Q2 2021 Spirit AeroSystems Holdings Inc Earnings Call
At Investor Day at 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 second quarter earnings call. We are pleased to see signs of recovery in global Air traffic. The U S. Air travel recovery has been strong and has come back faster than some expected TSA traveler throughput has exceeded 2 million passengers on multiple days during the past 2 months.
And some days in July where passenger screenings exceeded the 2019 levels.
Our recent International Air Transport Association report indicates domestic passenger market show improvement, but with demand still down 22% versus June 2019 levels.
The situation remains dynamic we are monitoring the most recent reports of a spike of COVID-19 cases, and what impact this may have on air traffic recovery.
However, the upward momentum of domestic air traffic over the past few months is an encouraging trend for our industry.
We are pleased to see the rebound of demand for the Max and the news of large orders from United Southwest, Alaska Air and Ryanair.
Ryanair took delivery of its first 737, Max 8200 and had positive feedback.
With 85% of Spirit's backlog associated with narrow body aircraft. We believe we are well positioned to benefit from this domestic air traffic demand and narrow body recovery.
In the first half of this year, we delivered 64.737 ship sets compared to 37% in the first half of last year, a 73% increase we are also on track to deliver about 160 chipsets. This year, 825% increase over the 71, we delivered in 2020.
As we have discussed before we are trailing Boeing in terms of 787 production rate to burn off the inventory of stored chipsets and Wichita and Tulsa.
This quarter for example, we delivered 35 units, but shipped 42 to Boeing.
We currently have about 125 units in storage all of which Boeing owns we expect storage units will decrease to about 100 ship sets by the end of the year. Our plan is that we will reach 20 stored units by the end of next year, which will remain as a permanent buffer to cushion the production systems.
Turning to the 787 program.
As a result of our ongoing engagement with Boeing we identified in additional fit and finish issue in the <unk> section of the fuselage.
This issue is related to a part that spirit receives from 1 of our tier 2 suppliers and we are working with Boeing and the supplier on a resolution.
We continue to coordinate with Boeing to ensure that we are performing all necessary rework primarily driven by this issue we have recognized a $46 million forward loss on the 77 program.
Despite this forward loss, we are maintaining our free cash flow target of negative $200 million to $300 million as indicated on our last earnings call.
This amount is net of the $300 million cash tax benefit, which we expect to receive in the second half of this year.
Next I would like to highlight the fact that we published our first sustainability report in June outlining spirits, environmental social and governance strategy.
The report also includes a few of our notable 2020 achievements for example by the end of this year, we intend to be 100% wind powered at our Wichita facility.
Now our Chief operating Officer, Sam Martin will take you through updates on our acquisition integrations Sam Thank you Tom.
The integration work streams for our recent acquisitions are progressing well.
Recently acquired the assets of applied aerodynamic we've already completed approximately 60% of the 323 identified integration tasks.
Integration of our other acquisition from Bombardier is also going well we.
We have completed about 90% of the tasks required to integrate the Belfast, Morocco in Dallas site.
The remaining paths are largely associated with the information technology transition services agreement and we expect to complete it before the end of the year.
The estimated synergies we're expecting from the deal are tracking to plan.
We are seeing good progress on <unk> hundred 20 wing costs supply chain improvements and infrastructure optimization.
<unk> continues to have confidence in this aircraft and we expect production rates to continue to improve over time.
Turning to the Belfast pension plan, we have ended our formal consultation with employees on the unions.
Subject to the completion of the process, we will close the plan for future benefit accruals and provide the defined contribution benefit plan before the end of the year.
But my body assets acquisition significantly increased our business jet work statement.
We also secured the award for the engine nacelle and the new Falcon Tenex.
This new growth has established spirit as a leading business jet aerostructure supplier a market segment that is recovering rapidly following the pandemic.
Is business aircraft inventories are down around 40% year over year, highlighting our strong demand. Additionally, U S business jet flight activity is about 6% higher than pre pandemic levels. Another good indicator of a rebound in this market segment.
We believe our capabilities and business jet program position us well to generate $500 million of revenue at accretive margins by 2023.
Another market segment, we are watching closely is urban air mobility also referred to as electric vertical takeoff aircraft or <unk>.
We believe our expertise in composite aerostructure design and manufacturing bring unique capabilities in this future mode of transport.
We have been exploring opportunities for the number of companies in this exciting new area and assigned agreements that are already generating revenue.
Now I will turn it back over to Tom.
Thanks, Sam These 2 acquisitions have helped us grow our aftermarket business jet businesses.
We are also accelerating our revenue diversification efforts and defense, which we expect will grow by roughly 20% in 2021.
