The Boeing Company (BA) Earnings Call Transcript & Summary

All right. I think we're going to go ahead and get started. I'm Myles Walton, the aerospace defense analyst here at Wolfe Research. Welcome to the next block of sessions, will be focused more on aerospace defense than airlines and transportation, which was the last block. Pleasure to have us kick off with Brian West of The Boeing Company. And I'm going to go ahead and hand it over to you, Brian. I know you had some comments to make, maybe introductory at the beginning and also just to, maybe an update, there was an article yesterday, I think, around China's delivery acceptance of some of the planes due to cockpit audio recorders. So I think you'll make an update on that as well, and then we'll go right into Q&A.

Terrific. Myles, thanks for having me. It's nice to be here with everyone. Broadly, I would say there is quite a bit of change happening at the company, both large-scale change and many, many smaller-scale changes, all in the name of improving quality, reducing traveled work and getting more stable. And if you're on the inside, you're seeing progress in many, many ways, day in, day out, week in, week out. And that's got people convinced that we're on to the right things around trying to take step function changes around things like traveled work. So it's encouraging, although you all can't see the benefits quite yet. We continue to be convinced this is the right path and it's the right time to make these investments on behalf of the long term. Now I also recognize that this can be disruptive, both operationally and financially. And we will, at times, frustrate both our customers and our shareholders. But this is the right time, and this is the right set of actions to take. I would say there's probably three phases to think about in the relative near term. As we exit June, we expect to be in a much better place than we've been in the first half, and that will begin to get us more predictable. And then we'll move into the second half of the year, and our operational and financial performance is going to get better, and it's going to accelerate as we go through the third and fourth quarter. And that will be the benefit of all the work we're doing right now. And lastly, as we enter 2025, and this is the most important part, as we enter 2025, we'll be more or less in the spot where we thought we were this year but with a much stronger foundation because of the work we're doing right now. And I understand everyone would wish it would go faster, but it's a long-cycle business and we have to be disciplined. We can't rush. We can't push the factory too hard or the system too hard because the payoff, if we do this right, is going to be big beyond 2025, and that's what we're aiming at. In regards to the question on China. So there was a certified cockpit voice recorder that's been active since 2022, and this is something that's in all the programs, so it's in the 87, the 37 and the 777X. The CAAC has asked for additional validation on a lithium battery in that recorder. And because of that, we have not been delivering airplanes to China recently. We will work very closely with the regulator. We follow their lead. We will work closely with our customers, but that will very likely have an impact in the quarter on deliveries in our cash flow.

From a deliveries perspective for the second quarter, should we expect improvement sequentially versus 1Q? Should we expect similar? And then maybe one of the questions that I framed on the earnings call was around these conforming fuselages running through the 37 production system, because we're looking at the deliveries and where the improvements are being made is really in the heart of the production system. So maybe give us a flavor of both the delivery and the production system health.

Yes, on 737. So on the production system, as I mentioned, there are a significant number of changes that are underway. And again, it's all around focusing on stability, reduced traveled work and better quality. The first half, we had said, is going to be a production rate below 38 per month, as we do the important work that I described. And then in the back half is where we're going to accelerate back toward the 38. And the fuselage, the heart of the production system that you mentioned, is an incredibly important component. And the team has worked with Spirit. They are making good progress with a set of enhanced protocols that we put in place effective March 1. So they're hitting their early expectations. We're not there yet, but we expect a good positive trend in the trajectory so that we could have material progress as we get outside of June, which is then important for the second half trajectory that I expected. So in terms of deliveries itself, I would say there is not going to be a step up in the second quarter. The second quarter will be more or less in line with the first quarter, a combination of the China impact I just described as well as working our way through solidifying our new production procedures. So it's -- you're not going to see that in the second quarter.

Okay. I think next week is the week you have to submit to the FAA the improvement plan for the 737 MAX. Aside from the obvious step of reduction of traveled work, what other things are being imparted into that plan? And I think the FAA administrator said something last night or this morning about you're at the start of a longer process of improving quality. Maybe describe what he's referring to.

