Ladies and gentlemen, thank you for staying by. Welcome to the Triumph Group Conference Call to discuss our Third 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 your pop-up blocker is disabled if you’re having trouble viewing the slide presentation. You are currently in a listen-only mode. 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 that this call is a 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 Triumph’s Q3 earnings call. I hope you’re all safe and well. Today, we reported our third quarter results for fiscal year 2021. Triumph achieved positive free cash flow due to our progress in improving profitability and managing working capital across all levels of the organization.

As our pivot to military sales accelerates, we’ve delivered sequential improvement in our operating margins and EBITDAP. We expect to build on that through the fourth quarter. The commercial aviation recovery is progressing, albeit slowly.

Our customers saw higher freighter utilization and increasing levels of air traffic, which has resulted in increasing MRO demand for the 12 repair centers across Triumph.

After months of rate cuts, OEM production has stabilized with commercial narrow-body volumes expected to increase at both Boeing and Airbus over the next year, offsetting commercial wide-body volume declines.

When combined with these favorable macro trends, our actions to improve our cash flow and historic margins generate positive momentum and position Triumph to close out our fiscal year on an upswing as we did last year pre-COVID.

After managing through the commercial downturn in the first half, we delivered quarter-over-quarter improvements in our core operations, driven by favorable trends in Systems & Support, military helicopter and engine content, and strengthening Airbus narrow-body production rates.

This is an example of the hidden value we see in Triumph’s diverse capabilities. Triumph supplies flight-critical components usually based on our design and under sole source contracts that are replaced multiple times over the life of an aircraft with a substantial aftermarket tail.

Despite pressures on commercial wide-body aircraft, we continue to see modest growth in backlog in Systems & Support as orders on commercial narrow-body and military platforms expand. Overall, Trump’s third quarter results are either in line with or above our expectations, keeping us on track to meet our full-year objectives.

Let me walk you through some of the highlights as summarized on Slide 3. First, we generated positive free cash flow through tight working capital management. Second, margins improved in both business units, as we continue to drive operational improvement and enhance the quality of our backlog.

Third, with the exit of our Hawthorne, California 747 factory and planned exit of the Grand Prairie 747 plant in June, we continue to progress towards our future state. Last, we’ve maintained nearly $0.5 billion in liquidity, while contributing $40 million stock to our pension plan, which lowers future cash obligations.

Together, with the pending divestitures, we have the liquidity to fund the company through this historic downturn.

We now have a line of sight to breakeven free cash flow in Q4, after all debt and advance repayments, and expect cash used in operations and free cash used for the full fiscal year to be on par or moderately better than current year-to-date levels. Our third quarter results are a story of progress on 2 parallel tracks.

First, within our core Systems & Support business, we continue to improve operations as evidenced through the second consecutive quarter of sales growth and improving operating margins.

Systems & Support reset capacity to match lower levels of production, with improved efficiencies and enhanced margins on programs that were previously challenged and/or underperforming.

For example, our landing gear actuation business in Yakima, Washington, which supports the 737 MAX amongst other platforms, improved its Q3 operating income year-over-year by 18% through productivity gains and favorable contract renegotiations.

As the MAX rates recover, our lower cost basis will benefit margins, another indication of the hidden value in our proprietary components across Systems & Support. On the second track, our structures business continues to achieve success in completing and exiting legacy programs.

We finally achieved breakeven cash from the completion of the G280 and are within 2 quarters of completing our obligations on the 747-8 program. Now, let me touch on each of the drivers for the third quarter, as outlined on Slide 5.

Military sales now comprise 56% of our volume in Systems & Support, helping to offset the impacts of the commercial aerospace market headwinds. Military platforms such as the V-22, CH-47 and E2D contributed to the sequential sales growth in our core Systems & Support business unit, driving a 33% increase to our military sales year-over-year.

By shedding the legacy cash consuming programs such as the G280, and ramping down our 747 content, our margin profile is improved overall. The structures we eliminated all red programs, we’ll be green across the board by March. Structures was modestly profitable in Q3, and after program shutdowns and advanced repayments was cash positive.

We expect to continue to improve quarter-over-quarter and drive consistency in future periods. Q3 cash use on sunsetting programs was lower than expected, in part due to the push out of the 747 by 1 quarter. We have less than 3 shipsets remaining to deliver on the program.

In Q3, we generated over $30 million in free cash flow due to working capital management and improving margins. We expect Q4 cash to be breakeven to positive based on the actions we’ve taken to date.

We remain on track to start fiscal year 2022 in our future state configuration as a largely pure play Systems & Support provider to military and commercial customers with interior structures capabilities as well. On Slide 6, I want to drill deeper into the sources of Triumph’s hidden value.

Listed here are the products and services that we provide unseen to the eye underneath the skin of the fuselage. They’re so critical to the safety and efficiency of the aircraft.

