Spirit AeroSystems Holdings Inc (SPR) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Spirit AeroSystems Holdings, Inc., fourth-quarter and full-year 2013 earnings conference call.

(Operator Instructions)

I would now like to turn the presentation over to Ms. Coleen Tabor, Director of Investor Relations.

Please proceed.

Thank you, and good morning.

Welcome to Spirit's fourth-quarter and full-year 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 opening comments by Larry and Sanjay regarding our performance and outlook, we will take your questions, then Larry will share some closing comments.

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.

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.

Good morning, everyone.

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

First of all, I'd like to thank all our employees around the globe for your hard work this year.

Your teamwork was instrumental in Spirit reaching all-time highs in aircraft production rates.

As we increased rate, we also recognized an overall improvement in quality.

We made great progress this year, but we've not yet reached our destination.

In addition, a tremendous effort went into concluding the strategic and financial review, and the management team has been instrumental in mapping our path forward.

I also want to thank the investment community for your patience this year.

It's been a year of change.

You've stayed with us when we announced the strategic and financial review and suspended guidance in May.

I will share with you some thoughts about the outcome of this review and give some color about the future.

And then Sanjay will walk you through all the numbers in more detail, and then we will answer your questions.

2013 was a transformational year for Spirit, and really the beginning of our efforts, as opposed to a conclusion.

And first, I want to take a moment to summarize some of the key findings and actions from the strategic and financial review.

Transformation starts with people.

The strategic review helped us see where we needed to strengthen our team, and a number of industry experts have joined us and are working and living in Wichita, Tulsa, Kinston, and Saint-Nazaire.

We had new leadership at my staff level and the next level down, and we're now focused on the entire organization.

In the last 10 months, we've added 15 experienced executives, including our CFO, the Senior Vice President of Operations, and, of course, the Senior Vice President of Strategy and Investor Relations.

We've been very fortunate to be able to add new leaders in quality, procurement; new site leaders in Kinston and Saint-Nazaire; and two senior deputies in our Aerostructures P&L.

In addition, we've moved many of our talented internal team members around to better align their strengths with our business needs.

We will continue to strengthen and align with a focus on promoting highly confident and motivated people that understand our customer's needs.

Next, in the areas of processes and decision making, we have realigned and integrated our organization.

We have a strong emphasis on markets, business management, program management, and production.

We are driving to a fully integrated management of the Spirit enterprise, and we've reinforced our planning, data, and metrics to communicate among ourselves and with our customers.

In addition to the overhead reductions we made, we have begun to centralize a number of functions.

We're balancing our make/buy strategy with the associated timelines against the production volume demands we have in 2014, and we also continue to make progress in our overall supply strategy.

With regard to the business we're in, we do believe in our value proposition.

Spirit's value-ended design and manufacturing capabilities in the commercial aerospace and defense markets are differentiated.

We are a partner of choice when taking on challenging projects and programs.

We put Tulsa up for sale to determine if there was a better fit in the industry, and we continue to work with potential buyers.

At the same time, we're adding new strategic customers like Bell Helicopter.

In simple terms, the commercial aerospace upcycle looks to be long-lived, and it continues to provide growth opportunities for us.

In the near term, our efforts will be to digest the newer programs while optimizing performance around our core business.

Longer term, we are looking to grow.

There's a natural growth opportunities for us where our core competencies apply, such as the defense sector.

Finally, our focus on cash flow is beginning to manifest results, as you can see in our 2013 performance and in our 2014 guidance.

We believe we've set a path to stabilize and grow our business.

Let's talk about 2013.

For the full year we reported revenues of $6 million with an operating loss of $364 million including the charges.

Operating cash flow was $261 million, and adjusted free cash flow was $57 million, an improvement of $141 million over a year ago.

Our backlog grew to a record high of $41 billion.

Excluding the tax asset valuation allowance we reported an adjusted loss per share for the full year of $1.70.

Including the DTA, we reported a loss per share for the full year of $4.40.

The fourth quarter results include a net $546 million of forward loss charges, which was primarily due to the 787.

So let's talk about the 787.

We updated our financials based on our actual performance and the achievable near-term cost reductions.

The result is a $385 million forward loss provision which offsets the deferred inventory.

This estimate is well-reserved, with opportunities in front of us, and we're working closely with our customer to realize these savings.

Turning to another item in the release, we also reported a $381 million of deferred tax asset valuation allowance.

This is an accounting treatment associated with the performance over the last three years, which would be released as we perform in the future.

Sanjay will give you more details on this.

So if 2013 was the year of identifying Spirit's transformation needs, then 2014 is the first full year where we put the plan into action.

And it's about making our commitments.

We started with the reorganization and followed by putting the right team in place.

