Ghassan Awwad - Director, IR Larry Lawson - President & CEO Sanjay Kapoor - SVP & CFO.

Sam Pearlstein - Wells Fargo Securities Cai von Rumohr - Cowen & Company Carter Copeland - Barclays Capital Doug Harned - Sanford Bernstein & Company Ron Epstein - Bank of America Merrill Lynch David Strauss - UBS Howard Rubel - Jefferies Jon Raviv - Citigroup Rob Spingarn - Credit Suisse Myles Walton - Deutsche Bank Ken Herbert - Canaccord Genuity.

Welcome to Spirit AeroSystems Holdings Incorporated Second Quarter 2015 Earnings Conference Call. My name is Vanessa and I will be your operator for today. [Operator Instructions]. I would now like to turn the presentation over to Mr. Ghassan Awwad, Director of Investor Relations. Please proceed..

Good morning. Welcome to Spirit's second quarter 2015 earnings call. I am Ghassan Awwad and 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. 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 website at 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 second-quarter earnings call. In June, we celebrated our tenth anniversary and I'd like to begin by congratulating Spirit's employees around the globe on what they've accomplished.

Spirit has transformed over the past decade into a global company, with eight locations across three continents, with a much more diverse product line.

Over the last 10 years, we have maintained our strong leadership position in design, build and manufacturing of metallic aerostructures and have become a well-recognized leader in composite aerostructure design and manufacturing, as well.

We've boosted our deliveries from 28 shipsets per month to 122 per month and we continue to invest in our value proposition as a reliable high-quality, low-cost partner. At the beginning of the year, I laid out our top five priorities.

Continued focus on improved performance, increased productivity, reducing cost and aligning our business to what we do best. Number two, leveraging investments as we prepare for rate increases ahead. Number three, continued progress on the A350. The fourth item was greater emphasis on long-term growth.

And, finally, we would address how we would handle capital deployment. Today, I'll provide you an update on our progress against those objectives. We continue to strengthen our leadership team. Michelle Lohmeier joined us to run Airbus Program. Ron Rabe has joined us to run Operations.

Duane Hawkins has moved over to take the reins of the Boeing Defense and Regional Jet Programs, while John Pilla is serving as our Chief Technology Officer after handing off the Airbus Programs to Michelle. With regard to performance, we delivered a total of 366 shipsets in the quarter, including a record 34 787 shipsets and 9 A350 shipsets.

Other significant accomplishments in the quarter include the delivery of the third CH-53K fuselage to Sikorsky.

Regarding cost reduction, the results of our efforts are beginning to reduce our costs and drive increased productivity are manifest in the quarter and we will continue to drive the enterprise with a focus on operational efficiencies across all aspects of the business. Preparing for rate increases is a key focus for us this year.

Near-term, we're capitalizing to increase the production rate of the 787 to 12 shipsets per month and the 737 to 42 shipsets per month, as well as higher production rates on the A320 and the A350 programs. In addition, we're making significant investments in existing and new automation, as we discussed last quarter.

We continue to make significant progress on the A350 program. The average deferred inventory in Q2 per shipset decreased to $1.9 million, as compared to $3.6 million in Q1. In the quarter, the program benefited from an increase in production rate, to nine shipsets, as compared to six shipsets last quarter.

With regard to capital deployment, I'm pleased to announce today that our Board of Directors has authorized a share repurchase program of $350 million. Now, let's take a look at the second-quarter results. For the quarter, we reported revenues of $1.7 billion and an operating income of $230 million. Operating margins were 13.6%.

Operating cash flow was $305 million and free cash flow was $230 million. Our backlog increased to $47 billion at the end of the second quarter which provides us seven years of sales visibility. With regard to 2015 guidance, we're raising our free cash flow guidance by $100 million, for a new range of $700 million to $800 million.

And we continue to support the guidance we provided to you last quarter, for sales of between $6.6 billion and $6.7 billion and earnings per share of $3.60 and $3.80. So with that, I'll ask Sanjay to lead you through the financials. He'll give you more specifics about the second quarter and then we're happy to take your questions.

Sanjay?.

Thank you, Larry and good morning everyone. Let me quickly walk you through some of the financial details for the quarter. So let's begin on slide 2 which shows the second-quarter consolidated sales of the company. Overall revenues for the quarter were $1.7 billion, a decrease from the second quarter of last year.

