Q3 2024 Triumph Group Inc Earnings Call
Operator: Welcome to Triumph Group's third quarter fiscal year 2024 results conference call. All participants will be in listen-only mode.
Welcome to triumph group's third quarter fiscal year 'twenty 'twenty four results conference call.
All participants will be in listen only mode.
Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad.
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After todays presentation, there will be an opportunity to ask questions.
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Operator: To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to introduce Tom Quigley, Triumph's Vice President of Investor Relations.
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I would now like to introduce Tom Quigley triumphs, Vice President of Investor Relations. Please go ahead.
Tom Quigley: Thank you. Good morning, and welcome to our third quarter fiscal 2024 earnings call. Today I'm joined by Dan Crowley, the company's chairman, president, and chief executive officer, and Jim McCabe, senior vice president and chief financial officer of Triumph. As we review the financial results for the quarter, please refer to the presentation posted on our website, which will discuss our adjusted results. Our adjustments and any reconciliation of non-GAAP financial measures to comparable GAAP measures are explained in the earnings press release and in the present. Additionally, 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 that may cause Triumph's actual results, performance, or achievements to be materially different from any expected future results, performance, or achievements expressed or implied in a forward-looking statement. Dan, I'll turn it over to you.
Tom Quigley: Thank you good morning, and welcome to our third quarter fiscal 2024 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 of trials.
Tom Quigley: As we review the financial results for the quarter. Please refer to the presentation posted on our website. This morning.
Tom Quigley: We'll discuss our adjusted results 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.
Tom Quigley: Certain statements on this call constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 995.
Tom Quigley: These forward looking statements involve known and unknown risks.
Tom Quigley: 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.
Tom Quigley: Dan I'll turn it over to you.
Daniel J. Crowley: Thanks, Tom, and welcome to Triumph's third-quarter call. I'll open my remarks by covering the strategic action we took with the product support sale and the significant benefits it will provide, and Jim and I will discuss our Q3 performance and the primary factors impacting our results, and our expectations for record Q4 results to end the fiscal year on an upswing. I'll wrap up with the growth drivers that instill confidence in our multi-year outlook. Overall, I'm excited about Triumph's future and our ability to deliver expanding levels of profitability and cash flow. This is our first opportunity to discuss the recently announced sale of our product support business, which remains on track to close this quarter. For Triumph, this is a game-changing transaction. One that will provide both financial and strategic benefits.
Daniel J. Crowley: Thanks, Tom and welcome to <unk> third quarter call.
Daniel J. Crowley: I'll open my remarks by covering the strategic action, we took with the product support sale.
Daniel J. Crowley: And the significant benefits it will provide.
Daniel J. Crowley: And Jim and I will discuss our Q3 performance and the primary factors impacting our results.
Daniel J. Crowley: And our expectations for record Q4 results to end the fiscal year on an upswing.
Daniel J. Crowley: I'll wrap up with the growth drivers, which is still confidence in our multiyear outlook overall I'm excited about <unk> future and our ability to deliver expanding levels of profitability and cash flow.
Daniel J. Crowley: This is our first opportunity to discuss the recently announced sale of our products support business, which remains on track to close this quarter.
Daniel J. Crowley: <unk> this is a game changing transaction.
Daniel J. Crowley: One that will provide both financial and strategic benefits.
Daniel J. Crowley: During our September 2023 Investor Day, we communicated Triumph's priorities and path to accelerating value creation in line with our stakeholder priorities. De-laboring our balance sheet has been a top priority. This transformative divestiture will significantly accelerate our de-levering progress by reducing our net debt by over 40% and materially reducing our interest carry as early as this March following transaction closure. On Tuesday, we provided a conditional notice on the repayment of certain of our bonds.
Daniel J. Crowley: During our September 2023, Investor day, we communicated <unk> priorities and path to accelerating value creation in line with our stakeholder priorities.
Daniel J. Crowley: Delevering, our balance sheet has been a top priority.
Daniel J. Crowley: This transformative divestiture will significantly accelerate our deleveraging progress by reducing our net debt by over 40%.
Daniel J. Crowley: And materially reducing our interest carry as early as this March following transaction closure.
Daniel J. Crowley: On Tuesday, we provided a conditional notice.
Daniel J. Crowley: On the repayment of certain of our bonds, Jim will provide more color on this later.
Daniel J. Crowley: Jim will provide more color on this later. As summarized on slide three, the divestiture truly represents a win for both our shareholders and bondholders. And it's entirely consistent with our strategic plan to focus on differentiated components and systems of our own design and to own our aftermarket tail. We combine this with expanding pre-cash flow and earnings from our remaining operations. This transaction positions Triumph to enter a recursive cycle of financial improvement, with higher free cash flow and lower debt to accelerate growth and shareholder value creation. As shown in slide four, post-closing, Triumph will compete in four primary business areas. Actuation Products and Services with 12 sites focused on hydraulic and electric actuation and mechanical controls. Systems and Engine Controls with Three Sides Serving the Fuel and Thermal Control Market Geared solutions with two sides providing power transmissions, integrated gearboxes, and loose gears, and interiors with five sites producing thermal-acoustic insulation systems, composite ducting, and cabin compression.
Daniel J. Crowley: As summarized on slide three the divestiture truly represents a win for both our shareholders and bondholders and.
Daniel J. Crowley: It is entirely consistent with our strategic plan to focus on differentiated components and systems of our own design and to own our aftermarket tail.
Daniel J. Crowley: When combined with expanding free cash flow and earnings from our remaining operations.
Daniel J. Crowley: This transaction positions triumph to enter a recursive cycle the financial improvement.
Daniel J. Crowley: With higher free cash flow and lower debt to accelerate our growth and shareholder value creation.
Daniel J. Crowley: As shown on slide four post closing triumph will compete in four primary business areas.
Daniel J. Crowley: <unk> products and services with 12 sites focused on hydraulic and electric actuation and mechanical controls.
Daniel J. Crowley: Systems and engine controls with three sized servicing the fuel and thermal control markets.
Daniel J. Crowley: <unk> solutions with two sides, providing power transmissions integrated gearboxes and loose gears.
Daniel J. Crowley: And interiors with five sites producing thermal acoustic insulation systems.
Daniel J. Crowley: Composite ducting and cabin components.
Daniel J. Crowley: These are competitive businesses that benefit from our lean transformation and diversity of customers and platforms. Post-closing, substantially all of Triumph's sales will be IP-based, and so forth. We are taking immediate steps to right-size the remaining company with an optimized cost structure that builds on the operational improvements implemented during our transformation and ensures we are well-positioned to achieve our long-term financial and operational targets. To be clear, we expect to continue our steady progress towards 20% EBITDA margins and Free Cash Flow Conversion of 10% of sales or better over the medium term on the strength of Triumph's IP-based product portfolio. As I reflect on the third quarter that ended in December, there were clearly challenges.
Daniel J. Crowley: These are competitive businesses.
Daniel J. Crowley: Which benefit from our lean transformation and diversity of customers and platforms.
Daniel J. Crowley: Post closing substantially all of <unk> sales will be IP based.
Daniel J. Crowley: <unk> sole sourced.
Daniel J. Crowley: We are taking immediate steps to rightsize the remaining company with an optimized cost structure.
Daniel J. Crowley: That builds on the operational improvements implemented during our transformation and.
Daniel J. Crowley: In insurance, we are well positioned to achieve our long term financial and operational targets.
Daniel J. Crowley: To be clear, we expect to continue our steady progress towards 20% EBITDA margins and free cash flow conversion of 10% of sales or better over the medium term on the strength of <unk> IP based product portfolio.
Daniel J. Crowley: As I reflect on the third quarter that ended in December they were clearly challenges. However, I am pleased with our ability to generate seven consecutive quarters of organic sales growth and to achieve positive free cash flow.
Daniel J. Crowley: However, I'm pleased with our ability to generate seven consecutive quarters of organic sales growth and to achieve positive free cash flow. Turning to slide five, I'll summarize the highlights from the quarter. Triumph generated year-over-year organic sales growth of 13%, driven by increasing commercial OEM production rates, even excluding our discontinued third-party MRO results. Our aftermarket sales increased year over year, with spares and repairs accounting for a robust 26% of our Q3 sales. MRO sales will continue to be a valuable financial driver for Triumph after the sale. We grew our total company backlog by 20% above the market growth rate, as Triumph expands its participation in a broad array of platforms, customers, and markets. Our year today booked a bill for Triumph with a very strong 1.34.
Daniel J. Crowley: Turning to slide five I'll summarize the highlights from the quarter.
Daniel J. Crowley: Triumph generated year over year organic sales growth of 13% driven.
Daniel J. Crowley: Driven by increasing commercial OEM production rates.
Daniel J. Crowley: Even excluding our discontinued third party MRO results.
Daniel J. Crowley: Our aftermarket sales increased year over year with spares and repairs accounting for a robust 26% of our Q3 sales.
Daniel J. Crowley: MRO sales will continue to be a valuable financial driver for triumph after the sale.
Daniel J. Crowley: We grew our total company backlog by 20% above market growth rates as triumph expands its participation in a broad array of platforms customers and end markets.
Daniel J. Crowley: Our year to date book to Bill for Triad was a very strong 134.
Daniel J. Crowley: And as part of the mentioned rightsizing efforts, we initiated $40 million in cost reduction actions across the company to mitigate any short-term margin dilution from the product support sale and to achieve the long-term earnings and cash metrics we presented at our Investor Day. While Q3 sales were strong, earnings and free cash flow came in below expectations as a result of delayed shipments due to a finite set of supply chain shortages and continued margin weakness in our interiors business. I'll cover both topics head-on and provide facts supporting our confidence in our full-year forecast.
Daniel J. Crowley: And as part of the mentioned right sizing efforts, we initiated 40 million in cost reduction actions across the company to mitigate any short term margin dilution from the product support sale and to achieve the long term earnings and cash metrics, we presented at our Investor day.
Daniel J. Crowley: While Q3 sales were strong.
Daniel J. Crowley: Earnings and free cash flow came in below expectations as a result of the delayed shipments due to a finite set of supply chain shortages and continued margin weakness and our interiors business.
Daniel J. Crowley: I'll cover both topics head on and provide facts supporting our confidence in our full year forecast.
Daniel J. Crowley: First, on the delayed deliveries. Although our overall supplier on-time delivery and full metric improved from 90% to 92% sequentially over Q3, we still experienced shortages, which held up higher-margin deliveries and contributed to our working capital balance. The specific late deliveries in Q3 were primarily machine components, electronics, castings, and bearings.
Daniel J. Crowley: First on the delay deliveries.
Daniel J. Crowley: Although our overall supplier on time delivery in full metric improved from 90% to 92% sequentially over Q3, we still experienced shortages, which held up higher margin deliveries and contributed to our working capital balance.
Daniel J. Crowley: The specific late deliveries in Q3 were primarily machine components electronics castings and bearings.
Daniel J. Crowley: Triumph staff are on site at these suppliers, expediting shortages and developing alternate sources for the future. I've been in touch with the CEOs of these firms to secure their commitments to make their fourth quarter deliveries, and we're seeing the results early in Q4. January deliveries were solid, with monthly sales of approximately $100 million, which supports our Q4 forecast. We expect over $50 million of inventory to be relieved in Q4. In many cases, we've already completed all Q4 products and are waiting on customer approvals to ship and collect. Customer demand is firm, meaning there are no new orders that are needed to close the fiscal year. Interior sales increased by 26% in the quarter.
Prime staff are onsite at these suppliers expediting shortages.
Daniel J. Crowley: In developing alternate sources for the future.
Daniel J. Crowley: I've been in touch with the Ceos of these firms to secure their commitments to make their fourth quarter deliveries and were seeing the results early in Q4.
January deliveries were solid with monthly sales of approximately $100 million, which supports our Q4 forecast.
