Spirit AeroSystems Holdings Inc (SPR) 2013 Q2 法說會逐字稿

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

second quarter 2013 conference call.

My name is [Myeesha].

I will be your coordinator today.

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

Later we will conduct a question-and-answer session.

Please note this conference is being recorded.

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

Coleen Tabor, Director of Investor Relations.

Please proceed.

Thank you and good afternoon.

Welcome to Spirit's second quarter 2013 earnings call.

I'm Coleen Tabor and in the room with me today are Spirit's President and Chief Executive Officer, Larry Lawson; Spirit's Senior Vice President and Chief Financial Officer, Phil Anderson; and Heidi Wood, Spirit's Senior Vice President of Strategy, M&A, and Investor Relations.

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 and 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 our Chief Executive Officer, Larry Lawson.

Good afternoon everyone.

Thank you for joining us today.

We scheduled this call to move expeditiously and to provide information to you as soon as possible.

We had a chance last week to discuss with you the most recent outcomes of our strategic and financial review.

We relayed the decision to offer the Oklahoma sites for sale and we gave you an outline of the charges.

Today we can provide a complete picture of the financials, and as you can see, overall we're making progress.

We reported $1.5 billion in revenues with $209 million in operating income before the $448 million charge, a $239 million loss after the charge.

Operating cash flow was $60 million and our backload rose $2 billion sequentially to an all-time high of $38 billion.

We reported earnings per share of negative $1.47 after charges.

On an adjusted pre-charge basis, earnings per share was $0.72, which was up 44% year-over-year.

I want to go straight to the charge and begin by saying we are not happy about this.

As you heard, we took a charge of $448 million in the quarter, $426 million of which reflects the revised cost projections of the Gulfstream G280 and G650 wings.

Last week we gave you a preliminary range of $350 million to $400 million prior to the conclusion of the review, which was based on a 400 unit block on the G650, which is in line with market forecast.

Ultimately, last week at the conclusion of review, it was determined to use the previous block size of 350 units spread over an additional two years to 2019.

We will continue to review the block size in future periods to determine when the modification is appropriate.

Looking forward, I would like to summarize the points I made at the management call regarding our recent decisions and our strategy.

We can get into more details during the Q&A.

We have taken a number of actions to include the sale of Tulsa, a reduction in our workforce and an organizational realignment.

We are aligned to our customers, focused on program commitments, we've added some great talent and we're reducing costs.

We are making the hard decisions.

Spirit is intensifying the focus on four key things I think is worth reiterating; disciplined decision-making and market focus, focus on performance, on costs and on cash flow.

We believe we have a strong value proposition in the design and manufacture of some of the most complex aero structures in the world, and at the best value for our customers.

With a healthy mix of mature new programs and commercially successful long-lived programs like the 737, the 777, the A320, the 787 and the A350, we are very well-positioned to participate in the commercial aerospace up-cycle.

In this context, and with a keen eye on performance, cost and cash, we are refining how we use our resources and balancing our mature program performance against the investments necessary for new programs.

We are determined to advance our differentiation in the marketplace.

This provides a framework which you can understand both our underlying performance and our strategic decisions around divesting the Oklahoma sites.

My last comments concern our focus on cash.

All of our financial metrics are important, but we are especially focused on cash flows.

We will challenge costs, focus investments, choose markets and incentivize the right decisions.

We will drive value for our customers, our shareholders and for our employees.

At this point, I'm going to turn the call over to Phil so he can walk you through the details.

Phil?

Thank you Larry, and good afternoon.

I would like to provide you with our segment highlights for the quarter and summarize the company's financial results for the second quarter of 2013.

On slide 4, the fuselage segment had strong top line growth and operating performance with operating income of $150 million on $732 million in revenue during the second quarter as volumes across mature programs increased.

The fuselage segment's 737 production line has now delivered more than 4,500 ship sets of the next generation fuselage and together, Boeing and Spirit have delivered over 7,600 737s, an incredible accomplishment by our customer.

