Spirit AeroSystems Holdings Inc (SPR) 2016 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Spirit AeroSystems Holdings, Incorporated, first-quarter 2016 earnings conference call.

My name is Sonya, and I will be your coordinator for 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.

And welcome to Spirit's first-quarter 2016 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 question-and-answer segment, we ask that you limit yourself to one question.

Before we begin, I need to remind you that any projections or goals we may include in our discussion today are likely to involve risks, which are detailed in our earnings release, in our SEC filings, and in the forward-looking statement at the end of this web presentation.

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

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

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

Good morning, everyone.

And welcome to our first-quarter earnings call.

We're pleased that Tom Gentile has joined us, assuming his role as Executive Vice President and Chief Operating Officer.

Tom oversees all of Spirit's programs, as well as engineering, operations and business development.

Over the last two decades, Tom has held several leadership roles at General Electric, to include President of GE Aviation Services and, most recently, as the President and COO of GE Capital.

It's been great working closely with Tom over the last month.

In March, Spirit AeroSystems was named by the Secretary of the Air Force as one of seven subcontractors on the B-21 program.

We're very proud to be part of the team.

We're currently in the early phase of the engineering and manufacturing development program, but this is a landmark win that gives us a new growth engine.

It confirms our value proposition, not only in aerospace, but also in defense, as a proven, value-added, low-cost partner.

Earlier this year, we celebrated a significant milestone with Boeing, when the 737 MAX took to the skies for its first test flight.

We're very honored to play such a crucial role in the development and production of the latest generation of this great program.

Relative to the A350 program, we continue to make progress.

We delivered 14 shipsets, with an average deferred inventory per shipset of $400,000, as compared to $1.2 million in 4Q 2015, and $3.6 million in the same period last year.

With regard to capital deployment, we remain opportunistic.

In the first quarter, we purchased 3.6 million shares for $165 million.

This concluded the previous share repurchase program announced in 2015 and, at the end of this quarter, there is $485 million remaining under the current repurchase program.

Every quarter, I comment that we're driving excellence into all of our operations, and we are comprehensive in our near- and long-term plans for improved performance.

We're seeing the results of these efforts.

In addition to that, Spirit achieved investment-grade credit ratings from Moody's and S&P.

Both agencies cited expectation of a strong balance sheet, with sustained earnings and cash-flow generation in coming years, as the basis of the upgrades.

So, now let's just take a look at the first quarter's results.

For the quarter, we reported revenues of $1.7 billion, operating income was $267 million, which was up [13%] year over year.

Operating margins were 16%, as compared to 13.5% for the same period of 2015.

Operating cash flow was $94 million, and free cash flow was $43 million.

Our backlog continues to be strong at $46 billion.

Our 2016 guidance remains unchanged.

We expect 2016 sales to be between $6.6 billion and $6.7 billion; earnings per share between $4.15 and $4.35.

Free cash flow is expected to be between $325 million and $375 million.

With that, I'll ask Sanjay to lead you through the financials, give you more specifics about the first quarter, and then, of course, we're always happy to take your questions.

Over to you, Sanjay.

Thank you, Larry.

And a very good morning, everyone.

Let me take you through our first-quarter 2016 financials and then we will summarize our full-year outlook.

But before we begin, I'd like to first thank every Spirit employee for the contributions in the quarter and for once again meeting our commitments to our customers, as well as our shareholders.

Now, let's start with slide 2. First, we have a very solid start to this year with robust earnings of $1.29 per share.

In the quarter, we met all our commitments to our customers, and delivered 397 shipsets, including 130 737s, 26 777s, and 33 787s.

In addition, we delivered 147 A320s and 14 A350s.

Second, along with six other partners, we were awarded significant work scope on the B-21 program, and are very excited about the opportunities that this program brings to Spirit long term.

We are now executing on the detailed plans to balance all the required investments and meet program deliverables.

Third, a key accomplishment was our participation on the successful first flight of the 737 MAX.

We would like to congratulate Boeing on achieving this major milestone.

The 737 program and all derivatives are a cornerstone of our current and future business.

Fourth, we remain steadfast in our continuous focus on improving operational performance and managing all components of our cost structure.

As we have often repeated on our calls, we continue to challenge ourselves on direct and indirect labor for efficient production in our factories.

We continue to look for every dollar of savings in our overhead spend, and are working hard now on rationalizing our entire material and procurement strategy.

Lastly, in recognition of our solid financial performance over the last few years, as well as a strong balance sheet, we finally achieved an investment-grade credit rating with both Moody's and S&P in the quarter.

This is a result of all the hard work by each and every employee at Spirit.

Again, my thanks to the entire team.

Turning to slide 3, revenues for the quarter were $1.7 billion, 3% lower compared to 1Q 2015, due to slightly lower deliveries on the 737 and 747 programs, and lower 787 revenue due to price stepdowns, and partially offset by increasing rates on both the A350 and the A320 programs.

