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spk19: submit a question and to do so please press star followed by the number one on your telephone keypad. We do ask that you please limit yourself to one question today and I now would like to hand the presentation over to Ryan Avey, Senior Director of Investor Relations and FP&A. Please, please go ahead.
spk06: Thank you, and good morning, everyone. I'm Ryan Avey, and with me today are SPIRITS President and Chief Executive Officer Pat Shanahan, and Senior Vice President and Chief Financial Officer Mark Suchinsky. 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, including those 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. With that, I would like to turn the call over to Pat.
spk07: Thank you, Ryan, and good morning, everyone. Today I will update you on how we are running the business at Spirit. Most of my remarks will focus on the steps we took after the January 5th accident. Mark will address the financials in his comments. My mandate when I came here was to put our operations and financials back on solid footing. In my estimation, we achieved significant progress toward that goal in the fourth quarter. However, the accident on January 5th demanded a different focus by our team. Consistent with our protocols, our response team was activated within hours. Since that moment, Spirit's focus was on supporting Boeing, its airline customers, the NTSB, the FAA, and our people. The immediate response was taking a hard look at our processes and incorporating any findings into action. Within days, we enacted countermeasures to include adding inline and ship-in-place inspections with Boeing that replicated those performed by the airlines to return to service, leveraging the FAA's safety management system to conduct a product safety risk assessment, incorporation of detailed review and observation with Boeing of the mid-entry door plug assembly and installation process to include both Spirit and Boeing operations. Concurrent with those immediate actions, we have initiated a second wave of actions centered on addressing human factors, nonconformities, product safety, and expanded inspections across 737 manufacturing. People are at the heart of the company in our manufacturing processes. A significant portion of the 737 fuselage build is manually performed by our skilled teammates. Repeatability, reliability, and capability in manufacturing is required to produce high-quality conforming products. The human condition and human factors must be accounted for in any improvement efforts. And through that lens, we are focusing additional actions. The four main levers to mitigate human factors that we are pulling include proficiency of our mechanics and inspectors, compliance to our quality management system, mistake proofing, and observation. We will do more testing and training. We will drive greater discipline to the QMS. We will enable our teammates with better tools, techniques, and technology that is available today. The goal of any world-class manufacturing company is perfection or zero defects. We aspire to achieve perfection. Detecting, correcting, and ultimately preventing defects, otherwise known as nonconformities, is the basis for continuous improvement. We are expanding our efforts to integrate more with Boeing's QMS, realigning organizationally to accelerate redesign and process reengineering, and utilizing more advanced data analytics. We are also increasing the number of Spirit-performed inspections and Boeing-performed inspections. And soon, we will integrate these efforts with those of the FAA and customers who have joined us here in Wichita. That is a brief summary of some of the systemic improvements in our second wave of collective actions. There are additional actions we are taking as well. The point is we are mobilized for implementation with detailed plans and fully aligned with Boeing. Our next wave of improvement will be the deployment of automation and automation for sections of the airplane that remain highly manual. That is the fundamental solution to zero defects and zero escapes. On the 737 fuselage, the front and back sections have the most complex physical geometries and are the most confined workspaces. The build is largely manual. Our eye is toward finding the right balance of using human-assisted technology and automated technology. There is a path to deployment. Broadly speaking, full-scale robotics is impractical. In our research labs, we have significant human-assisted technology that is manufacturing readiness level six. that we look to accelerate. I have recently reviewed this technology with the team and will ensure it receives the appropriate resources and investments. I am very proud of how our team has responded to this accident. They have been calm, focused, and moving with urgency. I have a lot of confidence in this team. At this point, the art form is to integrate broad actions with our ongoing operations and not as a one-off project. Our teams across manufacturing and engineering are fully aligned and will implement changes seamlessly. I believe we will move quickly because of our shift in governance away from being top down. The mindset shift is to understand that the airplane is the boss. The airplane tells us what to do. Our mechanics, sealers, engineers, and inspectors are like surgeons. They tell us in management what they need to perform their operations. Our goal is to give them what they need when they need it and resolve issues or make improvements. Receptivity from our teammates across our facilities, shop floors, and offices has been positive. I also appreciate their candor in telling me what's on their minds. I've heard from every corner of the factory in Wichita and from every shift. Lots of energy, lots of ideas. This does not surprise me. Our workforce at Spirit has a clear understanding of the importance of their work. That commitment is rooted in a long legacy we have in this industry. In the coming weeks, we will learn more from the regulators, from their formal reporting, and we'll respond with urgency and transparency. Now I'll shift to a couple other topics I think you have on your mind as well. We made significant progress in the fourth quarter in stabilizing the 737 production line. We briefly paused the line to stabilize, which ultimately allowed us to deliver 104 fuselages, the highest quarterly total in four years. We made investments during the quarter to recover schedule and buffer the production system, which enabled us to start the year with a balanced factory. Second, We recognize additional forward losses on the A350 and A220 programs this quarter, which Mark will address in a moment. That said, we are working to not only improve these programs in our day-to-day operations, but also are engaged in discussions with Airbus to address the long-term financials. The negotiations with Airbus continue and have been productive. We hope to conclude by February, but we need to ensure all items are addressed. We are converging on operational and financial solutions. I appreciate the partnership and engagement by their leadership. This remains an important near-term priority for me. I'll now turn the call over to Mark to review with you our financial results.
