Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group Conference Call to discuss our Second Quarter Fiscal Year 2021 Results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast.

Please ensure that your pop-up blocker is disabled if you're having trouble viewing the slide presentation. [Operator Instructions] There will be a question-and-answer session following the introductory comments by management. On behalf of the Company, I would like to read the following statement.

Certain statements on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause Triumph's actual results, performance or achievements to be materially different from any expected future results, performance or achievements expressed or implied in the forward-looking statements.

Please note that the Company's reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release, which can be found on their website at www.triumphgroup.com. In addition, please note this call is property of Triumph Group, Inc.

and may not be recorded, transcribed or rebroadcast without explicit written approval. At this time, I would like to introduce Daniel J. Crowley, the Company's President and Chief Executive Officer; and James F. McCabe, Jr., Senior Vice President and Chief Financial Officer of Triumph Group, Inc. Go ahead, Mr. Crowley..

Thank you, Kevin, and welcome, everyone, to our Q2 earnings call. I hope you're all safe and well. Earlier today, we reported our second quarter results for fiscal year 2021. Revenue and free cash flow were better-than-expected due to expanding sales on military and cargo platforms and tight working capital management.

Our operating margins and EBITDAP stabilized in the quarter, and we expect both to improve through the balance of the year. We made tangible progress in Q2 to position the Company towards its future state. Trends in air traffic and MRO demand indicate the aviation recovery is progressing at a positive, if measured pace.

OEM production rates remain stable and repair receipts are improving month-over-month. Combined with these macro trends, our actions to reduce cash use and restore margins generate positive momentum into the second half of our year and give us enhanced confidence we will achieve our full year targets.

After managing through the severe commercial downturn in our Q1, we delivered quarter-over-quarter improvement in our core operations, driven by favorable trends in systems and support, military helicopters and engine content and strengthening Airbus narrow-body production rates. Triumph's second quarter results are summarized on Slide 3.

Let me walk you through the highlights. First, based on the consistency of our build rates and improving aftermarket order book, commercial aerospace demand appears to have stabilized and is starting to recover.

Second, our Q2 results, while obviously down from the prior year, are either in line with or above our expectations, and keep us on track to meet our full year objectives. Third, we are yielding greater efficiencies from the Triumph operating system across all levels of the enterprise with an emphasis on working capital reduction.

Fourth, we remain on track with the last of our Structures program's transition and factory exits while continuing to complete our planned divestitures. And last, our recent refinancing transaction, asset sales and pension-related actions support our return to cash flow generation.

We exited Q2 on an upward swing, using less cash with a line of sight to positive free cash flow in Q4 and are committed to following through in the second half of the year consistent with our prior guidance. Now let me touch on each of the drivers for the second quarter, as outlined on Slide 5.

I'll recap the tailwinds and headwinds we encountered, thankfully, most of the headwinds in Q2 are nonrecurring. COVID-related impacts in Q2 included OEM production rate reductions from prior periods, excess commercial inventory as we align material receipts with demand, virus-related cleanups and facility exit costs.

Our team acted aggressively to reduce footprint and cost through the exit of our Arlington, Tulsa and Atlanta facilities. Overall, we reduced SG&A expenses by $10 million in the quarter. Q2 cash use on sunsetting programs was heavy, but is on track to complete this fiscal year.

Our Structures team delivered the final G280 components from our Tulsa facility this quarter. We have less than 4 ship sets of 747 components remaining to deliver. In Q2, we used $47 million due to these combined causes.

As demonstrated from Q1 to Q2, we expect cash use to decrease in our third quarter with positive cash flow generation in the fourth quarter. In addition, during the quarter, we successfully completed the sale of the G650 wing kitting and engineering services program to Gulfstream.

The sale of our two composite Structures businesses remains on track to close in Q3 as part of our game plan to exit all remaining cash consuming Structures programs this fiscal year. We plan to exit fiscal '21 in our future state configuration as a pure-play systems and support provider to military and commercial customers.

