Spirit AeroSystems Holdings Inc (SPR) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Spirit AeroSystems Holdings Inc.'s fourth-quarter and full-year 2015 earnings conference call.

My name is Abigail and I will be your coordinator today.

(Operator Instructions)

As a reminder, this conference call 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 fourth-quarter and full-year 2015 earnings call.

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

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

In order to allow everyone to participate in the Q&A 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 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.

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

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

Good morning, everyone, welcome to Spirit's 2015 full-year earnings call.

As I reflect on the last year, there were a number of significant accomplishments that were achieved by the Spirit team.

I'm thankful for their dedication, focus, and commitment.

We also celebrated a few major milestones with our customers on their journey to achieving a banner year for the aerospace and defense industry.

And of course, we made progress on some key objectives that I had defined at the beginning of 2015.

As you may recall, I outlined five key objectives for Spirit in 2015.

They were first, to continue our focus on improved performance, increased productivity, reducing costs, and aligning our business to do what we do best.

Second, to leverage our investments as we prepare for the rate increases ahead.

Number three, to continue our progress on the A350.

Fourth, to have a greater emphasis on long-term growth.

And finally, to address how we deploy capital.

Operationally we had a very good year.

Both Boeing and Airbus achieved record number of aircraft deliveries in 2015, reflecting continued strong demand for these best-selling aircraft.

Given that tempo, we met our quality and delivery commitments to our customers and added to our statement of work.

We addressed additional capacity with a $360 million capital spend last year in preparation for production increases, in terms of rates of 12 per month on the 787, 47 per month on the 737, in addition to rate increases on the A320 and the A350.

We continued our drive to lower costs at all of our sites and demonstrated improved productivity and quality across the board.

Our centralization effort continued with the closure of two sites and consolidated functional operations.

Our supply chain initiatives made good progress to include our make versus buy strategy.

We executed a smooth transition of the 787 wing, fixed leading edge from our Tulsa facility to our Malaysia facility, and at the same time, we insourced the 787 nose wheel assembly back into our factory in Wichita.

Just last fall, we delivered the first 737 MAX to Boeing on schedule, and we would like to congratulate Boeing on its successful first flight of the 737 MAX just last week.

We also made good progress on the A350 program.

In the fourth quarter, we delivered 14 shipsets, including 2 Dash1000 units, as compared to 8 shipsets, including 1 Dash 1000 unit in Q3.

For the full year of 2015, total deliveries were 37 shipsets as compared to 16 in 2014.

The average deferred inventory per shipset declined 1.2 million as compared to 2 million in Q3.

Excluding some one-time adjustments, the results were even better.

We're continuing our drive, as a team, as the whole A350 production gains momentum.

We also supported Airbus key milestones last year with the certification of the A320neo.

Other significant 2015 milestones include the delivery of the first V-280 prototype to Bell Helicopter, which was on budget and ahead of schedule, which went from concept to delivery in just 22 months.

The first flight of the KC-46 tanker, the first flight test of the MRJ, and the delivery of the third and fourth CH-53K fuselages to Sikorsky.

Of course our engineering developed efforts on the 787-10 and 777X are progressing to plan as well.

Financially we generated record cash and record earnings per share.

We were active in the market last year and we bought 5.7 million shares, or 4% of our total outstanding shares for $300 million.

We used the remaining $50 million of our share repurchase authorization early this year, and the Board of Directors has authorized an additional repurchase of up to $600 million through 2017.

In addition, the strong financial performance has enabled the full release of $242 million of deferred tax asset valuation allowance.

And then finally, we continued to retire risk with the resolution of several historical claims.

Turning to our 2015 financial results, we reported sales of $6.6 billion, an operating income of $863 million, and earnings per share of $5.66, which accounts for the impact of the 747 rate adjustment later this year.

Adjusted earnings per share was $3.92, excluding the impact of the deferred tax asset evaluation allowance.

Full-year backlog was $47 billion, which represents seven years of sales visibility, reported free cash flow was $930 million, and adjusted free cash flow was $738 million.

Now looking to 2016.

We're leveraging what we've learned to continue our efforts to reduce our cost in all aspects of our business, from overhead to logistics, and leverage the organic growth of our programs as well as new business opportunities.

We remain focused on both cash generation and disciplined cash deployment.

We believe in the value of our Company and the value of returning cash to our shareholders as demonstrated by the execution of the previously authorized share repurchase program.

Now turning to 2016 guidance.

We're guiding 2016 sales between $6.6 billion and $6.7 billion, earnings per share of between $4.15 and $4.35 for the year.

In terms of cash and capital expenditures planned for this year, we expect to generate between $575 million and $675 million in cash from operations.

CapEx is expected to be between $225 million and $275 million, and we are guiding free cash flow between $350 million and $400 million for the year.

Our guidance factors in our current understanding of Boeing's recent announcements regarding the 777 and the 747.

