Spirit Aerosystems Holdings, Inc.

Q3 2021 Earnings Conference Call

11/3/2021

spk_0: the morning ladies and gentlemen and welcome to the spirit aerosystems holding being third quarter two thousand and twenty earnings conference call my name is colin i'll be your coordinator today after today's presentation due will be an opportunity to ask questions to ask a question you may press start and one and you touched her and phone to withdraw your question please post starting to please note this event is being recorded i would know like to during the presentation over to a navy director of investor relations and financial planning in their noses please proceed
spk_1: thank you call good morning everyone looking to first recorded twenty twenty earnings call on my a bead recommend us relations and financial planning and analysis
spk_2: the to their spirits president and chief executive officer tom really inspire senior vice president and chief financial officer marks a ski after opening come to my toddler mark regarding our performance announcement we will take your questions in order to allow anyone to participate in question answer segment we have such you limit yourself to one question please a boy give money to remind you that any projections your goals we may include in our discussion today are likely to involve risks which are detailed in earnings release in reality t filings in the were looking statements into this when presentation in addition we refer you to earnings release the presentation for disclosures hundred and to ensure the monk out measures disgusting our results
spk_1: and as a reminder you can is broadcast in slide presentation on our website out industry doctor arrow dot com with that would like the current columbus or chief executive officer tom julie
spk_3: take your own and good morning everyone walking the spirit third quarter twenty twenty earnings call the global aviation industry continues to struggle with the historic production and air traffic caught by the covert nike pandemic which is create significant challenges for both airlines and aircraft manufacturers as the pandemic unfolded we quickly took actions to reduce costs and preserve liquidity as we mentioned and last quarter's call we've implemented about a billion dollars manualize cost reduction actions or a forty percent reduction in the now material base we've also made the very difficult decision to reduce the headcount of our commercial aviation programs by forty four percent which is more than eight thousand people most recently we out the closure are mcallister oklahoma site which that three axis machining and assembly for boeing programs most of the work for mcallister well now moved toward tulsa and which top facilities our biggest program is the seven three seven max and we have been encouraged by the news on the continued progress boeing has been making with the ebay and global regulators to return the aircraft service completion of the circadian plates a joint report from united states canada brazil and the european union civil aviation authorities which was incorporated in the up a draft flight standardization border or are all key milestones for the program we are proud partner on the max and make seventy percent of the structure we're looking forward to seeing the airplane safely back and service for twenty twenty one we are planning seventy seven production delivery to support owings production requirements going as indicated that they will be at a rate of thirty one aircraft per month by early twenty twenty two through twenty twenty one we also plan to reduce the current buffer inventory of one hundred and twenty eight seven three seven ships that we will like boys production rates by about five units per month implanted to decrease the inventory of ships that to a permanent buffer of twenty to twenty five unit the production rate than the other programs for boeing and airbus remain as they have reported based on are forecast to production we have to made our free cash flow for twenty twenty one will be negative but significantly improved from point point usage this estimate a point point one cash usage does not include the body a assets that we just acquired or cash tax benefits both of which will be positive we expect recap go to be positive in twenty twenty two over the last few months three actions have helped improve our overall liquidity position first in late september we neutrally terminated or agreement to acquire asko eliminating a capital outlay of four hundred and twenty million dollars while we were disappointed that the deal did not close we have tremendous respect for asko and will continue working with them as a valued supplier second we also took actions to restructure our balance sheet and improve our financial flexibility we repaid our term loans or four hundred and thirty million dollars during the quarter and terminated the twenty eighth and credit facility on october fifth we also raised nine hundred million dollars of new secure debt and third we recently closed the acquisition of select bombarding a assets for eight hundred and sixty five million which is twenty percent reduction from the original enterprise value the joke instead of a two hundred and seventy five million dollar cash payment to the sellers a forty five percent reduction from the original cast consideration of five hundred million dollars the a hundred sixty five million dollar deal valued include certain liabilities for pension and government incentives be three actions result in an adjusted to three liquidity possession of two billion dollars marco provide further details a little bit later now that we closed the body acquisitions we are thrilled to welcome our new his colleagues in belfast casablanca and doubts digital help accelerate our strategic transformation are providing more airbus content after market business defense and lowcock country operations the airbus content includes the composite when for the a to twenty which leverage is a state of the art fabrication process known as read than transfer infusion at a smaller nobody aircraft the a cute when he will benefit from the quicker recovery of domestic air travel around the world after covered nineteen in general skirt will benefit from that higher domestic demand since eighty five percent of our unit backlog or narrow body aircraft the acquisition also significantly increases are aftermarket and maintenance repair an overall business their pockets on airbus prepared and presence in the european market will complement spirits existing expertise with boeing repairs and presence in the us spirit also secures exclusivity and body a business jet programs and is now one of their largest suppliers and we expand our world right relationship with with work on the br seven ten and twenty seven hundred engine the sell components in addition the acquisition includes a work that manufacturing facility in morocco with a highly trained workforce located in an aerospace manufacturing cluster the facility have a wide range of experience with flight controls engine itself and fuselage sections and has an extremely competitive ca structure finally the bar yeah yeah position also establishes a robot path for spirit to participate in evaluation and development efforts for the uk next generation campus fighter program stretch leading our structures technology capability along with a larger footprint in the uk is well suited for us to become a strong team tempest industrial partner this opportunity fits nicely into spirits overall strategy of expanding our defense business with by the way realized a twenty percent growth rate in twenty twenty revenue we that more than fifty percent growth in our defense business in twenty twenty one in summary the acquisition of the mumbai the air structures assets accelerated the diversification of our customer base in twenty twenty one based on preliminary estimates we expect boeing commercial revenue to account for forty five percent of our total revenue and about the twenty four percent defense at fifteen percent business and regional jet that eight percent an aftermarket at a percent the revised enterprise value primitive a body acquisition of a