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.
We continue to see 2021 as a bridge year for our spirit and the commercial aviation industry domestic.
Domestic air travel in the United States as well as many other regions of the world are starting to recover which is encouraging especially for narrow body aircraft production rates we.
We are cautiously monitoring the COVID-19 variant and its impact on this recovery, particularly with international travel.
Expect international Air travel will continue to recover at a slower pace and therefore widebody programs will remain a headwind for the next few years.
As we work through the second half of the year, we are starting to see the benefits of increasing narrow body production rates.
Now, let's move to our second quarter 2021 results.
Please turn to slide 3.
Revenue for the quarter was 1 billion up 55% from the same quarter of last year.
And approximately 11% above the first quarter of 2021.
The revenue increase was primarily due to higher production on the 737 and <unk> hundred 20 programs as well as increased revenue from the recently acquired <unk> hundred 20 wing and Bombardier business jet programs.
These increases were partially offset by the lower wide body production rates, resulting from the continued impacts of the COVID-19 pandemic on international Air traffic.
Turning to deliveries.
Overall deliveries increased to 243 ship sets compared to 159 chipsets in the same quarter of 2020.
The second quarter 737 deliveries have increased to 35 compared to 19 chipsets delivered in the second quarter of last year.
We still expect to deliver.
Around 160 ship sets during the year.
Additionally, second quarter <unk> hundred 20 deliveries increased to 96 compared to 69 ships. That's delivered in the same period of last year.
Let's now turn to earnings per share on slide 4.
We reported earnings per share of negative $1.30.
Compared to negative $2.46 per share in the same period of 2020.
Adjusted EPS was negative 31.
Compared to EPS of $2.28 in.
In the second quarter of 2020.
Adjusted EPS excludes acquisition costs restructuring costs non.
Noncash voluntary retirement plan charges and deferred tax asset valuation allowance.
Looking at the operating margin, we saw improvement in the second quarter to negative 10% compared to negative 57% in the second quarter of 2020.
The cost reduction actions, we've taken over the last year, along with increasing production rates have contributed to the improved results with lower costs and expenses, including excess capacity restructuring and abnormal COVID-19 costs.
We also recognized lower forward loss charges compared to the same period last year.
In the second quarter, we recognized for loss charges of $52 million, primarily driven by engineering analysis and rework on the 787 program compared to forward loss charges of $194 million in the same period of 2020.
Additionally, the increase in other income is primary related to Belfast pension plan in the absence of voluntary retirement expenses recognized in the second quarter of 2020.
I do want to mention that there was a revaluation of deferred tax assets during the second quarter of 2021.
Due to a future increase of the United Kingdom's corporate tax rate.
This resulted in an income tax benefit of approximately $55 million. This.
This benefit is included in both GAAP and adjusted EPS.
The reevaluation of deferred tax assets, along with the adjustments related to tax law changes and other state tax impacts resulted in incremental adjustments to the valuation allowance.
As a reminder, the valuation allowance is a noncash item.
Earlier this week spirit received the latest <unk> 787 program demand for Boeing.
Based on our preliminary assessment, we expect to incur an incremental for loss of.
Approximately $40 million to $60 million in the third quarter of 2021 due to the impact of reduced production volumes and the corresponding amount of fixed overhead absorption apply to lower deliveries.
Due to the timing. This is considered a subsequent event and is not reflected in our second quarter financial statements.
Now turning to free cash flow on slide 5.
Free cash flow for the quarter was negative $53 million compared to negative 249 million negative in the same period of 2020.
This year over year improvement is primarily due to cost reduction actions increased production volumes and favorable working capital management.
The second quarter cash from operations also reflect an improvement of $142 million as compared to the first quarter of 'twenty 1.
Excluding the cash interest payments of approximately 80 million made during the second quarter cash from operations was positive $51 million.
We expect the second half of this year to improve as single aisle production rates continue to increase.
Despite the additional challenge of the 787 program.
We continue to expect free cash flow for the year to be between negative $200 million and $300 million.
Yeah.
Let's now turn to our cash and debt balances on slide 6.
We ended the second quarter with.
1.3 billion of cash and $3.6 billion of debt and.
In February we paid $300 million floating rate notes early and we remain on track to repay.
$1 billion in debt.
During the next 3 years.
The timing will be in line with air traffic and narrow body production rate recoveries.
The cadence of the global recovery from the COVID-19 pandemic could result in fluctuations in our cash flows from period to period.
Now, let's turn on segment performance on slide 7.
In the second quarter.
Fuselage segment revenues were $492 million up 51% compared to the same period of 2020.
Primarily due to higher production volumes on the 737 and Bombardier business jet program.
