Triumph Group raises fiscal 2024 guidance on strong Q2 results and expanding backlog By Investing.com

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Triumph Group (NYSE:) Inc. reported robust financial results for the second quarter of fiscal year 2024, surpassing expectations with significant revenue growth, particularly in the aftermarket. The company raised its guidance for fiscal 2024, attributing the positive outlook to increasing commercial aircraft build rates, growing defense spending, and a successful deleveraging plan.
Key takeaways from the earnings call include:
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<li>Triumph Group’s year-to-date performance showed strong sales and profitability, with a focus on the aftermarket. The company’s deleveraging plan is on track, with over $60 million in debt reduction since the start of the fiscal year.</li>
<li>The company purchased $19 million of its unsecured 7.75% senior notes due in August of ’25 and an additional $29 million in the third quarter, resulting in gains and reducing annualized interest expense by about $5 million.</li>
<li>Triumph Group raised its adjusted EBITDAP guidance to a range of $216 million to $231 million and increased cash flow from operations and free cash flow guidance ranges by $5 million. The company expects to reduce net leverage to between 6.1x and 6.3x at the end of the fiscal year and aims to reduce it further to 3.5x by the end of fiscal ’26.</li>
<li>The company is engaged in numerous military OEM opportunities and has significant content on Boeing (NYSE:) 787 aircraft. It expects its interiors business to recover to mid-to-high single-digit margins and is deploying value pricing strategies to achieve margin expansion goals.</li>
<li>The company expects organic growth of 10% to 13% in fiscal 2024 with revenue in the range of $1.43 billion to $1.47 billion.</li>
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During the call, executives discussed the company’s performance and plans, emphasizing a reduction in past-due backlog and working capital, which has helped drive strong MRO (Maintenance, Repair, and Operations) sales. They expect to achieve breakeven to positive results in Q3 and solidly positive results in Q4 in terms of EBITDA for Interiors. 
Triumph Group also highlighted a surge in military spares orders in Q4 and an increase in aftermarket sales, with repairs outpacing spares on the military side. The company’s executives noted that air traffic in the US is increasing, leading carriers to invest in spare parts and repairs. This growth has led to an increase in the forecasted aftermarket growth from 4-6% to 11%, primarily driven by repairs rather than spares. 
The company also provided updates on debt reduction, stating that $19 million of bonds were paid down in the quarter and an additional $29 million were paid down after the quarter. The reduction in debt will lead to a decrease in interest expense for the balance of the year. 
In conclusion, Triumph Group is on track to achieve its long-term financial and operational goals, with a focus on reducing debt, growing EBITDAP, and generating free cash flow to increase shareholder value. The second quarter’s results support the increased full-year guidance, and the company expects improved financial and operational performance throughout the fiscal year.
<h2>InvestingPro Insights</h2>
In light of Triumph Group’s strong Q2 results and raised fiscal 2024 guidance, it’s crucial to consider some InvestingPro Tips and real-time data. Triumph Group operates with a significant debt burden, which aligns with the company’s focus on debt reduction and successful deleveraging plan mentioned in the article. The company is also consistently increasing its earnings per share, a positive sign for potential investors. However, it’s worth noting that 5 analysts have revised their earnings downwards for the upcoming period.
InvestingPro Data shows that Triumph Group has a market cap of 680.76M USD and a P/E ratio of -18.41, indicating a low earnings multiple. The company’s revenue as of Q1 2024 stands at 1356.89M USD, showing a slight decrease of -3.95% over the last twelve months. Despite the decrease, Triumph Group’s gross profit for the same period was 396.96M USD, with a margin of 29.25%.
These insights, along with the 4 additional InvestingPro Tips available for Triumph Group, are beneficial for understanding the company’s financial health and future prospects. For more comprehensive tips and data, consider exploring the InvestingPro product.
<h2>Full transcript – TGI Q2 2024:</h2>
Operator: Good day, and welcome to the Triumph Group Second Quarter Fiscal Year 2024 Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Thomas Quigley III, Vice President of Investor Relations. Please go ahead.
Thomas Quigley: Thank you. Good morning, and welcome to our second quarter fiscal 2024 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.
