Triumph Group, Inc.’s (TGI) CEO Daniel Crowley on Q4 2022 Results – Earnings Call Transcript

Triumph Group Inc. (NYSE:TGI) Q4 2022 Earnings Conference Call May 18, 2022 8:30 AM ET

Company Participants

Daniel Crowley – President and Chief Executive Officer

Jim McCabe – Senior Vice President and Chief Financial Officer

Tom Quigley – Vice President, Investor Relations and Controller

Conference Call Participants

Peter Arment – Baird

Myles Walton – UBS

Seth Seifman – JP Morgan

Sheila Kahyaoglu – Jefferies

Michael Ciarmoli – Truist Securities

Cai von Rumohr – Cowen

Andre Madrid – Bank of America

Noah Poponak – Goldman Sachs

Operator

Welcome to Triumph’s Fourth Quarter and Fiscal Year 2022 Results Conference Call. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast. Please ensure that your pop-up blocker is disabled if you’re having trouble viewing this slide presentation.

All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

In addition, please note that this call is the property of Triumph Group Incorporated and may not be recorded, transcribed or rebroadcast without explicit written approval.

I would now like to introduce Tom Quigley, Triumph’s Vice President of Investor Relations and Controller, who will provide a brief opening statement.

Tom Quigley

Thank you. Good morning and welcome to our fourth quarter and fiscal 2022 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. During our call, we’ll be referring to the supplemental slides which are posted on our website.

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. Please note that Triumph’s reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release which can be found on our website at www.triumphgroup.com.

The format of the call today will be slightly different. Dan will open with color on the quarter and operating environment, then Jim will walk through the results for the quarter and year. Dan will then discuss actions we are taking to support revenue growth and deliver improved margin performance, with Jim returning to provide our outlook before opening up to Q&A.

Dan, I’ll turn it over to you.

Daniel Crowley

Thanks, Tom. For the fourth quarter, Triumph delivered on our strategic commitments and generated positive free cash flow and strong margins for the second consecutive quarter in our core systems and support segment, and we did so in a challenging macro environment while positioning for increasing demand.

Growth in our MRO and freighter end markets helped to offset headwinds from Omicron and 787, along with timing delays in a small number of military and legacy structures programs, that are expected to fully recover in early fiscal 2023. We have better clarity on near-term and multi-year OEM and MRO demand than we’ve had in the past two years and we like what we see. All markets beyond wide body commercial continue to improve and Triumph is positioned to realize the benefits of our diversification strategy.

We are able to provide guidance for fiscal ’23 that reflects increasing core revenue and improving profitability and cash flow. We will also provide color on our multi-year outlook that gives us confidence in a sustained aviation recovery. Triumph expands our profitability and cash flow year-over-year. We are maintaining our goal to double profitability over fiscal years 2022 to 2025, driven by improved OEM production rates, expanded MRO volumes, enhanced pricing from recent contract extensions, and lower cost structure as a result of our transformation.

As we stabilize operations and our balance sheet, our focus is pivoting to growth. In the fiscal year, we secured over $2.2 billion in new orders across the company, which reinforces that our backlog has begun to grow. On Slide 3, I summarize the quarter’s highlights.

First, we generated free cash flow of $29 million, driven by our improving operations and reduced working capital. A more favorable sales mix yielded a 19% EBITDAP margin in our systems and support segment as the benefits of cost reductions and lean events flow to the bottom line. Like many of our peers, our organic sales declined slightly due to short-term order deferrals on commercial wide body and a few supply chain-driven shipment delays, though partially offset by strong increases in MRO orders. We expect this temporary flat spot in the recovery to abate early in our fiscal 2023. That said, our actions to mitigate supply chain constraints lessened the impact on Triumph as we partnered with our customers and suppliers to ensure supply continuity and affordability.

Despite the mentioned headwinds, sales in our Q4 in our OEM and MRO end markets are up 18% and 21% sequentially as compared to Q3. MRO part number inductions, a key measure of total volume coming into our shops is up 34% quarter-over-quarter and 16% sequentially. Increased flight activity, especially at North America, is benefiting Triumph’s commercial airline sales to operators, which are up 57% sequentially and 66% year-over-year. In our freighter segment, sales are up 60% sequentially and 9% year-over-year.

Slide 4 depicts OEM and MRO sequential sales for both commercial and military segments. Notably, commercial OEM sales are stable with increasing MRO sales, driven by commercial transport and cargo, while military OEM sales are up on the strength of V-22 and CH-53K shipments, with similar increases in overall work on the C-17 and FA-18 aircraft.

Expanding on the health of our supply chain, a vast majority of our 3,000 suppliers came through the pandemic and are now preparing for increased levels of production. While ongoing inflationary pressures impact fuel, freight, metallic products, and labor for both Triumph and our suppliers, whose purchased materials make two-thirds of our cost of sales, we are focused on solutions, not excuses.

We commenced senior level discussions with our top 10 customers last year to get ahead of these challenges and held a supplier conference with over 240 suppliers in our Q4. Active communication, advanced forecasting, AI-based risk management, innovative staffing approaches, along with dual sourcing and disciplined price management, will help us manage the current inflationary environment and coming ramp-up.

The war in Ukraine commenced during the quarter. Triumph suspended the small amount of business we do in Russia and Belarus, which totals less than one-half of a percent in total sales. While the direct financial impact is not material to Triumph, we are closely monitoring the broader impacts across the global economy. The impacts of China lockdowns have been similarly small on Triumph revenue.

