Good day ladies and gentlemen and welcome to the Second Quarter 2008 Spirit AeroSystems Holdings Earnings Conference Call. My name is Jen, and I'll be your coordinator today. At this time, all participants are on a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Phil Anderson, Treasurer and Vice President of Investor Relations. Please proceed sir.

Good morning and welcome to Spirit's second quarter 2008 earnings call. I am Phil Anderson, and with me today are Jeff Turner, Spirit's President and Chief Executive Officer; and Rick Schmidt, Spirit's Chief Financial Officer. After brief comments by Jeff and Rick regarding our performance and outlook, we will take your questions. Before we begin, I need to remind you that any projections or goals we may include in our discussions today are likely to involve risks, which are detailed in our news release, in our SEC filings, and in the forward-looking statement at the end of today's press release and web presentation. And as a reminder, you can follow today's broadcast and slide presentation on our website, at spiritaero.com. I'd now like to turn the presentation over to Jeff turner.

Thank you Phil, and good morning. Let me welcome you to our second quarter earnings call. I'll begin on slide two. We continue to execute well across the company during the second quarter. Our results reflect improving performance and increasing backlog. As both revenues and profitability increased year-over-year and our backlog grew to almost $30 billion. Our revenues were 1.1 billion, an increase of 11% over the same time period of 2007. We achieved this top-line growth as volume increase in all segments. Operating performance was solid across the company as we expanded our core product operating margins from 10.6% to 12.8% as improved operating efficiencies in the factory and lower parity expenses were realized. Earnings increased 27% to $0.62 per share up from $0.49 a year ago. Our cash flow from operations was positive during the quarter as we continued to implement our strategy. We're investing in development programs to grow the business. Our core businesses continue to perform well and delivered solid financial results as expected. While executing our core business during the quarter, we rebalanced the 787 program to the revised customer production schedule and continue to support engineering changes in customer deliveries. We make solid progress on our large commercial aircraft, business jet, and military developments programs and we expanded our presence in the large commercial aircraft market with winds on the A350 XWB. Concurrent with our announcement on winning the centerpiece large design and manufacturing work on the A350 XWB, we also announced Spirit expansion of U.S. operation into the State of North Carolina. We are excited to have the opportunity to build a world class a facility. It will initially support the A350 XWB program. The facility will also serve as an important base for future growth. We had a successful first half of 2008 and expect to maintain that momentum into the second half of the year. However we do remain mindful of the challenges facing airline customers both domestically and internationally as they cope with the economic reality of significantly higher fuel prices. Let's talk about some of the specific accomplishments across the business during the quarter beginning on page... on slide 3. Fuselage Systems delivered strong operating margins of 18.7% on almost $500 million in revenue during the second quarter of '08. The Fuselage segment delivered the 2,700 737 next-generation fuselages delivered the second 777 freighter forward fuselages began major assembly on the first 747-8 freighter and delivered the second P-8A aircraft to Boeing. The team continues to execute well across programs while making good progress on development programs. On slide 4, you se the proportion team increased revenue from the year-ago quarter and delivered solid 16.6% operating margins. The team made good progress on development program delivering the first Inlet and Thrust Reverser test units for the Rolls Royce BR725 engine. This is the engine that will be used Gulfstream G650 business jet. The team also made good progress on the 747-A and P-8A programs. On slide 5, the Wing Systems segment also increased revenues in operating margins during the quarter. As volumes increase primarily on Boeing and aircraft... and Airbus products. The Wing Segment team continued progress on development programs including the 747-A, the Gulfstream 650 and assessment Columbus and for notch. The establishment of the Spirit Europe MRO service center and our new Spirit Malaysia facility are on track. And recently the wind systems team won new business on the A350 XWB. They will be designing and building the wing fixed leading edges. Now let me turn the slide 6 and discuss the 787. Last quarter, I told you we had three areas of focus, which I would like update you on. The first area of focus was to rebalance our 787 resources. We completed this during the quarter by realigning supply base schedules and internal staffing as well as re-planning capital and tooling investments. However inventories grew as we adjusted to the revised production and delivery schedule announced early in the second quarter. The second area focus was to continue the support required program engineering changes. This is a work in progress. We continue to work closely with our customers to incorporate the necessary engineering changes for the program. The third area of focus was to maintain efficiencies at a slower production rate. As you know prior the receiving the price schedule, Spirit had 22 composite four fuselage sections in work to support the original program schedule. Through the end of the second quarter 2008, we've delivered three four fuselages units in support of those revised schedules. The remaining 19 units are in process at a reduced production rate with our average primary focused on systems installation and incorporation of engendering changes in the units four and subsequent units. While we've temporarily suspended composite fabrication of additional four fuselage sections, we are intentionally focused on finding ways to improve efficiencies. It can be realized when we resume the fabrication process later this year. We will continue to update you on our progress as we go through the second half of 2008. Let's turn to slide 7 and I'll briefly discuss our latest wins on the A350 XWB. We are pleased to have been selected for our role on this new Airbus wide-body aircraft. The market acceptance of the A35 0XWB family has been very good with 470 orders from 28 customer to-date. This aircraft will serve airlines feature needs for the 270 to 350 passenger aircraft as well as bringing freighter capacity into the industry. Our role on the A350 XWB is to design and produce the composite intersection of the fuselages. And the composite fixed leading edges of the wings; both of these products Spirits core competencies and capabilities. Spirit's technical capabilities and shared investment in the development effort will deliver value to our customer and shareholders for decades to come. Now let me turn it over to Rick, who will provide more details on our financial result and outlook.

