Triumph Group Inc (TGI) 2024 Q1 法說會逐字稿

Good day, and welcome to the Triumph Group First Quarter Fiscal Year 2024 Results Conference Call. (Operator Instructions) Please note that today's event is being recorded. At this time, I would like to turn the conference over to Thomas Quigley, Vice President, Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to our first quarter fiscal 2024 earnings call. Today, I'm joined by Dan Crowley, the company's Chairman, President and Chief Executive Officer; and Jim McCabe, Senior Vice President and Chief Financial Officer of Triumph. As we review the financial results for the quarter, please refer to the presentation posted on our website this morning.

We will be discussing our adjusted results. Our adjustments and any reconciliation of non-GAAP financial measures to comparable GAAP measures are explained in the earnings release and the presentation. Certain statements on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause Triumph's actual results, performance or achievements to be materially different from any expected future results, performance or achievements expressed or implied in the forward-looking statements.

Dan, I'll turn the call over to you.

Thanks, Tom. Triumph is off to a strong start in fiscal year 2024 with expanding sales and margins as we focus on profitable growth and building on our success in the aftermarket. We are well positioned to take advantage of the increasing commercial aircraft build rates and growth in defense spending as we accelerate our future. We met or exceeded our expectations for Q1, delivering organic sales growth and improved profitability compared to the prior year.

Our deleveraging plan is on track as the issuance of our warrants yielded approximately $100 million in total proceeds, including $14 million in debt reduction. We plan to use a significant portion of these proceeds to further reduce debt. Overall, we remain committed to generating positive free cash flow and deleveraging the company to enhance shareholder value.

Turning to Slide 3. The return of the Paris Air Show after a 4-year hiatus reinforced the strength of the market as air carriers place large orders for both single- and twin-aisle aircraft. Global air transport capacity has returned to 96% of 2019 levels. And IATA projects worldwide passenger kilometer growth of over 28% in calendar year '23. This will offset the anticipated 4% reduction of still high cargo volumes compared to calendar '22. Increased orders for Airbus and Boeing commercial aircraft benefits all Triumph's operating companies. The mood of the air show was very upbeat with over 450,000 attendees and 2,500 exhibitors. We met with all of our Tier 1 and 2 OEM customers and several startups focused on electric aircraft in propulsion. Beyond the EV toll companies we hosted, we are also working with the OEMs on their electric regional jets and rotorcraft.

On the MRO side, lower commercial aircraft production rates over the past 5 years resulted in an increase in the average aircraft age from 9.5 to 11 years. Fleet aging translates into more demand for repairs and spare parts in both our OEM and third-party aftermarket businesses, a trend that we expect to endure given the long lead time for new aircraft.

After a period of deferred maintenance during the pandemic, Triumph continues to see steady increases in MRO inductions, which were up 15% in our Q1 over prior year. As worldwide and U.S. defense procurement spending grows for aircraft, ships and ordinance, Triumph has now achieved our target of 35% of our sales coming from military programs, up from 20% in 2016 across a broader set of customers.

We are deeply engaged in the next-gen aircraft propulsion pursuits with multiple aircraft and engine OEMs. From gearboxes for electric vehicle transmissions, the landing gear systems, thermal support and electric actuation, Triumph continues to be a key design partner in these future, more sustainable aircraft, strengthening our position in the marketplace. You can read more about this journey and our broader sustainability efforts in our annual sustainability report which we published online in July.

As Triumph expands our business and technology reach into new areas, we benefit from the support of our local communities. We've received substantial infrastructure funding from state governments to expand and improve our facilities, retain jobs and support the higher levels of production we are forecasting in the years ahead.

For example, Triumph recently received $6 million grants and pledges from the State of Connecticut to improve our West Hartford facility where we will produce next-gen fuel pumps and thermal systems while reducing our electrical power usage in the process. In Q1, we continue to focus on our employees and making Triumph an employer choice where they can have a rewarding career and be involved in their communities. Our focus on improving employee retention, especially for machinists and other technicians with hard-to-duplicate skills is paying off as overall attrition rates have improved year-over-year.

Company-wide, we have less than 100 open hourly job requisitions at this point and are ready for further increases in production. As we deliver on our commitments to our customers, Triumph continues to improve operationally, starting with a focus on keeping our people safe. Our comprehensive safety programs continue to yield positive results, as our recordable injury rate dropped closer to 0 in the quarter. 14 of our sites are now over 180 days without a recordable injury, and 7 of our sites have gone over 3 years of accident-free operations.

