Good day, and welcome to the Triumph Group Fourth Quarter Fiscal Year 2024 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, today's event is being recorded. I'd now like to turn the conference over to Thomas Quigley. Please go ahead, sir..

Thank you. Good morning, and welcome to our fourth 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 and full fiscal year, please refer to the presentation posted on our website this morning. We'll discuss 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..

the V-22 Pylon Conversion Actuators, the Navy's SH-60 engine control upgrades, the A-380 landing gear overhauls and CH-47 spares.

There are several long-term dynamics at play here as new aircraft fleets such as the A320neo and 737 MAX aircraft are heavily utilized driving spares activities, while the older 787 and A380 fleets are increasingly entering their landing gear overhaul cycle where we supply hydraulics and actuators.

Turning to Slide 6, I provide a case in point on our aftermarket growth, where Triumph is the OEM provider of the entire landing gear actuator suite on both the 787 and the A380 aircraft. Landing gear actuation overhaul activity is rising rapidly and we're allocating more capacity to accommodate the MRO demand.

These aftermarket programs carry margins, which are often two to three times our OEM margins as we supply spares and repair services to keep commercial and military aircraft in the air. We're also expanding our foreign military sales in the aftermarket as well.

There are several positive developments on the military side of the business as Triumph is engaged in a number of new development programs with Northrop Grumman, Boeing, Lockheed Martin, Kratos, Anduril, GE Aerospace and others in support of the NGAD and collaborative combat aircraft.

Turning to Slide 7, six of our top wins in the quarter were for military platforms. We annotated the slide on the right, where these are sole source awards based on Triumph IP and/or new product introductions.

Note that Triumph's backlog supporting military rotorcraft rose 30% year-over-year on the strength of our substantial IP content on the CH-53K, which rose 94% year-over-year to $165 million, more than offsetting the expected run out of V-22 OEM backlog.

Regarding the commercial market, Airbus production rates remained strong and growing with 10% increase in A320 family rates this year based on published information. Recall the A320 family is Triumph's third largest program in backlog.

Similarly, A350 rates are forecasted to increase and Triumph have been asked to support higher rates of A220 production and expanded work scope. We are aware of Boeing's recent public statements concerning a delay in their planned rate increases, which have not been formally communicated to supply chain yet.

As you can imagine, the actual adjustment and build rate for a given product is a function of delivery rates, aircraft and component finished goods inventory and the supply chain's ability to flex output down and back up.

Given the uncertainty on Boeing commercial transport programs, Triumph adopted a conservative fiscal '25 plan reducing our prior internal rate assumptions between 20% and 30%, depending on the Boeing platform. This has the net effect of reducing our fiscal '25 sales guidance by approximately $70 million or 6% from prior targets.

We will update all stakeholders as Boeing finalizes their production needs, and we'll continue to hustle while we wait for Boeing's ramp-up and increase market share through takeaways and second sourcing across their commercial platforms.

We remain fully committed to protecting Boeing's requirements and supporting future rate increases as they drive towards rate 50 for the 737 and rate 10-plus on the 787 by late 2025, 2026. We have high confidence that our operating plan for the next two years is sufficiently derisked to support our multiyear financial targets.

Jim will now provide further detail on our fourth quarter results, fiscal '25 guidance and updated long-term outlook..

Thanks, Dan, and good morning, everyone. FY '24 was a great year for Triumph, highlighted by the improvement in our balance sheet.

The proceeds from the divesture of the third-party MRO business had a healthy 14.5 times EBITDAP multiple, combined with the use of some of our substantial tax assets enabled us to meaningfully reduce net leverage from 7.6 times at the beginning of the year to 4.9 times at year-end.

The $548 million gain from the divestiture is evidence of the significant hidden value in Triumph's assets that are carried at historical cost on our balance sheet. On Slide 8 is our net debt, net leverage and liquidity.

In Q4, with the proceeds from the completed sale of the Product Support business, we retired the remaining $436 million of 7.75% senior notes due in 2025, clearing the runway of our next debt maturity. We also redeemed 10% or $120 million of our 9% first lien notes due in 2028.

Earlier this week, we issued a second redemption notice for an additional $120 million of our first lien notes that will be complete this month. The combined debt reduction of over $670 million will yield $55 million of annual interest savings. We've reduced our net debt by more than half over the last year, from about $1.5 billion to $700 million.

We now have significant financial flexibility with our next maturity not until 2028. Another balance sheet improvement to note is our pension liability of $283 million at FY '24 year-end, it is down $76 million or 21% from FY '23. Our cash and availability totaled $437 million at year-end, including $393 million of cash.

This is prior to the announced redemption of $120 million of the 2028 first lien notes this month. On Slide 9 are the FY '24 consolidated results. We achieved 13% organic sales growth, driven by strong aftermarket volume.

