Spirit AeroSystems Holdings Inc (SPR) 2015 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to Spirit AeroSystems Holdings Incorporated third quarter 2015 earnings conference call.

My name is Ethan and I will be your coordinator for today.

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

Later we will connect question-and-answer session.

Please note that this conference is being recorded.

I would now like to turn the presentation over to Mr. Ghassan Awwad, Director of Investor Relations.

Please proceed.

Good morning.

Welcome to Spirit's third quarter 2015 earnings call.

I am Ghassan Awwad, and in the room with me 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.

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 may include 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 of the end of this web presentation.

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

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

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

Good morning, everyone.

Welcome to our third quarter earnings call.

I'd like to start today's call by highlighting several key accomplishments on our development programs that were achieved during the third quarter.

We delivered the first composite fuselage for the Bell V-280 Valor from our rapid prototyping facility in Wichita.

We went from a concept of product delivery in just 22 months.

We are very proud to have met our customer's quality, cost and schedule expectations.

The 737 Max team continues to meet all program milestones.

The first fuselage was delivered to Redmond, Washington in August which enabled Boeing to start final assembly on schedule.

In addition, the 777X and the 787-10 development efforts are progressing to plan.

Our team is working very closely with Boeing to identify practices in the design and assembly of these state of the art aircraft.

Another significant milestone in the quarter was the delivery of the first A350-1000 fuselage to Airbus.

We also continue to make progress in reducing costs as we improve productivity and quality while ramping up production rates.

Preparing for production rate increases has been one of our top priorities this year.

We are executing to plan on rate increases for the 737, the A320, the 787 and A350.

We are managing the ramp up with great detail to address the full value chain and to protect our gains in quality.

As always, we continue to take a comprehensive view and act on cost items, whether measured in terms of productivity, supply cost or quality.

We are confident about the long-term outlook of our business and the health of our balance sheet.

Our consistent financial performance has allowed for the release of $189 million of the deferred tax asset valuation allowance with $9 million remaining in the fourth quarter.

With regard to capital deployment, in the second quarter we announced a share repurchase program of $350 million.

We returned $46 million to our shareholders with the purchase of 924,000 shares.

We believe our stock is a very good value and we will continue to press forward.

Now lets take a look at third-quarter results.

For the quarter we reported revenues of $1.6 billion, operating income of $192 million.

Operating margins were 12%.

Also in the quarter, as part of our continued drive to reduce risk, we resolved a few legacy matters.

Operating cash flow was $240 million and free cash flow was $139 million.

The cash balance at the end of the third quarter was over $1 billion.

Our backlog remains strong at $46 billion and at the end of the third quarter this provides seven years of sales visibility.

With regard to 2015 guidance, we are raising our earnings-per-share guidance to a new range of $3.80 to $3.95 and continue to support the guidance provided last quarter for sales to be between $6.6 billion and $6.7 billion and free cash flow of between $700 million and $800 million.

With that, I'll ask Sanjay to lead you through the financials, give you more specifics about the third quarter and then we'll be happy to take your questions.

Sanjay?

Thank you, Larry, and a very good morning, everyone.

It's been another good quarter and we progressed enough in the year that Larry and I feel comfortable raising our EPS guidance after having raised our free cash flow guidance last quarter.

Now let me walk you through some of the financial details.

Let's begin with slide 2 which shows the third quarter consolidated sales of the company.

Overall revenues for the quarter were $1.6 billion, a decrease from the third quarter of last year primarily due to the Gulfstream programs which were divested at the end of last year and, as we mentioned last quarter, also lower 787 revenues as a result of a price step down.

Operationally we continue to deliver to our customers' requirements.

We delivered 127 737s, 115 Airbus A320s, 31 Boeing 787s and 8 Airbus A350 ship sets in the quarter.

Our backlog remains strong at $46 billion which provides seven years of sales visibility and planning horizon.

Investing in our business, preparing ahead and executing on the rate increases efficiently remain our top priorities.

This will allow us to capitalize effectively on the continued robust demand for commercial aircraft that we see ahead.

Please turn to slide 3. Adjusted EPS for the quarter was $0.89 compared to $0.90 in the third quarter of last year.

Year-to-date adjusted EPS now stands at $2.97.

In the third quarter the company resolved historical customer and supplier claims.

The majority of the issues occurred in the timeframe between 2008 and 2013.

While the nature and the terms of these resolutions are confidential, in total they resulted in a one-time pretax $26 million charge or $0.12 per share.

Adjusted EPS excludes the deferred tax asset valuation release which is consistent with our guidance.

We released the majority of our remaining valuation allowance in the third quarter as we followed accounting guidance in the evaluation of all available positive and negative evidence resulting in $1.35 of EPS.

We expect to release an additional $9 million of valuation allowance in the fourth quarter which amounts to approximately $0.06 to EPS.