First, because of the Gulfstream programs which were divested at the end of last year. But we also had lower 787 revenues, as a result of price step-down in the quarter, something that we've talked about in previous quarters.

In the quarter, we met all our customer commitments and delivered 128 737s, 120 Airbus A320s and a record high 34 787 and 9 Airbus A350 shipsets. As Larry mentioned, our backlog grew again this quarter to $47 billion which allows us the stability to proactively manage our cost structure, our make buy, our make-ware and our automation strategies.

And can work this backlog in the most efficient manner for our customers and our shareholders. Now, please turn to slide 3. Adjusted EPS for the quarter was $1.09, compared to $0.98 in the second quarter of last year and represents an 11% year-over-year improvement.

Adjusted EPS excludes the deferred tax asset valuation allowance relief which is consistent with our guidance. We continue to focus on all aspects of our costs, from labor to overhead to supply chain.

Some of this is what you see in the results today, as our operating margin grew to 13.6% which is 160 basis points higher than the comparable period last year. A few other items favorably helped the quarter. Our interest expense was lower, due to the refinancing initiatives completed over the past year.

In addition, we also had a small, favorable FX impact this quarter. Turning to slide 4, free cash flow was $230 million in the quarter and $614 million year to date. As a reminder, quarterly cash flow will be uneven this year, due to the timing of a number of items.

First, the $614 million to date reflects a number of sizable, one time, positive items, such as the cash tax benefit attributable to the Gulfstream divestiture, as well as the Gulfstream arbitration settlement that we recorded earlier this year.

Second, the year-to-date cash flow also includes cash received in accordance with the 787 interim pricing agreement and is being recorded as deferred revenue. This cash is not included in the full-year guidance. Lastly, we have a number of increases in the use of cash, as we go into the second half of the year which will impact free cash flow.

Capital expenditures, while low in the first half, will increase over the rest of the year, in accordance with our guidance of $325 million to $375 million for the year. Also, the 787 advance repayment which resumed at the beginning of the second quarter, will result in lower free cash flow in the coming two quarters. Next, turning to slide 5.

Let me touch on a few highlights on our segment performance. Fuselage segment revenues were $888 million in the quarter, compared to $905 million last year, primarily due to lower revenues on the 787 program, offset by increased shipments on Airbus A350.

Operating income was $168 million, representing 18.9% margin, largely consistent with the performance in Q1. And as we have guided you in the past, we see core margins adjusted for small fluctuations on timing, in the segment, in the range of 16% to 17% for the year, after adjusting for the dilutive impact of higher A350 deliveries.

The fuselage team continues to meet milestone deliveries on a number of new derivatives, including the 737 MAX and the Airbus A350-1000, along with future models, the 787-10 and the 777X.

Turning next to our propulsion segment, revenues were $441 million, a decrease from the same period last year, driven by the timing of nonrecurring revenue on development programs. Operating income was $88 million, representing 20% margin, driven by cumulative catch-up adjustments on our mature programs, versus the $86 million a year ago.

Wing segment revenues were $368 million, versus $438 million a year ago. The decrease was primarily attributable to the Gulfstream divestiture and the 787 price step down.

Operating income was $50 million, representing 13.6% margin, down from $71 million a year ago which included $11 million in positive cumulative catch-up adjustments, along with a few other small one-time benefits.

Adjusting for these benefits, recurring margins were flat compared to the same quarter last year and sequentially slightly up from the first quarter of this year. You can see a picture of our Malaysia facility that assembles the 787 fixed leading edge and they are making good progress, as we ramp up to 12 shipsets a month next year.

A few other notes worth mentioning on the quarter. The 787 program realized an increase of $13 million in deferred inventory on 34 deliveries or roughly $400,000 per unit. This increase in deferred was due to the planned price step-down and is in line with our forecast and guidance.

We remain on target for the plan we laid out for this program last year and we're continuously focused on driving cost reductions and meeting our deliveries, as well as investing for the rate increases.

On the A350 program, deferred inventory grew by $17 million in the second quarter, as we shipped nine fuselage units to Airbus or $1.9 million per shipset which again is a continued improvement over previous quarters.

We've delivered 42 A350 shipsets in total now and consistent with our commitment, the Spirit team has demonstrated a lot of progress over the last year. But we all know we still have much work ahead of us and we're working internally and with our partners and customers, to achieve that.

