Spirit AeroSystems Holdings Inc (SPR) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Spirit AeroSystems Holdings conference call.

My name is Alexis and I'll be your coordinator for today.

(OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes.

I would now like to 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 2008 earnings call.

I'm Phil Anderson.

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

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

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

And as a reminder, you can follow today's broadcast and slide presentation on our website at SpiritAero.com.

I have one item to note before we begin today.

In our press release issued earlier this morning, we incorrectly noted that the 2008 Spirit revenue guidance is based on Boeing commercial airplanes 2008 delivery guidance of between 480 and 490 aircraft.

The correct delivery guidance in which our 2008 revenue guidance is based is between 475 and 480 aircraft.

I would now like to turn the presentation over to Jeff Turner.

Thank you, Phil, and good morning.

Let me welcome you to our first quarter earnings call.

Let's begin on slide 2.

We had a good first quarter as evidenced by our revenue growth and profitability.

Our revenues were over $1 billion, an increase of 9% over the same time period of 2007.

We achieved this top line growth as volumes increased on the 737 and Airbus products including the delivery of four A380 ship sets from Spirit Europe.

Operating performance was strong across the company as we expanded our core product operating margins from 10.9% to 12.8% as improved operating efficiencies in the factory and lower SG&A expenses were realized.

Earnings per share increased 22% to $0.61 per share, up from $0.50 a year ago.

During the quarter, we generated $70 million in cash flow from operations.

We reinvested the cash generated from our core products into the 787 program and achieved an initial advance payment from Boeing in accordance with our amended 787 payment terms.

Earlier this month, we received the revised 787 production and delivery schedule from Boeing.

Both this and the revised payment terms with Boeing are included in our first quarter results and our outlook.

During the quarter, we were pleased to announce our participation on the new Cessna Citation Columbus and the new Gulfstream G650 business jets.

These two programs, along with the CH53K helicopter program we won last year, demonstrate the value that Spirit's design and manufacturing capability is providing across the aerospace industry.

Our after-market business continued to grow during the quarter by securing a contract with Cathay Pacific Airways to provide maintenance services on their fleet of 777 Thrust Reversers.

And just last Friday, our after-market team announced our participation in a joint venture with HACEO, Hong Kong Aircraft Engineering Company, and several other partners to provide maintenance services to airlines in the Asia-Pacific region.

Our backlog at the end of the first quarter was a strong $27.5 billion, which is over six years of backlog based on projected 2008 revenues.

We are off to a strong start in 2008 and expect to maintain the momentum going forward.

Now on slide 3, let's talk about some of the specific accomplishments across the business during the quarter.

Fuselage Systems started the year out strong with increased revenues and strong operating margins as 737 production and deliveries increased.

During the first quarter, the team delivered the first P-8A Poseidon fuselage to Boeing commercial airplanes.

P-8A is a unique commercial derivative of the 737 next-generation and will be modified into a military configuration by Boeing Integrated Defense Systems for the United States Navy.

This unique configuration of the 737 was produced on Spirit's high-rate commercial production line, thereby reducing the need for expensive post-production modification by the customer.

The team also delivered the first 777 Freighter sections to Boeing and was selected by Cessna to provide the fuselage of their new large-cabin business jet.

On slide 4 you see the Propulsion team increased revenue and operating margins from the year-ago quarter on additional 737 volumes.

During the first quarter, the Propulsion team announced that Rolls Royce had selected Spirit to design and build the BR725 engine nacelle package and was awarded the repair contract for Cathay Pacific Airways 777 Trent 800 Thrust Reversers.

Our Propulsion team is the sole source designer and builder of 777 engine pylon and nacelle packages for all three-engine types offered on the Boeing 777 aircraft.

The team also made good progress on development programs including the 747-8, the P-8A, and the 787.

On slide 5, the Wing Systems segment also increased revenues and operating margins during the quarter as volumes increased for Airbus products and the Boeing 737.

During the first quarter, the Wing Systems team announced that Gulfstream had selected Spirit to design and build the fully integrated wing for the new G650.

This is a significant win for Don Carlyle and his team in Tulsa as they help move Spirit forward, focusing on diversification and long-term value-creation.

The Spirit Europe team successfully secured the contract with Cessna to build the empennage of Cessna's new Citation Columbus.

Growth plans for our European MRO service center and our new Spirit Malaysian facilities are on track.

Now let me turn to slide 6 and discuss the 787.

First, let me express my confidence that the near-term challenges on the 787 program are being addressed by Boeing and the partners.

And while there is much work to be done, a great deal has been accomplished.

With that confidence, we remain excited about the value that this product will deliver to customers and shareholders for decades to come.

