Triumph Group Inc (TGI) 2023 Q2 法說會逐字稿

Welcome to Triumph Group's Second Quarter Fiscal Year 2023 Results Conference Call. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast. (Operator Instructions) Please note, this event is being recorded. In addition, please note that this call is the property of Triumph Group, Inc. and may not be recorded, transcribed or rebroadcast without explicit written approval.

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

Thank you. Good morning, and welcome to our second quarter fiscal 2023 earnings call. Today, I'm joined by Dan Crowley, the company's Chairman, President and Chief Executive Officer; and Jim McCabe, Senior Vice President and Chief Financial Officer of Triumph. During our call, we'll be referring to the supplemental slides, which are posted on our website.

Certain statements on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks uncertainties and other factors, which may cause Triumph's actual results, performance or achievements to materially differ from any expected future results, performance or achievements expressed or implied in the forward-looking statements.

Please note, the company's reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release, which can be found on our website at triaggroup.com. Dan, I'll turn it over to you.

Thanks, Tom. Earlier today, we reported our second quarter results for fiscal year 2023. Leading the first half of fiscal '23 marks a long anticipated inflection point for Triumph as we transition from years of cash used to positive cash flow in the second half of the year. In addition, we delivered solid organic growth driven by backlog expanding at double-digit rates as commercial volumes return.

Supply chain constraints continue to be a headwind, leading to delays in sales in the quarter. This headwind was concentrated in our defense programs, but the active management of our supply chain has enabled us to mitigate the impact on Triumph. Our continued focus here as well as our visibility in our backlog and pipeline allows us to remain confident that we are able to achieve our current full year guidance.

Overall, our Q2 results were in line with our expectations, with pieces of our business exceeding them -- more to come on that. On Slide 3, I summarize the quarter's highlights. First, we generated organic growth of 6% sequentially and 13% year-over-year driven by improving commercial OEM and MRO demand. Induction of parts for MRO stepped up 11% sequentially in Q2 as both narrow and widebody flight hours recovered.

As a result of supply chain shortages, Q2 margins were level with the prior year quarter and are expected to step up in our Q3 and Q4 sequentially with year-end shipments. We have a clear line of sight on parts availability, support, planned shipments and maintain the high end of our revenue guidance. Backlog is up 11% and as Triumph realizes the benefits of our diverse products, end markets and customers.

With a pipeline of over $11 billion in opportunities, strategic wins on new platforms, and increasing R&D expenditures on differentiating technologies. We anticipate strong revenue increases over our planning horizon of fiscal '24 to '28. We expect to be cash flow positive over the balance of fiscal '23 and beyond, with material reductions in past due backlog, inventory and working capital anticipated in Q3 and Q4.

Now I'll provide my perspective on the industry and how it relates to Triumph, starting with the supply chain and then OEM rates. Prime continues to proactively mitigate supply chain challenges, which is less than the impact on Triumph relative to the market. Let me share what we're seeing and what we are doing. On build rates, Triumph has received firm purchase orders from the OEMs, which support our full year outlook.

We remain in close communications with the OEMs on out-year build rates to optimize our working capital levels. Supplier shortages resulted in deferred sales of approximately $22 million in Q2 and associated margins and cash. That said, our efforts to dual source work from low-cost sources has softened, but not fully mitigated shortages.

We track supplier On-Time In-Full, or OTIF, which is a measure of kit completedness so the top level assemblies can be completed on time. OTIF was as low as 74% in April and has improved month-over-month to the mid-80s. We are focused on critical shortages competing deliveries and anticipate achieving OTIF levels of greater than 90% by the end of the fiscal year, which supports our full year guidance.

Last year, we revised our policies to provide 24 months demand forecast to our primary suppliers as well as strategic order coverage beyond lead time, to secure allocation to protect our most critical programs. While our suppliers are not yet achieving 100% on-time performance, we expect this incremental progress will enable Triumph to burn down approximately $40 million of past due backlog by the end of fiscal '23.

Castings and forging providers have been the largest sources of shortages. As such, we are expanding our additive manufacturing applications on items such as housing, actuators and heat exchangers to reduce our long-term dependency on these long lead and capacity-constrained sources. Our top supply chain priority remains to secure near-term delivery assurance to ensure we achieve our fiscal '23 revenue plan.