And now on slide 6, as Larry mentioned, we're updating our full-year guidance. Revenues continue to be forecasted between $6.6 billion and $6.7 billion. Earnings per share remain in the range of $3.60 to $3.80. Free cash flow has increased to between $700 million and $800 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 or potential future adjustments, to the valuation allowance against the U.S. net deferred tax asset. We will continue to follow accounting guidance and assess the need to maintain our valuation allowance against our U.S.

net deferred tax asset, on a quarter-to-quarter basis. With that, let's see what's on your mind. We're happy to take your questions now..

[Operator Instructions]. And our first question comes from [indiscernible] with JPMorgan. Please go ahead..

Obviously, good performance, again, on the A350. And just looking at the declines in the unit deferred for the past five quarters, it has been pretty healthy every quarter.

Do those start to stabilize at some point? Has all the traveled work been burned off? Or are there still some pretty healthy increases coming up, near-term? I'm sorry healthy declines coming up, near-term?.

I will try to answer your question, you are right. You've seen a pretty significant reduction. We've described this is multiple moving parts. One of the most significant of those was, to your point, the traveled work. We had committed to you that we would have traveled work completed last year. We did that.

And so that is really not a significant part of what you would see in the deferred increase, at this point. But it was, obviously, a significant contribution in the reduction. The remaining components, really, then, are - again, it's - you have what I will call recurring and nonrecurring pieces.

And it's all in the recurring account, but what I would call one-time events, maybe, is a better way of saying it. Or really manifest in changed traffic. We're seeing the changed traffic come down. So, change-related turbulence has improved dramatically. So you're seeing that in the results.

And so now, the fundamentals here, for us, are to continue to drive down to our plan. So we're seeing our labor is tracking to our predicted hours per unit curves, support ratios, are all in line with the reductions that we planned. We're seeing improvements in quality. And again, quality would be one of those where we think there's more opportunity.

The numbers are not bad. But again, we're pressing hard there. So in the quality side, we're seeing significant improvements in performance. And the single most - so then you have things like consumables. Consumables, you'd be surprised at how much money is spent on consumables, especially on the composite end of the business.

I think these are things that a lot of people really don't understand, but larger amount of consumables. Not just drills, but bagging and other kinds of things. We're making great progress on the consumables side. And so the most powerful thing working for us right now is rate. And I think I've talked about this in prior quarters.

And so as the rate increases, then we see our ability to continue to drive down and amortize some of the fixed cost part of the operation, as well, that are in place, to achieve these higher rates. So are we done? The answer is no, we're not done. Obviously, we need to drive that line to a profitable line and so we continue to work.

In addition to all of that, cost reduction initiatives, we're working very, very close with our Airbus, on numerous kinds of things that help us attack the overall cost of the articles. So we're not finished. Should you expect to see - again, if you go back to Q1 of 2014, it was 28 million units. So here we're, Q2 of 2015, at two.

You'll see, it's going to continue down. It's going to, obviously, as we push this thing down, it is not going to go down at the same pace. But we're on our plan and I would say the two significant factors for us, going forward, really, our rate and cost reduction and then ongoing discussions with Airbus regarding changes..

Our next question comes from Sam Pearlstein with Wells Fargo..

I know one of the things you've committed to was talking about return of cash to shareholders. You did announce the buyback. But there is a 2.5 year timing on that.

Can you just talk about how you think about that, in terms of pace? What criteria, are you're going to put in place a plan to take it out? Or are you going to be more opportunistic? Just some bounds around how you are thinking about that?.

Yes, we gave ourselves a little bit of latitude, Sam. I think that, obviously, we probably have - we'd like to be opportunistic. At the same time, I think we're - we recognize that we had made a commitment to return cash to shareholders. So we will balance those two things, in terms of how we do this.

And at the same type, we have to be consistent with other guidelines, as it relates to the repurchase. But we'll - it'll be a balanced approach between trying to find the right timing, meeting obligations and then being thoughtful about returning cash to shareholders..

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

So on the A350, you continue to make spectacular sequential gains with, I assume, deliveries are going to track flat to up in the third and fourth quarter, even with seasonality.

When could we cross over to start amortizing on the A350? And also, on the 787, could you give us a little help as to when in the quarter you crossed over? Because you went from amortizing 700 to 400 per unit. So just to give us a sense as to where you might be in the third quarter? Thank you..

Yes, Cai, I don't think we can provide that kind of precision. But I would say this, back to your point, on the A350, to your point, there is the seasonality. So our approach, actually, as they take their break, we're going to continue to build.

