Spirit AeroSystems Holdings Inc (SPR) 2011 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 2011 earnings conference call.

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

At this time, all participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of this conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mrs.

Coleen Tabor, Director of Investor Relations.

Please proceed

Good morning.

Welcome to Spirit's fourth-quarter and full-year 2011 earnings call.

I am Coleen Tabor 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 the question-and-answer segment we do ask that you limit yourself to one question.

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 webcast and slide presentation on our website at spiritaero.com.

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

Thank you Colleen and good morning.

First let me apologize for the condition of my voice; it is suffering the effects of a head cold.

Fortunately, I feel better than I sound and hopefully my voice will hold out for the duration of this call.

With that said, let me welcome you to Spirit's fourth-quarter and full-year earnings call.

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

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

The core businesses remained the strong foundation for Spirit as we executed rate increases across the Company, delivering solid core operating performance in the fourth quarter.

2011 was an important year for Spirit.

While we successfully transitioned to higher production rates on our 737, 777, and A320 programs, we delivered over 1,000 core end-items, an 11% increase over 2010.

When we entered 2011, we had 10 development programs, six of which were in flight and ground tests and we exit the year with three successful transitions to early production.

Along the way, the year marked several important milestones for these programs, as the 787 and 747-8 freighter programs achieved certification and delivery.

The P8A entered low rate initial production and we made progress on the development of the G280 and the G650.

We also reached several delivery milestones this year as we shipped two CH-53K helicopters to Sikorsky and the first test CSeries Pylon to Bombardier.

We also shipped the first A350 production composite panels from Kinston, North Carolina to our Saint-Nazaire, France facility, and the first Fixed Leading Edge was delivered to our customer.

Clearly, the unplanned concurrency of our new programs has been challenging for us as we work our way through them.

This quarter includes a net $0.25 per share of losses on the G280, 747-8, and A350 wing programs.

While I am disappointed with these losses, I know the investment we are making in the development and manufacturing plans for these programs will position them to create long-term value for our shareholders.

In the quarter, we also finalized a 9.5 year agreement with our technical and professional workers in Wichita, marking our fourth long-term contract.

These agreements are focused on enhancing our partnerships and sharing the risk and reward of keeping our Company healthy and our team for the future intact.

As the large commercial aircraft market continues to be positive, we remain watchful of global economic and political dynamics while closely managing our capital spend to support increased demand for our products.

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

Our fuselage systems executed well with operating margins of 16.6% on $582 million in revenue during the fourth quarter as volumes across core programs increased.

Fuselage segment's 737 production line continues to perform well at high rates.

The team delivered it's 3,900th shipped set of the Next Generation fuselage in the quarter.

The 787 team delivered forward fuselage number 56, another 100% complete and fully powered-on tested unit, for a total of seven fuselage sections in the quarter.

And the joint Boeing and Spirit teams continue to make progress on cost improvements across the program.

The Fuselage team also celebrated delivery of the 1,000th 777 forward fuselage to our Boeing customer.

For more than 15 years the dedication to continuous improvement on this program has been evident in this airplane's success in the market.

Our North Carolina team shipped the first production composite panels for the A350 fuselage from our Kinston facility to our Saint-Nazaire, France facility where they were successfully joined in the quarter and recently delivered to our customer.

On Slide 4 you see the Propulsion team had strong execution with margins of 16.3% on $322 million in revenue during the fourth quarter as volumes across the core programs increased.

The Propulsion team's core business is performing well at higher rates as we delivered that 3,900th 737 Next Generation Engine Pylons and Thrust Reversers in the quarter.

The segment's 787 team also delivered engine pylons for unit number 57 in the quarter.

The Propulsion team marked a significant milestone as they delivered the first CSeries test Pylon, highlighting our team's dedication, determination, and expertise to meet our commitments to our customer.

Across the segments, our teams to continue to work closely with our Boeing customer in the early design phase of both the 767 tanker and the 737 MAX with focus on value engineering.

I am pleased with their progress on these two programs that will extend the life of these successful airplanes.

