Q3 2023 Spirit AeroSystems Holdings Inc Earnings Call

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Good morning, everyone and welcome to the Spirit Aero Systems Holdings, Inc. Third quarter 2023 earnings Conference call. My name is <unk> and I'll be the coordinator for today.

I would like to register a question on today's call you can do so by pressing star one on your telephone keypad or press star two to withdraw your question.

I would now like to turn the presentation over to Ryan Avey Senior director of Investor Relations and F. P&I. Please proceed.

Thank you Seth and good morning, everyone.

Brian <unk> with me today are Spirit's, President and Chief Executive Officer, Pat Shanahan, and senior Vice President and Chief Financial Officer, Mark <unk>.

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.

Including those 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.

With that I'd like to turn the call over to our Chief Executive Officer, Pat Shanahan, Great. Thank you Ryan and good morning, everyone welcome to Spirit's third quarter earnings call.

It is a privilege to be here with you today, representing spirit Aero systems, and our global team.

I want to thank the board for Entrusting me with this responsibility, while we search for a permanent CEO.

On behalf of the entire board, we think Tom Gentilly for seven years of dedication and service with spirit.

I'm very familiar with spirit and its operations.

From my time at Boeing.

As a board member for the past two years.

My trips to Wichita I go back to the nineties, where we tackled new programs and production rate increases together.

Now.

I am the supplier not the customer.

But the dynamics are the same over.

Over the past several years spirit has expanded its portfolio of commercial and defense businesses.

However, the core of the business.

Designing and building large scale aerostructures has not changed.

I've been in the role for about 30 days now.

Tomorrow, our military acronym.

My approach since the first day has been tackled LOE.

Take charge and move out.

Meeting them with the spirit team at all levels.

Deep into program and production rate plans and engaging with all our major customers.

My initial impressions are that we have a strong team and tremendous capabilities.

But we need better precision in our plans better performance and the right schedule.

We are manufacturing a product we produced in large quantity at higher rates before as opposed to being in the throes of complex commercial development, while concurrently ramping up production.

Seb: Good morning everyone and welcome to the Spirit AeroSystems Holdings Inc. 3rd quarter 2023 earnings conference call My name is Seb and I'll be the coordinator today If you would like to register a question on today's call you can do so by pressing star 1 on your telephone keypad or press star 2 to withdraw your question I would now like to turn the presentation over to Ryan Avey Senior Director of Investor Relations and FPNA Please proceed Thank you Seb and good morning everyone.

My focus.

Simultaneously stabilizing operations.

Delivering on our customer commitments and strengthening spirit financially.

I want 100% alignment with our commercial and defense customers.

Driving performance every day.

And most importantly.

And cohesive teams that view working together is the most effective way to perform and win.

Ryan Avey: I'm Ryan Avey and with me today our Spirit's President and Chief Executive Officer Pat Shanahan and Senior Vice President Chief Financial Officer Mark Suchinski. 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 including those detailed in our earnings release in 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 and non-gap measures we use when discussing our results.

The recent agreement with Boeing was an important step in the right direction.

The strength in partnership with support our shared goals.

Both companies to execute the increasing production rates.

Also and devoting increased attention to our other major OEM commercial commercial partnership.

Let me touch briefly on our strategy.

I do not intend to wait for my replacement before moving forward.

Pat Shanahan: With that I'd like to turn the call over to our Chief Executive Officer Pat Shanahan. Great thank you Ryan and good morning everyone. Welcome to Spirit's 3rd quarter earnings call. It is a privilege to be here with you today representing Spirit AeroSystems and our global team. I want to thank the board for entrusting me with this responsibility while we search for a permanent CEO. On behalf of the entire board we thank Tom Gentilly for seven years of dedication and service with Spirit.

Regarding diversification I will narrow the aperture.

I don't have an appetite for next square Adjacencies.

We spirit will build on our core defense aftermarket success.

My principal goal is to be cash flow positive as soon as possible.

Executing on programs, increasing deliveries as the most crucial lever to achieve that goal.

However, we have other cash levers to pull to accelerate many of the activities previously developed.

Pat Shanahan: I'm very familiar with Spirit and its operations from my time at Boeing and as a board member for the past two years. My trips to Wichita go back to the 90s where we tackled new programs and production rate increases together. Now I am the supplier, not the customer. But the dynamics are the same. Over the past several years Spirit has expanded its portfolio of course. Commercial and defense businesses however the core of the business designing and building large scale aero structures has not changed.

Along with new ones, we are covering every day.

Shifting the discussion to market demand.

It's incredible what a difference a couple of years make.

We are witnessing unprecedented demand.

I'm encouraged by the unbelievable organic growth in our core segment with a $42 billion backlog.

The demand comes with challenges that we must mitigate as part of a new world that is less stable.

I recognize we.

We are disappointed our stakeholders.

We want to restore confidence in the company.

I'm passionate about this industry, our customers and spirit.

Pat Shanahan: I've been in the role for about 30 days now to borrow military acronym. My approach since the first day has been Takamo take charge and move out. Meaning I'm with the spirit team at all levels deep into program and production rate plans and engaging with all our major customers. My initial impressions are that we have a strong team and tremendous capabilities. But we need better precision in our plans, better performance and the right schedule.

I'm in Kansas Most days because this is where most of the action is.

The people here.

Hearing quite frankly at all our operations have been warm and welcoming.

I'd like to provide you guidance for 2024, but I'm not prepared to at this time.

My plan is to give guidance at our next earnings call consistent with previous practices.

Now I will turn the call over to Mark to review with you our third quarter financial results.

Pat Shanahan: We are manufacturing a product we've produced in large quantity at high rates before as opposed to being in the throes of complex commercial development while concurrently ramping up production. My focus is simultaneously stabilizing operations delivering on our customer commitments and strengthening spirit financially. I want 100% alignment with our commercial and defense customers. I'm driving performance every day and most importantly building cohesive teams that view working together as the most effective way to perform and win.

Thank you Pat and good morning, everyone.

As many of you know I've known Pat as a member of our board for a while now and I look forward to working closely with him as we navigate the path forward I can tell you that we are aligned on our priorities and the trajectory of of spirit.

Now turning to recent events. We are pleased to have reached a memorandum of agreement with Boeing in October, which we expect will result in improved cash flow over the next several years I want to highlight the financial impacts of the agreement, which will be reflected in our financial results beginning in the fourth quarter.

First the MLA established an immediate higher price in the 787 program with reductions to pricing on the 737 program beginning in 2026.

Pat Shanahan: The recent agreement with Boeing was an important step in the right direction. The strength and partnership will support our shared goals of both companies to execute the increasing production rates Also, I'm devoting increased attention to our other major OEM commercial partnership Let me touch briefly on our strategy I do not intend to wait for my replacement before moving forward regarding diversification I will narrow the aperture I don't have an appetite for next-square adjacencies We spirit will build on our core defense and aftermarket success My principle goal is to be cash flow positive as soon as possible Executing on programs increasing deliveries is the most crucial lever to achieve that goal However, we have other cash levers to pull to accelerate many of the activities previously developed along with new ones we are covering every day Shifting the discussion to market demand, it's incredible what a difference a couple of years make We're witnessing unprecedented demand I'm encouraged by the unbelievable organic growth in our course segment with a $42 billion backlog The demand comes with challenges that we must mitigate as part of a new world that is less stable I recognize we have disappointed our stakeholders We want to restore confidence in the company I'm passionate about this industry, more customers and spirit I'm in Kansas most days because this is where most of the action is The people here and quite frankly at all our operations have been warm and welcoming I'd like to provide you guidance for 2024 but I'm not prepared to at this time My plan is to give guidance that our next earnings call consistent with previous practices We'll now turn the call over to Mark to review with you our third quarter financial results Thank you Pat and good morning everyone As many of you know I've known Pat as a member of our board for a while now And I look forward to working closely with him as we navigate the path forward I can tell you that we are aligned on our priorities and the trajectory of spirit Now turning to recent events we are pleased to have reached the memorandum of agreement with Boeing in October Which we expect will result in improved cashflow over the next several years I want to highlight the financial impacts of the agreement which will be reflected in our financial results beginning in the fourth quarter First the MOA established immediate higher price on the 787 program with reductions to pricing on the 737 program beginning in 2026 We expect to record a reversal of a four loss and material right obligations of 350 to 370 million as a result of the 787 price increase With this a majority of the existing 787 forward loss liability will be reversed And we anticipate positive margins on the program beginning in the first half of 2025 as production rates increase Next the MOA provided for a broad release of existing claims and liabilities which will include the reversal of 23 million of anticipated claims Previously recorded related to the 737 vertical fan attached fitting issue In addition, we will receive funding for certain tooling in capital through 2025 on the 737 and 787 programs.