I'll now comment on the favorable tailwinds in Q2 and year-to-date. Military sales increased in both Systems & Support and Aerospace Structures, helping to offset the commercial declines.

For example, our Staverton UK actuation business has seen military sales more than double year-over-year, growing from 14% to 32% on a path towards 40%, as they replace lost commercial volumes. Overall, military content comprises 52% of the backlog in Systems & Support.

Our ability to pivot to freighter and military content is a reminder of how valuable Triumph's backlog diversity is, especially as we continue to work through the commercial downturn. As mentioned, we saw repair receipts starting to pick up month-over-month, led by aviation recovery in Asia.

We are recording higher receipts across 8 of our 10 MRO repair centers on a weekly basis, including net increases at those sites in excess of 38% compared to Q1. As expected, we benefited from our early and aggressive austerity measures, yielding improved gross margins.

We remain on track to achieve over $120 million in savings in fiscal '21, much of which will benefit future years. We redoubled our lean efforts via our Triumph operating system in the second quarter, completing 30 lean events and identified over 200 more now underway, most targeting inventory.

Past due backlog at the Company reduced by $15 million year-to-date. After years of operational improvement, our Structures programs have achieved green status across the board with systems on a similar trajectory this fiscal year. Success and execution will position Triumph for continued growth as we come out of the pandemic.

With these initiatives and our continuous assessment of our cost structure, we have upside to our operating margins which we expect to improve quarter-over-quarter through the year. As CEO, one of my original transformation goals was to make Triumph's financial performance more predictable.

Q2 marked another quarter of strong program financial performance with positive cume catch up overall, our second consecutive quarter with favorable true-ups. As previewed last quarter, we refinanced a portion of our balance sheet to increase our liquidity and ability to work through the commercial market down cycle.

We also completed 2 pension-related actions together improved earnings and future cash flows. Jim will cover these in detail in a moment. Collectively, these initiatives further derisk our balance sheet and support improved profitability cash generation in fiscal '22 and beyond.

I want to characterize how the overall market trends are affecting Triumph. Slide 6 references data over the past quarter span. Global logistics and freight operators are preparing for the greatest product rollout in history, one which will strain freighter fleets and drive utilization rates to record levels.

Additional passenger aircraft are expected to be flown and cargo missions generated increased MRO for Triumph. Airlines continue to adapt their fleet, marketing and pricing to spur air traffic volume, actions that are driving a 33% increase in commercial aerospace MRO quarter-over-quarter.

We held calls with all our major carrier customers in the quarter and are bidding new part numbers as they recompete their supply chain. Greater aircraft utilization is up 15% year-over-year, providing a bright spot for our third-party MRO business, which focus on customers like Atlas, FedEx and UPS.

We expect MRO revenues in this segment to accelerate after the holidays, as freight carriers address deferred maintenance requirements. The most recent third quarter U.S. GDP numbers show a strong rebound at 7.4% growth, reclaiming two thirds of the loss in the first half of the year, a recovery 4 times faster than that of the 2008 financial crisis.

This is potential evidence that the underlying economy remains strong and will rebound quickly, absent COVID restraints. Turning to new business awards. Our Triumph Systems business had a productive quarter, recording wins on 70 work packages, amounting to$381 million in value with 70% win rate by dollar value.

Notably, Triumph factory shipments in the quarter were 35% military. TSS reportable backlog remained stable at $1.25 billion,indicating that further increases in our military mix are on the horizon. Military MRO shipments were up 12% from Q1.

Several key strategic wins are highlighted on Slide 7 and include wins on military helicopters and thermal products across multiple platforms. For the Apache helicopter, Triumph developed improvements to our T700 electronic engine controls, enhancing safety and performance.

This order for 261 units represents our first award for this new control unit, and it will eventually displace all fieldedT700 control units in the U.S. and many FMS aircraft. This program will result in nearly $200 million of U.S. military awards plus additional undefined FMS awards.

