Spirit AeroSystems Holdings Inc (SPR) 2014 Q4 法說會逐字稿

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

fourth-quarter and full-year 2014 earnings conference call.

My name is Jeanette, and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded.

I will now turn the presentation over to Mr. Ghassan Awad, Director of investor relations.

Please proceed.

Good morning.

Welcome to Spirit's fourth-quarter and full-year 2014 earnings call.

I'm Ghassan Awad.

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, and 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 earnings release, in 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 reminder, you can follow today's broadcast and slide presentation on our website at www.spiritaero.com.

With that, I would like to turn the call over to our chief executive officer, Larry Lawson.

Thank you, Ghassan, and good morning, everyone.

Welcome to Spirit's 2014 full-year earnings call.

It's been a busy and gratifying year for the Spirit team.

Many of the initiatives put into place during the 2013 strategic and financial review are manifest in the 2014 results and in the 2015 guidance.

We're very optimistic about the future, and we have tangible opportunities to improve our operations and grow the business.

We've endeavored for seven quarters to communicate our vision and follow through accordingly.

We've made good progress, and we still have more to do.

You may remember as an outcome of the strategic review in 2013, we realigned our organizational structure around our programs and our customers.

We brought in new members to our leadership team.

We strengthened and standardized our processes and metrics.

We assessed our markets and products.

And we instituted a disciplined decision-making process.

We began to reduce risk and focused on being a cost-driven culture that meets our customer commitments and consistently generates free cash flow.

To that end, 2013 was the first year Spirit generated positive free cash flow, and we pledged at that time that we would progressively improve until reaching best in class.

While 2014 was a year of transition for Spirit, there were numerous accomplishments in the programs, sites, systems, processes, and people.

In summary, we addressed performance challenges in both development and production.

We improved productivity and quality.

We mitigated many risks as exemplified by the sale of the Gulf stream wing programs.

And of course, we continued to progress on the A350.

There were a number of highlights in 2014.

We delivered a record 1,545 ship sets last year.

We also made positive in roads in defense, with focused program execution on the CH53K and Textron's Bell V-280 Valor.

And we celebrated with Boeing and the US Air Force the successful first test flight of the KC-46 tanker program.

We deployed $129 million of capital in our first share repurchase.

And the nine-year partnership with Onex drew to a close last year with the completion of the sale of Onyx's remaining shares.

Cost reduction is a central theme for us, and we continued to reduce overhead cost, improve productivity through numerous projects across the enterprise.

We completed our centralization activity, executed a voluntary retirement program, and we're moving forward with our strategic sourcing initiatives.

So let's turn to the 2014 financial results.

Last year was a record year for Spirit.

We realized record sales, EBIT free cash flow, and backlog.

We reported sales of $6.8 billion, which was up 14% year over year, and an operating income of $354 million and an earnings per share of $2.53, or adjusted earnings per share of $3.57, excluding the impact of the divestiture of the Gulf stream programs and the deferred tax valuation allowance.

The full-year backlog was $47 billion, up 15% versus 2013, which represents seven years of sales visibility.

Our adjusted free cash flow was $302 million.

2014 was a year of transition, and 2015 is focused on productivity and preparation for sustained growth.

We have five key objectives for Spirit in 2015.

Number one, we will continue to focus on improved performance, increase productivity, reducing cost and aligning our business with what we do best.

Two, we will leverage our investments as we prepare for the aircraft rate increases ahead.

Three, we'll continue our progress on the A350.

Four, we'll have greater emphasis on long-term growth.

And finally, we'll address how we deploy capital.

With regard to productivity, we continue to challenge our team to find opportunities across the enterprise and the functions to improve performance and reduce cost.

We are going deeper in our operations.

And we better understand our path to be a world-class operation.

As part of the strategic sourcing initiatives, we're taking a methodical approach to what the Company makes and what it buys.

We're bringing certain products back inside the Company because they better align with our core capability and, at the same time, our outsourcing commodity work into the supply chain.

Whether it is information technology engineering or manufacturing, we're focusing on what we do best.

We are investing smartly as we move diligently toward the rate increases on the 737 and the 787, as well as the introduction of the 737 Max and the design activity of the 787-10 and the 777X.

We're using these investments to advance our manufacturing capacity and technology to deliver on time and enhance our productivity, safety, and quality.

As for our Boeing wing programs in Tulsa, we will examine our opportunities to work with local leadership.

Our new on-site leader, Bill Brown, has an outstanding manufacturing and after-market expertise.

Bill is driving our day-to-day execution and the vision for Tulsa modernization, as well as our after-market business.

