Triumph Group Inc (TGI) 2022 Q4 法說會逐字稿

Welcome to Triumph's Fourth Quarter and Fiscal Year 2022 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. Please ensure that your pop-up blocker is disabled if you're having trouble viewing the slide presentation. (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 and Controller, who will provide a brief opening statement.

Thank you. Good morning, and welcome to our fourth quarter and fiscal 2022 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 be materially different from any expected future results, performance or achievements expressed or implied in the forward-looking statements. Please note that Triumph'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 www.triumphgroup.com.

The format of the call today will be slightly different. Dan will open with color on the quarter and operating environment. Then Jim will walk through the results for the quarter and year. Dan will then discuss actions we are taking to support revenue growth and deliver improved margin performance, with Jim returning to provide our outlook, before opening up the Q&A. Dan, I'll turn it over to you.

Thanks, Tom. For the fourth quarter, Triumph delivered on our strong margins for the second consecutive quarter in our core Systems & Support segment, and we did so in a challenging macro environment, while positioning for increasing demand. Growth in our MRO and freighter end markets helped to offset headwinds from Omicron and 787, along with timing delays through a small number of military and legacy structures programs that are expected to fully recover in early fiscal 2023.

We have better clarity on near-term and multiyear OEM and MRO demands than we've had in the past 2 years, and we like what we see. All markets beyond body (sic) [widebody] Commercial continued to improve, and Triumph is positioned to realize the benefits of our diversification strategy.

We are able to provide guidance for fiscal '23 that reflects increasing core revenue and improving profitability and cash flow. We will also provide color on our multiyear outlook that gives us confidence in the sustained aviation recovery.

As Triumph expands our profitability and cash flow year-over-year, we are maintaining our goal to double profitability over fiscal years 2022 to 2025, driven by improved OEM production rates, expanded MRO volumes, enhanced pricing from recent contract extensions and lower cost structure as a result of our transformation.

As we stabilize operations and our balance sheet, our focus is pivot to growth. In the fiscal year, we secured over $2.2 billion in new orders across the company, which reinforces that our backlog has begun to grow.

On Slide 3, I summarized the quarter's highlights. First, we generated free cash flow of $29 million, driven by our improving operations and reduced working capital. A more favorable sales mix yielded a 19% EBITDAP margin in our Systems & Support segment as the benefits of cost reductions and lean events flow to the bottom line.

Like many of our peers, our organic sales declined slightly due to short-term order deferrals on commercial widebody and a few supply chain-driven shipment delays, though partially offset by strong increases in MRO orders. We expect this temporary flat spot in the recovery to abate early in our fiscal 2023.

That said, our actions to mitigate supply chain constraints lessen the impact on Triumph as we partner with our customers and suppliers to ensure supply continuity and affordability.

Slide to mention headwinds. Sales in our Q4 in our OEM and MRO end markets are up 18% and 21% sequentially as compared to Q3. MRO part number inductions, a key measure of total volume coming into our shops, is up 34% quarter-over-quarter and 16% sequentially. Increased flight activity, especially at America, is benefiting Triumph's commercial airline sales to operators, which are up 57% sequentially and 66% year-over-year. In our freighter segment, sales are up 60% sequentially and 9% year-over-year.

Slide 4 depicts OEM and MRO sequential sales for both Commercial and Military segments. Notably, Commercial OEM sales are stable, with increasing MRO sales driven by commercial transport and cargo, while Military OEM sales are up on the strength of V-22 and CH-53K shipments, with similar increases in overall work on the C-17 and F/A-18 aircraft.

Expanding on the health of our supply chain, a vast majority of our 3,000 suppliers came through the pandemic and are now preparing for increased levels of production. While ongoing inflationary pressures impact fuel, freight, metallic products and labor for both Triumph and our suppliers, whose purchase materials make up 2/3 of our cost of sales, we are focused on solutions, not excuses.

We commenced senior level discussions with our top 10 customers last year to get ahead of these challenges and held a supplier conference with over 240 suppliers in our Q4. Active communication, advanced forecasting, AI-based risk management, innovative staffing approaches, along with dual sourcing and disciplined price management, will help us manage the current inflationary environment and coming ramp-up.

The war in Ukraine commenced during the quarter. Triumph suspended the small amount of business we do in Russia and Volaris, which totals less than 0.5% in total sales. While the direct financial impact is not material to Triumph, we are closely monitoring the broader impacts across the global economy. The impacts of China lockdowns have been similarly small on Triumph revenue.

So, we are through the transition year, that was fiscal 2022, and looking forward to a sustained recovery in the payoff for our transformation efforts. Before I share the actions Triumph is taking to drive revenue growth and improve margins over fiscal '23 to '25, let me turn the call over to Jim to cover our fourth quarter and fiscal year in more detail. Jim?

Thanks, Dan, and good morning, everyone. As I review the financial results for the quarter and fiscal year, please refer to the presentation posted with our earnings release today. I will discuss Triumph's adjusted results. So, please see our earnings press release and the supplemental slides in the presentation for the explanation of our adjustments.

