Thank you for standing by. Good day, everyone, and welcome to The Boeing Company's third quarter 2014 earnings conference call. Today's call is being recorded. The management discussion and slide presentation, plus the analyst and media question and answer sessions are being broadcast live over the internet. At this time, for opening remarks and introductions, 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 third quarter 2014 earnings call. I'm Troy Lahr, and with me today are Jim McNerney, 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 at boeing.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 McNerney.
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 two, 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%, to $16 billion, and operating margins were strong at 11.2%. We delivered 186 commercial airplanes in the third quarter, including 31 787 Dreamliners, and we added net new orders of 501 airplanes. Boeing Defense, Space & Security revenue was $8 billion in the third quarter, and operating margins increased to 10.8%.
BDS captured numerous key contract awards in the quarter, including NASA's Commercial Crew Program, with a potential value of $4.2 billion, and the first order for the 502 Phoenix small satellite. Significant BDS program milestones include delivery of the first Chinook helicopter under the latest multi-year contract with the U.S. Army, successful launch and orbit of the seventh 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 three. 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 1,011 are well above our planned output, and our record backlog of more than 5,500 aircraft represents more than seven years of production at current rates.
Given the 737's 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 t hen increase production again to 52 per month in 2018. Furthermore, the compelling value proposition of the 787 and its sizable backlog of more than 850 orders are driving production rate increases from today's 10 per month to the previously announced rate of 12 per month in 2016, then u p to 14 by the end of the decade. We also are increasing production on the 767 from the current rate of one per month to two 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. 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. 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. 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 two 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 will 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 fifth 787-9, as well as the first Dash 9 with GE-powered engines.
Both the GE and Rolls-Royce engine types are now certified on the Dash 9. In addition, our Charleston facility delivered its first 787 at its planned production rate of approximately three 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 737 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-18G Growlers, as well as strong support from both on P-8 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 One 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, UCLASS, and the T-X trainer. 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 billion 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, good morning. Let's turn to slide four to discuss our third quarter results. Third quarter revenue increased 7% to $23.8 billion, driven by growth in our commercial airplane business. Core operating margins increased to 10.2%, reflecting solid productivity gains in both businesses. Third 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 five. For the third quarter, our commercial airplane business increased revenue 15% to a record $16.1 billion 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 billion in net orders during the quarter, backlog achieved a new record of $430 billion and over 5,500 aircraft in seven years of production. In the third quarter, 787 deferred production costs increased $947 million to $25.2 billion, largely driven by the increase of 787-9 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 787-10, we'll continue to look for opportunities to accelerate our build plan in early 2015 and 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 787-8 and -9 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 -9 in production, preparing for the 12 per month rate, introducing the -10 while driving efficiencies across all aspects of the program. The team remains focused on solid day-to-day execution, risk mitigation, improving the long-term productivity and profitability and cash flow going forward. Turning now to defense, space, and security results on slide six. Third quarter revenue for our defense business was $7.9 billion, operating margins increased to 10.8% due to strong performance across the business. Boeing Military Aircraft third quarter revenue increased 3% to $3.5 billion, reflecting higher volume on our P-8 program. BMA operating margins also increased to 12.4% on continued solid program execution.
Global Services & Support revenue of $2.3 billion, operating margins were 9.7%, largely due to delivery mix in the quarter. Network & Space Systems reported revenue of $2 billion, reflecting timing of ULA launches and lower government satellite volumes. 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 billion, with 37% of our current backlog now from international customers. Turning now to slide seven. Boeing Capital's net financing portfolio increased slightly to $3.5 billion on some new aircraft volume. Now turning to cash flow on slide eight. Third quarter operating cash flow before pension contributions was $1.7 billion, driven by higher commercial airplane production rates and solid operating performance, somewhat offset by timing of receipts and expenditures in the quarter. During the quarter, we made a planned discretionary pension contribution of $750 million.
