The Boeing Company (BA) Earnings Call Transcript & Summary

Thank you for standing by. Good day, everyone, and welcome to The Boeing Company's Second Quarter 2023 Earnings Conference Call. Today's call is being recorded. The management discussion and the slide presentation, plus the analyst question-and-answer session are being broadcast live over the Internet. [Operator Instructions] At 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. Welch, please go ahead.

Thank you, and good morning, everyone. Welcome to Boeing's Second Quarter 2023 Earnings Call. I am Matt Welch, and with me today are Dave Calhoun, 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 at boeing.com. As always, detailed financial information included in today's press release. Furthermore, projections, estimates and goals included in today's discussion involve risks, including those described in our SEC filings and in the forward-looking statement disclaimer at the end of the web presentation. In addition, we refer you to our earnings release for presentation -- and presentation for disclosures and reconciliation of certain non-GAAP measures. Now I will turn the call over to Dave Calhoun.

Thank you, Matt. Welcome, everyone. As usual, I'm going to make a few comments upfront with respect to the quarter. The quarter was solid, very solid for all of our businesses. We continue to make steady progress on our recovery. We do have challenges. The supply chain notably is the most significant, but it's steadily getting better. Overall, we feel good about our operational and financial outlook, including the free cash flow and delivery ranges that we set for 2023 as well as for that 2025 and '26 time frame. We're particularly encouraged by generating $2.6 billion in free cash flow in the quarter. Cash flow is the best metric that we have to measure progress against this recovery. We had a very strong second quarter, and we're confident in the $3 billion to $5 billion target for the year. I'd like to highlight a couple of updates around the businesses. Commercial Airplanes had a very solid quarter. Demand remains high. We booked 460 net orders in the second quarter. And we're proud to announce or firm up key orders, I should say, 220 for Air India and we secured our commitment for up to 300 with Ryanair. Broadly, demand is strong and resilient. The need for 42,000 airplanes over the next 20 years is what the industry is telling us. And with demand strong, the supply side of the system is beginning to settle down. Our focus remains on execution and driving stability in the production and the supply chain, and we're making steady progress. We delivered 136 commercial airplanes in the quarter, including 103 737s and 20 787. Given the progress through the first half of the year, we are on the right path to reach our 737 and 787 delivery guidance for the year. And we're steadily increasing our rates on each program with focus on stability every step of the way. With respect to the Spirit quality escapes, the work stoppage and the bridge impairment, all have been contained and will be remedied as we exit the third quarter. But it will cost us a few deliveries in the quarter itself. We're also progressing across our key development programs: the 737-7, the 737-10, the 777X and the 777-8F. This quarter is a solid proof point that we're beginning to stabilize our operations and are on the right path, and the financial results speak for themselves. I'd like to recognize our team and our customers on the 737 MAX return to service. As of this month, the fleet has flown more than 5 million flight hours and over 2 million flights since returning to service, all with exceptional reliability. The return to service in China is now largely complete as well with more than 90% of the 737 MAX aircraft back in service. More broadly, in China, we're encouraged by recent signs of progress. It's an important market for us. We're committed to our customers there, and we'll be ready to deliver when that time comes. Boeing Defense. In Defense and Space, we still have more work to improve operating performance, but the portfolio is well positioned and we're making progress. Results impacted by continuing losses on 3 fixed-price development programs, Commercial Crew, the T-7A and the MQ-25 have hit us in the quarter. On Starliner, we're in lockstep with our customer. We prioritize safety, and we're taking whatever time is required. We're confident in that team and committed to getting it right. On MQ-25, scheduled pressure added cost to the program, but we've had some recent successes that give us confidence that we're heading in the right direction. We're approximately 25% of the way through the build of our first MQ-25. The static test article fuselage is complete with preparation underway for the start of static testing this quarter. And on the T-7A, the impact was not due to any performance challenge within the quarter and was more associated with our estimates for higher supply chain and production costs in the future, similar to what many in the industry are facing. Even with the cost growth, we're hitting some key milestones on the program. The Air Force successfully completed its first flight of the T-7. We're heading towards the start of a flight test in earnest. We're looking at the program. If you look at the program from award to this moment, we've had some very important successes. We moved from firm concept to early flight testing in just 36 months on this program. And a combination of model-based engineering, 3D design and our advanced manufacturing increased first-time quality by 75% and reduced our assembly hours by 80%. We're also making progress on other key BDS programs. On the Tanker, for example, we have now completed rework on the production aircraft acquiring it, and we have resumed deliveries to the Air Force. As we move through each quarter, we're progressing through these contracts and getting closer to putting them in the rearview mirror. Despite the challenges, we're hitting some important milestones that increase our confidence. Most importantly, these programs will meet or beat the high-performance standards of the warfighter. Given the fixed-price nature of some of our contracts, we're very transparent about these financial impacts. And we're working to stabilize, to derisk and mature them through development. Quarterly charges have declined significantly over the last 18 months. The demand side of BDS is strong. We see solid order activity. In the quarter, we booked orders valued at $6 billion, including key contracts from the U.S. Army for 19 Chinooks, and Germany also shared its plans to purchase 60 Chinooks. We remain confident in our Defense business. Demand is strong, and we will continue to improve operational performance to more normalized levels. Boeing Global Services. Another very strong quarter both on the commercial and government side of BGS, healthy revenue and expanding earnings and margin. We're really proud of this team. They've had solid, steady performance. And they've enabled both commercial and military customers to keep fleets flying through a very dynamic time. Some of our highlights this quarter include the expansion in Poland with a new parts distribution site, Japan Airlines adopting Boeing Insight Accelerator, our digital predictive maintenance solution for the 787 fleet. To wrap up my comments, we've had no shortage of challenges pop up to the start of this year, and we knew that would be the case. We've had conformance items that we've identified or external challenges within the supply chain, even logistic routes, including washed out bridges. This is a complex business. We expect items to come up. And when they do, we're transparent. We take action, and we move forward. This is what progress looks like. We're proud of the team. We are well positioned for the year and for the long term. Relative to the strong demand, we will remain in a supply-constrained world for the foreseeable future. And with that, I'll turn it over to Brian.