Triumph was cash positive again this quarter. On Slide 5, are our consolidated results for the quarter. Revenue of $387 million reflects increased revenue from narrowbody and business jet platforms, offset by short-term headwinds on 787 and delivery timing on a military program in our Geared Solutions business. Our revenue continues to shift towards our core, with Systems & Support revenue now making up 74% of total revenue in the quarter, up 10 percentage points from 64% a year ago.

Adjusted operating income of $43 million represents an 11% operating margin, up from 7% a year ago. Systems & Support generated substantially all the operating income this quarter. Our adjustments this quarter include a $4 million gain on the sale of assets as we settled working capital adjustments on prior divestitures, $5 million of restructuring costs from previously announced facility closures and reductions in SG&A and overhead. Separately, we annuitized some of the smaller pension liabilities to reduce costs, resulting in a $32 million noncash pension charge in the quarter.

Turning to Slide 6, you'll find our fiscal '22 results. As expected, our net sales declined with planned divestiture and sunsetting programs, while our mix of sales included sizable MRO growth. Our full year adjusted operating income was $135 million, representing an adjusted operating margin of 9%, up 349 basis points over the prior year.

Turning to Slide 7, you'll see our Systems & Support results and highlights. Revenue in the quarter include higher narrowbody and bizjet systems content. Systems & Support operating income was $49 million or 17% for the quarter, which is a 408 basis point increase over last year. Systems & Support EBITDAP was $55 million, another step towards our goal of doubling EBITDAP over the next 3 years.

Commercial MRO sales were a significant source of growth, up 17% in the quarter and 14% for the year. This sales strength, along with the benefits of the Aviation Manufacturer's Job Protection Program, enhanced our margins while ensuring Triumph retains critical talent to support the expected OEM production ramp later in the calendar year.

On Slide 8, you'll find the results of our Structures segment. Structures revenue of $100 million was up 3% organically over last year, excluding divestitures and sunsetting programs. 737 production rate increases and interiors contributed to the organic growth. Structures now contributed 26% of total revenue as we continue to see the revenue mix shift towards Systems & Support.

The sale of our Stuart Structures facility is expected to close in the first half of this calendar year. Required government and customer approvals are completing on plan. This divestiture marks the comprehensive exit of our build-to-print and contract manufacturing businesses. leaving only close out of residual 747 structures deliveries from inventory and divested site transitions in FY '23.

Following to divestiture. Systems & Support is expected to approach 85% of consolidated sales, while Interiors will grow over time with the projected Commercial OEM rate increases.

Slide 9 provides our free cash flow walk for the quarter and year-to-date. We generated $29 million of free cash flow in the quarter as we continue to reduce nonrecurring cash uses. As expected, free cash flow this quarter included $25 million of nonrecurring cash drivers comprised of $21 million of advanced liquidations and $4 million for previously accrued 747 losses and shutdown costs.

Our full year results included a total of $164 million of nonrecurring cash uses as detailed on the slide. These nonrecurring impacts are on a steady decline as we achieve predictable financial performance. Excluding these items, we were $7 million cash positive for FY '22. Capital expenditures were $4 million in the quarter and $20 million in the fiscal year, with higher capital investments forecasted over our planning horizon as we invest in our Systems & Support segment.

On Slide 10 is a schedule of our net debt and liquidity. Our efforts to strengthen the balance sheet are paying off. At the end of the quarter, we had about $1.4 billion of net debt, down 2% from a year ago. We also had about $300 million of cash availability, which is more than sufficient for our projected needs.

During the fiscal year, we paid down our first lien notes by $137 million from proceeds from divestitures. We also extended the maturity of our AR securitization facility to November of 2024 and increased its capacity from $75 million to $100 million, in terms of the low-cost source of contingent liquidity.

Our next debt maturity is over 2 years from now. We will continue to delever by expanding EBITDAP and free cash flow in our continuing businesses. Our target leverage ratio is 3 to 4x adjusted bank EBITDAP.

Now I'll turn the call back to Dan for more color on end market expectations and our recent wins, all of which are factors in our outlook for fiscal '23 and beyond.

Thanks, Jim. Building on our incremental operational and financial progress year-over-year, I'll recap our recent wins and share how we are positioning Triumph in the macro environment for fiscal '23 and beyond.

Triumph continues to win in a competitive marketplace on the strength of our platform incumbency, innovative engineering and IP. As noted, we won more than $2.2 billion of new orders in fiscal '22, the highest in the last 6 years.

Turning to Slides 11 to 12. Wins for the quarter are diverse, spanning OEM and MRO markets, and comprised of Military and Commercial awards over helicopters, fighters, eVTOL aircraft, passenger-to-freighter cargo conversions, commercial transport and business jets.

We are finding new applications for our existing IP across a wide variety of products and services and market segments. Recent strategic awards include another win in the growing passenger-to-freighter conversion market expanding content with Boeing Global Services and an agreement with Safran to overall actuators on VistaJet business jets.

Recall, we set an internal goal to generate sales from new products, platforms and customers by 25% over the next 3 years, and we are well on our way.