Daniel Crowley: Thanks, Tom. Triumph closed the first half of fiscal year 2024 with expanding backlog, sales and margins as we focus on profitable growth and building on our success in the aftermarket. We are entering the second half of the year from a position of strength and raising our fiscal 2024 sales, earnings and cash guidance. Our year-to-date performance, increasing commercial aircraft build rates and growth in defense spending supports our updated outlook for the year. During the second quarter, we met or exceeded our expectations, delivering strong sales and our sixth consecutive quarter of year-over-year growth as well as predictable profitability. Our deleveraging plan is on track, including over $60 million in debt reduction since the start of the fiscal year, which will yield approximately $5 million in annualized interest savings. As I reflect on the quarter, I’m pleased with our ability to execute on our short-term performance targets, we remain very excited about the long-term financial and operational opportunities for Triumph. In particular, our performance serves as evidence that we continue to accelerate our future towards the targets we discussed at our September Investor Day. Turning to Slide 3. I’ll summarize the highlights for the quarter. Year-over-year organic sales growth was 16% and driven by improving MRO demand, accelerated above Q1’s 14% growth and above our original guidance. Aftermarket sales increased year-over-year accounting for a robust 43% of our Q2 sales, roughly doubled since the start of our restructuring. Recall our Interiors business started the year slow, with slower ramps in sales, supply chain delays, inflationary pressures and unfavorable foreign exchange headwinds. The team began executing on our recovery plans and exited September at breakeven on increasing volumes and growing backlog. And last, we grew our total company backlog by 15% above market growth rates as Triumph benefits from strong representation across a broad array of platforms, customers and end markets. We continue to benefit from growing commercial travel demand up 28% through August year-over-year. and increased MRO demand as aircraft returned from peak summer use, commercial transport aircraft new orders more than 2,000 year-to-date and planned OEM rate step-ups. Book-to-bill is 1.37 year-to-date and $1.8 billion of reportable backlog is up 16% year-over-year, even as past due backlog has been driven down by $17 million or about 18% this fiscal year-to-date. In the military market, there is a robust U.S. defense budget in place and expectations for it to remain at similar levels for the next few years. Given the multiple regional conflicts, budgets are likely to grow beyond current forecast. Triumph is currently engaged in an unprecedented number of military OEM opportunities including over 30 classified RFPs year-to-date. We are in discussions on hydraulic systems, fuel pumps, landing gear systems, thermal systems, gear boxes, door actuation and more. all driven by expanding Triumph intellectual property. In Q2, Triumph’s commercial OEM shipments were up 70% year-over-year, while commercial aftermarket revenues rose 48% year-over-year. Military OEM sales were consistent with prior year, while military MRO rose 24% year-over-year on the strength of many programs, led by V-22 pylon conversion actuators. As we shared at our recent Investor Day, Triumph enjoys significant content on Boeing 787 aircraft with just over 1 million shipset value, benefiting both the OEM and MRO sales across 6 Triumph factories. This is a great aircraft with more than 1,800 orders since 2013 and a backlog of nearly 800 aircraft, 235 of which were ordered in 2023. So demand is robust, and Boeing is working to increase rate as rapidly as possible. Orders in our portal support the move to rate 5.3 per month in our fiscal year, up nearly 2x from the start of our year and 787 shipments for the second quarter were up 142%. We also anticipate emerging sustainment requirements for the 787 as the oldest aircraft in this fleet are just beginning to exceed 10 years in service. As these aircraft enter their landing gear maintenance cycle, Triumph will begin overhauling increasing numbers of our landing gear actuation components, including extended retract actuation, truck positioning, nose wheel steering and door actuation. New wins for the quarter included CH-47 engine controls, a UH60 gear package and an accessory repair package for Atlas Air (NASDAQ:) as well as personal service units, cruise seats and starters for Delta Airlines (NYSE:). While only 10% of our sales performance at our interiors business remains a focus area, as an unfavorable sales mix driven by OEM delays and supplier shortages along with margin impacts from inflationary pressures on materials and labor and foreign exchange changes, created headwinds to start the fiscal year. We’re running additional Triumph operating system lean events to offset these external headwinds, and we’re starting to see positive developments. These include events to drive down cycle time and improve efficiencies and productivity. As production demand increases, we are working closely with our customers to derisk the supply chain by securing alternate sources where necessary to keep cost competitive and to in-sourcing more work as rates continue to ramp, which will provide added absorption benefits. Interiors is on a path to recover to mid- to high single-digit margins this fiscal year and to enhance the confidence in their long-term earnings targets. Value pricing remains a key strategy to Triumph is deploying towards our margin expansion goals. This includes the implementation of our expanded commercial playbook, expanding our commercial risk reviews and implementing new processes. Given the evolving market environment, this has included exploring shorter duration supplier and customer contracts, incorporating inflation clauses tied to indices or specific material pass-through clauses and focusing on aftermarket premiums and market access. Previously, we highlighted that 80% of our contracts have terms of 6 years or less, providing a near constant flow of opportunities to optimize value based on our technical solutions, capabilities and IP and our recent wins include examples of these efforts. We remain on track with the pricing objectives laid out during the recent Investor Day. Jim will now take us through our second quarter results and updated outlook for fiscal 2024. Jim?
