The Boeing Company (BA) on Q2 2021 Results - Earnings Call Transcript

Operator: Thank you for standing by. Good day, everyone, and welcome to the Boeing Company's Second Quarter 2020 Earnings Conference Call. Today's call is being recorded. The management discussion and slide presentation, plus the analyst question-and-answer session are being broadcast live over the Internet. At this time, for opening remarks and introductions, I'm turning the call over to Ms. Maurita Sutedja, Vice President of Investor Relations for the Boeing Company. Ms. Sutedja, please go ahead. Maurita Sutedja: Thank you, John. Thank you and good morning. Welcome to Boeing's second quarter 2021 earnings call. I'm Maurita Sutedja. And with me today are David Calhoun, Boeing's President and Chief Executive Officer; and Dave Dohnalek, Boeing’s Interim Chief Financial Officer. And as a reminder, you can follow today's broadcast and slide presentation through our website at boeing.com. As always, we have provided detailed financial information in our press release issued earlier today. Projections, estimates and goals we included in our discussion this morning involve risks, including those described in our SEC filings and in the forward-looking statements disclaimer at the end of this web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of certain non-GAAP measures. Now I will turn the call over to David Calhoun. David Calhoun: Thank you, Maurita. And good morning, everyone. I hope you're all staying well as we continue through this global pandemic. And please encourage everyone you know to get the vaccine if they haven't already. With the onset of COVID-19 roughly a year and a half ago, our worlds were turned upside down. As an industry, we faced it head on and worked together every step of the way. While there is still ways to go before a full recovery we're encouraged by the continued progress on vaccine distribution and the uptick in domestic travel. We're also looking forward to further progress on coordinated, international travel policies and protocols. I've said before that we've used this year as a critical inflection point, and it's proving to be just that. We're turning a corner and the recovery is gaining momentum. Throughout all of this we are continuously learning and adapting how we operate to best serve our customers, our suppliers, our teammates, our communities, and other stakeholders. And I'm proud of how our team has remained focused on our mission. Before I go through our business update, I'd like to take a moment to recognize and thank Dave Dohnalek for serving as our interim CFO. Dave is a proven well-respected leader here at Boeing, and I'm grateful for his partnership as we transition. And as you know, we have appointed Brian West to serve as Boeing's next CFO. It's effective August the 27. Brian is an exceptional leader with significant financial management and long-term strategic planning experience in complex global organizations across the aerospace, manufacturing and services industries. And thanks to Greg Smith's legacy, he is inheriting a world-class finance team here at Boeing. I've worked directly with Brian previously in my professional career. He has brought operational expertise and will bring a great perspective to our business transformation journey and post pandemic recovery as he joins the team this month. Dave Dohnalek: Great. Thanks, Dave. And good morning, everyone. It’s good to be reconnecting with many of you that I know from my time in Investor Relations and throughout my career at Boeing. I’m honored to be in the role of Interim CFO and to help facilitate a smooth transition for Brian. Now let’s turn to Slide 4, please. Second quarter revenue increased to $17 billion, primarily due to higher commercial deliveries and commercial services volume. Positive earnings in the quarter also benefited from lower period costs. Additionally, several non-recurring items favorably contributed to the quarter. Income tax in the quarter primarily reflects benefits from a lower valuation allowance. Now let’s turn to Commercial Airplanes on Slide 5. Revenue was $6 billion, reflecting higher commercial airplane deliveries. The improvement from the prior year was also due to a $551 million 737 MAX customer consideration impact in the second quarter of last year. Although Commercial Airplanes operating margin continued to be under pressure, it improved in the quarter due to higher commercial airplane deliveries and lower period costs. We delivered 47 MAX airplanes in the second quarter. We currently have approximately 390 MAX aircraft built and stored in inventory. We have made significant progress in our efforts to remarket some of our inventory airplanes and have now largely addressed that issue and put it behind us. Just prior to the 737 MAX return to service in the U.S., we estimated that around half of the approximately 450 aircraft we had in storage would be delivered by the end of 2021 and the majority of the remaining aircraft by the end of 2022. That expectation has not changed. We expect delivery timing and the production rate ramp profile to remain dynamic, given the market environment, customer discussions and the remaining global regulatory approvals. There is no material change in our assumption for 737 abnormal costs or our assessment of the liability for estimated 737 MAX potential concessions and other considerations to customers. Turning to 787. Second quarter deliveries were light as we worked through the activities that Dave just mentioned. Our latest assessment of the financial impact of inspections, rework, temporary production rate adjustment and delivery delays has been included in our second quarter closing position. The 787 program margin remains near breakeven. On a cash basis, these additional costs will create a headwind in the near term. However, we still expect overall unit margins to hold up relatively well. Moving now to 777X. As Dave mentioned, we still expect first delivery of the 777X to occur in late 2023. We are making progress in our flight test activities. We still expect that the peak use of cash for the 777X program occurred in 2020 and that cash flow will improve as we get closer to EIS and begin deliveries in late 2023. We anticipate the program will turn cash flow positive approximately one to two years after first delivery. We are starting to see improvements in Commercial Airplanes financial performance due to increasing 737 MAX deliveries and great efforts by the BCA team to manage costs through our business transformation activities. We also captured strong orders in the quarter, which is a testament to the value of our products and our customers’ focus shifting now to fleet planning. Although the Commercial recovery will take time and we still have work to do, we’re on a positive path and we remain – and we will remain focused on driving stability on the 787 program and across the business. Let’s now move to Defense, Space & Security on Slide 6. Second quarter revenue increased to $6.9 billion, primarily due to higher volume on the KC-46A tanker program and the P-8A program. We posted the strong operating margin of 13.9% in the second quarter. The margin increase was driven by lack of a charge on the tanker program as compared to second quarter of 2020 as well as a favorable adjustment on a non-U.S. contract. We received $4 billion in orders during the quarter, including an award for 14 Chinook helicopters for the UK Royal Air Force. We also reached an agreement with Germany for five P-8A aircraft. BDS backlog is currently valued at $59 billion. Now let’s turn to Global Services on Slide 7. In the second quarter, Global Services revenue increased to $4.1 billion and operating margin grew to 13.1% driven by higher Commercial Services as the market continues recovering from the impact of COVID-19. Operating margin was also helped by lower asset impairments, lower severance costs and a favorable mix of