Spirit AeroSystems Holdings Inc (SPR) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Spirit AeroSystems Holdings and Company's first-quarter 2013 earnings conference call.

My name is Larissa, and I'll be your coordinator today.

(Operator Instructions)

I'd like to turn the presentation over to Mrs.

Coleen Tabor, Director of Investor Relations.

Please proceed.

Thank you and good morning.

Welcome to Spirit's first-quarter 2013 earnings call.

I'm Coleen Tabor, and with me today with Spirit's new President and Chief Executive Officer, Larry Lawson, and Spirit's Senior Vice President and Chief Financial Officer, Phil Anderson.

After brief comments by Larry and Phil regarding our performance and outlook, we will 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 the web presentation.

And 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 our Chief Executive Officer, Larry Lawson.

Thank you, Coleen, and let me say good morning to all of you on the call.

Let me welcome you to Spirit's first-quarter earnings call.

I'll begin with a brief introduction and then Phil will review our performance and the financial results, and of course I think I said earlier, we'll take your questions after that.

Let me begin by saying that I appreciate the confidence of the Spirit Board to select me to lead Spirit AeroSystems.

I want to especially thank Jeff Turner and the Board for the great work they've done in building the foundation here.

I was, in particular, attracted to this opportunity.

I thought that it was a great place to enter the commercial market space with a Company that has a long history of building valued products with great people.

I believe my experience aligns well with Spirit.

And along those lines just to give you a little background about me for you, I hold engineering degrees from the University of Missouri and Lawrence Technological University.

And along the way, I've managed to become an MIT Fellow and had the opportunity to attend the Harvard Advanced Management Program.

I know many of you, and as you may know, I began my career as a flight controls engineer working for McDonnell Douglas on programs like the F-15 and the F-18.

And during my career, I've had the opportunity to hold a broad range of leadership positions in engineering development, business development, program management, as well as a business leader.

I had the privilege of working some very challenging programs as a leader on programs like the JASSM Cruise Missile, the F-22 and the F-35 as the program leader.

I come to Spirit from Lockheed Martin where I led the Aeronautics business segment with revenues of $15 billion.

And in addition to the programs that I mentioned above, I was very fortunate to be responsible for great programs like the F-16, the C-130J, the C-5, a logistics business, as well as the Skunk Works.

My wife and I are quite happy to be relocated to Wichita.

And I've been three weeks on the job.

In those three weeks, I've focused on meeting with all of our customers.

I've actually had more than one meeting with each.

I've had an opportunity to engage with our team and I've had some initial introductions to our operations and our programs.

I make a few observations about our business.

We are in a growth market, I think, as most of you know.

And our partners, or customers maybe I should say, are the best in the business in both commercial and business jet aviation.

With regard to our operating results, the first quarter reflects the performance of our core programs with 14% revenue growth over the same quarter a year ago and 10% operating margins.

And the growing marketplace that we're in provides us an opportunity to take our $36 billion backlog and grow it further.

Spirit has -- our high volume commercial aircraft structural production is unique for our industry.

And of course, we will -- we are and will continue to work both on our product performance as well as the cost of our operations.

The focus really will be on being the best value supplier to our industry partners, customers, and we'll do that through outstanding program execution.

We're going to continue our culture of sustained operational excellence and, of course, we're going to be looking for supply partners with a similar commitment.

We believe that delivering on our core business and core derivatives, as well as working through the new product development cycles, will result and continue a long-term profitable growth for us.

As the global demand for commercial aircraft continues to be robust and as our customers drive innovation into the next generation of derivative airplanes like the 737 MAX, the 777 X, and the 320 NEO, Spirit's opportunities are real and substantial.

So in closing, let me just say as you saw in our press release, in the near term we will conduct a comprehensive, strategic, and financial review of our development programs in Wichita, Tulsa, Kinston, and Saint-Nazaire.

I think you all know development programs are challenging and these programs have not been the exception.

I plan to be personally involved with these evaluations and I hope that I can add some value based on my experience.

We will certainly work with our teams on the path forward.