Pat Shanahan: We will repay the majority of the capital funded related to the 787 program beginning in 2025. In October, we receive an advance on the total expected CAPEX funding of 100 million. Between now and 2025, there will be some timing differences between the receipt of funds and the CAPEX spending, which will be reflected on the statement of cash flows. And finally, the repayment dates were extended on the previously disclosed $100 million, $180 million advance of customer financing received in the second quarter of this year.

We expect to record a reversal of a four loss and material right obligations of $350 million to $370 million as a result of the 787 price increase.

With this a majority of the existing 787 forward loss liability will be reversed and we anticipate positive margins on the program beginning in the first half of 2025 as production rates increase.

Next the MAA provided for a broad release as existing claims and liabilities, which we own which will include the reversal of $23 million of anticipated claims previously recorded related to the 737 vertical San attached fitting issue.

In addition, we will receive funding for certain tooling and capital through 2025 on the 737% and 787 programs.

We will repay the majority of the capital funding related to the 787 program beginning in 2025.

In October we received in advance on the total expected capex funding of $100 million.

Between now and 2025, there will be some timing differences between the receipt of funds and the capex spending which will be reflected on the statement of cash flows.

And finally, the repayment dates were extended on the previously disclosed $100 million $180 million advance of customer financing received in the second quarter of this year.

We will now make repayments of $90 million in December of 2025, and equal repayments of $45 million in December of 2026 and 2027.

The MAA strengthens the relationships with our largest customer and further aligns the parties for future success.

Broadly speaking the agreement provides increased cash over the next several years, which will help support production rate ramps across the different Boeing programs.

Now let me take you through the details of our third quarter financial results, which I remind you does not reflect any impact of the recent polling MLA.

So now let's start on slide two.

Revenue for the quarter was $1 4 billion up 13% from the third quarter of 2022.

Year over year improvement was primarily due to higher production on almost all of our commercial programs as well as increased defense and space and aftermarket revenues.

Overall deliveries for the quarter increased 5% year over year.

The third quarter 2023 revenue was impacted by disruption from the I am work stoppage in early July and.

And the 737 F pressure bulkhead issue and continued supply chain and labor challenges.

Which resulted in less near term deliveries specifically on the 737 program.

We now expect full year deliveries on the 737 program of approximately 345 to 360 units.

Now turning our attention to EPS.

We reported earnings per share of negative $1 94, compared to negative $1 22 in the third quarter of 2022.

Excluding certain items adjusted EPS was negative $1 42 <unk>.

Compared to negative 15 cents in the prior year.

Operating margin was negative 9% compared to breakeven in the same period of 2022.

Driven by higher changes in estimates and excess capacity costs recognized during the current period.

Third quarter for losses totaled $101 million and unfavorable cumulative catch up adjustments were $64 million.

This compared to 49 million of foreign losses, and $5 million of unfavorable cumulative catch up adjustments in the third quarter of 2022.

The current quarter Ford losses relate primarily to the 787 and <unk> hundred 50 programs.

And were driven by higher estimates of.

Of supply chain labor and other related costs.

Unfavorable cumulative catch up adjustments relate primarily to the 737% to <unk> hundred 20 programs.

Collecting higher factory costs, and rework costs related to the quality issue on the 737 F pressure bulkhead.

Pat Shanahan: We will now make repayments of 90 million in December of 2025 and equal repayments of 45 million in December of 2026 and 2027. The MLA strengthens the relationships with our largest customer and further aligns the parties for future success. Broadly speaking, the agreement provides increased cash over the next several years, which will help support production rate ramps across the different polling programs. Now, let me take you through the details of our third quarter financial results, which I remind you does not reflect the any impacts of the recent polling MLA.

Additionally, excess capacity costs during the third quarter of 2023 were 50.

$56 million up from $31 million in the same period of 2022.

Other income in the third quarter of this year was $7 million compared to other expense of $42 million in the prior year.

Variance was primarily due to noncash pretax charges of $73 million recorded in the third quarter of 2022, driven by the termination of our pension value plan, a as well as lower pension income during the current period.

Let's now turn to free cash flow.

Pat Shanahan: So now let's start on slide two. Revenue for the quarter was 1.4 billion, up 13% from the third quarter of 2022. Year over year improvement was primarily due to higher production on almost all of our commercial programs, as well as increased defense and space and aftermarket revenues. Overall deliveries for the quarter increased 5% year over year. The third quarter 2023 revenue was impacted by disruption from the IAM work stoppage in early July and the 737F pressure bulkhead issue and continued supply chain and labor challenges, which resulted in less near term deliveries, specifically on the 737 program.

Free cash flow usage for the quarter was $136 million cash.

Cash usage increased compared to the same period of 2022, largely driven by the negative impacts of working capital and costs associated with factory disruption.

Working capital was impacted by the disruption and work stoppage associated with the Iam strike at the beginning of the third quarter rework and disruption costs related to the 737 F pressure.

Pressure bulkhead issue as well as ramping to higher production rates on the 737 program.

Third quarter 2023 cash from operations also included $50 million customer advance that was previously disclosed and the payment.

Pat Shanahan: We now expect full year deliveries on the 737 program of approximately 345 to 360 units. Now, turning our attention to EPS. We reported earnings per share of negative $1.94 compared to negative $1.22 in the third quarter of 2022, excluding certain items adjusted EPS was negative $1.42 compared to negative $0.15 in the prior year. Operating margin was negative 9% compared to break even in the same period of 2022 driven by higher changes in estimates and excess capacity costs recognized during the current period.

Of the ratification bonus related to the iam contract of $23 million.

We have updated our full year free cash flow to reflect the lower 737 deliveries expected.

Expected for the year and the impacts of the Boeing MLA and now expect our full year free cash flow to be in the range of negative 275 million to negative $325 million.

With that let's now turn to cash and debt balances on slide three.

We ended the quarter with $374 million of cash and $3 $9 million of debt.

Addressing the $1 2 billion of 2025 debt maturities is a near term priority.

Pat Shanahan: Third quarter four losses total 101 million and unfavorable cumulative catch up adjustments were 64 million. This compared to 49 million afford losses and 5 million of unfavorable cumulative catch up adjustments in the third quarter of 2022. The current quarter four losses relate primarily to the 787 and 8350 programs and were driven by higher estimates of supply chain labor and other related costs. The unfavorable cumulative catch up adjustments were laid primarily to the 737 and 8 320 programs, reflecting higher factory costs and rework costs related to the quality issue on the 737-F pressure bulk.

And we continue to evaluate all refinancing options to address that as well as our overall liquidity.

Next let's discuss our segment performance starting with the commercial segment on slide four.

In the third quarter of 2023 commercial revenue increased 10% over the same period of 2022 due to higher production volumes on almost all of our programs.

Quarterly operating margin decreased to negative 7% compared to positive 4% in the prior year driven by higher on favorable changes in estimates and excess capacity costs recorded in the current period.

Changes in estimates during the third quarter, which I previously discussed included forward losses of $87 million and unfavorable cumulative catch up adjustments of $59 million.

Pat Shanahan: Ted. Additionally, excess capacity cost during the third quarter of 2023 were 56 million, up from 31 million in the same period of 2022. Other income in the third quarter of this year was $7 million compared to other expense of $42 million in the prior year. The variance was primarily due to non-cash pre-tax charges of $73 million recorded in the third quarter of 2022 driven by the termination of our pension value plan A, as well as lower pension income during the current period.

In comparison during the third quarter of 2022, the segment recorded charges of $47 million afford losses, and $7 million of unfavorable cumulative catch up adjustments.

Next let's turn to defense and space segment on slide five.

Defence and space revenue grew to $206 million or 27% higher than the third quarter of last year due to higher development program activity and increased KC 46 tanker production.

Pat Shanahan: Let's now turn to free cashflow. Free cashflow usage for the quarter was $136 million. Cash usage increased compared to the same period of 2022, the largely driven by the negative impacts of working capital and cost associated with factory disruption. Working capital was impacted by the disruption and work stoppage associated with the IM strike, at the beginning of the third quarter, rework and disruption costs related to the 737 AFRAL pressure bulkhead issue, as well as ramping to higher production rates on the 737 program.

Operating margin for the quarter decreased to 5% compared to 11% in 2022, primarily due to higher changes in estimates recorded in the current period the.

The segment recorded forward loss.

A $15 million in unfavorable cumulative catch up adjustments of $5 million compared to forward losses of $2 million and favorable catch catch up adjustments of $2 million in the third quarter of 2022.

