Good morning ladies and gentlemen and welcome to Spirit AeroSystems Holdings Incorporated Third Quarter 2019 Earnings Conference Call. My name is Chad and I will be your coordinator today. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ryan Avey, Director of Investor Relations.

Please go ahead..

Thank you, Chad, and good morning, everyone. Welcome to Spirit's Third Quarter 2019 Earnings Call. I'm Ryan Avey, Director of Investor Relations.

And with me today are Spirit's President and Chief Executive Officer, Tom Gentile; and Spirit's Senior Vice President and Chief Financial Officer, Jose Garcia.After opening comments by Tom and Jose regarding our performance and outlook we will take your questions.

[Operator Instructions] 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 and 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 investor.spiritaero.com.With that, I would like to turn the call over to our Chief Executive Officer, Tom Gentile..

Material and Process Innovation at the Composites and Advanced Material Expo for the development of the Advanced Structures Technology and Revolutionary Architectures or ASTRA demonstrator panel.

It's the same one that we took to the Paris Air Show.The ASTRA demonstrator is a full-scale composite fuselage skin panel that combines advanced manufacturing technologies and revolutionary architectures in carbon fiber to cut roughly 30% of future composite fuselage costs.

The National Institute for Aviation Research or NIAR at Wichita State University supported the development of this technology by completing hundreds of structural validation tests.As part of our collaboration with NIAR, we also recently celebrated the grand opening of our offices at the Innovation Campus at Wichita State University.

We now have almost 80 scientists and engineers working on advanced technologies to improve manufacturing efficiency. We view innovation in metallic and composite structures as a differentiator and core competency for Spirit.With that I'll ask Jose to lead you through the detailed financial results.

Jose?.

Thank you Tom. Good morning everyone and happy Halloween or as we say back in Spain [Foreign Language]. Let me summarize our third quarter financials. Please let's move to Slide 4. Revenue for the quarter was $1.9 billion, up 6% from the same period of 2018.

This growth was driven by higher volumes of production on the 777, 787 and A350 programs, as well as higher revenue recognized on the 787.Let's now turn to earnings per share on Slide 7. We reported adjusted EPS of $1.38 per share compared with -- to $1.70 in the third quarter of 2018.

Excluding the impact of the 787 forward loss as a result of Boeing's recent announcement to decrease production to 12 aircraft per month from the prior 14 per month, adjusted EPS would have been $1.62.Adjusted EPS excludes as in prior quarters.

the impact of expenses related to the Asco acquisition and a small gain related to the voluntary retirement program that we announced in 2Q.The adjusted EPS decrease year-over-year was primarily due to the forward loss on the 787 program, resulting from Boeing's recent announcement to decrease rate, a higher tax rate of 24% this quarter compared to 18% in the same quarter last year and the non-repeat of a litigation recovery last year.

All of these partially offset by improved performance and favorable model mix on the 737 program and increased aftermarket activity.The forward loss on the 787 program reflects the impact of fixed cost absorption due to extending the current accounting block by four months.

The current accounting block runs through line unit 1405 and will now close in the fourth quarter of 2022.The benefits of the cost mitigation actions that we announced earlier in the year will continue into Q4 and into next year, as will the efficiency and quality improvements on our largest program from an unstable 737 production rate.

These gains will be partially offset by price step-downs on the 787 and A350 programs in Q4 and 2020.As we have previously discussed, this step-downs are contractual and occur at certain milestone units.

These price step downs of course are already contemplated in our stated margin and cash targets but can create short-term headwinds in the quarter in which they occur.

For the quarter, normalized segment margins were 16.4%, compared to 15% in Q2 this year, reflecting the higher work on cost reduction and more stable operations, while we remain at rate 52.

While we continue to target 16.5% margins next year, we are likely to see some pressure in Q4 as the customer price step downs take effect.Now turning to Slide 8, free cash flow. Adjusted free cash flow for the quarter was $219 million, compared to $130 million in the third quarter of 2018. This reflects a 68% increase year-over-year.

Adjusted free cash flow excludes the impact of the Asco acquisition. The adjusted free cash flow includes a $123 million cash advance from Boeing. The purpose of this advance was to fund increased inventories from suppliers while we were reducing our rate to 52 during the period of the MAX disruption.

As agreed with Boeing this cash advance will be applied against future deliveries.Let's now turn to capital deployment on Slide 9. As you know we paused our share repurchases pending further clarity surrounding the regulatory approval of the MAX return to service.

Given our solid operational performance we ended the third quarter with a very healthy cash balance of $1.5 billion. Additionally, we paid $12 million in dividends in the third quarter. Our commitment to a disciplined and balanced approach to capital deployment remains unchanged.Now, let's look at our segment performance on Slide 10.

For our fuselage segment results, please turn to Slide 10. Fuselage segment revenue in the quarter was $1 billion, up slightly from the same period last year.

This was due to higher production volumes on the 787 and A350 programs as well as higher revenue recognized on the 787 program.Operating margin for the quarter was 10.5%, compared to 13.6% in the same period last year, primarily due to the 787 forward loss recognized as a result of Boeing's announced decrease to 12 rate and higher costs related to the 737 program largely resulting from the impact of the MAX grounding.

