Triumph Group Inc

NYSE:TGI

Earnings Call Analysis

Triumph Group Reports Strong Start to Fiscal 2025

Triumph Group kicked off fiscal 2025 with a solid quarter, reporting a 7% increase in revenue to $281 million, and a 23% rise in adjusted operating income to $17 million. The company saw robust growth in commercial aftermarket revenues, up 43%, primarily driven by legacy 737 spares and repairs. Military aftermarket revenue also increased by 11%. Despite temporary OEM rate deferrals and supply chain challenges, Triumph improved its credit rating by reducing debt by $120 million. Looking forward, Triumph confirmed its annual guidance: net sales around $1.2 billion, adjusted EBITDAP at $182 million, and free cash flow between $10 million and $25 million.

Solid Financial Performance in Q1

In the first quarter of fiscal 2025, Triumph Group delivered a solid performance exceeding planned targets across key financial metrics. Revenue reached $281 million, marking a 7% increase year-over-year, while adjusted operating income jumped 23% to $17 million. The adjusted operating margin improved by 80 basis points, rising to 6%. This growth was bolstered by strong aftermarket revenue, which constituted 33% of total sales and contributed 73% of the profit for the quarter, reflecting the resilience of their Systems and Support segment amid supply chain challenges.

Aftermarket Revenue Growth

Triumph's aftermarket sales showed significant growth, up 27% year-over-year. This increase is attributed to a rising average fleet age, necessitating extended service life for older aircraft due to the delays in new aircraft deliveries. A notable driver is the entering overhaul cycle of the Boeing 787 landing gear, which has critical service price points between $185,000 and $400,000. This robust demand for aftermarket services positions Triumph well for sustained profitability.

Debt Reduction and Financial Stability

During the quarter, Triumph aggressively managed its balance sheet by redeeming $120 million of first-lien notes, reducing total debt to $959 million. This proactive approach to debt management earned them upgrades in credit ratings from both S&P and Moody's – a testament to improved financial stability. They expect to save approximately $55 million annually in interest expenses moving forward, which will have a favorable impact on cash flow.

Guidance and Future Outlook

Triumph maintained its full-year guidance, projecting net sales of approximately $1.2 billion and adjusted EBITDAP of about $182 million, reflecting a 15% EBITDAP margin. They anticipate free cash flow generation between $10 million to $25 million for fiscal 2025. While some earnings may see temporary challenges due to lower anticipated sales in the second quarter owing to supplier delays, they forecast recovery in the second half of the year.

Increasing Backlog and Market Demand

The overall order backlog increased by 11% year-over-year to $1.9 billion. This increase was driven by a strong demand for commercial and military products. Triumph's backlog is expected to grow further as they capitalize on increasing aircraft production rates, especially with the market forecasting a 25% increase in aircraft sales over the next few years. The stability of both commercial and military segment revenues highlights Triumph's strong market positioning and adaptability.

Long-term Industry Trends Favorable

Insights from the recent Farnborough International Air Show bolstered Triumph's confidence, as OEMs projected increases in aircraft sales and production levels, which would positively impact their operations. The industry’s overall outlook remains promising, and Triumph's new proprietary products, including cybersecurity-equipped avionics and digital engine controls, align well with emerging market needs.

Conclusion and Strategic Focus

In conclusion, Triumph Group's first quarter results showcase a company that is effectively navigating through challenges in the aerospace and defense sectors while focusing on key growth areas such as aftermarket services. Continued emphasis on operational efficiency, debt reduction, and innovation through new product development positions them for sustainable long-term success. Investors can find confidence in Triumph's strategic direction and ongoing adaptability to market dynamics.

Earnings Call Transcript 2025-Q1

[Operator]

Good day, and welcome to the Triumph Group First Quarter Fiscal Year 2025 Results Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would like now to turn the conference over to Thomas Quigley, Vice President, Investor Relations, Mergers and Acquisitions and Treasurer at Triumph. Please go ahead.

Pardon me, everyone, we're having a technical issue. I will get the speakers ready in just one moment. Thank you for your patience.

[Technical Difficulty]

Ladies and gentlemen, thank you for your patience. Apologies for the technical issues. I will now introduce Mr. Thomas Quigley to begin the call. Please go ahead.

[Thomas Quigley, executive]

Thank you. Good morning, and welcome to our first quarter fiscal 2025 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 discuss our adjusted results. Our adjustments and any reconciliation of non-GAAP financial measures to GAAP measures are explained in the earnings press 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, 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, executive]

Thanks, Tom, and welcome to Triumph's First Quarter fiscal 2025 call. I'm pleased to report that Triumph is off to a solid start to the year and expect continued improvement as we move through the course of the fiscal 2025 and into seasonally stronger quarters.

Turning to Page 3, I'll highlight key accomplishments from the quarter. We generated year-over-year sales growth of 7%, driven by strong aftermarket demand, offsetting a modest reduction in military OEM product demand. We expanded margins on price increases and favorable sales mix. We retired an additional $120 million of debt, strengthening our balance sheet. We were rewarded with recent credit rating upgrades from both Moody's and S&P.

Turning to Page 4, you can see that aftermarket sales, including spares and repairs from our Systems and Support segment is trending up in support of both commercial and military end markets. Triumph aftermarket sales were up 27% year-over-year as we benefit from a rising average fleet age the need to fly older aircraft longer due to the shortage of new aircraft entering the fleet and the emergent 787 landing gear overhaul cycle.

As we mentioned last quarter, the 787 landing gear overall cycle 12 years and the oldest member of the fleet are hitting 12 years now, necessitating the removal and overhaul of all land and gear actuation, essentially all of which Triumph supplies. Our typical twin aisle landing gear actuation overhaul price is between $185,000 and $400,000.

