Spirit AeroSystems Holdings Inc (SPR) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Spirit AeroSystems Holdings, Incorporated Fourth Quarter and Full Year 2009 Earnings Conference Call.

My name is Jeri and I'll be your coordinated today.

(Operator Instructions.) I would now like to turn the presentation over to Mr.

Alan Hermanson, Director of Investor Relations.

Please proceed, sir.

Good morning.

Welcome to Spirit's Fourth Quarter and Full Year 2009 Earnings Call.

I'm Alan Hermanson, and with me today are Jeff Turner, Spirit's President and Chief Executive Officer, and Phil Anderson, Spirit's Vice President and Interim Chief Financial Officer.

After brief comments by Jeff and Phil regarding our performance and outlook, we'll be glad to take your questions.

In order to allow everyone to participate in the question and answer segment we do 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 the 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 web presentation.

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

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

Thank you, Alan, and good morning.

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

I'll begin with a look at our business and associated performance, then Phil will walk us through the financial results and guidance.

And after that, we'll be glad to take your questions.

First, let me say I'm disappointed with our fourth quarter and full year 2009 results.

We've fallen short of our projections.

2009 has clearly been a year filled with disruption and challenges.

Nonetheless, our performance has not measured up to my expectations.

Having said that, over the past 4.5 years our team has been aggressively executing our long term strategy for growth and diversification and our vision has matured.

Our core businesses are funding significant portions of our growth as we start to see some of our new programs enter their initial stages of productions.

In particular, four of Spirit's new programs entered the flight test phase in the fourth quarter of 2009.

Programs now in the flight test development phase include the Boeing 787, the Gulf Stream G250, the Gulf Stream G650, and the Rolls Royce BR725.

Additionally, we have two more programs scheduled to enter flight tests this year.

It's truly exciting to be part of the progress our customers are making and to be part of the next generation of large commercial and business jet products.

2009 marked key milestones for Spirit as our core businesses delivered significant chip sets.

While we have made good progress over the last four years on improving costs and efficiencies, we did not capture all of the anticipated cost improvements largely in the 737 and 747 accounting blocks, as they concluded in the fourth quarter of 2009.

This resulted in an unfavorable adjustment to these initial accounting blocks of approximately $26 million, or $0.13 per share.

Also included in the $26 million charge was 5 million of obsolete and surplus inventory that was identified prior to block closure.

Additionally, the CH53K program, which is in the systems development and demonstration, or SBD phase, accounted for an $8 million, or $0.04 per share charge, due to additional development costs supporting a weight improvement plan as our initial design has required refinement to meet our weight commitments.

As we work through the design elements of this program, the program forecasts continue to be profitable and we have expectations of significant follow on work.

As our development programs mature over the next couple of years, we will continue to focus on program execution while addressing typical development challenges, including design evolution, change in weight management, and schedule compliance.

We are attacking these challenges by working with our customers, fulfilling program requirements and ensuring solid action plans are in place that will yield the desired results.

While executing our development efforts during the quarter, we continued to support the 787 program with the restart of the composite fabrication area while preparing our supply chain for production ramp up.

The team is excited to see the 787 in flight test and is beginning a regular production pace.

While global economic conditions show signs of improvement and we see stable near term demand for our products, we continue to remain cautious regarding the outlook for commercial aerospace.

Our focus is on supporting our customers while staying poised to react to market changes.

Overall, our backlog remains substantial at 28 billion.

Our balance sheet is strong with robust liquidity and we are well positioned to react quickly to market changes.

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

Fuselage systems delivered operating margins of 11.5% on $506 million in revenue during the fourth quarter of 2009.

Though revenues were up, margins were relatively flat due to unfavorable contract adjustments and lower CH53K profitability due to additional costs supporting the weight improvements.

Weight continues to be an area of focus as we work closely with our customer to meet program goals.

We have made good progress with this activity while continuing to grow our partnership with Sikorsky.

The fuselage segment celebrated an historical milestone with the completion of line unit 3,132 of the 737 next generation fuselage.

This event was significant for us because of its comparative history.

In Wichita, we built a total of 3,132 737 classic fuselages during its production life from 1967 to 2000, a span of 34 years.

In comparison, it has taken us only 13 years to build the equivalent number - 3,132 - next generation fuselages, which truly demonstrates our design and build strength.

The core business continues to perform well as we deliver newer derivatives.

We shipped the 24th 777 freighter forward fuselage, 13 747-8 freighter, and continue to support test activities for the P-8A Poseidon.

The team is progressing on the Airbus 8350 XWB program and construction sites for both Kinston, North Carolina and St.

Nazaire, France are well underway and our development teams continue to partner with Airbus focusing on technical and schedule requirements.

On slide four you see the propulsion team delivered operating margins of 9.8% on $250 million in revenue during the fourth quarter of 2009.

These margins were lower than the same period in 2008 due to unfavorable contract adjustments and lower after market volumes.