spk13: Thanks, Pat, and good morning, everyone. We experienced significant pressures in 2023 due to production schedule volatility, supply chain constraints, and ongoing inflation. quality challenges and increased labor costs. This resulted in higher than anticipated costs throughout the year. However, we also accomplished some major milestones during the year, including reaching a contractual resolution with our largest union, bringing Pat on board to lead Spirits Recovery, and executing a favorable agreement with our largest customer. We also did a debt refinance and a capital raise, which strengthened our capital structure and increased production rates across many of our major programs. While we expect some of these pressures from 2023 to continue into 2024, we enter the year strongly focused on execution to stabilize and strengthen spirit both operationally and financially. Given the latest news around the 737 MAX production rates in relation to the FAA approval, as well as our ongoing negotiations with Airbus, we are not in a position to provide guidance at this time. Now, let me take you through the details of our fourth quarter financial results. Let's start on slide two. Revenues for the quarter were $1.8 billion, up 37% from the fourth quarter of 2022. This substantial increase year over year was primarily due to higher production on our commercial programs, increased defense in space, and aftermarket segment revenues, as well as the impacts from the previously disclosed Boeing MOA executed in October of 2023, which included favorable pricing adjustments on the 787 program. Overall, deliveries in the quarter increased 16% year over year. Now, turning our attention to EPS. We reported earnings per share of positive 52 cents compared to negative $2.32 in the fourth quarter of 2022. Excluding certain items, adjusted EPS was 48 cents. compared to negative $1.46 in the prior year. Operating margin was positive 11% compared to negative 11% in the same period of 2022, largely driven by the favorable impacts from our Boeing MOA. As a result of the favorable pricing adjustments to the 787, we reversed 361 million of total liabilities during the fourth quarter, which included 787 forward loss reversals of 206 million which favorably reduced cost of sales, and reversal of 787 material right obligation of $155 million, which flowed through the income statement as an increase to revenue. Fourth quarter net forward loss reversals totaled $34 million and unfavorable cumulative catch-up adjustments were $55 million. This compared to $114 million of forward losses and $59 million of unfavorable cumulative catch-up adjustments in the fourth quarter of 2022. The current quarter forward losses relate primarily to A350 and A220 programs and were driven by higher estimates of supply chain, labor, and other costs. We also recorded net incremental forward losses for anticipated performance obligations beyond 2025 in the amount of approximately 30 million. The unfavorable cumulative catch-up adjustments relate primarily to 737 program, reflecting higher costs required to recover and stabilize the production system, which we have done in the fourth quarter. Now turning to free cash flow. Free cash flow for the quarter was positive 42 million compared to free cash flow usage of 66 million in the fourth quarter of 2022. Fourth quarter free cash flow includes the previously disclosed funding of approximately $100 million received from Boeing per the terms of the MOA and tooling and capital through 2025 on both the 737 and 787 programs. In our effort to stabilize operations, we also made certain working capital investments and accelerated certain capital investments in the fourth quarter of 2023. Now, let's discuss our quarterly segment performance, starting with our commercial segment on slide three. In the fourth quarter of 2023, commercial revenues increased 43% over the same period 2022. due to higher production across all of our programs, as well as favorable pricing from the 787 Boeing MOA. Quarterly operating margin increased to positive 17% compared to negative 8% in the prior year, primarily driven by favorable change in estimates recorded in the current period. These changes in estimates, which I previously disclosed, included net forward loss reversals of 48 million and unfavorable cumulative catch-up adjustments of 51 million. In comparison to the fourth quarter of 2022, the segment recorded charges of $111 million of forward losses and $58 million of unfavorable cumulative catch-up adjustments. Now let's turn to defense and space segment on slide four. Defense and space grew to $205 million, up 12% higher than the fourth quarter of last year due to higher development program activity and increased KC-46 tanker production. Operating margin for the quarter decreased to 2% compared to 11% in 2022, primarily due to higher unfavorable changes in estimates recorded in the period. The segment recorded forward losses of $13 million and unfavorable cumulative catch-up adjustments of $4 million compared to forward losses of $2 million in the fourth quarter of 2022. The forward losses were primarily driven by higher production cost estimates on the CH53K program, and unfavorable cumulative catch-up adjustments, which were primarily driven by the Boeing P-8 program. For our aftermarket results, let's turn to slide five. Aftermarket had a strong quarter with revenue of $91 million, up 24% compared to the fourth quarter of 2022, primarily due to higher spare part sales. Aftermarket has continued to grow with global air traffic recovery and is on track to meet our plan for $500 million by 2025. Operating margin was strong for the quarter at 23% compared to 13% during the same period of 2022, primarily due to the absence of a one-time inventory adjustment charge recognized in the fourth quarter of 2022. With that, let's now briefly touch on our full year results on slide six. 2023 revenue came in at $6 billion. That's up 20% year over year driven by higher commercial production volumes as well as higher defense in space and aftermarket segment revenues. 