Spirit Aerosystems Holdings, Inc.

Good morning, and welcome, ladies and gentlemen, to the Spirit Aerosystems Holdings, Inc., second quarter 2021 earnings conference call. My name is Grant, and I'll be your coordinator today. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I'd now like to turn the presentation over to Aaron Hunt, Director of Investor Relations. Please proceed.

Thank you, Grant, and good morning, everyone. Welcome to SPIRIT's second quarter 2021 earnings call. I'm Aaron Hunt, Director of Investor Relations, and with me today are SPIRIT's President and Chief Executive Officer, Tom Gentile, SPIRIT's Senior Vice President and Chief Financial Officer, Mark Suchinski, and SPIRIT's Executive Vice President and Chief Operating Officer, Sam Marnick. After opening comments by Tom, Sam, and Mark regarding our performance and outlook, we will take your questions. Before we begin, I need to remind you that any projections or goals we may include in our discussion today are likely to involve risks, which are detailed in our earnings release, in our SEC filings, and in the forward-looking statement at the end of this web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of non-GAAP measures we use when discussing our results. And as a reminder, you can follow today's broadcast and slide presentation on our website at investor.spiritarrow.com. With that, I would like to turn the call over to our Chief Executive Officer, Tom Gentile.

Thank you, Aaron, and good morning, everyone. Welcome to SPIRIT's second quarter earnings call. We are pleased to see signs of recovery in global air traffic. The U.S. air travel recovery has been strong and has come back faster than some expected. TSA traveler throughput has exceeded 2 million passengers on multiple days during the past two months, and some days in July where passenger screenings exceeded the 2019 levels. A recent International Air Transport Association report indicates domestic passenger market show improvement. but with demand still down 22% versus June 2019 levels. The situation remains dynamic. We are monitoring the most recent reports of a spike of COVID-19 cases and what impact this may have on air traffic recovery. However, the upward momentum of domestic air traffic over the past few months is an encouraging trend for our industry. We are pleased to see the rebound of demand for the MAX and the news of large orders from United, Southwest, Alaska Air, and Ryanair. Ryanair took delivery of its first 737 MAX 8200 and had positive feedback. With 85% of Spirit's backlog associated with narrow-body aircraft, we believe we are well-positioned to benefit from this domestic air traffic demand and narrow-body recovery. In the first half of this year, we delivered 64 737 shipsets compared to 37 in the first half of last year, a 73% increase. We are also on track to deliver about 160 shipsets this year, a 125% increase over the 71 we delivered in 2020. As we have discussed before, we are trailing Boeing in terms of 737 production rate to burn off the inventory of stored shipsets in Wichita and Tulsa. This quarter, for example, we delivered 35 units but shipped 42 to Boeing. We currently have about 125 units in storage, all of which Boeing owns. We expect stored units will decrease to about 100 ship sets by the end of the year. Our plan is that we will reach 20 stored units by the end of next year, which will remain as a permanent buffer to cushion the production system. Turning to the 787 program. As a result of our ongoing engagement with Boeing, we identified an additional fit and finish issue in the forward section of the fuselage. This issue is related to a part that Spirit receives from one of our Tier 2 suppliers, and we are working with Boeing and the supplier on a resolution. We continue to coordinate with Boeing to ensure that we are performing all necessary rework. Primarily driven by this issue, we have recognized a $46 million forward loss on the 787 program. Despite this forward loss, we are maintaining our free cash flow target of negative $200 to $300 million, as indicated on our last earnings call. This amount is net of the $300 million cash tax benefit, which we expect to receive in the second half of this year. Next, I would like to highlight the fact that we published our first sustainability report in June, outlining SPIRIT's environmental, social, and governance strategy. The report also includes a few of our notable 2020 achievements. For example, by the end of this year, we intend to be 100% wind-powered at our Wichita facilities. Now our Chief Operating Officer, Sam Marnick, will take you through updates on our acquisition integrations. Sam?

