The Boeing Company (BA) Earnings Call Transcript & Summary

Yes, the lights are pretty bright. Good morning, everyone. I'm Kristine Liwag, Morgan Stanley's Head of Aerospace and Defense Equity Research. I'm very, very excited to host our next panel. We have Kelly Ortberg, CEO of Boeing. Welcome.

Good morning.

And Jay Malave, CFO of Boeing. So very, very excited to have our next panel. Before we start, we'll do the standard disclosures. For important disclosures, please see the Morgan Stanley research is your website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. And Jay, you've got yours.

I do. Thank you, Kristine. Today's discussion includes forward-looking statements that are subject to risks and uncertainties and including the ones described in our SEC filings. Relevant disclosures are included in the materials accompanying the event webcast, which can be accessed on the Events and Presentations section of our Investor Relations website.

Okay. Great. Wonderful. So Kelly and Jay, welcome again and lovely to see you at Laguna this year. I guess it's been a big year for Boeing in the past year since we were here. You now have the 737 MAX 7 certification. You've had successful production rate increases in several aircraft programs. I guess when you look back in the past year, can you share with us what you think have been the most successful accomplishments for Boeing? And also, what's been the biggest challenge in this past year.

Yes. It's been a big year for us. A lot of accomplishments. You mentioned the ramping up of production that's been paramount importance, and the team has done a really nice job of doing that on our commercial business. And they've not just done it to get to the delivery output, but we've sustained all of our key metrics -- we've done a lot of work on our culture across the company, restoring trust. We've seen the FAA give us redelegation of authority this past year, which is a really, really good sign on how we're reinventing our relationship with the FAA. And probably the most -- maybe the most underappreciated is the amount a really good work that's being done in our defense portfolio and dealing with not only our challenging fixed-price contracts, but really setting the stage for future growth in that portfolio. Steve Parker and his team have really done a nice job. I think as I -- and I said this at the beginning of the year, the 1 area probably at least the last part of last year that I didn't feel like we had made as much progress on was the certification programs. And as you mentioned, now having the 7, the 737-7 are done, the 10 is coming very shortly. We really are knocking down these major milestones on certification as well.

And congratulations on that. Diving deeper on production rates, let's look at the 737 MAX 7. It's been successful to get to 47 per month. So also congratulations on that. You've noted that you you have plans to increase the production rate again to 52 per month after you see stabilization. Can you walk through what specific KPIs you're looking at now and how long you want to be at those metrics before being comfortable to officially going to 52 per month? And also, when you think about production rates beyond 52 per month, what are the key gating items for production?

Yes. Well, first of all, you're right in that we're now driving at 47 a month, but we are not stable yet at 47 a month. That's been our task here to get I'd say that's probably taken us a little bit longer than what I had anticipated maybe when we talked at the earnings call. The -- the supply chain is in really good shape, including CFM on the engines for our rate ramps on 737. The area we're constrained right now is in our wings production. We actually produce all the wings in Renton for the MAX line. And we just have not seen the flow improvements that we expected in the time frame. So it's taken us a little bit longer. Having said that, we've got plans in place to go address that and move to the next rate. I think we're in pretty good shape from a supply chain to actually move to the next rate once we get some of these flow enablers behind us, and that will happen next year.

Great. And then you touched on the supply chain, Kelly. It sounds like you're more optimistic on the supply chain. But when you look at further rate increases when you get to the 52 or beyond talk about additional bottlenecks that you're monitoring for the supply chain there? And then also, how do you balance either the health of the supply chain, how much physical inventory you have versus potentially freeing up inventory to improve working capital?

Yes. I'll let Jay talk about the inventory because it's a big focus area for him to to try to answer that question that you're talking about. Look, in terms of supply chain, constraints. Again, on MAX, I'm not so worried about at least our near-term constraints. Now once we get to 52 and 57%, that's when you're going to see the supply chain more aligned with us relative to inventories. We're still at pretty high levels of inventory. So you've got to see us go to 52. We need to see stability out of our wing shop. The other thing that's important is we've just turned on the north line in Everett for 737 MAX. This is a new production line that we're going to build 4 airplanes here initially to certify the line. And we need to have that line producing to go to rate 52. So think about stabilizing at rate 47 in rent in getting that north line certified and producing. And once we've accomplished those 2 things, then we'll be ready to move to rate 52.