James McCabe: Thanks, Dan, and good morning, everyone. Triumph’s second quarter results exceeded our expectations with significant revenue growth over the prior year period. On Slide 5 are the consolidated results for the quarter. Revenue was $354 million. With the continuing business, excluding divestitures and exited programs, organic revenue increased 16% over the prior year quarter. Organic revenue growth primarily benefited from increased aftermarket volume and pricing on our largest programs, while demand across most of our end markets improved during the quarter on a year-over-year basis. Prior year revenues included a $16 million nonrecurring benefit from the sale of noncore IP, after which revenue growth would be 23%. Adjusted operating income for the quarter was $37 million, representing 11% margin, a 60 basis point increase over last year. And adjusted EBITDAP for the quarter was $46 million, representing a 13% EBITDAP margin, which is on track to our full year guidance. Sequentially, adjusted operating margin was up 300 basis points and adjusted EBITDA margin was up 220 basis points over Q1, driven by higher revenue and a favorable mix with an increase in aftermarket sales from 41% to 43% of total revenue. In the quarter, we incurred $1.9 million of restructuring costs to retire our last structures IT contract as our transition services agreement ended, and a $1.3 million charge associated with potential environmental costs at legacy structure site. Slide 6 shows our military revenue. For the quarter, military revenue was $117 million, representing 33% of total revenue. Military OEM sales were strong and on par with last year as increased sales on CH-53K and B22 offset expected lower sales on E-2D and AH-64 programs. Military aftermarket sales in the quarter were up 24% compared to last year and up 70% sequentially on increased demand for spares and repairs. Slide 7 shows our commercial market revenue. For the quarter, commercial revenue was $227 million, representing 64% of total revenue. Commercial OEM sales were $131 million, and absent the sale of noncore IP were up 17% in the continuing business. This growth was driven by increases in both volume and price in key programs, including Boeing 787 and 737 programs. Commercial aftermarket sales of $96 million grew 49% in the continuing business on strong demand for commercial aftermarket spares and repairs. This is our highest quarterly commercial aftermarket sales since fiscal 2017. Remaining 3% of our revenue is non-aviation, which is profitable and represents about $9 million of sales in the quarter. That’s up 24% over last year. Our continuing sales mix trend towards more aftermarket is having a positive impact on margins and cash flow. As I mentioned, total aftermarket sales represented 43% of our quarterly revenue. This was up from 36% in the prior year quarter. The breakdown of our aftermarket sales and MRO capabilities is on Slide 8. Our free cash flow work is on Slide 9, which shows our Q2 and year-to-date cash use. Our $37 million of cash used this quarter included $74 million in semi-annual interest payments as well as planned investment in our net working capital in support of increasing second half sales volume. This is consistent with our expectations and the quarterly free cash flow guidance we previously gave. We expect to be solidly cash positive in Q3 and in Q4 in support of full year cash flow guidance, which is up to $40 million to $55 million. On Slide 10 is our net debt and liquidity. As of September 30, we had $1.5 billion of net debt and our cash availability was approximately $230 million. During the second quarter, we purchased $19 million of our unsecured 7.75% senior notes due in August of ’25, and we purchased an additional $29 million so far in the third quarter. We purchased these notes at a discount to par resulting in gains. When combined with the $14 million in bond redemptions in the first quarter, we reduced annualized interest expense by about $5 million. We also have over $300 million deferred tax assets to continue to create value through reduced cash taxes moving forward. Our fiscal ’24 guidance begins on Slide 11. We are increasing our fiscal ’24 guidance for revenue, adjusted EBITDA and cash flow and updating our operating income guidance. Based on anticipated aircraft production rates, we expect organic growth of 10% to 13% in fiscal ’24, with revenue in the range of $1.43 billion to $1.47 billion. 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 11% rate for the fiscal year. Commercial OEM revenue growth is driven by production ramps on following 737 and 787 programs and the Airbus A320 family, even while supply chain and geared turbofan repairs are considered. Non-aviation sales are expected to increase, driven by the previously announced work supporting hollister sustainment. We increased our adjusted EBITDAP guidance consistent with the increased sales guidance to a range of $216 million to $231 million. Our adjusted EBITDAP margin guidance continues to indicate up to a 16% consolidated EBITDAP margin in fiscal ’24, representing roughly a 200 basis point improvement over last year. We increased our cash flow from operations and free cash flow guidance ranges by $5 million for fiscal ’24, including second half working capital improvements. We continue to expect solid cash generation in Q3 and strong cash generation in Q4, consistent with prior year seasonality. This is driven by working capital liquidation on the second half sales surge, reduction in past-due backlog and increased OEM inventory turns. Interest expense is expected to be $151 million, including $145 million of cash interest, and we expect $7 million of cash taxes. This is after the cash interest savings from $49 million of bond purchases completed to date. Organic margin expansion, cash generations and debt reduction are expected to drive our net leverage from 7.6x at the end of last year to between 6.1x and 6.3x at the end of this fiscal year. As we discussed at our Investor Day, we are on a path to reduce leverage into the range of 3.5x no later than the end of fiscal ’26 through EBITDAP expansion and free cash flow generation. However, Triumph continues to explore alternatives to accelerate deleveraging through business and product line portfolio actions. In summary, the second quarter’s results are in line with or ahead of our expectations that support the increased full year guidance. We are reducing debt and interest expense by purchasing bonds in the market, growing EBITDAP and generating free cash flow this year. We’re executing our multiyear plan to continue to grow revenue, margins and free cash flow, reduce leverage and increase shareholder value. We remain on track to achieving the targets established at our Investor Day in September. Now I’ll turn the call back to Dan. Dan?