Thank you, Tom. The integration workstreams for our recent acquisitions are progressing well. We recently acquired the assets of Applied Aerodynamics, and we've already completed approximately 60% of the 323 identified integration tasks. The integration of our other acquisition from Bombardier is also going well. We have completed about 90% of the tasks required to integrate the Belfast, Morocco, and Dallas sites. The remaining tasks are largely associated with the Information Technology Transition Services Agreement, and we expect to complete it before the end of the year. The estimated synergies we're expecting from the deal are tracking to plan. We have seen good progress on A220 wind costs, supply chain improvements, and infrastructure optimization. Airbus continues to have confidence in this aircraft, and we expect production rates to continue to improve over time. Turning to the Belfast pension plan, we have ended our formal consultation with employees and the unions. Subject to the completion of the process, we will close the plan to future benefit accrual and provide a defined contribution benefit plan before the end of the year. The Bombardier asset acquisition significantly increased our business jet work statements, We also secured the award for the engine nacelle on the new Falcon 10X. This new growth has established Spirit as a leading business jet aerostructure supplier, a market segment that is recovering rapidly following the pandemic. Used business aircraft inventories are down around 40% year over year, highlighting a strong demand. Additionally, U.S. business jet flight activity is about 6% higher than pre-pandemic levels, another good indicator of a rebound in this market segment. We believe our capabilities and business ship programs position as well to generate $500 million of revenue at accretive margins by 2023. Another market segment we are watching closely is urban air mobility, also referred to as electric vertical and takeoff aircraft, or eVTOL. We believe our expertise in composite air structure design and manufacturing bring unique capabilities in this future mode of transport. We've been exploring opportunities with a number of companies in this exciting new area and have signed agreements that are already generating revenue. Now I'll turn it back over to Tom.

Thanks, Sam. These two acquisitions have helped us grow our aftermarket and business jet businesses. We are also accelerating our revenue diversification efforts in defense, which we expect will grow by roughly 20% in 2021. Now I'll turn the call over to Mark to take you through our detailed financial results. Mark?

Thank you, Tom, and good morning, everyone. I hope everybody's doing well. We continue to see 2021 as a bridge year for our spirit and the commercial aviation industry. Domestic air travel in the United States, as well as many other regions of the world, are starting to recover, which is encouraging, especially for narrow-body aircraft production rates. We are cautiously monitoring the COVID variant and its impact on this recovery, particularly with international travel. We expect international air travel will continue to recover at a slower pace, and therefore wide-body programs will remain a headwind for the next few years. As we work through the second half of the year, we are starting to see the benefits of increasing narrow-body production rates. Now, let's move to our second quarter 2021 results. Please turn to slide three. Revenue for the quarter was $1 billion, up 55%, from the same quarter of last year and approximately 11% above the first quarter of 2021. The revenue increase was primarily due to higher production on the 737 and A320 programs, as well as increased revenue from the recently acquired A220 wing and Bombardier business jet programs. These increases were partially offset by the lower wide-body production rates resulting from the continued impacts of the COVID-19 pandemic on international air traffic. Turning to deliveries, overall deliveries increased to 243 shipsets compared to 159 shipsets in the same quarter of 2020. The second quarter 737 deliveries have increased to 35 compared to 19 shipsets delivered in the second quarter of last year. We still expect to deliver around 160 shipsets during the year. Additionally, second quarter A320 deliveries increased to 96 compared to 69 shipsets delivered in the same period of last year. Let's now turn to earnings per share on slide four. We reported earnings per share of negative $1.30 compared to negative $2.46 per share in the same period of 2020. Adjusted EPS was negative $0.31 compared to EPS of $2.28 in the second quarter of 2020. Adjusted EPS excludes acquisition costs, restructuring costs, non-cash voluntary retirement plan charges, and deferred tax asset valuation allowance. Looking at the operating margin, we saw improvement in the second quarter to negative 10% compared to negative 57% in the second quarter of 2020. The cost reduction actions we have taken over the last year, along with increasing production rates, have contributed to the improved results with lower costs and expenses, including excess capacity, restructuring, and abnormal COVID-19 costs. We also recognized lower forward loss charges compared to the same period last year. In the second quarter, we recognized forward loss charges of $52 million, primarily driven by engineering analysis and rework, on the 787 program compared to forward loss charges of $194 million in the same period of 2020. Additionally, the increase in other income is primarily related to Belfast Pension Plan and the absence of voluntary retirement expenses recognized in the second quarter of 2020. I do want to mention that there was a revaluation of deferred tax assets during the second quarter of 2021. due to a future increase of the United Kingdom's corporate tax rate. This resulted in an income tax benefit of approximately $55 million. This benefit is included in both GAAP and adjusted EPS. The reevaluation of deferred tax assets along with the adjustments related to tax law changes and other state tax impacts resulted in incremental adjustments to the valuation allowance. As a reminder, the valuation allowance is a non-cash item. Earlier this week, Spirit received the latest 787 program demand from Boeing. Based on our preliminary assessment, we expect to incur an incremental forward loss of approximately $40 to $60 million in the third quarter of 2021 due to the impact of reduced production volumes and the corresponding amount of fixed overhead absorption applied to lower deliveries. Due to the timing, this is considered a subsequent event and is not reflected in our second quarter financial statements. Now turning to free cash flow on slide five. Free cash flow for the quarter was negative 53 million compared to negative 249 million negative in the same period of 2020. This year-over-year improvement is primarily due to cost reduction actions, increased production volumes, and favorable working capital management. The second quarter cash from operations also reflect an improvement of 142 million as compared to the first quarter of 21. Excluding the cash interest payments of approximately 80 million made during the second quarter, cash from operations was positive 51 million. We expect the second half of this year to improve as single aisle production rates continue to increase. Despite the additional challenge of the 787 program We continue to expect free cash flow for the year to be between negative $200 million and $300 million. Let's now return to our cash and debt balances on slide six. We ended the second quarter with $1.3 billion of cash and $3.6 billion of debt. In February, we paid $300 million floating rate notes early, and we remain on track to repay $1 billion in debt during the next three years. The timing will be in line with air traffic and narrow body production rate recoveries. The cadence of the global recovery from the COVID-19 pandemic could result in fluctuations in our cash flows from period to period. Now let's turn segment performance on slide seven. In the second quarter, use lot segment revenues were $492 million, up 51% compared to the same period of 2020. primarily due to higher production volumes on the 737 and Bombardier Business Jet program, partially offset by lower production volumes on the 787 program. Operating margin for the quarter was negative 7% compared to negative 77% in the same period of the prior year, primarily due to increased 737 production volumes and the resulting decrease in excess capacity costs, as well as less net forward losses in the absence of a loss on disposal charges. The fuselage segment recorded $4 million of favorable cumulative catch-up adjustments and $36 million of net forward losses during the quarter, primarily due to the 787 program. Propulsion revenue in the quarter improved to $242 million, up 43% compared to the same period of 2020, primarily due to higher revenue on the 737 program and aftermarket sales, partially offset by decreased volume on the 777 program. Despite the challenging environment, operating margin for the quarter was positive 12%. This is compared to negative 10% in the same quarter of 2020. Increased 737 production and the resulting decrease in excess capacity costs, as well as less forward loss charges, were the main drivers to the improvement in the segment profitability. The segment recorded $6 million of favorable cumulative catch-up adjustments and $9 million of forward losses. High production volumes on the 737, A220, and A320 programs were the main contributors to the increase in wing revenue to $259 million. Operating margin for the quarter was negative 6% compared to negative 35% in the second quarter of 2020. The increases in segment profitability and operating margin were primarily a result of increased A320 production volume, as well as less forward losses compared to the same period of 2020. The segment recorded 8 million of net forward losses. In closing, we are encouraged by the recovery in domestic air traffic demand. We anticipate improved performance through the second half of the year as narrowbody production rates continue to increase. Increasing narrow body rates should also create positive momentum going into 2022. Additionally, we are pleased to see the progress made so far on our aftermarket business jet and defense diversification efforts. Integrating our acquisitions and expanding our diversification continue to drive long-term growth potential. Cash flows remain a top priority for our team, and we're actively working on the execution of our cost and working capital initiatives. We are also monitoring the remaining regulatory approvals needed for the 737 MAX return to service. And in addition, we are encouraged by the domestic aerospace recovery from the COVID-19 pandemic. With that, I'll turn it back over to Tom for some closing comments.

