Spirit AeroSystems Holdings Inc (SPR) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2007 Spirit AeroSystems Holdings Earnings Conference Call.

My name is Letitia, and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

At this time, I will turn the presentation over to Mr.

Phil Anderson, Treasurer and Vice President of Investor Relations.

Please proceed, sir.

Good morning.

And welcome to Spirit's first quarter 2007 earnings call.

I'm Phil Anderson.

And with me today are Jeff Turner, Spirit's President and Chief Executive Officer and Rick Schmidt, Spirit's Chief Financial Officer.

After comments by Jeff and Rick about our performance and our outlook, we will take your questions.

We have provided detailed information in the press release issues earlier today.

As a reminder, you can follow today's broadcast and slide presentation on our website at spiritaero.com.

Before we begin today, I need to remind you that any projections and goals we may include in our discussions this morning are likely to involve risks which are detailed in our news release, in our SEC filings and in the forward-looking statement at the end of this Web presentation.

Let's begin.

This morning, Jeff will take you through some of the first quarter accomplishments, Rick will review the financials, and then Jeff will briefly summarize.

Then we will be happy to answer your questions.

I will now turn the presentation over to Jeff Turner.

Thank you, Phil.

And good morning.

Let me welcome you to our first quarter 2007 earnings call.

This morning, I will take you through some of our first quarter 2007 accomplishments.

And then I'll turn it over to Rick to review the financials.

On slide two, you see we had a good first quarter as evidenced by our revenue growth and profitability.

Our revenues were $954 million, an increase of 42% over the same time period of 2006.

We achieved this top-line growth through the acquisition of Spirit Europe in the second quarter of 2006 and increased volumes on Boeing products.

We delivered shareholders $0.50 of earnings per share, up from $0.19 per share a year ago.

Operating performance was strong across the company as we expanded our operating margins from 7.5% to 10.9% quarter-over-quarter, and successfully fulfilled our commitments to our customers by maintaining on-time deliveries and high-quality products and services.

We generated cash flow from operations in line with our plan and reinvested in the business, funding new programs and increased capacity for current programs.

The 787 Program remains on track as we move into production and begin increasing the rate in support of first flight, flight test and our delivery requirements.

During the quarter, we were pleased to be announced to Boeing's Global Tanker team that is offering the KC-767 advanced tanker to the United States Air Force.

The KC-767 is a great aircraft that I'm confident will meet or exceed the customer's mission needs well into the future if it is selected.

During the month of April, we won some incremental work in our aftermarket business to provide 777 thrust reverser repair, overhaul services and rotables leasing to Cathay Pacific.

We also reached agreement with Boeing to provide nacelle component repair and overhaul services for Boeing 777 and next-generation 737 airplanes.

Both of these successes recognize the value of the Spirit brand as the sole-source designer and original manufacturer of thrust reversers on these two best-selling commercial programs.

Now, on slide three, let's talk about some of the specific accomplishments across the business during the quarter.

Fuselage systems, our largest segment, continued to execute well, increasing revenues by 26% and increasing operating margins to 18.6% in the quarter as R&D expenses on the 787 transitioned to capitalized pre-production cost in the first quarter of 2007.

The team delivered the 2,200 next-generation 737 to Boeing during the quarter, an impressive milestone, considering the first next-generation 737 was delivered to Southwest airlines less than ten years ago.

Today, the 737's success continues with over 1,500 airplanes in our expected backlog at the end of the first quarter.

Given the strong continued demand for all of our products, we are investing in additional constraint relieving capacity at certain points in the production process, thereby increasing our overall output in support of our customers' future deliveries.

We continue to progress well on the development of the Boeing 777 freighter and the 747-8 across our business segments.

At the end of the first quarter, the 777 freighter made up almost 20% of the 777 backlog, while the 747-8 has firm orders for 97 airplanes, 65% of which are freighters.

These are new programs that are being well-received in the marketplace.

On slide four, you see the Propulsion team also increased revenue and operating margins during the quarter.

I mentioned to you during our year-end 2006 earnings call that the Propulsion Systems team continues to lead the industry in the application of technology and materials.

The picture on this chart is a great example of what I was talking about.

This is the 787 engine pylon production line, where pylons for both the General Electric and Rolls Royce engines are manufactured.

The new drill technology being applied is reducing manufacturing time and producing excellent quality for the 787 -- this manufacturing technology that we can apply to existing programs as well as future programs.

You may recall from the investor conference that Spirit, in conjunction with the program, designed the pylon for the 787 to enable rapid engine changeover between engine types, making the asset more fungible between airline operators and more attractive to aircraft financers.

These and others like them are ideas we are bringing to derivative programs and to new programs.