The forward losses were primarily driven by higher production cost estimates on the Sikorsky CH 53, K program, an unfavorable cumulative catch up adjustments that were primarily driven by the P. Eight.

Pat Shanahan: Third quarter 2023 cash from operations also included 50 million customer advance that was previously disclosed and the payment of the ratification bonus related to the IM contract of 23 million. We have updated our full year free cashflow to reflect the lower 737 deliveries expected for the year and the impacts of the Boeing MOA and now expect our full year free cashflow to be in the range of negative 275 million to negative 325 million.

Graham.

For our aftermarket segment results, let's turn to slide six.

Aftermarket revenues were $97 million up 21% compared to the third quarter of 2022, primarily due to higher spare parts sales.

Aftermarket continues to grow along with the global Air traffic recovery and is on track to meet the plan for the year.

Operating margin for the quarter was 19% compared to 24% during the same period of 2022, driven by sales and model mix.

Pat Shanahan: With that, let's now turn to cash and debt balances on slide three. We enter the quarter with 374 million of cash and 3.9 million of debt. Addressing the 1.2 billion of 2025 debt maturities is a near term priority and we continue to evaluate all refinancing options to address debt, as well as our overall liquidity. Next, let's discuss our segment performance starting with the commercial segment on slide four. In the third quarter of 2023 commercial revenue increased 10% over the same period of 2022 due to higher production volumes on almost all of our programs.

With that we'll be happy to take your questions.

Thank you.

To ask a question. Please press star one on your telephone keypad now if you would like to withdraw your question. Please press star two and the interest of time and fairness to all participants we ask attendees to limit themselves to one question at a time.

Yeah.

Our first question today comes from Seth <unk> from Jpmorgan. Please go ahead.

Pat Shanahan: Quarterly operating margin decreased to negative 7% compared to positive 4% in the prior year driven by higher unfavorable changes in estimates and excess capacity cost recorded in the current period. The changes in estimates during the third quarter which I previously discussed included four losses of 87 million and unfavorable cumulative catch up adjustments of 59 million in comparison during the third quarter of 2022. The segment recorded charges of 47 million of four losses and 7 million of unfavorable cumulative catch up adjustments.

Thanks, very much good morning, everyone and welcome Pat.

A bunch of questions here good morning.

A bunch of questions, but maybe I'll just jump I wanted to ask you specifically pad about about two things that you said in your opening remarks.

One is you talked about other cash levers to pull to accelerate I wonder if you could expand upon that and you also talked about having the right schedule and I Wonder when we think about 737 production from here.

What is the right schedule mean.

And whats the whats really what are the two or three things that you think are most important.

Pat Shanahan: Next, let's turn to defense and space segment on slide five. Defense and space revenue grew to 206 million or 27% higher than the third quarter of last year due to higher development program activity and increased KC 46 tanker products. Operation, Operating Margin for the Quarter Decrease to 5% compared to 11% in 2022, primarily due to higher changes in estimates recorded in the current period. The segment recorded ford loss of 15 million and unfavorable cumulative adjustments of 5 million compared to ford losses of 2 million and favorable catch up adjustments of 2 million in the third quarter of 2022.

To getting to adequate 737 profitability and not having more of these negative Cumulus estimates.

Sure Seth.

Happy Wednesday, let's maybe take the first one.

Okay.

The biggest.

As I mentioned, the biggest lever to get to positive free cash flow is program performance.

But that's not a path for the rest of the team to go after indirect costs.

And those range from.

Organization structure to enforcement of contracts with our suppliers to a number of the other traditional things you might address in terms of looking at inefficiencies or belt tightening.

Pat Shanahan: The forward losses were primarily driven by higher production cost estimates on the Sikorsky CH-53K program and unfavorable cumulative catch up adjustments that were primarily driven by the P-8 program. For our aftermarket segment results, let's turn to slide 6. Aftermarket revenues were 97 million, up 21% compared to the third quarter of 2022, primarily due to higher spare parts sales. Aftermarket continues to grow along with the global air traffic recovery and is on track to meet the plan for the year.

In addition to that.

They are just things we have to stop doing so in parallel to the other.

<unk> activity, we've really accelerated our focus on every dollar matters and let's bring it to the bottom line more quickly.

You are.

The other question I think is really the.

Most important issue that we're dealing with right now and that is the right schedule.

What I've learned over my almost 40 years in this business. If you get the right schedule everything else works is schedule is a barometer for performance and if youre unscheduled youre going to realize.

Pat Shanahan: Operating Margin for the Quarter was 19%, compared to 24% during the same period of 2022 driven by sales and model mix. With that, we'll be happy to take your questions. Thank you. If you would like to ask a question, please press star 1 on your telephone keypad now. If you would like to withdraw your question, please press star 2. In the interest of time and fairness to all participants, we ask attendees to limit themselves to one question at a time.

Appropriate cost and you get the right cost you'll get the right financial results.

When I look at the schedule and hopefully with the guidance we provided in terms of end of quarter deliveries.

You did the math and the math is let's adjust for.

Holidays and.

Non working days.

Our effective rate when.

When you look at deliveries is we're at about 37% to <unk> 42, a month in the fourth quarter delivering to Boeing.

Seth Sysman: Our first question today comes from Seth Sysman from JP Morgan. Please go ahead. Thanks very much.

We have a.

Our path to the fifties in 'twenty five.

Pat Shanahan: Good morning, everyone, and welcome Pat. A bunch of questions here, morning. A bunch of questions, but maybe I'll just jump out. I wanted to ask you specifically about two things that you said in your opening remarks. One is, you know, you talked about other cash levers to pull to accelerate. You know, I wonder if you could expand upon that. And you also talked about having the right schedule. And I wonder when we think about 737 production from here.

And the reason I say, we have a path to the fifties as we've been there before.

So it's not something new it's a question of <unk>.

How do we stabilize in our internal operations, so that without the effort. We're using today, we can cost effectively with high quality produce the fuselages that Boeing so desperately needs.

The path is through rate increases the biggest.

Pat Shanahan: You know, what does the right schedule mean? And you know, what's the, what's really, what are the two or three things that you think are most important to getting to adequate 737 profitability and not having more of these negative human adjustments? Sure, Seth. Happy Wednesday. Let's maybe take the first one. You know, the biggest, as I mentioned, the biggest lever to get to positive free cash flow is program performance. But that's not a pass for the rest of the team to go after indirect costs.

The two biggest levers for us are.

The supply chain and our own internal productivity.

When you just.

Look at producing 737 fuselages at 42 a month.

Roughly 25000.

Parts that go into one so at 42 1 million parts, we need per month and.

And when you look at the amount of fasteners that we put in it's.

Something on the order of $10 million a month.

So for us to produce it's really about being synchronized and stable and there's just a lot of detail that goes into achieving that.

Pat Shanahan: And those range from organization structure to enforcement of contracts with our suppliers to a number of the other traditional things you might address in terms of looking at inefficiencies or belt tightening. In addition to that, they're just things we have to stop doing. So in parallel to the other. Improvement Activity, we've really accelerated our focus on a every dollar matters and let's bring it to the bottom line more quickly. Your other question I think is really the most important issue that we're dealing with right now, and that is the right schedule.

I believe that we'll be able to stabilize here and meet boeing's demands in 2024.

I'd like to walk you through the.

Detailed schedule that we're working on I would just tell you this is that.

We're not doing things parametric Lee we're down to looking at things by the day by the train pool by the supplier.

I've been here only a short period of time, but the readiness that we didn't have in the past is not their readiness. If you will see in 2024.

Great. Thank you very much.

So.

Our next question comes from Sheila <unk> from Jefferies. Please go ahead.

Pat Shanahan: And what I've learned over my almost 40 years in this business, if you get the right schedule, everything else works. The schedule is a barometer for performance, and if you're on schedule, you're going to realize the appropriate cost, and if you get the right cost, you'll get the right financial results. When I look at the schedule, and hopefully with the guidance we provided in terms of end of quarter deliveries, you did the math, and the math is, let's adjust for holidays and non-working days.

Good morning, guys and happy Wednesday, Thank you Pat.

I was wondering if you guys could.

Talk about the free cash flow revision.

$75 million to $325 million of usage, how are you thinking about that change there in the prior guide how much of it is tied to the 787 and then just as we think about the step up in Q4, what really changes.

First 30 days or so on the job or what have you seen that could be in the media.

Yeah.

Well Sheila let me, let me just take the walk on the headwinds and the tailwind and I think Pat can provide some additional color.

