The Boeing Company (BA) Earnings Call Transcript & Summary

Thanks, everybody, for joining. We have Jay Malave from Boeing, helping kick us off at the UBS Industrials Conference. Jay, thanks for coming.

Well, thank you, Gavin. Thank you for having me here and giving me the opportunity to represent the Boeing Company. It's a pleasure to be here and look forward to a good discussion this morning with you. Appreciate it.

So you've been at the company for 3 months now. How are you spending your time across the businesses?

Yes. So I joined the company in mid-August and immediately moved to the Seattle area. We were talking about before. I'm actually in Bellevue. And that gives me an opportunity to spend a lot of time in our factories in Washington, Renton, Everett. A couple of weeks ago, I was in our Auburn, Washington facility. And it gives me the opportunity through repetition to really understand what's happening day-to-day in our operations, which is important to me and really be in the center of gravity in terms of what's happening in the company. So it's been an exciting time to be there. So I spend most of my time there in Washington State. Kind of first impressions of the company since it's been almost 4 months, about 3.5 months, first, think about the culture, and there's been a lot of discussion on the culture and Kelly talked about the improvements that he was embarked on one of the 4 priorities that he mentioned when he first joined the company. And I think when I came in, I got the benefit of the progress that had already been made by the time I joined. Kelly had been in the company for, by that time, over a year, in that ballpark. And there were a lot of, I think, advancements made during that time period. So what I've seen is really pretty engaged workforce, a very strong management team, one that has a can-do attitude, one that is focused on improvement and focused on making Boeing better every single day, which to me is incredibly important because that's a sign of a performance culture. And that's one of the things you look for when you join a company. You can never really tell from the outside looking in what's actually like working in the company. But I've seen really an organization, including a management team that's really focused on can-do, action orientation. We've talked about active management. And we talk about active management in the context of working win-win solutions with the customer and the BDS environment. But I take a little bit of a broader view than that. And when I view active management as a team, a leadership team that's willing to roll up its sleeves, get its hands dirty to help solve problems, help be part of the solutions. And that's exactly what I see here at Boeing. And so it's exciting to be part of that. I'm that type of person who likes to get into the detail, likes to get into how do we solve a problem rather than just observing it. And so from my perspective, I've been able to transition pretty easily to an environment like that. I'm very impressed with the team that we have in our facilities. They're very good, very experienced, very capable. They know what good looks like, and they've done a good job, I think, getting us to where we've been today over the past year. If you think about the progress that we've made, already 2 -- pretty much 2 rate breaks on the 737, a couple of rate breaks on the 787, really on plan to what we said we would do this year in 2025. So when you think about you roll it back where we were a year ago to where we are today, the progress has been, in my view, pretty exceptional. The other thing I would say is the -- what I'm also impressed by is the operational embrace of lean practices and processes. And so I see continuous improvement throughout the factories. Every time I do go to the factory, the team wants to take me into their obeya room to see the projects -- the continuous improvement projects that they're working on. And again, I see that as views as a sign of a performance culture that's pretty much already embedded. When you think about what else can we do, I think that lean practices can be spread across the entire company, including the functions. Right now, it's pretty focused on operations, as you would expect, given where we are in our recovery. But I think we have opportunity to really spread it across all of the functions. So I think a great start so far. I'm coming and joining the company at a great time, and the recovery is in full force.

Great. Maybe diving in there then on MAX. On the 3Q call, you were at 38 per month and cycling at 42. How is that going as you stabilize it?

Yes, it's going according to plan, as you would expect. It takes a few months to take the production cadence and move that into output. November here is going to probably be a little bit light on deliveries, but our production rollouts are pretty much exactly where we expected. And it's just a shorter workday month because of the holiday. But overall, we're cycling where we expect to be. And when I look at deliveries in terms of what we generally have guided to for 737, including -- as well as 787, we expect to be pretty much where we were for the year. So I think it's also so far, so good there. It will take us, like I said, a few months to turn this into output. And I would expect that to occur starting probably in the first quarter of next year.

And the minimum 6 months between rate breaks, that's after you stabilize or that's after you've broken from 38 to 42?

