The Boeing Company Conference Call on Oct. 10. 2007 / 1:30PMonline.wsj.com/public/resources/documents/transcript-ba... · 2018-08-27 · FINAL TRANSCRIPT BA - The Boeing Company Conference

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BA - The Boeing Company Conference Call

Event Date/Time: Oct. 10. 2007 / 1:30PM ET

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C O R P O R A T E P A R T I C I P A N T S

David DohnalekBoeing Co. - VP IR

Jim McNerneyBoeing Co. - President, CEO

Scott CarsonBoeing Co. - EVP, CEO Boeing Commercial Airplanes

James BellBoeing Co. - CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Howard RubelJefferies & Co. - Analyst

Doug HarnadBernstein Research - Analyst

Ron EpsteinMerrill Lynch - Analyst

Robert SpingarnCredit Suisse - Analyst

Heidi WoodMorgan Stanley - Analyst

Steve BinderBear Stearns - Analyst

Cai von RumohrCowen & Co - Analyst

Troy LahrStifel Nicolaus - Analyst

Robert StallardBanc of America Securities - Analyst

George ShapiroCitigroup - Analyst

Joe NadolJPMorgan Chase & Co. - Analyst

David StraussUBS - Analyst

JB GrohDA Davidson - Analyst

Myles WaltonCIBC World Markets - Analyst

Ben FidlerDeutsche Bank - Analyst

Peter ArmentAmtech - Analyst

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Oct. 10. 2007 / 1:30PM, BA - The Boeing Company Conference Call


James GonzalesBloomberg News - Analyst

James WallaceSeattle PI Newspaper - Analyst

Lynn LunsfordWall Street Journal - Analyst

Stanley HolmesBusinessWeek magazine - Analyst

Dominic GatesSeattle Times - Analyst

Thelemay PaythorpeKPLU Public Radio - Analyst

Cheryl CorleyNational Public Radio - Analyst

P R E S E N T A T I O N

Operator

Good afternoon and welcome to the Boeing Company's conference call. Today's call is being recorded and is being broadcastlive over the Internet. At this time, for opening remarks and introductions, I am turning the call over to Mr. David Dohnalek, VicePresident of Investor Relations for the Boeing Company. Mr. Dohnalek, please go ahead.

David Dohnalek - Boeing Co. - VP IR

Good afternoon. I'm Dave Dohnalek and with me today are Jim McNerney, Chairman, President and CEO of the Boeing Company;James Bell, Chief Financial Officer of the Boeing Company; and Scott Carson, President and CEO of Boeing Commercial Airplanes.

Today, we will discuss the status of our 787 program. As a reminder, Boeing will release its full third-quarter earnings results onOctober 24.

Now, before we get started, as usual, I need to remind you that any projections and goals that we may include in our discussionsthis morning are likely to involve uncertainty. Those risks are detailed in the forward-looking statement in our press release andin our various filings with the SEC.

Now, I will turn the call over to Jim McNerney.

Jim McNerney - Boeing Co. - President, CEO

Thank you, Dave, and good afternoon.

As you saw in this morning's release, we have announced that Boeing will reschedule the first delivery of the 787 Dreamlinerto late November or early December 2008, a six-month delay from the original target of May 2008. In addition, we have movedour target for first flight to around the end of the first quarter 2008.

In a few minutes, Scott Carson will provide you with some background on our current status and he will outline the steps we'retaking to ensure the execution of our new schedule and the success of the program. Then James Bell will cover the financial






aspects of today's announcement. Before I pass it over to Scott, though, let me say a few words about this program and sharewith you my expectations for our performance and meeting our customer commitments.

While we had promised the 787 update during our third-quarter earnings conference call later this month, the need to makethese schedule changes announced this morning became apparent to us at a planned program review early this week. As wehad mentioned before, we are well past the invention stage of the program. The work we're doing now is the hard work ofbuilding the first airplanes and getting our overall production system prepared for delivering airplanes to our customers beyondthat.

As we stated in our release this morning, while we made some progress over the past several weeks completing work on ourearly production planes and improving parts availability across the production system, the pace of that progress has not beensufficient to support our previous plans for first delivery or first flight. We have always acknowledged the challenges inherentwith game-changing innovations like the 87, but we're disappointed by today's schedule changes and deeply regret the impactthese delays will have on our customers. Be assured, however, that we are committed to working with each and every affectedcustomer to minimize any disruption. This said, our most important commitment is to deliver an airplane that performs to ourcustomers' expectations over the long life of this program. As to this commitment, we remain confident about the design ofthe 787 and the fundamental innovation and technologies that underpin it. The market demand for this airplane continues atunprecedented levels, and our enthusiasm and expectations for its ultimate success is unchanged.

With those comments, let me turn it over to Scott to walk you through more details. Scott?

Scott Carson - Boeing Co. - EVP, CEO Boeing Commercial Airplanes

Thank you, Jim, and good afternoon. Since Mike Bair and I spoke with you early in September, our 787 team has continued toaggressively work on the main pacing items that we described in our program update, namely completing the traveled workon airplane 1 and software coding and integration. While these two issues were competing as pacing items for our first flightin mid-November to mid-December timeframe, the issue really driving today's decision is the traveled work and parts availabilityon airplane #1. It has simply proved to be more difficult than we anticipated to complete the structural work on the airplaneout of sequence in our Everett factory.

