Mark Suchinski: No, I think you hit it, Pat. Obviously, Sheila, as you go up in rate, you get the leverage from the higher production rates from an absorption standpoint. But at the end of the day, I think the key here is as we look over the next couple of years, it’s about operating the factories efficiently, leaning it out, working on flow, working on the items that Pat talked about and he’s got the teams really rallied around that. And so we’re really excited over the next couple of years as we go up in rate to see that financial benefits of those production rates through the variety of actions that we’re working on, including focusing on improving overall quality. So we do think over the next couple of years, we’ll continue to drive our unit cost down and take advantage of the higher production rates.
Pat Shanahan : Sheila, maybe just one add-on here. I think we have to think about the supply chain. I mean, I think that’s the one that if we do change production rates, we have to figure out what do we do with the things that we’ve already ordered. How do we keep them healthy, so that as things get corrected, we can go back to building fuselages? So I think that would be the one we still need to sort through.
Sheila Kahyaoglu: And just to follow up, given the MAX is the biggest driver of your free cash flow, do you still expect do you expect free cash flow to be positive in ’24 without giving any guidance.
Mark Suchinski: Sheila, let me just address that. I think what I would tell you is with the question marks around the production rate increases in front of us that we had previously planned in ’24, the Airbus negotiations, and then just trying to assess what additional cost may come as it relates to quality and the regulatory oversight. As we said in our press release, we’re just — we’re not in a position to talk about cash flow. We know that it’s an important aspect of our business here, and I’m not trying to avoid the topic. We’re working really hard to improve the overall business financially. But give us a little time to digest the current situation here. And in the coming months, we’ll be able to give you the answers that you guys are looking for.
But I think we need a little bit more certainty. There’s — there’s still too much uncertainty here for us to really dial this in and give you a more direct and concrete answer. So more to come. It’s not now, but give us a little while, and we’ll be able to address those questions.
Operator: We now have Scott Deuschle from Deutsche Bank.
Scott Deuschle: Pat, have you priced your content on B-21 yet?
Pat Shanahan : You say that one more time. This is on the?
Mark Suchinski: 21 kind of.
Scott Deuschle: Yes, have you priced your [indiscernible] on B-21 yet?
Mark Suchinski: We have not.
Scott Deuschle: Okay. And then, Pat, can you clarify what the operating elements might be with respect to the Airbus negotiations? Are you referencing moving some work over to them? Or is this something else?
Pat Shanahan : Well, our focus has really been on price and the focus has really been on understanding between the two companies what is the right level of productivity that should be achieved that they’re willing to pay for and what is costs were all aligned on that is real and needs to be reflected in the price. And our discussions to date have been in substantiating both of those. And along with that, aligning expectations around our performance on the A220 and the A350 in ’24.
Operator: We now have Ken Herbert of RBC Capital Market.
Ken Herbert: Pat and Mark. I wanted to ask on inventory build. Can you comment on at which rate you’re pulling say, MAX shipments from suppliers at and depending upon your schedules with Boeing on the MAX, how much inventory are you prepared to build? And maybe how much of a use of cash as working capital this year versus maybe visibility on how much of a savings it can be in the back half of the year.
Mark Suchinski: Thanks, Ken. Let me take that one. I think Pat briefly mentioned it, as we move through 2023, we had expected to be at a higher rate at this point in time. We’d expect it to deliver more than we finished the year out at. And so we built inventory throughout the year and ordered inventory from our suppliers in anticipation of that. And that caused us to build inventory to help to support 42 a month. We’ve also tactically here in the fourth quarter, built strategic buffers with critical components for our production system. So really, you saw throughout the year, almost a $300 million increase in inventory through 2023, and that was in anticipation of higher rates. As we move into 2024, and where our plans are at here.
We’re not going to have to make that sizable increase because we’ve got the suppliers tuned up to help support and produce and deliver at 42 aircraft per month. So I would say that as we move into 2024, I would anticipate working capital to the drag that we saw in 2023 to be released to a big degree. And so I think in summary, suppliers are delivering to us at 42. Pat talked about what our factory cycling to. And so our goal here is to really optimize the working capital as we stabilize the factory, and we think that there’s some work for us to go do there. And we think that as we move forward here, that will create a bit of a tailwind to our free cash flow.
Pat Shanahan : And maybe just to add on to what Mark is saying, they’re discrete plans around how we’re managing the suppliers and the buffer. So again, one of the things we ask them to do is protect the factory in terms of the critical jobs that need parts to maintain the build of the aircraft. And so in those critical areas, we’ve built buffer stock. They’re also suppliers when we look at their history that are unpredictable. So those we will continue to work with, but we’ll probably build some buffer stock. Then there are the highly reliable consistent suppliers where we need to maximize inventory turns and the teams are taking those bleeding down the inventory and trying to balance there, the suppliers build — they don’t want to turn them off and start them at the same time, we’ve got a kind of optimized way to get our inventory turns up.
So it’s a dance and the teams are able to do pulled 10 levers, whereas in the past, I think it was just one order all the parts. So I expect to see a real improvement in 2024.
Operator: We now have Doug Harned of Benstein.
Doug Harned: Pat, when you talked about the process redesign, introducing automation as some of the things you’re doing to deal with the quality escapes across the company. But I think of this on really two time scales, and that can be and some of those things can be longer term. But at the same time, you have issues that may already be in things that have been done, like the miss drilled holes that came up over the weekend. There’s a lot of concern that there could be another incident like the Alaska MAX 9 incident. How do you make sure that as you do the broader redesign, you can also identify any situations that might be an issue in things that have already been essentially produced?
Pat Shanahan : Yes. No, good. Thank you for that question. And I remember in the last call, you asked me about just the overall quality and maybe we can expand into that. I think the short answer to that question is our quality management system really looks at product quality the FAA’s safety management system looks at product safety. So our first look at the 37 has been through the product safety lens. And maybe just in parallel, I think what you’ll find is that there — if we drew a Venn diagram, there would be a lot of overlap between the safety management system risk assessment and feedback nonconformities for our QMS. But our first priority has been to look through the product safety lens. We have four discrete categories that we’re evaluating.
If you look at the installation plans that we have that direct how 737 fuselage is built, there 2,300 through this lens of product safety, we’ve distilled it down to 200 that we’re going through and doing a detailed examination of to include observations of the mechanics and a review by our master mechanic of the build process. That’s in parallel, I think, Doug, maybe to this broader question of what are you doing now about quality? And what are you doing long-term? And the short answer for us at Spirit on quality is less manual, less interpretation and more inspections. Medium-term and long-term is more human-assisted equipment and technology, more automation. And when we think about, well, where is the focus, it’s where most of the manual work is, it’s in the forward and rear sections of the airplane.
If you are a mechanic working in there, you’d almost have to be a gymnast. So we’re really looking at, well, how do we address the human factors as some of this other technology is bridging to be implemented. We’re very focused in four areas. The first is proficiency. We got to test more, we got to train more. The second is compliance. And I always think of Bill Belichick here is do your job. So part of the compliance piece is people have to show up and do their job. I mean, we will help them do their job, but there’s an element of they need to be committed to personal warranty. The third is, there’s a lot of things we can do to mistake proof. The build of the aircraft. And probably the last one is observation. It’s not just more inspections, but it’s our team spending more time on the factory floor.
So that’s — if you were to come here to our war room and look at our plans, you see that we’re really trying to address human factors in the near term, prioritized by product safety.
