I think we're good to get started, so welcome back. It's a pleasure to have with us from The Boeing Company, Brian West, the company's Chief Financial Officer. I'm Myles Walton, the aerospace defense analyst here at Wolfe Research. Welcome to day 3, the final day. With that, I think, Brian, you have some opening remarks, or an opening comment, perhaps?
Probably just to reference the.
Disclosure
... statement disclosure thing. I think that's about all I had in my opening remarks.
All right.
Otherwise, it's great to be here.
All right, awesome.
Great to be here.
Well, that's a good opening remark. The lawyers will be happy. Let's kick it off with this year, look to the present, we'll look to the medium term, and then we'll go and dive into each of the businesses. The present, this year, you've looked forward to a $3 billion-$5 billion free cash flow target. Some things have gone your way, some things haven't. I know front and center in a lot of people's minds is the fitting issue on the 737. Maybe update us on that, as well as there's other moving pieces to the current year free cash flow outlook.
Sure. $3 billion-$5 billion is the number for this year. When you put any plan together, there are gonna be some things that are pressures and opportunities. Let's talk about a couple of the pressures. First one is the 737 fuselage Notice of Escape that we talked about last month. It is on track with everything we talked about as we move through the recovery. In fact, we've begun to deliver airplanes, reworked airplanes out of inventory. It's a very important proof point, and we will proceed. Lots of resources focused on this, incredibly constructive with our supplier partner. The times that we had thought would take on the front end and the back end, very different cycle times, is holding firm. Good progress.
More work to do, but there is a level of confidence with the team. In terms of the cost, just as a reminder, the cost of this rework was immaterial, and it was booked in the first quarter in our closing position. By the way, we still had margins on the 737 that were up, program margins. That's all behind us. I wanna make sure that it's very clear. As we think about deliveries on the 737, we still believe... April was 18. That was pretty much expected, given when this NOE hit. We still expect the first half of the year to be about 30 per month, in the back half, about 40 per month.
That puts us right within the range of our 400-450 deliveries for this calendar year on the 737. Now, that range will be dictated by the performance of this recovery on the 737 fuselage, but so far, so good. Another pressure, you know, being a little bit more pressured than we'd originally thought, and it will take time to work through a few programs that we just have to get stability around. We will get there, and it'll just take us some time. On the opportunity side, order front, feels really good. We've had some very nice wins with Air India, SAUDIA, Riyadh, and which we've talked about before.
Very proud to be the continued partner of Ryanair as they think about their growth plans across Europe. That was a very important one for us. We're proud to help and support them. I'll shake that all out, high conviction on the low end of that range, of the $3 billion. Is the upfront a bit pressured? Sure, we have more time to go in the year, and, you know, we are committed to delivering that range.
Okay, good. I think the implied 737 deliveries in the high 60s, it sounds like you could even, you know, be trending slightly above that level, given what we're seeing in May, if that holds for June, sounds like it's about the right assumption?
So far, so good.
Okay. All right. One of the other things that you've talked about, and we'll move and evolve to the medium-term outlook, is the 777 margins and their opportunity to get back to close to where they were, but probably a little bit below where they were pre-crisis. Can you talk about why can't they get back to where they were? Is it a pricing issue? Is it a cost issue? Is it more of a time to get there than anything else?
Talking cash margins?
Yeah, let's talk with cash margins.
Sure. It's all about cash.
Which is.
I'm for that. With the 737, the underlying cost of the airplane hasn't changed. Of course, you've got some concessionary tail impacts that will create some noise. You know, on the 737, the things that are going for it, broadly speaking, is lots of productivity. You know, over time, you get a little bit of price advantage, but the margins for that program are pretty solid as we look forward, mostly because on the pricing side, I'm sold firm through on the 737, 2026. For the numbers we're talking about in our guide, it's pretty much baked in, and then it's all about making sure we execute and can deliver these airplanes to our customers with a stable supply chain.
You know, they won't quite get back to where they were, but pretty close. The more important thing is that longer term, the things that could help us expand and enhance margins further are things that we can control, mostly execution, maybe a little bit around price and performance.