Thanks, Dave, and good morning, everyone. Let's start with the total company financial performance. Second quarter revenue was $19.8 billion, that's up 18% year-over-year. The growth was primarily driven by higher commercial volume, including increased 787 deliveries. Core operating margin in the quarter was minus 2%, and the core loss per share was $0.82. Margins and EPS were driven by expected abnormal costs and period expenses as well as losses on 3 fixed-price development programs in our Defense business, which I'll cover later. Free cash flow, as Dave mentioned, was positive $2.6 billion in the quarter, significantly better versus last year and last quarter driven by higher commercial deliveries and favorable receipt timing. Relative to our expectations shared at the last earnings call, the strong order activity in the quarter drove over $2 billion of favorable advanced payment timing. Keep in mind, most of this was expected to incur in the third quarter. Turning to the next page, I'll cover Commercial Airplanes. BCA booked 460 net orders in the quarter, including 220 with Air India, 39 with Riyadh Air and signed a purchase agreement with Ryanair for up to 300 737 MAX-10s. We now have over 4,800 airplanes in backlog valued at $363 billion. Revenue was $8.8 billion, up 41% year-over-year on 136 airplane deliveries driven by the 787 program. Operating margin was minus 4.3%, a sequential improvement versus the first quarter as anticipated, but remains negative as we continue to be impacted by expected abnormal costs and period expenses, including higher R&D spending. As Dave noted, we worked through a number of operational challenges so far this year. We're making steady progress, and we'll continue to focus on stability as we look to increase production on key programs. On the Spirit work stoppage, we were pleased to see a quick resolution, and we will work through any limited impacts to production. Overall, this is not expected to change our production and delivery outlook. On to the programs. On the 737, we had 103 deliveries in the quarter, including 49 in June, a positive proof point that the production system is stabilizing. In regards to the Spirit fitting issue that we discussed last quarter, in May, we resumed deliveries of rework airplanes and also began producing newly built airplanes meeting our specifications. In light of this progress, we are now transitioning production to 38 per month and still plan to increase to 50 per month in the '25, '26 time frame. As we move to the higher rate, we'll continue to prioritize stability, and it will take some time to consistently deliver at 38 per month off the line. We still project full year 737 deliveries of 400 to 450 with sequential improvement in the second half. We ended the quarter with approximately 228 MAX airplanes in inventory. This includes 85 for customers in China and 55 that have now been remarketed as part of the plan we've previously discussed. We still expect most MAX inventory airplane to be delivered by the end of 2024. Moving on to the 787 program. We had 20 deliveries in the quarter and still expect between 70 and 80 deliveries this year. We increased production to 4 per month during the quarter and still plan to reach 5 per month by year-end. We ended the quarter with 85 airplanes in inventory, and rework is progressing nicely. And we still expect most to be delivered by the end of 2024. We booked $314 million of abnormal costs in the quarter, in line with expectations. And there's no change to the total estimate of $2.8 billion, which is largely done by year-end. Finally, on the 777X program, efforts are ongoing, and the program time line is unchanged. Abnormal costs were $136 million as expected, and we've lowered our total estimate from $1.5 billion to $1 billion, which reflects plans to resume production later this year rather than early 2024. Moving on to the next page, and Defense and Space. BDS booked $6 billion in orders in the quarter, including an award from the U.S. Army for 19 CH-47 Chinooks, and the backlog is now at $58 billion. Revenue was flat at $6.2 billion, and we delivered 38 aircraft in the quarter. Operating margin was minus 8.5%, primarily driven by 3 fixed-price development programs. The first was related to Commercial Crew tied to schedule delays that we've previously shared and had a $257 million impact; the second on MQ-25 related to a schedule shift that drove a $68 million impact; and lastly, on the T-7A production contract, we revised the long-term production cost estimates that will occur over several years starting in the 2025 time frame, which drove an impact of $189 million. These determinations were mostly made over the last few weeks as