This is our team's plan and commitment.

We believe we have the right incentives and we (technical difficulty) to paying dividends in quality, productivity, and flowing operating income to the bottom line.

Here's is our guidance for 2014: we are guiding revenues of $6.5 to $6.7 billion, earnings per share of $2.50 to $2.65; and free cash flow, excluding severe weather expense, of approximately $150 million.

It's a good start.

It's well above what we did last year, and we have more work to do.

So, in conclusion, we've made progress.

Our commitment remains to the four key focus areas I have been sharing with you:

Number one, we are making disciplined decisions around markets and customers.

We can continue to work on the divestiture of our Oklahoma sites and we're adding strategic customers.

Two, our focus on performance is sharpening the way we serve our customers.

We're seeing improved performance in development, quality and delivery.

There's a lot of work to do in 2014 in support of the higher production rates that are fueling the growth of the enterprise as we also ensure our customers' success on their new programs.

Thirdly, our cost improvement actions and future plans continue to align our resources with where we bring competitive advantage and valuated design and manufacturing.

And ultimately, our focus on free cash flow is beginning to bear fruit.

Any true transformation down to the shop floor takes time, and you should expect to witness our full transformation over the course of the next few years.

We are making progress and the cash flow we produce in 2013, and this higher free cash flow guidance in 2014, attest to our confidence.

My team is excited as we look to the future.

We're focused on predictable results.

We're committed to working to realize the opportunities while delivering results to our customers, our shareholders, and our employees.

We are moving forward as a sharp company, designing and producing high quality, affordable aerostructures at record volumes.

I'll turn the call over to Sanjay so he can walk you through the details.

Sanjay?

Thank you, Larry.

Very good morning to all.

As I finish my fourth month here and, really, the first full quarter, I want to say I remain very excited about Spirit and also our future.

I, too, would also like to start by thanking our team for their efforts, as we wrapped up the strategic and financial review last year and now prepare for 2014.

The cooperation and teamwork they displayed is a testament to the core values of this organization.

And now we are dedicated to ensure that we achieve our future commitments.

First, let's take a look at the results in the quarter with our segment highlights.

I will then spend some time summarizing the company's full-year financial results, including a more detailed discussion on the charges.

Finally, I will wrap up with our outlook for 2014.

Now let's turn to slide 4. In the fourth quarter, fuselage segment revenues grew by 3% to $701 million.

Year over year the segment revenues grew by 10%, with strong mature program operating performance.

Operating loss was $227 million.

Improvements on high volumes of mature programs were offset by the forward loss charges on the 787 program and model mix, rate decreases, and increased costs that impacted our low volume 747-8 and 767 programs.

In the quarter, the fuselage segment 737 and 777 production lines performed very well and we realized $26 million in positive cumulative cash-up adjustments associated with continued productivity and efficiency improvements.

Also, we remain on track to achieve production rates of 42 ship sets per month on the 737 program.

The 787 team also completed the transition of the 10-per-month delivery rate in the quarter; and we are now producing at amongst the highest wide-body production rates in our history.

Finally the A350 fuselage team delivered four set of section 15s in the quarter, including 2 in 1 month for the first time.

In terms of performance, we remain intensely focused on quality and delivery on the production side; as well, on the development of the A350-1000 derivative.

Let's turn to slide 5. In the fourth quarter propulsion segment revenues grew by 8%, and year over year, the segment revenues grew by 11%, also driven by performance on our mature programs.

Operating income was $19 million on a revenue of $398 million, as improvements, driven by high volumes and mature programs, were offset by the forward loss charges on the 787, increased cost estimates on the BR725, and model mix impact on the 767.

The propulsion segment 737 and 777 production lines continue to perform well and contributed $15 million in positive cumulative cash-up adjustments associated with productivity and efficiency improvements.

The 787 propulsion team also achieved their 10-per-month delivery rate in the quarter.

Let's turn to slide 6. In the fourth quarter, wing segment revenues grew 5%.

Year over year the segment revenues grew 7%, with strong mature program operating performance.

Operating loss of $63 million on $393 million in revenue during the fourth quarter, as once again, higher volumes and mature programs were offset by the 787 forward loss and supply and performance which impacted our Gulfstream product lines.

The wing segment A320 production team continues to successfully support our customers' high volume program, surpassing line units 6,000 in the quarter.

Spirit 737 and 777 slats production lines showed solid performance in the quarter, contributing to the $10 million in positive cumulative cash-up adjustments, again, associated with productivity and efficiency improvements.

Lastly, we continue to make progress and work towards a win-win outcome with potential buyers for our Oklahoma operations.

Turning to the consolidated results for the company on slide 7. Revenues for the full year of 2013 were up approximately 10% as compared to 2012.