Pat Shanahan: Our effective rate, when you look at deliveries is, we're at about 37 to 42 a month in the fourth quarter, delivering to Boeing. We have a path to the 50s in 25, and the reason I say we have a path to the 50s is we've been there before. So it's not something new. It's a question of, how do we stabilize in our internal operations so that without the effort we're using today, we can cost effectively with high quality, produce the few slages that Boeing so desperately needs.

The biggest impact of free cash flow from a headwind standpoint, as fewer 737 deliveries.

And I think the challenge that we have here is when we were staffed to 42 airplanes per month, we've been bringing in parts to help support 42 airplanes per month.

And when we drop our deliveries from the previous forecast of $3 70 to $3 90 to $3 45 to $3 60, a lot of that cost is embedded into our system and so by not delivering the aircrafts were not collecting the cash on the delivery. So I think the impact is a little bit bigger than.

Then you've put in your note as it relates to missing the deliveries.

Pat Shanahan: The path is through rate increases. The two biggest levers for us are the supply chain and our own internal productivity. When you just look at producing 737 a few slages at 42 a month, it's roughly 25,000 parts that go into one, and so at 42 that's a million parts we need per month, and when you look at the amount of fasteners that we put in it's something on the order of 10 million a month.

The additional four losses and the negative cum catch up adjustments that we took is going to add some additional pressure to cash in the fourth quarter.

And then we're seeing.

A lower <unk> hundred 20 deliveries in the fourth quarter, and Thats, primarily driven by a customer change in their schedule.

On the flipside positiveness from the bowling MLA, the 787 price increase in the Capex funding. So I think if you factor all of those things in there.

The biggest impact I would say is that the lower 737 deliveries and us being staffed and having the working capital in place and we're just not going to relieve that inventory and collect the cash.

Pat Shanahan: And so for us to produce is really about being synchronized and stable, and there's just a lot of detail that goes into achieving that. I believe that we'll be able to stabilize here and meet Boeing's demands in 2024. I'd like to walk you through the detailed schedule that we're working on. I would just tell you this is that we're not doing things parametrically. We're down to looking at things by the day by the train pole by the supplier. I've been here only a short period of time, but the readiness that we didn't have in the past is not the readiness you will see in 2024. Thank you very much.

Yeah.

Yeah.

Okay got it thank you.

Thanks Sheila.

Our next question comes from Myles Walton at Wolfe Research. Please go ahead.

Thanks, Good morning.

One quick clarification and then one question for you Pat So on the clarification are you currently shipping to Boeing conforming fuselages at this point I realize that you were able to recognize revenue and earnings on sort of nonconforming and then fixed fixed after the fact, but if you can update us if youre now conforming.

You made comments about diversification in your opening remarks.

Sheila K.R. Glue: Our next question comes from Sheila K.R. Glue from Jeffries. Please go ahead.

Just curious I know you've been on the board for a few years and you've only been on the job for a very short period of time, but is diversification necessary to make spirit a great company.

Mark Suchinski: Good morning guys, and happy Wednesday to you too Pat. So I was wondering if you guys could talk about the free cash flow revision, you know, 275 to 325 million of usage. How are you thinking about the change there from the prior guide? How much of it is tied to the 737 and just as we think about the step up in Q4, what really changes and, you know, for 30 days or so on the job, what have you seen that could be an immediate improvement?

80% concentration of Rep to Boeing.

Just a few years ago.

Obviously, the stock did quite nicely in the revenue and earnings for <unk>.

We're actually pretty good so is diversification required.

Sure maybe I'll just take the diversification one first.

To the degree that spirit has approached that in the past I would say.

Mark Suchinski: Well, Sheila, let me just take the walk on the headwinds and the tailwinds, and then I think Pat can provide some additional color. You know, the biggest impact of free cash flow from the headwinds standpoint is fewer 737 deliveries. And I think the challenge that we have here is when we were staffed to 42 airplanes per month, we've been bringing in parts to help support 42 airplanes per month. And when we drop our deliveries from the previous forecast of 370 to 390 to 345 to 360, a lot of that cost is embedded into our system.

No diversification doesn't make sense at this time and when you look at the demand for commercial airplanes.

Having two of the biggest customers in the world.

And not being able to satisfy the demand that should command our full attention.

Maybe the kind of the next level down.

Great Defense business here.

It's a more dangerous world.

I think what you would take away from some of that is.

We have tremendous engineering capability.

Mark Suchinski: And so by not delivering the aircraft, we're not collecting the cash on the delivery. So I think the impact is a little bit bigger than you've put in your note as it relates to missing the deliveries. The additional four losses in the negative cum catch-up adjustments that we took is going to add some additional pressure to cash in the fourth quarter. And then we're seeing a lower A220 deliveries in the fourth quarter, and that's primarily driven by a customer change in their schedule.

When you think about the future of <unk>.

Large scale aerostructures.

It's advanced materials.

So to that extent the diversification.

Probably developing broader capability in advanced materials makes a lot of sense.

Aftermarket is just isn't of the volume that we see in the other businesses.

And to your earlier question I believe their conforming.

Mark Suchinski: On the flip side, positiveness from the Boeing MOA, the 787 price increase, and the CAPEX funding. So I think if you factor all those things in, the biggest impact, I would say, is the lower 737 deliveries and us being staffed and having the working capital in place. And we're just not going to relieve that inventory and collect the cash. Okay, got it. Thank you.

We'll make sure to get back to you on that.

The full answer there.

Sheila K.R. Glue: Thanks Sheila.

Yes Myles.

The product that we're shipping to Boeing at this point in time is being reworked and is conforming we've put the fixes in place so.

We're in good shape there.

Okay. Thank you.

Sure.

Our next question comes from Scott Social from Deutsche Bank. Please go ahead.

Hey, good morning.

Myles Walton: Our next question comes from Miles Walton at Wolf Research. Please go ahead. Thanks good morning. One quick clarification, and then one question for you Pat. So on the clarification, are you currently shipping to Boeing conforming few slashes at this point? I realize that you were able to recognize revenue and earnings on sort of non-conforming and then fix after the fact, but if you can update us if you're now conforming. And then Pat, you made comments about diversification in your opening remarks, and just curious, I know you've been on the board for a few years, and you've only been on the job for a very short period of time.

Hey, good morning.

My understanding is that supplier negotiation supplier price negotiations with Airbus. These days after and revolve around moving money from one year to another but that they often fail to address the underlying long term economics for suppliers.

But it seems like you need a real structural fix here rather than a band aid.

So I'm curious if you think it's possible.

That you get a structural remedy from Airbus.

And if not maybe you can describe later alternatives might be thank you.

Myles Walton: But is diversification necessary to make Spirit a great company? It had 80% concentration of rep to Boeing, you know, just a few years ago, and obviously the stock did quite nicely in the revenue and earnings were, were actually pretty good. So is diversification required?

Well I wont describe what the alternatives are because I think we can get a remedy.

Yeah.

I am.

Spending more and more time with my Airbus counterparts.

And this is a item of utmost urgency for me personally and I will be.

If not leading very deep into these conversations and discussions.

Pat Shanahan: Sure, maybe I'll just take the diversification one first. To the degree that Spirit has approached that in the past, I would say no diversification doesn't make sense at this time. And when you look at the demand for commercial airplanes, having two of the biggest customers in the world and not being able to satisfy the demand, it should command our full attention. On maybe the kind of the next level down, we've built a great defense business here, and, you know, it's a more dangerous world, and I think what you would take away from some of that is we have tremendous engineering capability, and when you think about the future of large-scale aero structures, it's advanced materials.

Yeah.

If you would indulge me for a minute just talking about.

Composites and advanced materials, just as I mentioned before.

It really is the is the future and when we.

Think about the situation, we have a near term financial problem.

And when I look at.

The 820 or the C series. It was produced about the same time as the 787 and the <unk> hundred 50.

Or.

From a technical standpoint, those products are performing extremely well.

The maturity of the production system when those.

Designs were certified.

Slide.

We're really immature and there are heritage cost limitations.

And the performance that we should be realizing out of the manufacturing system just isn't there, but I think it is.

Pat Shanahan: So to that extent, the diversification and probably developing broader capability in advanced materials makes a lot of sense. Aftermarket is just isn't of the volume that we see in the other businesses. And to your earlier question, I believe they're conforming. We'll make sure to get back to you on a full answer there. Yeah, Myles, the product that we're shipping the Boeing at this point in time is being reworked and is conforming. We've put the fixes in place, so we're in good shape there.

Currently not there.

Between the us and Airbus, we have to come to some resolution.

Myles Walton: Okay. Thank you.

To address that discontinuity.

I think we'll be able to get to the place that makes sense for both parties.

But it is in near term action that I am committed to undertaking.

