Spirit Aerosystems Holdings, Inc. (SPR) UBS Aerospace Virtual Conference

Corrected Transcript

12-Nov-2020 Spirit AeroSystems Holdings, Inc. (SPR) UBS Aerospace Virtual Conference

Spirit AeroSystems Holdings, Inc. (SPR) Corrected Transcript UBS Aerospace Virtual Conference 12-Nov-2020

CORPORATE PARTICIPANTS

Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc......

OTHER PARTICIPANTS

Myles Walton Analyst, UBS Securities LLC ......

MANAGEMENT DISCUSSION SECTION

Myles Walton Analyst, UBS Securities LLC Well, thanks so much for joining us again. Welcome back to the UBS Virtual Aerospace Conference. And with us for this next session, we're really privileged to have with us, Spirit AeroSystems' CEO, Tom Gentile. It's going to be a conversation. And so, to enliven that conversation, I'd really ask you to put questions into the chat. So, if you look in your interface on your desktop, you'll see upper left-hand corner there'll be a Q&A tab. Go ahead and submit that question. We'll fold it into the discussion as we go through this conversation.

So, Tom, thanks so much for joining us this morning. Tom Gentile was named President and CEO of Spirit AeroSystems in August 2016. As everybody I'm sure on the call knows, Spirit AeroSystems is one of the largest aerospace structures provider in the world for both commercial and military markets. Prior to Spirit, he was President and CEO of GE Capital. And before that, he was also CEO of GE Healthcare Systems and also the CEO of GE Aviation Services. So, a broad breadth of background. Most of the conversation, I'm sure, will be around Spirit AeroSystems and its position in the market, but his perspective from prior experiences, I'm sure, will form the discussion for those on the line.

And again, please put those questions in the chat and we'll pull them into the discussion. So, Tom, I think you had some opening remarks to maybe set the stage and I'm going to turn it all over to you...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. All right. Thanks, Myles. Great to be here. And good morning, good afternoon, everybody. Just wanted to start off with an overview of Spirit's situation. Obviously, this has been a very difficult year with the dual challenges of the MAX grounding and COVID-19. For Spirit, about 70% of the structure of MAX is what we supply. And so, with that being grounded, that impacted us. It was half our revenue last year. And so – and then coupled with COVID this year, we saw about a 58% drop in our revenue in Q3. And at the same time, we've seen our deliveries all across the board with Boeing wide-bodies and Airbus down about 45%. And so, that's had an impact on our stock. We've been downgraded.

Spirit AeroSystems Holdings, Inc. (SPR) Corrected Transcript UBS Aerospace Virtual Conference 12-Nov-2020 And so, what we've done is we've taken actions to reduce costs, to preserve liquidity, also to continue driving diversification of our customer base, and to improve productivity in our factories. And so, from the standpoint of costs, we've aligned our costs to our lower levels of production. So, one of the things that we've done is we took about 8,000 of our commercial employees out of our workforce, so about 44%. We also cut executive salaries 20%. We've had our salaried employees on four-day workweeks for basically the whole year since March. We've taken out a lot of other indirect costs, so about $1 billion of total cost or 40% of our nonmaterial base.

The other thing we've done is we've taken a lot of actions to preserve liquidity. We negotiated with Boeing a $225 million advance earlier in the year. We deferred $123 million repayment to Boeing until 2022. But we also raised capital. In two different transactions, we raised $2.1 billion of new capital. We cut our capital expenditures by about $150 million to $125 million. We reduced our dividend down to $0.01, but we also terminated – we mutually terminated an acquisition we had planned with Asco that really eliminated a capital outlay of $420 million. We did close our acquisition with Bombardier, but at a reduced price. We took $225 million off the cash consideration, which was a 45% reduction.

So, combined with all those things, we substantially improved our cash position. We ended Q3 on a pro forma basis with $2 billion in cash on the balance sheet. Our cash burn in Q3 was about $72 million. And so, if you look forward, even if things stay about as they are, we have more than 20 quarters of cash on our balance sheet. So, plenty to weather the storm however long it lasts. But we do expect to be cash flow-positive beginning in 2022 based on current projections.

At the same time, with the acquisition of Bombardier's aerostructure assets, we've really improved our diversification, more Airbus content, more work on composites, more wing, also more aftermarket. The Bombardier acquisition more than doubles our aftermarket presence. So, as we look forward, next year, Boeing commercial is going to be about 45% of our total, Airbus will be about 25%, defense about 15%, business jets now become more significant at 8% and aftermarket at 8%. So, a much more diversified company. And we're taking advantage of this slower period of production to really improve productivity. So, we are automating things, digitizing more of our factory floor, improving our workflow in our factories, so that when we do go up in rate, and we will, we'll be a lot more productive when we do so.