The steady rise in spares and repairs on key platforms, including the Boeing 737 and Airbus A320 fleet and the Boeing 787 and Airbus A380 wide-body fleets, benefits our sales mix and financials. Overall military segment revenues were stable to slightly down, supported by the strength of CH-53K sales, offset by V-22 and E2D OEM declines though mostly offset by aftermarket sales on these same platforms.

Key wins for the quarter include contracts for the FA 18 E&F fuel pump overhaul, the T-7A gearbox and the Kratos XQ58 landing gear, which benefit 3 of our 4 Triumph operating companies where we are positioned on key growth platforms. As discussed on our last earnings call, the inflationary impacts on our interiors business continue to be challenging but largely in line with our expectations and reflective of broader industry trends, particularly a decline in narrow-body production rates and supply chain cost increases.

We took actions in the quarter to rightsize the interiors business, consistent with the delayed MAX ramp while we continue our commercial discussions with Boeing. Triumph remains on track to achieve our overall annual net sales, adjusted EBITDAP and cash flow guidance. When adjusting for a legacy environmental legal contingency we recognized in the quarter, our operating income and EPS guidance also remain unchanged. Jim will provide more color on our outlook later in the call.

I'm also pleased with our ability to execute our pivot to systems and IP-based aftermarket. This is the first quarter that Triumph has operated as a pure-play systems IP-based aftermarket and interiors company following the divestiture of our product support business, we have partnered with AAR on a seamless transition and identified areas to win together through AAR's distribution channels.

As reported, the product support divestiture served as a catalyst to allow us to significantly and rapidly delever the business, strengthen our balance sheet and meaningfully reduce our cash interest expense. We remain well positioned to capitalize on strong demand from the aftermarket in the short term and higher OEM build rates over the next 18 months. Triumph is ready for the expected A&D industry super cycle based on our diversification of customers and end markets as we gain share with new products, MRO services and takeaways. Here's Jim to review our financial results.

[James McCabe, executive]

Thanks, Dan, and good morning, everyone. Q1 results exceeded our plan on all key financial metrics and Triumph remains on track to achieve our full year objectives. Q1 was a good quarter for Triumph, with the strength of our proprietary aftermarket revenue and Systems and Support more than offsetting the temporary OEM rate deferrals and supply chain challenges. We continue to lower our debt and improve our credit as evidenced by the ratings upgrades Triumph received from both S&P and Moody's in the quarter.

Our consolidated first quarter results are on Page 5 and shows solid growth in revenue, operating income and margins compared to last year. Revenue of $281 million was up $17 million or 7%. Adjusted operating income of $17 million was up $3 million or 23%. Adjusted operating margin of 6% was up 80 basis points from about 5% last year and $25 million of adjusted EBITDAP represents a 9% adjusted EBITDAP margin.

Aftermarket revenue was 33% of total revenue, up from 27% of revenue in Q1 of last year. Our aftermarket revenue while only 1/3 of our revenue delivers 73% of our profit in the quarter. Our growing installed base of proprietary products drives our aftermarket revenue and profit growth.

We had 3 non-GAAP adjustments this quarter. A legal contingency loss of $7.5 million related to a legacy environmental matter, restructuring costs of $1.6 million as we continue to reduce our fixed costs and a debt extinguishment loss of $5.4 million from the debt repayment in the quarter. Although not an adjustment, our Q1 legal cost to manage certain legacy loss contingencies were about $1.8 million higher than planned.

Our Q1 commercial revenue is on Page 6. Commercial aftermarket revenue was up $15 million or 43%, largely on legacy 737 spares and repairs. We also had an IP sale of about $5 million in the quarter compared to $3 million in the prior year period. Commercial OEM revenue of $119 million was up slightly as 787 revenue increases more than offset revenue declines on Valve 49, Boeing 737 and other commercial platforms.

Our Q1 military revenue is on Page 7. Military aftermarket revenue of $41 million was up $4 million or 11% over Q1 last year, which was offset military OEM decline. CH-53K continues to be an important military program for us in both OEM and aftermarket revenue.

Cash flow is on Page 8. For Q1, as expected, we built working capital and had free cash use of $113 million. This included $8 million of capital expenditures, up from $6 million last year. This cash use was driven by seasonally higher working capital, timing of OEM rate ramps and supply chain shortages, all of which are expected to improve in the second half. The cash used in the quarter also included approximately $2 million of accelerated interest payments for the debt redemption, $1.6 million of cash restructuring costs and about $5 million of cash taxes related to the sale of product support in Q4 last year.

On Page 9 is our net debt and liquidity. During the quarter, we redeemed $120 million of the first lien notes, reducing them from $1.079 billion to $959 million. At the end of the quarter, net debt was $821 million, up from year-end as planned to support the seasonal working capital build. Liquidity totaled $203 million, including $153 million of cash and is sufficient for our planned working capital needs. Our combined reduction across fiscal '24 and '25 year-to-date, will yield $55 million of annual interest savings, and our remaining notes are not due until 2028.

On Page 10 is our FY '25 revenue, EBITDAP and free cash flow guidance, which is unchanged from last quarter. We continue to expect net sales of approximately $1.2 billion, we continue to expect approximately $182 million of EBITDAP for a 15% EBITDAP margin. For free cash flow, we continue to expect $10 million to $25 million of generation for FY '25.

Looking ahead to Q2, in addition to normal seasonality, we anticipate lower sales than last year in our Geared Solutions business, primarily as a result of leap water deferrals and supplier delays on the T22 program. In the second half of the year, [ years ] expects increases on programs as well as the T-7A as it transitions from development to production and higher aftermarket sales.

Free cash used in the second quarter is expected to be in the range of $70 million to $90 million, driven by a $43 million interest payment, seasonality and working capital timing due to OEM rate ramp. We forecast rapid working capital burn off in the second half of the year, consistent with our full year free cash flow guidance.

