Spirit AeroSystems : Q2 2022 Spirit AeroSystems Holdings, Inc. Earnings Conference Call Transcript

Corrected Transcript

03-Aug-2022

Spirit AeroSystems Holdings, Inc. (SPR)

Q2 2022 Earnings Call

	Total Pages: 22
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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Q2 2022 Earnings Call	03-Aug-2022

CORPORATE PARTICIPANTS

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

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OTHER PARTICIPANTS

Douglas S. Harned	David Strauss
Analyst, Sanford C. Bernstein & Co. LLC	Analyst, Barclays Capital, Inc.
Seth M. Seifman	George David Shapiro
Analyst, JPMorgan Securities LLC	Analyst, Shapiro Research LLC
Robert Spingarn	Michael Ciarmoli
Analyst, Melius Research LLC	Analyst, Truist Securities, Inc.
Cai von Rumohr	Ronald J. Epstein
Analyst, Cowen and Company, LLC	Analyst, BofA Securities, Inc.
Sheila Kahyaoglu	Peter J. Arment
Analyst, Jefferies LLC	Analyst, Robert W. Baird & Co., Inc.
Kristine Tan Liwag
Analyst, Morgan Stanley & Co. LLC

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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Q2 2022 Earnings Call	03-Aug-2022

MANAGEMENT DISCUSSION SECTION

Operator: Good morning, ladies and gentlemen, and welcome to Spirit AeroSystems Holdings Incorporated Second Quarter 2022 Earnings Conference Call. My name is Matt and I'll be your 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 would now like to turn the presentation over to Aaron Hunt, Director of Investor Relations. Please proceed.

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Aaron Hunt

Director - Investor Relations, Spirit AeroSystems Holdings, Inc.

Thank you, Matt, and hello, everyone. Welcome to Spirit's second quarter 2022 results call. I'm Aaron Hunt, Director of Investor Relations. And with me today are Spirit's President and Chief Executive Officer, Tom Gentile; Spirit's Senior Vice President and Chief Financial Officer, Mark Suchinski; and Spirit's Executive Vice President, Chief Operating Officer and President of Commercial Division, Sam Marnick. After opening comments by Tom 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, including those detailed in our earnings release, in our SEC filings and the forward-looking statement at the end of this web presentation and reference in our call today. 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.spiritaero.com.

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

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Thomas C. Gentile III

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

Thank you, Aaron and good morning, everyone. Welcome to Spirit's second quarter earnings call. We continue to navigate a dynamic environment driven by challenges in supply chain, staffing and inflation. OEM schedule changes as a response to this dynamic environment also disrupt operations and drive the need for rescheduling and replanning efforts. Despite these near-term pressures, the long-term outlook for air traffic and the global aviation industry remains strong. Domestic air traffic has recovered to close to 2019 levels. And over the July 4 holiday weekend, air traffic even exceeded 2019 levels. Aircraft backlogs remain healthy. Spirit's backlog is $34 billion, of which 85% is narrowbody aircraft.

Along with the rest of the industry, we were happy to be back at the Farnborough airshow in July, which was the first major gathering of the entire global industry since the 2019 Paris Air Show. The return of the event was welcomed for us to reconnect with many of our customers, suppliers, and other stakeholders. At the airshow, we saw continued narrowbody demand improvement with Boeing securing multiple 737 MAX orders, including 100 737 MAX-10s from Delta Airlines. Prior to the show in early July, Airbus also secured a large narrowbody order for nearly 300 A320s. Those orders reinforced the improved long-term outlook for narrowbody aircraft that support future production rate increases.

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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Q2 2022 Earnings Call	03-Aug-2022

While the long-term outlook remains favorable, this quarter, we did experience economic pressures like the rest of the industry. As we ramped 737 MAX production to 31 airplanes per month in May, we saw additional challenges surfaced in our supply chain. These challenges at some suppliers resulted in parts shortages in our factories. As a result, we are taking longer to stabilize at rate 31 aircraft per month on the MAX and have taken the opportunity to burn down the fuselage buffer we have in Wichita, which was reduced by 19 chipsets during the quarter and now sits at 66 chipsets. Overall, we now expect to deliver about 300 737 MAX units in 2022.

We also saw a number of schedule changes this past quarter particularly on the A350, 767, and 787 programs. These schedule changes contributed to the forward loss this quarter. The 787 program also required some additional engineering analysis to support Boeing's efforts to resume deliveries. We continue to respond to all Boeing's questions on the 787, so they can complete their work with the FAA. In addition, we saw several supplier bankruptcies that created challenges this quarter. On the A220 program, one supplier bankruptcy drove a forward loss of $25 million related to schedule recovery efforts and transfer of work. Through the efforts of our supply chain team, we have been able to ensure supply continuity to our customer. Also, we are experiencing challenges with inflation on purchase services, logistics and transportation that have created some headwinds to our results.

