Spirit AeroSystems : 8th Annual Morgan Stanley Laguna Conference Transcript

Corrected Transcript

15-Sep-2020

Spirit AeroSystems Holdings, Inc. (SPR)

Morgan Stanley Laguna Industrials Conference

	Total Pages: 12
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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Morgan Stanley Laguna Industrials Conference	15-Sep-2020

CORPORATE PARTICIPANTS

Thomas C. Gentile

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

Mark J. Suchinski

Chief Financial Officer & Senior Vice President, Spirit AeroSystems Holdings, Inc.

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OTHER PARTICIPANTS

Kristine Tan Liwag

Analyst, Morgan Stanley

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MANAGEMENT DISCUSSION SECTION

Kristine Tan Liwag

Analyst, Morgan Stanley

Good afternoon, everyone. Today we're hosting Spirit AeroSystems with CEO Tom Gentile; and CFO Mark Suchinski. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is now for members of the press. If you are a member of the press please disconnect and reach out separately. For important disclosures please see the Morgan Stanley Research Disclosure website at www.morganstanely.com/researchdisclosures. If you have any questions please reach out to your Morgan Stanley sales representative. One logistical item, we will be taking questions from the audience. If you want to ask a question please send one over through the webcast portal.

So, Tom and Mark, welcome. Thank you for joining us today. And I'll hand it over to Tom.

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Thomas C. Gentile

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

All right. Thank you, Kristine, and good afternoon everybody. Nice to be here, back at Laguna Beach although virtually this time and not in person. But before I start we do have a Safe Harbor statement, so any goals or predictions that we discuss today could involve risks and all those risks are outlined in our SEC filings.

So, yeah, I'll start and the way I often start and start is just to remind everybody that we're not the airline. So if you thought we're Spirit Airlines, I'm sorry to disappoint you. We're ex-Spirit Aerostructures. So we build large structures for commercial and military aircraft, things like fuselages and wings and the slats.

We spun out from Boeing back in 2005. We're an independent public company and we have significant work packages on of the Boeing and Airbus programs. Our biggest program is the 737 MAX. We're a proud partner on the 737 MAX but obviously that's been a difficult situation. We make 70% of the structure on 737 MAX and it historically represents 50% of our revenue. So when it got grounded last year after the second tragic crash, it was

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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Morgan Stanley Laguna Industrials Conference	15-Sep-2020

very difficult situation for Spirit. Boeing suspended deliveries at that time, but we kept producing at 52 aircraft per month, until in December only actually stopped production.

At that point, we faced at Spirit a very significant challenge because it did represent half of our revenue. So we negotiated a new [indiscernible] (00:02:17) with Boeing at 216 aircraft for 2020, which was about a 60% reduction. Then when the pandemic hit, obviously that was another challenge. And we renegotiated down yet again to 125 aircraft and in June we agreed a third production change with Boeing at 72 aircraft for 2020.

But the pandemic also impacted wide-body production particularly because of international travel. And so that 787 program has gone from 14 aircraft per month - it will be 6 next year. And 777 has gone from 5 aircraft per month last year till - 2 next year. And of course this is not just Boeing. Airbus is also impacted and they reduced their production by 40%.

So the combination of all those production hits and cuts really impacted Spirit. In the first quarter, our revenue was down 50%. In the second quarter it was down 68%. And we burned a lot of cash in both of those quarters particularly since some of the working capital - the inventory was already on order and we couldn't turned it off fast enough so it accumulated. It will burn off in the future but with production rate slow right now, it's burning off less fast.

So we said in the - for the year we'll probably burn about $800 million of cash this year. The good news is we started off with a very strong cash position. We did raise $1.2 billion in high-yield bonds. So, we ended Q2 with $1.9 billion in cash and we're confident in our projections that we'll have enough cash to get through this challenging period until we're cash flow positive again in 2022, even if we do both of the deals that are pending at the full price, which we can talk about later.

