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  • Good day, everyone and welcome to The Boeing Company's Second Quarter of 2018 Earnings

  • Conference Call.

  • Today's call is being recorded.

  • The management discussion and slide presentation, plus the analyst and media question-and-answer

  • sessions are being broadcast live over the internet.

  • At this time, for opening remarks and introductions, I am turning the call over to Miss Maurita

  • Sutedja, VP of IR for The Boeing Company.

  • Miss Sutedja, please go ahead.

  • Thank you and good morning.

  • Welcome to Boeing's second quarter 2018 earnings call.

  • I am Maurita Sutedja, and with me today is Dennis Muilenburg, Boeing's Chairman, President

  • and CEO and Greg Smith, Boeing's CFO and EVP of Enterprise Performance and Strategy.

  • After management comments, we will take your questions.

  • (Operator Instructions) We have provided detailed financial information in today's press release

  • and you can follow the broadcast and presentation through our website at boeing.com.

  • Before we begin, I need to remind you that any projections and goals in our discussion

  • today are likely to involve risks, which is detailed in our news release, various SEC

  • filings and the forward-looking statement disclaimer in the presentation.

  • In addition, we refer you to our earnings release and presentation for disclosures and

  • reconciliation of non-GAAP measures that we use when discussing our results and outlook.

  • Now, I will turn the call over to Dennis Muilenburg.

  • Thank you, Maurita, and good morning.

  • Let me begin today with a brief overview of our second quarter operating performance followed

  • by an update on the business environment and our expectations going forward.

  • After that, Greg will walk you through the details of our financial results and outlook.

  • With that, let's move to slide 2.

  • Thanks to the dedicated efforts of employees throughout our Company, Boeing delivered strong

  • second quarter 2018 financial results that included higher revenue and earnings and strong

  • operating cash flow, driven by solid execution across the Company.

  • During the quarter, we generated $4.7 billion of operating cash and repurchased $3.0 billion

  • of Boeing stock.

  • We also paid $1.0 billion in dividends, reflecting a 20% increase in dividends per share from

  • last year.

  • We continue to deliver on our commitments returning cash to shareholders, while investing

  • in our people, innovation and future growth.

  • Revenue in the second quarter was $24.3 billion, reflecting higher volume of commercial deliveries

  • and favorable mix, along with services and defense contract volume.

  • Core earnings per share of $3.33 was driven by strong performance across the businesses,

  • volume and mix, and lower tax rate, partially offset by a write-off due to the previously

  • announced Spirit litigation outcome and cost growth on the KC-46A Tanker program, which

  • I'll address shortly.

  • For the full year, we're raising guidance for revenue to reflect higher volume at BDS

  • and BGS.

  • Additionally, we're adjusting BCA and BDS segment operating margin guidance.

  • Greg will discuss these in more detail in his section.

  • Before we delve into the second quarter operating performance for our businesses, let me spend

  • a minute on the KC-46 Tanker program.

  • We continue to make steady progress towards final certification for the KC-46 Tanker and

  • recently completed all flight tests required to deliver the first aircraft, which is expected

  • to be in October of this year as now agreed upon with the US Air Force.

  • This is a significant milestone for us and our customer, representing the combination

  • of three years of testing and over 3,300 flight hours.

  • However, the program did see additional cost growth in the quarter at $334 million after-tax,

  • primarily due to higher estimated cost of incorporating changes into six flight tests

  • and two early build aircraft, as well as additional costs as we progress through the late-stage

  • testing in certification process.

  • Regarding these flight test and early build aircraft, as flight testing to support the

  • first delivery was completed, and final configuration of each aircraft has been defined, the plan

  • to complete manufacturing of these eight aircraft is now clear and firmed up.

  • While there's still a lot of work ahead of us, we now have a very clear line of sight

  • what is needed to deliver these highly mission-capable aircraft to our customer.

  • We remain confident in the long-term value of this franchise, a program that is going

  • to have a production run measured in hundreds of airplanes and decades of follow-on support

  • and training.

  • With that, now let's look at Commercial Airplanes.

  • For the quarter, Commercial Airplanes generated revenue of $14.5 billion, reflecting 194 deliveries

  • with operating margins of 11.4%.

  • Continued healthy sales activity contributed to 239 net new airplane orders or $16 billion

  • during the quarter, including 91 widebody orders adding to our robust backlog that stands

  • at nearly 5,900 airplanes and is worth $416 billion.

  • Year-to-date, we have captured over 900 net new orders and commitments.

  • The 737 MAX program marked it's one year anniversary of entering revenue flight service in the

  • quarter and its production ramp-up continued.

  • To date, we have delivered 162 MAXs, with 52 of them delivered in the quarter.

  • As for the 777X program, in the quarter we moved the first two test airplanes into the

  • low-rate initial production line in the main factory.

  • We also began the systems testing for this exciting development program.

  • We'll remain on track for first 777X delivery in 2020.

  • Now, over to Defense, Space & Security.

  • BDS reported second quarter revenue of $5.6 billion, reflecting the Kuwait F/A-18 production

  • contract award and higher weapons volume with operating margins of 9.3%.

  • The $7 billion of new orders booked by BDS during the quarter demonstrates the value

  • we bring to our customers across their defense, space & security portfolio.

  • These orders included finalization of the production contract for 28 F/A-18 Super Hornets

  • to Kuwait, an additional order for 18 F/A-18 Super Hornets for the US Navy and three P-8

  • Poseidon aircraft for the US Navy, as well as a multi-year contract for 58 V-22 Osprey

  • aircraft.

  • Key milestones for BDS included induction of the first F/A-18 aircraft into the Service

  • Life Modification program, two successful tests for the US Air Force's Minuteman III,

  • and production of the 100th P-8 aircraft.

  • On the commercial satellite side, we successfully completed the O3b mPOWER preliminary design

  • review with SES.

  • Turning to Global Services, our integrated services business completed its first full

  • year of operation at the end of the quarter.

  • BGS reported second quarter revenue of $4.1 billion with operating margins of 14.7%, reflecting

  • higher volume along with product and services mix.

  • During the quarter, BGS won new business totaling approximately $4 billion that demonstrates

  • the value that we bring to our broad range of commercial and government customers.

  • These included in an F/A-18 depot maintenance contract for the US Navy and Marine Corps,

  • a Global Fleet Care contract for Primera Air's 737 fleet, and performance-based logistics

  • contracts to support the Netherlands rotorcraft fleet.

  • These orders highlight the strength of our One Boeing offerings.

  • Additionally, BGS delivered its first 737 Boeing converted freighter in the quarter.

  • As part of our growth strategy of complementing organic investments with selective strategic

  • acquisitions, in May, we announced our agreement to acquire KLX a major provider of aviation

  • parts and services.

  • By combining the talent and product offerings of our ABL business and KLX, we will provide

  • a one-stop shop that will benefit our supply chain and our customers in a meaningful way.

  • Also in the quarter, we announced a proposed partnership with Safran to jointly design,

  • build and service auxiliary power units.

  • This move will strengthen Boeing's vertical capabilities as we continue to expand our

  • services portfolio and make strategic investments that accelerate our growth plans.