With respect to the A350, with Cutter airlines taking delivery of the first A350 aircraft, an Airbus achieving the pivotal milestone of entry into service, our attention shifts to the execution of a smooth and seamless ramp up on this important new program, while we continuously improve our cost position.

Finally, our approach to capital deployment will be balance and discipline.

You can anticipate we'll use all the tools in the toolkit from investing in manufacturing, cost reduction, share repurchases, the possible use of dividends, new business, and potential acquisitions.

We'll not likely pay down debt.

Just as we focus on cost, return on investment and risk in our operations, we'll do the same as it relates to addressing our capital deployment strategy.

These initiatives should produce results in 2015 and the years ahead.

So now for the 2015 guidance.

We are guiding 2015 sales to between $6.6 billion and $6.7 billion; earnings per share between $3.60 and $3.80 for the year.

In terms of cash and capital expenditures planned for the year, we expect to generate between $925 million and $1.075 billion in cash from operations.

CapEx will be higher this year between $325 million and $375 million.

And we're guiding free cash flow between $600 million and $700 million for the year.

The cash in 2015 reflects improvements in operations, changes in advances, tax benefits from the sale of the Gulf stream wings, rate-related cost and associated funding, as well as other miscellaneous changes from 2014.

There will be a number of puts and takes throughout the year, and I would recommend, given the timing of receipts and disbursements, to focus on the year versus the quarters.

In closing, we believe we're making progress toward our goal for Spirit to be recognized as one of the best performing aerospace and defense companies.

We'll stay true to our brand, which is the highest quality and most reliable and affordable partner in the industry.

With that.

I'll ask Sanjay to lead you through the financials, give you more specifics about 2014 and the guidance for 2015, and then we'll be happy to take your questions.

Sanjay.

Thank you, Larry, and a very good morning, everyone, particularly in snowy New York.

I'm looking forward to sharing more detail on our 2014 results and our 2015 guidance with you today.

Larry took you through many of the 2014 accomplishments earlier, but I also want to recount a few financial initiatives that we executed throughout last year.

As you may remember, early in the year we refinanced our debt, lowering our cost of borrowing.

We secured a long-awaited refund on our Malaysian taxes.

We worked on cost management throughout the year on labor and overhead.

We built a more robust EAC process that is helping us to do a better job in managing our risks and our opportunities.

And in this last quarter, we finally completed implementation of SAP across all our domestic sites.

Now, this will provide us better visibility and management of financial data.

And then last, but not the least, I am proud to say that we fully remediated both our material weaknesses in the quarter.

So a lot of progress, but, obviously, lots more to do in 2015 and beyond.

Okay, let me begin my presentation now.

And we will start with the consolidated results for the full year.

Then, we will do a quick recap of the quarter by looking at our segments, followed by a summary of the Gulf Stream transaction, our near-term CapEx outlook, and then, finally, we'll wrap up with our outlook for 2015.

With that, let's turn to slide 2 for the full-year consolidated results of the Company.

Overall revenues for the year were $6.8 billion compared to $6 billion last year, reflecting a 14% year-over-year increase and was a record high for Spirit.

The revenue increases were driven by higher deliveries across multiple programs.

Compared to last year, we delivered 51 more 737s, 53 more 787s.

And we also increased our A350 deliveries from 8 to 16.

2014 revenues also include $229 million for the Gulf stream programs, and as you know, these programs were divested at the end of last year.

On earnings per share, consistent with my notes to our guidance last year of excluding the impact of the deferred tax asset valuation allowance and the Gulfstream divestiture, adjusted earnings per share was $3.57 compared to negative $1.71 in 2013, which, of course, was impacted by a number of forward losses on various programs in that year.

On our bottom line, we are capturing the benefits of all the cost reduction that we have worked during the year and also, the better quality and delivery performance that we executed in 2014.

And of course, we continue to focus on mitigating our risks.

Finally, an important measure of our performance is the adjusted free cash flow for the year, which also showed a significant improvement as we generated $302 million in 2014.

The entire Spirit team has been very focused on this, and we are very proud of our results.

We are making sure that we balance our investments against our cash conversion as we drive shareholder value.

Now, let's take a quick look at our quarterly segments through our segment performance on slide 3. Fuselage segment revenues were $788 million in the quarter compared to $701 million in 2013, reflecting a 12.4% increase.

And operating income was $141 million on higher deliveries and cumulative catch-up adjustments on mature programs.

The fuselage segment 737 program continued to perform well and was the driver of the $28 million in positive cumulative catch-up adjustments.

In the fuselage segment, the A350 team also met our milestones.

And along with Airbus, we celebrated the first important delivery to Qatar Airlines.