Also in the quarter, our Wellington, Kansas MRO facility was named the Most Improved Supplier of the Year by Collins Aerospace. This demonstrates the strength of our relationships with key customers, as our operational excellence and in particular, our quality levels measured in defect rates and escapes continue to improve.

Turning to Slide 4, I'll summarize the highlights from the quarter. Year-over-year sales growth was 14%, driven by improving commercial OEM and MRO demand. Aftermarket sales increased year-over-year, accounting for a robust 41% of our Q1 sales, roughly double our level from 2016. Helped by strong execution, increases in our aftermarket sales drove improved profitability on a year-over-year basis. We grew our reportable backlog by 10%, slightly above market growth rates as Triumph benefits from strong representation across a broad array of platforms, customers and end markets. In Q1, we received funding or notices of award for next-generation development efforts spanning gearboxes, landing gear systems as well as classified autonomous vehicle and actuators for an adaptive cycle engine.

Turning to Slide 5. There are multiple positive indicators which give us confidence in our fiscal '24 plan. Bookings for the quarter exceeded $500 million, up 19% year-over-year. Book-to-bill for the quarter was a very strong 1.6x, driven by strong orders for military helicopters, primarily the Apache and the CH-53K and commercial transport rate increases. New business wins totaled $669 million for the quarter, led by the GE LEAP gearbox, Apache Thermal Systems, classified thermal system application and new MRO wins.

Our backlog is increasingly profitable, supported by our investments in new products and technology, portfolio changes and pricing initiatives. Following the air show, we reached an agreement with Honeywell to supply user controls for the next-generation APUs, and we continue to expand our content on GE's advanced military engine offering for the F-35 and other emerging programs. We remain encouraged that both the OEM and MRO markets continue to recover as commercial transport revenues, demand and capacity, all continue to improve rapidly. Airbus and Boeing are planning to increase rates across their portfolios during our fiscal year, which will drive up Triumph orders, book-to-bill and backlog further.

Turning to Slide 6. In Q1, we closed on the large contract to supply GE LEAP gearboxes as well as fueldraulic actuators, which use fuel in place of hydraulic fluid for multiple military engines. Our refreshed technical portfolio now boasts customer partners and associated developmental applications for new fuel pumps, internal engine actuation, engine controls, thermal solutions, gearboxes and landing gear systems.

Turning to Slide 7. I want to share an example of our proprietary product development efforts on GE's new military engine, which is targeted towards multiple platforms. Our progress on this cutting-edge engine illustrates Triumph's value as a leading solutions provider on high-performance applications.

To date, our chipset content on this new engine exceeds $300,000, positioning Triumph for significant revenue from aircraft powered by this engine. On the aftermarket front, we signed a contract with Moog for MRO support on the 787, where Moog's customer relationships and our MRO capabilities are helping to maintain fleet readiness. We view partnerships as key to accelerating our MRO growth. Stepping back, it's important that Triumph maintains a pipeline of programs in every phase of the program life cycle from R&D through development, production to sustainment, and we are.

As shown in Slide 8, Triumph participates in military and commercial programs that span the acquisition life cycle. This is important for several reasons. Participation in early conceptual design phases allows Triumph to leverage and expand its intellectual property to create sole-source [enduring] content in direct collaboration with our customers' engineers.

Note that for fiscal 2024, approximately 90% of our sales are for proprietary or sole-source products, excluding our interiors and third-party MRO businesses. Having ample new programs in the development phase as we do, (inaudible) for more profitable later phases while keeping our engineering teams busy on a stream of new products. Mature production program participation provides the sales, profit and cash to generate shareholder value and fund our investments in R&D and CapEx.

And then last, support to programs in their sustainment phase generates even higher margins, allows us to refresh our OEM solutions and replace incumbents and improve future systems. As reflected in the programs on the left side of this graphic, Triumph has come a long way from being overweighted on sunsetting programs and build-to-print content to a modern company with increasing content on next-gen and ramping platforms that will generate long-term shareholder value.

I consider this repositioning of our program portfolio to be equally important as our business portfolio reshaping and process transformation. The strength of our team is what makes all of this possible as we accelerate to our future state. Indeed, the one team culture we've created at Triumph positions the company to sustainably execute our profitable growth strategy in the years to come.

Jim will now take us through our first quarter results and detailed outlook for fiscal '24. Jim?

Thanks, Dan, and good morning, everyone. Triumph's first quarter results met or exceeded our expectations with significant revenue growth over the prior year period.

On Slide 9 of our consolidated results for the quarter. Revenue was $327 million. For the continuing business, excluding divestitures and exited programs, organic revenue increased 14% over the prior year quarter. Organic revenue growth primarily benefited from increased volume and pricing on our largest programs, while demand across most of our end markets improved during the quarter on a year-over-year basis.

