Triumph Group Inc (TGI) Q2 2022 Earnings Call Transcript

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Triumph Group Inc (TGI 2.54%)
Q2 2022 Earnings Call
Nov 9, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group Conference Call to discuss our Second Quarter Fiscal Year 2022 Results. 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 blockers disabled, if you're having trouble viewing the slide presentation. You are currently in a listen-only mode.

There will be a question-and-answer session following the introductory comments by management. On behalf of the company, I would like to read the following statement. 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 the company's reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release which can be found on their website at www.triumphgroup.com. In addition, please note that this call is a property of Triumph Group Inc. and may not be recorded, transcribed or rebroadcast without explicit written approval.

At this time, I would like to introduce Daniel J. Crowley, the company's Chairman and Chief Executive Officer; and James F. McCabe Jr., Senior Vice President and Chief Financial Officer of Triumph Group Inc. Go ahead Mr. Crowley.

Daniel J. Crowley -- Chairman, President and Chief Executive Officer

Thank you, Kevin and welcome everyone to Triumph's Q2 earnings call. I hope you're all safe and well.

Earlier today, we reported our second quarter results for fiscal year 2022. I'm pleased to share that Triumph demonstrated both strong margins and improving cash flow companywide, allowing us to maintain full year financial guidance, all while we continue to come through the pandemic and strengthen our portfolio and balance sheet.

Demonstrated by our new wins and announced partnerships. Our focus in Q2, continue to be on improving and organically growing our core business while closing out several non-recurring cash uses. Our cost reduction actions continue to boost our results as the market recovers. We continue to see promising macro trends, this quarter on multiple fronts.

While organic sales declined slightly due to short-term widebody platform headwinds increases in demand for commercial aviation translated into higher orders for maintenance, repair and overhaul work, both in terms of volume and favorable mix. In fact, staffing in our engine accessories, MRO business has surpassed pre-pandemic levels. Overall, we're pleased with Triumph's second quarter results, which are either in line or above our expectations, enabling us to meet our objectives.

On Slide 4, I summarized some of the quarter's highlights. Our 20% increase in the quarter and MRO services continues to be the company's leading indicator of the commercial market recovery. Prior our cost reductions, lean events and earlier than anticipated retirement of programmatic risks yielded an 18% EBITDA, margin in our Systems and Support segment. Our pivot toward growth is reflected in our wins and strategic partnerships announced in the quarter.

Portfolio actions continue to reduce debt. We have sufficient liquidity and flexibility to meet debt obligations in the normal course of business. And last, supply chain pressures are being proactively managed in collaboration with our customers to ensure supply continuity and affordability. Jim will go into more detail on the quarter's results. As observed across the A&D industry, the market recovery will continue to be uneven, over the next several quarters.

There are enough tailwinds, however, to allow Triumph to relax our cost savings austerity measures from last year as the market continues to improve to retain our experienced workforce in anticipation of the ramp-up, one likely to be paced by talent and manpower capacity. Triumph is complying with the U.S. executive order regarding vaccinations and is seeing a declining rate of new cases.

We do not expect significant impacts from our compliance, but we will continue to make-keeping our people safe our first priority. As we come out of the pandemic Triumph is entering into a new deal with its employees revisiting the value proposition to include greater flexibility and career opportunities for both salary and hourly team members.

Over the last 20 months, our employees demonstrated that they can be extremely productive and overcome life and death challenges without the historical command and control management, culture and restrictive policies of the past. By accelerating the adoption of empowered cross-functional teams across the company, we anticipate higher levels of engagement and productivity than before the pandemic, and we believe that we'll be a preferred place to work going forward.

At Triumph, we value our employees and intend to break new ground on this front. In my view, this new deal will be one of the silver linings of the pandemic. Our actions combined with OEM and MRO rate increases will support expanded margins and cash flow, putting us on a path to delever the company year-over-year. Few comments on the macro environment, the commercial aviation market recovery continues to progress with a global capacity now running just 30% off 2019 levels.

Worldwide, 86% of single-aisle and 64% of twin-aisle aircraft are now in active service. Recently, carriers recorded two consecutive weeks where traffic across all regions improved relative to 2019 levels. Global travel is at the highest point since the crisis began. Notably, there's evidence of compensatory domestic schedule increases in response to the curtailment of international travel, which help explains why China's domestic schedule is expected to be up nearly 30% from 2019 levels by the end of November and the U.S. domestic schedule is expected to exceed 2019 levels in the same period.

Long-haul markets are down 55% to 75% to 2019 depending on region, but the good news here, is that there are announcements from Singapore removing restrictions for vaccinated travelers as of October 19, Qantas resumed international travel November 1, and the U.S. removed restrictions for vaccinated European international travelers from November 8. All these together should result in near-term benefits as transatlantic travel is expected to rise to two-thirds of 2019 levels by the end of November.