During the fourth quarter of 2007 and continuing through the first quarter of 2008, we made the decision to slow production rates.

This action proved valuable, as we were able to efficiently redeploy people and resources to other existing programs and new programs.

Earlier this month we received the revised production and delivery schedule from Boeing.

We reviewed the new schedule and are confident in our ability to support the requirements, and we believe we have taken the necessary actions to mitigate the current block cost impacts on our other programs caused by the delay through improved operating efficiencies across the company.

Near term, we have three main focus areas.

One, rebalance our workforce, the supply base, and capital and tooling plans to align with the revised schedule.

As I said, we began rebalancing our people in the fourth quarter of 2007.

In the first quarter of 2008, we implemented an interim schedule slowdown.

Both of these actions helped avoid additional costs and disruptions.

Two, support required program engineering changes as efficiently as possible.

Change in corporation continues to be a watch item for us at Spirit.

Three, maintain efficiencies at a lower production rate.

There are operating efficiencies to process yields at higher volumes.

We were beginning to see these efficiencies prior to implementing the slowdown.

So the challenge is to not only hold the game but to find additional improvements that can be made in a lower production rate environment that would translate into improved efficiencies as volumes increase.

We will update you on our progress as we go through the year.

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 8 summarizes our financial results for the first quarter, starting with revenues up 9% over the prior year period, driven primarily by higher delivery rates to Boeing and Airbus.

Operating profit was up 25% as margins improved significantly year-over-year, increasing by 170 basis points.

This improvement is largely due to higher unit deliveries, productivity initiatives, and lower SG&A and R&D spending.

Fully diluted earnings per share of $0.61 for the quarter were 22% higher than earnings of $0.50 in the prior year period, largely due to higher sales and improving our operating margins.

Cash flow from operations of $70 million and capital expenditures of $66 million for the quarter reflect our continuing investment in the 787 program and other new programs as well as revised 787 payment terms.

During the quarter, we also made significant progress in improving our liquidity position by increasing the size of our revolver by $250 million and renegotiating certain payment terms for the 787 program.

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

Slide 9 highlights our progress on key P&L metrics both year-over-year and sequentially versus the four quarters of 2007.

First quarter revenues grew 9% year-over-year and 6% sequentially over Q4, both largely attributable to higher unit deliveries to Boeing and Airbus as can be seen in the unit delivery chart included with the press release.

Total 787 revenues in the quarter, which include both production and non-production elements, were approximately $17 million as we delivered one forward fuselage unit.

Operating income margins were 12.6% in the quarter, 170 basis points above the prior-year period.

On a sequential quarterly basis, operating margins were also up significantly due to the benefits of higher volume.

Lastly, first quarter fully diluted EPS of $0.61 grew significantly over the prior-year period due to the improving operating margins.

Our effective tax rate of 33.5% in the current quarter was largely unchanged from the prior-year period.

Sequentially, EPS was up $0.07 or 13% from Q4 due to higher volumes and the absence of $5 million in acquisition evaluation expenses, which were included in the Q4 results.

R&D expense in the fourth quarter was $10 million, slightly below the prior-year period and down from Q4 as we complete the R&D phase for several of our recently announced non-787-related new programs.

Our lower sequential R&D spending benefited operating margins in both our Fuselage and Wing Systems segments.

SG&A expense for the quarter was $39 million, about 13% below the prior-year period.

The reduction is primarily due to lower non-cash stock compensation expense and lower transition expenses.

Expending for various transition activities was largely complete in the first half of 2007.

Sequentially, SG&A was down about $11 million or 22% from the fourth quarter, largely due to the absence of $5 million of acquisition evaluation related expenses mentioned earlier and the continuing year-over-year decline in stock compensation expense.

Declining absolute dollars of R&D and SG&A expense combined with rising sales is one of the contributing factors to Spirit's improving operating margins.

In the aggregate, SG&A and R&D declined from 5.8% of sales in the first quarter of '07 to 4.7% in the first quarter of '08, 110 basis-point improvement in operating margins.

Maintaining tight controls over all forms of overhead spending has been a major focus of management and will continue to benefit future periods as revenues increase.

Slide 11 summarizes the P&L for the first quarter versus the same period in the prior year.

During the quarter, Spirit realized approximately $2 million of net favorable changes in contract estimates, slightly below the $3.5 million recognized in the fourth quarter of '07.

Almost all of the current period benefit was realized in the Wing Systems segment due to continuing productivity initiatives at both our Tulsa and Spirit Europe operations.

The prior-year period included approximately $6 million of favorable cum catch adjustments, again largely recognized within our Wing Systems segment.