So, coming out of this situation, we do now have a good cash cushion. We've taken our costs down to the levels of production that we are currently at and that'll start to help our margins as we go forward. And we have a very good work package on every aircraft in Boeing and Airbus's backlog, and the backlogs have more or less been resilient. Obviously, MAX has lost some backlog, but it's still at about 3,400 units and Airbus remains very intact as well.

So, we feel like we're in a good position, more diversified, good cash position. We'll be more productive coming out of this. And we are optimistic about the future. We won't be on Zoom calls forever. We will start to travel again and that will mean that production rates will go back up in the future. It'll take a couple of years but they will recover.

So, with that, Myles, we can go right to questions.

Spirit AeroSystems Holdings, Inc. (SPR) Corrected Transcript UBS Aerospace Virtual Conference 12-Nov-2020

QUESTION AND ANSWER SECTION

Myles Walton Analyst, UBS Securities LLC Q Well, I can't wait to [indiscernible] (5:55). Maybe let's talk a little bit high level about the health of the supply chain below you and next to you. And you've given to us in sort of two lenses. One is your lateral supply chain and those that you see as similar to you, beating into the supply chain; above you, so the Boeing and Airbus; but also maybe more specifically your supply chain and its health, how it's dealing with the current downturn, have they been as successful as you have in terms of getting to a cost structure that they can almost break-even and, to your point, have 20 quarters of stability if nothing improved. Give those two lenses...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A All right. Well, the supply chain clearly has been impacted by this situation, both the MAX grounding and COVID. These are historic crises in the industry. And with air traffic now down, still down 65%, and it was down more than 90% back in March and April. So this has been difficult for everybody.

I'd say, though, the supply chain laterally has been remarkably resilient. People have been able to get access to capital markets. I described our efforts. You've seen the same with Triumph. You've seen the same with airlines. People have been able to access the public capital markets and that has certainly helped. I think some of the actions the Fed take that has taken – has enabled that.

In terms of our supply chain, as we look below, that's critical that that supply chain remains healthy and they've also been resilient. We have seen a couple of bankruptcies, but surprisingly few at this point, only a couple really. And I think part of that, though, is that where we are in the cycle. So the MAX grounding and then the subsequent pause in production that Boeing announced last December was so quick that we didn't really have time to react to it. And so, we had all of our orders, particularly from the international suppliers, coming in on the water and coming in.

So, first quarter and second quarter really, we saw a working capital drag because we were still paying out for all of that supply that was coming in. We've readjusted all the purchase orders now and so now you're going start to see some destocking at the suppliers. That will actually put them under some more pressure as we go forward and as production rates increase.

But they've been [audio gap] (8:23) we've been helping them a lot, as have the OEMs, both Boeing and Airbus. For example, we've helped probably close now to 600 suppliers with things like buying up inventory, keeping them at a slightly higher rate than we are, buying material. We've helped them with payment terms through our vendor financing program with Bank of America. We've extended a lot of contracts during this time. Our contract, for example, with the MAX, our pricing contract goes out to 2033. And so, that's given us some latitude with some of our suppliers to extend contracts.

So, we've been helping them. We want them to remain healthy because, as we are going back up in rate, we're just starting. So we're at 7 aircraft per month right now in the MAX, we're going to 10 in January. And we want our supply chain to remain healthy. On the Airbus side, we're at 40 aircraft still for the A320 and protecting 47 aircraft for the back part of next year. So we want our supply chain to remain healthy and we are providing support, as are the OEMs.

Spirit AeroSystems Holdings, Inc. (SPR) Corrected Transcript UBS Aerospace Virtual Conference 12-Nov-2020 Myles Walton Analyst, UBS Securities LLC Q Okay. And in terms of that supply chain next to [indiscernible] (9:25) did they – are they removing as much cost? I mean, it sounds like from a Spirit perspective, you were going to be in a better profit position potentially financially if you got back to the same production levels based on the cost actions you're doing. No crisis goes to waste here.

And so I'm just curious, as you look to your suppliers who are obviously instrumental in how much probability or financial success you'll have, are they equally diligent in that cost reduction effort? And should I think of what you're presenting at your cost structure level as largely indicative of what they're doing down the chain? ...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A Yes, I think that's the case. The suppliers that we've seen have all taken actions to reduce their cost and their head count, to consolidate their infrastructure and to look for opportunities to improve their liquidity. One of the challenges is the banks are very nervous about aerospace credit right now. And so, that's been a challenge. We've been able to access the bond markets to get some of the liquidity.

Now, the smaller suppliers aren't able to do that, especially the family-owned ones. Some of them who are owned by private equity have access to their parent liquidity, but the others don't. And so, they've been a little bit more challenged on the liquidity front, but they've been taking a lot of action to cut costs wherever they can.