With that, Sanjay will lead you to the details of financials and give you more specifics about 2015 and the guidance for 2016, and then, of course, we'll be happy to take your questions.

Sanjay?

Thank you, Larry, and good morning, everybody.

Let me take you through our 2015 financials, as there were a number of puts and takes that occurred, as well as go into the details of our 2016 outlook.

First, I want to reiterate that both our 2015 results, as well as our 2016 guidance, factor in all the recent announcements made by Boeing last week.

As Larry mentioned, we did have a very good year operationally, and I, too, would like to thank the entire Spirit team for their hard work in ensuring that we, again, also met our financial commitments.

You'll recall we guided 2015 EPS of between $3.80 to $3.95 and free cash flow of between $700 million to $800 million and today reported EPS of $3.92, which includes the impact of Boeing's announced 747 rate reduction.

This rate reduction resulted in a $7.3 million charge, and we were able to absorb this and remain within the higher end of our guidance.

In addition, we generated $738 million in free cash flow, that warrants more detailed explanation, which I will get to in a moment.

We also met our commitments to our customers and delivered 1,457 shipsets, including record deliveries of 502 737s, 102 777s, 126 787s, and 37 Airbus A350s.

In addition, we delivered 494 Airbus A320s.

Also as recognition of our performance and engineering capabilities, we were awarded additional scope of work on one of our existing programs.

As shown on slide 2, 2015 revenues were $6.6 billion, steady versus 2014, supported by our strong portfolio of programs like the 737 and the A320, where production rates continue to climb upward through the rest of this decade.

The A350 and the 787 programs, which are in a significant production upswing, and the 777 program, which is now in a transition period ahead of the 777X launch in 2020.

Now turning to slide 3, our segment results for 2015.

Fuselage segment revenues were $3.4 billion, driven by higher A350 deliveries and partially offset by the price step down on the 787 program.

Operating earnings were $607 million, reflecting the flow-through benefits of prior initiatives on one-time productivity improvements, cost-reduction actions, and some performance incentives.

Propulsion segment revenues were $1.8 billion, supported by modest increases in Boeing mature programs, as well as the BR725 program, mitigated by lower nonrecurring sales.

Operating income was $378 million, reflecting improvements in our mature program work, and again, some one-time performance incentives.

Wing segment revenues were $1.4 billion for the year and reflect the divestiture of the Gulfstream program.

Wing segment operating earnings were $179 million and were diluted by a one-time asset impairment charge we took in the fourth quarter.

On the 787 program we delivered a total of 126 shipsets in 2015, and the deferred inventory balance grew overall by $7 million, primarily driven by the price step downs and offset by continued improvement in our cost performance.

Our current [lock] will end later this year, and we remain on track with the plan that we set out almost two years ago.

On the A350 program we delivered a total of 37 shipsets in 2015 compared to 16 shipsets in 2014.

More importantly, the average deferred inventory per unit this year was [$1.9 million.

In the fourth quarter, our latest units delivered are averaging [$1.2] million, and excluding some one-time supplier costs, the results were even better.

The teams continue to make good progress on our cost and working down the learning curve on this program, but as we have repeatedly said, there is still a lot more work to do.

Which brings us to EPS on the next slide, slide 4. We reported EPS of $3.92, versus $3.57 last year, which shows a healthy 10% year-over-year improvement in our core earnings.

This is the result of the numerous actions put into place starting in 2013 and 2014 that are now starting to flow into our bottom line.

GAAP EPS was $5.66, which includes the $1.74 for the full release of the deferred tax asset valuation allowance.

While we still have more work to do in general, I can say that Larry and I are pleased with the extent to which the teams are identifying initiatives, creating and capturing value as we continue our focus on labor productivity, overhead expenses, and consolidating key support functions, such as engineering, procurement, IT, and also finance.

We are also making progress in doing a much better job closing in on opportunities to balance our known and sometimes unknown risks that are inherent in our industry.

Turning to free cash flow on slide 5, 2015 cash flow included several one-time benefits, many that we have previously discussed.

Starting with reported free cash flow of $930 million, we exclude $192 million in cash received as part of the 787 interim pricing agreement.

Adjusting for that, free cash flow was $738 million, which is within the range I gave you last year of $700 million to $800 million for 2015.

As you may recall, this interim cash received was treated as a deferred revenue and excluded from our guidance in 2015.

The $738 million included a number of significant positive one-time items that occurred in 2015, including the tax refund received last year as a result of the Gulfstream program divestiture, the favorable settlement with General Dynamics, as well as the suspension of the 787 advanced payments we had in the early part of last year.

As we have stated before, we remain committed and confident to achieving industry benchmarks of steady and consistent 6% to 8% percent sales to cash conversion in the next few years.

Now turning to our 2016 guidance, we expect revenues to be between $6.6 billion and $6.7 billion, which reflect the higher deliveries on the Airbus A350 and A320 programs and steady rates on the 787 and 73 programs this year, as well as lower deliveries on the 777, the 747, and the Airbus 330 programs.

