Spirit AeroSystems Holdings Inc (SPR) 2013 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Spirit AeroSystems Incorporated, third quarter 2013 conference call.

(Operator Instructions)

I would now 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 third-quarter 2013 earnings call.

I am Coleen Tabor and in the room with me today are Spirit's President and Chief Executive Officer Larry Lawson; and Spirit's Senior Vice President and Chief Financial Officer Sanjay Kapoor.

After brief comments by Larry and Sanjay regarding our performance and outlook, we will take your questions.

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

In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of non-GAAP measures we use when discussing our results.

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

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

Thank you Colleen.

And good morning everyone.

Welcome to Spirit's third-quarter earnings call.

First I want to thank our Spirit employees for their hard work and determination.

This team is really concentrated on performance which is essential.

We're making good progress in the drive to reduce our cost and to deliver high-quality aerostructures to our customers and cash to our shareholders.

Obviously there is more work to be done.

I would like to take a moment to welcome the newest member of the Executive Leadership Team, our Chief Financial Officer, Sanjay Kapoor.

We're very pleased to have Sanjay onboard.

His experience across the commercial and defense programs as both a CFO and as a P&L Leader give him the knowledge and perspective necessary to help us in our drive it towards predictability in our financials.

He has a very strong track record, particularly in the areas of program and cost management.

He is a true complement to the team.

We are continuing to make additions to the team in alignment with our four key themes.

Disciplined decision-making and market focus, a focus on performance, a focus on cost and of course, a focus on free cash flow.

Welcome to Spirit, Sanjay.

Now let us turn to result in the quarter.

We reported $1.5 billion in revenues with $170 million of adjusted operating income.

And $51 million in operating income including the charges.

Operating cash flow was $185 million in adjusted free cash flow was $141 million.

We are pleased to see the improving results on cash flow.

The backlog continues to be in a record high of $38 billion.

We've reported earnings per share of $0.65 after charges on an adjusted basis earnings per share were $0.77 which is up 18% year-over-year.

The quarter included a net of $112 million forward loss on the recurring and nonrecurring contracts for the A350.

We told you we would disclose information as we progressed through our assessments.

There have been a number of actions on the A350 that we have taken and upgraded plans and settlement that are reflected in the quarter.

On the recurring side, the cost of early development and production discovery along with a concurrent production cost are incorporated in the charge we took this quarter.

In addition, longer-term costs associated with the recurring transportation and material test costs were also included.

The nonrecurring costs side reflects with the scope of development work for the -1000 derivative.

As we continue to work in the early phase of this program, we are closely monitoring costs and schedule performance while working cost improvement initiatives with our customer.

Turning to our strategic and financial review.

We continue to forge deeper into our cost structure and refining what we measure, so that we track and reward the right behavior to position Spirit for long-term success.

You saw us take action with additional overhead cost reductions.

We are progressing on the Tulsa sale, we've announced the intended sale of our interest Progresstech.

And we announced a [tay maker] agreement with Bell Helicopter on the V-280 Valor.

The next generation tilt rotor designed to meet the Army's vertical lift requirements.

We have also decided to centralize our procurement function, [consolidating other] support functions.

We continue to balance our capital needs and assess our material make buy decisions.

I also want to point to leadership and organizational changes we made which, will pay off in the future.

Spirit has undergone significant change in the last 6 month.

You have seen leadership changes at the top, but there have been numerous leadership and management changes throughout the Company.

We continue to strengthen our team.

These decisions sharpen our focus on what we do best, value and engineering and the manufacturing of complex aerostructures.

Let me just say, that fundamental to our mission is a relentless commitment to drive quality into everything we do.

So, last quarter I talked about energizing Spirit's focus on free cash flow thought out the enterprise.

We see the beginnings of positive cash flow trend this quarter.

We have a long way to go.

We won't see the result of all of these changes overnight but we are making solid progress.

We plan to conclude the strategic and financial review by the fourth quarter and we will be prepared to give 2014 financial guidance and set expectations concurrent with our fourth quarter and full year 2013 earnings report.

So to wrap up my comments, we work very hard to ensure our customers don't miss a beat.

We are delivering aerostructures to our customers at all-time highs and our quality and attention to detail is getting better.

We are making strides in running a better business.

We are taking action.

And most importantly, we're all best position for all long-lived commercial aerospace upcycle.

So at this time I am going to turn the call over to Sanjay so he can walk you through the details.

Sanjay.

Larry, thank you so much and good morning to everybody.