2023 adjusted EPS decreased year over year primarily due to higher interest and other expenses partially offset by improved operating income during the current year. Other expense for 2023 was 140 compared to other expenses of 14 million in 2022. primarily due to higher non-cash losses related to settlement accounting for our primary U.S. pension plan, foreign currency, and sales of receivables recognized in 2023. Full-year cash flow was a usage of $374 million compared to a use of $516 in 2022. Free cash flow usage was higher than we previously expected, primarily due to factory costs incurred in the quarter to recover schedule and stabilize operations higher levels of inventory to support rate increases, as well as increased capex spend related to the customer-funded capital and tooling received as part of the Boeing MOA. With that, let's now turn to cash and debt balances on slide seven. We ended the year with $824 million of cash, which reflects the proceeds from the issuance of common stock and exchangeable senior notes during the fourth quarter of 23. We will use the if converted method regarding exchangeable notes implications to EPS, which results in the shares being dilutive if there is positive net income. If net loss position, they would be anti-dilutive. We ended the year with $4.1 billion of debt. There are now no significant debt maturities until 2026. So with that, we will be happy to take your questions.
spk18: Thank you.
spk19: If you would like to ask a question, please press star followed by one on your telephone keypads. If you would like to remove that question for any reason, please press star followed by two. And again, it is star one for any questions. And we do please ask that you please limit yourself to one question. And we will pause here briefly as questions are registered. We have the first question on the phone lines from Seth Seidman of JP Morgan.
spk04: Hey, thanks very much, and good morning, everyone. Pat, thanks very much for the comments at the beginning of the call. I guess maybe to level set a bit where 737 is right now. You talked about kind of stabilizing the factory in the fourth quarter. Does that mean stabilizing at a production of 38 a month? And if we took it as a given that it's up to the FAA now when that rate will move higher, but if we took it as a given that that's the rate for 2024, that Spirit is now in a place to produce at that rate through the year, and that what we saw you know, what we've read about over the past few weeks since the Alaska accident and, you know, specifically yesterday with the latest, you know, mist drilling issues and Boeing's effort to cut down on traveled work, you know, do you still kind of consider the factory to be stabilized at 38 a month?
spk07: Yeah, good morning, Seth. I would tell you that we are cycling at 42 a month. but building at 38 a month. And by that I mean we have a production schedule that allows us to have buffer days, and it's our means of testing our ability to go up in rate. And those buffer days allow the factory to, when we talk about stability, minimize traveled work, have everybody stay in position. So from that standpoint, we're in a good position and we'll take our guidance from Boeing as to how to adjust our schedules if necessary. Maybe I'll just address those two nonconforming holes. Those are not a safety of flight issue. And just kind of characterize the normal process. Anytime there's a nonconformity, we basically scope and bound it. Engineering does a preliminary look to see if there's a safety of flight issue. Then essentially we communicate to the customers if there's any potential exposure, but we say, you know, here's a heads up. And then we do a detailed engineering analysis and work to get a final disposition. And when we have a final disposition that we can determine a repair and from that a response and relative to these two holes, there is not a final engineering disposition. We expect that in the next 72 hours. Based on that, we'll determine what the repair might be and any impact associated with that. And then the follow on is a root cause corrective action. Maybe just thanks very much. I think we have about. You bet.
spk02: OK, I'll stick to one this morning, thanks.
spk13: Thanks Seth.
spk19: Thank you. We now have David Strauss of Barclays. You may proceed with your question.
spk16: Thanks. Good morning. Quick follow-up there. What is the status of the max buffer stock as it relates to you matching up with Boeing in terms of your production rate? And then on the Airbus side of things, the 5 million mark us on the balance sheet. At this point, is that really all 828 through 50 negotiations conclude with Airbus? Should we expect to see a significant reversal there? Thank you.
spk07: I'll take the Airbus one.
spk13: Sure. Hey, David, let me address your second comment in regards to the balance sheet and the forward loss reserves that we have both short-term and long-term. I think we mentioned this on the last call as it relates to Boeing and the 787 program. We stated that we would be in a forward loss through 2024, maybe slightly into the first quarter of 2025. So really the short-term forward loss has some 787 in there as we come down our unit cost curves and drive that to cash flow positive in 2025. And then it would include the A350, as you indicated, and the A220, and a little bit on 6-7 and CH53K. But I think you got it right.
