Spirit AeroSystems : UBS Global Industrials and Transportation Conference 2022 Transcript

Corrected Transcript

08-Jun-2022

Spirit AeroSystems Holdings, Inc. (SPR)

UBS Global Industrials and Transportation Conference

	Total Pages: 19
1-877-FACTSET www.callstreet.com	Copyright © 2001-2022 FactSet CallStreet, LLC

Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
UBS Global Industrials and Transportation Conference	08-Jun-2022

CORPORATE PARTICIPANTS

Thomas C. Gentile III

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

.....................................................................................................................................................................................................................................................................

OTHER PARTICIPANTS

Myles Walton

Analyst, UBS Securities LLC

.....................................................................................................................................................................................................................................................................

MANAGEMENT DISCUSSION SECTION

Myles Walton

Analyst, UBS Securities LLC

All right. Welcome back. I'm Myles Walton, the aerospace, defense and airlines analyst here at UBS. And it's a pleasure to continue the discussion with Spirit AeroSystems. We've got with us Thomas Gentile. He's going to represent the company as the company's CEO. And I know that, Tom, to get started, you've got some Safe Harbor that you'd like to share with us.

.....................................................................................................................................................................................................................................................................

Thomas C. Gentile III

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

Yes. Well, thank you very much, Myles. It's great to be here. And I just need to remind everyone that projections or goals that we may include today in our discussion are likely to involve risks which are detailed in our news releases and in our SEC filings.

	2
1-877-FACTSET www.callstreet.com	Copyright © 2001-2022 FactSet CallStreet, LLC

Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
UBS Global Industrials and Transportation Conference	08-Jun-2022

QUESTION AND ANSWER SECTION

Myles Walton

Analyst, UBS Securities LLC

Q

Okay. Wow, that is brief and effective. So I want to get right to one of the key questions that I've been asked probably since your earnings call. And it's really about the connection of your assumptions about where the 737 rates were and what people thought your thinking was on the 737 rates and where they actually - what the new guidance implies? So maybe just set the stage of what was assumed previously? What's assumed today? And sort of what was the driver for the change?

.....................................................................................................................................................................................................................................................................

Thomas C. Gentile III

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

A

Right. So back in the first quarter when we had our fourth quarter earnings results and we presented those, we were taking a look at the year, and we - at that time, Boeing hadn't been completely clear about what their production rates were. And we, of course, didn't want to get ahead of them. So we really gave some guidance in terms of what a floor was, in terms of what the rates could be. But our internal assumptions assume that we were going to go to 31 aircraft per month in May and then have another rate increase in September or October. So that would have put our total production for the year at 350 units.

So when we first gave an outlook for our cash flow and said that we'll be negative $123 million, which was the advance payment to Boeing, the repayment of that, and then basically breakeven operationally, it assumed that we're going to produce 350 MAX units in 2022. Well, subsequently, what happened is Boeing came out and was more clear that they weren't going to go up above 31 and we weren't going to go up above 31. So we revised our forecast down to 315 units.

And that's what was a principal driver when we said that we had an additional $50 million to $100 million of pressure. It wasn't just that. We also had some COVID pressure in Q1 with the big spike in Omicron. We had some utility cost increase because of inflation, some logistics costs. And then 787 rates also went down and left us with more working capital and work in process than we anticipated.

So all those factors contributed to that revised forecast of $50 million to $100 million. So what we're saying now is we'll be negative $175 million to negative $225 million, including the $123 million advance repayment to Boeing.

.....................................................................................................................................................................................................................................................................

Myles Walton

Analyst, UBS Securities LLC

Q

Got it. That is pretty crystal clear now. And in terms of the liquidation of the inventory that sits between yourselves and Boeing. Boeing's acquired that inventory, but it still resides at your facilities. What's the strategy or the pathway to get that to, I think, 20 is the target level versus where it is today?

.....................................................................................................................................................................................................................................................................

Thomas C. Gentile III

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

A

Right. So if you go back to, unfortunately, the second crash in March of 2019, at that time, Boeing continued producing at 42 aircraft per month, but they kept us at 52 with the anticipation that very quickly the MAX would be recertified. They'd go back up to 57, and we'd burn off the inventory that we built. Of course, that didn't happen. And we ended up by the end of the year with almost 140 units.

	3
1-877-FACTSET www.callstreet.com	Copyright © 2001-2022 FactSet CallStreet, LLC

Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
UBS Global Industrials and Transportation Conference	08-Jun-2022

And so, what we decided at that point is we would trail Boeing on the way back up of 5 to 10 aircraft per month to burn it down. Now it eventually got down as low as 75 units because we did trail Boeing the last 18 months. But where we are right now is we're producing at 31, they're at 31, and it's actually crept back up a little bit to 85 to 90. And that's where we are. And as long as we're producing at the same rate, it's going to plateau there.

But the goal is to continue burning it down next year as they go up in rate, we'll continue to lag them. And we expect that it will burn it down over the course of 2023 to the 20. And the goal is, is that we'll have 20 units that are a permanent buffer, that act as a cushion to the production system. And those 20 units will be up near Renton where they're finally produced. And they'll pull out of that buffer, and we'll keep replenishing it. And that will create a cushion to the production system.