On Slide 5, you see the Wing segment which primarily consists of our Europe, Malaysia, and Oklahoma operations.

The Wing team reported a disappointing operating loss of 2.6% on $314 million in revenue during the fourth quarter, as volumes increased across core programs and margins were impacted by increasing costs on the G280, the 747-8, and the A350 nonrecurring wing programs.

As I discussed throughout 2011, the risk on the G280 is centered around achieving our plan.

As we continued implementation of that plan late last year, we continued to see engineering change and higher than forecast assembly and supply chain cost resulting from it.

The team also identified additional opportunities to bring more automation into the manufacturing processes for both the G280 and the G650 in Tulsa.

This additional investment in SpiritExact and automation on the programs will leverage our expertise to develop an efficient production line in support of these programs.

Spirit Europe produced higher volumes of hardware for our Airbus customer reaching line unit 5,100 for the A320 wing components.

The Oklahoma team delivered the 38th 747-8 Fixed Leading Edge Wing section and the 56th set of 787 slats in the fourth quarter.

Development efforts progressed on the A350 wing program as the Spirit Europe team delivered the first Fixed Leading Edge test article in the quarter.

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

Thanks Jeff, and good morning.

I will begin with the key financial highlights for the fourth quarter and full year of 2011 on slide number 7.

Revenues for the fourth quarter of 2011 were up approximately 14% as compared to the fourth quarter of 2010 on higher volume of large commercial aircraft deliveries.

Operating margins for the quarter were 8.4% compared to 2010 margins of 9% and fully diluted earnings per share were $0.42 per share, decreased from $0.44 per share year ago as our efforts to provide a balanced risk profile on new programs more than offset the contribution from the higher volumes and good expense management.

The quarterly results reflect positive contributions from the core business as Fuselage and Propulsion segments realized favorable cumulative catch-up adjustments totaling $23 million or $0.11 per share primarily associated with the productivity and efficiency improvements in the 737 contract block that closed in the quarter, slightly offset by an unfavorable $2 million or $0.01 per share cumulative catch-up adjustment due to cost growth in the wing segment.

The quarterly results also reflect forward loss charges totaling $50 million or $0.25 per share associated with the G280, 747-8, and A350 wing nonrecurring program.

Revenue for the full year 2011 grew 17% from 2010 with higher deliveries across all programs.

Operating margins for the full year were 7.3% compared to 2010 margins of 8.6%, while fully diluted earnings per share declined 13% to $1.35 per share driven by the charge as recorded on development programs in 2011.

Cash from operations for the quarter was $128 million source of cash as lower customer advanced repayments and normal year-end timing of receivables was realized.

Capital expenditures were $86 million for the quarter compared to $105 million during the fourth quarter of 2010 as measured investment to new programs and capacity expansion for core products continued.

Slide number 8 represents the adjusted 2011 fully diluted EPS without the one-time new program charges realized throughout the year of 2011.

The net charges for the CH-53K includes a favorable adjustment in the fourth quarter reducing a portion of the forward loss on the SDD program.

As you can see, adjusting for the total charges results in a $2.00 per share in 2011, driven by the strong core business, controlled SG&A and R&D spending.

On Slide 9, R&D and SG&A expenses as a percentage of sales 2011 reflect a consistent level of spend for the Company going forward.

And expense management continues to be a high priority for the Company.

Slide 10 summarizes cash and debt balances.

Cash balances at the end of 2011 were $178 million as compared to the third quarter of 2011 balance of $138 million.

At the end of the year, our total debt-to-capital ratio was 38% and our US defined benefit pension plan remains fully funded while we continue to make modest cash contributions to our UK plan.

Our overall liquidity position and balance sheet remain strong.

Slide 11 summarizes net inventory balances which increased by $59 million during the quarter.

This inventory growth reflects increased deliveries in our core and 787 programs, inventory management improvement initiatives, and the investment in new programs.

As Slide 10 shows, the business jet and wing programs, the 787, and the A350 continue to be the primary drivers of inventory growth in the quarter.

787 deferred production balances continue to increase at a slower rate as expected.