The other thing, we're starting to see some of the suppliers talk about consolidation at the lower levels. There are a few processes underway where people are either looking for investments or to sell. And so, I think we're going to see more of that as we get further into the cycle. There's still a lot of uncertainty about what production levels are going to be next year and beyond...... Myles Walton Analyst, UBS Securities LLC Q Okay...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A We see some promising indications. The MAX looks like it will be back in service at least in the US soon. I mean, the FAA hasn't committed to a date, but they've had some very encouraging remarks. EASA has said that they are expecting to follow soon after that. That's good. But right now, of course, people aren't traveling. You and I are both kind of on this virtual situation. New York is still pretty much shut down to outside business, certainly from Kansas. We're not able to go there without quarantining.

And so, until people start traveling again, airlines are going to be half short and they're going to be reluctant to take new aircraft and that's going to put pressure on the production schedule. So we've got a long ways to go. And I think the suppliers are really in the early stages of it. So they need to continue to look at their costs, they need to look for opportunities to consolidate and take capacity out. Fortunately, we're not seeing as many bankruptcies as I think everybody feared. But nevertheless, suppliers are taking a lot of aggressive actions to align their costs to the current levels of production which are lower......

Spirit AeroSystems Holdings, Inc. (SPR) Corrected Transcript UBS Aerospace Virtual Conference 12-Nov-2020 Myles Walton Analyst, UBS Securities LLC Q Okay. The one question that did come in, and advise any member on the line to submit those questions, was around your comment around the 10 MAX a month production, moving there from the 7 currently. And if that's considered a floor for the year, if you think there's a risk of downside from that level and the progression to get to the 26, I guess, that's implied in 2022...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A Right. Well, Boeing has said publicly that they expect that their MAX production will be back up to 31 by early 2022. And they said that their priority is to deliver the 450 aircraft that they've already built but haven't delivered. And that makes sense because of all the working capital that they've got tied up on those aircraft, and they wanted to, obviously, generate the cash.

So they haven't said publicly what their production rates will be for 2021. And so, we don't want to get out ahead of them. We don't want to give any indications. We just know that they're saying publicly, they'll be at 31 by early 2022. We're going to 10 at the beginning of 2021, just to try to keep pace with them. We are going to lag them by at least five aircraft per month because that's how we're going to burn down the inventory that's built up here at Spirit.

So, we've got 130 shipsets at Spirit, including fuselages which are stored in Wichita. Now, Boeing's already paid us for those, but they're still here. Those still need to get burned down. And so, the plan would be, as they go up in rate, we'll lag them by 5 per month and that, by the middle of 2022 or so, that buffer will be down to about 20 to 25 units. And that's what we will keep on an ongoing basis to essentially cushion the production system...... Myles Walton Analyst, UBS Securities LLC Q Okay. Good. And remind us on the [audio gap] (14:06) is that really the point where normalized margins come back into the fold for Spirit as we look at it? And what are the conditions that could make you have better margins than you had in the past relative to the 2019, 2018 levels? And what could be some obstacles for that? ...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A Right. Well, what we've said in the past is when we were really the most stable in the recent past was probably 2016. That was before we started the rate increases. That was – we were still on the NG, 100% NG, not MAX. And our wide-body programs were at pretty good rates. I mean, 777 was at 8 aircraft per month at the time, A350 was about 10, 787 was 12, it eventually went to 14 for a short time. But 2016 was a stable year and our margins were about 16%. Now with the impacts of the tax changes and some of the revenue recognition changes, we always said 16.5% was a good rough equivalent to that number now back when MAX was at 42 aircraft per month.

We think when MAX gets back to 42 aircraft per month that it's reasonable for us to be in that 16%, 16.5% margin range, even though wide bodies will be at lower rates than they were back in 2016. So, 777, of course, is going to be not at eight, it's going to be more like two, 787 now is going to go to six, A350 is going to be at six, and five for a little while. So, we'll have a little bit more headwind on the wide bodies.

Spirit AeroSystems Holdings, Inc. (SPR) Corrected Transcript UBS Aerospace Virtual Conference 12-Nov-2020 But on the narrow bodies, we've done a lot in terms of productivity, a lot in terms of digitization, automation on the factory floor, changing around the workflow, improving our supply chain. So, some of that tailwind on the narrow bodies should help offset some of the headwinds on the wide bodies, and that's why we think 16.5% is a reasonable target once the MAX is back in the 40s...... Myles Walton Analyst, UBS Securities LLC Q Okay. Okay. I did get another question here. So, the question is around the supply chain, so just to stay on that topic, and how concerned are you with the ability of Spirit and its supply chain to actually ramp? Maybe not survive at this rate, but to actually now achieve the objectives, which are getting back to that 47 aircraft a month. And do we sort of rewind the clock and encounter some of the challenges we had in the last rate-up cycle? ...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A Okay. Well, going up in rate is always hard because there's a lot of moving pieces to it. But the one thing that's going to be different this time is all the capital and tooling is in place. And that wasn't the case last time. People were still scrambling to put that into place. Second is, at least on the MAX side of the equation, we've converted 100% already from the NG to the MAX. And then really the same thing on the A320, we went from the neo – or from the ceo to the neo. We don't have to do that this time.