products and services. During the quarter, BGS won key contracts worth approximately $3 billion, resulting in a total backlog now of $19 billion. We saw incremental improvement in Commercial Services during the second quarter and we expect the quarterly revenue trend to improve as we support increasing airline flight operations. That said, given the dynamic environment, we can expect to see variability in the revenue and margin trajectory from quarter-to-quarter at BGS. Now let’s take a look at cash flow on Slide 8. Operating cash flow for the quarter improved significantly to negative $0.5 billion, reflecting higher Commercial deliveries, higher order receipts, reduced expenditures on lower wide-body production rates and benefits from our business transformation efforts. While we saw a cash flow benefit from order activity in the second quarter, keep in mind that we continue to expect advanced payment burn-down to be a headwind for the rest of this year and into next. Now let’s move to Slide 9 and discuss our liquidity position. We ended the second quarter with strong liquidity, including $21.3 billion of cash and marketable securities on our balance sheet and access to $14.8 billion from our bank credit facilities which remain undrawn. Our debt balance remains stable at $63.6 billion at the end of the quarter. We expect to have lower total debt at the end of the year due to the paydown of maturing bonds and potential early paydown of our delayed draw term loan. Given the dynamic environment, we maintain vigilance in managing our cash. Thanks to actions taken throughout the business to enhance our cash balance, we believe we currently have sufficient liquidity. We remain focused on reducing our debt levels and actively managing our balance sheet. Our investment-grade credit rating is important to us and we will continue to consider all aspects of our capital structure to strengthen our balance sheet. Moving to the next slide. In summary, we operate in a dynamic business environment. We’re seeing the commercial market recovery accelerating. However, it continues to be uneven across different regions and the near-term path remains challenging. Given this backdrop, we will continue to diligently cultivate opportunities and monitor risks. Our key enablers include vaccine distribution and travel protocols, U.S.-China trade relations, remaining 737 MAX regulatory approvals and resumption of 787 deliveries. Our financial performance in the second half of this year will largely be driven by these key enablers. On cash flow, we still expect full year 2021 to be a use of cash. Despite additional pressure from the updated 787 delivery schedule, our expectations for cash flow this year have not deteriorated due to timing of advanced payment burn-down and favorable order activity. With respect to the quarterly trajectory for the remainder of this year, we expect continued variability in cash flow quarter-over-quarter due to timing of deliveries as well as receipts and expenditures such as expected cash tax benefits and MAX customer settlement payments. We still expect to turn cash flow positive in 2022. The key drivers of cash flow in 2022 as compared to this year include continued improvement on the 737 program due to lower customer considerations and higher delivery payments as well as recovery in commercial services. However, advanced payments will still be a headwind in 2022. While our delivery expectations are now higher next year due to some 787 deliveries moving from this year into 2022, the related additional cash flow will be largely offset by the burn-down of advanced payments next year. To close, while focusing on safety, quality and operational excellence, our team continues to closely examine all aspects of our business, simplify and streamline everything we do, drive stability in our operations and make long-lasting change. I’m honored to be a part of such a strong team and look forward to our bright future. With that, I’ll turn it back to Dave Calhoun for closing comments. David Calhoun: Thanks, Dave. I appreciate it. As we continue to transform our business, we remain committed to quality, safety, integrity and transparency in everything that we do and every action we take. I’m extremely proud of the resiliency and dedication of our team and I remain confident in our future. So with that, Dave and I are happy to take your questions. Thanks. Operator: Our first question comes from Noah Poponak with Goldman Sachs. Please go ahead. Noah Poponak: Hi, good morning, everyone. David Calhoun: Hi, Noah. Dave Dohnalek: Hi, Noah. Noah Poponak: I wanted to ask about margins given the performance in the quarter, and you talked a lot about the business transformation. Is there any way to quantify what you're gaining in the aircraft business, whether it's a structural cost out or where the MAX and 87 production rates need to be to achieve the margins they had last cycle or anything along those lines. And then, can we expect BDS and services margins to continue to march higher from the levels they achieved to this quarter? Thanks. David Calhoun: Yes. Noah, thanks for that question. So let's start with maybe BDS and BGS. As you know, BGS, before the pandemic was sort of mid-teen margin business. And I think, you saw some significant progress towards that this quarter to 13.1%. So I think that will depend from quarter-to-quarter on mix. There's a variability in many, many programs in BGS, but I think we're seeing positive trajectory there. And we see a path to getting back towards those mid-teen margins overtime. In BDS, strong quarter on margins with 13.9%. Now some of that was due to as we mentioned a higher or a benefit from a non-U.S. program adjustment that the benefit of the quarter, even if you sort of stripped that out BDS performed well. And in the kind of the low double digit margin territory that they've been in good times. We were not taking charges. So clearly the fact that we didn't take any significant charges in the quarter and performed well across the programs that turned out very well. And so, then back to BCA, clearly, we're still in a negative margin territory, although much better than we've been certainly in recent quarters and compared to the same quarter last year. I think a lot there will be driven by rate. We are ramping up in the 737 MAX program at 16 per month now moving to 31 per month at the beginning of next year. And we intend to go higher, obviously driven by what we see in the market beyond early next year in some of that, the key enablers that we just talked about China being one are important in that in addition to just overall traffic trends. So I think for BCA, it's going to be production rate driven in addition to getting additional traction on the business transformation efforts we've had cutting costs. And then of course, as Dave mentioned, achieving stability especially in the 787 program as we work through our final issues there. Dave Dohnalek: Yes. I'm optimistic to get to or beat our prior, the margins you were accustomed to with respect to BCA, biggest part be in transformation and the leverage we can get by reducing our sort of break even rates. And that's what we're working on. It's been quite effective. The key will be to keep it when the market turns back. So anyway, I'm looking forward to that. Noah Poponak: So, David, it sounds like you believe you can have the margins you used to have in BCA even before you're all the way back to the production rates you had? David Calhoun: Well, yes. I mean, our initiatives are definitely intending to do that. We'll see when the measures come, but if you think about the dynamics with respect to that, it's all about that underlying infrastructure costs and the consolidation of a couple of plants and a few things like that. That has to give us benefit at similar rates from where we were before. So yes, the leverage is in the rates, but when we get to those similar rates, I feel