Q2 2022 Boeing Co Earnings Call
Yeah.
Thank you for standing by good day, everyone and welcome to the Boeing Company's second 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 today's 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 youll hear a tone that you've been placed in 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 am turning the call over to Mr. Matt Welch Vice President of Investor Relations for the Boeing Company. Mr. Welch. Please go ahead.
Okay.
Thank you John and good morning, everyone wells.
Welcome to Boeing's second quarter 2022 earnings call.
I am not Welch and with me.
Boeing's, President and Chief Executive Officer, and Brian West Boeing's Executive Vice President and Chief Financial Officer.
And as a reminder, you can 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.
Yes. This is John with AT&T. Please continue.
Yeah.
Interruption there.
Okay.
Start over.
Right.
Sorry, we were muted.
It's good to be with all of you thanks, Matt for the intro.
I want to start my brief comments upfront with just a revisit at the Farnborough Air show Little over a week ago. It was important for US it was in <unk>.
Emotional out coming for our company and our people.
We always look a little better when we are standing next to our products and our flight teams who are operating them. It.
It was great to see and I think everyone witness the triple seven accident flight, which was more than magnificent. The dash 10 also in flight and our investment with Lyft.
And its product in the important Ito market.
We met with our customers, we met with suppliers partners.
The usual, except it didn't feel like the usual because it had been a while.
We're proud of the orders that we collected.
Over the course of that of that week.
Over 200 orders and commitments and importantly, it covered the whole line. The 737, Max are 87, and the Triple seven X and it shows the extent to which our airlines are already our airline customers already anticipating fleet renewal projects and their willingness to bet forward on that.
On that prospect.
So to say there are always busy as they can be trying to get their own fleets up and running and the supply constraints they face.
Dealt with.
Looking at the quarter a lot of things good happened over the quarter.
We are on the verge of returning to the eight seven delivery process I won't give a date I never have that's up to the FAA.
But we've been working closely with our customers and the regulator on those final steps with.
We're proud of our team we're proud for the discipline and the detailed work they applied this over this long course.
And it'll be worth it in the end, we will have a predictable and high quality wine and our customers to be pleased with the products and a reminder to everyone that this 87 fleet Thats out there has been working harder than it's ever worked and it's been performing.
Incredibly well.
Turning to the Max again, one airplane at a time the fleet is performing incredibly well oftentimes exceeding the specification and expectations of our customers have when they originally placed their orders.
And we continue to work hard on predictability of the delivery chain.
We're focused mostly on the engine supply lines and then those second tier constraints that those engine suppliers are facing and I think we've made an awful lot.
Our progress on that front, Brian will give you a sort of our best guess at how this year turns out with respect to those deliveries.
It is it's now I think.
Based on far better knowledge of what those supply constraints are and commitments from our supply side side engine.
Suppliers.
And Bds.
I don't want to skip over the scar liner. It was important it was an emotional up for all of us at Boeing to get back on track where wet dress for the.
Space launch system rocket the biggest rocket yet.
We're looking forward to that to that launch. So we had a we had a good sort of engineering coming out with respect to those achievements and yes, we're still working through some of the challenging macro environment.
Issues, especially with respect to our fixed price development.
Sure.
Contracts and Brian I'll also walk you through a walk you through that.
Finally on the services side.
Pretty much everyone thats been reporting it is coming back and it's coming back in a rapid way our commercial service business was up 30% the carries strong margins with it and so is a big and important contributor to our overall cash flow story.
And again the result of all of this work.
<unk> step forward with respect to stability.
We did get to <unk>.
<unk> operating cash flow positive.
So that puts us a little bit ahead of our internal plan and we feel good about that and.
And we are still committed to be cash flow positive for the for the calendar year 2022.
It's underpinned by a very strong commercial market I think you all know that everyone who spoke to it.
A lot of supply constraints out there with respect to the operators of our airplanes the airlines.
And what they've got it to to get the fleets running efficiently and.
Build their capacity, where it needs to be but they are out there in the market trying to rebuild their fleet for the future and meet that significant demand and so far we have not seen any drawback on that demand and while we understand the sort of recession fears that are growing out there. So far it has not impacted the <unk>.
Asian industry of our customers.
So mostly what we're focused on and I don't think it will surprise anyone and I think I've heard it most of my peers report is the supply chain stabilizing it.
Ensure that it's predictable and consistent and for us in particular with respect to the commercial side of our business. It relates to engine production engine availability. So that we can predictably deliver airplanes to our to our customers. We think we have made an awful lot of progress on that front I know you've heard directly from the engine suppliers they are making.
<unk> progress.
And we've adjusted all of our delivery rate expectations at least in the near term to satisfy those those constraints.
A comment quickly on regulatory and geopolitical.
I'll start with geopolitical.
China.
The good news is that because of the strong demand in the marketplace, we've been able to manage our risk going forward with respect to the airplanes that we have built and are waiting delivery.
