Q1 2021 Boeing Co Earnings Call
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Thank you for standing by good day, everyone and welcome to the Boeing Company's first quarter 2021 and earnings Conference call. Today's call is being recorded the management discussion and slide presentation, plus the analyst question and answer session are being broadcast live over.
The Internet they ask a question on today's conference. Please press the digit one followed by the digit zero on your Touchtone telephone and again. It is one zero for questions. After pressing one zero and you will hear that you've been placed and Q pressing one zero again, we'll take you out of queue 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. Maurita <unk>, Vice President of Investor Relations for the Boeing Company. Mr. <unk>. Please go ahead and.
You John and good morning, welcome to Boeing's first quarter 2021 earnings call I'm Redoes Pedro and with me today are David Calhoun, Boeing's, President and Chief Executive Officer, and Greg Smith, Boeing's Executive Vice President of Enterprise operations, and Chief Financial Officer.
As a reminder, you can follow today's broadcast and slide presentation through our website at Boeing Dot Com and.
As always we have provided detailed financial information and our press release issued earlier today projections estimates and goals will include and our discussions. This morning are likely to involve risks, which are detailed in our news release and our various SEC filings and in the forward looking statement disclaimer at the end of this web presentation.
In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of certain non-GAAP measures now I will turn the call over to Dave Calhoun.
Yeah. Thank you Maria and good morning, everyone.
I hope, you're all staying safe and healthy as we navigate this global pandemic and.
On behalf of Boeing I want to share our heartfelt thoughts and support for those and India, who are coping with the devastating and deadly impact of this most recent COVID-19 surge.
If we think back to where we were a year ago as the impact of COVID-19 began to unfold, it's been quite a year.
While it has been challenging we saw the U S industry and governments come together to support one another like never before and Thankfully. We view 2021 is a critical inflection point for our industry and a proof point for the for those public investments.
While a full recovery is still likely a few years away, we're seeing encouraging signs, including progress on vaccine distribution in many countries and domestic travel recovery in certain markets.
And remind everyone at the outset, we never imagined vaccines would be developed and distributed this early in the pandemic.
We continue to adapt to new ways of conducting our business and remain dedicated to supporting our teammates and their families.
As well as our customers and the communities where we operate.
So let me start with an update on the business on the next chart.
Starting with the 737 program.
And as all of you know, we have identified electrical issues and certain locations and the flight deck of select 737, Max airplanes. We are finalizing the plans and documentation with the FAA to outline the process required for operators to return their airplanes to service.
Upon approval by the FAA, we expect the work to take a few days per airplane.
Approximately 100 in service airplanes are impacted.
We will complete this same work on airplanes and our inventory.
We have also paused deliveries, while we address these issues, which will make our April deliveries very light.
At this time, we expect to catch up on deliveries over the balance of the year.
We recognize and regret the impact this has had on our customers operations and are focused on ensuring that their airplanes are ready for the summer season.
More broadly and the last several months, we've made important progress and safely returning the Max to service worldwide.
Since the FAA is ungrounded and late last year more than a 165 countries have now approved the resumption of Max operations we've.
We've delivered more and more 85, Max airplanes to customers.
'twenty one airlines have returned their fleets to service and we've safely flow and more than 26000 commercial flights totaling more than 58000 flight hours.
We also recently received regulatory approval for the E 200 variant of the 737 and important aircraft for our valued customer Ryanair.
We now assume net written meaning non U S regulatory approvals will occur this year with approval in China, and most likely now and the second half of the year.
As always we will continue to work with global regulators and follow their lead and the steps ahead.
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Our first priority remains assisting our customers with returning their parked fleet to service more.
More than one third of the previously parked fleet is now flying revenue generating flights.
We're also honored and encouraged by the orders from Southwest Airlines, United Airlines, and Alaska Airlines in the quarter, along with an order last week from Dubai Aerospace Enterprise and the trust, our customers are placing and Boeing and and the 737 family.
These orders underscore our customers' commitment to continued modernization of their fleet with 737 airplanes that enable operational efficiencies such as improved fuel burn, which reduces carbon emissions quieter engines that benefit the communities they serve and excellent dispatch reliability to support on <unk>.
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At the end of the quarter, we had approximately 3200 aircraft and our 737 backlog.
We're currently producing at a low rate and expect to gradually increase the rate to 31 per month and early 2022 with further gradual increases corresponding with market demand.
We will continue to assess the production rate plan as we monitor the market environment and engage and customer discussions.
The timing of our remaining regulatory approvals will also determine our delivery plans and shape our production ramp up.
We will continue to communicate transparently with our supply chain to ensure readiness and stability.
Turning to the 787 program.
We resumed deliveries in March following rigorous testing and analysis and are closely coordinating with our customers.
We will follow the FAA or the FAA has been involved every step of the way and this process.
We've delivered a total of nine 780 sevens since restarting deliveries last month with potentially a couple more by the end of this week.
Based on what we know today, we still expect to deliver the majority of the 787 aircraft currently and inventory.
By the end of the year.
We will closely monitor the market environment and keep you updated on delivery progress.
And as we previously communicated in March we consolidated the 787 and final Assembly to Boeing South Carolina, which went smoothly.
Also we transition to a lower production rate of five by the end of the quarter.
On the Triple Seven X program.
We're working closely with global regulators on all aspects of development, including our rigorous test program.
Our team remains focused on executing this comprehensive series of tests to demonstrate the safety and the reliability of the airplanes design and we're pleased with the progress that we've made to date.
We're also providing regular updates to our customers and still anticipate that the first triple seven X delivery will occur late in 2023.
As planned we are transitioning the combined triple seven and Triple seven X production rate to two per month.
We also continue to see strong fragrance demand and are assessing our production plans to efficiently transitioned to the triple seven X.
In addition to our commercial programs, we continue to deliver for our defense space and services customers and.
We reached these program milestones were firmly grounded and guided by our core values safety quality and integrity.
Let me highlight a few of these accomplishments.
Our defense security and space team began production of the T. Seven day Red Hawk advanced trainer and achieved first flight and delivery of the F 15, and E X to the U S Air Force with a second aircraft delivering just last week.
On the KC 46.