Adjusted operating income for the quarter was $24 million, representing a 7% margin and adjusted EBITDA for the quarter was $36 million, representing an 11% EBITDAP margin, which was in line with our plan. Excluding the $5.3 million benefit from AMJP Act in the prior year, adjusted operating margin and adjusted EBITDA margin were consistent with year-to-year.

In the quarter, we settled certain working capital and indemnification claims related to accounts payable connected with our sale of Stuart facility, resulting in a $2.4 million working capital adjustment payable to the company. The settlement also resulted in a payment of $9.2 million to the buyer with such amount applicable to the general liability cap provided for in the purchase agreement. The settlement resulted in a $3.8 million charge in the quarter.

As noted in the earnings release, we are evaluating the final accounting of legacy Aerospace Structures divestiture-related items, which could result in noncash adjustments to reported amounts, including gain or loss on sale of assets and businesses. We do not anticipate that potential adjustments would be material to the reported amounts, and we plan to provide an update upon completion of this evaluation process. These potential adjustments do not relate to the previously disclosed identification claims related to the sale of the Stuart facility, which have been resolved in part at this time.

Slide 10 shows our commercial market revenue. For the quarter, commercial revenue was $205 million, representing 63% of total revenue. Commercial OEM sales were $117 million and grew 8% in the continuing business. This growth was driven by increases in both volume and price in key programs, including the 787 and 37 (sic) [737] programs. Commercial aftermarket sales of $88 million grew 43% in the continuing business on strong demand as commercial aftermarket demand has continued to increase.

Slide 11 shows our military revenue. For the quarter, military revenue was $113 million, representing 35% of total revenue. The growth in military OEM revenue compared to last year was due to the continuing recovery of the supply chain in this market. Military aftermarket sales in the quarter were down 7% compared to last year due to timing of spares demand. The remaining 2% of our revenue is nonaviation, which is profitable and represented about $8 million of sales in the quarter.

Our sales mix changed towards more aftermarket having a positive impact on margins and cash flow. In the quarter, total aftermarket sales represented 41% of our revenue, up from 33% in the prior year quarter. The balance of our sales mix across markets is valuable and enhanced by our products, platform and life cycle diversity, which supports our ability to sustainably grow margins and free cash flow.

Our free cash flow walk is on Slide 12, which shows our Q1 cash use and illustrates our expectations for free cash flow for the remainder of the year, which I'll provide more specifics on later. Our $70 million of seasonal cash use this quarter included $62 million of ramp in net working capital in support of increasing sales volume. This is consistent with our expectations and the quarterly free cash flow guidance chart that we provided last quarter.

On Slide 13 is our net debt and liquidity. As of June 30, we had $1.6 billion of net debt, and our cash and availability was approximately $210 million. This is before the July proceeds from the warrants. During the first quarter, we retired $14 million of unsecured senior notes from warrant exercises and announced the redemption of the warrants. Redemption was completed in early July '23 and raised an additional $81 million in cash through warrant exercises in advance of the redemption. We intend to use about $50 million of these proceeds to repurchase a portion of our unsecured senior notes. Our next maturity is the $486 million of notes due over 2 years from now in August of 2025.

Our fiscal '24 guidance begins on Slide 14. We are reaffirming the guidance provided last quarter around revenue, EBITDAP and cash flow for fiscal '24. We're updating the GAAP operating income guidance to reflect the 2 adjustments this quarter totaling about $6 million. Based on anticipated aircraft production rates, we continue to expect organic growth of 7% to 10% in fiscal '24.

Aftermarket volume is the largest component of the increased followed by OEM volume, pricing and an increase in non-aviation revenue. The aftermarket is expected to grow at a solid 9% rate for the fiscal year. Commercial OEM revenue growth is driven by production ramps on programs such as 737 and 787 and the Airbus 320 family.

Non-aviation sales are expected to increase, driven by the previously announced work supporting (inaudible) through sustainment. Our adjusted EBITDAP margin guidance continues to indicate up to a 16% consolidated EBITDAP margin in fiscal '24, representing roughly a 200 basis point improvement over last year. We expect to generate positive free cash flow in fiscal '24, including additional cash used in the second quarter in the range of $30 million to $40 million, as our semiannual interest payments for the quarter will offset working capital improvements.

We continue to expect modest positive cash generation in Q3 and strong cash generation in Q4. This EBITDAP margin expansion, cash generation and debt reduction are expected to drive our net leverage from 7.6x at the end of last year to between 6.1x to 6.3x at the end of this fiscal year. Of course, our plan is to reduce leverage into the range of 3x in the next couple of years through EBITDAP expansion and free cash flow generation.