With accelerated recovery to follow, which will provide additional MRO opportunities for Triumph over time. Global revenue passenger kilometers, which have been hovering at around 200 billion a month for the six months ending in February, have since doubled to approximately 400 billion a month, a welcome improvement which will drive and increase Triumph's MRO revenues.

Cargo demand has been very strong. It currently exceeds 2019 levels in all regions excluding South America. Through the first three quarters of the calendar year, cargo flights were up 75% between Asia and North America, 110% between Asia and the EU, and 97% between the EU and North America. Triumph's cargo-related revenue is up 41% year-over-year. Our leading indicator for MRO job inductions are up 49% in FY '22 year-to-date over the prior year and up 10% sequentially.

The defense budget for FY '22 remains in process, with three of four legislative committees proposing a $778 billion top line and the, House Appropriations Committee, supporting the President's requested $753 billion. This will be resolved in December conferences, is likely to result in a final year budget around $778 billion, an increase to FY '21 $741 billion of approximately $37 billion, providing program stability year-over-year.

Slide 5 provides an approximation of U.S. defense platform positions on a lifecycle curve with new programs in the pipeline and in development on the left and sunsetting programs to the right. Triumph is well positioned on mature production programs and on those entering their MRO phase where we are actively engaged on both OEM MRO and third-party MRO content. The programs in the development and growth stages will be key to the future.

We were actively securing ship-set content on all future vertical lift programs, next generation adaptive cycle engines and next generation air dominance programs, as well as the B-21. Programs currently in the introduction phase, including the T-7A, MQ25, and the CH-53K and Triumph has built significant ship-set content on these platforms. I recently attended the first delivery of the CH-53K helicopter to the Marine Corps at Sikorsky facility in Connecticut, and it was a well-organized and exciting event.

Congratulations to the Marines and Lockheed Martin Sikorsky team, as well as their entire supply base. Our war-fighters need this amazing aircraft, and Triumph is proud to provide key systems such as the blade fold and damping system for the rotors for which we recently signed an agreement spanning LRIPs 3 to 6. Ramping military fleets include all F-35 variants and the KC-46 tanker where we have existing content and are working to increase share through technology insertion and takeaways.

Commercial transport builds rates are stable, and the OEMs are making plans for single-aisle rate increases. Triumph recently attended the Airbus Supplier Conference wherein Airbus shared plans to increase production of the A320, A321 from rate 45 to 65 by mid-2023 and even higher to 70 in 2024 and 75 in 2025 as well as increases in the production of the A220 through 2025. This is good news for the industry.

The Triumph's Airbus sales for the quarter reflect the improving Airbus single-aisle outlook as our systems and support A320 family sales increased 22% quarter-over-quarter and sequentially. As expected, the twin-aisle segment recovery lags the single-aisle. Boeing is implementing production fixes on the 787. And the recent decision to move to rate two for several months is a temporary headwind to the supply base.

We continue to follow this closely and look forward to return to higher production rates and international travel. As a result of reduced 787 shipments, Triumph's sales for the quarter are down 6% sequentially. However, bookings are up 57% sequentially. Turning to Slide 6, for the quarter, Triumph recorded 67 new wins valued at $1.25 billion including several large Boeing contracts for thermal acoustic insulations, composite ducting, and hydraulic products across multiple Boeing platforms.

Triumph is a global market leader in commercial transport, thermal acoustic insulation systems, and this long-term contract ensures that we retain that position far into the future. New MRO wins, included agreement with Honeywell to provide support for LEAP engine starter components, the CT7 gearbox overhauls for Sabena Technics, an A380 landing gear overhaul work for Collins.

We also signed contracts for a multi-ATA chapter repair contract with FedEx, an agreement with ATSG for 737 integrated drive generators repair. New Triumph IP-driven wins include orders for Triumph's AH-64 fuel control upgrades, a nose wheel steering system for a classified Lockheed program, and the aforementioned CH-53K multiple LRIP awards for blade fold and damping systems.

I also want to mention that in the quarter, we delivered our first A320 XLR landing gear up-lock flight test units to Airbus. Triumph is a market leader in up-locks and this new innovative design provides active confirmation of up and locked position of safety enhancement. And finally, I want to highlight the recently completed joint venture between Triumph and Air France KLM, known as xCelle, which will enable xCelle to service new fleets such as the 787 and 737 MAX, which normally wouldn't transition to third-party repairs for another 10 years or more.

Announced at last month's MRO Europe show, we're very excited about this transformative joint venture. And we're excited to grow this business with our partners, Air France KLM. While the current market environment includes costs to supply chain pressures, we continuously assess our cost for labor, materials, and overhead. This week, I'm supporting our supply chain team and hosting our top 50 suppliers, with the goal of identifying capacity constraints and mitigation acts, de-risk the expected ramp, and commercial OEM production.

We're also securing a greater level of contractual protections against increase in the material costs as we renew contracts and aware of potential inflation in some commodities. Some examples include back-to-back contracting agreements with suppliers on short to medium term agreements, the use of customers' right to buy, agreements for raw materials, API adjustments based on the industry indices.

