Matt Welch:

Thank you, Lois, and good morning, everyone. Welcome to Boeing's quarterly earnings call. I am Matt Welch, and with me today are Dave Calhoun, Boeing's President and Chief Executive Officer; and Brian West, Boeing's Executive Vice President and Chief Financial Officer. As a reminder, you can follow today's broadcast and slide presentation at boeing.com. Projections, estimates and goals included in today's discussion involves risks, including those described in our SEC filings and in the forward-looking statement disclaimer at the beginning of the presentation. We also refer you to the additional disclaimers related to the Spirit AeroSystems transaction at the beginning of the presentation as well the disclosures relating to non-GAAP measures in our earnings release and presentation. Now, I will turn the call over to Dave Calhoun.

Brian West:

Thanks, Dave, and good morning, everyone. Before jumping into the financial results, let me take a moment on our planned acquisition of Spirit AeroSystems. On July 1, we announced a definitive agreement to acquire Spirit in an all-stock transaction worth approximately $4.7 billion with a total enterprise value of approximately $8.3 billion. As our materials indicated, we expect the transaction to close mid-2025, subject to the satisfaction of customary closing conditions, including regulatory and Spirit shareholder approvals as well as the sale of Spirit operations related to certain Airbus commercial work packages. This agreement contemplates us acquiring substantially all Boeing related commercial operations primarily consisting of the Wichita, Kansas, Tulsa, Oklahoma and Dallas, Texas facilities as well as other commercial, defense and aftermarket operations that would further augment our capabilities and offerings across the portfolio. Regarding the defense programs, we're committed to working with Spirit, its customers and the DoD to ensure continuity in order to support these critical missions. We continue to believe that this reintegration leverages and builds on our capabilities, support supply chain stability, integrates critical manufacturing and engineering workforces that allows for the ultimate unification of safety and quality management systems. Fully aligning to the same priorities, incentives and -- centered on safety and quality is in the best interest of our customers, the aviation industry and all stakeholders, including the flying public. All of this demonstrates our ongoing commitment to aviation safety, quality and stability. Turning to the next page, I'll cover the total company financial performance for the quarter. Revenue was $16.9 billion, primarily reflecting lower commercial delivery volume. The quarter loss per share was $2.90, reflecting lower commercial delivery volume and losses of $1 billion on fixed price defense development programs, which I'll get into later. Free cash flow was a usage of $4.3 billion in the quarter, which was generally in line with the expectations shared in May. Results impacted by lower commercial deliveries and unfavorable working capital timing. Turning to the next page, I'll cover Boeing Commercial Airplanes. BCA delivered 92 airplanes in the quarter. Revenue was $6 billion, and operating margin was minus -- 11.9%, primarily reflecting lower deliveries and expected higher period costs, including R&D. The backlog in the quarter ended at $437 billion and includes more than 5,400 airplanes. Last week's Farnborough Airshow continue to highlight the robust demand for our product lineup as we announced orders and commitments for over 150 airplanes, including nearly 100 widebodies. Now I'll give more color on the key programs. The 737 program delivered 70 airplanes in the second quarter, including a meaningful step up to 35 in June. July will be more or less in line with June levels despite normal seasonality. On production, we gradually increased during the quarter and still expect to be higher in the second half, as we move to 38 per month by year-end. We've reactivated the third line in our rented factory and monthly production improvement from high single digits at the end of the first quarter to roughly 25 in June and July. As Dave noted, the factory is currently operating within or near the KPI control limits laid out with the FAA as part of the safety and quality plan. The factory is operating with all fully inspected fuselages today and near-term production will continue to be paced by fuselages from Wichita. More broadly on the master schedule, we continue to make adjustments as needed and manage supplier by supplier based on inventory levels. Our objective remains to keep the supply chain paced ahead of final assembly to support stability and minimize traveled work. The quarter ended with approximately 90 737-8s built prior to 2023, the vast majority for customers in China and India. This is down 20 from last quarter's value, and we expect approximately 10 more delivered in the month of July. We still expect to deliver most of these airplanes by year-end as we work towards shutting down the shadow factory. Regarding the -7 and the -10 models, inventory levels remained stable at approximately 35 airplanes and the certification timelines remain unchanged. On the 787, we delivered nine airplanes in the quarter, although the quarter was impacted by lower production, seat delays and other delivery timing items noted previously. We're starting to work through these issues and delivered six airplanes in July. The program produced below five per month in the quarter as expected and still plans to return to five per month by year-end. We ended the quarter with around 35 airplanes of inventory built prior to 2023 that required rework, which continues to progress steadily. We still expect to finish the rework and shut down the shadow factory by year-end with most of these airplanes delivering this year. Finally, on the 777X program, as Dave noted, we took a very important step on the certification timeline earlier this month as the program obtained type inspection authorization and began FAA certification flight testing. We'll continue to follow the lead of the FAA as we progress through the certification process and still expect first delivery in 2025. Inventory in the quarter grew approximately $800 million in line with recent quarterly trends and will continue to grow as we move towards entry into service as we've previously contemplated. Moving on to the next page, Boeing Defense & Space. BDS booked $4 billion in orders during quarter, including capturing an award from the US Air Force for seven MH-139 helicopters and the backlog ended at $59 billion. Revenue was $6 billion, down 2%, driven by fixed price development losses and BDS delivered 28 aircraft in the quarter, including the first CH-47F Block 2 Chinook to the US Army. We took a $1 billion loss on certain fixed-price development contracts in the quarter and operating margin was minus 15.2%. In late May, we indicated that margins would take a step back and be negative due to a couple of things. First, the deliberate slowdown of the Puget Sound factories has impacted the derivative programs, specifically, a $391 million loss on the KC-46A Tanker, as well as margin compression on the profitable P8 program. Second, we've seen additional fixed price development cost pressures, resulting in additional losses on T-7A, VC-25B and commercial crew, primarily related to higher estimated engineering and manufacturing costs and inefficiencies associated with meeting certain technical requirements. Given the fixed price nature of these contracts, we continue to be transparent about impacts as we work to stabilize and mature these programs. While acknowledging these are disappointing results, there's a complicated development programs, and we continue to put milestones behind us and remain focused on retiring risk each quarter and ultimately delivering these mission-critical commitments to our customers. Stepping back, the game plan to get BDS back to high single-digit margins in the medium to long term remains unchanged. The core business remains solid, representing approximately 60% of our revenue and performing in the mid to high single-digit margin range. The demand for these products continue to be very strong, supported by the geopolitical threat environment confronting our nation and our allies. And the 25% of the portfolio primarily comprised of fighter and satellite programs, the quarter again saw improved margin trends as we continue to make important progress including delivering our eight F-15EX aircraft to the US Air Force, which enabled the program to achieve its initial operating capability milestone in July. We still expect to return strong historical performance level as we roll to new contracts with tighter underwriting standards. Overall, the defense portfolio is well positioned for the long term. There's strong demand across the customer base, the products are performing well in the field, and we're confident that our efforts to drive execution and stability will return this business performance levels that our investors will recognize. Moving on to the next page, Boeing Global Services. BGS continued to perform well in the second quarter, delivering very strong results across a globally deployed team that is focused on supporting its customers on both the defense and commercial sides. They received $4 billion in orders and the backlog ended at $19 billion. Revenue was $4.9 billion, up 3%, primarily on higher commercial volume. Operating margin was 17.8%, down slightly compared to last year, but still strong performance. In the quarter, BGS secured an Apache performance-based logistics contract from the US Army and captured FliteDeck Pro service contracts with Hainan Airlines and Ryanair. Importantly, BGS continued to deliver very strong operating margins for the first half of the year, matching the record levels from 2023. It's a terrific franchise that's set up for years to come. The team is focused on profitable, capital-efficient high IP offerings, and we still expect it to grow at solid mid-single-digit revenue levels and throw off mid-teen margins with very high free cash flow conversion. Turning to the next page, I'll cover cash and cash and debt. On cash and marketable securities, we ended the quarter at $12.6 billion, reflecting the $10 billion issuance of new debt in May, partially offset by the use of free cash flow in the quarter. The debt balance increased to $57.9 billion driven by the new debt issuance. We continue to maintain access to $10 billion of revolving credit facilities, all of which remain undrawn. The deliberate actions we're taking demonstrate our commitment to improve safety and quality, and we continue to manage the business with a long-term view. We acknowledge the impact these actions are having on calendar year cash flows. So let me provide some additional context on near-term expectations. While commercial production and deliveries are improving, additional losses in BDS and working capital timing continue to weigh on near-term cash flow. Inventory will remain a near-term headwind as we prioritize supply chain stability to support future rate increases and advanced payments will take time to improve as we stabilize production and improve profitability of deliveries to our customers. Given these near-term working capital pressures, third quarter is expected to be another use of cash. We expect these working capital timing impacts will be -- unwind as deliveries and production stabilize later this year. On the free cash flow outlook for the year, we are now expecting a larger use of cash than previously forecasted. As you know, operating leverage in our business is meaningful. And as we ramp up deliveries, free cash flow will grow. We are deliberately investing today and taking the time necessary to get it right to ensure we're positioned to ramp -- in a more predictable and stable fashion. We remain committed to managing the balance sheet in a prudent manner with two main objectives

Doug Harned:

Good morning. Thank you. I wanted to understand a little bit about the -- so the process, the production process on the 787 and the 737 because you're saying this inventory build, and it appears both from suppliers supplying it 38 a month for the MAX and five to six a month for the 787. On that end, I expect you're having inventory build. And then on the other end, difficulty with seats, so you would have things coming off the line and some of the inventory to China as well. It's difficult to get out of there. Can you talk about how you think of managing this inventory on both ends, given the production process or ramp that you're on right now?

Doug Harned:

If I can just follow up on that. The -- you all have talked about the bottleneck -- chief bottleneck, I believe, being the fuselage deliveries from Spirit. So as you bring that third line on, how does this work? It didn't seem like it was final assembly that was the bottleneck before. So how does that help you with Spirit at a point now where -- is your capacity that is limiting factor?

Dave Calhoun:

The only thing I would add, Doug, is the third line, it also helps us with unforeseen issues, because it gives us flexibility across three lines as opposed to having to close two if we end up the nonconformance somewhere. So we are simply trying to over-capacitize accommodate things that appear and steady our production.

Operator:

Thank you. Our next question is from Peter Arment from Baird. Please go ahead.

Dave Calhoun:

Peter, thanks. Every metric gets better when you slow things down. So yes, I don't want to kid anybody. The step we took to slow things down, it was very deliberate, very straightforward and every metric benefits from that moment. So we've had a step change improvement, traveled work, of course, being the big one. And the way to measure traveled work in my view, I think the view of our production team is when we get a clean fuselage and we move it through less than half the float time it would have taken in its prior state that reduces everything. And the reason is you don't have traveled work, you don't have defects moving down the line, you don't have any of that stuff. So we've been a beneficiary of a step change on that front, and we're now at the stage where we're only getting clean fuselages where, as you know, in the first two quarters, we were managing a mix of the prior regime and what we're getting now. So anyway, that's the big proxy for the way things are going to move forward and are moving forward. You’ll know when we get out of kilt on any one of those metrics. I don't think any of them are going to stop us from the plans that we've announced and our expectations as we approach year-end. Probably the one we'll all just keep our eye on is the traveled work scenario where we cannot allow ourselves to get back into a scenario where we're traveling things too far down the line. And we got a lot of controls in place. So that won't happen.

Operator:

Thank you. Our next question is from Sheila Kahyaoglu from Jefferies. Please go ahead.

Brian West:

Yeah, sure. Thanks, Sheila, for the question. So the working capital drag has been pretty meaningful in the first and second quarter, and it's the inventory as well as the advances as deliveries have been lower. Now the third quarter is going to be a similar working capital drag as it was in the first and second quarter. Inventory will still be a headwind, albeit a smaller one. And the advanced timing will be an additional headwind, which, again, that will gradually improve over time with deliveries. And we're seeing that customers are applying excess advances and lowering advanced payments as they want to see delivery performance improve. So, we've just got to deal with that timing because once the factory moves and we start delivering, all of that will unwind on both the advances and the inventory. But it is going to take us time to do that. Now, in the third quarter, deliveries will be better, but we still have these working capital headwinds. In the fourth quarter, we're going to have stronger deliveries. We're going to have real working capital improvement. And I'd also mentioned that we're going to have tanker 11 that we expect. So, the -- these cash flows can move fairly meaningful quarter-to-quarter and it's all predicated on our ability to deliver and get the factory stable and getting it improved. So that's the way we're thinking about the back half on cash.

Brian West:

So, we've always said 10, but at any given moment, if that kind of moves a little bit given what's in front of us, we can be comfortable. I think there's a broader question around we're constantly looking at liquidity. You saw that with what we did in May. You saw that in how we treated the Spirit transaction. So, right now, we're comfortable with where we're at and how we get to the end of the year.

Operator:

Thank you. The next question is from of Myles Walton from with Wolfe Research. Please go ahead.

Brian West:

So, both, to answer your question. We do have the excesses that people are applying as well as people are withholding the PDPs until they get that delivery structure -- delivery schedule more stable. So, it's both. I mean, what you saw in the quarter that we had a pullback of about $1 billion on the advance balance. Those two things are both happening in that balance, and we expect that in the second half to continue. But when we start to deliver with predictability, all that will begin to unwind. So, this really is timing. And it's timing over quarters is our best guess, and it's all, again, predicated on our ability to get deliveries in a different position.

Myles Walton:

And on advances on 777X to offset that $800 million quarter inventory growth, is that a material offset to the $800 million? Or is it $800 million more or less the net 777X performance that we're seeing?

Myles Walton:

Okay. Thank you.

David Strauss:

Morning. Thanks for taking the question. Brian, I know it's difficult to put a fine point on the cash burn. But I guess for the full year, are you looking at a number closer to a $5 billion order burn or a $10 billion order burn? That's the first question. And then, you've obviously said you're prioritizing your investment grade rating. To the extent that you need more funding, do expect the rating agency to allow you to issue debt again in key 5G? Or are you potentially thinking about having you to do an equity offering? Thank you.

David Strauss:

Thanks very much.

Jason Gursky:

Good morning everyone. I just want to go back to the 777 for a minute. And Brian maybe ask you to talk a little bit about the expected future burn on that program from a cash flow perspective in the quarters leading up to certification and initial delivery. And then -- and I know a lot of that's being driven by inventory, of course. So maybe as well, talk about what the inventory burn looks like on back side of that and kind of what you are expecting at this point from production and we get out in that '25, '26 time frame and kind of what you're thinking on deliveries out in that '26 time frame, given the backlog, assuming that you get the certification done there in 2025 and first deliveries get started? Thanks.

Operator:

Thank you. And our next question is from Kristine Liwag from Morgan Stanley. Please go ahead.

Dave Calhoun :

Well, we're definitely not planning on a strike for starters. I can't really -- it's too early to call out a gap analysis with respect to the puts and takes, because we're too early in the process. And I like the framework. I like investments that we want to make with respect to training and development of people. We know that ASKs will be big. We know wage ASKs will be big. We're not afraid to treat our employees well in this process. So we're just going to work as hard as we can, not to have a strike. And anyway, I -- this will be in Kelly and Stephanie's backyard by the time we get to that negotiation. But as you know, as well I do until the last week is in play, don't know much. So I'll just leave it at that and try not to predict. Other than to tell you, we have an expressed intent to not have strike.

Operator:

And thank you. The next question is from Cai von Rumohr from TD Cowen. Please go ahead.

Brian West:

So in terms of your question around the 737 rate ramps, keep in mind, beginning part of this year, we were very, very low production, like single digit. And now we're getting to the point in June, July where we're kind of mid-20s. And August will likely be an improvement ahead of that. But then we're going to have a nice steady ramp through the back half of the year, again, predicated on a successful Line 3 being brought to bear and also the China resumption. So everything we see, we've got the labor, we've got the inventory, we've got the fuselages, it's all lined up for us to continue to improve our delivery ramp. And that's on us to go execute it. So we feel good about the progress we've made, and we've got proof points that says, a real ability to hit our 38 per month as we exit the year. In terms of the discussion of the supply chain, they're all unique. It's one-by-one. We're very careful to make sure that the way we're trying to protect stability in our own factory, we're trying to protect stability across the supply chain. And we do make certain moves here and there. Probably Spirit is the best example. And we have to do that that so when we move through the course of this year and going forward, we do it in a very stable, predictable way with the supply chain that's right there with us. Nothing that we see gives us any pause or concern. We've got all the assets and resources. We just have to start working our way through and delivering these airplanes for our customers.

Brian West:

There's not really a material change, Cai. Here and there, there might be some differences, but nothing material and that's not contemplated in our forward look.

Operator:

And our next question is from Seth Seifman from JPMorgan. Please go ahead.

Brian West:

So I'd be careful not to speak for Spirit too much. On the other hand, they're performing well. We expect them to continue to perform well, and we've got confidence that we're going to get clean fuselages that helps coincide with our delivery schedule. So we feel pretty good about where they sit and their continued performance. So nothing there gives us any concern at the moment. And in terms of investing, we look forward to closing this acquisition. We look forward towards bringing them into the Boeing world. And we will not be shy or bashful with any investments that are needed in order for long-term stability. We feel really good about what is in front of us on that front, and we can't wait to close.

Operator:

Our next question is from Noah Poponak from Goldman Sachs. Please go ahead.

Dave Calhoun:

Well, I'll take a crack, and I'm not going to divulge anything that I'm not perfectly aware of. The Board made this decision. Over the last nine months, when I think about the number of people they've called around the industry, the supply side, the buy side, side, the regulatory pretty remarkable, thorough discussions. And at the end of the day, a couple of names surfaced and they landed on Kelly and I could not be happier with the call because I know Kelly. Kelly. I've been around He's a seasoned operator he's got experience. He knows what we do for a living and he'll bring that experience immediately to bear. So I wasn't really in the decision-making process, so I don't want to kid you about that. On the other hand, where it ended up is, in my view, a very, very strong place. And then with respect to Kelly, Kelly was quite informed about everything going on at Boeing, leadership team, et cetera. And anyway, I don't think he's coming in with a notion he want to change a lot of folks. And my guess is he's going to put his arms around Stephanie and the rest of the team in a big way and just try to support their work. He knows full well that we're in a recovery mode. And he knows full well we got to complete the recovery mode, and we got to get this stable and move forward. So that's me talking. And anyway, I don't think Brian can add much to this. But don't think this is intended to be a large leadership overhaul.

Brian West:

It's not a number that we disclose. It's not immaterial. The good news is, is that you see it right there in the cash flow statement total. That's a big driver, and the good news is that this is timing. This will unwind as we deliver airplanes for our customers, which we look forward to being able to do more predictably.

