Q4 2020 Spirit AeroSystems Holdings Inc Earnings Call

[music].

Good morning, ladies and gentlemen.

And then and welcome to Spirit Aerosystems Holdings incorporated fourth quarter and full year 'twenty and 'twenty earnings Conference call. My name is Matt and I'll be your coordinator today should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be and opportunity to ask questions to ask a question.

You May press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would like to turn the presentation over to Aaron Hunt director of Investor Relations. Please proceed.

Thank you, Matt and good morning, everyone and welcome to Spirit's fourth quarter and full year 2020 earnings call I'm Air and Hunt director of Investor Relations.

With me today are Spirit's, President and Chief Executive Officer, Tom Gentile.

Parents theater, and senior Vice President and Chief Financial Officer, Mark switch and ski and.

And spirit Executive Vice President and Chief Operating Officer, Sam Martin Inc.

After opening comments by Tom and Mark regarding our performance and outlook, we will take your questions before.

Before we begin I need to remind you that any projections or goals. We may include in our discussion today are likely and involve risks.

Which are detailed in our earnings release, and our SEC filings and and the forward looking statement at the end of our presentation and.

In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of non-GAAP measures, we use when discussing our results.

As a reminder, you can follow today's broadcast and slide presentation on our website at Investor Day Spirit Aero Dot com.

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

Thank you Erin and good morning, everyone welcome to Spirit's fourth quarter and full year 2020 results call.

2020 was one of the most challenging years and aviation history for spirit, the Max grounding and the COVID-19 pandemic created a dual crisis. Our response focused on five critical actions for.

<unk>, our employees restructuring our cost base strengthening our liquidity implementing productivity and efficiency projects and diversifying our business.

Protecting employees from Covid became a top priority.

Covid represented and unprecedented health care challenge and as the virus began to spread we put in place protocols to protect our employees we.

We referenced best practices, and CDC guidance to implement enhanced cleaning measures air purification, and social distancing mask requirements and extensive testing.

All of these measures have allowed us to continue our operations while protecting employees.

We also restructured our cost base to align to lower levels of production almost.

Almost immediately in 2020, we started with the need to react to multiple production rate reductions due to the 737, Max grounding and the Covid pandemic impact.

After producing 606, Max chipsets and 2019, we produced just 71 and 2020.

We also saw substantial reductions in the production rates of all of our other Boeing and Airbus programs.

We moved swiftly to take actions to mitigate the impact of these adjustments to our original plans.

Consequently through the restructuring of our cost base, we reduced our commercial aviation program head count by more than 8000 people trimmed our purchase services and set in motion multiple facility closures as we address the significantly lower production rates.

Overall, we executed $1 billion of annualized cost reductions or about 40% from the 2019 non material base.

We also strengthened our liquidity position and as a result established a solid foundation to see us through these difficult times.

Our initial actions included reducing the cash dividend to a penny per share suspending the share repurchase program and deferring $120 million of capital expenditures.

And also provided a $225 million cash advance and granted a deferral of $123 million repayment until 2022.

In April we raised $1 2 billion of senior secured second lien notes and pay down our $800 million revolver, which put us at $1 $9 billion by the end of Q2.

And the last half of the year, we paid down $426 million on our term loan and completed another $900 million capital raise and.

And for negotiating a $225 million discount on the Bombardier asset acquisition mutually terminating the <unk> acquisition, and reducing our cash usage and the third and fourth quarter. We ended 2020 with a $1 $9 billion and cash on hand.

The third focus area with productivity.

While challenging the reduced production rates created an unprecedented opportunity to accelerate.

Celebrate productivity and efficiency projects that would have been nearly impossible at higher production rates.

During 2020, we completed the consolidation of warehouse space across our Wichita campus and to our global Digital Logistics Center and consolidated more than 500000 square feet of warehouse space into a seven storey 150000 square foot facility.

And this new facility, we have leveraged technology similar to what other world class distribution centers use.

Which translates into a more accurate and timely part handling and delivery system to the mechanics building product on our factory floor.

And the 787, Max we have a new 10 station hybrid automated assembly line for for beams.

Our Max eight has 47 for beams with more than 400 different configurations.

This new Assembly line will improve quality and our ability to manage all of these configurations. It will be operational by the end of this quarter.

And our Prestwick facility, we have implemented a new state of the art resin transfer molding technology for <unk> hundred 20 spoiler production.

The team is making good progress on the development of the production line that will efficiently produce hundreds of spoilers per month at peak rate and.

And most immediate efforts are focused on completing the first part qualification process. Then once that's complete moving toward production at rate by the end of the first quarter.

Additionally, we have accelerated our company digitalization efforts last year, we implemented a manufacturing execution system, our mes and the 737 Max fuselage line.

Our system is a digital tool to track data and production metrics, which simplifies many of the reporting activities performed by managers.

As a complement to the Mes, we have put in place digital manufacturing operating system boards to give our managers visibility into real time production process and facilitate.

Discussions and daily meetings, we have also implemented digital workflow solutions to manage PARP movements across our main Wichita factories.

Another recent change we have started is the deployment of digital work instructions, we have transitioned from a manual tax heavy set of documents to new digital work instructions that provide graphics pictures and detailed instructions tied to <unk> digital models for our mechanics and inspectors.

From implementing integrated tools for operations management to visualization of the fabrication and assembly process. Our digitization projects underway are expected to reduce the time needed to build product and enhance quality for our customers.

Another significant project has been improving the production flow and our main 737 Max factory.

We have freed up over 125000 square feet of manufacturing space and the fuselage factory by shifting sub assemblies to new locations. For example, we moved the fabrication of the Max for a few slides to a new facility on our campus, where we also build the forward fuselage for the 767.

We are also shifting the construction of the Max wing box out of the main Max factory to our Tulsa site.

These moves are enabling a simplified 737 fuselage production flow previously the movement of parts and sub assemblies Criss crossed the factory and sometimes the same part traveled a similar path multiple times before moving to the end of the line.

The new production flow reduces the number of moves needed drives a more efficient use of time and improves productivity and quality.

We are also working closely with many of our partners and the supply chain to help them navigate this challenging time and the industry and.

And the last 12 months, we have provided assistance to hundreds of suppliers. This support includes contract extensions purchases of finished goods and raw materials and vendor financing through our partner at Bank of America.

Recently Bank of America secured a guarantee from the U S export import Bank X M to help finance this program or.

Our suppliers are critical partners to our success and this level of support is important as we work to secure our supply chain as production rates recover over the next few years.

We are also putting additional emphasis on environment sustainability and governments also known as ESG.

And additional improvement we implemented last year was to put an agreement in place to power our entire $12 8 million square foot Wichita site with 100% wind power.

In addition, water recycling is another area, where we have integrated systems and adopted practices to minimize water consumption and improve water efficiency.

And with a reverse osmosis system spirit, Wichita recycled more than 2 million gallons of highly purified water each day, and recycles 575 million gallons annually, which has enabled us to reduce our freshwater demand by more than 70%.

And our spirit Belfast site.

We have one of the largest roof mounted solar arrays in the region and 2020, 70% of the Belfast plants electricity came from clean energy.

And our Prestwick site, where we've just built a new aerospace innovation center. The team installed a second bank of solar arrays to supplement and existing bank and our Prestwick, finishing center a 100% of the power consumed on our Prestwick cite is from solar or wind power.

And we work to stabilize the business and 2020. We are also focused on positioning spirit for the long term.

On page five of the presentation, we have summarized spirit strategy. Our vision is to be a diversified design and manufacturing champions.