Specific protections where supply chain sources are customer specified such as casting and IP parts, and general protections against material price changes above a certain threshold level. We've held 10 joint problem solving calls with our OEM customers, to mitigate anticipated supply chain constraints expected over the next 12 to 18 months, and have been encouraged by their willingness to participate in joint problem solving.

In summary, our markets are improving and our pivot from restructuring to growth is underway. We expect this trend to continue as commercial production rates increase into next year. Triumph grew margins in the quarter in our core systems to support business and retired several non-recurring cash uses allowing us to maintain our financial guidance for fiscal 2022 with improving cash outlook quarter-over-quarter and year-over-year.

We remain focused on our goal of doubling our profitability over our planning horizon while deleveraging the company with the combined lift of cost reductions, volume increases, more favorable pricing, and new products and services. We will continue to invest sustainably in the development of our people as part of our employee new deal, our operations, and our new products to enhance shareholder value year-over-year.

With that, Jim will now take us through the results for the quarter in more detail. Jim?

Jim McCabe -- Senior Vice President and Chief Financial Officer

Thanks, Dan, and good morning, everyone.

Our core business continued on its path to value by growing backlog, expanding margins, investing sustainably, retiring risks and realizing the benefits of our operating system. Our performance through the first half, coupled with the diversification of our businesses, enabled us to maintain our guidance and we expect to generate positive free cash flow over the balance of the year.

We continue to execute on our plans to prepare the few remaining noncore businesses and product lines to decrease debt, maintain liquidity, and focus on our profitable core businesses. I will discuss our consolidated and business unit performance on an adjusted basis. So please see our press release and supplemental slides for the explanation of our adjustments.

On Slide 8, you'll find our consolidated results for the quarter. We continue to improve profitability on an adjusted basis quarter-over-quarter through the enhanced quality of our backlog and net favorable reserve adjustments realized through our focus on efficiencies and retirement of certain lost contract liabilities. MRO services, continues to lead the recovery and mostly offset the short-term headwinds associated with the 787 production pause.

As a result, sales were down 2% organically while the impacts of our recent divestitures and sunsetting programs and structures led to lower sales compared to the prior year. Q2 adjusted operating income was $28 million and adjusted operating margin was 8%, up 339 basis points for the prior year.

With respect to the segment results, on Slide 9, net sales in Systems & Support include a 20% increase in third-party MRO sales and improving commercial narrow-body build rates, offset by headwind from the production pause on 787 and reduced spares orders. The segment sales by end market were consistent as a percentage of sales this quarter compared to the prior year quarter with military representing just over 50% of sales, reinforcing trans-program portfolio diversity.

Operating margin for Systems & Support was 15%, a 367 basis point improvement from the prior year and benefited from increasing MRO demand and net favorable reserve adjustments. Subsequent to quarter end, on October 1, we completed the sale of our Staverton in U.K. facility and licensing of certain legacy non-core product lines. Annual sales from this business were approximately $30 million and earned below segment level average margins.

This divestiture did not have an impact on our financial guidance for the year. Summarized on Slide 10, second quarter net sales for the Aerospace Structures segment after adjusting for divestitures and the sunsetting 747 and G280 programs decreased 2% due primarily to the production pause on 787. The continuing structures business is stable and improving as evidenced by the 7% adjusted operating margin compared to 4% in the prior year.

The recent contract win and extension with Boeing in our Interiors business secures future demand, expands capabilities and provides for continued operational efficiencies as the team continues to recover from the pandemic. Our large structures facility in Stuart, Florida remains a profitable business, and were are in active discussions with several strategic parties about its future.

Turning to Slide 11 in the second quarter, we retired $11 million of discrete cash obligations related to settlements and the wind-down of 747 production. Excluding these sunsetting uses of cash, we used $60 million of cash in the second quarter on modest working capital growth in support of anticipated production rate increases primarily on commercial narrowbody platforms. We remain focused on aggressively managing our working capital, with several initiatives across the enterprise targeted to improve our inventory turns.

Capital expenditures will accelerate over the second half as we anticipate investment in our core systems and support segment in support of rising OEM and MRO demand and sustainable supporting infrastructure improvement. On Slide 12, is a summary of our net debt and liquidity, our net debt-to-EBITDAP leverage ratio improved by 10% year-to-date. At the end of the quarter, our net debt was approximately $1.4 billion and our combined cash availability was about $220 million.

In connection with the sale of our Staverton facility, in October, we paid down approximately $24 million of our first lien notes from the proceeds. Our next step maturity is not until 2024, as we continue executing our deleveraging actions to strengthen our cash flow and improve our credit. Slide 13 is a summary of our fiscal 2022 guidance. Based on anticipated aircraft production rates and excluding the impacts of potential divestitures, for FY '22, we continue to expect revenue of $1.5 billion to $1.6 billion.

