Ghassan Awwad - Director-Investor Relations Thomas C. Gentile - President & Chief Executive Officer Sanjay Kapoor - Chief Financial Officer & Senior Vice President.

Howard Alan Rubel - Jefferies LLC Lucy Guo - Cowen & Co. LLC Doug Stuart Harned - Sanford C. Bernstein & Co. LLC Jonathan Raviv - Citigroup Global Markets, Inc. (Broker) David E. Strauss - UBS Securities LLC Samuel J. Pearlstein - Wells Fargo Securities LLC Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker) George D.

Shapiro - Shapiro Research LLC Seth M. Seifman - JPMorgan Securities LLC Richard T. Safran - The Buckingham Research Group, Inc. Ken Herbert - Canaccord Genuity, Inc. Myles Alexander Walton - Deutsche Bank Securities, Inc..

Good morning, ladies and gentlemen, and welcome to Spirit AeroSystems Holdings, Inc.'s Second Quarter 2016 Earnings Conference Call. My name is Jonathan, 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 and instructions will be given at that time.

As a reminder, today's program is being recorded. I would now like to turn the presentation over to Mr. Ghassan Awwad, Director of Investor Relations. Please proceed..

Good morning, and welcome to Spirit's second quarter 2016 earnings call. I'm Ghassan Awwad and in the room with me today are Spirit's President and Chief Executive Officer, Tom Gentile; and Spirit's Senior Vice President and Chief Financial Officer, Sanjay Kapoor.

After opening comments by Tom 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 statements at the end of this web presentation.

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

With that, I'd like to turn the call over to our Chief Executive Officer, Tom Gentile..

Thank you, Ghassan, and good morning, everyone. Welcome to Spirit's second quarter earnings call and my first earnings call as President and CEO of Spirit AeroSystems. I cannot emphasize enough how honored and privileged I am to lead the great team at Spirit.

Since I joined Spirit four months ago as COO, I've had the opportunity to visit most of our domestic and international sites and meet many of our employees. I'm very proud of our team and all their accomplishments. Their dedication, commitment and expertise in aerostructures are unmatched.

In addition to its global footprint, Spirit has a very solid foundation. With work packages on every major platform of Boeing and Airbus, emerging work on some new platforms such as the Bombardier CSeries and the Mitsubishi MRJ, new inroads in defense, and a backlog of $47 billion, our business is very well-positioned for the future.

Before getting to the Q2 results, I wanted to start by expressing my sincere appreciation and gratitude to Larry Lawson, who recently retired as CEO of Spirit. As the leader of this company over the last 3.5 years, Larry has done a tremendous job.

He transformed the company's performance with a clear strategic vision and a disciplined focus on operational excellence. He helped stabilize critical programs, exited noncore activities, and won new business, which has strengthened Spirit's outlook. During Larry's tenure, the business experienced remarkable growth by any measure.

Revenue grew by 23%; deliveries increased by 18%; Spirit's backlog improved by 34%; earnings per share were up 10 times; and Spirit's stock price grew by 1.6 times. But more importantly, Larry assembled a great team of subject matter experts that I will inherit. The Spirit Board and I have great confidence in our leadership team going forward.

Larry left an incredible legacy at Spirit, and we wish him well in retirement. Over the last four months, I've had the opportunity to meet most of our customers and many of our key suppliers. I've had the opportunity to spend significant time with Boeing and Airbus leadership.

The Farnborough Air Show came at a good time, and we had several good meetings with Boeing and Airbus executives. I've also been to both Seattle and Toulouse for meetings and will continue active engagement with both of our largest customers.

In addition, I met many of our shareholders and Wall Street analysts during the reception we had in New York in June. At the Farnborough Air Show, I was very encouraged with what I saw and heard, relative to the health of our industry. The most powerful underlying trend in aviation is the continued growth of revenue passenger miles.

The recent Deloitte industry report highlighted that less than 10% of the world's population has taken a flight yet. The roughly 5% annual growth in revenue passenger miles should continue to drive demand for aircraft long into the future.

While orders this year were softer than in the recent past, Boeing and Airbus still have a record backlog in excess of 12,500 aircraft, which translates into more than eight years of production and is driving higher rates of production on key programs such as the 737 and the A320.

With fuel prices still low, airline traffics have been at record levels the past two years. Overall, I remain optimistic about the macro factors driving the aviation industry. Yet our industry remains incredibly dynamic and competitive. While Spirit has a good position right now, we can take nothing for granted.

We must earn the trust of our customers every day by executing on cost, quality and delivery for current programs and remaining innovative so that we can win a place in the next generation of platforms. My vision for Spirit is to be a trusted partner in our core aerostructures business, while laying the groundwork for future growth.

First and foremost, we will focus on meeting the cost, quality, and delivery commitments of our current programs, and we will do that while keeping safety as the key priority. Second, we will work to strengthen the relationships with our key customers. Boeing is, by far, our biggest customer. Their success is our success.

We have some open contract issues right now with Boeing and are engaged in active dialogue with them to reach a mutually satisfactory agreement. Airbus is our second largest customer. I'm pleased to report that we have reached a long-term agreement with them on the A350, which I will describe later.

Third, to be successful, Spirit must continue to drive down our costs. We are working actively with our supply chain using a clean sheet approach to find the most competitive sources of supply. In addition, we have rigorous project that's looking at all other aspects of our cost base.

Fourth, as we seek to grow, we will continue bidding on work packages in our core aerostructures business for both commercial and defense programs. We will look to build on our recent success of organic wins such as the recently announced B21 Bomber program.