.....................................................................................................................................................................................................................................................................

Myles Walton

Analyst, UBS Securities LLC

Q

Got it. Okay. So obviously, if you're going to liquidate from your inventory, then there must be a presumption that

Boeing is going to increase their rates above 31, else...

.....................................................................................................................................................................................................................................................................

Thomas C. Gentile III

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

At some point, yes.

A

.....................................................................................................................................................................................................................................................................

Myles Walton

Analyst, UBS Securities LLC

...that wouldn't happen.

Q

.....................................................................................................................................................................................................................................................................

Thomas C. Gentile III

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

A

Well, we do expect it. I mean, there is a lot of demand out there in the system. Domestic travel is recovering. That's leading to demand for narrow-body aircraft. Fuel prices with $120 barrel oil, there's a big incentive for the airlines to convert their older aircraft into the newer more efficient MAX and neos. And then, of course, you've got Airbus going up significantly in rates. I think all those factors will eventually drive an increase in rate on the MAX. But Boeing hasn't said when that will be, and we'll wait and see what they project.

.....................................................................................................................................................................................................................................................................

Myles Walton

Analyst, UBS Securities LLC

Q

But presumably, if you're going to 31, you're not going to go back down so you can burn inventory. So if Boeing for some reason didn't keep - didn't go above 31, we would just stay at this inventory buffer level. And then, when they eventually do rise, we would burn it.

.....................................................................................................................................................................................................................................................................

Thomas C. Gentile III

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

A

That's right. We don't anticipate going down. I mean, Boeing has been, I think, very good about trying to protect the supply chain and the production system. And our production system can't go up and down easily. And so, we're been consistently going up. We're now at 31. We'll stay there and stabilize. And that will be good for the health of Spirit and also for the rest of our supply chain.

.....................................................................................................................................................................................................................................................................
	4
1-877-FACTSET www.callstreet.com	Copyright © 2001-2022 FactSet CallStreet, LLC

Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
UBS Global Industrials and Transportation Conference	08-Jun-2022
Myles Walton	Q
Analyst, UBS Securities LLC

And just as the logistics, there is a QR C, code on your table. If you scan it, you can then ask questions and I can fold them into the dialogue, which I should have said at the beginning, but I'll say now, and I'll see them up here.

In terms of that rate 31 that you're now at, I think as of May, that's a pretty big leap from the 21 you were at previously. So how do you do a 50% very quick move like that? Is there risk to it? And also, from a financials perspective, what should we anticipate given it's happening now and we'll see roughly a half a quarter in the second quarter and a full quarter in the third quarter? Will there be a very material move in the profitability quickly?

.....................................................................................................................................................................................................................................................................

Thomas C. Gentile III

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

A

Yeah. Well, I'll answer that first, the answer is, yes. Going from 21 to 31, we now get the benefit of the revenue for

31. In the first quarter, it was the exact opposite. As we went up from 21 to 31, we had all the costs for more labor, which we tend to bring in three months in advance and material. And that created a headwind. Now that we're at 31, we get the benefit of the additional revenue.

And obviously, we burned $300 million in the first quarter. But we've said, our guidance is $175 million negative to negative $225 million. So in the last three quarters, we'll be positive in order to get there. Some of that is because of the rate increase, and also some of it is improved working capital management. We accumulated a lot of additional inventory in 2020 and 2021 which we're burning off in the back half of this year as the rates go up. So that's the financial aspect of it.

In terms of operational, yes, it's very difficult to go up 50% in rate, even if it's just 21 to 31. The benefit we have is we've been at higher rates before. Back in March of 2019, we were just breaking to 57. So we had all the infrastructure, the capital. We know how to do it. The other good news about now is we're 100% MAX. So back in that 2016 to 2019 period, we were converting from the NG to MAX as well as going up in rate. Now we're 100% converted to the MAX with the exception of the P8, which is still on the NG platform. So that's good.

The other thing is we took advantage of the downturn to streamline the plant to make it more lean in terms of the flow. We moved certain sections out of the plant, like the forward fuselage and the wingbox. So those come in now as completed units. And they're not being built in Plant 2, which is creating distraction for other parts of the integration. And then, we've added a lot of integration in automation, digitization and robotics into the plant so that it's more efficient.

We have, for example, workflow tools so that we can track the movement of parts throughout the plant. We also have an automated now digital warehousing system, and we create kits. We've got more than 8,000 kits with the exact parts that a mechanic needs in a shadow box, a foam shadow box. And those are delivered each morning right to the line site, so that the mechanic has what they need for the day.

So all those improvements have made it easier for us to go up in rate operationally. But I won't underestimate the challenge. It's still significant. We're working through some of the teething issues even as we go right now.

.....................................................................................................................................................................................................................................................................

Myles Walton

Analyst, UBS Securities LLC

Q

	5
1-877-FACTSET www.callstreet.com	Copyright © 2001-2022 FactSet CallStreet, LLC