Q4 2019 Earnings Call
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Good morning, ladies and gentlemen, and welcome to Spirit Aerosystems Holdings, Inc.'s fourth quarter and full year 2019 earnings conference call.
My name is Andrea and I'll be your coordinator today.
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Please note. This event is being recorded I would now like to turn the presentation over to Ryan 80 director of Investor Relations. Please go ahead.
Thank you Andrew Good morning, everyone welcome to spurts fourth quarter and full year 2019 earnings call.
Brian maybe director of Investor Relations with me today, our spirits, President and Chief Executive Officer, Tom Dooley, ENSPIRIT Senior Vice President and Chief Financial Officer marks a transcript like opening comments my comment Mark regarding our performance outlook, we will take your questions in order to allow everyone to participate in the question and answer segment. We ask that you limit yourself to one question. Please.
Before we begin I need to remind you that any projections. Our goals. We may include in our discussion today are likely to involve risks, which are detailed in our earnings release in RCC filings in the forward looking statement at the into this one presentation.
In addition, we refer you to our earnings release and presentation for disclosures and reconciliations 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 under investor without spirit Arrow dotcom with that I would like to turn the call over to our Chief Executive Officer, Tom Dooley.
Thank you Ryan and good morning, everyone welcome to spirits, 2019 fourth quarter and full year earnings call I'd like to start today by welcoming our new Chief Financial Officer, Mark Sosinski.
Mark is a long tenured and respected leader at spirit, particularly within the finance team. We held a variety of key roles from 2006 to 2018, including serving as controller and principal accounting Officer 2014 2080.
Most recently Mark was our vice president of quality and before that VP of the 77 program. He brings a comprehensive understanding of our business and has strong relationships with both internal and external stakeholders.
Let's move onto the 737 Max.
I want to reemphasize that while the current situation regarding the Max is challenging we remain confident in the long term outlook for the aircraft.
The Boeing Max backlog remained strong at approximately 4400 aircraft and there have been no significant cancellations.
Air traffic growth was solid in 2019 at 4.2%.
2020 will be impacted by the current of Iris, but expectations for long term growth remain healthy.
The Max is critical to meet this demand for air traffic, especially given the high utilization of narrow bodies in the Max's range and mission.
And spirit manufacturer, 70% of the structure of the Max including the entire fuselage in short the Max is an important aircraft for the global aviation system and spirit as one of the key suppliers to the program. We're proud to be a partner on the mass program and we will support Boeing as they work with the FDA and other global regulators to return it safely to serve.
Yes.
Given the delay in the Max re entry back to service, but we made the decision on December 16 to suspend deliveries beginning in January and directed spirit to do the same on December 19th.
On December 20, if we announced a production suspension and began taking immediate actions to align our cost structure with expected lower levels of production in 2020.
We took a number of actions.
First we directed our own suppliers to halt incoming deliveries to spirit.
We implemented a workforce reduction of approximately 2800 employees in Wichita and 400 employees in Oklahoma.
We also initiated a voluntary retirement program for both hourly and salaried workers further we are reducing capex spend differing all but the most necessary expenditures.
We've also created internal teams led by senior executives to manage and tightly control all of our indirect and discretionary expenditures.
Additionally, we extended our I am Union contract for approximately 9000 workers for three years. The previous contract was set to expire on June 26 of of this year. We jointly agreed with the I am to work on the contract extension early so that we could focus solely on the Mac situation.
On January Thirtyth, we reached an agreement with Boeing regarding production and deliveries for 2020.
We will produce and deliver 216 shipsets in 2020 compared to 606 Shipsets in 2019.
We will restart production slowly in the coming months ramping up deliveries through the year to deliver about 70% in the back half of 2020.
We do not expect to return to 52 Shipsets per month until late 2022.
Of course this agreement is based on several assumptions, including the timing of 737, Max returned to service and Boeing's expected production rate.
In addition, as part of this agreement volume will pay $225 million to spirit, consisting of two parts. The first part is $70 million in support of our inventory and production stabilization of which we will repay $10 million in 2021.
The second part is $155 million, which is an incremental prepayment for deliveries over the next two years.
Other terms of the agreement include extending the repayment of 123 million advance we received last year until 2022.
And extending the 737 Max contract through 2000 2033, it previously expired in 2013.
Importantly, the agreement also includes the creation of a Boeing Spirit Joint Task Force to monitor the health of Spirit 737, Mac supply chain.
As production reserves this year and Boeing advances to its target of 57 airplanes per month in the future. We expect several years of strong double digit compound annual growth. This growth will be easier for us to execute for a number of reasons first we have already transitioned to a 100% Max production.
Over the last few years as we are increasing and rate at the same time, we were shifting from the energy to the Max today, the only ngs that we still produce our PPA rates for the Navy, which averaged about two aircraft per month.
We have previously produced up to 57 aircraft per month, which we achieved in early 2019, just prior to the Max grounding and we have experienced at each of the production levels, we're going to see up to that level.
We already have all the capital and tooling in place to achieve these higher production rates.
