Q1 2020 Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the Spirit Aerosystems Holdings Inc.'s first quarter 2020 earnings Conference call. My name is Eric and I will be your coordinator today.
All participants on today's call will be and they listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw. Your question you May Press Star then too.
I would now like to turn the prison presentation over to Mr., Ryan Avi [noise] director of Investor Relations. Please proceed.
Thank you Eric and good morning, everyone. Welcome to spirits first quarter 2020 earnings call I'm, Ryan Navy director of Investor Relations with me today, our spirits, President and Chief Executive Officer, Tom Gentilly insert senior Vice President and Chief Financial Officer, Mark such Inscape.
After opening comments my comment Mark regarding our performance and 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 or goals. We may include in our discussion today are likely to involve risks, which are 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 in 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 in slide presentation on our website at Investor Dot Spirit Aero Dot com.
With that I would like a turn call over to our Chief Executive Officer, Tom gently.
Thank you Ryan and good morning, everyone welcome to spirits, 2021st quarter earnings call. We held our last quarterly earnings call only about two months ago, we're working hard to navigate the impact of the extended Max grounding and the resulting production suspension.
Since then the Cobot 19 pandemic has created a healthcare emergency for the entire world, which has had a particularly severe impact on the global aviation industry.
More than 19000 aircraft are grounded in traffic in April in the U.S. was down 96%.
While we shipped our attention to addressing this new challenge we are mindful of the human tragedy, which is unfolding in the courageous work of the first responders in frontline Hospital staff, we're working tirelessly to bring relief to patients.
Like all the other companies in our industry. We're also taking extraordinary measures in our factories and offices to keep our worker safe and healthy as they perform their central work.
The aerospace industry in spirit are facing unprecedented disruption and uncertainty from the continued 77, Max grounding and the cobot 19 pandemic.
With Airbus and Boeing have announced significant cuts and production across most of their programs in response to this disruption.
At Spirit, our first priority has been to preserve the health and safety of our workforce and risk.
Fonts to Cobot 19, we quickly enacted a robust crisis management in response prop as part of our enterprise risk management program to help us navigate this challenge.
We have taken a number of measures to improve the safety of our teams as we resumed operations to support our customers which include processes aligned with CDC guidelines to work with any exposed individual on the necessary quarantine period and the process to return to work.
In addition to the steps we've taken to improve the safety of our team in the workplace. We have moved aggressively to take a number of actions to preserve liquidity and reduce cost to aligned to the lower levels of production.
The actions, we have taken to preserve our liquidity through this uncertain time include a reduction of the cash dividend to a nominal one penny per share.
The continuation of the suspension of our share repurchase program.
In EMEA away with Boeing to receive a $225 million cash advance and deferred repayment of $123 million advance from Boeing from 2020 to 2022.
Deferral of over $120 million of capital expenditures amendments to our credit agreements to allow for notes issuance and to provide additional flexibility in light of the current market conditions and raising $1.2 billion can senior secured second lien notes.
After raising the $1.2 billion in new capital, we paid down in full our $800 million revolver on April Thirtyth.
As a result of our proactive balance sheet management and cash mitigation actions. We believe we have an adequate liquidity position to manage through this crisis.
The major cost actions. We took included the following workforce reductions of 2800 employees in Wichita, Kansas and 400 employees in Oklahoma, which we announced in January and the elimination of 200 contractor positions.
Voluntary retirement program for 850 hourly and salaried workers the extension of the I am in IBW Union contracts for three years, a reduction of pay for all us based spirit executives by 20% until further notice.
A 21 calendar day furlough, a production workers and manager supporting bone programs in Wichita, Kansas and Oklahoma.
40, workweeks for salaried workforce at our which tuck Kansas facility until further notice and an additional workforce reduction of 1400 50 employees in Wichita, Kansas, which we announced on May Onest, we will announce additional workforce actions at other spirit locations in response to lower customer production levels in the coming weeks.
Given all the disruption in the global aviation industry spirits stock along with many other companies in the industry experienced a significant decline to predict spirit and its stockholders from party seeking to take advantage of this lower stock price in the current market environment. We also adapted a limited duration stockholder rights agreement on April 23.
Okay.
Before moving on I also want to thank all the spirit employees for stepping up to help our communities in response to covert 19.
At Spirit, we have been involved with a number of activities related to the cobot 19 response. One action. We took is that we assembled cross functional tas teams in Wichita and Prestwick.
To assist with developing new designs for face yields to be used by the heroes on the front line of treating patients with cobot 19.
So far the teams have delivered over 17000 of these heavy duty shields to frontline workers. The team in Wichita also designed a special booth to protect frontline workers, while they administer diagnostic test for cobot 19.
In addition earlier this week, we announced a partnership with by Air the world's largest healthcare company fully dedicated to respiratory care.
This temporary project will support there need to ramp up production of their critical care Ventilators. This includes an order from the US Department of health and human services for 22000 ventilators for the strategic National stockpile.
Spirits capabilities in design engineering, industrial engineering supply chain management fabrication complex assembly and functional system testing align very well to the manufacturing requirements of these ventilators, we're proud to be able to contribute and some small way to providing use much needed medical devices that can help treat the patients most severely impacted by.
Cobot 19.
We will assign approximately 700 of our hourly and salaried employees to this project. We're part of the workforce announcement last week. The plan is for the 700 employees to work through October on this temporary project the ultimate duration of the project will depend on the ongoing demand for the ventilators.
Moving to production rates.