good about where we're going to be. Noah Poponak: Can you just quickly give us the millions of dollars of the contract adjustment in BDS? Dave Dohnalek: Yes. We don't have that specific number that we're disclosing. But again, it would be, even if you strip that out, above 11% margins at BDS, which is we're happy about the progress there. Noah Poponak: Got it. Thank you. Operator: Our next question from the line of Myles Walton with UBS. Please go ahead. David Calhoun: Thanks. Good morning. Myles Walton: Good morning, Dave. Dave Dohnalek: Hi, Myles. Myles Walton: Dave Calhoun, some of the order activity in the last six months would seem to be opportunistic as you're back-filling some of those guidelines from the 37 and repositioning some of those. So a lot of questions we get is, is this more, just a surge of opportunism or is this really significant demands that's turning to the positive. Maybe you can frame it for, what you expect over the next six to 12 months for an order activity. David Calhoun: I don't view this as opportunistic either on my side or on the customer side. When you make decisions to order 270 airplanes, expand your capacity and get aggressive in the marketplace, that is a fundamental decision as it gets. And it was very little with respect opportunism. The good news when I just evaluate the United order is they have to consider all of their routes, all of their operations. And then they, as you know, solve for the lowest cost, most efficient delivery of a passenger, a route of a passenger. And then they make choices around the airplanes. The good news is they have history with both manufacturers. So I liked the way our product line competed with our competitor. I mean, it was straight up out of the 270, we got 200, the models and the routes that they're intended to satisfy their optimal for United. And anyway, so I'm quite pleased with how that went and it was quite in my view strategic and long-term, and in the case of Southwest it's the same. Southwest, we benefit from it being in all Boeing fleet and they benefit from it being all Boeing. But on the other hand, they're doing the same thing as United. These are two very strong airlines who are staking out the future and making big strategic decisions to do so. They're extending their reach, they're improving their routes structures, et cetera. So, yes, I can't see these in any way as being opportunistic. I do think, and expect as domestic markets return recoveries robust, the retirements stay retired, and I believe most of them will that we're going to end up in that same real estate play going forward, meaning airlines who get aggressive and have balance sheets and are strong who want to improve their routes structures, and grow into the market. They'll be the first one to play. I can't predict exactly when that happens. Just like I couldn't predict when United would step forward or Southwest. But I know, I think these two are as strategic as it gets. And we held our ground and posture and we let the airplanes performance sell itself. That's really the way it happened. Myles Walton: Okay. So you would expect the backlog on a 37 MAX to continue to build even if the stronger deliveries in the second half of the year? David Calhoun: Yes, I do. I do. Again, I can't predict timing and I certainly can't predict the scale of each and every order. But I liked the way these were led and I liked the way we competed. Myles Walton: Thanks. Operator: Next question from Kristine Liwag with Morgan Stanley. Please go ahead. Kristine Liwag: Hi, good morning, Dave and Dave. David Calhoun: Hi. Dave Dohnalek: Good morning, Kristine. Kristine Liwag: Can you help us understand the drivers of a free cash flow through the rest of 2021 and how we should think about the run rate of 737 MAX concession payments? I mean, ultimately, is there a path to positive free cash flow for any of the remaining quarters of the year? David Calhoun: Yes, so. Kristine, I think number one, the burned out advanced payments, as I mentioned, is going to be lumpy, obviously dependent on delivery schedule. And we're going to see that effect the second half of this year and also 2022. So that is a headwind. Certainly, the tailwinds you see are expected higher airplane deliveries certainly 737 MAXs. And as we work through 787 higher deliveries there too, once we complete the work and are able to deliver again. I think, well, we're not predicting which quarter or this year might be cash flow positive. I think, it will be variable. We certainly made a lot of progress from Q1 with the Q2 cash flow performance. I think the rest of the year, I think it will be a balance of higher deliveries and some headwinds from advanced payments, but also benefits from, as Dave mentioned, continued work on the business transformation efforts and also on the expectation that we should be receiving a cash tax benefit sometime in the second half could be in Q3, could be in Q4. So that would be a benefit to the year as well on cash. But we're not predicting Kristine, not giving guidance on a quarter, cash flow level. But we see, we do see some tailwinds for the rest of the year. Dave Dohnalek: The underlying trajectory is good. And we're making really solid ground on that basis. So I feel good. We always have our quarterly lumps, but anyway I do think this quarter is indicative of the underlying trend. Kristine Liwag: Thanks. And if I could squeeze one more on the 737. Earlier this month, we saw news on Chinese willingness to conduct flight tests. Has there been any feedback on what you need to do to get the aircraft certified? David Calhoun: Yes. But let's just say, the dialogue with the CAAC, first of all, remember they have a hundred airplanes on the ground in China that the airlines want to get into the year. They got the Olympics coming and they want to move down that path. So they have a lot of natural incentive to want to do it. We've been working closely with them from the beginning. It's constructive. Technical issues are being resolved. In fact, for the most part, I think they're all behind us. And yes, I anticipate there will be test flights conducted in certification. As we said, we expect that we will get that before the end of this year. So anyway, I'm very encouraged about the constructive nature of that, of how that's going. And anyway hopefully bigger trade issues don't get the way. I don't believe they will. Both sides are incented for this industry to move forward. Operator: Our next question from Doug Harned with Bernstein. Please go ahead. Doug Harned: Thank you. Good morning. David Calhoun: Good morning, Doug Dave Dohnalek: Good morning, Doug Doug Harned: On the 787. The new issue that you're addressing, it appears to be the same type of structural nonconformity problem. You've been addressing elsewhere in the airplane since last August. Now, how do you get comfortable to know there's not a next place where this issue could come up and because it appears to be occurring across multiple suppliers, how do you resolve that for the long term? Is it a production process problem, a quality control problem, or maybe even an over specification of tolerances? I mean, can you describe a little bit of what's going on here? David Calhoun: Yes, Doug, I really appreciate the question, because it outlines the heart of what we're trying to accomplish here. So let me start by saying, this is not the FAA getting tough on Boeing. This is Boeing getting tough on Boeing. We launched a program to inspect because we did find some issues by way of notice of escape out of out supply chain. Early on, we decided we would do a nose to tail inspection of all of it, tier one, tier two. And we did exactly all the things you're describing. Our specs to type, the process controls that our suppliers where they need to be is the rework operations that we've now put into our operations in Charleston, are they necessary? And are they getting the job done? And in every