This is a great example of our continued commitment to enhancing fielded fleet performance through our technology-driven upgrade programs.

The second highlighted strategic win is a funded upgrade program for Triumph's T55 engine fuel control and fuel pump metering unit on the CH47 Chinook, which will increase performance by 25% and reduce fuel burn by 10%.

This program extends Honeywell's proven track record of performance improvements on the popular T55 engine with power increases of 138% since its introduction. We are excited to be a key partner on this critical program. Finally, Systems captured a number of thermal system or heat exchanger awards in the quarter.

Our thermal business formed from a consolidation of our Connecticut and Maryland factories is predominantly military oriented with awards in the quarter, spanning helicopters, fighters and bombers. This is a great business and a growing market segment. These awards and others are summarized on Slide 8.

Our ability to win work in an increasingly competitive market reflects well on our capabilities and will be key to growing top line after years of shedding noncore programs and sites. With that, Jim will now take us through more results on the quarter.

Jim?.

Thanks, Dan, and good morning, everyone. Our second quarter results were driven by sequential growth in sales in our core Systems and Support business. Increases in the military end market and commercial sales to Airbus drove the improvement.

Margins improved across the enterprise, as we continued exiting loss-making programs and realizing the benefits of our cost reduction actions. Consequently, our second quarter results met or exceeded our plan, and we are on track to achieve our full year objectives. Production build rates remained stable and aftermarket demand is improving.

The demand profile we're seeing is in the range of what we had planned, and we anticipate continued improvement in cash flow and margins as the year progresses. I will discuss our consolidated and business unit performance on an adjusted basis. So please see our press release and supplemental slides for the explanation of our adjustments.

On Slide 9, you'll find our consolidated results for the quarter. Planned reductions from sunsetting and transitioning programs in our Structures segment drove our decreased sales compared to last year.

Revenue declined organically in both segments due to production rate decreases in commercial programs and aftermarket demand, partially offset by an increase in military revenue. Despite the headwinds, adjusted operating income was $21 million this quarter, and our adjusted operating margin was 4%, up sequentially from last quarter.

We're gradually improving profitability on an adjusted basis quarter-over-quarter. With respect to the segment results. On Slide 10, net sales in our Systems and Support segment were up 6% sequentially, including a 50% increase in sales on Airbus commercial programs.

Net sales were down compared to the prior year on reduced OEM demand, partially mitigated by military growth. Adjusted operating margins for System and Support were down over the prior year on decreased MRO volume but up sequentially from last quarter.

Our restructuring actions impacted the segment's margin this quarter by approximately 80 basis points. System and Supports expanding military market sales, along with the cost reduction actions we've taken will help improve margins as we progress through the rest of the year.

Summarized on Slide 11, second quarter organic net sales for our Aerospace Structures segment were down as anticipated due in part to planned sunsetting and transitioning programs as well as declines in commercial programs.

Completion of Aerospace Structures sunsetting programs is expected to use $40 million to $50 million over the remainder of the fiscal year. This group is continuing to take actions to aggressively reduce costs. These actions resulted in $11 million of restructuring costs in the quarter.

Excluding these costs, operating margin would have been slightly higher than last year. These cost reduction actions will benefit margins and cash flow in fiscal 2021 and beyond. Turning to Slide 12. As discussed last quarter, we're experiencing a temporary increase in our working capital, as we adjust our supply chain to the new lower demand.

Our $47 million of cash used in the second quarter was slightly better than planned and driven by increases in working capital and includes $10 million of liquidation of prior customer advances, $22 million of cash used to close out the G280 program and $13 million of restructuring costs.

Capital expenditures were $5 million in the quarter, including upgrading critical equipment in our core Systems and Support segment. We remain focused on aggressively managing our cash and liquidity. We anticipate using less cash in Q3 than we did in Q2 and to be cash flow positive in Q4. On Slide 13 is a summary of our net debt and liquidity.