On a normalized basis after, reversing changes in estimates from prior periods, fuselage segment margins improved sequentially to 13.8% in the third quarter compared to 13% last quarter.Now turning to Slide 11 for our propulsion segment results.

In the third quarter, propulsion revenue was $521 million, up 18% compared to the same period last year primarily driven by favorable model mix on the 737-program and higher production volume on the 777-program.

Operating margin for the quarter was strong at 21.4% compared to 17.2% in the third quarter of 2018, primarily due to favorable 737 model mix.On a normalized basis, after reversing change in estimate impacts, propulsion segment margin was 21.9%, up 400 basis points compared to the same period of last year.

We have done a lot of work on driving improvements in propulsion margins and those efforts are starting to deliver results.For our wing segment results, let's turn to Slide 12. Wing revenue in the quarter was $391 million, up 3% compared to the same period last year, driven by higher production volume on the 777 and 787 programs.

Operating margin for the quarter was 13.8%, compared to 15.5% in the third quarter of 2018, primarily due to the 787 forward loss that we recognized as a result of Boeing's announced production rate of 12On a normalized basis, after reversing change in estimate impacts, wing segment margin was 15.4%m up from 15% in the same period of last year.

As Tom mentioned, with the MAX still grounded there is still uncertainty around production rates and we will not be providing full year outlook for 2019 at this time.

We expect to provide full year 2020 guidance on our next earnings call in late January when we have more clarity on the MAX return to service dates and Boeing's associated production schedule.In closing, the third quarter results reflect good progress especially on the actions to reduce cost and improve working capital to partially offset our challenge on fixed cost absorption from lower production rates on the 737.Having said that, there is still more work to do in terms of improving quality and efficiency in our factories.

Our improved execution on all these items will enable us to meet our commitments next year.With that I, will turn it back over to Tom for some closing comments..

Thanks, Jose. And now I'll make some closing comments before we take questions.

The acquisition of the Bombardier assets is a transformative deal for Spirit, aligning perfectly with our stated strategic goals of capturing more Airbus business, expanding our low-cost country footprint and scaling our aftermarket business.Post synergies, the acquisition price represents 6.5 times 2019 EBITDA, which trades below where Spirit currently trades and delivers investment returns in excess of 10% the criteria that we've always discussed.

In addition, this quarter we restructured the terms of the Asco acquisition to reflect the delay in closing the transaction and agreed with the sellers to a purchase price of $420 million.

We remain confident in the strategic fit and financial outlook of Asco and look forward to closing the deal early next year.Operationally following the MAX grounding, we've taken actions on cost control and working capital to mitigate the impact and have made good progress.

We made solid progress on our cost mitigation targets this quarter and even as we made investments in improved quality and efficiency, we are starting to see some of the benefits of a stable production rate in our factories.

Our focus for the remainder of the year will be to sustain progression towards optimizing our factories to deliver on our margin targets next year.That said, normalized margins this quarter were 16.4% and we remain on track to achieve 16.5% next year, even taking into account the customer price step downs that will start in Q4 2019 on the A350 and some other programs.

Cash flow this quarter was $219 million and year-to-date is $620 million, demonstrating solid execution even during the MAX grounding.With that, we'll be happy to take your questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Sheila Kahyaoglu with Jefferies. Please go ahead..

Hi, good morning and thank you for the time..

Good morning..

Tom, just a question for you, I mean clearly two deals in the past 12 months, I guess you're focusing on your goal of diversifying away from Boeing. How do you think about the Bombardier assets? And in the past it's been a struggle with bizjets in the Gulfstream business.

How is this -- how is this asset different? How do we think about the contract structure of the work package?.

Well, first of all we don't have a goal of diversifying away from Boeing. Boeing is our largest customer. We have tremendous respect for them. We want to continue to grow with Boeing. At the same time, we do want to grow some of our other customers faster.

And so we've stated that Airbus content, military content, fabrication are our key goals.So as we look at the Bombardier assets for aerostructures, you mentioned that they're in business jets and they are. And it's true that Spirit has struggled in the past with some of its business jet programs.

But the thing about the Bombardier Global Express in particular where a lot of that structure is built in Belfast in terms of some of the control surfaces around the empennage is that represents really a state of the art aircraft.

It's got the longest range of any business aircraft, recently completed a trip from Sydney Australia to Detroit, Michigan my hometown. And that was a world record. So it's got great orders and it's really a great platform for the future.

So we're very confident of that.And we have life of program contracts with Bombardier on that at very good pricing in terms of the deal economics. And when we start to combine what we do in terms of engineering and design operations and particularly supply chain, we think we can bring even a lot more value to it.

So that's the business jet side of it.The other thing that the Bombardier assets have is a very significant work package on the A320 -- excuse me -- the A220. They make the entire wing with the resin-infused technology for carbon fiber composites. This is a state of the art wing.

We think it will give us a great head start in terms of future wing programs with Airbus. And the A220 is off to a good start itself. It's got over 500 orders in total -- 525 orders in total. And it's got a backlog of about 435 aircraft. So it's in a very strong position. And again Belfast makes the entire wing.

