Spirit AeroSystems Holdings Inc (SPR) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2008 Spirit AeroSystems Holdings Earnings Conference Call.

My name is Stacey, and I will be your Conference moderator for today.

(Operator Instructions)

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 Fourth Quarter and Full Year 2008 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 brief comments by Jeff and Rick regarding our performance and outlook, we will take your questions.

And in order to allow everyone to participate in the question-and-answer segment today, we ask that you limit yourself to one or two questions.

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

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

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

Thank you, Phil, and good morning.

Let me welcome you to Spirit's Fourth Quarter and Full Year 2008 Earnings Call.

2008 was a year filled with accomplishments and challenges for Spirit, as we focused on long-term value creation for our shareholders.

I would like to take a few moments this morning to highlight several of the accomplishments, and also to provide some perspective on the challenges we faced in 2008.

And I'll conclude on how we are positioning ourselves for the future.

I'll begin on slide two.

Overall, we executed our core business well, and our performance was solid across the Company.

Despite the machinists' strike at Boeing and the pension headwind, we achieved full-year sales of $3.8 billion, operating margins of 10.8% and fully diluted earnings per share of $1.91.

Financially, the impact of the IAM strike at Boeing, along with the forecast for future pension expense, reduced the full-year earnings by $0.51 per share.

We made good progress on our growth and diversification strategy in 2008.

We announced projects underway with Gulfstream and Rolls-Royce, while winning new business with Airbus, Cessna and Mitsubishi.

Each of these development programs are underway and making solid progress.

We're also making progress on establishing our new Spirit Malaysia manufacturing facility.

Spirit Malaysia is on schedule to be operational by the end of the first quarter of 2009.

Spirit Malaysia's initial focus will be on Airbus products, but over time will provide value to products across the Company and will add value immediately in 2009.

Additionally, we announced and commenced construction of a manufacturing facility in North Carolina.

This new facility will support Spirit's new business content on the Airbus A350 XWB.

Spirit North Carolina is expected to be operational in mid-2010.

I continue to be pleased with our performance on the 787 program.

Our team continues to work well with the customer and our suppliers regarding future production plans.

I will provide you additional thoughts on the 787 program later in the presentation.

Spirit's year-end backlog increased 20% over 2007 to $31.7 billion.

This increase consists of the combined Airbus and Boeing backlogs and new business wins.

Now let me provide you with my perspective on the challenges we faced in 2008.

As I have mentioned before, I'm extremely proud of how the Spirit team planned and executed our business during the two-month strike by the machinists at Boeing.

Our internal planning, partnering with our customers and working with our unions representing Spirit employees allowed Spirit to maintain production, while avoiding layoffs and furloughs.

The reduced-work week schedule enabled the Company to execute a balanced approach to address this difficult situation.

This plan successfully balanced the requirements of our customers, our suppliers, the needs of employees and shareholders; while minimizing the impact to our communities and maintaining the health of our business.

I'm proud of our team's ability to take challenges head-on and deliver solid performance in a nonstandard business environment.

Pension asset performance and the discount rate also impacted our results for the fourth quarter and full year 2008.

However, as you know, our US plan was frozen when Spirit was formed, and pension income and expense is a noncash item.

The plan remains fully funded at year end 2008.

Now let's talk about some of the specific accomplishments across the Business, beginning on slide three.

All three of our business segments' revenues and operating margins were impacted by both the machinists' strike at Boeing and the higher projected pension expense, which Rick will discuss in his comments.

For the year, we delivered 72 fewer Boeing ship sets than we had expected prior to the strike.

The Fuselage team continued to execute well across all programs.

They delivered the 2,800th 737 Next Generation fuselage, the sixth 777 Freighter forward fuselage section, the third P8-A Poseidon fuselage and the first 747-8 forward fuselage section to Boeing in 2008.

The team continues making advancements on the Sikorsky CH-53K and the Cessna Columbus programs.

On slide four, you see the Propulsion team's results for the year.

The Propulsion team delivered the first 747-8 unit and third ship set of the P8-A Pylon in 2008.

The team continues to gain momentum on other development programs, including the Mitsubishi Regional Jet and the BR725 program for Rolls-Royce.

On slide five, you see the Wing Systems segment, which is comprised of our Spirit Europe and our Oklahoma operations.

In addition to the strike and pension impact, Spirit Europe's margins were impacted by the substantial strengthening of the US dollar during the quarter.

Airbus products remain on track, and our European MRO operation is open at the Prestwick facility.

And the previously mentioned Spirit Malaysia facility is planned to be operational in the first quarter of 2009.

Now let me turn to slide six and give you a brief update on the 787.

We delivered aircraft number five in late January.

And aircraft number six, the last flight test aircraft, is progressing through the system's installation process.

Overall product quality remains high, and we continue to work with the supply base to enable a smooth production ramp-up.

We are continuing to work closely with our customer on incorporating necessary engineering changes on flight test aircraft and the first in-service aircraft.

Our internal efforts remain focused on productivity improvements and increased utilization of the capability we have in place.

We expect to restart forward fuselage production later in 2009.

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 fourth quarter, which were significantly impacted by the IAM strike at Boeing.

