Ghassan Awad - IR Larry Lawson - President and CEO Sanjay Kapoor - SVP and CFO.

George Shapiro - Shapiro Research David Strauss - UBS Joe Nadol - JPMorgan Robert Spingarn - Credit Suisse Jason Gursky - Citi Peter Arment - Sterne, Agee & Leach Myles Walton - Deutsch Bank Securities Carter Copeland - Barclays Capital Ken Herbert - Canaccord Genuity Michael Ciarmoli - KeyBanc.

Good day, ladies and gentlemen, and welcome to the Spirit AeroSystems Holdings Inc Fourth Quarter and Full Year 2014 Earnings Conference Call. My name is Janet, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

Please note that this conference is being recorded. I will now turn the presentation over to Mr. Ghassan Awad, Director of Investor Relations. Please proceed..

Good morning. Welcome to Spirit's fourth quarter and full year 2014 Earnings Call. I'm Ghassan Awad. In the room with me today are Spirit's President and Chief Executive Officer, Larry Lawson; and Spirit's Senior Vice President and Chief Financial Officer, Sanjay Kapoor.

After opening comments by Larry and Sanjay regarding our performance and outlook, we will take your questions, and then Larry will share some closing comments. In order to allow everyone to participate in the question-and-answer segment, we ask that you limit yourself to one question.

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

In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of non-GAAP measures we use when discussing our results. And as a reminder, you can follow today's broadcast and slide presentation on our website at spiritaero.com.

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

Thank you, Ghassan, and good morning, everyone. Welcome to Spirit's 2014 full year earnings call. It's been a busy and gratifying year for the Spirit team. Many of the initiatives put into place during the 2013 strategic and financial review are manifest in the 2014 results and in the 2015 guidance.

We're very optimistic about the future and we have tangible opportunities to improve our operations and grow the business. We've endeavored for seven quarters to communicate our vision and follow through accordingly. We made good progress and we still have more to do.

You may remember as an outcome of the strategic review in 2013 we realigned our organizational structure around our programs and our customers. We brought in new members to our leadership team. We strengthened and standardized our processes and metrics. We assessed our markets and products and we instituted a disciplined decision making process.

We began to reduce risk and focused on being a cost driven culture that meets our customer commitments and consistently generates free cash flow. To that end 2013 was the first year Spirit generated positive free cash flow and we pledged at that time that we would progressively improve until reaching best in class.

While 2014 was a year of transition for Spirit, there were numerous accomplishments and programs, sites, systems, processes and people. In summary, we addressed performance challenges in both development and production. We improved productivity and quality.

We mitigated many risks as exemplified by the sale of the Gulfstream Wing programs and of course we continued to progress on the A350. There were a number of highlights in 2014. We delivered a record 1,545 ships last year.

We also made positive inroads in defense with focused program execution on the CH-53K and Textron's Bell V-280 Valor and we celebrated with Boeing in the U.S. air force, the successful first test flight of the KC-46 Tanker Program.

We deployed $129 million of capital in our first share repurchase and the nine-year partnership with Onex drew to a close last year with the completion of the sale of Onex's remaining shares. Cost reduction is a central theme for us and we continue to reduce overhead cost, improved productivity through numerous projects across the enterprise.

We completed our centralization activity, executed a voluntary retirement program and we're moving forward with our strategic sourcing initiatives. So let's turn to the 2014 financial results. Last year was a record year for Spirit. We realized record sales, EBIT, free cash flow and backlog.

We reported sales of $6.8 billion, which was up 14% year-over-year and an operating income of $354 million and an earnings per share of $2.53 or adjusted earnings per share of $3.57 excluding the impact of the divestiture of the Gulfstream programs and the deferred tax valuation allowance.

The full year backlog was $47 billion, up 15% versus 2013, which represents seven years of sales visibility. Our adjusted free cash flow was $302 million. 2014 was a year of transition and 2015 is focused on productivity and preparation for sustained growth. We have five key objectives for Spirit in 2015.

Number one, we will continue to focus on improved performance, increase productivity, reducing cost and aligning our business with what we do best. Two, we will leverage our investments as we prepare for the aircraft rate increases ahead. Three, we'll continue our progress on the A350.

Four, we'll have greater emphasis on long-term growth and finally, we'll address how we deploy capital. With regard to productivity, we continue to challenge our team to find opportunities across the enterprise and the functions to improve performance and reduce cost.

We're going deeper in our operations and we better understand our path to be a world-class operation. As part of the strategic sourcing initiatives, we've taken a methodical approach to what the company makes and what it busy.