So that is very attractive.And then the other program they have in Belfast is A320 thrust reverser package which Airbus awarded for the geared turbofan on the A320neo. And that again represents the state-of-the-art technology on obviously, the biggest narrow-body program that Airbus has. In addition, these assets include Morocco.

They have a big plant in Casablanca, state-of-the-art low cost, but very good technology excellent workforce a lot of engineering and this is going to be a great platform for us as we expand all of our programs in Spirit.And then finally, I'll just highlight aftermarket. This is really one of the hidden gems of this acquisition.

They've got significant MRO capabilities in Belfast and also in Dallas and this is going to more than double our aftermarket activities. This is skilled work. They're very efficient. They have tremendous customer relationships with airlines all over the world very competitive.

And we see this as an opportunity to really accelerate the growth of our aftermarket business. It's always been strong. This enables us to really take it to a completely different level. So on all those different fronts we're extremely excited about this acquisition of the Bombardier Aerostructure assets..

Thank you..

The next question will be from Seth Seifman with JPMorgan. Please go ahead..

Thank you very much, and good morning. Tom, I wonder if you could talk a little bit more about the acquisition. In terms of the synergies, I know, Bombardier has done a few rounds of cost cutting in its aerostructures business.

And so kind of where you feel like the synergies come from? And also Airbus has been pretty explicit about looking for price cuts from suppliers.

Has all of -- all those arrangements been ironed out as part of the deal?.

The answer to that is yes. We've talked with Bombardier and with Airbus obviously the two largest customers and we have agreed pricing. And so that's all built into the deal economics which gives us great comfort. So that is definitely set.

When we think of the synergies we built in about 5% cost synergies and also some revenue synergies particularly from MRO. So when we look at the MRO business and we look at what we do and what they do and we put those together there's going to be some significant revenue synergies.But on the cost side it's really about playing to our strengths.

And I would say, we are very strong in terms of creating a competitive world-class supply base with a strategy that we have employed that has six pillars and starts off with clean sheet evaluations reverse engineering literally 100,000 different parts.

So we know exactly what they cost.As we take our supply chain strategy and overlay it with these Bombardier assets, we see a lot of opportunity to get even more competitive pricing and more competitive supply and delivery. We also see a lot of engineering synergies. They've got great engineering resources.

I mentioned they developed the original Wright Flyer back in the early days of aviation.But they've continued to really be at the forefront of innovation with things like the new A320 thrust reverser the all-composite wing using resin infusion technology. And so there's going to be a lot of opportunities on engineering.

That wing also is really state-of-the-art.

And as Airbus thinks about its wing of the future we think that will give us a great platform to continue working with them.And then typically in a deal like this in terms of the cost side of things if we just look at facilities and overhead and indirect cost and functional expenses around the world we'll be able to get more economies of scale just because of the larger size that we'll be able to bring.

So all of those things will help us drive 5% cost synergies and also some significant revenue synergies. I think -- and I mentioned about $60 million total and post synergies when we look at the total enterprise value the EBITDA multiple is about 6.5%. So we're very, very pleased with that.

It trades below where we trade and that was always one of our stated goals in looking at acquisitions..

Thanks. Congratulations..

Thank you..

The next question will be from Ronald Epstein with Bank of America Merrill Lynch. Please go ahead..

Good morning. Maybe two things..

Good morning..

Good morning..

Maybe two things. How do you think about the impact of 787 on the business in terms of the cuts? We're going up from 14 to 12.

And then how do we think about it if it were to get cut further than that down the road? So when we think about modeling all that out?.

Right. Well as you know on the 787 when we announced our first collective resolution at the end of 2017, we announced the $373 million forward loss out to line unit 1405 and that's just reflected the pricing that we put in place. Now when we did our collective resolution deal with Boeing at the end of last year.

We reset the pricing going forward after line unit 1405 to be breakeven at that time.And so, because we are in a loss position right now, when we went up in rate from 12 to 14 at the beginning of this year, we recognized a gain of about $40 million. So by going back down to 12 we reversed $33 million of it.

And it was just because we'll have been producing it 14 for 18 months by the time they go back down to 12.So obviously there is an impact when rates go down. If rates go down further that will create more pressure on our forward loss position and so we will recognize it accordingly.

But Boeing has not made any indications that it will go down below 12 at this point. So we'll obviously watch very carefully and work with them on that.But what we are confident of is that, after line unit 1405 the pricing increases to the point where we think we'll be breakeven and a little bit better.

Now the lower rate will put some pressure on that about $100,000 a unit. We're confident we can address that and still be positive in terms of our margin after line unit 1405.So the other thing about the 787 is, it's a great aircraft. It's got great range, great fuel efficiency. The airlines love it. It's opened up a lot of new city pairs.

And we think that we'll have a great opportunity to see that increase its sales and orders in the future. And so I wouldn't be surprised as orders increase if Boeing re-looks at its production rate down the road..

The only thing I'll add to what Tom explained is, in terms of cash we do have a headwind which is overhead absorption at the lower rate. But because this is a lost contract and cost is above price, we have a tailwind on volume.So we will pick up some cash as we produce fewer units.

