Thank you for standing by. Good day, everyone, and welcome to the Boeing Company's Q3 2014 Earnings Conference Call. Today's call is being recorded. The management discussion and slide presentation, plus the analyst's immediate
and
I'm turning the call over to Mr. Troy Lahr, Vice President of Investor Relations for The Boeing Company. Mr. Lahr, please go ahead.
Thank you and good morning. Welcome to Boeing's Q3 2014 earnings call. I'm Troy Lahr and with me today are Jim McNearney, Boeing's Chairman and Chief Executive Officer and Greg Smith, Boeing's Chief Financial Officer. After comments by Jim and Greg, we will take your questions. In fairness to others on the call, we ask that you please limit yourself to one question.
As always, we have provided detailed financial information in today's press release and you can follow this broadcast and slide presentation through our website atbelling.com. Before we begin, I need to remind you that any projections and goals included in our discussion this morning are likely to involve risk, which is detailed in our news release, in our various SEC filings and in the forward looking statement disclaimer at the end of this web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of non GAAP measures that we use when discussing our results and outlook. Now, I'll turn the call over to Jim McNearney.
Thank you, Troy, and good morning, everyone. I'll start with some comments on the quarter and our business environment. After that, Greg will walk you through details of our financial results and outlook. Now let's move to slide 2 please. Boeing delivered another strong quarter with solid operating performance across our production programs and services businesses, which drove a 19% increase in our core earnings per share.
This performance has allowed us to continue returning cash to our shareholders through our strong dividend and share repurchase program. Revenue at Boeing Commercial Airplanes increased 15%, dollars 16,000,000,000 and operating margins were strong at 11 0.2%. We delivered 186 commercial airplanes in the 3rd quarter, including 30 1787 Dreamliners and we added net new orders of 501 airplanes. Boeing Defense Space and Security revenue was $8,000,000,000 in the 3rd quarter and operating margins increased to 10.8%. BDS captured numerous key contract awards in the quarter, including NASA's Commercial Crew Spaceship program with a potential value of $4,200,000,000 and the first order for the 502 Phoenix Small Satellite.
Significant BDS program milestones include delivery of the 1st Chinook helicopter under the latest multiyear contract with the U. S. Army, successful launch in orbit of the 7th GPS IIF satellite and delivery of the first four upgraded airborne warning and control system aircraft for France. With that, let's turn to the business environment on Slide 3. Strong growth in the commercial airplane market continues to drive demand that supports our planned production rate increases over the remainder of the decade.
Net new orders for the year of 10.11 are well above our planned output and our record backlog of more than 5,500 aircraft represents more than 7 years of production at current rates. Given the 737s robust backlog of more than 4,000 orders, we plan to increase production from the current rate of 42 per month to 47 in 2017 and then increase production again to 52 per month in 2018. Furthermore, the compelling value proposition of the 787 and its sizable backlog of more than 8 50 orders are driving production rate increases today's 10 per month to the previously announced rate of 12 per month in 2016 and then up to 14 by the end of the decade. We also are increasing production on the 767 from the current rate of 1 per month to 2 per month in 2016. Notwithstanding a somewhat richer mix of global economic and geopolitical developments throughout this year, which we are monitoring very carefully, global passenger traffic trends are strong and air cargo traffic continues to gradually improve, although the latter still remains a watch item for us.
We continue to see replacement demand as an increasingly important market driver with airlines opting to introduce newer more efficient airplanes with compelling economics and a rapid return on investment rather than keeping older less efficient models in service. Our new technologically advanced airplanes not only have far better fuel efficiency and lower maintenance costs, but also often deliver higher passenger and cargo revenue, increased residual values, greater range and a better overall passenger experience. All of these elements provide significant value to our customers over the life of the aircraft. When we look at that combination of growth and replacement needs over the next 20 years, we forecast global demand for nearly 37,000 new commercial airplanes. Near term, customers continue to demonstrate confidence in their fleet plans with deferral requests still running well below the historical average and we continue to have requests to accelerate deliveries.
This ongoing strong demand coupled with our large and diverse backlog underpins our outlook for sustained growth in the years ahead. In the Twin Aisle segment, we continue to see healthy demand for both the 777 and the new 777X, which are outselling the competition by a wide margin, giving us confidence in our ability to transition between the 2 airplanes. We also continue to enhance the value proposition of the 777 for customers with our relentless drive on product improvements that will further increase operating efficiencies. Year to date, we have 45 orders and commitments for the 777. We expect demand for the 777 to remain healthy through the end of this decade with an anticipated average order capture of around 40 to 60 airplanes per year to support the transition to the 777X.
We'll continue to evaluate our options for the most efficient way to transition from the current 777 to the 777X as the new airplane enters final assembly in the 2018 timeframe. We are also introducing new manufacturing processes and technologies that allow us to further optimize the 777X production system. As we mentioned before, a smooth production transition is a top priority on this program. On the 787 program, we achieved several noteworthy milestones, including delivering the 5th 7 80seven-nine as well as the first -nine with GE powered engines. Both the GE and Rolls Royce engine types are now certified on the -nine.