In summary, first quarter results exceeded our plan and included revenue growth, operating income growth and operating margin over last year. We remain on track to achieve our full year financial objectives. Now I'll turn the call back to Dan. Dan?

[Daniel Crowley, executive]

Thanks, Jim. We just returned from the 2024 Farnborough International Air Show, and our positive outlook on the long-term demand was reinforced by the level of traffic there and OEM projections. The OEMs expressed optimism about planned increases in aircraft sales and production levels, which are expected to ramp through the end of the calendar 2024 and into 2025.

The air show was a very productive event for Triumph. We conducted over 180 meetings and showcased our new proprietary products such as engine actuation, cockpit indicator panels and new cyber protected digital avionics which are at the heart of multiple product development efforts from engine controls to displays.

I'll touch on 3 takeaways from [ Froberg. ] First, it's clear that our customers need Triumph. We are problem solvers and have innovative engineers. We heard keep doing what you're doing, and we'd like you to help us [ were ] here. We solve our customers' hardest challenges.

Second, while delays in commercial transport rate increases are impacting much to the industry, the OEMs are signaling increasing rates later this year and Triumph will benefit from any increases given our conservative assumptions. Boeing and Airbus commercial transport backlog rose 25% since December of 2020, the airlines need these new aircraft. Meanwhile, the aftermarket, both spares and repairs is growing, and expected to remain strong through the end of the decade, according to leading aircraft lessors.

And third, our alignment with our customers has never been better. Our customer collaboration is accelerating as evidenced by customer-funded initiatives ranging from landing gear system designs to additively manufacture gearboxes, thermal system solutions and new actuator and engine control products.

Triumph continues to seek out and solve our customers' greatest challenges. Total backlog continues to rise, up 11% year-over-year to $1.9 billion, even as we push out some narrow-body orders. Backlog is stable sequentially as a result of delayed orders, which occurred in first quarter of fiscal '24, but have not yet hit the FY '25 order book.

Commercial single-aisle backlog was flat as Airbus A320 family increases were offset by declines in the 737 and A220. However, twin aisle backlog is up 42% year-over-year, driven in particular by the 787 and 777 orders spanning OEM and aftermarket. Triumph's growth in the commercial segment will accelerate as rate increases at Airbus and Boeing [indiscernible] in the near future.

Turning to Page 12. New wins for the quarter include an F-18 Afterburner Fuel Pump MRO award. We're also supporting the new GE classified military engine testing with multiple components. Additionally, GE awarded us through T7a-F404 gearbox and Kratos Award Triumph a landing gear design and build program for the Kratos XQ58 Valkyrie, a collaborative combat aircraft variant.

Turning to Page 13. I want to acknowledge our now second largest customer, GE Aerospace and the breadth of our growing engagement with them. Over the last 4 years, our GE revenues have grown at a 23% CAGR nearly doubling. We have a strong portfolio of legacy products for GE, including gearboxes, rotorcraft fuel controls, fighter fuel pumps, and heat exchangers.

But more importantly, we have a growing portfolio of new applications, which have led to the development of products and entirely new product lines. For example, on GE's new military engines, both adaptive cycle and a classified derivative engine, Triumph has 10x the content on these new engines versus prior GE military engines which will be tailwinds as these engines transition to production. GE recognized Triumph as both a value partner and a problem solver. We are positioned to grow alongside them in the years to come.

On the emerging electric vehicle market, we've had several wins in the quarter, including a thermal package on the [ Deutsche ] aircraft 38 and ECO and a funded preliminary design effort for a Tier 1 electric regional jet gearbox. We continue to track commercial transport segment performance, including aircraft orders and backlog while new aircraft orders year-to-date are lagging prior year, total aircraft order backlog stands at more than 15,000, up 25% from 2020 and represents 12 years of production backlog at current rates, underpinning the rising pressure for further production rate increases.

I look forward to working with both the new Boeing Commercial CEO, [ Stephanie Pope; ] and Boeing's CEO, [ Kelly Ortberg, ] who I know from my past industry roles. Triumph is fully supporting Boeing's quality and safety management system initiatives and is closely monitoring their supplier portal for aircraft rate changes.

On the development front, we were very encouraged that Boeing's 777X program is moving forward to the formal stage of flight testing with the FAA. Triumph has over 700,000 content on this new advanced aircraft, which I saw in number during my recent visit to Boeing's final assembly plant. With a backlog of over 500 aircraft prior to certification, this is expected to be a very successful program.

Before I wrap up, I want to update you on a post-quarter closed cyber event. On July 27, we identified a cybersecurity incident involving unauthorized access to certain of our IT systems. The company immediately took steps designed to contain the incident and activated our incident response plan to support continued operations.

Consistent with the responses of other firms, we also notified appropriate law enforcement authorities and continue to work closely with cybersecurity experts and legal counsel to protect the company's interest and our customers. We have substantially restored the effect of systems and resume normal operations. We believe that the security incident has not had and is not reasonably likely to have a material impact on the company's financial results.

In summary, we're off to a solid start for the year, and Q1 puts us on track to achieve our fiscal 2025 objectives. The path to our year-end guidance is expected to be nonlinear but the improvement in customer demand in the second half of the year gives us confidence in our outlook.

Aftermarket sales continue to power the company through the near-term OEM headwinds. We expect to expand margins and improve cash quarter-over-quarter as we further realize benefits from our improved business profile and initiatives. The encouraging long-term outlook for our industry, our unique and focused market position and commitment to performance as is well positioned for continued success.

