The Boeing Company (BA) Earnings Call Transcript & Summary

Okay. Good morning. Let's get started. I'm Doug Harned, Bernstein's Senior Global Aerospace and Defense analyst. And I'm really happy today to have with us Kelly Ortberg, CEO of Boeing. Kelly, I don't know -- you may have a couple of words you want to say and then we'll get into the fireside chat.

Well, just welcome, everybody. Thanks for joining us here. Doug, I look forward to it. I don't have any opening comments. I'll -- we'll get right into the Q&A.

Okay. Great. Well, you've been CEO now for a little over a year.

No, August 8.

So August 8, less than a year.

Almost a year.

That's -- okay. You've done a lot. So it seems long.. So -- but you've known Boeing for a long time. And in that time, as in the role, what surprised you? What are the hardest challenges you faced? And maybe you can give us a few comments just on how you see the progress going now.

Yes. So I spent most of my career as a supplier to Boeing. So as you point out, I knew Boeing quite well from the outside. And I would say in the main, not a lot of surprises. I think I knew the situation is pretty well publicized. We had a lot of near-term challenges as I started in August. We went through the strike, getting through that, getting our balance sheet restored was a critical priority for me. And I think we're making good progress. We put together a recovery plan. First focus is on stabilizing the business and that includes ramping back up our production lines, which we'll talk about, I'm sure. And so far, so good. I'm pretty pleased with the progress we're making. We got a lot of work yet to do but I think the mantra of getting the company turned around, restoring Boeing back to the iconic brand that we all know and want is underway. And our team is committed to making the necessary changes to continue with the momentum. .

Well, you were just on the trip with the President in the Middle East. And perhaps you could comment a little bit about -- certainly, you got some very big orders there on the commercial side. But if you think about both commercial and defense opportunities because some very big defense numbers were put out there but we don't have a lot of detail on it. How do you think about opportunities in the Middle East after that trip?

Look, the Middle East is a very big market for us, both defense and commercial. You're right. We announced the single largest widebody order in the history of Boeing and -- with Qatar and that was a great order to continue to fill our backlog. And I think demonstrates the strength of the product line, particularly the widebody product line that we have. But also our defense products with tankers going into the region, F-15 fighters and upgrades to the F-15 fighters are also great opportunities for us in the Middle East. So that will continue to be a strong market for us, orders Etihad in as well in widebody. So feel pretty good about that. And as you look at this tariff environment, as people look to try to rebalance trade with the U.S., where there's a trade imbalance, there's no better way to do that than through the purchase of aircraft if you want to do that quickly. So we're excited about the future here. We're excited about the opportunities. Backlog is not our challenge. We have a very, very strong backlog. Our challenge is ramping up production and delivering on that backlog and making sure that we have slots available for the customers who want the aircraft.

Well, actually, one aspect of that is there is a -- is this point about slots available. When you're getting the orders like this, when you're effectively sold out into the 2030s, how do you manage new orders? I mean, are you actively thinking about higher rates a few years out? How do you manage the skyline?

Yes. So we commit to a planned skyline in terms of our orders and then essentially customers get in line as we go do that. And as you point out, we are essentially sold out through the end of the decade. We are going to increase production rates on virtually all of our aircraft. We're in the process of doing that now on the 737 MAX, as you know, we're capped at 38 a month with the FAA but we're very quickly approaching that rate and we'll be going through a rate increase there. We're in the process of increasing 787 production from 5 a month to 7 a month. And then the 777X is getting through the certification process and then we'll be ramping that up. But we would expect to have continued ramp-up in all those programs here over the next several years to support the market demand.

Well, one of the topics that we talked about on the last earnings call was tariffs because you've I know been actively engaged with the administration on this topic. I'm guessing it came up on your Middle East trip. You had said that for Boeing this year, the impact should be less than $500 million. But a lot's happened and continues to happen. We've had new news in the last 24 hours with respect to technology exports to China, a legal opinion against the tariffs this morning. How do you think about that now? And what has the dialogue been like over the last several weeks?

