Boeing Company (The)

Thank you for standing by. Good day, everyone, and welcome to the Boeing Company's fourth quarter 2018 earnings conference call. Today's call is being recorded. The management discussion and slide presentation, plus the analyst's immediate question and answer sessions, are being broadcast live over the Internet. At this time, for opening remarks and introductions, I am going to turn the call over to Ms. Marita Sutasia, Vice President of Investor Relations for the Boeing Company. Ms. Sutasia, please go ahead.

Thank you, and good morning. Welcome to Boeing's fourth quarter 2018 earnings call. I'm Marita Stajan. What we meet today is Dennis Mullenberg, Boeing's chairman, president, and chief executive officer, and Greg Smith, Boeing's chief financial officer and executive vice president of enterprise performance and strategy. After management comment, we will take your questions. In fairness to others on the call, we ask that you please limit yourself to one question. As always, we have provided detailed financial information in our press release issued earlier today. And as a reminder, you can follow today's broadcast and slide presentation through our website at Boeing.com. Before we begin, I need to remind you that any projections and goals we include in our discussions this morning are likely to involve risk, which is detailed in our news release, in our various SEC filings, and in the forward-looking statement disclaimer at the end of this web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliations of non-GAAP measures that we use when discussing our results and outlook. Now, I will turn the call over to Dennis Oliver.

Thank you, Marita, and good morning. Let me begin today with a brief overview of our 2018 operating performance, followed by an update on the business environment and our expectations going forward. After that, Greg will walk you through the details of our financial results and outlook. With that, let's move to slide two. Thanks to the dedicated efforts of our teams across the company, Boeing delivered strong 2018 financial results that included record revenue, earnings per share, and operating cash flow, driven by record commercial aircraft deliveries, higher defense space and securities, and services volume, and strong performance. And all of our three businesses increased their backlog in 2018. We sharpened our focus on profitable, sustained long-term growth strategies, disciplined execution of our production and development programs, delivering greater lifecycle value, including growing our services business and driving further quality, safety, and productivity gains across the enterprise. For the full year, we generated record operating cash flow of $15.3 billion. We repurchased 26.1 million shares for $9 billion. and made dividend payments totaling $3.9 billion in 2018. We continue to deliver on our commitments of returning cash to shareholders while investing in our people, innovation, and future growth. In December, our board of directors authorized a new $20 billion share repurchase program and a 20% increase in our quarterly dividend. The increases are part of our balanced cash deployment strategy and reflect the confidence we have in our strong lineup of products and services and our long-term outlook for the business. Turning to our core operating performance for the year, Boeing commercial airplanes generated revenue of $60.7 billion, reflecting a record 806 deliveries, including the delivery of the first 787-10 Dreamliner and the first 737 MAX 9. During the year, we delivered 256 MAX airplanes, nearly half of the total 737 deliveries. Continued healthy sales activity contributed to 893 net new airplane orders during the year. Adding to our robust backlog stands at nearly 5,900 airplanes and is worth $412 billion. Our backlog equates to about seven years of production at current rates. Key commercial airplane milestones in 2018 included the delivery of the 700 an 87th 787 Dreamliner, and the first airplane from the new 737 Completion Center in China. The 737 program increased its production rate to 52 per month and made good progress on its recovery plans to mitigate supply chain challenges, with 173 aircraft delivered in the fourth quarter. Also in the year, we completed the first flight of the 737 MAX 7 and delivered the first MAX Boeing business jet airplane. The 777X program achieved a number of key milestones last year as we rolled out the static test airplane and began production of the flight test airplanes. We recently completed final body join for the first flight test airplane and turned on its electrically powered systems. We plan to start flight testing this year and remain on track for the first 777X delivery in 2020. Meanwhile, the 787 program further matured its rate readiness. We have started transitioning to 14 per month in our factories and supply chain as we prepare to begin delivering at this higher rate. We expect to complete the transition in the second quarter. Now over to defense space and security. BDS reported revenue of $23.2 billion, a 13% growth year-on-year, reflecting higher volume across its business. BDS booked $36 billion of new orders during the year. including wins on important new franchise opportunities like the TX Trainer, the MQ-25 unmanned aircraft, and the MH-139 helicopter. More recently, in the fourth quarter, BDS was awarded contracts to modernize the entire Spanish Chinook helicopter fleet and a joint ground system to provide tactical satellite communications for the U.S. Air Force. BDS made progress on a number of critical program milestones, including delivering the first two KC-46 tankers to the U.S. Air Force earlier this month. Two more tankers have been accepted by the Air Force, and we expect to deliver these aircraft imminently. We look forward to working with the Air Force and the Navy during their initial operational tests and evaluation of the KC-46 as we further demonstrate the operational capabilities of this next-generation aircraft across refueling mobility, and combat weapon systems missions. Additionally, we received the contract