Triumph Group, Inc. (NYSE:TGI) Q4 2023 Earnings Call Transcript May 17, 2023

Triumph Group, Inc. beats earnings expectations. Reported EPS is $0.39, expectations were $0.26.

Operator: Good morning, and welcome to the Triumph Group’s Fourth Quarter Fiscal Year 2023 Results Conference Call. All participants will be in listen-only mode for the duration of the call. Please also note that this event is being recorded today. I would now like to turn the conference over to Tom Quigley. Please go ahead, sir.

Tom Quigley: Thank you. Good morning, and welcome to our fourth quarter fiscal 2023 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 this morning. We will be discussing 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. 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, which 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 the forward-looking statements. Dan, I’ll turn it over to you.

Dan Crowley: Thanks, Tom. Triumph ended fiscal 2023 and Q4 on an upswing, with strong margins and positive cashflow, positioning the company for success in fiscal year 2024 and beyond, as demand accelerates. We met or exceeded our full-year financial targets, delivered organic sales growth, maturely expanded profitability, and in our fourth quarter, generated $52 million in positive free cashflow. Q4 was an encouraging finish to a solid fiscal year that marked year-over-year improvement in both earnings and free cashflow. Over the past two years, Triumph doubled our adjusted EBITDA margins from under 7% in our fiscal ‘21 to 14% in fiscal 2023. As we go forward, we expect this momentum to continue and are guiding to further margin expansion and topline growth in fiscal ’24, as we seek to enhance shareholder value in a rapidly improving demand environment.

Deleveraging remains a top priority as we continue to optimize our capital structure over time. We recently extended our debt maturities, providing additional liquidity and flexibility as Triumph returns to consistent cashflow generation in fiscal ‘24 and beyond. Our four-point strategy remains on track. First, reposition the company as the systems and aftermarket company, which we’ve done. Two, improve operations and grow our proprietary and aftermarket sales and margins. Three, return to positive free cashflow to help delever the company. And four, generate the shareholder returns our investors expect. Triumph is a stronger company today as a result of our actions, allowing us to compete successfully in the market against larger and more valuable peers.

Turning to Slide 3, I’ll summarize the highlights for the quarter. First, we generated organic sales growth of 21% over the prior year quarter, with increased sales reported across all our end markets. Year-over-year sales growth was 14%, driven by improving commercial OEM and MRO demand. Note that aftermarket accounted for 41% of our Q4 sales, while military programs account for 37, both up from prior years. Key drivers for the increased Q4 revenue included higher volume on the Boeing 737 and 787, OEM and spares for military rotorcraft, GE LEAP gearbox shipments, and the Cell overhauls, All tailwinds on growth platforms, which we expect to continue in fiscal ‘24. Profitability for the quarter materially exceeded prior year levels. On a fiscal year basis, We achieved our highest margin percentages since 2014 as a result of our strong execution and improved business mix.

Key profitability drivers for the year included higher spare sales, cut-in of previously negotiated price increases, development program transition to production, higher sales at our MRO sites, and lower SG&A and overhead costs. Our cost reduction results enhance our operating leverage. In other words, we won’t have to add back support cost as volumes increase. What’s encouraging here is we saw higher EBITDA margins across all our primary product lines year-over-year, from actuators to engine controls, gear boxes, to product support. We grew our backlog by 11% as Triumph continues to benefit from our broad representation across platforms, customers, and end markets, and as our differentiated solutions gain traction with our customers who are helping to fund our R&D efforts.

Our backlog improvements in size, diversity, and profitability, are rooted in our investments in new products and technology, portfolio changes, and pricing initiatives. In addition to the long-term agreements which we secured in recent years across all our businesses, backlog renewal is key to Triumph’s sustained long-term growth. Beyond higher OEM rates and MRO receipts, new wins in the space market and for products supporting the war in Ukraine, enabled us to exceed our goal of generating 25% of our sales from new products and markets. Turning to cashflow, we generated strong positive free cashflow to end the year, benefiting from over $120 million in unlevered free cashflow in Q4, as we accelerated product shipments, cash collections, and reductions in working capital.

We are on track to generate positive free cashflow on a full-year basis for fiscal ‘24 and beyond, while expanding our CapEx investments and funding working capital in support of the commercial ramp. Taken together, the momentum in our end markets, our operational and pricing improvements, and expanding backlog, lay the foundation for our fiscal ‘24 guidance. Triumph made great strides this year operationally across the enterprise, including achieving world-class safety levels, with 12 or half of our sites recording zero injuries in the last year, reducing red programs by over 75%, which reduces financial risk, establishing over 100 high performance teams to streamline our execution, reducing quality defects by 20%, with 11 sites achieving world-class levels of less than 1% cost of poor quality, and improving supplier on-time delivery performance from the mid-70s percentages to the low 90s, to free up captive inventory.