Hey, tanker program and the U S. Air Force has begun demonstrating limited operational use for air refueling as well as cargo and passenger airlift operations and as safely conducted over 1400 missions over the last six months.
We also successfully completed hot fire testing for Nasa's space launch system SLS rocket.
Additionally, our global services team delivered the 50th 737, and 800 Boeing convert converted freighter and adjusted our first E 18 G growler for the U S Navy modifications.
We also.
Continue to manage the COVID-19 disruption on our programs, including impacts to the V. C 25 program, where employee clearance constraints impedes our ability to exchange mechanics, when quarantines are required.
In addition to operational and programmatic highlights.
We've also maintained significant emphasis on sustainability across the company and are making great strides.
We're enhancing our sustainability disclosures and planning to release, our first ever global equity diversity and inclusion report and our first integrated sustainability report later this year.
Yes.
Underscoring our commitment to the environment for the 11th year in a row. We're proud to have received the energy star partner of the year Award for sustained excellence and recognition recognition of our company's successful energy conservation practices.
Now, let's turn to the next slide to discuss the industry environment.
Our government services defense and space businesses remains significant and relatively stable.
While increased government spending on COVID-19 response is adding pressure to defense budgets and some countries.
Others are increasing spending on their security.
Overall, the global defense market remains strong and we continue to see solid global demand for our major programs.
The strength of our defense portfolio was underscored by another strong quarter of Bds orders totaling $7 billion.
The diversity of our portfolio will continue to help provides critical stability for us as we move forward.
And the commercial market, we continue to see near term market pressure due to COVID-19.
However, many of our key long term fundamentals remain intact.
The recovery is gaining traction but remains uneven.
We continue to anticipate the next six months will be very challenging for our airline customers and the entire industry.
COVID-19 case rates are still high in many areas around the world and travel restrictions remain in place putting significant pressure on passenger traffic, especially in those affected markets.
We're seeing some positive momentum and particularly in domestic travel.
Consistent with what we've discussed in prior quarters, the domestic market is leading the recovery and in some cases it has slightly outpaced our expectations.
February and domestic traffic was 50, 51% below 2019 levels. Since then it has picked up and some regions, including the United States and China, and we anticipate continued momentum and this spring.
On the other and international operations remains extremely low with February traffic still 89% below 2019 slightly behind our earlier expectations.
Ongoing virus concerns and the absence of coordinated global policies on cross boarder entry protocols have hindered the recovery and the international segment.
Vaccine distribution remains the critical hurdle to a broad reopening.
The active fleet is still around three quarters of its previous size.
With single aisle activity levels slightly above twin aisle.
And although utilization rates and load factors are increasing and some areas. They are still below historic levels.
Which means airlines are flying less and 60% of their normal capacity.
And at the global level.
Regional dynamics, such as case rates government travel policies continue to influence passenger traffic and drive and the uneven recovery profiles all around the world.
Yeah.
The U S and China domestic markets are showing resilience with pent up demand.
U S Airlines are seeing a significant increase in bookings for domestic and leisure routes.
TSA throughput in April has been the highest we've seen since the onset of the pandemic with daily averages approximately one 4 million passengers around.
Around 60% of 2019 levels.
However, passenger traffic and other parts of the world such as Europe parts of Latin America remained significantly lower due to new strains of the virus lower vaccine penetration and uncertainty about government reopening plans.
As expected the number of aircraft being retired from the active fleet keeps growing.
And with around 1500 airplanes retire or announced to be removed since the onset of the pandemic.
We anticipate this trend will continue as our customers focus on retiring your oldest and least efficient airplanes and replacing them with new airplanes that will be as much as 25% to 40% more fuel efficient with commensurate emission improvements.
And freighter market remains another bright spot with cargo traffic and February 9% higher than 2019.
Yields have remained very high and more freighters are flying and before the pandemic due to limited belly cargo capacity from passenger airplanes.
Over the long run cargo demand will continue to be driven by global trade and GDP growth.
Progress on vaccine dissemination and domestic passenger traffic and many countries continue to support our medium term outlook and our belief and the long term strength of the market.
As we've shared previously and consistent with IATA and other industry groups, we expect passenger traffic to return to 2019 levels in 2023 to 2024.
We still see the recovery in three phases first domestic traffic.
Then regional markets, such as intra Asia and for Europe, and intra Americas flights and then finally long haul long haul international routes.
Therefore demand for narrow body aircraft is expected to recover faster while wide wide body demand will remain challenged for a longer period.
As we start to see positive signs and the resumption of domestic and international Air travel.
Our confident and travel initiatives continue to partner with airlines regulators, leading universities and medical experts around the world to demonstrate the safety of air travel.
Our confidence and air travel has been substantiated by Bioscience bite by science.
Testing and analysis based on a multilayered approach to keep our air crews and passengers safe no matter, where they are ceded and the aircraft cabin.
We've also we're also working with governments and industry associations to help ensure when people decide to travel they know what to expect.
We encourage any new protocols.
They use data driven risk based approaches to minimize disease transmission risks between countries.
Standardized and secure method to verify traveler information should be part of any solution to safely expand the international travel.
As we move forward testing mechanisms progress on vaccine distribution and coordinated global interactions will be the key drivers of the recovery.
We're also monitoring the global trade environment, and particular U S. China relations given the importance of the Chinese market to our near term delivery profile as well as future orders, which influence future production rates.
We will continue to engage with leaders in both countries to urge a productive dialogue reiterating the mutual economic benefits of a strong and prosperous aerospace industry.
China represents 25% of the global growth and our industry over the next decade.
And the commercial services market, we saw stable demand and the first quarter.
We're seeing some rebound from the bottom and we expect to see increased activity as airlines are preparing for the summer season.
That said, we continue to anticipate it will take multiple years to reach previous demand levels and the recovery trajectory may be uneven.
Additionally, accelerated retirements are lowering the age of the fleet, reducing services demand and prolong the recovery for commercial services.
On the liquidity front managing liquidity continues to be vital for the aerospace industry until the market recovers.
Despite the challenges and as we noted in our recently released current aircraft finance market outlook. There are generally continues to be liquidity and the market for our customers to acquire new airplanes and.
In fact, 100% of Boeing deliveries in 2020 were financed by third parties.