We are through the transitionary year that was fiscal 2022 and looking forward to a sustained recovery and the payoff for our transformation efforts. Before I share the actions Triumph is taking to drive revenue growth and improve margins over fiscal ’23 to ’25, let me turn the call over to Jim to cover our fourth quarter and fiscal year in more detail.

Jim?

Jim McCabe

Thanks, Dan, and good morning, everyone. As I review the financial results for the quarter and fiscal year, please refer to the presentation posted with our earnings release today. I will discuss Triumph’s adjusted results, so please see our earnings press release and the supplemental slides in the presentation for an explanation of our adjustments. Triumph was cash positive again this quarter.

On Slide 5 are our consolidated results for the quarter. Revenue of $387 million reflects increased revenue from narrow body and business jet platforms offset by short-term headwinds on 787 and delivery timing on a military program in our geared solutions business. Our revenue continues to shift towards our core with systems and support revenue now making up 74% of total revenue in the quarter, up 10 percentage points from 64% a year ago.

Adjusted operating income of $43 million represents an 11% operating margin, up from 7% a year ago. Systems and support generated substantially all the operating income this quarter. Our adjustments this quarter include a $4 million gain on the sale of asset as we settled working capital adjustments on prior divestitures, $5 million of restructuring costs from previously announced facility closures, and reductions in SG&A and overhead. Separately, we annuitized some of the smaller pension liabilities to reduce costs, resulting in a $32 million non-cash pension charge in the quarter.

Turning to Slide 6, you’ll find our fiscal ’22 results. As expected, our net sales declined with planned divestiture and sunsetting programs while our mix of sales included sizeable MRO growth. Our full year adjusted operating income was $135 million, representing adjusted operating margin of 9%, up 349 basis points over the prior year.

Turning to Slide 7, you’ll see our systems and support results and highlights. Revenue in the quarter included higher narrow body and biz jet systems content. Systems and support operating income was $49 million or 17% for the quarter, which is a 408 basis point increase over last year. Systems and support EBITDAP was $55 million or 19%, a 420 basis point increase over last year, another step towards our goal of doubling EBITDAP over the next three years.

Commercial MRO sales were a significant source of growth, up 17% in the quarter and 14% for the year. This sales strength along with the benefits of the Aviation Manufacturers Job Protection program enhanced our margins while ensuring Triumph retains critical talent to support the expected OEM production ramp later in the calendar year.

On Slide 8 you’ll find the results of our structures segment. Structures revenue of $100 million was up 3% organically over last year excluding divestitures and sunsetting programs. 737 production rate increases and interiors contributed to the organic growth. Structures now contributes 26% of total revenue as we continue to see the revenue mix shift towards systems and support. The sale of our Stuart structures facility is expected to close in the first half of this calendar year. Required government and customer approvals are completing on plan. This divestiture marks the comprehensive exit of our build-to-print and contract manufacturing businesses, leaving only close-out of residual 747 structures deliveries from inventory and divested site transitions in FY23. Following the divestiture, systems and support is expected to approach 85% of consolidated sales while interiors will grow over time with the projected commercial OEM rate increases.

Slide 9 provides our free cash flow walk for the quarter and year to date. We generated $29 million in free cash flow in the quarter as we continue to reduce non-recurring cash uses. As expected, free cash flow this quarter included $25 million of non-recurring cash drivers comprised of $21 million of advance liquidations and $4 million for previously accrued 747 losses and shutdown costs. Our full year results included a total of $164 million of non-recurring cash uses, as detailed on the slide. These non-recurring impacts are on a steady decline as we achieve predictable financial performance. Excluding these items, we were $7 million cash positive for FY22.

Capital expenditures were $4 million in the quarter and $20 million in the fiscal year with higher capital investments forecasted over our planning horizon as we invest in our systems and support segment.

On Slide 10 is a schedule of our net debt and liquidity. Our efforts to strengthen the balance sheet are paying off. At the end of the quarter, we had about $1.4 billion of net debt, down 2% from a year ago. We also had about $3 million of cash availability, which is more than sufficient for our projected needs. During the fiscal year, we paid down our first lien notes by $137 million from proceeds from divestitures. We also extended the maturity of our AR securitization facility to November of 2024 and increased its capacity from $75 million to $100 million. It serves as a low cost source of contingent liquidity.

Our next debt maturity is over two years from now. We will continue to de-lever by expanding EBITDAP and free cash flow in our continuing businesses. Our target leverage ratio is three to four times adjusted bank EBITDAP.

Now I’ll turn the call back to Dan for more color on end market expectations and our recent wins, all of which were factors in our outlook for fiscal ’23 and beyond.

Daniel Crowley

Thanks Jim.

Building on our incremental operational and financial progress year over year, I’ll recap our recent wins and share how we are positioning Triumph in the macro environment for fiscal ’23 and beyond.

Triumph continues to win in a competitive marketplace on the strength of our platform incumbency, innovative engineering and IP. As noted, we won more than $2.2 billion of new orders in fiscal ’22, the highest in the last six years.

Turning to Slides 11 and 12, wins for the quarter are diverse, spanning OEM and MRO markets and comprised of military and commercial awards over helicopters, fighters, eVTOL aircraft, passenger to freighter cargo conversions, commercial transport, and business jets. We are finding new applications for our existing IP across a wide variety of products and services and market segments. Recent strategic awards included another win in the growing passenger to freighter conversion market, expanding content with Boeing Global Services, and an agreement with Safran to overhaul actuators on VistaJet business jets.

