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spk10: Good morning, ladies and gentlemen, and welcome to the Spirit Era Systems Holding Inc. Third Quarter 2020 Earnings Conference Call. My name is Cole, and I'll be your coordinator today. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touchtone phone. To withdraw your question, please press star then 2. Please note, this event is being recorded. I would now like to turn the presentation over to Ryan Avey, Director of Investor Relations and Financial Planning and Analysis. Please proceed.
spk12: Thank you, Cole, and good morning, everyone. Welcome to SPIRIT's third quarter 2020 earnings call. I'm Ryan Avey, Director of Investor Relations and Financial Planning and Analysis. And with me today are SPIRIT's President and Chief Executive Officer, Tom Gentile, and SPIRIT's Senior Vice President and Chief Financial Officer, Mark Sachinsky. After opening comments by Tom and Mark regarding our performance and outlook, we will take your questions. In order to allow everyone to participate in the question and answer segment, we ask that you limit yourself to one question, please. 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 and 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.
spk18: Thank you, Ryan, and good morning, everyone. Welcome to SPIRIT's third quarter 2020 earnings call. The global aviation industry continues to struggle with the historic reduction in air traffic caused by the COVID-19 pandemic, which has created 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 in last quarter's call, we have implemented about a billion dollars of annualized cost reduction actions, or a 40% reduction in the non-material base. We've also made the very difficult decision to reduce the headcount of our commercial aviation programs by 44%, which is more than 8,000 people. Most recently, we announced the closure of our McAllister, Oklahoma site, which does three-axis machining and assembly for Boeing programs. Most of the work for McAllister will now move to our Tulsa and Wichita facilities. Our biggest program is the 737 MAX, And we have been encouraged by the news on the continued progress Boeing has been making with the FAA and global regulators to return the aircraft to service. Completion of the certification flights, a joint report from the United States, Canada, Brazil, and the European Union Civil Aviation Authorities, which was incorporated in the FAA's draft flight standardization board report, are all key milestones for the program. We are a proud partner on the MAX and make 70% of the structure. We are looking forward to seeing the airplane safely back in service. For 2021, we are planning 737 production deliveries to support Boeing's production requirements. Boeing has indicated that they will be at a rate of 31 aircraft per month by early 2022. Through 2021, we also plan to reduce the current buffer inventory of 128 737 shipsets. We will lag Boeing's production rates by about five units per month and plan to decrease the inventory of shipsets to a permanent buffer of 20 to 25 units. The production rates on the other programs for Boeing and Airbus remain as they have reported. Based on our forecasted production, we estimate our free cash flow for 2021 will be negative, but significantly improved from 2020's usage. This estimate of 2021 cash usage does not include the Bombardier assets that we just acquired or cash tax benefits, both of which will be positive. we expect free cash flow to be positive in 2022. Over the last few months, three actions have helped improve our overall liquidity position. First, in late September, we mutually terminated our agreement to acquire ASCO, eliminating a capital outlay of $420 million. While we were disappointed that the deal did not close, we have tremendous respect for ASCO 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 of $430 million during the quarter and terminated the 2018 credit facility on October 5th. We also raised $900 million of new secured debt. And third, we recently closed the acquisition of select Bombardier assets for $865 million, which is 20% reduction from the original enterprise value. The deal consists of a $275 million cash payment to the sellers, a 45% reduction from the original cash consideration of $500 million. The $865 million deal value includes certain liabilities for pension and government incentives. These three actions result in an adjusted Q3 liquidity position of $2 billion. Mark will provide further details a little bit later. Now that we've closed the Bombardier acquisitions, we are thrilled to welcome our newest colleagues in Belfast, Casablanca, and Dallas. The additions help accelerate our strategic transformation by providing more Airbus content, aftermarket business, defense, and low-cost country operations. The Airbus content includes the composite wing for the A220, which leverages a state-of-the-art fabrication process known as resin transfer infusion. As a smaller narrow-body aircraft, the A220 will benefit from from the quicker recovery of domestic air travel around the world after COVID-19. In general, Spirit will benefit from this higher domestic demand since 85% of our unit backlog are narrow-body aircraft. The acquisition also significantly increases our aftermarket and maintenance repair and overhaul business. Their focus on Airbus repairs and presence in the European market will complement Spirit's existing expertise with Boeing repairs and presence in the U.S. Spirit also secures exclusivity on Bombardier's business jet programs and is now one of their largest suppliers. And we expand our Rolls-Royce relationship with work on the BR-710 and Trent 700 engine nacelle components. In addition, the acquisition includes a world-class manufacturing facility in Morocco with a highly trained workforce located in an aerospace manufacturing cluster. The facility has a wide range of experience, with flight controls, engine nacelles, and fuselage sections, and has an extremely competitive cost structure. Finally, the Bombardier acquisition also establishes a robust path for Spirit to participate in the evaluation and development efforts for the UK's next-generation Tempest fighter program. Spirit's leading aerostructures 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 Spirit's overall strategy of expanding our defense business, which, by the way, realized a 20% growth rate in 2020 revenue. We expect more than 15% growth in our defense business in 2021. In summary, the acquisition of the Bombardier Aerostructures assets accelerated the diversification of our customer base. In 2021, based on preliminary estimates, we expect Boeing commercial revenue to account for 45 percent of our total revenue, then Airbus at 24 percent, defense at 15 percent, business and regional jets at 8 percent, and aftermarket at 8 percent. The revised enterprise value for the Bombardier acquisition of $865 million represents a multiple of 11.8 times expected 2020 EBITDA adjusted to remove one-time items. Our plan is to generate synergies in a number of areas, including the supply chain, facility consolidation, and overhead reduction over the next three years. After taking into account the expected synergies of 6 percent of revenue, the adjusted EBITDA multiple will be 7.3 times. Our preliminary estimate of 2021 revenue for the Bombardier assets that we just acquired is between $700 million and $800 million. One other highlight for the quarter was the work we did to manufacture ventilators in support of the battle against COVID-19. After building a state-of-the-art production facility, logistics system, and global supply chain, the Spirit team, working with our partner Vyair, successfully delivered 20,000 critical care ventilators to U.S. customers and customers in more than 20 different countries. The contract was on a cost-plus basis and was accretive to our results. Spirit is very proud of our partnership with Vyair to meet the demand for life-saving ventilators around the world. With that, I'll turn it over to Mark to take you through our detailed third quarter results.