Yes, it's stabilization. We'll go through it. And as the production system stabilizes at the current rate, the team starts thinking about how they're going to break to the next rate and they start positioning for that next rate break. And so before the rate break, they really are positioned for it through the production cadence that they have, the amount of days that are expected in terms of the cycle time for final assembly there. And so again, when we say no less than 6 months, it gets harder as you increase rates. And so 6 months is probably the best performance we're going to see, but our history tells us it takes a little bit longer than that.

And I guess same question on 787, going from 7 to 8. How is that going?

Yes. Same thing there. We're cycling at 8. We're rolling out. I think the improvement in rollout is starting to take hold there. And so we're just kind of monitoring progress as they go. It's going to be the same thing. It's going to take a little while before this turns into output. And I would expect that to occur sometime next year as well. And as we evaluate and stabilize, we'll start thinking about when the next rate break will be. But first things first, we got to get stabilized at 42 [ on ] 37 and get stabilized at 8, and that's what we're in the process of doing.

So how do you think about deliveries next year? I think you said volume up, but I assume there will be lower inventory deliveries.

Yes, that's right. So we expect absolutely deliveries to be up in both cases, both 737 and both 787. When you look at this year, and we've talked about in the range of 440 to 450 deliveries for the 737 in that range, there's upwards around 50 aircraft in that ballpark of aircraft that we're delivering that came from inventory. When you now fast forward to 2026, we're going to be increasing our deliveries, but there won't be hardly any aircraft, if any at all, that will be coming out of inventory. So it will be really through the production rollout system that will be the source of the deliveries. The one other item I'd say, which is a little -- will create a little bit of a difference between deliveries and production builds is that for the 737-10, we'll be building aircraft next year. We're expecting certification of that aircraft to be later in the year. So we are unlikely to deliver all the aircraft that we build just because of the timing of the certification process. But again, big picture, we expect deliveries both on the 737 and the 787 to grow in spite of the fact that we have less aircraft coming out of inventory to be delivered.

And presumably, 737 -10 and 7 rework will push those inventory aircraft into '27?

Yes. Some of those will be -- yes, will be pushed into '27, which will position us for continued growth in '27 and beyond. We continue to expect -- and I'm sure we'll talk about cash flow, but BCA deliveries growth year-over-year, we continue to expect that. That will be a big driver of the cash flow.

Working our way up to the cash flow question.

There we go. Yes.

777X?

777X.

So you're in Phase III now. What do you need to do to get that done? And what are the next milestones?

Yes. So we are starting the testing now. I mean that is a big package that we got the TIA3 approval in November. And so we've been positioning aircraft for flight testing there. This represents this approval of about 30% of the entire flight test program. And so that was a pretty big approval that gives us kind of momentum to move forward. If you think about some of the systems that are part of that package, avionics, environmental control systems, auxiliary power units. So there's pretty substantive systems will be tested as part of this flight test program, and we're well on our way there. And we're also positioning ourselves for the next batch of approval for TIA as well. Once we get there, we'll talk about that. But I think we're pretty well positioned per the schedule that we laid out in the earnings call, which we said getting this approval anywhere between late fourth quarter, early first quarter of '26. We've got it here in the fourth quarter, and so we're pretty much on schedule.

What has been kind of the main bottleneck on the slower certification process there?

It was new requirements. And these new requirements required essentially learning, both on the part of Boeing as well as the FAA. And as we learned what it took to comply really on both sides, unfortunately, we had these delays in these TIA approvals because we just weren't entirely clear on how to satisfy those requirements. We believe that we have a sort of much better understanding of what it takes going forward. And so we think the process for future approvals will be a lot more smoother with that understanding.

Moving to defense. I know you're restricted from looking at that business in full detail until January, but that seems to be performing better with no charges this year. So any thoughts on progress would be great.

That's right. So just kind of for the record, I've been spending my time pretty much on the BCA business in BGS. I've been restricted from BDS until the end of this year, which now is weeks away. So come January, I'll be able to dive a little bit deeper into BDS. And what I would say there is that Steve Parker and his team have done a great job, I think, stabilizing that business. That was another area that Kelly had highlighted in terms of stabilization. We're starting to see the benefits of that stabilization in the programs there. And we've got these big 5 programs. And I think, again, I'm talking to it from afar because I haven't been able to dive in. But by all means, he's doing a great job there and his leadership team is doing a great job there. So I would expect them to be -- continue to improve year-over-year, not just from '26 over to '25, it will be '27 over '26, '28 over '27 as well. The margin profile will improve. We've talked about high single-digit margins in that business. And I think that they're on track to be able to go march up that margin trajectory. So I think that the team is doing a nice job. One thing I'll say is I think there's been some investor angst in terms of once Jay Malave gets access to the BDS program, there's going to be a bunch of grinades that go off on all these programs. And look, I'm there to learn. I'll be going into the business to learn to help understand. In any program, there's going to be risk, there's going to be opportunities. My job will be how can I help them mitigate risk and how can I help them realize opportunities. I'm not going in there with a mandate or an agenda to throw grinades at different programs. It's kind of how can I help be a support to this business and to Steve and his team.