We intend to stand by our Chinese Airlines standby, the AAC and get those airplanes back, but the timing, which has been pushed in deferred in light of some of the Covid management issues in China, and some of that geopolitical overhang.
We can suffer our way through that and well and it should not impact the.
The cash flow positive.
Posture that we've taken for the year, so it's a little.
Easier to manage for us it's no less important and we will continue to encourage our administration to work as closely as they came with the Chinese to reopen the trade corridor with respect to aviation a relationship we have enjoyed for over 50 years, and we will continue to support our customers medium and long term it does represent.
Resent the difference between commercial aerospace leadership or not given the size and scale of the China market.
And then on the regulatory front.
We are working constructively with the FAA, we have our heads down and we're working towards certification by year end on the dash seven and the Dash 10 and.
And we believe what we're working on is in fact, the safe option with respect to all options.
A narrow body space and so we're going to just keep plugging away.
And anyway, that's an offset.
As we navigate through this environment stability is the watchword for all of US we want to be predictable, we think that will differentiate us.
And that's why we're we've got we're focused on it we continue to increase our investment in research programs. So readiness program with respect to the next big commercial airplane all the digital modeling tools that are required to be ready for that we continue to invest aggressively in.
And we continue to enhance those underlying digital technologies that we will bring ultimately to the surface services market as well.
Safety quality transparency.
These are the values and this is what we remain focused on.
So before I turn it over to Brian .
<unk>.
The Max it's on track and it's performing.
For customers in many cases exceeding expectations.
We think we're through the most difficult parts of COVID-19.
<unk> are a pivotal and emotional test for the Boeing company and we feel good about it and we're ready for the crude flight global services well on its way back in a big way, we feel terrific about their progress.
And now we are at the detailed moment to get ready for 787 deliveries a moment, we've been waiting for.
We look and feel as though were on the verge of doing so.
So we've taken a long view, we continue to take a long view and we do believe we are in the middle of a turnaround.
And it is beginning to show itself so with that.
I'll end, my opening comments and turn it over to Brian .
Thank you, Dave and good morning, everyone.
This was an important quarter, we made good progress on key programs and a pretty dynamic macro environment affected by inflation labor availability and supply chain constraints.
All of which impacted both us and the industry.
Despite these challenges we improved our quarter over quarter cash performance and importantly generated positive operating cash flow.
Cash was driven by higher commercial delivery volume as well as order activity and advanced payment timing.
This keeps us on track to generate positive free cash flow for the year and higher cash flows in 2023.
We still think about our performance in three parts and remain confident about the trajectory.
First as Dave mentioned, we made progress on key milestones.
We're nearing a return for the 87 and repairing our airplanes for delivery.
We continue to focus on three seven production stability of 31 matches per month.
And we've de risked China from our near term delivery profile.
Next as we see continued progress on these programs, we anticipate improvement in our performance metrics, including deliveries revenue margin and cash flow in the back half of the year.
We also expect cash flow benefits from order activity and favorable receipt timing over the next two quarters.
Finally, our financial performance should start to accelerate into 2023.
Going forward there is a significant opportunity for our company to return to sustainable growth and we look forward to sharing our plans at our Investor day on November 1st and second.
Before getting into the financials I want to make a few points on the current business environment on slide three.
Demand for commercial airplanes is strong, especially the freighter market.
We've seen cargo traffic increase from 2019 levels, largely driven by e-commerce and the efficiency of airfreight.
With more than 90% share of the freighter market. Our lineup is well positioned to capture continued growth.
On the passenger side traffic has recovered significantly but is still well below where it's been historically relative to global GDP.
As airlines are currently in the middle of the summer high season operational and supply constraints are becoming the pacing item for air traffic growth and the market's leading the recovery.
That said the commercial traffic recovery is accelerating and passenger traffic has reached its highest point since 2019 in both North America and Europe .
Domestic traffic remained relatively stable at 77% of 2019 levels as of May.
While China is still lags significantly we saw some improvements in flight operations in June as travel restrictions lifted.
Excluding China domestic traffic was over 90% of 2019 levels.
International traffic is gaining momentum at 64% of 2019 up from just 48% in March especially.
Especially in regional markets, such as intra Europe , Trans Atlantic and use Mexico as well as notable improvements via the middle East and in some parts of Asia.
Overall, our commercial passenger market recovery expectations are in line with what we've shared previously.
We still see overall passenger traffic returning to 2019 levels and at $40 43 to 2024 timeframe.
Taking all of this into consideration. We recently released our 2022 commercial market outlook, which forecasts a total addressable market valued at more than three three trillion.
Over the next decade and demand for nearly 20000 airplanes.
The forecast closely aligns to what we laid out last year and reflects the market's continued recovery.
More specifically, we anticipate demand for more than 14000 narrow bodies or over 120 per month on average over the next 10 years.
Through 'twenty year perspective, we project demand for more than 41000, new airplanes, including 940 dedicated freighters.
We are very confident in our product lineup, which is well suited to capture this long term demand and we feel very good about last week with over 200 orders and commitments at Farnborough.
