Q3 2019 Earnings Call
For opening remarks, an introduction I'm trying to be color to Ms Burrito, Senior Vice President Investor Relations for the Boeing Company Mr. <unk>. Please go ahead.
Thank you John and good morning, welcome to Boeing third quarter 20, <unk> earnings call I'm worried procedure and with me today, It's Dennis Muilenburg, probably president and Chief Executive Officer, and Greg Smith borrowing Chief Financial Officer, and Executive Vice President of Enterprise performance as strategy.
After managements comments, we will take your questions in fairness to others on the call. We ask that you. Please limit your yourself to one question good question.
That's a waste we have provided a detailed financial information in our press release issued earlier today.
And that's a reminder, you can follow today's broadcast as slide presentation through our website at <unk> Dot com.
Before we begin I need to remind you that any projections estimates and goals. We include in our discussion. This morning are and are likely to involve risks, which are detailed in our news release in our various FCC filing 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 Muilenburg.
Thank you Merida and good morning.
This month marks the one year anniversary a blind air flight 610 accident.
It's been roughly seven months since the Ethiopian airlines like three or two accident.
Not a day goes by where my team and I don't think about these exits they weigh heavily on us and we will never forget the wise lost aboard those flights.
We're sorry.
And we continue to extend the deepest sympathies to the families and loved ones.
These actually that's effect oldest personally and reinforces the importance to the work we do.
We know wise depend on it and nothing is more important to us and the safety of all those.
Hi on airplanes.
Let me walk you through the latest developments regarding the 737 Max on the next flight.
Our priority remains supporting the safe returned to service, the Max and assisting our airline customers and operators through this difficult time.
We are working daily with the Okay and global regulators on the process. They have laid out for certifying the 70, 37, Mac software and training updates and I'm rounding the global fleet.
Again, I want to expressed regret for the difficulties that the release of an instant message document on Friday has presented to the F. hey, another regulators and we understand entirely the scrutiny. It's receiving we're committed to working with the investigative authorities and the U.S. Congress as they continue their investigations.
We are focused on going forward.
As we've shared we completed the end cap software update earlier this year, which addresses concerns found following the two Max accidents and provides three additional layers or protection to prevent accents like these from ever happening again.
To date, we've conducted more than 800 test in production flights totaling more than 1500 hours with the updated software, which incorporates feedback from across global regulators and Max operators.
We're making steady progress on the second software update announced in June for additional flight control computer redundancy to eliminate the possibility of even were extremely unlikely risks that are unrelated to the accidents.
And the upcoming days going well complete additional testing of this software update and conduct multiple simulator evaluations are abuse, leading up to a certification flight with the up Hey 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 at Boeing to this effort dedicating all resources necessary to ensure that the improvements the 737, Max or comprehensive and thoroughly tested that includes spending over 100000 engineering and test hours on their development.
Looking forward, we target regulatory approval for the 737 Max returned to service to begin this quarter as we've said before however, it's the <unk> and other regulatory authorities will ultimately determine the timing and conditions have returned to service and each relevant jurisdiction.
This may include a phased approach and timing may vary by jurisdiction.
During this process we've been working closely with you have to in other regulators. We provided documentation had them flight simulators and help them understand or logic in the design for the new software.
All of their questions are being answered the process is dynamic and involve constant dialogue with government agencies that will continue in the days and weeks ahead.
In preparation for the safe return to the 737 Max to service, we work to build the trust and confidence for customers and regulators, we partnered with customers and pilots from around the world as we've developed our solutions, we have welcomed and encourage their questions and giving them opportunities to test those solutions first hand, and our simulators, we posted 540.
Five participants for more than 140 customers and regulators around the globe to experience the software updates in our simulator sessions.
We've also conducted 20 global conferences with more than 1100 participants for more than 250 organizations tilt operators and finance years prepare for returned to service and provide them the opportunity to ask questions for teams.
In addition, we're conducting weekly technical calls with their customers worldwide to deliver the highest quality support and fully prepared the fleet to say we returned 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 returned to the service to the Max We announced a change earlier this month that separates the chairman and CEO role to further enable me to center my attention on running the company is Boeing's President and CEO , Dave Calhoun, Our board 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.
We have a deep knowledge of the aerospace industry and it's been a strong an independent leader on Boeing's Board since 2009, together, we can be a forced 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.
Turning to slide three.
As part of our longstanding commitment to safety last month I now several actions were taken to continuously improve.
The actions followed recommendations from our Boeing Board of directors that were the result of the five month Independent Board Committee review that I'd requested of our policies and processes for the design and development per airplane.
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 a committee is important 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 lines Boeing's Chief engineer 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 reform its reaffirmed 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 were committed to reaching even higher working currently expanding our efforts to strengthen the way we manage safety across Boeing in our supply chain.
Example, by broadening the use of a comprehensive safety management system and safety review boards were already driving a companywide approach to safety quality and integrity. It strengthens our vision and serves to reinforce and improve our operational performance.
Additionally, investments and enhance flight simulation and computing capabilities and 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 will 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 mistaken expanded leadership role with a heightened focus on safety.
Well keep learning from these recent accident will 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. They mentioned earlier our best current estimate is returned 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.
Her 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 returned to service, we expect to 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 CFA and other regulatory authorities will ultimately determined the timing and conditions have returned to service in each relevant jurisdiction.
Should our estimate of the anticipated returned 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're mindful.
These are challenging times for many and we remain grateful for your support.