Daniel Crowley: Thanks, Jim. Triumph’s performance in the second quarter of fiscal ’24 highlights the strength of the new Triumph, the stronger systems and aftermarket driven company with a growing IP portfolio and backlog yielding steadily improving financial results year-over-year. We expect improved financial and operational performance to continue throughout the fiscal year as our expanding mix of aftermarket and IP-driven OEM sales gives us confidence in our updated fiscal 2024 guidance and long-term outlook. Jim and I are happy now to take any questions you have.
Operator: [Operator Instructions]. Today’s first question comes from Seth Seifman with JPMorgan.
Seth Seifman: Good results. I wanted to ask, in terms of the improvement in the overall outlook, was there any change to the outlook for the Structures business — or sorry, the Interiors business now. I guess in other words, should we think that Interiors, maybe there are some more challenges there and that was more than offset by the goodness that you see in FNS?
Daniel Crowley: Yes, that’s how I see it, Seth. We had printed 13% in the quarter despite being breakeven in Interiors. And let me characterize Interior’s revenue profile for the year. They started the first quarter of the year with a monthly sales of $10 million to $11 million in the second quarter, that went to $10 million to $12 million. For Q3, we’re looking at $11 million to $14 million per month, and then in Q4, $15 million to $19 million. So very strong second half sales. We also jumped on it with a return to green program to drive productivity we saw about 10% improvement in productivity through the months of September and October. And these are really two well-run plants in Mexico. The challenges have been external, both foreign exchange and input costs, and we’re addressing both. On the input cost, we’re competing the suppliers that have raised prices so that we have alternatives. And on foreign exchange, I’ll let Jim address what we’re doing there. Just to break down and Terry is a little bit further, it’s really three businesses within one business. Even though it’s only 10% of sales, it’s a small contributor to Triumph overall. The insulation piece, which is the biggest piece is a 20% margin is plus margin business. And cabin production parts that we made that support the cabin and is sort of high single digits, where we’ve been losing money is in composites, which is mostly ducting, so we’re taking some actions to automate that plant. We just opened a new clean room there, and we’re doing additional lean events to drive that. But overall, the plants are quite well run. It’s just dealing with these external headwinds. But yes, we have a strong second half that we are counting on to be part of the overall trajectory of the company on both sales, cash and profit. Jim?
James McCabe: They are external drivers like inflation and FX or challenges and the wax and wane, but the reality is we have to get our costs down, and then we have to exercise a right to the contracts for adjustments where we have them. And then where we don’t, we have to go negotiate when new contracts come up, adjusted prices to cover those costs. But the team is very active on remediating the challenges there. But I think you’re exactly right, that the system strength, which is so important is more than offsetting the Interior challenges.
Seth Seifman: And then maybe just one follow-up, if that’s okay. If we think about the military OEM business, and just maybe — just on the OEM side, you think maybe there’s a little more visibility in terms of the content you have and the expected build rates for the platform. It seems like maybe this year can be up a little from last year, which is $260 million to $270 million of sales in the military OEM side. How does that evolve going forward and what are the drivers? Because I know there’s probably some legacy rotorcraft that you’re on and — but also some growth opportunities. So how does that piece of the business evolve?
Daniel Crowley: We really do have a strong presence in helicopters, especially out of our West Hartford fuel controls, engine controls business and thermal products, but also gearboxes and heat exchangers. So when you look at the rates, we just got the award for the LRIP 7 and 8 lot for CH-53 from Sikorsky, that’s a program that’s been building at about 0.8 aircraft per month, and it’s ramping up to over the next 3 years to double that. So that’s a nice tailwind for us. MH60 is also growing in rate modestly. We do a lot of gears for the age AH64 Apache, and that rate goes up about 10%, maybe 15% over the forecast. So while it’s not a doubling sort of build rate increase, unlike last year where we were marking down OEM rates, we’re finally swinging into positive. And I’m very encouraged about the new starts on military. We’re getting pulled into lots of bids, Fara, Flora on the helicopter side, are two examples, but also on the next-gen fighters as well. So we see our competency in helicopter components being strength to the company.
