Boeing Company (The)

Thank you for standing by. Good day, everyone, and welcome to the Boeing Company's second quarter 2019 earnings conference call. Today's call is being recorded. The management discussion and slide presentation, plus the analysts and media question and answer sessions, are being broadcast live over the Internet. At this time, for opening remarks and introductions, I am turning the call over to Ms. Marita Sutasia, Vice President of Investor Relations for the Boeing Company. Ms. Sutasia, please go ahead.

Thank you, John, and good morning. Welcome to Boeing's second quarter 2019 earnings call. I'm Marita Cedra, and with me today is Dennis Mollenberg, 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 comments, 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, estimates, and goals we include in our discussion this morning are likely to involve risks, which are detailed in our news release, in our various FACC 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 Mullenberg.

Thank you, Marita, and good morning. Let me start with the 737 MAX. The accidents that occurred in Indonesia and Ethiopia continue to weigh heavily on us. We will always be sorry for the lives that have been lost and the families that have been impacted. These accidents affect all of us personally and reinforce the importance of the work that we do. We know lives depend on it, and nothing is more important to us than the safety of the flight crews and passengers who fly on our airplanes. We're also committed to supporting the families and communities affected by the Lion Air and Ethiopian accidents. Earlier this month, we pledged $100 million in funds to help support those families and communities. And last week, we announced that $50 million from this pledge would be dedicated to providing near-term financial assistance to families of the victims. And we have partnered with renowned experts Kenneth Feinberg and Camille Biros on disposition of these funds. Now let me turn to the latest on the MAX technical updates. Last month, the FAA directed us to address a specific condition of flight unrelated to MCAS that the planned software update did not previously address. We agreed with the FAA's decision, and we are currently working on the software changes to address this requirement. In addition, we are working with the FAA and other regulators to complete as many elements of the certification process as possible in parallel with the development of the software update. We will submit our final certification package to the FAA once we have satisfied all of their requirements, which we currently estimate will be in the September timeframe. However, as we have consistently emphasized, It is the FAA and other global aviation regulators that will determine when the 737 MAX returns to service, and we are working tirelessly to meet their requirements. The process is dynamic and involves constant dialogue on outstanding questions and open issues that will continue in the days and weeks ahead. We are committed to working with these regulators to satisfy all of their requirements and to ensure the 737 MAX's safe return to service. As I mentioned last quarter, as part of our commitment to continually improve safety as we have always done, we've established a new board committee to review Boeing's policies and processes for the design and development of airplanes. The committee has sought input from outside experts, from both industry and government, and is working expeditiously to conduct its review and provide any recommendations it deems appropriate. In preparation for the safe return of the 737 MAX to service, We've conducted a dozen customer conferences with MAX operators around the world and nearly 225 simulator sessions to develop, test, and demonstrate the software. In addition, we conduct weekly technical calls with our customers worldwide to ensure that all the appropriate steps are being taken so that the fleet is fully prepared to return to service when the grounding is lifted. This involves having the necessary technical kits and expertise on hand while adopting a new airplane entry into service mindset in partnership with our customers. This also includes a comprehensive package of training and educational resources. In April, we reduced the 737 production rate to 42 per month to accommodate the pause in max deliveries. Both within Boeing and our supply chain, we are using this time to improve the production system health and stability. As we said in our pre-release last week, our best current estimate is a return to service of the MAX that begins early in the fourth quarter. Based upon this estimate and other factors, we expect to be able to maintain our current production rate of 42 deliveries per month to be followed by incremental rate increases that would bring our production rate to 57 during 2020. As our efforts to support the 737 MAX's safe return to service continue, we will continue to assess our production plans. Should our estimate of the anticipated return to service change, we might need to consider possible further rate reductions