The Boeing Company (BA) Earnings Call Transcript & Summary

And thank you for joining us. Brian West, CFO and Executive Vice President Finance of the Boeing Company. Thanks for taking time out and spending here with us today.

Nice to be here.

Yes. So maybe to start it off, there's been a lot of headlines about Boeing lately. How do you think about what's confronting Boeing? And what is Boeing doing that encourage the changes required for the company to reemphasize a focus on quality, safety and compliance?

Let me start by saying that we continue to be fully committed to transparency and accountability with our regulators. The FAA is deeply involved and undertaking a tougher audit than anything we've ever been through before. And as they do their important work, we're undertaking comprehensive actions so that we can move forward to strengthen quality and build confidence. There is changes that need to happen. There's no doubt about it. But we're going to do so diligently and expeditiously. But we won't rush or go too fast. In fact, we're deliberately going too slow to get this right. And we are the ones who made the decision to constrain rates on the 737 program below 38 per month until we feel like we're ready. And we'll feel the impact of that over the next several months. The events of January 5, in Alaska Airlines Flight 1282 and everything we've learned since, we acknowledge that we need to improve upon safety and quality and conformance. And one area that we're focused on in particular is something called traveled work. Traveled work has existed for a very long time. And in recent years, we tried to get ahead of it. It turns out it wasn't enough. So now our CEO is calling for a step change improvement in how we think about traveled work. And I've known him a long time, and he's determined on this point like I've never seen because it speaks to our culture and it speaks to our people. For years, we prioritized the movement of the airplane through the factory over getting it done right, and that's got to change. The leadership team got it in the immediate aftermath of January 5. We control how this happens, and it's about our resolve to get ahead and get after traveled work. And Dave is in the factory personally making sure that we do get control of it because once you do reduce traveled work, your quality gets better, your stability gets better. And probably most importantly, the work and the mechanic gets better, and they know that better than anybody, better than anybody. And we've got to listen and act on their behalf. And this goes beyond the 737 program. All BCA programs and factories have to deal with this, and it's going to impact them in the near term as well. Beyond our own factories, traveled work also is something you have to think about with your supply chain, and we've got work happening there, too. In fact, starting on March 1 of this year, we no longer travel work between Wichita and our fuselage supplier in Renton. It had been going on too long. So now we will only accept a fully conforming fuselage from Spirit, which means in the near term, there might be variability of supply. But long term, the predictability that we're going to get is dramatically better and the nonconformances dropped significantly in our factory because it takes those nonconformances and it pushes them upstream where they belong to get actions. That is an example of a step change improvement that Dave is looking for, and we're getting after it. Beyond traveled work, the other things that we're working on to get after safety, quality and regulatory compliance are around things like training, tooling our quality management system and how that links with our safety management system and picking up the signals on the factory floor, incentive compensation, to name a few. So rest assured that there's a lot of change happening at Boeing right now and it's a hard moment. And we'll probably better because of it, but I'm confident that we're going to see our way through it.

So just kind of following up on one of your comments. Can you speak to the news that Boeing might reacquire Spirit? And there's been a lot of incoming questions, I mean, I'm certain you have. How you are thinking about the longer-term strategic synergies and so on and so forth?

So you all would have seen our response to the discussion in the media. When there's more information to share, we certainly will do that. I would say I'd point back to comments that Dave made in January around how Boeing more than 20 years ago probably got a little too far ahead of itself on the topic of outsourcing. And this is probably the example. We believe and Spirit believes that reintegrating these 2 companies is what's best for safety and for quality for the aerospace industry. We have conviction on that. And without going into the synergies and efficiencies, it's really about focus and running that business not as a business, as a factory. Run it as a factory and stay focused on safety, on quality and stability. And that opportunity sits there. And I will also say that one thing that I've commented previously is how important our investment-grade rating is to us. And we work very closely with the rating agencies. And I will say that if a transaction were to occur, we would not use equity, right? We would fund it with a mix of cash and debt. But in terms of how that all plays out, can't comment, but the discussions are happening.

Got it. Got it. Got it. When investors are thinking about the stated financial targets were put out before some of the stuff happened, what framework should they be thinking about now from that perspective?