Yes. So I'll just say, it's been very dynamic. It's a dynamic environment. I think we're going to be in a dynamic environment for a while here until some of these unilateral or bilateral agreements are put in place. Having said that, as you point out, we identified from an input tariff perspective about less than $500 million of impact. It's primarily in a product we're importing from Japan and from Italy and also primarily on the 787. We are paying duties today, tariff duties on those imports. But in many cases, those airplanes get reexported and there's a duty drawback process. So we're able to recover the duties we pay. The only duties that we would have to cover would be the duties for a delivery, say, to a U.S. airline. So we're going to manage through that. I personally don't think these will be there in the permanent in the long term. If you look at the agreement that was reached with the U.K., that doesn't include tariff in -- on our aircraft and so -- or the components we would buy there. So we're going to just have to manage through the input tariff side. The more impactful and the thing we watch more closely is any retaliatory tariffs. And we saw that in China where there was an increase in tariff. And sure enough, the Chinese airlines immediately said, I can't take delivery of the airplanes. And that's way more impactful to us. Now that's been reversed. China has now indicated -- the airlines have indicated they're going to take deliveries. The first deliveries will be next month. So we're yet to accomplish that task but they're planning and they're telling us they're going to take delivery. So we have to watch that and make sure we don't have other regions of the world where we get retaliatory tariffs and we're unable to deliver aircraft that we have produced for those areas. I would say in the main, though, since we talked at the earnings call, it's not a lot different. It is a dynamic environment but I don't see the impact a lot differently than what we saw then.

No. An important topic clearly is the 737 MAX ramp. You've talked about getting up to 38 a month in production, fairly soon. But perhaps you can give us some more insight on to where you stand right now?

Yes. So we're ramping up to the 38 a month, as you point out. And that's happening as we speak. We're very close, getting very close to achieving that 38 per month rate, which is what we've been planning. We will produce at that rate for a period of time to make sure our production system is stable. And that stability is measured with key performance indicators that have been agreed to with the FAA. And then once we get through that stability and the performance indicators look good, which they do right now, then we'll go have a review with the FAA and move to 42 a month from that production. An important milestone we had in this last month is, we completed our milestone review with the FAA on the 787 to move from 5 to 7 a month. So the good news with that is that was successful. It's the exact same process we're going to use for the 737 MAX increase. So I feel pretty good. And we've talked with the FAA extensively to make sure we're aligned on what are going to be the criteria that we need to demonstrate to move to the next rate. The performance indicators look good. Supply chain is stable. So I feel pretty good here in the next period of time, we'll be through that first rate increase, which is critically important because the -- if you think about the overall cash flow performance of the company, moving from negative to positive cash flow, as we've said in the second half of this year, it's important that we get to a higher production rate on the 737 MAX.

And you've talked about getting to 38, stable, meet all the KPIs, work with the FAA and then you could go to 42. How should we think about the size of that interval going from 38 to 42, once you're comfortable that you can go to the FAA and say, we're producing repeatedly at 38 a month.

Well, I think this first rate increase, we actually go [indiscernible] parts of our production line at a higher rate to ensure that when we do move to the 42 a month rate that we can actually achieve the stability. So we're pretty confident in our ability to move from 38 to 42. Now after that, we do have subsequent rate increases in our plan and they would typically be in that 5 per month rate. So that feels like a good increment. So the next one would be to 47. I would not expect those to be any earlier than 6 months apart. And so that could get us to where we'd like to get to 47 here by the end of the calendar year. But we're not going to move to the...

47 by the end of next...

