Spirit AeroSystems Holdings Inc (SPR) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to a Spirit AeroSystems Holdings Inc.

fourth quarter and full year 2010 earnings conference call.

My name is Deanna and I will be the coordinator for today.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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 2010 conference call.

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

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

In order to allow everyone to participate in a Q&A 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 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 web presentation.

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

With that, I'd like to turn the call over to Jeff Turner.

Thank you Alan and good morning.

Let me welcome you to Spirit's fourth-quarter and full-year earnings call.

I will begin by a look at our business and related performance and then Phil will review the financial results.

After that, we will be glad to take your questions.

We executed well a across the Company as we delivered solid operating performance in the fourth quarter with our core businesses remaining a strong foundation for Spirit.

In 2010 we have seen significant progress.

We delivered over 950 core end items.

We progressed on our development programs with the opening of our new Kinston, North Carolina and Saint-Nazaire, France sites, along with new test hardware delivery, commencing on programs such as the A350XWB and Sikorsky CH-53K.

We have added stability for our business as we now have long-term agreements in place with our IAM, IBEW and UAW labor partners and we established a path forward on the 787 program with our customers.

Looking back over the past 5 years, we have utilized our core businesses, to fund significant portions of growth.

As the global market for commercial aircraft continues to improve and new products are brought to market, we now have the opportunity to implement plans for additional stability of our core products by supporting faster production rates.

While we see some investment required, we are implementing capacity expansion plans that add long-term value for Spirit and our stakeholders.

The core business that is solid and growing, we continued our diversification activities with ongoing support on our new development programs.

While these programs are in various stages of development maturity, we are approaching all of our programs with a strong customer focus and an intense concentration on program execution.

As we implement our long-term strategy and diversify our business, long-term perspective for our Company continues to strengthen as demand for our core products increases.

With the substantial backlog, over $28 billion, supporting Spirit's future, we are well aligned for long-term value creation.

Let's talk about some of the specific accomplishments across the business during the quarter beginning on slide 3.

Fuselage systems delivered operating margins of 13.1% and $519 million in revenue during the fourth quarter.

Fuselage segment high volume 737 production line continues to perform well as the group has now delivered more then 3,500 ship sets of the next generation fuselage.

The 787 team has also demonstrated continued progress on delivering airplane fuselage number 31.

Additionally, our 787-9 design and development activities are progressing well as we work closely with our customer to ensure we support the new derivative design needs as well as producibility improvements.

On another derivative program, our fuselage team made more progress on the 747-8 program this quarter by delivering line unit number 23 Ford fuselage.

This Sikorsky CH-53K helicopter program celebrated a significant milestone this quarter with the rollout and delivery of our Spirit's first composite helicopter fuselage.

Exciting for our employees to be a part of this state-of-the-art heavy lift aircraft as they continue to fabricate and assemble the follow-on six test units.

In the development activities on our Airbus A350XWB program are progressing.

And the team continues early test hardware fabrication in our Kinston, North Carolina facility.

On slide 4 you see the propulsion team delivered solid operating performance with margins of 15.2% on $263 million in revenue during the fourth quarter.

As the margins were enhanced by product mix.

Propulsions core business is heavily supported by the 737 next generation engine pylon and thrust reverser teams which continue to perform well as the groups have now delivered more than 3,500 units of hardware.

Additionally, our newer configuration Pylon production hardware continues to progress as we shift our 36 787 and 19 747-8 engine pylon ship sets in the quarter.

The propulsion team continues to support development activities which include initial stages of production on the Rolls Royce BR725 engine Nacelle program and design activities on the Bombardier C series and Mitsubishi regional jet programs.

On slide 5 you see the wing system segment which comprises our Spirit Europe, Spirit Malaysia and Oklahoma operations.

The wing team executed well on core production volumes with operating margins of 9.7% on $288 million in revenue during the fourth quarter of 2010.

Spirit Europe continue to produce significant volumes of hardware surpassing line unit 4,600 for A320 wing components.

At our Tulsa, Oklahoma site the aerostructures team continue to produce newer derivatives of products as they deliver the 23rd 747-8 fixed leading edge wing section and the 34th set of 787/ in the fourth quarter.

Additionally, activities also continued in Tulsa on the Gulfstream G250 and G650 wing programs as the teams focus on an initial production startup and efficiency while these programs remain in the airplane test phase.