In terms of where we want to compete our strategic priorities are to focus on Boeing Airbus defense aftermarket business and regional jets, and non aerospace manufacturing, where our skills and capabilities translate.

In terms of how we want to compete our execution requirements focus on make buy and advantaged supply chain and world class manufacturing seven distinctive technologies.

Digitization and talent and inclusion.

At Spirit, our DNA has always included a strong emphasis on safety quality customer focus and delivery.

We augment these basic elements of our DNA with our values transparency collaboration and inspiration with and encouragement to our employees to speak out.

Overall, our objectives are to diversify and de lever and drive improved margins.

Let's look at how we've been diversifying spirit <unk>.

During the past year, we made excellent progress on our diversification strategy with the acquisition of the Belfast, Morocco, and Dallas sites from Bombardier.

And the acquisition of <unk>, a leader and high temperature materials.

After closing the deal with Bombardier last October our integration team quickly started working with our new team members and created a list of 450 integration tasks ranging from rationalization of our facility footprint.

To systems integration to ensure a smooth transition.

Since the October close they have completed around 65 per cent of the tasks by the end of the first quarter.

We expect to be 75% complete we have and the room with us today, our COO, Sam Arctic who is leading this overall integration. If you have questions on the integration later, she will be able to answer them.

The acquisition of the Bombardier assets accelerates, our diversification and the addition of the 820 wing, which leverages composite resin transfer infusion technology and is fully integrated with all systems and flight control surfaces.

<unk> spirit as one of airbus's largest suppliers with the experience gained on the <unk> hundred 20 program. We believe spirit has a competitive position for future narrow body aircraft as we build knowledge and expertise and composite wing production.

The acquisition has also roughly doubled our aftermarket business and is very complementary to our current capability previously spirit worked on Boeing work and North America, and the Belfast site focused on Airbus work in Europe are merged team now gives us the opportunity to offer the combined aftermarket capabilities.

Across more products and geographies. We believe we are and a good position to achieve our objective of $500 million and aftermarket revenue by 2025 at accretive margins.

In addition, spirit's business jet work statement expanded by roughly four times with the acquisition and we have become one of the largest suppliers to Bombardier.

From the mid size to very large business jet categories, our capability and scale as a business jet supplier can provide great value to the manufacturers and this segment of the industry. Our belief is that business jets are likely to recover sooner than commercial aviation. Following the pandemic. Our objective is to have the business and regional jet work achieve.

<unk> $500 million of revenue by 2023.

Also at accretive margins.

The Bombardier acquisition has also resulted in a stronger defense business, which we had not previously expected our Belfast team recently was selected by the U K to lead project Mosquito and the prototype design and manufacturer of the Uk's first unmanned combat aircraft, which is also referred to as a loyal wingman.

The three year $41 million deal to develop the aircraft's highlights the significant capabilities, our new spirit Belfast colleagues bring to military production.

Overall, we expect that the Bombardier assets, we'll have about $700 million of revenue and 2021 and.

And expect the purchase business to grow at approximately 15% annually with future margins north of 10%.

And in the future the assets of what we have purchased will be included within our existing segments.

And for this year it will be wing at about 43% fuselage at about 28% and propulsion at 29%.

The addition of the skilled and experienced team members and Belfast, Morocco, and Dallas will position spirit, well for many years for potential growth.

While the Bombardier asset acquisition was our largest dip the <unk> acquisition, which we completed last January has opened new opportunities for our defense business. The integration of F&I is complete and we are very pleased with the response, we have received from customers the.

And the combination of <unk> high temperature composite capability with spirit industrialization expertise has expanded the products and capabilities to current and potential customers. We now have a very robust pipeline of opportunities, especially and hypersonic weapons. Most recently NASA selected F M I.

To provide thermal protection systems to support several emerging space missions under the Science mission director and we are thrilled to be selected to support NASA and contribute to the future of deep space exploration.

F&I has been a great addition to the spirit family contributing to our 20% defense growth and 2020 and projected 15% growth and 2021 if.

And if we look at the programs of record for the programs that we are and they would generate future defense sales of approximately $6 billion. Our overall defense capabilities, along with our open commercial capacity will be important elements and our plan to grow our defense business to $1 billion of revenue by the mid 2000 twenty's with tip.

Nicole defense margins.

On page seven we have summarized our revenue split over three years. So that you can see the expected benefits of our efforts to diversify spirit and.

And 2019, Boeing commercial represented 74% of our revenue and 2021, we expect Boeing commercial will account for 44% of revenue based on current production rate plans and we expect that in 2021, Airbus will account for 23% defense for 18% and aftermarket and <unk>.

<unk> jets will each represent about 8% of revenue.

Emerging from this crisis, we believe spirit will be a more diversified company with several new and profitable revenue streams.

We are also focused on delevering.

As we recover from the effects of recent challenges we have begun to work on our current debt level and plan to pay down $1 billion over the next three years.

We have started the process by redeeming the $300 million floating rate note, which was due in June of 2021, using cash from our balance sheet.

We expect this process to be complete by Tomorrow February 20 for it from there. Our net next debt maturity is $300 million due in 2023 and by that point and time, we expect narrow body production rates to be at much higher rates and they are today.

Our next maturity after that is not until 2025, we remain committed to regaining an investment grade credit rating.

Our third objective is to drive margins.

As a vaccine rollout continues and air traffic begins to resume domestic travel will recover first.

We expect that this trend will favor single aisle aircrafts, such as the 737, Max and the <unk> hundred 20 day.

And they will be the first to recover as they perform the bulk of domestic flights. We believe spirit will benefit from this trend because 85% of our backlog is narrow body aircraft.

With all the productivity actions, we have taken we expect our margins will recover back to the historic levels of about 16% once the Max production rate reaches the low forties.

While the Bombardier acquisition will be slightly dilutive overall to this level, we still expect to achieve our historic targets in aggregate.

Although we expect that international traffic will take longer to recover which will put pressure on wide body production, which typically serve those routes. We are actively repurposing our production capacity for wide body composite aircraft to defense applications.

This transition will replace the hours, we have lost due to wide body rate declines and should have a positive impact on margins and the future.

With that I'll turn it over to Mark to continue through our detailed financial results and our expectations for 'twenty and 'twenty one mark.

Thank you Tom and good morning, everyone.

I hope everybody is doing well and staying healthy.

As Tom mentioned in his opening remarks.

Spirit as well as the overall aviation industry faced one of the most challenging years and aviation history.

Throughout 2020, our teams responded by making significant adjustments to adapt our cost structure to lower production levels.

Putting in place productivity improvements.

And working towards diversifying our business through M&A activity and growth and our defense business.

We also took several meaningful actions to strengthen our liquidity position.

We began by reducing the cash dividend to a penny per share suspending the share repurchase program and deferring about $120 million of capital expenditures.

We then negotiated with Boeing to receive a $225 million cash advance.

And defer a $123 million repayment to 2022.

And then in April we raised $1 2 billion of senior secured second lien notes and paid down or $800 million revolver.

And the last half of the year, we paid off our term loan and terminated the existing senior credit facility, while concurrently completing a $900 million capital raise consisting of 500 million senior secured first lien notes and a new 400 million senior secured term loan b credit facility.

Additionally, we utilize the cares act and the UK deferral programs, which were made available and response to COVID-19.

This allowed the deferral of $33 million and payroll taxes.

21 and 2022.

As well as the deferral of $32 million of VAT payments to 2022.

And a $16 million benefit related to the employee retention credit.

These actions have provided us with increased financial flexibility and liquidity and has enhanced our ability to address the potential longer and lower rates of production.