  • In summary, we delivered another quarter of strong operating performance, captured noteworthy

  • additions to our large and diverse backlog, returned significant cash to shareholders

  • and complemented our organic growth with planned, strategic inorganic investments.

  • With that, let's turn to the business environment on slide 3.

  • We continue to see healthy global demand in our commercial, defense space, and services

  • markets.

  • We've recently revised the size of these growing markets upward to $8.1 trillion over the next

  • 10 years.

  • In the commercial airplanes market, airlines continue to report robust profits and strong

  • passenger traffic outpacing global GDP.

  • Passenger traffic in 2018 grew 6.8% through May.

  • Meanwhile, cargo traffic maintained its strong momentum, growing by 5.3% in 2018 through

  • May, as we see trade and industrial production growing in all regions.

  • Our global customers continue to recognize the compelling value proposition that our

  • new, more fuel-efficient product family brings to the market as reflected in the healthy

  • new order intake we've seen year-to-date.

  • We continue to see the trend of diverse and balanced demand from a geographical perspective,

  • as well as across the spectrum of airline business models.

  • The changing nature of travel with the expansion of network city pairs and rising middle-class

  • population in emerging markets, have fundamentally expanded traffic patterns and underpinned

  • sustained growth.

  • There also is more balanced demand between fleet growth and replacement of older aircraft

  • and we're seeing more consistent stable customer purchasing patterns.

  • We believe the evolution and key market dynamics in the aggregate is driving greater stability

  • and far less cyclicality for our industry.

  • Over the long term, we remain highly confident in our commercial market outlook, which now

  • forecast demand for nearly 43,000 new airplanes over the next 20 years, up from our previous

  • outlook of approximately 41,000 airplanes.

  • This is comprised of more than 31,000 aircraft in the narrowbody market and approximately

  • 9.000 aircraft in the widebody market.

  • These deliveries, of which 44% will be driven by replacement demand, will double the size

  • of the global fleet.

  • This long-term demand, combined with healthy market conditions and robust backlog, provides

  • a solid foundation for our planned production rates.

  • Turning to our product segments, starting with the narrowbody.

  • Our production rate of 52 per month, starting June of this year and planned increased to

  • 57 in 2019, is based on our backlog of nearly 4,700 aircraft and a production skyline that

  • is sold out into early next decade.

  • We continue to assess the upward pressure on the 737 production rate.

  • In the widebody segment, we have seen steady orders for the 787 and 777 airplanes and have

  • high confidence in a meaningful increase in widebody replacement demand early next decade.

  • For the current generation 777, we received 19 net new orders in the quarter, bringing

  • the backlog to 96 aircraft.

  • The renewed strength in the air cargo sector has provided support for the 777 bridge as

  • highlighted by recent orders, which included incremental freighters for FedEx and DHL.

  • Additionally, earlier this month, we finalized Qatar Airways order for five 777 freighters

  • and received a letter of intent for 29 777 freighters from Volga-Dnepr and CargoLogicHolding.

  • As we transition production to the 777X, we expect 777 deliveries of approximately 3.5

  • per month in 2018 and 2019, as previously announced.

  • As you can see from the recent activities, we continue to make good progress on the 777

  • bridge.

  • And while we still have some work to do in filling the remaining 777 production slots,

  • in particular for 2020 and beyond based on our progress of capturing new orders and commitments,

  • managing the skyline and working new campaigns, we continue to believe the rate plan we've

  • put in place establishes a floor for the program and supports our production bridge from the

  • current 777 to the 777X.

  • As we look forward to the 777X, we have a strong foundation of 340 orders and commitments

  • that support our plan for ramping up production and delivery of this new aircraft.

  • We also captured 59 orders for the 787 Dreamliner family in the quarter, a solid platform for

  • long-term production.

  • With more than 650 firm orders in our backlog, our plan to increase Dreamliner production

  • to 14 airplanes a month in 2019 is well supported.

  • We continue to see repeat orders for the 787 Dreamliner, including from Qantas, Bank of

  • China Aviation and United.

  • These repeat orders, coupled with continuing attraction from new carriers, such as Bamboo

  • Airways, recent commitment for 20 787s, highlight the strong market preference for 787 and its

  • superior value.

  • Turning to our 747 and 767 programs, with our unmatched freighter product lines, we're

  • well positioned to capture the increased cargo demand.

  • During the quarter, FedEx announced an order for 12 incremental 767 freighters.

  • This further supports our 767 production rate increase from 2.5 per month to 3 per month

  • in 2020.

  • We remain focused on the strong, long-term aerospace industry fundamentals as highlighted

  • by the continued strength of traffic.

  • It's important to have this in perspective as we navigate through global trade discussions.

  • As a global company with operations around the world, supporting commercial and government

  • customers in more than a 150 countries, Boeing maintained strong relationships with our customers,

  • suppliers and other key stakeholders around the world.

  • We will continue to engage with leaders in these countries to urge a productive dialog

  • to resolve trade differences, highlighting the mutual economic benefits of a strong and

  • prosperous aerospace industry.

  • Turning to Defense, Space & Security.

  • We continue to see solid demand for our major platforms and programs.

  • The final appropriation bill for fiscal year 2018 US federal budget funded our key programs

  • across our fixed wing, rotorcraft and commercial derivative aircraft and our missile, space

  • and satellite products.

  • Boeing continues to see strong support for our key products in fiscal year 2019 President's

  • budget and in Congress, including increased procurement of one 110 F/A-18 Super Hornets

  • across the future year defense plan and support for a fourth multi-year procurement for the

  • F/A-18, and increases for various programs in our weapons and rotorcraft portfolios.

  • The BDS portfolio is well positioned with mature world-class platforms to address current

  • needs.

  • International demand for our defense and space offerings remains high as well, in particular

  • for rotorcraft, commercial derivatives, fighters, and satellites.

  • As I mentioned earlier, we finalized production contract for 28 F/A-18 Super Hornets for Kuwait

  • and received a multi-year contract for the V-22 Osprey, which includes four aircraft

  • for the government of Japan.

  • Recently, New Zealand selected the Boeing P-8 Poseidon aircraft as its new Maritime

  • Patrol Aircraft.

  • We're making progress towards completing other previously announced international sales,

  • including additional Chinook helicopters for Spain and Saudi Arabia.

  • Our investment in future growth and new sales continues in areas that are priorities for

  • our customers, such as commercial derivatives, rotorcraft, satellites, services, human space

  • exploration, and autonomous systems.

  • Much of that investment supports the priority we have placed on capturing future franchise

  • programs, where we are also leveraging capabilities and technologies from across the enterprise

  • for the TX Trainer, ground-based strategic deterrent, and the unmanned carrier-based

  • MQ-25A, along with several other important opportunities.

  • Turning to the Services sector, we see the $2.8 trillion services market over the next

  • 10 years as a significant growth opportunity for our Company.

  • BGS provides agile, cost-competitive services to our customers worldwide.

  • We aim to grow faster than the average services market growth rate of 3.5% as we further expand

  • our broad portfolio of services offerings and continue to gain market share.

  • Strong orders of $4 billion in the quarter reflect our customers' recognition of our

  • value proposition in helping them optimize the performance of their fleets and reduce

  • operational cost through the life cycle.