Today, its ears and investors understand the long term value proposition of aircraft and the fundamental need to connect the world.
As we see airlines adapt to these market realities product differentiation and versatility will be key.
Our product lineup is well positioned to meet our customer needs.
As we navigate this difficult time, we're not losing sight of our future.
We've taken great care to ensure we have the team the resources and the investments necessary to meet our customer commitments to drive our improvement initiatives and innovate for the long term.
In addition to our work on our current programs. We're also advancing technology that will define our next chapter.
We anticipate that our investments will lead to next generation aircraft that offer higher performance, while being more fuel efficient and easier to maintain and easier to reconfigure we.
We will continue to take the right action to adapt to the market impact of COVID-19, and position our business for the future by closely managing our liquidity and while driving long lasting change to make our business leaner sharper and more sustainable.
So with that let me turn it over to Greg.
Great. Thanks, Dave and good morning, everyone, Let's please turn to slide four.
First quarter revenue decreased to $15 2 billion, primarily due to lower 787 deliveries and commercial services volume. This was partially offset by higher 737 deliveries and higher KC 46, a tanker revenue.
Earnings in the quarter were also impacted by lower commercial airplanes period costs, partially offset by lower tax benefits and higher interest expense.
Income tax and the quarter, primarily reflects a benefit from the impact of the pre tax losses, largely offset by the adjustments to the valuation allowance and true ups to the tax benefits recorded in 2020.
Let's now move to commercial airplanes on slide five.
Revenue was $4 3 billion driven by lower seven eight and seven deliveries, partially offset by higher 737 and volume.
Although commercial airplanes operating margin continued to be under pressure they performed in the quarter.
They improved in the quarter excuse me due to higher 737 deliveries lower abnormal production costs compared to the same period and prior year and the absence of the first quarter 2020 charge related to the seven and three seven N G Pickle fork repair costs.
We delivered 58 and 737, Max airplanes and the first quarter. We currently have approximately 400 737, Max aircraft built and stored in inventory as we previously communicated we expect to have to remarket. Some of these aircrafts and potentially reconfigure them and <unk> seen by the recent orders we're making.
Good steady progress on the remarketing effort.
You May also recall right before the 737 Max returned to service, we estimated that around half of the approximate 450 aircraft. We had in storage would be delivered by the end of 'twenty, one and the majority of the remaining by the end of the following year that estimate is unchanged.
Through the first quarter, we have delivered 85 737 aircraft from storage and as Dave mentioned, the recent delivery pause will impact our April deliveries, we expect delivery timing and the production rate ramp up profile remain dynamic given the market environment customer discussions and the remaining global regulatory.
Free approvals.
There's no material change and our estimated for total of 737 abnormal costs of $5 billion. During the first quarter, we expense $568 million of abnormal production costs, which brought the cumulative abnormal cost expense to date to $3 1 billion. We expect the remainder of these.
Cost to be Expensed as incurred largely in 2020 one hour.
Our assessment of the liability for estimated 737, Max potential concessions and other considerations to customers as well as the expected cash impact timing did not change significantly and the first quarter from our prior assessment.
Cumulatively, we've crude a $9 3 billion dollar liability for the estimated potential concessions and other considerations to date, we've reduced the liability by $4 9 billion through cash payments to customers and other forms of compensation, including $1 2 billion, we paid this quarter.
We have a settlement agreements covering approximately $2 5 billion of the remaining liability balance of $4 4 billion.
Turning now to seven eight and seven as we discussed we resumed deliveries in March. We currently have approximately 107 and eight seven airplanes and inventory.
Based on what we know today, we still anticipate that we will deliver the majority of these airplanes during 2021.
We are working with our customers to facilitate deliveries and continue to monitor the international long haul recovery as we assess our delivery plans.
Our latest assessment of the financial impact related to the inspections and the delivery delays has been included in our first quarter closing position as we've previously disclosed the 787 program has near breakeven gross margins due to previously announced reductions and production rates and program accounting.
Quantity.
If we are required to further reduce the accounting quantity and ore production rates or experienced other factors that result, and lower margins. The program could record a reach forward loss in future periods.
<unk> on a cash basis, the seven eight and seven unit margin has held up relatively well even at lower production rates as many underlying profitability drivers remain intact.
Moving now to Triple seven X as Dave mentioned, we still expect first delivery of the Triple seven X to occur in late 2023, and we are making good progress on our flight test efforts.
We still expect that peak use of cash for Triple Seven X program was in 2020 and net cash flow will improve as we get closer to E. I S and began deliveries and late 'twenty three we anticipate the program to turn cash flow positive approximately one to two years after the first delivery.
Given the significant headwinds that remain in the market BCA margin progression will be highly dependent upon future production rates and will take time. However, we continue to take appropriate action to make foundational lasting change through our business transformation efforts in order to help offset those headwinds.
And as much as possible.
Let's now move to defense space and security on slide six.
First quarter revenue increased to $7 2 billion and first quarter operating margins increased to five 6%, primarily driven by higher KC 46, eight tanker revenue and the absence of charges related to the program and prior period, partially offset by a pre tax charge.
$318 million on the BC twenty-five B program, which was largely due to COVID-19 impact and performance issues at our supplier.
We received $7 billion and orders in the quarter, including contracts for 27, KC 46, eight tanker aircraft to the U S. Air Force 11 P. Eight Poseidon aircraft to the U S Navy and Royal Australian Air Force and six Bell Boeing V 22, Osprey rotorcraft to the U S.
Navy and U S Air Force holding the backlog steady at $61 billion.
Let's now turn to global services results on slide seven.
And the first quarter global services revenue declined to $3.47 billion.
And operating margins decreased to 11, 8%, both driven by lower commercial services volume due to COVID-19, no notable asset impairments were booked in the quarter.
During the quarter Bgs won key contracts worth approximately $3 billion, resulting in backlog of approximately $20 billion.
While services demand was relatively flat in comparison to fourth quarter 2020, we expect the quarterly revenue trend to improve as we support increased airline operations and more airplanes are flying as travel recovers.
That said given the dynamic environment, we can expect to see revenue trajectory vary from quarter to quarter.
Despite the challenging environment, we continue to position our services business for the future and are evaluating our portfolio to ensure that we have the right solutions to help our customers and industry navigate the downturn and prepare for market recovery. These efforts are starting to take hold and positively impact our operating margin performed.