It also impacts the repayment schedule in some of the advances we had with Boeing. So net-net on a cash basis, the impact is a lot less than the earnings impact on the forward loss. And it gives us more time to get the cost below price. We will add four months to the block.

So there is a bit more time in getting our cost out structure in the right place..

Got you, and then maybe just one follow-on. Related to the April MOU with Boeing you guys got a $122 million advance.

If the 737 return to service just takes a little longer like I guess it has or if there's further delays do you expect to get any more advances from Boeing? Or how does that change that structure?.

Well, the reason we got the advance was just to address the working capital issues because we had already essentially loaded up the plant for 57 not only our own material, but also suppliers. And so that was really to ease that.Now it depends on when the MAX goes back into service what the situation is.

Boeing has been very helpful and cooperative in terms of working with us to figure out what's the right solution, in terms of production rates and working capital and things like that. So we'll make the decision once we determine when the MAX goes back into service..

It would have to be an impact on rate for us to really justify the need for another advance because it would -- an impact on rate would impact inventory in our supply chain. So it will then -- it would have to be beyond a delay it will have to be a decision to change rate..

Okay, great. Thank you..

The next question comes from Carter Copeland with Melius Research..

Hey good morning, gents..

Good morning..

Just wondered if you might help us kind of understand the progress that's happened in the Bombardier assets you're acquiring.

I mean there are some public financial statements out there that kind of point to pretty low levels of profitability and you're obviously looking at a proforma number, pre-synergies that has a lot of improvement there.I wondered if you might give us some color on, what's happened in those assets if that's related to volume or changes in cost or onetime items just to give us a sense of the maturity or what's going on with those assets before you take them in?.

Right. Well overall the good news, if you look at the top line especially because they're getting into some new programs with the A220 starting to ramp up in rate and the A320 thrust reverser not yet even into production. As we look out the growth rate is actually quite good.It's going to exceed 10% on a compound annual growth rate.

So that's very strong. The other thing as you look at the aftermarket assets for example very strong margins as you typically see in the aftermarket. They've got very efficient operations in Belfast and in Dallas. They do specialized repairs. They've got a great customer base.

And so the margins in the aftermarket are quite good.The other thing is, we talked about business jets earlier. These are mature programs that they've been building for Bombardier for quite some time. They still have some CRJ work. They also have some Global Express work, as well as Challenger work.

And those are very, very good industry margin levels because they're mature and there's a lot of efficiency.And then as we look forward into the A320 program there's a lot of opportunity to continue improving the margins on that.

They have their Morocco facility and a lot of work for some -- especially some of the new packages that they're winning are planned to be done in Morocco which has a very competitive labor force very highly skilled labor force. And so that's another way to drive the margins.And then beyond that, we talked a bit about synergies.

And whether it's supply chain or engineering or functional, we see a significant opportunity to bring synergies. I mean this is a structures business. We're a structures business. We're the largest structures business in the world. And so, we can bring significant economies of scale to drive synergies.

As I mentioned, it's 5% cost synergies and a couple of points of revenue synergies. So that's another way that we can drive the margins.And then, as I mentioned on the A320neo, there's no revenues yet, but that's a new program. It's part of Airbus' effort to in-source then to sell.

They've certainly got a strong stake in seeing that be successful, and we're really pleased to see that the thrust reverser is a part of the work package in these Bombardier assets.So, as we look across all the programs, the top line growth is very good and margins are very good in some of the programs.

And with the scale and the efficiency we bring as a global aerostructures business, we'll be able to drive significant synergies to improve the margins further..

The next question will come from Rajeev Lalwani with Morgan Stanley. Please go ahead..

Hi. Good morning, Tom. Good morning, Jose..

Good morning..

Good morning..

A couple of questions around the timeline some of the things you laid out today.

Can you provide some color on when the synergies start to flow in from the Bombardier assets, the liabilities that you've assumed beyond that payment you're going to make when deal close? When do those have to go out?And then on the Boeing side, you highlighted the dollars coming in, but can you give more clarity around the timeline again of those dollars coming out over the next few years that you highlighted?.

Okay. Well let's start with the Bombardier deal. The synergies really would start immediately upon closing. We would be able to start to leverage our supply chain expertise. And that's -- we expect to close some time in the first half of 2020. We'll get the synergies really starting immediately.

We'll do a lot of integration work in advance in terms of functional and engineering and indirect to costs and labor opportunities and then the supply chain opportunities.So, the first full year of 2021 we expect to be accretive.

And we'll get probably one-third of the synergies that I mentioned, the 5% cost in the 1.5% or 2% of revenue kind of one-third per year in 2021, 2022. So that's kind of how we're thinking about the synergies.Now the two liabilities that we're inheriting. The pension liability, we're zeroing out the pension deficit that currently exists today.

So we start with a clean slate.

And then we'll work with the union and the pension trustee in the UK and the pension regulator to determine the path forward to mitigate the ongoing expense of the pension.And so, we have a lot of expertise with pensions in the UK having dealt with our Prestwick site and several people on our team are extremely knowledgeable about pensions.