We're bringing certain products back inside the company because they better align with our core capability and at the same time, we're outsourcing commodity work into the supply chain. Whether it is information, technology, engineering or manufacturing, we're focusing on what we do best.

We're investing smartly as we move diligently toward the rate increases on the 737 and the 787 as well as the introduction of the 737 MAX and the design activity of the 787-10 and the 777X. We're using these investments to advance our manufacturing capacity and technology to deliver on-time and enhance our productivity, safety and quality.

As for our Boeing Wing Programs in Tulsa, we will examine our opportunities work with local leadership. Our new onsite leader, Bill Brown, has an outstanding manufacturing and after-market expertise. Bill is joining our day to day execution and the vision for Tulsa modernization as well as our after-market business.

With respect to the A350, Cutter Airlines taking delivery of the first A350 aircraft, an Airbus achieving the pivotal milestone of entry into service, our attention shifts to the execution of a smooth and seamless ramp up on this important new program, while we continuously improve our cost position.

Finally, our approach to capital deployment will be balanced and discipline. You can anticipate, we will use all the tools in the toolkit from investing and manufacturing, cost reduction, share repurchases, the possible use of dividends, new business and potential acquisitions, we'll not likely pay down debt.

Just as we focus on cost, return on investment and risk in our operations, we'll do the same as it relates to addressing our capital deployment strategy. These initiatives should produce results in 2015 and the years ahead. So now for the 2015 guidance. We're guiding 2015 sales to between $6.6 billion and $6.7 billion.

Earnings per share between $3.60 and $3.80 for the year. In terms of cash and capital expenditures planned for the year, we expect to generate between $925 million and $1.75 million in cash from operations.

CapEx will be higher this year between $325 million and $375 million and we're guiding free cash flow between $600 million and $700 million for the year.

The cash in 2015 reflects improvements in operations, changes in advances, tax benefits from the sale of the Gulfstream wings rate related cost and associated funding, as well as other miscellaneous changes from 2014.

There will be a number of puts and takes throughout the year, and I would recommend given the timing of receipts of disbursements to focus on the year versus the quarters. In closing, we believe we’re making progress toward our goal for Spirit to be recognized as one of the best performing Aerospace and defense companies.

We’ll stay true to our brand, which is the highest quality and most reliable and affordable partner in the industry. With that I’ll ask Sanjay to lead you through the financials, give you more specifics about 2014 and the guidance for 2015 and then we’ll be happy to take your questions.

Sanjay?.

Thank you, Larry and a very good morning, everyone particularly in snowy New York. I’m looking forward to sharing more detail on our 2014 results and our 2015 guidance with you today. Now Larry took you through many of the 2014 accomplishments earlier, but I also want to recount a few financial initiatives that we executed throughout last year.

As you may remember, early in the year we refinanced our debt lowering our cost of borrowing. We secured a long awaited refund on our Malaysian taxes. We worked on cost management throughout the year on labor and overhead. We built a more robust EAC process that is helping us to do a better job in managing our risk and our opportunities.

And in this last quarter, we finally completed implementation of SAP across all our domestic sites. Now this will provide us better visibility and management of financial data and then last, but not the least, I’m proud to say that we fully remediated both our material weaknesses in the quarter.

So a lot of progress, but obviously lots more to do in 2015 and beyond. Okay.

Let me begin my presentation now, and we’ll start with the consolidated results for the full-year then we’ll do a quick recap of the quarter by looking at our segments, followed by a summary of the Gulfstream transaction, our near-term CapEx outlook and then finally we’ll wrap up with our outlook for 2015.

With that let’s turn to Slide 2, for the full-year consolidated results of the company. Overall revenues for the year were $6.8 billion, compared to $6 billion last year reflecting a 14% year-over-year increase and were a record high for Spirit. Revenue increases were driven by higher deliveries across multiple programs.

Compared to last year, we delivered 51 more 737s, 53 more 787s and we also increased our A350 deliveries from 8 to 16. 2014 revenues also include $229 million for the Gulfstream programs. And as you know these programs were divested at the end of last year.

On earnings per share, consistent with my notes to our guidance last year of excluding the impact of the deferred tax asset valuation allowance and the Gulfstream divestiture, adjusted earnings per share was $3.57, compared to negative $1.71 in 2013, which of course was impacted by a number of forward losses on various programs in that year.

On our bottom line, we’re capturing the benefits of all the cost reduction that we have worked during the year and also the better quality and delivery performance that we executed in 2014 and of course we continue to focus on mitigating our risks.

Finally an important measure of our performance of the adjusted free cash flow for the year, which also showed a significant improvement as we generated $302 million in 2014. The entire Spirit team has been very focused on this and we’re very proud of our results.