So given that I'm three weeks on the job, I thought I would at this point hand over the presentation to Phil, who will provide you more details for the business during the first quarter with a review of our financial results, beginning with slide 3. Thank you.

Thanks, Larry, and good morning.

On slide 4, the fuselage segment had strong top line growth and operating performance with margins of 17% on $718 million in revenue during the first quarter, as volumes across the core programs increased.

The fuselage segment's 737 production line is now performing well at a rate of 38 airplanes per month, having delivered more than 4,400 ship sets of next-generation fuselage.

During the quarter, the fuselage team continued to make progress on the A350 XWB program delivering the fifth production composite center fuselage to our Airbus customer.

The 787 fuselage team surpassed the 100 unit mark by delivering the one hundred sixteenth forward fuselage section.

Additionally in the quarter, the fuselage team delivered the seventh CH-53K helicopter fuselage to our Sikorsky customer.

Thus completing the hardware delivery for this system design and development contract and positioning Spirit for the next phase of bidding for the production work on this important program for the United States Marine Corps.

On slide 5, the propulsion segment reported strong operating margins of 17% on $375 million in revenue as volumes across core programs increased.

Propulsion's core business, 737 next generation engine pylon and thrust reverser production lines are also performing well at 38 airplanes per month as the teams have now delivered more than 4,400 units of hardware.

The 777 Nacelle and pylon lines delivered the one thousand on hundredth package in the quarter.

Additionally, the 787 propulsion team also surpassed the100-unit mark as they shipped pylon line unit number 117 in the quarter.

The propulsion segment includes several development programs for Spirit.

737 MAX, 767 Tanker, the Bombardier CSeries, and the Mitsubishi regional jet.

And in the quarter, each of these programs successfully met major milestone development.

On slide 6, the wing segment reported operating margins of 5% on $343 million revenue during the first quarter as volumes across core programs increased.

The Spirit Europe operations continue to produce significant volumes of hardware for our Airbus customer, surpassing line unit 5,600 for the A320 wing components.

Spirit Tulsa's next-generation 737 slats and flaps production lines are now performing well at a rate of 38 ship sets per month having delivered more than 4,400 ship sets.

The Tulsa team surpassed the 100-unit mark, as they deliver the one hundred fourteenth set of 787 slats.

And the Spirit Malaysia facility delivered its first 787 fixed leading edge in the quarter.

As we continue to support our customer's requirements and incorporate change in the 787, we saw some continued cost growth as reflected in the additional forward loss related to the wing in the quarter.

And as Larry mentioned, improving execution on this and other development programs will be our near-term focus as we conduct strategic and cost reviews across our development programs.

Turning to the financials on slide 7, revenues for the first quarter of 2013 were up approximately 14%, as compared to the first quarter of 2012 on higher production volumes and product mix.

Operating margins for the quarter were 10%.

Excluding $9 million severe weather-related charges in the quarter, operating margins were 10.6% reflecting year-over-year improvement associated with increased production and productivity and efficiency improvements on core programs.

The quarterly results reflect positive contributions from the core business as Spirit realized net favorable cumulative catch-up adjustments totalling approximately $20 million, driven by productivity and efficiency on core programs.

In the quarter, we also experienced manufacturing cost growth on the 787 previously mentioned, resulting in a $15 million forward loss.

As we enter the production phase of the A350 XWB program, we have set the production contract accounting blocks for both fuselage and the wing to break-even margins.

We believe this level of conservatism is appropriate and consistent with our practice over the past three years during the certification and initial production phase of development programs.

This program will be included in the review announced earlier today.

Fully noted earnings per share for the quarter was $0.57, reflecting margin expansion on higher volumes.

Adding back the expenses associated with the severe weather in the quarter, earnings per share would have been $0.61 per share, reflecting the continued strength of the core business.

Cash from operations for the first quarter of 2013 was a $45 million use of cash.

In comparison, the first quarter of 2012 included $150 million customer advance related to the A350 XWB fuselage program.

Excluding the $150 million customer advance, cash from operations in the first quarter of 2013 is a $93 million improvement due to the timing of accounts receivable, accounts payable in the first quarter of 2013.