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Let's now turn to cash flow on slide eight.
Operating cash flow for the quarter improved to negative $3 4 billion, reflecting the timing of receipts and expenditures and higher 737 deliveries, partially offset by lower seven eight and seven deliveries and lower advanced payments.
Let's move now to slide nine discuss our liquidity position.
We continue to proactively manage our cash and cash position and assess our liquidity through the pandemic.
We ended the first quarter with strong liquidity, including $21 9 billion of cash and marketable securities on our balance sheet and access to $14 8 billion from our newly increased bank credit facilities, which remain undrawn.
We also continue to have access to the capital markets are.
Our debt balance remained stable at $63 6 billion at the end of the quarter.
As part of our ongoing prudent liquidity actions, we refinanced $9 8 billion of our delayed draw term loan that was due in early 'twenty, two and expanded our revolving credit facility by $5 3 billion.
These liquidity enhancement enhancing activities are in addition to the many actions we've discussed before including suspending our dividend, reducing discretionary spending matching 401, K contributions and stock pre funding pension with stock and awarding most of our employees a one time stock grant.
That will best and three years and Lou of a merit increase.
These actions reflect our continued derisking strategy and are part of our balanced approach to ensure we're proactively meet future obligations. We work hard in the past to maintain disciplined cash management, while seeking opportunities to strengthen our balance sheet and we will continue these efforts.
Once cash flow generation returns to more normal levels, reducing our debt level will be our top priority.
We believe we're currently have sufficient liquidity and are not planning to increase our debt levels. However, we will continue to actively manage our balance sheet. Our investment grade credit rating is important to us and we will continue to consider all aspects of our capital structure to strengthen our balance sheet.
Let's turn now to the next slide to summarize.
Our business environment remains dynamic and while the commercial market recovery is gaining some traction and has been uneven and the path ahead is far from certain we will continue to diligently work opportunities and monitor risk factors, including vaccination pace and case rates along with passenger traffic.
February and remaining 737, Max regulatory approvals and U S. China relations as Dave mentioned, we're still awaiting 737, Max regulatory approval from China, and the timing of it will affect our 737 delivery plan, China is an important market for our commercial airplanes and order activity from.
China will affect our future production rates.
As we've discussed even as our industry begins to recover we anticipate 'twenty one will be another challenging year. However, based on what we know today, we still expect revenue earnings and operating cash to improve from 2020 commercial deliveries will continue to be the single biggest driver across all financial metrics.
Tricks.
Revenue improvement from 'twenty, and 'twenty to 2021 will be driven mainly by higher 737, and seven eight and seven deliveries as we plan to unwind inventory and deliver from the production lines.
Consistent with what we shared last quarter. We also expect improvement to our bottom line from 2020 to 'twenty, one primarily driven by higher commercial deliveries absent of 2020 charges improved performance and benefits from continued business transformation actions.
These impacts will be partially offset by higher interest expense.
Also bear in mind that our commercial business will continue to book significant abnormal production costs for the 737 program in 'twenty one.
Similar to our revenue and earnings trajectories, we continue to expect 2021 operating cash flow to be much improved from 2020, 'twenty driven by mainly by inventory burn down associated with 737, and seven eight and seven programs.
While higher deliveries will be a tailwind and the timing of advanced payments and the burn down of access advanced payments, along with 737 customer settlement payments and higher interest payments will continue to be headwinds.
We expect the first quarter was the most challenging quarter from a cash perspective, and we expect the trend improve for the remainder of the year as we ramp up eight 7% and 737 deliveries and subsequent periods. However, there could be some timing variation quarter over quarter, so quarterly trajectory could be uneven as discussed.
Our cash flow profile is heavily dependent upon obtaining the remaining 737, Max regulatory approvals that commercial market recovery and ongoing discussions with our customers on their fleet planning needs.
In aggregate, we continue to expect 2021 to be a use of cash we expect that continued improvement on the seven and $3 seven Max program due to lower customer considerations and higher delivery payments as well as recovery and commercial services will enable us to turn positive cash flow in 'twenty.
22, the key watch items that I highlighted earlier will be the differentiator and our outlook trajectory.
And given the dynamic environment, we continue to monitor the risks and opportunities to ensure we're well positioned for the future.
Over the past year, we've been keeping you updated and our extensive business transformation effort.
We're continuing to closely examine all aspects of our operations to simplify and streamline everything we do and take billions of dollars out of our operating costs, while driving our key efforts and safety quality and performance.
We're doing this now so that we can emerge a leaner sharper and more resilient company as the market recovers and production rate increases and the future will continue to execute a wide spread set of changes over a multiyear period and I'm pleased that the strong progress we have shown in 2020 that.
Has carried into 'twenty, one and is gaining momentum.
We expect the majority of our efforts will result, and lasting change that will drive long term productivity.
Margin expansion and cash flow generation as our market continues to recover.
And as we take action, we're ensuring that every step only further drives key efforts and safety quality and delivering on our commitments.
We have a dedicated team focused on these efforts embedded in every business unit and function to ensure we're continually improving and every aspect of our operations. This is an enduring effort that our entire leadership team is committed to driving forward in the future.
And finally as you know last week I shared my intent to retire from Boeing and July I want to take a moment to thank the 140000 and great people Boeing and all of our partners who have made.
My 30 years and the company so special and.
It has been a true honor and a privilege to work alongside all of you.
I will cherish the relationships that have been very fortunate to have here and over the years and those include all of you and the financial community that had the opportunity to get to know so well over the last decade and beyond and.
At Boeing and I've been inspired every day by the incredible technology products and services, we bring to the world and <unk>.
While it's our products and our mission to get you excited it's the great people at Boeing that make it all possible and as the people that I will miss the most.
Over the next few months they will be solely focused on a smooth transition my responsibilities and then on to the next chapter in my career I.
I will always be cheering on Dave and the entire Boeing team from the sidelines I'm confident and the long term market opportunity ahead, the Boeing company itself and the team behind it so with that I'll turn it back over to Dave for some closing comments.
Thanks, Greg and thanks for everything as you know behalf of the board and the entire Boeing team I want to thank Greg for his incredible contributions and his dedication to Boeing and its people as.
