Q2 2020 Boeing Co Earnings Call
Thank you for spending by good day, everyone and welcome to the bone company's second quarter 2020, <unk> earnings Conference call.
Today's call is being recorded the management discussion a slide presentation plus the analyst question and answers that you are being broadcast live over the Internet to ask a question on today's conference. Please press the digit one followed by the did just zero I know touched on telephone again.
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This time for opening remarks, and introduction I'm trying to call over to Miss more we took contagious Vice president of Investor Relations for the billing company Mr. Pager. Please go ahead.
Thank you and good morning, welcome to Boeing second quarter 2020 earnings call I'm worried us danger and with me today, our David Calhoun.
He is president and Chief Executive Officer, and Greg Smith borrowings Executive Vice President of Enterprise Operation, Chief Financial Officer, and interim leader of communication.
After management comments, we will conduct a question and answer session in fairness to others on the call. We ask that you. Please limit yourself to one question as always we have provided detailed financial information in our press release issued earlier today and that's a reminder, you can follow today's broadcast and slide presentation.
Through our website at Boeing Dotcom.
Before we begin I need to remind you that any projections estimates and goals. We include in our discussion. This morning are likely to involve risks, which are detailed in our news release in our various assay 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 disclosures and reconciliations of certain non-GAAP measures now I will turn to call over to Dave Calhoun.
Thank you worried and good morning, everyone I hope, you're all continuing to stay safe and healthy during this crazy global pandemic that we're all living through.
Before getting started I want to recognize all of the health care professionals, the public servants frontline workers, who are dedicated to keeping us safe and healthy day in day.
On behalf of all of our Boeing associates. Thank you.
I also want to thank my Boeing teammates around the globe for everything they aren't doing to support each other or business our communities and our customers. During these intentionally challenging times.
With that let's turn to business and slide two please.
The current challenges we are [laughter], we have arose unprecedented proportion I think we all know that this is true for our company to for our industry and our society at large.
In terms of uncertainty it is important we focus first on our people and that is where I'll start today.
We're working hard to strengthen our culture support our workforce and to help our communities.
The racial equity in social Justice movement reminds us that we must do more to confront racism head on.
I'm proud of our Boeing team's commitment to this and the progress we've made over the years.
But I recognize we recognize we have more work to do.
We're raising the bar on our key measures of equity diversity and inclusion and over the next four years, we will double the $25 million, we've invested in partnerships and organizations that support marginalize communities.
Commitments in this area will be an even more permanent and visible aspect of our engagement going forward.
Turning to the covert 19 pandemic.
That's cases rise in certain areas, we are focused on keeping our people and our community safe.
As you know during March and April we temporary temporarily suspended some of our operations due to cope with 19.
We resumed operations and brought our teams back to work only after implementing objective and rigorous staffs aligned with federal and state guidance to ensure the health and safety of our workforce.
We are taking all responsible measures across our facilities.
Including requiring face coverings enhancing facility cleaning, adding visual indicators.
We're modifying work areas and adjusting work patterns to allow for physical distancing, providing access to medical information around the clock quarantining anyone potentially exposed to the virus and conducting contact tracing and much more.
For all of our employees, whose jobs can be done effectively from home, we continue to implement virtual working arrangements.
We believe we point effective processes in place that enable our facilities to be as safe or safer than their respective communities.
Nevertheless, we will remain vigilant and follow the advice of our health care professionals and adhere to the government government guidelines as we monitor the virus.
As our employees focused on their own health there also stepping up to help their communities through the crisis.
It would be more proud of their efforts and I'll highlight just a few of their contributions.
To date, we printed more than 40000 phase shields and completed 12 airlift missions, delivering 4 million units of personal protective equipment to healthcare workers in need.
And combined with our gift matching program, our employees have donated a million and a half dollars to support covert 19 response efforts in their local communities.
Oh. It has also delta heavy blow to the commercial aerospace sector and our business.
Airlines have cutback operations dramatically.
They assess their business there are making difficult decisions that result, grounding fleet differing airplane orders postponing acceptance of completing orders.
And slowing down or stopping payments.
There are also accelerating aircraft retirements, differing elective maintenance and requiring fewer service.
That is why we are working closely with our customers and suppliers to navigate through this uncertainty.
We continue to monitor the commercial marketplace by staying very engaged with our customers around the globe to fully understand their short term medium term and long term requirements.
We haven't we will continue to work with our customers on specific timing and adjustments to their deliveries will discuss this further in the business environment part of this discussion.
As air travel resumes and restrictions ease around the globe aircraft crew and passenger health and safety are always our top priority.
Through our confident travel initiative Boeing is supporting our customers and working with industry stakeholders to support multiple layers of protection aimed at minimizing health risks for passengers in crew throughout the travel journey.
Layer of protection is a system wide approach with customers airports regulatory authorities in industry associations, all having a role to play.
First layer is having measures in place to prevent any one with the virus from boarding the airplane.
The second layer is assisting airlines on cleaning and disinfecting practices.
The third layer is to minimize contaminants from from spreading in that cabin itself through to the design of cabin airflow. They use a pepper filters and encouraging passengers, if not requiring passengers to where face coverings.
In cabin technology enhanced cleanliness standards airflow systems and other preventative measures are helping protect the health and safety of every person who steps onboard Boeing airplanes.
These have to be combined with personal responsibility of passengers and cruise, including wearing face masks and taking other precautions, which is a critical part of creating a safe travel experience.
Another important aspect of bridging to recovery is ensuring the health of our supply chain.
We're doing everything we can to support our global suppliers and their stability remains a key watch item for us in the aerospace and as our aerospace industry Weathers These unprecedented challenges.
We're monitoring our supplier status around the world to assess risks and we'll address any potential disruption.
We've been continuing payments to our more than 12000 suppliers supporting about one of the half million jobs.
As we discussed last quarter given this severe nature of this virus and the shock.
To preserve the long term competitiveness of our industry as well as our company, we're intensely focused on ensuring liquidity through the intermediate crisis.
We've taken aggressive liquidity steps over the past few months, including raising $25 billion in the capital markets in May.
Well, we've addressed the immediate liquidity issue, we still must continue taking action to improve our performance and transform our business for the future.