Partially offset by lower production volumes on the 787 program.
Operating margin for the quarter was negative 7% comp.
Compared to negative 77% in the same period of the prior year.
Primarily due to increased 737 production volumes and the resulting decrease in excess capacity costs as.
As well as less net for losses in the absence of a loss on disposal charges.
The fuselage segment recorded $4 million of favorable cumulative catch up adjustments and $36 million of net forward losses during the quarter, primarily due to the 787 program.
Propulsion revenue in the quarter improved to $242 million up 43% compared to the same period of 2020.
Primarily due to higher revenue on the 737 program and aftermarket sales, partially offset by decreased volume on the Triple 7 program.
Despite the challenging environment operating margin for the quarter was positive 12%.
This is compared to negative 10% in the same quarter of 2020.
Increased 737 production and the resulting decrease in excess capacity costs as well as less forward loss charges were the main drivers to the improvement in the segment profitability the.
The segment recorded $6 million of favorable cumulative catch up adjustments.
$9 million of forward losses.
High production volumes on the 737.
820, and <unk> hundred 20 programs were the main contributors to the increase in wing revenue to $259 million.
Operating margin for the quarter was negative 6% compared to negative 35% in the second quarter of 2020.
The increases in segment profitability and operating margin were primarily a result of increased <unk> hundred 20 production volume as well as less for losses compared to the same period of 2020 the.
The segment recorded $8 million of net forward losses.
In closing we are encouraged by the recovery in domestic air traffic demand.
We anticipate improved performance through the second half of the year as narrow body production rates continue to increase.
Increasing narrow body rates should also create positive momentum going into 2022.
Additionally, we are pleased to see the progress made so far.
On our aftermarket business jet and defense diversification efforts integrating our acquisitions and expanding our diversification continue to drive long term growth potential.
Cash flows remain a top priority for our team and we are actively working on the execution of our cost and working capital initiatives.
We are also monitoring the remaining regulatory approvals needed for the 737 Max return to service and in addition, we are encouraged by the domestic aerospace recovery from the COVID-19 pandemic.
With that I'll turn it back over to Tom for some closing comments. Thanks.
Thanks, Mark we continue to see improvement in domestic air traffic, which has translated to improved production rates for a narrow body aircraft versus 2020 for the year, we expect to deliver $160.700.7 ship sets up from just 71 in 2020.
This quarter. We also continued work with Boeing to address fit and finish issues on the 77 program and will continue to coordinate with them to complete all necessary rework.
Recovery in narrow body production is supporting better overall performance. We're also encouraged by the continued growth in our aftermarket business jet and defense programs. We are maintaining our 2021 free cash flow guidance of negative $200 million to $300 million with that we will be happy to take your questions.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone.
We ask that you limit yourself to 1 question.
They are using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then 2 at this time, we will pause momentarily to assemble our roster.
Our first question will come from Seth <unk> with Jpmorgan. Please go ahead.
Okay, great. Thanks, Thanks, very much and good morning, everyone.
Good question.
The 787 and <unk>.
Yeah.
The degree to which you feel you have all of the I guess from the work that needs to be done understood and in hand, and that your suppliers do as well.
And then following up a little bit more on the quantitative side in terms of thinking about.
Revenue is going for you guys. When the rate came down by 2 per month in late 2019 in Q3, and then again in Q4 that was driving charges for spirit of $34.35 million is there anything we can read into the size of the $40 million to $60 million charge coming in Q3.
With regard to where your production.
No.
Starting in the second half here.
Okay. Thanks.
With regard to 787.
What I would say is we have been working very hard in conjunction with Boeing to review all aspects of the production process to understand.
What issues might might be there and in echoing what Dave Calhoun said on on the Boeing earnings call.
The latest issue isn't an example of Boeing being hard on spirit or the FAA being hard on spirit. It's a question of spirit being hard on spirit.
We took a very hard look at all of our production processes and we did identify an issue with apart in the forward fuselage that comes from 1 of our suppliers and as a result of that we have done some additional work and identified some rework, which we will be completing and that's what really drove me.
Most of the forward loss in this quarter.
And so so have we gotten everything we've looked at it very hard we've scrubbed. It very hard. So we were confident that the issues that we know about we are addressing.
And we will continue to look at it and work closely with Boeing.
We do have a good handle in terms of the fixes required.
We outlined some fixes in the last quarter those are underway in fact.
The repairs and the rework or more than half finished on the ones that were previously identified on the new issue, we do have a repair.
The engineering analysis did not show that it was the safety of flight issue.