787 deferred production average growth rate for the full year 2011 was $6.2 million per unit as compared to the full-year 2010 average growth rate of $14.2 million per unit.

Turning to Slide 12, our focus on execution intensified in 2011 as we transitioned to higher production volumes on multiple programs.

We began initial work on the 737 MAX which will extend our largest core program well into the future and made good progress on 787 cost reduction initiatives.

We also make good progress as we focused on the basics including physical inventory management, period expense control, as well as capital investment decisions and implementations.

We continue to focus on meeting customer requirements on new programs as we manage design evolution, testing, certification, and transition to production.

Certainly the quantity of new programs has posed challenges.

However we continue to retire risk as design and production plans mature and full-rate production is achieved.

As we manage the dynamics of an expanding core business and new program development, our liquidity and balance sheet remains strong.

Slide 13 summarizes our 2012 full-year financial guidance.

As we move into 2012, the demand for our core products remains strong and the next generation of large commercial airplanes and business jets are entering production.

Reflecting this growth, we expect our revenues for 2012 to be between $5.2 billion and $5.4 billion with fully diluted earnings per share of between $2.00 and $2.15 per share.

The guidance ranges anticipate growth and stability in the core business and allow for some additional, more modest changes on new programs and experience in 2011.

Cash flow from operations for 2012 is expected to be greater than $300 million driven by core volume growth, slowing inventory growth, and substantially lower repayments associated with customer advances.

Capital expenditures are expected to be approximately $250 million as we invest in core program capacity expansion, and prudently time our investment to new program infrastructure and growth.

We expect the 2012 tax rate to be approximately 31% to 32% assuming the US Research Tax Credit is extended.

Combined, R&D and SG&A are expected to be between 4% and 4.25% of revenue for the full year of 2012.

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

Thank you, Phil.

I will wrap up on Slide 14 with a few brief comments.

Our core business continues to be the foundation for Spirit as these teams executed well in the fourth quarter and throughout 2011.

We have successfully transitioned to higher production rates across our core programs and the same systematic process used for these transitions is in place for the upcoming rate increases.

In 2011, we managed the challenges of working with new customers, engineering change inherent with new programs, and executing new production plans, all while working to meet our customer expectations and moving these programs closer to production.

As we move into 2012 and beyond, our unique competitive position on the best-selling commercial and business jet platforms, along with our strong financial profile positions us well to deliver long-term value to our customers, employees, and shareholders.

We remain focused on execution, investing in our core programs, improving profitability, as well as developing, supporting certification, and transitioning new programs to initial production.

We will now be glad to take your questions.

Thank you.

(Operator Instructions)

Howard Rubel, Jefferies.

Good morning and thank you very much.

Jeff or Phil, you were kind enough to give us a walk of the programs that gave you challenges and problems during the course of last year, could you give us a sense, for your guidance for 2012, what percentage of the business is zero margin?

Yes Howard, good morning by the way.

Why don't I start with an easy question first right?

Yes thanks very much for that one.

(laughter) The guidance range of $5.2 billion to $5.4 billion, of course includes rate increases on 37 that began last year and now they're sustained full year.

We moved to higher production on 777s this year and we moved another higher rate production on 737 later in the year, as well as some A320 volume increase.

As you know, 787 is in that mix as well.

We delivered 25 787s last year.

We anticipate approximately 40 units this year; that has tended to fluctuate over the last several years depending on the pull from Boeing.

We are kind of dialed into a 40 number.

That could change and of course that is volume at zero margin.

So that is a clear headwind for us as the core business volumes improve.

G280, of course that is zero booking rate now, as well.

650 is a thinly margined program.

Both of those programs increasing volumes in our factories as we go through the year, mostly in the second half.

So it's roughly -- I would couch this year as really 15% to 20% of our revenues are going to be in some of these more challenged programs this year.

That said, we think the ability to improve productivity on the core business is very much within our range to do that and we are working very hard to do that.

I think that's a good point, Phil, that 85%-plus of our core base here is the strong and growing programs.

Because it does look like on what you are doing that you do have some modest, but possibly there is some upside to the core profitability as we go forward.

Yes.

