Q1 2022 Boeing Co Earnings Call
Yeah.
Thank you for standing by good day, everyone and welcome to the Boeing Company's first quarter 2022 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 to ask a question on <unk>.
Todays conference. Please press the digit one followed by the digit zero on your Touchtone telephone again. It is one zero for questions. After pressing one zero you will hear a tone that you placed in the queue pressing one zero again will take you out of Q. It may prevent you from being able to ask a question at the.
This time for opening remarks, and introductions I'm, turning the call over to Mr. Matt Welch Vice President of Investor Relations for the Boeing Company. Mr. Waltz. Please go ahead.
Thank you John and good morning, everyone wealth.
Welcome to Boeing's first quarter 2022 earnings call I am Matt Welch and with me today are Dave Calhoun, Boeing's, President and Chief Executive Officer, and Brian West.
He is executive Vice President and Chief Financial Officer.
As a reminder, you can take follow today's broadcast and slide presentation through our website at Boeing Dot com.
As always we have provided detailed financial information in our press release issued earlier today.
Projections estimates and goals. We include in our discussion. This morning involve risks, including those described in our 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, Thanks, Matt I'm going to make a few comments upfront and then turn it over to Brian for a more detailed look at our financials in the quarter.
First I need to acknowledge.
That on the 20 <unk> of March.
Slide 50, 735 of our good customer China Eastern.
Unfortunately crashed and took the lives of our 132 passengers and crew.
These things always take our breath away.
And I want to extend.
Extend our thoughts and prayers from the entire Boeing company of course to the to the families and friends of those passengers.
Those are always rough moments our technical team is in fact supporting both the NTSB and the NTSB as it supports the C. AAC who is of course the lead investigator.
Those are the only comments that I will make.
Along the lines of the China Eastern accident, but know that we are in the middle of that investigation.
22 <unk>.
Some challenges presented themselves.
Unexpectedly Russia, obviously.
As though is the big issue in the news inflation.
Inflation continues to take a hard run at pretty much everything we do and Covid.
Unfortunately, it didn't leave as soon as we would have liked so the at least the first 45 days of the quarter were impacted more than we imagined.
All that said.
Our focus.
And progress remains consistent with what we shared last quarter, we still expect to accelerate our performance and the key financial metrics, namely cash flow because that is our key financial metrics. That's what we've been focused on for a couple of years and we will remain focused on and we remain committed to the to the no.
<unk> that we will have positive free cash flow over the over the course of 'twenty, two and meaningful improvement in 2023, everything we are doing is leading with safety and quality and ultimately driving stability for our airline customers and we believe we're taking the right action.
For the future we have progressed on many key milestones will comment on a few of them today, but we're focused on the 37, Max and the 787 production and the return to service of those airplanes that we have built in.
Stored in behalf of our airline customers.
We feel good about all the progress we're making on that front.
The commercial market recovery I'm, not going to expand significantly on that you've heard from almost all of the U S airline customers many of the European customers.
Traffic is returning and it's returning.
Pretty big way.
Airplanes are being utilized at a fairly high rate domestic markets are the first to have recovered in a recovery robustly regional markets.
And even long haul traffic now is beginning to return the only real exception in that demand scenario.
Is China in light of their current Covid constraints.
But we're hopeful though we expect that they'll come out of that and continue to expand there.
So that commercial market is is very very strong.
Particularly strong for our.
Line of airplanes, namely the Max the 87, and the Triple seven and I don't want anyone to forget the <unk> basically continues to play a very important role in the freighter world.
I should comment on the conflict.
Crane.
I think I mentioned last time, we're together we had 1000 people in both the.
The Ukraine in Kiev and.
And in Moscow.
Those two teams worked pretty closely together so it's been a.
Bit of a gut ranching and emotional period for all of the Boeing company and our associates.
I'm very proud of the work that we are going to support our team in Kiev.
We've provided a million and a happens humanitarian assistance, but also match all of our employee donations to those people who are helping.
And then most importantly, we have Boeing families in Poland and throughout the region, who have willingly accepted and opening their homes to our displays teammates that that's a big deal.
And it's been an uplift for all of us to watch watch that happen.
We're following the lead in the U S government and strictly adhering to export controls and all of the restrictions, we suspended maintenance and support for our Russian customers and in the spirit of doing the right thing we have suspended titanium imports.
Chipotle for US we had a program of inventory build for quite some time ever since Crimea, such that we believe we are reasonably protected on that front.
Next.
I shouldn't comment on that $3 seven Max specifically.
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It's only been a little over a year since that airplane was recertified and put back into service. We now have over 1 million flight hours.
It is performing incredibly well at 99% plus service reliability, our customers are happy with it in almost every case that I'm aware of.
About the airplane exceeding the performance specs that we sold it on.
So we feel very good about that and we feel very good about the skyline and our ability to deliver on that Brian will get into rate discussions.
In his piece of that one, but we still continue to think about this one airplane at a time so that we can maintain that high in service reliability rate.
We're applying the same rigor to the 787 and we took a very important step.
Just in the last week by submitting the paperwork and the plan to the FAA, we're proud of that work.
We've touched a lot of operations across our facilities.
Exacting spec with respect to the 87.
Precisely and that's all embedded in the paperwork that we presented to our FAA.