It's important to note that this growth is impressive because we achieved these higher production rates while at the same time resetting our cost structure.

Operating margins for the year of negative 6.1% reflect the full-year charges and losses per share for the year were negative $4.40, largely driven by the forward losses in the quarter.

Now, there's a lot to digest here, so I wanted to spend some time and go into a bit more detail.

What you see here is the result of our comprehensive strategic and financial review, which involved a thorough review on all of our programs.

Let me give you a little bit more color on these charges, first, on our Boeing programs, then our Gulfstream program, then finally, the deferred tax asset valuation allowance.

On the Boeing programs, the 787 charges are based on updates to the current block based on actual performance for labor and material, while also incorporating near term achievable cost reductions.

This update resulted in the $385 million forward loss provision.

On the 747-8, the $31 million additional forward loss was driven by projected model mix changes of freighters to passengers, as well as rate reductions that impacted the current and also the subsequent block.

On the 767, the $11 million forward loss reflects the impact of model mix changes and increased costs.

On our Gulfstream products, the G650 $54 million and the G280 $43 million additional forward losses in the quarter resulted primarily from supply and performance issues that drove higher labor and delivery costs on both programs.

And the BR725 $22 million forward loss reflects increased labor and material estimates.

Lastly, the deferred tax asset valuation allowance of $381 million was a non-cash charge to earnings.

After evaluation of both positive and negative evidence, including Q4 reported losses that result in a three-year cumulative loss calculation, we determined this is appropriate based on accounting guidance, to record a valuation allowance against our US net deferred tax asset.

We have the potential to reverse these reserves as we recognize profits in the future.

Now, moving to the adjusted free cash flow, as Larry and I have shared, our focus is on cash.

We have made a small step in the right direction.

We have generated positive adjusted free cash flow of $57 million from operating performance for the first time in Spirit's history.

We have reduced overhead costs, balanced capital spending.

We are looking at our make/buy strategies.

We are putting a lot of thought into our investments.

Cost and return on investment is the starting point for decisions in regard to how we utilize our cash.

As you will see in our guidance, this momentum continues into 2014.

Let's move to slide 9, that summarizes our cash and debt balances.

Cash balance at the end of the fourth quarter was $421 million as compared to the third quarter 2013 cash balance of $436 million.

At the end of the quarter, our total debt-to-capital ratio was 44%.

And our net debt to total capital ratio was 34%.

Our US defined benefit pension plan remains fully funded.

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

Physical inventory balances were in line with the rate increases.

Deferred inventory balances increased by 177 million, driven by the A350 program and the Gulfstream programs.

$97 million of the deferred growth is on the A350 program.

Once again, as I reminded you in the fourth quarter, while we are making very good progress, completed our customer sites on previously shipped units is included in the number.

The 787 program realized a net decrease of $16.4 million in deferred inventory on 19 deliveries, or approximately $860,000 per unit.

Non-recording inventory balances decreased as we achieved milestones for development work on the A350-1000.

The recognition of forward losses in the quarter drove the increase in the forward loss provision balances.

Let's move to slide 10.

We are pleased to have completed our work on the strategic and financial review and are now ready to share with you our financial outlook for 2014.

In 2014 we are guiding revenues of $6.5 billion to $6.7 billion, reflecting an increase of approximately 10%.

This is mainly driven by 787 increased production rates.

Earnings per share in the range of $2.50 to $2.65.

And this is based on an effective tax rate of approximately 31% to 32%.

And finally, adjusted free cash flow of $150 million.

Some important notes to our guidance: consistent with 2013, it includes the Oklahoma operations for 2014.

It reflects expected benefit of the US research tax credit for 2014.

And it excludes any potential adjustment to the valuation allowance recorded against the US net deferred tax assets at the end of 2013.

This outlook is the result of the detailed work of the team, and it balances the opportunities present in a [rate] increasing environment with the challenges of early production on maturing programs.

And while it's not risk free, we have a measurement system in place to monitor our performance and drive to deliver on our commitments.

In closing, I would echo Larry's comments in saying that the team is excited about the future.

We are focused on predictable consistent results and are working to realize the opportunities while managing the risks that are inherent in our industry.

We look forward to delivering superior results to our customers, our shareholders and our employees.

At this stage, we will be happy to take your questions.

Our first question comes from Rob Spingarn from Credit Suisse.

Go ahead.

Sanjay, in the past we've talked about the concept at Spirit of forward-looking forward losses and backward-looking forward losses.

And I was hoping you could, within that context, talk about all of these charges, given that there are several of them and the numbers are large.

And to what extent there is forward cash pressure from any of this, with particular respect to the 787.

Or is it just simply reducing prior deferred and, therefore, non-cash.