By the end of -- no, by the end of this calendar year. If we could do to 42 here midyear, then by the end of the calendar year, 6 months later, we'd be doing the next increment to go to 47 a month. So we'll continue that process. Having said that, if we're not ready, we won't do it. So the production system has to be stable. The key performance indicators have to be there for us to move to the next rate. And you don't know where you are until you move there. So we'll see how things progress. What I will say is moving from essentially a stop production poststrike up through 38 a month, the improvements we've made to our safety and quality plan, to our production processes, have really paid big dividends. And we are seeing the improvement. In fact, we're producing a little higher than I even expected. So in some cases, going slow and deliver has allowed us to actually go faster. So we're going to keep disciplined here and we'll move to the next rate when the indicators say we're ready to go there. We're in pretty good shape from the supply chain, too. I'll say that supply chain stability has improved. And we're, of course, sitting on a tremendous amount of inventory with -- particularly on the 737 MAX. So that's helping us also with the buffer any supply chain issues with the rate increase that were upon us.

I mean as we've kind of looked at this, you've got a lot of engines, a lot of fuselages, 38 to 42, our expectation was there's not a lot of supply chain issues there. When you start to go to 47 and then 52, that's when I would expect you may have another set of challenges. How do you look at that?

So you're right. I think as we move up and as the buffer inventory comes down, then the supply chain performance gets much more important that they're right on schedule. But we're -- and many of our suppliers are also producing at a higher production rate. So -- and they've been there before. So I think we'll be able to ramp this up. Having said that, we're always working with the supply chain. We had the Precision Cast Parts fire here in the last quarter and we're managing through a supply of those parts. We'll always have those kind of challenges when you've got over 1 million parts in some of these aircraft, it's -- we need all of them. So supply chain management continues to be a focus item for us. But we don't have anything right now that I'd point out as chronic concerns relative to the rate increases. Once we get to those higher rates, we'll see.

And when I think about that, if you were to look at 6-month intervals, if you look historically at Boeing sort of pregrounding of the MAX, we didn't see a 6-month cadence of rate increases. And in fact, 52 was a very problematic one, particularly with Spirit. I mean do you feel when you look at the system today, that you're in a much better place than the company was even sort of pre-COVID on the ability to make at these rate.

Yes, there's no question the production system is way more stable. So that's one thing. And the other thing I'd just point out is remember that we're returning to rates we've been at before. So in some of the cases, historically, we're achieving a rate that we've never achieved. So all the way through the supply chain, we're doing things at higher rates than they've ever been achieved. That's not the case here. We're kind of recovering. So in many cases, our supply chain has the capacity, has the capital in place. They're ready to go at a much higher rate. We're the ones what's holding them back. So I do think we have a more stable production system. We've made massive changes in our safety and quality plan and how we're building the airplanes. I think that's going to pay dividends for us as well. But I'll just say again, if we aren't ready to move to the rate and I think this is the big learning is, we're not going to go to a 50 a month rate and have an unstable production system. We're just not going to do it. We'll stay at the lower production rate until we demonstrate the performance and then we'll move to the next rate. And that performance includes the supply chain. So several of the 6 KPIs that we have are clearly flowing through the supply chain. So if we're being shorted of the supply chain and we've got a lot of escapes coming out of the supply chain, then we're going to have to stabilize that before we move to a higher rate.

So if you look at this now after all of the scrutiny that's gone on over the last sort of 18 months with respect to the 737. You had issues like the junction box problem last year, things like that. Are you more comfortable now that escapes, those types of escapes are less likely to occur?

Yes. I mean, Notice of Escape is 1 of the 6 KPIs and that KPI is green right now. So we have made significant improvements. Now I would also say we were stopped with production during the strike. I do think that we and our supply chain worked hard during that period to improve where we had supply chain constraints. We're further away from the COVID recovery that everybody's had to manage with workforce. And so I think we are seeing a much more stable supply chain and production system. We're not seeing the level of quality defects that we've seen before. I think our quality defects are down over -- approximately 30% on the 737 MAX line. So we are seeing significant improvement in the quality. The fuselages, I'll point out specifically from Spirit, the quality of fuselages is much, much better than what we were seeing beforehand. We worked closely with Spirit to drive some of those quality defect issues back into their build process, so they're eliminating those defects. And the fuselages are flowing through the factory much faster than what they were. Prior, we were bringing in fuselages that had no defects on them and then we were fixing the defects while were building the airplane. And that was just kind of a recipe for quality issues, delays, inefficiencies. So I think we've got that significantly improved and that will help us here going forward.