Revenues were down 34% over the prior-year period, driven largely by the strike and the impact of a strengthening dollar on our UK results.

We estimate the strike impacted Q4 deliveries by 63 units, or about $451 million of revenues.

The strengthening dollar lowered Q4 revenues by approximately $30 million versus the prior-year period.

Operating profit, at $28 million for the quarter, was down 74%, as margins were impacted by lower revenues from the strike and a negative $27 million cum.

catch adjustment.

The strike impacted operating profit by an estimated $57 million in the quarter.

Fully diluted earnings per share of $0.14 for the quarter were down 74% from earnings of $0.54 per share in the prior-year period, largely due to the strike impact of an estimated $0.28 per share and the negative cum.

catch.

The current-year period benefitted by $8 million, or $0.06 per share, from the continuation of the research and experimentation tax credit.

As this tax legislation was not passed until the fourth quarter, the full-year benefit was reflected in the current quarter.

Cash flow from operations of $58 million and capital expenditures of $61 million for the quarter reflect our continuing investment in the 787 program and other new programs, revised 787 payment terms negotiated earlier this year, and additional strike-related inventory build.

Slide nine highlights our progression on key P&L metrics over the trailing four quarters.

Fourth quarter revenues were down 37% sequentially from Q3, as the strike impacted the entire quarter's results, versus only a few weeks in the third quarter.

We estimate revenues lost to the strike to be $53 million in the third quarter and $451 million in the fourth quarter, for a total-year impact of just over $500 million.

Operating income margins were 4.4% in the quarter, well below the prior-year period and sequentially, due to the strike impact and negative cum.

catch adjustment mentioned earlier.

Lastly, fourth quarter fully diluted EPS of $0.14 was down 74% sequentially due to the same factors.

Our effective tax rate in the current quarter was almost zero due to the recognition of the full-year R&E credit that I mentioned earlier.

On slide 10 -- R&D expense in the fourth quarter was $15 million, about flat with the prior-year period in absolute dollars but a larger percentage of sales.

The sales were temporarily lower due to the strike.

Sequentially, R&D expense grew 15% from the third quarter, as we [begin] a modest ramp-up in spending for some of our recently announced new programs, primarily in the Fuselage segment.

SG&A expense for the quarter was $36 million, about 29% below the prior-year period, due primarily to lower noncash stock compensation expense and the impact of the three-day work week for most of the quarter.

Sequentially, SG&A was down 8% from the third quarter for the same reasons.

The revenue decline caused by the strike resulted in SG&A and R&D increasing from 6.6% of sales in the fourth quarter of 2007 and 5.0% in the third quarter of 2008, to 7.9% in the current quarter.

When sales return to pre-strike levels, these metrics should also resume their historical trend.

Slide 11 summarizes the P&L for the fourth quarter and full year versus the same periods in the prior year.

During the quarter, Spirit realized approximately $27 million of net unfavorable changes in contract estimates versus a net $3.5 million favorable in the prior-year period and $13 million unfavorable adjustment in the third quarter.

$20 million of the $27 million unfavorable adjustment relates specifically to lower pension income and our current contract accounting blocks.

While this lower pension income will be realized in 2009 and 2010, it effectively increases cost for the entire contract block and, under our accounting policies, must be recognized in the current quarter.

This adjustment impacted profitability in all three of our reporting segments.

Another $5 million of the $27 million unfavorable cum.

catch adjustment relates to foreign exchange rate movements -- more specifically for Spirit, the strengthening of the dollar versus the pound.

The approximate 20% strengthening of the dollar in the fourth quarter lowers the dollar value of our pound-based revenues and profits resulting in a negative adjustment.

The impact of the Boeing IAM strike was largely reflected in the third quarter results based on our initial estimates for the duration of the strike and the pace of the subsequent ramp-up.

These estimates were trued up in the fourth quarter and generally found to be conservative, resulting in a partial reversal of the strike-related impact booked in the third quarter.

Slide 12 compares 2008 full-year results to the prior two years for revenue, operating margins and fully diluted earnings per share.

Despite the impact of the strike and the recent delays in the introduction of the 787 program, Spirit has continued to grow and strengthen as a company.

Slide 13 summarizes the estimated earnings impact on total-year 2008 results from the IAM strike at Boeing and the negative cum.

catch adjustment resulting from lower pension income in the next few years.

The strike impacted reported EPS of $1.91 per fully diluted share by an estimated $0.41 per share in the third and fourth quarter.

Lower pension income in the remaining months of our current contract blocks negatively impacted Spirit by $20 million pretax, or $0.10 per share, all in the fourth quarter.

Absent these events, Spirit would have experienced double-digit year-over-year earnings growth, despite the delays in the 787 deliveries which constrained our 2008 results but will provide solid long-term growth.

Slide 14 summarizes the trailing four-quarter changes in our cash and debt balances.

Cash balances at the end of the fourth quarter of $217 million increased $39 million, or 22%, from the prior quarter end, largely due to improving cash flow from operations.

The fourth quarter included $110 million of customer cash advances for the 787 program.

Total debt balances decreased slightly in the quarter due to some minor scheduled repayments.