The core business continues to perform and produce some of our newer customer hardware.

In particular, we've delivered our 15th chip set of 787 engine pylons, our fourth 747-8 engine inlet, and our eighth 747-8 ILON chip sets.

The propulsion segment continued to make progress on development programs by delivering the third and fourth inlet and thrust reverser flight test units for the Rolls Royce BR725 engine and the Gulf Stream G650 business jet.

Our team continues to work with the customer supporting certification activities as well as transitioning from development to initial stages of production.

As with all new programs as we bring this BR725 into production, we are focused on a smooth ramp up and achieving our cost curves.

Additionally, our pylon teams, supporting the design and build of the Bombardier C Series jet and the Mitsubishi regional jet, continue to progress well in their early stages of development

On slide five, you see the wing systems segment which is comprised of our Spirit Europe, Spirit Malaysia, and Oklahoma operations.

The wing team delivered improved margins with increased revenues from the year ago quarter on additional volumes.

The core business of Spirit Europe continues to execute well and they are making good progress on the development of the A350 XWB wing spar package.

Activities at Spirit Malaysia continue progressing well with another milestone reached as we are now in full rate assembly production for the A320 composite wing components.

Our aero structures team in Tulsa continues delivering high volumes of core products along with new programs.

In particular, the group delivered the 12th 747-8 fixed leading edge wing section.

The Tulsa team is also progressing with development programs and now has three of their four new programs in the flight test phases of development.

Our focus continues to be on fulfilling our customers' schedule and technical needs with emphasis on cost improvements and weight reduction activities.

We continue to work closely with our customers as we move from development activities into production.

Although the overall aftermarket industry has been depressed, we have continued to expand our aftermarket business to new areas of opportunity, which position us for growth as the market returns.

In November, we announced the opening of a joint venture repair station in Xinjiang, China, which will provide composite repairs and overall services across the Asia Pacific region, complementing our North American and European repair centers.

Additionally, at year end we launched our global sales and distribution of after market spare parts, which will allow Spirit to strengthen relationships with our international customers and respond directly to their spare parts requirements.

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

We delivered five forward fuselages in the fourth quarter and 11 units for the year with unit number 15 shipping before year end.

Our 787 team began the restart of the composite forward fuselage fabrication area.

The team continues to focus on production readiness to ensure both internal processes and our supply base are prepared for a smooth ramp up of production.

Overall product quality remains high as we continue to incorporate the necessary [engine] changes on the initial in-service airplanes.

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

The key is filling the production line and driving rhythm into our factory flow, so that efficiencies can be realized.

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

Thanks, Jeff, and good morning.

I'll begin with our key financial metrics for the fourth quarter on slide number eight.

Revenues for the quarter were $1.78 billion, up 76%--up 67% compared to the fourth quarter of 2008 as the IM strike at Boeing in late 2008 adversely impacted fourth quarter 2008 deliveries.

Operating margins were 7.9% in the quarter, above the prior year period, but lower sequentially than the third quarter of 2009 operating margins of 12.4%.

As Jeff mentioned, fourth quarter 2009 operating performance included a 34 million unfavorable cumulative catch up adjustment, reflecting approximately 26 million of costs associated with the initial 737 and 747 block closeout and $8 million associated with the profitability adjustment on the CH53K program.

You will recall these initial contract accounting blocks began in June of 2005, completed in the fourth quarter of 2009, and represented over 9 billion in contract revenues.

Our current contract accounting blocks on these programs represents approximately the next two years of forecasted deliveries.

Fourth quarter fully diluted EPS of $0.36 was significantly higher than the same period last year, primarily due to the higher sales and operating income.

Our effective tax rate in the quarter was approximately 31%, which was consistent with the quarters--the other quarters of the year.

Lastly, fourth quarter cash flow from operations was 197 million, which included anticipated payments for development programs.

Capital expenditures were $70 million for the quarter.

A summary of our full year 2009 results is on slide eight.

Full year 2009 revenues grew 8% to over 4 billion, up from 3.8 billion in 2008 as total deliveries for large commercial aircraft increased in 2009.

Full year 2009 operating income was 303 million, down from 406 million in 2008, primarily due to the charges recorded in the second quarter.

Fully diluted EPS for the year was $1.37 compared to $1.91 in 2008.

The benefit of the higher deliveries was more than offset by the unfavorable second quarter adjustments mentioned previously.

Cash flow from operations was a negative 14 million for the full year 2009 compared to a positive 211 million generated for the full year 2008.

The company's cash flow shift is primarily driven by the change in customer advances and deferred revenue and partially offset by lower net inventory values, increased accounts payable, and lower accounts receivable.

Capital expenditures for the full year 2009 were 228 million, slightly less than in 2008.

Slide 10 summarizes the third and fourth quarter 2009 cash and debt balances.

Cash balances at the end of the year were 396 million, up 152 million from a year ago, largely reflecting the proceeds generated from the issuance of senior unsecured notes in the third quarter of 2009 and receipt of unplanned non-recurring payments associated with our development programs in the fourth quarter.