So we don't know that theres going to be anything required on the fleet. Although we'll continue to do analysis and that might require more inspections in the future, but there is rework required on the units that Boeing hasn't shipped and Thats. What we are in the process of doing but we have the repair we have delivered the first units and the rework has has begun.
With regard to the rate outlook. The subsequent event was really a result of getting a new indication of program demand from Boeing and looking out over the next.
Several years to see what impact it could have on our our position as you know we're in a forward loss in our accounting Black goes all the way up to $14..5 so we're taking into account a very long period of time and I have to say that the situation is extremely dynamic.
We have information that we're learning more every day and in this situation is likely to change and we will respond accordingly, but we did want to give you an indication of a subsequent event because the program demand is changing as we all know and over the next 3 months as we get more information and we do more analysis, we'll have an update in terms of what the actual impact is.
Great. Thanks, very much Tom.
Thanks.
Our next question will come from Myles Walton with UBS. Please go ahead.
Thanks, maybe I'll just follow up on that you've taken about 100 million for loss charters between this quarter next quarter on the 87.
How much of that is cash you're absorbing in the guidance for this year versus versus future years.
Who wants to take that 1.
Hey, good morning Myles.
As we indicated we took a $29 million for loss from 787 in the first quarter.
We identified some issues that we're going to require some we work in our factory and help supporting Boeing.
Then Tom just described the situation that occurred here in the second quarter.
The additional $49 million.
We expect that.
As you as you factor in the impacts of lower production rates.
A portion of the costs are cash and noncash in nature.
We don't I would say the majority of the cash.
Should be expended this year the cash component of it.
I do think that some of that cash consumption and the continued reworked.
We'll continue.
Into 2022 as Boeing indicated on their call. They expect to deliver about 1 half of the units that they have stored here in 2021, and so the rework that we have to do we have to coordinate with Boeing get access to the airplanes.
And so it's hard for me to be specific because it's it's.
Long and involved process, where we work with Boeing we get access to the airplane, we have to have our mechanics due to work get the parts in there.
But I would anticipate the where you were costs that we have knowing that about half of those are.
Aircraft will be delivered next year.
We'll be incurring that cash impact.
Both in 2021, and 2022 I wouldn't quite say, it's 50.50, it's probably more heavily weighted to 'twenty, 1, but there will be some some cash headwinds in 2022 as we continue to rework those airplanes to allow for Boeing to deliver to their line customers.
Okay, and Tom you mentioned the Destocking there.
Liquidation of about 80, Max inventory in 2022.
I guess that would imply you producing I don't know just under 300 Max's next year, maybe is that is that going to swing materially based on the Boeing production schedule or is the idea you definitely want to get any liquidated and so your production will be kind of a swing item.
No. It was definitely depend on boeing's production and will coordinate closely with them.
And in the current plan in terms of the buffer is based on outlook and scenarios that we've discussed with point, but that could change for example, Boeing has indicated that China's re certification of the Max will likely influence there their future production schedule. So that that'll be 1 of the factors that we continue.
To monitor closely.
Okay. Thanks again.
Our next question will come from David Strauss with Barclays. Please go ahead.
Thanks, Good morning.
Good morning, Good morning, Dave.
I think question for Mark Mark Ken.
Yes. It is.
The guidance for 2022 still a return to positive free cash flow and if so can you can you help us bridge that.
That difference or that gap between the call it $5 million to $600 million ex the tax benefit that you were talking about burning next year and are you still assume what exactly are you assuming for for working capital for this year and next.
Sure David.
Yeah, I mean, we've communicated our goal and objective.
And based on the information that we have.
Over the last couple of quarters that.
On an operational basis, we think that we can get to cash flow positive I think the when you think about what are the tailwind that will help us in 2022.
Obviously, the number 1 component will be the increasing <unk>.
737, Max production rate and I will tell you that that is the single biggest driver to the cash flow improvement in 2022.
And so we have some baseline assumptions.
What the delivery rates are but as you know here.
<unk> is still working with the with China.
And have given indications that production rates above 31 are highly dependent on on the China certification. So the number 1 priority for US are the number 1 factor is is.
Our assumptions on where the 737 production rates are going to go in 2022 and Boeing does.
We do have preliminary schedules, but those can change over time.
The second item I would say is we'll continue to have.
Some tailwind benefits on the working capital side, we built up a lot of inventory.
As you can see this year, we're doing a good job of working in Destocking some of our inventory.
The amount of inventory days on hand that I expect us to have at the end of the year as well as what we're turning our inventory is.
Nowhere close to our historical levels. So we should continue to receive working capital benefits, particularly on the on the inventory side there'll be some headwinds on the AAR side, just as the revenues increase but I would say that those are the 2 biggest components. It's the 737, Max obviously Airbus.