We now expect adjusted EPS of $0.68 to $0.88, a 27% increase from our prior guidance of $0.41 to $0.61, driven by program risk retirement. Cash taxes net of refunds received are expected to be approximately $5 million for the year, $1 million higher than prior guidance, while we continue to expect interest expense to be approximately $140 million, including approximately $137 million of cash interest.

After approximately $42 million of free cash use in the quarter, we expect to generate free cash flow over the balance of the year with approximately breakeven free cash flow in Q3 and solidly positive free cash flow in Q4. For the full year, we continue to expect the use of $110 million to $125 million of cash from operations, with approximate $25 million in capital expenditures resulting in free cash use of $135 million to $150 million.

We continue to achieve our goals and have made significant progress in improving the predictability of our profitability and cash flow. Margins improved in Q2, and we expect to be cash-positive over the balance of the year. Our cost reductions, operational efficiencies, improved pricing, and increases in volume will all contribute to improving margins moving forward. The measures we are taking are making us a stronger and more competitive and sustainable company moving forward.

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

Daniel J. Crowley -- Chairman, President and Chief Executive Officer

Thanks, Jim.

I'm pleased with our second quarter and first half results, and we're looking forward to delivering a strong second half of the year. Increases in our MRO services and higher OEM narrow-body production rates give us confidence that the worst of the pandemic is behind us. We've pivoted to grow through new wins and strategic partnerships that should benefit Triumph and its stakeholders going forward.

Consistent with our full-year guidance, we'll build momentum quarter-over-quarter by continuing the track record of growth and margin expansion in our core business and drive to positive free cash flow over the balance of the year. Triumph is becoming a leaner, more profitable, and cash-positive company.

We continue to make strides toward our future state configuration. We're unlocking the hidden value in our business, improving our win rate, and delivering benefits for all stakeholders in a responsible and sustainable way.

Kevin, we're happy now to take any questions.

Questions and Answers:

Operator

At this time, the officers of the company will like to open the forum to any questions that you may have. We ask that you limit yourself to one question and one follow-up to give everyone the opportunity to participate. [Operator Instructions] Our first question comes from Myles Walton with UBS.

Myles Walton -- UBS -- Analyst

Hey, good morning. I was wondering if I could pick up where you left off on the EPS guidance. And I think you mentioned higher risk retirements just to get to that level of EPS for the full year. Are you thinking this is idiosyncratic margin uplift from risk retirements you can see? And/or what is the other income that you're currently looking for that's looking like it might be a little bit of a help to you for the year as well?

Jim McCabe -- Senior Vice President and Chief Financial Officer

Yes, sure, Myles hi, this is Jim. Risk retirement, we have a lot of programs that are long running. And they come up with estimates for cost to go. And as we improve the estimates through actions, through better sourcing, through efficiency, we're able to reduce the cost that are estimated for the rest of the year, and that's what's going on. That combined with the changes in the market, where the demand on programs are lower margin goes down, higher margin demand goes up. That all adds to the mix in our margin improvement.

Myles Walton -- UBS -- Analyst

Okay just a lot. Though, Jim, maybe $0.70 implied -- at the high end, $0.70 implied to the back half versus the $0.19 in the first half. Is there anything else? Is the other income line running above that $45 million to $50 million level you gave in August? Is there any other color you'd want to give? This just seems to imply a pretty, pretty healthy step-up in margins?

Jim McCabe -- Senior Vice President and Chief Financial Officer

So, it's really primarily the larger program is risk retirement. So, whether it'd be 47 or some of the other large platforms where we have cost, the rest of it will be much higher, we'll be able to close them out at a better rate. I think if you look in the Q.

In the MD&A you're going to see a lot of the description there. There's a number programs. The majority of them are positive adjustments, there are some negatives, but overall, its net risk retirement, is really the driver.

Myles Walton -- UBS -- Analyst

Okay all right. I'll leave it at one. Thanks.

Operator

Our next question comes from Sheila Kahyaoglu with Jefferies

Sheila Kahyaoglu -- Jefferies -- Analyst

Hey, good morning, guys. Thank you for the time. Maybe, if we could talk about Stuart, Jim you started talking about that a little bit that you guys are still in the active process, kind of, where do we go from here? What's the timing lag and then, what do we think about next steps from the company once it's divested? And what the structures business looks like?

Daniel J. Crowley -- Chairman, President and Chief Executive Officer

Sure, I mean as I mentioned, we have -- we're in discussions with several strategic parties on Stuart. The important thing about Stuart is not that one potential transaction. It's really the overall dream [Phonetic] we've been on to transform the company. And what's left in structures is the interiors business, a little bit of 747. And then Stuart, which is primarily 767, but there are some G650. There are some 777 in there as well.

Structures, has become a smaller part of the business. So if you look back over the first half of last year, we were 50% structures, sales and 50% systems. This year, for the first half we're two-thirds systems and in fact, more than two-thirds of the profitability the company comes from systems now. So structures, has become a smaller part of the business. Stuart a profitable and valuable business and we're going to continue to run it until its future is determined.