spk16: Mark? Thank you, Tom, and good morning, everyone. I hope everyone is doing well and staying healthy. As Tom mentioned in his opening remarks, Spirit, as well as the overall aviation industry, are in the early stages of a multi-year recovery, and we expect to continue to face near-term challenges. Throughout this year, our teams have responded well to the changes brought about by the COVID pandemic. We have made significant adjustments in order to adapt our cost structure to our customers' lower production levels and will continue to adjust with the goal of emerging as a stronger company. With our long-term growth and diversification strategy in focus, we are pleased to have closed on the acquisition of select assets of Mobartier. This acquisition is key to our strategic transformation efforts and the additional work content with Airbus and aftermarket will position us well going into the future. Now let's move to our third quarter results. Please turn to slide four. Revenue for the quarter was $806 million, down 58% from the same quarter last year. This reduction was primarily due to the lower production rate on the 737 MAX resulting from the continued grounding of the program and the significant impacts of COVID-19 pandemic. Production rates across all of our commercial programs continue to be negatively impacted by COVID-19. We delivered 15 737 shipsets in the quarter, compared to 154 in the same period of 2019. Overall deliveries decreased to 206 shipsets, compared to 437 shipsets in the same quarter of last year. Let's now turn to earnings per share on slide five. In the quarter, we reported earnings per share of negative $1.50 per share compared to $1.26 per share in the same quarter last year. Adjusted EPS was negative $1.34 per share compared to positive EPS of $1.38 in the same period of 2019. Adjusted EPS excludes the impacts of the acquisitions restructuring costs, and the non-cash voluntary retirement plan charges. The third quarter operating margins declined compared to the same period last year as a result of costs incurred related to the low rate of max production, including excess capacity costs of $73 million, as well as lower production rates across almost all of our commercial programs due to the impacts of COVID-19. For the quarter, we recognized restructuring expenses of $20 million for cost alignment and headcount reductions, as well as forward loss charges of $128 million, primarily driven by the lower future production rates announced on the 787 and A350 programs. I'd also like to note that our total segment operating margin, normalized to exclude changes in estimates, improved significantly over the last quarter. This quarter-over-quarter improvement demonstrates 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, as well as other market and analyst data, and as a result, adjusted the results on the 787 and A350 programs to include a lower rate of production for a longer duration compared to our previous forecast. This resulted in an incremental fixed cost absorption on the 787 and A350 programs, and as a result, we recorded forward losses of $65 million on the 787 program and $45 million on the A350 programs during the quarter. Additionally, we recognized 18 million of forward losses on other programs, including the 747 and 76 program, which was primarily due to production rate decreases on this 777 program. Our year-to-date tax rate was approximately 38 percent. As discussed last quarter, as a result of the CARES Act, we can carry back our anticipated 2020 net operating loss to years where we paid tax. This has created a favorable year-to-date tax rate compared to our expected normalized rate. Now turning to free cash flow on slide six. Free cash flow for the quarter was a use of 72 million compared to a source of 214 million in the same period of 2019. This year-over-year decrease is primarily due to the negative impact of working capital requirements and significantly lower deliveries across all of our commercial programs, partially offset by favorable cash tax. The third quarter free cash flow was also impacted by $17 million of restricting costs, as well as $11 million of cash used to unwind the term loan interest rate swaps. Additionally, the third quarter of 2019 free cash flow included $123 million cash advance received as part of the April 2019 MOA reached with the Boeing Corporation. Free cash flow improved by about $175 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 our working capital requirements, as well as some favorability from the timing of certain deliveries in the quarters. we anticipate cash flow use in the fourth quarter to be slightly higher than what we have recognized in this quarter, primarily due to higher interest on additional debt and some favorable timing of deliveries that are not expected to repeat in the fourth quarter. Excluding Bombardier, we anticipate full-year cash used in operating activities to be around $700 million to $800 million, with approximately $120 million of capital expenditures. In other words, we expect free cash flow for 2020 to be around 800 to 900 million of outflow, which is in line with our expectations and our commitments to you in the last quarter. We are quickly diving into the Bombardier integration and analyzing the appropriate structure for the business. There will be a one-time cash outflow of 35 million in the fourth quarter relating to restructuring activity. Finally, as Tom mentioned in his remarks, Our 2021 free cash flow will continue to be negative but significantly improved from 2020, excluding cash tax benefits. We are expecting a cash tax benefit of approximately $300 million as a result of the carryback permitted by the CARES Act and anticipate receiving a majority of this benefit in 2021. This will provide cash benefits in 2021 above and beyond our year-over-year operational cash improvement. Let's now turn to cash and debt balances on slide seven. During the quarter, we announced the termination of the ASCO acquisition along with new financing activity. We raised $900 million of first lien senior secured debt, including $400 million term loan B and $500 million in notes due in 2025. In connection with the closing of this new debt, we terminated the existing senior secured credit facility, including the revolver. Prior to the termination, on September 30th, we paid off the term loans that had a remaining balance at the end of the second quarter of approximately $430 million. This financing activity, along with the ASCO acquisition termination and Bombardier price reductions, improved our overall liquidity position by $1.2 billion and provides us with additional balance sheet and operational flexibility. We ended the quarter with $1.4 billion of cash and $3 billion of debt. These balances reflect the termination of the prior credit facility, including the payoff of the term loans, but the cash and debt balances do not reflect the $900 million of new senior secured debt as those funds were not received until just after the end of the quarter. Including the capital raise and cash used for the Bombardier acquisition, the adjusted cash balance at the end of the quarter would be $2 billion. The debt balance adjusted for the $900 debt raise would result in a total debt balance of $3.9 billion. We believe our cash balance provides ample liquidity to navigate the uncertainty within our industry. Now, let's turn to our segment performance on slide eight. Fuselot segment revenue in the quarter was $421 million, down compared to the same period of 2019, primarily due to lower production volumes on the 