Our net debt at the end of the quarter was approximately $1.6 billion and our combined cash and availability was about $467 million. In the quarter, we raised $700 million in first lien senior secured notes, amended our receivable securitization facility and retired our revolving credit facility, which removed our maintenance covenants.

We forecast to have ample liquidity even before any further liquidity enhancing actions. On Slide 14, with respect to our pension obligations, we complete the actions to update our valuation and reduce our required funding over the next several years.

We elected to change our pension plan year-end from March 31st to September 30th to reflect more current asset and liability values, which is expected to reduce the previously estimated funding requirements in excess of $120 million over the next four years.

Additionally, the Company has changed the asset valuation method it uses to report the funded status of its pension plan to a preferred method, which is expected to increase our income about $6 million this year.

Based on anticipated aircraft production rates and including the impacts of pending program completions, for FY '21, we continue to expect revenue to be approximately $1.8 to $1.9 billion.

We expect free cash use for the full year to be moderately higher than the first half, with less cash use in Q3 as compared to Q2 and positive cash flow in the fourth quarter. Our backlog is down slightly from Q1, but stable and more balanced with military content.

This is an important strength in today's operating environment and makes our revenue more stable and predictable. Our focus on our operating system, coupled with our cost reduction actions, improve our competitiveness and add value for our customers, especially with the intellectual property and our core businesses.

We forecast strong liquidity and continue to evaluate additional actions to enhance our cash position and capital structure. The measures we have taken will help us manage through this downturn, and we continue to anticipate quarter-over-quarter improvement in our results this year. Now I'll turn the call back to Dan.

Dan?.

Thanks, Jim. In summary, we're in a much better place in Q2 than we were in Q1. We're benefiting from stability in OEM production rates with early signs of recovery, with increasing order flow in the MRO markets.

We continue to see benefits of our cost reduction actions and forecast quarter-over-quarter growth in Systems and Support and recovering margins across the enterprise.

The mandate to improve our performance is more critical as a result of the current economic environment, which is why our lean efforts and win rate give us confidence for future revenue, cash and profitability.

Our balance sheet and portfolio transactions enhance our liquidity and bridges us to the other side of the pandemic as we exit noncore operations and move to our future state. The reduced market volatility gives us confidence that we can be cash positive in Q4.

Though uncertainty remains, we are committed to improving profitability and cash flow and becoming a more predictable business.

Our say:do ratio remains strong, and the Triumph team has proven we can overcome our industry and customer challenges and get the job done, through restructuring, contract renegotiations, portfolio reshaping, refinancing and now through managing through the pandemic.

Fortunately, we entered the fiscal year with solid momentum from which to build and Triumph will come through this crisis as a stronger company. Kevin, we're now happy to take any questions..

[Operator Instructions] Our first question comes from Sheila Kahyaoglu with Jefferies..

Hi good morning. In terms of your free cash flow moving parts, you've had changes to the pension, asset sales. So I don't know how you guys find time for actually managing this business. But my question is actually involving the operating profitability in the quarter. You saw some modest but good sequential improvement in the businesses.

So I guess, how do you guys think about the medium-term earnings profile of both Systems and Structures at the moment?.

Improving. And part of it is the recovery of the MRO demand, which, as you know, Sheila, carries a higher-margin for spares and repairs. So as that recovers, that will be a tailwind for margins..

Yes. I think also the cost actions we took earlier in the year, they start to take effect, and restructuring gets behind us. So we see some of that improvement. And actually, we focus more internally on our operational efficiencies with the extra capacity we've had, and that's going to benefit us going forward.

So it's gradual improvement, but the direction is good..

And then on the Structures business, I guess, do you still expect $100 million contribution from both G650 and composite because I thought G650 was fairly minimal in the quarter.

So is the majority of that composite? And then how do we think about the remaining Structures' assets? And what else is loss-making? Is it just the four 747s in the quarter left to go in terms of the profitability profile in that business?.

Yes. Thanks, Sheila. We still expect in the range of $100 million combined for those tow divestitures. The $650 million proceeds come generally as a liquidation of inventory. So they flow through cash flow. But the total proceeds are still the same.