or other options, including a temporary shutdown of the MAX production. The grounding has also impacted our customers and their flight schedules. The production rate adjustment to 42 per month will also cause associated airplane delivery delays in the future. We've been in constant contact with our customers to support them during this difficult time, and we'll continue to work closely with all of our customers around the world and deal with the impact individually, customer by customer. As we announced last week, we are recognizing impact to our second quarter results from both the longer than expected lower production rate and also estimated potential concessions and other considerations to customers. I want to personally thank everyone who continues to be our partner in this journey, from our airline customers and their pilots, flight attendants, and others who have been impacted by these groundings, representatives from all levels of government who share our commitment to safety, to the flying public, and everyone in the aviation community impacted by these events. We are grateful for your support, and we will continue striving to earn and re-earn your trust. Now let me turn to an overview of our second quarter 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 how we are maintaining financial discipline and prudently managing liquidity as we work through the safe return to service of the MACs. With that, let's move to slide two. During the quarter, we recorded revenues of $15.8 billion and core earnings per share of negative $5.82, reflecting the MACs charge as well as lower volume of 737 deliveries partially offset by higher defense and services volume. We recorded negative $0.6 billion of operating cash and paid $1.2 billion in dividends, reflecting a 20% increase in dividends per share from last year. Now let's look at the second quarter operating performance for our businesses. For the quarter, commercial airplanes generated revenue of $4.7 billion, reflecting 90 deliveries, and the $5.6 billion pre-tax max charge. We saw solid wide-body activities in the quarter, and our backlog remains healthy at more than 5,500 airplanes worth $390 billion. Also, earlier this month, we launched our latest round of flight testing through our Echo Demonstrator program to assess new technologies, from enhancing safety and environmental performance to improving the flying experience. We debuted a Boeing 777 that will serve as the 2019 flying testbed for 50 projects. A majority of the test flights will fly on sustainable aviation fuel to reduce emissions and demonstrate the fuel's viability. Now over to defense space and security. BDS reported second quarter revenue of $6.6 billion and booked $4 billion of new orders, demonstrating the continued value we bring to our customers across our defense space and security portfolio. Those orders included contracts for a second lot of MH-47G Block II Chinooks for the U.S. Army, service life modification for the U.S. Navy's F-18 fleet, wideband global satellite communications for the U.S. Air Force, and a five-year extension of joint direct attack munition tail kits, spares, repairs, and technical services for the U.S. Air Force. Key milestones for BDS included the first TX trainer program flight test on contract with the U.S. Air Force, and successful completion of the Starliner's final parachute test in preparation for upcoming launches. We delivered five KC-46 tankers to the U.S. Air Force in a quarter. Year to date, we've delivered a total of 13 tankers. We look forward to continuing to work with our customer during their initial operational test and evaluation of the KC-46, and we are committed to delivering the highest quality product to our customers. Turning to global services, BGS reported a revenue of $4.5 billion, representing 11% growth year on year. 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. During the quarter, BGS won new business, totaling approximately $4 billion, which included performance-based logistics contracts for AH-64 Apache for the U.S. Army, and KC-767 tanker for the Italian Air Force. BGS also received commitments from ASL Aviation Holding and GCAS for up to 45 737-800 converted freighters. And as announced at the Paris Air Show, we're excited about Boeing's first off-platform component service program with British Airways for the airlines A320 and A320neo aircraft. Also in the quarter, aligned with our targeted vertical integration strategy to strengthen internal capabilities, increase innovation, and provide greater end-to-end value for our airline customers, we entered into an agreement to acquire Encore Group, an aerospace interiors company. Additionally, through Boeing Next, which leads our future mobility efforts, we announced a strategic partnership with Kitty Hawk Corporation to collaborate on future efforts to advance safe urban mobility. Progress also continues with the Embraer transaction as we work through regulatory approvals and other closing conditions. We still expect to complete the transaction by the end of the year. In summary, our priority continues to be the safe return to service of the 737 MAX, and we've continued to prioritize additional resources and focus on this effort. At the same time, we are maintaining our focus on keeping the business strong and healthy. As I demonstrated in the second quarter, our team continues to execute on operating performance and capture noteworthy additions to our large and diverse backlog. 