Brian, thank you for coming. You're Executive Vice President of Finance, CFO of The Boeing Company. Thank you for taking time out. I know this has gotta be a really busy time for you, so.
Pleasure to be here.
Yeah, thank you for making the trip. Maybe I'll just start off with just a question. You're, you're new to the company, right? I mean, within, you know, the last year and a half. What have been some of the, you know, positive and negative surprises for you? You know, sometimes a fresh set of eyes can be really helpful. You know, what are some areas where you think you can affect change in the company relative to what you thought it would be?
Yeah. Thanks. I would say what didn't necessarily surprise me, but it's a reminder that Boeing knows how to execute. We know how to execute. I remember that from my past, and I have looked at the last three years of everything that's been thrown at this company, lots of directions, and they just keep executing. We keep executing. That's important. As we think about going from what was a crisis to a turnaround to recovery, we gotta keep executing. This calendar year, we will execute on our commitment for our primary financial goal, which is free cash flow. We will do between $3 billion and $5 billion of free cash flow consistent with our guidance. If we think longer term, we see a path to get to $10 billion.
How we get from where we are today to the end of the year to that $10 billion, it's execution. The playbook and what we have to go do, it's hard work, but it's right in front of us. That's encouraging. Now, it's also underwritten by our people. What I was also pleasantly surprised is the resilience of this workforce. You know, our people, our mechanics, and all the people supporting the airplane in the factories over the last three years, super resilient, determined, very impressive. The engineers that have a whole new playbook of how to deal with certification, impressive. Our sales team, who, you know, as we're disappointing customers, are standing with them, supporting them, and growing the order book and having record orders.
Again, the people piece was particularly impressive and I'm proud to be on that kind of team. I would say on the piece that was a little surprising, and I'll try to make this an opportunity, still a lot of bureaucracy in the company. A lot of bureaucracy. You know, bureaucracy slows everything down, and we are focused on streamlining. I have every intention to try to make the center small, and what that means is getting rid of all the non-value stuff that corporate functions put upon companies. It's there, we have to deal with that. I wanna work with third-party partners that are better at doing certain things than we'll ever be. I wanna move resources out to the businesses and out to the factory.
I think that makes you go faster, and you're more effective. We gotta work our way through that. As we get efficiencies in these corporate functions, so to speak, we get to redeploy them where we differentiate. More engineers, more mechanics, more quality, more supply chain. That's what matters. I have no problem making that trade all day, every day. I guess lastly, I would say that my biggest learning in 18 months, you know, like, our CEO started almost day one of the job, called out values. One of those values was transparency. I have learned over the last 18 months how important that transparent culture is to our company and is to our industry. You know, it's not always easy, it's sometimes it's painful, but we always took the long view, right?
Always took the long view as we're working through issues, either was on the fleet for the return to service for the MAX, whether it was the H-7. If you took the long view, it made the trade-off easier. It was some tough moments, and we worked our way through it. I will tell you, being transparent makes us stronger, trust with our regulator, with our customers, with the flying public, with all of you. We're not patient people, and it's been said before, this takes patience, and we have to do it and be determined and work our way through it. We're better off at the end. That was a big learning for me to experience firsthand, and hopefully we'll all be a little bit better for that.
Those are kind of the bigger things that I think about.
Gotcha. That's kind of a good segue maybe to the next question. There's been a lot of recent news on the 737 rate ramp, 787, the delivery pause and then the restart, 767 supplier quality issues. Can you give us any update there?
Sure. Let's start with the 737. Stability continues to be job one. We are getting better in certain areas, but this proposition still is supplier by supplier, and we gotta continue to work with our supply base to get stable and predictable. As we work that coordination with this big supply chain, as we get stable, and we have proof points, and as we get more confident that we could ramp the rate, we will. We're not there yet, but we will. We have to be very disciplined in this process. Now, closer to home, you know, we had 35 MAX, sorry, 737s go out in January. We had 25 in February, so it's a little lower. March will be higher.
Overall, our Guidance of 400 or 450 737s for this year, we're still committed to, and we still have line of sight to. You know, the good news there is that, you know, demand on the three seven is robust, and it feels pretty good. The three seven, we just got to stay disciplined and, you know, move that at the appropriate pace. On the eight seven, last week we started deliveries after a short pause. Despite that pause, we still see a path to recover that pause and still get to 70-80 eight seven deliveries this year and get to a five per month production rate as we exit the year unchanged.