In terms of loss contracts, the $280 million is behind us now, having shipped the last ship set within the past quarter. So it's really just 47 that's left there..

Sheila, you've been with us this whole journey. And you can remember back to the Bombardier program, the E2 program, the G280 and now 747 and G550 eventually as well. And it's -- we now can see at the end of the line on these programs and the cash use. So we feel good about where we are. We've got -- it's a deterministic outcome at this point.

There's not uncertainty around the closeout of 747..

Right. Best luck in the quarter. Okay..

Thank you..

Our next question comes from Seth Seifman with JPMorgan..

Hey, good morning everyone. This is actually Ben on for Seth.

I guess I was kind of wondering, when you talk about exiting FY '21 and your future state configuration, just wanted to confirm that, that includes selling the remaining noncore Structures facilities? And I guess, being able to close those by the end of FY '21, or just kind of have the announcements in place?.

Certainly, the latter and hopefully, the former, we're well along in the process, and we're dealing with parties that we're familiar with and have a track record and have negotiated supply agreements and purchase agreements. So the speed of transactions, I think, will be good.

But they may extend into '22 through what we call a transition support agreement, TSA and that ensures that there's a smooth handoff of any facilities, people, IT systems. So it wouldn't be a material impact, and we're driving towards that..

Okay. Great.

And then thinking about the margin in Structures, can you give us kind of an update on where the margins are for the core kind of Interiors business and how that's kind of looking this year?.

Yes. So I don't have margins by OpCo like that, but I can tell you that margins have been impacted significantly by volume, especially in that Interiors business. And there is a lot of narrow-body, boeing volume that goes through there.

But we're able to, there's a rate that's in the mid-single digits that we're shipping on, for example, MAX still enabled us to maintain the workforce and the overhead there. So we'll be ready to ramp when that program is ready to ramp.

And margins in that segment, I think we've previously put out pre COVID guidance that was in the low teens for that type of business. So it can be good margin business once the volume comes back..

Yes. That one particular factory in Mexico, was the one that was most exposed to the MAX, but Boeing's guidance to get to 31 a month by the beginning of 2022, that's going to give us a ramp next year, next calendar year, that will allow that factory to recover in margin..

Our next question comes from Myles Walton with UBS..

This is actually Louis Raffetto on for Myles. So I just want to go back to sort of Sheila's question and your response there. So it looks like aftermarket system support was, you said it was up nominally sequentially, but it looks like it went from being down 13% last quarter, down 23% this quarter.

Can you just help me square that, I guess?.

So sequentially, from first quarter to second quarter, I think we were up 6%. So I'm not sure I'm following your percentages..

Well, in your slide deck, you said aftermarket was down 23% this quarter in Systems and Support. Last quarter, it was only down 13% year-over-year..

Yes.

So you're talking about aftermarket, in particular, as opposed to the whole segment?.

Yes..

Yes. So I have to go back and look at the percentages there. But generally, the aftermarket business there has been holding up, and it's a good source of profitability and cash flow, and we'll be moving forward. But we'll look at your specific question, we can circle back..

Generally speaking, aftermarket went down about half in the first quarter, and it's coming back. We're tracking it very closely as I mentioned by factory, and we saw stability in the months of May and June. And then July, August, September, we started to see a tick up in Q3. Q2 benefited from that..

Okay. And so you guys talked a lot about the margin improvement sequentially, but it looks like EBITDA margins were actually down sequentially. I think that was mostly on Structures and maybe unallocated. Looks like there were some moving pieces in the D&A and contract liability.

Was that related to the 280 or is there other moving pieces there?.

Certainly, the 280 would be part of that. I think you're going to find a lot more detail in the queue will be followed in the] next day or so..

Yes, as Jim mentioned, we've shipped the last G280. So that program is behind us now in terms of losses. And it's only the 747 runout that remains..

Our next question comes from Ken Herbert with Canaccord..