Whether it’s cockpit controls, actuators, the nose wheel steering, landing gear, fuel pumps, hydraulics are the services we provide for wheels and brakes and nacelles and engine accessories. These products and services are important to the customers and to Triumph’s financials, and they represent the future of the company.

I’d like now to share my perspectives on the path to recovery for the commercial aviation industry as summarized on Slide 7. Aviation industry metrics remain largely stable numbers of flights, TSA throughput, load factors and utilization all remained stable on a global basis.

However, like in many industries, the effective rollout and distribution of the vaccine and containment of new variants is key to unlocking the aviation industry recovery. Like the rest of you, I’m pleased to see the progress that’s being made and will continue to closely watch the ongoing efforts.

Industry wide in 2020, 723 commercial transport aircraft were delivered. In the quarter, Airbus delivered 225 aircraft, while Boeing recommenced deliveries of the 737 MAX. In December, 112 aircraft were delivered to customers ending the year on a high note. OEM production rates have stabilized and order adjustments have been flown down to Triumph.

Canada, the U.S., Europe and China are all making great progress on certifying the MAX to return to service. 3 quarters into this crisis, we’re able to look back and recall the unprecedented impact to the industry, while recognizing signs of recovery today.

Slide 8 depicts the early impact of Triumph’s core systems business in Q1 as orders declined due to cancellations and reschedules. And that time Q1 book-to-bill dropped 0.15 probably backlog down 14%.

Undeterred and coming off a good fiscal year 2020, Triumph continued to execute on our strategic objectives, pivoting to military and freighter end markets and executing on our cost control measures. Despite reductions in commercial traffic and OEM rate adjustments. Military sales were up more than 30%.

Year-to-date sales are down 25% overall, but in Q3 backlog once again began to rise as book-to-bill for Q3 was 1.02. Today, Systems & Support backlog is 55% military and looking forward, the Systems & Support pipeline to 73% military, reflecting our continued focus in this area.

Turning to Slide 9, Triumph closed $400 million in new wins for the quarter across OEMs, Tier 1s and carriers. Slide 10 touches on 3 key wins, including the renegotiation and extension of several of our largest commercial transport contracts, a CH-53K helicopter award, and a host of MRO awards driven by Triumph IP.

The CH-53K is a key platform for Triumph with IP driven content in excess of $2 million per shipset. Note that also Q3 marked the first time since the onset of the crisis. The Triumph sales and repairs, overhauls and spares grew quarter-over-quarter. In summary, Q3 was a good quarter.

And the actions we’ve taken to the unprecedented crisis have positioned us for a return to profitable growth as we look forward to Q4 and the new fiscal year. With that, Jim will now take us through more results for the quarter.

Jim?.

Thanks, Dan, and good morning, everyone. 9 months ago, as the pandemic persisted across the globe, we’ve not yet bounded its impact on our revenue and operations. Despite that uncertainty, we provided full year sales guidance and continue to hold that guidance through today.

We reacted quickly to reduce our cost and working capital to lower demand and to secure our liquidity. We meant that our revolver to maintain covenant compliance. We renegotiated customer advanced repayments.

And then we raised $700 million in a bond offering to pay off our revolving credit facility, which eliminated our maintenance covenants, and put substantial cash on the balance sheet to enhance and secure our financial flexibility. In the first half of the year, we used about $250 million of cash.

As we were reducing our expenses and honoring our inside lead time purchase commitments will be adjusted purchase orders to reduce customer demand. Now in the third quarter, Triumph is cash positive again sooner than we had planned. We exceeded our third quarter cash flow and earnings plans and are on track to achieve our full year objectives.

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 11, you’ll find our consolidated results for the quarter.

Planned reductions from sunsetting and transitioning programs in our structures segment drove a decrease sales compared to last year. Despite the headwinds, adjusted operating income was $38 million this quarter, and our adjusted operating margin was 9%, up sequentially from $21 million and 4% last quarter.

We’re gradually improving profitability on an adjusted basis quarter-over-quarter. With respect to the segment results, on Slide 12, net sales in our Systems & Support segment were up 4% sequentially, including a 10% increase in sales on Airbus commercial platforms.

The segment sales were about 55% military in this quarter, up from only 31% in the prior year quarter. Adjusted operating margin for Systems & Support was 16.6%, which is comparable to last year and up sequentially over the last quarter. The $24 million impairment of rotable inventory related to customer fleet retirements.

And our $1 million of restructuring costs impacted the segments’ margins this quarter by approximately 935 basis points. Summarized on Slide 13. Third quarter organic net sales for Aerospace Structures segment were down as anticipated due to planned sunsetting and transitioning programs, as well as declines in commercial programs.