Thanks Jeff and good morning everyone. Slide 9 summarizes our financial results for the second quarter starting with revenues up 11% over the prior year period driven primarily by higher delivery rates to Boeing. Operating profit at $136 million was at 33% as margin improved significantly year-over-year, increasing by 220 basis points. This improvement is largely due to higher unit deliveries productivity initiatives and lower SG&A and R&D spending. Fully diluted earnings per share of $0.62 for the quarter were 27% higher than earnings of $0.49 per share in the prior year period largely due to higher sales and improving operating margins. Cash flow from operation of $7 million and capital expenditure of $54 million for the quarter reflect our continue investment in 787 program and other new programs as well as revised 787 payment terms. Slide 10, highlights our progression on key P&O metrics over the trailing four quarters. Second quarter revenue grew 11% year-over-year and 3% sequentially over Q1 both attributable to high unit deliveries to Boeing as can be seen in the unit delivery charge included with the press release. Total 787 revenues in the quarter were approximately $17 million about the same as Q1 as we delivered one forward [ph] piece of large units in both periods. Operating income margins were 12.8% in the quarter 220 basis point above the prior year period. On a sequential quarterly basis operating margins were about 20 basis points due to the benefits of some higher volume and slightly higher favorable cum catch adjustment in Q2. Lastly, second quarter fully diluted EPS of $0.62 grew significantly over the prior year period due to the improving operating margins. Our effective tax rate of 33.9% in the current quarter was slightly higher than both the prior year period and the first quarter. Sequentially EPS was up $0.01 or 2% from Q1 driven largely by higher revenues. R&D expense in the second quarter was $11 million 23% below the prior year period as we complete the R&D phase of several of our non-787 related new programs. Sequentially, R&D spending was about flat with the first quarter. SG&A expense for the quarter was $41 million about 25% below the prior year period. Reduction is primarily due to lower non-cash stock compensation expense, lower transitioning expenses in the absence of almost $10 million of expenses recognized in the prior year period related to our secondary offering. Spending for various transaction activities was larger than complete in the first half of 2007. Sequentially SG&A was up slightly from the first quarter in line with our expectations. Declining absolute dollars of R&D and SG&A expense combined with rise in sales is one of the contributing factors that Spirit is improving operating margins. In the aggregate SG&A and R&D decline from 7.1% of sales in the second quarter of '07 the 4.9% in the second quarter of '08, a 220 basis point improvement in operating margins. Even excluding the secondary offering expenses in the prior year lower SG&A and R&D spending improved operating margins by 130 basis points. Slide 12, summarizes the P&L for the second quarter versus the same period in the prior year. During the quarter Spirit realize approximately $4 million of net favorable changes and contract estimates slightly above the 2 million recognized in the first quarter of 2008. Most of the current period benefits was realized in Fuselage segment due to continuing productivity initiatives more than offsetting upward pressure on material costs. Prior year period included approximately $3 million a favorable cum catch adjustments, largely recognized within our propulsion systems segment. Embedded in second quarter cum catch was a small negative adjustments for the 787 reflecting continuing cost pressure and therefore lower profitability on this program. 787 will continue to be a significant launch item for Spirit. But, today we have been able to successfully mitigate the impact of the recent schedule slides. Slide 13, summarizes the changes in our cash and debt balances during the quarter. Cash balances at the end of the quarter of 147 million decreased 56 million or 28% from the prior year period, prior year quarter end largely due to the repayment of $75 million of revolver debt during the first week of the second quarter. Total debt balances decreased by $72 million in the quarter due to the same $75 million revolver repayment. Driven by consistent profitability and growing shareholders' equity Spirit capital structure continues to improve. At the end of the second quarter our net debt-to-capital ratio was under 24% versus 27% at year end 2007 and our net debt to 2008 EBITDA ratio was well below one. Additionally, at the end of the second quarter the company had over $790 million of short term liquidity available through our revolving credit agreements and available cash balances, which we continue to believe is fully adequate to fund projected cash flow needs. Slide 14, details our cash flow for the first six months of 2008 versus the same prior year period. Cash flow from operations for the first half was positive $78 million with higher customer advance payments and improving profitability offset for the working capital growth. The working capital build was largely driven by the reschedule of 787 deliveries and spending for other new programs including the 747-A. Inventory growth includes an increased in capitalized development cost of $33 million for the quarter, entirely for new programs unrelated to the 787. At the end of the quarter capitalized development costs were total of $334 million including $237 million for the 787. Capitalized developments costs for the 787 were largely completed in the third quarter of 2007. Included in cash flow from operations for the second quarter, our cash tax payments were approximately $82 million a level well above the tax provision for the quarter and amounts paid in first quarter do entirely the timing. For the year Spirit expects cash tax payments to approximate the tax provision. Capital expenditures of $190 million of first half were down 25% from the prior year period as the inflation of producti0on capacity for the 787-A program is winding down. Slide 15, details our updated 2008 guidance for revenue, fully diluted earnings per share, and cash flow, which includes our current estimates for 787 deliveries to Boeing. We project 2008 revenues to be around $4.4 billion and fully deluded EPS of $2.35 to $2.45 on this revenue basis assuming an effective tax rate of approximately 33% of pretax earnings. The projected effective tax rate assumes federal research and development tax credits are available for the entire year although no bunch benefits have been recorded in year-to-date results. Our EPS guidance range has been increased by $0.10 to reflect our performance in the first half of 2008. Our guidance for 2008 cash flow items remains unchanged from the prior quarter. We expect cash flow from operations of $400 million capital expenditures of $275 million, and capital reimbursement of $ 116 million. I'd now like to turn it back over to Jeff for some closing comments.