737, 787, and A350 programs. Operating margin for the quarter was negative 23 percent compared to 11 percent in the same period of the prior year. This decrease was primarily a result of forward losses recognized on the 787 and A350 programs and lower profit recognized in the 737 program, including excess capacity costs of $42 million. The fuselage segment recorded $9 million of favorable cube catch-up adjustments and $92 million of net forward losses during the quarter. On a normalized basis, after reversing change in estimate impacts, Fuselage segment margin improved to negative 3% in the third quarter compared to negative 20% in the second quarter, reflecting the benefits of cost reduction initiatives we have completed this year. Propulsion revenue in the third quarter was $171 million, down compared to the same period last year, primarily due to lower production volumes on the 737 and 777 programs. Operating margin for the quarter was negative 9 percent compared to 21 percent in the same quarter of 2019. The segment recorded 5 million of unfavorable QM catch-up adjustments and 15 million of net forward losses. The decrease in segment profitability and operating margin was primarily a result of lower margins recognized in the 737 program, including excess capacity costs of 18 million and the reduction in production rates on the 777 program. And finally, wing revenue was $168 million down compared to the same period of 2019, primarily due to lower production volumes on the 737, A320, and A350 programs. Operating margin for the quarter was a negative 14 percent compared to positive 14 percent in the same quarter of 2019. the segment recorded $22 million of net forward losses. The decrease in segment profitability and operating margin was due to forward losses recognized in the 787 and A350 programs and lower margin recognized on the 737 program, including excess capacity costs of $13 million. In closing, this has been a very challenging year for SPIRIT. We have taken difficult but necessary actions to adapt to the changes brought on from both the max grounding and COVID-19. We continue to assess potential future scenarios to identify areas of opportunity and develop action plans to mitigate risk. The $900 million capital raise, along with the termination of the ASCO acquisition and the Bombardier price reduction, strengthens our liquidity position. and enhances our ability to address future challenges. Further, we will continue to stay focused on our growth and diversification strategies. The acquisition of Bombardier is a significant event for us, 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.
spk18: Thanks, Mark. And now I'll make some closing comments before we take questions. Given the significant changes to the global aviation industry resulting from the COVID-19 pandemic, SPIRIT has taken substantial cost reduction actions to align to lower levels of production. These actions include the reduction of 8,000 employees on commercial programs, closure of several facilities, and the reduction of other non-labor spend. In total, the annualized cost reduction actions have exceeded $1 billion, or 40% of our non-material base. We've also made substantial improvements and our manufacturing processes to improve digitization, automation, and process flow. Spirit also took several actions to strengthen our liquidity position. We mutually terminated the ASCO acquisition, repaid our term loans, and canceled our 2018 credit facility, raised $900 million of first lien secured capital, and closed the acquisition of Bombardier's Aerostructures assets for $275 million, a cash reduction of $225 million from the original amount. The Mabardier acquisition also accelerates our strategic transformation with additional work on Airbus programs, aftermarket, business jets, engines, and defense. The acquisition also brings low-cost manufacturing operations in Morocco. We have taken these significant steps during a very challenging time in the industry, which will allow us to emerge as a stronger, more diversified company. With that, we'll be happy to take your questions.
spk10: And at this time, we will now begin the question and answer session. If you would like to ask a question, please press star then one on your telephone keypad. If you would like to withdraw your question, please press star then two. Please note we ask that you please limit yourself to one question. And our first question today will come from Miles Walton with UBS. Please go ahead.
spk06: Thanks. Good morning. You've tackled a lot of issues in the quarter, so it's not an easy job where you sit. I was wondering if you could talk about the underlying margins excluding the forward losses and cumulative changes. It looks like your segment margins were about break-even. And I'm curious if that's sort of the underlying business right now at these low levels, you're breaking even. And then maybe more detailed, just a one-off, on the A350, the size of the forward loss there seems to be about double of what was in the debt segment. offering disclosure and just curious what changed there because it looks like you were assuming five per month back then as well.
spk18: Right. Well, I'll start off. In terms of the margins, you're right. We have made some substantial improvements quarter over quarter. I mean, obviously, deterioration year over year because of the reduction in production rates. But the cost reduction actions are starting to take hold. And so even at very low levels of production, you start to see the margin improvement. So, for example, right now, effectively, for 737, we're at a 7 APM rate. On 777, we've dropped now to about 2 per month. On 787, we're still at 10, but that's dropping to 6. So even with all those headwinds, you saw the margins improve on the 737 program on a normalized basis last quarter at negative 20%. to this quarter at negative 3%, so almost break even. So we're pretty happy about that. Now, the forward loss on the A350 program was really just due to rates. When we originally made the estimate of what we thought the forward loss was going to be, we were working on the assumption that the rate was going to drop from 10 to 6. But in fact, Airbus dropped it to 5 for at least a six-month period beginning in kind of the September timeframe. So when we took that into account, that drove the higher forward loss than we predicted at the end of last quarter. Mark, anything else to add?
spk16: No, I think you hit it right, Tom. You know, the A350 miles really was due to the fact that between now and the end of the year and mainly through next year, we're really going to be producing at about 4.5 per month. And when we originally made the assessment, it was in the forward losses in the 5 to 6 range. And so, you know, we've had to take that into account And also with that lower level of production, it's had a negative impact not only on Section 15, but also our fixed leading edge program. All right.
spk06: Thank you.
spk10: And our next question will come from Carter Copeland with Milius Research. Please go ahead.
spk11: Hey, good morning, gentlemen.
spk10: Morning, Gary.
spk11: Just a question on cash from what you've sort of disclosed about next year. Based on this year's guidance, sort of 850 out, you get the cash tax benefits of 300, and the cost out isn't quite there, but I don't know, call that 200. It kind of gets you to low single digit, hundreds of millions out. Are there other pieces that I'm missing? And I guess specifically with that, what should we expect from a cash standpoint on the Bombardier assets in your view? Thanks.