We'll also look opportunistically at inorganic opportunities that help to strengthen our supply chain, add to our core, or move into a logical adjacency. Over the next few months, we will be conducting a strategic review of opportunities and will discuss the outcome of that with our Board later in the year.

In any event, we will continue to be disciplined on capital allocation. We will only invest in inorganic growth if the returns meet our thresholds. We have a $600 million share buyback program in place today.

We see our shares as undervalued and we plan to continue to buy Spirit shares under the existing buyback program, for which I will provide an update in a moment. Of course, we also remain committed to meeting our financial commitments and delivering on the guidance that we provide investors on revenue, EPS, and cash flow.

And finally we will continue to build a high-performance leadership team to attract, develop, and retain top talent. Let's turn now to a major milestone in Q2. I'm pleased to announce that after much collaboration with Airbus, we reached a fair and equitable long-term agreement on the A350 program.

As a result of the agreement, Spirit extended the block to 800 shipsets and recorded an additional forward-loss of $135.7 million in the second quarter. Sanjay will provide additional detail on the financial impact of this agreement in just a few minutes.

We remain focused on making progress in this program and driving cost reduction while delivering the highest quality product. This comprehensive agreement strengthens our partnership with Airbus and positions Spirit to extend our collaboration with them in the future.

We continue to work very closely with Airbus senior leaders on technology collaboration and are actively pursuing new business opportunities with Airbus. Now let's take a look at Q2 results. In the second quarter, we delivered a record 408 shipsets, including 36, 787s and 28, 350s.

The deferred balance on the 787 program remained relatively stable compared to the first quarter, while on the A350 program, the balance grew by $6.8 million or $341,000 per shipset, compared to $411,000 per shipset in the first quarter and $1.9 million last year.

For the quarter, we reported revenue of $1.8 billion, up 8% compared to the same period of 2015. Operating income was $83 million and net income was $45 million, taking into account the A350 forward-loss and some other one-time items, which Sanjay will explain. Reported earnings per share were $0.35 or $1.21 per share, excluding the one-timers.

Operating cash flow was $250 million and free cash flow was $161 million. With regard to 2016 guidance, we are revising our earnings per share guidance to $3.45 to $3.65 per share, which reflects $0.86 per share impact of one-time items. We're also increasing our free cash flow guidance to a new range of $350 million to $400 million.

We continue to support the guidance we provided you last quarter for revenue to be between $6.6 billion and $6.7 billion. With regard to capital deployment we remain committed to our strategy of utilizing an opportunistic and disciplined approach.

In the second quarter we repurchased 3.3 million shares for $152 million which brings the total year-to-date to 6.9 million shares for $318 million. We plan to continue to execute on the current repurchase program of up to $600 million through December 2017.

Some other notable accomplishments in this quarter include refinancing of our $300 million bond and our $500 million term loan. Having achieved investment-grade credit rating last quarter, these refinancing activities allow us to take advantage of lower interest rates while providing additional flexibility relative to capital deployment.

Delivery of the first CSeries to Swiss Airlines in June by our customer Bombardier. We're very proud to be the design and build partner of the engine pylon on this program and congratulate Bombardier on the first delivery of the CSeries. In addition, delivery of the 100th A350 shipset to Airbus occurred in early July.

And finally, we are approaching the delivery of our 500th 787. Overall, a very eventful quarter. With that I'll ask Sanjay to lead you through the financials and give you more specifics about the second quarter.

Sanjay?.

Thank you, Tom. And a very good morning, everyone. Let me take you through our second quarter financials, summarize our full year outlook, and then we will take your questions. Starting on slide three, revenue for the quarter was $1.8 billion, which is 8% higher compared to 1Q 2015.

The increase was primarily driven by record deliveries and higher revenue recognized on non-recurring programs. In the quarter we delivered 128 737s, 25 777s, 36 787s, as well as 145 A320s and 20 A350 shipsets. In addition, our Wing segment revenue was positively impacted by some one-time claim settlements in the quarter.

Production rates on programs such as 737, 787, A320, and A350 are projected to increase through the rest of this decade resulting in a very healthy backlog of $47 billion or 7 years of sales visibility.

Moving to slide four, we reported earnings per share of $0.35 for 2Q 2016 or $1.21 when adjusted for three one-time items including the Airbus agreement that Tom mentioned, which was an impact of $0.68. The other one-time items were charges we took for our former CEO's retirement for $0.11 and the cost associated with debt refinancing for $0.07.

In total, the impact of all three was $0.86. All of these charges were non-cash in the quarter. We refinanced our $300-million bond and lowered our going-forward interest rate from 6.75% to less than 4%, and also reset our interest rates on our term loan to 150 bps over LIBOR.

These refinancing activities should result in lowering our interest expense by almost $10 million on an annual basis going forward. By comparison, in 2Q 2015 we reported adjusted EPS of $1.09, and the adjusted $1.21 in Q2 2016 represents a healthy 11% year-over-year increase.

Earnings per share for the quarter benefited from the continued focus on cost-reduction initiatives and a lower share count. However, we also absorbed a significant impact due to the appreciation of the U.S. dollar to the British Pound.

Turning to free cash flow on slide five, for the quarter, we reported free cash flow of $161 million compared to $163 million of adjusted free cash flow reported in Q2 last year. Capital expenditure in the quarter was $54 million compared to $75 million in Q2 2015.

While CapEx was lower in the quarter compared to last year, and some of this is just timing, also recall that in 2015, we had nonrecurring payments from our customer that were offsetting the capital spend on the 787 program. We also continue to absorb the natural higher working capital requirements on these programs as they ramp up in deliveries.

