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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.