That's not how it works, right? If you identify a cost overrun, you book it in the quarter, you identified it. You don't wait for Jay to look at it.

That's right. And so -- that's exactly right. We've got, I think, a pretty robust EAC process. The team has gone through. They've recorded their charges in the past. I don't think we need to relive what we've seen in the past, but they do that with the benefit of information that they have real time. And so to the extent there's changes, it's based on new information that arises in that period. And so it's not -- the new information isn't Jay Malave getting access to the program. The new information or facts relate to either the schedule or the cost profile in a program.

Now that we've built up to free cash flow, I realize there are a lot of moving pieces on the 3Q call, you weren't ready to kind of commit to a '26 guide, but how are you thinking about framing that? And any initial thoughts on '26?

Yes. If you rewind the clock a little bit, on the earnings call, I've been in the job for a little bit over 2 months, and it just wasn't enough time to really get a good grounding. We were in the process of a multiyear forecasting process. And for me, I would say probably the beginning third of that. And so I'm a data hog. I like to understand the data. I like to beat it up. I like to pressure test it. And I was nowhere near ready to make any type of declaration proclamation based on just the progress that I have made to date as of then. Since that time, we've made a lot of progress. Unfortunately, my FP&A team probably is not loving me right now. But we've gone through a lot of data, a lot of information, and I'm just much more grounded now than I was there, and I feel a lot more comfortable with where we are. And so what I can tell you is for next year, we absolutely expect to grow year-over-year in cash flow. And I would say that, that will result what we expect anyway is in the low single digits in terms of positive free cash flow, which I think is pretty substantial growth year-over-year. And let me kind of rewind the clock before I get to '26. '25, we have to reset a little bit. If you recall when we provided the guide for '25, we talked about negative $2.5 billion for the year. Premised in there was this DOJ payment that we anticipated making. That payment is slipping out of '25. And right now, it looks like it's going into 2026. And so where I would expect us to be now in 2025 is closer to about $2 billion of an outflow. Now you'd say, okay, you just put a headwind now into 2026 in the range of $700 million. But even with that, I expect free cash flow to grow. And as I mentioned before, I expect right now anyway, free cash flow to be in the low positive single digits. So in spite of that, we know CapEx is growing next year. CapEx is growing really on the back of 2 projects. One is our growth driver in Charleston on the 787, which is a good thing. That's going to be an enabler for us to drive up our rates up to around 14 over time per month as well as the investment that we're making in St. Louis for the new F-47 program, again, a good multi-decade growth driver for the company. So those are -- while they create some short-term pressure on CapEx and free cash flow, those are great long-term projects for us. The other thing I would say in terms of pressure would be this whole thing about legacy deliveries, delayed aircraft deliveries. It's causing kind of 2 effects. One is the elongated cash collection cycle for -- related to advances, and we were sitting on some excess advances and also puts pressure on the price per aircraft because we're paying penalties on these aircraft that are delayed. But even with those challenges, it comes back to BCA deliveries. We expect deliveries to grow next year. So that will be a large driver of positive cash flow. Embedded in that with increasing deliveries at BCA is the benefit of excess inventory burn down. So that will come along with that. So we'll get some working capital benefit there. And we will start seeing cash margins improve as well next year. You couple that with improvements at BDS that we expect, and they're on the right track, as I mentioned before, and continued growth in BGS, and that formula creates success for positive free cash flow of low single digits for next year. So I think that we've got a pretty good formula to drive that. And I think that will be a recurring formula over the next few years.

So low single-digit billion, including the DOJ payment next year?

Yes.

That's great visibility. The 777X impact, can you kind of break down how much of that charge is cash near term versus long term, the advances, the...