Our focus on core cash flow improvement is steadfast, and when adjusted for the higher working capital, we continue to see year-over-year improvement in this metric. As a result of our continued performance to improve cash flow, we are raising our 2016 free cash flow guidance to a range of $350 million to $400 million.

Turning next to capital deployment on slide six, as Tom mentioned earlier, we remain committed to our disciplined and opportunistic capital deployment strategy. In 2Q 2016, we continued the execution of our existing share repurchase program by purchasing 3.3 million shares for $152 million compared to $165 million in Q1 this year.

Year-to-date we've already repurchased a total of 6.9 million shares for $318 million, which leaves a balance of up to $332 million under our current share repurchase program. For our segment results let's turn to slide seven.

Fuselage segment revenue in the quarter was $915 million up from $888 million for the same period last year due to higher production deliveries on the A350 program and higher revenue recognized in certain non-recurring programs.

Operating margin for the second quarter of 2016 was 2.1% as compared to 18.9% during the same period last year, primarily driven by $135.7 million net forward-loss charge recorded on the A350 Fuselage program.

Propulsion segment revenue in the second quarter $482 million compared to $441 million for the same period last year driven by higher revenue recognized on certain non-recurring programs and some increased deliveries on the 787 program. Operating margin for the second quarter was 15.4% as compared to 20% in the second quarter of last year.

In the quarter we recorded pre-tax $8.8 million unfavorable cumulative catch-up adjustments on mature programs and a $2.4 million unfavorable change in estimates on forward-loss programs. These charges were mainly the result of one-time supply chain decisions, which will yield benefits in future years.

Wing segment revenue in the second quarter was $424 million, up from $368 million for the same period last year due to higher production deliveries on the A350 and the A320 programs.

Operating margin for the second quarter was 15.3% as compared to 13.6% during the same period last year due to favorable labor and material cost performance, and a favorable impact of fixed overhead absorption as a result of higher production rates.

In the second quarter of 2016 the segment recorded pre-tax $9.8 million favorable cumulative catch-up adjustments primarily due to the Airbus agreement. And a favorable change in estimates on forward-loss programs of $1.2 million.

On the 787 program, we delivered a total of 36 shipsets in the quarter and the deferred production balance remained fundamentally stable compared to the last quarter. Our current block will end later this year and we remain on plan to our estimates and guidance.

I would like to recognize the entire 787 team for their relentless focus on executing cost reduction initiatives, while simultaneously managing the ramp-up in production to 12 aircraft per month. This program has executed on plan to the costs and estimates that were re-baselined all the way back in Q4 of 2013.

Slide eight summarizes our performance on the A350 program. We delivered a total of 20 shipsets in 2Q 2016 compared to 9 shipsets in 2Q 2015. The 100th shipset was also delivered in early July. More importantly, the average deferred production per unit continued to decline and is now averaging approximately $300,000 per shipset.

As we have repeatedly said, at this early stage of a major development program, deferred production per unit is sensitive to factors such as production rates, logistics and other costs.

I want to remind you that the additional forward-loss of $135.7 million recorded in the quarter is a non-cash charge, and it results in major de-risking of the A350 program and helps strengthen our partnership with Airbus. With firm orders in excess of 800 units, we felt comfortable extending the size of the block from 400 to 800 units.

The teams continue to make good progress on our cost and invest in ramping up production rates, and while we expect to become cash positive on a per unit basis in 2017, there is always a lot more work to do. Turning to our 2016 guidance on slide nine.

Our revenue guidance for the full year 2016 remains unchanged and is expected to be between $6.6 billion and $6.7 billion. On earnings per share, we are now revising our guidance to $3.45 to $3.65.

The new guidance reflects the impact of the one-time items that occurred in the second quarter which were the Airbus agreement, our former CEO's retirement cost, and debt refinancing charges which collectively resulted in a net impact of $0.86 per share.

The guidance also includes the impact of the current foreign exchange rate and all the announced changes in production rates by Boeing on 747 and Airbus on the A380 program.

So just for comparison, if you were to exclude the one-time charges, this EPS guidance would equate to approximately $4.30 to $4.50 compared to the previous guidance of $4.15 to $4.35.

We're also increasing our free cash flow guidance to a new range of $350 million and $400 million, which includes the investments on the defense programs and the higher working capital requirements on the A350 program. Our guidance is now based on an effective tax rate of approximately 31%.

And with that, now let me hand it back over to Tom for some closing comments..

Thanks, Sanjay. To wrap up this portion of the call, let me summarize the key highlights of Q2 which you'll find on Slide 10.

After considerable effort, we reached an agreement – a long-term, comprehensive agreement with Airbus on the A350 program, which eliminates uncertainty and provides stability for the remainder of the contract, extended to 800 shipsets.

With this agreement in place, we've strengthened the partnership with Airbus and we're now actively bidding on new work programs with them. During the quarter, we had record deliveries, surpassing the 400 shipset milestone for the first time with 408 deliveries.

Our reported EPS is $0.35 per share or $1.21 per share adjusted for one-time items, up 11% on a similar basis from 2Q 2015. We're increasing cash guidance to $350 million to $400 million.

We successfully refinanced our debt with low interest rates and recognizing that we view our shares as being undervalued during the quarter, we repurchased 3.3 million shares for $152 million, and we plan to continue executing on our share repurchase program of $600 million.

So we have a lot of work to do at Spirit, but we've got a good position in the industry with work packages on all the major programs and a very strong team. I'm optimistic about our future. So with that, we'll be happy to take your questions..

And as a reminder, please limit yourself to one question each. Our first question comes from the line of Howard Rubel from Jefferies.