Thank you, Rick, I'll wrap up on slide 16 with a few brief comments. We have a solid second quarter in first half of 2008, and expects the solid second half of '08. The core business continues to perform well delivering top line growth and increased profitability. While we are paying close attention to the current market dynamics we expect the near term deliveries and the long term market to remain strong. Our continues focus is on meeting our customer commitments, while growing and diversifying our business. We'll now be glad to take your questions. Question And Answer

Thank you, sir. [Operator Instructions]. Our first question comes from Ron Epstein with Merrill Lynch.

Hey, good morning, guys. Jeff, if Boeing were to have a strike how does that flow through for you guys, are the works the opportunity and what happens to Spirit?

Well I mean clearly you any interruption in the production line is something that we would obviously were not to see and what we do is, we would negotiate the process determine, what production needed to continue, what might need to be curtail somewhat and we actually had this similar situation three years ago and really work through it fairly effectively clearly would have impact but it's too early to tell and hopefully there won't be one.

Okay, great. And then a question for Rick year-over-year the margin performance the gains were very good, and as we look forward, I mean what we can expect to find more places for you to find more execution enhancement?

Certainty you've seen Ron for a number of quarters that we continue to have small favorable cum catch adjustments and those are obviously indicative of improving performance in the, you know, our overall cost structure, but specifically in our various productivity initiatives in the shop. I mean we continue to work very hard at those, and I don't see any reason at this point why they can't continue. In the near term probably the biggest impact on margins will be the introduction of higher deliveries on the 787 program as you recalled. We've been very specific that our margins on the 787 are lower than our legacy programs. So as we started to generate higher overall 87 revenues that will create some downward bias on our total company margins.

Okay, and do you expect in the second half of '09, you guys are easy set your blocks on a legacy program so that could mitigate some of that?