Total debt balances increased slightly in the quarter due to additional borrowings on our Malaysian term loan.

At the end of the fourth quarter, our net debt to capital ratio was 25% versus 22% at the year end 2008.

Our total debt to total capital ratio was 36% at the end of the year.

The company's $729 million revolving credit facility was undrawn at the end of the year.

This facility will step down to 409 million in capacity in June of 2010 and has a planned maturity of June 2012.

We continue to believe that this level is adequate to fund projected cash flow needs.

Additionally, we ended 2009 with almost 1.1 billion in short term liquidity available through our revolving credit agreements and available cash balances.

Slide 11 details our cash flow for the full year 2009 versus 2008.

Cash flow from operations was a negative 14 million, as lower customer advance of payments and deferred revenues were partially offset by improvements in payables, inventory growth--lower inventory growth, as compared to 2008.

The current growth in inventory was primarily driven by 787 spending and new program investments, partially offset by higher 787 unit deliveries.

Improvements in accounts payable was driven primarily by improved payment terms with our vendors.

Capital expenditures were 228 million for the year, down 8 million from 2008.

Slide 12 summarizes our guidance for 2010.

So 2010 is a pivotal year for Spirit as we grow and diversify our business.

The core of our business remains strong as we work to bring the next generation of large commercial aircraft and business jets to market.

During 2010, we expect revenues to range between $4 and $4.2 billion, consistent with 2009 levels as demand for single aisle aircraft remains strong in the 787, as well as other new programs offset lower demand for twin-aisle products.

Based on this projected revenue, fully diluted earnings per share guidance for 2010 is expected to be between $1.50 and $1.70 per share, reflecting continued strong volume on the core business and increased margin pressure in the next contract accounting blocks driven by volume and model mix, increased appreciation expense, and lower pension income.

We have also allowed for some conservatism in our outlook given the new program development efforts in 2010.

Cash flow from operations net of capital expenditures is expected to be a use of 250 million with approximately 325 million in capital expenditures.

Cash flow from operations in 2010 includes the liquidation of approximately 250 million in customer advances associated with the 787 program and investments in other new programs.

Included in the 2010 capital expenditures is approximately 100 million in tooling costs related specifically to the Airbus 8350 XWB.

No additional customer reimbursements are planned for 2010.

And looking ahead into 2011, we expect cash flow from operations net of capital expenditures to be significantly stronger than 2010 levels.

Slide 13 provides more detail into the earnings outlook for Spirit.

Starting at the top of the page, you see our 2009 fully diluted EPS results for the year ended 2009.

The 2009 actual adjusted line factors out the significant items that impacted the year.

Moving down from the 2009 adjusted line, you see the primary headwinds to our profitability in the next contract accounting blocks.

These items reflect changes in volume and model mix, increasing depreciation expense and lower pension income.

These three elements represent some of the margin advantages inherent in the initial contract blocks of Spirit.

So as you would expect, we are working on a number of initiatives to improve the long term profitability of the company.

First, we are continuing to work on productivity initiatives in our factories, in our support areas, and in the supply base.

We are also increasing our focus and prioritization of R&D investments.

And as you know, our program management best practice implementation is well underway.

This is an area that has challenged our industry during the past decade.

We have made good progress, but remain intently focused on improvement in this area as we execute our core business and new programs.

Additionally, we will leverage off our new operational capability in Malaysia and North Carolina.

As these operations come online and mature, they will provide us with opportunities to improve profitability.

And finally, we will continue to use a balanced staffing approach to ensure we have the team to support our future growth.

These are the right things to do as we implement our long term strategy of growth and diversification.

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

Thank you, Phil.

And I'll wrap up on slide 14.

Executing our core business effectively and growing and diversifying our business profitably remains the cornerstone of our strategy.

Over the next two years our focus will be on core business performance and execution of new programs while keeping our business healthy and our team for the future intact.

We will continue our pursuit of productivity and efficiency as we seek for improvement across the enterprise.

2010 is a pivotal year for Spirit as we manage core business production, ramp up the new programs, support flight test activities on multiple programs, and continue new program development.

We've accomplished a lot over the last 4.5 years and continue to make significant progress.

With a strong backlog and balance sheet, I'm confident in our strategy and remain focused on delivering long term value for our customers, our employees, and our shareholders.

We'll now be glad to take your questions.

(Operator Instructions.) And your first question comes from the line of Ron Epstein with Bank of America.

Please proceed.

Good morning, guys.

Good morning, Ron.

Phil, can you give us I guess some more color around how we should think about the margins in the segment going forward, particularly in 2010?

Sure, Ron.

So a few things.

One, the mix--most of the segments had some pressure for the reasons we talked about, like pension expense coming through--or pension income lower, there's more depreciation even in the core business, frankly, as we refresh those assets as we go through time.

