Boeing Q1 2024 Earnings Call Transcript

Hey, Myles.

So why don't I start this off? It is going to stay sporadic through 2Q. The real pivot for us is the number of clean fuselages we get out of Spirit with the new inspection protocols. It started slow. In the meantime, we've been working on all the fuselages that were already trapped in the pipeline that did not go through that inspection process. So that's why it's slow and lumpy here in these couple of months, but we will be through that process within the next 60 days, and then we will just be dealing with clean fuselages out of Wichita.

So far, we are quite encouraged at just how clean they are and how quickly they move through our production cycle. Substantially better, faster than before. So as we exit 2Q, we will know exactly what numbers are coming out of Wichita and what expectations are. We are not going to rush it. We are simply going to demand that they be clean. But I like all the signals. I was walking through the factory yesterday. When we get a clean one, it whistles through the factory, and that's the most important thing.

Yep.

Hi, Doug.

We do. Spirit is 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 that moving up another 12, in my view, is doable in the window that we're talking about. So that's the bet we're making, and I'm confident we can get there. But job one is the six months that commenced post Alaska and the inspection protocols and the nonconformance fixes that are then embedded into the Wichita facility.

Yep.

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 737-8s to 737-9s for 10s in the near term so that we can support our customers in their fleet planning. So that will all roll through and the timing will be expended over the next couple of years.

What our expectation is that over time that while these program margins won't get back to the 2018 levels, they will expand, and that will largely be driven by the rate ramps that Dave described. And the reason why they'll be different from where they were in 2018 is largely, as you know, is because of the customer mix and these delayed considerations. So all in all, when we step back and think about long term, structurally, particularly on the cash margin front, not a lot has changed. We just have to work through getting from here to those higher levels, including the consideration that we've described that we booked in the quarter. Overall, long term, we still think we get there.

Morning.

Thanks, Seth. First and foremost, 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 are 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 into 2025. And to that end, any supplemental funding that I talked about would do two things.

First of all, it would restore our cash balance to the historical level that you point out, that $10 billion-ish. But it also means that we want to continue our practice to stay well ahead of our near-term maturities. And by near term, I mean, roughly, the next 12 months. So that's what we're thinking about as we sit here today. We will be prudent and thoughtful. We believe the market would be open to us. And as we've said consistently, the most important thing is our investment-grade credit rating that we think a lot about, and it is a priority.

Okay, Sheila, that's like a three parter.

Yeah, I'll do my best. So I -- all of the 737 disruption that it goes on today, in my view, is self inflicted in the sense that we've made the decision that the amount of traveled work, particularly as it relates to the fuselage that was embedded and normalized in our factory, that we would make a dramatic reduction in it. So that move we made with all the inspectors and all the rework operators down to Wichita, the visibility we provided to the Wichita workforce with respect to the rework that we were doing, the FAA didn't demand that. We demanded it, because it's -- we are determined to get ahead of it.

What the FAA is doing, and they have been very diligent and businesslike in the way they've approached this is they want a control plan, and they want a control plan in 90 days that, in essence, monitors and measures whether our production system is in control moving forward. And if it ever gets out of control, the signals are clear both to the FAA and to us, even more importantly, and that we don't -- we won't extend, we won't rate up, we won't do anything until it is under control and it has to stay that way.

So 90 days isn't like a wave of magic flag and everything's great, and you guys can go from 38 to 40. It's quite different. It is simply a set of metrics and controls that we both agree are the right ones to monitor the performance of our factories. And I am confident it will be a good set of controls and something that we can live up to. And we are going to work our way through this one. As I said, the most important thing that occurs over the next six months or, frankly, starting in January when we launch this effort is going to be the pace at which clean fuselages come out of Wichita. That is the most essential part of this equation.

With respect to IAM, as you know, we work through the summer. There's a lot of discussions going on between our team and their teams. It feels productive. While we're doing that, we have huge engagement with a relatively new workforce across our factories in light of what we've just experienced. That engagement helps. It doesn't hurt. I can't ever tell you I'm perfectly confident that we rush to an agreement, but we are all going to try to solve for continuous production. And I think we -- I think our chances are good, but we are not going to know until we get really close to the deadline. And that's just real life in labor negotiation.