Daniel J. Crowley: We expect over $50 million of inventory to be relieved in Q4.
Daniel J. Crowley: In many cases, we've already completed all Q4 products.
Daniel J. Crowley: And are waiting on customer approvals to ship and collect.
Daniel J. Crowley: Customer demand is firm meeting as no new orders that are needed to close the fiscal year.
Daniel J. Crowley: Interior sales increased by 26% in the quarter.
Daniel J. Crowley: So only 15% of Triumph's total sales. That said, Interior's profitability in the quarter and free cash flow continue to lag expectations in Q3, due to the previously mentioned headwinds of labor and material inflation and the peso exchange rate. However, these results are about to change. We expect interiors to generate mid to high teens EBITDA margins in RQ4 as a result of the following actions. Contract Price Adjustments, where customers have specified full-source material call-outs, and developing alternative sources for those products where suppliers have raised their input prices, increased labor productivity from the lead events we initiated earlier this year to offset the minimum wage increases affecting all companies doing business in Mexico.
Daniel J. Crowley: So only 15% of trying to total sales.
Daniel J. Crowley: That said in <unk> profitability in the quarter and free cash flow continued to lag expectations in Q3.
Daniel J. Crowley: Due to the previously mentioned headwinds of labor and material inflation and the peso exchange rate.
Daniel J. Crowley: However, these results are about to change.
Daniel J. Crowley: We expect interiors to generate mid to high teens EBITDA margins in our Q4 <unk>.
Daniel J. Crowley: As a result of the following actions.
Daniel J. Crowley: Contract price adjustments, where customers have specified sole source material callouts.
Daniel J. Crowley: And developing alternative sources for those products, where suppliers have raised their input prices.
Daniel J. Crowley: Increased labor productivity from the lead events, we initiated earlier this year to offset the minimum wage increases affecting all companies doing business in Mexico.
Daniel J. Crowley: I encourage you to view the videos of the two plans posted on Triumph's website or LinkedIn page to see some of the improvements and the 2,000 plus men and women behind them. And then lastly, overhead absorption benefits from additional work we've been asked to take on from our competitors who are not supporting the OEM ramps, a sign of our customers' loyalty and Triumph's ready capacity. As we have done with our actuation and engine controls businesses, both of which are on the path to generate EBITDA margins above 27%, interiors can and will be restored to prior levels of profitability and pre-cash flow. Similarly, our Geared Solutions business is on track to deliver double-digit margins in Fiscal 24, after years of work to retire REDD Development Programs and transition them to production.
Daniel J. Crowley: I encourage you to view the videos of the two plants posted and tribes website or Linkedin page to see some of the improvements in the 2000, plus men and women behind them.
Daniel J. Crowley: And then lastly overhead absorption benefits from additional work we have been asked to take on from our competitors, who are not supporting the OEM ramps and sign of our customers' loyalty and triumphs ready capacity.
Daniel J. Crowley: As we have done with our actuation and engine controls businesses.
Daniel J. Crowley: Both of which are on path to generate EBITDA margins above 27%.
Daniel J. Crowley: Interiors can and will be restored to prior levels of profitability and free cash flow.
Daniel J. Crowley: Similarly, our geared solutions business is on track to deliver double digit margins in fiscal 'twenty four after years of work to.
Daniel J. Crowley: To retire red development programs and transition them to production.
Daniel J. Crowley: Turning to page 6 and looking ahead to our fiscal 24 year-end, the combined tailwinds of deferred Q3 sales, inherent seasonality, incremental price increases, and selected IP sales puts us on track to have a record Q4 that will translate into year-over-year margin expansion. Our updated guidance adjusts for the sale of product support. We have a clear line of sight across our Remaining Co. to deliver over 20% EBITDA margins in Q4, compared to 16.7% for Fiscal 23.
Daniel J. Crowley: Turning to page six and looking ahead to our fiscal 'twenty four year and the combined <unk> of deferred Q3 sales inherent seasonality incremental price increases.
Daniel J. Crowley: Selected IP sales.
Daniel J. Crowley: Puts us on track to have a record Q4 that will translate into year over year margin expansion.
Daniel J. Crowley: Our updated guidance adjust for the sale of product support.
Daniel J. Crowley: We have a clear line of sight across our remain co to deliver over 20% EBITDA margins in Q4 compared to 16, 7% for fiscal 'twenty three.
James F. McCabe: As with the commercial OEMs who posted robust aircraft deliveries in their Q4, we are very busy with product shipments and cash collections in our Q4. As noted, January deliveries were strong, as we conduct daily delivery assurance calls to close out our fiscal 24 with year-over-year improvement expected across all financial measures, including over $100 million of free cash flow improvement from the prior year. We look forward to providing Fiscal 25 guidance after the product support transaction closes and with our year-end results during our next earnings call that reflect the combined contribution of our portfolio actions, cost takeout, and lower interest payments. Jim will now take us through our third quarter results and updated outlook for Fiscal 24 in more detail. Then I'll return to discuss our end market outlook and growth drivers. Jim?
Daniel J. Crowley: As with the commercial Oems, who posted robust aircraft deliveries in their Q4.
Daniel J. Crowley: We are very busy with product shipments and cash collections in our Q4.
Daniel J. Crowley: As noted January deliveries were strong as we conduct daily delivery assurance calls to close out our fiscal 'twenty four with year over year improvement expected across all financial measures.
Daniel J. Crowley: Including over $100 million of free cash flow improvement from prior year.
Daniel J. Crowley: We look forward to providing fiscal 'twenty five guidance after the product support transaction closes with our year end results. During our next earnings call that reflect the combined contribution of our portfolio actions cost takeout and lower interest payments.
Daniel J. Crowley: Jim will now take us through our third quarter results and updated outlook for fiscal 'twenty four in more detail then I'll return to discuss our end market outlook and growth drivers Jim.
James F. McCabe: Thanks, Dan. Good morning, everyone. The sale of our product support business, which is on track to close this quarter, will transform Triumph's balance sheet. The net proceeds of approximately $700 million will reduce Triumph's outstanding debt by over 40% and will reduce annual cash interest expense by approximately $56 million. Net leverage will reduce to approximately four times adjusted EBITDA by our fiscal year-end next month. This lower leverage will improve our credit profile and create the opportunity for a lower cost of debt and even more interest savings moving forward. The product support business is now reported as discontinued operations in all periods presented, current and historical.
James F. McCabe: Thanks, Dan and good morning, everyone.
James F. McCabe: The sale of our product support business, which is on track to close this quarter will transform trials balance sheets.
The net proceeds of approximately $700 million will reduce triumphs outstanding debt by over 40% and will reduce annual cash interest expense by approximately $56 million.
James F. McCabe: Net leverage will reduce to approximately four times adjusted EBITDA by our fiscal year and next month.
James F. McCabe: This lower leverage will improve our credit profile and create the opportunity for a lower cost of debt and even more interest savings moving forward.
James F. McCabe: The product support business is now reported as discontinued operations in all periods presented current and historical it is important to note that we are in a transitional period for financial reporting.
James F. McCabe: It is important to note that we are in a transitional period for financial reporting. Triumph's continuing operations in Q3 have not yet benefited from the expected $56 million of annual interest savings from the debt reduction from the transaction proceeds or from the planned $40 million of fixed cost reduction as we manage the continuing business to achieve our consolidated margin and cash flow targets. On slide seven, we show our net debt liquidity. As of December 31st, we had just under $1.5 billion of net debt, and our cash availability was approximately $218 million. During the quarter, we purchased $31 million of our 2025 unsecured notes in the market.
<unk> continuing operations in Q3 have not yet benefited from the expected $56 million of annual interest savings from the debt reduction from the transaction proceeds orphan the planned $40 million of fixed cost reduction as we manage the continuing business to achieve our consolidated margin and cash flow targets.
James F. McCabe: On slide seven is our net debt liquidity.
James F. McCabe: As of December 31, we had just under $1 5 billion of net debt and our cash availability was approximately $280 million.
James F. McCabe: During the quarter, we purchased $31 million of our 2025 unsecured notes in the market.
James F. McCabe: We purchased those notes at a discount to par, resulting in a $1 million gain. We intend to use the proceeds for the sale of the product support business to de-lever and strengthen our balance. To that end, yesterday, we provided our first lien bondholders with a conditional notice of redemption to redeem $120 million of the first lien 2028 notes at 103. We also provided our unsecured 2025 bondholders with a conditional notice of redemption to redeem all of our unsecured notes at par. Both redemptions are conditioned on the closing of the sale, and the unsecured redemption will only occur after we make an asset sale offer to the first lien note holder.
James F. McCabe: Repurchases notes at a discount to par, resulting in a $1 million gain.
James F. McCabe: We intend to use the proceeds for the sale of the product support business to Delever and strengthen our balance sheet to.
James F. McCabe: To that end yesterday, we provided our first lien bondholders with a conditional notice of redemption to redeem a $120 million in the first lien 2028 notes at 103.
James F. McCabe: We also provided our unsecured 2025 bondholders with a conditional notice of redemption to redeem all of our unsecured notes at par.
James F. McCabe: Both redemptions are conditional on the closing of the sale and.
James F. McCabe: And the unsecured redemption will only occur after we conduct an asset sale offer to the firstly noteholders.
James F. McCabe: Firstly, notes are currently trading above par, which should impact the holder's decision whether to tender their notes at par. Pro forma for the expected $700 million in divestiture proceeds, Triumph's net debt is less than $800 million. Triumph's third quarter results reflect significant revenue growth and cash generation improvement over the prior year period, partially offset by softness and results in interiors and in our Geared Solutions business and systems and support. On slide 8 are the consolidated results for the quarter. Revenue was $285 million. For the continuing business, excluding divestitures and expended programs, organic revenue increased 13% over the prior year quarter. Organic revenue growth primarily benefited from increased commercial OEM volumes and commercial aftermarket repairs and spares, while demand across most of our military and markets slightly declined during the quarter on a year-over-year basis. Adjusted operating income for the quarter was $20 million, representing a 7% operating margin. Adjusted EBITDA for the quarter was $28 million, representing a 10% EBITDA margin.
The first lien notes are currently trading above par, which should impact the holder's decision whether to tender their notes at par.
Pro forma for the expected $700 million of divestiture proceeds triumphs net debt is less than $800 million.
James F. McCabe: <unk> third quarter results reflect significant revenue growth and cash generation improvement over the prior year period, partially offset by softness in resulted in interiors and and are geared solutions businesses systems and support.
James F. McCabe: On slide eight of the consolidated results for the quarter.
James F. McCabe: Revenue was $285 million for.
With the continuing business, excluding divestitures and exited programs organic revenue increased 13% over the prior year quarter.
James F. McCabe: Organic revenue growth, primarily benefited from increased commercial OEM volumes in commercial aftermarket repairs and spares while demand across most of our military end markets slightly declined during the quarter on a year over year basis.
James F. McCabe: Adjusted operating income for the quarter was $20 million, representing a 7% operating margin and adjusted EBITDA for the quarter was $28 million.
James F. McCabe: Representing a 10% EBITDA margin.
James F. McCabe: We expect fourth-quarter revenue margins to be significantly higher, as you will see in our guidance. Slide 9 shows our growing commercial market revenue. For the quarter, commercial revenue was $180 million, representing 63% of total revenue.
James F. McCabe: We expect fourth quarter revenue and margins to be significantly higher as you will see in our guidance.
James F. McCabe: Slide nine shows our growing commercial market revenue.
James F. McCabe: For the quarter commercial revenue was $180 million, representing 63% of total revenue.