Aerospace Structures achieved 3 consecutive quarters of favorable cumulative catch-ups due to strong performance and effective program close outs. This group’s actions to aggressively reduce costs resulted in $3 million of restructuring costs in the quarter. Excluding those costs, operating margin was consistent with last year at 5%.

The only loss program significant left is a 747, which we are focused on closing out as efficiently as possible. Production is ending in about 6 months and then we will close and clean up the lease facilities. Turning to Slide 14. As discussed in prior quarters, in the first half of the year we experienced a temporary increase in our working capital.

As we adjusted our supply chain to the new lower demand, our $38 million of cash flow in the third quarter was better than planned and driven by a net decrease in working capital. Q3 cash flow includes $10 million of advance repayments, and we have approximately $180 million of advances outstanding to be liquidated over the next few years.

Restructuring costs were $4 million in the quarter and $33 million year-to-date. The G280 and 747 programs were breakeven in the third quarter, and have used $50 million year-to-date.

Completion of Aerospace Structures sunsetting programs primarily 747 is expected to use $20 million to $25 million in the fourth quarter, and additional $50 million in FY 2022. Capital expenditures were $8 million in the quarter, including upgrading equipment in our core Systems & Support segment.

We remained focused on aggressively managing our cash and liquidity. We anticipate being breakeven to slightly cash flow positive in Q4. On Slide 15 is a summary of our net debt and liquidity. Our net debt at the end of the quarter was approximately $1.6 billion. Our combined cash and availability was about $489 million.

In the quarter, we contributed $40 million of stock to our defined benefit pension plan, creating a funding credit towards FY 2022 required contributions, resulting in an estimated $80 million of FY 2022 cash funding required. We forecast to have ample liquidity even before any further liquidity enhancing actions.

SG&A expenses this quarter is 26% lower than last year, reflecting our continued cost reduction initiatives. We also have an excess of $300 million of deferred tax assets that continue to create value through reducing cash taxes.

Based on anticipated aircraft production rates and including the impacts of pending program completions for FY 2021, we continue to expect revenue to be approximately $1.8 billion to $1.9 billion.

We expect free cash used for the full year to be on par with or moderately better than the 9 months ended Q3, with breakeven to positive free cash flow in the fourth quarter. Our backlog is up slightly in our core Systems & Support segment and more balanced with higher military content.

Our focus on our operating system coupled with our cost reduction actions, improves our competitiveness and adds value for our customers. We’re forecasting strong liquidity and continue to evaluate additional actions to further enhance our liquidity and our capital structure.

The measures we’re taking to managing this downturn are making us a stronger and more competitive company moving forward. Now, I’ll turn the call back to Dan.

Dan?.

Thanks, Jim. In summary, we maintain momentum through Q3 by generating positive free cash flow. And we remain on track to achieve our full-year objectives. Stability in OEM production rates with early signs of recovery in MRO demand give us confidence the worst of the pandemic is behind us.

Cost reduction actions and the exit of loss-making programs have led to improving margins across the enterprise. We continue to forecast quarter-over-quarter growth in Systems & Support and further recovery in margins.

As we exit non-core operations and move to our future state, the hidden value of our core will become more evident as we drive revenue growth, margin expansion, sustainable cash flow generation and enhance our win rate. This is something you’ll hear me talk about in future quarters.

Our balance sheet and portfolio transactions enhance our liquidity and bridges us to the other side of the pandemic. The reduced market volatility gives us confidence we can be more predictable in our cash generation.

Though uncertainty remains, we are committed to continuing to improve profitability and cash flow as we become a more predictable business. The Triumph team has repeatedly overcome challenges and got the job done through restructuring, contract renegotiations, portfolio reshaping, refinancing and now managing through the pandemic.

Fortunately, we ended the fiscal year with solid momentum from which to build. And that’s exactly what we’ve done. I’m confident 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 Robert Spingarn with Credit Suisse..

Hi, good morning..

Good morning..

Good morning..

So, Dan, what’s – just at a high level, when we think about the structures business and the wind-down there, could you just refresh us? You said the 747, I guess, is the only loss making program that you still need to exit.

Is everything else in there non-loss-making and a keeper at this point? How do we think about where this business goes from here?.

That’s right. We’ve exited the programs that weren’t contributing value, the Bombardier Global 7500, the G280, the G650, the Embraer E2 except for a small subcontract, and now, 747. I mean, 747 made money in years past, when the rate was 7 a month. But our responsibility has been to wind that down. It’s now roughly 0.5 per month.

And the 2 large factories that supported, as mentioned in Los Angeles, that plant is closed and we’ll close the one in Grand Prairie.

So what remains in structures, whether it’s the V-22 empennage or the T-7A trainer, or the work that we do for Gulfstream on the G500 and 600, for the Pratt & Whitney F-35 engine ducts are all favorable contracts that will add value over time..

I see. And then, just on the military side, I think you talked about military sales being up 37% in the quarter with a stable backlog.