During the past few weeks, we effectively worked through the traveled work documentation process that we told you aboutin the September update. However, the individual installation jobs have taken longer than planned to complete, due in part tothis being the first aircraft, but also due to unplanned rework for sections delivered to us. Parts availability from remainingstructural pieces to fasteners to other small parts has affected the sequencing of the work in the factory, compounding thesedelays. As a result, the acceleration we needed to see in the completion of structures and systems installation has not occurredin a fashion that supported the plan we presented to you. Having said all of that, we believe the more difficult structural workon airplane #1 is now largely behind us. The airplane came off its jacks on Sunday and our mechanics are proceeding with theremaining structural and systems installation work.

Work on the static test airplane, the second to come down the line, was also installed due to parts availability, but that workwill now move ahead as airplane 1 work accelerates.

Regarding the other flight-test airplanes, airplanes #2 through 6, you may recall, in late summer, we asked our structural partnersto re-sequence their ship dates, starting with airplane 2 to reduce the amount traveled work we would see in our factories andto free our 787 final assembly facility to focus on assembling the more fully stuffed structures, the way we had originally intendedto build the airplane. By and large, we are encouraged by the progress our structural partners are making on those airplanes.Our revised schedules will only help ensure that when they arrive in [Everett], we will not have a similar situation to the delayswe're seeing on airplane 1.






On the issue of systems coding and integration, we made some but not all of the milestones we set forth in September. However,the schedule changes driven now by the production issues, this activity is no longer pacing as the primary critical path item. Infact, the new schedule actually allows us more time to conduct additional testing, ensuring the software is more mature andreducing the chance of issues coming up during flight test. We have received interim loads on our flight-control software, andwe are encouraged by its performance in the lab. We expect to have it fully loaded in the next several weeks. The final load forpilot training in our simulators was delivered in September and is working well.

Finally, once it became clear to us that we could not meet the original delivery schedule in May, we felt it was prudent to addmargin back into our flight-test program. As you'll recall, we said in September that the 5.5 month schedule for flight test leftno room for error. While we're very pleased with the ground testing and simulation work that we've done to date, now that weare rescheduling the program, we believe it's prudent to add margin back into the flight-test schedule as the right step for theprogram.

As Jim shared with you, our revised schedule puts first delivery in late November to December time frame. Because we will beproducing 787s concurrently with our flight test program, we expect still to deliver 109 787s through the end of 2009. This is 3fewer than our original plan of 112. That's clearly an aggressive plan, but we believe we have the resources needed to conductour change in corporation program on the completed airframes following flight test.

Mike Bair and our internal team, along with our supplier partners, are committed to supporting this new plan and are workingthe detailed schedules to support it as we speak. Recognizing that there is risk associated with any new airplane program atthis stage, we still remain confident that this new plan is achievable, and we are all aligned to make it happen.

Before I hand this over to James, I want to emphasize one important part of our strategy as we move forward. At Boeing, we'vesaid for a long time that everything we do begins with our customers and ends with our customers. That holds true during thetough times as well as during the good times. By taking these steps now, we are in a better position to help our customers planfor their (inaudible) requirements next year then if we had waited longer to make this decision. While we deal with our ownchallenges, it's critically important that we remain focused on our customers and the inconvenience we've created for them.

We are extremely disappointed that we are in this situation where we cannot meet our customers' expectations for a deliveryin May 2008. It's up to all of us on the team to use this disappointment as further motivation to execute the program and deliverthis outstanding product to our customers.

Now, I'd like to turn this over to James Bell. James?

James Bell - Boeing Co. - CFO

Thanks, Scott. As we stated in our news release this morning, we do not expect the schedule delay announced today to havea material impact on our earnings and our earnings guidance for 2007 and 2008 remains unchanged as a result of this news.

This position is consistent with Scott's comments from the September 5 update and my comments at subsequent analystconferences during the past few weeks, where we said "A delay of a few months would not have material implications for ourearnings."

We would expect to see a revenue impact in 2008 associated with the specific number of deliveries that ultimately would movefrom 2008 into 2009, which we expect will be in the range of 30 to 35 airplanes. But as I told you before, in any new programlike this, early airplanes are low-margin planes that would be dilutive to the overall operating margins for BZA. We will updateour revenue and delivery guidance for 2008, along with the rest of our guidance, when we provide our third-quarter updatetwo weeks from today.






We have also assumed in our final -- in our assessment the financial impact of any penalty payments we may owe customersbased on contractual obligations. The impacts of those payments would be added into our cost base on the program, per ournormal accounting treatment.

While today's news is disappointing, as both Scott and Jim have said, the business case for the 787 remains extremely solid.With 710 orders to date from 50 customers, the market response could not be more reassuring. We remain confident about thecontributions the program will make to the future performance of Boeing.

Now, I will turn it over to Dave for questions.

Unidentified Company Representative

Thanks, James. Operator, we will take questions now. Let me remind everyone that we will be issuing our third-quarter financialresults on October 24, so we ask that you limit your questions on today's call to the changes in our 787 schedule announced inour press release this morning. Operator?

Q U E S T I O N S A N D A N S W E R S

Operator

Thank you. Today's question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). Howard Rubel,Jefferies.

Howard Rubel - Jefferies & Co. - Analyst

Thank you very much. Scott, could you talk a little bit about what kind of customer response you've had and how you can showthem how the schedule will return to your plan?


Howard, as you might imagine, we are in the process of the outreach to the customers. The early response clearly is one ofdisappointment, but at the same time, understanding they are anxious for us to help them solve the problems that sit in frontof them in terms of lift, but I would say the reaction is as we expected.

Operator

[Doug Harnad], Bernstein Research.

