Boeing Company (The)

Standing by, good day everyone and welcome to the Boeing Company's third quarter 2019 earnings conference call. Today's call is being recorded. The management discussion and slide presentation plus the analyst and media question and answer sessions are being broadcast live over the internet. At this time, for opening remarks and introductions, I'm 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 third quarter 2019 earnings call. I'm Marita Staja, and with me today is Dennis Mullenberg, Boeing's President and Chief Executive Officer, and Greg Smith, Boeing 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 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 over to Dennis Mullenberg.

Thank you, Marita, and good morning. This month marks the one-year anniversary of the Lion Air Flight 610 accident. It's been roughly seven months since the Ethiopian Airlines Flight 302 accident. Not a day goes by where my team and I don't think about these accidents. They weigh heavily on us, and we will never forget the lives lost aboard those flights. We are sorry, and we continue to extend the deepest sympathies to the families and loved ones. These accidents affect all of us personally and reinforce the importance of the work we do. We know lives depend on it, and nothing is more important to us than the safety of all those who fly on our airplanes. Let me walk you through the latest developments regarding the 737 MAX on the next slide. Our priority remains supporting the safe return to service of the MAX and assisting our airline customers and operators through this difficult time. We are working daily with the FAA and global regulators on the process they have laid out for certifying the 737 MAX software and training updates and ungrounding the global fleet. Again, I want to express our regret for the difficulties that the release of an instant message document on Friday has presented to the FAA and other regulators, and we understand entirely the scrutiny it's receiving. We are committed to working with the investigative authorities and the US Congress as they continue their investigations. We are focused on going forward. As we have shared, we completed the MCAS software update earlier this year, which addresses concerns found following the two MAX accidents and provides three additional layers of protection to prevent accidents like these from ever happening again. To date, we've conducted more than 800 tests and production flights, totaling more than 1500 hours with the updated software, which incorporates feedback from across global regulators and MAX operators. We are making steady progress on the second software update announced in June for additional flight control computer redundancy to eliminate the possibility of even extremely unlikely risks that are unrelated to the accidents. In the upcoming days, Boeing will complete additional testing of this software update and conduct multiple simulator evaluations and reviews leading up to a certification flight with the FAA on board. Just last week, The company successfully conducted a dry run of the certification flight test. We're making daily progress on these important certification steps. We have brought the very best of Boeing to this effort, dedicating all resources necessary to ensure that the improvements to the 737 MAX are comprehensive and thoroughly tested. That includes spending over 100,000 engineering and test hours on their development. Looking forward, we target regulatory approval for the 737 MAX return to service to begin this quarter. As we've said before, however, it's the FAA and other regulatory authorities who will ultimately determine the timing and conditions of return to service in each relevant jurisdiction. This may include a phased approach and timing may vary by jurisdiction. During this process, we have been working closely with the FAA and other regulators. We provided documentation, had them fly the simulators, and helped them understand our logic and the design for the new software. All of their questions are being answered. The process is dynamic and involves constant dialogue with government agencies that will continue in the days and weeks ahead. In preparation for the safe return of the 737 MAX to service, we have worked to build the trust and confidence of our customers and regulators. We've partnered with customers and pilots from around the world as we've developed our solutions. We have welcomed and encouraged their questions and given them opportunities to test those solutions firsthand in our simulators. We have hosted 545 participants from more than 140 customers and regulators around the globe to experience the software updates in our simulator sessions. We have also conducted 20 global conferences with more than 1,100 participants from more than 250 organizations to help operators and financiers prepare for return to service and provide them the opportunity to ask questions of our teams. In addition, we are conducting weekly technical calls with our customers worldwide to deliver the highest quality support and fully prepare the fleet to safely return to service when the grounding is lifted. This involves an entry into service approach augmented with advanced analytics. This also includes a proposed comprehensive package of training and educational resources. With our first and foremost priority the safe return to the service of the MAX, We announced a change earlier this month that separates the chairman and CEO roles to further enable