I would say that that 787, going back to my earlier point, it's a reminder of transparency at work. An issue was identified, it was escalated quickly, it was reviewed with our regulator, and ultimate resolved. That's what we have to do, and I think that all makes us better, and it's behind us, and we're moving forward. 767, as you might have seen in the media, you know, there is a supplier quality issue, and it's on the center fuel tank. We have the fix. We know how to fix this, but now we have to go implement the fix both on production airplanes and some airplanes that are in the fleet.
You know, it also has been speculated, and it won't be a surprise, is that Tanker is gonna have an impact on that because of that supplier quality issue. There'll be an impact in the quarter. If you remember, in the Q3 of last year, we de-risked as much as we could some of these fixed price development programs, including the Tanker. As we were moving through the Q4 and into this year before this event with this supply issue, we were tracking very well to that de-risked timeline and expectations. We actually do a little bit better, this hits us. As you know, my accounting doesn't allow me to account for unknowns. We'll deal with it. We'll deal with it, we'll be fine. We'll move forward.
The most important thing is, we are focused on recovering deliveries. The 767 itself deliveries will recover in the Q2 . On the Tanker, it'll take until the second half, but we will recover in the year. It will not impact at all our $3 billion-$5 billion cash flow expectations. It's not ideal. We'll move forward and, you know, you know, that's basically it.
If we maybe dig down a little deeper on Tanker, if that's okay. You know, could we be expecting another billion-dollar charge on that or?
No. No, no, no. Not billion. Not even half of that. We have to deal with it and, it will, it will impact BDS margins in the quarter. They will be negative, they won't be positive, and it'll be part and parcel because of dealing with this, you know, thing that hit us. This is where we're at with the program. Most important thing about the Tanker is that the product, it is outperforming its mission, good customer feedback. We gotta keep our eye on the ball of getting predictable and work our way through it.
You know, maybe changing gears a little bit. What are you seeing with the supply chain, right? I mean, supply chain has been an issue that has been discussed a lot in the sector, at this conference, across sectors. What kind of intervention has Boeing had to make on the supply chain to help out?
There's major parts of the production system and the supply chain that are performing pretty well. It's not all performing well, and you've got your areas where you've got hotspots. I would say in terms of intervention and investments, we have put inventory buffer stocks in certain spots to make sure we have stability and predictability. That's all contemplated in our forward look on cash. Even if I had to do a little more of that to get more stable, I'd make that trade, and we'd still be fine. We have a lot of resources that are deployed into tier one, tier two supply houses, and it's lean manufacturing, it's engineering, it's quality.
We're trying to put resources in to help the system, help our partners, and also get an early indicator of what might be coming at us. A year ago, it felt like there was a little bit too much discovery in the supply chain. It's getting better. The general alignment on demand is very solid. Hiring is getting better. Training is still something that we're all working on, right? Trying to skill up new labor. Hard work. Doesn't happen overnight. I would also say that the visibility into the constraints at tier two, tier three is getting better. And overall, the operating rhythms, particularly the tier ones, both top to top and down and in, the cadences and the information sharing is better and better and better. Look, we are not out of the woods.
The supply chain issues are gonna be persistent. They're gonna last, well into this year. We are in a better spot than we were, a year ago.
Those investments potentially in the supply chain, does it have any implications on cash flow? Do you foresee any need for vertical integration?
Yeah. The investments that we have made or contemplated are in our expectations, and they're in our $3 billion-$5 billion. That wouldn't disrupt it. In terms of vertical integration, it's not something that we're focused on. We're focused on stability, and that is job one.
Gotcha. Gotcha. maybe transitioning back to the 737, can you offer an update on certification of the MAX 7 and MAX 10?
As we exited last year, we got the important extensions that allowed our Boeing and FAA team to keep doing the important work at hand. On the dash seven, while the regulator will dictate specific timing, we do expect certification and delivery this year. We are working very, very closely with Southwest to make sure that we can, you know, help them with their fleet management and how that's all gonna play out for the course of this year. No specifics, but it's progressing. The dash ten, of course, will follow the seven, and the dash ten on both certification and delivery, likely next year. Again, same message. We are working hand-in-hand with the FAA to get this done.
I would say, as you step back, the lesson learned is that there is a different set of expectations as it pertains to certification of airplanes. That is the new reality. We are gonna resource it. We're gonna be disciplined. We're gonna be transparent and proactive and work hand-in-hand to make this work go as smoothly as it possibly can go. We'll make progress. We keep doing. The trust factor is getting better and better and better.
All right. Now maybe transitioning a little bit to product strategy. If you think about the competitive dynamics with Airbus, particularly in the narrowbody market, why is not doing a new jet to counter Airbus's ascension in that segment of the market a good idea?
I'm not sure I agree with all of that, but-
No.