Now, let me turn it over 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 were financial results and how we are maintaining financial discipline and prudently managing our liquidity as we work through the safe returned to service to the Max.
With that.
Let's move to slide four.
Oh.
During the quarter, we generated revenue of $20 billion in core earnings per share of $1.45 cents, reflecting lower 737 deliveries, partially offset by higher defense and services volume.
We recorded negative $2.4 billion 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.
See I ended the quarter with our backlog of nearly 5500 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.
Yes reported third quarter revenue of $7 billion and booked $5 billion, new orders demonstrating the continued value we bring to our customers across our defense space and security portfolio.
It was orders included contracts for a fifth KC 46 tanker production lot or the U.S. Air Force and nine age 60, 40 apache's for the U.S. Army.
Key milestones for Bts included the M Q2 5 unmanned aerial refueling first test flight.
Also T X trainer now renamed the T. seven a red Hawk performed just 100 test flight.
Their accomplishments in the quarter included the first flight the inaugural P. Eight 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 U.S. Air Force.
Moving onto tanker as mentioned Boeing received a 2.6 billion dollar 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 book contracts for commercial modification component and training services as well as contracts with U.S., you're forced for F. 15 training to cutter 810 Thunderbolt to re winging. It KC 46 tanker lot five services.
Also in the quarter, India based carrier Spacex 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 and relevant jurisdictions have attained a number of regulatory approvals, including clearance to close in the U.S. and Japan.
The European Commission earlier this month opened a phase two assessment and its review of the transaction.
We remain convinced that both the commercial aviation and the KC 390 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 returned to service to the some 37, Max and we've continued to allocate additional resources isn't and attention on this effort.
At the same time, we're 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.
Stand deal has exceeded Kevin Mcallister, as president and CEO Boeing commercial airplanes, and Ted Colbert has exceeded sand deal as president and CEO of Boeing Global services effective immediately stand brings extensive operational experience at commercial airplanes and trusted relationships with our airline customers and industry partners and.
Got it brings to our global services business and enterprise approach to customers and strong digital business expertise a key component of our long term growth plans.
We're also grateful to Kevin for is dedicated and tireless service to Boeing our customers in 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 continued 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 dollars over the next 10 years.
In commercial aviation well, 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 of contracted year to date amid a challenging trade environment.
That said, we continue to see steady utilization of the global freighter fleet, well carriers are placing aircrew mental 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 and 2020.
With an industry outlook for approximately 44000, new airplanes over the next 20 years and an ecosystem of lifecycle solutions needed to maintain and supported we continue to see sustainable long term growth in commercial aviation.
This is powered by mature in 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're well positioned in this market with a strong portfolio of airplanes, a large and diverse order backlog and strong one Boeing cheap.
The narrow body segment will command a larger share of new deliveries with expected demand for more than 32000 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 or 737 program has a backlog of more than 4400 aircraft.
In the wide body segment, we've seen solid order activity this year for our market, leading 787 and triple seven families in the quarter Korean Air and Air New Zealand place 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 1000 small to medium wide body aircraft to be replaced over the next decade.
In the near term as we've shared the U.S. to try to trade situation has presented challenges for our wide body production plants 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're in the planting window on the rate decision due to the production lead times. Therefore, 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 to 77 production rate from 14 per month to 12 per month.
For approximately two years.
We will maintain this disciplined rate management process going forward taken 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 U.S., 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 are 77 backlog of nearly 530 orders provides a solid foundation and represents more than three and a half years production.
Moving to the Triple seven program. The current generation Triple seven continued its steady sales momentum with 14, new orders in the quarter. These provide further support for the Triple seven bridge.
On Triple Sevenx development, we continue to progress on our pre flight testing focusing on final systems propulsion, an airplane level tests on a static airplane test results are detailed analysis of the data is progressing well.
What we've seen to date reinforces our prior assessment, but this will not have a significant impact on the design or on the preparations for first flight.
The GE NYNEX engine remain pacing item as we work towards first flight of the Triple Sevenx GE or engine supplier has made good progress to address the durability challenges G.S. installed retrofit components in the certification test engines and testing has restarted.
Once the engines become available GE and Boeing we'll need to successfully complete additional testing before we're ready to fly.
We still expect first flight to take place in early 2020.
We continue to explore opportunities to improve the timeline. So just 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 GE NYNEX engine and associated risk. We now expect first delivery of the triple seven nine to be in early 2021.
The combined triple seven Triple Sevenx production rate is five per month, we continue to expect the triple seven 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 and Triple Sevenx timeline by producing more triple seven current generation aircraft.
We are focused on further bolstering the triple Sevenx skyline.
The Triple Sevenx 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 two and a half to three per month in 2020.
At defense space and security, we continued 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 dollars of opportunities for our business with 40% of that from outside the U.S.
The Bts 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 Efifteen X and F 18 fighter Jets Apache and V 22, Osprey Rotorcraft, Jay Damn weapons satellite programs the space launch system and key derivative programs like the KC 46 tanker.
In the P. Eight we also see robust support for our future franchise programs.
We are maintaining a sharp focus on these future franchises. We met the M Q2 5 recently began test flights were humbled to honor the legacy of the Tuskegee Ehrman with a t. seven a red Hawk. We also remain absolutely dedicated to commercial crew in the space launch system, which will maintain our nation's position as a leading edge of space.
Exploration.
Turning to the services sector, we see the 3.1 trillion dollar 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 until assignment digital solutions.
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.
So with that Greg over to you for our financial results. Thanks, Dennis Good morning, everyone, let's move to slide six and will discuss our third quarter results.