Given the 737, Max return to service and many parts of the world as well as the various measures taking place to address the pandemic. We are hopeful that 2021, we'll start the early stages of a multiyear recovery.

Looking ahead to 2021 and beyond we are focused on our long term growth and diversification strategies as Tom just discussed now let's move to our 2020 results.

Please turn to slide eight.

Revenue for the year was $3 4 billion down 57% from 2019.

This reduction was primarily due to the lower production rate and the 737, Max resulting from the continued grounding of the program and the significant impacts of the COVID-19 pandemic production rates across all of our commercial programs were negatively impacted by COVID-19.

We delivered 71 737 ship sets during the year compared to 606 and 2019.

Overall deliveries decreased to 920 ship sets.

<unk> 1007 hundred 91, chipsets and 2019.

While commercial deliveries were down our defense business grew by over 20% and 2020 and is helping with our overall diversification objectives.

Let's now turn to earnings per share on slide nine.

We reported earnings per share of negative $8 38, compared to positive $5 <unk> per share in 2019.

Adjusted EPS was negative $5 72 per share compared to positive EPS of $5 54 per share and 2019.

Adjusted EPS excludes the impacts of the acquisitions and restructuring costs, the noncash voluntary retirement plan charges and the deferred tax asset valuation allowance.

2020 operating margins declined compared to 2019 as a result of costs incurred related to the low rate of Max production, including excess capacity cost of $279 million.

As well as lower production rates across all of our commercial programs due to the impacts of Covid.

We recognized for loss charges of $370 million, primarily driven by lower future production rates announced on the 787 and <unk> hundred 50 programs and we incurred costs due to the COVID-19 related factory closures of $34 million.

Additionally, we.

We recognized restructuring expenses of $73 million for cost alignment and headcount reductions to support lower production rates as well as a non cash a voluntary retirement program charge of $87 million.

During the fourth quarter of 2020.

The valuation allowance on deferred income tax assets of $150 million was established this noncash valuation allowance was recorded.

Just on the required accounting analysis to assess recoverability of our deferred tax assets against future taxable income.

This is an accounting assessment, which places an emphasis on our recent losses.

I want to remind everyone that this valuation allowance does not limit our ability to utilize deferred tax assets and future periods. It also does not change our outlook on future results and has no impact on cash flows for future tax returns.

Once income generation returns, we can expect to see the allowance reverse resulting and an increase to reported earnings.

Now turning to free cash flow on slide 10.

Free cash flow for the year was a use of $864 million, including the acquired Bombardier assets compared.

Compared to a source of $691 million and 2019.

Free cash flow usage of $864 million is in line with what we discussed and the third quarter earnings call of 800 to 900 million for the full year, which excluded Bombardier.

This year over year decrease is primarily due to the negative impact of working capital requirements.

Significantly lower deliveries across all of our commercial programs and $73 million of restructuring costs, partially offset by $215 million received as a result of the February 2020, MLA with Boeing as well as some favorable cash tax.

As we discussed on last quarter's call, we expected free cash flow.

In the fourth quarter to be higher than in the third quarter cash.

Cash flow usage, and the fourth quarter was $181 million per.

Primarily driven due to higher cash tax interest payments of $80 million on additional debt the absence of some favorable timing on deliveries.

As well as cash outflow of about $50 million related to the Bombardier acquisition.

Which included onetime cash outflows of approximately $26 million for restructuring activity and $11 million related to equipment lease buyouts at the purchased Bombardier sites.

Looking at cash from operations, if we exclude the interest paid on debt and the consolidated cash use of <unk>.

Cash from operations improved $44 million from the third quarter to the fourth quarter of 2020.

This reflects our continued improvement in our operating performance.

And as a reminder, our cash interest payments are more heavily weighted in the second and fourth quarters of the year.

We expect cash interest to be $200 million in 2021.

Looking ahead into 2021, we expect our free cash flow to be negative, but significantly improved from 2020.

In addition to the operating cash flow, we have a planned payment of approximately $135 million for the Bombardier pension, which we expect will be offset by cash tax benefits due to our operating losses recorded in 2020.

And as discussed in last quarters call. We are expecting this cash tax benefit to be approximately $300 million as a result of the carry backs permitted by the cares Act.

We anticipate the first half of 2021 to be our most challenging with improvements as we progress into the later half of the year.

And I'll production rates increases projected.

As we have previously indicated we expect cash flow to be positive in 2022.

Let's now turn to our cash and debt balances on slide nine.

We ended the fourth quarter with $1 9 billion of cash on hand, and $3 $9 billion of debt.

The balances reflect the significant liquidity actions I previously described including those taken during the last half of 2020 <unk>.

Including the payoff of the $430 million term loan under the prior credit facility.

Capital raise of $900 million and new senior secured debt and the payment of $275 million for the Bombardier acquisition.

The terminal the new term loan B credit facility provides us with increased flexibility as it has less restrictive terms than our previous credit facility, which we terminated during the back half of 2020.

We believe this liquidity position and increased flexibility puts us in a good position and navigate future challenges within our industry.

Additionally, as Tom mentioned in his opening remarks, we have been assessing our cash and debt levels and have made a plan to delever. The company over the next few years.

And this delevering process will start by using cash on hand to redeem the 300 million floating rate notes, which mature. This June we expect the redemption to be completed on Wednesday February 24th.

Lastly, as we have stated in the past we remained committed to regaining an investment grade credit rating and the future.

Now, let's turn to our segment performance on slide 12.

Fuselage segment revenue and the year was $1 7 billion down compared to 2019, primarily due to lower production volumes on the 737, and 787 and <unk> hundred 50 programs operating margin for the year was negative 26% compared to positive 11% and the prior year.

This decrease was primarily a result of for losses recognized on the 787 and <unk> hundred 50 programs lower profit recognized on the 737 program, including excess capacity cost of $175 million and restructuring expenses of $41 million for cost alignment and headcount reductions.

And the fuselage segment recorded $18 million of an unfavorable cumulative catch up adjustments and.

And 274 million of net forward losses during the year.

Propulsion revenue and 2020 was $785 million down compared to the previous year, primarily due to lower production volumes on the 737 and triple seven programs.

Operating margin for the quarter was negative 5% compared to positive 20% and 2019.

The segment recorded $8 million of unfavorable cumulative catch up adjustments and $37 million of net forward losses.

Decrease in segment profitability and operating margin were primarily a result of lower margin recognized from the 737 program, including excess capacity cost of $61 million and the reduction and production rates on the Triple seven program.

And finally wing revenue was $799 million down compared to 2019.

Primarily due to lower production volumes on the 737, <unk> hundred 20, and <unk> hundred 50 programs.

Operating margin for the quarter was negative 9% compared to positive 14% and 2019.

The segment recorded $59 million of net forward losses.

Decreases and segment profitability and operating margin.

We're primarily a result of forward losses recognized from the 787 and <unk>.

<unk> hundred 50 programs lower margin recognized and the 737 program, including excess capacity costs of $43 million.

I also want to discuss the purchase accounting treatment for the newly acquired Bombardier assets.

This transaction, which requires us to apply business combination guidance under ASC 805.

Which resulted in an evaluation of the fair value of the underlying assets and liabilities that were required acquired.

We have completed our initial assessment and certain adjustments were required related to inventory.

Property plant and equipment and.

Tangibles goodwill liability balances and for loss liabilities per.

For the business combination rules the assessment will be completed within 12 months of the closure of the acquisition.

The preliminary assessment resulted and goodwill of $487 million and intangibles of $188 million.

The non cash intangible expense will amortize on a straight line basis of approximately $11 million per year.

Also.

As part of the opening balance sheet adjustments, we established a forward loss liability on the balance sheet of $282 million.

