Spirit AeroSystems : 2022 Investor Day Transcript

Corrected Transcript

02-Mar-2022

Spirit AeroSystems Holdings, Inc. (SPR)

Investor Day

	Total Pages: 46
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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Investor Day	02-Mar-2022

CORPORATE PARTICIPANTS

Aaron Hunt	Duane F. Hawkins
Director-Investor Relations, Spirit AeroSystems Holdings, Inc.	Executive VP, President-Defense & Space Division, Spirit AeroSystems
Thomas C. Gentile III	Holdings, Inc.
Kailash Krishnaswamy
President, Chief Executive Officer & Director, Spirit AeroSystems
Holdings, Inc.	Senior Vice President-Aftermarket Services, Spirit AeroSystems
Mark J. Suchinski	Holdings, Inc.
Kevin Matthies
Chief Financial Officer & Senior Vice President, Spirit AeroSystems
Holdings, Inc.	Senior Vice President, Chief Technology & Quality Officer, Spirit
Samantha J. Marnick	AeroSystems Holdings, Inc.
Executive Vice President & Chief Operating Officer; President,
Commercial, Spirit AeroSystems Holdings, Inc.

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OTHER PARTICIPANTS

Ken Herbert	Louis Raffetto
Analyst, RBC Capital Markets LLC	Analyst, UBS Securities LLC
Kristine Tan Liwag	Jack Ayers
Analyst, Morgan Stanley & Co. LLC	Analyst, Cowen & Co. LLC
Seth M. Seifman	Andre Madrid
Analyst, JPMorgan Securities LLC	Analyst, Bank of America
Sheila Kahyaoglu	Jon Raviv
Analyst, Jefferies LLC	Analyst, Capital One
David Strauss
Analyst, Barclays Capital, Inc.

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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Investor Day	02-Mar-2022

MANAGEMENT DISCUSSION SECTION

Aaron Hunt

Director-Investor Relations, Spirit AeroSystems Holdings, Inc.

Okay, we'll get started. Good morning everybody, welcome to Spirit AeroSystems 2022 Investor Day. I'm Aaron Hunt, Director of Investor Relations. We've got a lot of good information to share with you today. But before we do that, I need to remind you that any forward looking statements, goals, objectives we may include in our discussions are likely to involve risks, which are detailed in our news release and our SEC filings.

I have a few logistics to cover with you before we get started. Presentations will be available on our Investor Relations website as well as a replay of this event. At the end we'll have a question-and-answer session today, in- person questions will be taken live. So please wait for a microphone before asking your questions. Ryan and Jessica will run a microphone to you.

Virtual participants can submit questions any time during the event, using the question-and-answer box on your screen. Then the virtual questions will be asked by a moderator during the session. And finally, technology exhibits as well as lunch will be available in the room next door for our Wichita participants after the event.

So let's take a quick look at the agenda. First, Tom will get up and talk about our business and strategy. Then Mark is going to get into some details about our segments and our financial outlook. Sam, Duane and Kailash will go over some of their key priorities. And then Kevin will give you some details about - how we're thinking about research and technology, as well as our quality journey. And then we'll finish the day, as I mentioned before, with a question-and-answer session. And closing comments from Tom.

So with that, I'll turn the podium over to our first speaker President and CEO, Tom Gentile. Tom?

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Thomas C. Gentile III

President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc.

Okay, well, thank you, Aaron and good morning, everybody. Welcome to Wichita. We're thrilled to be able to have an in-person meeting and actually a hybrid event, where we have a lot of people who are joining us digitally. But we appreciate the effort that so many of you've made to get here to Wichita, because part of what we wanted to show and communicate are some of the changes to our factory, which have taken place over the last couple of years. And we're proud of those, but also wanted to be able to highlight how much impact that they'll have as we start to go up and rate as we start to emerge from this pandemic.

And an event like this obviously takes a lot of planning. And so thank you to our Investor Relations team, our audio-visual team, for pulling everything together. Timing, of course, is not great. Right now we're still emerging from the pandemic. We knew we would be where we are on that. We, of course, couldn't anticipate the events in Ukraine, which is really a humanitarian issue. It's a military issue. And so again, we couldn't anticipate those events, but we decided to go forward with our in-person event anyway.

We have a lot to talk about in terms of some of the changes that have happened to Spirit, where we're going in the future? And so the presentations this morning will give you a much better sense of that.

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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Investor Day	02-Mar-2022

But I thought what I would do is start off by really going back and looking at the challenges that we faced the last two years and there have been two major crises. The first was the MAX grounding and then the subsequent halt in production, which occurred at the end of 2019. But there were the two tragic crashes in Indonesia and in Ethiopia. And what that resulted first was the plane got grounded, but Boeing kept building, as you call it 42 aircraft per month, eventually they had 470 aircraft that were stored at different locations around Seattle and other places. We kept producing at 52 aircraft per month, thinking that it would be a fairly short-lived grounding and that everything would resume again and we would be able to burn off any inventory. We ended up, at one point, with about 140 shipsets stored, and you can see the pictures of the fuselages stored right across the street on Air Capital Flight Line, which is adjacent to McConnell Air Force Base.

And so coming at the end of 2019, when Boeing made the decision to really stop production for a period of time that was already a major crisis for us, MAX represented half our revenue. We make 70% of the structure of the MAX. We're a proud partner on the MAX. It's a great aircraft, but obviously that created a lot of challenge for us.