case, we look for even the smallest exception to the tolerances that we've designed. And in every case, we then take a step to one identify it. We immediately talk to the FAA about it. Two, we fix it. Three, we make sure it won't happen again. How do you do it? Well, you have teams inside our suppliers working on process control development understanding of exactly why that spec is necessary and where it is. And on our side, we start putting disciplines in place that make it clear to those supply chain that we're not going to keep our line running. If we get one that isn't right. That's a little bit of what's going on here. Here's the good news. If we ever add a window to get this behind us once and for all it's now. We're producing at the lowest rate ever customers are not knocking down our door to get their airplanes in light of the COVID impact on international traffic. And so we're very determined to see our way through this. Good news, the inspections are done right, toe to tail. So those inspections are done. Doesn't mean somewhere along the way, our suppliers are going to raise their hand and tell us there's an escape somewhere along the way. But it's not going to be as a result of this big effort that we've put forward here. And each and every one of these issues that we find, we always have a decision to make with respect to compliance, which is that each and every part and every airplane is built precisely to the drawings that we've created and it's our to job to rework the issue. And that's – that is what we're going through. I view this as a courageous moment for Boeing. My hats off to our team, believe it or not, all of these conditions were preexisting my leadership team. So the work they're taken on and the readiness that we're getting in place for, what I think is the second half recovery in the wide body world of next year. That's when I believe it border protocols are going to get understood and predictability will return to the market. When that happens and orders come, we will have to be able to respond to rate increases in a very stable form and fashion. And I think the actions we're taking right now are the most important part of that puzzle. So I really do apologize to investors and I apologize for guessing that the last issue was our last but we're getting close. And most importantly, the underlying causes are getting understood and resolved. Doug Harned: Then is this latest issue, which seemed to be somewhat of a surprise, was that the result of just the completion of inspections, which are now done, and this one was turned up, or is there more to go here? So that there's still some risks that remains, I mean, I know there's always a tiny bit of risk, but how would you characterize that? David Calhoun: The former, it was part of our inspection process. This one happened to be a tier two issue. So you go through your supplier, then you go through your supplier’ supplier to find that process control that needs to be implemented clearly and correctly. And the rework that needs to be done is largely done on their premise. So again we don't have a, like a big inspection program from here forward. This one is for the most part complete and I expect things to change dramatically. But most importantly, the amount of rework we'll eliminate in our factory and the predictability of our supply chain on all these fronts is that much better off. Doug, one other comment I want to make just to make sure everyone knows how important 87 is. During this COVID period, no wide body passenger airplane has been flown more aggressively than 87, it's everywhere. 90% of that fleet is up and active and being worked as hard as it can be worked. So despite the low numbers with respect to all this international traffic, et cetera, the 87 is the prized asset. That's getting worked hard. Doug Harned: Okay. Thank you. David Calhoun: Yes. Operator: Our next question is from Seth Seifman with JPMorgan. Please go ahead. Seth Seifman: Thanks very much. And good morning, everyone. Dave, I was wondering if you could talk a little bit about the advanced balance you mentioned that as a headwind to free cash flow in the second half 3022 almost $51 billion right now. It hasn't really come down very much at all since the pandemic started. Is there, a kind of a back to the envelope way that you can help us think about how much that liability balance used to come down? David Calhoun: Yes, thanks, Seth. So it's – that's going to be lumpy from quarter-to-quarter, and obviously depending on the delivery schedule, which we've talked about is going to vary from quarter-to-quarter. We also saw orders come in, right? So you've got deliveries happening. You've got orders coming in, so you've got adding and subtracting at the same time. So the bottom line for you to think about is that we still do see these PDPs or advances as a headwind, through the second half of this year and into next year. It's a headwind, we think we will more than overcome, because we we're predicting or expecting cash flow to be positive in 2022. But just so it's not off your radar screen, this will be with us for the next number of quarters as we work through these deliveries out of inventory and apply advanced payments, case by case, customer by customer. So it's really hard to predict or give guidance there, but net-net, again, 2022, we expect to be positive cash flow and we would have tailwinds more than offsetting that headwind. Seth Seifman: Okay. Thanks very much. I'll stick to one. David Calhoun: Thank you. Operator: And next we will go to Rob Spingarn with Credit Suisse. Please go ahead. Rob Spingarn: Hi, good morning. David Calhoun: Good morning, Rob. Rob Spingarn: Just a clarification, first, Dave Calhoun for you, and then a question on R&D. But do you need to do any rework on delivered 787s? That's the first question. The second question on R&D is it's – I think it's down about at least for BCA at about half the second quarter 2019 level. So, when does that trough and when might you expect to start investing in R&D again, growing headcount there and what will be the focus of that incremental investment? David Calhoun: Yes, I'll start this with the underlying premise on R&D. I mean, we are – my view is we are fully funded on the important R&D efforts that will support BCA broadly. I want to separate that from development funding which is the ongoing certification work associated with the MAX 10, 777X. And I hope in the relatively near term a freighter version of that airplane. So, we are going to be very busy and have been very busy on the development front and spending a fair amount of money on it. I don't expect that number to go up significantly at any different at any point in time even in the relatively near term, not because we're not going to take on new stuff just because. And the next comment I would make on just the research front and what is the likely technologies that will surround that next airplane. It's not going to be dramatically different with one exception, and that is everything sustainability. That next airplane will have to meet some serious sustainability tests. I do think that sustainable aviation fuels is going to be a big part of that and our propulsion suppliers with respect to the packages that they are now promoting, you may have seen the CFM package most recently with the fan. Anyway, I think, it's going to be a fight between sustainability propulsion packages and meeting that spec. And then for Boeing it's to make this the most efficient airplane it can possibly be. And you may have heard me say our investments in the underlying modeling technologies that have to be deployed applying the digital thread that we have in our defense programs to the commercial programs that is critically important to this next development. It will shorten the cycle on development, it will improve the productivity on the program itself and that's critical. And then finally just our