And even though after eight quarters of practicing the term deferred tax asset valuation allowance now rolls off my tongue, I look forward to no longer discussing this item as part of next year's results.

Turning to operating margins, in 3Q Spirit reported 12% margins which includes the one-time historical claim resolution.

Excluding these resolutions operating margins were 13.5%.

These reflect the Gulfstream divestiture, a better mix of mature programs, lower nonrecurring revenues, as well as cost reduction activities undertaken by the team over the last year.

Turning to slide 4. Free cash flow was $139 million in the quarter and $753 million year to date.

So let me bridge the gap a little between our guidance for the year of $700 million to $800 million and the strong performance year to date.

Year-to-date cash flow includes cash received under our 787 interim pricing agreement with Boeing and is being reported as deferred revenue.

This cash is not included in the full-year guidance.

Capital expenditures increased in the third quarter $101 million in preparation for the number of aircraft rate increases we have ahead.

There are still a number of moving parts to free cash flow for the full year but we feel good about the guidance we have given you and the underlying results show the improving trend in what remains a top initiative as a Company.

Our intense focus on cash generation and balanced approach to cash deployment are flowing down to you, our shareholders, as we repurchased 46 million shares -- $46 million of shares in the third quarter.

Turning to slide 5. Let me take you through the segment results.

Fuselage segment revenues were $820 million in the quarter compared to $804 million last year, primarily due to the increased 737 and Airbus A350 deliveries.

Operating income was $131 million representing 15.9% margins which were impacted by the historical claims resolution, and as we have guided you in the past, we still see core margins in the range of 16% to 17% for the year.

Turning next to our Propulsion segment, revenues were $430 million, a decrease from the same period last year driven by the timing of nonrecurring revenue, on development programs and fewer BR725 deliveries in the current quarter.

Operating income was $95 million representing 22.1% margins driven by strong mature programs versus $82 million a year ago and 18.5% percent margins.

Wing segment revenues were $341 million versus $446 million a year ago.

The decrease was primarily attributable to the Gulfstream divesture and lower 787 revenues.

Operating income was $46 million representing 13.4% margins, down from $63 million a year ago which included $15 million in positive cumulative cash [out] adjustments as compared to $3 million in the current quarter.

Many important milestones were accomplished in the quarter across the segments including first customer shipment of the 737 Max, the V280 Valor program and the Airbus A350-1000 program.

A few other notes worth mentioning about the quarter, the 787 program realized an increase of $25 million in deferred inventory on 31 deliveries.

Or roughly $800,000 per ship set.

As a mentioned last quarter, this increase in the deferred is attributable to the planned 787 price step down and is in line with what we were expecting.

The team remain focused on reducing costs in partnership with suppliers and our customer as we prepare for rate increases on this program.

On the A350, deferred inventory grew by $16 million in the third quarter as we shipped 8 fuselage units to Airbus including one -1000 unit.

Or $2 million per ship set.

We are meeting our customers' demand and improving operational performance but we have more work to do to continue down that learning curve and drive cost reduction initiatives.

And now on slide 6. We are updating our full-year guidance.

Revenues continue to be forecasted between $6.6 billion and $6.7 billion.

Earnings per share is increased to the range of $3.80 to $3.95.

The increase is due to continued strong operational performance and risk reduction efforts throughout the year.

Free cash flow continues to be expected between $700 million and $800 million and these results are based on an effective tax rate in the range of 32% to 33%.

Our 2015 guidance excludes the year-to-date and fourth-quarter impact for the valuation allowance against the US net deferred tax asset.

With that, we are happy to take your questions now.

Thank you.

We will now begin the question and answer session.

(Operator Instructions)

David Strauss from UBS.

Good morning.

Sanjay, as it relates to free cash flow this year, obviously there are a lot of moving pieces, a lot of nonrecurring items in there.

Can you just help us with laying out all the nonrecurring items, or what you consider nonrecurring, that's running through the number this year, so we can kind of get level set to the right place as we think about 2016 pre-cash flow?

Sure, David, absolutely.

Thank you.

There are at least three major one time events in 2015.

The first one is as you know as a result of our divestiture on the Gulfstream business, we're picking up roughly about $221 million of cash tax payments in the year.

We have a majority of that in the first quarter of this year and then the last payment on that we will receive is in the fourth quarter.

The second one time event obviously was the settlement that we had on the Gulfstream business with GD.

We shared with you that we were -- achieved a fair and equitable rate around that.

Obviously I can't diverge the amounts, but I think everybody has a pretty good idea as to what that number was.

And the third thing was that if you remember in the first quarter of the year we were suspended from the 787 advance payments that were being refunded to Boeing.

That restarted itself in Q2 of this year but we did have the first quarter benefit of that.

So those are the three one time benefits in 2015.

The other thing I keep reminding you all about is that if you really look at the year-to-date cash, I'll remind you that we do have an interim arrangement on the 787 where we are getting certain pricing which we're treating as deferred revenue, and that's something that we are not counting on until such time as we achieve a resolution with Boeing.