At our Kinston, North Carolina facility our Airbus A350XWB spar team managed a significant milestone during the quarter by shipping the wing outer spar component, which is one of six major sections supporting the fix leading edge.

The team is proud of this accomplishment, as it was the first production component of any kind to be shipped out of the new state-of-the-art Kinston facility.

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

Thank you, Jeff, and good morning, everyone.

I will begin with a look at Spirit's key financial highlights for the fourth quarter and full-year 2010 on slide 7.

Revenues for the fourth quarter, 2010 were, essentially, unchanged from 2009.

Fewer large commercial aircraft deliveries were offset by higher non-production revenues.

Operating margins for the quarter were 9% compared to 2009 margins of 7.9%, while fully diluted earnings per share of $0.44 increased from the year ago quarter of $0.36 per share.

The fourth quarter 2010 results included a $3 million pre-tax charge or $0.02 per share related to the UAW contract incentive which was agreed to as part of the new 10-year contract we signed in December.

And an unfavorable cume catch-up adjustment of $10 million or $0.05 per share associated mainly with the 787 program, which I will discuss in more detail in a moment.

Revenues for the full year 2010 grew 2% from 2009 as higher unit deliveries of 737 and 787 were partially offset by lower 777 and Airbus A320 ship set deliveries.

Operating margins for the full year were 8.6% compared to the 2009 margins of 7.4% while fully diluted earnings per share in 2010 grew 13% to $1.55 per share.

Cash from operations for the full year 2010 was $125 million source of cash as core programs generated strong cash flows and we continue to invest in the 787 and other new programs, while repaying 787 cash advances.

Deferred revenue was a source of cash reflecting the 787 agreement with Boeing that was completed in December of 2010 and a announced earlier this year.

We expect to finalize the contract amendment during the first half of 2011 which will result in liquidation of the short-term liability.

Capital expenditures were $288 million for the year.

Current year expenditures were primarily due to investments in our North Carolina facility as well as sustaining programs.

And as you know, during the fourth quarter, we did reach an agreement with Boeing on the 787 program.

This agreement includes both financial and non-financial elements, which we believe adds value to both Spirit and our customer.

While the program has appropriate management contingency in place and we do not anticipate a forward loss, we think that it is prudent to set the current contract accounting block profitability to zero.

We believe this level of conservatism is appropriate during the certification and initial production phase of the program.

This change in profitability assumption resulted in the previously mentioned unfavorable cumulative catch-up adjustment during the fourth quarter of 2010.

Looking ahead, we are very pleased to have a path forward with what we think is a win/win and establishes a baseline which we can generate value in the future.

With slide 8, R&D and SG&A expense as a percent of sales in 2010 reflect the consistent level of spend for the Company.

In terms of absolute dollars, SG&A increased due primarily to early retirement incentives, increased stock comp expense and expanding global footprint.

As you know, we continued to make expense management top priority.

Slide 9 summarizes the cash and debt balances.

Cash balances at the end of 2010 were $482 million as compared with the third quarter 2010 balances of the $66 million.

During the quarter, we received $300 million in proceeds from our note offering and repaid $150 million on our revolving credit facility.

Our overall liquidity position and balance sheet remains strong as we enter 2011.

At the end of the year, the total debt to capital ratio was 40%, reflecting the impact of additional notes.

The US defined benefit pension plan remains fully funded at the end of the year.

Slide 10 summarizes our financial guidance.

Over the next several years, the demand for core products is increasing and the next generation of large commercial airplanes and business jets are planned to enter production.

This is an exciting time for Spirit as we remain intensely customer focused while continuing to drive productivity and efficiency across the Company.

Reflecting this growth cycle, we expect our revenues for 2011 to be between $4.5 billion to $4.7 billion with fully diluted earnings per share of between $1.70 to $1.90 per share.

Cash flow from operations for 2011 is expected to be approximately, $75 million.

Capital expenditures are expected to be approximate $325 million as we invest in core program capacity expansion and new program growth.

As we move into 2012, we expect revenue growth above the 2011 guidance range as demand increases for our core products and new products enter the production and delivery phase.

Cash flow from operations, less capital expenditures, is expected to be positive in 2012 as volumes increase, cash advance payments decline and working capital investment stabilizes.

We expect 2011 tax rate to be approximate 31% to 32% as the discrete events that positively affected 2010 are not anticipated to recur.

I would now like to turn the call back over to Jeff for some closing comments before we take your questions.

