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CompanyName:BoeingCoCompanyTicker:BASector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q32015EarningsCallMarketCapasofEventDate:94.37BPriceasofEventDate:141.19
©2014TheStreet,Inc.Al l R ightsReserved Page1of23
Boeing(BA)EarningsReport:Q32015ConferenceCallTranscriptThefollowingBoeingconferencecalltookplaceonOctober21,2015,10:30AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
TroyLahr;Boeing;VPofIRDennisMuilenburg;Boeing;President&CEOGregSmith;Boeing;CFOTomDowney;Boeing;SVPofCorporateCommunications
OtherPart icipants
DougHarned;SanfordC.Bernstein&Company;AnalystHowardRubel;Jefferies&Company;AnalystMylesWalton;DeutscheBank;AnalystSamPearlstein;WellsFargoSecurities;AnalystCaivonRumohr;CowenandCompany;AnalystJasonGursky;Citigroup;AnalystRonEpstein;BofAMerrillLynch;AnalystSethSeifman;JPMorgan;AnalystCarterCopeland;BarclaysCapital;AnalystSteveLevenson;StifelNicolaus&Company;AnalystRobSpingarn;CreditSuisse;AnalystJulieJohnsson;BloombergNews;MediaDougCameron;TheWallStreetJournal;MediaDominicGates;TheSeattleTimes;MediaAlanScott;Reuters;MediaMikeAlmedinberg;Crain'sChicagoBusiness;Media
MANAGEMENTDISCUSSIONSECTION
Operator :
WelcometotheBoeingCompany'sThirdQuarter2015Earningsconferencecall.Today'scallisbeingrecorded.
Themanagementdiscussionandslidepresentation,plustheanalystandmediaquestion-and-answersessions,arebeingbroadcastliveovertheInternet.
Atthistime,foropeningremarksandintroductions,I'mturningthecalloverMr.TroyLahr,VicePresidentofInvestorRelationsfortheBoeingCompany.Mr.Lahr,pleasegoahead.
T royLahr (VPofIR):
Thankyou,andgoodmorning.WelcometoBoeing'sthirdquarter2015earningscall.I'mTroyLahr,andwithmetodayisDennisMuilenburg,Boeing'sPresidentandChiefExecutiveOfficer;andGregSmith,Boeing'sChiefFinancialOfficer.Aftermanagementcomments,we'lltakeyourquestions.Infairnessto
CompanyName:BoeingCoCompanyTicker:BASector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q32015EarningsCallMarketCapasofEventDate:94.37BPriceasofEventDate:141.19
©2014TheStreet,Inc.Al l R ightsReserved Page2of23
othersonthecall,weaskyoupleaselimityourselftoonequestion.Wehaveprovideddetailedfinancialinformationintoday'spressrelease,andyoucanfollowthebroadcastandpresentationthroughourwebsiteatBoeing.com.
Beforewebegin,Ineedtoremindyouthatanyprojectionsandgoalsinourdiscussionstodayarelikelytoinvolverisk,whichisdetailedinournewsrelease,variousSECfilingsandtheforward-lookingstatementdisclaimerinthepresentation.Inaddition,wereferyoutoourearningsreleaseandpresentationfordisclosuresandreconciliationofnon-GAAPmeasuresthatweusewhendiscussingourresultsandoutlook.NowI'llturnthecallovertoDennis.
DennisMuilenburg (President&CEO):
Thankyou,Troy,andgoodmorning.I'llstartwithsomecommentsonthequarterandourbusinessenvironment.Afterthat,Gregwillwalkyouthroughdetailsofourfinancialresultsandoutlook.
Withthat,let'smovetoslide2.Boeingdeliveredstrongthirdquarteroperatingperformance,with9%revenuegrowth,10.2%coreoperatingmargins,18%growthincoreearningspershare,andoperatingcashflowof$2.9billion.Givenouroperatingperformanceinthequarter,weareraising2015guidanceforrevenue,coreEPSandoperatingcashflow.Thisperformanceandconfidenceinourlong-termoutlookcontinuestosupportourcommitmenttoreturncashtoshareholders,whilealsomakingstrategicinvestmentstogrowourbusiness.Yeartodate,wehavereturnednearly$8billiontoshareholdersthroughsharerepurchaseanddividends.Thisremainsapriorityunderourbalancedcashdeploymentstrategy.
RevenueatBoeingCommercialAirplanesincreased10%onrecorddeliveriesofourindustry-leadingproductfamily.Duringthequarter,wedeliveredour325th787.Webeganfinalassemblyandachievedpower-onforthe737MAX,completedfirmconfigurationonthe777X.Andsuccessfullyconcludedfinaltestingandbeganimplementingtheadvancedautomatedfuselageproductiontechnologyonthe777line,whichwillimprovesafety,qualityandflowtime,andinsureasmoothtransitiontothe777X.
BoeingDefense,Space&Securitygrewitstoplineby6%onhigherrevenueatBoeingMilitaryAircraftandNetwork&SpaceSystems.KeycontractawardsduringthequarterincludedanorderfromIndiafor22Apacheattackhelicoptersand15Chinookheavy-lifthelicopters,andacontractfromJapanforfiveB22tilt-rotoraircraft.WealsoreceivedacontractfromtheUSNavyfor13additionalP-8APoseidonaircraft.
Significantdefenseprogrammilestonesincludeddeliveryofthefirsttwoof12EA-8GrowlerstotheRoyalAustralianAirForce,andthestartofflighttestingofthefirstfull-upKC-46Aaerialrefuelingtanker.Duringthelastfewweeks,wehavesuccessfullydeployedthetanker'srefuelingboomanditscenterlineandwingrefuelingdroguesystemsmultipletimesoverabroadrangeofflightconditions.Whilemoreworkremainsahead,theseearlyaccomplishmentsrepresentsignificantriskreductionandrealprogressontheflighttestprogram.
Insummary,wehadanotherstrongquarterofoperatingperformanceandcashgeneration.Withthat,let'sturntothebusinessenvironmentonslide3.
Thecommercialairplanebusinessenvironmentgenerallyremainshealthy,drivenbyimprovingairlineprofitability,solidairpassengertrafficandmeaningfulreplacementdemand.Aircargotrafficremainsawatchitemforusasthegradualmarketrecoverycontinuesamidmodestoverallglobaleconomicgrowthrates.Airplaneorderactivityandcustomerdiscussionsarecontinuingatamoderatedbuthistoricallyhealthypace.
Deferralrequestsandcancellationsremainwell-belowthehistoricalaverage.Inthesingle-aislesegment,
CompanyName:BoeingCoCompanyTicker:BASector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q32015EarningsCallMarketCapasofEventDate:94.37BPriceasofEventDate:141.19
©2014TheStreet,Inc.Al l R ightsReserved Page3of23
demandforournewfuel-efficient737MAXremainshigh,withcumulativeorderstotalingnearly2,900airplanesfrom58customers.Giventhestrongmarketdemand,wecontinuedtoseeupwardpressureonnarrow-bodiedproductionratesbeyondtheannounced52permonthin2018.However,weremainsteadfastinourfinancialdisciplineasweassessthemarketdemandforfurtherproductionratechanges.
Duringthethirdquarter,wemadethedecisiontoincreasethe767productionrateto2.5permonthstartingin2017,drivenbyongoingstrongdemandforthe767freighterontopoftheexistingplannedtankerproductionbase.Thisisatestamenttothecompellingvaluepropositionthatairplanebringstothemarket.Demandalsoremainsstrongforthe777X,withabacklogof306aircraftfromsixcustomers.
Onthe777,wehave44ordersincommitmentsyeartodate,includingthetwo777-300ERsannouncedlastweekforEVAAirways.Our777backlogstandsat235aircraft,withproductionfor2016essentiallysoldoutand2017productionmorethanhalfsold.Withfirmconfigurationofthe777Xcompleteandourmanufacturingadvancementstakinghold,wearenowworkingtofinalizetheproductionplantophaseinthisnewtechnology.Wewillalsocontinuetoassess777supplyanddemandtomaximizeairplaneprofitabilityoverthetransitionperiod.
Onthe787program,EVA'sdecisionlastweektoalsopurchaseupto24787-10sisevidenceofcontinuedstrongmarketdemandfortheDreamliner.The787'sbacklogofnearly800ordersfullysupportsourplannedproductionrateincreasesto12permonthin2016and14permonthlaterthisdecade.Wehavenowdeliveredmorethan330787s,includingmorethan50-9s.