  • These activities stretch across BGS' four capability areas, including parts, engineering

  • mods and maintenance, digital aviation and analytics, and training and professional services.

  • Our digital solutions powered by Boeing Analytics provide airlines with advanced optimization

  • and analysis is illustrated by a recent contract from Etihad Airways to implement our crew

  • management solutions to support the planning and operation of their 7,500 crew members.

  • The flexibility and strength of our optimization in the crew management suite will allow Etihad

  • to solve complex issues with ease and support their decision-making process with detailed

  • quantifications of risk and costs.

  • Our focus remains on optimizing the businesses and expanding our portfolio offerings through

  • organic growth investments, such as strengthening our vertical capabilities, complemented by

  • strategic acquisitions to position BGS for long-term sustained growth and profitable

  • growth.

  • Our expertise, the global reach of our business, and our strong customer partnerships have

  • us well-positioned to compete and win in this important sector.

  • Before I close this business environment section, I would like to spend some time on Embraer.

  • Consistent with our enterprise strategy of pursuing strategic investment opportunities

  • where they demonstrate real value and accelerate our organic growth plans, earlier this month,

  • we signed an MoU with Embraer for formation of a joint venture comprising the commercial

  • aircraft and services business of Embraer.

  • This proposed partnership will strategically align with Boeing's commercial development,

  • production, marketing and lifecycle services operations, strengthen the vertical capabilities

  • of Boeing and enhance value for our customers through industry-leading products and services.

  • Additionally, we will create another joint venture to promote and develop new markets

  • and applications for defense products and services, especially the KC-390 multi-mission

  • aircraft.

  • This comprehensive, enterprise-wide collaboration with Embraer will create the most important

  • strategic partnership in the aerospace industry, strengthening both companies' leadership in

  • the global market and creating more value for both companies' customers, shareholders

  • and employees.

  • While this agreement is a significant step, a considerable amount of work remains.

  • In the coming months, we will continue to work with Embraer and its shareholders, the

  • Brazilian government and regulators among others to complete the transaction.

  • In summary, with growing markets and opportunities ahead, our team remains intensely focused

  • on growth, innovation and accelerating productivity improvement to fuel our investments in the

  • future.

  • With that, Greg, over to you for our financial results.

  • Thanks, Dennis, and good morning, everyone.

  • Let's turn to slide 4, and we'll discuss our second quarter results.

  • Revenue for the quarter was strong at $24.3 billion, reflecting higher volume of commercial

  • airplane deliveries, favorable mix along with an increased volume at both Defense, Space

  • and Security, as well as Boeing Global Services businesses.

  • Core earnings per share of $3.33 reflects solid execution across the businesses, higher

  • volume and improved mix, along with a lower tax rate.

  • The results were partially offset by an after-tax charge of $124 million related to a receivable

  • write-off due to the previously announced Spirit litigation outcome and cost growth

  • of $344 million after-tax on the KC-46 Tanker program.

  • As Dennis mentioned, we're raising our full-year revenue guidance to reflect higher volume

  • at Defense, Space & Security and Global Services.

  • And additionally, we're adjusting Commercial Airplane and Defense, Space & Security segment

  • operating margins.

  • I'll provide more details on our 2018 outlook further in my remarks.

  • Now, let's now discuss Commercial Airplanes on slide 5.

  • Our Commercial Airplane business revenue increased to $14.5 billion during the quarter, reflecting

  • higher deliveries and improved mix.

  • BCA operating margins increased to 11.4%, driven by strong operating performance on

  • production programs, higher 787 margins, and timing of some period expense partially offset

  • by a $307 million pretax charge on the KC-46 Tanker program.

  • Second quarter BCA operating margins, excluding the tanker charge were 13.3%.

  • BCA captured $16 billion in net orders during the second quarter and the backlog remains

  • very strong at $416 billion and nearly 5,900 aircraft, equating to approximately seven

  • years of production.

  • On the 787 program, we delivered 38 aircraft and booked 59 net orders in the quarter, and

  • additionally, we extended the 787 accounting block by 100 units.

  • This resulted in higher margins on the program, and therefore, moderated the decline of deferred

  • production balance this quarter.

  • The overall cash profile of this program continues to improve due to the improved mix, supplier

  • step-down pricing, and our team's day-to-day focus on improving 787 profitability and cash

  • generation.

  • Let's now turn to Defense, Space & Security results on slide 6.

  • Second quarter revenue increased $5.6 billion, driven by F/A-18 production contract award

  • for Kuwait and higher weapons volume.

  • BDS margins of 9.3% reflected our continued focus on productivity and execution, offset

  • by a $111 million pretax charge on the KC-46 Tanker program.

  • Second quarter BDS operating margin, excluding the tanker charge were 11.2%.

  • During the quarter, BDS won key contract awards worth $7 billion and our backlog stands at

  • $52 billion with 35% of that from international customers.

  • Turning now to Boeing Global Services results on slide 7.

  • In the second quarter, Global Services revenue increased to $4.1 billion, reflecting higher

  • volume, predominantly driven by increased part sales.

  • Year-over-year growth of 15% for the quarter, and 11% in the first half of the year, more

  • than meets our objective to outpace the average annual service market growth rate of 3.5%.

  • BGS operating margins were solid at 14.7%, reflecting ongoing productivity efforts, as

  • well as mix of products and services in the quarter.

  • During the quarter, BGS won key contract awards worth approximately $4 billion and our backlog

  • now stands at $20 billion.

  • This month marked the one-year anniversary of the launch of Boeing Global Services business

  • and we're proud of the team's accomplishments.

  • BGS results year-to-date are a testament to the team and the enterprise focus on achieving

  • topline growth while maintaining disciplined execution.

  • The key wins this year underscore the strength of the One Boeing offering to our customers.

  • Let's now turn to cash flow on slide 8.

  • Operating cash flow for the second quarter was strong at $4.7 billion, driven by planned

  • higher commercial airplane rates, stronger operating performance across the business,

  • and timing of receipts and expenditures.

  • Year-to-date cash flow remains strong at $7.8 billion.

  • We remain focused and on track with our balanced cash deployment strategy.

  • In the second quarter, we repurchased $3 billion of Boeing stock and paid $1 billion in dividends,

  • reflecting a 20% increase in dividend per share from last year.

  • We continue to anticipate completing the remaining $12 billion repurchase authorization over

  • the next 18 months to 24 months.

  • And since the end of 2012, we've returned more than $48 billion to our shareholders

  • through dividend and share repurchase.

  • At the same time, we've invested more than $30 billion in key strategic areas to ensure

  • long-term sustainable growth for Boeing and our customers.

  • We remain committed to returning approximately 100% of free cash flow to investors, while

  • continuing to invest in future growth opportunities.

  • Let's move now to cash and debt balance on slide 9.

  • We ended the quarter with nearly $10 billion of cash and marketable securities, lower debt

  • levels, and stable credit ratings.

  • Our cash position continues to provide us with the flexibility to invest in innovation

  • and profitable growth opportunities, while again returning value to shareholders.

  • Turning now to slide 10, we'll discuss our outlook for 2018.