me to center my attention on running the company as Boeing's president and CEO. Dave Calhoun, our board's independent lead director, is now serving as our non-executive chairman. I'm fully supportive of this division of labor and look forward to continuing my close partnership with Dave, who has a deep knowledge of the aerospace industry and has been a strong and independent leader on Boeing's board since 2009. We can be a force multiplier for this important work underway across the company and with our external stakeholders. This move is just the latest of several actions by our board and senior company leaders to strengthen Boeing's governance and safety management processes, which I will discuss next. Let's turn to slide three. As part of our longstanding commitment to safety, last month I announced several actions were taken to continuously improve. The actions followed recommendations from our Boeing Board of Directors that were the result of a five-month independent board committee review that I'd requested of our policies and processes for the design and development of our airplanes. Members of the committee on airplane policies and processes rigorously explored these aspects of our business and made several recommendations focused on further improving safety throughout the company and the broader aerospace ecosystem. My team and I fully embraced our board's recommendations and took immediate steps to implement them across the company. With the committee's input, we established a new product and services safety organization that will review all aspects of product safety and maintain oversight of our accident investigation team and the company's safety review boards. Additionally, we're strengthening and elevating our engineering function through a direct reporting line to Boeing's chief engineer who reports to me. We're also establishing a formal design requirements program enhancing our continued operation safety program, partnering with our airline customers on flight deck designs that continue to anticipate the needs of future pilot populations, and we're expanding the reach of our Boeing Safety Promotion Center. These actions are on top of the steps our Board already has taken to reaffirm its commitment to and oversight of safety, including establishing a permanent Aerospace Safety Committee and adding safety-related experience is one of the criteria for future directors. In addition to implementing the Board's recommendations, we're committed to reaching even higher. We're concurrently expanding our efforts to strengthen the way we manage safety across Boeing and our supply chain. For example, by broadening the use of a comprehensive safety management system and safety review boards. We're already driving a company-wide approach to safety, quality, and integrity that strengthens our vision and serves to reinforce and improve our operational performance. Additionally, investments in enhanced flight simulation and computing capabilities have increased our company's ability to proactively test a wide range of scenarios, resulting in improved product safety. Advanced research and development efforts in future flight decks are also underway, leveraging leading-edge work in human factors, science, and design. Safety is our continual focus. Looking to the future, we'll be exploring ways we can strengthen global aviation safety in partnership with stakeholders across the aerospace community. We also continue to invest in talent for the future. At this defining moment, Boeing must take an expanded leadership role with a heightened focus on safety. We'll keep learning from these recent accidents, we'll stay true to our values, and we will come through this together as a company and industry. As we keep safety at the forefront, we also remain focused on stability across our production systems and supply chain, as well as mitigating impacts to our customers. As I mentioned earlier, our best current estimate is a return to service to the max that begins this quarter. Based upon this estimate and other factors, we expect to maintain our current production rate of 42 deliveries per month with a focus on supply chain and production system stability. This will be followed by incremental rate increases that would bring our production rate to 57, by late 2020. After return to service, we expect the 737 MAX airplanes produced during the grounding and included within inventory will be delivered over several quarters, with the majority of them delivering in the first year. We will continue to assess our production plans as part of our scenario planning process. As mentioned before, the FAA and other regulatory authorities will ultimately determine the timing and conditions of return to service in each relevant jurisdiction. 