As you know, we're continuing to innovate the 737 as we invest in the 737 Max which will create the next industry-leading single aisle aircraft for years to come.

The 787 fuselage team delivered the 130th forward fuselage section in the quarter which included the first 787-9 derivative.

We are proud to partner with Boeing on this next generation twin-aisle airplane as their growing backlog and customer base demonstrates the market demand for the -8 and -9 airplane, as well as strong interest in the recently announced -10 derivative.

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

We congratulate Airbus as they achieve the important milestone of the A350 first flight in the quarter.

Congratulations to Airbus.

On slide 5, the propulsion segment reported strong operating income of $82 million on the $419 million in revenue, as volumes across mature programs increased.

Propulsion 737 next generation engine pylon and thrust reverser production lines are performing well at high rates as the teams have now delivered more than 4,500 units of hardware.

The 777 nacelle and pylon lines delivered the 1,120th package in the quarter.

Additionally, the 787 propulsion team shipped pylon line unit number 132 in the quarter, which also included the first 787-9 derivative.

Development of derivative and next generation products continues in the propulsion segment as we again successfully achieve milestones on the 737 Max, 767 tanker, the bombardiers C-Series and Mitsubishi regional jets.

On slide 6 the wing segment reported operating income of a negative $404 million on $369 million in revenue during the second quarter, as volumes increased in the forecasted future cost growth of $448 million, primarily on business jet programs, was recorded.

The charge on the business jet programs represents the culmination of changing conditions and new developments as we have worked to understand the go-forward supply chain costs, and incorporate an additional labor performance and revised recovery plans into our projections.

In a quarter with such complexity, the additional time provided to this update to the estimate, demonstrates the fidelity of the process and the outcome.

Spirit Europe operations continue to produce significant volumes of hardware for our Airbus customer, surpassing line unit 5,800 for the A320 wing components.

Spirit Tulsa's next-generation 737 flaps and flaps production lines showed steady, mature program performance, having delivered more than 4,500 ship sets.

The Tulsa team delivered the 1,034th set of 787 [flaps], which included the first 787-9 derivative.

As Larry discussed in his opening comments, separate from the performance in the quarter, we made a strategic to decision to pursue a divestiture of our sites in Oklahoma.

While these sites have great products, people and programs, we are refocusing the company on Spirit's differentiating capability and large-scale, high-volume commercial and defense aircraft.

Turning to the consolidated results for the company.

On slide 7, revenues for the second quarter 2013 were up 13% as compared to the second quarter of 2012 on higher production volumes and non-production revenue.

Operating margins for the quarter reflect the charge.

Excluding the net forward losses, cumulative catch-up adjustments and certain other items, operating margins were 11.7%, reflecting year-over-year improvement associated with increased production and productivity and efficiency improvements on mature programs.

The quarterly results reflect positive contributions from the mature programs as Spirit realized a net favorable Q1 catch-up adjustments totalling approximately $41 million.

Fully diluted earnings per share for the quarter was a loss of $1.47 per share, driven by new program charges.

Excluding the forward-loss charges, cumulative catch-ups and certain other items in the quarter, earnings per share would have been $0.72 per share, reflecting the strength of our mature business.

Adjusted free cash flow for the quarter was a $21 million source of cash, a solid $50 million improvement over the year-ago quarter.

Slide 8 provides a walk of the second quarter, a GAAP earnings-per-share to the adjusted earnings-per-share of $0.72.

Slide 9 summarizes cash and debt balances.

Cash balances at the end of the second quarter were $317 million, as compared to the first quarter of 2013 cash balances of $313 million.

At the end of the quarter, our total debt to capital ratio was 39% and our net debt to capital ratio was 31%.

We continue our strong track record of liquidity and balance sheet management as a result of the financial strategy implemented over five years ago to support the company's day one customer diversification strategy that was focused on clean-sheet designed aircraft.