As a follow on to that, what kind of margins are you expecting by segment in 2014?

Thank you.

That's a good question.

Let's talk about the 787 because that obviously was the big driver in this quarter.

I will tell you that, like you based your question in terms of backward-looking or forward-looking, most of the impact of the 787 is forward-looking.

What we've done here is realize what we think we can achieve in terms of near-term cost reductions and base our estimates on the actuals that we are currently achieving, which are pretty good.

Therefore, most of the 787 impact will be felt in the future.

In terms of cash, there is a chance that is in 2014, but that's baked into my guidance.

Then there is a significant amount that will flow out in 2015 and 2016.

And, of course, as we guide for those years we incorporate those numbers, as well.

Now, 787 is a big one.

The remaining programs are balanced.

In many cases, again, if I look at the Gulfstream programs, those outlooks are also in the future.

That's the next big charges that we took in the quarter.

The others are rate decreases and model mix impacts that are a little bit more balanced between backward-looking and forward-looking.

Hopefully that answers your question.

Is there a way to qualify the cash impact -- the forward cash impact associated with the charges?

Like I said, the 787 charges, there is a chance this year, and then most of it is in 2015 and 2016.

So -- and that is, frankly, the biggest number.

The second one is the Gulfstream, and that is, again, forward-looking.

I don't want to give you some precise numbers here, but, again, like I said, when we guide for 2015 and 2016, we'll include those things in our guidance.

Then the only other thing was the segment performance in 2014, margins by segment.

Again, we are focused -- inside the business, we are continuously focused, trying to drive our cost structure right, focus on the performance of our businesses and try and maintain these margins consistent with what we see as far as the customers are concerned, and to obviously strive to try to get to be best in class in our industry.

So it's got to be consistent with what we have right now.

Sanjay, I guess the basis for the question is you referred throughout the release -- you and Larry -- to changing material and labor costs, and then also to these near term achievable efficiencies.

I think that we would find useful some kind of measuring stick as we go through 2014, because it sounds like though figures are in flux.

You know, again, one of the biggest things we did all of last year and particularly in the fourth quarter, as Larry and I went through pretty much every program in a lot of detail and some very comprehensive reviews, so we that can have balance, risks, opportunities, our estimates and so on and so forth.

One of the best measures you will see as we deliver on these results that we've committed to you -- what we guided you is a very balanced approach to what we think we can achieve and should achieve.

The team is obviously quite focused on it.

In the second, third and fourth quarter, you will start to see, as we continue to perform and deliver on what we are committing to you in terms of 2014 guidance.

Okay.

Thank you very much.

A question from Howard Rubel from Jefferies.

Go ahead.

Thank you very much.

Sanjay, you said something that I want to understand a little bit more with granularity.

If we take the numbers on the 787, it would appear that the losses actually step up before they decline.

Can you reconcile that with the fact that you'll probably be at a reasonable production rate?

You're at 10-a-month right now, so one would think that the cost should actually be coming down, not increasing.

That's a good question.

You're right.

The costs are coming down.

As you know, we have stepdown pricing in our contracts.

What we've adjusted to is the curves that what we feel we can achieve.

We also included in there, like Larry mentioned, along with our customer, a number of cost reduction initiatives that we baked in.

We plan to work on those.

But, you know, again, these contracts do have stepdown pricing, and that does matter as we go down these curves.

I would like to interject.

This is Larry.

Yes, thank you.

The -- if we compare 787 performance, it's actually the best we've ever seen of any of our comparable products.

I think we've got a great track record, and it's pretty well recognized in the industry, in terms of what we've done with the 737 cost reduction and what those curves have looked like.

Truthfully, and I don't know that we have spoken about this a lot, but the truth was 777 was really the best performing program we had.

The truth is the 787 is actually outperforming both of those programs in terms of total cost reduction.

The curves are really quite impressive.

And what we had to -- what we're doing is we're taking the -- we're ship set 167 or so in terms of deliveries and, so, at the end of the 4Q.

So, we're pretty well into this -- 164 units, I'm sorry.

And, so, we have a good handle on what -- where we're going.

The labor numbers look great.

Support ratios are coming down.

We'll continue to press on that, and then have to continue to work down material costs.

So as we projected from unit 164 out to the end of the block, we just said, look, given the term of this execution, here is the amount of cost reduction we think we're going to achieve and then put that forward.

So it's not bad performance.

It's actually exceptional performance, but it's a challenge to be able to recover all of the deferred inventory as we go forward against the stepdown pricing.

So, then, a chunk of this is actually not cash, because you've already invested it and --

So, the deferred inventory is, of course, prior cash.

But in front of us, what we're talking about is getting enough cash to recover the deferred inventory.

