Spirit AeroSystems : Q4 2021 Spirit AeroSystems Holdings, Inc. Earnings Conference Call Transcript

Corrected Transcript

02-Feb-2022

Spirit AeroSystems Holdings, Inc. (SPR)

Q4 2021 Earnings Call

	Total Pages: 28
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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Q4 2021 Earnings Call	02-Feb-2022

CORPORATE PARTICIPANTS

Aaron Hunt	Samantha J. Marnick
Investor Relations, Spirit AeroSystems Holdings, Inc.	Executive Vice President & Chief Operating Officer; President,
Thomas C. Gentile III	Commercial, Spirit AeroSystems 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

Myles Walton	Cai von Rumohr
Analyst, UBS Securities LLC	Analyst, Cowen and Company
Douglas S. Harned	Hunter Keay
Analyst, Sanford C. Bernstein & Co. LLC	Analyst, Wolfe Research LLC
David Strauss	Kristine Tan Liwag
Analyst, Barclays Capital, Inc.	Analyst, Morgan Stanley & Co. LLC
Robert Spingarn	Ronald J. Epstein
Analyst, Melius Research LLC	Analyst, BofA Securities, Inc.
Sheila Kahyaoglu	Michael Ciarmoli
Analyst, Jefferies LLC	Analyst, Truist Securities, Inc.
Peter J. Arment	Noah Poponak
Analyst, Robert W. Baird & Co., Inc.	Analyst, Goldman Sachs & Co. LLC
George David Shapiro	Seth M. Seifman
Analyst, Shapiro Research LLC	Analyst, JPMorgan Securities LLC
Ken Herbert
Analyst, RBC Capital Markets LLC

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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Q4 2021 Earnings Call	02-Feb-2022

MANAGEMENT DISCUSSION SECTION

Operator: Good morning, ladies and gentlemen, and welcome to the Spirit AeroSystems Holdings, Inc.'s Fourth Quarter and Full Year 2021 Earnings Conference Call. My name is Charlie, and I will be your coordinating your call today. [Operator Instructions]

I would now like to turn the presentation over to Aaron Hunt, Director of Investor Relations. Please proceed.

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Aaron Hunt

Investor Relations, Spirit AeroSystems Holdings, Inc.

Thank you, Charlie, and good morning, everyone. Welcome to Spirit's fourth quarter and full year 2021 results 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, Chief Operating Officer and President of Commercial Segment, 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 fourth quarter and full year 2021 results call. Despite the challenges we faced in 2021 due to the ongoing COVID-19 pandemic, we successfully navigated the year delivering cash flow of negative $214 million, which was within the expected range of negative $200 million to negative $300 million that we communicated last year.

Throughout the year, we remain focused on keeping our employees safe, meeting our customer commitments and progressing on our three main priorities. Diversifying our revenues, delevering a $1 billion over three years and driving margins to our 16.5% target. During 2021, we made good progress on our diversification. We substantially completed the integration of the assets we acquired from Bombardier in Belfast, Casablanca, and Dallas, with only minor items remaining. The efforts included exiting the information technology transition services agreement with Bombardier six months early and closing the defined benefit pension plan in Belfast to new participants.

Our Airbus work packages increased significantly from this acquisition with the addition of the A220 integrated wing and center fuselage and strengthened Spirit's position as one of the top external suppliers to Airbus. We also became a top supplier to Bombardier with the addition of significant business jet content. The acquisition also increased our Aftermarket business and established a good foundation on which we continued to build during the year.

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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Q4 2021 Earnings Call	02-Feb-2022

In addition, the acquisition even help grow our defense business. Shortly after closing the deal, we learned that the Belfast team had won the contract to build a loyal wingman demonstrator for the UK Ministry of Defense, known as Project Mosquito. The acquisition was a meaningful accelerator to our diversification efforts. As a result, in the third quarter, we announced we would begin to report financial results in three new business segments: Commercial, Defense & Space and Aftermarket. We also changed our organization to align with these three new segments and appointed Sam Marnick, Duane Hawkins and Kailash Krishnaswamy respectively to lead the new segments.

I'll turn it over to Sam now to talk more about the Commercial segment. Sam?

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Samantha J. Marnick

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

Thank you, Tom, and good morning, everyone. In the Commercial business segment, we're focusing on three priorities in 2022. First, execution on our narrowbody production program to meet the coming increases in production rate. Second, continued progress on productivity projects to help Spirit achieve the 16.5% margins once the MAX reaches 42 aircraft per month, and a renewed focus on growth for the future. But first, let's look at execution.