Primary <unk>.

Primarily related to the <unk> hundred 20 program, which had an impact on the goodwill balance.

The establishment of the for life liability was impacted by the change and the <unk> hundred 20 production schedule, which is primarily driven by the COVID-19 pandemic and the associated fixed overhead costs within the factories.

The deterioration and the performance between the time the deal was announced and when it was closed as well as other factors for <unk>.

Liability represents anticipated losses for expected customer orders over the next three to five years.

Of the $282 million.

Approximately $56 million and noncash was due to business combination guidance on the evaluation of the fair value of underlying assets and liabilities.

Which will be unwound from the for loss liability as units are delivered over the next five years.

In addition, the for loss liability includes approximately $50 million of noncash depreciation.

This is our initial assessment.

And we continue to focus on capturing synergies, including.

Including analyzing each site's capacity and structure to reflect the current production rate environment as well as maturing or cost reduction projects, which will help improve our profits on the programs. In addition.

As our business recovers from the effects of COVID-19, we expect each of these programs to benefit from our cost reduction efforts and results and improved margins.

As we announced last quarter, we negotiated a $225 million purchase price reduction to the original acquisition price taking into account market changes driven by the COVID-19 pandemic.

In addition, we've always said that this acquisition was a three way negotiation, including Airbus who were supportive and these discussions to make sure we could come to a mutually agreeable outcome.

Finally, we also recognized $5 million of excess capacity costs in 2020.

We expect to continue to incur these excess capacity costs going forward as production rates remained low and consistent with the accounting treatment. We follow on the 737 program.

So what I've just described summarize the accounting treatment for the individual elements of the acquisition.

But going back to Tom's previous remarks.

We project this acquisition will generate roughly $700 million of revenue and 2021.

Which we expect to grow at approximately 15% annually.

With future gross margins approaching 10% or better.

Strategically it has accelerated our diversification with more Airbus content, New defense work and expanded aftermarket and business jet work packages.

Overall, we remain excited about this acquisition.

In closing.

2020 was a challenging year that required us to take difficult, but necessary actions to adapt to the changes brought on from both the Max grounding and the COVID-19 pandemic.

<unk> 2021 continues to be a complex and dynamic situation.

And we will continue to assess potential scenarios to identify areas of opportunity and develop action plans to mitigate risk.

Further we will stay focused on our growth and diversification strategies.

With that I will turn it back over to Tom for some closing comments.

Thanks, Mark and now I'll make some closing comments before we take questions. We reacted to the multiple challenges in 2020 by restructuring our cost base and strengthening our liquidity.

We also executed on many different projects to drive productivity improvements and continued to diversify our business, while protecting our employees and <unk>.

And in 'twenty, one will be a bridge year for sport spirit as we recover from the effects of the 737, Max grounding and the Covid pandemic.

Now that the 737 Max has safely returned to service and many parts of the World. We look forward to improved production rates for that program.

We are encouraged by the various measures being taken to address the COVID-19, pandemic and hope to see a much improved environment for air travel as the year progresses.

In summary, our focus going forward is to continue diversification efforts start to delever over the next two to three years and drive segment margins to our previous targets with that we'll be happy to take your questions.

We will now begin the question and answer session. At this time, if he would like to ask a question. Please press Star then one on your Touchtone phone if he would like to withdraw. Your question. Please press Star then two has a courtesy and we please ask that you. Please limit yourself to one question. If you have additional questions you may reenter the queue.

Our first question comes from Jon Raviv with Citi. Please go ahead.

Hey, Thanks, and good morning here a question on the on the margin commentary just any perspective on the margin performance on underlying basis, and <unk> versus <unk> and Tom you said, 16% I think on the call just squaring that since I think I had 16, 5% and <unk>.

My head with Max and the <unk> is that the bar is that the 820 dynamic you. Just described are wide body being replaced by military just any thoughts on what that normalized margin number should be and our hedges.

Youre right 16, 5% is what our target is we just rounded it for for the sake of the presentation, but 16, 5% is what we think is achievable once we get the Max production rates into the into the low forties.

Okay. Thanks for that clarification and I'm just curious sorry, just for one question on day, two 'twenty is that program going to be generating profit at all and its future or only after the three and a half years to get to that 10% or better gross margin.

Well right now we've set up the forward losses that goes out three to five years.

And so we expect that during that time, we're going to continue to work on all the projects that we have identified in terms of capturing synergies, which we said it would be at about 6% of revenue.

We've identified a lot of those those projects are not all mature.

And so as those projects mature.

We should see improved performance on the program the other.

Other thing is rates are still quite low on the <unk> hundred 20 program.

Airbus has given us the best guidance. They can over the next few years, but again as we see the market recover and air traffic resumed we expect to see the 220 rates.

Get back to where they were projected to be previously and that will also improve the profitability of the program. So after the three to five year program, absolutely, we expect to 820 to be profitable.

Thank you.

Our next question comes from David Strauss with Barclays. Please go ahead.

Okay.

Good morning.

Tom can you can you touch on the day, Max and the 787, and obviously Boeing sitting on a lot of and an inventory of both at this point.

Do you expect your maxillary he's actually pick up relative to the 71 and 2020.

And how are you thinking about your 87 rate given you are somewhere around seven of them, all and and boeing's non delivery and any airplanes.

Right.

And with regard to the Max.

But Boeing has said that they're going to prioritize delivery of the units that they have built and not delivered and they have been doing that as you saw and in December and in January we're able to deliver upwards of 40 units. So that's quite encouraging.

As I said, we did produce 71 Mac ship sets in 2020, we've got about 130 units stored at our site in Wichita.

Boeing has paid for those already but those are and storage we will burn those down over the next 18 months or so and we do expect rates to be higher in 2021 on the Max and they were in 2020, our Boeing hasn't been specific yet what they have said is that they expect to be at about 31 aircraft per month and early 'twenty two.

On the Max we are lagging them by about five ship sets per month, so that we can burn down the inventory thats here and Wichita.

That's where we are but we do expect that the Max deliveries for us, even though Boeing is going to be delivering out of their inventory, we expect Max deliveries for us will be higher in 2021, and they werent and 20 on the 787.

Boeing has indicated that they are going through some extensive reviews of the build process and and the units that has delayed some shipments we've continued to ship, but it did impact our shipments and the fourth quarter.

We expect that once the reviews are complete.

And we will be able to resume shipments for the 787 again and we will continue to ship to our current schedule, which is at about five per month.

Alright, thank you.

Our next question comes from Seth <unk> with J P. Morgan. Please go ahead.

And then thanks very much and good morning.

And I was curious about yes, good morning, and you mentioned that the abnormal production costs will continue and.

2021, I guess I agree you would expect but relative to that sort of 50 ish million.

Level for the fourth quarter.

Is there any more color you could give us on and on how that should proceed through the year.

Yes.

So Seth.

And we had about.

$280 million of total excess capacity costs that we incurred in 2020.

With a modest pickup and 737 production rates, which we'll see later in the year.

We will see some improvements.

And 'twenty, one compared to 2020.

We havent given out specifics, but.

I would say we could see.

A 30% reduction and in that number but we also have to kind of factor in debt.

And that <unk> hundred 20 is going to be in a similar situation where that factory is set up to produce at more than 10 ship sets per month.

And we're roughly at for and therefore, we're going to we're going to have a little bit of headwind and excess capacity costs on the $2 20.

So overall, we'll see and improvement and excess costs, which will help profitability and will help cash.

And as.