In the 787, quite frankly, we've mentioned before that is a low margin program for us and that volume is coming up here in 2010 and will continue into '11.

So those are some major items that really put some margin pressure on that we're looking to offset with some of the initiatives I talked about.

And there's some R&D coming on this year.

Now, the R&D line we expect to remain right at the 1.5% of sales quite frankly, but a nice slice of that R&D this year will be for 787-9 development.

Okay.

And some of the initiatives you're talking about in terms of trying to save some costs, I mean, when do you think you could see some follow through in the numbers?

Yes, I mean, we've been working on them obviously for a long time, ever since the company was formed.

And so, many of these aren't new initiatives.

I think as we move into the next block though I think that the appetite here is we're going to pick up a little bit of the pace as we move through time.

That said, we also don't want to sacrifice the growth that we see coming at us over the next couple of years as the market might return and the volume might pick back up on the core business and on new programs.

Okay.

And then--.

--And I think--let me just jump in there, Ron.

I think clearly the--ultimately, the big lever on our margins is production volumes and getting through these new programs and getting them into production.

And we'll continue to do the things to make improvements--incremental improvements in our core businesses.

And the more we execute our new programs to our plans, the better that will be for our margin expansion across the company.

And in the release, you talked about cash flow getting better in 2011, although you left it pretty vague.

Can you give us any more discussion around that?

Sure.

Let me just do that.

I think--I mean, clearly, we've got a stack up of new development programs here and working capital demands to build up some of these programs as well.

But we've said kind of consistently that we're moving through this bubble of development.

And we think we're not going to pinpoint it down because we're not giving guidance for 2011.

But we clearly think, if we execute the plans we have on the table today, that we'll see ourselves moving into the positive side of cash within 2011.

Okay, thank you.

Thanks, Ron.

Thank you.

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

Please proceed.

Good morning.

Good morning, Doug.

It's actually Finbar Sheenhy for Doug.

I just wanted to get a little more from you on what happened with those charges at the end of the year.

You made reference in your press release to moving resources across from sort of mature programs to new development programs and I'm wondering is that part of what happened here.

Can you give us a little more sort of detail on where those charges came from in Q4?

Sure.

Finbar.

So, three pieces.

We mentioned the CH53K.

We talked about some clean up in the inventory.

And the stub there is 21 million kind of left over, which is mainly on 37 and 47 programs.

So that 21 million is split roughly half between the two programs for a couple of different reasons.

The 47 was in a stage late in the third quarter where the production was a bit uncertain from the customer.

So we were--we had the third quarter call and we were thinking about how we were going to handle that.

So that drove some disruption in the fourth quarter.

We didn't necessarily anticipate that.

So that was one piece of it.

The second piece was the 737 where we had a common process in Wichita, specifically, where--the fabrication is a good example--where the fab areas supply all the product lines.

And the 777 fabrication effort kind of started down in the fourth quarter and we held those heads and transitioned them to the 787 even though there's a little skill mismatch there.

But the goal was to try to transition them to the new programs.

That drove a little more cost in the 737 given it's a bigger part of the base.

So again, we didn't necessarily get that in our forecast as we should have, but it was certainly the right thing to do as we moved into 2010 with increased requirements for people.

You throw those variables in and you close out these accounting blocks that have been running for 4.5 years and you've got to take them in that quarter.

So that creates a bit of a challenge, too, where otherwise you might be able to find ways to offset some of the cost.

So that's a little more detail for you.

And as you roll now onto new accounting blocks for those two programs will we see a step as you sort of go onto a new block, or is that going to be a fairly continuous transition in terms of margin, setting aside the sort of true up that you just did there?

Yes.

So some of the--if you look--you normalize all the [cumulative] catches out, you probably see a consistent margin running through, maybe a bit of a step down for the reasons we talked about, because the lower pension income and depreciation and mix are real headwinds we have here in the next accounting block.

Thank you.

Sure.

And your next question comes from the line of Carter Leake with Davenport Company.

Please proceed.

Good morning.

Good morning, Carter.

All right.

Let's see where to start.

How about let's just start giving us a better understanding of how we could have so much uncertainty in the last quarter of a five-year block, because obviously it leads to--we've got a 777 block I think coming up in February.

Do I expect the same issues?

And we have the forward block.

To be blunt, how can we have confidence in your accounting block assumptions?

In that forward block it looks like you have 700 units over 23 to 27 months.

Does that still hold?

It does.

It does, Carter.

Let me just give you a couple of thoughts, and then Phil can pipe in here as well, if he'd like to.

One of the reasons we cut the size of the block going forward into about half what we used in the past is to get more--get a tighter rein on our forecasting and our approach to that.

So we pulled it in to where it's about a two-year 700-unit block, as opposed to a four to 4.5 year block, so to try to work out some of the noise that is inherent in the forecasting process of a block in contract accounting like we do.

So that's one thing we've done.

The second thing is I think we've done quite a bit of work as we've mentioned in the past on upgrading some of our systems.

