really didn't give an option to our shareholders and some of the feedback was we'd like to have the choice. So what the warrants did was give shareholders something of value they've got equity securities trading of our book now and they can choose to sell that into the.
<unk>.
And get money that way and realize the value of that way they could go buy bonds and use those.
The exercise warrants to get stock and they could call that stock or sell the stock.
Or they could.
Thank you so just hold onto it for the term and when the time comes.
They want access for cash because the stock is trading.
So it provides optionality and value pro rata to our existing shareholders.
We're pleased to be able to do that.
Just one component over an overall.
Leveraging strategy Delever naturally through EBITDA expansion.
In our portfolio changes that get higher margins.
I want to provide that optionality, but it doesn't solve all problems. It just provides one avenue for value for shareholders. We're still going to go through a refinance on the best terms possible at the right time, our maturities before they come due.
But if I look you basically have five quarters to get this done and unlike other high yield candidates.
Like Bombardier or spirit.
Our debt is bigger than your revenues in their case, it's like twice as big.
While you're probably not going to pay 12, 12% as Sheila said.
Clearly you're going to have to pay a whole lot more than seven 5% unless the market changes very substantially so that basically refi will really increase.
Your interest costs.
Your margins are not that bad your margins are pretty good.
So, but the percentage increase you can get in those margins kind of looks like it limits. The adjusted EBITDA growth and so I mean do you feel like youre potentially in sort of a spiral where higher interest cost eats up most of the incremental adjusted EBITDA margin or is there a point where you.
See basically the adjusted EBITDA goes up and you can really deal with the interest expense. So you can really generate.
The type of value that I think your shareholders would like.
Yeah. Thanks, Thanks, Guy and I think with our Q3 results show as the underlying value of our business absent the debt, but your question is a fair one first let's start with the dividend warranted at full execution that should reduce our interest carry by about $20 million.
When we refinanced the the first and second lien.
The average rate of those two is about seven 5%.
And yes, the 2020 fives are trading at a.
At a lower price but.
<unk> is viewed favorably by the bondholders in terms of our ability to service debt and we are seeing a opening of credit and high yield markets. In the last few weeks that gives us a lot of confidence that we're not going to pay as you said a whole lot more than seven five so I would say watch that space first of all.
And any debt, we do we will have the option to refinance at a couple of years in and reduce any interest carry that comes along with that debt on a short term basis.
During that period, I think you'd agree all the projections for the A&D market are favorable.
$24 25.
We're all looking forward to full.
A full exit from the pandemic can be at rates that were higher than 2019 level.
Things we've done during the period this downturn period really do position us to have the stronger earnings and cash generation. So.
We're confident that we can get refinance we're confident that we can get our our debt.
Our interest carry down recall, we retired all of the Boeing advances.
We've shared the businesses that were sources of cash use.
We're getting our mix right between OEM, and aftermarket, which benefits earnings as well so.
A long answer, but an important question and we are dealing with it head on.
Terrific. Thank you very much.
Our last question will come from Noah <unk> with Goldman Sachs.
You May now go ahead.
Hey, good morning, everybody.
Yes.
You had provided the slide.
Where you saw the major airplane production rates going 2025.
Before Boeing's Investor day.
Can you just square me up on what your internal plans now have for the Max and the 87 and that period of time compared to what you were thinking previously.
Yes.
We've gotten the latest schedule from Boeing that gives us bill rates I mentioned, our current delivery rates, 30% to 31, a month for they're there they've put a marker out there to be around 50.
2024, and so it'll ramp up incrementally between now and that at some logical step points.
What I've observed about boeing's rate changes.
With each new schedule, we get.
There is a smaller adjustment so the ball is bouncing LSI with each bounds there really dialing it and they put a lot of people on the road as have we chasing those supplier shortages.
As they fix them, there's fewer and fewer ones to remedy that our constraints on the on the ramp you read about Boeing opening a fourth line for 737, what they called the North line.
It's going to help a lot all the recent orders reinforced the need for that so we are staying in lock step with them, we're not building at rates above them.
I'll say part of our higher working capital in Q2.
Q3.
It was.
Flat spot that we saw on engine production.
And boeing's build rate as well and now that we've got clarity to the rate going up this year.
And next year, we're going to burn that inventory off quickly. So we're excited.
Even on the on the leap, we do a lot of gearboxes for the leap.