We have a line production schedules across all our programs with the recently announced decrease rates of production by Boeing and Airbus in response to lower commercial air traffic, resulting from Cobot 19.
We previously had an agreement with Boeing to produce and deliver 216 737 Mac Shipsets in 2020.
Under the current schedule that we announced yesterday, we now expect to deliver 125 737, Max Shipsets, including 18 that we have already delivered in the first quarter.
These deliveries will be weighted toward the second half of the year.
We have also adjusted our 787 production rates from 14 aircraft per month to 10 in line with Boeing's latest schedule. The combined triple seven drops to three aircraft per month from five over the next few years rates for the 767 and 747 remain unchanged.
For our Airbus programs, we have also aligned to the new schedule that Airbus announced with the Athree hundred 20 going from 60 to 40 aircraft per month, and the Athree hundred 50, dropping from nine to six aircraft per month.
We continue to take full advantage of this period of reduced production to implement initiatives that are harder to achieve at full run rates in order to improve quality and efficiency.
These initiatives include optimizing product flows streamlining our factories accelerating automated automation and digitization projects and completing the transition for global digital Logistics Center.
These projects will enable us to ramp up to higher rates of production in the future with increased productivity and improved quality.
We remain confident in the recovery of commercial air travel and are working hard to maintain spirits position as a leading aerostructures aerostructure supplier to both bearing Boeing and Airbus as well as our defense customers.
Now for an update on our planned acquisitions, we continue to see the long term strategic value in both the ASCO and mum BARDA Aerostructures acquisition.
We intend to close both of these deals if all the conditions are met and we're working closely with both parties on those conditions.
The actual acquisition increases our Airbus in defense content and broadens our fabrication business access revenue was 50% Airbus work, including all of the slap tracks across all of their programs ASKO also expands our to set defense work statement with key F 35 work packages.
The one party Aerostructures deal brings customer diversification, a low cost country footprint and expanded aftermarket content all of which are in line with our stated strategic growth priorities.
The deal also strengthens our relationship as a key supplier to Airbus through the 220 wing and the Athree hundred Twentyneo thrust reverser.
This acquisition also adds intellectual property in the form of state of the art resin transfer infusion carbon fiber composite fabrication, which is used on the eight to 20, Wayne and positions us well for future derivatives or next generation narrow body aircraft.
We also closed an integrated the semi acquisition in the spirit in the first quarter, we're very excited about their unique capabilities and high temperature materials as it relates to future priority areas identified by the department of Sep defense such as Hypersonics.
On the topic of defense.
Spirit has a very strong value proposition for our military customers, including competitive cost manufacturing application of commercial best practices and design build capabilities, we have positioned spirit to compete for new growth opportunities to expand our defense business FMR has brought significant new capabilities to spirit, which.
Strengthen our defense value proposition.
Also with current commercial production rates lower we have available capacity to compete aggressively for new defense business over the last few years, we've made good progress growing our relationships with the defense primes. We also continue to get strong support from our congressional delegation we have a strong pipeline of potential.
Units in defense.
With that ill ask Mark to lead you through the detailed first quarter 2020 financial results Mark.
Thank you Tom and good morning, everyone.
As Tom mentioned in his opening remarks, there continues to be a significant amount of uncertainty surrounding the impacts of the covert 19 pandemic.
Our major customers have reduced their planned production rates in light of the pandemic and may make additional adjustments in the future as we all learned more on the impact of covert 19.
During this unprecedented and unpredictable time, we will continue to assess and make decisions to ensure that spirit remains financially healthy during this crisis.
So let's move onto our first quarter results.
Please turn to slide five.
Revenue for the year.
Was 1.1 billion down 45% from the same quarter last year.
This reduction was primarily due to the 737 Max production suspension that began on January onest as well as the production pause related to the impacts of Cobot 19 that began in March.
We delivered 18, Max Shipsets this quarter compared to 152 in the same period of 2019.
Overall deliveries decreased to 324, shipsets compared to 453 Shipsets in the same quarter last year.
Now, let's turn to earnings per share on slide six.
We reported adjusted EPS of negative 79 cents per share compared to positive EPS of $1.60 to.
60 cents per share in the same period of 2019.
The first quarter adjusted EPS excludes the impacts of planned acquisitions restructuring costs and the voluntary retirement plan executed during the first quarter of 2020.
During the first quarter of 2020, there were several significant expenses incurred related to the Boeing directed 737, Max production suspension as well as the impact of the coated 19 pandemic.
As a result of the Max production suspension that began in January onest, we recognize lower margins driven by significantly less deliveries.
Excess capacity cost of $73 million and restructuring expenses of over 43 million for cost alignment and head count reductions.
Additionally.
We recognized abnormal costs of 25 million, resulting from the Boeing production suspension related to covert 19 that began in March.
Further we recognized a noncash charge of 69 million, resulting from the voluntary retirement program offered during the first quarter of 2020.
In addition to the expenses I. Just described we also recognized forward loss charges of approximately 20 million in the first quarter of 2020 related to the 747787, Athree hundred 50 and be our 725 programs.
Our first quarter results do not contemplate the impact of the recently announced lower production rates by our customers.
Airbus lower production rates by approximately 30% Boeing lower production rates on the 737787 and 777 programs.
The announcement of the lower production rates is considered a subsequent event and is not reflected in our first quarter financial statements.
These lower production rates will likely result in an unfavorable change in estimate adjustments during the second quarter.
Based on our preliminary assessment.
We expect to incur an incremental forward loss of approximately 70 to 90 million on the 77 program in the second quarter.