Sheila Kahyaoglu -- Jefferies -- Analyst

And just to follow-up on that, what-for the second half, what do we think about profitability for the structures business? It seems to imply maybe high-single double- digit margin. Is that correct? Is that how we should think about it?

Daniel J. Crowley -- Chairman, President and Chief Executive Officer

Yes, the margins are a little lumpy there because they are longer term contracts that have estimates involved in them. But I think we've been looking at kind of lower single-digit margins in that segment has been the baseline.

Sheila Kahyaoglu -- Jefferies -- Analyst

Okay. Thank you.

Operator

Our next question comes from Peter Arment with Baird.

Gruden -- Baird -- Analyst

Hey, good morning. Actually you have Gruden [Phonetic] on the line for Peter today. Maybe if I could, just looking at free cash flow here kind of in the quarter and through the balance of the year, separating out some of the noise you had, $11 million, call it nonrecurring uses this quarter, which is -- looks like it's going to step up in the back half on advanced payments return at $21 million a quarter, you still have $31 million to go on 747 closeouts. And you mentioned the higher capex too. So I guess the question is just what is driving the material improvement in the back half year and call it the core free cash flow to get to positive free cash flow on a reported basis overall, even with the significantly higher onetime usages than we just saw in the second quarter?

Jim McCabe -- Senior Vice President and Chief Financial Officer

Yes, thanks. There's a number of drivers for the free cash flow, and thanks for highlighting the nonrecurring ones because it's important to back those out if you really want to understand what's going on in the core. Sales are going to be higher in the second half of the year. We gave guidance in the $1.5 billion to $1.6 billion range. I think the first half sales are only about 47% of that. And fourth quarter is always a very strong quarter seasonally as well. So volume increases are a key part of the driver.

Our working capital initiatives are paying off, too. Inventory is stable and declining. We've been burning off excess inventory that had grown during the pandemic, and we've gotten more efficient as well as we've been able to take our excess resources and put them to work in efficient programs. Cost out as well, and that's all part of the efficiency programs. Price ups because we've had contracts that have been up for renewal. We've been able to reestablish pricing to create fair margins. And less restructuring, we were much higher restructuring last year, and the benefits of those restructuring is flowing through.

And our portfolio changes are another element of it. We've eliminated loss programs, either through fixing them with new contracts or exiting them. And we've been able to grow the more profitable programs. So it's no one thing, it's a concerted effort and sustainable. So we're pleased with the progress we're making on cash.

As I mentioned, in the first half, we used $193 million of cash. We certainly be around cash breakeven roughly in the third quarter. And that would imply in the fourth quarter to hit our guidance range, we'd be about $43 million cash used to maybe 58 -- I'm sorry, $43 million cash generation to $58 million cash generation, which I referred to as solidly positive cash flow. So cash is very important. We're focused on it, and we've got a lot of good drivers as tailwinds.

Gruden -- Baird -- Analyst

Okay. Thanks. And then just a follow-up on that, since you mentioned the price increases. Can you just give us an update on where we stand on the LTA negotiations? I was understanding we shouldn't really be expecting those to flow through until we get closer to exiting the year? Just maybe any color on sizing that in fourth quarter and into 2020?

Jim McCabe -- Senior Vice President and Chief Financial Officer

Yes. There's a number of contracts that you saw recently announced. Some of those include price adjustments. We did mention previously that there are some contracts we did earlier in the year that are going to kick in price increases in the fourth fiscal quarter for us, which starts in January. So that's the beginning of some important and meaningful price increases. And that's part of the improvement in profitability and cash moving forward. But there's no one big contract. And again, it's diversification of those contracts enables us to address cost and pricing on an ongoing basis. Contracts can range from five to seven years. So we have opportunities all along the way to continue to improve profitability.

Daniel J. Crowley -- Chairman, President and Chief Executive Officer

I'll just add, Jim, that we're pretty well positioned between the OEMs and the suppliers. The suppliers tend to supply commodity items that we can compete, get competition on. And we have more of the IP that gives us pricing power with our OEMs. But at the same time, we're seeing these volume increases, and that's also helping us on margin expansion because we took a lot of cost out during the pandemic. We don't need to add that back as the volumes return.

Gruden -- Baird -- Analyst

Appreciate it. I'll hop back in queue.

Operator

Our next question comes from Seth Seifman with JPMorgan.

Seth Seifman -- JPMorgan -- Analyst

Jim, I just wanted to follow-up some of the questions earlier about the profitability, especially in structures. And so if we look at the profitability in the quarter, and the team adjustment that benefited structures in the quarter, when we think about the core structures business that will remain post Stuart, is that profitable right now?

Jim McCabe -- Senior Vice President and Chief Financial Officer

So we don't break out the two pieces in structures. It's not -- structures are profitable. I would say the rest of the business is breakeven range at the moment. But as MAX in particular returns, we're going to see rapid acceleration in profitability and cash flow there. As the overall company is not impacted materially by MAX, but interiors business and one of our other shops, Valencia, California, is more impacted. So that's where it stands in the structures.