At the end of the fourth quarter, our net debt-to-capital ratio was just over 22%, versus 27% at year end 2007.

And our net debt to 2008 EBITDA ratio continues to be well below 1.

The year-end 2008 metrics includes $186 reduction in shareholders' equity, which was reflected in other comprehensive income, due to the unfavorable performance of our defined benefit pension plan in 2008 that I'll discuss in a minute.

Additionally, at the end of the fourth quarter, the Company had over $850 million of short-term liquidity available through our revolving credit agreements and available cash balances, which we continue to believe is fully adequate to fund projected cash flow needs.

Earlier, I mentioned that our 2008 pension plan performance will result in lower pension income in future years.

Slide 15 provides further detail on our US defined benefit pension plan in 2008, which you may recall was frozen at the time of the divestiture from Boeing.

At the end of the year, this plan was still more than fully funded, with plan assets at 110% of plan liabilities.

The funding percentage is down from 157% at year end 2007 due to a 23% reduction in plan assets and a 53-basis point reduction in the discount rate on the respective measurement dates.

This performance reduces the level of noncash pension income expected to be generated by the USDB plan and increases Spirit's total pension expense in 2009 and 2010 by approximately $35 million per year.

This reduction is reflected in our current contract accounting blocks and generated the $20 million negative cum.

catch adjustment in Q4 that I mentioned earlier.

Overall, Spirit continues to have a strong, fully funded plan, although it is still subject to the same influences experienced by many other companies.

Slide 16 details our cash flow for the full year 2008 versus 2007.

Cash flow from operations was positive $205 million, as higher customer advance payments and ongoing profitability continues to offset working capital growth.

The working capital build was largely centered on inventory, which was driven by the reschedule of 787 deliveries earlier this year, continuing engineering changes on the 787, and pre-production and non-recurring engineering spending for other new programs, including the 747-8 and our two new Gulfstream programs.

Fourth quarter inventory growth of $113 million includes an increase in capitalized development costs of $45 million for the quarter, entirely for new programs unrelated to the 787, as capitalized development costs for the 87 were largely completed in late 2007.

At the end of the year, capitalized development costs were $421 million in total, including $235 million for the 787.

The strike also contributed to higher inventory balances at the end of the quarter, due to the timing lag of rebalancing our supply chain to reduce delivery schedules.

This inventory should be delivered during 2009.

The decline in our accounts payable balance during the fourth quarter is also a function of reducing incoming material from the supply base.

Capital expenditures were $61 million in the fourth quarter and $236 million for the year.

Total-year spending was down 18% from 2007, as the installation of production capacity for the 787-8 program continues to wind down.

Slide 17 summarizes our guidance for 2009 compared to 2008 actual results.

2009 revenues should be in a range of $4.25 billion to $4.35 billion, a 12% to 14% growth over 2008.

This growth will partially result from the resumption of pre-strike level of unit deliveries to Boeing.

Ramp-up of 787 deliveries and growth in revenues from non-Boeing customers will also contribute in 2009.

Offsetting some of this growth is currency headwind from our UK operations.

At the present dollar-pound exchange rate, negative currency headwind for revenues will exceed $100 million.

Full pre-strike delivery levels will not be achieved until the end of the first quarter, so we expect it to be the weakest quarter of the year in 2009.

On this projected revenue base, Spirit expects earnings per fully diluted share of $2.15 to $2.35, an 18% growth over 2008 using the midpoint of the range.

Earnings growth should exceed revenue growth due to the non-recurrence of negative cum.

catch adjustments booked in 2008 and contributions from new programs.

SG&A and R&D expense are projected to remain at 5% to 5.5% of sales, consistent with our levels in 2008.

Offsetting some of our margin expansion opportunities will be earnings headwind created by foreign exchange that I mentioned earlier, lower projected interest income and a higher effective tax rate in 2009.

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

Thank you, Rick.

I'll wrap up on slide 18 with a few brief comments.

Our core business is performing well.

We're conservatively capitalized and financially strong.

Our continuous focus is on meeting our customer commitments as we grow and diversify our business over the long term.

We're equally as focused on cost containment and improving profitability.

Early in 2008, we implemented processes to limit hiring and intensified our efforts to improve operational efficiencies.

These efforts are yielding results as we enter into the uncertain market environment.

Overall, given the challenges we've faced, I'm pleased with our 2008 performance and am confident we are positioned to support our customer requirements for 2009.

In addition, we are doing the necessary contingency planning to prepare for a range of possible economic outcomes.

We will now be glad to take your questions.

(Operator Instructions) Robert Spingarn, Credit Suisse.

Morning, everyone.

Good morning.

Morning, Rob.

Rick, you just talked about the capitalized development in inventory.

I think it was $235 million for the 787, $235 million, and then another $100 million-plus on other programs.

How much are you amortizing per unit shipped on 787?

Oh, 787 is all being amortized over the first 500 units.

Okay, so --

So it's roughly $1.4 million a copy.

Okay.

Okay, excellent.

And that'll be amortized straight-line, again, over those first 500 units.

Okay.