Thank you, Phil.

I will wrap up on slide 11.

Our core business continued to execute well in the fourth quarter and remains Spirit's strong foundation.

While demand for our core products continues to grow as the global market for commercial aircraft improves, we are implementing plans to support faster production rates.

Our team's development activity have progressed as we continue through the test phases and transition the factory areas into initial production.

We remain focused on meeting customer commitments, on operational and financial excellence and on leveraging a rate increasing environment to drive productivity and efficiency improvements.

Looking forward, our Company is financially strong and in a solid competitive position as our core product volumes increase and our development programs mature.

With this growth outlook and a focus on our core value of performance excellence, we are confident that we are driving to meet our goal of long-term value creation.

We will now be glad to take your questions.

(Operator Instructions)

The first question will come from the line of Ron Epstein, Bank of America, Merrill Lynch.

Thank you.

Good morning, guys.

Just a question around your outlook for cash flow for next year, I think you guys said it was $75 million of operating cash flow for '11.

How do we think about that in the context of the direction where cash flow is going?

I think some folks were surprised that the operating cash flow was not higher given the renegotiated 787 deal with Boeing.

So, Ron, the biggest use of cash in the operating line for '11 is really the repayment of the advances on the 787 is the biggest moving part this year.

We have two tranches on the program of advances, one is for the first 40 to 45 airplanes -- or 45 to 50 airplanes of full payment that we have to -- as we move through '11, we will have to repay that.

As we move into '12, of course, that gets complete and the 787 starts to generate cash as we move through 2012.

The other thing, really moving into 2012, I also said that we expect the net of cash from operations and CapEx in 2012 to be positive next year.

The volume is coming up, obviously, as our customers announce production rate increases, right in the heart of our core program.

So we will be generating some additional volume in '12 and as we move through the next several years, as the reductions in advance payments are complete and the working capital, we think, stabilizes in 2012.

It will be largely stable in '11, as well.

That is the 24 month look on cash.

When you think about 787 and if you were to disaggregate it from the other programs, when does 787 become free cash flow positive?

That is a tough question, I think.

They are playing it certified this year and we began the ramp up you probably get out into the '13 timeframe ultimately.

Sorry, just one last one.

On 787, itself, when we think about the average margin on the program over the current block, it is my understanding it is still profitable.

Can you give us any color around how profitable?

Let me just jump in here a.

I think, Ron, that is one of those things we are really excited about on our path forward is the process that we have underway between ourselves and our customers to drive value for both of us.

As you know, this first block is -- it takes us out several years in now.

So we are not in any way in a position to start forecasting what the next block should be.

But we are very excited about the prospects, of working jointly to drive the value that we will see both for the program and for ourselves.

Okay.

Thank you.

Thank you.

The next question will come from the line of Carter Copeland, Barclays Capital.

Good morning, gentlemen.

Good morning, Carter.

Phil, I wonder if you can just clarify really quickly, I just want to understand the moving pieces here.

We had the Boeing settlement, and it came out, I guess, my assumption here is that it was better than the conservative terms that you had assumed in the 787 block, which would have been positively beneficial for the margin built into the block.

However, we have a new schedule which, presumably, had some sort of absorption benefit.

And it sounds like you have inserted extra contingency into the accounting assumptions to bring that to zero.

Is that the right characterization?

Yes, Carter, I think that is fair.

We said here, --the program, obviously, is, it is a few years behind the original plan.

We have talked now for quite some time that this is below 5% gross margin program for Spirit.

There is still some -- while we believe the certification schedule is very solid for the third quarter, we look at production ramp up and when that is going to happen.

You combine all three of those factors and you say it is really appropriate to be a little more conservative here on the program until we get it certified, until we get the ramp up underway.

So I think you categorized it pretty well.

Carter, let me add just one thought and that is I think we have really worked hard to balance the anticipated risks that are still there with our contingency.

And all of that built upon a very solid base of a path forward and a process to drive improvement.

We say that, extra conservatism or not, and of course time will tell.

There is still enough unknown that I think being appropriately conservative is the path we have chosen.

That is completely fair.

I am just trying to get the sort-of difference here between derisking and relative to your expectations for the settlement.

Would it be fair to say that had we not had a new schedule and you not inserted sort-of more contingency for the risk of the ramp up, you would have had a positive cumulative catch on the program, not negative, is that fair?