The other thing is that the workforce is already trained. Now, we've laid off a lot of people, so have our suppliers. Those people have to be recalled and get retrained and recertified, but we've been through it once. So, while any rate increase is challenging and difficult, this one will be much less challenging and difficult than the last one because we're not converting models. We already have the capital and the tooling in place. The workforce is already trained. And so it's a question of retraining them and getting them back up to speed.

So, we'll be watching two major things with the suppliers for the rate increases. One is, get the staff back in place early enough for each rate break, so that they get more on-the-job training and they're ready to go. And the second thing is the long lead time orders on material, particularly forgings and some other long lead time parts, and that's very important. And that's going to take some cash flow, so that's one thing that we'll watch is the suppliers are going to be in a little bit more challenging position with regard to their liquidity. And with rates going up before the revenues coming in, there's going to be a little bit of a gap. And so we're going to have to watch that carefully and figure out some creative solutions for how we bridge those gaps...... Myles Walton Analyst, UBS Securities LLC Q Yeah. That was the specific follow-on that was in the question around that working capital need and did you have confidence pricing to be able to somewhat take that ahead of revenue...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A It's going to be − that's going to be a challenge. It'll the biggest challenge in fact, because what I said before is the suppliers probably haven't seen the full impact of the production rate cuts just yet because there was a little bit of a lag before the purchase orders fell and the MAX inventory levels all went down in our case. But there's some destocking that's going on right now. And so, that will put more pressure on their cash flow. So that when we do start to ramp, I expect some suppliers will be in a challenging situation. We'll have to monitor that carefully. We're following in Airbus and make sure that there's sufficient liquidity in the supply chain to go up in rate.

Spirit AeroSystems Holdings, Inc. (SPR) Corrected Transcript UBS Aerospace Virtual Conference 12-Nov-2020 Myles Walton Analyst, UBS Securities LLC Q Okay. And you closed on Bombardier aerostructures and so that's bringing you diversification to end markets and you mentioned 45% of your sales would be to Boeing next year. I'm curious, one of the pieces of business that was in Bombardier aerostructures was around nacelle for A320. And I'm just curious if that program is delayed or is not going to happen and not in the business plan? ...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A We're not planning on it. I think Airbus has said that they put that program on pause. I don't know if they've officially killed it, but probably in practical purposes they're going to stay with the incumbents on both the GE and the CFM version, as well as the geared turbofan from Pratt & Whitney. So, both of those will stay with the incumbent.

As we look at that deal, obviously, in the long-term, there was some volume related to the A320 TR. And obviously, the A320 is a very attractive aircraft. But it wasn't the main focus for us. Really, we were very interested in the composite integrated wing for the A220 and the aftermarket. Those were the key elements of the deal for us. And then, the really highly competitive plant that they have in Morocco was extremely attractive.

So, that wasn't a big deal for us. We took that into account. And I think the price reduction that we negotiated with Bombardier took into account some of the challenges of COVID and the reduction in volume and overall, and the reduction or the change in the work still from the elimination of the A320 TR.

But we're very excited about the Bombardier acquisition. As I've said, it gives us a lot more exposure to the A220 with the integrated wing. It's a very unique composite fabrication technology called resin transfer infusion. We think it positions us well for future generations of wing with Airbus and with other OEMs.

And right now, it's clear that with the pandemic, domestic travel around the world is going to recover first. China has already recovered on domestic, even a little bit above. Russia has already recovered. It'll be the first to recover in Europe and in the US, and that's going to favor narrow bodies.

And Spirit is in a position where we're heavily, I'd say, focused on narrow bodies. Now, that was a bit of a challenge obviously the last two years with the MAX being grounded. But coming out of this situation, 85% of our units in the backlog are narrow body, and that's going to be good for Spirit and good for people who have that exposure to narrow bodies.

And the A220 being obviously a smaller gauged aircraft, should be well-positioned with traffic levels being a little bit lower. And I know Airbus is very excited about what the possibilities are. And so, we've been watching it.