I wanted to ask Jim about the adjustments you've made to the pension plan. I mean, it seems like you've been able to lower the expected cash contributions pretty significantly through just changing timing, but then you also alluded to just some of the adjustments you've made around assumptions.

Can you just unpack that a little bit and how much really does the timing impact versus sort of the risk around the changes you've made in the accounting assumptions?.

Sure, Ken. So the first thing we did is we changed the pension accounting to a preferred method, which marks to market the fixed asset securities faster and it doesn't amortize whenever the changes over a longer period. So it's, it makes the valuation more current. And it is a preferred method. Other companies are doing it.

It creates about $6 million more of income in the period. It's just that we want to have the most accurate valuation. But the second one, the change in year-end, which we've applied for, with the IRS that we expect approval of is really to, for the same purpose, it's to update the valuations to a more current period because our year-end was March.

We valued our assets at a very poor time in the market. And they've since recovered substantially. So a lot of the reduction in funding is due to the recovery of the assets and the revaluation of the liability at the current interest rates.

So it's really to bring forward that liability and not have it measured at an anomalous time, which was at the end of last fiscal year..

That's helpful.

As you think about the pension and some of the asset sales, are there any sort of risks? Or how do you envision this? Do you potentially, see it as a potential risk in terms of resolution as you look at the Structures business on a go-forward basis? Or how do we think about your ability to manage sort of these liabilities post all the divestitures?.

All liabilities are addressed in all of our planning for divestitures. And I think they're very manageable, and we have plans to address each of them over time. As you can see, the pension can be volatile.

And of course, the whole markets were volatile at the end of last year, but it is much more stable outlook going forward for the funding requirements of it. And divestitures will not impact that. So it's very manageable, and we have it in hand..

Our next question comes from Michael Ciarmoli with Truist Securities..

Maybe just on Structures and thinking about current production rates. The 787 fairly big platform in both segments.

Can you give us some color where you are there? I know suppliers seem to be in different states, whether they're at 10 or you're going to see further pressure on that program? Just maybe where are we with revenues? And should we expect further pressure from those cuts?.

So we're producing 10 a month. It's the current bill rate and it is a product that contributes in several of our plants, actually with a few exchangers, less so in Structures. We don't do a lot on 787 Structures. And the rate that Boeing has talked about is six a month, mid next year, and we'll follow their trend.

And that's the importance of the military work that Jim described as an offset. We're seeing strong interest from both engine MRO, engine OEMs as well as airframers on the defense side. So the diversity of our backlog and platform participation helps us offset any one program.

And 787 is also a program where we're doing some amount of contract renegotiation with Boeing to make sure we're earning a fair return for the products that we produce, that will also benefit even as volumes drop..

So -- but the 787 is the second, I guess, biggest program in Structures backlog, but it's not a big revenue contributor.

Is that the message there?.

I think the message is that there's so many different programs that even the second biggest one doesn't have a major impact when--.

Flat distribution across our top programs..

Okay. Okay. And then just to follow-up on the aftermarket. I just want to make sure. So it was down 13% year-over-year last quarter, down 23% year-over-year this quarter.

But did -- it grew sequentially, I guess, in other words, did absolute revenues in aftermarket seemingly hit bottom last year, and you're seeing a sequential uptick now?.

Yes. I don't have the aftermarket growth quarter-to-quarter in front of me for that at the moment..

Yes. We track both revenue and also a leading indicator of repair job receipts. Just think of it as the inbox for MRO, and that's ticking up. That gives us more confidence that Q3, Q4 are going to benefit from increased demand.

On the chart that I shared about aircraft trends, whether it's the return to service or utilization rates, load factors, Asia is coming back first, obviously, and we have a presence in Thailand. Seeing a nice order stream on our job repairs and also our accessory businesses in Texas. And Wellington, Kansas are both seeing good pickup.

So it's a regionally driven market. And we'll follow the trend first in Asia, then Europe and the U.S. along the way to military freighter [Indiscernible]..