In 2021, we made many changes to our operations so that we can be ready to meet the high-end narrowbody production rates that our customers will need in the future. Improvements are partly based on our experience from the last series of 737 rate increases. Now, while some of the complexities like simultaneously producing multiple models of the NG and the MAX, whilst adding tooling and other equipment are behind us, we are putting measures in place to help us meet challenges we might face. These changes will help us achieve solid execution in the Commercial segment.

For example, the new automated 737 floor beam assembly line which reduces the number of hours required to fabricate and assemble those structures will improve our productivity and quality execution. The advanced digitization on the production floor and improved production flow in many areas is expected to result in better efficiency, such as reduced wait times between workstations.

The launch of the Global Digital Logistics Center consolidates thousands of square feet and parts kits to a centralized location at our Wichita site. And at our Prestwick site, our new automated A320 spoiler line is a state- of-the-art system to produce hundreds of spoilers at peak rate.

And looking at our readiness preparations, we have established a team of specialized employees to plan for Spirit's and our supply chain readiness. The team has been preparing plans for the production increases ahead to be ready to react to emerging pressures. Additional capacity in our fabrication area, a new capacity we gained with our Bombardier asset acquisition, may be used to help mitigate risk.

Our 2022 production plan factors in a reduction in the 737 shipset inventory, which is currently at 97%. By the end of 2022, we expect to see the level reach approximately 20 shipsets, which will remain as a permanent buffer inventory. We are also planning for increased production on the 737 and will remain aligned with Boeing's communicated 31 aircraft per month production rate. We believe the rate increase preparations we have in place will help to drive the execution of narrowbody programs in 2022 and beyond.

Now, as we move to higher narrowbody production rates, we also remain focused on driving our costs down and margins up. The team is working on a number of initiatives to reduce costs. We have a team that regularly

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Spirit AeroSystems Holdings, Inc. (SPR)	Corrected Transcript
Q4 2021 Earnings Call	02-Feb-2022

reviews what we make our factories versus what we purchase from suppliers, so that we can have a cost- effective mix based on what we see in our production plants.

Another closely related initiative is our regular review of asset utilization. We have teams in place to optimize our footprint to improve overhead costs and repurpose space for new work ahead. We closely watch the available hours of our equipment capacity for opportunities to maximize our usage and margin improvement.

Finally, turning to growth, we are pleased that in 2021, Spirit won two new business jet programs, including the nacelle for the new Dassault Falcon 10X. The team also began work with an emerging electric vertical takeoff and landing, or eVTOL, company that promises exciting future potential. We have many new opportunities that the team is evaluating, and we intend to build a pipeline of new Commercial opportunities.

In summary, for 2022, we expect to see our narrowbody production and deliveries to continue to increase. The improvements we have put in place and the team we have assembled have been anticipating the higher production rates, and we look forward to the opportunities we have for our new Commercial segments.

With that, I'll turn back over to Tom.

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Thomas C. Gentile III

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

Thanks, Sam. Our Commercial business segment has a strong position on current Airbus and Boeing programs. We have made a number of changes to enable us to meet the expected rate increases on narrowbody programs, but we also have many other growth opportunities as Sam described.

Our Defense & Space business has also been very active in setting us up for future growth. Early in the year, we announced that NASA had selected our FMI business in Maine for a contract to provide thermal protection systems to support several of their emerging projects. Along with the NASA award, our Defense & Space team also won several new classified contracts. In the summer, we joined Lockheed Martin to unveil Polaris, a digital engineering and advanced assembly demonstrator that will help our customer reduce cost and improve quality. Then in October, we opened the National Defense Prototype Center in partnership with Wichita State University's National Institute for Aviation Research, or NIAR. We continue to win new Defense business and now have 24 development projects over $1million that could lead to significant future revenue. In 2016, we had just one such program over a $1 million.

One of the ways we have been able to win new programs recently is by repurposing widebody capacity which is available due to the slow recovery in international air traffic and lower widebody production rates. We have plans for our Defense footprint to expand from about 500,000 feet today to almost 1 million square feet over the next two years.

In addition, we continue to execute against $6 billion in funded programs of record and are increasing and finalizing new additional multiyear contracts that will grow that funded amount. Moreover, our new business pipeline for Defense & Space is extremely strong. We have many additional projects and opportunities that the Defense & Space team is actively shaping. We remain on track to grow our Defense & Space business to $1 billion in revenue by 2025 at typical defense margins.

Turning to our Aftermarket segment, we built upon the foundation from our Bombardier asset acquisition and added Applied Aerodynamics to the Spirit portfolio early in 2021. The Applied Aerodynamics acquisition gave us radome and wing component repair capability to add to our Airbus and Boeing engine, nacelle and flight repair -

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