With regard to capital deployment, we paid $525 million in dividends to shareholders and repurchased 8 million shares for $1 billion in the third quarter, bringing our year-to-date repurchase activity to 39 million shares for $5 billion. 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 $5.8 billion 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. Let's move now to cash and debt balances on slide nine. We ended the quarter with $10 billion of cash in marketable securities. Our cash balance continues to provide solid liquidity and positions us well going forward.
Turning now to slide 10, we'll discuss our outlook for the remainder of 2014. We're increasing our core earnings per share guidance for 2014 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 2014 to now be greater than $7 billion. 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 million to now be approximately $2.3 billion 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 products and services. We're also increasing our BCA operating margin guidance to be approximately 10.5% on improved operating performance. In the fourth quarter, we expect BCA margins to be impacted by higher deliveries of 747 and 767, some additional planned fleet support costs for new customer introductions, higher R&D on the 787-10 and 777X, as well as additional investments in productivity initiatives.
In summary, third quarter financial performance reflects the strength of our backlog, the strong demand for our products and services, and our continued focus on driving productivity throughout the enterprise. With that, I'll turn it over to Jim for some closing comments.
Thank you, Greg. With three 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 to 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. Greg and I would be happy to take your questions.
Ladies and gentlemen, to ask a question on today's conference, please press the star key followed by the digit 1 on your touchtone telephone. Again, hit star 1 for questions. In order that your question be clearly heard, we ask that you not use a speakerphone, cell phone or phone headset. Please use your handset to ask the question. If you're on a speakerphone, please be sure your mute function is switched off so your signal can reach our equipment. Star 1 for questions. As a reminder, in the interest of time, we are asking that you limit yourself to one single part question. Again, star 1 for 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.
Yep.
On the other side, deferred production on the 787 moved slightly above your guidance level, and I would say free cash flow for the quarter was low, given your guidance even before pension. I'd like to understand better how you see the strong operating performance we've seen turn into cash going forward. Specifically, when do you see the 787-8 and the 787-9 each turning cash positive, and what else drove the high unit margins in the quarter? 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. As I mentioned before, there's timing between quarter, when it relates to advances and milestone payments. Some of that is what you're seeing. I'd equate that to timing, is what you're seeing in the quarter. As I mentioned, we've been pulling forward 787 inventory, and particularly around 787-9, to ensure that program enters into the production system in a very smooth manner, of which it's doing. We also got some timing around C-17 orders that we've talked about. Those, again, are all related to timing throughout the balance of the year.
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. When you look forward into 2015, we expect to see continued growth in cash flow. Through the execution on the production rates, additional productivity, international orders, and then that'll be somewhat offset by higher cash taxes and 777X R&D starting to kind of come into play. 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. Again, that's all executing on our production rates and continuing to drive productivity. I'm not sure if I covered all your questions.
If you're talking about moving inventory forward related to the Dash 9, and I'm trying to understand, if it's possible to put that aside for a moment and think about how the 787-8 and Dash 9 are each performing in terms of cost. Is the Dash 8 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?
Yeah. No, 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 Dash 8 and Dash 9. If you step back and look at unit cost, on Dash 8 and Dash 9, 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. Obviously, we expect that to continue to expect to come down the learning curve on the 787, as well as step down in supplier pricing and continuing to work with productivity initiatives, all of that ultimately contributing to cash flow over the long term of the program.
Okay. Thank you.
Okay.
Our next question's from Joseph Nadol with JPMorgan. Please go ahead.
Thanks. Good morning.
Good morning.
Greg, just staying on the deferred, I was wondering if you have a new estimate of where it might peak or if we're sticking with the about $25, even though we're already a little bit over. Just honing into the Dash 9, 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 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.
Well, just to kind of help, when you look at just over $900 million of growth in deferred in the quarter, there's about $200 million in there that's related to 787-9 pull forward. 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 a smooth transition as we're operating at 10 a month. Ray and the team have done a fantastic job in doing that, and you're seeing that in the results when we're making, obviously, our deliveries. That kind of methodology they're utilizing in the production system is a risk reduction.