So, is there any sales pull forward going on there as DoD tries to protect its supply chain? And if so, does that create a pressure-point to growth in 2022 or am I reading that wrong?.

There’s been an acceleration of cash payments from the DoD tier 1 primes. And that was at the DoD’s directive, they flowed money down. So payment terms would improve to, let’s say, 10 days. Northrop Grumman in particular has been helpful and programs like the Global Hawk and the E-2D. But we’ve not seen sales pull ahead.

What we’ve seen is volume increase. And we’re well positioned on a number of upgrade programs, helicopter engine upgrade programs as an example. And so, that money which has been in the pipeline, program by the DoD for reliability improvements to the fleet is now hitting Triumph.

So I don’t see it as a pull ahead so much as a ramp-up as budgets have flowed down to suppliers..

Okay, just quickly with the F-15 and F-16 coming back into production, is there anything that you have there in terms of content that we should be focused on?.

Yes, we do a lot of content on the F-15 legacy and EX. We’ll share the configuration, as there is that we support. On the F-16 I mentioned on Page 9 of the deck that there is an ISR pod that we’re supporting with Collins. And there are some re-competes they’re running on the F-16 under subsystems like landing gear that we’re looking at.

So we think we’ll get more content out of that. But as I mentioned before, it’s really about the diversity of our platform role. So any one program goes up or down, we’re somewhat buffered from and we’ve had good engagement across both the tier 1s and the tier 2s such as Collins and Safran.

And as they integrate and upgrade subsystems, we get content through them. And Honeywell as well, I should have mentioned Honeywell; they’re a really good customer..

Okay, thank you, Dan..

Thank you..

Our next question comes from Cai von Rumohr with Cowen..

Yes, thank you very much. So I think you mentioned somewhere in your release about sort of having some extended contracts or new contracts on existing platforms with Boeing.

Can you comment on those? How far out did they go? And is the pricing acceptable in terms of making money and maybe a little more generous than it’s been in the past?.

It turns out that a number of our long-term agreements that were signed 7 to 10 years ago are coming up for renewal in multiple businesses and in multiple customers, not just Boeing. And so, what typically happens is the OEMs look out 1 to 2 years in advance of those LTAs expiring and they engage suppliers like Triumph and they renegotiate.

We may have been on a price step-down agreement under the prior LTA, but if volumes are changed or raw material costs have gone up, or if some assumption related to commercial versus military, the mix has changed, it will factor that in our pricing. And so, we have received favorable pricing, where those LTAs reset.

And they typically are for anywhere from 5 to 7 years extended into the future. And so far we’ve not lost any work as a byproduct of the LTA renewal..

Terrific. Thank you very much.

And could you update us on your efforts to sell Red Oak and Stuart?.

So we’ve been working with investment banks for better part of 6 months now. We have interested parties in both facilities. And I can’t comment on the state of negotiation with those parties. But what I’ll say is that we’ve not seen any degradation in interest.

And our expectation is that we’ll make announcements in due course, once those have been inked. One thing that’s true of these agreements is they’re fairly complicated. You’ve got asset purchase agreements, sales agreements, transitional support agreements.

So it’s mostly around the work of finalizing those documents before they’re either announced or closed.

Jim, anything you’d like to add?.

Yeah, I think that the important thing to remember too is that the lost programs have been addressed there. So really, it’s just the 747 that’s left, where we have the stable to growing business. But we’re still working the strategic plan to continue to address those non-core assets..

Yeah. And I’ll comment that Stuart in particular is benefited as the 767 freighter and tanker provider of the large wing carry-through structure with favorable cash flow and margin. So it’s not a business that we’re anxious to unload. In Red Oak with the T-7A, it’s got a good future ahead..

Terrific. Thank you very much..

Thank you..

Our next question comes from Myles Walton with UBS..

Thanks. Good morning. I was wondering if maybe you could touch on the cash flow. Working capital is obviously better. The loss making programs obviously is slightly better than your full-year projection previously as well. I’m curious as you look to 2022 you mentioned $180 million of customer advances still to run off.

What kind of headwind is it in 2022? And also from our working capital perspective, is there opportunity in 2022? Or do you have some of these progress payment reversals and you have kind of done everything you can on working capital on 2021?.

Yeah. Thanks, Myles. For this quarter, working capital was beneficial. And I think it was a follow-through to what we talked about last couple of quarters, as it takes a while to change your supply chain to new demand.

And we’re now seeing that we’re working through inventory that we paid for in previous quarters, so we have less cash going out to pay for that inventory. And it’s just the beginning. I think we’re going to continue to see improvements in working capital efficiency moving forward.

Lower sales require less working capital and we’ve gotten more efficient in our internal processes to make sure we have only what we need. In terms of the other drivers, Dan mentioned one. It’s not the largest, but the military. First tiers are paying us a little faster, which is nice in the quarter.