My team and I are closely aligned with our customers as we work through the near-term issues facing full recovery of OEM demand, and we're excited about our new products on future aircraft and engines that will enhance our long-term value creation. Triumph will continue to hustle while we wait for the follow-through on customer demand, while strengthening our -- streamlining our business and investing in our product portfolio to enhance our shareholder value. We're happy to answer any questions that you've got at this time.

[Operator]

[Operator Instructions]. Our first question comes from Peter Arment of Baird.

[Peter Arment, analyst]

Jim, Tom, again, can you maybe walk us through, you're going to have like a heavy usage of free cash flow in the first half. But you expected obviously turned positive. What are the kind of the programs that you can kind of point to? Is it the 787 work? Obviously, the aftermarket power in the company that kind of gives you that positive swing in the back half of the year? And what rate do you expect to kind of be at on the 737 MAX? I know that's critical for your interiors profitability.

[Daniel Crowley, executive]

Yes. First of all, when I look at the business, I look at it through this lens of the operating companies, and we have strong performance out of our actuation business. It's hitting its marks as well as engine controls. And so they're performing independent of the MAX. We're seeing strong sales growth out of that as well.

Our geared solutions business is down slightly and we know why that is. It's predominantly the LEAP program as well as the wrap-up on the [indiscernible]. They have new programs that are transitioning into production in the second half of the year that will benefit them like the T7. Interiors is definitely down. They're producing it on the order of 12 to 14 a month now in the MAX because we delivered a lot of inventory. It's physically a large product to store.

As that rate comes back at the end of our fiscal year, what I predicted would be Q4, we're going to see that business have an upswing in volume. And overall, it's really the mix of MRO, military and commercial, all coming back strong in the second half of the year that contributed to that. Jim?

[James McCabe, executive]

Yes, it's a diversified working capital challenge, and it's across multiple programs, not just the big Boeing programs, but LEAP gearboxes and V-22, where we have some supply chain challenges are all contributing to the temporary working capital surge. But we see line of sight for all those to liquidate in the second half of the year.

[Peter Arment, analyst]

Okay. And then just as a clarification, Jim, you mentioned your -- I think, an interest cost payment in the second quarter, it seemed larger than either what the run rate is? Or could you maybe just walk us through a little bit because you did pay down the debt and kind of the interest rate in the quarter, interest cost was -- kind of trending below your guidance for the year. So maybe you could just update us there?

[James McCabe, executive]

Sure, Peter. It's a semiannual interest payment September 15 is about $43 million. So -- and that's just on the remaining bonds that are outstanding. There's $959 million that are out there. Sorry, can you [ reask ] the second part of your question?

[Peter Arment, analyst]

Yes. Just so that -- in that guidance of $95 million to $90 million on cash interest still holds with that number?

[James McCabe, executive]

Yes, absolutely. That's correct.

[Operator]

The next question comes from David Strauss of Barclays.

[David Strauss, analyst]

Yes, correct. A follow-up question on interiors. What kind of volume do you need on the MAX to get to positive EBITDAP in [ Indian ] carriers? And when would you expect to get there this year?

[Daniel Crowley, executive]

Sure. Thanks. Interiors is -- let me first break down the interiors, there's 3 different businesses. Insulation is the largest, followed by composites and then cabin components. Installation, we assumed a build rate this year of 160 shipsets.

So you can do the math, it's [ 12, 13 ] and the portal is at that same kind of rate. Composites were producing at a higher volume closer to 30 a month because composite is the smaller products that can be packaged and tested and we didn't really build ahead on composites. Plus we're backstopping a number of suppliers that aren't performing on that. So some of that work is dual sourced.

And then cabin components follows composites. So the real challenge is getting installation rates back up. And we've been profitable in this business at rates that are on the order of 30 a month. So to go from, call it, 13 a month to 30, we'll cross that threshold. And if Boeing can get to 40 as they've advertised next year, it will be solidly profitable.

But we're not just relying on the rates, right? We've taken advantage of this bathtub in production to take out significant cost. The operations are performing well, independent of the rate. They're 99% on-time delivery and similar quality. We're moving some work between the 2 plants in [ Mexicali ] that could take us. We hosted Boeing on-site teams who are very impressed with what we're doing. We're picking up 787 work from competitors.

So we're using the time to improve the performance of the business. And it looks like the peso is turning in our direction. It was really impactful to us last year. We still have work to do on supplier input costs. That's been a big driver for that business. but we're going to deal with that head on.

[David Strauss, analyst]

Okay. I guess, do you assume positive EBITDAP for the -- within the $182 million EBITDAP guidance for the year? Are you assuming that interiors is positive for the full year?

[Daniel Crowley, executive]

It's a modest contributor at this point and still, again, about 10% of sales. So it's not a big swinger on Triumph's full results.

[David Strauss, analyst]

And then Jim, I guess another follow-up on the prior question on interest expense, just the income statement amount -- I think the quarter was [ 19%, ] you've now reduced your debt balance. How do we get the $95 million for the full year?

[James McCabe, executive]

Yes. There's a little bit of favorable FX that runs through that line as well. But the interest expense itself on a cash basis is just the $959 million at 9%.

[Operator]

The next question comes from Michael Ciarmoli from Truist Securities.

[Michael Ciarmoli, analyst]

Dan, I think you said you guys exceeded the plan on all metrics. I mean, was that -- was the $7 million loss in interior part of the plan? I mean, it seems like that would have been worse. And then what's I mean, how do we -- the confidence level, I guess, in the second half here? I mean, what -- do you really -- is this solely dependent on the MAX ramping and this kind of chatter or reports the past 24 to 48 hours of them redesigning that door plug?

Is there any risk to ramping up that production that you guys see and kind of just trying to get a sense of the confidence level in this back half of the year here?