And we expect to incur an incremental four loss of approximately 15 to 20 million on the Athree hundred 50 fuselage program in the second quarter.
Now turning to free cash flow on slide seven.
Free cash flow for the quarter was the usage of 362 million.
Compared to a source of 201 million in the same period of 2019.
This year over year decrease is primarily due to the negative impact of working capital requirements, largely resulting from payments made to suppliers for inventory receive prior to the 737, Max production suspension and significantly lower deliveries in the first quarter.
This was partially offset by $215 million received as a result of the February am away with Boeing.
In April we amended our credit agreement to allow us to race secured second lien debt and provides additional covenant flexibility.
Following this amendment, we raised 1.2 billion of 7.5% senior secured second lien notes due in 2025 in a private offering.
We use these proceeds to pay off the $800 million revolver on April Thirtyth.
And we'll use the remaining 400 million for general corporate purposes.
In conjunction with the notes offering we terminated the $375 million short term delayed draw term loan facility.
Looking ahead, we project negative free cash flow for 2020.
Largely resulting from our customers recently announced production rate reductions due to the impact of cold at 19.
In addition, our recent customers production facility suspensions, we'll have a further negative impact on our second quarter cash flow.
We expect our cash usage in the future quarters to be less than what we recognized in Q1 as we resumed production across the programs, including the Max and begin to realize the benefits from our cost mitigation actions. However, the lower production rates, resulting from coven 19 will have.
The negative impact on our ability to generate positive cash flow in 2020.
Additionally, we expect slower cash flow recovery going forward do our true to our customers recently announced production rate reductions.
During this time, where revenue will be significantly lower than before we will continue to assess and adjust our cost base in order to minimize cash spend and we'll continue to do so until production levels return to the point, where we are once again chartering positive free cash flow.
Now, let's turn to our fuselage segment performance on slide eight.
Fuselage segment revenue in the quarter was 552 million down compared to the first quarter of 2019.
Primarily due to what production volumes and 737 program, resulting from the Boeing directed production suspension that began on January onest as well as Colin 19 production shutdowns that began in March.
Operating margin for the quarter was negative 15.7% compared to 13% in the same period of the prior year.
This decrease was primarily due to lower margins recognize in the 737 program due to excess capacity cost of seven of 51 million, which significantly less deliveries in that quarter.
We also incurred $30 million of restructuring expenses for cost alignment and head count reductions.
Incurred of no more costs of 15 million, resulting from the coal that 19 bowling production suspension in March.
As well as pricing terms on the Athree hundred 50 program.
Now, let's turn to our propulsion segment performance on slide nine.
In the first quarter propulsion revenue was 225 million down compared to the same period of the prior year, primarily due to lower production volumes on the 737 program, resulting from the 77 production suspension.
As well as coven 19 reduction shutdown that began in March operating margin for the quarter was negative 2.4% compared to 19.7% in the same quarter of 2019.
The decrease was primarily due to lower margins recognized in the 737 program due to excess capacity cost of 16 million.
Restructuring expenses of 9 million.
And abnormal costs of $6 million, resulting from the coded going production suspension that began in March.
Now if we turn to our wing segment performance on slide 10.
During the first quarter when revenue was 291 million down compared to the same period in 2019.
Again, primarily due to production volumes on the 737 program.
As well as.
The coated 19 production shutdown began and additionally, there was lower revenue recognized on the Athree hundred 50 program due to pricing terms.
Operating margin for the quarter was positive 4.7% compared to 16.1% in the first quarter of 2019.
This decrease was primarily due to lower margins recognized in three seven program due to excess capacity costs of 6 million.
Restructuring expenses of 4 million abnormal costs of 4 million, resulting from the coded Boeing production suspension that began in March.
Pricing terms on the Athree 50 program.
In closing this is a difficult time, not only for spirit, but for the entire aerospace industry.
These past few months have certainly been challenging and we have had to make some very difficult decisions.
As Cobot 19 continues to have a major impact on the aviation industry, we will continue to assess and make decisions to ensure that spirit and all of our stakeholders are positively positions for the future.
Our primary focus will be on liquidity and cost management throughout this crisis.
With that I will turn it back over to Tom for some closing comments.
Thanks, Mark our focus at spirit right now is on managing cost to align with the lower production rates that we described and preserving liquidity is uncertain times in our commercial business.
We are taking advantage of this period of lower production rates to improve our factory processes to enable us to increase production rates in the future with higher levels of productivity and quality.
At the same time, we will work closely to integrate the three transformative acquisitions in 2020 of them BARDA ASCO and at the mine. In addition, we have positioned spirit to compete for new growth opportunities to expand our defense business over the coming years. This year might have the significant demand to produce ventilators, we're shifting some of our own.
And capacity to that effort to fight against the Cobot 19 crisis.
Executing on these priorities will help us become a leaner more diversified and more balanced company in the future. We're confident in long term growth and importance of air travel spirit is well positioned to participate in this growth as a key supplier to the industry with that we were happy to take your questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before passing the keys. If your question has been answer to you wish to withdraw your question. Please press Star then too.
And the interest of time, please limit yourself to one question you may reenter. The question Q4 will follow up if you wish to do so by pressing Star then one we will pause for just one moment to assemble our roster.
And our first question today will come from sets season of at JP. Morgan. Please proceed with your question.
Great. Thanks, Thanks, very much good morning, guys.
I was wondering I guess, just kind of the commentary about the the acquisitions. So if we take the cash on the balance sheet.
At the end of the quarter and we add let's say the 400 net.