Doug Harnad - Bernstein Research - Analyst

Yes. You know, an important part of the innovation of this program has been the distributed production approach. So far, thisdoes not seem to have gone very smoothly with the traveled work, the parts shortages, out of sequence production. Can youdescribe any changes that you're making to the supplier management approach to prevent these problems from happeningas you ramp-up production next year?







That's a great question, Doug. We have been very engaged over the last several months with each one of our major structuralsuppliers and further down in the supply chain. I think we clearly have learned some things about how we could do this jobbetter in the future. We have taken steps to make those corrections.

The schedule that we've put in front of you this morning that we are reflecting in this slide has our structural partners fullyengaged with us with committed dates that we're managing to with defined milestones within each one of those. But I thinkwe've learned a lot in this process. We're trying to apply those lessons, both to the go-forward plan on this program and certainlyon all the subsequent programs.

Operator

Ron Epstein, Merrill Lynch.

Ron Epstein - Merrill Lynch - Analyst

I guess this is both for Jim and Scott. What gives you confidence that the new schedule is workable, that a couple of monthsfrom now it doesn't start stretch out to 12 months and then 18 months? 190 in 2009 seems pretty aggressive. I mean whatmakes you feel good about that?


Ron, a couple of points to note here -- one, 109 is tied to airplanes that will be produced really starting now through the end of2009 and delivered in that timeframe. Not all of them will be produced in 2009. We have not set the schedule over by six months;we've set over the certification and first delivery by six months but we will be continuing the production process. So I think thathelps us have confidence in the way we're building this up, that it is more rational and more predictable.

In terms of confidence in this schedule itself, we have tied it to a number of things that we have learned. First is we have a muchbetter appreciation of the difficulty in building airplane 1 and getting it ready for flight test. Certainly, in the months just past,we've learned some additional things but importantly, we have completed the primary structure on the airplane. We are nowdown to work that we have a lot of experience with and that is system installation. We are also working with a set of dates fromour customers -- I'm sorry, from our suppliers, that they have committed to -- not dates that we have imposed on them -- andhave the measurement plans and processes in place with them to assess their work on an ongoing basis.

Then finally, we've put some margin back in the flight-test program. As I said in my prepared comments, when we talked toyou in September, I think we made it clear that we had taken all of the margin out of the flight-test program. We have takenthis opportunity in the set-over to put margin back in to deal with the kinds of unknowns that could materialize. We believe,when you have combined those three factors that, one, we have much more confidence in our ability to achieve this plan andI think you'll see it in the results that we produce, month over month. Ron, I would just add one thing. As we've looked at thedata over the last couple of months, what we see is that the design, the integrity of the design of this airplane remains solid.We are not learning anything here that says the design was inappropriate or disjointed between the partners. This resultsobviously as you know from having one design tool from the very beginning and real-time visibility across all the teams aroundthe world. So, that has not resurfaced as an issue.

As we've experienced in the last couple of months, we are not experiencing things we didn't think we would experience. We'rejust experiencing slower resolution of what we thought we would find, which, as you point out, are supply-chain related issues,which for me doesn't in any way invalidate the approach. It's more an issue of getting the supply chain up and going. I am notseeing anything that says that supplier partner #1 or #2 or #3 can't get to the status that they've committed to, nor have I seen,






in Everett, a capability that isn't there to put the plane together. It's more that the work shifted, parts unavailability, and so weare wrestling with scarce, out-of-sequence work that we expected to have. It's just taking us longer to get it done. It's sort ofstarting up the supply chain rather than a fatal flaw in the supply chain.

Operator

Robert Spingarn, Credit Suisse.

Robert Spingarn - Credit Suisse - Analyst

Could you talk a little bit more about the impact to your suppliers and your airline customers? You did mention penalty payments.At what point to you begin to incur these? When are they material? On the supplier aside our those that are keeping the scheduleasking you for reimbursement? How, if at all, will that affect the terms on this program?


Rob, what we've done on the assumptions that Jim mentioned to you -- and obviously every contract with every customer isdifferent. The cost impact that he described models what we would see, based on the terms specifically of the customers thatare impacted. So we think we've taken that into account. In some cases, that's a worst-case. I mean, it is hard to predict, becausein many cases customers work with you in these situations. In other cases, they insist, properly, on some form of compensation.

As to the supplier side, if they in general -- and again, the contracts differ -- but in general, if they perform as we've asked themas originally contemplated against the supply chain objectives, and they are beginning to true-up to that, we will treat themin terms of cash and revenue as we normally would. Obviously, since we are putting some burden on them, we're going to tryto help them where it makes sense.


Just to see if I understood you (multiple speakers) on the first part, I think Scott said back in September that if the delay was upto roughly three months, any penalties would be immaterial.


Yes.


What you said there is you are evaluating now. So is it possible, with a six-month delay, what you're saying is the numbers areunknown at this point?


No, no. What I should have said better is that we have good visibility on what those numbers could be, because it results fromevery contract and every impacted airplane. And, the net impact of that in our accounting base is, in fact, relatively small.







Okay, thank you for clarifying.

Operator

Heidi Wood, Morgan Stanley.

Heidi Wood - Morgan Stanley - Analyst

Good morning. I want to understand better. The problem wasn't technical; it was getting the supply chain able to meet things.I'm trying to understand. Again, I know this question was asked earlier but I want to press on it. Why not build more conservatisminto these production rates into 2009?