[Daniel Crowley, executive]

Yes. First of all, thanks, Michael. When I say we exceeded the plan, it was on a consolidated basis, which speaks to the strength of our Systems and Support business, particularly actuation, had a very good Q1 and they offset the softness in interiors, which was below plan, to your point.

As far as the MAX rates, yes, we're counting on rates to come back at the back end of the year. If they materially don't then we'll come back and we'll update investors. But we've done such amount of work on diversification. It's still -- that single program is only about 12% of our revenue. So should a flat rate remained flat for longer than we'd like, then the impact is not going to be huge.

As far as the door plug, listen, Boeing is doing the right thing on this. I've been tracking this as an insider on all their quality calls. Certainly, it was a disappointment. They came clean on the hand-off issues. They had related to the faster installation. I was one of the first people to ask, "Hey, why can't this door plug be designed such that it's retained under flight pressures and doesn't require fasteners. They're only there is a secondary backup?" And when I told that to senior Boeing leaders, they said that's already in our pipeline to do that. And this was 2 months ago.

So it's something they've been -- it's not something [indiscernible] may have just go publicly the last day or 2, but it's something that Boeing is already ahead of the game on. So I'm confident they'll get it fixed. It's a disappointment. It did impact a lot of us in the supply chain, but it will get fixed. And based on what I'm seeing within Boeing and all the work that they've done, I attended their supplier conference in Q1. They're fully committed to improving their performance and not stepping up the rate until the metrics justify doing so.

[Michael Ciarmoli, analyst]

Got it. Perfect. And then just Dan, I think you called out that XQ58 landing reward. Can you -- is that a sizable or material win for you guys. Any color on that? I know there's a lot of movement with these collaborative combat kind of aircraft and plans.

[Daniel Crowley, executive]

I don't think it's going to be a huge contract. The thing about our land and gear business is we go in and help prime OEMs that don't have any expertise, but they may attempt to do the landing gear on their own, and then they look at crash survivalness, the ability to operate in off-nominal conditions, heavy landings, cross wins. And suddenly, it's not so easy.

And so we have a team in Seattle that designs these full test rigs. I was just up there looking at the landing gear that they've designed for the beta E [ Vital ] aircraft, and they were running deployment test on that. It's a very slick design, very low cost, low weight given that's important on [indiscernible].

On the XQ58, we met with Eric and his team at the air show, a very good meeting. They know what they're good at. We know what we're good at, and they're glad to have us as a partner. You're going to see us do that on other aircraft up to a certain weight class. The large landing gear, we're not really in that space. But these small to medium class aircraft were becoming a strong leader in.

[Operator]

The next question comes from Myles Walton of Wolfe Research.

[Myles Walton, analyst]

Jim, how did -- I think 2Q was looked at as a neutral from a free cash flow perspective and now 70 to 90 million obviously was burning hotter in the first quarter. Can you point to specifically why that deterioration? And I guess, why the confidence that you'll still recover to the same point by the end of the year?

[James McCabe, executive]

Sure. Yes. I know that consensus out there was around 0. We had a little bit of cash usage in our AOP. And unfortunately, it's grown because of the rates -- the timing of the rate ramp essentially is one driver. Supply chain challenges on certain military programs are another driver. The LEAP schedule for deliveries is another driver. Those are 3 of the big ones.

We're continuing to support our customers to make sure we have the inventory available. As we've said before, we have longer lead times than the frozen window for customer order changes. So that inventory will get used. We see a lot of that liquidating in the second half of the year. The diversified mix of programs that are impacted, which means that we have high confidence that a lot of those will liquidate and a few of them don't. It's not going to be a deadly to the overall forecast.

So it's really working capital driven. It's timing but it's the right thing to do to support our customers. And remember, 73% of our profit in Q1 was aftermarket. So it's really about the aftermarket. Even though it's 1/3 of sales, that's going to continue to drive the cash flow and profitability.

It has near-term opportunities we're going to seize on and we're continuing to build the longer-term OEM deliveries that see things like the 787 landing year overhaul and maybe 12 years later, but all these programs are going to pay off in the aftermarket in addition to the OEM contribution, which is less than the aftermarket.

[Myles Walton, analyst]

Okay. Yes. I think consensus is neutral because I thought on the last call, you pointed to neutral in the second quarter followed by generation in the third and fourth, but maybe if there's something that was long?

[James McCabe, executive]

Yes, I said in the range of. So our planning was just a modest use in Q2 originally.

[Daniel Crowley, executive]

It really is just a timing issue. It's not as if we bought the wrong parts and misjudged the market. We typically order these long lead parts 6 to 12 months in advance of need. So if Boeing changes their demand, which they have the right to do inside lead time, then you can get some overshoot on working capital, and that's what we're seeing in Q2.

[Myles Walton, analyst]

Okay. And then you've gone through -- you've gone through this long simplification process through divestitures and are still sort of struggling to generate material free cash flow. Is it questioning for you whether you have to do more from a portfolio perspective? Or is there a point where you think about strategic alternatives to the whole for the benefit of the company or shareholders?

[Daniel Crowley, executive]

Fair question, Myles. It's something every quarter, we meet with the Board, and we look at all options that are available to the company. So it's not a new topic. In fact, I have a chart that I use with the board that goes back to when we first started looking at each [ opco ] as well as the overall company. So we're always open to different outcomes that would enhance shareholder value.

But we do feel that what we've consolidated the company down to -- through consolidations and divestitures is the right asset base. Certainly, interiors is one we're going to continue to look at but we need to restore the rates on that. We've got some pricing negotiations that are still pending with our customers.

But I like the business that we have, actuation, engine controls, gear boxes, and interiors under the right conditions of volume. And we'd like to get our leverage down. We reduced it from 10x to I think 4.9 with the TPS divestiture. This year, we're on path to reduce it, 3.5. We have a line of sight over our planning horizon to get it down to 2.

