Edited Transcript of SPR earnings conference call or presentation 1-May-19 3:00pm GMT

In our industry, safety is the most important priority. We focus every day on safety in our factories and in the products we build. We know that millions of people around the world depend on the safety of the planes they fly every day, which is why all of us were so devastated after the recent accidents involving Lion Air and Ethiopian Airlines. Our sincere condolences go out to the families of those involved in these strategic events.

Everyone is well aware of all the efforts that Boeing is taking to address the 737 MAX situation. We are proud to be a partner on the MAX, and we'll work with our largest customer, Boeing, and provide them with whatever support they need as they work with regulators around the world to return the MAX to service. Spirit makes 70% of the structure of the MAX aircraft, including the entire fuselage, the pylon which holds the engine to the wing, the thrust reverser and the flaps and slats of the wings. It is an important program to Spirit, and we have an increasing production on that aircraft from 42 ship sets per month in 2016 to 52 aircraft per month in 2018. Our previous plan had been to increase production from 52 to 57 aircraft per month during the second quarter of 2019. Following Boeing's decision to adjust their production temporarily to 42 aircraft per month, which they announced on April 5, we worked closely with them to minimize disruption to Spirit's operations in our supply chain. We recently announced an agreement we reached with Boeing to continue producing at a rate of 52 aircraft per month even as they reduce their production to 42 aircraft per month.

During the period in which we are producing at a higher rate than Boeing, we will continue to deliver to Boeing, as we always do, outside of our factories in Wichita and Tulsa. Boeing will pay us for the deliveries and take possession of the ship set parts. Spirit will then store all of the parts including the fuselages on our premises until Boeing is ready to receive ship sets at their factory in Renton outside of Seattle. We have done this storage procedure before during previous work stoppages of Boeing and are familiar with the process. We are installing temporary mechanisms at Spirit's expense to protect the fuselages from inclement weather during storage in Wichita. We will store all of the other Boeing 737 MAX parts indoors in our facilities. When Boeing resumes their planned rate of 57 aircraft per month production, Spirit will remain at 52 aircraft per month until we burn down the stored MAX ship sets at which point, we will increase production to 57 aircraft per month. This staggered delivery approach will enable Spirit and our supply base to provide better support to Boeing during this period of time while they are working with global regulators and airlines to return the 737 MAX fleet to service.

As I've described in the past, the approach Spirit has been implementing to go to 57 aircraft per month involves 3 production lines in our major plant in Wichita, where we manufacture the 737 fuselages. At this point, we are now producing all MAX fuselages except P8 aircraft in some minor models. Each production line will have the capacity to produce 21 aircraft per month. At a production rate of 57 aircraft per month, each line would have produced 19 aircraft per month and we would've had 2 days of buffer per month in each line. While we remain at 52 aircraft per month, we will add extra buffer days into each production line to achieve that production rate. In total, we will have 11 or 12 buffer days each month across the 3 lines. The advantage of this approach is that our production system will be set up to produce at a rate of 57 aircraft per month but will only deliver 52 aircraft per month with the buffer days. These buffer days will enable us to reduce overtime in contractors significantly below our previous plan levels and remain poised to increase to 57 aircraft per month when directed to do so by Boeing. During this time, we will reduce hiring as attrition occurs to align headcount to the production rate of 52 aircraft per month. With these actions, we are not planning layoffs at this time.

The stability of remaining at 52 aircraft per month, longer than we had previously planned, will help us improve efficiency and quality while enabling our supply chain to get healthier as well. We will take full advantage of this opportunity.

Given the importance of the 737 program to Spirit, which accounts for about 50% of our annual revenue, the global grounding of this aircraft is a significant event. Our prior guidance for 2019 assumed we would produce 737 monthly production -- that we would increase the 737 monthly production in June 2019 to 57 aircraft. As we now expect to remain at 52 aircraft per month for some period of time, the guidance does not reflect our current outlook. Due to these uncertainties, we will issue updated guidance for 2019 when we receive more definitive information on the timing of the 737 MAX return to service and Boeing's new production schedule. What we do know is that we will produce fewer 737 MAX aircraft this year than we had previously forecasted by 5 units per month beginning in June for as long as we remain at a production rate of 52 aircraft per month.

We are taking a number of actions to mitigate the impact of this new production schedule, as summarized on Slide 2. Given the reduction in production units and corresponding revenue, we have begun taking immediate actions to reduce expenses, defer capital investments and redouble our efforts on working capital improvements to mitigate the financial impacts of the production rate change. One action we have taken is to review all capital expenditure projects. We have deferred or delayed anything not an absolute priority for this year and will now spend only $200 million to $250 million rather than our previous forecast of $250 million to $300 million. Along with initiatives to manage working capital more efficiently and an advance from Boeing to help with supply chain working capital requirements, we plan to mitigate the impact of the MAX production change on cash flow. By reducing discretionary expenditures, managing indirect and nonlabor expenses more efficiently and realigning our direct labor and variable cost to the new production levels, we plan to offset some of the impact of the 737 MAX production change on operating profit but still expect some headwinds, which we will quantify as we get more certainty on our production rates for 2019.

We have a strong cash position with over $1.2 billion cash on hand at the end of Q1. After we close the Asco deal, which I will describe below, and taking into account the cash we will generate in Q2, we will have approximately $800 million in cash on our balance sheet at the end of Q2.

Now let's take a closer look at first quarter results, which were very strong.

At $1.968 billion, revenue was up 13% over Q1 of 2018. Operating income was 46% up to $233 million. Adjusted earnings per share was up 53% at $1.68. Our segment operating margin was 15.3%, which is down, as we expected, from Q4 because we had all of the cost in place to produce 57 aircraft per month in Q1, but we're still only delivering and getting paid for 52. Margins are on track to improve over the course of the year, although now of course, we'll face the additional headwinds of the 737 52 aircraft per month production rate versus our plan of 57 for the back half of the year. José will provide a more detailed financial overview in a few minutes.

And now, a few other recent highlights on Slide 3, starting with Asco. We were pleased to receive conditional clearance from the European Commission for the acquisition of Asco on March 20 and expect to finalize the closing in Q2 after meeting the required conditions. The work that we are currently doing involves segregating data to which Asco had access as part of the Belairbus structure. Once we identify that data and treat it consistently with the commission's requirements, we will be in a position to close the deal. That work is well underway and should be completed within the next few weeks.

Asco remains a compelling strategic fit for Spirit as the acquisition expands our Airbus content, adds new defense content and broadens our fabrication business. We are excited to begin executing a detailed integration of Asco into the Spirit family. As we have previously discussed, the closing process has been longer and more costly than we originally anticipated.