Thanks, Mark. We continue to see improvement in domestic air traffic, which is translated to improved production rates for our narrowbody aircraft versus 2020. For the year, we expect to deliver 160 737 shipsets, up from just 71 in 2020. This quarter, we also continued work with Boeing to address fit and finish issues on the 787 program and will continue to coordinate with them to complete all necessary rework. The recovery in narrowbody production is supporting better overall performance. We are also encouraged by the continued growth in our aftermarket, business jet, and defense programs. We are maintaining our 2021 free cash flow guidance of negative 200 to 300 million. With that, we'll be happy to take your questions.

We'll now begin the question and answer session. To ask your question, you may press star then one on your touchtone phone. We ask that you limit yourself to one question. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Seth Sizeman with JPMorgan. Please go ahead.

Great. Thanks very much, and good morning, everyone. Question about the 787 and just, you know, the degree to which you feel you have all of the I guess, rework that needs to be done understood and in hand and that your suppliers do as well. And then following up a little bit more on the quantitative side in terms of thinking about, you know, where revenue is going for you guys when the rate came down by two per month in late 2019 in Q3 and then again in Q4, that was driving charges for Spirit of $34, $35 million. Is there anything we can read into the size of the $40 million to $60 million charge coming in Q3 with regard to where your production is going to go starting in the second half here?