Sure. So the engagement with the FAA has been underway since February when the audit was commenced. And we've hit a 30-day check-in. We had a 60-day check-in. And next week, there is a final submission of the 90-day plan. Rest assured that there's been lots of dialogue between all of these waypoints. At the working team level, the engagement is constructive. And I expect next week, we're going to get some good feedback. In terms of the changes that have been underway, we've talked about the one big one, the fuselage. We've already seen evidence that because of the enhanced protocols that are in place in Wichita, once we get fuselages under those new protocols and when they get to our factory, rework is lower, flow time is better, traveled work is less. We're seeing the benefits that we expected. And again, we're not declaring victory, but we know this was the right move, and we will begin to reap the benefits. Other improvement areas beyond the fuselage, we did a stand-down with thousands of employees and got thousands of recommendations. I would bucketize it into three areas of where we are seeing improvements. One is training, one is simplification of our work instructions and the third would be tool availability. And our objective is to make sure that the mechanic is fully prepared to do the work as intended. And those are basics, but they are important basics that we have a lot of people working very hard to make sure we achieve improvements across the board in those areas. So, progress. The 90-day plan, I would agree, is not a finish line. We look forward to the feedback that we'll get after next week. We look forward to continued engagement with the FAA. Regardless, we view this has been a long-term investment that's going to be good for the company, good for our customers, good for the industry.

I think your fuselage suppliers talked about 31 a month for the rest of '24, but you talked about 38 a month in the back half of the year. And those two things will have to line up at some point, realizing Spirit has inventory in the near term. Does that put significant pressure on -- operationally for them to go from 31 to 38 the front end of '25?

So we're working very closely with Spirit every day to support our production plans. And as you said, that number of 31 per month is out there from the production side. Keep in mind, there is a large number of fuselages that are accounted for either as ship in place or WIP. And the Spirit team has set up and staffed a number of rework stations to get after the ship in place and the WIP fuselages. So that will supplement the 30 per -- 31 per month, and that's going pretty well. As I mentioned, they're getting more confident in the enhanced protocols and we're getting clean fuselages. As we exit -- as Spirit exits this year, we would expect these inventory fuselages to be largely complete. We'd expect these resources to be redeployed, and we would expect the production line to be more confident with the -- institutionalize a new set of protocols. And we think that's a good thing. And then as you move towards the end of the year, all of this is in line with what our rate readiness expectations are for Spirit. And it's aligned to what our master schedule considerations are. And then, of course, if you step back, you've got the rest of the supply chain to synchronize, and all that is going pretty well. So fuselages, very key part of the equation, we can see the visibility to their production plans and facilitization plans. And we believe that we can move out of this year at the rates that we've described. So I think that's going pretty well.

Okay. So switching gears to the 87, if that's okay. The company recently disclosed a system-level checkout test that was documented but may have not been done. What's been the response from the regulators? You've sort of informed them accordingly? And what impact does that have on your delivery production profile looking forward?

So a teammate in Charleston identified an irregularity with a required conformance test on the wing body joint. And immediately, this employee raised their hand, raised it to leadership and it quickly escalated to the program leadership. And that program leadership investigated the situation. They moved decisively to remedy the situation, including alerting our regulator. Importantly, the engineering team assessed that this situation is -- does not create an immediate safety of flight risk for the in-service fleet. So now, we've got to go conduct this test out of sequence for any airplane in the build process and anything on the flight line. And yes, it will have some near-term impact as we complete that work. I don't believe that this will take us off our underlying production plan to go from our rate today, which is under 5 per month, and then get back to the 5 per month later in the year. I also think, importantly, we commend this colleague. This is exactly the kind of thing we want our people to do, is raise their hand in an open culture if they see something that does not look right, and the leadership across the board that listened and then acted swiftly. And rest assured that program leadership team now has moved out and looked more broadly to ensure that they got a handle on where this can never happen, and they're working on that. And again, I applaud the team down there. In terms of the 787, beyond this one item that you mentioned, I will say that the supply chain constraints that I talked about at the last earnings call are still persistent. We still have heat exchangers and seats that are pacing items that we are working our way through, and they're tough.

Is it still you expect them to resolve by the end of the year? Or is it...

We'll be in a better spot. We've got a plan to get there, but second quarter deliveries will look more like first quarter's growth.

Okay. The 777X, obviously, you've invested a lot so far. You're continuing to invest in it as it moves towards certification next year. Can you size maybe the cash flow drag that you're experiencing now, that you'll experience next year and sort of the pathway looking forward? And also, is 2025 still the realistic expectation for certification? And what does that dictate us through relates to TIA from the FAA?

