Great. All right, I think we'll go ahead and get started. I'm Myles Walton, the aerospace defense analyst here at Wolfe Research. Welcome to the next block of sessions, will be focused more on aerospace defense than airlines and transportation, which was the last block. Pleasure to have us kick off with Brian West of The Boeing Company. I'm gonna go ahead and hand it over to you, Brian. I know you had some comments to make, maybe introductory at the beginning, and also just maybe an update. There was an article yesterday, I think, around China's delivery acceptance of some of the planes due to cockpit video cockpit audio recorders. I think you'll make an update on that as well, and then we'll go right into Q&A.
Terrific, Myles, thanks for having me. It's nice to be here with everyone. Broadly, I would say there is quite a bit of change happening at the company, both large-scale change and many, many smaller scale changes, all in the name of improving quality, reducing traveled work, and getting more stable. And if you're on the inside, you're seeing progress in many, many ways, day in, day out, week in, week out. And that's got people convinced that we're onto the right things around trying to take step function changes, around things like travel work. So it's encouraging, although you all can't see the benefits quite yet, we continue to be convinced this is the right path, and it's the right time to make these investments on behalf of the long term.
Now, I also recognize that this can be disruptive, both operationally and financially, and we will, at times, frustrate both our customers and our shareholders. But, this is the right time, and this is the right set of actions to take. I would say there's probably three phases to think about in the relative near term. As we exit June, we expect to be in a much better place than we've been in the first half, and that will begin to get us more predictable. And then we'll move into the second half of the year, and our operational and financial performance is gonna get better, and it's gonna accelerate as we go through the third and fourth quarter. And that will be the benefit of all the work we're doing right now.
And lastly, as we enter 2025, and this is the most important part, as we enter 2025, we'll be more or less in the spot where we thought we were this year, but with a much stronger foundation because of the work we're doing right now. And I understand everyone would wish it would go faster, but it's a long cycle business, and we have to be disciplined. We can't rush, we can't push the factory too hard or the system too hard because the payoff, if we do this right, is gonna be big beyond 2025, and that's what we're aiming at.
In regards to the question on China, so there was a certified cockpit voice recorder that's been active since 2022, and this is something that's in all the programs, so it's in the 787 , the 777 , the 777 X. The CAAC has asked for additional validation on a lithium battery in that recorder, and because of that, we have not been delivering airplanes to China recently. We will work very closely with the regulator. We follow their lead. We work closely with our customers, but that will very likely have an impact in the quarter on deliveries and our cash flow.
From a deliveries perspective for the second quarter, should we expect improvement sequentially versus 1Q? Should we expect similar... And then maybe one of the questions that I framed on the earnings call was around these conforming fuselages running through the 777 production system, 'cause we're looking at the deliveries, and where the improvements are being made is really in the heart of the production system. So maybe give us a flavor of both the delivery and the production system health.
Yeah, on the 737.
Yeah.
So on the production system, as I mentioned, there are significant number of changes that are underway, and again, it's all around focusing on stability, reduced traveled work, and better quality. The first half, we'd said is gonna be a production rate below 38 per month as we do the important work that I've described. And then in the back half is where we're gonna accelerate back toward the 38. And the fuselage, the heart of the production system that you mentioned, is an incredibly important component, and the team has worked with Spirit, they are making good progress with a set of enhanced protocols that we put in place effective March the first. So they're hitting their early expectations.
We're not there yet, but we expect a good positive trend in the trajectory, so that we could have material progress as we get outside of June, which is then important for the second half trajectory that I expected. So, in terms of deliveries itself, I would say there's not gonna be a step up in the second quarter. The second quarter will be more or less in line with the first quarter, a combination of the China impact I just described, as well as working our way through solidifying our new production procedures. So, it's, you're not gonna see that in the second quarter.