Heidi, we think the issues that we are seeing are tied to the rework in the first airplane, not to fundamental issues in the productionsystem. We know from work that's going on across the supply base, in some cases they are already to unit 10. Our challengehas been dealing with the out-of-sequence work that came into the Everett plant on #1 and the delays in being able to completethe structural work on 1 and then the structural work on the static airplane.

As we get those issues behind us, there's no reason to set the supply base over. It is performing well, and we believe we havethat well planned out. So we don't think we are inducing any additional risk from letting the production schedule stay the wayit was.

Heidi Wood - Morgan Stanley - Analyst

Does that include full production scheduled for 2011? That remains intact as well?


Yes.

Operator

Steve Binder, Bear Stearns.

Steve Binder - Bear Stearns - Analyst

Can you maybe just touch on why -- is there any planned change in your R&D budget for 2008, in light of the slip?


We don't believe there's going to be a significant impact on the R&D budget in 2008. There'll obviously be some resources thatget held a little bit longer than we planned, but the engineering work, the big consumer of the R&D money, is not beingdramatically affected by this, Steve. So we expect, over time, the engineering resources will come off the program in an orderlyfashion, perhaps not quite as fast as we had anticipated, but we don't see a big impact at this point.






As we work through the rest of this plan, we're going to have a better handle on that. If we change the position, we will certainlylet you know as part of the normal update.

Steve Binder - Bear Stearns - Analyst

Either Scott, James or Jim, did I hear correctly then, if you look at your cost pools on the 787 block, the only upward change inthe cost pools was related to potential penalty payments? Is that correct? You are not assuming any additional supplier releasein those clusters?


No, we would absorb some cost but it is primarily the penalty because, as Scott mentioned, we're going to keep the supplychain on the current production schedule. So you won't have standing armies just sitting around.

Operator

Cai von Rumohr, Cowen & Co.

Cai von Rumohr - Cowen & Co - Analyst

Yes, thank you very much. What sort of impact does the schedule slip have on the level and the pattern of period costs, otherthan R&D?

Secondly, on your cash flows to suppliers, given that I guess most of them are under contracts where they get paid 30 days afteryou deliver the plane and certify the plane, but I assume a number of them are going to call up and say, gee, this is not my fault;can you do something for me?


We will be fair with our supply partners, but clearly there's not going to be a lot of impact. You are going to see, in '08, somerevenues slide out to '09. The earnings from those deliveries aren't that significant. Remember, the early deliveries generallydon't have high margins and they would be dilutive to the margins for [BC8], anyways, so we don't really see that as a real issue.


But do the period costs continue? So that while you don't have the revenues and the contribution isn't that big, those periodcosts are still there so (multiple speakers)?


Yes, we will still have some fixed-period expenses that are there. What we're saying is we will be able to absorb the impact ofthat and we're not going to change our guidance for '08.


Thank you.






Operator

Troy Lahr, Stifel Nicolaus.

Troy Lahr - Stifel Nicolaus - Analyst

I think, in the past, you said your out-of-sequence or traveled work was going to go about 10 to 20 aircraft, and then you thinkthat those would be worked out. Given the delays, is that fewer or is it still -- I guess I'm not clear on that.


Yes, what we believe we have right now, Troy, is a situation as we described on the 5 of September, where we have a state ofbuild from each one of the major structural suppliers, so they're not all in exactly the same place. The first airplane where weget 100% back to what the baseline plan was where the sections come in as originally envisioned is about unit 28.


Okay. It seems like that has been stretched out then a little bit, because I thought last time, September 28, you said about 10to 20 units. Is that -- am I just not understanding that correctly?


I think we haven't change that. I think it's the same place we were on September 5.


Okay, so even into 2009 then, you're still going to be doing a significant amount of rework on these aircraft as they come in?


It is all preplanned, and that will be the piece that is different from where we are in airplane 1. Airplane 1, when it came in, wefirst had to understand the state of completeness and reconcile that against the parts we had. For airplanes 2 and on -- and thereason we held them at the factories was so that, when they arrive, we know precisely what it is we're getting when they arriveand we have preplanned for what you described as out of sequence work, which is out of sequence to what our final build planwill be. But it won't be coming with surprises. It will be as 3D (inaudible) and as planned for.


You think it will be a smooth transition from going from working on the out of sequence, the [traveled] work and shifting backover to what you guys normally should do?


That is our intention, yes. That's why we've done it this way.






Operator

Robert Stallard, Banc of America.

Robert Stallard - Banc of America Securities - Analyst

James, I'd just like to follow up on your comment about the supply chain. To clarify, you're basically saying that you're tellingyour suppliers to stick to the previously stated production schedule, right?


That's correct.


So if they continue to ship to you, isn't this going to have a working capital implication assuming they want to get paid for theparts they delivered?


It could, and we would obviously work with those, our supply partners, if there is an issue.


But at this stage, you are not prepared to give us a sort estimate of how much this could affect Boeing's cash flow?


No, and it won't have a material impact on it; that's for certain.

Operator

George Shapiro, Citigroup.

George Shapiro - Citigroup - Analyst

Two questions -- James, in terms of the penalty payments, so accounting convention lets you just basically capitalize all thosecosts and that's why we will never see much of an impact on the current costs, but it will have an impact on how quickly you'llbe able to improve the margin on the 787. Correct?


That was pretty simplistically put, George. It will become part of the cost base and we're still going through the analysis as towhat that initial cost base should be and obviously to estimate the cost. But yes, because it's cost we didn't anticipate, it wouldhave some impact on the margin and on the early deliveries. But it would be spread out, spread out over the accounting(inaudible).