And then one other thing -- I think you were just talking about --

Rick, I think that was the -- excuse me a [second] -- I think that was the cash in the --

It's about $400 million --

$400,000, I think, the $230 million --

I'm sorry, you're absolutely right.

Yes, I'm sorry.

I was thinking of the advances.

No, you're absolutely right, it's -- the $235 million will get amortized over those 500 units, yes.

Okay, so a little under $0.5 million apiece.

Yes.

Then on the CapEx that you talked about for next year, the figure you gave -- did you mention what -- is there any offset from Boeing there?

Well, we have the final year of the CapEx reimbursement program that I think we highlighted on our guidance page.

Yes.

The final year is $115 million.

So we always reflect that as a separate line item.

Okay, you're talking about 2009 now?

For 2009,yes.

Okay, I was looking at the 2008 actual of $116 million --

It was $116 million in '08 actuals, that's correct.

Okay, so they're very similar.

Yes, they are.

Okay.

But that is the last year of that reimbursement.

Okay.

And then really, the only other thing I wanted to ask you about is if you could walk us through how we should think about this positive cash flow that you've talked about in the guidance, but not with a whole lot of specificity.

How should we think about the working capital accounts as we go through the year, and then relative to the CapEx and reimbursement try to size this cash flow?

Right.

Well, talking specifically about working capital, we do expect to have some further working capital build in 2009.

It'll be almost entirely in inventory.

We're expecting on the order of another $200 million of growth in inventory.

Receivables -- we should have a little bit of growth in receivables, based on higher revenues.

But that should be offset by our accounts payable balance coming back into kind of historical levels now that the strike is behind us.

So I would think most of our working capital growth would be centered on inventory.

Then the other item to consider in our cash flows is the 787 advances.

As you know, we've received significant advances the last couple years, which start to be repaid once we start to deliver 787 units.

So we will ship a number of 787 units.

But we've largely been paid for those units already in 2008.

So we in effect start to have a repayment of the prior-year advances.

We estimate that to be roughly around $100 million in 2009.

Okay.

And while we're on the topic, Rick -- I don't know if this is you or Jeff -- but you shipped five.

Roughly what would you say you've got in inventory -- ship sets started anywhere from beginning of the work to finished product?

Rob, we have not got any change in the number that we've started, from several quarters now.

I think it's line unit 22 that we had started.

Okay.

So we will, later this year, restart that process.

So just to reconcile what Rick just said, at what point in the delivery manifest do you -- what have you been paid for in terms of advances?

Was it 40, 50 units?

The advances that we received in 2008 basically paid for roughly that many -- paid fully for that many units.

The number I threw out there?

Yes.

Okay.

Last question, for Jeff -- how should we think about -- your guidance contemplates Boeing and Airbus sticking with their production schedules.

And is there any cushion, perhaps in the back end of the year, should that weaken?

We know you have to sort of work to their manifest.

But how do you think about the numbers with a conservative angle?

Well, I think there's a couple angles to that; there are a couple facets to that, [the] question, Rob.

First of all, they did announce a delivery number for them.

And as you know, we lead them somewhat.

So we have also looked at a little bit of contingency.

So you see a little bit wider range for us, which we think is prudent.

The other thing is we -- as Rick mentioned, we're going to have a little bit lower first quarter.

Because we got a fair amount of a head start on the first part of the year deliveries for Boeing.

So I think the combination of those two -- we've been as prudent as we know how to be.

And we will still, of course, fully meet the demand pull from the customers.

Okay.

Thank you both.

Thank you.

Howard Rubel, Jefferies.

Thank you very much.

I want to talk a little bit about your outlook.

If we add back the numbers that Rick walked us through with respect to the strike -- there was $0.10 for pension and another $0.41 for the disruption.

And so that would have gotten us a number, I think, like -- or $0.51.

So it gets you like $242 million.

And your outlook for this year is $235 million at the high end.

There's still some strike impact in this current quarter, and then there's still, what, $35 million or so, that Rick articulated, regarding pension.

So if we added those back, you would show growth year-over-year?

Is that fair?

Yes, I think it is, Howard.

The other point you didn't mention, that I alluded to in my earlier comments -- we are expecting a little '09 headwind as well from lower interest income, and a slightly higher effective tax rate.

I estimate those two items will create about $0.10 to $0.12 of headwind in 2009.

That's helpful.

And then, just to talk about 787 -- actually, I'd rather talk about Hawker exposure for a moment.

I mean, they've cut rates fairly substantially, and you're seeing some pressure in the business jet market.

Could you just address again how you're dealing with some of those uncertainties?

Hard to do it when the customer says, we need it tomorrow.

But --

Yes.

So clearly, the way we deal with that, Howard, is of course keep our ear to the ground and -- sometimes in our case -- our ear to the air.

And close communication with customers -- we watch what you guys forecast, and we run a number of scenarios, and make sure that our planning is looking forward to encompass a whole range of possible outcomes, and then make prudent steps in our decisions.

So we're -- so as you can imagine, and as we mentioned early in '08, we became more conservative in overhead management and staffing, and those sorts of things.

And of course, we carry that on, and even to a heightened level in '09 -- realizing that we have to balance potential outcomes, whatever they are, with the demand that gets pulled from us.