Okay. I think next week is the week you have to submit to the FAA the improvement plan for the 737 MAX. Aside from the obvious step of reduction of traveled work, what other things are being imparted into that plan? And I think the FAA Administrator said something last night or this morning about you're at the start of a longer process of improving quality. Maybe describe what he's arranging.
Yeah, sure. So the engagement with the FAA has been underway since February, when the audit was commenced. We've hit a 30-day check-in, we had a 60-day check-in, and next week there's a final submission of the 90-day plan. Rest assured that there's been lots of dialogue between all of these waypoints, with the working team level. The engagement is constructive, and I expect next week, we're gonna get some good feedback. In terms of the changes that have been underway, we've talked about the one big one, the fuselage. We've already seen evidence that because of the enhanced protocols that are in place in Wichita, once we get fuselages under those new protocols, and when they get to our factory, rework is lower, flow time is better, traveled work is less.
We're seeing the benefits that we expected, and again, we're not declaring victory, but we know this was the right move, and we will begin to reap the benefits. Other improvement areas beyond the fuselage, we did a stand down with thousands of employees and got thousands of recommendations. I would bucketize it into three areas of where we are seeing improvements. One is training, one is simplification of our work instructions, and the third would be tool availability. And our objective is to make sure that the mechanic is fully prepared to do the work as intended, and those are basics, but they are important basics that we have a lot of people working very hard to make sure we achieve improvements across the board in those areas. So progress, the 90-day plan, I would agree, is not a finish line.
You know, we look forward to the feedback that we'll get after next week. We look forward to continued engagement with the FAA.
Yeah.
Regardless, we view this as being a long-term investment that's gonna be good for the company, good for our customers, good for the industry.
I think your, your fuselage suppliers talked about 31 a month for the rest of 2024, but you've talked about 38 a month in the back half of the year, and those two things will have to align up at some point, realizing Spirit has inventory in the near term. Does that put significant pressure on operationally for them to go from 31 to 38, the front end of 2025?
Mm-hmm. So we're working very closely with Spirit every day to support our production plans, and as you said, that number of 31 per month is out there from the production side. Keep in mind, there is a large number of fuselages that are accounted for either as ship in place or WIP. And the Spirit team has set up and staffed a number of rework stations to get after the ship in place and the WIP fuselages. So that will supplement the 31 per month. That's going pretty well. As I mentioned, they're getting more confident in the enhanced protocols, and we're getting clean fuselages. As we exit, as Spirit exits this year, we would expect these inventory fuselages to be largely complete.
Mm-hmm.
We'd expect this, these resources to be redeployed, and we would expect the production line to be, more confident with an institutionalized new set of protocols, and we think that's a good thing. And then, as you move towards the end of the year, all of this is in line with what our rate readiness expectations are for Spirit, and it's aligned to what our master schedule considerations are. And then, of course, if you step back, you've got the rest of the supply chain to synchronize, and all that is, going pretty well. So fuselages, very key part of the equation. We can see the visibility to their production plans and facilitation plans, and we believe that we can move out of this year at the rates that we've described. So I think that's going pretty well.
Okay. So switching gears to the 787, if that's okay. The company recently disclosed a system-level checkout test that was documented but may have not been done. What's been the response from the regulator, as you've sort of informed them accordingly, and what impact does that have on your delivery production profile looking forward?
So a teammate in Charleston identified an irregularity with a required conformance test on the wing body joint. Immediately, this employee raised their hand, raised it to leadership, and it quickly escalated to the program leadership. That program leadership investigated the situation. They moved decisively to remedy the situation, including alerting our regulator. Importantly, the engineering team assessed that this situation does not create an immediate safety of flight risk for the in-service fleet. So now, we've gotta go conduct this test out of sequence for any airplane in the build process and anything on the flight line. Yes, it will have some near-term impact as we complete that work.