First and foremost, I am excited to be part of a team at Spirit and want to thank Larry and the Board for their confidence in asking me to join their team.

Also want to take a moment to thank Phil, as many of you know, he moves into a new role leading our defense and contracts organization.

I'm four weeks into the job and while it early for me to assess all of the challenges and opportunities.

I do look forward to leveraging my experience and background in both aerospace and defense, in finance, and program management -- and both from United Technologies and Raytheon, as we leverage our $38 billion backlog at Spirit and drive predictably into our results and ultimately deliver on cash.

Now turning to the results in the quarter, we'll start with our segment highlights and then I'll summarize the Company's financial results.

Moving to slide 4. The fuselage segment had solid top line growth and operating performance.

Operating income was $26 million on $710 million in revenue during the third quarter as higher volumes on mature programs were partially offset by the forward loss charges on the A350 program.

Adjusting for the charge in the quarter, operating income was $142 million.

The Fuselage segment's high-value 737 production line deliver the 4,600th ship set of the Next Generation fuselage and continues on plan to step up to 42 planes per month.

The 787 fuselage team delivered the 145th forward fuselage section and celebrated with our customer as the first 787-9 took flight in September.

This is a very exciting new airplane and we are very proud to be on.

We continue to support our customer in the test phase of the A350 XWB program with the seventh, delivery of the composite center fuselage.

At the same time we are also incorporating $79 million of higher cost in the recurring contract, primarily associated with change activity and early development discovery and the associated production inefficiencies in this early stage of the program.

As well as higher than expected test and transportation cost.

Separately, on the A350 XWB nonrecurring contract, the scope of work for that design and tooling for the -1000 derivative was agreed to in the quarter.

And that translated to a $33 million forward loss.

Moving to slide 5. On slide 5, the Propulsion segment reported solid operating income of $70 million on $389 million revenue driven by higher volumes on our mature programs.

The 737 Next Generation engine pylon and thrust reverser production line continued to perform well at the high rates.

Having now delivered more than 4,600 units of hardware.

The 777 nacelle and pylons lines delivered the 1,150th package in the quarter and 787 propulsion team delivered the 146th pylon in the quarter.

We also celebrated our Bombardier customer's achievement of the first flight on the CSeries in September and our congratulations to Bombardier.

On slide 6, the Wing segment reported operating income of $35 million on $398 million in revenue during the third quarter again higher volumes and mature programs.

Our European operations continue to produce significant volumes of hardware for our Airbus customer, surpassing line unit 5,900 for the A320 wing components.

With more than 4,600 ship sets delivered, Spirit Tulsa's Next Generation 737 slats and flaps production line, shows solid performance in the quarter.

On 787 program the Tulsa team delivered the 152th ship set in the quarter.

As you can see from these results, we continue to focus on driving performance in Tulsa, just as Larry and the team pleaded to do when we announced the intent to sell the Oklahoma sites.

And to that end, by the way, I would like to say the sells process is moving along as planned.

On slide 7, turning to the consolidated results for the Company.

Revenues from the third quarter of 2013 were up approximately 10% as compared to the third quarter of 2012 on higher production volumes.

Operating margins for the quarter reflect the charge, excluding net forward losses, cumulative catch-ups, and other items, adjusted operating margins were 11.3% as we achieved year-over-year improvement associated with increased production, productivity, and efficiency improvements on our mature programs.

The quarterly results reflect positive contributions from the mature programs as Spirit realized a net favorable cumulative catch-up adjustments totaling approximately $28 million.

Fully diluted earnings per share for the quarter were $0.65 excluding the forward loss charges and the associated positive net tax impact, cumulative catch-ups, and other items in the quarter adjusted earnings per share were $0.77.

Adjusted free cash flow for the quarter was $141 million reflecting a solid improvement over the third-quarter last year.

We saw a significant cash benefit in the quarter driven by higher production rates and performance encore programs, as well as modest contributions from tax and milestone payments.

Slide 8 summarizes the cash and debt balances.

Cash balance at the end of the first quarter was $436 million as compared to the second quarter 2013 cash balance of $317 million, an improvement of $119 million.

At the end of the quarter, our total debt to capital ratio was 37% and our net debt to total capital ratio was 27%.

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

On slide 9, we summarize net inventory balances at the end of the third quarter for 2013.

Physical inventory balances improved as business jet deliveries increased and we continue to actively manage inventory growth in a rate increasing environment.

Deferred inventory balances increased by $96 million driven by the A350 XWB program and Gulfstream programs.