Phil, let me say it this way.

I do not think we spent a lot of time on that scenario.

I think the issue for us is, where are we on the program, what makes sense going forward and we structured it, I think, appropriately, to deal with some of the issues that were behind us, some issues that are still on us and some potential, both improvement and risk, in the future.

Sorry to interrupt you.

I think the big picture, Carter, is the thing that previously mentioned and as we look at it and say, there is no question about kind-of the current financial realities of the program and Boeing certainly isn't in denial on that fact, so we have really got a path forward to have success near-term and work together long-term to make this program a great program.

So when we look at the accounting and how we incorporated the MOA into the process, we took everything into account when we did that and arrived at what we thought a very appropriate position for this program at this point.

I would add prior to some of the current issues that the program has had to work through, we were in that first block looking at very low, very low single-digit margins.

So to be in the position where we are today where we feel very solid about the path forward, about the -- what we have as appropriate contingency and appropriate opportunity and risk balance going forward, we feel very good about where we are.

Somewhat related -- that is very helpful.

Thanks.

Just somewhat related to that, Phil, on your commentary about the 2012 cash flow been very positive, is the view there congruent with the same sort of conservative approach to thinking about the ramp up that you built into your 787 block?

I mean, if we find that the ramp is hard to do, could it be the case that it could run the risk of not being positive cash flow for 2012?

Well, I suppose that is always a risk.

I mean again -- bigger picture, right, Carter, is there is still a number of development programs including the 787 that we are investing in.

And clearly now, we are also investing in the expansion of our core business capacity, which is a great thing, by the way.

Thrilled to be doing it quite frankly cause it is a great return for us.

So when you look at all the investment we are doing this year in the new program activities, positive looks really achievable for us, bar everything going really badly, which we don't anticipate.

That is great.

Thank you very much, guys.

Thank you, Carter.

The next question will come from the line of Heidi Wood, Morgan Stanley.

I want to -- can we just talk a little bit about the cash settlement that you had?

Is it fair to assume that it was something north of $225 million, given the $225 million increase in deferred revenue?

And if we strip out the payment, it looks like the operating cash flow came in a little bit light.

Can you walk us through where you might have seen some weakness, specifically?

No, I think you've probably got it couched pretty well, Heidi.

The deferred revenue account certainly, is where the settlement came through, given we didn't finalize the contract terms, we are in the process of doing that now.

So when we get that actually accomplished, which we fully anticipate to, we will relieve that deferred revenue account.

Some of the other -- the weakness, really, is coming off of some of the other development programs.

We are still investing in the Gulfstream programs which are consuming a little more cash than probably what we would have liked in 2010 and then clearly the 787.

You are probably looking at the inventory counter and if you have not, you will.

There was $300 million of inventory growth from '09 into '10 and three quarters of that was the investment in the 787.

So those are the moving parts, Heidi.

And then built into your assumption for cash flow in '11, Phil, what do you assume in terms of inventory in 2011?

Yes.

We -- moving parts, as you would expect.

But we really think '11 and '12 are where the working capital stabilizes.

So we do not see a lot of growth in '11 and '12, don't see a lot of burn down, either quite frankly.

Again, we need to perform well on the new programs and really control the engineering effort there, get them certified into production, are the things that we are really worried about.

But the net/net, it looks like a stabilized working capital for the next couple of years, until these programs get well into production and start burning off the inventory.

Then last question, Phil, can you talk to us about where you are on the G250?

Was there an upward adjustment to the accounting block to prevent a new negative cumulative catch up adjustment in the quarter?

No.

There wasn't any adjustment.

Our market assumptions are relatively conservative, given kind-of what we just came through in the last several years, though it looks like the market is picking up a little bit.

We are more optimistic about the market today than we were a quarter ago.

It feels like to us, our Gulfstream is, as well.

So I think there was nothing in the accounting that precluded a forward loss.

Okay.

Great.

Thanks, very much.

Thank you, Heidi.

The next question will come from the line of Howard Rubel, Jefferies.

Thank you, very much.

Phil, if we take this $10 million cume, correct, that you spoke to, that would provide us with an indication of the margins that you had been accruing for the program to date, is that fair?

Yes, that is fair, Howard.

So, frankly, then if we think about the rest of the business, then going -- I mean then it was substantially closer to zero then under 5%, not to be cute about it, but it is almost a pencil line.

Yes.