Some of that will reverse, but I think next year, big drivers for cash next year. And we look forward to giving you guidance, once we finished our planning process, is of course advances liquidations. And we don’t have guidance yet to give how much we’ll liquidate exactly next year. We look forward to providing that. We do have a 747 close out.

That’s about $50 million into next year. We have pension, but we address that with our contribution of stock. Largely, there’s a small amount of cash that may be due next year. And we’ll give you guidance when we close out the year on that. Working capital is still going to be a tailwind for us. I think volume is important.

We’re looking forward to increase in volumes. We’re seeing slow but steady increases in volume. And it’s a backlog that is higher quality now too. And it’s more military content, more steady margins. And then the full year effect of our cost reductions that we incurred this year. It is going to benefit us next year.

So, lots of levers and you got an experienced management team which look forward to executing on those next year..

Okay, 2 clarifications if I could.

The rotables write down, is that specific to a contract? And has that inventory been disposed off in some way? Or is that potentially going to come back through the P&L? And likewise on the write-down of the assets for sale, should we interpret that as lower proceeds than previously expected or anything else that change that? Thanks..

On the impairment of inventory, as rotable inventory related to legacy fleets like the MD-88 is one of them that have been taken out of service. So they’re recognized as lower value. It’s a non-cash impairment charge, so we still have the material. And should demand increase in the future, we may be able to get more out of it. So that’s just a reserve.

It’s not cash in the period..

Assets for sale….

And the second piece was the assets held for sale. We did recognize the $45 million reduction in the loss or the increase in the loss of assets held for sale. It relates to the decrease in value that we’ve determined in that held-for-sale assets. It’s not necessarily a reduction in proceeds, although it probably is a small reduction.

It’s just an estimate right now. And when we close a transaction, we’ll true it up..

Thanks..

Our next question comes from Peter Arment with Baird..

Yes, good morning, Dan and Jim. Dan, on your Systems & Support, you mentioned that OEM was down I think 51% versus the prior year.

Can you maybe talk about where you are at least where you are in terms of thinking up with the kind of the planned production rate to the recovery of Boeing? Or 787, obviously, trending down, 737 coming back, but how are you in terms of any inventory that you have to work off?.

Yeah, thanks, Peter. So unlike some of our peers, we weren’t built to hit multiple shipsets at our plants. We typically were maybe 1 or 2 months ahead, although we did have agreements with suppliers that might stretch out 6 to 9 months.

And so, we spent much of Q1 and Q2 burning off that excess inventory as the rates fell faster than we could slow down suppliers. But the good news is, is that Airbus has firmed up their narrow-body demand. I mentioned, all the 2 OEMs together delivered 125 aircrafts in December.

And the monthly average for the whole year was 60 a month, so 2X the monthly average. So you’re definitely on the upswing. They’ve asked – Airbus has asked us to protect rates higher than 4. And we are doing that in partnership with our suppliers. Certainly, it’s been a difficult time for the 787 with the reduction from 10 down to 5.

We’ve adjusted accordingly, but we are looking forward to the 737 MAX recovery. I mentioned the return to service arrangements that have now been adopted in Canada, Europe and the U.S. So they’ve put a forecast out there that gets them back to 30 plus a month in 2022.

And that’ll be a big tailwind not only for our interiors business, which does all the blankets, the floor panels. But for some of our actuation businesses in the Yakima and Valencia and Clemmons that support the platform. Today, the 737 MAX is perhaps 3% of revenue. And we expected to go back up to where it was pre-COVID 7% to 8%.

So the net of those is if you had to have a rising tide, having it on the narrow-bodies at both Airbus and Boeing is going to offset the decline in the 787. And on the 777, we have more content on the legacy 777 and the 777X. So that’s really not an impact to us.

And then the 767 remains flat at a 3-month and they continue to look at demand for freighters and tankers. And that may go to 4 months at some point. So we’re in lockstep with the OEMs on rates. And although, we’ve got another year to work through and ramp up on the MAX, we were excited about what it will do for Triumph in our fiscal 2023..

Appreciate the color. I’ll leave it at one. Thanks, Dan..

Thank you..

Our next question comes from Greg Konrad with Jefferies..

Good morning..

Good morning..

It seems aftermarket has outperformed peers on the downturn.

What was commercial aftermarket down specifically in the quarter? Or is the down 28% just commercial? And then just thinking about your prior push to increase aftermarket content, are you seeing share opportunities as the market resets at these lower levels?.

Okay. Thanks. So we measure MRO, both the – I’ll call it, the upstream early indicators like receipts, and then how many repair orders we push out and then that translates into sales as we’re paid for those.