Capital expenditures were $80 million for the quarter, including $6 million for severe weather rebuilding capital, compared to $54 million during the first quarter of 2012 as investment to new programs and capacity expansion continues.

On slide 8, first-quarter R&D and SG&A expenses reflect our continuing disciplined expense management.

Slide 9 summarizes cash and debt balances.

Cash balances at the end of the first quarter were $313 million, as compared to the fourth quarter of 2012 cash balances of $441 million.

At the end of the quarter, our total debt-to-capital ratio was 36% as we continue to proactively manage capital structure of the Company.

Our US defined benefit pension plan remains fully funded while we continue to make modest cash contributions to our UK plan.

Slide 10 summarizes net inventory balances at the end of the first quarter of 2013.

Physical inventory balances remain stable in the quarter as we proactively manage inventory growth in a rate-increasing environment.

Nonrecurring inventory balances decreased as we met milestones, primarily on the A350 XWB-900 program.

Deferred inventory balances increased by $122 million, driven by two A350 Section 15 deliveries, which contributed $48 million in growth and 17 787-8 deliveries, which contributed $11 million in growth, or approximately $650,000 per unit.

In summary, our core business continues to perform well and deliver the results we expect.

The team is doing a great job.

As noted in our press release issued earlier today, we will not be issuing further financial guidance at this time, pending the completion of the comprehensive strategic and financial review of the Company's development programs at our various sites.

This is a prudent approach given these programs are now in the early stages of full-rate production, and our development phase execution challenges over the past several years.

I'd now like to turn it back over to Larry for some closing comments before we take your questions.

Thank you, Phil.

I'll wrap up on slide 11 with a few very brief comments and then we'll go to your questions.

Spirit's core fundamentals are manifest in our $36 billion backlog.

The growth of the industry offers real opportunities for us, and we're positioned well.

We are part of both these derivative programs that are part of our core, and we're also participants on the next generation of aircraft going forward.

This offers us, frankly, long-term growth, near- and long-term growth opportunities and some near-term challenges as it relates to the development of these products.

So in summary, obviously, we won't take our eye off the ball as it relates to the core business growth and core product innovation.

We'll continue to innovate and invest in our core products and the derivatives.

We will be driving down our enterprise costs, working at challenging ourselves on operating costs across the board.

And as we've said before, there will be a particular focus on the development programs and the path to completion.

The fundamentals of all our decisions going forward will be driven by value creation for Spirit and for our customers.

So at this point, we'd be happy to take your questions.

(Operator Instructions)

The first question comes from Robert Spingarn with Credit Suisse.

Good morning.

Good morning, Rob.

Larry, welcome.

Thank you.

I'd like to start with a high level question focused on your coming to the Company.

If you could talk a little bit about the challenges and opportunities you see coming from a military background to a business that's largely oriented towards the commercial aerospace markets?

Well, thank you, Rob.

And that's a great question.

It's not the first time I've gotten that question.

And so, I have actually thought about it a bit.

What I would say is this is that in both cases we produce airplanes.

And the fundamentals of producing airplanes are constant.

It's really the business models that are a bit different.

In the defense marketplace, and obviously there is some product differentiation as well and I came from a business we developed, we were the prime and developed the entire aircraft.

And so, we were frankly doing business with companies like Spirit.

They were part of our supply base.

But the terms of the contracts that we had in the defense business were typically, with both the government and our supply base, firm fixed price commercial agreements at least going to the supply base.

So, it's not something I'm unfamiliar with.

I think from a business model, the primary differentiation is that in the commercial marketplace you're making longer term commitments earlier in the cycle.

In the defense business, the government would fund the development of a product which you would then build at some low rate and then make your firm fixed price commitment.

Whereas in the commercial market space, at least as of late, those commitments are made pretty early in the cycle and create some of the I'll say turbulence that Spirit has experienced as well as Boeing and our other customers and partners.

So, those are the fundamental differences between the two.

But the -- as far as firm fixed price contracting or commercial contracting or developing airplanes, I think those experiences are common and, hopefully, given the number of airplane developments that I've had the good fortune of either participating in or leading, I should hopefully be able to bring a little bit to the party here.