We remain encouraged that both OEM and MRO markets continue to recover as commercial revenue levels are on track to exceed 2019 levels this calendar year. Triumph is benefiting from a 52% increase in global revenue passenger kilometers to 88% of pre-pandemic levels. The primary driver for both new aircraft orders, production rate increases, and MRO spend. Similar growth in the international travel is benefiting our wide body MRO sales. Robust commercial demand helped increase Triumph’s fiscal year 2023 bookings 31%, including $171 million in new contracts in March alone, our highest of the year. Six of our 24 factories will benefit from Ryanair’s recent order for 300 MAX-10s, and those from United Airlines. Turning to Slide 4, new wins totaled $205 million for the quarter and $743 million for the year.

Important military winds for the quarter included content on the CH-53 helicopter, including the blade fold and blade damping system and engine oil coolers, and an F-35 drag shoot actuator. We also received a large order for the M777 Howitzer Magazine components. Increasing volume is our biggest enabler for top and bottom-line growth. Boeing Airbus continue to forecast higher OEM production rates, and recall that Triumph typically steps up our rates eight to 10 months ahead of the OEMs, due to product lead times. As shown on Slide 6, we anticipate the Boeing 737 MAX rate to step from the current rate 31 to rate 38 this summer, and then rate 42 by March. The A-320 family achieved rate 46 in March, with plans to move to rate 49 before the end of our fiscal year.

Airbus also plans to increase the A-220 rate from the current 7.5 per month to 9.2 and then to 10 within our fiscal year. Recall that Triumph supplies cabin insulation, floors, and mechanical controls on the A-220. On or before Triumph’s fourth quarter, the Boeing 787 will move from the current rate four to rate five, while the Airbus A-350 will move from rate 5.6 to rate six. Triumph supplies the entire 787 landing gear hydraulic system, cargo door actuation system, and interiors components. Regarding the military outlook, the US defense budget rose approximately $60 billion in ’23, and the 2024 request is up another $26 billion, signaling demand stability over the next two years. Triumph’s total military sales were up 18% year-over-year and 34% sequentially, with platforms such as the CH-53 helping to drive our fiscal ‘23 results.

Finally, aftermarket inductions across military and commercial platforms for maintenance, repair, and overhaul, are up 24% year-over-year to over 35,000 components. Together, these OEM and MRO increases across all our end markets, support our fiscal ‘24 guidance and long-term business outlook. So, overall, very good news on demand trends. I want to share an update relative to our proprietary product development efforts in the systems area and its importance to our value generation efforts. For fiscal ‘24, approximately 72% of our sales are for proprietary products, excluding our third-party MRO business. Our technical staff maintain robust product roadmaps so that intellectual property, technology, and product development investments, are directed towards emerging customer needs.

We are targeting new starts as well as takeaways on existing programs. By partnering with our customer to solve their most difficult challenges, we received over $30 million in customer-funded contract research and development commitments in the last 12 months to augment our self-funded R&D. Turning to Slide 7, you can see some of the positive results of these joint R&D efforts. New applications include next-gen landing gear systems, military gear boxes, electric aircraft components, fuel pumps, fuel hydraulic actuators, thermal vapor cycle compressors, and engine controls, all products with valuable aftermarket demand. I’m particularly happy to have content on GEs new LM 25 NX military engine, and new solutions for sixth gen fighters. This customer engagement was made possible by our customer-focused teams who are shaping future requirements and identifying takeaway opportunities to expand our backlog.

Triumph’s strong financial and operational close to fiscal ‘23, along with our proprietary products and end market growth, are key enablers to enhancing our long-term value. None of this would’ve been possible without the Triumph team members whose engagement and accomplishments in fiscal ‘23 make it possible for the company to achieve its potential. Together, the culture we’ve created at Triumph helped us manage through the last three years and positioned the company to sustainably execute our profitable growth strategy in the years to come. Jim will now take us through the fourth quarter results and our detailed outlook for fiscal ‘24. Jim?

Jim McCabe: Thanks, Dan, and good morning, everyone. Triumph’s fourth quarter results exceeded our expectations, with significant revenue and margin growth over the prior year period. On Slide 8 are the consolidated results for the quarter. Revenue was $393 million. For the continuing business, excluding divestitures and exited programs, organic revenue increased 21% over the prior year quarter. We benefited from organic sales growth in our largest programs and all our end markets. Adjusted operating income for the quarter was $60 million, representing a 15% margin, an increase of over 400 basis points from 11% in the prior year period. Adjusted EBITDA for the quarter was $68 million, representing a 17% EBITDA margin, which is a 500 basis-point improvement over the prior year period.

Increased demand in all our markets, especially the aftermarket, was a key driver for the significant margin improvement over last year, along with pricing and cost reductions. Triumph’s full-year results for fiscal ‘23 were also strong, with higher operating income and higher margin. On Slide 9 are the annual consolidated results. Revenue was $1.379 billion. For the continuing operations, organic revenue increased 14% over the prior year. Adjusted operating income for the year was $159 million, and 11% operating margin, up over 200 basis points from the prior year. Adjusted EBITDA for the year was $196 million. That is a 14% EBITDA margin, which is a 200-basis point increase over the prior year. Our segment tables are attached to the press release, and please note that the segment formally known as structures, is now called interiors.