So the upstream measures of receipts across all of our 12 MRO were up 11% from Q2 to Q3, we went from about 1,600 repair orders to 1,854, so a nice quarter-over-quarter increase. There’s a little latency in the receipts into delivered, repaired items and therefore sales. So there’s a lag there, but the leading indicator is favorable.

And as you look across all of our plants, the trend quarter-to-quarter of the 12 that we did; 10 were up; and 2 were down quarter-over-quarter; the 2 that were down, where – Atlanta, where we do interiors refurb, it’s a very small operation, and nobody’s bringing their planes in for interiors. So we’ve decided to close that plant.

But – and then one was near breakeven, and the others were favorable. So those are the metrics that we watch in terms of taking market share away from others. We’re looking at those smaller MRO providers that don’t have the rotable inventory or the cash resources that Triumph has to pick up share.

A lot of the carriers, Southwest is an example, has gone out to market with large RFP packages to compete MRO work, and we’re supporting those as well. And they’ll benefit fiscal 2022, nothing necessarily in the short-term. So overall, we’re encouraged, I mean, at the trough, MRO demand was down by about half.

Now we’ve seen that recover, we expect it to continue as flight hours recover..

And then just one follow-up, which is more on the military. I mean, you mentioned improve competitiveness, as some of the costs have come out, and that the $4.5 billion pipeline is majority on the military.

What are you seeing in terms of new opportunities are these mostly new build or retrofit programs? And are some of them more takeaway wins versus new starts?.

Okay. 3 different categories, takeaways, new build, and new starts. I would say that the biggest driver is retrofits and upgrades, were they take a helicopter whose engine controls maybe become obsolete or they want to gain some margin on performance.

And we’ll go in and work with either the depots or with the OEMs to improve the reliability of those components. And that’s happening frequently at our West Hartford, Connecticut site. But we’re also on the new platform some of them are still low in rate like the T-7A.

I want to say on the Boeing Defense T-7A that the promise of full-sized [determinant holes essentially a clip together wing] [ph], is being realized right now.

Having worked in this industry and factories that were for us of tooling where you could hardly see the aircraft, now these structures are coming together with essentially a window frame fixture. And it’s a really good sign for the future affordability of aircraft. It’s the tolerance tighten on the piece parts, and I just essentially click together.

We’re also on the MQ-25, that’s early in build, and we’re – have roles on 2 primes for the future vertical lift with the Army, where we’ll supply landing gear and hydraulics. So we’ve got good positions on new builds, but they’re not contributing significantly to today’s revenue as much.

We are getting some lift on recurring production programs, F-15, the F-35. And we’re positioning for some technology insertion on the F-35, where they’re refreshing certain components midway through the ramp. But – and then MRO demand we’ve covered.

So what you try to do is plot, where are you in the lifecycle of an aircraft, and make sure you have programs in all phases. You want programs in R&D, you want them in new product introduction, you want them in recurring production, and then in the sustainment phase, sort of the atrophy index.

And we plot that across all our programs to make sure we’re not overweighted in mature production programs, and therefore we’re going to have a bathtub in the future. And we’re not overweighted in development programs where margins are low, you want to have a renewal of your backlog, and that’s what we’re focused on doing..

Thank you..

Thank you..

Our next question comes from Seth Seifman with JPMorgan..

Hey, thanks very much. Good morning. I guess, as you think about the military piece of Systems & Support going out on a multiyear basis and the flattening budget.

Do you still see potential for growth on the military side or when you think about the military side sort of flattening out with the budget and the commercial recovery becoming the growth driver there with flat or declining military sales?.

Yeah, I don’t have any data that supports the flattening DoD budget yet. And I think history supports that for at least the first year or 2, there’s a lot of inversion momentum around programs of record. The Biden administration is expected to put out their budget in the April timeframe.

It would normally be in January with a new administration, they delay that a few months. There may be some changes in priority will align to those. But we’re not expecting a downturn in defense spending. The world remains an unsafe place the recent news about U.S. and Syria as an example.

And we’re because we play such a broad role from tankers, to helicopters, to fighter aircraft, to – we support land vehicles as well, we don’t talk about that much, but we do. And so we’re not exposed to any single platform, should there be a change in priorities.

And it will adjust, but I’m confident that we won’t see it turn down at least in the first 1 to 2 years..

Okay, great.

And then on the just going back to the MRO comment you made earlier, the 11% increase, was that commercial only? Or was that across all of MRO?.

Across both military and commercial..

Okay. Okay. And then, during the pandemic, as you look to in the aftermarket outside of MRO and the proprietary aftermarket.

During the pandemic, with the things kind of quieter in terms of repair work, in terms of production, has that been more of an opportunity for you to push forward on that effort? Or has it been a period where there isn’t as much opportunity, and we should look for that to pick up more in the future, as volumes activity pickup?.