TurningtoDefense,Space&Security,wecontinuedtoseesolidsupportforourmajorprograms.CongresshasbeensupportiveofthePresident'sFY16DoDandNASAbudgetrequestincreasestocoreBoeingprograms,includingtheP-8APoseidon,theF-18SuperHornet,ApacheandChinookhelicopters,andtheNASAspacelaunchsystem.Internationaldemandforourofferingsremainsstrong,particularlyintheMiddleEastandtheAsiaPacificregion.Duringthethirdquarter,internationalcustomersforDefense,Space&Securityrepresented35%ofrevenueand40%ofourcurrentbacklog.
Thestrengthofourdefenseandspacebusinessstemsfromourinvestmentsintechnologyandinnovationthathaveestablishedaportfolioofreliable,provenandaffordableproductsandservices.Wecontinuetoinvestinorganicgrowthareasthatareprioritiesforourcustomers,suchascommercialderivatives,space,unmannedsystems,intelligence,surveillanceandreconnaissance,andthecriticalfewfuturefranchiseprograms,likeLongRangeStrikeandtheT-Xtrainer.TeamsthroughoutourCompanyalsocontinuetoensureourlong-termcompetitivenessbydrivingfurthersafety,qualityandproductivitygainstoimproveprogramprofitabilityandfundinvestmentinfuturegrowth.
Insummary,ourteamisexecutingonourbusinessstrategybygrowingrevenues,generatingsolidoperatingperformanceandcapturingstrategicnewbusiness.Now,overtoGregforourfinancialresultsandourupdatedguidance.Greg?
GregSmith (CFO):
Thanks,Dennis.Goodmorning,everybody.Let'sturntoslide4andwe'lldiscussourthirdquarterresults.Third-quarterrevenueincreased9%to$25.8billion,drivenbyrecordcommercialairplanedeliveries.Coreoperatingmarginsof10.2%reflectsolidexecutionacrossbothbusinesses.Coreearningspershareforthequarterincreased18%to$2.52,reflecting,again,continuedstrongcoreoperatingperformanceonproductionprogramsandwithinourservicesbusinesses.
Let'snowdiscussCommercialAirplanesonslide5.Forthethirdquarter,BoeingCommercialAirplanesrevenueincreased10%to$17.7billiononarecord199airplanedeliveries.BCAoperatingmarginof10%reflectsstrongexecution,offsetbytheimpactofhigherplannedR&Dspendingandincreased787deliveries.CommercialAirplanescaptured$13billionofnetordersduringthethirdquarter,andbacklog
CompanyName:BoeingCoCompanyTicker:BASector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q32015EarningsCallMarketCapasofEventDate:94.37BPriceasofEventDate:141.19
©2014TheStreet,Inc.Al l R ightsReserved Page4of23
remainsverystrongat$426billionandnearly5,700aircraft,equatingtomorethansevenyearsofproduction.
Specificallyonthe787,wecontinuetoexpecttheprogramtobecashpositiveinthefourthquarter,andwestillanticipatedeferredproductiontodeclineshortlyafterweachievethe12-per-monthproductionratelaterin2016.Nochangetothesefundamentalmilestones.Wecontinuetoseeprogressinthekeyoperationalperformanceindicatorsforthe787programasweimplementadditionalproductionefficiencies,whilemeaningfullyincreasing787-9production.Asplanned,the787-9productionrateanddeliveriesarenowoutpacing787-8.Thisisatestamenttotheteam'sdetailedadvancedplanningandday-to-dayexecutiontoensuresmoothtransitionandramp-upofthe787-9.
Onthe787-8,wehavecontinuedtomakeprogressonunitcostreduction,wherewe'venowseenadeclineofapproximately40%overthelast230deliveries.We'vealsomadefurtherprogresson787-9,wherewenowhavehadmorethan30%costreductionoverthefirst50deliveries.Drivenbycontinuedcostreductions,ahealthymixof-9sandthebenefitoffavorabletimingonquarterlyspending,the787deferredproductionincreased$577milliontoanowbalanceof$28.3billioninthethirdquarter.
Wecontinuetoanticipate787deferredproductiongrowthtofurtherdeclineinthefourthquarter.Westillhaveworkaheadofusonthe787asweremainfocusedonthesolidday-to-dayexecutionandriskmitigation,whileimprovingthelong-termproductivityandcashflowgoingforward.Wewillcontinuetomanagethesmoothramp-upofthe787-9production,prepareforthe12-per-monthintroduction,andintroducethe-10,whileagain,drivingefficienciesacrossallaspectsoftheprogram.
Let'snowturntoslide6todiscussDefense,Space&Securityresults.BDSreportedstrongrulesinthequarter,withrevenueincreasing6%to$8.4billionandoperatingmarginsof12.2%onstrongperformanceandafavorabledeliverymix.BoeingMilitaryAircraftthirdquarterrevenueincreased15%to$4.1billion,largelydrivenbyF-15contractnegotiations.
Operatingmarginswere12.2%inthequarter,reflectinghighervolumesandstrongperformance.Network&Spacerevenueincreased5%to$2.1billion,drivenbycommercialcrewvolume.Thissegmentalsogeneratedstrongoperatingmarginsof11.5%onfavorablemixandproductivityimprovements.GlobalServices&Supportrevenuedeclinedto$2.2billion,largelydrivenbytimingofdeliveries,whileoperatingmarginswerestrongat12.9%.Defense,Space&Securitycaptured$9billionofordersduringthequarterandreportedasolidbacklogof$59billion.
Let'smovetocashflownowonslide7.Operatingcashflowforthethirdquarterwasstrongat$2.9billion,drivenbyhighervolumesandsolidoperatingperformance.Withregardstocapitaldeployment,wepaid$618millionindividendsandrepurchased11millionsharesfor$1.5billioninthethirdquarter,aswecontinuetodeliveronourcommitmentofreturningcashtoshareholders.Yeartodate,we'vereturned$8billiontoshareholdersthroughdividendandrepurchased41millionshares.Again,thisreflectsourcommitmentandconfidenceinthelong-termoutlookforourbusiness.Returningcashtoshareholders,alongwithcontinuedinvestmentstosupportfuturegrowth,remainahighpriorityforus.
Let'snowmovetocashanddebtbalancesonslide8.Weendedthequarterwith$9.9billionofcashandmarketablesecurities.Ourcashbalancecontinuestoprovidesolidliquidityandpositionsuswellgoingforward.
Let'snowturntoslide9andI'lldiscussouroutlookforthebalanceof2015.Basedonthestrongoperatingperformanceyeartodate,we'veincreasedour2015guidanceforrevenue,operatingmargins,coreearningspershareandoperatingcashflow.Coreearningspershareguidancefor2015hasincreased$0.25,tonowbebetween$7.95and$8.15ashare,oncontinuedsolidexecutionacrossthebusiness.TheCompanyrevenueguidancehasincreased$500million,tonowbebetween$95billion
CompanyName:BoeingCoCompanyTicker:BASector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q32015EarningsCallMarketCapasofEventDate:94.37BPriceasofEventDate:141.19
©2014TheStreet,Inc.Al l R ightsReserved Page5of23
and$97billion,onhighercommercialairplanedeliveries.
ECAdeliveryguidancehasincreasednow5airplanes,tobefrom755to760.Defense,Space&Securityoperatingmarginguidanceisincreasedtoapproximately10%,againreflectingstrongoperatingefficienciesacrossthebusiness.Operatingcashflowhasincreasedtoapproximately$9.5billiononimprovedperformanceacrosstheCompany,aswellasfavorabletimingofreceiptsandexpenditures.Furthermore,we'reloweringourR&Dguidance$100million,tonowbe$3.4billionfortheyear,toreflecttimingofspending.
Inthefourthquarter,weexpectECAmarginstobeimpactedbythestrongoperatingperformance,somewhatoffsetbydeliverymixandhigherplannedR&Dspendingon777X,aswellasadditionalinvestmentsinproductivityinitiatives.Soinsummary,wegeneratedsolidrevenuegrowthandhealthyoperatingmargins,whilegeneratingsignificantcashflow.Wemeaningfullyreturnedcashtoshareholdersandinvestedinourfuture.Andwiththat,I'llturnthecallbackovertoDennisforclosingcomments.
DennisMuilenburg (President&CEO):
Thankyou,Greg.Withthreesolidquartersbehindus,weremainfocusedondisciplinedexecution,qualityandproductivityimprovements,andmeetingcustomercommitments.Ourprioritiesgoingforwardareclearandconsistent:theprofitableramp-upincommercialairplaneproduction;deliveringonourdevelopmentprograms;continuingtostrengthenourdefenseandspacebusiness;drivingproductivityandperformancethroughouttheenterprisetofundourinvestmentsandinnovation;talentandtechnology;andimportantly,providingincreasingvaluetoourcustomersandourshareholders.Nowwiththat,wewouldbehappytotakeyourquestions.
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions)OurfirstquestioncomesfromDougHarnedwithBernstein.
DougHarned (Analyst-SanfordC.Bernstein&Company):
Yes,goodmorning.