This name change more accurately reflects the ongoing focus of that business, following the completion of our efforts to reposition the segment. We are encouraged by the progress we have made, and would note that interiors is benefiting from a strong backlog and growth forecast. We also expanded our disclosures over the last year to include revenue by end market, including commercial and military, and then OEM and aftermarket under each. Slide 10 shows our commercial market revenue. For the quarter, commercial revenue of $237 million was 60% of total revenue. Commercial OEM sales were $141 million and grew 35% in the continuing business. This growth was driven by increases in both volume and price in key programs, including the Boeing 737 and 787 programs.

Commercial aftermarket sales grew 51% in the continuing business on strong demand as commercial air travel has continued to ramp. Slide 11 shows our military revenue. For the quarter, military revenue of $144 million was 37% of total revenue. Both military OEM and aftermarket revenue grew compared to last year, as supply chain recovery benefited this market. The remaining 3% of our revenue is non-aviation, which is a growing and profitable business, representing about 12 million of sales in the quarter. Our sales exchange towards aftermarket is having a positive impact on margins and cashflow. In the quarter, total aftermarket sales represented 41% of our revenue, up from 31% in the prior year. Our portfolio actions and our growing aftermarket demand have both contributed to this positive mix change, and we expect this trend to continue as we move through fiscal ‘24.

Our free cashflow walk is on Slide 12. Our $52 million of cash generation this quarter included a $70 million reduction in our net working capital, driven by the fourth quarter sales line. As supply chains continue to improve, we have been able to reduce the inventory we’ve been carrying. We also incurred an additional $14 million in interest payments in the quarter, due the timing of our refinancing. On Slide 13 is our net debt liquidity. During the fourth quarter, we completed the refinancing of a substantial portion of our debt, issuing new 9% first lien notes and retiring two series of notes that were due to mature in ‘24. This transaction extended those maturities to 2028, providing additional liquidity, enhancing our financial flexibility, including the ability to prepay a portion of these new notes at a reasonable premium.

At March 31st, we had just under $1.5 billion of net debt, and our cash availability was approximately $287 million. Our next maturity is the $499 million of notes due over two years from now in August of 2025. These bonds are currently designated bonds that can be used to exercise our outstanding warrants for stock to reduce this debt. In the quarter, we received $4 million of proceeds from warrant exercises, and retired $1 million of these designated bonds. Our fiscal ‘24 guidance begins on Slide 14. The bridge of our FY ‘23 to FY ‘24 revenue is at the top left. Adjusting for approximately $78 million in fiscal ‘23 sales from exited businesses, and based on anticipated aircraft production rates, we expect organic growth of 7% to 10% in fiscal ’24.

Aftermarket volume is the largest component of the increase, followed by OEM volume, pricing, and an increase in non-aviation revenue. The aftermarket is expected to grow at a solid 9% rate, driven by continued expansion of overall air travel domestically and internationally. Commercial OEM revenue growth is driven by production ramps on programs such as Boeing 737 and 787, and the Airbus A-320 family. Non-aviation sales are expected to increase, driven by the previously announced work to supporting Howitzer sustainment. The top right chart shows our EBITDA growth over the last three years and guidance for FY ‘24. We’re proud of this positive trend. Our adjusted EBITDA margin has improved from about 7% in fiscal ‘21 to 12% in fiscal ’22, to 14% in fiscal ‘23, and our guidance indicates up to a 60% consolidated EBITDA margin in fiscal ‘24.

The EBITDA margin expansion has been driven by a number of key factors, including the reshaping of our portfolio, increasing operational efficiencies, improving the pricing in terms of our contracts, and from increased demand from higher OEM production rates, and a ramping aviation aftermarket. The bottom left chart shows our improving quarterly free cashflow cadence for the last two years and the anticipated cadence in fiscal ‘24. We expect to generate positive free cashflow in fiscal ‘24, including normal seasonality with working capital growth, using cash in the first half to support higher deliveries and resulting cash generation in the second half. The bottom right chart is our unlevered free cashflow bridge from fiscal ‘23 to fiscal ‘24, which shows our free cashflow before interest.

As previously noted, fiscal ‘23 included $24 million in non-recurring cash uses, and $32 million in net working capital increases. We anticipate a modest net working capital improvement over fiscal ‘24, and our largest driver is earnings growth, which is expected to drive just over half of the unlevered free cashflow improvement. Turning to Slide 15, you’ll find our detailed fiscal ‘24 guidance. We expect revenue of $1.39 billion to $1.42 billion. That’s 7% to 10% growth in the continuing business, and cash from operations of $60 million to $80 million. After $25 million to $30 million of capital expenditures, we expect to generate $35 million to $50 million of free cashflow in FY ‘24. That’s up to $123 million improvement in free cashflow from fiscal ‘23.