Matt Welch:

Lois, we have time for one final question.

Ken Herbert:

Hey, good morning, Dave and Brian. Thanks for squeezing me in. I just wondered, Dave, maybe if you can provide a little bit more color on certification timing on the -7 and -10. I know it's now 2025 you're confident in the deicing certification, but can you give any more granularity on how we think about that timing and some of the next milestones for those two particular variants on MAX?

Ken Herbert:

So first half 2025 sounds realistic?

Matt Welch:

All right. Lois, everybody, that concludes our call. Thank you for joining.

Employee engagement has been energizing for all. Actions are being taken across all of our factories, and areas of focus include:

training, particularly on the job, taking advantage of our slowdown and adding hundreds of hours of training for each of our manufacturing employees; tooling, more of it and improve maintenance; work instructions, simplify, simplify, simplify; compliance checks, discipline; traveled work controls, don't travel work; incentive structures; employee listening; and maybe above all, culture improvement.

Myles Walton:

You gave color on the April MAX deliveries similar to February, but I'm really more interested in the production output, how it's going on the line, where you are relative to where you were when you started to give the no traveled work policy, how that's improving or not? And what specific metrics you're looking at to allow you to go higher over the next 6 months?

Douglas Harned:

When you look at production on the 737, when you talk about going to $10 billion in free cash flow maybe by late -- by the end of 2026 or even 2027, this seems to be very much contingent on getting to this 50 a month rate. But when you look at that process, if I go back even pre-grounding for the MAX, Spirit had never successfully done a rate break to 50 a month before.

David Calhoun:

We do. Spirit's committed to it. I think the acquisition of Spirit will factor in significantly into that prospect. Clean fuselages in Spirit and in Wichita and fix on all those nonconformances will reduce their cycle and improve their output. So there's a lot of things that contribute to it, Doug. If we get ourselves to 38, which is our first objective, and we do it in a steady fashion moving up another 12 in my view, is doable in the window that we're talking about.

Operator:

The next question is from Cai von Rumohr from TD Cowen.

Brian West:

Cai, I'll take that one. Why don't we talk about in the context of 737 overall margins? The program booked about 300 basis points of impact in the quarter. And that was primarily driven by the delayed rate ramp that you're describing as well as mixing in more 8s and 9s for 10s in the near term so that we can support our customers in their fleet planning.

Seth Seifman:

Brian, you talked a little bit about the cash balance and liquidity. I don't know if this is necessarily the right way to think about it, but I feel like there's this conventional wisdom out there that Boeing should have roughly $10 billion of cash on the balance sheet. Maybe that can dip a little bit lower intra-year as we see now.

Brian West:

Thanks, Seth. First and foremost, I remind everyone that we do have $17 billion of liquidity today, comprised of the cash on hand as well as our credit lines. What we're focused on is a first half cash usage that is resulting from all of the actions we're taking to stabilize both the factory and the supply chain to set ourselves up for success as we move to the second half and into 2025.

Sheila Kahyaoglu:

Can we talk about the 737 rate again? How much of that is self-inflicted versus the FAA processes that are in place? And when we think about the 90-day time line that comes to a head with the IAM negotiations over the summertime, I would assume. So how do we think about the IAM progressing as well? And how much was incorporated into the $10 billion free cash flow target?

Sheila Kahyaoglu:

Sorry about that.

David Calhoun:

Oh, yes. Yes, yes.

Noah Poponak:

I guess this is sort of asked and you've alluded to pieces of the answer to this, but I'm just going to ask it anyway because it seems to be the most important thing, which is just how long does it take to do everything you need to do on product quality? And how much of it needs to be done before you can increase production again versus how much of it can be done as you're increasing production again?

Noah Poponak:

Okay. Have you guys thought about framing and disclosing some version of that time line of work maybe in big buckets or categories that you would provide to the investment community? Because it feels like everybody is guessing and has no visibility.

David Calhoun:

I think that's fair. Noah, the most important one, the essential one and that we will have to report as we close the second quarter is going to be the number of clean fuselages that we're receiving from Wichita and the prognosis for that going forward. So that will be the most essential part of the equation I think you're trying to solve.

Operator:

Our next question is from Kristine Liwag from Morgan Stanley.

David Calhoun:

Yes. I'm sure Brian is going to answer this one, but let me start. We have a rate increase plan. And as everyone knows, it gets us up to 50 here as we get into that '25, '26 window. So our job now, given the slowdown here in these 6 months and then sort of the pushout of those rate increases is to make sure we have all the inventory we need to satisfy that 50 number and have the buffers where they need to be to make sure that the supply chain can demonstrate the capacity to meet those numbers.

Brian West:

Only thing I would add is that tactically, we have adjusted the master schedule at a supplier-by-supplier basis. It's all out there. They know it. We will continue to pace final assembly in line with that master schedule so that we don't sacrifice stability because what we're talking about is a very important near-term investment that we have to stay laser-like focused on so that we don't take a step back. And that's what we're focused on. And we believe that we can handle the cash flow fluctuations as we get through the first half into the second half and position ourselves for 2025.

Scott Deuschle:

Dave, could you further characterize what you're seeing with respect to supply chain performance on the 87? And where the constraints are that are driving you to drop back below 5 a month? And then I'm curious if there's been any change to the plan on the 777X ramp.

Scott Deuschle:

Got it. And then, Brian, can you get an advance on the large P-8 contract that you won this quarter?

David Strauss:

Just wanted to clarify on your comments around the balance sheet and liquidity. Is equity -- considering equity issuance, is that still off the table as you think about the balance sheet and potentially funding Spirit?

David Strauss:

Okay. And a quick follow-up there as it relates to Spirit. How engaged is Airbus in this process at this point and thinking about potentially taking back their own work? And does the deal need to wait until you get full clarity on what might happen with that Airbus business? Or do you think you can move forward without full clarity there?

Operator:

Our next question is from Peter Arment from Baird.

David Calhoun:

Yes. I always -- I appreciate you're asking that, Peter. First of all, the process we have in place is a good one. Steve Mollenkopf in the Chair role, Bob Bradway in the governance role. The Board at large, they're going to look at the market every way they can. They know I have an internal candidate that I think the world of. They will balance sort of their perspective and get to the right conclusion with my full support. I do not expect that to happen in the next month or 2. So let's all be clear about that.

Operator:

And that question will come from the line of Jason Gursky from Citigroup.

David Calhoun:

Go Jason. Thank you.

Matt Welch:

And that concludes our call today. Thank you, everybody, for joining.

Matt Welch:

Thank you and good morning everyone. Welcome to Boeing's quarterly earnings call. I am Matt Welch and with me today are Dave Calhoun, Boeing's President and Chief Executive Officer; and Brian West, Boeing's Executive Vice President and Chief Financial Officer. As a reminder, you can follow today's broadcast and slide presentation at boeing.com. As always, detailed financial information is included in today's press release. Furthermore, projections, estimates and goals included in today's discussion involve risks, including those described in our SEC filings and in the forward-looking statement disclaimer at the end of the web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of certain non-GAAP measures. Now, I will turn the call over to Dave Calhoun.

Brian West:

Thanks Dave and good morning everyone. Let's start off with the total company financial performance for the quarter. Revenue was $22 billion. That's up 10% year-over-year. Growth was driven by higher commercial volume and favorable mix. The core loss per share was $0.47, better than last year primarily on improved commercial volume, better mix and lower abnormal costs. They were offset by lower defense margins and higher period expenses, including R&D, which we expected. Free cash flow was $3 billion in the quarter, in line with the prior year and up sequentially from the third quarter primarily due to improved commercial deliveries and strong order activity, which show favorable advanced payment timing, some of which was anticipated in the first quarter of 2024. Turning to the next page, I'll cover Boeing Commercial Airplanes. BCA booked 611 net orders in the quarter with 411 737s, including an order with Akasa, 98 777Xs largely an Emirates order and 83 787s. We have over 5,600 airplanes in backlog valued at $441 billion. BCA delivered 157 airplanes in the quarter and revenue was $10.5 billion. That's up 13% driven by higher widebody deliveries and favorable mix. Operating margin was just positive at 0.4%, driven by returning to normal 737 delivery levels in the quarter, improved mix as well as lower abnormal costs associated with getting to five per month on the 87 and resuming production on the 777X. Now, I'll give more color on the key programs. On the 737, we delivered 110 airplanes in the quarter and 45 in December. The program also began FAA certification flight testing on the 737-10 in December. For the year, we delivered 396 airplanes, on the upper end of the revised guidance range we provided in October. Per the FAA announcement, we'll maintain production at 38 per month and work transparently with the FAA to complete all requirements for future increases. At the same time, we'll continue to prioritize the master schedule to avoid disruption in our supply chain. On the 737-9, we're actively supporting our customers' return to service activities. And as of today, the majority are back flying. In our factory, we have 10 -9s in production, all of which will undergo the FAA group inspection process prior to delivery. Spirit has also adopted this inspection routine in its factory. The quarter ended with about 200 MAX airplanes in inventory. It's important to think about this inventory in three buckets. First, there are 140 737-8s built prior to 2023. The vast majority are for customers in China and India. We still expect to deliver most of these airplanes by year-end as we work towards shutting down the shadow factory. In the second bucket, there are around 25 airplanes produced in 2023 that are still in WIP, given the disruptions in the second half of last year. And we expect these to deliver in 2024. And lastly, there are approximately 35 -7 to -10s that we will deliver once those airplanes are certified, the timing of which will be determined by the FAA. Moving on to the 787. We delivered 23 airplanes in the quarter, including 11 in December. For the year, we delivered 73 airplanes, within the guidance range we originally outlined for 2023. The program successfully transitioned production to five per month in the quarter and still plan to steadily work our way to 10 per month in the 2025, 2026 timeframe. We ended the quarter with approximately 60 airplanes in inventory, about 50 of which require rework, which continues to progress steadily. We still expect to deliver most of these airplanes by year-end as we finish the rework and shut down the shadow factory. We booked $77 million of abnormal costs in the quarter and have approximately $300 million left to go that will wind down by year-end, in line with our expectations. On the 777X, we resumed production in the quarter and continue to progress along the program timeline, which remains unchanged. During the quarter, the Emirates order for 90 777Xs brought the program backlog to more than 400 airplanes and also extended the accounting quantity. We continue to follow the lead of the FAA as we progress through the certification process, including working to obtain approval from the FAA to begin certification flight testing. We booked $71 million of abnormal costs in the quarter, which is now fully behind us after resuming production, in line with our expectations. Moving to the next page, Boeing Defense and Space. BDS booked $8 billion in orders during the quarter, including the Lot 10 Award from the US Air Force for 15 KC-46A Tankers. The backlog is now at $59 billion. Revenue was $6.7 billion, up 9% on the tanker award and improved volume and BDS delivered 52 aircraft and two satellites in the quarter. Operating margin was minus 1.5% in the quarter, a sequential improvement from 3Q, but still we have more work to do. 4Q results were impacted by cost true-ups on three fixed-price development programs totaling $139 million as well as unfavorable performance and mix on other programs. Our game plan to get BDS back to high single-digit margins by the 2025-2026 timeframe remains unchanged. Our core business remains solid, representing 60% of our revenue and performing in the mid to high single-digit margin range. The demand for these products is very strong and we need to execute, compete and grow these offerings. On the 25% of the portfolio primarily comprised of fighter and satellite programs, operational performance stabilized as we exit the year. And as a result, the fourth quarter saw improved margin trends, although still negative. We still expect to return to the strong historical performance levels as we roll out new contracts with tighter underwriting disciplines as we move into the 2025-2026 timeframe. Lastly, we have our fixed-price development programs that represent the remaining 15% of revenue. Despite the relatively modest cost trips [ph] in the quarter, we continue to focus on maturing these programs and retiring risks quarter in, quarter out. And we made some good progress in the fourth quarter. In addition to capturing the tanker award from the US Air Force, the program delivered nine aircraft in the fourth quarter, continuing to build positive momentum in spite of the supply-related disruptions to the factory that we faced earlier last year. And on the T-7A, the first Red Hawk arrived at Edwards Air Force Base in November, formally starting the Air Force development flight test campaign for the aircraft. Overall, the defense portfolio is poised to improve. The strong demand across the customer base, the products are performing in the field, and we're confident that our efforts to drive execution and stability will return this business to performance levels that our investors recognize. Moving now to the next page, Boeing Global Services. BGS had another strong quarter. They received $6 billion in orders and the backlog is now at $20 billion. Revenue was $4.8 billion, up 6% primarily on favorable commercial volume and mix. Operating margins were a very strong 17.4%, an expansion of 350 basis points versus last year as both our commercial and government businesses were delivering double-digit margins. In the quarter, BGS opened a parts distribution center in India and received a follow-on contract to provide sustainment for the C-17. Turning now to the next page, I'll cover cash and debt. On cash and marketable securities, we ended the quarter at $16 billion. On debt, the balance remained flat at $52.3 billion and over the next few days, we'll pay down $4 billion of the $5 billion of maturities coming due this year from our available cash on hand. We continue to maintain access to $10 billion of revolving credit facilities, all of which remain undrawn. Our liquidity position remains strong. Our investment-grade credit rating continues to be a priority. And we're developing -- deploying capital in line with the portage [ph] we've shared previously

Operator:

Thank you. [Operator Instructions] And our first question is from the line of Peter Arment. Please go ahead.

Dave Calhoun:

Hi Peter.

Dave Calhoun:

Yes, Peter, I appreciate that. By the way, one stat which I was just handed, which I track all the time is the number of our -9s that have been returned into service. We're at 129, and that is progressing at a very quick rate based on the inspection protocols that are FAA and we all agreed with. I am very proud of the progress that we've made, and I feel great about it, of course, with one exception, and it's too big an exception, which is the escape. I also know that as the NTSB investigation narrows and concludes, and I do believe that will happen in relatively short order, all the learning that can be extracted from it and all the learning that can be extracted from all those inspections of all those airplanes flying day in and day out, that will inform us on what improvements we can make on our quality systems. First and foremost, we will run the door plug literally from the second a door is received at Wichita through their lines, all 12 positions, through our 11 positions here. Inspections will be added at every turn. It is on lockdown, and we've had help from our FAA. We've had help from our customers, et cetera. So, that's sort of step two. The next one is how do you take all of that learning and apply it through all the supply chain lines. And we have some medium- and long-term efforts just beginning to make sure that we do that. My confidence comes from quality systems always can get better. And when you have a moment like this, you take everything. You literally look at everything, and we're all keenly aware of everything. So, we're going to run that play as hard as we can, and we're going to take the time to do it and the FAA -- I'm sort of glad they called out a pause because that's a good excuse to just take our time, do it right and I wish I had called that out in the first day, but maybe I would have. We've been good at taking pauses. I've probably taken more pauses in the last three years, and I'll apologize to all our investors now, than have been taken in 10 years before it. But this is what we do, and it's how we get better. And I also say, Peter, as you know, one of the nagging issues that we've been facing have been shortages here and there, where we have to pause our line. Buffer inventory is not quite as robust as we'd like them to be based on supply chain weaknesses. We will run our master schedule in accordance with the plans that preceded this. And each and every part we receive and all the buffer inventories that we get will stabilize production here on out, less traveled work in our line, all things good come from that. So, I feel really good about it. And I also have confidence in our airplanes that will be certified. I like the respect that the FAA and Boeing are showing one another. Again, maybe too long a diatribe, but there are lots of reasons for why I'm feeling good. And in some ways, this moment will accelerate recovery, not delay it.

Dave Calhoun:

Yes. So, Peter, as we've talked many, many, many times, we have stood by our customers in China day in, day out. They have been flying MAXs now for the better part of the year. They are performing extremely well. And we'd always hoped and expected they would begin to take deliveries. And I think everybody has noticed that those deliveries have started. So, we are just going to stay diligent, stay with each and every one of them and make sure our Chinese customers get what they've ordered and paid for.

Operator:

Thank you. The next question is from the line of Sheila Kahyaoglu from Jefferies. Please go ahead.

Dave Calhoun:

Sheila, thanks for that question. I'm going to just give a little bit of a moment on why we made that decision on the time-limited exemption. I'll let Brian help quantify it. I visited Capitol Hill for a lot of reasons. My biggest one is to own the problem, be transparent and convey that to all of our workforce so that they know we're willing to do that. And then we can all be honest, clear with each other every step of the way in this process and so I'm glad I made the visit. I was not expecting when I met with Senator Duckworth, the conversation that we had. You know she's a pilot and a decorated pilot. She listened to everything I had to say. We didn't have a debate about the safety of the 7 and the 7 in its certification work was moving along at a pretty steady pace. She had a way different argument for me, and it was right. She said, you want to introduce this new airplane, a derivative, yes, but a new airplane. And nine months from now, you'll have an engineered solution to it, to this issue. And why is that the right call? And in my view, it was a sound, principled position to take. I went home for the weekend. I talked to our customer, and you know who that is, unbelievably constructive, and this is the right thing to do for aviation. So, that is really how it happened, and it was that simple. But the passion and the argument that Senator Duckworth presented to me, I'm so glad I heard. Anyway, that's what happened. The 7 will have to move until we get that engineered fix in place. And then I'll let Brian sort of quantify the, okay, now what.

Sheila Kahyaoglu:

Okay. Thank you.

Myles Walton:

Thanks. Brian, you alluded to 2024 being another -- I think the words were steady year of free cash flow. I think in sort of follow-on descriptions, you gave a lot of uppers to what's going to happen year-on-year. So, is steady meaning growth in free cash flow and/or can you give some of the offsets to the uppers? Thanks.

Myles Walton:

Okay. Thank you.

Seth Seifman:

Hey, thanks very much and good morning.

Seth Seifman:

Brian, you talked a couple of times about the shadow factories and the path towards winding them down over the next year and change. Is there any way to quantify how you think about what the cost of the shadow factories was in 2023 or what you expect it to be in 2024?

Dave Calhoun:

Maybe I'll just add and refresh everybody's memory because we've talked about it a couple of times. In our shadow factories, we put more hours into those airplanes than we do to produce it in the first place. So, anyway, that's a metric I know everybody understands.

Brian West:

Right now, we plan for, obviously, not to be quite what it was in 2023. That's factored into my comments. The good news is, is that we still have a pretty robust demand environment. Our commercial teams are working hard to chase every next order. So, we're not counting on a big one, but we know that our teams can go win campaigns.

Operator:

Thank you. The next question is from Jason Gursky from Citi. Please go ahead.