Finally, we are taking advantage of the slow period to train our workers streamline our factories do maintenance and improve manufacturing process flows. So we can come back more efficient with higher levels of quality.
We have identified a number of initiatives we can leverage in this transition period that would be harder to Q2 achieved during full rate production.
These projects include things like accelerating the full transition of our new global digital Logistics Center.
Optimizing the product flow for two separate seven to seven fuselage sections, the wing box and the forward fuselage and pulling forward digitization projects for our operating system.
Next I want to address near term cash liquidity, which is a major focus for us right now.
Our strong 2019 cash performance combined with our decision to pause share repurchases helped to create a healthy cash balance by the end of 2019. Additionally, we drew $800 million on our revolver in late December shortly after bowling directed us to suspend production in order to proactively protect liquidity given the uncertainty we ended two.
The 19 with $2.4 billion and cash on our balance sheet.
Given the 737 program is our largest contributor of cash and it represents half our revenue the production hall and slow slip subsequent production ramp will be challenging in terms of cash flow for the first half of 2020, we have taken a number of proactive measures to improve our near term liquidity. In addition to the cost mitigation actions I just described.
We go over those given the significant to the 737 program to spirit, we reduced our quarterly dividend from 12 cents to one cents to preserve liquidity until production rates are higher levels.
As stated above we also deferred repayment of $123 million cash advance from Boeing that we agreed in our April 2019 agreement from 2020 until 2022.
We have also entered into a $375 million short term delayed draw term loan facility, which ensures accents access to additional funds. If we need them. This facility matures in the third quarter of this year or 45 days after the Epay recertify of seven to seven Max whichever is earlier.
To provide ourselves with a further liquidity cushion we're planning to raise additional capital in the bond market. This year. The plan is to use this longer term funding to pay off some of our shorter term financing, including the revolver.
In terms of cash uses we have two previously announced acquisitions expected to close this year ASKO and selected assets have been Bharti A's Aerostructures business.
In addition, we closed one smaller defense related acquisition in January which I'm very excited about and we'll go into more detail shortly.
All three of these acquisitions are aligned with our strategy of increasing our Airbus defense fabrication and aftermarket content.
We remain committed to these acquisitions all of which contribute positively to our revenue profit and cash flow in the coming years collectively. These three deals at closing will require about $1 billion of cash in 2020 of which 120 million has already been paid.
As a result of our proactive balance sheet management and cash mitigation actions since the Max grounding, we're confident in our liquidity position to managed to the Max situation under likely near term scenarios, let's move on to Q4 now.
Performance in Q4 was mixed the announcement by Boeing but they had reduced 787 rate from 12 aircraft per month to 10 resulted in a $34 million forward loss in Q4.
On 737, we saw significant disruption as we spent money early in the quarter on overtime and contractors to meet delivering quality requirements for 2019, only deventci a suspension of production, which caused us to extend our holiday shutdown period and take several units out of our production plant.
Once we resumed production of the 737 Max our goal is to stabilize the production system and return to our historically strong delivery and quality performance, while we focus on recovering margins to our target levels.
For 2020, improving quality, while managing costs and ramping to higher rates of 737 production will be our number one priority.
At the same time and equally as important we're not slowing down on our long term inorganic growth and diversification strategy.
Our strategic priorities for inorganic growth, our Airbus defense fabrication and aftermarket.
As I mentioned earlier in January we completed a small but very strategic acquisition of a company called FM I for $120 million.
FM, Mike is an industry, leading technology company specializing in high temperature materials and composites, primarily for defense with several applications on hypersonic missiles.
After my is the sole source on several legacy strategic defence programs and they are partnered with the defense primes as well as the department of defense.
FM I makes threed woven carbon carbon composite knows cones and throttles on vehicles like missiles, requiring temperatures above 4000 degrees their performance on several airforce and Navy programs over the last couple of decades hazard FM I attractive positions on the strategic defense applications.
Acquiring semi alliance with spirit strategic growth objectives to diversified customer base and expand our current defense business.
EPAM as advanced capabilities in high temperature materials combined with spirits expertise in industrializing next generation Aerostructures creates a critical capability.
To industrialize state of the our defense technologies essential for the advancement of hypersonic weapons, which the department of defense has identified as a national priority.
The ASCO acquisition will increase our Airbus defense and fabrication footprint.
Ask those revenue is 50% Airbus with exclusive and sole source positions on all the Airbus programs for Slas and other when mechanisms.
Ask will also grows our defense content on the F 35 program and expands our fabrication capability and capacity.
Ask has resumed its operations following the cyber attack it experienced last year and we remain on track to meet all the conditions to close this transics reaction in 2020.
The Bharti Aerostructures acquisition solidifies, our long term relationship with Airbus through the 220 wing and the Athree hundred 20 Neo thrust reverser.
The acquisition also doubles, our high margin aftermarket business and add significant business jet fuselage propulsion and when product revenue to our portfolio.
This acquisition as intellectual property in the form of state of the art resin transfer infusion carbon fiber composite fabrication, which is used on the 220 wing and position spirit well for the next generation narrow body aircraft, we expect to close on this transaction later this year.