In the second quarter, we completed the realignment of our engineering organization and the integration of our new enterprise operations financing strategy group.
These moves are foundational steps in our effort to strengthen engineering to elevate the company's focus on safety a quality improved operational factory in supply chain performance and streamline our processes.
And lastly, despite the challenges we face we've not lost sight of our commitment and our need to deliver on our priorities, which have not changed.
We're continuing to make steady progress toward the safe return of the 737 to service.
Working closely with the Epay and other global regulators.
Well, we still have a lot of work in front of US. We're encouraged with the completion of the FAA certification flight test earlier this month and the phase announcement to move forward with a notice of proposed rulemaking to safely return the 737 to service.
Both are important milestones in the certification process as we collect them we've focused on ensuring transparency at all stages.
Well working now in completing the remaining Ci tasks coordinating with and following the lead of our global regulators.
As you would expect the pandemic is required some changes to how we do things, including working remotely and virtual meetings with our regulators.
For activities that cannot be completed remotely, we're making appropriate and safer arrangement to enable effective cross border collaboration with the global regulators, but.
But the overall environment presents real logistical challenges for the necessary international travel and the in person meetings, which are required and that we are working through.
Based on our latest assessment, we now expect the necessary regulatory approvals will be obtained in time to support resumption of deliveries during the fourth quarter.
Of course, the actual timing will ultimately be determined by the global regulators.
After an approximately four months suspension of production operations in May we resumed early stages of our 737 production line.
During the suspension, we implemented more than a dozen initiatives focused on workplace safety product quality and they have strengthened in the production system and help optimize the build environment, allowing for more predictability and stability for future rate increases.
In addition to the 737, we're focused on meeting our commitments to our commercial defense and space customers.
The fact within defense, we delivered 44 aircraft in the quarter completed the critical design review for the T. seven eight advanced trainer and achieved our first flight of both the F 15, Qatar advanced and the Epay 18 block three Super Hornet for the U.S. Navy.
Now, let's turn to the next slide to discuss the business environment for our industry.
At the fed space and security, we continue to see a healthy market with solid demand for our major platforms and programs both domestically and internationally.
Our portfolio of 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.
The $7 billion of orders that Bts booked in the quarter and some recent awards, including the historic contract for the F 15 E X from the U.S. Air Force.
Combined with the contract extension from NASA to support the international space station underscore the strength of our offerings.
The demand outlook for our government services business remained 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 U.S. programs.
Our government services defense and space programs continues to provide critical stability for us as we move forward.
On the commercial side, our industry and our company or whether in challenges like none we have ever experienced in our life tenant.
And many of those challenges are still unfolding.
I honor projects passenger traffic will drop by more than half this year compared to 2019.
As global economic activity slows down due to covert.
And governments severely restrict traveled to contain the spread of the virus.
After a sharp 94% drop in passenger traffic in April we've seen tangible signs of recoveries in key markets, such as China, and Europe with operations increasing into July.
The U.S. has also improved from the April lowest point.
However, the recent uptick in coated cases has slowed its recovery.
So while we were encouraged by the early signs of recovery the past few weeks demonstrate the trajectory maybe uneven.
Well the cargo side the reduction of belly cargo capacity has led operators to utilize essentially all available freighters.
Significant use of passenger aircraft as freighters continue.
Though yields are starting to return to normal as Morbelli cargo capacity comes back online.
We've also seen improvement in global fleet utilization.
Around 65% of the fleet is now back in the service with hundreds of aircraft reactivated weekly.
Utilization metrics are improving as airlines resume more of their network and schedules.
June passenger operations reached approximately 30% of last years level.
With acceleration in July bringing them to nearly 50% at last years level.
Passenger load factor has improved from a from the April levels, but remains low.
In June the load factor was 58% versus 84% a year ago.
As I alluded to earlier, we're seeing different pieces of recovery for different regions.
In some countries.
Reopened their air travel improved along with it.
This is the case in Europe with many airlines resuming operations as borders open.
The U.S. recovery has sustained weekly 20% traffic growth momentum until about the fourth of July and since then with rising cases in key leisure markets.
We've seen signs a flattening or slight declines as the airlines have noted.
Continued growth in cases, and corresponding travel restrictions were quarantine policies.
May dampen the near term recovery.
The way forward will depend on the development with respect to the pandemic and the scope of government travel restrictions.
We continue to see volatility on the recovery path ahead.
Given the amount of an uncertainty that is still in front of us managing liquidity continues to be vital to our industry's ability to bridge to recovery and the navigate the challenges.
As we previously discussed we continue to believe that the fundamentals that have driven air travel for the past five decades and double the air traffic over the past two decades remain intact and we believe this industry will in fact recover.
But we currently estimate it will take around 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.
The picture is obviously dynamic and subject to many unknowns.
As we see it today narrow body airplanes will lead the way to recovery as airlines, bringing their networks back online focusing first on domestic routes.
Meanwhile, border closures and travel restrictions significantly dampened international travel demand, which in turn impacts the utilization of wide body passenger fleets in the near term.
A key driver in both segments will be the rate of retirements of older fleets.
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, where an active service prior to the crisis.
So far we have tracked retirements of close to 1000 or these aircraft across the global fleet.
We're placements will not be uniform as airlines will focus on the oldest and least efficient airplanes to retire.
Some airlines have already made announcements to this effect.
Thousands of more fuel efficient airplanes that we and our competitors have in backlog will make future flying even more environmentally sustainable and help us reach our industry's emission reduction targets.
Airplanes that we plan to deliver this year will be 25% to 40% more fuel efficient than the airplanes, they're replacing.
The urgency and value of fleet versatility is accelerated by this crisis and 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.
Our unmatched cargo light up the world's largest and most efficient twin engine, Jeff the triple Sevenx and of course, the versatile 737 family.
On the services side, we're seeing a direct impact on our commercial supply chain business as fewer flights resolve the decreased demand for our parts and logistics offerings.
Our commercial customers are curtailing discretionary spends such as modifications and upgrades and focusing on required maintenance only.
We anticipate accelerated retirement of older aircraft, which will result in a newer fleet when air travel resumes to previous levels.
This 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.