Slide 13 references fiscal 2022 full year new business results. Excluding follow-on awards, the value of new orders is up more than 60% from prior year as our efforts to engage new and existing customers with our full portfolio of capabilities gained momentum. Book-to-bill for fiscal 2022 is 1.16, an organic growth trend we expect to continue over our planning horizon.

Looking at the broader markets on Slide 14, we see strength in the military, freighter, narrowbody and MRO demand all at the same time, with wide-body MRO increases now appearing as fleet retirements slow. Military sales now comprise 35% of Triumph's revenue, up from 20% 5 years ago.

The President's most recent 2023 DoD acquisition budget reflects a top line increase of 3.8% to $813 billion, with Triumph-supported programs benefiting from strong support. Triumph is well positioned on military platforms across the life cycle. On the front end, Triumph has substantial and growing content on new platforms such as the future vertical lift with InVictus and RAIDER X, the MQ-25 refueling drone, and the T7(a)-RedHawk trainer. The mid-cycle, we supply critical content on existing production programs, such as the CH-53K, F-35 and V-22. We're engaged in multiple campaigns to supply fuel, thermal and hydraulic components and expect to add more F-35 content in the near future.

On the tail end of the life cycle, we continue to expand aftermarket offerings across platforms such as the UH-60, the AH-64, the F-15, F-16, C-17 and all versions of the F/A-18. Overall, we expect military end markets to grow modestly over the next few years, and for Triumph's military sales to keep pace or exceed this growth rate.

On the commercial front recent global flight activity increased to 68% of 2019 levels despite very low levels of flight activity in China and Russia. U.S. flight activity is at 84% of 2019 levels, followed by 75% recovery in Europe, 71% in the Middle East and Africa, 66% in Asia Pacific.

Of note, transatlantic flights between the U.S. and EU are up 37% over the last month to 80% of 2019 levels, indicating a strong upswing in international travel. This increased flight activity benefits Triumph in 2 ways: first, through increased commercial MRO volumes; and second, the new OEM aircraft order activity is gaining momentum and will drive single-aisle rate increases. Airbus' recent Qantas order is a good example as it included single-aisle orders for the A220 and the A320, in addition to A350 twin aisle orders.

Slide 15 shows anticipated rate increases for key commercial programs indexed to fiscal 2019 production rates and the incremental revenue contribution over our planning horizon. 737 MAX rates have started to rebound. While 787 production remains at low rates, Boeing anticipates increases later this fiscal year.

737 MAX, 787, A320 family and the A350 are some of Triumph's largest programs and collectively are expected to increase Triumph sales by over $300 million from fiscal '22 to fiscal '25.

We're excited about the freighter conversion markets as well. Freighter conversion orders are projected to double from COVID's consumption of passenger jet belly capacity and the increase in e-commerce. Triumph is well positioned to capitalize on this demand with hydraulic power packs and actuation to drive cargo doors and cabin acoustic installation and ducting modifications, which are required in the conversion effort.

Over the last few quarters, we won conversion content on the signed Draco and Mammoth programs. We expect others to follow. Last, collaborations, such as our joint venture with Air France-KLM, called xCelle Americas, and Honeywell channel partnership will generate MRO opportunities on growing commercial platforms earlier in their life cycle than our competitors. We plan to expand these partnerships throughout key markets, including the Americas, Europe, Asia Pacific and the Middle East, where Triumph will be represented at next week's Global Aerospace Summit in the UAE.

Before Jim presents our guidance, I want to talk about the company, Triumph, and our brand. Going on Slide 16, we started fiscal 2023 by launching a new brand identity for the company that reflects our significant transformation. Triumph has transformed from a decentralized holding company to a pure-play provider of high-performance systems and value-added aftermarket services.

For this reason, we removed the word, "group," from our brand name as we now embrace a one company, many solutions operating philosophy. Triumph's new logo features a sleek modernized version of our company's classic T symbol, a nod to Triumph's progress and forward velocity.

Operationally, we removed a layer of overhead to better serve the needs of our broad customer base. And while we will continue to report in 2 segments, we are now organized around our core operating companies, which places our P&L leaders closer to the customer and senior management and improves internal alignment.

As we move forward, Triumph is powered by diversity, where our competitive strength comes from a complementary blend of people, products, platforms and end markets. This broader take on diversity helps Triumph to be more resilient and to perform at higher levels so that we can remain differentiated in the market and deliver enhanced shareholder value year-over-year.

With our recent wins, market trends and company relaunch as a backdrop, Jim will now walk you through the details of our fiscal '23 guidance.

Thanks, Dan. To set the stage for where Triumph is going, let's reflect on how far we've come. Slide 17 demonstrates that over the past 5 years, by design, Triumph shrunk to its profitable core, overcoming the pandemic and improving financial performance.

Over the same period, Triumph's EBITDAP margin percentage has more than doubled as we pivoted to more IP-based content with a stronger mix of military and commercial sales. while driving out costs to match a smaller but healthier business base. Free cash improved also as the proceeds from recent divestitures allowed us to reduce debt and leverage, while the remaining portfolio continues to improve its cash conversion. This will result in a more predictable financial future.