Clearly there is.

There are tailwinds from those core programs and some headwinds that Phil identified and clearly as those core programs, as we execute the rate increases successfully, they add to the tailwind.

Thank you very much.

Yes, thank you Howard.

Robert Spingarn, Credit Suisse.

Good morning.

A couple questions on that note, you guys did talk about 40 787 deliveries in 2012, what specifically Phil, does the guidance imbed?

And at what point, at what number of 787s would free cash flow go below zero?

The guidance embeds approximately 40, as I said.

The breaking across the average cost line, we still view that as the line units which we have been very consistent on talking about, between line unit 125 and 150, which we always are pushing to do better than that.

That tends to be kind of where the norm is and that's probably some time in 2013 given current production plans.

Okay.

And then, you had a slide in here that talked about your EPS in 2011 versus your adjusted, so $1.35 versus about $2.

So $0.65 roughly of headwind from development programs.

What is embedded in the 2012 $2 to $2.15 if we were to look at the numbers both from a GAAP and an adjusted basis?

It's clearly up at the top end of the range.

We basically say we are hitting on all of our marks and we haven't experienced any more cost growth.

I think the lower end of the guidance would anticipate some modest challenges on the development programs which we've talked about.

Also, I will tell you as we increase volumes, Jeff can certainly add too to this, this is an opportunity in a volume-driven business to try to break out and really drive the core business to a higher level of profitability which we are very much focused on.

But I think the current range, I think you can take away that we are being somewhat conservative given our past experiences here on the development programs.

We think we've got the risk calibrated just about right and feel good about our guidance range given where we are.

But is it fair to say, you are saying what was $0.65 headwind in 2011 is now $0.15 in 2012?

That's what the guidance would imply, Rob.

We had some bigger challenges than $0.15 this year, obviously.

At this point, there is nothing that tells us those are going repeat.

So in other words you have derisked enough.

And as a final question, 747-8 pre-production or intangible inventories -- looks like that's mostly gone.

Is that a fair conclusion?

Yes that's correct.

So that program, do you feel that's almost fully derisked here?

Yes it's close.

We do a very thorough job at trying to evaluate the risk and opportunities and as I said here today, I think the charges we took to calibrate the operating team for success, it doesn't mean they are not working really hard to do better.

I would add to that Rob, clearly this particular block of the 747 is a highly disrupted block so steady production throughout the rest of the block is an important element in our plan.

We anticipate that that will occur but should it not, it would put us on the risk side of that register.

Clearly a short block with a lot of change and a lot of disruption has created the 747-8 situation that we are dealing with.

Carter Leake, BB&T Capital Markets.

Thanks for taking my call.

The 787 number of 40 shipped sets, what production rate are you assuming on that?

Is that 3.3 a month?

Or are those aircraft -- are some of those already built?

Carter, many of them are, of course, in the production line.

We don't carry a large amount of reserve.

So they are working their way through the line.

We will plan to produce a lower rate at the first of the year and then increasing as we go through the year.

Are you currently at 2.5?

Is that the current rate?

That's approximately the rate we are at.

Okay.

And preparing to step that up as we move through the year.

And I would just say categorically, Carter, we are well prepared to make those steps and we are very much in sync with the pull signals that we get from the program.

David Strauss, UBS.

Good morning.

G280, the latest charge you took there --Phil, how does that break out between cost growth and setting up the move to North Carolina and where are you in terms of moving the program to North Carolina?

A couple of thoughts on the program.

We have actually studied the manufacturing plant with a great deal more rigor and tried to get our mind around how we actually introduce automation on the 280 and the 650.

So we have adjusted the manufacturing plant somewhat but we will still have some assemblies in North Carolina but some of the major assembly work will still be done in Tulsa which will take advantage of some capital we are going to put in place that can be utilized on the 280 and the 650.

So some of the cost growth is associated with that new improved manufacturing plant.

And then some of that is the assembly curve.

We've overrun the assembly curve a little bit in the past quarter, so we are recognizing that here as well.

And we remain conservative about some supply chain costs.