You'll see the significant impact of co of it is reflected in our commercial services financial results this quarter.
Which Greg will go through a little bit layer.
We closely monitor the commercial marketplace by staying very engaged with our customers all around the world to fully understand short and long term requirements.
We regularly incorporate additional insight to inform current and future production rates.
Based on our latest assessment, we've decided to refine our commercial airplane production rates to better calibrate near to medium term supply and demand balance.
Let's turn to slide four.
And the narrow body segment, we expect to continue to produce the 737 at low rates for the remainder of 2020.
And gradually increase the rate to 31 by the beginning of 2022 with further gradual increases that correspond with market demand.
The production ramp profile is also affected by the pace of delivery of our stored aircraft.
We have moderated the production rate ramp up from our prior assumptions to reflect commercial airline industry uncertainty due to the impact of Covance.
We continue to see our 737 family of airplanes, creating capacity for growth and providing required replacements for older less efficient airplanes.
We have and will continue to work closely with our customers review their fleet plans and make adjustments where appropriate to adapt to lower than planned 737 production in the near term.
Provide more flexibility to deliver our backlog.
And protect the value of the 737 family.
Moving to the wide body segment.
We previously planned to reduce the 787 production rate 10 per month in 2020.
And gradually reduced to seven per month by 2022.
In light of the ongoing challenges presented by the pandemic and the impact on our airline customers. We now plan to reduce the 787 production rate from the current 10 per month to six per month in 2021 to further de risk our skyline.
Taking into account the financial condition of our customers at a geopolitical environment.
Given the lower growth lower rate profile, we will prudently evaluate the most efficient way to produce a 787 to include the studying the studying the feasibility of consolidating our 787 production into one location.
We will continue to evaluate the rate beyond 2021 to balance supply and demand.
Our 787 family has a compelling value proposition offering unparalleled fuel efficiency and range flexibility, enabling carriers to optimize fleet and network performance as well as profitably expanding into new markets.
Turning to the Triple Sevenx.
We continue to execute the flight testing phase of our rigorous test program.
As we look toward entry into service, we've adjusted the timing of the first triple seven dash knowing delivery to 2022.
Versus our prior forecast of 2021.
This reflects our assessment of the development and test timeline feedback from our customers and projected impacts from covert 19.
We're also incorporating lessons learned from the 737 certification process, we will continue to manage the risks inherent in any development program.
We continue to expect to deliver triple Sevens at an average rate of approximately two and half per month in 2020.
We will take a measured approach to the triple seven X Ray ramp as we look to minimize the amount of change in corporation work by managing the number of aircraft produced prior to entry into service.
Due to market uncertainties, driven primarily by the impacts of covert 19.
And moving the Triple seven ex the circ delivery to 2022, we now plan to reduce the combine triple seven triple Sevenx production rate to two per month in 2021 versus our previous plan a free per month in 2021.
Finally, well make no change to the 767 and 747 production rates at this time.
These programs are targeted for the cargo market and approximately half. The 767 production is dedicated for the tanker program.
On the 747, we will continue building 747 at the current rate as we deliver on our commitment to key customers.
In light of the current market dynamics and the outlook.
We anticipate.
Completing production of the iconic 747 in 2022.
Our commitment to our customers does not end at delivery. These airplanes will be flying for decades to come and we'll continue to support the 747 franchise its operations and sustainment well into the future.
These rate decisions are based on our current assessment of the demand environment, taking into account a host of risks and opportunities.
We will closely monitor the key factors that affect or skyline, including the wide body replacement cycle and the cargo market.
We will maintain a disciplined rate management process and maintain and make adjustments as appropriate.
In the future.
As I mentioned last quarter, the sharp reductions in demand for our airplanes and services that we see over the next several years.
Well support the size of the workforce that we had prior to the start of the pandemic.
As previously announced we started implementing a reduction of our global staffing by approximately 10% by end of this year from where we ended the year.
Last year.
Through the combination of voluntary layoffs, attrition and where necessary involuntary layoffs.
These are difficult actions, we're taking along with infrastructure and spending reductions to better position us for the future.
We're taking a thoughtful and methodical approach carefully managing required skills and talents.
Some areas and most notably defense, we continue hiring to meet our customer commitments and to fill critical skill positions.
We are implementing these reductions as fairly respectively and transparently as possible.
Providing as much support for our employees as we can can through the duration of the global health emergency that we're facing.
Unfortunately, the prolong the impact of Govan 19, the further reductions in our production rates and the lower demand for commercial services means we'll have to further assess the size of our workforce and ensure we're aligning with the smaller market.
More hard decisions are likely ahead of us as we try to limit the impact on our people as much as we possibly can.
We will be communicating with our teammates openly honestly and transparently.
The assessment will be aligned with our ongoing efforts to simplify and improve how we do our work driving agility and positioning us for when the industry recovers.
In summary, our industry is changing.
Our customers' needs are shifting and we're adapting.
We believe over the next several years air travel demand will gradually recover to the growth trends.
Protecting long term flexibility, while adjusting capacity in the interim to balance near to medium term supply and demand and demand will be critical to preserve our long term prospects.
There's no question that this is a historically dynamic and challenging time for our industry.
Well, we're closely and transparently with our customers our suppliers and our employees as we navigate through and rebuild much stronger on the other side.
We'll take decisive action to transform the business.
Focused investments.
Preserve liquidity streamline and size our operations to become a better more sustainable Boeing.
And with that let me turn it over to Greg for an update on our financial performance.
Greg Great. Thanks, Dave and good morning, everyone, let's turn to slide five for a second quarter results.
Our financial results continue to be significantly impacted by co bid and the 737 Max grounded.
Second quarter revenue of 11.8 billion reflects lower commercial airplane deliveries and commercial service volume and an additional 737, Max customer consideration charge of 551 million in the quarter.
Earnings in the quarter also impacted by over $2 billion of charges comprised of the BDCA abnormal costs.
Bgs charges as a result of the co bid 19 market environment and severance costs for approximately 19000 employees, leaving the company of which around 6000 of left as of June Thirtyth.
These reductions combined with additional hiring that continues in key areas like Bts and critical skill areas will result in approximately 10% net workforce reduction this year.