Yes. You look at next year, and again, that created some pressure. We talked about that in the third quarter call. It's about $2 billion of pressure in 2026, which is mostly related to the aircraft deliveries. That's why I didn't mention it specifically here because it's part of these excess advances and also lower delivery payments that we receive next year. The charge itself, the cost associated and the cash burn associated with that, $4.9 billion, that will be over a number of years as we deliver -- predominantly as we deliver aircraft through the end of the decade. So after we get through 2026, it's not a huge number in any given year after that will kind of -- I want to say pro rata. It's not necessarily pro rata, but it will carry out through the end of the decade and into the early 2030s as well.

And then touching on the advances kind of overcollection you mentioned, I mean, backlog is up a lot. Orders are extremely strong. Deliveries are growing and you have milestone payments on delivery growth. When do you expect to lap that overcollection of advances?

That will take us a few years. I mean it's really dependent on the BCA delivery profile. To the extent that we're able to meet or beat our BCA delivery profile, then that will be able to burn that off quick. I think the key thing there is that it's temporary. We just have to burn off the aircraft that are burdened by that. Once we do, then that will be out of the way and the BCA delivery profile will get back into the normal cycle that we do from a cash collection standpoint. And so there's a little bit of a tail to it, but I think that over time, it does get better.

And then the final piece on inventory that you mentioned, you don't have any more [ delivered ] aircraft...

That's right.

Is that working down work in process and destocking the supply chain?

I think that some of -- with the increasing rates, some of that will happen naturally. When you look at one of the lessons learned for us is that we probably need to carry a little bit higher inventory than we may have in the past when we were at these kind of higher rates. But again, there's still a significant, I would call it, multibillion-dollar opportunity to burn down that excess inventory. And the beauty of increasing our delivery rates is that the working capital cycle will move faster. So your holding period, just your cycle time will be lower. You'll be moving inventory faster, which frees up cash. So there are just multiple benefits to the increasing delivery rates.

And then the unit cash margins, is that just a combination of higher volume, workforce productivity, what other pieces layer into that?

Well, yes. We'll see -- absolutely, as you're delivering higher at higher rates, the productivity gets better, so your cost per unit gets better. As I mentioned before, we're dealing with some of these aircraft with penalties that burns off as well. So the cash margins will actually get a pretty significant boost between now and the end of the decade.

And I guess looking further out, it seems like you weren't ready to explicitly endorse the previous $10 billion framework, but you did mention Boeing getting back to historical levels. So where are you in your planning review...

Yes, it's right. It's the same planning process that I looked at in kind of multiyear. And again, I feel very confident after having gone through that in our outlook. And yes, $10 billion for the Boeing Company is very attainable for us to achieve. And I think that you look at it -- you look at kind of some of the benchmarks that we had in the past and you look at '27, [ 2018 ] sic [ 2028 ] and $10 billion is just no reason why we can't get to that once we get to these higher rates on the aircraft. And so yes, I'm very comfortable saying that we can absolutely deliver $10 billion. It's going to be dependent -- a big dependency is on these rates. When you think about how we get from here to there, it's -- we got to complete the certification programs on time. And we'll have some pretty big milestones in 2026 that we'll be able to evaluate. We have to go up the ramp on the deliveries at BCA. We need to see the improving margins and cash flow profile at BDS. We need to see continued growth at BGS. All of those taken together will be the drivers and enablers of this $10 billion cash flow generation mark that we've talked about in the past. And it's all very doable.

And then as I think about deploying that cash, is the priority deleveraging and paying down debt?

That is. Between now, we've got -- if you think about our profile, we've got a big maturity in 2026, about $8 billion. A lot of that will be in the first half of '26. We've got about a little bit over $4 billion in 2027. We'll keep bringing that down, pay down the maturities to a level that we think is appropriate for the business, which gives us the flexibility. Also have a cash balance that gives us also the flexibility to be kind of a shock absorber to the extent that anything occurs in the industry. But I think that we'll be generating free cash flow that gives us optionality. And so I think that will be between the balance that we have today, the cash flow that we're going to be generating, that will give us plenty of optionality to pay down the debt, to invest in the future and start thinking at the right time about investor returns. We're not there. We need to turn the corner, but the cash flow profile and the cash flow potential and visibility of the company puts us on the right track for that.

How do you think about the right level of cash balance? I mean you mentioned having some buffer. You're obviously sitting on a lot of cash, but you also have an elevated interest.