spk18: Great. Well, first of all, as you know, the cash usage for this quarter was $72 million. Mark said it's going to be quite a little bit higher next quarter. As we go into next year, again, with our current forecast, 737 production should be higher than this year, but it's very dynamic, so we'll see. Some headwinds on the twin aisle programs, but by and large, we don't expect the cash usage per quarter to exceed what we've seen in kind of Q3 and Q4. So So you're right. With the cash tax benefit of $300 million, that'll put us in the kind of single digit to, you know, right around the $100 million net usage, and perhaps better depending on performance. What it doesn't include is Bombardier, you know, still digging into it, but we do expect Bombardier to be positive. We've got some work to do there as we look at their capital expenditures and their R&D and things like that, and we align it to our program's and as well as we start to drive synergies, particularly in the supply chain. So we expect it to be positive. Don't know yet how much, but I think your analysis in terms of where we will be for cash flow next year, including the cash tax benefit, is about right.
spk11: Great. Thank you for the color, Tom. Thanks.
spk10: And our next question will come from Robert Springhorn with Credit Suisse. Please go ahead.
spk15: Hi. Good morning. My question's going to be on Bombardier, but before we go there, just to clarify, based on the moving pieces and where rates are now, in what quarter, Tom or Mark, do you expect to, based on current planned rates, no changes, will we see trough revenues? Because it sounds like some rates are still trending down on the wide bodies. And, of course, Bombardier is a little bit obscure. So that's the first question. Second question is, why did Spirit and Bombardier value the deal somewhat differently? Bombardier talked about some favorable adjustments on the forward business.
spk16: Yeah, so first off, as it relates to the trough from a revenue standpoint, I would tell you that we expect the trough is behind us. The revenue that we generated in the second quarter of 2020 or this year, we expect that to be our low point. And as you saw here, we've made a slight improvement here in the third quarter. And then as we move into next year, we have to adjust for some of the twin aisle pressure next year. But the expectation is 737 will be a little bit higher next year, which will help offset that. I think we're in a good position as we move forward here to slightly start to see revenues move upward as we move into 21 and even stronger into the back half of next year based on the OEM data that has been provided to us. And then specifically as it relates to Bombardier's press release and how they characterized, all I can tell you is that Bombardier – Accounting is due to IFRS. Spirit uses US GAAP and how they calculated their liabilities or the deal values is really up to them and their accountants. I can tell you that we used our accountants and our actuaries to assess the pension obligation liability and the repayable launch agreement and then the cash proceeds. So You know, when we finalized the purchase accounting here and established the balance sheet at the end of October, we're very comfortable with, you know, our accounting assessment as it relates to what the value of the deal is. I wish I could connect the dots more for you, but, you know, they probably had some different assumptions than we did, but we do know that our deal value in the enterprise and what the liabilities we'll establish on our books is consistent with U.S. GAAP.
spk18: Right. It really gets down to how they valued the pension statement. obligations in IFRS versus how we did in US GAAP.
spk15: Okay, just the last part, just Tom, on the exclusivity that you have there, is that part of some kind of a pricing arrangement or should we see similar profitability in that business to what we would normally expect from Spirit?
spk18: Well, the exclusivity is that we have sole source life of program agreements on the parts that the Belfast operations currently supplies to Bombardier on their business jet programs. And the profitability is slightly accretive on those programs to Spirit's normal profitability margins.
spk15: Okay. Thank you very much.
spk10: And our next question will come from Christine Luag with Morgan Stanley. Please go ahead.
spk14: Hi. Good morning, guys.
spk10: Good morning.
spk14: Good morning. For the 48 assets that you've acquired, can you discuss a free cash flow profile of these businesses? And then now that you've closed the deal, what your priorities are in the next year?
spk16: Yeah, Christine, I'll address the cash flow on that. I think Tom will kind of talk a bit about the business next year. But the reality is this. Their business has been It's our business now. It's been impacted by COVID-19, so obviously there's going to be lower revenues than we initially anticipated when we signed the purchase agreement there. We just closed the deal a few days ago. Our teams just hit the ground on Monday and Tuesday. I've got my financial team diving into the details as it relates to the next couple of months. We'll be working with them over the next month or so to establish an annual operating plan for 2021. You know, they had a plan previously and expectations with their former parent company. And as we think about the integration and the synergies and where that business is going on a go-forward basis, we expect, you know, decent revenues as it relates to the business jet side of things. I think we've got good line of sight to A220. And we're really pleased with the aftermarket port of the business. So we're not yet going to really get into details as it relates to where we think their cash flow is going to go next year and how it's going to contribute just specifically. We'll factor that into our guidance when we talk to you guys at the end of January. But it's really in the early days of the Bombardier acquisition and our teams are are working in earnest as it relates to the integration and the synergies. But we're really pleased about that business and what it could offer from a value proposition for Spirit.
spk18: Great. And, Christine, in terms of priorities for the business, first and foremost is integration. It's a new acquisition. It's a big one. It's the biggest that Spirit's 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 going to be on capturing synergies, and that's part of the integration effort, but specifically looking at supply chain, facilities optimization, overhead. And particularly in supply chain, with Spirit, we bring a lot more critical mass and scale with suppliers. And so we'll start integrating those opportunities and leveraging our existing supply base to get more competitive opportunities as we go forward. Operationally, the A220, of course, is a huge program. It's the entire integrated wing using that resin transfer infusion technology for fabrication that I mentioned in my prepared remarks. And we're going to be looking very hard at the production process, the flow, material waste, and looking at ways we can optimize the production and drive further productivity in it. And then the other big thing is aftermarket. This acquisition more than doubles our aftermarket business, and it gives us substantial This is Tom again. Sorry, we must have dropped off. So, moderator, perhaps you could let us know, where did we stop? Did they hear my response to Christine's question?
spk10: You were giving your response to Christine's question. However, I have reopened Christine's line if you would like to re-ask that question again.
spk18: Christine, I'll just start over and make sure we get it in fully.
spk14: I think the part you dropped off, Was your question about aftermarket? Okay, right.
spk18: So aftermarket is going to be a big focus for us with this acquisition. And Bombardier's assets more than double our aftermarket revenue. And so we've always historically been very strong on Boeing repairs for flight control surfaces, nacelles, and thrust reversers in the U.S. market. And the Bombardier business was always very strong on Airbus flight control surfaces, nacelles, and thrust reversers in the European market. So those two things come together very nicely and complement each other and will more than double our aftermarket business. And as I said in my prepared remarks, our aftermarket revenue now becomes 8% 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 aftermarket activity.
