The Boeing Company (NYSE:BA) Q3 2023 Earnings Call Transcript

The Boeing Company (NYSE:BA) Q3 2023 Earnings Call Transcript October 25, 2023

The Boeing Company misses on earnings expectations. Reported EPS is $-3.26 EPS, expectations were $-3.21.

Operator: Thank you for standing by. Good day, everyone, and welcome to The Boeing Company’s Third Quarter 2023 Earnings Conference Call. Today’s call is being recorded. The management discussion and slide presentation, plus the analysts’ question-and-answer session are being broadcast live over the internet. [Operator Instructions] At this time, for opening remarks and introductions, I’m turning the conference over to Mr. Matt Welch, Vice President of Investor Relations for Boeing Company. Mr. Welch, please go ahead.

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

Dave Calhoun: Thank you, Matt, and thanks to all for joining us this morning. Let me start with a comment on the conflict in Israel and Gaza. We were saddened to see the horrific attacks on Israel and the escalating conflict in the region that is resulting in a significant humanitarian emergency. We will continue to monitor the situation. We will focus on the safety of our employees and we will aid those in need. As always, we’ll follow the lead of the U.S. government and we’ll coordinate closely with government agencies, customers and suppliers, always with safety, security and well-being as our top priority. Now let me turn to the quarter. As you know, we ran into a few challenges over the last several months, but we’ve demonstrated that we know how to overcome obstacles and it will continue to do just that.

We knew 2023 would be a bumpy ride. We have more work to do, but overall, we’re making progress in our recovery and we are on track to meet the financial goals we shared for this year and for the 2025/2026 time frame. A time frame I refer to as stability. As you know, free cash flow has been our primary financial metric through this recovery. And based on our performance year-to-date, we still plan to be in the guidance range for the year as well as the $10 billion target by 2025 and 2026. This is a complex long cycle business and driving stability takes time, especially as an entire industry works its way back from the impact of a global pandemic. We expect challenges to come our way. And when they do, we are transparent. We take action and we move forward.

So month to month and quarter to quarter, it can be tough to predict, but we’re focused on the long-term and we’re taking the tough actions now to ensure that the long-term future is strong. So with that, I’ll highlight a few key updates around the business. Boeing Commercial, BCA, in commercial, demand continues to be incredibly robust. We booked about 400 net orders in the quarter, including 150 737 MAX-10s for Ryanair, 50 787s for United Airlines, and 39 787s for Saudi Arabian Airlines. With demand strong, our focus remains on delivering airplanes. We are seeing increased stability and quality performance within our own factories, but we’re working to get the supply chain caught up to the same standards. Our production system is poised for steady and efficient increases, but we won’t push the system too fast and will ensure the supply base is in lockstep with us.

On the 737, we’re moving through rework on the most recent non-conformance in the aft pressure bulkhead. That work slowed production and deliveries down in the course of the quarter, and given our year-to-date total, we now expect 737 deliveries for the year to be in this 375 to 400 range. While a setback, we’ll regain our momentum as we progress through the issue. We are keeping our suppliers hot, according to the master schedule. We plan to complete the production transition to 38 per month by the end of the year, and still plan to reach the key rate of 50 per month by that 2025 and 2026 time frame. Important to note, with respect to our supply chain, delivery shortfalls have been driven by non-conformances, not actual supply chain constraints.

On the 787, the program is demonstrating improved stability. We are now transitioning production from four to five per month and expect to meet our delivery range of 70 to 80 for the year. And longer term, we’re on track for the rate step up to ten per month by 2025 and 2026. To ensure our broader recovery and return to more normal margins, the key focus continues to be on liquidating our 787 and 737 inventory so that we can eliminate those shadow factories and focus our resources on the production floor, all of our resources. Nonconformance costs are exponentially higher on all of those finished airplanes. We still plan to deliver most, if not all, of the inventory by the end of next year, which will set us on a strong path for 2025 and 2026.