So that's showing up in my deferred -- my short-term deferred revenue accounts in my balance sheet.

So that's -- those are the one-time things and I think hopefully that helps.

Thank you.

Ron Epstein from Bank of America.

Good morning, guys.

Could you give us an update on progress on the A350 program?

I remember back, it must of been almost a year ago now that Larry said something like once you guys get to about 100 airplanes you'll have a better understanding of where you are on the learning curve and if you kind of give us an update on that?

Sure, Ron.

First of all I think I've been getting to this point that we're actually making really good progress.

If you think back as you point out a year ago, at the beginning of 2014 I think, our deferred per unit was [$28 million] a unit.

We're now down -- I told you that we would kind of make our way down the curve where that would -- you would see a lot less of what I would call nonrecurring kind of charges, or historical cost regarding fixing airplanes, recovering traveled work etc.

and now we're down in the $2 million range so made a lot of progress there.

And so, I think that our costs are actually -- have been quite predictable.

The way this really works then is as you are looking forward you're really looking at I'll say three factors.

The first factor is okay, are your material, I'm talking about the supply chain part of your cost, you're looking at your cost going forward, you're looking at your cost reductions, you're looking at your changes of the cost of the basic unit, and what your confidence is in those and of course it's risen.

We're not done but I think our confidence is much higher there and we have very definitive set of plans.

Most fairly well laid out with the individual suppliers and with Airbus.

The second part of that is your labor, our labor curbs are coming down and what you see on the labor side always is kind of an interesting thing.

Because you'll see it coming down and you'll have a rate jump and you'll see a little bit of an inversion, then it starts back down again.

So quarter to quarter it's really hard to get visibility -- really to be too discrete about what is happening in any given quarter.

As a matter fact, to be honest with you, at these low rates you can have a small amount recurring bill and it buys us the number quite substantially.

But we're making good progress on both the labor side whether it's touch or whether it's support costs and we feel pretty confident with the plan.

And then the last part is we have an ongoing negotiation going on.

That negotiation is very data-driven -- I think it's a great conversation.

I think it's been very productive and so -- Is it a hundred units?

I think my sense is that we're going to beat that substantially and frankly, we're not there all the way but that we are getting a very good sense about all of this and should be able to certainly beat the 100 unit airplane stability point.

Okay.

Great.

Thank you very much.

Howard Rubel from Jefferies.

Thank you very much.

Now that you've settled some of these litigation items with Boeing, does that open the door to discussions you need to settle on both 78 and on MAC pricing?

That's not really -- We had a number of items that we have settled this year.

To be honest with you Howard, if I think back 2 1/2 years ago, or even a year ago to where we are today, and I think you can probably even see this in terms of in our disclosures in terms of reserves that we've taken, we've just continued to work off most of these items.

And so the number of folks that we've worked through, and you know how these go, some are -- I think Sanjay was just talking a few minutes ago, some of them are positive to us and some of them are just de-risking the Company.

But I wouldn't say any of them have had any impact on any negotiation whether it's been with a supplier or been with any of the [LEMs].

I wouldn't say there's any connection whatsoever.

This is just normal business of clearing up things that have been sitting out there for a long, long time and needed to get resolved.

I understand that.

But are you at this point where you can see line of sight to some of these items that you would like to get behind you so you don't have another year of deferred revenues?

Well certainly.

I think all the parties -- I think both parties are motivated to get this done and I think the only thing I can say is that it's a lot to negotiate.

There's a lot of material there.

There's a lot of details involved and we're going to be very deliberate in how we handle this.

I think from our standpoint, the terms provide us the ability to be patient and I think both parties want to get this on.

I don't want to see deferred -- be on what we planned, and I wouldn't -- the deferred on 87, it's right on the plan that we laid out over two years ago.

It's quite encouraging that we continue to be able to march to plan, but we're just going to continue to be very deliberate.

I mean we meet on a regular basis and we meet at the working level and at the high levels and this is a relationship that is vital to both of us and the business is important and we will get there.

Thank you very much, Larry.

Robert Spingarn from Credit Suisse North America.

Good morning.

I have a similar question but first I wanted to ask Sanjay to walk through the mechanics of the deferred on the 78, and if you adjust for that, how did the revenue performance -- what was the real revenue performance in the quarter?

Because it seems like that's a little tough to discern but there's $800,000 going onto balance sheet?

Robert, so the 787 price step down obviously impacts the revenue and you've seen that.

There is one other thing I should probably have mentioned this, the settlement that we had on the historical claims was also contra revenue because it related to sort of nonconformance work from history.

So you can add that $26 million as sort of a one-time downer on revenue on the quarter.

But other than that, as far as 787 is concerned you have the price step downs obviously impact the revenue line.

If you really looked at our deferred balance on the 787, we started the year at about 550 and right now we're about 567 or so.