Here's what I think about the narrow body. The MAX is sold firm through 2026. Very good demand. Where we go on the dash eight, dash nine on the MAX competes very well, right? Performs very well. Customers love the airplane. Holds its own. As we get the certification for the seven to ten, we get to go a little smaller and we get to go a little bigger. That complete family, think about the family across seven, eight, nine, ten, holds its own, right? Very proud of that product lineup. Customers like the airplane. In terms of the dash ten and specifically your question, I look at the order book. I look at Delta. I look at United. They're selecting the dash ten.
hasn't been certified delivered yet, and they're putting confidence in that offering, and that feels pretty good. That's the narrow body side. On the wide body side, you know, 787, hardest working airplane in the last few years for sure. Customers again love that airplane and evidenced by recent success, United, Riyadh Air, Saudi. You know, those are very meaningful big orders for us, and it's just a reflection of that wonderful 787 airplane. Of course, the 777 more or less kinda sits in a space by itself. Broadly speaking, the portfolio feels pretty good. You know, as we think about, you know, next offerings, you know, we wanna make sure that we work very closely with our customers.
Whether it's on a narrowbody replacement or something else, we don't believe. We don't wanna do anything nichey. We wanna do something that is step function changing of how our customers are gonna get more efficiency and, you know, it will be better. Right now anything on that front is next decade, and we've been consistent with that. I also wanna make sure there's not an impression that that means we're just standing still. We have. We hired 10,000 new engineers in the company last year. 10,000. One of the things we worried about heading into this year, sorry, last year, was would we be able to meet our hiring goals? Can the Boeing brand attract talent? Turns out we beat our hiring goals last year.
Hired 15,000 people, largely engineers and mechanics. 10,000 hires, right? I think it says something. I think it says that we are a technology company, and it's because we wanna focus on capabilities like digital, producibility, sustainability, autonomy, right? Those are capabilities that if we get really good at, and we will, and we can have some real domain expertise, we can shape the future of aerospace just the way we always have done, and we'll pick our spots. I feel like there's plenty innovation. By the way, our development pipeline is full. Commercial, You have the 737-7, dash 10. You got the 777X. You have the 787-8 Freighter. You have the X-37B, right? Really interesting things.
On the defense side, you've got T-7A and MQ-25 and MQ-28, MH-139. Proprietary work that is very interesting. we wanna be, you know, we wanna call out engineering excellence and innovation, and it's alive in the company for sure. We're spending on it. We're putting billions in R&D, and we'll spend more R&D money this year than last year, and we'll spend more R&D next year than this year. It's a commitment that we have as Boeing that we're not gonna, you know, we're gonna be steely-eyed on, and we're gonna keep doing it 'cause we think that's good for our industry, we think it's good for our customers. you know, how that shapes in terms of next this, next that, doesn't matter. Capabilities matter, and being able to attract really talented people matters.
That's great. That's great. I think a question that's on everybody's mind is China. From that perspective, I mean, how is Boeing thinking about China? You know, on the one hand, it's a large market for aircraft. We all know that, and it's been a big driver for growth in the industry for everybody, particularly for Boeing. On the other hand, it's also, you know, wants to be a major competitor in the industry. How are you thinking about that, and what's it mean? You know, there's, you know, we're in this global environment that's a little trickier today.
Yeah. Yeah, it's tricky. China for us is focused on return to service for the MAX. That is job one. There's 97 airplanes that were grounded with the MAX. 27 or 28, I think it's 28, are back flying again. That's 20 more than it was this time last month, progressing. We stand ready to help our customers in China return those next 70 airplanes to service as traffic continues to grow in that market, and that's our first responsibility. You could envision where as things play out, maybe traffic keeps growing and customers do fleet planning and the regulators decide what they're gonna do. You could see an event where at a point in time, there's a return to delivery discussion. I don't know when.
I know that will be dictated by customer fleet planning, along with traffic growth, along with the regulator. Return to service is the one thing that we do have as a first priority. If you think longer term, an important market, you know, we just issued the Commercial Market Outlook for, you know, what the future is likely to entail. In the next 20 years, by our estimation, over 8,000 airplanes are gonna be needed in that market. 8,000. That's a lot for, you know, two legacy airframers to handle, and there's probably, you know, it's clearly big enough, bigger than just one can handle, right? We think there's a role in there for the competitors to play. By the way, the C919, it's not a new competitive entry.
We've known about that. We're comfortable with that. Market's big. Let's go compete and win.
Got it. Maybe switching back to some of the financials, I mean, how are you thinking about the evolution of BCA margins over the next several years?