And that leads perfectly into the follow-up question which is the way it was described in the release and, Larry, I don't know if this is your wording or Phil's, but you're now conducting both a financial review, which we've seen in the past, but also a strategic review.

And I'd like to ask if you could focus on that last part a little bit.

Does this mean any of the following?

You're considering how you proceed forward on certain development programs, meaning that you potentially could exit some?

Or you might sell some or a facility?

And then also how are you going to change the approach to writing contracts where the risk mitigation seems to have been part of the issue here?

Thanks.

Well let me start with the last part of that question.

I think that, obviously, there's a conversation that we're having with our customers about what's the right balance going forward in terms of these risk sharing partnerships.

And in that dialog there has been shifts in these business models over the years.

There was a significant shift toward a I'll say more supply based driven model in the commercial market space a number of years ago.

Probably, and again I'm not an expert on the subject, but maybe beginning with the 787, maybe prior to that.

And so, that conversation is occurring right now with our customers in terms of how we go forward.

So, I don't have an answer for you.

As it relates to what will we consider in both our assessments of how we're doing our development programs as well the strategic element of that.

I would say I don't know the answer.

What I would say is that what we're telling you is that we're looking at all aspects of the business.

And we're not leaving any element of it untouched.

We're going to focus on creating value to Spirit and an overall I'll say balance of where our growth profile is and a best value to both our customers and our shareholders.

And that's why we're telling you that it's going to be both a program assessment as well as a site assessment so that we can really take the bigger view as well as the tactical view.

The next question is David Strauss from UBS.

Good morning and welcome, Larry.

Thank you.

On 787, might be a question for Phil.

Phil, can you talk about what deferred production did on 787 in the quarter?

And when you guys crossed over 100 aircraft or 100 ship sets, did you actually have a pricing?

Did you see a lower price go through to Boeing?

And where would you see price from here step down as well?

Good morning, David.

We did see deferred decline on a per unit basis in the first quarter.

In my notes there, it's just about $600,000 per ship set.

So, it's now below a $1 million per ship set of contribution, which is additional improvement as we've gone through time.

To your question on step downs, yes, we've tried to be clear as we've gone through time that the 787 contract, the original contract, had stepped down pricing in it.

And there are certain line units where that cuts in as we go through time.

And so, I think that set the expectation and of course, the challenge therein lies is to continue to bring the cost down as the prices step down which we've been doing reasonably well in the first 100.

But I think that's going to be something we certainly want to bring Larry up to speed on as we go through this review, so we can really understand the cost profile as well as the step downs in conjunction with each other.

Phil, did you actually step down at 100?

Was that the first point you actually stepped down in the pricing?

No, no, David.

I think this program actually has been stepping down through the first 100.

Again, I think this is something we talked about probably somewhat a bit of a long time ago, back in 2007 at some point.

But the learning curves are steeper at the front end than they are as you go through time.

So, the step down at the front end of the program were more pronounced, and then as you get into the recurring sequential production phase, that learning curve flattens out as do the price step downs.

So, as we go through time the step downs, they are just not as big as what they were in the first 100 aircraft.

Got it.

Larry, you talked about having met with some of your customers.

I understand you've already met with Boeing.

Could you characterize that meeting and how you see the process of negotiating a new contract with them playing out?

So, David, I think you're referring to the 2013 agreements and we actually have had several conversations, several meetings, and as a matter of fact more in the near term.

I think the way I would characterize it, it's been a very productive and good set of dialog.

Boeing is incredibly important to us.

And I think, obviously, they expressed the similar feelings that we're very important to them.

And we're both anxious to wrap this up and so all I would say is that all the parties are communicating.

The Board is actively involved in this discussion as well as our teammates and the Boeing team.

And I would just characterize it as a good conversation and hopefully something we can get wrapped up in the near term.

Thank you.

The next question comes from Doug Harned with Sanford Bernstein.

Good morning.

Good morning, Doug.

I just wanted to follow on that.