production system will be quite different as we think about it. And we have very active programs on both the modeling and production system to be ready for that moment. So that's a lot. But I'm quite – I'm actually quite confident that our R&D budgets are what they ought to be and quite robust relative to the needs of our BCA business. Rob Spingarn: Okay. And then just on that 787 any retrofit needed? David Calhoun: Oh yes, I'm sorry. Look, that's a determination that has to be made with the FAA. And most of this in light of the fact that the safety margins on the structural elements of our airplanes is huge. So, it's not the world's easiest set of analyses to go through and our teams have taken their shot at it. They go through the FA in great detail. And so, I don't really know the answer to that. But the ideal for all of us is to just incorporate it into ongoing maintenance schedules of the airlines. So that is that's our hope and desire and sort of anyway, but I'm going to leave it to the FAA and our ultimate conclusions between those two teams as to just what happens on that front. Rob Spingarn: Okay. Thank you, Dave. David Calhoun: Yes. Operator: And next we'll go to Rob Stallard with Vertical Research. Please go ahead. Rob Stallard: Thanks so much and good morning, David Calhoun: Good morning Rob. Dave Dohnalek: Good morning Rob. Rob Stallard: I can't really keep track of the number of times you mentioned China on the call, but this is clearly a very important issue. Now Dave Calhoun, you said that you expected certification by the end of this year. Is that effective to the drop-dead date, that if we're sitting here on the 31 of December and you haven't got certification, then you'd have to then cut the, say the 737 RAM, for example, and maybe further push out the recovery on the 787? Or is it actually an earlier day because you need to give notice to your suppliers? Thank you. David Calhoun: Yes, it's a great question. If we get to the end of the year, I often use the beginning of the following year, but I'll start thinking about it very hard and end it by the end of the year, if we get to that moment and importantly, we're not within a minute of getting certification in some way, we do have to consider real actions with respect to what the future rate ramp looks like. And so yes, that's – your premise is right? Rob Stallard: So that still gives supplies enough notice to effectively double production in that timeframe? David Calhoun: Yes, I mean, but I – we put some margin into that. In other words, we may have to take some risks ourselves with respect to their readiness and their production rates and inventory that we might accumulate. That's on us. We understand that, but yes, the answer is yes, we’ll have to give them notice. And I think they're going to be – they will be okay with that largely because of risks we take. Rob Stallard: That's great. Thank you very much. David Calhoun: Yes. Operator: Our next question is from Sheila Kahyaoglu with Jefferies. Please go ahead. Sheila Kahyaoglu: Thank you. Good morning guys. So just a follow-up on Bob's point, actually, since we're on the map, can you talk about the ramp to 31 a month production in the beginning of 2022 from 16 today? And burning down half of the inventory – inventory to aircraft at the beginning of the year, implies 165 deliveries and assuming 16 per month production rate through year end, that implies our delivery rate of 44. So how do we kind of think about that visibility on the regional basis? What kind of assumptions did you make on China and other regions? And then also just on that last point you made Dave on profitability, what does that kind of mean for BCA profitability and when you hit breakeven? Dave Dohnalek: Well, I can't throw a dart and be that precise with respect to the day we are at profitability. But we have a real rate ramp scheduled for the remainder of our year on the subject of deliveries. Not so much production. I think we get as high as 50 as we exit the year. And then that begins to make a big dent. And I'm pretty confident we can do that. We have de-risked our year largely for China. So, they become next year's risk with respect to delivery. So, we'll run that play and that ramp as hard as we can, we will have signals with respect to where China is well before that. And if we have to make adjustments, we will. But I do think we are prepared for that delivery rate. And I think we're close to what we’ve already demonstrated. I think we delivered over 30. I don't think I know over 30 in the month of June. We've got big teams, they know how to do it, the FAA has granted us our authorities and we're running full speed. And as I said, the performance of the airplane has been fantastic. So, again, it's your premise is right, China is mostly de-risked for this year, but will definitely be part of next year is a risk as we talked earlier. Again, I remain confident on that prospect, but we'll know when we know. Sheila Kahyaoglu: Thank you. Dave Dohnalek: Yes. Operator: And our next question from Ron Epstein with Bank of America, please go ahead. Ron Epstein: Hi Dave, how are you? Dave Dohnalek: Hi, Ron. Good. Ron Epstein: Just maybe a question on the engineering front. There has been some press that we've seen some engineering ranks sitting out at Boeing. How do you think about that, particularly at the, maybe the more senior level, some of the senior technical fellows taken off? Are you worried about a bit of a brain drain in the engineering ranks, Boeing, and how are you addressing that? Dave Dohnalek: With every – first of all, as you well know, I've been in engineering businesses most of my life. With every retirement of a seasoned veteran in Boeing, in engineering, there's always a, oh my gosh, what's going to happen, because they carry an awful lot of knowledge. And so, I accept that as a norm. On the other hand, those very same people work as hard as they could to train the best engineers that the aerospace industry, whatever see behind them. And when moments like this happen, where we've had a few more and mostly just out of natural, voluntary actions on their part all good for them all in good relation to us. These folks that they've trained all these years step up and they step up big and they are impressive and they are good. And so, in many ways, there are always two sides to that coin. And I love the side I'm seeing, which is an incredibly qualified, highly motivated group of younger engineers who studied under these folks. And I promise you, these folks who left will never not return those kids’ phone calls. Life goes on. And we continue to improve. I have been traveling the engineering function across The Boeing Company in some of the highest profile projects, some of the most amazing technologies I have ever seen. I can't, I don't ever come away unimpressed. The folks are great. I really don't worry about it. I do worry about input, meaning we are now in a ruthless competition with everybody, not just our aerospace industry, which is getting bigger, but also all of the folks in the cyber and Silicon Valley world. But I like our chances. We've got a great mission. Most engineers start their career and start their jobs based on the mission of the company. We got a pretty good one and anyway. So, look, I read it, I've seen it, I understand the concern from the outside in, but from the inside out I'm quite confident in our technical team. Ron Epstein: So, just as a logical follow-on, what are you doing to recruit the best? I mean, there's a lot of choices out there like you highlighted. And in fact, there's even a lot of startups now in aerospace, which is an interesting time. How are you getting the best folks to come to Boeing? Dave Dohnalek: Big internships, we got a lot of them, active internships. We never slowed them down during COVID. I personally participate in the discussions with many of the interns. This virtual world allows you to do