On slide 5, the Wing Systems segment also increased revenues and operating margins during the quarter.

The acquisition of Spirit Europe, combined with overall increased sales, achieved revenues of over $240 million in the quarter.

Our deliveries of Airbus' single-aisle A320 aircraft increased by 8% in the first quarter of '07 over the fourth quarter of '06.

First quarter operating margins increased to high single digits as improving profitability remained a priority for the segment.

The Wing team is on track on the 787 and continues to make good progress on both the 777 freighter and the 747-8 development programs.

Turning now to the 787 program on slide six, the market for this aircraft remains robust.

In fact, today is the third anniversary of the 787 program launch.

And at the end of the first quarter 2007, Boeing had booked 544 orders from 44 customers around the world, making it the best-selling commercial aircraft in history.

This is a great compliment to our customer strategy and to the Spirit people that helped design the aircraft, and who are working diligently to ensure we meet our customers' commitment on this program.

Today, we are pleased with our progress on the 787.

Our design for manufacturing approach is yielding excellent quality.

And we are supporting our customers' schedule needs.

In fact, we recently rolled out the first flight-forward fuselage at Spirit and now have eight forward fuselages in the production process.

While we are pleased with good progress to date, we continue to manage the program and our supply base closely as we move forward towards increased production volumes.

Now, let me turn it over to Rick, who will provide more details on our financial results and outlook.

Thanks, Jeff.

And good morning, everyone.

Slide eight summarizes our financial results for the first quarter, starting with revenues up 42% over the prior year, driven by higher delivery rates to volume in the Spirit Europe acquisition.

Operating margins improved significantly year-over-year in all of our segments, improving by 340 basis points, largely due to increasing delivery rates and lower R&D expense.

Cash flow from operations and capital expenditures, at $50 million and $88 million respectively, were in line with expectations and reflect our continuing investment in the new 787 program, as well as working capital to support higher sales levels.

Despite the significant reinvestments in our core business, our balance sheet continues to strengthen, and we continue to have substantial liquidity available for future growth initiatives.

I'll describe all of these items in more detail in the upcoming slides.

Slide nine provides a graphical depiction of our progress on key metrics, both year-over-year and sequentially versus the fourth quarter.

As I mentioned, revenue grew 42% year-over-year and 12% sequentially over Q4.

The year-over-year growth is partly attributable to the Spirit Europe acquisition, which was completed on April 1, 2006 and added $127 million to Q1 2007 revenues.

Excluding Spirit Europe, revenues grew 23% largely in line with growth in our deliveries to Boeing, but somewhat above the growth in Boeing's airplane deliveries to their customers, due to the lingering effects of the IAM strike at Boeing in late 2005.

R&D expense in the first quarter was $10 million, 75% below the prior year level, and 50% below Q4 primarily as result of the completion of the R&D phase for the 787 program.

These reductions in R&D expense have contributed to improving operating margins.

Operating margins continue to expand, reaching 10.9% in the quarter.

This represents a 340 basis-point improvement over the prior year period, and a 40 basis-point improvement over the fourth quarter, if you exclude the IPO-related charges that we booked in that period.

These improvements are largely driven by higher sales volumes, various productivity and cost reduction initiatives and lower R&D spending.

Lastly, fully diluted EPS grew significantly year-over-year, from $0.19 in the prior year period to $0.50 this year.

This improvement is driven by the combination of higher volumes, improving cost productivity and lower R&D expense.

EPS is also up sequentially from the fourth quarter, after adjustment of the IPO-related charges that I mentioned, and release of tax valuation reserves, both of which were booked in that period.

The complete reconciliation of the adjustments to the fourth quarter is included in the appendix to this presentation.

Slide ten details the full P&L for the first quarter versus the same quarter in the prior year.

In addition to the items I mentioned previously, Spirit did recognize $6 million of favorable changes in contract estimates during the quarter.

These changes in contract estimates have been driven by favorable trends in our material, labor and overhead costs and represent a continuation of improvements reflected in prior quarters, but to a lessening degree in line with our expectations.

In the quarter, the $6 million favorable adjustment was offset almost entirely by unfavorable nonrecurring adjustments in Spirit Europe.

So, the net impact of the cume catch adjustments was minimal in the quarter.

Almost all of the above items are reflected within the Wing segment.

So, segment margins are largely unaffected.

Prior year first quarter was also favorably impacted by cume catch adjustments of approximately $34 million relating to revenues booked in 2005.

This $34 million favorable adjustment increased reported gross profits versus the current-year period.

A similar situation occurred in Q4 2006, where $22 million of favorable cume catch adjustments were recorded in the quarter.

This adjustment, again, increases reported gross profits and segment margins versus the current-year period.