And then we can start thinking differently. But right now, we're comfortable with our balance sheet structure and we don't see a need to do any major divestitures to maintain our leverage and cash flow.

[Operator]

The next question comes from Seth Seifman of JPMorgan.

[Unknown Analyst]

This is [ Rocco ] for Seth. Have you begun to see any destocking of Triumph forecast Boeing? And how is the Airbus rate ramp delay impacting Triumph?

[Daniel Crowley, executive]

I'm going I want to play that back. Have we started to see destocking from Boeing?

[Unknown Analyst]

Yes.

[Daniel Crowley, executive]

So we did lower our backlog consistent with the pushout of MAX orders in the quarter even though backlog was still up, I think, 8% in aggregate despite that. Boeing is -- we looked at their delivery and they're starting -- they're getting close to shipping their finished goods, aircraft that's coming down in a pretty steady fashion. So this will pivot from, I'll call it, depressed build rates to higher build rates over the next year. But we did take action on the backlog and expect that to reverse. Did that address your question? Or did I miss it?

[Unknown Analyst]

Yes. Then just the Airbus rate ramp delay, is that impacting Triumph's?

[Daniel Crowley, executive]

So modestly, it's such a robust rate already. We would have liked to have seen it head north in our fiscal '25, we're building like on the A3 20x family about 50 a month, and we were headed 60 next year and then into the 70s thereafter. And so it's really just a question of the profile to get there.

So it's one of our top 3 or 4 programs, but it's a steady enough build rate that we're meeting all of our, I'll call it, economic production quantity thresholds, and we're able to support them in the aftermarket as well, as Jim mentioned. So yes, it's impacting them. I know they've talked about it because they've set a very high bar for their output because of the huge backlog of orders. But from a supplier point of view, it's not impacting us.

[Unknown Analyst]

Great. Then are you concerned by the rounding of the V-22 following the accident a few months ago? And should that weigh on defense results for the year?

[Daniel Crowley, executive]

The V-22 crash that happened was unrelated to the hardware, the Triumph supplies. It was an engine-related defect. It's been publicly reported, not the pylon conversion actuators that we supply. However, when they limit the use of the aircraft or pause its use, it does have an impact on OEM deliveries and to some extent, aftermarket. And that was part of the softness that Jim reported in our military business. Longer term, the V-22 is going to be in operation for decades. And the [ Valor ] V-280 is coming up behind it and other platforms are a long way from fielding. So we expect the demand for those actuators to continue, and we're confident in the quality of the hardware we're shipping.

[Operator]

The next question comes from Ron Epstein of Bank of America.

[Ronald Epstein, analyst]

What -- are you [indiscernible] back into your outlook for the possibility of the strike? I mean it seems like a pretty high probability. The question is just how long this is [indiscernible]? How are you thinking about that? And how is that kind of factored into your outlook?

[Daniel Crowley, executive]

So when we adopted our build rate for the year, we call it past 3 of our annual operating plan. We assume [indiscernible] on the order of 30 a month for most of our factories, as I mentioned. And so we're pretty derated already. And that's an average over the course of the year, 360 shipsets. If they have a dip that goes down associated with the [indiscernible] strike, and I don't have any intel that says they will have one. We'll likely just build inventory and not adjust our build rates.

Boeing has been a responsible prime and allowing the supply chain to continue to build at economic rates where they can. I mean there's a limit, obviously. But I'm sure you've asked [ Brian West, ] am I investing in supplier protecting suppliers, and you say, yes, I've got billions of dollars of inventory to prove it.

So I expect them to continue that behavior as opposed to, hey, everybody stop production, we're on the strike. If it were to be protracted, yes, the rates might be adjusted. But I'll know more about that in the coming -- we all will in the coming days and weeks. We have contingency plans operationally that if should it happen and they send signals in the portal to reduce the rate. We know how to destaff. We know how to furlough people produced over time and put notice out to our suppliers. So the mechanisms are in place, but I don't think we're going to end up having to do it.

[Ronald Epstein, analyst]

Got it. Got it. And then can you speak to a little bit -- you mentioned it, it's on one of your slides, the electric aircraft, your box development. What are you doing there and who's it for and so on and so forth?

[Daniel Crowley, executive]

Yes. Well, in preparing for our remarks today, I wanted to talk about the name of the prime because it's a prime you would know. They didn't want us to mention it. But let me just describe the application.

So today, a lot of regional jets or turboprops. And they have gearboxes that connect let's say, [ Pratt Windy PC 6 ] engine to the propeller and these gearboxes don't go away when you adopt electrification. In fact, they become the critical link between the electric motors, which has been at a very high rate and the prop which spends at a lower rate. So the gearbox has stepped down that rotational speed, whether it's [ prop ] or it's a helicopter rotor.

The design of it is different because you're not getting a single shaft input from a turbine motor, you're getting input from maybe 4 parallel electric motors. And what they're trying to do, the prime is trying to do is to build a clean sheet aircraft that takes advantage of this new architecture while still maintaining, I'll call it, an airframe that looks similar, but underneath the skin, it's got a place for the batteries to reside.

It's got our gearboxes, these new electric motors, it's got new engine controls because you don't need to worry about fuel pressure. It's got more electric actuation. So you don't need a hydraulic system since you don't have a traditional engine, you don't have an [ Amad ] that's providing an accessory engine gearbox that drives things like hydraulic pumps.

So all those subsystem architectures have changed and they have funded us to lead the design of that gearbox. So look for Triumph to continue to support those kind of applications even as aircraft electrification advances.

[Ronald Epstein, analyst]

And then maybe one more on the landing gear system for Kratos. How much new design landing gear has plants actually done?