And the.

My counterparts at Airbus feel the same sense of urgency.

Got it thank you so much.

Okay.

Okay.

Our next question is from Doug <unk> from Bernstein. Please go ahead.

Good morning, Thank you.

Good morning, guys.

Scott Doyschle: Our next question comes from Scott Doyschle from Deutsche Bank. Please go ahead. Hey, good morning. Pat, my understanding is that supplier negotiations with Airbus these days often revolve around moving money from one year to another, but that they often fail to address the underlying long-term unit economics for suppliers. But it seems like you need a real structural fixer rather than a band-aid. So I'm curious if you think it's possible that you get a structural remedy from Airbus. And if not, maybe you can describe what your alternatives might be. Thank you.

When you look at spirit's been dealing with.

New quality escapes over the last year that have resulted from manufacturing problems that happened well before this year such as the tail fittings.

F Bulkhead issue 77, nonconforming <unk>, how do you make sure that there are not more issues like these still to come out and how are you thinking about changing the way you approach quality from an operational standpoint. So you can you can prevent this in the future.

Yes.

Well Doug.

That's probably reading my mind in terms of.

Pat Shanahan: Well, I won't describe what the alternatives are because I think we can get a remedy. And I am spending more and more time with my Airbus counterparts. And this is an item of utmost urgency for me personally, and I will be, you know, if not leading very deep into these conversations and discussions. I'd, you know, if you would indulge me for a minute, just kind of talking about composites and advanced materials, just as I mentioned before, you know, really is the future.

What's really going to change the reputation and.

They give customers greater confidence as that.

We really.

Deliver pristine quality products to our customers maybe just.

Frame it from this standpoint, the tone from the top internally.

Is that my priority is the safety of our teammates.

The quality of the product that we build and.

And productivity.

Externally.

The focus is quality to our customer on time reliable delivery.

The mindset I have is that we can be.

Pat Shanahan: And when we think about the situation, we have a near term financial problem. And when I look at the 820 or the C series, it was produced about the same time as it 787 and the 8350 from a technical standpoint, those products are performing extremely well. The maturity of the production system when those designs were certified were really immature. And there are inherent cost limitations. And the performance that we should be realizing out of the manufacturing system just isn't there, but I think it's inherently not there.

Zero defects.

We can eliminate all defects, we have very robust quality management system.

But every day, we have to put time and attention to that.

It isn't as though there is a silver bullet out there or a different procedure that we can implement its the whole organization being first and foremost focused on how we build the product in.

Youll see that over time, because that's where my time will be and as you know where you put your time here.

It gets people's attention and leadership as a long shadow and I think youll see us.

<unk> quite a bit in this area.

Pat Shanahan: Between us and Airbus, we have to come to some resolution to address that discontinuity. I think we'll be able to get to the place that makes sense for both parties, but it is a near term action that I'm committed to undertaking, and my counterparts at Airbus feel the same sense of urgency. Thank you so much.

Okay. Thank you.

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

Thanks, Good morning, Pat.

Good morning.

Good morning.

Mark I think before you guys have talked about <unk> to <unk>.

Free cash flow positive in 2024.

Is there anything on the other side of the Boeing MLA as to why that that still wouldn't be the case, that's Mike <unk>.

Doug Honett: Our next question is from Doug Honett, from Bunstein. Please go ahead.

Pat Shanahan: Good morning. Thank you. When you look at, in the spirit's been dealing with new quality escapes over the last year, that have resulted from manufacturing problems that happen well before this year, such as the tail fittings, the F bulkhead issue, 1777 on conformities, how do you make sure that there are not more issues like these still to come out? And how are you thinking about changing the way you approach quality from an operational standpoint?

First question and then second question just an update you mentioned knee the urgency around.

The refinancing what are you looking at in terms of in terms of timing to come to market. I think previously you talked about maybe <unk> and <unk>.

In two phases, so any update there. Thank you.

Well good morning, David good to hear from you.

As it relates to 2024, I think Pat said.

30 days into his role here.

He is making its way through we're looking at the business Holistically and really focused on.

Pat Shanahan: So you can prevent this in the future. Well, Doug, that's probably reading my mind in terms of what's really going to change the reputation and give customers greater confidence is that, you know, we really deliver pristine quality products to our customers. Maybe just, let me frame it from this standpoint, you know, the tone from the top internally is that my priority is the safety of our teammates, the quality of the product that we build and productivity externally.

Completing the year getting.

Getting the business stabilized and then providing you guys a good robust update in February but I'll, just kind of reiterate what we said previously.

We expect 2024 to be a positive cash flow year.

The Boeing MLA is is definitely a benefit to 2024 and beyond and.

So I'll leave it at that at this point in time and in February we will come back and give you more specifics around our plans.

As it relates to the refinancing.

It's obviously a big priority for me.

Pat Shanahan: Finally, the focus is quality to our customer and on time reliable delivery. The mindset I have is that we can be zero defects. I mean, we can eliminate all defects. We have a very robust quality management system. But every day we have to put time and attention to that. It isn't as though there's a silver bullet out there or a different procedure that we can implement. It's the whole organization being first and foremost focused on how we build the product.

The refinancing is.

It is a little more than a year out.

The goal here is to assess all of our options that we have at this point in time.

We've got some good plans in place we're thinking through.

<unk> been successful.

As we've gone to to the markets in the past.

And I think that's it.

As Pat talked about his big goal working with Airbus One of my Big goals is getting through the refinancing getting us behind us. So we can focus on the business in 2024 and so there.

There is a sense of urgency there.

A near term priority.

And we're going to be working through that.

Pat Shanahan: And I think you'll see that over time because that's where my time will be in is, you know, where you put your time. You know, it gets people's attention and leadership has a long shadow and I think you'll see us improve quite a bit in this area.

As I had previously stated to make sure that we get the refinancing done before before the debt becomes short term.

Doug Honett: Okay, thank you.

Great. Thank you very much.

Thank you.

Yeah.

Our next question comes from Joel just Shapiro from Shapiro Research. Please go ahead.

David Strauss: Our next question comes from David Strauss at Barclays. Please go ahead. Thanks, Maureen. Hi, Pat. Maureen, Mark, I think, you know, before you guys talked about getting to pre-cashable positive in 2024. Is there anything on the other side of the Boeing MOA as to why that that still wouldn't be the case? That's my first question. And then second question, just an update, you know, you mentioned the urgency around the refinancing. What are you looking at in terms of in terms of timing to come to mark? I think previously you talked about maybe doing in in two phases, so any update there.

Good morning, welcome Pat it's been a while but good to see you back in there.

Yes. Thank you.

Good to be here good morning, George.

And.

Mark if I looked at this quarter as free cash flow I take out the $100 million.

That you are getting from from Boeing and <unk>.

I don't.

I'm not sure whether you got it.

Another advance for Airbus, but if you did I mean.

Yes, still next year's free cash or to be a lot better than just looking at this year's fourth this year implied fourth quarter, which was like 140 million take out the.

<unk> hundred million from Boeing so at $40 million.

Mark Suchinski: Thank you. Well, good morning, David. Good to hear from you. You know, as it relates to, you know, 2024, I think Pat said, you know, he's 30 days into his role here. He's making his way through. We're looking at the business holistically and really focused on, you know, completing the year, getting the business stabilized and then providing you guys a good robust update in February. But I'll just kind of reiterate what we said previously. You know, we expect 2024. To be a positive cash flow year. The Boeing MOA is definitely a benefit to 2024 and beyond.

And I don't think there was an Airbus payment. There you can correct me, but why won't next year at least be as good as the annualized rates in this year's fourth quarter.

Oh.

Good question George.

I think as as I addressed with David as it relates to free cash flow again, we'll stick with the fact that it's going to be positive next year.

We will provide you more specifics around that when we come back and chat with you in the first week of February when we disclose our results. We don't we don't want to get ahead of things Pat's got a lot of work to do here and we're all here supporting him.

We will put pull together a good plan and we will provide you guys an update in February.

Mark Suchinski: And so, you know, I'll leave it at that at this point time and in February we'll come back and give you more specifics around our plans. You know, as it relates to the refinancing, you know, it's obviously a big priority for me. You know, the refinancing is a little more than a year out. The goal here is to assess all of our options that we have at this point in time. You know, we've got some good plans in place.

Okay, and then one quick one for you Marty.

Hi, Eric than expected excess cost.

Can you give some color with that and kind of what's the thinking might be when we get to the fourth quarter.

Sure George.

I would just say this the.

Third quarter was was highly disrupted when you think about our production.

The number of units are positioned in the factory starting the quarter.