We continue to partner with our customers and suppliers to ensure continuity and affordability. On the cost side, we continue to work with our suppliers to mitigate potential price increases while also sourcing from alternative suppliers with lower costs where possible. Along these lines, drive awarded contracts to new suppliers in India and Thailand in the quarter as these countries expand their investment in A&D.

As a result, these increases have typically totaled less than 2% of sales and we expect any impact to be immaterial to our results. Prime's cost reduction plans go beyond our supply chain. We set a goal to generate $49 million in cost savings in fiscal '23 and $42 million of which are related to internal costs. Year-to-date, we have generated $40 million in savings. Looking at OEM rates, the commercial aviation market continues to recover.

Although paced by the ability of suppliers to support desired ramp rates. Travel demand continues to strengthen. The global commercial fleet has returned to 91% of pre-COVID levels with 96% of single-aisle aircraft and 74% of twin-aisle aircraft returned to active service. There were other encouraging signs in the quarter for the twin aisle segment as Boeing booked orders for 60 twin-aisle aircraft, including 16 787s from China Airlines.

Further, Boeing resumed deliveries of the 787 in August, heading over 9 in the quarter, while Airbus delivered 13 A350s in the quarter. We anticipate rate increases on the 787 to follow. This is welcome news given Triumph's substantial shipset content on these platforms, which includes the entire suite of hydraulics and actuation for the 787 landing gear system. We are currently delivering 787 at rate 2 to 2.5 per month with a ramp to rate 4 anticipated early next year. Boeing forecast to return to rate 5 in late calendar year 2023 and rate 10 and 2025.

After large increases in OEM narrow-body build rates from pandemic lows, the commercial OEMs recently delayed the next step-up in production rates by 6 to 9 months to let the supply chain catch up.

Prime had already lowered demand forecast for narrow-body deliveries in our internal plants. Most of our plants are producing MAX components at 26 to 31 shipsets per month and 45 to 48 per month on the A320 family, which has been key to organic sales growth I mentioned. Engine delivery pushouts in Q2 on programs such as GE LEAP have already started to reverse as OEM supply chains catch up as a result of prudent slowdowns, which will benefit our second half of the year.

Short-term increases in inventory are expected to burn off in our second half benefiting free cash flow. While we look forward to even higher OEM rates, the recent rate stability and gradual supply chain recovery reinforce the bottom is in for our commercial end markets. We look forward to providing our fiscal '24 revenue guidance with the latest OEM rate increase profiles.

This macro backdrop, Triumph continues to see increasing demand across our markets as the aviation market recovers. Areas of strength include recovering OEM rates, strong MRO demand and partnerships. Q2 saw our Systems and Support segment book-to-bill up 34% year-over-year, with Q2 bookings up 15%. This is primarily driven by increases in commercial OEM and MRO end markets while military backlog was also up a more modest 4%.

I'll touch on military more in a moment. Prime's backlog growth is the best leading indicator of top and bottom line expansion. Cross Triumph backlog is up 10% year-over-year, with Boeing 737 backlog up 40%, F-35 up 60% and the CH-53K backlog up in excess of 100%. MRO inductions are up as air transport and freight traffic expands and we continue to progress to expand our market reach geographically, securing industry-leading aftermarket partnerships.

We recently announced our partnership in the Middle East with Mubadala Sanad which will provide in-country access to the region's MRO markets and enable us to accelerate growth in engine accessory repairs. We expect this partnership to provide incremental sales starting early in fiscal '24. Beyond forecasted increases in demand, enhanced pricing from recent contract extensions are starting to cut in, especially where we are the design authority, which applies to about 70% of our products or where we are sole source, which is the case for 90% of our products, excluding our third-party MRO business.

Taken together, our growing backlog and improving mix of OEM and aftermarket business support our goal of doubling profitability over fiscal years 2022 to 2025. Let me provide supporting facts on where we are on winning and how it affects our product mix. We set a goal in fiscal '21 to generate 25% of our revenue from new customers and solutions. Since that time, 40% of Triumph's awards are associated with new products and/or new customers.

Wins for the quarter totaling more than $200 million can be seen on Slides 4 and 5. These wins are driven by Triumph IP on a number of products, including airframe-mounted gearboxes for the next-gen military platforms, hydraulic control valves on future vertical lip helicopters, turboprop engine controls thermal pump packs and rotorcraft digital engine control upgrades.