We’re making sure that we balance our investments against our cash conversion as we drive shareholder value. Now let’s take a quick look at our quarterly segments through our segment performance on Slide 3.

Fuselage segment revenues were $788 million in the quarter, compared to $701 million in 2013 reflecting a 12.4% increase and operating income was a $141 million on higher deliveries and cumulative catch-up adjustments on mature programs.

The Fuselage segment 737 program continue to perform well and was the driver of the $28 million in positive cumulative catch-up adjustments. In the Fuselage segment, the A350 team also met our milestones and along with Airbus, we celebrated the first important delivery to Qatar Airlines.

In our Propulsion segment, revenues were $385 million and operating income was a $107 million driven by cumulative catch-up adjustments on our mature programs. The Propulsion segment 737 and 777 production lines had solid performance, contributing to $21 million in positive cumulative catch-up adjustments.

The segment also benefited from a reversal of forward loss charge of $16 million, primarily on the BR725 program. The KC46 Tanker program achieved the milestone of the first flight in the quarter, which is an important program highlighting Spirit’s defense value proposition.

And our Wing segment revenues also grew reaching $397 million on high deliveries in the quarter. Operating income was $61 million as the segment benefitted from cumulative catch-up adjustments on mature programs.

The 737 line in Tesla and the A320 wing program in Prestwick had strong performance in the quarter, both contributing to the $14 million positive cumulative catch-up adjustments. Some other notes on the quarter. The 787 program realized a net decrease of $4 million in deferred inventory on 28 deliveries or roughly $150,000 per unit.

And the A350 deferred inventory grew by $47 million in the fourth quarter as we shipped five units on the Section 15 Fuselage to Airbus. For the full-year we have shipped 16 sets and the average deferred inventory growth per unit in Q4 was 66% lower, compared to the first quarter of the year.

And while we continue to make great progress on this critical program, it is still early in its stage and we have much work to do. Moving to Slide 4, I also wanted to walk through the financial impact of the Gulfstream programs transferred with the Triumph Group.

The transaction closed on December 30, 2014, and included a cash payment of a $160 million. The transfer included substantially the entire Gulfstream program inventory fixed assets and tooling and an assumption of the remaining advance payment liabilities.

As a result, we recorded a $197 million after-tax charge or a $1.39 per share, a tax benefit of $274 million was recorded, which included a valuation release of $118 million. As a result, we will realize cash tax benefits of $221 million in 2015. Let’s move to Slide 5 that summarizes our cash and debt balances.

Cash balance at the end of the year was $378 million and includes that payment on the divestiture of the Gulfstream programs. Our debt remains stable at $1,154 million and we maintain adequate liquidity with the revolver that is untapped. At the end of the year our total debt-to-capital ratio was 42%, compared to 44% in 2013. And lastly our U.S.

defined benefit pension plans remain fully funded. Let’s move to Slide 6, which shows our start and end of year cash balances. As you can see, we have applied a very disciplined and balanced approach in our cash deployment. We started 2014 with a cash balance of $421 million. During the year, we generated $302 million in free cash flow.

Early in the year, we used $129 million on the share repurchases to return capital to our shareholders and $56 million in onetime financing fees and other costs as we restructured our debt.

And then another cost as we restructured our debt and then another $160 million as part of the Gulfstream Divesture, an important milestone as we executed our strategy of concentrating on our core capabilities. As a result the net cash balance at end of the year was $378 million.

Slide 7 shows our capital expenditures for 2013, 2014, and 2015 and highlights the future investments that we're making in tooling and equipment to meet the rate increases of our customers. As Larry mentioned, we are on the right program, many of which are seeing increases in rate such as the 737, the 787, and the A350.

As a result of 2015, we are projecting capital expenditure in the range of $325 million to $375 million. We will be receiving non-recurring cash payments that are consistent with the increased investment required on the program. Thus on a free cash flow basis, the higher capital expenditures are fundamentally neutral on a year-over-year comparison.

Also as we make these investments, we continue to look for ways to use this to lower our cost and become more efficient. We will continue our balanced approach to capital and consider this to be a good investment in our future.

Now let's move to Slide 8, for the full year 2015 we're guiding revenues in the range of $6.6 billion to $6.7 billion and earnings per share in the range of $3.60 to $3.80. Free cash flow in the range of $600 to $700 million and this includes the one-time benefit of the tax refund associated with the Gulfstream divesture transaction.

And an effective rate -- tax rate in the range of 32% to 33%. On the differed tax assets valuation allowance, as I have repeatedly said, we will continue to following accounting guidance and assess to need to maintain our valuation allowance against our U.S. net deferred tax assets.