James McCabe: I would also point you to Page 14, so we have the backlog there by program, and I’ll give you more flavor over what’s in the next 2 years and the military programs there from F-35, which is 2% of backlog right now, up to the CH-53 is 8% of backlog. And half of those programs are rising in rate, half of them may be reducing in rate or some stable ones. But it’s a good balanced portfolio of military OEM work.
Operator: And our next question today comes from Ellen Page at Jefferies.
Unidentified Analyst: Just going back to Interiors, you had called out FX as a headwind. And the headwind in Q1 as well, how much of the loss was due to the peso? And how do we think about reaching mid to high single digits in fiscal H2. Just what are the kind of moving pieces there?
James McCabe: Thanks, Ellen. Rough about $500,000 per month would be peso at the current rate, as you know, the peso strengthened to some all-time highs against the dollar. But that will change over time, and we’ll have the opportunities to reprice and address cost structure to help mitigate that. So that’s the piece that’s FX related. But Dan talked about some of the actions we’re taking, which are going to increase the second half. I think volume is one of the biggest drivers. So really expecting a lot more volume in the second half. The mix changing back towards installation, which is more profitable than the ducting is, and some of the cost mitigation actions we’re taking as well.
Unidentified Analyst: Can we just go over the moving pieces to the free cash flow guide. You raised OCF by $5 million, I believe. What were the key drivers there?
James McCabe: The key driver is really the sales, which is driving profitability, partially offset by the increased working capital needed to supply the higher sales in the second half of the year. So there’s — it’s a modest increase, but it’s an important one, and it’s consistent with those higher sales.
Daniel Crowley: What we’ve been watching very closely, in fact, at the Board level, is the reduction in past-due backlog and working capital because there’s been multiple currents within the working capital flow. We’ve been investing in working capital for the rotables, for MRO. That’s helped us drive our strong MRO sales and then also protecting OEM ramps by buying more. But at the same time, we want to increase turns on the MRO or on the OEM side. So what we saw in September, October were improvements in both measures, both the past due burn down and the turn. So that’s the leading indicator we need to see that confidence that we’re going to improve working capital in the second half of the year.
Operator: And our next question today comes from David Strauss with Barclays.
David Strauss: On Interiors, would you expect it to get to EBIT or EBITDA positive in Q3?
James McCabe: So we’re exiting breakeven in September. So yes, we expect to be breakeven to positive in Q3 and strong — solidly positive in Q4 to get back to the mid- to high single digits for the year.
David Strauss: And Jim, on free cash flow, I think if I go back to the bar chart that you had in the Q4 slide deck. It looks like Q2 was a little bit weaker than what you were anticipating there if I just compare it to prior years. If so, what was kind of where was the miss relative to your internal plan on cash flow? And that bar chart implied a pretty big Q3 free cash flow number? I know you said positive, but I just want to see if we could revisit kind of the sequential growth in free cash flow you’re expecting Q3 and Q4.
James McCabe: David, at the end of the fiscal year, we reported, we put out the chart with the cash flow cadence for the 4 quarters that you’re referring to. But actually, after Q1, I updated that, and I said $30 million to $40 million cash used, if you look at the transcript for Q1. And at the Investor Day, I reiterated that. And the real driver for a slightly higher cash use was the higher sales we’re seeing. There was some impact from supply chain and from demand changes. But it was really the higher sales for the second half. So $30 million to $40 million used — I guess we came in at $37 million used this past quarter, and we should be positive in that range for Q3 in the $30 million to $40 million cash positive and then the balance to get to our full year guidance would be in Q4. So very strong Q4 as we’ve had in prior years. But with this higher aftermarket percentage at 43%, with even more seasonality and with the ramping production rates I think we’re going to have a stronger Q4 than we’ve ever had before.
Daniel Crowley: And taken together, year-over-year, it’s a swing of about $120 million to $130 million in cash flow for the full year. So we feel very good about the trajectory on cash.
David Strauss: And Jim, just the net working capital that you’re assuming now for the full year, how much of use are you anticipating?
James McCabe: I don’t have a working out to that level. It’s obviously going to be coming down in the second half of the year. And I have to follow up on that and look forward to giving you more information about that moving forward to the absolute working capital level. I can tell you that we are driving turns down, and we have a concerted effort on inventory management to get the turns down to improve the working capital moving forward. And it’s the right time to do it with ramping sales because we have lots of inventory and we have lots of opportunities to be more efficient with it. We’re trying to find the right home for inventories, working with vendors and customers who may have lower cost of capital than us, for vendor managed inventory, customer-owned inventory. So the direction is positive, and we’re going to be liquidating working capital in the second half of the year.