And as always we will let the FAA take the lead with respect to search and ticketing.
We will work closely with them they have been involved in this process from the very beginning so there is no new news embedded in this.
Triple seven family.
I'd like to make a comment with respect to the decision we made on the <unk>.
Triple seven acts in the extension of its introduction until <unk>.
2025, I believe we've made that decision out of a position of strength not weakness we've embedded every lesson that we've learned on three seven Max shirts, and we continue to I have two of those are ahead of US we were we've applied all the lessons from the 787 shirt, which we of course, we have just.
Submitted and believe that we've got to give ourselves the time and freedom to.
Get this right with the FAA and give everybody the time they need.
To give us the short that will last frac.
Frankly for decades and decades.
Into the future. It also by calling it out now it gives us an opportunity to.
Create some capacity for our traditional metal wing triple seven freighter, which right now is an incredibly high demand. So we will extend extend that.
Our plane life and continue to meet that demand and then finally, the triple seven eight freighter, which we introduced with Qatar is a very big deal with respect to the long term ramifications of the Triple seven family.
In the decades ahead, we're very proud of the Triple seven family in the post.
A $3 87 and $4 seven world, we think it stands on its own and it'll be one of the great contributors to shareowner value over the decades ahead.
Boeing Global services.
I'm not going to get into a lot of detail other than to say, we're riding that wave of recovery with respect to fleet utilization pretty much everywhere in the world.
And so that business as it is.
Enjoyed that success and has been able to stay ahead of the supply chain constraints that some are feeling.
All things good on that front and they're on Bds.
A messy quarter.
And we got hit where you might expect us to get hit in a supply constrained.
Still COVID-19 impacted an inflationary world and that is that is on a group of fixed price development contracts that I think you're all aware of.
Where we add a recognized future costs.
On those program economics, and so we have taken a write off.
On those programs VC twenty-five b the T seven <unk> and the M Q2 5, Brian will talk to you a little bit more about this.
D. C 20, <unk> was by far the biggest part of that of that hit Youll recall it was a.
Public negotiation that happened quite some time ago.
We took some risks.
Knowing that COVID-19 would arise and not knowing the inflationary environment would take hold like it has and both of those things have been as impacted us fairly severely this will ultimately accrue to two airplanes, where we will continue to do our work and deliver first rate.
<unk>, two <unk> to our customer and the government.
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As we deliver the today's numbers know.
No that we we are increasing our investment safety produce ability.
Digital transformation autonomy and sustainable aerospace or they are the key notes with respect to where those investments are going.
Feel good about where that setting us up for the future.
We're progressing on our development programs are we frustrated with the timing you bet.
But we're progressing and everyone is getting their feet firmly planted on the ground, both us and our counterparty and the regulators around the world.
And so I have to feel good about the progress that we're making collectively and that matters for the long term.
Stability and predictability its coming along it'll matter in the years ahead and above all else. Our culture is built around safety build around quality and transparency is is is the word of the day with respect to how we interact with our counterparties everywhere in the world.
Strong leadership team in place I'll comment.
And also congratulate Leann Leann has retired she.
She has given us over 30 years of service.
<unk> never had a more diehard and more engaged a leader in our company. So I want to congratulate her on that as you know she'll be with us until the end of the year and supporting transition activities.
But also to congratulate Ted cohort, who is a fantastic leader and a proven himself at our services world and servicing a half of his business and servicing the U S. Military so he is ready.
To go on Boeing Defense, and we will do a fantastic job.
Stephanie Pope in our services business, it's a bit of an old hat. She was the CFO at our services business. When we stood it up she did a lot of the hard work associated with that stand up a week treasurer her as an operator, all the right instincts and look forward to her future leading the services business. So we feel good about the Tam.
Transitions that have occurred and then I'll call out before I turn it back to Brian just the.
Thanks to our administrator, Steve Dixon at the FAA.
As many of you know he is retired he stood tall during a difficult moment for the Boeing company and for the FAA and the recertification of the 737 Max amongst the other multitude of responsibilities that he has had we respect the work that he did.
And ultimately that encourage that that he provided in the face of what was otherwise difficult external circumstances.
So congratulations to him and then the acting administrator building Nolan he can count on our full support as he.
As he now it takes over.
So I'm confident in the milestones that we've been meeting.
And we've been focused I think on the right things and with respect to long term shareowner value that is what it's all about and we intend to deliver on that.
Prospect, So Brian I'll turn it over to you.
Great Thanks, Dave and good morning, everyone.
Once you certainly had a few challenges and navigate the warranty claim the updated regulatory requirements on our commercially airplane programs as well as the combination of Covid supply chain constraints inflation impacting in particular, the fixed price defense development programs as Dave mentioned.
Importantly, though cash performance is on track with our expectations.
Utilization in the quarter was in line with what I shared a few months ago the trajectory throughout the rest of the year remains intact and we continue to expect to generate positive free cash flow for the year.
The business is resilient and we're encouraged by the momentum we're seeing.
We still think about this year in three parts.
First we anticipate reaching key delivery milestones on the eight seven we're on a path to restart deliveries in the near term.
The three seven we continue to work towards resuming Max deliveries to Chinese customers at the same time, we're re sequencing our skyline to take advantage of strong customer demand for the Max airplane and a meet delivery objectives.