Revenue for the quarter was $20 billion with core earnings per share, but dollar 45, reflecting lower 737 deliveries, partially offset by higher defense and services volume.
Before we discuss the segment performance. Let me also touch on the 737, Max and explain how the grounding has impacted our financials.
What we've done to mitigate some of that impact and what we're focused on today and going forward.
The purpose of art third quarter financial results.
We have assumed that regulatory approval for the Max returned to service begins in the fourth quarter. This year.
While this assumption reflects our best estimate at this time I just want to reiterate that the actual timing condition of returned to service will be determined by the regulatory authorities and could differ from this assumption and our estimate.
Our third quarter financial results also assume a gradual increase and the 737 production rate from the current 42 per month to 57 per month by late 2020.
We also assume that after returned to service of the Max airplanes produced during the grounding and including within inventory will be delivered over several quarters with the majority of them being delivered in within the first year.
Any changes these assumptions could require us to recognize additional financial impact.
We added $872 million a program costs on the 737 in the third quarter. This is primarily to reflect current assumptions regarding timing of returned to service and the timing of planned production rate increases. These additional costs will be spread across the undelivered aircraft in the account.
Adding block of approximately 3100 units and therefore reduced the 737 program margin.
During the quarter, where reassessed our estimate of potential considerations and other and concessions for customers for disruptions related to the 737, Max grounding and associated delivery delays. This reassessment included updated updating estimates to reflect revise returned to service.
And production rate assumptions as well as latest information based on engagements with 737 Max customers.
We have made no significant adjustments to the recorded liability in the quarter.
As we've mentioned, we're also addressing the impact individually customer by customer.
And we will look at various forms of economic value that we can provide we expect any concessions or other considerations to be provided over a number of years and therefore, you can expect the impact to our cash flow to affect 2019 and beyond.
We continue to see this impact to be more front end loaded in the first few years, but of course will be dependent upon individual conversations with customers.
Looking forward the key drivers of the financial impact related to the 737 continued to be the returned to service timeline and conditions.
The delivery ramp up which is dependent on how fast we can deliver aircraft wants the fleet returns to service and how fast are customers can accept the aircraft also includes 737 production rate profile and as discussed customers regarding potential concessions and considerations.
We expect our financial results to continue to be adversely impacted until we safely return the 737 Max to service.
Resumed deliveries to our customers and ramp up production rates.
We continued to perform detail scenario planning around returned to service and production rates, including analyzing the implications on our supply chain customer fleet and deliveries to fully understand the range financial outcomes.
We will continue to assess our current production plans and <unk> corporate any new insights such as returned to service timeline storage capacity and supply chain all in our analysis to help inform us on whether further rate reductions or other options, including a temporary shutdown the Max production are needed.
We've also taken actions to prudently manage our liquidity, increasing our balance sheet flexibility in managing our spending and laser focused on productivity. We will continue the diligently review all levers available to minimize the financial impact.
It's important to note that everything we do our focus on quality and safety, our and always have been our highest priority. We do not compromise these values for cost or schedule.
Returning the Mac safely to flight continues to be priority one for us the team effort that leverages, the best talent from across Boeing and outside experts, we will continue to apply what ever resources are required to return the 737, Max safely into the fleet and take the time necessary to do so.
Working hand in hand with our customers.
Let's now move to commercial airplanes on slide seven.
Our commercial airplane business revenue decreased to 8.2 billion during the quarter, reflecting lower 737 deliveries BC operating margin declined a negative 0.5%, reflecting lower 737 deliveries, partially offset by higher 787 margin D.
The a backlog includes nearly 5500 airplanes valued at 387 billion equating to more than six years of production.
Let's now turn to defense space the security results on slide eight.
Third quarter revenue increased to $7 billion, reflecting higher volume on satellites weapons and new franchise programs T cell M&A in particular, partially offset by lower F 15 volume Bts booked operating margin of 10.7% in the quarter, reflecting improved performance.
During the quarter Bts, one key contract awards worth $5 billion and our backlog stands at 62 billion with 30% from outside the U.S., Let's now turn to Boeing Global services results on slide nine.
In the third quarter Global services revenue increased to 4.7 billion, reflecting the acquisition of K.L. acts and higher government services volume year over year growth of 14% for the quarter continues to outpace the average services market growth rate of 3.5%.
Yeah.
Bgs booked operating margins of 14.4% and as I mentioned before bgs margins quarter to quarter are subject to fluctuations due in factors such as mix products and services as well as performance on individual contracts.
During the quarter Bgs, one key contract awards worth approximately $6 billion, bringing its backlog now to $21 billion.
Let's now turn to cash flow on slide 10.
Operating cash flow for the third quarter was negative 2.4 billion driven by lower 737 deliveries lower advance payments and timing of receipts and expenditures.
We expect continued working capital pressure to adversely affect cash flow until Mack <unk> deliveries resumed.
Strong operating cash from other parts of the business the strong balance sheet and further balance sheet levers will help provide adequate liquidity during this period.
In the third quarter, we paid $1.2 billion in dividends and as I. Previously mentioned, we have temporarily pause or share repurchase program. Our long term balance cash deployment strategy and commitment to returning cash to shareholders remains unchanged. However, in the near term managing our liquidity.
Okay and balance sheet leverage our top priorities and we will continue to be so until the 737 Max deliveries resumed.
We execute the 737 production rate increases and see stability in the production system.
Let's move now to cash and debt balance on slide 11.