With that I'll ask Mark lead you through the detailed 2019 financial results Mark.
Thank you Tom and good morning, everyone.
Before I begin I want to thank Tom and the board for their confidence in asking me to take on this new role.
While I'm new to the CFO position I am not new to the company.
I look forward to leveraging my finance and operations experience to help us navigate through the challenges and uncertainties that have resulted from the 737 Mac situation.
These are challenging times not only for spirit, but also across the entire aerospace industry I.
Im confident that we are prudently managing the situation in the right way and I'm optimistic about the company strong future ahead.
As we previously announced on January Thirtyth the company conducted in accounting review.
As a result of the review the company determined that it did not comply with its established accounting processes with respect to certain potential contingent liabilities received after the ended the third quarter of 2019.
After competing conducting the appropriate accounting review with respect to those potential contingent liabilities. The company concluded that it should have recorded an incremental contingent liability in the third quarter financial results of less than 8 million and we have recorded the appropriate amount in Q4.
This amount is not material to our third quarter results and does not require a restatement of our financial statements.
However, we have determined that the noncompliance resulted in a material weakness in our internal controls over financial reporting.
We have corrective action in place and expect the material weakness in financial reporting to be fully remediated by the end of the year.
Since being appointed as Chief Financial Officer about a month ago I've done a deep dive into the Companys financial results and can can confidently summarize those for you today.
Please move to slide five.
Revenue for the year was 7.9 billion up 9% from the private prior year.
This growth was driven by higher volumes of production on the Triple 7787, and Athree hundred 50 programs higher revenue recognized on the 77 program.
Increased aftermarket activity and favorable 737 model mix.
Let's now turn to earnings per share on slide six.
We reported adjusted EPS of $5 in 54 cents per share compared to $6 in 26 in 2018.
The 2019, adjusted EPS excludes the impact of expenses related to the acquisitions and the voluntary retirement program announced in the second quarter of 2019.
The adjusted EPS decreased year over year, primarily due to foreign losses recognized in the 787 program, resulting from Boeing's announcements to increase production from 14 to 10 aircraft per month.
Reduced profitability on the 737 program largely resulting from the impact of the Max grounding, partially offset by higher production volumes on the 737 and triple seven programs.
The forward losses on the 77 program reflects the impact of fixed cost absorption due to extending the current accounting block, which runs through line unit Fortino, five and will now close in the first quarter of 2023.
As Tom mentioned fourth quarter performance was mixed.
In addition to the fixed cost absorption impact on the 77 from decreased production rate of 12 to 10 aircraft per month, we continued to have elevated costs in the 737 program due to production disruption and our efforts to improve quality.
The 737 production suspension also impacted the number of units in the accounting contract, which led to increased costs being recognized in the fourth quarter.
Also as mentioned on the last earnings call. There was a contractual price step down on the Athree hundred 50 program in the fourth quarter.
Lastly, the fourth quarter was also impacted by a number of one off nonrecurring type items.
These items include an additional four loss on the BR seven to five program due to a block extension.
Asset write offs and a few other smaller items.
Looking ahead to the 2020 financial reports, it's important to note.
Per GAAP, we will be recognizing excess costs, resulting from the 737, Max production suspension and subsequent production recovery schedule separate from normal production contract costs.
We will recognize excess or of normal expenses.
Related to the idle plant and subsequent abnormally low rate as unallocated segment cost to sales.
Further.
These in normal cost will be recognized and reported in the period in which they occur as opposed to normal production costs, which are allocated to an accounting contract, which could be spread over multiple periods.
As a result, these excess costs associated with the production suspension as well as the subsequent low rate production will be reflected as period results beginning in the first quarter of 2020 and will continue until the production resources are utilized at normal capacity.
Additionally, cost relating to restructuring which include expenses such as those related to workforce reductions will be reported separately on the income statement.
Now turning to free cash flow on page seven.
Adjusted to exclude the impact of the planned acquisitions.
Free cash flow for the year was 723 million.
Compared to 565 million in 2018.
This reflects a 28% increase year over year, driven by several factors, including a 123 million cash advance received from Boeing in the third quarter. Our continued focus on working capital and capital spend as well as lower cash taxes.
Capital expenditures for the year were 232 million compared to 271 in 2018 during the first half of 2019 soon after the Max was grounded we took actions to review all capital expenditure projects in order to determine which could be deferred or delayed in order to reduce the amount of capital spend.
And to a range of 200 to 250 million.
As compared to our previously forecasted range of 250 million the 300.
We plan to continue this process during 2020 and expect to spend around 150 million on capital expenditures.
2020 will be a difficult year, especially in terms of cash and I can assure you that we will be diligently managing our liquidity and adjusting our cost structure to aligned to the lower levels of production.
Currently we are projecting negative overall free cash flow for 2020 with the majority of cash burn during the first half of the year.
However, as we increase Max production rates and begin to realize the benefits of our cost mitigation actions, we expect positive free cash flow on a run rate basis by the end of the year.
In addition, we amended our credit agreements to provide covenant relief to the ended the first quarter of 2021.