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 $8.7 trillion over the next 10 years. That's up from $8.1 trillion in our previous forecast. The increase is driven by strong commercial aviation fundamentals, airline productivity, wide-body replacement demand, and large, stable defense and space markets, as well as the need for lifecycle services solutions. 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, including the U.S.-China trade discussions. We believe in the mutual economic benefits of a strong and prosperous aerospace industry. In commercial aviation, while we have seen moderation of traffic in the first half of this year, global passenger traffic continues to grow faster than GDP and near long-term trends. In 2018, we saw the ninth straight year of above-trend growth for passenger traffic. So far in 2019, passenger traffic has grown at a solid 4.6% through May. On the air cargo market, we saw a contraction in the year-to-date traffic. While we expect cargo traffic headwinds to linger in the near term, we anticipate an improvement in the latter part of the year. Our view of the demand fundamentals remains robust. We are highly confident in our industry outlook, which now forecasts the demand for approximately 44,000 new airplanes over the next 20 years. That's up from approximately 43,000 in our previous forecast, doubling the size of the global fleet and requiring a sizable ecosystem of lifecycle solutions to maintain and support it. We continue to see sustainable, long-term growth in commercial aviation, powered by mature and emerging economies, a growing middle class, and continued innovation in business models and products. The changing nature of travel has fundamentally expanded traffic patterns with improved accessibility and affordability. At the same time, airlines are maintaining capacity, discipline, and keeping supply and demand in balance. There are also more balance between airplanes purchased for fleet growth and replacement. Of the 44,000 new airplane demand, 44% will go towards replacing aging aircraft. leading to more stable purchasing patterns. We believe that evolution in these key market dynamics in aggregate continues to drive less cyclicality for our industry. These long-term demand fundamentals provide a solid foundation for our commercial business. We're well positioned in this market with a strong portfolio of airplanes, a large and diverse order backlog, and a strong OneBoeing team. Additionally, we are forecasting demand for around 800,000 new civil aviation pilots and 770,000 new maintenance technicians over the next 20 years. About 80% of them will be for commercial aviation. Meeting this strong demand will require a collective effort from across the global aviation industry. The aviation industry will need to adopt innovative training solutions to enable optimum learning and knowledge retention. The narrow-body segment will command the largest share of new deliveries. We expect airlines to need more than 32,000 single-aisle airplanes in the next 20 years. These new airplanes will continue to stimulate growth and provide required replacements for older, less efficient airplanes. Our 737 program has a backlog of more than 4,400 aircraft and a production skyline that is sold out into early next decade. Last month, International Airlines Group one of the world's largest airline groups signed a letter of intent to purchase 200 737 MAX jets. We are honored by their trust and confidence that IAG is placing in the 737 MAX and ultimately in the people of Boeing and our deep commitment to quality and safety above all else. In the wide body segment, we have seen steady order activities for the 787, and the 777 and have high confidence in a meaningful increase in wide-body replacement demand early next decade. In the near term, we continue to monitor and inform the U.S.-China trade discussions. China is an important part of the global aircraft market, and progress on this front will help support our wide-body production rates. The current generation 777 continued its steady sales momentum with two new orders from DHL in a quarter and 12 new commitments and letters of intent from Qatar Airways. which we firmed up earlier this month, and also from China Airlines and Turkmenistan Airlines. These provide further support for the 777 Bridge. Turning to 777X, orders and commitments of 364 aircraft provide a strong foundation that supports our plan for ramping up production and delivery of this new aircraft. We continue to focus on further bolstering the 777X skyline. On 777X development, Our first two flight test airplanes are now in pre-flight testing. Overall, the airplane is performing well in pre-flight tests with