I want to highlight that while our guidance takes into account all of the Boeing production rate announcements made last week, we have applied our best assessment into our guidance and will continue to work diligently with our customers on the exact details and timing of these changes.

Based on this, we are guiding 2016 EPS to be between $4.15 to $4.35, again reflecting a strong year-over-year improvement in our earnings as we continue to focus our efforts to improve our performance and cost structure.

We are guiding free cash flow to between $350 million to $400 million.

This guidance excludes the disposition of the 787 interim cash.

Our focus on cash continues as better performance offsets the significant headwinds of higher advance repayments, higher working capital requirements of the A350 program, as well as the impact of the 777 and the 747 lower deliveries in 2016.

Our guidance is based on an effective tax rate of 31.5% to 32.5%.

Lastly, since I do not have to talk about adjusting for valuation allowances anymore, we will be happy to take your questions now.

(Operator Instructions)

Robert Stallard, RBC Capital Markets.

Larry, maybe on the A350, obviously your deliveries to Airbus are significantly in advance of what they're actually delivering to the airlines.

I was wondering if you can give us some idea of how you expect your delivery profile to pan out over the next 12 months relative to what Airbus is saying?

Really, I'm not going to provide any Airbus color in terms of I will say a projection.

I did -- have been paying attention to what they have been telling folks in terms of what they are going to deliver in 2016, which was a pretty coarse output.

We are making tremendous headway, I guess is what I would say, as reflected in the 4Q deliveries.

I think if you were to just take 4Q and look at 2016 you could make a bottom-end assessment of an expectation.

Other than that, I really probably shouldn't get into the details of the contract.

But that is probably a -- give you a good enough sense of what the lower end of the projection would be.

You have to remember, obviously, there is quite a bit of lead time between our deliveries and in the very end of Airbus still -- as we ramp and rate, they're progressively behind us.

Then those tack times shorten as both our rates and their rates go up.

Just a quick follow up, you're not worried that there could be a hiatus or a plateau as they burn through some of these --?

We have seen nothing, Robert, we have seen absolutely nothing that would indicate that.

I think that their specific issues have been well-defined.

So I do not think I'm speaking out of class by saying that they have had some challenges, which I think for the most part, they have been handling at the end of their line and keeping their line running and as they resolve any specific issues.

It is not, by the way, uncommon to see these kinds of things happen as you transition to production and then ramp up in rate.

My experience with them is they manage these issues as they come and do a great job overall of making things work.

Carter Copeland, Barclays.

Just a clarification, quickly, and a question.

I noticed, Sanjay, the deferred revenue item still is on the balance sheet.

Does that mean that interim pricing agreement has been extended?

I thought that closed at the end of the year, but just color on that.

And then one for Larry.

I know there was an article out, I guess it was last week or the week before, highlighting that you guys were looking to bolster the executive team with maybe another member as part of a long-term succession planning process.

I don't know if -- it was not an official Spirit communication, but anything you can provide on the thinking around that would be very helpful.

Thank you.

Okay.

Do you want me to go first?

Let me just take the first question first.

As far as the deferred revenue is concerned, there are two components of that deferred revenue, if you remember.

One was some sort of interim payments on a recurring basis that are in fact tied to a settlement last year, which we did not -- did not happen.

But again, like -- I don't want to get into all aspects of these settlements.

That money was not in my guidance.

I excluded it, and some time that will get paid back.

The other component of the deferred revenue was also, as you remember, we were investing in the rates on the 787.

And I told you that we will treat that payment from Boeing, as well, as a deferred revenue because that kicks in when we in fact start delivering at 12 aircraft per month.

Those are the two balances on those accounts.

It kind of bounced between the short-term deferred and the long-term deferred based on what is in the 12 month cycle.

That is really what you're seeing on the balance sheet.

You did such a great job on that one, do you want to take the second one?

(laughter) That's a good question, Carter.

I guess let me put everything in context here first of all.

It is kind of interesting to me.

We have -- over the last three years, have been incredibly focused on adding talent to our team.

It hasn't really provoked many questions up until this recent report.

We're still just in the business of trying to find talent.

To give you a sense of calibration, in the last three years, of our top 98 jobs, 89 people are either new to the Company or new to their job.

So in our top 98 leadership positions, 89 of those are new.

And we have obviously been working very hard on an overhaul.

That said, as we -- to be honest with you, we've kind of slowed down at the, what I will say, at the executive leadership team level, but we're always looking for talent.

So fundamentally -- and most of our energy, frankly, has been down further in the organization as we continue to improve ourselves.

As we consider all of the things that we have to do, we often look around at each other and go who is adding this to their day job?

It is clear that we need more bandwidth on the team, and so -- it is funny, we've been out looking for additional talent at the ELT level for well over a year.