Turning to the future on Slide 18. Specifically within our Systems & Support segment, the approximately $1 billion in FY '22 sales will split 57% OEM production and 43% aftermarket and military sales comprised 50% of segment sales. As noted, short-term growth in this segment is expected to be driven by ramping OEM production rates.

As a result, we expect growth in this market to be between 18% and 22% in FY '23. 2/3 of the Systems & Support's FY '22 profitability came from aftermarket. We expect growing MRO sales to yield segment EBITDAP margins just over 20% for the year.

As we look beyond FY '23 to FY '25, we expect revenues will exceed FY '20 levels, with segment margins expanded into the low to mid-20% range. Systems & Support provides a strong foundation for solid organic growth, which should continue to yield improving margins and cash flow year-over-year.

Turning to Slide 19, for our full year guidance. Based on anticipated aircraft production rates, and assuming a Q1 closure on the pending Stewart facility sale, we expect FY '23 revenue of $1.2 billion to $1.3 billion, which assumes organic growth of our core business of 8% to 12%.

We forecast EPS of $0.40 to $0.60 per diluted share. Our earnings expectations take into account certain supply chain and inflationary pressures and updated actuarial assumptions under our pension plan, as noted in the appendix. Cash taxes, net of refunds received, are expected to be approximately $7 million for FY '23, while interest expense is expected to be $129 million, including $123 million of cash interest.

For the full year, excluding the impacts of the actions and structures, we expect to generate $30 million to $45 million of cash from operations, with approximately $30 million in capital expenditures, resulting in core free cash flow about breakeven to $15 million in fiscal '23. Our Structures actions include the liquidation of advances and the remaining closure and/or sale of facilities and programs. As of March 31, we have $104 million remaining in advances, and the timing and nature of these liquidations is still to be determined.

The closure and/or sale of legacy facilities and programs are expected to use between $70 million to $75 million of cash in fiscal '23, with $30 million anticipated to be in Q1. As with our results over FY '18 to FY '22, our goal of doubling our continued FY '22 EBITDAP by FY '25 remains our focus and is expected to be achieved primarily through commercial OEM production rate increases, MRO expansion, contractual pricing improvements and increased efficiencies from prior cost reduction actions.

In addition, over our 4-year planning horizon, we are targeting a consolidated EBITDAP margin of approximately 20%, along with a free cash flow conversion of over 10% of sales.

We look forward to reporting on our progress on each of these initiatives quarterly as we approach fiscal '25.

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

In summary, I'm pleased with our year-over-year improvement, providing us with solid momentum as we enter fiscal 2023. And I'm further encouraged by the near-term market recovery.

In a challenging macro environment, punctuated by supply chain constraints, rising fuel cost, labor shortages, Triumph achieved 2 consecutive quarters of positive free cash flow and strong margins in our core Systems & Support business.

Short-term order deferrals and delivery timing issues are expected to abate in our fiscal '23 and are being offset by our new contract wins. Our actions to this quarter, combined with OEM and MRO rate increases, will support our expanded margins and improve cash flow, putting us on a solid path to deliver growth, while deleveraging the company year-over-year.

Pivoting to growth, having exited build-to-print structures and winning new business, are at the core of our path to value. Powered by diversity, our company is poised to expand top and bottom lines year-over-year.

I look forward to reporting on our progress as we continue the efforts to further unlock the hidden value across our business and to deliver value for the benefit of all of our stakeholders.

We're happy now to take any questions.

(Operator Instructions) Our first question comes from Peter Arment from Baird.

Jim, could you maybe give us a little more color on working capital? Just sort of how that trends as this transformation continues with the company? How should we -- it's obviously -- it seems like it's a headwind this year, but does it start to become, at some point, either neutral or a tailwind as the business takes on more volume and you start to see kind of an overall different mix?

Yes. Thanks, Peter. Yes, working capital has been high because of the structures business in the past. So, as we exit structures, it naturally is coming down. So, -- and it has also been because of advanced liquidations, which are ending.

So, the nonrecurring cash uses and -- that were previously accrued like 747 and liquation advances, with them in the past, we're going to see improving working capital. And the business that remains is less working capital intense. And our goal has been to fund with working capital efficiency improvements in the core business the growth that we expect in the coming years. So, I think you're going to start to see working capital be neutral and then be a tailwind for us moving forward.

That's helpful. And just as a follow-up. Just as a clarification on the liquidate of the advances. Is that -- you said you have not decided what you're doing with the proceeds of Stuart sale?

So, for our outlook, we've assumed that those are settled in the transaction. So, we're not including advanced liquidations in outlook. In the quarter, we just reported, there was $21 million of advanced liquidations.

The next question comes from Myles Walton from UBS.

Jim, maybe go back to the cash flow for just a second. Your 10% conversion target versus what's implied, I guess, in fiscal '23 is a pretty neutral conversion. Two questions. One, why is it not more year-on-year improvement in cash flow? I think you said the core cash flow last year was $7 million. That's pretty much what you're guiding for this year.

And then conversely, why is the conversion go from basically 0 to 10% in the next couple?