And then really, just a couple of months later, we were in the middle of the pandemic. I mean, the early signs of the pandemic were already apparent at the end of January 2020, that the Singapore Air Show was almost cancelled. It wasn't cancelled, but attendance dropped precipitously in 2019 in February. And then in mid-March, everything shut down. It was about March 13 or so when all the lockdown started. And you can see the decrease in air traffic had dropped 96% by the end of March 2020, which is the biggest drop in the history of the aviation industry. Even after 9/11 air traffic only dropped about 15% or 20%, and it recovered in about three months. And as you can see, it's been almost two years and we still have not recovered to the levels that we were at before. In fact, domestic traffic has recovered faster. It's about 85% recovered to 2019 levels, but international traffic is still far below where it was, and so the overall is still down.

The picture at the bottom shows some of the things that we did. We had to take a lot of precautions. These are some employees making masks. In fact, this picture is of a factory we set up at the end of March and into April 2020 to produce ventilators. And that's the governor of Kansas, Governor Kelly, Laura Kelly on the far right, but we've produced over 20,000 critical care ventilators which we shipped around the world to help fight the pandemic and also to leverage some of the excess capacity in the workers that we had. At one point, we had over a 1,000 workers trained working in the factory, three shifts. When we started by air, our partner was building three ventilators a week, we got it up to 500 per day and ended up shipping 20,000 around the world.

So that was the, the two crises that we faced throughout 2020. And it had a big impact on us. Our deliveries overall fell 48%, but the MAX went from 606 units in 2019 to 72 units in 2020, a drop of 90%. And that, of course, had a big impact on our revenue. We were at about $8 billion in 2019, dropped to $3.4 billion in 2020. And our free cash flow went from about $690 million in 2019 to negative $870 million or so in 2020. So it was a big drop. Liquidity was very important. And because of that, obviously we had our credit rating downgraded and we went from an investment grade credit rating to something far less. We had three separate drops and we had to renegotiate our covenants with the banks on three separate occasions.

So very challenging time. And we responded aggressively. The first thing we did is we had to keep employees safe. We kept producing right through the pandemic. Yes, deliveries were down, but even the MAX, there were still some deliveries and on our Defense customers there were a lot of deliveries. We never missed a single delivery during that time. We put in place protocols. We had people wear masks. Some people worked remotely when they could. But the vast majority, 85% of our people were here the entire time. We did [indiscernible] (00:08:02) all of our US workers back by June of 2021 and we've been there ever since. So we managed to get through the pandemic, keep delivering, but kept our employees safe.

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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Investor Day	02-Mar-2022

We also had to align our costs to lower levels of production. And we did reduce our commercial head count by more than 8,000 people, and we took out over $1 billion of costs, about 40% of our total costs. So we had to make some very difficult decisions under very tight timetables, but we had to do that in order to stabilize the company.

And, of course, the last thing was liquidity. We had to take a lot of liquidity actions to ensure that we had enough cash to weather the entire storm. Part of that was raising bonds in the debt market. Our partners here from Bank of America really led the charge with us on that. And we appreciate that. We had two different offerings. Both ended up being oversubscribed substantially. So that was good. We also mutually terminated our acquisition of Asco, which was a $450 million acquisition. And we negotiated a significant discount with Bombardier to reflect the different environment that we faced in the pandemic. And so in total, along with reducing capital expenditures and cutting our dividend, it was about $3 billion worth of liquidity actions that really put us in a stable position, while rates were down.

But our focus coming out of the pandemic is really to come back as a stronger company and a more diversified company. And so the three key issues first is, is this diversification. And I'll show you some of the concentration levels that we had, but it was imperative for us to think about how do we get a broader base set of customers coming out of the pandemic, so that we could really be in a stronger position? And what we've talked about is a vision of where we are 40% Commercial, 40% Defense & Space and 20% Aftermarket.

The second big priority is delever. We took on an additional $2.1 billion of debt during the pandemic that took our total debt at one point to about $3.8 billion and we lost our investment grade credit rating. So, one of our focuses is to pay down debt. We've said we want to get $1 billion out between 2020 and 2023 and we paid down $300 million already. Mark is going to talk a little bit more about this with the goal of getting our investment grade credit rating back and reducing the interest rates that we pay and so, therefore, lowering the total interest expense so that we free up cash flow for innovation and growth.

And then the last thing is to drive margins is to get back to margins where we were back in 2016 when we were stable, producing one type of major aircraft on the MAX side and were at 42 aircraft per month. So, to get back to 16.5% margins once the MAX gets back to a level of 42 aircraft per month. So these are the three major strategic objectives that we have.

Let's go through these a little bit more. In terms of diversification, going into the pandemic, it was very clear we were too concentrated. We were too concentrated in terms of original equipment, 98%. We were too concentrated in terms of commercial aerospace, about 95%. Boeing represented 79% of our revenue in 2019, and the MAX was 50%. So, this level of concentration meant that we traded at a discount to our peers. Structures is, by definition, lower margin than some of the other segments of aviation, and we don't have as much Aftermarket typically. I always like to say we built things right the first time. We don't need as much Aftermarket, but nevertheless the concentration did cause us to trade at a discount to our peers. And you all know the numbers very well.

And so, it was an objective for us to say, how do we start to diversify? And yes, it was difficult in 2020 when the market was low for us to think about diversification. But it was that important strategically that it was worth making the effort.

And so the biggest thing that turned this around was the acquisition of Bombardier's assets, their aerostructures assets in Belfast Ireland. This was the old Short Brothers, which has a huge legacy, goes back to 1908 when the three Short Brothers built the first Wright Flyers in Europe in partnership with Orville and Wilbur Wright. And then

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