Prime's MRO businesses are growing with new inductions up 26% year-over-year and recent awards across platforms in both military and commercial programs. New MRO customers added year-to-date include DHL Bahrain, JetStar, BBAM Aircraft leasing, Irish Air Corps and Goodrich Foley, Alabama. The military market, which expanded during the COVID downturn is stable with continued U.S. government demand. While military sales were down in the quarter, backlog is up, bolstered by geopolitical events and subsequent FMS sales, including 96 AH-64 to Poland, 35 F-35s to Germany 24 F-35s to the Czech Republic.

Additionally, we are experiencing resurgent orders for the M777 Howitzer, a British vehicle towed artillery for which Triumph supplies magazine assembly components. Triumph is actively developing IP, the support of new military platforms in the form of next-generation gearboxes, valves, fuel pumps, actuators, landing gear systems and vapor cycle cooling systems on multiple platforms currently under development.

These upgrades are needed to address aircraft electrification, higher fuel efficiency demand the higher heat loads associated with electronic warfare. In the quarter, Triumph secured roles on the next-gen engines, the digital series fighters and the Army's new helicopter platforms that will benefit our fiscal '24 to '28 planning horizon. Watch for Triumph orders as OEMs prime awards for these new systems are announced.

Fiscal '23 also marked an increase in the breadth of electric aircraft ventures beyond the eVTOL or air taxi space. We are actively engaged in 5 programs, providing a mix of gearbox solutions, installation, landing gear solutions and actuation for freight, regional transport and urban mobility segments. Landing gear actuation of gearbox components remain essential to electric aircraft planning to Triumph's strengths.

We'll share more information on these programs as they mature. Bottom line, despite short-term flat spots in commercial rates and timing issues caused by supply chain shortages, Triumph continued to deliver on our commitments to our customers and to meaningfully grow backlog. We remain on our path to value through this dynamic A&D cycle.

We kept our momentum going during the downturn and expanded our partnerships, products and services, which are now forming the foundation for our future growth and margin expansion. Jim will now take us through results for the quarter in more detail. Jim?

Thanks, Dan. And good morning, everyone. As I review the financial results for the quarter, please refer to the presentation posted on our website this morning. I will be discussing our adjusted results. Our adjustments are explained in the earnings press release and in the presentation. Triumph's second quarter results met our expectations, and we are on track to achieve our full year financial objectives. Our consolidated results for the quarter are on Slide 8.

Revenue of $308 million reflects increased volume from narrow-body platforms, offset by decreased military rotorcraft volume compared to last year. Excluding revenue from divested businesses and sunsetting programs and despite the current market environment, we grew consolidated revenue 13% organically over the prior year quarter. Adjusted operating income of $30 million represents a 10% margin, up from 8% a year ago and includes the impact of decreased military rotorcraft sales more than offset by a favorable closeout of legacy programs a sale of certain noncore IP and tailwinds from commercial narrow-body production rate increases.

Adjustments this quarter include $104 million gain on the sale of businesses. Primarily from the Stuart divestiture that closed on July 1 and $2 million of restructuring costs from an aftermarket product line we exited in the quarter. Systems and Support segment results and highlights are on Slide 9. Organic revenue was up 13% in the quarter, including decreased military rotorcraft sales primarily from supply chain delays, but more than offset by higher commercial narrow-body volume and a sale of certain non-core IP.

Systems that support operating income was $43 million or 16% margin, which is up slightly from the prior year. As Dan noted, we benefited from the commercial market upswing with commercial OEM sales up over 30% in the quarter over last year. Results for our Structures segment are on Slide 10. The continuing business in this segment is the interiors insulation inducting business. Excluding divestitures and sunsetting programs, Structures revenue of $33 million was up 14% organically.

737 production rate increases and Interiors contributed to the organic growth, partially offset by lower wide-body sales, which are expected to rebound. Operating income improved with the favorable closeout of certain 747 obligations and volume-driven recovery in the Interiors business.

Our free cash flow walk is on Slide 11. Our $24 million of cash used this quarter included $17 million of working capital growth to support the ramp in our second half sales. As for our quarterly cash flow cadence, we expect our usual seasonality. And with approximately breakeven cash flow in Q3 and strong cash generation in Q4, in line with our full year cash flow commitment. We continue to expect capital expenditures of approximately $30 million for the year, as we upgrade and expand our capacity for efficiency and to support new programs and future growth.