Yes. Thanks, Miles. So, there's a lot of moving parts in last year. In fact, we did divest some businesses, if you remember. We had some cash generation from businesses like the Red Oak, Milledgeville, Thailand, Staverton, all which were divested out of last year. And then the assumption that Stuart won't be there either moving forward is part of the mix of year-over-year change in cash flow.

But the remaining core business is cash flow positive. And as we reduce overheads and nonrecurring cash uses, we're going to rapidly recover to that 10-plus number of cash conversion that we're targeting at the end of our 4-year planning period. Working capital is an element of that, but I think the change in the portfolio is a bigger driver.

I hope that's helpful to your question.

Yes, that's helpful. I just want to clarify, the 4-year planning, does that line up with fiscal '25 or are we talking about a different 4-year cycle?

That's '26. So, what we said is we're going to double our continuing EBITDAP. And just to give you some numbers on that. Our EBITDAP last year was about $169 million, I think you'll see in the press release.

And if you exclude the Stuart piece of that and some of the other divested businesses, it's more of the $150 to $155 range. So, that's what we're looking to double by FY '25. So, you're talking $300 million, $310 million in the 3-year period.

Our planning horizon goes out to FY '26. So, when I was referring to our 20%-plus on consolidated EBITDAP margin and 10% or more of cash conversion on sales, that's in FY '26.

Okay. Okay. Got it. And then just a clarification, the sale divestiture proceeds, are you at a point where you can size those for us, either net of the advances that would go with it or gross? Just any color given you're pretty much there.?

Not yet. When we close, we'll disclose what's necessary on the transaction, but we're just not there yet with the exact details.

The next question comes from Seth Seifman from JPMorgan.

You guys mentioned a little earlier the expectation to continue reporting in 2 segments. Just kind of curious if you considered kind of giving a different look at the business and kind of why, given that so much of it is gone, what's the importance of having the core structure as a separate segment going forward?

Yes. Sure. Seth, this is Jim. I think what we're trying to do, we took feedback from investors and analysts. They want to see more market information, and they want to see continuity in the existing segments. So, that was the majority of the feedback. So, that's what we're planning to do, is not change segments, but to give more market detail within the segments is more meaningful. So, that would mean commercial, military and non-aviation and then aftermarket and OEM. So, look forward to that in the coming quarters.

Okay. Okay. And then I guess, in terms of the 7 -- what you're thinking about for 787 in the upcoming year? And how sensitive your outlook is to that? Is that kind of the delta in the 8% to 12% organic guidance? Or what are you kind of baking in for 787 recovery?

This is Dan. I'll jump in. So, we used to produce 14 a month of the 787 that trailed off to 10 and then 8, 6, 4 and we're running at about 2.5 a month right now. And I'm confident that Boeing is going to achieve their certification and return to higher rates. We believe it's going to happen in the latter part of the summer.

And so we're stepping that back up. It won't go all the way back up to 14. But as you look at this over the planning horizon, we see a path to getting back to the 8 shipsets a month sort of rate maybe even 10 a month by fiscal '24. So, it's one of many important programs to Triumph. It did contribute some softness in our second half of last year, but we've derated the build right now, make sure we keep our working capital matching the rate that Boeing needs, and we're looking forward to the recovery in the years ahead.

(Operator Instructions) Our next question comes from Sheila Kahyaoglu from Jefferies.

I wanted to talk about Slide 14 a little bit. So, thank you for putting that out there, as the business has sort of changed form. How do you think about the growth rate for Triumph's business? I know those are market growth rates for commercial and military and how -- what we could think about your planning assumptions for -- you just touched upon 787 and maybe the MAX?

Yes. Can do, Sheila, thanks. We put this chart in. It's one similar that we provided to our Board of Directors to show what underlies our multiyear outlook. What's the commercial narrowbody, wide-body military? And although it's not shown on the chart, freighter market as well.

And so our growth rate is a composite of these 4 segments. narrowbody looks very good. And despite some of the certification challenges on certain variants of MAX, Boeing is ordering at rates above 30. And we see that rate going up into the mid-40s over our planning horizon.

Same thing with Airbus. If you look at Airbus' build rates in the 40s headed into mid-60s. And the message we get from the supply chain calls is get ready, what are you doing on labor? Are you putting capacity in place as your lower-tier suppliers?

So, we think single-aisle is solid. And even if they only achieve 90% of their outlook, it's still a robust recovery. Twin aisle, it's -- the reason we show a high CAGR is starting from a low build rate today. So, over the planning horizon, it's like our interiors business. It was way down because of the MAX, but it's one of the fastest-growing operating companies we have because of rate recovery.

And you can see, we are counting on 787 coming back and 777. We have a big role in the legacy 777. So, even if the 777X is pushed to the right, we expect demand for 777 to continue. And then there'll be additional freighter demands as well.

Military, we show that more flattish, but it's at a high level. And what's encouraging is we have a lot of shipset content with Sikorsky on the CH-53. So, that program, as it goes through its low-rate production, will benefit us.