So when you look longer term, talked about it before being sold out into the 2030s. There's clearly more demand. And I know that you once got to, like maybe for a very short period of time to 57 a month with the 3 lines in Renton. You've got a fourth line now for the 737 in Everett. If you look longer term, do you -- can you envision this program going above 60 a month because you would have at least internally the capacity to do it if you wanted to do.

Well, look, we are gearing up so that we both have the capacity and the agility in our production system. As you point out, we were producing at a pretty high rate with just the Renton line. So we've added a fourth line or we're adding a fourth line in Everett. What we're going to do with that fourth line is primarily focus it on the Dash 10 variant of the 737. It's the most different from the other. It has the most complexity, meaning it will probably flow through the factory at a slower rate. And that will allow us to keep the Renton -- the 3 lines in Renton flowing much more efficiently. So yes, we have plans to increase rates. We'll see how the production system and the supply chain performs as we get to those much higher rates. That's ways ahead of us right now.

That would be a good problem...

That would be a good problem -- maybe next year, we'll talk a little bit about that problem. Right now, our focus is getting the production system through the first rate increase. I will also say, which I think is important, virtually every one of our customers is reporting a higher quality of airplane at delivery. So we're doing this and we're not sacrificing the quality of the airplane. And we're going to continue to do that. I think the financial performance will follow the production performance of the company. And I think we need to think about it that way.

So you mentioned the Dash 10. Where do you stand now on the MAX 7 and the 10 with respect to certification given that you're working through, I know the inlet design has been the biggest issue here?

Yes. So both the 737-7 and 737-10 are slated to complete the certification this year. And the critical path right now for us is the anti-icing design for the inlet. And we're in the process of finalizing that design. We've got some testing underway, critical path testing that should complete in the June, July time frame to move forward with that. So that's important that we get through that deicing, It has taken a little longer than what I expected. But the team is working through. We've got multiple solutions that we're working and trying to select the right and best solution going forward. Having said that, if there are any delays in getting the -- through the certification, which we're not anticipating right now, we will just continue to build the Dash 8. So I don't think it's like a production output concern. But many customers are waiting on the Dash 10 and Dash 7. So we want to get those through the certification process. The Dash 7s essentially there, except for the de-icing work that we have to do.

So switching over to the 787. As you said, you've got the okay, to go to 7 a month now. Here's the heat exchanger supply problem is, I guess, largely resolved to be at 7.

Yes. Yes. So we made great progress there. That's an example of where the supply chain has stabilized. That problem was a result of the Russian invasion situation and having to move the production line. It took them a while to get back on plan but right now, the heat exchanger production output is meeting our demand and allowing us to go to 7 a month. If it wouldn't have been, we wouldn't have moved. It was quite impactful to build a 787 and put this air conditioning pack in out of cycle. So getting that back to where we've got the product, so that that's not, traveled work is really important for us.

So when you look at the rates now, can you give us a sense of when you think you'll actually be at 7 in production and then I know 10 is that soon on 7.

Yes, soon on 787. So the way these work is, we have a capstone review, which is, think of it as a rate readiness review with the FAA. And we're -- at that review, we basically have everything laid in place to be at that rate. So provided we go and get approval on that rate, then we start cycling most of the components right away at that 7 a month rate. So you should think that on 787, we're cycling at that rate right now, which will lead to deliveries in the coming months at that rate. So production goes pretty quick to the new rate.

One of the issues, though, in deliveries has been interiors. So you've had a lot of airplanes that are essentially produced but not ready to deliver. How do you see your ability to close that gap with your interior suppliers and certification?