You see that in the Q when you get it and all the cost will be -- that's the impact of the price step down.

And the cost that Larry just talked about.

We continue to work on cost with our suppliers, with Boeing, internally to our Company, and we're absolutely making -- meeting our plan.

Okay.

But you see that in the revenue line and you'll see that in the cost line and obviously the Delta is what you see grow from the deferred.

Okay.

Larry, thank you Sanjay.

Larry, when you look out, we're all aware of the fact that we could see a rate reduction on 777.

Your customer talked about a floor of 7 per month, we're at [8.3] now, how disruptive would that be?

How does that factor into your numbers?

Well, I guess what I would say -- obviously 777 is a fraction and you could probably do the math yourself and see what percentage of our profitability is times 777.

But it's a fraction so we're talking about a fraction of a fraction.

But my overall sense is that we're talking about a 2018 conversation here.

I think there's been some question about is this a 2017 situation?

They're halfway there on 2017, 2016 is in good shape, halfway there and 2017 they've been making good progress, and so my sense is this is kind of a 2018 conversation.

And so while we dip down, we'll see a 8.3 to 7 rate reduction in 2018.

We may, but there's a lot of time between now and then and lots of opportunities for Boeing to work in the marketplace.

I mean, this is a very unique airplane.

It's not an airplane -- it sets in its own class really, and so it's not like it's going head-to-head against another product.

It really is -- it's just been one of those kind of iconic airplanes and so we'll see.

I don't want to do the math here, but it's a fraction of a fraction, Robert.

Okay.

And then just what I wanted to touch on sort of follow on to Howard was when you think about the accounting approach that you and Sanjay take, the CUM catches, we have the deferred revenue, you're sort of in a constant state of negotiations on a number of your major programs.

And you put all that together, we can get to a point where you are no longer adjusting to get back on the curve every quarter where there's more predictability in that curve and more, if you will, transparency in each quarter on what your real profitability is rather than tuning up in the future to correct for divergences.

Yes, if you're talking about CUM catch-ups, you see a lot fewer of those quarter-to-quarter than you have historically, principally because, we really do have a pretty good handle on this business.

Especially if I reflect back, I built a lot of airplanes, but when you reflect back every business is different and so on the last couple of years we've had a chance to really, really drill down and so you see a lot fewer of those, principally because if you were to look at my metrics book, we go through every week, I can tell you when we're tracking heads on 737 down to 3 to 5 heads and we know -- the great thing is not only does management know what's going on but actually the people all the way down to the floor are learning this process.

It's kind of creating then the ability as the team looks forward to kind of take some of that out and put it in to the A [season].

We see that as part of the overall performance.

I know, Sanjay, you probably want to talk about team catches.

It's a good question.

No, it's a fair question.

I would tell you I think we've actually (inaudible).

In fact, as I've been telling you guys for the last year now, if I look at our segments and look at the margins inside those segments, they're pretty -- we've given you good ranges, we always fall within those ranges.

We continue to work on cost reduction and as we realize those benefits, we do much better job in our sort of EAC process to make sure that we capture those benefits.

And therefore you do some CUM catches from time to time.

But I would tell you, our goal has always been de-risk the Company, get balanced work on just not the 20% but the 80% and look across the board and I think you're seeing the benefit of all of that and a lot more de-risk and a more stable sort of portfolio.

Yes, we do have negotiations, yes we have to work on the 350, the 787, but that is a continuous journey on that.

I was going to say, is the issue here -- it's obviously a predictability thing if you're trying to be conservative, but is the issue here not so much the predictability and the cost, which I think you have a good handle on, but now the predictability and the pricing?

Oh, I don't know.

Look, I don't think, Robert, we could probably get into the details of the negotiations, but it's a big package so everything goes into the discussion whether it's in the whole portfolio.

And so it becomes a discussion about all the elements of the business and we are obviously maneuvering for a good win-win equitable situation.

And we're in a good place to negotiate.

So I think we probably have to stop there.

Doug Harned from Sanford C. Bernstein.

Thank you, good morning.

On the 737, when you look at the things that Boeing is trying to decide here and regarding rate, if you were to see rate go up to say 60 per month, what would that mean for you in terms of physical steps you would need to take?

And certainly I wouldn't expect it to be acceptable if that only lasted for one to two years.

So are there contractual things that you can do to give you confidence that if you take rate up you'll be fairly secure for a longer period of time?

Doug, everything obviously is -- goes on the table and is negotiable.

As it relates to our ability to go up and higher rates and I think we've been pretty clear we have the ability to support a customer and they give us exercises.

Obviously, they are looking at what their options are and so we go do this work for them and give them the confidence and I'm telling you, they do an extraordinary job.

They really get into the details.

It's an impressive thing to watch and to watch the teams work together, frankly, is an impressive thing.

