BOEING Earningcall Transcript Of Q2 of 2024
and Brian West, Boeing's executive vice president and chief financial officer. As a reminder, you can follow today's broadcast and slide presentation at boeing.com. Projections, estimates, and goals included in today's discussion involves risks, including those described in our SEC filings and in the forward-looking statement disclaimer at the beginning of the presentation. We also refer you to the additional disclaimers related to the Spirit AeroSystems transaction at the beginning of the presentation as well the disclosures relating to non-GAAP measures in our earnings release and presentation. Now, I will turn the call over to Dave Calhoun. Dave Calhoun -- President and Chief Executive Officer Thanks, Matt. Good morning to all, and thanks for joining us. First, you saw the news that the company has announced the appointment of Kelly Ortberg as my successor commencing August 8th of this calendar year. As you know, the Board conducted an extensive search process. It was led by Steve Mollenkopf. I am incredibly grateful to the way in which he conducted it, the extent to which he conducted it. And I'm extremely confident in their selection of Kelly as the next leader for Boeing. He's had more than 35 years of experience in aerospace and is tremendously respected in the industry. I look forward to working with him to ensure a smooth transition. I want to focus my upfront comments on the progress that we are making on our recovery as we strengthen our quality management systems and position the company in best possible way as we move forward. Brian will cover the financials following my remarks. As a company, we've been on a multiyear path to strengthen our safety and quality management systems. We've stressed our commitment to transparency every step of the way. The January accident obviously sharpened this focus, leading us to take multiple additional steps to improve the stability of our operations, including major elements of our supply chain. First, among our actions was to slow things down and control travel work, allowing our supply chain to catch up and provide the buffer we need to improve quality and stabilize deliveries going forward. Our second-quarter financial results reflect the reality of that continuing recovery post the Alaska accident. We're committed to doing all of the work necessary to ensure Boeing is the company the world needed to be, safe and predictable. Over the last seven months, we have made meaningful progress toward that goal. At the end of May, we provided our comprehensive safety and quality plan to the FAA, which continues to provide strong oversight of the delivery process. The planned notes are key performance indicators, by which we and our regulators will monitor the health and the quality of our production system. These measures include employee proficiency, notice of escapes, supplier shortages, rework hours, travelers at factory rollout, and ticketing performance. All of these key performance indicators, KPIs, are established and operationalized across our BCA employee programs and they provide real-time insight to support stability, quality, and safety. We are seeing improved performance across the majority of the metrics and remain confident in our ability to meet these KPIs as we expand production. An important element of this plan is the control limits we've established by which the FAA and more importantly, our own team hold ourselves accountable. Furthermore, our plan doubles down on four key investments; workforce training, simplification of manufacturing plan and processes, eliminating defects, and elevating our safety and quality culture. We continue to seek feedback from our employees, from our customers, our regulators, policymakers, shareholders, and many others as we move forward. One of the most important actions we took was the transfer of our rent in fuselage inspection process to Wichita. On-site Boeing inspectors at Spirit increased by almost three times, the number that we had before January. And defects we initially caught and reworked in Renton are now caught and reworked in Wichita. While this dramatically reduced the number of clean fuselages coming from Spirit in the first few months, we have seen steady improvement ever since. The improvements in quality have significantly improved our rent and flow times over that same period. While our focus remains on our factories to ensure we can meet our customer commitments, we are also making important progress on our development programs, including the 737-7, the -10, and our 777X. Most notably, this month, we received type inspection authorization, TIA, for the 777-9 and began cert flight testing with FAA personnel on board the aircraft. Our team has put the 777-9 test fleet through more than 1,200 flights, 3,500 flight hours across a wide range of regions and climate condition. And the certification of flight testing will continue validating the airplane safety, reliability and performance. In addition, we've identified an engineering solution for the engine anti-ICE system for in-production aircraft that will be implemented and certified in 2025 to support the first delivery of our -7 and -10 in MAX family. A comment on Boeing Defense, Space & Security performance. Clearly, the results this quarter are disappointing. Brian and I have mentioned before that we expected the fixed-price development programs to remain bumpy until we complete the development phase and transition to mature long-term franchise programs. Based on the lessons that we've learned in taking on these fixed-price development programs, we have maintained contracting discipline for all future opportunities. We remain cautiously optimistic about the long-term prospects of our defense business, and we believe we can progress toward a more historical level of performance over time. Finally, Global Services remains a bright spot and continues to deliver solid results. We have a strong franchise and the team remains dedicated to supporting our commercial and defense customers. Before turning it over to Brian, let me touch on the recently announced agreement to acquire Spirit AeroSystems. This is an important shift in strategic direction, and it would course correct as -- made decades ago. This planned acquisition is a very significant demonstration of our resolve to invest heavily in quality and safety and to take the additional actions needed to reshape our company. As we have said, we believe this proposed deal is in in the best interest of the flying public, the best interest of our airline customers and the employees of Spirit and Boeing, and the country more broadly. By bringing in critical manufacturing work back within our