spk07: Maybe just to answer the question about the buffer or what we refer to as the ship-in-place, there are 42 available units today to ship-in-place. We're taking a few extra days, so think of that as a delay on some of the deliveries to Renton's. just to make sure we can complete all the inspections related to the mid-entry door plug as well as any known rework and conducting some additional inspections.
spk13: Thank you. Thanks, David.
spk19: Thank you. We now have Jason Gursky of Citigroup. Your line is open.
spk08: Great. Good morning, everybody. Let's see. Maybe a two-part question. I apologize for that. Pat, I wonder if you can just, you know, to fix a problem, you have to understand, you know, exactly how you got here. So I was wondering if you could just, from your perspective, describe a little bit about, you know, the conditions that led us to where we are today. Sounds like you've got a plan to fix something. I'm just kind of curious to get your input on how we got here. And then, The second part of the question is, you know, once we figure this all out, has anything kind of fundamentally changed on the types of rate breaks that you can do in the future? I know Boeing's got a master schedule out there and historically you guys have gone up 10, 15% at different rate breaks and then hold for a bit before going back up again. So I'm just wondering in the context of all of this, whether things have fundamentally changed in the industry or the industry's view on its ability to to go up in rate and whether we go up slower than we have in the past. Thanks.
spk07: Yeah, Jason, I think it's hard to go back and look at how we how we got here. I wish I had that history. But what I would tell you is the basic fundamentals around rate breaks haven't changed. Some of the dynamics around the supply chain have changed. I would offer that some of the work that Spirit has done in the fourth quarter to align the 2024 plan with Boeing's rate schedule has afforded us some more stability. We have used that time to improve the dynamics of the supply chain. We've seen a lot of improvement in the near term to support rate 42. As it relates to rate 47, we have a line of sight on virtually all the issues, five suppliers that we have to give special attention to. But at this point, the majority of the issues are related to raw material and labor availability. I think the hardest part of this industry is, given its complexity and breadth, how do you judge how quickly to go up in rates? In the case of the 737, it's been done before, so there's a playbook that parametrically says this is what you can do, but we have to adjust that for current events in the environment. But I would say that the 2024 plan we laid out incorporates the existing environment, and if there are any changes, we'll accommodate Boeing's direction.
spk05: Great, thank you.
spk19: Thank you. We now have Myles Walton of Wolf Research.
spk11: Thanks. Pat, you're in a pretty unique position having been inside of Boeing, Vice President of Commercial Airplanes for a time, and now inside of Spirit, and can sort of give the perspective, I think, of what if, and the what if is if Wichita were still part of Boeing, would the signals, would the Boeing quality QMS system have captured these quality escapes sooner? And if so, does that create industrial logic for some element of reabsorption, or is the solution just a greater integration into Boeing's existing QMS?
spk07: I guess I would respond not so much to the hypothetical, but the fact that we're behaving as if we were part of Boeing and that the coordination and the integration to refer to is really taking place now. So if you sat in one of our meetings, you know, people took off their badges, you would not be able to tell which company they worked for. I think because of the, trust that's been built recently, some of the feedback loops that existed in the past are being restored, and that should allow us to even work better together.
spk11: So just to clarify though, Pat, is that a change of behavior, the tightness of the feedback loop, or is that a reflection of what's always been the case since the departure?
spk07: I think as a result of the MOA and the shedding of the financial constraints, it opened up the aperture to really work more seamlessly together. And we're seeing that. And I think we're surprised every single day how much more quickly people are working shoulder to shoulder. So I think the MOA was a big change that allowed us to increase the integration between the two companies.
spk11: Okay. All right, I'll stick to one. Thank you.
spk19: We now have Sheeda Kanu from Jefferies. You may proceed.
spk17: Good morning, guys. Thank you. Pat, if I could ask you, in just this current state, how do we think about the 737 cash profile per ship set, just given potentially additional costs this year? How does that change with a rate break in 25 if the FAA does also limit you guys at 38 a cap? I'm not sure. And then into 26, the free cash flow per ship set, just giving the step down. Just past profile in the back.
spk07: Sheila, I'm just trying to think. Yeah, no, no, no. I mean, obviously, when you go up in rates, you can distribute the overhead more broadly. the fundamentals of the things that we're doing in terms of improving cash flow or cost reduction. A lot of that's through productivity or improvement in quality. So those things aren't going to change. We've built a plan around achieving support labor or support cost that mirrors our performance in 2018. We're working to that regardless of a change in direction from Boeing, so that might dampen a bit. Indirect costs, we're going after the same way. Probably the one that wouldn't be affected by rate is working capital, because we just need to optimize that to a much larger degree. Last year, we were anticipating being at a much higher rate, so there's a real opportunity there regardless of where the rates, you know, stabilize at. Mark, any other comments?