Currently, to address the charges to earnings in the quarter, and as we now work through a strategic and financial review of the company, we have amended our senior secured loan and credit facility to suspend the existing financial covenants through the fourth quarter of 2014, after which time, the financial covenants will apply again.

During this period, the company will be subject to a liquidity covenant and any draw under the revolving credit facility will be subject to a borrowing base limitation.

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

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

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

Non-recurring inventory balances decreased as we met milestones, primarily on the 787 and 737 programs.

The 787 program realized a net decrease of $2.3 million in deferred inventory on 14 deliveries for approximately $160,000 per ship set.

While this performance does signal an important milestone reached, it is important to remember that the 787 contract includes step-down pricing for the -8 that our performance must follow in order for our results to continue this trajectory, and we still must determine the pricing for the -9 and -10.

As we shared with you, our comprehensive strategic and financial review continues and we expect to report our progress on these initiatives and any financial implications in the coming quarters.

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

Thank you Phil.

So, to conclude, we have made progress.

There's much more to do.

We are charting a path forward towards being a performance and financially driven enterprise.

With high expectations, the emphasis throughout the company is going to be about driving for cash.

There's no shortcut.

It's about focus and discipline.

We're going to sharpen our focus on what we do best.

We're going to drive on cost and performance where the standard is world-class.

We're positioning the company going forward for prosperous growth for our customers, for our shareholders and for our employees.

With that, we're ready to take your questions.

( Operator Instructions )

Doug Harned, Sanford Bernstein.

Yes, thank you.

I'm interested in the charges.

I'm trying to understand how the wing system charges went up.

You're taking the block size down to 350, and I know before you had talked about that the cash impact of this would likely be spread over an extended period of time.

How are you looking at this now as you bring that block size in, you take the charge up, how should we think about that in terms of the cash impact?

Good afternoon, Doug.

The cash impact really, the charge is now, 85% of it is 2014 through 2019 now.

I think if I do the math, it's roughly about $16 million a quarter over six years and then the rest of that about $65 million, $70 million would flow through 2013.

Okay.

On the 787 wing charge, what drove this?

What are the considerations that took this up from the number that you had before?

Mainly our current period performance and continuing to work through our recovery plans in the program will remain contributors.

Again, that was about $22 million in the period that we recorded and that was the 787 wing components.

Howard Rubel, Jefferies.

Thank you very much.

Larry, sort of a blunt question -- why not break these contracts, especially with the Gulfstream, then proceed with them, given the substantial charges?

Certainly, we have evaluated all of our options and I would just say that this reflects a complete consideration of all the options.

Howard, I would just say that, if a judgement recall regarding the timing of when you incorporate market data and use market data, there is the assessment itself of market data and then there is the accounting rules so you get your own conviction.

One of the questions you may be concerned about, for example, the effect this might have on a buyer of a facility but the truth is that the buyer always is going to do their own assessment of the value of the products that you're selling.

They're going to use market data and they'll decide what market assessment they're going to use, current market assessments range from 400 aircraft to 550.

The buyer will make their decision about what range to use, the buyer will make a judgment regarding what synergies they think they bring to the acquisition of the product.

The buyer certainly will decide what value the site has to them in terms of access to markets.

I would just say there's accounting treatments, and there is assessments and judgments applied and then there is, as you know, the sites for sale.

There's the things that the buyer are going to do, as it relates to how they assess the situation.

I probably should say that since our management call, there has been a lot of interest expressed in the sale of the site.

David Strauss, UBS.

A350 -- I had a chance to quickly look at your 10-Q filing.

It looks like your deferred balance built significantly there on just one delivery in the quarter.

Phil, can you talk about A350 and when you might to be in a position to evaluate that program for a charge because it looks like you're running at a significant loss as we sit here today.

That's a good question.

I think at the management call I made a comment that we were very focused on the performance side on the A350.

I will tell you that we are early in the program so there's a number of factors that I am looking at and I'm going to take my time really to work my way through this.

I think the thing that is important, you have to differentiate the development cost versus what you think the going-forward, recurring costs are going to be on a platform and you take all the information on-board.