Lastly, you'll note that SG&A expense is flat year-over-year as a result of declining stock compensation expense offsetting normal increases to support a growing business.

Stock compensation expense was $7 million this quarter versus $13 million in the year-ago period.

Slide 11 summarizes the changes in our cash and debt balances during the quarter.

Cash balances at the end of the quarter of $157 million remain substantial, but declined about $27 million or 15% from the year-end 2006, due to expected negative free cash flow in the quarter, as I'll describe in a minute.

That balance has declined slightly in the quarter due to some minor scheduled repayments.

As you recall, Spirit retired about $100 million of debt in the fourth quarter with a portion of the proceeds from our IPO.

With improving profitability, Spirit's balance sheet continues to strengthen.

At the end of Q1, our net debt-to-capital ratio was below 33%, and our net debt to projected 2007 EBITDA ratio was well below 1.

These are both indicators of a financially healthy company.

Additionally, the company continues to have over $540 million of short-term liquidity available through our $400 million revolver, which remained unused during the quarter, and our available cash balances.

Slide 12 details our cash flow for the quarter versus the prior year.

Operating cash flow for the quarter was $50 million, in line with expectations, but heavily influenced by working capital increases of almost $100 million.

The working capital increase was about evenly split between growth in accounts receivable to support higher sales levels, and growth in inventory offset by slightly higher accounts payable levels.

Inventory growth was largely driven by increases in capitalized development costs of $46 million primarily for the 787 program.

At the end of the quarter, capitalized development costs were $190 million.

On a year-over-year basis, operating cash flow was down approximately 44% due largely to a reduction of $71 million in customer advances.

Capital expenditures at $88 million for the quarter remain at high levels, as we complete the installation of production capacity for the 787 program.

Over half of our capital expenditures in Q1 were for the 787.

Overall, the net aggregation of cash flow from operations, capital expenditures and customer reimbursement of capital expenditures was $27 million negative in the quarter, and this drove the reduction in our cash balance since year-end 2006.

Moving to slide 13, here we highlight our guidance for the full year 2007.

This guidance is unchanged from what we issued in conjunction with our year-end 2006 earnings release.

And we are reaffirming this guidance today.

To reiterate some of the highlights, we expect revenues between $4.0 billion and $4.1 billion, operating income between $400 million and $420 million, and fully diluted EPS between $1.80 and $1.90.

Cash flow will continue to be a major management focus all year, with projected working capital increases and further capital expenditures in support of the 787 program.

Over all, we continue to expect free cash flow or the net aggregate of cash flow from operations, capital expenditures and customer reimbursement of capital expenditures to be only slightly positive for the year.

I'd now like to turn it back over to Jeff for some closing comments.

Thank you, Rick.

To summarize on slide 14, we had a good first quarter, growing both our revenues and our earnings, while we continued to reinvest in our business.

Commercial backlogs continued their growth.

Our strong operating performance and the capabilities of our people have us well-positioned in this healthy aerospace market.

We are executing well and have continued opportunities to grow and diversify.

As I mentioned to you at our investors' conference several weeks ago, we are focused on disciplined growth that increases shareholder value.

As I shared with you in our year-end call, our top priority is delivering on our commitments to our customers, executing our backlog and remaining financially strong.

We are committed to delivering financial results that reflect the ability and the quality of our team.

We will now be glad to take your questions.

[OPERATOR INSTRUCTIONS]

And your first question comes from the line of Troy Lahr, with Stifel Nicolaus.

Please proceed.

Thanks.

I wondered if you guys could drill down a little bit more on the fuselage margins -- maybe just kind of quantify how much was 787 R&D versus maybe this mix shift in operating efficiencies.

And also how much of this is really sustainable as we look out for the remaining three quarters of the year?

Rick, you want to try that.

Sure, Troy, if you're looking at the improvements year-over-year, there was relatively little R&D, almost no R&D -- 787 R&D -- that impacted any of our segment margins in the first quarter.

So, I mean, that phase of the 787 program is now behind us.

And as we pointed out, we did have a slight favorable cume catch adjustment in the quarter.

But almost none of that related to the fuselage segment or propulsion for that matter.

Almost all of it related to our Wing Systems business.

So, that's not really impacting our margins in Q1 either.

So, I think the margins that you're seeing today, we believe, are fairly sustainable going forward.

Okay.

And the mix shift should be the same throughout the rest of the year you think?

Yes.

The mix shift -- yes, we do get mix shifts between longer airplanes and shorter airplanes.

But that tends to be fairly minor impact.

So, that should not have a significant impact one way or the other.

Okay.

And just lastly, how much of -- can you kind of quantify or just help us understand the Spirit Europe loss provision -- maybe exactly what that was?