Operator: And our next question comes from Cai von Rumohr with TD Cowen.
Cai von Rumohr: Impressive results. So your aftermarket business was strong in the second quarter and a very good sequential gain. Based on what you said about the year, it looks like the rate of growth in aftermarket sales will be much more modest in the third and fourth quarter. Could you give us some color on what you expect commercial and military aftermarket to do sequentially in the third and fourth? And if that’s the case, which it looks to be the mix would look like it would be a little bit leaner and yet your adjusted EBITDA numbers seem to assume very good margin improvement sequentially with a mix shifting towards more OE. Help us understand that, if you could.
James McCabe: Certainly, the commercial aftermarket is the strongest driver of the growth. We’ve seen outperformance year-to-date, and we expect that to continue in the second half. The visibility that’s not — it’s harder because you’re looking at market data. You’re not getting the actual orders in, it’s not a backlog business. We may only have 45 to 60 days worth of orders visibility for that. So I think there may be a little conservatism on what the mix will be. We know what OEM rates are, they can change, but the aftermarket mix I think it’s stable moving forward. Commercial is still strong. Military usually has a big surge in Q4. We see a lot of spares orders in our fiscal Q4. But we don’t provide guidance by market segment. We’d like to tell you the trends, but sometimes one segment outperforms that helps cover underperformance in other segment. That’s the benefit of our balance of diversification.
Cai von Rumohr: So basically, you’re saying that the mix should be the same going forward? Or is the mix shifting toward OA net-net?
James McCabe: I don’t think it’s going to shift towards OE because the aftermarket is stronger in the fourth quarter, in particular, both for military and commercial. So I guess they’re probably going to be more aftermarket in the second half of the year, but it depends on the OEM rate ramps. At the moment, I think aftermarket is probably going to overtake and continue to be stable to increasing as a percentage of our sales.
Operator: And our next question today comes from Myles Walton with Wolfe Research.
Myles Walton: So just actually a clarification on Cai’s question. So the Slide 8, is that referring to that 11% growth in fiscal ’24? Is that referring to the whole channel of MRO or the commercial channel in insulation?
James McCabe: It’s whole channel. So we have about $152 million, I think, of sales, and that’s the breakdown for the quarter of sales by aftermarket. It’s broken into third-party MRO where it’s not RIP necessarily and the spares, which obviously can be the highest margin. And then the third pieces are IT, which are higher margin typically than repairs on third party. On the bottom of that page, you can see we have the Q2 and the year-to-date breakdown for all those components.
Myles Walton: You mentioned the portal showing you 5.3% per month on the 77. Could you also share what it’s looking at for the 37. And maybe, Dan, that big growth you’re anticipating in Interiors, I imagine that’s primarily inflation driven on the 37. Is that correct?
Daniel Crowley: It’s one of the largest programs in Interiors for sure, but it’s certainly not the only one. We have A220 work out of Airbus. We do 787 work. So it’s a mix of programs, but it is the largest. On the OEM rates, Boeing has talked quite publicly about their step up to 38, whether it’s going to come in the calendar Q4, the following quarter. But we’re building at rates that are approaching that now, and we’re typically, on average, about 1 quarter setback from them. So as they ramp up, we’re already delivering into the pipeline, sometimes to intermediaries and then products that flow to Boeing. So our factories are building at rates of 30 to 35 a month right now. And in priming for rates that go up into 40 next year, or fiscal ’25. So that’s the general MAX-737 outlook for us. Airbus is a similar story. We’re building at rates that are in the high 40s and planning for rates for the 50s next year and 60s thereafter.
Myles Walton: And just one last quick one. When you mentioned portfolio actions in terms of pursuit of the balance sheet, improvement. Could you elaborate on the size of any potential turning you might be looking at or business lines that you might be thinking about from that perspective?
Daniel Crowley: We really can’t. It’s one of these things every year. We’re looking at every business, trying to make sure we’re managing the portfolio for shareholder value. But deleveraging is our top priority. Debt reduction — and so we’ve had inbounds for several of our businesses. And one of the challenges is because we’re on a ramp across OEM and MRO, what’s the value of these businesses. You could understand that people would come calling when the rates have been depressed and we’re on the sort of, I’ll call it, the base mountain climb of OEM and MRO rates. So people who have interest in these businesses have to properly value them, but we want them to be needle movers for deleveraging, not just around the margin.
Operator: Our next question today comes from Michael Ciarmoli with Truist.
Michael Ciarmoli: Nice results. Just to maybe go back, the DKL is pretty solid here on Slide 8. And it looks like, I mean, spares were up 7% sequentially. I mean can you maybe parse that out for us? Was it more commercial? Was it more military? And kind of what you’re seeing out there and what drove that level of spares activity.