Seth Seifman -- JPMorgan -- Analyst

Right. Okay. Okay. And then when you spoke earlier about where that margin was going in the second half, it sounded like some of the reserve releases that you expect will be on some of those bigger sunsetting structures programs, which I would think that that would bring the margin up in structures in the second half? Is that fair?

Jim McCabe -- Senior Vice President and Chief Financial Officer

We're not really forecasting any reserve releases. I think what we've seen is improvement in reduction in reserves in the first half of the year. It's possible we could continue to de-risk them. But the moment our estimates for costs moving forward are what they are for second quarter. So we don't forecast that they're going to go down further.

Daniel J. Crowley -- Chairman, President and Chief Executive Officer

What's encouraging about the MAX is the rates are already up above 20, and they're headed to 30 to 40 and to 50 over the next three years. And so interiors, which is part of Structures, was a profitable business pre-pandemic. They've been hit pretty hard. They were a drag on earnings through the pandemic. And now they're starting to come back in volume. And with this long-term agreement that Jim mentioned in our remarks, that's only going to give us more certainty as to margin recovery in structures and interiors, in particular.

Seth Seifman -- JPMorgan -- Analyst

Okay. And then, Dan, just as we think bigger picture about the industry, you mentioned meeting with suppliers and talking about mitigating some of the pressures that may be ahead over the next several quarters. Can you talk a little bit about what are the areas that are the most challenging right now in the supply chain, thinking about it more just from an overall industry perspective?

Daniel J. Crowley -- Chairman, President and Chief Executive Officer

Yes. So we have some of the same constraints that existed during the ramp-up in 2018, 2019 today that we have then, raw materials, castings, forgings, some specialty items like bearings. And then you add to that all of the commodities that are in short supply because of the overall pandemic, chemicals, liquid nitrogen, resins. So in some ways, we've got this perfect storm of rising demand in freight, military and commercial against the backdrop of short supply and a cash trap supply chain who hasn't had the dry powder to invest in capacity or expand.

So by meeting with our suppliers and our customers outside of lead time, what we're doing is we're defining what has to happen now so that in 12 to 18 months, when the rate really hits us, we can be ready. The first part is communicating the rates with confidence because if people derate the production rates, I don't believe them. They won't hire. They won't add on capacity. Number two is shore up those areas of short supply that are known capacity constraints. And that may be dual sourcing, maybe developing new sources in low-cost countries, but we know what those likely constraints are going to be. And number three is put better measurement systems in place to know which suppliers are at risk and where is the inventory, the digital threat from the lowest tier supplier all the way up to the OEM. All those things together are going to help us mitigate. There's still be some shortages in stock-outs, but our risks are to go down because we're starting early.

Seth Seifman -- JPMorgan -- Analyst

Thanks. That's very helpful. Thank you.

Operator

Our next question comes from David Strauss with Barclays.

David Strauss -- Barclays -- Analyst

Thanks. Good morning. Would you expect Systems & Support to grow year-over-year in the second half?

Daniel J. Crowley -- Chairman, President and Chief Executive Officer

Yes. We have a backloaded revenue plan for our Q3, Q4 and then beyond that fiscal year '23 to '26 because of the OEM rates, strong military budgets, we're looking at high single-digit growth for systems business over our planning forecast and some of the operating companies will be double-digit growth rates. So it's a much better place to be than March of 2020 when we're staring into an abyss of unknown demand. And the numbers I rattled off related to Commercial Aviation just reinforced that. I've been one of the more bullish CEOs about the timing of an international business travel recovery. A lot of folks said, "Hey, it's going to be '24, '25." I see it sooner. And I think what the Board is reopening, we'll have data to support that.

David Strauss -- Barclays -- Analyst

Okay. And then, Dan, I guess, overall, the outlook on defense, we heard from a number of the primes here recently about flat, maybe even down next year for their defense businesses. Obviously, you have -- I think you mentioned Systems & Support is about 50% defense. How do you feel about your defense exposure and the ability to grow as we look out into next year?

Daniel J. Crowley -- Chairman, President and Chief Executive Officer

The key is what platforms are you on. So I've described the top line defense budgets, which are growing. But you want to be on those platforms that are being protected in the budget and are tied to critical mission gaps like tankers, MQ-25. There's a new tanker, as you know, that Lockheed Martin and others are competing for. And then just building out the fighter, Cadre, of F-35. Now there's new versions of F-15 that are being introduced. And there's money going into this digital century, a series of fighters. So -- and then the Army's modernization of future vertical lift. We feel very good about our positioning on that. There's two separate programs there. There's one called for the future attack reconnaissance aircraft and then one called Flora, future long-range attack aircraft. And we're supporting Bell and Sikorsky on FARA, and then the Bell versus Sikorsky Boeing team on the FARA contract. And we have content -- different content on each program, but that -- those programs appear to be protected in the defense budget. So depending on the OEM and the prime, you talk to, they're going to have different exposure. And we feel confident that we're going to see the continued support for our platform. So I'm not concerned about it.