Sure.

Actually it was a number of smaller items that, in the aggregate, came close to the amount we booked in our cume catch adjustment.

About half of it was related to one small contract where we do have a loss.

And the size of that loss increased slightly during the quarter.

So, we booked that entire amount.

And that was a couple of million dollars.

The rest of it were just various odds and ends, some of which related to the acquisition of Spirit Europe originally.

Great.

Thanks guys.

And your next question comes from the line of Howard Rubel, with Jefferies.

Please proceed.

Thank you, very much.

Two questions -- first, with respect to the cume correct, Rick.

When we kind of go through the factory and we've seen everything you've done there, there's an element of integration that is quite impressive.

And so, I'm struggling a little bit with why we only have that cume correct in one segment.

And why wouldn't we see it either in subsequent periods in other parts of the business unit?

Or could you just go through a little bit of the math there?

Sure.

As we said, almost all of the adjustment was in our Wing Systems segment.

And it related to some productivity improvements and some lower material costs specifically related to that segment.

So, those changes did not carry over into the other segments.

As you know, and as we've talked about in prior calls, under contract accounting, because we're using both actual costs behind us and projected costs in front of us, our project costs do include learning curves.

And to the extent that we achieve those learning curves, then you wouldn't expect to see a change in our contract profitability.

So, I think what we saw in the first quarter is that our operational performance was very much in line with our expectations in both the fuselage business and the propulsion business.

Thank you.

And then the follow-up question is you highlighted -- Jeff, you highlighted a couple of aftermarket, we'll call them wins.

Could you help me understand when they're going to impact the business and how you can build on these to capture some additional business beyond that -- either quantify it, or give us a sense of when you're able to turn it on.

Sure, Howard.

A couple thoughts there.

One is, I think we have talked in previous calls and previous meetings where we see about $1 billion total marketplace for aftermarket for products that we are the OEs for.

We have an internal target that will take us several years to achieve to get a quarter of that market.

I think at the investor conference, we answered a question that said we were about at 10% of that now roughly.

What we see here is -- in the recent announcements, is some wins that help us achieve the forecast and the plans that are in place.

The one with Cathay Pacific, we actually have some of that hardware in house today that we're working on.

So, it's part of the plan going forward.

It shows the value that we can bring to the market.

The particular one with Cathay Pacific, you may have noticed that we partnered with Nordam to win that particular piece of work.

So, we see a good, solid piece of business here.

Again, not a huge driver in our business, but something that is value-enhancing for us.

Oh, I agree.

I mean, we've been waiting for some of this to happen.

And I'm trying to figure out when we're going to see it -- when should it translate into a little bit of incremental to what you've been laying out at the $4 billion plus range.

Yes.

Thank you.

And from the line of Cowan & Company with the next question, we have Cai von Rumohr.

Please proceed.

Yes.

Good quarter.

Could you follow up, give us a little more detail?

What was the loss contract in Europe?

Is this something that's likely to recur?

And kind of comment a little bit on the impact of currency in the quarter on a go-forward basis -- the FX in fact.

Sure, Cai.

As I said, it's a very small contract for us.

It's not one of the major contracts there.

And we do believe that this is a one-time event.

So, we should not see this reoccur in subsequent periods.

FX, we do have a small FX impact on our results.

A portion of Spirit Europe's revenues are denominated in pounds and euros.

So, we benefited by a couple of million dollars for the quarter in revenues and really no impact on cost.

We fully hedge that exposure.

So, the P&L impact is immaterial and only has a modest impact on revenues.

On a go-forward basis, is this a concern, because you produce in pounds sterling.

And you have dollar denominated contract that we should be concerned going forward?

Actually overall, Cai, our net exposure in non-U.S.

dollar currency -- so, in our case, pounds and euros -- is very small.

It's on the order of $25 million to $30 million a year.

And we fully hedge that.

So, it has very little impact on our business.

Actually, most of -- a good portion of the Spirit Europe revenues are actually denominated in their local currency.

So, we have a fairly good balance between local currency revenues and costs there.

That's why our exposure is relatively small.

Okay, excellent.

And could you give us a little more color?

You gave us your operating margin guidance.

But R&D looked low in this quarter.

Do you still expect it to be about $60 million for the year?

And SG&A looked a little lower.

You mentioned the stock comp was $7 million.

Where do you see stock comp for the year?

And was there any acquisition restructuring impact in the SG&A in this quarter?

And what do you expect for the year?

There were some minor amounts of what we consider transition expense, which for us at this point are strictly related to our systems transition -- so, as we transition to our own standalone IT systems.

So, we had a modest amount of that in SG&A.

