Q1 2021 Spirit AeroSystems Holdings Inc Earnings Call

[music].

Good morning, ladies and gentlemen, and welcome to the Spirit Aerosystems Holdings incorporated first quarter 2021 earnings Conference call.

My name is Jamie and I will be your coordinator today.

After today's prepared remarks, there will be and opportunity to ask questions.

At that time to ask a question you May press Star and then one.

To withdraw yourself and the question queue, you May press star and two.

Please also note today's event is being recorded.

At this time I would like to turn the presentation over to Aaron <unk> director of Investor Relations. Sir. Please go ahead.

Thank you, Jamie and good morning, everyone and welcome to Spirit's first quarter 2021 earnings call I'm era, and Hunt director of Investor Relations.

And with me today are Spirit's, President and Chief Executive Officer, Tom Gentilly Spirit, Senior Vice President and Chief Financial Officer, Mark such and ski and Spirit Executive Vice President and Chief Operating Officer, Sam Martin.

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

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 the forward looking statement at the end of this web presentation.

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

And as a reminder, you can follow today's broadcast and slide presentation on our website at Investor day at Spirit, our 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 first quarter results call.

A year ago, we are contending with the unprecedented disruption and uncertainty from the continued 737, Max grounding and COVID-19 pandemic.

Since then the FAA lifted the 737, Max grounding order and shortly after that the aircraft resumed commercial service today.

Today, the 787, Max is certified and the U S U K Europe and many other parts of the world and.

Additionally, Boeing has secured several new orders from airlines, including large orders from southwest.

Oscar Air and Ryanair, who will take delivery of their first newly certified 737, Max 8200, aircrafts and the near future.

The COVID-19 pandemic has had a significant global impact.

Aviation industry saw more than 19000 aircraft grounded and air traffic down more than 95% at the worst point last April.

Thanks to the tireless efforts of many to mitigate the severe impact of COVID-19, We believe we are now and the path to recovery. We continue to see encouraging news on the return to commercial air travel with domestic routes, primarily flown by narrow body aircraft, leading the way.

And the U S. The TSA checkpoint travel numbers have been consistently staying above the 1 million Mark since early March and more recently, we have seen many days above $1 5 million travelers, including one 6 million travelers last Sunday.

We have observed a similar domestic recovery in China, We believe spirit is well positioned to benefit from this trend of recovering domestic air travel and the largest aviation markets given that 85% of our backlog is narrow body aircrafts.

In line with the improved narrow body outlook as we described in our 10-K spirit is planning to produce about 160 737 Max aircraft in 2021.

This plan allows for us to burn down the Boeing inventory of 737, Max ship sets stored and Wichita and Tulsa with.

With the current outlook, we should be at our targeted number of a permanent buffer to cushion the production system towards the second half of 2022.

We have regular conversations with Boeing on the current environment and will work closely with them to make any necessary rate adjustments as the year progresses.

As for our Airbus narrow body programs, we have plans in place to support the <unk> hundred 20, and the <unk> hundred 20, Airbus schedule increases as the air traffic demand recovery continues.

International Air traffic demand still remains at relatively low levels versus pre pandemic times and is expected to take longer to recover.

Consequently, we have experienced and believe there will continue to be pressure on our wide body programs.

The wide body programs have created significant pressure on our overall performance as the Oems have adjusted production rates on those programs downward.

And the <unk> hundred 50 scheduled changes this year and next year contributed to the forward loss of $29 million that we announced this quarter. The forward loss also included some charges for tooling and bill process improvements to improve product quality, we decided to implement the improvements and our kinston facility. During this period of lower production rates.

Over the last few months, we have also been working with Boeing on the 707 program.

At Boeing's request, we conducted an extensive review and engineering analysis as a result of fit and finish issues that they had identified and other parts of the aircraft.

While there were no safety of flight issues areas of rework were identified we have started the rework and Boeing has re initiated deliveries of the 787 and the reward plan that we have put into place supports boeing's 707 delivery schedule and the engineering analysis and the projected rework will drive a forward loss of $29 million.

Mark will provide.

More detail on the Ford losses, and his comments.

The uneven recovery from the pandemic created challenges during our first quarter. During 2021, we expected to see performance start to normalize as we get into the second half of the year, assuming air traffic recovery remains on track.

Overall, our 2021 free cash flow usage is expected to be between $200 million and $300 million.

After considering the $300 million cash tax benefit.

As we have previously indicated we expect our cash flow to be positive in 2022 as production rates improve and we realize all the benefits of the cost reduction and productivity actions that we've taken.

Now I would like to turn our focus to the integration process of our recently acquired Belfast Casablanca, and Dallas sites, our Chief operating Officer, Sam <unk> has joined US today, and I would like to turn the call over to her to give you a few updates on the integration process as well as progress and our aftermarket business Sam. Thank you Tom the integration of our three new.