These charges were partially offset by income tax benefit related to the NFL carry back provision in the cares act as well as the impact of pretax losses I'll cover these charges in more detail on the subsequent slides.
Let's now move to commercial airplanes on slide six.
Revenue was 1.6 billion, reflecting lower commercial airplane deliveries due to the significant impact of co bid 19 pandemic on our customers and on our operations, including the shutdown of our commercial airplane production for several weeks in April in May.
Also impacting revenue in the quarter was 515 $51 million increase in estimated 737 Max customer considerations.
This is compared to a $5.6 billion charge, we booked in the second quarter last year to establish the customer consideration liability.
BC, a second quarter operating margins declined due to the falling lower delivery volume $712 million of abnormal production costs related to the 737 Max program.
468 million of severance expense and 131 million of abnormal production costs for the temporary suspension of our Puget sound and Charleston production sites.
Stupid to cobot 19 through again the April in early May timeframe.
Similar to prior period in preparation for second quarter financial statements, we made certain assumptions on the 73, seven Max including delivery and production rate.
Ramp up profiles.
As Dave mentioned Weve moderated the production rate ramp up.
From our prior assumption to reflect detailed ongoing discussions with our customers that they as they assess the environment and their fleet requirements.
We've also revise our assumptions on timing and the profile deliveries from storage delivery from storage will continue to be priority. One after assisting our customers with their returned to service.
We currently have approximately 450 737, Max aircraft built and stored in inventory.
We expect to continue to produce the 737 at very low rates for the remainder of 2020 and gradually increase the rate 31 by the end of 22 and expect further gradual rate increases just because correspond with market demand.
We've assumed that the timing of regulatory approvals will enable the 737 Max deliveries to resumed during the fourth quarter of 2020.
We have also assume that the majority of the 737 Max aircraft in storage will be delivered during the first year after resumption of deliveries.
No material change in our estimate.
Total abnormally costs of $5 billion. We expect these costs will be expensed as incurred over this year and the next year.
During the second quarter, we Expensed 712 million of abnormal production costs, which brought the cumulative abnormal cost expense to date to 1.5 billion.
As reflected in or in the second quarter revenue, we've updated our assessment of the liability for estimated potential concessions and other considerations to customers for disruptions related to the 737, Max grounding and associated delivery delays.
Yes. This reassessment up includes updated estimates to reflect revisions to return to service.
Delivery and production rate assumptions, driven by timing of regulatory approvals as well as latest information based on engagement with our customers.
Cumulatively, we've accrued a 9.6 billion dollar liability for the estimated potential concessions and other considerations.
To date, we've made 2.6 billion of payments to customers in cash and other forms of compensation.
Including $600 million, we paid this quarter.
We have settlement agreements covering approximately $3 billion of the remaining liability balance of 6.7 billion.
We continue to address the impact individually customer by customer, including assessing the effects of Max disruption.
It is having on our their operations in light of the cobot pandemic.
We also continue to expect any concessions or other considerations to be provided over a number of years with the cash impact to be more front loaded in the first few years.
Any changes to these assumptions could require us to recognize additional financial impacts.
Commercial airplanes backlog includes more than 4500 aircraft valued at $326 billion.
The decline in backlog in the second quarter reflected aircraft order cancellations and removal of aircraft orders from our backlog due to a SC six so six accounting standard.
The AMC six six imposes additional criteria for recognizing in aircraft order in boeing's backlog, even though the customers continue to have binding contracts with our company.
We have we we went on and order is deemed.
Not meet the criteria that we adjust the backlog accordingly.
The AMC six so six adjustment removes aircraft some backlog if the customer has a contractual right to cancel.
And incorporates our assessment of a customer's liquidity position and commitment to take the delivery.
As Dave mentioned earlier, we are taking action to adjust our production rates and our infrastructure to adapt to the cobot 19 pandemic impact on aircraft demand.
These rate decisions are based on our current assessment of our demand environment and we will continue to closely monitor these factors that affect our skyline and make rate rate adjustments as appropriate in the future.
We strive to adjust our production rates as timely as possible.
Some cases, we would have liked to bring production rate down sooner to match near term demand. However, there's a number of key factors that need to take into consideration.
Including orderly supply chain transition and production systems stability.
Therefore, we expect production to continue to outpace delivery rate in the near term, resulting in higher finished good inventory.
Let's now move to defense space the security on slide seven.
Second quarter revenue was stable at $6.6 billion, reflecting cobot 19 impact on derivative air aircraft programs, partially offset by higher volume across the remainder of the portfolio.
Second quarter operating margin decreased to 9.1% largely due to $151 million KC 46, eight tanker charge, primarily driven by additional fixed cost allocation, resulting from lower commercial airplane production volume due to cobot 19.
Bts operating margin in the second quarter of 2019 benefited from a gain on sale of property.
During the quarter Bts, one key contract awards were $7 billion in our backlog stands at 64 billion with 31% from outside the United States.
Let's now turn to global Boeing Global services results on slide eight.
In the second quarter Global services revenue declined to 3.5 billion due to lower commercial services volume due to cobot 19, partially offset by higher government service volume.
Operating margin in the quarter reflected lower commercial service volume less favorable mix of products and services and a $923 million of an earnings church.
Barges are due to significant impacts co bid has had on our customers liquidity and demand for certain products as customers fleet plans adapt sharp reductions in air travel.
The charges include the following reserve for higher expected credit losses, primarily due to customer liquidity issues.
Inventory write downs and impairments of distribution rights, primarily driven by airlines decision to retire certain aircraft.
In contract termination in facilities impairment charges, and finally severance costs.
Bgs backlog declined to $18 billion, primarily due to the reduction for commercial orders that in our assessment no longer meet the accounting requirements of AMC six so six for inclusion in our backlog.
Our remaining backlog is primarily made up of government contracts, which continue to be stable.
To respond to the challenging markets, an iron dynamics, we have taken significant action and proactive steps.
Right size and ultimately better position our services business for these new market realities. These include employment actions as well as proactively taking steps to right size, our inventory and tailor our portfolio to ensure that we are positioned to serve our customers. Both through this challenging time and when the industry begins to.
Recover.
Let's now turn to cash flow on slide nine.
The historic market downturn.