Certainly impacts deferred on the near term, as far as the long-term profitability and risk reduction on the program, it's absolutely the right thing to do. 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. That's certainly what they're managing. 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. 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 Dash 10 products and get those into the production system, de-risk 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 billion. We're at $25.2 billion. Again, keep in mind, the last two or three quarters, we've pulled forward Dash 9, and that wasn't in the original plan. There's no question about that. Again, absolutely the right thing to do. We're continuing to focus on it. 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, just to keep on the point.
Yeah.
I understand the 787-9 pull forward. It was a couple of hundred, and I think maybe it was 300 or so, 300 or 400 last quarter.
Right.
I understand that, it doesn't seem like sequentially the other part of deferred really came down. It seems like that was maybe 700 and change last quarter, 700 and change this quarter. Is any more color on the 787-8?
787-8 continues to make progress. We're continuing to make progress there, as we have. There's really, I'd say they're continuing on the trajectory of reducing unit cost as we've been on.
Thank you.
Okay.
Our next question is from Cai von Rumohr with Cowen and Company. Please go ahead.
Yes, thanks so much.
Hi, Cai.
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, I'm confused as to why you got a billion-dollar positive swing in unit cost to about $500 million profit. Which were the programs that were profitable or more profitable in the third quarter versus in the second? How does that all square with the trend in 787 deferreds? Thank you.
Yeah, on overall unit, we saw improvement on the 777 quarter-over-quarter, and about flat on the 737. To give you some perspective on the 737, we also had a block extension, 200 units that included the investment to go up to 52. Also, most of those 200 units were MAX airplanes. I think it really gives you a sense of the value these airplanes bring into 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. Good performance, I'd say, on the core programs, and continuing to make progress on the 787. When you look at unit versus program, Cai, you also got to take into account, as I've talked before, mix. You've got more early build on the Charleston and more Dash 9s in there in Q3.
Even with that, you've seen improvement when you've compared unit to program. 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. Going forward, obviously Partnering for Success and supplier step down as we introduce new blocks into the production system. All of that adding to the improvement in unit cost going forward.
Thank you.
You're welcome.
next, go to Carter Copeland with Barclays. Please go ahead.
Hey, good morning, gentlemen.
Morning.
Just a quick clarification on the 777 to your comment about unit versus program. Did the 777 program margin change in the quarter? Then as a follow on the period expenses and fleet support that you called out both in the release and in your prepared remarks.
Yeah.
Greg, can you help us understand maybe how impactful that is to the full year margin, then maybe help us understand the cadence of those expenses quarter-over-quarter? Have those been growing sequentially each quarter, or were they high one quarter versus the others? Any help there would be much appreciated.
Sure. 777 margin did improve slightly in the quarter. Again, a lot of the things I talked about on the 787 are obviously embedded into the 777, so we're continuing to try to reduce the unit cost overall on that program. 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. We're making investments in fleet support to ensure that they are able to introduce those airplanes very smoothly into their operating system. Then R&D.
You're starting to see in the back half here, you'll see 787-10 really starting to ramp up, and you also see early introduction of the 777X R&D. Those are primarily the moving pieces. You also got a little bit of mix in the fourth quarter on BCA margin, where we'll have a couple more 747s that'll be dilutive on the margin basis. Again, we're going to continue to manage that as we have, and if we see an opportunity to improve that margin in the fourth quarter, we'll certainly capture those gains.
All right. Thanks.
You're welcome.
Our next question is from Jason Gursky 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, what the right way to interpret it is. In the prepared remarks, I heard you reaffirm that you'll finish the rest of the authorization over the next one to two years.
Yep.
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? What is driving the decision to buy back at an elevated rate?
I'll save you the latter. Absolutely.