Next once we see progress on these programs, we anticipate improvement in our performance metrics, including deliveries revenue margin and cash flow and finally as we move through the remainder of the year, our financial approach will accelerate.
And going forward there to see the opportunity for our company to return to sustainable growth.
This fall we plan to host an investor day to share our more detailed expectations for the rest of the year and beyond.
Before I get into the financials I did want to make a few points on the current business environment on slide three.
I'll start with one of the stronger segments freighters.
Market remains quite robust with cargo traffic up 12% above 2019 levels in February largely driven by E. Commerce is continues to be one of the more reliable forms of transportation in our lineup is perfectly positioned to take advantage of this growth for a very long time.
The commercial passenger market recovery expectations are largely unchanged from what I shared last quarter, even as we saw some events that added near term pressure, including reduced passenger traffic in and around Russia.
Global flight ops are at about 75% of 2019 levels as the global recovery is tempered by China and the impact of the war in Ukraine.
We still see overall passenger traffic returning to 2019 levels in the 2023 to 2024 time frame.
Domestic traffic continues to lead at 78% of 2019 levels in February with China. The notable exception ex China domestic traffic was 84% of the 2019 levels.
U S carriers, who are providing the best window into the recovery at this point our customers are seeing record booking volumes and very strong forward yields for late spring and summer.
To the point of being able to offset sharply higher fuel prices and Theyre also highlighting the return of business travel.
Beyond domestic routes were seeing encouraging signs from intra regional traffic in both Europe and the Americas.
International traffic continues to lag at 40% of the pre pandemic levels, but we are seeing a recovery in regional markets, such as intra Europe and U S. Mexico, both progressing well with significant reopening now underway across many parts of Asia.
Long haul recovery will be led by the Trans Atlantic market. This summer as well as middle East connectors.
Time and again the market has shown its resilience driven by the essential nature of moving both people and goods around the World and then in addition to commercial airplanes, the expanding market recovery directly benefits our commercial services business.
In defence and space, we continue to see stable demand.
<unk> FY 'twenty three budget request reflects the important role our products and services have in ensuring our national security, including significantly increased funding for the <unk> and support for our other critical products and services and support National Security.
Outside of the U S. We're seeing similar solid demand as governments prioritize security defense technology and global cooperation given evolving threats.
Our operations are well positioned to maintain continuity. Despite the Warren Ukraine, and we see limited impact to our business I'll cover the financial impacts a bit later.
On the supply side, we are carefully managing supply chain constraints and working through issues as they arise to ensure the stability of our production system. We have experienced some disruption to our production such as some supplier delays and resource availability, including the impacts of Covid and we're actively working mitigation plans to ensure continuity.
The markets, we see we serve continue to be big our competitive position is strong and we are actively addressing the supply chain and all of this gives us confidence in the fundamentals of our business and our long term outlook as we work hard to serve our customers.
With that let's turn to the financials on slide four.
First quarter revenue of $14 billion was down 8% and the core operating loss in the quarter was negative $1 5 billion, resulting in a $2 75 core loss per share.
Operating cash flow was a usage of $3 2 billion in line with what we expected.
These results were impacted by $1 $3 billion of charges at Bds, which I will discuss in more detail in a minute.
Due to the Warren Ukraine and associated impacts to our business, we did record about $200 million in pre tax charges in the quarter related to certain asset impairments and we also reduced the backlog by 86 units in roughly $5 billion.
As we review business unit financials I'll highlight some unique challenges, we're overcoming as we drive stability and positioned for the future.
Now, let's move to commercial airplanes on slide five.
First quarter revenue was $4 2 billion down slightly primarily driven by the timing of wide body deliveries, partially offset by higher $3 seven deliveries.
Operating losses of zero point $9 billion, and the resulting negative margin rate reflects abnormal costs and period expenses, including charges for impacts of the war in Ukraine, and higher R&D expense as we increase our investment in the business.
Turning to the 87 program as Dave mentioned, we met a very important milestone and submitted the <unk> plan to the FAA.
Deliveries remain paused and we had 115 airplanes in inventory at the end of the quarter.
Importantly, we've completed the rework on the initial airplanes and are preparing them for delivery.
<unk> conducting our own check flights in advance as always we will work closely with the FAA on remaining steps and we'll follow their lead on timing of deliveries.
As we stated last quarter, we are producing at very low rates and we'll continue to do so until deliveries resume gradually returning to five airplanes per month overtime.
Notably, we're currently rolling out conforming airplanes from the factory.
We did not take additional charges on the 87 program in the quarter, we did record $312 million of abnormal costs in line with expectations and we still anticipate a total of approximately $2 billion of abnormal with most be incurred by the end of 2023.
Consistent with what we shared last quarter cash margins on the 87 remain positive and are expected to improve significantly over time.
We see a long runway ahead for the seven program based on a very healthy backlog of 405 airplanes and compelling operating economics for our customers and we're well positioned to capture future demand as the wide body market recovers.
Moving on to the $3 seven program, we delivered 80 637 airplanes in the quarter, including 37 in March a slight decrease from fourth quarter of last year, despite impacts of Covid and some supply chain delays and typical seasonality.
Given some supply chain disruption and timing of taking airplanes out of storage delivery deliveries were slightly below our expectations and we ended the quarter with 320, Max airplanes and inventories however.