to provide the second KC-46 international tanker to Japan. This highlights the broader demand and market opportunity that we see for this program. Other key operational milestones for BDS included the unveiling of the SB-1 Defiant helicopter, Boeing and Sikorsky are developing for the U.S. Army's joint multi-role technology demonstrator program, and completing another Minuteman III flight test. We continue to ramp up the activities for the TX and MQ-25 programs. These wins are the culmination of years of unwavering focus, improving our technology, and de-risking the programs. We have developed and flight tested two all-new production-ready TX jets, with 76 flight tests having been completed to date. We've already seen strong interest as well for the TX from outside of the US. On MQ-25, we have demonstrated deck handling and engine trials. Our MQ-25 prototype aircraft is currently in ground test and expected to undergo first flight this year. Now turning to global services. BGS reported revenue of $17 billion, representing 17% growth year on year. Since its operations began in July of 2017, BGS growth has consistently outpaced the average for the services market. BGS continues to win new business, highlighting the value we bring to our broad range of commercial and government customers and the strength of our one Boeing offerings. BGS booked new orders totaling approximately $18 billion in 2018. The awards included support services and sustainment contracts for military customers globally, such as the recent C-17, F-18, and F-22 contracts with U.S. Navy and Air Force, and F-15 for Qatar. In addition to the strong momentum in its parts and supply chain business, BGS continues to expand its market-leading digital solution portfolio and customer base. In the fourth quarter, more than 5,300 commercial and military aircraft were monitored in flight by Airplane Health Management, a cloud-based, real-time health monitoring solution. Adding to the list of our digital analytics customers, Shenzhen Airlines recently signed up for crew pairing and rostering services. Shenzhen will be the first airline in China to use Boeing analytics-powered crew management solutions. Bringing the most advanced data analytics capabilities to the airlines allow them to focus on their core business of serving their customers while improving efficiency and cost. In the fourth quarter, we also completed acquisition of KLX, a major global provider of aviation parts and services. Boosting our supply chain capability enables us to better serve our customers while profitably and purposefully growing our business. Our integration activities continue to progress well. We've retained top KLX talent and are on track to achieve or exceed our business case synergy value. Additionally, last year we started operations for our airplane seat joint venture with Adiant and auxiliary power units joint venture with Safran. These partnerships support Boeing's vertical integration strategy to strengthen in-house capabilities and depth in key areas to offer better products that deliver greater value to our customers, grow our services business, and generate greater lifecycle value. We've also made progress in our strategic partnership with Embraer. We've recently received approval by the government of Brazil and signed the definitive agreements with Embraer. The Embraer shareholder vote scheduled for February 26 is the next major milestone. Over the coming months, we'll continue to work with Embraer, global regulators, and other stakeholders to complete the transaction and create the most important strategic partnership in the aerospace industry. Assuming the approvals are received in a timely manner, we expect to close the transaction by the end of this year. In summary, we delivered another year of strong operating performance, captured noteworthy additions to our large and diverse backlog, returned significant cash to our shareholders, invested in our people and our business to drive innovation and excellence, and complemented our organic growth with planned strategic inorganic investments. With that, let's turn to the business environment on slide three. We continue to see healthy global demand for our offerings in commercial, defense, space, and services. These are sizable sectors that are growing. and backed by strong fundamentals with a combined market opportunity of $8.1 trillion over the next 10 years. I would note that as a global company with customers in 150 countries, we are always mindful of the potential impact of geopolitical and macroeconomic forces. We continue to track a host of near-term issues and mitigate potential risks as appropriate. We value and maintain strong relationships with our customers, suppliers, and other stakeholders around the world. reinforcing the mutual economic benefits of a strong and prosperous aerospace industry. In commercial aviation, global passenger traffic continues to grow faster than GDP and long-term trends. For 2018, passenger traffic grew 6.6% through November, representing the ninth straight year of above-trend growth. We believe the changing nature of travel, with more connected city pairs and a rising middle class, has fundamentally expanded traffic patterns and supports sustained growth. At the same time, airlines are maintaining capacity discipline, keeping supply and demand in balance, as industry profitability remains near historic highs. Meanwhile, air cargo continued its solid momentum in 2018, with traffic increasing nearly 4% through November. Our customers continue to recognize the superior value proposition of our more fuel-efficient airplanes. as reflected in the strong intake of new orders we saw last year. For 2019, we expect to see our new order intake to be moderated but still at a healthy pace. Our sales expectations are built on the diverse demand that we're seeing around the world and across airline business models. There also is more balance between airplanes purchased for fleet growth and replacement, leading to more stable purchasing patterns. We believe the evolution in these key market dynamics in aggregate continues