I don't believe that this will take us off our underlying production plan to go from our rate today, which is under five per month, and then get back to the five per month later in the year. I also think importantly, we commend this colleague. Right? This is exactly the kind of thing we want our people to do, is raise their hand, in an open culture if they see something that does not look right, and the leadership across the board that listened and then acted swiftly. Rest assured, that program leadership team now has moved out and looked more broadly to ensure that they got a handle on where this can never happen.
Mm-hmm.
They're working on that, and, you know, again, I applaud the team down there. In terms of the 787 beyond this one item that you mentioned, I will say that the supply chain constraints that I talked about at the last earnings call are still persistent. We still have heat exchangers and seats that are pacing items that we are working our way through, and they're tough.
But is it still... You expect them to resolve by the end of the year, or is it?
We'll be in a better spot. We've got a plan to get there, but, you know, second quarter deliveries will look more like first quarter's growth.
Okay. The 777X, obviously, you've invested a lot so far. You're continuing to invest in it as it moves towards certification next year. Can you size maybe the cash flow drag that you're experiencing now, that you'll experience next year, and sort of the pathway looking forward? Also, is 2025 still sort of the realistic expectation for certification, and what does that dictate as it relates to TIA-
Mm-hmm
... from the FAA?
We start with the 777X. On the demand front, customers really like the airplane. Last quarter, we were able to get a few wins that were important. In terms of the timeline, there's no change to the entry into service or the first delivery, which is targeted to be 2025. And the milestones that get us from the here to there are normal, and we're working through them. There's nothing to report that's changed on that front. In terms of the cash question, as expected, we're starting to see, you know, pretty significant investment implications around this production ramp. And the near-term working capital pressure associated with a new airplane is as expected. In the first quarter, as an example, it was about $800 million higher, and it's gonna continue to grow as we move towards entry into service.
But we always contemplated this, and this is part of the investment of launching a new airplane. So, everything's pretty stable. There's no changes. We know what the cash flow implications are gonna be over time, and, we're mostly focused on trying to knock down these certification milestones.
Would this year be... would next year be better than this year from a cash consumption, assuming your plan stays?
We know, when we started to ramp up production in the last year-
Mm-hmm
... we started to see the big lift on cash. That's gonna be pretty steady going forward. I don't think there's a big drop-off. So we know it's in front of us, we're prepared for it, and the best thing we can do is move through certification, then deliver airplanes to customers who really want the lift.
Okay. So speaking to the order book, last year was pretty outstanding. How's 2024 shaping up? And, you know, sometimes, I think, did we just sign up to too many commitments, 'cause now we have to deliver against those commitments? What's the, the level of, sort of risk mitigation of the backlog at this point relative to the commitments that you're standing on?
So the order environment is robust, and as you point out, last year was record orders, and in the first quarter, it was solid. We booked 125 net orders, 85 were 737-10s for American. We had 28 777Xs, as I mentioned. The backlog sat at $448 billion with over 5,600 airplanes. So it's been pretty good, and there's really no sign that the underlying demand signal is slowing down. In fact, you probably saw in March, global passenger traffic was up almost 14%, cargo was up over 10%, and that's cargo's fourth consecutive month of double-digit improvement. So the signals continue to be pretty good, and the product line holds up really well competitively. And you know, we'll continue to compete campaign by campaign in this demand environment. And the good thing is that we stand ready to help-...
To resolve the pent-up replacement demand, as well as this underlying growth that's gonna underwrite our customer fleet plan. So demand feels pretty good. Now, we have frustrated and disappointed our customers because of some of the production supply chain issues that we're up against. And while I understand that frustration, the most important thing we can do for our customers and the supply chain in the industry is to focus on the actions that are underway as we speak, so that we could stabilize this production system, improve quality, and get more predictable. And there are changes to the backlog that we have made, and continue to make, with our customers to make sure that they can get the lift at the right time.