Offset by positive cumulative catch-up on our mature programs.

$33 million of the deferred growth is attributable to the A350 XWB program.

Work completed at our customer sites on previously shipped units, is also included in the balance in the quarter.

The 787 program realized a net increase of $9.9 million in deferred inventory on 15 deliveries or approximately $660,000 per unit as we delivered two -9 units and continue to transition to 10 per month rates.

As we have said before, it is important to remember that the 787 contract includes -- step down pricing for the -8, and that our performance must follow in order for our results to continue on that trajectory, and we still must determine the pricing for the -9 and -10.

Nonrecurring inventory balances increased as the development work continues on the A350-1000.

Recognition of forward losses on the A350 program, drove the increase to the forward loss provision balances.

As Larry has noted, we expect our comprehensive strategic and financial review will be completed in the fourth quarter and we intend to provide our financial outlook for 2014 with our fourth-quarter and full-year 2013 earnings report.

It is important to note that while we plan to conclude this review in the fourth quarter, several of our new programs will remain in the development in the early production phases and many factors including program schedules, performance and cost improvements will continue to influence our financial results.

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

Thank you Sanjay.

In summary we made progress.

There's a lot, lot more to do.

Please bear in mind it takes time to implement these changes and for them to generate results.

We are definitely on a path to a disciplined data-driven enterprise generating predictable and consistent free cash flows.

We are forging a results driven enterprise that is far sharply focus on what we do best, driving performance, addressing cost with an emphasis on cash.

And we believe we are well-positioned to realize the commercial aerospace up cycle.

Our focus obviously is on delivering value to our customers, our shareholders and for our employees.

We are now ready to take your questions.

(Operator Instructions)

Carter Copeland, Barclays

Good morning guys and welcome Sanjay.

Thank you Carter.

Just quickly on the announced rate increases that Boeing's called out for the 87 and the 37, can you give us a little color of what the scale of investment you're going to need to make to hit those rates might be and when we should expect it?

And better yet, in addition to that, can you tell us if that investment is all yours or in some way shared with the Boeing?

Carter, I will answer that.

First of all we work very closely with Boeing in terms of preparation, in terms of what is required, when it is required, in terms of the implementation.

And to be quite candid, often the negotiations around how that is done is Incorporated into a larger negotiation regarding the total package.

I would say at this point it's not determined.

We have a very concise plan.

That plan has been provided to Boeing both on the 737 and the 87.

But we haven't concluded anything as it relates to how that business deal would be put forward.

So it is fair to say that the partnership for success and the -9 pricing and the repricing on the legacy stuff and these investments that is all included in one big bucket here?

I would not say partnering for success, partnering for success is kind of something that over just everything.

Our conversation we laid was pretty specific and delivered around each program.

Okay and just a follow-up.

On the increase in the 787 deferred production amount in the quarter, was that related to a repricing as you called out or is it related to the -9 costs or is it both?

Actually you got it right.

It is the mix of the product is what is the mix of the fact of that we have -8 and -9 quarter to quarter actually affects the two costs propositions.

Last quarter I think you saw a little bit of reduction in the inventory, you saw increase.

It is a function any change of the mix as we push our way below that, push our cost down below the line.

Okay great, thank you very much.

Howard Rubel, Jefferies.

Thank you very much.

Nice quarter on cash and maybe you can elaborate a little bit more Larry, on both that and talk about the new cost structure that you seem to be targeting.

How you're thinking about how much additional fixed cost you take and with you do in terms of cycle time to improve your cash flows?

Well, the -- let me take the second part first and just talk about the things that we have already done and then the things that we're doing.

We have made, we are not getting to specific numbers, we have made pretty substantial reduction in our headcount as you know you're and principally in the salaried workforce, actually almost totally, in the salaried workforce and principally in overhead.

I can tell you it was a double-digit reduction, healthy double-digit reduction in terms of total salaried headcount.

The -- interestingly enough, while we're doing that, we are actually hiring on the hourly side to take on these rate growth both on the 37 and the 87.

We have made a number of -- we are -- I will say as it relates to the things that we are looking at going forward without being, I will say deterministic in terms of the value, I think I alerted to the fact in my comments that we are really looking at a couple of areas that is, specifically how we distribute our capital spend and making sure it is very focused on specific things that we need to go do.

And then making the decision about we what we continue to do versus what we make, verses what we buy.

Those studies aren't done yet so I really cannot assign a value to them but I can tell you, it certainly will help us in our cost structure.