We ended the quarter with $10.9 billion of cash and marketable securities. We raised additional debt in the quarter, increasing the balanced by 5.5 billion primarily to fund the Embraer acquisition and also to help shore up liquidity position as we work through the current Max challenges.
Our strategy of maintaining a strong balance sheet provides us with with substantial borrowing cat capacity through capital markets access and unused credit facility of 6.6 billion.
Our long term goal and strategic objectives remain unchanged and we will continue use or three business units strategy as a key differentiator in the marketplace make prudent investments and leverage talent and innovation from across the company.
As always we'll continue to keep a close eye on the geopolitical and macroeconomic developments.
Prudently managing risks as Dennis said, we maintain our disciplined rate management and continue to monitor that band it the environment and make rate adjustments as appropriate in the future.
As a reminder, in addition to the Max our financials, particularly cash flow will also be impacted by the decrease in the 77 production rate and timing of Triple Sevenx entry into service reduction in future deliveries creates cash headwind due to lower cash from pre delivery and delivery.
Payments.
So in summary, while focusing on a very important priority of safe 737, Max returned to service and minimizing the significant impact on our customers and the flying public our team keeps the core operating region <unk> engine strong delivering results and meeting customer commit.
While we still have a lot of work in front of US. We're confident that we have the REIT focused team and resources to navigate through them.
Committed to providing you with additional updates on the Max returned to service progress production rate plans.
As we may have more information, we'll strive to continue to keep all of our stakeholders and form with the utmost transparency through our public statements and information posted on our website.
Once we have further clarity we will schedule a follow up investor and media conference call to discuss financial impacts provide financial guidance, which will capture the puts and takes including the impacts from the recent wide body changes.
With that I'll turn it back over to Dennis for closing comments all right. Thank you Greg.
These are challenging times.
First and foremost for the families and loved ones affected by these recent accidents.
They will always be on her thoughts.
This is also a defining moment for Boeing.
And I can assure you that we have learned from this and we'll continue learning.
We have changed from this and we will continue changing.
And we're committed to coming through this challenging time, better and stronger as a company.
Well stay true to our enduring values of safety quality and integrity, while driving operational excellence across the enterprise.
We will never waiver and our commitment.
The importance of our work demands it.
Nothing is more important to us than the safety of our customers and the flying public.
The safe returned to service of the 737 Max is there a companys top priority.
Want to thank my Boeing teammates, who are delivering on this priority and on our other commitments of executing on our key priorities driving growth and operational excellence across the business in close partnership with our customers suppliers and regulatory agencies or returning value to our shareholders.
With the changes, we're making to the Mac software and training, we're confident that the Max will be one of the safest airplanes ever to fly.
The long term fundamentals of our businesses remain strong and our key priorities are unchanged. Our one Boeing advantage has never been more clear and we will leverage this unique strength to deliver and improve on our commitments to our customers and partners around the world.
With that we happy to take your questions [laughter].
Ladies and gentlemen to ask a question on today's conference. Please press the star <unk>, followed by the digit one on you touched on telephone again in a star one for questions in order that your question. We clearly heard we ask you not usually speaker phone cellphone our home headset. He's use your handset to ask a question if you're on the speak.
Your phone please be sure your mute function has switched off so your signal can return equipment star one for questions.
As a reminder, in the interest of time, we are asking that you limit yourself to one single part question again Star one for questions. Our first question comes from the line of Sheila KL Jefferies. Please go ahead.
Thanks, Good morning, Dennis and Greg.
<unk>.
Perhaps a question for you on cash given Max production and changes in working capital associated with the aircraft as well as the reason why body caught on that you saw then how are you thinking about the free cash flow profile of the company a over the next yeah, yeah, Yeah, well look considering the circumstances of where we are.
Obviously, the cash profile is more challenging than it was but I'd say the long term objective that we had in place continues to be in place.
I'd say you know outside a Max you know in the service in defense business.
We continue to see opportunities there.
But as you mentioned you know between getting the 737 Max backup that will be the single biggest driver safely return that back to service deliver in our aircraft off the ramp and meeting those rate breaks that we talked about in maintaining stability will be the key driver in the cash flow profile going forward.
We've got more triple seven ex inventory build as a result of the schedule change so we.
We see that use of cash now, peaking in 2020 and and obviously with the 73787 a rate decisions that a that we announced today and the associated advances that also will have an impact within that timeframe. So lots of puts and takes but 737 Max being the biggest.
Driver through that period, so we have better clarity.
On that path forward and the stability will give you a further update of where we think we are over the over the long term profile, but again that remains our objective and the underlying engine continues to perform well, but we've got to continue to execute and like I said those key elements are really going to be the the big drivers of cash going forward.
Hi, Thank you.
Next question from Doug Harned with Bernstein. Please go ahead.
Good morning, Thank you.
<unk>.
If we go back.
As always.
You had previously said that you'd expected have completed fix for them access to the F. <unk> by the end of September .
So we're in mid October now that appears to have slipped, but yesterday, Steve Dixon made have DFI I mean, some statements it sounded a fairly positive regarding software and documentation that Boeing has provided the FAA. So I'm trying to understand where we stand now is there.
You know what constitutes the delivery of a final six and is there a milestone that we should be looking for ahead of an essay certification flight.
Yes, Doug Doug Good question as you know we've been working this at a very detailed level you know basically every hour everyday and close coordination with the FDA and we're in the process of delivering those certification items and that includes the final software the training products.
The system description documents and that has been an internship process we did start.