And so we work really closely with them and we've done numerous exercises as you know and so I think from that standpoint our ability to support them isn't really in question.

What makes sense is a whole other thing and that's not -- that's something you have to talk to them about in terms of where they think the market's going or those kinds of things that relates to the ultimate decision.

Now of course, again this is a function of are you investing?

What are you doing?

If you're making investments then you want assurances.

That obviously is always part of the conversation.

What other kinds of assurances typically that you would get in something like this?

Well obviously it just depends on your investment.

If you'd like to be able to obviously create an ROI around your investment that makes sense and you have to give that a period of time.

So that's a conversation but to be honest with you, that's not been something that we've had to talk about.

You mean not having to talk about a proposed rate increase or just it's very comfortable in terms of how you would ultimately work that out?

I think we're in a good place as it relates to the discussion and if we get up there, we feel perfectly comfortable working with -- negotiating reasonable terms.

Whether it's around our investment or whether it's around guarantees.

But look, that's all kind of conjecture.

We're not having that conversation today.

Okay.

Very good.

Thanks.

Carter Copeland from Barclays.

Hi, good morning guys.

I won't ask about negotiations.

I'd rather learn more about costs.

The 350, 1000 and the impact it had on the A350 deferred, I wondered if you might help us understand that a little bit and maybe put in terms of progress you made on the 900 if you can strip that out?

I know you said you were going to try to bundle some deliveries which got you some benefit on the transport cost, but any color there would be really helpful.

Thanks.

Yes, that's insightful because yes, we're actually pushing our third Dash 1000 through the line so to your point the very first one that goes through whether it's over of the wing side or whether it's on the fuselage side, the first time it has disproportionate impact because it just takes substantially more hours to build the first one.

You are checking out your automation, you are marking off of all your drill marks.

You're dealing with all those things so we have a higher incurred cost, and the first is pretty substantial.

Turns out in our case the second one has been similar to, and principally because we've made a number of tooling changes and a number of automation changes that we had to re-validate on the second Dash 1000.

Third unit's going through the line right now looking really smart.

We made some good progress there.

So yes, it does and that's why I was saying at these low production rates it's really kind of hard, especially with the Dash1000 coming through or other change related traffic, one-time events, it makes it really hard to tie it straight down to okay, here's what's going on from a recurring standpoint.

I don't think we have the math.

We haven't done the math.

I mean we know the math but we haven't laid that out.

Carter, again, I know it's a very macro perspective that you guys get to see, which is about $2 million of deferred growth, that includes 8 shipsets, that includes the Dash1000.

Like Larry was saying, it's a [varied], unique capital and tooling that influences in a particular quarter just because we had one shipset on the Dash1000.

It does, but again we're trying to take you down -- the perspective we're trying to give you is we're working across the board on cost, on the A350 program.

We are actually making very good progress.

Again, rate does matter and as rates pick up in the future you will see that benefit, but the Dash1000 does create a little bit of incremental churn, but we're not quantifying that for you guys on the outside specifically.

I guess the only I would point out along that line, it's kind of an interesting thing I think, we delivered eight, we would have delivered nine-- we delivered the ninth unit the next day, one day outside the quarter.

We ship those units when Airbus calls on them.

Next quarter we will have the largest number of deliveries in any quarter so we're making I think very good progress.

It's not without -- surprises every once in a while in terms of any introduction of any new thing as you mentioned the Dash1000, but we're just marching on.

Quality gets better, costs are reducing and performance is far more predictable today as we kind of move forward.

Thank you gentlemen.

Jason Gursky from Citi.

Yes, thanks.

Let's just start with business development and growth opportunities.

Larry talked a little bit about the types of things that you might be able to do to accelerate revenue growth including work on defense side and then Sanjay, I think you recently talked about some additional work that could be coming out of Airbus.

Can you provide some updates on your efforts on both of those fronts and any additional new biz development opportunities you see out there?

Yes, sure.

Inside the organic part of the business, we have opportunities and I think Airbus has been I think somewhat transparent about their initiatives, the second source, the number of their supply chain, and we're obviously out there competing for that.

So there are opportunities there.

There are some opportunities obviously for growth as we transition products, say from the NG to the MAX.

The MAX is a bit more sophisticated of an airplane and of course we're looking for opportunities there to help [volume] reduce costs and improve performance.

And so there are a number of things there that we can do.

The work that we're doing on the defense side I would say that again, growing any business from organically kind of growing it up takes a bit of time, but our value proposition is being very well received.

And I don't know that we really were branded as a kind of a prototyping house.

I wouldn't say that would be part of our branding, but the work that we did, both on the CH-53 as well as on the V-280, I think people are getting a better sense about how agile we are in terms of our ability to design a product and then go out and manufacture it very rapidly.

And so whether that's in defense or some other arenas there's that.

When you look at the magnitude of all that, it's probably -- you have your core organic growth, you have your new business opportunities, and you kind of go hey, is that enough to satisfy us in the long-term and in terms of growth?