As we move through the year, the excess cost will be a little higher and the first half and less and the back half of the year I think and easy way to think about it is we we established that excess cost allowance for production rates that are below 52 aircraft per month for the Max and they will be in effect until the Max rates get back to 52 and above but as the rates.

Climb the excess cost will go down and proportion to how close we are and a 52 aircraft per month. So that's just an easy way to think about it.

Great. Thanks, Thanks very much.

Our next question is a follow up from David Strauss with Barclays. Please go ahead.

Okay.

Yeah.

Okay.

And so there's no one else and Theres no one else in the queue and need to ask a question.

Well go ahead. If you have another question, we can take it and I'll kind of jump on and David.

Okay.

And two one to ask about the cash.

Cash flow and.

The 2021 work.

And given us prior.

In terms of the $300 $300 million.

Cash tax benefit.

And you'll offset by or I guess with along with around 500 mill and our working capital tailwind.

Is that all still still in place I mean, I think that arise so like a $2 million to $300 million burn in in 2021 and that is that the right ballpark.

That's right, David we're holding holding to what we communicated and in the third quarter and based on what we know today we.

No change and that view.

And does the does the Bombardier pension contribution is that going to flow through operating cash flow and does that go somewhere else.

And it will flow through operating cash flow.

And Thats and Thats included in the walk as well.

Right.

Okay. Thank you very much.

Okay.

Our next question comes from Carter Copeland with Melius Research. Please go ahead.

I made it and thanks guys.

Good to hear from that.

I didn't know if I was gonna make it in there and where are you going to follow up so.

Tom I'm going to cheat slightly and just ask you what a two parter clarification, just just for extra color on two other things you've talked about one and the integration.

Timeline and tasks that you laid out with respect to the Bombardier assets and just some color on what integration tasks, what sorts of integration tasks completed and what remains just to kind of give us a sense of.

And what the various risks are there and then the other is on all the stuff you talked about on the Max line moving around the work flow.

All of those efforts are there any metrics you can give us on what you anticipate that means for direct labor and what it means for flow times, what it means for anything that you've looked at it and kind of zero day. Non said this is what's compelling about that particular change or some other particular change. Thanks.

Alright, so to start on the integration question, let me turn it over to Sam Martin Who's our Chief operating Officer, Sam is leading the integration and can provide you some color on the type of cash that we're undertaking and what's been completed so Sam Yeah, Hey, good morning Carter.

And so as Tom mentioned previously there's about one the integration is about 450 activities and really bad and organized into 'twenty two functional work stream areas typical workstream everything you'd imagine like a campaign.

Human resources all of those kinds of thing by the end of Q1, we should be about 75% through the integration activities cadre, but there were some activities that will that will take quite a bit long debt. So for an example, with that of that would be some of the accounting that needs to be done. Another example would be.

And the transition services agreement. So we have a transition services agreement for 18 months, obviously, we're going to try and get off of that quicker, but that will be a longer and integration activity and the same time is giving me integration activities. Obviously, we we're also simultaneously doing the synergy activity.

The work streams, as well and above kind of feed each other and.

And the integration activities.

And I, we've seen a lot of success is because this is very much a business that we used to Carter and the teams are very much and already integrated in terms of things like metrics and cadence.

For all working from the same kind of.

Measures already we're also really making some great progress on some of the combination and so when you when Tom talked about the aftermarket business. For example, already we're doing and repairs and Dallas were doing repairs and Belfast.

Traditionally done out of the spirit, which Todd site. So all in all we're seeing some really good progress on the integration and hopefully that gives you a little bit of color. There are some activities, though that will that will spread out into the latter part of the year that will take longer to come off system and strike them for.

Right, Okay, and just as a quick follow up to that are there any are there any LTA is that the previous organization was engaged and that you want to make your way out of or is that not an issue of significance.

Those are all things that we're working through on the on the AR and the integration activities. There are some things and obviously, we'll be looking at within that supply chain or other such agreements and so as we're working through our position for the future here will be will be addressing all of that and seeing which makes sense for us and which don and as well.

Walking through the synergies for example, as we make decisions and I have a make buy.

And that impacts those types of agreements, where we will look at those as they come up got it and and one okay and I would say, sometimes long term agreements Carter might be and place, but with spirit. We have a lot of scale, we have a lot of new programs and opportunities to work with suppliers to create win win situations, where we can get what we're seeking and they can get something that helps them as well.

And so we're confident we can manage through any situations that exist.

Let me get to your second question, which is you asked all of these things that I talked about in terms of automation and robotics and digitization of the factory floor and process redesign how that will translate into metrics and and what the benefits will be and so the type of metrics that we're going to see improved primarily we'll be looking at things like first.

Of all labor productivity, we measure realizations. So in other words, how many hours do we performed versus how many hours do we have available with all the disruption that we've seen in the past few years realization, which should be close to a 100% has obviously dropped a lot with all the changes that we're making we expect to see our realizations start to occur.

The the 90% to 100% level again.

The other big area is really about quality all the changes, we're making ultimately are going to drive better quality performance, so fewer defects less scrap and rework less repair and fewer escapes to our customers all the ways that our customers measure quality, we will be able to see significant improvements and that also translates and.

For dollars I mean, if you reduce scrap and rework obviously that that helps out for bottomline as well. The other thing we will see in terms of labor productivity is a reduction and over time when the factory is disrupted and it snap performing and work gets out of sequence you have to work harder at that that creates a lot of overtime, we're expecting over time to be less and eight.

Percent going forward, we had time periods and the last couple of years as rates were going up where overtime could even reach into the 30% range. So that's going to be a significant reduction and then we're going to see improvement and and some other line items like things like perishable tools and shop supplies ultimately, though all of those things will translate into margin and so when we say we're going to get to 60.

And a 5% margin.

This is one other ways that we're going to get there is by making all of these improvements to our production systems.

Great. Thanks for the color Tom Alright.

Alright, thanks, guys.

Our next question comes from Myles Walton with UBS. Please go ahead.

Thanks, Good morning based on the comments that defense is growing 15% and is I guess going to stay at 18% of sales.

And I guess the implication is for billions of 21 sales and sort of your your benchmark target, which would imply that the bombardier sales come through and the rest of the business.

It is flat year on year is that the way youre thinking about it that the wide body declines are being offset slightly by the narrow body growth.

Yes, effectively miles will.

Definitely we're seeing a lot of pressure on the twin aisle, and particular 787 and triple seven and so that's going to be a pretty big headwind coming in into the year.

And we are seeing some single aisle recovery recovery on top of it so.

I would say maybe.

Little bit a little bit of benefit above and beyond the headwind on the twin aisles, but roughly speaking.

Single aisle improvement is going to be offset by the twin aisle.

Reductions on the Triple seven and the 787 and the point I was making was that with the wide bodies down, particularly the composite aircraft. We have open capacity, we have automated fi replacement capacity trim and drill capacity non destructive inspection capacity and we can repurpose that toward defense programs and we've been doing that.

Been winning defense work and that's why I mentioned in terms of the programs that we're on now the program of record has future sales of over $6 billion. So.

We're very confident that the growth of the defense business can help offset some of the wide body softness right now and.

We will also create a very profitable revenue stream for us going forward.

And on that I know that the head of the B 21 program actually publicly and Air Force magazine and talked about.

Spirit and particular switching.

Supply of of work force over the 'twenty one from for.

From other commercial assets and I'm. Just curious you don't have to come into the program, specifically, but the profitability of defense in general.

How is that trending where is that relative to your mature commercial programs and where is that you know when you.

And when you do get to a billion dollars and sales, whereas the profitability profile and defense relative again to your more mature programs.

And what we said is defense programs have typical defense margins, so that's and the kind of 12% to 14%, but those tend to be very stable very long term.