In addition, our Charleston facility delivered its first 787 at its planned production rate of approximately 3 per month, which supports the overall current production rate of 10 per month. Production performance at Charleston continues to progress nicely. In the single aisle segment, demand for our new fuel efficient 7 37 MAX remains high with cumulative orders totaling nearly 2,300 airplanes from 47 customers. The production bridge from today's 737 to the MAX remains solid, with the first MAX delivery expected in 2017. Turning to Defense, Space and Security.
We continue to see solid support for our major programs in the FY 2015 budget process. We are encouraged by the actions taken in both the House and Senate Appropriations Committees with regard to additional Apaches and EA-eighteen gs Growlers as well as strong support from both on P8 and Tanker. Our international business represented 28% of BDS revenues during the quarter and 37% of the BDS backlog as we continue to leverage our unique 1 Boeing global advantage. Our investments in technology and innovation for organic growth continue in areas such as commercial derivatives, space, unmanned systems, intelligence surveillance and reconnaissance and the critical few large scale future programs that are priorities for our customers like Long Range Strike, Space Launch System, U Class and the T X training. The relative strength of our Defense, Space and Security business stems from a portfolio that is reliable, proven and affordable.
We continue to focus on driving further efficiency, quality and productivity gains to improve program profitability and fund investment in future growth. As part of these efforts, BDS continues to make strong progress on our market based affordability initiative as we strive to reduce operating costs by another $2,000,000,000 to ensure competitiveness through the ongoing downturn in domestic defense spending. Our announcement in December of plans to consolidate some of our defense service and support work into Oklahoma City and St. Louis is one example of those efforts. Decisions that affect our workforce are never easy, but we are fortunate to have a growing commercial business with employment needs that have helped mitigate some of the impact on our people.
In summary, our team is executing on our business strategy by meaningfully growing revenues, generating solid operating performance on improved execution and capturing strategic new business. Now over to Greg for our financial results and our updated guidance. Greg? Thanks, Jim, and good morning. Let's turn to slide 4 to discuss our 3rd quarter results.
3rd quarter revenue increased 7% to $23,800,000,000 driven by growth in our commercial airplane business. Core operating margins increased to 10.2% reflecting solid productivity gains in both businesses. 3rd quarter core earnings per share increased 19% to $2.14 on higher volume and continued strong operating performance. Let's turn now to our Commercial Airplane business on slide 5. For the 3rd quarter, our Commercial Airplane business increased revenue 15 percent to a record $16,100,000,000 on 186 airplane deliveries.
The solid BCA operating margin of 11.2% reflects strong program execution offset by the impact of higher 787 and 747 deliveries and higher fleet support for new customer introductions. Commercial airplanes captured $69,000,000,000 of net orders during the quarter and backlog achieved a new record of 430,000,000,000
dollars in over 5,500 aircraft
in 7 years of production. In the 3rd quarter, production costs increased $947,000,000 to $25,200,000,000 largely driven by the increase of 787-nine production and the continued inventory pull ahead to efficiently optimize in production and minimize disruption as we introduce the aircraft into our production system. Similarly, on the 787-ten, we'll continue to look for opportunities to accelerate our build plan in early 2015 to mitigate early introduction risk, while preparing to increase the overall 787 production rate to 12 per month in 2016. The team continues to reduce unit cost and improve flow time on both the 787-eight and -nine through continued focus on optimization of the production system and maximizing efficiencies. Overall, we continue to make solid progress on the 787 program.
However, we still have work ahead of us, as I said, introducing the -nine in production, preparing for the 12 per month rate and again introducing the -ten while driving efficiencies across all aspects of the program. The team remains focused on solid day to day execution, risk mitigation and improving the long term productivity and profitability and cash flow going forward. Turning now to Defense, Space and Security results on slide 6. 3rd quarter revenue for our defense business was $7,900,000,000 and operating margins increased to 10.8% due to strong performance across the business. Boeing military aircraft 3rd quarter revenue increased 3% to $3,500,000,000 reflecting higher volume on our P8 program.
BMA operating margins also increased to 12.4 percent on continued solid program execution. Services and Support revenue of $2,300,000,000 and operating margins were 9.7% largely due to delivery mix in the quarter. Network and Space Systems reported revenue of $2,000,000,000 reflecting timing of ULA launches and lower government satellite volume. Operating margins increased to 9.3% in the quarter on strong program execution across the portfolio. Defense, Space and Security reported a solid backlog of $60,000,000,000 with 37% of our current backlog now from international customers.
Turning now to slide 7. Boeing Capital's net financing portfolio increased slightly to $3,500,000,000 on some new aircraft volume. Now turning to cash flow on slide 8. 3rd quarter operating cash flow before pension contributions was $1,700,000,000 driven by higher commercial airplane production rates and solid operating performance somewhat offset by timing of receipts and expenditures in quarter. During the quarter, we made a planned discretionary pension contribution of $750,000,000 With regard to capital deployment, we paid $525,000,000 in dividends to shareholders and repurchased 8,000,000 shares for 1,000,000,000 bringing our year to date repurchase activity to 39,000,000 shares for $5,000,000,000 The capital deployment to date continues to demonstrate the strength of our portfolio and our backlog and our commitment and confidence in the business performance going forward.