We're going to actually - so we may actually build up a little inventory on the A350 over the August time period, because we're trying to work some transportation-related things that could give us a little headroom on the - both sides of the ocean and smooth out our line a little bit. But that doesn't mean they'll take deliveries; they won't.

Third quarter, I think we're probably - you're right, it's probably flat. But rate is increasing. So as we go over the period, the rates are increasing. So depending on how things go, fourth quarter could be different. And a substantial number, more deliveries in the fourth quarter, again, depending on how the rate goes overall.

But we feel very good about ourselves. And then, of course, we have to look at this in two pieces. There's the section 15 and there is the wing component and we balance that all out. But your observation regarding deliveries is right on. What I would say is, fourth quarter could be hotter.

And then on 787, as we've - again, really, we're on the plan that we laid out six quarters ago. It's really even longer than that. And we continue to track down that plan, we try to beat that plan and I think we've been - I think if you go back to six quarters ago, this is what we told you.

That set the expectation that we would try to, in a timely fashion, track down the - drive cost the and keep up with the pricing curve. And we said we thought there would be a little bit of challenge, from a timing standpoint, in doing that. We continue to, obviously, aggressively go after 787 cost and we're very, very engaged with Boeing.

There's numerous initiatives to try to make that happen and we'll continue to do that. But I guess my summary statement regarding 787 is, we're tracking to the plan we laid out more than six quarters ago..

Our next question comes from Carter Copeland with Barclays..

Instead of one big one, I'm going to do two little ones.

Can you clarify the rate that you're at on 350, in the back of the line today? And what the milestones - what the step-ups are there that are right in front of you? And then a really easy one, in terms of the price step-downs on the 787, are there more of those to come or is that done?.

We haven't talked about the specific quantities that we deliver, Larry.

So Carter, I think what you are asking is, what exactly are the number of the units that we intend to deliver in the back half of this year, if I get your question?.

No, really, I'm just trying to get at the - how many shipsets per month you are trying to build - or you're building right now? And when you have to step that up? And the risk associated with that step-up? Just trying to get more color around..

Yes, I guess what I would - I think, again, we're pretty hesitant, Carter, about making these statements. But I think Airbus has been forthright about a build rate, by the end of the year, of five per month. And what I would tell you is, we're on a steady slope to get there. Obviously, our material leads their material.

So we advance them, as we approach that five. And so we're ticking right along. From a risk standpoint, I think we feel very comfortable where we're. Like I said, I think I made a point a second ago that we're going to go ahead and work most of our operations across their break, to make sure that we provide ourselves even a little more buffer.

It will create a little bit of inventory for us. But I think, overall, it's the smart thing to do. And it actually will help us to take down some of our transportation cost, because we can aggregate some of our shipping. We don't normally get into the details regarding contracts, so we really can't talk about 787, other than what we told you before.

Which was, I think we were pretty clear we would be cash positive for a period and then we would have some deferred on the back end of the block. And that's the plan we're working to and we're going to continue to execute that. And Sanjay - I'm sorry, Carter, go ahead..

No, it's fine. I was just trying to get at, we went from production and deferred production, to now we're in additions. And then, obviously, both.

Are we now on a linear path to try to get that back by the end of the block? Or is there another one of these adjustments that you might have along the way? Just mechanically trying to figure out if that's the case?.

Sure. And I think, Carter, the best way to look at this is, if you remember - and again, we spend a lot of energy - I don't want to go back multiple years here, but when we did our strategic reviews. And we - this was a critical program for us and we laid out a plan, like Larry said which we shared with you at the early part of last year.

And we're tracking to that plan completely. And again, if you look at the deferred balance on our balance sheet today on the 787, we see these specifics in the Q. It's roughly around $550 million and we have got a forward loss of about 600, a little over that.

So technically, as long as we continue to remind you that we're on our plan, you might see the deferred growth. Now, our intention, clearly, is to work on cost reductions continuously and we do that, not only inside our company, but also, frankly, with the Boeing company.

We share and we coordinate and we partner and we do all of those things that are good for all of us. And what we see today is no surprise inside what we see, so we're completely on plan. This was in our guidance. These numbers are all part of our game plan. And obviously, our plan is always to do better. So that's how I'd say it..

Our next question comes from Doug Harned with Sanford Bernstein & Company..

I was interested in wing systems. If we went back to when you have the Gulfstream programs, then understandably, there were a lot of challenges there. But in wing systems today, the margins, they tend to still be fairly volatile.