And less cyclical than you see on the commercial side.

Okay alright. Thanks.

Our next question comes from Greg Conrad with Jefferies. Please go ahead.

Good morning.

Good morning, Greg.

You gave some helpful color around kind of the accounting from Bombardier, but it looks and in Q4, you added back about $51 million of cash usage and I think on the last call you talked about expecting Bombardier and to be positive contributor to cash you mentioned margins and kind of revenue growth, but how do you kind of view the cash.

All of that business going forward.

Yeah, so on our third quarter call.

We knew that.

When we acquired at the end of October that there was going to be some severance related costs that would be a headwind on cash and the fourth quarter.

And based on our current look here into 2021, we expect the Bombardier assets, Belfast, Morocco, and Dallas to be a positive cash flow contributor in 2021.

Thank you.

Our next question comes from Robert Spingarn with Credit Suisse. Please go ahead.

Thank you Tom.

And while we're talking about the targets for defense and for Biz jet for $1 billion and the $500 million could you just give us a general sense of.

And the big programs and there I assume the Biz jets, mostly 7500, but wanted to clarify that and then if you could just give us a rank order and and defense.

Right. So, let's just start with defense the the programs that we have for defense right now we have the military derivatives for the commercial programs from Boeing So the P. Eight as the 737 and we make 70 per cent of the structure. The KC 46 tanker is a derivative of the 767 and we make the forward fuselage on that we.

Also have.

We built the whole fuselage for the CH 53 K.

Which is the heavy lift helicopter for the Marines.

And then we are one of seven suppliers that was named to the B 21 Raider program, which is an important program for National Security. In addition to that we have won work packages on several new classified programs, which we can't go into in detail.

In terms of what they are but that's why we wanted to give you the program of record number of $6 billion.

In terms of Bombardier and.

And in terms of business jet programs.

Our on the.

And the global 7500 make the horizontal stabilizer.

The global 5006 thousand we do the wings, the few slides and the tail, we do themselves and the fuselage for the challenger.

We made a few slides for the Lear jet 75, obviously, that's going to be ending.

But we'll do that throughout the course of this year, we make the and the sales for the BR 710.

Which is on several different aircrafts, we make the nacelle.

Well well for the <unk> hundred 30, and then we also make themselves for the new emcee 'twenty, one which is a regional aircraft and.

Russia.

In addition on the business jet program.

We've announced that we're going to be the partner with Ariane for their for pressurized fuselage and then we've won two additional business jet programs, which have not been announced publicly but we'll be very significant contributors and the future.

Okay, and then just a clarification on the 220 and the forward loss is that calculated on a continued rate of for per months throughout this several year period or does it gradually have the rate rising towards 10.

And that number.

Yeah. So Rob you know we've taken the current outlook that Airbus has given us.

And so we expect over the next couple of years for the <unk> hundred 20 production rates to climb higher than they currently are and that's factored into the overall loss calculation.

Got it got it thank you very much.

Our next question comes from Kristine <unk> with Morgan Stanley. Please go ahead.

Hey, guys.

For the Bombardier assets to be free cash flow positive and 'twenty 'twenty, one what integration and synergy milestones are embedded in your outlook.

Well.

I would say we have.

Modest assumptions as it relates to the actual synergies.

And I know that on the Bombardier acquisition, we talk a lot about the Airbus <unk> hundred 20.

But I want to remind folks that there are other two important aspects of that acquisition.

It's the business Jets that Tom just described we're on a variety of different business jet programs, many of which are profit.

Nicely profitable programs and then the significance, which I continue to say is really the jewel of the acquisition and my eyes is the aftermarket business, which is substantial.

Our aftermarket business and has margins consistent with our.

Our aftermarket peers.

Although the <unk> hundred 20 program is going to be a bit challenging from a cash flow standpoint and in.

2021.

Assuming for four to five rate per month.

Two thirds of that business generating profitable growth and so that will help us on the margin side as well as well.

We're going to see some tailwind on Destocking and some inventory that we built up on the <unk> hundred 20 program in 2020, as we thought those production rates would come up so some modest benefits on the synergies we're looking at.

24 to 36 month timeframe for us to squeeze squeeze out fully those synergies.

We see nice profitability coming from the business Jets and the aftermarket we're seeing some working capital tailwind and thats going to all culminate into some positive cash flow here and.

And.

Tom mentioned it.

And a nice little piece of defense work in 2021, that's going to help us be casual generate some cash flow on the defense side of things.

Let's see if we were to adjust the working capital tailwind for the year, what should go and taking out into 'twenty because of its own.

Okay.

Animal and.

How do we think about.

The run rate of free cash flow conversion for about two thirds of the business profitable.

Profitable is that mid teens or I guess.

Double digits.

Cash margin, how should we think about that.

I don't want to guess Kristina I haven't looked at it that way.

To be honest, we have been.

Really focused on purchase accounting.

And we're working long hours with our external auditors to get the purchase accounting.

Wrapped up here.

We're spending time focused on our 2021 projections, which is the near term and then as Sam Martin talked about we're starting to tap the longer term strategy around the synergies and all the cost projects that we have and I would tell you that.

Really really long list of projects on the <unk> hundred 20 for.

Site consolidation overhead reduction supply chain.

We have a whole host of projects that we think over and over the next couple of years will drive some value on their program to help us get to profitability along with <unk>.

We've got our fingers crossed that that program will continue to sell well and the marketplace and if we can see those production rates climbed into the 100 120 530.

We can be we can be profitable and I would just say you know if you listened to the Airbus there kind of and the same situation that we are they talked about getting the profitability and the middle of the of the 2000 Twenty's and so our goal is to get there and try to get there sooner than that.

Sorry, I couldn't answer your question I, just don't have those statistics off hand here, but.

Maybe on future calls we can we can help clarify that as we continue to get our arms around this business. We've just had it for a couple of months here and we've got a lot of work to do here, but we feel really good about the acquisition.

Thank you for the color.

Our next question comes from Doug Harned with Bernstein. Please go ahead.

Good morning, Thank you.

Doug.

Hi, and on the 787.

And this is this is Ben.

Somewhat of a challenge here with a lot of inspection work going on at Boeing.

Our understanding is that you know the issues around nonconformity extend across a lot of areas, including section 41, and the forward cargo door.

Can you can you talk about with the issues on the 787 are these are there spirit specific issues here.

Are these and said more a broader process question that extends across suppliers and how have you worked to help and.

And what's the path to resolution of these issues that you're involved with.

Well, we've been working very closely with Boeing.

In terms of trying to understand.

The whole production system and doing the analysis that they have requested.

Our understanding is they they're also doing analysis and other sections of the aircraft, but those are not really.

Visible to us so we're focusing on our work package with Boeing and what we're doing is is based on feedback that <unk> gotten from their own and investigations and other parts of the aircrafts they've asked us to perform similar engineering analysis on sections that we do and we're doing that analysis, we are working with.

Them to understand the results in.

And in some cases it may require rework we have started some rework just so that they can resume their deliveries sooner and.

And as we get all of the engineering analysis done will determined and the long term what type of rework is done but this is the type of thing that happens is you identify a potential issue you do the engineering analysis and you you understand whether the area is acceptable as it is or if it could require some rework.

In addition to the extent that we need to change some of our production process and the future. We will do that we're learning a lot from this engineering analysis in terms of things like tools and processes.

And we will make any improvements that we think are necessary as a result of that analysis going forward.

And do you have a sense here.

Given that and furloughed people on the program and.

Do you have a sense of what the timeline is based on the work that youre doing too.