As it relates to long-term planning, I guess we don't -- I don't want to say we don't have a plan.

But let me just say, if and when we do have a succession plan, it will be very comprehensive and well thought out with a good transition plan.

There's no imminent -- I think there was some reference to my contract expiring.

If those of you who have studied my contract, it's public.

It's an evergreen; it automatically renews.

So there is no really stress there or anything.

It is really just -- I would just say it is really business as usual for us in terms of trying to improve our team.

And then like I said, I think succession planning is a good thing.

I can't say it's a bad thing.

It is something that you have to be prepared to do.

And so when we do a plan, we will make sure that it's -- when and if we get that done, we'll make sure that it will be a very thorough and well thought out plan.

Carter, if I could just add (multiple speakers) the boss shows up on the weekends, he shows up here to drive the business and the detail.

I don't think I have seen any change in that, Carter.

(laughter)

Well, that's good.

Thanks for the color, Larry.

Myles Walton, Deutsche Bank.

Quick clarification of the clarification that Carter just asked.

Sanjay, did you -- were you saying that the interim pricing negotiations had concluded unsuccessfully and effectively had concluded, or were going to be extended for a period of time?

The other question really is on the 737.

I think the market has got a little bit confused from last week and Boeing on their 737 guidance.

It looks like it is not disturbing your delivery rates, and it sounded like you are looking for that kind of 40 -- the 500 plus aircraft deliveries in 2016, as well on the 737.

Can you help us straighten out what would be an implied 30 aircrafts or so delta between what Boeing is saying they're going to deliver over the last couple and the current year versus what you seem to be delivering?

Sure, Myles, let me take the first one first.

I know many of you have many questions often about the negotiations that we enter into with our customers, which as we have talked a number of times in the past, they are holistic.

They are large.

They are complicated.

They have a number of factors in them.

They're usually no one-time definition, it's sort of concluded.

We, during the course of the year, make a number of settlements and conclusions as we go along.

Those discussions are still in play and will always remain in play, because these are -- there are many different versions of contracts and things like that.

I don't want you to feel that it was concluded and nothing happened or anything like that.

There were certain arrangements we had made in terms of getting interim payments.

We had a time associated with that.

That time expired, and we're still in discussions.

So, that process will continue.

We work really hard, actually with both Boeing and Airbus and on the strength of our performance and the value that we bring to the table and the capability that we offer, the cost structure that we offer and the cost reductions we work on together, so that at least from our perspective will continue.

Your second question in terms of rates, our rates are flat.

They're based on skylines that we have received from our customers, and those are the rates that we are producing, too.

I know that -- I listened to the same Boeing call that some of you guys did.

But as far as we are concerned, we are delivering to the rate and the shipsets that I'm showing you, which are exactly flat.

How many MAXes are in there?

It sounds like you delivered your first in the fall.

Is it a handful?

Myles, I would be crossing the line if I gave you specifics on the MAX.

I think that is much more a question for Boeing, if you do not mind.

We're restricted from what we can talk about from that perspective.

George Shapiro, Shapiro Research.

Sanjay, I was wondering if you could go through the cash flow guidance for 2016 a little bit more?

Because I would have thought it would have been a little bit higher, but you may have bigger rate build on the 350 than I thought and certainly I had some interim pricing benefit from the 87 in there.

Just on that, do you return that money to Boeing, or with negotiations ongoing you just kind of keep it in limbo?

George, firstly, you just lost me a beer bet because I was convinced that you were going to ask Larry the first question instead of me the first question.

But thanks for losing me that.

(laughter)

More importantly, let's talk about cash flow for 2016.

Listen, our guidance in 2016 of $350 million to $400 million -- like I talked about in my prepared remarks -- incorporates, and some of this in your models you may or may not be factoring in.

But just to give you an idea, in 2015 the advance repayments that you guys are well aware of, both on the 787 program as well as on the A350, was about $130 million.

Just given the delivery increases in 2016 compared to 2015, you are going to see about a 50% increase in that number.

Again, we can't get specific because it depends on the exact number of deliveries, but you're going to see a very sizable headwind in 2016 compared to 2015 as far as the returning that advanced payment.

The good news here, George, Larry and I are going to have a drink the day sometime in 2017 when we are done paying off -- at least with Airbus -- the Boeing repayments will last a little longer -- but sometime in 2017 that headwind will disappear.

The second thing is, as we are ramping up on the 350 -- and it is a significant ramp up -- there is a sizable working capital impact, not only on inventory but also on just calculating the number of units we have at the end of the year and the receivable impact that we have on that and sometimes even the -- just those things.

The last thing is, like I told you, I incorporated into our guidance on cash flow all of the impact on the rate reduction of 777 as well as the 47.

At least you know those are important programs to us.

That is far as cash flow is concerned.

I have already forgotten your second question.

I think your second question was, do we return money and all of that?

That is part of our negotiations.

