Ah, thank you everyone for joining. My name is Sheila Kahyaoglu with the Jefferies Aerospace and Defense Equity Research Team, and we have the Spirit AeroSystems team with us. Thank you guys so much for supporting us. Thank you, Sheila, for having us. Thank you. We have Tom Gentile here, who's President and CEO, and Mark Suchinski, who's SVP and CFO. Did I pronounce that correctly, Mark? Yes, you did. Okay, good, 'cause we're gonna have a contest later on. So, Can I say a quick safe harbor statement first? Sure. Okay. So we'll get the legalese out of the way here. Well, I'll just read it. I need to remind everyone that any projections or goals we may include today in our discussion are likely to involve risks, which are detailed in our news releases and SEC filings. Perfect. Perfect. Thanks so much. Just to start off, what are next steps from Spirit, as we think about how you guys are gonna normalize production rates and continue to rise, and how do we think about both the short term and potentially the next three to five years? Right. Well, as we get beyond the two recent quality issues, we look forward to the future, where there's a lot of demand now for aircraft. Air traffic has recovered. Just this morning, I saw it's 95% of 2019 levels, and domestic traffic is actually above that, and that favors narrow bodies, which Spirit has a very strong position on narrow bodies. 85% of our backlog of $42 billion is narrow bodies. And on the 737, we actually have a huge work package with 70% of the structure, and on the A320, we have a very significant package with the leading edge, the trailing edge, and the spoilers, which is about 60% of the structure on the wing. Both of those programs are going up in rate significantly, and ultimately, that's gonna drive Spirit's economics. Next year, we will be cash flow positive and also in 2025, as Boeing goes up above 50% on the 737 and Airbus goes up above 75%. But for us to really get the execution, we are making a lot of changes in our plant. Over the last four years, we've invested a lot in lean production flows. We've changed the layout of the plant to make it more efficient. We've moved some of the subcontracting parts out of the plant, so they come in intact now for final integration. We've also invested a lot in digitization and automation. We have a new automated digital logistics center. We've digitized a lot of the workflows. We've created tools for scheduling. We've implemented a lot of quality tools like optical inspection, as well as visual work instructions. So those are some of the things that we've done to the plant. We've also beefed up the organization. We've put some new operations leaders in place to give us better coverage on first shift, as well as the off shifts. We've put in place line side support teams with cross-functional support, like engineering, quality, HR, as well as supply chain, so that we can solve problems real time on the factory floor to give our managers more time to manage. Those are some of the changes that will help us meet today's rates, as well as the future rates that are coming up, not only on the narrow-body programs, but also the wide-body programs. That's super helpful, laying out some of those changes. You know, what are the biggest pinch points you're seeing in terms of ability to meet production rates? It was previously some supply chain, mostly labor as well. It's really those two things. It's labor and supply chain. On labor, you know, first of all, we were very happy we got our contract with the IAM concluded this past summer. It's an industry-leading contract, and now that it's in place, we can focus on execution. Of course, we were disappointed we had the work stoppage, but we have a good relationship with the union, and they had endorsed the original deal. But after it was a negative vote, we got the feedback. We got back together with them. There was some confusion around the healthcare plan. We quickly addressed that. We restructured the deal, took some of the signing bonus money, spread it out in terms of gross wages, and we also changed the overtime on the weekend. So we used to be able to designate mandatory overtime on the weekends, and we eliminated that. So that contract got in place, and it. Obviously, the second vote passed, and it was a relatively short strike. But labor continues to be a challenge, to find enough skilled workers. We've got the gross numbers now in place, but we're still seeing a fair amount of attrition, especially amongst newer employees, and it's also taking these new employees longer to get up to speed. We laid off 8,500 people in Wichita alone during the pandemic. A lot of those were older, more senior experienced workers who took voluntary retirement packages, and the new workers that are replacing them are taking a little bit longer to get up to speed. So we're hiring them 8-10 weeks in advance and training them. We're also putting in place workplace coaches to help them with on-the-job training and a new position that we agreed in the recent contract, master mechanics, again, to provide coaching and support to the new hires to get them up to speed faster. But that's one of the challenges in terms of the rates is labor. The other is supply chain. And, you know, while the air traffic is recovering, I would say the supply chain is still stressed. We see a lot of small suppliers who, because of the cash conversion cycle, have to hire labor, get material, long-lead material in advance, and that puts