By the impact of Cobot 19 on our airlines and the global economy continues to put significant pressure on our cash receipts.
Operating cash flow for the second quarter was negative 5.3 billion driven by lower commercial airplane delivery volumes advance payment timing.
Commercial service volumes and as discussed cobot, 19 cause delivery and production disruption in the quarter.
In the quarter. We also saw increased cash receipts from the release of withholds on tanker deliveries and the department of Defense initiative to increase.
Progress payment rate.
We appreciate the Pentagon leadership and supporting the National Security industry base, and we continue to do our part to keeping cash flow to our supply chain.
We continue to expect cash flow generation on the government side of the business to be solid and in line with earnings.
Clearly the additional reductions in our commercial production rates as well as the updated triple Sevenx schedule have made our cash profile even more challenging.
However, based on what we what we know today interactions.
We still see a path to positive cash flow in 2021.
We will continue to work opportunities diligently and monitor risk factors given the dynamic nature of the current environment.
Let's move now to slide 10, and will discuss our liquidity position.
As discussed last quarter, given the significant impact 19 on our operating cash.
We've been proactively managing our cash position and assessing additional liquidity.
In May we completed a $25 billion bond issuance.
And the strong Investor response in the bond validates the confidence we have in our future.
Also in the quarter, we paid down 2.4 billion of commercial paper, bringing our total debt just 61.4 billion.
We appreciate the administration Congress, the federal reserve and the Treasury Department's, whether swift actions and stabilizing the market at the onset of this crisis, which help the credit markets function again, and pave the way for our successful bond offering.
We ended the second quarter with 32.4 billion of cash and marketable securities.
We also continue to have access to our 9.6 billion dollar revolving credit facility.
Which to date has not been drawn upon.
We expect our current are we expect our use of cash due to cobot 19 to continue for the remainder of the year and into part of 21.
Given the dynamic environment, we continue to carefully monitor our cash flow position and perform scenario planning to understand the range of outcome and assess what future actions, we may need to take to ensure that we continue to have sufficient liquidity.
Managing our liquidity and balance sheet leverage our top priorities as we navigate this challenging environment.
Reduce our debt levels once once cash flow generation returns to normal levels will continue to be a top priority.
Let's now turn to slide 11.
Clearly cobot 19 pandemic is continuing to present significant challenges for our industry and for our company.
We're managing these challenging daily taking swift action to bridge to recovery and emerge stronger on the other side.
To bolster our near term liquidity, we've taken a number of actions since early this year, we suspended our dividends and terminated our prior share repurchase authorization.
We proactively drawn down on our 13.8 billion dollar term loan in mid March and raised 25 billion of new debt cut discretionary spending and reduced or deferred R&D and capital expenditures.
As discussed two aligned to the new commercial aerospace realities. We're also lowering commercial production rates and taking difficult workforce actions as we look to the future. We're focused not just on adapting and recovery, but on emerging stronger and more resilient for the long term.
It includes prudently and proactively reviewing every aspect of our company and to identify opportunities to improve performance on our and our focus on safety physician for new market realities, and ensure where sharper leaner and more competitive for the long term.
This is a true business transformation effort.
And addressing Holistically five key areas.
Reassessing all aspects of our infrastructure facilities sites and enterprise footprint in light of the reduced demand.
And also taking into account new remote working opportunities.
We're looking critically at our organizational cost structure and how we operate reevaluating our portfolio and investments to ensure were focus in our spend on where we see market opportunities and areas more critical to our future like safety quality and innovation.
We're managing our supply chain stability carefully while calibrating to lower demand.
And we're driving operational excellence and to every corner of our company. So we can improve performance enhanced quality workplace safety and reduce rework.
As we transform our enterprise cross these five pillars, we will continuously assess the size of our workforce to ensure we're adapting to market realities, while limiting the impact on or people as much as possible.
The goal is to improve cash flow profile restore our balance sheet strength as quickly as possible and these actions will help get us there the financial objectives. We've established are measured in billions of dollars.
And we'll be executed over a multiyear period again. This effort is about ensuring we're well positioned for the future.
Even as we reduce our spend we will continue investing in area is critical to our future, including safety quality operational excellence and innovation in key technologies and products.
We're also working with our supply chain partners to carefully manage liquidity do all we can to maintain stability through this demand shot so.
So that we can protect for the long term health.
The U.S. aerospace industry.
Again, approximately 770 cents and every dollar we spend goes to the supply chain and we're focused on the best ways to keep liquidity flowing through our business and to our supply chain through this period.
We're also staying in fully engaged with our customers assessing the challenging environment to ensure we are right minded about near term and long term demand. So that we can always be prepared to meet our customers' needs.
We work hard to de risk the past decade by addressing a number of different areas, including pension funding risk labor stability product development sequencing and raising the bar productivity safety cash management discipline.
Our teams know how to do this and I'm confident we're taking the right actions to ensure long term sustainable future.
So with that I'll turn it back over to Dave for closing comments.
Thanks, Greg.
We're definitely an unprecedented period is tough moment for the industry and the world.
Every day I'm inspired by the resilience in the hard work of our Boeing associates, our customers and our business partners. We are and we will continue taking the right actions to navigate through this together, while maintaining focus on our priorities.
Living our values and driving safety quality operational excellence into everything we do.
We're focused not just on adopting and recovering but on emerging stronger and more resilient than ever before.
We believe the long term industry fundamentals remain strong and air travel will recover our portfolio of products and technology is well positioned for that recovery.
Much hard work remains ahead of us, but what I've seen the Boeing team do gives me great confidence that we will adapt we will lead and we will thrive as our industry recovers.
With that Greg and I will be happy to take your questions I'll turn it back to merida. Thank you.
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Our first question will come from the line of Myles Walton.
Yes. Your line is open.
Myles Walton with you'd be yes. Your line is open.
And our next question comes from the line of Hunter K with Wolfe Research. Your line is open. Please go ahead.
Thank you good morning.
Greg.
Good morning, Greg can you. Please give us some color on that path to positive free cash flow and 21 kind of curious to know.
Obviously, I know your assumptions on rate, but beyond that what are the primary drivers you need to achieve it. Thank you yeah, yeah absolutely.