  • For the full-year guidance, we're raising revenue guidance by $1 billion, to now be

  • between $97 billion and $99 billion, from our prior guidance of between $96 billion

  • and $98 billion.

  • The increase in revenue reflects the growth from key international fighter awards and

  • higher weapons revenue for BDS and higher parts revenue for BGS.

  • As a result, we're increasing guidance by $500 million, to be between $22 billion and

  • $23 billion for BDS, and between $15.5 billion and $16 billion for BGS.

  • We're also updating full-year BCA and BDS segment operating margin guidance to reflect

  • BCA's strong performance and cost growth on the KC-46 Tanker program this quarter.

  • BCA margin guidance is increased to now be greater than 11.5% from our prior guidance

  • of approximately 11.5%, again reflecting strong performance and offsetting the growth on the

  • tanker program this quarter.

  • BDS margin guidance is reduced to now be between 10% and 10.5% from our prior guidance of approximately

  • 11%, again primarily due to the reflecting of the impact of the KC-46 Tanker growth.

  • The rest of the full-year guidance, including EPS, cash flow, and aircraft deliveries remain

  • unchanged.

  • And by holding EPS and cash flow guidance, we are absorbing the impact of the tanker

  • cost growth and Spirit litigation charge, offsetting that with performance.

  • As we look toward the remainder of the year, we remain focused on strong execution, including

  • development programs, and risk mitigation within our Company and throughout our supply

  • chain.

  • So in summary, our core operating engine continues to deliver strong results.

  • We will continue to use our three-business unit strategy as a key differentiator in the

  • marketplace, make prudent investments, and leverage talent and innovation across the

  • Company.

  • At the same time, we will set challenging goals and objectives around elements of operations

  • and support functions tied to profitability and efficiency to generate cash and improve

  • working capital, while delivering value to our customers.

  • All of these will help us achieve our goal to grow year-over-year revenue, cash flow,

  • and margins.

  • So with that, I'll turn it back over to Dennis for some closing comments.

  • Thank you, Greg.

  • With a strong couple of quarters providing solid momentum for the year, our team remains

  • focused on further driving both growth and productivity.

  • We wouldn't have been able to achieve these strong results without the hard work and dedication

  • of our employees and the great partnership we enjoy with our customers and suppliers.

  • In addition to the strong Commercial Airplane market dynamics I mentioned earlier in my

  • remarks, we've taken our own actions to reduce cyclicality in our business.

  • This includes remaining disciplined in our production rate decisions, de-risking our

  • pension liabilities, strategically phasing our research and development spending, creating

  • labor stability with long-term contracts, and expanding our Services business, which

  • is also less cyclical.

  • We have executed on our long-term strategy of robust and continuing organic growth investment

  • and returning value to shareholders, complemented by strategic acquisitions and partnerships

  • that enhance and accelerate our growth plans.

  • The recently announced planned strategic partnerships with Embraer and Safran, and agreement to

  • acquire KLX Aerospace, are entirely consistent with this strategy.

  • As the world's largest aerospace company spanning commercial, defense, space, and services,

  • we are as optimistic about our future and the future of our industry as we have ever

  • been.

  • Our priorities going forward are to leverage our unique One Boeing advantages, continue

  • building strength on strength to deliver and improve on our commitments, and to stretch

  • beyond those plans and sharpen and accelerate our pace of progress on key enterprise growth

  • and productivity efforts.

  • Achieving these objectives will require a clear and consistent focus on the profitable

  • ramp-up in Commercial Airplane production, continuing to strengthen our Defense and Space

  • business, growing our integrated Services business and leveraging the power of our three

  • business unit strategy, delivering on our development programs, driving world-class

  • levels of productivity and performance throughout the enterprise to fund our investments in

  • innovation and growth, disciplined leading-edge investments and balanced value-creating cash

  • deployment and continuing to develop and maintain the best team and talent in the industry,

  • all of which position Boeing for continued market leadership, sustained top and bottom-line

  • growth, and increasing value for our customers, shareholders, employees, and other stakeholders.

  • With that, we'd be happy to take your questions.

  • As a reminder, in the interest of time, we are asking that you limit yourself to one

  • single-part question.

  • First, we'll go to the line of Peter Arment of Robert W. Baird.

  • Your line is open.

  • Dennis, could you address the kind of the supply chain readiness, I guess, particularly

  • on the narrowbody side?

  • Some of the comments coming out of Farnborough is that the engine OEMs are still studying

  • these higher rates and they don't seem to be ready to committing to them yet.

  • Maybe you could just give us some color and do you still need that 18 month to 24-month

  • kind of lead time to make a rate decision?

  • First of all, very important that we continue to work with our supply chain on our overall

  • production ramp-ups.

  • So as I mentioned in comments, we just moved to 52 a month on the 737 line as of June.

  • We're still planning to ramp-up to 57 a month next year.

  • And as I mentioned in comments, we continue to see upward pressure from the marketplace.

  • We are selling and filling skyline out in the 2023 and beyond time frame.

  • Now in our current production system, while we see challenges and you've heard from our

  • supply chain on some of the pressure points, things like fuselages and engines, which are

  • well acknowledged, and those are items we work on a day-to-day basis, we're continuing

  • to ramp up our supply chain, and it's healthy and we're meeting our customer delivery requirements.

  • And -- I think that's the key as we're continuing to hit on deliveries.

  • And as we contemplate future rate increases, we're going to continue to look at the supply

  • chain in an integrated manner.

  • And there are no doubt, pressure points as we ramp up.

  • That's why we need to continue to be very deliberate, very disciplined in these decisions.

  • We've done that.

  • We've done more than 20 rate breaks since 2010, so we know how to do this.

  • We're going to continue to apply that same disciplined approach.

  • But I will say that the market pressures indicate upward pressure, and as we approach our decision

  • points with the lead times as you outlined, we'll do that in a very deliberate and disciplined

  • manner.

  • Next, we have the line of Sheila Kahyaoglu with Jefferies.

  • Your line is open.

  • Can you talk about Commercial Aircraft profitability given margins excluding that tanker costs

  • were over 13%?

  • So maybe could you talk about the moving pieces as we move through the remainder of the year?

  • Yes, sure.

  • I mean, to-date, you've seen improvement kind of across the board on the production programs,

  • and obviously, with the block extension on the 787.

  • We're seeing the results of that this quarter.

  • And going forward, you're going to continue to see a lot of productivity efforts across

  • the programs, but you're going to see some shifts in period expense, in particular R&D.

  • So we'll have some more R&D in the back half, and think of that as just timing, primarily

  • driven by 777X.

  • And then we've also got some investments that we're making around productivity in the back

  • half that aren't reflected in the first half.

  • So, I'd say those are the big moving pieces.

  • But we're seeing, obviously, great performance across the board.

  • Obviously, a lot of focus in particular around taking best practices across the enterprise

  • and bringing them not only to Commercial Airplanes but across all of the portfolio.

  • So, there is a lot more, I'd say, One Boeing effort going on leveraging best practices

  • and we're going to continue to do that as we strive to increase margins and cash flow

  • going forward as Dennis and I have articulated.

  • Next, we have the line of Seth Seifman of JPMorgan.

  • Your line is open.