We delivered $1.192 billion of revenue, $115 million of adjusted operating income and $144 million of EBITDAP, representing a 12% EBITDAP margin. During FY '24, we grew our aftermarket revenue by 19% over FY '23. Military aftermarket revenue was up 10% and commercial aftermarket revenue grew 30%.

This aftermarket revenue in the continuing business from the growing installed base of products we manufacture was 29% of revenue in FY '24, up from 26% in FY '23 and continues to grow.

It's a profitable, diverse and valuable revenue stream that benefits when the OEM new aircraft delivery rates are down because the aging fleet and service needs more spares and repairs. Remember that our reported backlog only includes purchase orders with delivery dates within the next 24 months.

Our backlog grew 22% during FY '24 from $1.55 billion to $1.9 billion. Approximately $1.15 billion of that backlog is scheduled to be shipped in FY '25. We've also increased our customer diversity over the last two years. In FY '22, sales to Boeing were 37% of our revenue. During FY '24, sales to Boeing are only 23% of revenue.

No other customer is over 10% of revenue, and within the Boeing revenue, we have platform and program diversity. On Slide 10 are the fourth quarter results, which shows solid growth in revenue, operating income and margins.

$33 million more revenue, representing 11% organic revenue growth, $9 million more adjusted operating income, 16% adjusted operating margin, up from 14% last year, and 16% EBITDAP margin on the higher revenue. Aftermarket revenue was 34% of revenue and growing, up from 28% in Q4 last year. Our Q4 commercial revenue is on Slide 11.

Commercial OEM revenue of $140 million was down $5 million, which was more than offset by the more profitable commercial aftermarket revenue, which was up $18 million on sustained demand for spares, including on multiple business jet platforms and legacy 737 aircraft. Our Q4 military revenue is on Slide 12.

Military aftermarket revenue of $65 million was up $11 million or 21% over Q4 last year, which offset the military OEM revenue declines. Cash flow is on Slide 13. For the full year, we generated $9 million of cash flow from operations and after $22 million of CapEx investment had free cash use of $12 million.

For Q4, as expected, we generated significant positive free cash flow; $78 million cash flow from operations and $72 million of free cash flow. Working capital reduction contributed about $19 million of cash flow in the full year and $122 million of cash flow in the quarter. A comprehensive cash flow walk is in the appendix on Page 27.

For FY '25, consistent with prior year seasonal working capital cycles, we expect growth in Q1 in the range of the amount of the reduction in Q4, followed by working capital reduction in the second half of FY '25. On Slide 14 is our FY '25 guidance.

Our guidance includes the benefit of the recent $40 million of cost reduction actions, net of anticipated inflation. These reductions were necessary to rightsize fixed costs in the continuing business and are enabled by the standardization and efficiency work that has been done over the last several years and is ongoing.

We have assumed less than the current Boeing purchase order demand in our guidance based on our expectation for a temporary shift in demand, which varies by site. We are committed to meeting our obligations to Boeing and to being prepared to support future rate increases.

This assumes temporary demand shift primarily impacts FY '25 and is not expected to impact our longer-term demand from Boeing or our longer-term financial targets. Our guidance also includes approximately $75 million of price increases in FY '25 over FY '24, three quarters of which are already agreed and under contract.

These actual and planned price increases reflect consideration of the current and forecast cost environment, and most importantly, the value that our complex and unique products deliver to our OEM and aftermarket customers.

For the balance sheet, following the announced $120 million 2028 note redemption this month, we assume $960 million of the 2028 notes remain outstanding during the year. We also assume cash funding for the forecast pension payments in FY '25 of $23 million. We expect net sales of approximately $1.2 billion.

We expect operating income of approximately $140 million, which is about a 22% increase over FY '24. We expect approximately $182 million of EBITDAP, which is a 26% increase over FY '24, and 15% EBITDAP margin, which is a 300 basis point increase over 12% EBITDAP margin in FY '24.

For free cash flow, we expect $10 million to $25 million based on our conservative OEM demand and working capital assumptions. We expect CapEx of $20 million to $25 million, interest expense of $95 million, cash interest payments of $90 million and cash income taxes of $12 million.

On Slide 15 is a graphic of the recursive cycle of deleveraging benefits, which is upside to our longer-term targets. As we continue to reduce debt and increase EBITDAP, our credit ratings will improve. This will lead to opportunities to refinance our remaining lower debt at lower rates and reduced interest expense.

Less interest expense means more free cash flow to reduce debt and the cycle repeats. We expect opportunities to improve our capital structure that are not assumed in our longer-term financial targets. Our longer-term financial targets of the continuing operations are on Slide 16.

Sales, EBITDAP margin, free cash flow, yield on sales and net leverage are presented for FY '24 actuals, FY '25 guidance and FY '26 and FY '28 targets.