At which point, we expect to achieve sustained performance throughout the year from a stable and increasing Max production rate and will also benefit from the full year contributions to earnings and cash flow from the acquisitions.
The covenant relief demonstrates the support and confidence of our lenders in spirit.
Now, let's turn to our segment performance on slide eight.
Fuse fuselage segment revenue in the year was 4.2 billion up 5% from 2018.
Primarily due to higher production volumes on the Triple seven and 77 programs and increased aftermarket activities.
Yes, we offset by lower production volumes on the Boeing 737 program.
Operating margin for the year was 10.5% compared to 14.4% in the prior year, primarily due to the 77 forward losses recognized as a result, with boeing's announced rate decreases.
And higher costs related to the 737 program.
On a normalized basis after reversing changes in estimates from the prior periods.
Slide seven segment margin was 11.4 compared to 14.4% last year.
In the fourth quarter, we continue to incur costs due to the production slowdown and efforts to improve quality and 737 program. We are taking full advantage of the production suspension and the slow ramp in production rate throughout this year to further optimize or production system, which will lead to improved operational metrics and lower.
Cost going forward.
Additionally, the price step down on the Athree hundred 50 program impacted the fourth quarter profit.
In 2019 propulsion revenue was 2.1 billion up 21% compared to the prior year.
Primarily driven by higher production volumes on the 737 Triple seven and eight to 20 programs as well as favorable model mix on the 737 program.
Operating margin for the year was 19.7% compared to 16.7% in 2018, primarily due to performance and favorable model mix on the 737 program.
On a normalized basis after reversing change in estimates of propulsion segment margin was 20.5% up compared to 16.7% in 2018.
In 2019, when revenue was 1.6 billion up 5% compared to 2018, driven by higher production volumes on the Boeing 77, and Airbus Athree hundred 50 programs operating margin for the year was 13.6% compared to 15% 2018, primarily due to 72.
Seven forward losses recognized as result of Boeing's production rate decrease performance on the 737 program as well as pricing on the Athree hundred 50 program.
On a normalized basis after reversing change in estimate impacts wing segment margin was 14.2% compared to 14.8% in 2018.
As Tom mentioned in his opening remarks, there are still a lot of uncertainty surrounding the timing of the Max's returned to service and as a result, we will not be providing full year 2020 guidance at this time.
We expect to slowly restart production in March and then gradually ramp throughout the year.
For the year, we plan to produce a total of 216 Max units of which 70% will will be produced during the second half of the year, we expect to return to a production rate of 52 per month by the end of 2022.
I can assure you that detailed plans are being executed aggressively to manage overhead costs during the stage of low production.
Cost reduction captains had been appointed to lead a very meticulous process to reset our cost structure to better align with our current production volumes.
Regarding recovery begins in the second quarter, and we will improve through the year from increasing Max production rates and realization of our cost mitigation activities.
We plan to exit the year with stable cash flow generation and sufficient cash to fund our operations.
This is a very challenging time for spirit and we have a lot of work to do.
But as I said in my opening remarks, I am confident that we're prudently managing the situation in the right way and I feel very optimistic about our future with that I will turn it back over to Tom for some closing comments.
Thanks, Mark and now make some closing comments before we take questions. Our focus in 2020, as an improving quality managing costs and ramping to a higher rate of production over the next several years and we will leverage the current lower rates of production to make sustained improvements to our assembly lines, especially the 737 Assembly line.
At the same time, we will work to close and integrate the tree transformative acquisitions that we announced last year on Bharti Ace Aerostructures business ASKO and at the mine.
Executing on these two priorities the the cost reductions and quality in the operational goals along with the inorganic growth will help us become a leaner more diversified company over the coming years.
As I began earlier, we remain confident in long term viability of the Boeing 737, Max program and the outlook for aviation overall, the Max is critical to the future of the U.S. and global commercial aviation and has a tremendous impact on the us economy.
Spirit as most critical aerostructure supplier for the Max supplying 70% of the structure, including the entire fuselage.
Spirit remains a proud partner on the Max program, and we look forward to working with Boeing to ensure the long term success of the program with that we'll be happy to take your questions.
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At this time, we will pause momentarily to assemble our roster.
Okay.
And our first question comes from Carter Copeland of Melius Research. Please go ahead.
Hey, good morning.
I guess for almost afternoon.
Wondering if you might give us a little bit more.
Understanding on you mentioned the supply chain health I, just sort of wonder obviously this is a challenging situation from a liquidity standpoint for you guys, but I'd imagine the supply chain Bonnie view as you know a collection of microcosm that look very very similar and so.
You anticipate having to pay out anything.
Support suppliers and what is your task Force you mentioned kind of revealed about risks when you try to ramp back up just any color you can get on give us on on how that that looks today, Tom would be helpful. Thanks, great.
Thanks cart well as as you can imagine the suppliers are critical partners to us across all parts of our business, but particularly to the 737 program and our most important strategic all along with Boeing is to ensure the long term viability in health of the supply chain because after we get back into service in stock.