We are talking about future cash flows, we're just talking about the magnitude of the future cash flows.

Just to conclude, where are you with the rest of the negotiations with Boeing in terms of what I'll call your master agreement with them?

You know, we continue to meet with Boeing, and we continue to work on trying to reach an equitable agreement for both parties.

I mean, there's -- the conversations have become more refined and, I think, more data driven.

And we're going to continue to work with them and try to figure out a way to bring this to an equitable conclusion.

Thank you.

Our next question is from Carter Copeland from Barclays Capital.

Good morning.

Good morning.

Just a quick one -- a couple of quick ones.

Sanjay, can you clarify with respect to the 787, when you think about GAAP earnings versus the underlying unit earnings or something closer to cash?

How does that look, positive or negative if we think 2014, 2015, 2016 under the new profile.

Is 2014 negative, but then 2015 and 2016 are positive to recover what is left of the deferred balance?

Carter, thank you.

Here's what I'll tell you.

Clearly 2015 and 2016 are more challenged.

In 2014 we made some pretty impressive rate increases, like Larry talked about.

We've gone down some pretty excellent learning curves, and so on.

But, again, based on stepdown pricing, the out years are more challenge, from a cash perspective, than current years.

So, the out years are presumably a use of cash instead of a source of cash?

Yes.

Okay.

Again, based on -- I'm sorry.

Go ahead.

A different question, please.

Go ahead.

Well, I was going to remind you that this is exactly what I just said in terms of a deferred loss that we've established.

There is some (inaudible) within this year and that's included in our guidance and then the rest in 2015 and 2016 in terms of cash flow.

With respect to the margins, when you look at what is implied in the segment level margins to get to the EPS number, it looks like a reasonable step down, 200 some odd basis points from what you did in 2013 X the various catches and charges.

Now, some of that would be mix, I assume, maybe 75 bps, something like that.

But the rest is unexplained at this point.

Have you left some room in that?

I know you made a comment with respect to development programs and challenges.

Have you left room in that guidance to absorb the hiccups we have seen in cost estimating on something like the A350 for this year or not?

Well, what I tried to give you in terms of guidance, what Larry and I gave you.

You're absolutely right, firstly, in terms of the mix impact.

You can look at Spirit's portfolio.

Clearly, at this stage, we've got a number of programs, the A350 and even the 787, the Gulfstream programs, that are in the early stages of maturation.

That clearly has an impact.

It's inherent in this industry and the mix obviously plays a role.

Listen, what we gave you in terms of guidance is what we believe is a balanced view of all of our -- of the entire portfolio.

Our goal inside the company clearly is to try to perform to the higher end of the range that we've given you.

But, you know, I have to make sure that what we commit to you is something that we deliver.

Okay.

Thank you, gentlemen.

Our next question comes from Doug Harned from Sanford C. Bernstein.

Please go ahead.

Yes, good morning.

Continuing on the 787, in the fuselage systems area there had never been a charge before.

I appreciate you've been coming in the learning curve rapidly, and as you said, it continues to be quite good relative to other programs.

But, the stepdown pricing has been known for some time.

So can you talk about, with respect to the fuselage, and the other two components as well, where you have run into problems here?

Is it the dash nine, is it taking rate up.

What had made this turnout worse than what it was thought to be before?

Doug, we -- first of all, let me just say, we really took a lot of time on this particular subject.

This is not -- this is really based on a very in-depth analysis of really all the moving parts as it relates to our costs.

I don't want to get into the long history of what assumptions were made in terms of commodity pricing and material and all of that, what kind of leverage people thought they could get.

But there were a number of very large assumptions made early on as it related to expectations in terms of, I'll say, material costs, et cetera.

As we have kind of gone through all of these items and really assessed both labor, support, quality of the product, quality-related costs and then on the material side both -- what I'll say fabricated material, things, supply that we buy, as well as commodity material, we got down to164 ships sets in, and we're going to have to predict what the next 336 are going to cost.

So, in this window, what is our expectation.

And we have another expectation further out in time, but in this -- through the next three-year window, 2014, 2015, 2016.

We had to make a judgment, and we did.

By the way, we didn't flatten the curve.

The curve continues to follow the performance we've seen.

And then it really leverages some of the initiatives that Boeing's put in place to see further additional material cost downs.

When you balance that all out and you bring it all up to the top, after looking at this very hard for the last nine months, this was the conclusion we came to.

All I can tell you is this has been incredibly exhaustive.

Not only with us but, quite frankly with our partner, spending a lot of time looking at this.

Two things on that, then.

I take it that material cost has been a large part of this.

Then, second, when you're working with Boeing, in the context of the broader agreement you are trying to complete with them, are you getting any relief from them on pricing here?