that. So that's something we will continue. It's the mission. It's really the mission. Most of these engineers and these highly qualified data analysts and software engineers, they like what we do. They want to go to deep space, right? They want to help protect their country. These are meaningful things. So, we try to attach them to our mission, our vision, and then we try to give them the best set of assignments they can get. Move them around, do the things that Boeing can do because of our big footprint. Anyway, and then some of them just go as deep as they can go, because there is a particular technology, we might be a world leader on. Those are easy for us to recruit because they just want to go deeper. So anyway, we're active on it. I personally am active on it and I'm confident in what Boeing brings to them. Ron Epstein: Thank you. Dave Dohnalek: Yes, thank you. Operator: Our next question is from Carter Copeland with Melius Research. Please go ahead. Carter Copeland: Hey good morning, gentlemen. David Calhoun: Good morning, Carter. Dave Dohnalek: Good morning. Carter Copeland: Just a question on the 787 for either one of you actually, I know you had been pretty close based on the previous disclosures to forward loss on the program, just given where that stood. And given that you've now taken the delivery rates lower, I was kind of surprised you didn't actually tip that line. Was that related to the efficiency that you talked about earlier, Dave, in terms of on the backend, you'll be better. Just any color you could help us on how you guys avoided that despite the lower production will be helpful. Thanks. David Calhoun: Yes, Carter, yes, thanks for the question. Certainly, there are some additional costs associated with the rework, production rate adjustment, delivery, timing, et cetera. But there also are other puts and takes that, go into this as, you know that have enabled us to maintain a positive margin there. And so, we – it's still near to zero, it's that where we want it to be, we've got work to do to get it, to keep moving north in higher. And we, obviously examine this thing every quarter very detail approach along with our auditors, et cetera. And so, we just have some additional benefits in the cost side and that are offsetting enough so that we don't find ourselves in an RFL position. And obviously, as Dave said, it's all about achieving stability and starting to march back up that margin. Dave Dohnalek: We have not made any outlandish forward assumptions with respect to productivity that we don't know is there, because we don't do that. So anyway, it's not half baked, this is fully baked. Carter Copeland: Great. Thank you for the color gentlemen. David Calhoun: Yus. Thanks, Carter. Operator: And next, we'll go to Richard Safran with Seaport Global. Please go ahead. Richard Safran: Everybody, good morning. How are you? David Calhoun: Good, Rich, how are you? Richard Safran: Excellent. So, Dave I wanted to know if you could expand on your opening remarks about freight and your strategy there? Your comments about current freight demand, I would think drive an improvement your long-term outlook and wondering if that's the case. Second, am I correct that there are new emission standards coming that might impact the 637 and 777 freighters? I was wondering if you comment on how you are going to address and meet those standards. And then finally, Airbus is talking about a 350 freighter any plans to address this threat? Dave, I'm just trying to get to your overall product strategy here for freighters. David Calhoun: Yes, I am quite confident in the freighter market. I think some secular things have happened there that are going continue to make that a very important market. As you know we are significant in that market and have long-standing customer relationships. And especially in the next couple of years prior to the ICAO standards being implemented. I'm confident it will drive some additional 76 and additional 777 demands, et cetera. We need to develop a new ICAO compliant freighter version opportunity. I circle the 777Xs, the logical place for that and the smart place to do that. So, as I said, without suggesting that we've already launched and/or that we have one plan by the day, we're confident and I'm confident that that might be the next of our programs. And it will be an incredible freighter with incredible long-term advantages for our major customers. So anyway, that's where we stand. And in the meantime, there are exemptions that exist within the ICAO language that have to be accommodated by our U.S. Government in some way, shape or form that allow for a transition strategy to that new kind of opportunity that is ICAO compliant. Because you'll recall, or maybe know, or don't know the 76 when it moves into a, like a FedEx or UPS opportunity. If this displaces airplanes that are 40% plus less efficient and most importantly, 40% less environmentally friendly. So, there is, I think, some transition strategies that can and should be implemented that will help us in that. But we need to step forward on an airplane itself. And yes, so I don't mind tip in my hand. That's what's got my greatest interest. Richard Safran: Great thanks for the color. Maurita Sutedja: Operator, we have time for one more analyst question. Operator: Certainly. And that will be from Cai von Rumohr with Cowen. Please go ahead. Cai von Rumohr: Yes, thanks so much for squeezing me in. So, Dave, I was a little surprised by your comment on expecting China approval by year end, because while I get it that the airlines wanted and that you are making progress with testing, nothing in China happens without political okay. And everything I read is that situation has been going downhill. So, the question is, are you seeing any specific signs either from the Chinese government through your contact or from the U.S. Government that would give you confidence to make a projection that you expect to see those the approval by year-end? Thank you. David Calhoun: Yes, let me just in some ways state the obvious. I don't want to imply that anything is risk-free on this front. It's not, it never will be. Especially as it relates to the China relations, which are real. And then we see all the strains as well. The advantages and the needs on both sides with respect that the need for the equipment, again, 100 airplanes on the ground, an economy that has been the fastest to recover from COVID and economy preparing for the Olympics and for a substantial amount of traffic to, and from in the domestic market. So, all of those needs line up and they support to airlines to accommodate that traffic is where it needs to be. There is nothing that prevents this trade from happening. So, there's nothing written that says you can't do it. I mean, so there's nothing that prevents it. And our government fully understands and appreciates the fact that our industry is a leader in the world. And that leadership in China is critical to that and the employment that it, of course holds. So, without them having to sort of launch this as some big new opening to a structural agreement, we're just going to stay on course and continue to support free trade between these two players, both of whom understand the importance. And there are plenty of trade partners that exist between China and the United States. All I like to do is look, look at all the sort of import numbers in this country and vice versa. It's a big corridor. We just want to be part of that and we want to do it the right way and support our customers. And things have been constructive if they weren't. I would tell you so anyway that’s where we are. Cai von Rumohr: Thank you. David Calhoun: Yes. Operator: All right, that completes The Boeing Company’s second quarter 2021 earnings conference call. And thank you all for joining.
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Jefferies Upgrades Boeing to Buy Amid Spirit AeroSystems Acquisition