However, we still anticipate delivering most of these airplanes by the end of 2023, the timing and pace of deliveries to Chinese customers and supply chain stability remain key factors to our delivery profile.
We continue to make progress ramping our $3 seven production rate and are essentially at 31 airplanes per month.
As we shared last quarter $3 seven abnormal costs costs are largely behind us the Max customer consideration liability also continues to burn down as expected.
On our development programs, we're doing everything we can to complete the certification of the Max seven and Max 10, and ensure their respective first deliveries this year and next.
We're working closely with the FAA on implementation of aircraft certification safety and Accountability Act legislation and expect any necessary actions to be defined later this year.
As always we will file the leader of regulator on the timing of certification.
Moving on to the Triple seven Triple seven X programs, we remain highly confident in this family of airplanes as Dave outlined.
We launched the Triple seven dash eight freighter with an order from Qatar Airlines in January and as a result, we increased the accounting quantity on the program to 400 airplanes.
We continue to perform triple seven dash nine Boeing flight test to retire technical risk with over 2000 flight hours completed through the end of the first quarter.
The airplane is performing well and our customers continue to see the value and the compelling economics and sustainability benefits. This airplane offers.
Based on an updated assessment of the time required to meet certification requirements. We now anticipate delivery of the first triple seven dash nine airplane in 2025.
Additionally, we are coordinating with the FAA to prioritize resources across our development programs.
As we manage the company for cash flow, we are adjusting our triple seven dash nine production rate, including a temporary pause due 2023.
This move will minimize inventory reduce the number of airplanes, requiring change incorporation and avoid capitalizing costs and the balance sheet. Additionally, given the robust market for freighters were leveraging this production pause on the triple seven dash nine to add triple seven freighter aircraft in the 2023 to 2026 timeframe we.
Anticipate that triple seven dash nine pause will result in approximately $1 $5 billion of abnormal costs beginning in the second quarter of this year and continuing until production resumes. We believe this is the best allocation of resources and cash.
Turning to overall demand at BCA during the quarter, we booked 167 gross commercial airplane orders, including 134 orders for the $3 seven Max at the end of the first quarter, we had nearly 4200 airplanes in backlog valued at 291 billion.
Let's now move to defense space <unk> security on slide six.
First quarter revenue was $5 5 billion down, 24% and operating margin was negative 17%.
These results were primarily driven by lower volume and $1 3 billion in charges on fixed price development programs, including the VC 25, B and the <unk> on.
On a normalized basis basis, adjusting for onetime items revenue across our defense portfolio, including government services was down 9% half of which was the impact of Covid and supply chain constraints. The other half was from planned program transitions.
The VC 25 program.
Corded of $660 million charge, primarily driven by higher supplier cost higher cost to finalize technical requirements and schedule delays.
The T <unk> Red Hawk program recorded $367 million in charges, primarily driven by ongoing supplier negotiations impacted by supply chain constraints COVID-19 and inflationary pressures.
We continue to have high confidence in the long runway ahead for the T 700 program similar pressures impacted other fixed price development programs, though to a lesser extent.
From a cash perspective, these charges will be incurred over the next several years.
We received $5 billion in orders during the quarter, including an award for six MH 47 G block two Chinook rotorcraft for U S Army special operations and the Bds backlog remains at $60 billion.
Across the portfolio, we're focused on improving performance as we transitioned several development programs into production and we're making progress but have more work to do as we position ourselves to deliver for our customers.
While we recognized charges on these key programs, we remain confident in demand for these future technologies and capabilities and our defense and space portfolio is well positioned for growth.
Now, let's turn to global services results on slide seven.
Global services Global services team had a great quarter, particularly on our parts and distribution business due to the strength of the portfolio and broad offerings first quarter revenue was $4 3 billion up 15% and operating margin was 14, 6% in line with our expectation.
Results were driven by higher commercial service volume and favorable mix.
We received $3 billion in orders during the quarter, including a fuel saving digital solutions contracts for Etihad Airways 87 fleet and a contract for KC 135 horizontal stabilized from the U S Air force to be jeez backlog remains at $20 billion.
With commercial services revenue now back to nearly 90% of pre pandemic levels. Our service business remains well positioned for growth as the commercial market recovers and the defense business continues to see strong support.
Now, let's turn to slide eight and cover cash and debt.
We ended the first quarter with strong liquidity comprised of $12 3 billion of cash and marketable marketable securities in the balance sheet and access to $14 $7 billion across our bank credit facilities, which remain undrawn.
Our debt balance decreased slightly from the end of the last year to $57 7 billion driven by repayment of maturing debt.
Our investment grade credit rating is a priority we remain committed to reducing debt levels.
Now similar to what I shared last quarter I'd like to review the key drivers of 2022 revenue and cash.
In comparison to 2021, and we still anticipate total company revenue to increase this year the growth will be primarily driven by higher commercial airplane deliveries on the $3 787 programs and solid growth in our services business as the commercial market continues to improve.
And while the overall demand outlook for the defense business remained stable due to the revenue impacts of the charges. We took in the first quarter.
We're forecasting a modest decrease revenue at Bds This year versus 2021, However, we expect 2023 to return to stable levels.
On cash we still expect to generate positive free cash flow. This year. The key driver of improvement remains higher three 787 delivery volume.