We do not want to get into all aspects of that on a call like this.

My quick question for Larry was going to be, you've delivered 53 350s now.

Larry, you've been saying when you get close to 100 you get pretty comfortable.

But with over 50, what is your comfort level as to where you need to be?

George, you asked somebody's question for sure.

(laughter) I think I have said this, that -- and it is obviously becoming clearer as the deferred comes down that the visibility on the moving components of the recurring price become clear.

Again, there's -- the most powerful component on the actual cost is the rate.

I could sit here and talk to you about, I think my confidence around labor learning curve.

I could talk to you about the cost downs -- or negotiated material cost downs, et cetera, which I think we are feeling better about.

But there's two other variables, rate being the most powerful of those.

Rate is the most significant part of that because it is consuming your fixed cost against that, and it's going to define when we hit that crossover point between cost and price.

I think that is what everybody is really trying to get a sense of.

As Robert asked in the very first question -- so hey, Larry, what do you predict the rate to be this year?

We are in that dynamic phase where it is going up, and then there's some prediction about when.

So what I would say is there is that component.

The other piece is the negotiations that are ongoing relative to negotiating the costs associated with the changes and when that all proceeds.

The best thing I can offer you is that the clarity around the costs -- the visibility around the costs is getting better.

And our performance, obviously, helps us -- aids us, frankly, in our discussions with our customer as well as aids us in our ability to achieve a rate.

I do not have a number for you.

I wished I did, but I think what you will see next quarter when we talk is you will see again an improving reduction in the deferred and probably a better visibility next quarter in what the outcome will be in terms of deliveries for the year.

I will leave it at that, George.

Doug Harned, Bernstein.

I wanted to go back to the 737.

Boeing has announced that it is taking its rate up in 2019 to 57 a month.

When you look at that rate increase, what does that mean in terms of the footprint that you need to produce the airplane, going to that rate, the investments that are required?

And also, how does it change the way you thought of going to 52 a month now that 57 is the target?

It doesn't -- we have an approach for both.

The good news is neither require a new building; we can figure out how to get this under the roof, which is very important.

I think we have a good sequencing plan that walks us from 47 to 52, and then from 52 to 57.

Frankly, the breakpoints are more around capacity of product as opposed to facility needs to incorporate more width.

We continue to refine it.

I can tell you that this is something that our team spends a tremendous amount of time on.

I personally invest a lot of time on making sure that we do this in the most effective and efficient way possible.

When you head to that 57 number, when you look forward, when do you start to have to pull the trigger on it?

And how do you become -- how have you become comfortable that is a rate that you can invest in and stay at and not have to pull back?

That is a great question.

I would just say that our first objective, obviously, is to minimize the impact of the rate, to be creative in terms of how we do our work out in the factory.

But no, we do have a plan.

And we are not -- we haven't hit the point at which we need to invest in 57.

But back to, I think to your fundamental point, which is how do you feel about sustaining that rate or what would you do?

And that is all part of the conversation that we have with Boeing around the overall proposition itself and how we go forward together.

And I will just leave it at that.

You have seen that historically that we have worked together and come up with equitable terms with each other to make these things happen, and we would expect to negotiate the same thing going forward.

David Strauss, UBS.

One clarification question and then another question.

You said you have assumed a 777 rate cut in your guidance, say, can you clarify exactly when you see that coming through?

In other words when do you step down in rate?

My other question is around the 87.

I think you will get through your block, Sanjay, here in Q3 roughly of this year.

What have you assumed as far as the go forward block in the guidance, and what margin have you assumed on that block?

I will take the 777 question.

On the 777 we do actually have a stepdown in rate this year in anticipation of Boeing's announced rate reduction.

It's 4Q rate reduction, so we precede their 2017 rate reduction by about a quarter.

Do you want to take the 87?

David, yes, you are absolutely right.

Obviously, when I gave you guidance I've baked in my assumptions.

That block -- we finished our current block towards the end of the third quarter, probably.

So sometime later this year we'll have to make a couple of decisions in terms of block sizes, like I talked about at the last call.

Obviously it does depend on our negotiations.

We've always said this on Dash 9, Dash 10 pricing.

Having said that I will tell you we have very good, solid, interim pricing arrangements.

So I don't want you guys to sit there and say, just because we have not concluded or something like that.

I've obviously made the right assumptions that I feel confident about for the second block, and that is what is baked into our guidance.

Now in terms of specific margins, I've spent the last two years trying to wean everybody off getting into margins by program.

And I apologize, but that is where I would like to leave it because we do not want to get there.

We want to try and help you understand our business in its entirety, both for cash flow as well as for earnings.

We made assumptions and I'm very comfortable with the guidance that we have given you.

That obviously includes the second block or the start of the second block.

Not to get specific, but is it safe to assume you have assumed a positive margin on the next block on 87?

I really don't, David -- I don't want to answer that question, please.