Let me start with the 777X on the demand front. Customers really like the airplane. Last quarter, we were able to get a few wins that were important. In terms of the time line, there's no change to the entry into service or the first delivery, which is targeted to be 2025. And the milestones that get us from here to there are normal, and we're working through them. There's nothing to report that's changed on that front. In terms of the cash question, as expected, we're starting to see pretty significant investment implications around this production ramp. And the near-term working capital pressure associated with the new airplane is as expected. And in the first quarter, as an example, it was about $800 million higher. And it's going to continue to grow as we move towards entry into service. But we always contemplated this, and this is part of the investment of launching a new airplane. So everything is pretty stable. There's no changes. We know what the cash flow implications are going to be over time, and we're mostly focused on trying to knock down these certification milestones.

Would this year be -- would next year be better than this year from a cash consumption, assuming your plan stays?

When we started to ramp up production in the last year, we started to see the big lift on cash. That's going to be pretty steady going forward. I don't think there's a big drop-off. So we know it's in front of us. We're prepared for it. And the best thing we can do is move through certification and then deliver airplanes to customers who really want the lift.

Okay. So speaking to the order book, last year was pretty outstanding. How is '24 shaping up? And sometimes I think, did we just sign up to too many commitments because now we have to deliver against those commitments? What's the level of sort of risk mitigation of the backlog at this point relative to the commitments that you're standing on?

So the order environment is robust. And as you point out, last year was record orders. And in the first quarter, it was solid. We booked 125 net orders, 85 were 737-10s for American. We had 28 777Xs, as I mentioned. The backlog sat at $448 billion with over 5,600 airplanes. So it's been pretty good. And there's really no sign that the underlying demand signal is slowing down. In fact, you probably saw in March, global passenger traffic was up almost 14%. Cargo was up over 10%, and that's cargo's fourth consecutive month of double-digit improvement. So the signals continue to be pretty good. And the product line holds up really well competitively. And we'll continue to compete campaign by campaign in this demand environment. And the good thing is that we stand ready to help resolve the pent-up replacement demand as well as this underlying growth that's going to underwrite our customer fleet plan. So demand feels pretty good. Now we have frustrated and disappointed our customers because of some of the production supply chain issues that we're up against. And while I understand that frustration, the most important thing we can do for our customers and the supply chain in the industry is to focus on the actions that are underway as we speak, so that we could stabilize this production system, improve quality and get more predictable. And there are changes to the backlog that we have made and continue to make with our customers to make sure that they can get the lift at the right time. There's nothing that's changing dramatically, but we do have flexibility in order for us, one, to be able to give them schedules that meet their fleet needs, albeit at reduced levels, but also confidence that in the future, we're going to get more predictable. And we communicate transparently and frequently to make sure that they know what's coming at them from our perspective best we can, knowing that ultimately, as we get more predictable, we'll never take our eye off the ball on safety, quality, and we'll get them the airplanes they need. But we believe that we've got a path forward. We don't believe we need to make unnecessary trades. And we have to stay very close to our customers and make sure that they're aligned with their fleet planning needs.

So you talked about the 2Q deliveries looking similar to 1Q. Does that mean the burn could be as significant as 1Q? Maybe just start with that, and then we'll get into what the implications are for the full year.

Sure. So the second quarter is going to be more in line, possibly a little worse than the first quarter, driven by the delivery we mentioned around China as well as some of our own factory disruptors that are working their way through. And then that's going to be hard to make up. We expect the full year now to be a use versus generation of cash flow. Importantly, the first half, obviously, a usage of cash. The second half, it's going to be positive, and it's going to get better for three reasons: we're going to have higher volumes largely out of BCA, largely out of the 37 program; we're going to have these shadow factories just about to shut down; and we're going to have some favorable receipt timing, including an expected award on the tanker program for Lot 11. So there are specific things that we can point to that we know are going to accrue to our benefit in the second half. Might not make it all up, but it's going to get better. And that momentum is in line with the accelerating operational and financial performance that I've described upfront. And importantly, that's going to put us in a much better position as we move into 2025, which we think is what we need to make sure that we keep our eyes focused on: a better momentum heading in 2025, a more stable production system and the ability to start to generate cash flows that are much different than the first half.

So is it fair to say low single negative at this point or low single use?

Yes. I'm going to say use.