But you noticed, we did not change our guidance for the year, even though we were slightly favorable in Q1 on both.

If you did run rates for both R&D and SG&A expense, we were a little bit favorable to our overall guidance.

But yes, it's one quarter out of the year.

I think after the second quarter, we'll have a better sense of where we'll end up for the year.

But as of right now, we still see ourselves overall tracking towards our guidance.

So therefore, we should look for R&D to pick up as we go through the year.

And SG&A should pick up -- actually that would be flattish as a percent of sales.

Right.

But on an absolute basis would be increasing?

We could see it increasing in the next three quarters.

R&D expense is largely going to be driven by what happens with new programs.

You know, we have some new programs as we've mentioned before, we haven't been able to announce that we're currently spending R&D money on.

Though some of those start to accelerate in the second half of the year.

And there are some other things in our pipeline that we've talked about as well that could generate some additional R&D expense for us in the latter half of the year.

At this point, again, it's -- after one quarter, we just felt it was too early to make a call that some of the lower spending that we've seen in the first quarter is going to continue on for the rest of the year.

Jeff, if you want to add to that.

No, that's.

That's right on.

Terrific.

Thanks.

Thank you.

Representing Citigroup, the next question comes from the line of George Shapiro.

Please proceed.

Good morning.

First question is, if you add back R&D in Q4 and Q1, the margin pre-R&D actually went down from about 12.8% to 11.9%.

So, can you explain what's driving it down?

Absolutely, George.

If you go back and you look at the Q4 press release, you'll see that we booked about $22 million worth of cume catch adjustments in Q4.

And obviously, that did not recur at all with the modest cume catch adjustments that we booked in Q1 that were offset by the items that we talked about.

We really didn't have any of that benefit in Q1.

So, I think if you normalize for that, you'll see that margins improved on a quarter-to-quarter basis.

Okay.

And the other thing, in terms of R&D, if you indeed go up to $60 million for the year, then it probably appears that the operating margin of [10.9] would be the peak for the year in this quarter.

And that's why you didn't change your guidance, which is the actually less than what you reported for this quarter?

Well, I think what we're suggesting, George, is that it's just too early to call on both the operating margin side and on the R&D side at this point.

Okay, but you'll have an additional 60 basis-point head wind from the R&D going up, if indeed you correct in that projection.

No, you're absolutely right.

But as you noticed, we didn't change out guidance in the aggregate.

So --

Okay.

And what's the expectation for Spirit Europe revenues for the year, because this quarter was somewhat more than what I thought.

I think what you're seeing in Q1 should be indicative of the year.

Okay.

And --

And just in generally, George, the first quarter for Spirit Europe -- as you see.

If you kind of annualize our first quarter for the year and compare it to our guidance, you can see that we expect the next three quarters to be high revenue quarters than what we have in Q1.

And that's largely driven by the 787 starting to come into our revenue stream.

Okay.

And you mentioned you capitalized $46 million of 787 R&D this quarter.

What are you going to capitalize for the year?

Well, we expect to have overall another $40 million to $50 million in capitalized development through the end of the 787 program.

So, almost all of that will hit us in 2007.

So, you'll see more of it in the second quarter.

And then you'll start to see it tail off as that program enters full production, all those preproduction costs will start to tail off.

And that was fully reflected in our guidance, as we've talked about before.

And you mentioned in general about transition expenses in response to Cai's question.

Can you just spell out exactly how much they were, and what you expect them to be for the year?

Sure.

Well, we didn't give any specific guidance for transition expenses.

It's embedded in our SG&A.

But actually in the quarter, we spent just under $5 million.

Okay.

And can you provide a run rate for interest income and other income for 2007?

I think what you saw in the first quarter from an interest expense standpoint should be pretty indicative, because we did the debt retirement in the fourth quarter.

So, Q1 represents our current debt level.

Interest income should stay about where it was.

We basically said we'd end the year with the same kind of cash balance we began the year overall.

So, you'll see a little bit of variation in that quarter-to-quarter.

But that should generate interest income that's pretty much in line with what we saw in Q1.

Okay.

And the last one, any resolution on nonrecurring engineering with Boeing?

It looked like you still had it as a $45 million or so receivable.

We continue to work that, George, with Boeing.

And I believe we're making progress.

But that's something that I think will be continuing dialogue as we go through the whole program and derivatives and so on.

Okay.

Thanks, very much.

Thank you.

With Morgan Stanley, you have a question from the line of Heidi Wood.

Please proceed.

Good morning.

I want to go back to the guidance, Rick, and better understand how you're laying out the quarters; because obviously, guidance is unchanged.

And given what you've reported the first quarter, that throws 26%, 28% of the year.