them under some cash pressure. We also see shortages of raw material and even fasteners, some basic things, and that creates disruption across the supply chain. And when the suppliers are distressed, it creates part shortages for our factory, which is disruptive, but it also means sometimes we have to find cover and support. And in the last 18 months, we've had $200 million of charges in supply chain that we've had to cover, either by dual sourcing, insourcing, or providing cover. So, it's getting a little bit better, but it's still a pinch point as we go up in rates, and it's putting pressure on the system.... And so I would say, right now, those are the two big issues that we're focused on: labor and supply chain. Thinking about the MAX, we'll get to the recently disclosed issue. Where are you in terms of rate today? How do we think about getting factors to go up in rate, the next rate breaks, whether it's 37 or 42 a month? And how do you think about the lead time relative to Boeing? Right. Well, we right now are starting to cycle at 42 aircraft per month. We've got two production lines in our plant. We can go up to three, but we have two right now. Each produces 21 aircraft per month, so one a day. So we call it two one-day lines. So we load two each day, and we try to deliver two each day. Right now, we're just getting into that and starting to cycle at 42 aircraft per month. And, you know, there's always some startup issues. For one thing, with no mandatory weekend overtime, we have to find a different way of working. And so what we're doing is what we call alternative work weeks, is we're putting different shift patterns in place so that we have weekend coverage full-time. So that's one of the things that we're doing. In addition, on the 42 aircraft per month, we are now about aligned with Boeing in terms of production rate. And as we go into next year, we're going to finish this year at 42 aircraft per month, we're going to go into next year at 42 aircraft per month. So this year, our guidance was 370-390 aircraft on the MAX. We're probably going to be at the low end of that range, given all the pressures, and there's some pressure to that. But we're going to end this year at 42 aircraft per month, and we're going to be at 42 aircraft per month all of next year, as will Boeing, and that's about 500 aircraft next year. And then in 2025 and 2026, Boeing has said they want to get up to 50 aircraft per month, and they've added a 4th line in Everett, so they're very serious about it, and, and they certainly have the backlog to support it. That would get us back up to 600 aircraft per month. So, that's how we will align with them. We typically are about 6 months in advance of them because we're earlier in the, in the production process, and so we start hiring, even, 10-12 weeks before that. So we give it enough time to train our employees and also to, get them on the job experience. Talk to us about the recently disclosed aft pressure bulkhead issue on the MAX. In terms of deliveries, it doesn't seem to change your guidance for the full year. Any potential rework to profitability- Yeah. and free cash flow? So let me, let me just talk about quality in, in general. So quality obviously is very important for Spirit and for the whole industry. You know, the safety of, of air traffic depends on it, and we work on it all the time. We have a quality management system that actively and continuously seeks out quality issues so that we can fix them and make our products with better quality and, and, and, and safer in terms of outcome. Now, we're disappointed that in these two issues, but escapes are not uncommon in our industry. A fuselage, for example, has 80,000 different parts and 450,000 fasteners. So escapes happen, and they happen on all programs. They usually don't get this much attention. In this case, I would say there's greater scrutiny on quality in general, post the MAX grounding and post the pandemic, and particularly on the MAX for obvious reasons. In this case, for an abundance of caution, Boeing decided to pause production or deliveries temporarily while we were doing bounding. Normally, that doesn't happen. We identify an escape, we bound it, do a safety of flight analysis, and in this case, Boeing and the FAA determined there was no immediate safety of flight issue, and so the fleet could continue flying. The other thing that was unusual about this particular issue is that, normally, if... when we have an escape, we-- you fix the units in our factory and then in Boeing's factory, and we're done. But of course, in this case, Boeing has 250 units that are stored, and we have about 60 units that are stored in Wichita, Boeing-owned inventory, and some number of those have to be fixed. So in this case, with the aft pressure bulkhead, there were three suppliers over time. The issue related to Spirit, we were using an automated drilling process, which, if not done perfectly, could create an oblong hole, okay? And this came up. But one of our quality processes actually found this. So our quality management system includes a process where we encourage employees to speak up if they see a manufacturing process that could be fixed or improved. And one employee came up and told us about this. We were already actively working on a fix, when the escape was found. But we are in the process of bounding it, and for us, it looks like we have about 39 units to replace or to inspect and repair. We've already inspected through X-ray 15 of