Our strong portfolio is bolstered by programs that are projected to increase in production rates through the rest of this decade, such as the 737, the A320, 787 and the A350, resulting in a very healthy backlog of $46 billion.

Moving to slide 4, we reported EPS of $1.29 for 1Q 2016, versus adjusted EPS of $1 for 1Q 2015, adjusted to remove the impact of the partial release of the deferred tax asset valuation allowance.

Most of the improvement in core earnings resulted from disciplined cost-reduction initiatives and productivity increases across the board.

These initiatives were identified and put into place over the last several years, and have given us the confidence to recognize a cumulative catch-up in the quarter, as some of our blocks near completion.

In the quarter, we released the majority of the deferred credit balance on legacy programs for prior years.

At the same time, we incorporated performance improvements into future booking margins.

Earnings per share for the quarter also benefited from a 5% lower average share count, as compared to the same quarter last year, which is a result of the opportunistic execution of our share repurchase program.

Turning next to free cash flow on slide 5, for the quarter we reported free cash flow of $43 million.

Historically, first-quarter free cash flow has always been impacted by the seasonality of working capital and incentive-plan payouts.

The $384 million cash flow in 1Q 2015 included a number of significant, positive, one-time items, such as the tax refund as a result of the Gulfstream program divestiture, the favorable settlement with GD, as well as the suspension of the 787 advance repayments.

In 1Q 2016, cash received as part of the 787 interim pricing agreement was $43 million, compared to $16 million in 1Q 2015.

As you may recall, this interim cash is treated as deferred revenue, and excluded from our guidance.

We remain on plan to achieving our guidance of $325 million to $375 million for 2016.

Slide 6 summarizes our share repurchase activities.

Since 2014, we have returned $594 million to our shareholders in the form of share repurchases.

And we plan to return an additional amount of up to $485 million through 2017, as part of our $600 million share repurchase program announced earlier.

In total, all this adds up to over $1 billion in cash that is planned to be returned to our shareholders.

And as we've always said, our approach to capital deployment remains disciplined and opportunistic.

For our segment results, let's turn to slide 7. Fuselage segment revenues were $874 million, down from $917 million for the same period last year.

The decrease was primarily due to lower revenues recognized on the 787 program, lower production deliveries on the 737 and 747 programs, and offset by higher revenues on the A350 and the 767 program.

Operating earnings were $177 million, up from $165 million for the same period last year, reflecting favorable performance and productivity improvements.

The segment reported $16.2 million favorable cumulative catch-up adjustments on mature programs, and a favorable change in estimates on forward-loss programs of $3.1 million.

Propulsion segment revenues were $439 million, down slightly from $446 million for the same period last year.

Operating earnings were $99 million, up from $96 million for the same period last year, as a result of continued improvement in our cost performance.

The segment realized $5.9 million favorable cumulative catch-up adjustments on mature programs, and a favorable change in estimates on forward-loss programs of $8.9 million.

Wing segment revenues were $361 million, down from $377 million for the same period last year.

The decrease was due to lower revenues recognized on the 787 program, and lower production deliveries on the 747 program, partially offset by higher revenues recognized on the A350 program.

Operating earnings were $59 million, up from $45 million for the same period last year, resulting from productivity and efficiency improvements.

The segment recorded $10.1 million favorable cumulative catch-up adjustments on mature programs, and a favorable change in estimates on forward-loss programs of $3 million.

On the 787 program, we delivered a total of 33 shipsets in the first quarter, and the deferred inventory balance grew overall by $33 million, due to price stepdowns in the quarter and offset by cost improvements.

Our current block will end later this year, and we remain on plan to our estimates and guidance.

On the A350 program, we delivered a total of 14 shipsets in the first quarter, compared to six shipsets in 1Q 2015, the average deferred inventory per unit decreased to $400,000, as compared to $3.6 million in the same period last year.

As Larry mentioned, we continue to make progress in our performance, and invest in ramping up our production rates.

As we have always said, while we have made progress in reducing our deferred growth per shipset, there is still a lot more work to do.

Turning to our guidance on slide 8, we expect revenues to be between $6.6 billion and $6.7 billion, which reflect the higher deliveries on the A350 and A320, steady rates on the 787 and 737 programs this year, as well as lower deliveries on the 777, 747 and the A330 program.

2016 EPS is expected to be between $4.15 and $4.35 per share, 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.

Free cash flow is expected to be between $325 million and $375 million, which includes the investments on the defense programs.

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

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

And with that, we will be happy to take your questions.

Thank you.

(Operator Instructions)

Sam Pearlstein, Wells Fargo Securities.

Good morning.

Sanjay, I wanted to ask about the guidance and looking at where you are in the first quarter.

It implies about $1.00 per share for the remaining three quarters, but you have now fewer shares outstanding, which, I think, was not in the guidance.

The 787 moves to a new block.

I know the 777 comes down in the fourth quarter, but what else would be negative that would keep you from seeing net-worth-CD earning power decline as we go through the year?

