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

Doug Harned – Sanford Bernstein & Company Howard Rubel - Jefferies & Company, Inc Carter Copeland - Barclays Capital Inc. Cai von Rumohr - Cowen & Company Robert Spingarn - Crédit Suisse Ron Epstein - Bank of America David Strauss - UBS Sam Pearlstein - Wells Fargo Securities Jason Gursky - Citi. Peter Arment - Sterne, Agee.

Ken Herbert - Canaccord Genuity. Myles Walton - Deutsch Bank. Steven Cahall - RBC Capital Markets.

Good day ladies and gentlemen and welcome to the Spirit AeroSystems Holdings Incorporated First Quarter 2015 Earnings Release Conference Call. My name is Vanessa and I will be your coordinator today. 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. And I would now like to turn the presentation over to Mr. Ghassan Awad, Director of Investor Relations. Please proceed..

Good morning. Welcome to Spirit's first quarter 2015 Earnings Call. I'm Ghassan Awad. And in the room with me today are Spirit's President and Chief Executive Officer, Larry Lawson; 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 statement 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 Web site at www.spiritaero.com.

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

Good morning everyone. Welcome to our first quarter earnings call. We just completed the first quarter of an important year in the history of our company. 2015 marks the 10 year anniversary of Spirit. It’s been an exciting event for past 10 years and we’re looking forward to making the enterprise even better over the next 10.

We’re fortunate to have a great portfolio of programs in a growing long cycle market and we’re equally thankful for a great work force dedicated to delivering quality product.

Relevant to driving for improvement in February and I shared with you that our focus for 2015 is about productivity and preparation for sustained growth and I outlined our top-five priorities. They are number one, continued focus on improved performance, increase productivity, reducing cost and aligning our business to what we do best.

Number two, leveraging investments as we prepare for aircraft rate increases ahead. Number three, continued progress on the A350. Number four, greater emphasis on long term growth and finally deploying capital. Let me give you a brief update on some of these measures.

Our first objective of increasing productivity and reducing our cost is the most important in defining our path forward over the next few years. We’re making good progress on our operational delivery, quality and productivity. In addition to the investments to support rate, we’re investing in automation projects of over $100 million.

These automation projects will return our investment over the three years to four years and continue to differentiate our manufacturing capability. In addition, we’re aligning our manufacturing to focus on what we do best to fully maximize our value proposition.

In terms of preparing for rate increases, we’re driving the enterprise to find the most efficient and productive approaches for rate increases on the 737, A320, 787 and A350. As you’re aware the market demand for commercial aircraft remains robust and global traffic continues to grow.

Global air traffic grew by 5.9% in 2014 and airfreight demand grew by 4.5% during the same timeframe. With regard to the A350, we continue to make progress. In Q1, we delivered six high quality ship sets to Airbus. The average deferred inventory in Q1 for A350 decreased to $3.6 million as compared to 9.5 million at the end of 2014.

Our goal is to execute a seamless ramp up as we continue to reduce cost. Finally, we will be opportunistic in deploying capital whether we’re investing and reducing the cost of goods sold, share repurchases or other [indiscernible]. Now let’s take a look at first quarter’s results.

For the quarter, we reported revenues of 1.7 billion and operating income of 235 million, which was up 21% year-over-year. Operating margins were 13.5% as compared to 11.2% in the prior year. Operating cash flow was 424 million and free-cash-flow was 384 million, an improvement of 392 million as compared to the year-ago.

Our backlog continues to be strong at 46 billion. With regard to 2015 guidance, we continue to support the guidance we provided you last quarter. We expect 2015 sales to be between 6.6 billion and 6.7 billion, earnings per share of between $3.60 to $3.80. Our free-cash-flow remains unchanged and is expected to be between 600 million and 700 million.

So with that, I’ll ask Sanjay to lead you through the financials, give you more specifics on the first quarter and then we’ll be happy to take your questions.

Sanjay?.

Thank you, Larry. Larry took you through some of our operational highlights, now let me add some additional financial details on our results for this quarter. Our focus on producing predictable results every quarter is working and we’re pleased to complete our four consecutive quarter with positive free-cash-flow.

As a result of this performance, our credit ratings were recently upgraded by Moody’s and Standard & Poor’s Rating Agencies. And as previously announced, we also refinanced our term loan B to a term loan A, reducing annual interest expense by roughly $4 million. And we extended the term of our untapped revolver.

This now provides improved financial flexibility that is better aligned to our long term objectives. With that, let’s turn to Slide 2 which shows the first quarter consolidated sales of the company. Overall revenues for the quarter were 1.7 billion after excluding approximately 50 million of Gulfstream revenue in the same period last year.