So, yes. It's primarily the seating interiors where we've had problems and it's specifically focused where we have a new configuration of seating that we have to go through a new certification. That's still a problem for us. We're still working through that with all the seating manufacturers. Where we have a customer who's taking a new seat that's not certified, that's where we're seeing the delays. If it's a customer who's taking an existing seat configuration that is certified, there are -- there's no delays. So it's more of a certification than it is a production output problem for us and we're working through that. My guess is that it's going to be with us through the end of the year as I look. And it's with all the seating manufacturers. It's just taken us a lot longer to get through certification. And it's primarily these new larger first class, business class configurations with doors. And so the whole certification process has gone much slower than anybody anticipated with that. But we're working it. We do have some airplanes on ground that are done, for certain aircraft that we're waiting on the seats. And once we get the certs of the seats, we'll be able to deliver.

And is there any parallel issue? I know they're -- I know some airlines have some fairly exotic configurations on the MAX 10 too. Is there any -- do you foresee any issues with certification -- interior certification?

Well, we're watching it real -- yes, we're watching that real closely to make sure that we aren't overcommitting in terms of how many different seat configurations we can get certified in a certain period of time and the complexity. So it will -- it's something that we've got to watch on. As you point out, on these -- particularly the Dash 10s that have these types of complex seat configurations. It's going to be with us also on the 777-9 as we bring that into service, making sure we incorporate lessons learned here so that we don't have seating delays on those aircraft because those aircraft will have most complex configurations in the front of the airplane.

And when you look at production going to 7 soon on the 787 in Charleston, my understanding is that without a lot of capital investment, you could get to 10 there. And -- but now with the demand, particularly with these new orders, it looks like there is potentially demand pressure to go higher. Can you give us a sense of perhaps when you might end up going to 10? And then what has to happen should you later want to invest to go higher?

Yes. I haven't put a specific date on the move to 10. We'll move there as soon as we can. The demand, to you point, the demand is there. So once we get to 7, we can get to that 10 within the existing production generally within the existing production footprint. I think to go beyond that is going to require some additional investment in our facilities there. We've authorized that. So we are investing in expansion so that we can go to rates beyond 10 a month rate. And the beauty is, as you point out, there's tremendous demand for the airplane. So I have no concern about our ability to sell into a higher production rate there. It's an execution performance challenge for us.

So jumping over to the 777X, how does that look? Can you update us now on what you're seeing as the entry into service time line and the production [indiscernible]?

Yes. So we want to get most of the certification work done by the end of the year on the 777-9. We have 4 flight test aircraft now, all in flight tests. So the flight test program is progressing and it's progressing well. We don't have major -- any major technical issues coming out of the flight test program. So I'm hopeful that we'll get through the certification flight tests by the end of the year. We may still be doing some ETOPS testing going into next year. But no real change to our forecast of getting that certification done so that we can start deliveries next year. Obviously, again, a part of the Middle East order that we just talked about included 777-9s too, there's strong demand for that aircraft. It will be the largest twin in the market and there's a lot of folks who really are looking forward to bringing that airplane along. I will also say it's an airplane that has had the most flight testing done than any other aircraft we've ever done in terms of hours. So we feel pretty good about the stability and our entry into service for the airplane that we've done enough flight testing on that, that it's going to be a great airplane.

Now another airplane there's still very good demand for is the current 777 Freighter. But 2027, I think that's supposed to stop delivering.

Yes, that's our current plan. Yes. We'll wrap the 777, we call it the metal wing, the existing configuration. We'll wrap up that freighter configuration, expecting a Dash 9 freighter configuration the year after that. So we'll be transitioning from the existing 777 Freighter to a 777X Freighter configuration.

When you look farther out, how are you thinking about a next-generation airplane we had both GE and RTX here yesterday talking about thoughts on next-gen engines. From a Boeing standpoint, what are you looking at here?

Yes. I look at that really kind of in 3 work streams. One is, when is the market ready? And two, when are we ready, both financially and from a capacity perspective? And third is, when is the technology ready? And I would say the answer is not now on all 3 of those work streams. As you point out, engine technology is going to be important element of that. If you talk to our airline customers today, I think universally, they would say, we still have work to do and the durability of the existing newer engines that are there. And we'd like to make sure that we don't see the type of durability issues in the future. So I think ensuring we get through that step. And I want to be ready when the time is right. So we're working all 3 of those work streams but that time is not here today. We've got time to get ourselves prepared and do that right. I'll also say that the backlog is fantastic for our current product line and getting the Dash 10 into the market, I think, is going to be an important step for us as well. So there's no hurry here. We will do a new airplane when the market and the technology and we're ready. And I don't know when that's going to be right now.