Recall we set an internal goal to generate sales from new products, platforms and customers by 25% over the next three years, and we are well on our way. Slide 13 references fiscal 2022 full year new business results. Excluding follow-on awards, the value of new orders is up more than 60% from prior year as our efforts to engage new and existing customers with our full portfolio of capabilities gain momentum. Book to bill for fiscal 2022 is 1.16, an organic growth trend we expect to continue over our planning horizon.

Looking at the broader markets on Slide 14, we see strength in the military, freighter, narrow body and MRO demand all at the same time with wide body MRO increases now appearing as fleet retirements slow. Military sales now comprise 35% of Triumph’s revenue, up from 20% five years ago. [Indiscernible] most recent 2023 DoD acquisition budget reflects a top line increase of 3.8% to $813 billion, with Triumph-supported programs benefiting from strong support.

Triumph is well positioned on military platforms across the life cycle. On the front end, Triumph has substantial and growing content on new platforms such as the future vertical lift with Invictus and Raider X, the MQ-25 refueling drone, and the T-7A Redhawk trainer. In mid cycle, we supply critical content on existing production programs such as the CH-53K, F-35, and B-22. We’re engaged in multiple campaigns to supply fuel, thermal and hydraulic components and expect to add more F35 content in the near future. On the tail end of the life cycle, we continue to expand aftermarket offerings across platforms such as the UH-60, the AH-64, the F-15, F-16, C-17, and all versions of the FA-18. Overall, we expect military end markets to grow modestly over the next few years and for Triumph’s military sales to keep pace or exceed this growth rate.

On the commercial front, recent global flight activity increased to 68% of 2019 levels despite very low levels of flight activity in China and Russia. U.S. flight activity is at 84% of 2019 levels followed by 75% recovery in Europe, 71% in the Middle East and Africa, and 66% in Asia Pacific. Of note, transatlantic flights between the U.S. and EU are up 37% over the last month to 80% of 2019 levels, indicating a strong upswing in international travel. This increased flight activity benefits Triumph in two ways: first, through increased commercial MRO volumes, and second, the new OEM aircraft order activity is gaining momentum and will drive single aisle rate increases. Airbus’ recent Qantas order is a good example as it included single aisle orders for the A-220 and the A-320 in addition to A-350 twin aisle orders.

Slide 15 shows anticipated rate increases for key commercial programs indexed to fiscal 2019 production rates and the incremental revenue contribution over our planning horizon. 737 MAX rates have started to rebound. While 787 production remains at low rates, Boeing increases anticipates increases later this fiscal year. 737 MAX, 787, A-320 family and the A-350 are some of Triumph’s largest programs and collectively are expected to increase Triumph sales by over $300 million from fiscal ’22 to fiscal ’25.

We’re excited about the freighter conversion markets as well. Freighter conversion orders are projected to double from COVID’s consumption of passenger jet belly capacity and the increase in ecommerce. Triumph is well positioned to capitalize on this demand with hydraulic power packs and actuation to drive cargo doors, and cabin acoustic insulation inducting modifications which are required in the conversion effort. Over the last few quarters, we won conversion content on the Sine Draco and Mammoth programs and expect others to follow.

Last, collaborations such as our joint venture with Air France KLM, called xCelle Americas, and Honeywell channel partnership will generate MRO opportunities on growing commercial platforms earlier in their life cycle than our competitors. We plan to expand these partnerships throughout key markets including the Americas, Europe, Asia Pacific, and the Middle East, where Triumph will be represented at next week’s Global Aerospace Summit in the UAE.

Before Jim presents our guidance, I want to talk about the company, Triumph and our brand. Shown on Slide 16, we started fiscal 2023 by launching a new brand identity for the company that reflects our significant transformation. Triumph has transformed from a decentralized holding company to a pure play provider of high performance systems and value-added aftermarket services. For this reason, we removed the word, Group from our brand name as we now embrace a one company, many solutions operating philosophy. Triumph’s new logo features a sleek, modernized version of our company’s class T symbol, a nod to Triumph’s progress and forward velocity.

Operationally, we removed a layer of overhead to better serve the needs of our broad customer base, and while we continue to report in two segments, we are now organized around our core operating companies which places our P&L leaders closer to the customer and senior management and improves internal alignment.

As we move forward, Triumph is powered by diversity, where our competitive strength comes from a complementary blend of people, products, platforms, and end markets. This broader take on diversity helps Triumph to be more resilient and to perform at higher levels so that we can remain differentiated in the market and deliver enhanced shareholder value year over year.

With our recent wins, market trends, and company re-launch as a backdrop, Jim will now walk you through the details of our fiscal ’23 guidance.

Jim McCabe

Thanks Dan. To set the stage for where Triumph is going, let’s reflect on how far we’ve come.

Slide 17 demonstrates that over the past five years by design, Triumph shrunk to its profitable core, overcoming the pandemic and improving financial performance. Over the same period, Triumph’s EBITDAP margin percentage has more than doubled as we pivoted to more IP-based content with a stronger mix of military and commercial sales while driving out cost to match a smaller but healthier business base. Free cash improved also as the proceeds from recent divestitures allowed us to reduce debt and leverage while the remaining portfolio continues to improve its cash conversion. This all results in a more predictable financial future.