We are running a little hot on development.

Why is that?

I asked myself the first two questions when I looked at the development program, the 350 is, number one, do we have a plan that both parties agree to communicate with each other regularly on that is metrics driven so that we are both working with the same piece of music.

I will tell you that this was a particularly challenging program early on because it was a new product, new customer and a new site.

That represented a unique set of challenges.

Today, I can tell you that we have a common piece of -- a common plan -- I usually often refer to it as a common piece of music that we're both playing to and that we are statusing with each other and that is a tremendous accomplishment.

We have to give both members of the team, Airbus as well as our team, a lot of credit for getting there, but that hasn't always been the case.

It gets you to the second part of the question, which is do you have the right team to go execute the plan?

I told you early on that we had realigned and part of that realignment, to be quite blunt, was to put additional resources and the right resources in the plan.

Why is this?

Well, because, really, you burn money, you can burn money -- it's much more painful to mis-schedule.

You will spend a lot more money if you can't stay on schedule than you do if you expend resources to get back on plan.

Right now, we are running hot to get the plan completely implemented and get right on schedule and we are making a lot of -- we are making great progress.

You can ask yourself the question all these programs, the development programs, will the 350 be different than other programs?

All I can point to is the major metrics all indicate that Airbus is doing quite well and we are going to make sure that we do we what we have to do to support them.

Again, I guess if I were to boil this down into the simplest way to say it, the most important part of the development side of this is to stay on schedule.

Myles Walton, Deutsche Bank North America.

First one was a clarification -- if there was any benefit from the Boeing master price agreement not being settled up yet in the quarter?

And the second one, Larry, your cash focus you talked a lot about -- I'm curious as you into negotiations with customers, Boeing and/or others, are you making active trade-off decisions between offering up some profitability for better cash terms at the front end of these contracts?

That is not really something that we would -- those are always options and we don't get into negotiations.

I don't think the two ever really disconnected.

Really, our emphasis on cash is trying to drive the decision-making in the enterprise to be thoughtful across the board.

We want to challenge everything that we do, so whether we're talking about our capital investments or the things that we are pursuing or the businesses we participate in, if they are not profitable then of course they don't throw cash in the end.

That is really a difficult trade to talk about, because it is effectively the profit that drives the cash.

I think what I'm really trying to say is it's all the other decisions in the enterprise whether it's overheads, cost of goods sold, CapEx.

I can continue on and go through the details, but really trying to get the team to challenge everything we do across the board that takes those profits that you were referencing and take them to the bottom line.

That doesn't mean we are going to be shortsighted about investments.

I hope I was clear in my comments that we recognize that to participate in the future and partner with our customers, that investments are necessary.

But we need to be smarter about the decision-making that we are involved in.

Obviously we would like to invest in things that have -- that we believe will be very successful and have a long cycle and lead to future business.

Myles, on your pricing question, upfront, we are in the interim pricing period with our customer, just to be clear on that.

Of course we won't talk about the economics of that but I do want to make clear we are in an interim pricing period.

Is that helping?

I'll leave that to you to do the math.

Cai von Rumohr, Cowen and Company.

Impressive $41 million in positive cum catches.

It looks like you achieved that all on the 737 and 777 so it's on what about $850 million, so it's like 450 bps on the revenue.

Maybe explain why that number was so good, whether you dipped into any of the deferred production credits that you had and your thinking in showing a number that good while you're still negotiating with Boeing.

Great questions as usual, Cai.

Right to the point.

I think the performance of the programs is coming through.

We have been in a rate increasing environment really across the board for the last several years.

That is continuing in '13 and then we grow again in '14 on the 737 program.

I think we have improved on how we've managed through the deferred balance as you are talking about, looking at all the risks in front of us which would include pricing, quite frankly in the bigger scheme of things.

As we know, it's sustainable performance -- we've talked about this before.

We are about constantly improving the performance of the Company on a sustained basis.