Thank you, Sam.

Sam, listen, it's a very fair question and, again, I have to take us all back to 2014 and 2015.

As you know, we've been building a reputation in our Company of always meeting our commitments.

Quite frankly, our internal plans are always to try and find ways to exceed our commitments.

But, it is the first quarter and, at the end of the day, what we try and do is, make sure we not only improve year-over-year, which as you know we have.

I think in 2014, we hit $3.57; last year we did $3.92; and this year, we're going to do $4.15 to $4.35.

But you also have to remember, Sam, that we're ramping up in rates and we always have to -- that's one of our brands; we will always ensure that we deliver to our customers and, sometimes, we do anything and everything that it takes, including with our suppliers, as well as expediting parts and so on.

So, it is the first quarter.

We're comfortable with everything that I know today, in terms of our guidance.

And, obviously, we will try to do better.

Lastly, as you pointed out, and I think we were very clear, the share repurchase, which is a component in our current results, was excluded from our guidance.

So, over the course of the year, depending on the outcome of how opportunistic and disciplined we are, whatever the impact of the share repurchase is, is obviously additive to our numbers.

Thank you.

Doug Harned, Bernstein and Company.

Thank you, good morning.

On the A-350, your progression on costs looks very good.

I'm interested in, at this point, when do you expect to be at breakeven?

And, also, the Airbus has a large number of airplanes in various stages of completion in Toulouse right now, many waiting on interiors.

Have the delivery delays associated with those affected your work at all?

So, if you can visualize, and I know you're quite familiar with our business, as you're ramping up in rate, and I've done this quite a few times in a number of programs.

This is probably -- there's a number of really challenging periods, as you mature your production line.

You're getting to your ultimate rate.

Maybe the most difficult is the ending of the engineering phase and the beginning of the production phase because there are so many changes that are making their way into your production line.

Thank goodness, for the most part, that's behind us.

Change traffic is very small, in comparison to what it had been historically.

So today, as we ramp up in rate, we're just dealing with in the machinery and Airbus is dealing with the machinery inside their own company, as well as inside the supply base.

So, the front end of the line runs faster than the back end of the line.

As you go up in rate, our deliveries, our build and, then, our deliveries precede, obviously, the Airbus build and delivery.

So we haven't seen -- and it's a reasonable question -- we haven't seen any slowdown from the plan in terms of demand.

It's generally been within days and, so, all of us, I think, across the board, in terms of, we supply both wing parts, as well as center section of the fuselage.

We're all working hard to continue the path up to, ultimately, whatever the ultimate rate turns out to be.

And, as it relates to your first question, where is breakeven, I don't, I'm not going to give a forward-looking projection.

I tend to be, I guess, I'd prefer to be safe and demonstrate results.

And particularly in this phase, when the numbers get down - when you're in this phase of the ramp rate, what happens is -- and I mentioned this last year -- this is the rate, you're very rate sensitive.

And you're rate sensitive in two aspects.

You're rate sensitive on the revenue side, because if you don't have deliveries, then, obviously, that impacts the revenue side and, on the cost side, your fixed cost, obviously, you're very sensitive to the number of units delivered in any given quarter.

This is not a good time to be doing that, and there's actually a third component I probably should mention, which is you will have some one-cost, one-time, nonrecurring costs that occur, as a you're paying kind of an expediting -- I call it expediting cost, associated with getting to rate.

Whether that expediting cost is manifest, is surge capability in your line, or that expediting cost is in freight, or it's, you're expediting your supply base.

There's a whole number of things that occur in this space.

You can see we're making very good progress, but it's not -- and I think the really good news, the really good news is, I think we have very good cost transparency at this point.

But, there's a difference between saying hey, how do you feel about your ability to project your labor learning curve, your support ratios, your supply-base cost downs, versus, how will you handle the turbulence in any given year or quarter?

We're feeling really good, as you can see, but there will be some challenges during the year, quarter to quarter, and we'll continue to make progress.

But, this is one of those transitional years.

Thank you.

Howard Rubel, Jefferies.

Thank you very much.

I want to also pursue a cost question.

You've been able to recover, Larry, some of the losses on some of the programs you've taken charges on, but they're very small, relative to what's still out there, in terms of potential.

Could you address the possibility of, I'll say, taking a step function forward, in terms of recovering those costs?

Well, Howard, I'm not sure I know what specifically, what program you referring to.

We certainly don't anticipate any step losses or anything, right now.

I could go through the

whole portfolio program by program, but we just discussed A-350.

I think you can see the progress there.

I think on 787, in this particular quarter, it's, as we move toward the end of the block, we're right on the plan that we laid in, my gosh, it goes back two years ago.

So we're marching right along.

We know what our step-down pricing looks like.

We know what our cost visibility is on 787 and were confident about where we're going to end up there.

So I certainly don't see any negative news, or maybe you meant positive news, I'm not sure.