Okay.
When you step back, just think about, I've talked about this a lot because there's a lot of big moving pieces in here, as I've talked before on advances or milestones. You step back and you think about last year and this year combined, over $16 billion of cash generation coming from the core operation. You look at that, then you look at the production rates, you look at the record backlog, the fact is, I think we've got a maybe three or four production rate increases going forward that we need to execute. We've already been through almost 17 to date, that's what's given us the confidence. The risk profile obviously has changed dramatically and the continued focus on execution.
Repurchasing $5 billion of stock this year, really, again, looking forward, looking at the strength of the backlog, looking at our ability to execute on that backlog and capture additional productivity. That's what's really driven us to buy back the shares at the pace we have been buying back. We put the authorization in place, obviously, to utilize it, we're going to continue to do that, as we see fit. It gets back to just the fundamentals, I think the competitive differentiator in the marketplace, in the financial marketplace, where you're looking at 5,500 airplanes in backlog, 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.
I think the team has done a great job, and I think we're going to continue to do a great job going forward.
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.
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 8% margin in the fourth quarter. I would think a lot of those things like R&D, the mix 787, et cetera, really don't change going into next year. Is that how we should be thinking about BCA into next year as well?
Yeah, 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. 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&D than we had this year, again, that's the ramp down, obviously, of the 787-9, ramp up of the 777X and the Dash 10. Then again, improvements on 787 margin expected into next year. Then we're going to continue to make investments in 777X automation as we've talked about, I think, in the past. Those are kind of the moving pieces as you think about going into next year. Then, of course, we're continuing to focus on the productivity initiatives I discussed.
That's generally, I think, the best way to look at it for next year. 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 Robert Spingarn with Credit Suisse. Please go ahead.
Good morning.
Morning. Greg, just on something you said a couple of questions ago about the importance of execution. Also volumes, rate increases. 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 2017 when you hit the next rate on the narrow-body? Because the 787 component of it seems to be moving a little bit to the right here. When you said earlier, sometime in the 2015 timeframe, 787-8 goes break-even. When should we be thinking about a change in the slope on the free cash flow curve?
Well, as I said, we're going to see growth next year and expect to see growth thereafter, it's really, again, executing on the production rates. Now, once you get to peak rate, I would say that's where you really have maximized the cash flow of just the basis of the elements of what's driving the cash flow between progress payments and delivery payments. Once we get to peak rate is really where you should see the real potential, or peak potential from the company.
Again, the Partnering for Success and the other initiatives more mature out in that timeframe. Again, the top line is pretty solid. We know the rate breaks, we know what we need to do to execute them, far fewer than what we've had to. We're making investments today.
We're making investments in that growth, whether it's Dash 10 or whether that's MAX or 777X. Obviously those investments will peak as they get, I'll say, T-minus entry into service, there'll be some offset there. Again, we continue to see a strong cash flow profile going forward driven on those elements of the business.
Right. Greg, how do we factor in the fact that your peak rates keep moving to the right? Not because they're delayed, they just keep getting higher.
Well, I wouldn't say the rates have moved to a right, they've moved up.
That's what I mean, getting higher. You have new peaks further out at higher levels and c ontinued investment to get there. When you're talking about maturing at a peak rate, are we talking about the 10 per month on the 787, the 12, the 14, the 42, the 47, or the 52 on the narrow-body? How do we think of that? What's a peak rate, what's a 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 five-year period. 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 737. 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.
Yeah, 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 at what price of Brent Crude might we see some demand destruction?
Well, first of all, airlines tend to buy on the distribution around a mean. In a volatile world, that distribution is pretty wide. 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%-24% more efficient than the planes they're replacing, this replacement generation has more compelling numbers associated with it than any generation I've seen since the 707. 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 Gursky with Morgan Stanley. Please go ahead.
Yeah, good morning.
Morning.