F-35, although the rate may not be going up a lot, we're increasing our work share content on that. So, we'll see revenue growth from there. A few legacy programs will come down, V-22, but we see strength in the fighter segments.

So -- and then probably the most encouraging sign in the short term is the MRO recovery. Although the overall market CAGR is 3% to 5%, we're seeing this big rate in inductions month-over-month, 7%, 8% a month growth. So, the quarter was up, I think, 35% in induction. So, it's really an encouraging trend.

And because they're not retiring the widebodies any further, those -- as they up their flight volume, were seeing both nacelle and engine accessory induction. So, I'd say our growth rate is high single digits to maybe low double digits across this composite of the market.

Okay. And maybe just a follow-up to that. On Slide 13, you have a list of new business wins that you've had over the past year. How do we think about those incremental opportunities or what to watch out for? It seems like it's mostly on the defense side for now. Is that kind of fair? What should we look out for basically?

Yes. We feel good about our defense strategy we put in place a few years ago. And what's encouraging about this chart is the amount of IP-based wins, whether it's nose wheel steering or it's hydraulics or actuation. These are products that we design and build.

And then many of these products have a frequent replacement through the life of the aircraft. So, there's a good MRO tail. On the Commercial side, we expect that to recover with -- as LEAP orders go up, we met with GE last week, and they're very bullish about the outlook for LEAP. And we're seeing this freighter market, as mentioned, freighter conversion. So, today, we're seeing more orders in the military, but we expect that to pivot back to commercial in time.

The next question comes from Michael Ciarmoli from Truist Securities.

Maybe Jim, just back to free cash flow, I want to make sure I heard you correctly. Is there $70 million to $75 million of cash use in additional facility closings this year? And if so, can you elaborate on that? It seems to be maybe higher than expected?

Yes, there is $70 million to $75 million in our forecast for noncash -- non-core cash uses. And it relates to the structures wind-down, structures is are capital-intense business and a lot of infrastructure. These are the previously accrued expenses related to closeout of legacy programs, include things like 747. It would be the cash use of programs that are -- or businesses that are being divested before the divestiture completes.

It also includes infrastructure windup, like IT systems and teams that are supporting and dedicated to that group when we complete the divestiture.

Michael, these are -- this is it. This is the last year. These are bounded. It's deterministic. We know both the scope of those run outs and the timing.

And there's actually more opportunity to reduce that, then there is a risk that will increase, but we have to put the forecast for a baseline.

Okay. Okay. And is this the first time you've disclosed that? I was under the impression, I guess, maybe that we were looking at the end of the 747 and -- maybe it just seem a little bit higher?

Yes, 747 production ended last year, but the wind up goes beyond production. And we haven't given any specifics for the coming year. Some of this is deferred from previous years as things have taken longer. But yes, that is the outlook for this year. It's reconciled in the schedule in the back of the presentation.

Okay. And then last one, I guess, if we just look at sort of the implied guidance on -- that you've got on Slide 17 there, I mean, you've got the good growth in Systems & Support. I think you called that out at 18% to 22%. I can't really make out what Structures is going to be, but it seems to be a pretty small number. I always thought that the Interiors was running around $120 million, $130 million. And if that's growing, what's the -- did we have that wrong? Or what's the level of Structures and the Interiors business next year?

It is growing from that level. It is faster growing, as Dan indicated, because it was reliant on narrowbodies, in particular, 737. So, as that recovers, it will grow. And it's got new work, new programs like A220 that it has just won. It just secured a lot of backlog with a big -- the contract continuing its business last year.

We did a 10-year [LT] with Boeing for all of their aircraft, and we just signed A220, which is a great aircraft -- narrowbody aircraft, and we expect that volume in that business to effectively double over the planning horizon.

So, it went way down. We had -- at the peak, I think we had 2,500 employees that were supporting that business. And with the MAX cut, that went down to less than half of that, and now it's on a path to recover. And we'll do it more efficiently than we did before.

The experience, although difficult in going through the pandemic, our team down in Mexicali did a great job of rightsizing the plant and driving productivity initiatives. So, it will be more profitable year-over-year.

Okay. So, is it about a $50 million to $75 million run rate next year? I mean just given that the consolidated guide is $1.2 billion to $1.3 billion? And Systems & Support is basically going to be $1.2 billion?

Yes, that's a little bit low. Why don't we get back to you give you the firm number?

On.

Page 19 is the guidance, Mike. So, $1.2 billion to $1.3 billion is our consolidated guidance. That includes Interiors as well.

Yes, it should be north of 100 on revenue.

Okay. Right. Yes, I'm just trying to reconcile it with the chart on the prior page, Page 17. That shows TSS and pass. Okay. We can figure offline.

The next question comes from Cai von Rumohr from Cowen.

So, I guess your total cash flow guide is minus $35 million from ops, the CapEx, so it would be a negative $65 million. I know that number includes the onetime $75 million wind up. Does it also include the full $104 million for Boeing? Or kind of are you assuming that, that might be pushed out?

The assumption is that that's resolved in the transaction. It's not -- the $104 million liquidation is not included in guidance.