After the most recent Boeing announcements of further schedule slides for the 787, we evaluated the potential impact from loss of manufacturing hours and disruption on the profitability of all of our programs.

After extensive review, we concluded that negative impacts would be largely mitigated by certain actions which is moving current 787 employees to other programs where production activity is increasing, slowing hiring of new employees, reducing overtime, and other cost-reduction activities.

Effectively managing the Boeing's new production schedule for the 787 will continue to be a significant watch item for Spirit management.

However, as a consequence of the recent delays, we expect profitability of the first 500-unit contract block for the 787 will be further reduced.

We now expect gross profit margins below 5%.

Turning to slide 12, during the quarter, Spirit concluded two major events that greatly enhanced our liquidity.

First was the completion of an amendment to our existing credit agreements that expands the size of our revolver from $400 million previously to $650 million, an increase of $250 million.

Second was the renegotiation of payment terms for our 787 deliveries to Boeing.

Previously, the initiation of cash payments for 787 deliveries was tied to certification and delivery to airline.

Recent delays in certification resulted in additional working capital build and absorbed available liquidity.

Under the new arrangement, Boeing will provide advance payments in 2008 for a specified number of units independent of the actual delivery date.

The first payment for $124 million was received in the first quarter.

The successful conclusion of these milestones stabilizes our 2008 cash flows and provides adequate dry powder for future financing needs.

Both rating agencies responded positively to these developments, S&P by upgrading our credit outlook from negative to stable, and Moody's by reaffirming our current rating.

Slide 13 summarizes the changes in our cash and debt balances during the quarter.

Cash balances at the end of the quarter of $203 million increased $70 million or 53% from year-end 2007.

The increase was driven by a receipt of $124 million of new advance payments from Boeing and a $75 million draw on our revolving credit agreement, partially offset by further working capital build.

Total debt balances increased by $70 million in the quarter due to the $75 million revolver draw, offset slightly by scheduled repayments.

The $75 million revolver draw was fully repaid in the first week of the second quarter.

Driven by consistent profitability and growing shareholders' equity, Spirit's capital structure continues to improve.

At the end of the first quarter, our net debt to capital ratio was under 26% and our net debt to 2008 EBITDA ratio was well below 1.

Additionally, at the end of the first quarter, the company had approximately $765 million of short-term liquidity available through our amended revolver and available cash balances, which we believe is fully adequate to fund projected cash flow needs.

Slide 14 details our cash flow for the first quarter versus the same period in the prior year.

Cash flow from operations for the quarter was positive $70 million with higher customer advance payments and improving profitability offset further working capital growth.

Working capital build was largely driven by the 787.

As inventory from suppliers was received at a faster pace than production levels, our projected deliveries have been rescheduled.

Inventory growth includes an increase in capitalized development costs of $21 million for the quarter, entirely for new programs unrelated to the 787.

At the end of the quarter, capitalized development costs were $301 million in total, including $238 million for the 787.

Capitalized development costs for the 87 were largely complete in the third quarter of 2007.

Capital expenditures of $66 million for the quarter were down 25% from the prior-year quarter and only slightly above Q4 as the installation of production capacity for the 787-8 program is winding down.

Chart 15 details our updated 2008 guidance for revenue and fully diluted earnings per share, which reflects our current estimates for 787 deliveries to Boeing.

We project 2008 revenues to be around $4.4 billion, down from the previous estimate of $4.7 billion due entirely to lower 787 deliveries.

We expect these revenues to be recovered in subsequent years.

On a $4.4 billion revenue base, we expect fully diluted EPS of $2.25 to $2.35, assuming an effective tax rate of approximately 33% of pretax earnings.

Projected effective tax rate assumes federal research and development tax credits are available for the entire year, although no benefit was reported in the first-quarter results.

With the recent renegotiation of 787 payment terms and a better understanding of our 2008 and 2009 787 production requirements, we are now in a position to provide 2008 cash flow guidance for the first time.

For 2008, we expect cash flow from operations of $400 million, capital expenditures of $275 million, and a capital reimbursement of $116 million.

It should be noted that the additional 787 advance payments included in this guidance are an acceleration of cash receipts previously anticipated in 2009 and early 2010 upon aircraft certification.

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

Thank you, Rick.

I'll wrap up on slide 16.

We had a good first quarter and expect a strong year ahead.

As always, our team remains focused on meeting our customer commitments on our core products and our development programs.

Growing and diversifying our business profitably remains the cornerstone of our strategy.

We will now be glad to take your questions.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of David Strauss with UBS.

Please proceed.

Good morning.

Thank you.

Rick, can you just give a little bit more color in terms of the -- what you're thinking about margins as we go forward through the year?

Obviously, the 12.6 in the quarter just included a small cum adjustment.

You know, 787, well, it's going to be low margins; it's not going to be ramping up as we go through the year.

Just -- if you can hold these kind of margins, it would imply much higher numbers than what you're talking about on the EPS side.

So, what are kind of the offsets as to why margins wouldn't hold at these levels as we go through the year?

Yes, good question, David.

A couple of things.

I think we're looking at the first quarter is probably going to be the low point in the year for our SG&A and R&D spending.

With some of the new programs that we've announced and potentially some other things coming on line, we would expect R&D spending to increase in the second half.

I think that we would also expect some modest increases in SG&A.

You mentioned the 787.

That obviously--the revenues that we do recognize in '08 will be at lower margins, as we've said.

We're also being cautious about the impact that the changes in 787 schedules are going to have on our business.

As Jeff mentioned, we've done extensive review of this.

We believe we have the actions in place to mitigate the impact on all of our programs.

But we are being cautious about how that plays out over the course of the next couple of quarters.

Okay.

And then on the working capital side, the inventory build, can you give us a little bit of color?

Is that going to kind of slow as we go through the year?

It seems like that's what you're implying.

Or is it going to -- just kind of gauge that for us.

Obviously, last year you had a pretty big build.

Is it going to be that big this year as well?

Well, I think the -- there again, the first quarter will probably be the high point for increase in working capital because as we can appreciate with the recent changes as of just a quarter or two ago, we were expecting to have much higher deliveries of [87s] in 2008.

So, some of that working capital is upon us now.

But I do expect the first quarter will be the high point.

You'll note, working capital was up about $150 million in the first quarter.

I would expect that the rest of the year, we will see some working capital increase, but probably no more than that, for the next three quarters versus what we did in the first quarter.

Okay.

And last one.

I know you had some outstanding issues, 2005 through 2007, issues on 787, some recovery you were looking to get from Boeing.

Have you had any resolution to those issues?

Well, clearly, with the change in terms that we announced in our 8-K a couple of weeks ago, there's been some change.

That reflects an ongoing conversation that we're having with Boeing.

As I've mentioned before, and I'll repeat here, this is a long-term program.

There are a lot of facets to it.

So we anticipate that we will continue to work with them.

We have seen some resolution.

We have seen some items that we will continue to work on.

Right.

Thanks a lot.

Your next question comes from the line of Cai von Rumohr with Cowen & Company.

Please proceed.

Yes, thank you.

Your SG&A and R&D were fairly light in the quarter.

Could you give us a little more kind of granularity in terms of where they might be for the year?

And a split on the SG&A of the transition cost and the stock comp cost expenses in the first quarter?

Sure.

In SG&A, there was almost no transition expense to speak of in Q1.

Stock comp expense for the quarter was just under $4 million, which was about $2.5 million less than it was last year.

Our sense of where we see it going, when we originally had issued our 2008 guidance for earnings, we had said at that point that we expected SG&A and R&D to be largely flat year-to-year.

I think at this point, given our current outlook and our actual experience in the first quarter, I think in the aggregate you'll see SG&A and R&D be down a little bit from what we spent in the prior year, and that clearly is one of the reasons that operating margins are improving over 2007.

The only comment I'd make to that is we do have opportunities out there that we are pursuing and, depending on the timing of those and the amount of the effort, I mean, clearly, we're projecting that there'll be a higher spend in later quarters than there was in the first quarter.

Okay.

Clearly, the SG&A is going to be down.

Can you say the same for the R&D, that the R&D is going to be down for the full year?

I said the aggregate of the two would be down slightly from 2007.

Okay.

Could you comment on the R&D?

I mean -- or at least is that likely to be down?

Or what are the things we should think about that could cause it to be down or to be up?

The primary reason it will be up, obviously, would be spending on new programs.

At this point, again without getting too specific, I do think R&D will be higher in 2008, but I think it will be modestly higher.

Okay, great.

Thanks so much.

Thank you, Cai.

Your next question comes from the line of Joe Nadol with JP Morgan.

Please proceed.

Thanks, good morning.

Good morning, Joe.

Good morning, Joe.

On the inventory, you provided us in good detail already.

I'm wondering if you could give us what the total 787 inventory all in was at the end of the quarter.

All in at the end of the quarter, it was about just over $600 million.

Okay.

You can see, that's almost -- it's just slightly over 40% of our total inventory.

And that does include capitalized development costs.

Right.

And when do you expect that to peak?

Well, certainly, as we've said, capitalized development costs are concluded at this point.

So that's not growing.

And as we start to deliver units, obviously, that will start amortizing down.

I would think the peak -- as we said, growth is -- working capital growth is clearly slowing.

A lot of that is driven by the 787.

But as we move to higher production rates, it's hard to say exactly when, Joe, but I would think while the increases will be more modest from here, I think the peak is probably somewhere in early mid-'09.

Okay.

How many ship sets do you expect to deliver this year on 787?

We're not providing specific guidance on that, Joe.

We will certainly support the flight test units.

And then -- the way it operates is we operate on a pull from Boeing.

So, just basically we'll have the units ready and they'll pull.

I guess I'd make another point that it's relatively modest impact.

In fact, there's a modest impact on our '08 guidance, don't think it will move it one way or the other, depending on when they do call.

Okay.

Have you completed your negotiations?

I mean, you've got these great cash terms, you talked about margins sliding a little bit.

Is price still an area of negotiation or has that been settled --?

Well, clearly, there are a number of areas of continuing dialogue that will impact price.

So, change traffic and configuration that's moved through time, any disruptions, all those things that we've talked about in the past that -- not to mention future rates and derivatives.

So there is just a number of items on the table and will continue to be.

So as I mentioned a minute or two ago, we have active negotiations and conversations underway continually.

We have seen some progress.

And there are many more conversations to have over the life of this program, frankly.

Okay.

And then just one more, Rick, on 787.

I know this is a tough one, but looking -- you mentioned that you're pulling cash forward obviously with the change in terms with Boeing on the 87.

I'm wondering if you could give us some thoughts on -- if free cash flow generation from this program in 2009-2010--I know that's hard--but conceptually how should we be thinking about that?

Yes, at this point, Joe, we're obviously not in the position to provide any cash flow guidance for beyond 2008.

But there are a lot of moving parts to that equation, as you can appreciate.

I mean Jeff just articulated some of the variables that are impacting that.

Yes.

So I think it's just too early to call at this time.

Your inventory will be declining, your payments from Boeing will be cut off for a period during '09, but then resuming through 2010 --?

That's correct.

That gets to the heart of the number of moving parts that are going to be influencing our cash flows in the next couple of years.

Yes.

All right, thank you.

Thanks, Joe.

Thank you.

Your next question comes from the line of Ben Fidler with Deutsche Bank.

Please proceed.

Yes, thank you.

A couple of questions.

First is just still on Wing Systems.

If we look at the margin for Wing Systems, even adjusting to that cum catch-up, delivered quite impressive margin growth, up to 11.6%.

Do you see that as a sustainable base point or are there any things that will be impacting the margins through the remaining quarters of this year?

No, we do believe that that is sustainable, Ben.

We've seen margins in Wing Systems increase fairly consistently over the last five or six quarters.

As we've disclosed, a significant portion of our favorable cum catch adjustments have been in the Wing Systems business.

So I think what you're starting to see now in the margins is the aggregation of those favorable cum catches, which obviously means that future profitability is improving.

So we do think the current levels are sustainable going forward and hopefully will continue to improve.

Okay, thank you.

One more thing, Jeff, on -- I wonder if you can characterize where you're at with discussions with Airbus over A350, and even if there is any potential revisiting of some of those Airbus sites, particularly the German ones or the deal you're having followed through that Airbus was hoping to do, selling those German sites off?

Sure, Ben, I'll be glad to.

I mean, clearly we've said that we are interested in participating with Airbus on the A350.

We're continuing to work with them.

We've also said that we felt like a decision point was midyear.

That continues to feel right to us.

It could be sooner; it could be a little longer.

So, clearly, a program that we've expressed interest in, Airbus has expressed interest in having us on the program.

So we will continue to work to see if we can have an agreement there that works for both of us.

We have watched with interest some of the news releases on the German site.

We were very impressed with the people and the capabilities in those businesses when we visited them.

As you know, late last year we came to the conclusion that we couldn't close the business case for both us and Airbus on that in order to achieve the necessary value-creation for Spirit.

So we didn't pursue that further.

We remain open to really any M&A activity that's in line with our strategy and that we believe will deliver value to our shareholders.

Thank you very much.

Yes.

Thanks, Ben.

Your next question comes from the line of Howard Rubel with Jefferies.

Please proceed.

Thank you very much.

Could you address 737?

You're now at 31 a month.

There were neither positives nor negatives, it looks like.

It looks like it went smoothly.

Could you add a little color to that, Jeff, please?

Sure.

In some ways, part of it was like the duck on top of the water.

It did run smoothly.

I think probably something noteworthy that people may or may not have recognized is that we had that P-8A Poseidon major change fuselage coming through the line at exactly the same time.

And Buck Buchanan and his fuselage team just did a phenomenal job of making the rate increase and bringing the P-8A home.

So that is going well.

It's going well in both the fuselage and in the wing and propulsion areas.

So we made that step.

We're continuing to work to smooth out.

There's always issues associated with the production staff, as you know.

And we're working hard to smooth all those out.

But we're pleased with the progress that the team has made.

Second thing is that if we look at the gross margin that Rick articulated on the 787 for the cum program, frankly, that won't cover your cost to capital.

What can you do to make it a little bit more profitable or what are the things that are going on that would change that either plus or minus from here?

Well, clearly the delays have had impact on us.

And, I mentioned it earlier in my prepared remarks, we will continue to very aggressively look at things we can do to improve that production line.

We had a plan for certain rates and rate buildup.

Clearly that's a different plan now, stretched out a bit.

So we'll have to work hard to figure out additional improvements that we can make on the line that will work at a lower rate production but also not be a drag when we go to the higher-rate productions.

So that will be an ongoing effort, Howard, continuous improvement that we will focus on on that program.

Jeff, your tooled for seven a month right now, right?

We have floor space for seven a month; we're close to that.

A lot of our equipment will handle seven a month.

I don't know if we have all the tooling in place.

I don't think we have all the tooling in place yet for seven a month.

So we can delay that, which is part of what we've done.

But, I mean, clearly we were gearing for the requirement of seven a month and looking at potentially higher rate, which we will continue to do, Howard.

It'll just be -- it'll be a little further out to the right.

And then finally could you give us a little more color on some of the other opportunities that you discussed?

I mean either market size or market in particular, if you could.

Well, you know the 350 opportunity that we're in discussions with Airbus over.

And we've been able to announce a couple of business jets.

There are still business jet and regional jet opportunities out there that we are pursuing.

Thank you.

Your next question comes from the line of Heidi Wood with Morgan Stanley.

Please proceed.

Great.

Thanks, guys.

A couple of questions.

Going back to Howard's question on the 737 rate, Boeing says that they are taking a look at some of their production rate assumptions given that the demand that they've seen.

Can you give us an idea of what kind of advance timing you would need if they were to choose to raise that rate higher?

And any additional CapEx you'd have to engage in?

Heidi, we usually -- especially when we're running at high rates like we are now and the supply base is pretty much at capacity and needing to expand to go faster, we look at 12 to 18 months kind of as a rule of thumb.

And again, as we've continued to talk, there's -- the incremental investment that we need is again constraint-relieving capital or constraint-relieving tooling.

So it's not major changes to our capital requirements.

Right.

Because you've gone as far -- in some ways, the maturity of the program, you've made a lot of productivity initiatives.

At this stage, it's a question of CapEx, right?

It tends to be tooling and CapEx.

And, Rick, you mentioned overtime was on the decline now with the 787 slowdown.

How much of a margin headwind was that in the quarter and in the fourth quarter for you?

It's difficult to quantify for a specific number, Heidi.

I mean, clearly higher levels of overtime contribute to higher costs for us, so to the extent that over time is coming down, that is an opportunity for us to lower cost.

It's not a significant component of our overall cost picture.

Right.

And then the -- relative to the competition, the opportunities ahead, like A350 and perhaps E-series and some business jets, how does the profile of opportunities look between '08 to '09?

My sense is that it sort of -- this is sort of a big, robust R&D opportunity here for you now.

But does that drop off in '09?

So if you win some of the things that you're thinking about, then we would be hitting kind of more of a steady state R&D as opposed to being concerned that that's going to be heading higher?

Is that a fair characterization?

I think it is a fair characterization, Heidi.

We're seeing -- we've seen a lot of opportunities.

We've identified and pursued and won a number of them as we've announced.

So I think there's a bit of a plateau out in front of us.

I would add to that, Heidi, that R&D, the level of R&D spending tends to be dependent on the nature of the contract terms that we negotiate on new programs.

In some cases, R&D could be funded by the customer as opposed to us funding it.

So it really just depends on who the customer is and the nature of the contract terms, and depending on how that comes out, that obviously could drive the level of R&D spending that you'd see in our financial statement.

Good, thank you.

And then one last [nit], Rick, if you don't mind.

I'm not sure I heard your comment about the capitalized cost comment on the 747-8.

What are the extent of capitalized cost requirements for the dash-8?

The 747?

Yes, the 747.

Actually we didn't mention the 47 in our prepared remarks, Heidi.

All right.

Well, then --?

The point I made was related specifically to the 787.

All right.

Then, what kind of capitalized cost requirements do you have for the 747-8 then, Rick?

Relatively modest.

All right, good.

Thanks very much.

Thank you.

Your next question comes from the line of Doug Harned with Sanford Bernstein.

Please proceed.

Good morning.

Good morning.

Good morning, Doug.

Looking at the new programs, kind of pursuing the line that you've been discussing here.

If you look at engineering headcount today and you go out this year, next year, how are you thinking about the trajectory?

Are you maintaining or are you actually increasing -- you look to increase your engineering size?

Of course, depending on program wins, at kind of a minimum, we're looking at maintaining.

Depending on program wins, we could see some increase in engineering requirements.

And then, separately, on Malaysia, you said that things are on track there, so I assume you're looking at being operational in Q1 of '09.

Could you describe where that stands today and the types -- when -- the types of activities that we should expect to see move in to Malaysia in '09?

Sure.

The building itself is underway.

The groundbreaking is complete.

And the activity that will go in there is primarily driven by our Spirit Europe activity and it will be some composite assemblies that will be delivered directly to Airbus.

But is this work that is currently being done in Prestwick?

It's work that's being done in our supply base.

Okay.

So we're in effect bringing this work back in-house, Doug.

I see, I see.

And then one last thing, on after-market business, with the HAECO and the Prestwick work, how large do you see this becoming in terms of a contributor to Spirit revenues?

Yes.

We -- as we've mentioned I think many times, it's not a huge impact on us.

I mean it's a good business.

It's a business that we're obviously pursuing and making inroads in.

But I'd say a good modeling number is 5% of our total revenue, somewhere plus or minus that range.

That's where you're headed, that sort of level.

Right.

Okay, great.

Thank you.

You bet.

Thank you.

Your next question comes from the line of Robert Spingarn with Credit Suisse.

Please proceed.

Hi, guys.

Hi, Rob.

Good morning, Rob.

A question on your -- on the 787 rate.

You got asked this earlier, and I know you can't get too specific.

But you took sales guidance down $300 million for this year.

You were at 45 ship sets, so the implication here is you now net, I don't know, 10, 12, 15, somewhere in that neighborhood.

Should we expect the test aircraft to deliver about one a month here starting from the end of April until call it the end of July?

I don't have that -- anything quite that specific.

But if that's what the numbers work out, it makes sense to use that.

We're actually--I mentioned earlier, we're actually on a pull from Boeing.

So we prepare to use, have them ready, get them -- all the changes into them that are coming through and then have them ready for the pull.

So the pull can vary depending on when Boeing is ready to pull it in to their line.

Right.

But your guidance suggests that you'll at least have, like I said, about a dozen airplanes pulled by yearend.

And --?

That's a reasonable ground rule.

Okay.

And then just taking it a step further, Jeff.

Should we see a pause between aircraft six and seven just because we're ending the test aircraft phase and then going into the customer phase?

I don't think so, Rob.

I guess it could happen depending on what's coming back.

But clearly the desire is to get the program on a drumbeat.

Boeing's talked about 25 units at the end of '09, so that pipeline needs to be full and the rate needs to begin to increase in order to meet a demand like that, and then the follow-on years as well.

Sure.

And could you call to give us some color on sort of the evolution of the systems installation between ship sets 1, 2, and 3?

Every ship set is getting more complete.

The changes are being incorporated, never to the 100% level that we want but clearly each is significantly better than the previous.

Can you get to 100% by four or five?

Probably not.

But it won't -- and, of course, 100% is that mythical number, you know?

Right.

But very complete.

I mean, it is -- there's a high degree of completion and it will continue to increase.

Okay.

And then just, Rick, if we go back to cash flow for a moment, there are a lot of moving parts.

You talked about the 787 inventory and other components, but from a higher level could you just walk us through company-wide how we should think about receivables, inventories and payables because I noticed the payables were up a bit in the quarter?

How should we think about those three items for the full-year '08?

Sure.

I mean, payables obviously is as volume increases, volume being the amount of purchase material that we buy, the amount of capital equipment that we buy.

If that increases over time, then our payables will increase roughly in conjunction with our revenues.

Receivables, obviously, pretty much the same way.

You probably noticed that in receivables, our receivables were up quite a bit in the first quarter.

But that's fairly typical if you go back and you look at the last couple of years, you'll always see a spike-up in receivables in Q1 because the -- our balance tends to be -- the lowest point of the year tends to be at the very end of the year.

Because of the holiday shutdowns, we're -- we don't ship a lot to Boeing in the second half of December, but yet we continue to get paid for units that we delivered earlier in the quarter.

So the end of the year tends to be the low point and it spikes up in Q1 and then kind of stays at normal levels until the yearend again.

Inventory, as I said, inventory we believe will continue to grow not only for the 787 but for some of our legacy programs as well as, again, as we continue to go to higher rates, some of our new programs come on line, but certainly the growth in inventory will be more modest than what we've seen in the last couple of quarters.

Okay, thanks, Rick.

Thank you, Rob.

Your next question comes from the line of Carter Copeland with Lehman Brothers.

Please proceed.

Hey, good morning, guys.

Hi, Carter.

Jeff, I wondered if we could get back to this new production schedule a bit and talk -- provide a little color around how much you really plan to slow down.

I mean, you're already well ahead of where Boeing is.

In your new plan, when do you sort of catch up?

When does the production that you expect to be doing, synch up with delivery with Boeing?

Do you have any idea of when that happens?

Carter, I'm not sure I understand your --

Well, just based on Rob's question, if we slow down to one a month, let's say, and don't stop, and it will be late '09 based on the Boeing delivery schedule before your production and their production then synch up.

Is that about right?

It will vary, Carter, among our product lines, wing, pylon, and fuselage.

We will operate -- we'll probably be ahead and have some inventory for quite a while, frankly, because we'll want to run the bottleneck processes.

We'll want to make sure that we're learning on that curve like we need to.

So I mean you all knew we were like Line Unit 21 on winding the barrels.

So I mean we'll continue to wind barrels, albeit nowhere near the -- as faster rate as we had originally planned.

But we'll continue to do that.

When you get to the systems installation side, once you get the systems, they go in very well.

So that one we can probably get a lot closer to the actual pull schedule quicker.

So it'll vary across our product and across the value chain.

Okay.

And one for Rick.

Rick, what does the full year cash flow guidance assume in terms of total advances?

Did you -- have you disclosed that at all?

No, we haven't, Carter.

But certainly it is fully reflected in our guidance.

Okay.

And one last one.

On the CapEx, the $275 million, it seemed a little high relative to last year's $288 million, especially given that we had 787 spending that was going to come down.

What's behind that level?

It seemed kind of high.

Well, if you look at the -- what we had in the first quarter is pretty much on that run rate.

So, as Jeff mentioned, there still is some 787 tooling, a little bit of capital that's in front of us for getting to the ultimate production rate.

There is some capital for some of our new programs that we've talked about that we've announced recently.

So I would say those are the primary drivers.

There are some capital obviously for the Malaysia facility that we've talked about before.

So there are a number of projects like that that are contributing to the capital spending a little.

So, no big items but a lot of sort of little ones that add up is what you're saying?

I think that's a fair statement, Carter.

Okay, great.

Thanks a lot, guys.

Thank you.

Your next question comes from the line of Dana Merber with Griffiths McBurney Corporation.

Please proceed.

Hi, good morning, guys.

Rick, just one question.

The $124 million that you received in the first quarter from Boeing, how does that flow through cash flow statement?

It ends up in the line called "Customer Advances."

Okay.

So there's some netting going on there as well?

There is, because those -- the payments that we got in the quarter reflect payments for some of the units we've already delivered.

Okay.

So that gets -- those are in effect liquidations of those advances and those get netted in that Customer Advances line.

Okay, great.

Thanks.

That's it.

Operator, we have time for one more question, please.

Yes, sir.

Your final question comes from the line of David Strauss with UBS.

Please proceed.

Thanks.

Rick, the CapEx recovery from Boeing, when is that going to come through?

The $116 million is on scheduled dates, specific dates.

And it was intended to be roughly on a quarterly basis when it was originally set up, but the first one was actually I think on March 30 or something.

It came like a day or two after the end of our quarter.

So it's pretty much linear on a quarterly basis.

Okay.

So similar with what we saw last year, just didn't show up in the Q1 number.

Yes.

Okay.

And then my last one.

The investments that you're making on the 650 and the Columbus, I think you kind of talked about the R&D portion of those -- you're well into those being behind you.

Obviously you're going to have capitalized development costs.

Can you kind of size what you're looking at in terms of a total investment on each of those programs or give us some sort of idea maybe relative to 787, what the spending profile is?

Well, they're obviously a lot smaller than the 787.

And here again we have in some cases some of the development costs and the upfront expenses is funded by Spirit; in some cases it's funded by customers.

So the ultimate investment tends to be variable by project.

But certainly the total amount that's funded by Spirit is obviously well below levels that we're seeing in the 787.

These are obviously quite a bit smaller airplanes.

Thanks, David.

Ladies and gentlemen, this concludes our Q&A session for today as well as the presentation.

You may now disconnect and have a wonderful day.