Michael Ciarmoli: Nice results. Just to maybe go back, the DKL is pretty solid here on Slide 8. And it looks like, I mean, spares were up 7% sequentially. I mean can you maybe parse that out for us? Was it more commercial? Was it more military? And kind of what you’re seeing out there and what drove that level of spares activity.
James McCabe: Michael, I’ll start. It was more commercial this quarter. And that’s why I think the margin impact is a little less than you might see in some of the military spares. But it’s lumpy business, as we’ve talked about before, where fortune was surged this quarter. And the fourth quarter is typically when we see the biggest surge in the spares. And there are opportunities to increase spares volume, which we continue to work on and increase spares pricing to cover increasing costs and enhance margins moving forward.
Daniel Crowley: I know you have models for air traffic, but the ones we watched showed the first 10 months of U.S. traffic. TSA volumes were above 2019 levels by 1.4%. But more importantly, September and October, traveler throughput was up 5.7% over the year 2019 levels. So it’s definitely ramping, and that’s driving the carriers to invest in spares and repairs. And the timing, you all commented on the strong commercial MRO sales. As Jim mentioned, these fleets are coming out of service. They hit their peak volume — TSA volumes in July — so they’re bringing them in for maintenance, and we’re benefiting from that.
Michael Ciarmoli: And then just — I mean, you had been forecasting, I think 4% to 6% aftermarket growth, it’s now 11%. Any — can you give us any of the underlying military commercial? Is it more spares, I mean, the IP sales look pretty flattish. But maybe just what really drove that increase. And I would imagine with the pratt issues, airlines flying some of these older planes longer has to help.
Daniel Crowley: Well, we’ve been in touch with — proud about ways we can help. And it’s been a productive dialogue I would say right now, repairs are outpacing spares on the military side. And that is going to, I think, revert as the depletion of U.S. stockpiles to support the various conflicts leads to orders for new spare hardware to replace those. So these things tend to swing in their own cycles, repairs and spares, but thanks for the recognition of the progress on spares. Last year, the spare sales were softer. So we’re encouraged to see them coming back. Triumph does a lot of line replaceable units. And that’s really the beauty of the new portfolio is if you tour our plants, you see these actuators and heat exchangers and gearboxes.
And these are the items that are used up, consumed during operation and typically replace not a heavy maintenance but a frequent checks. In terms of the mix of the driver of the increased growth as you can see, 2/3 of our aftermarket is repairs, 1/3 fares. So it’s more repairs and spares and it’s probably a little more commercial than military for the back half of the year.
Operator: And our next question today comes from Ronald Epstein with Bank of America.
Ronald Epstein: Just trying to understand what happened with the interiors duct work and the composite, if you can kind of go in more detail. Like it seems like as of maybe last quarter that sort of came out of nowhere. And I guess what I’m worried about is, could this happen in another business or not? Or I mean, how should we think about that?
Daniel Crowley: And I’m giving lots of inside baseball on interiors more than we ever have in the past. But on composites, recall, we used to build these products, these ducts at our Spokane, Washington plant. And we moved them to Mexico. And at the time, a condition of transfer with Boeing is that we produce them in the same manner and we really missed an opportunity to relay out the line, add more automation. From their point of view, it was to avoid any changes that might lead to quality issues. But now that we’ve stabilized production in Mexico, we’re going back to the line with Boeing partnership to take out further cost, and I’m highly confident that we’re going to see the sort of productivity gains and composites that we saw — that we do see today in installation.
So that’s one change. This business has been a 20% plus business before and we’re focused on getting it back there, and we plan to exit this year with strong margins that are double digits on operating margins and then get it back into higher margins over our planning horizon.
James McCabe: And I would add, obviously, the cost challenges are multifaceted. There’s inflation down there, that’s been higher than we experienced in other countries. There’s the FX headwind with the peso strengthening. And then there’s directed supplier costs that we can continue to work on because they have some sole-source directed suppliers. And we have opportunities sometimes through adjustment clauses to recover that. Sometimes we need to develop second sources or work to pass through the prices. So there’s lots of levers. There was a — it was a challenge, and it was a bit of a surprise in Q1, but we’re all over it and we’re going to improve it for the balance of the year.
Ronald Epstein: And then, Jim, how are you thinking about — I mean, really the refinancing that has to happen given where interest rates are now, I mean what — you kind of alluded to there’s maybe some creative things you could do. Could you give us a hint to what you’re thinking?
James McCabe: Well, as you know, opportunistics, so we continue to monitor the markets. And if there’s an opportunity to refinance that good cost in terms, we would consider doing that but we’re also improving the business dramatically, positive free cash flow this year, improving our credit. So we don’t want to move too fast that we don’t get the benefit of our improved credit. We’ve recently seen — I think Moody’s upgraded our corporate family rating as well as our 25 bonds. At the same time, we’re buying back with excess cash — the bonds bought back at a discount, so we create a gain. We reduced our interest expense. We’re going to continue to do that as we can with excess cash from cash flow from operations, from working capital liquidation.
So we’re going to keep chipping away until it gets to a point where we can consider whether there are some delevering actions we can take with the portfolio, which we’ve talked about, or whether we want to refinance. These aren’t due until August ’25. So they don’t go current until next — August next year. But we’re keenly aware of it and we’re watching the markets. So it’s not a big concern about refinancing, but we do want to delever. So it would be best if we could just reduce that debt all together and not have to refinance.
Operator: And our next question today comes from Noah Poponak with Goldman Sachs.
Noah Poponak: What is assumed in your 2025 and 2026 margin plan for the Interiors margin?
