David Strauss: Did you actually — if you adjust for the divestiture, did you actually cut your EBITDA — absolute EBITDA forecast for the year. I wasn’t quite sure. Or is it kind of unchanged adjusting for the divestiture?
James McCabe: So, you broke up a second. I think you’re asking, did we adjust our EBITDAP for the–?
David Strauss: Exactly, yes. Sorry. The absolute number, if you adjust for the divestiture.
James McCabe: Yes. We just removed Product Support.
David Strauss: Okay. So, it’s unchanged at for that.
James McCabe: Yes, it should be materially unchanged.
David Strauss: Okay. And a couple of people I think have asked around this on free cash flow 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-forward free cash flow, is that correct?
James McCabe: That’s correct. So, the interest savings is definitely accretive to cash flow moving forward. The $40 million part of that is related to the allocated part of it is just normal course 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.
David Strauss: 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?
James McCabe: Well, 10-plus has higher provided for in there. 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, was 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’s going to be accretive to cash flow over the multiyear period as well.
Daniel Crowley: That’s really that recursive cycle that I mentioned where debt comes down, credit ratings go up, 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 at lower rates. 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 with this transaction is meaningfully front.
David Strauss: Great. Thanks very much.
Daniel Crowley: Thanks Dave.
Operator: The next question comes from Ronald Epstein of Bank of America. Please go ahead.
Ronald Epstein: Good morning.
Daniel Crowley: Good morning.
Daniel Crowley: A lot has been covered so far. So, maybe just a bigger picture question. I mean what’s — where do you expect to see Triumph in five years? What’s the long-term plan for the company. With the sale of the division, it almost feels like you’re at a turning point where you could just keep getting smaller? Or do you pivot here and try to build the business in a different direction?
Daniel Crowley: Ron, it’s the latter. I don’t want to get smaller. 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, become more difficult below a certain level of sales. The good news is, this TPS comes out of the portfolio and we level off around $1.2 billion in revenue. We can accelerate our topline organically, as I said, higher than the market growth rates to replace that and then we could 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. That’s good news. In terms of where we’re going as a company, we think that Triumph the value gap between Triumph and companies like Woodward and Moog is unjustified.
But we’ve got to prove it. We’ve got to go show that we can generate the earnings and cash and really go through that recursive virtuous cycle so that investors see the payoff for the time they’ve spent investing in our company, the money they’ve invested. So, that’s why we’re excited about the future is 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. We’re going to enjoy good OEM margins because they’re 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 it’s becoming fun now.
You can — and you’ve been with us through the whole story, Ron. So, it wasn’t any fun dismantling the structures business, but we’ve done it, and it’s been repositioned 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. But what it leaves Triumph with is this real 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 to building on that core portfolio, expanding our products, expanding their reach on platforms, and then driving the cash and earnings that this business is capable of doing.
Ronald Epstein: Got it. Got it. Thanks for that. And then maybe just a more short-term question. How are you guys really thinking about the impact of the MAX in your business? It’s about, what, 18% of the backlog. So, it’s material. And there’s so much volatility uncertainty around that program, particularly in the short-term. I mean how do you think about managing that?
Daniel Crowley: So, I’m close to this. 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 Boeing can’t do it alone if suppliers are generating escapes to 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. And I think this is a really important inflection time for Boeing and for the entire supply chain, one of my conversations with Stan, I said, about every seven years, we all have to relearn certain disciplines in the aerospace industry, whether it’s torqueing fasteners or crimping connectors or fad awareness, and that’s driven by two dynamics.
One is changes in make or buy, where you had 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 have that coming out of the pandemic, where 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 allows those newer employees and arm 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 until all the fixes are in place, you’ll read about issues on the program. That’s not to be — not — 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’ll 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.
Ronald Epstein: Got it. Thanks. Thank you very much.
Daniel Crowley: Thanks Ron.
Operator: 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 in selected IP sales. I just wanted to make sure that, that IP sale comment, is that similar to sort of the IP sales you’ve had in the past, like second quarter of last year where it’s pretty chunky in terms of drop through to margins.
Daniel Crowley: Exactly.
Myles Walton: Do you have a size for that?
Daniel Crowley: I’d say $10 million to $13 million. It’s a series of smaller ones. In the past, Triumph didn’t prove the tree either at the operating company level or at the product line level. But the reality is 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. And in Q2 of last year, there was a dip because GE pushed out a lot of the LEAP deliveries and 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 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’re not 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, that’s the contribution. And you can count on us to continue to do that opportunistically in fiscal 2025.
Myles Walton: Okay. Thanks again.
Operator: This concludes our question-and-answer session and Triumph Group’s third quarter fiscal year 2024 earnings conference call.