I think your question was related to, the first part of your question was related to cash.

It really was -- I think I will let Sanjay answer that because there were several moving parts on the cash of the equation.

Thank you Larry and good morning Howard.

Howard, if I was to summarize the cash flow and like you said we had a good cash flow quarter.

Like Larry said a lot of the improvement are performance driven, but there are some one timers in there.

We do have some benefits from a tax refund from a prior year as well as you probably have noted in our results, we really didn't have any tax payments in the quarter.

So those were one time along with some other one time events associated with some tooling and some payments associated with R&D.

Adjusting for that, some other working capital timing issues but a large chunk of that was in terms of performance.

And by far, Howard, the majority was performance related.

And then just a follow-up.

When we look at the segment from line items you have a fairly large other cost of goods sold item.

That I suspect is where you have allocated restructuring.

And we should probably expect some additional restructuring going forward.

Is that fair?

Well, that reflects the current charges associated with both the voluntary and the involuntary reductions that Spirit has been making.

So that reflects our current view on the cost associated with that.

Thank you gentlemen very much.

Robert Springarn, Credit Suisse.

Good morning this is Julie for Rob.

(multiple speakers) Can you offer any additional details on the Tulsa for sale in terms of the level of interest versus your expectations or perhaps what we should be thinking on timing?

Absolutely.

-- This may surprise you but I think we were frankly a bit surprise.

We knew there would be a healthy interest in Tulsa.

I think we were a little bit surprised at the amount of interest.

As you know Julie, the things go through phases.

So we started with a very large group and then actually narrowed that down.

That has now -- we have actually moved from the phase 1 part of the activity down into the second phase of the activity.

So we have actually selected what we think our the best buyers to go forward.

And we will try to complete the second phase of this work this year.

So now timing, I cannot -- as you get into the very final phase of this activity, timing is pretty hard to predict.

You go through generally a phase where you are trying to close.

You can be sure.

It could be longer.

I really couldn't tell you.

But it is most likely to extend into next year sometime.

Okay, that is very helpful.

Thank you.

And then, how should we thinking about the percentage of the total Company's earnings in positive cash flow that you will be selling?

Well, I think if you are thinking long-term, you should think about us in terms of earnings, we are probably going to be in family with our customers.

So you should think that this Company will have margins consistent with our customers margins.

And certainly we will drive to constantly make that better but we are a big part of their business so if our margins get, creates cost pressures in other directions.

--To be honest with you, kind of the way is partnering thing works.

As it relates to cash flows, we are obviously going to overtime -- right now if you look at us, we have -- we probably have as a relates to the balance of new programs to mature programs, we have these wonderful mature programs.

Brought probably are a little heavy on new programs for I would say any company.

And those new companies are drawing some investments and those investments tend to consume cash.

When we look at this over the next couple of years, what we see is that kind of burned down those investments.

And in trying to be really thoughtful about -great news is there are a great number of opportunities in front of us.

They have some investments associate those associated with them as well.

And we will play those investments out in a new term and condition to move on.

As it relates to Tulsa in terms of their cash contribution, Tulsa, Sanjay's going to-- (multiple speakers)

At this state we are not giving out information on too.

Like you said it is at a very early stage of divestiture and we're right in the middle of negotiation and we will see how that goes.

Thank you.

David Strauss, UBS.

Good morning, welcome, Sanjay

Thank you David.

I wanted to touch on A350.

Your only seven ship sets into a 400 airplane block at this point.

Given that and the size of the charge, how do you feel about having this size in terms of the potential for moving forward, additional forward losses on the program.

And then can you also touch on the charges that relate to the fuselage portion asked what is going on with the lien leading edge portion of the program?

The charges are, David, the charges are relative to the fuselage.

There are no purchase against the wing portion of the contract.

How I feel about this?

What I tell you is that in all of these -- you take two views on this.

First of all, the first view is.

Are you going to be on the 350 program?

We are certainly happy to be on the 350 program.

It is going to be a long program and it is important for us to participate in it.

We are never happy about having to take a charge but these development programs, as you point out, were pretty early.

Seven ship sets in.

The charges were really kind of a mix between I will say the current cost that we are seeing in the concurrent part of the production of the 900.

And then a portion of the charge was assigned to a nonrecurring forward-looking charge that relates to what we expect that we will spend on the development of the -1000.

So as it relates to the recurring charge, what we are really doing is we are making sure that we keep this project on schedule.

One of the fundamental elements that really cause cost to balloon in these programs, especially in these concurrent programs, but is where you are testing and producing simultaneously, is staying on schedule.

