Spirit AeroSystems : Q1 2023 Spirit AeroSystems Holdings, Inc. Earnings Conference Call Transcript

Corrected Transcript

03-May-2023

Spirit AeroSystems Holdings, Inc. (SPR)

Q1 2023 Earnings Call

	Total Pages: 27
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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Q1 2023 Earnings Call	03-May-2023

CORPORATE PARTICIPANTS

Ryan Avey	Mark J. Suchinski
Director-Investor Relations, Spirit AeroSystems Holdings, Inc.	Senior Vice President & Chief Financial Officer, Spirit AeroSystems
Thomas C. Gentile III	Holdings, Inc.
President, Chief Executive Officer & Director, Spirit AeroSystems
Holdings, Inc.

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OTHER PARTICIPANTS

Seth M. Seifman	Robert Spingarn
Analyst, JPMorgan Securities LLC	Analyst, Melius Research LLC
Ken Herbert	George David Shapiro
Analyst, RBC Capital Markets LLC	Analyst, Shapiro Research LLC
Sheila Kahyaoglu	Kristine Tan Liwag
Analyst, Jefferies LLC	Analyst, Morgan Stanley & Co. LLC
David Strauss	Michael Ciarmoli
Analyst, Barclays Capital, Inc.	Analyst, Truist Securities, Inc.
Douglas S. Harned	Noah Poponak
Analyst, Sanford C. Bernstein & Co. LLC	Analyst, Goldman Sachs & Co. LLC
Cai von Rumohr	Peter J. Arment
Analyst, TD Cowen	Analyst, Robert W. Baird & Co., Inc.
Myles Walton	Andre Madrid
Analyst, Wolfe Research LLC	Analyst, BofA Securities, Inc.

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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Q1 2023 Earnings Call	03-May-2023

MANAGEMENT DISCUSSION SECTION

Operator: Good morning, ladies and gentlemen, and welcome to Spirit AeroSystems Holdings, Incorporated First Quarter 2023 Earnings Conference Call. My name is Jason and I'll be the coordinator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions]

I'd now like to turn the presentation over to Ryan Avey, Senior Director of Investor Relations and FP&A. Please proceed.

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Ryan Avey

Director-Investor Relations, Spirit AeroSystems Holdings, Inc.

Thank you, Jason, and good morning, everyone. I'm Ryan Avey, and with me today are Spirit's President and Chief Executive Officer, Tom Gentile; and Senior Vice President and Chief Financial Officer, Mark Suchinski.

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 and our SEC filings and in the forward- looking statement at the end of this web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of non-GAAP measures we use when discussing our results.

With that, I'd like to turn the call over to our Chief Executive Officer, Tom Gentile.

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Thomas C. Gentile III

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

Thank you, Ryan, and good morning everyone. Welcome to Spirit's first quarter results call. I want to begin today by providing an update to the quality issue with the vertical fin attach fittings of certain models of the 737 fuselage that Spirit builds. After identifying the issue, our top priority was to work with Boeing and the FAA for their confirmation that it was not an immediate safety of flight issue. Once we confirmed this, we turned our attention to ensuring our ongoing production meets manufacturing standards. We have revised our assembly process in production, have restarted production, and have resumed shipments of conforming fuselages to Boeing.

We have identified the affected units located in Wichita, including units in Spirit work-in-process as well as Boeing-owned inventory units in Wichita, and have developed a repair. Excluding units for China and other customers with no current delivery dates, this issue impacts 35 to 40 units in Wichita, about 60% of the total. We have completed repair on four units, and our current assessment is that the repair work will be complete for units in Wichita by the end of July. The total impact for these repairs and the factory disruption it caused is $31 million, of which we booked $17 million in Q1. For your information, the repairs in Wichita are expected to average approximately $100,000 to $150,000 per unit.

There will be some near-term impacts to our 737 deliveries in the second quarter due to rework and disruption in our factories. We are still targeting two production rate increases later this year, to 38 airplanes per month in August and to 42 airplanes per month in October for the 737 program. With the associated disruption, we now expect to deliver between 390 and 420 737 fuselages in 2023.

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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Q1 2023 Earnings Call	03-May-2023

We are closely coordinating with Boeing to help minimize production schedule and delivery impacts, leveraging stored fuselages and new production. We appreciate the support Boeing has provided in working through this issue with us, reinforcing the strong partnership that we have. We have worked with some of our customers to receive $280 million of cash advances to help support Spirit's near-term liquidity. As Dave Calhoun, Boeing's CEO, mentioned in Boeing's earnings report, Boeing has agreed to provide Spirit with a cash advance of $180 million to help cover the short-term cash impact of fewer 737 deliveries in Q2.

The quality and safety of our products are very important to Spirit and our customers. Our employees understand and take great pride that the products we manufacture are enabling flights around the globe every single day. As part of our quality management system, we have processes in place to address issues like the vertical fin attach fittings, which we followed in this case. We also have an extensive root cause corrective action process and are implementing additional protocols to reinforce our quality systems to prevent similar occurrences in the future.