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 line. I want to reiterate my personal thanks to everyone who continues to be our partner in this journey. We are mindful these are challenging times for many, and we remain grateful for your support. Now let me turn to an overview of our third 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 our liquidity as we work through the safe return to service of the maps. With that, let's move to slide four. During the quarter, we generated revenue of $20 billion in core earnings per share of $1.45. reflecting lower 737 deliveries, partially offset by higher defense and services volume. We recorded negative $2.4 billion of operating cash due to the 737 impact. We paid $1.2 billion of dividends in the quarter. Now let's look at the third quarter operating performance for our businesses. Commercial airplanes generated revenue of $8.2 billion, reflecting 62 deliveries. BCA ended the quarter with our backlog of nearly 5,500 airplanes worth $387 billion. As we discussed before, global trade tension is putting near-term pressure on our wide-body production rates, especially the 787. I will discuss that in more detail later. Now over to defense, space, and security. BDS reported third quarter revenue of $7 billion and booked $5 billion in new orders, demonstrating the continued value we bring to our customers across our defense space and security portfolio. Those orders included contracts for a fifth KC-46 tanker production lot for the U.S. Air Force and nine AH-64E Apaches for the U.S. Army. Key milestones for BDS included the MQ-25 unmanned aerial refueler first test flight. Also, TX Trainer, now renamed the T7A Red Hawk, performed its 100th test flight. Other accomplishments in the quarter included the first flight of the inaugural PAA Poseidon for the UK Royal Air Force and final assembly of the Space Launch System core stage structure. Also noteworthy is the Satellite Launch Services Award received by our United Launch Alliance joint venture from the US Air Force. Moving on to tanker, as mentioned, Boeing received a $2.6 billion contract for production lot five, covering 15 KC-46 aircraft, spares, and support equipment. We delivered nine tankers to the U.S. Air Force in the quarter and 23 year-to-date. Turning to global services, BGS reported revenue of $4.7 billion, representing 14% growth year-on-year. BGS continues to win new business. highlighting the value we bring to our commercial and government customers and the strength of our One Boeing offerings. In the quarter, BGS booked contracts for commercial modification, component and training services, as well as contracts with U.S. Air Force for F-15 training to Qatar, A-10 Thunderbolt II re-winging, and KC-46 Tanker Lot 5 services. Also in the quarter, India-based carrier SpiceX Express took delivery of the first 737-800 Boeing converted freighter to expand its air cargo operation. Progress continues towards our planned strategic partnership with Embraer. We're actively engaged with authorities in relevant jurisdictions and have obtained a number of regulatory approvals, including clearance to close in the U.S. and Japan. The European Commission earlier this month opened a Phase II assessment in its review of the transactions. We remain convinced that both the commercial aviation and the KC390 joint ventures will increase competition in the market and create value for our customers and the traveling public, as well as drive innovation in products and services. We now expect the transaction to close in early 2020. In summary, our priority continues to be the safe return to service of the 737 MAX, and we've continued to allocate additional resources and attention on this effort. At the same time, we are maintaining our focus on keeping the business strong and healthy while focusing on operational performance. As we announced yesterday, we made several leadership changes that will further strengthen our company during a challenging time. Stan Deal has succeeded Kevin McAllister as President and CEO of Boeing Commercial Airplanes, and Ted Colbert has succeeded Stan Deal as President and CEO of Boeing Global Services, effective immediately. Dan brings extensive operational experience at commercial airplanes and trusted relationships with our airline customers and industry partners. And Ted brings to our global services business an enterprise approach to customers and strong digital business expertise, a key component of our long-term growth plans. We are also grateful to Kevin for his dedicated and tireless service to Boeing, our customers, and our communities during a challenging time, and for his commitment to support this transition. With that, let's turn to the business environment on slide five. 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. In commercial aviation, while we have seen some moderation of traffic growth, global passenger volume continues to be resilient. Building on nine straight years of above-trend growth, passenger traffic this year is growing at a solid 4.5% through August, again outpacing global GDP and tracking with long-term growth rates. Meanwhile, the air cargo sector is facing more headwinds, as overall volumes have contracted year-to-date amid a challenging trade environment. That said, we continue to see steady utilization of the global freighter fleet while carriers are placing incremental orders to support their fleet replacement needs. Additionally, traffic data points to solid growth in air cargo-intensive sectors such as pharma, technology, and express shipments. Improvements in industrial production and global trade will be key to a rebound in air cargo in 2020. With an industry outlook for approximately 44,000 new airplanes over the next 20 years and an ecosystem of lifecycle solutions needed to maintain and support it, we continue to see sustainable long-term growth in commercial aviation. This is powered by mature and emerging economies, a growing middle class, and continued innovations in business models and products. We believe the evolution in 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 are well positioned in this market with a strong portfolio of airplanes a large and diverse order backlog, and a strong one Boeing team. The narrowbody segment will command the largest share of new deliveries with expected demand for 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. In the widebody segment, We've seen solid order activity this year for our market-leading 787 and 777 families. In the quarter, Korean Air and Air New Zealand placed follow-on orders for the 787 to replace aging aircraft, reflecting the start of the wide-body replacement cycle that we expect to accelerate early next decade. We see the need for more than 1,000 small to medium wide-body aircraft to be replaced over the next decade. In the near term, as we have shared, the U.S.