And we also work very closely with the union -- Unite which is in Prestwick and is also in Belfast.The other one is a series of government loan, incentive, repayment obligations, and these are paid off over time on every A220 delivered.

So the UK government provided incentive funding to build some of the facilities and the capital equipment to enable the 220 wing to be produced in Belfast. And those get repaid over time.Again, once we take ownership, we'll work with the UK government to figure out a way to mitigate those and make them the most efficient.

So, we're very confident on that. And then Rajeev, you said something else about other timing on Boeing.

Could you just repeat that part of your question please?.

Yeah. That's exactly right. We got the advantage from Boeing with the lower rates to manage working capital. When do you actually have to start paying that back? I think in your comments you said several years or something like that. But some more clarity on that..

It really is tied to when we go back to 57, is what we've talked about with Boeing. It's still so -- we're still working out all the details but what we've agreed is it would be after we go back to rate 57 which could be end of 2021, early 2022, and then we would pay it off on a per-unit basis..

Okay. Thank you..

The next question comes from Jon Raviv with Citi. Please go ahead..

Thank you very much. Just kind of a bigger picture one question that maybe has some different pieces to it, but lets you guys go where you want on that one. You've previously talked about free cash flow margin target approaching 9%.

Is that achievable as you take on these sorts of liabilities, whether it's 737 advances, the Bombardier items, et cetera?And I guess embedded in that is a real more specific question around is Bombardier cash going to be able to keep up with the sales growth based on maybe some CapEx cycle there and some new programs ramping up? Thank you..

I'll take this one. So Jon, yes the free cash flow target for us is 7% to 9%. Obviously, the acquisition of Bombardier in the first two or three years is going to be heavily dependent on both the A220 and the A320 CapEx demands. So, it's going to be somewhat dilutive to that 7% to 9% or to the 9%, the high-end of the range.

We still plan to be within 7% to 9%. So it will put pressure on the 9%, but we think we're solidly within the 7% to 9%.Now, once we get through this investment cycle on these faster growth programs, we're really on a steady state on both the A220 wing and the A320.

So, I think the CapEx needs will moderate and will only be tied to rate.Similarly to what's happening with our core business here where we see the next two to three years without rate increases as an opportunity to really moderate the CapEx and get a tailwind on that.We are obviously as part of the integration we're going to work on working capital as we do in our own business here.

We have a very good playbook on days to pay with suppliers. We're now at 60 days; we picked up six to seven days in the last year. 60 days is still short compared to industry standards. So, we have quite a bit of runway there.And on inventory we're still -- obviously the MAX grounding didn't help in 2019.

So, we have a big plan to work our inventory levels and increase turns to the tune of half a turn per year in the next few years. So, we will apply that playbook to the integration of the Bombardier assets and that will help us fund some of the short-term CapEx needs that we see here..

Thank you very much..

The next question comes from Robert Spingarn with Credit Suisse. Please go ahead..

Hi, good morning..

Good morning..

Tom if Boeing were to reduce rate again in other words if this RTs just takes a bit longer and they have to go down to whatever the next natural rate might be maybe something in the low 30s, do you drop there? Or do you drop below because of your excess inventory? How do you guys think about this? I understand it's a draconian kind of scenario, but I imagine you have planned for it..

We have. We've run scenarios at all different levels of production. And it really depends on when the MAX goes back into service and how Boeing decides to manage its production schedule.Obviously, we're producing at a higher rate than Boeing right now.

And so we're storing those additional fuselages in a buffer and they're there anywhere from say 15 to 25 days before we ship them to Renton, which is near Seattle.And so we've run those different scenarios. If Boeing goes down more, we would sit down and talk with them about what's the appropriate production level for us.

That's why we didn't give guidance for the rest of this year. We still don't know when the MAX is going to go back into service.

And we'll work closely with Boeing to determine what the right production level is.Now, what I would say though is that this period of time where we're at 52 gives us a chance to achieve some stability that we haven't had for a while. So, going back to 2016, we were shifting from the NG to the MAX. We were hiring lots of new people.

We were going up 10% a year in terms of our rate from 42 to 47 then 52 then getting ready for 57. So, as you can imagine a lot of disruption a lot of extra costs as we were going through those learning curves.Now, we're going to be at 52 for an extended period of time which will allow us to get more stable and allow our supply chain to get healthy.

And that will mean not only more stability, but also opportunities to improve quality, which is so important now in the industry -- probably more important than it's ever been..

Given that stability is so important, is a pause if it's needed better than a lower rate?.

Well, yes, I think it is. Especially with our production system which is fairly complicated. I think you've been here to the factory and you've seen it. The fuselage itself is 33 manufacturing days. There's 450,000 fasteners in each one and quite intricate.And so our production system gets disrupted if you go up or down.

And so we take that into account and when we discuss with Boeing is what is the right production level for Spirit to be at to make sure that the whole production system operates smoothly and efficiently during this whole period where the MAX goes back into service and Boeing delivers the aircraft that they've already built and not delivered and gets the aircraft that are grounded back in the air..

Thanks very much..