Our producing eventually the rates there is going to start going up and we want to make sure that everybody can meet those rate increases and do it efficiently and and with high levels of quality. So it's in all of our interest to ensure that we have a healthy supply chain.
So to that end, what we've done with falling as we formed a joint task force because a lot of suppliers, who supply US also supply bowling directly and so there's a lot of crossover.
So we are doing is jointly reviewing all the suppliers and going through their situation understanding their their cash flows our liquidity position there their debt situation, they're operating performance and trying to understand what is a good solution for that particular supplier.
And there's a lot of different levers that we can we can look at in terms of their inventory levels their payment terms the rate at which they are producing we go through it and then we develop a customized solution for each of the suppliers now as you can imagine. These discussions are ongoing they're very dynamic very fluid because the situation is changing and our goal is to work with each supply.
Prior to come up with a solution that works for them and works for the whole system with the goal that we all get through this together and that we emerged stronger and able to meet the production rate increases that we are going to come in the future.
And how many of the supplier SEBI reviewed at this point.
We've reduced our reviewed a lot and we're open to talk to all the suppliers I'm talking to suppliers everyday and and we have these formal reviews with them. So.
We have got this mechanism set up and we're going to make sure that we use it in order to help all the suppliers get through this very challenging situation.
Great. Thanks, Tom Thanks Art.
Our next question comes from Jon Raviv Citi. Please go ahead.
Hey, Thanks, guys good morning.
Thank you just put into context that moves down downgrade new facility in place what about this means that you're also seeing a raise debt this year to kill for term stuff what it will that means for capital allocation flexibility.
Going forward.
The two titles will only gets it.
Are you able to look back at repo at some point you reassess the dividend at some point, where we sort of more tilted.
And why and shareholder friendly.
I think you're not just the near term even going into Q.
Right well a couple of things happened.
That impacted the whole liquidity situation. The first thing was the suspension of the production system for January in which it. What's also turned out into February had an impact on our earnings and our cash flow in the in the first quarter.
We have bank debt. So we had the $800 million revolving facility in a $400 million term loan and there were covenants on that bank debt, which we would have been in danger of breaching through the normal course of operations in the in the first quarter. So the first thing we did was we.
I had to negotiate waivers to the covenants on that bank on those bank loans.
In addition, as you as you mentioned, we also did get downgraded by both Moodys and standard and poor's by by two notches and and so that took us out of investment grade into high yield which put some additional pressure on the situation. So we did renegotiate those covenants and we negotiated waivers.
That did put some restrictions.
In terms of our capital allocation, so until we return to investment grade.
One of the restrictions is that we not make share repurchases. We do have the flexibility to increase dividends back up to the previous levels of about 12 cents a share.
But our goal is over the next couple of years is really focused on executing on the Max production system.
Getting back to vary.
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Christine where they left off.
Thank you very much and apologies everybody for the technical issues, but John had asked me about capital allocation and I'm not sure how much of that got through so let me just repeat.
When we learned of the production suspension at the end of 2019.
That obviously impacted our first quarter financials, particularly our cash flow and our profitability because the Max is half of our production.
And so that put us at risk.
Breaking our covenants on our bank loans, which consisted of our revolver and a 400 million dollar term loan.
In addition, standard and Poor's Moody's downgraded us two notches. So we went to our banks and renegotiated our loan covenants and we were successful in doing that but as a result of doing that particularly since we're no longer investment grade our new covenants at least for this period of time until the early part.
Next year have some restrictions on them related to capital allocation.
Specifically, we are not permitted to do share repurchases until we regain investment grade.
We can increase the dividend.
But really our focus for the immediate future is the focus on backs execution to go up and rate as Mark mentioned by the second half. We are really starting in Q3 will be cash flow positive again on a run rate basis and as production increases over time, we will continue to generate more cash and our goal is to pay down debt over the next.
Here and a half or so.
Back to investment grade and then we can resume the share repurchases and reset the dividend.
Once we're in a much stronger cash position.
Thank you okay.
Thank you bye.
Our next question comes from David Strauss of Barclays. Please go ahead.
Thanks.
One clarifying question and then a follow up so you had you had said.
That free cash flow in 2020 would be would be negative I guess the clarifying question is does that include the.
Boeing Advancers that excluding the billing and bands and then on on 77 Tom.
I know you've talked about step down pricing there do you get any relief or on 77 pricing given what are now much what we're headed to in terms of much lower rates. Thanks.
Okay, well on the other free cash flow question, let me turn it over to Mark and then I'll touch on the 77 question.
Yes, David our projection for negative cash flow for the year does include.
The $225 million of.
Of advances that we got from Boeing which represent $155 million prepayment in price and roughly $70 million for inventory stabilization.
Okay. What's hurting the 77 question in terms of pricing changes as the rate changes the answer is no.
The prices that we agreed with Boeing are essentially fixed and they do not index to rate.
That's different than the 737 program, where we now have pricing up to 2033 that is index to rate 787 is now.
Okay. Thank you.
Our next question comes from Seth Seifman of Jpmorgan. Please go ahead.
Oh, thanks, very much and I've had good morning, just just to kind of quick clarifications I guess.