As we described previously the working capital benefit from delivering airplanes, where inventory will be partially offset by a lower advances and progress payments balance.
Still anticipate a burn down of our advanced balance this year. The profile continues to be dynamic due to customer discussions and timing of deliveries.
From a phasing standpoint, our first quarter cash utilization was in line with what we shared in January we remain confident that our free cash flow will improve in the second quarter, and we will make meaningful and will meaningfully accelerate in the back half of the year as we achieved the key delivery milestones that I that I outlined.
As we look beyond this year, we expect 2023 cash flow will be materially higher than 2022, and we look forward to sharing more details on our plan in the fall.
To wrap up our performance is tied to several key items commercial market recovery returned to delivery for the 87 and $3 seven Max in China successful execution and certification of development programs and production system and delivery stability.
We remain acutely focused on what we can control most notably we continue to focus our efforts to stabilize our production system, including the supply chain and improve our delivery predictability and while we saw improvements in some of these first quarter. We have more work to do and we're keenly award aware that these activities will be critical to our access in a REIT.
Prioritizing these resources accordingly.
Beyond these.
These execution priorities immediately in front of US we continue to invest in our people technology manufacturing capabilities and strategic partnerships to ensure we are well positioned for future growth and Theres no doubt that the business environment is evolving that said, we're making good progress driving productivity and cash flow, while addressing risks as they arise and why.
We do all of this we're laser focused on safety quality and stability.
We believe these are the right actions and resource calls and we remain confident in the strength of our business now and in the future with that over to Dave for closing comments.
Yes.
We believe we're on a real improvement track with respect to engineering and manufacturing of our products and ultimately.
The predictability of our business with respect to our commercial customers. We also believe strongly in our defense product line and the prospects for defense orders and growth in the relatively near to medium term, so that Chad I'll turn it over to questions.
Let's go.
And ladies and gentlemen, or does that your question be clearly heard we ask that you not use a speaker phone cell phone or a phone headset. Please use your handset to ask a question.
You're on a speaker phone please be sure. Your mute function is switched off so your signal and reach our equipment. As a reminder, in the interest of time, we are asking that you limit yourself to one single part question.
One moment for your first question.
And that is from Noah <unk> with Goldman Sachs. Please go ahead.
Good morning, everyone.
Yes, hi.
A lot of questions but.
I guess the two most important things in the near term or when you can restart 707 deliveries.
When you'll resume Max deliveries to China. So.
Can you give us more specific detail on what the regulators and Counterparties are still looking for what specifically you need to do to satisfy their questions in process and then I know you don't want to get into predicting timing on these but you have guidance for cash flow for the year. So just.
How are you thinking through what those deliveries need to look like to have that positive free cash.
Yes, so why don't I grab that one Brian can augment any way like again this is a tricky moment where.
I get into trouble, if I predict any outcome with respect to FAA certification.
What I can say because I do control is the quality of the package that we delivered to the FAA and I also know that their fingerprints are all over it because they've been sort of side by side with us in this process. We've been getting guidance every step of the way. So I feel very good about all of that our customers.
We have been through these airplanes.
And so I think we're in reasonably good shape to go through a normal order and I do not expect this to get elongated in any significant way and I believe our our cash flow.
<unk> or confidence if you will with respect to the year are well suited and have enough room for the FAA to do its work and for us to answer questions in that process. So it's been a long hard.
Run, but I feel I feel really good about where we are.
And with respect to China. Similarly.
We've had no indications that.
There arent going to be China deliveries in any way.
As we know we're certified to fly the airplanes.
Covid environment has put a really tough.
The situation in play because our customers are not fly in there down 70% in their domestic travel.
This is significant for them so how long that goes on.
It's measured in a couple of months I still feel good about where we are with respect to deliveries we de risked this year's deliveries significantly.
And we can derisk more.
The market is craving.
737 matches, so I'm not concerned about our ability to derisk I don't want to de risk because I still have faith that that.
China can can take take the airplanes.
Indian growth.
Got it.
Dave last quarter, you talked about collecting data.
As you rework 77, and it sounded like you had to collect a lot of data took time then you have to iterate with the FAA is the package you've sent them that you describe as a package is that now sort of a binary they'll either accept that package or not or does it still remain.
Iterative Q&A type of process.
Well, we believe.
Based on all of our interactions.
With the FAA and our own engineering unit members and others.
That we have sufficient data to make our case and recertify. Our certified this airplane in accordance so we have a reasonably high level of confidence in that and I don't expect any significant sort of banter around that.
But I can't I can't be absolute about it we're.
We're going to go through the process I just know that there's been a lot of involvement on both sides and a lot of working together in this process and getting to get into the package we submitted.
Okay.
Yeah.
Okay.
And next we'll go to David Strauss with Barclays. Please go ahead.
Thanks.
<unk>.
Brian I know you noted that you know.
You would expect free cash flow to improve here in the in the second quarter I wanted to see if that meant positive or you still think you're running negative.
And how youre thinking about.
The capital structure from here I think you've talked about in the past that you need 10 billion to run the business Youre down to 12.
If you burn further cash in the quarter I mean are you willing to take on additional leverage at this point or would you look to potentially an equity raise.
I'll take the last one we see no need as we think about both near term and midterm any need for that type.