Well, what I would say, Doug, is we're continuing to work, the data is the most important part of having an intelligent conversation.

And, you know, we still have -- we still have Dash 9 and Dash 10 in front of us, as well as future cost reduction initiatives.

And frankly, a look at what the ultimate build rates will be, and the configuration of the final product there is still variability in front of us and room to work.

I can tell you we're not doing this in a vacuum.

Okay.

Thank you.

Our next question is from David Strauss from UBS.

Go ahead.

Thank you, good morning.

Good morning.

Following up along the same lines, in terms of these step downs that you're now citing, I think you also went through a stepdown in unit 100.

Where do these next pricing stepdowns take place, and are they of actually bigger magnitude than what you saw in terms of stepdown in unit 100?

David, I, again, I don't want to get into when the stepdowns are, how big the stepdowns are.

Clearly you know that our contracts do involve stepdowns in the current block.

And we've been working really hard to make sure that our cost lines and our curves are the best that they can be.

So, have we been aware of stepdowns?

Yes, we have.

Like Larry just explained in quite detail, over the last nine months, we've had an exhaustive look at our curves, which have been pretty good on labor, on material.

But, at this stage, we have delivered a significant portion of the current block.

When you look at what we can achieve in the near term and, by the way, there is a lot that we've signed up to do, that's the result of that exercise.

So it's a balanced view in terms of what we feel we can deliver, and that's the basis of the charge.

Okay.

How are you estimating price on Dash 9, because I think last we knew you still hadn't set up price from Boeing on the Dash 9?

Again, like Larry said, we are working with our partner, our customer, the Boeing corporation.

And there are a number of factors as we discussed -- the Dash 9 and, in future, the Dash 10 pricing.

So we continue to work with them on the configuration, on the pricing, on the quantities, and so on and so forth.

That's still out there.

We are working hard with them.

Okay.

Thank you.

Our next question comes from Ron Epstein from Bank of America, Merrill Lynch.

Go ahead.

Yes, good morning, guys.

How about just maybe a big picture question for you and then a follow-up.

Larry and Sanjay, when you look -- you brought in a whole new team into the company, you did this comprehensive review.

What are you guys doing different than the previous team to make investors feel confident that, okay, this is it.

We don't have more of these kind of charges coming down the road.

The most common question I get asked, and probably my peers, too, when does Spirit stop taking charges?

What are you doing different than the previous team?

Under the previous management Spirit went way off the rails?

What I would say is -- maybe I was too oblique in my comments.

We're trying to make smart decisions as it relates to going forward in terms of the type of work that we get involved in and then our ability to estimate that work.

And make sure that the jobs that we take on align with our core competencies.

And where they don't, then we look at, frankly, divesting those things from the portfolio.

So, that is -- that's the first step of, you know, working this thing.

What I would say is some of this is just timing in the industry.

It is very difficult to -- this is part of the commercial marketplace that we live in.

It's very difficult early on to kind of make -- a clean sheet of paper is more challenging, let me say it this way, for a major redesign, or new product, I should say, than a derivative product.

So, the good news going forward is that there aren't a lot of clean-sheet paper products out in front of us.

They are mostly derivatives.

That provides us less risk as we go forward and with more rigor and discipline.

You know, we are trying to figure out at the same time while we're taking on these new things, we're obviously trying to figure out how to run the business as efficiently as possible.

And, so, that provides us some head room.

We are very fortunate to be in a growing industry.

So the growth side of the industry, and especially the fact that at it's in our core, provides us a little bit of opportunity, especially as we work with efficiencies, to try to absorb some of these other challenges.

So, you know, it's an interesting set of timing.

I have to admit when I came here I think you all asked me what was the biggest surprise.

The biggest surprise for me was the, I'll say, balance of new programs versus mature programs.

And most companies that I've worked for and enterprises that I've run, the balance was a little different.

You probably would have one major development and then maybe a couple of derivatives and then your mature product line.

In our case, we've had a number of new developments, and it's created a bit of, I'll say, imbalance in the portfolio.

To some degree, it's reflected in our guidance.

The question earlier was, your guidance looks a little conservative.

Well, it reflects a little bit of that in terms of the overall balance.

The only confidence I can give you is, the good news is we're in a growing industry as opposed to declining.

We've got the right folks here and, frankly, we're not finished, to try to figure out how to execute on the tough things and optimize our performance in the things that are more mature for us.

I wish it was a lot more sophisticated than that.

I'd be really proud of myself.

But the truth is this is blocking and tackling.

Okay.

Follow on, now that you've done the review and you've written down a lot of the programs that are problematic, why divest the Tulsa now?

Why not keep it in the portfolio being that everything is marked down now?

It may turn out that way.