And I think the answer is and I've said this, I get different receptions to this time to time, but that I think that over time, we will look at acquisitions.

And that will be part of the overall approach to growing our portfolio because I don't think we feel satisfied with the growth, not that it's bad, I mean, it's tremendous to be able to see these increasing rates on all these programs.

A lot of people would be very happy to trade places with us for this kind of transparency and this kind of market growth, but we want to grow even beyond that.

So we're looking hard at what our long-term opportunities are and you should expect that that will be part of our portfolio going forward.

I hope that answer your question, Jason.

No, it does.

I appreciate that.

Sanjay if you could just humor me with a clarification question on the CapEx outlook for this year?

Where do you think we're going to end up and what is that tell us about next year?

Sure, and Jason, our CapEx, the guidance we haven't changed.

We told you it's somewhere between $325 million and $375 million and CapEx by its very nature is a little lumpy and so it's harder for me to sort of shrink that any further, but it's in that range.

The other thing on capital that you should remember from our discussions earlier in the year, some of that capital is for the rate increases on the 787 as we are ramping up on that.

And we are -- that was part of the interim arrangement that we had with Boeing where we get -- we had an agreement on some payments that we were going to get, and I told you that that was net neutral.

So CapEx for the year, somewhere between $325 million and $375 million and we're track to that.

This quarter was relatively healthy.

We spent a little over $100 million on capital in this particular quarter and if you look at Q1, Q2, we basically ramped up.

But that's ramping up because of rate increases investments are ramping up.

And if you do the math, we should see a pretty sizable amount of CapEx in Q4 as well.

But all that again guys, all of that is -- it's all of that is also baked into our cash flow guidance so that's all on track.

And does that continue to ramp into next year?

So the rate increases continue, like I just mentioned, the capital that Larry just mentioned we're in constant dialogue with our customers in terms of the variety of rate increases that we are looking at and how you achieve that.

So we should see somewhat of a similar kind of number going forward but we talk about all of that when we talk about our guidance with 2016 and beyond.

Look, on the capital side I think the thing that gets confusing as Sanjay pointed out is that there's a number of one-time events that occurred and year-to-year in terms of how you go forward on capital and who makes what investment.

I mean our capital in 2016 is a little bit down, little bit lower than say 2015 and then 2017, it just got a little bit of -- some lumps in it, pops up a little bit.

That said, you have to be careful about drawing too many conclusions about our reduction in capital given how payments are made.

And I do not want to not be transparent on this.

I mean you will see the numbers when we guide and we'll give you all of that.

But that's what you're going to see is you're going to see 2016 capitals just a little bit lower than 2015 and a little bit lower than I can tell you than 2017.

Great.

Thanks, guys.

Seth Seifman from JPMorgan.

Thanks very much, good morning.

Larry and Sanjay, it feels like the tone you've try to set overall with regard to a lot of things has been one of consistency.

Should we think about the pace of share repurchases falling in that category as well?

I am just going to leave you with the statement that I made, which is we think our share price is a great value and so however you would like to interpret that.

We did get started and, we expect to move along at a good pace.

And if I could just add to that.

You're absolutely right.

We want to be more predictable.

We want to be more consistent.

We are more balanced in everything that we do.

We continue to de-risk and like you saw as we demonstrate performance we raise our guidance.

So all of that stuff that Larry has been working with the team, that's exactly what we want to do in the long term.

Yes, I guess that probably is the one thing-- we take all these initiatives that we do.

They've become quite detailed in the planning end, but they don't manifest discreetly.

It's not like you're flipping a switch and you're seeing these things because these initiatives that we have, I mean today we're seeing the benefit of actions taken two years ago and we continue to progress.

I think we feel much more positive or -- about the specifics of our plans looking forward and we have lots of options.

I think the thing that I feel good about is that we have quite a few options when we look to the future about other opportunities we can use to address our cost.

Some of those require investments, but the ROIs are good and so -- and we have a lot of dry power.

So I like -- we have a lot of work to do.

I don't ever come to work and don't feel like there's nothing to do, but quite the opposite.

Every day okay, we have to go do this and do that.

Pretty passionate about moving quickly, but I do recognize that even when we move at a relatively high pace that the results of these changes manifest incrementally over time.

So that's kind of -- I hate to be described as steady but in reality that's kind of where we are.

I apologize.

(Laughter) Thanks, you're absolutely right.

Ken Herbert from Canaccord Genuity.

Hi, good morning.

Sanjay and Larry, just a clarification, and I know you've talked about this in the past, but you're still looking at I think it's 57 working days in the quarter and 77 deliveries, I think step down sequentially, but it sounds like Larry you're able to ship, I think you said you're looking for the highest number of A350 deliveries in a quarter.

Did I get that correctly?

Yes, that's true in both accounts and that's just -- I think about it in the case of the A350, it's kind of on a continuously ramping profile and so that is certainly our expectation.