  • I wonder if you guys could talk a little bit about the cash flow profile of the tanker

  • program from here and maybe thinking about a couple of the different elements, including

  • any additional cash that might be needed on other aircraft that are in inventory beyond

  • the ones that you mentioned?

  • Any penalties that the Air Force might be entitled to, along with, on the positive side,

  • the inventory reduction that comes from the deliveries?

  • Yes.

  • Seth, Tanker is going to continue to improve the cash profile going forward as we make

  • more progress and then reach the milestones that Dennis articulated in the first delivery

  • there being in October.

  • So we have got a number of, obviously, aircraft in work now, and as we deplete that inventory

  • and start delivery, you'll see improved cash in the years to come.

  • So it won't be anything near term.

  • Everything's been contemplated on the near-term for the balance of this year.

  • But, even as we talked about cash flow growing going forward, this is a key element of that,

  • but not a significant moving piece when you think about the broader, I'll say, cash levers

  • of the Company.

  • And Seth, Just to add a little more color on Tanker itself, I think a key thing to note

  • again in the quarter as I mentioned, while we took the charge on those early build aircraft

  • and flight test aircraft, I think it's very important to note the milestone we achieved

  • in the quarter as completing all of the flight testing associated with first delivery, getting

  • all of our artifacts submitted for final certification, and getting crystal clarity on what is left

  • to build out these aircraft.

  • We have a known configuration, flight testing is completed, and now we need to finish the

  • work to get to delivery, and that will produce the results that Greg mentioned.

  • And next, we have the line of Rajeev Lalwani of Morgan Stanley.

  • Your line is open.

  • Just staying on the Tanker, obviously, you've had some challenges on the program.

  • You've managed them reasonably well, but as we look forward to the 777X and maybe the

  • NMA, what are you doing to just derisk those programs so that you don't have similar obstacles

  • like you did on the Tanker?

  • Is it more of a digital approach, are you trying to manage a timeline a bit?

  • Just some color there to help us get comfortable with any risk going forward.

  • You bet.

  • Yes, Rajeev, on that, we have got a very focused effort on enterprise development programs

  • and lessons learned, learning from each of the programs as we execute them.

  • While Tanker has had its challenges, we have learned a lot through that process, especially

  • in our commercial derivative lines and how we do development programs that span our commercial

  • production and military certification requirements.

  • Tanker was especially complex because of the multiple certifications required both commercial

  • and military.

  • That's not a complexity that we have on a product like 777X or NMA.

  • That said, several lessons learned.

  • One includes digitizing our engineering at a more detailed level upfront.

  • This is the model-based engineering initiatives that we have underway, as an example.

  • Also, more significant investments in system integration labs upfront to de-risk development

  • and eliminate downstream discoveries.

  • That's been very effective for us on 777X.

  • And also, some of the early prototyping in the production systems, again, to derisk key

  • areas as we move into the production flow.

  • And we're seeing that reflected again on 777X as the first two airplanes have now moved

  • into the low-rate initial production line.

  • All of these early de-risking steps are showing up in a positive way on 777X.

  • And we're going to be keeping a close eye on that as we build out to flight test aircraft

  • and move into flight test.

  • But, given that we're into the heart of 777X right now, we have got a healthy development

  • program on track to deliver on 2020 as scheduled.

  • We're seeing clear signs of improvement in our overall development program process.

  • That's our headset going forward and we'll continue to learn.

  • I think, this is one of the benefits of our phased R&D approach.

  • Rather than doing multiple development programs in parallel, we're now doing a much more sequential

  • approach that we can learn program to program and continue to reduce risk going forward.

  • Next, we have the line of Hunter Keay of Wolfe Research.

  • Your line is open.

  • So you talked about mix driving some pressure on BGS margins, and I think you called out

  • part sales as driver of the top line.

  • As we learn more about this business, what are some of the moving parts that help and

  • hurt mix there that we should think about going forward, and whether that's by end market

  • or contract type?

  • And second part of the question, as the business spools up, would you be willing to trade a

  • little bit of margin for some top-line opportunities?

  • You're right.

  • I mean, It's a very different portfolio than the other businesses, so you're dealing with

  • thousands of contracts and a couple of million different, I'll say kind of offerings through

  • parts or other services.

  • So with that, just the nature of that business, you're going to end up with some ebbs and

  • flows quarter-to-quarter depending on how that mix plays out.

  • So, the portfolio is very different, obviously, and that's going to drive some of that change.

  • But, beneath that, the focus continues to be on core operating performance, the cost

  • structure, the working capital around that business.

  • So, that engine is going to continue to run quarter-over-quarter, week-after-week, month-after-month.

  • But you are going to end up seeing these movements quarter-to-quarter.

  • But end objective, grow the business as we've talked about a lot, at the same time grow

  • the bottom line and expand margin.

  • That's the underlying objective of this business, and ultimately we think we can serve our customers

  • much better in doing that We're staying very focused on our overall

  • effort to drive to mid-teen margins across the entire business.

  • So to the last part of your question, Hunter, on margin growth in BGS, we expect margins

  • in BGS to be accretive to our overall enterprise margin.

  • So, this is all about profitable growth.

  • Next up, we have the line of Carter Copeland of Melius.

  • Your line is open.

  • Just a quick clarification and a question expanding on what Seth asked.

  • Greg, can you confirm if the 787 unit versus program was positive or negative in the quarter?

  • And then just, on this whole tanker cash flow -- the size of the charge and how we should

  • think about impacting the cash, are the terms of payment with the customer on that payment

  • upon delivery of the aircraft or milestone based ahead of that?

  • Yes, they're milestone based.

  • Performance milestone based.

  • And with regards to the 787, we did see -- obviously we saw unit improvement this quarter across

  • the board.

  • Next up, we have the line of Doug Harned of Bernstein.

  • Your line is open.

  • I know at Farnborough, you got a number of 777 orders.

  • Can you help us understand where you stand on filling the bridge to the 777X?

  • Then, perhaps give us a sense of what you think that 777X ramp will look like given

  • the planned entry into service in 2020.

  • Along with that, just when do you expect we'll likely see more orders for the 777X rather

  • than just the 777?

  • You bet.

  • The key thing on 777 is, we've seen very strong recovery in the freighter market in particular.

  • And you see that in the demand in recent orders.

  • We've got 24 new orders year-to-date for 777s, through the end of the second quarter.

  • Since the end of the quarter, an additional five from Qatar, 777 freighters.

  • So, year-to-date, 29 new orders for 777s.

  • Beyond that, we have the additional announcements that have been recently made, including the

  • letter of intent from Volga-Dnepr for 29 777s.

  • We continue to have a number of other campaigns underway as well.

  • So, you really see the strength of the market there continuing to build our confidence in

  • filling out the bridge.

  • So I said we're really now focused on skyline slots 2020 and beyond.

  • We still have work to do, but our confidence continues to grow based on recent sales successes

  • and what we see as sustained growth in the freighter market.

  • Now, as we look beyond that, and headed toward 777X development, I think a key fact for you

  • is today we have 340 orders and commitments in place for the 777X.

  • For the dash-9 variant of that, we have 273 of those 340.