Turning to the future on Slide 18, specifically within our systems and support segment, the approximately $1 billion in FY22 sales was split 57% OEM production and 43% aftermarket, and military sales comprised 50% of segment sales. As noted, short term growth in this segment is expected to be driven by ramping OEM production rates. As a result, we expect growth in this market to be between 18% and 22% in FY23. Two-thirds of systems and supports FY22 profitability came from aftermarket. We expect growing MRO sales to yield segment EBITDAP margins just over 20% for the year.

As we look beyond FY23 to FY25, we expect revenues will exceed FY20 levels with segment margins expanded into the low to mid 20% range. Systems and support provides a strong foundation for solid organic growth which should continue to yield improving margins and cash flow year over year.

Turning to Slide 19 for our full year guidance, based on anticipated aircraft production rates and assuming a Q1 closure on the pending Stuart facility sale, we expect FY23 revenue of $1.2 billion to $1.3 billion which assumes organic growth of our core business of 8% to 12%. We forecast EPS of $0.40 to $0.60 per diluted share. Our earnings expectations take into account certain supply chain and inflationary pressures and updated actuarial assumptions under our pension plan, as noted in the appendix.

Cash taxes net of refunds received are expected to be approximately $7 million for FY23, while interest expense is expected to be $129 million, including $123 million of cash interest. For the full year, excluding the impacts of the actions in structures, we expect to generate $30 million to $45 million of cash from operations with approximately $30 million in capital expenditures, resulting in core free cash flow of about breakeven to $15 million in fiscal ’23. Our structures actions include the liquidation of advances and the remaining closure and/or sale of facilities and programs. As of March 31, we have $104 million remaining in advances and the timing and nature of these liquidations is still to be determined. The closure and/or sale of legacy facilities and programs are expected to use between $70 million to $75 million of cash in fiscal ’23, with $30 million anticipated to be in Q1.

As with our results over FY18 to FY22, our goal of doubling our continued FY22 EBITDAP by FY25 remains our focus and is expected to be achieved primarily through commercial OEM production rate increases, MRO expansion, contractual pricing improvements, and increased efficiencies from prior cost reduction actions. In addition, over our four year planning horizon, we are targeting a consolidated EBITDAP margin of approximately 20% along with a free cash flow conversion of over 10% of sales. We look forward to reporting on our progress on each of these initiatives quarterly as we approach fiscal ’25.

Now I’ll turn the call back to Dan. Dan?

Daniel Crowley

In summary, I’m pleased with our year-over-year improvement providing us with solid momentum as we enter fiscal 2023, and I’m further encouraged by the near term market recovery. In a challenging macro environment punctuated by supply chain constraints, rising fuel costs and labor shortages, Triumph achieved two consecutive quarters of positive free cash flow and strong margins in our core systems and support business.

Short term order deferrals and delivery timing issues are expected to abate in our fiscal ’23 and are being offset by our new contract wins. Our actions this quarter combined with OEM and MRO rate increases will support our expanded margins and improve cash flow, putting us on a solid path to deliver growth while de-leveraging the company year-over-year.

Pivoting to growth, having exited build-to-print structures and winning new business are at the core of our path to value. Powered by diversity, our company is poised to expand top and bottom lines year-over-year. I look forward to reporting on our progress as we continue the efforts to further unlock the hidden value across our business and to deliver value for the benefit of all of our stakeholders.

We’re happy now to take any questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Our first question comes from Peter Arment from Baird. Please go ahead.

Peter Arment

Hi, good morning, Jim and Dan. Jim, could you maybe give us a little more color on working capital, just sort of how that trends as the transformation continues with the company? How should we -it’s obviously – it seems like it’s a headwind this year, but does it start to become at some point either neutral or a tailwind as the business takes on more volume and you start to see kind of an overall different mix?

Jim McCabe

Yes, thanks Peter. Working capital has been high because of the structures business in the past, so as we exit structures, it naturally is coming down. So it has also been because of advance liquidations, which are ending. So the non-recurring cash uses that were previously accrued, like 747 and liquidation of advances, with them in the past we’re going to see improving working capital. And the business that remains is less working capital intense, and our goal has been to fund with working capital efficiency improvements in the core business the growth that we expect in the coming years. So I think you’re going to start to see working capital being neutral and then be a tailwind for us moving forward.

Peter Arment

That’s helpful. And then just as a follow-up, just as a clarification, on the liquidation of the advances, is that — you said you have not decided what you’re doing with the proceeds of the Stuart sale?

Jim McCabe

So for our outlook, we’ve assumed that those are settled in the transaction, so we’re not including advanced liquidations in outlook. In the quarter we just reported, there was $21 million of advanced liquidations.

Peter Arment

Appreciate the detail. Thanks, Jim.

Jim McCabe

Thank you.

Operator

The next question comes from Myles Walton from UBS. Please go ahead.

Myles Walton

Thanks. Good morning. Jim, maybe to go back to the cash flow for just a second, your 10% conversion target versus what’s implied, I guess, in fiscal ’23 is pretty neutral conversion. Two questions. One, why is there not more year-on-year improvement in cash flow? I think you said the core cash flow last year was $7 million, that’s pretty much what you’re guiding for this year. And then conversely, why is the conversion go from basically 0% to 10% in the next couple?

Jim McCabe

Yes, thanks Myles. So there’s a lot of moving parts in the last year. In fact, we did divest some businesses. Remember, we had some cash generation from businesses like Red Oak, Milledgeville, Thailand, Staverton, all of which were divested out of last year. And then the assumption that Stuart won’t be there either moving forward is part of the mix of year-over-year change in cash flow. But the remaining core business is cash flow positive. And as we reduce overheads and non-recurring cash uses, we’re going to rapidly recover to that 10-plus number of cash conversion that we’re targeting at the end of our four-year planning period. Working capital is an element of that, but I think the change in our portfolio is a bigger driver.