Thank you. The next question will be from David Strauss with Barclays. Please go ahead..

Thanks. Good morning..

Good morning..

I wanted to ask you on the margin target the 16.5%. I think you had previously said you thought you could get there in Q4. It sounds like you're backing off that now on the on the 87 step downs which I would have thought you would have known about those when you gave the 16.5%. So, I guess that's the first question.

What's changed there with regard to Q4?And then Tom when you talked about 16.5% for 2020 are you talking about that you're going to get there at some point next year? Or you expect to average 16.5% across the full year 2020? Thanks..

Well, thanks for the question David. First of all, this quarter if you look at our normalized margins, we were at 16.4%, so pretty close to that target. And Q4 we aren't going to see some pressure from the planned A350 step down.So, you're absolutely right, we did know that was coming. We didn't know that we were going to be at rate 52.

We had planned originally to be at rate 57. So -- but the plan is in Q4 as we stabilize as we want to end the year, we want to leave the quarter at about the 16.5% rate. Probably, won't average that for the quarter, but that's where we want to get to by the end.

And the goal would be for 2020 to average 16.5% absent any purchase accounting that would result from the Bombardier acquisition..

Okay. And just as a follow-up I think you had talked about a 5% reduction in fixed cost to kind of achieve this? How far are you into achieving the 5% at this point? Thanks..

We're making some good progress. We did a couple of things this year to help us move in that direction. For example, we are taking down contractors and looking at our indirect headcount. But one program, we did this year was a voluntary retirement program right after the MAX grounding back in April. And we identified 200 people that took that program.

And it was a good program for them and really helps us start to reduce our fixed cost. We're going to make a bigger effort on the fixed costs.

I mean, when we were going to go to 57 by backing off to 52 that's basically taking what's half our revenue down by 10%, which means we want to take 5% out of the business that's where we came up with a 5% number. Voluntary retirement programs helped. This year we did have a furlough for 10 days for all of our salaried staff.

That doesn't repeat next year but it helped this year.Next year, we will have the full impact for the full year on the voluntary retirement program.

And then we're going to look hard at our indirect costs and figure out how do we get more productive given that we're going to see this 5% pressure for a prolonged period of time for at least a couple of years. And so that's what the plan is for next year is to continue working toward that 5% target..

Great. Thanks..

Our next question will be from Myles Walton with UBS. Please go ahead..

Thanks. Good morning..

Good morning..

Good morning..

I was wondering could you – you have obviously a nice step down in the price for Asco.

Has there been any significant change in the underlying business there in terms of revenue run rate kind of first as a clarification?.

The answer is no. The outlook that they've given us for their financials for next year and beyond are still very robust very strong and has the kind of growth that we were originally looking at. The cyber attack that hit them in June did require a significant effort to recover.

And they were down for several days, and they got behind in their production. So they've had to put in some additional resources to recover. The good news is they are on their recovery plan. They're meeting all of their customer delivery requirements.And so they've gotten the production back on track.

And what that's done then is enabled them to refocus their attention toward meeting the European Commission conditions to segregate all the data so that we can close the transaction. But the financial projections still look very strong. And again, it's a great fit. A lot of Airbus content.

They're really the leading supplier for the slat tracks and flap tracks for Airbus. They also have some significant F-35 content. So they bring a lot of military content and then they bring a lot of fabrication capability.

They've got a great workforce that has outstanding productivity good engineering and also very strong commercial capabilities on fabrication. So it's going to be a nice fit with our business on all those fronts. And as I said, the financial outlook still looks very strong..

Got it. And the question, I had I don't know who is for Jose or Tom, but on the 777 it looks like you're going to deliver 55 fuselage – or 55 chipsets this year and that's Boeing spend obviously moving more lower than higher on that outlook.

And I'm just curious as you look into 2020, if there were a 10% step down from kind of your current delivery pace does that have a meaningful impact on you achieving 16.5% margins for next year?.

Well, it will definitely be a headwind. 777 is a mature program and so margins are better on the mature programs. Right now, when we look at the skyline we're still projecting about flat in terms of units for 777 next year. The – obviously the 777-9 is getting pushed out a bit, but we're seeing more freighters offsetting that.

So from our production standpoint, we're looking at a flat year next year in 777..

Okay. Thanks..

The next question will be from Ken Herbert with Canaccord. Please go ahead..

Hi, good morning..

Good morning, Ken..

Hey, Tom I just wanted to ask on the Belfast and the wing capability there with your contracts with Airbus are you exclusive if they look to do anything larger or with variance on the A220? And then specifically, can you just – you made a comment earlier in the call about sort of incremental opportunity out of this facility with Airbus maybe on other wings for other aircraft.

Can you provide a little more color around that or help with maybe setting expectations on how that could play out?.

Right. Well, we have the program for the A220 as it is today. If they do a variant there's no guarantee. But obviously as the incumbent, and if we continue to perform well, we would have a very good position.

And I think with our engineering from Spirit and the engineering that they have there in Belfast we'd be able to provide a strong value proposition.So that's on the A220. As Airbus thinks about the wing of the future, they've been thinking about composite structures and different technologies which are out of autoclave, like resin infusion.