I'd say at this point Ron, it's probably too early to tell. We will... some of our blocks do start to mature at the end of 2009. So the tail end of 2009 will start to reflect some impact from our new contract blocks, and we'll certainly fully reflect that in the guidance that we provide that we provide on '09 when we do that in conjecture with our third quarter earnings with it.

Okay, guys. Great, thank you very much.

Thank you.

Your next question is from Troy Lahr with Stifel Nicolaus.

Thanks. Could you guys kind of tell me how much confidence you have in your full year outlook for revenues, $4.4 billion? I guess first half growth was around 9.7%, it looks like you are going to need to do 18% in the back part of the year to get to that. Can you tell us what's going on in such a 787 starting to pick back up?

There's certainly 787 pick up in that. There's also some non-production components of our revenue forecasts.

Can you like non-production on what... can you give a little specific?

It will be some non-recurring billings for some what development works.

For some of our new programs, Troy.

Okay, so your so are pretty confident in that?

Yes.

Okay. And then on 787, the engineering changes that you talked about, you've been working through that. Has the pace on those slowed down or is it still pretty good volume coming through on... for engineering changes?

Well, there's still some significant volume, but we have seen some reduction I mean clearly through the earlier units. Those are very much getting cleaned up. So, it's volume beyond I think any of it's would want, but that we are seeing some mitigation to that.

And when do you think that becomes less of a concern for you guys as unlike a third quarter or fourth quarter issue or more like 2009?

I suspect it will out a little bit.

Okay, all right. Thanks guys, I will jump back in queue.

Your next question is from George Shapiro with Citigroup.

Hi good morning.

Good morning, George.

Rick, I want to look at cash flow for a minute. You had another $150 million build in inventory in the second quarter, and yet when were out there, you didn't look like you were doing a lot of work Jeff was alluding to on the 787. So what caused that much inventory build again?

Well, certainly the 787 is the largest individual component and as you look at the inventory build by program, it's certainly largest individual component, and it's really the result of the reschedules that took place right at the beginning of the quarter while we've... our folks have done tremendous effect to mitigate the impact of the reschedules. It's very hard to shut off all of that incoming inventory build. And frankly all of it, you don't want to shut off, because the program is going to ramp up here over the course of the near term. So there are still some 787 build. We fully expect that to mitigate though. As we said the end of the first quarter, we looked at working capital in the aggregate and we had a pretty substantial increase in working capital for the first quarter over $200 million. And at that time, we said we didn't expect the increase in total working capital would be that much again for the last three months. We still believe that to be the case, Gorge, at this point. So, you are going to see inventory growth moderate in the second half. We also tend to get favorable performance in our accounts receivable in the second half typically our year-end is the low point for the foreseeable dispose [ph] as you saw in 2007. We will have a bill down of accounts receivable in the second half that will also contribute to some positive cash flow. So at this point, I think we still feel confidence in our cash flow guidance for the year even though we recognized, but it is somewhat back end loaded.

Yes, because it implies roughly that you got to have $85 million so decline in working capital in the second half to be able to get to the 400 million number.

That's right. And a good chunk of that will come from inventory... sorry, from accounts receivable. And again we expect inventory growth to moderate in the second half.

And it looks like based on just looking at the advances that you probably got about another $100 million from Boeing as part of their re-scheduling plan for the 787 in the quarter.

That's about right, George.

Okay. And then just one last one: you commented on 787 was a little bit of negative in the quarter. I mean are you guys just managing that much better than Boeing at this point, because they had a recognized, I'm sure you are aware the extra allocation to the other programs, where I guess at this point you are still okay although monitoring what's going on, is that the best read?

The way I would describe it George as we went through a very extensive process and conjunction with our first quarter close, the ascertaining what the impact would be if the schedule slides, not only on the 787, but all of our programs. And what mitigating actions the company would have to take in order to minimize the impact. That was fully reflected already in our first quarter results. We've obviously refined those numbers in the second quarter as we have a better understanding of the... of what the schedule is going to look like in the near term. And that did result in a slightly negative cume tax adjustment on the 787. But I think overall, we've dealt with those issues in the first quarter, updated our assessments in the second quarter; and at this point, we still feel that it's manageable.

Okay. Thanks very much. I'll let some body else go.

Thank you.

Thanks, George.

Your next question is from Robert Stallard with Macquarie.

Good morning.

Good morning.

Rick, I was wondering if you would touch on the unallocated SG&A and R&D. You said you've seen R&D trade of a bit this second quarter. What should we expect for the rest of the year in this area?