We expect $165 million to $180 million of operating income, and $210 million to $225 million of adjusted EBITDA, representing up to a 16% EBITDA margin. Interest expense is expect to be $154 million, including $148 million of cash interest, and we expect $7 million of cash taxes. Our pension funding forecast is on Page 19. $15 million is the estimated required contribution in FY ‘24. We’ve used stock for required contributions in the past and may elect to do so in the future. We would note that estimates after the first year can change significantly as we have seen in the past few years. In summary, it was a strong finish to a solid year and with fewer one-time items than past years. We completed our portfolio actions and are clearly positioned as an aerospace systems and aftermarket company.

We extended our debt maturities, grew revenue, expanded margins, and improved free cashflow. For fiscal ’24, we’re focused on executing on our plan to continue to grow revenue, margins, and cashflow, and increase shareholder value. We are in the planning process for an Investor Day in the fall, and look forward to sharing our multi-year targets and bridges at that time. Now, I’ll turn the call back to Dan. Dan?

Dan Crowley: Thanks, Jim. Triumph’s performance in our fourth quarter and fiscal ‘23 underscores that we’re a stronger systems and aftermarket-driven company, with a larger and more profitable backlog and financial results that are steadily improving year-over-year towards the targets we set in fiscal ’21. We entered our fiscal 2024 with an optimized portfolio of businesses, programs, and products, at a time of accelerating customer demand. Our increasing mix of aftermarket and IP-driven OEM sales, gives us confidence in our fiscal ‘24 guidance and long-term outlook. Jim and I are happy to take any questions you have.

Q&A Session

Operator: We’ll take our first question, which will come from Sheila Kahyaoglu with Jefferies. Please go ahead with your question.

Sheila Kahyaoglu: Thank you, so much and good morning, Dan, and Jim. First off, can I get the Excel backup data behind Slide 14? That’d be great if we could get that first slice. So, I appreciate those slides, so that’s super helpful. I guess I wanted to go actually to the next slide because – the supplementals, but in terms of the pension items you mentioned becoming a significant headwind in fiscal ‘25 with the contributions there, how do we think about those numbers in the context of your free cashflow generation, and maybe that’s something you’ll discuss in the fall.

Jim McCabe: Yes, thanks, Sheila. And I’ll look for that Excel spreadsheet and let you know. But I think pension is an interesting one because it’s volatile in the out years. And as you know, last year, at the same time last year, we had only $1 million dollars or so per year funding forecast. It’s only the next year that really matters because after that it can change dramatically based on market conditions, interest rates, returns. So, what we’re focused on is the $15 million in the coming year. If you look at the pension liability on the balance sheet, it went from up about $58 million only. So, but the funding went up a lot more than that. And some of it has to do with elections, which we’re going to revisit and consider before the next year. But in the fiscal ‘24, we have $15 million to deal with, which we’re planning for.

Sheila Kahyaoglu: Got it. Okay. And then just a quick follow-up on the interiors margins. This is like one of the – as you guys mentioned, the best quarters you guys had. Adjusted EBITDA margins of 7.6% in the quarter. Is that sort of the baseline we should be thinking that for profitability?

Jim McCabe: Could you repeat the number you just said?

Sheila Kahyaoglu: Oh, 7.6% I believe was the adjusted EBITDA margin.

Jim McCabe: Right. Look, if margins are going to continue to improve, and you’ve seen – I went through the consolidated EBITDA margin, which doubled from 7% to 14%, and we’re projecting up to 16% next year. The margins in across the business are going to continue to improve from leverage on additional revenue, right? So, we’ve got gross margin falling through without increasing fixed expenses. So, the trends are positive across the board in all the markets, including interiors.

Sheila Kahyaoglu: Okay, great. Thank you.

Operator: And our next question will come from Peter Arment with Baird. Please go ahead with your question.

Peter Arment: Yes thanks. Good morning, Dan, and Jim. Hey, just on – thanks on all the details you guys have given and congrats on finishing up on a strong note for the year. On the organic sales outbreak, you mentioned aftermarket was up 9%, 7% to 9% is the guide for the year, or 7% to 10% for the year. Is it – I’m surprised it’s not stronger just given the trends that you’re seeing. Is there something that’s offsetting that or maybe just timing or up against tough comps? Any color on that, Dan, would be appreciated. Thanks.

Dan Crowley: You bet. Yes. We track the inductions that come into all of our MRO sites month-over-month, and they steadily increased through the fiscal year. Roughly started out the year below 2,000 a month, and they were hitting 3,000 by the time we got to march. So, a 50% increase through the course of the year. So, we’re encouraged by the return to service of aircraft. Internationals opened up, as you know. China is going to expand. Our TASA site, which is in Thailand, is seeing increased traffic. So, aftermarket’s going to continue to drive. Where we really want to extend our aftermarket is in spares. Spares came down in prior years as people just went to the boneyard and extended service intervals. Now, sparing is starting to pick back up and spares carries stronger margins than even overhaul.

So, we’re optimistic about aftermarket and we’re hiring at those plants that support that, and we’re continuing to join ventures with our partners at Air France. So, we’re excited about the future in aftermarket.

Peter Arment: Appreciate that. And then just, Jim, just as a follow-up on kind of the free cashflow finally turning positive, which is great, it’s about 2.5% to 3.5% of sales on kind of your guide. We’ve long talked about kind of getting that to mid to high single digits. How do you think about that, some of the bigger drivers? I mean, is it just the cash interest coming down, working capital improvement? What are some of the things that you’re looking for there? Thanks.

