Q1 2020 Earnings Call
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Thank you for standing by good day, everyone and welcome to the Boeing Company's first quarter 2020 earnings Conference call today's call is being recorded.
Management discussion and slide presentation, plus the analyst question and answer session are being broadcast live over the Internet to ask a question on today's conference. Please press the digit one followed by the digits zero on your Touchtone telephone again. It is one zero for questions. After pressing one zero you will.
We'll hear that you've been placed in Q.
Cresud one zero again will take you out of Q and May prevent you from being able to ask a question at this time for opening remarks and introductions I'm turning the call over to MS. Murray tissue Tasia, Vice President of Investor Relations for the Boeing Company Miss you Tasia. Please go ahead.
Thank you John and good morning, welcome to Boeing's first quarter 2020 earnings call I'm worried as a teacher and with me today, our David Cohen.
<unk>, President and Chief Executive Officer, and Greg Smith, <unk> Executive Vice President Enterprise Operation and Chief Financial Officer. After management comments, we will conduct a question and answer session in fairness to other kinda call. We ask that you. Please limit yourself to one question as always we have provided detailed financially.
Nation in our press release issued earlier today and that's a reminder, you can follow today's broadcasts and slide presentation to our website at Boeing Dotcom before we begin I need to remind you that any projections estimates and goal. We include and our discussion. This morning are likely to involve risks.
Which are detailed in our news release in our various FCC filing and into forward looking statement disclaimer at the end of this web presentation. In addition, we refer you to our earnings release and presentation for disclosure enriched population of certain non-GAAP measures now I will turn the call over to Dave Calhoun.
Thank you Merida and good morning, everyone.
I want to start by saying I Hope you all staying safe and healthy during this global crisis.
I also want to thank my Boeing colleagues around the world for everything they are doing to support each other our business and our customers. During these intensely challenging times.
Yeah borrowing I'd like to recognize all the public service out there from federal state and local authorities to frontline health care professionals and first responders.
So the difficult decisions in the personal risks they are making to protect and care for all of us.
Let's turn to the second slide please.
The Golden 19 pandemic is equal crisis like no other.
This fits home for us personally and professionally.
Across Boeing.
Focused on keeping our people and our community safe.
I'm going to stop the virus by taking every measure possible, including early implementation of virtual work.
Deep cleaning our work areas adjusting work patterns, adding visual indicators to increase social distancing in temperature screening stations with no touch thalmann scanners, providing access to medical information around the clock.
Orientating anyone potentially exposed to the virus suspending operations, where necessary and more.
We have doubled our paid leave policy for those who cannot work remotely when their sites were suspended.
That's sites, where we've had to temporarily suspend operations. We've worked closely with our customers to ensure we maintain critical support for them.
And before bringing our teams back to work, we've implemented objective and rigorous steps aligned with federal and state guidance to ensure safe and order we restart of operations.
Earlier this week, we announced that we will resume operations at our Boeing South Carolina site, beginning on May 30.
No. This move brings back our final production site that was temporarily suspended as a result of covert 19.
We're also doing everything we can to support our global supply chain health.
A number of our suppliers have suspended or reduced their operations, resulting in some supply shortages for our own operations.
In some cases this contributed to our site suspension decisions.
We've taken a mid taken mitigating actions, where we can but supply disruption remains a key watch item for us.
At the other end of our value chain, we continue to support our commercial airplanes and services customers as their own business slows to attract.
We've also focused on meeting the commitments to our defense and space customers.
Given the Swift and severe nature of this covert 19 shock to preserve the long term competitiveness of our company as well as our industry. We are intensely focused on ensuring liquidity through the immediate crisis.
We welcome that some 26 countries, including the United States have announced economic support package is worth more than $100 billion, specifically targeting the aerospace and airline sectors.
Aerospace industry relies on a global shared supply chain and the aviation sector supports 3.6% the global GDP generating more than 65 million jobs worldwide.
In the U.S. we.
We applaud the administration and Congress for working together to pass the carriers Act.
Which will be critical to supporting the nation's entire aerospace manufacturing sector, which comprise two and a half million jobs and 17000 suppliers.
We expect it programs coming out of the Bill and funding options. The government is putting in place will provide support to help the credit markets function again, providing the liquidity that is vital to our industry's ability to bridge recovery.
The 25 billion dollar support package agreed to by the U.S. Airlines and the government is a pivotal step toward maintaining the aviation pillar of the U.S. economy.
Even if the recovery will take years not much.
Knowing that the U.S. airline industry has critical financial support through the pandemic allows us to plan our production in services system for the medium and long term impact on air travel.
Greg will go through our liquidity situation in more detail a bit later, but let me just say, we believe that government support will be critical to ensuring our industry access to liquidity, we continue to evaluate options and the capital markets as well as funding options from the U.S. government via the U.S Treasury and various fed.
Well reserved programs.
We've also taken other aggressive liquidity steps, including drawing down on a term loan reducing operating costs suspending the dividend payments terminating share repurchase authorization, reducing we're deferring non critical spend and accelerating some progress payment receipts with the help.
From our defense customers.
Additionally, we are working to re size and reshape our business starting at the top with our leadership structure.
We are consolidating roles simplifying processes and focusing accountabilities.
As part of this reorganization I've asked Greg Smith.
Well most of you know well to take additional responsibilities, leaving our enterprise manufacturing supply chain and services functions. In addition to a CFO and strategy roles.
Before I turn to our longer term business environment and the steps, we're taking to prepare for it I want to call out the selfless contributions Boeing employees have made to the broader fight against the Corona virus.
David producing protective phase shields for distribution to health care professionals have flown or aircraft when missions to transport critical of health care supplies around the world donated masks glaukos and other equipment and contributed hundreds of thousands of dollars the food centers for people in need and that's just a partial lift.
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Now I'd like to turning the attention to the outlook for our industry highlighted on slide three.
Eric travel industry has never seen anything quite like this.
The latest eye on a forecast projected full year passenger traffic to be down 48%. This year compared to 2019 as global economic activity slows down due to the covert 19, and the government's severely restricting travel to contain the spread of that fibers.
Here in the U.S. passenger traffic at this moment in time, it's down 95% compared to one year ago.