Well look I'd say first and foremost 737 returned to service and driving the production and then the delivery ramp as we deliver those aircraft out inventory that's that is the primary driver.
Outside of that Triple Sevenx getting closer to two.
Yes.
And the the financials associated with that.
The 737 or 787, Im sorry cash profile does improve.
Due to inventory unwind and.
In really that the deliveries are outpacing production. So we'll see the benefit of that and then just continue to take actions on liquidity and Rightsizing the company and productivity, but essentially those are really the four four biggest.
Buckets to get you to 2021, but the single biggest driver being the 737 Max profile.
Thank you.
You're welcome.
And our next question comes from the line.
Of Carter Copeland.
One moment.
Next question comes from the line of Carter Copeland.
With nearly as research. Your line is open. Please go ahead.
Hey, guys good morning.
Morning.
Hey, just a quick clarification a question Greg because of the rate changes did you have material program margin revisions downward on the eight seven and the three seven and I am comfortable are you about forward loss stay away from for loss Meates Evan.
And then just on the the six so six revisions in the and what you're seeing there. What's it can you give us a better.
Sense of the backlog change and how much of that is related to your the liquidity assessments you outlined and.
Some of these planes carnival at this point.
Yeah, Yeah, let me start with on the margin front, yes, we obviously, we had adjustments on margins program margins across the board.
With the with the rate reductions and the revised delivery profile.
When you when you step back and look at age 70 in particular at this with these lower rates and look at it on a on a unit basis.
The margins, obviously don't increase the way we had in prior with the with the higher rates, but they maintain to be pretty strong on the on a unit basis and I would say that continues to be the fundamentals, we've talked about again, even with the lower rate.
The improvement of mix and the step down by by block.
So in and of course, the continued continued productivity and as Dave mentioned, we're we're initiating the study on the on on the multiple sites. So.
More to more to come on that but.
We'll continue to continue to work obviously all areas of productivity on the program.
Particularly with these lower rates, but again on a cash basis on a on a unit basis.
Margins are actually hanging in there pretty well even at these low rates and that's really I think a credit to the lot of the work.
That's behind Us that got done to get the program more efficient and so we're certainly seeing the benefits that even at these low rates.
On the on on the six so six in the second quarter. So I think if you look at it there was about about 480 odd.
Cancellations that were noted about 300 to those were associated with six so six so there's a disciplined process that that has outlined that we go through every quarter and assess the entire backlog by customer that the team goes through it makes that assessment and we do that like us.
Said every quarter and we'll continue to do that and I suspect with time at least in the near term, we'll have we'll have more adjustments on.
Related to six so six but again that that doesn't mean that they may not take the airplane overtime. It just has to get through that that criteria, even others contracts in place, but again, there's steps that we take and thorough assessment and when we adjust the backlog accordingly at that time.
But it could change.
Quarter over quarter, some folks could move into that six so six and move out of it but again, we'll trued up every quarter.
Okay. Thanks, Greg you are very welcome.
And our next question will come from the line of Myles Walton would you be as your line is open. Please go ahead.
Thanks, Good morning, Hey, Great and then second house Heck second half a 2020 should we expect to cash or burn to be materially improved from the first half or is that excess.
Inventory builds going to be a continued headwind and then just considering everything else you. Obviously saw the liquidity problem with the debt offering but do you do you think about accelerating the balancing of capital structure here to ensuring investment grade ratings.
Yes, I think as you look at the second half.
Right right now mild it's a little bit better.
That's at least when we got in the forecast as you can imagine it's dynamic and will remain dynamic through the balance of the year, but as we look at it right now and our latest forecast, we see it being slightly better.
And it will continue to be burning cash into early 21, and like I said as with the production rates that we laid out.
And the assumptions we made around those in our actions that will take we can see a path to positive cash flow and 21, and we'll continue to keep you up to date on that but you should continue to expect to see negative cash flow through the balance of the year and into early 21.
On the on liquidity front I think again, you know getting the $25 billion was critical and I think the fact that the markets got opened up and.
And allowed us to.
Get in there at the right time and as you know we were well over subscribed, which I think just goes to the competence that that the market has in the long term fundamentals are the marketplace.
We don't see a need to raise any additional capital at this time.
And but we'll continue to monitor it and keep keep all of our options open.
But as I said in my opening remarks on deployment, if we see opportunities to pay down that debt sooner or restructure that in any way, we will absolutely be doing that and we'll be laser laser focused on bringing that down and get in the balance sheet.
Back in order.
Got it thank you.
You're welcome.
And then next question will come from the line of Seth Seifman with Jpmorgan. Your line is open.
Thanks, very much and good morning.
So if you right Craig I Wonder if you could give us a little more color on the 737 I mean, the change in in the rate from.
Can you kind of 31 by the end of 21 to beginning of 22 sounds like seems like a fairly small change it seemed like your suppliers are experiencing something a little bit bigger and so maybe what does that say about the cadence of that ramp during 2021 and how much risk is there still around that number.
And maybe finally, what opportunities are there maybe for you to make more deals with some of your top customers to to get more plants out of out of inventory and allow you to raise that rate.
Yeah, well look I mean.
Like Dave mentioned, and I think I echo the rate profile that we put in in the delivery profile is really based on detailed discussions with each of our customers.
Debt certainly have better clarity you know this quarter than they did last quarter. So we adjusted that accordingly, but we're in discussions with them with them daily.
And we'll continue to do that and make make adjustments when you look at the supply chain as you know Seth it's everybody's in a different state.
Well say inventory in rate based on where they were before.
The pandemic in particular, where we had.
Suppliers that we're not did not have appropriate.
Inventory levels are weren't making our masters schedule. So some of those had been accelerated so I would just tell you that each one of them is at a bit of a different place.
Depending on how much built inventory they have so you're going to see variation supplier by supplier and were again, staying really engaged with them daily on our plans and assumptions and then helping them as they manage through their inventory or the ramp up but you're not going to see all say everybody going to.
Have a similar profile to what we have really due to the like I said, the fact that everybody sitting at a little bit different inventory level and of course, we're going to as we said priority one for US help our customers get the fleet back up and then it's clear in the ramp delivering the inventoried aircraft that are as you know built in ready to go.