Your question, please?.

Thank you very much. Good morning. And yes, nice results when you walk through it all..

Thanks, Howard..

Thank you, Sanjay. I just want to touch on the revenue outlook for a moment. Could you do a little bit of a walk, Sanjay? Because unless I see some massive fall-off in production rates in the second half of the year, and even allowing for some rate payments, you still should show up at – above or at the high end of your revenue guidance as I see it.

Could you address sort of the sustainability of the 320, the 350, and also the benefit of the 737 MAX?.

Sure. Sure, Howard. Fair question, and I think, in the past we used to talk about it. We've sort of gone away a little bit from it. But the first thing you got to remember, Howard, is at least in this year, the number of calendar days in the fourth quarter is about 57 days, 3Q is 64 days, so the second half of the year has fewer number of work days.

Having said that, I have kind of also mentioned a little bit, in the second quarter, we did benefit a little bit from a sort of one-time settlements that we had, which obviously will not repeat themselves. Having said all that, I have to tell you, we are absolutely on track to meeting our customers' deliveries.

That is our brand; that's our reputation, so we will make sure that we hit those numbers.

There's always volatility in sort of the month of December; things can move one day, two days to the left or the right based on customer needs, particularly on these ramped-up programs, but having said all of that, it's quite likely, and I think you're right, we are likely to be at the higher end of our guidance range in terms of revenue, so there's no underlying issue that we're not talking about.

We're absolutely meeting our deliveries. There are obviously a fewer number of days, but we will deliver to our customer commitments, and we do that. We probably are going to be at the higher numbers..

Thank you..

Thank you. Our next question comes from the line of Cai von Rumohr from Cowen and Company. Your question, please..

This is Lucy on for Cai. First, Sanjay, if you can give us a little bit more detail on the moving parts of your raised free cash guidance. It looks like the adjusted net income will be up $20 million, but you mentioned there's also some additional investments and working capital requirements here.

Is it higher versus your private – prior expectations? And I have a follow-up..

Sure. Sure, Lucy.

As you know, in the last three years, and of course Tom's continuing that focus, our focus has been on managing our cost, and all aspects of our costs; our labor costs, our – both our direct and our indirect G&A, our overhead costs in every aspect of what we spend in producing our parts, as well as working on our supply chain costs and so on.

At the end of the day, Lucy, that is what causes our cash flow improvement. Something that we have targeted in the last few years, highlighted internally as well for our teams, so I got to tell you, the working capital requirements are obviously a headwind but those were baked in into our numbers.

These additional improvements are a result of all the things – all the cost reduction and performance things that we continue to do in our business.

So we see this, and we've kind of talked about this quite a bit that our targets are on free cash flow year-over-year improvements and eventually getting to those sort of 6% to 8% of revenue kind of conversions, and we are absolutely on track to achieve all that..

Thank you for that. The second question is related to your Boeing negotiations. If you can maybe update us on, or remind us on the approach to the negotiation. Are you looking at perhaps some piecemeal agreements on the 787 or the 737 programs, and then separately, Boeing has talked about potentially elongating their payment terms.

Has that been in a part of the negotiations with Spirit and potentially, what would they offer you in return on that?.

Sure. Lucy, I'm almost missing Cai on the call because, as I've told Cai many times, and I think I've shared with you as well, we can't get into our negotiation stance in a public arena. We don't do that.

All I can tell you is we have fact-based negotiations with our primary customers, very similar to what we ended up with Airbus as well, and those negotiations continue. They happen in good faith. They happen at all the appropriate levels. There's been a lot of noise about payment terms and things like that, and I don't want to get into all aspects.

All I can tell you is we have appropriate contractual terms with our customers – with both our customers, and like we deliver on time to a quality, cost and schedule that they expect and we want to. We, likewise, get paid contractually as well so there is no impact because of some of the noise that you're hearing..

Thanks very much. I'll pass it on..

Thank you. Our next question comes from the line of Doug Harned from Bernstein. Your question please..

Thank you. Good morning..

Good morning, Doug..

Morning..

I wanted to see if you could help us understand the A350 charge a little more because when you look at the block extension that takes you to about 700 airplanes left or 700 shipsets left to deliver, so it appears that the way you look at this program and the timing with which you get the cash that's coming out of deferred back is now much, much – stretched out much farther than one would've thought before.

Can you talk about what's gone into this agreement, sort of the puts and takes, and what we should expect for a cash trajectory on the A350?.

Doug, this is Tom. Maybe I'll just take a cut first. First of all, the block extension was really because of the way we negotiated with Airbus. We have a contract for 800 units.

They've taken more than 800 orders at this point and we negotiated on that basis, and so it made sense to extend the block from 400 to 800 aircraft, and what we've also done is really identified all of the costs and because we have the full look now across the entire contract, we thought it was appropriate to report it in that way.

And so that's how the forward-loss resulted. But I'll turn it over to Sanjay to explain a little bit more of the specifics in terms of the pieces that you were mentioning..

Sure. Sure. And Doug, and I apologize. Doug, I have been reading some of the early reports this morning from a number of folks, and I know this is something that's vague. So, let me just sort of give you a little bit of a longer answer than normal.

And frankly, first, before I do anything, I just want to thank – this has been a long effort on behalf of a number of folks on the Spirit team and frankly on the Airbus organization, and over the last almost year or two years now, lots of trips back and forth. And so this has been a huge effort.

The second thing I think we've always talked to you guys is that this negotiation was a fact-based negotiation. We bring a lot of value to the table.