I think it's important to note that a great deal of this continues to be driven by some engineering changes.

As late engineering changes come through, it impacts the assembly, it impacts the supply chain, the parts you are buying.

So we are still dealing with a fair amount of that development maturity of the design.

When you wrap all of that up, that really recognizes where we are at in the fourth quarter here.

Okay.

On cash flow, we obviously know 787 is going to be less of a drag in '12 on the advanced side and potentially even on the deferred side.

What about the other big moving pieces, like the Gulfstream program, the 747-8?

Can you give us some help there, whether they are hurting or helping from a cash flow standpoint and maybe by roughly how much?

I won't size it up for you specifically David, but G programs are the ones contributing probably more substantially even than the 787 at this point.

Our progress on 787 has been very, very good.

Although we are still building inventory in the deferred account, it is at a much slower rate as compared to 2010.

So that will grow, but at a slower rate.

G programs will grow and then there's some A350 growth that's order of magnitude of less.

Still see inventory growth this year.

I would couch it between 5% and 8% is where it looks like its heading to.

Again, the cash flows, the volume coming up on the core, slowing inventory growth and then you pointed out correctly the 787 advances.

We finished repayment of $396 million last year, so our current look at advance repayments is less than $10 million this year.

So all that combined really allows us to turn the corner on cash from operations in 2012.

George Shapiro, Access 342.

Good morning.

Phil, I just wanted to push a little bit when you said there was only like $0.15 of contingencies embedded in the guidance.

Because if I rough it out, I figure you've got maybe $350 million increase in legacy revenues this year that probably should contribute maybe $0.40 by itself.

So I would argue that you probably got more contingency in there and wondering how you would respond to that?

George, you are usually very accurate.

I think that's fair.

I think it's also prudent from our chairs given the number of development programs and where they are at in the development cycle.

I think we view the guidance as appropriately conservative given our past challenge with development programs.

But I have to always close with the horsepower and the ability to drive our core business to even a better place and we had the 737 MAX which extends our product line now for quite some period of time and all of our core businesses are increasing in volume.

And quite frankly, this is as good as at gets in the commercial aerospace from my knot-hole, all-time record volumes and a lot of opportunity for us to improve.

That's fair.

Same questions similar on cash flow, Phil.

You have clearly been off on your cash flow guidance for a number of years, but it would seem to me that you are somewhat conservative there this year and rightfully so.

I mean obviously, given the history --I just care to get your comment on that.

I think you have adequately described it, George.

Plenty of moving parts on the cash flow.

Okay.

Thanks a lot guys.

Thank you, George.

Cai von Rumohr, Cowen & Company.

Yes.

So refresh my memory, you said $6.2 million average.

So where were you in the fourth quarter on 787 deferrals?

It looked like $4.5 million, something like that?

Yes that's pretty close, Cai.

Or less than that?

A little bit less, yes.

Right.

So you are pretty close to $4 million.

This is pretty good improvement from $6.3 million in the second and you had the anomaly in the third quarter.

Right.

So as we are looking at next year, what kind of a number -- I assume it is less than the $4 million; it's probably down in the $2millions or something like that.

Is at that a reasonable guess?

Yes I guess its reasonable.

I don't have the numbers but we are going to continue to improve, of course, and we are working hard at driving it down as quickly as we can.

Through both value engineering, through supply chain management, and internal productivity improvements.

Cai, I would say clearly the more steady the drumbeat and the hitting of the milestones in terms of rate breaks and rate increases, the better the news for us on that program.

Sam Pearlstein, Wells Fargo.

Good morning.

A couple questions on the cash flow again.

The last several years you typically have a lot a usage of cash in the first of couple quarters and then a big positive in the fourth quarter.

So can you talk about the seasonality this year as to how you see that laying out?

And more specifically, can you quantify in any way what the A350 G280 milestone payments that you expect to receive this year?

Yes, on the first question, the seasonality -- as you probably know, the first quarter tends to be the trough for cash flow for Spirit.

A lot of that is associated with our year-end timing of the receivables given a large portion of our core business is on net 10-day payment terms.

So the first quarter is the resetting of the normal receivable flow.