This represents a 4% increase in year-over-year comparable results. Revenue increases reflect all time high deliveries on the 737 and the A320 programs. We delivered 134 Boeing 737 Fuselage, nine more than last year and 135 A320 wing ship sets, seven more than in Q1 2014.

Spirit’s content on these high demand aircraft continue to support solid top-line sales for the company. Also contributing to the increase was the delivery of six A350 Section 15 ship sets, four more than in the first quarter of last year. Finally, we continue to have solid backlog providing approximately seven year sales visibility.

Now let’s turn to Slide 3. Adjusted EPS for the quarter was $1 compared to $0.85 in the first quarter of last year and consistent with our guidance, this excludes the impact of the deferred tax asset valuation allowance in both periods.

We continue to realize improved operating performance as we manage and challenge our cost across the board, while we deliver on increased and record rates to our customers.

Over the past two years, we have initiated a host of cost reduction programs on labor, on our supply chain and also every aspect of our overhead spend and all this is bearing fruit in our results that you see today, but we still have a long way to go. Turning to Slide 4.

Free-cash-flow was $384 in the quarter, while we have solid operational performance there were a few one-time benefits in the quarter. First, this includes an approximately $170 million cash tax benefit predominantly attributable to the Gulfstream divestiture.

In addition, we now benefit from the absence of these programs which were a net consumption of cash in 2014. We also concluded a successful settlement on the [GSE] arbitration in the quarter the terms of which remained confidential. Lastly, as a reminder this is the last quarter that benefits from the suspension of the 787 advanced repayments.

Finally note that our quarterly cash conversion will vary given the timing of one-time events and capital expenditures that will occur throughout the year. Let’s turn to Slide 5. Total company wide operating margin for the quarter was 13.5%. Some highlights on our segment performance.

Fuselage segment revenues were 970 million in the quarter compared to 858 million last year, which was a healthy 7% increase given higher 737 and increased A350 deliveries. Operating income was 165 million representing 17.9% margin on these higher deliveries versus 142 million a year ago.

We are on track for the increased rates on multiple programs in the segment. On the 737 going to 47 per month, 787 increasing to 12 per month and the A350 program which is also increasing in rate.

Turning to Propulsion, revenues were 446 million a small decrease from the same period last year due to the timing of non-recurring revenue on development programs. Operating income was 96 million driven by cumulative catch-up adjustments on our mature programs versus 80 million a year ago.

Bombardier CS300 accomplished its first flight in the quarter which pylon team celebrated along with our customer. It represents a key step for that program. The Wing segment revenues were 377 million versus 440 million a year ago. Absent the impact of the Gulfstream divestiture, sales were up 4%.

Operating income was 45 million versus 50 million a year ago, which is the result of the timing on some trailing costs related to the Gulfstream divestiture. The 737 line in Tesla and the A320 wing program in Prestwick continue to showcase its ability to perform at high rates. A few other notes worth mentioning on the quarter.

The 787 program realized a net decrease of 23 million in deferred inventory on 32 deliveries or roughly 700,000 per unit. While we continue to make good progress on this program, as a reminder, there are planned step downs which of course are already baked into our guidance.

On the A350 program deferred inventory grew by 22 million in the first quarter as we shipped six Fuselage units to Airbus, reflecting again a significant improvement in our cost management on this program.

The cost trajectory that you’re seeing this quarter shows the reduction of travel and non-recurring engineering work we have been talking about for the last year and the improvements that Larry talked about in his remarks regarding the operating performance. We’ve continued to stress the A350 program, it’s still early in its program life.

To-date, we have delivered 33 ship sets, so while progress is very encouraging, we’ll caution that there is much work in front of us. Let’s turn to Slide 6. As Larry mentioned, guidance for 2015 remains unchanged.

Revenues are forecasted to be between 6.6 billion and 6.7 billion, earnings per share in the range of $3.60 to $3.80, free-cash-flow between $600 million and $700 million and these results are based on an effective tax rate in the range of 32% to 33%.

Our 2015 guidance excludes any year-to-date impact on future adjustment to the valuation allowance against the U.S. net deferred tax assets. We will continue to follow accounting guidance and assess the need to maintain our valuation allowance against our U.S. net deferred tax assets on a quarter to quarter basis.

With that, we’re happy to take your questions now..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We ask that you please limit yourself to one question. You may queue up again for additional questions. [Operator Instructions] And our first call comes from Doug Harned with Sanford Bernstein & Company. Please go ahead..

Can you talk something about the 787-9, that’s becoming a much larger part of production now? I know you’re on an interim agreement on this. But can you talk about from a production standpoint, there’s been a lot of work was done on this in terms of cost reduction and manufacturability, a lot of differences from the -8.

You talked about how that’s progressing, what you see is the opportunity there for margin relative to the -8?.