There's nothing that's changing dramatically, but we do have flexibility in order for us, one, to be able to give them schedules that meet their fleet needs, albeit at reduced levels, but also confidence that in the future we're gonna get more predictable. And we communicate transparently and frequently to make sure that they know what's coming at them from our perspective, best we can, knowing that ultimately, as we get more predictable, we'll never take our eye off the ball on safety quality, and we'll get them the airplanes that they need. But we believe that we've got a path forward. We don't believe we need to make unnecessary trades, and we have to stay very close to our customers and make sure that they're aligned with their fleet planning needs.
So you talked about the 2Q deliveries looking similar to 1Q. Does that mean the burn could be as significant as 1Q? Maybe just start with that, and then we'll get into what the implications are for the full year.
Sure. So the second quarter is gonna be more in line, possibly a little worse than the first quarter, driven by the delivery we mentioned around China, as well as some of our own factory disruptors that are working our way through. And then, you know, that's gonna be hard to make up. We expect the full year now to be a use versus generation of cash flow. Importantly, the first half, obviously a usage of cash. The second half, it's gonna be positive, and it's gonna get better for three reasons: we're gonna have higher volumes, largely out of BCA, largely out of the 737 program. We're gonna have these shadow factories just about shut down, and we're gonna have some favorable receipt timing, including an expected award on the tanker program for Lot 11.
So there are specific things that we can point to that we know are gonna accrue to our benefit in the second half. Might not make it all up, but it's gonna get better, and that momentum is in line with the accelerating operational and financial performance that I described upfront. And importantly, that's gonna put us in a much better position as we move into 2025, which we think is what we need to make sure that we keep our eyes focused on, a better momentum heading into 2025, a more stable, production system, and the ability to start to generate cash flows that are much different than the first half.
So, is it fair to say low single digits negative at this point or low single digits?
Yeah, you know, I'm gonna say use.
Okay.
There's a little bit too much unpredictability that it's gonna be useful, and as we move through the second half, we'll probably get more descriptive.
Okay. And then you just mentioned the shadow factory as being one of the pieces, but obviously, that was dependent on China deliveries. So how do I attach or detach the China lack of acceptance of deliveries with the winding down of the shadow factory?
We can finish the work-
Okay
... completely-
And then hold them.
And then hold them.
Okay.
That would be the plan.
Okay.
It's more of a delivery versus the work itself.
Okay, makes sense. Then, in terms of the segment-level look, it was really part of the Investor Day, where you sort of lined up how do you get to that $10 billion number, and sort of went through the segments as to the profiles of improvement. Can you give us a picture of how the segment levels are doing from a free cash flow, maybe last year-
Yeah
... this year, and looking forward?
So, on a fourth quarter, 2023 earnings call, we started to talk about the op cash deltas to what we thought in the fourth quarter of 2022. And we had said at the time that BDS was gonna be significantly worse than the range we put out at the time. And then we talked about BGS and BCA more than made up and were above their ranges, which is why we ended up better than midpoint in 2023.
Mm-hmm.
If I roll that forward, I would say BDS is going to be better than last year, but still negative. BGS is steady, it's growing, the margins are terrific, the cash flow conversion's strong. That's just gonna keep moving forward. The balance is then gonna be BCA, that we're solving for, and that's gonna be lower than last year.
Yep.
That'll all be predicated on our ability to turn this corner in the second half.
Okay. No conversation's complete without BDS discussions, so they actually turned in a profit for the first quarter. But I don't know if you wanna update us where their look is for the second quarter or for the full year. Obviously, you have a few programs you're still trying to nail down there, and they seem to come up every once in a while.
The team is hard at work of stabilizing the business operationally, and first quarter is a good example of when that works in terms of what the future can look like, but it's still bumpy.
Mm-hmm.