He is talking about significantly higher production rates next year on the <unk> hundred 20 that will be a nice contributor for us as well.
And less rework that on the 787 should we should see less cash consumption on that.
<unk>.
Those are the major drivers, but we have a bunch of other initiatives that we're working behind the scenes to go drive cash flow an improvement, but I would say that the majority of the improvement is we're going to see between 'twenty, 1 and 'twenty..2 is tied specifically to narrow body production rate increases and the continued destocking of <unk>.
Inventory.
Which gives us a really good chance to be to get to the operational cash flow in 'twenty 2.
And Mark does that.
Does that include the 120 or so million dollars advance you have to pay back to Boeing on the Max in 2002 and.
In terms of thinking about positive free cash flow.
Well I really view that as a 1 time isolated repayment.
Net.
It's tied to an agreement that we had with Boeing back in in 2019, obviously, that's a big big headwind that we want to overcome as well, but my primary goal is working with our teams to get to a point where operationally Inc.
Income wise, we're generating positive cash flow in 2022.
Okay. Thanks very much.
Our next question will come from Doug Harned with Bernstein. Please go ahead.
Good morning, Thank you.
Linda.
Yes.
Getting back to you mentioned the Mark you mentioned the Airbus right I mean, they were very firm last week on their plans to ramp to <unk> 60 for a month.
On the single aisle by Q2.2023.
We've heard skepticism from a number of suppliers on that rate increase.
How do you view this they talked about a linear ramp to that point I mean are you set including your lower tier suppliers to execute on this and then.
What happens if the demand environment should deteriorate and rates don't go on that trend line, how do you respond to that.
Alright. So the first answer is yes, we are set we've been working very closely with our suppliers to meet the demand scenarios that Airbus has shared with us.
I gave a lot of credit to the Airbus leadership team, including home and in all of his key.
Key lieutenants, they've met with the suppliers and they've taken us through their assumptions and all the actions that they're taking to confirm what the rate increases are and as they as indicated on their call last week. If you look at their backlog and how long. It is at a different production rates and how long airlines would have to wait for their units the <unk>.
Rate increases would be justified so on that basis, they have shared with us their scenarios and we are working to those and we're working with our sub tier suppliers to those rates as well.
Now if it changes then of course, we'll take the appropriate action, but the good news is we've been at these levels before so all of the infrastructure is in place all the capital is in place all the tooling is in place and we've had all the workers hired and trained now some of those have been furloughed.
But they remain available and as the rates go up we will be recalling them.
And so so we are confident that we're going to be able to execute on those and if they change.
We are confident also that we'll have sufficient lead time that we can take the appropriate actions, but we're ready and our sub tier supplier base is ready as well.
And then just related to that on the <unk> hundred 50, I mean, you had taken rate to 3.
3 a month and our understanding with Airbus continues to produce at 5 a month that you delivered more fuselage is then they can run through final assembly.
Assembly when they cut their rates.
And they are now planning for a raise to 6 a month.
What do you see as the trajectory for your production rate on the <unk> hundred 50.
Well again, we mirror them pretty closely the sections that we make for the <unk> hundred 50, or the center fuselage section, which they call section 15, and also the fixed leading edge on the wing.
And so as.
As their production rates go up will go up I mean, there is sometimes some <unk>.
Inventory adjustments that go on but on the <unk> hundred 50, we're usually pretty closely aligned will carry a few units in surplus to act as a buffer for the production system, but generally speaking, we're very much aligned to them and so we don't see ourselves getting getting far off it's very close to <unk> and our performance and delivery performance.
This year is quite good.
They're pleased with it and so I don't see a disconnect. There will go up with rate as they go up with trade on the <unk> hundred 50, and we will be very closely aligned.
Okay very good thank you.
Okay. Thanks.
Yes.
Okay.
Our next question will come from Robert Spingarn with Credit Suisse. Please go ahead.
Hey, good morning.
Tom I just have a few clarification questions.
First did <unk> hundred 20.
Ships ships at delivery drop from Q1 to Q2.
And it did it did I mean, we had in Q1.130 deliveries and in Q2 dollars 96 and.
And Airbus had in Q2.
132 units. So if you look at it there was a little bit of Destocking going on in inventory adjustments post Brexit.
Nothing from our standpoint to be concerned about our rate remain the same it didnt changed is just day. They pulled a few fewer units just because they were probably adjusting their inventory levels.
Yes that was that was what happened, but as we mentioned we were up significantly from Q2 in 2020.
We only delivered 69 units net.
So do you think youre aligned now or does this play out over another quarter or 2.