Because when you look at Boeing, and presumably one of the things that come up is that Boeing probably wants costs to come down.

And when you look at what Boeing can offer you and you think about that relationship, what are the sorts of things that you see as an opportunity from a Spirit standpoint that Boeing could really help you out on whether it's more content, whether it's access to resources?

Are there some of those types of things that you've gotten into?

I'd say that the answer is all of the above.

There's, in our discussions with them, we're going to talk about all the products that we currently either are manufacturing for them or developing.

And we'll, there's really -- we'll take a comprehensive view of the trades as it relates to coming up with what will be I'll say a fair and equitable agreement with both parties.

And then, I just also was interested when you look at the results from the quarter, I know in the release there was the statement that the results on the core programs were consistent with existing guidance.

But in both propulsion and fuselage systems, the results were very, very strong on margin and that's even after you did the cume adjustments.

And so I'm curious, are these really consistent with where you've been looking at things?

Or are you now proceeding even better from an operating standpoint than you had planned?

I'm going to let Phil answer the particular question.

But what I would say to you is that for us and our relationship, back to the earlier question as it relates to the balance between the development aspect of the business as well as the production end of the business.

You have to take in its whole when you look at it in terms of your net operating margin.

So, that's kind of the view we take when we look at both the work that is at maturity as well as the work in the cycle.

Phil, I'll let you answer that.

Sure.

Doug, a bit more of it.

You're seeing good results coming through the fuselage propulsion.

Really as a result of some volume improvement and productivity and efficiency in the shop.

The biggest part of this business in the revenue line these days is the core business, and there's a lot of people doing a lot of good work in the Company in the core business.

And I think you're seeing it come through the results.

And a bit more amplification onto the Boeing relationship.

It is symbiotic.

And it's not always about cost or price.

It's about capability, reliability, dependability.

Which we think we do pretty good on the core business most every day.

And we're going to work real hard to get the development programs into that state as well.

The next question comes from Myles Walton with Deutsche Bank.

Thanks, good morning.

Good morning.

Phil, maybe just first a cleanup one.

On the receivables growth in the quarter.

Can you comment on where the retainages are to Gulfstream and when you think that would get results?

Yes, they're just North of 100 million miles.

We're working on resolving that.

The bulk of the receivable was really just timing issues, nothing more than that.

But we are focused on the Gulfstream retainage.

And, again, that's something we're certainly going to be putting some effort into as we move to the future here.

And resolving that though is built into the guidance for this year?

Well, we aren't giving guidance I think as you know.

So, I think we're just really going to focus on getting things resolved with Gulfstream as we move through the year.

The next question is Sam Pearlstein from Wells Fargo.

Good morning.

Can you talk about a little bit about the after market in the quarter, just the trends, especially in the propulsion side?

Because while the absolute margins look good, when I look at it on an incremental margin it would seem like it didn't translate into strong incremental margins in that segment.

Yes, I think in general, Sam, the after market is really dependent on the model mix.

And then what kind of parts we're selling to the customers.

So, it's really nothing more than a model mix issue typically on after market.

Was it up or down in the quarter if I look at it?

The results in propulsion I believe were a little bit better.

The next question is Cai von Rumohr with Cowen and Company.

Yes, thank you very much.

So, where are we on the Boeing master contract?

Hi, Cai.

Well, as Larry described we are working it together.

It's an active process.

Larry has just come on board in the last three weeks and we're certainly having discussions with our customer on the matter.

You know, we also -- Boeing is obviously very important to us and I think Larry said that as well.

And I think we both would like to get it wrapped up sooner rather than later.

And we're making progress towards that, I think.

Okay.

And then if we look at the quarter, you had $28 million of positive cume catches.

Could you give us a little more granularity like what program with 737 it occurred on?

And how much of any of that was block crossover impact or in favorable closeout adjustments?

Sure.

There were no block closeouts in the quarter, Cai.

And so, the performance is really coming through on the higher volume programs which is 737 and 777 at this point.

So again, it speaks to the, really, the hard work of the teams in the factories after delivering 4400 aircraft on the 737 NG that we're still working hard in finding improvements.