Okay, okay. I'm gonna leap to the medium-term outlook. You've provided the $10 billion of free cash flow, and we'll sort of come back in closer focus. On that $10 billion guide, you know, obviously $6 billion of implied growth from the midpoint of this year. Give us a sense as to you feeling better or worse than maybe 6 months ago, as well as under the covers, which are the more challenging elements of the walk to get there?
Sure. The $10 billion is still our number. As you note, the $6 billion path are things that are pretty clear. We know how to execute what is underwriting that delta, the production ramp, right? We have our sights set on for the 737, getting to 50 per year, from what today is 31. On the 787, we have our sights set at 10. Sorry, I said 50 per month. The 787, it's 10 per month, which today is in the 3s, headed to 5. Just that natural volume ramp is going to be very powerful. At the same time, as we get through the next 2 years, and we unwind the big inventory balances on the 737 and the 787, remember, there's essentially 2 small factories that are doing that work.
Once we liquidate that will all go away, and that will be a natural productivity lift. Those are two very important, compelling parts of that delta. I also think the BDS business will look a lot more normal once we work through some specific programs with cash flows, and cash conversions are ones that you will be more familiar. We also have some things that we expect to go the other way. We expect R&D to get a little bit higher as we invest in the business as a priority. We expect, based on the profit growth, that there will be a cash tax implication, which is normal and natural.
We also know that on the 777X, as we're in that zone of 2025, 2026, there will be a natural usage of cash as that airplane will successfully, is my expectation, go into service. All of that nets into that $6 billion delta and that ultimate $10 billion outcome, and we're just as confident today as we were before, mostly because it was underwritten by execution that we feel we have good line of sight to.
In terms of the elements you mentioned, sort of the ones that are at the top of the list that keep you up at night, what would you subscribe those to?
Well, I would say what does not keep me up at night is the demand outlook. Every time we look at it is very robust, and we can talk more about that. What you're seeing and what we have to, you know, get through in the next year or two, is the supply chain fully recovering. We had never counted on it fully recovering this year or even next year, but we expected by the time we get to that 2025, 2026 and the $10 billion, we always characterize that as normal, what you all would recognize from Boeing.
Getting the supply chain from where we're at, which is better, but not healed, to that point in time where it's normalized, that will always be something that we're gonna be very focused on, trying to make sure that we can do all we can to help that supply base heal.
I think one of the questions I get is $10 billion the end? Is 50 per month the end? You know, what's after that? I know it's something you don't want to necessarily entertain, but in the, in the sense of why, you know, why $10 billion is normal, if it's actually absorbing $2 billion for 777X, if it's actually 50 a month, which, you know, the industry probably wants something higher than that.
Look, there's no doubt that when you get out of our planning period, there is a robust backlog, that robust backlog underrates all of our confidence. As we think about the recent orders that we're very proud that I mentioned, that's a good moment, because you keep on building out a skyline. We're not sold out. We just keep on selling in the future, that's something that we have a lot of confidence in, our customers are putting the confidence in the product plan. You know, will that go up over time? Sure.
Right now, it's important for us to focus on near-term execution, get through this year, deliver that 3 to 5, get through the 2023, 2024 liquidation of all those airplanes on the 787 and 737, you know, take small steps forward, and then get to a point where we feel really confident, and we will get there. What goes beyond that, we'll talk about when we can, but right now, we've got more than enough to work on that's right in front of us.
That's fair enough. You mentioned the 737 sold out through 2026. I think Airbus has talked about something closer to 2028, even 2029 at times. Does that normalize price at this point? Are we at a point where customers should not be expecting sweetheart deals, we're well through that phase, and now we're in a, you know, a price, maybe not a price giver mode, but pretty close?
Well, what I would say, on that question more broadly is that the environment that we're in right now, the current environment, it's pretty good for price realization. Why is that? Because you see the skyline, the deliveries keep moving to the right, which is a good dynamic. You know, we will be disciplined on this topic. We know that the demand environment right now is favorable. As long as we stay disciplined, we think that the environment will be normal. I also remind you that every campaign, we compete head-to-head, and, that's the nature of our business. You know, the good news is that if you look at our track record feel really good about the wins.
you know, that is something that over time, I think will be just fine, not anything we really worry a lot about.