The EBITDAP expansion is robust, and along with the free cash flow generation, drives the net leverage reduction, even without the benefits of lower interest expense from potential capital structure improvements, which is not assumed. We conservatively assume the $960 million of our 2028 notes remain outstanding to maturity.

However, we will continue to consider capital structure improvement opportunities as they become available to reduce interest and accelerate cash generation and deleveraging, which will deliver upside to these targets. We assume cash funding of the pension plan as detailed by year in the appendix on Slide 23.

We have substantial tax assets that continue to minimize U.S. federal cash taxes for several years. On Slide 17 are the relative size of the key drivers of the multiyear growth.

EBITDAP margin and free cash flow are expanding more rapidly than revenue driven by the contribution margin on the incremental volume, price increases, favorable mix for military and aftermarket revenue growth and cost efficiencies.

In summary, fourth quarter results included solid organic revenue and operating income growth, operating margin expansion, cash generation and a significant reduction in our net leverage.

Triumph enters FY '25 with a stronger balance sheet, a profitable and diverse $1.9 billion backlog, tailwinds from the recent cost reductions and previously negotiated price increases. The multiyear plan includes rapid margin and cash flow expansion to drive shareholder value with upside opportunities, including a lower cost of debt.

Now, I'll turn the call back to Dan.

Dan?.

Thanks, Jim. Turning to Slide 18, I provide a few supporting facts for our bullish outlook. First, fiscal '25 is the first year when previously negotiated price increases on long-term agreements begin to cut in with full effect.

As Jim noted, we estimate that over $75 million of gross price increases will become effective this year, contributing to a 300 basis point year-over-year increase in EBITDAP margins.

The inability of the OEMs to satisfy the high and rising demand for new aircraft has led to a growth in the average fleet age over the last five years of approximately 18 months.

This, coupled with rising global travel demand is accelerating Triumph's spares and repair business, which has experienced a 9% CAGR over the last three years as aftermarket sales finished the year at $347 million.

To be clear, Triumph's aftermarket business is generated by OEM and IP within Systems & Support and does not include sales from the recently divested third-party maintenance business.

Triumph's commercial transport production revenue grows more than $200 million from fiscal '24 to fiscal '26 if Boeing and Airbus meet their publicly shared targets for the A320 family, 737 MAX, A350 and 787.

Turning to Slide 19, I provide additional color on Triumph's Geared Solutions business, which has been on a steady recovery path, leveraging the Triumph operating system. This business is attractively positioned for a strong IP-driven future.

Today, Geared Solutions MRO business is driven predominantly by products developed in the 1980s, including the V-22 Pylon Conversion system and the F/A-18 C&D Airframe-Mounted Accessory Drives, or AMADs.

Looking ahead, we have five new gearbox applications that will transition to production over the next two years, including a new Saab Gripen AMAD, the Boeing T-7A AMAD, several new gearboxes on the B-21 and a new AMAD for South Korea's new KF-21 aircraft. In fact, we received our first production gearbox orders for the KF-21 aircraft in the quarter.

As these aircraft transition to production, their deployment will generate spares and repairs volumes, ensuring that Geared Solutions participates across all phases of the product life cycle, renewing Geared Solutions backlog.

They are also increasingly engaged in additive manufacturing to replace costly and long link castings and in the electric vehicle space as they are sought out for their expertise in the drivetrain, which connects electric motors to rotors and propellers.

Triumph is extremely active in new product innovation, particularly modular components and subsystems that have multi-platform application and allow us to compete at the next level of the supply chain. This is important to expanding and maintaining our content on future aircraft and creates retrofit opportunities on legacy planes. Turning to Slide 20.

We provide a current snapshot of Triumph's innovation flywheel, including new gearboxes, fuel pumps, a new high-capacity thermal compressor and entirely new product line of engine internal actuators and digital engine controls featuring high-speed cyber protected processors.

These new product developments are financially sponsored by leading customers, and our source of long-term shareholder value as our IP-based solutions address our customers' most difficult challenges. In summary, fiscal 2024 was a successful year for Triumph.

We have positive momentum into fiscal '25, driven by our aftermarket expansion, even with conservative assumptions on the Boeing commercial rates.

Building on the excellent performance of our flagship system and electronic controls and actuation businesses, we fully expect to have all four of our operating companies hitting on all cylinders as we progress through fiscal '25.

We are taking necessary actions now to reduce our spend in the short term to offset the financial contribution of our divested third-party MRO business that will put us back on the trajectory we presented at the Investor Day, having accelerated our deleveraging by two-plus years.

The medium and long-term fundamentals for Triumph remain strong and reflect what we believe is the start of the next aerospace and defense super cycle. The encouraging outlook for our industry, our unique and focused market position and our commitment to performance, has us well positioned for continued success.