That incremental process since September of the review cycles have taken a little longer than originally planned but I think that's a good representation of the fact that were diving deep into the documents were answering all the questions and and the FAA has taken the time to make sure. We we get it right. So I think that level of scrutiny is good.
We have a now have the a the final software in our regression testing labs.
As you heard from administrator Dickson, a yesterday or the FDA has been involved in that final software delivery. You also heard from a administrator Dixon that we've now delivered the final system description document of the changes to the Max that's another important milestone so there are tangible.
Milestones being achieved but we still have more work to do a last week, we did a complete a and initial dry run of the certification test flight a we anticipate doing a a couple of more dry run kind of flights, but to a next big milestone that you might look for Doug to your question when we get to the certification flow.
Oh that'll be a key waypoint on the way to the airworthiness directive.
And again that final decision around the airworthiness directive to on ground the fleet and bring the Max back up that will be the regulators decision that will be the ace decision, we're going to lean forward and provide every piece of data weekend were going to make sure. The depth of analysis is complete we're going to answer every single question.
And I can tell you we are making steady daily progress.
We have a well defined plan and we're performing against that plan and the preeminent focus here is on safety, we're going to take the time to get it right make sure it's safe.
And we'll continue to share the milestones progress as we go.
Okay. Thank you.
Next question from Peter Arment with Baird. Please go ahead.
Oh, yes, combined Dennis Greg.
Hi, Dennis maybe you could just talk about 77 decision. This is really obviously the first a production cut and for that for them that program. It's been so successful maybe just on a holding that rate at 12 months kinda confidence levels around that and just thoughts about in general the longer term.
Production profile for the submit something back yeah. Peter It's good question, obviously, not a decision that we take lightly as Greg mentioned and as we've talked about before production rate discipline is one of our key management principles or something that will drive stable long term growth.
Our prospects for the long term wide body market haven't changed we still still see that as positive as I mentioned in my comments, we see a market for roughly a thousand new small to medium size wide bodies over the next decade, so that a replacement waves cycle early in the next decade that we've talked about previously we still.
See that coming but in the near term our skyline has been dependent on orders from China and now that we're within lead time on our production system and those orders from China have not materialized, we need to make a decision and so that's what you see reflected here.
We think.
Decision to take the write down to 12 for approximately two months is a good excuse me for two years is a good a disciplined decision and fits with the market signals that we're seeing we're going to continue to monitor the U.S., China trade policy discussions.
And then we'll we'll continue to make our plans going forward, we have a very disciplined process for looking at the market our supply chain held all of the other parameters that might affect our customers decision, making process and all the decision. We're announcing today is something that's consistent with that disciplined approach so bottom line.
Here is our long term prospects.
Not changed but we need to make prudent decisions here in the nurtured near term that match with the economic realities.
Next we'll go to Myles Walton with DBS. Please go ahead.
Thanks, Good morning, and Dennis you've had a mid teen DCD margin target out there are a while I'm just curious with all the changes I guess, the three sevens now 400 basis points, maybe lower in the block program looking for the eight seven rates and a triple seven I read now looking more and <unk> and a 10% to 12% range and then Greg just a clever.
Occasion on share repurchase.
It was a interpreting your comments you're meeting don't anticipate share repurchase until 2021. After everything is back up to that is that accurate.
Yeah, Greg you want to take there so I.
I don't anticipate share repo until we've got returned to service, we're executing on the production rates and reaching the stability that we expect.
And once we get to that level, then we'll reassess our cash deployment efforts and of course as I mentioned, a we've got additional debt on the balance sheet, and where we plan to address that as well so well keep you up to speed, but those are the key milestones to watch for an until we're satisfied with where we are and we're generating the cash that we were.
I'd expect as a result of reaching those milestones. We we'll we'll re execute on our cash deployment strategies, and but I said, a long term our long term objective is certainly a what it was but we've got to get through that those those milestones before well redress repo <unk> okay.
And miles to your first question similar thing on the operating margin side, our long term objectives and targets have not changed we're still driving towards a mid teen margins a business. We have it altered our our plans for that but again in the near term our laser focus is on the safe return to service to the Max that is the most.
It's important thing we can do and we're going to invest all of our resources focus in making that happen or the fundamentals of the business the investments, we're making and digitizing our enterprise lean principles in our factories.
A lot of this production rate disciplined in efficiency, we're continuing to drive during this interim time period, while we have had to make production rate reductions on the 737 line for good reasons. We're also using this as an opportunity to continue to invest in the line and maturing some of our advanced manufacturing process.
This is and that will make free a healthier production system for the long run and keep us on track for those long term targets, but in the near term no question. Our focus was on the safe return to service to the Max and I can tell you without any question our preeminent focus everyday going forward is on safety and quality.
Thank you.
Our next questions from Carter Copeland Smelliest research. Please go ahead.
Hey, good morning, gentlemen.
Hi murder <unk>.
Greg just a.
Clarification on the cash are you no longer receiving a Max PDP isn't advances I just I didnt quite catch that are your earlier comment and then on the page seven margin increase I mean, you've had several steps upward and that margin and Alaska and several quarters.
Are we to assume that this is similar I mean and and scale in terms of the the increase or should it be significantly less because of the rate decision just wanted to dive in there just because you feel you had good deferred production numbers there until it look like that that might have been better than a team continues to do do it.
Great job and executing on their plans across not only the two sites, but within the supply chain with the partners as well and integrating the mix you know between nines tens and eights teams done a great job and you're seeing the results of that in the margin the profile that you've seen you should expect that to continue.