we closed out the quarter. Similar to last quarter, roughly 60% of the portfolio is generating solid levels of performance, in line with historical margins. But we continue to see operational impacts from labor instability and supply chain disruption on other programs that contributed to lower margins. Looking at BDS in aggregate, it will take time to return to normalized levels of performance. We're confident and we're focused on the path to high single-digit margins in 2025, 2026. The strong demand across the customer base, the portfolio is well positioned and we're focused on execution. Moving on to the next page, let's cover Services. BGS had another very strong quarter. BGS received $4 billion in orders during the quarter, and the backlog is $18 billion. Revenue was $4.7 billion, up 10% year-over-year primarily driven by favorable volume and mix in both Commercial and Government Services. Operating margin was 18%, an expansion of 110 basis points versus last year with both our Commercial and Government businesses delivering double-digit margins. Operating margins in the quarter were higher than expected due to favorable mix, which we don't expect to continue at these levels. In the quarter, BGS announced an expansion in Poland with a new parts distribution site, a collaboration with CAE. And the Japan Airlines has adopted the Boeing Insight Accelerator for their 787 fleet. Turning to the next page, I'll cover cash and debt. We ended the quarter with $13.8 billion of cash and marketable securities. And our debt balance decreased to $52.3 billion. In the quarter, we repaid $3.4 billion of maturing debt and provided a $180 million cash advance to Spirit as previously shared. Year-to-date, we've repaid $5.1 billion of debt, which is essentially all of our maturities for the year. We also maintained $12 billion revolving credit facilities at the end of the quarter, all of which remain undrawn. Our liquidity position is strong. The investment-grade credit rating continues to be important. And we're deploying capital in line with the priorities we've shared: invest in the business and pay down debt through strong cash flow generation. And flipping to the last page, I'll cover our outlook. The 2023 overall financial outlook is unchanged from what we've previously shared, including $3 billion to $5 billion of free cash flow generation. The operating cash makeup by division will likely be different with BCA and BGS better than expected and BDS lower than expected due to the lower operating performance. Net-net, we still have confidence in the $3 billion to $5 billion of free cash flow for the year. Stepping back to address the state of the market. Commercial demand remains strong across our key programs and services. Cargo remains healthy. Global passenger traffic was up 39% in May and is at 96% of pre-pandemic levels, 105% domestic and 91% international. China pass-through traffic in May was at 87% of pre-pandemic levels with domestic traffic up more than 300% year-on-year and above pre-pandemic levels. Defense demand is also robust, and the FY '24 budget continues to progress in line with our expectations. Our portfolio and capabilities are well positioned to support the needs of the nation and of our allies. With demand strong, we still find ourselves in a supply-constrained environment. And our focus continues to be on execution, both within our factories and the supply chain, as we steadily increase production. Relative to the first half of 2023, we continue to expect operating and financial performance to improve in the second half. On the third quarter specifically, we expect BCA margins to improve sequentially, but remain negative, and we're not anticipating much in terms of BDS profitability. The 2Q effective tax rate of 63% included cumulative adjustments related to the projected valuation allowance. These adjustments will continue to weigh on the tax rate for the remainder of the year. And given the strong results in 2Q cash flow, 3Q will be lower sequentially, still positive and likely in the hundreds of millions of dollars. All things considered, we feel good about where we're at on the road to recovery. Right now, we're squarely focused on meaningful operating performance improvement, including deliveries, revenue, margins and cash flow, all of which will improve as we progress through 2023. And while the challenges remain, we're headed in the right direction. Ultimately, we expect our operational and financial performance to continue to accelerate, align with the plan we laid out at our IR Day last November. And we are confident in $10 billion of free cash flow in 2025, 2026. With that, I'll turn it over to Dave with some final remarks.