DennisMuilenburg (President&CEO):
Goodmorning,Doug.
DougHarned (Analyst-SanfordC.Bernstein&Company):
I'mgoingtoprobablyviolatethisalittlebitbecauseIwantedtogetsomeclarityonthedeferredproductionrampaspartofthisquestion.Sowhenyoulookforward,you'retalkingaboutbeingcashpositiveinQ4onthe787.Myunderstandingwasthatwouldbefollowedbyaplateauin2016,andthenthatwouldrampdownasyoutookrateuptowardthebackpartof2016.Ijustwanttomakesurethat,thatisstillhowyou'rethinkingaboutthis.Andthen--
GregSmith (CFO):
Yes.
DougHarned (Analyst-SanfordC.Bernstein&Company):
Thatishowyou'rethinkingaboutit?
DennisMuilenburg (President&CEO):
CompanyName:BoeingCoCompanyTicker:BASector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q32015EarningsCallMarketCapasofEventDate:94.37BPriceasofEventDate:141.19
©2014TheStreet,Inc.Al l R ightsReserved Page6of23
That'sexactlyright,andthatremainsconsistent,andwe'reconfidentinthatprofile.
DougHarned (Analyst-SanfordC.Bernstein&Company):
Okay,great.Thenthesecondpartis,whenyoulookouttowardtheendoftheblock,whenwelookatthis,thedeferredproductionlevelsuggeststousthatwhenyougetinthelaterportionoftheblock,you'regoingtohavetohaveunitcashmarginsmoveabove25%fortheprogram.
Nowthat'saprettygoodnumber,andwhatI'dliketoknowfirst,isthatcorrect?Andthensecond,howdoyouseethepathtogettingthere?
GregSmith (CFO):
Well,Doug,Iwon'tgetintothespecificprogram-by-programmargin.ButIwillgiveyouasenseof,I'llsay,thefewareasthatarefocusedon--thathavebeeninthepastandwillbethepathforwardtocontinuetodrive787profitability.
Certainlyproductivity,continuingtocomedownthelearningcurveinternally.Youheardustalkabouttheprogresstodateonthe787-9andthe787-8,sothat'sgottocontinue,andwe'vegotalotofprojectsin-work.We'vegottogetthosematuredandwe'vegottogetthemcutinonlinenumbers.Sothereisnotalackof,I'llsay,focusandideasinthatarea,butwe'vegottogetthemmaturedandgetthemin.Butcontinuingtoexecuteaswehaveontheproductivity.
Mixplaysabigfactorinhere.Soourabilitywitharichermixofdash-9sand-10s.Andquitefrankly,asyou'veseenthedash-9getenteredintotheproductionsystemassmoothasitis,isanother,Ithink,indicatorofthatmixcomingtogether.Andkeepinginmind,thisisallinourbacklog,sothisisdeliveringonthebacklog.Butgettingthatsmoothintroductionandhavingthatrichermixofdash-9sand-10swillobviouslygrowasyougetfurtheroutinthatcostbaseanddeliveronthatbacklog.
Thesupplychain--obviouslywe'vegotplannedstepdownandcontractualstepdown,butwe'vealsogotinitiativesthatwe'reworkingtogetherintheCompanyandacrossthesupplychain,lookingforadditionalproductivityideas.Andkeepinginmind,there'sonlybeen300unitsbuilthere,roughly.Andaverysteepramp-up,andalotofchangeinratebreak.
Having--beingstableat10,andnowmakingthattransitionupto12,thisiswhenyoulook--historically,thisiswhereyou'vebeenreallyabletocaptureadditionalproductivitygains.Sowe'reworkingwiththesupplychainonthat.
Andthenrate.Asyouknow,we'regoingupinrate,anditwilltotalabout40%,goingupto12amonthin2016,andthen14amonthlaterin2019/2020timeframe.Somakinggoodprogressongettinguptoratewithinthesupplychain,aswellasgettingthefactoriesreadyinternally.
Again,thisisdeliveringonthebacklog,andyouknowthemarket,andsothatsupportstheserateincreasesverymuch.Butagain,thatwillcontinuetodriveproductivity.
AndthenIguesstheonlycommentI'dmakeonthemargins,I'dsaytheyaresimilartowhatweseetodayonourwide-bodyprogramsandwhatwe'reachieving.SoI'dsaygoodprogresstodate,alotofworkaheadofustodo,teamsgotgoodplansinplace,butweneedtokeepexecutingaswehave.Andthatwillbethepathgoingforward.
DennisMuilenburg (President&CEO):
Doug,justtoaddalittlemorecolortothat.AsGregsaid,ineachofthosedimensions,wehaverealandfirmactionsunderway.Icantellyouformyself,Greg,Rayandthewholeteam,thisisaveryimportant,
CompanyName:BoeingCoCompanyTicker:BASector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q32015EarningsCallMarketCapasofEventDate:94.37BPriceasofEventDate:141.19
©2014TheStreet,Inc.Al l R ightsReserved Page7of23
high-priorityfocusareaforus.
AndineachoftheseproductivitydimensionsthatGregtalkedabout,theadvantagewehaveheregoestothefactthatwe'vegot800oftheseaircraft,roughly,inbacklog.Sothisgivesustheopportunitytodothatlong-termplanningandengagement,andtodriveprofitabilitywiththatlong-termview.Andthatiswhat'sgoingtodriveusdownthelearningcurvetogettothoseobjectivesthatGregmentioned.
DougHarned (Analyst-SanfordC.Bernstein&Company):
Aspartofthattrajectory,thenpresumablyyoustillhaveanumberofcontractualstep-downsinthesupplychainthatyou'relookingforwardtoandthatyouhaveaprettygoodhandleon,Iguess?
DennisMuilenburg (President&CEO):
Wedo,Doug.Andthatincludestheover-archingPartneringforSuccessumbrellathatwe'vetalkedaboutbefore,thatincludescommittedstep-downsthatareintheplan,andacontinuingefforttodrivevaluegeneration.Soourvalueengineeringeffortthatwe'vetalkedaboutbeforewithoursupplychainnetwork,morethanathousandideasinthepipelinerightnowthatwe'removingfromdesignstagetoimplementationstage.Sobothplannedandcommittedstep-downs,aswellasadditionalvaluegenerationbeyondthat.
DougHarned (Analyst-SanfordC.Bernstein&Company):
Okay,thankyou.
Operator :
OurnextquestionisfromHowardRubelwithJefferies.
HowardRubel(Analyst-Jefferies&Company):
Thankyouverymuch.Dennis,yourecentlyextendedthe787-10withanewcustomer,andyou'vedoneanumberofthingswiththe777toenhanceitasavalueproposition.Couldyouaddressalittlebitthemarketdynamicsyouseebecauseofthecapabilitiesthesenewairplanesoffer,andhowyouseetheenvironmentforboththe777demandandalsothe9andthe10?
DennisMuilenburg (President&CEO):
Youbet.Thanks,Howard.
Soyes,juststeppingback--andIknowthere'sbeenalotofdiscussionoutthereaboutthewide-bodymarketplaceandtheprospectsgoingforward.Andletmepaintforyouamarketoutlookthere,andthenhoneinonthosetwospecificairplanesinparticular.
Butifyoutakealookattheoverallmarket,wecontinuetoseeagrowinghealthymarketplace.Aswesaidbefore,ourcurrentmarketoutlookfor38,000newairplanesoverthenext20yearsintotal.Wecontinuetoseestrongpassengergrowth,independentassessments,again,of6%year-over-yeargrowththroughoutthetimeperiod.
Cargogrowthhasbeenmoremoderated,andhasbeenabitslowtorecover,asyouknow,butweareseeingsomerecoverysignsthere.Ifyoutakealookatoverallmarketcharacteristics,wecontinuetoseeastronghealthymarketplace,bothnarrowbodiesandwidebodies.
Ifyoutakealookatreplacementdemand,itcontinuestobestrong.Weexpectabout40%ofthoseaircraftinthatmarketoutlooktobedrivenbyreplacementdemand.AsIsaidcancellationsandreferrals
CompanyName:BoeingCoCompanyTicker:BASector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q32015EarningsCallMarketCapasofEventDate:94.37BPriceasofEventDate:141.19
©2014TheStreet,Inc.Al l R ightsReserved Page8of23
remainbelowhistoriclevels,aswell.Sothemarketfundamentalsremainstrong.
Now,whenwegettothetwoproductsyoumentioned,on787,asnoted,with800aircraftinbacklogandacontinuingstrongmarketdemand--andIthinkEVA'sdecisionherejustinthelastcoupleofweekstoacquire24787-10sisjustanothergoodsignofthevaluethat,thatproductisbringingtothemarketplace.The787isdeliveringvalueforourcustomers.