-China trade situation has presented challenges for our wide-body production plans, in particular for the 787 program. As part of our practice for a significant market such as China, we had forecasted orders from operators based in the country as part of our skyline assumptions. The lack of orders from China in the past couple of years has put pressure on the production rate. We are in the planning window on the rate decision due to the production lead times. As part of our disciplined rate management process, we believe it is appropriate to make a production rate adjustment to balance the supply and demand. So, beginning in late 2020, we plan to transition the 787 production rate from 14 per month to 12 per month for approximately two years. We will maintain this disciplined rate management process going forward, taking into account a host of risks and opportunities. We will continue to assess the demand environment and make adjustments as appropriate in the future. We also continue to monitor and inform the US-China trade discussions. We value and maintain strong relationships with our customers and government stakeholders around the world, reinforcing the mutual economic benefits of a strong and prosperous aerospace industry. And we remain hopeful that airplanes will ultimately be part of the trade solution. At our planned rates, our 787 backlog of nearly 530 orders provides a solid foundation and represents more than three and a half years of production. Moving to the 777 program, the current generation 777 continued its steady sales momentum with 14 new orders in the quarter. These provide further support for the 777 bridge. On 777X development, we continue to progress on our pre-flight testing, focusing on final systems, propulsion, and airplane level tests. On the static airplane test results, our detailed analysis of the data is progressing well. What we've seen to date reinforces our prior assessment that this will not have a significant impact on the design or on the preparations for first flight. The GE9X engine remains the pacing item as we work towards first flight of the 777X. GE, our engine supplier, has made good progress to address the durability challenges. GE has installed retrofit components in the certification test engines and testing has restarted. Once the engines become available, GE and Boeing will need to successfully complete additional testing before we are ready to fly. We still expect first flight to take place in early 2020. We continue to explore opportunities to improve the timeline, such as leveraging our system integration labs and additional airplane ground testing consistent with our commitment to safety. That said, as we further assess the impact of the GE9X engine and associated risk, We now expect first delivery of the 777-9 to be in early 2021. The combined 777-777X production rate is five per month. We continue to expect the 777 delivery rate to be approximately 3.5 aircraft per month in 2019. The delivery rate is expected to be approximately three per month in 2020 as we mitigate some of the impact of the slide in 777-X timeline by producing more 777 current generation aircraft. We are focused on further bolstering the 777X skyline. The 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. On the 767 program, we added 16 new orders in the quarter, including 15 for the KC-46 production lot five. As previously announced, We plan to increase the 767 production rate from 2.5 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 $2.5 trillion of opportunities for our business, with 40% of that from outside the U.S. The BDS portfolio remains well positioned with proven 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 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 also see robust support for our future franchise programs. We are maintaining a sharp focus on these future franchises. The MQ-25 recently began test flights, and we are humbled to honor the legacy of the Tuskegee Airmen with the T-7A Red Hawk. We also remain absolutely dedicated to commercial crew and the Space Launch System, which will maintain our nation's position as the leading edge of space exploration. Turning to the services sector, We see the $3.1 trillion services market over the next 10 years as a significant opportunity for our company. We continue to see growth with expanded service offerings across the supply chain portfolio and our global digital solutions. New business in the quarter reflects our superior products both on and off platform with new digital agreements signed with Air Canada for our manpower planning software and with Indigo for ops control and tail assignment digital solutions. In summary, with growing markets and opportunities ahead, our team remains committed to growth, innovation, and accelerating productivity improvements that fuel our investments in the future. So with that, Greg, over to you for our financial results.