Jim McCabe: Yes, so you see the ‘24 guide of $35 million to $50 million of free cashflow, that’s just the beginning. Obviously, we’re going to ramp, and our goal is to be up in the high single digits on a free cashflow as a percentage of sales. And the cadence will be, we’re in the low single digits in ‘24, and then we’ll move kind of into the mid-single digits in ‘25 and then higher single digits in ‘26.

Peter Arment: Appreciate the color. Thanks, guys.

Operator: And our next question will come from Myles Walton with Wolfe. Please go ahead with your question.

Myles Walton: Thanks. Good morning. I was hoping you could maybe give us a couple of the moving parts from an EPS perspective. I think you’ve given us most of them, but when you put it all together, and obviously, you’ve got the warrant issue as well that I think has a interest adjustment. Is the EPS for fiscal ‘24 somewhere closer to $0.50? Is that about the right ballpark?

Jim McCabe: So, I think we’re trying to give you the building blocks. The reason we didn’t guide to EPS is because of the moving share count, as you mentioned. Share count is skewed by pro forma warrant accounting, which has to assume that all of them have been exercised. And then there’s exercises. So, during the period, we had $5 million worth of warrant exercises, some of which increased shares and reduced debt. So, we’re going to give you all the components, and I think probably in the follow-up call, we can talk you through each of them and you can make your own assumptions about the number of shares outstanding. So, that’s the intent there. We’re going to get back to EPS guiding as soon as the warrant’s exercised.

Myles Walton: Okay. And what is the outlook for that to sort of be realized at this point?

Jim McCabe: Well, warrants in the quarter, there was $5 million worth exercised, about $1 million of debt retired, and that was tendered for shares, and then $4 million of cash was raised. So, the market will dictate when they transact. They expire in December.

Myles Walton: Okay. One of the slides I thought was interesting on Slide 3, sort of implied what the margin guidance is between the OEM, the aftermarket, and that 12%, I guess, implied OEM margin, and the 25% implied aftermarket margin. Are those sort of improving in tandem? Is there more of a improvement you’re seeing in one side or the other? Just more color there, both this year and into next year, if you can.

Jim McCabe: Yes, they’re both improving. Aftermarket is improving more than OEM. And our mix went from 31% to 41%. So, the mix alone drove more profitability, but even within that 41%, we’re seeing higher margins because there’s just a flow through from the operating leverage as sales increase and we don’t increase fixed costs.

Myles Walton: Okay. And then Dan, you’ve had the $300 million EBITDA target out there for fiscal ’25. Is the trajectory you’re putting up for ‘24 enough to maintain that for ‘25 at this point?

Dan Crowley: So, we think so. It’s a quarter-to-quarter measurement. Although it’s a multi-year goal, we’re tracking the OEM rate so closely. As Jim mentioned, volume is our number one lever, along with aftermarket to hitting that number. And the direct conversations I had with Boeing and Airbus in the last week, give us confidence that those rate step-ups that they’re advertising are going to happen. There’s no doubt, there’s a lot of hand-to-hand cop bad on shortages, but as I mentioned in my script, the percentage of on-time delivery with suppliers has improved in the quarter to the low 90s. We want to get it to mid-90s or higher so that you’re really only working shortages on an exception basis. As spirit recovers on their repairs, Boeing’s ramp rate is going to ramp up their confidence in those step-ups.

And that’s the biggest lever for us to hit the $300 million. So, we’ll continue to update you on that. At the Investor Day that Jim mentioned, we’ll give more color and the bridges on both profitability, revenue, and free cashflow.

Myles Walton: Okay. Thanks so much.

Operator: And our next question will come from Ron Epstein with Bank of America. Please go ahead with your question.

Ron Epstein: Good morning, Dan. So, Dan, like, so we got to free cashflow positive, right? That’s great. Check. The business cleanup is going. I guess a big picture question, where to from here? When you think we’ve kind of gone through kind of the worst of the downturn and how disruptive it was on the company and so on and so forth. But when you look out five years from now, 10 years from now, I mean, what’s your vision for where Triumph could be?

Dan Crowley: Yes, thanks, Ron. And you deserve to ask that question because you’ve been with us for the whole journey. I’ve looked at our product lines and we’ve got great content, and we talked about the IP expansion. And five to 10 years, what you’re going to see is Triumph as a market leader in fuel pumps and heat exchangers, gear boxes and actuation. And as the fleet evolves towards a more electric fleet, you’re going to see us adapt our products to meet that need. And the reason I know this is happening is because our customers are funding us to do the R&D right now for the platforms that’ll be fielded in that five-to-10-year window, whether it’s Airbus doing an electric regional jet that requires a gearbox to transfer electrical power to the propellers, or whether it’s additive manufacturing, that will replace the current castings on gear boxes, we’re making those investments.