Greg, just a clarification question for you. 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 Dash 8, Dash 9 move into a profitable state as the Dash 10 is ramping up? Therefore things stabilize? Is that the right way to think about things on the 787?
I think it's a combination of certainly getting to 12 a month, getting the 787-9 rate up are really the stabilizing factors, obviously, and continue to come down the learning curve internally and then the step down pricing on the supply chain are really the big drivers in there.
Offsetting that will be some deferred build on the 787-10. Is that right?
Correct. Like I said, if there's opportunities to pull some of this forward, and I'll say verified in the production system, we're certainly going to do that as we have with the 787-9, and as you've seen, it's been very successful. That's a quarter- by- quarter, month- by- month decision that we'll make as we get closer to those products moving into the production system. Twelve a month is a big milestone on deferred production.
Right. 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 margin expansion opportunity do we have here for the commercial business in particular?
You're seeing the beginnings of the impact now in the margins you're seeing in our businesses. Pretty robust margins. We have plans to keep them in that neighborhood at least. I would say we're still in the first 25% of this initiative. We've probably matured deals with somewhat over 1/3 of our supply base. There's discussions with another 1/3 , and then there's another 1/3 that we're jousting with a little bit.
Seeing the beginning of the impact now, still a lot more in front of us than behind us. I think it is going to be fundamental, not only to our profitability, but also the profitability of the people we work with. 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.
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. If we hadn't had this program, we wouldn't be able to respond properly. We're going to keep pushing this one.
Okay. Thank you.
Yeah.
We'll go to Myles Walton with Deutsche Bank. Please go ahead.
Thanks. Good morning.
Morning.
Morning.
Hey, maybe Greg, the advances, they were a use of cash in the quarter. I'm coupling that with, I think the best commercial BCA bookings quarter in your history. Certainly, I would imagine relative, in your prepared remarks, you said that orders are coming in well ahead of your expectations for the full year. 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?
Absolutely. As you know, on an 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. That's where you're seeing an offset, and it's purely just timing of progress payments one quarter to another. There's nothing else to read into that other than timing on progress payments.
In other words, there's no help that you're getting from the outsize order activity for your full year guidance on cash flow?
No, I wouldn't say yet. You'll see more strength in the fourth quarter. That's where you'll definitely see some timing in there. As we talked about, you got a little bit of inventory. When you look at it on a net basis, inventory buildup on 737 and 87 that are also offsetting that. Again, I just equate that to purely timing.
One clarification. The C-17, is that a cash headwind to this year on white tails, or is it all virtually in 2015 that we have to think about?
No, it's this year.
Thanks.
Yeah, it's this year. You're welcome.
Our next question's from Peter Arment with Sterne Agee. Please go ahead.
Yes. Good morning, Jim and Greg.
Morning.
Hi, Peter. Morning.
Jim, you've mentioned the last couple of years that the majority of deliveries have been going for replacement versus growth. I wonder 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 the historical growth estimates that have been associated with deliveries?
Yeah. If you look back in history is 75% growth, 20%-25% replacement. Starting with really the 787, the replacement has been double that. A real discontinuous change, so 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-sized 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.
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'll keep us disconnected from overall GDP trends. This is what gives us a multiplier on GDP. 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.
Yeah. If I could just follow up to that, one of the things that's been driving this has been the elevated fuel prices. I know you mentioned to Rob's question about, i t would have to go a lot lower. Some analysis indicates that if you saw oil at $70 for an extended period, you'd see some disruption. Are we thinking a number materially below that?
Yeah. We would not see much impact at $70. Okay? It would have to be much different than $70 b ased on our analysis.
Thank you.
Operator, we have time for one more analyst question.
That'll be from Noah Poponak with Goldman Sachs. Please go ahead.
Hi, good morning, everyone.
Hi, Noah.
Morning.
Yep. Maybe since I'm last, I'll do one more deferred question.
Great.
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. 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. 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?