On inventory, Kristine, just we've been doing some reviews now for really since the beginning of the year and looking at what the opportunity set is in inventory. And you think about kind of what we're trying to accomplish -- and it's quite obvious. If you look at our balance sheet in sits a lot of inventory for the level of activity that the company is actually producing and delivering that. But when you look at, say, BC's by far the largest element of inventory we have, and you've got to really break it down -- and you've got to figure out a way in terms of feathering in the productivity and the improvements in inventory in such a way that continues to enable the rate increases. So it's not counterproductive to rate increases. So if you look at -- you take a look at our inventory and you break it down at BCA, you've got kind of the normal production inventory to build an aircraft. And as we increase in rates, we'll have more throughput, we'll be more productive. And that will say that we'll more manage inventory come more productively inefficiently. While at the same time, it will be countered against wanting to increase rates and having more inventory -- so the opportunity set there is how do you hold it at least flat as you're increasing rates through better productivity. But again, how do you do that to make sure that you don't interrupt these rate increases that we're -- we're trying to accomplish. Secondly, we -- and you're probably very familiar with this one is deferred production. And it's just a matter of our cash margins exceeding what we have in our average booking rates. We think next year, we'll start to level off there at least in the 737 and 787. And then we'll start to come on the other side of that, where cash is exceeding, the cash margins do start exceeding what our booking rates are. So it's a matter of just catching up to the profitability. There's also -- we have stored aircraft -- so as we talked about in the past, we've got 7 that we've prebuilt. We're building 1037-7s-37-10s that we'll start delivering on upon the certifications really next year and probably over an 18-month period. So then we'll see the inventory draw down related to that. And then the final opportunity at BCA is really sitting on excess inventory. We certainly have excess inventory in different commodities, and we did that as a function of where we were a couple of years ago. And it's the same thing, how do you feather that down while not taking your suppliers out at too low a rate relative to what you're operating at and what you're going to. And so that will take multiple years to come down. But you got to think about the opportunity set, there's multiple billions of dollars there. So it's something that we're pretty focused on. It has to be done in a way, as I mentioned, the operational plan for that has to be consistent with our rate increase plans, so they're not working against each other. But I think that we've got good road maps for that. And each of these will have their own work stream. Quickly just on BDS, just opportunities is there as well. Their inventory is not anywhere near as high as being a defense business. they have to think about precontract inventory. And so what you can do there is get into long lead material contracts, what they referred to as advanced procurement contracts with the customer such that you're being paid for the long lead look material. And then on -- the other piece of them is really contract assets, just delivering on your milestones, you delivering your milestone, you'd be able to turn that into a billable receivable quickly and then collect it. And so -- and at BGS, on their commercial side, there -- if you think about them, they're kind of a parts distribution business and parts distribution is fairly low turns. But again, there's opportunity there to increase turns at the same time generating the same sales. And on the defense side of BGS, similar to BDS, really hitting your scheduled milestones. So what we're going to have to the extent that we don't have in all cases, a work stream associated with each of those areas. And this is a multiyear opportunity that we'll be able to realize.

And so Jay, just confirming what you said there and summarizing, it sounds like once production rates are no longer in the increased phase, but more in the stabilization period and you get to those rates and you give time element to implement these things, you could free up a few billion dollars in working capital.

Right. And the beauty of that is once you get to the stabilized area where maybe you're not picking up inventory as a source of cash, but you're still holding it at a certain level, so that you can drop through the margins and really the net income of our throughput and so as I mentioned before, it's a really solid opportunity for us and just got to -- there's a tail to it question.

Wonderful. And totaling to what you guys mentioned on the 737 MAX 7, which is now certified, so very exciting. But -- Kelly, for the 737 MAX 10, can you walk us through the time line expectation of the certification of that program? And once that gets certified, how should we think about the pace of production and delivery for both the MAX 7 and the MAX 10.