Brian West:

Sure, I'll take the first one. Yes, we've cycled to 38 per month. We said that. Keep in mind, it always takes time for that to equate it to deliveries, but we're not firing blanks. On your question on the 60% of the portfolio on BDS, look, they've consistently quarter in, quarter out has still been able to deliver some very good performance on some products that the customers need. And you know the laundry list that we talked about, things like Apache and all that sort of stuff, missiles and weapons, things that are needed right now in this environment that we live in. And they're performing well and they're in that mid to high single-digit margin rate. And when we step back, if we think about going from where BDS is with margins, two things have to happen. That 25% that's wrapped around fighters and satellites, that has to get better. We expect it to get better and look a lot like it used to. So, then you've got 85% of your portfolio clicking at stable, consistent mid- to high single-digit rates. And we know we can get there. And then you've got this 15% of the portfolio on fixed-price development programs that we expect to be less of a drag as we retire risk over time. And we expect that to play out.

Operator:

Thank you. Your next question is from Doug Harned from Bernstein. Please go ahead.

Dave Calhoun:

Hi Doug.

Dave Calhoun:

Doug, I'll just start by saying I think it's manageable. We will have this -- if there's a delay in any way, we're not going to know at the last second. We're going to know with a considerable timeframe in my view. And by the way, right now, the status on the 7 and the 10 was progressing reasonably well. I don't believe the FAA has taken anybody off the course, and we haven't taken anybody off the course and so they are making real progress. And I think we were almost close to the finish line had we not pulled the time-limited exemption. So, I don't -- again, I'm never going to suggest a date or anything like that for the FAA. But they're working diligently on it, and they know how to separate these two -- these -- the issue we're wrestling within our factory from the cert efforts. And I believe we're going to have plenty of time, and we'll be able to manage our product mix reasonably well. There won't be anything dramatic by way of change. If there are some change from quarter-to-quarter, first or second, you'll know it pretty early, and so will we and I think it's quite manageable.

Dave Calhoun:

Yes. Although I will say, if this pause goes on for a little while, I like -- I don't want to pause my customers. But the pause is going to be helpful for us in so many ways in the sense that, that supply chain, they're going to keep running according to that master schedule. It's good for us if some buffers get developed and some of the more stressed suppliers get ahead of the game. So there is important progress that will get made despite this momentary pause.

Dave Calhoun:

Thanks Doug.

Ron Epstein:

Hey, good morning. How are you? If I may, I got a two-part question if that's okay. The first one, if you guys could walk through 787 a little bit. You mentioned the rate -- what's going on in that line, that sort of thing. We get questions about that. And then I'll come back with the second part in a second.

Ron Epstein:

Yes, that's been doing great. And then maybe the second question, this one is a little more difficult. The -- I'm still trying to get my head around how we got here. Meaning if you go back to the beginning of the MAX issue, wasn't the 737 line like the most scrutinized production line in the world? So, what happened to get to where we got today? I understand that revamping the quality system and all that is all great news. It's a positive move forward. But why did that have to happen now? And I just don't understand that.

Ron Epstein:

Okay.

Cai von Rumohr:

Yes. Thanks so much. So, now that you've waived the exemption on the engine anti-icing and you're designing the new system, you said it would take about a year. Have you accelerated that at all? And could you accelerate it more because my assumption is that is going to be the long pole in the tent in terms of when you -- when the FAA can certify the MAX 7 and 10?

Cai von Rumohr:

Terrific. Thank you. And then another quick one. With the supply chain running at the master schedule but you're delivering not quite as many, should we think about a fairly large build in the inventory account here in the next couple of quarters until you get beyond that?

Cai von Rumohr:

Thank you.

Operator:

Thank you. And that question comes from Noah Poponak from Goldman Sachs. Please go ahead.

Dave Calhoun:

Hey Noah.

Noah Poponak:

Might go over one if I'm last. But Brian, recognizing that there's some limitation here in how you can discuss it, but maybe just trying to talk out MAX units this year with assumptions of not breaking to higher rates. You made it a point to say you're at 38. I know that rate final assembly, where the entire supply chain is, is always a different number. But if I just simply said 31 for six months and 38 for six months, that's in the low 400s and then you unwind five to 10 of inventory a month. I can kind of get somewhere near 500 or just decent growth from 2023. Is that just a reasonable starting point as we wait to learn more from the FAA?

Noah Poponak:

Yes, fair enough. Fair enough. Are you willing and able to speak to just updating what the cap is these days on the monthly inventory unwind and how China plays into that?

Noah Poponak:

Okay. And is China officially fully 100% taking deliveries? We see it in the press. We see the reading of the tail number of websites. But can you just declare that, that's just fully officially on at this point?

Noah Poponak:

Okay. And then, Brian, just one more, defense. The margin is still not where you want it but better sequentially. Any framework you can provide around how that progresses through 2024? And what was the final defense cash burn in the 2023 cash, so we can think about where -- what to work off of as we go into 2024.

Noah Poponak:

Right. okay.

Noah Poponak:

We got in and we got them all in. got the rest in. Thanks so much for the time. I appreciate it.

Matt Welch:

Thanks everybody.

Matt Welch:

Thank you and good morning. Welcome to Boeing's quarterly earnings call. I am Matt Welch, and with me today are Dave Calhoun, Boeing's President and Chief Executive Officer; and Brian West, Boeing's Executive Vice President and Chief Financial Officer. As a reminder, you can follow today's broadcast and slide presentation at boeing.com. As always, detailed financial information is included in today's press release. Furthermore, projections, estimates and goals included in today's discussion involve risks, including those described in our SEC filings and in the forward-looking statement disclaimer at the end of the web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of certain non-GAAP measures. Now I will turn the call over to Dave Calhoun.

Brian West:

Thanks, Dave, and good morning, everyone. Let's go to the next slide and start with total company financial performance. Third quarter revenue was $18.1 billion. That's up 13% year-over-year. Growth was driven by higher commercial volume, primarily on higher 787 deliveries. Core operating margin in the quarter was minus 6%, and the core loss per share was $3.26. Margins and EPS were negatively impacted by unfavorable defense performance, which I'll cover in a moment; lower 737 deliveries that were in line with expectations set last month; and expected abnormal costs and period expenses. Free cash flow was a usage of $310 million in the quarter. This reflects the lower 737 deliveries and in line with our expectations. With that, I'll turn to the next page and cover Boeing Commercial Airplanes. BCA booked 398 net orders in the quarter, including 150 MAX-10s for Ryanair, 50 87s for United and 39 87s for Saudi Arabian Airlines. BCA now has over 5,100 airplanes in the backlog valued at $392 billion. BCA delivered 105 airplanes in the quarter, and revenue was $7.9 billion. That's up 25% year-over-year driven by the higher 787 deliveries. Operating margin was minus 8.6%. We saw the impact of the lower 737 deliveries as well as expected abnormal costs and period expenses, including higher R&D spending primarily on the 777X investment. Now I'll give a little more color on the key programs. On 737, we delivered 70 airplanes in the quarter, reflecting the impact of the recent supplier fuselage nonconformance. Since our early September update, additional areas of the aft pressure bulkhead were identified that require further inspection and rework, which you likely read about. This additional scope impacts units that had already gone through the initial rework and will take us more time to stabilize production and deliveries. We founded the issue, understand the rework steps required and booked a nonmaterial financial impact in the quarter. Considering these latest facts, we expect October deliveries to be in line with September and now expect to deliver between 375 and 400 airplanes for the year. Performance ultimately will be dictated by the pace of a fuselage recovery. The quarter ended with approximately 250 MAX airplanes in inventory, 85 of which are being held for customers in China. We still expect most of the MAX inventory aircraft to be delivered by the end of 2024 but more are likely to slip into 2025 tied to the fuselage recovery. To support stability, suppliers are continuing with planned rate increases and we're selectively managing inventory levels on certain parts where prudent. We expect to complete the 737 transition to 38 per month by year-end, and we're maintaining plans to increase to 50 per month in the 2025, 2026 time frame. On the 787 program, we had 19 deliveries in the quarter and 50 year-to-date. We still expect 70 to 80 deliveries this year. We started transitioning production to five per month in October and still plan to reach 10 per month in the 2025, 2026 time frame. We ended the quarter with 75 airplanes in inventory. Rework is progressing nicely, and we still expect most to be delivered by the end of 2024. We booked $244 million of abnormal costs, in line with expectations. The total estimate is now $3 billion, up a bit, and we still expect to be largely done by year-end. Moving to the 777X program. Efforts are ongoing. The program timeline is unchanged, and we plan to resume production later this year. We booked $180 million of abnormal costs in the quarter, in line with expectations. The total estimate is unchanged at $1 billion, and we expect to be done this quarter. Importantly, as Dave mentioned, we recently reached an agreement with Spirit on commercial terms associated with the 737 and 787 programs. We believe this agreement is a win-win for both companies and directly promotes our goal to drive stability and support our airline customers. Moving on to the next page, Boeing Defense and Space. BDS booked $6 billion in orders during the quarter, and the backlog now stands at $58 billion. Revenue was $5.5 billion, essentially flat year-over-year, and we delivered 28 aircraft. Operating margin was minus 16.9% in the quarter. In early September, we indicated that margins would be around minus 9%, the driver being a $482 million charge on the VC-25B fixed price development program due to higher estimated manufacturing costs related to engineering changes, labor instability, and the resolution of supplier negotiations. As we closed the books at quarter end, we saw another 8 points of margin erosion driven by first a $315 million loss tied to customer considerations and higher estimated costs to deliver a highly innovative satellite constellation contract that we signed several years ago. And second, we had smaller, less material cost pressures across a couple programs totaling $136 million primarily driven by the MQ-25program. These are disappointing results in the quarter and year-to-date. This performance is below our expectations, and we acknowledge that we aren’t as far along in this recovery as we expected to be at this stage. I’d like to point out that the team is executing a game plan to get BDS back to the high-single digit margins by the 2025, 2026 time frame. As you can see on the right hand side of the slide, we’re driving lean manufacturing, program management rigor and cost productivity consistently across the division. We have invested in new training programs to accelerate performance on the factory floor, and we’ve deployed resources at our suppliers to support their recovery. Perhaps most importantly, we instituted much tighter underwriting standards. As you know, part of the challenge we’re dealing with are legacy contracts that we need to get out from under. Rest assured, we haven’t signed any fixed price development contracts nor intend to. These moves are all fundamental to accelerating the recovery by the 2025, 2026 time frame. We have detailed metrics and milestones to evaluate our performance and progress across the three areas that we’ve previously highlighted. First, we have a solid core business representing about 60% of our revenue that performs in the mid to high-single digit margin range. The demand for these products is strong. In particular, volume for our missile and weapons products as well as the Apache are very robust given the current threat environment, and we need to keep executing, competing and growing these offerings. Then we have the 25% of the portfolio representing specific fighter and satellite programs that have negatively impacted margins the past several quarters. In these areas, we took on fixed price production contracts in a pre-pandemic environment with real technical innovation that we’re working our way through. We fully expect to see recovery in these areas as we improve execution, deliver next generation capabilities, and roll into new contracts with stronger underwriting disciplines that more accurately reflect the prevailing economic conditions. We expect to return to the strong performance levels that we’ve demonstrated historically on these programs as we move into the 2025, 2026 time frame. Lastly, we have our large fixed price development programs that represent the remaining 15% of the portfolio, and we continue to be focused on maturing and retiring these risks. Specifically, on the KC-46A program, we’re stabilizing the production system. We’ve seen signs of progress and improved productivity, and as of this month, we have delivered 77 tankers to the customer. For the VC-25B, we’re now maturing through the build process, and the key milestones ahead are power on and first flight, both of which will essentially be behind us as we move through the 2025, 2026 time frame and represent a significant derisking of the program. For commercial crew, while it has been a long road, we’re preparing to execute a successful crewed flight test next year and then fulfill operational launch commitments, all of which will be completed as we exit 2025, 2026. On T-7A, we just delivered the first aircraft to the Air Force this quarter and have begun critical phases of the flight test program. On MQ-25, we’ll get through key build and flight test milestones and transition out of the development phase as we move through the 2025, 2026 time frame. We remain very confident in the T-7A and MQ-25 investments that will deliver innovative performance to the customer with a strong long-term demand profile. So for BDS, this recovery is challenging at the moment, but we believe the actions we’re taking will begin to gain traction and then accelerate. Fast forward to that 2025, 2026 time frame, fixed price development contracts will be substantially derisked. We’ll have a healthy order book underwritten with much better economics and underwriting disciplines, and a resilient employee base and supply chain that’s executing at a much higher level. Moving on to the next slide Boeing Global Services. BGS had another strong quarter. They received $5 billion in orders during the quarter, and the backlog sits at $18 billion. Revenue was $4.8 billion, up 9% year-over-year, primarily on favorable commercial volume and mix. Operating margins were a strong 16.3% in line with our expectations. Importantly, our commercial and government businesses continued to deliver double-digit margins. With that, we’ll turn to the next page and cover cash and debt. On cash marketable securities, we ended the quarter at $13.4 billion, and on debt, the balance remained flat at $52.3 billion. We had access to $10 billion of revolving credit facilities at the end of the quarter, all of which was undrawn. Our liquidity position is strong. The investment grade credit rating continues to be a priority, and we're deploying capital in line with the priorities that we've shared, invest in the business and pay down debt through strong cash flow generation. And flip into the last page on our outlook. The overall financial outlook for 2023 is unchanged from what we previously shared, including $3 billion to $5 billion of free cash flow generation, although the updated 737 deliveries now point more toward the low end of the free cash flow range. We also expect R&D to come in slightly above our original guide, tied to the higher 777X investments that I touched on earlier. Stepping back to address the state of the market. Commercial demand remains strong across our key programs and services. Global passenger traffic was up nearly 30% year-on-year in August and is at 96% of pre-pandemic levels, 109% domestic and 89% international. Cargo remains healthy and August was the first month with annual cargo growth since early 2022. Defense demand is also robust, and FY2024 budget continues to be in line with our expectations. Our portfolio and capabilities are well position to support the needs of the nation and of our allies. With demand strong, we still find ourselves in a supply constrained environment and our focus continues to be on execution both within our factories and the supply chain as we steadily increase production. We're squarely focused on a meaningful step up in operating performance, including deliveries, revenue, margins and cash flow, all of which we expect to improve as we finish out the year. On 4Q specifically, we expect BCA margins to improve sequentially, but remain negative more in line with 2Q, and we're still not anticipating much in terms of BDS profitability. On the tax expense side, we still expect full year tax expense of approximately $250 million. As we look into early 2024, we see a number of key milestones that give us confidence in building momentum across the business. The 737 factory should be recovered from the current non-conformance and will be stabilizing production at 38 per month with step ups as we move to 50 per month by 2025, 2026. 787 will be stabilizing production at five per month with a focus on stepping up to 10 per month by 2025, 2026. We'll be further along in our inventory unwind with better line of sight to the elimination of the 737 and 787 dual factories. Keep in mind that correcting non-conformances gets exponentially easier when this inventory has been delivered to our customers. BDS will be further along in recovery as I described earlier. BGS will still be generating mid-teen margins, executing on its high cash conversion, capital efficient, disciplined growth model. And all of this will underwrite our continued strong liquidity position and enable us to further delever the balance sheet early next year. With that, back over to Dave for closing comments.

Operator:

Thank you. [Operator Instructions] And our first question will come from the line of Doug Harned from Bernstein. Please go ahead.

Dave Calhoun:

Yes, Doug, that’s the money question. We think we are synced perfectly with the constraints that we know. You talked about engine constraints. We have as clear and as transparent a relationship as we could possibly have with the GE and CFM teams. The rates that we have outlined in our guidance reflect those constraints. We all could go much higher, much faster, if it were strictly a demand question. But we have to listen hard to those constraints. So we are there. On Spirit, we really do believe that the commercial agreement and I can have Brian make a comment on; he was in the center of that negotiation. The commercial agreement gives them the resources and the breathing room they need to get ahead of our rate forecast. And maybe even more importantly, I think the selection of Pat at exactly this moment in time to sort of get them really focused on factory performance I’m quite optimistic and quite pleased with. We’ve had just in the last 30 days as many interactions with Pat as we’ve had over the last year, even though we’ve had more than 100 people embedded at Spirit. So, all the signs are good there. I feel like we took a major step forward on relieving that particular constraint. And as you know, that is mostly a conformance constraint. I got to tell you, these fuselages, man, they have been gone over with a microscope in light of what we’ve experienced here in the last four months. So all that said, those are – you correctly articulated the constraints that we’ve had to deal with. On the all other, we had one that has really taken aggressive steps and gotten ahead of us. And so I’m feeling better about all other than I have in quite a long time just because there was another one embedded. I’m not going to mention names. So anyway, that’s it in a nutshell, I am always tempted based on demand to tell you we can do more than 50 and get to 60 and we are physically capacitized to do it. You’re correct in that. But I can’t call it out until the supply chain constraints can make it. And they haven’t yet to get to those kinds of numbers. But we have a couple of years to work it, and we’ll continue to work it. But right now, everything we’re doing is based on the constraints we know. And that’s what we’ve outlined to the industry. And even in these last just several months with the non-conformance issues that have sort of constrained our delivery, as we’ve said many times, we have kept our master schedule intact to get to that 38. We’re definitely building inventory in the process, and we’re paying our suppliers. So they’re not second guessing where we’re going to end up. And we think we’re going to have a little bit of buffer, particularly at the front end in light of what we’ve just experienced.

Dave Calhoun:

Yes, first of all, we’ll definitely update guidance for next year as we get into the early part of next year, put these non-conformances in a rear view mirror once and for all, get to a stable rate at 38, and then we’re going to be anxious to build from there as fast as we can. We will give guidance based on everything we know early in that year. So not avoiding it now, but its best we get these things in a rear view mirror. And the good news is we really do have these in a box with respect to the scope of work that’s required and now it’s just executing against it. And our teams have done a pretty good job on that.

Dave Calhoun:

Yes.

Jason Gursky:

Good morning, everybody. Brian, you made some comments in September about expectations for cash flow in 2024 and the past two year goals in 2025 and described things back in September potentially being nonlinear. So you’ve had some things that have happened since then, including the push out of some deliveries into 2024. You’ve incurred some more charges, I think that were a bit greater than you were expecting in the Defense business. I’m wondering if you can kind of update us on the current thought on 2024 cash flow and kind of the puts and takes that you’re expecting. What are the good guys, what are the bad guys relative to 2023? And then maybe just provide us some thoughts on the quantum of cash that you expect to generate at the company, 2023, 2024, 2025 and 2026, given all that’s occurred here, particularly in the defense business here since you lead out those goals at your Investor Day last year, whether the quantum of cash that you expect to generate over those four years has changed materially? Thanks.