Airlines are cutting back operations dramatically as they assess their businesses, they're making difficult decisions that result in grounding fleets differing airplane orders postponing acceptance of completed orders and slowing down or stopping payments.
They are also accelerating aircraft retirements and requiring fewer services.
The fundamental the fundamentals that have driven air travel to the past five decades.
Doubled air traffic over the past two decades remain intact.
We believe this industry will recover.
Part of the will take two to three years for travel to return to 2019 levels and it will be a few years beyond that for the industry to return to long term growth trends.
Our outlook is informed by decades of analysis and insights on customer behavior, including all the industry has reacted to prior market shocks.
We incorporated assumptions related to a prolonged recession and potential consolidation within the industry.
In our assessment.
The picture is dynamic and subject to many unknowns, but as we see it today now where about narrow body airplanes will lead the way to recovery trailed by wide body fleets as airlines progressively bring their networks back online.
Therefore wide body passenger fleets will likely be more significantly impacted the narrow body airplanes in the near term.
A key driver in both segments will be the rate of retirements of older fleet.
We expect our customers to look at their fleet planning strategies differently in light of these dynamics.
More than 2500 aircraft with 20 plus years of service we're in active service prior to the crisis.
Replacements will not be uniform.
As airlines will focus on the oldest and least officially to retire.
Hmm some airlines have already made announcements to this effect.
Airplanes that we plan to deliver this year will be 25% to 40% more fuel efficient than airplanes that they're replacing.
Our position is helped by the value proposition of our family of airplanes and the diversity of our backlog.
This includes our market, leading 787 Dreamliner family.
Our unmatched cargo line up the world's largest and most efficient twin engine, Jeff Triple Sevenx and the versatile 737 family.
The balance the supply and demand given the covert 19 shock and to preserve our long term potential and competitiveness, we have decided to reduce the production rates of several of our commercial airplane programs.
Let's turn to slide four.
In the narrow body segment, we have assumed that we will resume 737 Max aircraft production at low rates in 2020 as timing and conditions have returned to service or better understood.
We expect to gradually increased production rate to 31.
During 2021 with further gradual increases that correspond with market demand.
The slower production rate ramp up reflects commercial airline industry uncertainty due to the impact of covert 19th.
And the production rate ramp profile is also affected by the pace of delivery of our store aircraft.
We continue to see our new Max airplanes, creating capacity for growth and providing required replacements for older less efficient airplanes.
We will continue to work closely with our customers to review their fleet plans and make adjustments where appropriate to adapt to lower than planned 737, Max production in the near term.
Provide more flexibility to deliver Max airplanes in our backlog and protect the value of the Max family.
Moving to the wide body segment.
We now plan to reduce the 787 production rate to 10 per month in 2020, and then gradually reduced to seven per month by 2022.
We will continue to evaluate the rate beyond 2022 to balance supply and demand.
Our 787, Dreamliner family has a compelling value proposition offering unparalleled fuel efficiency and range flexibility, enabling carriers to optimize sleep and network performance as well as profitability as well as profitably expanding to new markets.
Turning to the Triple Sevenx.
We've made progress on the Triple Sevenx certification requirements and have resumed flight testing with the restart of our operations in the Puget sound.
We currently expect first delivery of the Triple seven dash nine to be in 2021, and we'll continue to manage the risks inherent in any development programs.
Especially ones around certification in the post Max environment, and covert 19 related impacts.
We now expect to deliver triple seven at an average rate of approximately two and a half per month in 2020.
Due to the market uncertainties, driven primarily by the impacts of covert 19, we plan to reduce the combined triple seven triple Sevenx production rate to three per month in 2021.
We will take a measured approach to the trouble sevenx rate ramp as we will look to minimize the amount of change in corporation work by managing the number of aircraft produced prior to entry into service.
On the Triple Sevens as I discussed earlier, we will continue to closely monitor the cargo market carefully manage our skyline.
Finally, well make no change to the 767 in 747 production rates at this time.
These programs are targeted for the cargo market and approximately half of the 767 production line is dedicated to the tanker program.
These right decisions are based on our current assessment of the demand environment.
Taking into account a host of risks and opportunities.
We will closely monitored the key factors that affect our skyline, including the wide body replacement cycle and the cargo market.
We will maintain a disciplined rate management process and make adjustments as appropriate in the future.
Now, let's turn to slide five.
The diversity of our portfolio is unmatched in our government services defense and space programs will provide critical stability for us.
Moving forward.
In fact, our work in these areas accounted for 45% of our overall revenue in 2019.
That will obviously increase in the year ahead.
At defense space and security, we continue to see a healthy market with solid demand for our major platforms and programs both domestically and internationally.
Despite some near term production impacts associated with our temporary suspension of operations at various locations our portfolio programs and technologies remains well aligned to our customers missions.
We're also well positioned with proven world class platforms to address current needs and innovative capable and affordable new franchise programs for the future.
For example, the President's budget request for fiscal year 21 supports key Boeing programs, including the V 22, and Apache's 12 at 15 X aircraft and 15, K KC 46 eight tankers.
It also request funding in line with the expected development profile of future franchise programs. The MQ 25, the T. seven a red Hawk and the MH 139, a great wall and our extra large unmanned undersea vehicle.
We have received broad support from the Pentagon for programs and products across the Pds portfolio.
We are continuously improving performance of our existing platforms, including the KC 46, a tanker in our space programs.
While the tanker program has had delays and other challenges.
With this month's agreement with the US Air force to develop and integrate a new remote vision system. We will ensure the KC 46 becomes the standard by which all future refueling aircraft are measured.
Given its 2020 design update no other tag or will have the technological capabilities of the KC 46 and.
The men and women at U.S. Airforce have our full commitment and our investment in the tanker reinforces that dedication.
Our stays teams completed the core stage of Nasa's space launch system and learned key lessons from the C. S. T 100 star liners orbital flight test.
We will we fly this test to demonstrate the quality of the star liner system paving the way for future crude flights.
It is the right thing to do for our NASA customer in the Astronaut's will ultimately fly on it as you may recall, we provisioned for another and crude mission in our financials last quarter.
On the services side, we're seeing a direct impact on our commercial supply chain business as fewer flights resulted in decreased demand for our parts and logistics offerings.
Our commercial customers are curtailing discretionary spend such as modifications and upgrades and focusing on required maintenance.