So, we think that's going to be a great aircraft. We've got the entire integrated composite wing for it, which is good for us. And then the other thing of course, as I mentioned, is the aftermarket. We've historically been relatively small in aftermarket. But with now Bombardier's assets, we'll more than double our aftermarket business. It becomes 8% of our revenue next year and it will grow from there...... Myles Walton Analyst, UBS Securities LLC Q

Spirit AeroSystems Holdings, Inc. (SPR) Corrected Transcript UBS Aerospace Virtual Conference 12-Nov-2020 Is that aftermarket – just to triangulate, that's proprietary aftermarket associated with products you're producing or is it a licensed aftermarket through letters, just kind of describe it? ...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A It's both. Bombardier does a lot of spare parts for the regional jets and the business jets for Bombardier, but they also do a lot of repairs and they had DER repairs for flight control surfaces, primarily on Airbus products or Rolls Royce nacelles. So, they do nacelle, thrust reversers, flight control surfaces, similar things to what we do.

The interesting thing is it's really a great complement when you put the businesses together because they have a lot of repairs on Airbus and Rolls Royce nacelles in Europe. And from a standpoint of Spirit is we have a lot of repairs on Boeing products in the US. And so, when you put those things together, it really creates a very complementary situation.

And we just announced a kind of an enhanced relationship with EGAT in Taiwan. And so, that'll give us an opportunity to address the Asia market with Boeing and Airbus repairs. And so, we're quite excited about the possibilities of growing our aftermarket significantly as we go forward...... Myles Walton Analyst, UBS Securities LLC Q And the number for next year, 45% exposure to Boeing, sort of understates your mix because the 737 is still at a very low level. But if you think about it longer-term, not to put any date or year to it, do you want to be in that sort of level where Boeing is very important to you, but they're not driving the boat? ...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A Well, look, we're Boeing's biggest supplier there, biggest customer. We want that relationship to continue to grow. So – and it will once again, once in access, we're safely back in service. But at the same time, our other businesses and our other customers are going to be growing faster, particularly Airbus and defense.

And so, obviously, in the commercial world, with the duopoly between Airbus and Boeing, the 50/50 is kind of what you get in the best circumstances. And so, we'll always be a little bit more tilted toward Boeing because we have such a significant work package with them, but it'll balance out over time.

And one of the things we haven't really talked much about is the growth of our defense business. We've got some very good defense business today. We're on some great programs. We're one of seven suppliers named in the B- 21 bomber. We're on the CH-53K. We have the commercial derivatives from Boeing on the P-8 and the KC-46 tanker.

So, that's been a business that's growing. We'll be $1 billion by 2022. As I mentioned, it'll be 15% of our business next year. But we see that growing significantly in the future and we're making a very concerted effort to accelerate that...... Myles Walton Analyst, UBS Securities LLC Q Yeah. Actually, you brought it up where I was going to go next on the defense piece. So, it was about a $0.5 billion business in 2018. Sounds like it's going to be about $750 million next year – or I'm sorry, this year I guess,

Spirit AeroSystems Holdings, Inc. (SPR) Corrected Transcript UBS Aerospace Virtual Conference 12-Nov-2020 and then $1 billion in 2022. What's driving that aside from the B-21 presence? What kind of relationships have you organically created? Is it through extensions of new programs? Is it extensions of new relationship with the expansion of work shipsets? How would you describe the doubling of the defense business? ...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A Right. So, a few things. First of all, the programs that we're on, getting into their production phase. So, B-21 is still in development. The CH-53K is still in the low initial rates of production [indiscernible] (25:41). And so, as those get into higher rates of production, that will naturally increase.

And then we've got a couple of programs which are still competitive, like the V-280, which is for the Future Vertical Lift, the FLRAA, as it's known. And that is Capability Set 3 for the Army and they seem to be very well- positioned. So, if that wins, that'll obviously increase. So those are the existing programs. As they get into full rate production, there's a natural lift.

The second thing is, we've been able to go out and been fairly aggressively with the major primes, so Raytheon, Northrop, Lockheed Martin on new programs and we had a lot of open commercial capacity right now because of the COVID-19 crisis. And we're able to bid a value proposition that says we can immediately come up to speed. We've got the infrastructure, we've got the capital equipment and it's available right now. We can take on this work. And so, that's been very compelling. We've been able to win quite a few programs as a result. For example, we were awarded a Title III award of $80 million from the Department of Defense, which was because we had these assets available that we could immediately deploy.

The other thing that we did is we made an acquisition earlier this year called FMI, it's based out in Maine. And what they do is specialty materials, in particular a 3D woven carbon-carbon composite that's used for flight control surfaces on very high speed applications that incur very high temperatures, so hypersonic missiles that go Mach 5 and can get up to 4,500 degrees. This 3D woven carbon-carbon composite is very good for that.