We appreciate the trust and confidence our customers are placing in us.
Our service business also continues to benefit from growing commercial fleet and strong cargo markets with several Boeing converted freighter and materials management agreements recently announced.
Over the next 10 years, we see a three three trillion service market.
<unk> well as our broad customer focused portfolio of offerings.
In defence and space, we see solid long term markets, both domestically and internationally.
In the United States their support for increased defense spending in Congress to meet the challenges of today.
Internationally many of our fellow NATO members partners and allies have announced plans for increased spending on national defense and we look forward to more specifics around these priorities.
Turning to the supply chain, we continue to experience real constraints.
We're taking action to mitigate risks and a number of areas including engines.
Raw materials and semiconductors.
The stabilized production and support our supply chain, we're increasing our onsite presence at suppliers cream.
Creating teams of experts to address industry wide shortage shortages.
Utilizing internal fabrication for surge capacity and managing inventory safety stock levels and growing more needed.
With that backdrop, let's turn to the financials on slide four.
Second quarter revenue of $16 7 billion declined 2% and.
And we generated <unk> 5 billion of core operating earnings.
After accounting for interest expense and taxes, we had a core loss per share of <unk> 37.
Operating cash flow was positive <unk> 1 billion in line with our expectations and an improvement from the same period last year.
Let's move to commercial airplanes on slide five.
Second quarter revenue was $6 2 billion up 3%.
Primarily driven by higher 37 deliveries, partially offset by lower 87 deliveries.
Operating losses of zero point, $2 billion, and resulting negative margin rate reflect abnormal costs and period expenses, including higher R&D expense as we continue to invest in the business.
On the 87 program, we're very close to resuming deliveries, we're ready airplanes together with our customers and have completed flight checks on the initial airplanes.
As always we will follow the lead of the FAA on the specific timing.
We have a 120 airplanes in inventory and are making progress completing the necessary rework to prepare them for delivery.
As stated last quarter, we're producing at very low rates and we'll continue to do so until deliveries resume gradually returning to five airplanes per month over time.
Similar to the $3 seven program the supply chain remains a key watch item for 87 production and deliveries.
We recorded $283 million of 87 abnormal costs in line with expectations and we still anticipate a total of about $2 billion.
With most be incurred by the end of 2023.
These costs are driven by rework and production rates below five per month.
It is important to keep in mind that cash margin on the 87 remain positive and are expected to improve significantly over time. However, as we deliver the first few 87 airplanes you may see some variability in cash payments as we compensate customers for delays.
The 87 continues to be the most utilized wide body airplane due to his operational efficiency and flexibility.
With over 400 airplanes in backlog recent orders and commitments at announced at Farnborough and additional demand as the commercial market recovers, we see a strong future for the ATM program.
Moving on to the 307 program.
We've delivered 189 airplanes year to date below our original expectations due to three things.
Supply chain disruptions.
Slow time of taking airplanes out of storage and timing of deliveries to Chinese customers.
We don't anticipate making up those deliveries in the back half of the year and will continue to experience monthly variability, including a late month a light month in July .
We now expect deliveries to be closer to the low four hundreds for 2022 short of what we discussed earlier this year as we drive stability and predictability.
We ended the quarter with 290, Max airplanes and inventory of rich.
Roughly half are designated for customers in China.
Given this uncertainty with our customers in China, we now expect more deliveries of airplanes from inventory to ship into 2024.
Due to overall progress on Max production, we did not book abnormal costs in the quarter. Additionally.
Additionally, we've reached agreement on over 95% of our Max customer consideration liability.
Shifting to the Triple seven nine program our status is largely unchanged from what we shared last quarter.
We still anticipate delivery of the first triple 709 airplane in 2025 and continue to coordinate with the FAA to prioritize resources across our development programs.
We booked a $102 million of triple seven abnormal costs in the second quarter in line with our expectations and we still expect to record $1 $5 billion of these costs through 2023, while triple seven dash nine production remains positive.
Turning to overall demand at BCA during the quarter, we booked 184 commercial airplane orders, including 169 orders for the 737 Max.
At the end of the second quarter.
We had over 4200 airplanes backlog valued at 297 billion.
Let's now move on to defense space and security on slide six.
Second quarter revenue was $6 $2 billion down.
<unk>, 10% driven by lower volume and operational performance.
Operating margin was one 1% driven by approximately $400 million of charges on fixed price development programs, most notably a $147 million on MQ25, and $93 million on commercial crew.
This total also includes relatively small cost growth on the <unk> tanker in VC 25, with no one program impacted by more than about $50 million and the drivers were largely supply chain impact and inflation.
All of this will be outlined in the Q.
We also saw the same pressures across a few of the mature programs.
While this performance was disappointing, we're making progress narrowing our development risk profile and remain confident over the long term.
We received $2 billion in orders during the quarter and Bds backlog was 55 billion.
Additionally, the Chinook helicopter has been elected to bring heavy lift capability to the German military.