There's always the potential, as we continue to drive down cost, but the whole enterprise, that's our objective.

But, again, we try to put that in our guidance.

As we look at our guidance, we sit down and we take a look at the historical view of our cost reductions, and, there's always a little bit of conservatism, so you saw some of the net negative-deferred building up in some of the accounts last year.

As we continue to drive the enterprise down, that kind of that manifests, as the team both looked at that, and we saw the progress that we were making, or the status against our future initiatives, the team's confidence showed up as key catches.

That doesn't mean a multiplied by four, by the way.

To be clear, that was -- those really were catches and were not, and were part of our thinking, quite candidly, when we gave guidance.

So, really, the machine is working very, very well.

Our approach to cost reduction, when I say comprehensive, I mean, it doesn't mean that we've used up the, we've emptied the tank of opportunities.

We have a number of identified things that are, were very well thought-out initiatives, which as we measure those things, again, our confidence is quite high that they will come home.

That's manifest.

And then as I look forward and I see other things that we have in play, that play out, not over quarters, necessarily, but play out over years, I'm really confident there, as well.

And, really, the big question for us often is, gosh, how much change can we consume without disrupting our primary objective, which is to make sure that the number-one thing about our brand is that we deliver product and meet commitments.

And that's the balancing act and the great news is, when it shows up as a win, where you go to market and you compete head to head, like we were able to compete in a very significant way, as part of the B-21 program, and then demonstrate our value, it's a great thing, especially when it's in a new market.

So, I don't know that I answered your question to your satisfaction, Howard, but that's the best I can offer.

Thank you.

Myles Walton, Deutsche Bank.

Thanks, good morning.

When I'm comparing the quarter 1 to quarter 1, in terms of cash flow, and I do the corrections for the one-timers last year, and, then, also the incremental pricing, is it a fair compare to last year something like, maybe it's down $15 million or so, year on year, versus, obviously, a headline number?

And, then, on the forward-loss reversals, could you give us some color as to programs were you're doing those reversals.

Thanks.

Sure, Myles.

Listen, obviously Q1 of last year, in terms of cash flow, was so corrupted by these one-time events.

They were large and they were everything from taxes to settlements with GD, which, again, if you really looked at the balance sheet, Myles, it's confusing because it flowed in and out of everything between receivables that we've had, as well as settlements that we had, and so on and so forth.

And, if you recall, when we gave you guidance for this year, and I tried to say that, hey, the $325 million to $375 million guide we have for this year is representative of sort of a clean number that you can look at.

So, the real question is, what is Q1?

Because, again, if you exclude the interim payments, it's fundamentally zero.

But, that is, historically -- and, again, if you go back into 2012, 2013, 2014, all aerospace companies, frankly, you see the impact of the December shut down.

That creates the anomaly in Q1 of your accounts receivable bumping up.

And, again, you can see that and you'll see that; in fact, we're hoping to release our Q this afternoon; you'll see all that.

So, there's nothing other than timing in working capital, as far as cash flow is concerned for Q1, other than, we do have, compared to last year, like we did talk earlier as well, there is a little inventory buildup on 787 and A350 programs, but these are ramping up.

But, again, that cleanse itself.

And, again were quite comfortable with our guidance for the full year, as well.

So, nothing other than timing.

It's really working capital and, obviously, the other big thing that happened in the first quarter is the incentive payouts to our employees and executives and that's, obviously, usually a large number.

So those are the two things that, in a normal course of events, would affect cash flow in Q1 and, again, without looking at 2015, if you really go back into 2014 and 2013, you'll see a very similar trend.

I hope that helps.

I'm sorry, you also asked about forward losses and what programs.

Again, the programs -- if you recall last year, when we sort of rushed and gave you guidance associated with Boeing's announcements on the 747 and programs like that, we did our best estimates, in terms of what the costs could be, and we continue to manage our costs and, so, they really relate to that but it's across the board, too.

That's really what they forward loss.

The way this works is, we, and, I think Larry's been talking about it for the last two years, we work on not -- we work on all cost.

And as all costs filtrate into the allocation, that's really what happens.

So, it's cost reduction across-the-board that benefits in Q catches are profitable programs and, obviously, it reverses itself in terms of losses on (inaudible).

And I think that's good.

Yes.

Go ahead.

Operator go ahead.

Seth Seifman, JPMorgan.

Thanks very much and good morning.

I was wondering, Larry, maybe if you could talk more, now that Tom Gentile has joined Spirit, you mentioned some very broad responsibilities at the beginning of the call.

Where do you see him focusing, specifically?

How you see those responsibilities evolving, and what this means for where you'll be focusing?

Sure.

Absolutely.

The truth is, fundamentally, we're a manufacturing company.

And, there's lots of other things that we do, but the truth is, we are a manufacturing and also and engineering company, because we're not just a build to print house.

We have a lot of design activity going on as well.

So, I think the important factor, of course is, Tom is spending a lot of time, and we're spending a lot of time together, really, getting a good foundation, as it relates to each of our sites.

We're a global company so, of course, that means traveling, both here to the US sites, as well as to our sites overseas.

Getting to know the team.

Getting involved in the daily tempo.

And, really, again, the fundamental thing here is, as the most important thing of what we do, is our ability to deliver on commitment.

And, of course, the efficiency at which we do that, then, of course, drives the financial engine.

Those of the things that are the fundamentals of our business and that's where he's spending the preponderance of his time.

Now, certainly, he brings a lot of experience and talent to our team, as it relates to other things that were interested in doing, and chasing whether that is M&A or other kinds of financial considerations.

But, if we don't build and deliver, and the real machine here is working on the efficiency, that's really what manifests itself and has manifested itself over these last few years.

And, of course, we have quite a bit of rate increases in front of us, and, so, we're working hard on the engine.

He's, frankly, we're working side by side, and I wouldn't say he has any specific emphasis.

At some point, when my meeting, all the sudden my invites to meetings reduces, I'll know that he has the ball with a number of things, but, so far, pretty much every meeting I go to, we are both there.

Thank you.

Carter Copeland, Barclays Capital.

Good morning, Larry, Sanjay.

I want to clarify and tie of A350, quickly, and ask about B-21.

I know you said on the A350, you get cost transparency, but when you look at the revenue side, I noted the disclosure in the K that said you had some assumed recovery there and future revenues.

Is that a price adjustment we should be thinking about, over the long-term, or is it a lump-sum repayment or capture?

Anything you could do to help us clarify that would be great.

And, then, just on the B-21, in general.

Obviously, big win and it changes the value proposition.

Larry, how does that change how you think about what the universe of BD opportunities are for the Company, or M&A opportunities are for the Company, any color you can provide there?

Let me take the last question and let Sanjay answer the A350 financial question.

On the B-21, I think that the thing that is encouraging to us, and I'm going to -- I can't get into too much detail, but let me just say, it highly levered our design-manufacturing expertise.

And, the commercial space, as applied to the defense space.

Now, having spent 36 years in one, or 34 years, excuse me, in one and, then, so many years in this one, I can tell you, having lived on both sides of that fence, that it's an impressive thing to see and, whether it's manifest in terms of approach and the ability to do some very different things, or it's manifest in just kind of the basics, which are labor rates and cost structure, it's really an incredible value proposition to the defense side of things, where budgets are getting tighter; in particular, they are getting tight on the acquisition side, because of growing operations cost, growing mill per, maintenance cost, et cetera.

So, I think what it does is, it introduces DOD, at least over some progression, to a different thought for how to go forward.

Now, opportunities -- my view of defense opportunities is that there's a variety of them.

And the probability that anyone goes forward is 50/50.

You can decide, you can participate in every one and live with the yield and still not do poorly, if you're smart about your investments.

But, I think, for us, we're going to be pretty selective in terms of looking for the things that I think our entrees that either feed our R&D or manufacturing side of the, I'll say development side of our cycle, but be on the right programs, the ones that are going to get funded, and make their way ultimately into production, and become needle movers and our overall financial gauge.

They come every often, so often.

As you look on the horizon you want big things.

You want things that fit.

So, there's a some natural things I can see for us.

And, so, what we have to do now is kind of take this -- my view of all of this is that this is a fantastic win.

But if we don't win more business, it would be, frankly, it would be a disappointment.

But I see just the opposite happening.

I'm just waiting for that next entree, and I can see at least one or two.

Sanjay do you want to take --

I'll take your second question, or your first question may have been about the A-350 and our disclosure, et cetera.

As you know, Carter, we've, obviously, got a nonrecurring program and a contract, of course, recurring.

What that largely refers to -- and Larry has talked about this in the past -- there are three or four aspects of achieving long-term what we need to do on the A350 program.

Of course, need to work on our cost, which we have been doing; clearly the rates matter, because they do lead to absorption; and the last one is a negotiation with our customers, associated with resetting, due to all the changes there are natural and in every new program.

And that's really what were talking about, so, we're not talking about some big, one-time lump sum or anything like that.

And, to Larry's point, good performance and good cost visibility is not only important for us; it is also important for us in the context of how we discuss that and, obviously, cost-reduction initiatives with our customers, as we try and resolve these issues.

We work with all of our customers exactly on the same kind of principles.

And that's really what that refers to.

It's more recurring than sort of a nonrecurring kind of thing.

I hope that helps.

Thank you.

Jason Gursky, Citigroup.

Good morning, everyone.

Larry, a quick question for you.

In the past, you've talked about this journey you've been on with the cost side of things and, when you arrived, you went in and attacked head counts, efficiencies, and you've talked, I think, in the past, about the opportunity there that sits in the supply chain and the ability to, perhaps, reduce the number of suppliers, and get more work to fewer guys and get better pricing out of it.

You also talked about make-buy decisions.