In our propulsion segment, revenues were $385 million, and operating income was $107 million, driven by cumulative catch-up adjustments on our mature programs.

The propulsion segment 737 and 777 production lines have solid performance, contributing to $21 million in positive cumulative catch-up adjustments.

The segment also benefited from a reversal of forward loss charge of $16 million, primarily on the BR725 program.

The KC-46 tanker program achieved the milestone of the first flight in the quarter, which is an important program highlighting Spirit's defense value proposition.

And our wing segment revenues also grew, reaching $397 million on higher deliveries in the quarter.

Operating income was $61 million as the segment benefited from cumulative catch-up adjustments on mature programs.

The 737 line in Tulsa and the A320 wing program in Prestwick had strong performance in the quarter, both contributing to the $14 million positive cumulative catch-up adjustments.

Some other notes on the quarter.

The 787 program realized a net decrease of $4 million in deferred inventory on 28 deliveries or, roughly, $150,000 per unit.

And the A350 deferred inventory grew by $47 million in the fourth quarter, as we shipped five units on the Section 15 fuselage to Airbus.

For the full year, we have shipped 16 sets, and the average deferred inventory growth per unit in Q4 was 66% lower compared to the first quarter of the year.

And while we continue to make great progress on this critical program, it is still early in its stage.

And we have much work to do.

Moving to slide 4, I also wanted to walk through the financial impact of the Gulf stream programs transfer to the Triumph group.

The transaction closed on December 30, 2014 and included a cash payment of $160 million.

The transfer included substantially the entire Gulf stream program inventory, fixed assets and tooling, and an assumption of the remaining advanced payment liability.

As a result, we recorded a $197 million after-tax charge, or a $1.39 per share.

A tax benefit of $274 million was recorded, which included a valuation release of $118 million.

As result, we will realize cash tax benefits of $221 million in 2015.

Let's move to slide 5 that summarizes our cash and debt balances.

Cash balance at the end of the year was $378 million and includes the payment on the divestiture of the Gulf stream programs.

Our debt remains stable at $1.154 billion, and we maintained adequate liquidity with a revolver that is untapped.

At the end of year, our total debt-to-capital ratio was 42% compared to 44% in 2013.

And lastly, our US defined benefit pension plans remain fully funded.

Let's move to slide 6, which shows our start and end-of-year cash balances.

As you can see, we have applied a very disciplined and balanced approach in our cash deployment.

We started 2014 with a cash balance of $421 million.

During the year, we generated $302 million in free cash flow.

Early in the year, we used $129 million on the share repurchases to return capital to our shareholders and $56 million in one-time financing fees and other costs, as we restructured our debt, and then another $160 million as part of the Gulfstream divestiture, an important milestone as we executed our strategy of concentrating on our core capabilities.

As result, the net cash balance at the end of the year was $378 million.

Slide 7 shows our capital expenditures for 2013, 2014, and 2015 and highlights the future investments that we are making in tooling and equipment to meet the rate increases of our customers.

As Larry mentioned, we are on the right programs, many of which are seeing increases in rate, such as the 737, the 787, and the A350.

As a result, for 2015 we are predicting capital expenditures in the range of $325 million to $375 million.

We will be receiving nonrecurring cash payments that are consistent with the increased investment required on these programs.

Thus, on a free cash flow basis, the higher capital expenditures are fundamentally neutral on a year-over-year comparison.

Also, as we make these investments, we continue to look for ways to use this to lower our cost and become more efficient.

We will continue our balanced approach to capital and consider this to be a good investment in our future.

Now let's move to slide 8. For the full year 2015, we are guiding revenues in the range of $6.6 billion to $6.7 billion, and earnings per share in the range of $3.60 to $3.80; free cash flow in the range of $600 million to $700 million, and this includes the one-time benefit of the tax refund associated with the Gulfstream divestiture transaction; and an effective tax rate in the range of 32% to 33%.

On the deferred tax asset valuation allowance, as I have repeatedly said, we will continue to follow accounting guidance and assess the need to maintain our valuation allowance against our US net-deferred tax assets.

So like last year, I'll remind you that our guidance excludes any potential adjustment to the valuation allowance against our US net deferred tax asset.

We are happy to take your questions now.

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions)

George Shapiro.

Yes.

Good morning.

Morning, George.

Morning.

Sanjay, I wanted to ask, to get this free cash flow you're guiding to -- even if I take out the $221 million -- we're either seen a change in the advance policies, so you're going to get more advances, or what you just mentioned about the recurring cash is going to be that much to offset it.

Or are you projecting working capital to decline?

