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spk14: Good morning, ladies and gentlemen, and welcome to the Spirit Aerosystems Holding Inc's fourth quarter and full year 2021 earnings conference call. My name is Charlie and I will be coordinating your call today. If you would like to ask a question during the presentation, you may register to do so by pressing star followed by one on your telephone keypad. I would now like to turn the presentation over to Aaron Hunt, Director of Investor Relations. Please proceed.
spk19: Thank you, Charlie. Good morning, everyone. Welcome to SPIRIT's fourth quarter and full year 2021 results call. I'm Aaron Hunt, Director of Investor Relations. And with me today are SPIRIT's President and Chief Executive Officer, Tom Gendile, SPIRIT's Senior Vice President and Chief Financial Officer, Mark Suchinsky, and SPIRIT's Executive Vice President, Chief Operating Officer, and President of Commercial Segment, Sam Marnick. After opening comments by Tom, Sam, and Mark regarding our performance and outlook, we will take your questions. Before we begin, I need to remind you that any projections or goals we may include in our discussion today are likely to involve risks, which are detailed in our earnings release, in our SEC filings, and in the forward-looking statement at the end of this web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of non-GAAP measures we use when discussing our results. And as a reminder, you can follow today's broadcast and slide presentation on our website at investor.spiritarrow.com. With that, I would like to turn the call over to our Chief Executive Officer, Tom Gentile.
spk20: Thank you, Aaron, and good morning, everyone. Welcome to SPIRIT's fourth quarter and full year 2021 results call. Despite the challenges we faced in 2021 due to the ongoing COVID-19 pandemic, we successfully navigated the year delivering cash flow of negative $214 million, which was within the expected range of negative $200 million to negative $300 million that we communicated last year. Throughout the year, we remained focused on keeping our employees safe, meeting our customer commitments, and progressing on our three main priorities, diversifying our revenues, delevering a billion dollars over three years, and driving margins to our 16.5% target. During 2021, we made good progress on our diversification. We substantially completed the integration of the assets we acquired from Bombardier in Belfast, Casablanca, and Dallas, with only minor items remaining. The efforts included exiting the Information Technology Transition Services Agreement with Bombardier six months early, and closing the Defined Benefit Pension Plan in Belfast to new participants. Our Airbus work packages increased significantly from this acquisition, with the addition of the A220 integrated wing and center fuselage, and Strength and Spirit's position as one of the top external suppliers to Airbus. We also became a top supplier to Bombardier with the addition of significant business jet content, The acquisition also increased our aftermarket business and established a good foundation on which we continued to build during the year. In addition, the acquisition even helped grow our defense business. Shortly after closing the deal, we learned that the Belfast team had won the contract to build a loyal wingman demonstrator for the UK Ministry of Defense, known as Project Mosquito. The acquisition was a meaningful accelerator to our diversification efforts. As a result, in the third quarter, we announced we would begin to report financial results in three new business segments, commercial, defense in space, and aftermarket. We also changed our organization to align with these three new segments and appointed Sam Marnick, Dwayne Hawkins, and Kailash Krishnaswamy, respectively, to lead the new segments. I'll turn it over to Sam now to talk more about the commercial segment. Sam?
spk00: Thank you, Tom, and good morning, everyone. In the commercial business segment, we're focusing on three priorities in 2022 – First, execution on our narrow-body production programs to meet the coming increases in production rates. Second, continued progress on productivity projects to help Spirit achieve the 16.5% margins once the MAX reaches 42 aircraft per month, and a renewed focus on growth for the future. But first, let's look at execution. In 2021, we made many changes to our operations so that we can be ready to meet the high and narrow-body production rates that our customers will need in the future. Improvements are partly based on our experience from the last series of 737 rate increases. Now, while some of the complexities, like simultaneously producing multiple models of the NG and the MAX, whilst adding tooling and other equipment are behind us, we are putting measures in place to help us meet challenges we might face. These changes will help us achieve solid execution in the commercial segment. For example, the new automated 737 floor P assembly line which reduces the number of hours required to fabricate and assemble those structures, will improve our productivity and quality execution. The advanced digitization on the production floor and improved production flow in many areas is expected to result in better efficiency, such as reduced wait times between workstations. The launch of the Global Digital Logistics Center consolidates thousands of square feet and parts kits to a centralized location at our Wichita site. And at our Prestwick site, our new automated A320 spoiler line is a state-of-the-art system to produce hundreds of spoilers at peak rate. In looking at our rate readiness preparations, we have established a team of specialized employees to plan for spirits and our supply chains rate readiness. The team has been preparing plans for the production increases ahead to be ready to react to emerging pressures. Additional capacity in our fabrication area and new capacity we gained with our Bombardier asset acquisition may be used to help mitigate risk. Our 2022 production plan factors in a reduction in the 737 shipset inventory, which is currently at 97. By the end of 2022, we expect to see the level reach approximately 20 shipsets, which will remain as a permanent buffer inventory. We are also planning for increased production on the 737, and will remain aligned with Boeing's communicated 31 aircraft per month production rate. We believe the rate increase preparations we have in place will help to drive the execution of narrow body programs in 2022 and beyond. Now, as we move to higher narrow body production rates, we also remain focused on driving our costs down and margins up. The team is working on a number of initiatives to reduce costs. We have a team that regularly reviews what we make at our factories versus what we purchase from suppliers so that we can have a cost-effective mix based on what we see in our production plans. Another closely related initiative is our regular review of asset utilization. We have teams in place to optimize our footprint to improve overhead costs and repurpose space for new work ahead. We closely watch the available hours of our equipment capacity for opportunities to maximize our usage and margin improvement. Finally, turning to growth. We are pleased that in 2021, Spirit won two new business jet programs, including the nacelle for the new Dassault Falcon 10X. The team also began work with an emerging electric vertical takeoff and landing, or eVTOL, company that promises exciting future potential. We have many new opportunities that the team is evaluating, and we intend to build a pipeline of new commercial opportunities. In summary for 2022, we expect to see our narrow-body production and deliveries to continue to increase. The improvements we have put in place and the team we have assembled have been anticipating the higher production rates, and we look forward to the opportunities we have for our new commercial segments. With that, I'll turn back over to Tom.