And then we take out the acquisition the kind of leaves you with a little over a billion and just want to make sure you guys see that as kind of adequate to deal with the rest of this year.
Given the cash burn that's that's expected over the next over the next three quarters.
Ssds. Thanks for the question and the answer is yes, we do think its adequate.
We also as you know raised 1.2 billion of high yield bonds.
Second lien securities that give us eight and additional cash cushion. So we've been able to pay off the revolver and have $400 million. In addition for general purpose per a general corporate purposes. So while we're confident that liquidity position is adequate even after completing the two deals.
Okay great.
Mcmullen for now thanks.
Our next question will come from Myles Walton.
Yes. Please proceed with your question.
Thanks, Good morning on maybe on the the estimate of forward loss for the three for the 77 in the Athree hundred 50, just wanted to make sure what's embedded in those.
In terms of your.
Longer term view of production rates, maybe specifically on the eight seven.
Fortino five in what period now.
Is that going to occur I think was previously one Q 23.
And is the Athree hundred 50 forward loss charge not larger because you were in a profit position and you're typically.
Getting back to zero booking rate. Thanks.
Well, let me just first part of the question with regard to the 787.
It takes the forward loss does take into account not only the reduction to 10, this year, but going down to seven or eight next year, which Boeing has also indicated and so the fortino five unit does push out now into later 2023.
On the Athree hundred 50 again, we're assuming the six rate continues for the indefinite future that Airbus has already announced.
We have milder than I think I think Tom summarized it well were the block on eight seven extended.
Roughly somewhere between 10, and 12 months because as a separate slowdown.
And so therefore, the fixed cost absorption is really having an impact due to the lengthening of the accounting contract.
And then I think your comment on Athree hundred 50 is correct.
We were in a profitable position and Athree hundred 50, and with the lower production rates here.
It's put us into a much closer position of being breakeven at this point in time.
I'll leave it at one thank you.
Our next question will come from Carter Copeland Melius Research. Please proceed with your question.
Yes, hi, and thanks for the time.
Just.
Stick to the one on the comments around free cash flow I realize there's a lot of moving parts here and you don't have.
Guidance, but are you hinted a little bit it that the phasing of the cost out and and normalization of.
Production at the lower rates I get that you don't have expectations for positive free cash flow for the year, but do you think by the time, we get to the end of the year before you could have a positive free cash flow quarter.
Or is that a 2021 occurrence in your view.
Great well Carter before when we were discussing cash flow, we were thinking we'd get to free cash flow positive by Q3 of this year on a run rate basis, but with the most recent production reductions that Boeing has announced on the 737 Max for spirit being 125 units, we expect that that's going to get pushed.
Doubt about 12 months. So we are expecting negative free cash flow. This year next year, we expect to be breakeven, but we'll be getting to cash flow positive on a run rate basis by about midyear.
In 2000, great.
Thanks for the color I'll stick to one.
Our next question will come from Jon Raviv with Citi. Please proceed with your question.
Hi, Thank you.
Sticking to the cash question. So appreciate the color around.
Hitting run rate positive mid 21, so he talk about some of the moving pieces and what you're able to due to the production line right now to generate more cash starting in mid 21 and going forward. You know is there a particular volume that you need to make cash on these programs or are the changes you're making now going to put you in a much better position that really thinking about things like issue.
50, which has gone to no profit here and 77, which is.
Now generated cash for long time, and that will generate cash for awhile.
Lots on those dynamics on with much appreciated.
Right well with the lower production rates one of the things we've done as we've aligned the workforce to those lower production rates across all programs and so that's it was the 2800 employees in Wichita in January the 400, Oklahoma in January 1400, 50 that we just announced last weekend in Wichita and there will be other.
Our employee reductions across the other programs and the other sites in the coming weeks based on the timing. So thats one way that we are able to.
Adjust to the to be lower levels of production.
Your other question was regarding.
Free cash flow.
It is heading made cash on 77 eventually.
Oh yen and 77 and Athree hundred 50 again same thing is the.
The the workforce is variable and so we will take down workforce to align to the production rates now. The other thing is we're continuing to work on our cost reduction programs. The original intent was to get to a positive cash flow position and profit position on 77 by line unit Fortino five.
With the reduction in rate that's now expected that becomes harder we'll have to get a couple of hundred thousand dollars more of cost reduction, but the good news is we'll have more time to do it because the fortino five gets pushed out about 18 to 24 months.
Yes, I think the only thing I would add is.
We've got a variety of projects that were looking at.
With the excess capacity now in Kinston in our eight seven facility, we have some opportunities to do some insourcing and some moved some work around that would allow us to do a better job of absorbing our fixed costs, which ultimately could help the profitability of not only athree hundred 50, and eight seven but also.
Wallace potentially the win some new work here. So in addition to just the straight cost actions that we continue to focus on around head count.
Our fixed cost structure within the facilities. There are some work opportunities are moving some work around that I think would allow us to maybe better utilize the capacity within those facilities.
Thanks, I'll leave it wouldn't have questions.
Our next question will come from David Strauss with Barclays. Please proceed with your question.
Thanks quick follow up and then question I guess back on.
Question around the cash balance I think you're going to be roughly little bit over 1 billion in kind of pro forma cash on the balance sheet youre talking about burning cash the rest of year and I thought your covenants requires leased holding 1 billion in cash on the balance sheet the lease for awhile.
So if you could just comment on that and then on on Max relative to the.
You're getting to 125 delivered production deliveries. This year do you think that has room to actually move up at all in.