intermediate gauntlet and initial taxi tests completed during the quarter. Our teams are currently focused on final systems, propulsion, and airplane level tests. However, the GE9X engine remains the pacing item as we work towards first flight. As we previously mentioned, GE, our engine supplier, is working through some challenges with the engine that are putting risk on the overall test schedule. Based on GE's latest assessment on what it will take to address these challenges, we are currently projecting that first flight will occur in early 2020 rather than in 2019 as we had previously mentioned. This schedule slide is obviously disappointing given how well the aircraft has been performing in pre-flight tests and that we are on track on non-engine activities. While we continue to target 2020 for first delivery of the 777-9, the engine issue has added significant risk to the schedule. We continue to work closely with GE as well as explore opportunities to improve the schedule, such as leveraging our system integration labs and additional airplane ground testing as we strive to meet this delivery target in a manner consistent with our commitment to safety. We continue to expect 777 delivery rate to be approximately 3.5 aircraft per month in 2019. Given the pressure around 777X first delivery timeline, we are reassessing the 2020 skyline. In light of the strong demand for our freighter line, we intend to mitigate some of the impact by producing more 777 current generation freighters in 2020. Turning to the 787 Dreamliner, in the quarter, we saw Air New Zealand, Korean Airlines, and Air Lease Corporation announced their commitments to purchase a total of 33 787-9 and 787-10s. Korean Airlines firmed up their orders last week. Our 787 backlog stands at more than 550 airplanes. Similar to the 777X, we will continue to focus on further bolstering the 787 skyline. On our 767 program, we added six new 767 freighter orders in the quarter. And as previously announced, we plan to increase the 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. Looking at the defense and space market for the next 10 years, we see a $2.5 trillion market of opportunities for our business. About 60% of that is in the U.S., so there's tremendous opportunity around the world. Our strategy of global reach with local presence is key to our success. You see that across Europe, Australia, India, and the Middle East, to name a few. The BDS portfolio is well positioned with mature, world-class platforms to address current needs and innovative, capable, and affordable new franchise programs to build the future. We continue to see broad support for our products from the Pentagon, NASA, and Congress, including for procurement of the Boeing F-15EX, and F-18 fighter jets, Apache and V-22 Osprey rotorcraft, JDAM weapons, satellite programs, the Space Launch System, and key derivative programs like the KC-46 tanker and the P-8. We have also seen robust support for our future franchise programs. We are maintaining a clear focus on these future franchises, including the ongoing MQ-25 and TX development programs and our NASA commercial crew and Space Launch System programs at the leading edge of space exploration. Additionally, we're focused on leveraging our work to date on GBSD to help deliver this essential national security capability. Turning to the services sector, we see the $3.1 trillion services market over the next 10 years as a significant growth opportunity for our company. This is a very dynamic and exciting marketplace, one that is driven by new technology and a relentless drive for greater efficiency, reliability, and safety. BGS provides agile, cost-competitive services to our customers worldwide. The future of commercial and government aircraft and services will be increasingly centered on technology and data services to drive smarter business decisions in commercial aviation and improve the commercial passenger experience and to enhance warfighter safety, effectiveness, and mission readiness. 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. Strong orders of $4 billion in the quarter reflect our customers' recognition of our value proposition in helping them optimize the performance of their fleets and reduce operational costs through the lifecycle. The market continues to recognize our broad and deep portfolio of digital solutions. which harness the power of big data to significantly expand fleet capability and cost savings for commercial and government customers. During the quarter, we expanded our global rosters of customers, including announcements at the Paris Air Show by Delta Airlines and JetBlue Airways, who signed up for our crew, navigation, analytics, and other solutions to help optimize their operations. In summary, with growing markets and opportunities ahead, Our team remains committed to growth, innovation, and accelerating productivity improvements to fuel our investments in the future. Our one Boeing strategy and offerings across our three businesses are key differentiators that strengthen our position as the world's leading aerospace company.