We anticipate accelerated retirement of over airplanes, which will result in a newer fleet when air travel resumes to previous levels, which will prolong the period of decreased demand for our commercial services offerings.
Similar to commercial airplanes, we expect a multiyear recovery period for the commercial services business.
The demand outlook for our government services business, which in 2019 accounted for just under half of.
Bgs revenue it remains stable.
The strength of government services provides a strong foundation for our overall services business.
We see growth in a number of government services areas, including ramp ups to support international customers with training logistics and supply chain offerings as well as growth on key us programs.
In summary, our industry is going to look very different as a result of this pandemic and the economic impact. It has had on airlines and schedules around the world.
The resulting reductions in the VCA production rates I outlined will require us to make similar adjustment in our infrastructure are spending in our workforce.
We will be a smaller company for a while.
We've worked hard to maintain the stability of our workforce avoiding layoffs, even though even through the suspension of Max production.
Doubling the length of time, we pay employees impacted by the Cove, it induced shutdown of Puget sound Charleston, and other sites.
Bringing people back to work at those sites as soon as we safely could.
But the sharp reduction in demand for our airplanes, we see out over the next several years will support the size of the workforce we have today.
At this time, we're taking action to reduce our workforce by approximately 10% of our roughly 160000 employees by end of this year.
The combination of voluntary layoffs attrition and involuntary layoffs as necessary.
This is 10% of the total for our enterprise.
To make even deeper reductions in areas that are most exposed to the condition of our commercial customers.
More than 15% across commercial airplanes and services businesses as well as our corporate functions.
At the same time, the ongoing stability of our defense space and related services businesses will help us limit the overall depth of the cut.
Of course, we will continue to monitor market conditions closely in light of the unpredictable factors currently driving it and we will make ongoing adjustments as appropriate we.
We will continuously work to shape, our business to compete and what we think the market will look like over the next five years.
I shared this news with our employees this morning.
And I committed to implementing these reductions as fairly.
Respectfully and transparently as possible.
And to providing as much support for our employees as we can through the duration of the global health emergency we are facing.
Before I turn this over to Greg I want to update you on a couple of other important topics.
First our progress on safely returning the 737 Max to service.
We're continuing our work on the safe return of the Max to service working closely with the FDA and other global regulators.
Right now we are focused on completing the software validation and required technical documentation that will appreciate a certification flight.
Some of this documentation work has taken longer than we anticipated and the Corona virus situation has also required some changes to how we do things, including working remotely and virtual meetings with our regulators.
With that said, we've continued to make very solid progress and we currently expect that the necessary regulatory approvals will be obtained in time to support resumption of 737, Max deliveries during the third quarter.
Of course, the actual timing will ultimately be determined by our regulators.
In the meantime, we have approximately 450 737, Max aircraft built and stored at our Max backlog has remained strong throughout this process at approximately 4000 aircraft.
They are the most fuel efficient narrow body planes in the market with useful lives well over 25 years.
We have been working proactively with our customers to maintain the health of this backlog while responding to their needs.
Turning to Embraer.
We announced Saturday that we have terminated the agreement to establish a strategic partnership between our two companies covering both a planned commercial and defense joint ventures.
We work diligently for two years to finalize the transaction, but ultimately we could not come to resolution around critical unsatisfied conditions for the deal under our Master transaction agreement.
It is deeply disappointing.
But we have but we have that reached a point where continued negotiation was no longer helpful.
And so we exercise the rights set out in the mth terminate the agreement.
Looking ahead, we will continue to concentrate on what is most important across Boeing.
To that end I established six company priorities in January.
They included returning a 737 Mac safely to service and earning back trust with our stakeholders.
We're also committed to delivering excellence across our businesses and restoring our production health.
And we are determined to invest in our future while always living our values.
We will not lose sight of the importance of making investments that are critical to our future such as the continued such as continuing to progress on our development programs such as the Triple Sevenx and the 737 Max Ted.
With that let me turn it over to Greg for an update on our financial performance.
Great.
Great. Thanks, Jane and good morning, everyone.
Please turn to slide six.
First quarter results.
Our first quarter results were primarily driven by the co bid 19 impacts and 73, seven Max ground revenue earnings per share and operating cash flow materially reduced.
Prior experiencing Tobin 19 impacts we were tracking well in meeting our original internal first quarter forecast.
Our revenue of 16.9 billion reflects lower 737, Max deliveries versus first quarter of last year.
As well as fewer deliveries in the quarter due to coded 19 core earnings per share was negative $1.70 and earnings in the quarter were also impacted by a charge on the KC 46, a tanker program.
Before we discuss this segment performance, let me touch on 737 Max.
As Dave mentioned, we're currently have approximately 450 737 Max aircraft Bill.
And stored in inventory, we continue to monitor and maintain these aircraft in the regular basis, including completing more than 2000 flights over the past year.
Also as mentioned primarily due to Kobe 19 impacts we've revised our assumptions on timing and the profile deliveries from storage and the production rate ring.
Delivery from storage will continue to be priority, one post assisting our customers with their returned to service.
These aircraft and storage will convert to significant operating cash over the period of time it takes to deliver these aircraft out of inventory.
In preparation for first quarter financial statements, we made certain assumptions, including timing of initial deliveries production.
Okay, Great rant profiles.
We've assumed that we will begin 737 Max aircraft production at low rates during the second quarter.
2020 is timing conditions and returned to service in coated 19 impacts are better understood.
We expect to gradually increase the production rate of 31 during 2021 and expect further gradual increases to correspond with market demand.
We've assumed the timing in the regulatory approvals will enable the 737 Max deliveries to resumed during the third quarter of 20 to 20.
We've also seen majority of the 73 seven Max aircraft produced during the grounding and included within inventory will be delivered during the first year. After a resumption of degrees, although again at a slower pace than we previously assumed.
And again, the slower production and delivery rate ramp flex commercial airline industry impacts as a result of co bid 19.
In the first quarter, we we reduced the number of aircraft in the 737 accounting quantity by 400 units as a result of the reduction to planned production rates due to cold midnight team.
The reduction to the plant production rates will will result in further increases in cost can produce on deliberate aircraft, primarily due to additional fixed cost absorption.
Reduces program margins actor deliveries resumed.