I think that's what you see us doing.

When we feel good about the prospective performance, that's when we release those cum catches.

I think the obligation of the Company regarding negotiation is we are performing well and we have an obligation to shareholders to report the performance of the Company and frankly I think Boeing appreciates we are doing so well in the programs, quite frankly.

Larry can certainly speak to the quality costs and other things that go on financially.

They need a strong supplier, we are and we look forward to doing business with them long in the future.

Maybe on the (inaudible) -- your site is frozen -- can you give us what the deferred production costs were by the other key program, the G650, et cetera.

I don't have those numbers in front of me, Cai.

Maybe we can take that up with you if it's in the Q -- as it's in the Q.

Carter Copeland, Barclays.

Congrats on the cash break-even on the 87.

Nice to see some downward deferred production numbers.

I had a question for Larry, really quickly -- kind of big picture conceptual.

There's a lot of stuff moving around here in terms of both some of your key programs in some degree of change with your customer and the re-engining and potentially what happened with the 777 X. You've obviously got some other contracts and sites, lots of moving considerations around cost actions.

I wonder if you could touch a little bit on the prioritization of -- when you reach a steady state and you have a book of business that has a set of contracts, there are often times, trade offs between how much you invest, how much a partner invests, whether or not you want to trade profits for cash.

There is more to it than just simple cost and price.

I wondered, relative to your comments about cash being a priority, if cash would be something that you would place a premium on in such a way that you might be willing to accept in some of these negotiations for the moving parts, lower prices at future points in time or different investment profiles.

How do you think about that trade space?

I guess I'm sending absolutely the wrong message.

Let me be clear.

We are not -- we don't have any liquidity issues.

We have a cash reserve.

We're not trying to build up a cash reserve to reduce debt.

That's not the premium here.

Trading profit for cash really wouldn't be -- I just can't think of an example right now where that would be a smart thing to do unless potentially it was on a new program and we were talking about shaping the curves.

I don't mean learning curves.

I'm talking about inventory versus payback.

That's really not what I'm referencing.

What I'm referencing is how we make decisions as a team.

It just strikes me that cash drives focus because it takes the profits that you are garnering on these programs, this performance that you are referring to and drives these cash flows to the bottom line.

This is about cash flow not cash.

I am not trying to -- this is not an objective to build a big stockpile of cash to go buy something.

Frankly, we haven't even started having conversations with what we might do if we had a large cash bucket, but it's more about behaviors.

This is not about our customers.

This is more about how we make decisions in terms of cost structures, investments, et cetera.

Back to your comment about investments -- all of these are unique.

What we want to do is partner with our customers.

We are looking for opportunities to be involved early in the game to understand what their needs are because, frankly it's the early investments that make the best payoffs.

If there's a particular technology, a manufacturing approach that our customers need or -- frankly, I think as the aircraft become more and more integrated, whether it's the nacelle or the engine, doing that work up-front is where the premium is.

We're really trying to drive our team, to answer your question about investments -- that's where we think we get the biggest bang for the buck on the investments -- I should say where we think our customer gets the biggest bang for the buck on the investment.

I hope that answers your question.

I may have set my emphasis on cash, it's really more about cash flow.

That's great.

It's helpful.

Just a quick one for Phil -- at times you've had -- if you look at the operating performance, Ex to Cums and the charges in the quarter, the 11.7 -- is there anything beneficial to note in the mix or is it relatively normal operating performance?

I know sometimes you get development revenues and the like.

Is that a clean number?

Yes, it's a pretty clean number Carter -- the operating engine of the Company delivering the value.

Thanks for your questions.

George Shapiro, Shapiro Research.

I just wanted to pursue the 350 a little bit more.

If you look at it, it looks like the deferred increase was about $33 million for the ships that delivered and when you delivered two in the first quarter, it was about $24 million for each of them.

If you could just follow up your comment before -- do I look at this as getting worse or is this just jumping around or how do I look at that?

I would say a couple things.