We should compare our math maybe.

But okay.

All right.

But in any event, it would seem that going forward, one of the other challenges you had was negotiating higher rates with your customer on some of the other programs.

Where do you stand with that, Jeff?

Do you get some similar incentives from some of the higher rates that you are going to be producing at?

In general, Howard, we are -- we have had, from our customers, a commitment that they have made to the market for higher rates.

Clearly, we have our plans to support that, and we feel very good about our ability to support it and the value that that will bring to us.

But we have negotiated our path forward and -- and frankly, I think , as you know, and in the press and lots of conversation, there is ongoing conversation about where the rates need to go to meet demand.

You can rest assured that we are in the middle of all of those conversations and, obviously, a rate increasing environment is a solid opportunity for the entire supply chain, which we are a part, to add

Yes, but I mean for the shareholders, a little bit, Jeff, in terms of incremental profitability, the opportunity for you to create some value for your customer is very clear.

But I am talking about taking some of the operating leverage that you have and bringing it to the bottom line.

We see a little of it next year but it is still not quite as good as I think it could -- it is a matter of debate but -- I'm going to push you a little bit harder.

Well, I am talking about that, as well, about adding value for shareholders.

When I talk about adding value throughout the supply chain, it is an opportunity for sales, our customers and our supply chain, frankly, to add value.

We intend to do that.

If you look just maybe a little bit of color on this year, this year production wise is going to look fairly similar to last year.

And of course recall that we are in the accounting blocks from 2010 and 2011.

You are not going to see a lot of that rate increase impact in '11 or in the blocks that include '10 and '11.

And then last, one might want to say beware of the A350.

New programs are always hard.

There are challenges in the supply chain there.

How are you protecting yourself from getting into a problem where if that customer should have a delay, that we do not see a repeat of the 787?

Well, a couple of things, one, clearly, as you have articulated, there are risks of development programs.

They are challenging in their nature.

Our amount of exposure to the 350 is of not to the same magnitude as it was on the 787.

Clearly we do have the Kinston facility in play on the A350.

We are watching that very closely, working very diligently as a partner on the program to be successful on the pieces that we are responsible for and to be in sync with the program.

As we look at the reality of the situation, where we are and where we anticipate to be, we continue to look at opportunities and risks and manage that to the best of our ability.

But as you point out, we are not going to manage out all of the risk of any development program.

Okay.

Clear eyed is helpful.

Thank you, very much.

Thank you, Howard.

And the next question will come from the line of Myles Walton, Deutsche Bank.

Thanks.

Good morning.

Just a quick question on the guidance in terms of the 787.

How many are you baking into the guidance at this point in terms of ship set deliveries.

Myles, we did not guide specifically on not.

But if you look at what our customers said in terms of the number of deliveries and their production plans, we are syncing up ours with theirs.

They have not yet released the production plan for 2011 and when they do, if it is substantially different from what we have in our assumptions, we will make the adjustments.

Okay.

And then, on the -- you mentioned the accounting blocks being the same for '11 as '10.

I think the three seven roles over to the next accounting block at the end of the year.

Can you give us some color on the significance of this depth and margin as you move into the next block and the moving parts there?

Phil, I evaded the last question, why don't you take this one.

You did a nice job.

So you are right.

The three seven completes towards the end of this year.

The volume increases that have been announced from our customer effect really '12 and '13.

And we are not going to guide margins into the next accounting block today.

We -- you have alluded to there are margin benefits in absorption.

And this is a volume driven business, after all.

Now we have some investment to make, as you're seeing come through our CapEx this year, the capacity we are running through right now is about 31 or so per month.

We are having to expand the capacity to meet the demand, which is fantastic, quite frankly.

We have got to make the investment.

And that's got to be a return on the investment.

But overall, there is margin expansion, we have seen.

Now you got to keep in mind, the 787, the volume is going to be coming up on that program as well.

We are looking at zero margins kind of near-term here.

A flat margin in Spirit on the consolidated basis, we will tell you there is margin expansion in the core offsetting the 787 dilution that will be happening.

Okay, and then just a clarification, the trendline for CapEx into 2012, what, exactly, is the underlying maintenance CapEx, that you are seeing, the drop from '11 to '12?

Yes.

We've underlined maintenance CapEx.

We have pretty consistently said it is in the $80 million to $100 million range, that tends to be where it is.

Anything over or above that really is capacity expansion and growth for new programs, essentially.