Interest expense is expected to be $153 million, including $147 million of cash interest and we expect $7 million of cash taxes. This is before cash interest savings from about $50 million of planned bond repurchases, which is approximately $4 million on an annualized basis.

Our pension funding forecast is on Slide 18, which has been updated to reflect the June '23 contribution of stock to the pension plan. We have no cash funding requirements this fiscal year. and we have reduced our fiscal '25 required funding estimates to $20 million. We would note that estimates after the first year can change significantly as we have seen these past few years.

In summary, the first quarter's results are in line with or ahead of our expectations and advances on our path to consistent organic growth and quarter-over-quarter cash and earnings expansion. We are reducing debt and improving our leverage by deploying warrant proceeds, growing EBITDAP and generating free cash flow this year. We are executing our plan to continue to grow revenue, margins and free cash flow and increase shareholder value. We look forward to sharing our long-term targets at our upcoming Investor Day in September.

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

Triumph's performance in the first quarter of fiscal '24 demonstrates the strength of the new Triumph, a stronger systems and aftermarket driven company with a growing IP portfolio and backlog, yielding steadily improving financial results year-over-year. We expect improved financial and operational performance to continue throughout the fiscal year as our expanding mix of aftermarket and IP-driven OEM sales gives us confidence in our fiscal '24 guidance and long-term outlook.

We look forward to sharing our multiyear plans and financial targets at our upcoming Investor Day on September 13 in New York City. We'll showcase key products and business leaders who are accelerating the future of Triumph in an engaging way. We look forward to seeing you there.

Jim and I are happy to take any questions you have.

(Operator Instructions) Today's first question comes from Sheila Kahyaoglu with Jefferies.

So Jim, maybe first one for you. Q1, we definitely expected a free cash outflow of about $70 million as you did, but you reiterated the free cash flow guidance of $35 million to $50 million despite the $15 million tailwind from pension contributions you're getting. So can you maybe talk us through the offset and how you expect free cash flow to progress over the next 3 quarters?

Sure, Sheila. We had plans to use stock to fund the pension plan this year. So in our initial guidance, we assume that. So that's why we didn't have to adjust cash guidance. And as you said, we're on track with the cash use. And we did put a chart for everyone's benefit in last quarter of the quarterly cadence of cash use, and you can look at that.

And I gave you a range for the second quarter, $30 million to $40 million. And it's consistent with prior years where you see that trend of strong generation in Q4, but we have to build working capital leading up to high deliveries in Q3 that generates that Q4 cash flow.

Got it. And then maybe just given its current -- you completed the warrant deal in July with $99 million of proceeds, including $85 million of cash there. So how are you thinking about the next step to improve capital structure from here?

Yes. Our next maturity is over 2 years from now, the 25 bonds and it's $486 million after the $14 million reduction from the warrant exercises. So the warrants worked as we had expected. They gave benefits to shareholders that were distributed pro rata, so that was a dividend to shareholders. They helped us with the refinancing with a good execution and a good rate when we did that. But they've served their purpose and we were able to redeem them and some people did choose to exercise.

We got $81 million of cash after the end of the quarter. So now we just have the first lien debt of about $1.2 billion and then we get the $486 million that's maturing in 2 years. The first lien is not due til '28. So there's no additional equity issuances anticipated right now. What you do is just generate cash from operations, which we plan to do this year, and that's going to increase over the next couple of years. So EBITDAP expansion and debt reduction from cash flow from operations is how we're going to delever quickly.

Our next question comes from Peter Arment with Baird.

Dan, thanks for all the color on the slides and some of the details. One of the comments, the 18 planned increases, OEM production rate increases this year. Could you maybe give us an update kind of where you are in terms of -- in sync with the OEMs or lagging or ahead, maybe just on some of the major programs to tick off?

Yes. Thanks. We're taking lockstep. Each of the OEMs publishes their own skyline chart and we get it formally -- and then they separately post in the portals that we use for purchase orders, the quantities they need. And those are usually pretty close, the reason I say not identical is it depends on their on-hand inventory and what we have in work in process, but they generally match. So we are seeing steady increases out of Boeing and Airbus.

They have asked that we not comment on the specific numbers because each supplier is at a different point of production. But we're ramping up in all of our factories and interiors, which was impacted significantly by the MAX slowdown, it really didn't contribute financially to Triumph. Fiscal '23 is starting to see the volume come back on MAX, which is great. And we're also supporting 787, I think, in about 7 of our factories and that was an impact last year. And now we're seeing 787 rates come back.

