Spirit AeroSystems : Q1 2021 Spirit AeroSystems Holdings, Inc. Earnings Conference Call Transcript

Corrected Transcript

05-May-2021

Spirit AeroSystems Holdings, Inc. (SPR)

Q1 2021 Earnings Call

	Total Pages: 27
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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Q1 2021 Earnings Call	05-May-2021

CORPORATE PARTICIPANTS

Aaron Hunt	Samantha J. Marnick
Senior Leader-Sales and Marketing, Spirit AeroSystems Holdings, Inc.	Chief Operating Officer & Executive Vice President, Spirit AeroSystems
Thomas C. Gentile III	Holdings, Inc.
Mark J. Suchinski
President, Chief Executive Officer & Director, Spirit AeroSystems
Holdings, Inc.	Chief Financial Officer & Senior Vice President, Spirit AeroSystems
	Holdings, Inc.

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OTHER PARTICIPANTS

Carter Copeland	Hunter Keay
Analyst, Melius Research LLC	Analyst, Wolfe Research LLC
Myles Walton	George D. Shapiro
Analyst, UBS Securities LLC	Analyst, Shapiro Research LLC
Sheila Kahyaoglu	Kristine Tan Liwag
Analyst, Jefferies LLC	Analyst, Morgan Stanley
David Strauss	Robert Stallard
Analyst, Barclays Capital, Inc.	Analyst, Vertical Research Partners LLC
Seth M. Seifman	Noah Poponak
Analyst, JPMorgan Securities LLC	Analyst, Goldman Sachs & Co. LLC
Robert Spingarn	Michael Ciarmoli
Analyst, Credit Suisse Securities (USA) LLC	Analyst, Truist Securities, Inc.
Ken Herbert	Peter J. Arment
Analyst, Canaccord Genuity LLC	Analyst, Baird Equity Research
Douglas S. Harned
Analyst, Sanford C. Bernstein & Co. LLC

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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Q1 2021 Earnings Call	05-May-2021

MANAGEMENT DISCUSSION SECTION

Operator: Good morning, ladies and gentlemen, and welcome to Spirit AeroSystems Holdings, Incorporated's First Quarter 2021 Earnings Conference Call. My name is Jamie and I'll be your coordinator today. After today's prepared remarks, there will be an opportunity to ask questions. [Operator Instructions] Please also note today's event is being recorded.

At this time, I'd like to turn the presentation over to Aaron Hunt, Director of Investor Relations. Sir, please go ahead.

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Aaron Hunt

Senior Leader-Sales and Marketing, Spirit AeroSystems Holdings, Inc.

Thank you, Jamie, and good morning, everyone. Welcome to Spirit's first quarter 2021 earnings call. I'm Aaron Hunt, Director of Investor Relations. And with me today are Spirit's President and Chief Executive Officer, Tom Gentile; Spirit's Senior Vice President and Chief Financial Officer, Mark Suchinski; and Spirit's Executive Vice President and Chief Operating Officer, Sam Marnick. After opening comments by Tom, Sam and Mark regarding our performance and outlook, we will take your questions.

Before we begin, I need to remind you that any projections or goals we may include in our discussion today are likely to involve risks, which are detailed in our earnings release, in our SEC filings and in the forward-looking statement at the end of this web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of non-GAAP measures we use when discussing our results. And as a reminder, you can follow today's broadcast and slide presentation on our website at investor.spiritaero.com.

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

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Thomas C. Gentile III

President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc.

Thank you, Aaron, and good morning, everyone. Welcome to Spirit's first quarter results call. A year ago, we were contending with the unprecedented disruption and uncertainty from the continued 737 MAX grounding and COVID-19 pandemic. Since then, the FAA lifted the 737 MAX grounding order, and shortly after that, the aircraft resumed commercial service.

Today, the 737 MAX is certified in the US, UK, Europe and many other parts of the world. Additionally, Boeing has secured several new orders from airlines, including large orders from Southwest, Alaska Air [Airlines], and Ryanair who will take delivery of their first newly certified 737 MAX 8200 aircraft in the near future.

The COVID-19 pandemic has had a significant global impact. The aviation industry saw more than 19,000 aircraft grounded and air traffic down more than 95% at the worst point last April. Thanks to the tireless efforts of many to mitigate the severe impact of COVID-19, we believe we are now on the path to recovery. We continue to see encouraging news on the return to commercial air travel with domestic routes, primarily flown by narrowbody aircraft leading the way.

In the US, the TSA checkpoint travel numbers have been consistently staying above the 1 million mark since early March. And more recently, we have seen many days above 1.5 million travelers, including 1.6 million travelers

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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Q1 2021 Earnings Call	05-May-2021

last Sunday. We have observed a similar domestic recovery in China. We believe Spirit is well-positioned to benefit from this trend of recovering domestic air travel in the largest aviation markets given that 85% of our backlog is narrowbody aircraft.