As we work through these blocks as we've talked about there's some key levers within those box our own productivity supplier step down.
As well as as well as mix.
That will be favorable to the margin.
As we work, but work through the block. So that's all about executing on those fundamentals and if we do that and do that as planned you'll continue to see mark margin expansion.
Associated with the program on advances obviously the profile of advances in particular on the 737, it's changed dramatically and appropriately. So so we are still getting some advances, but obviously with the with the shutdown all of those have been rescheduled and that profile again.
Is is very different than a than it would have been clearly if we were at full rate. So we continue to work with each of our customers on this but again as we talk about cash flow going forward. So we execute on the rates going up and do that and maintain stability through that period and the efficiencies will start to see.
That advanced stream picking up in associated back with the higher higher deliveries. So obviously, a key enabler for cash flow going forward, but as we're as we're at this period right now as I said, we're going to you're going to see continued pressure on cash on operating cash until we get back to service.
And so just to be clear on that eight seven margin. The step up was similar to what you've seen and some of the recent quarters.
Yeah, it varies from quarter to quarter Carter, just depending on again, depending on mix and and delivery profile and and or just overall kind of.
Again model mix that plays into that pretty significantly as well so okay.
Thanks, Greg Okay, you're welcome.
Our next question from Ron Epstein with Bank of America Merrill Lynch. Please go ahead.
Hey, good morning does it around.
How do we think about and then the backdrop with a change in leadership of door in commercial [noise].
How do we just think about where and I may stands now.
Right I mean, yeah, the broader market keeps moving right along right. So.
I <unk> power you guys thinking about them and how should we think about animation and there is that still a project you guys are interested in so on and so forth.
But yeah, Ron not first of all let me be really clear on our priorities. Our priority is safe return to service or the Max and.
It's been clear to our team hurdle all of our suppliers cleared all of our constituencies and.
We've applied additional resources there we've put additional talent there that is our focus.
Now with that in mind, we are continuing to drive forward with our efforts evaluating and in May.
We still are not at a decision point, nor are we ready to be at a decision point yet all we're continuing to.
You a mature the business case, though we're continuing to invest in risk reduction around the production system of the future and that continues to be a productive offered force.
So we'll continue to leverage those investments and when we're ready to make a decision or we will so still a project of interest we're still looking at a middle of the next decade <unk> entry into service timeframe.
As we talked to our customers.
And we'll make a good prudent decision when we're ready, but let there be no question. Our focus is on safe returned to service the books.
Okay, great. Thank you.
Next well to <unk> with Cowen and company. Please go ahead.
Yes, thank you very much so.
Maybe you can walk us through the milestones required to achieve your S.A. airworthiness directive the sequence of those milestones and then the milestones between receiving the A.D. and resumption of U.S. service because most of your customers.
In the U.S. are talking about flying again in February not at yearend. Thank so much you bad Guy. Good. Good question. Let me just walk you through that it a top level and again. This is a very detailed plan that we've laid out with all of our teams and stakeholders and one that we're working together with the <unk>.
<unk> regulators in the near term a we're marching through the the a the technical steps. If you will and that includes finalizing the software that will go into a series of simulation evaluations. There's a near term milestone that we referred to as the line pilot devaluation that will take that final software and with external.
Line pilots from airlines come in and evaluate the handling all of these airplanes.
We'll also have a external set of Ah pilots coming in again authorized by the regulators that will conduct what we call a joint operations evaluation board and that sort of pilots will evaluate the training materials so over the near term.
Those are two key milestones for us one that evaluates the software update to the airplane and the second that evaluates the training products.
In that same timeframe as those two milestones are completed will roll into the certification flight that I mentioned earlier.
That will be another key milestone for us and then after all of the assessments are completed those valuations are done.
That will roll into the airworthiness directive decision that the FAA will make and that other regulators will make.
Subsequent to the issuance of the airworthiness directive in the on grounding of the airplane that we would move into the phase of on grounding the aircraft and incrementally, bringing up fleet operations for our airline customers and the a the reference points that you're seeing out there from our customers are perfectly aligned with the the detailed technical plan that I.
Just walked you through so they're very aware of that plan and there is a a time period between the airworthiness directive and when they can resume full operations revenue Barry operations and that includes youre, bringing each individual airplane up making sure that each airplane is safe and ready to perform a we've been working as we've been so.
During airplanes to ensure the help those vehicles, but we'll be working tail number by tail number with our customers to ensure they can bring to fleet up back successfully and then get back to full revenue very operations and that's why you see a bit of a time lag between the airworthiness directive and what our customers are now quoting as going operational data.
So hopefully that gives you a feel for the time facing the plan and ultimately you're bringing all of those grounded airplanes back up and all of the stored airplanes, a backup to fleet operations will be a multi quarter.
Operation.
Thank you.
Our next question from around Shivaswamy with Morgan Stanley . Please go ahead.
Hi, good morning.
Craig stay on the sound 37, maybe moving at a slightly different direction in terms of me [laughter] backlog. It's entirely remained stable here over the last couple of quarters built with eating backdrop in some of them actually she said he not saying Oh interesting cancellations, maybe just talk more about that diet.
Log westcliff customers may not a minimum it seems like advances are pushing out obviously the orders aren't there et cetera. So some color.
You bet Rajiv we've been having a good productive conversations with our customers around the world, we're engaged with them daily keeping them abreast of Ah the progress, we're making on the safe returned to service.