So, you can lay out how you think the second and third and fourth fold out?

I'm not sure I have more to add than what we had said earlier.

A couple of key drivers were the fact that we had under-spent the run rate on both R&D and SG&A expense.

We also, if you looked, our effective tax rate was a little bit below the 34%, a couple of tenths, not significant.

Our share count was a little bit below the 141 that we had expected for the year.

So, I think all of those in the aggregate kind of generated some of the favorable variants to what we would have expected for Q1.

How that's going to unfold over the course of the next three quarters largely depends on some of the variables that we've talked about -- things like new programs.

And the effective tax rate under the current tax accounting requirements tends to be a little more volatile than perhaps it's been in the past.

So, you could see some change there.

So, there are still a number of variables that are out there, not even -- just from financial variables, not even dealing with some of the business variables that are out there -- that we felt it was just a little too early in the year to make a call on our guidance -- to change our guidance.

Oh, I'm not arguing for change.

I'm just trying to -- since we don't have a lot of history with you guys on a quarterly basis, and you have a better bandwidth of the variables that you're looking at, I'm just trying to get a sense as to whether we ought to look for the first half being 60% of the full year -- or anything to give us better color; because again, we're trying to match the comment that I think you made earlier, about the sustainability of the margins in the first quarter, and then some of these R&D issues that are coming in the back half.

So, just hoping you'd provide maybe a little more granularity as to timing.

Sure.

Well, as I said too, the other thing to keep in mind is revenues will be growing in the next three quarters.

We do expect Q1 to be our lowest revenue quarter for the year.

So, clearly, if we maintain margins, that should generate higher income in absolute dollars.

And then the variables become some of the other things that we've talked about, like R&D, SG&A and the tax rates, share account, things like that.

And again, it's just one quarter out of three.

I think once we get the second quarter behind us, we'll have more visibility on some of these issues and be able to re-look at our guidance at that point.

Okay.

And then can you maybe talk to us a little bit about the M&A pipeline?

Just describe the environment.

And I know you can't get into specifics.

But maybe given that you have a sense as to how deep you are in discussions, how would you characterize the odds that you might consummate a meaningful deal within the next 12 months or so?

Well, I think clearly we've stated part of our strategy is to look at that, the opportunities that are out there.

We clearly have nothing to announce or to bring before you today.

We will continue to look at opportunities.

I think the other point to make is our priorities, as we mentioned earlier, are first of all to execute on our existing backlog and our existing business; second, to invest our energies on new programs and new opportunities of which there are a number; and the third priority being to look for M&As that are accretive to our business.

So, we will follow those lines.

And if and when there's something to announce, we'll do that.

You don't care to say whether it's looking better or worse than --

No, no.

All right.

Thought I'd try.

Thanks very much, guys.

Thank you, Heidi.

And your next question comes from the line of Ron Epstein representing Merrill Lynch.

Please proceed.

Yes, hey guys.

Great, how are you?

Hi Ron.

I just wanted a couple questions here.

On the 787 production process, can you give us some color on how it's going?

And when the fuselage sections come out of the process, or during the process, how are the yields going in terms of imperfections and voids?

Are you ahead of where you thought you'd be?

Are you behind?

If you can just give us a feel for that.

Yes, I'd be glad to.

We are very pleased with the quality of the yield.

I think we made a big point early on in our discussions that our experience in helping develop the processes and building test units, we thought that was very important.

That is playing itself out in the production.

We're pleased with the quality of the units.

We're pleased with the way we've been able to fill up the lines.

Obviously we've not got everything running smoothly yet.

But that's pretty typical of a startup.

But I think it's fair to characterize it that the quality of the units is probably better than we had anticipated.

And we're pleased with the ability to produce those and have the high quality results of our processes.

Okay.

And then just kind of following up on Heidi's question.

Rick, if you were to look at the guidance and try to characterize it, would you characterize it as conservative?

Well, I think I'd characterize it as pretty much the way we've described it, as it's too early to tell.

I mean, we're certainly encouraged by the first quarter.

And again, we'll see how the -- we still have a number of variables in front of us, both from a financial standpoint and from a business standpoint.

And we've reaffirmed our guidance.

That obviously indicates that we feel comfortable with the guidance that exists today.

And we'll kind of see how things unfold.

That's great.

Thank you.

And your next question comes from the line of [Dana Merber] representing GMP Securities.

Please proceed.

Hi, good morning, guys.

Just a couple questions.

First, we talked a bit about some sales slippage from the second half of last year.

Are you guys comfortable that you're fully caught up now?

I'm sorry.

I had trouble hearing that.

Did you ask about sales slippage?

Yes, sorry.

Can you hear me now better?