We also achieved important milestones across the portfolio.
Nasa's space launch system completed a dress rehearsal and the KC 46, eight tanker is now certified to refuel a 97% of the military's air fuel fleet.
Let's now turn to global services results on slide seven.
The global services team celebrated its fifth anniversary this month and continues to perform well, especially in our parks and commercial training businesses. We're encouraged by the overall momentum.
Second quarter revenue was $4 3 billion up 6% and operating margin was 16, 9%.
Results were driven by higher commercial services volume now nearly back to pre pandemic levels and favorable mix.
We also discontinued and engine distribution agreement in the quarter, which will impact our government service revenue profile going forward.
We received $4 billion in orders during the quarter, including a contract for Airlift flight dispatch services for the U S Air Force.
And a contract for avionics upgrades and cyber security support for the U S Navy.
The bgs backlog is $19 billion.
With strong support for our defense business and are highly valued commercial capabilities. Our services business is poised for growth as the commercial market continues to recover.
Now, let's turn to slide eight to cover cash and debt.
We ended the second quarter with strong liquidity comprised of $11 4 billion of cash and marketable securities on the balance sheet.
And access to $14 7 billion across our bank credit facilities, which remained undrawn.
Our debt balance decreased slightly from the end of the from the end of last quarter to $57 2 billion.
Driven by repayment of maturing debt.
Our investment grade credit rating is a priority and we remain committed to reducing debt levels through strong cash flow generation over time.
As far as the rest of the year is concern we still anticipate 2022 total company revenue to be higher than last year, primarily driven by higher commercial airplane deliveries on the $3 787 programs and growth in our services business, partially offset by lower defense revenue.
Looking into 2023, we expect total company revenue growth from this year.
BCA revenue is planned to be higher again on three 7% seven deliveries.
The demand outlook for the defense business remains steady and we expect 2023 revenue to be better than 2022 as the business stabilizes.
While we forecast Bgs revenue to continue to grow next year the growth rate will be tempered as we are nearly back to pre pandemic levels.
Turning to cash we still expect to generate positive free cash flow this year and the key drivers of second half improvement are higher three 7% and eight seven delivery volume or.
Orders of advanced payments.
Bds receipts as well as favorable expenditure timing.
As we look to 2023, we still expect cash flow will be higher than 2022, and we plan to share more details in November .
Overall, our performance is tied to several key items.
Supply chain production system and delivery stability.
Three 7% and 87 delivery ramp.
Successful execution and certification of development programs.
The commercial market recovery and the macro economic environment.
While our progress depends on some factors beyond our control we will remain focused on our own performance and taking the right actions to drive stability and predictability and grow at a growth in the future.
Taking a step back this business and our team have come a long way over the last few years, we've seen our fair share challenges and more hurdles still remain but we're making progress.
Demand for our products is strong we're investing in our future and our people are demonstrating exceptional commitment.
With that over to Dave for closing comments.
Yes, I'll keep them brief.
We do believe we are in the middle middle of a momentum shift.
We're all anxious and looking forward to delivery of our important airplane in the 787.
Again, a reminder of how well it is performing in the field and therefore, the delivery stream is critically important to our customers. So I'll leave it with that and turn it over to Q&A.
Yes, Thanks, David before we start the Q&A as I noted at the beginning of this call. We have provided detailed financial information in our press release issued earlier today.
<unk> estimates and goals. We include in our discussion. This morning involve risks, including those described in our SEC filings and in the disclaimer at the end of this web presentation.
Please also refer to those materials for a reconciliation of certain non-GAAP measures.
With that as Dave said, we are now prepared to take your questions.
Thank you and ladies and gentlemen in order to do that your question be clearly heard we ask that you not use the speaker phone cell phone or phone headset. Please use your handset to ask a question if youre on a speaker phone. Please be sure. Your mute function is switched off so youre signal can reach our equipment as a reminder, in the interest of.
Time, we are asking that you limit yourself to one single part question. Our first question comes from Doug Harned with Bernstein. Please go ahead.
Thank you good morning.
Good morning, Doug.
Morning.
When you look to this year.
And we are looking at in a positive free cash flow for the year.
Okay.
Really depend heavily on two things delivering the restart of the 787 in the.
Deliveries for the ramp.
The ramp in deliveries for the Max which I assume.
Youre going to get to the low four hundreds on this if you look at those two parts.
The 787.
Could you describe on that one what gives you confidence now that you are so close we've heard things before.
Optimism about a narrow restart but.
This appears to be much more eminent now I would guess, even though I know youre not going to try and predict the FAA is timing. So that's on the 787 and then when you go over to the Max.
We've taken that.
Number down into the low four hundreds can you talk about what you need out of that Max profile to be on this positive cash flow time timeframe timing.
And then.
Whats the split between the stored in new production. So a lot of things there, but all in that positive free cash flow objective.
Yeah, Doug So why don't I start with eight seven predictability so.
Like we said in like you acknowledged we can't give you a date, but what we do track is all the work.