In 21 based on what Boeing is looking at today in the kind of deliveries they might be lumpy not given given how far you are ahead of them at this point. Thanks.
Next on the cash balance yes, the covenants are for a $1 billion to maintain a billion dollars and we expect that we will be able to meet the covenants.
So thats the expectation regarding the Max the rate right now that Boeing has given US is 125 for this year.
It will move up in 21.
Again, everything is subject to market conditions, but we expect by the end at 21 to be hitting rate 31 in the current plan, but it could change, but it will definitely be higher in 21, and we are working on our production system to have the flexibility to was onto Boeing whatever their production rates are and we.
So with them and we communicate with them.
And depending on what market conditions are we will be prepared or spot.
Yes.
On the cash just to help you guys do some math here.
At the end of the first quarter, we have 1.8 billion a cash we raised 1.2 billion. So that would put our cash balance at 3 billion.
We took 800 million and pay down the revolver that would leave us with 2.2 billion, a cash and Tom talked about the $900 million needed for the the acquisition. So after you back out the acquisitions, we'd be sitting with $1.3 billion of cash just to provide some somewhere between 1.3 1.4 billion a cash so.
Just to help you do some math here 1.4 billion is is a significant amount of cash that we would have if you just factoring what we have the race and what what's required to support the the closing of both ask on Bharti.
And Mark So I guess, you're implying that the cash burn wont wont drop you below that billion dollars through the rest of the year.
That's what I'm, saying.
Okay. Thank you.
Our next question will come from Sheila Kahyaoglu.
Jefferies. Please proceed with your question.
Thank you good morning kind of Mark maybe I could just follow up on that last point, Mark and ask another question. If you're at 1.3, you've already burned 360 in the quarter and you don't expect to be breakeven for another four quarters.
Can you just clarify that.
Yes, let me just be more specific obviously, both Boeing and Airbus just recently announced through production rates.
So we're reacting fairly quickly around what impact it will have on our revenue.
As Tom indicated we've taken some workforce reductions obviously there'll be some cost associated with taking those those folks out but the ultimate goal here is to get those get the production system aligned to the production rates and get the system tuned up so that the back half of the year, we're in a normal production in.
Firemen.
And we've been talking a lot about cash in as we indicated we consumed 362 million in the first quarter.
Based on what we know today we.
To be more specific I would say, we're looking at potentially six to 700 million on a full year basis as it relates to negative cash flow.
So.
I think you guys are going to continue to poke on that and I think.
More specifically can you go in November thank you.
And I would say Sheila that one of the things as we took a lot of actions on on workforce and other cost items in Q1 in Q2.
And those were expenses in the first half of the year, we will start to get the benefit in the second half. So the first half of the year, obviously with production rates being much lower the cash burn as higher that starts to go down significantly in the back half of their.
Okay, I think I use that my question. So I'll go back in the queue. Thanks guys.
Thank you.
Our next question will come from Georgia Shapiro of Shapiro Research. Please proceed with your question.
Yes.
I wanted to ask what the definition is for EBITDA because it looks to me like you could violated the interest coverage ratio or that first lien leverage by the third quarter of this year and then just a follow up on the last question seems like you'd get close to the billion dollar.
By the end of the year in the liquidity, but you said that the first two quarters of 21 would also be negative and that liquidity ratio.
Requirement runs to the fourth quarter 21, so to get just comment on that thanks very much.
Yes.
George.
I would say that your question around the covenants on the first lien.
We're very comfortable.
With with that the first lien would be just considered our we've paid the revolver off. So that's that's first lien debt. All we would have is the term loan some lease commitments and then the one of our bonds got pulled along with that so from a first lien debt standpoint.
We have we have less than a billion dollars worth the first lien debt. So.
Im not really concerned as it relates to meeting our covenants around around the first lien.
As it relates to EBIT da we do have add backs that are part of our credit facility a variety of different add backs.
Related to things that are restructuring or noncash like the CRP.
So when you think about the financial statement EBIT da it slightly different for bank purposes, we have a variety of different carve outs that we get to add back and as a result of that we spent a lot of time looking at our projections here and taking a look at our at our covenants and I won't say that the ended the year doesn't get.
Right, but at this point in time.
Our projections indicate that.
We will not breach any of our covenants.
In the billion dollar liquidity for the first half the next year.
Yes so.
As as you saw on our credit facility, we do we do required having a billion dollars and liquidity of the revolver Cogs counts against that so we've paid down we've paid down the revolver. So.
Thank you Jerry we have full access to that $800 million. So.
I would say as it relates to the minimum liquidity requirements were very very comfortable that we can meet the minimum liquidity requirements that are part of our credit facilities.
Okay. Thanks, very much <unk>.
Well.
Our next question will come from Hy Bon rumor of Cowen. Please proceed with your question.
Thank you very much. So what are you assuming in terms of cash contributions from Scotland bombarding given.
The with Airbus as our new and.
Coded it's got to be a little more difficult is a great.
And also how does that relate to cash because if your numbers right you're going to have 300 million negative cash in the remainder of the year. So.
You know that gets you to the billion dollar so it kind of sounds like youre going to have to access the revolver again.
No no refer to the first thought yes. The answer is no we are planning to access the revolver.
Cash contribution from ask on Lombardi should to be positive.
Lastly, there effected like the rest of the industry by the Cobot 19 crisis.
But we expect that once we complete the acquisitions and integrate them they will be positive overall, but but probably less than than what we were originally planning and we'll we'll determine that as we as we continue to evaluate them.
Leading up to the closing.
Thank you very much.