Okay. Thanks. So with regard to 787, what I would say is we have been working very hard in conjunction with Boeing to review all aspects of the production process to understand what issues might be there. And echoing what Dave Calhoun said on the Boeing earnings call, the latest issue isn't an example of Boeing being hard on Spirit or the FAA being hard on Spirit. It's a question of Spirit being hard on Spirit. We took a very hard look at all of our production processes, and we did identify an issue with a part in the forward fuselage that comes from one of our suppliers. And as a result of that, we've done some additional work and identified some rework, which we will be completing. And that's what really drove most of the forward loss in this quarter. And so have we gotten everything? We've looked at it very hard. We've scrubbed it very hard. So we're confident that the issues that we know about, we are addressing. And we will continue to look at it and work closely with Boeing. We do have a good handle in terms of the fixes required. We outlined some fixes in the last quarter. Those are underway. In fact, the repairs and the rework are more than half finished on the ones that were previously identified. On the new issue, we do have a repair. The engineering analysis did not show that it was a safety of flight issue. So we don't know that there's going to be anything required on the fleet, although we'll continue to do analysis, and that might require more inspections in the future. But There is rework required on the units that Boeing hasn't shipped, and that's what we are in the process of doing. But we have the repair, we have delivered the first units, and the rework has begun. Now, with regard to the rate outlook, the subsequent event was really a result of getting a new indication of program demand from Boeing and looking out over the next several years to see what impact it could have on our position. As you know, we're in a forward loss. And our accounting block goes all the way up to 1405. So we're taking into account a very long period of time. And I have to say that the situation is extremely dynamic. We have information that we're learning more every day. And the situation is likely to change. And we'll respond accordingly. But we did want to give an indication of a subsequent event because the program demand is changing, as we all know. And over the next three months, as we get more information and we do more analysis, we'll have an update in terms of what the actual impact is.

Great. Thanks very much, Tom.

Thanks.

Our next question will come from Miles Walton with UBS. Please go ahead.

Thanks. Maybe to just follow up on that, you've taken about 100 million forward loss charges between this quarter and next quarter on the 8-7. How much of that is cash you're absorbing in the guidance for this year versus future years? I don't know who wants to take that one.

Hey, good morning, Miles. As you indicated, we took a $29 million forward loss on 787 in the first quarter. We identified some issues that were going to require some rework at our factory and help supporting Boeing. And then Tom just described the situation that occurred here in the second quarter, the additional $49 million. We expect that, you know, as you factor in the impacts of lower production rates, a portion of the costs are cash and non-cash in nature. You know, we don't, I would say the majority of the cash should be expended this year, the cash component of it. I do think that some of that cash consumption and the continued rework will continue into 2022. As Boeing indicated on their call, they expect to deliver about one half of the units that they have stored here in 2021. And so the rework that we have to do, we have to coordinate with Boeing, get access to the And so it's hard for me to be specific because it's a long and involved process where we work with Boeing, we get access to the airplane, we have to have our mechanics do the work, get the parts in there. But I would anticipate the rework costs that we have, knowing that about half of those aircraft will be delivered next year, we'll be incurring that cash impact both in 2021 and 2022. I wouldn't quite say it's 50-50. It's probably more heavily weighted to 21. But there will be some cash headwinds in 2022 as we continue to rework those airplanes to allow Boeing to deliver to their airline customers.

Okay. And, Tom, you mentioned the liquidation of about 80 MAX inventory in 2022. I guess that would imply you producing, I don't know, just under 300 MAXs next year maybe. Is that going to swing materially based on the Boeing production schedule, or is the idea you definitely want to get 80 liquidated and so your production will be kind of the swing item?

It will definitely depend on Boeing's production, and we'll coordinate closely with them. And the current plan in terms of the buffer is based on outlook and scenarios that we've discussed with Boeing, but that could change. For example, Boeing has indicated that China's recertification of the MAX will likely influence their future production schedule. So that'll be one of the factors that we continue to monitor closely. Okay. Thanks again.

Our next question will come from David Strauss with Barclays. Please go ahead. Thanks. Good morning. Good morning.

Good morning, David. I think question for Mark, Mark can, I guess, is the is the guys for 2022 still a return deposit free cash flow? And if so, can you can you help us bridge that, you know, that that difference or that gap between the, you know, called five to 600 million X the tax benefit that you're talking about burning this year? And are you still assuming what exactly are you assuming for for working capital for this year and next? Thanks.