Type of event, we feel very comfortable with our liquidity position and the balance sheet, we know that as we get more progress on really accelerating cash flows that will that that derisking will change and we'll talk about that later as we meet some of these milestones, but we don't see any need.
To tap lines.
That or anything else that nature as we stand here today.
In terms of the cash flow for the year look.
<unk> will be better than <unk>, and it's probably pretty obvious but.
In the second half will accelerate so I'm not going to put a discreet number on <unk> it'll.
It'll be better, but the full year, we will generate cash flow and you know everything is pretty much lined up.
As we talked about last quarter puts and takes but overall confident with.
Where we think we're going to land for the year.
So is 10 billion still the right number that you need in terms of cash to run the business or is it lower than that.
You know.
I think recency effect it seems like it's in that 10 to 12, but it's too hard to tell right now given you know it's a dynamic world, we're very comfortable where we stand right now and as we start to put points on the board with delivery and execution all of that will be a rich discussion that we can't wait to have with you.
Alright, thanks very much.
And next we'll go to Peter Arment with Baird. Please go ahead.
Yeah, Good morning, Dave Brian .
Dave I Wonder if I could just come back to kind of <unk> questions. On the 787, just you have a 115 aircraft and inventory and it sounded like you know are producing aircraft off the line in a conforming to your latest spec, what's what's left to be done within that 115.
And like the other stored aircraft when we think about Max. So we think about most of these aircraft will be delivered through 2023 or does it stretch out beyond that.
Yes, so I'll take that one.
It is.
On the 115, AR and inventory and the 87 you know as.
As we have described that are abnormal cost is going to substantially be done by the end of 'twenty two 'twenty, three which will also correspond with the liquidation of that inventory. So that nothing's really changed on that front. In fact, we probably feel a little bit more confident as we are starting to look at clean airplanes.
On the three seven consistently you know, we've got 320 and inventory at the end of <unk>.
The quarter.
We hate that it's that high.
But the flip side of that is that we will be able to meet some pretty robust demand that's out there in the marketplace and that again will likely liquidate over the course of between this year and next and that has not changed.
Our next question is from Rob Stallard with vertical research. Please go ahead.
Thanks, very much good morning.
Good morning, Rob.
The question I have is on the 787 Max right you mentioned, you're pretty much at 31 months here what are your plans going forward and what is your confidence that the supply chain could match any further rate increases, especially what's going on with your competitor. Thank you.
Yes, so we always think about this in two ways. One is that that inventory opportunity I. Just described and we've got to work on getting those delivered and then of course the production rate that we're essentially at 31 a month.
Our biggest job right now is to stabilize around that rate.
The teams are working hard they deal with.
Supply constraints that pop up every now and then but we got to be stable around 31, and then anything else is going to be a future decision that we're not prepared to take because we just want to get confidence in what's right in front of US. The good news is is that there's plenty of demand that we can fulfill and while we're watching the supply chain very closely.
We feel good about where that.
Particular program stacks up.
That's great. Thank you.
Yes.
Next we'll go to Seth <unk> with Jpmorgan. Please go ahead.
Okay, Thanks, very much and good morning.
Just following up on 737 I think.
Brian you spoke last quarter about looking to deliver about 500 aircraft and you talked about being on plan.
So is that still is that still your target for this year and how does.
The kind of evolving situation in China affect that if at all and then second on our on Rob's question on the on the production rate for 737, how does the Max 10 certification question factor into that.
So we derisk, China just to put that one aside as Dave mentioned.
First quarter deliveries were a little light.
What we expected and we probably won't get quite all the way there in the calendar year count, but that's just timing.
You know like I said, we've got plenty of finished goods inventory, we've got the right where we want it. So we may not quite get there, but again.
The momentum month in month out has gotten better and we feel confident that if you don't quite get there. This year, it's just going to be timing to the next which we're perfectly comfortable with and again thats been all factored into our cash flow updated look and still believe that we will be cash flow positive in the year.
As it pertains to the Dash 10, right now it's the all of the energy and focuses on certification and really that one won't disrupt our near term projections.
Okay. Thanks very much.
Our next question is from Cai von rumor with Cowen. Please go ahead.
Yes, thanks, so much so.
On their call General dynamics mentioned that the G 700, as basically may have a certification slipped because of additional software validation that the FAA is now requiring which was not anticipated when they started this process and they mentioned kind of the.
The Max sort of indirectly as an issue. So are you seeing that the FAA is now basically stabilizing what they're requiring or are they stable and then they ask for even more data and how does that sort.
Sort of relate to your confidence that you will be able to certify the Max 10 by year end.
Yeah.
Yes, let me take that one.
Very tricky question and I don't want to speak for our counterparty in any way.
Part of our Triple seven X move out into 25 was to incorporate exactly whatever observations that you.
You took account of.
To incorporate all of the learnings we've had from our search programs.
Original Max eight seven.
Now the dash seven and then the Dash 10.
So we keep trying to incorporate all our learnings and it is a definitely a more rigorous process that we're all going through.
Everything has to be completed every eye is to be dotted and every T has to be crossed.
And now we're all getting used to it so on the subject of whether thats, a mature process or not.
Boy I hope, so and I believe we're all better off for it I don't like all of the difficulties we've had to go through to get here, but.
So far so good and I know I think the FAA has enough rigor and what theyre doing but with every next shirt.