Yes, that's much better.

Thank you.

Okay.

Sorry about that.

Yes, just from the previous quarter, we talked maybe sales were a little bit lighter than expected.

And I was just trying to get a sense of whether or not you guys are comfortable that you're fully caught up on any slippage from last year.

What we did is we built into our 2007 plan the revenue plan that we expected.

And there are some pluses and minuses as we go through the first quarter.

But we're pleased with where we are in regard to our plan.

So, fully caught up would be inappropriate to say.

But pleased with where we are is appropriate.

Okay.

And just secondly, with respect to potential production rate increases on the 787, I know it's difficult for you guys to comment on any potential CapEx with an increase in rates.

But if you were to increase rates, let's say, to ten per month, can you maybe discuss on relative terms, for example, would it be significantly more intensive than what you're facing with rate increases on the 777 and 737?

Well, I think you're accurate that it's difficult for us to comment on.

But I think order of magnitude is probably fairly close to that -- maybe a bit more, because of derivative issues that may be in that mix as well.

I think it is fair to say that it's significantly less than the initial requirements to set up the process lines.

Could you say is there maybe some sort of an inflection point where you'd require a significant amount more of capital, like if you were to increase rates to 11 per month or higher, does it increase exponentially?

That is really difficult, because there are so many timing and so many variables involved.

So, clearly sooner requires more, because you haven't got the learning curve effect that you'd want.

Later requires obviously much less.

So, you got a lot of variables going in there.

You got potential derivatives.

And you've got timing.

So, it's just too speculative in my mind to comment on.

Okay.

Thanks, guys.

Yes, thank you.

From the line of Credit Suisse with the next question, we have [Robert Springert].

Please proceed.

[Spring].

Good morning.

Hi, Rob.

Hi guys.

A couple different topics -- just going back to R&D again, with very little -- I guess 787's done effectively.

But you're ramping throughout the year as we've talked about already on the call.

Can you give us some sense in terms of composition of the R&D?

You talked about the 777 freighter and the 747.

How about the business jet composition and maybe some of the other things that you're targeting?

How should we think about that?

Well, I think there's a base level of R&D that we use for process and future product.

And that's probably two-thirds of it, roughly.

And then, as we enter in with new opportunities and new programs, we spend some of the rest of that guidance.

Jeff, would the base R&D reflect your business mix now, which is largely commercial, large jet?

It would reflect what we've talked about in previous meetings, where we are focused on multiple segments and customers outside of just the large jets.

But clearly, we look for technologies and processes that are applicable across a broad range of customers and across all the range that we're focused on.

Okay, so a lot of it's general Aero structures.

Right.

And process and whatever -- new material, applications and so on.

Two other topics I'd like to address.

First, over in Prestwick, what kind of capacity do you have for the A320?

It seems to be a somewhat aggressive ramp there as well.

Overall capacity is -- we have a lot of capacity in that site.

There will be clearly some specific tooling perhaps.

But capacity in Spirit Europe is not an issue.

You can get up to 40 a month?

We can go as high as the customer has announced they want to go.

Okay.

And --

Hey, Rob.

The real issue with any of these rate increases is our supply chain.

Okay.

And not our specific capacity.

We have the ability to ramp our capacity when we need it.

We just got to keep the supply chains healthy as we go up.

Okay.

And then just finally on a couple of the military programs that you touched on today and in the past -- on the tanker, should we think about that in terms of similar type of contribution that you get on 767?

Are there any key differences that we should be thinking about?

Yes, the key difference on that one, Rob, is that the engine selected on that is the Pratt & Whitney engine.

And we do all the nacelle and the pylon for that engine.

So, that's the best combination of the '67 that we could have hoped for for our business.

Higher end of the range.

And then any update on the A-10?

No, no update on that as yet.

We think the timing's not that far away.

Would that be correct?

You know, I apologize, Rob.

I'm trying to remember the timing.

We're hoping it's not too far away.

Hoping in this quarter, some kind of an announcement.

We always hope for that.

Earlier rather than later.

Thanks very much, guys.

Take care.

From the line of UBS with the next question we have David Strauss.

Please proceed.

Good morning.

You touched on your ability to ramp up on the Airbus side.

What about on your core 737, 777 lines?

Where are you as far as monthly production rates right now?

And what's your capacity to go higher?

As we've talked, we are lining our production to meet the projections of our customers.

We are in the process of gearing those lines to meet the '07 and '08 announced production levels.

Again, our internal operations are set up in terms of tooling or any additional capacity in terms of equipment -- constraint relieving equipment and tooling.

Those are progressing well.

Again, I will emphasize.

The issue I believe that we've talked about consistently is the supply chain, getting raw materials and standards to flow like they need to.