Mark Suchinski: We're thinking through. We've been successful. As we've gone to the markets in the past. And I think, you know, that's, you know, as Pat talked about his big goal working with Airbus, one of my big goals is getting through the refinancing and getting us behind us so we can focus on the business in 2024. And so there's a sense of urgency there. It's a near term priority. And we're going to be working through that, you know, as I had previously stated to make sure that we get the refinancing done before, before the debt becomes a short term.

David Strauss: Thank you very much.

Not gearing back to production line back up until around call. It July 10th because of the Iam work stoppage and then the the vertical or the App bulkhead issue. So I would say for the most part it's it's the iam strike it was a quality issue.

David Strauss: Thank you.

Then just some of our own performance in the factory that ultimately added to the excess costs and so what I would say is it's a little bit of an anomaly because of that.

And as we move into 2024, I would expect us to continue to see that those excess costs go down.

As we go up in rate and absorb more of the fixed cost overhead here. So.

George Shapiro: Next question comes from George Shapiro from Shapiro Research. Please go ahead.

Again, I think we'll continue to see things improving in the fourth quarter, and then get better in 'twenty four as compared to 23.

George Shapiro: Good morning. Well, Compat, it's been a while, but good to see you back in there. Thank you. Good to be here. Good morning, George. And Mark, if I looked at this quarter's free cash flow, I take out the $100 million that you're getting from Boeing, and I don't, I'm not sure whether you've got another advance for Airbus. But if you did, I mean, you're still next year's free cash ought to be a lot better than just looking at this year's fourth quarter, which was like $140 million take up the $100 million from Boeing.

Okay. Thanks very much.

George Shapiro: So it's $40 million. And I don't think there was an Airbus payment there. You can correct me. But why won't next year, at least be as good as the annualized rate for this year's fourth quarter? Good question, George. I think as I address with David, as it relates to free cash flow, again, we'll stick with the fact that it's going to be positive next year. We'll provide you more specifics around that when we come back and chat with you in the first week of February when we disclose our results.

Okay see you George.

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

Hey, good morning, everybody.

Good morning.

Pat is it at least in the scenario analysis that you stay in the CEO seat long term.

Rather than it.

Being an interim solution.

Well.

I'll tell you no.

My commitment to Adrian My wife, and the board was that I would do.

Do this for a year.

Stand up the operations, so that we could put it.

Strong replacement in place and that remains the commitment and.

No change at this time.

Sure.

Okay I.

I appreciate that and then just as a follow up on the aft pressure bulkhead.

Challenge on the Max.

I heard you that you are now shipping.

<unk> clean new off the line.

I guess, what about the inventory rework and just overall whats the timeframe in which that is behind you completely.

George Shapiro: We don't want to get ahead of things. Pat's got a lot of work to do here, and we're all here supporting him. We'll put together a good plan, and we'll provide you guys an update in February.

I don't have time frame.

George Shapiro: Okay, then one quick one for you, Mark, the higher than expected excess costs, can give some color with that and kind of what the thinking might be when we get to the fourth quarter? Sure, George, you know, I would just say this, you know, the third quarter was highly disrupted. When you think about our production, the number of units, our position in the factory, starting the quarter, not gearing back the production line back up until around July 10th because of the IAM work stoppage and then the the vertical or the F bulkhead issue.

Specifically right now.

The work that we've been doing it if we had if we had this call in another week I could probably give you.

Precise answer the.

Analysis continues to improve and so I can't really tell you what the final work scope is there, but its trending towards sooner rather than later.

George Shapiro: So I would say for the most part it's, it's the IAM strike, it was the quality issue. And then just some of our own performance in the factory that, you know, ultimately added to the excess cost. And so, you know, what I would say is it's a little bit of an anomaly because of that. And as we move into 2024, you know, I would expect us to continue to see that those excess costs go down as we go up and rate and absorb more of the fixed cost overhead here. So, again, I think we'll continue to see things improving in the fourth quarter and then get better in 24 is compared to 23. Okay, thanks very much. Okay, see you, George.

Okay.

Fair enough. Thank you.

Thanks Noah.

Our next question comes from Robert sell out from vertical research. Please go ahead.

Thanks, so much good morning.

Good morning, good morning.

<unk>.

This is probably one for you actually.

Only address negotiations I was wondering if you could give us some idea of how this differs.

Versus the discussions you've been having with Boeing and in conjunction with Airbus and the <unk>.

<unk> hundred 20 program that Didnt take a charge this quarter. So wondering if you could give us an update on how that Scott. Thank you.

Maybe mark can talk about the charge and I can talk about the negotiation you want to take that for sure.

Rob you're right no.

No forward loss charge and the <unk> hundred 20 program it was a pretty good quarter.

I think the team is doing well, we're meeting our delivery commitments to.

Noah Poponak: See you. Our next question is from Noah Popponak from Goldman Sachs. Please go ahead. Hey, good morning, everybody. Good morning. Pat, is it at least in the scenario analysis that you stay in the COC long term rather than it being an interim solution? Well, I'll tell you Noah, my commitment to Adrian, my wife and the board was that I would do this for a year, stand up the operation so that we could put a strong replacement in place. And that remains the commitment and no change at this time.

Our customer.

And so a pretty quiet quarter on the on the <unk> hundred 20 side.

Yeah, maybe just to comment on that.

Differences or similarities between Boeing and the Airbus negotiations.

They're very similar I mean the nature.

This is really kind of concentrated on the 8% to 27 at the end of the day, it's really about the 820.

And.

Like my earlier comment about the maturity of the production system and expectations of performance, where we're not aligned.

Until we can.

Get that alignment it makes.

Producing at the higher rates more difficult.

And I think that will come to a reasonable outcome because it's important for.

It's important for Airbus, It's important for spirit is important for the airplane.

There is strong demand for that airplane and where.

Pat Shanahan: Okay, appreciate that. And then just as a follow up on the after pressure bulkhead challenge on the max, I heard you that you're now shipping, conforming, clean, new off the line. I guess what about the inventory rework and just overall, you know, what's the time frame in which that is behind you completely? I don't have a time frame specifically right now in the work that we've been doing. If we had this call another week, I could probably give you a precise answer. The analysis continues to improve. And so I can't really tell you what the final work scope is there, but it's trending towards sooner rather than later.

We're committed to Airbus and I think they're committed to us and it's just somebody here in the short term, but I'm encouraged based on the Boeing agreement that we'll get there with Airbus.

Okay, and just a quick follow up Pat.

Noah Poponak: Okay, fair enough. Thank you. Thanks Noah.

Put a timeframe on this do you think you'll get this done the full pipeline.

Well I think so.

Okay. Thank you very much.

Yeah.

Our next question comes from Robert Springer from Melius Research. Please go ahead.

Scott might guess on for Rob Spingarn.

Pat I did want to ask you if you pursue a financial remedies on the <unk> hundred 20 or a 350.

Any concern that spirit could potentially see a reduced role later on the <unk> hundred 20, <unk> hundred 20, Neo if Airbus re wing programs.

Robert Stallard: Our next question comes from Robert Stallard from Vertical Research. Please go ahead. Thanks so much. Good morning. It's probably one for you actually. On the Airbus negotiations, I was wondering if you could give us some idea of how this differs versus the discussions you've been having with Boeing. And in conjunction with Airbus, the A220 program didn't take a charge this quarter, so there's only if you could give us an update on how that's going.

Yes.

I mean I spent half my time on that question and half my time on the negotiating.

But not so much the negotiating strategy with the strategy process.

With our advanced engineering capability and the things that we do with resin transfer molding.

We are a critical part is not so much the wing of tomorrow.

Robert Stallard: Thank you. Yeah, maybe Mark can talk about the charge and I can talk about the negotiation. You want to take that first? Sure. Rob, you're right. No forward loss charge in the A220 program. It was a pretty good quarter. I think the team is doing well. We're meeting our delivery commitments to our customer. And so a pretty quiet quarter on the A220 side. Yeah, maybe just a comment on the differences or similarities between the Boeing and the Airbus negotiations.

Eric.

Airbus has long term composite supply chain I think we are a vital piece of that the issue. We have is just here in the near term how do we solve this finnair.

<unk> financial disconnect.

But I would bet on the team in Belfast to be a critical part of Airbus as future. We just have the overhang of some agreements that go back.

Longtime pre COVID-19 that we have to kind of work our way through.

But it was the earlier remark I made about this company and advanced materials, the things that we're doing.

Our.

Really going to be the basis of the next generation of product out there in the defense World.