spk13: No, I think you hit it, Pat. You know, obviously, Sheila, as you go up in rate, you get the leverage from the higher production rates from an absorption standpoint. But at the end of the day, I think the key here is, as we look over the next couple of years, it's about, you know, operating the factories efficiently. um leaning it out working on flow working on the items that that pat talked about and he's got the teams really rallied around that and and so we're we're really excited over the next couple years as we go up and rate um to see that financial benefits of those production rates through the variety of actions that we're working on including uh focusing on improving overall quality so we do think over the next couple years we'll continue to drive our unit costs down and take advantage of the higher production rates. Sheila, maybe just one add-on here.
spk07: I think we have to think about the supply chain. I think that's the one that if we do change production rates, we have to figure out what do we do with the things that we've already ordered? How do we keep them healthy so that as things get corrected, we can go back to building fuselages. So I think that would be the one we still need to sort through.
spk17: And just to follow up, given the max is the biggest driver of your free cash flow, do you expect free cash flow to be positive in 24 without giving any guidance?
spk13: Sheila, let me just address that. I think what I would tell you is know with the with the question marks around the production rate increases in front of us that we had previously planned in 24 the airbus negotiations and then just um trying to assess what additional costs may come as relates to quality and the regulatory oversight um you know as we as we said in our press release we're just we're not in a position to talk about cash flow we We know that it's an important aspect of our business here, and I'm not trying to avoid the topic. We're working really hard to improve the overall business financially, but give us a little time to digest the current situation here, and in the coming months, we'll be able to give you the answers that you guys are looking for, but I think we need a little bit more certainty. There's There's still too much uncertainty here for us to really dial this in and give you a more direct and concrete answer. So more to come. It's not now, but give us a little while and we'll be able to address those questions.
spk18: Sure. Thank you.
spk13: Thank you.
spk19: Thank you. We now have Scott Duchamp from Deutsche Bank.
spk05: Hey, good morning. Pat, have you priced your content on B21 yet?
spk07: Can you say that one more time? This is on the LRIP? The B21 content.
spk05: Yeah, have you priced your LRIP content on B21 yet? Yes.
spk07: We have not.
spk05: Not yet.
spk01: Okay.
spk05: And then, Pat, can you clarify what the operating elements might be with respect to the Airbus negotiations Are you referencing moving some work over to them or is this something else? Thank you.
spk07: Well, our focus has really been on price and the focus has really been on understanding, you know, between, you know, the two companies, what is the right level of productivity that should be achieved that they're willing to pay for and what is cost we're all aligned on that is real. and needs to be reflected in in the price and our discussions to date have been in substantiating both of those and along with that aligning expectations around our performance on the 220 and the 350 and 24. thank you we now have 10
spk12: apologize we now have ken herbert with rbc capital markets yeah hi good morning uh uh pat and mark um i wanted to ask on on inventory build can you comment on at which rate you're pulling say max uh shipments from suppliers at and how depending upon your schedules with with boeing on the max how much inventory are you prepared to build and, and maybe how much of a use of, of cash is working capital this year versus maybe visibility on how much of a savings it can be in the back half of the year.
spk13: Uh, thanks Ken. Uh, let me, let me take that one. You know, I think, uh, Pat briefly mentioned it, you know, as we move through 2023, um, you know, we had expected to be at a higher rate at this point in time. We'd expected to deliver more than we finished the year out at. And so we built inventory, you know, throughout the year and ordered inventory from our suppliers in anticipation of that. And that caused us to build inventory to help to support 42 a month. We've also tactically here in the fourth quarter built strategic buffers with critical components for our production system. So really, you know, you saw throughout the year almost a $300 million increase in inventory through 2023, and that was in anticipation of higher rates. As we move into 2024 and where our plans are at here, you know, we're not going to have to make that sizable increase because we've got the suppliers tuned up to help support and produce and deliver at 42 aircrafts per month. So I would say that, you know, as we move into 2024, I would anticipate working capital to the drag that we saw in 2023 to be relieved to a big degree. And so, you know, I think in summary, suppliers are delivering to us at 42. Pat talked about what our factory's cycling to. And so our goal here is to really optimize the working capital as we stabilize the factory. And we think that there's some work for us to go do there. And we think that as we move forward here, that will create a bit of a tailwind to our free cash flow.
spk07: Maybe just to add on to what Mark's saying, there are discrete plans around how we're managing the suppliers and the buffer. So, Ken, one of the things we ask them to do is, protect the factory in terms of the critical jobs that need parts to maintain the build of the aircraft. And so in those critical areas, we've built buffer stock. There are also suppliers, when we look at their history, that are unpredictable. So those we will continue to work with, but we'll probably build some buffer stock. Then there are the highly reliable, consistent suppliers where we need to maximize inventory turns and the team's are taking those bleeding down the inventory and trying to balance their, the supplier's bill. They don't want to turn them off and starve them. At the same time, we've got a kind of optimized way to get our inventory turns up. So it's a, it's a dance and the teams are able to do, you know, pull 10 levers. Whereas in the past, I think it was just one, you know, order all the parts. So I expect to see a real improvement in 2024.