James F. McCabe: Commercial OEM sales were $141 million and were up 26% in the continuing business. This growth was driven by increases in both volume and price in key programs, including the Boeing 787 and 737 programs. Commercial aftermarket sales of $39 million grew 26% in the continuing business on strong demand for commercial aftermarket spares and repairs. But tensions are on military revenue, which is down slightly. For the quarter, military revenue was $97 million, representing 34% of total revenue. Military OEM sales were down 3% versus the prior year. As expected, lower sales on the B-22, E-2D, and AH-64 were partially offset by growth on the CH-53K program. However, military aftermarket sales in the quarter were down 6% compared to last year due to unfavorable timing for demand for spares and repairs.
James F. McCabe: Commercial OEM sales were $141 million and were up 26% in the continuing business.
James F. McCabe: This growth was driven by increases in both volume and price in key programs, including the Boeing 787, and 737 programs.
Commercial aftermarket sales of $39 million grew 26% in the continuing business on strong demand for commercial aftermarket spares and repairs.
James F. McCabe: Slide 10 shows our military revenue, which is down slightly.
James F. McCabe: For the quarter military revenue was $97 million, representing 34% of total revenue.
James F. McCabe: Military OEM sales were down 3% versus prior year as expected lower sales on V 22, <unk> and <unk> hundred 64 were partially offset by growth on the CH 53 K program.
James F. McCabe: Military aftermarket sales in the quarter were down 6% compared to last year on unfavorable timing for demand of spares and repairs.
James F. McCabe: The remaining 1% of our revenue is non-aviation, which is profitable. We represented about $3 million of sales in the quarter, and it's down slightly over last year. Our free cash flow walk is on slide 11. We generated $22 million of free cash flow in Q3, even with working capital using $23 million of cash in support of increasing fourth quarter sales volume and increasing free cash flow generated.
James F. McCabe: The remaining 1% of our revenue is non aviation, which is profitable represented about $3 million of sales in the quarter and is down slightly over last year.
Our free cash flow walk is on slide 11.
James F. McCabe: We generated $22 million of free cash flow in Q3, even with working capital using $23 million of cash in support of increasing fourth quarter sales volume and increasing free cash flow generation.
James F. McCabe: Our fiscal 24 guidance begins on slide 12. Our guidance is being updated to exclude product support since it is now reported as a discontinued operation. Based on anticipated aircraft production rates, we expect organic growth of 12 to 14 percent in Fiscal 24, with revenue in the range of $1.17 billion to $1.2 billion. Our adjusted EBITDA guidance is in the range of $157 million to $167 million, indicating up to a 14% consolidated EBITDA margin in fiscal 24 for the continuing business. Pro forma for the debt reduction interest savings, we continue to expect our continuing operations to be solidly cash positive in Q4, consistent with prior year seasonality, driven by working capital liquidation on the fourth quarter sales surge, reduction of past due backlog, and increased inventory terms. We will continue to include product support in our year-end cash guidance, given the uncertainty around the closing timing, and update investors no later than our next earnings call. Interest expense is expected to be $151 million, including $145 million of cash interest.
James F. McCabe: Our fiscal 'twenty four guidance begins on slide 12.
James F. McCabe: Our guidance is being updated to exclude product support since it is now reported as discontinued operations.
James F. McCabe: Based on anticipated aircraft production rates, we expect organic growth of 12% to 14% in fiscal 'twenty four with revenue in the range of $1 7 billion to $1 2 billion.
James F. McCabe: Our adjusted EBITDA guidance is in the range of $157 million to $167 million, indicating up to a 14% consolidated EBITDA margin in fiscal 'twenty, four and the continuing business.
James F. McCabe: Pro forma for the debt reduction interest savings, we continue to expect our continuing operations to be solidly cash positive in Q4, consistent with prior year seasonality driven by working capital liquidation on the fourth quarter sales surge.
James F. McCabe: Reduction in past due backlog and increased inventory turns.
James F. McCabe: We will continue to include product support in our year end cash guidance given the uncertainty around the closing timing and update investors no later than our next earnings call in May.
James F. McCabe: Interest expense is expected to be $151 million, including $145 million of cash interest, we expect $7 million of cash taxes.
James F. McCabe: We expect $7 million in cash. This is prior to the anticipated $56 million of annual interest savings from debt reduction following the closing of the sale of product support. Organic margin expansion, cash generation, and debt reduction are expected to drive our net leverage from 7.6 times last fiscal year end to approximately four times at the end of fiscal 24 next month. We are updating our operating plans as we do this time each year, and expect to provide FY25 guidance on our next earnings call. With the product support business now classified as discontinued operations in all periods presented,
James F. McCabe: This is prior to the anticipated $56 million of annual interest savings from debt reduction following the closing of the sale of the product support business.
James F. McCabe: Organic margin expansion cash generation and debt reduction are expected to drive our net leverage from seven six times last fiscal year end to approximately four times at the end of fiscal 'twenty for next month.
James F. McCabe: We are updating our operating plans as we do this time each year and expect to provide FY 'twenty five guidance on our next earnings call.
James F. McCabe: With the proxy port business now classified as discontinued operations in all periods presented.
Daniel J. Crowley: You have current and historical results for the continuing business, including sales by end market, all excluding product support. Please also consider the $56 million of annual interest savings from debt reduction with the divestiture proceeds and the $40 million of fixed cost reduction actions. In summary, the third quarter results included solid organic revenue growth and positive cash generation, yet a lower than planned EBITDA operating margin due to the impact of industry-wide supply chain constraints and inflation, both of which we are actively addressing. Triumph's fundamentals remain strong as we continue to focus on our OEM components, IP-based spares, and MRO business. Now I'll turn the call back to Dan. Dan?
James F. McCabe: We have current and historical results for the continuing business, including sales by end market.
James F. McCabe: All excluding product support.
James F. McCabe: Please also consider that $56 million of annual interest savings from debt reduction with the divestiture proceeds.
James F. McCabe: And the $40 million of fixed cost reduction actions being taken.
In summary, third quarter results included solid organic revenue growth and positive cash generation, yet lower than planned EBITDA in operating margin due to the impact of industry wide supply chain constraints and inflation both of which we are actively addressing.
James F. McCabe: Trials fundamentals remains strong as we continue to focus on our OEM components, IP based spares and MRO business.
James F. McCabe: Now I'll turn the call back to Dan Dan.
Daniel J. Crowley: Thanks, Jim. Turning to page 13, I want to share more detail on the growth outlook and the product investments that underpin our excitement about Triumph's future. Both global passenger travel demand, which we measure in RPKs, and airline revenues were at or above 2019 levels in 2023. This demand is expected to rise another 10% in 2024, lifting roughly two-thirds of Triumph's sales. The strong recovery in airline financials is reflected in higher commercial transport aircraft orders. Airbus finished 2023 with record net orders of 2094 aircraft, and Airbus production rate projections are largely holding, as reflected in their supplier portal. Triumph's main Airbus narrow body content on the A320-321neo family, now at rate 60 per month. Also includes the LEAP engine gearbox, engine cowl door actuation, valves, landing gear up locks, and a hydraulic transfer pump on the A350, now at rate six per month.
Daniel J. Crowley: Thanks, Jim.
Daniel J. Crowley: Turning to page 13, I want to share more detail on the growth outlook and the product investments that underpin our excitement in <unk> future.
Daniel J. Crowley: Both global passenger travel demand, which we measure in RP kase and airline revenues were at or above 2019 levels in 2023.
Daniel J. Crowley: This demand is expected to rise another 10% in 2024 lifting roughly two thirds of <unk> sales.
Daniel J. Crowley: The strong recovery in airline financials is reflected in higher commercial transport aircraft orders.
Daniel J. Crowley: Airbus finished 2023.
Daniel J. Crowley: With record net orders of 2094 aircraft and Airbus production rate projections are largely holding as reflected in their supplier portal.
Daniel J. Crowley: <unk> main Airbus narrow body content on the <unk> hundred $23 21, Neo family now at rate 60 per month.
Daniel J. Crowley: Includes the leap engine gearbox engine caldor actuation valves landing gear up blocks.
Daniel J. Crowley: And our hydraulic transfer pump.
Daniel J. Crowley: On the <unk> hundred 50, now at <unk> six per month or.
Daniel J. Crowley: Our content includes cabin insulation, pumps, utility actuation, and control valves. So it is so profitable content on the ramping Airbus program. Boeing secured 1,314 net orders, including the second highest year of 787 orders at 301 since program launch, which gives us confidence that rates of 10 a month or higher are increasingly likely. Note that the Dreamliner is Triumph's highest ship said value program at a million dollars per aircraft. Together, in 2023, Airbus and Boeing will post 709 Twin Isle orders.
Daniel J. Crowley: Our content includes cabin installation pumps utility actuation in control valves.
Daniel J. Crowley: So profitable content on ramping Airbus programs.
Daniel J. Crowley: Boeing secured 1300 14 net orders, including the second highest year of 787 orders of 301 since program launch, which gives us confidence that rates of 10, a month or higher are increasingly likely.
Daniel J. Crowley: Note that the Dreamliner is triumphs highest chipset value program at $1 million per aircraft.
Daniel J. Crowley: Together in 2023, Airbus and Boeing posted 709 twin aisle orders. This is good news for trial as we have substantial twin aisle content.
Daniel J. Crowley: This is good news for Triumph, as we have substantial Twin Isle content. Year over year, Triumph's fiscal 24 revenue on the top four commercial aircraft programs is up 40% in aggregate, while backlog rose another 32%, even as shipments rise substantially. Regarding the recent headlines on the 737 MAX production rate, we are aligned with Boeing, who are maintaining component build rates of approximately 38 per month in their supplier portal. We do not expect any impact to our multi-year projections due to the recent FAA announcements.
Daniel J. Crowley: Year over year <unk> fiscal 'twenty for revenue on the top four commercial aircraft programs is up 40% in aggregate, while backlog rose another 32%, even as shipments rise substantially.
Daniel J. Crowley: Regarding the recent headlines on the 737 Max production rate, we are aligned with Boeing who are maintaining component build rates of approximately <unk> 38 per month in their supplier portal we.
Daniel J. Crowley: We do not expect any impact to our multiyear projections due to the recent FAA announcements, we are fully supporting boeing's supply chain wide quality improvement efforts as well.
Daniel J. Crowley: We are fully supporting Boeing's supply chain-wide quality improvement efforts as well. In summary, Triumph's commercial OEM sales are up 18% year-over-year. Despite the supply chain challenges impacting the industry, and expected to continue to increase with the production ramp of both wide-body and narrow-body aircraft. On the military side, we're seeing a rotation of platform investments as OEM demand for legacy aircraft, such as the V-22 and UH-60, declines, while development programs such as the T7A and CH53K transition to production, and next-gen platforms, such as the Army's future vertical lift and On slide 14, key wins for the quarter included additional GE military engine fuel-draulic actuators, Betas, CX300 EVTOL, nose and main landing gear shock struts, and Adarpa Sprint Program Gearbox Design, all solutions based on Triumph IP.
In summary, <unk> commercial OEM sales are up 18% year over year.
Daniel J. Crowley: Despite the supply chain challenges impacting the industry.
Daniel J. Crowley: And expected to continue to increase with the production ramp of both wide body and narrow body aircrafts.
Daniel J. Crowley: On the military side, we're seeing a rotation of platform investments as OEM demand for legacy aircrafts, such as the V 22, and UA 60 decline.
Daniel J. Crowley: While development programs, such as the <unk> and CH 53, K transition to production.
Daniel J. Crowley: And next Gen platforms, such as the Army's future vertical lift and Nextgen air dominance gets started.
Daniel J. Crowley: On slide 14 key wins for the quarter included additional GE military engine fueled rollick actuators.
Daniel J. Crowley: Betas, CX 300, EV tall knows in mainland gear shocks struts.
Daniel J. Crowley: And the DARPA Sprint program gearbox design, all solutions based on triumph IP.