What I would say is that I’ll review the 77 every week. So I’m working at the learning curves support ratio et cetera. They are pretty much on par as it relates to the two airplanes. I mean -- both are within our expectations in terms of managing down the learning curves. There's a little bit content differential between the two.

We have a little more content actually in our statement to work on the -8 and on the -9, some of that’s moved out just part of the what I call is a kind of rationalization of the program. But I don’t see a big difference in terms of the two programs as it relates to either -- I don’t know opportunities, I would say probably the bigger.

The reason -9, to your points more important long term, it's just it will be a larger quantity. But when we work on one, it's similar to working the other..

But right now you are at a situation where you're fairly early on the -9, and so I’m trying to get a sense of you are coming down sort of the early part of the learning curve in the -9, you should be pretty far long on the -8.

I’m just trying to get a sense how those two work together in your?.

I’m sorry Doug. It may surprise you. But they are actually not that. We’ve gone down very quickly down the -9 curve that they are not that similar. The fabrications, so the way we build a 787 is, we’re fabricating composite materials, we're bonding on, I mean they're very-very similar in the manufacturing approach.

The difference are in the tooling and final product. But we are pretty far down the -9 curve..

Thank you. Our next question comes from Howard Rubel with Jefferies and company..

Sanjay, you’ve done a nice job of improving your credit standing although that’s really a combination of everybody. But you now have new debt governance with this new bank agreement.

Could you elaborate on what the agreements permit you to do?.

Sure.

Howard, like all companies that are healthy, we took as we improved in our performance and we renegotiate our debt, not just to lower our interest rates, but also we get in line with our peer group in terms governance that allow us the flexibility to do the kinds of things that Larry has talked about in the context of capital deployment whether it be in the our ability to do regular things in share repurchases or dividends and things like that.

And so we’ve created the appropriate kind of flexibility that every company has. So it’s no different than what we have with anybody else. And obviously like I said we also lowered our interest rates. So this was the right thing for us to do at this stage..

Our next question is from Carter Copeland with Barclays Capital Inc..

Just a quick clarification and question for you Sanjay. The GAC claim settlement that you said the term for confidential, did you have any of that included in your full year cash flow guidance originally.

And then secondly I was just wondering about the step up in the deferred revenues and which is pretty sizable, about 40 million in the quarter, and I wonder what that related to. And I don’t think you had a step like that in quite a while.

And I’m just wondering if you could give us some color there?.

Sure, Carter. So the answer to your first question, the GD settlement, the GAC arbitration settlement; firstly, I will tell you we’re happy with that settlement. It was fair and we are very pleased with how that turned out.

And like I have said maybe even before, that was not in my guidance and again this is our first quarter so we will see how things shape up for the rest of the year and then we’ll decide what to do with it. As far as the deferred is concerned, yes, I’m glad you are asking that question.

If you recall including in our K last year as well as in some of the questions that we handled in the fourth quarter, as we renegotiated an interim arrangement with our customers on how we increase the rates on the 787, we are recording the portion of the investment dollars, that one-time nonrecurring dollars that we receiving as deferred revenue.

Now I told you last quarter as well, when we gave you the guidance for this year, that the amount of money that we are getting for the investment on the rate increases fundamentally matches the increase in the CapEx that we have this year. So it’s broadly cash flow neutral. And it is part of our guidance.

The only reason it’s the deferred revenue is because since it relates to the increased rate, when we delivered that increased rate we will recognize that revenue. There is another component in that which is associated with some of the interim pricing that we have till such time as we reach a conclusive settlement. It’s very small right now.

That is not in our guidance and that’s also a portion of the differed revenue..

Thank you. Our next question comes from Cai von Rumohr with Cowen & Company..

Thanks so much. If you could give us two part questions more color on the overall differed and particular why they were so much better on the A350 and whether that is you can sustain that level and improve upon it and secondly just a follow up on Carter’s point. I mean you’ve done terrific year.

You were better on the gulf stream settlement wasn’t in there, you have this extra differed revenue in the cash flow guide didn’t improve to something else get worse..

On A350, if you think back and conversations we’ve had in prior calls where I kind of pointed to there were multiple moving parts to our differed accumulation. Some of that being what I call travelled work that work that we were working off in country and that I said we’ll get that work out by the end of the year.

So there was that component there was some non-recurring. I’ll call it non-recurring although it’s assigned to the recurring account related to change is… so as change has come down that helps.

The biggest factor or I said a big factor of course when is just in recurring cost component what really are helping us improved and ray is the largest single factor. If you think about this as rate goes up the more [planes] we deliver it relatively simple math.

You are taking all of the components and cost especially the fixed cost whether that’s the non-recurring or an over head fixed cost and you dividing the gross at greater number of aero planes as rate goes up, rate is a powerful tool in reducing the differed for delivery and so rates important to us. It also helps us on the support labor side as well.