Thevaluepropositionisclearlyacompetitiveadvantage,bothintermsofoperatingcostreduction,aswellastheadvantageonrevenueandcargovolume,andresidualvaluethatitbringstothecustomers.Andwiththeproductionefficienciesthatwe'regenerating,weremainverybullishon787.AndasGregtalkedabout,ourplanstorampupto12amonthandthento14amonthbeforetheendofthedecade,allsupportedbystrongmarketdemandandauniquevaluepropositionofthatairplane.
Onthe777,we'vebeenveryfocusedonbuildingoutthe777bridge,aswe'vetalkedabout.Weneededtogenerateabout40to60ordersperyearonthecurrent777tobuildthatbridge;year-to-date,we'vegot44ordersandcommitments.Sowe'recontinuingtofilloutthatbridge.
Inessence,the777lineissoldoutthrough2016,morethanhalfsoldin2017,andwecontinuewithanumberofseriouscampaignsthere,allbridgingtothe777X.Andasyoupointedout,the777Xisbringing,again,auniquevaluepropositiontothemarket.Bothtoday's777andthe777Xhavereallynopurecompetitor,andbringuniquevaluetoourcustomers.
And777Xhavingjustcompletedfirmconfiguration,goodsolidsignsondevelopmentprogrambeingexecutedonplan,andweplantohaveEISonthatairplane2020asscheduled.Soinallcases,astrongfundamentalmarket,therightdifferentiatedproductline--both787sand777s--andverymindfulrightnowaboutbuildingabridgefromthe777tothe777X.
HowardRubel(Analyst-Jefferies&Company):
IfIjustmay,onthe78,initiallyyouhadteethingpainsintroducingitintothemarket.Couldyoujustforasecond--andthenI'llendhere--addressboththestatsreliabilityandhowyou'veimprovedthat,andhowthat'salsohelpedlowerbothairlinecostsandyourcosts?
DennisMuilenburg (President&CEO):
Youbet.Andwecontinuetoseestrongprogress.
Andyou'reright,wehadsomechallengesasweintroducedthatairplaneintoourcustomerfleets.Andwe'vebeenveryfocusedonreliabilityimprovementsbothinthefieldandintheproductionline.We'veseensteadilyimprovingdispatchreliabilityacrossourcustomersets,andwe'repleasedwiththeprogressthere.
Thatsaid,moreworktogo,sowe'renotdone.Andwe'regoingtocontinuetodrivedispatchreliabilitythereforourcustomersuntilweachievetheobjectivesthatwehave.Somoreworktogo.
Iwillsaythatreliabilityimprovementsthatwe'vedeliveredtodateinthefield,andthenhaveback-drivenintotheproductionlinehavereallytakenhold.Andthebestsignofthatiswiththeroughly50dash-9sthatwedelivered.Asthey'rehittingthefleets,they'recominginatamuchdispatchreliabilitythantheoriginaldash-8s.
Sojustfurtherproofthattheinvestmentswe'remakingaredeliveringvalueforourcustomers.Andwe'regoingtostayveryfocusedongettingtothefinishlinethere.
HowardRubel(Analyst-Jefferies&Company):
CompanyName:BoeingCoCompanyTicker:BASector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q32015EarningsCallMarketCapasofEventDate:94.37BPriceasofEventDate:141.19
©2014TheStreet,Inc.Al l R ightsReserved Page9of23
Thankyou.
Operator :
OurnextquestionisfromMylesWaltonwithDeutscheBank.
MylesWalton (Analyst-DeutscheBank):
Thanks,goodmorning.
DennisMuilenburg (President&CEO):
Goodmorning.
MylesWalton (Analyst-DeutscheBank):
Greg,maybeoneforyou.Iknowtimingaroundadvancesissomethingthat'sgenerallyhardtopredict.You'veputoutthereaplaceholderof$3billionfor2015.
Andyear-to-date,thathasn'treallycontributedmuch.Andifyoulookatthefourthquarter,obviouslythatcamethrough.It'shardformenottothinkyou'dberunning$1billion-plusaheadofyourrevisedguidance.Socanyouhelpgiveeithertheoffset,orifthatismoreorlessjustconservatismaroundnotknowingwhenthat$3billionisgoingtotick?
GregSmith (CFO):
Yousaidit,Myles.Theycertainlydomovearound.Istillexpectittobeapositivecontributorto2015,buttimingdoesfactorin,soweshouldhavemoreinthefourthquarter.
ButIthinksteppingbackfromthat,youcansee,it'saboutthestrengthofthecashenginehere,andnottherelianceontheadvances.Obviouslyadvancesareimportant,butwhenyoulookintothecoreoftheCompany,you'reseeingstrongcashflowgeneration.Andthat'sthebigfocusareaforus.Andasyousaid,advances,they'regoingtomovearoundquarter-to-quarter,andwewillhaveafewmorehereinthefourthquarterthanwehaveinthethirdquarter.
MylesWalton (Analyst-DeutscheBank):
Evenwiththetickupintherevisedcashguidanceforthisyear,theoutlookisstillgrowthinto2016fromthenewlevel?
GregSmith (CFO):
Yes,asyoustepbackandyoulookatthelong-termprofileoftheCompany,westillseethesameopportunitytohavestrongcashflowgrowthgoingforward.Itreallyplaysintocertainlytheproductionratesincreasesthatwe'vetalkedaboutonthe737,the767,andaswellasonthe787overthelongterm.Andobviously787improvingthroughthatperiod.Sooverthelongterm,we'reconfidentinthelong-termcashflowgrowth,I'llsay,storythatwehaveinplace,andit'sauniqueonewhenIcompareustootherindustrials.
MylesWalton (Analyst-DeutscheBank):
Great,thanks.
GregSmith (CFO):
Thanks.
CompanyName:BoeingCoCompanyTicker:BASector:IndustrialGoodsIndustry:Aerospace/Defense
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Operator :
We'llgotoSamPearlsteinwithWellsFargo.
SamPearlstein (Analyst-WellsFargoSecurities):
Goodmorning.
GregSmith (CFO):
Goodmorning.
SamPearlstein (Analyst-WellsFargoSecurities):
Dennis,you'vetalkedaboutinthepastbeingabletogetmid-teensmarginswithintheBCAbusiness.AndIguessI'mwonderinghowcomfortableyouarestillwiththat?Andhowdothingslikethe777transitionandvolumeandactuallylowercommodityprices--whichshouldbelowerescalation--howdoesthatplayintoit?WhatdoesittaketogetthosekindofmarginsinBCA?
DennisMuilenburg (President&CEO):
Sam,goodmorning.Yes,weremainfocusedonthataspirationaltarget.
Aswe'vetalkedaboutbefore,weseemargingrowthinBCAasanimportantpriorityforus.You'reseeingitinthedataandtheresultsthatwe'reproducing.TheproductivityactionsthatGregdescribedearlierareallpartofdoingthat.
Partofitisproductivityefficiencyinsideourownfactories.AnotherkeyportionofthatiswithinoursupplychainthroughourPartneringforSuccesseffort.
ButifwetakethelongertermviewofwhatourCompanycanandshouldbe,gettingtothatmid-teensmarginrangeisanexpectationandaspirationthatwesetforourselves.AndIthinkthat'sasmartandaggressivetargetforthelongterm.We'regoingtostayveryfocusedonit.
AsGreghassaid,withthebacklogthatwehaveandtheproductlinethatwehave,ouropportunitytogeneratelong-termcashgrowthandlong-termmarginaccretionisverystrong.Andwearetakingtherightproductivityactions,bothinternallyandexternally,todothat.Andthatwillresultinincreasedreturntoourshareholders,anditwillallowustofundandinvestinourfutureinnovationandtalent.Soweareveryfocusedondoingthat,andremainsteadfastonthatlonger-termtarget.
Now,regardingyourquestionaround777,aswethinkaboutthattransition,obviouslyakeytopicforushereasthe777Xwillbegincomingintotheproductionsysteminthe2018timeframe,leadingtoEISin2020.AsImentionedearlier,we'rebuildingthe777bridgewithtoday'scurrentproductline,leveragingthefactthatairplanedoesprovideauniquevaluepropositioninthemarketplace.
We'rethinkingcarefullythroughexactlyhowwedothattransitionandthetimingofit.Aswe'vetalkedaboutbefore,it'simportantthatwedothatefficiently.We'retryingtopullaheadsomeofthetechnologyinvestmentintheline,likeautomationinthefuselageline,tode-riskthattransition.AndasImentionedearlier,we'vealreadyimplementedthatautomationhereinthe777lineonthefuselageuprightbuild,andthat'sgoingwell.Sothat'sanotherwaytode-riskthattransitionandensureprofitabilitythroughit.