Daniel J. Crowley: Now 38% of our sales. We expect our mix of military business to continue to turn over, with new starts replacing legacy programs. And this is where Triumph's work on product innovation will generate long-term value and new aftermarket streams. Turning to slide 15, Triumph has embarked on a modular solutions approach, whereby core products in engine controls, thermal cooling, actuation, and gearboxes find application on both commercial and military platforms. Often developed with customer funding, these core products will be the engine of growth over our planning horizon and a strong source of competitive advantage. As a case in point, Triumph has been selected for GE's next-gen engines for critical actuators and Honeywell's APUs on the strength of our modular digital controls that are scalable, redundant, cyber-proof, and affordable.
Daniel J. Crowley: Now 38% of our sales.
Daniel J. Crowley: We expect our mix of military business to continue to turnover with new starts replacing legacy programs and this is we're trying to work on product innovation will generate long term value and new aftermarket streams.
Turning to slide 15 triumph has embarked on a modular solutions approach whereby core products and engine controls thermal cooling actuation and gearboxes find application on both commercial and military platforms.
Daniel J. Crowley: Often developed with customer funding. These core products will be the engine of growth over our planning horizon and a strong source of competitive advantage.
Daniel J. Crowley: Case in point Triumph has been selected for GE as next Gen engines for critical actuators.
Daniel J. Crowley: And honeywell's Apu's on the strength of our modular digital controls that are scalable redundant cyber proof and affordable.
Daniel J. Crowley: Once qualified and on wing, we expect these core products to generate significant top and bottom line growth in the years to come. On slide 16, I also want to highlight the recent opening of Triumph's new state-of-the-art Thermal Solutions Development Center at West Hartford in partnership with the state of Connecticut. As aircraft electrical and thermal loads increase, aircraft designers need ways to get that heat off board.
Daniel J. Crowley: Once qualified non wing.
Daniel J. Crowley: We expect these core products generate significant top and bottom line growth in the years to come.
Daniel J. Crowley: On slide 16, I also want to highlight the recent opening of triumphs new state of the art thermal solutions development Center at West Hartford in partnership with the state of Connecticut.
Daniel J. Crowley: This aircraft electrical and thermal loads increased aircraft designers need ways to get that heat off board.
Daniel J. Crowley: And this lab will provide new capabilities to our growing thermal customer base, helping to develop next-gen thermal components and integrated system solutions. We are particularly excited about our solution for the F-35 power and thermal management system, known as PTMS, where Triumph is one of three firms downselected by the F-35 Joint Program Office to compete for the phase one development effort. We're competing against incumbent Honeywell and Raytheon Technologies to be the integration lead and offering an 80-kilowatt advanced vapor cycle cooling capability for the Lightning II that will be validated at our new West Hartford Thermal Development Center.
Daniel J. Crowley: And this lab will provide new capabilities to our growing thermal customer base.
Daniel J. Crowley: Helping to develop nextgen thermal components and integrated system solutions.
Daniel J. Crowley: We are particularly excited about our solution for the F 35 power and thermal management system known as <unk>.
Daniel J. Crowley: Our trial is one of three firms down selected by the F 35 Joint program office.
Daniel J. Crowley: To compete for the phase one development effort.
Daniel J. Crowley: We're competing against incumbent Honeywell and Raytheon technologies to be the integration late and offering an 80 kilowatt advanced vapor cycle cooling capability for the lightning too that.
That will be validated and our new West Hartford thermal development Center.
Daniel J. Crowley: We are engaged on other thermal solution programs with Northrop Grumman, Sikorsky, Bell, and General Atomics. So, in summary, if you combine steadily improving commercial OEM demand with Triumph's strong position on next-gen military platforms, high-margin aftermarket sales, and Improving Balance Sheet and Cost Takeout Actions we initiated in Q3, you've got a recipe for strong follow-through in Q4 and in the years ahead. Despite supply chain delays in our third quarter, my team and I are excited about the future for our company and are set up for a very strong Q4. Triumph's actions to accelerate our deleveraging demonstrates our commitment to value creation and will create the right conditions for success in fiscal 25 and beyond as the combined benefits of our growing backlog and lower interest expense fuel our IP-based OEM and aftermarket business. We look forward to updating our investors in May and 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. To ask a question, you may press star, then 1 on your telephone keypad.
Daniel J. Crowley: We are engaged on other thermal solution programs with Northrop Grumman Sikorsky Bell and general Atomics.
Daniel J. Crowley: So in summary, if you combined steadily improving commercial OEM demand with.
Daniel J. Crowley: With <unk> strong position on Nextgen military platforms.
Daniel J. Crowley: Our high margin aftermarket sales.
Daniel J. Crowley: And improving balance sheet and cost takeout actions, we initiated in Q3 and you've got a recipe for strong follow through in Q4 and the years ahead.
Daniel J. Crowley: Despite supply chain delays in our third quarter my team and I are excited about the future for our company and are set up for a very strong Q4.
Daniel J. Crowley: <unk> actions to accelerate our deleveraging demonstrates our commitment to value creation and will create the right conditions for success in fiscal 'twenty, five and beyond as the combined benefits of our growing backlog and lower interest expense fuels, our IP based OEM and aftermarket business.
Daniel J. Crowley: We look forward to updating our investors in May and are happy to take any questions you have.
Speaker Change: We will now begin the question and answer session.
Speaker Change: We ask that you limit yourself to one question and one follow up to give everyone the opportunity to participate.
Speaker Change: To ask a question you May press Star then one on your telephone keypad.
Operator: If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. And our first question will come from Seth Seifman of J.P. Morgan. Please go ahead. Hey, thanks very much, and good morning, everyone.
Speaker Change: If you are using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: To withdraw your question. Please press Star then two.
Speaker Change: At this time, we will pause momentarily to assemble the roster.
Speaker Change: And our first question will come from Seth placement of Jpmorgan. Please go ahead.
Seth: Hey, thanks, very much and good morning, everyone.
Seth: Good morning.
Seth Michael Seifman: So the first question I had on the aftermarket, I thought it was kind of interesting. In the release, it talks about aftermarket sales, including both repair and overhaul and spare parts. And I assume that's excluding the product support business. So in terms of the aftermarket, how would you describe the split between repair and overhaul versus spare parts within the aftermarket and remaining Triumph? And is it significantly different between commercial and military? Thanks, Seth. It's Jim.
Seth: So first question I had on the aftermarket so that's kind of interesting in the release it talks about aftermarket sales, including both repair and overhaul.
Seth: And spare parts and I assume thats, excluding the product support business. So in terms of the aftermarket.
Seth: How would you describe the split between repair and overhaul versus spare parts within the aftermarket and remaining trials and is it is it significantly different between commercial and military.
Speaker Change: Thanks, Seth as Jim you are correct.
James F. McCabe: You're correct that all the presentation excludes product support for the end market analysis. So, you know, it's roughly 50-50. MRO versus spares in that business. In the quarter, the aftermarket business was about 27%, around $73 million. But obviously, it's a higher margin than the OEM business, and it's all based on our IP, too. So that's one thing I want to make people understand is that we are still in the aftermarket, but we're in the aftermarket with our intellectual property spares and repairs. So think about the repair piece of it as being IP based as well. Greg
Speaker Change: All the presentation excludes product support for the end market analysis. So.
Speaker Change: It's roughly 50 50.
Speaker Change: MRO versus spares in that business in.
Speaker Change: In the quarter.
Speaker Change: Aftermarket business was about 27% or $73 million.
Speaker Change: But obviously it's.
Speaker Change: Higher margin than the OEM business.
Speaker Change: It's all based on our IP too. So that's one thing people understand is that we are still in the aftermarket, but we're in the aftermarket with our intellectual property spares and repairs.
Speaker Change: Alright, so think about the repairs piece of it as being IP based as well.
Speaker Change: Correct.
James F. McCabe: Okay, okay, great. And then just a follow-up question in that same vein, the level of profitability margin rate between the commercial aftermarket and the military aftermarket, is there a very significant difference there? All right.
Speaker Change: Okay. Okay, Great and then just a follow up question in that same vein.
Speaker Change: The level of profitability margin rate between commercial aftermarket and military aftermarket is theyre very significant difference there.
Hi.
James F. McCabe: Over time, no. On specific programs, yes, but I think that they have comparable levels of profitability because they are based on RIP. We do see a premium for foreign military sales. That's where we tend to command a bigger premium because these foreign countries haven't invested in the development costs that the U.S. government has on the platform, so they pay a premium for those products. And that tends to be more lumpy or cyclical. We've had quarters where that has really contributed. This obviously wasn't Q3 wasn't one of them.
Speaker Change: Over time no.
Speaker Change: Specific programs, yes, but I think that they are comparable levels of profitability because they are based on our IP.
Speaker Change: We do see premium for foreign military sales Thats, where we tend to command a bigger premium because these foreign countries have and invested in the.
Speaker Change: And the development cost with U S government has on the platform. So they pay a premium for those products.
Speaker Change: And that tends to be more lumpy or cyclical.
Speaker Change: <unk> had quarters, where that's really contributed this wasn't SKU, obviously Q3 wasn't one of them, but when we get the Fms spares that benefits us greatly.
James F. McCabe: But when we get the FMS spares, it benefits us greatly. Okay. Excellent. I appreciate it. The next question comes from Sheila Kahyaoglu of Jeffreys. Please go ahead. Good morning, Dan and Jim, and thank you for your time.
Speaker Change: Okay excellent I appreciate it thanks very much.
Speaker Change: Okay.
Speaker Change: The next question comes from Sheila <unk>.
Sheila: Of Jefferies. Please go ahead.
Sheila: Good morning, gentlemen, gentlemen, thank you for your plan.
Sheila Kahyaoglu: I wanted to maybe ask about systems and support, just given the support, you know, sent off there, and great job on that. But what do we think about systems margins underlying longer term? I think you made a comment that you're keeping your long-term free cash flow target, but the lower interest is offset by margin dilution. So, could you maybe right-size us on what system profitability looks like going forward? Yes, Sheila, thanks for the question.
Sheila: I wanted to bring mobile al.
Sheila: Okay.
Paul: Go ahead Paul.
Paul: Alright.
Paul: Hello.
Paul: Great job on that.
Paul: What do we think about systems margins underlying longer term I think you made a comment that you are keeping your long term free cash flow target and trust.
Speaker Change: Our insurance was offset by margin dilution. So if you can maybe right size us on what.
Speaker Change: Capital model looks like going forward.
Speaker Change: Yes, Sheila thanks.
Sheila: Thanks for the question.
James F. McCabe: Historically, you can see that when you pull out the product support business at Disc Ops, our margin for this year is around 14% instead of the 16% we were forecasting before. So, the product support business was slightly higher than our average margin. That's what we're referring to in terms of the consolidated margins being down a little bit in the current year when you pull out product support. But the rest of the business still has the same growth characteristics, still has the same margin targets, and it's still very strong and growing. So, system support is just now more IP based, and we'll have higher margins in the aftermarket. Yeah, as you can imagine, Sheila, when you take a business that's generating, you know, 20% plus, even at margins, you know, out of the portfolio, you'll see a short-term dip.
Sheila: Historically, you can see that when you pull out the product support business <unk>.
Sheila: Disc ops that our margin for this year is around 14% instead of the 16%.
Sheila: Forecasting before so.
Sheila: The <unk> business was slightly higher than our average margin.
Sheila: What we're referring to in terms of the consolidated margins being down a little bit in the career when you pull out product support.
Sheila: The rest of the business still has the same growth characteristics still has the same margin targets and is still very strong and growing so system to support its just now more IP based and we will have higher margin aftermarket.
Speaker Change: As you can imagine Sheila.
Speaker Change: When you take a business jet.
Speaker Change: Generally, 20% plus EBITDA margins.
Speaker Change: Out of the portfolio Youll see a short term dip, but thats the mandate to me and my management team is to get interiors and geared solutions.