Supply chains have been talked about for a while, since we've sort of shut down everything and restarted it. David Calhoun had some comments earlier in the week in Qatar regarding supply chain normalization, end of 2024. There was nothing incremental to that, I don't think, but maybe give you an opportunity to clarify if there was.
No, exactly, we have been consistent, he's been consistent, just to set expectations that our planning always assumed that it was gonna take time to, you know, recover. That's just an important reminder. Parts of the supply chain have gotten better. Parts of the supply chain aren't quite where they need to be, we need to work with, you know, key Tier 1 suppliers to get them to a better spot, we help them. We've got resources that are forward deployed to help the entire supply chain stay more coordinated so that we can all deliver to the customer with reliability and predictability.
You know, there's always gonna be some part right now that is not quite where it needs to be, and that's not anything that is gonna all of a sudden, be a flip of a switch. It'll take us into this year, it'll take us into next year. That was always contemplated, and we put out our view of the future. When we get out of 2024 and into the 2025, 2026 timeframe, quote, "normal," meaning the supply chain is, you know, back to something that we all recognize as more consistent. We're just not there yet.
Yeah.
That's not new news.
Okay. It would appear, at least on the surface, that maybe the 787 ramp could be conceptually more challenging than the 737 ramp, just in pure numbers. At the same time, you were well above your targets just a few years ago. Maybe lay out those two in particular, maybe which is the more gating?
They're different. They're both incredibly important to our cash flows as we think about that $10 billion. I would say on the 737, you know, we're at the moment where we had a lot of confidence to break rate up, we get a little hiccup. Rest assured that last month, we for the first time said, "We're gonna move to 38 this year. Don't know exactly when, but that is in our game plan." That just gives you a signal of our confidence that the supply chain, while not completely recovered, it's getting better, and we'll be able to meet those ramps. Of course, the master schedule has us going at rate increase all the way up to 50.
That is just making sure the supply chain stays coordinated and confident. Coordinated and confident. On the 787, similarly, we're at 3 per month now. We expect to get to 5 per month as we exit this year. Of course, very important, Tier 1 fuselage supplier that is gonna be important to deliver on that, and our expectation is that they will. They have a similar ramp in terms of going from 5 up to 10. The Charleston site, high confidence in that team. The consolidation is complete. They know how to do the pieces, not just the final assembly, but the other sections they're responsible for. It's all come together pretty nicely.
I guess if I were to think of broadly, the things that would be, quote, "concerning," it still goes back to the confidence supply chain. It's getting better, but we still need to make sure we're laser-like focused on that to make sure that no one is second-guessed the demand signal, 'cause the demand signal is real.
Yep. One of the things that you'd mentioned at the top was the 737, you'd started delivering reworked planes. Could you maybe put a finer point on it? Are those reworked fuselages that went through the system, or are they reworked previously finished planes that you've got out the door?
Those are the ones that had this, supply Spirit AeroSystems, NOE. When we talked about the effort that it would take, we acknowledged that because of where that sit and what was required, it was gonna take longer, measured in weeks. What I'm saying is that we've begun delivering ones that we've corrected that fully. Complicated, but known set of work scope, and we're through it, and we're beginning to deliver, and that's an important proof point. 'Cause we talked about that, was that it was an issue that was identified very quickly, escalated very quickly. We evaluated it, talked to our stakeholders, customers, and regulators, bounded it, got the work scope, and then began to move forward. At a time that was, very, very speedy, but also very transparently.
Now we're at the point where we've gone through that original set of procedures on airplanes, and they're being delivered, and that's important. Gives us confidence.
Yeah, It's holding to whatever your initial assessment was.
Yes
as to the cost and profile?
Yes. Cost and schedule is on track.
Good. Good. China, so the other topic took us 18 minutes to get to, wouldn't in normal times, but it seems like the breadcrumbs are there in place for a resumption of deliveries at some point this year. I know, you know, Dave has spoken more optimistically in recent months than not. What's the current view, both of maybe the timing, the appetite, and also the ability of Boeing to deliver planes to a customer who hasn't taken them in a while.