We’re helping on the next-gen variable bypass jet engines. I mentioned G, the LM 25 NX. We’ve got key roles on those fuel pumps. So, we can tell that the pipeline of technology and products is going to be transitioning into new starts and then production. So, we don’t have to guess what the future’s going to look like because we’re already working on it. And I think you’ll see us in aftermarket expand our services, the FAA, ATA chapters, Triumph will continue to be supplier as we do today, thrust reverser overhaul and engine accessories, but we’ll branch into other products. And the investments we’re making in partnerships will make us a more global company in five years, especially in Asia and the Middle East. So, think of Triumph as a company that even as a stronger portfolio than we had in 2010 when Triumph went down the path of structures.

We’re going to have a mix of business that’s comparable to the Moogs, the Parkers, the Eatons, with a much bigger footprint in terms of global markets.

Ron Epstein: And then how much of the mix do you think will be defense, right? I mean, what’s your goal for that between defense and commercial? Like ultimately?

Dan Crowley: So, when we started, we were 80/20 commercial defense and we’re now 37%. And we’re getting to the point where there’s enough balance and diversity in our mix of business that we can be more selective on what we pursue based on its contribution to cashflow generation and debt reduction. So, we have plenty of both now, and it’s a good position to be in because as mentioned, the budgets are strong on the defense side. So, ultimately, we may level out at 40% to 45% defense, but that number is less important than the contribution of the individual programs to our financial goals. Everybody on the management team is focused on debt reduction and free cashflow generation, and you’re already seeing topline is now starting to grow in the core, and earnings are coming up. Now, the focus is on cash.

Ron Epstein: Got it. And then if I may, just one quick follow-on. In the current market, and I’m certain you guys are seeing this, there’s virtually no usable spare part. I mean, USM parts out there, there’s nothing out there. There’s been a bigger push in the PMA because of airlines just looking for parts. Is there anything medium term you guys can do to kind of grow the spares business?

Dan Crowley: In our OEM businesses, we’ve got depots that are embedded in the production plants. And so, recapturing our aftermarket tail is definitely a priority. Whether it’s hydraulic fuses or all the consumable holdback bars for the military, every time an FAA team goes off the deck, it’s Triumph holdback bar. So, we’ve got factories that are really focused on extending the aftermarket sale for the OEM products that we have. I understand your point on used serviceable materials. For us, it’s the regional expansion and aftermarket, so Asia, middle East, potentially Latin America. These are markets that we don’t really play in to a great extent. So, we’ll see volume growth through regional expansion.

Ron Epstein: Got you. Thank you very much.

Operator: And our next question will come from Michael Ciarmoli with Truist. Please go ahead with your question.

Michael Ciarmoli: Hey good morning, guys. Thanks for taking the questions and congrats on getting to the free cashflow here. Maybe, Dan, just to stay on that topic, I think it’s been kind of six years or kind of Ron’s original question on that topic, six years since you’ve been here. You’ve got the renamed interior structure. I mean, is there any more portfolio shaping left? I mean, do you have the core businesses now? And I guess specifically, do you think interiors has a long life in that five to 10-year look for Triumph?

Dan Crowley: Yes, thanks, Michael. First, remember that the structures business is less than 10% of our sales, and metallic structures now is out of the portfolio entirely. So, what’s left is interiors. And remember, we posted these numbers for Q4 and fiscal ‘23 with our interiors business being largely breakeven. So, we’ve got a lot of upside here. That business was a 20% business in the past. We expect the volume to double over our planning horizon, and it’s a really good plant. We’ve consolidated all the work down into two factories in Mexico. It’s very cost competitive, very lean. So, we’re bullish on interiors and we think it’s going to be a big tailwind to margin expansion and cashflow in the future. And it’s a business that we do well.

We are market leader in that space, whether it’s insulation or cabin floors, ducting, those are all strengths for us. So, we’re excited about it. But overall, the six years we’ve been coming to Triumph, has led to the portfolio we’ve got today. And although we may do some minor product line exits, we have the business we need now to deliver on the restructuring and transformation.

Michael Ciarmoli: Got it. Helpful. And then Jim, just on that, on the free cashflow, ultimately grinding that to mid-single digits and then high single digits, can you give us more color maybe behind the mechanics there? Is it going to be just managing that cap structure and kind of pairing down that interest drag? Is there any more optimization of working capital? And should we even think about, as you guys look at the cap structure and maybe the warrants come to a close here, do you contemplate any sort of equity offerings to sort of manage that interest burden?

Jim McCabe: So, thanks. I think it’s important to note that I’m not relying on capital structure improvements for the cashflow. This is really operating cashflow coming from volume increases, from demand in OEM aftermarket. And as we’re growing the install base, we’re going to have a bigger percentage of aftermarket moving forward. But we’re pretty conservative in our capital structure assumption. So that’s only upside for us if we can find ways to optimize that, which we will work on. But we’re not counting on that for our cashflow guidance. In terms of working capital, last year we used I think $32 million roughly of working capital, and we’re going to generate in the single digits of working capital in $24 is our plan. And that’s because of stabilization of supply chain and really our own internal efficiencies as well.