Can you provide us an update on where we are, at this point, and when -- I know it will be a continuous process, but those initial remarks that you made about the supply-chain side of things, where are we at this point?

I think I remember at one point you suggested in 2016, in 2017 you had a very large number of supply-chain contracts that were rolling off, that would allow for consolidation.

I know it's continuous, but, I'd like to get an update, relative to your initial comments about that.

Okay.

First of all, we're making good progress, but, like anything, you figure out, you look at your planning, and you say, okay, the first step was to say, okay, how do we take our supply and then develop, I'm going to say a strategy?

The strategy, step one, is to say, okay, let's figure out how to break these things into categories and then look at those categories and figure out, okay, what would be a global strategy for each of these categories of things that we buy?

And what are the organics around what these costs are?

Does it make sense to change at all?

Are there some pure economic levers that we could pull through either consolidating around existing suppliers?

And, just use either an under capacity they might have, or aggregating their investments, because, just like us, the suppliers are faced with the same dilemma.

It's an interesting thing.

One of the challenges that we've had is that, as we looked at a lot of our supply base, we were a large percentage of their base, which meant any time there was a rate-related investment, or, I'll say, a technology-related investment, that we, effectively, paid that bill.

The other part was to really look at, I hate to say this, but the overhead structure and the G&A and labor rates of each of the suppliers and make some smart decisions about, okay, how are we going to do this.

Because, again, as I pointed out, depreciation is a big part of the cost structure; labor rates are a part of the, structure as well.

And then the question is, how much can we, given -- it's an interesting -- it's not bad news, it's good news, we are going up in rates, but, you don't look for us, number one, nothing more important is delivering product.

And so here we are going up in rate.

So the question then is, how do we lay this out?

So, the planning for these things, as we make these arrangements, don't go over, don't manifest in one year.

They actually don't manifest in two years.

They generally manifest, any one of these arrangements, generally, manifest in three years.

It's a progressive thing.

There's long-lead material, there's tooling, there's all kinds of things you have to do.

But the payoffs are substantial.

And so it's very comprehensive.

We're not done.

You have a sense of, there's two parts to story.

One is the plans we've already laid in, the arrangements we've already made manifest over some period of time and then there is probably another 50% of the plan that you have to, the material base, that you have to be had.

There's room for us to continue to do better there, from a supply standpoint.

Thank you.

George Shapiro, Shapiro Research.

Two-part question.

Sanjay, if I look at receivables, they were actually up $146 million, which is a big number, and I know that comparison to last year is no good, because of all the stuff going on.

But, is there anything that you can isolate and that $146 million, as to why it wasn't collected in the quarter?

And, then, my second part is, I thought you said the deferred for the 787 went up by $33 million, if that's correct, it implies you got to really step down sharply the rest of the year, because you've only got like $21 million to absorb another 59 aircraft deliveries.

So, if you could explained that further.

Thanks.

Sure, George.

Thanks.

Fair questions.

Firstly, on the receivables.

I know it's big.

Is anything lumpy?

I actually looked at DSOs and looked at everything, in terms of our 30/60 days, by customer.

We do this thing as a religion around here, as you can imagine.

There is nothing, there's no anomalies in that accounts receivable, other than timing.

So there's nothing there that is a one time that slipped or anything like that.

If I remember, we are ramping up and so that's just pure timing, and that will cleanse itself over the rest of the year.

So I'm not worried about that and, certainly it's in line with the cash flow guidance.

Now, in terms of 787.

You're absolutely right.

We did have a step down.

You saw the impact of the step down; obviously, it is offset a little bit by cost reduction.

The step downs happened at a discrete event, cost reduction happens gradually and over time.

Our cost reduction initiatives for the rest of the deliveries through line unit 500, which is when our block will end, our continuous plan and, like, I said in my comments, we are very comfortable with what we set out, like Larry said, this is quite amazing.

We set this goal for ourselves and our team almost three years ago.

And we have, and it's not been easy, but we've actually worked our way down that throughout those three years.

There is one thing that you may be forgetting.

I have talked about this in the past, which is, if you remember, there are two components of the deferred revenue, in terms of our arrangement that we agreed with our customer.

The first one was the money that we get as quarterly payment, associated, largely, with the investment that was required to get to rate 12.

That portion of the deferred revenue will start getting amortized, as we start, in fact, delivering 12 aircraft per month, which is a little later this year.

So that deferred revenue will get accounted for, partially in this block, as well.

And that will -- again, if you take that and you take our cost reduction and everything that we're working on, and some other things, we are quite comfortable with the fact that we will be on track for this particular block.

And that's all baked into our guidance for the year.

Thank you.

Cai von Rumohr, Cowen and Company.

Thank you very much.

To follow up to George's question, are there any other step downs before the end of this block?

Then, secondarily, given that you stressed that there are multiple step downs going forward, perhaps you could update us on your status of negotiations with Boeing, particularly on the 787 and, then, with Airbus, with any of your equitable adjustments requests.

Thanks.

Sure, Cai.

Very fair questions, Cai.

I respect those questions.

It so hard for me, for us to talk about negotiations in these kinds of forms, particularly since they are non-concluded yet.

We're in the midst of negotiations with both of our customers.

All I can tell you, which I know I've shared with all of you in the past, which is our negotiations are always fact-based.

They are based on performance.

Good solid performance.

Value that we know we bring to both our customers and so on.

First question was also about are there additional step downs and things like that?

Again, I know I'm going to duck these questions, but, we don't talk about step downs when they happen, and so on and so forth.

All I can tell you is that we've laid out our plans.

We are very comfortable with what we have laid out; otherwise, as you know, we're getting into the block.

I'd be required, and have a very good estimate in terms of where we will end up.

I'd be required to disclose any pluses or minuses at this stage.

I know you're going to trust us in that.

The negotiations with both Airbus and with Boeing are progressing and we had a really good discussions with all of our customers.

Thank you.

Robert Spingarn, Credit Suisse.

Good morning.

Larry, I want to go back to defense and, Sanjay, just a quick clarification for you.

Larry, you said you'd be disappointed if you didn't win some more defense, longer term, and, obviously, the B-21 is a huge coup for you guys.

Do you have a target mix for the Company, I don't know, five or six years from now?

I assume Terrainer is that other program that's on your list.

Actually -- I'm not going to comment on it.

I'm very familiar with the Terrainer, obviously from our prior job, so I'm quite familiar with that, but that's not necessarily a specific target of ours.

But, as it relates to the Company at large, there is the opportunity for the business to grow, but I don't ever really see it being really more than 20% of the Company, unless we, and we certainly could expand in our-- and it just takes time in defense, kind of expanded the things that we do today in the structure's business and, given the low-rate nature of defense, the only high-rate programs right now really is the F-35 and its supply base is fairly well-established.

So for that to become a larger part of our portfolio really moves us over to more of a conversation around M&A and, certainly, we think long and hard about when we're thinking about acquisitions, we're -- we have a pretty specific view of this.

We're looking for somebody, obviously, who has value, but back to your point, has the right programs.

We'd love, when we look companies and we see companies that have commercial high rate on the right programs, programs that are not coming to an end, right, or not low rate, then that's attractive but if they have a defense mix as well, that, for us, that's something that is of particular interest.

So there will be two methods for us to try to grow that.

And, given the tempo for new starts, right now, the new starts that are being talked about, obviously, the terrrainer is one, and then, there are some, always discussions around unmanned vehicles.

So, there's that, and, of course, as I said, there's an acquisitions.

Thank you.

Ken Herbert, Canaccord Genuity.

Good morning, Sanjay and Larry.

Just wanted to follow up.

You had a nice quarter, obviously, with accumulative catch-ups.

I wanted to get clarification -- more this quarter than we've seen over the last couple of years, was the amount this quarter of the benefit, perhaps, more than you'd expected, heading into the quarter?

And, I'm just curious, for the full-year guidance, your typically, this seems to running maybe a 5% to 10% of earnings.

Is that a fair assumption to use for this year?

Or is it, perhaps, a little bit more of a benefit this year, considering, obviously, Larry, everything you've done a talked about, in terms of the overhead, the supply chain, the automation and everything else you've invested in.

I think there is, I'm going to say this -- there's a growing confidence on the team side.

I referred to some of the negative deferred that had built up, and, I think, obviously, when you have negative deferred, that's a little bit of conservatism.

So, as the team came into the year and I really can't tell you -- I think you'd be surprised at the level of detail that we are really working these things in.

So, as I was looking at, as last year ramped up and we were going to this year, and looking at the overall historical performance, okay, did we do what we said we were going to do, kind of along the line of the question that was asked about supply chain.

Today, we are reaping the benefits of the initiatives that are old, that we put in place behind us, right?

And they go all the way back.

Some of these initiatives go back three years, you know.

And, so, as they come, they're kind of like, okay, as this manifests, then you see it show up, and, so, you say, okay, hey, guess what, my 777 block is coming to an end.

I need to do this.

My confidence in the historical is good and, now, I've ended the quarter, looking forward to the initiatives, because these initiatives all have timelines.

Some of them are immediately, are in the year, right, so a lot of our indirect costs, management of non labor, everything from tools to -- I think you'd be quite surprised at the level of detail.

We look at that and then we go, you know what, here's what happened in the first quarter.

Boy, it looks like we're on track, it's consistent with the guidance we bought.

It's low front-loaded in terms of manifestation of the EPS.

Does it give us good confidence that we've got the ability to perform for the year?

Maybe do better?

Sure.

So I think the team's overall confidence is coming up as all of this comes to fruition, and I think, again, back to an earlier question, have we used up all of our powder?

The answer is no.

But don't think it all shows up in one year.