  • Jefferies upgrades Boeing to Buy, highlighting the long-term benefits despite potential EPS dilution in 2026.
  • Boeing announces a strategic acquisition of Spirit AeroSystems for $4.7 billion to enhance supply chain management and operational efficiency.
  • The acquisition aims to address manufacturing defects and is seen as a pivotal step for Boeing in the aerospace industry.

On Monday, July 1, 2024, Jefferies updated its stance on Boeing (NYSE:BA), changing the grade to Buy while recommending holding. At the time of this update, the price of Boeing was $182.01. Jefferies highlighted that although the Boeing deal might dilute earnings per share (EPS) for 2026, the benefits it brings are considered 'priceless.' This analysis was published by The Fly.

Boeing, a leading aerospace company, has announced a significant move to reacquire Spirit AeroSystems (SPR) for $4.7 billion. This strategic acquisition is aimed at bolstering its supply chain management, marking a pivotal step for Boeing as it seeks to enhance its operational efficiency and reliability. The deal, disclosed on Monday, is a long-awaited step by Boeing to strengthen its position in the aerospace industry.

The acquisition of Spirit AeroSystems, a prominent fuselage maker, for $37.25 per share in an all-stock transaction valued at $4.7 billion is a strategic expansion for Boeing. This move is aimed at reintegrating Spirit AeroSystems back into Boeing and addressing and rectifying manufacturing defects that have plagued its operations. The acquisition is seen as a strategic effort by Boeing to enhance its operational efficiency and reliability in the aerospace sector.

At the time of the announcement, Boeing's stock price stood at $182.01, experiencing a slight decrease of $0.5 or -0.274%. Throughout the trading day, the stock fluctuated between a low of $180.65 and a high of $184.435, reflecting the market's initial reaction to the news of the acquisition. Over the past year, Boeing's shares have ranged from a low of $159.7 to a high of $267.54, with a market capitalization of approximately $111.73 billion and a trading volume of about 5.9 million shares.

Jefferies' upgrade of Boeing to Buy, despite the potential dilution of EPS for 2026 due to the acquisition, underscores the long-term strategic benefits of the deal. The acquisition of Spirit AeroSystems is considered 'priceless' by Jefferies, highlighting the significant positive impact it is expected to have on Boeing's supply chain management and overall operational efficiency. This strategic move by Boeing is seen as a key step in enhancing its competitiveness and reliability in the aerospace industry.

UBS Maintains "Buy" Rating on Boeing with Adjusted Price Target

  • UBS has adjusted its price target for NYSE:BA to $240 from $250 while maintaining a "Buy" rating.
  • Boeing's significant achievement in space exploration highlighted by the successful docking of its Starliner capsule at the ISS.
  • The company's stock performance and market capitalization reflect its resilience and potential for growth in aerospace and space exploration sectors.

On Friday, June 7, 2024, UBS maintained its "Buy" rating on NYSE:BA but adjusted its price target to $240 from the previous $250, as reported by TheFly. This adjustment comes at a time when Boeing's stock was trading at $191.42, reflecting the company's ongoing efforts and challenges in both its aerospace and space exploration sectors. Boeing, a leading aerospace company, has been making headlines not only for its commercial and military aircraft but also for its ventures into space exploration, a sector where it competes with other aerospace giants and newer space-focused companies.