From the second quarter through the remainder of the year, we expect cash flows to improve as we go through the quarters.

The development programs tend to be, it looks like the milestones associated with, specifically the A350 are second-half loaded, so that would improve the cash flow as we go across those milestones in the second half of the year.

I will reserve my comments on the size of the cash on the Gulf Stream and A350 programs, but the seasonality is as I described.

Okay.

If I could just follow-up on the ending of the accounting block on the 737, is there anything you can help us with in terms of balancing the higher volume on the new block versus the volume price changes in terms of -- just block to block, is it up 25 basis points, 50 basis points, any order of magnitude in terms of how to think about those?

Not specifically Sam.

As the volumes go up, this is a volume driven business, so we expect to capture the appropriate margin as we drive more volume across our fixed-cost base.

I would give you a little more color Sam, each of these blocks that has a succeeding block with increased rates in them, the cost of achieving the next rate step is often born in the existing block so that tends to be a bit of a depressor.

But fundamentally, as we have been saying consistently, these are tailwinds for us and we are very high focused throughout the Company on achieving the improvements associated with increasing rates.

Doug [Harnett], Sanford Bernstein

Good morning.

I am interested on the A350 and I know you delivered the first panels to Airbus.

And when you think about progress on the fuselage, I know in December Airbus talked about issues that Spirit had been having with the supply chain.

Can you comment on where you stand in terms of the fuselage program and if there are still any issues there that you are worried about?

Sure, Doug I'd be glad to.

First of all, we were very clear that we had some schedule challenges and some of the designs were late on that and that, of course, bleeds into the production side, the supply chain side, all of that.

And we were full-court pressed at the end of the year with our supply chain and our assembly.

We have put those first units together.

They went together exceedingly well, the SpiritExact process worked phenomenally.

So the products came together and they came together beautifully.

We still have a couple of units that we are working on right now and are working through some additional supply chain issues but that is quickly coming around like we need it to and I feel very good about the assembly on the fuselage, the units that we have been able to send over to Saint-Nazaire.

We had some traveled work on the first ones which are endemic to a late engineering release and late supply chain deliveries.

Those are going to clean up, we believe during the first part of the year here.

So, the finished product is magnificent and looking very good and working well.

And then if I can, on the G280, I found it a little surprising to see you take charges related to production as opposed to development.

If you can comment -- has it been a surprise to you to see more challenges on the production side, which I normally think of you all as being quite strong at -- when you look at the G280 and also the G250, how are those going compared to your prior (technical difficulties).

You broke up a little, Doug, but I think you are asking about the 280 and the fact that we are taking charges as it moves into production as opposed to the development side.

I would just say categorically, as we characterize it, it's still not settled down like it needs to in terms of the engineering design changes and therefore the production side of that is still more disturbed than we would like it to be.

That drives itself into supply chain and into our assemblies.

So surprised -- clearly we would've liked to manage that better and not had the additional cost, but we are over the cost forecast and we thought we would bring it down at cost curve quicker than we have and that has a tremendous amount of our focus as we work on that program.

Robert Stallard, Royal Bank of Canada

Good morning.

Jeff, I was wondering if we could go back to the A350 and if you could elaborate on what drove the charge in this quarter in the wing section and whether there's a risk of something similar happening in the fuselage area?

Sure.

I think the issue there continues to be the engineering and a few changes that are coming through on that program.

If you recall, we have four contracts on the A350, a fuselage development, a wing development, and then a fuselage production, and wing production.

The thinnest one of those was the wing development.

That is the one that we had some additional engineering dollars coming through in this quarter.

We have delivered hardware.

The hardware again, went together very well.

We had some finish up on the engineering that we did that added some additional costs to it.

So I see the other three contracts have better contingency conditions associated with them.

This is the one that we've had concerns with from previous quarters, as well.

It's not big, but it needs to be finished and completed.

It should be this year and we need to get through that and get it behind us, and move it to the production side which is looking better for us.

Okay.

A quick follow-up for Phil.