Sure, David. Yeah, I mean, we've communicated, you know, our goal and objectives and based on the information that we have over the last couple of quarters that, you know, on an operational basis, we think that we can get to cash flow positive. I think when you think about what are the tailwinds that will help us in 2022, obviously the number one component will be the increasing demand 737 MAX production rate. And I will tell you that that is the single biggest driver to the cash flow improvement in 2022. And so, you know, we have some baseline assumptions on what the delivery rates are. But as you know here, Boeing is still working with China and have given indications that production rates above 31 are highly dependent on the China certification. The number one priority for us or the number one factor is our assumptions on where the 737 production rates are going to go in 2022. And Boeing does. We do have preliminary schedules, but those can change over time. The second item I would say is we'll continue to have some tailwind benefits on the working capital side. We built up a lot of inventory today. As you can see, this year we're doing a good job of working and destocking some of our inventory. But the amount of inventory days on hand that I expect us to have at the end of the year, as well as what we're turning our inventory, is nowhere close to our historical levels. So we should continue to receive working capital benefits, particularly on the inventory side. You know, there'll be some headwinds on the AR side just as the revenues increase. But I would say that those are the two biggest components. It's the 737 MAX. Obviously, Airbus is talking about significantly higher production rates next year on the A320. That will be a nice contributor for us as well. And less rework on the 787. We should see less cash consumption on that. Those are the major drivers, but we have a bunch of other initiatives that we're working behind the scenes to go drive cash flow improvement. But I would say that the majority of the improvement, as we're going to see between 21 and 22, is tied specifically to narrow body production rate increases and the continued destocking of inventory, which gives us a really good chance to get to operational cash flow in 22.

And Mark, does that include the $120 or so million advance you have to pay back to Boeing on the max in 2022 in terms of thinking about positive free cash flow?

Well, I really view that as a one-time isolated repayment that is tied to an agreement that we had with Boeing back in 2019. Obviously, that's a big headwind that we want to overcome as well. But my primary goal is working with our teams to get to a point where operationally, income-wise, we're generating positive cash flow in 2022. Okay. Thanks very much.

Our next question will come from Doug Horn of Bernstein. Please go ahead. Good morning. Thank you.

Good morning, Doug. Mark mentioned the Airbus rate. They were very firm last week on their plans to ramp to 64 a month on the single aisle by Q2 2023. We have heard skepticism from a number of suppliers on that rate increase. How do you view this? They talked about a linear ramp to that point. I mean, are you set, including your lower tier suppliers, to execute on this? And then what happens if the demand environment should deteriorate and rates don't go on that trend line? How do you respond to that?

So the first answer is yes, we are set. We've been working very closely with our suppliers to meet the demand scenarios that Airbus has shared with us. I give a lot of credit to the Airbus leadership team, including Guillaume. and all of his key lieutenants, they've met with the suppliers and they've taken us through their assumptions and all the actions that they're taking to confirm what the rate increases are. And as they indicated on their call last week, if you look at their backlog and how long it is at different production rates and how long airlines would have to wait for their units, the production rate increases would be justified. So on that basis, they've shared with us their scenarios And we are working to those, and we're working with our sub-tier suppliers to those rates as well. Now, if it changes, then, of course, we'll take the appropriate action. But, you know, the good news is we've been at these levels before. So all the infrastructure is in place, all the capital is in place, all the tooling is in place. And we've had all the workers hired and trained. Now, some of those have been furloughed. but they remain available, and as the rates go up, we will be recalling them. And so we're confident that we're going to be able to execute on those, and if they change, we're confident also that we'll have sufficient lead time that we can take the appropriate actions. But we're ready, and our subcure supplier base is ready as well.

And then just related to that, on the A350, I mean, you had taken rate to – three a month. And our understanding was that Airbus continues to produce at five a month and that you delivered more fuselages than they could run through final assembly when they cut their rates. And they're now planning for a raise to six a month. What do you see as the trajectory for your production rate on the A350?

Well, again, we mirror them pretty closely. The sections that we make for the A350 are the center fuselage section, which they call section 15, and also the fixed leading edge on the wings. And so as their production rates go up, we'll go up. I mean, there's sometimes some inventory adjustments that go on. But on the A350, we're usually pretty closely aligned. I mean, we'll carry a few units in surplus to act as a buffer for the production system. But generally speaking, we're very much aligned to them. And so we don't see ourselves getting far off. It's very close. And our performance and delivery performance this year is quite good. They're pleased with it, and so I don't see a disconnect there. We'll go up with rate as they go up with rate on the A350, and we'll be very closely aligned. Okay, very good. Thank you.

Our next question will come from Robert Spengard with Credit Suisse. Please go ahead.

Hey, good morning. Tom, I just have a few clarification questions. First, did A320 ship set delivery drop from Q1 to Q2? It did.