We've seen continued to strengthen our backlog stability in that backlog our customers still around the world see the value of the 737, Max and they know what it will ultimately bring to their operations. So that backlog of roughly 4400 aircraft has remained solid and a stable.
We have had discussions with customers, who you know given timelines and fleet needs may want to move skyline positions in some cases model differences remodeled trades are option. So as we think through <unk> customer compensation models. As you know, we're having those those discussions with our customers a there is some.
Trade space around a delivery profiles and skyline positions.
But all of that within the context, what I think overall very a stable a backlog position and we continue to see strong customer commitment around the globe.
I guess.
Next we'll to him ramps been done with credit Suisse. Please go ahead.
Hi, good morning.
What Rob Rob.
Greg with regard to the concessions not changing no material change there and it does seem and you know to the prior couple of questions that we have slipped to the right for Rts at least from October to likely December I'm. So wanted to see why we wouldn't see you know a change there because it certainly adds you know couple of <unk>.
Hundred delayed airplanes and then the other part of it is.
Well aligned to other customers on this concession figure if I understood correctly last time, they weren't they had not necessarily endorse the figures that where that were in the 5.9 billion.
In other words those weren't necessarily based on agreements with that has that changed yeah. No. So Rob I would tell you. There's there's a lot that goes it adds a multiple data points, obviously going into that and we assess it on a regular basis and obviously go through that quarter by quarter, So that could change.
Range, obviously with time, so our discussions with our customers the methodology their expectations and kind of working through customer by customer the impact on them and then ultimately a form of settlement continues to be a regular dialogue and it will be so we did not see a change in what we have.
Early this quarter that does not mean that we won't could not see a change going forward. This is part of our regular I'll say closing a process that we will go through every one of those and what's outstanding and assess what we believe is the liability again based on multiple.
Ah data points, including you know conversations and and overall I'll say kind of impact is to have that they have experience, but we don't again expect significant change in that but again, we assess it every quarter.
Thank you Greg you welcome.
Next we'll to assess salesmen with JP Morgan. Please go ahead.
Thanks, very much <unk> good morning.
[laughter] cracks I definitely appreciate it do you guys aren't aren't giving guidance right now, but just in terms of thinking about the cash trajectory going forward.
Nearly $3 billion cash burn in the quarter plus a you know a billion for the dividend you know if do we think about something similar in Q4 and I would assume that Q1, Oh, we'll still have some challenges and at you know there's some cash on the balance sheet, but some of that is earmarked for embraer you talked about the potential maybe to I still have additional back.
She levers can you can you talk a little bit more maybe even just in broad numbers about the near term liquidity and balance sheet profile and what you expect to do yeah, well local over over the short term as you know you know on a quarterly basis, just through timing of expenditures.
And just through advances that varies you know significantly or can vary significantly so I would not take necessarily one quarter and apply it to the next as you know so we've got key milestones in the fourth quarter around advances around deliveries in the course within our defense business as well so there.
A lot of puts and takes in their Seth.
But that Rts assumption and then that production rate increase in delivering those units again off of Iran, or real key drivers to cash going forward. So if those assumptions there as estimates change that profile, obviously will change a resulting in that so.
That's the near term I'd say you know movements.
Beyond that if you went outside of Max again, the services business defense business is doing a nice job on the working capital where reprioritizing spending as we navigate through this and as I said, we do have additional balance sheet levers, if we need to pull additional levels levers will do that we don't see that.
Over the short term, but were you know again managing this prudently best we can and running various scenarios to really kind of understand our banding around liquidity and taking some proactive actions internally as well as in the debt markets and we'll continue to do that.
Again until we have final Rts and then start delivering airplanes.
Great. Thank you very much welcome.
Next we'll to Entre came with Wolfe Research. Please go ahead.
Hi, Thanks forgive me on a good morning, guys.
Let's talk a little bit about seven axis certification process. If you decide I don't think you said you whether they're going to go derivative or new type yet, but how does that decision impact the not only the process itself, but the operating economics for the airline customers when they when they consider the the benefit like training costs and things like that of it.
Derivative versus the new type thanks.
Yeah Hunter on on that point, we're a continuing to work through the all certification and development process and a with the F.A. yeah. The keys gonna be a any process updates that we might learn from the 737, Max any revisions to the the certification timelines.
Seniors, we're we're thinking through that in any lessons learned that we might have any applications, we might want to make to the triple Sevenx as I said, where I can tune in March towards a first flight early in the becoming here and then more yes now we're looking at a first delivery early in a in 2021 and.
Well be thinking through all the details of that certification plan with the regulators over the next to many months and again, if there any updates to the.
To the a plan or any of the requirements will be sure to to discuss those in factor those into the into the planning going forward.
Operator, we have time for one more question great that will be from on John's whenever you with Citi. Please go ahead.
Oh, Thank you on that topic tennis and again, you know bigger picture now it's been a while with the Max Crown and you've seen what it takes to certify I'm using some of the shortfalls in a previous processes. So just on over the long term beyond Triple Center next to what extent future aircrafts development, just essentially costs more or whether its engineering testing sort of.
Station and in that context, and if there's not some uncertainty around that why does it make sense to maintain the current capital allocation parties.
Yeah, John was once again as we take a look at our development processes. A we're always you know continuously learning and applying any lessons learned we might have from the previous programs and certainly a through the process to the a the Max development and and flight testing and everything that we're proceeding with right now to get to a safe returned to service.
Anything we're learning from that process is factoring into all of our development programs going forward.