The schedule of our net debt and liquidity is on Slide 12. At the end of the quarter, we had just under $1.5 billion of net debt. We had about $150 million of cash and availability, which is more than sufficient for our projected needs as we pivot to positive free cash flow generation. We expect to be profitable and cash flow positive for the balance of the year.

We are continuing to reduce our leverage as planned by expanding EBITDA and free cash flow in our continuing businesses. We are currently benefiting from our below-market fixed rate debt in this rising interest rate environment. Of course, we regularly review our capital structure with our advisers and Board. We're paying close attention to the capital markets and remain nimble and opportunistic for when the window is open to improve our balance sheet before our next bond maturity in June of 2024.

Consequently, we are confident in our ability to reduce our leverage, improve our capital structure and address our debt maturities with a series of timely, balanced and constructive actions that I look forward to sharing as we announce and execute them. For our full year guidance, turn to Slide 13. Based on expected aircraft production rates and the resulting demand on each of our facilities. We expect FY '23 revenue to approximately $1.3 billion. We are increasing our GAAP EPS guidance by $0.15 to $1.66 to $1.86 per diluted share. We are increasing our adjusted EPS guidance range by $0.12 and to $0.40 to $0.60 per diluted share due to a higher pension income estimate.

We continue to expect cash taxes net of refunds received, to be approximately $7 million for FY '23. The interest expense is expected to be $129 million, including $123 million of cash interest. For the full year, we expect to use $30 million to $40 million of cash from operations with approximately $30 million of capital expenditures, resulting in free cash use of $60 million to $70 million in fiscal '23.

In summary, despite some temporary supply chain challenges, we were able to identify and execute actions to meet our commitments and our Q2 results are in line with our expectations. We remain on track to achieve our full year guidance and our multiyear financial objectives. Now I'll turn the call back to Dan. Dan?

In summary, our second quarter results achieved in a challenging macro environment, position us to deliver positive free cash flow and expand top and bottom lines in the second half of our fiscal year. This, in turn, will provide a strong jumping off point for fiscal '24. While it can't come fast enough, the commercial market recovery is happening with rapidly improving MRO uptake closely followed by OEM rate increases.

Our systems and support backlog meaningfully grew in the quarter, and our strong book-to-bill of 1.31 year-to-date confirms that our go-to-market strategies and pursuit of new customers, products and services are working. Triumph remains on track to achieve our full year objectives. I look forward to reporting on our progress as we continue to unlock the hidden value across our streamlined business and to deliver value for the benefit of all our stakeholders. We're happy now to take any questions.

(Operator Instructions) Our first question will come from Seth Seifman of JPMorgan.

Thanks very much, and good morning, everyone. I wonder, Jim, if you could quantify 2 things. I guess, first of all, the -- from the side, the IP sale, in systems and support, how much earnings that provided? And then also, how you think about the go-forward margin in structures because it was almost 20% in the quarter, which is actually better than systems.

Even at the low production rates we're at now. And so anything that might have been unusual there and how to think about that going forward.

So on the IP sale, we did have opportunities to monetize some IP. It was legacy programs, so it was strategic for us to do that. It was about $15 million of sales and it was high profit because a lot of expenses were occurred in prior periods. So the profit was probably in the low teens.

So that's one way we closed the quarter, and we have levers to pull every quarter. So we're pleased to be able to do that to meet our covenants for this year in this quarter. In terms of the margins and structures, yes, we did have good margins. We continue to work through the remaining vendor liabilities on legacy programs. And so there was improved cash there. I think the overall improved cash for the company was about $8 million positive for the quarter. And the majority of that was related to closeout -- favorable closeout of those legacy liabilities. There's not a lot more of that left.

But also in the background as interiors continue to perform in that segment. So we're seeing an upswing based on some 37 MAX volumes going through there as they were kind of breakeven-ish, they're returning to profitability and they have a very strong growth forecast for next year in the Interior segment.

Great. Great. And then maybe as a quick follow-up, you mentioned being nimble with regard to the capital structure. Can you talk a little bit about how you balance the desire to see some more improvement and positive cash flow before addressing the capital structure versus kind of the need to the need to take care of that sooner rather than later? And how you're thinking about balancing those 2 things?

Yes. Well I mentioned we pay close attention to the markets because you have to go to the market when the market is ready, not necessarily when you want to. So you have to look for windows. Our next debt maturity is not until June of '24 and we're enjoying very low fixed rates right now, which we want to enjoy as long as possible. We want to be positioned to refinance.