spk20: Thanks, Sam. Our commercial business segment has a strong position on current Airbus and Boeing programs. We have made a number of changes to enable us to meet the expected rate increases on narrow-body programs, but we also have many other growth opportunities, as Sam described. Our defense and space business has also been very active in setting us up for future growth. Early in the year, we announced that NASA had selected our FMI business in Maine for a contract to provide thermal protection systems to support several of their emerging projects. Along with the NASA award, our defense and space team also won several new classified contracts. In the summer, we joined Lockheed Martin to unveil Polaris, a digital engineering and advanced assembly demonstrator that will help our customer reduce cost and improve quality. Then in October, we opened the National Defense Prototype Center in partnership with Wichita State University's National Institute for Aviation Research, or NIAR. We continue to win new defense business and now have 24 development projects over $1 million that could lead to significant future revenue. In 2016, we had just one such program over $1 million. One of the ways we have been able to win new programs recently is by repurposing wide-body capacity, which is available due to the slow recovery in international air traffic and lower wide-body production rates. We have plans for our defense footprint to expand from about 500,000 feet today to almost a million square feet over the next two years. In addition, we continue to execute, again, $6 billion in funded programs of record and are increasing and finalizing new additional multi-year contracts that will grow that funded amount. Moreover, our new business pipeline for defense and space is extremely strong. We have many additional projects and opportunities that the defense and space team is actively shaping. We remain on track to grow our defense and space business to a billion dollars in revenue by 2025 at typical defense margins. Turning to our aftermarket segment, we built upon the foundation from our Bombardier asset acquisition and added applied aerodynamics to the Spirit portfolio early in 2021. The applied aerodynamics acquisition gave us radome and wing component repair capability to add to our Airbus and Boeing engine nacelle and flight control surfaces for overhaul and repair. The two acquisitions gave us a large presence in Dallas, and we have decided to center our aftermarket headquarters there. We also set up a JV with EGAT in Taiwan to expand our services in Asia. In 2021, we saw aftermarket revenue of about $240 million, and plan to grow the business to $500 million by 2025 at accretive margins. We believe our new segments and organizational changes help us become a more diversified company. In 2016, approximately 95% of our business was commercial. In 2021, 79% of our revenue was from our commercial business, 15% from defense and space, and 6% from aftermarket. In the future, Our aspiration is that our revenue will be a 40-40-20 split across the three segments. We are aggressively pursuing a path to cash flow breakeven in 2022 net of the $123 million advance repayment to Boeing. But of course, this is highly dependent on the production rates that Boeing decides on finally for the max. Now I'll turn the call over to Mark to take you through our detailed financial results and more on our 2022 expectations. Mark will also provide further details on our efforts to de-lever and recover our investment-grade credit rating. Mark?
spk18: Thank you, Tom, and good morning, everyone. Despite the challenges over the last past couple of years, Spirit has maintained focus on our strategy to diversify and grow, especially during 2021, which provided me a very transformative year for Spirit. The integration of FMI, the Belfast, Morocco, and Dallas site, from Bombardier and Applied Aerodynamics have expanded Spirit's capabilities, global footprint, and customer base. With that, we saw the need to form three new segments, commercial, defense in space, and aftermarket. These new segments position us well and encourage us to really sharpen our focus on the unique products and services that we provide to our customers. Looking ahead to 2022 and beyond, We are focused on the execution of the increasing single aisle production rates, as well as our key three priorities, which are to diversify revenue, de-lever by a billion dollars over the next three years, driver segment margins to the 16.5% target. Now with that, let's move to our 2021 results. Please turn to slide four. Revenue for the year was $4 billion, up 16% from 2020. This improvement was primarily due to higher production rates in the 737 program, as well as increased revenue driven by the acquisition of the A220 Bombardier program or A220 Airbus program and the Bombardier business jet programs and further growth in aftermarket. These increases were partially offset by lower wide-body production rates resulting from the continued impacts of the COVID-19 pandemic on international air traffic as well as Boeing's pause in 787 deliveries. As we turn to deliveries, overall deliveries increased to 1,028 shipsets compared to 920 shipsets in 2020. 737 deliveries more than doubled to 162 compared to 71 shipsets delivered in 2020, while 787 deliveries decreased to 37 shipments compared to 112 in 2020. Let's turn now to earnings per share on slide five. We reported earnings per share of negative $5.19 compared to negative $8.38 per share in 2020. Adjusted EPS was negative $3.46 compared to negative $5.72 in 2020. 2021 adjusted EPS excludes cost-related M&A, restructuring, the deferred tax asset valuation allowance, curtailment gain, and pension settlement losses. 2020 adjusted EPS excludes M&A and restructuring costs, expenses related to the VRP offered in 2020, and the deferred tax asset valuation allowance. Looking at operating margins, we saw an improvement to negative 12% compared to negative 24% in 2020, reflecting the cost reduction actions we have taken over the last two years, along with the increasing production rates. In 2020, we recognized lower expenses, including excess capacity, COVID-19 charges, and restructuring costs, as well as lower changes in estimates, including forward losses and cumulative catch-up adjustments compared to 2020. Despite the improvement of single aisle rates during 2021, full-year profit was significantly impacted by the continued lower production rates on the twin aisle programs. The wide-body programs, especially the 787, recognized significant overhead and forward loss charges during the year, which more than offset the execution and benefits on narrow-body programs. Forward losses in 2021 totaled $242 million, primarily driven by lower production rates announced by Boeing and Airbus on the 787 and A350 programs, and in addition, some additional engineering analysis and rework cost from the 787 program. In 2020, we recorded $370 million of forward losses, primarily driven by lower production rates on the 787 and A350 programs. In 2021, we also recognized an increase in other income, primarily driven by a curtailment gain of $61 million, resulting from the closure of the defined benefit plans acquired as part of the Bombardier acquisition and a pension settlement spinoff loss on a U.S. plan of $11 million. 2020 was impacted by expenses of $87 million related to the voluntary retirement program. All of these items are non-cash in nature. Additionally, during the year, we recorded a non-cash valuation allowance of $204 million on deferred income tax assets compared to $150 million that we recorded in 2020. Now turning to free cash flow on slide six. Free cash flow for the year was a use of $214 million compared to a use of $864 million in 2020. The free cash flow usage for the year was in line with the range that we previously have communicated. Free cash flow benefited from higher deliveries, lower restructuring costs, and positive impacts of working capital, as well as $300 million of income tax refunds. These were partially offset by a payment of 154 million towards the Belfast pension plan made during 2021. Additionally, 2020 free cash flow included 215 million received as part of the February 2020 MOA that we negotiated with Boeing. With that, let's now turn to our cash and debt balances on slide seven. We ended the year with 1.5 billion of cash and $3.8 billion of debt. In terms of delevering, we remain committed to paying down $1 billion of debt through the end of 2023, which we believe will enable us to regain our status of investment grade. We initiated progress on this commitment in February of 2021 when Spirit prepaid $300 million of floating rate notes. Then in October, we took advantage of the lower interest rate environment and refinanced our term loan which lowered our interest rate from 5.25% to 3.75%. Now let's discuss our segment performance. This is the first time we've reported the new segment structure, including commercial, defense in space, and aftermarket. So let's begin with commercial on slide eight. In 2021, commercial revenues increased 15% compared to 2020. primarily due to higher production volumes on the 737, A220, and Bombardier business jet programs, partially offset by lower production volumes on the Twin Owl programs, and in particular, the 787 program. Operating margin for the year was negative 7%, compared to negative 23% in the prior year. The improvement in operating margins were primarily due to higher volumes on the 737, as well as lower expenses related to forward losses restructuring COVID-19 and excess capacity in 2021 as compared to 2020. The segment recorded 6 million of unfavorable cumulative catch-up adjustments and 227 million of net forward losses during 2021. In comparison, during 2020, the segment recorded 29 million of unfavorable cumulative catch-up adjustments and 367 million of forward losses. Now let's move to defense and space, which is on slide nine. Defense and space segment revenue in 2021 improved by 19% compared to 2020, primarily due to increased activity on the P-8, KC-46 tanker, and classified program revenue growth. In 2021, operating margin for the year was 8% compared to 10% in 2020. Margin was negatively impacted in 2021, by higher forward losses and a one-time charge of approximately $9 million on a non-classified program. The segment recorded $14 million of forward losses compared to $4 million in 2020, primarily driven by an investment on the V280 program made during 2021. For our aftermarket segment results, let's now turn to slide 10. Aftermarket revenues were up 19 percent compared to 2020, primarily driven by the inclusion of full-year MRO activity from the Belfast and Dallas sites, which were acquired late in 2020, partially offset by lower spare parts sales compared to the prior year. Operating margin for the quarter improved to 21% compared to 18% in 2020, driven by favorable product mix and lower restructuring costs. In closing, we saw air traffic begin to recover in 2021, and expect it will continue to improve as we progress throughout the year. In addition to our three key priorities to diversify, deliver, and drive margins, our focus over the next 12 months will be on the execution of increasing single aisle production rates. Our productivity and efficiency improvements made within our factories over the last couple of years should enable us to meet production rate increases in a more cost-effective manner. If we look ahead to 2022, our performance will be driven by the commercial market recovery, specifically the 737 and A320 programs. As a result, we expect to see improvement in our financial metrics, including deliveries, revenue, margin, and cash flow. That said, we anticipate the first quarter to be the lowest quarter of the year for deliveries, revenue, earnings, and cash flow, with meaningful improvement throughout the year. Let me turn it back over to Tom for some closing comments.
spk20: Thanks, Mark. 2021 was a transformative year for Spirit. We continued our recovery from the dual crises of the max grounding and the COVID-19 pandemic by investing in productivity and innovation to ensure we emerged a better company coming out of this period than the one that went in. We also made substantial progress on our diversification efforts, which culminated in new reporting segments and a new organization aligned to those segments. We are excited about the launch of these three new segments, commercial, defense in space, and aftermarket. Even though commercial air traffic continues to have some volatility with the recent COVID variants, demand for domestic travel around the world remains robust, and narrow-body production rates at both of our OEM customers continue to increase. Eighty-five percent of Spirit's backlog is narrow-body aircraft. We have evaluated our operations and our supply chain so that we are ready to meet the narrow-body production targets from both of our customers. We will also continue to evaluate options to retire a total of $1 billion of debt over the three-year period ending in 2023. We made good progress starting with paying off $300 million in floating rate notes in February of 2021. This year, we also refinanced our term loan B to secure a lower rate and upsize the loan to give us flexibility to repay other higher interest obligations. We remain committed to regaining our investment-grade credit rating. Our investment in innovation and productivity projects to improve our operations will help us ramp our narrow-body production rates. These same actions will contribute to our objective of achieving 16.5% margins once max rates reach 42 aircraft per month. 2022 will bring continued improvement in our financial results and our cash flow generation with the expected increase of narrow body production rates and the growth of our new defense in space and aftermarket segments. With that, we'll be happy to take your questions.
spk14: If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, it is star followed by two. When preparing to ask your question, please ensure you're unmuted locally and And please limit yourself to one question only. The first question comes from Miles Walton of UBS. Your line is open. Please go ahead.
spk09: Thanks. Good morning. Tom or Mark, I'm not sure which. Could you talk about the trends in underlying margins, excluding excess costs, excluding board loss charges. You've resegmented, so it's a little tough to ask by the segment, so I'm just going to ask at the high-level company level. It doesn't look like the margins are really improving as you're going through the course of the year underlying. Could you just explain that and then maybe give us a roadmap as to why they start to really inflect in 22 and then into 23?
spk20: Well, I'll start with that, Myles. First of all, we did start to see margins improve throughout the course of last year. And it really is linked primarily to rates on the narrow-body aircraft. As those rates go up, we get better fixed cost absorption. We lower some of those excess costs that we've had in the past couple of years. And overall, that has a positive benefit on margins in the commercial segment. Let's focus on that. And coming into 2022, again, the same thing will happen. We're going to see rates continue to improve on both the MAX and the A320 aircraft. And that will drive better fixed cost absorption and ultimately lead to better margin performance this year and getting into next year. As we said, when we get to 42 aircraft per month on the max, that's a stable amount. That's a good surrogate. And that's when we think we can get to the 16.5% margins.
spk18: Yeah, Miles, I would just say that, you know, it's – It gets a little difficult for you guys as you try to glean or dig through the numbers. You know, the fourth quarter was a little bit messy with, you know, additional four losses on 787 with the lower expected production volumes, particularly in 2022. A couple of one-off charges in the defense area. So I think, you know, if we strip out the four loss items, which mainly – have been related to lower volumes on our twin out programs, and those are the programs where we're in a forward loss situation. Those programs, along with a few one-off items as we look at the third and fourth quarter, once you kind of normalize those out, we see our excess costs starting to get more in alignment with the higher rates. I think underlying, when we look at actually our gross profit, we're starting to see the benefits of the higher production rates. And I think as we move into 2022 and we get past the, you know, we're now at low, stable, twin-hour rates, we'll start to see the 737 and the 8320 benefits show up in our overall margins. And, you know, we're planning to execute here in 2022. And so some of that noise will be behind us. You know, we've seen a lot of ups and downs in 2020 and 2021. a lot of schedule changes, a lot of things that have impacted us, and we've really tried to react to those accordingly. I think you'll start to see the incremental margin growth that you're expecting as we move throughout 2022. But as I said in my opening comments, you know, our first quarter will be our most challenging quarter from a revenue and an earnings and a cash flow standpoint, and we should see things start to really improve in the second and third quarters as But you'll see a nice margin tick up here in the first quarter compared to what you've seen here in 2021.
spk20: And I would just add that if you look at the segment margins for aftermarket, you'll see they're north of 20%. Defense, you've really got to go back a couple years to a normal year, but they're going to be in the, as we said, the 12% to 14% range going forward. So those will also contribute in the future. Okay. All right.
spk09: Thank you.
spk14: The next question comes from Doug Hand of Bernstein. Your line is open. Please go ahead.
spk04: Good morning. Thank you. On the 787, I mean, Boeing has talked about the need to get enough, in a sense, enough volume of, through enough volume of inspection and repair, you know, so the FAA can look at this in a sense from a statistical standpoint. You know, when you look at Spirit's role in your forward pressure bulkhead, the overall Section 41, when you look at where you're at now, both in terms of new production, in other words, being able to make sure that the nonconformities are gone, that it meets the requirements, and then also the number of the work you've been doing to get through the shipsets that you've delivered and are being inspected and repaired in the completed aircraft at Boeing. Can you give us a sense of where you are now on this sort of road to recovery and delivery on the 787 from a spirit standpoint?
spk20: So, Doug, I'm in new production. We've been through all the engineering analysis, and we've completed that, and we know now – what changes we need to make to production going forward. And all those changes are incorporated, and we are executing those as we start to produce again. In terms of the rework, again, we've also identified the rework that needs to be done. And, in fact, I'd say we're about 40% complete with all of the rework that we need to do on the 110 units that Boeing still has in storage. because we've had access during different points of last year to those, and we were able to get in and do them. And we will complete that rework as we get access to those aircraft. And so we know what has to be done. We've already started the work. As I said, we're 40% complete. And in terms of new production, we know how we will build it going forward, and the teams are now essentially perfecting that and putting it into operation as we resume production on the 787.
spk04: And then given that insight, do you have any updated sense of when we might see deliveries happen?
spk20: Nothing beyond what Boeing indicated in their earnings call last week. So we are waiting for them to give us more information. They're obviously in close contact with their regulator and customers. So I would just defer to the comments that Dave Calhoun made last week on when they'll resume deliveries. Okay, great. Thank you.
spk14: The next question comes from David Strauss of Barclays. Your line is open. Please go ahead.
spk06: Thanks. Good morning. Maybe for Mark. Good morning. Mark, can you just talk about the pathway in terms of burning off or coming down in terms of these excess capacity costs? I think previously you had said You know, 25% lower. You did $218 million this year. Is that 25% still right? You know, do we get by the end of the year, based on what you're thinking about for max rates, are those, you know, are those excess capacity costs pretty close to zero? And are you actually also taking excess capacity costs on E7 at this point? Thanks.
spk18: Okay, good question. So on our excess capacity, you know, we've got multiple programs that, you know, we're seeing much lower production rates, and so we're period costing that. 737 is one of them, as you mentioned. A220 is another one, and A320. We do have the negative impacts of the lower production rates on 787 and that has a what I'll call collateral impact to our twin out programs because there's a shared costing rate and the lower the production is on 787, it has a negative impact on our Boeing twin out programs. So in 2020, we incurred $280 million worth of excess capacity costs, mainly 737 and A320. In 2021, With the integration or with the acquisition of Bombardier, we included some additional excess costs related to A220 on our way to higher production rates. So in 2021, we ended up roughly, call it somewhere between $215 and $220 million. And I expect, based on the rate ramp in 2022, that we should see our excess costs to be about half of what we saw in 2021.
spk14: The next question comes from Robert Stingarn of Malleus Research. Your line is open. Please go ahead.
spk17: Good morning. Sam, you opened your comments on cost initiatives, and I wanted to get a sense of how much more cost reduction work is still needed to get the company to the 16.5% margin at rate 42, or are these initiatives accretive to that?
spk00: So what I would say is it's part of getting to that 16.5%. These initiatives, we spent a lot of time this past probably year and a half getting these in place. We'll really start to see the benefit of those as rates start to increase, and we'll really see what efficiencies that we can gain. Additional to that, as we go out here into the future and we do eventually get to the 42 aircraft a month, whatever point that is, there are a number of other initiatives that we're constantly looking at that are not baked into that. For example, as you look in out years, as you look at what you might do with your supply chain, would you make buy? The initiatives I talked about in terms of what we've done so far in terms of the automation, the digitization, those are all part and parcel of getting us where we need to be on the to 16.5.
spk20: Yeah, and I would say that, of course, like any set of projects, we always set our own internal targets higher, recognizing that there might be some leakage, but also to offset other challenges that are going to come up. Obviously, inflation and material and labor, all of these things are going to be headwinds that we'll have to overcome. And so, you know, we always say we have to run fast to stand still. So the initiatives that Sam outlined are are all built into our plan to get to 16.5%. And we've targeted to achieve more than that, but we want to make sure that we achieve at least that. And so our goal is to offset the headwinds that we already know are there and still deliver and execute to that target.
spk17: Okay. Thank you for that. Just a quick clarification from Mark, if I could. Mark, how do we think about the net effect on cash flow in 2022? from 787. We've talked a lot about the slow ramp and the rework and so on. Some of these things, I guess shipments being down is a positive on the, given the negative cash margin on new builds. But then, of course, all the rework and engineering goes the other way. So what's the net effect in 22? And, you know, does that lead to 23 being a tailwind on 8-7 or a headwind?
spk18: Rob, really good question. You know our program really well. And so you're right. Since we're in a four loss position, we have negative cash flow on a unit by unit basis on the 787 program. So the lower production rates here in 2022 will be a benefit to us. I would say that those benefits offset the additional reworks and finalization of some engineering analysis that we're completing. So overall, I think the lower volumes, the savings there offsets the rest of the rework, the cash that is required to go complete the remaining, call it 55, 60% of the rework that is needed. The one area that we're really focused on is we had, from a production system standpoint, work in process in our system in the line along with supply chain parts expected at a higher rate in 2021. So if we do our jobs right, there could be some tailwind here in 2022 from an inventory standpoint, getting the production system, getting the number of units in flow at the lower rate more in alignment with the current rate of production. And so that could provide a little bit of tailwind in from a cashflow standpoint in, in 2022. And we're very, very focused on, you know, supporting Boeing when they decide to, to start the production back up, we'll be there for them, but we got a lot of work to go do there. So, you know, multiple pieces we're juggling. I think you've got it right. Benefits by lower deliveries. You know, we still have some rework. The majority of that we should complete this year. And then, you know, maybe we get a little bit of tailwind here if we can do a good job managing down our supply chain parts to the lower levels of production and getting our production system back in sync with the production rates when Boeing starts to deliver aircraft to airlines.
spk20: I mean, I think another way to say it is we completed 40% of the rework on 787 last year. but really spent 60% of the cost because it included engineering analysis, which we don't have to do this year. And the 40% of the cost this year for the rework will essentially be offset because of the lower production rates on the 787. Okay, got it.
spk17: Thank you all.
spk20: Thank you.
spk14: Our next question comes from Sheila Kahayalu of Jefferies. Your line is open. Please go ahead.
spk12: Hey, good morning, guys. Thank you for the time. I was wondering if we could talk about maybe, you know, commercial profitability. I appreciate the segment breakout, but there's really no historical context. So if you could give a little bit or maybe on the 777 specifically, you know, what did 2021 profitability look like and how do we think about the profitability of that program as it maybe steps up in rate?
spk18: Hey, Sheila. Hey, good morning. Good to hear from you. I would say this. If you can give us just a few days here. we'll be filing our 10 K and when we follow our 10 K it's, it will show three years worth of results under our new segmentation. And so, you know, you'll see 2021 results, 2020 results in 2020, 2019 results. You'll see a breakout between commercial defense space and aftermarket. You'll see revenues, you'll see operating margins and operating profit. And I think, um, Really, if you go back to 2019, and we should have this filed in the next few days, I think that will give you a good feel for the segment margins when we get back to normal-type production rates. And so I don't really want to get ahead and get too specific. You know, I think it's pretty easy to see in our disclosures today or earnings release, you saw aftermarket margins in excess of 20%. We've always told you those were creative and north of 20. We've talked about defense margins that are typically somewhere between 10% and 14%. And then I think when you see the 10K that we file here, and I think 2019 is a good proxy from what you should expect as we move into what we'll call is normal production 2023, I think that'll give you a good feel for what overall commercial margins are. Expect to be.
spk20: And I would just add this, is that as we look at the 737 in particular, because obviously that's still a big program for us. It's still a major driver of our economics. One of the things we're going to do is look at 2016 as a comparison. And the reason we picked 2016 is because that was a time we were at about 42 aircraft per month, and it was stable production in the sense of we were producing 100% NGs. So even in 2019, we were still doing a little bit of both NGs and maxes. But now we're 100% maxes. And so we're using 2016 as a surrogate to say, where do we need to get all of our operating metrics and comparables in order to drive the margins to get to the 16.5% target overall? I was actually going to ask you about 2016.
spk12: And then just on the 777, can you talk about profitability and how it looks there?
spk18: Sure. I mean, 777 has always been a really good program for Spirit, right? Obviously, you know, Tom starts to talk about 2016 as a good benchmark year for us when we talk to our teams about cost and margins, right? You know, the headwind we have, right, back in the 2016-2017 timeframe, we were producing at a rate of roughly eight aircrafts per month. And that really, that overhead absorption really helps supercharge margins. You know, as Boeing has indicated, we'll be, over the next couple of years, looking at two, three, four aircrafts per month. We like the 777 freighter that we have and 777X aircraft. you know, as Boeing has indicated, hopes to start delivering at the end of 2023. And as those rates start to go up, that will help contribute and contribute nicely to our overall commercial margins. It's a good program for us. It's a profitable program for us. And it's one that, you know, we're hoping Boeing continues to get more orders. Hopefully they can deliver more freighters. We're ready to support them. And hopefully... they execute on the timelines and getting the airplane certified, and we're excited to be on that. And you see a lot of customers in the marketplace excited about that 777 platform with Qatar looking to buy 777 freighters. So it's a good program for us, and it will be a contributor as we move into 22 and 23. Okay, thanks. Thank you.
spk14: The next question comes from Peter Arment of Baird. Your line is open. Please go ahead.
spk02: Yeah, good morning, Tom, Sam, Mark. Hey, Mark, maybe I could just follow up with you on just kind of defense margins. You know, you kind of commented that they're kind of more normalized. It's 10 to 14 percent. But you've got a lot of growth planned in front of you, and I assume some of that is still in development. So how do we think about the pathway on those margins if we're just thinking about 22 and 23, you know, going forward? Thanks.
spk18: Sure. You know, we had a couple of, a couple of one-time items here in 2021 that really kind of depressed the margins. It doesn't really show what our defense margins are. I talked about a, an agreement that we have with Bell on the V280, call it a cost sharing agreement as we, as we work with them to win that program. That was a, That was an $8 million investment that we made in 2021 that won't repeat as we move forward. And then we had a one-time charge on one of our non-classified programs in the fourth quarter. And if I exclude those two items in 2021, you know, we'd be looking at, you know, 12% to 14% margins on the defense side. And when we look at 22% and 23%, Everything is lining up for that. You know, we have a nice mix of mature programs like the CH53K. We all know that we're on the B21, which is still in development, and we've been winning some classified programs. And the classified programs typically are development-type programs, cost-plus-type programs that enable you to achieve, you know, a fair margin for the work that we're doing. So we've got a good path into defense, right? We're excited about it. almost 20% growth in 2021, and we really feel good about another nice growth profile as we move into 2022. And we expect to achieve those types of margins in this year, and As we continue to grow, it's going to be a nice contributor to our overall book of business.
spk20: I would say one way to look at the defense margins is you can think of it in maybe three categories. Mark mentioned the core programs that are mature and in production, CH-53K, and you could even include P-8 and KC-46, which are the military derivatives of the commercial aircraft there. Then we have these new classified programs, which are cost plus. And then I would say we have some specialty programs, particularly that came out of our FMI acquisition, that are more targeted, more niche, tend to be a little bit higher margin, and those tend to be on things like thermal protection barriers, space applications, missile applications, and for very specialty type of materials. And so the combination of those three things give us confidence that the defense and space segment can deliver the 12% to 14% margins consistently going forward. Appreciate the details. Thanks, Tom.
spk14: The next question comes from George Shapiro of Shapiro Research. Your line is open. Please go ahead.
spk15: Good morning. Mark, if I want some clarification, the forward loss that you took on the 787 looks like it was just due to lower production rates. So, one, can you tell us what you're including in terms of the expectation for the 787 rates as to when you get to your 1405, which you kind of had as the magic number. And then two, the cost incurred for the rework that you did on the 787, that's not included in the charge you took. Can you spell out roughly how much those costs are going to be? And then is there any agreement as to what you might have to contribute to Boeing in terms of the $3.5 billion charge that they took, if any? Thanks. Thanks.
spk18: Okay, well, let me answer the first two questions, and then Tom will address the third component. And so maybe let me attack the second component, which is the rework, okay? And so during 2021, we recorded approximately $154 million of forward losses in total. We did incur a forward loss in the fourth quarter of $32 million, okay? And that $32 million in the fourth quarter was specific to lower deliveries, which extended the block. And those lower deliveries are primarily isolated to 2022 and the fourth quarter of 2021. But we have included in those four losses estimates as it relates to the rework, both reworking Boeing aircraft that are that are completed, the 110 that Tom talked about, reworking airplanes in their production system and rework in our factory. And as Tom indicated, it's a combination of engineering work that we did, plus actually touch labor, replacement parts, et cetera. And when we look at, we're completing that work, as Tom said, roughly 40, 45% of the work itself, the number of units were completed in 2021. but we spent about 60% of that cost. The remaining component, the remaining 40% of the cost will be spent in 2022 as we complete those units. So that cost is in the forward loss. It's reflected in our financial results. 60% of that cash cost is included in our free cash flow that we reported in 2021, and the rest of it will be spent in 2022. the latest schedule change, again, it was kind of isolated to, you know, five, five and a half quarters. It means that, you know, our block now extends into 2025. And so, you know, you talk about getting to line unit 1406, which is our next price increase there. But, you know, the The airplane program, we're working very closely with our customer. Once they get it delivered, that'll be good for us. But at this point in time, 2020 and 2021 has had a significant impact on our block. It extended the block by roughly two years, and that includes two years worth of fixed costs like depreciation, property taxes, insurance that now unload on that same number of units. So It's a lot of headwind on us, but we've got it all captured. It's in our forward losses. It's all booked. So hopefully that helps, George.
spk20: And I would say, George, as Mark said, the lower production rates are already incorporated into the forward loss, as well as all the rework and engineering analysis. Those were part of the forward losses in 2021. And so we've taken a pretty conservative view of what the production rates are likely to be this year. As you know, if you look back in time, in 2020, we delivered 112 787 shipsets. In 21, it was 37. And we're anticipating even fewer this year, kind of in line with what Boeing has been communicating. With regard to your last question on claims, I will just say that we've not discussed any claims with Boeing. We do have rework to do on some of the work packages that Spirit provides for the 787 on the undelivered units, the 110 that I mentioned, and we're about 40% complete with those. Now, we're doing all that rework at our own expense with our own people in Boeing's factories, and all of the costs for that are reflected in the forward losses that we took mostly in Q3 of last year, in 2021. What I'd say is that the Spirit rework is not the sole cause for the delays to the Boeing 787 deliveries, and so we'll stay in close communication with Boeing on that, but we have not discussed claims with them.
spk15: Okay. Thanks very much.
spk20: Thank you. You're welcome.
spk14: The next question comes from Ken Herbert of RBC. Your line is open. Please go ahead.
spk05: Hi, good afternoon, Mark and Tom. Thanks for letting me on. I just wanted to ask a question, if I could, Tom, about the supply chain. I wanted to see sort of relative to the third quarter, if you've seen any incremental delays in the supply chain, specifically around, I guess, the 3.7, any incremental areas maybe of pressure from the supply chain? And I guess more importantly, as rates continue to go up on the 3.7 and eventually on the 8.7, are there any areas you'd highlight maybe as a greater financial risk, either where you might be looking to inject capital into the supply chain or where you would expect suppliers that might need a little more support if there are issues to support the rate?
spk20: Right. Well, Ken, the answer is we have seen some pressure, like everybody in the global supply chain. on some ports. So for example, the California ports tend to be a little bit more backed up right now. So some of the products that we have coming out of Asia, and we have suppliers in Malaysia, in South Korea, Indonesia, amongst others, we have seen some pressure on that and some increase in freight rates. But, you know, if you look at freight as a total part of our business, it's it's about 2% of our total cost base. So even if it goes up some, it's a relatively minor total cost impact, even if the rates go up quite a bit. One of the things that we've been doing, for example, is doing some consolidated air shipments from Asia, particularly, say, from South Korea, is we can load up a lot of parts onto one aircraft and basically skip over the ports in L.A. and California. and get them here. So we've been able to demonstrate that we can do that. As rates go up, we are working very closely across the entire supply chain to make sure that we have access to the parts. In many cases, we're looking at dual sourcing opportunities. As you know, we have a significant fabrication capability internally, so we can insource things, and we're looking for local suppliers to provide backups if we get into trouble. So we're actively working all those things. We actually appointed a new vice president to lead supplier development in the field, and we have a fairly large team that we can deploy anywhere in the world to work with suppliers as we see situations. And one of the situations we're looking actively to mitigate is any potential supply disruptions at the ports. And so we're putting in place proactively plans to either dual source or insource some of that content so that we don't experience risk. You know, obviously the 737 program, because it's the biggest program we have, that's where we're seeing some of the most pressure. I mean, that's where we're spending a lot of time in the mitigation. 787, it's much less so. I mean, the rates are much lower, and we expect them to remain lower for this year, so we're not anticipating as much pressure there.
spk05: That's great. And maybe if you could just quantify, of your 3.7 supply chain, maybe how much is from domestic suppliers versus how much do you source internationally, just roughly?
spk20: Right. Well, we still source more than 60% domestically, even on 737, because, you know, we just have some of our big suppliers happen to be domestic, and a lot of them in the Kansas, Oklahoma region. So it's, you know, we do source from international suppliers, but still most of our supply is coming domestically. Great. Thank you.
spk14: The next question comes from Kai Von Rimmer of Cowen. Your line is open. Please go ahead.
spk01: Kai Von Rimmer Yes. Thanks so much. And I apologize. I missed some of the early part of the call. But could you give us, you know, where you are on the 737, i.e., how much the inventory, you know, how many of the stored fuselages you have in, you know, at your facilities now? where the rate is now, where you expect to be in terms of stored fuselages by year end, and kind of how should we think of the profile of your rate versus Boeing as you're moving up?
spk20: Right. Well, Sam did mention that we are at 97 units this morning, so we've broken the 100 barrier. At one point, we were up to 140. And so, as we've said, we are lagging Boeing on production rates. We can burn off that inventory. Our plan is to burn off the inventory by year end to a level of 20, which will become a buffer, a permanent buffer to cushion the production system. But when we get to that point, we will no longer be wrapping aircraft and storing them out of the ramp. So by the end of third quarter into the fourth quarter, we expect the ramp across the street to be pretty much emptied. Right now we're at a rate of 21. You heard on Boeing's call that they're at a rate of about 26. So that's what we always said is that we'd lag them by about five to burn down those aircraft over time, and that's exactly where we are. And then in terms of the rates going forward is we'll stay at a lower rate to Boeing until we burn off that inventory, and then we will re-sync with them at the same rate that they are whenever that occurs. And I expect that that resyncing will happen by the end of the year. Thanks, Guy.
spk14: The next question comes from Hunter K. of Wolf Research. Your line is open. Please go ahead.
spk08: Hey, thanks for getting me on. Just a couple quick ones. I just want to just clarify a question on the free cash flow for 2022. Are you targeting break-even free cash flow after the $123 million payment to Boeing? I thought you had said last quarter you were targeting break-even free cash flow before that payment. Am I incorrect, or is there an improvement in that commentary? No, it's after the $123 million. After, okay. All right, thank you. And then of the 24 development projects, Tom, that you mentioned that are over a million dollars, how many of those are outside the aerospace and defense realm?
spk20: Well, they're all in aerospace and defense. They're all defense projects. Okay. All right, you're not thinking. So all of them are defense and space.
spk08: Pardon? I was wondering if there was some sort of like a. Could you repeat that? I didn't hear. Sorry, I was just wondering basically if you were thinking about some sort of like adjacent market type concept in some of these development projects. Oh, yeah.
spk20: No adjacencies. It's all pure defense and space work. Got it. Thank you. Awesome.
spk14: The next question comes from Christine Lewig of Morgan Stanley. Your line is open. Please go ahead. Thanks.
spk16: Paul, Mark, Just talking about the defense charge you mentioned, it's a non-classified program. Can you provide a little bit more detail on exactly what that was, what that entailed, and is it really one time? If you could share where you get that confidence.
spk20: Yeah, I'll take that, Christine. It was really just an issue on a single unit. It's some rework that we have to do. To be honest, we took a bit of a conservative view that, you know, we'd have to do more rework. We'll refine and clarify that as we go forward. But it was a one-off thing, and we are going to fix it, and we don't expect it to repeat.
spk16: Great. And as you grow your defense business, what's the normalized margin we should think about here going forward? And then is there, I mean, with the program that you mentioned, is this related to future vertical lifts? And how should we think about that upside for you with which team wins this summer?
spk20: Right. Well, as we said, for defense, we want to get to $1 billion by 2025 at typical defense margins, which we say are 12% to 14%. So as I was saying a little bit earlier, if you look at the type of defense, I think Peter asked this question, is we've got our classified programs, and those tend to be in development phase. Those are cost plus. We've got our kind of core mature programs like the CH53K or the P8 or the KC46, and those are typical defense margins, 12% to 14%. But then we have some specialty programs, which can be higher margins. So overall, we're saying 12% to 14% on defense going forward. Now, on the future vertical lift, we are on the VAL team, the VALOR for the V280 program, And as Mark said, there was some investment in 2021 in that program as they are getting ready for the decision, which I think is expected. They're going to make the decision sometime in March of this year, maybe communicate it by June. Perhaps there's some slippage on that. But those numbers aren't built into our forward outlook. It's only the things that are in our outlook is the work on the development program. But this is the FLARA program, the Future Long Range Assault Aircraft. And it is nominally going to be a replacement for the Blackhawks, which have about 2,000 units in the field. So it would be a very big program if Bell were to win it and our work package would go forward. That's a very big program going forward, but that's not included in our current financials.
spk16: Great. Thank you, guys.
spk18: Thank you.
spk14: The next question comes from Ron Epstein of Bank of America. Your line is open. Please go ahead.
spk11: Good morning. We haven't talked much about pretty much every other airplane program, maybe with the exception of the A220 program. Could you walk us through that in a little more detail, where you expect those rates to go and how you think the profitability in that program will proceed over time?
spk20: Right. Well, on A220, we're at about four aircraft per month right now. Airbus has indicated that by 2025, middle of the decade, that they would be at around 14. So that's kind of our trajectory. And as you know, we did have a forward loss when we opened that program up in Q1 of last year of about $375 million. But we said it would basically get to break even by 2025. when they get to the rate of 14. So that is what's built into our financials. Obviously, we've got programs in place to try to do better than that, but that's what's built into our core financials right now.
spk11: And a word from the Bombardier acquisition of their aerostructures components. Where do you get profitability any time sooner than 2025?
spk20: Well, two places. One is the aftermarket. So Mark mentioned that the aftermarket this year is about $240 million. A lot of that did come from the Bombardier acquisition, and that was at very good margins. So you saw that it's north of 20%. The other area is business jets. We did inherit quite a bit of business jet work for Bombardier. We're now one of their largest suppliers. And those are at positive margins. I obviously suffered a little bit because of COVID, but as the rates recover, we expect those to normalize. But those are two areas of the Bombardier acquisition that are immediately profitable with good margins.
spk11: Great. Thank you very much.
spk20: You're welcome.
spk14: The next question comes from Michael Caramoli of Truist Securities. Your line is open. Please go ahead.
spk10: Hey, good morning, guys. Thanks for sticking around to get me on. Tom, I was wondering, can we go back to kind of supply chain and what Ken was asking? And I guess, you know, specifically just looking at the labor market, thinking about inflation, that that's going to impact both labor and raw materials, you know, and I think you guys had planned to rehire 4,600 people over the next three years. But how are you thinking about just labor availability and then 16.5% margins, I mean, we don't have a crystal ball, so I don't know what inflation is going to look like. But if we have inflationary pressures, do you still think you can get to that 16.5%?
spk20: The answer is yes, we do. Let me go through the two aspects of the question. So in terms of labor availability, just to give you some sense, we laid off about 5,200 people in Wichita. We've recalled already about 2,200 of those. A number of other people did permanent retirements or took part of retirement programs, so they wouldn't be available in the pool. We still have about 1,000 left in the recall pool, and we think that will take us through at least midyear and perhaps longer. So the labor availability is good because we still have a pretty good recall pool to tap, and we're in the process. But the good news is we should have everybody recalled by the end of this year. It's certainly in Wichita, and we expect in our other locations as well in the U.S. Now, with regard to inflation, obviously that's a concern, but if you look at the different components, direct labor is only about 8% of our cost. Indirect labor is a bit more, but there we made a lot of cuts, and we're looking at improving productivity so that we can be more productive as we come back and we don't need to add as much cost. The raw material... is obviously a bigger number. And then you have the parts. And let me just say on raw material, you know, we're fortunate as a Tier 1 supplier as we buy a lot of our raw material through the buying consortia that Boeing and Airbus had. So for Boeing, it's TMX, and for Airbus, it's Combit. And particularly on the TMX side, you know, those prices tend to be fairly locked with Boeing. They buy at huge volumes, and we benefit from that. And so... We feel we have a good way to manage the raw material cost by working with Boeing and Airbus through their buying consortia. On the parts, those come from our supply chain. That represents typically about 66% of our cost, and that's a big chunk of it is from suppliers. Now, there, what we have done is we've put in place a lot of back-to-back contracts. So with, for example, on the 737 program, our pricing with Boeing goes out to 2033. So particularly during the pandemic, we offered a lot of our big suppliers the ability to put their contracts out to 2033, and a lot of them took it up. And so we have back-to-back contracts with our suppliers, which essentially give us a natural hedge on part inflation for a big chunk of our direct cost. And so, you know, we work very closely with our suppliers during the pandemic. We provided support to about 600 suppliers in total. It added up to over $2 billion, and a lot of that were these contract extensions out to 2033 so that we had a back-to-back hedge on inflation. So that's the way we're managing inflation in some of the different buckets.
spk10: Got it. Very helpful. Thanks, guys. Thank you.
spk14: The next question comes from Noah Popanak of Goldman Sachs. Your line is open. Please go ahead.
spk03: Hello, everyone. So how many 737 MAX shipments, shipsets are you anticipating in 2022?
spk20: Right. Well, Boeing, as you know, has indicated that they will get up to 31 aircraft per month in early 2022. And so we will work with them depending on what rate they establish. We are going to align with our customer. We don't want to get out ahead of our customer. And I think they're trying to just look at the market and understand it before they make any commitments, and we'll do the same.
spk03: Tom, I think last quarter you had indicated for your shipsets this year it could be in the range of 275 to 300. If you're lagging Boeing by five a month for a few months, or I'm sorry, until you link up with them, and they're 26 for a few months here, break to 31, even if they just stayed there for the full year, that would be in the zone of 300 for you before even unwinding the inventory you've talked about. So it would put you over 300, and you gave that range last quarter. Can you maybe just update that range from last quarter?
spk20: Well, we just did a math equation and said if Boeing is at 31 and they stayed there the whole year, let's say, So 12 times 31 for them would be 372. And we said we wanted to burn down 80 that were in our inventory across the street. So the 372 minus 80 gets us into the 290 range. That was just a math equation, just running the numbers like that to give everybody a scenario. But it really depends on the outlook for narrow body market. And Boeing is carefully watching that. And what they've indicated is they're going to get to 31 in early 2022. and they haven't provided any more public guidance than that. And so that's really the best that we can provide as well.
spk18: Yeah, and, you know, we're always as transparent as we can be with you guys. I just think it's really difficult for us right now to get ahead of our customer. You know, what they've said is they're at 26, they're going to 31. They talked about, you know, in the next few months, not in the first quarter, but probably in the second quarter, making decisions on, what they might do above 31. And until Boeing makes that decision, you know, it's very difficult for us to give you precisely what we're going to deliver this year. It's still in flux, right? And we're really waiting for direction from our customer on where they think things are going in the back half of the year. And so, you know, although I know you want the information, we really want to provide it to you, I think we need further direction from Boeing, all of us do, before we can really get too precise as it relates to where we think things are going here. And, you know, we'll give you another update next quarter. And when we know information and we've got it solidly, you know, we will provide it to you like we always have in the past.
spk03: Yep. No, that's very fair. Is 2023 a relatively normal free cash flow margin year?
spk20: I mean, of course, it depends on their body production rates, particularly the max. But based on kind of outlook, I would say that, yes, that's exactly what we're expecting.
spk18: Yeah. No, we don't want to get too ahead of things. But the market recovery is coming. I think even if it isn't as bullish as everybody says, it will be a very good cashier for Spirit.
spk03: Okay. Okay. And I'm sorry to stay on this, but just before I leave the call, has the narrow-body plan overall situation worsened or improved? Or is it just that we're now at the point in time where decisions will have to be made about the back half of 22, so your ability to discuss them with specificity has lessened because of the nature of not wanting to be ahead of your customer?
spk20: Yeah, I would say nothing has changed. And, you know, we are here in 2022. Our customer has given indications about what they expect and what their outlook is, and we don't want to get ahead of that. But nothing has changed in the outlook. It's still fundamentally the same.
spk18: No, I would say the latter. You know, obviously things move around a bit. Okay.
spk03: Yeah, that makes sense. Yep. Thanks so much.
spk20: Okay. Thanks, Noah.
spk14: The next question comes from Seth Seifman of JP Morgan. Your line is open. Please go ahead.
spk07: Thanks, and good morning. Thanks for sticking around over time this morning. I guess, Tom, just one question. Now that we have the segments and we think about kind of the long-term targets and I guess the understanding, as you've mentioned before, that you know, there's probably an inorganic component to reaching those targets over the long term. Is there like, you know, are there things that kind of need to happen with regard to getting up to certain production rates or leverage levels or cash flow levels before you start to think more about that inorganic component or, you know, is it kind of totally opportunistic?
spk20: Well, as you know, I mean, deals happen when they happen, and they're actionable when they become available. So, you know, obviously it would be better if we could wait until everything was fully recovered and we were generating lots of cash. But if the right deal came up that was strategic and met our financial hurdles, we would look at ways to accomplish how we could do it. I mean, we do have capacity and opportunities to fund deals if they came up. But, again, in an ideal world, we'd get everything stable and back. But, as you know, in the world of M&A, deals are available when they're available, and you've got to be prepared to move.
spk07: Okay. Great. Thanks very much. Thank you, Seth.
spk14: There are no further questions. This, therefore, concludes today's call. Thank you for joining. You may now disconnect your lines.
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