And so a good portion of this cost is related to driving you're investing in resources needed to drive us back onto schedule.

It shouldn't be a surprise to you but early in the development cycle, you have testing and then you get concurrent change.

That concurrent change sometimes some of it hits you in the factory and unfortunately some will hit you downstream.

When you travel work your productivity reduces and frankly has an impact on you.

But that is the downside of concurrency.

The plus side of concurrency is that you test the assets that you take two tests are built at production facilities and you move down your learning curve at the same time.

And this is always a constructive tension that goes on in these concurrent programs.

I would just say that the emphasis, and I think I said this at the last call, the emphasis for us is stay on schedule.

One we look at the A350 in the macro terms and the program has done a pretty reasonable job of hitting their flight dates.

They now have to aircraft up and flying.

They are can accumulate a lot of data and moving along.

I think if you were to look at how they did in terms of their first flight data it is a pretty respectable performance.

I do not want to -- what I would say is it is early as you point out.

But I believe we are doing the right things.

As a relates to the future, we will continue to monitor our progress but I think that is the most I can offer you right now.

Okay one follow-up about the 87 and the 47.

On the 87, it looks like you're delivering, your actual deliveries are running below your underlining production rate for the last several quarters.

Could you maybe touch on that, what they dish and is the -9?

Or is Boeing sitting on excess inventory?

And on the 47, what rate are you at today, and when do you expect to hit the one and a half that Boeing is going down to.

As it relates to -- I do not know about several quarters.

We certainly in delivering the -9, your insight is pretty good.

In the delivery of the -9 what happens, when you introduce a variance in the production line, actually slows down, it actually impacted the -8 production.

We actually went down, by the end of the year, we will be in a build rate 10 and we are progressing quite smartly toward that build rate.

On the 47 as you noted, Boeing has announced a build rate of one and a half per month and we are moving to that pretty quickly.

I think today we are at -- 175 at the end of the year and really into 15 next year.

Ron Epstein, Bank of America Merrill Lynch.

Good morning guys, a quick question for you.

As you think about the contract, this master contract you are working to with Boeing, it is my understanding that Spirit has a fair amount of intellectual property on the 737.

When you think about production rates going from 42 months to 47 per month and the broader negotiation, in some ways to you have the keys to the kingdom because of that intellectual property?

Well, we do not look at the world that way.

To us, Boeing is incredibly important customer and has been a great partner.

We think that when you look at the value, we look at this from a value property standpoint.

When Boeing decided to allow us to diversify and since the IPO, we have created a lot of value for them.

And so when we look at the relationship, is mostly around value, making sure that we deliver a product to them -- that the product gets there on time.

That the quality of the product is great.

And that it is of great value.

So that is how these conversations go on them on 2013 and we look at how this all fits into the overall value proposition.

Now, specifically as it relates to 2013 negotiations, to your point, the overarching negotiation, one of the things we have done here recently is to turn up the date.

You noticed any organizational chain, I announced that Phil Anderson would be the Head of Contracts.

Phil has been dedicated to working with Boeing in terms of trying to close at these negotiations and I think we are making good progress.

Okay, great.

And then one follow-up if I may.

As we think about -- I think this is a follow-on onto Carter's question.

As we think about some of the investments that might be required particularly on the 737, that is 47 per month, does that require bricks and mortar.

Conceptually -- you guys are probably just still thinking about it.

What is required to do that?

It is -- it is just a more -- how do you get there when we try to think about the type of investment that is required?

Look it's all of the above.

We are looking at -- we look at a whole host of options to be very honest with you.

The obvious things, it obviously we need, there is capital and tooling affiliated with going from a 42 to a 47.

We need a little more high based studies and so we are actually looking at --it how we would take advantage of that space and taking opportunity in the overall enterprise.

It is a combination of tooling and space to be perfectly candid, to get to 47.

Robert Dillard, Royal Bank of Canada.

Good morning.

Good morning.

Just a couple of quick financial questions.

I was wondering what your expectation might be for a CapEx for the full year and also for the income statement what you think the tax rate will be.

This is Sanjay.

In terms of capital, again, I am not giving any guidance for the year.

It is pretty much what we have experience in the first part of the year, year today.

But just again, I go back to what Larry commented.

We are putting in an enormous amount of discipline into how we make these decisions so every capital investment we are looking at whether it be rate increases or it be production efficiency improvements et cetera is going through a lot of scrutiny, and rightfully in the terms of investment we expect to return on those investments.