Well, you mentioned... used the term unallocated. For us almost all of our R&D is allocated to the segment. So, we have very little un allocated R&D by itself. Most of our SG&A is not allocated to the segment; it kind of goes the other way. But as we look at both of those items, Rob, I think we see some moderate growth in both R&D and SG&A in the second half as the business continues to expand and some of our new programs are coming online, we're building up our new facilities in Malaysia and North Carolina. That will contribute to some growth in SG&A. R&D I think we'll see modest growth there in the second half again driven by some of our other new programs that are coming online. But at this point, as we said earlier in our investor conference, we do see that growth in R&D and SG&A moderating and that's probably the largest contributor to the increase in our guidance for 2008 and is the fact that we do see that spending being a little bit below what our earlier expectations are.

And you expect that trend line of SG&A maybe leveling off or coming down to continue into '09 and beyond.

Well, a lot of SG&A, the decline has been driven by our non-cash stock compensation expense, the reorganization of that expense. That expense has been declining for several years now. And it will continue to decline into 2009. We do expect... on the other side, just what we would consider our normal operating SG&A, we do expect to see some growth on that in 2009 as the... again the business continues to build and some of our new programs come on line. We'll obviously talk in more detail about that when we release our guidance for 2009 in the third quarter.

Okay.

But I would say you can expect continue to see tight expense control in this category from us.

Yes,And Jeff, you mentioned the progress you had in winning difference contracts at different areas of aerospace. But if we look forward to conceptually, do you expect the proportion of your revenues to shift that much say in 2009 or 2010 from what you expect in 2008?

No, not so much that early on, '09 and '10 are pretty much... the production programs that we have now. But I think as you go through time, you will see the impact of all these programs we've been winning as those as those programs finish up development and then move into production.

Do you still like 80% odd Boeing OEM?

Yes, yes.

Okay, thank you.

Yes, thank you.

Your next question is from Rob Spingarn with Credit Suisse

Good morning

Good morning, Rob.

Just a couple of things; just really following up on what George was talking about. Is it correct to say the current expenses that Boeing saw in the quarter, the unabsorbed 787, those were at least a portion of that was more customer-orientated. These are expenses you generally would have to begin with?

We really don't have inside into any more than you do into what was driving that I mean clearly we've looked at ours and then as fourth riding transparence as we can possible, so I mean clearly there is dynamics on the whole airplane and with the customers that they have that we don't, but I can't really answer that.

Okay, all right, thanks Jeff. On the 787 schedule Rick could you talk a little bit more about this is already been touched on but the inflows and outflows with regard to cash on the advances in inventory side. If I understood the settlement with the Boeing on the cash you are being paid according to the original delivery schedule, is that correct?

That's correct.

Okay, but you're building inventory at a slower schedule?

That's also correct.

So how should, we think about this in terms of unit numbers in advances versus inventory build?

Well the advances are reflected in their own balance sheet accounts in both of the balance sheet and in our cash flow account, so advances themselves do not impact the inventory balance.

Understood, understood, but you might expect them to track a little bit more evenly or at least the advances to me might outlay the inventory build?

Yes, I'd say Rob that the, I wouldn't think of the two of them is being linked, I mean the additional advances that we got in 2008 from Boeing of which we've seen the impact for the first six months already I mean those were driven by an agreement to go back to the very original schedule, which was a number of years old now obviously our inventory build today is based on the schedule that it's relatively new to us, so I wouldn't look at two things is being what.

Is it fair to say that advances will continue at about a flat rate for the does half of the year is the first half?

We will continue to see advances in the second half of the year perhaps not to the degree that we've seen in the first half but on that order.

I am just thinking about when we contemplate the original schedule I think you would have been at rate for most of 2008 if not all?

That's right, but if we would have started being paid for our deliveries already effective May '08 with the original schedule.

Right, but first it would have been a built-up an inventory there so a fair amount of delivery right at that front end.

That's exactly right.

Okay. And then...

Let me modify, the clarification I would make here is that when you say we would be up to rate, we would be marching though a rate increase cycle, so it wouldn't have been a specific rate, but it wouldn't be, but it wouldn't been at escalating rate.

Okay with the back-end of the year at a higher rate than the front-end.

Yes, clearly.

Okay. And then talking about rates the number of aircraft delivered why number four obviously has some issues not necessarily with you, but notwithstanding that aircraft get slow down, I had hope that we would have all the test aircraft delivered in Seattle and final assembly at this point when should that happen?