But that growth for new programs has been there for five years.

That, presumably, would continue, is that fair?

There is more 787 capacity to put in place as that program gets going.

The A350 is mid-stride in development.

That program we are ramping up as we go through the next several years and then bringing the biz jets online, the higher rates, all require investment over the next couple of years.

Okay.

Fair enough.

Thanks a lot.

The next question will come from the line of Noah Poponak, Goldman Sachs.

Hi, good morning.

Good morning.

I just wanted to try this margin topic, again, even though you have discussed it a little bit here.

Just because, if we go back to 2009, you guys were talking about getting ready to move to new blocks and had actually provided reasons why those could be beneficial to the margin.

We then had to step function down in the margin because you shortened the blocks and you had the depreciation in the pension headwind.

It just seems like as we move beyond '11, do you go back to longer blocks, and if you have that happening with better volume plus the reversal of those headwinds, you were doing 11%, 12% type operating type margins in that time period I am referring to.

It just seems like there could be or should be a step function back as you move into those next blocks.

Yes, so let me make it -- take it --the accounting blocks, we still see at two years, roughly, as the right quantities, and time frames to put in place.

Okay.

So you do not intend to extend back?

Yes.

I really don't.

It is simpler to forecast two years then it is four to five years.

This is a cyclical business, so it's always difficult to predict downturns, once you get out so far.

So two years is kind of a nice timeframe to be able to reasonably predict and forecast your cost.

Okay.

A similar question, you have got your pricing agreements with Boeing coming up.

I think you propose in '11 and execute in '13.

Can you give us some more specific timing of when in '11 and is there thought on your behalf of taking out the volume pricing agreements, just given how successful Boeing has been in removing the cyclicality from the business and the visibility you have going forward?

Yes.

You are pretty well calibrated on the time frames.

The pricing discussions have to take place next two years.

Over the course of this year we will sit down with our customer and start having those discussions.

They will bring what their priorities are to the table and we will bring ours.

We actually have a very good working relationship with them.

The 787 agreement is proof of the strength of that relationship.

We view that as a win/win and we are going to look at 2013 pricing on our core business and we think we will find a good, long term solution there as well.

We look at, as you can imagine, it is really important that our customers know that we need to be reasonably profitable in this business and generate good cash flow or else we are not that great of a partner ultimately.

We bring our capability to the marketplace.

Even with a big customer, they really appreciate what we bring and so it tends to be a very robust, and good and healthy discussion.

And frankly, I anticipate that to happen with 2013 pricing, as well.

I would just add, Noah, any of the options that you mentioned plus any you can think of, will be on the table.

Specifically on the volume pricing, that is something you will at least look at maybe not doing in the future?

We will absolutely look at all the options, that one included.

And just one quick clarification, I think you mentioned in 2012 revenue being higher than '11.

Are you saying on an absolute basis, or are you saying that the rate of growth in '12 will be faster than the 10% that is implied in your '11 guidance?

No.

On an absolute basis, Noah.

We are entering three seven volumes will be higher, triple seven volumes will be higher in '12.

Three twenty will be higher.

Three twenty's higher.

This is a growth cycle here in commercial aerospace.

And we are gearing up for it.

It seems like it should also be the case that the rate of growth is faster in '12 than '11, no?

Yes.

I think that is probably fair.

The production rates are announced so there is not a great secret there.

Yes.

Yes.

You guys can do the math.

Right.

Okay.

Thank you, a lot.

Thank you, Noah.

The next question will come from the line of Ken Herbert, Wedbush Morgan Securities.

Hi, good morning everybody.

Good morning, Ken.

Just first, I wanted to see if you of assume in CapEx next year, excluding the maintenance, about $225 million?

Can you talk about and specific for the growth in CapEx, any detail on how that breaks out by program?

Or should we assume that a lot of the growth is A350, or, any way you can help us think about breaking that out would be great.

Yes.

The two biggest programs are 350 and 787.

We are going to invest in 10 a month capital in 787 when the time is right.

And, of course, A350, as well.

And then core business capacity expansion is something we -- a year ago we were not really talking about and then now we are in a mode where we get to invest in our core business to expand the capacity support the higher three seven and A320 rates and 777 rates.

All which is pretty good news in my mind.

Is it fair to say on the 787, with the investments you are going to make in 2011 that the CapEx could, assuming current ramp in a 10 a month target, CapEx could drop down on that program in 2012 significantly?