We're taking hard look at our safety review board processes are certification processes and take a look at play debt designs for the future.
All of those things will factor into our future development programs, but in terms of our priorities for capital allocation. Those 37 haven't changed as we've always said are number one use of cash is investment in <unk> organic growth and that continues to be the case. We think that is the the best use of our capital It's Ah.
It's way that we build our future and we haven't seen anything here that would turn us in a different direction. So we're going to continue to invest in organic growth for the future.
Ladies and gentlemen that completes the analyst question and answer session for members of the media. If you have a question. Please press the star key followed by the digit one on your Touchtone phone I will now returning to the Boeing company for introductory remarks by Miss Antilles, Senior Vice President Communications Mr. Li. Please go ahead.
Good morning, we will continue the call with media questions for Dennis and Greg and John We're ready for that first question and in the interest of time, we ask that you live it limit everyone to just one question.
And first we'll go to Eric Johnson with Reuters News. Please go ahead.
[noise] identified right. Thank you very much or Eric.
So.
The comments you made is focused on ethics approval, but I wonder how you see the risk of surprise or delays from overseas regulators as they take longer to or asked for more changes.
And then separately I wanted to get.
Some he tells as you can on why on the decision to fire Terry Mccallister. Thank you.
Hi, Eric on your first question regarding international regulators, a we've been working hand in hand, with the FAA and on those interfaces throughout this entire process. The phase can being something that they called the certification management team, which includes transport, Canada, Aonec out of Brazil, and Yasser out of Europe .
We've been get engaged with the regulators in China and several frankly several dozen regulators around the world. So this is all the highly coordinated process with the up a a's lead a regulator roll a we've taken some of the same deliverables that I mentioned earlier things like the system description document.
Things like a other certification deliverables and with the phase approval have shared those with the international regulators. Those are also undergoing review. So all of this work is being done concurrently now until the reviews are complete we may have additional actions additional questions from some of these international regulators.
As I mentioned earlier, while the coordination is ongoing it could well be that approvals will vary by jurisdiction and again the regulators will make that decision ultimately will be their timeline, but we are and will continue to share data consistently transparently with all of the regulators are interest here is on.
The safe returned to service the Max that is our focus and I were working that hand in hand, with U.S.A. and we'll continue to support the other regulators as well.
To your second question on our leadership changes again, our focus here is on ensuring that we continue to to feel the strongest team. We can and these are decisions that we've made as a company that are aligned with our our leadership plans our plans to to have a strong and growing company for the future.
And Oh. These these changes are aligned with that plan, our focus is on safety and quality and performance and delivering operational excellence.
Our next question from Julie Johnsson, That's Bloomberg. Please go ahead.
Good morning warning Ah I, Julie Hey would you like walking us through your expectation freight trade ceasefire between the U.S. in China.
President Tom compute weeks ago, I hinted at a mega had a potential Boeing deal coming a with.
A phase one agreement, we've we've been puzzling as to what he was referring to when he mentioned 16 billion to $20 billion and orders and I'm also wondering how how we should square that up a with a 787 rate cut today, yeah, Yeah. Julie good good question and as I mentioned.
We're continuing to engage a with a with a constituencies in both the U.S. and China on the trade discussions we've been continuing to inform those discussions we continue to see a benefit to both countries with a healthy aerospace ecosystem a here in the U.S. as you know the Earth.
Space industry is the largest exporter, a we contribute about $80 billion of trade surplus per year to the U.S. economy, and we are heavy manufacturing industry, we generate strong manufacturing jobs here in the U.S., China clearly needs the airlift capacity of those 44000 new.
Airplanes over the next 20 years that I mentioned about 7700 to those are in China, and so there's mutual interest in both countries that we continue to see I think the recent trade discussions have been productive there they're moving in a good direction.
But given the timeline and the fact that we don't have firm orders from China at this point, where within production lead times and so we have to make the decision on the 787 line, which is what you see reflected in our announcement today.
We're going to continue to monitor and support of the China a trade discussions those are still very important for the future.
But for purposes of our company, we have to be very disciplined in our production rate management and we're going to continue to do that and the decision that we're announcing today is consistent with that discipline.
Okay. John we have time for one last question, please and that will be from David Koning with the associated press. Please go ahead.
Thank you very much Mr. Bowman Bergen looking ahead to your congressional testimony next week.
I'm curious how are you preparing for that what kind of reception do you expect and will you meet with any families of the passengers from the actually apply to say they are going to be there.
Yeah, David we we are preparing for those hearings of course, a we've been supporting the a the document requests from a from the committees both at the Senate and house and we're going to continue to do that we welcome all the discussion and the questions I'm I'm looking forward to participating in those hearings.
We anticipate there will be tough questions a challenging questions a lot of scrutiny and and frankly, we support the scrutiny on on the work that we're we're doing I think everybody here is aligned on the objective of a safe aviation system for our country.
And I know that's the interest of the committees that is clearly the interest of our company.
And I look forward to participating those hearings and talking about what we're doing all again with a focus on safety and that's our culture. That's what our company is about and I hope to represent that represent well at the hearings next week and as I mentioned earlier, our sympathies can continue to go out to the families and loved ones.
Those that have been.
Affected by these accidents, you know that will never go away.
And I anticipate that some of those families will be represented a next week and I hope to be able to express my sympathies to them.
As we're at the hearings.
Okay that concludes our earnings call. Thank you for joining us today for members of the media. If you have further questions. Please call our team at 21 to five four for two zero you know to thank you again.
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