Robert Stallard: I'd say they're very similar. I mean, the nature, you know, this is really kind of concentrated on the A220. I mean, the end of the day, it's really about the A220. And you'll like my earlier comment about the maturity of the production system and expectations of performance were not aligned. And until we can get that alignment, it makes producing at the higher rates more difficult. And I think that we will come to a reasonable outcome because it's important for Airbus.

Robert Stallard: It's important for spirit. It's important for the airplane. There's a strong demand for that airplane and we're committed to Airbus. And I think they're committed to us. And it's just something here in the short term. But I'm I'm encouraged based on the Boeing agreement that we'll get there with Airbus. Okay. I just couldn't follow up Pat. How to put a timeframe on this. Do you think you'll get this done before February? Well, I think so. Okay. Thank you very much.

Commercially because we can do it at scale and we get reps.

Every single day.

And to go replicate some of these assets in a greenfield at scale is cost prohibitive.

No.

I think it's just you get trapped in these situations of managing quarter to quarter or that.

Somebody should get better performance and they are actually realizing it.

I think just like with the Boeing agreement, we're going to get to a place that makes sense for both parties.

Thanks, I'll just stick to one.

Thank you.

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

Yes, thanks, so much and Pat welcome.

So.

The Boeing MLA basically.

You basically.

Get some.

Have to take a lower price on the 737 as you get out to 'twenty six.

Robert Sprungan: Our next question comes from Robert Sprungan from Melius Research. Please go ahead. Yeah, Mike is on for Rob Spingarn.

And you get a much higher price on the 787 near term, but then.

Around the middle of 2008, you have the renegotiation of the price.

Pat Shanahan: Pat, I did want to ask you if you pursue a financial remedy on the A220 or a 350. Is there any concern that spirit could potentially see a reduced role later on the A220 or a 320 neo if Airbus rewings those programs? Yeah, no, I mean, I spend half my time on that question and half my time on the negotiating. Not not supposed to negotiate strategy for the strategy process. And I think with our advanced engineering capability and the things that we do with resident transfer molding, we're a critical part.

787 and <unk>.

As I read what Ive read of the MLA it looks like.

Basically.

Barring any change in the negotiation that the 787 price at that point goes back.

To where it currently is or relatively close is that your read or so how should I be concerned that that's a real liability or.

As you get out there.

The 87 could revert to going back into modest basically breakeven or loss.

Hey, Cai, it's Mark let me jump in there.

Pat Shanahan: It's not so much the wing of tomorrow. It's just Airbus's long term composite supply chain. I think we're a vital piece of that. The issue we have is just here in the near term, how do we solve this financial Connect, but I would bet on the team in Belfast to be a critical part of Airbus' future. We just have the overhang of some agreements that go back a long time pre-COVID that we have to kind of work our way through.

I would say that.

We came to a good conclusion on the appropriate pricing on the 787 program essentially out through the order book.

We have a commitment between the two parties.

To negotiate a fair and reasonable price beyond 16, 051 year in advance of that delivery date.

And just like we came to an appropriate conclusion, which allows spirit to make a an appropriate margin on that airplane program here shortly.

What our expectations will be long term.

Pat Shanahan: But, you know, it's just, you know, the earlier remark I made about this company and advanced materials, the things that we're doing are really going to be the basis of the next generation of product out there on[inaudible] Hi, I don't think we're in a position where we're pressured to negotiate. I mean, Mark, you might comment just on the financial situation, but I think we have time to get it right, but there's no point in wasting time.

Okay, and then separately.

If I may one more on the.

Airbus.

Talks.

Clearly.

It's going to be difficult to do a refi unless that is behind you.

Does that do you feel that puts increased pressure on you to kind of.

Come to the table more quickly or how do you deal with that timing.

Issue of having to get that done before a refi.

I don't think we are in.

Position, where were pressured to negotiate and Mark you might comment just on the financial situation, but.

I think we have time to get it right, but there is no point in wasting time.

No I agree with Pat.

See this guy I think.

I think the Boeing MLA provides.

A nice boost to liquidity here over the next several years.

And and I think we have some momentum here on that front end.

So again when it comes to the refinancing we're going to do what's best for Us for our company and for our shareholders and and work through that accordingly, and as Pat said no pressure on the Airbus side that will happen and its due course.

Thank you very much.

Our next question comes from Gavin Parsons at UBS. Please go ahead.

Thanks, Good morning.

Good morning, good morning.

Pat you suggested.

Delivering I think around 37% to 42 months in the fourth quarter just to clarify is your plan still that you'll be cycling and delivering at 42, starting in 2024 or is there a spread.

And then could you update us on the current Max inventory buffer.

Yeah.

Let's see.

No guidance on 'twenty four.

And in terms of the buffer I don't have.

Got that path because we've got as you know a mix of units in there yes.

Gavin we have about 80 units in buffer.

We like to categorize them in two components.

Units that are that are on hold.

And then units that are available to ship. So there's there's around 50 units.

That have that are in boeing's and the buffer Boeing owns titled to those and Boeing can pull them whenever they are ready to pull so buffers increased a bit at the end of the second quarter. It was low as.

As we prepared for the work stoppage issue, but we've been able to build up that buffer to a certain degree.

And as Pat said the goal here is as we move forward here to sync up our production schedules, but thats an update on the buffer.

Okay. Thank you.

Okay.

Our next question comes from Pizza, Amit from Baird. Please go ahead.

Yes.

Good morning, Pat and Mark.

$100 million to $100 million youre getting for tooling related equipment.

For the 737 and 787 can you kind of give us a little more color of what the real benefit is there I mean, obviously, it's nice to see the cash infusion.

Pat Shanahan: No, I agree with Pat. I just say this guy, I think the Boeing MLA provides a nice boost to liquidity here over the next several years. And I think we have some momentum here on that front. And so again, when we come to the refinancing, we're going to do what's best for us, for our company and for our shareholders, and work through that accordingly. And as Pat said, no pressure on the air bus side, that will happen in its due course.

But yes.

Yes, Pat you said you've been at these higher rates before so what is what is actually the benefit that youre seeing here. Thanks.

Pat Shanahan: Thank you very much.

Yes sure Peter.

A couple of things number one with most Oems in it.

If you have production rate increases or model mix or new new derivatives, the Oems always own the tooling right and so that's unchanged from our previous agreements.

But in this current environment when we look at the model mixes and we have the dash sevens the age of the nines and tens.

Boeing is selling more <unk> more turns and that has an impact on our production system and so therefore, it's going to require us to make some capital investments and so one of the benefits of the agreement. We appreciate this from Boeing is theyre going to pay for some capital that normally spirit would have to pay.

Gavin Parsons: Our next question comes from Gavin Parsons, EBS. Please go ahead. Thanks.

Gavin Parsons: Good morning. Pat, you suggested you'll be delivering, I think, around 37 to 42 a month in the fourth quarter, just to clarify, is your plan still that you'll be cycling and delivering at 42 starting in 2024, where they're spread. And then could you update us on the current Max inventory buffer? Let's see. No guidance on 24. And in terms of the buffer, I don't have, I've got that pass. As you know, a mix of units in there.

And.

Normally what would happen is as we built those units, we'd absorb more overhead and that would help profitability, but the big benefit here is it's a combination of tooling and capital that Boeing is going to pay for they've given us at advanced in the fourth quarter and some funding in 'twenty, four and a little bit in 'twenty five and that's going to result in us spending.

Higher capex in 'twenty, four and 'twenty five.

To reflect the new models and the adjustments we need to make in the production system. So there is a benefit to spirit.

Gavin Parsons: Yeah, so we, Gavin, we have about 80 units in buffer. We like to categorize them in two components. Units that are, that are on hold. And then units that are available to ship. So there's, there's around 50 units, you know, that have, that are in Boeing's, in the buffer, Boeing owns title to those, and Boeing can pull them whenever they're ready to pull. So buffers increased a bit. At the end of the second quarter, it was low as, as we prepared for the work stoppage issue.

Going to be a little lumpy when their receipts come in when the funds go out, but we think our Boeing customer.

They're making the actual capital investment themselves.

And so we appreciate that so so really that's in a nutshell, it's a it's a nice little benefit although it's cash neutral.

It is a benefit to spirit.

I appreciate the color thanks Mark.

Sure thing.

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

Hey, good morning, guys. Thanks for taking the question good morning.

Gavin Parsons: But we've been able to build up that buffer to a certain degree. And, and as Pat said, you know, the goal here is as we move forward here to sync up our production schedules. But that's an update on the buffer.

Peter Arment: Okay, thank you.

Pat or Mark.

Just on the MLA can you maybe help us out or give us a little bit more detail. Obviously, you kind of can triangulate, where the 787 deliveries are going to be this year you got the $60 million revenue increase I mean was.