George Shapiro - Citigroup - Analyst

And then one for Scott -- by keeping the production rate the same, obviously you don't run into issues, as much issues with thesuppliers. But on the other hand, aren't you taking a big risk that you're not going to have any certification problems that wouldhave to necessitate some rework on the concurrent reduction ramp-up?


George, we're going to have so much time with the systems in the laboratory that we believe we are significantly mitigatingany risks that we would see there. The structural risk itself, we have had now nearly five years of structural test work behind us.We've seen no surprises that would lead us to believe that the risk as you put it of us continuing production is inappropriate.

Operator

Joe Nadol, JPMorgan.

Joe Nadol - JPMorgan Chase & Co. - Analyst

My question actually is similar to the one that George just asked, his second question. Jim, I see this as almost a strategic decisionyou are making, it rising to that level of continuing the production schedule despite the fact that you are pushed back six monthson the certification and flight-test part of the program. I'm just -- you are 4.5 years ahead of your competitor. The product hasbeen so well received in the marketplace. I'm wondering why -- if, A, Jim, you could share with us your thoughts, because thismust have been a very tough decision to make -- your thoughts on that specifically.

Secondly, the Boeing Company's experience on past programs as to what changes were made to production aircraft duringthe certification process, on the 777, do you incorporate things that you discovered during that process that made their wayinto production aircraft?


Well, Joe, you're asking the right question, obviously. I mean, I think -- to say that we are not taking a risk at all is wrong. I thinkScott's answer a minute ago about the robustness of knowledge that we've got about this airplane, including -- especiallybecause of the delay, is part of the answer. I also think that the change in corporation process that we had in place with oursupplier-partners and some of the timing associated with that, we have anticipated some change in corporation. You're right;the change in corporation could be across 35 airplanes rather than 22, and I am not sure about those numbers on the priorschedule. That's illustrative. That is more risk.

But I don't think we would take it if we thought there was a major technical problem that could surface. It might, but we don'tthink so. We wouldn't be taking it if the cash dynamics, as James described, were in any way significant.

So I think it's a judgment call; it's a judgment call. Your argument is that we are taking more risk than we were in the originalprogram, and that's hard to deny. But, we are very confident in the design of this airplane. We have customers who are veryconfident in the design of this airplane, and we don't think we are taking an unwarranted financial risk. Therefore, we're goingto stick to the schedule.






Joe Nadol - JPMorgan Chase & Co. - Analyst

I guess my question isn't "Are you taking more risk?" The question is why are you taking that risk? Because Airbus, if they keeptheir schedule, their first delivery of an A350 is 2013. If you pushed everything back six months, it would just give you so muchmore flexibility. I understand your customers would be disappointed, but they are already disappointed. That is the part of thisI just don't understand.


I think it is rooted in the commitments we've made to our customers, and there will be a lot of disappointment around this slip.Also, we have a supply chain that is expecting us to integrate and perform and to just slip another six months to remove everymodicum of risk would be unfair to them, too. So, I think we are a supply chain team making a balanced decision in the nameof some of the best customers in the world out there.

Operator

David Strauss, UBS.

David Strauss - UBS - Analyst

Scott, we kind of beat around the bush here. You know, obviously, all of these airplanes you're talking about delivering in 2009were not be built in 2009. Can you just give us an idea when you get to kind of November-December and the first (inaudible),how many airplanes will be built at that point or will be pretty close to being completed?


Scott?


I would be guessing, because I don't have that data right here in front of me, David. Can we have the guys get back to you what(inaudible) (multiple speakers). Oh, you know it, James?


Yes, I do.


James will answer.


We will probably have come out of there with about 40 airplanes, 40 or so, in that range.






David Strauss - UBS - Analyst

Okay, so that means you're still looking at the same kind of build rate in 2009, then?

Operator

JB Groh, DA Davidson.

JB Groh - DA Davidson - Analyst

Actually, my question has been asked and answered. Thank you.

Operator

Myles Walton, CIBC World Markets.

Myles Walton - CIBC World Markets - Analyst

Obviously you are not developing the 87 in isolation; there's always development programs going on. I am just wondering fromthe standpoint of management intention and/or R&D resources, has the 87 delay impacted either the timelines or the 47-8 atthe end of '09, or the -3 and -9 introductions on the 87?


No, it hasn't affected the timelines for those. Obviously, we're doing a fair amount of juggling on resources to make sure wekeep all the programs moving forward on schedule, but we're maintaining the schedules on the other airplanes that youmentioned.

Operator

Ben Fidler, Deutsche Bank.

Ben Fidler - Deutsche Bank - Analyst

Yes, a question just coming back to the cash flow issue, if I could? As you discussed earlier in answer to some of the otherquestions, you do see the potential that some of the over-costs on the early 787s from the rework, some of the customer penaltieswill be put on the balance sheet and also, as we've heard earlier, you'll end up with 30, 35 extra aircraft in build probably by late2008. I'm really struggling to see, James, why you're confident there will be no cash flow impact at the Boeing Group level. Whatam I missing?


I didn't say they would be no cash flow impact. I just said that we would still have good cash flow in spite of the schedule change.(multiple speakers)







So if we look at the impact on guidance, you've been helpful in terms of no impact on earnings guidance. (multiple speakers)


That's exactly right. So thank you for clarifying that for everyone. All I said, there would be no impact on earnings guidance. Wewill update you on cash as we work our way through and what we would want to do with supply chain. The fact that obviouslywe're going to be carrying more inventory in '08 as we will be building planes up and we will give you an update on where allthat stands at the third-quarter call.