And the issues that the both teams have rustled with over this time and we are approaching closure on all of that.
Number of documents the number of analyses the number of sign offs has progressed at a fairly rapid rate here towards the close.
So we see that documentation phase, which has been a been a lion's share of the phase as.
As closing relatively soon.
And then therefore, the readiness of airplanes, which we have been working off at exactly the same moments simultaneously.
Also being in shape to the point, where customers are climbing around the airplanes and making certain that they are also ready for delivery and acceptance. So.
All that's coming together and yes, the FAA remains in control but.
There's just enough workload on sort of both fronts readiness of the airplane and the documentation and certification requirement.
That we just feel like we're on the verge and are reasonably confident in that front. So that's why I feel different this time and I will acknowledge Doug that.
We have felt like it was.
Near term it in previous periods, but not not with the same level of <unk>.
Due diligence that I feel now.
On the Max delivery front, let me turn it over to Brian and he's got to he's got all the numbers. So thanks, Doug So the low four hundreds we think the balance of the year, we will satisfy the cash flow requirements to do their fair share of that total picture. So we.
We think that.
Pretty well aligned in terms of whats come out of inventory versus the production line.
Our biggest objectives on both fronts to do.
Both stable in a stable manner and as you can see from our numbers. We've been doing about 10 ish out of storage. This last quarter, we continue to get a little bit better on that front. So that's something that we're going to work hard on as we turn the corner in the second half of the year. So both are very important to doing both and a stable predictable banner.
Get to that low 400 for the year I will also indicate there's three really other important levers of the cash flows in the back half as a bridge from the first half you mentioned the big two the three seven and the 87 deliveries, but theres also going to be favorability timing from Bds receipts that will work to our favor there'll be.
Favorability of expense timing will accrue to us.
There will be higher order activity in advanced payments, particularly driven by the triple seven adjustments that we made last quarter remember, we added metal wind capacity and the launch of the Triple Seven X freighter version and all of those benefits are going to manifest themselves in helping the cash trajectory in the second half versus the first half so.
Those are the those are the big pieces that we think about.
Okay very good thank you.
Next we'll go to Rob Spingarn with Melius Research. Please go ahead.
Hey, good morning.
Hi, Rob Dave you opened with the supply chain and the troubles there either specific supply chain question and something more general on rates given your engine background from GE, how do we solve this casting shortfall thats now plagued the industry twice in recent years, both now and I want to say around two.
118 is this a short term cyclical issue or is there a greater structural problems. That's the first question. The second question.
Yes, Brian touched on <unk> and the significance of the Max and the.
And the 87 ramp I wanted to see if you could boundary the Max production rate on the low and high end, perhaps with the trajectory, perhaps with and without China.
So let me discuss the engine related it is a.
It is a very important.
Issue to be resolved and it is not yet resolved.
That structural casting.
Part of the puzzle you may recall, two or three meetings ago at their Si I acknowledged that will eventually be the issue and of course it is.
So all of that capacity is limited it's not just about money. It's qualification it's one of the toughest.
Components inside the supply chain to ultimately get to a qualified status as well as just the sheer physical capacity to do it. So I do think we all have to moderate our rates to make sure that we are ahead of that and I do think the the work that we've done Unfortunately.
Our choice not to move up to 38 here is as soon as we had originally predicted.
So based on that constraint.
But I do believe we're at a state now where at 31.
We're comfortable the industry can get there.
And maybe you have already gotten there.
And then we're going to watch as they qualify more capacity going forward.
To make.
Before we pull those rates up so.
Is it medium and long term.
Somehow some way that constrained in my view in the next three to five years has to get solve itself.
Some investment has to get made and capacity has to expand for the engine suppliers to keep up with what I believe will be continued robust demand. So that's may not be a satisfactory answer but that is the reality of the world I've lived in for the last 20 years.
So and then with respect to the other parts of the question I'll flip it over to Brian again, yes.
For rate production.
Production rate.
I wouldn't worry about China as David.
Continue to we've talked about.
We enjoy a pretty robust demand market.
And the China delivery and when that happens.
Separate from our ability to move rate given the other demand in the marketplace. So.
I think I would separate those two its not a pacing item.
What does the trajectory look like.
Four.
Yes.
For Max production, So Dave just talked about 38, do we know when thats going to happen.
No no.
Now ill answer that the answer is I don't know when that will happen.
Stability in 31 and then.
Confidence that engine suppliers will have their castings in order and can predict.
Steady delivery at 38 that will then initiate us to say now 38, I don't want to get ahead of ourselves stability for me is still job one and that's what we'll stay focused on do I think it will be better next year, yes, but I don't I don't know exactly when and I don't want to get ahead of myself.
Thank you.
Yes.
Next we'll go to Sheila <unk> with Jefferies. Please go ahead.
Hey, good morning, David Brian .
Maybe if we could talk about commercial profitability, if we strip out the abnormal costs and then as far as that triple seven.