What is the timing on investing to get to that level relative to post 2011 and what we should be looking for?

We have a little bit more investment to make to get up to the seven a month capacity and then we will be moving to the 10 a month.

Time frame wise, I think it feels like to us, it is a 2011, 2012 timeframe that we will be doing that.

Okay.

Great.

Thank you.

And just finally, one further clarification, can you just talk, specifically, on a different subject for the CH53, any commentary around how the risk profile on the development profile may have evolved since we last spoke in the last quarter and any significant changes you had put where you discuss around the risk on that program, as you see it now?

I don't see a lot of change, Ken, from last quarter to this one.

We clearly retired some risk on it as we completed and delivered the first test unit.

Probably our biggest issue on that program is that the next six units, we have seven units that we will deliver in the test program -- the profiles on those, I think historically, we tend to have, we try to have less change on units in a commercial setting.

In a military setting, there tends to be more change than maybe our base assumptions were, so we will have to manage that closely.

That will drive some schedule issues, could drive some cost issues.

There is a rigorous test process underway.

As you know, we did struggle a little bit on some of that initial configuration getting weight in the window where we needed it.

I would say we retired some risk and we have still got some risk.

I would say it is in about the same position it was in Q3.

Okay.

Thank you, very much.

Thank you.

The next question will come from the line of Joe Nadol, JPMorgan.

Thanks.

Good morning, guys.

Good morning, Joe.

I would like to, if possible, if you could build a margin bridge from 2010-2011, might be helpful.

You had 8.6% operating margin in 2010 and I think your guidance is getting us into the sort of mid to upper 9s, maybe 110 bips in the middle of the range for improvement.

That would be 50 bips if you assume no cume adjustments.

Phil, any other color you can give on the moving parts?

No, I think you, obviously, have got the numbers down.

The things we really encountered in 2010, were a couple of things.

We had some of the Sikorsky performance coming through.

We have adjusted the 787 contract as we have spoken here this morning.

And then -- you guys have not really asked about, nor have we talked about, we had some really big successes in 2010 on our labor relations front.

Where we implemented 10 year contracts.

Certainly, Jeff is more adept to speak to that than I am, but part of that process was provide some incentives on the equity front that we recognize as expenses in 2010 which aren't going to go forward as planned.

They provide 10 years worth of benefits.

That is about $30 million, $29 million coming through to the P&L this year.

We do not expect those things to repeat, obviously.

So all of that helps expand the margin into 2011.

Any other swings, if we look at the unallocated SG&A, is that -- it is a big hunk here.

Is that flat as a percentage of sales as your sales growth?

No.

We still think R&D and G&A combined come to a 4.5% to 5% expense coming through the periods for us.

We are looking at, basically, those two items going away, the cume adjustments and the labor settlement, everything else is kind of flat?

That is right, Joe.

Expense management is something we are really intensely focused on, as you can imagine, as we grow.

The second question is on the -- you made a couple mentions, Phil, that working capital should be stable this year and next year.

Are you excluding the burn off of the advances from working capital?

No.

That is all in, Joe.

There are some bigger moving parts, certainly.

If you excluded the advances and the deferred revenue liquidation, that happened this year, we will still be in an inventory growth phase.

On a net basis, you will see it is around a $2.5 billion inventory range over the next couple of years, maybe some swings quarter to quarter as we liquidate advances and deferred revenues.

How is inventory not growing if your rates are growing on your core programs and then you are still presumably going to be adding to your deferred production cost on 787?

Those are the two things that are growing there are just some offsets.

The deferred revenue, when we liquidate that, that will lower the inventory level.

And then we have actually had some pretty good performance on our physical inventory in 2010 that we expect to continue as we move through '11, also.

Okay.

All right.

Thank you.

Sure.

The next question comes from the line of Robert Stallard, World Bank of Canada.

Good morning.

Good morning, Rob.

I was wondering if you could kick out and talk about your after-market business in the quarter, how much it was up year-on-year and what your expectations might be for the full year?

The fourth quarter was a little bit better than the rest of the quarters in 2010, certainly.

Some of the product mix you saw coming through in propulsion segment, primarily.

In 2011, we do expect some growth to return.

It is not significant growth, in my mind.

I know some of the other big after-market players see growth returning.

You have to keep in mind we have got somewhat of a boutique after-market business.