So like last year, I remind you that our guidance excludes any potential adjustment to the valuation allowance against our U.S. net deferred tax assets. We're happy to take your questions now..

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] And our first question comes from George Shapiro. Please go ahead..

Yes, good morning..

Good morning, George..

Sanjay, I wanted to ask to get to free cash flow you're guiding to even if I take out the $221 million. We're either seeing a change in the advanced policy, so you're going to get more advanced or what you just mentioned about the recurring cash is going to be that much to offset it or are you projecting working capital to decline.

And then I just wanted to ask on the A350 that the deferred was no different than Q3 if you could just comment on that. Thanks..

Sure, so George on the free cash flow line, you're right. The $600 million to $700 million guide includes basically the tax benefits on the Gulfstream transaction.

The impact of increase in capital expenditure between 2014 and 2015, like I mentioned in my prepared remarks is fundamentally neutralized not because of an advanced payment change or anything like that, but because of one-time nonrecurring payment that we received from our customers.

Outside of that, the $600 million to $700 million we've talked about that all last year that we intend to find ways to improve. It obviously assumes that we no longer have the Gulfstream programs and then it’s the natural improvement in our business.

So if you did the math that way and adjust for a few other one-time thing even Larry referenced to it in his opening remarks, if you remember in 2014, we did benefit from a shift on the 787 advanced repayments. If you adjust for that, you take the taxes and you take the Gulfstream business and you take improvements that we believe we will deliver.

You come to the range that we have guided you..

Yes George, I think you asked the question about 350, I think the question was third and fourth quarter in terms of deferred and what I would say to you is that at these low rates you're pretty sensitive to a number of factors. So remember the deferred is made up of both the Section 15 and or the fuselage as well as the wing.

And so what you're seeing is that a couple of phenomena, one is we had a unit to deliver that airbus took in January instead the end of the year. We also had some FX impact on the wing portion and finally it's also payment sensitive and so there was a payment that didn't come in end of the year and so it still looks a little bit flat.

What I can tell you is this will help you I think a lot is that the actual progress made on the Section 15 the fuselage and 4Q was about 18% reduction over 3Q..

And we have David Strauss online with a question..

Good morning..

Good morning, David..

Sanjay, back to the cash flow, can you specifically address within your cash flow guidance and if you assume that 77 cash is improved in 2015 and same things for A350..

So David, that’s fair question, but again I don’t want to get into program by program cash flow assumptions here. What we always told was last year and this year, we're looking at our portfolio on a quarterly basis on a yearly basis. There is movement this based on our cost curves coming down as well as we all know we have price step-downs as well.

But my cash flow guidance for the company includes the pluses and minuses associated with all of these programs..

Okay. Let me ask you in a different way. So on A350 and 787 deferred per unit, you're assuming further improvement in A350 and what is 787 deferred due from here..

Again David, going forward you will see the impact in the quarter. It depends on how we do on our cost and what the impacts are for the specific price step-downs, but again I know you're focused on each of these programs, I am trying to give you an answer at the Spirit level, because that's how we manage and guide to you.

Clearly Larry mentioned that the 350 is walking down a very sharp curve. I said it's about 66% reduction from the start of the year till the end of the year. And as we ramp up in terms of quantity, then in 2015 we would expect to see the benefits of our absorption and the benefits of all the cost reductions that we are working on.

Unfortunately, on a quarter by quarter basis, the timing does affect because these units that are shaped collect cost in our work in process for the duration while they're there and so it gets a little lumpy in each quarter.

But overall you should see cost reduction impacting the 350 program and we should start to see the deferred -- increase in deferred bill come down in 2015..

And Joe Nadol is on line with a question..

Thanks, good morning. Like to come out this same question maybe a little bit of a different way for really for cash flow expectations beyond 2015 you guys have said that you want to drive improvement progressively, you have a big $221 million benefit in 2015. You have a one-time -- it sounds like a one-time payment coming to offset you CapEx.

We don’t know what your CapEx expectations are beyond 2015, although you have some big rate increases still coming beyond that. Can you help us sort of level set expectations between 2015 for cash flow..

I would say Joe is I know you would like to have some precision around this and I think what we've given you is directional guidance. As we work each of these items whether we're de-risking the company and we end up with a tax benefit or we work our rate increases in associated funding, you're seeing some variability in cash year to year, right.

So you saw in 2013, $57 million, you saw in 2014 $300 million. You're seeing if you're plotting this, you're seeing $700 million and when you correct it you're going to get a number that you would assign to the operational piece of this.

And I think Sanjay kind of guided you through that math and when you look at 2015 its going to -- there will be some variability there too. Not everything in '15 is all negotiated. So things are happening.