Again I want to take us away from positives or flat or changes on all of these programs.

Our focus, as you have seen, at the end of the day for the last two years -- I know we have been harping on this -- is to not just work on the 20% programs that need help but also on the 80%, so that we can give you an overall guidance of the Company and look up at our portfolio in terms of total performance.

I know I am ducking your question, but I do not want to get into program-by-program margins.

Cai von Rumohr, Cowen and Company.

I was wondering on the 777 rate cut that is coming toward the end of 2016, have you factored in some impact there in your guidance, and how much share count are you assuming in the EPS guide going forward?

The 777, I think Larry just tried to answer that question.

Our lead times are about three, four months ahead of Boeing's.

And as you know, Boeing announced a rate reduction on the 777 starting in 2017.

And so we've absorbed that into our guidance.

Your second question in terms of -- and I am assuming it's associated with the new share repurchase program that we announced of the $600 million -- others might have the same question.

There is no impact assumed in my guidance associated with this new share repurchase program.

Because I couldn't do that; those will be determined as we go through the year and there's no way I could have made some guesses on that part.

So, the $4.15 to the $4.35 EPS guidance that I have given does not include any additional share repurchase impact that we may see during the course of 2016.

Howard Rubel, Jefferies.

Sanjay, not to beat a dead horse, but we're going to try on gross margins for a second at the corporate level.

If we look at your guidance, it would appear as if you can still show some improvement in gross margin despite the fact that you have adverse mix.

Can you or Larry address how you are able to do that?

Okay.

I'm not -- the math is a bit complicated, but I will just focus on the point I made in my talking points regarding 2015 and 2016 regarding cost reduction.

Our efforts -- I think there might be some sense that we took all the costs we could out of the enterprise in the first two years and we are down to a diminishing set of options.

I think on the surface that would appear to be the case.

But frankly, what has happened is as we've learned the business better -- I hate to say that quite that way -- and have deployed our talent, the level of visibility and the number of options that we are pursuing to reduce costs have expanded.

That is why I made the comment earlier about bandwidth.

We -- not only am I talking about the inherent operations that we have but it is also our future options as we look into 2016.

Sanjay kept saying next year and I keep saying Sanjay, 2016, it is this year, we are already a month in.

(laughter)

When we think about this, we're not just thinking about -- what is happening is we're seeing the benefits -- and I think Sanjay alluded to this -- of the reductions in 2013 as they come to fruition, you see the full manifestation of those.

2014, same thing.

2015 the same thing.

And then the number of things that we have cut into the 2016 plan continue to yield results.

And that is why it is always a complex conversation because I think we see all the moving parts and then we have to describe this to you in rather larger terms.

That is probably the best way I could explain it, Howard, without walking you through the specific overheads.

That is why I made the reference here, to overhead, to logistics, it doesn't matter whether we are talking about air freight, negotiating new ground, new logistics, 3PLs, overhead, closing facilities.

We're being much more comprehensive in our view today, again, fundamentally for two reasons.

One is that people have been in their jobs for awhile now, and they have the ability to go after it.

A lot of the initiatives that we have taken hold of now really people get it.

And a lot of hard work, a lot of Saturdays and a few Sundays.

Just to follow up on that for half a second, and I appreciate that.

You did state that you were able to expand the scope on a particular -- with a particular program.

Could you elaborate on that?

And then also could you talk about other opportunities that could in fact lead to a higher revenue number than the high end of your guidance?

Sure.

It is interesting thing.

First of all, I can't really expand on the reference to the additional statement of work.

I'd just say you get a chance to look at our 10-K here and any material contract mod is in there.

That is the best I can offer you on that particular point.

And I did reference the pursuit of other new business.

What I would say about that is it is a fantastic thing to get new business.

It -- seldom does it offer you near term revenue.

It is usually an opportunity to invest.

So the truth is that there is a pretty good investment, a bit of capital, tied with that additional statement of work that is in our 2016 guidance that -- frankly it does not move the needle much on revenue or EPS in 2016, but obviously in future years it will.

Today, again it is a bit of an investment.

This is always -- as we look at these opportunities that we have, and there are some, that is the way it lays out.

Sometimes our customers let us talk about these things and sometimes they don't, so that is the way it is.

What we try to do is I think when we give our guidance, Howard, is to be very responsible.

And I don't want to use the word conservative, but not overly aggressive maybe is a better word to use, and do the best we can to communicate that with you because we know you also have a responsibility to try to model these things.

It is kind of a challenging place to be.

But ultimately, I think the thing that is encouraging is that it is good news that we can go out and secure new business.

Robert Spingarn, Credit Suisse.

On the A350, Larry, you talked about the $1.2 million deferred and the importance of volume.

I think it seems like at 2014 in Q4 you are a bit higher than Q3 but only about halfway to the target mature volume.

It seems like -- and I think you have said deferred is going to continue to come down.