There'sbeenalotofconversationsoutthereaboutexactlywhattheshapeofthattransitionmightbe,andwe'refactoringinmarketdemand.AsIsaid,someuncertaintyaroundcargorecovery.
Frankly,someuncertaintyaroundEx-ImBankreauthorization.Thosearefactorsthatcouldcausesome
CompanyName:BoeingCoCompanyTicker:BASector:IndustrialGoodsIndustry:Aerospace/Defense
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customerstodelaydecisionsaroundwidebodies,sowe'rebeingmindfulofthat.Wewanttomakesurewemaintainahighlyprofitablelinethroughthetransition.Allofthosefactorsaregoingintoourplanningrightnow.
Frankly,withthat,wedon'tseeanyscenarioswherewewouldcomedownbelowaseven-a-monthproductionrateduringthetransition.Importantagaintoremindourselvesthat2016isessentiallysoldout,2017ismorethanhalfsoldout,sothistransitionthatwe'retalkingaboutisa2017andbeyondtransition.Andthroughallofthat,we'regoingtodrivethisinawaythatmaximizesprofitabilityofthelinethroughthetransition,allowsustocontinuetoinvestinthefuture.
Andmybroadercommentsaboutcontinuedcashgrowthandmarginaccretionoverthelongterm,allaccountforthat777transition.Sothat'sallfactoredintoourbiggergameplan.
SamPearlstein (Analyst-WellsFargoSecurities):
Thanks.AndGreg,Idon'tknowifyoucanmentionanythingaboutthecommoditycostandhowthataffectstheescalationandyourassumptionsintheprogramaccounting?Didithaveanyeffectthisquarter?
GregSmith (CFO):
No,itdidn'tSam.Itdidn'thavemuchimpactatall.
SamPearlstein (Analyst-WellsFargoSecurities):
Thankyou.
DennisMuilenburg (President&CEO):
Thanks.
Operator :
OurnextquestionisfromCaivonRumohrwithCowenandCompany.
CaivonRumohr (Analyst-CowenandCompany):
Yes,thankyouverymuch.Couldyoucommentwhethertherewereanyadjustmentstocommercialblocksoraccrualrates?
Andthenrelatedly,Dennis,youtalkedaboutmoderatedorderstrength.Areyoustilllookingforbook-to-billtogetto1.0fortheyear?Becauseitlookslikeyou'regoingtohavetomoveprettyquicklytogetthere.
Andifso,howdoestheChineseorderplayintothat?Andwhataretheimplicationsofgettingthereornotgettingthere,intermsofpotentialprofitability,lookingforward?Thankyou.
DennisMuilenburg (President&CEO):
Cai,letmetakethesecondpart,andthenI'llflipittoGregforyourfirstquestion.
Soregardingbook-to-billfortheyear,again,wecontinuetoseebook-to-billofapproximately1fortheendoftheyear.AsImentioned,somehesitancyrightnowinthewide-bodymarketplacearoundcargorecoveryanduncertaintywiththeEx-ImBank.That'scausingsomecustomerstopauseabitondecision-making,soit'smoreofatimingissue,ratherthanavolumeissue.Sowestillanticipatebook-to-billtoberoughly1bytheendoftheyear.
CompanyName:BoeingCoCompanyTicker:BASector:IndustrialGoodsIndustry:Aerospace/Defense
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Somedecisionscouldslideintotheearlypartofthenewyear.Frankly,withabout5,700aircraftinbacklog,annualbook-to-billratiosarenotthatimportanttous.We'recontinuingtogenerateorderspipeline,buttimingquarter-to-quarter,ifithappenstoshiftabitwiththekindofbacklogwehave,weremainveryconfidentinthelong-termplan.
Asyoumentioned,therecentannouncementbyourcustomersinChinawasverypositiveforus.WewerehonoredtohostPresidentXiatourfactoryinEverettacoupleweeksago.Amongstanumberofagreements,thatincludedanannouncementaround300aircraft--250narrowbodiesand50widebodies.Someofthoseareairplanesthatwerealreadyinbacklogbutunidentified.Othersareincrementalnewcommitments.
Andwe'llbeworkingthroughthespecificdealsonthoseairplaneswithourcustomersoverthenextmanymonths,andwe'llannouncethoseastheycometofruition.Butthatwillgenerallycreateupsidetoourbook-to-billposturefortheendoftheyear.
Gregyouwanttotakethefirstpart?
GregSmith (CFO):
Yes,onblockextensions,weextendedthe737by200aircraft;sooneblockextensionthere.Andthenwiththeincreaseddemandandoutlookonthe767,weincreasedthataswellby34units.Asfaraschangeinbookingratesbyprogram,nosignificantchangesI'dsay,Cai,acrosstheboard.
CaivonRumohr (Analyst-CowenandCompany):
Thankyouverymuch.
GregSmith (CFO):
You'rewelcome.
Operator :
OurnextquestionisfromJasonGurskywithCiti.
JasonGursky(Analyst-Citigroup):
Onequickclarificationquestion,andthenthemeatofone.Dennis,youmentionedtherateofsevenamonthonthe777.Wouldyoubefiringblanksinthatenvironment?That'stheclarificationquestion.
AndthenthemeatofthequestionisoneforGregonCapExoutintothefuture.Canyoutalkabouttheputsandtakesthatyou'relikelytoseeoverthenextcoupleofyearsonCapEx?
DennisMuilenburg (President&CEO):
Yes,Jason,onthefirstquestionthere,yes,thatwillbefactoredintotheoveralltransitionplan.Asyou'rewell-aware,that'saverycommonpracticeforusaswetransitionmodelmixesinourhigh-volumelines.Aswegofrom777to777X,wherewecanpulltechnologyandimplementationahead,aswe'redoingwithautomation,wewill.Thatwillmakethetransitionevensmoother.
Insomecases,wewillfireselectedblanksdowntheproductionline.That,again,willhelpussmoothoutimplementationandinsureleanimplementation.Notethatwe'llalsohavesome777flighttest--excuseme,777Xflighttestaircraftthatwillflowthroughtheproductionsysteminthatsametimeframe.Soallofthatwillbefactoredintotheproductionprofileandthetransitionplan.
Butagain,asIsaid,welookedthroughalloftheoptionsandvariableshere,bothfromamarketdemand
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standpoint,fromaproductionefficiencystandpoint.Wedon'tseeanyscenariosthatwouldtakeusbelowaseven-a-monthproductionrate.Andwe'reveryconfidentthatwecanachievethatimplementation,remainveryprofitableonthatlinewhilewedoit,andsuccessfullybringthe777Xtothemarketplace.
GregSmith (CFO):
AndJason,onCapEx,we'llexpecttogoupslightlynextyearfromourlevelsthisyear.Andagain,that'ssupportingthegrowthintheproductionrateswetalkedaboutandfurtherinvestmentsinthedefensebusiness,aswellassomeoftheproductivityinitiatives.Sofurtherimplementationoftheautomationactivityonthe737andthe787willalsobeputintoplaythereand,again,supporting777X,aswellastheplannedproductionrates.AndthenIwouldsaypast2016,thenwestarttocomedownandmoderatefromthereisreally,again,linkedtoourgrowthandlinkedtoourinvestmentprofile.
JasonGursky(Analyst-Citigroup):
Okay,that'shelpful.Thanks,guys.
GregSmith (CFO):
Okay,you'rewelcome.
DennisMuilenburg (President&CEO):
Thanks,Jason.
Operator :
We'llgotoRonEpsteinwithBankofAmericaMerrillLynch.
RonEpstein (Analyst-BofAMerrillLynch):
Yes,goodmorning,guys.
GregSmith (CFO):
Goodmorning,Ron.
RonEpstein (Analyst-BofAMerrillLynch):
Quickquestionforyou,forGreg.Whenyouthinkaboutbalancingnear-termcapitalreturnstoshareholdersversuslong-termvalue--andinthecontextofthisis,I'mthinkingaboutthesharebuybacks.Year-to-date,youguysboughtback--what,ifIdidthemathright--41.5millionsharesforabout$6billion,right?
GregSmith (CFO):
Yes.
RonEpstein (Analyst-BofAMerrillLynch):
Thatimpliesanaveragecostofmaybe$144to$145pershare.
GregSmith (CFO):
Yes.
RonEpstein (Analyst-BofAMerrillLynch):
CompanyName:BoeingCoCompanyTicker:BASector:IndustrialGoodsIndustry:Aerospace/Defense
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That'swithinabout10%ofthehistoricalhighsofthestock.Howdoyouthinkaboutthat?
GregSmith (CFO):
Well,wethinkthestockisstillundervalued.Andagain,IthinkitgoestothemarketplacethatDennistalkedabout.Itgoestothestrengthofthebacklog,whichthenlinksrighttotheproductionratesthatwehaveannounced,thatare,again,deliveringonthatbacklog.