hundred and sixty five million dollars represents a multiple of eight point eight eleven point eight times expected twenty point ebitda adjusted to remove one time items our plan is to generate synergies in a number of areas including the supply chain in the thirty consolidation and overhead reduction or the next three years after taking into account the expected synergies of six percent of revenue the adjusted ebitda multiple will be seven point three times are preliminary estimate a point twenty one revenue for the bombarding a assets that we just acquired it between seven hundred million in a her and out years one other highlight for the quarter was the work we get to manufacture ventilators in support of the battle against kobe nineteen after building updated the our production facility logistics system and global supply chain the school team working with a partner by air successfully delivered twenty thousand critical care ventilators to us customers and customers and more than twenty different countries the contract was on a cop caught basis and was a creative to our results screw very proud of our partnership with by air to meet the demand for lifesaving saving ventilators around the world with that i'll turn it over to mark to take
spk_4: if you are detail third quarter results mark thank you tom and good morning everyone
spk_3: i hope everyone is doing well and thing healthy
spk_4: and tom mention in his opening remarks spirit as well as the overall aviation industry are in the early stages of a multiyear recovery and weeks back to continue to face near term challenges
spk_2: throughout the here or teams have responded well to the changes brought about by the cold the pandemic we have made significant adjustments in order to adapt or costs structure to our customers lower production levels and will continue to adjust with the goal of emerging as a stronger company the long term growth in diversification strategy and focus we're planning to have closed on the acquisition of luck effort of my partying
spk_4: this acquisition is kid or strategic transformation efforts and the additional were content with airbus and after aftermarket will position as well going into the future now let's move to our third quarter results please turn flight for revenue for the quarter with eight hundred and six million down fifty eight percent from the same quarter last year
spk_3: this reduction was primarily due to the lower production rate on the seven three seven max resulting from the continued running of the program and the significant impacts of covert nineteen pandemic production rates across all of our commercial programs continue be negatively impacted by coded nineteen
spk_4: we delivered fifty seven three seven chipsets in the quarter compared to one hundred fifty four in the same period of twenty nineteen
spk_3: overall deliveries decrease the two and six ships that compared to four hundred thirty seven ships that in the same quarter last year let's now to turn to earnings per share on flight five in the quarter we reported earnings per share of negative one dollar fifty cents per share compared to a dollar twenty six per share in the same quarter last year just the dps was negative one dollar thirty four cents per share compared to positive dps of a dollar thirty eight in the same period of twenty nineteen adjusted fps excluded the impact of the acquisitions restructuring costs and the non catch voluntary retirement plan charges the third quarter operating margin declined compared to the same period last year as a result of costs incurred related to low rate of max production including excess capacity caught the seventy three million as well as lower production rates across almost all of our commercial programs get to the impact of covert nineteen
spk_4: for the quarter we recognize restructuring expenses of twenty million for caught the linemen and headcount reductions as well as for last charges of one hundred twenty million primarily driven by the lower future production rates announced on the seventy seven and a three fifty programs i'd also like to know that our total segment operating margin normalize to school changes in estimates improved significantly over the last quarter this quarter over quarter improvement demonstrate the effectiveness of the many cost reduction actions we have implemented this year we expect to continue to recognize these benefits as we move into the future during the third quarter we evaluated additional schedule and demand information received from our customers
spk_3: as well as other market and analyst data and as a result adjusted the result on the seventy seven and eight three fifty programs to include a lower rate of production for a longer duration compared to our previous forecast this resulted in incremental six cost absorption on the seventy seven and a three fifty programs and as a result we recorded for losses of sixty five million dollars and the seventy seven program and forty five million on the a three fifty programs during the quarter
spk_2: additionally we were recognized eighteen million afford losses on other programs including the seven four seven and seven six program
spk_3: which will primarily due to production rate decreases on the triple seven program are you today tax rate was approximately thirty eight percent as discussed last quarter as a result of the care that we can carry back are anticipated twenty twenty net operating loss two years where we pay tax this is created a febrile year to date tax rate compared to are expected normalized rate
spk_2: now turn the free cash flow on flights six
spk_4: free casual for the quarter was the use of seventy two million compared to a source of two hundred fourteen million in the same period of twenty nineteen
spk_3: this year over year decreases primarily due to the negative impact working capital requirements and significantly lower deliveries across all of our commercial programs partially offset by favorable cash tech the third quarter free cash flow was also impacted by seventeen million of restructuring cost as well as eleven million of cash new to unwind the term loan interest rates what
spk_4: additionally the third quarter of twenty nineteen free cash flow included one hundred twenty three million dollars cash advance received as part of the april twenty nine p m away reach with the boeing corporation free cash flow improved by about one hundred seventy five million from the last quarter this quarter over quarter improvement was a result of the benefit from the cost reduction actions we have taken throughout the year a decrease in are working capital requirements
spk_3: as well as from favorability from the timing of certain deliveries in the court
spk_4: we anticipate cash flow use in the fourth quarter to be slightly higher than what we have recognized in this corner
spk_3: primarily due to higher interest on additional debt and some favorite time of delivery that are not expected to repeat in the fourth quarter
spk_2: excluding been partying we anticipate for your cash youth in operating activities to be around seventy eight hundred million with approximately one hundred twenty million of capital expenditures
spk_3: in other words we expect free cash flow for twenty twenty to be around eight hundred to nine hundred million of outflow which is in line with our expectations and our commitment to you in the last quarter we are quickly diving into the bombarding integration and analyzing the appropriate structure for the business there will be a one time cash outflow thirty five million in the fourth quarter relating to restructuring activity finally as tom mention in his remarks our twenty twenty one free cash will continue to be negative but significantly improved from twenty twenty excluding cash tax benefits we are expecting a cash tax benefit
spk_4: of approximately three hundred million as a result of the carry back permitted by the care that
spk_3: and anticipate receiving a majority of this benefit and twenty twenty one
spk_4: this will provide cast benefit and twenty twenty one above and beyond our year over year operational cash improvement