His remarkable leadership has made a significant and lasting impact for our company for our customers and for our stakeholders.
Thanks to Greg's efforts Boeing has.
Also has had the benefit of very solid teams across the function that he oversees people I've gotten to know quite well.
As we build on Greg's legacy, we're not searching for a new strategic direction, we will engage and a comprehensive and thoughtful search process for a world class executive with the talent and skills commensurate with the high level. Greg has set this process will encompass executives within Boeing and across the external market.
We're well positioned for the future and we will continue to transform our business, they're not just navigate through this pandemic, but to ensure that we emerge stronger and more resilient for the long term.
While there is no question that COVID-19 has had a profound impact on our industry. We view this year as a key inflection point and as a positive as positive signs begin to emerge.
As governments around the world accelerate vaccine distribution people are getting back to work and global economies are beginning to get back to business and as they do and we're proud of our role in enabling travel to connect people to connect businesses and importantly to connect cultures.
And we face into the challenges at hand, we remained steadfast and our commitment to quality and safety integrity and transparency.
Through it all I am proud of how our team continues to stay focused on our customers and their important missions and I'm confident and our future.
With that Greg and I will be happy to take your questions.
And ladies and gentlemen in order that your question be clearly heard we ask that you not use the speaker phone and cell phone or fallen headset. Please use your handset to ask a question if you're on a speaker phone. Please be sure and your mute function is switched off or your signal can reach our equipment as a reminder, and the interest of time we.
You are asking that you limit yourself to one single part question.
Our first question comes from Sheila and yellow with Jefferies. Please go ahead.
And thank you good morning, everyone as Dave and Greg and Greg Congratulations and we look forward to your next chapter.
I guess for either of you how do we think about commercial profitability going forward and into next year is there a break even rate when we think about production and our deliveries on the Max and the 787 and that Destocking resolved itself.
Okay.
Yeah sure I think as I mentioned and my my remarks in and obviously, let Dave weigh in here, but it's really tied to burning off that inventory and then the production rates associated and particularly with the 737 and so very similar to what we talked about on cash and revenue trajectory earnings and margin are are going.
To be very much on the same trajectory, but as I'll also as we've talked about.
Under the umbrella of business transformation, we've been really as we've been in this period, we've been challenged and all aspects of the business and looking for opportunities to streamline and but at the same time never losing sight of the future. So as you've seen from us where we posted last year, we continued to make significant investments and the business and and we will but at the.
Same time, you know, we're going to still stay a stay very focused on the business transformation efforts that should help continue to help that trajectory as we see the market improve and and and our ability to increase production rates associated with that improved market, but I'll, let dave weigh in as well.
Yes, theres, probably not much I can add there, but I am I will just add my confidence that as as production rates.
<unk> to return to what we would consider ultimately normal and then above.
We should get more leverage than we've ever gotten sick.
And simply because of all the actions that we've taken with respect to the fixed and readiness to serve costs and are out there, but maybe even a bigger part is the stability, we will bring back to their production lines themselves.
So as we move the rates up we can do so and a and a stable fashion. There is enormous productivity attached to that track. So I agree with all the comments that Greg made I would just add that that commentary.
Yes.
Thank you.
Youre welcome.
And next we'll go to line of Doug Harned with Bernstein. Please go ahead.
Thank you good morning.
First Greg I just wanted to thank you for all the work you've done with all of us over the years, it's been a it's been great and definitely want to wish you the best and your next steps here. Thank you very much Doug.
And so by.
Yeah, No kidding co getting it's a long time I actually Dave I have a question for you that also goes over a long time, I think and your involvement and the industry.
If you think back over the years.
Airbus and Boeing historically have always had kind of and ongoing battle about market share and they talk they talk about it and can see each other that sort of thing and its been particularly true and narrow bodies.
So when you look at the situation today and in the mass.
Obviously, it's been held back there's still a large market for it but Airbus has been delivering a lot of neo is they have a big backlog on the last call, we talked a little bit about the 321 X L. R.
And you look forward now.
How important is market share do you think about that is that number for narrow bodies important is and is there something that is there a level that you wouldn't want to make sure that Boeing is at.
Yeah, It's a great question.
And I Wanna be it I want to split that market, let's put it that way and that's why it's played out historically, they do better and some segments of that market, we do better and other parts of that market.
With respect to the products that we feel.
And I'm confident we can get there what I will say about this is I can't make up for the production GAAP that we created on our own right.
And that entire year I can't make up for that and so I'm not going to try to I'm not going to try to regain that ground and simply from this point forward going to try to hold our own with respect to what I think is our rightful share.
We'll also bring the rates back in the most stable fashion and I can conceivably bring them.
I will pay for that and I think that is good for Boeing I think that is really good for shareowners.
So.
It's all a question over what period of time do you want to measure it and I'm confident that over a longer period of time, we will get back to where we need to get too and.
And I'm confident and the product lineup and I've always had been and I continue to be and I think some of the recent activity.
Jeff that when you look at the applications that we're actually putting our our airplanes to work for.
We're at a pretty decent place.
It's a great question and ill.
And if I, if I can follow up on that and when you look at the last four months, you've been averaging and a little bit more than 20, Max's since it restarted and that's clearly well below the capacity that you have to deliver them.
What are the constraints here or are they more on customer willingness to take delivery or moral and your processes to get those airplanes out there and and delivered.
Well, it's the former.
And I am I'm quite.
Our confidence that the recovery in this country is coming and it's probably coming sooner than most anywhere with the exception of China.
But when you look broadly around the world, it's not quite as robust and so this year is still going to be a rough and tumble here for most countries around the world, including Europe and.
That is that is the issue is when and when do they project that theyre going to come out and then will the order activity pick up and each of those markets. The same way and has picked up here and the United States and I'm confident that it will and we will get over those gaps, but it's well, it's uncertain and a lot of countries around the world and.
And then the final.
And very important strides is we've got a.
Reinstate our trade relationship and aerospace with China, and that's a big part of the market long term, it's important that we get our share our fair share of that market, which historically has always been at 50% little more when you consider all the wide body activity.
And we need to get back to that stage I believe that will happen.
But it's going to take a little time.
Great. Thank you.