  • If you want to compare that to where we were at the same time on the 777-300ER, back when

  • it was introduced, at that point in time, relative point in time, we had 70.

  • So, 273 versus 70.

  • That should give you a sense of the confidence we have in the backlog for 777X.

  • Now, we still continue to have additional campaigns and high interest in the 777X, but

  • we're in very good shape as we look at our production pipeline and backlog position to

  • ramp-up successfully on the 777X.

  • So, the key focus now is to move into flight test on the 777X, finish out the current 777

  • bridge where we have growing confidence again, and then get to EIS for 777X in 2020.

  • And I would say all of the dimensions of that puzzle continue to firm up and we're seeing

  • growing confidence.

  • That's why the production rate plan we put in place, we see that as a very clear floor

  • for the production program and we look forward to moving into the 777X.

  • Next in queue, we have the line of David Strauss of Barclays.

  • Your line is open.

  • I want to ask about cash flow, so I think, Greg you talked earlier about -- earlier in

  • the year that you saw prepayments as relatively neutral for the year.

  • I think year-to-date, we're running at $3 billion.

  • Are you expecting those to reverse as we go through the second half?

  • And, then second part on inventory, it looks like the ex the drawdown in 787 deferred,

  • you've had about $1 billion inventory build this year.

  • Is that 777X or is that just related to this 37 ramp?

  • Any color there?

  • Yes, I think inventory is a little bit of both, David.

  • Obviously, 777X inventory being the biggest driver, and will continue to be through the

  • balance of the year and into next year.

  • With regards to the advances, you're absolutely right.

  • They move around quarter-to-quarter depending on the PDP schedule.

  • We've seen some this year, more frontloaded than we will in the back half of the year.

  • We've taken that into consideration with the guide.

  • Next in queue, we have the line of Ron Epstein of Bank of America.

  • Your line is open.

  • I think at Farnborough, Dennis, you mentioned on the 797 -- I think the quote is, we want

  • to be in the 2025 window with maybe a 2019 launch.

  • When we think about the 79 (ph), or middle market -- whatever it's going to be, should

  • we start in financial forecast start building in something for that because it seems like

  • the drumbeat's really gaining momentum.

  • And then that -- second part of the thing would be when we think about it, is it a widebody,

  • is it a narrowbody?

  • Where are you guys on that now?

  • First of all, as you know, we haven't made a launch decision.

  • But we continue to look at the middle of the market airplane.

  • As you heard at Farnborough, we continue to have very productive customer discussions

  • on that topic.

  • We do see a marketplace there for 4,000 to 5,000 aircraft and we're very focused now

  • on deliberately going through our business case to make a good launch decision.

  • We are protecting 2025 as the entry into service date that aligns with our customer's needs

  • and desires.

  • So we're doing the appropriate long lead work to protect that delivery date.

  • We're looking at making a launch decision in 2019.

  • Again we're going to be very deliberate about that and make sure the business case that

  • makes good, solid sense.

  • That's our headset going in.

  • We're not going to predetermine the answer there.

  • We're talking to our supply chain and we're taking a look at every dimension of the program.

  • We have to look at this through a lifecycle lens, both in airplane and downstream services,

  • and make sure we're producing value for customers.

  • So that's our headset.

  • In terms of your question about widebody or narrowbody, again as we look at configuration

  • options and details, and begin firming that up, what we're hearing from customers is we

  • need something that has the comfort and twin aisle benefit of widebodies, but has narrow-body

  • economics.

  • That's frankly the challenge of closing the business case.

  • It goes back to all of the work we're doing on transforming our enterprise to drive efficiency

  • in development, production, and support.

  • If we build the confidence in the data we need to make a business case that closes,

  • we'll launch.

  • And if we don't, we'll continue down the path with our current product lines.

  • Next, we have the line of Robert Spingarn of Credit Suisse.

  • Your line is open With your very strong margins at BCA, especially

  • ex that charge, clearly, you've done a lot with costs, you're going to continue to do

  • that, but I wanted to ask you about the pricing side of the equation, especially in the context

  • of Airbus comments last week at the show about pricing opportunity, given the scarcity of

  • slots.

  • So, I know, you have to balance that against higher rates, but how should we think about

  • pricing over the next few years?

  • Well, Rob, when we take a look at that, first of all, I think it's important to note that

  • pricing is holding up.

  • It's driven by a number of different parameters, includes supply versus demand as you're pointing

  • out, but it's also value that we generate for our customers and making sure that, that

  • value proposition is clear.

  • So, everything we do on the pricing front is looked through that customer value lens

  • and that's our focus.

  • And the fact that pricing is holding up and you can see that reflected in our performance

  • is a good sign of the unique value that our product lines are delivering for our customers.

  • I will say as you look across our narrowbody and widebody product lines, it's very clear

  • that our products deliver operating cost advantage and value advantage for our customers, and

  • that's a key part of our equation going forward.

  • We're also keeping in mind the fact that we have this enterprise-wide global support and

  • services capability.

  • So, in many cases, we think about pricing, we're looking at it holistically across airplanes

  • and services, which I think is a unique part of the Boeing value proposition.

  • Between the pricing and the cost element, do you have a sense of when you can hit this

  • 15% type margin at BCA?

  • Well, as we said, we're driving towards that mid-teen margin by the end of the decade.

  • That's been our objective.

  • You can see the progress we're making.

  • And as we mentioned before, we expect it to be continuing incremental progress.

  • There's not going to be a big step function or a hockey stick.

  • It's continuous, focused, incremental performance and I think as you can see in our data, Rob,

  • you see the core BCA margins minus the tanker charge up over 13%.

  • That ought to give you a good indicator of the progress that we're making.

  • We are going to be relentless on this focus and it's really about driving out cost, driving

  • productivity, working with our supply chain, and being diligent about our production rates.

  • Next, we have the line of Noah Poponak of Goldman Sachs.

  • Your line is open.

  • Greg, was the 787 cash unit margin up or down in 2Q versus 1Q?

  • And then any willingness to even if in a wide range kind of give us an indication of where

  • you've taken that to.

  • And then similarly, on the program accounting margin, on the program even if in a wide range,

  • maybe help us out on how big of a change you made on it.

  • Yes, Noah, I mean, I think overall you're seeing 787 improvement like I said across

  • the board.

  • As you look at kind of the big levers and the cost structure there that we've talked

  • about, the mix improving, the overall productivity unit-over-unit in our factories and again

  • really leveraging the best practices, looking at the commonality between a 9 and a 10, and

  • I'll say kind of how that improves productivity in our factory and in our supply chain is

  • pretty significant, combined with the supplier step-downs that we have in place contractually.

  • And again, our own focus internally and even going out into the supply chain, taking our

  • productivity where we've been successful in areas of productivity and bringing that out

  • to the supply chain to help the overall program improve.

  • So, I wouldn't say it's one thing, Noah.

  • It's many levers that we're working on and trying to pull and you're seeing that in the

  • unit margin and the overall cash profile of the program.

  • And as we've said a number of times, I mean, the way the team looks at this, the way we

  • look at it is unit-over-unit, what do we need to do to improve and be even more competitive

  • in the marketplace, and how do we leverage the best practices within our factories, combined

  • within Services, between Defens, Space & Security, and in Commercial and also within the supply

  • chain.