My team and I are excited about the future for our company, one with lower debt and interest carry and improving credit outlook, growing backlog and an improving market demand. We're happy to take any questions you have now..

Thank you. [Operator Instructions] And today's first question comes from David Strauss with Barclays. Please go ahead..

Hi, good morning. Thanks for taking the question. This is actually Josh Korn on for David. I wanted to ask about the longer-term forecast. We thought interest savings could be greater than what you lost with the divestiture. So, why the free cash flow conversion -- or I'm sorry, the free cash flow percent of sales forecast went down? Thanks..

Sure. Hi, Josh. It's Jim McCabe here. In the multiyear, we conservatively assumed that we're going to keep the current first lien notes outstanding. They're 9% notes, and after the earlier announced $120 million additional paydown that will happen this month, will be down to about $960 million.

So, we're going to be opportunistic about capital structure improvements. They may occur, but we don't want to lean forward on that. We're trying to put a reasonable conservative assumption and moving forward on the balance sheet, especially for FY '25.

But I do believe over the multiyear period, there will be opportunities for improvement in cap structure and we will see it.

In fact, I put that recursive cycle slide in because we're getting some of that feedback from investors, too, saying, hey, you should be able to lower your cost of capital with your higher EBITDAP, your lower leverage, improved credit and we're looking forward to doing that..

Thank you. Just one for me..

Thank you. And our next question today comes from Noah Poponak with Goldman Sachs. Please go ahead..

Hey, good morning..

Good morning..

Hey, Jim, just staying there. So at the Investor Day, you had the fiscal '26 free cash flow $100 million target. The slide here $1.4 billion revenue times -- or multiplied by 4% free cash flow margin is $56 million. So, it's a pretty significant reduction.

I hear what you just said there on how -- Product Support comes out and then you're maybe layering in the interest expense reduction.

So, can you just break out or bridge the pieces from $100 million to $50 million? How much product support came out? How much interest expense came out -- but could come out later? How much is just less profitability in Interiors? What are the actual specific moving pieces from the $100 million to the $50 million?.

Yeah. Thanks, Noah. The effect of the divestiture was to substantially reduce the leverage. It did substantially reduce debt as well. So, interest goes down, but we did give up a business that was slightly above the midpoint of our margins and it was higher growth because it's a commercial aftermarket, albeit third party.

So what we saw was a slowdown in the sales growth and we started from a lower base on EBITDAP, but we get up to 20% just a year or two later and the cash flow follows. Working capital assumptions may be a little more conservative moving forward, given some of the uncertainty around the Boeing OEM rates.

And we haven't assumed any of our improvements in capital structure.

So I don't have exact reconciliation back to the Investor Day, but I think what we traded was a little bit of growth deferral and margin expansion for a better portfolio that has higher IP content, but much lower leverage, much lower credit, and we cleared the runway of any maturities until 2028..

I'll just add, Noah, that when we had the Investor Day, Boeing was looking at more robust year-over-year rate recovery. So, we've been conservative in our fiscal '25 and '26 volume assumption, as you noted. But the good news is book-to-bill and backlog are up and as those orders drop and we convert them to sales, cash will follow..

Okay. Yeah, I mean that all makes sense. But the revenue -- I guess the revenue adjusted for product support isn't terribly different in that '26. It's just a little hard to reconcile that. I guess on the working capital piece, the '25 numbers you provided, EBITDAP minus cash interest, cash tax, CapEx, pension, that doesn't get me to the '25.

So, it sounds like there's working capital use in '25 as well.

I guess what's going on with working capital that it's going to be maybe a larger source of cash than you were expecting? Because I understood it as you had some pretty meaningful working capital improvement initiatives?.

Yeah, we do have working capital needs, and we have to protect the ramp, which we see coming, although it may be slipping several quarters from where we thought it was going to be. So, the incoming inventory is still there, and we're going to be prudent about balancing that.

I think a slide that might be helpful to you is Slide 17, because what we did there was we bridged the cash flow from FY '24 on the bottom to show how it's increasing through '26 and what the major drivers are. So you have the EBITDAP expansion, which is that first large bar.

It's offset by working capital usage, that's the orange bar, and pension funding, and then the interest savings is the blue bar, and there's a little bit of tax in there, too. So those are the components of '24 to '26 cash, and we can give you more public information, we could follow up with and point out to you the components..

Okay. Great. And then just last thing I want to ask about, I know you gave -- I heard you give some detail there on the Interiors margin in the quarter and going forward. I guess, the projection there was much higher for the quarter and you provided that a month into the quarter when you reported your fiscal third quarter.

I guess, how is that able to be so much lower than your forecast with a lot of the quarter already behind you? And can you just circle back to what the actual fundamental drivers of the performance are?.