Yes.
And next we'll go to Seth <unk> with Jpmorgan. Please go ahead.
Thanks, very much and good morning, Gregg Thanks, very much for all your help over the years and.
And Alexia, yes sure.
Sure sure I just wanted to ask this morning about about 787, and we think when we think about the process from here.
Similar to the question that Doug asked about three seven and the delivery pace is it more governed by.
And the customer's willingness to take deliveries, whereas it governed by putting aircrafts through kind of a change incorporation process and in which case kind of how much of that work is done and.
And then not to split hairs too much here, but I believe last quarter and the plan was to deliver the vast majority of the aircraft and and inventory and you know this quarter. It's the majority so has that kind of.
Is there now and expectation to carriers and more 707 inventory into 'twenty two.
Yeah can I, let me take that and I'll, let Greg if he wants to add sought me can you.
You used the word willingness and and that's an important word and that is not the issue. It's there are a lot of logistics issues. When we look at month to month to month to month around getting crews in and getting them out not so much with respect to the U S.
Policy, but from where they might be coming so and all.
All of these orders and Theres not a giant reconfiguration costs are embedded in the eight seven program.
These are orders with known customers and known destinations.
And there was no we're not playing games with our language, we whether we put the word vast and front of it or not we'll see but that's not going to be because of a lack of willingness to take airplanes. It's just going to be because of logistical timing with respect to win cruise can get in and take delivery and move them out.
And anyway that would be my commentary, Greg anything you want to add no no I think that's absolutely right on.
Okay, great. Thank you.
Okay.
And our next question is from Carter Copeland with Melleous Research. Please go ahead.
Hey, Thanks, Good morning, guys and Greg I Echo everyone else. Thank you so much for your help over the years and nothing but the best of luck and the next chapter. Thank you very much I appreciate it and you only have to deal with one more geeky accounting question for me. So I can't guess, what it is but I won't.
And maybe you can ask me for yourself I wanted to ask about the the 87 deferred production number.
And that that along with my guess to Oh. Good. Good then you have the answer ready to go. So you had been running for 400 $500 million a quarter up until this quarter you talked about a rate change obviously you got the rework on.
The planes that are sitting there and inventory can you just help us understand kind of bridge between.
178, and the kind of numbers you were running because the rates not all that different it doesn't seem so any color. There I think that's helpful. No absolutely yeah, and actually Carter you got it right I mean, it's all of those other moving pieces that are obviously, you know unusual and didn't exist and the prior quarters. So.
Once we kind of get through that and get kind of to a normalized pace.
Youll see divert deferred continue on the trajectory that we've outlined before but near term to your point, there's a lot of moving pieces in there there are weighing into that number that or not I would say sitting at a normalized level, but it will once we once we start continuing to deliver and and long term like I said it'll be on the same path as we've talked about before.
And like I say, it to say that the biggest pieces revaluation.
Pardon me is it safe to say the biggest piece of that Delta is the revaluation of the inventory.
Well, it's the fact that you've got so much disruption going on in the factory that's it.
And between between the rework and building inventory and and and storing aircraft. It's all of that that's weighing in AR and the current period that obviously will not be experienced and once we even when we start ramping up which is as Dave indicated earlier than what we've already started so like I said before long youll see that back at a.
Normalized I'll say level of of burn outside of that like I said cash unit cash basis programs really doing a great job and really holding up well at a very low rate.
And and again, that's a testament to all the hard work that's gone on over the years.
On stabilizing you know the factory and the operations and the productivity initiatives. So youre seeing the benefit of that so is the right kind of stabilizes and and and goes up and we certainly deliver those inventoried aircraft, that's going to be a big driver as I mentioned on cash flow between the balance of this year and then going into 'twenty two.
Okay. Thank you if I could add if I could add.
One thing is we are our pause went on longer than I think anybody wanted to maybe even including us except for that pause, we directed and awful lot of energy a lot of cost and a lot of.
And of effort to remove the nagging rework loops that existed for quite some time, so our ability to now climbed down that rework curve I'll get back to a real standard operations with fewer constraints.
To get us ready for a.
Our return on rate.
I'm highly confident that that's exactly the way this is going to play out. So it was purposeful with respect to that pause the amount of work that we took on.
Great. Thank you for the color gentlemen, and.
Thank you.
And our next question is from Peter Arment with Baird. Please go ahead.
Good morning, Dave Greg Good.
Good morning.
Greg Thanks for everything and like everyone else I appreciate it all over and over all the years I hate.
Hey, Dave This is more I guess, a bigger picture question on the.
The U S. China relations kind of a watch item comment it seems like it's first time, you're really highlighting this under the business environment has something changed in terms of your timeline and what you thought when the regulator would be approving or is this just that you know, it's just taking longer and maybe you could just give us a little more color on that in terms of when you expect it.
Yeah. Thank you.
This issue has been hanging around for.
Quite a while but we have a new administration in place and the United States.
I don't want it and I didn't want to work in their office from the first day, when they're trying to come to grips with their own strategies with respect to China broadly.
And I'm glad they're doing that but we're now at a stage where the focus on the economic recovery here in the United States on the part of the administration as well as now getting their feet a little firmer on the ground with respect to China Relations. It's time for us to just point out the economic implications of trade.
Trade with China in the aerospace industry and commercial aviation specifically.
There are significant and you all know that and so we're just hoping to get get everybody incentivized and lobby both sides, we have great relationships and China, we have firm orders on the books with China, but we need to get the order stream going again, and I'm confident that that will happen.
But this just happens to be the moment too to begin to talk about that broadly and that's why you saw you saw and we talk about it on her on the call. This morning, and and this discussion. We're just got to make sure that our administration knows the importance of.
Of.
Getting those relationships straight and I think trades good for everybody I think they do too, but we got to work our way through that and give them the time to process.
Dave just as a follow up to that is just the.
Is the timing aspect if this drags on and you know into the middle of the second half or later and that impacts your rate decisions for next year is that what you were alluding to earlier.
Well it will eventually if it if we dragged out all the way through the year and eventually relate.
<unk> will impact the recovery of our rates and not so much the rates that exist as we exit the year. So the pace of that recovery of those rates is what it may impact and.
Anyway, narrow bodies before wide bodies, but so that's it and it is what it is.