[Daniel Crowley, executive]

Well, by platform quite a bit. I mentioned the beta. We also did the [ Serus ] business jet aircraft. We did the [ Dream Chaser, Rosewood ] gearing, which looks more like space shuttle, it's got heat shields on it. And then we've done now the [indiscernible] 58. And we support some of the small military aircraft. We're involved in some of the classified work that I can't discuss.

So I'd say it's a very broad set of applications, not particularly on large programs in terms of production volume, but a very good mix of platforms. And that's our niche. There are other people that have the high volume, large aircraft, but they are also -- they've been negotiated down on price over multiple rounds whereas we tend to do pretty well on these shorter run applications.

[Operator]

Our next question comes from Cai Von Rumohr from TD Cowen.

[Cai Von Rumohr, analyst]

Good quarter. Two-part question on Boeing rates. 787, where are you now? And where do you expect to go and when? And secondly, when does the MAX go up? Because if you do 160 ship sets, essentially that looks like you're running 12 to 14 for the entire year.

[Daniel Crowley, executive]

Okay. I'll start with 787. So we adopted an assumption that is between 53 and 63 ship sets this year. So if you divide that by 12, you get the 4.5 to 5 a month. It depends on the factory and I don't mean to make this complicated, Cai, just -- it really is a function of buffer stock inventory what we ship.

The portal demands that are in the system from Boeing for us are higher. They are between 5 and 8 per month with our [ Clemen ] site that builds actuation, landing gear actuation components at that higher rate. So it's a little bit of a head scratcher in terms of why are some factories lower than others, but we're pleased that the actual demand is coming out higher than what we adopted for the basis of our AOP. And that's part of why Jim was able to reference higher commercial OEM volume in the quarters because 787 is pretty strong.

Now looking ahead, what we look to happen on the 787, is that in our fiscal '21, we forecast that to get up to maybe 8 a month universally across all of the factories, not just [ Clemens ] but [ Yakima ] and interiors as well because Interiors is a big 787 provider. They're building -- Interiors is building at about 4.5 per month today. And what we're seeing in the portal for interiors is about 6 a month. So sorry to be complicated in my response, but it does vary by plant. You asked -- the first question was about 737?

[Cai Von Rumohr, analyst]

Right, because the $160 million basically looks like you run the whole year at about 12% to 14%. So when does that go up? And what does it go to?

[Daniel Crowley, executive]

So I really have to defer to Boeing in terms of the shape of their ramp. We have our own internal forecast by month. I'm looking at it right here. I mean we can see step-ups happening in September and then November and sort of leveling out at 38 in our Q4, which is January to March. So it's a pretty -- it's -- we've modeled a 2- to 3-step increase between now and then Boeing does like to keep their steps constant for a period of time. They don't want to step monthly. They like to step in 6-month increments, but I'll defer to them on the actual shape of the ramp.

[Cai Von Rumohr, analyst]

Terrific. And just one for you, Jim. [ Pension ] contribution, I didn't see any in the first quarter. I believe your initial guide, you had something like $23 million, how much is that contribution expected to be? And when will it hit?

[James McCabe, executive]

So Cai, it's spread out throughout the year. There was none in the first quarter. There's more payments throughout the year. So they'll be spread over the balance of the year. I'll have the exact timing, but I think you can look to be spread pretty evenly over the balance of the year.

[Operator]

The next question comes from Sheila Kahyaoglu of Jefferies.

[Sheila Kahyaoglu, analyst]

So first question for you, maybe on Systems and Support. If we exclude that IQ sales, it looks like margins were 14.5%, about flat year-on-year but we're modeling about 500 basis points of acceleration as we exit the year. So just gradually ramping, how do we get comfortable with the systems and support margin outlook?

[James McCabe, executive]

The IP sale of $5 million this quarter compares to $3 million that was in the prior year quarter. So it's just more than we've had previously. I think the margins are still up even if you took those out, but the fact is those are normal course for us now. We're continuing to improve our older programs that we -- others see more value than we do in running them out, and that helps provide some cash.

But it support outperformed its plan in the first quarter. It continues to outperform. The aftermarket is very strong there. So -- can you repeat the second part of your question on where you're looking where it was going for the full year?

[Sheila Kahyaoglu, analyst]

Yes, just -- I was more talking about the absolute margin of like 14.5% as we think about exiting the year, we get to about 19%. So how do margins improve so much as we exit the year?

[James McCabe, executive]

Yes. So it's volume driven. Remember that this year, we have a couple of things going on. We've got price coming in. So we got $75 million of price, and we've got volume increasing. So in Systems and Support as I look at my volume over the course of the year.

Despite the second quarter challenges for geared that I spoke about, there's significant increases in Q3 and Q4. So it's volume driven. There's some price. Remember, we took $40 million of annualized cost out as well across the company. So we're going to see benefits from that, too. So 3 of those are what contribute towards the rate that you said, which is very much in the reasonable range for the full year.

[Daniel Crowley, executive]

Sheila, you remember that old saying about forecasting is difficult, particularly about the future. Last year, we slowed down our rate on GE LEAP in the second quarter. And then they called us and said, forget that throttles forward, we need more shipment out of you. We almost recovered to the full original AOP by the end of the year. And we may see that this year depending on how things progress, but they did notify us of fewer demand for the gearboxes that we produce for them and we adjust our outlook accordingly.

I would say stay tuned through Q2, Q3, and we may, in fact, see the pendulum swing back to producing at higher rates for the narrow-body. We're not counting on that. That's not in our forecast. But we'll be prepared for it. And we have the inventory to do it. I think if you look to the prior year, look at the trends on the margins prior year, it's very consistent that we'll be achieving what we're forecasting for this year.

[Sheila Kahyaoglu, analyst]

And maybe on free cash flow, what's sort of the OE assumption you have baked in to get to cash positive in the second half in Q3 and Q4?