Thanks. I'll get back in queue..

Next question comes from Peter Arment with Baird..

Hi. Good morning. Dan, just a follow-up on your comments there on the aftermarket.

Is there any way to qualitatively talk about commercial versus military? When you talk about these percentages, I mean I assume the commercial numbers are down more, but it sounds like you're actually seeing things turn there?.

They are. And we'll parse that out -- it's in the queue, our contributions of military by business unit, you can see and if there's any questions that we can answer in the one-on-ones as well, that go deeper. But what we've seen with strong defense spending to increase the fleet readiness across all platforms, triumph has benefited from that.

And just as Boeing reported in their earnings call about a strong military government services business, we're seeing the same. And we overhaul refueling booms, some of the legacy aircraft.

We also do thrust reversers on programs like the C-17, heat exchangers the F-15, F-18 [Indiscernible] So as those services drive towards availability, we're benefiting from those expenditures. On freighters, the demand is very high. And they're seeing increases and then planning for the holidays that are steep.

So they're asking us what's our rotable inventory and what can our turn times be for aircraft to minimize downtime. So we're bullish on those areas. But yes, commercial is down mainly in the U.S. carriers in Europe, but Asia is starting to come back..

That's helpful.

And just as a follow-up, Jim, could you just remind us kind of the cadence on kind of customer advance repayments, at least the schedule that you're thinking about today?.

Sure. Yes. In the quarter, it was $10 million liquidation, and it's expected to be $10 million in the next 2 quarters, each, $10 million each. And that's it for this year. And then when we give guidance for next year, we'll talk about what the liquidations will be then..

Our next question comes from Caitlin Dullanty with Bank of America..

This is Caitlin on for Ron Epstein.

Now that we are about 8 months into this pandemic, and we've seen a little bit more on how the commercial aero downturn will play out, how are you guys seeing about the future of your business post portfolio cleaning? There are any change to your strategy? How are you planning to position the business so that you do emerge from the pandemic stronger?.

Thanks, Caitlin. So the first is rightsizing the business to the true commercial demand. And we've talked on this call about the Boeing rates, but we're very encouraged by the rates we're seeing out of Airbus.

I was on the phone yesterday with the Head of Procurement for Airbus and their confidence in narrow-body rate increases is high, and we'll benefit from that. We support Airbus on A320, 330, 350. So there is some amount of rebalancing between the OEMs.

And then having rightsized the business now to the expected demand as programs recover, like the 737 I mentioned earlier, we'll do it from a lower cost basis. And I think, ultimately, we'll be more profitable than we were pre COVID for a given level of production. And then the second is defense.

When I started this journey here at Triumph, we were 20% defense, and that number is now about 33% and we expect it to continue to grow as we exit legacy programs like 747 and exit the G650 to Gulfstream in the quarter.

So the rebalancing of the portfolio is part of it and then the recovery of commercial when it comes, will both be tailwinds for Triumph..

That's helpful. And then just for, I guess, on the 737, we've been hearing from a lot of suppliers that inventory on the MAX is pretty high, and many of the suppliers are almost fully shipped for calendar year '21.

Can you help us understand a little bit where your MAX ship set inventory is in the channel and how much of a tailwind RTS will actually be for you guys in the calendar year '21?.

Yes. We know on-hand inventory and work in process, finished good to work process for every factory for the MAX. Thankfully, we weren't built ahead. We build interiors almost just in time. So when that rate dropped, we furloughed workers for 2 months in Mexico and then brought back about half of them since as the rate, the line has restarted.

So I'd say typically, we have, on the order of one, 3 months of finished goods inventory. But we've continued to produce. I mentioned on prior earnings call that Boeing has allowed us to continue to produce MAX to maintain a hot line and avoid disruptions.

So we're not going to see the kind of impacts you've seen out of the engine OEMs or large Structures' OEMs or the OEMs themselves. We did not get far ahead on the MAX production..

Our next question comes from David Strauss with Barclays..