Got it thanks, so much.
Okay.
And our next question is from Myles Walton with UBS. Please go ahead.
Thanks, and good morning, Greg Best wishes on next pursuit and thanks for all the help over the years and even the IR at Raytheon was helpful.
The question for Dave or Greg one of the pushback I get it which I think is actually fares at Boeing maybe shouldnt be putting we're taking out as much structural cost and instead, maybe there's an absence of costs that needs to be added for innovation and program execution and supply chain health I know the last call.
A lot of the comments were actually on the structural cost actions I'm. Just curious how would you respond to that given the program execution has not been perfect. But you can go down the list, but how how would you respond to you actually might need to put structural cost into the system.
Yeah.
And completely reject that argument and of course I would.
But we have maintained and sustained it's actually quite remarkable in light of everything we faced but we have sustained all the important research investments that we've been making.
We've sustained all of the development programs that were in the works and they're not insignificant and we've added resources to those development.
Programs.
As reflected in the accounting adjustments, we made at the end of last year.
They represent we put time and we put more cost into these programs we didn't we didn't.
Take less so.
And I'm actually very confident I think we have removed and awful lot of duplication of effort and Greg can give you that and and living color.
And with especially with respect to overlapping technology development programs between our Bds and our commercial world.
So anyway, I am confident in and our future and I think the level of investment we've put in and do our research and development differentiators compared to our competitors I feel great about I feel great about that that's the benchmark and we care the most about so that'd.
That'd be my commentary I will turn it over to Greg Yeah, No I no surprise I completely agree and look I think he got also got a step back we've invested over $60 billion over the last 10 years and that has all been in key technologies and programs and and all that.
And within our factory within our space. So we have not been short on investment by any means and you saw even last year and the middle of the pandemic. We have continued to make the appropriate investments and the right area of the business and I'd say, even in some cases, we've made more investments like on the 737 line in order to capture and <unk>.
Stability on the other and as Dave indicated that's ultimately going to be great for our company, but great for our industry and our partners. So and a lot of cases, we've moved money or shifted money or even added money and some cases, because we're playing the long game here and and we're looking for areas, where we have constraints.
Or where as Dave said, we have duplication of effort and we're just challenge and ourselves also and what's best in class, even down to program levels of layers and spans around leadership and what constraints they have down and a program level and how can we remove those constraints, so but not losing sight of the future and quite frankly.
You know, making some of these moves that are going to provide even more stability going forward as Dave indicated and that's the whole idea that has three seven rate comes up we see better stability coming out of this than we did going in and its no different on any of the other programs. So.
And yet, but theres lots being done here and theyre, good and they continue to be lots being done, but I think I can speak on behalf of everybody no losing sight of the future here and it's all about you know, helping our work force, helping our suppliers and drive and stability and that ultimately will be good for the entire industry.
Thanks for the color.
And welcome.
Thanks.
Our next question is from David Strauss with Barclays. Please go ahead.
Thank you and.
Greg Let me Echo what everyone else said congrats on a good job, particularly these last couple of years. Thanks.
Thanks, David.
Wanted to ask about 787.
And 100, or so aircrafts and our park today.
What proportion of those and have actually had the fixes implemented and and how long does it take to make the fixes to and individual airplane and yes.
And we're on the same page here, you're you're implying that you think you can deliver 100 plus aircrafts over the over the next three quarters.
Yeah.
Yeah, So maybe I'll start and and Dave can certainly wait and weigh in here, but as far as the number of aircrafts were working through them sequentially. Dave. So we're working through them in in tail number by tail number so as we're working through those that's informing you know aligned up with our.
Every plan, so youre not going to see all of them being reworked at the same time, that's not going to how it's going to work and that's on how it is working but it's progressing well as you can see by the increase and the deliveries.
So far to date as far as your measure in this and days as far as the amount of rework required, but we're taking whatever time it takes to to to get the work done in station and and completed per our spec.
But it is improving aircraft over aircrafts. So as the teams are completing the rework they are actually coming down a learning curve. So we anticipate that overall cycle time to to improve.
And like we said you look where right now we've got a schedule lined up with by tail number by month by customer and that it gets the majority of the and the 100 inventoried aircraft delivered by the end of the year and as Dave indicated you know well that that could move around from customer to customer and so on.
But we're trying to stay ahead of that and stay and very engaged with our customers around specific timeframes of which we'll be making our delivery and all that are lined up with how we do the rework and how we.
Stabilize the ramp and and and complete complete the final deliveries. So I don't know David if there was anything you wanted to add to that.
No no. This is more about how the airplanes moved from position to position as opposed to the applied work itself.
And.
At the end of the day, we're going to be at a rate probably.
This month at 10 or 12 airplanes and.
And that just demonstrates that that's what we can do and we're and hold that rate for as long as we can depending on customers and their ability to get in and take deliveries. It's again as I said before the trekking and this one is the logistics of all of the customers coming in and out and then how we move these states these planes through position.
And the applied work itself.
It's pretty clear and it's getting more productive every day. So we're in a pretty good place on that front.
Thanks, and Greg you had mentioned sequential free cash flow improvement through the year would you expect by the fourth quarter that your free cash flow positive.
Yeah, no what what I, what I said was that the first quarter, you know with the more challenging one.
And it's gonna, it's gonna be you know plus or minus month over month quarter over gosh, Scott, It's gonna be a little bumpy, David but it's going to play right back into you know Dave's comment just just prior on the 87.
Delivery profile and its not linear so it's it's again laid out in detail, but its not exactly the same month over month or quarter over quarter. So all of that is going to play and but but look and everybody's working extremely hard obviously to meet our commitments to our customers get there.
These aircrafts reworked appropriately and then of course get <unk>.
Continued to delivery and the same thing on the 737, and that's what's going to get us to a better profile by by the end of the year, but I'd expect it to be be lumpy.
Quarter over quarter between and particularly the second and third quarter.
And then some are I think on a better trajectory and the fourth quarter.
Great I appreciate the comments.
Welcome.
Okay.
And next we'll go to Ron Epstein with Bank of America. Please go ahead.
Yeah, Good morning, guys and the.
And Greg and I Echo everybody else's comments, it's been a pleasure working with you over the years, both Regina and at Boeing and so thank you for that.