And the thing about the wing for the A220, that's in Belfast, is it's a state of the art composite wing that they're already doing.Now Airbus is going to explore a lot of different options.

But the point I was trying to make is that, we are going to have experience with a fully developed state of the art composite wing using out of autoclave carbon fiber technology, resin infusion, for Airbus and that certainly will position us well as they think about future composite wings for different programs and new programs..

Okay.

Just to clarify, it sounds like your -- the capital is in place in that facility to support rate increases on the A220, such that incremental CapEx there is just obviously as necessary, maybe support incremental higher rate, but there's nothing else you're looking at near term?.

Well, depending on where they finally go on rate, there will be some capital expenditures. That's all built into the model and we've also talked to Airbus about what the appropriate sharing level will be on that. So we're very set on that. And there's plenty of capacity in the facility to support the future rate increases that Airbus is contemplating..

Great. Thank you..

The next question will be from George Shapiro with Shapiro Research. Please go ahead..

Yes. So can you explain the difference? Bombardier is saying the assets carrying values in excess of $700 million and you've guided at $590 million. And then also, over what time will you pay the difference from the $630 million to the $1.09 billion that you're going to pay?And last, I want to try the synergies one more time.

It looks like maybe this business makes 9% and you're expecting it to go to 15% pretty quickly.

I mean, what would you -- could you actually be doing that Bombardier, I'm sure, tried to do to be able to get the margin up that quickly?.

Right. Well, the $500 million and the $700 million is really mostly a difference in terms of U.S. GAAP versus International Financial Reporting Standards, IFRS. So when we had the actuaries value the pension deficit that currently exists, the pension deficit liability, they used U.S.

GAAP accounting.And given all of the assumptions in terms of how many people took lump sums and discount factors and all of the accounting technology that went into it, the valuation for us on GAAP was $300 million.

When Bombardier looks at it and their financial condition is much different than ours.So that also plays a factor in terms of credit rating and financial outlook and stability.

And so when they valued it using their financial outlook and using IFRS and that GAAP, they come up with a higher deficit liability which is -- that explains the difference between the $500 million and $700 million.Now in terms of the time period, the pension -- the deficit gets zeroed out at the deal.

So as we start, we'll be neutral, there'll be no net pension liability deficit.

Now going forward, there's a pension and we'll continue to work with the union, as I've said the pension regulator and the pension trustee to manage that in a safe and prudent way as we go forward.The government loan obligations get paid over time on a per unit based on the A220s delivered. There's a per unit amount that gets paid.

And there may be some opportunities for us to front load that or negotiate different things based on what we're going to do with the assets in Belfast. We've got a lot of ideas for how we can continue to grow those assets.

So that's going to be paid out over time, based on the deliveries of the A220 wing.Now in terms of the synergies, I think, I mentioned it before. As the largest aerostructures business in the world, we have tremendous economies of scale, particularly in supply chain, functional cost, engineering.

And as we bring our business together, I think, we are probably the perfect fit for this asset.I mean if you look at what they do, they do fuselages, wings, propulsion and aftermarket. Those are the exact same things that we do. And by combining that scale, we'll be able to drive synergies to achieve the economics that we have forecasted..

Okay. Thank you..

Okay. Thanks, George..

The next question will be from Hunter Keay with Wolf Research. Please go ahead..

Hi. Thanks for getting me on. The A320 ship set delivery is down from Q3. Is that mainly 321neo? I know, you guys don't disclose mix. So is that mainly 321neos? And do you expect to pick back up again in 4Q? I'm just basically wondering if Airbus is all caught up with some of the problems they've disclosed. Thanks..

Well, I mean, there has been fewer A321s than in our original plan, as Airbus has rebalanced the line. So we do see some of that impact. We are completely caught up to the schedule the Airbus has given us on the A320 family. And I think the issues on production schedule at the Airbus level are well-known in the market.

And I think they've described those in their communications. So that obviously filters down to the supply chain like us..

The only thing I'll add is there is a little bit of timing. We did accelerate some deliveries earlier in the year to build that buffer against potential exit issues. And also in the third quarter they have a scheduled holiday, Airbus, which slows down delivery. So I think the third quarter was just light, given timing.

For the full year, we're going to be where we plan..

And we're completely on schedule for the A320 with Airbus..

Okay, Tom. Thank you..

Thanks..

The next question will be from Cai von Rumohr with Cowen and Company. Please go ahead..

Yes. Thanks so much. So, follow-up on the acquisitions, so, Bombardier, you're saying $50 million in cost savings. How much of that is supply chain? Because it's kind of incredible to assume, you get all of that right out of the box.And secondly, you've taken the price for Asco down from $602 million to $420 million.

At one point, I think you were suggesting the EBITDA margins were like 17%, 18%. Is it still as profitable? Because, if, so, you're buying it at like 5.5 timers EBITDA..

Well. I'll just take the Asco one first. Yes, the price started off at $650 million and then we dropped it to $604 million as the delays continued and now to $420 million. The outlook is still good.And the -- when you look at the deal economics and, we'll sort those out when we finally close, they obviously look a lot better, at the lower rates.