Yes. I mean we historically have talked about a $10 billion minimum balance. That's something that for the time being that I kind of adhere to and agree with. I'll do my own analysis and kind of over a longer period of time to determine whether or not that should be a little bit higher, a little bit lower. But I think $10 billion minimum cash balance is a pretty good benchmark.

You just finished the Jeppesen divestiture.

That's correct.

Thoughts on proceeds there. And then separately, in terms of M&A, do you still expect Spirit to close this year?

Yes. On Jeppesen, it's been a big boost to our cash balance as we talked about. And I may have caused a little bit of confusion on the third quarter call, and let me just maybe clarify that related to the Spirit that -- so let me just talk about Spirit. Yes, we do expect to close out. We made a lot of progress over the last month there. We're in the final strokes, and we are awaiting the approval. We think that we've satisfied what we need to satisfy. And we're just waiting for kind of sign-off on that. So we think that we still expect that to happen before the end of the year. As far as their debt and our cash balance, including Jeppesen, we expect to pay down about $3 billion immediately of the Spirit debt upon close. There's $2 billion of high-yield debt that we think that we're just going to take out. And then there's about $1 billion of bank notes that we want to take out as well. So that will leave kind of their legacy debt maybe about $1 billion that we'll retain. What that means to our cash balance is that we've got the proceeds from Jeppesen. You've got the -- we couple that with what we're going to pay down on Spirit, and I expect our cash balance at the end of the year to be around $29 billion.

Spirit's financials have been a little messy. Any thoughts on how that incorporates into the Boeing financials?

Well, we've got -- for that business, we're doing some -- we've done some prework. There, you can't get too far into the financials because you can't gun jump. So we've been, I think, at the appropriate level of arm's length there. We do have some ideas, but we follow some of the external financials that you do. Our access is somewhat limited because they are a public company as well. So I think upon close, we'll be able to get to dig deeper into their financials and understand whether or not there's any impacts to our EACs, particularly in the commercial programs. And we'll deal with that accordingly as we close. But there's nothing there that we've seen that's just something that's just going to cause any large disruption to us.

There's been a lot of discussion on a potential new single-aisle aircraft. Anything that's involved in your thinking on the milestones?

No, not really. You think about -- there's been kind of a speculation that's been out there for certain events. And look, we're focused on execution. We just spent a lot of time in our discussion here talking about our BCA delivery rates, our certification programs, the improvement program at BDS and continued growth at BGS. So there's a lot on our plate from an execution standpoint. And at the end of the day, I think Kelly has talked about this, and I agree wholeheartedly with what he said, is there's kind of 3 things that need to happen before you talk about kind of a next-generation aircraft. One, the market has to be ready. Two, the technology has got to be ready, and we -- the Boeing Company has to be ready. We don't believe any of those factors have been met in any way. And so we're ways off from that. That doesn't mean that we don't invest in technology development. You'd be -- you just don't put your head in the sand and not invest in technology, talk to suppliers and think about what next-generation technologies can be and how do you think about the framework of that technology in the future. But that in no way means that we're ready to embark in any way on a new platform. That's a ways out. First things first, we need to deal with what's at hand, and that's what we're laser-focused on.

When you think about the cash profile of the new aircraft, is that more weighted towards actually building out the production capacity and then the deferred? Or is that more in the R&D phase?

Well, I think historically, and I think that it's -- whether or not the business model remains is a question to be determined, I think, at that point in time. But you look at history and you have development programs start and a lot of the cash burn upfront is on R&D. As you make progress in R&D, then you start capitalizing for production. You're building assets that are going to be in flight test. And so there's a number of things that go on there. That's again, historically, I think how you've seen the cash profile. And as you certify and get into delivery, start recovering that investment. But again, for us, let me just be clear, that's not something that we're contemplating anytime soon.

Got a few minutes left. Anything that we missed, any closing remarks?

No. I mean we covered a lot of ground, Gavin. I think we provided some clarity in terms of next year. I appreciate you giving me the opportunity to talk about what I've been able to go through over the past month plus versus where I was during the earnings call. So hopefully, that gives people -- investors a little bit more clarity on how we're thinking about next year and beyond.

Okay. Thank you very much for being here.

Thank you, Gavin. Appreciate it.

Thanks, Jay.

All right.