Certainly, the Dash 10. If we have an opportunity to do that, for all the reasons I talked about on the Dash 9, we'll absolutely do it, and that's supporting profitable growth going forward. It's a risk reduction, it is absolutely the right thing to do.
Again, I think the Dash 9 performance demonstrates that. That's probably the one that comes to mind where 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, one year ago, I said approximately $25 billion. There's obviously been a lot of moving pieces within that number, and the Dash 9 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. Making rate, and the team's done a good job on making rate, and then the supplier step down.
All of those elements within deferred are being managed all around productivity, 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 of Dash 8 inventory. If we can pull some of that in, we pull that in at the same time. It's going to move around, Noah, but as we enter into more Dash 9s, and we have the opportunity again to risk mitigate, we'll do that as well.
We're managing it, obviously, with a very focused mindset on cash generation and long-term profitability and cash generation for the program over the long term. 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. I guess given we're a little over 25, we're not breakeven yet on Dash 8, we're pulling forward a little more on Dash 9. We've yet to pull forward on Dash 10, each of those being $200 million. It sounds like the approximate could translate to $1 billion-$2 billion rather than $1 million-$200 million. Is that a fair assessment or is that too large?
Well, I think we're going to continue to do this quarter-over-quarter. I certainly don't see a profile that gets you to $2 billion, but it'll depend on the decisions we make on pull forward, and if we decide to do that, and our continued focus on unit cost. Obviously, it's about making rate and coming down on the unit cost, and we're going to continue to focus on that. Like I said, this is all about making investments now to 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. Again, it's all those things that we've talked about. During 2015, we expect to be cash positive on the program.
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 following years to stabilize the production system and maximize the efficiency.
Okay. Thanks very much.
You are welcome.
Ladies and gentlemen, that completes the analyst question and answer session. For members of the media, if you have a question, please press the star key followed by the digit one on your touch tone phone. I will 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 312-544-2002. Operator, we are ready for the first question. In the interest of time, we ask that you limit everyone to just one question, please.
First go to Doug Cameron with The Wall Street Journal. Please go ahead.
Hi. Good morning, Jim and Greg.
Morning.
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 first, second quarter of 2015 timeframe. Given the transfer, the planned transfer of some commercial work there in Wichita as well, I wonder if that decision making timeframe 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-15 and F-18 production. We're pleased to see in the current budget proposal that F-18s are supported, in the FY 2015 budget, which takes us out through the end of 2017.
The international orders on 2015 take us beyond that. That's not yet etched in stone with our government. Could there be a significant decision first part of 2015? Yes. Does it look as if we may be able to navigate through that? Yes. 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.
Oh, hi. A quick question on 747-8. I'm just wondering if there are any plans to reconsider the 1.5 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 accelerating. 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. For right now, we think we're in the right spot.
Next, we go to Dominic Gates with The Seattle Times. Please go ahead.
Good morning.
Morning, Dominic.
Hi. I wanted to ask about the 737 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. Looking at market share now, the Neo's showing no signs of waning, just had that huge order from IndiGo, and it looks like 737's at 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. You've always insisted you'll end up at 50/50 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. Yeah, our view of where it will end up based on our discussions with customers, based on our pipeline, hasn't changed. 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 in a similar place. Market share will be what market share will be, but our view hasn't changed on that at all.
Our next question's from Alwyn Scott with Reuters. Please go ahead.
Hi. Good morning.
Morning.
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 1/3 are engaged, 1/3 are in the converting stage, and 1/3 have yet to engage. Can you explain why 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 are working with us on a Partnering for Success basis. I didn't want to leave the impression we're not making progress. We are. It would be fair to say that over the last three to four 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'll be from Steve Wilhelm with the Puget Sound Business Journal. Please go ahead.
Good morning, gentlemen.
Morning.
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? If it was higher in the past, what factors made it happen then relative to now?
Certainly, we had a strong quarter, and it really went across all the production programs. 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. 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 310-