We expect to complete the remaining $5,800,000,000 repurchase authorization over approximately the next 1 to 2 years. Returning cash to shareholders along with continued investment to support future growth remains a priority for us. Move now to cash and debt balances on slide 9. We ended the quarter with $10,000,000,000 of cash and marketable securities. Our cash balance continues to provide solid liquidity and positions us well going forward.
Turning now to slide 10 and we'll discuss our outlook for the remainder of 2014. We're increasing our core earnings per share guidance for 20.14 by $0.20 to now be $8.10 to $8.30 on continued solid execution. Based on strong operating performance combined with the impact of timing of receipts and expenditures, we're increasing our operating cash flow guidance before pension contributions for 20 14 to now be greater than $7,000,000,000 In addition, as a result of our continued focus on execution and disciplined cash management, we're lowering our outlook for capital spending by $200,000,000 to now be approximately $2,300,000,000 for the year. This performance allowed us to further return cash to shareholders as we continue to aggressively repurchase shares and pay dividends. We remain confident in our long term cash generation potential given the focus on execution, our ability to deliver on the unprecedented backlog and our unmatched portfolio
of
percent on improved operating performance. In the Q4, we expect BCA margins to be impacted by higher deliveries of 74767, some additional planned fleet support costs for new customer introductions, higher R and D on the 787-ten and 777X as well as additional investments in productivity initiatives. In summary, 3rd quarter financial performance reflects enterprise. With that, I'll turn it over to Jim for some closing comments.
Thank you, Greg. With 3 solid quarters behind us, we are focused on closing out the year with continued strong business performance that will allow us to meet our customer commitments, fund our investments in the future, recognize and reward our team for their work and continue to return cash shareholders. Our priorities in 2014 and beyond remain clear. Profitable ramp up in production on our commercial airplane programs, executing on our commercial and defense development programs, driving productivity and affordability throughout the enterprise, continuing to strengthen and position our defense business with targeted investments and further international expansion and all the while providing increasing value to both our customers and our shareholders. Now Greg and I would be happy to take your questions.
Our first question will be from Doug Harned with Sanford Bernstein. Please go ahead.
Yes, good morning.
Good morning, Doug.
When you look at the year so far, you've had very strong margins in BCA. This quarter your unit margin turned significantly positive which is new.
Yeah.
But on the other side deferred production on the 87 moved slightly above your guidance level and I would say free cash flow for the quarter was low given your guidance even before pension. So I'd like to understand better how you see the operating performance, the strong operating performance we've seen turn into cash going forward? And specifically, when do you see the 787-eight and the-nine each turning cash positive? And what else drove the high unit margins in the quarter? And is that something that we should expect to continue?
Okay. Well, Doug, let me start with cash flow. Certainly, you're right. I mean, strong execution across the business and across the programs. And that's certainly driving our cash flow to date.
And as I mentioned before, there's timing quarter between quarter when it relates to advances and milestone payments. So that's some of that is what you're seeing. So I'd equate that to timing is what you're seeing in the quarter. And as I mentioned, we've been pulling forward 787 inventory and particularly around -nine to ensure that that program enters into the production system in a very smooth manner of which it's doing. We also got some timing around C17 orders that we've talked about.
So those again all related to timing throughout the balance of the year. So we still expect to see very strong cash flow through the balance of the year. And really coming from the elements we talked about continuing to execute on the deliveries, on the productivity as well as the 787 unit cost. Now when you look forward into 20 15, we expect to see continued growth in cash flow. Again, through the execution on the production rates, additional productivity, international orders and then that will be somewhat offset by higher cash taxes and 777X R and D starting to kind of come into play.
But the fact is you'll see growth. And then from there forward as we've talked about you'll continue to see operating cash flow growth throughout the balance. And again that's all executing on our production rates and continuing to drive productivity. I'm not sure if I covered all your questions.
Well, if you look at the you're talking about moving inventory forward related to the -nine. And I'm trying to understand if you if it's possible to put that aside for a moment and think about how the 787-eight and -nine are each performing in terms of cost. Are those is the -eight cash positive yet if you were to look at it on a standalone basis? Can you give us a sense of where that is today relative to what I would call more one time items related to inventory timing?
Yes. Yes. No, we're not as I've said before, we're not cash positive yet. We expect to be cash positive in the 2015 timeframe and that will be a blend obviously of -eight and -nine. But if you step back and look at unit cost on -eight and -nine, they continue to progress well as I've talked about on prior calls as well as I'd say the other key indicators that ultimately make it into deferred and cash around flow time and overall cost to quality, all of those trending in the right direction on the program.
So obviously, we expect that to continue, continue to expect to come down the learning curve on the 787 as well as step down in supplier pricing and work continuing to work the productivity initiatives, all of that ultimately contributing to cash flow over the long term of the program.