Daniel J. Crowley: But that's the mandate to me and my management team is to get interiors and geared solutions to levels of profitability they've been at before. In fact, one of my directors on the board mentioned that he said, you know, gears used to be our most profitable business. But we went through a period of winning and working through these development programs that reduced their margins, and those are now coming back, and we're going to get interiors turned around as well. That used to be a 20% business. So, when all four of our businesses, actuation, engine controls, interiors, and gears, are hitting on all cylinders, you're going to see follow through on margins. Okay, great.
Speaker Change: To levels of profitability they've been at before in fact, one of my directors on the Board mentioned, he said gears used to be our most profitable business, but we went through a period of <unk>.
Speaker Change: Winning and working through these development programs.
Speaker Change: That had reduced their margins and those are now coming back and we're going to get interiors turnaround as well that used to be a 20% business. So when all four of our businesses actuation engine controls interiors and gears are hitting on all cylinders youre going to see fall through on margins.
Paul: Okay Paul.
Daniel J. Crowley: And then maybe to follow up on your free cash flow guidance for the year, you bracketed it depending on the timing of the divestiture closing. So is it kind of fair to assume that support was 100% free cash flow conversion or about $55 million of free cash flow annually? That sounds a little high because we already have CapEx and other working capital movements within the periods. So it is important to note that for cash flow purposes, you don't exclude these canteen operations.
Paul: And then maybe to follow up on your free cash flow guidance for the year you back into that depending on the timing of Bob divestiture closing.
Paul: Is it part of Florida.
Paul: 100% free cash flow conversion or about 55 million of free cash flow.
That sounds a little high because we view of Capex and other working capital movements within the periods. So it is important to note that for cash flow purposes, you don't exclude this cleanup discontinued operations and we did footnote on the guidance slide there.
James F. McCabe: And we did a footnote on the guidance slide there that includes product support, but sales and profitability do not. So because we don't know the exact timing of the transaction closing, we just included the cash flow for the whole business, including product support, in that forecast. But it might be less or more depending on the timing.
Paul: That includes products corporate sales and profitability do not so because we don't know the exact timing of the transaction closing.
Paul: We just included the cash flow for the whole business, including product support in that forecast.
Paul: It might be less or more depending on the timing it turns out great products.
James F. McCabe: It turns out that product support carries more inventory because they have a big rotable balance, and the cash conversion and our other OEM component business is, in fact, higher. So is the right way to think about it, that $10 million delta you have in your guidance for free cash flow, just annualize that, so sorry, it's closer to $40 million then? That's a reasonable approach. Thanks. The next question comes from Peter Arment of Baird. Please go ahead.
Paul: It turns out that product support carries more inventory because they have a big rotable balance and the cash conversion and our other <unk>.
Paul: OEM.
Paul: Component businesses in fact higher.
Paul: So is the right way to think about it that $10 million Delta you have in your guidance for free cash style, just annualize that it's closer to 49.
Speaker Change: But that's a reasonable approach.
Speaker Change: Okay. Thanks.
Speaker Change: Thanks Sheila.
Speaker Change: Next question comes from Peter Arment of Baird. Please go ahead.
Peter J. Arment: Good morning, Dan and Jim. Dan, you called out interiors and your confidence in the margins kind of turning higher. Transcripts provided by Transcription Outsourcing, LLC. But you also mentioned some red development. Yeah, in interiors, there are no development programs.
Peter J. Arment: Hey, good morning, Dan and Jim.
Peter J. Arment: Hi, Dan.
Peter J. Arment: You've called out interiors, and you kind of your confidence of the margins kind of turning higher in the fourth quarter and it sounded like.
Peter J. Arment: That seem sustainable just maybe you could just give me a little more color around the contract price adjustments you said just confidence around increased labor productivity and I think obviously overhead absorptions rates increase but you also mentioned some red development programs, maybe if you could just peel back some of that some of the some of the moving parts here.
Daniel J. Crowley: They're all mature production programs, not just Boeing; we do a lot of 737, 787, but also for Airbus and the A220. And those programs are all, you know, ramping up in rate. So it's a matter of getting the volumes up in the plant, which has absorption benefits.
Speaker Change: Yes, and interiors there are no development programs. They are all mature production programs not just Boeing when we do a lot on 737 787, but also for Airbus <unk> hundred 20.
Speaker Change: And those programs are all.
Speaker Change: Ramping in rate.
Speaker Change: So it's a matter of getting the volumes up in the plant, which has absorption benefits.
Daniel J. Crowley: The, you know, the main issues I talked about in the interior, the external forces. Mexico has raised the minimum wage again. We're dealing with the last, hopefully, the last blast of the peso exchange rate. And then we've had some suppliers raise input costs. But the mandate to us remains the same, which is, you know, how do you get margins up? So, you know, we're doubling down on the productivity initiatives. I do encourage you to check out those videos of the two largest plants in Mexico because you get a sense of just how much automation we already have in those plants.
Speaker Change: The the main issues I talked about on the interiors.
Speaker Change: External forces.
Speaker Change: Mexico has raised the minimum wage again, we're dealing with the last hopefully the last blast of the peso exchange rate and then we've had some suppliers and raise input costs, but the mandate to US remains the same which is how do you get margins up so we're doubling down on the productivity initiatives I do encourage you to check out those videos are the two largest plan.
Speaker Change: In Mexico, because you get a sense of just how much automation, we already have in those plants and some of the material input materials like the resins that we use to make up these installation blankets have gone up significantly in price. So we're working on that within interiors theres three components Theres installation theres composite duck.
Daniel J. Crowley: And some of the input materials, like the resins that we use to make up these installation blankets, have gone up significantly in price. So we're working on that. Within the interior, there are three components. There is insulation, there is composite ducting, and there are cabin components.
Speaker Change: And Theres cabin components has mostly been the.
Daniel J. Crowley: It's mostly been the composite ducting that's really held us up, so we're in discussions with our customers on pricing for that. What's been encouraging is that our customers have come to us and said, hey, other suppliers of these commodities are not performing, and they're not ready to ramp up, they don't have the staffing, and we want you to take on that work as early as Q4. So that's when we're gonna see the combined contributions of these productivity initiatives and volume offset the external driver. I appreciate that, Colin.
Speaker Change: The composite ducting, that's really held us apps. So we were in discussions with our customers on pricing for that.
Speaker Change: Been encouraging is that our customers have come to us and said hey, other suppliers of these commodities are not performing and theyre not ready to ramp they don't have the staffing and we want you to take on that work.
Speaker Change: As early as Q4, so that's where we're going to see the combined contributions of these productivity initiatives and volume offset the external drivers.
Speaker Change: I appreciate that color and just as a follow up question. Just you called out that you are still confident in kind of approaching a total company EBITDA margin of 20% and I assume over the medium term that still is kind of targeting the fiscal 'twenty six.
Daniel J. Crowley: And just as a follow-up question, just, you know, you called out that you're still confident about approaching... I assume over the medium term that still is kind of targeting the fiscal 26, which you laid out in your investor day. Is that still fair?
Laid out in your Investor day is that is that still fair.
James F. McCabe: Thank you. So, you know, we're doing our planning right now, so we're not reiterating the exact timing, but that's still the target. So the timing can move slightly, but it's very much achievable, and we were on a pace of growing 150 to 200 basis points a year. And so we hope that that pace is going to continue as we finish our planning process. The volumes are a little different in each of the segments, and with the overhead reduction,
Speaker Change: So we're doing our planning right now so we're not.
Speaker Change: Reiterating the exact timing, but thats still the target so the timing can move slightly.
Speaker Change: But it's very much achievable and we were on a pace of growing 150 200 basis points a year.
Speaker Change: So we hope that that pace is going to continue as we finish our planning process.
Speaker Change: Volumes are a little different in each of the segments and but.
Speaker Change: With the overhead reduction and.
Daniel J. Crowley: And the efficiencies are able to enable that red reduction. We're looking forward to 20% very soon. Yeah, one of the factors, Peter, that gives us confidence is that we're running hotter on year-over-year sales growth than the market. And we've been asked by analysts, hey, your book, The Bill, sounds great, but when are we going to see it translated into sales? The answer is, it is now.
And the efficiencies we are able to enable that a rent reduction we're looking forward to 20% of our one of the factors Peter that gives us confidence is that we're running hotter.
Speaker Change: On year over year sales growth than the market.
Speaker Change: And Thats.
Speaker Change: We've been asked by analysts to your book to Bill sounds great, but when are we going to see it translate into sales.
The answer is it is now we're seeing it across.
Daniel J. Crowley: We're seeing it across commercial and an MRO account. So now it's a matter of getting margins up, which we're focused on doing in Q4. And in Q3, we had some shipments that were held up that were higher-margin deliveries. It was a disappointment.
Speaker Change: In commercial and MRO accounts.
Speaker Change: So now it's a matter of getting margins up which we're focused on doing in Q4 and in Q3. We had some shipments that were held up that were higher margin deliveries of disappointment.
Daniel J. Crowley: When you don't have the bearings or the castings that are critical to certain high-value components and you can't ship them, it's really impactful. So we've got to get those in. Many of those have already been delivered in Q4. We're confident we can do it. But on the path to 20%, I would say performing at a higher revenue growth rate than the market is going to provide lots of lift for all businesses. Thanks so much, Ben.
Speaker Change: You don't have the bearings or the castings that are critical to certain high value components that we can ship them. This really impactful. So we've got to get those in many of those have already been delivered in Q4, and we're confident we can do it.
Speaker Change: But on the path to 20% I would say performing at a higher.
Speaker Change: Revenue growth rates in the market is going to provide lots of lyft for all the businesses.
Myles Walton: Thanks, Peter. The next question comes from Myles Walton of Wolf Research. Please go ahead. Thanks. Good morning.
Speaker Change: Thanks, So much Dan appreciate it.
Speaker Change: Thanks Pierre.
Speaker Change: The next question comes from Myles Walton of Wolfe Research. Please go ahead.
Myles Walton: Thanks, Good morning, I was hoping Dan maybe you could dig into the $40 million in.
Daniel J. Crowley: I was hoping, Dan, maybe you could dig into the $40 million in corporate costs or overhead direct... removal that is doing, and is it, how much of that is directly related to... 20% reduction. The Bulletproof Executive 2013, Certainly. So we spend about almost $500 million, not quite $500 million, on SG&A and overhead. It's a big number, and it pays for things like updating our IT systems, improved controls, research and development, and engineering product development, and that's really how you drive long-term growth. When I was at Raytheon, that was really the strength of our portfolio, the investments we made in platforms like Patriot.
Myles Walton: Corporate costs or overhead direct fixed costs removal that you are doing.
Myles Walton: Doing and is it how much of that is directly related to.
Myles Walton: That 20% reduction in underlying size of the company because the product and support how much of it was already planned and if you can just dig a little bit deeper.
Speaker Change: Certainly so we spend about almost 500, not quite $500 million in SG&A and overhead, it's a big number and it pays for things like updating our it systems.
Speaker Change: Improved controls Reese.
Speaker Change: Research and development.
Speaker Change: During product development.
Speaker Change: And that's really how you drive long term growth and when I was at Raytheon.
Speaker Change: That was really the strength of our portfolio as the investments we made in platforms like Patriot.
Daniel J. Crowley: And we've done enough now on that as we take out one of the five operating companies, there is the, you know, automatic gets smaller by that percent that you cited. But we've been doing enough investment in the infrastructure of the company and common processes, common IT, that we can now start to scale back some of those investments and run the company in a leaner, more agile fashion. So we're confident we can do it. It's not just labor.
Speaker Change: And we've done enough now on that as we take out one of the five operating companies.
Speaker Change: The automatic gets smaller by that percent that you cited but we've been doing enough investment in the infrastructure of the company and common process common.
Speaker Change: And we can now start to scale back some of those investments and run the company in a leaner more agile function.
Speaker Change: Our fashion. So we're confident we can do it.