But at this stage, you're not willing to help us sort of get a vision of where that working capital impact may be (multiple speakers)?


The third quarter is only two weeks away.


Operator, we will take one more question from analysts, please.

Operator

Peter Arment, Amtech.

Peter Arment - Amtech - Analyst

Just a quick question, maybe for Scott, on the flight-test program -- it hasn't been asked, I don't think, regarding -- are we stillworking under the current assumption that Dreamliner 1, now that it is off its jacks and [construction] work is completed, thatthat is the first aircraft that will fly? Or should we -- is there a possibility given the improvements of the structural work beingdone in aircraft 2 through 6 that 2 might be the first aircraft that flies?


I believe airplane 1 will still be the first airplane to fly, but it will be very close to 2.


Operator, we will move now to the media questions, please.






Operator

That completes the analyst question-and-answer session. (OPERATOR INSTRUCTIONS). I would now return you to the BoeingCompany for introductory remarks by Mr. David Dohnalek, Senior Vice President of Communications. Mr. Downey, please goahead.


Thank you. We will continue with the questions for Jim, James and Scott. If you have any questions after the session ends, pleasecall the media relations contact listed at the bottom of our news release today. Operator, we are ready for the first question. Inthe interest of time, we ask that you limit everyone to just one question.

Operator

Thank you. James Gonzales, Bloomberg News.

James Gonzales - Bloomberg News - Analyst

The new schedule seems to be -- still seems to be pretty quick and pretty compacted. The question is when it gets to thecertification point, will the FAA be able to keep up with the tight certification flight-testing window that you guys have scheduled?Because from my understanding, it's not necessarily linear. One thing has to be accomplished, processed by the FAA, for youto go to the next up. Do you see the FAA process, the beaurocratic process there being a hurdle?


We, in this slide, James, added a month, give or take, to the flight-test schedule, to help accommodate concerns that clearly wehad. As we told you last time, there was very little contingency room left in the flight test plan. So taking that step now seemedthe prudent thing to do. We believe we and the FAA are well coordinated on both what the plan is and how to execute thatplan, and we will proceed that way.

Operator

James Wallace, Seattle PI Newspaper.

James Wallace - Seattle PI Newspaper - Analyst

Of those 50 customers, how many are going to get their planes late? Hello?

Jim McNerney; (multiple speakers) We are counting, Jim.


I'm guessing there's maybe 15 customers perfected, Jim.






James Wallace - Seattle PI Newspaper - Analyst

Okay. Also, Scott, could you as a little more color to the issue of the parts shortages that you're experiencing, particularly with#1 plane? Is this throughout the supply chain? What kind of parts? Are your structural partners also having supply issues?


James, the problems we've had with parts have ranged from fasteners that we talked about a lot to clips and brackets and smallassemblies being provided further down in the supply chain. While in the past, it has been fairly broad in its context, I thinkwhere we sit today and as we look forward, one of the reasons we have more confidence in where we are today is it's isolatedto now a handful that we can focus on our work with to help both our situation and Everett, but importantly also the situationat our major structural partners.

Operator

Lynn Lunsford, Wall Street Journal.

Lynn Lunsford - Wall Street Journal - Analyst

My question is kind of two parts, so I'm going to violate your rule a little bit. You say that these issues are ready related to the#1 plane, and we've talked before about how Boeing was taking a number of risks on the airplane, including putting more ofits future in the hands of its suppliers. Are you seeing anything in this that tells you that you shouldn't have turned over as muchof the plane to suppliers? Or is this something that is just kind of growing pains that will work their way out?


This is Jim. What we have drawn the line differently based on 20-20 hindsight in this instance or that instance? Yes. I mean thereis some learning there, as Scott said.

Would we change the strategy, based on this experience? The answer is no from my perspective. I think this is more of a startingup a completely new production system for us. We are not doing it as well as we want to. But I think I am convinced that as wework our way through it, that we're going to be glad when the get to the other side of the start-up in that all of the things thatrecommended this approach to us to begin with, in terms of the benefits of broader, deeper engineering capability, globalstance, etc., leveraging technology tools, IT tools we haven't been able to use before, the financial model I think are things thatwill still attract us to this way of doing it.

Some more start-up certainly is frustrating now as we are living through it, but I would say more startup-related, sure. There issome fit and finish we would do and there's some learning to be had, but Scott, would you say (inaudible)?


No, I think I agree with that. The other thing I would add, Lynn, is while we've talked a lot today about the challenges on #1,and they are what is driving this, you recognize, from our earlier calls, that we've already taken steps in terms of how we managein a structured way the out-of-sequence work on the next 20-plus airplanes. It's not an isolated challenge, but it is one that afterairplane 1 is a well-disciplined process that carries with it the kind of planning that we learned through airplane 1 we neededto do a better job of.






Lynn Lunsford - Wall Street Journal - Analyst

As one short follow-up, is it through true to characterize that this will -- like I think Mike Bair called it a voyage of discovery, thatthis particular voyage of discovery has had surprises on both sides of the equation, both for Boeing and its suppliers -- that theytook on some risks that they didn't realize they were taking on, and Boeing gave up some things that it didn't really probablywant to give up, in retrospect?


Whether or not I would characterize it exactly the way you did or not, I would say yes; it has been a voyage of discovery I thinkfor the entire supply base. Out of that voyage, all of us -- certainly at Boeing and I believe throughout the supply base -- havelearned things that we could have done better to avoid some of the situations we find ourselves in today.

Operator

Stanley Holmes, BusinessWeek magazine.