You look for two other components that’s just the build labor. We’re doing really well and we’re on plan. We’ve got a great learning curve.

We have a numerous projects in place and we continue to have good success there in terms of working our touch labor down and then finally as we this thing that your question as continue, I mean I wouldn’t expect to see the same or you shouldn’t expect to see the same ratio of improvement every quarter.

But you should expect to see improvement and the last component to that is on the material side and that’s really, there is truly two pieces of that one is I call our cost reduction projects and we have quite a few of those, we were working close to and then obviously negotiations that we have with our supply base and in most of that is around how to find real organic value.

So that’s the components that have created the progress you’ve seen and the same things you will see improve going forward. As we reach just the recurring piece I mean it’s not going to be, they will reduce the over time, it’s going to kind of flat and so become cash positive. Your second question, I’m not trying about that question.

It’s nothing deteriorated. We are very happy with where we are today. All I was trying to point out in the quarter was that there are some one-time events that had a pretty high number of cash flow in first quarter in fact quite [indiscernible] I think we’ve delivered in the first quarter would be one time in years passed done in a year.

But it’s still the first quarter and you’ll see how we perform in the next three quarter..

Thank you. Our next question comes from Robert Spingarn with Crédit Suisse..

Good morning. So regarding the guidance for turning to the earnings guidance, you did a dollar in the quarter you interest expenses is going to go down. We understand there is moving pieces with regard to your long-term agreements, couple questions.

First, where are you on the agreements with following, is it the case that the 787 is done and then why… how should we think about the earnings with respect to the improvement in the interest expense yet the implied guidance that the quarterly earnings go down?.

Robert let me handle the guidance question. I think you are talking about the earnings per share in terms of dollar in the first quarter. Firstly, I’ll tell you, let me give you sort of a math answer first and I’ll give you sort of little bit of color on it. I think I shared this with you guys even last year.

If you look at the sort of the manufacturing days that we have in each quarter and this year somewhat similar to last year, it’s heavy in the first half and it’s lighter in the second half and that’s really because Q4 typically is a much shorter quarter and so if I was to give you the numbers Q1 in 65 days, Q2 64, Q3, 63 and Q4 it’s 57 days and so that’s roughly about 53% in the first half and 47% in the second and if you really even just use the math and use my dollar and you were just with the kinds of things that you were talking about and you just did the simple math.

I think you will still get into the range that we have provided. So that’s really now… our objective over the course of the year, our internal plans are always to do better. Always and I think I’ve been saying this for the last year or two now, that you are trying to create a culture in our company that we always deliver to our commitments.

So we see a very good first quarter. We see some good cost reductions that have been taken place for the last 2 years that are manifest with themselves into the margins that you are seeing and we expect to see that to continue. But just the math would suggest that this stage that we are still within the range that I guided to you..

Okay, the only other part of this [indiscernible]that maybe we should talk about is that the [indiscernible] catches will little bit smaller in the quarter. They were in off three segments and it might suggest that maybe those are slowing which could explain one reason why Q1 would be higher EPS wise in the quarters.

But then again this is your seasonal tendency, so is there anything to read there on the catches as we progress through the year where they go up as they normally do?.

No, Robert just be a little careful because as we take into account these catches and we’ve been raising our booking rates.

You got remember for the long cycle business and as we do our estimate with completion any cumulative catch ups that relates to performance improvements and efficiencies et cetera manifest themselves into higher booking rates and you can see that, right? I mean if I was to elaborate a little bit on the question.

Last year if you recall I’ve mentioned you guys that on our fuse lot segment we see margins in 15% to 16% and then we see maybe 150 basis points higher on the proportion and double digit on the wing and this year we are 17ish percent on the fuse large and on adjusted basis still about 150 basis points higher on the propulsion and so you are seeing that in the core margin performance, where you see less accumulative catch ups because one of the task that Larry assigned to the finance organization get a better handle on how we do our estimates and how we do risk and opportunity management and how we bring less volatility into our business..

Right, understood. It’s just simply that it contributes to that EPS nonetheless depending on how far back the reach back is… right and last question on just the clarification. Larry I think you comment about 100 million in CapEx for automation. Maybe Sanjay it was you, you talked about recovering that over 3 to 4 years.

Did I understand that right you will cover that over 3 to 4 years or you begin to earn a return on that 3 to 4 years..

We plan to recover that over 3 to 4 years..

Right. And last question on -- just a clarification. Larry I think you referred in the 100 million in CapEx for automation or maybe Sanjay it was you, you talked about recovering that over three to four years, did I understand that right, you recovered that over three to four years or begin to earn return on that three to four years. .

We planned to recover that over three to four. .

So that’s about a $25 million annual improvement in profit. .

