Myles Walton: Dan, I was hoping to maybe go back to something you said in the past, which is the doubling of EBITDA, I think $310 million is implied for $25 million. And sort of two questions. One, is there a margin target you mentioned 14% is about what you’re going to do this year. Is your margin target embedded in that $310 million? And then should we think about it as a linear improvement projection from here to fiscal €˜25? Thanks.
Dan Crowley: Yes. We have that very discussion in our own meetings and with the Board, Myles, and we’ve been on a fairly linear percent margin improvement over the last three years. As you can imagine, it’s a little harder as you go. But what we did is a composite of our peers, and we looked at everybody from TransDigm and HEICO at the high end to other peers at the lower end to the average. So that’s where Triumph needs to be at least at a peer like earnings multiple, which is between 18 and 20. And that’s — we believe that’s achievable. But more important than the percentage of the absolute dollars, that’s why Jim and I were setting a target to get above $300 million. It’s because you can’t delever with percentages. We need earnings and cash generation in the amounts that are sufficient to achieve our capital structure goals, and we’re confident we can do it.
When we provide our guidance for fiscal ’24, we’ll give you more color on that for next year, and we’re contemplating an Investor Day in our next fiscal year as well that we can give you more insight on the multiyear outlook.
Myles Walton: Okay. All right. And then, Jim, I just want to make sure, I think in Seth’s question, it sounds like there were some one-times in structures, maybe a few million. Is that right as kind of final cleanups?
Jim McCabe: I think there’s a — around $1 million of cleanup there, continuing maintenance under the TSAs. There was — cash, I think, was less than $1 million in the quarter. So it’s getting de minimis as we don’t have that many ESC programs left.
Dan Crowley: There was a number of investors that reacted adversely to a reserve we put up for a closeout of pass about $75 million. And what we found is we don’t need anything like that to wrap up the work at those sites and disposition tooling and shut them down. So we’re more confident in the close-down cost there than we were earlier in the year.
Myles Walton: Okay, alright. Thank you.
Dan Crowley: Thank you.
Operator: Our next question will come from Pete Osterland with Truist Securities. You may now go ahead.
Pete Osterland: I’m on for Mike Ciarmoli this morning. Thanks for taking our question. First, I just wanted to ask on Systems and Support margins. You mentioned the prior year period benefits there, but it looks like margins were down there on a sequential basis as well despite higher sales. So I was just wondering what’s driving the margin pressure there. Did product mix have a negative impact quarter? Or was it more on the cost side?
Jim McCabe: So compared to last year, you mentioned first, there were some one-timers I called out in there last year, the Aviation Manufacturing Protection Act money we got in, we had an IP license sale in conjunction with the legacy product line sale. But there was a modest IP sale in Q2 of this year, a small one, which benefits us as well. This quarter is very clean. There’s not a whole lot of one-timers this quarter. So when you look at this quarter moving forward, we’re going to grow from there. I mean the EBITDA margin, which is another way to look at it in the quarter for TSS was 17.5% in Q3, and that’s up from 17.3% a year ago. So we’re pleased with the progress there. The mix does change from time-to-time. Some of the spare sales can be lumpy. But the overall trend is positive, and we’re pleased with it.
Dan Crowley: Yes. When you take out those one-timers that Jim mentioned, that we had in prior years, and we didn’t have any this quarter. It was clean earnings from operations. The rate of profitability growth in TSS was higher than the revenue growth. You mentioned revenue growth 21%, so the core earnings growth was, in fact, higher. And that’s what we intend to demonstrate again in Q4.
Pete Osterland: All right. That’s helpful. And then just as a follow-up, how are conditions for you in the labor market currently? Are you seeing any elevated attrition? And do you have the hires in place that you need to meet the growth that you’re anticipating into fiscal €˜24?
Dan Crowley: We do. We look at our headcount every week across all the sites. And there’s been a few pockets of touch labor. We’re getting specialized skills like gear grinding has been harder. But generally, our attrition levels are better than our peers. And I attribute that to this new deal I mentioned in my comments, Triumph — we can’t throw money at all of our employees, but we can address all of their needs, which include flexible work hours, and support to their development plans. We did some things on giving cash stipends during the summer last year, because of gas prices. And people really appreciate that. And we’ve done a lot to engage employees and our community involvement. And we just want to be an employer of choice, and that’s gone a long way.