But you are already at the point where you are above breakeven by -- I think that the delta between the content you thought you had when you started and what you ended up with, given that the scope increased.

How much further can you go before you have a renegotiated solution with Airbus?

Both things have to happen, clearly; I think I have been very clear about that.

And I think you are absolutely right on.

You need both of those things to transpire.

But I would say that I would hope that -- and I think you have been watching this now for a number of years.

My tenure, the number -- well, just two years ago it was $26 million per, and I think beginning of 2015 it was -- was it $13 million, $14 million, ending the year at $1.2 million.

So, I think you are getting a good sense of the trajectory there.

As I look at the numbers -- I have a little more visibility.

As I look -- when I look at the numbers going into the next Q, again the trend continues.

We are on a good trajectory down, and we need to continue to -- again as I said, rate's an important factor.

To your point, you cannot keep dividing a positive number and get below, but I did not mean to imply that was the only factor; it is just -- when you take the costs and you break them up into their constituent elements, you see depreciation and the number of fixed costs that get divided by the rate.

And it is pretty powerful.

But we're also taking costs out simultaneously and then obviously we re-negotiating.

All of those things have to happen and they are.

The point I was trying to make, Larry, is that you're outperforming here.

Against what may be the price should be, you might be at breakeven now.

Robert, again, I've got to take you with me for our negotiations.

(laughter) No, and we have said this, we have always said with all of our customers, when we -- not negotiate, when we justify, we do it on the strength of our performance.

We do it on the strength of data and facts and figures.

And to be very candid, we also work on cost reduction initiatives with our customers to try and lower this cost even more that benefits, not just us, but benefits them as well.

I think Robert's point is we're doing pretty well, and we just need to continue to do that.

Yes, given the scope.

Sanjay, I had a quick one for you as well.

This is actually the question, or a follow up on George's question on the cash flow, and I have tried to go at this in prior calls.

How do we think about an apples-to-apples comparison 2015 to 2016?

In other words taking out the tax refund, the Gulfstream refund, the settlement with General Dynamics, the advances and so on, just to get an idea of how we compare the $350 million to $400 million in 2016 to what a comparison would be in 2015?

Robert, that's a very fair question.

I struggle with that too, because -- not in terms of the absolute mathematics of it, but obviously inside.

I have of a number of -- which I refer to.

I had a number of one-time events in 2015 -- some of which you know about.

We articulated the three big ones that we know about.

Some others that you can probably detect in the verbiage that we use, whether it be one-time performance incentives or supplier rebates or some negative headwinds associated with settling historical claims and things like that.

There is a lot more ones, puts and takes in 2015.

That is why I was trying to get everybody to look at and focus at 2016 because it is a lot cleaner in terms of taking our performance and converting that into cash.

Clearly, there are those three things that I mentioned, headwinds in 2016, such as the higher advance repayments, the 777 and the working capital associated with these rate increases that we are seeing.

If I could show you all the math inside that I see, I do feel that we are continuing to do year-over-year improvement.

And that is a result of all the cost reductions that Larry has brought to this Company and the entire team has worked on.

That is the inherent improvement in free cash flow that you are seeing.

I know it is difficult for you to find your models, and I apologize, but there are so many one-time things that happened in 2015 that I almost feel you should look at 2016 in the context of what I described and that should give you what we truly deliver.

The last thing I will tell you is we always said to you that we want to benchmark ourselves against our peer group and get to the best 6% to 8% cash conversion, and over some period of time we are quite confident that we will get there.

Seth Seifman, JPMorgan.

Larry, the step-up in the share repurchases, I think maybe was a little bit more or came a little bit faster than might have expected.

Did anything change with regard to your philosophy of how you are approaching that?

And also, with the new authorization, anything to read into how you guys are looking at the M&A environment or the opportunity to do other things with your cash?

Seth, I will say it to you as simply as I can, it's a 9 PE.

Fair enough.

9 PE, when I look at my options, given the volatility of the marketplace, I know how well my business runs and so I just -- it is the best investment I think we can make.

I'd just leave it at that.

I'm kind of -- frankly, I wonder on these calls sometimes whether we could ask you guys some questions.

I will just answer that one that way.

Fair enough, thanks.

If I could follow up quickly?

Sanjay, the CapEx guidance, it is about a little over $100 million decline at the midpoint this year, but I know that last year you were funded to some degree for a lot of the investment.

On a net basis, what is happening to CapEx as we go from 2015 to 2016?

Then, when we are done at the end of 2016, where will you be capacity-wise on each of the growing programs?

Sure, Seth, and again this goes back to Robert's question, the previous one, which is how many one-times and how do you compare 2015 to 2016?

You're absolutely right.

2015 incorporated some one-time payments associated with the investments and the 12 aircraft per month.

I will tell you without getting -- I cannot get too specific, but again, adjusted for those kinds of payments -- and there are some small payments this year as well.