This is actually Matt Akers on for David. I want to ask about 747 in particular.

I guess, can you remind us what the kind of cash costs are on that program this year? And then as you look forward to fiscal '22, how does that kind of trend sequentially? Are there still cash cost next year, or do those go away?.

Yes. So the second half of this year, Matt, 747 cash is going to be $40 million to $50 million. So, and there will be some residual cash next year, but not nearly to the extent that we have this year, as we wrap up the facilities and close out the program. And that's the last of our loss-making programs. The G280 just completed this past quarter..

We have two large plants that produce 747 structures. Typically, the cylindrical sections of the fuselage major panels. And the production in our Hawthorne, California is complete, and we're dismantling the plant and freeing it up for use by local industry. It's a lease facility.

The other plant is in Grand Prairie, Texas, it's also leased from Lockheed Martin, and they have demand for that space. And so we'll be turning that over incrementally over the next year. We moved the Boeing 767 work out of Grand Prairie in Florida. That's gone extremely well. We're hitting all our learning curves and quality numbers.

And the remaining 747 work at that plant will finish over the next few months. So it's, we can see the end of the line. It's been a great program over many years. Of course, we've been producing a fraction of the prior rates, used to be as high as 7 a month. We're now doing about 0.8 a month, thus the losses, but we can't see an end to the line..

Got it. And then I guess just one more.

You touched on this earlier, but I guess, what do you think is a reasonable kind of EBITDA margin target for the overall business once you get through these transactions and maybe year or two out once we're at sort of a more normalized commercial aerospace demand environment?.

Yes it's going to be in the mid-teens would be a target, I would say, but that's a general one, depending on how the market goes and what portfolio looks like in the out years, but being a mid-teens EBITDA margin is a reasonable goal..

Our next question comes from Scott McCrea with Cowen..

This is Cai von Rumohr from Cowen. So you mentioned you have positive cash flow in the second half, excuse me, yes. So, but can you talk about next year. At one point, you were going to repay Boeing $20 million per quarter. It's $10 million this quarter.

If you go back to $20 million next year, can you be cash positive next year?.

Thanks, Cai. It's Jim. On, of course, we used $205 million of cash in the first quarter this year at the depth of the crisis. And we've trimmed that back to $47 million used, and we're still using working capital, increasing working capital modestly as we adjust the supply chain.

What we said about the second half is the third quarter, we're still going to be a user of cash, but to a lesser extent than the second quarter, so less than the $47 million. And that we anticipate being cash positive in Q4 of this year. We haven't really given any guidance for the following year.

You can imagine all the changes in the markets and program rates, and we're still evaluating what that's going to look like next year. So I think I'm going to have to pass on specific cash items for next year.

We've, what we've said in the past, but the world has changed a lot, and we're going to be putting that guidance out after we finish our planning process this year..

As we just think about next year without a number, what are the key drivers, the key trends that we should be looking for in terms of where the cash flow would be going?.

Sure. Good question. Obviously, it's going to be production rates, right? And demand in the aftermarket, but it's also going to be what we liquidate in advances on Boeing, and it's going to be the portfolio. So it will be completed divestitures and what's our ability to maintain or increase price on programs that may have lower volume.

So there's a lot of levers we can pull. It will be pension funding. That's a big piece of it, too. And we're working through all those pieces right now. And I think what we've demonstrated in the past is we find ways to make our numbers every year. And we look forward to doing that this year and beyond..

Thank you very much..

James McCabe:.

.:.

And since there are no further questions, this concludes Triumph's second quarter fiscal Year 2021 earnings call. This call also has a replay that will be available today at 11:30 a.m. Eastern Standard Time and run through 13th at 11:59 Eastern Standard time. You can access the replay by dialing 1-800-585-8367 and entering access code 566-9003.

Again to access the replay, you can dial 1-800-585-8367 and enter an access code 566-9003. Again, this concludes today's conference call. You may all disconnect, and have a wonderful day..