Larry used to talk about as you get closer to 100 units, you have a pretty good idea as to what your costs are and what your costs are likely to be in terms of working on collectively cost-reduction initiatives in the future.

Like Tom said, we wanted to negotiate 800 units, not get into a constant do (30:33) loop of negotiating 200 at a time or 400 at a time, et cetera. So this made a lot of sense for us. It made a lot of sense for Airbus to economically negotiate over the long term.

And frankly, independently, the 800 unit block made sense because, like Tom mentioned, they have more than that in orders, and we have certainty in revenue, and we have certainty in our cost structure. So that all makes sense kind of independently.

Now obviously, it's a lot easier to negotiate – going back to your question about 700 units left to go, and yes, we have a roughly $700 million deferred balance, since if you add up the two forward-losses between this time and the previous one, that would sort of say there's about $450 million of cash that we would recover over the next 700 units, which would be about a little over $600,000, $650,000 a shipset.

So going forward, from a cash flow perspective, this is a really, really good result. It's always a lot easier and better to negotiate and settle.

You know, when you look at your costs going forward, some of the history and you can see the charts that I had in my presentation about – back in 2012 and 2013 – where we had a lot of travel work, and we had a lot of engineering changes, and a lot of sort inefficiencies; it's hard to negotiate and settle, who caused all that.

I think, at the end of the day, this is a really, really, really good result for both of our companies. Nobody is happy about a forward-loss, but I can tell you on a cash flow basis, this is a really, really good result going forward.

And last but not the least, I think this sets a relationship between our companies that provides for – they understand the value we bring to them. They respect that value. And we of course with both our customers intend to delight them. And this allows us to reset that relationship and build on it going forward.

And we'll see how we do on that, but I think that's a good reset. So overall it was very fair, it was equitable, it was long term, it was balanced. Obviously we have a lot of work to do, but it was the right kind of decision that we all worked for the last two years to make happen..

I appreciate the logic in going to an 800 block. I mean that all makes complete sense.

What I'm trying to understand is if we back up a few weeks ago before this agreement and when you had – you weren't – you hadn't taken this forward-loss and one would think that you were expecting to recover this $700 million in deferred minus the first charge of over 300 more airplanes..

Sure..

So that's why I'm trying to understand what was your thinking before this deal was done and the numbers we looked at versus what they are today..

Right..

So, Doug, I would tell you again, without getting to the specifics of the negotiation I think what you should also read in here that we not only sort of set the prices associated with all of the change activity that has happened in the current block, but also the impact in the second block associated with those changes.

So you can – we can keep second guessing as to what it would have been on 400 units versus 800 units, but the good news here is we reset our cost and our prices not only for the first 400 units, but also for the second 400 units..

And I would say, Doug, too is that we just felt it was the most transparent is to convey what the total impact was over the full block, the full 800 units, rather than try to piecemeal it over the first 400 units and then the second 400 units.

Two other things I'd add is that on the deliveries you see that we've been reducing the amount of negative on the deferred production each quarter. And we should be positive by the end of this year, early next year. So we're on a good trajectory with that. And as Sanjay said this has really improved the relationship with Airbus.

We met with the senior guys at Farnborough. I had a lot of good discussions and we're actively bidding on some new packages. So overall we felt this was a very solid agreement..

Okay..

Last thing, I know – and I know, there's – a lot of people have a lot of questions. I mean this just makes our company, de-risks our company, our goal of converting 6% to 8% free cash flow and revenue. It just starts to put all the things in place so that we can through our own performance achieve those goals..

Okay. Great. Thank you..

Thank you. Our next question comes from the line of Jason Gursky from Citi. Your question please..

Hi, good morning. It's Jon Raviv on for Jason..

Good morning, Jon..

Thanks for taking the question.

Tom, could you talk a little bit more about the strategic review you mentioned that you'll be looking at over the next few months, what you consider a logical adjacency or expanding your portfolio? And in that context, could you give us a little, on your view, of the inorganic sorts of opportunities out there? Thank you..

Right. Well, this – when I say strategic review, it's really more of a typical strategic planning exercise that any company would go through. Since I'm new, this first one will go into a little bit more detail, and we'll plan to review it with our Board at the next Board meeting in October.

And so we're going to look at a whole series of things, but first and foremost it's going to be on the core and how we stabilize our core business, continue to meet our current requirements and improve the performance.

And so that's going to include things in supply chain to drive down cost, as well as how we improve our overall processes and improve our quality and our delivery. So that's a key part of it. Certainly we'll look at our growth agenda.

That's an important thing to the Board, is to understand our long-term growth agenda, and that's both organic and inorganic. We've had some recent wins organically with the B21 Bomber, so we'll talk about where we want to pursue additional commercial and defense organic pursuits.

And then the last area is really inorganically, and we'll be opportunistic. As I've said before, we're going to be disciplined on capital allocation.

We have a share repurchase program in place right now that we'll continue to execute, but opportunistically, if we see opportunities come up that are inorganic in nature that either add to our core or help us strengthen our supply chain through vertical integration or a logical adjacency, we'll look at those.

But they'll have to meet our return thresholds, and we'll take a look at that very carefully. So overall I would say this comprehensive strategic review is more just a regular strategic planning exercise. We do it every year with the Board, and that takes place in October this year..

Thank you..

Thank you. Our next question comes from the line of David Strauss from UBS. Your question, please..

Good morning..

Good morning, David..

Sanjay, I guess to go back to A350, what can you tell us about the nature of the agreement? Is it a volume-based pricing agreement or are there set step-downs? And then is there any change in the zero-margin assumption on the block right now?.