Dress these issues, where do you see when you can get back to what I would call more normal production.

And while the furloughs that we have made on the program really relate to the production rate decreases that Boeing has announced I mean, we were at 14, and then 10 and now we're basically at five and so that's really what drove the furloughs. So we're we're continuing to do the work on the program. In addition to the engineering analysis and <unk>.

Just described but the furloughs that you referenced are not due to this but they're rather due to the production rate declines at Boeing announced with the program.

Oh, Okay I see so okay. So these are basically going on and parallel.

And.

I guess the.

Yes, Doug what really happened here is original the original production schedule had us going to from about 10% to five a month in April and then based on the latest schedule that we got from Boeing that they communicated late last year that moved the production break a reduction down to five months earlier and the January February time time for.

And so we had a plan to kind of transition some of those employees and April over to the $3 seven program as those rates went up but due to the fact that the production rate came down sooner.

And you could you could see some of the lower deliveries and the fourth quarter.

We're our production system is tuning down to five months roughly five a month for the for the full year 2021 and that was the main reason why we had for most employees. We just production rates came down sooner than we expected and.

And we had to.

And reduced the workforce to equate to current production levels.

So that was the reason for the forward loss and not.

Not the inspection issues and the and the analysis Youre doing.

That's correct Doug.

Okay. Okay, great that's very helpful. Thanks.

Our next question comes from George Shapiro with Shapiro Research. Please go ahead.

Yes, I wanted to clarify when you say the 16, 5% margin.

And you'll get when Max gets and the low forties and you also said that you'll still have excess capacity costs until it gets to 52. So as that 16, 5% include the excess capacity costs or is that what you'd expect is a normalized number without the excess capacity.

No George that would include the excess capacity costs.

We think even with the excess capacity costs, we can get to around 16, 5%.

And that's for the whole sector, so that in Cluj the zero margins on the bulk of your other programs.

And that is correct.

Okay, and then are there any excess capacity costs for any of the other programs or the numbers. We're seeing are strictly for the Max.

What you saw in 2020 was primarily the Max but in 2021 22.

And into 2023, we will have excess capacity costs on the <unk> hundred 20 program as well.

So it's just contained.

To 737, and <unk> hundred 20.

Okay, and there is no excess capacity costs on like the 787 rates coming way down because youre already and the loss position is that it.

George the technical side of it is the new rules that came out regarding excess capacity costs.

If Boeing.

And if Boeing would would've told US Hey, we plan to get back to 14 aircraft per month on 787.

Does the product because of our buildings.

April capable of producing 14, we would then have excess capacity costs right and so you really have to look at it is your what is your factory set to produce.

And if you're a customer commits like they have on 737 and that Theyre going to go back to 52, a month and the $23 24 time frame.

Therefore, we have to do a separate calculation to put certain costs and excess and certain costs go into the program, but on 787. There is no commitment bowling and said Hey, you know their plan is to get back to seven or eight months, they've never come out publicly and stated that they wanted that theyre going to go back for 14, and because they are not going to go back to <unk>.

And then all of the cost hit the program as opposed to hitting excess I hope that helps yeah that helps and is that true then for like the 350 program with Airbus.

That's right and triple seven.

Okay. That's very helpful. Thanks, Mark.

Sure.

Our next question comes from Hunter Keay with Wolfe Research. Please go ahead.

Thanks for getting me and thanks for getting and Mark just a couple quick ones for you.

Is there any shot that you can obtain some pension relief from the stimulus or is that not applicable and this scenario.

And the cash contribution of $135 million and then.

Guys I said pre Max actually your minimum cash balance I believe it was $4 million to $600 million, how do you feel about that now going forward. Thanks.

Sure.

I would say that.

And as it relates to either the cares act or any benefits from the U K I'm not quite sure. There is a path forward as it relates to.

Any pension relief.

But you are aware of the fact that we do have a pension plan and in Belfast.

And.

And.

And we're evaluating that pension scheme to see if our if we can come up with a different scheme that would be beneficial.

To our employees and also beneficial with spirit and so those are some things that we're working on.

As it relates to our integration and synergies that Sam is leading but the $130 million pension payment for this year is locked.

We're committed to making that and we'll be evaluating the program as we go forward, but there's no no chance that that would change that will happen and in the October timeframe.

Okay, and then and the market the Max $4 million to $600 million minimum capital.

For minimum cash.

And so the for the 600 was really when we think about our business as it relates to being a $7 billion to $8 billion company and so the amount of cash debt that were required to hold just to be support the business on a normal run rate basis fluctuates based on our revenues and our cost profile.

And the number of our employees so.

If were half the size that we were when we were needed for to 600, we're probably more and the 2% to 400 and.

And so I.

I think that's the way you should think about the hunter.

Okay. Thank you.

Our next question comes from Mr. Cai von <unk> with Cowen. Please go ahead.

Yes, thanks, so much so.

When you did Bombardier you talked of getting 600 bips of margin improvement over three years.

And then you also talked about gross margin 10%.

Out there 24 that would imply that currently we're doing about 4% gross margin.

Which wouldn't seem to be consistent with generating and the cash how do I square those two issues.

Well I would say this cai.

I don't think you are.

I know how you did your math to get to 4% currently.

But that's not what we're expecting right now.

And as time moves on right just like the 787 as the revenue mix.

And the Bombardier assets more revenue is generated on the <unk> hundred 20 program and.

As.

And as those production rates go up that has a dilutive impact on margins.

Today with where the production rates are right. It doesn't have as dilutive of an impact here over the next couple of years because of the.

The percent of the overall revenue to that business, we have the aftermarket and business jets that I talked about but if at some point in time and in the future. We're going to go from 40 deliveries a year to 130 deliveries a year and we're going to be generating zero percent margins on it that will drive a dilutive impact on our overall gross.

And so.

The goal here is the business is as is.

Is supporting the 10% gross margins currently and as time moves on the <unk> hundred 20, we will put a lot of pressure on the gross margins but.

But as Tom talked about we've got the synergies and cost reduction projects, which we believe will enable us as we move out over the next three to five years to turn that program first to breakeven and then profitable and once we go do that that will will help us on the gross margin side.

And the next three years to five years, so and in a way I would look at it to Guy is once we get that program to profitability.

And then the rates start to pick up in the back half of this decade, it's going to be a great long term program for spirit.

Got it so that and.

And there's another question you mentioned.

And I expect it to have destock.

<unk> 20 this year.

I would assume given the changes that you're going through a destock on the true 20, Boeing is essentially producing nothing on the three seven and now or you also nothing and 787 is kind of going through this thing where they talk of 10 per month.

Kind of sounds like Theyre doing nothing and so is the first quarter are going to be very very light in terms of.

Volume.

No Cai.

And I don't want to get get ahead of myself, but I would tell you I don't expect the first quarter revenue to be significantly different than what we generated and the fourth quarter.

Got it very helpful. Thank you.

Sure.

Our next question comes from Ron Epstein with Bank of America. Please go ahead.

Hey, good afternoon, and good morning, guys.

Hey, Rob on the book.

And part of the acquisition did you guys say, 15% growth and if you did.

Off of what base and over how many years, because bombardier and never got that out of it.

Right well.

<unk>.

And the development phase of the 820 <unk>. So as that goes up that's what's going to drive the revenue growth, we did say 50% growth.

The base is basically off of this year, which will be and the $700 million range.

Over the next five years.

Gotcha Gotcha and then.

On the defense applications that you're.

Using widebody capacity on.

Can you say what they are and then what do you do and the wide body demand comes back with the defense stuff.

Using that capacity today.

Great well. Unfortunately, they are classified programs. So we can't go into more detail on them. They are obviously using composite technology.