At the air show, there was a lot of confidence in the MAX step-ups, Airbus rates as well. And then even the longer-term platforms like 777X, Boeing is quite confident in the demand for that platform. So I'll just summarize by saying we're staying in close alignment with the OEMs and it is helping us achieve our quarter-over-quarter revenue growth. That's part of the beat in revenue in Q1 was the OEM rates.

And just as a follow-up, on the slide where you kind of highlighted all the new program wins and kind of the revenue life cycle. How would you say that pricing on a lot of these new products is going in like from a handicap, how it should impact margins over the long term, just comparing like kind of how you approached to this cycle versus the old Triumph?

Sure. In the past, people really didn't look at value claiming and pricing. It was more of a cost plus certain fixed fee. And that model really undervalues our portfolio of IP and our sole-source position. So about 3 years ago, we started on this journey of revisiting all of our programs, ranking them from most profitable to least. And for those bottom quartile programs, engaging with the customer either through redesign or outsourcing or (inaudible) the contract back to help us improve our margins overall.

But every program is a candidate for value pricing. And what you've seen, the expansion of margins at Triumph from below 6% to 14% last year and this year, we're on path to hit 16%. Pricing has been a key enabler for that. And I don't know that this tailwind is going to endure forever. I think once capacity catches up with demand, there'll be some leveling out, but that's still a few years away.

So we're continuing to make the case for pricing where it's justified. In many cases, we've been able to lower prices through lean events and low-cost sourcing. We've done a lot of partnering with Korea and India over the last 2 years, that's helped us maintain affordability on those programs where that's key. But as you look at Slide 8 on all those programs that are coming up the curve, they are candidates for value pricing as well as some of the programs that are more mature that are ending a long-term agreement and resetting for the next 5 or 10 years. So it's definitely part of our are -- one of the main components of our margin expansion program.

Yes. It's also necessary in an inflationary environment that price doesn't all go to the bottom line. We try and get as much as possible there. But reality is we have to cover inflation in materials, inflation in our own costs, and we're of course, working to offset that. And volume helps. The sales volume helps that and our own efficiencies internally help that. If you look at the chart we provided last quarter, and we're going to do more of this in our Investor Day.

We walked forward what the big drivers are to revenue growth and profitability. The first two are actually the OEM rates and the aftermarket volume. The third is price. So price is important. We are getting price to help cover inflation, but we're not over relying on it as a part for profit driving.

The next question comes from David Strauss with Barclays.

Your EBITDAP margin in the quarter is 10.9%, I think you're forecasting 15% to 16% this year. So how do you get there? It looks like the Q1 shortfall was in Interiors. So what was going on there?

Well, EBITDAP for -- the consolidated EBITDAP for the first quarter actually met our plan internally. So this is a seasonally low quarter, and we can get to 16% for the full year based on meeting our plan, which includes the 11% range in Q1. Yes, Interiors -- remember, this is the Interiors segment. So it includes last year the Stuart business. So there were some contribution last year from Stuart that went away. And this year, Interiors -- remember, that was the business that was losing money. It's ramping back up, volume is increasing, but it's -- and there's still some cost of winding up the old Stuart and TSA business there.

So it will improve moving forward. but it was a challenging quarter for Interiors. I think one of the headwinds for Interiors is that we do have a lot of operations in Mexico, and there's FX headwinds with the peso strengthening against the dollar. And while we have a hedging program, it only mitigates the impact for the medium term. So long term, we need to continue to work on improving the cost structure and making sure we're exercising our contractual rights to improve profitability there.

Okay. And Jim, the $7 million payment on sale of assets and businesses, what did that relate to?

So there's $3.8 million that is the settlement of the working capital with regard to the sale of Stuart that was adjusted in the quarter. The $7 million...

Yes, that was the net funding on the settlements, David. So Jim (inaudible) remarks earlier.

Yes, the $7 million was the cash out relative to that settlement, we've previously been part of it. It was the $3.8 million to true-up to the full cash payment.

Okay. Are you finished there?

We're finished with the working capital components of that. So that's -- there's still -- there is, of course, disclosures around the risk around that divestiture, which we'll update this quarter, but there's been no material developments other than the settlement of the working capital.

And we did end our transition service agreement on June 30. So we are wrapped on our obligation period in every divestiture where we provide services to the buyer, whether it's IT or handling the accounts payable and receivable. So getting that all wrapped up has been a focus for the last month.

The next question comes from Myles Walton with Wolfe Research.