I'll pick up from my earlier comments. The path to stable financials is a stable factory, and that's what we're focused on right now. In regards to the longer term, the vision and the framework that we laid out in November of 2022 is still intact, still intact. It can take us longer to get there. If I think about BCA, for example, commercial demand continues to be robust. We've recently got orders from American on the 737-10. We've got Thai on 787 order. Ethiopian put in an order for the 777X. So there is real momentum, and we continue to grow. I'd also point out that on the demand discussion, both the 787 and the 737 are sold firm through 2028. So we're quoting 2029 and early 2030s. So that's a steady picture that's been there that is underwriting everything. So the backlog is big, and that backlog also represents over 7 years of production that we've got to go fulfill. At the same time, we've got these 2 big shadow factories we discussed, one in the 787, one in the 737. We are intent on shutting them down as we exit this year and liquidating those -- that inventory, delivering those airplanes to our customers. And the productivity benefit is enormous because you're going to take some of our most highly skilled labor and point it away from rework and point it towards first run production. That's pretty powerful. And then when the time comes, there is an opportunity to increase our rates in our commercial business. And my guess is that's going to happen. And yes, the commercial business, we think about managing it for that longer term '25, '26, the pieces still hold. As it pertains to our defense business, equally, there's some very nice robust demand given the global threat environment that we find ourselves in around the world. And we are competing and our products are showing up nicely and missions are being supported by our customers. We, at the same time, are derisking these fixed price development contracts. Every day that goes by, there's less risk as we move towards delivering those for our customers. I'd also say that in BDS, even since November 2022, we've made even more progress on tightening the underwriting standards and the contracting is getting stronger. And then more broadly, we expect the portfolio within our Defense business to stabilize so that all the products are collectively going to deliver margins that are in the high single digits as we think about the '25, '26 timeframe. And the business will throw off meaningful cash flows. So again, the pieces are holding. A lot of work to do. On BGS, wonderful services franchise that's set up well for the long term. It's going to grow in the mid-single digit top line. It will be capital efficient. The margins are the mid-teens. The cash flow conversions are high. And I would also say that -- this is a part of our business. It's the most global. It's got the most global footprint. And we've got thousands of colleagues who are out with our commercial and our defense customers all day every day to understand what their needs are and how the fleets are performing. And that's incredibly powerful information that we bring back to the company. So BGS also, pieces are clicking. With regards to capital allocation and our framework, no change. We want to generate cash after having invested in our own growth and then delever the balance sheet. And as I've said, the investment grade rating is still a priority. And when all is said and done, we believe the $10 billion of free cash flow that we put out there, it's going to take us longer to get there than we planned. It will be further out in that '25, '26 window. But we believe that the actions that we're taking right now better position us for that long term. Now let's talk about here and now. So we did not give annual guidance. But I will say that there's some important changes that you have to consider. So as we have decided to hold airplanes in position longer and get after this traveled work broadly, it is going to impact revenue, earnings and cash flows both in the quarter and in the year. And in the quarter, our free cash flow will be a usage of somewhere between $4 billion and $4.5 billion, and that's higher than we originally planned back in January. And there's 2 things driving it. First of all, there's a combination of lower deliveries, lower volume at BCA and negative mix from inventoried airplanes. That's a big piece of the delta. And then there are some working capital pressures, both inventory as well as some receipt timing. That is what's going to happen in the quarter. And we also believe that some of that will not be made up for, for the full year. So the full year free cash flow is expected to be in the low single-digit billions of free cash flow generation. We are not at the moment where we can manage the near term for these financial outcomes because of the work at hand around stability. But I will tell you, we're doing everything we can to make sure that we exit the year stronger. And we still are intent on delivering and solving for that long-term target that I just went through. And our expectation is that we'll get more predictable and better positioned not only for our customers, but for our investors. It will take time.

So maybe as a follow-on, you addressed this a bit. How should investors think about a rate ramp? We always get that question. You must get that question. So how -- in that backdrop that you painted, how should we think about that?

So with rates, I don't know exactly what the rates are going to be for reasons I described, so I'm not going to guess. It's not the right time. But I will say that our objective is to get quality up, get traveled work down and drive supplier stability. And some things that have happened recently that reinforce all 3 of those. I talked about quality and traveled work. As it pertains to suppliers, we have recently updated our master schedule to reflect this slowdown that I've mentioned in the factory. But I will tell you that our objective is to keep with the practice that we had in the post-pandemic recovery, where we held the supply chain and pace them just ahead of final assembly. And we're going to keep doing that. What it also means is that some suppliers, we are going to pace differently. And it will get tactical, the ones who were behind get caught up, the ones who are ahead get to slow down. And we're managing that supplier by supplier as we speak, in fact. We understand that when we do this, net-net, there will be spots where we are going to build inventory. And we're doing that because we believe when the time comes and we want to increase our rates, if we want to do it in a way that is stable. A very stable fashion is our objective. So yes, it's an investment, but we view it as an important investment as it's going to be a cash headwind. It's going to be an important investment. When you consider the size of that backlog, we're just going to have to do it and face into it. So in terms of the timing, we're going to take advantage of this moment. We are going to get the suppliers back where they need to be if they were behind. And we're also going to incorporate these findings that we have from our own 737 factory team as well as the FAA. There's lots of things that are coming in that we want to change the production system, and we're going to do that. At the end of the day, I think on the 737, the way I think about it is the first half the rates will be lower. Second half, they're going to be higher as we get towards that 38 per month. And beyond 38 per month will be up to the FAA.