All that taking into consideration again in forming the production rates that that will happen in conjunction but really.
Predominantly follow.
After we deliver off the ramp so lots and lots of moving pieces in there, but I think the most important thing is.
We got to stay engaged with a supplier and.
And really get them clear line of sight and help them manage through through the transition period.
As we get returned to service and get the airplane back in here.
Thank you very much.
You're welcome.
Thank you and your next question comes from the line of Noah Poponak with Goldman Sachs. Your line is open.
Hey, good morning, everybody.
Martin I know.
Greg maybe just following up on those fluid conversations with your customers I mean.
It's a very dynamic situation, obviously, but do you guys have talked about having.
Spoken every every customer and you've identified the categories of customers that were there would want to take deliveries right. Now I mean, there was an airline this morning actually talking about accelerating because it's an opportunity to counter cyclically investors. So I mean, I guess, how close are we to the whole ecosystem of you the supply chain your customer.
Others being on the same page you know what inning are are you in of.
Of of revision until we feel like we aren't going to get production rate cuts.
Anymore moving forward.
Yeah, well look I think we're all in the same page. However, like we said its hits dynamic, especially in the near term. So it's really important that.
Our engagements happen happened frequently add a clear line of sight and understanding. So then we can make appropriate changes to delivery profiles rates and then into supply chain. So so what we laid out today is is our best estimate based on all that input and feedback from customers.
You know again in around the globe and then managing the risk.
Within within our factories combined with.
The supply chain as both Dave and I've articulated several times is.
We've spent a lot of time and effort stabilizing the 737 production facility and enhancing it.
And with with a keen eye towards as we move up.
And move back into a higher production rates.
It's going to be very smooth and methodical and we're going to certainly have the advantage of all the hardware we put in place to drive stability and not have traveled work.
And and just to ensure that again, we have smooth smoothed rate ramp up that combined with informed customer.
Being informed by our customer so all of that it's been taken into consideration.
On the profile that we just laid out and obviously, if we see that changing we'll adjust accordingly, I think the one moving piece in there no at that certainly does have flexibility is is new delivery off the ramp.
Those Aaron Crafter finished there they are ready to go we've got flexibility and the team actually is done some great work.
Getting ahead of that in essentially modeling out and really practicing.
How they're going to deliver those aircraft in recognizing theres going to be some movement from tail to tail and customer the customer. So we've got that that flexibility out there that I suspect it will have to utilize as we as we deliver those finished planes that will in turn and inform the production rate ramp up so.
We will continue to kind of keep keep both of those in mind in and like I said, one one form the other and.
And we'll continue to stay engaged with the customers.
Just as a quick follow up to that the.
The discussion around 2021 free cash flow.
Look like you're going to have Max inventory on wind and then airplanes, you're producing but not delivering this year also on line next year and those could be pretty sizable numbers, where even if they're aircraft business otherwise was just breakeven cost defenseless services.
You do actually maybe of nicely positive cash flow is the is the missing piece there just it sounds like from your earlier comments you my plan to be producing ahead of deliveries. The rest of this year and then even into the beginning of next year.
Yeah, Yeah, I think thats definitely that there's going to be the case and and on the Max again customer my customer. It. It varies so it's not it's not kind of a one size fits all when it comes to cash.
And the delivery profile of those airplanes that are that are that are going to come off the ramp. So again lots of moving piece right in there, but as we kind of pull it all together just again based on what we see today, we can see that path to positive cash flow and like I said it will continue to keep you up to date on that but I think we've got between the.
Rates in our game plan around how we're going to execute between now and then I think.
I think we have a good good line of sight on that right now.
Greg if I might just add something since I've been part of most of these calls with our customers its.
I want to acknowledge what you said is actually a fact, we do have many calls the art or on the forward looking want to take a big position kind of kind of discussion and then we have the others of course, where are the opposite so that's a true story I think from Boeing's vantage point and our.
Posture at the moment, we're still trying to de risk the skyline that has been our motive and to emphasize to everyone, including our own people that were going to move. The finished goods first that is going to be that's our intent. If we can move it faster great. We're still going to hold our production rates as.
Conservative as we can so that we can get get that inventory on the move and then when I think this virus ever looks like it's an array of view mirror I think all those discussions that of course, we do have about the forward upside point of view I think don't come faster radical slower anime honestly I think as much about the recovery and the pace up as I.
Do sort of that retrenchment and to deal with today's liquidity, because I think actually that ramp up is going to be the more important part of this positive going forward.
Oh, that's really interesting thank you.
Thank you and our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is open.
Thanks, so much good morning, everyone.
Sure.
I wanted to ask about normalized margins at the CIA and 2022 at these lower rates.
Based on these Rachel will produce about 510 aircraft in 2022, the last time Youre around those levels was 2011. Your commercial margins back then we're closer to 10% and granted that included some service and free cash flow. If we adjust for 77 was around 10 billion.
So I guess I'm asking how do we think about normalized margins and free cash flow sometime in 2020 tail.
Yeah, well she'll as he said.
Right now is that it's the path to there to that point right and.
So the focus that we talked about around right sizing the company and taking the actions are going to they're going to feed feed right into into that.
When you look at kind of unit margin over that period by by program.
Again as I mentioned on one of the prior questions. We're certainly under more pressure because of the lower.
Production rates, but but as we ramp up in particularly on the Max we'll see that gross margin on a unit basis come up and then again, we'll just have to continue to manage our spend all of our discretionary but the actions that date and all that Dave common here, but the actions that that we're putting in place now are really.
Focused out in that timeframe and make sure we come out of this.
Stronger and healthier in position to compete and get us through this this window.
This period, we're all faced with the pandemic.
And in really just not leave a rock on turned as far as.
Our cost structures in our printer site consolidations and so on to ensure that we we preserve cash flow out in that period, and then therefore margin, but I'll, let let Dave comment as well.
Well I'm not sure theres much I I can add to that we're going to have these volume impacts and on our program accounting et cetera over this near near term unit margins cash margins is our focus we feel good about where they are we think we can make a better and then adds volume and orders come along and we.
And begin to look out further I think everything gets not only gets back to where it was but maybe gets better so.
Not much I can add to sort of the dynamics of next year as margins.