And then, I just wanted to ask on the A350, that the deferred was no different than Q3.

If you could just comment on that?

Thanks.

Sure.

So George, on the free cash flow line, you're right.

The $600 million to $700 million guide includes, basically, the tax benefits on the Gulfstream transaction.

The impact of the increase in capital expenditure between [$14 million] and [$15 million], like I mentioned in my prepared remarks, is fundamentally neutralized, not because of an advance payment change or anything like that, but because of a one-time nonrecurring payment that we received from our customers.

Outside of that, the $600 million to $700 million, we've talked about that all last year that we intend to find ways to improve.

It, obviously, assumes that we no longer have the Gulfstream programs, and then it's the natural improvement in our business.

So if you did the math that way and adjust for a few other one-time things, even Larry referenced to it in his opening remarks -- if you remember in 2014, we did benefit from a shift on the 787 advance repayments -- if you adjust for that, you take the taxes, and you take the Gulfstream business, and you take the improvements that we believe we will deliver, you come to the range that we have guided to.

Yes, George, I think you asked a question about 350.

I think the question was third and fourth quarter in terms of deferred.

And what I would say to you is that at these low rates, you're pretty sensitive to a number of factors.

So remember that [ferd] is made up of both the Section 15, or the fuselage, as well as the wing.

And so what you're seeing is that, a couple of phenomenas, one is we had a unit deliver that Airbus took in January instead of the end of the year.

We also had some FX impact on the wing portion.

And finally, it's also payment sensitive.

And so there was a payment that didn't come in end of the year.

And so you see it looks a little bit flat.

What I can tell you is -- this will help you, I think, a lot -- is that the actual progress made on the Section 15, the fuselage, in 4Q was about 18% reduction over 3Q.

David Strauss.

Good morning

Good morning, David.

Sanjay, back to the cash flow, can you specifically address within your cash flow guidance if you've assumed that 787 cash is improved in 2015 and same thing for A350?

David, that's a fair question, but, again, I don't want to get into program-by-program cash flow assumptions here.

What we've always told you last year and this year, we're looking at our portfolio on a quarterly basis.

On a yearly basis there is movement.

You know this based our cost curves coming down, as well as, we all know we have price step downs, as well.

But my cash flow guidance for the Company includes the pluses and minuses associated with all of these programs.

Okay, let me ask you a different way.

So on A350 and 787 deferred per unit, you're assuming further improvement in A350.

And what is 787 deferred due from here?

Again, David, going forward you will see the impact in the quarter.

It depends on how we do on our cost and what the impacts are for the specific price step downs.

But again, I know you're focused on each of these programs.

I'm trying to give you an answer at the Spirit level because that's how we manage and guide to you.

Clearly, Larry mentioned that the 350 is walking down a sharp curve.

I said it about 66% reduction from the start of the year to the end of the year.

And as we ramp up in terms of quantities in 2015, we would expect to see the benefits of our absorption and the benefits of all the cost reductions that we are working on.

Unfortunately on a quarter-by-quarter basis the timing does affect -- because these units that are shipped collect cost in our work in process for the duration of while they're there.

And so it gets a little lumpy in each quarter, but, overall, you should see cost reductions impacting the 350 program.

And we should start to see the deferred increase in deferred bill come down in 2015.

Joe Nadol.

Thanks, good morning.

I'd like to come at this same question maybe a little bit of a different way for, really for cash flow expectations beyond 2015.

You guys have said that you want to drive improvement progressively.

You have a big $221 million benefit in 2015.

You have a one-time, it sounds like a one-time, payment coming to offset your CapEx.

We don't know what your CapEx expectations are beyond 2015; although, you have some big rate increases still coming beyond that.

Can you help us level set expectations beyond 2015 for cash flow?

I would say, Joe, is I know you'd like to have some precision around this.

And I think what we've given you is directional guidance.

As we work each of these items, whether we're derisking the Company and we end up with a tax benefit, or we work our rate increases and associated funding, you're seeing some variability in cash year-to-year.

So you saw in 2013 $57 million.

You saw in 2014 $300 million.

You're seeing, if you're plotting this, you're seeing $700 million.

And when you correct it, you're going to get a number that you would assign to the operational piece of this.

And I think Sanjay guided you through that math.

And when you look into 2015, there will be some variability there too.

Not everything in 2015 is all negotiated, so those things are happening.

But what I can tell you is you draw a line to that we're going to continue to make progress in terms of operational performance year-over-year.

And we're moving in a good direction.

Will it be a straight line?

No, it won't be a straight one.

But will there be variability year to year?

Yes.

Are we on a good trajectory?