But what I can tell you is as you draw a line through that, we're going to continue to make progress in terms of operational performance year-over-year and we're moving in a good direction. Will it be a straight line? No, it won't be straight. Will there be variability year-over-year? Yes.

Are we on a good trajectory? Well, I think -- I hope you're getting a sense if that's the case given two years under our bell and guidance for the third year.

But there is a lot of moving parts that go behind all these things and frankly a lot of discussions that occur between us and our customers as it relates to kind of how we go forward in the trade. So really at this point, we're not guiding '16 yet.

Maybe as the year goes on, we can give you a little more indication but as right now, it's just -- we're kind of sticking with our general I think directional guidance on years beyond '15..

And we have a question from Robert Spingarn..

Good morning..

Hi Robert..

So at the risk of asking the same question, I guess at this point you know what the focus is. When do you -- how do we think about 100% conversion. I think if we back out the $221 million, would Sanjay aside from the small pieces you mentioned. I think that is the only thing to back out. And that leaves you with conversion of around 80% to 82% for '15.

So how do we think about the trajectory to 100% following on to Joe’s question and the others?.

So Robert listen, these are all very fair questions and I understand from the perspective that you're coming from and again you have to look at it from our perspective. On an operational basis, you know we have challenges on a number of our programs and we continue therefore not just to work on cost for those programs.

All of 2014, I think Larry mentioned it several times, that we're concentrating across the Board on cost. So it's just not cost on programs associated with these early development like the 787 of the 350.

We work on overhead and as that cost comes down, that benefits across the Board and that then yields better results on our mature businesses as well not just in terms of margin, but also in terms of costs.

Now going forward, yes we are increasing our rates and many of you know what the OEMs have declared in terms of rate increases and you'll see some capital lumpiness going forward as well.

But our goal and Larry has been pretty clear about this, our goal is to get eventually, it might take a year or two or more, but eventually is to get to that 6% to 7% cash conversion on the revenue basis. That’s our goal, because that would be in line with our peer group. And this year we made some pretty good progress.

In 2014 we managed our cost really well. We got a very balanced and disciplined way in the way we are managing our capital, both internally as well as how we work that with our customers. So that we have a steady trajectory..

And Jason Gursky is online with a question..

Yes good morning. Sanjay one quick one for you and then one for Larry. One for Sanjay the SAP deployment that you mentioned, you're done here in the United States, which I guess improves that you are going to be doing something internationally.

Can you talk a little bit about year-over-year spending trends on the SAP deployment? And then Larry you said that there were five things that you're focused on. You did a little bit more of a deep dive on four out of the five.

I was wondering if you could provide a little bit more detail on the one long-term growth and initiatives that you'll be engaging in 2015 and what we might see externally as a result of those efforts. Thanks..

Yes okay, let me just try to answer your questions, they are IT questions and so we actually invested a lot of time in our IT strategy as it relates to going forward. So yes, Sanjay said that our domestic sides, we actually running -- we are actually in the early stages of running SAP also on our international sites as well.

I would say its early instantiation and then we will continue to enhance or grow that capability this year. The expenditures interestingly enough I made -- you may have noticed in my comments and my referenced IT.

We made some pretty big decisions about what we’re going to do internally and externally and frankly we were able to come up with a much more productive architecture for the deployment of our IT services and we’ve actually been -- we’ve deployed that.

We actually used it the last quarter of the year toward the end of the year and so far this year quite effectively and so we’ve been able to save some money believe it or not on IT and actually increase and improve our services.

So there’s not a -- it’s all in the plan I guess is what I would say and it’s a part of all the moving pieces that are included when we provide you guidance.

The question about growth is I think one on everyone’s mind as it relates to I think there’s always a question regarding, okay you guys are doing well in terms of your ability to collect capital. And I will tell you at the end of 2013.

I think after the call and we wrapped up 2013 and a few of the folks Sanjay came up and said free cash flow, give me high five and let’s go get it let’s go well -- let’s get a beverage and I’m sitting there with kind of my head down, because what’s wrong I get kind of low bar Sanjay. So this year we did better.

We weren’t at our 6% peer group performance, but I think hope you get a sense that we’re solidly on our way there, which means we’re working really hard to collect the cash to have the choices and the options for have to deploy it.

Then as hard as we work to do this, I hope you believe that we’re not going to be short-sighted in terms of the deployment of it and I think it would be quite clear, we’re going to look at, we’ll look at share repurchase obviously, we’re going to look at dividends as I said in my comments.