Our next question will come from Doug Harned net of Bernstein. Please proceed with your question.
Good morning, Thank you.
Doug.
Yes, Airbus and Boeing I've talked a lot about the challenges in the supply chain, you're right in the middle of that and so a good portion of your cost is procured cost how do you think about your suppliers.
And and I say that win and thinking about what whose responsibility in the sense.
Is your supplier base to make sure that they're healthy I mean Boeing is thinking about this Airbus is thinking clearly you must be as well and there is the opportunity and smaller suppliers for some government support so how do you think about keeping that supply.
[noise] base healthy and what's the what risks are there.
Well, you're you're absolutely right size the suppliers in our industry are critical partners and it's important that they stay healthy so that we have accessed and security of supply for the current production and as production rates increase so we've we've been monitoring the financial health of our supply chain very closely.
No doubt theyre going to be some suppliers, who are going to need financial support during this period, but we've been working with them with a number of different levers to provide relief. So for example, we have a vendor financing program for payment terms, we can work on their inventory levels looking at purchasing some of their finished.
Good.
We can extend the contracts for them. So we've got a lot of different levers. We have also been helping them really facilitate access to various government programs not only in the U.S., but in other countries.
We we held a a conference call for more than 120 of our suppliers co sponsored by the U.S. Chamber of Commerce to help them understand the cares act and how to access it thats been a great source of.
Funding for a lot of our smaller suppliers. So we've been doing that also with Boeing.
With the first time away that we did this year, we did create a joint Boeing Spirit task force to monitor the health of the supply chain. So because a lot of our suppliers also supply Boeing directly.
And so we've been again working with them jointly with Boeing in order to maintain the financial health of the supply chain, because it's very important that the suppliers get through this very challenging period and remain viable so that they can support now and current production, but also the production rates increases that we expect in the future.
The reason I ask is that you've talked a lot about reduction in cost and.
The workforce in your facilities, which I'll make sense, what I'm getting out here is just how do you look at this part of your cost structure. In other words are you able to take cost down is there risk there how does how does this play into the outlook that you're laying out.
Well over the last few years, we've we've done a lot in our supply chain too.
To get to competitive cost so I've always talked in the past about the six pillars, starting with our clean sheets, where we look at what the should cost is of all the cost that we have.
We have a very structured strategic sourcing process to help the customers are those suppliers get to those clean sheet levels of should cost.
We provided support to help them get there we set up centers of excellence to in source work, where we can do it more competitively.
We've also done what we call hotel bids for hyper competitive competitions to get to those clean sheets and then we transferred parts. So over the last few years, we transferred more than 15000 parts to make sure. We have the most competitive rates. So so we've done a lot of work over the last few years to get the competitive rates now is not the time to come.
Thank you to push on the on the supply chain.
What we've been doing is helping them.
Transform their operations to achieve these lower levels of production in many cases, we've extended contracts because essentially the air traffic has gone out three years that production rates have gone out three years and so our deal with Boeing for example on the 737 goes up to 2033 that gives us a lot of flexibility to do back to.
Back contracts with our suppliers to give them a longer horizon over which to amortize their investment. So so we're working very closely with our suppliers to help them get through this challenging period.
Great. Thank you.
Our next question will come from the Ken Herbert of Canaccord. Please proceed with your question.
Hi, good morning.
Good morning.
I wanted to just maybe shift gears and talk about something positive.
You highlighted Tom in your comments some good news specifically in terms of.
Increased opportunities and maybe backhaul growth better than expected on the defense side I'm. Just wondering if you could sort of level set us on how important are what percent of revenues you expect defense to be this year.
How the CH 50, Threek K is progressing in particular, and then maybe a few opportunities. Besides the recent acquisition to maybe see some better than expected growth in sense. Thank you.
Great well I mean defense gets up to probably north of 15% this year of revenue.
But it's it's not necessarily the way we wanted to achieve that that growth because the commercial side, obviously has come down, but you're absolutely right. Our defense business is growing very strongly right now it will be more than 20% growth. This year, partly because some of the defense programs that were on our getting into higher rates of production and we've also.
Started to win some some smaller work packages for our fab business and now with the open capacity that I mentioned earlier because of the slowdown in commercial we can compete very aggressively for more defense business. So long term our aspiration, we said, it's going to be $1 billion over the next three or four years as lead programs around get into full rate production.
But ultimately we want defense, even when we returned to full rates on the commercial side to be 40% of spirits business.
We think we bring a tremendous value proposition to our defense customers, particularly in things like composite fabrication design and engineering and now with FM My with high temperature surfaces, and very unique and competitive applications for things like Hypersonics. So so we.
I have some pretty big ambitions on defense I as I said this year, it's 15% of our revenue it'll be a billion dollars in the next couple of years, but ultimately we want it to be 40% of spirits total revenue, even when commercial rates get back to the levels. They were at in 2019.
Yes, I would just and I want to get into details, but I would say I'm personally so.
Currently surprise as it relates to the number of new work opportunities that are that are being coming our way on the defense side and so it's a compliment to our defense team how they performed under current work.
And so we're seeing some really good opportunities to grow the defense side.
To offset the production rates that are coming down in the commercial side. So I just want to complement our defense team.
Great. Thank you.
Our next question will come from Ron Epstein of Bank of America. Please proceed with your question.
As drops in can you check if your line is on mute fleece did a good good afternoon address yeah I was on my apologies for that.
Just following up on the previous question.
One of the opinions that we've heard.
As of the or disease.
As a response Didier does response to like an industrial policy response to as a pandemic is trying to.