Well, I think, I hope you're getting a sense that's the case, given two years under our belt and guidance for the third year.

But there's a lot of moving parts that go behind all these things.

And frankly, a lot of discussions that occur between us and our customers as it relates to how we go forward in the trades.

So we really, at this point, we're not guided 2016 yet.

Maybe as the year goes on we can give you a little more indication.

But as right now, it's just we're sticking with our general directional guidance on years beyond 2015.

Robert Spingarn.

Morning.

Morning, Robert.

So at the risk of asking the same question, I guess at this point you know what the focus is.

How do we think about 100% conversion?

I think if we back out the $221 million, which, Sanjay, aside from the small pieces you mentioned, I think that's the only thing to back out.

And that leaves you with conversion of around 80%, 82% for 2015.

So how do we think about the trajectory to 100%, following onto Joe's question and the others?

So Robert, listen these are all very fair questions.

And I understand from the perspective that you're coming from.

And again, you have to look at it from our perspective.

On an operational basis, you know we have challenges on a number of our programs.

And we continue, therefore, not to just work on cost for those programs.

I mean, all of 2014, I think Larry mentioned it several times, that we are concentrating across the board on costs.

So it's just not cost on programs associated with these early development like the 787 or the 350.

We work on overhead, and as that cost comes down that benefits across the board.

And that then yields better results on our mature businesses as well, not just in terms of margin, but also in terms of cost.

Now, going forward, yes, we are increasing our rates.

And many of you know what the OEMs have declared in terms of rate increases, and you'll see some capital lumpiness going forward as well.

But our goal, and Larry's been pretty clear about this, our goal is to get, eventually -- it might take a year or two or more -- but it, eventually, is to get to that 6%, 7% cash conversion on the revenue basis.

That's our goal because that would be in line with our peer group.

And this year we made some pretty good progress in 2014.

We have managed our cost really well.

We've got a very balanced and disciplined way in the way we are managing our capital, both internally, as well as how we work that with our customers so that we have a steady trajectory.

Jason Gursky.

Yes, good morning.

Sanjay, one quick one for you, and then one for Larry.

On the one for Sanjay, the SAP deployment that you mentioned, you're done here in the United States, which I guess infers that you're going to be doing something internationally.

Can you talk a little bit about year-over-year spending trends on the SAP deployment?

And then, Larry, you said that there were five things that you're focused.

You did a little bit more of a deep dive on four out of the five.

I was wondering if you could provide a little bit more detail on the long-term growth initiatives that you'll be engaging in, in 2015, and what we might see externally as result of those efforts?

Thanks.

Yes, okay.

Let me just try to answer your questions.

I mean, they're IT questions, and so we actually invested a lot of time in our IT strategy as it relates to going forward.

So yes, Sanjay said that our domestic sides -- we're actually in the early stages of running SAP also on our international sides as well.

I would say it's the early instantiation, and then we'll continue to enhance or grow that capability this year.

The expenditures, interestingly enough, I mean I made that, you may have noticed in my comments when I referenced IT, we made some pretty big decisions about what we're going to do internally and externally.

And frankly, we were able to come up with a much more productive architecture for the deployment of our IT services.

And we've actually been -- we've deployed that.

We actually used it the last quarter of the year, toward the end of the year, and so far this year, quite effectively.

And so we've been able to save some money, believe it or not, on IT and actually increase and improve our services.

So there's not a -- it's all in the plan, I guess is what I would say.

And it's a part of all the moving pieces that are included when we provide you guidance.

The question about growth is I think one on everyone's mind as it relates to, I think there's always a question regarding, okay, you guys are doing well in terms of your ability to collect capital.

And I mean, I will tell you at the end of 2013 after the call and we wrapped up 2013 a few of the folks, Sanjay came up and said, man, free cash flow, gave me a high-five, and let's go get a beverage.

And I'm sitting there with my head down.

And he goes, what's wrong.

I'm like, it's kind of a low bar, Sanjay.

So this year we did better.

We weren't at our 6% peer group performance.

But I hope you get a sense that we're solidly on our way there, which means we're working really hard to collect the cash to have the choices and the options for how to deploy it.

Now, as hard as we've worked to do this, I hope you believe that we're not going to be shortsighted in terms of the deployment of it.

And I think, to be quite clear, we're going to look at share repurchase.

Obviously, we're going to look at dividends, as I said in my comments.

There are things that we can do, investments that we can make that reduced our cost of goods sold that we'll look at those from an ROI standpoint and make judgments about maybe spending some cash now that saves us money in the long term.

And frankly, you see the amount of investment going on in the facility.

That's really good news when you really think about.