four walls, we can unify our safety and quality management systems and ensure our engineers mechanics are working together as one team day in and day out. I'll close with a comment to our employees. Thank you for all that you do every single day. You care deeply about our mission, about our company and about each other. Your passion, your resilience, and commitment are inspiring. This is a challenging period of time for all of us. There is no doubt, but I am confident, maybe more confident than I've ever been in our future because of you. And thank you, and Brian, I'll turn it over to you. Brian J. West -- Executive Vice President, Finance and Chief Financial Officer Thanks, Dave, and good morning, everyone. Before jumping into the financial results, let me take a moment on our planned acquisition of Spirit AeroSystems. On July 1, we announced a definitive agreement to acquire Spirit in an all-stock transaction worth approximately $4.7 billion with a total enterprise value of approximately $8.3 billion. As our materials indicated, we expect the transaction to close mid-2025, subject to the satisfaction of customary closing conditions, including regulatory and Spirit shareholder approvals as well as the sale of Spirit operations related to certain Airbus commercial work packages. This agreement contemplates us acquiring substantially all Boeing-related commercial operations primarily consisting of the Wichita, Kansas, Tulsa, Oklahoma, and Dallas, Texas facilities as well as other commercial, defense, and aftermarket operations that would further augment our capabilities and offerings across the portfolio. Regarding the defense programs, we're committed to working with Spirit, its customers, and the DoD to ensure continuity in order to support these critical missions. We continue to believe that this reintegration leverages and builds on our capabilities, support supply chain stability, integrates critical manufacturing and engineering workforces that allows for the ultimate unification of safety and quality management systems. Fully aligning to the same priorities, incentives, and -- centered on safety and quality is in the best interest of our customers, the aviation industry, and all stakeholders, including the flying public. All of this demonstrates our ongoing commitment to aviation safety, quality, and stability. Turning to the next page, I'll cover the total company financial performance for the quarter. Revenue was $16.9 billion, primarily reflecting lower commercial delivery volume. The quarter loss per share was $2.90, reflecting lower commercial delivery volume and losses of $1 billion on fixed-price defense development programs, which I'll get into later. Free cash flow was a usage of $4.3 billion in the quarter, which was generally in line with the expectations shared in May. Results impacted by lower commercial deliveries and unfavorable working capital timing. Turning to the next page, I'll cover Boeing Commercial Airplanes. BCA delivered 92 airplanes in the quarter. Revenue was $6 billion, and operating margin was minus -- 11.9%, primarily reflecting lower deliveries and expected higher period costs, including R&D. The backlog in the quarter ended at $437 billion and includes more than 5,400 airplanes. Last week's Farnborough Airshow continue to highlight the robust demand for our product lineup as we announced orders and commitments for over 150 airplanes, including nearly 100 widebodies. Now I'll give more color on the key programs. The 737 program delivered 70 airplanes in the second quarter, including a meaningful step up to 35 in June. July will be more or less in line with June levels despite normal seasonality. On production, we gradually increased during the quarter and still expect to be higher in the second half, as we move to 38 per month by year-end. We've reactivated the third line in our rented factory and monthly production improvement from high single digits at the end of the first quarter to roughly 25 in June and July. As Dave noted, the factory is currently operating within or near the KPI control limits laid out with the FAA as part of the safety and quality plan. The factory is operating with all fully inspected fuselages today and near-term production will continue to be paced by fuselages from Wichita. More broadly on the master schedule, we continue to make adjustments as needed and manage supplier by supplier based on inventory levels. Our objective remains to keep the supply chain paced ahead of final assembly to support stability and minimize traveled work. The quarter ended with approximately 90 737-8s built prior to 2023, the vast majority for customers in China and India. This is down 20 from last quarter's value, and we expect approximately 10 more delivered in the month of July. We still expect to deliver most of these airplanes by year-end as we work toward shutting down the shadow factory. Regarding the -7 and the -10 models, inventory levels remained stable at approximately 35 airplanes and the certification timelines remain unchanged. On the 787, we delivered nine airplanes in the quarter, although the quarter was impacted by lower production, seat delays, and other delivery timing items noted previously. We're starting to work through these issues and delivered six airplanes in July. The program produced below five per month in the quarter as expected and still plans to return to five per month by year-end. We ended the quarter with around 35 airplanes of inventory built prior to 2023 that required rework, which continues to progress steadily. We still expect to finish the rework and shut down the shadow factory by year-end with most of these airplanes delivering this year. Finally, on the 777X program, as Dave noted, we took a very important step on the certification timeline earlier this month as the program obtained type inspection authorization and began FAA certification flight testing. We'll continue to follow the lead of the FAA as we progress through the certification process and still expect first delivery in 2025. Inventory in the quarter grew approximately $800 million in line with recent quarterly trends and will continue to grow as we move toward entry into service as we've previously contemplated. Moving on to the next page, Boeing Defense & Space. BDS booked $4 billion in orders during quarter, including capturing an award from the U.S. Air Force for seven MH-139 helicopters and the backlog ended at $59 billion. Revenue was $6 billion, down 2%, driven by fixed price development losses and BDS delivered 28 aircraft in the quarter, including the first CH-47F Block 2 Chinook to the U.S. Army. We took a $1 billion loss on certain fixed-price development contracts in the quarter and