James McCabe: Michael, I’ll start. It was more commercial this quarter. And that’s why I think the margin impact is a little less than you might see in some of the military spares. But it’s lumpy business, as we’ve talked about before, where fortune was surged this quarter. And the fourth quarter is typically when we see the biggest surge in the spares. And there are opportunities to increase spares volume, which we continue to work on and increase spares pricing to cover increasing costs and enhance margins moving forward.
Daniel Crowley: I know you have models for air traffic, but the ones we watched showed the first 10 months of U.S. traffic. TSA volumes were above 2019 levels by 1.4%. But more importantly, September and October, traveler throughput was up 5.7% over the year 2019 levels. So it’s definitely ramping, and that’s driving the carriers to invest in spares and repairs. And the timing, you all commented on the strong commercial MRO sales. As Jim mentioned, these fleets are coming out of service. They hit their peak volume — TSA volumes in July — so they’re bringing them in for maintenance, and we’re benefiting from that.
Michael Ciarmoli: And then just — I mean, you had been forecasting, I think 4% to 6% aftermarket growth, it’s now 11%. Any — can you give us any of the underlying military commercial? Is it more spares, I mean, the IP sales look pretty flattish. But maybe just what really drove that increase. And I would imagine with the pratt issues, airlines flying some of these older planes longer has to help.
Daniel Crowley: Well, we’ve been in touch with — proud about ways we can help. And it’s been a productive dialogue I would say right now, repairs are outpacing spares on the military side. And that is going to, I think, revert as the depletion of U.S. stockpiles to support the various conflicts leads to orders for new spare hardware to replace those. So these things tend to swing in their own cycles, repairs and spares, but thanks for the recognition of the progress on spares. Last year, the spare sales were softer. So we’re encouraged to see them coming back. Triumph does a lot of line replaceable units. And that’s really the beauty of the new portfolio is if you tour our plants, you see these actuators and heat exchangers and gearboxes. And these are the items that are used up, consumed during operation and typically replace not a heavy maintenance but a frequent checks. In terms of the mix of the driver of the increased growth as you can see, 2/3 of our aftermarket is repairs, 1/3 fares. So it’s more repairs and spares and it’s probably a little more commercial than military for the back half of the year.
Operator: And our next question today comes from Ronald Epstein with Bank of America.
Ronald Epstein: Just trying to understand what happened with the interiors duct work and the composite, if you can kind of go in more detail. Like it seems like as of maybe last quarter that sort of came out of nowhere. And I guess what I’m worried about is, could this happen in another business or not? Or I mean, how should we think about that?
Daniel Crowley: And I’m giving lots of inside baseball on interiors more than we ever have in the past. But on composites, recall, we used to build these products, these ducts at our Spokane, Washington plant. And we moved them to Mexico. And at the time, a condition of transfer with Boeing is that we produce them in the same manner and we really missed an opportunity to relay out the line, add more automation. From their point of view, it was to avoid any changes that might lead to quality issues. But now that we’ve stabilized production in Mexico, we’re going back to the line with Boeing partnership to take out further cost, and I’m highly confident that we’re going to see the sort of productivity gains and composites that we saw — that we do see today in installation. So that’s one change. This business has been a 20% plus business before and we’re focused on getting it back there, and we plan to exit this year with strong margins that are double digits on operating margins and then get it back into higher margins over our planning horizon.
James McCabe: And I would add, obviously, the cost challenges are multifaceted. There’s inflation down there, that’s been higher than we experienced in other countries. There’s the FX headwind with the peso strengthening. And then there’s directed supplier costs that we can continue to work on because they have some sole-source directed suppliers. And we have opportunities sometimes through adjustment clauses to recover that. Sometimes we need to develop second sources or work to pass through the prices. So there’s lots of levers. There was a — it was a challenge, and it was a bit of a surprise in Q1, but we’re all over it and we’re going to improve it for the balance of the year.
Ronald Epstein: And then, Jim, how are you thinking about — I mean, really the refinancing that has to happen given where interest rates are now, I mean what — you kind of alluded to there’s maybe some creative things you could do. Could you give us a hint to what you’re thinking?