Sure. We, like, all of you, look at the demand signals of traffic in China, and they continue to be very, very strong and on their way back to pre-COVID levels. It's been very consistently growing. For us, what that has meant in terms of the signals we watch, first and foremost, is returning the full fleet to service in China. Of the 97 airplanes that were on the ground, 61 are back flying, and that continues to be good progress as our customers return those airplanes to revenue generating, following the traffic growth. Nice signal. Second signal is the AD report that came out, important milestone that we got through. Again, another important point that will enable us to move towards eventually delivery. I don't know when that will happen.
We stand ready to support our customers in China when they make that decision. You know, it'll likely happen over time. I just can't give you a call, and remind you that we've completely de-risked our financial profile for that event, and even if it were to happen, it's not going to be incremental. There's no upper there. We are more interested in making sure we get our customers in China as they need to meet the traffic needs that they're seeing, and we will be patient, and we will follow their lead.
You say there's no upper there, by that, it's more of the 2025, 2026, you're supply side limited. Obviously, China's not an important customer beyond that time frame, it clearly would be.
Look, broadly speaking, outside of what we're calling our quote, forecast period...
Yeah
of 2025, 2026, that's arbitrary on our part. Longer term, it's a big, important market. We've been there for 50 years. We've got great customers, and we want to serve them.
Yep. Okay. Switching to defense for just a second. You laid out in the last call, 15% are sort of the red programs, the 5 we all know about. You've got 25% that are legacy, that are sort of under earning. You get 60% of the portfolio that's doing exactly what it should be doing. Maybe talk about the steps to get from where we are today to that, you know, high single-digit margin you're targeting.
The part of the portfolio that isn't performing as we would expect are programs, and there's only a few. We know how to make these assets. We just happen to be at a moment where some of the supply chain shortages, labor instability, both in our four walls and with our suppliers, it is creating, you know, problems, right? It's up and down, and it's frustrating. My confidence is that we will figure this out. Same way that we talk about the supply chain healing on the commercial side, the exact same dynamics play out in this space. While it is frustrating, and we are not expecting much in the way of profitability in the second quarter from BDS, because it's gonna take time.
As we move through this year and into next year, and that supply chain heals, and our labor stability gets better and better, and we get more productive on labor, and we get the benefit of things like lean manufacturing, we could see the point where in 2025, 2026, that those programs, that are a few, will get back to margin levels that you recognize. And that's on us, and we are gonna execute on that. I just, it's not gonna be as fast as you might think. It'll take us some time.
You had mentioned the second quarter from an EPS perspective, it would look similar to the first quarter, excluding the charge. Just when you think about the businesses, I think you've said that services might be down on margin, because you can't replicate what was very high teens. Within commercial, you've got a slightly worse mix, because fewer MAXs. Are the BCA margins gonna actually get better on a worse mix?
BCA margins last quarter were -9.2%. Even with lower volume on the narrow-body, two things are gonna get that sequentially better. One, the wide-body mix. If you remember in the first quarter, 787 was paused for a period of time. You know, we'll be able to pick that up. The 767, because of the deferred quality escape, that'll get a little bit better, and there are some 777 timing that'll benefit us in the quarter. We will have the benefit of lower abnormal. Those dynamics, despite the fact that we're gonna have a little bit lower volume of the 737, net-net, will get sequentially better.
Okay. Does that paint the picture of exiting the year with positive BCA margins?
What I'll tell you is that long term, when we think about the 2025, 2026 time frame, when we think about BCA being low double-digit % margins, a lot of confidence, because we will work our way through these persistent things we're dealing with. We'll have retired those two factories, production will ramp, and we'll get to these margins that you're very familiar with. It's just gonna take us some time, and the thing about a recovery, nothing's linear. Things are lumpy. Well, we'll go through it, the teams are focused on it, and we're well positioned as we go through the year to be able to fulfill that demand behalf of the customers, and the margins over time will get better.
Okay. What is the right capital structure for Boeing? You know, a number of years ago, it would run a neutral balance sheet, net cash almost. Is that where you need to get to, or is you know, a modest amount of leverage okay for a sustainable business like Boeing?