I think it is going to be considerable going forward.

Your second question on tax rates.

Again, you saw the big swing on taxes in the third quarter in our numbers.

That basically is based on an assumption as to where we think we are going to end the year at.

So again, I cannot give you any guidance for the rest of the year but that is what I believe it.

Is it safe to assume that you'll be back to a tax charge in the fourth quarter?

Like I said I cannot tell you what my Q4 incomes are and all of that, we are working through that all of that right now.

You will see that when Larry and I talk to you about that -- for the full-year results.

Larry, just a quick one if you could give us an update on how the G2 80 is (inaudible )in to your plan.

Actually smartly.

280 is doing well according to the plan that we discussed with you in the last quarter.

Myles Walton, Deutsche Bank.

Thanks, good morning.

Mitt (inaudible) here for Myles Walton.

I think it is safe to say in the near or midterm you probably have more control over the cash flows of the business than the margins just given some of the beauty around contract accounting.

If that is the case, how do you think about the outlook for cash conversion of the business over the next few years?

It is a good question.

I think I actually was asked earlier and what I would say is that where we are really trying to do is in the near term here is, you kind of say it right, a lot of the investments that have been made in the new program certainly have affected the margins on those programs.

And that has been the division we have had.

To say, okay let's get laser focused on cash flows going forward.

And to really we are trying to figure out how to deliver cash as consistent with an enterprise of our type.

In the balancing of all of that is been investments that you have to make as it relates to your long-term, coming the long cycle of this business.

And that is the balancing act that we are going through here and also the next three years.

John Godden, Morgan Stanley.

Thank you for taking my question.

Larry, I was hoping to sort of as a broader question about your vision for the conclusion of the financial review.

We have seen some indications of progress of course, throughout the year with some of these piecemeal announcement.

And I am curious, as we think about what the financial review represents or what it might not represent, should we be expecting a big bang of large announcement of a number of initiatives or more piecemeal initiatives that kind of tied together with guidance in all of these things that we have been looking for?

I was just hoping you could offer some color.

I really wish I could.

The best I can offer you is we are going to provide guidance when we give you the 2013 wrap up.

We are going to issue guidance for 2014.

And at that time, I think you will get a good sense of what the results, the wrap up is, the strategic review, it will be done.

Will disclose whatever is left to disclose or conclusions regarding the structure of the company.

And then we'll give you tangible -- here is what we believe we are going to do in terms of revenue cash, EBIT, margins, et cetera, operating income.

You will get a good view of that.

I hate that we are not there.

I wish we were.

I wish I were reporting that right now.

But we will -- I am telling you, we will give you that at the end of fourth quarter.

No problem.

That is very helpful.

And Sanjay, I was hoping to follow up on some of your comments about discipline and CapEx.

We heard that a couple times-- I was hoping you would give us some metrics to help us understand the discipline.

What kind of ROIC are you targeting, does it vary if looking at a growth opportunity or some sort of internal investment opportunity.

If you could just elaborate on that, I think that will be helpful.

I appreciate that.

The answer depends on what the investment is.

I think one of the best things about Larry brought to the table here which I have already seen in my last four weeks.

Is that a number of people are not just going out and in their little silos and making the right decision that makes sense for them.

We are trying to look at this across the portfolio.

We're trying to make sure that the investments have a good, quick playback in some cases, a higher return in other cases.

And also fulfill our strategic intent in terms of what Larry has laid out.

So we are trying to take the things one at a time.

Again, this is a healthy business.

There is plenty of cash in our business to make all of the right kind of investments.

We're just being much more disciplined about how we are going to do this and that fits into the strategy that Larry has laid out.

George Shapiro, Shapiro research LLC.

Good morning and welcome Sanjay

Thank you George.

My question -- a couple of questions.

On the balance sheet I noticed that accrued expenses went up like $49 million from Q2 to Q3.

Does that relate to the tax benefits that you are talking about and then just in general, what percentage of the cash flow would you say was from operation?

You kind of said the majority of it but if you could pin it down a little bit.

I understand.

Again, Larry talked about it and I also answered a similar question earlier.

Clearly we had some very healthy cash flow in the quarter.

Again, -- if I was to give you a little color on it the large chunk of it was clearly on performance but you are referring to the other chunks.

And one of them is the accrued expenses increase.

And the third chunk was what occurred was related to taxes and some milestone payments that we got any quarter.

So the sort of one time things that occurred, the accrued expense is another chunk and then the rest of it is clearly performance.

I hope that helps.

Yes, that helps.

One follow-up Sanjay.

A new CFO, are you looking at changing how you account for some of these programs like specifically, you have a 400 aircraft to on the 787.

Boeing just one up to 1300.

Do you look at that and stick with the discipline of keeping it at 400?

That is a fair question and I have to tell you in my last four weeks I can imagine it is been pretty intense as I came in here for the third quarter closing.

All of these decisions and all of these questions that you are asking me, we have answers for some of these things.

I am at the early stage of trying to explore these.

Hopefully, Larry and I are going to go through the pros and the cons.

I do not have a decision for you right now.

And George, this is Larry.

What I would say is you need to remember that we are on contract accounting.

Boeing is ongoing accounting and as such we do not have the flex ability to change the size of the aircraft that you would have taxability in terms of program accounting.

We do not -- we just do not have that flexibility.

And so, a discussion around block size, what size block you have out of your total contract, could be one conversation but I think today, I could not find any fault in frankly, given that we are contract accounting, how we're doing it.

Sam Pearlstein, Wells Fargo.

Good morning.

Can you talk at all and give us any update on your assertions with Gulfstream and are they still underpaying receivables and any type of in -- insight on how that will be resolved.

We did announce in this quarter -- you probably haven't seen the queue yet.

We are in arbitration with Gulfstream.

We did actually, enter arbitration over that very issue, Gulfstream is still taking withholds.

And I believe they will continue to do that.

Until we settle this arbitration.

Okay.

And then Larry, you talked about the cost structure and trying to improve it.

And I guess, what should we look at to see the improvement ask is it something we should be focused on, employment levels and can you talk about where you were and where you are now?

Or are there other metrics that really your focused on in terms of being able to show improvement?

I think always a challenge, Sam, is trying to figure out how you make sure that you -- your cuts, you are working our efficiencies and so there is a number of us metrics we look at in terms of try to figure out whether our support ratios are in line.

So kind of walk you through the way we do this.

It is -- I will describe it to my folks as four steps but it is really kind of two steps.

You start measuring and you make sure you measure the right things and then you effectively look at the programs you have and you find your highest performing elements of your programs.

And then use that those as your initial targets for everyone.

And programs are all in different phases so the development programs are going to have higher support ratios then let's say you're very mature programs have but you said those that target then you put that on timelines.

And then you lay that out against her manpower plan.

You ultimately, what you like to do is and what you define as world-class metrics is your best-performing program you do not think is, I will say, a world class performer.

I have actually build a lot of airplanes and I will tell you looking at a lot of these programs -- they are pretty good.

What I am really trying to sort out now is what is unique about one program versus another either whether it is in development or production or whether -- for example some of the highly automated programs like the 87 program actually requires lower touch labor levels by higher support levels just because of the way it is tooled and the way we actually manufacture the product.

We are working through those specific metrics in to figure out if we are in the right place.

I tell you that when we are looking at our macro metrics, which is sells per employee, to figure out whether were- we sit relative to our peers, we look quiet attractive today and so we're going to continue to drive this and -- as I said earlier, we have taken a double digits in terms of salaried headcount.

And so now we are kind of tuning is the way I would describe it in terms of personnel.

On the other side, it is always been the question is how are you handling your material costs?

Are you negotiating?

Have you achieved -- the most you can squeeze out of your material cost?

In terms of what you make and in terms of what to buy?

And you have to be very careful because for us the most important thing is to make sure that we protect our customers deliveries.

And to very deliberate -- switching can be quite -- if you are not careful, can create a bigger problem than the benefits they yield so we are going to be very deliberate as we go forward.

Joel Nettle, JPMorgan.

Hi good morning it's Seth [Pipman] on for Joe this morning.

Just a quick question maybe on the good results in the propulsion segment.

If you add back the adjustments, it looks like you are able to generate roughly the same level of EBITDA as Q2 with sales down including the sales on the programs that produce earnings.

If you could talk maybe all the role of the after market in that segment in the quarter as well as the sustainability of the EBIT level and the margin level going forward.

I do not -- first of all, I have to tell you I do not believe we mix the propulsion and after market.

We do?

Okay.

I guess -- I know what the margins are on both.

I couldn't probably address the mix.

What I will tell you is it is a very small percentage at this stage.

Right.

So, is not a meaningful number.

Clearly this is an area that we are looking at we want to grow eventually.

It is not something that is not.

Seth, we will follow up with you and I will have Coleen follow-up and we will get the answer to your question.

How's that?

That sounds great, thanks.

And then it sounds like the good margin performance was pretty much attributable to the core programs then?

Well, obviously, yes.

Our mature programs tend to do better on margins.

Okay, thank you.

[Shandar] (inaudible), Sanford Bernstein.

Good morning.

I just wanted to ask you if you could characterize the status of your provisions now for the Gulfstream programs.

You took a small additional charge this quarter but at this point, are these provisions something we should see as covering the worst-case -- best estimate?

How much certainty do you have going forward as whether this covers the total outlook?

Let me just say -- there was a question earlier about how we're doing on 280.

And I should say that the charge we took was not a performance related charge.

It is actually related to pricing and the contract itself.

And so, it's charge related.

So we are back to the point -- the caution was are we on track performance wise?

Yes, we are.

That charge was really tied to pricing dynamics.

The question is, is the NP adequate to cover our exposure?

We believe we provisions it to be so.

That is the best that I think I can offer you.

On the pricing side, can you expand a bit on how the pricing changes and expectedly at this point?

We do not set the pricing for the airplane it's tied to the sales of the 280.

So it is tied to the sales price of the 280?

Yes, the ultimate customer.

All right, thank you.

Michael Ciarmoli, KeyBanc Capital Markets.

Hey, good morning guys.

Thanks for taking my questions.

Larry, maybe if you could just give us an example.

You talked about this new discipline and the new philosophy across the enterprise.

Can you just give an example of -- you have got -- you're going to be participating in the B280, maybe what you introduced into the -- I guess the bidding process there or why it even made sense to bid on that program and introduce it while you got so many other also near with legacy rate increases, divestitures and so any other moving parts?

We committed, Michael, to make a non-training and in the defense business.

The truth is, the B280 was absolutely a perfect partnership for us.

Is a great match.

As you know, we build composite fuselage for the CH53 and so when Bell was looking for a partner in terms of going forward somebody who could build a high-performance, low weight, low-cost, composite structure for their tilt rotor, they came to us.

And so, they said this was part of the partnership.

So, we already have, I think, the right experience to do this.

We didn't take this, to be candid, we did not take a substantial financial risk and we believe it is the right program to participate in.

And frankly, it is almost a perfect alignment as it relates to in terms of what makes sense.

Okay, that is fair.

Just the last one.

747 rate comes down are you guys going to be able to adequately manage maybe some of that cost pressure associated with those volume declines?

There is no doubt that the reducing rate on the 747 will challenge us.

We are obviously focused on trying to figure out how to do that efficiently and economically but it certainly creates pressures for us.

Fair enough.

Thank you.

Operator we have time for one more question.

Ken Hebert, Canaccord.

Hi, good morning.

Good morning.

Just wanted to follow-up on comments from prior calls.

Where are you specifically in negotiations with your supply chain on both the Gulfstream as well as the A350 and that is there any update you could provide there?

On Gulfstream, actually we are well into defined arrangements with our supplier.

So that is the way I would describe that.

We continue to have some negotiations open but it is really more around established supply base, I will say negotiations.

On the A350, again, we have delivered 7 units.

There's a lot of change going on there.

And the truth is we are about, I would say, 40% some odd of the by is still on spot buy.

And we are out working to, as the product symbolizes, will continue to negotiate going forward long-term agreements.

But we have got a ways to go on 350.

Okay, if I could just have one follow-up.

That is helpful.

It sounds like one of the, still a lingering conserver Boeing is supplier sub supplier management.

Broadly speaking Larry, is there anything you are doing now in, I guess more specifically, in your Legacy programs to specifically address ways that you might manage the supply train differently and then of course any comments on ongoing efforts to continue to take cost out from your supply base.

I know you talked about (Inaudible) versus buying discussion.

But any other comment you could make on managing your supply chain would be helpful.

Well, we are always out looking at which of our long-term agreements expire.

And where our opportunities are.

Our business is a little bit different, when you think about it.

We have a very high raw material content in our product.

And so, a lot of what we buy is commodities.

If you really get down to it, it is aluminum, titanium, and carbon fiber.

We would be excited if Moore's law applied to aluminum.

It would be a great thing.

I have seen that in other points -- other places I have worked in my career but unfortunately, we are pretty heavily in the commodities right things.

So our focus is really an fabrication.

And where those materials are converted into products.

And we have a tremendous amount of energy frankly, going right into exactly that, which is where do we do fabrication and how we do fabrication.

And thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating, you may now disconnect.