James McCabe: Well, as you know, opportunistics, so we continue to monitor the markets. And if there’s an opportunity to refinance that good cost in terms, we would consider doing that but we’re also improving the business dramatically, positive free cash flow this year, improving our credit. So we don’t want to move too fast that we don’t get the benefit of our improved credit. We’ve recently seen — I think Moody’s (NYSE:) upgraded our corporate family rating as well as our 25 bonds. At the same time, we’re buying back with excess cash — the bonds bought back at a discount, so we create a gain. We reduced our interest expense. We’re going to continue to do that as we can with excess cash from cash flow from operations, from working capital liquidation. So we’re going to keep chipping away until it gets to a point where we can consider whether there are some delevering actions we can take with the portfolio, which we’ve talked about, or whether we want to refinance. These aren’t due until August ’25. So they don’t go current until next — August next year. But we’re keenly aware of it and we’re watching the markets. So it’s not a big concern about refinancing, but we do want to delever. So it would be best if we could just reduce that debt all together and not have to refinance.
Operator: And our next question today comes from Noah Poponak with Goldman Sachs.
Noah Poponak: What is assumed in your 2025 and 2026 margin plan for the Interiors margin?
James McCabe: I’m hesitating, no, because I don’t know when we get into the margins of the segments, which we have given. We said that — this has been a 20% margin business in the past. I’ve said that this is easily back to the mid-teens on a normalized basis. So you can imagine if we’re just coming out of September and breakeven-ish to look into — with effect for the full year, have mid- to single high-digit on EBITDAP percentages, so you can expect to be in the double-digit percentages during those periods.
Daniel Crowley: What I’m most excited about is the growth in actuation and engine controls. Actuation is going to hit, I think $500 million in sales this year and 20% plus on business with great aftermarket. And engine controls is one that’s getting a lot of that military MRO work and new wins on helicopters. So even though Interior is getting a lot of headlines, its again, still 10% of the business. We know the drivers. We’re fixing it. But the core parts, what I’ll call the crown jewels of the company, actuation, engine controls are really performing well.
Noah Poponak: Jim, the release and the presentation discuss debt — recent debt reduction, but I’m seeing a few different numbers, seeing a different number for the 2025s, and I thought was left there. Can you just level set me on — what did you pay down in the quarter? What have you paid down since the end of the quarter? And what’s left on the ’25.
James McCabe: So in the quarter, we paid down $19 million of the bonds. And subsequent to the quarter, we paid down another $29 million of the bonds. And back in Q1, there was warrants, $14 million of debt was retired as part of that process.
Unidentified Company Representative: Take that off , where we’re going to be right now.
Noah Poponak: And the — it looks like you’re saying on Slide 9 that, that action reduces interest expense and that flowed to the free cash flow guidance. Is that correct?
James McCabe: So it does reduce interest expense for the balance of this year, but on a full year basis, it’s $5 million. So that’s not in the year. That’s a full year.
Noah Poponak: That’s a full year. So this year is a piece of that and then a piece of just core business operations.
James McCabe: Correct.
Noah Poponak: And then I guess related to that, that’s a positive, but you’ve got the big 4Q where you’re citing volume, which makes sense because of what’s happening with sort of planned volumes. But we — you continue to operate in these end markets where the planned volumes are shifting around. And so I guess, I was a little surprised you raised it given that, but at the same time, you’re giving us these numbers halfway through the quarter here. So I don’t know what’s the level of confidence in that number? Or where is there a risk of something sliding out of the end of your year and into next year, on that free cash flow plan.
James McCabe: We’re highly confident in our numbers, and we have a very detailed bottoms-up forecasting process by program, by site. The risks come in the demand in the aftermarket, which we don’t have long-term visibility, too. And then, of course, OEM rates. But I think it’s less on OEM rates as much as we talk about those with aftermarket being growing so much and being so important to the fourth quarter, that’s where the risk is, it’s just demand. And that demand is so diverse that I think it’s lower risk than a particular OEM rate schedule might be.
Daniel Crowley: And working capital certainly is a big swinger, and we’re highly focused on that. We ran dozens of lean events in October. We’re going to continue those through the second half of the year. And we’re doing all the kinds of analysis on our material planning and work in process and finished goods and safety stocks and rotables and things that drive working capital. So the rates do affect inventory burn down because the rates help us to draw up on what’s on the shelf. But that’s one of the swingers as well, but we’re confident we’re going to make it.
Operator: Thank you. And ladies and gentlemen, this concludes today’s question-and-answer session and today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day.
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 <a href="https://www.investing.com/news/stock-market-news/earnings-call-triumph-group-raises-fiscal-2024-guidance-on-strong-q2-results-and-expanding-backlog-93CH-3226331">Source link </a>The post <a href="https://forextraderhub.com/triumph-group-raises-fiscal-2024-guidance-on-strong-q2-results-and-expanding-backlog-by-investing-com.html">Triumph Group raises fiscal 2024 guidance on strong Q2 results and expanding backlog By Investing.com</a> first appeared on <a href="https://forextraderhub.com">Forex Trader Hub</a>.

Triumph Group raises fiscal 2024 guidance on strong Q2 results and expanding backlog By Investing.com

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