Okay. Okay. Thank you.
Okay. Our next question is from Joe Nadel with JPMorgan. Please go ahead.
Thanks. Good morning. Good morning. Greg, just staying on the deferred. I was wondering if you could if you
have a new estimate of
where it might peak or if we're sticking over. And then just holding into the -nine, I think the pull forward that you've talked about on the inventory is a little more than maybe you expected a year ago. Could you maybe give a little more concrete give us a little more on exactly what's going on there? Is this payments to suppliers that are happening in advance? I guess quantify it a little bit and help us get a sense as to when it maybe flips the other way?
Yes. Well, maybe just to kind of help, when you look at just over $900,000,000 of growth in deferred in the quarter, there's about a couple of $100,000,000 in there that's related to 787-nine pull forward. So essentially what they're doing is as these products become more mature in the production system and the suppliers are performing, we're pulling those components in and migrating those into the production system to allow smooth transition as we're operating at 10 a month. And Ray and the team have done a fantastic job in doing that and you're seeing that in the results when we're making our deliveries. And so that kind of methodology they're utilizing in the production system is a risk reduction.
Certainly impacts deferred on the near term, but as far as the long term profitability and risk reduction on the program, absolutely the right thing to do. And as I've said to you in the past, the program team out there is focused on unit by unit improvement on all aspects, whether it's quality, unit cost or flow time and ultimately cash. And that's certainly what they're managing. But there's some near term, as I said, risk mitigating activities that we've taken into account here that do impact near term on deferred, but are absolutely the right thing to do for this program. And that's what you've seen in the quarter.
And you're going to continue to see some of that as we start to pull forward -ten products and get those into the production system, derisk the overall production system and get ready for 12 a month. On the overall deferred, there's really no change. I said it would be approximately $25,000,000,000 We're at $25,200,000,000 But again keep in mind the last 2 or 3 quarters we've pulled forward -nine and that wasn't in the original plan. There's no question about that. But again, absolutely the right thing to do.
So we're continuing to focus on it. But like I said, Joe, it's all about making rate and making unit cost improvements unit over unit and that's what the team continues to focus on.
If I may, I know this is violating the one part one question, but just to keep on the point. I understand the -nine pull forward. It was a couple of 100 and I think maybe it was 300 or so, 3 100 or 400 last quarter. Right. Understand that, but it doesn't seem like sequentially the other part of deferred really came down.
It seems like that was maybe $700,000,000 and change last quarter $700,000,000 and change this quarter. So is there any more color on the -eight?
Yes. No, -eight continues to make progress. So we're continuing to make progress there and as we have. So there's really I'd say they're continuing on the trajectory of reducing unit cost as we've been on. Okay.
Thank you.
Okay.
Our next question is from Cai von Rumohr with Cowen and Company. Please go ahead.
Yes. Thanks so much. Hi, Cai von. Not to beat a dead horse, but if we take out the pull forwards, which is not execution, it doesn't look like the 787 deferreds are coming down that much. Hence, it's pretty I'm confused as to why you got a $1,000,000,000 positive swing in unit cost to about $500,000,000 profit, which were the programs that were profitable or more profitable in the 3rd quarter versus in the second?
And how does that all square with the trend in 787 deferreds? Thanks.
Yes. I mean on overall unit, we saw improvement on the 777 quarter over quarter and about flat on the 37. Now to give you some perspective on the 37, we also had a block extension 200 units that included the investment to go up to 52, but also most of that those 200 units were MAX airplanes. So I think it really gives you a sense of the value this airplane is bringing to the marketplace and at the same time the focus on productivity that you're seeing not just on that program obviously on the other programs. So good performance I'd say on the core programs and continuing to make progress on the 87.
But when you look at unit versus program, Cai, you also got to take into account as I talked before mix. So you've got more early build on the Charleston and more -9s in there in Q3. And even with that, you've seen improvement when you've compared unit to program. So continuing to make progress, still got a long way to go, but I think they got good plans in place. They're monitoring them.
We've got the enterprise engaged on how to capture more productivity. And then going forward, obviously, partnering for success and supplier step down as we introduce new blocks into the production system. So all of that adding to the improvement in unit cost going forward.
Thank you.
You're welcome.
And next we go to Carter Copeland with Barclays. Please go ahead.
Hey, good morning gentlemen. Good morning. Just a quick clarification on the 777 to your comment about new versus program. Did the 777 program margin change in the quarter? And then as a follow on, the period maybe how impactful that is to the full year margin?
And then maybe help us understand the cadence of those expenses quarter over quarter? Have those been growing sequentially this quarter? Or were they high 1 quarter versus the others? Any help there would be much appreciated.
Sure. 777 margin did improve slightly in the quarter. And again a lot of the things I talked about on the 87 are obviously embedded into the 777. So we're continuing to try to reduce the unit cost overall on that program. So you're seeing some of the results of that.