Jason Gursky:

Okay. And then, Brian, just if you don’t mind, the $10 billion quantum out in 2025, 2026, can you talk about the potential for – where we might go from there? What are some of the puts and takes that we might see from a growth perspective beyond that $10 billion?

Jason Gursky:

Great. Thanks.

Peter Arment:

Yes, thanks. Good morning Dave and Brian.

Peter Arment:

Hey Brian, maybe just to talk about stability there because you just brought it up on – if we look at just the remaining two months of the year, if you’re going to deliver about 15 737s in the – in October, that kind of implies that you need to deliver high 30s or high 40s if you’re going to be at the upper end of your range. Just kind of the confidence level around that for November, December, I mean. And if you could update us on when you talked about the – in September, I think about the 75% of the MAX aircraft in storage had to be inspected. What’s the latest there? And just lastly, is there – is the – getting to 38 a month later in the year, does that impact any of your rate break decisions when you’re thinking about 2024? Thanks again.

Peter Arment:

Appreciate the color. Thanks guys.

Myles Walton:

Hi guys, good morning. Brian or Dave, looking at the $10 billion target for 2025, 2026, is there a way that we can have confidence yet that even if BDS is nearly neutral that the rest of the organization can still get to that number? And then also, if you can just highlight the space satellite constellation charge. I’m always a little bit curious when I first hear about it if I’m going to hear about it again, so maybe just lay out the trajectory of that program. Thanks.

Myles Walton:

Okay. Thank you.

Sheila Kahyaoglu:

Good morning, Dave, Brian, and Matt. Thanks so much. And I just wanted to dig into commercial airplanes and just the operating loss there of $678 million. Brian, I know you’ve been out there in the trenches working with suppliers. You called out another loss in Q4. So maybe as you think about the production rates normalizing, can you maybe parse out how much of the losses are linked to concessions, pricing, supply chain constraints, and how you expect that to turn?

Sheila Kahyaoglu:

Okay, great. Thank you.

Cai von Rumohr:

Yes, thanks a lot. So Brian, 777X R&D spiked up. It looks like total R&D at BCA was up about $150 million sequentially. Where do those – where does the 777X sort of R&D number go moving forward? When does it peak? When does it come down? And also maybe you could update us on the certification status given we’re in a CR, [ph] are we going to make it on MAX 7 by year end? What about MAX 10? What about achieving TIA on the 777X?

Dave Calhoun:

I always have to add because I don’t want to get in a trap like we did a long time ago. The FAA makes that call and we’re going to give them all the flexibility they need. We try to interpret it the best we can, and that’s what we’ve done. Know that there haven’t been any real changes to the airplanes. So we are mostly working design assurance documentation as required by the new legislation back at the end of 2020.

Brian West:

I don’t think that we’ve necessarily put a date out on that for obvious reasons. So we’ll let the teams do the work and we’ll let the regulators dictate those specifics and we’re just going to follow their lead.

Operator:

Thank you. And the next question is from Seth Seifman from JPMorgan. Please go ahead.

Brian West:

Yes. So Seth, we're just going to wait until January to be able to describe any kind of range for cash flow next year. We just got to get through our planning cycle. We had to close the year. So just be patient with us. But we will be specific in January, the same way we were this year. And I'll also probably let you know that, that would apply to your question on deliveries or how to think about them. Delivery is going to be higher next year. We're going to have momentum going on this year. All of those details, we're going to flesh out and share at the beginning of the year and at the right time, and we look forward to doing that.

Operator:

The next question is from Noah Poponak from Goldman Sachs. Please go ahead.

Dave Calhoun:

Hi Noah.

Noah Poponak:

Brian, just staying on the 737 pace for me, recognizing you're not going to give a number for next year, it sounds like. But if October is similar to September, it implies November, December are decent delivery numbers. So is it the case that the aft fuselage issue and the incremental inspection of hand-drilled in addition to laser-drilled fasteners, that, that is kind of behind you as you get to January 1st? It's not impacting 2024, 737 deliveries. And then when you're talking about being at 38 a month out in the off-the-line final assembly versus where the system is, is a different number, is there a wide gap in that to start the year? Or can we think out a real clean stable 38 a month to start the year?

Noah Poponak:

Okay. And I guess putting a lot of this together and everybody trying to figure out where the 2024 free cash is going to land. Is it kind of reasonable to think of 2024 as just two halves and that some of your hesitation in giving some of those numbers is you just don't know exactly where the year starts. Is there still some 737 disruption? 787 at five is a different margin than 787 at 10? Maybe BDS margins are still negative in the first half, but they're positive in the second half. And so this next year's first half free cash flow just still have some of 2023 elements lingering in it, but that the second half will be kind of run rating into more of what your stable looks like and maybe second half 2024 looks, the numbers look more like second half of 2022 type of free cash flow numbers. And we can comfortably think of that as run rating into your future?

Dave Calhoun:

Noah, if I could just maybe add one thing to make sure everybody knows what, at least what I'm all focused on. We're going to exit this year with a little more than 100 of the return-to-service airplanes that we had at the end of 2020. That is what our shadow factories are focused on in a big way to make sure that we can bleed that down to basically nothing by the end of next year. So the pace at which we bleed that down, we complete that rework, deliver all those airplanes dictates a lot about that cash flow. It gets better every month. But it's going to be all about the pace at which we can do it and transfer that workforce into the production rate increases. So we need – there's a lot to know about that. We're going to give you our best shot at what that guidance looks like. But by way of proxy, that is a very important achievement for us. And I'm 100% focused on it, and I know Brian is and the team at BCA.

Dave Calhoun:

Yep.

David Strauss:

Thanks. Good morning everyone.

David Strauss:

Wanted to ask about the supply chain. Are there any other spots – hot spots in the supply chain where you've either had to infuse a meaningful amount of cash like you did with Spirit or are in negotiations to do something similar to what you've done with Spirit? That's the first question. And then the second question, I guess a clarifying comment for Brian. On the BCA margin progression next year turning positive, is that both on a program on a unit basis or would that just be on a program basis? Thanks.

Brian West:

And in terms of the margins on both unit and program, they'll be positive. And program, we'll have growth. So we look forward to describing that as we get closer to January but both.

Dave Calhoun:

Yep.

Rich Safran:

Thanks, Brian, Matt. Good morning. I got a two part tanker-related question for you. First, with Lockheed dropping out, when do you expect an award? And what could that do to your overall assessment of program profitability? I'm basically assuming here that you would have to review the accounting on the program. Second part is with deliveries restarting, what's being anticipated? I mean, how much of a catch-up should we expect in 4Q? And is that being factored in your guide?

Brian West:

Yes. No, exactly. We don't see that changing. We'll just add to volume like we do with any kind of extension. And in terms of your question in the fourth quarter, of course, any kind of deliveries and cash flow are going to be factored into our look for the quarter and going forward. So that's all baked in.

Dave Calhoun:

Yes.

Dave Calhoun:

Thank you.

Operator:

Thank you and that completes The Boeing Company's Third Quarter 2023 Earnings Conference Call. Thank you all for joining and you may now disconnect.

Matt Welch:

Thank you and good morning, everyone. Welcome to Boeing’s second quarter 2023 earnings call. I am Matt Welch. And with me today are Dave Calhoun, Boeing’s President and Chief Executive Officer and Brian West, Boeing’s Executive Vice President and Chief Financial Officer. And as a reminder, you can follow today’s broadcast and slide presentation at boeing.com. As always, detailed financial information included in today’s press release. Furthermore, projections, estimates and goals included in today’s discussion involve risks, including those described in our SEC filings and in the forward-looking statement disclaimer at the end of the web presentation. In addition, we refer you to our earnings release for presentation – and presentation for disclosures and reconciliation of certain non-GAAP measures. Now, I will turn the call over to Dave Calhoun.

Brian West:

Thanks, Dave and good morning everyone. Let’s start with the total company financial performance. Second quarter revenue was $19.8 billion, that’s up 18% year-over-year. The growth was primarily driven by higher commercial volume, including increased 787 deliveries. Core operating margin in the quarter was minus 2% and the core loss per share was $0.82. Margins and EPS were driven by expected abnormal costs and period expenses as well as losses on three fixed price development programs in our defense business, which I will cover later. Free cash flow, as Dave mentioned, was positive $2.6 billion in the quarter, significantly better versus last year and last quarter driven by higher commercial deliveries and favorable receipt timing. Relative to our expectations shared at the last earnings call, the strong order activity in the quarter drove over $2 billion of favorable advanced payment timing. Keep in mind, most of this was expected to incur in the third quarter. Turning to the next page, I will cover Commercial Airplanes. BCA booked 460 net orders in the quarter, including 220 with Air India, 39 with Riyadh Air and signed a purchase agreement with Ryanair for up to 300 737 MAX-10s. We now have over 4,800 airplanes in backlog valued at $363 billion. Revenue was $8.8 billion, up 41% year-over-year on 136 airplane deliveries driven by the 87 program. Operating margin was minus 4.3%, a sequential improvement versus the first quarter as anticipated, but remains negative as we continue to be impacted by expected abnormal costs and period expenses, including higher R&D spending. As Dave noted, we worked through a number of operational challenges so far this year. We are making steady progress and we will continue to focus on stability as we look to increase production on key programs. On the Spirit work stoppage, we were pleased to see a quick resolution and we will work through any limited impacts to production. Overall, this is not expected to change our production and delivery outlook. On to the programs. On the 737, we had 103 deliveries in the quarter, including 49 in June, a positive proof point that the production system is stabilizing. In regards to the Spirit fitting issue that we discussed last quarter, in May, we resumed deliveries of rework airplanes and also began producing newly built airplanes meeting our specifications. In light of this progress, we are now transitioning production to 38 per month and still plan to increase to 50 per month in the ‘25-26 timeframe. As we move to the higher rate, we will continue to prioritize stability and it will take some time to consistently deliver at 38 per month off the line. We still project full year 737 deliveries of 400 to 450 with sequential improvement in the second half. We ended the quarter with approximately 228 MAX airplanes in inventory. This includes 85 for customers in China and 55 that have now been remarketed as part of the plan we have previously discussed. We still expect most MAX inventory airplane to be delivered by the end of 2024. Moving on to the 87 program, we had 20 deliveries in the quarter and still expect between 70 and 80 deliveries this year. We increased production to 4 per month during the quarter and still plan to reach 5 per month by year end. We ended the quarter with 85 airplanes in inventory and rework is progressing nicely. And we still expect most to be delivered by the end of 2024. We booked $314 million of abnormal costs in the quarter in line with expectations and there is no change to the total estimate of $2.8 billion, which is largely done by year end. Finally, on the 777X program, efforts are ongoing and the program timeline is unchanged. Abnormal costs were $136 million as expected and we have lowered our total estimate from $1.5 billion to $1 billion, which reflects plans to resume production later this year rather than early 2024. Moving on to the next page and defense and space. BDS booked $6 billion in orders in the quarter, including an award from the U.S. Army for 19 CH-47 Chinooks and the backlog is now at $58 billion. Revenue was flat at $6.2 billion and we delivered 38 aircraft in the quarter. Operating margin was minus 8.5% primarily driven by three fixed price development programs. The first was related to commercial crew tied to scheduled delays that we have previously shared and had a $257 million impact; the second on MQ-25 related to a schedule shift that drove a $68 million impact; and lastly, on the T-7A production contract, we revised the long-term production cost estimates that will occur over several years starting in the 2025 timeframe, which drove an impact of $189 million. These determinations were mostly made over the last few weeks as we closed out the quarter. Similar to last quarter, roughly 60% of the portfolio is generating solid levels of performance, in line with historical margins. But we continue to see operational impacts from labor instability and supply chain disruption on other programs that contributed to lower margins. Looking at BDS in aggregate, it will take time to return to normalized levels of performance. We are confident and we are focused on the path to high single-digit margins in 2025-2026. The strong demand across the customer base, the portfolio is well positioned, and we are focused on execution. Moving on to the next page, let’s cover services. BGS had another very strong quarter. BGS received $4 billion in orders during the quarter and the backlog is $18 billion. Revenue was $4.7 billion, up 10% year-over-year primarily driven by favorable volume and mix in both commercial and government services. Operating margin was 18%, an expansion of 110 basis points versus last year with both our commercial and government businesses delivering double-digit margins. Operating margins in the quarter were higher than expected due to favorable mix, which we don’t expect to continue at these levels. In the quarter, BGS announced an expansion in Poland with a new parts distribution site, a collaboration with CAE. And the Japan Airlines has adopted the Boeing Insight Accelerator for their 787 fleet. Turning to the next page, I’ll cover cash and debt. We ended the quarter with $13.8 billion of cash and marketable securities. And our debt balance decreased to $52.3 billion. In the quarter, we repaid $3.4 billion of maturing debt and provided a $180 million cash advance to Spirit as previously shared. Year-to-date, we’ve repaid $5.1 billion of debt, which is essentially all of our maturities for the year. We also maintained $12 billion revolving credit facilities at the end of the quarter, all of which remain undrawn. Our liquidity position is strong. Investment-grade credit rating continues to be important. And we’re deploying capital in line with the priorities we’ve shared

Operator:

[Operator Instructions] And our first question will come from Sheila Kahyaoglu from Jefferies. Please go ahead.

Brian West:

Hi, Sheila, I’ll start off with that. Last quarter – first quarter, I should say, BCA margins were negative 9%, and we knew that they were going to get sequentially better, and they did. They got down to negative 4%. So it’s good progress. In terms of where we’re headed, as we think about the back half of the year, we will still have some negativity, although sequentially better in the third quarter. And then as we exit the year and moving over into the first quarter of next year, those margins will move positive. We’re confident in that. And some of the things are the ones you mentioned, which is rate ramp. You’ll have some of this abnormal behind us in the rearview mirror and will be done. And of course, the pricing environment is pretty good. So all of that give us confidence that we will get these margins positive. And it will likely be towards the end of the year, early next year. And the team is laser-like focused on meeting those expectations.

Operator:

Thank you. The next question is from the line of Peter Arment from Baird. Please go ahead.

Brian West:

Well, it’s both. Certainly, the liquidation benefit is something we’re very focused on because when you get rid of both on the 377, those dual factories, it’s just going to be a huge relief for the business to put that behind us. And we’re tracking, and we’re going to make good progress. And that will be substantially behind us as we move out of 2024. So that, no doubt, is a very big deal, coupled with the rate breaks. We just announced going to 38. That’s a big important move, and there’ll be subsequent rate breaks beyond that. And all of that is going to play into a margin trajectory that’s going to start to look a lot more normal. And by the time we get through 2024, and we’re focused on that ‘25-26 timeframe, as we’ve said, BCA margins will look a lot like that before in that low double-digit area. So we know what we have to go do. The levers are clear. We just got to execute.

Operator:

Thank you. The next question is from Myles Walton from Wolfe Research. Please go ahead.

Dave Calhoun:

No, I wouldn’t say anything has changed. We’re still confident in the regulatory process. This is our desire to simply get ahead of the production curve. There is no – yes, no breaks on the regulatory side. We still have margin in that. And hopefully, we can beat it. But all the projections we’ve given you, I think, are still intact.

Myles Walton:

Great, thanks.

Jason Gursky:

Good morning, everybody. Brian, one just bookkeeping question and then one question on defense margins. On the more bookkeeping one, the services business is posting some pretty good margins here, and you’re noting mix. I’m just wondering when you – if you could just talk a little bit about when you kind of go back to more normalized margins in that business based on what you’re seeing in your inventory mix there. And then on the defense, you’ve historically talked about 60% doing pretty well, 15% of these development programs and then 25% some legacy programs. That’s how you’ve talked about the margins in that business. Can you confirm that 60%, 15%, 25% is still the right mix of things? And then kind of what’s based – or what’s in your assumptions on getting back to that high single-digit rate in that ‘25-26 timeframe in those three buckets?

Dave Calhoun:

I just comment on that. It’s just important to note that they are still in an extremely supply-constrained world. Everything they do is supply constrained. So pricing is a little favorable. Anything that they can get out of their shops are being taken. That has not changed. And so how long that lasts? My prediction is it’s going to be quite a while. I don’t see any let up with respect to the need for lift out there, and everybody is fighting for the next part. So I think that’s just the moment we’re in.

Jason Gursky:

Great. Thank you.

Cai von Rumohr:

Yes. Thank you very much for taking the call. So basically, to follow-up on Jason’s question, if we take out the loss programs, BDS still was marginally red. And if we take the 60% that should be earning, they should be earning $300 million. So if the 25% losing $300 million, that’s the one I really don’t understand. How bad is that? And if you say you’re going to have modest profits in the third quarter, I mean, again, it looks like there is fairly significant underperformance there. Maybe give us a little more color on the programs involved and what it takes to get them back? Thanks so much.

Cai von Rumohr:

Is there a – is part of the problem that you got stuck with contracts, those are mostly fixed price contracts and with inflation and all this disruption, that’s the problem? And if so, do any of those contracts reach their end so that you can basically get better pricing going forward?

Cai von Rumohr:

Thank you.

Robert Spingarn:

Hey. Good morning.

Robert Spingarn:

Dave, you have been really clear on no new airplane right now. But at the same time, you have talked about and Boeing is working on the Transonic Truss-Braced Wing aircraft, which seems to be a pretty exciting design for the narrow-body market. And while I know it’s early in that process, do you think it has a chance to enter service with current gen engines like the LEAP or the GTF and then maybe later take on a CFM rise? And then as a second part to this question, could this aircraft actually service the large narrow-body market as well, something against the 321?

Robert Spingarn:

Great. Thanks so much.

Operator:

Thank you. Your next question is from Kristine Liwag from Morgan Stanley. Please go ahead.

Dave Calhoun:

Hi Kristine.

Kristine Liwag:

On the 737 MAX production rate increases to 38 per month, can you just give us more insight in terms of what’s happening with the supply chain? What’s their health? And any particular bottlenecks that you are monitoring in order for you to get to that rate? And any other additional color regarding the timing of this step-up would be appreciated as well.

Dave Calhoun:

Most of our time and applied effort with respect to the supply chain is focused on readiness for the 50.

Dave Calhoun:

Yes. It is. As you suggest, 38 has to come and has to come in a stable form so that we are not up and down every month. But maybe more important than that, we now have such good visibility into the supply chain. We know whether they are ready for the next – for 40, 42, 44, etcetera. So, I just think it’s the combination of much better visibility on each of those step-ups and yes, our own factories assembling and delivering at a steady pace. But you will see all that just like we do.