The follow up on David's last question, so at a rate of 10 a month.
Generally I guess unit 14, Andre goes out I think you said early in 2023.
Beyond that is there an opportunity to be cash profitable at if hypothetically the rate is 10 a month.
The answer is yes. It represents each each rate great from 14 to 12, and then from 12 to 10 represented a headwind of about $100000.
So $200000 the the new prices about 5.25 million.
After the 14 OPI and so we've got to make up the extra $200000, but we have more time now to do it.
The other positive aspect of this rate decline is the.
77 isn't afford loss position in its cash flow negative because were delivered year unit, we consume less cash.
In that in a time period up until 14, OPI, but that we fully expect still to be cash flow positive. Once we get the line unit Fourq unified which is now going to be in early 2023 on the 77 program.
Great Great. Thanks, and then just really quick follow up to be clear the 375 short term.
Loan that that's still undrawn.
Yes, it yet we haven't and we don't expect you brought it was really a.
A vehicle to help with that through the covenant.
Renegotiations and as we said it expires later this year either by the third quarter or by the recertification of the Max six units after that whichever comes first.
Got it thank you very much.
Our next question comes from Cai von Rumohr of Cowen and company. Please go ahead.
Yes, thank you very much so.
First you know your comment about negative cash flow for the year.
You mentioned, you expect to be cash positive in the third and fourth quarters, which basically implies.
Pretty big deficits and the first on I guess last on the sockets can you a walk us through kind of some of the drivers is or is that mainly going to be on allocated.
Cost of goods sold is that kind of the severance because you already laid off 21% of Wichita.
And.
Yeah, Yeah, if you could answer those questions that'd be great.
Hi, Mark let me walk you through that.
Obviously, we are very low rate of production.
Essentially limited production in the first quarter going has a negative impact as it relates to our ability to we're not going to generating revenue and therefore that kind of a negative impact on.
Got any cash coming in the door, but you have to remember at the end 19, we are producing at a rate of 52 airplanes per month.
A billion dollar accounts payable cash balance on our books. So the cash drag is a big catch regulated working capital.
Therefore, we're gonna have to liquidate payables most of our payment terms are between 60 90 days suppliers. So therefore, there will be a big.
Accounts payable be a big consumer of drawing down cash here in the first quarter, we'll start slowly start to ramp back up in the second quarter, which will allow us to book some revenue from start to generate some cash.
But obviously the biggest drag will be specifically around working capital in the first half of the year, obviously lower production volumes on three seven gold from 600 units on the 200 will also have a negative impact on revenue with cash.
It's a combination of those two items.
Burned out of the payables normal flow revenue rate ramp back up and really at the end today as we moved into the back half of the year, we will not have the type excess costs at normal cost in fixed cost that we haven't more in the first half, which again also will drive some consumption of cash right, yes, all the cash.
Asked mitigation actions or the cost mitigation actions that we're taking.
They they are taking place now, including the layoffs and some of the reductions in our indirect costs the benefits start to accrue in the back half of the year, which helps our cash position.
So you'd mentioned layoffs, but you already announced layoffs. So is this the cash impact of the layoffs really is hitting in the first quarter as opposed to in the fourth.
That's right so.
Yes.
Part of the regulatory process, we had provided one act and upon that one we were required to pay our employees that were impacted by the reduction 60 days worth of pay and so essentially those employees that were impacted by the workforce reduction.
We're paying its actually paying or wages in the first quarter and into April and so therefore, that's going to cause a negative drag on cash flow in the first quarter as well.
Thank you very much.
Our next question comes from Sheila Kahyaoglu of Jefferies. Please go ahead.
Hi, Thank you Tom and welcome Mark.
Can you maybe talk about profitability expectations on the Max therapy Sheila.
Segment margins once you reach a normalized snacks production rate, whether it's in 2022 and Mark you alluded to some charges that you said would be in the corporate line now how do we think about that Q4 run rate of 8.6% margin.
Lodge, given you were still producing at a rate of 52 a month.
Q4.
Well.
There were several impacts as Tom indicated early in the fourth quarter.
We will run including hard from a factory standpoint to catch up on some deliveries.
We had some extra headcounts and contractors and some overtime, which had a negative impact on the on the profitability in the quarter, but also.
Due to the slowdown we actually shut down production.
The last couple of weeks of December after we were notified by Boeing that there were ceasing production in January that also had a big time impact to us.
And then as a result of that slowdown we had a county contracts that well over a period.
And so we had to split our accounting contract we have less units in the accounting contracts, which also had a negative impact on what I would consider normal margin in the fourth quarter. So but the bottom line is Q4 is really slow down and some of our initial efforts on quality and overtime is only part of the quarter really had a net.
End of impact.
On the fourth quarter profitability for the fuselage segment I would tell you we look at.
As we get in 22 and 2023.
Get back to 47 52.
We will go back up and have the types of margins that you guys have seen in 2017 to 2018 timeframe.
And really has unfortunately situation is what was a little silver lining here, we're really doing a lot of things from a factory standpoint that will allow us to go back up in rate watch more efficiently much more cost effectively and allow us to.