Maybe, Jim, can I just follow up on that for a second what Dave was just asking, the disclosure around the 767 rework claim. Is that the same as the working capital true-up or are the 2 things independent?

No, they're independent.

And have you made progress on the particular claim that came out of the post last quarter?

We don't have any additional disclosures about that claim. It was sold in June -- July of '22 and still are a part of Triumph. So I think that's pointing back to disclosures there.

Sorry, you're breaking up.

It was sold in July of '22. There's -- it's not part of Triumph anymore, so I don't have any more insights into that. But there's been no developments to report at the moment.

Yes. The only public statement is that Boeing has completed any rework related to that, paid repairs. So the scope of work appears to be bounded. And the prior settlements that Jim mentioned related to working capital and AP represent a decrement to our overall liabilities under that transition services agreement.

Okay. All right. Can you transition to the backlog chart you have, which is always helpful. There was one addition, I think if I have it right, the $220 million came on to the slide. And just curious, it looks like it's primarily an Interiors scope of work, and I apologize if I missed it previously, but is that something you won during the quarter? Is it leveraging your 37 work? Will it be able to sort of enhance profitability of the Interiors quicker?

So yes, it's a new addition. No, it was not awarded in the quarter. It was a prior quarter. It's really important work because we don't do a lot of interior work for Airbus, we do some. We have a factory in France that provides rapid reaction support for blankets that have been made in Mexico, if they tear one during installation. So you see Triumph crews on the aircraft right after the structure is delivered, installing these blankets and helping.

But we didn't have work on the A220. I traveled to Mobile and met with the senior leadership at Airbus Americas and plant management, and we made the case for what we could do to support them. And we had to win on all the reasons you'd expect price, delivery, quality. And so that's a program that's going to be a long-term tailwind for us, and we expect to find other scope we can do on the A220 as they seek new sources.

Our next question comes from Michael Ciarmoli with Truist.

Maybe just as it relates to Interiors, obviously, Jim, you talked about the challenges this quarter. But has anything changed in terms of the longer-term margin potential for Interiors? And is this still a core business for you guys going forward?

So I'll start, and Jim can add. Yes, this business was a 20% business pre-COVID. And it's really well run operationally. They've done a great job of adopting lean production there. What we did during the last 3 years during the downturn, a, we took out a lot of cost. And b, we completed the exit of our Spokane Interiors facility, moving that work to both Mexicali and to Zacatecas, the 2 plants that are in Mexico. So that's all done.

Interiors is really 3 businesses. It's installation blankets, it's floor panels and it's ducting. And ducting is typically composites. Installation of floor panels are performing well. Ducting has been less profitable in part because of the integration work of moving what we did in Spokane and down into Mexico. That's all going to be late, flat this year. And then we'll see ducting catch up with the other 2 product lines, margins. Combine that with the 737 rate coming back, and we'll be on a path to double-digit margins this year and then back to 20% over our planning horizon.

Yes. I think the short answer financially is no, it doesn't change longer-term prospects. It is a bump in the road that we can work through. And we've shown a history of being able to recover and address challenges. So we look forward to taking that back up in the teens pretty quickly.

Okay. Perfect. And then just on the commercial aero aftermarket, you called out the strength and certainly the -- we can see the strong year-over-year. Anything sequentially? It looks like those revenues were down. Is it just seasonality? Or are you seeing any changing order patterns? Or I just wonder if you could speak to the aftermarket revenues dipping on a sequential basis?

Yes. So I'm just -- I'm looking at the chart here. The commercial aftermarket revenue, though, is up from $63 million to $88 million. So I'm trying to understand the dipping comment.

Sequentially, you did $96 million in the March quarter in aero aftermarket, and you just did $87 million this quarter. So sequentially, dipping in revenues, anything to point out there?

Yes. So I'm going to have to look into that. I don't want to comment without the history on it, but certainly, it's a strong market. There must have been some unusual activity last year -- last quarter that helped us out. It may be seasonality to some degree because remember, aftermarket in our fiscal fourth quarter is always very strong after the holidays. But I think you have to look at it on a seasonal basis, and we are up year-over-year, and we're seeing continued strength, including a 9% growth rate this year.

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

Yes. So a follow-up, where does -- looking forward, do we look for more growth in commercial MRO and the growth in commercial OE looked like it was a little lighter than I expected. So what sort of pattern do we have there? And overall, does commercial MRO as a percent of the total sales go down as OE comes back? How should we think about that mix?

Yes. Thanks, Cai. I'll take that. So we're definitely going to see OEM start to catch up. The growth in commercial MRO led us out of the pandemic. That was the early work as they returned fleets that were stored back into service. And we all fly so we know what the load factors are like. I mentioned we're back to 96% of 2019 levels. So there's been really good commercial MRO flow to make that happen.