Think about the alternative, which is you're on programs that aren't growing, don't seem to have a future.

I kind of like this approach.

And so for us, we just have to work hard to balance out those expenditures against what we think is a reasonable business model.

And we work real hard to do that.

So it's always the growth part that I think gets people nervous.

Are we going to go out and buy something and what would we buy?

And I can tell you that we don't have anything on our radar scope as it relates to a near-term acquisition.

There's nothing.

We look at lots of things.

I would say that the bar is very high.

And I think in prior calls I've kind of given some sense of what it is that we would consider.

We're not going to stray far afield from what we do.

We're not going to buy something that's troubled.

Although, I would say we have a little more management bandwidth now that we've moved the Gulfstream wings off.

That certainly helps our team a little bit.

But we're not looking for a fixer-upper.

We're looking for something that has strategic value that's accretive to the business.

And again, then the next question is are going to pay too much?

And the answer is, well, that certainly would be the plan.

We're going to be very diligent about using the money that we've worked so hard to put in the bank.

We're going to balance that between shareholders, customers, and ultimate -- that's why I use the word long-term growth or sustained growth -- but things that are strategic as it relates to our view of the business.

And I will tell you that those things are typically, by the way, the timing of all that, it just -- things come when they come.

And so you have to be ready to take advantage of those opportunities.

Now, I'd just say one last thing.

I know this is a long answer; I apologize.

Last year we did $129 million share repurchase, and it wasn't at the end of the year.

It was fairly early in the year.

I think that should give you a sense about our confidence and our willingness to deploy capital in a way that's smart and a good return for shareholders.

Peter Arment.

Yes, good morning, Larry and Sanjay.

Good morning.

Larry, following up on -- well, you've given us a lot of information on the cost driven culture.

I wonder if you could just give us the latest update of how you're thinking about initiatives for 2015 on the supply chain consolidation, the efforts there?

And then also on the capacity, is the CapEx investments that you're making.

Does it specifically cover all kind of known, planned rate increases?

Or if you can give any color there.

Thank you.

Okay, sure.

Yes, I'll do that.

Okay, so supply consolidation, the first step, of course, went for us was to -- I said we completed the centralization in 2014, and we did.

We were able to go out to the operating sites, pull back the people.

And the benefit of that centralization, whether it was in IT, or engineering, or procurement, I could go on.

What it allowed us to do is to find a better standard of execution that everybody would operate to.

So it got us all on the same playing field and allowed us to say, this is the standard that we do business.

And if you were to see my -- I put out a top initiatives to our team this year -- at the top of the list is that we're going to be a standards-based company.

We're not going to be a relatively -- it's not going to be, hey, every year we're this.

We're really trying to define where we're headed to.

We may not get there in one year, but we're demanding as it relates to saying, here's the standard we're going to operate to.

And centralization was a key element of that.

The second part of that was then to develop a strategy around, specifically, the types of things that we buy and who we want to do business with.

And I tell you, that's not an easy thing to do.

You have to have some fundamental convictions about whether there's economies of scale that are organically available.

And the truth is that in many of the places where we buy, frankly, there's an over capacity.

And so it's the ability to aggregate your buy and use the that under capacity or the economies of scale, however you want to think about it.

It provides a real benefit, a true organic cost reduction opportunity for the seller and for the buyer.

And a lot of times there's just a lot of, hey, look we're just going to demand.

For me that's not a lasting strategy.

A lasting strategy is one that levers your real convictions about the economics.

And then when you have too many suppliers, frankly, it's difficult to really get your footprint there where you're managing the product the way you want to manage it.

So we did a very extensive should-cost exercise last year, where we went through all our products.

And we did a, hey, just a baseline bottoms up, what does it cost to make these parts, and then what does the business model look like?

Then, we did a, I'll say, a commodities view of here's sheet metal.

This is how we do paint and treatments.

Here's our fabrication services.

And then, we looked at all the supply base, and then we said, okay, now what would a strategy be around all that.

And we now, we're on the same view of that now.

And we've actually had some thoughts about what that's worth.

And now, we're in the process of going out with that strategy.

Let's see, you asked a question about CapEx.

On the CapEx front, you know that inside those CapEx profiles that Sanjay showed you, inside there is, obviously, that's our maintenance CapEx rate, as well as there's already CapEx in there to get to [47], increasing rates on multiple programs.

I don't think we mentioned 320, but, obviously, we have 320 business as well, and we're investing money in our 320 business as well.

And so when you look at all that, you kind of see it -- so that 2013 and 2014 doesn't reflect our maintenance CapEx.

It reflects actually maintenance CapEx plus investments that have been occurring in those years.