Our forecast has us improving our cash flow, improving our profitability. So we're going to naturally deleverage over time. and we're going to look for those windows, and we're getting good advice and we have good plans in place with multiple options to execute.

The next question comes from Sheila Kahyaoglu of Jefferies.

Thank you guys so much. I wanted to maybe ask about free cash flow. Jim, you've been very good about talking about it and how we think about the sequential improvement here. I think there was $21 million free cash flow clean for the first half. How do we get to the full year? And how do we think about just any onetime items in that otherwise?

Thanks, Sheila. We've had a lot fewer onetime items than previous years and never previous quarters. Year-to-date, we did have $17 million of cash used in Q1 from the Stuart business, which is now gone. And we had $4 million of cash shut-down costs in Q1 as well.

We really don't have any in this quarter. That's why you'll see on the slide, I didn't call any out for the quarter. So they're behind us. It's a pretty clean quarter. Seth did mention the sale of the IP, that only brought $5 million of cash in the quarter. But we have those kinds of things. We're in the business of developing and selling IP, whether it's directly or as part of our product.

So in terms of cash flow cadence moving forward, we're looking at breakeven-ish in the third quarter and solidly cash positive because of the trends in the business, but also because of our seasonality in Q4. So $50 million to $60 million of cash generation in Q4, and that gets us into a range of using only 60% to 70% for the year. And then moving forward, we're looking to be cash positive every year going forward.

There'll still be some seasonality, but we're on the right track. We're excited about pivoting to growth in cash flow and profitability.

Great. Thanks for just reiterating that. I'll jump back in the queue.

The next question comes from Myles Walton of Wolfe Research.

Jim, I was hoping to just follow up on that for a second. I think the original guidance had about $70 million of onetime or nonrecurring items in it, and you've got $21 million year-to-date. Is there still anticipated to be 50% in the back half? Or is -- are the 1x less vicious and you're reiterating the full year free cash flow?

Yes. Thanks, Myles. The one -- I guess, the way you said it is the 1x are less vicious and that's true because we've been mitigating them. And that's part of the pickups we're talking about in our Structure segment is these lingering liabilities, we've been able to negotiate them down and reduce them.

So they're a lot less. And right now, especially with the advances going, remember they're all going with the structured divestiture there's really very little nonrecurring moving forward for this year.

So is there something in the operations that's offsetting the goodness of the nonrecurring going away?

Right now, in terms of cash flow, I would say it's the inventory growth because of supply chain challenges. And you saw we had $87 million in the first half of the year of working capital growth. Now that was only $70 million in the past quarter and it will reverse itself for the second half.

Now that's our normal cadence anyway because of seasonality, but it's been exacerbated by the supply chain challenges. We're working through them, and we think we're as good if not better than others in mitigating supply chain challenges. We have a great organization doing that globally. And we know we're going to be able to manage them.

Okay. Dan, one question for you. If you look at the defense portfolio, there are a couple of programs in there that maybe not next year is sunsetting, but certainly over the next few programmatically look like they do. So for something like the V-22, can you describe the sort of flexibility in the cost structure you're planning for, so that you have an off ramp as those programs naturally wind down and whatever new business comes along?

Yes. Thanks, Myles. The cadence on V-22 is really high, both on OEM and on MRO Naver who acquires the spares and repair units in the aftermarket has a lot of orders queued up with us in the short term, we're busy. And there's some mods that are happening to improve the ability of those actuators to work in a high-dose dirt environment that we're cutting it as well.

So the platform has got a lot of life. We are we're diversifying the makeup of the work at our gearbox business. We're on new starts like the T-7A, where we do the accessory mounted drive gearbox drive, and we're on LEAP IGBs on the commercial side, and we're winning content on the new future vertical lift alternatives. So even though V-22 may come down in the in the future, we're not worried about it. We're busy now and we're on the new platforms.

Okay. All right. Just one cleanup one. Pension, Jim, is there any outlook on funding requirements there? I know there's been obviously a movement in discount rates and asset returns, but is there a look that funding will be required sometime in the near future or no?

Yes. So annually, we do the funding forecast at every fiscal year-end. And there was no material funding over the next 4 years, and we did that at the end of March. As we all know, the world has changed in terms of asset returns and interest rates during that time period.