Those remain tight.

And I think we will continue as will our customers continue to focus on that part of the supply chain.

Okay.

And Rick, on the advance side, I think Boeing is going to provide $100 million advance this year.

It looks like there is a $29 million advance in the core.

Was that part of that?

Or are you going to get that in one slug?

No, we actually get it quarterly.

It's $25 million a quarter.

Okay, great.

Thanks.

So, you saw one quarter's worth in Q1.

Okay.

Thank you.

And representing Lehman Brothers, the next question comes from Joe Campbell.

Please proceed.

Good morning, guys.

It's actually Carter Copeland.

Good morning, Carter.

Hi, Carter.

How are you doing?

Good.

I've got just a couple of quick ones.

One, Jeff, could you size the 767 tanker opportunity in terms of should Boeing win, what that could mean for you guys long term?

I think the way to look at that, Carter, is it's the '67.

It's a fully loaded '67 for us, if you will.

It's got all the nacelle, all the pylon, and all the forward fuselage pieces.

And then it would be whatever the rate is that you forecasted that program would run.

Right.

And one for Rick.

If I recall correctly, the block in the contract accounting assumed 28 737s in terms of deliveries a month.

With things ramping up, I know you can't quote specifically on the rate.

But the Boeing delivery guy obviously suggests the rate's going up.

Is there a point in time where you're forced to revisit that assumption?

And when would that be?

Well, the way we define our contract blocks, it's not based on a rate per month.

It's based on an aggregate number of units.

And we did not change our contract blocks with one minor exception.

We did not change our contract blocks in this quarter.

So, we still have the same block size for the 737 in the first quarter as we did in the fourth quarter.

As rates go up, though, what that means is that obviously if rates do increase, well get to the end of that contract block sooner; which means we would start new blocks sooner.

Right now, almost all of our blocks carry us through about 2009.

And at that point, once we reach the end of that quantity, then we would start a new contract block.

So, at the point in time where the deliveries would lead you to believe that the block would be -- the end of the block as defined in total number of units are reached at some point earlier, you would need a cume catch, correct?

Not necessarily.

And it really just depends.

Again, we calculate our margins over an entire contract block.

And the cume catches are driven by changes in that margin within that block.

So, what happens in subsequent blocks really doesn't have any impact on a cume catch for a current block.

No, but the overhead per unit would get better in the current rate, right?

That's right.

That's exactly right.

And we've talked about that before, that as we get more volume into the years that encompass our current blocks, then there are absorption benefits.

And we have seen some of those benefits have resulted in favorable cume catch adjustments in prior periods.

Right.

So, if that's the case, is there a point in time where you're delivering at a certain rate, that you're forced to visit that assumption -- basically the timing that it takes to deliver that block?

Sure.

I mean...

Or, is it up in the air until you decide, okay, we've delivered X number of units.

And we're on this trend.

Yes.

No, I think as we've said in prior periods, we've generically made the decision that we're going to stick with a fixed number of units for our contract block, kind of regardless of what's happening in the supply-demand equation.

So, at this point, I don't foresee -- again 737 is our biggest program.

I don't foresee at this point changing the number of units that are in our current block calculation for the 737.

As I've said, it would just -- if rates do increase, then we will just come to the end of that block sooner.

If for instance they increased to the point where we'd start to get into that block in '08 rather than '09, then that could create some dynamics; because then you get to the point of getting more volume into earlier years, which does have a favorable impact on our results.

But over all, we've just generally made the decision that we're going to attempt to maintain the contract blocks that we have today and not create another variable by continuing to move those contract block sizes around.

Great.

Thank you, very much.

And good quarter.

Thank you, Carter.

Operator, we have time for one more question please.

And your final question comes as a follow-up from the line of Howard Rubel representing Jefferies.

Please proceed.

Thank you, very much.

We've tried a number of different ways to get some stuff from you.

Maybe I can do this a little more directly.

It would be very helpful if you could provide delivery numbers for each of the aircraft models.

Are you planning to do that?

Howard, we did it.

There's a schedule.

In the appendix to the presentation at the back is a schedule that highlights deliveries.

Oh, yes.

It's 19 of all things.

Yes, sir.

Sorry about that.

Ask and ye shall receive, Howard.

That's right.

No, it shows that we're listening, Howard.

That question came up at the last call.

And people expressed an interest in seeing that data.

So, we've provided it.

Sorry.

I got everything else but that page.

Thank you, very much.

Thank you, Howard.

Ladies and gentlemen, thank you for your participation in the Spirit AeroSystems Holdings first quarter 2007 earnings conference call.

This concludes the presentation.

You may all disconnect and have a good day.