Yes. [Audio Gap]

Yes, 38 to 42 will be the milestone review.

Not the -- so the 40 -- not the 40. Yes. Okay. That's what. Okay.

Yes, we would -- let me just clarify, so what I meant, we'll go through the milestone review from 38 to 42, then we'll move to 42. What I was -- meant to say is, at the end of the year, I would expect we'd be doing the milestone review from 42 to 47, so that we can move with that, so we won't be outputting at 47, to be clear.

Okay. Good. Okay. That -- yes. So go over to BDS. So this was the first quarter in quite some time that you had no charges. How are you thinking about BDS today, some of the programs, KC-46, T-7A, Air Force One, you've got a number of these fixed-price programs that have been problematic. Do you think that risk is behind you now?

Not totally. On a price development program, the risk is not behind you until you're done and we still have a lot of work to do. Having said that, I think we're making good progress on how those contracts. In some cases, it's a better baseline management, better program management, working with our customers on the requirements to make sure that we have an achievable path forward. We've done some things differently like on the T-7 program. We've worked with the Air Force to restructure that program kind of in a win-win way that they get things that they needed but we also derisked some of the risks that we had in the program. And I think that's kind of the methodology that we have to use for working together with our customers going forward. So we've got a lot of work yet to do but I do believe we're managing those risks better. We're working with our customers better and we just got to get the programs through the development phase. We still have flight testing on several of these platforms, which is always a risky phase to go through and make sure that the aircraft meets the performance. So we'll continue to manage those. I don't think one quarter is a good quarter. I think we're doing a better job of baseline management. But again, we're not done until we're done on these projects.

And one of the other issues that we've seen in BDS is that even on the mature programs, they hadn't really been delivering at margins that one might have had hoped for because I think back in kind of the pre-COVID times, this used to be just a great free cash flow generator. And so you had a lot of mature programs, which you still have a good number of those that draw off cash. How are you thinking about, aside from these fixed-price development programs, the rest of BDS and what it needs to meet the goals you have?

Yes. Look, I think we get those back to the historic margin performance. You're right in some of the legacy programs have been underperforming as we've made changes to the EX, for example, on the F-15. We've been slow in the ramp up in production. But I don't see anything that keeps us from restoring that business back to the historical performance margins. So we did have a lot of post-COVID challenges there. We also had supply chain challenges in our -- in those legacy defense programs, all that's getting a lot better. So I feel pretty confident that we'll be able to restore those programs back to legacy margins. The defense program -- or the fixed price development programs, it's important that we stabilize and just keep those from being a headwind here for the portfolio going forward.

Now a big win was the F-47. Can you comment at all about what you think led to that win?

Well, first of all, it is a huge win for us and very important for our St. Louis operations. As you know, we do the F-15 and F-18 there and be a part of the next generation -- the first sixth-generation fighter really sets the stage for decades to come for our St. Louis operation. We did a very, very good -- the team did a very good job on pursuing that program. We invested in this area more than any investment we've ever made in our defense business and that investment paid off. We had a -- we have a superior product, very mature and where we are in terms of the design of the product. I can't talk a lot more about it but we're excited to have that program. And again, I think it puts a boost to energy in our defense portfolio and our team to go win such an important program and prove that we still have the technology capability to go do that.

Well, as you look at this investment profile, knowing that you did invest a fair amount, how does that look still? I mean, is there still significant investment from your standpoint?

Less investment on the R&D but more investment in the CapEx. So there will be a step-up in some CapEx investment associated with that. And there's another big program out there as well. So we'll see where that plays out.

The [indiscernible], right?

Yes. Right. And if that program moves forward and we're lucky enough to be selected there, then that will also require some additional CapEx investment.