And so, we're very pleased with the outlook for that.And the margins look good. The revenue growth looks good. And they've got great presence on the F-35 program as well as on all the Airbus programs. They even do a little bit of Bombardier work.

So, that's something that we will look to be growing, as we continue to develop the relationship with Bombardier.On the synergies, just getting back to it, the synergies that we're expecting, over the time, it's about $60 million. And it's going to be about one-third a year over the next three years after the deal closes.

And it's going to involve the things I said. It's -- supply chain will be a large part of it, but there will also be some opportunities in terms of functions, administration, infrastructure and facilities, so the normal things that you would see.But a big chunk of it clearly will be the supply chain.

In our industry, in structures, in aerospace, about 66% to 70% of our cost base does come from the supply chain. And so that's typically where the most significant savings are.But we also see some revenue synergies, particularly in the MRO area. And I mentioned that before is, that's where it's a little bit opposite. They have more scale than us.

And we can bring our customers, some of our expertise and some of our tooling and benefit on the revenue side on the MRO..

Just a quick follow-up on the Asco, why would a seller give you like a 30% discount on price, if the outlook was still the same? Are the margin targets still pretty much the same?.

Margin targets haven't changed materially, based on the financial projections that we have. We'll get into it in more detail once we close. This deal has taken longer for both parties.

I think both parties recognize that it's taken longer and cost more.And so, we explored various different structures with the seller and agreed that this new price was the thing that just works best for both parties. So, again as I said, we're still very, very excited about the strategic fit of Asco.

And the financial outlook still looks good.We collaborate very well with Christian Boas, who's the owner right now, along with the siblings. And he's the CEO. And we're looking forward to working with him after we close this deal. He brings tremendous expertise in the fabrication area.

And we think we can continue to grow the business, with that assistance..

Thanks so much..

The next question will be from Peter Arment with Baird. Please go ahead..

Yeah. Thanks for squeezing me in. Good morning, Tom, Jose. Maybe just a clarification, you've given us so much details on the Bombardier deal, probably too early for a pinpoint number. But have you sketched out what you expect for intangibles on this transaction? Thanks..

We have not. I mean, we're going to just start integration planning here shortly. And we look at, what's there, in terms of allocating value, excess value to intangibles versus goodwill. We do have an opportunity to do it concurrently to the Asco.So we have experience assessing that. And we will plan to adjust it to earnings, once the deal closes.

And we've looked at the standards in the industry and we've seen that most of our peers suggest intangible amortization, to earnings. So that's kind of our first part, although, we still need to conclude on that decision..

Okay, got it. And just as a quick follow-up, Tom. Just obviously you expected Asco to close a long time ago. Just -- it looks like both these deals are going to be closing pretty much around the same time. Just thoughts on that, just handling it from just being management stretched too thin? Thanks..

Right, well. you're right. They could converge because the Asco deal has taken longer than we expected. But we'd be happy for both of them to close in the first half of next year. So in terms of management bandwidth of course it's always a challenge when you're integrating big acquisitions like this.But these are different teams.

The Asco part of the business will be part of fabrication and we have a global team led by a gentleman named Kevin Matthies. And so he will be responsible for integrating the Asco assets.The Bombardier assets are really Airbus focused. And it will be run by our Airbus program, which is based in Europe. Scott McLarty is the gentleman's name.

He's based in Prestwick has a lot of experience in working with Airbus and working in the U.K. and with the Unite Union. So it will be a good fit. So it will be a lot of work, but the teams that are working on it will be very different teams, and we'll be able to divide and conquer and integrate both of these successfully..

In the interest of time, our final question today will be from Michael Ciarmoli with SunTrust..

Hey, good morning guys. Thanks for giving the opportunity. Just Tom maybe one more time to hit Carter's initial question and George's on the margins at the Bombardier asset. They've got a lot of aftermarket. Is that lower margin aftermarket? Is that more services? Just trying to get a sense of why the margins are currently so low.

I mean, is it more new start programs? Is there still a lot of development there? Just maybe if you can give some specifics as to why those EBITDA margins are at that 9% 10% level?.

Right. Well, it's structures. And you've got two programs that are really in start-up mode the A220 wing and then the 320 thrust reverser.

So those are programs that as they mature will naturally be able to improve margins, and particularly as we can bring synergies to them.So that's -- I mean, I think that's the main reason that you see some of the challenge. The Bombardier programs the business jet programs the CRJs. Those are mature. The margins on those tend to be pretty good.

Aftermarket is really -- they do some spare parts, but what they do is a lot of structural MRO particularly around thrust reversers.So very similar to the things we do. A lot of that is extremely sophisticated work.

The margins are quite good on that and we see a lot of opportunity through revenue synergies to grow that business at a faster rate than it was growing before. And as I said it doubles our aftermarket and makes it a lot more significant contributor to our economics going forward..

Got it. Helpful. Thanks guys..

Ladies and gentlemen, this concludes our question-and-answer session and thus concludes today's call. We thank you for attending Spirit AeroSystems Holdings Inc.'s third quarter 2019 earnings conference call. You may now disconnect your lines. Take care..