... important questions that we're just not ready to answer yet, mostly because our focus is what's in front of us more near term, and what we're focused on right now is the strength of the balance sheet as we move through the next two years. What gives me confidence is, first of all, a little under $15 billion of cash as we closed the first quarter, $12 billion of untapped credit lines, so liquidity, solid, very solid. You think about the maturities that are in front of us. You know, this year it's a little over $5 billion in maturities. They're already substantially taken care of, right? Confidence.
You think about the investment grade rating, which is very important to us, and as we execute with the liquidity position I just described, as we execute on delivering and then generating free cash flow, we expect that rating will get better and better and better. When we get a few more points on the board, there'll be a moment to stop and look and say, "Okay, what's the future look like?" In order to answer that question, we want to get a few things done before we start to engage in that discussion.
One of the big picture questions I get a lot is, does Boeing have the systems engineering controls expertise it needs to manage the complexity of the programs that it signs up to? It's hard for me to dispute some of the data points that would say there's a lot of work that needs to be done. What kind of trust can you rebuild for launching a new program, which I understand doesn't happen imminently, or competing on a new defense program? What's changed such that, you know, we're not going to step into bad business cases, we're not gonna make assumptions that, you know, we shouldn't have made?
Broadly speaking, I am very enthusiastic about our ability to attract the best engineers in the world. We hired, you know, 10,000 last year, and the brand sells, the mission sells, and I'm very proud that we have the technical know-how across the board, and confidently can say that, you know, we can deal with complicated things and deliver innovative products for the customers. There's no doubt about that. As we think about your question on BDS specifically, you know, we've got lessons learned like anybody does. That's behind us. We've been through that many times. I would say that right now we are committed to disciplined underwriting, on bidding proposals that happen every day, or programs that probably aren't quite as big that would get to anyone's level in this room. We know how to do this, and as...
for every next program, we'll get better and better and better, and we will not make the same, decisions or quote, "mistakes" that we might have made in the past. What our objective is to get innovative, differentiated technology to the customer and the warfighter as a win, and also have it a win for the business, and I'm convinced you can do both.
Services, obviously a pretty bright point in the portfolio, great returns, really good trajectory of growth ahead of it. Maybe talk about how you can, you know, grow it, expand the margins, maybe even above what you're targeting for the target period, given you're almost... Well, you are above them today.
Love our service business. It's just a franchise that is there for a very long period of time, and we have made certain decisions, our leadership team is making certain decisions to make sure that we are not chasing big, unrealistic targets, but we're trying to have steady, stable growth in ways that can be capital efficient and margin accretive, and that is the game plan that they're running to. In terms of the things they get excited about, we get excited about: intellectual property. Any IP that we can go out there, love that. Anything that is around digital assets, in and around the cockpit, we wanna make sure we're feeding that business to grow responsibly.
You know, for us, if we have a steady grower in the mid-single-digit top line, it can continue to reliably deliver mid-teen margins and have very high cash flow conversions. Love that business, you'll love it, and if it can from time to time get a little bit better, great. Having that as a foundation over a service franchise that goes over decades, I think you're gonna like what we have.
Okay.
We do.
Okay. Maybe just a final one. The tanker has a service component at some point, a long tail to it. Is it going to be a... You know, the kind of service business you have on the C-17 is amazing. Is there a future for the tanker to actually have an annuity stream that is compelling?
We've always thought about the tanker, despite what the past has been, as a very important airplane. It is delivering its mission 100%. The customer is giving it high marks, as we continue to deliver those airplanes, and it continues to do the job it was intended to do, it's gonna have a very, very long tail, and we're gonna enjoy our piece of that. There's no doubt about it, we have to take the long view. I also think recent decisions on how they've chosen to think about their path going forward, on the tanker program, gives us opportunity. In those opportunities, we're gonna look to make sure that we're priced competitively and that we are thinking about that long term.
Yes, we feel very good about what that could be over a very long period of time, and it's a great airplane, and it's meeting its mission.
All right. Well, we're exactly at time, thanks so much, Brian. Really appreciate it.
Thank you.