So the next firm calculation we'll be doing is at the end of this fiscal year. But we did note that we do expect there will be some funding based on current market conditions and current interest rates that they don't change before the end of the fiscal year. So there is a headwind on pension funding, should things not change, but not in the near term.

Next year is not going to be significant. It's really the out-years 2, 3 and 4 that might be impacted. But we'll know more specifically at the end of this year.

The next question comes from Cai von Rumohr of Cowen.

I guess to follow up with Seth's question about how you're thinking about ReFi. You made the point that basically a ReFi would be done at -- likely be done at a considerably higher rate. And given the level of your cash flow, it looked like ReFi just in terms of the ongoing outlays would take a fair bit out of that.

So is it fair to assume that given your business prospects look like they're getting better that you're more inclined to kind of wait and see and enjoy the current lower interest rates you've got?

Yes. Thanks, Cai. Yes, I don't think it's a foregone conclusion that our rates would be higher. That's part of being measured in your approach and look at your timing. And we do have time about 18 months before maturity, and we are enjoying an improving business.

So with our cash going positive and our profitability increasing, we're going to look for those windows and execute in a balanced way of the refinancing is necessary to continue the business. So I hope that answers your question.

Okay. No, that's very helpful. And then Spirit basically had a situation where their OE customers asked them to slow down deliveries because they are not producing at their indicated line rates. Is that a risk for you? I mean your rates look like they're a little lower, but it seems like things are bouncing around all over the supply chain. So is that something we should be concerned about?

We wouldn't have a mark down the OEM rates to what we have firm orders for, and I mentioned the ranges of output. They vary by plant depending on the what's the channel inventory between us and the OEMs. But to have Airbus producing at 47% month in Q2 to headed to 55% within 6 months and then going to 65%, 6 to 9 months after that. I mean, to have the MAX at 31%, yes, they did push it to the right, but it should step to 38% maybe second quarter of '23 calendar and then on the way up into the 40% in '24.

So for us, we're starting to see the benefit of that. And it benefits our absorption on SG&A and overhead our supply chain, we're going to burn off that excess inventory that Jim mentioned. Even the 787 rates, we've taken them down to approximately 2% a month. We used to do 14% so when that program gets back to 5% or 10%, it's going to be a huge upside for Triumph. We are watching engines. There was a slowdown in the quarter on engine deliveries. And those are starting to come back.

We got signals from the OEMs and said, it looks like we've done enough derisking, go ahead and start ramping up again. So I think there's some give and take between engines and air framers, but our rates are -- we have confidence in our rates.

Thank you. Next question comes from Michael Ciarmoli of Truist Securities.

Can I just go back to the free cash flow, Jim, I want to make sure I understand. Last quarter, you had core free cash flow breakeven of $15 million, and that included roughly $70 million of one-timers. Now you think the one-timers are down to $20 million.

You don't talk about core free cash flow. You just have $60 million to $70 million. So should we think about the apples-to-apples 0 to 15% is now negative 40% to negative 50% on inventory? Or just help us reconcile what the apples-to-apples as last quarter to this quarter?

Yes. So we temporarily use that term core cash flow and Stuart was still in the portfolio. And now that Stuart is out, we went back to what we've always used, which is consolidated free cash flow. All our businesses are continuing, including the interiors business that's in the Structures segment remaining. So we include all that cash flow.

So we're no longer breaking out core versus noncore. Our businesses are continuing right now. So I hope that answers the question, but happy to entertain any follow-up.

Yes. I mean, so did the cash flow weaken then? I mean, I'm just trying to get an apples-to-apples here.

The onetimers associated with the legacy businesses, that have been reduced have been offset with growth in inventory due to deferred shipments primarily related to supply chain, but a little bit on won't be demand.

Okay. And then how long do you think it takes to unwind that inventory? I mean I know you talked about positive second half and then positive in '24. Is that inventory, that working capital hold through second half year? Do we get more of a burn down as we move into fiscal '24? Or how should we think about that?

Right now, we're forecasting it will burn down over the next 2 quarters by the end of the year. And remember that our business now has quicker cycle times because we used to be 69% systems business. Now we're 88% of our sales are from the systems business.

So we're truly a systems company, and that turns a lot quicker than the long the big metallic structures businesses we used to be more in. And also, the diversity is helping us so that no one problem becomes too big of an issue. Our concentration -- our largest customer used to be last year, 36% of our sales, now it's down to 29%. And that still includes some of the divested business this year.