Right.
So I think luck with what's going on that day.
Question for you. So I just want to follow up on Michael's question.
You've talked a lot about business transformation.
What what's the and state and ultimately how does engineering and sitting in that visit because to be fair seven and three had issued 70 had issues triples that are in excess issues and some four seven and eight had issues KC 46 as issues Air Force. One now has issues and the star liner has issues.
How does a business transformation fix that.
Well I'll remind everybody that the <unk> hundred 80, <unk> hundred 50, <unk> hundred 38, three you're not talking about here.
Just want to remind everybody, but they don't they had a little trouble as well. These programs are big and they're complicated so the idea that we fix everything.
I'm not sure I can sign up for that the idea that we're going to be a whole lot better I can sign up for it and the work we've done to align our engineering function broadly.
Everybody inside the company has signed up for that endeavor and feels great about it.
Work, we've done with respect to the safety management system that surrounds that engineering function.
And which they lead and behalf of the company.
It avails itself to new data to a faster.
And cycle time with respect to how our company processes that data and ultimately makes decisions around that data.
And.
Our reinvestment in the fundamental design practices the company that will.
And still disciplines that we.
And we just need to get better and better at and everybody and the company has signed up to do this and we're making real investments in that process.
So I feel very very very good about all of that and it will it does not mean that in and of flight test somewhere along the way, we don't run into and issue that needs to get resolved.
And so it is the nature of our industry to do big things and do them very well so.
Anyway.
And I'm confident that these transformation efforts are significant I'm also confident on this production stability, which goes hand in hand with engineering.
We've taken actions over this really hard actions over the course of this year to stop things, when we see and issue and get them fixed once and for all and the 87 in Q1 was a glaring example of that.
Fifth fit and finish issues with respect to the joins and our fuselages and we're just nagging problems difficult problems and we applied real engineering talent and expertise to that new process controls.
New lines of communication with our supply side, so that so that we're not surprised by that stuff anymore, and we can eliminate rework loops that ultimately travel with the product.
And I could go on and on and on and on and on.
But I think some of the signs should be very apparent.
To you and to us and to our customers.
And our next product do you expect to see it go smoother.
Oh, yes, yes, and I expect and X product to get differentiated probably and in a significant way on the basis of the way, it's engineered and built and less.
Yes.
Dependent on the on the propulsion package that goes with it.
Got it got it okay. Thank you yeah. Thanks.
And next we'll go to Jon Raviv with Citi. Please go ahead.
Okay.
Good afternoon, and thank you very much and best of luck, Greg and allowed US John the next endeavor.
But what what one one related question here looking at the balance sheet and when you look at net leverage you're over three times Levered versus your peak EBITDA and and I appreciate that that number of claims is and <unk>.
Moving to consume cash so and so how is the company prepared for you know God forbid another another crisis give it given this position and your and your commitment to the <unk> rating.
Realize you issued some stock for pension of horrible and K, but how are you evaluating it here I know, it's you know, it's a different conversation versus $100 ago, but here, we are and the mid two hundreds depending on the day yeah. So so how are you thinking about that how that dynamic at this point.
Yeah look I don't I don't think it's any different than we have been thinking about it since the beginning which as you know, we're looking around corners, and playing out options and and making sure we have them and understanding the second and third order effect and to your point some of them.
Sequence of these sometimes matters and the timing of the matter. So I think the you know the big takeaway should be that we're going to constantly review the capital structure and the strategy and the long term strength of the balance sheet and with that you know we're going to keep all our options open and on the table, but how we think about it is.
And again, not just as a base case, but we just as we have just keep looking around corners and understanding what what levers would we pull and when would we need to pull them and what would be the implications of doing that and as I said on the call that as we see it today, we don't see a need for additional liquidity, but.
And also as you've seen how we've handled the bank.
Our bank line and and extended our our credit facility, where we're making sure that we've got all the right things in place if we need to go there and if we do we'll be prepared to required to do so.
Thanks, very much for fitting me in and yet Youre welcome and opt.
Later, we have time for one more question.
Thank you and that will be from Hunter Keay with Wolfe Research. Please go ahead.
Thank you so much for giving me on Greg Let me be the last wanted to say congratulations it's been a pleasure.
And Likewise center thanks.
Of course.
Dave I I'd Love for you to continue on the the comment that you made you ran at the end there.
And what's next and how it's less dependent on the propulsion package can you just continue to elaborate on what you're about to say please and what what is what is this going to involve you know from a product perspective, but also from a manufacturing perspective, what are you guys thinking about.
Yeah. So.
And there's a lot that goes into this.
But I think it's important that everyone understand most often and when a new airplane is.
Developed by either either side. It is usually developed around our propulsion package that offers 15% to 20% improvement with respect to efficiency versus the one it's displacing.
That's the way it is.
It's happened over a long period of time.
I don't believe the next generation of engine can deliver that kind of performance and then therefore, whatever cost efficiency ultimately and whatever performance advantages are derived from the next airplane and my view, we're going to come from the way, it's engineered and the way its manufacturer all with a focus on a lower cost per seat.
When we get it out to the marketplace and yes, a more.
Sustainable package with respect to environment.
So that's what we all have to be focused on I like the pressure that puts on the manufacturers that means the technologies. We deploy are they are our technologies we have.
Done an awful lot of fantastic work and our defense programs.
And with respect to using engineering modeling and then.
<unk> manufacturing processes that that cash that engineering modeling directly create parts that can be assembled and one and one motion.
And with great efficiency.
Secondly, we've invested as you know and composites and our.
And our platforms for a very very long time, the learning curves associated with getting efficient and composite development are significant and I.
And believe Boeing is a huge advantage on that front and so how we bring that engineering modeling the composite development work that we've done over these years and then quick simple assembly like we've demonstrated with our with the trainer airplanes and other defense programs, we have to do it at scale and we have.
It proved to ourselves we can do it at scale, but in my view those are going to be the advantages to that next airplane and it gets developed and I just loved where Boeing is positioned.
On that front when that when the time comes.
Yeah.
Thank you.
Yes.
Alright that completes that Boeing company's first quarter 2021 earnings conference call. Thank you all for joining.
Yeah.
Okay.
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