We are committed to strengthening and continuously improving our safety and quality culture as a trusted partner to our customers. Mark will address our preliminary assessment of the financial impacts of the vertical fin attach fittings in his remarks.

Now, turning to our commercial business. We are encouraged by the continued strong growth in the return of air travel demand. Based on February results, global traffic is now at 85% of February 2019 levels, with domestic travel at 97% and international reaching 78%. Our backlog stands at $37 billion, which includes work packages on all commercial platforms in the Airbus and Boeing backlog.

While the recovery of air traffic is progressing well toward the pre-pandemic levels, we continue to face challenges associated with increasing production rates in terms of our supply chain and our factories. Overall, the health of our supply chain remains challenging, and we continue to encounter shortages and one-off supplier issues that we must address as they arise. In the quarter, we recorded an $81 million forward loss on the A220 program, of which $46 million was for non-recurring costs related to a distressed supplier. The remaining $35 million was driven by production schedule changes and foreign currency movements.

One of our major focus areas remains execution within our factories and mitigating supply chain challenges to meet the upcoming production rate increases across multiple programs. We've made good progress in hiring and training new employees ahead of the planned 737 production rate increases later this year. We continue to expect ongoing supply chain challenges throughout the year, but do expect gradual improvement going into next year.

In terms of expected deliveries on our other commercial programs this year, there is no change from what we discussed on our last earnings call of 40 to 45 shipsets on the 787 program and 60 shipsets on the A350 program. We continue to expect to deliver about 75 to 80 A220 units. For A320, we have received an updated production schedule from Airbus and now expected to deliver about 580 shipsets this year, about 85 fewer than we previously discussed last quarter.

Now, let's move on to our defense and aftermarket businesses. Our defense and space business continues to show strong top-line growth, up 19% this quarter compared to the first quarter of 2022. With the award decision on the future long-range assault aircraft, FLRAA, recently upheld, we look forward to supporting Textron and Bell as part of Team Valor on this important program for the US Army.

As a reminder, we first began work on the prototype for the FLRAA program nearly a decade ago and are excited to transition to the next phase of this program. This is another demonstration of Spirit's strong value proposition

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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Q1 2023 Earnings Call	03-May-2023

for military customers, including competitive cost manufacturing with the application of commercial best practices and design build capabilities.

We also announced an MOU with Skyworks Aeronautics to pursue support for Skyworks defense and commercial platforms in the UK and European markets. We will work collaboratively on detailed design activities to support Skyworks, a vertical takeoff and landing high-speed and long-range aircraft.

Our aftermarket business also produced strong revenue growth of 22% this quarter compared to the same period last year with solid operating margins of 20%. The aftermarket team is executing on our growth strategy as highlighted by several recent agreements. We announced the signing of an exclusive cooperation agreement with Singapore's ST Engineering's Commercial Aerospace business to support customers in the Middle East with aircraft engine nacelle and MRO solutions. Additionally, we signed agreements with both Joramco and Jordan and GMR Aero Technic in India to be Spirit's authorized repair center, further expanding our strategy to be available locally for our global customers.

I also want to mention our upcoming negotiations with the IAM Union here in Wichita. We appreciate our IAM colleagues' dedication and hard work, particularly over the pandemic, as we continue to ramp our production lines as part of the aerospace recovery. Our primary objective is to reward our IAM colleagues with a fair and competitive contract as we meet the increased demands from our customers.

I'll now turn the call over to Mark to take you through a few more details on our results. Mark?

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Mark J. Suchinski

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

Thanks, Tom, and good morning, everyone. I want to begin by discussing the financial impacts resulting from the vertical fin attach fitting issue that Tom addressed in his opening comments. We've performed a preliminary financial assessment of our production impacts, and as a result, expect disruptions and rework within Spirit's Wichita factory to negatively impact full year gross profit by approximately $31 million, of which $17 million is reflected in the first quarter 2023 financial results.

The rework costs on available units in Wichita is expected to average between $100,000 and $150,000 per unit, which is approximately $5 million of the total. We expect to incur future additional costs, including those that our customer may assert to repair previously delivered units in their factory and warranty costs related to the affected [ph] 737 (00:09:45) units in service. However, those remaining costs cannot be reasonably estimated at this time.

The disruption of rework that will take place in Wichita will reduce near-term 737 production by about 30 to 40 units, leading to full year 737 deliveries of about 390, and with the potential to make up additional units in the back half of the year. We will continue to evaluate the impacts on our financials. And as more information becomes available, we'll keep you updated.

Now, let me take you through the details of our first quarter financial results. So, let's start on slide 3. Revenue for the quarter was $1.4 billion, up 22% from the first quarter of 2022. This improvement was primarily due to higher production on the 737 program and increased aftermarket and defense and space revenue, partially offset by lower production on the A220 program. The defense and space segment had a strong quarter with top-line growth of 19%, increasing revenue over the prior quarter by about $30 million.

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