And so, that has enabled us to provide a much stronger value proposition on new work packages, particularly in hypersonic missiles and space applications that we never had before. So the combination of our current programs growing, using our open commercial capacity, bidding and developing relationships with the primes, particularly Raytheon, Lockheed, and Northrop, and then FMI, all of those things are really helping us accelerate our defense growth...... Myles Walton Analyst, UBS Securities LLC Q So, when you say bidding aggressively with the OEMs or the primes, should we interpret that as being margins that these could be, not loss leaders, but dilutive margins to start with relative to the 16% and you hope to build enough scale such that it contributes over time? ...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A No, we really haven't been using that as the lever to win. I mean, we're focusing on our technology and our capacity and our capabilities. But the margins for our defense programs are the typical defense markets. They're very solid. They're very stable. They don't tend to get as high as some of your most mature commercial programs. But on the other hand, they don't have some of that downside cyclicality that you sometimes see in commercial.

Spirit AeroSystems Holdings, Inc. (SPR) Corrected Transcript UBS Aerospace Virtual Conference 12-Nov-2020 But we're not using margin as part of our value proposition. We're bidding typical defense margins, but we're focusing on the available capacity we have and the expertise that we have and the capability...... Myles Walton Analyst, UBS Securities LLC Q Okay. Maybe to shift gears to the 787 for a second. Obviously, that program, your content on that is critical. You've created – there's a masterpiece of integration of Section 41 and delivery of that [indiscernible] (29:07) to Boeing. But it's still a program where you don't make any money. And this is the sort of the thing I struggle with is, despite your performance on it, your contribution to it, the contract structure is so un-financially profitable.

I'm curious, how do you see the future evolving if you look in the mirror and you've got zero margins on the A350, zero margins on the 787, and Boeing comes along with a new program sometime in the next five years? How do you enter that conversation? ...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A Well, the 787 has been a challenging program and we are in a forward loss position, so we lose money on each unit right now. The good news here is with rates going down, we're losing less money than we were last year. So, that's kind of one silver lining to this situation. What we did negotiate with Boeing is that we will have a price step- up line unit 1405, and that will get us back to projections that price will be above cost at that point.

Now, that got pushed out obviously because rates are lower, but that gives us more time to get there. So obviously less production, less scale is a headwind, but we have a longer time to get there. So we're still planning to get there. Same thing on the A350 is it's been in a forward loss position, but when rates start to go back up, and they will, and all the things that we're doing at our Kinston plant in terms of driving productivity should help us make that a profitable program as well.

And so, that's sort of the path we're on. And obviously, we're always interested in work on new programs, but I think we understand new programs now and we want to make sure we don't bid on them in such a way that they're going to be loss leaders forever. I mean, programs have to be profitable for everybody across the supply chain. And the 787 has been a very challenging program, but it will get to profitable on a unit basis on line unit 1405...... Myles Walton Analyst, UBS Securities LLC Q Okay. Okay. And then, in terms of new programs coming down the path, are you in active discussions about new programs potentially for Boeing? In the near-term, obviously M&A was on the table for a while. That has probably been put in the backburner for a bit. But just curious if any comment you could make there in terms of your expectations for new programs...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A I mean, really – I don't know what Boeing's plans are for its future models. Our focus right now is on the current models and making sure that we manage through this very difficult time. And if the MAX comes back into service soon, which looks like it could happen, there's going to be a lot of work. And that's really what our focus is, is making sure we help Boeing get the MAX back into service and that we meet the production rate schedule that

Spirit AeroSystems Holdings, Inc. (SPR) Corrected Transcript UBS Aerospace Virtual Conference 12-Nov-2020 they have. That's going to keep us busy for a while. I don't anticipate a new program for Spirit on the commercial side for some time...... Myles Walton Analyst, UBS Securities LLC Q Okay. And then there is a new commercial partnership, I guess, with the Aerion [indiscernible] (32:09), which I imagine is small right now. But I'm curious of what you see from that program, what's your level of involvement today, and where does that go...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A Right. Well, we're really proud to be a partner with the Aerion on the AS2, and we're going to build the forward fuselage, the pressurized fuselage where the passengers sit. And they have a great value proposition and a compelling strategy to reintroduce supersonic speeds to commercial aircraft for the first time since 2003. And their focus is on a business jet-sized aircraft, so about 16 passengers, and they're going to be using the latest technology. They've got a pretty aggressive schedule. They still are planning to get to their preliminary design review by the end of 2021. Perhaps it could slip a little bit, but they've got a great team working on it.

So, we're excited about that. The opportunity for us is that it's really cutting-edge technology. It's stretching us technically in terms of design, as well as the production and the industrialization. And so, we like that. It will push us to be better and that will make us more competitive on future military programs and future commercial programs.