In addition, abnormally low production rates will extend for a longer period once production magazines.
And as expected to result in around the billion dollars of additional abnormal production costs.
Increasing the total from approximately 4 billion to $5 billion.
These will be expensed as incurred and we expect the majority of these abnormal production costs to be expense this year.
During the first quarter, we expensed 797 million of abnormal production costs.
Any change to these assumptions could require us to recognize additional financial impacts.
Theres no material change to our estimate of potential concessions and other considerations to customers for disruption related Max grounding and associated delivery delays.
In the first quarter, we reduced the liability bounced by approximately $700 million primarily through cash payments.
We continue to address the impact individually customer by customer, including assessing the impacts of the Max disruption is having on their operation in light of Kobin 19 panel.
We also continue to express expect any concessions or other considerations to be provided over a number of years with a cash impact the more front loaded in the first few years.
Let's now move to the commercial airplanes on slide seven.
Our commercial airplane business revenue decreased 6.2 billion during the quarter, reflecting lower deliveries primarily by the 737 next round, the as well as impacts and Kobin 19.
Operating margin decline to negative 33.3% due to the following lower delivery volume 797 million of abnormal costs from the temporary suspension of the Max program mentioned earlier.
$336 million charge related to the 737 next generation brain bidding component also known as the pickup work any repair costs associated with that.
Lower 77 margins, primarily due to rate reductions related to co bid 19, and $137 million of abnormal production costs from the temporary suspension of Puget sound operations in response to Colgate 19, we saw approximately one week impact of these costs in the core.
Yes.
We expect to see additional abnormal costs in the second quarter relate to suspension of our Puget Sound and also our Charleston sites due to cold mid 19 through April and early May.
787 program margin decreased in the quarter, primarily due to lower planned production rates, which drove additional fixed cost absorption higher disruption costs any hundred unit contraction of the accounting on the requiring us to recognize the remaining deferred balance over fewer aircraft.
VCA backlog includes over 5000 airplanes valued at $352 billion.
As Dave mentioned earlier, the quoted 19 pandemic has significantly impacted aircraft demand, we're taking actions as a result of these new realities by adjusting production rates and our infrastructure, which will position us for the future and help us bridge to recovery.
These rate decisions are based on current assessment of our demand environment and we will continue to closely monitor these factors that affect our skyline and make rate adjustments as appropriate in the future.
Excuse me Whats millimeter defense based security on slide eight.
First quarter revenue decreased to $6 billion, primarily driven by the charge on the KC 46 eight tanker.
Cts operating margins of negative 3.2%, primarily due to pretax charge of 827 million for the KC 46, eight tank of which 551 million was driven by the costs associated with the agreement signed in April with US Air force to develop and integrate our new.
Remote vision system, while the remaining costs reflect productivity and efficiencies and co bid 19 related factory disruption.
A number of other programs, including the DC 25 be were also impacted by co big Nike further reducing margin in the quarter.
Our provisions on the care Act in our contracts may provide an opportunity recover some of these costs related to co bid 19 overtime and we will continue to evaluate them.
During the quarter Bts, one key contracts with $6 billion in our backlog now stands at 64 billion.
28% from outside the United States.
Let's turn to Boeing Global services results on slide nine.
In the first quarter Global services revenue was flat at 4.6 billion, reflecting higher government services volume largely offset by lower commercial service volume duty Kobin 19.
Bgs operating margin increased 15.3%, primarily due to favorable government service performance.
During the quarter Bgs, one key tronic contract awards worth approximately $4 billion, which brings its backlog now approximately $23 billion.
We only saw the beginning of the impact of Colgate 19 on our commercial services demand for the first quarter and we expect obit 19 to have significantly larger impact on the bgs business in future periods.
In response to this changing market dynamics, we are taking a number of proactive steps to right size and ultimately better position our business that these new market realities.
These include employment actions as well as proactively taking steps to rightsize, our inventory and tailor our portfolio to ensure that we're positioned to serve our customers. Both through this challenging time and when the industry begins to recover.
Let's turn now to cash flow on slide 10.
During our last earnings call, we share that the use of cash flow. This year, you expect to be greater than 22019, clearly coded 19 hedge that meet our cash flow situation, even more challenging in 2020.
The shift in severe impacting has had on the airlines in the global economy is added significant pressure on our cash receipts.
Operating cash flow for the first quarter was negative 4.3 billion driven by the lower commercial airplane delivery volume.
Dance payments and impact of Koby had 19 and timing of receipts and expenditures and as discussed Tobin 19 also caused delivery and production disruption in the quarter.
Also in the quarter, we spent 428 million on capital expenditures paid 1.2 billion demand dividends, which were declared last December and take 2.2 billion of debt maturity.
Colgate 19, pandemic, clearly presenting unprecedented challenges for our industry and our company.
We're taking a number of actions to accelerate and concerns cash in March 2020, we suspended payment of our dividend until further notice since April 2019, we've suspended our share repurchase program and in March 2020, our board of directors terminated its prior authorization to repurchase shares of the company's common.
Stock.
And as previously mentioned, we have taken actions and reduce production rates in our commercial business.
We have heard load certain employees and as Dave discussed will be taking workforce actions through a combination of voluntary layouts attrition and involuntary layoffs as necessary.
We have and we will continue through reduced discretionary spending.
Also reducing or deferring research and development and capital expenditures, but we will continue spending in key priorities and technologies that will be critical to our future into our customer success.
We're working with our government customers to assess and mitigate any impacts associated with co bit 19 and demo.
We appreciate the steps in the department of Defense has taken a work with its industry partners to improve near term liquidity in the forms of increased progress payment rates and reductions in withholds among other initiatives.
In pursuit of the carriers that we're also deferring certain tax payments.
We are working with their supply chain partners to carefully managing liquidity, but at the same time doing everything we can do to manage the stability and health of our supply chain as we manage through this demand shop to protect the long term health.
The U.S. aerospace industry.
We're focused on the best ways to keep them quickly flowing through our business into our supply chain through this period.
The most important source of liquidity for our suppliers good credit of the Oems and tier one suppliers.
As I mentioned prior to close to 19, we were tracking our internal first quarter and full year forecast also has mentioned coated 19 is clearly putting additional pressure on 2020 cash flow and we expect operating cash to be more negative in 2020.