And we had expected an announcement on that about a month ago and it seems like -- I mean, headlines we've seen sort of put on hold by the Navy. I mean, do you have any insight into how this is proceeding?

I do not. So I'm hopeful that this goes forward. But I'll just say the F-47 kind of went through the same phase as well as that wasn't sure when the decisions were going to be made. But once they were made, they went pretty quickly to source selection. So I think we're in the same boat here and we'll see.

Yes, that's a good point. 6 months ago, NGAD looked like it may be dead.

Yes, Nobody knew when NGAD -- yes, right. So again, I think that the proposals are in, they have all the information they need to make a source selection. This is more of a when do we want to launch the program? Are we going to launch the program decision? And so we're waiting on that.

So this work will be presumably centered in St. Louis. And that's a facility. I haven't been in it in a little while but I would imagine pretty underutilized heading into this program.

Well, I think you'd be surprised if you came to St. Louis. We'll have to bring you to St. Louis. There's a dramatic change in our facilities there. We've just recently torn down the legacy McDonnell Douglas headquarters building and we're building new facilities to support the production of the new aircraft. So the airplanes actually won't be built in the existing facility for security and other reasons. But a pretty big transformation in the overall footprint in St. Louis. We have the land and the facilities in the field to do the job but we're investing heavily in the infrastructure.

Well, my assumption to be also, as you put F-47 work in there, this should be helpful on margin. That's initially cost plus but helpful on margin overall from an operational standpoint. Is that...

Well, from an overall absorption perspective, obviously, any big contract is beneficial to the overall absorption. The margin rate on the program like any new program or development program will be lower than the overall production margins.

And something that I know you have done in the past, certainly it was true with the 787 development is, there has been some transfer sort of things like virtual tooling, things like that, that have come across defense to commercial. Do you expect to see any benefits from the engineering talent you get and the things you're doing on F-47 more broadly for the company?

Yes, not directly. They're different widgets but I think indirectly for sure. We've -- that's one of -- been one of the big advantages between the commercial and government portfolio, is our ability to take technology from one to the other and move that across, particularly in how we build the manufacturing processes, material science areas. So yes, I would expect that we'll get significant benefit from that across our entire portfolio.

Now just stepping over to BGS. This has been a great performing business for some time and you've been getting at least 17% margins there, even though it seems like every year, it's guided to lower. Can you talk about what that profile looks like now? I mean, you've -- you're divesting Jeppesen. I don't know if that changes much in your outlook.

Well, the divestiture of Jeppesen would happen probably towards the end of the year. And initially, there may be some slight deterioration in the overall BGS margins as we divest of that. But as we incrementally grow the services business, I think we'll be able to cover that, that deterioration. Look, I think everybody in the industry has seen stronger demand in the aftermarket than anticipated. And that's the result of -- I don't think we're sandbagging. I think the market performance has been a little bit better in the aftermarket. The BGS business is critical and critically core to the company. So selling those -- the proprietary critical parts to support our customers and the demand just looks very good going forward, demand signal. So I think our BGS business is set very well to continue to deliver the profitability we need.

So when you look at BGS today, you've certainly got things like Aviall and KLX in there. Is the portfolio you have really core at this point? How do you think of core and noncore in that business?

Yes. Look, the BGS, the core parts business into our core, either it's defense or -- and all the services that go around that, either defense or commercial is super core to us. It's what allows our customers to operate platforms and we'll always keep that. Now Jeppesen was in our BGS portfolio and we determined that, that was something that wasn't core to us. But if you look at a portfolio level, certainly, BGS is very important to our future.

Now when you take all this together, you're guiding to free cash flow positive H2. Can you describe what goes into that and what gives you confidence in that guide?

It's all around production rates. Moving the MAX production up is really the story. Obviously, there are other things that impact it. But if we get through the production increase, get through the rate readiness review, that's what will allow us to drive higher levels of cash flow. And I think you've seen that in our performance to date that the cash performance for the company is very much driven by the MAX production rates.

And so when you go forward, knowing that it's quite difficult because the movement of advances and inventories are hard to project. But can you give us any sense into how you see that free cash flow profile going beyond 2025?