We we have sufficient capacity in our factories, so that when the wide bodies come back we'll be able to support those rates plus a defense. So.

And we're confident about that and then we'll see how far back the the wide bodies come.

But we're confident we can we can do both even when we see the wide body.

Volumes return and by the way that will be a great challenge for us to address at the time.

Yes.

Yes, Ron I would say this.

And you've been out to our factories before in many instances, we don't have one single point of failure and the factory, whether it's trimble determined drill for broaches or lay up machines and so we always have a little bit of extra capacity, even at the higher rates and so really as Tom said.

We're not quite sure when the twin aisle production rates will come back up and a lot of our composite.

<unk> and that we have is very applicable to current classified program. So we're going to be able to use up some force for space and we're going to be able to utilize those machines on a <unk>.

Couple of these classified programs that are just slowly starting out but we believe over the next couple of years could lead to some really big things as Tom indicated with the program of record and the future.

Could contributed 6 billion plus to spirit and so that's how we're going to manage it.

And obviously, we've made a commitment to our commercial customers to support specific rates and we will do that but we will be able to do that and allow us to grow defense and those highly automated factories.

Got it okay alright. Thanks.

Our next question comes from Noah <unk> with Goldman Sachs. Please go ahead.

Hello, everyone.

Hello Hello.

Just thinking about this.

$1 billion of annualized cost that you have pointed to.

Being able to to extract.

And and squaring that up with a discussion of a 16, 5% segment operating margin if the Max per.

Monthly production rates and the low forties.

The last time, the Max production rate was in the low forties.

And for Boeing and for you.

Spirit had a $1 billion approximately.

Adjusted segment operating income or total company EBITDA.

And so I guess I'm wondering if you.

And in that period of time and the segment operating margin was up.

Moving on the exact year and some moving pieces. It was approximately 16, 5% so.

And the forward I know the wide bodies will be much lower but there.

And there is no margin there you've given US a list of new things that are coming in at a decent margin so outside of the Max you're mixing up.

And then the discussion on the Max is the same rate.

If the cost out is literally the size of the entire EBITDA you used to have.

With similar Max conditions, why wouldn't that future segment EBIT margin be significantly higher than.

The 16 and a half for what it used to be when it used to be afforded to them yes.

I would just say the headwinds on the wide body and probably a little bigger than you are.

And thinking about right now I mean, if you go back to 2016, the Triple seven was at eight aircraft per month, it's now at two.

And back then the 787 was at 12 and was still and a kind of a forward loss position, but generate good revenue and <unk> hundred 50 was actually profitable and when it was at a rate of about eight at that time. So.

We've got now more and headwinds on the wide body that we have to offset and we said it a little bit of dilutive type.

Time, Inc, which will have for the 820 during that time.

But we think once we get the Max back into the low <unk>, we can offset those and get back to the 16, 5% margin targets.

Okay. Okay. So it's just more and more on the wide body, then and what are you expecting right plan and the triple seven.

And it's always been a good program for us and going from eight to two is a significant headwind.

Right.

Tom you had in your prepared remarks, you you went.

Really helpful. You went through a lot of the specifics.

Things, you've done on the cost side, and and automation and Digitization.

It.

It sounded new and that you were.

Detailing and specificity today, but the targets are already seeing I mean, how much of that is new in process right now on top of the cost you had been thinking about before versus you're just giving us the details and the examples of what you were already thinking your work it's more of the latter I mean.

These programs are all long term programs like that global digital Logistics Center I mentioned, we've been working on that for two and a half years, its just coming online now.

And the floor beam automation center, we've been working on for about two years. Its just coming online the spoiler line that I mentioned over and Prestwick again more than two years, but it is just coming online. So it's just a concurrence of events that these things all happen to be coming online right now, but we've been working on them and I wanted to provide you. The details. So you can see the specifics of how we're going to be.

Driving these productivity improvements and the factory that will also help on our on our quality.

I bet, you know and and I mentioned two.

While we've been working on these things some of the process flows and those have really been and the last 12 months as production rates went down we looked at our factories. Our main factory plant two we call it where we build a few slides for 737 and we said.

We've got some time now production rates are low how could we re imagine this factory how could we redesign it since we have the opportunity so that it could be much more efficient and the future and that's when we moved out the forward fuselage and the wing box and we've now started to really completely overhaul the flow and factory to we couldnt have done that if we were at 52.

Aircraft per month, but at.

Seven aircraft per month, we had the capacity to do it and we went and did it.

Got it okay. Thanks, so much thanks.

Thanks.

Our next question comes from Michael <unk> with Truest. Please go ahead.

Hey, good afternoon, guys, thanks for AR and Mike will.

I'll take the question.

One quick one you know.

Everything that's going on with the 787, I guess back to Doug's question does that change.

Or could it potentially change your cash breakeven there I think it was for line unit for two five and then maybe just to tie a bow on all this commentary.

Every all these moving pieces do you guys think you can get to positive operating margins or operating income and the second half of 'twenty, one or should we be more calibrated into 'twenty. Two just given low rates on the narrow body still some uncertainty and obviously the widebody pressures right. Let me take 77 first you're right. The line unit is $14.

Five we have a price increase which will get us up to the level, where we think our cost will be that was always the goal obviously with the production rate dropping it creates more of a headwind, but with the production rate dropping it also pushes out when line unit 14 O five happens and so we have more time to achieve it so that's still our goal.

One other ways that will offset some of the volume decline on the 787 is what I said earlier is is using some of that capacity on defense programs, which will help absorb some of that fixed cost, which will help to 77 profitability. So the goal is still okay. When we hit my need at 14 O. Five is that we will be breakeven or better.

Got it.

Right.

Now your second question.

Maybe just repeat it please.

Yeah, just thinking about it.

Generating positive operating income and positive margins here, just should we be calibrated towards second half 'twenty, one even and fourth quarter 'twenty, one or just given headwinds with wide bodies and maybe modest rate ramps on narrow should we be more calibrated towards early 'twenty two.

Well I mean, we said will be 2022 and were targeting cash flow profitability, Mark mentioned that our interest payments happen in Q2, and Q4, the big interest payments and so.

Lets us gives us a little bit of headwind in Q4, so even if we were seeing some some good momentum on the production side, we'll have those headwinds on the interest cost side. So I think we'll standby will be cash flow positive in 2022, yeah, Mike Okay.

Maybe to be more specific.

We should see improving operating margins as we progress throughout the year, if the production rates hold we should see higher single aisle rates.

And the third and fourth quarter, and so I don't want to get too specific about when we will see positive operating margins, but I will tell you we should see them.

Pick up nicely in the third and fourth quarter.

Before we break into into 2022, where we should see continued benefits as the cingal rates, both on the $3 seven and <unk> hundred 20.

Don't want to get too specific but we should see things start to build nicely as we move into the back half of the year.

Perfect. That's helpful. Thanks, guys.

Our final question will come from Peter Arment with Baird. Please go ahead.

Yes, good morning, Tom Mark.

And just regarding all the transformation efforts that you're doing and kind of related to the cash question.

Do we think about the spirit still as a company that can generate.

Seven and 9% of free cash flow once volume comes back or just given all the kind of metrics and improvements you've been making should we be thinking about the business differently, particularly given the acquisitions et cetera.

That's our goal and even with the acquisition that's still our target.

We said, we wanted to diversify and Delever drive margin, but by doing those things that will enable us to generate cash and we think for 79% range is is a good target for when the business has stabilized air traffic has recovered and our production rates and gone back up.

I appreciate all those details thanks for your time.

Thank you.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.