On the period expense, I'd say the moving pieces within there are fleet support. And as you know, we're introducing more new 787s to customers this year than we have in the prior years. And we want to ensure that that is a very smooth transition. So we're making investments in fleet support to ensure that they do able to introduce those airplanes very smoothly into their operating system. And then R and D, so you're starting to see in the back half here, you'll see -ten really starting to ramp up and you also see early introduction of the 777X R and D.
So those are primarily the moving pieces. You also got a little bit of mix in the 4th quarter on BCA margin where we'll have a couple more 747s that will be dilutive on the margin basis. But again, we're going to continue to manage that as we have. And if we see an opportunity to improve that margin in the 4th quarter, we'll certainly capture those gains. All right.
Thanks. You're welcome.
Our next question is from John Gunnar with Morgan Stanley. Please go ahead.
Great. Thank you for taking my question. Good morning. Greg, I wanted to ask a bit about the buyback activity year to date and what the right way to interpret it is. In the prepared remarks, I heard you sort of reaffirm that you'll finish the rest of the authorization over the next 1 to 2 years.
I'm curious when we think about the buyback year to date and the fact that it's been at an elevated rate, is that a disagreement with the market on the price of the stock?
Is that the expectation of continued strong execution going forward?
Elevated rate?
I'll save you the latter. Absolutely. I mean when you step back just think about and I've talked about this a lot because there's a lot of big moving pieces in here as I talked before on advances or milestones. You step back and you think about last year and this year combined over $16,000,000,000 of cash generation coming from the core operation. And you look at that and then you look at the production rates, you look at record backlog and the fact is I think we've got maybe 3 or 4 production rate increases going forward that we need to execute.
We've already been through almost 17 to date. And that's what's given us the confidence. The risk profile obviously has changed dramatically and the continued focus on execution. And repurchasing $5,000,000,000 of stock this year really again looking forward, looking at the strength of the backlog, looking at our ability to execute on that And we put the authorization in place, obviously, to utilize it and we're going to buy back the shares at the pace we have been buying back. And we put the authorization in place obviously to utilize it and we're going to continue to do that as we see fit.
But it gets back to just the fundamentals and I think the competitive differentiator in the marketplace in the financial marketplace where you're looking at 5,500 airplanes in backlog and we know where they are. We're very happy with the quality of that backlog. It gets to execute on that and executing on that flawlessly. And I think the team has done a great job and I think we're going to continue to do a great job going forward.
And is there potential to revisit or even increase the authorization going forward?
Yes. We certainly will do that as we see. Got it. Okay. Thanks a lot.
And next we go to Sam Pearlstein with Wells Fargo. Please go ahead.
Good morning. Good morning.
I wanted to follow-up on the question about some of those period expenses, which is that if you look at the BCA guidance that would imply something like a mid-eight percent margin than the Q4. And I would think a lot of those things like R and D, the mix to 8.7 etcetera really don't change going into next year. So is that how we should be thinking about BCA into next year as well?
Yes. I think as you think about next year, obviously, we'll see strong growth coming out of BCA going into next year again executing on the production rates. And we're also expecting a little bit higher services revenue going into next year. Now on the margin front, we're going to have a little bit more R and D than we had this year. And again, that's the ramp down obviously of the 787-nine, ramp up of the 777X and the -ten.
And then again improvements on 787 margin expected into next year. And then we're going to continue to make investments in 777X automation as we've talked about I think in the past. So those are kind of the moving pieces as you think about going into next year. And then of course, we're continuing to focus on the productivity initiatives I discussed. But that's generally I think the best way to look at it for next year.
And again on the top line, we know what we need to do. And on the bottom line, we're going to continue doing what we have been doing this year and last year on productivity.
Okay. Thanks.
You're welcome.
Our next question is from Rob Spingarn with Credit Suisse. Please go ahead.
Good morning.
Good morning.
Greg, just on something you said a couple of questions ago about the importance of execution and also volumes, rate increases. And we're all sitting here waiting for free cash flow per share to get into the double digits and into the mid teens perhaps. What's the timeframe? When do you have the confluence of this rising execution and at the same time the volumes that will drive that long awaited steeper slope in the cash flow? Is this 20 17 when you hit the next rate on the narrow body?
Because the 787 component of it seems to be moving a little bit of the right to the right here. When you said earlier sometime in the 2015 timeframe Dash 8 goes breakeven. So when should we be thinking about a change in the slope on the free cash flow curve?
Well, as I said, you're going to we're going to see growth next year and expect to see growth thereafter and it's really again executing on the production rates. Now once you get to peak rate, I would say that's where you really maximize the cash flow of just the basis of the elements of driving the cash flow between progress payments and delivery payments. So once we get to peak rate is really where you should see the real potential or peak potential from the company. And then again, the partnering for success and the other initiatives more mature out in that time frame. But again, the top line is pretty solid.
When you look we know the rate breaks. We know what we need to do to execute them far fewer than what we've had to. But and we're making investments today. We're making investments in that growth whether it's -ten or whether that's MAX or 787 or sorry 777X. So obviously those investments will peak in as they get, I'll say, kind of T minus entry into service.
So there'll be some offset there. But again, we continue to see a strong cash flow profile going forward driven on those elements of the business. Right.