But where we’ve seen labor challenges has mostly been at the lower tier supply chain where they haven’t been able to get the, kind of, experienced mechanics and casting houses, in particular, they’ve struggled. So that’s a watch area for us. But internal Triumph, we’re actually in good shape.
Pete Osterland: Alright, that’s helpful color. Thank you.
Dan Crowley: Thank you.
Operator: Our next question will come from Cai von Rumohr with Cowen. You may now go ahead.
Cai von Rumohr: Yes, thanks so much. Maybe walk me through sort of the thinking behind the warrants, which are sort of priced at strike at $12.35. And the stocks under that, I guess, it makes sense if someone wants to buy and use the 2025 maturities to exchange them that there’s a positive arbitrage. But what are you seeing there? And what do you expect in terms of retiring debt by those warrants?
Jim McCabe: Thanks, Cai. Yes, the warrants provide optionality to shareholders. And in the past, you’ve seen us raise equity through an ATM and that really didn’t give an option to our shareholders. And some of the feedback was, we’d like to have the choice. So what the warrants did was give shareholders something of value. They got equity security, it’s trading over a buck now, and they can choose to sell that into the market and get money that way and realize their value that way, they could go buy bonds and use those to exercise warrants to get stock and they could hold that stock or sell the stock, or they could may just hold on to it for the term. And when the time comes maybe they want exercise for cash, because the stock is trading above that point.
So it provides optionality and value pro rata to our existing shareholders. So we’re pleased to be able to do that. It’s just one component of an overall deleveraging strategy, right? We’re delevered naturally through EBITDA expansion and portfolio changes to get higher margins. We want to provide that optionality, but it doesn’t solve all problems. It just provides one avenue for value for shareholders. We’re still going to go through a refinance on the best terms possible at the right time, our maturities before they come due.
Cai von Rumohr: But if I look, you basically have five quarters to get this done. And unlike other high-yield candidates like Bombardier or Spirit, your debt is bigger than your revenues. In their case, it’s like twice as big. And while you’re probably not going to pay 12% like Sheila said, you’re clearly going to have to pay a whole lot more than 7.5% unless the market changes very substantially. So that basically a refi will really increase your interest or costs, and your margins are not that bad. Your margins are pretty good. But — so — but the percentage increase you can get in those margins, kind of, looks like it limits the adjusted EBITDA growth. And so I mean, do you feel like you’re potentially in sort of a spiral where higher interest cost eats up most of the incremental adjusted EBITDA margin?
Or is there a point where you see basically the adjusted EBITDA goes up and you can really deal with the interest expense, so you can really generate the type of value that I think your shareholders would like.
Dan Crowley: Thanks, Cai. I think what our Q3 results show is the underlying value of our business, absent the debt, but your question is a fair one. First, let’s start with the dividend warrant. At full execution, that should reduce our interest carry by about $20 million. When we refinanced the first and second lien, the average rate of those two is about 7.5%. And yes, the 2025s are trading at a lower price, but Triumph is viewed favorably by the bondholders in terms of our ability to service debt. And we are seeing an opening of credit in high-yield markets in the last few weeks. It gives us a lot of confidence that we’re not going to pay as you said, a whole lot more than 7.5%. So I would say watch that space, first of all, and any debt we do, we’ll have the option to refinance it a couple of years in and reduce any interest carry that comes along with that debt on a short-term basis.
And then during that period, I think you’d agree all the projections for the A&D market are favorable by €˜24, ’25, we’re all looking forward to a full exit from the pandemic and be at rates that were higher than 2019 level. And the things we’ve done during the period, this downturn period really do position us to have these stronger earnings and cash generation. So we’re confident that we can get refinanced. We’re confident that we can get our debt carry — our interest carry-down. Recall, we retired all of the Boeing advances we’ve shed the businesses that were sources of cash use, and we’re getting our mix right between OEM and aftermarket, which benefits earnings as well. So a long answer, but an important question, and we’re dealing with it head on.
Cai von Rumohr: Terrific. Thank you very much.
Operator: Our last question will come from Noah Poponak with Goldman Sachs. You may now go ahead.
Noah Poponak: Hey. Good morning, everybody.
Jim McCabe: Hey, Noah.
Noah Poponak: You had provided the slide of where you saw the major airplane production rates going 2025 before Boeing’s Investor Day. Can you just square me up on what your internal plans now have for the MAX and the 787 in that period of time, compared to what you were thinking previously?