Again, a solid quarter. We are wrestling our way through the BDS contract -- fixed-price contract exposures that we have. We're confident we will see them through. And as I've said before, most importantly, the products that we deliver to warfighter will perform as or better than expected. So with that, I'll open it up to questions.

[Operator Instructions] And our first question will come from Sheila Kahyaoglu from Jefferies.

So just digging into Commercial Airplanes' operating loss of $383 million in the quarter, how do we think about this turning positive? Can you maybe talk about the biggest drivers thinking about production rates stabilizing and then going up, what that does to operating margins? And how do you think about finalizing abnormal cost concessions and just pricing playing into the mix?

Sheila, I'll start off with that. Last quarter -- first quarter, I should say, BCA margins were negative 9%, and we knew that they were going to get sequentially better, and they did. They got down to negative 4%. So it's good progress. In terms of where we're headed, as we think about the back half of the year, we will still have some negativity, although sequentially better in the third quarter. And then as we exit the year and moving over into the first quarter of next year, those margins will move positive. We're confident in that. And some of the things are the ones you mentioned, which is rate ramp. You'll have some of this abnormal behind us in the rearview mirror and will be done. And of course, the pricing environment is pretty good. So all of that give us confidence that we will get these margins positive. And it will likely be towards the end of the year, early next year. And the team is laser-like focused on meeting those expectations.

The next question is from the line of Peter Arment from Baird.

Brian, staying on that same line of questioning on MAX profitability, maybe you can just walk us through how we think about cash profitability will improve with these scheduled rate breaks. Do we need to hit like a higher rate of 42 a month before we see meaningful improvement there? Or is it more about the -- once the liquidations are complete in 2024?

Well, it's both. Certainly, the liquidation benefit is something we're very focused on because when you get rid of both on the 737 and the 787, those dual factories, it's just going to be a huge relief for the business to put that behind us. And we're tracking, and we're going to make good progress. And that will be substantially behind us as we move out of 2024. So that, no doubt, is a very big deal, coupled with the rate breaks. We just announced going to 38. That's a big important move, and there'll be subsequent rate breaks beyond that. And all of that is going to play into a margin trajectory that's going to start to look a lot more normal. And by the time we get through 2024, and we're focused on that '25, '26 time frame, as we've said, BCA margins will look a lot like they did before in that low double-digit area. So we know what we have to go do. The levers are clear. We just got to execute.