Youre at two 3% operating margins in the quarter with an average of 33 Max's produced a deliberate.
How do we think about how margins come back as maybe the 77 comes in the supply chain pressures alleviate now how should we look on the step ups.
<unk> operating margins.
Yes, so in the short term it will be a little bumpy as we start to rollout.
The <unk> and continue to get confidence on our stability in the three 7%.
But over time, when we get to a point, where both are stable and operating where we expect them to.
Margin margin, it's going to go up.
I can't predict the number I wont predict the number but they are going to get better and better because we are going to be more predictably in a stable fashion to be able to deliver on both fronts.
Anyway.
Alright, Thank you very much.
Okay.
And next we'll go to Noah <unk> with Goldman Sachs. Please go ahead.
Hi, good morning, everyone.
Good morning I'm.
I'm just going to circle back to these macs to this match delivery discussion because it's a bit confusing.
Depending on how you define low 400, if I subtract the first half of that and divide by six.
Suggests the delivery pace would slow compared to what you did in June .
And Thats, where the higher production rates on the inventory suggests the inventory unwind is slowing.
So why would that happen.
And then just on this underlying rate I mean, any supplier we talk to says they're kind of ready to go and just waiting for direction from you that they're not getting.
The leasing companies are saying there is a narrow body shortage you have a competitor at a much higher rate.
Is it is your answer to Rob's question on that is just purely forgings and castings and otherwise you would be higher.
It's a little hard to square the circle on all of those inputs.
Before Brian gets in the.
It's never about any supplier, it's about one or two.
Surprise, you one way or the other.
And with respect to a medium or longer term rate.
Increases or changes.
Yes, it does actually get down to that engine supplier and it does get down to those castings. So we have to be confident that they are ready.
And that and that we can count on those deliveries so.
Anyway, that's that.
That is the world we live in now.
Hey, Noah.
June .
We are proud of the 43 that were able to deliver.
On a caution everyone as you'll remember April was 28 may was 29.
I just indicated that July is going to be a little light. So I don't want us to get ahead of ourselves in terms of.
Taken a June rate and extrapolating that would be a mistake.
A month in month out we're aiming at stability around 31, some months, where it might be a little lower some months might be a little higher when we look at the whole balance to go and the things we're watching we feel comfortable in that low 400 number.
And hopefully will be better, but that's right now responding to.
How much lead time do you feel like you need to give the broader supply chain to break to the next higher rate whenever whenever that is.
Well first of all we're doing our very best to be transparent and we are.
Always informing them that when we get close how much lead time.
I don't know three or four months.
If it's a formal designation.
But I think they are all like you said I think a lot are prepared to get to those higher rates.
But we need a few specific ones to be ready to get to those higher rates and sorry to keep coming back to that but.
That's really where it is I think we have our eye squarely focused on the constraint that matters. The most.
And as that plays out Youll, probably know as fast as I do and then we'll we'll let that go to the rest of the market I think the rest of the market will respond quickly.
Okay.
Helpful. Thank you I appreciate it.
Yep. Thanks Nina.
And next we'll go to David Strauss with Barclays. Please go ahead.
Okay.
Thanks, Good morning, everyone.
Good morning.
Dave Brian wanted to see if you could.
Tell us how many roughly Matt sorry, 77 deliveries you're assuming.
For the rest of the year, because it's pretty hard.
To kind of bridge that.
Positive free cash flow for the year.
Without assuming a fair amount of 77 deliveries in the last five months as my first question and then the second question you had talked about a meaningful improvement in free cash flow in 'twenty three.
Wanted to see if you could put some bounds around that are we talking a couple billion dollars are we talking.
Hockey the consensus right now is showing eight 7 billion improvement in free cash flow next year I wanted to see if thats within the realm of reason.
Yes sure. So your last question can't wait for November to be able to give you a more detail around that and we'll wait until November .
And then on your question on the 87 number.
We're not going to give a number on that front.
We wanted to get to one.
And we're really excited to get to want SaaS, we can and once that plays out we'll get more visibility, but it's a little too early to quantify that clearly we've got an expectation that we're going to liquidate some 80 sevens over the course of the second half, but I'm, just a little cautious to stick a number out there.
Alright, and quick follow up Dave.
The audit that's going on with the FAA and the.
The change in leadership there you don't you don't think that potentially holds up.
The 87 at all.
I do not.
I do not and I've also asked that question. Many times. So I think we are in.
Good place.
Again.
Im going to follow up just quickly with Brian's comment.
We're not playing the game.
We are working as hard as we can to get some stability in a tough environment.
We chose that November meeting as the moment to sort of say, okay, where are we on stability.
Is the framework for cash flow over the course of the next year.
We're looking forward to that day and that meeting and I think at that moment in time a lot of these variables will have resolved themselves and we can give you a much a much clearer view of what the future looks like.
Thank you very much.
Yes.
Yes.
And next question is from Seth <unk> with Jpmorgan. Please go ahead.
Okay, Thanks, very much and good morning.