We're all going to learn.
It's just going to take a little longer its going be a little more thorough than it's ever been.
Thank you.
Okay.
Next we'll go to Rob Spingarn with Melia. Please go ahead.
Hi, good morning.
Just following with this theme Dave.
We've already covered the say a lot of the problems and issues Boeing's facing are on these development programs or this unusual recertification process that you're doing on 787 and had to do on the Max.
Is the common denominator here the FAA or is it engineers do you have enough engineering resources.
Ryan mentioned allocating resources with the FAA so.
Is there a shortfall there and how do you solve it.
Yes.
I've never seen this and I have yet to run into an issue, where we have not been resource to adequately on the on the programs. This is always boiled down to the timelines and we go through these timelines every week so.
The timelines have always been impacted by E.
The rigor of the discussion between ourselves and our counterparty.
The FAA on what's needed what data is required what's needed to demonstrate a certain point or two.
Right fully the development assurance program.
Yeah.
A lot of writing a lot of documentation very thorough et cetera. It has not been about whether we've had enough engineers to do the development work or two or even to write the technical work.
So yeah.
Yeah more focus more resources on programs is always helpful, but thats not been the constraint so far and I don't expect it to be the constraint I think our pushout on the triple seven acts with respect to the re allocation of resources frankly, the biggest beneficiary of that is going to be the traditional metal wing triple seven.
And our ability to just run some more airplanes through that through the line.
In the midst of the demand that we're seeing so.
On a reallocation question, that's that's where I see the benefit the most.
Yes, I have yet to really see it on the on the programs themselves.
And if the Max 10 slips beyond year end, and then you need the new flight crew alerting system.
Do you assume you'll get you'll get the waiver or does this put the program at risk I mean, if you can't get the 10 done without substantial more cost and looking at the order book do you just leave that market for next airplane.
It's a great question I hope I never get there first and foremost with respect to the.
<unk>.
Original legislation there was there was a lengthy window put in there based on historic.
Certification.
Timetables that would've provided for the seven and 10 easily.
So these things have taken longer the intent of that legislation was never to stop.
The derivative product line with respect to the Max So I believe our chances are good.
With respect to.
Getting legislative relief doesn't mean, we will get them and if we don't it's a problem.
On the other hand demand for the Max is substantial.
We have other airplanes and substitution that we could implement and that decision.
He has to get made sometime between now and the end of the year.
We don't feel the need to do it now I'm still pretty focused in our company is pretty focused on getting the dash 10 certified in in our customers' hands.
They love everything about the airplane, it's doing incredibly well on the on the development program itself. So.
It's a good question. It's the right question and we have to make sure our Decisioning and thought processes is ahead of where we think things end up at the end of the year.
Okay. Thank you.
Yes.
And next we go to Ron Epstein with Bank of America. Please go ahead.
Yes.
Good morning, guys.
But back to the engineering question.
When you when you sit back and you look at it at the company.
I mean do you have to restructure the engineering organization.
Really what's going on there I struggled to think of.
A program that you guys arent.
Our haven't taken a charge on and the no.
The vast number of the issues that you had compared to some of your peer companies both in either defense or commercial it just seems like.
It's just been more troublesome for Boeing and some of your peers.
Why is that the case and what can you do to prevent that for future programs because future programs are going to have to happen.
Yes, So Ron let me, let me start by.
Hoping that you haven't missed the restructuring of our engineering organization. We it's the first thing I did.
It wasn't to address the.
The issue you're talking about.
Because I don't attribute all of our issues in specific instances in write offs two engineering shortfalls I don't.
I never have but we did restructure engineering to it affect reinforce build.
Our safety management system in a different way with a different outlets. So that people could voice concerns and call out engineering disciplines as appropriate and its work and it's been fantastic and we benefited from.
The ideas that have moved from the Bds and BCA et cetera et cetera. So we've been beneficiaries of what I think is a significant restructuring.
We are hiring we are doing I think a terrific job on that front. It is not easy. So I don't want anybody to think otherwise, but we have had a pretty successful hiring program pretty successful retention program on that front.
But when we look at the write offs that we've taken let's.
Let's take this quarter for instance, these fixed price development contracts that we took were taken before COVID-19 existed and before this inflationary spiral came ripping down the road.
So I don't attribute that to engineering shortfalls.
And.
I don't and I don't attribute our certification issues and timelines to engineering shortfalls in any way.
Our airplanes are flying incredibly well, our triple seven X made it to Dubai made it to Singapore, and a gangbuster show everyone loved it.
It's flying beautifully it's meeting all of the requirements that we that we laid out but the process of discovery between ourselves and our certification of our regulators around the world. It's different it's changed it's got to be thorough and it's got to be good. So.
I don't.
Except the premise entirely.
That you put forward in the question.
But please don't Miss the fact that we have restructured and we are building our engineering function.
I've always believed is strong I believe it's going to be even stronger.
Okay.
Our next question is from Sheila <unk> with Jefferies. Please go ahead.
Good morning.
Thanks, so much David.
You've alluded to match demand being got several times on the call but.
Also you know youre not at 31, a month on the <unk> on the delivery right.
There yet so how could we think about going above 31, a month. It doesn't seem like you need the Max 10 start to get above that but do you need China to get above it arguably stabilized at that level.
