Yahoo Finance Triumph Group, Inc. (NYSE:TGI) Q2 2024 Earnings Call Transcript
Triumph Group, Inc. (NYSE:TGI) Q2 2024 Earnings Call Transcript November 7, 2023
Triumph Group, Inc. reports earnings inline with expectations. Reported EPS is $0.01 EPS, expectations were $0.01.
Operator: Good day, and welcome to the Triumph Group Second Quarter Fiscal Year 2024 Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Thomas Quigley III, Vice President of Investor Relations. Please go ahead.
Thomas Quigley: Thank you. Good morning, and welcome to our second 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 press release and in 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 it over to you.
Daniel Crowley: Thanks, Tom. Triumph closed the first half of fiscal year 2024 with expanding backlog, sales and margins as we focus on profitable growth and building on our success in the aftermarket. We are entering the second half of the year from a position of strength and raising our fiscal 2024 sales, earnings and cash guidance. Our year-to-date performance, increasing commercial aircraft build rates and growth in defense spending supports our updated outlook for the year. During the second quarter, we met or exceeded our expectations, delivering strong sales and our sixth consecutive quarter of year-over-year growth as well as predictable profitability. Our deleveraging plan is on track, including over $60 million in debt reduction since the start of the fiscal year, which will yield approximately $5 million in annualized interest savings.
As I reflect on the quarter, I'm pleased with our ability to execute on our short-term performance targets, we remain very excited about the long-term financial and operational opportunities for Triumph. In particular, our performance serves as evidence that we continue to accelerate our future towards the targets we discussed at our September Investor Day. Turning to Slide 3. I'll summarize the highlights for the quarter. Year-over-year organic sales growth was 16% and driven by improving MRO demand, accelerated above Q1's 14% growth and above our original guidance. Aftermarket sales increased year-over-year accounting for a robust 43% of our Q2 sales, roughly doubled since the start of our restructuring. Recall our Interiors business started the year slow, with slower ramps in sales, supply chain delays, inflationary pressures and unfavorable foreign exchange headwinds.
The team began executing on our recovery plans and exited September at breakeven on increasing volumes and growing backlog. And last, we grew our total company backlog by 15% above market growth rates as Triumph benefits from strong representation across a broad array of platforms, customers and end markets. We continue to benefit from growing commercial travel demand up 28% through August year-over-year. and increased MRO demand as aircraft returned from peak summer use, commercial transport aircraft new orders more than 2,000 year-to-date and planned OEM rate step-ups. Book-to-bill is 1.37 year-to-date and $1.8 billion of reportable backlog is up 16% year-over-year, even as past due backlog has been driven down by $17 million or about 18% this fiscal year-to-date.
In the military market, there is a robust U.S. defense budget in place and expectations for it to remain at similar levels for the next few years. Given the multiple regional conflicts, budgets are likely to grow beyond current forecast. Triumph is currently engaged in an unprecedented number of military OEM opportunities including over 30 classified RFPs year-to-date. We are in discussions on hydraulic systems, fuel pumps, landing gear systems, thermal systems, gear boxes, door actuation and more. all driven by expanding Triumph intellectual property. In Q2, Triumph's commercial OEM shipments were up 70% year-over-year, while commercial aftermarket revenues rose 48% year-over-year. Military OEM sales were consistent with prior year, while military MRO rose 24% year-over-year on the strength of many programs, led by V-22 pylon conversion actuators.
As we shared at our recent Investor Day, Triumph enjoys significant content on Boeing 787 aircraft with just over 1 million shipset value, benefiting both the OEM and MRO sales across 6 Triumph factories. This is a great aircraft with more than 1,800 orders since 2013 and a backlog of nearly 800 aircraft, 235 of which were ordered in 2023. So demand is robust, and Boeing is working to increase rate as rapidly as possible. Orders in our portal support the move to rate 5.3 per month in our fiscal year, up nearly 2x from the start of our year and 787 shipments for the second quarter were up 142%. We also anticipate emerging sustainment requirements for the 787 as the oldest aircraft in this fleet are just beginning to exceed 10 years in service.