There are things that we can do -- investments that we can make that reduced our cost of goods sold that we’ll look at those from an ROI standpoint and make judgments about maybe spending some cash now that saves us money in the long-term.

And frankly you see the amount of investment going on at the facility, that’s really good news when you really think about it, it means -- if you think about the alternative, which is your own programs that don’t have -- they aren’t growing don’t seem to have a future, I kind of like this approach and so for us we just have to work hard to balance out those expenditures against what we think is a reasonable business model.

And we work real hard to do that. So it’s always the growth part that I think gets people nervous.

Are we going to go out and buy something and what would be buy and I can tell you that we don’t have anything on our radar scope as it relates to hey near-term acquisition there’s nothing -- we’re looking at -- we look at lots of things, I would say that the bar is very high.

And I think in prior calls I’ve kind of given some sense of what it is that we would consider? We’re not going to stray far of our field from what we do. We’re not going to buy something that’s troubled.

Although I would say, we have little more bandwidth -- management bandwidth now that we’ve moved the Gulfstream wings off that certainly helps our team little bit. But we’re not going to -- we’re not looking for a fix or offer. We’re looking for something that has strategic value that’s accretive to the business.

And again then the next question is are you going to pay too much and the answer is, well that certainly wouldn’t be the plan.

We’re going to be very diligent about using the money that we work so hard to put in the bank and we’re going to balance that between shareholders, customers and ultimate -- that’s why I use the word long-term growth or sustained growth. But things that are strategic as it relates to our view of the business.

And I’ll tell you that those things are typically by the way the timing of all of that. It just things come when they come and so you have to be ready to take advantage of those opportunities. Now, I’d just say one last thing I know this is a long answer I apologize, last year we did $129 million share repurchase and it wasn’t at the end of the year.

I It was fairly early in the year. I think that should give you a sense about our confidence and our willingness to deploy capital in a way that's smart and a good return for our shareholders..

Peter Arment is online with a question..

Good morning, Larry and Sanjay..

Good morning, Peter..

Just Larry, I guess following up on -- well you’ve given us a lot of information on the cost rate and culture. I’m wondering if maybe you could just give us a latest update on how you’re thinking about initiatives for 2015 on the supply chain consolidation kind of the efforts there.

And then also on the -- just quickly on the capacity, is it the CapEx investments that you’re making. Does it specifically cover all kind of known planned rate increases or if you can give any color there? Thank you..

Okay, sure I’ll do that. Okay so supply consolidation, the first of course for us was to -- we did this -- I said we completed the centralization in 2014 and we did we were able to go out to the operating sites, pull back the people and the benefit of that centralization whether it was in IT or engineering or procurement.

I could go on what it allowed us to do was to find a better standard of execution that everybody would operate to.

So it got us all on the same playing field and allow us to say this is the standard that we do business and if you were to see my -- I put out kind of the top initiatives to our team this year, the top of the list is that we’re going to be a standards based company. We’re not going to be a relatively -- it’s not going to be hey every year we’re this.

We’re really trying to define where we’re headed to. We may not get there in one year, but we’re demanding as it relates to saying here is the standard we’re going to operate to. Centralization was a key element of that.

The second part of that was then to develop a strategy around specifically the types of things that we buy and who we want to do business with. And I’d tell you that’s not an easy thing to do. You have to have some fundamental convictions about whether there’s economies of scale that are organically available.

And the truth is that in many of the places where we buy, frankly there is an over-capacity and so the ability to aggregate your buy and use that under-capacity or the economies of scale everyone would think about it, it provides a real benefit right, a true organic cost reduction opportunity for the seller and for the buyer.

And lot of times and just a lot of hey look we’re just going to demand or for me that’s not a lasting strategy. A lasting strategy is one that levers your real convictions about the economics.

And then when you have too many suppliers frankly it’s difficult to really get your footprint there where you’re managing the product the way you want to manage it. So we did a very extensive should cost exercise last year, where we went through all our products.

And we did a hey just a baseline bottoms up what does it cost to make these parts and then what does the business model look like. Then we did a -- I’ll say commodities view of here sheet metal this is how we do paint and treatments, here is our fabrication services.

And then we looked at all the supply base and then we said okay now what would a strategy be around all that. And we now -- we’re on the same view of that now we’re in the prowl and we’ve actually have some thoughts about that’s worth. And now we’re in process of going out with that strategy let’s say you asked a question on CapEx yeah.

On the CapEx front, so you know that inside those CapEx profiles that Sanjay showed you, inside there obviously that’s our maintenance CapEx rate as well as there’s already CapEx in there to get to 47 and increasing rates on multiple programs.