But the recovery has started. We saw some good numbers in terms of air traffic in this September for Labor Day. But in April and March, we saw traffic down 96%, and so that's a challenge. On the narrow-body side, with domestic travel - we expect domestic travel will recover first. China has already rebounded to about 90% of their pre-COVID levels and that's with the narrow body production. Most of our backlog, which is still over $42 billion is with narrow-body, the 737 MAX and the A320.

Wide-body is going to [indiscernible] (00:04:33). International travel's going to take longer to recover. So we think we could get back to production rate we were at in 2019 maybe by the end of 2023 for narrow-bodies, but wide- bodies are going to take 12 to 24 months after that.

So it's clear we've taken a number of actions to deal with these lower production rates. Obviously we started with aligning our cost to lower production levels. With production down about 45% this year, we have laid off of about 8,000 employees globally from our commercial workforce. We have also reduced executive pay by 20% and put all of our salaried employees on four-day work weeks starting in March for the rest of the year.

We've reduced a lot of our indirect costs. We've taken out on an annualized basis about a $1 billion worth of cost or 40%. We've also taken a number of actions to preserve liquidity. We have our dividend down to $0.01. We suspended all share repurchases. We cut our capital expenditures by $125 million. We negotiated an advance with Boeing for $225 million. We also deferred the repayment of an advance to Boeing for $123 million from 2020 to 2022. And as I mentioned, we also were able to raise $1.2 billion of new capital.

So we have a stable liquidity position and it will get us through this current challenge. But we're also taking advantage of the slower production to invest in our productivity in our factories. We're digitizing our warehousing.

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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Morgan Stanley Laguna Industrials Conference	15-Sep-2020

We're automating production systems using more robotics. We're streamlining the production flow, removing some of the sub-assemblies for the 777 MAX out of our main factory into satellite operation so that we can improve the lean flow and reduce working capital.

We're also investing in our wing capabilities. In Prestwick we're putting in place a new spoiler line that's carbon fiber composite using resin-infused technology application. So that's helping us make a lot of improvements. We'll continue to invest in R&D. We're opening up the new innovation center in Prestwick, Scotland that will help us develop the work with Airbus for the Wing of Tomorrow. We're also investing with the National Institute for Aviation Research in Wichita with Wichita State University. And so that's important for us, is to continue investing.

And then one thing the pandemic has shown us is that we do need to diversify. And so, we are continuing to diversify in defense with the acquisition last year with FMI, which gives us many capabilities and carbon-carbon fiber for high temperature surfaces. We are continuing to expand our defense work. We recently received an $80 million Title III grant, which will help us build more equipment for the air force.

And we're looking to expand our aftermarket. That's another areas where historically we have not been as strong as we would like. And that's the deals that we've announced for Asco and [ph] Atlantic (00:07:29), which is the Bombardier Aerostructures business, will help us diversify in particular give us more Airbus content, more military defense content, more composite capability, more aftermarket capability as well as low cost-centric footprint.

So those are the strategic reasons that we announced those deals. We're obviously working with both parties, meeting the conditions. The Asco deal has a long stop date on October 1. All the conditions are not yet met. If the conditions are not met by October 1, then that deal will terminate. The long stop date for the Bombardier deal is October 31, and we're working on that. Again, the conditions are not yet met. We are working with Bombardier, but we have until October 31, which is the long stop date.

So, a lot of challenges for Spirit but we're optimistic about the industry overall. It's a long cycle business. We were in a great super cycle. That's over, but we're starting a new super cycle. We looked forward the next five years. As production rates recover, Spirit is in very good position. We've still got a great backlog. We're in all the programs for Airbus and Boeing. We got great design and engineering capability. We're winning a lot of defense business; last year defense grew 30%, and we see a bright future for that. And we have a strong stable cash position with $1.9 billion of cash on hand, and we will be able to get through this period into cash flow positive again in 2022. And all the productivity initiatives we're driving will help us regain our missed forward margins of 16.5%, and we'll be able to do that at lower levels of production than before because of all the investments we're making in automation and digitization and robotics.

So, that - with that, Kristine, we can take some questions.

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