Could you talk about what a normal level for wing systems margins would likely be? What the potential is, where you can find opportunities to raise those? How do you look at margins in wing systems?.

Sure. And Doug, I know you've seen some volatility, but I think if you go back to some of the comments I made on the first quarter call and including on this one, this quarter, we did a little over 13%.

In Q1 of this year it was down, but I think I shared with you, they were down temporarily because of some trailing costs that we had associated with the divestiture. There were some old costs that had floated into this year. But adjusted for that, last quarter was pretty consistent with this year, in terms of margin percentages.

So what do I see, going forward? And I will just add a little bit here because on the wing system, we continue to see about a 13%-ish, maybe a little higher than that, percent margin this year. I have to say, Larry, the entire team, works on cost reductions across the board.

And so to the extent that we're able to make improvements in that, you'll see that in this segment and you will see that in other segments, as well. Particularly as we reduce our costs, in terms of overhead costs and costs that are allocated and shared.

So I think across all our segments, not just the Wing Segment, but if you look at the fuselage, I think I told you guys 16% to 17%. And long-term, including the dilutive impact of the 350, okay? So across the board, I think we see pretty good, steady kind of margins..

But are you saying that wing systems, in terms of margin improvement, it's no more of a priority than the others? In other words, if you look across the portfolio, is there a one area where you are going, this is where I think we can perhaps do even more?.

What I would say is that, Doug, it's not that we don't think there's opportunity there. There is - it is a slightly different market. It's a bit more fractured. So for us, back to your point, the real emphasis is on driving down your cost position. Do I think there's opportunity there? Yes. Is it all manifest in a quarter or even in the year? No.

We do have a plan, a strategy. It's part of an overall bigger plan, as it relates to the things we've described to you before, whether it's material or just productivity. We're seeing a little bit of a bump this year.

When we had a little bit of a - because of the transition of the Gulfstream wings, created a little bit of - I'll say a little bit of a hill for us in the beginning of the year that we have had to work our way through. But we're just driving the overall enterprise with the same kind of cost reduction focus.

But do I think margins on the wings are going to match the other parts of the business? I think wings are going to step in a slightly different place than you would see on the very large aerostructures or in propulsion..

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

Maybe just standing back, a big picture question for Larry. It looks like you've got operations on track and things seem to be chugging right along.

When you think now, going forward, if we think our a couple of years, maybe even farther, where do you want to take the company? Where do you see Spirit AeroSystems, say, five years from now?.

Our emphasis, in the last couple of years, has been to stabilize the operations, to actually become one of the top performers in the industry, as it relates to productivity.

And frankly, we our number one emphasis - and I don't want to kid you - every day, when we come here, the most important thing to us is to deliver a high-quality product on time, that our partners can rely on us as a source of supply. I think that's something that's incredibly valuable to them. It's important to them.

And it doesn't matter whether the product is an engineering product or the product is something that we produce out in the factory, whether it's a development article or something else.

So our everyday emphasis is on exactly that point which is, what can we do with the current operations to make it better? That is a lot of energy goes into that, that's why we're investing in the automation. That's why we're looking at the configuration of the factory. That is the thing that drives this machine.

And when we're thinking about our - how we would deploy, then capital, back to your point or what would be the - what would this company look like, we obviously want to be more productive. And so - and we want to be able to be the most competitive guy out there and also be financially very sound. So that's the biggest part of our emphasis.

Then you go from there. Obviously, then we're thinking about - okay, what goes well with us? We want to grow the business. There's an inherent organic driver in our business that's the increasing rates on a lot of the programs and some of the emerging derivatives, as well.

So where do we want to grow the business? And obviously, we've talked about defense. We want that to be a good bigger part of our portfolio. We're getting a lot more traction - or a lot more interest, I should say, today.

The number of inquiries that we get from the OEMs has gone up dramatically because they understand better how we can contribute to their operations, both from a performance as well as a financial standpoint. And so I think that's very encouraging for us.

But I think we also recognize that any time you're growing a new business, that's on a time horizon and especially when you are doing it organically.

And then you look around and you say, okay, are there any things, then, you would go out and look at acquiring that make sense to the enterprise? They make us better, they fit a perspective about what you think the business should be. And to be honest with you, we have a pretty tight definition around that. It's not as broad as you might think.