No I think we're much more in alignment now so we don't we don't expect to see that kind of deviation going forward I think it was an aberration in this quarter.
Okay, and then just going back to the 787 and I think you said, you're still evaluating whether or not the existing fleet needs to be addressed at.
It sounds like that's a process you're going through with Boeing.
I'm still wondering do these conditions exist.
Has this been part of the production process the entire time or was there a change where their supplier is doing something differently.
I would imagine with 1000 aircraft out there in the fleet. If you have to go there. This is a significantly more expensive problem.
Right well the the answer is that the production process hadn't changed it was basically the same right from the beginning it was just we're taking a harder harder look at it now and putting it under more scrutiny. The analysis showed that there was not a safety of flight issue in the fleet and so there's there's no immediate.
Required now we'll continue to do engineering analysis that that could continue to evolve but right now there is none.
And so we don't have any determination in terms of what the fleet disposition will be but at this point because it's not a safety of flight issue, we're looking at more inspections.
But because there is a a non conformity.
New aircraft can't be delivered if theres, a known nonconformity and so that's why there's rework required on the aircraft that are not delivered and I think as Brian mentioned there was about 177 units that are not delivered right now and so that's where we're focusing our rework efforts.
Got it and then just if you do have to take care of some aircraft that are already delivered is that the kind of thing that can be done in a heavy check or would they have to have a special.
Service call.
Right.
Those would be done in a normal scheduled heavy checks.
Okay. Thank you.
Our next question will come from Hunter Keay with Wolfe Research. Please go ahead.
Hi, Good morning, Hi, everybody. Good morning, Thank you.
Just a couple from from me.
Mentioned EBITDA I was wondering if you could expand on the opportunities there and you mentioned some revenue kind of curious where that's coming from which program and then second question is can you give us a rough breakdown for the 50 for this.
As jet and RJ is in the quarter and.
I expect that to trend over the next 18 to 24 months. Thank you.
Yeah, Hi, Hunter this is from us on.
The question about E VTOL and what we're doing that.
Talking with a number of the players in the market.
On the kind of work that we're doing with the plans right now and these are yet to be announced agreements and and work with those different companies is generally around.
A couple a few different areas I would say specifically technical consulting services engineering services things like that but also looking forward the industrialization plans as well so those are the areas.
We're focusing on.
Could you repeat your second question Hunter.
Yeah. Thanks, Sam It was about the 50 for Biz jet and RJ shipments in the quarter I Wonder can you give us any color on the breakdown there and kind of how you expect that well let me let me let me jump on that 1.
So we don't break down specifically the business jet deliveries just at their request for the Oems, but really the increase is driven by the fact that we now have the Bombardier assets and so the challenger in the Global Express are now in these numbers, we're let's say, we're not before and actually in this quarter there might be 1 lear the final.
Lastly, our net snuck in there as well but.
Other than that we don't we don't break that down into more detail.
Okay. Thank you Thompson.
Yeah.
Our next question will come from.
Bon Bremer with Cowen. Please go ahead.
Yes. Thanks, so much. So you you characterize the 787 rate change as a subsequent of that how much of the $40 million to $60 million applies to this year given that they value.
Basically have cut their rate.
Until they get this problem.
And how much of this is in the guide and do you expect to recover any of the cost if for 1 supplier had a part that's causing you the heartburn and other you're going to be able to.
Reimburse you for any of that.
So I'll take that 1.
First of all most of the forward loss would be associated with future years, not necessarily this year, because our block that goes out to 14 O 5 and at current production rates that takes us out to 2025. So so not much of it is related to 2 this year.
It's just the way the numbers work, but again, it's a dynamic situation, it's going to change and so we'll learn more over the course of the next quarter and we'll give more firm indications of what the impact will be.
With regard to supplier recoveries, we've taken into account everything with our current for losses that we have announced.
We're focused right now primarily on the operational recovery and.
And there'll be future commercial requirements, but we haven't had discussions with the supplier and there certainly are cooperating they're working very hard and coordinating with us and they.
They will share in the commercial situation as well, but we've taken into account all of that with the for current forward losses.
And then you mentioned kind of.
The absorption issue given that Boeing is basically cutting back their production near term below 5.5 a month is that going to have any noticeable impact on this year or at least how much is it in terms of cash this year.
It's going to create a little bit of a headwind, but as we've indicated we're holding to the guidance. We gave which is we will have a cash usage of $200 million to $300 million net of the cash tax benefit so yes.
Yes, its some headwind, but we're actually doing better than some of our working capital initiatives to help offset it as well as some of our cost management initiatives. So we're holding to the guidance that we gave earlier.
Thank you.
Yeah.