And I do think that there is gaining – there's a growing momentum to reintroduce supersonic travel. You've got boom out there as well and a couple of other programs. And they're going to solve the issue of the sonic boom over land using algorithms, so that the boom dissipates before it hits the ground. And you see the FAA doing a lot of work on the regulatory side about what's going to be required to allow supersonic travel in the future over land.

But regardless of that, there's still over the oceans and there's an opportunity. So, the AS2 in particular is a hybrid. It can go supersonic, but it can also travel at 0.95 Mach over land. So, it's going to be a very unique aircraft in that sense. I mean, price point is pretty high, so the volume won't be significant, but it will push us on the technological front and we think that's a good thing. We're really proud to be a partner with Aerion on the AS2...... Myles Walton Analyst, UBS Securities LLC Q Okay. And there was a question back to the workforce for a second and it was around the ability to recall the workforce. And the assumption around you're getting – are you assuming you're getting the same people and you're just retraining them up to where they were and should the industry expect that those people are ready to come back when they get the phone call, or is that not the assumption? ...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A Well, as I said, we've laid off about 8,000 of our commercial workforce since the start of all this. And so, those people are available to be recalled. Now, they're clearly looking for other things to do in the meantime. But we did a couple of things. One of the things we did this year, for example, starting back in March, is we started building ventilators with a company called Vyaire, which is the largest respiratory company in the world. And we had about 1,000 people at the height of that working on building ventilators.

Spirit AeroSystems Holdings, Inc. (SPR) Corrected Transcript UBS Aerospace Virtual Conference 12-Nov-2020

We built 20,000 critical care ventilators and shipped them to 20 countries around the world. And that program ended in mid-October. And as we are ramping up now for the increase in the MAX up to rate 10, we're taking the people from the ventilator and shifting them back to the MAX program. So, that in effect created a bridge. So, that was very timely and we are proud of the work we did on the ventilators and it served that well.

As we go up in rate on future programs, we've got a little bit of reallocation, I would say. So, next year, 787 is going to have a rate decrease. 777 is going to stay low. So we'll be shifting some people from our wide-body programs to the narrow bodies next year, if current rates hold as we expect.

And then once we are going up even further in rate, we'll start recalling workers. A lot of workers like to stay where they are. So they don't necessarily leave the area. They find other things to do. But we offer a very attractive proposition for them to come back and we do expect we'll get a lot of them back. If we don't, again, in the places where we operate, Wichita, Tulsa, Kinston, North Carolina, there's a pretty good base of industrial workers and we've always been very successful. We've got great relationships with the technical colleges to do training and we do on-the-job training. And we'll have plenty of lead time to get those workers back in, get them trained and certified, and make sure that they're ready when those rate breaks take place...... Myles Walton Analyst, UBS Securities LLC Q Okay. One other question that also came in was around cash flow and you mentioned to be cash flow positive in 2022. And the question is more around that prior-year target of 7% to 9% of sales being free cash flow and when do you get to that and achieve that? Is it at the same time that you get those 47 aircraft a month on the 737, or is there a higher order calculus you want to offer? ...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A It's about the same. When we get to those 16, 16.5% margins, the cash flow overall should be 7% to 9%, plus or minus. And then the cash flow situation, I would say, is [indiscernible] (37:25). As I said, end of Q3 pro forma basis, we had $2 billion of cash in our balance sheet. Our cash usage in Q3 was $72 million. That was pretty good. It might be a little bit more in Q4. But even if it's $100 million a quarter, for next year that would be $400 million. We think it'll be a little bit less than that.

We do have $130 million cash payment next year on the Bombardier pension that we'll be making. But on the flip side, we also are going to get the benefit of the CARES Act tax benefits. So we have operating losses this year. We can go back five years and recover the taxes that we paid. And so, we think the next – and we said this on our earnings call, we think it will be about $300 million next year in cash tax benefit from the CARES Act and that'll help offset some of the operating cash losses. And then, as I said, we expect to be cash flow-positive again in 2022 based on current production forecasts...... Myles Walton Analyst, UBS Securities LLC Q And just to clarify, that pension contributions through the Bombardier deal, is that in your 2021 free cash flow expectation or is all the comments pre-Bombardier? ...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A

Spirit AeroSystems Holdings, Inc. (SPR) Corrected Transcript UBS Aerospace Virtual Conference 12-Nov-2020 Well, we haven't given a forecast yet of our cash flow, but we're certainly including it in our planning. Yes, absolutely. It's embedded...... Myles Walton Analyst, UBS Securities LLC Q Okay. Yeah. All right. And in terms of the – there's another question on your position for a new program and how you'd be thinking about participating in that, taking on the risk for yourself. If Boeing were to offer you a seat at the table, is that something you would actively pursue or is it more of a risk at this point for the company that you'd potentially ask to defer? ...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A Well, as I said, right now our focus is on getting the MAX back into service and there's going to be a lot of work associated with that, production rates going up and down, down on some of the wide bodies, back up on the narrow bodies. So, that's our focus. We're always interested in new programs for the future of course. I mean, this is a long-cycle business and new programs are 40 years' worth of work, if not more. I mean, obviously, the MAX has been going for 50, 54 years now, so lots of upside.