Soit'sthatprofile,alongwiththeproductivityexpectationsyear-over-year.Soweobviouslyseealotofvaluestillleftinthisstock.That'swhyweboughtback$20billioninthelastthreeyearsandremaincommittedtothat.
Atthesametime,weremaincommittedtothedividend,toensurethatwe'recompetitivefromthedividendperspective,aswellasinvestinginthebusiness.That'sbeenfirstandforemostforus,investinginthingslike777X,liketheMAX,like787-9and-10.Andtheserateincreasesalongwith,again,efficiencies,automation,thatwe'reputtinginon777,we'reputtinginon737.Andthenadditionalinvestmentswe'remakingdowninCharlestontosupport,again,productivityandrateincreases.
Sothat'sthekindofprofileweseethatgivesustheconfidencetocontinuetobuybacktheseshares,buthaveabalanceddeploymentplantomeetallofourobjectives.
RonEpstein (Analyst-BofAMerrillLynch):
Great.IfImay,justafollow-on,seeingthateverybodyelseaskedaboutfivequestions.
Howdoyouguysthinkaboutthemiddle-of-the-marketairplane?That'ssomethingwe'vebeenthinkingaboutalot,andthere'sbeenalotofchatteraboutthatintheindustry.Howdoyouthinkaboutasapotentialmarketopportunity,andwhatinvestmentwouldberequired?
DennisMuilenburg (President&CEO):
Westillseethatasanichemarket,butanimportantone,andwe'rehavingconversationswithourcustomers.Weseetodaythat,thatmarketspaceislargelyservedbyour737MAX8and9family,andontheupperend,bythe787.Andwethinkthat,inlargepart,servesthatmarketspace.
It'simportantthatalotofourcustomers,theirbuyingbehaviorandtheirneeds,arerelatedtofamiliesofaircraft.Andwestillseeinthatnarrow-bodymarketplacetheMAX8asbeingrightattheheartofthemarket,augmentedwiththeMAX9toservesomeofthoseneedsthatareinthatmoreofthemiddle-of-the-marketsegment.Soforthenearterm,weseeourcurrentproductlineasbeingtherightanswerforthatsegment.
Thatsaid,we'recontinuingtohaveconversationswithourcustomers.Andifweneedtorespondwithanewairplaneinthatmarketplace,thatwouldbesomethingthatwouldbemoretowardsthemiddleofthenextdecade.It'snotsomethingthatwoulddramaticallyaffectourR&Dprofilesoverthenextfourtofiveyears.Wethinkthoseprofilesareverysolid,withourcurrentdevelopmentprograms.
Butitissomethingwe'rekeepinganeyeon,continuingtotalkwithourcustomers,understandtheirneeds,andifthemarketdemandsaresponse,we'llbeready.
RonEpstein (Analyst-BofAMerrillLynch):
Great,thanksalot.
Operator :
CompanyName:BoeingCoCompanyTicker:BASector:IndustrialGoodsIndustry:Aerospace/Defense
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OurnextquestionisfromSethSiefmanwithJPMorgan.
SethSeifman (Analyst-JPMorgan):
Hi,thanksverymuch,andgoodmorning.
GregSmith (CFO):
Goodmorning,Seth.
SethSeifman (Analyst-JPMorgan):
Togetinonthe787alittlebitmoreandwhatyouexpectinQ4,nottonitpicktoomuch,butyou'vetalkedinthepastaboutahealthydeclineinthedeferredgrowthinQ4,butnowwe'restartingfromalowerlevel.Somaybejustalittlemorecoloronhowtothinkaboutthat?Andthenifyoucouldexplainalittlebitaboutthedynamicsasweheadinto2016,andwhyitplateausforalittlewhilebeforegoingdownatthat12-month?
GregSmith (CFO):
Sure,we'llseeadeclineindeferredinthefourthquarter,I'dsay,similartotherateofdeclineyou'veseeninthisquarter.AndQ3certainlywashelpedbystrongperformance,butwedidhavesometimingofexpendituresaswell.Sowehadalittlebitof,I'llsay,favorablepick-upinthethirdquarter.
Butagain,Ithinkwhenyoustepbackandlookattheoverallprofileordeferredtodate,it'sbetterthanwhatweoriginallyprojected.Andthenasyoumoveinto2016,Seth,asIsaid,you'llstarttoseethatturnonceyouhitthe12-a-month.Sothegrowthwillmoderateobviouslyintothefourthquarter,andthenthroughinto2016untilyouhitthatrate,andthenthat'swhenwewouldexpectittoturn.
Andthatturndown,again,isdrivenbytherate,aswellasthestepdownonthesupplychain,thecontractedstep-downpricingandthecontinuedproductivity.Butalsothatmix.Imean,ensuringthatwe'vegot--thatdash-9continuestocomeintotheproductionsystemasithas.Sothoseare,I'dsay,thekeyindicatorsorkeyleversaswemoveinto2016.
SethSeifman (Analyst-JPMorgan):
Thanksverymuch.
GregSmith (CFO):
You'rewelcome.
Operator :
NextwegotoCarterCopelandwithBarclays.
CarterCopeland (Analyst-BarclaysCapital):
Goodmorning,DennisandGreg.
GregSmith (CFO):
Goodmorning,Carter.
CarterCopeland (Analyst-BarclaysCapital):
Greg,Iwonderedifwecouldgobacktothemarginsforasecond.Inotedyouextendedtheblock200
CompanyName:BoeingCoCompanyTicker:BASector:IndustrialGoodsIndustry:Aerospace/Defense
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unitsonthe737,butnomaterialmarginincreasethere.Iwonderedwhythatwas?IassumethatwouldbeallMAXs.
Andthenonthe777,Dennis,yourcommentsabouttryingtomaintainthatmarginratetotheextentpossible.Youobviouslyhavesomeprettysignificantextracoststherewhenyoutransitionoverthesurgelinefromthe787tothe777.Isitthat,thatcostisinthe777Xblock--orit'scalledR&D?
Howshouldwethinkabouthowyoumanagethetwodifferentprogramsgoingdownthesameline,becausethere'sobviouslysignificantcoststhere?Soanycolorwouldbemuchappreciated.
GregSmith (CFO):
Letme--ifyou'reallright,I'llanswertheMAXquestion.
DennisMuilenburg (President&CEO):
Goahead,Greg,yes.
GregSmith (CFO):
Itwasaslightpick-up,Carter,butagain,200unitsonalargeblock.Sothere'salotofmovingpiecesinthere.There'ssomeinvestmentinthereforadditionalrateincreasesinproductivity.Sowhenyounetthatallout--again,notasignificantchangeonoverallbookingratesforthequarter.
CarterCopeland (Analyst-BarclaysCapital):
Butpositive?
GregSmith (CFO):
Yes.
CarterCopeland (Analyst-BarclaysCapital):
Okay.
DennisMuilenburg (President&CEO):
Toyoursecondquestionon777,soasyounoted,theR&Dinvestments,theCapExinvestmentswe'remakingtobring777Xonline,areallpartoftheprofilethatwesharedwithyouintermsofourtotalR&DandCapExinvestment.Wherewecanpullthoseforwardandpre-implementonthe777linetoreducerisk,likethefuselageuprightbuild.Wearedoingthat.Butallofthatisincludedinourtotalinvestmentprofilefor777X.
CarterCopeland (Analyst-BarclaysCapital):
Allright,thanks,guys.
GregSmith (CFO):
You'rewelcome.
Operator :
OurnextquestionisfromSteveLevensonwithStifel.
SteveLevenson (Analyst-StifelNicolaus&Company):
CompanyName:BoeingCoCompanyTicker:BASector:IndustrialGoodsIndustry:Aerospace/Defense
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Thanks.Goodmorning,everybody.
DennisMuilenburg (President&CEO):
Goodmorning.
SteveLevenson (Analyst-StifelNicolaus&Company):
Couldyoupleaseexpandyourcommentsontheupwardpressureonsingle-aislerates?Andcanyouletusknowifthere'sanypushbackfromthesupplychain,particularlyonengines?
DennisMuilenburg (President&CEO):
Yes,whenyoutakealookatthemarketthere,Steve,itcontinuestoshowsignsofstrengthandgrowth.Whatwe'reseeingfromcustomersintermsofmarketdemand,especiallyforthe737MAX,continuestobeapositivesignforus.
We'vetoldyouwe'reat42amonthnow,we'rerampingto47amonth,and52amonthby2018.Thosearecommittedplansthatwehaveinplace.Wecontinuetodostudiesonpossibilitiesoframpingupbeyondthat.AsIsaidearlier,we'regoingtomaintainverystrictfinancialdisciplineaswedothosestudies,beingverymindfulaboutit.