And then there's a step up because now you have multiple things happening where we're marching toward [47] to [52].

And as you know, [52] is 2018.

So you invest in your CapEx prior to the implementation, so that can give you a sense that we're going to have CapEx expenses through 2017, as it relates in support of [52].

We get to [12] on 787 in 2016.

So you can imagine that those expenses that are, obviously, finished in 2015.

And then, whatever may happen on the other programs in terms of further announcements will affect that.

And not just the rate, but the year at which the rate [announce] because we put these plans together, and then sometimes our customers decide to move the dates, either, well, generally left lately.

And so it makes our ability to say to you, hey, this is what our CapEx in 2016 is going to be -- it makes it a little challenging.

The good news is that we can support our customers' needs.

Again, I think I try to say this is part of our value proposition.

It's the most important thing, I think, that we offer is that we're a reliable partner, and so we work very hard to make sure those things happen.

The other thing we do though, I think, and I just want to really make this point, is you can see the amount of money going into the enterprise.

We're being very smart about how to lever those investments in a way that gets us the maximum benefit in terms of across the board, whether the subject is quality, or the subject is cost or safety.

So I hope that kind of addresses your answer without giving you a formula.

I wished I could.

We're in a pretty dynamic environment right now, and it's a good thing.

Let's just say it's a good thing.

But it's a dynamic environment.

And so it's hard for us to just say, here's a hard number for 2016 right now.

Myles Walton.

Thanks, good morning.

Sanjay, I'm just curious.

As I look at the fourth quarter and the implied results you put up, obviously, you were baking in some favorable cumes, probably not the reversals of some of the forward-loss charges.

But in the context of your 2015 guidance, is it fair to think that the fourth quarter you were factory in maybe a third of the positives that you reported, and that's similar to the proportional run rate you're looking at in 2015?

Or is some of this cume benefit going into the underlying base margin assumptions?

That's a good question, again, Sam.

It's always a harder question because things vary by segment, and things vary even in the blocks of closing, and how much will the cumulative catch-up we have relate to prior-year performance, and so on and so forth.

A better answer for you I think may be -- and let me just talk about in this sense because I think many of you may have a similar kind of questions.

And if I look at my fuselage segment on average, if I look at the average of the Q1 through the Q4, we're running around 15% to 16% margins.

And we see that continuing into 2015.

The propulsion segment, that has fewer, so zero margin programs in there, and also, obviously, benefits a little bit from the after-market business.

So that typically has about 150 basis points better than the fuselage.

And the wing, you know we've worked so hard.

And if you adjust for all the cume catches and the reversal of the forward losses that we had, including the stuff that we did on the BR725 in (inaudible) propulsion actually.

But on the wing side, that's in the double-digit margin range of about 10%.

And we see that continuing.

So rather then the answer to you what the impacts are in cume catches and how much was that of the prior year, I think it will help you if I gave you those kind of ranges for 2015.

Now, as we work on cost and continue to do better and better, we should start to see that performance roll into our EACs.

But I will also tell you, Sam, that we have worked as a finance team really hard in the course of this year to do a much better job of our estimates of completion and tie back our risks opportunities so that we don't see too much volatility going forward.

Okay.

Carter Copeland.

Hey, good morning, guys, and good numbers.

Sanjay, maybe you can get two beverages this year.

(laughter) You know, Larry, that would be a stretch.

Okay 1.5.

(laughter) Look, I wanted to switch gears a little bit and talk about the reversal of the forward loss on the BR725 and everything that went into that.

I don't think I've ever seen a reversal of a forward loss at this Company, so what level of conviction did you have to have?

What was behind that?

Is it just straight cost?

How does that discussion go after a lot of charges?

Can you just give us some color around what kind of assumptions changed, or how your conviction level group, or whether we'll see something like this again in the future?

Sure.

Carter, it's Larry.

Let me answer real quick.

It really was a combination of two things.

It was really a, actually, to be very candid, renegotiated pricing.

And then, we had really gone after BR725 really, I want to say, 18 months ago is when we really put our hammer down in terms of working on the cost side.

Really it was the combination of the two things.

But it wasn't just cost.

It was cost and pricing that allowed us to do that with confidence.

Ken Herbert.

Hi, good morning.

Good morning, Ken.

Larry, I just wanted to ask you gave us some good quantification on the A350 earlier in the call.

Just sort of a two part question, can you dig a little deeper into the A350 and, specifically, some of the milestones we should be watching for this year now that we've had entry into service or very close to.

And how that program might track this year from a risk management standpoint?

And then the second part is, if you take just even a higher look, clearly, your goal Gulfstream activity goes a long way to derisking the portfolio that we'd all been talking about, and you've been talking about.