I guess Brian .
If we look at the advanced balance of 52 billion I think it's higher than it was at the end of two.
<unk> 2018, when when rates were significantly higher and it sounds like you're telling us that that balance is going to be even higher still but perhaps significantly.
By December 31.
Does that does that ever come down at some point, how do we kind of think about where that where that goes from here and.
And Dave when you say, having some.
Some visibility.
On some of these big questions at the November meeting does that include potentially Max deliveries into China.
So we.
We that balance did come down this quarter.
And we do expect it to come down it will.
It will be the excess PDP burn down that will.
I'll come down but it.
It gets offset by the benefit of incoming PDP is an order receipts and we love that.
Right.
A lever of our business that accrues to us.
The more we do that the more we've got airplanes go into and commitments and orders to our customers. So but overall the trajectory will have to fall.
Quarter in quarter out.
Hard to peg because of that.
Accretive offset.
But if you had in your model at some point like a requirement that this had to that there has to be some kind of 10.
10, plus billion dollar reduction and this balance at some point over time is that is that just an incorrect understanding of how this all works.
Well I'm not going to comment on 10 billion I do know that there has to be the burn down of the access and that will happen over time.
We do our best to try to isolate that as in terms of our projections on the other hand.
The benefits of order volume is something that we benefit from as well so it has been.
<unk> over the last several quarters, it's been taking small chunks down and we expect that to continue to come down, but I can't call. It.
Order of magnitude of $10 billion drop.
The way you're suggesting.
There's just too many dynamics in there and I'm reluctant to make those kind of statements.
Thanks.
And then with respect to China in November I will give you. The update you will probably be as up to speed every week between now and then as I am because it does it does.
Require a bit of a <unk>.
Buying and.
Geopolitical break between China, and the U S.
So at any rate in the meantime, we do deliver airplanes occasionally to China based on pure need and those are mostly wide bodies and mostly cargo.
Great. Thank you very much.
Next we'll go to Cai von <unk> with Cowen. Please go ahead.
Yes. Thank you so much so.
It looks like you produced on average 24 737 in the second quarter.
Comfortable argue that you can kind of sustain an average of 31 per month, because I know that you pause when you have to even though the indicated line rate is 31 and secondly, if you can should we estimate.
<unk> production, plus taking 10 or 12 out of inventory to kind of get to what we assumed for the production rate and.
The second half.
So I'll take the.
Second part of that.
I think that reliably month in month out we'll aimed at 31.
<unk>.
Anywhere from 810 12 is the range on liquidity from inventory it could be in that kind of mix.
And that gets you to the <unk>.
Low four hundreds for the total year.
Is the way I would think about it.
I don't think the pieces go much below eight on the coming from inventory.
I don't think we do better than 12 in any given month, but we will modulate between that and the production rates as we go into the back half of the year.
And again the <unk> the average of 31 with respect to production is a clear objective of ours anything short of that will be disappointing our real objective, though is to make that.
A stable rate in each of the months and we're not there yet so be careful to extrapolate any one month.
And you've made the point that demand is so strong.
You have to see to make the decision to raise the rates on 31 for a month.
I'm going to get back to earlier questions. If I thought I had an engine supply I'd do it today.
Yesterday.
Thank you.
Yes.
Hey, Matt.
And next we'll go to line of Cristina <unk> with Morgan Stanley . Please go ahead.
Thanks, Good morning, guys.
Good morning.
Dave on the supply chain, how much full year mitigating actions cost in terms of higher labor costs or investments from general fabrication or maybe even working capital for buffer stock and also as a follow up on the N. Gen discussion earlier, what can you do to encourage investment casting suppliers to invest.
That's <unk>.
<unk> been trying to encourage them for a very very long time.
Honestly I think it's going to be as is always the case.
They are going to increase their margins.
My guess is it'll be considerable I don't know all their contract timings and all of our relationships with our engine suppliers, but you know how hard they're going to be working and when those margins get to a point where everyone believes it's worth investing a significant amount of money, that's what they'll do and I suspect that they will come.
And I will encourage the industry that in that way and they're going to have to believe in our demand forecasts, which so far I think we've been highly incredible with respect to the long term demand forecast for four airplanes. So on me.
On all those readiness questions and investments yes.
We are you are right to ask the question because we've said to everybody if youre in pursuit of predictability than.
And then you have to invest in all of those buffer stocks and you have to.
Stay ahead of this curve in every way that we possibly can.
And I'd.
I'd say its.
Marginally more investment intensive, but not enough to honestly make that big a difference for us going forward.
Especially when you compare it to our investment in finished goods inventory.
Which right now is.
Bit of a bit of an all time high and.
I will also we haven't talked about it just mentioned everybody that.
While none of us like how we got here.
If you are faced with a bunch of supply constraints as a market over the next couple of years.
Having over 400 airplanes that are finished.
At your fingertips, and yes, they're hard to get out and get ready and back into the marketplace is a pretty good buffer in and of itself and allows us allows us to <unk>.