I'll start with the here and the now. I think it's important. You know, right now, we're at a point where we're still trying to recover, and margins are depressed for a variety of things. Last quarter, Q4 2022, margins at BCA were negative, you know, almost 7%. This quarter, margins at BCA likely will get a touch worse because the quarter-over-quarter volume will be less. We'll deal with that. What I'm more interested is the trajectory of how margins will play out the rest of the year, which they will gradually get better as volume gets higher. As I think about the next couple years, what's important is that, while it will be likely bumpy, it's because I've got to liquidate a lot of airplanes from inventory.
I have had to stand up two, essentially two additional production systems, one in 737 and one in 787, to get those airplanes out of inventory and back in the air. That is work that we have to do as we over the next two years, that will largely be behind us. The benefit is that when that goes away, all that cost comes out, all that rework comes out, and the margins will accelerate.
The other benefit that we expect is that we also will have a highly skilled, trained workforce that has been working the last couple years on reworking airplanes, and they'll be repositioned and pivoted towards, okay, now help with building new airplanes and helping with the ramp to get up to, in the case of the 737, 50 a month and the 787, 10 a month. We see all that in front of us. You know, that'll get us to a point where margins will look more familiar to what you've seen in the past. We get a lot of questions around inflation. You know, for us, our customer contracts typically have escalation clauses, and of course, our supply contracts are long-term in nature.
We always watch it, but it's not a concern at this moment. You know, as we think about BCA and getting to margins that are familiar to all of you know, double-digit BCA margins, and it's underwritten by 737 margins that are gonna get better. Not quite back to what they were in 2018 because you've got, you know, some customer mix and some concession stuff in there, but they're gonna get better from where they're at, and you're gonna have a 787 that will actually be better than where they are today and better than where they were in 2018, largely because of the benefit of the dash ten model mix and some consolidation benefits of Charleston.
All that for a picture that we believe we can execute to, as long as we liquidate this inventory and work that productivity and reposition for the rate ramp. Again, we think it's underwritten again by a big backlog, and that gives us a lot of confidence.
Maybe transitioning now to the defense. How are you thinking about the defense franchise? You know, one of the surprising things for us this year is, I think it's probably the only major defense franchise that's not gonna generate cash. What has to change in the business? You know, what lessons can be learned from decisions that were made before you ever were at the company?
Fair point. Let's talk about the cash usage that we are facing this year. That's no new news. That's a reflection of the de-risking actions that we took last year on the accounting side. The cash flow just takes time to catch up, so that's all contemplated in our forward look of this year. For us, reminder that reflects 15% of the BDS portfolio. It's these fixed price development programs. We gotta execute them, right? We have to get the Tanker more predictable, get it out to the customer who is loving that airplane because it's meeting its mission requirements. We have to deliver two perfect VC-25B airplanes to the customer, and we have to make sure that we continue to take the long view on the T-7 and the MQ-25, and we will.
Because those opportunities longer term still are ones that we think a lot about. We gotta work our way through that. Lesson learned, believe me, there is a different risk tolerance for underwriting in the company. Got new team members, new leader of the business. Together as a team, we are getting very clear-eyed about risk we're willing to take and not willing to take. Fixed price development work is something that we have no appetite to take. Hard lesson learned, don't wanna do it again. In terms of the trajectory of the business, you know, we have to start working on the 85% of the portfolio that probably doesn't get enough of the attention. Now, margins are too low, right?
If you look at the Q4 last year, BDS discrete, meaning no charge noise, it did two points. That wasn't good enough, right? It's because the same kind of labor supply chain disruption that we've talked about in commercial, it finds itself in our defense business as well. We gotta work a very disciplined plan to work margins to be better. The team knows, and they're positioned to do that. I would say longer term, our expectation is that we get a BDS business that is more familiar to what you remember. Margins have to be in the high single digits.
I'll remind you that, because of the way we organize ourselves, you know, when I say BDS margins at high single digits, if you add in the benefit of the services component of defense, you actually get that business to look more like around double digits, just around double digits. We know that we've got to go execute on that front. Somewhat good news is that when we talked about the forward look, in that $10 billion, you know, our expectations on the BDS business was stable growth. It, you know, low single digits. It wasn't make a huge splash. That actually could turn out to be a little better than we expect.
We thought it was prudent to stabilize the business, execute on these fixed price development contracts, and then get the underlying margins better and better and better. It's a lot of work to do, and we're up to it. We know how to do this.
On defense, you know, there's some new programs out there. You kind of ferret them out of the defense budget. You know, where does Boeing stand with regard to NGAD? That's the Next Generation Air Dominance, if folks aren't familiar with that acronym. You know, Collaborative Combat Aircraft-.
Mm-hmm.