I was wondering if there is anything we should be aware of looking at the quarters in terms of revenues and EPS if you expect any anomalies there

Regarding the look ahead in '12?

Yes, 2012.

No there's really no anomalies.

I think we laid out, there is some seasonality to our delivery profile where the second and third quarter tend to be the heaviest delivery quarters; fourth quarter is a little bit lighter normally, given that we have a shutdown the last week of the year.

But nothing stands out that we should talk about.

Michael Callahan, Auriga USA.

Good morning, guys.

I guess the first question is on the 737 production increase, as we go up to 38, and then the 42 -- where do we stand on that process, how much additional inventory do we still have to add, CapEx, things like that?

And then what have we done already versus what's going to happen in 2012?

We have made the step very successful to 35 a month.

There will be, as there always is with increasing rates, there will be constraint-relieving capital and tooling that are in our plans and baked into this year's guidance.

That will primarily be to take us from 35 to 38.

We will begin in some of our backshops before the end of this year to break to production to support 38.

Our deliveries I think begin first quarter next year to support the customer.

But those are in this year's plans and we will continue -- we have a very robust process for rate increase analysis and we will continue to use that.

It has served us well on previous rate increases and I think will on the 38 and 42, as well.

Now, 42 is out into the next couple of years, so I won't talk about it specifically.

I would just add too, that broader on the capital investments we are making, clearly we are really pleased to put money into our core business because it's a very nice return for us.

Equally important, we are actually timing the investments of these new programs with the infrastructure and the inventories, given they have tended to move around in time.

The schedules are fluid.

So we pay close attention to when we make the actual capital investment for higher rates on some of the new development programs.

I think we are doing that pretty will.

Eric Hugel, Stephens Inc.

Good morning guys.

Can you walk us through -- you took the charge on the 280.

Can you give us an update on how things are standing with the 650, trying to catch up with the work as well as the ramp up in production there?

Sure.

I will say that our operations tempo is improving.

Inside the factory is becoming more stable.

We are adding some support and some labor as needed as we come up the curve in terms of higher rates, working very closely with the customer.

We have had some of the work shared and some done in Savannah and some done in Tulsa.

We will continue to do that and move the work appropriately to support the continued improvement in the production and to prepare for and to achieve the rate increases.

Inside our factory is progressing well; we are smoothing out the supply chain, there has been some issues there as there are on almost all new development programs.

We are seeing that improve.

So overall we are seeing the kind of improvement that we need on that program.

Great.

Real quick, Phil, the interest looked pretty light this quarter.

Was there anything in there and what's a good run rate we should be thinking about for next year?

The run rate is pretty consistent with this year.

Richard Safran, Buckingham Research Group.

Hi.

Good morning.

I missed part of the call so if you addressed this, I apologize.

But your volume pricing agreements expire in '13, mid part of '13.

I wanted to know -- I know you are in discussions with that.

Can you give some sense of progress, maybe a timeline here if possible.

Generally want to know what we are expecting.

The issue is, obviously one concern here is how much leverage you actually have negotiating market-based pricing.

I would just key on a couple key things that you said.

It is a 2013 repricing and clearly important to us and our customers, so you can appreciate that a lot of dialogue is underway.

And, I think the keywords are market-based pricing.

Clearly we need to make sure that these prices are appropriate for ourselves and our customer and we get the kind of returns appropriate and allow us to be a strong Company that can continue to invest in the future.

We will do all of that and frankly as non-publicly as possible.

Okay.

Thanks a lot.

Thank you.

Ken Herbert, Wedbush.

Hi.

Good morning.

I wanted to ask a question again on the free cash flow guidance, specifically on the CapEx side.

I remember you started 2011 talking about a larger number than you ultimately came in at and as recently as the end of last year you were talking about, I think in range of $300 million in CapEx for '12 and again in '13.

How much of the reduction to $250 million is timing or how much is really prudence and obviously ability to do more with less, so to speak, with the existing investments?

So, there is obviously both in the equation, Ken.

Timing is certainly part of it.

We want to have the capital required on the floor ready at the point of use at the point in time where we need to use it and not way ahead of time.