Very good. .

Robert, like Larry said, these are fantastic projects that have short payback and make sense like the boss said to try and help reduce our cost of goods sold. .

Yes. The only think I would say is that, I’m announcing decision to go do something, it will obviously a timeline related to the actual implementation. It’s a pretty sizable change to the factory and obviously there is leave times on this automation. So, the return obviously starts once you actually implement the automation. .

Thank you. Our next question comes from Ron Epstein with Bank of America..

Quick question for you, in this quarter it looks like deliveries where were well ahead of where production rates currently are and even if you kind of project that on a six to nine months ramp.

So just curious what was going on there? How come that deliveries was so far ahead with what’s going on in the ramp?.

Ron, I’m not sure the ahead of the ramp, I will tell you do not forget last year if you recall there was six huge fuselages that got disrupted in the Boeing chain and we’ve delivered about four of those last year and there is couple in this quarter that that explain a little bit of the high portion on the 737.

But everything else, I mean like we said in our comments we all give ramping up to the 47 and from the appropriate rates. So, we’re running at [42]..

Okay. That makes sense. And another follow up question, when do you expect to get 737 MAX pricing set for Boeing and if you don’t get that done in the short term does it automatically deprive that 737, and these levels -- I mean how do that work. .

Goodness, I don’t want to get into the details of the contract just to say that there is provision.

737 MAX pricing is agreement is all part of this global agreement that we in Boeing have agreed to work together on and the nice thing is we’re building those units and we’re out in the marketplace trying to find the best deals we can in terms of our ability to required materials.

So, there is some changes still in process, so there is always some volatility in conversations when you got changes or trying to incorporate. But it’s slowing down and it will be part of the overall discussion with Boeing. .

Okay, great. Thank you. .

And thank you. Our next question is from David Strauss with UBS. .

Sanjay, you spoke of step downs to come on 787 and as a result it sounds like the manifest are moving back the other way. Can you give us a sense of the timing around these step downs, when we could expect to see those come through. .

David, again the reason I mentioned that is I wanted to make sure that you guys remember that.

And again, I tried take us all away from program by program level kind of -- you will see these things manifest themselves as we -- this is a combination of how we lower our cost, the timing varies, it’s not really there are different components and the timing varies on that.

So, I really don’t want to get into that because you will see that going forward in the rest of the year. But again, like I said, that’s all baked into my guidance, whether it’s the improvements on the A350 or the challenges that we face near term on the 787, that’s all baked in.

So, I really don’t want to get into what the amount is and when it physically happens and so on. We are making, I will tell you this. We are making really good progress our cost across the board and we are working hard to….

I think you’ll see it in the -- David just see it in the differed from quarter-to-quarter. You’ll see as the differed changes, you’ll be able to get a sense of the timing. .

Okay. I was just trying to as -- trying forecasting 2015 free cash flows, just trying to get if it’s a 2015 of that or 2016 of that. .

I think what we’ve said in general is that there will be some, in quantitative but that in 2015 you’ll see a little bit flattish to negative.

So, again it’s a little bit of a race so I think the reason we were avoiding trying to be quantitative is because we’re challenging ourselves to try to stay down below the step down pricing, we’re working at it hard and it’s hard to -- this specially this point in year to say this is the number when we’re pressing hard. .

Right, okay. And as a follow up, Larry the fifth of your five objectives, capital deployment can you just give us an update there if there is one obviously your cash balance is now up to 750 million. How much cash do you perceive having on the balance sheet to kind of run the business. Thanks. .

Those five priorities weren’t met to for those five items but to imply our priority and certainly not our least priority. It’s equal to and it is fully our intention. And I think we’ve said it’s a high priority to us to return capital to shareholders this year to some form or multiple forms. And that hasn’t at all.

As Sanjay said, we have some mechanical things that we had to do to allow ourselves to be able to do that, we’re not -- we now have the ability to do that. And so I can only say to now, I mean without making an announcement which I’m not prepared to do with this that it’s a priority.

And where we end up in terms of our cash balance, really that’s a conversation we’re having because as you can see, and I eluted to this, the debate for us is around, if you’re talking about sustained growth or you’re talking about your financials, you have multiple opportunities.

We’ve historically talked about this quite of bit depth in terms of what are your alternatives, you can do share repurchases which certainly are top priority. But then according, I think you’re going to see us spend a lot of energy focused on internal investments.

We really some opportunities where we can invest in ourselves as we look forward to continue to improve our operations and then I would say every other opportunity other than those are more opportunistic if the right things happen, if something pops up you certainly want to be able to respond to that.

There is nothing I could tell you, on the desk and it is the term I’ve used in the past that we’d indicate that we’re up getting ready to do something but we’re really focused on is improving our own operation.