Stanley Holmes - BusinessWeek magazine - Analyst

Scott, beyond the structural issues, it seems that there's a lot of software on this airplane, and that seems to be also a fairlysignificant issue. I'm going to ask two questions here. Sorry. The first one is, could you please be more specific on the system'sintegration struggle? I guess by that, I mean, you know, the struggles that you appear to be heading with the central computingresource and how you're trying to integrate all of that software into one software system? And the process unit that is beingbuilt by Smith's? My understanding of that is a real entanglement, so if you could be specific one that.

Then second, perhaps a broader issue on just how much challenge this has been regarding trying to test the software and theamount of software that has been on this plane I think is greater than any other plane in the past. Am I not correct?


I don't know specifically if it is greater than any other airplane, but it certainly is a significant amount of software to managethis to this airplane. I will probably disappoint you, because I won't be able to talk some of the detail specifics about the Smith'sactivity. I know generally where we are.

But let me say this about the overall system integration work. We have had two or three software areas that have been on thecritical path right along with the production build of the airplane. As Mike explained in early September, those two components,the software and structures work, were running neck and neck.

As it became clear that in fact the most critical pacing item was the structures, this has actually given us a little bit of headroomon the software side. We're going to have much more time with the software in the lab, both in terms of maturing the individualsoftware itself but also in integrating the software packages to assure service-ready functionality by the time the airplane flies.So the silver mining in this cloud tied to the structures work is we think it has given us some breathing room that is going toallow the software piece to be much more mature by the time the airplane flies.


That was the issue, right? Is was the software testing and the software was not mature yet?







Right.


Okay. Thank you.

Operator

Dominic Gates, Seattle Times.

Dominic Gates - Seattle Times - Analyst

Going back to the structures supply chain, you've identified the problem as really affecting airplane #1 and problem with partsshortages and out-of-sequence work. I want to try and clarify just how much of that is sorted item. I mean, is airplane #2,everything is okay from there on? We just have to get airplane 1 fixed and the static plane and then once those are cleared outyou can begin to do things?

Because it seems like, apart from those parts shortages and out-of-sequence work, there does seem to have been a problem inplaces like Charleston with management and staffing just not having the experience to deal with it. How do you know that -- Iknow Boeing said a lot of people, for example, to Charleston to try and fix those issues. But how can you be confident thatsupply chain is now fixed after airplane 1?


So, let's go back and just review where we are on airplane 1. I think you characterized it about right. The complexity of dealingwith the traveled work on airplane 1 and to some extent on the static airplane has been how do you do work out of sequence,particularly when you have an emergent requirement, for, say, an outsized fastener when you have to delay other work thatcould be done except for that piece isn't done? That's the kind of trap we found ourselves in in doing the two airplanes that arecurrently in Everett, and mostly on airplane 1, frankly.

When we re-sequenced 2 on to put the work back in the factories to ensure they reached the state of completion that wasanticipated in the original build plan, we de-risk the job both for us and Everett but also de-risk the job significantly in Charleston.We have a lot of people in Charleston helping, and in fact, the time that we are taking on moving to and on into Charleston willgive that process time to mature. We think that was the prudent thing to do; that's why we did it over a month ago now.

We think today's issue, the delays that we're talking about the day are driven by the out-of-sequence we are seeing on airplane1 for all the traveled work that came into Everett. We don't believe it is endemic throughout the system for 2 and on.


When the Jim replied to Lynn Lunsford about the supply chain, he indicated there were some things you might have donedifferently. I'm wondering if starting a greenfield factory in Charleston and hiring a lot of mechanics without sufficient aviationexperience is one of those things you might have done differently.







I like the Charleston factory. I like having it next to (inaudible). We like having (inaudible) as a partner there. I think, if there's alesson learned, it might be you'd start earlier and you'd do a little more training, perhaps, with our people there, helping themlearn the production process. But there's no fundamental flaw in Charleston.


You think after 2, 3, 4, 5, it's going to flow pretty well as planned? You still got out of sequence work but it is preplanned andso after 1 and the static rig move, you think you have a plan that will run smoothly?


I think there are going to continue to be growing pains at the front end of this as we come up the ramp. Having said that, webelieve we have plans in place that allow us to deal with those challenges, but we see them being more what I would call normalchallenges as opposed to extraordinary that we're facing now.


Any idea when the next plane will come to Everett for assembly, the next parts, when you will free up one of those positions totake another airplane?


I don't have the specific schedules in front of me, but Dominic, you should let us get back to you on that rather than guess.

Operator

[Thelemay Paythorpe], KPLU Public Radio.

Thelemay Paythorpe - KPLU Public Radio - Analyst

Yes, I'm wondering specifically what Boeing can do to help your airline customers as they deal with these disruptions. What canthe Company do to make that easier for them specifically?


Well, the first thing we can do is get to them early, which is what we are doing today. I think the airlines, when they get withinsix months of delivery, begin to advertise routes and advertise new equipment. They begin to make equipment choices thatinteract with the new airplane. So I think the most fundamental thing we can do is, when we know there is going to be a delay,talk about it as quickly as we know that. That's our purpose here today.

Also, we work very closely with our airlines. A number of the airlines that we're delivering to at the beginning have people inour facilities in the Puget Sound area working with us. It's good to have that kind of working relationship because you can workthrough all of the small problems and the big ones, contractual issues as well as issues around logistics and any adjustmentsthey would like to make. So, it's a matter of staying close, getting to them early, and having the right spirit. When we have done






something that we -- when we haven't done something we've committed to to resolve it quickly and fairly with the airlines'best interest in mind.


