Doug Harned: And if I can just quickly follow-up. Is there a way to characterize where you are on this path? I mean, you’ve now had a chance to be much closer to this over the last few months. Is there a way to characterize when you feel like at least in the near term here, the issues, the escapes that we have seen that you’ve got a really solid handle on it and feel confident in what’s being delivered, I guess.
Pat Shanahan : Yes. I mean that’s the question that I think we all wrestle with how can we predict the future? It’s hard. I don’t know how to predict it, but I — some of the things that we just talked about it, the best way to do that. So it’s here in short order, making real progress in making these things stick, I think, will give us the belt and suspenders confidence that we can mitigate this. I’d say the other one is we’ve been working with Boeing to do more inspections and more inspections as though we weren’t doing a lot of inspections. I think what we’re doing a better job of is harmonizing our work together. So we’re looking at it the same way, at the same time, all the time and trying to keep it here in Wichita. And these are — some of them are our interpretation of fastener rider skin quality. But those — when we’re working together mitigate what ends up being found in rent in where it’s much more disruptive to fix.
Operator: We now have George Shapiro from Shapiro Research.
George Shapiro: Mark, if I look at the underlying margins that you’ve had in commercial, I mean you had 10.6% as the high in the first quarter, and you had relatively high 737 deliveries. But this quarter, you had the highest 737 deliveries and the margin was like 8.5%. Now is that just reflective of the extra work that you mentioned that you put into try and improve the production process in the quarter? And what would be kind of a normal look as we went forward on this.
Mark Suchinski: George, I would say just that, I mean, it’s hard to assess and state that the fourth quarter is kind of a normalized commercial margin. We entered the quarter in a very disruptive state behind schedule Pat talked about, we did a pause in the fourth quarter. And so there was a lot of investment to stabilize the factory in the fourth quarter. And you saw that come through in the unfavorable cumulative catch-up. We delivered the most deliveries that fuselages in the fourth quarter than we did in four years. So there was definitely a big cost investment to stabilize the 737 production system. And when we think about jobs behind schedule all of the operational metrics that we had as we exited the year we were in the best shape than we’ve been in a long, long time here.
So I don’t want to lean forward here and start talking about what the normal margins are but they were definitely depressed as it relates to the investment we made to stabilize the operations. And we did a lot of good work in the fourth quarter. Anything you want to cover, Pat, on top of that?
Pat Shanahan : And in addition, it’s not margins, but we also made working capital investments to also stabilize that factory and that put a little bit of pressure on cash, although your question wasn’t about cash. It was more about the margins. But the goal here is once you have a stable factory, the financials will come with it, and that’s what we’re focused on.
George Shapiro: And one quick follow-up, Mark. The free cash flow that you missed in the quarter, I mean, certainly, it looks like $30 million or so was CapEx, and you enumerated a couple of other things. I would think that some of that is actually a benefit to 2024 because you won’t be spending that much more on CapEx than what you spent this quarter. Is that a fair statement?
Mark Suchinski: That’s right, George. We’ll buy some of that back as we move into 2024, for sure, right? We — as we think about stabilizing the operations and co-investing with Boeing, we did accelerate some of that CapEx to stabilize the system. And so as you said, some of that will come back as a benefit in 2024.
Operator: We now have Gavin Parsons of UBS.
Gavin Parsons: Maybe just following up on George’s question there or on the end on cash flow. A lot of moving pieces in ’23. I think besides the working capital, the pension closeout the MOA, the advances labor contract ratification. What are some of the other moving pieces? Or are there other onetime items we should keep an eye out for in ’24 or is ’24 a relatively clean year best we can tell?
Mark Suchinski: As you said, there was several 1x items, both good and bad in 2023. As we think about 2024, we are not anticipating significant one-offs as we stand here today. I think it’s about just running the business. We talked about some of the opportunities to improve free cash flow and what are some of the tailwinds we’re working hard. We talked about the operations, but we’re also focused on indirect and overhead costs and the working capital side of things. But Gavin, I’m not aware of any of the sizable type items that we saw in 2023 coming back in 2024.
Operator: We now have Noah Poponak from Goldman Sachs.