Wearestillinaslightlyoverbookedposition,intermsofourorderprofileforthe737.Andallofthatjustcreatesgeneralupwardpressuretoproductionrates.We'regoingtobeveryfiscallyresponsibleasweconsiderthoseoptions.Again,ourcommittedplantakesusoutthrough2018,sowehavetimetoconsiderthesealternativesbeyondthat.
TheotherthingthatI'dliketofactorinisthe737MAXdevelopment.Thefactthatwe'veachievedpower-on,onthefirstairplane,thatfinalassemblyisonoraheadofschedule,alsogivesusconfidenceintermsoftheairplanecomingtogetherandbeingreadyforEISwithourcustomers.Soboththedevelopmentprogramprogress,aswellasthemarketdemandsignals,showusthatnarrowbodiesareaveryrobustmarketforus,bothshortandlongterm.
SteveLevenson (Analyst-StifelNicolaus&Company):
Again,anypushbacksfromsuppliers?
DennisMuilenburg (President&CEO):
Well,wecontinuetotalktooursupplychain.Certainly,it'srampinguptothedegreewe'rerampingupissomethingthatwehavetopayattentionto.Andoursupplychainislettingusknowwheretheyseepressurepointsandwhereweneedtoworktogether.
NothingthatIwouldsayisoutoftheordinary.Thesearenormalramp-uppressures,andweknowhowtodotheserateramp-ups.We'vedonemorethanadozenoverthelastfewyears.We'vegotafewmoreimportantonesaheadofusduringthenextfiveyears.
Butworkingacrosstheintegratedsupplychainandmakingsuretheyhavethecapacityandthecapabilitytodeliveronourneedsisanimportantpartoftheequation.That'soneofthethingswefactorintoourcommittedplans.Weremainveryconfidentthatoursupplychaincanmeetourramp-upto52amonthontheMAX.Ifweweretogobeyondthat,factoringinsupplychaincapabilityisakeycomponentofthatdecision.Again,wehaveplentyoftimetomakethatdecisionwiththecommittedplanswealreadyhaveinplace.
SteveLevenson (Analyst-StifelNicolaus&Company):
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Gotit.Thankyouverymuch.
T royLahr (VPofIR):
Operator,wehavetimeforonemorequestion.
Operator :
ThatwillbefromRobSpingarnwithCreditSuisse.
RobSpingarn (Analyst-CreditSuisse):
Thankyou,goodmorning.
DennisMuilenburg (President&CEO):
Goodmorning.
RobSpingarn (Analyst-CreditSuisse):
Dennis,Iwantedtoaskyouonthebuyback.ButbeforeIgettothat,justaquickquestionforGregontheF-15,andthenIthinktherewassomeC-17sthatwerepre-builtbutdeliveredinthequarter.SoGreg,thequestionthereis,howmuchcashdidtheF-15deal--Ithinkit'sabouta$700millioncontributiontorevenue.Butthosetwoitems--howmuchunusualcashdidthoseprovideinthequarter?
AndthenDennis,foryou,giventhatyouhaveprettygoodvisibilityintowhatyourprograminvestmentlookslikeover,let'ssay,thenexthalf-decadewiththeMAX,the777X,anditsoundslike757replacementsintheplan,butdoesn'treallyrampuntilafterthat.Giventhat,canweexpectthatyourbuybackatthecurrentlevelsshouldcontinueunabatedgoingforward--roughlythoselevels?
DennisMuilenburg (President&CEO):
Greg,whydon'tyoutakethat?
GregSmith (CFO):
Yes,noimpactoncashontheF-15,Rob.Andthen,I'dsay,veryinsignificantontheC-17.
RobSpingarn (Analyst-CreditSuisse):
Okay.
DennisMuilenburg (President&CEO):
Andtoyourgo-forwardquestion,Rob,again,aswelookatprioritiesforcashdeploymentoverthenextseveralyears,toppriorityremainsorganicinvestment.Andthisisdeliveringonourdevelopmentprogramslikethe777X,theMAXandthe787-10.We'reconfidentinthat.
Andaswesaidbefore,withthephasingofthoseprograms,ourR&Dprofileyear-to-yearweexpecttoremainconsistent.AndsothatshouldgiveyouconfidencethatourR&Dfoundationisnotgoingtovarysignificantlyyear-to-year.Thatwillbeafoundationalinvestmentthat'sbuiltintotheplanoverthenextfiveyears.
Secondpriority,aswesaid,isreturningstrongvaluetoourshareholders,bothintheformofdividendsandsharerepurchase.Weexpectthattocontinuetobeastrongcomponentofouroverallcashdeploymentoverthenextmanyyears.
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Andthenthirdly,anytargetedactionswemighttakeintheM&Aarena--acquisitionarena--thatwouldbeathirdpriorityinthatlist.Sowe'regoingtoremainveryfocusedonthosepriorities.Andthefactthatweexpectlong-termcashanotherwillallowustofuelboththosefutureinvestmentsandthingslikesharerepurchase.
RobSpingarn (Analyst-CreditSuisse):
SoDennis,tojustclosethetitlelooponthat,borrowingbigM&Aforward-yearshouldreallynotlookanydifferentthannow,fromabuybackperspective,orperhapshigher,giventhatyou'reramping?
DennisMuilenburg (President&CEO):
I'mnotgoingtogiveyouguidancetospecificnumbers,Rob,butsharerepurchaseanddividendstrengthoverthelongtermwillcontinuetobeahighpriorityforusoncashdeployment.
RobSpingarn (Analyst-CreditSuisse):
Okay,thankyou.
Operator :
LadiesandGentlemen,thatcompletestheanalystquestion-and-answersession.
(OperatorInstructions)
I'llnowreturnyoutotheBoeingCompanyforintroductoryremarksbyMr.TomDowney,SeniorVicePresidentofCorporateCommunications.Mr.Downey,pleasegoahead.
T omDowney(SVPofCorporateCommunications):
Thankyou.WewillcontinuewiththequestionsforDennisandGreg.Ifyouhaveanyquestionsfollowingthispartofthesession,pleasecalltheMediaRelationsteamat312-544-2002.Operator,wearereadyforthefirstquestion.Andintheinterestoftime,weaskthatyoulimiteveryonetojustonequestion,please.
Operator :
We'llgoJulieJohnssonwithBloombergNews.
Julie Johnsson (Media-BloombergNews):
Hi,all.Ijustwantedtocirclebackon777rate,andfollowupwitha747ratequestion.IjustwanttomakesureIunderstandthis.Areyoustudyingtakingtheratetosevenamonthorplanningto?
Andwouldthisbeeffectivein2017,orarewelookingmoreat2018forthetriple?Andon747,obviously,thecargomarketisnothelpingorderactivitywiththatplane.Arewepotentiallylookingattakingtheratebelowoneamonth?
DennisMuilenburg (President&CEO):
Letmefieldthefirstonethere,andthenGreg,I'llaskyoutotouchonthesecondone.
Julie,regarding777,asIsaid,we'redoingourscenarioplanningrightnowthatincludesmarketdemandandfeedbackwe'rehearingfromourcustomers.Itincludesthevaluepropositionofthe777andthe777X.AndIwanttostressagainthat,thatairplaneisprovidinganabsolutelyuniquevaluepropositioninthemarketplace.
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It'sdifferentiatedandourcustomersseeit.Andthenalsodoinganefficientandprofitabletransitionfrom777to777X.Sothoseareallthingsthatwe'refactoringintoourplan.
Wehaven'tfinalizedthatplanyet.We'reworkingthroughavarietyofoptions.Butaswelookthroughallofthoseoptions,wedon'tseeanyscenariosthatwouldtakeusbelowaseven-a-monthproductionrate.Sowewantedmakesurethatwasclear,asthere'sbeenspeculationaboutwhatoptionrangewemightlookat.
Weseethatasafloorforourplanning,givenallofthescenarioswe'relookingat.Specifictiming--implementationisyettobefinalized.We'reworkingourwaythroughthosedetails.Thosewillbedecisionswe'llhavetomakeinthefirstpartofnextyear.
ButI'llstressagainthatwearesoldoutessentiallythrough2016,morethanhalfsoldoutthrough2017.Sowhatwe'retalkingabouthereisatransitionthat'sout2017andbeyond,andwewouldgetintothemeatofthatinthe2018timeframe.Somoredetailstobeworkedthrough,butweremainconfidentthat,consideringallofthefactorsItalkedabout,thatwe'llbeabletoprofitablygothroughthattransitionandbringthe777Xtothemarketplace.
GregSmith (CFO):
Julie,on747,asyouknow,thishasbeenachallengingmarketplacerecently.Andwetookthe--weannouncedtakingtheratedownfrom1.3to1amonthearlyin2016,sowecontinuetomonitorthatmarketplace.Itischallengingrightnow;itisdrivenbythemarket.