Our next question will come from George Shapiro with Shapiro Research. Please go ahead.
Yes.
Mark I wanted to ask if I look at the implied underlying margins in like fuselage and wings sequentially. They are actually down despite higher revenues.
And I was just wondering what's driving that deterioration I'm taken out all of the onetime things that you talk about.
Well, we probably need to compare compare notes here George because some of our internal looks at it.
I'm seeing slight sequential improvements from the first quarter to the second quarter.
Not as much as I would like to see but you know the analysis that.
That I have here indicates.
The sequential improvement first quarter, the second quarter and in all of the segments fuselage.
A portion.
Inc.
My numbers are taking out.
The pre tax losses, taking out to kill them adjustments taking out the <unk>.
Restructuring abnormal costs excess capacity, some taken everything out and I have like <unk> gone from 8.8 to 8 and wing has gone from 6.9% between 8 I have propulsion going up.
No.
Maybe I'll check with Ryan or are we can compare the notes that way then but could.
Because you're saying, you're saying you've done the same analysis and youre seeing that margin up slightly.
Exactly yes, we're seeing.
Fuselage somewhere between 100.200 basis points improvement in our margins.
And that's what we're expecting we will see as narrow bodies.
Our rates pick up here in the third and fourth quarter, continuing to focus on our costs and our productivity.
And that should continue to allow us sequential improvements in our op margins.
Okay ill check afterwards, with Ryan and then 1 other quick 1 it looked like maybe a $20 million benefit from Belfast pension income in the quarter, where you had a surprisingly large other income is that something that continues here or what's actually driving it.
Yes, good question George.
Based on the current market conditions and the actuarial assumptions we are seeing.
Some tailwind on pension income as it relates to.
I guess, what we'll call them Bombardier or Belfast shorts pension plan.
And so that's a noncash benefit that's rolling through through other income.
It's completely tied to market conditions.
The interest rates the.
The valuation of the assets and liabilities and so that's a that's a bit of a of a tailwind I think we will continue to see those benefits in.
In the third and fourth quarter as long as market conditions hold.
With the inflation increasing.
It's a it's obviously.
A very dynamic calculation when you try to factor in where your assets and liabilities are gonna go. We are just from a clarity standpoint, we are in a deficit position on that program.
Based on current market conditions, you are seeing some lift in other income.
And I expect that to continue in the third quarter, Yeah. I think the other important point is that as Sam just mentioned on net pension program. We have closed it to new entrants and to new accruals in terms of the defined benefit portion of it and it's going to be replaced with a defined contribution plan and that will all be complete by the end of the year.
Year.
Yes, that's why Tom I was asking whether that income continues.
Yes. It continues the rest of this year and then it goes away next year.
The program that no that's right George right once we.
Once we once we do the formal closeout.
Have to do a curtailment assessment for accounting purposes.
That could be positive or negative that'll be noncash, but as we move into 2022.
The Belfast site will be on a more traditional plan.
Consistent with with Prestwick in our.
In our U S sites.
Okay. Thanks very much.
Thanks.
Our next question will come from Christine <unk> with Morgan Stanley. Please go ahead.
Hey, good morning, guys on the 787 can you give some more details on exactly what the rework in health do you have to take it apart from the manufacturer pieces and how involved is the testing and rework and how long does it take.
Right well.
The rework involves.
Essentially replacing apart.
And so our Boeing in FAA will decide on the final fix and then we will support it as necessary and do the rework, but we've already defined.
What the fix is in terms of being able to provide a replacement part and the rework again. These things all always evolve so it starts off it might take.
8 or 10 days to do the first 1 and then it gets progressively smaller as the team gets more experienced going forward, but but but that's the current issues. We've already started it we've already completed the first few units and we're starting to get down the learning curve.
We speak.
I see and a follow up on the 77.2.
Since the program is at a unit cash loss are you better off with your units, so youre, losing less cash or does not having economies of scale hurt you more.
It's the former it isn't a cash loss position. So the fewer units we deliver for spirit that means our cash is better.
Great. Thank you.
Our next question will come from Noah <unk>.
With Goldman Sachs. Please go ahead.
Hey, good morning, everybody.
Good morning Thomas.
Tom So I just wanted to try to ask you if everything and everything you've discussed on 787.
If you are willing to make an estimate as to approximately when.
Youre far enough, along and rework as dawn such the deliveries can resume.
Yeah.
Well I won't be able to give you that information I mean really Boeing is and is going to make that determination probably in conjunction with the FAA.
We're focused really on the rework that we do.
And then volume will take that into accounts to determine when the deliveries will begin but as I said, we've identified our fix and we have started to perform that rework.