But Greg, how do we factor in
the fact that your peak rates keep moving to the right? And not because they're delayed, they just keep getting higher.
Well, I wouldn't say the rates have moved to a right, they moved up.
That's what I mean, getting higher. So you have new peaks further out at higher levels.
Right.
And continued investment to get there. So it's a little when you're talking about maturing at a peak rate, are we talking about the 10 per month on the 8.7, the 12, the 14, the 42, the 47 or the 52 on the narrow body? How do we think about? What's the peak rate? What's the mature rate?
I think all of those are going to come into play. And as you know, they're all pretty much staggered throughout that next 5 year period. But when you talk about investments as an example, we've already made the investments or accounted for the investments of going to 52 a month on the 3.7%. So again, I think this is a demonstration of the strength of the market and the strength of the portfolio. And again, I wouldn't call it moving investments or moving rate to the right.
It's more moving rates up.
Yes. I wasn't trying to suggest they're delayed. I meant going higher. Just a quick one for Jim. Jim, we've seen a lot of movement in the price of oil here.
And I know that airlines fleet plan on a long term basis. But what at what price of Brent crude might we see some demand destruction?
Well, the airlines 1st of all, airlines tend to buy on the sort of the distribution around a mean. So and in a volatile world that distribution is pretty wide. So their behavior tends to be driven by that more than a point estimate. Having said that, our analysis shows the price of oil could still fall a long way before our planes are anything other than compelling economically. I mean, this generation of new planes that we're introducing anywhere from 16% to 24% more efficient than the planes they're replacing is this replacement generation is has more compelling numbers associated with it than any generation I've seen since the 707.
So our analysis we do sensitivities on both interest rates and price of oil. And you've got to go a long way from where we are now before you begin to see even incremental impact. Okay. Thank you. Thank you both.
Okay.
Our next question is from Jason Gerske with Citi. Please go ahead.
Yes. Good morning. Good morning. Greg, just a clarification question for you and then one for Jim as well. On the clarification, can you just talk about or clarify the cadence of cash and deferred on the 787?
Is it the case that the -eight-nine move into a profitable state as the -ten is ramping up and therefore things kind of stabilize. Is that the right way to think about things on the 787?
Yes. I think it's a combination certainly getting to 12 a month, getting the 787-nine rate up are really the stabilizing factors obviously and continue come down the learning curve internally and then the step down pricing on the supply chain are really the big drivers in there.
Yes. But then offsetting that will be some deferred build on the -ten. Is that right?
Correct. Yes. And like I said, if there's opportunities to pull some of this forward and I'll say verify it in the production system, we're certainly going to do that as we have with the -nine and as you've seen it's been very successful. But that's kind of a quarter by quarter month by month decision that we'll make as we get closer to those products moving into the production system. But 12 a month is a big milestone on deferred production.
Right. And Jim the question for you is just the phrase productivity gains and partnering for success has been used throughout this call. Can you give us an update on where we are with partnering for success? And what you at this point, knowing what you know about the success of that program to date and the productivity gains that you're seeing, what kind of margin expansion opportunity do we have here for the commercial business in particular?
Well, you're seeing the beginnings of the impact now in the margins you're seeing in our businesses. So pretty robust margins. We have plans to keep them in that neighborhood at least. The and I would say we're still in the first 25% of this initiative. We've probably matured deals with somewhat over a third of our supply base.
There's discussions with another third and then there's another third that we're jousting with a little bit. So seeing the beginning of the impact now, still a lot more in front of us than behind us. And I think it is going to be fundamental not only to our profitability, but also the profitability of the people we work with. I mean, we're taking cost out of our mutual business activities. And those that are working with us are getting in many cases more volume from us as part of the arrangement.
So this and this all gives us more flexibility on either taking it in margin or using it in price in the marketplace when we face those situations. And if we hadn't had this program, we wouldn't be able to respond properly. And so we're going to keep pushing this one.
Okay. Thank you.
Yes.
And we'll go to Myles Walton with Deutsche Bank. Please go ahead.
Thanks. Good morning.
Good morning. Hey,
maybe Greg, the advances, there were a use of cash in the quarter. And I'm coupling that with, I think, the best commercial BCA bookings quarter in your history. And certainly I would imagine relative in your prepared remarks said that orders were coming in well ahead of your expectations for the full year. So can you play out why advances aren't more of a source to your original benchmark for cash flow and or what's offsetting it?
Yes. No, absolutely. I mean, as you know, on initial order, there isn't a lot of cash that comes with that initial order. Most of the cash associated that's with Progress Payment. So that's where you're seeing an offset and it's purely just timing of progress payments 1 quarter to another.
So there's nothing else to read into that other than timing on progress
payments. So that in other words, there's no help that you're getting from the outsized order activity for your full year guidance on cash flow?
Yes. No, I wouldn't say yes. And you'll see more strength in the 4th quarter. So that's where you'll definitely see some timing in there. And then as we talked about you got a little bit of inventory.