Extra size, a little extra discipline on the stability front as we begin to March up that curve over the next 18 months. So anyway, I don't want that to get lost.
As a buffer overall.
Thanks, Dave.
Yes.
And next one line of rich Safran with Seaport Research partners. Please go ahead.
Thanks, Brian Matt Good morning.
Good morning.
I'd like to shift the topic to defense suggest a minute.
Your comments about stable global demand.
Could you also comment on international demand in general for defense equipment and maybe in your answer also comment about additional demand for your tanker programs are the <unk> 46, and MQ25, and the reason why I'm asking this is I believe both of these programs.
<unk> had quite aspirations for international sales. So I thought maybe you had.
Can you comment on that as well thanks.
Yes, no I appreciate the question.
We've been bullish on international opportunities.
<unk>.
I am more bullish now than I was wondering when it even began and I was again I was optimistic there and it is because of the world we see in front of us.
It does take a couple of years too.
To take the the threats that are out there that manifest themselves into real orders and sort of long commitments and night.
But I I.
I suspect that's the way this world will turn here in the next couple of years, we had some <unk>.
Early sure indications from those closest to the conflict.
Our Chinook victory here.
Faster than maybe we would imagine why because because our customer is right next to the front.
<unk>.
I am optimistic on the program, specifically that you called out.
They might be on the leading edge of that of that demand curve, but it's not it's not going to happen in the next six months and second it.
It will take us probably a year to get to where that demand begins to manifest into real orders.
Okay. Thank you yes. Thanks.
And we'll go to George Shapiro with Shapiro Research <unk> Research. Please go ahead.
Tom.
Dave I'm trying to figure out where all this strong demand is coming from because the way I look at it as shell orders were the weakest since 2009 for both you on Airbus you are better obviously, but still weakness since 2016, if domestic traffic returns to 2019 and 2000.
23, and the same number of planes should be needed you had less retirements really pick up to a level never before we've seen at five percentage of fleet versus the current one three it is going to be 2000, more planes and needed out there. So if you can kind of just reconcile where all the demands coming from.
Well there are awful lot of irons in the fire.
Like you I I try to compare and contrast, how many irons in the fire now versus where they were.
Certainly in the in the Covid period significantly higher but even in that prior 19.
The world.
Theres just a lot of irons in the fire and there is already a concerned about supply constraints. So you know what that mix.
Ends up doing and then I will just add to that puzzle you know the.
Sustainability constraints and while you may be skeptical and maybe I am too about renewal or.
<unk> taken airplanes out of service I think that day is on us and I think that's going to that's going to be real and in the years ahead you'd.
You'd be surprised.
How many of the <unk>.
Orders, particularly in the mature markets like Europe et cetera, where that is the discussion more than any other which is we need we need to improve the sustainability performance of our fleets otherwise we're going to lose ground.
I will point, if you don't mind to a tool we introduced at the show called Cascade, which is a mess.
Our measure of emissions for every airplane every day for everybody.
And it's meant to be a open tool for the industry do you think about policy changes and all those things that are going to incent.
The renewal of fleets and the improvement on this front that.
That tool is a tool that will show you in our November meeting and its one I hope you'll use because I do think that changes I do think that changes the.
That that that rate of retirement, and a pretty big way.
Yes.
Because I mean, you really got to get a level, we've never seen before to get these 2000 planes out and I mean, if I, even just look at Delta in your recent order with Delta that I've taken the Max 10 till 'twenty five right.
Right now they've got six.
And so there are over 25 years old.
Yeah, no exactly but those 25 year olds.
I believe the pressure on us.
We'll not subside it will grow and policies will get written I think are are trickier honestly speaking for the industry for a moment.
And as you get familiar with the tool that I'm, referring to and think about this our trick is to make sure that policy with respect to the environmental and sustainability performance of the aviation fleet does not get so far ahead of the industry that it stopped the music.
We've seen that happened in the energy world a little bit I don't want to see that happen in the aviation World. So that's why this tool is important to us and stent.
The retirement of some of the old less efficient airplanes, and yes, thats good for us and good for the industry.
But also educate the policymakers so they don't get so far ahead that it begins to begins to constrain the industry's growth.
And how do you think increasingly session concerns affect this you would think there would be less retail amongst them.
While so far I'm not sure I can draw the correlation all the way to retirement, but this.
This general recession things, so far Hasnt hasnt impacted our aviation industry will at some moment Navy pricing.
Price elasticity has been remarkable.
As I look at things and.
And demand for aircraft I think has been prioritized fundamentally due a higher a higher slot in a consumer's list of priorities.
<unk>.
Anyway.
I'm not smart enough to drive the perfect line between one and the other but.
I believe that the retirement world is going to change in a pretty big way.
Okay. Thanks, very much for the color.
Yes. Thank you.
Alright. Thank you everyone for joining us. This morning. This completes our second quarter 2022 earnings call.
We're sorry your conferences ending now please hang up.
Okay.