It did. We had in Q1 130 deliveries and in Q2 96. And Airbus had in Q2 132 units. So, you know, if you look at it, there was a little bit of destocking going on, inventory adjustments post-Brexit. Nothing from our standpoint to be concerned about. Our rate remained the same. It didn't change. It's just they pulled a few fewer units just because they're probably adjusting their inventory levels. So, yes, that was what happened. But as we mentioned, we were up significantly from Q2 in 2020. We only delivered 69 units then. Do you think you're aligned now or does this play out over another quarter or two? No, I think we're much more in alignment now, so we don't expect to see that kind of deviation going forward. I think it was an aberration in this quarter.

Okay, and then just going back to the 787, and I think you said you're still evaluating whether or not the existing fleet needs to be addressed. It sounds like that's a process you're going through with Boeing. I'm still wondering, do these conditions exist? Has this been part of the production process the entire time, or was there a change where this supplier – is doing something differently? Because I would imagine with 1,000 aircraft out there in the fleet, if you have to go there, this is a significantly more expensive problem.

Right. Well, the answer is the production process hadn't changed. It was basically the same right from the beginning. It was just we're taking a harder look at it now and putting it under more scrutiny. The analysis showed that there was not a safety of flight issue in the fleet, and so there's there's no immediate action required. Now, we'll continue to do engineering analysis that could continue to evolve, but right now there is none. And so we don't have any determination in terms of what the fleet disposition will be. But at this point, because it's not a safety of flight issue, we're looking at more inspections. But because there is a nonconformity, new aircraft can't be delivered if there's a known nonconformity. And so that's why there's rework required on the aircraft that are not delivered. And I think as Boeing mentioned, there's about 100 787 units that are not delivered right now. And so that's where we're focusing our rework efforts.

Got it. And then just if you do have to take care of some aircraft that are already delivered, is that the kind of thing that can be done in a heavy check or would they have to have a special service call?

Right. Those would be done in the normal scheduled heavy checks. Okay. Thank you.

Our next question will come from Hunter K. with Wolf Research. Please go ahead.

Good morning. Hi, everybody. Good morning. Thank you. Just a couple from me. You mentioned eVTOL. I was wondering if you could expand on the opportunities there. And you mentioned some revenue. I'm kind of curious where that's coming from, which program. And then the second question is, can you give us a rough breakdown of the 54 BizJet and RJs in the quarter and how you expect that to trend over the next 18 to 24 months? Thank you.

Yeah. Hi, Hunter. This is Sam. I'll take the question about eVTOL and what we're doing there. So we're talking with a number of the players in the market and the kind of work that we're doing with the players right now, and these are yet to be announced agreements and work with those different companies, is generally around a few different areas. But I would say specifically technical consulting services, so engineering services, things like that, but also looking forward at industrialization plans as well. So those are the areas that we're focusing on. Could you repeat your second question, Hunter?

Yeah, thanks, Sam. It was about the 54 Bizjet and RJ shipments in the quarter. I wonder if you could give us any color on the breakdown there and kind of how you expect that.

Well, let me jump on that one. So we don't break down specifically the business jet deliveries just at the request of the OEMs. But really the increase is driven by the fact that we now have the Bombardier assets. And so the Challenger and the Global Express are now in these numbers where they were not before. And actually – In this quarter, there might be one LIR, the final last LIR that snuck in there as well. But other than that, we don't break that down into more detail.

Okay, thank you, Tom and Sam. Thanks.

Our next question will come from Tyvon Brimmer with Talon. Please go ahead.

Yes, thanks so much. So you characterized the 787 rate change as a subsequent event. How much of the 40 to 60 million applies to this year, given that they basically have cut their rate until they get this problem done? And how much of this is in the guide? And do you expect to recover any of the cost if the one supplier had a part that's causing you the heartburn? I mean, are they going to be able to reimburse you for any of that?

Right. So I'll take that one, Kai. First of all, most of the forward loss would be associated with future years, not necessarily this year, because our block goes out to 1405, and at current production rates, that takes us out to 2025. So not much of it is related to this year. just the way the numbers work. But again, it's a dynamic situation. It's going to change. And so we'll learn more over the course of the next quarter, and we'll give more firm indications of what the impact will be. With regard to supplier recoveries, we've taken into account everything with our current forward losses that we have announced. We're focused right now primarily on the operational recovery, and there'll be future commercial requirements. But We have had discussions with the supplier, and they're certainly cooperating. They're working very hard in coordinating with us, and they'll share in the commercial situation as well. But we've taken into account all of that with the current forward laws.

And then, you know, you mentioned kind of, you know, the overhead absorption issue. Given that Boeing is basically cutting back their production near term below five a month, Is that going to have any noticeable impact on this year, or at least how much is it in terms of cash this year?

