Spirit AeroSystems : Q2 2023 Earnings Call Transcript

Corrected Transcript

02-Aug-2023

Spirit AeroSystems Holdings, Inc. (SPR)

Q2 2023 Earnings Call

	Total Pages: 24
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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Q2 2023 Earnings Call	02-Aug-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

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

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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Q2 2023 Earnings Call	02-Aug-2023

MANAGEMENT DISCUSSION SECTION

Operator: Good morning, ladies and gentlemen, and welcome to Spirit Aerosystems Holdings Inc's second quarter 2023 earnings conference call. My name is Jordan and I'll be your coordinator today. [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, Jordan, and good morning, everyone. I'm Ryan Avey, and with me today are Spirit's President and Chief Executive Officer, Tom Gentile; Senior Vice President and Chief Financial Officer, Mark Suchinski; and President of Commercial and Chief Operating Officer, Sam Marnick.

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 second quarter results call. I'll begin today by discussing the IAM contract and providing an update on the 737 vertical fin attach fitting progress. On the IAM contract, we are very pleased to have in place a four-year contract with our IAM represented employees which reflects the gratitude we have for their contributions. While the first vote resulted in a work stoppage, we quickly went back to the table with our union partners and reached a resolution.

Due to the work stoppage from the strike, we now expect to deliver between 370 and 390 737 fuselages this year. The front of our production line is starting to break to 42 airplanes per month in August, but we won't be able to fully recover the lost manufacturing days from the work stoppage and the subsequent resumption of full production at our Wichita site. Mark will walk you through some of the financial impacts related to the new contract and work stoppage in his comments.

On the vertical fin attach fittings, first, all the rework on the available 737 fuselages in Wichita was completed during the second quarter, which was ahead of the timeline we provided on our last call and within the financial estimates that we provided. We were quickly able to develop a repair process and prioritize the rework. I want to recognize our operations team for the incredible effort they made to develop the repair, implement it, and maintain the schedule and budget. With regards to the units at Boeing, we have also recorded a provisional liability in the second quarter related to a potential claim for the repair work performed to date at Boeing. Additionally, we do not expect a material financial impact associated with previously delivered airplanes in the fleet.

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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Q2 2023 Earnings Call	02-Aug-2023

Now turning to our Commercial business. Commercial air traffic demand continues to be strong and is approaching full recovery to pre-COVID levels. Based on May results, global air traffic is at 96% of 2019 levels, with domestic air traffic now exceeding 2019 levels by 5% and international improving to 91% of 2019 levels. This strong recovery in traffic, combined with robust airline demand for new airplanes with improved fuel efficiency and seating capacity, has fueled the recent large orders book from airlines. As a result of these orders, our backlog at Spirit grew from $37 billion to $41 billion in the second quarter, which includes work packages on all Commercial platforms in the Airbus and Boeing backlog.

We are focused on executing the upcoming rate increases to meet the strong recovery in demand. While we are making progress, there continues to be challenges in the supply chain which have destabilized our production lines. We still see examples of distressed suppliers, even smaller ones, which have significantly disrupted our operations because of shortages we've had to address. Over the last 18 months, we have incurred impacts approaching $200 million from individual distressed suppliers and other supply chain pressures which have been reflected in our past earnings. These challenges in the supply chain also drove some of the forward losses recorded in the second quarter, primarily on the 787, the A350 and the A220 programs. Our priority for the second half of the year remains on execution within our factories, and managing these supply chain challenges to meet production rate increases.

While we continue to expect supply chain challenges, we have put plans in place to help mitigate the impacts. We have Spirit employees in the field working with suppliers regularly, addressing rate readiness, helping them buy material, extending contracts, and offloading work to relieve some of the pressure.

As we've mentioned previously, in our own factories, we are bringing in new employees earlier than we have in the past to help ensure a smoother transition on production rate breaks. Expectations for deliveries on our other programs through the year are as follows: 40 to 45 shipsets on 787; about 60 shipsets on the A350; 580 shipsets on the A320; and 75 to 80 shipsets on the A220.