Then I just have one last thing.

The Wing revenues -- was that -- and profitability looked a little bit weak.

Were there any issues with respect to the new development programs?

Or was that all just currency, Rick?

No, the entire $5 million that I mentioned of negative cum.

catch related to currency all falls into the Wing segment.

Thank you, gentlemen, very much.

Thanks, Howard.

Thank you, Howard.

Joe Nadol, JPMorgan.

Thanks, good morning.

Hi, Joe.

First question is just -- I know you don't give quarterly guidance, and I don't want you -- wouldn't want you to start a precedent.

But just given the circumstances here, I was wondering if you could help a little bit on what kind of ship set volume you're looking at for Q1.

You've already said it's going to be weaker.

What sort of residual is there from the strike?

Well, the way I would categorize it, Joe, is Boeing announced that the strike cost them 105 units of production in 2008.

And if you look at our unit ship sets, we had -- we lost 72 units in 2008, and that included three units of 87 deliveries.

So if you exclude those two, we lost 69 units.

So the difference between the 69 units and the 105 units for us has to come out of 2009.

And most of that will come out of the early part of the year.

Okay, that's helpful.

On the cash flow -- I guess the $200 million that you mentioned, Rick, in terms of the growth in inventory -- that's net of what you'll be able to shed in terms of strike-related inventory?

That's correct, that's a net increase.

Okay.

And so, taking a step back here, more philosophically looking at the cash flow outlook in the balance sheet, any investments that you have planned -- your net debt hasn't budged much.

But that's not including the Boeing advances, which, as you note, have been going up quite a bit over the past several quarters, and you had to burn those off in the next several years.

Obviously, the outlook has shifted in both business jet market and the commercial aircraft market, to some degree.

Can you talk a bit about how you're viewing both the investments that you already have in the plan and any other ways you can cut CapEx, and how you're evaluating potential new investments -- although I imagine that pipeline is going to be shut down, just because OEMs are going to be pulling back?

Yes, let me take a swing at that, and then Rick can add some flavor, if he wants to.

First of all, of course, we're being as conservative as we know how to be.

We're delaying projects that can be delayed.

Of course, we have certain contractual commitments that we will continue to meet.

But again, it goes back to the whole spectrum of contingency planning that we do and the requirements that we have.

I'd also make note that a number of our new development programs have some shared risk associated with that, with our customers and partners as well as Spirit.

So we have stressed our plans through a whole number of scenarios and feel -- I started to say very good.

It's hard to feel very good in this environment, but feel very confident that we have the whole range of potential outcomes covered and remain very conservatively capitalized and very strong.

Okay.

Thank you.

Yes.

Troy Lahr, Stifel Nicolaus.

Thanks.

Just wondered, regarding your 2009 guidance, if you could talk a little bit more at the segment level and give us just some clarity on how you see that shaping up.

In terms of revenue --

Just sales and margins.

Well, the sales will obviously follow the production deliveries.

I think we'll see a little bit higher growth in our Wing business because of some of our new programs there.

Primarily the Gulfstream programs will contribute some revenues.

I think we'll have a little higher growth in our Fuselage business.

Again, some of our new programs there -- the Sikorsky program, the A350 program -- will generate some revenues that wouldn't be directly attributable to changes in production rates.

So I think you'll see a little higher growth in those two segments.

The profitability will basically return to the levels that we saw before the strike, maybe a little bit down because of the lower pension income, which -- as you heard, we took a cum.

catch adjustment for that in the fourth quarter.

But that obviously dampens our margins going forward, so that'll stay with us through the remainder of these contract blocks, which will take us out through the end of 2009.

Okay, but just on the margin side, I mean, we really don't see anything moving meaningfully one way or the other, one segment versus the other?

No, I think once you get past the strike impact, I think you'll see our margins look similar to what we had before.

Okay.

And then, when do we expect the blocks to start resetting, given the delays?

Is that kind of middle of 2010 now?

No, it's actually -- and again, it varies by program obviously, because each contract has its own endpoint based on the number of units included in the block -- but generally, most of our blocks will mature around the end of 2009.

There's a few that go off into early '10.

But the big ones for us are the 737s, the various products that we make on the 737.

And those blocks pretty much come to an end at the end of 2009.

So on average, if you kind of plussed and minused it all, I'd say on average, we'll start the new blocks somewhere in the first quarter of 2010.

Great.

Thanks, guys.

Heidi Wood, Morgan Stanley.

Good morning.

Morning, Heidi.

I want to turn to the cash flow, Rick, if you don't mind, and get a little bit better clarity.

I may have missed it, but are you -- what is the cash flow guidance from operations for 2009?

Well, we didn't (multiple speakers) provide any specific guidance.

Again, given the volatility that we have, we didn't provide very specific guidance.

What we said is that we would expect to have positive cash flows, positive free cash flows, with the assumption of $250 million to $275 million of CapEx.

And that includes, obviously, the $115 million of capital reimbursement that we mentioned earlier.

I mean, if you do the math on that, it would imply a cash flow from operations that looks a lot like what we did in 2008.

All right.