Let me give a little color on where we’re seeing increasing MRO demand. China during the last quarter was up 23%. So the support we provided to China Southern, China Airlines, China Eastern, all very large airlines, is up substantially. Asia in general is up 17%.

In Malaysia, in particular, Europe is up 16%, and part of that is our partnership with Air France. We decided to enter into this joint venture to get on the new newer aircraft. So I think, 737, 787, those are just getting into their intensive phases of support and the partnership with Air France, under license from Collins allows us to do so.

North America is up about 13%, and that’s driven by cargo carriers. The only market is really down with South America. And that had to do with softness with some of our engine accessory work down there. But that’s a smaller contributor to MRO. So it looks like Asia is coming back strong.

And we expect Europe and North America to continue to steadily ramp up. And then defense MRO spending is also favorable..

Great. Okay. Thanks very much..

Thank you..

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

Hey, good morning, guys. Thanks for kicking the question. Maybe just go back to I think what Cai was asking on the contract renegotiations and renewals.

Do you expect these newer extensions to provide some margin tailwind versus – it sounded like you had the opportunity to review and reset some of the price breaks, raw materials, other discounts in there.

But do you expect these to be margin accretive versus the prior contracts?.

Yes. And to elaborate, Triumph, when they acquired a number of companies had contracts that were loss making for which they adjusted the acquisition price and then established a fair market value reserve, and they would unwind that reserve as products were delivered, but it was a cashless profit, because the programs were in a loss position.

So as these LTAs renew, we’ve had to explain to OEMs that we can’t sell silver dollars for $0.25. And they’re realistic about it. They know they’ve benefited from years of cost advantage, a discount on some of these products. We do enter into discussions with the primes about what could be done to drive affordability.

Are there design simplifications? Can we give them some of the content back and source it through their suppliers. So the answer, where possible, we’d like it to make it where cost comes down and margins are enhanced. But the answer to your question is yes, we expect it to be a tailwind for margins..

Got it. And then just one more. On the – if we think about the RemainCo company within structures, you called out some of those – some of the content on the V-22, the gold streams, the F-35, the trainer. And then obviously, you’ve got the interior, the blankets, the insulation.

Can you give us a sense, is there a big margin difference between those various offerings and maybe can you give us a sense of what the split would look like between those revenues?.

So, there is a difference in margin based on where they are in their lifecycle. Obviously, the T-7A, as an example, is not a high margin program in its development phase. But Boeing has large hopes for the program not only with the Air Force, but the Navy and foreign military sales.

And when you get an FMS, the margins prove V-22 is more in the production, mature production phase, margins are stronger there. As Jim reported, cash was about 5% operating profit business when you take out things like 747 shut down. So it’s not stellar, but it’s positive in that regard. And we have an end in sight to the closeout of 747.

So what remain is the smaller structures business, but a much healthier one, better led, better processes, better quality, that are on time delivery. That’s my comment about no more red programs.

Some of you who have been with me for the journey here at Triumph, remember, when we started, and said, we’re going to eliminate all the red programs, and it took longer than we would have liked but we’re there on structure. So I’d like to give a shout out to that management team.

It’s good business, good capabilities that may not be aligned with our long-term vision for the company, but there are people who want to focus on structures. And last time I checked, you can’t fly the aircraft without primary structure..

Got it. Great. Thanks a lot, guys. I’ll jump back..

Thank you..

Our next question comes from Ken Herbert with Canaccord..

Yes. Hi. Good morning.

I just wanted to first ask on the TS&S margins in the quarter, can you go into a little bit more detail on what drove the sequential improvement relative to the second quarter?.

So good question, Ken, I think there’s a little bit of volume going on. But there’s a lot of cost reduction as well, as we can continue our austerity measures and reducing our fixed costs, remember, SG&A is down in the mid-20% lower than a quarter ago. And the mix has improved as well.

We see more military mix, which is more stable, high margin business, and less of the commercial, which can be volatile in terms of margins. But overall, the margins and that core business are headed north and work towards our longer-term goals. And we’re taking all the actions necessary to accomplish that..

Okay. And, Jim, that’s perfect.

Can you just remind us, what are sort of the longer-term goals? I know you’ve outlined them in the past, but has that changed? Or how do we think about segment margins for this business in 2022 and beyond? And what’s the potential?.

Yeah. Like, everybody in this industry, we’re trying to see into the future. And it’s not as clear as it was maybe a couple years ago. So the direction is clear that we’re going to continue to improve those the opportunity is unfolding as part of our planning process, and as the market starts to recover.

But there’s no reason that these can’t be backup in the 2020s in the normal pre-COVID market..

Okay. And if I could just 1 final question, Dan, maybe for you. I like the detail you’ve provided on Slide 6 with your hidden value.

As we think about this business moving forward, what’s the mix of – for the TS&S business, the mix of what you manufacture, where you own the IP relative to say, build-to-print moving forward?.