  • So that's been I'll say the cadence and the level of effort that's been going on and that's

  • going to continue.

  • And like I said, you're seeing that in the overall cash profile of the program, improving,

  • combined with going up in rates very smoothly and getting that Dash-10 into the production

  • system smoothly where we're going to deliver approximately 14 aircraft this year, Dash-10s.

  • Very, very smooth introduction, and that really goes to the commonality of that design versus

  • Dash-10 and the team's relentless focus on ensuring that we get that into the hands of

  • the customer on-time, minimize risk.

  • Somebody asked about risk earlier on.

  • It's a great example of de-risking how we bring up a derivative program into the production

  • system.

  • So, point is, a lot of different things, but you're going to see that continued effort

  • going forward on this program and all the other ones.

  • Appreciate that color.

  • Any ability to give us a sense of where the program accounting margins sits at this point?

  • Well, it's improved, obviously, with the block extension.

  • That helped and, again, if you go out in that further block you're seeing favorable mix,

  • pricing, and supplier obviously step down along with our own productivity.

  • So, as we march through time, you're going to see an improvement overall to that margin

  • incrementally as we move forward in those blocks.

  • But like I said, here day-in and day-out, it's about unit performance, meeting our targets,

  • utilizing all our working capital initiatives, and in all of our productivity, but we're

  • focused unit-over-unit ultimately will, translate into program margin.

  • Next, we have the line of Sam Pearlstein of Wells Fargo.

  • Your line is open.

  • I was wondering if you could talk a little bit more about, you mentioned the joint venture

  • with Safran and APUs ,and I guess I'm trying to think about how do you balance the spend

  • on a new plane with some of the significant non-recurring engineering in areas like (inaudible),

  • APUs, maybe even avionics that takes place?

  • And that's typically borne by suppliers and how does that factor into your thinking about

  • potentially launching a new plane?

  • Yes, Sam, we figured that into our overall organic investment profile and that phased

  • R&D plan that I mentioned earlier.

  • And as part of our organic investment we're very focused on a few key verticals.

  • We don't need to be vertical everywhere, but there are a few areas where when we look through

  • a customer value lens, it's clear that we can add value.

  • The work on APUs with Safran is one of those areas.

  • You mentioned avionics.

  • It's another area.

  • Interiors is another area, we've looked at where we've announced a joint venture with

  • Adient.

  • So, those are very targeted areas, well-known investments.

  • As part of our organic profile, those have been feathered in with our broader R&D investments

  • in new platforms and product lines, including things like the 777X and some of our new defense

  • products and services.

  • So, that's all part of an integrated R&D plan.

  • And the way we've laid that into the profile is done in a way to ensure synergy between

  • our verticals that we're building and our future platform products, and it's important

  • that we do that in a synergistic way.

  • So, I would view that as an integrated organic investment plan, not something where we're

  • trading verticals or platforms.

  • It's doing it together with an eye towards creating value for customers, and then where

  • it makes sense, we augment that with inorganic investments.

  • That cash deployment strategy remains constant.

  • And as we talked about, while we make those organic and inorganic investments, we've also

  • committed to returning 100% free cash flow to our investors, and that commitment remains

  • solid.

  • Okay.

  • Operator, we have time for one more analyst question.

  • Next, we'll go to the line of Ken Herbert of Canaccord.

  • Your line is open.

  • I just wanted to follow-up, Dennis, on your comments earlier specifically on, as you look

  • at everything now much more with a lifecycle lens, I'm just curious on the NMA, assuming

  • you move forward there, how does that lens impact your analysis of the business case

  • in terms of the market opportunity?

  • And then second, and maybe more importantly, how that might potentially impact your go-to-market

  • strategy as you obviously have opportunities now to capture economics in a much broader

  • range.

  • I'm just curious, if you can provide any more detail as to your thinking around that and

  • how it might specifically get applied or used around the NMA.

  • Yes, well, in particular, as we look at the business case for NMA, as I said, we're looking

  • at it both from an airplane and downstream services standpoint, so in an integrated lifecycle

  • view, again, where can we create value for customers.

  • And depending on the customer set, there's a different value proposition for different

  • airlines.

  • In some cases, we can reduce operating costs.

  • In some cases, we can help them reduce capital investment costs.

  • So, we're factoring that entire equation into our business case.

  • It does give us more parameters to look at.

  • It gives us more ways to construct a business case for the future, and taking that holistic

  • lifecycle view, just gives us a more robust business case.

  • It also, as you pointed out, will affect our potential go-to-market approaches, again,

  • how we can tailor a value proposition for different customers.

  • And it will drive different ways of how you might design such an airplane.

  • Again, from the start, thinking about digital solutions and the architecture of the airplane,

  • so that it can enable optimized services for customers.

  • So, it's not only something that factors into the business case, it also affects how we

  • would design the airplane.

  • So all of that is being done in our business case analysis.

  • And I'll go back to my earlier point that it's important that we get it right, and we're

  • going to take the time to get it right.

  • We're protecting the EIS date for our customers at 2025, and if we decide to launch this development

  • program, the R&D profile would be on the back side of 777X, so it would feather in nicely

  • and be consistent with our overall cash flow priorities.

  • And that does complete the analyst question-and-answer session for this morning.

  • (Operator Instructions) I will now return you to The Boeing Company for introductory

  • remarks by Mr. Phil Musser, Senior Vice President of Communication.

  • Mr. Musser, please go ahead.

  • Thank you very much, operator.

  • We'll continue now with media questions for Dennis and Greg.

  • If you have any questions following this part of the session, please contact our Media Relations

  • team by e-mail or at 312-544-2002.

  • Operator, we're ready for the first question, and in the interest of time, we ask that you

  • limit everyone to just one question, please.

  • Certainly.

  • And our first question comes from the line of Julie Johnsson of Bloomberg.

  • Your line is open.

  • Just to circle back on narrowbody rate, it seems to me that Boeing is taking sort of

  • a more cautious or measured approach to evaluating rate increases into the 2020s, while your

  • competitor is talking about rate 70% or even rate 75%.

  • I'm just wondering if the supply chain can actually support the rates that Airbus has

  • been publicly mulling?

  • And if they move forward, is Boeing going to have to keep pace, especially given the

  • very strong demand environment?

  • Yes, Julie, let me provide some additional perspective on that.

  • Again, we're going to be very focused on being disciplined about our rate decisions and our

  • production ramp up.

  • We've got important work ahead of us.

  • We've just moved to 52 a month on the 737 line.

  • We're going to move to 57 a month next year.

  • As we said the market pressures do indicate upward pressure on that rate.

  • That's a challenge, but it's a good challenge to have, but at every one of these steps,

  • we're going to bring our entire supply chain along and I think you see that reflected in

  • our performance.

  • We're continuing to meet our delivery commitments to our customers.

  • That's the lens that we put on these production rate decisions.

  • We see pressure points in the supply chain.

  • We work those on a day-to-day basis and we're very focused on maintaining our discipline.

  • And we'll make rate decisions not only informed by market pressures, but informed by our ability

  • to execute them successfully.

  • And I think our track record of doing 20 successful rate breaks over the last several years speaks

  • to our approach.