spk12: Great. Thank you very much.
spk18: We now have Doug Honans of Bunstein.
spk15: Good morning. Thank you. Good morning. Pat, when you talked about the process redesign, introducing automation as some of the things you're doing to deal with the quality escapes across the company, but You know, I think of this on really two time scales. And that can be, and some of those things can be longer term. But at the same time, you know, you have issues that may already be in things that have been done, like the mist-drilled holes that came up over the weekend. There's a lot of concern that there could be another incident like the Alaska MAX 9 incident. How do you make sure that as you do the broader redesign process, you can also identify any situations that might be an issue and things that have already been essentially produced.
spk07: Yeah, no, good. Thank you for that question. And I remember the last call you asked me about just overall quality, and maybe we can expand into that. I think the short answer to that question is, Our quality management system really looks at product quality. The FAA's safety management system looks at product safety. So our first look at the 3.7 has been through the product safety lens. And maybe just in parallel, I think what you'll find is that if we drew a Venn diagram, there'd be a lot of overlap between the safety management system risk assessment and feedback on nonconformities for our QMS. But our first priority has been to look through the product safety lens. We have four discrete categories that we're evaluating. If you look at the installation plans that we have that direct how a 737 fuselage is built, there are 2,300. through this lens of product safety, we've distilled it down to 200 that we're going through and doing a detailed examination of to include observations of the mechanics and a review by our master mechanic of the build process. That's in parallel, I think, Doug, maybe to this broader question of what are you doing now about quality and what are you doing long term? The short answer for us at Spirit on quality is less manual, less interpretation, and more inspections. Medium term and long term is more human-assisted equipment and technology, more automation. And when we think about, well, where is the focus? It's where most of the manual work is. It's in the forward and rear sections of the airplane. If you were a mechanic working in there, you'd almost have to be a gymnast. So we're really looking at, well, how do we address the human factors as some of this other technology is bridging to be implemented? We're very focused in four areas. The first is proficiency. We've got to test more. We've got to train more. The second is compliance and I always think of Bill Belichick here as, you know, do your job. So part of the compliance piece is people have to show up and do their job. I mean, we will help them do their job, but there's an element of they need to be committed, you know, to personal warranty. The third is there's a lot of things we can do to mistake-proof the build of the aircraft. And probably the last one is observation. It's not just more inspections, but it's our team spending more time on the factory floor. If you were to come here to our war room and look at our plans, you'd see that we're really trying to address human factors in the near term, prioritized by product safety.
spk15: And if I can just quickly follow up, is there a way to characterize where you are on this path? I mean, you've now had a chance to be much closer to this over the last few months. Is there a way to characterize when you feel like, at least in the near term here, the issues, the escapes that we have seen, that you've got a really solid handle on it and feel confident in what's being delivered, I guess?
spk07: Yeah, I mean, that's the question that I think we all wrestle with. How can we predict the future? It's hard. I don't know how to predict it, but I Some of the things that we just talked about are the best way to do that. So it's here in short order making real progress and making these things stick I think will give us the belt and suspenders confidence that we can mitigate this. I'd say the other one is we've been working with Boeing to do more inspections. And more inspections isn't as though we weren't doing a lot of inspections i think what we're doing a better job of is harmonizing our work together so we're looking at it the same way at the same time all the time and trying to keep it here in wichita and these are you know some of them are you know our interpretation of fastener height or skin quality but those when we're working together mitigate what ends up being found in Renton where it's much more disruptive to fix.
spk13: Okay, thank you. Thanks, Doug.
spk19: Thank you, Doug. We now have George Shapiro from Shapiro Research. You may proceed with your question, George.
spk02: Good morning. Mark, if I look at the underlying margins that you've had in commercial, I mean, you had 10.6 as the high in the first quarter, and you had relatively high 7.37 deliveries. But this quarter, you had the highest 7.37 deliveries, and the margin was like 8.5. Now, is that just reflective of the extra work that you mentioned that you put in to try and improve the production process in the quarter? And what would be kind of a normal look as we went forward on this?
spk13: Hey, George, good morning. Good morning. I would say just that. I mean, it's hard to assess and state that, you know, the fourth quarter is kind of a normalized commercial margin. We entered the quarter in a very disruptive state behind schedule. Pat talked about we did a pause in the fourth quarter. And so there was a lot of investment to stabilize the factory in the fourth quarter. And you saw that come through in the unfavorable cumulative catch-up. you know, we delivered the most deliveries, fuselages in the fourth quarter than we did in four years. So there was definitely a big cost investment to stabilize the 737 production system. And when we think about, you know, jobs behind schedule, all of the operational metrics that we had as we exited the year, we were in the best shape than we've been in a long, long time here. So I don't want to lean forward here and start talking about what the normal margins are, but they were definitely depressed as it relates to the investment we made to stabilize the operations. We did a lot of good work in the fourth quarter. Anything you want to cover, Pat, on top of that? In addition, it's not margins, but we also made working capital investments to also stabilize that factory and that put a little bit of pressure on cash, although, you know, your question wasn't about cash, it was more about the margins. But the goal here is, you know, once you have a stable factory, you know, the financials will come with it and that's what we're focused on.