There had been some deferral of orders mid year. This year that got restored in our fourth quarter. So now we're scrambling to.
To deliver them.
As they as they update their profile will adjust but we expect those adjustments to be smaller.
And generally in the direction of going from 30% to 50 on the narrow body.
Yes.
Okay.
Helpful.
And just a little digging in a little further on the Max and the shorter term.
Their stated production rate there has been about the same for a while and the delivery the monthly delivery number bounces around but it's sort of been at the same zone for a while.
It sounds like you are saying that.
Firming up.
You're seeing a higher contribution from the Max.
Like you said they are pointing to the fourth line.
Is it is that the correct read that that is stabilizing and now evaluating going higher sooner than later or is that too ambitious and theres still a lot to clean up.
I think their delivery rate over the last four quarters supports it.
In their first quarter.
Liver.
95 aircraft total and their Max deliveries were in the 27%.
<unk> to 35, then they went up to 43 by June .
And then they ended the year with 53 Macs.
<unk> in December so there is real.
Quantifiable increases in output out of Boeing.
Their total delivery in December was $69 53 were Max's so it's definitely happening.
We've got people there and their plant observing.
The production and we supply a lot of hardware on the Max It is an important program for us and as the rate comes back it's benefiting not only interiors, but a number of our our actuation plants.
So.
We are aligned with them and.
As we continue to diversify our customer base I mentioned all the Airbus.
Our content, we have some press releases in the quarter about new wins with Airbus, but the Max is going to be a tailwind for us as well Jim anything that.
Some of the plants had some inventory there Bernie.
Boeing was burning through so that's why we may be ramping kind of trailing their ramp and were still going up some of our places are near just in time and some are not so I think that's the difference there is that we're ramping.
Inventory.
Okay.
Last one you just referred to some new wins you announced.
The investor presentation with the earnings now every quarter in a row for a while has a slide or two.
Strategic initiatives and new wins.
This quarter you described you described some clean sheet new products.
And we see a lot of announcements.
Is there any way to quantify that the organic revenue growth has started to pick up obviously the end markets picking up but I mean, how many new products are adding as a percentage of the existing portfolio or how much outgrowth do you see or any other way you could frame that because.
It seems pretty encouraging I mean, youre pointing to multiple new things there.
Yes.
First of all I'll take.
I'll take that challenge to quantify the contribution of our new wins.
Maybe a product byproduct basis for our Investor day is coming up but in my in my script I talked about how we set a goal of 25% of revenue coming from new customers and suppliers.
And we're seeing that the new wins are on the order of 40 plus percent of the volume and our goal is to be throughout the product lifecycle. So an early development programs Bank six Gen fighter on new current development programs be 'twenty, one we cant talk about specific.
Content, but we are on that platform and then we want to be on low rate programs that are transitioning into production like CH 53.
And then we want to be on mature programs like the F 35.
C.
<unk> C 130, <unk> 30 was plus up in the President's budget.
V 22.
Got <unk> five aircrafts as well.
Yes.
Apache got pushed up.
For 35 aircrafts.
If you have and then we want to be at the very end, which is the tail end of Sustainment phase of mature aircraft. Today V 22, as an example to knock these are good.
<unk> for us in the aftermarket.
If you get gaps in any part of that that arc.
From early development through Sustainment you get these.
Swings in your mix and then your financials and try and had that problem five years ago. They had a lot of late.
Life production programs like 747.
G 650.
C 17, and that was good while it lasted but.
A big gap opened up in the pipeline and now we've achieved I think a stability across those so let us take the action to give you specifics on how they are contributing.
The leading indicators, whether it's backlog growth or book to Bill are very favorable and they have been.
Over a month, we look at our each of our operating companies.
As your controls gears actuators aftermarket.
They all have book to Bill greater than one point, so it's a consistent level of growth across all of our operating units.
Okay. Thanks very much.
Thanks, a lot.
This concludes our question and answer session and triumph group's third quarter fiscal year 2023 earnings conference call.
This call will have a replay that will be available today at 11 30, a M Eastern standard time.
February eight at 11, 59 PM Eastern standard time.
You can access to replay by dialing one 870 734 475 to the guidance again, that's 1877344.
Two nine.
Entering access code 214090 discrete against two one or 0903. Thank.
Thank you for attending today's presentation you may now disconnect.