Noah, there's no doubt it is disappointment. And we thought they do better on cash and earnings, but they did deliver the sales. So, we've got a new leadership team in place there, intensively going through all of their cost, making sure that they're helped working to fill the factory.

Recall, there's two big factories down there and Zacatecas one is empty, one is full running ducting. That's why we've been engaging with Boeing to fill that factory. That will help us with absorption. So that's going to be a key lever for us returning that business.

We know it makes money with volume and we've done some things on the cost side as well here that we hadn't done before. Operationally, it's a really good plant. Quality is outstanding, on-time deliveries outstanding, but if we're going to get it back to where it was, we're going to have to do more on cost and more on volume.

So yeah, disappointing financial results in the quarter. But I think the key signal is sales are coming up in Interiors and we're doing the actions required to address the earnings and cash..

Okay. Thank you..

Thank you..

Thank you. And our next question today comes from Peter J. Arment with Baird. Please go ahead..

Good morning, Dan and Jim.

Hey, Dan, on the $75 million in pricing that you highlighted for this year that starts to cut in, where -- can you still highlight what's available in terms of new pricing opportunities for Triumph going forward?.

Yeah, it's a question we often get and every new LTA that resets presents an opportunity for us. I'll remind you that we negotiate these LTAs outside of lead times because if we can't reach agreement with an OEM, they may choose to source this elsewhere.

Sometimes they don't get around negotiating it, and there really is no alternative, but to stick with the incumbent. And we have gone through, I'd say, roughly half of our contracts, but the thing is, it doesn't end. It renews as contracts extend, because the average contract LTA duration is about five years.

We have some 10-year ones, we have some three-year ones, five years sort of the typical. And rather than doing it is -- it runs out as a source of opportunity is something that we continue to schedule. This is something we review with the Board. We have a list of all of our contracts. And when LTAs reset -- we don't always wait for the LTA to reset.

There might be some reasons why we need to see price ups in the middle of one of those longer term because of changes in the underlying assumptions or customers' rates have dropped or changed so that we get another bite at the apple. So although I would say we're about halfway through our initial complement of LTAs, there's more ahead.

It doesn't end..

That's helpful. And then, Jim, could you maybe just -- from just a modeling perspective, you've given us the annual guidance, but how you're thinking like maybe first half versus second half, whether you want to comment on the top-line or just free cash flow cadence? Thanks..

Sure, Peter. Yeah, I mentioned in my prepared remarks that the cash used in the first quarter -- we build working capital every first quarter. It's going to be the same this year. And the cash use is kind of be in the $100 million range for the first quarter.

But then we're going to be neutral in the second quarter and kind of cash generation in Q3 and Q4 strong casual generation again. So, the same profile we've seen in prior years, driven primarily by working capital, but some aftermarket demand is stronger at the end of the year as well.

So that's the cash profile, and it could improve if the Boeing rates are higher than our discounted forecast. In terms of the cadence -- as I know people like to know the margin cadence, and I'll talk to the Systems & Support in particular because that's the most of the business.

Similar margins in the first quarter to last year and similar expansion in margins quarter-over-quarter, with a 100 basis point to 150 basis point per quarter improvement with the fourth quarter being the strongest, but a continuous ramp through the year on margins.

So, [indiscernible] business, and now you've got the history by quarter that we posted previously so you can see the comps, and they should be favorable moving forward. And with some good, strong aftermarket continuing and with some luck on the Boeing rates, we could do better than our forecast..

Appreciate it. Thanks, guys..

Thank you. And our next question today comes from Seth Seifman with JPMorgan. Please go ahead..

Hey, thanks very much, and good morning..

Good morning..

I wanted to check in on the expectations for Boeing rates beyond '25 in the long-term plan. And I think in the response to Noah's question, it sounded like there were still some conservatism baked into fiscal '26. But in the prepared remarks, I thought you talked about beyond this year, Boeing and Airbus getting to their published rates.

So, just kind of curious what kind of 737 and 787 rates you have baked into that fiscal '26?.

Yeah. Thanks, Seth. So, there's three programs that we track closely with Boeing. The 787, they're about to drop a new schedule. They've done some messaging in the media about what that might look like. The 777, they have dropped a new schedule called U-80, and we've digested that. That's a very modest change.

In fact, I toured the 777, 777X line in Seattle in the quarter, and it's very encouraging to see the level of build that's happening on that program. It really took me back because the program quickly shifted from building flight test aircraft to building deliverable aircraft. The 737, they have a new schedule that's coming out. We don't have it yet.

So, we have to go with our own best estimates on that. And as mentioned, when we take all the Boeing programs together and we adopt, I think, a higher degree of conservatism than we have in the past, it's about a $70 million revenue hit.

Now we may find that the 737 rates that are, let's say, in the low 30s in fiscal '24 that we're entering, we're forecasting to get into the 40s in fiscal '26 and hit 50 in fiscal '27. We'll see how that plays out, and we'll update all of our investors and analysts as we go.