So, that’s going to contribute, but it’ll be a modest contributor because of course, even though we’re generating a little bit of cash by reducing working capital, we still are supporting growth with the remaining inventory and working capital. So, it’s operationally-driven, not capital-driven.

Michael Ciarmoli: Got it. Perfect. Thanks, guys. I’ll jump back in the queue.

Operator: And our next question will come from Jack Ayers with TD Cowen. Please go ahead with your question.

Jack Ayers: Hi, thanks. Good morning. This is Jack on for Cai today. Congrats on the quarter. So, yes, so I wanted to just start on Q4, obviously really, really strong improvement, with margins growing sequentially. And I just wanted to just make sure we’re calibrated here. I know you called out that IP transaction on the commercial OEM side. I’m not sure if that was from a previous quarter. Just any color there, and just the associated earnings of that would be really helpful. Thanks.

Jim McCabe: Yes, thanks, Jack. That was a couple of quarters ago. It was in Q2 that that transaction happened. Fourth quarter was very clean, no material one-timers.

Jack Ayers: Okay, got it. That makes sense. And then lastly, I just kind of wanted to ask about military and new programs you’re watching here as we look out over the next few years. And I know Boeing called out the T-7 sort of delays here for a couple of years, and I know you guys have pretty good content there. I just want to hear your perspective on that issue, and then just any broad color on new programs in military. Thanks.

Dan Crowley: You bet. So, we’re focused on the mature programs that are in production now, like F-35. And we’ve been approached by Lockheed Martin to develop content that would upgrade the aircraft in areas like cooling, heat rejection, actuation. So, that’s our first place to start. Then we’re on the emerging programs like MQ-25. We do have a small content on T-7A. It used to be bigger when we had the structures, but we exited that. So, T-7A is not a big driver. But on the sixth gen fighters that are now getting funded, we’ve got content across the different OEMs. And I mentioned GE’s new military engine, the LM 25 NX, which has a lot of advantages and the benefits of two engine competitions are pretty well understood. So, we’re excited.

I’d say, rotorcraft is a very strong area for Triumph. So, as CH-53K gets their L rep awards, we go up in volume. We have significant ships set content on that platform, and then they’re working on the Army’s future gen – future vertical lift platforms. We’re on both of those teams for (FARR) and FLRAA. And it’s a time when our customers are also doing tech refresh to their existing fleet. So, think Apache. We do a lot of heat exchanger work for the Apache. We do gear boxes for that as well. And even though the Army’s starting modernization, they’re going to operate their legacy fleet for a long time. And so, they’re putting fixes in the components that we do, especially at our engine control business, to refresh them and increase their reliability.

So, for us, military, it’s a broad diverse set of platforms. One area that we’ve had more inquiries of late is in classified programs, and whether it’s Northrop Grumman or Lockheed Martin, we’ve had more inbounds on that. So, we’ve been working with Lockheed on the digital thread capability, which they’d like to have all their suppliers put in place to provide improved data sharing, whether it’s engineering or manufacturing data, and we’re collaborating with them on supply chain as well. So, I feel like the defense business gives us all sorts of ancillary benefits. The cash terms are good. The customer funds a lot of the R&D, and they’re pulling us in in the early phases. So, I’m happy to have expanded our defense work and it’s going to benefit us going forward.

Jack Ayers: That’s great. Thanks, guys.

Operator: Thank you. Our next question will be a follow up from Myles Walton with Wolfe. Please go ahead with your question.

Myles Walton: Thanks for letting me back in. I did have just one quick one I forgot to ask. I realize you had sold the 767 facility to Daher in the middle of last year, but I’m curious, is there any liability you all have to carry for the Boeing quality issues that were discovered in the 767 fuel tank? I don’t know if there’s anything that predated the sale that might be a liability you’re carrying today.

Dan Crowley: No, not at this time. Recall, we sold this business in July of last year. And at that time, we had Boeing consent, and there was no material issues that were outstanding, material manufacturing issues related to any of the programs there. And we continue to support Boeing, both defense and commercial across the board. You know we’ve done 15 divestitures. We’ve not had reach back from prior asset sales, and we’re committed to quality. I’m very proud of the performance that I mentioned in my comments about cost of poor quality. So, we’ll support any inquiries that we’ve received in the future, and we’ll update investors as appropriate. But right now, it’s not a concern.

Myles Walton: Okay, perfect. Thanks.

Operator: And our next question will come from Noah Poponak with Goldman Sachs. Please go ahead with your question.

Noah Poponak: Hey, good morning, everyone. I wanted to talk about or ask about Slide 6 where you’ve laid out the OEM rates. You’ve had a slide like this for a little while now that maybe like a little bit more optimistic than some of the others in the space. I guess there’s been a lot of short-term noise and movement, but maybe the ‘24 and the ‘25 that you’ve had all along, we’re getting closer to. So, I don’t know. I was just curious to hear your level of confidence in these. Is there one or two that look a little bit more of a long putt to you than the others? I guess, specifically the MAX maybe has the most questions right now with the fittings issue. How confident are you in that 38 and 42? And then overall, Dan, I think you said it, I think you quoted an eight-to-10-month lead time. And so, the right side of this chart is about eight to 10 months from now. Are you at most of these rates now?