Well, by default, David, there is no change in assumption on the zero margin for the block, which is I think where Doug was also poking at. And in terms of trying to help you a little bit more with the agreement, listen, I hate to say this, but I can't get into the specifics of the agreement.

I know we use words like fair and equitable and I really mean that. The good news here was we agreed on long-term pricing. Like in all agreements, there are aspects of working together on cost which we always do with our customers.

Obviously, there are specific prices for specific shipsets and things like that but beyond that, I'm not sure I can give you too much information, David, on the agreement.

At the end of the day, going forward, given the value we bring and the cost that we know and like Tom just mentioned, we expect to actually with the agreement that we have now get cash flow positive, I said it in my prepared remarks as well very shortly, at least in 2017. So, all in all, it was a good agreement..

Okay..

And it was comprehensive and it was fact-based..

As a follow-up, turning to the 787, given that we're going to move into the next block some time in Q3, can you tell us the size of the block at this point, Sanjay, and what your margin assumption is on the next block? Thanks..

Sure, David, and that's a fair question and you're absolutely right. Towards the end of this year, we will be establishing our next block.

Quite candidly, we're going through all of the assumptions that have to be made prior to establishing that second block and whether it be in terms of our pricing assumptions, our costing curves, as well as the size and so on, so forth, we're making those decisions, David. We're not ready to announce any of that yet.

I will tell you that we will obviously follow appropriate accounting guidance and conservative aspects as we establish that and all of that is baked into our guidance so you shouldn't be surprised this year about anything associated with that. When we establish that, we'll talk about it.

We're going through that process right now internally and then obviously with our auditors and so on..

All right. Thank you..

Thank you. Our next question comes from the line of Sam Pearlstein from Wells Fargo. Your question please..

Good morning..

Good morning, Sam..

I'm going to try again on the A350 a little bit. Which is you had assumptions before you had various assertions and so I'm presuming as part of this, you're either getting paid or not getting paid for those assertions.

What I'm trying to just think through is, is the price of what you're getting paid what allows you to get to the point where you're going to be cash positive and then after you recoup whatever you asserted, it might go back down. So I'm trying to just parse together when you said it will be cash positive on a unit basis for 2017.

Is that on a few units? Or is that for the full year we're going to see a cash positive impact from the A350?.

Yes. Sam, fair question.

And again, that's why in my – even again my prepared remarks, I did tell you, when you look at deferred balances growing, particularly when you're at fewer number of units, it does bounce around a little bit because just the nature of in the early development, sometimes, including in – Larry may have even talked about it in previous calls – we are ramping up right now and we are incurring certain expediting costs, and sometimes these are lumpy in nature and can cause a little bit of a blip up or down in a particular quarter.

Having said that, like we talked about with Doug, over the next 700 units we expect to recover at least $650,000 of cash per unit going forward on average. And I think you'll see that, and you'll see that benefit. And going to your original question of how much was this a price negotiation, was this a cost impact, well, it is a combination of both.

That's why I said we had fact-based discussions with Airbus where we shared with them what it does cost and what the value we bring to the table, and likewise we adjusted pricing to reflect what it takes to produce these units today, given all the change actively that happened between our two companies and the engineering activity and so on.

So it is a combination of price and cost in the negotiation. We expect to get cash flow positive and, sort of, remain cash flow positive because over time, that's the only way you get to the $450 million of cash recovery between now and the end of the block..

That's great.

If I can follow-up, can you just explain what happened with R&D this quarter, why it dropped a couple million dollars?.

Nothing specific, Sam. It's a little bit of timing. These things are – our R&D expenditures are not that huge and sometimes just some bills and some timing actively happens. So we are on track to a number very similar to last year. We're not not investing in ourselves; that's not the message here.

Frankly, one of the things that Tom has brought is making investments in innovation and R&D. And that's a focus and so that – it's got nothing to do with changing our behavior. This is all just timing activity..

Yeah. And I'll reinforce that. It definitely is timing. Coming in, looking at the – our R&D is – we can even do more. I mean, if we're going be successful in the next generation platform, we really have to be driving innovation in the core aerostructures areas that are going to really make us desirably as a partner for the next generation.

So it's a priority for us. It's something we're going to be talking about in our strategic review. It's important to the Board, and I think the little dip that you saw this quarter should not be indicative of anything. It's going to be a priority for us going forward..

Thank you..

Thank you. Our next question comes from the line of Robert Spingarn from Credit Suisse. Your question, please..

Good afternoon..

Hey. Good afternoon, Rob..

On the 787, just going back, your block determination that you're going through now, will that use the interim pricing agreement or some expectation of whatever the future agreement is?.

So the interim pricing that we've talked about multiple times, Robert, which is not in my cash flow guidance, by default is therefore not in my assumptions for earnings per share or anything like that. And that's part of the comprehensive negotiation that we are undergoing with Boeing.

And again, that's something that we can't really comment on too much..

But it sounds like if you haven't reached that agreement yet with Boeing and you're not using the interim agreement, then there will be some variability once the Boeing agreement is done relative to what you've put into the block assumptions..

Right. That's why I said. I didn't put in any of the interim payments associated with that in my block or in my cash flow guidance. I was absolutely pure with that, and we kept you informed that we took those interim payments outside of our guidance..

Well, I guess, what I'm asking you, Sanjay, is do you have a pricing assumption that's based on a reliable number....

Absolutely..

You don't have a final – okay. That's where I'm struggling a little bit..

Yeah. No. That's fair. We've obviously made an assumption, Robert, in our block as to what we believe is a Dash 9 price and it's – we follow accounting guidelines. We follow conservative accounting appropriate principles to do that. And when we settle on what it ends up being, then that's what the impact will be. But we're quite confident....