It's not? So, basic -- just so I understand, so -- it's -- okay. It's taken out in the guidance. But so how much cash do you think net of all of this is going to be available to reduce debt? It sounds like not much. It sounds like you're still negative?

Yes. So, as I mentioned earlier, we're not giving the exact transaction value, but there will be value and reduction of the advances through the transaction, and that's going to improve cash flow moving forward.

You can see the detail, Cai, on Page 26. The $30 million to $45 million of generation then after the $70 million, so 0 to $15 million. But that's correct. There's a substantial portion of proceeds that will be used to satisfy the advances in our assumption.

And so what about you have substantial debt coming due in the latter part of '24 and '25. What's your thinking kind of once you get through all of this? How are you going to deal with that?

Yes. The debt maturities are over 2 years away. We have good interest rates right now, and most of our debt is fixed. In fact, substantially all of it is. So, we continue to monitor the markets. And as we continue to improve EBITDAP or reduce our leverage, we'll be in a better position to execute and get better rates on refinancing moving forward. But we have over 2 years.

(Operator Instructions) The next question comes from Ron Epstein from Bank of America.

This is actually Andre Madrid on for Ron. I wanted to go back a bit. I know it's been touched on slightly, but I kind of wanted to talk just about those projected rates on Slide 14.

So, 777, 787 seem pretty aggressive. And I just want to ask, continued issues at Boeing like, with all that going on, what makes the team confident that you guys could actually hit these objectives through 2026?

We talk directly to both Airbus and Boeing on a daily basis. We get their latest schedule releases. We also watch the actual orders to see if the forecast matches the near-term orders. And both companies have been meeting their commitments to us on rate step-ups. That's the first thing is -- I think with my personal opinion, having talked to Boeing leaders on the 787, is the recent news coverage around 787 certification has been overdone and that they know what they need to do, and they're diligently working through the FAA submittals.

It's a great airplane. There's over 1,000 out there in service. Passengers love it, it's got a great fuel efficiency. So, the 787, there's a place for it in the market. And with time, there'll be a greater demand for it.

So, we do have confidence in it. I know there's different views on that. But Boeing is really doing what's required. They may not be getting credit for it in the coverage, but dealing with their supply chain, they have honored their commitments on rate step-ups on the MAX, and we appreciate that. It's helped a number of our plans, and we think the same will happen to 787.

Again also addition to our commercial rate confidence, our mix of business has changed. So, we're now -- 1/3 of our business is aftermarket. It used to be only 1/4 of our business. Now it's up to 1/3, and Military is up to 36%. So, Commercial is still a meaningful part of our business, but it's a smaller piece than it was a couple of years ago.

Yes. And on Airbus, you probably saw they opened a third line at Mobile in support of their rate increases, and we get the -- we're on quarterly [sledging] calls with them about rate readiness on the upswing. So, same story there. they're really pressing. And there'll be some constraints in supply along the way, but nothing that I think will impair those rate step-ups.

Okay. That's helpful color. If I could actually follow up. You said on the military side, about 36% of the portfolio now. What other opportunities are you guys seeing on new programs and for legacy work as well? And following on that, how do you kind of see the exposure shaping up down the line maybe 5 years out?

Well, although I've worked in defense for my whole career, I'm not going to handicap 5 years out. What I can say is that the conflict and the war in the Ukraine has triggered the DoD to ensure readiness of all their platforms, and that's translating into a request for MRO and for spares.

And then the new starts, whether it's Future Vertical Lift or the T-7A or MQ-25, even as they go through development challenges, which are common, the demand for those platforms is high. And we see the F-35 continuing to be an area where we can expand work share, if not, rate from of our business base.

And -- what I'm encouraged by is, as the OEMs say, we either have a reliability issue on a given component or we want more affordability on certain products. They're coming to Triumph and they're competing the incumbents. So, even if the rates don't materially go up, we expect to gain share as well. So, we're confident in our ability to sustain and grow our military business over time.

And we have an aftermarket component in military, too, which gets more valuable when it gets the foreign military sales. So, we have products in the military throughout the life cycle, including the aftermarket, and that makes us more predictable and balanced.

The next question comes from Noah Poponak from Goldman Sachs.

Dan, on 787, you stated you're confident Boeing will achieve the certification and return to higher rates. And then you said you think that will happen in the latter part of the summer. Do you think the certification is in the latter part of the summer or that the move to higher rates is in the latter part of the summer?

I won't speak for Boeing on the timing of those events. I'm just giving you my opinion as a supplier to Boeing that I think the coverage on that has been overstated to the negative and that they are closer to achieving their certification goals.

And just because the underlying demand for the platform, we see the rates coming back. So, I won't comment on the specific timing. But if you take the long view, which is what we're presenting with our multiyear guidance, there's no doubt the 787 is going to be back up in rate.

And on that longer view, the rates you have laid out versus the index to fiscal '19, your fiscal '25, the math there, it implies about 9 a month, and that would be calendar '24. I mean, is that an indication from the OEM? Or is that your best guess? That's a substantially faster recovery than I think most in the market expect on the widebody side.