Where would you say the risk resides today, either within the portfolio or from an execution standpoint?

Is it really A350 focused still very much?

Or are there other things that we should perhaps be thinking about?

Well, I think, let me just answer your question on the A350.

Obviously, when we think risk, I think most people point to the A350 and for good reason.

We've delivered 27 units.

We're early in the cycle.

We've built up a deferred inventory.

When you say A350, by the way, I think most people think fuselage.

And of course, we're thinking fuselage and wings.

And these things are actually moving different to each other.

And we're making great progress on both, but they're in different positions.

I think what I would look at, I think that the really key for 350 this year is rate increases.

The most important factor in the learning curve, or your ability to, what I'll say, absorb your fixed cost is your rate.

And when you look at the unit price of or unit cost, excuse me, of any one of these products that we build, you have depreciation costs, and overhead costs, and a lot of fixed costs that are very rate-sensitive.

And so what's important to us this year is to see how rate does.

The current plan has us at five rate at the end of the year.

And I think Airbus's plan is six by the beginning of next year.

And so they're going up a pretty good curve, and if so, we'd love to see that happen.

We're certainly on track ourselves with getting there.

And it would be an important factor.

We also this year have to build the first Dash 1000.

We're doing great in terms of building our pieces of that.

And that's going quite well.

So I would just say I think from my standpoint it's -- I think I said in my comments, it's the smooth transition to higher rates and will be the most important factor.

And then, obviously, for us it's our actual performance in executing our plan, whether that's in touch labor, support ratios, or material reductions.

And what I would say is, I think we're going to learn a lot as we go along.

This is the other question I get quite often, how do you see this transpiring over time?

And my view is as we learn something, we're going to continue to derisk the program.

Operator, we have time for one more question, please.

Michael Ciarmoli.

Hey, good morning, guys.

Nice quarter, nice cash flow.

Sanjay, just the one thing I want to be clear, maybe to follow up on Rob's question earlier with the cash conversion.

You've got the advanced payment on the 787 to Boeing.

I guess those were frozen for 12 months.

Is that going to be a headwind going forward?

What is the exact plan regarding those repayments?

Yes, so on the 787, I think we actually disclosed last year, Michael, which is we suspended those payments for a year.

And basically, that one year was a suspension of nine months in 2014 and three months in 2015.

So clearly, in terms of 2015 versus 2014 that's an impact to us year over year.

But again, that is baked into the guidance that I gave you.

So really, if you look at where we ended up last year and you looked at the tax benefits and you, obviously, add the impact of the not having the Gulfstream wings in 2014 that we divested, and then you adjust for the 787, I think if you just did that little math, I think you'd come close to our guidance along with the improvements that we've always said we will deliver.

And I think that should give you a good reconciliation on cash.

Okay, thank you all for your questions.

I will now turn the call over to our president and Chief Executive Officer, Larry Lawson, for some closing comments.

Thanks, Ghassan.

Well, to conclude the call, I guess I would say we've made good progress.

We've got a solid foundation for our Company moving forward.

We have a busy year, and we're excited about 2015, but 2015 is not necessarily as exciting as 2014 and 2013, which is a good thing.

We believe that we're on the right programs.

I think we're still convinced that we're going to invest in our value proposition to make sure that we're a reliable and affordable partner.

You can tell, I think, that we're moving in to the next phase of our journey.

And I, certainly, can tell from the questions today that we're getting in to the procession of the math.

And, look, we'll do everything we can to provide you the information that you can understand as best we can in terms of within our guidance and our ability to help you understand our path forward.

It was intriguing to me today.

We didn't get a question about the cycle.

I'm hoping that's a good thing.

My own view of that is that I can't think of another industry, except maybe shipbuilding, that has an eight-year backlog.

And you think at this -- this is a capacity-limited business, and so eight years is a long time.

And it's very unique to our industry.

I think that really tells you, whatever volatility there may be, we still have a solid backlog.

And frankly, it doesn't appear to us that the underlying demand for our products are reducing because when you just look at the moving parts, whether it's the urbanization of Asia or whatever, the organic demand for the product is there solidly.

And obviously, there's other things in play, the strength of the dollar, and the cost of fuel.

And all of those things, when you look at the big numbers, it's not very hard to convince yourself that there's going to be a demand for new aircraft.

And whether the curve gets flattened or stays steep, this cycle is going to continue on we believe.

And we plan on making sure that our value proposition stays aligned to that.

So I want to thank you all for joining us.

Actually, I'm looking forward to the next call in the next quarter.

Thanks, everyone.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.