So there could be a true up of some type..

Yes..

Okay..

Yes..

Sanjay, on the Propulsion margin, you mentioned some mature programs were behind the adjustments, the negative adjustments. Could you speak to that a little bit? And even after backing those out, is that margin perhaps a little bit lower than normal and what we should expect going forward..

Sure. And fair question. Again, Robert, the Propulsion segment is roughly a $400 million business for us on a quarterly basis. So even a few million dollars, which are the right kinds of investments that we make, sometimes can swing these margins quite a bit in a particular quarter again.

I think a better way for me to try and answer these questions for you is, between the cum catches that we took in the last quarter, for example, and some of the negative activity that happened in this quarter, but at the end of the day, we've always said to you, and I'm pretty confident of that, that the Propulsion segment margins, which are roughly about 100 basis points, 150 basis points higher than our Fuselage segment, we do about 17% on Fuselage, so let's just say it's about 18%, 18.5% on Propulsion.

One-time things do happen.

Some of this one-time that I talked about in my prepared remarks were related to the right kinds of decisions we make sometimes with changes in our suppliers or costs that we have to incur to move things around or sometimes savings that don't show up on time, but in the future, will yield many times the amount of money that we're putting into these efforts which we've talked about and explained to you under the sort of make-buy and make-wear principles that we've been applying along with our clean sheet activity.

So nothing to concern on Propulsion margins going forward or in – on average as a whole. They should be in line with what I just mentioned..

Thank you. Our next question comes from the line of George Shapiro from Shapiro Research. Your question, please..

Yes. Sanjay, I want to try and get one more shot at this 350. It would seem that normally when you extend the pool, you get a benefit, but since you're increasing the loss, my assumption would be that you probably gave back some in price in this negotiation contract with Airbus..

True. Again, it was a comprehensive negotiation, George. Like I said, we talked and agreed on pricing structure and obviously values, not just in the near term but over the entire 800-unit block. And they were fact-based, very transparent negotiations, I can assure you, and some of this you guys don't see, normally.

But there were lots and lots of teams from Airbus visiting our factories and walking through the way we produce things, looking at suppliers together, trying to figure out how we can shave costs together and so on.

And so at the end of the day, given this – that the program is fairly stable now that we have the 100th unit, both on the A350-900 and the A350-1000, it's a lot easier to look at what costs are and what prices need to be and so on going forward.

So, yes, it was a reset on all of our claims and the change activity and the pricing assumption, but also we still have to obviously work on our costs going forward as well..

Okay. Thanks. And then a quick one. I'm estimating that the non-recurring sales this quarter is somewhere around $60 million.

Is that a fair number?.

Not that high, but it's getting there. Again these are lumpy things, George, as you know. We are pretty active on both the 737 MAX, the 777X, 787-N, (50:56) I mean, all of these non-recurring programs are pretty active.

And when you get some development tooling costs and these are lumpy in nature you end up with a little bit of volatility in a particular quarter. More importantly, (51:12), but we continue to perform really well on these development programs.

I think if you really look at the engineering commitments that our teams have made and to both Boeing and Airbus, we are performing really well as far as that's concerned..

And I can't resist one other one. The 787 deferred was $1 million last quarter and zero this quarter.

So the significant improvement is, what, risk retirement by getting to the 12 per month, or what am I missing?.

Well it's again – it's all of the above, George. I think particularly with you I've had many conversations where we've said to you, please we set a plan up three years ago almost, and we're absolutely meeting those numbers. And we continue to work on our costs.

Obviously there's an impact in terms of pricing and step downs, but we are absolutely on track to that plan that we established back in 2013..

No, you've done a great job. I give you a lot of credit..

Thank you. It's the team – all 16,000 people in Spirit..

Okay. Thanks..

Thank you. Our next question comes from the line Seth Seifman from JPMorgan..

Thanks very much and good morning. One a little deep in the weeds for you, Sanjay. The advanced burn down was down from last quarter even though you delivered more A350s, more 787s.

What's the cause of that?.

Seth, so again I don't want to get into all specifics, right, but at the end of the day, Seth, if you really look at the full year you're going to see that our full year advance payments this year are going to be higher compared to last year just because of the higher number of shipments on the 787 and A350 that we're doing.

There are some aspects of what we work with our customers, but I don't want to get into the specifics of that..

Right. Okay. Okay.

And then as a quick follow up, Boeing has told us that they're not going to be delivering 787s in 2017 at a rate of 12 a month because they have the initial 787-10s running through the factory but we should think about your delivery rate as remaining constant at the stated production rate, right?.

Absolutely. Absolutely.

Yeah. Okay. Great. Thank you..

Thank you, Seth..

Thank you. Our next question comes from the line of Richard Safran from Buckingham Research. Your question please..

Tom, Sanjay, Ghassan, good morning..

Good morning..

Good morning..

I have two non-related items I wanted to ask you about.

First is I want to know if you could talk longer-term CapEx trends? I know you revised up to include the B-21 not too long ago, so I just thought maybe you could comment on how we're going to see that CapEx trending longer term? Separately and back on the A350, we're all aware of the issues that Airbus has been having and the buildup of A350s on the ramp in Toulouse.

Just wanted to know if you could discuss what Airbus is telling you about the ramp and given what you're seeing, what you are doing to manage risk on that program? Are you confident in the rate ramp? Is there any conservatism or anything baked into your A350 expectations?.