Anyway, I think that covers most of what you asked. Was there any other part I missed?

Oh, yeah. Yes. Yes.

Yep.

Hey, Noah.

Yeah. So Noah, I'll address this one. First of all, I'm glad you asked about the six months. When I say six months, I'm talking about the first half of this year because remember, we commenced all of these actions the day after the Alaska Air accident. Our determination -- the big factor here, in my view with respect to the essence of the question, is this move to eliminate traveled work in our factory and, specifically and most importantly, the fuselage. So that action was commenced on March 1, inspection line in place, full inspections being performed in Wichita.

Our rework teams with respect to nonconformances that were worked up in Seattle, those teams have been visiting regularly down to Wichita. And I fully expect for them to come up to rate with clean fuselages here as we get into the second half. That, again, is the big productivity driver in the Renton factory. And the cycle time improvements also double up as capacity improvements for pretty much for us and for them.

So that is the big question. The 30,000 ideas, that is a long list of stuff that just provides for continuous improvement from this day until forever. So that's not something that all has to get processed and completed before we can sort of flip the switch and go. It's quite the opposite. It is a set of continuous improvement concepts and ideas that we simply set out with our workforce and our leadership team over time. And that's recognized by our employees and by our leadership team. So that's how I think about this sequence.

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. I think all the other stuff, we'll categorize for you. That's not hard. We do it for the FAA. We do it for our own teams. But that is not going to be rate limiting. It's not -- none of that is going to factor into the rate limits. What is going to factor in is this determination is to make sure traveled work doesn't come back to us and that Wichita is up to the rate increases.

Yep.

Yeah, I'm sure Brian is going to answer this one, but I'll -- 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 six months and then sort of the push out 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.

So this slowdown, in my view, is an opportunity for us to shore up whatever supply chain issues were out there sort of one supplier at a time and to get there. Now if we get to a moment because the slowdown has gone on too long, if we get to a moment where the buffers exceed that requirement, we will curtail, but not until they exceed that requirement. Brian?

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 are 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 are 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, morning.

Yeah, no change on the latter. But we really have two constraints to think about on the 787. One is discrete. It's well understood and known, and it's heat exchangers. This is a product that used to be built in Russia. When the invasion happened, it got moved, and the capacity of that supplier has not kept pace with us. But the improvement plan that we all see gets us where we need to be by the fourth quarter, and we have a lot of confidence in it. So again, discrete, well known, et cetera.

The other one that is -- that affects us is not necessarily our suppliers. But as you may know, the seat suppliers out there are in shorter capacity. A lot of that is buyer furnished. But nevertheless, it holds up an airplane. And so that one is a little more medium term-ish. Capacity is being built out. I think people will get ahead of it, but that will be a little longer than the heat exchanger. And anyway, so that will affect us a bit. And when you have a buyer-furnished problem like that, you don't have a consequence attach to it, as you probably know.

So we are going to not talk about that specifically in terms of that award. I did want to come back to two things that you asked about. I want to make sure there's color out there. 777X, as we described, no changes. But I would like to indicate that we are starting to see the inventory implications of that ramp. And that's something that's big and important as we move through this year, and we are excited to be able to put that in service. But that does create some working capital pressure that I don't want to be -- have lost on anyone.

And as it pertains to the 787, very nice progress in terms of our inventory liquidation progressing well. Keep in mind, not all of that will get delivered. All that will get reworked and completed, but the deliveries are going to lag. And as far as production is concerned, we will be a couple lower than that five per month for most of the year as the supply chain catches up. And as Dave mentioned, we do have a recovery plan, and we are optimistic. And one bright spot is that that second line has now been activated. So as soon as that supply chain is positioned, we'll be ready to go, but it will be lower as we move through this year.

Morning.