It's going to create a little bit of a headwind, but as we've indicated, we're holding to the guidance we gave, which is we'll have a cash usage of $200 to $300 million net of the cash tax benefit. So, yeah, it's some headwind, but we're actually doing better in some of our working capital initiatives to help offset it, as well as some of our cost management initiatives. So we're holding to the guidance that we gave earlier.

Thank you.

Our next question will come from George Shapiro with Shapiro Research. Please go ahead.

Yes, Mark. I wanted to ask, if I look at the implied underlying margins in, like, fuselage and wings, sequentially they're actually down despite higher revenues. And I'm just wondering what's driving that. that deterioration. I'm taking out all of the one-time things that you talk about.

Well, we probably need to compare notes here, George, because some of our internal looks at I'm seeing slight sequential improvements from the first quarter to the second quarter. Not as much as I would like to see, but the analysis that I have here indicates that sequential improvement first quarter, the second quarter, in all of the segments, fuselage, propulsion, and wing.

My numbers are, you know, taking out the pre-tax losses, taking out the QM adjustments, taking out the restructuring, abnormal costs, excess capacity. So I'm taking everything out, and I have, like, fuselage going from 8.8 to 8. and wings going from 6.9 to 3.8. I have propulsion going up. Maybe I'll check with Ryan or Aaron and we can compare the notes that way then. Because you're saying you've done the same analysis and you're seeing the margin up slightly?

Exactly. Yeah, we're seeing in fuselage somewhere between 100 and 200 basin points improvements in our margins. and that's what we're expecting. You know, we'll see as the narrow bodies rates pick up here in the third and fourth quarter, continue to focus on our costs and our productivity, and that should continue to allow us sequential improvements in our op margins.

Okay, I'll check afterwards with Ryan, and then one other quick one. It looked like maybe a 20 million dollar benefit from Belfast pension income in the quarter where you had this surprisingly large other income. Is that something that continues here or what's actually driving it?

Good question, George. Based on the current market conditions and the actuarial assumptions, we are seeing some tailwinds on pension income as it relates to i guess what we'll call them bombardier or belfast shorts pension plan uh and so you know that's a non-cash benefit that's rolling through through other income uh it's completely tied to market conditions um you know the the interest rates the uh evaluation of the assets and liabilities and so that's uh that's a bit of a of a tailwind i i think we'll continue to see those benefits in the third and fourth quarter, as long as market conditions hold. You know, with inflation increasing, you know, it's obviously a very dynamic calculation when you try to factor in, you know, where your assets and liabilities are going to go. We are, just from a clarity standpoint, we are in a deficit position on that program. But based on current market conditions, you are seeing some lift in other income. And I expect that to continue in the third quarter.

I think the other important point is that, as Sam just mentioned, on that pension program, we have closed it to new entrants and to new accruals in terms of the defined benefit portion of it. And it's going to be replaced with a defined contribution plan. And that will all be complete by the end of the year.

Yeah, and that's why, Tom, I was asking whether that income continues. I guess it continues the rest of this year and then it goes away later.

next year if you uh with the program that no that's right george right once we once we've once we do the formal closeout we'll have to do a curtailment assessment for accounting purposes that could be positive or negative that'll be non-cash but as we move into 2022 the belfast site will be on a more traditional plan consistent with Presswick and our U.S. sites.

Okay, thanks very much.

The next question will come from Christine Lewag with Morgan Stanley. Please go ahead.

Hey, good morning, guys. On the 787, can you give more details on exactly what the rework entails? Do you have to take it apart? Are you manufacturing pieces? And how involved is the testing and rework, and how long does it take?

Right. Well, the rework involves essentially replacing a part. And so Boeing and FAA will decide on the final fix, and then we'll support it as necessary and do the rework. But we've already defined what the fix is. in terms of being able to provide a replacement part. And the rework, again, these things all always evolve. So it starts off, it might take eight or ten days to do the first one, and then it gets progressively smaller as the team gets more experienced going forward. But that's the current situation. We've already started it. We've already completed the first few units, and we're starting to get down the learning curve as we speak.

I see. And a follow-up on the 787, too. Since the program is at a unit cash loss, are you better off with fewer units so you're losing less cash, or does not having economies of scale hurt you more?

It's the former. It is in a cash loss position, so the fewer units we deliver for spirit, that means our cash is better.

Great. Thank you.

Our next question will come from Noah Popanek with Goldman Sachs. Please go ahead.

Hey, good morning, everybody.

Good morning.

Tom, so I just wanted to try to ask you with everything you know and everything you've discussed on 787, you know, if you're willing to make an estimate as to approximately when, you know, you're far enough along and rework is done such that deliveries can resume.