So it will be in the mid-20s in terms of our concentration by customer. When you look at the diversity across programs and customers, it's easier to attack them and not have one big problem.

Got it. Got it. Okay. That's helpful. And then, Dan, just one more, if I could. You mentioned, obviously, the challenges which we're aware of on castings and forgings. And I think you talked about using some additive manufacturing for housing, heat exchangers.

Can you just elaborate how long does that process take for you guys? How long does it take to get qualified? Just maybe a little bit more color there.

Yes, certainly a multiyear process. But the key is customers saying that the material properties and surface finishes have additive meet the requirements of the product. So we'll start out in less stressed components. Secondary actuation usually has lower loads than, let's say, primary actuation like you do for flaps and rudders.

And so we can cut it in on some of the metal structures that are used in those actuators. Heat exchangers are very encouraging because most heat exchangers are still made sort of in a tube and fin design that goes back to the 1800s. And now you can print those. So we're going through -- we've got our first flight hardware on that -- on those sort of products and use now. And then we'll just get customers to adopt them incrementally. There's weight savings, there's cost savings.

So the value proposition is pretty compelling. But it does take years to cut it in. The point being is that we're not just wringing our hands about the shortages in the supply chain between low-cost sourcing and our efforts on the additive, we're going to do permanent solutions to what's been a chronic problem. You may recall in the last ramp up 2018, 2019 pre-pandemic, these were the same bottlenecks we had back then. And it's my understanding that casting and forging providers had serious loss of talent specialized knowledge that's taking some time to rebuild. So we're not going to count on that coming back fully.

(Operator Instructions) And our next question will come from Ron Epstein of Bank of America.

I actually just got a follow-up on that question that Michael just asked. The additive manufacturing. I mean, realistically, I mean, to get that stuff certified, so on and so forth, that could take a really long time.

And is that something you'd want to do internally? Or is that stuff that you'd be working with an ad manufacturing partner? A pretty specific domain knowledge to do that? I mean is that an area of investment for you guys or not how you're thinking about that?

So we invested several million dollars in partnership with GE. I want to say 3 years ago, and we bought a few of the machines. More importantly, we talked to them about material selection, the powders the best applications and Triumph didn't acquire the machines to get into the printing business. The future is you design for additive, you upload the designs to the cloud and then the parts are dropped by drones by the dock.

I mean it's going to be something you can source. But so many of our products will benefit from it. So you're having an organic capability allows you to learn how to design for it. So right now, fuel pumps, actuator housing, gearbox housings, are all right applications for this. So our engineers are excited, especially the younger ones coming into the company because most universities now have 3D printing is core curriculum, and they want to do that when they get out in practice.

So we're partnering with the agencies that have the strongest voice and certification like RightPath -- we went up to the Air Force technology labs. We showed them what we're doing and the analysis that we've done on the strength of the parts, and they're helping us with the cut. And the same thing will be required with Naver a very deep technical ranks.

And then our military customers will follow suit. And on the commercial side, they'll also benefit from what's happening already on the engines. GE taught us a lot about what they've been able to achieve on commercial jet engine additive as an example. So long term, I'm confident in it we'll try to find a way to provide more quantification of its adoption for the investors.

Got it. Got it. And then you mentioned earlier about moving some work to India and Thailand. Where was that work currently done? Was it done here? Or was it done in another low-cost market like China?

So we got out of China pre-pandemic Triumph had a plant there and more partnerships. There were some legacy 747 parts that are made, but we had almost no impact from supply chain coming out of China. We had some demand reductions as MRO went down because they were flying less, but not on the supply side.

So there was more parts that were being sourced from U.S., Europe, other markets that were at higher cost. And I said my head of supply chain there and he came back and said you wouldn't believe the level of investment that India is putting into A&D and serious capacity. So we're going to ride that wave. We already have a plant in Thailand. It's one of our best plants, MRO plants. And so we have some experience in that market and they're sourcing locally there.

So it's just the natural progression of waste to take cost out, and we're going to follow it. I also want to say that more manufacturing done closer to the end markets is the trend. So the partnership with Mubadala Sanad and the UAE is going to support not only the Middle East region, but India, since a lot of air traffic is going to go through the Middle East into India.

And by having a presence in Thailand, as China reopens, we expect to get a tailwind there and we look forward to expanding our Air France JV from the Americas and Asia.