David Strauss -- Barclays -- Analyst

All right. Thanks very much.

Daniel J. Crowley -- Chairman, President and Chief Executive Officer

Yes.

Operator

Next question comes from Ron Epstein with Bank of America.

Ron Epstein -- Bank of America -- Analyst

Yes. Good morning, guys. Maybe just following up on the supply chain question. What are you seeing on labor, right, in your own businesses and when you look down into your suppliers?

Daniel J. Crowley -- Chairman, President and Chief Executive Officer

So starting with Triumph, we furloughed a large percentage of our workforce during the pandemic. And the take rate for rehires is about 50%. So a lot of folks that went off to other industries, let's say, Amazon Logistics, they didn't come back. That's starting to improve now a little bit as some of the U.S. subsidies ended in September. We're starting to see more folks come back. In fact, at our Grand Prairie engine accessories plant, our headcount now is higher than it was pre-pandemic, and they suffered a big hit midway through the downturn. But labor is a topic that's getting lots of discussion. At AIA, they formed a Civil Aviation Leadership Council that was key to sponsoring the Jobs Protection Act for aerospace workers. Lots of things happened for the airlines early on, nothing was happening for contractors like Triumph and our peers.

So the money that's now flowing out to preserve jobs is helpful. But we're thinking of new channels of where to get folks, the tech schools, even down to the high schools pipelining. And we're putting in new engagement programs around lean so that we can get more output with fewer employees, and we're investing in capital equipment to get higher machine productivity. So it's not going to be one lever that offsets the labor capacity constraint.

One thing that's true about the defense industry, aerospace as well as we've gone through such boom and bust cycles through the decades that we know how to regrow our workforce. It's a proven capability. New people come in, and there's certainly a lot more automation than we had back in the '80s when I started. So although it's going to be a constraint, it's something we're working on. And I appreciate the government support we're seeing on this front.

Ron Epstein -- Bank of America -- Analyst

Got it. Got it. Got it. And then changing gears a little bit. What are you seeing in space in the space business? You haven't talked a lot about that. I think you guys recognized it as a growth area. What potential do you see there for Triumph?

Daniel J. Crowley -- Chairman, President and Chief Executive Officer

Yes. I spent a big shock in my early career in space on both launch vehicles and satellites. And so I know it well. And when we came into -- when I came to Triumph, we even renamed our structures business to be aerospace structures rather than the traditional aircraft focus. For Triumph, we see the opportunities in actuation and power. We're investing in electric actuation to replace hydraulics. Hydraulics is not really part of the space picture. On one hand, reusable launch vehicles, it reduces the demand for consumable products. But on the other hand, the volume of constellations that are going up, whether it's Elon Musk or SpaceX or Bezos venture, the volumes are going up.

So we're going to find niches where we can support -- where precision high-reliability products are needed. I'm a little bit more excited about industrial applications than space. Triumph does nuclear actuation. It's something that most people are not aware of, and we're trying to grow that business, especially in mechanical controls that help monitor the status of the reactors. As money goes into infrastructure, we're going to be working hard to grow our mechanical controls business, which is one of our most profitable. So you'll probably see more press releases on that, Ron, than you'll see on space.

Ron Epstein -- Bank of America -- Analyst

Great. Thank you very much.

Daniel J. Crowley -- Chairman, President and Chief Executive Officer

You bet.

Operator

Our next question comes from Cai von Rumohr with Cowen. Cai, your line is open. You can ask your question.

If your line is muted, could you please unmute the line?

Do you want me to just move on to the next question?

Daniel J. Crowley -- Chairman, President and Chief Executive Officer

Yes, please.

Operator

Our next question comes from Michael Ciarmoli with Truist.

Michael Ciarmoli -- Truist -- Analyst

Hey. Good morning, guys. Thanks for taking the questions. Maybe just to go back, I think, to Myles and Seth and get some clarity on second half margins with structures. I guess you had $7.6 million, give or take, a positive favorable adjustments in the quarter. And as we look to second half, it doesn't sound like there's any more risk retirements or reserve releases. I mean are we just looking at a kind of sustained core improved margin level for second half on the programs within structures?

Jim McCabe -- Senior Vice President and Chief Financial Officer

Yes. At any point in time, we're not forecasting to improve beyond the estimates for costs we have. But as soon as we take actions to become more it's likely not to be realized, then we're going to show improvement. So the opportunity certainly exists. And I can tell you we're driving toward continue to reduce the cost to close out cost in particular on the programs that are ending like four-seven [Phonetic]. So there's the opportunity there, but that's not in our forecast right now. But still, the business overall is solidly profitable in the single digits with our current estimates.