Speaker Change: Not just labor Theres also non labor cost that we'll take out.
Daniel J. Crowley: There are also non-labor costs that we'll take out. And this is gonna help us maintain our margin progression. These reductions have been in the works. They build on reductions we've made in the past. So you remember when we had six EVPs over six segments plus 47 presidents. We entirely eliminated the EVP at the segment level and consolidated those 47 presidents down to five.
Speaker Change: And this is going to help us maintain our margin progression.
Speaker Change: These reductions have been in work they build on reductions we've made in the past you've been following our story a long time. So you remember when we had <unk>.
Speaker Change: Six evp's over six segments, plus 47 president.
Speaker Change: Entirely eliminated.
Speaker Change: EVP and.
Speaker Change: And segment level and consolidated those 47 President's down to five now with the sale of <unk>.
Daniel J. Crowley: Now with the sale of TPS down to four, we're looking at further reductions there. So those are enablers.
Speaker Change: TPS down to four we're looking at further reductions there.
No.
Daniel J. Crowley: The last enabler is that we've matured the team. We have a really strong leadership team that's not just focused on backlog execution, but they have a much stronger profit orientation, looking at contracts, pricing, and value claiming. And we're now more comfortable with centralizing a lot of our processes, going back to a little bit more of a decentralized model. And that allows us to take out costs at headquarters. So that's the overall context for the 40 million. And then I would like just two clarifications if I could. One is the implied margins removed from the guidance for about 23%, but I think the first half product support margins were about, The Bulletproof Executive 2013, And then the other clarification, just on that dashboard you have at the end, where you have an increased percentage of aftermarket and an increased percentage of military. By definition, it implies a decrease in commercial OE, which is a little counterproductive. Yeah, thanks, Myles.
Speaker Change: Those are enablers the last enablers.
Speaker Change: Mature the team we have a really strong leadership team that's not just focused on backlog execution, but they are a much stronger profit orientation looking at contracts pricing value, claiming.
Speaker Change: We are now more comfortable.
Speaker Change: Having centralized a lot of our processes going back a little bit more of a decentralized model and that allows us to take out costs at headquarters. So those that's the.
Speaker Change: Overall context for the $40 million.
Speaker Change: Okay.
Speaker Change: And then just two clarifications if I could one is the implied margins removes from the guidance for about 23%, but I think the first half product support margins for about 16 on an EBITDA basis and then the other clarification just on that dashboard you have at the end, where you have an increased percentage of aftermarket and an increased percentage of military.
Speaker Change: Sorry.
Speaker Change: By definition implies a decrease in commercial OE, which is a little counterintuitive.
Speaker Change: Yes, thanks miles.
Myles Walton: I think I'm going to have to follow up on some of that with the public data when the Q gets filed this afternoon. You're going to see in the Q the disclosure of discontinued operations broken down. So, I think you'll get some of your answers in there, but remember there is seasonality in product support. So, the fourth quarter is one of the strongest quarters, and that may be what you're seeing in the.
Speaker Change: I think we will have to follow up with some of that with the public data one with Q gets filed this afternoon, you're going to see in the Q the disclosure of discontinued operations broken down.
Speaker Change: So I think you'll get some of your answers in there, but remember there is seasonality and product support so the fourth quarter is one of the stronger quarters.
Speaker Change: And that may be what youre seeing in the numbers.
James F. McCabe: And then, sorry, the dashboard with the percentage growth in military and aftermarket implying that percentage declines in OE is a little counterintuitive. I think it's slide 13 you're referring to, with the positive growth outlook slide. Yeah, correct.
Speaker Change: And then sorry, the dashboard with the percentage growth in military and aftermarket implying that its percentage declines in OEM little counterintuitive.
Speaker Change: So.
Speaker Change: I think it's slide 13, you're referring to with the the.
Speaker Change: A positive growth outlook slide.
Myles Walton: The bottom left two charts show the percentage increase of revenue in the military and afterwards. If we had gone back a few years on military revenue, you'd see that it started at 20%, you know, when I started the restructuring transformation. And then we built it up into the high 30s during the pandemic when the aircraft fleet was stood down and It's a military shot up, and then commercials are resurging.
Speaker Change: Yes, correct. The bottom left two charts show percentage increase of revenue and military now.
Speaker Change: If we had gone back a few years on military revenue you'd see that it started at 20%.
Speaker Change: I started the restructuring.
Speaker Change: <unk> transformation.
Speaker Change: And then we built it up into the high <unk>.
Speaker Change: During the pandemic when the aircraft fleet, which stood down.
Speaker Change: Military shot up and then now commercials resurging. So this number moves around but what this reflects is the growth of those platforms that I mentioned that are transitioning to production and coming into development and we're spending the money now in the product development to support those next gen. So.
Daniel J. Crowley: So this number moves around. But what this reflects is the growth of those platforms that I mentioned that are transitioning to production and coming into development. And we're spending the money now on product development to support those next-gen. So, you know, we do see a tick up, but I think this sort of 60-40 split of commercial OEM will be the average. It'll move around from year to year.
Speaker Change: We do see a tick up but I think this sort of 60 40 split of commercial OEM will be the.
Speaker Change: The average it'll it'll move around from year to year and then on aftermarket we're going to continue to drive that and I want that to be really clear messages that even as TPS.
Michael Ciarmoli: And then on aftermarket, we're gonna continue to drive that, and I want that to be really clear messages that even as TPS. Exits Portfolio. We have significant opportunities in the aftermarket, and almost every one of our OEM plants has an embedded depot where they do the repairs and overhaul. So you'll see that continue to grow as a percent of our sales. Thank you. The next question comes from Michael Ciarmoli of Truist Securities. Please go ahead.
Speaker Change: Exit portfolio.
Speaker Change: We have.
Speaker Change: Significant opportunities on the aftermarket.
Speaker Change: Almost every one of our OEM plants has an embedded depot.
Speaker Change: Where they do the repair and overhaul so youll see that continue to grow as a percent of our sales.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you.
Michael Ciarmoli: The next question comes from Michael ceremony of Choice Securities. Please go ahead.
James F. McCabe: Hey, good morning, guys. Thanks for taking questions. Maybe, maybe just back to the longer-term targets and tied into Sheila's question. I think you had free cash flow conversion, you know, kind of a 6% of sales in the 26 time period moving to 10%. How should we think about that?
Michael Ciarmoli: Hey, good morning, guys. Thanks for taking my questions, maybe maybe just back to the longer term targets and tightened to Sheila's question. I think you had free cash flow conversion.
Michael Ciarmoli: But at 6% of sales in the 2006 time period moving to 10% how should we think about those I mean, it seems like the near term interest savings could potentially drive some upside so.
Michael Ciarmoli: I mean, it seems like the near-term interest savings could potentially drive some upside. So any more color on the cash targets? The targets are still the same.
Michael Ciarmoli: Any more color on the on the cash targets.
Speaker Change: So the targets are still the same.
James F. McCabe: I think our steady-state target was 10% plus on cash flow conversion and 20% plus on margins, and we did have that waypoint that we put out there in September, but we're revisiting that, and maybe we can bring that in. It could move a little bit at the point, but it's still going to be just modest timing differences, and those remain the same, and the continuing business has the potential to deliver them. I think our cost outs are only going to enhance our ability to deliver them and maybe a little bit earlier. Okay, I got it, I got it.
Speaker Change: Our steady state target was 10% plus on our cash flow conversion and 20% plus on margins and we did have that waypoint that we put out there in September.
Speaker Change: Revisiting that and maybe we can bring that and it can move a little bit at the point, but it's still going to just be.
Speaker Change: Modest timing differences.
Speaker Change: And those remain the same in the continuing business has the potential to deliver those I think are cost outs are only going to enhance our ability to deliver those and maybe a little bit earlier.
Speaker Change: Okay got it got it and then just you called out in the press release, the revenue headwind just to reconcile I mean.
Michael Ciarmoli: And then just you called out in the press release the revenue headwind just to reconcile and, you know, the difference between what got moved into support. What was the magnitude of the revenue headwind that you saw this quarter? And I mean, it sounds like you're going to obviously pick all that up and get some pretty good inventory tailwinds next quarter. But can you kind of detail the revenue pressure? And so, I mean, the exact magnitude of what I don't think I have in total.
Speaker Change: The difference between what got moved into into support what was the magnitude of the revenue headwind that you saw this quarter and I mean, it sounds like youre going to obviously take all of that up and get some pretty good inventory tailwind next quarter, but can you kind of detailed over revenue pressure.
Speaker Change: Yes, so I mean, the exact magnitude.
Speaker Change: I don't think I have in total that we have.
James F. McCabe: What we have is the theme behind it, because what we're seeing is the late shipments that are mostly going to be delivered in January or in Q4. And they're related to, for example, the one I was just looking at last night was that the military was down slightly. Well, that was driven by some electronic supplier shortages that are going to ship out in Q4. And we can ship more if we get more of the electronics. So, we have people working closely with that supplier. That's one example.
Speaker Change: Themes behind it because what we're seeing is delayed shipments that are mostly going to be delivered in January or in Q4 and they are related to for example, the one I was just looking at last night was military was down slightly while that was driven by some electronics supplier shortages that are going to ship out in Q4.
Speaker Change: And we can ship more of if we get more of the electronics. So we have people working closely with that supplier. That's one example, and there is other fourth Stan referred to that are waiting for final approval. They're done we just have to get go through that process. So.
James F. McCabe: Then there are other parts they referred to that are waiting for final approval. They're done. We just have to get through that process. So, we put a chart in there of quarter over quarter so that you can see year over year what it is. But the shortfall in the third quarter is being made up in whole or part in the fourth quarter. But the fourth quarter is not unrealistic based on historic seasonality. It is a big quarter.
Speaker Change: We put a chart in there quarter over quarter, so that you could see year over year that.
Speaker Change: What is <unk>.
Speaker Change: The shortfall is in third quarter.
Speaker Change: As being made up in whole or part in fourth quarter.
Speaker Change: But the fourth quarter is not unrealistic based on historic seasonality. It is a big quarter it'll be record quarter, and we've done a lot of work on it.
James F. McCabe: It will be a record quarter, and we've done a lot of work on it. Weekly, we talk about what has to get done to make sure we hit our numbers for the month. In the first month of the quarter, we already had a hundred million dollars of sales, which is consistent with our plans for the. I would say that the shortage has probably paced maybe $20 million of revenue in the quarter, if that helps. Okay, I got it.
Speaker Change: Weekly we talk about what has to get done to make sure we hit our numbers for the month in the first month of the quarter, we already hit 100 million $100 million of sales, which is consistent with our plans for the quarter.
Speaker Change: I would say that.
Speaker Change: The shortages, probably pace, maybe $20 million of revenue in the quarter if that helps.
James F. McCabe: Perfect. Thanks, guys. I'll turn it back to the next question comes from Kaivon Rumor of T.D. Cowan.
Michael Ciarmoli: Michael Okay.
Michael Ciarmoli: Okay got it perfect. Thanks, guys I'll jump back in queue.
Cai von Rumohr: The next question comes from Cai von <unk> of TD Cowen. Please go ahead.
Cai von Rumohr: Please go ahead. Yes, thank you very much, guys. So it looks here like if we use the midpoint of your guisance, you're looking for around 350 million in sales. You're looking for, it looks like, margins of 20.
Cai von Rumohr: Yes, thank you very much guys.
Cai von Rumohr: So it looks here like if we use the midpoint of your guidance Youre looking for around 350 billion in sales.
Cai von Rumohr: You are looking for it looks like margins of 23% adjusted EBITDA margins in the systems business.
Cai von Rumohr: The Bulletproof Executive 2013, And you mentioned the $100 million in January. So, a very big step up in February. Are you assuming any kind of supplier slips? Because, basically, this has been an environment where slips are more the norm rather than the exception. Are you assuming any, is there sort of any, you know, assumption? Some flip so that you know you would hit the number even Yeah, yeah, thanks, Guy.