Got it. Got it. Got it. And then maybe just one quick question on the balance sheet. As you all look into 2024, I mean there's been this open question about refinancing. Have you had any change of thoughts there? I mean, that's a question we frequently get from investors is how we'll try up to the refinancing and so on and so forth.

And I don't know if there's anything is changed on that front since the last quarterly call.

So really, nothing has changed other than we continue to develop our specific strategies and the criteria in which we'd execute it. So we're looking for those windows to open up in the market. I mean right now, the high-yield market is pretty closed -- and we don't have to go to market right now because we have a runway of 18 months.

So we're going to continue to improve the underlying business with better profitability and cash flow. So we'll get the best rating in the best terms of execution when the time comes but nothing's really changed. It's going to be opportunistic on execution, and we're going to continue to improve the business so time's on our side.

The next question is a follow-up from Sheila Kahyaoglu of Jefferies.

Sorry, sticking to one question. In terms of just the inventory usage year-to-date, I was just wondering what are you guys using inventory on? Is it just prebuying raw materials that you're seeing lead time stretching to? Or is it just wiring or semiconductors? If you could give some clarity around that? And just how that unfolds?

And is it for MAXs? Or just where is that being strained or is it for defense because you see the supply chain having issues there? And then I noticed payables is not a benefit for you guys, but is for some of the other suppliers -- are you worried at all about smaller Tier 3, Tier 4 suppliers not getting enough advances in cash funding? Are you guys watching that in your supply chain at all?

Great question. So in inventory, we were -- we started our year in April we are working to a higher set of 787 and GE LEAP rates, as an example. And then there was some markdown of those rates. And of course, you place these orders 6 to 12 months in advance of need. And so that was a bit of a whipsaw on demand versus supply.

So now we're going to burn that off on both programs. We're not ahead of the game on MAX. We're closely matched to the OEM rates there. So we're not impacted by any temporary flat spot on the MAX. So I would say that would be the biggest area. It's less raw materials. I think that only accounted for about $7 million of inventory growth in the quarter. it's more about work in process.

So it's parts that we have, and we're waiting for the last few parts from the supply chain to complete a kit so we can ship a product, ring the bell, book the sales, get the cash. So that's the biggest component. That was up maybe $30 million in the quarter. And when we say we're going to burn it off in the second half of the year, as those last few remaining parts, what I call On-Time In-Full come in we'll complete those assemblies, ship the product and then deliver the sales.

We looked at our second half of the year as to whether it's meaningfully higher than prior year, and it's single-digit increase over prior year on revenue and earnings and cash. It's not a huge step up. So we can do it. And I think everybody I've talked to my peer group is seeing the same thing in terms of slow incremental improvement on the supply chain is not getting worse, but it's not going to be solved overnight.

On payables and Tier 3 suppliers, we've done 2 things. One, we started giving them longer horizon forecast. Two, we started giving them longer lead authorization. And three, we worked with them to help them with additional roles within the company, other programs they can support. And we haven't had any bankruptcies.

We've had a couple of suppliers that were -- have quality issues so we've had to deploy teams into them to help them get back on track. Again, castings and housings tend to be a constraint. But there hasn't been a financial barrier for them to perform. Jim?

Yes. Thanks, Dan. I think you covered it pretty well. It's -- from a purely financial perspective, it's the WIP. So the working process has gone up but if you look at what's the root cause, it's the on time in full. Just waiting for that -- those last few parts to flout the bill materials.

But we haven't seen very dramatic growth in raw materials. It's really in our work process. So we have to balance those -- we are working with suppliers that are challenges, and we're making progress. So looking forward to burning -- I think we have $40 million of past due, we're expecting to burn down by the end of the year.

Just one last point, Sheila. To the question that Cai asked earlier's about the rates and you mentioned V-22. If you look at Page 16 and our backup data, five of the top 6 programs in our backlog are all going up in rate. And between volume and new pricing that we've secured, we feel very good about this being the core driver of volume to drive inventory burn off and then cash and margin expansion.

Thank you. This concludes our question-and-answer session in Triumph Group's Second Quarter Fiscal Year 2023 Earnings Conference Call. This call will have a replay that will be available today through November 15 at 11:59 p.m. Eastern Standard Time.

You can access the replay by dialing 1 (412) 317-0088 or 1(877) 344-7529 and entering the access code 1319709. Thank you for attending today's presentation, and you may now disconnect.