And we will kind of settle around and you’ll see those numbers go up and then we’ll deploy capital and we’ll kind of find our place in terms of what we feel comfortable with. .

I appreciate the color. Thank you. .

Thank you. .

And thank you. Our next question comes from Sam Pearlstein with Wells Fargo Securities. .

Good morning. .

Good morning, Sam. .

Could you talk a little bit more about the A350, just given the sequential improvement we’re seeing, I guess I’m trying to just project out. When do you see yourself hitting zero or there are step downs that we should be expecting also as we progress see that through this year or internally part of next year. .

Well, this is been probably the one coming throughout and I understand why, it is an important question.

I think my answer had been historically that you normally, I would say if you asked anyone who builds airplanes or built a lot of airplanes would probably tell you ships set 100 is kind of the point that you know your cost far enough, down the curve, your high enough rate and you had time to either work or define the projects which we’re going to implement and negotiate cost and all of that.

So, historically people have kind of targeted ship set 100, we have ship set 33. And so ship set 33, we’re making great, we’re on plan.

That’s the interesting thing and one of the variables, I mean I think I talked to rate being probably one of the most powerful variable so what’s incredibly important at least year-to-year is how you manage that rate increase.

And frankly, you want to see it happen and so for us it’s kind of a balance act, we staff up for the next rate break and which is coming here soon and then we march up to our in terms of our ability to hit those spends and hit those rates and then the question there is okay, there is another one this year and we start preparing for that.

You don’t want to find yourself an over supportive over staff, you don’t want to over drive your inventory. So, there is whole lot of, I got to tell you it would short [indiscernible] lot of stuffing including shipping which I going to tell you the logistics cost are not in consequential.

And so, for example, we’ll actually build up the inventory probably on 350 to be able to kind of trace the majority in the system around, our ability to [indiscernible] and work against these shipping milestones. So, those are all the things in play and like I said, rate being the most important of those but everything else is coming down.

And do I think we’re on track to understand by ship set 100. I think we’ll probably do better than that. I think given certainty of where we are, I think we’ll proceed that, am I ready to pick a ship set and say, we’ll know by the ship set, not yet. Is there any big step down this year? No.

So, this is really about us marching the plan and working closely with Airbus in terms of the cost reductions as well as the managing on our own factory and again achieving rate..

Thank you. And then if I can just follow up a quick question is speaking of low rates to 787 I was surprised that, even through it’s small there was a favorable adjustment. Can you just talk a little bit about what’s going on and what was going on on that program. .

Sure Sam, Sam that’s just again, this is -- remember we’ve tracked a little program by program level in terms of the efficiency of how we manage our labor and our overtime and our support ratios but we’ve also across period manage how we tackle our overheads and these overhead expenses come down the allocations to these programs that benefit from that as well.

On the 747 there is a close block on that. So, we basically had some improved efficiencies and as we mitigate our risk that’s what happen in that is small and it is nice to see. .

Thank you. .

And thank you. Our next question is from Jason Gursky with Citi. .

Hi, good morning. It’s actually John on for Jason.

When you talked about growing your business is that referring mostly organically, inorganically especially as it pretends to defense and those that you brought on from defense, for more defense actually I should I say and what’s the cash call in it beyond kind of growing in two different beyond the core transfer that you are doing now. .

Obviously the organic growth that we’re seeing in commercial is the fundamental driver for us but -- and will always be the principle part of our business. So, when we talk -- when I think about this and I kind of lay out the, today I’m looking kind of around just say six year strategy.

But, so commercial organic growth we’ve been very clear that if the right opportunities came along we would expand our business, our priorities in terms of expanding our commercial business would be to create a diversification either a product or customer and on the product side, we would look at things that were too far for us, I don’t think you’ll see us in the food service business.

You’d be surprise that the number of suggestions that I get but we won’t, it doesn’t have to aero structures either. What it most likely be yes, most likely we’ll try to find the right things that’s the broader part of the airplane to tag on.

But those things they come as opportunities, you don’t just go take a new starts in this business only come along every 25 years. So there is only certain mechanism to kind of grow that part of your business.

Now on the defense side, I mean it is kind of an interesting thing we’re in the cycle where there is a lot of pressure on overall federal budgets, there is a big debt and so obviously I think most people feel. Where you can see frankly the declining revenues and defense and we’ll see what happens with sequestration et cetera.

But there are a few new starts in defense and in particular in our segment in the air side of defense. And we’re going to try to participate there, we think our value proposition is very attractive, we have a very high quality engineering team and a great manufacturing capability.

You’ve seen other examples of leveraging commercial into defense b Boeing to that with the tanker and -- and there is been other examples of that. And when you look at our costs, it’s pretty attractive in our capability.

So we think we’re in natural and so what you do for us is I think for us most of our purpose will be on finding the right new starts to participate. .