spk_3: let's now turn to cash and debt balances on flight seven during the quarter we announced the termination of the ethical acquisition along with new financing activity
spk_4: we raise nine hundred million of firstly senior secure dead including four hundred million dollar term loan be and five hundred million in notes do and twenty twenty five
spk_3: in connection with the closing of this new that we terminated the existing senior secured credit facility including the revolver prior to the termination on september thirtieth we paid off the term loans that have remaining balance at the end of the second quarter of approximately four hundred thirty million this financing activity along with the ethical acquisition termination and bombarding a price reduction improved our overall liquidity position by one point two billion and provides us with additional balance sheet and operational flexibility
spk_5: we enter the quarter with one point four billion of cash
spk_3: and three billion in debt
spk_4: the ballot is reflect the termination of the prior credit facility including the pay off and the term loans but the cash that balances do not reflect the nine hundred million of new senior secure debt as dolphins were not received until just after the end of the quarter including the capital race and cash used for the body acquisition the just cash balance at the end of the quarter would be two billion the debt balance adjusted for the nine hundred that raise and would result in a total that balance of three point nine billion we believe our cash balance provide ample liquidity to navigate the uncertainty within our industry
spk_2: now let's turn towards segment performance on friday
spk_4: fuselage segment revenue in the quarter with four hundred twenty one million down compared to the same period of twenty nineteen primarily due to lower production volumes and seven three seven seventy seven and a three fifty programs operating margin for the quarter with negative twenty three percent compared to eleven percent in the same period of the pro
spk_3: a year this decrease was primarily a result the for losses recognized on the seventy seven and eatery fifty programs and lower profit recognize on the seven three seven program including excess capacity costs of for forty two million dollars the fuselage segment recorded nine million of favorable you catch up adjustments and ninety two million of net forward losses during the quarter on a normalized bases after reversing change in estimate impact fuselage segment margin improved the negative three percent in the third quarter compared to negative twenty percent in the second quarter reflecting the benefit of cost reduction in issues with completed this year propulsion revenue in the third quarter was one hundred seventy one million
spk_2: down compared to the same period last year primarily due to lower production volumes and seven three seven and triple seven programs
spk_3: operating margin for the quarter with negative nine percent compared to twenty one percent in the same quarter of twenty nineteen
spk_6: the segment recorded five million have been favorite team catch up adjustments and fifteen million of net forward loss
spk_3: the decrease in segment profitability and operating margin was primarily a result of lower margins recognized the seven three seven program including excess capacity cost of eighteen million and the reduction in production rates on the triple seven program and finally when revenue with one hundred sixty eight million down compared to the same period of twenty nineteen primarily due to lower production volumes and seven three seven a three twenty and a three fifty programs operating margin for the quarter was negative fourteen percent compared to posit fourteen percent in the same quarter of twenty nineteen the segment recorded twenty two million of net forward losses the decrease in segment profitability and operating margin or the dude to four losses recognized and seventy seven and a three fifty programs and lower margin recognized and seven three seven program including excess capacity costs of thirteen million dollars in causing this has been a very challenging year for spirit
spk_2: we have taken difficult but necessary action to adapt to the changes brought on for both the max rounding and covert nineteen
spk_3: we continue to assess potential future scenarios to identify areas of opportunity and develop action plans to mitigate risk but nine hundred million capital race
spk_4: along with the termination of the ethical acquisition and the mumbai the a price reduction strengthens our liquidity position and enhances our ability to address future challenges
spk_3: further we will continue to stay focused on our growth and diversification strategies the acquisition of somebody is a significant it of then forth and we look forward to making them a big part of the spirit team with that i will turn it back over to tom for some closing comments thank market and all they can call the comments before we take questions given a significant changes to the global aviation industry resulting from the covered nike pandemic screw taken substantial cost reduction actions to a to lower levels of production these actions include the reduction of eight thousand employees and commercial programs closure of several facilities and the reduction of other non labor spent in total yeah you like cost reduction actions have exceeded a billion dollars or forty percent of are now material base without with automated cancel improvement and our manufacturing process to improve digitization automation and process flow author could several actions to strengthen strike now liquidity position we need really terminated the ask where position we paid our term loans and cancel their twenty eight and credit facility rate nine hundred million dollars of personally insecure capital and close the acquisition of bombarded era structures assets for two hundred and seventy five million dollars a cat production of two hundred and twenty five million dollars from the original now
spk_0: the nobody acquisition also accelerate our strategic transformation with additional work on airbus programs aftermarket business jet engines and defense the acquisition also brains low cost manufacturing operations and morocco we have taken the significant steps during a very challenging time in the industry which will allow us to emerge as a stronger more diverse by company with that will be happy to take your questions
spk_7: and at this time we will now begin the question and answer session if you would like a question please press start in one and your telephone keypad if you would like to withdraw your question please press starting to leave know we as you please limit yourself to one question and i first question today will come from by
spk_8: open with you yes please go ahead
spk_7: thanks good morning if if have a lot of issues in the quarter so
spk_3: it's not an easy job where you set of i was wondering if you could talk about the underlying margins excluding the four losses and and cumulative changes it looks like you're segment margins where about break even and curious if if that's sort of the underlying business right now these low levels you're you're breaking even and then maybe more detailed just one off on a three fifty size of the the fourth loss there seems to be about double what was in debt offering disclosure and just curious what change their it looks like you are assuming five per month back down as well a lot of up start off in terms of the margins you're you're right we have made them substantial improvements quarter over quarter mean have it's a deterioration year over year because of the reduction in in production rates but the cost reduction actions are starting to take whole and so even at very low levels of production yeah you start to see the margin improvement so for example right now effectively for seven three seven were at a seven a pm right and triple seven we've we've dropped now to about two per month
spk_9: and seven eight seven were still at penn but that's drop into sex so even with other head when you saw the margins improve on the seven three seven program on a normal basis last quarter it negative twenty percent to this quarter negative three percent almost breakeven so we're we're pretty happy about that