But I'd ask that you give us until next quarter to see these revised schedules on the 737 and 787 so that we can more accurately update our forecast. I also want to add that I spent a full day at the Boeing Supplier Conference out in Seattle with Stephanie Pope and Ihssane Mounir and all of their leaders, the heads of every one of their programs.

And I listened to them, described in detail their plan is to address the FAA concerns, the quality metrics that they are tracking to that would provide the basis for raising their rates, and it's all very straightforward very credible.

It's towards the things that you -- I think any reasonable person would look at and say, if you improve on those metrics, it makes sense that you're clear to continue to increase production. So, I have confidence of doing the right things. I started my morning -- this morning watching Michael Whitaker on the news talking about this very issue.

And I think his comments were spot on that it's really the beginning of a journey where Boeing really does track these metrics. And I'm also confident, I should say, the things that are doing with Spirit.

It was very encouraging to hear them report out a very detailed process level engagement, improvement in tooling, automation, workforce engagement that's happening there. I know the folks on the phone here don't get to hear that, I do as a member of the aerospace quality forum that Boeing has launched, I'm on monthly calls with the CEO of BCA.

So I know what they're doing. And I think once they get through that FAA gate, they'll be able to provide more clarity on the 737 demand. But the most important thing that I'd like you to take away from this call is that we've adopted conservative assumptions.

And we don't expect to have to come back to investors and analysts and say, hey, it's actually worse and we've got a hole in our forecast..

Okay. Thank you. That's very helpful color.

And then as a follow-up, just -- and I apologize if I missed this during the prepared remarks, but in terms of the end market growth rates that are baked into the sales forecast for this year, can you run through this?.

The growth rates that are baked into the -- on a revenue top-line, is that what you're asking?.

Yeah.

In terms of the commercial OE aftermarket, the military OE aftermarket?.

Sure. Hey, Seth, it's Jim. We didn't give the details of exactly which markets are growing by exactly what rate, but I would tell you that the long-term trends and certainly the trend in FY '25 is continued growth in aftermarket overall.

And that's important because aftermarket, even though it's a third of our sales, two-thirds of our profit and therefore, cash flow. So while OEM rates are important, two-thirds of our sales, they're only a third of our profitability.

So strong aftermarket growth, and I think we see continued improvement in military as well even on the OEM side as some of the production starts to ramp..

Okay. Excellent. That's very helpful. Thank you..

Thank you..

And our next question today comes from Cai von Rumohr with TD Cowen. Please go ahead..

Yes, thanks so much. So, you mentioned $75 million price hike. How much of that actually hits fiscal '25? And what is the net impact of that? Because obviously, folks are giving you that because your inflation is higher.

So, what are the -- how much of it hits and what's the net impact?.

All of the gross savings, the price ups hit in the fiscal year. That's a fiscal year number. It's not a number that lays out over multiple years. There'll be further savings on price -- or further price ups that lay in over the out years. And then the net contribution is reflected in our 300 basis point margin expansion.

Jim, anything to add?.

Yeah. As Dan said, the $75 million is the year-over-year price improvement from FY '24 to FY '25 gross. And as you alluded to, Cai, there are -- there is inflation that offset some of that but not all of that.

And that, coupled with the $40 million of annual price -- or cost reductions we've made is the reason we're able to expand margins from 12% to 15%. Largely, all that could be accounted for by the cost decreases alone.

But there are offsets to the price, price is necessary, but it's also accretive to margins as shown by that 300 basis point improvement..

Terrific.

And then, while you can't tell exactly yet where Boeing is going to take some of these rates, can you give us some color like where are you today on the 787, A350 -- excuse me, 787 and 737? And what's your inventory position? I mean, do you have a lot of them sitting around? Give us some color on that and we can make a guess in terms of where you might be going..

So, on 787, our full up rates were around six last year, and we were headed to 10 in fiscal '27. I think Boeing can still make that sort of rate, that the issues that they're working through now are all readily solvable. But in the short term, there will be a decrement, and that's why we've adopted that conservatism.

On 737, again, Cai, it does vary by factory, and it varies based on the work in process and finished goods inventory levels. But I think last year, we ended the year kind of in the low 30%s, and we were headed into a year that's the mid-30%s getting to about 50% in fiscal 27. That was the prior assumption.

And now we're adopting conservatism around that number of -- on the order of 20% to 30%.

I think that's more conservative than how it will play out, but we've really listened to our investors and the analysts that says Triumph, if you really need to have a plan that you can hit with confidence over the next two years, how it affects working capital is and we typically order parts six to 12 months in advance.

So that's why we were ordering to that higher profile in the middle of last year and that contributes to part of, I'll call, the build in working capital that we reported at -- over the last few quarters.