We do see some growth but we do not see it being significant in 2011.

If you look at the final numbers in 2010, how much was after market as a percentage of group sales?-

I think it came in at around $100 million of revenue.

Okay.

Secondly, I was wondering if you could clarify what your expectations are for the G250 and 650 wing set delivery this year?

The 250, we are still working with the customers on both of those programs the G6 and G2 -- we are not really going to probably comment on that.

We are clearly working, when the airplanes get certified, what the ramp-up looks like on those two programs.

Certainly, in '12, we expect to be in production on both of them.

In terms of the profile for those two programs, do you expect them to be back end loaded or fairly consistent?

I think it will be more back end loaded as we move through the year.

Okay.

Thank you.

Sure .

The next question will come from the line of Doug Harnad, Stanford Bernstein.

Good morning.

Good morning Doug.

On the 787, when you completed the Boeing agreement or at least the framework for it that you are still to finalize, how does the pricing structure change in terms of how you are looking at the pricing on the first early deliveries and then the learning curve going forward?

I am wondering if you are committing to more price reductions long-term and, perhaps, getting more on the front end from Boeing?

Doug, what we did on that is we had a little bit of history under our belt so we had a clear view of what was behind it.

We know what is on top of us in terms of current produced ability, current cost to produce, so on .

We had the forecast going forward.

What we have done is align those and try to align the pricing to that curve and made sure that we jointly had an execution team that would drive the producibility to match those curves.

The curves look like some historical curves.

We have got a joint team working on making sure that we achieve those curves.

It roughly matched what was behind us, what we see right on top of us and what we forecast we can achieve

Has it changed in terms of how you look at this, say six-months to a year ago in terms of the pricing you are going to see per ship set, now that you know more and you have completed negotiations with Boeing?

We are all a bit smarter than we were a year ago.

The relaxing on some of the pricing up front that recognizes the current financial reality of the program then the recoupment later is how it is structured up.

I think Boeing kind of talked through this last year in some of the earnings calls actually.

So it kind of resembles what you would expect.

The great news is look, we have got a good go forward plan with them, to go work cost production and we all feel very good about the ability to go do it on this program.

As the program gets certified, we all get focused on ramping up production -- get the dash 9 engineered, we really feel like we are in lock, step and sync with our customer on this program now.

Probably the biggest change if you just backed up a step and said, what has changed the most in the last year, it is as the airplane has gone through more tests and getting closer and closer to the cert point, that the intention of the whole program is towards derivatives, moving towards derivatives and now towards producibility.

Where we were a year probably a year ago was less emphasis on producibility than what we see now.

That allows us to put the join teams in place and drive producibility to achieve what we all believe is possible and probable on the cost/pricing of the program.

It follows more, again, historically what is behind us is higher than we had anticipated.

The opportunities we have in front of us are greater than what we could come up by ourselves.

So on a joint team now we think we have greater opportunities for both on cost and price improvement.

When you look at the timeline on this, two things, one on production rates, you have delivered the 31st fuselage, section 41.

Now, are you seeing any pushback from Boeing, given their situation in terms of delivery delays as far as slowing your production rate, your delivery rate?

And then the second piece on the timeline is, when are you expecting to see a finalization on the 787-9 in terms of your role in that?

Let me answer the second one first, Doug the 787-9 teams are fully engaged right now working configuration and producability items that will come as a part of that dash 9.

That is for the establishment of the baseline and the design.

That is, primarily, a 2011 activity.

The execution of that, of course, will flow out to the timing of what programs announced for the dash 9 implementation.

We are heavy into the dash 9 and the producibility activities around that derivative right now.

I am sorry, but restate your first question .

About Boeing.

As it has been on this program, we are operating to a pull signal from Boeing.

There has been variation in the sequencing of those pull signals.

Again we look forward to a time when those signals start coming on a very regular pre-planned basis.

We run our of factory as much as we can to a pulse that is synced up to what we anticipate those pulls to be.

There was some press out in December that we shifted some resources off of the 87 and we had done that in response to anticipation of a slower signal for that month.

We will continue to work that and keep our teams in sync and as the airplane goes through cert and the new production schedule comes out, we will be anticipating and delivering to the pulse segment.

Okay.

Thank you.

Thank you.

Ladies and gentlemen, this does conclude the Q&A portion, as well as the conference for today.

I want to thank you for your participation.

You may now disconnect and have a great day.