spk_4: now the ford lot on a three fifty program was really just due to rates when we originally made the estimate of what we thought the for loss was going to be a we were working on the assumption that the rate with can grab from tend to sex or but in fact airbus grafted have five or at least a six month period beginning in canada september timeframe so we took that into account that drove the higher forward last and we predicted at the end of last quarter mark anything else that not they get you hit it right tom you know the eight three fifty miles really was do fact that between now and the in the year and mainly through next year we're really going to be produce
spk_10: about four to have per month
spk_0: and when we met and originally made the assessment it was in the four losses in the five to six range
spk_11: and and so we've had to take that into account and also with that lower level of production it had a negative impact not only on section fifteen but also orphic leading edge program
spk_12: our thank you
spk_13: and our next question will come from quarter cup coping with million research please go ahead
spk_11: a good morning gentlemen
spk_3: pointer just a question on cash from what you've sort of disclosed about next year know based on this year's guidance sort of eight fifty out to get the cash tax benefits of three hundred and got that isn't quite there but call at two hundred a kind of gets you to low single digits hundreds of millions out in are there other pieces that i'm missing and i guess specifically with that what what should we expect from a cast and point on the lombardi asset and you a tax break well first of all as you know the cash usage for this quarter with seventy two million marks said it's going to be cry a little bit higher next quarter and we go into next year again with our current forecasts seven three seven production should be higher than this year but it's very dynamic so we'll see some had went on the twin i'll programs but your by and large we don't expect the cash usage per quarter to exceed what we've seen in and acute three you for
spk_13: so so you're right with the with the kazakh tax benefit of three hundred million that that will put us in the kind of single digit to right around the hundred million net usage and prep better depending on performance
spk_0: why doesn't included somebody a you're still digging into it but we do expect somebody a to be positive we've got some work to do their if we look at their capital expenditures in there are in d and things like that
spk_14: and we align a to our programs and and as well as we as we start to drive synergies particular in the supply chain so we expected to be positive don't know yet how much but i think your analysis in terms of where we will be pretty cash next year including that cash tax benefit is is about right
spk_3: great thank you for the color tom
spk_15: and our next question will come from robert springer with credit suisse please go ahead hi good morning
spk_16: my question is can be on bombarding a bit before we go there just to clarify based on the moving pieces and were rates are now in what quarter tom or mark the expect is based on current plan rates no changes we see trough revenues
spk_3: sounds like some rates are still trending down on the wide bodies
spk_5: and of course bombarding is a little bit obscure so that's the first question second question is why did spirit and lombardi a value the deal somewhat differently bombarding a talked about some favorable adjustments on the for business
spk_4: yeah so first off is related to the the trough i'm rather revenue standpoint i would tell you that
spk_2: back to drop has is behind us
spk_4: the revenue that we can already in the second quarter of of twenty twenty year this year we expected to be are low point and as you saw here we're we've we've made a you know a slight improvement here in the third quarter and then as we move into into next year
spk_17: you know we have to adjust for some between i'll pressure next job but
spk_5: the expectation is seventy seven will be a little bit higher next year which will help offset that so i think we're we're in a good position as we move forward here to slightly start to see revenues move upward as we move and twenty one
spk_4: and even stronger to the back half next year based on
spk_18: the only am data that has been that has been provided to us
spk_4: and then specifically as it relates to
spk_19: nobody's press release and how they characterized all all i can tell you that
spk_4: you know body
spk_3: accounting is the is due to i for us
spk_2: spirit uses
spk_3: us gap and and how they calculated their liabilities or or the d that the deal values is really up to them and their accountants i can tell you that you know we we used our accountants and are actuaries to assess the pension obligations liability
spk_15: in the repayable launch agreement and then the cat proceed so you know when we finalize the person's accounting here and establish the balance sheet at the end of october were very comfortable with
spk_14: you know our accounting assessment as relate to what the the value of the deal is a i wish i could connect the dots more for you but you know that they probably had some different assumptions than than we did but we do know that are deal value in the enterprise and what the liabilities was devilish on our books is consistent with us gap for a really get down to how they value
spk_8: the pension obligations and i oppressed versus how we did us gap that okay just different
spk_3: the last part of just tom on the on the exclusivity
spk_20: that you have their to that is that part of up some kind of pricing arrangement that are we see similar profitability
spk_0: in that business to what we would normally expect from spirit
spk_21: yeah well the exclusivity is that we have so source life of program agreements and the parts that the belfast operations currently supplies to bombard a eight and their business jet programs and the profitability is slightly a creative on those programs to spirits normal profitability margins
spk_22: okay thank you very much
spk_23: and our next question will come from christine we work with morgan stanley please go ahead
spk_21: i did morning die when on it
spk_2: we've acquired
spk_4: a cash cow
spk_2: one of the
spk_3: and then now that you've called the that your priorities are in the next year yeah christine it all dressed the cash flow and that i think tom will can talk a bit about the business next year
spk_2: but but the reality is that you know their their business has been it's our business now been impacted by call the nineteen so so obviously there's going to be lower revenues then we into and initially anticipated when we find the purchase agreement there
spk_4: and we just close the deal a few days ago our teams just hit the ground on monday and into they have got my financial team diving into the details as it relates to you know the next couple of months
spk_2: we'll be working with them or over the next month or so to establish a new operating plan for twenty twenty one
spk_3: you know they had out a plan previously and expectations with their their former parent company and as we as we think about the integration and synergies in were that business is going on a go for basis we expect you know a decent revenues as relate to the business jet side of things i think we've got good line of tied to a a to twenty and we're really pleased with with the aftermarket poor of the business so we're not yet going to really get into details as relate to we're we think they're casual was going to do and next year and how it can contribute just specifically i will factor that into our our our guidance when we talk to you guys at the end of january but it's it's really in the early days of the bharti acquisition and and our teams are are working in earnest is related to the it to the the integration in the synergies but we're really pleased about the that business and what it could offer from of value proposition for spirit right a christian in terms of priority for the business first and foremost as integration the new acquisition it's a big one big biggest said spirits ever made and so we have a fairly large integration team working on all the normal things in terms of finance hr information technology driving all of those things second big focus is gonna be on capturing synergies and that's part of the integration effort by specifically looking at supply chain facilities optimization overhead and predicament supply chain with spirit we bring a lot more critical mass and scale with suppliers and so will start in agree