That continues.

We're not happy yet with the speed with which we can link forecasting and reporting.

And we're working on that and we'll see some improvements in that as we go forward.

Again, we call this--these were our first blocks over a span of a long period of time and I think arguably a fair amount of unusual disruption in them.

So I think we'll sort them down and that will give us better focus, as well as improving our systems and our system usage as we go through time.

Phil, did you have anything you wanted to add to that?

No, I think that sums.

I think your point is a fair one, Carter.

I think we left the guidance range somewhat wide at third quarter knowing we were closing out some of the largest accounting blocks in the same quarter.

And I think that's something my team is going to work on is just the process Jeff mentioned of accelerating and improving the flow time of the forecasting process, so we can get ahead of the curve and are able to look at these things closer.

And we've already started that process.

How comfortable are you on 777 block that expires in February?

Any reason to expect any big surprises?

No.

Well, you can appreciate, Carter, what the--the surprise we got as we closed these blocks, the amount of additional scrutiny that we're applying to those.

So as of right now, we don't see a big surprise coming.

But again, I will remind us that these again are long blocks and there's some big blocks that are going to close still in front of us in the next few months.

We think we've adequately taken those into account.

And of course, we'll know with absolute clarity as we close them.

All right.

Two quick ones.

Do you still expect 6.1 to 6.5 in revenues in the 2013 timeframe provided the 787 ramps as expected?

Yes.

I guess we haven't refreshed it that far out given some of the moving parts, Carter.

I think a year ago or two years ago we weren't expecting to have six flight test programs happening in 2010 either.

So I think we need to go back and take a look at that.

The market's moved around.

(Inaudible) wouldn't apply on that.

I mean, clearly, you can expect revenue growth as we go through the year, 787 driving it as the business jet programs come on.

Yes, I think the time--just maybe without being specific on the scale and the timing, we clearly have driven a strategy that says that this is a growing market.

These core products are going to grow in volume.

The new products are solid--going to be solid performers in their segments in the market.

And 2010 is a pivotal year for us we need to get through, get some of this risky development behind us and get into production ramp ups.

And so, I think generally we're--I am very optimistic about where this business is going.

I'm not quite as--I'm not clear enough right now to call exactly when we hit the numbers that you mentioned.

But clearly, our forecasts show growth in our core business and our new programs as they come in.

And I think our customers' forecasts support that.

One last one.

How do you view a potential 737 A320 re-engine, positive or negative?

We view that as a great opportunity.

A great opportunity for the customers, if they decide to do that.

Those are great airplanes.

They have--they enjoy a huge installed base.

They are efficient.

They are effective.

We build a lot of parts for them.

And we're ready, willing, and able to help with any upgrades that any of our customers' products need.

Is it a re-bid or--if it comes up, or do you have derivative rights?

There is a variety of options there.

We look at each one of them as we need to bring value to the customer and to the customer's airplane.

And so, there's opportunities to expand our business with those and there's opportunities to protect our business with those.

Great.

Thanks for taking my questions.

Oh, you bet.

Thanks.

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

You may proceed, sir.

Thank you.

One of the challenges you have going forward is going to be negotiating with the unions on a new contract.

And so, how do you get comfortable with factoring in some outlook on that versus your costs?

And what kind of productivity have you thought about or considered in that process?

Howard, we have focused very--a lot of energy on our workforce on the unions that represent them from day one of this company.

We view this as a partnership relationship.

Our two core--our mantra, if you will, is we say we've got to keep our company healthy and we've got to keep our team for the future intact.

That clearly includes good, solid relationships with all of our employees and their representatives.

And we have taken that very serious.

We don't see this--any of our negotiations as a pop-up event.

We see it as an ongoing relationship.

And I think we've done the right things.

I think we've got a great staff of people.

I think their hearts are with us in terms of wanting to keep our company healthy and certainly to keep our team intact.

So I think those are the attitudes that we're going to carry into any negotiation and certainly the 2010 negotiations with the IAM are pivotal.

I think we're in a position to drive that partnership solid certainly into the next contract.

So I know all these things are serious, they're big deal, they're important to the employees and to the company and the shareholders.

And we view them that way holistically.

And I have a measured level of optimism that we've done the right thing so far.

We've got plans to really listen to our employees and make sure that what they need personally, what they need in terms of this company staying healthy, and what we all need are in concert going forward.

And I think they are and I think the negotiation will show that.

Well, I mean, maybe another way to ask it is, are we at risk of seeing a cost price squeeze because your prices are more or less fixed with Boeing for the time being and your costs could go up substantially here or to some degree?

Well, Howard, I think if they went up substantially that would in fact cause a squeeze.

So clearly, we all see that as a requirement to keep the company healthy is to not allow that to happen.

So clearly, any wage or incentive or whatever needs to be paid back, if you will, with productivity improvement.

And I think we all understand that.

Thank you very much.

Yes, thank you, Howard.