those. What we have to do is about 1,000 holes in the aft pressure bulkhead, 500 of them are machine enabled, so could be suspect. So we X-ray all of those, and then we look to see on the X-ray, could they be suspect? And if they are, what we do is drill out the fastener, inspect the hole. If there's no issue with the hole, and often there isn't, we just put in the same size fastener. If there is an oblong hole, what we do is we oversize it, drill it out again, so it's a little bit bigger, and then put in a larger fastener. We expect to be done with the repairs of the units in our factory by the end of November. Now, for Boeing, it may take a little bit longer because they have, in many cases, completed aircraft. The 250, there's maybe 65% or 70% of those that could require inspection and repair. For us, what they've agreed is we had 29 in WIP. We are going to complete the production on those 29. We've set up a, essentially a separate factory across the street, where we're going to have eight repair lines, and we'll do X-ray on two of those and then repair on six. And so we will be able to flush through our 39 relatively quickly, and then we'll deliver those to Boeing. So we'll complete the production on the ones that are in our WIP. Boeing will pay us for those. We'll then repair them and ship them to Boeing. Boeing could have some delays as they're waiting for our units to come, and their repairs could take longer, 'cause ours, when we repair it, it's a fuselage only. For them, they may have if it's a finished aircraft, they already have the lav and the galley and the overhead bins and things like that, and systems. So they have to work around that, so it could take them a little bit longer. But in this case, once we do the X-ray, and we've assessed which holes we need to address, the repair itself for us is fairly straightforward to drill out the holes and replace the fasteners. But that's the work that's underway. And And as I said, we've already completed the X-ray on 15 of the 39, and we've started the repair. So just to follow up on that point, as we think about, you know, the like, your current production rate, you're still going to go at 42 aircraft per month as you repair the other ones? And how do we think about the delivery free cash flow impact for 2023? Right. Well, this particular issue, because we're going to get all the repairs done by the end of November and ship those units, this by itself won't have a material impact on our range. We said the range was $370 million-$390 million. What we're seeing is some additional pressures on supply chain and labor, so we think we'll be at the lower end of that range, possibly some pressure to that. But, you know, the good news is the team is cycling at 42, and we're working a number of different initiatives to offset any impact. Our goal is still to focus on break-even cash flow in the back half of the year. We said we were about negative $200 million- $250 million, but we, of course, had $100 million of customer advance in that from one of our customers. The way their advance came through, it counts as free cash flow. So that is what the outlook is. We're going to continue to try to hold to that. We are going to get the additional $50 million from the one customer that was supposed to come in November. It's our... Actually, they've already delivered it to us. So our cash balance is pretty solid. And what we're focusing on now is stabilizing at 42 a month with the 737, getting the workforce trained, and so that we can finish the year off strong and hit next year at a solid 42 per month. Switching gears to the A220 program, where are you on that program today, and how are you thinking about the rate ramp there? So the A220 program ultimately is going to be a great program, but it's been disappointing that the rates have been much lower than we expected. So for example, even this year, the original projection was we thought we would do 100 units, then it went down to 82 units, then 78 units. We're probably in the 65 units-70 units range right now. So it's come way down. That's put more pressure on the program. And so our economics on the program, from what we originally thought when we concluded that deal in 2020, and we took a charge through 2025, there's pressure on that. And so this is, I think, true with three of our programs right now, the 220, the 350, and the 787, is those are all composite programs, at least the work packages that we have, and it's. We've never really achieved the learning curve to come down in terms of cost historically, and so those programs have always been under pressure. And now there's even more pressure because of wage inflation, other inflation, like logistics and utilities, part shortages, and also with the greater scrutiny on quality, some new work processes that add hours. And so, all of those programs are under pressure, and it really is not sustainable for Spirit. So we are having discussions with our customers, with Boeing and Airbus, about these pressures that we're facing and how we address them. I mean, it's great that we have a lot of demand and rates are going up, but to achieve those rates, the supply chain has to be stable and healthy, and Spirit needs to be stable and healthy. I think both of our customers realize that, and we're engaged in discussions. So on the A220, is there a certain rate that makes sense in terms of reaching profitability levels that make sense? Well, we, we had originally said in 2025, when they reached 