Operator:

Thank you. Our next question is from David Strauss from Barclays. Please go ahead.

Brian West:

Yes. There is no new issue on the 87. Let’s be very clear. There might have been a tick up in the stringer a few weeks ago, but we are very focused on both the joint verification work on the 87 and then getting stable at four and then work our way to five. So, 87, we feel particularly good about. And we are very confident in that 70 to 80 deliveries for this year.

David Strauss:

Okay. Great. Quick follow-up probably for Brian, so the BCA forecast, the 2.5 to 3.5 operating cash flow this year, you have got an up arrow there. So, what is surprising to the upside? I mean you are still running through big unit losses. Is it just upside from working capital, advances coming in sooner than expected or better than expected? Is that the upside in terms of what that up arrow signifies?

David Strauss:

Got it. Alright. Thank you very much.

Operator:

Thank you. Our next question is from Doug Harned from Bernstein. Please go ahead.

Dave Calhoun:

Hi Doug.

Dave Calhoun:

Yes. Doug, why don’t I take this. You are right. I guess the truth is, I think both us and our competitors face that circumstance of having to take orders now quite a ways out there. I would love to get to 60, and the market is there for it. There is no doubt about it. For me, there is a moment in time that is really important with respect to execution and the subject of stability, and that is second half of next year when we wind down all of our shadow factory efforts that we can apply all of the labor to those rate increases. So, we already have the labor in-house, but now we get them to work on new airplanes. And that’s a very good thing, and you know the economics attached to that. It’s just not a simple thing to do. And I don’t want any of us to get ahead of ourselves on this front. So, we are just going to stay focused. We are going to work hard on stability. Second half of ‘24 is a very important moment in time because I believe that’s the step change for BCA in pretty much every way. And if we get through that well and we execute well, then we will be talking to all of you about 60. But I don’t want to get ahead of myself on this one and either as a team.

Dave Calhoun:

Again, I am – having a little too much capacity is not a problem for us right now when you are trying to knock down stability. So, if we run something at a suboptimal level, it’s not going to cost us much, and it’s going to improve stability and delivery and all of those things. So again, I don’t – I want to be careful. I don’t want to get out that far and talk about trades at that moment. But right now, we are just focused on stability. We want to have more capacity than we need so that we are ready for that next increment. And that workforce transition is probably the most important part of all of it.

Operator:

Thank you. Your next question is from Seth Seifman from JPMorgan. Please go ahead.

Brian West:

Well, I will be less than satisfying for you because I just can’t – I really can’t talk about next year delivery numbers. And it’s just not the right time to do that. Although we still have confidence as we get out of the first half of this year, the second half will be better. And then we will just want to make sure we are always sequentially improving. As it pertains to the 87, very proud of that team, given where they have been over the last couple of years. They have got the joint verification work, very steady, consistent. They are working on their share of escapes that they knock down as fast as they see them. And they are getting to production rates that are steady. And they are getting to that five per month by the end of the year is a big deal and no longer they are in the abnormal category. They are back towards a path where we expect them. And then there will be, obviously, increases from there to get to the 10 by ‘25, ‘26. So, there is nothing in particular right now that is a major worry be for 87. And the supply chain still feels like it’s getting better, a little more stable, a little more coordinated. And we got to keep executing.

Operator:

Thank you. And your next question is from Ron Epstein from Bank of America. Please go ahead.

Dave Calhoun:

Hi Ron.

Dave Calhoun:

Yes, Ron. So, you probably saw in our disclosures that we reduced our exposure, at least with respect to the finished goods inventory down to 85. Of course, we did that with the permission and constructed dialogue with our customers in China. The return-to-service work in China with respect to the airplanes that were already there is largely complete. Everybody is very happy with the performance. In fact, the reliability of the fleet has been fantastic. And we are getting a lot of good signs that they will resume delivery, but I am not going to predict that for you. We are just going to keep managing it exactly the way we have been. We are not dependent on it. We want to do it, and we certainly want to support our customers in China. And we will be the free trade beacon with respect to our administration and all the political influences. But I am just going to leave it, posture just the way it has been. I know that we have 85 airplanes that we would like to begin delivery on. We are getting good signals. I hope it can happen. Our guidance is not dependent on it.

Dave Calhoun:

Honestly, I probably been curt and maybe too curt with my answer is, but I really don’t think about it. I don’t view it as a meaningful competitor. There is nothing that I would want to do on the product development front to respond to it. It’s not the world that we’re interested in. We like our portfolio. The next airplane, in my view, with respect to development has to be a meaningful change, 25%, 30% better than what flies today. That’s why we are focused on Transonic wings. That’s just our game plan. And I don’t think based on all the competitions that we have touched and all the speculation that we hear, I just don’t think it’s going to be a meaningful difference.

Matt Welch:

Louise, we have time for one final question.

Noah Poponak:

Hey. Good morning everyone.

Noah Poponak:

Maybe just a few, since I am last follow-ups or things that haven’t been asked. The leadership of the company had been out around the air show talking about the MAX maybe getting to 42 a month by the end of the year. I mean is that the official plan, or can you talk about that? Pricing, the checks that we have access to are saying that new aircraft pricing is up a double-digit percentage compared to pre-pandemic. Is that what you are seeing? And then in the defense margin next year with the way you see the milestones laying out and the progress on the cost that you are maybe going after, can you have some reasonable low to mid-single digit margin in the defense business next year, or is that 2025 plan more back-end loaded?

Dave Calhoun:

And the good news is I am not surprised at all that our team is conveying those messages. I am not surprised because we are all in that prep mode.

Dave Calhoun:

Yes, I can’t – I am not going to give you any specific numbers. Let me just say that the industry is short of airplanes by a reasonably large margin. Boy, do we compete, I will tell you that, for every one of these orders because they are big and they are important. But as you might expect in a constrained market, things probably get better.

Matt Welch:

And that concludes our second quarter earnings call. Thank you for joining.

David Calhoun:

Thanks, Matt. Good morning, everyone, and thank you for joining us. We had a solid first quarter, and we continue to make real progress, steady progress in our recovery. Challenges remain. There's more to do. But overall, we feel good about the operational and financial outlook shared last November, including cash flow and delivery ranges set for 2023 as well as for the 2025, 2026 time frame, where we can see $10 billion in annual free cash flow.

Moving to BCA. I'll start with orders. Demand remains very strong across all of our product lines. We booked 107 net airplane orders in the first quarter. And on top of this, we were proud to announce major customer commitments earlier this year:

Air India, 190 737 MAX, 20 787s and 10 777Xs; and Riyadh Air, the newly established airline in Saudi Arabia; and Saudia, ordering up to 121 787 airplanes.

Brian West:

Great. Thanks, Dave, and good morning, everyone. Let's go to the next page and cover the total company results. First quarter revenue was $17.9 billion. That's up 28% year-over-year, primarily driven by higher volume in both commercial and defense.

Our liquidity position is very strong. The investment-grade credit rating is a priority, and we're deploying capital in line with the priorities we've shared:

generate strong cash flow, invest the business and pay down debt.

David Calhoun:

Yes, not much to add. Just a reminder that in November, when we did finally set out guidance for all of our investors, we described an environment that would continue to be strained through 2023 and through most of 2024. We still see the world exactly that way. Demand is as robust, if not more than what we had thought back in November, and so we remain confident.

Operator:

[Operator Instructions] And our first question will come from the line of Myles Walton from Wolfe Research.

David Calhoun:

Yes, Myles, I appreciate the question. This particular defect, I happen to take a look at it, by the way, along with the rest of my Board. We happen to have our shareowner meeting shortly after the issue came to our attention.

Sheila Kahyaoglu:

Maybe how do we think about BCA margins going forward? How do we think about the production trajectory of your impact, concessions historically in aircraft and inventory impacting BCA margins?

Douglas Harned:

On the 787, you're on the path to reach 5 a month in Q4 and then go to 10 a month in '25, '26. And you've also had some discussions that the rate could potentially go higher longer term. Now this is all being done in Charleston. And if we go back a few years, the maximum capacity at Charleston was 7 a month.

David Calhoun:

So let me start from the back end and work my way toward the front end. As you might imagine, when you go from 2 to 1 and you optimize that 1 and you don't transport parts from one to another, you expect higher margins, and we do, and I'm confident we will achieve that.

Noah Poponak:

Wanted to try to ask about the 737 pace in the near term and then also in the medium term between now and the plan you've outlined for '25. So I guess, how many units are somewhere in process somewhere in a factory? It seems like those need to be reworked before you could then restart to sort of clean off the line units.

David Calhoun:

Noah, on the finished goods, by the way, it's two things to keep in mind. One, we are largely through a couple of them already. So -- and we are defining the scope of that work and again, measured in a few weeks, not measured in months. And so we're confident in that.

Noah Poponak:

Right. Right. The finished goods, it would just seem like as long as you can rework faster than you deliver, that doesn't change your pace and the deliveries were -- the percentage of deliveries from that wasn't enormous. So that makes sense. That's what I was sort of trying to get at, what's factory, but I think I better understand it now. So appreciate all that color.

Robert Spingarn:

Just a quick clarification and then a question. The clarification, the production rates you're talking about, the 38, et cetera, is that Renton only? Or does that include deliveries out of inventory from Moses -- or rather production out of Moses Lake on the mods?

Brian West:

You broke up a little bit at the end of your question on pricing. Could you just...

David Calhoun:

Yes. Let me comment on pricing, particularly on the wide-body world. Nobody is sold-out. We're just all selling further out. So we still compete and then we -- the deliveries themselves are important competitive factor in everything that we go for and then pricing follows.

Brian West:

And in your clarification question, the first part, that 38 is the final assembly number. So right now, it's at 31, movement of 38 sometime later in the year.

Brian West:

Yes.

David Strauss:

Just following up on the MAX issue. Has Spirit fixed the manufacturing issue from their end? In other words, are fuselages coming off their line clean now? And when would you actually start to expect to see those come to you?

David Strauss:

Okay. Quick follow-up, I think from the Investor Day, I recall the pacing item on going to 38 a month being activating the third line in Renton. Have you actually activated the third line at this point?

David Calhoun:

And we're still moving forward on the fourth.

Jason Gursky:

Just a quick question on the outlook for orders in the commercial business. So wondering if you could kind of provide a little bit of color on your expectations from a book-to-bill perspective for the year, given the pipeline that you're seeing.

David Calhoun:

Yes. Let me start. I want to make sure -- I want to speak out of both sides of my mouth here, if you don't mind. Number one, all of our guidance, all of our expectations are predicated on no China. So everything that we've discussed by way of production rate, supply constraints and demand in the marketplace does not factor that in, and I want to be clear about that.

Cai Von Rumohr:

At the November Investor Day, you laid out a forecast of cash flow of $3 billion to $5 billion this year. And since that time, you've taken a couple of shells, you see the 737, you discussed the 767, and you mentioned because of supply chain having to build to higher inventories. So there were a lot of bad guys in that revised number.

David Calhoun:

Cai, let me start with a reminder, and then I'll let Brian mention one or two good guys. Sort of the tanker advance, we had always counted on. So it may have come a little earlier because of their need to get tankers in the field. But that was always counted on.

Operator:

Peter Arment from RW Baird.

David Calhoun:

Yes. Again, I don't want anything to get misinterpreted here. The China market, which in my view has always been the issue with respect to taking deliveries of airplanes, has come back as robustly as anyone might have imagined. And domestic travel now is at the pre-pandemic level and will continue to grow. So they need airplanes.

Operator:

The next question is from Seth Seifman from JPMorgan.

David Calhoun:

Well, I'll be optimistic about the labor contract. I think as you might guess, I suspect their workers know the situation they're in. They know that they've got to deliver for Boeing, and my guess is they'll all get to a palatable answer. It's not my control, so you'll have to ask Tom about that.

Operator:

The next question is from Kristine Liwag from Morgan Stanley.

Brian West:

Yes. It's a matter of months, Kristine. Thanks for the question. It's a matter of months, and the inventory is all contemplated in our forward look. It's not anything we worry too much about. In fact, again, another indication of how we're thinking about this, we're perfectly comfortable keeping everyone at pace and hold a little buffer.

Kristine Liwag:

Great. And a follow-up on Seth's question on the labor agreement with Spirit. Should we see a production disruption at Spirit? What are mitigating actions you could take? And are there things that you could do to make it easier for you to meet your targets if, again, there is a production disruption at Spirit?

Matt Welch:

And Lois, we have time for one final question.

Matthew Akers:

Can you touch on BGS margins in the quarter? I think this is like the highest you put it since you broke that out. I know you mentioned the mix was positive, but can you say how much of that benefit was? I think this is kind of like a mid-teens margin pre-COVID. Should we expect to kind of gravitate back to that level? Or could it be kind of a little bit higher here?

Operator:

Thank you. And ladies and gentlemen, that does conclude the Boeing First Quarter 2023 Earnings Conference Call. Thank you for joining.

Matt Welch :

Thank you, and good morning. Welcome to Boeing's Fourth Quarter 2022 Earnings Call. I am Matt Welch, and with me today are Dave Calhoun, Boeing's President and Chief Executive Officer; and Brian West, Boeing's Executive Vice President and Chief Financial Officer. And as a reminder, you can follow today's broadcast and slide presentation at boeing.com. As always, detailed financial information is included in today's press release. Furthermore, projections, estimates and goals included in today's discussion involve risks including those described in our SEC filings and in the forward-looking statement disclaimer at the end of the web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of certain non-GAAP measures. Now I will turn the call over to Dave Calhoun.

Brian West:

Great. Thanks, Dave, and good morning, everyone. Let's go to the next page and cover the fourth quarter financial results. Revenue in the fourth quarter came in at $20 billion. That's up 35% year-over-year, driven by higher commercial volume. Core operating margin was negative 3.3%, and the core loss per share was $1.75. Both the margin and the loss per share were significantly better than prior year and impacted in the quarter by period expenses and abnormal costs. From a free cash flow perspective, our primary financial metric was positive $3.1 billion for the quarter, up significantly versus the prior year on higher deliveries and strong order activity and up sequentially versus the prior quarter and a bit better than our original estimate. I'll take a minute to go through each of the business units. Moving on to the next page with BCA. BCA revenue in the fourth quarter was $9.2 billion. That's up 94% year-over-year driven by higher 787, 737 deliveries, partially offset by 787 customer considerations. On the operating margins, they were negative 6.8% in the quarter, seemingly better than a year ago and in the quarter driven by abnormal costs and higher period expenses, including higher R&D spending. I'll take a minute to go through a few highlights of the major programs, starting with the 737. We had 110 deliveries in the fourth quarter and 387 for the full year, slightly ahead of our estimate. We ended the year with 250 MAX airplanes in inventory, 30 of which were Dash 7 and Dash 10 s, and we had 138 for customers in China. We do expect the monthly deliveries from inventory to slow slightly as fewer airplanes will be available, combined with some impact from the Dash 7, Dash 10 builds. We still expect most inventoried airplanes will be delivered by the end of 2024. On the 787, we had 22 deliveries in the fourth quarter and 31% for the full year. We ended the year with 100 airplanes in inventory, most of which will be delivered by the end of 2024. We booked $350 million of abnormal costs in the quarter, taking the total to date to $1.7 billion. We're increasing the abnormal accounting estimate by about $600 million to roughly $2.8 billion in total as we will be under the five per month production rate a bit longer than expected due to a supplier constraint that has temporarily slowed production. We still expect to hit five per month this year. Our total year delivery guidance of 70 to 80 is unchanged, and there is no change to the 2023 cash flows. 77 orders were strong in the quarter, and we've added 100 airplanes to the accounting quantity, which increases our GAAP program margin. On the 777X, the program time line is holding and efforts are ongoing. Abnormal costs were $112 million in the quarter, and there is no change to the $1.5 billion total estimate. On the customer settlement front, we continue to make good progress resolving contractual issues on the three big programs. The 737 MAX is near the finish line with the vast majority of customers settled. Of the original $9.3 billion of the set aside, there's only 3% left. On the 787, a year ago, we included a significant provision in the program, which has been very stable. There are far fewer customers in the MAX, and we've already reached agreement with several, all in line with our estimates. On the 777X, there are even fewer customers and discussions are ongoing. Keep in mind that the revenue and cash impact of these settlements will be over several years and all contemplated in both the near- and long-term financial guidance. Finally, on the orders front for BCA, we booked 376 orders in the quarter and have over 4,500 airplanes in backlog valued at $330 billion. Moving on to the next page, I'll cover BDS. BDS revenues in the fourth quarter were $6.2 billion, up 5% year-over-year. Operating margins were 1.8%. And if you include services, defense margins would be 200 basis points higher to 4%. There are two things impacting BDS margins in the quarter. First, we felt the operational impact of supply chain constraints in labor and stability. Second, we saw adverse timing of certain cost accrual true-ups, including higher pension costs that flow through the P&L in the quarter a big focus for the BDS leadership team to improve execution stability both in the factory and in the supply base. Some additional highlights, as Dave mentioned, we're very proud of Artemis' 1 successful mission to the moon last November, and we delivered 45 aircrafts in the quarter, including the first P8 to New Zealand as well as three satellites, including the first 2 O3B mPOWER units. We received $7 billion in orders during the quarter. including a contract for 2 KC-46A tankers from Japan and an award for 12 Chinook helicopters from the Egyptian Air Force. The BDS backlog is at $54 billion. Moving on to the next page, Global Services. BGS had another strong quarter, primarily driven by our parts and distribution business. BGS revenue was $4.6 billion, up 6% year-over-year and operating margin was 13.9%. Commercial volume was very strong, partially offset by some softness in the government space. We received $5 billion in orders during the quarter, including an F-15 depot support order for the U.S. Air Force, and we opened up the Germany distribution center. The BGS backlog is $19 billion. Moving on to the full year, the next page. Full year financial results, revenue came in at $66.6 billion. That's 5% up year-over-year driven by higher commercial volume, offset by lower defense revenue. Core operating margin was negative 7% and the core loss per share was over $11 both a bit worse reflecting the impact of defense charges taken earlier in the year. And on free cash flow, we generated $2.3 billion positive free cash flow in the year up significantly from the prior year driven by higher deliveries and order activity. Moving on to the next page. I just want to put that $2.3 billion of free cash flow in perspective. As you can see from the chart on the left, we've made a lot of progress over the last three years. 2020 was a usage of $20 billion of cash, 2021 improved but was still a usage of $4 billion of cash, in 2022, $2.3 billion positive. As Dave mentioned, a lot of work that's been done and more work to do. The team is pretty proud to get back to positive territory. It's been the 737 return to service and the deliveries that are ramping. It's been the 787, it's been restarted. It's been the commercial market recovery that's been a benefit along the way with a very strong order book, reflecting our customers' confidence in our product lineup. And of course, our service business has held up incredibly well. It was a good exit to 2022, and we expect momentum to continue for 2023. Moving on to the next page, cash and debt. On the cash and marketable securities front, we ended the year with $17.2 billion, up $3 billion versus the third quarter and we had $12 billion of revolving credit facilities, all of which remain undrawn. On the debt side, we finished the year with $57 billion in debt. And as a reminder, our investment-grade credit rating continues to be a top priority. Our liquidity position is strong, and we're very comfortable satisfying near-term maturities, and the overall plan continues to be deliver airplanes, generate cash, pay down debt. Moving on to the next page, 2023. Our financial outlook for 2023 is unchanged from what we shared in November. Operating cash flow in total will be between $4.5 billion and $6.5 billion. We'll reinvest about $1.5 billion in CapEx for a net free cash flow of $3 billion to $5 billion in 2023. As we start the year, overall demand remains strong. Global pass-through traffic increased almost 70% in 2022, and we're at 75% of pre-pandemic levels globally. If you take out China, that number grows to over 90%. So, demand is pretty robust and reflective of our order book. Our priority continues to be execution stability. And while we still see some disruptions in the factory and the supply chain, we're hard at work with our partners to address these issues and ultimately focused on meeting our customer commitments. On the segment operating cash flow, same numbers as November, BDS, we expect to be a usage of between $0.5 billion and $1 billion of cash. BGS will generate between $2.5 billion and $3 billion, and BCA will generate between $2.5 million and $3.5 billion. On the commercial delivery front, 737 deliveries are unchanged and between 400 and 450 airplanes, 787 deliveries are unchanged between 70 and 80 airplanes, and we've added a couple of items on the expense front. We expect R&D for 2023 to come in at about $3.2 billion versus $2.9 billion in 2022. The vast majority of this increase will be in BCA. We also have unallocated eliminations in other which will be relatively in line with 2022 at $1.6 billion. One important thing to note is on the quarterly phasing, it will look very similar to last year as both deliveries and the financials will improve throughout the course of the year. On the first quarter specifically, EPS will be an improvement over 4Q 2022 but remain in a loss position. And cash will still be a usage in the first quarter, although an improvement from the first quarter of 2022. Overall, we're squarely focused on free cash flow. And it's so far so good as we enter 2023. Moving on to the last page, 2025, 2026 long-term guidance. Same page we showed you in November, $10 billion of free cash flow is still our objective. And it's important to note that margins and EPS are important, but they will be uneven over the next two years. As we unwind the BCA inventory, we put the BCA abnormal costs behind us, and we get the BDS margins back on track to its normal trajectory. We're still confident that this plan is underpinned by things we largely control. One, productivity. Two, the commercial rate ramp. Three, services growth and four, the transition of key defense programs from development to production. Overall, we're as confident today as we're back in November, and we feel good about the way 2023 is starting. With that, I'll turn it over to Dave for any final comments.