Now, we're pulling our breaks on to slow that incoming material to reflect that more conservative assumption, while working with our suppliers to make sure that we can reverse that and spin up to the higher rates once Boeing gets the green light of the FAA.

Does that help?.

Yes, that is helpful. Thank you. And I guess my last one is, it is a two-part question. What's the status of the Daher suit regarding their acquisition of Stuart? And what's your answer? I mean, as we look at this cash flow, you're talking $56 million free cash flow in '26.

And so, if we look at '25, '26, that's really not a huge cushion if something goes wrong, if we have sort of an exogenous event.

Any thoughts about any additional actions you guys would take to kind of improve your flexibility more?.

So that's a multipart question, but I'll take a shot at it, okay? So, there's really no update on the Daher litigation. That's working its way through the legal process. We continue to vigorously defend ourselves.

As you recall, the fact is the buyer has been responsible for Stuart operations since the business was sold in July of 2022, and it was part of our larger portfolio transformation. And that sale agreement included terms that limit our potential exposure as well as the amounts claimed by Daher. So there's not really anything new there.

I'll point you to the 10-Q on how we lay that out. And we take our commitment to quality seriously. And when we've had issues in the past with Boeing, we've resolved those.

This happens to be with Daher not with Boeing because they [indiscernible] business structures, it is a complex business, and it takes a level of experience and close attention to detail. But we've exited that business, and we're going to work to continue to cap off the legacy liabilities in the structures area.

So -- but we don't expect any, I'll call it, major financial impacts in our fiscal year from Daher litigation. That's the bottom line..

And the last one about the flexibility..

So you're saying if something adverse were to happen, how would we fund them?.

Cai, just on financial flexibility, we came down from 7.6 times to 4.9 times on leverage, and by '26, we're at 2.6 times. So, we have room on the balance sheet should we ever need to raise more capital for any purposes. We don't expect it for that purpose. But -- and we don't have any maturities until 2028.

And we have solid availability with positive cash flow, with the conservative forecast. So, we feel confident in our ability to fund any needs of the business, whether it's from the existing balance sheet or if we need to raise more capital, we could..

Got it. Thank you..

And our next question today comes from Myles Walton with Wolfe Research. Please go ahead..

Hey, good morning. You've got [Lou Raffetto] (ph) on for Myles..

Good morning..

So maybe if I just start with the $40 million cost reduction actions.

Is that something you expect the whole amount to sort of be a benefit in fiscal '25?.

That's the gross amount, Lou, of the reductions. So, year-over-year, net of inflation, you probably see something in the $25 million to $30 million range of benefit, and we were targeting all of our SG&A and overhead or fixed costs.

So year-over-year, we're looking for 40% -- $40 million gross reduction, which net of inflation is probably going to be the $25 million to $30 million range..

Okay.

And are there -- you took $5 million cost in the quarter? Any additional costs to think about to achieve this year?.

Not -- I think most of it has been actioned already that has severance associated with it. And the rest of it -- lot of it is third-party costs that we're able to reduce without having those restructuring charges. There could be some, but I don't anticipate anything large..

Yeah, I would look at that cost reduction number in tandem with the conservatism we've adopted on rates. That way, we don't have to go back and do another sweep through in cost because the rates have fallen further.

We're watching the portals where Boeing loads their demands very closely to make sure that our assumptions that we based those cost outs on are holding and so far they are.

In fact, some of the early inputs that Boeing's putting in the portal are better than our conservative assumptions, but we're going to stick to those until the formal schedules are released..

Okay. And I know this was asked earlier, but I guess I still wasn't fully clear on just sort of Interiors and exactly what happened. Sales weren't too far off.

So just trying to understand if was some of these higher margin sales didn't drop through? Was there something on the cost side that completely came off found that surprised from the mid- to high-teens down to sort 2%?.

So, they had -- they were in -- we were transferring work from our Spokane plant down to Zacatecas in Mexicali. And some of their estimating on the cost of moving that work was off, and therefore, their predictions of earnings and cash was off. Now we've fixed that and we'll have accurate EACs going forward for the Interiors business.

And we've also gone in and established those hedges that I mentioned and adopted alternate sourcing actions. Those things we would have liked to have cut in sooner and they didn't, in fact, so we saw a continued drag on margins and cash. So it's a bit of a timing thing.

The thing I'd like to take away from our Interiors is we know how to get 20% out of that business. We've been there before. And we've done it when the volumes were higher.

We have a clear path to higher rates once Boeing gets past the current challenges we're using the time now to negotiate increased scope on programs like 787, not just with Boeing but with Spirit, the KHI and others, Airbus on the A220. So we're doing all the underlying actions to get back to where we used to be.

And with the cost advantages that we have in operating in Mexico, the strong quality, strong on-time delivery. It is one of the largest factories in the world that produces these type of installation and ducting products, we're confident we can get back to where we were..