But you have to evaluate every opportunity on the basis of the economics. And so we'll see when we get there. As I said, I think new programs are a little bit off − ways off right now in the commercial world, but we'll see. We're obviously watching very carefully. But we've got a lot of activity on the defense side. I mean, we're bidding on a number of programs on the defense side and so that's certainly keeping us busy.

Also on the business jet side, we have a pretty good business jet program. There's some new programs coming out. We're actively bidding on those. That should be pretty good from the standpoint of margin. And then the work with Bombardier, we're going to become one of their largest suppliers and the Challenger, the Global Express are great entries in their segments of the business jet world and we're excited about that opportunity...... Myles Walton Analyst, UBS Securities LLC Q And within the business jet landscape, Gulfstream and Bombardier are your two larger customers. How much penetration do you have that assessment? ...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A It's pretty minor right now, which is ironic, as Textron Aviation is right in our backyard. But we do do some work with them and we're doing more work with them. We've talked about machining. We're doing some composite work with them. And as they grow, the opportunity is there. And we're developing a very close relationship with Bell, which is a sister organization to Textron Aviation. And so, that will also help in the future as we go forward. But we're certainly more open to it and we have great regard for Textron Aviation and the work they do here in Wichita and around the country. And we would love to expand that relationship as well from where we are today...... Myles Walton Analyst, UBS Securities LLC Q And maybe one other whitespace with respect to COMAC and their vision for just being in air transportation. Talk about what relationship you might have today and what you think about that being in the future......

Spirit AeroSystems Holdings, Inc. (SPR) Corrected Transcript UBS Aerospace Virtual Conference 12-Nov-2020 Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A Right. Well, we have a small joint venture in China with a manufacturing company to make parts for COMAC. And as I see, China is an opportunity. It's not so much a low-cost country for importing parts back here. There's other countries that have lower costs. The opportunity in China is really building in China for the domestic aircraft production and for the current OEMs. So, both Airbus and China – or both Airbus and Boeing have significant operations in China. They do want more locally sourced parts.

And so, the joint venture we have there is looking to do that, to supply parts to the OEMs in China for their work and also to develop relationships with COMAC on the C919 and eventually on the C929 and also on the ARJ21. So we see that as an opportunity. It's for us very small right now, but we certainly have a toe in the water and we'd like to see it grow over time, as China continues to develop its indigenous manufacturing capability...... Myles Walton Analyst, UBS Securities LLC Q Okay. And then maybe one last one. You mentioned rate protection for the 47 aircraft a month at Airbus. What cost does it carry to carry rate protection? And is this something that any manufacturer would do to have suppliers protect versus you thinking they're actually going to go to rate 47 aircraft in middle of next year? ...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc. A Right. Well, normally, protecting a rate that's higher than where you are would be a little bit more expensive than it is at the present time, because it would involve capital and infrastructure. But that's already done. We already have the infrastructure. We already have all the capital and the tooling in place. So, really what protecting for rate 47 aircraft means is being ready to have the long lead material available and to have the workforce available.

Now, in our Airbus plants, particularly in Prestwick, which is the biggest plant for us for the Airbus wing work, but also in Malaysia, the infrastructure, the capital and the tooling is not an issue. And the workforce is there. Some of it has been on furlough. The UK, for example, has a program where they pay up to 80% of the cost of workers for a period of time, and that's extended. So we think that the workers will be available for us through recall to get it back up to 47 aircraft, if needed.

And then the other issue then is material. We just have to make sure we're working with our supply chain, so that the material is there. We'll need a little bit of lead time obviously for Airbus, and I think they'll give it to us if they truly are going go up to rate 47 aircraft. But the hardest part is usually the infrastructure, the capital and the tooling, and that's already in place...... Myles Walton Analyst, UBS Securities LLC Okay. Well, this has been a great conversation, Tom. I really appreciate you participating, not just talking about Spirit, but the overall ecosystem that we're excited to see get better here. And hopefully, we'll do this next year in person. So, thanks again...... Thomas C. Gentile President, Chief Executive Officer & Director, Spirit AeroSystems Holdings, Inc.

Spirit AeroSystems Holdings, Inc. (SPR) Corrected Transcript UBS Aerospace Virtual Conference 12-Nov-2020 Well, we look forward to that, Myles. Thank you very much for having us. We look forward to doing it in person next year...... Myles Walton Analyst, UBS Securities LLC Take care.

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