Of course, more money down into the supply chain to help suppliers, particularly those suppliers to have large commercial businesses.
Have you seen.
That effort impact your business for.
You've got ample commercial capacity, where they're trying to maybe do some of their commercial capacity for defense programs.
To help stabilize the business.
Yes, well first of all what I would say is the defense primes have all been very helpful. During this period. They they got a lot of support from the federal government and they in turn have been pushing that down to their supply chain, including us at one of the ways they've been able to do that is very short payment terms, they've also been able to look at.
Some.
Of capital and tooling that they're able to convert.
And then also looking to expand the current work statements I, just with incremental activity within the current programs and all those are our ways to push cash down into the supply chain and they've all been very helpful for spirit and as we go forward, what we've been able to to demonstrate to the.
Defense primes is that we have opened capacity and it's available right now not only on capital and tooling and infrastructure, but also on trained workforce and we are ready to compete very aggressively for newer packages on existing in upcoming defense programs. We have over 1000 cleared engineers in terms of security clearances.
So we're able to compete on a whole range of different projects and we think thats an attractive value proposition right now.
Given the the situation that we're in and we're competing aggressively as Mark said.
Got it got it then if just one follow on it for me.
What's your thinking around the contingency if we were to see more Max delays or further OEM production cuts.
One of the responses I heard from the investment community I think everybody did was after the born statements and Airbus and statements that.
There might be a little bit optimistic depending on how long. This thing last so so how do you plan for plan for that.
Well first on Max as Boeing announced in their earnings call, they've really decouple. The production schedule from the planned returned to service and obviously the phase working on that they're making sure. It's a safe returned to service, but production is decoupled, they're starting right now Theyve asked us to start right now.
So even if there is some delays in the returned to service.
Right now its decoupled from production so it it doesn't directly impacted.
If if the production rates change at Boeing or Airbus for whatever reason it could be a Max returned to service or could be the cobot 19 crisis. Then we would have to adjust our cost base to those lower levels of production in the one thing is we've demonstrated already that we've been able to reduce workforce in line.
With the with the production levels and a lot of our cost base is in effect variable and can be adjusted to production rate. So.
As we as we talked about a little bit earlier.
In terms of our supply base, when we're talking about with Doug and 60, 65% of the cost as inspires well with production rates lower we're buying less material from supplier. So we're able to reduce that part of the cost base, 20% or so his head count and with lower production levels, we will reduce headcount to align to those levels. So so we can do quite a bit.
To align to lower levels as a contingency if rates go down further for some reason.
Yes, thank you very much.
Our next question will come from Robert Springer of Credit Suisse. Please proceed with your question.
Hi, good morning.
I will ask of version of brands last second question, but not so much about rates going below boeing's plan, but if mature rates stay at Boeing plan, meaning that Tom you just talked about variable cost, but you you also referenced the eventual recovery to 19.
Level, let's say, we don't and out a few years from now were 31, Max's 778 Sevens three triple Sevens.
Given the.
Past.
Importance.
Of volume I would imagine you can't do 7% to 9% free cash flow as a percentage of sales under those rates or can you or would it be something lower.
Right well obviously.
The financials and cash flow improve as rates go up particularly on Max.
But.
But let's say Max levels don't go up as much.
As as as planned or don't reach 2019 levels for three or four years and same thing on the wide bodies. What Mark described is something we're doing this we are aligning our cost base very much to the lower levels of production. So we've reduced head count, but we're also looking to to win new work, particularly the defense side to fill up.
Some of that commercial capacity to offset those fixed costs. So so thats one of the big levers that we didn't have before that we will be pushing very aggressively. The other thing were doing is as I mentioned in my comments is we're taking opportunity from the slower production period to really drive a lot of improvements in the factory outward losing a lot.
More digitization and automation robotics.
We're changing workflows moving work around between different facilities to make things more efficient and so when we go backup in rates. We can do so a lot more efficiently than than than we could in the past and on the Mac side of things one other big changes that we have already converted everything to the Max.
The last time, we went up and rate we were doing that at the same time, we're converting from the end GE to the Max This time, we've already made that conversion. So so we expect this time around it will be a lot more efficient we will fill up the factories with with defense work to offset some of the the fixed charges and will align our variable cost to the level of production.
So, yes, where when when we get to the 79% it will take some time.
Part of it will obviously be dependent on mass production rate, but our goal is to get back to that level and to get back to sustainable margin levels as well Hey, Rob the only thing I would add is if there was some.
Some semi permanent.
Pain as it relates to long term production rates.
For extended periods of time, obviously, we'd be looking at all of our facilities and evaluating facility consolidation et cetera to really re size and restructure the in the entirety of business. So we have a few more what I would say opportunities for us to not only pull hard on our variable cost struck.
Sure.
People.
Aligning our production rates on the supply chain side, but if there was a long term permanent impairment in the commercial aerospace industry.
We have some other cost.
Actions that we can evaluate two to better align our overall cost structure with the long term production rates.
Okay. So what you're saying is you don't have to return to a let's say seven 8 billion dollar topline to get that 7% to 9% necessarily.
I would say that that goal with the goal is out there and I think we have a variety of of opportunities to make sure that we can focus on achieving.
Those of projected goals that we've put out over the last couple of years.
Okay. Thank you.
Our next question will come from Hunter key of Wolfe Research. Please proceed with your question.
Hey, good morning, Thanks for getting me on.
Hey, good morning.
Good morning, everybody. So Tom you mentioned the cares act for your suppliers, but I'm curious about government financially for spirit, and any potential terms or conditions that might be attached or the nature of it and how and when it might be administered.