Operator:

[Operator Instructions] Our first question will be from Peter Arment with Baird. Please go ahead.

Dave Calhoun:

Yes, Peter, why don't I start with China. Your numbers are within the range of my numbers, that is what's going on. I think as everybody knows, the opening up of China is going to be a major event in aviation. And the aviation industry was already stressed in terms of demand broadly in the world. So this is a serious bump for everybody, but most importantly, within China, they need the MAX to fly to satisfy those demands. So we were going to do there what we do here in the U.S. and focus on the airplanes they have on the Tarmac today, which is close to 100 airplanes, the readiness of each and every one of them, and ultimately, they're getting into full revenue service. So for six months, I think that's the course for all of us to stay focused on. And then we're going to take up the question of deliveries. And is there a moment in time where that begins to come back. I don't want to predict that date, Peter, but the odds go up every day. Our MAX gets back into service and the airplanes that we have on our tarmacs, hopefully, we get ready and deliver to our customers. So, I think there's a reason to be optimistic. We will not change guidance and or predict those outcomes until they actually occur.

Peter Arment:

Appreciate the color. Thanks.

Doug Harned:

Thank you. Good morning. When you look at the MAX right now, the good news is you don't have a demand problem. And as you guide to 31 a month production in 2023, and our assumption is that if you had engine delivery is higher, you can move up from there, given that you're facilitized and staffed for 38. And if you look out at the 2025 or 2026 timeframe, when you're guiding to 50 a month, you were once at 57 a month. So that would not be new territory. So what I'm trying to get at is when you look at these two years, clearly, there are supplier issues in '23, but is it feasible that you could see that production rate go higher? And if so, what would you want to see? And I look at '23 and '25 differently since '25, I'm assuming we'd be out from under a lot of these supplier issues.

Doug Harned:

And is that true? And when you look out to the '25, '26 timeframe, obviously, there's a long way to go before we get there. How do you think about just flexibility given there may be a number of scenarios that could come out here in terms of production levels?

Doug Harned:

Okay, great. Thank you.

Noah Poponak:

Good morning, everyone. I wanted to ask about supply chain. Can you -- I heard you, Dave, that you're not going to mention any specific supplier and I hear that and respect that. But if you could provide any more detail on what's happening on the 787? Is there a new quality control escape? Or is it just pure timing delays, visibility into that getting better? Any incremental detail there would be really helpful. And then what's the latest from the engine OEMs? I sounded a little better yesterday, but what are you guys hearing?

Brian West:

Yes. So on the 87, so the fourth quarter was our first real full quarter in a while of being able to deliver airplanes, both still at a low rate and also from an inventory it feels pretty good. And as we go into 2023, remember, the scope of work is pretty clear what we have to do in terms of reworking the inventoried airplanes. But remember, our suppliers have a part of that responsibility in their scope. So, bringing the suppliers - the big suppliers along to make sure that they are conforming and they've got all the protocols in place to get that done on their end is something that we're working our way through. It's going to take us a little bit longer than originally expected, which is why we are going to shift out, going to five per month a bit later in the year but we still see 70 to 80 in the cards, and so far so good. What you'll likely see is some good liquidation of the inventory as we go through the year and then obviously ramp up the factory as we get deeper into the year. But net-net, the 70 to 80 we still feel good about.

Myles Walton:

Thanks. Good morning. Just wanted to clarify a couple of things. One, Brian, I think you mentioned $600 million higher abnormal cost on the 787. Is that cash? Is that absorbed now in the '23 unchanged free cash flow guidance? And then also for defense, if you can just touch on your margin profitability expectation and rough magnitude for 2023? Thanks.

Myles Walton:

Alright. Thank you.

Kristine Liwag:

Good morning, everyone. Dave, you mentioned the milestone order from United despite the macroeconomic uncertainty in the near and medium term. So, when you look at COVID-19 now approaching the rearview mirror, China reopening, I mean the demand for air travel has been pretty strong. Can you talk about what your customers are saying about potential new aircraft orders? Should we anticipate more airlines making landmark orders like United? And could we see BCA at a positive book-to-bill for the year?

Kristine Liwag:

Thanks, Dave. If I could do a follow-up, with that environment that you described, it sounds pretty robust. Can you describe the pricing environment for these orders and how they compared to pre-COVID levels?

Kristine Liwag:

Thank you.

Seth Seifman:

Thanks very much. Good morning. And really, I guess, just a little bit of a quick clarification this morning rather than a question. Just making sure to understand the difference between production and deliveries this year on 737. When you say the high end of the guidance is assuming low 30s and moving to high 40s you're talking deliveries there. And then with regard to production, when you say that you are kind of hoping to get to a place where you see some stability this year, that's with regard to production in the factory. And so that would make it very -- make it seem unlikely that the production rate is going higher than 31% this year. Is that a fair way to think about things regardless of where that deliveries shake out?

Dave Calhoun:

And as a reminder that we're not shooting for the low end of the range.

Dave Calhoun:

Yes. Look, I don't want to suggest that we don't have our own opportunities internally. We do, mostly driving cycle out and creating buffers in the right positions, et cetera, all things that you would attach to a company that really practices lean. So we will make improvements there. But the lion's share of the rate discussions is going to be built around the supply chain and the capacity, literally the capacity and capability of that supply chain to meet the new rates. And as I said, very transparent discussions. It's almost entirely built around labor availability, trained labor ability as we move through the course of the year. Hiring is not a constraint anymore. People are able to hire the people they need. It's all about the training and ultimately getting them getting them ready to do the sophisticated work that we demand.

Operator:

And next, we go to Cai von Rumohr with Cowen. Please go ahead.

Dave Calhoun:

I'll take the last part of that to get that off the table. The provision to retrofit the fleet was taken in the fourth quarter. That's behind us. It was small. And there's a reason why it's small. But I just -- I hope everybody knows and understands how important it was to get those extensions in place in the legislation. The argument was purely a safety argument. Fortunately, we got a lot of support on both sides of the aisle, and we got it done. So this gives us all the flexibility we need to get these airplanes certified under the existing applications and we feel good about that. We think first flights for the 7 will be this year and probably for the 10 next year. So we like where that stands. Everybody's calm, the FAA, nobody ever put pencils down. So we're just going to progress. And like always, we're not going to tell you exact dates as to when we expect those certifications. So all feels good. And then yes, the legislation that was approved included some improvements that we put into our cockpit on the DASH 10 that everybody agrees are useful and helpful to pilots. And those largely software adjustments will be incorporated into the entire MAX fleet over several years. As Brian said, it's not a large number, but we provided for it, and we're confident we can meet those objectives provided the CERT and those improvements are accomplished here in the next year or two.

Dave Calhoun:

No, I'm sorry. Everything is on course for the 777X. And I think the only issue that has created some concern over the last couple of years has been our agreement with the ASO and some of the design principles that we think we're making terrific progress with ASO. And I think we will have a coordinated regulatory approach to the set, and so we're staying on our targets.

Operator:

And next, we'll go to David Strauss with Barclays. Please go ahead.

Brian West:

Yes. On the deferred production balance, that's basically the 787 cost base extension that I mentioned has an impact on program margins, and that's amplified by all the finished goods inventory that's sitting there on the under airplanes. So that's driving the increase. And your last question, basically, it's impacted by customer mix and the impact of customer concessions and considerations.

Dave Calhoun:

Yes, but only partially. And as of now, when you see the sort of the results of that effort, you can assume that will be on pause with respect to that until we get -- until we understand completely where China wants to go. So the answer is yes, and you'll see progress but you'll also see a pause so that we can discern what China wants to do. And hopefully, that's good news.

Operator:

Our next question is from Jason Gursky with Citi. Please go ahead.

Brian West:

Yes, sure. On the BDS. So as you mentioned, long term, high single digits, is what we've talked about. But in the near term, the same kind of supply chain constraints and labor availability that we've talked about in the BCA world, impact the BDS role as well. So when the current environment is less constrained and stabilizes, that will be a benefit. We expect it to happen partly in 2023, but the key thing to watch is just the stability of the supply chain is going to be a big, big deal that we're keeping our eye on. And that's going to be important as margins will tend to accelerate. The time and the pace remains to be seen, but it will get better in 2023. On the services side, so we had a big year for the services business. It's going to have to -- and part of that was based on the commercial recovery, and we enjoyed the benefit of that in 2022. But BGS, in terms of their revenue, they finished the quarter at a pretty good spot pretty clean basis. And if you just kind of think about that as how you would extrapolate into 2023 by quarter gives you a pretty good view of where we see that growth coming for. So it will grow, margin will be just fine right within that mid-teen levels that we've enjoyed. So we feel pretty good about the prospects of the service business, very stable, continue to grow, no surprises.

Operator:

Next, we'll go to Ron Epstein with Bank of America. Please go ahead.

Dave Calhoun:

Yes. So Ron, I'm going to highlight three things that I think are going to contribute to a truly differentiated new product. One of them is the trust wing, so I'll refer to that now. As you know, that is technology that's been worked on for the better part of a decade alongside of NASA. And the program that we've embarked on here is how do you commercialize it? How do we put it through the right set of tests, et cetera, so that, in fact, can be incorporated into new airplanes? So there's real intent there to be able to do it. I'm not sure it is going to be as good and/or applicable for middle of the market and/or a wide-body, but it will definitely have a role to play someday in the narrow-body world. So that's number one. Number two, you've heard us talk about the digital thread being able to create the digital model, not just for the airplane, but for the factory and for the servicing. But we are really cutting our teeth on a couple of defense programs that, frankly, we're learning a lot every day, all day, so that whatever we do on that next commercial airplane will incorporate the digital threat. And it will be way more mature than what it's been so far in our discrete defense programs. So anyway, I feel very good about that. And then the last major element has been the one that usually carried the day, but in this case, I think will simply contribute to a better day and that's propulsion technologies, bigger bypass ratios, and you probably know a trusting setup, trusting setup will create that opportunity to a far greater extent than today's wing simply because of the distance from the ground. So there are lots of reasons why I think these technologies can and will be proven and ultimately adapted. And when you're considering a 50-year kind of program for any new airplane, you have to think about this. And in our view, the objective has to be somewhere between 25% and 30% better than it is today. And that's what we're focused on. And I think we have the time to do it and the technologies to play out.

Dave Calhoun:

Yes. Ron, I want to be clear. We have had no trouble hiring people, none. We're sort of at or a little above where we were in the days you guys all remember because we've got so many of these rework apparatus going on, and there are a lot of people required to do it. So our job is to actually just take what we have, incorporate all the learning from the folks who are doing the rework that will displace whatever retirements and or demographic issues that we have over the next couple of years. We have a pretty good setup on labor and a pretty good mechanism ironically with these return to service aircraft and the joint verification, a pretty good mechanism to train mechanics, train our people to do the job. And on the engineering front, man, we've had a real good run hiring is over 10,000. Our job is to make sure that we just train them right, get them involved early and get on the life. So we are not facing a big demand. Our supply chain probably still is working the hiring a bit, but it's nowhere near as important as their -- the training of the people that they're bringing in. I've seen this thing really ease up in the last year, like really ease up. Tier 1s, I doubt any of them are really fighting for talent anymore. And underneath that, I think the supply chains are filling out. It's all about now that training and development.

Operator:

And next, we'll go to Rich Safran with Seaport Research Partners. Please go ahead.

Dave Calhoun:

Yes. So let me take this one. Let me address it at the portfolio level. In light of the difficulties we've had with the fixed-price development contracts, which I consider more of a contracting exposure as opposed to a portfolio exposure, I feel really good about the portfolio broadly, and there are reasons why I feel that way. We're fully invested, as you know, autonomy. I believe autonomy and teaming are going to be one of the real drivers with respect to airplane development, Air Force, Navy requirements going forward. And we're already invested and we're making real progress with both of those members of the fighting forces. And I'm sure you know the programs that we talk about. And there are others we can't talk about, which we're as excited, if not more excited about. So the long portfolio and the development that we've sustained over all these years, I feel really good about. We have the T7 trainer. It's way more important than just the market for trainers itself. Ultimately, we think it's -- it can be used as a derivative to do other things for the Air Force, and I'm sure you know what that's about. But maybe even more importantly, it's an absolute poster child for our digital thread. And it's teaching our customers how to think about the use of the digital thread, and it's teaching us how to perfect all the production technologies that we need to take full advantage of the digital trend. So if I look at our -- just our sort of our wing fleets, I feel very good about where we are. And as you point out, the F-15 -- the new derivatives boy, they are really important to our customers. We feel great about the future. It feels like a new platform, frankly, from my perspective, I'm not going to hand out the production rates at this stage, but we're feeling pretty good about the international demand as well as our U.S. demand. And you know, in light of the only other choices, this gets, frankly, more valuable over time until the really new classified work ultimately was completed and brought to the market. Anyway, I feel quite good about the portfolio. It's development where we stand in it. And I'm sorry, some of the contracting methods that we used in the early going here, but anyway, we are where we are. And I can't get off the page without talking about the tanker, which we all still believe very, very strongly and, again, difficult contracting moment for us. On the other hand, futility to the Air Force has been fantastic. The Vision system our commitment to it and then technologies beyond that allow for even autonomous refueling. These are things we're fully invested in, and we believe in the growth of the industry and the need with our customer. So anyway, there are other things, and you probably know a lot of that, but there's a reason to feel good, frankly, on the development front with respect to Boeing's defense business.

Brian West:

John, we have time for one more question.

Sheila Kahyaoglu:

Good morning, guys. And thank you. I know it's been asked a thousand different ways, but I don't know if I know the answer yet. So maybe, Dave, can you give us an idea of how -- where you are on the MAX and 787 from a cash per aircraft perspective? Or how far that is below prior peak? And is there a cadence of that profitability, free cash flow as we think about production rates increasing, supply chain impacts and just pricing as you get aircraft out of inventory.

Brian West:

Really -- Sheila, you really have to get through calendar year '24. And then a lot of the cloud, a lot of the things that we've been wrestling with, the things that impact the -- our margins and the lumpiness along the way, that all begins to clear as we get to the tail end of '24. And as we think about '25 and on, I think that clarity will be apparent to everybody.

Matt Welch:

And that concludes our fourth quarter 2022 earnings call. Thank you for joining.

Matt Welch:

Thank you, John, and good morning, everyone. Welcome to Boeing’s third quarter 2022 earnings call. I am Matt Welch, and with me today are Dave Calhoun, Boeing’s President and Chief Executive Officer; and Brian West, Boeing’s Executive Vice President and Chief Financial Officer. As a reminder, you can follow today’s broadcast and slide presentation through our website at boeing.com. As always, we have provided detailed financial information in our press release issued earlier today. Projections, estimates and goals we include in our discussions this morning involve risks, including those described in our 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 certain non-GAAP measures. Now, I will turn the call over to Dave Calhoun.