As these aircraft enter their landing gear maintenance cycle, Triumph will begin overhauling increasing numbers of our landing gear actuation components, including extended retract actuation, truck positioning, nose wheel steering and door actuation. New wins for the quarter included CH-47 engine controls, a UH60 gear package and an accessory repair package for Atlas Air as well as personal service units, cruise seats and starters for Delta Airlines. While only 10% of our sales performance at our interiors business remains a focus area, as an unfavorable sales mix driven by OEM delays and supplier shortages along with margin impacts from inflationary pressures on materials and labor and foreign exchange changes, created headwinds to start the fiscal year.
We're running additional Triumph operating system lean events to offset these external headwinds, and we're starting to see positive developments. These include events to drive down cycle time and improve efficiencies and productivity. As production demand increases, we are working closely with our customers to derisk the supply chain by securing alternate sources where necessary to keep cost competitive and to in-sourcing more work as rates continue to ramp, which will provide added absorption benefits. Interiors is on a path to recover to mid- to high single-digit margins this fiscal year and to enhance the confidence in their long-term earnings targets. Value pricing remains a key strategy to Triumph is deploying towards our margin expansion goals.
This includes the implementation of our expanded commercial playbook, expanding our commercial risk reviews and implementing new processes. Given the evolving market environment, this has included exploring shorter duration supplier and customer contracts, incorporating inflation clauses tied to indices or specific material pass-through clauses and focusing on aftermarket premiums and market access. Previously, we highlighted that 80% of our contracts have terms of 6 years or less, providing a near constant flow of opportunities to optimize value based on our technical solutions, capabilities and IP and our recent wins include examples of these efforts. We remain on track with the pricing objectives laid out during the recent Investor Day. Jim will now take us through our second quarter results and updated outlook for fiscal 2024.
Jim?
James McCabe: Thanks, Dan, and good morning, everyone. Triumph's second quarter results exceeded our expectations with significant revenue growth over the prior year period. On Slide 5 are the consolidated results for the quarter. Revenue was $354 million. With the continuing business, excluding divestitures and exited programs, organic revenue increased 16% over the prior year quarter. Organic revenue growth primarily benefited from increased aftermarket 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. Prior year revenues included a $16 million nonrecurring benefit from the sale of noncore IP, after which revenue growth would be 23%.
Adjusted operating income for the quarter was $37 million, representing 11% margin, a 60 basis point increase over last year. And adjusted EBITDAP for the quarter was $46 million, representing a 13% EBITDAP margin, which is on track to our full year guidance. Sequentially, adjusted operating margin was up 300 basis points and adjusted EBITDA margin was up 220 basis points over Q1, driven by higher revenue and a favorable mix with an increase in aftermarket sales from 41% to 43% of total revenue. In the quarter, we incurred $1.9 million of restructuring costs to retire our last structures IT contract as our transition services agreement ended, and a $1.3 million charge associated with potential environmental costs at legacy structure site. Slide 6 shows our military revenue.
For the quarter, military revenue was $117 million, representing 33% of total revenue. Military OEM sales were strong and on par with last year as increased sales on CH-53K and B22 offset expected lower sales on E-2D and AH-64 programs. Military aftermarket sales in the quarter were up 24% compared to last year and up 70% sequentially on increased demand for spares and repairs. Slide 7 shows our commercial market revenue. For the quarter, commercial revenue was $227 million, representing 64% of total revenue. Commercial OEM sales were $131 million, and absent the sale of noncore IP were up 17% in the continuing business. This growth was driven by increases in both volume and price in key programs, including Boeing 787 and 737 programs. Commercial aftermarket sales of $96 million grew 49% in the continuing business on strong demand for commercial aftermarket spares and repairs.