It'sagreatairplane.It'sanairplanethatsitsinaclasswithinitself,whetherit'sanIorafreighter,sothisiscertainlymarketdynamics.We'vegotapipelineofcustomerswe'relookingat.Butagain,havingsaidthat,it'sachallengingmarketplacefortheairplane.
Sowecontinuetowatchit,andatthesametimefocusonproductivitywithinthefactoriesandthesupplychain.Andwe'lllikelytakeanotherlookattheratehereearlynextyearandseewhereweareonordersandbacklog,andmoveforwardfromthere.Butrightnow,theplanistoholdat1amonth
Operator :
OurnextquestionisfromDougCameronwiththeWallStreetJournal.
DougCameron (Media-TheWallStreetJournal):
Goodmorning,everyone.Iknowyoumustbeprettyexhaustedatthatdefensequestionattheendoftheanalystcall,buthopefullyyou'llindulgeme.
Giventheamountofportfolio-shapingthat'sgoingonamongstthe[prime'snight],Dennis,howcomfortableareyouwiththeshapeoftheBDSrightnow,particularlyonmilitaryaircraftandspace?Andareyoucomfortablewiththatregardlessofwhathappenswithsomebigupcomingcontest?
DennisMuilenburg (President&CEO):
Yes,Doug,weare.AndasIsaidbefore,wehaveastrong,robust,healthydefensebusiness.
It'satoughmarketplace,andwe'veacknowledgedthat.We'redealingwiththerealitiesofsequestrationintheUSdefensebudget,somewhatoffsetbywhatwe'veseenasinternationaldefensegrowth,especiallyintheMiddleEastandtheAsiaPacificregions.Butourdefensebusinessoverallisahealthyportfolio.
Weliketheprogramstructureswehave,we'regrowinginternationallyandwe'reinvestingforthelong
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run.Thatmarketplaceissomewhatmuted,soweexpectthatbusinesstoberelativelyflattoslightgrowth,topline.Inparallelwiththat,we'recontinuingtodrivebottom-lineperformance,andyousawitintheresultsherewitha12.2%marginquarterinourdefensebusiness.Sothat'sarobust,importantpartofourportfolio.
Wehavedifferentiatedproductlinesonthingslikecommercialderivatives,theP-8andthetanker,whichpresentuswithopportunitiesforlonger-termgrowthandleverage--theoneBoeingvalue,ifyouwill,acrosscommercialanddefensesectors.We'recontinuingtoinvestinfutureproductlinesaroundhumanspaceexploration,satellites.We'reinvestinginunmannedsystemsandISRcapabilities.
Andimportantly,weareinvestingforsomecriticalfranchiseprogramsforthefuture.Youalludedtothat,butprogramslikelong-rangestrike,thenewTXtrainer,areimportant.Andoneofthereasonswecontinuetodriveproductivityissowecaninvestinthosefutureproductlines.
Andwedon'tseeaneedtosignificantlychangethestructureofourdefensebusiness.We'regoingtostayveryfocusedonexecutingthebusiness,investingorganically,andwherewecanmaketargetedacquisitionstoroundoutourportfolio,we'llcontinuetodothat.
Operator :
OurnextquestionisfromDominicGateswiththeSeattleTimes.
DominicGates (Media-TheSeattleTimes):
Goodmorning,DennisandGreg.
DennisMuilenburg (President&CEO):
Goodmorning,Dominic.
DominicGates (Media-TheSeattleTimes):
Ijustwanttoclarifyacoupleofthingsaboutthe777ratequestion.TheEISfor777Xis2020,butpresumablythat'sgoingtorampupoverseveralyears.
Sothefirstquestionaboutthebridgeis,howfarbeyond2020areyoustillhavingtofillabridgeforthecurrent777model?Andthensecondly,yougaveussomereassurancethatthefloorfortheproductionrateinthebridgeissevenamonth,butyoualsomentionedfiringblanksinthat.Canyougiveussomeidea,like,howmanyblanksarewetalkingabout?
Ifitwasoneamonth,that'sverydifferentfromoneortwoayear.Sogiveussomeguidancethere?
DennisMuilenburg (President&CEO):
Dominic,tothefirstpartofyourquestion,whenyoulookatthedurationofthebridge,you'reright.777XEISisin2020.Aswesaid,thebridgewe'retryingtobuildwiththecurrent777isroughlyafive-yearbridge,soittakesustothatsametimeframe.Thedepthofthatbridgeismostsignificantinthe2018-2019timeframe.
Sowe'reveryfocusedonfillingthatout,andweneedabout40to60aircraftperyearoverthatfiveyearstofillthatbridge.Sothateffortcontinuestopressahead.
Nowwhenyouthinkaboutthetransitionandproductionrate,thefactthatwe'llfiresomeselectiveblanksthroughtheline,thatisnotahigh-volumedecision,toyourpoint.Thisissomethingthatwe'lldoselectivelyaswebringleanimplementationonlineandthenewproductionrate.Wehaven'tfinalized
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exactlyhowmanythatwillbe,butthoseareincrementals,notasustainedactivity.Andthenalsomindfulthatwewillhave777Xflighttestaircraft--typicalnumbersofflighttestaircraft,principallyinthe2018/2019timeframe--thatwillbewithinthatproductionlineaswell.Sobothofthosearebeingfactoredintotheprofile.
Operator :
OurnextquestionisfromAlanScottwithReuters.
AlanScott (Media-Reuters):
Hi,canyouhearme?
DennisMuilenburg (President&CEO):
Yes.
AlanScott (Media-Reuters):
Okay.SoIwantedtocomebacktothe787,Dennis,andask--andalsoGreg--howfardoyouthinkyoucankeepincreasingthedeferredproductioncosts?Arewenearingtheupperlimitofwhatyoucanreasonablydeferwithouttakingacharge?Andifwe'renearingthat,howdoyouthinkaboutwhetheryouneedtoincreasetheaccountingblockoratwhatpointyoumayneedtotakeareach-forwardloss?
GregSmith (CFO):
Onthedeferred,Iwouldsay,Alan,thattheprofilehasn'tchanged,thekeymilestoneshaven'tchanged.Thegrowthwillstarttomoderateagaininthefourthquarter.AndasI'veindicated,oncewehit12amonth,that'swhenthedeferredwillstarttoturn.
I'dsayallthekeycontributorstothatunitcost,themix,andagain,gettingtothe12amonth,whichagain,we'remakinggoodprogressinthatarea.Sothoseareallofthekeyitems,I'llsay,contributorstothat.Butthefunnelofmilestonesintheprofileofthathasnotchangedfromwhatwediscussedprobablyayearandahalfago.
T omDowney(SVPofCorporateCommunications):
Operator,wehavetimeforonefinalmediaquestion.
Operator :
Thatwillbefrom[MikeAlmedinberg]withCrain'sChicagoBusiness.
MikeAlmedinberg (Media-Crain'sChicagoBusiness):
Hi,goodmorning.DennisorGreg,DeltaAirlineshascontinuedtopushthisideathatthere'sabubbleinthewide-bodyaircraftmarket.Theycomparedthatsegmenttothepre-recessionrealestatemarket.AnycommentonthistakefromDelta?
DennisMuilenburg (President&CEO):
Yes,Mike.I'llgobacktomyearliercommentsaboutourbroaderlookatthewide-bodymarket.Wecontinuetoseeaveryhealthyoverallmarketplace,bothnarrowbodiesandwidebodies.AsIsaid,trafficgrowthissustained,replacementdemandissustained,deferrals,cancellations,belowhistoriclevels.
Werecognizesomeofthecommentsthathavecomeoutrecently,andbelieveyou'rereferencingthe
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notearound$10million777sthatmightbeavailable.I'llsay,justbasedonourunderstandingofthemarketplaceandwhatweunderstandfromourcustomers,thatnumberisofthewrongorderofmagnitude.
Andfrankly,thevalueofthe777isholdingupverywellinthemarketplace.Itisauniqueairplane;inthat365-seatcategory,thereisnocompetingaircraftoutthere.It'sauniquevaluepropositionforourcustomers.Sothevaluesareholdingupwellinthemarketplace.
Wearemindfulthatthecargomarkethasbeenabitslowtoreturn.We'remindfulofthefactthatlackofEx-ImBankreauthorizationiscreatingsomeuncertaintyandsomedelaysincustomerdecisions,andsowe'reconsideringthat.Butifyoustepbackfromit,theoverallhealthofthemarketplaceandtheuniquevaluepropositionofourairplanesisveryclear,andweremainconfidentinthat.
T omDowney(SVPofCorporateCommunications):
Thatconcludesourearningscall.Again,formembersofthemedia,ifyouhaveadditionalquestions,pleasecallourMediaRelationsteamat312-544-2002.Thankyou.
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