Brian West:

Thanks, Dave, and good morning, everyone. Let’s jump right in. Cash flow, as Dave mentioned is our primary financial metric and it was positive in the quarter. Operating cash flow was $3.2 billion and free cash flow was $2.9 billion, both up pretty significantly versus both prior year and prior quarter, essentially driven by higher deliveries and some receipt timing. Revenue, earnings both impacted by charges in our defense business, where we took a $2.8 billion hit across five fixed price development programs, which I’ll go into. The macro environment challenges that Dave described required us to make certain adjustments, including a reassessment of future period cost forecasts. These adjustments are important to our go-forward momentum as we de-risk our defense portfolio and move to more predictable performance. And we still think about our performance in three parts and are positioning ourselves for an improving trajectory. First, we have reached important milestones across the business and made progress on commercial deliveries with the resumption of the 787 in August. Also, the 737 MAX return to service is largely complete, and we’re derisking the near-term delivery skyline for China. Next, we started to see improvement in our primary financial metric of free cash flow. This third quarter performance puts us on track to be positive for both the second half and the full year of 2022. And finally, as we look to 2023, our operational and financial performance should continue to improve. Now, the acceleration will not be as significant as previously anticipated, and our path to recovery is taking a bit longer than expected driven by the challenging macro environment. Longer term, there is a significant opportunity for our company to return to sustainable growth. As we liquidate the 37 and the 87 inventory, we improve execution on a de-risked BDS portfolio and achieve certification on the MAX, -7, the -10 and the 777X development programs. We look forward to sharing our plans at our investor conference next week. Before getting into the financials, I want to make a few points on the current business environment. Slide 3. While the turnaround is taking a bit longer, one thing that remains strong is demand for airplanes, as the commercial market recovery is playing out better than expected. We still see overall passenger traffic returning to 2019 levels in the 2023 to 2024 time frame. And although the economic indicators point to challenges ahead, this demand has proven resilient. In August, domestic traffic was at 85% of 2019 levels, led by the U.S., Europe and Latin America. Going forward, the recovery will be driven by China domestic and international traffic, which remain below 2019 levels at 62% and 67%, respectively. In aggregate, commercial passenger traffic was at 74% of 2019 levels. So, even with economic headwinds, we see the strength of demand continuing as air traffic recovers to its historic levels. In Defense and Space, we see solid long-term markets, both domestically and internationally. In the U.S., there’s broad support for increased defense spending in Congress to meet current challenges. And internationally, ongoing global tensions are driving our partners and our allies to announce plans for increased spending and additional capabilities for national defense, and we’re working hard to support their needs. In services, our business is well positioned with a broad set of offerings and will continue to benefit from the growing commercial fleet, a robust cargo market and increasing defense budgets. Turning to the supply chain. Constraints continue to impact production in both our commercial and defense businesses. On the commercial side, we’re focused on a few key areas, namely engine deliveries, which is the primary constraint to 737 production rate stabilization and subsequent increases. Customers are counting on us to resolve the situation with our supply chain partners, and we will. We’re taking actions to mitigate these impacts and support the supply chain. And as Dave described, we’ve increased our on-site presence at first tier and sub-tier suppliers to support work movement and address industry-wide shortages. And we’re utilizing our own internal fabrication for surge capacity and managing safety stock inventory levels and increasing where necessary to protect risk. With overall healthy demand, finished goods inventory and a diverse backlog, we feel well positioned to navigate the current environment and are confident that our product lineup is well suited to meet our customer needs. With that backdrop, let’s turn to the financials on slide 4. Third quarter revenue of $16 billion increased 4%. Core operating earnings were negative $3.1 billion, resulting in a loss per share of $6.18, largely driven by $2.8 billion of defense charges. We generated $3.2 billion of operating cash flow, a significant improvement from the same period last year, primarily due to higher commercial airplane deliveries and favorable receipt timing. Also, similar to the same period last year, we benefited from a tax refund of $1.5 billion in the quarter. Let’s move to Commercial Airplanes on slide 5. Third quarter revenue was $6.3 billion, up 40% primarily driven by the resumption of the 787 and higher 737 deliveries. Operating losses of $0.6 billion and the resulting negative margin rate reflect abnormal costs and period expenses. On the 87 program, we delivered 9 airplanes in the quarter and have 115 airplanes in inventory. The pace of deliveries from inventory going forward will be based on finishing rework as well as customer fleet planning requirements. We expect most of these airplanes to be delivered over the next two years. We continue to produce at low rate and will gradually return to five airplanes per month over time. Near term, the supply chain remains a key watch item for 87 production and deliveries. Longer term, with more than 400 airplanes in backlog, we anticipate higher production rates due to the expected wide-body market recovery. As customers return to medium-term fleet planning, we continue to have positive discussions with our customers on the 87. We recorded $330 million of 87 abnormal costs in the quarter, in line with expectations, and we still anticipate a total of about $2 billion, the most be incurred by the end of 2023. These costs are driven by rework and production rates below five per month. Moving on to the 37 program. We delivered 88 airplanes in the quarter, below our previous expectations, primarily due to supply chain disruptions, which impacted factory flow time. We continue to work towards stabilizing deliveries. However, given our delivery to date, we now estimate about 375 737 airplanes this year. The monthly delivery trend is expected to remain in the low-30s into next year. We ended the quarter with 270 MAX airplanes in inventory, down 20 versus last quarter. There were 35 deliveries out of storage, largely in line with our plan, but we also began positioning for MAX 7 deliveries and built 13 airplanes in the quarter. Of the inventoried airplanes, 138 are for customers in China. We continue to explore options to remarket some of these airplanes as we derisk our near-term delivery plan. Based on our latest assessment of China and the -7, -10 certification time lines, we now expect most of the inventoried airplanes to deliver in 2023 and 2024 with some moving into 2025. Moving on to the 777-9 program. Development efforts are ongoing and the program time line is unchanged from what we shared last quarter. We still anticipate delivery of the first 777-9 airplane in 2025 and continue to coordinate with the FAA to prioritize resources across our development programs. We booked $111 million of 777X abnormal costs in the third quarter, in line with our expectations, and we still expect to record about $1.5 billion of these costs through 2023, while 777-9 production remains paused. During the quarter, we booked 227 commercial airplane orders. As Dave mentioned, the customers we are proud to serve. In September alone, we received orders for each of our programs, including the 737 MAX, the 767, 787, 777, 777X. And at the end of the third quarter, we had over 4,300 airplanes in backlog valued at $307 billion. Let’s now move to Defense, Space and Security on slide 6. Third quarter revenue was $5.3 billion, down 20%, and operating margin was negative 52.7%. Results were driven by approximately $2.8 billion of losses on certain fixed price development programs. KC-46A and VC-25B made up the bulk of these charges at $1.2 billion and $766 million, respectively. We also recorded losses on T-7A, MQ-25 and commercial crude programs and saw pressures across other programs. These losses reflect a comprehensive review of program financial estimates. While some changes resulted from new information or developments during the quarter, others were the result of our most recent assessment of estimated future performance. Adjustments were primarily due to higher estimated manufacturing and supply chain costs as well as technical challenges, which are expected to continue longer than anticipated. The cash impact of the losses we recorded year-to-date are now heavily weighted in the near term, resulting in a cash flow usage at BDS for both 2022 and 2023. While current performance doesn’t reflect where we’d like to be, for sure, we’re focused on driving execution stability. These programs have an outsized impact on BDS margins and will be key to margin recovery in future periods. On the demand side, we received $5 billion in orders during the quarter, including tanker awards from both, the U.S. and Israel, resulting in BDS backlog of $55 billion. Additionally, the Apache helicopter has been selected by the Polish military. Now, let’s turn to Global Services results on slide 7. The Global Services business had another strong quarter, primarily driven by our parts and distribution business. Third quarter revenue was $4.4 billion, up 5%, and operating margin was 16.5%. Results were driven by higher commercial volume and favorable mix, partially offset by lower government volume. We received $5 billion in orders during the quarter, including a tanker support contract for the Italian Air Force and an F/A-18 depot expansion contract. The BGS backlog is $19 billion. With highly valued commercial capabilities and support for our defense portfolio, our service business is positioned to see continued growth. Based on what we’ve seen so far this year, we anticipate healthy total services top line growth for 2022 and similar growth in 2023. Now, let’s turn to slide 8 and cover cash and debt. We ended the third quarter with strong liquidity with $14.3 billion of cash and marketable securities on the balance sheet, an improvement of $2.9 billion since the end of the second quarter driven by free, cash flow generation. During the quarter, due to our improving cash flow and business outlook, we chose to reduce the size of our revolving credit facility capacity from $14.7 billion to $12 billion, which remains undrawn. Year-to-date operating cash flow was a generation of $55 million, and free cash flow usage year-to-date was $841 million. We expect our primary financial metric, free cash flow, to be positive for the fourth quarter and the full year, driven by commercial deliveries. Our debt balance is consistent with the end of the last quarter at $57.2 billion. Our investment-grade credit rating is a priority, and we remain committed to reducing debt levels through strong cash flow generation over time. In conclusion, while we have more work to do, we’re executing on our turnaround, and we’ve come quite a long way over the last three years. We remain focused on our own performance and taking the right actions to drive stability and growth for the future. We also continue to invest in key capabilities that will lay the foundation for the future. And through it all, our team is demonstrating exceptional resilience and dedication. More work ahead, but we’re confident that we’re on the right path. With that, over to Dave for closing comments.

Operator:

[Operator Instructions] Our first question comes from Sheila Kahyaoglu with Jefferies. Please go ahead.

Dave Calhoun:

Well, that -- let me start with steps. So, I’ll let Brian maybe quantify best he can. But I -- the steps are they’re as clear as they can be. We’ve been talking about this for quite a while. We get on regular calls with our counterparts at the engine suppliers. And as you know, in our case, it’s predominantly CFM and then GE broadly across the wide-body fleet, et cetera. So, we literally go down through all of those schedules. It inevitably comes down to castings and the support that they get from the two big casting suppliers. So, the best thing I can say now is that we are clearly on the same page, ourselves and our suppliers. We are taking steps to increase at a very gradual and, I hope, a disciplined way, the increase in rate with respect to castings and then ultimately from engines to us. I don’t want to predict outcomes on that front. I think the most important thing is we’re not being surprised as frequently as we used to be, and I do think that the engine suppliers are getting their heads -- their arms around things in a much better way than they had previously. So that’s really the situation as it is. I am confident that the industry will step up, but it will take more time than I probably had hoped when we started these conversations. And I suspect it won’t be until we get to the sort of end of next year before we can really make sizable rate increases with respect to that constraint. Brian?

Operator:

Next, we go to Myles Walton with Wolfe Research. Please go ahead.

Dave Calhoun:

Yes. Thanks, Myles. Let me get to the last part. It’s going to be about the same in terms of the headwind, to answer your last comment. Our BDS portfolio, the 85% of the business is doing pretty well. It’s these fixed-price development programs that, unfortunately, we’re working our way through. We had to account for recent performance, including a reassessment of our forecast cost to complete. There’s no doubt about it. The biggest impact was the tanker, as you mentioned. At $1.2 billion, it was driven by two things. The supply chain constraints and specifically part shortages have been persisting and they likely will persist longer than we had contemplated; and then, two, this labor instability. As you know, all airplane programs contemplate a learning curve improvement over time. And we adjusted our assumptions because labor stability is an issue that is likely to continue into the future. We can hire. It’s getting the workforce trained and up to speed that we had to account for in this particular period. We applied the similar framework to the VC-25B, where the labor stability issues are magnified because of the requirement to get secured -- security clearances. And that’s also contributed to schedule shifts. So, those are the two big ones. And it’s just at this moment, the provision reflects what we think is likely to happen in front of us. The other bucket really relates to what I would call true development, which is MQ-25, T-7 and Commercial Crew. We did adjust for similar macro constraints where needed. But there’s also a recognition, there’s technical challenges that we’re organized through and sometimes impact schedule. But overall, we feel very confident about those programs long term and the benefits that we’ll accrue, once we get them out in the market. So, there’s no doubt that we derisk these programs. Now, the two big ones for the next two years, and I’m not suggesting perfection, but we definitely lowered the risk profile. And for the smaller programs, in some cases, we derisked even longer. I think the thing we have to keep in mind is that our mandate is to stabilize and now deliver very important products to our customers who need them, anyway.

Dave Calhoun:

No.

Operator:

Our next question is from David Strauss with Barclays. Please go ahead.

Brian West:

So, I’d answer that question. We’re confident that we will be able to satisfy the maturities in front of us. We’ll talk a lot more about that. But, given the fact that where we ended the quarter with our cash balance, $14-plus billion, plus being able to be cash flow positive in the fourth quarter, that’s not a concern. In terms of the rate of change, we have a supply chain, as Dave mentioned that we’ve been dealing with, and that’s been reflected in our commercial deliveries through the course of the year. And we’re working our best to stabilize and get more predictable. But, while it may not be quite the rate of acceleration going forward, momentum is going to improve. It just could take a little bit longer, and we’re going to share a lot more about that with you next week. But, in terms of our liquidity position, what’s in front of us, high degree of confidence.

Dave Calhoun:

Well, there’s active discussions with customers about that topic. More to come in terms of things getting finalized, but it’s an active discussion, so that we can no longer defer that decision and actually start to think about how we liquidate that in terms of working capital improvement and cash flow. More to come, and we’ll keep you updated.

Peter Arment:

Hey Dave, maybe I could just circle back on the China question that David was just talking about. Have you seen any kind of positive movement from customers over there regarding wanting the MAX? And right now, you’re up to 51% of the store fleet is tied to China with 138 aircraft. And just, how you’re thinking about that because that obviously that percentage is going to continue to grow? Thanks.

Peter Arment:

And just as a follow-up, Brian, just the 8 to 10 out of storage, is that still a good number on a monthly basis? Thanks.

Operator:

Our next question is from Ron Epstein with Bank of America. Please go ahead.

Dave Calhoun:

Yes. Ron, I’m not going to comment on the past. I’m not sure that’s helpful to anybody. Our need to focus on free cash flow is a result of having taken a significant amount of debt on in light of the crisis that we had, some self-inflected; some definitely COVID related as it relates to the marketplace and all the things that we’ve had to contend with. So, we took on a lot of debt. Shareholders told us it would be great if you got rid of that debt sooner rather than later. And so, we’ve been focused on free cash flow. It is a great metric, period, in terms of how we measure all of our people and the work that we’re doing. It does not suggest that we have stopped investing in new capabilities that will ultimately differentiate this company and bring it right back to the leadership role that’s always enjoyed. So, I’m probably not going to take the bait. I do have confidence that we are doing exactly what we need to be doing, and the free cash flow metric is a very clear indicator of performance, not just in the near term but also the medium and long term. So, I’m sorry, but that’s the answer.

Brian West:

Well, thanks, Ron. They all have to go through a prescribed set of rework. We’ve been very clear on that. And we’ve contemplated what that is going to take. And now it’s up to our great team in Charleston and in Everett to get that work done. And it’s going well. It’s early innings, but it’s going well. And we have high confidence that they will get done what they need to do to get those inventoried airplanes in the customers’ hands over the next two years.

Seth Seifman:

I just wanted to dig in a little bit more on this issue of engines and castings. LEAP deliveries were up significantly in the third quarter. And it sounds like they see things getting better. I haven’t gotten the impression from Airbus that they’re expecting quite the pressures next year that you are. It seems like they expect that things are getting better. Is that because most of the LEAPs are going there and you guys have to wait longer, or is there more to it, or are these increasing CFM deliveries, is that not really enough to help you guys?

Seth Seifman:

Okay. And just to be clear then, it is the engines though that is preventing Boeing from delivering 737s off the line between, let’s say, the expected pace of 20 a month to be at a total delivery pace of low-30s versus the nominal production rate of 31 a month. So, they’re only able to get you engines to deliver at roughly 20 planes per month or so.

Operator:

And next, we’ll go to Noah Poponak with Goldman Sachs. Please go ahead.

Dave Calhoun:

Well, that’s a big complex and macro question. I’ll start with us. We have brought on 10,000 people. We are at a headcount level that we think can handle rate increases and all the things that we need inside our own shop. We have significant training and development programs and investments that are being made as we speak, so that we are productive with the introduction of all of these new people. I don’t have a number with respect to all of the supply chain constraints and labor shortages that they might have. But a lot of our constraints and -- with those suppliers that represent constraints are labor related. Some like in the casting world, are a little more labor and experience related because you may know in the casting world, that is not a simple process. It’s not just bring in people and start them up. There’s a real learning curve and cycle that is needed to sort of ramp up capacity. So, I don’t have a sort of big number for you. I wish I did. I know this. All of us, all of us in this industry are wrestling through these constraints. We try to compare notes. We’re trying to help our suppliers on the commodity side with our own contracts and the application of those contracts to their needs. And then on the labor side, anything that we can do to help them find people, that’s what we do. And we often second or send our own people out there to help them. So, it’s -- this is just what we’re in. I think it’s going to take probably all of next year before things really do begin to stabilize because we begin to see layoffs in other industries. We definitely feel that in the software world, we’re not having any kind of trouble bringing in the engineering resources that we need, particularly as it relates to software development because the rest of the industry that competes with us is beginning to soften considerably. So I wish I had a big specific number and an easy resolution. I don’t. This is what we’re going to struggle through all year next year.

Rob Spingarn:

Dave, a couple for you. You’ve said numerous times today that demand is not the issue. So, I was going to ask if you could talk about the developing wide-body cycle and the environment for that. And could it mitigate some of the narrow-body issues in China, in other words, selling wide-bodies into China? And how might that influence your rate plan for 87 and 777 freighter?

Rob Spingarn:

Okay. And just to clarify, a slightly different topic. How does this BDS review differ from prior reviews? How confident are you that you’ve captured everything here?

Brian West:

I don’t have much to add other than we sit in this environment and you can’t ignore these macro constraints and how they impact these programs. And that just is what happened this quarter. But the thing that we’ve done our best to do is derisk, and derisk, as Dave mentioned, some of these assumptions and future cost forecasts. So, we like where we closed the quarter of our position. We do it every quarter, and we feel confident. This particular quarter, it really was the recognition of the very rapidly changing environment that is persistent, and can’t assume it’s going to get better anytime soon.

Cai von Rumohr:

So, I guess, I kind of get the $2.8 billion on the development program, although that seems large. What confuses me is that excluding the $2.8 billion all those mature programs, F-18, F-15, Apache, et cetera, look like they’re at breakeven. They’re making no money when Lockheed and GV have their issues, but basically the mature stuff is doing okay, how come?

Brian West:

We saw across some of these other programs, similar disruptions in terms of both, factory stability, part shortages, labor. So, those weren’t immune at all. It’s just that they’re not magnified in the sense that there are these big fixed price development programs that have these reach forward losses embedded in them.

Brian West:

You know in making comparisons across our companies, our BDS is programs only. It’s not including the government services part of our business, which continues to run at reasonably healthy margins and does its things. So, I know you know that, but I just want to point it out.

Brian West:

Better numbers, better performance, better everything. So, I don’t want to tell you anything other than that. Our objective is to make sure these tankers are doing the job for our military customer. That is it. That’s all we’re focused on. And they are doing that. And they are now permitted to do all the missions that are required. So, we are knocking down risk and we are implementing these programs. And so, I am confident we’re going to get where we need to get, and you’ll be confident when you see the numbers play out the way I expect them to play out.