I don't have that schedule, Rob I think that's one for Pat and his team to tell you.

Well I am telling about your Section 41.

Well I think what we, our view is what we've got number of four here waiting on the pole and the others in the line right behind it so we prepared to support the pole.

And Pat seems to suggest at Farmbro [ph] that five and six looks really good very close to 100%

Yes, from our perspective four, five and six they all look great.

Okay. Then the only other thing I would ask I guess Rick this is or you on A350 contract can you talk a little bit more about the structure in terms of non-Spirit fund R&D and CapEx?

Well we announce the win on the Section 15 you might recall we had a short presentation that went with that indicated that the total spending for everything was about $700 million and that includes facilities, and design engineering, tooling, capital all of that was about $700 million and that total will be roughly equally split between the three parties so between ourselves our customer and by other third parties. Again the new win we just had on the leading edge the spending level for that is not as great as the section 15 and the financing arrangements are roughly similar to what we have there.

The next is from Dinno Maribor [ph] with GMP Securities.

Hi, good morning, guys. Just a question again Rick on the guidance that you provided or at least the increase guidance. I am trying to get a handle specifically on what is accounting for this guidance, this increase. I think you talked in your initial comment about the bulk of it being related to the first half of the year being maybe better than your internal projections, but then I think you on to say the G&A and the, maybe the R&D was a little bit lower, and what you would originally projected so. Can you as much detail kind of breakdown where that $0.10 increase comes from is it more first half or is better second half outlook?

Without getting too specific as I said the primary drivers are lower levels of SG&A and R&D for the year than we expected, but certainly contributing as well our higher revenues you saw our guidance is 4.4 billion we did 2.1 billion in the first half, so that it implies a couple of 100 million more revenues in the second half, but that certainly will drive some additional income. And on that revenues we expect to have a little bit better margins than we expected. So you saw small favorable cum catches in both Q1 and Q2 those obviously have a forward impact as well they not only represent higher profitability for revenues that we've already recognized, but reflect higher profitabilities for future revenues, as well so you're getting some impact from that, but I would say the bigger impact is more in the SG&A and R&D areas, and we'd expected to ramp up there to potentially be a little stronger than what we're seeing.

Fair enough. Thanks a lot.

The next question is from Howard Rubel with Jefferies.

Thank you very much. Just a follow on the SG&A theme for a moment Rick. Is this or maybe Jeff, is this like a new permanent level that you might very well see, I mean have you been able to structurally reengineer the cooperation to get some operating leverage out of the business as a result?

I think we talk for consistently about some lumpiness in those account R&D account and the SG&A I think you will pretty well the effect of our expense we don't see a lot of after some unknown advance at the moment, but we don't see any nig change and now we continue to be very aggressive and managing our account. R&D will move a little bit as we said.

I am not worried about R&D I mean sympathetic to its program driven but what I am seeing is?

I would just say it's just fundamental blocking and tackling on controlling expenses and again it doesn't just apply to the SG&A, it applies to all of our overhead functions. We are being very cautious given the market environment that we have today. We are being very cautious about adding additional headcount additional expense across the board.

I think that's terrific. The second question that I have is could you kind of update us a little bit on some of the other development programs and where you stand for example the 747 and you did highlight what's you're doing on G650 I mean how were those things coming in versus what's your thought and are there some additional opportunities out there?

Let me answer the second part first there are additional opportunities although as I am sure you can appreciate with the 350 and some of the things that we have won there's a lot of the opportunities that have been turned into new business. There remain a few opportunities in regional Jet and business Jet, and some longer term things that we are looking at. Development programs across the board as you know are challenging the 650 I'll talk about it first we are at this stage of that program where we are at the maximum burn for engineering relief, and getting the engineering drawing that into the manufacturing part and we have and that's really a mixed we have some areas that are doing well. We have some that needs more attention as is pretty typical over development program, but that's moving well we're getting into the supply based we are getting suppliers lined out determining what we're going build-in house or what we are going to get some supply base a lot of activity on that program. The 747-8 that one continues as well, and it's kind of across the board, we have a piece of that in each of our segments. Some going a little quicker than others, but all of them moving... all of them moving along and really in that point, where they're transitioning beginning to transition out of engineering into the full manufacturing and supply chain phase of that. I mentioned the P-8A pretty well through the line we've now built the second unit. So that's going really well. The 777 freighter. We talked about that that's the second or third unit. So, they are all coming through the line and all have the challenges associated with new development, and... but all are progressing and progressing as they need to get into production.