Number one is, the configuration of the vehicles are different so I'm not sure exactly which deliveries you're pointing at.

Some are units that go to structural testing, other's are units that go to flight.

The configurations aren't common in all of it.

Some have instrumentation et cetera.

They're not all exactly the same.

I'm not sure I know what the differences are in the comparisons, George, but I'd be happy to go back.

I will tell you that we are not seeing degraded performance against the deliveries.

Actually, our performance is getting better.

You may have noted, George -- from our customer -- some of the commentary offered that I think probably indicates an improving relationship and you know relationships are all founded on performance.

I was just looking at the fact that the first quarter you delivered two Ship Sets in this quarter you delivered one and I was just looking at the difference in deferred per delivery.

If it is okay, since I don't have that right here in front of me and I know I will definitely do a little more research here.

What I look at, with the data that I see is the number of hours per unit, the actual unitized cost, the touch and material and support differentiation as well as support costs.

Again, I need to do -- I need to go look into it a little bit more, but everything I'm seeing clearly shows an improving trend as it relates to -- on the manufacturing side -- as it relates to the performance against the aircraft.

What I would say, again, and I said earlier - on the development side we're running a little hot.

I think it will pay off in the long haul.

I'll be honest with you, some of that cost, that development cost is just catch-up on some things like concessions, et cetera, that we and Airbus both have to go work on.

John Godden, Morgan Stanley.

I was hoping that you could speak to your commitment to divesting Oklahoma and at what point would pursuing the divestiture become a distraction or at odds with potentially optimizing operations, if perhaps the interest wasn't as good as maybe you had hoped?

For sure it's not a fire sale, John.

I would -- we're, right now I will tell you we are very focused.

I have spent a lot of time in Tulsa with the Tulsa team, with the management team.

You can't imagine the amount of time that was spent putting the fidelity around the planning that went forward that, frankly, defined this charge.

We are committed to the site as an ongoing operation.

We think there may be a better owner.

We think that there may be folks out there who have similar tube contracts that can provide efficiencies, people who will look at that site in terms of access to markets they don't currently have.

Then, of course, they're going to look at it again from their assessment of the market -- not only the current market, say for the 280 or 650, but where those markets might go.

Of course we talk a lot about the 280 and 650 but it's a very diverse business with 737, 777, 787.

There's a lot of great programs in there.

We'll see what the interest is.

We'll see how it materializes in terms of the financials and we will make our decision on all of the above.

Okay.

That's helpful.

If I could just ask about a separate topic.

As I know you have heard, Boeing has been looking at potentially moving above 42 over time or at least those are some of the sound bites that they have offered.

Could you talk about the opportunity for productivity improvements from here at the mature programs and could they create capacity, over time, for you to move above 42 on the 737 or is there a CapEx bottleneck there that productivity can't get around?

I think that, as I understand it, Boeing actually announced that they were looking forward to a higher build rate.

They are exploring a build rate.

I think the number that they said was 47 aircraft.

You can be assured that we are working hand-in-hand with them on that because there is two questions that have to be answered -- not just what can our factory support, but what can our supply base support.

And what is the associated costs in terms of where the inflection points are and where the risks are as you build up and rate.

That is an ongoing conversation that we have with them over a wide range of rate options.

At the end of the day I would say that we are focused right along the lines of what their mainstays said that they're looking at and we don't see any major roadblocks.

Michael Ciarmoli, KeyBanc Capital Markets.

It's actually Kevin Ciabattoni on for Mike.

Good afternoon.

One for me.

It may be too early to be looking at this, but I'm just wondering how we should be thinking about the long term target for operating margins.

Is north of 15% a reasonable target given what we're seeing from other competitors in the structure space?

How have you guys been looking at that and maybe some general commentary on the -- ?

Yes, Kevin, thanks.

I think that's why I really referenced investments versus any particular program look.

When we deal with our customers we're balancing the portfolio all the way down to the net operating margin.