Yes. I think it's our estimate. The stated rates that we've seen are a little bit lower than that, but it's a platform that is produced, as I mentioned, at rates as high as 14 a month. And they do have a backlog of orders. So, you and I will see together, Noah, how it plays out. But Triumph is going to be prepared for higher rates on the 787.

Okay. And then could you also elaborate on 737 on that chart because if the pre-pandemic, pre-grounding your fiscal '19 index is the 52 a month that they were at, which the 0.6 for fiscal '22 would get you to the 31, then again, the -- you've got it above pre-pandemic, pre-grounding in your fiscal '24, which is calendar '23. That recovery looks pretty healthy, I think, compared to what we're all looking for. If you can give us some more details on the numbers implied on the MAX there?

Yes. We're thinking rates -- for our planning purposes, I'm not speaking for Boeing, of course. We're thinking rates in the 45 a month range in our fiscal '24. So, it would be higher than where they were pre-pandemic. They were headed into that territory. As you recall, we were all doing planning to go from -- I think it was 42 to 57 pre-pandemic. So, it's really getting back to jumping off point. that was pre-pandemic. And then going beyond that, achieving those sort of 57 rates out there in '26.

Again, our forecast. And Boeing is very good about giving shorter-term forecasts that we can -- within our procurement lead times, so we know what to go out and buy. But they have thousands of aircraft in backlog. There's certainly demand for the platform because of its fuel efficiency. And so we think, again, there's a market pull that once they get through their certification.

There's also a strategy in ramp-up. You want to do it in steps that are manageable so that everybody is adjusting -- moving the chains on capacity in a coordinated way and their rates support that. That helps to derisk the ramp.

Interesting. Okay. And just one more on what you're selling into. You mentioned wide-body MRO picking up. Maybe just if you could provide a little more color there? I mean is that just off of an incredibly low base? Or is that better than we think? What are you seeing in that piece of your business?

So, the freighter -- passenger freighter conversion, very encouraging. We have a chart. We showed our Board of how much those rates step up effectively. It's a nonlinear increase after -- and I'm going to get the -- I don't want to go off the cuff on the numbers, but after a fairly steady rate year-over-year on freighter conversions, it's suddenly going up at a high rate.

And I'll give the numbers to Jim for the one-on-one calls. So, that's encouraging. We sell hydraulics. We sell actuators. We do installation, and then plus the engine accessories and thrust reversers that we do as well.

On the wide-body, demand for freighters. I'm going to leave that to the OEMs. There's a lot of moving parts between Airbus and Boeing. But you and I, I think, would agree on the sort of unending demand for e-commerce and products. And if you believe there's going to be continued GDP growth, and that will track with that. So, I'd refer you to them.

What are you seeing in your wide-body aftermarket outside of the freighter conversion, just a normal course of...

What we saw last year was a huge downdraft where the wide-bodies were largely grounded in the last 2 years. And we thought there would be continued retirement of widebodies, and that's slowing. And as that slows and they put them back into service to meet the growing demand, I mentioned how much international travels just picked up in the last 90 days.

They have to get them back ready. A lot of these parts, they're both time-based replacement and cycle-based and our flying our derived replacement cycle. So, they're coming to us in ordering legacy parts for wide-body that didn't get ordered in the prior 2 years. So, there may be a point at which more fuel-efficient wide-bodies come back into play and they retire those. But in the short term, we're benefiting.

Our last question is the follow-up from Myles Walton from UBS.

Just a couple of clarifications. One, when I look at your fiscal '23 sales guidance, and I try to reconcile against the Slide 15, is that Slide 15 growth of segment revenue implied? Is that indicative of what you're putting into your guidance? And if not, what's our -- sort of the offset to that versus the $100 million plus that's implied in that bottoms-up analysis?

So, the incremental contribution, the red dashed line, it is reflected in our '23 sales revenue. And it talks about how these new OEM rates are going to benefit us in sales volume over time. So, we see on the order of $300 million and volume -- sales volume expansion over the next 3-year horizon because of that. So, that -- if you call it, $100 million a year, that first year is reflected in our '23 guidance.

That $1.2 million to $1.3 million includes $100 million of organic growth?

Yes.

Okay. And then another clarification, any American Jobs Protection Act benefit in fiscal '23 that we should know about?

There is a small portion of it. I think it's about $7 million in Q1 of recognition and maybe a little more in cash. I think the cash may be coming in $9 million or $10 million.

Okay. Got it. And then just a quick one. Jim, do you have a targeted leverage in either your 3-year or 4-year fiscal '25 or '26 that you'd want to share?

Yes. Yes. We target 3 to 4x adjusted bank EBITDAP at the end of FY '26, so the end of our planning period. So, 3 to 4x.

This concludes our question-and-answer session and Triumph Group's Fourth Quarter Fiscal Year 2022 Earnings Conference Call. This call will have a replay that will be available today at 11:30 A.M. Eastern Standard Time through June 1 at 11:59 P.M. Eastern Standard Time. You can access the replay by dialing (877) 344-7529 or (412) 317-0088 and entering access code 5049523.

Thank you for attending today's presentation. You may now disconnect.