Yeah, thanks. Thanks, Ken. So first on the revenue side, the quarter ago, we were roughly 50-50 on the contribution of structures versus systems. And in Q3 and you’ll see this in the 10-Q, it’s now 62-38 split. So we’re saying rapid acceleration in the weighting of systems versus structures as we exit programs and we grow on the military side.

In terms of IP versus build-to-print, we’ve already exited majority of the build-to-print business in structures, machining, fabrication, metal finishing. And what remains is good content as we’ve discussed previously. But on IP, I think we’re at about 80% IP for our products in Systems & Support.

And where it’s not our IP, for example, let’s say we manufacture – we do manufacture gears for the Apache, transmission gears, 1000s of them. Our Macomb plant makes over 80,000 gears per year. It typically takes 12 months to manufacture a single gear, so a big pipeline of inventory going through there.

That’s where lot of the CapEx that Jim mentioned has been invested, is into new close-tolerance grinding equipment. But that’s not IP, but it’s a sticky sole source. In fact, we took the Apache contract after another supplier had gone Chapter 11.

And we’ve been able to recover from what was a big past due position to supporting the Apache line and Boeing Defense has recognized that improvement. Very difficult to do over the last few years, but we did. So our focus is going to continue to be on IP. And we’ll keep build-to-print, where we can earn good returns and support the customer.

But IP is our preferred model. And you’ll see us do that in gearboxes, engine controllers, heat exchangers.

Just one other area that we’re excited about that was out at our Seattle R&D center last month, and we’re finally getting some traction on additives, starting to print parts that are flight hardware, critical fuel-pump housings, engine-starter housings.

And we’re trying to find those products that are a good fit with technology, not just replace subtractive manufacturing. Also we’re learning, we’re early on the journey, but we’re learning how to use additive. And that’s another area where our IP can come through. We’ll redesign the parts differently to take advantage of additive.

It’s a small percentage of revenue now, but I’m excited about what it can do..

Great. Thanks for all the detail..

Okay..

Thanks, Ken..

The last question comes from Ron Epstein with Bank of America..

Hey, good morning..

Good morning..

Good morning..

A longer-term question here.

When we think about Triumph in, say, 5 years as a benchmark period, how do you think the company will look when we think about how much the company is going to be defense versus commercial, services versus product, OE versus aftermarket? So if we take a little bit of a longer-term view, what are your goals there?.

engine accessories, structures, structural repair and interiors. Interiors is going to be less of a contributor, but we’re looking at new classes of product to provide aftermarket for, that build on what we do in engine components and structures. And then on defense versus OEM, if you recall, we started this journey we were 20/80 defense/commercial.

Okay, now we’re at about 35%. And I think it’s reasonable to think we’ll end up at 40% to 45%. You remember, Ron, when we were heavily weighted towards business jets and regional, and we’ve reversed that now. And those 2 together I think are less than 9% of our revenue combined.

So it’s, as you know, we’ve just decided it’s just not attractive market for Triumph in the things that we do. There are a few niches we do, high-tech composites, for example, complex leading edges, but not large structured wings. So that will continue to decline. And then you asked about OEM versus aftermarket.

And that’s, I don’t expect a big shift in that mix. OEM work is still good work, as volume you can count on. MRO tends to be more cyclical. For example, all the freighters that went out and flew their wings off to deliver all the holiday gifts, we didn’t get any MRO traffic.

And now, they’re all coming back and they’re catching their breath and they’re doing updates. So it’s nice to have the mix of the 2. I think the key word is balance, diversification of customers, of life cycles of the program, of regions. I mentioned the growth in Asia versus the U.S. That’s the key for Triumph to be predictable over time.

So 5 years, we certainly want to re-grow our top-line. And we just looked at the 5-year forecast with all of our leaders. And it’s a nice top-line CAGR and an even better margin CAGR.

So if we can get some luck here on the pandemic recovery, sustain the very high defense budgets that we’ve seen, there’s no reason why Triumph can’t finally be free of, I’ll call it the programs that have been a drag on the company. And we really are getting back to the company’s core from 1996 through 2010.

In that 14 years, they’ve built up a portfolio of systems and aftermarket companies. And that’s where we’ll be at the end of this journey with a broader set of offerings.

Does that help?.

Yeah. That’s great. Thank you very much..

You bet. Thanks, Ron..

Ladies and gentlemen, this is all the time we have for questions today. This concludes Triumph Group third quarter fiscal year 2021 earnings conference call. There is a replay available for today’s conference that starts at 11:30 AM Eastern Standard Time to the 18th at 11:59 PM Eastern Standard Time.

You can access the replay by dialing 1-800-585-8367 and entering pass-code 235-4859. Again, you can dial 1-800-585-8367 and entering pass-code 2354859. Thank you all for participating. Have a nice day. All participants may disconnect now..