We also expect a slower cash flow recovery.
Going forward due to the revised 737, Max delivery profile and the new wide body production rates.
Outside commercial airplanes.
Commercial services, we expect cash flow generation to be solid and in line with earnings on the government side of our business.
Let's now move to slide 11 will discuss the liquidity position in HR and finance plant.
As previously discussed we drew down 13.8 billion delayed draw term loan early to help shore up our liquidity position as we work through the current challenges also in the quarter, we paid down 2.2 billion of debt maturity, resulting in an $11.6 billion increase.
Bringing the total debt balance now to 38.9 billion.
We ended the quarter with 15.5 billion at cash and marketable securities again due to call. Good 19, our daily use of cash has continued to reduce this balance.
We continue to have access to our $9.6 billion revolving credit facility, which to date has not been drawn upon.
Given the significant impact mid 19 on our operating cash we're proactively managing our cash position working to set set access additional liquidity.
We believe the government support will be critical to ensuring our industry's access to liquidity. When we continue to evaluate options in the capital markets as well as funding options from us government via the U.S Treasury and various federal reserve programs.
We will continue to reviewing all available acceptance, let the best options for our company.
We believe through a combination of our actions and our ability to access additional liquidity, we will we will be able to obtain sufficient cash to fund our operations.
Managing our liquidity and balance sheet leverage and top priorities that we navigate this challenging environment.
We plan to immediately reduce our debt levels once our cash flow generation returns to more normal levels.
Again, we will not lose sight of making necessary investments in our business, our people, new technology and better processes and tools that are critical to our future.
This includes recent organizational change as Dave mentioned to simplify and streamline roles and responsibilities and prepare now.
Post pandemic industry footprint as part of that I'm excited to take on a new wrong worked closely with their teams across the business units to drive operational excellence and restore production and supply chain health is weak and the broader aerospace industry recover from coded 19 pandemic and rebuilds.
Longer.
The current environment is obviously very challenging and extremely dining.
We're seeing fully engaged with our customers continually.
Assessing the changing environment to ensure we have the right minded about near and longer term demand.
And as we discussed we're taking and we'll continue to take appropriate action to bridge the recovery.
So in our company and the U.S. aerospace industry in the 17000 suppliers supporting you can remain healthy and we're well positioned to capture future opportunities when we all emerge on the other side of this crisis.
With that I'll turn it back over to date for some closing comments.
Thanks, Greg.
We're in an unprecedented period for the industry in the world Im humbled and privileged to lead the talented people a Boeing.
We are and will be taking the right action to navigate through this pandemic.
Support our workforce maintain supply chain continuity and stability and position for a changing market.
We continue to support our defense customers and their critical National security missions.
We are progressing toward the safe returned to service of the 737, Max and we are driving safety quality and operational excellence and all that we do every day.
Through it all we are keeping the health of our employees their families and our communities top of mind.
We believe the long term industry fundamentals remain strong and air travel will recover.
A portfolio of products and technology is well positioned and we're confident we will emerge from this crisis as thrive again as a leader of our industry.
History has proven Boeing as a company that rises to these challenges.
With that Greg and I will be happy too.
Take your questions. Thank you.
And ladies and gentlemen in order that your question be clearly heard we ask that you not easy speaker phone cell phone or phone headset. Please use your handset to ask a question if you're on a speaker phone. Please be sure. Your mute function is switched off so you signal can reach our equipment as a reminder, in the interests of time.
We are asking that you limit yourself to one single part question.
Our first question comes from Peter Arment with Baird. Please go ahead.
Good morning, Dave Greg. Thanks, Thanks for your time.
I don't want those questions for David Greg, but maybe just Dave.
The pace of deliveries for the stored fleet over once you get back to certification in Q3 over I guess the majority you'll be looking to deliver over kind of a 12 month period, and then squaring that against the warming up of the production line in trying to get to.
Target of 31 aircraft just seems like a lot of deliveries maybe you could just kind of walk us through kind of how you are arriving at that I know that thats just given the backdrop of what we're seeing in air travel right now thanks.
Yes. Thank you.
Number one as you probably know.
And as been reported on widely we have been having conversations intense ones for the better part of a month.
With our Max customers about delivery and when to take him and.
It's I would call it up.
Wide variation with respect to what they ask for someone them right away some of them want to differ for quite awhile.
Our assessment is reflected in these numbers based on those interactions and yes, theres more to to be had but we think it sort of accurately reflects that and if anything in light of that now all of the government resources that had been provided to many of the airlines, which a month ago. We're still is still in doubt.
Some of that has settled down so.
Now with respect to priorities, our priority will be to deliver the finished goods inventory that we have.
And as a result of production rate is the one that we will sort of.
Change.
Based on what happens in the marketplace marketplace gets more robust for any reason I will increase that rate sooner rather than later and if it differs and or gets any worse, we will do the opposite so the variable and this is going to be the production rate and the rate. We've chosen now there's 31 number and and us.
Slow pace to get to 31 reflects everything we know about the conversations with all of our.
Max customers.
Thank you.
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Our next questions from Rob Spingarn with credit Suisse. Please go ahead.
Good morning.
Going on.
Greg This one this one's few Greg, let say that in 7877787 per month.
Anyone Max's in 2022 on I guess three triple Sevens is the new normal.
What kind of free cash flow profile would you have with that assuming stable bts and a reasonable recovery at Bgs I'm talking about 2022 now.
Yes, yes look clearly Rob.
To Peter's question.
To date that that is the new I would say the single biggest driver to your point, we've kind of laid out at least currently how we're thinking about production rates in that timeframe, but the single biggest driver that will be mats.
And.
And not only priority one delivering off that ramp.
And is being the first step but in that production rate.
Increase from there and so obviously the market's going to inform us.
You know how how we can we have the right profile that we've established today based on the numerous discussions we've had with the customers that will be the single biggest driver within that period, and then I'd say outside of that is the triple seven to Triple Sevenx as you know triple seven.
Acts as the use of cash this year will peak this year, we expected to be a use of cash next year, but then its cash flow positive.
In the following year, so that transition.
That will take place will be will be key to 2022.
Cash flow, obviously, we expect 2022 to be.
Much better than what we're experiencing this year.