You know, unmanned stuff, Loyal Wingman, that kind of thing. What else is there to compete for in that business?
You bring up a big one, NGAD. I can't say anything other than, it could be a significant opportunity, and we're focused on it. In terms of the CCA, you know, we've got the MQ, the MQ-28. It's out there. It's showing its teaming capability. Customers like it. It's real. Feel good about our position there. That'll all play out. In terms of what else is there to compete for, Germany, Chinook, Poland, Apache. US government, we just got another Apache. We got an E-7. We got a tanker extension. We also, you might have noticed the decision on KC-Y.
Yeah.
You know, not to do that, which that's good for the KC-46 franchise to extend. That feel pretty good. I've got P-8 campaigns. We've got F-15EX campaigns. Missiles and weapons has got some nice demand. There's plenty. There's plenty. I guess my point is there's plenty of things we've won and there are things that we're chasing. Overall, I think the portfolio stands up pretty well given the general threat environment with our partners and allies. You know, we like the fact that they talk about wanting to spend more on defense. Of course, it always takes time for that to trickle down into an actual order, but, you know, we're patient, and we've got the products.
You alluded this a little bit before, but how should we think about over the next several years the evolution of margins in defense and cash flow?
Yeah. Kinda talked about, you know, the here and the now. The quarter's gonna be negative. Trajectory will get better. We will get it to a point where it's high single digits is our expectation as supply chain gets more stable. We've got where the learning curve is behind us. The important one is this cash flow component. It is a drag. We gotta get it back to a point where it's contributing, you know, a couple billion of operating cash flow. That again will look very familiar to what you remember. It's a growing business, stable. It's got margins that are competitive, and it's got this very high cash conversion flow down.
Every time we look at it, we still say, "Yep, we can get there." Hard work, go execute, and that's on us.
When you know, kind of pull it all together, at the Investor Day, you offered the guidance of, you know, $10 billion of cash flow in 2025, 2026. Can you give us any more feel? Is it 2025, or is it 2026?
It's one of them. Not changing that. like, it is gonna be either/or. I. It's too soon to call out which.
Right.
I think for us importantly is that how do you get from three to five to 10? Like, what's the bridge? The things to keep in mind, it's the BCA or the commercial production rate increases, right? Getting to our established objective of 50 per month on the 737, 10 per month on the 787. That's gonna be a big deal to that bridge. You've got a BDS business that I just described is gonna get, you know, from a user of cash to a generator of cash. You've got a services business that is a wonderful franchise, and we gotta keep it going and, you know, get a little bit better and better and better, and we will.
You've got, you know, generally a productivity benefit across the whole company as we start to move out of these unique situations, and that inventory liquidation in BCA. You know, you get a little bit of interest pickup, and you got some good positives on that path forward, all things that we know how to execute on, right? There's not a lot of mystery. We know the plan. We gotta go put the work in to deliver it and execute. On the things that we know are gonna work the other way, we have a 777X that's gonna come out over the end of that period that we have to make sure that we provide for, 'cause that's gonna be something that's gonna be a little bit of a cash call in the plan.
We're gonna pay higher taxes, and, we're gonna invest a little bit more in R&D, all things that you'd want us to be doing. Yeah, I think, my view is whether it is 2025 or 2026, my point is we still have confidence that $10 billion is achievable, and we know the pieces, and we're working hard to execute on those pieces.
How about the balance sheet? you know, us equity analysts are always focused on that, but, how should we think about the evolution of the balance sheet? What leverage are you comfortable with, especially in a rising rate environment? When could we actually see the company resume a dividend payment?
Let's take the inflation, the interest rate question, off the table, because we don't have exposure to interest rates because it's fixed price debt, which is good. One thing you don't have to worry about. In terms of the maturity stack, whether it's short, medium, longer term, that maturity stack is manageable. As we exited last year, we had $17 billion of cash on hand. It was deliberate, made sure that it was more than enough, and we paid off $1.7 billion of maturities already this quarter. We've got $3.4 billion of maturities due next quarter. You know, very, very manageable. No, no issues at all.
As you think about fast-forward, as we execute our play, we wanna get that investment grade credit rating better, while still reinvesting back into the business for the long term. You know, we know that the path, again, to keep it simple, if we deliver airplanes, if we generate cash, we pay down debt, and that is gonna naturally happen. Again, this word I've said it probably 1,000 times today, we just gotta go execute on that. In terms of what, you know, a return to capital discussion might look like, too early. You know, it'll be there someday. It'll be there someday.
Great. Thank you, Brian.
Thank you.
All the questions I had.
All right.
Yeah.
Appreciate it. Thank you.
Yeah. Excellent. Thanks.