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

Please proceed.

Thanks.

Jeff, just going back to Carter's question real quick, it sounds like your guidance for this year does factor in maybe a more modest, unfavorable catch up on the 777 as you close that out.

Is that fair?

Well, I think rather than specifically that, I think you could say our guidance has--I mean, we've talked about the fact that 2010 has got a lot of issues in it.

So we've tried to factor in clearly some conservatism, if you will, for development programs, for these things that are in flight test.

I think they're going well, but you never know what comes out of them until they're done.

And some block closure potential--block closure issues as well, so we've clearly tried to be clear-eyed about the kinds of things that could hit us in 2010.

Okay.

And then--thanks.

And then, can you talk about your guidance a little bit?

I guess on the low end it calls for maybe revenues down 2%, the high end it's up 3%.

Can you maybe just talk about some of your key assumptions that are going to put you at either the high end or the low end and maybe how many deliveries you're thinking on 787?

Yes.

I mean, basically it's revolving around the 78 and some of the other new programs we've got are the biggest movers in the range.

Specifically on the 78, I think we're looking to kind of 25 to 30 aircraft this year.

We feel good about that.

And of course, that will be driven by the [pull]--the pull savings.

Remember that the 777 is going--in fact we'll break into a slower rate now to meet the customer's demand.

So we're pretty much in sync.

Not pretty much.

We are in sync with our customer demand forecast and that drives out--that will drive out some range.

There can be some difference.

For example, it's not uncommon for--to get a swing of several aircraft in a particular category as the detail schedules change through the year.

Okay.

And why the obsolete inventory?

And I assume that was on the 777 or the 777 and 737?

It was actually across the board.

And it was the result of a very focused inventory reduction activity that we've had underway.

And we have a certain level of O&S that we expect and because of the extra emphasis we've been putting on inventory we actually got a little more than we had reserved for.

Okay, thanks, guys.

Thank you.

And your next question comes from the line of Matt Vittorioso from Barclays Capital.

Please proceed.

Good morning.

Just a quick question.

I appreciate the guidance on cash flow.

Could you help us for modeling purposes think about where inventory is going throughout the year and how working capital might play out over the next four quarters?

Sure, Matt.

So I think we'll stick to what we really said in the third quarter where we expect overall inventory to grow modestly over the next couple of years as we move these development programs through development into production.

So that is still a good outlook.

So that basically says if you narrowed it down to 2010 you'll likely see it growing mostly quarter over quarter in the same profile.

Okay.

And the same sort of seasonality where the first quarter is a fairly large use of cash and getting better throughout the year?

Yes, I think that's a pretty good way to think about Spirit given where we're at in the development cycle.

That's right.

Okay.

And just real quick simple modeling questions.

When I look at your business, the chip set deliveries versus what Boeing expects to deliver, is that a one-for-one?

It didn't play out that way in 2009.

And I apologize if this is a simple question.

No, that's okay.

There's actually a fair amount of nuance to that depending on the airplane program, where the program is in its maturity, and frankly, what level of integration we have completed here when we ship it.

So for example, the 747, if you look at the details of the 47 it goes--the forward fuselage, the 41 section, goes in multiple pieces early in--earlier in the build sequence into Everett.

So it's a longer lag between when we ship and when they ship than say the 737, which goes as a full complete fuselage and has a much quicker build in Seattle.

So we are between four to six months on the outside to just a couple of months on the inside difference between when we ship and when they deliver.

Hey, Matt.

Maybe more--maybe on the Airbus side, too.

There's always--even with Boeing, but particularly in Airbus I think this year there's always some spillover between years.

So you might--if you don't get them all in '08, you get them in the front end of '09.

So they can move around from year to year once you get close to the year end.

Right, right.

That's--.

--And then, of course, the airplane--any new product we're going to be shipping well ahead of deliveries, because the production ramp ups are occurring coincident with flight tests.

And ultimate delivery of the aircraft doesn't occur until flight test and certification are complete.

Right, right.

So net-net on the chip sets, I know there's a lot of moving parts and a lot of different platforms with new development programs picking up some of the slack for existing platforms that are coming down.

Do you expect to be somewhat flattish for actual chip set deliveries or down a bit?

Some are flattish.

It's going to range.

But we could actually be up a little bit.

That's the upside of the--.

--Okay.

And one last--.

--Of the guidance.

Perfect.

One last quick one for me.

It's just on the after market spares and maintenance stuff that you've talked about.

Could you tell us what percentage or what piece of revenue that is currently?

I don't know if it's significant.

But what it is currently, where that shows up in the segment, and just how fast that can grow.

It's relatively small.

We've said all along, Matt, it's kind of a niche business for us just on those products that we are the OE for.

And our products don't tend to be real spares prone, so it's significantly less than 5% of our total.

And it tends to be more in the propulsion part of our business because of the moving parts and stuff in the thrust reversers, and then some in the wings.