Dan Crowley: So it varies by factory, but yes, we’re seeing pickups in our feeder plants to support it. And it’s not just on airframe components. It’s also on engines. After the quarter closed, we received the largest contract that has been awarded to Triumph on my watch over eight years for GE LEAP engine gear boxes. And we’ll put out a press release on that tomorrow. But that’s a signal of GE’s confidence in demand for LEAP engines for both the maxxed and for the A-320 family. And if you recall, in the middle of fiscal ‘23, there was a bit of a slowdown as GE allowed the supply chain to catch up. And we finished Q4 with a very high volume of output because demand is coming back. So, there’s leading indicators, not only with Triumph as a sub-tier supplier, but also the engine providers that the rates are coming up.

And I’ve been watching this space a long time. I remember touring Boeing’s plant when the 777 was initially rolled out, the first all-digital aircraft. I’ve been through their plants when they did the 787, which really broke the mold on composites and new supply chain approaches. And then the MAX line I’ve been down many times, which is very automotive in its style. So, they have the capacity to ramp up the line. Yes, part constraints are real. Boeing is putting tremendous amount of people out in the field to expedite any shortages, and capacity that was under-invested in during the pandemic is starting to ramp up. So, I have confidence in the rates. There seems to be no shortage of end market demand. You’ve read about the orders for these.

So, the backlog is growing. And the step-ups on 787 from rate four to rate five, we were at 14 on that before. And the demand for that platform is very high. If we can get that back to 10, as Boeing has advertised by 2025, 2026, that’s a huge tailwind for Triumph because we have a lot of content on the 787. So, I agree, it can’t happen soon enough, but these sort of rates are achievable and we believe will happen in the next two years. So, as we lay out our multi-year forecast, which is key to hitting – getting back to like $2 billion in revenue and generating the kind of cash conversion that you all expect, these rates make that possible.

Noah Poponak: Okay. Can you estimate – I know you explained it’s different by facility, but can you estimate the enterprise-wide maxxed rate that you are sending out of the company at this moment?

Dan Crowley: So, why don’t we take that as an action? We can address it offline. I don’t want to do it from the hip, but we know it by plant. And because as I mentioned, six of the 24 plants support the MAX. We have interiors content, actuation content, controls. So, and then engine gear boxes through GE LEAP CFM. So, it’s a broad array of plants, and I’d rather get it right and do it. But I can tell you, it’s coming up. We’ve made significant CapEx investment in our gear manufacturing business to support the ramp. And that was key to winning this GE LEAP follow-on contract, is it helped us support the volume and maintain pricing. So, it’s a coming attraction for sure.

Noah Poponak: Okay. And so, then to follow on all that in your bridge on Slide 14, and kind of to Sheila’s point about asking for the Excel, that net OEM volume sliver looks pretty small relative to Slide 6. Why is that? And could you also just say what that number is and that blue sliver there in millions of dollars?

Jim McCabe: Thanks. So, it’s Jim. I don’t have that sliver quantified in front of me, but it is smaller than the aftermarket volume. And in fact, remember, OEM sales are not as profitable as aftermarket sales. So, in terms of generating profit and free cashflow, the aftermarket are actually more important. The OEM volume has a lot of different programs. I think the best way to see what might be in there would be to look at our Slide 18, which is the top programs and backlog. And you’ll see a mix of military and commercial. Now, you’ll see the 37, which is 15% of our two-year firm backlog. It’s actually more like 10% or 11% of our total sales because all of our sales aren’t backlogged. There’s a lot of book and ship. Diversity of the mix here is why the exact rates of any one program can be mitigated by rate changes in the other direction or another program. So, it is a balanced growth with aftermarket leading it, and right behind it is the OEM lines.

Dan Crowley: And no, you can appreciate, we’re trying to be conservative here and not get ahead of the OEM rates or assume faster recovery than what they’ve advertised. So, our guidance is consistent with that mindset.

Noah Poponak: Okay. All right. Thanks so much.

Operator: And our last question will be a follow-up from Michael Ciarmoli with Truist. Please go ahead with your question.

Michael Ciarmoli: Hey, guys, thanks for taking the follow-up. I guess just to, I was going to hone in on where Noah was going there, but specifically on the A-320 rate in regards to what Airbus has said, I know they’re dealing with some supply chain issues, but they’re still targeting that kind of 60, 65 by the end of ‘24 and 75. So, how do we think about that rate 49 with that eight-to-10-month lead time?

Dan Crowley: So, I’m going to refer you to Airbus because I don’t want to speak for them, but if you saw their month-over-month deliveries, they came up very quickly in the month ending March. And so, yes, they are also working supply chain issues, but you have to look at very timely data in order to project the future revenues, the future build rates from there.

Michael Ciarmoli: Okay, fair enough. Thanks, guys.

Operator: And this concludes our question-and-answer session, and also concludes today’s conference call. We would like to thank you for attending and participating in today’s presentation. You may now disconnect.