And next but those will be the real I'd say key operational drivers that they will allow us to get there.
Greg is there anyway to quantify what cash flow looks like with 787 at Abpseven a month half of what the peak rate has been and with the 737, just a little over half what that targeted mature rate would be how do we think about what cash flow looks like in that environment.
Yes.
Rob I don't want to get into specifics in that timeframe, because obviously as we sit here today 2022 feels like a long way away.
Considering what we're we're navigating but it'll be it obviously it will be positive cash flow in that period from those key drivers.
Now how how positive.
Really obviously depend on rates, even further going out.
And not delivery rates as much as but production rates and advances.
Yes.
Could impact 2022 positively or negatively depending on where rates go from there, but those would be the big drivers and like I said now with these production rates we've established.
That's our that's our best assessment at this time and that that could change will size accordingly to do that but 2022 starts to feel like a more normal year.
Certainly then than what we've experienced in 19 and what we're going experience in 20.
Okay Fair enough. Thank you Greg.
Thanks, Rob.
Our next questions from the line of Seth Seifman with JP Morgan. Please go ahead.
Great.
Thanks, Thanks, very much and good morning.
A couple of questions.
A couple of questions about liquidity and capital structure I got the $15 billion of cash on the balance sheet, but also about 5 billion or short term debt and.
Burning cash.
Can you talk about the timeline.
Can you talk about maybe the $60 billion plus number for the industry that you.
Guys put out there are several weeks ago and kind of what was in that and how you think about it now and can you talk about whether Boeing needs to be at investment grade rated company.
Yes, maybe I'll, let Dave address the industry and then and then I'll follow up.
Yes.
The $60 billion number of course was put together early in this process and credit markets, where as tight as they could be and we were trying to assess the fragility of mostly the supply chain frankly in.
We do have some weak or soft spots in that supply chain.
But with risk with respect to boeing's role in the health of the supply chain I think everybody here knows that the real leverage for US is when we are sound and our credit is good and we place orders against all of our supply chains. Then in fact that provides the liquidity that they need to ultimately to make the adjustments it.
I'm going to make in response to our production rates so that in of itself whatever ultimately we do end up in the liquidity, we provide to our suppliers is most important but our number was meant to represent sort of the whole all of the supply chain 17000 suppliers.
The tier ones in the support that the tier ones might need and I can't speak for that.
And so again I 60 billion dollar number was in fact in industry number not a Boeing specific number.
[music].
Yes.
Justin.
Your second part of your question around being investment grade certainly.
We would like to maintain on being investment grade and I think as you've heard and seeing that we're doing everything possible to do that but.
Look the markets, probably going to impact that more more than anything.
Fortunately as you know, we we started that position of strength with our balance sheet, that's allowed us to navigate it.
And it's Steven I outlined we're taking all the right steps.
To manage liquidity day in day out and prepare for recovery on the on site.
But.
At the end in the dates it's going to be what was going to be on the investment grade.
We we prefer to state investment grade Logan I think we're doing all the taken all the right actions to try to maintain mall.
Thanks.
And our next questions from Carter Copeland with Smelliest Research. Please go ahead.
Hey, good morning, gentlemen, thanks for the time.
One card.
And.
Just Greg just quickly on on the eight seven I just want to make sure you I heard you right on the block reduction I think you said 100 units I wondered if you guys give some color on.
Why why to reduce that is are there is that a lack of visibility around unsold pricing and then just with respect to that what that did to the deferred production I mean, it looks like a $2 billion number in the quarter that would kind of imply that youve.
Dave that program margin down to a pretty razor thin level am I missing something in the math there.
No I think I think you got it I think you've got it right I mean, the contraction in the in the cost base was driven by time, so it's staying within the five year period.
We that we have on on cost basis, So as a result of.
Producing.
Fewer units.
Caused us to contract that cost base by 100 units.
I would say even with that contraction when you look at margin going forward on the 787, even with the lower.
Production rates net net on a unit basis holds up pretty well and real key drivers that even with the lower volume like I said.
Going to the impacted by that you know the fixed costs, but you kind of come back to the fundamentals on the on the backlog and profile the program going forward. When you look at model mix.
It's the supplier step down.
And even even with their own productivity.
It is impacted like I said, but not impacted as much as I think some would some would expect so I think those fundamentals.
I would ask you know don't lose sight of those because theres still there's still a key driver too.
Cash margin on the program.
It's just gap.
Right. Thank you have the color Yep, just maybe one other comment with respect to the market backdrop on the 787 the demand for the eight seven is pretty strong our issue is in our assumptions and we think we're right is that the international routes structures are going to come back much slower than the domestic ones and as a result the.
Seven suffers for that.
But otherwise the airplanes performance its utilization right now in the marketplace is pretty amazing. So we feel good about the airplane, but this pushover are based on the assumptions we've made.
It is what it is.
Thanks for the color gentlemen.
You're welcome.
Next we'll go to a Noah Poponak with Goldman Sachs. Please go ahead.
Hey, good morning, everyone.
Good morning.
I wanted to try.
Good all possible to get.
Precise or more precise on.
It's clearly challenging out there, but but just how many of your customers are attempting to.
Revise their their position in the delivery, Scotland because it.
The traffic growth numbers and just the way it feels it looks and feels like you could imagine literally every single one of your customers, having conversation with you about deferring or cancellation.
You are maintaining 10, a month on the seven for the year, which would suggest.
Thats not happening I'm pretty surprised by that you're telling us your conversations with your Max customers suggest they still want the airplane.
So for a decent amount of them somewhere close to where are the where they originally wanted it. So I don't know if theres any way to quantify.
What percentage of your customers are asking to move versus what percentage of your customers are just sticking to what.
They had previously what percentage of the backlog you expect to be cancelled.
Trying to get some kind of sense for.
The degree of turmoil in the immediate term.
With your customers ability to take airplanes.
So let me.
Take a swing it that I first of all I'm I'm going to assume if we haven't heard from literally all of our customers by now we will.
With respect to what they would like to do.
And these discussions are constructive and we do everything in our power to defer when we can swap where we can.
Et cetera, and remember a lot of our customers all of them are invested but with respect to pdps.
Of course, we have retained so.
Each of these discussions believe it or not has been quite constructive and productive and everything we know about their initial requests.
Our reflected in our new production rates.