Really have a good chance resource to reach those target margins that we had and Tom as indicated in the past of getting a gross margin 16 will have percent. If you let me just add to that.
Mark summarize it pretty well, but the the few slides margins were really impacted a lot by fixed overhead right now which were not absorbing once we get back to rates and we start absorbing that we expect that with all the cost reduction actions that we took in the fuselage in terms of process improvements and supply chain is the fuselage margins.
Get back to the historic levels of 15% to 16%, but one of things we've been talking about the last few quarters and I think you really see it. This quarter is how propulsion now is really growing in terms of margin. So the the margin this quarter for propulsion was 20% versus 16% last year. So.
So we're really starting to see per policy, what that's going to continue as we're going to see relatively stronger margins and propulsion, but the fuselage margins will bounce back to their historic levels of 15% to 16% range and as Mark said the overall margin. Our goal is once we get up into the 40 to 47 range again is for that to be at about 16.5%.
Okay, great. Thank you.
Thanks.
Our next question comes from Myles Walton.
Please go ahead.
Sure.
A couple of clarifications, one I think Tom you mentioned, 30% of the deliveries or take place in the first half.
Obviously implies starting production deliveries next month I would guess.
What's the contingent milestones.
To restart that production is is there anything externally related to the certification that's actually required for you to start delivering in for Boeing to start accepting those those resources.
The answer is is no I think Boeing has decouple the production from the recertification.
They said that the recertification they could expected year.
But that they were going to essentially start to production systems. So that they could maintain the viability to supply chain earlier than that so its decouple now there's all sorts of assumptions that will be built into that but right. Now the plans are to restart production even in advance of the recertification per per the plot plans at Boeing has already announced.
Okay and then the other one of the clarification on the body I think you mentioned closing in 2020 previously you talked about the first half for 2020 is it. So now looking like it's moving to the second half or is it still on track no I think we're still on track for that the first half. We've we've made all the regulatory filings and working through.
The detail closing, it's all on track and I said, I said 2020, but we still think first half is is achievable.
Okay I'll leave it there thank you.
Thanks.
Our next question comes from Robert Spingarn of Credit Suisse. Please go ahead.
Hi, good afternoon.
Hello.
Tom I wanted to get a little high level here and move past if we could.
The disruption the this year and next year go back to your normalized free cash conversion around 7% to 9% of sales.
And I think you've said you're going to bounce back on margin. So the question is can you bounce back to that on cash flow long term taking into account the new businesses, you've bought and how does that answer change mature rate on Max only gets to 52 and of eight seven stays Uh huh.
Great.
Answer is absolutely we're committed to getting back to that level of cash flow generation I think once the Max gets back into the 42 range.
A more normalized level of production for us and with all the actions that we've taken in terms of cost and manufacturing process.
Cash flow generation should be pretty good the acquisitions, all contribute positively and accretively to cash flow. So 79% is certainly our goal now we're going to add a little bit of headwind with 787 at 10, but Boeing has indicated that they expect that to go back up to 12 at once orders.
Recover in Asia in particular.
So, but even if held our goal is going to be 79% once the Max gets back up into the 42 range of a production rate.
Okay. Thank you.
Our next question comes from Doug Harned Bernstein. Please go ahead hi, this is cost based on the on for Doug.
Okay back to the propulsion systems margins. The told me cities margins are going to stay strong.
Yes, so a part has been the shift towards the Max.
No that shifts taking place and you got a couple of years, though a max production. The other parts that youre seeing what why you called the margin outlook that thanks.
Well that's the reason we're confident the margin outlook. There is we had the most change in the configuration out of those parts. So is that it's the pylon and the thrust reverser. So if you look at the Max we always say, it's about 35% different than the LNG. Most of the change was in the pylon and the thrust reverser. So that meant we went.
Now to the market and essentially sourced on new products with with suppliers and were able to negotiate good rate. So lot of the benefit came from sourcing those those new products for the pylon and for the thrust reverser.
That that certainly continues the other thing is another program that we have a highlight is the eight to 20.
And 80 20 was at a fairly low rate when it was the C series under Bharti eight now that Airbus has taken over the program. We've seen the rates really start to ramp up very significantly and we'll continue to do so.
That program is a good program for us and that is also going to contribute to our our propulsion margins over time, particularly as rates increase now that it's the a 220.
That's great. Thanks.
Our next question comes from Hunter Keay of Wolfe Research. Please go ahead.
Good morning, this is actually Mike Mondrian Ramona.
Can you talk a little bit about what you're seeing at Airbus in regard to the Athree hundred 21, the CFO is.
Are you seeing lower shipset pulls from Airbus and supply chain any color would be helpful. Thanks.
I would say, we've seen a little bit of a mix shift. So some of the Athree 20 ones, we had an or skyline has shifted to athree twentys.
And but the rates are.
I would say largely the same we've just seen a little bit of a mix shift and we continue to do rate studies for Airbus in terms of looking at higher rates in the future and Ah. So as we as we see it as they resolve some of the production issues. They havent Hamburg with the Athree 21, and open up the new production line into lose.