Yes. So it's very soon. We've got the -- when I left Seattle yesterday, I think we had 3 deliverables to complete all the deliverables to the FAA. Now the FAA work is quite a bit larger to review all that documentation then Dash 7 but we're in close coordination with them and working on that. And so I think you're going to see that certification very soon. And just to be redundant, we completed all the flight testing, all the testing, all of the real work is done. Now we're just in the documentation phase. We had a supplying the 10 this last week, and they're very complementary. So things are looking really good to get to the certification. Now on 10, we are already building those. And as Jay mentioned, we've got in inventory. So as you look at our backlog, roughly 30% of our backlog is Dash 10. So you just see us start to build roughly 30% of the airplanes that are rolling out. the production line will be Dash 10s. We are building 2 10s up in Everett as a part of the line certification One advantage every gives us is the 10 is a longer airplane. We can't go nose detail in the factory in Renton with all 10. We can do that in Everett. So it will give us a little more flexibility for product mix there and be able to do more of a longer aircraft.

Great. Now switching airplanes to the 777X. Can you provide an update regarding the certification of the 777X Also, there were some media concerns that some customers are concern about technology obsolescence of some of those initial 777X that were in production already. Has been the discussion there? Do you -- are you seeing cancellations for some of those initial airplanes? Are you seeing -- do you have to offer discounts.

There's no change in those initial units. Those are a contract discussions we're having with our customers. And I think we've got that well understood and well contained within our estimate to complete. I don't want to negotiate publicly on what -- who is getting what airplane, but I think that's not a big issue for us. It's something we've contemplated. As far as the certification program, we're continuing to tick off the flight tests that are under the approved type inspection authorities, so that's continuing. We still do not have ETOPS authorization, ETOPS is the extended flight test program for twin engine and that's related to the Mid SEAL issue we've got with the engine. Until we get the mid-sea certification plan complete, we can't get authorization to start that ETOPS. So we're expecting that very soon. GE is working that diligently I think they had to do a little more testing than what we originally planned. I think they're still confident in the fix -- so we've got to get that done. Having said that, that's probably going to cause us a little bit of a challenge between now and the end of the year. We may see some some of the testing spill into the next year. We're still planning on 2027 deliveries. And we still think that even if we had to shuffle some of our deliveries, that's within our our EAC are estimated to complete for the program. So we're working through that right now, but I don't see that as a major challenge for us, but we still got a lot in front of us on the flight test program, not done until we're done.

Yes. Kristine, as we transition with the passage of time as we get to certification, the focus will move to production and deliveries in our podcast. As Kelly mentioned, we do -- we have made a few adjustments are ready to deliveries and production schedules, but all within the estimate of complete that we did last year. So that's all working well. And then just kind of to reiterate what we've talked about in terms of cash flow. When you think about it, we really haven't seen much change there next year kind of in line with what it's going to be this year in that ballpark, generally flattish. We expect to improve in '28 and in turn positive in '29. So really no change there. While we do see some programmatic changes, the financial forecast and the EACs still pretty much what we thought before.

Great. Thank you. On the 787, actually, I flew it again about 2 weeks ago. I kind of forget how beautiful the aircraft is. Sometimes you see them on paper, but playing with the windows was fun. You've moved to 8 per month for the 787 production this year. Can you talk about how easy was it? Did you face some unexpected challenges for the 787 to get to 8 per month. Also, when would you be comfortable for potentially going to 10 per month. And now I know I'm looking out into the future, but if you look at the backlog, there seems to be demand to support it going to 12 per month potentially 14 per month.

Yes. So if I look back through the year, and we've been pretty transparent about this, we have been behind on engine deliveries for 87. And we did pause early in the spring, we had to pause of the production line to allow that allow that to catch up. Having said that, we've stabilized at rate 8, we have not yet achieved the engine delivery performance that will allow us to go to rate 10. That's probably moving towards the end of the year. We hope to do that a little bit earlier. But again, we're working that recovery plan with GE right now. So the rest of the supply chain feels pretty good in terms of production rollout. Now you do see lumpy deliveries from us on 787, and that's primarily driven by seating and seat certification. And as I've said, that's going to be with us for a while. It doesn't really impact our flow through the factory because we can build the airplanes is more of a -- we can't deliver them until we get the documentation and the certification work done there just are a lot of new seat configurations that are very complex and taking longer to certify than what we had anticipated. So I think you're going to still see us even though we may have a pretty good rollout rate of 8 a month, you're going to see us be a little bit lumpy here month-to-month on 787 delivery.

Just longer term, cresting back to your question on -- we do have plans to go to 14 in time. Our second assembly facility is under construction today. You can see it if you were to go buy to Charleston site, and we expect that to be complete next year. So that helps start thinking about these future rates.