That's clearly part of our analysis and we look at that frankly, on a monthly and oftentimes, weekly basis.

And then the other side of it is, part of our capital planning is to have the appropriate plans in place but we also look at the productivity we can get out of current assets.

And if the plans and actuals are in place getting us productivity out of existing assets then we can delay the purchase of new assets especially in the areas where we are looking at rate increases.

So it is a combination of both and clearly an emphasis on making sure that the capital that we need, we really need, and that it is there when we need it.

Okay.

Is it safe to assume a lot of this is 787 related and that we may see a bigger step up in 2013 perhaps than we were previously anticipating?

Some of it is 787 and as you know we have other programs as well.

We have A350; we have the increases for the production program.

So, a couple of big programs and some of that we have been able to push to the right and some of it we have been able to obviate for a period of time until the rate increases begin to hit us.

There will be requirements in 2013.

We haven't forecast what they are yet and they will depend a lot on the drumbeat and the rates that are hit on both new programs and existing programs.

Michael Ciarmoli, KeyBanc Capital Markets.

Good morning guys and thanks for taking the questions.

A follow-up on the CapEx and the investment this year.

Are you going to facilitize yourself with machining and tooling to get to a rate of 10 per month for the 787s or is that going to be more of a 2013 event?

What we have said consistently and it's no different now -- we have the floor space required for 10.

We have capital equipment either installed or in the plan for seven.

And as the plan for 10 comes clear, and our timing and our productivity we will be installing both capital and tooling and again in specific areas.

Some places, our tooling and most of our capital is capable of doing 10.

There are other places where we are going to have to put in some constraint relieving equipment.

So we will make those decisions lead time away and we will have that capital in place.

And that's part of the plans for this year and of course will be for future years as well.

Okay.

I would just add one comment to the capital, one of our core competencies is large-scale automation.

That is capital intensive, so we have gotten much better over the course of the last couple of years on deploying the right capital at the right time to enable and support our customers.

And that is always part of the discussion as we move through a year given the development cycles.

So I think it's one of the things our customers know we bring to the table is the ability to use the large-scale automation.

And from our cash flow standpoint we are getting better at working the timing aspect of it.

Got you.

And then Phil, one last one.

The revenue of guidance, this 6% to 10% what are the puts and takes there from the low-end to high-end?

Are there specific programs like the 787?

Sure.

The 787 is probably the biggest variable on the revenue line.

Given the volumes coming, approximately 40 is in the plan.

If that adjusts, of course we can bring it down.

Other than that, the core business, all the basic 320s 37s, 777s are very, very stable.

As they ramp up, they will be stable and very competent.

So it really revolves more around 787 and some of the business jet programs.

Thank you.

Operator we have time for one more question.

Peter [Arnett], Sterne Agee.

Good morning Jeff and Phil.

A question on the supply chain.

Boeing is spending a lot of time auditing suppliers and auditing suppliers' suppliers.

Jeff can you give a little color on what the discussions look like or what you are seeing in the supply chain given the ramp that is particularly back half of this year and going forward?

I think clearly, just like for Boeing or Airbus or Gulfstream, any of our customers, their supply chain is critical.

Our supply chain is to us as well.

We often do joint reviews of the sub's supply chain that supports a specific customer.

But clearly, as you look out at the kind of rates we are all contemplating, tier two, tier three, even tier four, raw material supply, fastener supply at reasonable price, all of those things are very critical to the ability to continue to ramp.

So the continual development and support of the supply chain both for current stable production, for bringing new programs in, and for facilitating it for the rate increases is a very critical part of our rate management process.

Are you seeing any long pulls in the 10 here regarding concerns or anything regarding lead times or anything else from raw materials all the way up through?

Not at this point for the rates we are at.

But clearly, if you look back where the supply chains have been constrained in other rate increasing environments, clearly raw materials is something to pay a lot of attention to.

Fasteners, especially specialty fasteners, are a very important part of the management.

And what we frankly look for is places where supply might be constrained.

We try to look far enough ahead that we can do something about it.

And ladies and gentlemen, this concludes your presentation.

You may now disconnect and have a good day.