Great, thanks. I’ll --. .

And thank you. Our next question comes from George Shapiro with Shapiro Research..

Yes. Couple of quick questions on the A350 deferred coming down. You were mentioned on the fourth quarter that the part of the reason it was look this port there was one delivery got put into Q1. So effectively obviously, we see the benefit of that this quarter.

So my question is in the second quarter we will continue to see the A350 at this level or lower?.

We will predict you will see to be at this level or lower..

Okay. And then follow-up Sanjay, if you could just provide maybe a little more color on the wing margin, you said was depress, because of some leftover Gulfstream costs, if you just maybe spell out roughly what that magnitude was.

So we can get underlying look at the margin?.

Sure, sure. And again George, the challenge in that segment, it’s a small segment. And just a few million dollars is the trailing costs, so it’s in the low-single-digit kind over number. But going forward, again I can see the margin in the wing segment creeping up to the 13% a little higher than that, but that’s what I see.

Nothing else happened in that segment other than what I just mentioned..

Okay. Thanks very much..

Thank you. Our next question is from Peter Arment Sterne, Agee..

Yes. Good morning Larry, Sanjay..

Good morning, Peter..

Good morning..

Larry I guess was just a quick question follow-on to the automation that obviously sounds like money will spent in terms of the recovery period. How about other sort of either portfolio saving or outsourcing opportunities and you look to kind of improve the cost base, maybe just give some update there? Thanks..

Yeah, Peter that is what I’m tell you. That is when I talk about make by and I talk about kind of doing what we do best. I mean that’s exactly what I’m talking about. And I’ve really described the process to you then kind of give you prediction. Because it takes time to get this right.

I mean what you want to do in this whole kind of structuring you’re thinking about how you make, you get, you optimize your business. You are saying looking at what you do best and how you differentiate yourself in the marketplace and what you do that others can do.

And then you look at the things that you due to that you might be able to buy more efficiently, if you do with correctly. And so what I would describe our process is being. Number one, we have a lot of suppliers, we buy a lot of fabricated parts. I was kind of described our business as scale and scale right.

And on the scale side, what you really want to do is you want to pick the people, who do a good job to you. I mean what’s, why don’t us obviously from reputation standpoint into our customers is a surety of supply. We need to deliver quality product to our customers and so that is why don’t.

So when we look at our suppliers at the same thing, we’re looking at people that we’re confident can give us a surety supply. The second thing we’re looking at is in it’s also quality.

The next that we’re looking for us, we’re saying hey if we, as we do this make buy or we reparse are buy, we’re looking for folks to have access capacity, because one of the difficulty. I’m just negotiating down is every time you go up and rig you’re paying the capital costs, you’re just creating difficult situation.

So what we do is we tend to try to figure out where working your put things, where you can minimize or get the real organic leverage. And so those, we’ve been doing that and then push what you figure that after yourself and what you have to engage the folks and get into the detail.

So these guys take time, we say we’re doing them take time to do, we’re working them, I got to say we spend a lot of time on this for working in hard.

And so always thing that you have pretty thoughtful about and an increasing rate structure, we are going up and you have to be incredibly diligent about the details in terms of how you do these things again you never put your rate in jeopardy.

But that’s the process that we’re going through and I can understand maybe peoples and patience with not saying all of the results, you’re seeing some of the incremental results or decisions that we may that are reflected in some of the improvements that you’re saying.

But I believe we can continue to make progress here and but again we’re not there yet..

That’s very helpful. Thank you..

Thank you..

Thank you. Our next question comes from Ken Herbert with Canaccord Genuity..

Hi, good morning..

Good morning, Ken..

I just wanted to follow-up Larry again on the A350 on your comments. Specifically on the material side, I mean just sounds like maybe incrementally a little more confident in the curves on the A350. But as you look at the projects you’re doing with Airbus and then specifically your supplier negotiations.

On either one of those, can you provide any more details in terms of either what percent of your supplier negotiations might be done or when you might expect to have sort of these things rapped up, because it sounds like your visibility on these has probably got in better certainly just as more sort of three months further in terms of the program.

But any more detail on those would be helpful?.

No, I really would prefer not. I would say, I think probably what you’re saying increasing confidence isn’t just in our negotiations with our suppliers, which I mean it certainly helps. But it’s also in the fidelity of the projects that we have that we’re working with Airbus.

I think we’re gaining confidence in the project themselves and the payback some of those projects. Early in the process, it’s not that difficult to identify here is a things you can do, you have to get the conversation along to these other things were going to do.

And I think we have growing confidence about the fact that we can make this since happen. And to be very -- I’ll tell you where that comes from. Early in introduction you’re very, very busy, everyone’s very busy and just trying to get the product out the door.