14 aircraft per month, that we would be break even and better. It looks like that 14 aircraft per month by 2025 could be a challenge based on where we currently are. Because, as I said, we, we've reduced rates from the original projections. This year, we're now in the 65 units-70 units range. So I, I, I think by, by the time we get to 14 aircraft per month, we could be profitable, or not, you know, break even and toward profitability. But what we're seeing is, is that is being pushed to the right, and, and we need to have that discussion with Airbus. Makes sense. Switching gears to the 787, you know, how do we think about your production rate today, and how do you think about the alignment and lead time with Boeing and, you know, your losses on that program? Right. Well, the 787 this year, we're saying we're at 40 total deliveries-45 total deliveries. We're right now at about 5 aircraft per month. At one time, that was at 14 aircraft per month before the pandemic. And Boeing has said they want to get back to 10 per month, possibly higher, but at least 10 per month toward the end of next year. We're working with Boeing on how we achieve that. But again, that program is another one that's been under pressure. It's a composite program, and we worked very hard with it. But even from day one, we were never able to get down the learning curve as fast as we expected, and so we've lost money. It's not a secret. It's—Our forward losses have been $1.4 billion on that program. We have delivered about 1,165, so we've lost over $1 million per unit on it. And then in addition, there's more pressure today because of wage inflation, other inflation, greater quality scrutiny has led to new build processes, which have added hours, and so that's created additional pressure. And we're having discussions with Boeing about how we address those pressures so that we are in a position where we can go up and rate with them. Okay, makes sense. So it seems like it's more about repositioning that contract, given just the labor pressures and, you know, just manufacturing is much more difficult. Yes. The program has always been under pressure. It's under more pressure today, and we're having active dialogues with Boeing about how we address that. ... talking the A350, it's a bit of a unique program, just given you won that business and you produced it outside of Wichita and North Carolina. How do the dynamics of that program change, just given a likely different cost structure on that one? Well, the A350, we build the Section 15, it's called. It's the center fuselage, which encompasses the wing box. We don't build the wing box, we build everything around it. It's a pretty long section. It's about 60 feet long, about 22 feet in diameter. And again, that's one that has been in forward loss. It used to be at rate 10. We're capitalized for rate 13, but during the pandemic, it dropped down to rate 4. Now, with the new freighter version and the pickup in demand, we're at about rate 5 right now, and Airbus is thinking they'll get back to rate 9. Now, higher rates on all these programs, even the forward loss ones, will be better, but they'll still be losses. And the pressures are the same: it's labor, it's inflation, it's supplier shortages. And so we are having discussions, and very transparent with Airbus, about how we address those pressures. And with both Boeing and Airbus, we've been open book in terms of sharing all the cost data, so they understand and know that we've been working on different opportunities and have exhausted those. And so we need to figure out now how we address those pressures. And by the way, this is the same type of discussion we're having with many of our suppliers, who are stressed, and they come and talk to us, and we find solutions. Sometimes it involves price, sometimes it involves change in terms, sometimes it might involve extending contracts or adding new work or offloading some things, a variety of different levers. But we understand the pressures, and we've been addressing them with our suppliers, and we're having discussions with our customers about how we address those similar pressures. Just thinking about your previous targets of 16.5 operating margins, you know, how do we get back to profitability levels? And it seems like with the A220, 787, and A350 under pressure, is it all about pricing and not much you could do on the cost saving side to fix it? Well, again, I go back to, we have a huge narrow body focus on the 737 and the 320, and as those programs go up in rate, that will drive a lot of cash flow for Spirit, as well as a lot of profitability. And both of those contracts are very good. The 737 contract that we struck in 2017 and 2018 goes out now to 2033. It's indexed to rate. It's a very, very strong contract for both parties, and that is going to benefit Spirit as the rates go up. And so that's the first thing. In terms of the 787, though, as I said, that one is under more pressure, and it always has been as a composite program like the A350. Turning to cash flow, perhaps. You've guided to $200 million-$250 million of usage this year, with $280 million in the first half. So how do we think about positive potential contribution in the second half? Right. Well, the first thing is rates are going up, so Q3 is going to be a little bit lighter in terms of deliveries because we had some of this disruption. Q4 will be better. So we'll have negative cash flow in Q3 and get better in Q4. So that's a positive, and as rates continue to go up on the narrow bodies, that's going to help our cash flow going forward. The other thing that will help our cash flow is really inventory. Because of the disruptions this year, we've had the vertical fin issue, then we had the work stoppage, then the aft pressure bulkhead. Inventory kept flowing in. We're probably $150 million above in inventory than we were. So we're really looking at how we can get our inventory levels back to historic levels. So if you look at our inventory turns, or our days on hand, they're about twice what they were in 2018 and 2019. We want to get those back to historic levels. That will help. So increase in rates will help. The improvement in inventory turns will help in terms of cash flow, and that's how we start to improve in the second half of this year and into next year. Great, um- By the way, I want to be very clear: 2023 will be positive in cash flow because of the increase in rates on the 737 and the 320. Twenty twenty-four. Twenty twenty-four. Yep. That is because of the rates going up, and 2025 will be even better as the rates continue to go up. So, you know, the thing that really drives Spirit is the rates on the narrow bodies, and as those go up, it helps us out quite a bit. So I get this question all the time: What's 2024, 2025 normalized cash look like? Is it a 7%-9% of revenues you've previously guided to? Yeah. Well, that's ultimately the goal, but there's more pressure now for a couple reasons. One, we are carrying more debt, and with higher interest rates, our interest expense is higher. We have these other pressures in terms of labor, and inflation, and those things are all putting pressure. But we're working on our working capital. Rates are going up, we've got a lot of cost initiatives that are underway, and so that all will help improve it. But it's going to take us some time to stabilize at these higher rates, realize the benefits of the working capital improvements, and drive some more cost initiatives for the cash flow to get back up to those levels. But from a standpoint of margin, you know, you mentioned 16%. That's going to be hard for the reasons that I said, but, you know, certainly, double digits, and we're going to keep pushing towards 16% and trying to offset these pressures, and we'll keep pushing toward the 7%-9% on cash flow, but it's going to take some time. We probably will have to get back to investment-grade credit rating, pay down some of the debt, to reduce that interest expense, and then we'll be in a better position to get to the 7%-9%. Last question. How, you know, how do we think about the balance sheet, your current leverage levels, your refinancing needs, and how you think about recapitalizing the balance sheet? Yeah. Well, this is a great question for Mark, since he's going to be driving that initiative. Yeah, you know, we have debt that comes due. High-yield bonds come due in April 2025, and so we've got some time. You know, we're in the planning stages, you know, we've been effective going to the capital markets and doing refinancing. So, you know, we've got a number of items that are in work, and we're working with our banking partners. We've had some discussions with the rating agencies. We've laid out a bit of our strategy, and they're supportive. So really, you know, we wanna get through the third quarter, drive some stability, have a little bit more clarity around the aft bulkhead quality issue, get our earnings out, and then there's a couple windows, you know, a couple of weeks if we do earnings first week in November, we got two or three weeks before Thanksgiving to hit the capital markets. There's a little time after that, and then another window in February and March to get the refinancing in place. But you know, our goal here is to do it in a few different tranches. You know, we have the ability and the capacity, first lien, second lien debt, to go do that and push those debts beyond 2020, 2030. And so we've got a good game plan, as I said before, constructive process that we're working through. We've done this before, and so we're confident, you know, between now and April, we'll get the refinancing in order and get that one eliminated. Sure. Good. Yeah, yeah, so we've got a plan for that. And so just to summarise, you know, first thing is we wanna get the quality issue behind us, and as I said, we're on our way. We've inspected the first 15 of the 39 that we need to do, and we've started the repairs. We'll be done by the end of November. Second thing we wanna do is really stabilize the rate at 42 aircraft per month, so we hit the ground running for next year and hit all of the rate increases. That is gonna drive a lot of cash flow for Spirit in the long term. So 2024 will be positive. 2025 will be even more positive. Third thing is, as I discussed, these pressures that we're seeing on our forward loss programs, the 787, the 350 and the 320. We wanna talk with our customers constructively about how we address those pressures so that Spirit and the supply chain can be healthy and stable as we go into these rate increases. It's in their best interest, and they realize that, and they've been very constructive with us. And then the last thing is, as Mark said, we wanna refinance that debt maturity in 2025, the $1.2 billion. And that's our focus right now. We're laser-focused on those priorities, and when we achieve those, Spirit will be in a much better place. Great. Thank you so much. Thank you, Sheila. Thanks, Tom. Thanks-