I hope that’s helpful to answer your question.

Myles Walton

Yes, it’s helpful. I just want to clarify, the four-year planning, does that line up with fiscal ’25 or are we talking about a different four-year cycle?

Jim McCabe

That’s ‘26. So what we said is we’re going to double our continuing EBITDAP, and just to give you some numbers on that. Our EBITDAP last year was about $169 million, I think you’ll see in the press release. If you exclude the Stuart piece of that and some of the other divested businesses, it’s more the $150 million to $155 million range, so that’s what we’re looking to double by FY ‘25. So you’re talking $300 million, $310 million in the three-year period.

Our planning horizon goes out to FY ’26. So when I was referring to our 20%-plus on consolidated EBITDAP margin and 10% or more of cash conversion on sales, that’s in FY ‘26.

Myles Walton

Okay, got it. And then just a clarification, the sale divestiture proceeds, are you at a point where you can size those for us, either net of the advances that would go with it or gross? Just any color, given you’re pretty much there?

Jim McCabe

Not yet. When we close, we’ll disclose what’s necessary on the transaction, but we’re just not there yet with the exact details.

Myles Walton

Okay, thanks.

Operator

The next question comes from Seth Seifman from JP Morgan. Please go ahead.

Seth Seifman

Thanks very much. You guys mentioned a little earlier the expectation to continue reporting in two segments. Just kind of curious if you’ve considered kind of giving a different look at the business and kind of why, given that so much of it has gone, what’s the importance of having the core structures piece as a separate segment going forward?

Jim McCabe

Yes, sure. Hey Seth, this is Jim. I think what we’re trying to do, we took feedback from investors and analysts, they want to see more market information and they want to see continuity in existing segments, so that was the majority of the feedback. So that’s what we’re planning to do, is not change segments, but to give more market detail within the segments that’s more meaningful. So that would mean commercial, military and non-aviation, and then aftermarket and OEM, so look forward to that in the coming quarters.

Seth Seifman

Okay. And then I guess in terms of what you’re thinking about for 787 in the upcoming year and how sensitive your outlook is to that, is that kind of the delta in the 8% to 12% organic guidance, or what are you kind of baking in for 787 recovery?

Daniel Crowley

This is Dan, I’ll jump in. So, we used to produce 14 a month of the 787, then it trailed off to 10 and then 8, 6, 4, and we’re running at about 2.5 a month right now. I’m confident that Boeing is going to achieve their certification and return to higher rates. We believe it’s going to happen in the latter part of the summer, so we’re stepping that back up. It won’t go all the way back up to 14. But as you look at this over the planning horizon, we see a path to getting back to the eight chipsets a month sort of rate, maybe even 10 a month by fiscal ’24.

So it’s one of many important programs to Triumph. It did contribute some softness in our second half of last year, but we de-rated the build rate now to make sure we keep our working capital matching the rate that Boeing needs, and we’re looking forward to the recovery in the years ahead.

Seth Seifman

Great. Thank you very much.

Daniel Crowley

Thank you.

Operator

[Operator Instructions] Our next question comes from Sheila Kahyaoglu from Jefferies. Please go ahead.

Sheila Kahyaoglu

Hey, good morning, guys. Thank you for the time.

I wanted to talk about Slide 14 a little bit. So thank you for putting that out there as the business has sort of changed form. How do you think about the growth rate for Triumph’s business? I know those are market growth rates for commercial and military, and how – what we could think about your planning assumptions for — you just touched upon 787 and maybe even MAX.

Daniel Crowley

Yes, can do Sheila, thanks. We put this chart in – it’s one similar to what we provided to our Board of Directors to show what underlies our multi-year outlook, whether it’s commercial narrow body, wide body, military, and although it’s not shown on the chart, the freighter market as well. And so our growth rate is a composite of these four segments. Narrow body looks very good. And despite some of the certification challenges on certain variants of MAX, Boeing is ordering at rates above 30, and we see that rate going up into the mid-40s over our planning horizon.

Same thing with Airbus – you look at Airbus’ build rates in the 40s, headed into mid-60s, and the message we get from these supply chain calls is get ready, what are you doing on labor, are you putting capacity in place with your lower tier suppliers, so we think single aisle is solid and even if they only achieve 90% of their outlook, it’s still a robust recovery.

Twin aisle, it’s–the reason we show a high CAGR is it’s starting from a low build rate today, so over the planning horizon it’s like our interiors business – it was way down because of the MAX, but it’s one of the fastest growing operating companies we have because of rate recovery. You can see we are counting on 787 coming back and 777, we have a big role in the legacy 777, so even if the 777X is pushed to the right, we expect demand for 777 to continue, and then there will be additional freighter demands as well.

Military, we show that more flattish but it’s at a high level, and what’s encouraging is we have a lot of chipset content with Sikorsky on the CH-53, so that program as it goes through its low rate production will benefit us. F-35, although the rate may not be going up a lot, we’re introducing our workshare content on that, so we’ll see revenue growth from there. A few legacy programs will come down – B-22, but we see strength in the fighter segments, so–and then probably the most encouraging sign in the short term is the MRO recovery. Although the overall market CAGR is 3% to 5%, we’re seeing this big rate in inductions – you know, month over month, 7%, 8% a month growth, so the quarter was up, I think, 35% in inductions, so it’s really an encouraging trend and because they’re not retiring the wide bodies any further, those as they up their flight volume, we’re seeing both nacelle and engine accessory induction. I’d say our growth rate is high single digits to maybe low double digits across this composite of the market.