I will tell you that I don't think we've changed.

We are not -- we took our time to make the decision to do that.

It was, I think as I've said previously, it was fundamentally tied to -- I think we view that site as more of a build print business.

And we think that, frankly, to be perfectly candid, there is -- we are kind of a -- at least at this point, bring back and focus on our value proposition.

And it gives us a little bit of balance, more balance in our portfolio.

In some cases, frankly, there's folks that have more leverage in the execution of the products built there, and some of the -- again, some of the business areas that are there are not as long as cycle or maybe -- we tend to be focused on, I'll say, the commercial side of the business as opposed to other segments of the business.

And so, that really was our motives as it relates to Tulsa.

We haven't moved away from that.

We think -- back to your point, it's a really good business especially in this long cycle of the commercial aviation business.

If things don't work out, we'll be the proud owners.

Okay.

Great.

Thank you very much.

Thank you.

Our next question is from George Shapiro from Shapiro research.

Please go ahead.

Yes, good morning.

Good morning, George.

Sanjay or Larry, I wanted to look at your earnings guidance from a different perspective.

Each of the past several quarters you have shown underlying earnings at $0.70 a share or better.

Next year, the 737 deliveries are going to go up.

Why shouldn't the guidance be at least two eighty unless you are assuming lower margins on the mature 737 or 777 programs, or you are just being conservative?

George, I understand both your question and possibly your calculation.

Like I said in my comments, a significant portion of the growth that we are seeing between this year and next, we are doubling the rate at which we will produce the 787 program.

As you're well aware, that in a forward loss provision is a no margin business for us.

So that unfortunately does have a diluted effect in terms of our overall operating margins.

Listen, we are going to continue to drive our improvements in our mature programs.

We need that to offset some of the risks that, like I said, are inherent in this industry, in our programs and in our portfolio.

Larry talked about it a lot.

What we tried to do here is to give you a balanced view of what we think -- on the mature side we are going to drive and do better at.

And some of the challenges that we continue to face on the new program, on the development that's going on inside our business.

That's what you're seeing at a very macro level in terms of our guidance.

If I push back a little bit, the $0.70 plus a share each quarter that you've shown includes the zero margin business?

Operating margins are certainly going to go down, but the $0.70 a share is just coming from the mature programs, and mature programs, if anything, are going up.

That's the gist of my question.

No, I understand.

You're right.

Again, the $0.70 per share is a number.

I was trying to answer to you the impact of the growth in the 787, which is a large part.

Again, you know, the $0.70, we still have a lot of work to do to achieve what we have committed to ourselves on all of the other programs.

You've seen a variety of charges.

There are model mix impacts, there are rate deltas that happen, and so on and so forth.

The delivery and the supplier things that we've had to deal with on the Gulfstream program.

So, we baked that into a balanced view and given you the best guidance we think we can achieve at this point.

Just a question on the free cash guidance that you've given, can you just provide how much deferred production increase that assumes?

I'm thinking $300 or $350 million.

I can't give the specific numbers.

That it is baked into the guidance at the $150 million free cash flow.

There are a variety of numbers that go in, as you can imagine.

Larry talked about, and I talked about also, not just cash from operations, but also managing the cost side of the cash, whether it be in CapEx or others.

We have growing businesses that will have an impact, whether it be the 350 or the Gulfstream.

That's incorporated into the $150 million number that we gave you.

Again, I say this on the earnings per share, as well as on the cash flow, we will strive to do better.

Okay.

Thanks very much.

Our next question is from Sam Pearlstein from Wells Fargo, please go ahead.

Good morning.

Good morning, Sam.

Just to follow-up on that, can you talk a little bit about incentive compensation and any changes you are implementing?

The magnitude of these charges would seem to say that EBITDA and EBITDA as a percentage of revenues would miss whatever targets you had for the year.

Maybe free cash flow's a little bit better.

What changes are you making to help drive this performance into 2014?

So we -- I gather the question is about 2014 incentive comp, as opposed to 2013.

We have made very, very significant changes in the incentives.

I referenced that in my opening comments.

To make sure that it was -- what we did, in more detail, what we did -- this is a bottoms-up bill.

This is not a tops-down answer.

When we did this bottoms-up bill, and Sanjay referenced a comprehensive look at the opportunities and risks and then where we set the targets for every one of the programs.

Every owner and every program and every product now has a definitive set of performance measures that they have to meet.

That level of detail that exists previously.

At the macro level, the integrated results are equally aligned and very much different than, I'll say, prior incentives.

There's a very clear accountability.

That's why I made the point that this is my team's plan.

There's very, very clear and measurable accountability for the performance to the execution plan for 2014.

Okay.

If I can follow-up, one the things you said you would talk about in your strategic plan was about capital allocation.