[James McCabe, executive]

Yes. So as we said, were 79 [indiscernible] in Q3 we'll be positive in -- I'm sorry, in Q2 were 70% to 90% will be positive in Q3 and then will be very positive in Q4. Again, similar to prior seasonality that we've seen in prior years.

[Sheila Kahyaoglu, analyst]

Okay. And last question on the aftermarket demand. [indiscernible], MRO was up 37%. So double that of peers. So what's kind of driving that and how do we think about full year aftermarket growth?

[Daniel Crowley, executive]

So aftermarket is a -- it's a reflection of legacy fleets operating longer because of demand. I mean you fly a lot to TSA just at their highest post-COVID throughput 3 million a couple of weeks ago. They need these jets. I mean, I've been flying on wide-bodies lately for domestic routes that I never expected to, but I really like it. And we are seeing it strong on military platforms as well in support of readiness.

We had some FMS spares come through in the quarter. We're seeing Army engine control replenishment orders come through. actuation, as I mentioned, had strong aftermarket. So it's not been a single [ opco ] or a site that saw the aftermarket demand. It's been pretty broad-based. And I was also asked we see this running out in a year or [ 2s ] time.

Now I'm starting to think it's going to be running through the decade. I don't think we're going to see between the military conflicts that are happening and the delay and ramp versus the backlog of aircraft orders, I don't see aftermarket trending down now for several years. So it's going to be -- I think it will be a good tailwind for us. And I mentioned AAR, but we also use [ VSC ] and [ Trima ] as distribution partners, and they're doing a very good job finding spares and repair opportunities for us, and we're not doing this by ourselves.

[Operator]

The next question comes from Noah Poponak of Goldman Sachs.

[Noah Poponak, analyst]

Jim, you just alluded to the free cash flow seasonality being similar to the past, but with the 1Q actual and what you just guided to for 2Q, the use in the first half would be about twice the size of the last 2 years when you had negative full year and the positive in the back half would need to be larger to get to the full year.

So directionally, it looks similar, but the order of magnitude is much different. And I guess it sounds like you're pointing to working capital and the volatility from Boeing, but you've got a revenue plan for the year of kind of flat organically. You're up a little in the quarter. You're saying aerospace OE revenue was up a little in the quarter. Defense is kind of flat. Aftermarket's really good. You've talked about and others have, Boeing kind of pulling at the higher rates they plan to get to from the supply chain, not really changing that.

So I guess with all of that, it's kind of like everything I know, except for your final answer on cash flow, would make me think that your cash flow did not have massive use of more capital and burn in the first half and a much different profile than the past 2 years, yet it does.

What's -- what am I missing? What's the missing piece there? I mean did you just ship a lot more on the front end than others in the industry? Or is there something different contractually between you versus others in the industry? I'm struggling to understand that much different shape of cash flow compared to revenue.

[James McCabe, executive]

Yes. So there's no simple answer because there are a lot of programs we're talking about. We did use more cash this year than last year. I think what you saw was a lot of customers giving us early payments and advances in Q4 this year more so than they did a year ago. So we had some of that reverse itself in Q1. Q2 is really a story of increasing working capital because we can't ship everything because the ramps are delayed because we have some supply chain challenges. And that's going to ship out in the second half of the year.

So there is higher cash in the second half of the year in the continuing business than last year. Remember, you got to look at last year ex the product support business. And Q4 conservatively is when most of the working capital reduction is, but there's a portion in Q3 as well. So you're right that it's a little more exaggerated than it was in prior years, but it's the same profile. Magnitude is a little higher in the second half.

[Noah Poponak, analyst]

Okay. Can you quantify what you're assuming for working capital use in the first half and what you're assuming for positive working capital in the second half, roughly?

[James McCabe, executive]

I don't have the working capital line itself to talk about [indiscernible] have the total cash flow. But as we used $113 million in Q1. We're saying we could use in the range of [ 70 to 90 ] in Q2. You're going to see significant generation in Q3 with the majority of the generation in the second half will be in Q4.

[Noah Poponak, analyst]

Okay. The 6 points of price that you've talked about, how did that look in the first quarter?

[James McCabe, executive]

We benefited from it. Again, I don't have the exact amount of price to hit Q1. Remember, it's not just price, it's cost out as well. But $75 million of price planned in the year, $65 million is -- was already under contract. So you can assume roughly 1/4 of that $65 million, but then I would de-rate it for the sales as a percentage of the full year.

[Daniel Crowley, executive]

Yes, we continue to see strength in pricing because of the supply chain constraints and people still investing in sources to make sure they can support a ramp when it comes or military, you look at our last 10 price ups, more than half are military related.

So we're getting quite a bit on that side as well. That helps us -- and remember, we negotiated a lot of these things back in '22 and they're just now dropping in here because we typically negotiate them outside lead time. And most of these are our IP. There's a few that are -- were sole source, build print, but it's so hard to switch.

Even an example on the Apache, we do gearboxes we replaced a near bankrupt supplier on that. And it was a very painful transition. We did it. We're performing reliably now, and we've gotten price on it since because they don't want to go through that again. So I think we'll see price continue to be a tailwind. We're not done.

These LTAs keep renewing on an annual basis. And this is also a part of why we're doing the new product development. so that we can claim more value, and we may ultimately have better margins at lower delivered cost because we redesigned a product in a way it's got fewer parts and lighter weight, but it's got a higher performance for our customer.

I'll give you an example. We just -- we're partnering with several primes on the vapor cycle cooling which has been a big part of our renovation of the West Hartford plant, and customers are very excited about us supporting their replacement of legacy cooling systems on the aircraft, and we'll have strong margins on that work. So it's an investment we made in years past that will pay off in the future.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.