Sheila Kahyaoglu

Okay, and maybe just a follow-up to that, on Slide 13 you have a list of new business wins that you’ve had over the past year. How do we think about those incremental opportunities or what to watch out for? It seems like it’s mostly on the defense side for now. What should we look out for, basically?

Daniel Crowley

Yes, we feel good about our defense strategy we’ve put in place a few years ago, and what’s encouraging about this chart is the amount of IP-based wins, whether it’s nose wheel steering or it’s hydraulics or actuation. These are products that we design and build and then many of these products have frequent replacement through the life of the aircraft, so there’s a good MRO tail.

On the commercial side, we expect that to recover as LEAP orders go up. We met with GE last week and they’re very bullish about the outlook for LEAP. We’re seeing this freighter market, as mentioned, freighter conversions, so today we’re seeing more orders in the military but we expect that to pivot back to commercial in time.

Sheila Kahyaoglu

Great, thank you.

Daniel Crowley

Thank you.

Operator

The next question comes from Michael Ciarmoli from Truist Securities. Please go ahead.

Michael Ciarmoli

Hey, good morning guys. Thanks for taking the question.

Maybe Jim, just back to free cash flow, I want to make sure I heard you correctly. Is there $70 million to $75 million of cash used in additional facility closings this year, and if so, can you elaborate on that? It seems to be maybe higher than expected.

Jim McCabe

Yes, there is $70 million to $75 million in our forecast for non-cash–non-core cash uses, and it relates to the structures wind down. Structures is a capital intense business, had a lot of infrastructure. These are the previously accrued expenses related to the close-out of legacy programs, includes things like 747. It would be the case use of programs that are–businesses that are being divested before the divestiture completes. It also includes infrastructure wind up, like IT systems and teams that are supporting and dedicated to that group when we complete the divestiture.

Daniel Crowley

Michael, this is it. This is the last year. These are bounded, it’s deterministic. We know both the scope of those run-outs and the timing.

Jim McCabe

And there’s actually more opportunity to reduce that than there is risk that it will increase, but we had to put the forecast for a baseline.

Michael Ciarmoli

Okay. Is this the first time you’ve disclosed that? I was under the impression, I guess, maybe that we were looking at the end of the 747 and maybe it just seemed a little bit higher.

Jim McCabe

Yes, 47 production ended last year but the wind up goes beyond production. We haven’t given any specifics for the coming year. Some of this is deferred from previous years as things have taken longer, but that is the outlook for this year. It’s reconciled in the schedule in the back of the presentation.

Michael Ciarmoli

Okay, and then last one, if we just look at the implied guidance on–that you’ve got on Slide 17 there, I mean, you’ve got the good growth in systems and support, I think you called that out at 18% to 22%. I can’t really make out what structures is going to be, but it seems to be a pretty small number. I always thought that the interiors was running around $120 million, $130 million, and if that’s growing, what’s the-did we have that wrong, or what’s the level of structures in the interiors business next year?

Jim McCabe

It is growing from that level. It is faster growing, as Dan indicated, because it was relying on narrow bodies, in particular 737, so as that recovers, it will grow, and it’s got new work, new programs like A-220 that it just won. It’s just secured a lot of backlog with a big contract continuing its business from last year.

Daniel Crowley

We did a 10-year [indiscernible] with Boeing for all of their aircraft and we just signed A-220, which is a great aircraft, narrow body aircraft, and we expect volume in that business to effectively double over the planning horizon. It went way down. At the peak, I think we had 2,500 employees that were supporting that business, and with the MAX cut, that went down to less than half of that, and now it’s on a path to recover. We’ll do it more efficiently than we did before. The experience, although difficult, of going through the pandemic, our team down in Mexicali did a great job of right-sizing the plan and driving productivity initiatives, so it will be more profitable year over year.

Michael Ciarmoli

Okay, so is it about a $50 million to $75 million run rate next year, just given the consolidated guide is 1.2 to 1.3 and systems and support is basically going to be 1.2?

Daniel Crowley

Yes, that’s a little bit low. Why don’t we get back to you and give you the firm numbers.

Jim McCabe

On Page 19 is the guidance, Mike, so 1.2 to 1.3 is our consolidated guidance. That includes interiors as well.

Daniel Crowley

Yes, it should be north of 100 on revenue.

Michael Ciarmoli

Okay, right. Yes, I’m just trying to reconcile it with the chart on the prior page, Page 17 that shows GSS and TAS. We can figure it out offline. Thanks guys.

Operator

The next question comes from Cai von Rumohr from Cowen. Please go ahead.

Cai von Rumohr

Yes, thanks so much. I guess your total cash flow guide is minus-35 from ops, the capex, so would be a negative 65. I know that number includes the one-time 75 wind-up. Does it also include the full $104 million for Boeing, or are you assuming that that might be pushed out?

Jim McCabe

The assumption is that that’s resolved in the transaction. It’s not–the 104 liquidation is not included in guidance.

Cai von Rumohr

It’s not included? So basically–just so I understand, it’s taken out in the guidance, so how much cash do you think net of all of this is going to be available to reduce debt? It sounds like not much. It sounds like you’re still negative.