Well, given that it's such a significant driver for your stock and such great concern, perhaps you can give us a little more clarity how -- on a quarterly outlook basis, are you cash-positive every quarter?

Or can you give us a sense about the puts and takes as we think about the next couple of quarters, Rick?

Yes.

I think you'll find, if you go back and look at our historical results, particularly the first quarter of 2008 -- even the first quarter of 2007 -- the first quarter tends to be our weakest cash flow quarter, just because of the way our deliveries typically end, at the end of the calendar year.

Yes, typically, everything we ship in December we get paid for in the month of December.

So we end up with quite low receivables balances at the end of the year.

And then those kind of return to normal levels at the end of the first quarter.

So we always have some receivables build, which constrains, obviously, our cash flows in the first quarter.

I believe you'll see that again in this quarter.

So the first quarter should be our weakest of the year.

Yes, after that, it really just depends on the timing of payments from customers for various activities that we're doing, and the timing of deliveries.

And then what about inventory?

I mean, we've seen it build.

You again talked about -- you gave us some kind of puts and takes on it.

But again, what happens over the next couple quarters?

Where is inventory going to end in year end 2009?

Well, as we said in our earlier remarks, we expect on the order of about another $200 million of inventory growth in the total year.

And that, in response to -- one of the questions was, does that include the burn-off of the inventory that you build for the strike?

And it certainly does.

So we will burn off most of that inventory in the first part of the year.

So that should help reduce the amount of inventory growth that we'll see in the early part of the year.

But other than that, I don't really see any real variations on a quarter-to-quarter basis.

That inventory growth is primarily for starting to ramp up production on the 787.

It's for the development costs that are continuing for some of our new programs.

And those are not really on a quarterly sensitive basis.

That's a fairly steady ramp-up during the year.

Okay, one last question, on the Malaysia facility -- can you give us a sense as to how we should think about the quarterly migration of work going forward?

I mean, how is that -- how are we going to see this spill into margins, and what should we be expecting there?

I'll maybe address the question of how it spills into margins.

Obviously, it's improved costs, or [lowered] cost, in our current contract block.

So early on, Malaysia primarily benefits our A320 block.

And that block extends for a longer period of time.

It extends into mid-2010.

So we're already starting to see a little bit of the savings in our current block, but relatively little.

What you'll see is the majority of those savings will fall into subsequent blocks.

Okay, great.

Thanks very much.

Thank you, Heidi.

Dana Merber, GMP Securities.

Good morning, guys.

Just a couple of questions.

First, just with respect to your backlog, you mentioned -- Jeff mentioned that it includes the commercial aerospace programs plus some of the new contract wins.

Can you maybe give us a bit more of a breakdown, like what proportion of it is commercial, what's the new contract wins -- little more detail, perhaps?

Well, clearly, the lion's share of that is the commercial jet transport backlog.

Yes --

I'd say, well over [90].

Yes, the only part of the non-Boeing work, or non-Airbus production work that we would have in backlog are those development programs that are specifically contracted for.

We would not have, for instance -- the Sikorsky's probably a good example.

On our CH-53K contract, we have won a development contract.

And then there's another contract that follows that that would be a production contract.

So in our current backlog, all we have is the development contract.

Because at this point, the production contract hasn't been awarded.

So we limit it to those things that are contractually firm.

Okay.

And just with respect to your CapEx as well -- I know you're going to be incurring, I'm assuming, the bulk of the CapEx on the Carolina plant over the next two years.

Is that fair?

I mean, when will -- how can we think about that kind of breakdown?

No, absolutely.

The growth that you see in our CapEx from '08 to '09 is really totally based on putting in place the production equipment for our North Carolina facility.

Absent that event, our CapEx probably would have been down a little bit in 2009.

Thanks very much, guys.

Thank you.

Finbar Sheehy, Sanford Bernstein.

Morning.

Morning.

Morning.

You've won quite a number of new programs -- the two Gulfstreams, the -- of course you got the A350, the Cessna, the MRJ.

Can you give us some insight into sort of the timing and size of the capital and R&D commitments that you'd need to make over time for those?

Well, the R&D investment for most of those is relatively modest, and it's spread out over the course of the next few years.

In many cases, as we've said in earlier calls and presentations, we've been successful in being able to share the development costs for a number of these programs with our customers, with third parties, and with Spirit providing some of the development costs as well.

So that kind of sharing arrangement has resulted in the actual R&D expenses for those programs being relatively modest in the next couple years.

And capital for equipment [of] facilities?

Yes, facilities-wise, in most cases, those programs that you mentioned fit fairly well within our current brick-and-mortar.

So there's not -- other than the A350, which is a major program that we're building the new facility for in North Carolina -- other than that, the other programs that you mentioned would largely fit into our existing facilities.

We may have some expansion in some capital equipment and things like that, but no significant new brick-and-mortar.

Okay.

And then, on the segments -- if we add back the cum.

catch-ups to the margins and the different segments this quarter, they were still down versus previous recent quarters.

Yes.

Should we assume that that was the effect of the strike on volumes primarily?

I mean, you mentioned the currency effect on Wings.

Yes.

No, actually, there's two things that come into play.