You’re transitioning from development into production, there is a lot of change traffic coming out of flight test. And you just, it’s just a churn everyday just to make the schedule, just to make your -- date. And it’s actually difficult for us and more difficult for others. And so it’s difficult than to have a conversation about.

Well, let’s introduce more change in the system to address costs, but it’s an important thing to do earlier in the program our rate is low, because it’s again really hard to do with high rate.

And so I think that’s where you probably hearing in my voice a little more comfort around the fact that these conversations have mature dramatically from ideas to specifics..

Okay, that’s helpful.

And would you be comfortable giving sort of numbers to maybe what percent of your suppliers on this program or now under long-term agreements versus what percent you’re still purchasing on the stock market so to speak for the A350?.

No, I’m not going to get it that level detail, but I mean, I appreciate the question. But I would suggest you do is just follow our deferred quarter-to-quarter.

And then you’ll get the chance to see, I think it’s actually get to see the result and at some point maybe I think about, I don’t know whether we can some point when we get -- we feel like saying a number we’ll do that. But right now just say watch us.

We’re telling you we’re improving it, we’ve been pretty clear how and I think you’ve seen the progress I mean this time last year, I think our deferred was 28 million at the top, so I appreciate that. So we made a lot of progress to get the 3.6 million..

Yeah, no great progress. I appreciate the color..

Yes, thank you..

Thank you. Our next question comes from Myles Walton with Deutsch Bank..

Thanks, good morning..

Good morning..

You need a great amount of progress on allocate cost containment here in the quarter. And just from a run rate basis for the rest of the year.

Are you able to contain to this 4% of sales type level on a go forward basis in particular fee income into around SG&A and the opportunity there?.

Sure Myles. Yes can I contain that, yes absolutely, these are fundamentally warranty approval and so yes. And as far as SG&A is concerned, again compare to last year. In Q1 last year may or may not remember, but in Q1 of last year, we have some charges associated with consultants that we’ve brought and to help us.

And but can I see around $52 million about 3% of sales as my G&A going forward absolutely. This is what we’ve talked about. When Larry launch challenges one cost reduction, it was across the board. We don’t just look at cost reductions on labor or on the factory floor et cetera. We’re looking at cost management across the board.

And I will tell you including in my own department, including in finance. And it’s everything from trying to lower interest rates, which we’ve done to try to improve the way, we manage SG&A spent et cetera. So absolutely, I’m pretty confident we can hold this where we are..

That’s great. And just one clarification Sanjany when the 135 million of changes you’re carrying get through the GAC settlement.

Was there any negative effect to the P&L at wing systems or was at all just the 3 million trailing costs that you talked about?.

No, that was just the trailing costs, there was in material benefit associate with the GAC settlement on P&L..

Okay. Thanks..

Denise we have time for one more question please..

Thank you. Our final question comes from Steven Cahall with RBC Capital Markets..

Thank you, good morning..

Good morning..

Just first on the global agreement, I know it’s very complex and there is a lot of moving part to that. But as you set down in the program. Can you give us any sense of maybe you can just qualitatively what the level of progresses are you half way there, are you most of the way there.

What can you kind of guide us in terms of how you’re feeling about the progress on that?.

The negotiations with our customers are continues process, I will tell you that. And I think you’re right these are complicated there multi-fasted and particularly when you get into a settle global kind of contacts.

And then you have to strike for the lot of action items that come out in terms of trying to figure out what the data says and what you’re doing in terms of cost reductions and so on and so forth. So I mean, this I couldn’t say here and tell you on 10% there or 30% there. When we are there, you’ll know about it that we are there.

I will tell you, we work really, really hard with both of our customers and we want to be the best partner, we want to bring the best value to them and the context of our negotiation is always based on solid performance, quality deliveries on-time, the best value proposition and trying to do sort of fair and equitable arrangements in terms of looking at the future.

So that’s the context which we do the continues negotiation with them..

And then maybe just one final clarification and what you said on the trailing cost on the wing.

Is that done now after Q1 or do we have a couple of more quarter is that?.

No, it’s be better, be done you and I, we’re done with the Gulfstream wings, we have transition services arrangements with the new owners which we provide them, but there is nothing that are hopefully we’re done with this trailing cost that came in.

Its like in any system you, sometimes you have some all purchase orders and from costs that flowing into the year after the transaction was done..

Great. Thank you..

Okay. I’ll now turn the call over to our President and Chief Executive Officer, Larry Lawson for some closing comments..

I think in the busy day and so I’m surprise that we manage to use the entire team. But I want to thank you all for participating in the call. See many of you in the coming weeks and we’re looking forward to having a great year. Thank you..

And thank you. Ladies and gentlemen, this concludes today’s conference. We thank you for participating. And you may now disconnect..