spk_24: eating those opportunities and leveraging our existing supply base to get more more competitive opportunities as we go forward
spk_25: operationally the eight to twenty of course is a is a huge program at the entire integrated wing using that resident transfer infusion technology for publication that i mentioned to my prepared remarks
spk_3: and we're gonna be looking very hard at the production process the flow of material waste and and looking at ways we can optimize the production in and drive further productivity and it
spk_0: and then the other big thing is aftermarket as this acquisition more than doubles are aftermarket business and it gives assist
spk_26: town again i'm sorry we must have dropped off
spk_21: so moderator
spk_3: practically let us know where we stop take your my response to interesting question you were giving your response to christine's question however if you i have reopened increasing fine if you'd like to be asked that question again start over and and i think i on your question about aftermarket
spk_24: right
spk_3: right so after market is going to be a big focus for us with this acquisition and
spk_0: i'm already a his assets more than double our aftermarket revenue
spk_27: and so we've always historically been very strong bowling repairs for flight control surfaces the self interest reversers in the us market and the party a business with our with very strong airbus like control surfaces silva
spk_28: and trust reversers in the european market so those two things come together very nicely complement each other
spk_3: and will more than double or aftermarket
spk_29: said am i prepared remarks are aftermarket revenue now becomes a percent of our total and we have substantial growth opportunities in the future so this becomes a significant opportunity for spirit to start to realize more revenue and income from after market activity
spk_3: thank you
spk_24: and our next question will come from sri lanka you agree with jeffrey please go ahead
spk_3: i had good morning guys and thank you to follow up on christine question may be sticking with bombarding a you're a be on the dl fell thirty five percent or sell but the and party but data fifty so i guess how do you think about how you fresca just stared at the exposure here given it's mainly a three twenty two twenty and best that exposure and how do you think about those program outlook appreciating kind of a deal just and you're going through add the forecasting for it
spk_27: who would be way that we looked at it
spk_0: obviously we struck a deal last october but the world change with the pandemic and i'm party a had certain expectations in terms of deal valuation and we were looking for some relief given that changes in the market so it was
spk_30: imagine a
spk_31: a rigorous discussion and we arrived at a at a mutual conclusion that it was a twenty percent reduction in the total the valuation but if you look at the caf consideration it was a forty five percent reduction said
spk_32: probably more in line with the that reduction that you just mentioned the other elements of this is it was always a three way negotiation with airbus because the pricing on the a to twenty and in all it's deliverables to airbus had to be taken into account and airbus was also very supportive in the discussions to make sure we could come to a mutually agreeable outcome so other things taken into account we feel very comfortable with where we ended up in a deal valuation so to win really for spirit
spk_33: because we get a transformative acquisition swim or been largely a to get the acquisition close they can move on with making their business more focused on business jets really a win or airbus and that they now have
spk_34: clarity in terms of their a to twenty particularly on me or integrated wing and yet we would say it's and it's a win for the the the workforce in in belfast casablanca in dallas because they now have certainty as we go for
spk_24: okay thank you for clearing that up their projects that that ever of our stuff
spk_3: but our next question will come from dog hard with bernstein please go ahead thank you good morning last last week airbus talk about
spk_33: they basically letter that it had sent out to suppliers on on rate increases for the aged twenty neo from forty to forty seven a month and they said that this they had been planning for suppliers to be ready for such an increase in queue to next year they move that back to que three next year what i'm interested in is your the largest structural supplier on the a three twenty neo and when you get a message like that that you should be ready for this rate increase how do you think about responding what do you do and what did it mean that they move this back from two to to que three
spk_3: from a spirit standpoint though
spk_24: the letter and and we had calls with with their senior leadership on this topic is the way they characterize it is they asked us to protect rate forty seven for the backup for the are so the current schedule is rate forty but they asked us to protect for forty seven so that means to make sure that we have all of our capital and tool
spk_33: in place that were prepared to increase the workforce two or three months in advance of that and that we also have line of sight to material particularly long lead material like forging
spk_0: if the rate does go up and they'll be would give us enough advanced notice to put those into effect but protecting the rate means you have to be prepared to go there if if they decide to make that move not the the market is very dynamic right now
spk_35: they have talked with all of their individual airlines and it created a new sky land based on when airlines can take delivery and and when they will take delivery so so they've been very diligent about the way they have constructed their schedule and what they communicated to their suppliers and they're actively just giving us advanced notice to be proper parody if the rate does go up or the fact that it shifted three months doesn't really impact us it just means that we push that that every time out so we we have done what they've requested we are protecting for rate forty seven in the back half of the year que three now and if they do decide to go up will be prepared
spk_8: the were and as does the going up mean is this
spk_3: when it wasn't that exactly mean that you would be within whatever quarter that is able to deliver and their quarter and is it mean that you would be kind of set to go and that i'm sort of not sure what for you what you know how to tie your way to their rate i guess that that's the thing i'm trying to understand but typically on a three twenty if they announced rate of forty seven we would be delivering at that rate during that period of time so it as as they said i'm a kayak the opposite october so if they decide to go on october we'd be prepared to deliver forty seven upsets in october okay okay very good thank you an r next question will come from can herbert with canaccord please go ahead
spk_0: i could morning tom and mark
spk_36: i wanted to see thomas you can provide any more detail on on the glide path for the seven thirty seven i'm from sounds like you're at seven a month now to the college twenty six a month at the end of twenty one or early twenty two of you sort of lag by five a month if you can provide any more detail on twitter rate breaks over the next several orders on that and and when you expect to catch up with boeing on sept thirty seven or eight well boeing has provided guidance it they think that they'll production rate will be at thirty one per month by early twenty twenty two and as we said we're going to lag them by about five aircraft from month to burn down the inventory that story here at at wichita right now we're in the process of ramping up to ten
spk_37: aircraft per month for it for january so we're in the process of of getting all of our headcount and material orders and supply chain a line for that are within that way you know that we don't have much other guidance other than what bowling would provide a it's a very dynamic environment and we will be guided by what what bowling tells us but that our planning right now is will be a pen
spk_3: by january or they'll be at thirty one by early twenty twenty two and we're going to like them by about five per month a in terms of the catch up are based on the current schedule it looks like we would burn down the hundred and thirty or so the hundred and twenty eight units that we haven't but for now to twenty to twenty five by the twenty twenty two and then we'll keep that buffer twenty or twenty five unit just the cushion the production system so that we don't have any disruption that could upset bowling's production line and ever so that the that's the plan thank you no next question will come from the thief men with jp morgan please go ahead oh thanks very much and in the morning
spk_24: the wonder of him in the i could add me to in here about one on under seven three seven with the current workforce
spk_3: how how high can can production go with the workforce as at the size that it is now and then just real quick on been bombarding a and the eighty twenty
spk_0: yeah we think about where the weight needs to go on that program before it becomes you know before it starts to contribute at you know
spk_38: thought cash morgan right one seven three seven our current workforce is aligned to our current production rate which is seven aircraft per month and as i said we're getting ready to go up to ten by the beginning of the year so
spk_39: i mentioned the ventilator program as that's winding down were transferring some of those people back to seven three seven program so that we are ready to go to canada in january so currently at a rate of seven and going to ten in terms of a party a the eight to twenty the current rate is about four per month
spk_3: and you know we're going to be prepared in the future to go up to fourteen per month by will be guided by again what what airbus decides in terms of how that will ramp that up in terms of proud that we will need to dig into to figure out where exactly that break even points are like and the profitability but it gonna be a good program overall the outlook on it is very good as i mentioned it's one of the smaller that went through the narrow body market and the nearby market is recovering for example china and russia and domestic aircraft lights air traffic are already about twenty nineteen levels the we expect to see the same in europe in the us is that domestic travel will recover first that will favor narrow body and with overall level the traffic lower than they were in the past a smaller narrow body like the eight twenty should do very well so so we
spk_24: expect that airbus will hit their long term production rate commitments on it and we will be ready to to meet those commitments and as we get further into i think will have a better sense of what the profitability break even point or thanks to and or next question will come from john ready with pretty please go ahead
spk_3: thanks in the morning dr cash you know if you talk a little more specifically karma what you need he in twenty twenty one for cash for new to be significantly better and anything what you need fee for cash break even and twenty two within your control was not under control it's like me that narrow body is clearly very important you talk that our bars are talking about max a lot but both
spk_24: is talking about flower delivery than twenty one which would therefore constrain their production would there would therefore concerning your product your your delivery so are the little bit more on what can you can call for work or whatnot your control and and what production rate the have to hit can actually make cash on each seven three seven thank you
spk_40: right
spk_9: so
spk_11: as he said mean what's in our control vs what's not in our control within our control it or contradiction actions
spk_40: and we need to continue to execute on knows we've got a lot of them are already in place but we need to maintain that that vigilant we also need to continue to drive productivity in our factories with what i mentioned things like digitization and automation robotics factory floor automation so so those are the things that are in our control to drive and and and we're definitely going to continue to drag those things not in our control and really the biggest driver for cash flow and twenty twenty one is going to be production rates are project now at seven three seven obviously the seven three seven it's are bigots program we make seventy percent of the structure last year it accounted for half of our revenue this year will produce seventy two units versus six hundred and six and twenty nineteen so if that recover than it is supposed to recover from this year according to bones current projections that obviously will drive improve castle for next year even with the headwinds have some lower rates and the why bodies like the triple seventy eight three fifty but this is a very dynamic environment
spk_17: the and lots of things could change obviously we're still waiting for the max to get back into service it's promising it's encouraging but that needs to happen and the a as that there's no timetable on that but they have said a lot of positive things about it
spk_4: so at the ass about away which is encouraging so we need to see that and then of course a pandemic
spk_40: people are starting to fly more domestically and places like china and russia but with the recent surge it creates more uncertainty so want to paint a back seat is in place that will obviously give greater greater focus and and for the development of these up private healthcare quarters or or or travel bubbles that you start
spk_11: developing between different countries which should help stimulate some international traffic so that they are the key issues or twenty twenty one and frankly for twenty point you as well we've got to continue to drive our cost reduction actions but we need to see single aisle production rate increase as air traffic recovers around the world
spk_40: yeah john you know just can add to what what tom said you know where
spk_0: with all the reduction in production rate this year we really do you know when you think about delivering seventy two seven three seven
spk_41: we're really kind of the trough right now of production volumes
spk_3: or even a modest improvement in seven three seven deliveries next year will be will create and when and creative benefits for so you know as we said before some of the drag of working capital that consumed quite a bit a cashier and twenty twenty will not repeat i expect working capital be a bit of a tailwind
spk_42: the a little bit of benefit from seven three seven next year
spk_3: and as we said before you know from a from an operational standpoint we expect our cash flow to be significantly better year over year more than half for cash born here and twenty twenty is working capital replayed related and that will not repeat next year will get a little bit of benefit their and you know when you when you think about a car
spk_40: or canada did some good map on of where we think flow is so significant improvement next year even with the low production volumes the cost reduction activities are taking place you see it and our cash usage this quarter
spk_41: so you know we're going to continue to go battle that the cost reduction cyber we also i think have some real opportunities on the working capital i could think we can do a better job next your inventory management which will the potentially give us some additional tail went on the casual side and you know if the market predictions come true you know we're looking at some modest recoveries back here for next year in into
spk_3: and into twenty twenty two that that will help on the operational front and then you know we've you know as we said you know the you know it's kind of a
spk_41: a pro and con but but you know the operating losses this year will generate some some sizable a one time cash tax benefit in in twenty twenty one and that will that will create you know some additional
spk_0: liquidity or cash to help us or work through that the challenges here but you know we we feel good about where we're at where we think who's going to be next year significant improvement and then is tom indicated you know we we get a little some help here on the vaccination in their narrow body starts to recover
spk_43: want we can be back in business jarring for casual and twenty twenty two thanks the know next question will come from george shapiro with superior research please go ahead ah yes good morning i just wanted to go back to last year the body i was gonna do about a billion dollars in revenues and ninety what is that number this year i know you mentioned on a call to go up to seven hundred plus next year i'm just trying to get the comparison is to watch well you're a last year was a but a billion dollars this year with the impact the kobe
spk_3: we just get the look at of the books
spk_44: from the standpoint of closing the deal looks like it'll be seven hundred to eight hundred million and then a recovery to the billion dollars in in the twenty twenty two time period but but that's what we we see right now had george to be or specific this year
spk_3: we're looking at sixty six fifty that that's what we're projecting for the year and then next year to seven seventy eight hundred so just a little bit a modest improvement next year before we start to see revenue start to climb back up and twenty two
spk_24: and just under seven three seven
spk_3: what happens if boeing further delays the increase to the thirty one per month
spk_24: right because certainly got a lot of planes to deliver they've got a lot of grounded planes as i just wanted to see how you react to that well we we will respond to their production rate and will will lag them by at least five per month
spk_3: and if if the rates are lower than were expecting this will align our cost accordingly okay thank you very much in our next question will come from david shots with berkeley please your head
spk_4: thanks tom i was wondering if you could you specify exactly what you're me for max production in twenty one
spk_45: did you got reflected in your your commentary around twenty one free cash flow
spk_3: and then looking beyond the backseat the other important platform
spk_40: three twenty three fifty seventy seven you're you're currently delivery well young you're delivering into the manufacturers and well above their own delivery rate to this point to what how much risk is there that the you actually have to drop your production read on the program actually have the drop below the me factors the product you rates going for banks right well on the other programs are are rate tend to line up to the manufacturers rate so airbus and boeing and when they they give us the schedule we we deliver to it and so so those are are pretty closely aligned and on the three twenty and airbus has been very clear there at a rate of forty right now that which is going to continue the next year the about us to protect for forty seven in the october timeframe and beyond the a three fifty he is right now a rate of five and that will go into really part of next year may june and then go back up to six
spk_43: seventy eight seven right now the candidate supposed to go to the six in a in about the march timeframe the triple seven is is is really doubted to one point eight and those are all as what the manufacturers have stated and we are aligned to those on the max boeing hasn't then
spk_40: specific yet about what the production rate will be and in twenty twenty one what they said his they expect to be to thirty one by early twenty twenty two and we're getting ready to go to in in january and so we we haven't really said what that the specific rate will be for twenty twenty one it will really wait and see what boeing dutch we don't want to get out ahead of them it's obviously a very dynamic environment their work
spk_4: you really hard with the airline
spk_43: they've given some guidance to the market and we're we're following that guidance and we're we're making sure that we aligned to the schedule that they get it
spk_45: a david i think your your point though is you know boeing and airbus you know going on the seventies doped up some units that they haven't delivered yet
spk_0: airbus has some as well
spk_46: again that's really kind of outside of our control they've asked this produce we're delivering and we know that there's a lot of uncertainty as removing the twenty twenty one i think production rates are still dynamic and as as we've acted very quickly the year if there are further rate reductions we will be forced to have did take additional workforce reduction and doug continue to focus our our cost to align with the production rate we have a highly variable cost structure here and you know the best thing that we can do is production rates are out of control and if they go lower
spk_40: because of the situation that you just addressed or going to have to take further workforce actions and we will continue to the line our qa structure with the the marketplace as we see it today and and as as you know it continues be dynamic because a cop and nineteen thanks a mark want one could follow up working capital in twenty twenty yeah beat hundred and nine hundred million free cash flow bernier your daddy into what do you what do you including a narrow you a you look at work and gavel when you call working capital what are you assuming within a number for your kind of negative or free cash working capital burning twenty yeah so david i would focus on receivables inventory accounts payable and accrued liability and profit sharing those are the big cash driving working capital items that are balance sheet
spk_46: no pain you think those are our the the sum of all that in two thousand he wanted because of slightly positive yes
spk_24: thank you
spk_4: the next question will come from curve on ruin with cohen please go ahead and i thank you thank you very much so
spk_40: when you first announced the bombarding a deal in october of two thousand and nineteen i think you were talking of six and a half times he did dog with synergies were to be kind of back it up to the billion dollars was my close to an eleven percent he the da margin and now you're talking of sixty six fifty in terms the revenues for twenty twenty and if i use to seven point three you know he backs up to about a twelve percent he bit dull martin so a higher either the margin after a substantial revenue drop
spk_46: a man if we're looking at next year wouldn't either da margin go up if in fact the revenues are building as as as you as you hope
spk_0: yeah yeah i mean when you when you think of it that way i don't think that
spk_47: in a bit the a margin on any of our business at around ten percent is unreasonable i think we have all a lot of opportunity from a cost and point tom talked about three or four major drivers
spk_48: that we think that we can take advantage of
spk_47: as relate to to the belfry welfare site
spk_40: that could really help out from a from profitability standpoint from a careful to the point so i don't think it's unrealistic to assume that you know that business can generate ten plus and the top close percent but the a margin as we look at the
spk_4: of getting back to the higher revenues over the next girl won the two years here and a guy i would say we do think we can increase the bigger margin next year as we drive the synergies particular supply chain
spk_40: but so if i look at this what is driving the revenues can say to twenty is already had raid
spk_9: i assume the said the seventy five hundred is gone you know plumber arrow structures point of view thirty five to forty the aftermarket i guess could be flat to up but i have a little trouble understanding what's driving the revenue up next year
spk_3: oh kyle as we said i indicated that we're looking at in a rut met met six fifty the it from revenue standpoint that were projecting seven eight hundred eight hundred if some of the business jet and aftermarket up business holds and are does outperforms kind of were had are but i don't think when you think about an increase in revenue from six fifty two around seven hundred that work that we're talking about a substantial drop right dumb a little bit about benefits on the business jets
spk_0: i don't expect that the seventy five hundred will deliver few more units will produce a few more next year we a little bit a left on the aftermarket side of things right and and we you know as relate to some of the from the discussion that we've had with with their both on pricing cetera
spk_49: the been or could could add some value is relate to the a or took a to twenty program
spk_50: thank you very much
spk_51: and or next question will come from hunter key with with research please go ahead i think you're getting the on a quick follow to that laugh come on mark when you talk about i was gonna your your ship said clinton was on to twenty prior am pro forma
spk_34: so the cure smith and then the second one is is i'm tom hi what's your primary metric for how you measure employee productivity thank you
spk_24: toronto real quick on the work statement on a to twenty per day
spk_3: the it and relate or the new eight to twenty worked at we're going to capture as part of this acquisition is you know top talked a lot about the the fully integrated composite wing but there is a of
spk_24: some potential fuselage works and federal wing box work to compliment are or propulsion package that we have and on the a age twenty
spk_3: the pylon so you know where we're starting to have some sizable work statement as we as we add the work caught from the party acquisition right hundred and to get it employ particularly our our focus and rec labor productivity your major metric is hours per unit which we look at across every program and i continue to work on that and we look at and we gotta do what to do but it's up to realization metric which is or that's our schedule today for particular unit how many did we complete so what was our directive news at executing the workload for today that was scheduled the hours per unit and what we call do what to do and we will look at those metrics across all of our programs on a daily basis
spk_51: thank you
spk_24: in or next question will come from run in with bank of america please go ahead
spk_3: a good morning
spk_50: throughout his gestapo of a
spk_52: are your restructuring the business and in
spk_0: don't want and so forth
spk_53: can you be structure how you do contracts to you've got more downside protection if another downturn of like this were to happen again i mean is there a way to do these things so below a certain point your cost plus or something because you know i'm in in the situation minute a i suppose is there was a once in a lifetime thing it might not be right i'm in his a better way to build downside protection into your contract with the every
spk_40: well i'm a fairly you can try their their get negotiators but i don't want that i would say is our biggest program is the max and as we said before or max contract is indexed rate so as rates go down our price went up and that's probably the best way to protect your yourself and in the event of a doctor could you can anticipate these things are better that case that contracting our biggest contract that was it good contract if you will mechanism that that helps with this with his downturn short of that you know we we always work with our customers in terms of what are the best terms and conditions that make sense in the market and and that we can live with so there's always a large focus on quality and delivery
spk_53: it's difficult to protect normally against downturns like this this is a once in a millennium type of situation
spk_54: the bike for our longer term contract we also go them some escalation protection as well so lots of different things that you can do and it's it's always a negotiation based on what market conditions are and and what the the
spk_53: beneath and and requirements are of of both parties at the time
spk_54: and if i may on seventy seven specifically said at one point you gotta be casual break even and twenty two when that happened now like twenty four twenty five i mean like that is he
spk_53: positive in terms of cash flow and profitability
spk_24: when we get the line unit fourteen or five now originally that was in twenty two twenty three tanker it obviously now at lower rate the production that gets pushed out to the and twenty twenty four thereabouts
spk_3: and it's still forty know five that still same line number and that yes okay current thank you
spk_24: but or next question will come from never up opening with goldman sachs please go ahead
spk_3: oh good good afternoon good yeah no more clarification a nano a longer term question the eight hundred to nine hundred million a projected twenty twenty three cash burn you provided that include or exclude that i think you a thirty five to forty million lombardi a outflow in the fourth quarter it does not include the thirty five million eight or nine hundred what we what we told you guys on our second quarter earnings call
spk_0: you know that the legacy business excluding the bombard yeah i think we're going to be on the favorable side of that
spk_55: in that does not include those one time severance related cash caught that will be incurred the bombard acquisition and will pay those out november december
spk_24: right
spk_3: and then longer term you know that you've spoken to
spk_55: the mix change in the business
spk_3: revenue presented to revenue perspective
spk_24: if we're looking for five years out how should we think through the margin differential him
spk_56: the advance vs aftermarket vs i mean i know it's different by your point of them in the original business but to put the people you're adding where you want to frame it by dissenters aftermarket boutique the party and yeah thats just here's the route back to the margin in those think that a metronome well as we go
spk_0: go out for the next few years obviously next year
spk_37: the max program this still lower so we we would expect the boeing percent of of spirits revenue to
spk_43: to increase again in the future as as the production rates normalize terms a margin a are are older more mature programs tend to have higher margins
spk_11: as as you would normally expect but the defense margins are what you typically expect and in and and contracts they they don't go as high but they also are are more stable even in and downturn so those are in that kind of twelve to fourteen percent range of typically don't and that's what we would expect as we as we go forward and
spk_40: enter that that this year our defense business grew up twenty percent next year we're expecting fifty percent and we've got line of sight to making it a billion dollar business in them twenty two twenty twenty three time frame which is bit ahead of what we originally thought going back a couple years ago
spk_4: an aftermarket at the margins and aftermarket typically are higher you know if if you think of typical spirit margins of sixteen and a half percent
spk_40: after market would be higher and if we go forward it's going to be a percent of our business next year as we go for it it will continue to grow and become a bigger portion of spirits overall represent the future thank you the next question will come from peter or meant with baird please go ahead
spk_4: yeah thanks good afternoon tom mark basically the man come on you give like details on them body ache on the synergy comment the six percent
spk_43: in terms of expected synergies nico outlet a rough time mine and when you expect the kind to achieve that and be kind of color you can give up on that we're going to work and start immediately by the full six percent will take the three years was our original projection and we'll we'll stick with that
spk_0: yeah obviously the with the pandemic lots of things have changed we we still see
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