Boeing's recent achievement in space exploration, specifically the successful docking of its Starliner capsule at the International Space Station (ISS), marks a significant milestone for the company. Despite encountering last-minute thruster trouble that nearly compromised the docking process, the mission proceeded as planned. This event is particularly noteworthy as it demonstrates Boeing's capabilities and commitment to overcoming challenges in space exploration. The successful docking, after years of delays due to technical issues including helium leaks on the spacecraft, showcases Boeing's resilience and technological prowess.

The significance of this achievement cannot be overstated, especially considering the competitive nature of the space exploration sector. Boeing's ability to successfully dock the Starliner capsule at the ISS, despite the initial docking approach being called off due to a technical issue with five out of the twenty-eight thrusters, highlights the company's engineering capabilities and its potential for future space missions. This success is a crucial step forward for Boeing, reinforcing its position in the aerospace industry and opening up new avenues for growth and exploration beyond Earth's atmosphere.

Financially, Boeing's stock performance reflects the company's ongoing efforts to navigate through its challenges and capitalize on its successes. With a stock price increase of $1.57, marking a change of approximately 0.83% to close at $191.42, Boeing demonstrates resilience in the face of adversity. The company's market capitalization stands at about $117.51 billion, with a trading volume of 5.82 million shares, indicating a solid investor interest in its activities and future prospects. This financial performance, coupled with its achievements in space exploration, positions Boeing as a key player in both the aerospace and space sectors, with the potential for continued growth and innovation.

Boeing’s Overweight Rating Reaffirmed at JPMorgan

JPMorgan analysts reaffirmed their Overweight rating and a price target of $210 for Boeing (NYSE:BA) stock. The analysts adjusted the free cash flow (FCF) estimates for Boeing for the second quarter of 2024 and the entire year, following management's recent investor conference update.

This adjustment is due to a decrease in near-term deliveries of the 737 and 787 models, coupled with the company's efforts to enhance its production processes. Despite the expected $4 billion cash outflow in Q2, Boeing's recent debt raise ensures sufficient liquidity.

Long-term cash flow estimates remain mostly unchanged for now, pending more information on the 737 production ramp-up, Boeing's potential acquisition of Spirit Aerosystems, and the priorities of the incoming CEO, once appointed. The year-end price target is maintained at $210.

Boeing Stock Plunges 7% on China Delivery Halt

Boeing (NYSE:BA) has recently stopped delivering aircraft to China due to a request from the country's aviation regulator for additional certification documentation. This documentation concerns the batteries in cockpit voice recorders installed in all Boeing models, including the 787 and 737 Max.

This suspension has financial repercussions for Boeing, with the company's Chief Financial Officer indicating a potential negative impact on second-quarter cash flow. Consequently, Boeing's shares fell by more than 7% yesterday.

Speaking at the Wolfe conference, Boeing's CFO noted that second-quarter cash flow might decline compared to the first quarter due to the continued halt in aircraft deliveries to China, a key market for Boeing. The company expects 787 deliveries in the second quarter to be on par with those in the first, indicating no short-term improvement.

In addition to the China delivery issue, Boeing faces persistent supply-chain challenges for the 787 model, which could further hinder production and delivery increases. The CFO also mentioned that margins in the defense segment are expected to be negative in the second quarter.

As a result, Boeing forecasts that second-quarter deliveries will remain close to first-quarter levels, with no significant increase anticipated.

Boeing Slashed to Sell at Northcoast Research

Northcoast Research analysts downgraded Boeing (NYSE:BA) to Sell from Neutral, setting a price target of $140 on the stock. The analysts reflected on a turbulent last three months for Boeing, during which the aerospace sector has seen its fair share of dramatic developments, including unusual incidents and concerns about safety protocols highlighted by whistleblowers. With the quarterly earnings update looming, which the analysts anticipate will raise further concerns about Boeing's fundamentals, Northcoast’s outlook is decidedly bearish.

The analysts suggested that while the market has already reacted to some negative news, as seen in the declining stock price, it may still be overlooking deeper structural issues such as balance sheet stability and potential future cash liabilities.

Boeing Shares Drop Following Another Incident

Boeing’s (NYSE:BA) shares dipped more than 1% pre-market today following a Sunday report about a Southwest Airlines Boeing 737-800 losing an engine cowling during takeoff from Denver International Airport.

The engine covering struck a wing flap, prompting the Federal Aviation Administration (FAA) to initiate an investigation into the matter. The affected Southwest flight, en route to Houston’s William P. Hobby Airport, returned safely to Denver approximately 25 minutes post-takeoff, with no injuries reported. Southwest is currently conducting a thorough examination of the aircraft.

This incident adds to a series of issues for Boeing, including a fuselage panel detachment on an Alaska Airlines jet in January and a separate FAA probe into a Southwest flight that veered off its intended landing path in New York in March. Boeing has faced ongoing scrutiny over quality control and safety, impacting the delivery schedule of its new Max aircraft. Additionally, Boeing announced last month that CEO Dave Calhoun is slated to retire at the end of 2024.

Boeing Stock Falls 2% Following Analyst Downgrade

Boeing (NYSE:BA) shares fell nearly 2% intra-day today after Melius Research downgraded the company to Hold from Buy while keeping a $209 price target.

The downgrade is attributed to "too many overhangs" affecting the aircraft manufacturer. Melius Research pointed to strong demand for Boeing’s commercial planes but highlighted significant concerns, including execution issues, a slower-than-anticipated ramp-up in 737 production, and ongoing losses in the Boeing Defense sector. These factors contribute to skepticism about reaching the projected $10 billion in free cash flow (FCF) by 2026, a figure both Boeing and consensus estimates target.

The research firm suggests Boeing is on the path to, and in need of, an extensive multi-year restructuring. It also anticipates that the stream of negative news will persist, continuing to weigh on Boeing's stock value. Melius Research’s FCF estimate for 2026 stands at $8.9 billion, falling $1.1 billion short of both consensus and Boeing’s own expectations.