Right well when we were looking to raise capital earlier. This year, we were looking at all the different options. So public markets government programs private placements the public market did open up.
Several other companies were able to access it so working with our advisors, we went to the market and got a great reception, we started off with $1 billion and it was six times oversubscribed, we actually raised.
Upsize it to 1.2 billion. So we were able to really meet our objectives in terms of capital raising true that offering.
And and so right now.
We've evaluated all the government programs, but we don't see the need to access those directly the ones that are in place now that said.
We had been in discussions with our trade associations as well as.
I think talking with lots of people in Washington, There are some programs being proposed that would provide more specific targeted support to aerospace companies and those are very interesting to us weve been evaluating those and we could access them in the future if they if they take the shape that we expect them to do but right now we don't expect to access.
Cares program, because we were able to raise money that was $1.2 billion of of high yield bonds second lien.
Okay. So some of the other non cares relief is still potentially on the table.
We'll evaluate it it's nothing has been announced yet but just some things that are being proposed and talked about for future packages and there are more specific there more targeted and they would work better for a company like spirit. So those are the kinds of things that we would consider if they if they actually come into effect.
Thank you Tim.
Our next question will come from Peter our mess with Baird. Please proceed with your question.
Yes, Thanks, Good morning, Tom Mark Tom just quickly on the.
On the 125 units that you've kind of reset from the 216 with Boeing.
I assume it's all skews more to the to the fourth quarter and Howard how are you thinking also about when you think about units that you haven't storage or you still.
Plan to use that as buffer or you're going to skew more to deliver some of those units right.
It does skew more as Mark said towards the back half of the year, probably 60, 70% is in the back half of the year, we do grow the storage somewhat so kind of peaks out in July and August, but it gets back down to the levels that we started the year at low one twentys by the end of the year.
So so that's that's what the shape as and we so we have plenty of capacity obviously the store the units.
And the goal is to burn that inventory off effectively by the end of next year to the we're going to always keep some level of buffer just to help improve the production process stability.
But over the next two years, we would burn that down and as I said, we'll end the year at about the same level. We started the year with a peak in the in the middle of the year this year.
Hi, good color thanks, Tom.
Thanks.
Our final question today will come from Noah Poponak of Goldman Sachs. Please proceed with your question.
Hello, everyone.
No.
Okay.
No.
I know, there's a abnormal costs and capex on the front end.
With the acquired businesses.
So forgetting about the next year or two.
In kind of a 2023 timeframe.
With whatever.
Revised lower revenue assumptions you'd have to make given the end market. What are you thinking now for the.
You know margin in free cash flow margin profile from the acquired revenue.
Normal period of time.
Yes, so we're if you're specifically talking about the.
The M&A opportunities that we have.
As it relates to ask will enable Marty.
Obviously.
We know what those revenue volumes are are.
Our our bid prices are are the acquisition price was based on some assumptions around revenue and profitability that we drove water there.
Obviously with the new market conditions at least here in the near term.
Production.
Volumes will be lower therefore revenues will be lower and and the margin that will be achieving will be a little bit lower.
At this point time, we're just focusing on closing those acquisitions.
Very strategic to us the diversify our Airbus business more than doubled the revenues there.
And that allows us to be more diversified.
Gives us some access to additional aftermarket.
And so at this point in time I'm not so much focus on what it can contribute in 2023 or more focus on how do we get to close right now.
And really focus on driving out the synergies and the integration into our business because I think that there's a lot of inherited values from both of those business that complements our current structure right, but what I was has FMC is clearly going to be accretive.
By 2023, I think the bump already a deal will look much better because the aftermarket will have recovered there'll be deeper into production on a 220 in the Athree 20 thrust reverser, so that will be at least at the same level as the rest of the business and then ask though is probably going to be a bit accretive as well.
Based on their historic margins. So so that's probably the best way we can describe it.
And Tom your answered I, just want to make sure.
I'm clear on.
Your answer previously to the question of in normalized margins.
On a.
Few years out, but if production rates, just stay where Boeing and Airbus I've announced they will be in the immediate term that youre. Your point is with a few more years to get more efficient in a few more years to take out more cost if you have to do it.
Maybe it's not quite seven to nine but but as you can sort of be still zone of that seven to nine a few years down the road even at.
Even if we just full production rates that have been in that.
Yes, yes, theres no doubt, we will be much more productive inefficient even at lower levels of production in the future, where we've taken a lot of fixed cost out we've adjusted our variable cost were streamlining our factories were adding in a lot more automation. So absolutely we will be more productive at lower levels of production going forward.
But no let me be specific if if we're talking about delivering 120 573 Sevens forever per year. We we don't expect that exactly right now and then an item you not anymore I mean, the 31 along.
Yes, yes.
I guess, ultimately where I'm going is like you know if you're at the lower production rates forever.
You're obviously not back to 2019 revenues, but then the acquisitions get you back to 29 zone of 2019 revenues, if the acquisitions or perhaps or better than the free cash flow margin you actually even in a sustained permanent depressed.
Thanks environment actually get back to the type of EBITDA and free cash flow that you had previously.
That's a great way to describe it thank you.
So make sure I'm not making some indications the stuff no. Yeah, you did not miss anything there now.
Yes, you're right on Noah.
Okay.
Thank you for the time I appreciate it.
Thank you.
Thank you that will now conclude the question answer session and the conference has now concluded. Thank you everybody very much for attending today's presentation. You may now disconnect.
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