Got it. Got it. So how do you manage the customer expectations, right? I mean there's been a fair number of headlines from customers that are not happy with not getting airplanes. How do you manage that as a company to keep the customers happy?

Yes, we put the customers in a tight spot. The most important thing we do is communicate with them. And they have been supportive of everything we're trying to do to enhance safety and quality for the industry. We are in regular, very transparent communications, and they know precisely where we stand and the progress that we're making. And we, at the same time, have to understand what their needs are as they think about their flight schedules and their passengers. So in the near term, the slowdown has impacted us and it's impacted them, and we're communicating it to them so that we can work our way through it. And we will stand behind our customers. In the medium term, we are using the flexibility to help support the customer. And what I mean by that is the production lines in Renton can do any minor mix model. So we will adjust and we'll be flexible to make sure that the customers get the airplanes they need in the near term. In the longer term, particularly in our 737 family, we believe that the market is going to grow. We believe that the product performs very well in the marketplace, and we're going to keep proving out its capability. And ultimately, our job is to make sure that we can execute on behalf of our customers in a way that's more predictable, more dependable with the highest quality in mind. And we're going to do that one airplane at a time. And our customers are hanging with us, and we're appreciative of that.

And from a penalty perspective, is there any compensation that customers are seeking? Or are we in an environment there's so much demand for airplanes that, that's off the table?

So as it pertains to the events of January 5, of course, there's customer consideration that is going to manifest itself in the quarter in the P&L, and we've got to take care of that. And we're well down the road to do that. And we continue to stand behind our customers with that responsibility. More broadly speaking, as we think about delivering the backlog, these changes and how they impact our customer fleets will create conversations. There could be in a position where there are some things we're going to have to do. But we want to make sure it's contained because our customers really want lift. And there's enough flexibility in the skyline to try to get them the right lift. It might be some changes about when and what model, but our objective is to try to satisfy their growth targets, and we're hard at work to do that. And if there's an impact, we'll deal with it. But there's nothing that's significant as I stand here today.

And is there any one particular area that worries you most? When you think about there's a lot going on. Is there any one tent-pole that's a little longer than the other ones?

I would say our ability to get executing on this new step function -- step change that Dave described is really important because it requires a lot of focus and everyone going in the right direction. I would say in the last couple of years, 3, 4 years, 2021 and beyond, there's been a lot of work at the company. There's been a lot of progress. We ungrounded the entire MAX fleet. We went from producing 0 737s to getting to a rate of the low to mid-30s. We stopped production for a prolonged effort well over a year on the 787. We stood up 2 shadow factories to deal with the rework for those airplanes and both the 737 and the 787. We've dealt with China. And it turns out, all of that wasn't enough, and we were reminded of that on January 5. And now it's a clear message. There's more work to do, and we're not going to be satisfied until we complete this journey. And it's going to be all the things that I outlined earlier around making sure that we could do it in a predictable, dependable, high-quality fashion to deliver the airplanes for our customers. So there is a lot of work to do right now, and you want to do that constructively with our regulators. And that's job one.

Got it. Got it. You mentioned China. But how should investors think about demand for airplanes out of China? And when could we potentially see orders, and that's sort of the one thing that is out there?

China is a very important market. We've been in China for over 50 years, supporting our customers and seeing this amazing growth over decades. We like to see the strong traffic recovery that's been happening. As you know that it was about a little over a year ago where we began to return the 737 MAX fleet to service in China, and that happened through the course of last year, happened in a very deliberate, conscious way, and it got 95-plus airplanes flying and generating revenue for our customers out there, good sign. And we're supporting them as they made that move. Now there's 85 airplanes that were in inventory at the end of the year. That's the focus. We want to make sure we get those airplanes delivered to our customers as they go integrate them into their fleet and grow their businesses. And we're hard at work at that. And having very close conversations as we understand all those near-term requirements and, of course, we want to understand where they're headed long term. Important market, focused on returning to delivery and very exciting times.

Got you. Got you. Another question, I think, that's on investors' minds is, how should we think about the timeline for the certification of the -7, and -10?