And so, it's pretty impressive from my vantage point.

The next question comes from JPMorgan.

Thanks, good morning.

And welcome, Larry.

On the Gulfstream, just honing in on that a little bit.

It seems on a dispute you're having with them that deliveries were down, sequentially.

And I'm just wondering if that's timing?

Or since they haven't been paying you, if you guys are slowing deliveries down?

And then, just I noticed, and this maybe just a semantics thing, but n the press release, you talked about successfully executing '87 and 350 but didn't mention Gulfstream, which has been a problem.

And just wondering if you can expand on really how you're thinking about this relationship and anything else you can give us?

Yes, Joe, on the deliveries, nothing unique.

I think there was just some timing in the quarter that is really all it amounts to.

You know, on the relationship front, I think we're working.

Again, I can assure you Larry's priorities are meeting with the customers in the first three weeks and getting a sense of how things are going.

And nonetheless, we are focused on delivering quality product to our customers every time on time.

And that's the goal we have.

And I think certainly with Larry on board we're going to be more intensely focused on that.

But, Phil, just on that point, if they're not paying you or maybe I'm misinterpreting that, just the language in the 10-K.

Are you continuing to just make these wings and ship them?

Or what exactly, this is going on for a few months, what exactly are you doing in the factories?

So, Joe, they are paying.

It's not a full payment.

That's where the retainage comes from.

Though it's a receivable that actually we will collect at some point we believe.

And it really speaks to the development program over the last several years that we've been managing through.

So, there is -- we do deliver, we do get paid.

It's not a full payment at this point which is one of the challenges.

The next question is Ken Herbert from Imperial Capital.

Hi, good morning.

Good morning.

I just wanted to further see if you could provide any more detail on the A350.

Specifically, I know there's been a significant amount of effort that you've been putting into that program both here and over in France in the last quarter.

And what kind of improvements have you seen in the quarter specifically on the wing there?

Hi, Ken.

Yes, we have seen improvements in the fuselage deliveries.

I think we're still not 100% complete on our deliveries to Airbus.

But the condition of, like we would call it, condition of assembly is improving which is a good thing.

There's still change on the program.

We're incorporating as we deliver.

So, I think operationally we're seeing improvements on the fuselage which you know is built in North Carolina.

And then we assemble the components over in Saint-Nazaire, France.

So, we've got work in France we're having to clean up.

And we've got some work in the Airbus factories where we're working with our customer on cleaning up.

And the wing components seem to be going reasonably well at this point.

There's always some challenges at the front end of the vidalton program, regardless of what section of the airplane it is.

But I think it's reasonably under control.

Okay.

So, as you look out, Phil, over the next few quarters, specifically on the A350, do you get a sense that you can see the light at the end of the tunnel there?

I know the development contracts go for a while here.

But specifically, on the additional work that you've been doing in the Airbus facilities.

How does that step down?

And is that going according to a plan you're happy with?

Well, we certainly have a plan.

And we are improving as we go.

We've made some improvements here in the first quarter.

And we are very, operationally, very attentive to hitting that plan with our customer.

And we understand very well the importance of the program with Airbus.

And so, I think we're in good shape on that.

We do want to continue to improve.

I think the shift or the focus is really two things.

From the dash-900 development which we're delivering now which I've been talking about, but we're also entering the stage of developing the dash-1000.

And that is in process.

So, our defiant effort is turning to the dash-1000 as well as cleaning up and incorporating the rest of the changes in the 900.

And then, of course, the 900 moves into production which we are intensely focused on as well.

And I think we've moved this program from the accounting standpoint to a break even margin.

So, as we move into the recurring or the products contracts, we don't anticipate booking any profit here in the near term just because of the state of the challenges on the initial stages of production now.

We have some supply chain work to do on this airplane, on both the wing and the fuselage.

And I think that's something we want to study very closely as we move through this year.

The next question comes from George Shapiro with Shapiro Research.

Yes, Larry, I had one for you and certainly welcome.

Thank you, George.

And that is there's been speculation about Airbus wanting to buy back the A350 program and little bit with Gulfstream doing the same with their program.