And it's not to suggested that there isn't risk remaining on the demand side.
But we're not like we're not looking for rose colored glasses, we're we're actually doing quite the opposite which is to.
Meet as many of these requests as we can negotiate outcomes, where we can and we have a whole bunch of them.
And then reflect that accurately and the product production rates in the for the forward view and that is exactly where we said so anyway, it's surprising but you know the one thing that's probably surprised me a bit is the the excess extent, the which this will accelerate fleet rationalization in the customer base.
You know this scenario, we went from a growth a robust growth environment, where even if they had plans to retire a portion of their fleet. They couldn't do it simply because the market was robust as it was and they've now going into the polar opposite and so this is that moment, where a rationalization efforts get big and believe it or not.
Some cases it even it even requires that maybe new airplanes.
Be ordered simply to rationalize the fleet, that's or try to put out of business. So there is a very interesting set a dynamics.
The fleet planning efforts are in full swing for everybody.
And again I think we've reflected everything we know.
Dave when I went to look up how much of the market of sale leaseback I remind myself I was surprised to remind myself how large that is.
The a lot of a large publicly traded leasing companies have raised capital recently you have state owned customers and you just have customers that had a good financial position coming into this is it reasonable to assume that that set of customers that I. Just described Kim can hold as challenging as things are can hold your together through 2020 until things.
Normalizing are growing again in 2021.
Well in my in my experience and I lived through it in my life of gas back in the.
Post 911 world.
It turns out that that is exactly what holds up and.
And we believe that in fact, it will hold up again.
A lot of the discussions we've had been with.
Financial markets and less worse as you would imagine so I think your assumption is correct and part of our assumptions in this process reflect the discussions we've had with financial sources. So.
I guess, yes is the answer I can't put an absolute number on it for you, but it's clearly reflected in our numbers.
Thanks very much.
Yes.
Our next questions from Doug Harned with Bernstein. Please go ahead.
Great. Thank you.
On liquidity. This morning, Airbus management described a lot of the same liquidity issues that you are describing today.
With the focus on the supply chains health.
It appears that the biggest cash risk that you're facing is also with the supply chain you.
Had the discussion around the 60 billion before.
But when you look at the responsibility for the cash needs the suppliers it crosses Boeing across his Airbus with a lot of overlaps you've got support potentially from governments and then the suppliers themselves. So.
It looks like they're a wide range of potential scenarios here for what the cash outcome could be for Boeing related to the supply chain can you talk about how you work with a different constituencies to try and address this and can you give us a sense as to what the range of outcomes could be here as you look over the next.
Here.
Well, let me take a crack at this first.
The right order of business is the one that is is going on right before our eyes.
And the first is to get the airlines from the pre covert moment and to the post call that moment.
And for them to be a warm when they get there so that they can begin that recovery process.
That ended of itself puts some stability out there in the marketplace.
And it allows us following to now reflect medium term demand long term demand and make the adjustments in accordance with that we believe we have a balance sheet and we believe we have tools available to us and credit markets that are open enough to us to be able to get from here or there and get their with room to spare.
As we do that are good credit that extends into the supply chain and the supply chain, then ask to make a whole bunch of adjustments on their own to reflect the new production requirements at both Airbus and Boeing.
So that again airlines bridging bridging that moment.
Boeing Airbus access to credit and their ability to finance from here to that medium term moment and then the supply chains ability to now restructure themselves to meet that new demand, but always relying on our credit and always relying on our factories be an open that's a real advantage and then the tools that the care.
As act has put in place and we do work closely with the the administration on trying to get them to understand where the soft spots might be in that overall supply chain and direct those tools to that supply chain and that's the process is unfolding before our eyes.
We believe it or not I think its robust and it's working and so I'm not anticipating at least at this moment in time, any big or serious repercussions from supply chain issues in some in some ways just in the last two or three weeks as governments have stepped up with their tools et cetera, there's been a little more stability than there was just pro.
Higher.
So is it fair to say as you and Greg look at the range of possible outcomes here.
With respect to the suppliers when you're talking about feeling fairly confident in this now you're able to say you can take off say some worst case scenarios that perhaps where they're back when you mentioned that 60 billion. So that so that even under the sort of current worst case here you are fairly confident you're hearing.
Solid shape for this year.
We are.
I know you would imagine but.
We have a lot of folks who help us with this and we have stress test the case that we're putting forward in many many ways that are much more difficult than what we've done what we believe we're going to do.
We do we do get through it and we do ultimately when we do take on more debt. We also believe strongly that we're going to start paying it down now at what rate we pay it down is the real question, but when we get to some form of stability at these production rates and I believe we will will be in good shape to begin begin that process of returning money to our lender.
Yes.
Okay, great. Thank you.
Yes.
Our next questions from Ron Epstein with Bank of America. Please go ahead.
Yes, good morning, guys.
Maybe changing engine that focus a little bit product strategy.
With the Embraer deal.
Not playing out.
And then and I may being off the table.
How do you think about competing against Airbus, who has a product at the lower end of the market.
And our product, but the higher end of the narrow body market, where it seems like that the Max's it's fine but it's.
Sandwiched between.
Aircraft that are optimized on both ends of the market by their competitor, so, particularly in an environment, where constraining burn your R&D spend their development spend.
Well with respect to the Max.
I have a lot more confidence in the Max and its place in the market.
Then maybe to question implies.
We have a value prop that actually is still pretty good.
In some ways if if.
If.
Airplane loads.
I want to get smaller as a result of maybe a smaller set of passengers flying on them in the in the next several years.
It might it might actually play to us.
We have a robust backlog with it.
And.
We're not out of the product development business. We're we're definitely in it we are invested in capabilities with respect to manufacturing and engineering that we believe will offer a very differentiated product in what ever.
Strategy, we choose.
And we're a fast at work at that stuff and we continue to be at work on it it will probably not be applied to an M&A and I think weve conveyed that to the marketplace.
But this time actually in some of these market changes and then those important technologies, we're investing and I actually I have a lot of faith both in the product that we currently serve it with.
And then secondly, the capabilities will bring to what whatever we eventually develop as nexgen.
And in the meantime on a wide body world and particularly in the freight or world. We like our strategies, we're going to continue to invest in it and I believe at the moment that Thats are probably our biggest priority. So and then at the low end embraer is not going away, they're going to fight, they're going to fight tooth and nail it to win at that low end.