There's a few spare parts that come out of our fuselage business for major C&D checks for aircraft.

But the majority of it, especially the repair side, is buried in those segments.

Okay.

So still much less than 5% of your business then?

Of total, yes.

Okay.

All right.

Thanks very much.

Thanks, Matt.

Thank you.

And your next question comes from the line of Noah Poponak with Goldman Sachs.

Please proceed.

Hi.

Good morning.

Hey, Noah.

Good morning, Noah.

What is the average monthly rate on 737 that's embedded in the new block?

A very precise question, Noah.

How are you going to answer that, Phil?

Well, look, I think Boeing has been--our customer is guiding bullishly on 37.

This year clearly we anticipate to continue pace at 31.

2010 feels strong as well.

So I think we remain kind of a little bit watchful with 2011 and we're proceeding accordingly.

But I think it still looks like it's going to be a strong year as well.

So I won't give you a precise answer there, Noah, but I think between what I said and what Boeing's given you it will probably get you a good answer.

I mean, I guess you guys had told us before that the estimated unit number was 700.

I think you just spoke about that again.

Yes.

And I think you said the duration was 23 to 27 months.

So the implied rate there is 26 to 30.

They're still at 31.

'10 looks pretty firm.

They sound more encouraging on '11 than they did three, six months ago.

Yes, they do.

If we do stay at 31, is that a clear area of upside to your assumptions?

Yes.

We tend to be--one year out we're definitely in sync.

And when we get past 12 months given the market conditions we will be a little bit conservative out there, sure.

Okay.

And the margin performance is mixed here, certainly lower than the average aerospace supplier and there are obvious reasons for that.

But you guys are giving a lot of different reasons and a lot of detail behind how you can improve the margin.

What is the longer term profitability of this business as we look out three to four years?

Well, I think we've said pretty consistently that we think as the programs themselves mature, you get them into a good drumbeat, if the rates remain strong and high, that this is a mid-teens kind of business.

And of course, you get all kinds of moving parts.

You get surges for higher rates and you get a drag if the rates go lower.

You get the implications of new programs as you bring them on.

They tend--frankly, they tend to be less profitable in the early part--early blocks and more profitable in later blocks.

So it has to do with the mix of your programs.

Frankly, it has to do, as we're seeing here, in how many of these new ones you have and if they for some reason or other stack up on top of each other and cause you more challenges than you had in the plan.

But ultimately, I think production programs, mid-teens is probably a reasonable set of estimates.

Okay.

And last one, can you maybe just give us a little bit more thorough update on the Gulf Stream programs?

We have both of those in the air.

You put a new team in place.

Just maybe some update on how we're doing there.

Sure, glad to.

Challenging programs, as we've talked about.

Solid customer, knows what they're doing, a good airplane it looks to us like.

Clearly, we talked a lot about the issues we had on the 250.

We've answered a lot of questions about bleed over on the 650.

Our answers I think have been consistent that those haven't gone as smoothly as we wanted them to.

But the 650 is a really good airplane program for us.

We suffered with some startup issues and have gotten a team in--had to switch out our team, as you know, in Tulsa.

We've augmented the new team, frankly, to keep things moving like they need to move.

So I think we're going to see 2010.

We're going to see it--that smooth out.

We're at the front end of what looks like a very solid, significant program with a good long production run on it.

So we're doing the things in 2010 to stabilize that and make sure it's ready to go and deliver what we need to deliver in 2010 and be ready for the first phase of full rate production in 2011.

Thanks a lot.

Yes, thank you.

(Operator Instructions.) And your next question comes from the line of Lucy Guo from Macquarie.

Please proceed.

Hi.

This is Lucy calling in for Rob.

Hi, Lucy.

Hi.

Just a question on 2011 again.

I know it's still early to talk about it.

But you may potentially have additional unfavorable volume and mix issues again, if there were any production (inaudible).

And you have uncertainties around the 787 ramp up.

Can you maybe just talk about the challenges and opportunities that lie beyond 2010?

Well, just in general, Lucy, I would say that we said earlier in our remarks that we saw 2010 as a pivotal year.

I think we're going to see a lot of these development programs move into production.

We're still going to have some development programs in 2011.

Clearly, if there is a depressing impact on the core business, I mean, clearly that would impact us in 2011.

We frankly don't see that.

We're cautiously optimistic.

We've got what looks like a real solid base for 2010 and some indications that that could move very strongly into 2011.

So I would say at this point in time as I look to the future, in response--I think it was maybe to Carter's question earlier, I just--I have great optimism for the out years here with this business.

'11 is a little hazy.

But I'm confident that the upswing is coming.

I just don't know when it is, if it's '11 or '12 or when it is.

But clearly, a downside in '11 would hurt us and we'd have to adjust for that.

But right now, we're focused on 2010 and think it's going to be really the pivotal year for us.

That's helpful.

And then, looking at the next batch of new aircraft programs.

You already announced some work on the C Series.