This is our highest quarterly commercial aftermarket sales since fiscal 2017. Remaining 3% of our revenue is non-aviation, which is profitable and represents about $9 million of sales in the quarter. That's up 24% over last year. Our continuing sales mix trend towards more aftermarket is having a positive impact on margins and cash flow. As I mentioned, total aftermarket sales represented 43% of our quarterly revenue. This was up from 36% in the prior year quarter. The breakdown of our aftermarket sales and MRO capabilities is on Slide 8. Our free cash flow work is on Slide 9, which shows our Q2 and year-to-date cash use. Our $37 million of cash used this quarter included $74 million in semi-annual interest payments as well as planned investment in our net working capital in support of increasing second half sales volume.
This is consistent with our expectations and the quarterly free cash flow guidance we previously gave. We expect to be solidly cash positive in Q3 and in Q4 in support of full year cash flow guidance, which is up to $40 million to $55 million. On Slide 10 is our net debt and liquidity. As of September 30, we had $1.5 billion of net debt and our cash availability was approximately $230 million. During the second quarter, we purchased $19 million of our unsecured 7.75% senior notes due in August of '25, and we purchased an additional $29 million so far in the third quarter. We purchased these notes at a discount to par resulting in gains. When combined with the $14 million in bond redemptions in the first quarter, we reduced annualized interest expense by about $5 million.
We also have over $300 million deferred tax assets to continue to create value through reduced cash taxes moving forward. Our fiscal '24 guidance begins on Slide 11. We are increasing our fiscal '24 guidance for revenue, adjusted EBITDA and cash flow and updating our operating income guidance. Based on anticipated aircraft production rates, we expect organic growth of 10% to 13% in fiscal '24, with revenue in the range of $1.43 billion to $1.47 billion. Aftermarket volume is the largest component of the increase, followed by OEM volume, pricing and an increase in non-aviation revenue. The aftermarket is expected to grow at 11% rate for the fiscal year. Commercial OEM revenue growth is driven by production ramps on following 737 and 787 programs and the Airbus A320 family, even while supply chain and geared turbofan repairs are considered.
Non-aviation sales are expected to increase, driven by the previously announced work supporting hollister sustainment. We increased our adjusted EBITDAP guidance consistent with the increased sales guidance to a range of $216 million to $231 million. 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 increased our cash flow from operations and free cash flow guidance ranges by $5 million for fiscal '24, including second half working capital improvements. We continue to expect solid cash generation in Q3 and strong cash generation in Q4, consistent with prior year seasonality. This is driven by working capital liquidation on the second half sales surge, reduction in past-due backlog and increased OEM inventory turns.
Interest expense is expected to be $151 million, including $145 million of cash interest, and we expect $7 million of cash taxes. This is after the cash interest savings from $49 million of bond purchases completed to date. Organic margin expansion, cash generations and debt reduction are expected to drive our net leverage from 7.6x at the end of last year to between 6.1x and 6.3x at the end of this fiscal year. As we discussed at our Investor Day, we are on a path to reduce leverage into the range of 3.5x no later than the end of fiscal '26 through EBITDAP expansion and free cash flow generation. However, Triumph continues to explore alternatives to accelerate deleveraging through business and product line portfolio actions. In summary, the second quarter's results are in line with or ahead of our expectations that support the increased full year guidance.
We are reducing debt and interest expense by purchasing bonds in the market, growing EBITDAP and generating free cash flow this year. We're executing our multiyear plan to continue to grow revenue, margins and free cash flow, reduce leverage and increase shareholder value. We remain on track to achieving the targets established at our Investor Day in September. Now I'll turn the call back to Dan. Dan?
Daniel Crowley: Thanks, Jim. Triumph's performance in the second quarter of fiscal '24 highlights the strength of the new Triumph, the 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 updated fiscal 2024 guidance and long-term outlook. Jim and I are happy now to take any questions you have.
See also 11 Most Undervalued Solar Stocks To Buy According To Hedge Funds and 15 Best American Dividend Stocks To Buy Now.
To continue reading the Q&A session, please click here.