In line with the improved narrowbody outlook, as we described in our 10-K, Spirit is planning to produce about 160 737 MAX aircraft in 2021. This plan allows for us to burn down the Boeing inventory of 737 MAX chipsets stored in Wichita and Tulsa. With the current outlook, we should be at our targeted number of a permanent buffer to cushion the production system toward the second half of 2022. We have regular conversations with Boeing on the current environment and we'll work closely with them to make any necessary rate adjustments as the year progresses.

As for our Airbus narrowbody programs, we have plans in place to support the A220 and the A320 Airbus schedule increases as the air traffic demand recovery continues.

International air traffic demand still remains at relatively low levels versus pre-pandemic times and is expected to take longer to recover. Consequently, we have experienced, and believe there will continue to be, pressure on our widebody programs. The widebody programs have created significant pressure on our overall performance as the OEMs have adjusted production rates on those programs downward.

On the A350, schedule changes this year and next year contributed to the forward loss of $29 million that we announced this quarter. The forward loss also included some charges for tooling and build process improvements to improve product quality. We decided to implement the improvements at our Kinston facility during this period of lower production rates.

Over the last few months, we have also been working with Boeing on the 787 program. At Boeing's request, we conducted an extensive review and engineering analysis as a result of fit and finish issues that they had identified on other parts of the aircraft.

While there were no safety or flight issues, areas of rework were identified. We have started the rework and Boeing has reinitiated deliveries of the 787. The rework plan that we have put into place supports Boeing's 787 delivery schedule. The engineering analysis and the projected rework will drive a forward loss of $29 million. Mark will provide more detail on the forward losses in his comments.

The uneven recovery from the pandemic created challenges during our first quarter. During 2021, we expected to see performance start to normalize as we get into the second half of the year, assuming air traffic recovery remains on track. Overall, our 2021 free cash flow usage is expected to be between $200 million and $300 million after considering the $300 million cash tax benefit.

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

Now, I'd like to turn our focus to the integration process of our recently acquired Belfast, Casablanca, and Dallas sites. Our Chief Operating Officer, Sam Marnick, has joined us today and I would like to turn the call over to her to give you a few updates on the integration process as well as progress in our aftermarket business. Sam?

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Samantha J. Marnick

Chief Operating Officer & Executive Vice President, Spirit AeroSystems Holdings, Inc.

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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Q1 2021 Earnings Call	05-May-2021

Thank you, Tom. The integration of our three newest sites is progressing to plan. To date, we have completed roughly 80% of the 450 tasks we have identified to capture synergies and integrate the operations into Spirit. Some of the remaining tasks such as exiting the information technology Transition Services Agreement will take longer by [ph] plan design (00:07:00).

A large part of our integration focus is capturing the synergies which we projected to be 6% of revenues. Based on 2021 revenues that are expected to be $700 million, we estimate the synergies to be $42 million.

The areas we are focusing on include A220 wing costs, supply chain, infrastructure, and engineering. We are on target to achieve the $42 million and perhaps even exceed it by 2023. In the period beyond 2023, we are identifying additional productivity opportunities.

In addition, as part of our integration, we are evaluating the Belfast pension plan and are in formal consultation with the employees and the unions on this matter. The current plan is closed to new participants and we are evaluating closing the plan to future accrual and replacing it with a defined contribution benefit plan.

Another significant part of this acquisition was the strong aftermarket business. Our Belfast and Dallas sites are now key pieces of our aftermarket revenue growth plan. While we've seen some COVID-related headwinds to the aftermarket business in the near term, the combined team is working to transfer repairs between sites and strengthen customer relationships as air traffic recovers.

In the first quarter, some of our activities including moving tooling and rotables to Belfast to support Boeing programs. Our Belfast operations have recently completed their first Boeing 777 thrust reverser repair.

To grow the aftermarket business further, we recently announced that we acquired the assets of Dallas-based Applied Aerodynamics, which provides radome and flight control surface repairs. We also announced the signing of a new JV agreement in Asia with EGAT in Taiwan, which enables us to provide our full suite of expanded repairs to that region.

All of these actions are contributing to our target of building the Spirit aftermarket business to $500 million in revenue at accretive margins by 2025.

Now, I'll turn it back over to Tom.

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Thomas C. Gentile III

President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc.

Thanks, Sam. In addition to diversifying into aftermarket, we've also been accelerating diversification into defense programs. After growing almost 20% in 2020, we expect our defense business revenue to grow 15% in 2021. The excess commercial capacity we have in our widebody factories, especially those that produce composite structures, provide us with immediate capacity that we can repurpose to defense programs.

We have been fortunate to win positions on several new classified defense projects. We believe we are on track to achieve $1 billion of defense revenue by the mid-2020s with typical defense margins. The programs of record for where we have work content will generate approximately $6 billion of future revenue.

In addition to diversifying our business, we've also been focused on delevering to reduce the additional debt we have accumulated during this pandemic period. One step we took was to repay $300 million in floating rate notes in February. Our next debt maturity is $300 million in 2023. We also have other pre-payable debt that could be

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