And I think Boeing would be able to give you the best indication about wing deliveries will actually risen.
Okay.
And then.
Mark or Samantha.
You mentioned in the discussion of next year's cash flow.
Mark I think the wording you used was initiatives behind the scenes.
That sounded new are those new things youre working in your operational drumbeat and if so could you maybe detail what you found or what you're working on there.
Okay.
No other really.
I, maybe I gave the impression that these are some new ideas that we that we've come up I can tell you we have a very strong.
Operational cadence, we have 4 or 5 different.
Specific cost reduction efforts around the Boeing programs, the Airbus programs, our organization our infrastructure.
Along with supply chain and some of our growth initiatives. The only point I'm, making is behind the scenes here we're doing.
I think a really good job of managing our costs and we're working across all of our businesses.
As it relates to how do we optimize improve productivity.
Leanne.
Top Thomas talked before about the variety of automation and digital type projects that we have all of those things are being worked behind the scenes and I truly believe as we move back up in rate and we're going to be more cost.
For competitive.
Or more cost efficient than we were pre.
Previous to the higher rate breaks and so all of that should contribute to an improvement in our cash generation.
As compared to where we were before.
Okay.
Thanks very much.
Our next question comes from Michael <unk> with Suntrust. Please go ahead.
Hey, Thanks for taking my question guys.
As it relates to how are you.
As it relates to the 787, you talked about the overhead absorption how do we think about the excess capacity costs I think you were targeting.
Maybe reduce that by 30% last year does does that become a little bit more challenging.
Just given the lower rates.
Kind of how youre going to have to manage this program.
It it puts a little bit more pressure on our over all cost structure here more specifically in Wichita.
But just for the sake of clarity our excess capacity.
Capacity costs are really tied to 2 what I'll call really kind of 3 specific areas. It's the 737 program.
We're expecting to get back to 52 aircraft per month.
Our <unk> hundred 20 program, because we have a line of sight to go back up to.
Hopefully 60, a month on the <unk> hundred 20 program and then the expectations are for.
From our customer on the <unk> hundred 20 wing program.
That we will be producing at much higher rates in the future.
And so those are the 3 programs that really generate the excess costs.
And the $47 million that we reported in the.
In the second quarter here I will tell you as we go up in rate and we continue to manage our cost youre seeing improvement in net excess cost in the first quarter, we incurred $67 million worth of costs and it's $20 million lower here in the second quarter and that's a combination of higher production rates as well as our continued efforts on on.
Making our costs better aligned with our current production rates.
Good step down in the second half just on the narrow body volume.
Exactly we'll see lower excess costs in the back half of the year end.
And I would expect significantly lower cost in 2022.
Perfect and just for clarification.
Part of <unk> question on the 787 is that your design is it a build to print for does the supplier on the design of that park.
Spirit has design authority on the part, but it was actually designed before spirit existed.
Okay helpful. Thanks forecast.
Okay.
Our last question will come from Peter Arment with Baird. Please go ahead.
Oh, yes, good afternoon.
Thanks for taking my question just Mark on Capex.
Your question regarding whether we see that start to trend back up as we get into 'twenty..2 I know you had been previously running at around 3 or 4 per cent of sales, but that's still a good level to think about or are you getting some efficiencies on just your capex spending thanks for that.
Thanks Peter.
Specifically, the Capex and I think we've talked about this on a few earlier calls.
Over the last couple of years as production rates have climbed essentially across all of our platforms.
It has required significant capital investment.
From a tooling from an infrastructure a lot of the capital that we have expanded our on highly automated programs like the <unk> hundred 50, and the 787 and so the real benefits that we're seeing you know we are managing our capex tightly in these very challenging times.
As we move forward into 'twenty, 2 and 'twenty 3 are as production.
Should volumes come back up we're not going to have to spend.
And invest the type of capital.
Capex that we have historically it'll.
It'll be our normal maintenance capex and some capex that go go support are our diversification efforts as we win organic work on the defense on the aftermarket side.
There'll be some capital that will be required to that but really you know I am expecting Ah in 2022, maybe a tick up higher than where we are now but you know.
We've indicated.
We're looking at around $150 million of Capex this year.
And so over the next couple of years, we're going to keep a very tight.
Tight leash around the capex, mainly because the business isn't requiring it and so.
What you're seeing now I think over the next couple of years will be fairly consistent and that will also help us as we as we think about what our cash flow generation is going to be in 'twenty, 2 and 'twenty 3.
I appreciate it thanks, Brian.
Thank you.
Ladies and gentlemen, this will conclude our question and answer session and now the conference has concluded. Thank you for attending today's presentation. You may now disconnect.