Mark Suchinski: Our next question comes from pizza omens from bed. Please go ahead. Yeah, good morning, Pat, Mark. Hey, the 100 million you're getting for, for tooling related equipment, you know, for the 737 and 787. Can you kind of give us a little more color of what the real benefit is there? I mean, obviously it's, it's nice to see the cash infusion. But, you know, you've, as Pat, you said, you've been at these higher rates before.

Was that all pricing and should we assume that kind of maybe rough 2 million per unit pricing and then you can.

Said not going to be margin positive 25, I guess.

Reversal of the amortization looks to be an additive, but I think youre still paying back from the existing.

Mou the 450000.

Can you just help US bridge some of those moving pieces. So we can get a better expectation on 787.

Mark Suchinski: So what is, what is actually, you know, the benefit that you're seeing here? Thanks. Yeah, sure, Peter. A couple of things. Number one, with most OEMs. And, you know, if, if you have production rate increases or model mix or new, new derivatives, the OEMs always own the tooling, right? And so that's unchanged from our previous agreements. But, in this current environment, when we look at the model mixes, and we have the dash 7, the 8, the 9, the 10s, you know, the Boeing is selling more 7s, more 10s, and that has an impact on our production system.

Yes sure Michael.

I'm not going to comment specifically on what the price increase is per unit.

But I think what you should take from the agreement as we're reversing forward losses.

Where previously in the future our cost was higher than our price.

So when you reduce or four loss right and the costs are.

Cost forecast is unchanged.

<unk> benefit so.

Those losses or those cash losses that we would book in the future. We're reversing those because those are no longer exist and then when we talk about when we get to positive margins on that program. We're at.

Mark Suchinski: And so therefore, it's going to require us to make some capital investment. And so one of the benefits of the agreement, and we appreciate this from Boeing, is they're going to pay for some capital. That normally, the spirit would have to pay. And normally, what would happen is as we built those units, we'd absorb more overhead, and that would help profitability. But the big benefit here is it's a combination of tooling and capital.

Mark Suchinski: That Boeing is going to pay for. They've given us an advance in the fourth quarter, and some funding in 24, and a little bit in 25. And that's going to result in us spending a higher cap-ax in 24 and 25 to reflect the new models and the adjustments we need to make in the production system. So there is a benefit to spirit. It's going to be a little lumpy when the receipts come in and when the funds go out. But we think our Boeing customer, they're making the actual capital investment themselves. And so we appreciate that.

Four five months moving to seven a month, so it's going to take us a little time to absorb some of that overhead.

And get the full benefits of the pricing agreement and so.

<unk>.

When we look at the.

The early part of 2025.

Be it at a higher rate than we are right now and based on the price, we're getting paid per unit and what our cost projections are.

We talked about being positive margins and we expect that to be a benefit on an ongoing basis. So.

Again, I don't want to get into specifics about how much we got paid but it's a big big deal to spirit. We're at the point now where we were in a loss position since the essentially the inception of the program and here in short order.

Our cash and the revenue will be higher than our cost and it'll be a cash positive program for us and so.

Mark Suchinski: So really, that's in the nutshell. It's a nice little benefit, although it's cash neutral. It is a benefit to spirit. It's a nice little benefit to spirit. Appreciate to call her. Thanks, Mark. Sure thing.

Good thing for us.

As that program starts to go up in rate here over the next 12 to 18 months.

Got it I'll keep it to one thanks guys.

Thank you.

Michael Ciarmoli: Our next question comes from Michael Ciarmoli, from Truist. Please go ahead. Hey, good morning, guys. Thanks for taking the question. Good morning. Pat or Mark, good morning.

Yeah.

Our last question today comes from Kristine <unk> from Morgan Stanley. Please go ahead.

Hey, Pat and Mark the MLA with Boeing clearly signals to spirit equity and bond holders.

Michael Ciarmoli: Just on the MOA, can you maybe help us out or give us a little bit more detail? Obviously, we kind of can triangulate where the 787 deliveries are going to be this year. You got the 60 million revenue increase. I mean, was that all pricing? And should we assume that's kind of maybe rough 2 million per unit pricing? And then you kind of said, not going to be margin positive for 25.

Strategic importance to Boeing.

That said operations continued to get worse with the forward losses, and a negative cumulative catch ups even in defense.

From your conversations with Boeing.

Degree does boeing's financial support extend and Ken billing step in to explicitly hub underwrite the refinancing of the 2025 maturities.

Michael Ciarmoli: I guess the reversal of the amortization, you know, looks to be an additive, but I think you're still paying back, you know, from the existing MOU, the 450,000. Can you just help us bridge some of those moving pieces so we can get a better expectation on 787? Yeah, sure, Michael. You know, I'm not going to comment specifically on what the price increase is per unit. But I think that what you should take from the agreement is we're reversing forward losses where previously in the future our cost was higher than our price.

Hey, good morning Christine.

Okay.

Interesting question.

And we do think our big customer for for the agreement that we have in place and we think it's a.

<unk> deemed it as a win win.

I wouldn't view it as charity I think we performed.

A great service to our customers I think we do a great job performing on their programs and so overall it's a.

They describe it as a win win and we view it as a as a win win.

As it relates to refinancing strategies.

As I've said before we have access to the capital markets, we don't need Boeing to underwrite us as we think about our strategies around upcoming maturities.

Michael Ciarmoli: So when you reduce a four loss, right, in the cost, our cost forecast is unchanged, it's a pricing benefit. So, you know, those losses or those cash losses that we would book in the future, we're reversing those because those no longer exist. And then when we talk about, you know, when we get to positive margins on that program, you know, we're at, you know, 4 or 5 a month moving to 7 a month.

And I would just kind of leave it at that.

Great and if I could do a follow up when we factor in the current inflation environment, the higher labor costs.

And the pricing step down for the 737 come 2026.

Michael Ciarmoli: So it's going to take us a little time to absorb some of that overhead and get the full benefits of the pricing agreement. And so, you know, when we look at the early part of 2025, you know, we're going to be at a higher rate than we are right now. And based on the price we're getting paid per unit and what our cost projections are, we talked about being positive margins. And we expect that to be a benefit on an ongoing basis.

What should margins for the program B for the 737 at that point.

How does that compare to where we were around 2019 levels.

Yeah, Hey, Kristine I'd, just say this eight before we jump to 2026.

Let us get through 2023.

And and have a good robust discussion with you in February about 2024.

We'll have those discussions in good time.

Michael Ciarmoli: So again, I don't want to get into specifics about how much we got paid, but it's a big, big deal to spirit. We're at the point now where we were in a lost position since essentially the inception of the program. And here in short order, you know, our cash and the revenue will be higher than our cost and it'll be a cash positive program for us. And so good thing for us as that program starts to go up and rate here over the next 12 to 18 months. Got it. I'll keep it to one. Thanks, guys. Thank you.

Great. Thank you.

Thank you.

This concludes today's conference call. Thank you very much for dialing in and have a wonderful day.

[music].

Yes.

[music].

Okay.

Kristine Liwag: Our last question today comes from Christine Lewag from Morgan Stanley. Please go ahead. Hey, Pat and Mark, the MOA with Boeing clearly signaled to spirit equity and bondholders, spirit strategic importance to Boeing. I mean, that said, operations continue to get worse with the forward losses and the negative cumulative catch-up even in defense.

Okay.

[music].

Yeah.

Mark Suchinski: So from your conversations with Boeing, to what degree does Boeing's financial support extend, and can Boeing step in to explicitly help underwrite the refinancing of the 2025 maturities? Hey, good morning, Kristine. You know, an interesting question, and we do thank our big customer for the agreement that we have in place, and we think it's a team that is a win-win. You know, I wouldn't view it as charity. I think we perform a great service to our customers.

Mark Suchinski: I think we do a great job performing on their programs. And so overall, they describe it as a win-win, and we view it as a win-win. As it relates to refinancing strategies, as I've said before, we have access to the capital markets. We don't need Boeing to underwrite us as we think about our strategies around upcoming maturities, and I would just kind of leave it at that.

Kristine Liwag: Great, and if I could do a follow-up, you know, when we factor in the current inflation environment, the higher labor costs, and the pricing step down for the 737, come, you know, 2026, what should margins for the program B for the 737 at that point, and how would that compare to where we were, you know, around the 2019 levels? Yeah, hey, Christine, I would just say this, hey, before we jump to 2026, let us get through 2023 and have a good robust discussion with you in February about 2024. We'll have those discussions in good time. Great, thank you. Thank you.

Operator: This concludes today's conference call. Thank you all very much for dialing in, and have a wonderful day.