Jim McCabe

Yes, as we mentioned earlier, we’re not giving the exact transaction value, but there will be value in reduction of the advances through the transaction, and that’s going to improve cash flow moving forward. You can see the detail, Cai, on Page 26, the 30 to 40 of use, the 30 to 45 of generation, and then after the 70, so zero to 15. But that’s correct – there’s a substantial portion of proceeds that will be used to satisfy the advances in our assumption.

Cai von Rumohr

So what about–you know, you have substantial debt coming due in the latter part of ’24 and ’25. What’s your thinking once you get through all of this, how you’re going to deal with that?

Jim McCabe

The debt maturities are over two years away. We have good interest rates right now and most of our debt is fixed – in fact, substantially all of it is, so we continue to monitor the markets and as we continue to improve EBITDAP and reduce our leverage, we’ll be in a better position to execute and get better rates on refinancing moving forward, but we have over two years.

Cai von Rumohr

Thank you very much.

Operator

Again, if you have a question, please press star then one.

The next question comes from Ron Epstein from Bank of America. Please go ahead.

Andre Madrid

Hey guys, this is actually Andre Madrid on for Ron. Wanted to go back a bit – I know it’s been touched on slightly, but I kind of wanted to talk just about those projected rates on Slide 14. 777, 787 seem pretty aggressive, and I just want to ask with continued issues at Boeing, with all that going on, what makes the team that you can actually hit these objectives through 2026?

Daniel Crowley

We talk directly to both Airbus and Boeing on a daily basis. We get their latest schedule releases. We also watch the actual orders to see if the forecast matches the near-term orders, and both companies have been meeting their commitments to us on rate step-ups. That’s the first thing.

I think my personal opinion, having talked to Boeing leaders on the 787 is the recent news coverage around 787 certification has been overdone and that they know what they need to do and they’re diligently working through the FAA submittals. It’s a great airplane, there’s over 1,000 out there in service. Passengers love it. It’s got great fuel efficiency. The 787, there’s a place for it in the market, and with time there will be greater demand for it, so we do have confidence in it. I know there’s different views on that, but–.

Boeing is really doing what’s required. They may not be getting credit for it in the coverage, but in dealing with their supply chain, they have honored their commitments on rate step-ups on the MAX and we appreciate that. It’s helped a number of our plants, and we think the same will happen with 787.

Jim McCabe

Dan, also in addition to our commercial rate confidence, our mix of business has changed, so we’re now–one-third of our business is aftermarket. It used to be only a quarter of our business, now it’s up to a third and military is up to 36%, so commercial is still a meaningful part of our business but it’s a smaller piece than it was a couple years ago.

Daniel Crowley

Yes, and on Airbus, you probably saw they opened a third line at Mobile in support of their rate increases, and we get the–we’re on quarterly supply chain calls with them about rate readiness on the upswing, so same story there. They’re really pressing, and there will be some constraints in supply along the way but nothing that I think will impair those rate step-ups.

Andre Madrid

Okay, that’s helpful color. Thank you.

If I can actually follow up, you said on the military side about 36% of the portfolio now. What other opportunities are you guys seeing on new programs and for legacy work as well, and following on that, how do you kind of see the exposure shaping up down the line, maybe five years out?

Daniel Crowley

Well, although I’ve worked in defense for my whole career, I’m not going to handicap five years out. What I can say is that the conflict and the war in Ukraine has triggered the DoD to ensure readiness of all their platforms, and that’s translating into requests for MRO and for spares. Then the new starts, whether it’s future vertical lift or the T-7A or MQ-25, even as they go through development challenges, which are common, the demand for those platforms is high and we see the F-35 continuing to be an area where we can expand workshare, if not rate per month.

We view the defense area as a solid component of our business space, and what I’m encouraged by is, as the OEMs say we either have a reliability issue on a given component or we want more affordability on these certain products, they’re coming to Triumph and they’re competing the incumbents, so even if the rates don’t materially go up, we expect to gain share as well. We’re confident in our ability to sustain and grow our military business over time.

Jim McCabe

And we have an aftermarket component in military too, which gets more valuable when it gets into foreign military sales. We have products in military throughout the life cycle, including the aftermarket, and that makes us more predictable and balanced.

Andre Madrid

All right, awesome. Thank you guys for that.

Operator

The next question comes from Noah Poponak from Goldman Sachs. Please go ahead.

Noah Poponak

Hi, good morning everyone. Dan, on 787, you stated you’re confident Boeing will achieve the certification and return to higher rates, and then you said you think that will happen in the latter part of the summer. Do you think the certification is in the latter part of the summer, or that the move to higher rates is in the latter part of the summer?

Daniel Crowley

I won’t speak for Boeing on the timing of those events. I’m just giving you my opinion as a supplier to Boeing that I think the coverage on that has been overstated to the negative, and that they are closer to achieving their certification goals, and just because of the underlying demand for the platform, we see the rates coming back. I won’t comment on the specific timing, but if you take the long view, which is what we’re presenting with our multi-year guidance, there’s no doubt the 787 is going to be back up in rate.

Noah Poponak

On that longer view, the rate you have laid out versus the index to fiscal ’19, your fiscal ’25, the math there implies about nine a month, and that would be calendar ’24. Is that an indication from the OEM or is that your best guess? That’s a substantially faster recovery than I think most in the market expect on the wide body side.