We think we would - obviously, we're in the commercial airplane business first. Would we like to build products that are - additional products that are commercial aircraft? We would. Do we have a preference, in terms of airplane types in commercial? We do. Do we have some definitive ideas about cost? We do.

And then on the defense side, I think we think we're a natural. But again, we wouldn't be a prime. So we would be looking for properties that are already good contracts, on solid defense programs, for which then when we added - when we participated, the synergies would be apparent.

So when you go out and you take that kind of definition and you go out in the marketplace and say okay, now what company is the perfect intersection of that? You don't see it. Today, you just don't see it. And so what we're - I will just tell you that - so we've discussed what we're not going to do.

And that is, we're not going to go out and just pick up small things and just add them to the portfolio, just because we know how to do that. Because I don't think that it - frankly, a lot of those things we could do organically. And we would just be better to invest our money in ourselves to make that happen.

And frankly, our customers would benefit from that, as well. So that's not likely to be an approach we'd take. I think, frankly, I think that we'd rather do a mid-sized something than a lot of little things. So you put all that criteria down and it narrows things down. And obviously, we're looking for somebody who has - fits those criteria.

So today, I think if you were to see where most of our energy goes, it's in probably the category 1 and 2 which is investing in ourselves. Whether that's in reducing costs which I would say this is the top of the list. Number 2 would be making sure that we support the increasing rates, at the same time we find out ways to reduce cost.

The third of those would be to returning value to shareholders, although that's a repurchase or the discussions we're having about potentially, in the future, doing a dividend. And then, acquisitions - we're - the machine is churning, but we're going to be very selective and very, very thoughtful about anything we do.

Because we have to bring value to it and it has to bring value to our customer..

Our next question comes from David Strauss with UBS..

A couple questions, then one on cash flow. Sanjay, the increased guidance for cash flow this year, does that just reflect the Gulfstream settlement? Or, is there actual improvement in there, beyond that? And then, could you just help us as we think about 2016? Obviously, you've got a number of one-time nonrecurring pieces in 2015.

But thinking about 2016, those items that won't repeat, along with advances that we'll be picking up, as well. Can you just help us think about - at least provide a framework for 2016 cash flow? Thanks..

Sure, David. So the answer to your first question, I think somebody may have - I think it may have been Carter last time, whomever asked me, was your original guidance, does that contemplate Gulfstream settlement? And I told you in Q1, the answer to that was no. In our guidance this time, that and everything else was included in our guidance.

So we try and give you our best guidance, based on what our operational performance, as well as some of these settlements and these one-time things and we're comfortable doing that. But it includes both those things. And we continue to make headway on our cost reduction. You see that, so it's a combination of all of that.

As far as 2016, I think, again, you know the one-time events that happened on our cash flow in 2015. We've told you, the reason that Larry has laid out is to have cash flow from operations from our core business do better every year. Now, it will get affected by things like capital, because that's lumpy.

And that, given the rate increasing environment, obviously, these one-time things will not [indiscernible] themselves. But our goal here is to continue to manage our cost structure, reduce our costs and improve our cash flow. I don't want to get into, what is the guidance for next year? We will do that at the start of next year.

But that's just how we look at it internally..

Our next question comes from Howard Rubel with Jefferies & company..

Larry, you have a number of development programs and you still have work on 78.

Might you touch on where you are, for example on the MAX, the 777x and also on the 78-10?.

Yes, the simple answer would be, we're actually on plan in all of those. The 350-1000, we've delivered the articles that we had to provide, they were all on time. Very little traveled work. So they were caught up with most of the latest-breaking changes and - so pretty pleased.

I wouldn't say that that was I would say the challenge on the 350-1000, frankly, was more along the lines of the first time through the line, because we have a flow line. So, when you have a flow line, you push a different configuration through. But we had a couple bumps, but we made our objectives and so that went quite well.

As regards to the 78-10, that's obviously a development that's on schedule and I think you've heard Boeing probably talk about the status of the 78-10. But we're doing very well there. For us, there are - it's a good - it's a pretty smooth transition between the variants on the 87.

On the MAX, I'm trying to think, here, if we can really talk about our deliverables. We have a big event up-and-coming here, but the - we're right on track. I won't get into dates or anything. But no, it's going very well. In all areas of the components, our - again, I hesitate. But our deliverables are delivering, and so it's going pretty smartly.

777X is I review that regularly. It's a reasonable schedule and I wouldn't say it's easy, I wouldn't say it's aggressive. It's a smart schedule.