I don’t think we mentioned 320, but obviously we have 320 businesses where we’re investing money in our 320 business as well. And so when you look at all that you kind of see it. So that '13 and '14 doesn’t reflect our maintenance CapEx, it reflects actually maintenance CapEx plus investments that have been occurring in those years.

And there is a step up, because now you have multiple things happening we’re marching towards 47 to 52. And as you know 52, it is 2018. So you invest in your CapEx prior to the implementation, so I’d give you a sense that we’re going to have GAAP expenses through '17 as it relates in support of 52.

We get to 12 on 787 in '16, so you could imagine that those expenses then are obviously finished in '15. And then whatever may happen on the other programs in terms of further announcements will affect that and that’s and not just the rate, but the year at which the rates announced, because we put these plans together.

And then sometimes our customers decide to move the dates either well generally left lately and so it makes our ability to say to you, hey this is what our CapEx in 2016 is going to be makes a little challenging. The good news is that we can support our customer's needs. And it’s again I think I would try to say this is part of our value proposition.

It’s the most important thing I think that we offer is that we’re a reliable partner. And so we work very hard to make sure those things happen.

The other thing we do though I think and I just want to really make this point is you can see the amount of money going into the enterprise we’re being very smart, very smart about how to lever those investments in a way that gets us the maximum benefit in terms of -- across the Board whether the subjects quality or the subjects cost or safety.

So I hope that kind of addresses your answer without giving you a formula. I wish that could. We’re in pretty dynamic environment right now and it’s a good thing I want to say it’s a good thing, but it’s a dynamic environment and so it’s hard for us to just say here is a hard number for '16 right now..

And Myles Walton is online with a question..

Thanks. Good morning. Maybe Sanjay, I’m just curious as I look at the fourth quarter and the implied results you put up, obviously you’re baking in some through bookings probably not the reversals of some of the forward loss charges.

But in the context of your 2015 guidance is it fair to think that maybe the fourth quarter you're factoring in maybe a third of the positives that you reported and that’s similar to the proportional run rate you’re looking at in 2015 or some of this benefit going into the underlying base margin assumptions?.

That’s a good question again and it’s always a harder question because things vary by segment and things vary when the blocks are closing and how much of the cumulative catch-up we have relate to prior year performance and so on and so forth.

A better answer for you I think maybe and let me just talk about it in this sense, because I think many of you may have the similar kind of questions. If I look at my fuselage segment on average if I look at the sort of the average of the Q1 for the Q4, we’re running around 15% to 16% margins and we see that continuing into 2015.

The Propulsion segment that has fewer sort of zero margin programs in there and also obviously benefits a little bit from the aftermarket business. So that typically has about a 150 sort of basis points better than the fuselage.

And wing we’ve worked so hard and if you adjust for all the catches under reversal of the forward losses that we had including the stuff that we did on the BR725 on the propulsion actually. But on the wing side that’s in the double-digit -- double-digit margin range of about 10% and we see that continuing.

So rather than me answer up to you what the impacts are cumulative catches and how much of that for the prior year, I think it will help you if I gave you those kind of ranges for 2015. Now as we work on cost and we continue to do better and better, we should start to see that performance roll into our EACs.

But I will also tell you same Sam that we have worked with the finance team really hard in the course of this year to do a much better job of our estimate of completion and tie back our risks and opportunity, so that we don’t see too much volatility going forward..

Okay..

And we have a question from Carter Copeland..

Hi, good morning guys and good numbers Sanjay maybe you can get two beverages this year. .

You know Larry thought of that. That would be of stretch..

Okay. One and a half. Look I wanted to talk -- switch gears a little bit and talk about the reversal of the forward loss on the BR725 and everything that went into that, I don’t think I’ve ever seen a reversal of the forward loss at this company.

So what level of conviction did you has to have? What was behind that as a just straight cost and then, how does that discussion go, I mean after a lot of charges, can you just give us some color around, what kind of assumptions changed or how your conviction level grew or whether we’ll see something like this again in the future..

Sure. Cart this is Larry. Let me answer real quick it’s not, it’s not it’s really was a combination of two things, it was really actually going to be very candid we negotiated pricing.

And then we had really gone after BR725, really I don’t want to say 18 months ago because when we really put our hammer down kind of in terms of working on the cost sides. Really was the combination of the two things but it wasn’t just cost, it was cost and pricing that allowed us to do that with confidence..

And Ken Herbert is online with a question..

Hi, good morning..

Good morning, Ken..

Larry, yeah Larry I just wanted to ask, you give us some good quantification on the A350 earlier in the call, just sort of the two part question, can you did a little deeper into the A350 and specifically some of the milestones we should be watching for the this year, now that we’ve had entry into service or very close to and how that program might track this year from a risk management standpoint.