Not yet. Let me get through the first production rate increase. Let's get to a positive cash flow and then we can start looking at how does the cadence look going forward. I'll just tell you, it's going to follow the performance of the production. As I said before, the financials will follow our production performance. So the faster we ramp up, the better our cash performance will be.

Now something that a lot of investors have been concerned about, given a lot of the missteps over the last several years is, how can I be comfortable investing now and have more confidence that those aren't going to happen again. And I'd say both on the BCA and on the BDS side. I mean, how do you get confident that -- we've talked about that a little bit but just.

Well, look, we've put together a plan on what we need to do and we're tracking to the plan and measure into the plan. There's still risk that we have to manage. I don't want to imply that we're done here. Restoring the company and stabilizing the company is our first step. We're not through that yet. I'll maybe claim victory on that when we get to a positive cash flow and we're through our first rate increase and we've got the certifications complete. We still have a lot of work to do. The only thing I will say is we're tracking to our plan. I feel good about our plan. Our team is focused on this plan. It's achievable and we're committed to bringing this home. We haven't done it yet. So we've got to still focus on being humble and let our performance do the talking and that's what we're going to try to do.

Well, one of the things that you've stressed has been culture and thinking about the culture back at Rockwell Collins. From my standpoint, having been pretty deeply involved in Boeing, 20 years ago or so, as I was constantly told in Boeing, everything is about configuration control, making sure everything is absolutely perfect on timing, quality. And that, at the time, did a lot of that but it had a lot of financial cost at the same time with people kind of checking checkers. Today, it seems like the company has sort of swung back and forth in there. When you think about the company going forward, how do you balance ensuring that you do have all of these details related to quality and performance and at the same time do that in a way that's financially successful?

Look, I think you've just got to focus on the performance first. We have to deliver. It's fundamental to us to deliver safe, high-quality products, whether that's a product going into our government customer, our commercial customer, it doesn't matter. We've got to focus on the -- ensuring that we've got a great product going into the market. So I don't know what it was like 20 years ago. I can't speak to when you're referencing but the fact that people were focused on safety and quality sounds good to me. That's what we want to get back to. Then we do need to focus on efficiency. I think there's areas where we can be more efficient. We just got to be extremely careful as we do these efficiency initiatives that we don't take away value, particularly if it's value to the safety or quality of the product. So we'll take that on. But I think just keeping that focus -- and look, we've been through trying times here. I think we know cutting corners can't be an answer for our recovery. We've got to do this right. And we keep saying, we got to do this right, focus on the right things and good things will come from it. And that's what we're doing as an organization. We're making large changes to the culture in the company to make sure everybody in the company is focused on doing the right thing and delivering a high-quality product to our customers. The good news is, I'm hearing good feedback so far. We're early innings, I will say. So there's work to be done. But we have a plan. We're making progress against that plan. Customers are feeling better about the products that we're getting. The metrics are showing the quality of the airplanes are better. So we're just going to keep marching on that.

Well, just to finish, got lot going on. What are you going to be focused on the next 12 months?

Yes. Well, like I said, the stability of the company is kind of the first thing. And so we got to -- I don't -- we're still not in a positive cash-generating situation and we definitely have to get through all the milestones to achieve that. I think my energy in the next year is going to be focused on probably less on the production ramp-up and more on getting through the certification and the development programs and getting those things behind us. So we're going to spend a lot of energy in that. Also a lot of energy in the culture change within the company because I think the culture change is important not only to enable the improvements but to ensure the stability and sustainability of the improvements we've made to make sure we don't -- we never digress as we go forward. So those are the areas of focus. And obviously, the -- managing the supply chain here as we ramp up is going to be continually be a focus area for the company and the team is doing a great job. I'm really pleased with the performance to date. We're focused on the right things. We've got the right people in the right places to make this happen. So we just got to stay focused, stay disciplined and good things will come.

Very good. Well, Kelly, thank you very much for joining us.

Okay. Thank you.