Probably the single largest, if you're just looking at absolute margin percentages, is the R&D and SG&A expense.

Because we had a much lower volume base in the fourth quarter, the same dollars of R&D and SG&A that we spent in prior quarters looks like a larger percentage of revenues.

So that had a -- for instance, in Fuselage, if you look year-to-year, Q4 of last year to Q4 this year, that had an almost 2 percentage point impact.

And it negatively impacted, really, all of the segments.

The other factor that comes into play is the cum.

catches relate to the periods prior to the fourth quarter.

So they in effect correct the profitability on margins that we've booked through the third quarter of this year.

They don't take into account the impact that it has on the current quarter.

So for instance, the lower pension expense -- lower pension income that we talked about -- generated a negative cum.

catch, but it also obviously reduces the profitability in the current quarter.

So that's reflected in there as well.

Got it.

Okay, thank you.

Thanks.

(Operator Instructions) Joseph Campbell, Barclays Capital.

Good morning.

It's actually Carter Copeland and Joe Campbell.

Good morning.

And we'll keep to -- good morning.

Jeff, Boeing has left open the opportunity to reconsider its production rates from sort of level to potentially down in their guidance to us.

And what I was wondering is, they seem to be talking about, well, if emergencies happen, we might have to do something to the end of '09, but probably not.

And depending on how soon we do these things, we're probably talking about the second half of 2010 rather than the first half.

But how does that work, in terms of just the timing of -- because you lead them a bit -- how do they have to -- when do they have to tell you, say, if they want to make a change to 2010?

When do you have to know how to -- when to do that?

Our contracted lead times are six months on the reduction side.

It's a little longer on a rate-increase side.

So contractually, they're obligated to tell us within six months.

Of course, if they violate that, then there's -- we're entitled to equitable compensation.

But normally, wouldn't they tell you earlier than that?

That's a sort of hard -- or is that --?

Yes, I think, Joe, absent some --

Shock?

-- some shock, right, there would be a very smooth plan, with not just us, but other key partner suppliers to Boeing.

So, I mean, conceptually as late as the end of this year and the beginning of next for something in the second half.

But presuming that they're doing this by looking at the world and talking to all their customers and so on, they would give you notice of your firing line, or a heads-up at least, in May or June -- mid-year, say, if they could?

I think that's fair.

And of course, as we mentioned earlier, we do lead them.

So they could hold their guidance for a number of units for '09, and it still might impact us in '09.

Well, that's what I was going to say.

So --

(inaudible) late in the year.

If they were making changes to the second half of 2010, rather than the first half, can we assume that your 2009 would be unchanged?

I think that's a fair assumption.

Yes, absolutely.

(inaudible)

But if they were to do that earlier, then it starts to get into your --

Yes.

Okay, Carter has one.

Rick, just a couple of quick ones -- on the 787 margin, now you've obviously -- I mean, obviously we're not starting back up winding barrels until later in the year, the programs push to the right.

Did you make another revision to the 787 margin in the quarter, or do you expect to in subsequent quarters?

Or are we getting near zero?

Any color there's helpful.

Yes, sure.

No, we true up margins and profitability estimates on all of our contracts every quarter.

And we did that again in the fourth quarter, obviously.

There was, as I recall, a slight deterioration on the 787, but it was largely immaterial.

Okay.

And one last one on R&D and SG&A.

Perhaps I missed it, but what's your expectation for R&D and SG&A for '09?

As I said in my prepared comments, Joe, we're expecting in '09 that R&D and SG&A -- the combination of the two would be in the 5% to 5.5% range, which is about where we ended up 2008.

If you look at the total year '08, which admittedly is a little bit impacted by the strike, we were about 5.4% for the two of them in '08.

So we think that as a percentage of sales, that'll hold.

So that implies, obviously, that we'll have some growth in 2008, maybe not as much as dollar-for-dollar with revenues.

But certainly we will have some growth.

Is the growth in R&D, or is it in -- I mean --

It's a little bit in both --

(multiple speakers) SG&A during the strike period?

Yes, well, couple of things there that -- couple of variables.

On the SG&A side, we're obviously starting to build the infrastructure now in North Carolina to support that program.

So we'll have a little infrastructure growth in SG&A to support that.

And also on the R&D side, kind of the major variable for us in 2009 are the 787 derivatives.

Depending on the schedule of the derivatives, it's possible that we could incur some R&D expense in 2009 for those programs.

At this point, we're still working with the customer, obviously, on those schedules, and how much of that would be R&D expense versus contract costs.

But we're certainly keeping a placeholder in our guidance for some growth in R&D expense next year, primarily for that reason.

Great.

Thanks a lot, guys.

Thank you.

Thanks, guys.

Thank you.

David Strauss, UBS.

Morning.

Good morning.

Morning, David.

Did you specifically spell out how many deliveries for the 787 are baked into your revenue guidance for '09?

No, we did not.

But we've got a range covered there, and it's in the 10- to 15-unit range.

Okay.

So if I think about your -- based on the difference where you are and where Boeing is, in terms of deliveries on the non-787 products, you're probably going to deliver an extra 30 or so ship sets relative to '08 on the [in] production stuff, and then 10 to 15 on the 87.