The next question is from Myles Walton from Wolfe Research.

One clarification and one question. So I think, Brian, you said that you expected second half improvement in 737 deliveries. So are you implying that we're now going to be at the top end of the delivery range for the 737? And then I was intrigued by the 777X pull forward of resuming production there. Dave, was there something on the regulatory front in terms of progress that's helping you pull forward that schedule at this point?

No, I wouldn't say anything has changed. We're still confident in the regulatory process. This is our desire to simply get ahead of the production curve. There's no -- yes, no breaks on the regulatory side. We still have margin in that. And hopefully, we can beat it. But all the projections we've given you, I think, are still intact.

Myles, in answer to the 737 forecast that we get to the high end, we -- of course, we did 103 in the second quarter, and the quarterly rates will be higher than 103 is our expectation. Of course, we had a little bit of the Spirit impact in there. That's why that will get sequentially better. And in terms of the rate itself, we squarely see the middle of that range as high confidence. And the question is going to be how much can we move from the middle of the range up to the higher end. And we'll prove that out day in and day out as we execute and build more airplanes. So we feel very good about the range, and we'll keep reporting as we see the execution. But right now, a degree of confidence in that front.

The next question is from Jason Gursky from Citi.

Brian, one just bookkeeping question and then one question on Defense margins. On the more bookkeeping one, the Services business is posting some pretty good margins here, and you're noting mix. I'm just wondering when you -- if you could just talk a little bit about when you kind of go back to more normalized margins in that business based on what you're seeing in your inventory mix there? And then on the Defense, you've historically talked about 60% doing pretty well, 15% these development programs and then 25% some legacy programs. That's how you've talked about the margins in that business. Can you confirm that 60%, 15%, 25% is still the right mix of things? And then kind of what's based -- or what's in your assumptions on getting back to that high single-digit rate in that '25, '26 time frame in those 3 buckets?

Sure. So let's take Services. Yes, they just had an excellent quarter. And both the Commercial and the Government businesses were performing incredibly well. We still have expectations of that business, and we want them to be doing margins that are in the teens. Will it be 18% quarter-in, quarter-out? No, it'll come back a little bit. But when I say come back a little bit, we still feel like our long-term view of that business should be in the mid-teens. And from time to time, it'll be a little better, and we'll keep pushing the business to be just as good as they can be. But I don't expect it to step back dramatically. We feel really good about where that business is positioned.

I'd just comment on that. It's just important to note that they are still in an extremely supply-constrained world. Everything they do is supply constrained. So pricing is a little favorable. Anything that they can get out of their shops are being taken. That has not changed. And so how long that lasts? My prediction is it's going to be quite a while. I don't see any letup with respect to the need for lift out there, and everybody is fighting for the next part. So I think that's just the moment we're in.

And in regards to the Defense business, you've got the pieces correct. The way we think about the fixed-price development programs that we've talked about, at the 15%, we just have to stabilize those and execute and know that every quarter, we're getting closer to having those products over and delivering behind us. The next piece of the 60%, very stable. There's a lot of very nice products in there, and we have to keep them stable. And with lean efforts and other things, we actually could get a little bit of productivity out of those programs to get better and better and better. But that's -- keep that 60% stable and keep it moving. And it's the 25% that's left over, that's the part of the portfolio. It's a handful of programs, and they are not where they need to be. They are negative. They need to swing positive, and there's a plan to go do that, but it's just going to take us a little bit of time. In terms of what this portfolio looks like in the '25, '26 time frame, we believe the 15% will be stable, right? We'll be at certain milestones where a lot of the stuff will be in the rearview mirror. And the 85% that's left over is going to be performing at very attractive margins because we've done the hard work of stabilizing and then trying to bring in even more productivity programs, including lean manufacturing, so that these businesses can get even healthier and stronger. So the road map is clear. It's on us to execute it, but we think we've got all the levers working. And the team is very motivated and laser-like focused.