Noah Poponak: Pat and Mark, what’s your latest thinking on your framework of where your free cash flow margin can go in the future, putting any specific RSI just longer-term at — compared to history at equivalent volumes, right? You used to have a targeted range and then you’ve had a targeted range for when volumes are back at certain levels. Is there any kind of new way you’re thinking about that as you evaluate where pricing costs are shaking out — and then I’m curious also to hear you talk about how you are going through the process of renegotiating pricing while your costs are such a moving target? Right? You’re at low volumes where you sort of don’t even know what the cost per unit is at higher volumes or double the volumes, right? So how are you factoring that in as you go through these customer pricing renegotiations?
Mark Suchinski: Noah, let me address the second one first and I understand your point with fourth quarter here, we just took some additional forward losses, which will put pressure on unit costs as we move forward here. But we’ve been doing a lot of work as we think about the A220, A350 on our long-term unit costs. We’ve worked shoulder to shoulder with our customer as it relates to where we are now, what the learning curves look like, what benefits we’ll get from optimizing the supply chain over the next three or four years. We’ve done a deep dive internally to assess that as best we can based on what we know now. And that is really the information that we’re using as we enter the conversations with our customers and that’s the best way that I would describe that on the Airbus side. As it relates to longer-term,
Pat Shanahan : Maybe I’ll just add on to that. Noah when we think about like the A220, for example, a good portion of the cost reduction, which allows us to get to the right pricing level comes from a transfer of work. Many of the suppliers that we would transfer the work to. This is coming out the old Bombardier supply chain are going to Airbus suppliers. And we’ve jointly evaluated those costs, and Airbus has a significant history with those suppliers. So I feel confident in that cost basis. We also have a fairly good understanding of the cost and productivity curves for assembly, particularly in Belfast. So and that’s really 9% or 10% of the cost. But those learning curves hold true. And I would just say on the A350, there’s a history of a higher production.
So that kind of holds as a baseline that we need to get back to, and then there’s a normal adjustment for labor and raw material price increases. So I don’t think there’s — with these increased rates that it really creates a different cost estimating basis that we’re not familiar with.
Noah Poponak: Okay. That makes sense.
Mark Suchinski: And then to address your first question around long-term. I don’t want to get into the prediction business. But when you think about what this business generated in the past, I think you’re referencing the 7% to 9% margins and $500 million to $600 million worth of free cash flow in the future. As we go up to the higher rates that will obviously help from a revenue and a profitability and a cash flow standpoint, I think we can get back to those levels. There are some headwinds as it relates to some of the inflationary pressures that we talked about before like the IAM contract. But I think the single biggest item that we need to work on to help us drive back up to those cash flows because I think the business is going to drive it is we’re carrying $4 billion of debt and $350 million, $325 million of cash interest.
So over the next couple of years, we need to take that positive cash flow, pay down debt. Not only will that help our leverage from a balance sheet standpoint, but it will get the cash interest drag off the books. And if we can drive that interest back down to our historical measures, we can get back to similar to levels that we’ve had in the past.
Operator: Your next question comes from Robert Stallard of Vertical Research.
Robert Stallard: Pat, I just wanted to follow-up on a comment you made earlier that you said that Spirit personnel are acting as if they’re now part of Boeing. I was wondering if this has any sort of impact on your relationship with Airbus in particular and perhaps to other customers.
Pat Shanahan : I don’t think so. I guess the real difference is I know more people at Boeing than I do at Airbus, but I’ve quickly come to meet quite a few of the executive leadership through program reviews we’ve been doing on the $220 million and the $350 million. But my Rolodex isn’t as great. But I’d say the interaction is just as positive and the transparency and the focus on driving improvement. I’ll do a number of — they use Google Meet, we Google meet. And the feedback I get is just as direct as the feedback I get from Boeing and working together effort is almost identical. I mean, everybody tries to get the job done the right way. I think with Boeing, I just have a few more tricks in my bag just because of my familiarity with how to navigate their system. But the treatment and the behavior and working together Spirit out of [indiscernible] is strong. And we just were able to get things done pretty well.
Operator: Your next question comes from Michael Ciarmoli of Truist Securities.
Michael Ciarmoli: Pat, lots of talk about quality. If the airplane is the boss, we got safety and quality or paramount. If I just — maybe not to put you on the spot, but if I look at your proxy, and I guess you’re going to file it next month, compensation incentives, looks like only 20% is tied to quality on annual cash comp, nothing tied to quality in the longer term. It seems like everything we’re talking about here, cash generation revenue, EBIT margin, all tied to quality. I mean, are you guys planning on changing compensation to drive some of this behavior towards more of a focus on quality.