Now let's move to an update of our defense and aftermarket businesses, which both continue to perform well toward our 2025 targets. Our Defense and Space business once again produced strong revenue growth, up 30% this quarter compared to the second quarter of 2022. The new business pipeline also remains robust, and we continue to make good inroads with the defense primes displaying our design-build capabilities and commercial best practices. Year-to-date to date, we have won 20 different contracts worth more than $200 million in total. We continue to bid on large defense programs and are on track to reach our target of $1 billion in Defense & Space revenue by 2025.

Our aftermarket business also had another quarter of solid revenue growth, up 15% compared to the same quarter last year, driven by increased MRO and spares volume with strong operating margins of 26%, helped by some one-time items. The aftermarket team also remains on plan to reach their 2025 revenue target of $500 million.

I'll now turn the call over to Mark to take you through some more of the financials for our results. Over to you, 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 two significant items that occurred during the second quarter, the 737 vertical fin attach fitting rework and the Wichita IAM negotiations. The teams worked diligently throughout the quarter on the 737 vertical fin attach fitting rework related to the quality issue that

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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Q2 2023 Earnings Call	02-Aug-2023

we explained in April. We're pleased to have resolved the required rework on available units in Wichita within the $31 million cost estimate we discussed on the last earnings call. We recorded a contra revenue charge of $23 million in the quarter to account for a potential claim from Boeing related to our estimate of the repair work to date at their facility, which we believe represents about half of the units. However, I want to emphasize that any potential claim we may receive from Boeing could be materially different from our estimate.

Now, as it relates to the IAM; the IAM negotiations and strike disruption affected all of our programs at the Wichita, Kansas site, which the 737 program was mostly impacted. Financial impacts during the quarter included $28 million of charges in the estimates, primarily related to higher employee benefits, including wages from the new IAM contract as well as strike disruption charges of $7 million and higher excess capacity costs. Additionally, as we look ahead over the life of the new union contract, we are forecasting labor costs to be approximately $80 million more on an annual basis. This will put pressure on margins going forward in addition to the broader inflationary pressures we are experiencing. With the quality issue resolved in our factory and a new labor contract in place, our entire focus is directed towards executing on our customer commitments, including the upcoming production rate increases.

Now let me take you through the details of our second quarter financial results. So let's move to slide 2. Revenue for the quarter was $1.4 billion, up 8% from the second quarter of 2022. Second quarter 2023 revenue was impacted by disruption from the vertical fin attach fitting issue as well as the IAM work stoppage. The year-over- year improvement was primarily due to higher production on the 737 and 787 programs, and increased Defense & Space revenue, partially offset by lower production on the A220 program. The Defense & Space segment had a strong quarter with top line growth of 30%, increasing revenue by about $45 million. Also, Aftermarket had a robust performance with 15% revenue growth and 26% margins. Overall deliveries for the quarter increased 8% on a year-over-year basis.

Now let's turn our attention to the EPS. We reported earnings per share of negative $1.96 compared to negative $1.17 in the second quarter of 2022. Excluding certain items, adjusted EPS was negative $1.46 compared to negative $1.21 in the prior year. Operating margin decreased slightly to negative 9%, compared to negative 8% in the same period of 2022, driven by higher changes in estimates, as well as the potential customer claim that I discussed in my opening remarks, partially offset by the absence of losses related to the Russian sanctions recognized during the second quarter of 2022 and increased aftermarket earnings.

Second quarter forward losses totaled $105 million, and unfavorable cumulative catch-up adjustments were $22 million. This is compared to $64 million of forward losses and $8 million of unfavorable cumulative catch-up adjustments in the second quarter of 2022. The current quarter forward losses relate primarily to the 787, A350 and A220 programs.

The 787 forward losses of $38 million resulted from the new IAM union contract, as well as increased supply chain and other production related costs. The A350 charges of $28 million were primarily due to increased costs related to production rate recovery efforts, including freight as well as unfavorable foreign currency movements. And the A220 loss of $27 million was driven by higher estimates of supply chain costs and unfavorable foreign currency fluctuations. Additionally, the unfavorable cumulative catch-up adjustments relate primarily to the 737 program reflecting increased labor costs from the IAM union negotiations as well as higher supply chain costs.

Other expense in the second quarter of this year was $10 million compared to other income of $35 million in the prior year. This variance was due to gain recorded in the second quarter of 2022 of $21 million related to the settlement of the repayable investment agreement with the UK Department of Business, Energy and Industrial

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