Daniel Crowley

Yes, I think it’s our estimate. The states rates that we’ve seen are a little bit lower than that, but it’s a platform that is produced, as I mentioned, at rates as high as 14 a month, and they do have a backlog of orders, so you and I will see together, Noah, how it plays out, but Triumph is going to be prepared for higher rates on the 787.

Noah Poponak

Okay, and then could you also elaborate on 737 on that chart, because if the pre-pandemic, pre-grounding, your fiscal ’19 index is the 52 a month that they were at, which the 0.6 for fiscal ’22 would get you to the 31, then again the–you’ve got it above pre-pandemic, pre-grounding in your fiscal ’24, which is calendar ’23, that recovery looks pretty healthy, I think compared to what we’re all looking for. If you can give us some more details on the numbers implied on the MAX there?

Daniel Crowley

Yes, we’re thinking rates–for our planning purposes, I’m not speaking for Boeing of course, we’re thinking rates in the 45 a month range in our fiscal ’24, so it would be higher than where they were pre-pandemic. They were headed into that territory, as you recall. We were all doing planning to go from, I think it was 42 to 57 pre-pandemic, so it’s really getting back to a jumping off point that was pre-pandemic and then going beyond that, achieving those sort of 57 rates out there in ’26.

Again, our forecast. Boeing is very good about giving shorter term forecasts that are within our procurement lead times so we know what to go out and buy, but they have thousands of aircraft in backlog, there is certainly demand for the platform because of its fuel efficiency, and so we think again there is a market pull once they get through their certification.

There’s also a strategy in ramp-up. You want to do it in steps that are manageable so that everybody is adjusting, moving to change on capacity in a coordinated way, and their rates support that. That helps to de-risk the ramp.

Noah Poponak

Interesting, okay. Just one more on what you’re selling into. You mentioned wide body MRO picking up. Maybe if you could provide a little more color there – I mean, is that just off of an incredibly low base or is that better than we think? What are you seeing in that piece of your business?

Daniel Crowley

The passenger freighter conversion is very encouraging. We have a chart we showed our board of how much those rates step up – effectively it’s a non-linear increase after–and I’m going to get the–I don’t want to go off the cuff on the numbers, but after a fairly steady rate year over year on freighter conversions, it’s suddenly going up at a high rate, and I’ll give the numbers to Jim for the one-on-one calls, so that’s encouraging. We sell hydraulics, we sell actuators, we do insulation and then plus the engine accessories and thrust reversers that we do as well.

On the wide body demand for freighters, I’m going to leave that to the OEMs. There’s a lot of moving parts between Airbus and Boeing, but you and I, I think would agree on the unending demand for ecommerce and products, and if you believe there’s going to be continued GDP growth, that will track with that, so. I’d refer you to them.

Noah Poponak

What are you seeing in your wide body aftermarket outside of the freighter conversion, just normal course of–?

Daniel Crowley

Well, what we saw last year was a huge downdraft where they–you know, wide bodies were largely grounded the last two years, and we thought there would be continued retirement of wide bodies, and that’s slowing. As that slows and they put them back into service to meet the growing demand, I mentioned how much international travel has just picked up in the last 90 days, they have to get them back ready. A lot of these parts, they’re both time-based replacement and cycle-based and hour flying derived replacement cycles, so they’re coming to us and ordering legacy parts for wide body that didn’t get ordered in the prior two years.

There may be a point at which more fuel efficient wide bodies come back into play and they retire those, but in the short term, we’re benefiting.

Noah Poponak

Okay, thanks so much.

Daniel Crowley

Thank you.

Operator

Our last question is a follow-up from Myles Walton from UBS. Please go ahead.

Myles Walton

Thanks, just a couple clarifications. One, when I look at your fiscal ’23 sales guidance and I try to reconcile it against Slide 15, is that Slide 15 growth of segment revenue implied, is that indicative of what you’re putting into your guidance, and if not, what’s the offset to that versus the $100 million-plus that’s implied in that bottoms-up analysis?

Daniel Crowley

The incremental contribution, the red dash line, it is reflected in our ’23 sales revenue. It talks about how these new OEM rates are going to benefit us in sales volume over time, so we see on the order of $300 million in volume, sales volume expansion over the next three-year horizon because of that, so if you call it $100 million a year, that first year is reflected in our 2023 guidance.

Myles Walton

Yes, that 1.2 to 1.3 includes $100 million of organic growth?

Daniel Crowley

Yes.

Myles Walton

Okay, and then another clarification, any American Jobs Protection Act benefits in fiscal ’23 that we should know about?

Daniel Crowley

There is a small portion of it. I think it’s about $7 million in Q1 of recognition, and maybe a little more in cash. I think the cash may be coming in 9 or 10.

Myles Walton

Okay, got it, and then just a quick one – Jim, do you have a targeted leverage in either your three-year or your four-year fiscal ’25 or ’26 that you’d want to share?

Jim McCabe

Yes, we target three to four times adjusted bank EBITDAP at the end of FY26, so the end of our planning period, so three to four times.

Myles Walton

Okay, thanks again.

Daniel Crowley

Thank you.

Operator

This concludes our question and answer session and Triumph Group’s fourth quarter fiscal year 2022 earnings conference call. This call will have a replay that will be available today at 11:30 am Eastern Standard Time through June 1 at 11:59 pm Eastern Standard Time. You can access the replay by dialing 877-344-7529, or 412-317-0088 and entering access code 5049523.

Thank you for attending today’s presentation. You may now disconnect.

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