It into tell your our focus is on unit cash margins and just continue to manage that as closely as we can for liquidity purposes, and then as as order books fill out we can we you'll you'll see that impact, but in the accounting side of the puzzle.
Great. Thank you.
You're welcome.
And then next question comes from the line of Doug Harned It with Bernstein. Your line is open.
Good morning, Thank you.
Good morning.
When when.
Greg you were talking about the flexibility.
Basically with the airplanes roughly 450, Max's that you have parked, but given a lot of the pressures that you had from from customers for deferrals and cancellations.
We look at this it probably doesn't mean that a large number of those airplanes will go to different customers than we originally planned. So operationally how are you go about reconfiguration of these airplanes, particularly you've got to supply chain. It would be involved here that sort of it's in a very difficult situation and.
Have you assume costs associated with reconfiguration and remarketing of these airplanes in the.
We see a provisions you've taken so far.
Yeah. The short answer is yes, we have Doug So we've assessed all 450.
And put a risk assessment against all of those aircraft.
And then.
Took a provision for that we believe we will have to.
Either re market or reconfigure, though some of those aircraft.
And Thats, something obviously that will continue to monitor and update on but we've assumed that will take place with some of those aircraft just again by by the discussions we've been having whether customers.
But just physically this could be I mean this is different than.
Anything that I've ever seen you had to deal with in the path in terms of scale I mean operationally, how how do you think about doing that.
Yes, well the team like I said, we're trying to stay ahead of these things. So anticipating this is a possibility quite frankly, some time ago team has gone through and got clear understanding about.
How would you go about doing this you know systematically where would we do it.
How much configuration would take place obviously with the Max as you know, it's fairly limited you're not dealing with a wide body. So impact on the supply chain quite frankly, I don't really see it much it's going to be it's going to be more basic reconfiguration and in some cases you know.
Possibly customers take them configured as is and they reconfigurable. So I think you're going to see advair.
Variety in how this plays out but again, we're anticipating we're going to do some of it and we're trying to get ahead of it in and I think getting those plans in place today and if it's better than that great. If it isn't where we'll be ready and facilitized to be able to do it.
Okay. Thank you.
Yeah.
And then next question comes from the line of Robert Stallard with vertical research. Your line is open.
Thanks, so much and good morning.
Good morning.
I'm, Greg I was wondering if you could give us some some more clarity on whats annual plan.
Got to these at 77 Mex deliveries you said you expect to deliver most of them in the first year Asta recertification re entry into service, but could you give us somebody of exactly well that number is am all the sort of cash impact to that would be thank you. Yeah. No I like I think we've been consistent to say hey look we want to.
We want to get those airplanes delivered and and that's the majority of them in the first year. So there will be airplanes that are outside that first year, but the majority will take place in the first year.
Rob. This is just based on discussions, we're having with customers and sequencing.
Sequencing those airplanes out and and will continue to focus on again relieving the inventory.
Off the ramp, which which then again that informs the production rate. So we got to we got to focus their first and then ramp up production and clear clear the ramp. So we can complete the airplanes coming out of production. So it moves around certainly month to month quarter to quarter, but again majority will remain.
You know in first year, and then we'll see some of that trailing off over time, just again based on customer preference.
Just a quick follow up because that would seem to imply a very large number of aircraft deliveries in the next almost 12 months when LCR line conditions, a very weak.
Yes, I am most of these going to replacement is that the best way to look at this.
Yes.
Yes, certainly I mean, they've got the fleet plans in place and so again, what informs it is our discussions with them around quantity.
And around timing and sequencing so.
It all of that's informing kind of how we front front load this thing, but look Robert could it couldn't move here and there from month to month and.
From quantity of airplane.
Outside this profile sure it could but as we see it today, we see the majority of those again informed by the customer.
We certainly have the ability and were capacitized to to deliver them and as you know there they're completed aircraft. So the cycle times from turn that airplane on in getting into the hands with customers pretty short. So we've got that again that flexibility in our favor here and we'll adapt accordingly based on the need to the customer.
Okay. Thank you very much.
Operator, we'll have time for one more question.
And our last question will come from the line of Cai von Rumohr Powell with Cowen and company your line.
Yes, thanks, so much so.
Well.
Last question so.
If you're going to 31 month going into 2022.
After the.
Close to 200 planes more than 2021, and if you could deliver 400 plus plans yet inventory goes down.
Thank you still have to 50 301 about plans leasing sense to go to 31, if you sell your skylawn calls for dividends.
Or 73 cents.
20 to 2021.
Correct.
Well I'd say look the the production rate increases Dave said it I said it you know it's going to be slow in gradual on the production side building up to 31.
And in that in that timeframe.
In conjunction with that will be the delivery again off the ramp and that will really in form.
You know the production rate, but it's a very gradual slow production rate build up to that 31 and that that that could adjust based on how we deliver off the ramp or any further.
Information, we gather from the customers again, the supply chain, we have the inventory clearly on hand, as you've seen and so if we could if we could go up quicker.
Certainly assess that but.
And I'll, let Dave weigh in here, but stability is going to be job one.
It's ensuring that we move up methodically and stabilized not have traveled work.
Time quality will do an assessment then we'll move up to the next rate and then we'll again will be informed of how quickly we are clear in the inventory off the ramp I know, Dave if you had anymore to add on the on the production side.
Yeah I don't.
Don't really have anything more to add other then again.
Think about our posture in the middle of next year. If in fact things are beginning to return.
Customers are beginning to see the virus in the rear view mirror.
Vaccines are being discussed in described.
I really believe that thought the toughest part of our positive as I said going forward is going to be then.
Returning to rate that satisfy what I think we'll be up reasonably robust returned to the market. So.
That's part of our.
Part of our math here.
But what Greg said holds.
For most of the year next year the governor on rate is going to be the pace at which we sell that finished goods inventory.
But as you look today does it look like 2022, you will deliver more than 2021 without getting into numbers.
Yes.
Sure also.
Okay. Thank you that's the plan Chi.
Thanks.
That completes the Boeing company's second quarter 2020, earning conference call. Thank you all for joining.
Okay.
Mhm speakers.
We're sorry your conference is ending now please hang up.