Well, as we stand for what I described in terms of what we are looking at right now, working closely with the rating agencies, we believe we can do the move I described in the near term with market access without that. As it pertains to Spirit, we talked about that this is a deal where discussions are ongoing. It's complicated. There's other parties involved. And what this means is that once it does get signed, we expect it to, then it's going to take time to close. And in that time between signing and closing, we are going to explore the optimal financing for that transaction in order to maintain the investment credit rating. And that's important.

How exactly that looks? Don't know. We've got the time. And importantly, at the same time, we're going to have a factory that we expect to get more and more stable. So we are going to get to the optimal answer. We are going to protect the investment-grade credit rating and how the pieces play out, stay tuned.

No, we can move forward without full clarity. And as you probably know, we are not going to get involved in that, whatever is going on there. We encourage Spirit to do whatever they need to do to try to remedy or improve their business relative to our potential acquisition. So I don't have a lot of insight into that. But I encourage Spirit to try to resolve that kind of stuff as quickly as they can. But we are not -- we are not being held hostage to that.

Yep.

Morning, Peter.

Yeah. I always -- I appreciate your asking it, 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 two. So let's all be clear about that.

Look, my prescription is pretty simple. You know as well as anybody, maybe better than anybody how long term this business is. You also know that mistakes that matter are usually in the development of another airplane, not so much in the production issues that we face today or the supply chain issues that were created from COVID. These are in the context of aviation, short-term issues that have to get wrestled through slowly in a disciplined way.

On the other hand, when you get big development programs wrong, you pay a price, and you pay it for a long time, and I know an awful lot about that. So my view is that next leader has to be prepared to make smart long-term decisions and get the development programs right. So that's the prescription that I've offered to the Board, that I offer to pretty much everybody. And again, I have an internal succession plan broadly that I like. And anyway, we'll see where things turn out. But either way, they have my full support.

Yep.

Lois, we have time for one more question.

Go Jason. Thank you.

Let's split this, Brian. I'll do the services. You can handle the defense contracts. So services. The one thing that I don't think anybody's factored into margin for us in services, a big profit pool that we have is our distribution business. This was the acquisitions of Aviall, KLX over the years. This calendar year, we have a full integration of those two distribution companies in mind. I've reviewed this program. This will be another important productivity stepping stone for the business that, in my view, provides for a sustainable margin improvement and just a better, smarter, simpler way of doing business around the world.

So that project is in full swing. We will likely do the change somewhere in the fourth or first quarter of next -- fourth quarter this year or the first quarter of next year. We'll let that team tell us when they want to pull the trigger. But that one is a pretty big one. And it's a pretty important one. It's one I've always wanted to get done. It will take those brands out of play. It will simply be a Boeing brand. And the integration in the warehouses broadly across our company, it's pretty significant. So you want to hit the...

Sure. On BDS, Jason, characterize it in a couple of ways. We are retiring risk every day, particularly on a program like VC-25B, which will move our way through. And we will deliver two airplanes, and then that will be over as a program. The ones that are interesting to us in terms of the mural development side would be the T-7 and the MQ. T-7, we expect to get through the flight test program, good progress with the customer. It's proceeding well. That's an important milestone as we exit this year.

Similarly, on MQ-25, we will get to the build, we will get to the software integration, and we will be able to get through an important milestone with the customer as we exit this year. Importantly, on the MQ-25, as I mentioned, we just signed with the customer two additional airplanes that are going to be cost type. That's important. Another move towards our intent to derisk.

And then on the commercial crew, we've got a launch coming up. That will continue to derisk that program. And the tanker, the tanker continues to show good progress. It does get impacted somewhat by our determination to reduce traveled work. But long term, the tankers are performing in the field. We're getting a better handle on what that needs to look like over time, and we're confident that we're derisking it. So by and large, we still feel confident that we'll work our way through it. And that will result in a BDS margin level as we get into the '25-'26 time frame that we believe is going to be in the high-single digits. Nothing has taken us off that, and we look forward to retiring these risks.

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