And then the second part as if you take a just even higher look clearly, your gold stream activity I think goes on, way to do risk in the portfolio that we often talking about and you’ve been talking about, where would you say that the risk resides today either within the portfolio from an execution standpoint, is it’s really A350 focused still very much or there other things that we should perhaps we thinking about..

Well, I think it’s let me just kind answer your question on the A350, I mean obviously, when we think risk, I think most people point of the A350, for good reason we’ve delivered 27 units.

Early in the cycle, we’ve built up a deferred inventory, when you say A350 by the way, we I think most people think fuselage and of course were thinking fuselage and wings and these things are actually moving different to each other and were making great progress on both but they’re in different positions.

I think when I would look at, I think the really key for 350 this year is rate increases. Most important factor and in the learning curve, well ability when I’ll absorb your fixed cost is your rate.

And when you look at the unit price of, unit cost of any one of these products that we build, you have deprecation cost and overhead cost, lot of fixed cost that are very rate sensitive.

And so it’s what’s important to ask this year is to see how rate does and the current plan, has as I said five rate at the end of the year and I think there was as plan as six by the beginning of next year and so its, they’re going up for pretty good curve and so we’d loved to see that happen, we certainly on track ourselves with getting there and it would be an important factor.

We also this year have to have the build a first dash 1000 were doing great in terms of building piece of that, that’s going quite well, so I would just say I think from my standpoint it’s I think as I said in my comments, assist with transition to higher rates and will be the most important factor and then, our obviously for us it’s our actual performance and executing our plan whether that’s in touch labor support ratios or material reductions.

And what I would say is, I think we’re going to learn a lot, as we go along, I mean I guess this is the other question I get quite often, how do you see this, transferring over time, my view as we learned something, why were continue to de-risk the program..

Operator, we have time for one more question please?.

And Michael Ciarmoli is online with a question..

Hey, good morning guys. Nice quarter, nice cash flow. I guess Sanjay just the one thing I want to be clear may be to follow-up on Rob question earlier, with the cash conversion, you’ve got the advanced payments on the 787 to Boeing, I guess those were frozen for 12 months.

Is that going to be a headwind going forward, I mean what is the exact plan regarding those repayments?.

Yeah, so on the 787 I think we actually disclosed this last year Michael which is we suspended those payments for a year and basically that one year was a suspension on nine months in 2014 and sort of three months in 2015, so clearly in terms of ’15 versus ’14 that’s an impact us to year-over-year but again that is baked into the guidance that I gave you.

So really if you look at, where we ended up last year and you looked at the tax benefits and you obviously add the, the impact of the not having the Gulf stream wings in 2014, that we divested and then you just for the 787, I think if you just did that little math, I think you come close to our guidance along with the improvements that we’ve always said we will deliver.

And I think that should give you a good reconciliation on cash..

Okay. Thank you all for your questions. I will now turn the call over to our President and Chief Executive Officer, Larry Lawson for some closing comments..

Yeah. Thanks Ghassan. Well, let’s to conclude the call, I guess I would say we made good progress. We’ve got solid foundation for our company moving forward. We’ve a busy year and we’re excited about 2015, but 2015 is not necessarily as exciting as ’14 and ’13 which is a good thing.

We believe that we’re on the right programs and I think we're still convinced that we’re going to invest in our value proposition to make sure that we’re reliable and affordable partner.

You can tell I think that we’re moving into the next phase of our journey and I certainly can tell from the questions today that we’re getting into the precision of the math and look we'll do everything we can to provide you the information that you can understand as best we can, in terms of within our guidance and our ability to help you understand our path forward.

It was intriguing to me today we didn't get a question about the cycle. I'm hoping that's the good thing. My own view of that is that I can’t think of another industry except maybe shipbuilding that has an eight year backlog and you think this is capacity limited business and so eight years is a long time. And it’s very unique to our industry.

I think that, that really tells you whatever volatility there may be, we still have a solid backlog and frankly it doesn’t appear to us that the underlying demand for our products are reducing because when you just look at the moving parts whether it’s the urbanization of Asia or whatever the demand, the organic demand for the product is there solidly and obviously there is other things in play, the strength of the dollar and the cost of fuel and all of this things, when you look at the big numbers, it's pretty -- it's not very hard to convince yourself that there is going to be a demand from new aircraft.

And whether the curve gets flattened or stays steep, this cycle is going to continue on we believe and we plan on making sure that our value proposition stays aligned to that. So I want to thank you all for joining us. We’re looking -- actually I’m looking forward to the next call and the next quarter. Thanks everyone..

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect..