Morning, ladies and gentlemen, and welcome to Spirit AeroSystems Holdings, Inc. third quarter 2022 earnings conference call. My name is Harry, and I'll be your coordinator today. To ask a question during the Q&A, please dial star one on your telephone keypad, and in the interest of time, please limit yourself to one question. I'd now like to turn the presentation over to Aaron Hunt, Director of Investor Relations. Please proceed. Thank you, Harry, and good morning, everyone. Welcome to Spirit's third quarter 2022 earnings call. I'm Aaron Hunt, Director of Investor Relations, and with me today are Spirit's President and Chief Executive Officer, Tom Gentile, Spirit's Senior Vice President and Chief Financial Officer, Mark Suchinski, and Spirit's Executive Vice President, Chief Operating Officer, and President of Commercial Division, Sam Marnick. After opening comments by Tom and Mark regarding our performance and outlook, we will take your questions. 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, including those detailed in our earnings release, in our SEC filings, in the forward-looking statement at the end of this web presentation, and referenced in our call today. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of non-GAAP measures we use when discussing our results. As a reminder, you can follow today's broadcast and slide presentation on our website at spiritaero.com. With that, I'd like to turn the call over to our Chief Executive Officer, Tom Gentile. Thank you, Aaron, and good morning, everyone. Welcome to Spirit's third quarter earnings call. Global air traffic demand continues to make good momentum toward pre-pandemic levels, but the lingering impacts of the pandemic are complicating the recovery and creating a challenging economic environment. The supply side of the aerospace recovery remains in a fragile state. While we saw positive earnings from all three of Spirit's segments for the first time this year, our day-to-day operations continue to face challenges from multiple factors, including volatility and near-term production rate schedules, supply chain challenges, availability of skilled labor, and persistent inflation. For example, while the headline production rates do not change, we have seen delivery schedule changes since last quarter for some programs, including the 767, the A220, and the A320, pushing units out of 2022 and putting pressure on free cash flow. Frequent schedule changes create challenges for us and our supply chain. While many of our suppliers are performing to expectations, we continue to see disruption in the supply chain, which is causing part shortages in our factories. Several issues are driving this supply chain disruption, including skilled labor shortages, attrition, part shortages, and inflation. Labor has also been a challenge. Earlier in the year, we addressed our labor needs by recalling workers. Many of these workers were less experienced and have had a longer learning curve to meet the same levels of productivity as the workers that retired during the pandemic. As we have gone to the open market to fill new openings, we have seen a higher level of attrition than in the past. To mitigate this attrition and attract the skilled labor needed, we have brought on additional contractors, have been holding job fairs, we have lengthened our training program, and have increased hourly starting wages. In addition, we have even been offering a signing bonus for hourly workers of $3,000 in Wichita. These issues, schedule changes, part shortages, labor shortages and attrition, and inflation, have disrupted our production system in Q3, resulting in lower than expected deliveries, which in turn had a negative impact on our cash flow. We have put in place plans to address these challenges, and we continue to target 300 deliveries for the 737 during the full year 2022 with our team. There is obviously risk to achieving this target, but our team is making a tremendous effort to achieve this delivery schedule so that we start 2023 in a stronger position. Right now, we are producing the 737 at a rate of 31 aircraft per month. We expect to be at this rate for much, if not most, of 2023. Given the ongoing schedule, supply chain, and labor challenges that we have been encountering, we have launched a cost optimization effort that should enable Spirit to be profitable and cash flow positive when the 737 is at 31 aircraft per month, which is where we are now and may remain for some time. This cost optimization effort will focus on reducing structural cost at Spirit in three major areas, operations, supply chain, and infrastructure overhead. While our commercial operations are taking more time to recover from the 737 MAX grounding and the pandemic, our efforts to diversify into defense and space and aftermarket are gaining more traction. Our defense and space segment grew this quarter, its revenue by 17% with 11.4% margins. We've been able to win more classified defense projects that are important to the new national defense strategy by repurposing some of our excess wide-body capacity to defense applications. So far, we have transitioned approximately 1.2 million sq ft in Wichita to defense business. These classified programs are early in their development, but will contribute to revenue and profit when they get into full rate production. In September, we were awarded a contract to provide the new horizontal stabilizers for the KC-135 tanker. We continue to target $1 billion in defense and space revenue by 2025. The aftermarket business also saw solid growth in Q3. The segment grew 38% over Q3 2021 with 24% margins. We recently signed an MOU with Malaysia Airlines Berhad to establish repair services for nacelles and flight control surfaces. We continue to target $500 million of revenue for our aftermarket business, with margins in excess of 20% by 2025. I'll now turn the call over to Mark to take you through a few more details on our third quarter results. Mark? Thank you, Tom, and good morning, everyone. We continue to experience significant pressures this quarter due to lingering impacts of the pandemic, including a very challenged supply chain, labor shortages, some production schedule volatility, and ongoing inflation. These challenges are not unique to Spirit, and I'm certain you have heard it from the other earnings calls over the last couple of weeks. We believe these challenges will continue through 2023, and we are taking additional actions like implementing a cost optimization program. We are slowly starting to see an improvement in our financial metrics. Revenues were up 30% year-over-year. Gross margins were the highest we've reported since the pandemic began, and most significantly, this is the first time we've reported positive commercial segment margins since 2019. While operational cash flow has continued to improve due to higher 737 production rates. Now, let me take you through the details of our third quarter financial results. First, let's start with revenue on slide two. Revenue for the quarter was $1.3 billion, up 30% from the same quarter last year. This improvement was primarily due to higher production on the 737 program and increased aftermarket revenue, partially offset by lower production revenue on the 747 program. Turning to deliveries, the narrow body programs in the third quarter of 2022 were 40% higher compared to 2021, with 226 in the third quarter of 2022. We delivered 22 more 737 units and 40 more A320 units compared to the third quarter last year. Wide body program deliveries were up 11% compared to the third quarter of 2021. Overall, deliveries increased to 316 units compared to 248 in the same period of last year. Now let's turn to earnings per share on slide three. We reported earnings per share of -$1.22, compared to -$1.09 per share in the third quarter of 2021. Adjusted EPS was - $0.15 compared to - $1.13 in the same period last year. This quarter's adjusted EPS excludes the deferred tax valuation allowance, as well as costs related to the termination of the Pension Value Plan A, while the third quarter 2021 adjusted EPS excludes the deferred tax asset valuation allowance and a pension curtailment gain. We continue to experience disruptions in our factories as a result of part shortages and labor challenges, while continuing to see further inflationary pressures in logistics, energy, and other indirect areas. Operating margins were slightly positive compared to -16% in the third quarter of 2021. The margin increase reflects higher production rates, specifically on the 737 program, as well as lower forward losses and excess capacity costs during the current period. The quarter's forward losses were $49 million and unfavorable cumulative catch-up adjustments were $5 million. This is compared to $70 million of forward losses and $3 million of unfavorable cumulative catch-up adjustments in the third quarter of 2021. The current quarter forward losses were primarily driven by the A350, 787, and BR725 programs. The A350 charges were a result of additional costs related to labor, freight, rework, and the impact of part shortages. While the 787 losses were driven by increased supply chain and other costs associated with the ramp up of production. The BR725 program forward losses were driven by increased engineering cost estimates. The third quarter 2022 earnings also included $31 million of excess capacity costs, a decrease of $21 million over the same period of 2021. Other expense for the third quarter of 2022 was $42 million, compared to other income of $95 million in the same period last year. The variance was primarily due to pension plan termination activities that were undertaken separately in each of the third quarters, which drove special accounting impacts in each period. The third quarter of 2021 included a curtailment gain of $61 million resulting from the closure of the defined benefit plans acquired as part of the Bombardier acquisition. In our current period, we terminated the frozen U.S. Pension Value Plan A. This termination satisfies pension obligations to participants while also eliminating the risk of future market volatility and reducing future compliance and fiduciary obligations. In relation to this termination, we recognized non-cash charges of $73 million in the third quarter of this year, primarily driven by an enhanced benefit the company is providing to certain U.S. employees in conjunction with the plan termination. We also anticipate additional non-cash charges over the next few quarters as the plan is finalized. Once this is completed, we expect after-tax cash reversion in 2023 in the range of $120 million-$150 million. Going forward, we anticipate the absence of this plan to reduce non-cash pension income by about $30 million annually. Now turning to free cash flow on slide four. Cash used in operations for the quarter was $36 million, which includes the quarterly cash repayment of $31 million towards the Boeing 737 advance received in 2019. Free cash flow usage for the quarter was $73 million, which was higher compared to the same period of 2021, driven mainly by large cash items in the third quarter of 2021, which included a $228 million tax refund and $38 million received from the Aviation Manufacturing Jobs Protection Program. 2022 free cash flow has been, and will be negatively impacted by customer deliveries that have been pushed into 2023, particularly on the A320 and A220 programs. Additional headwinds from the forward losses recognized on the A350, 787 and 777 in the third quarter, as well as ongoing supply chain disruptions, labor shortages and inflationary pressures. As a result, we expect the fourth quarter free cash flow to be between $0 and -$75 million. This estimate, along with the $450 million cash usage through the third quarter, results in full-year free cash flow usage of -$450 million- $525 million. Obviously, this is an increase from our previous target, with the majority of the increase due to push out of deliveries into 2023. With that, let's now return to our cash and debt balances on slide five. We ended the quarter with $671 million of cash and $3.8 billion of debt. Considering the lower production rates we are seeing and the current plan to stay at rate 31 on the 737 program for longer than our previous plan, we expect that it will take us longer to reduce our debt than originally anticipated. We now plan to explore refinancing options to provide additional cushion given the uncertain economic environment. As I mentioned earlier, we also expect to receive the surplus cash from the pension termination in 2023, and we anticipate this amount to be approximately $120 million-$150 million. Next, let's discuss our segment performance on slides six through eight. This quarter, we saw significant year-over-year improvements across all three segments, as well as sequential improvements across each segment over the second quarter of 2022. Now let's get into more detail on commercial segment on slide six. In the third quarter of 2022, commercial revenues increased 32% compared to 2021, primarily due to higher production volumes on the 737, 777, and A320 programs, partially offset by lower production on the 747. Operating margin for the quarter increased to +4% compared to -9% in the same period of 2021. The improvement was due to higher volumes on the 737 and lower changes in estimates and lower excess capacity costs. Changes in estimates during the current quarter included forward losses of $47 million and unfavorable cumulative catch-up adjustments of $7 million. In comparison, during the same period of 2021, the segment recorded $62 million of forward losses and $3 million of unfavorable cumulative catch-up adjustments. The segment had excess capacity costs of $30 million, compared to $55 million in the same period last year. Now let's turn to defense and space on slide seven. Defense and space revenue improved by 17% compared to the third quarter of 2021 due to increased P-8 and CH-53K production and higher development program activity. Operating margin for the quarter increased to just under 12%, compared to 6% in the same period of 2021. The improvement was due to higher classified program profit and lower forward losses compared to 2021, partially offset by higher costs in the current period on the Sikorsky CH-53K program. The segment recorded forward losses, favorable cumulative catch-up adjustments and excess capacity costs, each of $2 million, compared to forward losses of $9 million, favorable cumulative catch-up adjustments of $1 million, and excess capacity costs of $2 million in the third quarter of 2021. For our aftermarket segment results, let's turn to slide eight. Aftermarket revenues were up 38% compared to the same period of 2021, primarily due to higher spare parts sales, as well as higher maintenance, repair, and overall activity. Operating margin for the quarter increased to 24% compared to 14% in 2021 due to higher margins on spare parts sales and MRO activity compared to the same period in the prior year. Our aftermarket team continues to win new business, and we are pleased to see the continued growth in this segment. In closing, we remain focused on execution and delivering on our commitments to our customers as we manage through the pressures from the strained supply chain, a tight labor market, increased costs and the associated impacts of those pressures to our customer production schedules. Although the pace isn't as fast as what we would like to see. We are on the right trajectory to financial recovery. Revenues, margins, and operational cash flow have continued to improve over the last two years, and we expect that recovery to continue going forward. As Tom mentioned, we now expect the 737 program to remain at a rate of 31 per month for most of 2023, and as a result, we are initiating a focused effort to enhance our profitability and cash flow in 2023. This program will have a dedicated team focusing on reducing structural costs in the areas of operations, supply chain, and overhead. As we look to 2023, we continue to expect free cash flow to be positive, and we plan on sharing more details at our next earnings call in February. Now, let me turn it back over to Tom for some closing comments. Thanks, Mark. It was a challenging quarter, but we were pleased to see some positive results which will provide a foundation for a strong future outlook. First, overall revenue was up 30% year- over- year, mostly on 737 deliveries, which were 69 this quarter versus 47 a year ago. Defense revenue was up 17% year -over- year with 11% operating margins. Aftermarket revenue was up 38% with 24% operating margins. This quarter, we had the first positive operating income in three years at $5 million, and it was the highest segment operating margin in three years at 6.5%. These positive results are encouraging, especially since the adverse impact of the pandemic is lingering far longer than we all expected. The main challenges we have seen are similar to what other companies are experiencing. Unstable schedules from customers in a very dynamic environment, even when headline production rates do not change. Supply chain disruption resulting in part shortages for our factories, labor shortages, and elevated levels of attrition and high levels of inflation. We expect some of these challenges to continue into 2023. We are therefore taking several actions to position Spirit to be profitable and cash flow positive, even if production rates on the 737 remain longer than we expect at 31 aircraft per month. These three major actions to reinforce our performance in 2023 are the following. First, launching a cost optimization effort to remove structural cost in infrastructure, supply chain and operations that will ensure that Spirit is profitable and cash flow positive at 31 aircraft per month if that rate ends up being where we stay for an extended period of time. Second, exploring refinancing options to provide additional cushion given the uncertain economic environment. We are not planning to issue equity. Third, completing the process of our U.S. pension plan termination, which will revert between $120 million and $150 million of cash in 2023. With that, we'll be happy to take your questions. If you would like to ask a question, please dial star one oh one now. Again, in the interest of time, please limit yourself to just one question. Our first question will be from the line of Greg Konrad from Jefferies. Please go ahead. Good morning. Morning. Maybe just to start, just starting on the puts and takes for Q4 free cash flow. At the lower end of the usage, it kind of matches Q3 with based on the 300, a pretty big step up in 737 MAX deliveries. How do you think about the puts and takes, and how are you thinking about these items into 2023? Right. Well, the key, of course, for cash flow both in Q4 and in 2023, is gonna be deliveries of all programs, but particularly the 737 MAX. As I mentioned in my remarks, our target is still 300, which means we have about 100 more to go in Q4, and the team is focused on that. That will obviously drive better cash flow. Looking at next year, as I said, we're planning to stay at 31 aircraft per month and executing on that, stabilizing our factories, stabilizing the supply chain, getting working capital under control. That will be a key driver for next year on free cash flow. Thank you. Our next question is from the line of Seth Seifman of JPMorgan. Please go ahead. Thanks very much. Good morning. I guess when you talk about next year and being free cash flow positive next year, would that be free cash flow positive before the, you know, let's call it $135 million from the pension coming back? Also when we talk about exploring refinancing options, is that just right now about the next year's maturity or is it something more comprehensive? Right. Well, the answer on the first question is yes, that we expect to be free cash flow positive, even without the $120 million-$150 million reversion from the pension termination. Your second question again, Seth, was what? On the refinancing. Oh, yeah, just about the refinancing. Yeah, Seth we're just exploring all options. I would say that we're looking at it holistically, and so at this point in time, you know, we're not really kind of narrowing it in to any one specific maturity. We're just looking at the backdrop of our current macroeconomic environment. We're looking at the fact that 737 production rates are gonna be lower for longer. And so we're evaluating our entire situation. We're evaluating the capital market environment. We'll be making some decisions, you know, shortly. Okay. Very good. Thanks very much. Our next question is from the line of Robert Spingarn of Melius Research. Please go ahead. Hey, good morning. Tom, if I can, I've got two for you, one short-term and one long-term. What is it about Q3 that all of a sudden we're seeing significant movement in the rate assumptions? It sounds like you all, you know, you've changed since Q2 on this 737, and I imagine that's because of what Boeing said. Why all of a sudden the change in the plan, not just there, but on the A320 and the A220? What happened between July and now in the supply chain? Then the longer-term question is, the second question, you haven't had much time to think about this, but now that Boeing has given us numbers for 2025 and 2026, for their own financials and on rate, so 50 for the Max, 10 on the 777, you already have an Airbus plan for them. Can you come back to us with a plan for Spirit in those years? Okay, Robert. Well, let me do the first question first. On the short term, in terms of the rate assumptions, let's just start with Max. We are just right now getting some greater clarity from our customer, Boeing, in terms of what their outlook is. They gave a little bit more detail yesterday in their Investor Day. We're solidifying our plans. You know, as we look at it, we've always said we wanna trail them a little bit so we can burn off some of this inventory that we built up during the Max grounding and the pandemic. That hasn't really started yet. As we look at next year, they said they're gonna be at 31 for an extended period of time, so we will as well. We'll just watch their increases, and we'll trail along accordingly. We still have a buffer. This quarter was about 75 units, or actually 72 units, whereas last quarter it was 66 units. It actually grew a little bit this quarter. That's the situation on 737 MAX. With regard to the A320 and the A220, it really wasn't necessarily anything to do with the supply chain. It was more just Airbus making some decisions to move units out of the year. The production rate didn't change, but they just moved units out of the year that we won't deliver. That was the update really in terms of those programs. I mentioned that in my remarks. It was the headline production rates didn't change, but the number of units that we delivered did because they moved them out of the year. That is the It just seems like everything's tied to production rates and they're volatile and they're all over the place. I mean, I heard a lot of different production rates when I was out in Seattle the past two days, and it just seems like there's still quite a bit going on in the supply chain that prevents visibility for all of you. I think that's a fair comment. It's a very dynamic environment and things are moving around. You know, one thing Boeing mentioned yesterday is they wanna stabilize everything at the current production rates before they make decisions about going up. Airbus really wants to ensure that everything is stable as well. They have very, as you know, aggressive rate increases over the next few years. We wanna make sure that we are meeting the requirements. Yeah. I was just gonna say, it just seems like you all felt more comfortable with this three months ago than you do now. I'd say the dynamic environment and some of the uncertainty continues to play a part. It was a dynamic quarter for the reasons I mentioned, part shortages attrition and inflation. On the longer term, yeah, you said that Boeing has outlined some of their targets for rates on 737 MAX in 2025 and 2026 for 50 and then 787 to 10. Yes, that gives us some more clarity now, and we can take that information and incorporate it into our current forward-looking planning and start to come up with some outlooks for those years as well. Obviously we haven't had time to do it in the 24 hours since we learned about it, but. No, I totally understand. We'll be using that information. Yeah. Go ahead. I think the market would appreciate that. Thanks so much. Okay. Got it. Thank you. Our next question is from the line of Cai von Rumohr from TD Cowen. Please go ahead now. Yes. Thank you so much. Your target is 100 737s in the fourth quarter. That's way above anything that you've done. What kind of challenge is there to get that? Is your cash flow guide based on getting there? If you miss, you know, how should we think about, you know, per unit, you know, what that means in terms of cash flow shortfall? Right. It is higher than we've delivered in the recent past, but we've been working up to it with all of the changes and improvements and additions that we've been making over the course of the last year. For example, we have been continuing to hire new staff. We have brought on new contractors. We continue to incorporate the benefits of some of the digitization, automation, and lean process flow changes that we've made in the plants. All of those things are starting to come into force. We've also started to see some sort of stabilization in some of the part shortages. There's still some part shortages, but it's stabilizing, and we feel like we can have a good control of it. That's why we set that target, and we are tracking to it right now. Now, there is a risk that we might miss some of those deliveries. That was why when Mark said the guidance for Q4, he gave the range of $0 to -$75 to take into account that, if we execute on all of them, we would be at the higher end of that range, and if we miss some, we would be toward the lower end of the range. Mark, anything else to add? No, I think you said it right. I mean, I would prefer not to give you such a wide range in the fourth quarter. As Tom said, you know, there continues to be part shortages. We've got a few very critical suppliers that we're depending on to make these deliveries in the fourth quarter. If we can't get the parts in and we don't deliver, that means I can't turn around and bill the customer and collect the cash. W e're gonna fight through it over the next couple of months. That's the range where we have. If we end up not being able to make those deliveries this year, they fall into next year. That just means it's a timing situation. The cash ends up, we collect the cash in 2023 as opposed to this year. I'd say over the course of the last couple of quarters, we've been working toward getting to 31 aircraft per month and stabilizing at that level. We're currently operating the plant at 31 aircraft per month. We remain on the plan that we outlined for Q4. There are lots of challenges, but we're confident that the team is now performing and executing at its highest level for the last several quarters. I don't understand. 31 per month basically equals 93. You're talking 100, you're talking more. Are there some that essentially have been built that you would complete? Because 100, I mean, as I said to begin, is a pretty aggressive number given where you've been. Yeah. The actual rate, Cai, is a little bit higher than 31 in terms of where we cycle. Okay. That explains for some of it. We have some overtime built into that. Yes, there were about 8 or so, 8 or 10 units that were not delivered in Q2. That's carried over to Q3, and we finished those up in the very early part of Q4. They didn't finish in Q3. It's all those factors that give us confidence that we can hit the target. Now, there's some risk to it, but that's what the plan is, and that's what the team is executing to. Very helpful. Thanks so much. For our next question, Doug Harned of Bernstein, please go ahead. Yes, good morning. Thank you. You ou talked about next year, really, you know, pushing through a cost reduction effort. G iven that, you know, we've gone through the pandemic, clearly you and others, everyone had to reduce a lot of costs there. You know, how do you envision taking cost out from here? Then with that, if we see a rate go up, which we expect we will, it's not clear exactly when, how do you make sure you haven't cut too much so we don't end up back in the same kind of situation that a lot of suppliers were in, before when demand picked up? Right. Well, a few things, Doug. First of all on SG&A, we've got to make sure that we align the costs of all the indirect costs to the production levels that we have, not necessarily higher production levels that we may have anticipated. We wanna continue to optimize those costs and make sure we are getting them at the most competitive rate. So for example, a lot of our indirect sourcing and purchase services, we're taking a hard look at those types of costs to make sure that we are controlling them. The other thing is supply chain. There, what we're looking at really is level loading the system in the optimal way. It's figuring out where are the pockets of capacity and labor that exist and in areas at more competitive costs, and how can we move that around the supply chain? Including how can we take some of the things that we have brought in during the pandemic, how can we push that back out to the supply chain and get more cost benefits? And looking at a whole range of different options with the supply chain to level load the system and overall create more optimal pricing. And then the third thing in operations is continuing to leverage the investments that we've made over the last couple of years in things like digitization, automation, and lean factory flow, and capturing those benefits to drive improvements in realization and productivity on the factory floor to get more cost. We'll also look at, for example, our R&D. It's how can we get better benefits from the R&D? Not so much in terms of necessarily reducing the R&D, but perhaps shifting some of it from things that are further out to R&D efforts that'll deliver productivity benefits more in the near term. We have what we call Horizon 1, Horizon 2, Horizon 3. We'll be shifting some out of Horizon 3 into Horizon 1. Then the last area is things like capital expenditures, again looking at those capital expenditures and saying, "Well, what's absolutely critical? What can we potentially push out or stop in order to improve the outlook for 2023?" It's that combination of activities that will drive the benefits in overhead, in supply chain, and in operations. Mark, anything else to add? No, I think you covered it. Doug, you know, we're not really going to be aggressive on the factory specific assemblers, etc. There are many things that we're working on around outsourcing transactional type work. We're looking at combining some administrative functions across some of our sites. These are some things that, you know, with pre-production volumes being lower for longer, you know, we could afford some of that in the past, but at this point in time we can't. These are some real structural things that we're gonna go do. Be very, very mindful that we don't have a negative impact on our ability to deliver. There's some of our sites, there's some factories that, you know, are overutilized. We have to do some consolidation. It's those types of things. We're at this point in time, you know, we have to aggressively go at it. It will help us improve our overall margins, and it'll improve the cash flow projections that we have. We're taking it serious. We're doing it in a way to make sure that we protect the factory. There is some costs out there that we need to go get, in fact, due to the fact that production rates aren't recovering as quickly as possible. Boeing said yesterday that they looked at this 31 a month rate through the next year, but depending how things go in the supply chain, and particularly with engines, if you know, at some point it could go up to 38. When you look at that, and you've been going through this for a while, this uncertainty of when that next rate break would be, how much lead time do you need to take rate up if Boeing were to say they're not going to do it, but if Boeing were to say tomorrow, "Oh, we're going to 38, you know, in Q2," or something like that. Right. We, as we've said before, we usually like to get six months of lead time on a rate increase. We are very mindful that we need to make sure we deliver and meet the rate expectations of our customers. We're working closely with them, we're watching it, and we're not gonna do anything in terms of our cost optimization project that would hinder us or prevent us from meeting the rate expectations of our partners. Generally speaking, we like to have a six-month notice and, you know, we're confident that working with Boeing, we'll have at least that, if there is a rate increase in 2023. Yeah, I would just add, Doug, you know, that was historically true with the macroeconomic environment, labor shortages, attrition. You know, we have to do this thoughtfully. We don't wanna put ourselves in a position where we have a negative impact to the factory. Definitely contractual commitment to six months. In light of the current environment, you know, we're trying to work with Boeing on six to eight months lead time, right? Let's make sure that we protect the production system, we hire the people, we place the orders, and do it in a very thoughtful way so that we can execute this in a manner that really helps support the airlines but also protects our profitability. Great. Thank you. Our next question is from George Shapiro from Shapiro Research. Please go ahead. Yes, good morning. Mark, I just wanted to go back, you know, and get some color as to why cash flow got so much worse and could it happen next year? 'Cause, you know, like, in the Q4 call that, you know, occurred only back in February, you know, the guide was for effectively minus $120 million, including the cash payment to Boeing, and obviously you gave the numbers this morning. When you look at that clear deterioration in, like, eight months, you know, what was the biggest drivers for it? George, I think, you know, we've tried to convey this, the production schedules, the delivery assumptions, right? We started the year expecting 357 737 deliveries. It's 350 units on the amount of content and revenue and cash that's generated from that program is significant. When we look at the deliveries on A320 and where they are, we just talked about Airbus sliding out close to 30 units on us. They're within their Airbus supply window of 30 days. You know, the A220 program, you know, the OEMs are being challenged. You know, they're seeing supply chain challenges. They're seeing engine shortages. All of this stuff rolls down to the tier one, right? We're trying to react to it as quickly as we can. George, you've been in this business a long time. This is a long cycle, very complicated manufacturing process, long lead times. When we gear up the system to go produce and hire people and bring in inventory to support certain production rates, and those production rates change in short order, it's very difficult for us to pivot as quickly as that can be. What I would tell you is this, the one lesson learned for me is to be very cautious, right, about those production rates and what people are saying about the increase. Therefore, as we think about 2023, trying to take those lessons learned and the comments that Tom talked about is, you know, our expectation is we're gonna be at 31, right? We're not expecting and planning financially to do any better than that. From a financial planning standpoint, we have to assume that these production rates are going to be close to where we are now, right? We've got to get the factories healthy, and we can't anticipate these things going up until there's clear line of sight to it. You know, we've been through several cycles in the last 10 years, production rate climbs, and I've been here over 16 years, and I can tell you the challenges we're seeing with labor and supply chain, right? The inflation is putting way more pressure on the production system, even when we went from 42 up to 52. It's challenging environment out there, and it's putting a lot of pressure on our ability to produce. It's putting a lot of pressure on our ability to generate cash. We've got to carry extra inventory buffers because of supply chain. I would just say it's not a stable environment, and right now, collectively, Spirit, the OEMs, we have to get the factory stable. We have to start delivering at 31 a month consistently. When that happens, you'll start to see the earnings and the cash flow generation come through. George, what I would say is the recovery has just been more uncertain than any of us expected. We've seen multiple schedule changes really in all the programs, pushing things out further than we had anticipated. That's the biggest driver by far. Okay, let me just push this towards 2023 for a minute. You know, at the 31 rate, you're obviously gonna deliver like 377 777s next year, only 20 more than what you expected to deliver earlier this year when the cash was gonna be negative $120, and now you're saying it's gonna be positive next year. I mean, you get positive just from 20 more 737 deliveries next year versus what your expectation was from earlier this year? George, remember, the -$120 million included the repayment of the Boeing advances of $130 million. Right. Yeah. You had said breakeven- If you would have included those. If you would not include that, you exclude it, and that would have said at 357 777s, we would have expected to be positive. Yeah, breakeven is what you had said. Breakeven is slightly positive. Okay. For 2023, the extra 20 deliveries gets you to say you're quite positive, add $120 million-$150 million pension benefit you're gonna get? We haven't told you. I'm just saying, trying to figure out what. We haven't said how cash positive. We said we would be cash flow positive in 2023, excluding the pension cash reversion, and that we would provide more specifics in February when we have a better line of sight to what our production schedules are going to be. Okay. Thanks for the color. Thank you. Our next question is from the line of Kristine Liwag of Morgan Stanley. Please go ahead. Hey, good morning, guys. Morning. You know, looking at production rates, I mean, Tom, you alluded to that you heard about the new 737 production rate 24 hours ago, you know, when they released it to investors. In the past few quarters, it seems like the production rate guide down continued to be a surprise. I guess I would have assumed that you're in closer discussion with Boeing, it would be part of their planning process. Is this surprise normal, or is there something going on that you're not more in line with their planning process? No, we obviously talk to Boeing every single day about production schedules, and we have plans that are in place and scenarios. What I was saying is just their public announcement. I mean, obviously we have the schedules that are in place and the interactions that take place. It's been dynamic. You know, as I said, production schedules have changed. In the last 14 months or so, we've had several different production schedule changes on the 737 at the highest level, but also in terms of the model mix. It's a very dynamic environment. It's changing on a weekly basis. That's what I meant by that. It's not to say that we are just learning now what the outlook is. We obviously have production rate scenarios that we have been working with in a lot of detail. That's why we're confident that whatever Boeing does, we will be able to adapt to meet it because we are in constant discussion with them and we have good outlooks and we're constantly looking at different scenarios. I see. That's really helpful color. If I could clarify one thing you guys mentioned. For 2023, it seemed like your previous outlook where you'd be positive free cash flow was predicated on higher production rates. Is that, and I know you guys said that you'll provide more details next quarter, but now with maintaining that positive free cash flow in 2023 on lower production rates, does that imply that you expect to get that from these cost initiatives? Or, like, can you give us a few moving pieces on how you get there? Right. Well, we always said we would aspire to be cash flow break even essentially at 31. What we're saying now is since we expect to be at 31 longer, we wanna take actions to enhance our profitability, put ourselves in a position to be more cash flow positive and more profitable if we stay at 31 longer. The things that we're gonna do are the things that I mentioned earlier in terms of our operations. We'll look to incorporate and get the benefit of some of the investments we've made in digitization, automation, and flow. In terms of overhead, we'll look at consolidating capacity where it's underutilized. Share, aligning costs between sites, in a more efficient way, looking harder at indirect costs and purchase services and making sure those are aligned to production. In the supply chain, it's really looking at level loading to figure out how we can get the best cost position and go to where the capacity exists in terms of people and infrastructure, because there are shortages in different pockets, and we've got to level load the system so that we can optimize that better. Those are the things that we would do to be more profitable and more cash flow positive at 31 aircraft per month. Now, we say 31 aircraft per month. We use the MAX as just a proxy for the whole system, but obviously all of the programs contribute to it. It's just that the MAX is still our biggest program, and so we always use that as a proxy. Kristine, the only other item I would just add is, you know, we're coming off a pretty challenging third quarter. Deliveries didn't really hit where we expected due to all the factors that we just talked about. When you look at cash from ops, it was a consumption of $36 million. $31 million of that was a Boeing advance repayment. Operationally and working capital-wise from a cash from ops standpoint, we were almost break even in a very challenging quarter. I think those demonstrate the trends that we're seeing, the improvements that we're seeing in our cash position and our cost structure. You're seeing significantly lower excess costs. You look at last quarter, the cash from ops, you look at this quarter and then the guide that we're providing, you are seeing a very, very favorable trend, right? Getting very close to break-even cash flow from ops, you know, even during the challenging times at this 31 a month. As we get stable and we drive into next year, that's what gives us, you know, a pretty good feeling that at stable 31 a month, we can drive cash flow positiveness into our operations, take advantage of the cost optimization program, and then who knows, maybe late next year, a little higher production rate will be additive to that. That's kind of how we're thinking about it. That's really helpful, Mark. Thanks, Tom. Really appreciate your time. Thank you. Thank you. The next question is from the line of David Strauss of Barclays. Please go ahead. Thanks. Just to follow up on, you know, this line of questioning. You know, and helping us think about bridging this year to next year on free cash flow. Is really the $450 million-$500 million positive change, I guess, less the, you know, advance repayment. Is that really almost all MAX rate stabilizing at 31 a month? Is there anything else we should know about in terms of that bridge? As a follow-up question, Mark, in terms of refinancing, is an equity raise on the table or are you solely focused on, you know, refinancing on the fixed income side? Thanks. Yeah. Second item first. We're not exploring an equity raise at this stage of the game with where our stock price is, that would not be fair to our investors. There's other opportunities we have from a refinancing standpoint. The capital markets are available to a company like Spirit. You know, at this point in time, we're not looking at an equity raise. When you think about the cash flow, David, and I know what the math you're doing, you're saying, "Hey, $450 minus the $130, you're at $320," right? Is that $320 million improvement between 2022 and 2023, all 737? It's more complicated than that, okay? At the start of this year, we were at 21 aircraft per month, right? We broke rate, we had to bring in additional inventory. We've seen a whole lot of disruption, higher costs earlier in the year that had a significant negative impact to cash flow in the first quarter. A lot of that was, I would just say costs that were consumed to break rate from 21 to 31 that won't repeat. I think you have a couple of things going on. As you move into 2023, what I would call the cost, the inefficiency costs that occur when you go up in rate, hiring people ahead of time, learning curve, et c. Those costs won't repeat if we stay and get stable at 31 for a longer period of time. The second component is just theoretically, we go up 75 units on 737. Very helpful from a revenue, earnings, and a cash flow standpoint. I will also tell you that we're expecting higher deliveries on the A320 program. Another very good program for us, a solid program. We're seeing an uptick in some several of our other programs, higher revenue on defense, higher revenue on aftermarket. All of those things are contributors to the cash flow. If we can get things stable from a factory standpoint, then we have an opportunity to start to burn down some inventory, not bring in the buffer inventory that is needed during this challenging time. I think that the combination of all those factors, right, leads us to believe that ex the Boeing repayments, that we can take that negative 320 that occurred here in 2022 and turn that around to being positive. We'll come back and talk more specifically about how much more positive can it be. Give us a little time to dial in our production rates for next year. Let us take a little couple of more months to work through the disruption in our factories to try to get things a little bit more stable, and we'll have a better line of sight on that in a few months. Okay. How does the forward loss burn off on the A350, 787, A220 factor into all this? I mean, you've burned a lot of cash on those this year. Just looking at the burn down of forward loss balance. Is that a negative to next year given higher rates there? Or is that a neutral? Well, what I would tell you is our cash forecasting. We're well aware of the fact that we have multiple programs that are in forward loss. We know specifically based on our forward cost projections, exactly how much cash they will consume in 2023, 2024 and 2025, give or take. Some of the recent forward loss is gonna put a little bit of pressure on that. You know, based on our current situation with the forward losses that we've taken here through the third quarter and our projected cost versus price in 2023, that is factored into our assumptions that we can get to cash flow positive. Thank you. Our next question is from the line of Myles Walton of Wolfe Research. Please go ahead now. Thanks. Good morning. Good morning. There was a comment that Boeing made yesterday on two quality slips at their fuselage supplier in October that was preventing deliveries at pace and requiring rework. I'm just curious if that is something that happened at Spirit and is it recovered and is there a financial impact that was observed in the third or will be observed in the fourth quarter? Yeah, w ith the fuselage and all of our parts that go to Boeing across the different programs, you know, there are occasionally some escapes, either you know, from things that we do or from our suppliers. I think the one that Stan was referring to was a supplier escape to us that ended up getting to Boeing. If you think about it, there's 80,000 parts on a fuselage and 450,000 fasteners, it can happen. It's not routine, but we do see escapes, and we work with Boeing to get those fixed. It's nothing systemic. I think it was isolated to one of our suppliers who had an escape in their factory, which unfortunately flowed through to Boeing, and we're working with them to resolve it. Was the impact observed in the third quarter deliveries, or will it be observed in the fourth quarter deliveries? To Cai's point - Yeah, I mean, I think the letter. I don't know specifically in their line, but it's something that we don't expect is gonna persist all the way through the fourth quarter, so it would get resolved as these things normally do in a period measured in days and weeks, not months. Okay, all right. I would call this a routine escape that we will resolve with Boeing. Got it. Thanks again. Our next question comes from Michael Ciarmoli of Truist Securities. Please go ahead. Good morning, guys. Thanks for taking the questions. Just curious, again, staying on the free cash flow. As we think about 31 a month into next year, where do you think the excess capacity costs track to, especially contemplating the cost reduction plan? Just, I guess you made some comments on 25 for aftermarket and defense relative to the Investor Day. Should we still be thinking the commercial targets are still good, or does anything change with Boeing being at 50 and 10 for the 787? Thanks. Right. Well, in terms of the excess cost, I'll leave that one for Mark. Let me just talk about the 25 outlook. Again, we were anticipating that the 737 rates would go up. We were anticipating the 787 rates would go up. I think Boeing has been more clear publicly now about those, and so we will incorporate those into our thinking and start to think about how that impacts 25 and 26. But it's consistent with what the scenarios were that we have been working with. So no surprises on that. Mark, on the $31 excess costs, I'll let you answer that. It's an accounting issue. Yeah. We've talked about this before. Just to give you a little history, in 2020 we incurred $280 million of excess costs. In 2021, it's $218 million of costs. Through the first three quarters, we're at $126 million, and we incurred around $31 million in the third quarter. You know, based on the 31 a month production rate as well as, a couple of our other programs that have excess costs, you know, we expect the excess costs again to significantly improve year-over-year. We expect that to it should end up being slightly inside of $100 million. So another nice benefit from an earnings and from a cash flow standpoint. Yeah. I would say that, you know, the positive about the Max going up to 50 in the 2025 timeframe, and Airbus has already said they want the A320 family to be in the 75 range, that will be very positive for Spirit. 85% of our backlog is narrow body aircraft, and as we get back to those rates, as we get back up to 52, toward 52 on the Max, for example, the excess cost will go away, and we'll be absorbing a lot better in terms of our fixed cost, and that will drive overall benefits for Spirit. So that's, you know, I think, one positive aspect of the recovery, is that domestic travel is recovering first. That favors narrow body production. 85% of our backlog is narrow bodies, and as those production rates increase on narrow bodies, and we can absorb more of our fixed cost and drive productivity and efficiency in our factories, that will be very positive for our productivity, our profitability, and our cash flow. Got it. Thanks, guys. Thanks, Michael. Our next question comes from the line of Ron Epstein of Bank of America. Please go ahead. Ron, are you there? Yes. Yeah. Hey, sorry, I was on mute. Yeah, just trying to. Oh, yes. That's right. Messed it up. Anyway, a couple questions, quick ones. How cash accretive is your defense business today when we think about, you know, how supportive that can be for your cash flow outlook? How do you guys feel about the, was it 7%-9%, you know, cash flow guide that your target that you gave before? Right. Well, in terms of defense, as we've said, we expect that it could be at $1 billion by 2025 at, we call it normal defense margins of 12%-14%. And there's obviously some overhead on that, but it still would yield a very good cash profile. So the defense business is a good solid business for us. It's growing nicely. We've won a lot of new programs, and as those get into full rate production, that will drive those economics. And obviously with the global geopolitical environment right now, defense looks like a very good place for us to be growing and diversifying. With regard to the 7%-9%, that's been a historic target. We've talked about it. I mean, obviously, in the last 24 months, the environment has changed a lot in terms of inflation, interest rates going up, and a lot of other challenges in the supply chain. We will take a look at that and absorb it and incorporate some of that thinking as before we set targets. Things have changed. I mean, our aspiration is obviously as production rates increase, to improve our profitability and our margins and our cash flow conversion. We also have to take into account that it's a much different macroeconomic environment than even it was 12 months ago. Mark, anything else to add? No, I think you're right. You know, Ron, we've got to get stable. We got to get stable at 31 a month. First things first. Start generating positive cash flow. Once we get a better line of sight into 2024 and 2025, where those production rates are, and where the macroeconomic environment is, I think we'll be able to better discuss that. At this point in time, I don't have a crystal ball that's good enough to let me know where production rates are going to be and what the macroeconomic environment will look like during that time. You know, that's what we were able to demonstrate in the past, right? We're fundamentally the same company, you know, stronger defense business, stronger aftermarket business. You know, we're very focused on execution, getting stable, and then getting back to the type of margins and cash flow that you guys saw back in 2018 and 2019. Got it. If I may, maybe just one more, you know, broad question. This is maybe an observation, might be wrong, from, you know, what Boeing told the world yesterday. It seems like they're gonna be more protective of their balance sheet. If that's the case, that kind of implies they're gonna be less protective of other balance sheets and maybe in their supply chain. I mean, how did that complicate your life, if at all? Well, I would just say my response to that is we need to be prepared for us taking a longer timeframe to get back to the higher production rates. That's what I'm interpreting. That's exactly why we're launching this cost optimization program, is to take control of what we control and not worry about the things that we can't control or are beyond what we can control. If we're gonna be at 31 longer, then we will make sure we can enhance our ability to be profitable and cash flow positive at 31. Got it. That makes sense. All right. Thank you very much. Thank you. Thanks, Ron. Our next question is from the line of Noah Poponak of Goldman Sachs. Please go ahead. Hello, everyone. Hey, Noah. Can you talk about how you expect your MAX units that I believe you said is now at 72? How do you expect that to progress from here, and where do you expect it to end next year? Right. Well, as we've said, over time, as the recovery continues, at some point we will trail Boeing five units or so a month in order to burn off the excess units. Now, some of the units are you know still in, I would say, holding pattern. You know, so there's some China units, for example. We expect that will burn off. As Boeing goes up in rate, we will lag them, and that gives us a little bit more time to stabilize our factory. That's all a positive. The other thing is that we said this before, is the buffers actually turned out to be a very good and helpful thing for both Boeing and Spirit, because it allows us to have a cushion in the production system to prevent any sort of last minute issues impacting loads at the Renton factory. We've jointly agreed with Boeing is that we will keep a buffer in place, and we expect that to be about 20 units or so. That will be a permanent buffer that will help cushion the production system. We didn't have that in place, back in the 2018, 2019 time period. It could sometimes create disruption. We know there's some challenges in the production system, ongoing, some things that happen, right before delivery on occasion. That permanent buffer will help cushion the production system. We're at 72 now. We will keep a permanent buffer of 20, which means that we'd wanna burn off about 50. There are some that I said that are kind of in a holding pattern. That's the situation on the buffer right now. Yeah. Hey, I would just say this, Noah. It's probably for your modeling purposes, because you're kind of talking specifically about 2023. You know, we're at 31 a month. I don't anticipate us going below 31 a month. That's not in the cards. Based on Boeing's conversation yesterday about they wanna get stable at 31 a month, those two conversations just would lead you to believe that we're not gonna burn a lot off next year, which means our production of 31 and their production of 31 for the most of the year, which would mean that there probably wouldn't be a significant reduction in the burn off of the buffer units next year, which would mean our buffer would probably continue beyond that into 2024 at some point in time. I think, you know, based on what we told you about staying at 31 for most of next year and what Boeing said yesterday, I just think from a modeling standpoint, that's, you know, those are two data points to take into consideration. Basically, whenever they break to 38, you'll then have, you know, call it 4-6 months of staying at 31 to get the 70s or the 20. We won't necessarily burn it all off at once. We may lag them a couple of months when they go to 38, and then maybe a couple months when they go to 42. With the plan of burning the buffer off gradually. There's no time pressure to burn it off, and it's actually providing a good cushion to the production system, so it's serving a good purpose right now. Okay. Can you quantify the cost optimization for next year? Not yet. We're working on that. We'll have more to say at the February earnings call. Will any of that, you know, last into your longer term margins? Or should we consider the vast majority of that to be variable and it eventually comes back? Well, the idea is to reduce the structural costs, which ultimately will help margins. I know you're probably thinking, well, so does that mean your 16.5% target would go up? Well, don't forget there's lots of headwinds, and you always have to run fast to stand still. It will help the long term, obviously. It won't necessarily help us go beyond the 16.5%. We would still have a long way to go to get there, given all of the other pressures like inflation that we're seeing right now in the macroeconomic environment. It certainly will help. Thank you. All right. Thanks, Noah. Our last question for today comes from the line of Peter Arment of Baird. Please go ahead, now. Yes, thanks. Good morning, Tom and Mark. Hey, Tom and Mark, you both mentioned several times about just, you know, the ongoing labor shortage, and you've talked about this for a while. Just maybe you could just update us on, you know, where headcount stands in Wichita and what you have to kind of get to, I guess, for beyond, you know, rate 31 when, whenever it occurs for you know, to kind of be able to kind of hit all the targets that you've kind of laid out longer term. Thanks. Right. Yeah, I mean, the issue is that it's. As we have started to go up in rate, we've had to bring more people on. For example, we have about 11,000 people in Wichita right now, and we've recalled this year in Wichita about 470 people. But yet we've hired in Wichita over 1,900 new people. That gives you just an order of magnitude of, you know, roughly 2,300 new people, but 1,900 of those were new hires. What we're seeing is, based on history, the level of attrition is just higher than in the past. I mean, it's gone from about 9%- 12% overall. What we're seeing is some of the new hires, particularly the entry-level mechanic positions, the attrition rate's actually been even a little bit higher than that. That's kind of took a little bit of us to adjust to that higher level of attrition during Q2 and Q3. We've ended up having to hire more. I think we're starting to stabilize now. We understand it better. Those are the dynamics. We've hired now globally over 3,200 new people, globally, and 1,900 of those in Wichita. With the higher levels of attrition, it's meaning that we've had to go back and hire even more. Those are the dynamics. It's a dynamic environment out there. As I said, in Wichita, we actually had to increase our starting hourly wage, and we're even offering a signing bonus. That's helping. The job fairs are helping. We are getting to the point where we're stabilizing at 31, and we'll continue to work on that as we anticipate higher rates in the future. Okay. Just a clarification, and Mark, maybe if you have it, just do you remember what you were at, you know, back at staffing levels in Wichita back in 2018, you know, in terms of total employment? Thanks. Oh, I don't have that, Peter. We'll get that number and get it out rather than just guess. I mean, I have a rough approximation, but I don't wanna give you a number that's not completely accurate. It was higher than the 11,000 that I just quoted. Yeah, it's in our 10-K. We'll get that out. Okay. Yeah, we can, we can look it up. I appreciate all the details, guys. Thanks. Okay. Thank you. Ladies and gentlemen, this concludes the Spirit AeroSystems Holdings third quarter 2022 earnings conference call. Thank you for joining, and you may now disconnect your lines.