spk01: Thank you.
spk18: Okay, thanks, Christine.
spk10: And our next question will come from Sheila Coyoglu with Jefferies. Please go ahead.
spk01: Hi, good morning, guys, and thank you. Just to follow up on Christine's question, maybe sticking with Bombardier, your EV on the deal fell 35% or so, but the implied EBITDA fell 50%. So I guess, how do you think about how you've risk-adjusted the exposure here, given it's mainly A320 and BizJet exposure? And how do you think about those program outlooks, appreciating, Tom, that the deal just closed and you're going through the forecasting for it?
spk18: A few ways that we looked at it. Obviously, we struck the deal last October, but the world changed with the pandemic, and Bombardier had certain expectations in terms of deal valuation, and we were looking for some relief given the changes in the market. So it was, as you can imagine, a rigorous discussion, and we arrived at a mutual conclusion that it was a 20% reduction in the total deal valuation, but if you look at the cash consideration, it was a 45% reduction. So that's probably more in line with the EBITDA reduction that you just mentioned. The other element of this is It was always a three-way negotiation with Airbus because the pricing on the A220 and all the deliverables to Airbus had to be taken into account. And Airbus was also very supportive in these discussions to make sure we could come to a mutually agreeable outcome. So all those things taken into account, we feel very comfortable with where we ended up in a deal valuation. So it's a win really for Spirit because we get a transformative acquisition and It's a win for Bombardier to get the acquisition closed so they can move on with making their business more focused on business jets. Really a win for Airbus in that they now have clarity in terms of their A220, particularly on the full integrated wing. And we would say it's a win for the workforce in Belfast, Casablanca, and Dallas because they now have certainty as we go forward.
spk01: Okay. Thank you for clearing that up. Apologies for that reversal.
spk10: And our next question will come from Doug Horne with Bernstein. Please go ahead.
spk09: Thank you. Good morning. Last week, Airbus talked about the basically letters that it had sent out to suppliers on rate increases for the A320neo from 40 to 47 a month, and they said that they had been planning for suppliers to be ready for such an increase in Q2 next year, they move that back to Q3 next year. What I'm interested in is you're the largest structural supplier on the A320neo. 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 Q2 to Q3 from a spirit standpoint?
spk18: So the letter, and we had calls with their senior leadership on this topic, is the way they characterize it is they asked us to protect rate 47 for the back half of the year. So the current schedule is rate 40, but they asked us to protect for 47. So that means to make sure that we have all of our capital and tooling in place, that we're 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 forgings, if the rate does go up. And they would give us enough advance notice to put those things into effect, but protecting the rate means you have to be prepared to go there if they decide to make that move. Now, obviously, the market is very dynamic right now. They have talked with all of their individual airlines and created a new skyline based on when airlines – can take delivery and when they will take delivery. So they've been very diligent about the way they have constructed their schedule and what they've communicated to their suppliers. And they're effectively just giving us advance notice to be prepared if the rate does go up. The fact that it shifted three months doesn't really impact us. It just means that we push that lead time out. So we have done what they've requested. We are protecting for rate 47 in the back half of the year, Q3 now. And if they do decide to go up, we'll be prepared.
spk09: And does the going up mean, is this, what does that exactly mean? That you would be within whatever quarter that is able to deliver in that quarter? Or does it mean that you would be kind of set to go? I'm sort of not sure what For you, how to tie your rate to their rate. I guess that's the thing I'm trying to understand.
spk18: Well, typically on the A320, if they announce a rate of 47, we would be delivering at that rate during that period of time. So as they said on the call, I think Guillaume said October. So if they decide to go in October, we'd be prepared to deliver 47 ship sets in October.
spk09: Okay. Okay. Very good. Thank you.
spk10: And our next question will come from Ken Herbert with Canaccord. Please go ahead.
spk05: Hi, good morning, Tom and Mark. Good morning. I wanted to see, Tom, if you can provide any more detail on the glide path for the 737 from sounds like you're at seven a month now to the call it 26 a month at the end of 21 or early 22 if you sort of lag by five a month. If you can provide any more detail on sort of rate breaks over the next several quarters on that, and when you expect to catch up with Boeing on 737 rate. Right.
spk18: Well, Boeing has provided guidance that they think that their production rate will be at 31 per month by early 2022. And as we said, we're going to lag them by about five aircraft per month to burn down the inventory that's stored here at Wichita. Right now, we're in the process of ramping up to 10 aircraft aircraft per month for January. So we're in the process of getting all of our headcount and material orders and supply chain aligned for that. Within that, we don't have much other guidance other than what Boeing would provide. It's a very dynamic environment, and we will be guided by what Boeing tells us. But that's how we're planning right now is we'll be at 10 by January. They'll be at 31 by early 2022, and we're going to lag them by about five per month. In terms of the catch-up, based on the current schedule, it looks like we would burn down the 130 or so, the 128 units that we have in buffer now to 20 to 25 by mid-2022. And then we'll keep that buffer of 20 or 25 units just to cushion the production system so that we don't have any disruption that could upset Boeing's production line in Everett. So that's the plan. Great. Thank you.
spk10: Our next question will come from Seth Seifman with JP Morgan. Please go ahead.
spk03: Thanks very much, and good morning. I wonder if maybe I could sneak two in here, but one, on the 737, with the current workforce, how high can production go with the workforce at the size that it is now? And then just real quick on Bombardier and the A220, You know, how should we think about where the rate needs to go on that program before it becomes, you know, before it starts to contribute at a, you know, at a solid cash margin?
