Daniel Crowley: Certainly. So, we spend about almost $500 million, not quite $500 million in SG&A and overhead. It’s a big number, and it pays for things like updating our IT systems, improved controls, research and development, engineering product development and that’s really how you drive long-term growth. And when I was at Raytheon, that was really the strength of our portfolio as the investments we made in platforms like Patriot and we’ve done enough now on that, that as we take out one of the five operating companies, there’s the automatic gets smaller by that percent that you cited. But we’ve been doing enough investment in the infrastructure of the company in common processes, common IT and we can now start to scale back some of those investments and run the company in a leaner more agile function or fashion.
So, we’re confident we can do it. It’s not just labor. There’s also non-labor costs that we’ll take out — and this is going to help us maintain our margin progression. 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 six EVPs over six segments, plus 47 Presidents. We entirely eliminated the EVP and segment level and consolidated those 47 Presidents down to five. Now, with the sale of TPS down to 4. We’re looking at further reductions there. So, those are enablers. The last enablers as 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, value claiming.
And we’re now more comfortable having centralized 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, those — that’s the overall context for the $40 million.
Myles Walton: Okay, good. And then 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 16% on an EBITDAP basis. And then the other clarification, just on that dashboard you have at the end, where you have an increased percentage of aftermarket and increased percentage of military, by definition, it implies a decrease in commercial OE, which is a little counterintuitive?
James McCabe: Yes. Thanks Myles. I think we’re going to have to follow up with some of that with the public data on with gets filed this afternoon. You’re going to see in the Q the disclosure of discontinued operations working 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 stronger quarters, and that may be what you’re seeing in the numbers.
Myles Walton: And then sorry, the dashboard with the percentage growth in military and aftermarket implying that percentage declines in OE is a little counterintuitive.
James McCabe: So, I think it’s Slide 13, you’re referring to with the positive growth outlook slide?
Myles Walton: Yes, correct. The bottom left two charts to a percentage increase to revenue and military and aftermarket.
Daniel Crowley: Yes. If we had gone back a few years on military revenue, you’d see that it started at 20% 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 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, we do see a tick up. But I think the sort of 60-40 split of commercial OEM will be the average. It will move around from year to year. And then on aftermarket, we’re going to continue to drive that.
And that’s — I want that to be really clear message is that even as TPS exits the portfolio, we have significant opportunities on 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.
Myles Walton: Okay. Thank you.
Daniel Crowley: Thank you.
Operator: The next question comes from Michael Ciarmoli of Truist Securities. Please go ahead.
Michael Ciarmoli: Hey, good morning guys. Thanks for taking the questions.
Daniel Crowley: Morning.
Michael Ciarmoli: Maybe just back to the longer targets and tied in to Sheila’s question, I think you had free cash flow conversion kind of at 6% of sales in the 2026 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, just any more color on the cash targets?
James McCabe: The targets are still the same. I think there are 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 a point, but it’s still going to just be modest timing differences and those remain the same, and the continuing business has the potential to deliver those. I think our cost outs are only going to enhance our ability to deliver those and maybe a little bit earlier.
Michael Ciarmoli: Okay, got it. Got it. And then just you called out in the press release the revenue headwind. Just to reconcile, I mean, the difference between what that 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?
James McCabe: Yes. So, I mean the exact magnitude, I don’t think I have in total. What we have is the themes 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 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. And there’s other parts Dan referred to that are waiting for final approval, they’re done. We just have to go through that process. So, we put a chart in there quarter-over-quarter, so that you could see year-over-year that what is — what the shortfall is in third quarter is being made up in whole part in fourth quarter.
But the fourth quarter is not unrealistic based on historic seasonality. It is a big quarter. 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 hit $100 million of sales, which is consistent with our plans for the quarter.
Daniel Crowley: I would say that the shortage is probably pace maybe $20 million of revenue in the quarter, if that helps Michael?
Michael Ciarmoli: Okay, got it. Perfect. Thanks guys. I’ll jump back in the queue.
Operator: The next question comes from Cai von Rumohr of TD Cowen. Please go ahead.
Cai von Rumohr: Yes. Thank you very much guys. So, it looks here like if we use the midpoint of your guidance, you’re looking for around $350 million in sales, you’re looking for, it looks like margins of 23% adjusted EBITDAP margins in the systems business. And you mentioned $100 million in January. So, a very big step up in February and March. Are you assuming any kind of supplier slips because basically, this has been an environment where slips or more the norm rather than catch up? Are you assuming any — is there sort of any assumption of some slip so that you would hit the number even if that occurred?
Daniel Crowley: Yes. Thanks Cai. 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 cash payment terms of that part and whether or not we need a customer consent to ship these daily assurance — 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 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 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. But if you don’t have circuit boards, and you don’t have bearings, for example, and they go in lots of different products that you can’t ship a lot of product. And so we’ve gotten commitments and priority. These are vendors that supply the whole aerospace food chain. 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.
Cai von Rumohr: Terrific. Thank you very much. And the second one, where are we with the Daher suit?
Daniel Crowley: So, the Daher suit is — it’s been going on for some time. 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 Daher and that also resolved some claims related to accounts payable at the time. We were surprised, but in December, they filed litigation against the company, seeking additional indemnification related to 767 on the fuel tank issues. And this is an issue that was not known to Triumph or I should say, is not viewed as an issue at the point of sale to Boeing, our customer. So, it’s a large amount, but we work through similar types of claims in the past. We intend to vigorously defend the claims against our company for that.
The fact is they bought an operation in July of 2022. And have responsibility for it. We take seriously our commitment to delivering quality products for our customers. And the site was sold as part of our portfolio transformation, and this has really been the only time where we’ve had these kind of reach back issues. So, we have caps in place that limit our liability. There’s two caps. There’s a general cap at about $19 million, about $9 million of which has already been decremented because of the June settlement I mentioned and then another cap related to our reps and warranties. So, there’s really nothing new out there from a Triumph perspective. It’s a difficult issue. Boeing has already resolved it. They’ve contained the issue on their side, they’re continuing to deliver products.
I’ll point you to the 10-Q where we lay all this out.
Cai von Rumohr: Excellent. Thank you very much.
Operator: The next question comes from David Strauss of Barclays. Please go ahead.
David Strauss: Thanks. Good morning everyone.
Daniel Crowley: Good morning.