The next question is from Cai von Rumohr from Cowen.

So basically, to follow up on Jason's question, if we take out the loss programs, BDS still was marginally red. And if we take the 60% that should be earning, they should be earning $300 million. So if the 25% losing $300 million, that's the one I really don't understand. How bad is that? And if you say you're going to have modest profits in the third quarter, I mean, again, it looks like there's fairly significant underperformance there. Maybe give us a little more color on the programs involved and what it takes to get them black.

Yes. Sure, Cai. So we're not going to have modest profitability in the quarter. I think we said that we're not expecting much at all from the BDS portfolio, just to be clear, because these things aren't going to solve themselves in the near term. Yes, it's a significant gap. It's a hundreds of millions of dollars of swing that we have to go execute to get these handful of programs in a better spot. And they are complicated situations with complicated products and factories that almost went dark during the pandemic. And we've had to bring them back to life. And that takes time because one is to get them up and moving and then also to get the right labor that's trained and knows how to do some very complicated work. So we know what the programs are and how we got to go attack them. It just takes a little bit of time and a little bit longer than anyone expected. But we will make progress, and we'll work our way through it because we know how to make these programs and these products because we've been doing it for a while.

Is there a -- is part of the problem that you got stuck with contracts, those are mostly fixed-price contracts and with inflation and all this disruption, that's the problem? And if so, do any of those contracts reach their end so that you can basically get better pricing going forward?

Yes. Let me just comment on that. Not really. So we're going to have to live within this envelope with respect to pricing and contracts. We might get some ups here and there and modifications here and there, but I wouldn't say that's the answer to this. The answer is really to get a line that started from 0 because it was more or less dark, as Brian said, and get it up to pace. A couple of these products are -- they're not the same old product. There's actually a lot of new, I'll call it, capabilities embedded in these products. You can imagine what those are. I can't talk about them on the call. And so we're just working our way through learning curves. If we didn't see progress on those learning curves, we wouldn't be giving you the guidance that we're going to be back to where we were. We do see progress. It's not an act we haven't seen before. It does take time, frustrating for everybody, but we're getting there.

The next question is from Robert Spingarn from Melius Research.

Dave, you've been really clear on no new airplane right now. But at the same time, you've talked about and Boeing is working on the Transonic Truss-Braced Wing aircraft, which seems to be a pretty exciting design for the narrow-body market. And while I know it's early in that process, do you think it has a chance to enter service with current gen engines like the LEAP or the GTF and then maybe later take on a CFM RISE? And then as a second part to this question, could this aircraft actually service the large narrow-body market as well, something against the 321?

Yes. Look, I'm glad to get the question. We're heavily invested in this. We like what it could potentially deliver to this market, a level of performance that the industry is used to seeing with brand-new programs. So now for me to pick and choose the variations and the power plants at this stage is probably not smart. Suffice to say, we are intent on proving this technology. We are hopeful. And if it matures the way we think it will and that NASA, frankly, thinks it will, I do think it will see service. And then those power plant decisions will be exciting. You are right, we can use existing power, but we would prefer, frankly, to have a bigger fan diameter ultimately and maybe even open rotor someday. So those are all considerations without a doubt. I don't want to make choices too early. But all of those options that you're talking about are still out there. We just have to prove and mature the technology. If it behaves like it did in the wind tunnel, we're in a pretty good place.

Your next question is from Kristine Liwag from Morgan Stanley.

On the 737 MAX production rate increases of 38 per month, can you just give us more insight in terms of what's happening with the supply chain? What's their health? And any particular bottlenecks that you're monitoring in order for you to get to that rate? And any other additional color regarding the timing of this step-up would be appreciated as well.

Yes, Kristine, we're there. And we're confident that the supply chain is coordinated to deliver on this. They've known about it for a while, and we're happy to be able to move forward. So we feel very confident. In terms of subsequent step-ups, the master schedule that's been out there is clear on what those look like. And we'll do it a step at a time, and we're happy we can make this first move to 38.