We don't need to 10.
What would be the demand is there.
And we delivered.
37, Max's last months.
And in the month of March and we're working our way towards momentum. So we feel pretty good that the trick for US is to stay focused on that production rate of 31, a month and make it stable and dependable and reliable.
We derisked the China piece, the Dash 10 isn't contemplated in the near term. So if we just execute at that level, we feel pretty good.
Okay Cool and then on commercial profitability, if we exclude the abnormal costs. There was still a loss. So how do we think about that program getting to breakeven and how 78 seven is maybe impacting that.
Yes, I would say the eight seven from a cash margin standpoint, there's still positive they are down obviously, but the future it's going to get significantly better once the delivery start rolling So I think that program is perfectly fine.
And of course, the $3 seven as strong.
You know we might have some mix in there around any given quarter and of course, we had a couple of charges related to abnormal period costs and things like Ukraine, but those are kind of isolated I think going forward as we get deliveries going on three 787, those cash margins will accrue.
And accrete and then.
The 87 and some of the moves we're making we feel pretty good about getting the meddling frame are afraid of going to fill a factory and satisfies demand. So overall, we think that.
BCA margins are headed in the right direction and they're gonna follow deliveries.
Okay. Thank you.
Our next question is from Doug Harned with Bernstein. Please go ahead.
Good morning, Thank you.
Without a doubt.
Hi, I wanted to I wanted to switch over to defense.
David as you said the defense programs that you all are talking about this quarter.
There were bid as fixed price development contracts and somewhere we're very aggressive even to the point of no known below cost bids as investments and some of those problems. We're now seeing them coming home. So I mean these were done well before you came on as CEO , but.
How do you look at the Bds bidding process going forward.
And then well.
Also our the cost overruns on these programs completely due to higher input cost or there are there other execution issues at work here.
Yes, so that's it.
Great question Doug.
Yes, I will have a very different philosophy with respect to fig.
Fixed price development.
And so.
So I don't expect and I hope never to contribute to that issue.
But we are where we are and let me also say.
Because that was on the board at the time the T. Seven M Q2 5 programs were taken.
Yes.
They were written off the day, we took them knowing that we would be investing a fair amount of our own money.
And the yes.
Future of those airframes.
I will tell you this.
I think those are going to be really good bet.
Even though the development costs are more than we had anticipated.
When we get through them, all and deliver on those contracts those airplanes don't go away, they're our futures attached to them and big programs and our view that involve many many airplanes and I think both airplanes are going to be very successful in supporting our military.
So the future's with respect to.
Real airplanes, making real margins in contributing to the Boeing company I still believe strongly in.
And then I will just as I think.
I said earlier in my CNBC interview, you know Air Force, one I'm just going to call a very unique moment.
Very unique negotiation, a very unique set of risks that.
Boeing probably shouldnt have taken but we are where we are and we're going to deliver great airplanes.
We're going to recognize it costs associated with it.
With respect to inputs, yes, it's a it's predominantly.
Covid related inefficiency, because I'll remind us the in the defense World.
When a COVID-19 line goes down or a group of work workers the steps out.
We don't have a whole bunch of cleared people to step into their shoes.
<unk>. So it has always been a tougher tougher application and for <unk> hundred 20, <unk>, where their clearances or ultra high its really tough. So we just got whacked in a number of different areas.
You are where you started is a great question and one that I hope I never contribute too.
Very good thank you.
Thanks, John we have time for one more question.
And that will come from Myles Walton with UBS. Please go ahead.
Thanks, Good morning, Dave I'll stick to a high level. One when you first signed on you had I think seven performance goals and after today I think maybe you'll you'll be able to achieve a couple of them and so I'm just trying to understand how we should measure your the firm's performance and also it begs the question as Boeing realistic.
And its expectations of it's its own performance and have you sort of recalibrated.
Some more realistic things go bad so maybe we should calibrate more margin into our our measures of success.
Wow, that's a big question for the last one.
Very willing to take it on.
You know the circumstance under which I came into the role.
It all happened in a period of weeks and I simply took on the objectives that had been set program by program inside the business.
And I discussed with the board that I would not in any way shape or form hold that compensation.
Program.
Hostage to what I do with the Boeing company I would simply do what is right.
I would simply pursue the programs operate them the way I think they should be.
There are.
Improvement opportunities that would that would compromise my ability to make one of those deliveries and that's what I would do.
And that's what I've been doing and I have been resetting expectations every step of the way the best I can.
We have certain things in the world that we can't predict it frustrates, everyone I get it but what we do is we just keep trying to improve and get better and get back to a normalized rate of cash flow for you cash flow for us.
And I'm highly confident in our ability to do that and I'm highly confident in the Boeing people to do it so I don't want to recalibrate expectations other than.
Timing questions and real world stuff around how regulators approach certification these are real.
They take a little longer than they used to there are a little more thorough than they used to boeing's better for it in the long run and every one of these programs last for decades and decades every one of them and that's how I think about everything I do inside inside the Boeing company.
Thank my board understand it and I Trust that they will evaluate me on that basis, whether or not compensation schemes are perfectly aligned.
Thanks for taking the question Dave.
Thanks.
And that concludes our first quarter 2022 earnings call.
Yeah.
We're sorry your conferences ending now please hang up.