U S sites is progressing to plan.

To date, we have completed roughly 80% of the 450 tasks, we have identified to capture synergies and integrate the operations and to spirit.

Some of the remaining tasks such as exiting the information technology transition services agreement will take longer by plan design.

A large part of our integration and focus is capturing the synergies, which we projected to be 6% of revenue.

Based on 2021 revenues.

Expect it to be $700 million.

We estimate the synergies to be $42 million.

The areas. We are focusing on include <unk> hundred 20 wing costs supply chain infrastructure and engineering.

We are on target to achieve the $42 million and.

Perhaps even exceed it by 2023.

And the period beyond 2023, we are identifying additional productivity opportunities.

In addition, as part of our integration we are evaluating the Belfast pension plan and are in formal consultation with the employees and the unions on this matter.

And on plan is closed to new participants and.

We are evaluating closing the plan to future accruals and replacing it with a defined contribution and benefit plan.

Another significant part of this acquisition was a strong aftermarket business.

Belfast, and Dallas sites, and our key pieces of our aftermarket revenue growth plan.

While we've seen some COVID-19 related headwinds for the aftermarket business and the near term. The combined team is working to transfer between sites and strength and customer relationship is that traffic recovers.

And the first quarter, some of our activities, including moving tooling and multiples to Belfast to support Boeing program.

Our Belfast operations have recently completed the first filing triple seven trustworthy lesser a path.

The growth of the aftermarket business further we recently announced that we acquired the assets of Dallas based applied aerodynamics, which provides radome and flight control surface for pad.

We also announced the signing of a new JV agreement and Asia with Egypt in Taiwan, which enables us to provide a full suite of expanded their path to that region.

All of these actions are contributing to our target of buildings for the aftermarket business to $500 million and revenue at accretive margins by 2025.

Now I'll turn it back over to Tom.

Thanks, Sam and addition to diversifying into aftermarket we have also been accelerating diversification into defense programs.

After growing almost 20% and 2020, we expect our defense business revenue to grow 15% and 2021.

The excess commercial capacity, we have and our wide body factories, especially those that produce composite structures provide us with immediate capacity that we can repurpose to defense programs. We have been fortunate to win positions on several new classified defense projects. We believe we are on track to achieve $1 billion of defense revenue buy.

Mid 2020 with typical defense margins the programs of record for where we have work content will generate approximately $6 billion of future revenue.

In addition to diversifying our business. We've also been focused on delevering to reduce the additional debt we have accumulated during this pandemic period.

One step we took was to repay $300 million and floating rate notes in February are.

Our next debt maturity is $300 million in 2023, we also have other pre payable debt that could be retired as part of our objective to repay $1 billion and the next three years as production rates recover and we start generating positive cash flow. We believe these debt reduction actions along with increased production rates will help us regain.

And our investment grade credit rating.

Our efforts to drive margins are also progressing well.

And Wichita, the new automated floor beam Assembly line that we discussed and the last call is now operational.

And at our Prestwick site, we produced the first ship sets of <unk> hundred 20, spoilers using a resin transfer molding process and we'll shift those to Airbus and mid May and.

Both of these narrow body and manufacturing lines will help drive the margin improvement back to our target of 16, 5% as production rates recover.

Now I'll turn the call over to Mark to take you through our detailed financial results Mark.

Thank you Tom.

And good morning, everyone I hope everybody is doing well and staying healthy.

We continue to see 2021 as a bridge year for our spirit and commercial aviation industry, while the wide body programs will remain a headwind for the next few years domestic air travel and many regions of the world is trending and the right direction, which is an encouraging sign especially for narrow body aircraft.

During 2021, we have or are planning to increase production rates on our narrow body programs in order to support our customer delivery of new aircrafts.

We expect the first half of the year to be the most challenging to our financial results and expect to see improvement and the back half of the year as the narrow body production rates increase.

Now, let's move to our first quarter 2021 results.

Please turn to slide three.

Revenue for the quarter was $901 million down 16% from the same quarter last year.

The revenue decrease was primarily due to lower body rates, which had been under pressure due to the reduced international air traffic, resulting from the continued impacts of the COVID-19 pandemic and.

In addition, our <unk> hundred 20 production rate was lower and the first quarter of this year compared to last year.

Revenue from our recently acquired Bombardier business jet programs and the <unk> hundred 20 wing programs helped offset some of the wide body revenue decrease.

Our defense programs continue to be a bright spot up 41% as compared to the same quarter of last year.

Turning to deliveries wide body program deliveries were 48 down from 91, and the first quarter of 2020, which is a 47% reduction.

The narrow body program deliveries and the first quarter of 2021 were also lower when compared to 2020 with.