spk18: Right. Well, on 737, 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 10 by the beginning of the year. So I mentioned the ventilator program. As that's winding down, we're transferring aircraft. some of those people back to the 737 program so that we are ready to go to 10 in January. So currently at a rate of 7 and going to 10. In terms of Bombardier, the A220, the current rate is about 4 per month. And, you know, we're going to be prepared in the future to go up to 14 per month. But we'll be guided by, again, what Airbus decides in terms of how fast they'll ramp that up. In terms of profitability, we will need to dig into it to figure out where exactly the break-even points are in the profitability, but it's going to be a good program overall. The outlook on it is very good. As I mentioned, it's one of the smaller segments of the narrow-body market, and the narrow-body market is recovering. For example, China and Russia on their domestic aircraft flights, air traffic, are already above 2019 levels. So we expect to see the same in Europe and the U.S., is that domestic travel will recover first. That will favor narrowbodies. And with overall levels of traffic lower than they were in the past, a smaller narrowbody like the A220 should do very well. So we expect that Airbus will hit their long-term production rate commitments on it, and we will be ready to meet those commitments. And as we get further into it, I think we'll have a better sense of what the profitability break-even points are.
spk08: Great. Thanks, Tom.
spk10: And our next question will come from John with Citi. Please go ahead.
spk04: Thanks and good morning. Back to cash, you know, can you talk a little more specifically, Tom, about what you need to see in 2021 for cash burn to be significantly better? And then same thing, what do you need to see for cash break even in 22? What's in your control? What's not in your control? It strikes me that narrow body is clearly very important. You've talked about Airbus. We're talking about MAX a lot. But Boeing is talking about slower deliveries in 21. which would therefore constrain their production, which would therefore constrain your deliveries. So just a little bit more on what's in your control versus what's not in your control, and what production rate do you have to hit to actually make cash on each 737? Thank you.
spk18: Great. So as you said, I mean, what's in our control versus what's not in our control? What's in our control is our cost reduction actions, and we need to continue to execute on those. We've got a lot of them are already in place, but we need to maintain that vigilance. 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 those are the things that are in our control to drive, and we are definitely going to continue to drive those. Things not in our control and really the biggest driver for cash flow in 2021 is going to be production rates, particularly on the 737s. Obviously the 737 is our biggest program. We make 70% of the structure. Last year it accounted for half of our revenue. This year we only produced 72 units versus 606 in 2019. So if that recovers, and it's supposed to recover from this year, according to Boeing's current projections, that obviously will drive improved cash flow for next year, even with the headwinds of some lower rates on the wide bodies like the 777 and the A350. But this is a very dynamic environment. Um, 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 FAA has said there's no timetable on that, but they have said a lot of positive things about it. So has the also, by the way, which is encouraging. Um, so we need to see that. And then of course the pandemic, um, people are starting to fly more domestically in places like China and Russia, but with the recent surge, it creates more uncertainty. So once the pen, a vaccine is in place, that will obviously give greater focus. And also the development of these private healthcare corridors or travel bubbles that you start to see developing between different countries, which should help stimulate some international traffic. So those I think are the key issues for 2021, and frankly for 2022 as well. We've got to continue to drive our cost reduction actions, but we need to see single aisle production rates increase as air traffic recovers around the world.
spk16: Yeah, John, you know, just to kind of add to what Tom said, you know, with all the reductions in production rates this year, we really do, you know, when you think about delivering 72 737s, we're really kind of at the trough right now of production volumes. So even a modest improvement in 737 deliveries next year will create some tailwind and creative benefits for us. So You know, as we said before, some of the drag of working capital that consumed quite a bit of cash here in 2020 will not repeat. I expect working capital to be a bit of a tailwind. A little bit of benefit from 737 next year. And as we said before, you know, from an operational standpoint, we expect our cash flow to be significantly better year over year. You know, more than half of our cash burn here in 2020 is working capital replete. Related and that will not repeat next year. We'll get a little bit of benefit there and you know When you when you think about it Carter kind of did some good math on where we think cash flow is so Significant improvement next year even with the lower production volumes the cost reduction activities are taking place You see it in our cash usage this quarter So, you know, we're going to continue to go battle the cost reduction side but we also I think have some real opportunities on the working capital and I think we can do a better job next year on inventory management, which will potentially give us some additional tailwind on the cash flow side. And, you know, if the market predictions come true, you know, we're looking at some modest recoveries back half of next year and into 2022. That will help on the operational front. And then, you know, as we said, you know, it's kind of a, a pro and a con, but, you know, the operating losses this year will generate some sizable one-time cash tax benefit in 2021. And that will create, you know, some additional liquidity or cash to help us work through the challenges here. But, you know, we feel good about where we're at and where we think cash flow is going to be next year, significant improvement. And then as Tom indicated, you know, we get a little some help here on the vaccination and their narrow body starts to recover, we can be back in business generating free cash flow in 2022.
spk09: Thanks.
spk10: And our next question will come from George Shapiro with Shapiro Research. Please go ahead.
spk20: Yes, good morning. I just wanted to go back to Last year, Bombardier was going to do about a billion dollars of revenues in 19. What is that number this year? I know you mentioned on the call it'll go up to 700 plus next year. I'm just trying to get the comparison here as to what's... Well, you're right.
spk18: Last year was about a billion dollars. This year, with the impact of COVID... And again, we're just getting a look at the books from the standpoint of closing the deal... looks like it'll be 700 to 800 million, and then a recovery to the billion dollars in the 2022 time period. But that's what we see right now.
spk16: Yeah, George, to be more specific, this year we're looking at six to 650. That's what we're projecting for the year. And then next year to seven to 800. So just a little bit of modest improvement next year before we start to see revenue start to climb back up in 22.
spk20: And just on the 737, What happens if Boeing further delays the increase to the 31 per month rate? Because certainly they've got a lot of planes to deliver. They've got a lot of grounded planes. So I just wanted to see how you react to that.
spk18: Well, we will respond to their production rate, and we'll lag them by at least five per month. And if the rates are lower than we're expecting, this will align our costs accordingly.
spk20: Okay, thank you very much. Thanks, George.
spk10: And our next question will come from David Strauss with Barclays. Please go ahead.
spk19: Thanks. Tom, I was wondering if you could just specify exactly what you're assuming for max production in 21 that you've got reflected in your commentary around 21 free cash flow. And then looking beyond the MAX, it's the other important platforms, 320, 350, 787. You're currently delivering well. You're delivering into the manufacturers well above their own delivery rates at this point. So how much risk is there that you actually have to drop your production rates on those programs, actually have to drop below the manufacturer's stated production rates going forward? Thanks.