These things take time, especially when you've got to be diligent about making sure that you don't create change that disturbs your ability to deliver product, in a way, and a high quality at the same time, as well as, you know, execute on your development programs, which we have quite a bit going on, on the development side, as well.

So, I think what we're trying to say is, hey, guys, don't multiply by it by four; that wouldn't be real.

We would change our guidance, if we thought that were the case.

And, do we feel optimistic about the rest of the year?

Well, we're going to keep pushing and it's always our objective to try to outperform.

Thank you.

David Strauss, UBS.

Thanks.

Thanks for taking my question.

Obviously, during the quarter, there was news around the aftermarket and your arrangement with Boeing there.

Could you maybe level set us, what the arrangement was in the past?

How it worked between you and Boeing and what the arrangement is on a go-forward basis, and how did this end up coming about, this change?

Thanks.

You know, we're not -- we don't described contract terms, but I think, basically, it's no secret that we sold parts and provided services to the market.

And we also sold parts and services to Boeing.

And, in addition to that, we also had, we have I shouldn't say had -- we have an MRNO business.

And so, now, we're going to sell -- and, by the way, our customers were very happy with us.

We received a lot of recognition for our service through our customers, so this outcome was not related to any customer dissatisfaction with us.

This is more along the lines of a strategy that Boeing has.

And, so, we're going to sell parts to Boeing instead of -- so we'll sell all the parts to Boeing now, and will provide our services to Boeing and our MRNO business will continue.

And, I think Boeing is very optimistic about the aftermarket.

The general idea is that, first of all, in their view, and I think it's factual, there's a very large aftermarket there and they believe they can garner a bigger percentage of it.

I think, from our perspective, there is a growing aftermarket just associated with the fact that the fleet is growing.

It's kind of interesting thing.

The fleet is growing and retirements are down.

This progression of time, this is good news for us.

It just means, at some point, there's more airplanes out there that we'll sell parts for.

But in any consequence this is not a big, big part of our business.

I don't think I've ever at any quarter in any call ever said, it's my objective to grow aftermarket.

Frankly, it was a service that we provided when I got here and, I think, will move forward and hopefully be the beneficiaries of this growing market space.

Operator we have time for one more question, please.

Thank you.

Michael Ciarmoli, KeyBanc Capital Markets.

Good morning.

Thanks for taking my question.

Larry, on the B-21, can you, maybe, sell me and shareholders on why we should be really excited about this?

This is going to be a low-volume program.

If it goes the way any the other large scale DOD programs go, it's going to be behind schedule, over budget, the contract environment.

(Laughter) So, the structure business is tough, in general.

Why is this a good thing?

Well, I guess -- boy, I had this conversation over my career so many times.

Now I'm trying to remember.

It seems like, to me, the defense guys are doing quite well, as it relates to their share price, so people must feel like that the defense business is a worthwhile thing.

It doesn't, generally, expose you, first of all, to losses.

Right, you're not taking a commercial risk.

On the flip side, the margins in the defense business are often not as attractive as -- ultimately, as you get in the commercial side, but, of course, there is these very, very significant investments that occur on new starts that, that's a big part of this phone call today and discussions about the investment side versus the return side.

It's accretive from an EPS standpoint.

Absolutely.

How is this program different?

You're talking to somebody who has run some of the largest, most difficult defense programs, so I'm -- I understand all of the challenges that go with this.

Do I think this one is different?

Well, I do think that the service has been incredibly disciplined.

I mean incredibly disciplined.

My involvement goes way back on this, and I don't think I've ever seen the kind of discipline that I've seen, as it relates to defined requirements.

They have not moved off their requirements for the platform, at all in, gosh, it's been six, seven years.

So they've been very, very disciplined, in terms of cost being important, and manifesting that in the reflection of requirements.

Will it ever be high-volume?

This particular program is not a high-volume program, but, then, the question really is, what are the collateral benefits?

And that was my point.

We would be disappointed if this win did not manifest in other areas, as part of an overall ability to grow our portfolio.

And, frankly, people coming to us, to choose us as a partner, the very attractive thing about us is, not only are we, not only do we have incredible -- I have to be careful -- incredible technology, but we are incredibly affordable, in terms of both the design and manufacture proposition.

So, are we asserting that this is going to be a major knob turner for the business, in and of itself?

No.

It's going to be quite nice.

I have to tell you, I was just over, going through the details yesterday.

I think, it doesn't look like many of the delayed starts and all, and a lot of uncertainty.

It looks quite good.

The DOD seems -- and Congress, and the administration seem very committed to funding the program.

Everybody understands the need.

And for us, I think it's a chance to sell our value prop, in a broader sense, and, hopefully, expand the number of things we participate, as part of a long-term view of growing the portfolio.

What is the negatives?

Honestly, I can't think of a negative, unless somebody is worried about some very, very small margin dilution, but this is, on the EPS side, it's eventually a plus.

That concludes our earnings call.

Thank you for your participation.

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

This concludes today's program.