Thank you, gentlemen.

The next is from Doug Harned with Stanford Bernstein.

Good morning.

Good morning, Doug.

I am interested in production rates. And when you look forward is obviously a lot of concern about the overall dynamics of the airline industry. And when you look, say at Airbus, planning to go for 40 per month on the A320 family by 2010 or in 2010. Are you currently on a plan to ramp up to that rate. And if not, when do you have commit to go there?

Doug, in general taken steps in production requires roughly 12 to 18 months of prep time. And especially in an environment like we are in now, where the supply basis are pretty loaded. And in each of our cases, our contracts are requirements contracts. So when customer pulls from us, it's our responsibility to have units ready to meet their production demand. So as long as the customers are in specific example you gave, we are prepared to meet the demand of the customer.

And if you were to see a pull back, typically how far in advance would you expect to hear about that from Boeing or Airbus?

Well, typically, that will depend on market conditions. There are lead times in our each of our contracts associated with both speed up and the slow down. So if it's within lead time, it varies. I think the shortest one is probably six months as long as probably 12 or 18 months and it varies by program. And frankly it varies by how complex it is to speed up or slow down. In absent some major unforeseen event, usually those things are done well outside of lead time. So, we have plenty of time to either ramp up or slow down.

Okay. And then fuselages systems, getting back at the cume catch up you took, could you talk a little bit about going forward both in terms of the kind of productivity improvements that led you to that cume catch up and some sense of what you've got planned going forward. Also you are no longer... you are doing this with the P8 going through. What your appears to not have any... have had any disruption on the business need or so. Are these some things that you've got specifically in line over the next year or so?

Sure. We were smiling big here when you said the P-8A without any... I think that was clearly the duck above the water and duck below the water. That one was a very big pill to swallow and the team... the fuselage teams just did a marvelous job. But I think part of the improvement we are seeing is we have the 777 freighter going through. We were starting a 747-8. We had the P-8A going through, all at the some time, the team swallowed that, saw some improvements in their productivity as a result of that. And I think we were able the reflect that. And then of course countervailing that is that all the issues we are having on the 787 and I mentioned earlier in my prepared remarks we are putting a lot of emphasis on lean manufacturing techniques and what can we do to improve productivity when we get that line rolling again. So clearly lean manufacturing improvements with the whole supply chain manufacturing improvements that we can make internally, overhead strong overhead management control, all those things going into to us building better productivity true time.

Anotherspecific initiatives that you'd highlighted, I know you talked about some of the changes, the more dramatic changes, I think you want to see over the long term in terms in how that line runs back at your investor conference. Are there any specific initiatives that you think would have substantial impact over the next year.

None that we highlighted, it's a lot of blocking and tackling in everyday making improvement.

Okay, great. Thanks.

Yes.

The next question is from Cai van Rumohr with Cowen and Company.

Yes, thank you. To get back to the issue, you mentioned non-production revenues in 2008. Is that about $40 million $50 million? What is that... what programs is that for and what sort of gross margin does that revenue have?

Typically our non... what we would consider non-production revenues will average 5% to 10% of revenue in a specific quarter. The single biggest component of that is our after market business, which obviously is independent of our contract profitabilities and our OE deliveries. But it also includes things like tooling the third parties on occasion, it includes the GAAP companies that we have to consolidate. It includes non-recurring buildings on some of the programs that... some of our new programs that Jeff described right now obviously the big ones would be things like the 747-A. And the... on the 777, where we do engineering works for those programs that we get reimbursed for. So generally, the... so, again 5% to 10% of the revenues attempts to be somewhat lumpy on a quarterly basis... some quarters will be more than others. But the profitability of that tends to be pretty much in line with our production programs. So, I wouldn't say that it's dramatically higher or lower than our production programs.

Okay. And secondly R&D is kind of lower than kind of I estimated, and that you have the terrific win rate. Is the reason the R&D is lower is more of it's being done under contract and therefore kind of all of your expenses...

That certainly is a major contributor Cai.

Okay.

The next question is from David Strauss with UBS.

Good morning.

Good morning.