That's what's baked into your revenue guidance.

I was just having a hard time getting to your number.

Right, yes.

So it's the -- Boeing is guided to 480 to 485 for 2009.

We said we still have to burn off the 30 units that we built in '08.

So on that legacy basis, our core should be in the 450 to 460 kind of range.

Again, we tend to be a little bit ahead of Boeing because of the lead times.

But it'll be in that range excluding the 787.

And the 787 would be on top of that.

Okay, that's helpful.

And then, Rick or Jeff, maybe could you just talk about conceptually, if Boeing were to bring down rates, what impact that might have to your margins, given the volume-based pricing arrangement that you have with Boeing?

Well, you're absolutely right.

The volume-based pricing mechanism that we have certainly helps protect margins when rates go down, and that was the intent of that mechanism when we originally put it in place.

So that will provide some protection for margins.

It doesn't completely protect margins, as you can imagine, with the fixed cost base that we have here.

But to the extent that that happens, we talked earlier about when the current contract blocks end.

that impact, if it were to happen, would by and large be reflected in our next contract blocks.

Kind of given where we are today, with the endpoints of our current blocks, and kind of -- Jeff mentioned, alluded to the fact that we're -- with our lead times, we don't see a whole lot of impact in our current contract blocks.

But certainly it would create some exposure in the next blocks.

Okay.

And last one -- I think you've disclosed that your ship set value on the G650 is around $6 million.

Have you disclosed your ship set value on the 250?

I don't recall.

I don't recall that we have.

But it's --

On the 650?

Yes, on the 250.

250.

No, we have not.

I don't recall that we have.

But I mean, certainly, it's substantial.

Okay, guys.

Thanks.

Course, remember, on the 250, we just have the wing.

On the 650, we also have the nacelles on the BR725.

Thanks, Rick.

So the 650 content would be higher.

Carter [Lee], Davenport & Company.

Good morning, gentlemen.

Following on the G650 -- have you provided any production guidance on that ship set for either '09 or '10?

No, we have not.

And --

On -- I'm sorry.

And won't, unless our customer does.

Okay.

On the 777, I was wondering if you might be able to help me out on ramping up on the 777 in first quarter.

Will that be -- will all of the ramp-ups be of equal against each product line?

Just trying to see if I could model it differently.

Could you get back up -- could you ramp up quicker on the 777 than, say, the 73, or even the 74, for that matter?

You're talking about getting back up on the production step after the --?

Pre-strike production run rates, yes.

By the end of February, very early in March, I think we'll be back to full production rate.

On all aircraft?

Yes.

Okay.

I think that's right, isn't it, [Ron]?

Yes.

And just one more -- can we assume that there'll be any type of catch-up of the -- I'll call it the lost aircraft, the 69 units that you referred to?

Can we expect that anything will be caught up in fiscal year '09?

Well, certainly Boeing's guidance did not indicate that there would be a catch-up of the 105 airplanes that they said they've lost.

So if they don't catch them up, certainly we're not in a position to do so, either.

Okay.

Thank you.

Thanks.

Howard Rubel, Jefferies.

I just wanted to ask a follow-up question for a moment.

There were a number of what I call deferred revenue items and some other things on the cash flow statement.

Could you address those, please, Rick?

Sure.

Deferred revenue comes in where we get cash in advance of completing certain parts of the work scope.

And we had that situation on a couple of our new programs.

I think the most -- the largest in Q4 was on the A350 program.

And --

So those payments that we've received, obviously, will turn into revenues in future periods, as the work is completed.

Right.

And you haven't booked the -- right.

That's the whole point.

And --

Right, right.

And were there also some payments either on the 747-8 or the 787 that were above the ship set values?

Well, I mentioned in my comments, we did receive an additional $110 million of 787 advances.

So that's certainly reflected in our Q4 results.

And we were able to resolve some 747-8 engineering items, development costs -- nothing of any real consequence.

But we did resolve some of those items in the fourth quarter and did receive some revenue for those as well.

Thank you.

Thanks, Howard.

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

Heidi Wood, Morgan Stanley.

Jeff, I had a follow-up, which is that -- I'm just wondering, you talked about the contractual commitments that you had with the OEMs.

I'm just wondering if you've got any kind of an appetite to talk to them and renegotiate, just given that the world has changed so substantially.

I mean, just given the R&D that you're going to be spending on some planes where the outlook may be changed, do you have much appetite to do that?

Well, I think -- in general, Heidi, I think we -- I mean, we're open to negotiations that are appropriate.

That's a pretty broad question, I think.

I mean, clearly, we feel good about the business that we've won, the programs that we've won it on.

We feel very good about the long-term viability of the market.

I think clearly things have changed in the short term here.

But we've been very conservative in the way we manage our business.

So we don't see anything on the horizon that would put us in a position where we had to go renegotiate.

So if it makes sense to our long-term relationships and short-term needs, we certainly will.

But nothing really pops to mind as having needed to do that at this moment.

Okay.

Thanks so much.

Yes.

Thank you.

We thank you for your participation in today's Conference.

This does conclude your presentation.

You may now disconnect, and have a great day.