Cai von Rumohr: And you mentioned 100 million in January so a very big step up in February and March.
Speaker Change: Are you assuming any kind of supplier slips because basically this has been in an environment, where slips are more of the norm rather than catch ups.
Speaker Change: Are you assuming any is there sort of any.
Speaker Change: Assumption of some slips.
Speaker Change: You would hit the number.
Speaker Change: If that occurred.
Speaker Change: Yes, yes, thanks Scott.
Daniel J. Crowley: We do allow for less than 100% on time and in full. That's always the goal, but you don't always reach it. And so what we've done is we've prioritized every shipment for Q4. We know every part that has to go out the door, the cash payment terms of that part, and whether or not we need a customer's consent to ship. And these daily assurance and delivery assurance calls that I chair, we go through each OPCO one a day, five days a week, and we know what we have to do to finish the year. It does not assume 100% parts availability, but we know the mix of parts that have to ship, what they bring in terms of sales, cash, and earnings, and tie out to the Q4 financials. So the answer is we've got a plan, but it does not assume perfection in the supply chain. It's interesting because we're down to this, what I call four finite commodity groups, really almost four individual suppliers. I won't name them on the call that are pacing us.
Speaker Change: We do allow for less than 100% on time in full that's always the goal, but you don't get it and so what we've done is we've prioritized every shipment for Q4, we know every part that has to go out the door the.
Speaker Change: The cash payment terms of that part.
Speaker Change: And whether or not we need the customer consent to ship and these daily.
Speaker Change: Assurance deliveries <unk> calls that I chair.
Speaker Change: Go through each Opco, one a day five days a week.
Speaker Change: And we know what we have to do to finish the year and it does not assume 100% parts availability, but we know the mix of parts that have to ship what they bring in terms of sales cash and earnings and tying out to the Q4 financials. So the answer is we got a plan, but it does not assume perfection in the supply chain, it's interesting because.
Speaker Change: We're down to this what I call for a finite commodity groups.
Speaker Change: Really almost force individual suppliers I won't name them on the call that our pacing us, but if you don't have circuit boards and you don't have bearings for example, and they go in lots of different products than.
Daniel J. Crowley: But if you don't have circuit boards, and you don't have bearings, for example, and they go in lots of different products, you can't ship a lot of product. And so we've gotten commitments and Priority. You know, these are vendors that supply the whole aerospace, you know, food chain. And so sometimes you have to be the squeaky wheel to get your prorated share.
You can't ship, a lot of product and so we've gotten commitments and priority. These are vendors that supply the whole.
Speaker Change: Aerospace.
Speaker Change: Food chain.
Speaker Change: And so sometimes you have to be the squeaky wheel to get your prorated share and we're getting those commitments and in January we started to get the products. So that's what's giving us confidence that we can still hit these big step ups in Q4, even without 100% on time in full.
Daniel J. Crowley: And we're getting those commitments, and in January, we started to get the products. So that's what's giving us confidence that we can still hit these big step-ups in Q4 even without 100% on time. Terrific. Thank you very much. And a second one: where are we with the Daher suit?
Terrific. Thank you very much and a second one.
Speaker Change: Where are we with the hair suit.
Daniel J. Crowley: So the De Heer suit is, it's been going on, you know, for some time, you know, they, we entered into a settlement agreement with the buyer in June of last year that resolved a working capital dispute. And so we do have an ability to resolve issues with De Heer, and that also resolves some claims related to accounts payable at the time. We were surprised, but in December, they filed litigation against the company, you know, seeking additional indemnification related to 767 on the fuel tank issues. And this is an issue that was not, you know, known to, you know, Triumph, or I should say is not viewed as an issue at the point of sale to Boeing, our customer.
Speaker Change: So the <unk> suite is.
Speaker Change: <unk> been going on.
Speaker Change: For some time.
Speaker Change: We entered into a settlement agreement with the buyer in June of.
Speaker Change: Of last year that resolved a working capital dispute and so we do have an ability to resolve issues.
Speaker Change: But to her.
Speaker Change: And then also resolve some claims related to accounts payable at the time.
Speaker Change: We were surprised but in December they filed litigation against the company.
Speaker Change: Seeking additional indemnification related to 767 on the fuel tank issues and this is an issue that was not.
Speaker Change: None too.
Speaker Change: Triumph or I should say is not viewed as an issue at the point of sale to Boeing our customer.
Daniel J. Crowley: So it's a large amount, but we've worked through similar types of claims in the past. We intend to vigorously defend, you know, the claims against our company for that. You know, the fact is they bought an operation in July of 2022, and they have responsibility for it. We take seriously our commitment to delivering quality products to our customers. And, you know, this site was sold as part of our portfolio transformation, and this has really been, you know, the only time where we've had these kind of reachback issues. So we have caps in place that limit our liability. There are two caps.
Speaker Change: So it's a large amount, but we've worked through similar types of claims in the past we intend to vigorously defend the claims against our company for that.
Speaker Change: The fact is they bought an operation in July of 2022.
Speaker Change: And you have responsibility for it we take seriously our commitment to delivering quality products.
Speaker Change: For our customers and the site was sold as part of our portfolio transformation and this has really been the.
Speaker Change: Only time, where we've had these kind of reach back issues.
Speaker Change: So we have caps in place that limit our liability theres two caps theres, a general cap about $19 million about nine of which has already been decrementals because of the June settlement I mentioned, and then another cap related to our reps and warranties. So.
Daniel J. Crowley: There's a general cap of about 19 million, about nine of which has already been diminished because of the June settlement I mentioned. And then there is another cap related to our reps and warranties. So, there's really nothing new out there from a Triumph perspective. It's just a difficult issue. Boeing has already resolved it. They've contained, you know, the issue on their side. They're continuing to deliver products. You know, I'll point you to the 10Q where we lay all this out. Excellent. Thank you very much.
There's really nothing new out there from a trial perspective, it is a difficult issue Boeing.
Speaker Change: Boeing is already resolved it they've contained.
Speaker Change: The issue on their side they are continuing to deliver products.
Speaker Change: <unk> to the 10-Q, where we lay all this out.
Speaker Change: Excellent. Thank you very much.
David Strauss: The next question comes from David Strauss of Barclays; please go ahead... Thanks. Good morning, everyone.
Speaker Change: The next question.
Speaker Change: Question comes from David Strauss of Barclays. Please go ahead.
David Strauss: Thanks, Good morning, everyone.
David Strauss: Good morning.
David Strauss: Morning. Did you actually, you know, if you adjust for the divestiture, did you actually cut your EBITDA, absolute EBITDA forecast for the year? I wasn't quite sure. Is it kind of unchanged or adjusted for the divestiture? So you broke up for a second there.
David Strauss: Did you actually.
David Strauss: You adjust for the divestiture did you actually cut year EBITDA.
David Strauss: Absolute EBITDA forecast for the year I wasn't quite sure or is it kind of unchanged adjusting for.
David Strauss: The divestiture.
David Strauss: So you broke up a secondary I think youre asking did we adjust our EBITDA.
James F. McCabe: I think you're asking, did we adjust our EBITDA? Exactly, yeah, sorry, the absolute number if you adjust for the divestiture. Yeah, we just removed product support.
Speaker Change: For the exactly yes, sorry, the absolute number if you if you adjust for the divestiture.
Speaker Change: Yes, we just removed product support.
James F. McCabe: Okay, so it's unchanged, and on free cash flow, you know, as it relates to divestiture and interest savings. Jim, is it fair? I mean, it seems like this is accretive, the divestiture is accretive to go for free cash flow, is that correct? That's correct.
Speaker Change: Okay. So it's unchanged.
Speaker Change: For that it should be materially unchanged.
Speaker Change: Hey.
Speaker Change: And couple of people I think have asked around this on that okay.
Speaker Change: On free cash flow.
Speaker Change: As it relates to the divestiture and interest savings Jim is it fair I mean, it seems like this is accretive the divestiture is accretive to go for a free cash flow is that correct.
James F. McCabe: That's correct so in the interest savings.
James F. McCabe: So, you know, the interest savings is definitely accretive to cash flow moving forward. The $40 million part of that's related to allocated overhead. Part of it is just the normal course of moving forward to harvest efficiencies, but those are all cash positive. And when you compare it to the cash generation of the divested business, it's accretive to the continuing business. Okay. And then why wouldn't the free cash flow margin targets then be higher going forward, given that you're stripping out revenue and your free cash flow is higher? Well, 10 plus has higher provided for in there.
James F. McCabe: It's definitely accretive to the cash flow moving forward.
James F. McCabe: The 40 million part of that is related to the allocated overhead part of it is just normal course, we look forward to harvest efficiencies.
James F. McCabe: But those are all cash positive.
James F. McCabe: And when you compare it to the cash generation of the divested business, it's accretive to the continuing business.
Speaker Change: Okay, and then why wouldn't the free cash flow margin targets, then be higher going forward given that you're stripping out revenue in year free cash flow is higher.
Speaker Change: Well 10, plus has higher provided for in there so as.
James F. McCabe: So, as we go through the planning process, I'm going to be saying the same thing to our team. And it's logical that that flows through. And not only the interest savings now, but I alluded to it in my comments that with the improved credit profile, when we go to refinance our remaining debt, we should get better rates and better terms for that with improved credit.
Speaker Change: As we go through the planning process I'm going to be saying the same thing to our team.
Speaker Change: And it's logical that.
Speaker Change: That flows through and not only the interest savings now.
Speaker Change: Alluded to it in my comments was with.
Speaker Change: With the improved credit profile when we go to refinance our remaining debt, we should get better rates and better terms for that with improved credit so that can be accretive to cash flow over the multiyear period as well.
James F. McCabe: So, that's going to be accretive to cash flow over the multi-year period as well. That's really that recursive cycle that I mentioned where debt comes down, ratings go up, the cost of borrowing goes down, and then we expand free cash flow from operations, which accelerates the rate of debt reduction on debt that can be refinanced, and that lowers rates.
Speaker Change: That's really that recur a cycle that I mentioned, where.
Speaker Change: That comes down.
Speaker Change: Ratings credit ratings go up.
Speaker Change: Cost of borrowing goes down and then we expand free cash flow from operations, which accelerates the rate that debt reduction on debt can be refinanced it lowers rates as it becomes a nice virtuous circle of cost reduction, which we haven't been able to crest that hill until now with <unk>.
James F. McCabe: It becomes a nice, virtuous circle of cost reduction, which we haven't been able to crest that hill until now with this transaction. Most of the divestitures we've done, although we got, on average, 13 times earnings, over the 17 or so divestitures, they weren't really deleveraging, they just helped to stop stem the tide of bleeding in the structures business. This transaction is meaningfully different. Great, thanks very much.
Speaker Change: Transaction.
The divestitures, we've done although we got an averaged 13 times earnings.
Speaker Change: Over the 17 or so divestitures, they werent really deleveraging. They just helped to stop stem the tide of bleeding in the structures business with this transaction is meaningfully different.
Speaker Change: Yes.
Speaker Change: Great. Thanks very much.
Ronald Epstein: Thank you. The next question comes from Ronald Epstein of Bank of America. Please go ahead. Good morning.
Thanks, Dave.
Speaker Change: The next question.
Speaker Change: Comes from Ronald Epstein of Bank of America. Please go ahead.
Ronald Epstein: Hey, good morning.
Daniel J. Crowley: A lot's been covered so far, so maybe just a bigger picture question. Where do you expect to see Triumph in five years? What's the long-term plan for the company? You know, with the sales division? It almost feels like you're at a turning point where you could just keep getting smaller, or you could, you know, pivot here and try to build the business in a different direction. Ron, it's the latter. I don't want to get smaller.