That will normalize over time, but at this point all we've seen as some mix shifting between Athree 21 of the Athree 20.
Thank you.
Our next question comes from Peter Arment of Baird. Please go ahead.
Yes, good afternoon, Tom Mark.
You didn't mention a can you maybe just get a better understanding on the production side, how you're treating the fuselages that are in storage, how you're going to be feathering those in into the production.
Right. So we've got about 120 in storage right now and they're all rats and stored on the ramp that is adjacent to Mcconnell Air Force base.
And so the goal is over the next couple of years as we ramp back up to 57 is that by the time, we get to 57 that inventory should be essentially burned off to the sustainable level that was and what are the things that we've learned through this whole process is having a buffer between Wichita and written is a very good thing it.
Enables us to catch things.
To ensure that there are no issues with with train delays or anything like that so we'll probably always keep 20 or 25 in a in a buffer.
So that we can cushion the production system and the goal is is that by the time, we get the 57 sometime out in the future is we will be at that level. So so we will essentially lag boeing's production rate they'll go up higher than us and will burn that off but we expect that this year the buffer will still grow from 120.
But then it will burn down over the next couple of years as Boeing goes up in production and goes above us until we both get to 57.
Appreciate the color. Thank you.
Our next question comes from Michael family of Suntrust. Please go ahead.
Hey, good afternoon Ah thanks for taking the questions.
Tom just on the back to the free cash flow I guess to exit the year at free cash flow positive.
What sort of rate should we expect to see and I guess you know how iron clad is the contract with Boeing to produce up to 60, you know if we continue to see maybe certification slide.
Alright, well the the 216 is the agreement that we have with Boeing it depends on a lot of assumptions and if things change. They obviously could change that so that is.
I'm not locked in stone, but I think given the assumptions they made for a mid year certification of the Max we expect to do that now as we said it it's going to be a little bit fluid as Mark said about 70% of that production will be in the back half of the year. So we're going to start off relatively slowly in March April and May.
Let the production system kind of catch up and catches breadth and then we have to flush through a lot of work in process over the next couple of months as well so.
Again, if you look at over 10 months.
The average yeah, because we started March 10 months, it's about 21, a month start very low and then gradually increase over the course of the year, So not quite sure where we'll end up at the year, but 20 to 30 and that ranges is probably a good good good estimate.
Got it and then just a follow up I I guess, the the triple Sevenx is that going to be additive to cash flow as you guys get through or exit the year or how are you thinking about that program.
Well as you know the triple Sevenx schedule is pushing out and so we expect to see a little bit headwind. This year in terms of number of units that are in the skyline and those units are going to shift more towards the 300, <unk> freighter and away from yet so that's probably a little bit a headwind this year compared to last year right again, what that program is out and.
I mean, it had its first flight it was terrific I saw the aircraft just before it took its flight and what those folding Wayne's. It's a spectacular aircraft has got a great outlook for it and once the order start building and they get back up to the rates five aircraft per month and potentially even above that that will be a very strong program for us but this.
Sure, it's a little bit of headwind because of Italy.
Got it thanks guys.
Our last question is a follow up from David Strauss of Barclays. Please go ahead.
Thanks for taking it a follow up so mark it was helpful. You're a description of how the accounting will work on the Max at what rate you know, you're you're saying you're going to purity costs when were below normal in terms of production at what rate would you not expected.
Be taking taking these costs is period costs than they would flow through the the block in a normal way.
I would say once you get to a rate of about 32.
We get back to what we continue to be normal type production the factory and therefore wouldn't be required to be recording is there a normal idled production costs. So for the most part you're going to see.
We have global cost end up being period costs.
Primarily here in 2024 might be a little bit of bleeding between 2001, but it would be mainly could double 2020.
Okay, and a one one other follow up Tom.
You know you think about going back up in rate can you talk about.
Potentially the they need to hire back LIBOR and your ability to potentially called back.
Or bring back you know experience labor rather than green labor.
Right well, our preference would be to bring back the people that we laid off of this was a difficult decision to have to make these are our colleagues that we work with everyday and there were 2800 people in in which taught about 400 people in Oklahoma. So the first goal would be to get those those individuals back now of course.
Given that this production slow down period could last up to a year year and a half before we're going to need all of those people, they're gonna look for new work and we've actually been organizing job there in both which talking in Oklahoma or with a goal to get as many people as possible job in the local area, because that's where they would prefer.
Let's now we've also been talking to other companies suppliers customers, who are out of state not in Kansas, Oklahoma, they've been coming in as well and so some people may lead the state, but you know the people who live here in Wichita really like living in Wichita, and so when we have jobs. We're confident we can get a lot of it back.
But even if we can't.
This area has always been very fertile ground for experienced aircraft mechanics, and engineers and so we're confident that we'll be able to tap the area and get the people we need as we go backup in rates are there first obligation and commitment and desire is to bring back all the 2800 people in which case.
On the 400 people in Oklahoma that were part of the layoffs earlier this year.
Thanks very much.
This concludes our question answer session. The conference has now also concluded. Thank you for attending today's presentation. You may now disconnect.
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