And so we're having the normal conversations about, what's the best way to handle situations, what's the best way to build the next configuration of the aircraft? I think it's pretty well defined and so the debates are really more around processes and that type of thing. But again, that one's moving quite smartly, as well.

And I think that's probably a reasonable expectation, when you really think about it. These are all derivatives and so you would expect that your ability to develop a derivative should be good.

And those kinds of programs, frankly, perform much, much better, because it's easier to extrapolate the work that has to be done and your ability to manufacture the product and incorporate it into existing line, et cetera. So I feel good about all our development programs, right now.

Again, like I said, the derivatives are much easier to handle, in the scheme of things..

So it almost seems like you are on a path where there is some management reserves waiting to be utilized? Or waiting to be freed up?.

Yes, no, those programs don't actually operate that way. The - because you develop the product and then you come back later and then you work the changes. And so really, you do the development first and then you address the changes to the articles after the fact. And that's kind of a good thing, because you actually have a product.

And so you're able to take that existing product and go out and get the information you need to have that conversation. I don't want to leave you with the thought that there are zero challenges. Just like I said, in the 350-1000, it wasn't transparent. It did require some additional energy to make it happen, but it happened and that's expected early.

And the same thing is true of the other derivatives that we're actually producing product on, as well. There's always a little bit of churn, as you move your way toward certification and that type of thing. Not perfect. But, the good news for is, again, it's a change on an existing product.

If you go out, you can use either your new supply base or you can leverage your new strategy, as it relates to going out and getting very attractive pricing on products and then sit down with your customers and work the changes.

But we don't have a production set of contracts for all those derivatives today that you would apply management reserving it..

Our next question comes from Jason Gursky with Citi..

It's Jon Raviv, on for Jason. A question following up or really not follow up, but really just on organic growth, as opposed to inorganic growth.

I was wondering if you could review some of the content opportunities you might have in the near future? Perhaps some opportunity to bid on new work packages, as we understand that Airbus might be trying to diversify their supply chain? Any potential timeline for those and dots on magnitude? Thanks..

Yes, I will tell you that your observation is accurate. And obviously, I'm not going to get into our new business pursuits, in particular. But I would say that - just let you know that your observation is accurate. We're out working those opportunities and they're healthy opportunities.

They're not going to change the complexion of the company, but they are consistent with a growing enterprise, where you're taking advantage of your product line that you have today, your footprint that you have today and the relationships that you have with your customers.

And so we're working those pretty hard, in addition to the pursuits that I talked about earlier on, say defense or other areas..

Our next question comes from Rob Spingarn with Credit Suisse..

So Larry, back to the A350 for a minute and this nice improvement in the deferred. But I am wondering if you could talk a little bit about the negotiations? Because until you, I guess, solve the difference in actual content versus contracted content, can you reasonably be expected to get to breakeven? So that's a question on the A350.

Sanjay, for you on the free cash flow and you started to go there in your answer to an earlier question - what is this year's free cash flow guidance without the one-timers? Apologies for not having done the math myself, but it just seems like there's a number of things here. I don't know that they are all quantified.

But how does the $700 million to $800 million translate to operational free cash flow? Thank you..

Yes, Ron, I won't - to your point, no, we do have to address the changes in the configuration, to close the business case and that is part of our plan. And we're having, I think, a very healthy dialogue, a very good dialogue, very facts and data driven conversation with Airbus on that.

And so the answer to your question is, you are correct in your assumption. Sanjay, you want to -.

Sure. Robert, I will help you with the math. I don't know if I will completely help you with the answer to the math. But I think some of the things that you do know about are the tax benefits out of the Gulfstream divestiture. And I think we gave you some numbers on that and they are about $224 million.

So that's clearly a benefit in 2015 that will not repeat itself. We told you we were happy with the settlement that we had with Gulfstream on the operation. Again, the terms of that is confidential. You'll have to make some assumptions yourself on what that value is. And then the third thing I would tell you is and again, this is something you do know.

You can do the calculations. The 787 advance repayments, we benefited this year, because there was suspension, for at least one quarter in 2015, in the first quarter we did not pay any advance payments on the 787. So those would be the three big things that affect us one time..

That last one would be about $15 million, right? It was $60 million annually?.

Yes, it's a little bit more than that. The - we delivered about 30 units in the first quarter. So it is a little bit higher than that. But yes, it's directionally.