  • And while I can't comment on our competitors approach, what I can comment on is our disciplined

  • approach.

  • We're going to maintain that approach.

  • We're working very closely with our supply chain to bring them along in an integrated

  • fashion.

  • That'll continue to be our focus going forward.

  • Next, we have the line of Brian Sozzi of TheStreet.

  • Your line is open.

  • Dennis, since the last time we talked we got the Space Force announcement, I'm curious

  • how you're thinking about it and what type of dollar impact could that potentially new

  • program mean to a Boeing?

  • And then on the Services business real quick for you guys, are you planning to get more

  • aggressive on acquisitions there to build that out?

  • Yes, well, first of all, Brian, on Space Force and more broadly on the Space business, I'm

  • very encouraged by what I see as the administration leaning forward on investing in space, and

  • all dimensions of the Space business, not only Space Force, but more broadly, the work

  • that's going into space exploration and the reinvigoration of that entire ecosystem.

  • And we've had the opportunity to participate as part of the National Space Council and

  • beyond the user Advisory Group there, partnered with the administration.

  • So, we have industry voice at the table as we shape these potential opportunities.

  • So from that standpoint, I'm very encouraged about the US Government leaning forward and

  • investing in space.

  • It's good for business, it creates growth opportunities for us.

  • It's also a great way to develop stem talent for the future.

  • Now, when we look at our growth opportunities going forward, we do see the Space business

  • as an important part of that and that spans from low-earth orbit commercial travel and

  • access to the space station.

  • It includes our satellite business and it includes deep space exploration, including

  • the space launch system with a focus on returning to the moon and then stepping to Mars.

  • So, we're going to continue to lean forward in that business.

  • It's an important investment area for us.

  • Stepping back to your second question on services, we continue to see that as a very attractive

  • growth market for us, and we've set a high bar target of growing that to be a $50 billion

  • a year business over the five-year to 10-year time frame.

  • And while we're a year into that effort, I think we have some good signs, especially

  • if you look at the growth year-to-date of 11% versus 3.5% in the market.

  • Good signs that our strategy is working.

  • A lot of work ahead of us and it's an integrated organic and inorganic investment strategy,

  • primarily driven again by organic investment parts, mods and maintenance, our training

  • business, our digital business, those are all known organic investments.

  • And where it makes sense we'll complement that with inorganic investments, but we clearly

  • see acquisitions as a bolt-on complement to what is primarily an organic investment strategy.

  • Next, we have the line of Dominic Gates of Seattle Times.

  • Your line is open.

  • I want to ask about the maturity of the 777X, the new automated technology that you've introduced

  • there.

  • So you have both the new wing center and you've added the wing assembly automated equipment

  • now for that and you've also got the FAUB fuselage robotics.

  • Both of those initially had some issues, challenges as they were new.

  • Are they now both the fuselage and the wing automated systems now operating the way that

  • you want them to?

  • And how will you plan to use any of that for NMA?

  • Yes, Dominic, we continue to make very good progress on those automation systems and while

  • I won't declare them to be in final state, it's very clear that we've made progress both

  • on the fuselage automated systems as well as the wing build system.

  • And I think the key thing that you see and our focus here is that, while those automation

  • systems were designed purpose-built to be used for 777X production, we've de-risked

  • those systems by pulling them forward in the factory and applying them to the current 777

  • program where it makes sense.

  • So, we've been able to use that as a way to de-risk and as you pointed out, there have

  • been some challenges as we've ramped up those automation capabilities.

  • That's exactly why we pulled them forward into the 777 line is to experience and de-risk

  • those systems.

  • We've seen them continue to mature.

  • We're seeing operational efficiency gains in our factory.

  • We're seeing safety benefits for our workforce.

  • We're seeing quality benefits.

  • All of the things we hope to get out of the automation are coming to bear and we're going

  • to continue to mature those as we move into the test program for 777X.

  • And if we decide to launch NMA, part of that would leverage the next generation of automation

  • technology.

  • Again, as we digitize our airplanes, it becomes even more straightforward to apply these automation

  • techniques and we're going to see costs and schedule benefits, we're going to see safety

  • benefits for our workforce, and this is a key part of how we're transforming the Boeing

  • enterprise for the future.

  • Operator, we have time for one more question from the media.

  • Certainly.

  • Our last question will come from the line of Andrew Tangel of Wall Street Journal.

  • Your line is open.

  • The Chinese carriers and lessors have previously played a significant role in the orders and

  • commitments at the airshows in Paris and Farnborough, but there weren't that many fresh deals from

  • Chinese companies, at the recent airshow in Farnborough.

  • By one estimate, almost half of Boeing's new orders and commitments at last year's Paris

  • airshow came from Chinese companies.

  • What do you make of the relative absence of a large number of Chinese buyers at this year's

  • airshow, especially in light of how much growing demand you expect from China over the next

  • couple of decades?

  • And does this potentially signal that Chinese buyers are holding off making orders or commitments

  • because of some of the trade friction including between the US and China right now?

  • Yes, Andrew, look at our total orders book, as we noted, very strong.

  • And in fact, if you look at total orders and commitments year-to-date of more than 900

  • aircraft, commercial aircraft, that gives you a sense of the overall strength of the

  • market.

  • I don't find it surprising one way or the other that we may or may not have orders from

  • a particular region or a particular customer at the airshow.

  • We don't design our orders profile around airshows.

  • We have some customers who want to make announcements at airshows and we work with them to do that,

  • but our view is much more of a steady, sustained growth and orders throughput and you see that

  • reflected in our month-to-month orders and sales.

  • Our Chinese customers are exceptionally important to us.

  • They're a big part of the backlog we have of the 5,900 aircraft we have in backlog.

  • They're a strong portion of that.

  • The future market we talked about, the world needing 43,000 airplanes roughly over the

  • next 20 years, about 7,200 of those are in China, so it's an important customer for us.

  • We're well-positioned in China.

  • We're working closely with our customers there.

  • We're ramping up capability in China, while we ramp-up in the US as well.

  • And I'll go back to my fundamental point that as we think about China-US trade relationships,

  • aerospace is something that's good for both countries.

  • It's mutually beneficial, it creates growth capacity in China.

  • It's helping them grow their economy, it's growing jobs in China, and as China grows,

  • it's growing jobs in the US and our 737 production line for example, as we ramp up building on

  • Chinese demand, that's growing US manufacturing jobs.

  • And it's very clear to us that free and open trade environment and good relations between

  • China and the US is not only beneficial to the aerospace business, but in turn the aerospace

  • business is beneficial to the economies and jobs of both countries.

  • Thank you.

  • That concludes our second quarter earnings call.

  • Again, for members of the media, if you have further questions, please contact our Media

  • Relations team at 312-544-2002 or via e-mail.

  • Thank you very much.

  • Ladies and gentlemen still connected, that does conclude the presentation for this morning.

  • Again, we do thank you very much for your participation, and for using our executive

  • teleconference service.

  • You may now disconnect.

Good day, everyone and welcome to The Boeing Company's Second Quarter of 2018 Earnings

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ボーイング2018年第2四半期決算説明会 (Boeing Earnings Call Q2 2018)

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