Rick, just back on the second half kind of employee guidance, you did $1.23 and earnings in the first half. The second half your guidance implies kind of flat to slightly down. You're obviously going to have a couple of $100 million in extra revenues. You talked maybe SG&A and R&D, maybe a little bit higher, but it still seems fairly conservative in the back half of your... what you are forecasting. Do you have any conservatism baked into you guidance for the potential of a Boeing strike?

I wouldn't explain specifically to what might happen with Boeing is being reflected in our guidance, because again I don't think anybody's crystal ball is clear enough to determine is there going to be a strike and how long is it going to be and what impact is it going to be on the business. So, yes, we certainly haven't attempted to reflect that into our guidance. More of the what you are seeing is the fact that some of the second quarter or second half revenues that you are going to see, are going to be 787 related, which as we have clearly said, don't drive a lot of income. And we said the expect R&D and SG&A to ramp up a little bit in the second half. I think how quickly those things ramp up. And again what happens with some of our other programs, we will determine if we move towards the higher lower end of our guidance. But at this point, we attempted to find the right balance between fully reflecting what the good performance that we've had in the first half and what we expect to see for the second half.

Okay and when Boeing had its last strike back in late 2005, do you have an idea of how much of your revenues drop off kind of during that or nearly following the strike?

I am sure we can resurrect that. We don't have that readily available.

Yes. Well, you may recall if you go back and you look at probably back in the S1 is where you originally see it and we did have a shift in place program. Where we continue to deliver albeit at a reduced rate during the strike period. But we did continue to deliver during that period, because of just the discussion and agreements that we had between ourselves in Boeing.

The nest question comes from Carter Kopont [ph] with Lehman Brothers.

Good morning, guys.

Good morning, Carter.

Just a one quick sort of clarification here on overheads and the cost in the 787. I just want to be really clear here. The revision to the various allocated overhead that you would layer on to the 787 were made in Q1 and are now included in your updated block estimates, correct?

That's correct. Yes, the preponderance of that impact was reflected in our Q1 results.

Okay, so there is no other change and overhead out here that are on already fully incorporated?

Let me as you can appreciate it Carter, this is always driven by forecast between what we are today and the end of our contract blocks. So it's somewhat dependant on our ability to forecast, but if you look back the last couple of years. Our ability to forecast is I think proven to be pretty good. So we've clearly are factor again what we expect to happen with 787 rates and deliveries and certainly the same for other programs as well.

The next question is from Joe Nadol with JPMorgan.

Thanks. Good morning.

Good morning.

I guess first question is back on the strike a few years ago they took all the fuselages you were building I recognized that was much lower rate in the 37 but sort of that was the experience?

No, was not. We... what we did we reduced production right we went to three day work week here.

Okay.

We did what was called ship in place which allowed us to keep our production lines running and allowed us to have some inventory finished goods inventory if you want that pay for finished the inventory that was available for the ship, as soon as production lines kicked back up in CL [ph]?

So I mean the rates at that point were lower?

The rates were lower that's right.

The final question is from Ben Fidler with Deutsche Bank.

Hey, thank you, just couple of if I could firstly just on 787 I think I was on the Q1 call Rick that you mentioned you expect the low 5% gross margin on the first 500 block so now you clearly revisited you 787 as we saw with the U.S. negative cum catch-up. Just wondered if you can comment how that's impacted this commentary made on the Q1 code if is all?

Well certainly the fact tat recognize the negative cum catch in the second quarter would indicate that our margins are going to be a little bit lower than we thought. So they were below 5%, now they are still below 5% maybe a smaller a little bit smaller than we originally thought so it still is a program that has a relatively low level of profitability. And I wouldn't read too much into our comments there it just the change there was relatively small, but again we continue to evaluate the impact of the reschedules and our new production rates on the whole contract block and as you probably recall our contract block for the 787 extends quite a bit further it extend for the first 500 units. So there is more forecast variability on that program and perhaps on some of our legacy programs. It was a relatively minor change, but we did see a little bit of decline in our overall profitability for that first 500 unit volume.

Okay.thank you. And also just another on 787 if I could, could you... how many section 41 units that you expect to ship by the end of this year?

We have not been specific on that I think what we said it's clearly we are working four through six which is a test units and have those ready for the pull it was just simply determined by what pull comes from the program.

Okay. Thank you very much.

Yes, thank you Ben.

Ladies and gentlemen, this will conclude our Q&A session, as well as the conference call for today. We thank you for your participation in today's call, and you may now disconnect. Have a Good day.