So you can look at it in any one segment and get a view, but from us, we're looking the consolidated operating margin which frankly, it's in line with our customers.

We are not askew from them.

We are trying to figure out in the long haul, you are talking about the long haul, we bring all of that in balance.

Because a number of decisions were made in the 2005 and on time frame and have presented us a host of opportunities here that we are working our way through.

Our going forward conversation we have with any one of our customers is then trying to look at this in terms of total portfolio, total business that we do with them.

Their only request back to us is reduce your cost, improve your performance, enhance your quality, collaborate with us, figure out a way that we can go forward together smartly and that is exactly what we want to do.

Peter Arment, Sterne Agee.

Good afternoon, Larry and Phil.

Larry, just a quick one.

You have delivered now up to 130 787 forward fuselages.

What are you seeing there in terms of the overall progress on that program and what are you seeing now that you're at the seven a month rate?

I think it's clear we are moving to10 per month build rate and we are on track for that.

We have delivered of both -8s and -9s.

The feedback I get from the customer is they are very happy with that.

I will tell you just as a -- I'm new to this business.

I've been here four months and I spent 33 years in the defense business and I tell you I had the opportunity to work on some really exciting things.

When I went out and looked at the 787, I thought we were probably leading the field in terms of the manufacture composites in the defense business.

We were doing some pretty extraordinary things.

But when I went out there and looked at taking a quarter inch piece of carbon tape and then winding it into a section 41 or the forward fuselage, as you reference it, in a very complex monolithic structure, it was really eye watering.

I will tell you, on the flip side, from my standpoint, what's equally impressive is we are building these winged spars for these very large wings and we are holding tolerances to 0.005 inch or 0.01 inch.

It is an impressive capability that Spirit brings to the marketplace.

Overall, we are moving -- I think Phil mentioned that we are bringing costs down and we are moving rate up -- so for us, I think the vectors are in the right direction.

We are going to continue to press on all fronts, whether it's 787 or any one of these programs.

They are all important to us.

Ryan Eldridge, Barclays.

Doug Harned, Sanford Bernstein.

One more thing.

I'm interested in understanding -- on the pricing negotiations, when you look at the 737 and the 777 negotiations with Boeing, as well as getting pricing set on the -9 and -10 787s.

Lastly, potentially moving out of the wing portions of these -- are you in a discussion with Boeing about this all collectively or could you describe the timeline you think these will get resolved on?

Doug, I think we're certainly talking about all the things you just mentioned with Boeing.

I just make some broader comments because I don't really want to negotiate in public, quite frankly.

There's a symbiotic relationship and that's how we view -- we're a good supplier to Boeing.

We delivered significant value to our biggest customer over the last eight years of the standalone company, so I think they value that.

We're really working together.

Larry's coming in now and really understanding the customer, understanding what Spirit brings to the game for them and I think we're have very constructive discussions overall, on all fronts.

It will take some time so I'm not going to prescribe to a timeline right now but -- other than we're going to work with our big customer and there's a way to get all of this done.

Does the potential of exiting the Oklahoma operations and the 787 wing -- does that affect the timing of these discussions and how these go forward?

Is think it's an element.

I don't think it has to dictate timing.

Operator, we have time for one more question.

George Shapiro, Shapiro Research.

Phil, just looking quickly at the Q, it looks like that deferred balance for Boeing, other programs came down about $30 million.

I would think you would have to finish that with -- when the 737 block ends, which is the end of this year.

Is that correct?

Yes, that is generally correct, George.

That is technically how it works.

Then, maybe one for Larry.

Also skims into Q -- it looks like there was something you transferred, some business back to Gulfstream on the G650 -- if you just go through a little more color on what was in the Q.

We didn't -- there is work that is what we call station two, three and four work that we do at Gulfstream today that was originally targeted to be done in Tulsa.

It's being done in Gulfstream today.

It's really kind of a risk management approach.

We will ultimately bring that work back to Tulsa and actually, that's part of the detailed planning that we laid out.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you all for participating.

You may now disconnect.