Ronald Epstein: A lot's been covered so far so maybe just a bigger picture question.
Ronald Epstein: Where do you expect to see <unk> five years, what's the long term plan for the company.
Ronald Epstein: With the sales division it almost feels like you are at a turning point, where you could just.
Ronald Epstein: Smaller or.
Ronald Epstein: Pivot.
Ronald Epstein: Pivot here and tried to build the business in a different direction.
Brian: Brian It's the latter.
Brian: I don't want to get smaller.
Daniel J. Crowley: This $40 million cost takeout is necessarily achievable, but there's a point at which the cost to run a public company and do the things we want to do becomes more difficult below a certain level of sales. The good news is that TPS comes out of the portfolio, and we level off around $1.2 billion in revenue. We can accelerate our top line organically, as I said, higher than the market growth rates to replace that, and then we can begin to look at other options for the company. But our first priority remains deleveraging. We're happy about going from 7.5 down to 4.
Brian: This $40 million cost takeout is necessarily achievable, but theres.
Brian: There is a point at which the cost to run a public company and do the things we want to do.
Brian: Become more difficult below a certain level of sales. The good news is with this TPS comes out of the portfolio and we level off around one two.
Brian: $1 2 billion in revenue.
Brian: We can accelerate our top line organically.
Brian: As I said higher than the market growth rates to replace that and then we can begin to look at other options for the company, but our first priority remains deleveraging, we're happy about going from seven five down to four that's that's good news in terms of where we're going as a company.
Daniel J. Crowley: That's good news. In terms of where we're going as a company, you know, we think that Triumph, the value gap between Triumph and companies like Woodward and Moog is unjustified, but we've got to prove it.
Brian: We think that triumph the value gap between trial and companies like Woodward and Moog is unjustified.
Brian: But we've got to prove it.
Daniel J. Crowley: Yeah, we've got to show that we can generate earnings in cash and really go through that recursive virtuous cycle so that investors, you know, see the payoff for the time they've spent investing in our company and the money they've invested. So, you know, that's why we're excited about the future. When I go through those modular solutions on our new business front, those are the things that generate long-term value. And they have, we're getting paid for the non-recurring; we're getting paid for contract research and development. You know, we're gonna enjoy good OEM margins because they're discriminated solutions, and then they'll have a good aftermarket. This is a long game.
Brian: So we've got to show that we can generate the earnings and cash and really go through that recur a virtuous cycle so that.
Brian: Investors see the pay off.
Brian: For the time, they've spent investing in our company money they've invested so work Thats why were excited about the future is when I go through those modular solutions.
Brian: New business front.
Brian: Those are the things to generate long term value.
Brian: And they have we're getting paid for the nonrecurring we're getting paid for contract research and development.
Brian: We're going to enjoy good OEM margins because they are discriminated solutions and then they'll have good aftermarket. This is a long game I've been in this business a long time I know how value is created and that is becoming fund now you can imagine you've been with us through the whole story Ron.
Daniel J. Crowley: You know, I've been in this business a long time. I know how value is created, and it's becoming fun now. You can imagine, and you've been with us through the whole story, Ron. So it wasn't any fun dismantling the structures business.
Brian: So it wasn't any fund dismantling the.
Brian: The structures business.
Daniel J. Crowley: But we've done it, and it's been repositioned, you know, with the right owners. And now we've got a business with product support that's positioned with a very strong partner in AAR, who also has a distribution arm and heavy maintenance that can feed these plants. So that's the right transaction.
Brian: But we've done it and it's been repositioned with the right owners.
Brian: And now now we've got a business with product support that position with a very strong partner in AAR, who also has a distribution arm and heavy maintenance that can feed these plants. So thats the right transaction.
Daniel J. Crowley: But what it leaves Triumph with are these crown jewels of actuation and engine controls and gearboxes and, yes, interiors. Interiors will be better in the future. So in five years' time, what I think you'll see, your point about pivoting now is building on that core portfolio, expanding our products. The Bulletproof Executive 2013, Yeah. Thanks for that!
Brian: But what it leaves triumph with this <unk> crown jewels of actuation and engine controls and gearboxes and yes interiors interiors will be better in the future. So in five years' time, I think youll see your point about pivoting now is to building on that core portfolio expanding our.
Brian: <unk> expanding their reach on platforms, and then driving the cash and earnings that this business is capable of doing.
Ronald Epstein: And then maybe just a more short-term question. How are you guys really thinking about the impact of the MAX on your business? It's about, what, 18% of the backlog, so it's material.
Speaker Change: Got it got it thanks, Thanks for that and then maybe just to.
Speaker Change: By more short term question.
Speaker Change: Are you guys really thinking about the impact of the Max on your business.
Speaker Change: About what 18% of the backlog so it's material.
Daniel J. Crowley: And there's so much volatility and uncertainty around that program, particularly in the short term. How do you think about managing that? So, you know. I'm close to this.
Speaker Change: There is so much volatility uncertainty around that program, particularly in the short term.
Speaker Change: How do you think about managing.
Speaker Change: So.
Speaker Change: Im close to this.
Daniel J. Crowley: I remember walking the 777 line at Boeing in 1994, and I've walked their line ever since, including the 737 line, and I'm on monthly calls with Stan Deal and his team focused on things we can do as a combined industry team because it takes everybody. You know, Boeing can't do it alone if suppliers are generating escapes for them that they have to deal with. In terms of percent of our sales, it has gone up to about 14%. Nominally, we shoot for no one program to be greater than 10, but the max is just a huge, important program with a big backlog. I do have confidence that they will fix the issues they've got. It's a difficult time for them, but we're supporting them in every way we can.
Speaker Change: I remember walking the triple seven line at.
At Boeing in 1994, and I've walked their line ever sense, including the.
Speaker Change: 737 line and Im on monthly calls with Stan deal and his team focused on things, we can do as a combined industry because it takes everybody.
Speaker Change: <unk> can't do it along alone if suppliers are generating escapes to them that they have to deal with.
Speaker Change: In terms of percent of our sales it has gone up to about 14% nominally we shoot for no one program to be greater than 10, but the Max is just a huge important program with a big backlog I do have confidence that they will fix the issues they've got.
Speaker Change: It's a difficult time for them, but we're supporting them in every way we can.
Daniel J. Crowley: And I think this is a really important inflection time for Boeing and for the entire supply chain. You know, in one of my conversations with Stan, I said, you know, about every seven years, we all have to relearn certain disciplines in the aerospace industry, you know, whether it's twerking fasteners or crimping connectors or FOD awareness. And that's driven by two dynamics. One is changes in make or buy, where you have the supply chain, where you have new players coming in that are less familiar. And the second is a change in the workforce makeup. And we certainly had that coming out of the pandemic, where companies like Spirit and Boeing and others had a large influx of new employees. So the key is to put the controls in place and the culture that allows those newer employees and arms them with the tools to ensure quality. And that's exactly what Boeing is doing. And I'm confident they're going to get there. You know, until all the fixes are in place, you'll read about, you know, issues with the program.
Speaker Change: And I think this is a really important.
Speaker Change: Collection time for Boeing and for the entire supply chain.
Speaker Change: One of my conversations with Stan I said about every seven years, we all have to re learn certain disciplines in the aerospace industry.
Speaker Change: Whether it's talking fasteners or crimping connectors or fought awareness.
Speaker Change: And that's driven by two dynamics, one is changes and make or buy where you had the supply chain. We have new players coming in that are less familiar and the second is a change in the workforce makeup and we've certainly have that coming out of the pandemic.
Speaker Change: Companies like spirit, and Boeing and others have had a large influx of new employees. So the key is to put the controls in place and the culture that allow those newer employees.
Speaker Change: And arm them with the tools to ensure quality and thats exactly what Boeing is doing and I am confident theyre going to get there.
Speaker Change: Until all of the fixes are in place you'll read about.
Speaker Change: Issues on the program now that's not to be.
Daniel J. Crowley: That's not to be or shouldn't be a surprise, but the additional attention and inspection levels that the aircraft is getting will help catch those, and the partnership with the FAA will help, and there will be a time when they get over it, and then it's going to be, as Airbus has demonstrated, a steady, progressive ramp, and Triumph is going to benefit from both of those. Thanks. The last question is a follow-up from Myles Walton of Wolf Research. Please go ahead.
Speaker Change: It shouldn't be a surprise, but the additional attention inspection levels that the aircraft is getting will help catch those.
And the partnership with the FAA will help.
Speaker Change: And there'll be a time when they get over it and then it's going to be.
Speaker Change: Airbus has demonstrated.
Speaker Change: A steady progressive ramp.
Speaker Change: And <unk> is going to benefit from both of those.
Speaker Change: Got it thanks, Thank you very much.
Speaker Change: Thanks Juan.
Speaker Change: The last question is a follow up from Myles Walton of Wolfe Research. Please go ahead.
Myles Walton: Thanks. Sorry, just a quick one. I think in the comments, you talked about the fourth quarter benefiting from price increases and selected IP sales. I just wanted to make sure that that IP sale comment is similar to sort of the IP sales you've had in the past, like the second quarter of last year where, http://www.youtube.com.uk, Exactly. Do you have a size for that?
Myles Walton: Thanks, Sorry, just a quick one I think in the comments you talked about the fourth quarter benefiting from price increases and selected IP sales just wanted to make sure that that IP sale comment is that similar to started the IP sales you've had in the past like second quarter of last year, where it's pretty chunky in terms of drops.
Myles Walton: Through to margins.
Myles Walton: Exactly.
Daniel J. Crowley: You know, I'd say 10 to 13 million. It's a series of smaller ones. In the past, you know, Triumph didn't prune the tree, either at the operating company level or at the product line level. But the reality is, you know, products run their course. And I think Honeywell is probably a good benchmark for this. They do a good job of looking at every product line and saying, hey, which ones are worth more to others than they are to us. And monetizing them.
Speaker Change: You have a size for that.
Speaker Change: I'd say, 10% to $13 million.
Speaker Change: It's a series of smaller ones in the past.
Triumph didn't prune the tree either at the operating company level or at the product line level, but the reality is.
Speaker Change: Products run their course, and I think Honeywell is probably a good benchmark for this they do a good job of looking at every product line, and saying, Hey, which ones are worth more to others than they are to us and.
Speaker Change: And monetizing them in.
And in Q2 of last year, you know, there was a dip because GE pushed out a lot of LEAF deliveries. But then they turned the throttles on, and we had a very strong Q3 and Q4. I think you're going to see the same thing in our Q4, where, you know, we have a lot of pent-up demand and carryover from Q3. And I expect all of my presidents to bring these items forward. If they're not, it suggests that they aren't questioning and really scrutinizing their portfolio, and they're carrying products that are either aged out or no longer profitable or require a disproportionate level of resources. So, you know, that's the contribution, and you can count on us to continue to do that opportunistically in fiscal 25. Okay, thanks. This concludes our question and answer session and Triumph Group's 3rd Quarter Fiscal Year 2024 Earnings Conference.
Speaker Change: In Q2 of last year, there was a dip because GE and pushed out a lot of the leap deliveries and then.
Speaker Change: Turn the throttles on and we had a very strong Q3, and Q4 I think youre going to see the same thing in our Q4.
Speaker Change: Sure.
Speaker Change: We have a lot of pent up demand and.
Speaker Change: And carryover from Q3.
And I expect all of my President's to bring these items toward if theyre not it suggests that there's they're not questioning it.
Speaker Change: And really.
Speaker Change: Scrutinizing their portfolio and they are carrying products that that are either aged out or no longer profitable or require a disproportionate level of resources.
Speaker Change: So.
Speaker Change: That's the contribution and you can count on us to continue to do that Opportunistically in fiscal 'twenty five.
Speaker Change: Okay. Thanks again.
Speaker Change: This concludes our question and answer session and triumph group's third quarter fiscal year 2024 earnings conference call.