The recoveries in this kind of business take time. So in the second quarter, we're gonna take a step back on margins. They're gonna be negative, and it's for two reasons. One, you know, fixed-price development programs showing a little bit of cost pressure, and then secondly, the factory actions that are happening in the Puget Sound do have a knock-on effect of derivative programs, and that's just a reality of what we're up against as we try to stabilize more broadly. So it's unfortunate, but we know why. I still want you to think about the longer term and our confidence that our BDS business will get back to the high single-digit margin level by the 2025, 2026 timeframe. And it's because the 60% of the portfolio that's mid to high single digits performs very well with very good demand.
The 25%, which has been satellites and fighters, is getting better. It's not healed, but it's getting better, and then, of course, we've got some of the fixed-price development programs that every day we are de-risking schedule risk and operational risk. Sometimes, things pop up, and you've got to deal with them because of the accounting position that they're in. Broadly speaking, I have a lot of confidence in the team, and the demand for some of our, our products in the defense space is pretty good.
Okay, and we didn't touch on the BCA margin profile in the quarter. I think last quarter, you absorbed sort of the customer concessionary payments related to the 737 MAX 9, which presumably wouldn't be present this quarter. So is there sequential improvement of any sort with maybe slightly better 777 deliveries and less concessionary payments?
You know, it's, it's just we're not at the moment where we can really describe broadly, BCA margins. I'll wait on that one-
Sure.
Let us get through the work in front of us.
Okay. We talked about the fuselage manufacturer, Spirit, and obviously, you are all on a path to reintegrate Spirit. Can you maybe update us on that path and timing?
So Spirit and Boeing believe that reintegrating this business is important on a variety of fronts. We believe collectively having an operating team, a set of employees, a set of systems, all aimed at running the factory as efficiently as we can, is a good thing, and the benefits will be strength of quality and safety. It'll be more stable, benefits that'll accrue to key stakeholders we serve, including customers, employees, regulators, so we really believe in the strategic rationale of this transaction. In terms of the timing, I still believe that we could get something signed in the second quarter, but it's large, and it's complex, and we're not gonna rush to get a deal done.
We need to take the time, particularly need to allow Spirit the time to address the work it performs on behalf of other customers. But we are working on this. We feel confident, we believe in the logic, and we... Time will tell.
Okay, and given the less favorable cash position of the year you described, are you now thinking that funding would include everything on the table versus the cash to fund that you previously talked about?
Well, we've talked about. We'll arrive at the optimal funding. Nothing's off the table. We spent time with the rating agencies, and the most important thing is that we're gonna maintain the investment grade. And what that optimal financing looks like in order to maintain the investment grade is what we're gonna aim at. The benefit is that between sign and close, we've got time, and it's gonna take time to close this deal once we sign it. And in the course of that time, we are gonna mature our thinking, and importantly, we expect to have a more predictable, stable, underlying factory. So all of that will come together. We'll be thoughtful, and again, our number one priority is the investment-grade credit rating.
Okay. So you got two other items that we'll cover in the next 60 seconds. A CEO search and a large labor contract that you haven't completed in a decade or so since the last one that was done. Maybe on the CEO search, if you had a thought or two of what the organization is looking for, top qualities and maybe timing if you have one, anything.
So this is the board's question, the board's call, so I'll just go back to what our chairman said last week at the annual shareholder meeting. He, with the independent directors, are running a thorough process. They have solicited feedback from customers, from investors, from other stakeholders, and I'm quite confident that the board is gonna come up with the ideal leader to lead this company going forward. So I'm confident of that.
On labor, as you go into the fall, when do you start? You've already started some level of discussions. At what point do you think about, from a financial perspective, building buffers and risk mitigation and things like that?
So right now, I will say is that the teams are at the bargaining table. They've been there since March. They're working their way through a variety of milestones. We'll get closer to September 12th, and then we'll learn more about where we stand. I would just say that right now it's active, it's constructive, and you know, I believe that we will come to a fair and reasonable outcome.
All right. Well, I think that brings us to the end. Thanks, Brian. The company is super important to the broader economy and to the nation, so we're all rooting for it.
I appreciate that.
Thanks.
Thank you.