When you look at it on a net basis inventory buildup on 3.7 and 8.7 that are also offsetting that. But again I would I just equate that to purely timing.
And one clarification, the C-seventeen, is that a cash headwind to this year on Whitetails? Or is it all virtually in 2015 that we have to think about?
No, it's this year.
Okay.
All right. Thanks.
Our next question is from Peter Arment with Stern AG. Please go ahead.
Yes. Good morning, Jim and Greg.
Good morning, Peter.
Jim, you've mentioned in the last couple of years that the majority of deliveries have been going for replacement versus growth.
I'm wondering if we could just put
a finer point on that about how long do you think where this window continues to exist where we're seeing the majority of deliveries go for replacement before we trend back to kind of the historical growth estimate that have been associated with deliveries. Yes.
I mean if you look back in history, history is sort of 75% growth 20% to 25 percent replacement. And starting with really the 787, it's the replacement has been double that, okay? So a real discontinuity has changed. So about half of about half replacement, half growth. I think you're going to see it continue for a while as the new technology we've developed rolls through our model families.
For example, you're seeing it on the 87 today as it replaces the older medium size wide bodies. You're beginning to see it on the 777 as we spiral a number of those technologies now into the 777. You're beginning to see it on the MAX. And so I think that's going to continue probably for another decade or so with a more robust mix of replacement versus growth, which is the good thing about us in the sense that it will keep us disconnected from overall GDP trends. This is what gives us a multiplier on GDP.
And I think it's and it all stems from innovation. It all stems from the inventiveness of our people and staying out in front of the marketplace and our competition in that regard.
Yes. And just if I
could just follow-up to that. 1 of the things that's been driving this has been the elevated fuel prices. So I know you mentioned to Rob's question about it would have to go a lot lower. But some analysis kind of indicates that if you saw oil at $70 for an extended period, you'd see some disruption. Is that are we thinking a number materially below that?
Yes. I mean, we would not see much impact at 70, okay? And it would have to be much different than 70.
Okay. Very
helpful. Thank you.
Based on our analysis.
Thank you.
Operator, we have time for one more analyst question.
And that will be from Noah Poponak with Goldman Sachs. Please go ahead.
Hi, good morning everyone.
Hi, morning. Yes.
Maybe since I'm last I'll do one more deferred question.
Great.
I guess I'm wondering now that you're at 25, is it possible to more precisely pin down what the word approximate means in the approximately 25%. And I know that's maybe splitting hairs, but I think a lot of your stakeholders really care if it is going to really kind of hover around 25 while it's flat before coming down or if it needs to be 26 or 27 before it comes back down? And in that answer, if you could also address since the inventory pull forward that you're doing, which makes sense, was unanticipated and not in the original plan. Are there any other potential new strategies that could come about that you could tell us about that we could be in front of?
Yes. I mean, certainly the -ten. I mean, if we have an opportunity to do that for all the reasons I talked about in the -nine, we'll absolutely do it. And that's supporting profitable growth going forward. And it's a risk reduction.
And it is absolutely the right thing to do. And again, I think the -nine performance demonstrates that. And so that's probably the one that comes to mind where we if we have opportunities we will. It could impact near term deferred, but I'll tell you long term productivity and profitability for the program will benefit as a result of that and ultimately cash flow. On the deferred, a year ago, I said approximately $25,000,000,000 There's obviously been a lot of moving pieces within that number.
And the -nine performance on a unit cost basis and I think try to give you some color on the progress that's being made there. They are making good progress. Do we expect to make more? Absolutely. Would we like it to happen faster?
Absolutely. Team's very focused on it. And then making rate and the team has done a good job on making rate and then the supplier step down. So all of those elements within deferred are being managed all around profitability and cash flow. Quarter to quarter, they're going to change.
There's no question about that depending on what's taking place in the production or where we can pull forward certain elements. Even if -eight inventory, if we can pull some of that in, we pull that in at the same time. So it's going to move around Noah. But as we enter into more -9s and we have the opportunity again to risk mitigate, we'll do that as well. But we're managing it obviously very with a very focused mindset on cash generation and long term profitability and cash generation for the program over the long term.
So again, there's some near term decisions that you're going to see, but they're absolutely the right thing to do to drive again solid growth on both top line and bottom line for the program.
Okay. But I guess given we're over a little over 25, we're not breakeven yet on -eight. We're pulling forward a little more on -nine. We've yet to pull forward on -ten, -ten each of those being a couple of $100,000,000 It sounds like the approximate could translate to $1,000,000,000 to 2 $1,000,000,000 rather than $100,000,000 to $200,000,000 Is that a fair assessment or is that too large?
Well, I think it's certainly we're going to continue to do this quarter over quarter. I mean, I certainly don't see a profile that gets you to 2 $1,000,000,000 but it will depend on the decisions we make on pull forward. And if we decide to do that and our continued focus on unit cost, So obviously, it's about making rate and coming down on the unit cost and we're going to continue to focus on that. But like I said, this is all about making investments now to have ensure that we have long term profitable growth on the program. We look next year on a cash flow basis on the program.