Michael Ciarmoli -- Truist -- Analyst

Okay. Got it. And then, Jim, just on the cash flow, obviously, ex all the onetime items, looking at this kind of second half rate, even the exit rate in the fourth quarter. I mean I don't want to take that quarterly and of kind of, I guess, $40 million to $50 million, but I don't want to run rate that, but I mean looking into fiscal '23, I mean it seems like we shouldn't have any more onetime items. It seems like you guys should be solidly cash flow positive, whether that's $100 million, $200 million. I mean is there anything else beyond these final closeout costs, onetime allowance paybacks? Anything else we should be thinking about as we move into '23 for cash?

Jim McCabe -- Senior Vice President and Chief Financial Officer

Look, we're pleased with the progress we're making this year. We're really kind of focused on the second half of this year and the closeout that's going on. We're in the planning phases for next year. So depending on what actions taken, decisions we make in the strategic planning and our budgeting is going to tell how we're going to do for next year's cash flow. So I'm not ready to give any guidance for next year's cash flow. But certainly, exiting this year -- and there's some seasonality there, too. We're going to see a strong fourth quarter and, as you mentioned, in the range of $50 million. And all those tailwinds that we talked about do continue, whether it's volume increasing, the opportunity to reprice, cost can be contained, less restructuring and a better portfolio, were all going to add to our tailwinds momentum going into next year.

Michael Ciarmoli -- Truist -- Analyst

Okay, great. Thanks, guys.

Operator

Our next question comes from Myles Walton with UBS.

Myles Walton -- UBS -- Analyst

Thanks. Might go at this a little bit of a different way. Dan, on the last call, I think you talked about doubling EBITDA by fiscal '25 off of the base year being this year '22. It sounds like, from Jim's comment, base year EBITDA is going up on the basis of margin performance. Are we still doubling this higher level of EBITDA in '22 into your '25 forecast? Or do you want to put a specific number around that?

Daniel J. Crowley -- Chairman, President and Chief Executive Officer

So I think the key is that we get early returns on this commitment to double margins, and we're seeing that quarter -- year-over-year in our Q2 results. So we're feeling good about it to be out of the gates quickly on margin expansion. And this is before the volume effect really kicks in. Even with 787 rate cuts down, we were able to expand margins in our Systems & Support. And we're meeting with our teams next week to go through their strategies and growth plans for our fiscal '23 to '26, which is our planning horizon. And we've done two passes of this, and the numbers are very encouraging. We don't want to provide multiyear guidance yet, but we don't need a lot of new wins. There's not a big wedge of unidentified work to support the volume increases that we seek. And then combined with the cost reductions and the efforts to retire cash using unprofitable businesses, we're going to have a lot of tailwinds going into there.

Now can we get there in '25? Can we get to double in '26? That's still in the uncertainty band for the forecasting we're doing. But when I come back at our next earnings call, we'll lock down our fiscal '23 plan to be able to talk more about that. So I'd say, look at what we're doing in the short term, which is encouraging. And then look at the macro trends on both exit of lower quality, lower profitability programs, volume increases, and they're all enablers to the margin growth that I described. Jim, do you want to add anything?

Jim McCabe -- Senior Vice President and Chief Financial Officer

I think our goal remains to double the EBITDAP dollars is what we're targeting, but it's a goal in our planning process. So as we do strategic planning, we're going to look at all the opportunities to do that and the risk associated with those. As Dan said, that process is ongoing. But we look forward to telling you more about it. I think the trend is clear. It's just magnitude we're working on now.

Myles Walton -- UBS -- Analyst

Okay. And maybe just one clarification. I think in the slides and in the remarks, you talked about the 787 as being the shortfall for revenue. It did look like military was down, and I don't know if that's F-35 seen in other companies during this earnings season or other disruption on the defense side, but did defense revenues show up as you expected in the second quarter?

Daniel J. Crowley -- Chairman, President and Chief Executive Officer

It was slightly down in second quarter, mostly due to one program. We build some complex actuators for the V-22, and that program was held up in the quarter due to some supply chain delays. And those products are now starting to shift early in Q3, and we expect to have a strong second half of the year. So there's no larger platform concern related to military growth. It was a short-term timing on deliveries. We know what drove it, and we're fixing it.

Myles Walton -- UBS -- Analyst

Okay. Thank you.

Operator

Since there are no further questions at this time, this concludes Triumph Group's Second 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 the 23rd at 11:59 p.m. Eastern Standard Time. You can access the replay by dialing 1 (800) 585-8367 and entering access code 7629515. Again, to access the replay, you can dial 1 (800)585-8367 and entering the access code 7629515.

Thank you all for participating, and have a nice day. All parties may disconnect now.

Duration: 53 minutes

Call participants:

Daniel J. Crowley -- Chairman, President and Chief Executive Officer

Jim McCabe -- Senior Vice President and Chief Financial Officer

Myles Walton -- UBS -- Analyst

Sheila Kahyaoglu -- Jefferies -- Analyst

Gruden -- Baird -- Analyst

Seth Seifman -- JPMorgan -- Analyst

David Strauss -- Barclays -- Analyst

Ron Epstein -- Bank of America -- Analyst

Michael Ciarmoli -- Truist -- Analyst

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