spk18: Great. Well, on the other programs, our rate tends to line up to the manufacturer's rate, so Airbus and Boeing. And when they give us a schedule, we deliver to it. And so those are pretty closely aligned. And on the 320, Airbus has been very clear they're at a rate of 40 right now, which is going to continue into next year. They've asked us to protect for 47 in the October timeframe and beyond. The A350 is right now at a rate of 5, and that will go into early part of next year, May, June, and then go back up to 6. 787 right now is at 10, and it's supposed to go to the 6 in about the March timeframe. And 777 is really down to 2, 1.8. And those are all as what the manufacturers have stated, and we are aligned to those. On the MAX, Boeing hasn't been – specific yet about what the production rate will be in 2021. What they've said is they expect to be to 31 by early 2022, and we're getting ready to go to 10 in January. And so we haven't really said what the specific rate will be for 2021, and we'll really wait and see what Boeing does. We don't want to get out ahead of them. It's obviously a very dynamic environment. They're working really hard with the airlines, and they've given some guidance to the market, and we're We're following that guidance, and we're making sure that we align to the schedule that they've given us.
spk16: David, I think your point, though, is Boeing and Airbus, Boeing on the 87 has built up some units that they haven't delivered yet. Airbus has some as well. Again, that's really kind of outside of our control. They've asked us to produce. We're delivering. And we know that there's a lot of uncertainty as we move into 2021. I think production rates are still dynamic. And as we've acted very quickly this year, if there are further rate reductions, we will be forced to have to take additional workforce reductions and continue to focus our cost to align with the production rates. We have a highly variable cost structure here. And the best thing that we can do is production rates are out of our control, and if they go lower, Because of the situation that you just addressed, we're going to have to take further workforce actions, and we will continue to align our cost structure with the marketplace as we see it today. And as you know, it continues to be dynamic because of COVID-19.
spk19: Thanks. Hey, Mark, one quick follow-up. Working capital in 2020, the $800 to $900 million free cash flow burn that you're guiding to, What are you including in there? I mean, as you look at working capital, what do you call working capital? What are you assuming within that number for kind of negative or free cash working capital burn in 20?
spk16: Yeah. So, David, I would focus on receivables, inventory, accounts payable, and accrued liabilities and profit sharing. Those are the big cash-driving working capital items on our balance sheet.
spk19: Okay, and you think the sum of all that in 21 is a positive?
spk16: Slightly positive, yes.
spk19: Okay, thank you.
spk10: And our next question will come from Kaivon Rumer with Cowan. Please go ahead.
spk00: Yes, thank you very much. So when you first announced the Bombardier deal in October of 2019, I think you were talking of six and a half times EBITDA with synergies, which if you kind of back it up to the billion dollars was like close to an 11% EBITDA margin. And now you're talking of six to 650 in terms of revenues for 2020. And if I use the 7.3, you know, it backs up to about a 12% EBITDA margin. So a higher EBITDA margin after a substantial revenue drop And then if we're looking at next year, wouldn't the EBITDA margin go up if, in fact, the revenues are building as you hope?
spk16: Yeah. I mean, when you think of it that way, I don't think that an EBITDA margin on any of our business at around 10% is unreasonable. I think we have a lot of opportunity from a cost standpoint. Tom talked about three or four major drivers that we think that we can take advantage of as it relates to the Belfast site that could really help us from a profitability standpoint, from a cash flow standpoint. So I don't think it's unrealistic to assume that that business can generate 10 plus, 10 to 12 plus percent EBITDA margins as we look at getting back to the higher revenues over the next one to two years here.
spk18: And I would say we do think we can increase the EBITDA margin next year as we drive the synergies, particularly in supply chains.
spk00: But so if I look at this, what is driving the revenues up? Because A220 is already at rate. I assume the 7500 is gone, you know, from an aerostructures point of view, 35 to 40. The aftermarket, I guess, could be flat to up. But I have a little trouble understanding what's driving the revenue up next year.
spk16: Well, Kai, as we said, I indicated that we're looking at mid-650s from a revenue standpoint, and we're projecting 700 to 800. 800 if some of the business jet and aftermarket business holds and outperforms kind of where our heads are. But I don't think when you think about an increase in revenue from 650 to around 700 that we're talking about a substantial drop. right, a little bit of benefits on the business jet side. I would expect that the 7500 will deliver a few more units, will produce a few more next year. We got a little bit of lift on the aftermarket side of things, right, and we, you know, as it relates to some of the discussions that we've had with Airbus on price, et cetera, you know, could add some value as it relates to the A220 program.
spk00: Thank you very much.
spk10: And our next question will come from Hunter Key with Wolf Research. Please go ahead.
spk17: Hi, thanks for getting me on. Quick follow-up to that last comment, Mark, when you talked about, I was going to ask you what your ship set content was on 220 prior and pro forma. So I'd be curious about that. And then the second one is, Tom, what's your primary metric for how you measure employee productivity? Thank you.
spk16: Sure, Hunter. Real quick on the work statement on A220 today, The new A220 work that we're going to capture as part of this acquisition is, Tom talked a lot about the fully ingrated composite wing, but there's some potential fuselage work, some center wing box work to complement our propulsion package that we have on the A220, the pylon. we're starting to have some sizable work statement as we add the work content from the Bombardier acquisition.
spk18: Right, Hunter. And then to get at employee productivity, I'll focus on direct labor productivity. Our major metric is hours per unit, which we look at across every program and continue to work on that. And we look at, we call it do what's due, but it's a realization metric, which is For the hours scheduled today for a particular unit, how many did we complete? So what was our effectiveness at executing the workload for today that was scheduled? So hours per unit and what we call do what's due. And we look at those metrics across all of our programs on a daily basis.
spk10: Thank you. And our next question will come from Ron Epstein with Bank of America. Please go ahead.
spk07: Hey, good morning. So we've discussed a lot of how you're restructuring the business and so on and so forth. Can you restructure how you do contracts so 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 mean, the situation we're in, I suppose, is a once-in-a-lifetime thing, but it might not be, right? I mean, is there a better way to build downside protection into your contracts with the OEs?