Now we build the units and of course Airbus has to call for them, but you know as I just pointed out a while ago, we missed the quarter by -- we expected nine, it was eight, but it was only off by a day so we're in a constant conversation with them in terms of what they believe their demand is for the quarter and our expectations.

We'll deliver more 350s in the last quarter than we have in any prior quarter.

And again, just remember though, we're not a steady rate, we're at a ramping rate.

So what you're seeing is the -- work in process is manifesting in final product as we go forward.

Okay.

And just to follow-up on earlier comment you made regarding the sort of 100 unit and the symbolic nature of hitting that when you do hit that at some point next year.

Does the [leering] in of the Dash 1000, I know obviously it's been planned, is the cost savings you're able to achieve on that program is that maybe what's give you a little bit more confidence about perhaps hitting some of these milestones a little sooner on that program?

Is there anything else you specifically --

No, I wouldn't say that.

I wouldn't say it's unique to the Dash 1000.

I would say that just like we saw -- I think we have an expectation that we will move quickly down the learning curve on the Dash 1000 just like we did on the 787-9.

But you should see similar kind of performance.

But no, I wouldn't say that's the origins of our confidence.

I think the origins of our confidence are the kind of incredible detail incremental buildup that we have as we look at our unit cost and we differentiate all the different parts that make up that cost, material being the most predominant piece.

And so you're constantly looking at are you buying from the right people?

Do you have the right overall structure?

We do what we call clean sheet analysis but an effective should cost.

We're looking at aggregation deals where we take and look for people who have -- where we can put product together for people who have excess capacity which means there's not a large capital investment for them, and in a matter-of-fact is all upside and we'll certainly negotiate those deals.

We try to lever the buying power of the OEMs.

And so there's a lot of things and then there's a lot of -- we're still early which means there's lots of opportunity for redesign.

So those cost reduction opportunities are important and that -- and normally what happens on these things is that in the early days of production, transition from development to production, everyone is so focused on just getting that -- it's a very difficult transition to make.

They're so focused on making that transition that it's all-consuming.

It's very hard to have a conversation about changes -- change traffic as it relates to cost reduction because you can hardly handle the changes as it relates to just getting to where you need to be.

And so today with the change traffic down, again you still talk about this confidence, with the change traffic diminishing and now we're seeing kind of the nominal day-to-day performance.

Again, that's kind of the stability that leads you down the curve, kind of gives you confidence.

But listen, I would tell you, labor is important but frankly, touch labor is you know, 10% to 15% of your unit costs, support is actually a bigger piece.

You have overhead.

You have commodity pricing of materials and then you have your value added materials which is by far the biggest piece and so you attack those really two different ways, to the design and finding the right supply partners.

And both of those things are underway, and I think we're going to do better than shipset 100.

Okay.

That's helpful.

Just one final clarification on your comment on the material side.

I know some of the cost of the carbon fiber was an issue with 787 and some of the charges you've taken there in the past, is it fair to say that the cost of that component on the material side with visibility in contracts, you don't see that maybe altering the equation moving forward?

No, I don't see that as the most significant variable.

I would have obviously with oil prices down you would love to see those come down but you know how that works.

You negotiate these long-term deals.

We buy -- frankly we typically buy our commodity material through the OEMs and so you hedge the upside and the downside and you just go from there.

But it's not a major variable in terms of our ability to either get our cost down or reach an agreement with Airbus ultimately.

Great, well thank you for all the color.

Myles Walton from Deutsche Bank.

Thanks, good morning.

A quick one for maybe Sanjay.

On the accounting's locked rollover of the 87 and 2016, should we think about the 87 in your mind now being a mature program that will follow kind of an accounting block sizing standards of two years?

And then also as it relates to margin, preproduction rolling off looks like at a minimum your starting point is five points of margin.

Can you verify those?

Sure, Myles, I will make the decision on the size of the block sometime next year.

I don't want to walk into that at this moment in terms of whether we continue to look at it as a sort of another block of 500 or something different.

That's a decision we'll make next year.

And you're right about the pre-production, the pre-production does collapse at the end of this current block and so that benefit does flow into future deliveries.

What that means in terms of margins and so on for future will obviously depend on our negotiation, the size of the block.

In the past I think I've told you it'll depend on the Dash 9, Dash 10 pricing, those kinds of things.

So that's a little while away at the moment, Myles.

Okay.

And Larry, on business development, you guys were once on the Cessna Columbus back when it existed and it sounds like they will be launching a new larger jet, not Columbus revisited but something probably pretty close and just curious about your attitude towards that market in general and maybe if you want to go there specifically?

Yes, I think the folks who are in that market are good at being in that market.

We have some as you know still doing some of the [cell] work.

I think that people really -- it's kind of funny as I go out and talk to folks in Bizjet, Marketplace, they really like our products.