But adjusted CapEx in 2016 is little bit higher than in 2015, from my perspective, in terms of our cash flow.

More importantly, your question about where does this put us in terms of rates?

We are completely committed to the 12 aircraft per month on the 787.

We are committed to 47 aircraft per month on the 737.

Larry talked about the A320 and the A350 programs.

All of those program ramps-ups are what we have committed to, and we are absolutely on track based on those capital expenditures.

Jason Gursky, Citigroup.

I know we're supposed to be only asking one question, but since everybody else has asked two I think I will go in there as well.

(laughter) Sanjay, on cash, can you just confirm that we have rebase lined the cash flow for the Company and that as we are assessing the go-forward, 2016 is where we're going to grow from?

Larry, for you, on the cash deployment side.

I understand and appreciate the 9 times response to your question.

But I would imagine that if you believe in the longevity of the cycle -- and we have seen asset prices come down not just in your stock but across the board -- that there might be some opportunities here on the M&A front.

Can you talk a little bit about what it is going to take for us to see you deploy some cash into M&A to supplement the growth outlook for the Company?

Well, look -- let me take the second question, if you don't mind.

The answer is we haven't stopped looking.

We are out there looking every day.

And it is like anything else, life is a choice of alternatives.

You go to the grocery store and you look up there and you decide am I going to buy A or B. Sometimes you buy A and B -- if I'm shopping you buy A and B, but in any case -- so we're out looking.

I think the thing that -- and there are a few things out there that have caught our interest.

But the truth is, right now -- and by the way, we're not -- just to be blunt, we can do a share repurchase.

We can deploy capital and still pursue M&A.

We are not a highly levered Company.

So, one doesn't preclude the other.

I wouldn't think of it that way, if I were you.

And we will take advantage of an opportunity when we see it.

Again, when we look, we're looking for businesses that have the right contracts and the right programs, to be more candid, where you think you're going to get your investment.

And you can see an inherent efficiency that makes the acquisition accretive immediately and whatever premium you might pay that you can make up for it.

To your point, where we sit in the cycle right now, we're watching very, very closely.

But I have to admit, we are even astounded where things sit right now.

We're watching.

I will just leave it at that and just say -- and leave it with, hey, in our mind one does not preclude the other.

Operator, we have time for one more question please.

Ken Herbert, Canaccord.

First, just a clarification, then a question.

First, on the A350, can you quantify what the $1.2 million per aircraft in the deferred would have been excluding the one-time supplier issue?

And then second, in terms of a question.

Larry, you have talked a lot about -- and we have talked a lot about the cost initiatives you've pushed, initially from a CapEx standpoint and overhead and everything else.

But as you really start to tackle a supply chain in your procurement, can you provide any more specifics on the potential impact in 2016 or 2017 as you attack your purchasing in the contracts and as they roll off?

And what upside or what the impact could be on the cost structure from that standpoint, not just this year but moving forward?

I can't be quantitative, as you know, but let me provide some color.

I think I have done this previously.

What we're doing is aggregating the types of business that we do.

We spend -- like the majority of our revenue goes to procuring material.

We leverage the OEMs, buying contracts for most of the raw material.

There are some cases where we buy direct because, for us in particular, we can get a better deal because we're very substantial buyers of some particular products.

But on the commodity end, it is more driven by the market.

Again, what happens is when these things get hedged in these big buying pools, you don't immediately see -- for example, you would expect with the big downturn in the price of oil to see a big reduction in the -- or what you're seeing in the market, reduction in the prices on commodities to see that instantly to our bottom line.

It doesn't hit us the same way it does the airlines because a lot of these deals are hedged for longer periods of time.

We're seeing some benefits to that, but just not as much as I would like anyway.

Now, when you think about the other parts of the things that we buy, we buy fabricated parts.

We buy sheet-metal, very sophisticated sheet-metal parts, very simple sheet-metal parts.

We buy simple assemblies We buy -- and so what we are doing is we are culling the number of suppliers that we buy from, not just to get rid of suppliers -- although, there is an upside to our overhead associated with that, but more along the lines of aggregating our buy to get more organic buying power, frankly.

As these contracts expire, what -- we have developed the strategy where we combine these things in aspiring terms, and then we are negotiating out into the future.

It is not inconsequential, the advantage of doing that.

Again, that is why when Howard asked that question earlier, it is like there is a lot more still going on in all of this.

I was trying to think, what was your other -- does that kind of answer that?

There was a question for you in there.

That's helpful.

Just a clarification if you could on the A350 and the one-time impact.

I think Larry answered that, Ken.

Again, just wait another quarter, you will see the elimination of that one-time event, and you will see the results then.

We try and refrain from trying to give you all one-time issues that usually crop up.

We've been trying to keep this thing clean for you.

But it is -- we feel the performance is getting better.

That concludes our earnings call.

Thank you for your participation today.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program and you may all disconnect.

Everyone, have a great day.