spk18: Well, I mean, certainly you can try. They're good negotiators. But the one thing I would say is our biggest program is the max. And as we said before, our max contract is indexed to rate. So as rates go down, our price went up. And that's probably the best way to protect yourself in the event of a downturn because you just can't anticipate these things. But in that case, that contract being our biggest contract, that was a good contract, if you will, mechanism that helped with this downturn. Short of that, we always work with our customers in terms of what are the best terms and conditions that make sense in the market and that we can live with. So there's always a large focus on quality and delivery. It's difficult to protect normally against downturns like this. I mean, this is a once in a millennium type of situation. But for our longer-term contracts, we also build in some escalation protection as well. So lots of different things that you can do, and it's always a negotiation based on what market conditions are and what the needs and requirements are of both parties at the time.
spk07: And if I may, on 787 specifically, I think you said at one point you guys would be cash flow breakeven in 22. When does that happen now? Is it like 24, 25?
spk18: That is positive in terms of cash flow and profitability when we get to line unit 1405. Now, originally that was in 22, 23 time period. Obviously now with lower rates of production, that gets pushed out to the end of 2024 thereabouts.
spk07: And it's still 1405, that still same line number?
spk18: Yes.
spk07: Okay, great. Thank you.
spk10: And our next question will come from Noah Popenak with Goldman Sachs. Please go ahead.
spk02: Hi. Good afternoon, everybody. You're welcome. Quick clarification and then a longer-term question. The $800 million to $900 million of projected 2020 free cash burn that you've provided, is that include or exclude that, I think you said, $35 million to $40 million of Bombardier outflow in the fourth quarter?
spk16: It does not include the $35 million. The $800 million to $900 million is what we told you guys on our second quarter earnings call. That's the legacy business, excluding the Bombardier. I think we're going to be on the favorable side of that, and that does not include those one-time severance-related outflows. cash costs that will be incurred on the Bombardier acquisition, and we'll pay those out in November and December.
spk02: Great. And then longer term, you've spoken to the mix change in the business from a percentage of revenue perspective. If we're looking three, four, or five years out, how should we think through the margin differential in defense versus aftermarket versus I mean, I know it's different by airplane program in the original equipment business, but just in the pieces you're adding, whether you want to frame it by defense versus aftermarket versus the Bombardier assets, just curious to hear you talk through the margin in those things that are mixing up.
spk18: All right. Well, as we go out for the next few years, obviously next year the MAX program is still lower. So we would expect the Boeing percent of spirits revenue to – to increase again in the future as the production rates normalize. In terms of margin, our older, more mature programs tend to have higher margins as you would normally expect. But the defense margins are what you typically expect in defense contracts. They don't go as high, but they also are more stable even in downturns. So those are in the kind of 12% to 14% range typically. And that's what we would expect as we go forward on defense. And as I said, this year our defense business grew about 20%. Next year we're expecting 15%. And we've got line of sight to making it a billion-dollar business in the 2022-2023 timeframe, which is a little bit ahead of what we originally thought going back a couple years ago. On aftermarket, margins in aftermarket typically are higher. If you think of typical spirit margins of 16.5%, aftermarket would be higher. And as we go forward, it's going to be 8% of our business next year. As we go forward, it will continue to grow and become a bigger portion of Spirit's overall revenues in the future.
spk10: Thank you. And our next question will come from Peter Arment with Baird. Please go ahead.
spk13: Yeah, thanks. Good afternoon, Tom and Mark. Thanks for putting me in. Tom, you gave a lot of details on Bombardier. On the synergy comment, the 6% in terms of expected synergies, can you give a rough timeline of when you expect to kind of achieve that and any kind of color you can give on that?
spk18: We're going to start immediately, but the full 6% will take us three years was our original projection, and we'll stick with that. Obviously, with the pandemic, lots of things have changed, but we still see lots of opportunity, and we feel good about a 6% number and over a three-year time period.
spk13: Is the supply chain still one of the bigger opportunities that you kind of called out?
spk18: Yes, we see that. And it's because Spirit has a lot of critical mass and scale in structures, more so than Bombardier did. And so as we bring our suppliers into the mix, we expect that we'll be able to get to a lot more competitive outcomes.
spk13: Appreciate the details. Thanks, Tom.
spk10: And our final question today will come from Mike Ciaramoli with Truth Securities. Please go ahead.
spk08: Hey, good afternoon, gentlemen. Thanks for squeezing me on here. I guess just back Back to the working capital and cash flow, looking specifically at inventory, I mean, it continues to remain high, rates are lower. Should we just expect you've got all that long lead material? Should we expect significant declines? Looking at inventory contract assets, we didn't see too much of a change sequentially, but are you having luck slowing down? your incoming raw materials, just trying to get a sense of where that specific line can go under these new reduced rates.
spk16: Yeah, I mean, you see the balance sheet. You look at what our inventory balances are, and our business is one-half the size it was a year ago. You know, we very quickly reduced. 3-7 got shut down. We've gone through a series of production rate cuts. From a master scheduling standpoint, it takes a little time for us to slow the schedule down, feed it back to our supply chain. So there's no doubt we're carrying extra inventory right now. And so from a planning standpoint, as we factor our factory and the needs from a part consumption standpoint with what we have on hand, our supply chain team is working very diligently with our suppliers to align that up accordingly as we move through the rest of this year and into next year. And we saw some modest improvement in our inventory balances come down a bit between here at the end of the third quarter compared to the second. I expect our inventories to continue to improve as we move through the fourth quarter. And then in 2021, I do think from a working capital standpoint, we'll see some benefits because we have a lot of the parts. We were prepared for higher rates. And therefore, We have the parts we need and we'll consume them and we'll slow down the incoming receipt. Obviously, we'll have to focus and we'll continue to work with our supply chain. We want to make sure our supply chain is healthy and they're in a position to go up in rate late next year and into 2022. So we really kind of got to balance both of that. We will definitely take advantage of, I think, making our inventory levels more efficient or more in alignment with what our current rates of production are. And so that will help out in 2021 as compared to where our inventory levels are now.
spk08: Got it.
spk10: Perfect.
spk08: Thanks a lot, guys.
spk16: Thank you.
spk10: And this will conclude our question and answer session, also concluding today's call. We'd like to thank you for attending today's presentation. And at this time, you may now disconnect your lines and have a great day.
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