It certainly will be much better than what it was this year. And again, it's all those things that we've talked about. And during 2015, we expect to be cash positive on the program. So we're going to continue to execute on that. And I'll say kind of continue the productivity enhancements that the team has developed on the program that again really benefit not as much today, but definitely next year or next month or next quarter and the following years to stabilize the production system and maximize the efficiency.
Okay. Thanks very much.
You're welcome.
Ladies and gentlemen, that completes the analyst question and answer session. I'll now return you to the Boeing Company for introductory remarks by Mr. Tom Downey, Senior Vice President of Corporate Communications. Mr. Downey, please go ahead.
Thank you. We will continue with the questions for Jim and Greg. If you have any other questions after the session ends, please call our media relations team at 312-544
2,002. Operator, we're ready for
the first question. And in the interest of time, we ask that you limit everyone to just one question please.
And first go to Doug Cameron with The Wall Street Journal. Please go ahead.
Hi. Good morning, Jim and Greg.
Good morning. Good morning, Doug.
On the defense side, actually this bridges both parts of the business. You previously indicated in regulatory filings that you may make a decision on a big chunk of St. Louis in the sort of first, Q2 of 2015 timeframe. Given the transfer or the planned transfer of some commercial work there in Wichita as well, I wonder if that sort of decision making time frame is still valid or in fact bringing the commercial work in fact may change your mind regardless of what happens on the military side?
Well, the key factors around any significant decision around St. Louis eventually gets to F-fifteen and F-eighteen production. We're pleased to see in the current FY twenty fifteen budget, which takes us out through the end of twenty seventeen. The international orders on 2015 take us beyond that. Now that's not yet etched in stone with our government.
So could there be a significant decision 1st part of 2015? Yes. Does it look as if we may be able to navigate through that? Yes. But I wouldn't want to say categorically that a decision wouldn't have to be made at that time.
Obviously, longer term, long range strike is a program that we think we are well positioned to win, which would certainly sustain St. Louis over the longer term whatever perturbation we'd have to face into shorter term.
Our next question is from Julie Johnson with Bloomberg News. Please go ahead.
Hi. A quick question on 740seven-eight. I'm just wondering if there are any plans to reconsider the 1 point 5 per month rate this year given what we've seen with sales and the dwindling backlog?
Well, we were pleased to see that the cargo market growth is accelerated and this last quarter is up. Our best analysis as we sit here today says that the marketplace will support the rates that we have in place. The macro picture is improving. We'll just have to look at it every quarter and make the right decision for the Boeing company. But for right now, we see we think we're in the right spot.
And next we go to Dominic Gates with The Seattle Times. Please go ahead.
Good morning. Good morning, Dominic.
Hi. I wanted to ask about the 7 37 market share. Obviously, the MAX is doing extremely well, but you started a year behind the neo. And the expectation was that basically sales of the neo would taper off and sales of the MAX would catch up. But looking at market share now, the NIO is showing no signs of waning.
It just had that huge order from Indigo. And it looks like 7 37s had like 40% market share. We've also got news that Airbus may be looking at a longer range version of the A321, which may make it even more attractive. So you've always insisted you'll end up at fifty-fifty or approximately that. Can you elaborate on where that's going and how you see that happening?
Dominic, you were breaking up a little bit. I think I got the question. Yes, our view of where it will end up based on our discussions with customers, based on our pipeline, hasn't changed. I mean, you're right, we started a year and a half behind the other guys. If you look at the trajectory of where we are at a similar point in time where they were, we're right we're in a similar place.
So the market share will be what market share will be, but our view hasn't changed on that at all.
Our next question is from Alan Scott with Reuters. Please go ahead.
Hi, good morning. Good morning. Jim, it seems as though the partnering for success percentages that you stated a little earlier on the call haven't really changed much in the last few quarters. We keep hearing it's roughly a third are engaged, a third are sort of in the converting stage and a third have yet to engage. Can you explain why that's not we're not yet seeing any real shift in getting more suppliers into the tent?
Well, I didn't mean to leave the impression that we're not making progress because we are. I think if you take a granular look, a number of our partners have are working with us on a partnering for success basis. So I didn't want to leave the impression we're not making progress. We are. And I think it would be fair to say that over the last 3 to 4 months that another 10% of our partners have started working with us on a concrete basis.
Maybe that is a better way to answer that question.
Operator, we have one last question in the queue and we'll take that now.
That will be from Steve Wilhelm with the Puget Sound Business Journal. Please go ahead.
Good morning, gentlemen. Good morning.
I was interested in the 11.2% margin in BCA.
Could you put
a little historical context on that? Is that a record or a near record? And if it was higher in the past, what factors made it happen then relative to now?
Well, I mean, it certainly is we had a strong and it really went across all the production programs. I mean, I haven't gone back and looked at whether it was a record or not, but it certainly goes to the focus that team has on driving the productivity and even to Jim's question prior on partnering for success and we're starting to see the benefit of that. So just solid execution across the board.
That concludes our earnings call. Again, for members of the media, if you have further questions, please call our media relations team at 312-544-2002.