I see that continuing for 2 to 3 years because it's going to take that long for aircraft that are being ordered now to get into the fleet as the rates come up, at which point, legacy aircraft can be retired with some of that commercial MRO, especially legacy aircraft will be retired. So it is a dynamic where OEMs coming up, but commercial MRO should remain strong for the next few years. Longer term, we're excited about our partnership with Air France, that started 2 years ago. The first year was pretty slow.

But what we did in the last 12 months has started to pick up. What we do is we overhaul nacelles, thrust reversers for the new fleet, 737 and 787. So as those legacy aircraft, the older, let's say, 737 classics, as they are retired, we wanted to have a foothold in the newer, more modern aircraft on the aftermarket. So partnerships like the Air France are going to help us.

Today, that one is focused on the Americas. We're looking at expanding that to Asia, which, of course, has a large fleet. So there's definitely dynamics between the 2 commercial OEM and MRO, both are on upswing, I think longer term commercial MRO may flatten out.

So -- but I mean near term, do we look for continuing ramp-up in commercial MRO because it was down sequentially. But so going forward, do you expect it to go up at a pretty good flip the next couple of quarters?

Yes. What I watch, Cai, when I get a handle on that is these inductions and I mentioned they were up about 15%. It's a measure of the receipt. It's a short-cycle business unlike, let's say, the GE LEAP order we just got, it's an 8-year long-term agreement. This stuff has fairly short visibility. But what we're seeing in the short term is favorable. So until that changes, I'm going to be bullish on commercial MRO. If it does change, we'll report that on the next call.

Yes. I think you can look for normal seasonality in MRO. It is going to be strongest in the third and fourth quarter in particular as (inaudible) come down from holiday travel and from deliveries.

And then -- so a follow-up in terms of capital structure. I mean, very clever, the warrants in terms of helping to improve the balance sheet. But you still have a pretty heavy interest loan, a very leveraged balance sheet. Any thoughts now that it's clear that the market looks better of doing anything, convert or anything to kind of be able to retire more of that debt so it presents a pretty big headwind to your overall cash flow?

Yes. Thanks, Cai. Debt reduction is a priority for us. We want to do it primarily through cash from operations, and there's no plans to do any other capital transactions in the near term other than repurchase some bonds with the cash we generated from warrants. So we appreciate the interest of burden. With the repurchase of bonds, we can reduce some interest expense there. And we'll be opportunistic. But there's no plans at the moment, other than generating cash from operations.

Yes, Cai, we're going to -- we'll be back at you on this in the next 6 to 12 months. I think in the short term, it's -- we're focused on being cash positive this year and then guiding to a higher cash number next year. But as we get closer to our 2025 becoming current, we'll have our next steps to the deleveraging plan.

The next question comes from Andre Madrid with Bank of America.

Real quick, if you could just talk maybe a bit more about the work on the GE new fighter engine, the AETP, if you can give a little bit of color around that, and maybe parse out that $300,000 per engine number that you gave?

Yes, thanks. So the partnership with GE continues to strengthen. And we've been engaging on both the commercial and the military side. I mentioned on the commercial side on LEAP, we have all 3 versions of the LEAP in like, gearbox. We did about 1,500 last year deliveries on that program, and now it's been extended for 8 years. It's a long-term partnership with GE that we've now bridged over to the military side.

And as you know, there's funding going into an alternate engine that would go not only in F-35, but other military platforms. And GE has brought us in to help with things like the afterburner fuel pump as well as these fueldraulic actuators. And while I won't parse out the contribution of these individual components to the $300,000, what I will say is they're not done. They continue to ask us to come in with our chief engineer for that product line and meet with theirs. And it's encouraging because they're not looking at other sources, we're the primary sources that they're engaging.

So Amy Gowder, who runs the GE military engines and I have worked together in the past at Lockheed. She's a very strong leader and a great partner. We're confident that our work scope with GE military engines will grow. And we're not limiting our efforts there. We do a lot of gearboxes for Rolls-Royce, and we had productive meetings with Pratt & Whitney at the air show as well. So overall -- GE is now the third largest customer for Triumph, and we look forward to expanding that over time as they gain share in the market.

Got it. And just for clarification, are you saying that there might be upside of that 300 number or?

Yes, we do. They're not done with the design development of their next-gen, what they call, LM25NX engine. And as such, we will continue to offer technology, whether it's heat exchangers, actuators, fuel pumps, engine controls. I'll also note that right after the air show, we signed an agreement with Honeywell to be their provider of engine controls for all their next-gen APUs. So I failed to mention Honeywell as an engine partner as well.