operating margin was minus 15.2%. In late May, we indicated that margins would take a step back and be negative due to a couple of things. First, the deliberate slowdown of the Puget Sound factories has impacted the derivative programs, specifically, a $391 million loss on the KC-46A Tanker, as well as margin compression on the profitable P8 program. Second, we've seen additional fixed price development cost pressures, resulting in additional losses on T-7A, VC-25B, and commercial crew, primarily related to higher estimated engineering and manufacturing costs and inefficiencies associated with meeting certain technical requirements. Given the fixed-price nature of these contracts, we continue to be transparent about impacts as we work to stabilize and mature these programs. While acknowledging these are disappointing results, there's a complicated development programs, and we continue to put milestones behind us and remain focused on retiring risk each quarter and ultimately delivering these mission-critical commitments to our customers. Stepping back, the game plan to get BDS back to high single-digit margins in the medium to long term remains unchanged. The core business remains solid, representing approximately 60% of our revenue and performing in the mid to high single-digit margin range. The demand for these products continue to be very strong, supported by the geopolitical threat environment confronting our nation and our allies. And the 25% of the portfolio primarily comprised of fighter and satellite programs, the quarter again saw improved margin trends as we continue to make important progress including delivering our eight F-15EX aircraft to the U.S. Air Force, which enabled the program to achieve its initial operating capability milestone in July. We still expect to return strong historical performance level as we roll to new contracts with tighter underwriting standards. Overall, the defense portfolio is well-positioned for the long term. There's strong demand across the customer base, the products are performing well in the field, and we're confident that our efforts to drive execution and stability will return this business performance levels that our investors will recognize. Moving on to the next page, Boeing Global Services. BGS continued to perform well in the second quarter, delivering very strong results across a globally deployed team that is focused on supporting its customers on both the defense and commercial sides. They received $4 billion in orders and the backlog ended at $19 billion. Revenue was $4.9 billion, up 3%, primarily on higher commercial volume. Operating margin was 17.8%, down slightly compared to last year, but still strong performance. In the quarter, BGS secured an Apache performance-based logistics contract from the U.S. Army and captured FliteDeck Pro service contracts with Hainan Airlines and Ryanair. Importantly, BGS continued to deliver very strong operating margins for the first half of the year, matching the record levels from 2023. It's a terrific franchise that's set up for years to come. The team is focused on profitable, capital-efficient high IP offerings, and we still expect it to grow at solid mid-single-digit revenue levels and throw off mid-teen margins with very high free cash flow conversion. Turning to the next page, I'll cover cash and cash and debt. On cash and marketable securities, we ended the quarter at $12.6 billion, reflecting the $10 billion issuance of new debt in May, partially offset by the use of free cash flow in the quarter. The debt balance increased to $57.9 billion driven by the new debt issuance. We continue to maintain access to $10 billion of revolving credit facilities, all of which remain undrawn. The deliberate actions we're taking demonstrate our commitment to improve safety and quality, and we continue to manage the business with a long-term view. We acknowledge the impact these actions are having on calendar year cash flows. So let me provide some additional context on near-term expectations. While commercial production and deliveries are improving, additional losses in BDS and working capital timing continue to weigh on near-term cash flow. Inventory will remain a near-term headwind as we prioritize supply chain stability to support future rate increases and advanced payments will take time to improve as we stabilize production and improve profitability of deliveries to our customers. Given these near-term working capital pressures, third quarter is expected to be another use of cash. We expect these working capital timing impacts will be -- unwind as deliveries and production stabilize later this year. On the free cash flow outlook for the year, we are now expecting a larger use of cash than previously forecasted. As you know, operating leverage in our business is meaningful. And as we ramp up deliveries, free cash flow will grow. We are deliberately investing today and taking the time necessary to get it right to ensure we're positioned to ramp -- in a more predictable and stable fashion. We remain committed to managing the balance sheet in a prudent manner with two main objectives: First, prioritize the investment grade rating; and second, allow the factory and supply chain to reset, both of which were supported by our decision to acquire Spirit with all stock financing. We'll continue to actively monitor our liquidity levels and as needed, we'll supplement our liquidity position with these two objectives in mind. We're confident that over time, the business performance and capital structure will return to levels fully aligned with an investment-grade profile. Looking forward, we're taking the time now to ensure that our BCA factories are positioned to ramp production in a stable fashion for years to come. We'll also continue make progress on other important objectives, including shutting down the shadow factories, maturing and derisking the defense fixed-price development programs, and building on the continued strong results and services. Entering 2025 will be in a much stronger position because of the work we're doing now. As noted in the commercial market outlook published this month, we continue to see robust demand, and the fundamentals are there for the next 20 years, where we expect the global fleet to almost double as nearly 44,000 new airplanes are delivered with about half of those full replacement demand. The commercial and defense markets we serve, along with our product portfolio underpin our confidence as we manage the business today with a long-term view built on safety, quality, and delivering for our customers. With that, let's open it up for questions. Operator Questions & Answers: |
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