Well, I won't be able to give you that information. I mean, really, Boeing is going to make that determination probably in conjunction with the FAA. We're focused really on the rework that we do, and then Boeing will take that into account to determine when the deliveries will begin. But as I said, we've identified our fix, and we have started to perform that rework. And I think Boeing would be able to give you the best indication about when deliveries will actually resume.

Okay. And then... Mark or Samantha, you mentioned in the discussion of next year's cash flow, Mark, I think the wording you used was, you know, initiatives behind the scenes. That sounded new. Are those new things you're working in your operational drumbeat? And if so, could you maybe detail, you know, what you found or what you're working on there?

Oh, no, they're really – Maybe I gave the impression that these are some new ideas that we've come up. I can tell you we have a very strong operational cadence. We have four or five different specific cost reduction efforts around the Boeing programs, the Airbus programs, our organization, our infrastructure, along with supply chain and some of our growth initiatives. The only point I'm making is behind the scenes here we're doing I think a really good job of managing our costs. And we're working across all of our businesses as it relates to how do we optimize, improve productivity, lean. You know, Tom has talked before about the variety of automation and digital type projects that we have. All of those things are being worked behind the scenes. And, you know, I truly believe as we move back up in rate, we're going to be more cost efficient. competitive or more cost efficient than we were previous to the higher rate breaks. And so all of that should contribute to an improvement in our cash generation as compared to where we were before.

Okay.

Thanks very much.

The next question comes from Michael Charmoli with SunTrust. Please go ahead.

Hey, thanks for taking the question, guys. As it relates to the 787, you talked about the overhead absorption. How do we think about the excess capacity costs? I think you were targeting, you know, to maybe reduce that by 30% last year. Does that become a little bit more challenging just given the lower rates and kind of how you're going to have to manage this program?

It puts a little bit more pressure on our overall cost structure here, more specifically in Wichita. But just for the sake of clarity, our excess capacity costs are really tied to what I'll call really kind of three specific areas. It's the 737 program because we're expecting to get back to 52 aircrafts per month. It's our A320 program because we have a line of sight to go back up to hopefully 60 a month on the A320 program. And then the expectations are from our customer on the A320 wing program that we will be producing at much higher rates in the future. And so those are the three programs that really generate the excess costs and the $47 million that we reported in the second quarter here. I will tell you, as we go up in rate and we continue to manage our costs, you're seeing improvement in that excess cost. In the first quarter, we incurred $67 million worth of costs, and it's $20 million lower here in the second quarter. And that's a combination of higher production rates as well as our continued efforts on making our costs better aligned with our current production rates.

Good step down in the second half, just on the narrow body volume increases.

Exactly. We'll see lower excess costs in the back half of the year, and I would expect significantly lower costs in 2022.

Perfect. And just for clarification, the part in question on the 787, is that your design? Is it a built-to-print, or does the supplier own the design on that part?

Spirit has design authority on the part, but it was actually designed before Spirit existed.

Okay.

Helpful.

Thanks a lot, guys. Our last question will come from Peter Arment with Baird. Please go ahead.

Yes, good afternoon, Tom, Mark. Thanks for squeezing me in. Question just, Mark, on CapEx. Your question just regarding whether we see that start to trend back up as we get into 22. I know you've been previously running it around 3% or 4% of sales. Is that still a good level to think about, or are you getting some efficiencies on just your CapEx running? Thanks, Mark.

Thanks, Peter. Specific to CapEx, and I think we've talked about this on a few earlier calls, over the last couple of years as production rates have climbed essentially across all of our platforms, that's required significant capital investment from a tooling, from an infrastructure. A lot of the capital that we've expended are on highly automated programs like the E350 and the 787. And so the real benefits that we're seeing, you know, we are managing our capex tightly in these very challenging times. But as we move forward into 22 and 23, as production volumes come back up, we are not going to have to spend and invest the type of capital capex that we have historically. It'll be our normal maintenance capex and some capex that go support our diversification efforts as we win organic work on the defense on the aftermarket side, there'll be some capital that'll be required to that. But really, you know, I'm expecting, you know, in 2022, maybe a tick up higher than where we are now. But, you know, we've indicated, you know, we're looking at around $150 million of capex this year. And so over the next couple of years, we're going to keep a very tight leash around the capex. mainly because the business isn't requiring it. And so, you know, what you're seeing now, I think over the next couple of years will be fairly consistent, and that will also help us as we think about what our cash flow generation is going to be in 22 and 23.

Appreciate it. Thanks, Mark.

Thank you.

Ladies and gentlemen, this will conclude our question and answer session, and now the conference has concluded. Thank you for attending today's presentation. You may now disconnect.