All right, thank you very much..

Thank you..

And our next question today comes from Sheila Kahyaoglu with Jefferies. Please go ahead..

Hey, good morning, guys. I have a few questions, if you don't mind, just to play clean-up here. Dan, you mentioned you're being conservative on the MAX rates and you're going to a 30% cut internally versus where you thought you'd be producing, which I think is in the mid-30s or high-30s.

So does that imply your guidance assumes 30 a month or so on the MAX? And on the working capital item for free cash flow, are you assuming $20 million of usage in fiscal '25? And is that all MAX and 787?.

So, I'll start on the rates and Jim can hit the working capital.

The rates -- and I know it's tricky for us because unlike Spirit that has largely a discrete product in the fuselage, we've got seven different factories that are supporting it at different build rates and -- because Boeing is -- historically, they've allowed us to run at rates that are higher than their consumption rate because they don't want the supply chain to go idle.

And then turnaround and ramp back up to 40 to 50. So, we're waiting to see what they're proposing by commodity, by product. But it's not 30% across the board lower rates on the MAX. We -- some of the factories we are assuming in our fiscal '25 guidance about 20% reduction, not a 30%, but it does vary.

Once we get clarity from Boeing, we'll provide it to you and to others, so you can see how we handicapped it -- if we handicapped it right. But I think we've done the right thing.

Jim?.

Sheila, on the working capital, there's assumed usage in the $20 million to $25 million range for the full year, and that is largely driven by having inventory and lower shipment rates forecast. So we have to still maintain that inventory for our contracts, and we'll be ready for rate ramps.

But that's part of the reason for some working capital usage..

Yeah, just a little bit more color there, Sheila, it's a negotiated process, product by product with Boeing because some products lend themselves to rate cuts without implication to the supply chain and Triumph's workforce more than others. We can pull back the throttles in some plants more readily.

And we partner that decision with Boeing so that we don't cause problems later whether they're supply or price as the ramp comes back. So, we need to get through this process, they need to give clarity to the supply chain. We need to sit down, go through commodity by commodity, and then we'll be in a position to say, here's what we're building at.

But I've given you today the sort of aggregate numbers..

Sure. And then maybe on the margin for fiscal '25, when you talk about 300 basis points, you mentioned '25 net productivity.

So does that imply net price is about 1% off a 6% gross price?.

I don't have the exact number for the contribution, but there's a positive contribution, net of the inflation and material costs in particular. That sounds in the range of reasonableness for an assumption..

Okay. And then last question, just to level set everyone.

So on the long-term guidance, is there an organic top-line and margin change outside of the divestiture of Product Support?.

So no, there really isn't..

Yeah, we're still striving towards the same financial objectives and our goal is to be 20% or better on EBITDAP margins. And the profile to get there is -- it's been set back slightly because of TPS, but we're still on a very good trajectory to hit 15 this year.

Again, we think that's a conservative assumption, but that's our number, we're sticking to it and we're going to work like hell to beat it but that's the guidance for the year. And then the profile to get back to 20 -- to achieve 20 is laid out in Jim's slides..

Okay. Thank you..

Thank you..

And our next question today comes from Sam Struhsaker with Truist Securities. Please go ahead..

Hi. Good morning, guys. I'm on for Mike Ciarmoli this morning. I was just curious....

Hi. Good morning..

Good morning. You pointed to potential improvement within military OEM following a little bit of weakness this quarter.

Could you potentially provide any detail on kind of maybe the timing of that next year in the cadence?.

I think we're going to have to do that offline in a sense that there's different programs that contribute to the military recovery, and we only gave sort of aggregated numbers and then the new wins in that space. So we may have to take that action.

But if you go back to the backlog chart and it shows the rate changes that we have, I mentioned that program six through 10 in our backlog are all military programs, and they're all -- the rates are generally stable.

F-35, what I'm hearing on that is that they are expected to go to 20 a month, GAO would support that once they finish some of their software updates. That will be a tailwind for us right now. We're looking for additional scope on the F-35.

We're in the public about our pursuit of their power thermal management system, which is a large subsystem that provides cooling on the aircraft as well as APU functionality and engine starter generators.

And then the ramp-up of programs that are transitioning from development to production, we mentioned the Saab, T-7A, the KF-21, they all have their own time line for recovery. So, I think if it'd be better off if we provide some summary of the individual components of the military recovery rather than answer it off the cup..

No, that's very helpful. Thank you guys..

Thanks, Sam..

Thank you. And our final question today comes from -- I apologize, it comes from Ron Epstein -- actually, it looks like we lost Mr. Epstein's connection. So at this point, we're going to close the question-and-answer session and today's conference call. Thank you for attending today's presentation.

You may now disconnect your lines, and have a wonderful day..