Finally, in light of the Russian invasion of Ukraine, our customer stopped shipping parts for an aircraft program. Due to the uncertainty of that program, we have taken a net charge of $28 million related to adjustments of certain assets and liabilities associated with US sanctions on Russia. Our Defense segment continues to show solid growth. Recently, we had three big wins in defense. First, Spirit was selected to provide the pylons and nacelles for the B-52re-engine program. Second, Sierra Space also awarded Spirit the Shooting Star cargo module for their Dream Chaser program. Third, in mid-July, we joined Airbus Helicopters as a strategic partner to support the British produced H175M for the UK's New Medium Helicopter requirement. These wins demonstrate the momentum of our defense business in its core markets. Our Defense & Space growth strategy is moving us into new markets and expanding our relationship with the OEMs and primes.

The Aftermarket business also had a very good second quarter, growing revenue by 42% over the second quarter of last year and delivering 15% margins. Without losses on Russia-related programs, margins would have been about 20%. We also expect to see the business in the aftermarket benefit from new opportunities like the recently announced deal with Boeing Global Services on the MAX and the GAMECO partnership in China. I also want to highlight that we released our second annual Sustainability Report in July. We set our progress toward our sustainability targets, including key accomplishments of transitioning to 100% wind power at both our Wichita and Tulsa facilities. In addition, we completed an agreement to install a large solar panel array on the roof of our Malaysia facility. We continue to leverage our research and technology investments to assist in the development of newer, more fuel-efficient aircraft.

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

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Mark J. Suchinski

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

Thank you, Tom, and good morning, everyone. We feel optimistic about the strength of the post-pandemic's aerospace recovery as we continued to see narrowbody production rates increase. That said, we experienced some near-term pressures this quarter. We received schedule changes from our customers and faced a constrained supply chain, labor shortages, and rising costs. These challenges are not unique to Spirit, and I'm confident in our ability to manage through the uncertainties over time.

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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Q2 2022 Earnings Call	03-Aug-2022

Now, let me take you through our second quarter financial results. Let's start with revenue on slide 3. Revenue for the quarter was $1.3 billion, up 26% from the same quarter of last year. This improvement was primarily due to higher production on the 737 and increased aftermarket revenue, partially offset by lower production on the 787 program. Turning to deliveries, the narrowbody programs in the second quarter of 2022 were 60% higher compared to 2021, with 234 deliveries in the second quarter of 2022 compared to 146 in the same quarter last year. The 737 and A320 programs each had increased deliveries. The second quarter 737 MAX deliveries were 71 units compared to 35 in the second quarter of last year, while we delivered 147 A320s compared to 96 in the prior year. Wide-body program deliveries were down 19% to 35 units compared to 43 in the second quarter of 2021, driven mainly by the 787 program. Overall deliveries increased to 318 units compared to 235 in the same period of last year.

Now, let's turn to earnings per share on slide 4. We've got a lot going on from an EPS standpoint this quarter. So, I plan on walking you through the key drivers that impacted earnings. We reported earnings per share of negative $1.17 compared to negative $1.30 per share in the second quarter of 2021. Adjusted EPS was negative $1.21 compared to negative $0.31 in the same period last year. 2022 adjusted EPS excludes the deferred tax asset valuation allowance, gain related to the settlement of the repayable investment agreement and losses related to the Russian sanctions, while 2021 adjusted EPS excludes restructuring costs and the deferred tax asset valuation allowance. We continue to see supply chain challenges with many of our suppliers experiencing staffing pressures, resulting from a tight labor market and less experienced new employees as they have increased production rates. In turn, this has led to part shortages and disruptions in our factories during the quarter.

We also experienced further increased inflationary pressures in logistics, energy, consumables and other indirect areas. Operating margin was negative 8% compared to 10% in the second quarter 2021. The margin increase reflects increased production rates, partially offset by higher unfavorable changes in estimates and losses related to Russian sanctions. Operating margin in the quarter were negatively impacted by significant events, including supplier bankruptcies, losses related to Russian sanctions and production rate changes. This quarter's net forward losses were $64 million and we had unfavorable cumulative catch up adjustments of $8 million. This compared to $52 million of foreign losses and $10 million of favorable cumulative catch up adjustments in the second quarter of 2021.

The current quarter forward losses were primarily driven by the 787 and A220 programs. The 787 charge were a result of production rate decreases and increased supply chain and engineering costs, while the A220 charges were the result of increased costs associated with the supplier bankruptcy and cost to relocate that work. The unfavorable cumulative catch-up adjustments during the quarter were driven by schedule changes, part shortages and increased estimates for supply chain, freight and other costs, mainly on the 737 and A320 programs. In relation to the sanctioned Russian business activities, we recorded losses of $42 million and the reversal of a previously booked forward loss of $14 million for a net charge of $28 million. These charges resulted from impairments on inventory and capital as well as reserve adjustments.

Second quarter 2022 earnings also included $45 million of excess capacity costs, a decrease of $3 million over the same period of 2021. The quarter did not include any restructuring or abnormal COVID-19 costs compared to $8 million of these combined expenses during the second quarter of 2021. Other income for the second quarter of 2022 was $35 million, $4 million higher than the same period last year and reflects several offsetting items, including a gain of $21 million related to the settlement of the repayable investment agreement and higher foreign currency gains, partially offset by lower pension income, higher excise taxes and losses on foreign currency forward contracts.

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