Operator, we are getting tight on time here, so we will take one more question.

Operator

Cheryl Corley, National Public Radio.

Cheryl Corley - National Public Radio - Analyst

Good afternoon, gentlemen. If you don't mind, I think I have all of your voices identified (technical difficulty).


Hello? Could you speak up, please?


Can you hear me now? How about now? I asked, I said think I have all of your voices identified now, but if you could say yourname when you speak, I would appreciate it.

I just wanted to know. You were pretty adamant. The Company seemed to be pretty adamant early on about being able tomeet the original schedule. I was wondering how embarrassing it is that you had to announce this delay and how confidentare you now that you will be able to meet this new timetable.


Well, it is obviously disappointing. This is Jim McNerney, and we are disappointed to have to announce this delay. I mean, wetake our commitments to our customers and our supply chain partners seriously. We wish we didn't have to do this. Havingsaid that, fundamentally, new kinds of innovation like this airplane represents can present challenges. We're doing our best tomeet them.


You'll be able to meet them by this new timetable? Why do you think you'll be able to meet this new timetable?


Well, I think the reason we will be able to meet the new timetable is the detailed bottom-up planning we've done to assure thatwe can make it. We are very, very much looking forward to getting this program off the ground. It will be a 25-or 30-year success,one of the fundamentally new things in aviation.







Okay, thank you so much.


That concludes our call today. For members of the media, once again, if you have any follow-up questions, please use the mediarelations contacts at the bottom of the news release we issued this morning. Thank you very much.

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Cover PageCorporate ParticipantsDavid Dohnalek (5 Turns)Jim McNerney (8 Turns)Scott Carson (25 Turns)James Bell (14 Turns)

Conference Call ParticipantsHoward Rubel (1 Turn)Doug Harnad (1 Turn)Ron Epstein (1 Turn)Robert Spingarn (4 Turns)Heidi Wood (2 Turns)Steve Binder (2 Turns)Cai von Rumohr (3 Turns)Troy Lahr (4 Turns)Robert Stallard (3 Turns)George Shapiro (2 Turns)Joe Nadol (2 Turns)David Strauss (2 Turns)JB Groh (1 Turn)Myles Walton (1 Turn)Ben Fidler (3 Turns)Peter Arment (1 Turn)James Gonzales (1 Turn)James Wallace (2 Turns)Lynn Lunsford (2 Turns)Stanley Holmes (3 Turns)Dominic Gates (4 Turns)Thelemay Paythorpe (1 Turn)Cheryl Corley (4 Turns)

PRESENTATION1. Operator2. David Dohnalek3. Jim McNerney4. Scott Carson5. James Bell6. Unidentified Company Representative

QUESTIONS AND ANSWERS1. Operator2. Howard Rubel3. Scott Carson4. Operator5. Doug Harnad6. Unidentified Company Representative7. Operator8. Ron Epstein9. Unidentified Company Representative10. Operator11. Robert Spingarn12. Unidentified Company Representative13. Robert Spingarn14. Unidentified Company Representative15. Robert Spingarn16. Unidentified Company Representative17. Robert Spingarn18. Operator19. Heidi Wood20. Scott Carson21. Heidi Wood22. Scott Carson23. Operator24. Steve Binder25. James Bell26. Steve Binder27. James Bell28. Operator29. Cai von Rumohr30. James Bell31. Cai von Rumohr32. James Bell33. Cai von Rumohr34. Operator35. Troy Lahr36. Scott Carson37. Troy Lahr38. Scott Carson39. Troy Lahr40. Scott Carson41. Troy Lahr42. Scott Carson43. Operator44. Robert Stallard45. James Bell46. Robert Stallard47. James Bell48. Robert Stallard49. James Bell50. Operator51. George Shapiro52. James Bell53. George Shapiro54. Scott Carson55. Operator56. Joe Nadol57. Jim McNerney58. Joe Nadol59. Jim McNerney60. Operator61. David Strauss62. Jim McNerney63. Scott Carson64. James Bell65. Scott Carson66. James Bell67. David Strauss68. Operator69. JB Groh70. Operator71. Myles Walton72. Scott Carson73. Operator74. Ben Fidler75. James Bell76. Ben Fidler77. James Bell78. Ben Fidler79. James Bell80. Unidentified Company Representative81. Operator82. Peter Arment83. Scott Carson84. David Dohnalek85. Operator86. David Dohnalek87. Operator88. James Gonzales89. Scott Carson90. Operator91. James Wallace92. Scott Carson93. James Wallace94. Scott Carson95. Operator96. Lynn Lunsford97. Jim McNerney98. Scott Carson99. Lynn Lunsford100. Scott Carson101. Operator102. Stanley Holmes103. Scott Carson104. Stanley Holmes105. Scott Carson106. Stanley Holmes107. Operator108. Dominic Gates109. Scott Carson110. Dominic Gates111. Scott Carson112. Dominic Gates113. Scott Carson114. Dominic Gates115. Scott Carson116. Operator117. Thelemay Paythorpe118. Jim McNerney119. David Dohnalek120. Operator121. Cheryl Corley122. Scott Carson123. Cheryl Corley124. Jim McNerney125. Cheryl Corley126. Jim McNerney127. Cheryl Corley128. David Dohnalek

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The Boeing Company Conference Call on Oct. 10. 2007 / 1:30PMonline.wsj.com/public/resources/documents/transcript-ba... · 2018-08-27 · FINAL TRANSCRIPT BA - The Boeing Company Conference