to drive less cyclicality for our industry. Over the long term, we remain highly confident in our outlook, which forecasts the demand for nearly 43,000 new airplanes over the next 20 years, which will help double the size of the global fleet. These long-term demand fundamentals, combined with healthy market conditions and a robust backlog, provide a solid foundation for our planned production rates. Now turning to our product segments, starting with the narrow body. Our current production rate of 52 per month and planned increase to 57 this year is based on our backlog of more than 4,700 aircraft and a production skyline that has sold out into early next decade. The 737 program added 13 new customers during the year and the Max family surpassed 5,000 net orders in December. We continue to assess the market performance upward pressure on the 737 production rate. As with all rate increases, we continue to assess the supply chain readiness as well as the market demand in an integrated manner as part of our disciplined decision making. In the wide body segment, we have seen steady orders for the 787 and the 777 and have high confidence in a meaningful increase in wide body replacement demand early next decade. The current generation 777 continued its steady sales momentum with 51 net orders. The 777 program has captured more than 2,000 orders since its launch. These additional orders brought the backlog to 100 aircraft and provide further support for the 777 bridge. Turning to the 777X, we recently launched our Boeing business jet variant, the longest range business jet ever that can connect virtually any two cities in the world. We have a strong foundation of 340 orders and commitments for the 777X, which support our plan for ramping up production and delivery of this new aircraft. We are focused on further bolstering the 777X skyline. The combined 777, 777X production rate is five per month. As we transition to 777X, we continue to expect the delivery rate to be approximately 3.5 aircraft per month in 2019, and we expect the delivery rate to increase slightly in 2020 as we continue to assess 777 demand as well as 777X timing. The 787 Dreamliner extended its status as the fastest-selling twin-aisle jet in history with 109 net orders last year or more than 1,400 since the program launched. Highlights include Hawaiian Airlines and Turkish Airlines becoming new 787 customers. American Airlines and United Airlines added to the growing list of repeat 787 Dreamliner customers, highlighting the strong market preference for the 787 family and its superior value. With more than 600 in the backlog, our plan to increase Dreamliner production to 14 airplanes per month this year is well supported. Turning to our 747 and 767 programs, with our unmatched freighter product lines, we are well positioned to capture the increased cargo demand. We added four new orders for the 747 in the fourth quarter, and as previously announced, we plan to increase 767 production rate from 2.5 per month to 3 per month in 2020. At Defense, Space, and Security, we continue to see solid demand for our major platforms and programs. The BDS portfolio is well-positioned with a mature, world-class set of platforms to address current needs and innovative, capable, and affordable new franchise programs to build the future. We expect to continue to see broad support for our products from the Pentagon and Congress. Fiscal year 2019 defense bills authorized the fourth multi-year procurement for the F-18 fighter, added funding for additional rotorcraft, funded the requested quantities, our key programs across our fixed wing and commercial derivative aircraft portfolios, and supported our missile, space, and satellite products. While the fiscal year 2019 NASA appropriations have not yet been enacted, Congress has also demonstrated robust support for our key space exploration programs. Demand from outside of the U.S. for our defense and space offerings also remains high, in particular for rotorcraft, commercial derivatives, fighters, and satellites. Our investment in future growth and new sales continues in areas that are priorities for our customers. We will continue to leverage capabilities and technologies from across our enterprise to win important opportunities, such as the ground-based strategic deterrent. Turning to the services sector. We see the $2.8 trillion services market over the next 10 years as a significant growth opportunity for our company. BGS provides agile, cost-competitive services to our customers worldwide. We aim to continue growing faster than the average services market growth rate of 3.5% as we further expand our broad portfolio of services offerings and continue to gain market share. BGS's 17% year-on-year revenue increase solidifies our confidence in the growth opportunity and our team's ability to capture it. Strong orders of $18 billion in a year reflect our customers' recognition of our value proposition in helping them optimize the performance of their fleets and reduce operational costs through the lifecycle. Our focus for BGS remains on optimizing the business and expanding our portfolio offerings through organic growth investments, such as strengthening our vertical capabilities, complemented by strategic acquisitions and partnership to position BGS for sustained long-term and profitable growth. Our expertise, the global reach of our business, and our strong customer partnerships have us well positioned to compete and win in this important sector. In summary, with growing markets and opportunities ahead, our team remains intensely focused on growth, innovation, and accelerating productivity improvements to fuel our investments in the future. For example, the first test flight of our autonomous passenger air vehicle prototype last week shows our efforts to continue to lead with a safe, innovative, and responsible approach to new mobility solutions. Our one Boeing strategy and offerings across our three businesses are key differentiators that help cement our position as the world's leading aerospace company. With that, Greg, over to you for the financial results.