Okay, so that should give you a reasonably good estimate as to what was core performance versus - because I also told you that the cash, higher cash flow - I mean the higher CapEx was neutral, broadly neutral, in 2015, on the 787 [indiscernible]..

Our next question comes from Myles Walton with Deutsche Bank..

First, a clarification. Sanjay, I heard you say $30 million increase in deferred production, equated to a [indiscernible] per aircraft on 34 aircraft.

Is that just a type of shipset you had?.

Myles, I'm sorry. I said $13 million, not $30 million..

$13 million, okay.

So is that $1.1 million swing in excess over average, should we interpret that as more or less the complete price step-down, with efficiency offsetting the mix of dash 9s versus dash 8s?.

Myles, again, clearly, we had a step-down in the quarter. And step-downs are a deferred in line unit. I won't get into specific. I can't get into specifics as to when that happened in the quarter. But at the same time, we will also continue to make cost reductions, as we go down the learning curve.

Some of those cost reductions are - they progress slowly and steadily over time, as we improve our, like Larry spoke about, a number of initiatives that we've got. Some of those cost reductions happen a little bit more discreetly, when we move things between a supplier or et cetera.

But all of that went into that deferred swing between last quarter and this quarter..

But no substantial negative effects from dash 9 mix?.

No. The dash 9, no, I would not say that. I think Larry pointed this out, even in the last quarter, that we will continue to make a similar kind of progress on the dash 9 curve which for us is very similar. Not in total content, but in terms of the way we perform and produce those components. So, it's not for us, it is not a dash 8, dash 9 mix issue..

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

Just a clarification and a question, Sanjay and Larry. On the CapEx this year, the $350 million, can you remind us how much of that is maintenance versus investment spending? And if you can you give any color on the investment by program, that would be great. But then more importantly, you've talked a lot about automation.

And as you look at this, for the remainder of this year and into next year, what's the opportunity to maybe step that up a little bit, if there is real potential savings down the road? Or how are you balancing those investments with, obviously, the desire to drive more cash right now, as you look at the investment part of the CapEx? Thank you..

Yes, that's something we talk about, Ken, because yes, it's kind of a funny thing. So let's start with your first part of your question. We do have a maintenance capital level. I think we had told you in the past what that was, in or around $200 million. And then we have an incremental piece that [indiscernible] is related to rate.

And then in this particular year and frankly next year, a little bit, we started plugging in, I'll say, more automation produce-ability related investments on top of all of that. And so this year, we expect that we'll be within the range of $325 million to $375 million.

And that's really tied to - is it going to be $375 million, that's tied to, really, frankly, this automation conversation and our ability to accelerate the schedule there. Would we consider, in future years of investing, continuing a higher capital expenditure rate, if the returns were good? The answer is, absolutely yes.

So when I talk about investing in ourselves, that's fundamentally what I'm talking about. We kind of like those investments, because first of all, they're quite deterministic. I think we feel very comfortable about our ability to compute the ROIs on those investments. They're lasting and they're differentiating and so we like to do that.

We like to look for those kinds of opportunities and there is quite a numerous, I'll say, various colors of those kinds of opportunities to invest back in the company.

So we look into next year and I think what I've always - this is always the question about, how much are you going to spend on CapEx next year, Larry? And I kind of go, that's a tough question, because we're continuing to look for those opportunities to make ourselves better.

And then that's balanced against the expectation people have for free cash flow. And what you're doing, obviously, is, in this case, you plop $100 million down and say, okay, I'm going to get that back over the next 3.5 years and you can continue to do that. That works as - generally, a pretty good investment.

It is sure a heck of a lot better investment than, say, building more buildings, for example. So we're looking, is the answer to your question. We're looking hard at additional opportunities to invest in productivity in the enterprise. Whether it's in any of the products, propulsion, fuselage, wings, you name it.

That is part of the everyday, come to work, lean perspective about our business. Now, again, I - we didn't really chat much about this, because it's - automation is a fun thing to talk about. At the same time, we're obviously driving everything else in the system, as well.

And the most effective way to continue to perpetuate your cost reduction is by attacking all of the elements of your cost. It really makes you better and keeps you tuned up to know. You don't want to break your system which keeps you pretty tuned up - measure ourselves as, I'll say, athletes of manufacturing..

Thank you. This concludes our call for today. Thank you for dialing in..

Thank you, ladies and gentlemen. This concludes today's conference. We thank you for participating and you may now disconnect..