spk02: And one quick follow-up, Mark. The free cash flow that you missed in the quarter, I mean, certainly looks like 30 million or so was capex and you enumerated a couple of other things. I would think that some of that's actually a benefit to 2024 because you won't be spending that much more on CapEx than what you spent this quarter. Is that a fair statement?
spk13: That's right, George. We'll buy some of that back as we move into 2024 for sure. As we think about stabilizing the operations and co-investing with Boeing, we did accelerate some of that CapEx to stabilize the system. And so, as you said, some of that will come back as a benefit in 2024.
spk02: Okay, thanks very much.
spk13: Thanks, George.
spk19: We now have Gavin Parsons of UBS. The line is open.
spk09: Thanks, good morning.
spk13: Morning.
spk09: Maybe just following up on George's question there on the end on cash flow, a lot of moving pieces in 23, I think, besides the working capital, the pension closeout, the MOA, the advances, labor contract ratification. What are some of the other moving pieces or are there other one-time items we should keep an eye out for in 24 or is 24 a relatively clean year, best we can tell?
spk13: As you said, there was several one-time items, both good and bad, in 2023. As we think about 2024, we're not anticipating significant one-offs as we stand here today. I think it's about just running the business. We talked about some of the opportunities to improve free cash flow and, you know, what are some of the tailwinds. We're working hard. We talked about the operations, but we're also focused on indirect and overhead costs and the working capital side of things. But, Gavin, I'm not aware of any of the sizable type items that we saw in 2023 coming back in 2024. Okay.
spk09: Appreciate it. Thank you.
spk13: Thank you.
spk19: We now have a pop-up. From Goldman Sachs, you may proceed.
spk14: Hey, good morning. Good morning. Pat and Mark, what's your latest thinking on your framework of where your free cash flow margin can go in the future, putting any specific year aside, just longer term, compared to history at equivalent volumes? You used to have a targeted range and then you've had a targeted range for when volumes are back at certain levels. Is there any kind of new way you're thinking about that as you evaluate where price and cost are shaking out? And then I'm curious also to hear you talk about how you are going through the process of renegotiating pricing while your costs are such a moving target, right? You're at low volumes where you sort of don't even know what the COST PER UNIT IS AT HIGHER VOLUMES OR DOUBLE THE VOLUMES, RIGHT? SO HOW ARE YOU FACTORING THAT IN AS YOU GO THROUGH THESE CUSTOMER PRICING RENEGOTIATIONS?
spk13: OKAY, NOAH. LET ME ADDRESS THE SECOND ONE FIRST. YOU KNOW, AND I UNDERSTAND YOUR POINT. YOU KNOW, WITH FOURTH QUARTER HERE, WE JUST TOOK SOME ADDITIONAL FORWARD LOSSES, WHICH WILL PUT PRESSURE ON unit costs as we move forward here. But we've been doing a lot of work as we think about the A220, A350 on our long-term unit costs. We've worked shoulder to shoulder with our customer as it relates to where we are now, what the learning curves look like, what benefits we'll get from optimizing the supply chain over the next three or four years. We've done a deep dive internally to assess that. as best we can based on what we know now. And that is really the information that we're using as we enter the conversations with our customers. And that's the best way that I would describe that on the Airbus side. As it relates to longer term... Maybe I'll just add on to that.
spk07: Sure. When we think about like the 220, for example, a good portion of the cost reduction, which allows us to get to the right pricing level, comes from a transfer of work. Many of the suppliers that we would transfer the work to, this is coming out of the old Bombardier supply chain, are going to Airbus suppliers. And we've jointly evaluated those costs, and Airbus has a significant history with those suppliers. So I feel confident in that cost basis. We also have, you know, fairly good understanding of the cost and productivity curves for assembly, particularly in Belfast. And that's really 9% or 10% of the cost. But those learning curves hold true. And I would just say on the 350, there's a history of higher production. So that kind of holds as a baseline that we need to get back to. And then there's the normal adjustment you know, labor and, you know, raw material price increases. So I don't think there's, with these increased rates, that it really creates a different cost estimating basis that we're not familiar with.
spk14: Okay. That makes sense.