Sure. Let me handle the CapEx, and then Tom's had a number of good solid meetings with the customers on Airbus, including the one that you mentioned at Farnborough. Maybe Tom can comment on A350, which by the way is going quite well. Richard, CapEx; CapEx, we've kind of talked about two things in the past.

One is sort of our core CapEx, which is sort of just the routine investments that we make in our facilities and so on and that's, whether it's $100 million, $150 million a year, that sounds like a good number.

Beyond that, it depends on the rate increases which we are investing in and how we end up negotiating that with our customers, so the lumpiness on capital will depend on the negotiation.

As far as the B21 program is concerned, we're absolutely committed to that program and like we did this year, we shared with you overall in defense, not just on that program. We made some investments. Those investments will continue in the next few years and as we get into guidance for 2017 and beyond, we'll talk about CapEx based on those agreements.

So I think again, CapEx is baked in into our overall goal of getting to 6% to 8% of free cash flow conversions. With that, let me just turn it over to Tom, who maybe can talk about the 350..

Right. Well, the 350 for Airbus, and obviously they've had some challenges with it. At Farnborough though, when we spoke to them, they were still committed to getting 50 out this year and they may adjust that slightly, but that's all downstream.

Upstream and at the front of the line, they're still requiring the deliveries for us at the rates that they have communicated. So we haven't slowed down at all. In fact, we've been running, paddling under the water furiously to keep up with it, because their – the front of their line is still moving at the normal rates.

And however – whatever they ship out the back end, they'll decide that based on the delivery of the downstream supplies, but further up the line for us, nothing has changed..

Okay. Thanks very much..

Thank you, Richard..

Thank you. Our next question comes from the line of Ken Herbert from Canaccord.

Your question, please?.

Hi. Good morning..

Good morning, Ken..

Sanjay and Tom, I just wanted to follow-up on two things. First, taking a different tact here and maybe a little bigger picture. Coming out of the air show there was obviously a lot more commentary and concern around wide-body rates.

It sounds like, Sanjay, you've reflected everything that's at least been publicly announced in sort of the near term and longer term thinking on these programs.

How do you feel like, from a CapEx standpoint, you're relatively well-positioned or hedged assuming incremental downside in 777 or maybe 787 rates staying at 12 a month? I'm just trying to get a sense as to sort of a sensitivity to the CapEx to perhaps further downside on wide-body rates in particular..

So, Ken, on the 787, I mean, we've just achieved a 12 aircraft a month, and really, there is no investments that we – these are things that we are in discussions with, always with Boeing and we'll follow their cue and direction as they decide to go up to 14 or not towards the end of this decade, with the conversations that obviously they have.

The 777 (58:14) to the rates that we're currently producing at and obviously there are some incremental changes in our capital needs or in our tooling builds associated with migration to 777X. But I don't think capital is going to swing because of these kinds of rate changes on at least those two programs.

We'll obviously wait and see how the wide-body market does in the future years. Today we are on track to meeting our customers' requirements on what they've announced as the current rate from both of these programs..

Okay.

And just finally on the 777, at which rate are you capitalized for today, and can you just talk, I know, obviously this is all part of the broader negotiations, but can you talk about requirements to support rate of 57 on that plane?.

Sure. We are completely committed to our 47 which is next year and that was part of our commitment with Boeing. And obviously we are obviously committed to going to the higher rate, but those are part of the ongoing conversations with Boeing on the best way to achieve those rates in the future..

Okay. Great. Thank you..

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

Certainly. Our final question comes from the line of Myles Walton from Deutsche Bank. Your question please..

Thanks. Good morning..

Good morning, Myles..

I'm going to touch on a couple things that have already been – but I'm hoping you can add a little more detail, Sanjay. So accounting block extension for you at Spirit is pretty unusual. Call it almost extraordinary in terms of extending the quantity as opposed to moving into a new block.

You just touched on what hurdles you had to meet to do that and also if you hadn't done it, the forward-loss would have been somewhere in the $500 million to $600 million I would imagine.

So just, Tom, as you look at it in terms of managing risk as opposed to expending this risk into the next block, if there was a choice, can you go into the logic of why not take the charge now and then go into a new accounting block in 2018?.

Okay. Well, let me – I'll answer that question first, and I'll let Sanjay explain the process of extending the block.

When we were looking at this whole package, we obviously negotiated over the full 800 units and rather than piecemeal it and give you only – because we would have only been able to communicate where we were in the first block and that would have left some uncertainty for the remainder of it.

We decided to be as transparent as we could and give you the full picture over the 800 units. And that's how it's as simple as that. And so, Sanjay, maybe you can now explain the process we went through with (1:01:01) and our Board..

Sure. Myles, the process is a pretty standard process that like all good companies, we have our standard policy. We adhere to those policies. We adhere to accounting principles that frankly – this is not a – we want to do this or we want to do that. At the end of the day, like Tom explained as well, we have orders for more than 800 units.

Airbus has orders for more than 800 units. We are on contract for 800 units and beyond. We have certainty in terms of our costs and our revenues for the entirety of that block.

And the way we negotiated – the economic process in which we negotiated the contract also was based, like Tom said, to be transparent to everybody about the value that was created inside this negotiation.

And so all of those factors, coupled into our discussion, and it was all very transparent with our Board, with our auditors, with our internal process. So I won't say we don't change blocks. We change blocks rarely; that's true. But we have a process where we go very methodically and do that. And we absolutely followed that process..

Can you disclose in the Qs and Ks, the advance burn down on the 350. I imagine you'll do it again.

Has that number changed from the $1.25 million per aircraft?.

It did not..

Okay. Thanks..

That concludes our earnings call. Thank you for your participation today..

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day..