Just was wondering if you have any participation or are you looking at participating in programs like the C919 or the Russian jet.

I think--I mean, we look at--strategically we look across the landscape and try to pick those customers and products that (a) they want us, and (b) we see a good partnership that we can make money on.

So we've announced those that we are on and we have--and of course, we don't preannounce anything.

But what I've said consistently, Lucy, is if it's in our space and it's out there, you can rest assured that we're interested in it and having conversations and trying to decide if it makes sense for us to be part of the airplane or not.

Okay, thanks.

Thank you.

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

Please proceed.

Good morning.

Good morning, Rob.

Hey, Rob.

Phil, maybe you can clarify something for me.

I just want to make sure I've got this right.

When I look at slide 12 at your cash from ops number and then I reconcile that with page four of your release where you're talking about the same thing, I want to be clear.

Your cash from ops would be 75 million and free cash would be minus 250, or are we starting at cash from ops of minus 250 and going from there?

No, Rob, you're right.

Cash from ops, what we provided you would be 75.

Okay.

All right.

Because that's not what it says in the slides, if I'm reading those correctly.

Well, we're reviewing the slide.

Maybe it's semantics.

Yes.

I want to be--obviously it's a big difference.

Absolutely.

Yes.

So 75--just to be clear, 75 cash from ops with a 325 CapEx.

Okay, good.

Gets you to negative 250.

Free cash is minus 250?

You got it.

Okay, good.

Now, with cash from ops--this builds on a question from earlier.

With cash from ops at plus 75, can we walk through the major accounts and what you're expecting there understanding that the first quarter would be weaker.

But how do you think about the various working capital accounts?

You talked about inventory rising.

How much?

That kind of thing.

And maybe at the end of that you can throw on when we go cash positive on 87, it sounds like mid '11.

Sure.

So I think the working capital line largely AP and AR will kind of ramp back up here.

AP has got some permanent improvement to that as we came through '09.

AR will kind of go back up to normal levels as we deliver through the first quarter, and then the inventory will likely just kind of notch up as we go through the next couple of years modestly.

78, that's a great question, right.

We're liquidating those cash advances this year and most of them actually get liquidated this year.

There may be some spillover into 2011 based on the schedule we laid out of 25 to 30 airplanes.

So that's a big headwind for us this year on cash.

And 2011 cash would restart on the program.

So it's--.

--But that's at about chip set 40?

Is that about right?

Yes, it's right around 45 or 50, Rob.

45 or 50.

So it's well into the year a couple quarters.

Well, no.

I mean, I think the plan is we've deliver 15 right now.

You know, 15?

And we said 25 to 30 this year.

Okay, so you could do it in the first quarter.

Yes.

It kind of gets you there, doesn't it?

Yes.

Yes, it does.

Okay, last question.

What--in thinking about your range, 1.50 to 1.70, what are some of the swing factors there?

We talked earlier about good block closeout on 777 versus bad block closeout.

What else is in there?

Yes, those are the--that's one of them.

Just really any 787 volume that might--the 25 to 30 range.

It would be in there.

It's not driving a lot of earnings.

New program development as we think about that this year.

There are six flight test programs underway.

We hope they all go well, but we're being a little bit conservative on that regard.

Okay, thanks.

Sure.

Thank you.

And your next question comes from the line of Joe Nadol with JPMorgan.

Please proceed.

Good morning, guys.

Actually it's Seth on the line for Joe today.

Hey, Seth.

Hi.

How are you doing?

A quick question about the--you mentioned in the press release that you got the non-recurring contract payments that you had outlined in the third quarter.

And I was wondering if those were from Airbus and Boeing or if they were just from Airbus, and if so, what the status of negotiations is with Boeing given that we've seen some other suppliers who've talked about reaching comprehensive agreements with Boeing on 787 cash.

So that was from several customers.

And I think really the essence of your question is 787 negotiations.

And I would say I'm--I think we're seeing some movement there.

And we've got teams in place.

I think both ourselves and the customer are motivated to get some of these things resolved and get them behind us.

So I think we'll see movement on that this year.

And is there anything for that embedded in your cash flow guidance?

Sure.

Our forecast for--any of those types of items with our customers are in our forecast.

Okay.

And then, just the second question is about R&D.

And you talked about it seems like it's going to ramp up maybe a few million dollars this year.

And I wonder if you can talk just kind of directionally about 2011.

I would imagine maybe 787 is going down by then.

But it's things like activity on the A350 is picking up.

Where does R&D go in in 2011?

Yes, Seth.

You should just kind of focus on the 1.5% of sales.

I think that's--we've done a lot of work in R&D here in the last several months just looking at projects and we have a pretty good baseline.

And we think the 60 million range this year is about 1.5%.

And that's what we expect to operate to as kind of we move forward.

That's a good way to think about it.

Great.

Okay, thanks very much.

All right, Seth.

Thanks very much.

And this does conclude the time we have for questions and answers today.

We appreciate your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a great day.