So, how should we think about capital structure in general, because you have a big hit to the equity with the charges, then using the free cash or any proceeds from Tulsa, how do you think about that?

Any conversation about how we might deploy capital, I probably wouldn't tie it to any singular event.

We hope to accumulate capital again.

That's the point.

When I think about the near term, I'll say it -- the simplest way to say this is really stabilize the operation so we that can accumulate cash and then grow the enterprise.

The question how we might deploy capital, I can tell you, we will consider all the options ranging from, you know, share repurchase to the normal things that you would talk about, dividends and M&A.

We'll be really thoughtful, though.

I will tell you that we're going to be -- again, when I stay stabilize and grow, we're going to really, really focus on the challenges we have in front of us, in terms of performance and cash accumulation.

And performing, frankly, where we need to perform as a business.

You should expect, year over year, significant improvements.

Thank you.

Operator.

We have time for one more question.

Our last question comes from John Godyn from Morgan Stanley.

Go ahead.

Hey, thank you for taking my question.

Larry, in the prepared remarks, you sort of acknowledged volatility in the short term but a focus on a long-term multiyear plan.

I was hoping that you could maybe elaborate on some of the metrics that the organization is focused on in the long term?

Are there margin targets, free cash flow targets, ROIC targets?

You also mentioned defense as an opportunity.

If you could just help us plug into the vision that you have for the organization three to five years down the line.

Thanks.

I'll tell you in the near term and, you know, again, for my team I've tried to keep this really simple.

Let's focus on cash flow.

It's been a -- obviously you have to have earnings to generate cash.

So you can't give up your earnings and expect to generate cash.

So, for us, the emphasis, really, in the near term has been on free cash flow.

To get that free cash flow in line to where you would expect a $6 billion-plus enterprise to be throwing cash, then have the conversation around how you might deploy that capital.

But mostly, today, the focus really needs to be on why we had so much difficulty in getting that to the bottom line.

I would say some of this is timing, right.

The good news, bad news.

Good news is that you're in a market that's growing.

And the good news is you're a participant in programs that have very long cycles.

The challenging part is there is investments that go with that.

The question is, how do you balance those investments against your overall needs to take care of your shareholders.

And, so, really that kind of rigor and discipline.

We look at every component and cost that we have in the enterprise.

And whether it's overhead, or whether it's CapEx or whatever -- all of those elements.

That was the point I was really trying to make about being an integrated enterprise.

This isn't just a program-related conversation.

The functions have to perform as well.

I made the comment to centralization of a lot of the functions.

I think actually it will improve our performance and not just reduce our costs.

I think we'll actually end up performing better as an enterprise.

That's really -- I will be candid.

That's where the drive today is.

Most of the metrics that the team were working to, and they're pretty detailed.

I brought a lot of tools with me.

I built -- I had the good fortune of being involved in a lot of production programs and development programs.

Today we have a very by-program, by-product, week to week, did you earn your hours, did you hit your productivity did you -- all those kinds of metrics both in production, as well as development, in terms of figuring how to manage the business.

And then, an integrated approach to making decisions.

I made the comment earlier about being very responsible about the decisions we make.

You take on these decisions and then they define your future.

So, I'll just say with the most intensity, where the metrics are.

In the long term, yes, we have long-term objectives.

I would say, I was asked this question in the prior two calls, where do you ultimately see your margins.

My answer is my expectations of margins, they're going to line up to our customers.

Today we may be a little, you know, about there, a little suppressed from there, just because of the mix.

As we move along, we would hope to see some margin expansion.

We won't be, you know, out of line with our customers, would be what I would say as it results to the ultimate objective, which brings you back again to, well then, let's focus on cash.

That's very helpful.

Thanks a lot.

Thank you.

And now I would like to turn the call back over to our President and Chief Executive Officer, Larry Lawson, for some closing comments.

Thank you.

Well, listen, in summary as we enter 2014, we are absolutely a more financially and metrics driven enterprise.

We're absolutely committed, you know, to generating predictable and consistent results through process, focus and discipline.

We're stepping up our game at what we do best.

We're far more disciplined about our decision making and we're stabilizing the enterprise through performance and cost improvement.

I believe these actions coupled with the ramp up of the commercial aerospace upcycle positions Spirit to deliver results to customers, our shareholders and our employees.

So I just will end the call with thanking you and certainly thanking our employees, and I hope to see many of you in the month ahead.

I'm going to be on the road.

I'll be in Toronto, New York and Boston talking to a lot of our shareholders, as well as many of you.

I will be presenting at several conferences in the near term, and I hope we cross paths.

If we don't, we'll have a chance to talk again in our next call in early May.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

(Operator Instructions)