So, just wondering what your thought process on that, your attitude toward it?

Well you know, George, I think, first of all I think to point Phil made earlier.

We're five ship sets into the deliveries.

And we have a contract and a commitment to Airbus which we just have to focus on delivering to.

And so, as we kind of work our way through this thing, our focus really is on our own performance.

If Airbus has some ambitions then certainly we'll sit down and talk to them about any interest they may have.

But, right now, we're just, to be quite candid, we're pleased with the improving performance.

I don't, normally, I would say people who know me, it's not good enough.

And in my conversations with Airbus, all the discussions have been about performance.

But we're having very good exchanges with them.

The PMRs are going quite well.

And I just say right now, their heads are down to get to their first flight.

Okay.

And then one for Phil.

Phil, with the improving performance on the '87, why wouldn't break even be in the second or the third quarter?

Hello, George.

Well, we're going to continue to improve, we think.

So, we've consistently said we think the cash breakover is 125 to 150.

And seems like we're on track as we move through that.

Now, there's another variable as we talk about the 787 which is the dash-9 introduction, which we are right in the middle of, and then there's derivatives after that.

But the dash-9 is in the mix right now.

And rate, rate 10 is also something we're focused on this year.

So yes, I think it's continuing good performance in the program.

Now, so there's good things and then we got to think about these price step downs and matching the costs of these price step downs which were in the original contract.

Which I think we were going to be intensely focused on.

The next question comes from Greg Konrad from Jeffries.

Thanks for taking my call and welcome, Larry.

I was hoping to just go back to biz jets and the business overall.

Just last quarter, you mentioned that the management reserve had increased on the 280 and the biggest focus was on supplier negotiations.

Have you made any progress over the past quarter in terms of the supply base?

Yes, Greg.

So we have, you're exactly right, supply chain has been on an area we've been the primary focus on the business jets, which include the 280, the 650, and BR725 package.

We're very intensely focused on the supply chain.

We've made some progress in the first quarter as far getting procurement out.

But I would describe it as we still have a long way to go as we move through the year.

Our plan is to really execute that supply chain plan through the balance of the year.

And we should just keep talking about that as we move through.

And of course, I would also lean back on the comments of this strategic and financial review, those programs will be a part of that review as we move through the year as well.

And then just a quick follow-up.

In terms of 747 and the lower production rate in 2014.

Does that play into anything in terms of CapEx or any pressure on the program?

Yes, we just got the, Boeing just announced that here early in the second quarter, so we're going to take a look at that reduction as we move into the second-quarter process.

So, I think the only commentary I could really make about it because we don't really know the outcome of that volume reduction out in 2014.

But, I think as you know, the 747-8, most product is a thinly margined program that we'll just have to remain watchful of as we move through and incorporate that into our estimates.

The next question comes from Michael Ciarmoli from KeyBanc Capital Markets.

Good morning, guys.

Thanks for taking my questions and welcome aboard, Larry.

Phil, just on the A350, you mentioned the contracts were set at break even.

Is that conservative enough?

Can you walk us through some of the risk there where maybe that contract at 0% still has some risk in it?

Just trying to get the thoughts of remaining risk on that as you ramp?

Sure, I think we've looked at it and we know what we know right now.

And so as we look at the future, again, there's still a lot of change on the design that we're incorporating.

And so we're trying to focus on the forecasting and the recurring costs for the airplane.

And every quarter we're looking at everything we know, looking at the supply chain progress, looking at our labor factory experience support, direct labor, as well as overheads.

I think it's just too early to really call it.

When we do, we think about zero margin on the program, give that we've only delivered five units and the first accounting block the 400.

We're really just going to look at the estimates through quarters.

We, from a process standpoint, it's important that every quarter we look at these programs.

And these programs change from quarter to quarter.

And so as we get a view of risk, as that changes, we certainly update our view of the program and they that I think our best view right now is given we're only five units in, in a state of change on the design, that zero is appropriate right now.

And then just on the 787 rate.

You mentioned that 10 per month.

Where do you guys plan to be in next three months, the end of the year?