To the marketplace and they'll they'll battle Airbus.
The former BARDA in doing so and I don't think thats going to move the market in any significant way and or affect the future of Boeing in any significant way. So anyway. That's a that's probably it in a nutshell.
Alright, thank you.
Yes.
Our next questions from Sheila Kahyaoglu with Jefferies. Please go ahead.
Good morning, David Greg. Thank you for the time.
Good.
Morning.
Dave you mentioned on a wide bodies I'm just following up on that you seem pretty comfortable that the bottom of demand is then given this is largely a replacement market and granted not uniform what type of retirement rates are you thinking for the industry.
I don't I don't have a.
Retirement number on the tip of my tongue.
Suffice to say.
There are going to the retirements are going to accelerate in my view.
Considerably and airplanes are going to get put down permanently at a faster rate. That's the most important part of this.
That they get out they get put down permanently not that they just get part.
And so I do think that actually is going to play to our favor.
I Love, where our product line is I think it's fundamentally advantage. Unfortunately, just this up this intermat international route structure I, just think is going to take longer to recover.
And as a result will suffer with respect to ramp, but but I do feel very good about it and I do think.
Retirements are going to fuel a fair amount of our demand.
Yes, just dancing Chu as you know very well I'm going to look at the number of airplanes that are 20 plus years old.
And it's a significant significant amount and then to Dave's point at least what we've been.
And picking up on the customer side will be put down won't be coming back up and when you look at.
What we have in the pipeline in the backlog to some of those customers from efficiency point of view obviously.
We are significant improvements in it crosses the entire product line. So.
We'll see how it goes but I think across the globe we're hearing.
A lot more commitment to retiring that age fleet into daves point retiring are good and not bringing it back.
And we'll continue to monitor that obviously.
We'll take that into into account as we think about our production.
Deals going forward.
Greg just on that point should we think about production in line with deliveries.
So the production equates to deliveries for wide bodies in 2020, and 21 and beyond.
Yes, I think I think the only one that maybe a little off is that the transition from me.
Triple seven to triple Sevenx through that period as were.
On building.
That.
The balance of the flight test airplanes.
But outside of that.
Pretty pretty good correlation production rate to delivery rate.
Okay. Okay of course, Max mix being unique John talked earlier, yes.
Good thank you.
Our next question from Jon Raviv with Citi. Please go ahead.
Hey, good morning arms ask a question about 45% of the business that as it stands right now.
I think on the last call you mentioned that defense cash flow, maybe a little bit down year on year. This year due to timing, mostly but how do you see that playing out ongoing for NASA and the context also have a lot of the gross items in your defense portfolio being related to bring new programs. We've taken on some risk on the front in terms of investments I just do those those dynamics playing out over the next few years as a way to plug some of the whole.
All being created by Arrow, clearly being down here.
Greg you want to take that one or you want me to.
I'm, sorry, I missed part of it I apologize.
Out on me.
This is with respect to our defense business and I'll I'll start with yes. You are you are in fact.
Correct I.
2019, where we did have some balance.
The defense business was 45% this year of course, the defense business will probably be bigger.
And the commercial business and that will probably hold for a little while of course with these new rates and and delivery. So.
This is thats, an important part of our company that I'm not sure a lot of people reflect.
The risk elements associated with our defense portfolio now I'm, not I'm going to knock on wood, while I say it but I believe we've de risked much of our portfolio largely as a result of the significant.
No issues, we've had on tanker.
And of course the continuous.
Write offs that we've had to experience I do believe that that program now is exactly where it needs to be we're going to finish well importantly, our customer's going to.
Feel like we have finished well and we've delivered a product that that is second to none. So I do believe that the even the tank or future is is significantly brighter than than the one we've experienced up until now.
And then our fighter aircraft, we will continue to.
Supplement or attempt to supplement our order stream and production build.
And largely with the help of at Defense Department, whose posture is to want to do those kinds of things, particularly in this this moment in time, so again feel good about that and on the development front our development programs at the early stages are all looking quite good we're not we're really not off plan on anything in usually by now.
Now we have a sniff that we might be.
So again I feel pretty good about the risk profile of our defense business.
Despite the difficulties that weve up that we've attempted to overcome and just the last couple of years, Greg I'm not sure. If you want to add anything that yes, no I agree with everything you said Nathan obviously, when you look at the portfolio mix.
John that Max ramp up.
Thats, where it'll start to differentiate.
We'll go back to.
A richer mix on the commercial side, but.
Outside of that.
Thank you pretty much weight gain outlined and.
On the development programs as Dave said, we tried to de risk a lot of these upfront, especially some of those.
Wins that we had most recently and outside of that the portfolios actually performing performing well as is the bgs government services side of the business. So we got to keep that keep that engine running running smoothly as well.
Thanks occupants a one.
Operator, we have time for one more question.
And that will be from Myles Walton with DBS. Please go ahead.
Thanks, Good morning, Thanks for taking the question.
I'm wondering.
Prior question I think you talked about 2022 cash for free cash for as being kind of the team.
North proof to look out Im just curious and 21.
Is there any reason, we shouldn't expect that to be a sizable positive cash per year, given the liquidation you're talking on the Max or are the advances headwinds enough.
For 21.
All for being negative.
Yeah no.
Definitely 21 is is at least as we have a forecasted today much better than 20.
A lot of.
Key elements in that is is certainly the Max again, the profile of the Max deliveries coming off the ramp in the production.
There isn't there is more impact on the progress payments side.
But again as I talked about operationally on the 787, we're still seeing good cash conversion on the program.
And then in like I said.
You know triple Sevenx has improved.
From a cash burn on in 21 as well so.
That's a moving pieces enrollees is but the single biggest driver in there is Max the rate ramp on Max and Thats, what will contribute to a much more improved 2021 versus 2020.
But sorry, Greg the underlying that though improved as a positive the kind of feel comfortable enough to say that.
Yes, our current forecast based on all the rate discussions. We just had today is a positive 2021 cash flow.
Okay. Thank you.
You're welcome.
All right good that complete Boeing company first quarter 2020 earnings conference call. Thank you all for joining.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation you may now disconnect.
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