I think for us it's a difficult -- given the low production rates it just isn't our best opportunity to generate ROIs.

We can get a lot better ROIs and recognizing that it's not -- and by the way it's hard to drive the top line unless you have a lot of content.

It's hard to drive the top line.

But when we look at our opportunities to change our cost structure, we can quickly find incredibly high returns on investments that we can make in ourselves that kind of swamp any of the returns, especially these very heavy upfront investments required to enter into any one of these new ventures because most of the time, especially in the Bizjet side, most of the time it's hey, would you like to do our wing?

And it's usually on heavy upfront investment or would you like to build new cells?

And I will just be honest, we get a lot of calls from a lot of different folks.

They're very credible people and they're great discussions but -- so we are listening.

We're talking and listening and having the conversation, but I would just say it's not right now -- it's one of the more difficult investments to make.

Okay.

That makes sense.

Thanks.

Cai von Rumohr from Cowen.

Yes, thank you very much.

So I think on your second quarter call, Larry, you made a big deal about how getting to rate on the A350 was going to be key to kind of really turning the corner.

Is Airbus the rate ramp that you expected as of mid-year?

And are we still looking at delivering, given you missed by one in this quarter, something like 12 units in the fourth quarter?

Yes, Cai, I know that Airbus has their call in just -- what is it, a few days or so here?

-- so we don't normally comment on our customers' profiles.

But you are absolutely right.

Ultimately, your ability to achieve rate is the factor that makes the biggest determination, or one of the biggest determinations, in your recurring costs because you're amortizing your fixed cost against a much bigger base so it's an important factor for us.

That said, I think that the backlog on the airplane is solid.

The demand for the product I think has done well in the marketplace I mean from what I hear.

And so the question is, and this would be a great question for you to ask them in terms of where they are, but the question is simply about the trajectory to get there, not I don't think with regard to the market and its home.

Okay.

I'm a little confused, Sanjay, with your kind of cash flow guide.

If I look at your short term deferred revenue, it looks like it's $196 million at the end of the third quarter.

If you don't achieve a master contract of negotiation, does that number go to zero and therefore your cash flow is zero in the fourth quarter?

That kind of is the way it looks like.

Yes so, Cai, the way I would look at it is -- really look at the balance in that particular account at the start of the year and that's when the interim arrangement kicked in and you're really seeing the growth, I would say, not all, but a majority of that relates to -- most of it relates to the term arrangement.

And yes, if you subtract that from a year-to-date cash flow you get a pretty good idea as to what we truly perform and what we need to perform in the fourth quarter just operationally to achieve the guide that I gave you of the $700 million to $800 million.

I'm assuming that until such time as we don't have an agreement that that cash flow is not in my guidance and will be returned and yes that number will come down to very close to the number it was at the start of the year, the $20 million-some.

And yes, that will go down.

Thank you very much.

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

Sam Pearlstein from Wells Fargo Securities.

Good morning.

Just to follow up on that one question, I just want to make sure I understand.

The amount of the $290 million to-date is not included in the cash flow so we should take your free cash flow number and add that to 90 just to kind of get a sense to what the reported number will look like this year?

Sam, I'm not sure I --

I'm sorry, on the deferred revenue.

I should take what the balance is and add that to the free cash flow guidance?

No, so in my current year-to-date cash flow number of $753 million includes cash that I'm currently receiving from Boeing associated with that interim arrangement.

The Delta between the start of the year, and where we at the end of third quarter in my short-term deferred revenue, the Delta is about $170 million-odd, we started the year at about $23 million, we are right now balance of $196 million.

You'll see that in my press release.

Most of that, not all but most of that, relates to the interim arrangement.

It's in my $753 million, but if I don't achieve a settlement by the end of the year all of that will go back.

It's not included in my guidance of $700 million to $800 million for the year.

I hope that helps.

Okay.

And then just in terms of the 737, you did start a new block this quarter is that right?

Is there any way to kind of isolate what the core margins in terms of just thinking about volume versus pricing and how that flows through in terms of the overall performance?

Sure Sam.

So the answer to your first question is yes, we did start a new block and like our margins and our performance -- I think I mentioned this a few times in the past.

Last part of what we're working on now is cost reduction across the board.

It's in our overhead accounts, it's in our--.

That manifest themselves to appropriately and get allocated into a variety of our programs whether it be the 737 or other programs.

So I don't want to get into program by program margin.

They're very consistent with what we have been performing and our goal obviously is to continue to do better.

Okay.

Thank you.

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

Thanks, Ghassan.

We're over time I can see, and I know it's a very busy day.

Listen, I always thank you for your questions.

They are always -- we do the best we can to answer those.

Looking forward to talking to you again the fourth quarter.

I'm guessing -- I was surprised I didn't get any questions about the Royals or the Mets.

I'm presuming most of you are Mets fans and I just say go Royals.

(Laughter) And thank you all.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.