Are you shooting for that 10 per month by year end?

And should we expect any additional CapEx associated with that?

So, certainly some of the CapEx we're spending this year is for 10 a month and we expect to exit 2013 essentially at 10 per month.

Next question from Michael Callahan from Topeka.

Thanks for taking my question.

Welcome, Larry, and congratulations as well.

Thank you.

I guess first thing is a follow-up on the development programs and securing contracts with your supplier.

I think the key focus there was, obviously, hopefully taking some costs out.

Of the ones you have secured at this point, what are your overall feelings as far as how successful you've been in negotiating those lower or in a more favorable position?

Sure, Michael.

We've had good successes.

But there's a long way to go.

But I think the fact is we've had some very favorable outcomes on moving to longer term what I would call long-term appropriately priced contracts for lower volume programs.

And that is one of the challenges.

The aerospace market or the defense or commercial is very busy right now in terms of supply chain.

And so, we need to get these programs procured at what we think we can get them procured for.

And we've had some good successes, but a long way to go.

Okay.

That's helpful.

I guess then, second question here just on consolidated margins.

Broke 10% on operating margin here this quarter first time in really I guess almost two years.

As we're thinking about the consolidated margins going forward, what are your guys' thoughts as far is the there any improvement that you can make from here?

In the past you guys have said you anticipate maybe development programs essentially off set the higher rates on core programs.

Is that still the thinking or is it looking more positive from here?

Well, I think that's right now we're looking at the all of that with the strategic and finance reviews.

So, I think I'll just take a pass on answering.

But clearly, you're seeing the strength of the core business in our results.

We'll continue to be focused on improving those margins in the core business.

But I won't go out and provide you any guidance until we get through this review at this point.

Next question comes from Peter Arment-- Sterne, Agee and Leachl.

Yes, good morning, Larry and Phil.

Phil, a question on 787 capacity.

Just mainly thinking about Wichita.

Boeing's indicated that once they get to 10 a month and stabilize, clearly there's a desire to move higher.

How do we think about how your spare capacity is of what you put in place, and the efficiencies actually you've been seeing?

Sure, Peter.

The efficiencies I think we're doing very well on.

Our Chief Operating Officer is here, I'm looking at him.

He says that we're doing pretty good on those things.

And we're seeing that coming through on the program.

We exit the year 10 a month.

And I think that's something we're intensely focused is the automated side of the process.

The manual side of the process.

And as you know, the automated side of the process really comes down to feeds and speeds on machines and efficiencies which we're intensely focused on with some of our R&D spend which we have on an annual basis.

So, I think we're pretty optimistic about the efficiencies in the factory.

But I point back to it's heavily buy, so there's a lot of supply chain in there.

Some of it is source directed from our customer which we buy through.

And so, some of it's very dependent on our customer.

From a cost standpoint, there are price step downs which we've talked about earlier on the call.

So, all of the efficiencies we're getting out of the factory we just have to stay intensely focused on those.

And, ultimately, I think we believe it's a good long term program.

We'll do okay but it's a matter of getting down the learning curves.

We need to get down to match the price step downs.

Okay, and if I could just ask a related question.

On the step downs, Larry, Boeing's got a partnering for success program where they're looking for some price discounts.

And you've got a big 737 contract that's coming due.

It seems like actually more of an opportunity for you to work out a larger agreement with Boeing?

Could you maybe just give us some initial thoughts?

Well, that's the discussion that we're having.

And is exactly that because it is a partnership to your point.

And, obviously, one of our most valued partnerships.

And the balance between our business and their business is exactly as you state, is how do you, when you net all of this out, how does it work?

And so, we are having exactly the conversation you just had.

I think it's been incredibly productive.

I think we've broadened the discussion, let me just say, to include more data from the entire air price standpoint, to say, hey, here's the commitments we can make and here's the challenges we have and how do make this equitable for both parties.

So, I think we agree with you.

It's a good opportunity but it's probably a little bit longer conversation than the one we were having.

Thank you, ladies and gentlemen, this concludes today's conference.

Thank you for the participating.

You may now disconnect.