spk13: Appreciate that. And then to address your first question around long term, I don't want to get into the prediction business, but when you think about what this business generated in the past, I think you're referencing the 7% to 9% margins and $500 million to $600 million worth of free cash flow in the future. As we go up to the higher rates, that will obviously help from a revenue and a profitability and a cash flow standpoint. I think we can get back. back to those levels. There are some headwinds as it relates to some of the inflationary pressures that we talked about before, like the I am contract. But I think that the single biggest, uh, item, uh, that we need to work on to, to help us drive back up, um, to those cash flows. Cause I think the business is going to drive it is we're carrying $4 billion of debt and 350 million, $325 million of cash interest. So over the next couple of years, um, We need to take that positive cash flow, pay down debt. Not only will that help our leverage from a balance sheet standpoint, but it'll get the cash interest drag off the books. And if we can drive that interest back down to our historical measures, we can get back to similar two levels that we've had in the past. OK.
spk14: Thanks for the detail. Thanks, Noah.
spk19: Your next question comes from Robert Stallard of Vertical Research.
spk00: Thanks very much. Good morning.
spk01: Good morning.
spk00: Pat, I just wanted to follow up on a comment you made earlier that you said that spirit personnel are acting as if they're now part of Boeing. I was wondering if this has any sort of impact on your relationship with Airbus in particular and perhaps other customers.
spk07: I don't think so. I guess the real difference is I know more people at Boeing than I do at Airbus, but I've quickly come to meet quite a few of the executive leadership through program reviews we've been doing on the 220 and the 350, but my Rolodex isn't as great. But I'd say the interaction is just as positive and the transparency and the focus on driving improvement. I'll do a number of, you know, they use Google Meet, so we Google Meet and You know, the feedback I get is just as direct as the feedback I get from Boeing. And the working together effort is almost identical. I mean, everybody tries to get the job done the right way. I think with Boeing, I just have a few more, you know, tricks in my bag just because of my familiarity with how to navigate their system. But, you know, the treatment and the behavior and the working together spirit out of Boeing You know, Toulouse is strong and, you know, we just were able to get things done pretty well.
spk11: Right.
spk07: Thanks so much, Pat.
spk13: Thanks, Rob.
spk19: Your next question comes from Michael Ceramoli of Tourist Securities.
spk03: Hey, good morning, guys. Thanks for taking the question. Pat, lots of talk about quality. If the airplane's the boss, we've got safety and quality are paramount. If I just, maybe not to put you on the spot, but if I look at your proxy, and I guess you're going to file it next month, compensation incentives, looks like only 20% is tied to quality on annual cash comp, nothing tied to quality in the longer term. You know, it seems like everything we're talking about here, cash generation, revenue, EBIT margin, all tied to quality. I mean, are you guys planning on changing compensation to drive some of this behavior towards more of a focus on quality?
spk07: It'll be significantly different. And the heaviest weighting will be on quality. And right now, I'm really working to design it so the system can't be, you know, manipulation is probably too strong a word, but I want to make sure that it drives, you know, the right behaviors and we can measure, you know, true performance. I'll just do a shout-out to Donna Anderson at T. Rowe Price. She threw out the idea. You ought to really look at the utility industry. We're in their quality metric. there's a significant penalty for an escape. So we're really trying to look at how do we measure defect reduction, but also, you know, what if there's any type of escape? Only one wouldn't drive much in the metric, but it really should. So the answer to your question is we're changing it fundamentally and we're now making sure that what we put in place works well and drives the right kind of behavior. Got it. Outstanding. That's good to hear. Thanks. I'll keep it to one.
spk13: Thanks, Michael.
spk19: Thank you. Due to time, our final caller comes from Peter Arment of Robert W. Baird. You may proceed with your question.
spk10: Yeah, thanks, Mark. Good morning. Good morning. Pat, maybe just a quick one just because it's the end of the call. I mean, is there a timing when you expect to price the B21 LRIP? And then just, Mark, if you could just give a little more color on the CH53K program. I know you mentioned some of the forward losses there. Just, you know, any color in terms of the health of the program right now. Thanks.
spk07: Why don't we switch? Why don't you answer the LRIP? I'll answer the 53. Absolutely.
spk13: Yeah, thanks, Peter. On the B21, we expect in the back half of this year to complete the negotiations in regards to the initial LRIP on that program. We're on the tail end of the development side of the program, which is a cost plus type arrangement. And so we'll be able to report back more on that later in the year. And obviously, when we think about our customers, You know, our goal here is to sign up for contracts that, you know, add value to our company. Uh, and so that's what our focus is going to be as we negotiate that contract later in the year.
spk07: Yeah, I just maybe comment on the 53 program. We disappointed Stephanie Hill and our teammates at Lockheed Martin in 23. We're on track to turn that around in 24 and it. Personally consumes my time every week, so we can deliver on. not only deliver on the airframes we've committed to, but also get to a higher production rate that supports the needs of the Marine Corps.
spk10: Appreciate all the call. Thanks, Pat. You're welcome.
spk19: Thank you. I can confirm we have no further questions, and I would like to conclude the call here. Thank you all for joining and I can confirm the Spirit Arrow Systems fourth quarter 2023 conference call has now concluded and you may now disconnect your line and please enjoy the rest of your day. Conference call has now concluded and you may now disconnect your line.
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