Dave Calhoun:

As you know, better than anyone, these are complicated programs, lots of assumptions, lots of moving parts, backdrop of a volatile environment. We did our very best to derisk.

Operator:

And that will come from Doug Harned with Bernstein. Please go ahead.

Dave Calhoun:

Doug, no, I can try to reconcile numbers. All I can tell you is I personally witnessed alongside my counterpart the reconciliation of the engines we need to deliver the airplanes and the engines they’re producing on weekly rates. And so, we just have -- we have a gap. We got room to make up. And we’re going to get there, but it’s going to be at a constrained rate and we know that. And that’s what we’re trying to factor into our forward looks,, and that is what you will see when we get together next week. So, there’s no -- there is no other constraint, Doug, with respect to our rate projections and others. There are lots of weekly constraints that just simply impact the stability of the line, but they are not going to be rate limiters, either short term or long term. It will boil down to engines and the competition for castings between Pratt and CFM.

Brian West:

It was contemplated, Doug.

Brian West:

Sure.

Matt Welch:

Thank you, John, and good morning, everyone. Welcome to Boeing's second quarter 2022 earnings call. I am Matt Welch and with me today are Dave Calhoun, Boeing's President and Chief Executive Officer; and Brian West, Boeing's Executive Vice President and Chief Financial Officer. And as a reminder, you can follow today's broadcast and slide presentation through our website at boeing.com. As always, we have provided detailed financial information in our press release issued earlier today. Projections, estimates and goals we include in our discussions this morning involve risks, including those described in our 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. [Technical Difficulty]

David Calhoun:

Start over? Okay. Sorry, we were muted. It's good to be with all of you. Thanks, Matt, for the intro. I want to start my brief comments upfront with just a revisit at the Farnborough Air Show a little over a week ago. It was important for us. It was an emotional outcoming for our company and our people. We always look a little better when we are standing next to our products and the flight teams who are operating them. It was great to see, and I think everyone witnessed the 777X in flight, which was more than magnificent, the -10 also in flight and our investment in Wisk and its product in the important eVTOL market. We met with our customers. We met with suppliers, partners, the usual, except it didn't feel like the usual because it had been a while. We're proud of the orders that we collected over the course of that week, over 200 orders and commitments. And importantly, it covered the whole line, the 737 MAX, our 87 and the 777X. And it shows the extent to which our airlines are already -- our airline customers are already anticipating fleet renewal projects and their willingness to bet forward on that prospect. Needless to say, they're all as busy as they can be trying to get their own fleets up and running and the supply constraints they face dealt with. Looking at the quarter, a lot of things good happened over the quarter. We are on the verge of returning to the 87 delivery process. I won't give a date. I never have. That's up to the FAA. But we've been working closely with our customers and the regulator on those final steps. We're proud of our team. We're proud for the discipline and the detailed work they applied over this long course. And it will be worth it. In the end, we'll have a predictable and high-quality line, and our customers will be pleased with the products. And a reminder to everyone that this 87 fleet that's out there has been working harder than it's ever worked. And it's been performing incredibly well. Turning to the MAX. Again, one airplane at a time, the fleet is performing incredibly well, oftentimes exceeding the specification and expectations our customers had when they originally placed their orders. And we continue to work hard on predictability of the delivery chain. And we're focused mostly on the engine supply lines and then those second-tier constraints that those engine suppliers are facing. And I think we've made an awful lot of progress on that front. Brian will give you sort of our best guess on how this year turns out with respect to those deliveries. But it is -- it's now, I think, based on a far better knowledge of what those supply constraints are and commitments from our supply side engine suppliers. In BDS, I don't want to skip over the Starliner. It was important. It was an emotional up for all of us at Boeing to get back on track. We had a wet dress for the space launch system rocket, the biggest rocket yet. We're looking forward to that launch. So we had a good sort of engineering coming out with respect to those achievements. And yes, we're still working through some of the challenging macro environment issues, especially with respect to our fixed price development contracts. And Brian will also walk you through that. And then finally, on the services side, like pretty much everyone that's been reporting, it is coming back, and it's coming back in a rapid way. Our commercial service business was up 30%. It carries strong margins with it. And so it's a big and important contributor to our overall cash flow story. And again, the result of all of this work, a big step forward with respect to stability. We did debt to cash flow -- operating cash flow positive. So that puts us a little bit ahead of our internal plan, and we feel good about that. And we are still committed to be cash flow positive for the calendar year 2022. It's underpinned by a very strong commercial market. I think you all know that. Everyone has spoken to it. A lot of supply constraints out there with respect to the operators of our airplanes, the airlines and what they've got to do to get the fleets running efficiently and build their capacity where it needs to be. But they are out there in the market trying to rebuild their fleets for the future and to meet that significant demand. And so far, we have not seen any drawback on that demand. While we understand the sort of recession fears that are growing out there so far, it has not impacted the aviation industry or our customers. So mostly what we're focused on, and I don't think it will surprise anyone, and I think I've heard it in most of my peers' reports is the supply chain, stabilizing it, making sure that it's predictable and consistent. And for us, in particular, with respect to the commercial side of our business, it relates to engine production, engine availability so that we can predictably deliver airplanes to our customers. We think we've made an awful lot of progress on that front. I know you've heard directly from the engine suppliers. They are making progress, and we've adjusted all of our delivery rate expectations at least in the near term to satisfy those constraints. A comment quickly on regulatory and geopolitical. I'll start with geopolitical, China. The good news is that because of the strong demand in the marketplace, we've been able to manage our risk going forward with respect to the airplanes that we have built and are awaiting delivery. We intend to stand by our Chinese airlines, stand by the CAAC and get those airplanes back. But the timing, which has been pushed and deferred in light of some of the COVID management issues in China and some of that geopolitical overhang, we can suffer our way through that and will. And it should not impact the cash flow positive posture that we've taken for the year. So it's a little easier to manage for us. It's no less important, and we will continue to encourage our administration to work as closely as they can with the Chinese to reopen the trade card or with respect to aviation, a relationship we've enjoyed for over 50 years. And we'll continue to support our customers. Medium and long term, it does represent the difference between commercial aerospace leadership or not, given the size and scale of the China market. And then on the regulatory front, we are working constructively with the FAA. We have our heads down. We're working towards certification by year-end on the -7 and the -10. And we believe what we're working on is, in fact, the safe option with respect to all options in the narrow-body space. And so we're going to just keep plugging away. And anyway, that's enough said. As we navigate through this environment, stability is the watch word for all of us. We want to be predictable. We think that will differentiate us. And that's why we've got -- we're focused on it. We continue to increase our investment in research programs, the readiness program with respect to the next big commercial airplane, all the digital modeling tools that are required to be ready for that, we continue to invest aggressively in. And we continue to enhance those underlying digital technologies that we will bring ultimately to the services market as well. Safety, quality, transparency, these are values, and this is what we remain focused on. So before I turn it over to Brian, the MAX, it's on track. And it's performing for customers, in many cases, exceeding expectations. We think we're through the most difficult parts of COVID-19. Starliner, a pivotal and emotional test for The Boeing Company, and we feel good about it, and we're ready for the crewed flight. Global Services, on its way back in a big way. We feel terrific about their progress. And now we are at the detailed moment to get ready for 787 deliveries, the moment we've been waiting for. And we look and feel as though we're on the verge of doing so. So we've taken a long view. We continue to take a long view. And we do believe we're in the middle of a turnaround, and it's beginning to show itself. So with that, I'll end my opening comments and turn it over to Brian.

David Calhoun:

Yes, I'll keep them brief. We do believe we're in the middle of a momentum shift. We're all anxious and looking forward to delivery of our important airplane, the 787. Again, a reminder of how well it is performing in the field, and therefore, this delivery stream is critically important to our customers. So I'll leave it with that, and turn it over to Q&A.

Operator:

[Operator Instructions] Our first question comes from Doug Harned with Bernstein.

David Calhoun :

Yes, Doug. So why don't I start with 87 predictability? So like we said and like you acknowledged, we can't give you a date. But what we do track is all the work, any issues that the both teams have wrestled with over this time. And we are approaching closure on all of that. The number of documents, the number of analyses, the number of sign-offs has progressed at a fairly rapid rate here toward the close. So we see that documentation phase, which has been a lion's share of the phase, as closing relatively soon and then, therefore, the readiness of airplanes, which we have been working on at exactly the same moments simultaneously, has also been in shape to the point where customers are climbing around the airplanes and making certain that they are also ready for delivery and acceptance. So all that's coming together. And yes, the FAA remains in control, but there's just enough workload on sort of both fronts, readiness of the airplane and the documentation and certification requirement that we just feel like we're on the verge and are reasonably confident in that front. So that's why I feel different this time. And I will acknowledge, Doug, that we have felt like it was at near term in previous periods, but not with the same level of due diligence that I feel now. On the MAX delivery front, let me turn it over to Brian. He's got all the numbers.

Operator:

Next, we'll go to Rob Spingarn with Melius Research.

David Calhoun :

So let me discuss the engine-related. It is a very important issue to be resolved, and it is not yet resolved, that structural casting part of the puzzle. You may recall 2 or 3 meetings ago at this, I acknowledge that would eventually be the issue. And of course, it is. So that capacity is limited. It's not just about money, it's qualification. It's one of the toughest components inside the supply chain to ultimately get to a qualified status as well as just the sheer physical capacity to do it. So I do think we all have to moderate our rates to make sure that we are ahead of that. And I do think the work that we've done, unfortunately, our choice not to move up to 38 here as soon as we had originally predicted is honestly based on that constraint. But I do believe we're at a state now we're at 31, we're comfortable the industry can get there and maybe have already gotten there. And then we're going to watch as they qualify more capacity going forward to make -- before we pull those rates up. So is it medium and long term? Somehow some way that constraint in my view in the next 3 to 5 years has to get solved itself. Some investment has to get made, and capacity has to expand for the engine suppliers to keep up with what I believe will be continued robust demand. So that may not be a satisfactory answer, but that is the reality of the world I've lived in for the last 20 years. So -- and then with respect to the other parts of the question, I'll flip it over to Brian again.

Robert Spingarn :

What does the trajectory look like?

Robert Spingarn :

For MAX production. So Dave just talked about 38. Do we know when that's going to happen?

Operator:

Next, we go to Sheila Kahyaoglu with Jefferies.

Brian West :

Yes. So in the short term, it will be a little bumpy as we start to roll out the 87s and continue to get confidence in our stability in 37s. But over time, when we get to a point where both are stable and operating where we expect them to, the margin rate is going to go up. I can't predict the number. I won't predict the number, but they are going to get better and better because we are going to be more predictably in a stable fashion to be able to deliver on both fronts, anyway.

Noah Poponak :

I'm just going to circle back to this MAX delivery discussion because it's a bit confusing. If I -- depending on how you define low 400, if I subtract the first half from that and divide by 6, it suggests the delivery pace would slow compared to what you did in June. And that's with a higher production rate. So the -- suggests the inventory unwind is slowing. So why would that happen? And then just on this underlying rate, I mean, any supplier we talk to says they're kind of ready to go and just waiting for direction from you that they're not getting. The leasing companies are saying there's a narrow-body shortage. You have a competitor at a much higher rate. Is it -- is your answer to Rob's question that it's just purely forgings and castings and otherwise, you'd be higher? It's a little hard to square the circle on all of those inputs.

Brian West :

June, we're proud of the 43 that we're able to deliver. I want to caution everyone, as you remember, April was 28. May was 29. I just indicated that July is going to be a little light. So I don't want us to get ahead of ourselves in terms of taking the June rate and extrapolating it. That would be a mistake. Month in and month out, we're aiming at stability around 31. Some months might be a little lower, some months might be a little higher. When we look at the whole balance to go and the things we're watching, we feel comfortable in that low 400 number. And hopefully, it will be better, but that's right now we're squaring to.

David Calhoun :

Well, first of all, we're doing our very best to be transparent, and we are always informing them that -- when we get closed. How much lead time? I don't know, 3 or 4 months if it's a formal designation. But I think they're all -- like you said, I think a lot are prepared to get to those higher rates. But we need a few specific ones to be ready to get to those higher rates. And I -- sorry to keep coming back to that, but that's really where it is. I think we have our eye squarely focused on the constraint that matters the most. And as that plays out, you'll probably know as fast as I do, and then we'll let that go to the rest of the market. I think the rest of the market will respond quickly.

David Strauss :

Dave, Brian, wanted to see if you could tell us how many roughly MAX -- or sorry, 787 deliveries you're assuming for the rest of the year because it's pretty hard to kind of bridge the positive free cash flow for the year without assuming a fair amount of 787 deliveries in the last 5 months. That's my first question. And then the second question, you've talked about a meaningful improvement in free cash flow in '23. I just wanted to see if you could put some bounds around that? Are we talking a couple billion dollars? Or are we talking -- the consensus right now is showing a $7 billion improvement in free cash flow next year. I want to see if that's within the realm of reason.

David Strauss :

All right. A quick follow-up. Dave, the IG audit that's going on with the FAA and the change in leadership there, you don't think that potentially holds up the 87 at all?

Operator:

And next question is from Seth Seifman with JPMorgan.

Brian West :

So we -- that balance did come down this quarter, and we do expect it to come down. It will. It will be the excess PDP burn down that will come down. But it gets offset by the benefit of incoming PDPs and order receipts. And we love that, right? There's a lever of our business that accrue to us. And the more we do that, the more we've got airplanes going and commitments and orders to our customers. So -- but overall, the trajectory will have to fall quarter in, quarter out. It's hard to peg because of that accretive offset.

Brian West :

Well, I'm not going to comment on $10 billion. I do know that there has to be the burn down of the excess, and that will happen over time. And we do our best to try to isolate that as terms of our projections. On the other hand, the benefits of order volume is something that we benefit from as well. So it has been flattish over the last several quarters. It's been taking small chunks down, and we expect it to continue to come down. But I can't call it an order of magnitude of a $10 billion drop the way you're suggesting. There's just too many dynamics in there, and I'm reluctant to make those kind of statements.

Operator:

Next, we'll go to Cai von Rumohr with Cowen.

Brian West :

So I'll take the second part of that. I think that reliably month in, month out, we'll aim at 31. Anywhere from 8, 10, 12 is the range on liquidity from inventory. It could be in that kind of mix. And that gets you to the low 400s for the total year is the way I would think about it. I don't think the pieces go much below 8 coming from inventory, and I probably don't think we'd do better than 12 in any given month. But we will modulate between that and the production rates as we go into the back half of the year.

Cai von Rumohr :

And you've made the point that demand is so strong. What will you have to see to make the decision to raise the rate from 31 per month?

Operator:

And next, we go to the line of Kristine Liwag with Morgan Stanley.

David Calhoun :

Well, that's -- well, I've been trying to encourage them for a very, very long time. Honestly, I think it's going to be, as is always the case, they're going to increase their margins. My guess is it will be considerable. I don't know all their contract timings and all their relationships with our engine suppliers. But you know how hard they're going to be working. And when those margins get to a point where everyone believes it's worth investing a significant amount of money, that's what they'll do. And I suspect that day will come. And I will encourage the industry in that way. And they're going to have to believe in our demand forecast, which, so far, I think we've been highly credible with respect to the long-term demand forecast for airplanes. So on the -- on all those readiness questions and investments, we are -- you're right to ask the question because we've said to everybody if you're in pursuit of predictability, then you have to invest in all those buffer stocks. And you have to stay ahead of this curve in every way that we possibly can. And I'd say it's marginally more investment-intensive, but not enough to honestly make that big a difference for us going forward, especially when you compare it to our investment in finished goods inventory, which right now is a bit of an all-time high. And I will also -- we haven't talked about it, just mentioned to everybody that while none of us like how we got here, if you are faced with a bunch of supply constraints as a market over the next couple of years, having over 400 airplanes that are finished at your fingertips, and yes, they're hard to get out and get ready and back into the marketplace, is a pretty good buffer in and of itself and allows us to exercise a little extra discipline on the stability front as we begin to march up that curve over the next 18 months. So anyway, I don't want that to get lost as a buffer overall.

Richard Safran :

I'd like to shift the topic to defense for just a minute, your comments about stable global demand. Could you also comment on international demand in general for defense equipment? And maybe in your answer also comment about additional demand for your tanker programs, the 46 and MQ-25? And the reason why I'm asking this is I believe both these programs had quite aspirations for international sales. So I thought maybe you'd comment on that as well.

Operator:

And we'll go to George Shapiro with Shapiro Research.

David Calhoun :

Well, there are awful lot of irons in the fire. And like you, I try to compare and contrast how many irons in the fire now versus where they were. Certainly in the COVID period, significantly hotter. But even in that prior '19 world, there's just a lot of irons in the fire, and there's already a concern about supply constraints. So you know what that mix ends up doing. And then I will just add to that puzzle. You know the sustainability constraints. And while you may be skeptical and maybe I am too about renewal or taking airplanes out of service, I think that day is on us. And I think that's going to be real in the years ahead. You'd be surprised how many of the orders, particularly in the mature markets like Europe, et cetera, where that is the discussion more than any other, which is we need to improve the sustainability performance of our fleets otherwise, we're going to lose ground. I will point, if you don't mind, to a tool we introduced at the show called Cascade, which is a measure of emissions for every airplane every day for everybody. And it's meant to be an open tool for the industry to use to think about policy changes and all those things that are going to incent the renewal of fleets and the improvement on this front. That tool is a tool that we'll show you in our November meeting, and it's one I hope you'll use because I do think that changes the -- that rate of retirement in a pretty big way.

David Calhoun:

Yes. No, exactly. But those 25-year-olds -- I believe the pressure on this will not subside. It will grow, and policies will get written. I think our trick here, honestly speaking, for the industry for a moment and as you get familiar with the tool that I'm referring to and think about this, our trick is to make sure that policy with respect to the environmental and sustainability performance of the aviation fleet does not get so far ahead of the industry that it stopped the music. We've seen that happen in the energy world a little bit. I don't want to see that happen in the aviation world. So that's why this tool is important to us. Incent the retirement of some of the old, less efficient airplanes. And yes, that's good for us and good for the industry, but also educate the policymakers so they don't get so far ahead that it begins to constrain the industry's growth.

David Calhoun :

Well, so far, I'm not sure I can draw the correlation all the way to retirement, but I -- this general recession thing so far hasn't impacted our aviation industry. Will it at some moment? Maybe. Price elasticity has been remarkable as I look at things. And demand for air travel, I think, has been prioritized fundamentally to a higher slot in the consumers' list of priorities. So anyway, I'm not smart enough to draw a perfect line between one and the other, but I believe that the retirement world is going to change in a pretty big way.