The next question comes from Noah Poponak with Goldman Sachs.

You guys had for a little while there, the slide in the presentation with where you saw all of the OEM production rates going? And in an answer to a question earlier, you alluded to the OEMs saying they didn't want you to talk about that. Did Boeing and Airbus say to you to take that slide out and not talk about those numbers?

No, they didn't. They did reach out to us after the earnings call and say, when you state a rate, some analysts and investors take that as being the Airbus or the Boeing position on the rate. And because what I said earlier about where we are on finished goods and work in process inventory, our rate may differ slightly from others. So they asked that we not characterize the rates in such a way that people will assume it's the new public rates that the OEMs have adopted.

So you really do need to speak to them to get that. What I'm telling you is that we're closely aligned to the rates that have been advertised publicly. And they do vary by factory within Triumph modestly, I would say, 5% to 10% of the published rate. But they're not meaningfully different. So we're in line with them.

Okay. That makes sense. You've had a lot of new business wins. I appreciate all the detail you've outlined on those in the earnings releases, the book-to-bill, multiple quarters of pretty high book-to-bill. But the all-in top line organic revenue growth, obviously, there's been some fast growth quarters, but there's been some slower ones. And it just, I don't know, on a 2-year basis or so, it hasn't been significantly different than the end market.

Can you spend a minute on when the new business wins start to flow through? Should we expect your top line to accelerate beyond 2024, the growth rate? Or should we still be thinking about kind of the end market mix as the main driver of growth?

Great question. So -- and we're going to cover this in some detail at the Investor Day coming up in September, and I hope you'll be there. The chart on Slide 8 is a good reference to answer your question. We're on programs that are ramping like the CH-53, Sikorsky gets their LRIP awards. We've got strong content, millions of dollars of content on that platform. We talked earlier about the A220, which is a platform that's coming up in rate as well as the MAX and the neo variants. Some of the platforms are earlier days, more to the left of the chart. For example, on B-21, we supply key components on that. I won't list them. We're on the MQ-25, the T-7A and the A320XLR.

Last week, I was over in the U.K. We just finished qualification for all the new uplocks which secure the landing gear on the 321XLR. And that program is going to shift into production rates that are 50 or more a month. So we're excited about that contributing. So I think your comment is fair in the sense that some of the wins that we've announced haven't translated yet into sales. So we're sort of trending at the industry average or slightly above it today.

But overall, Triumph is setting a goal for $2 billion of overall revenues from last year's roughly $135 million. And you can do your own math about what is the CAGR to get there. But at the Investor Day, we'll lay that out by operating company. So you can see across engine controls, actuation gearboxes, third-party maintenance, which one is growing at which rate. And we'll also present the industry growth rates so you can compare and contrast. But what I would close my response with is the growth in backlog and the growth in book-to-bill are the headwaters for increasing sales and therefore, cash and earnings. So we're confident in our multiyear outlook and look forward to showing it to you.

Okay. Appreciate that. And just one other thing I wanted to ask about. I think you said the enterprise level adjusted EBITDAP in the quarter met your plan even though it's well under 1/4 of the full year and the margins lower than it's been for several quarters and is down year-over-year.

I guess I just would have thought that with the portfolio reshaping and the rebasing of the business that you've completed and the improvements in the business you've had and the end market getting better and the volumes going higher, that your margins through the year would be a little more level-loaded and not have as much ramp beginning to end of year. Is that -- I mean, is this kind of the last year we'll see that, or how should we -- what should we expect for that shape going forward for Triumph?

Yes. So if you think about what was in last year, we still had the Stuart business in there, which is not as seasonal as the aftermarket business is. So I think there will be a little bit of added seasonality from that move, even though the margins are better, and there's a lot of different aspects of that business that are different than the aftermarket. So EBITDAP last year also benefited from AMJP. There was about $5-point-some million in last year that enhanced EBITDAP. And taking those two things into account, that's probably why our plan was a little lower this year. But it is -- we are on plan, and we do intend to hit the 16% for the full year.

And Jim, the quarterly progression from here, it has a similar shape to last year, I assume?

Yes, exactly. And (inaudible) portfolio, it's hard to break out of that trends that we've seen in previous years. There will be some modification, but we still see strong fourth quarter. And as we get more and more aftermarket, of course, that aftermarket is seasonal, and we're going to have a strong fourth quarter for years to come.

We are showing no further questioners in the queue. And this does conclude the question-and-answer session as well as the conference for today. Thank you for attending today's presentation, and you may now disconnect.