With respect to China, we are encouraged by recent signs of progress and continue to work closely with our customers on the timing of returning to delivery. As I mentioned, supply chain performance will be a key enabler. As Spirit Aerospace Systems brings in new leadership, we’re looking forward to working with Pat. Pat Shanahan is known by The Boeing Company. We have great respect for his abilities on the shop floor, and we’re pleased to have recently established a mutually beneficial agreement that will enhance stability of our production system and help us deliver on our customer commitments, a true win-win. Lastly, on the development side, we’re progressing across our commercial programs, and our timelines are unchanged on the 737-7 and the 737-10 and the 777X and 777-8 freighter.

A reminder, as always, the FAA will ultimately control the timing. Boeing Defense Systems, BDS, in Defense and Space, we still have more work to improve operating performance. Results this quarter were impacted by higher estimated costs on the VC-25B program. We are maturing through this build process, incorporating engineering changes to better support the installation process, and we resolved important supplier negotiations over the course of the quarter. I’ll note that none of these items will impact the performance and capability of the end product. The increased estimates reflect the process by which we build the airplanes. And in a fixed price environment, any unplanned hurdles can introduce unrecoverable costs. At the end of the day, we have two airplanes to build.

We are getting past these hurdles and are committed to delivering two exceptional airplanes for our customer. Separately, as you saw, we are also expecting higher costs on a satellite program as we build out the Constellation and meet our life cycle commitments for our customer. We’re working on real innovation and advanced capabilities in this space and see real potential market as we deliver against this commitment. More broadly across BDS, we’re stabilizing operations and taking comprehensive actions to improve performance, including lean initiatives, contracting disciplines, factory improvements, engineering investments and more. We’re seeing some early signs of progress, but financial improvement at BDS’ lower volumes takes time. Recovery in BDS is slower than we’d like, slower than I’d like, but we’re confident in the future and our path to normalizing BDS margin performance by that 2025 and 2026 time frame is intact.

The confidence is due in part to key milestones we’re starting to hit and the strong demand we’re seeing. For example, we delivered the first T-7A to the U.S. Air Force this quarter. We also captured a key award from the U.S. Army for 21 Apache helicopters. Additionally, we continue to invest and position ourselves for significant opportunities in proprietary programs. The backlog at BDS is $58 billion, and nearly 30% of that is outside the United States. We’re proud of the role our products play in protecting global security and national defense. Demand is strong, we’re confident in the business, and we will continue to improve operational performance to more normalized levels. Boeing Global Services, BGS, in Global Services, the team had another strong quarter, both on the commercial and the government side with improved revenue and earnings relative to the third quarter of 2022.

The financials were again driven by strong operating performance and the team’s ability to hit key milestones and capture new business. In the quarter, BGS delivered the 150th 737-800 Boeing Converted Freighter, received an award from the U.S. Navy for P-8 trainer upgrades and signed a digital maintenance agreement with multiple airlines. Our services team represents Boeing with our customers nearly every minute of every day. The work they do to keep military and commercial fleets flying is best-in-class, and we’re proud of the performance that they’re delivering. A step back with respect to the market outlook. Looking across all three business units, demand for our products and services continues to be incredibly strong. Our backlog is at $469 billion, including over 5,100 commercial airplanes.

Over the next ten years, the value of the markets we serve across commercial, defense, space and services is estimated at $10.7 trillion according to our most recent Boeing market outlook. Our products deliver exceptional capability in strong and growing markets, and our portfolio is well aligned with our customers’ needs. The demand is there to support our recovery. It is on us to perform, and we will remain disciplined and patient in the process. Brian, I’ll turn it over to you.

Brian West: Thanks, Dave, and good morning, everyone. Let’s go to the next slide and start with total company financial performance. Third quarter revenue was $18.1 billion. That’s up 13% year-over-year. Growth was driven by higher commercial volume, primarily on higher 787 deliveries. Core operating margin in the quarter was minus 6%, and the core loss per share was $3.26. Margins and EPS were negatively impacted by unfavorable defense performance, which I’ll cover in a moment; lower 737 deliveries that were in line with expectations set last month; and expected abnormal costs and period expenses. Free cash flow was a usage of $310 million in the quarter. This reflects the lower 737 deliveries and in line with our expectations.

With that, I’ll turn to the next page and cover Boeing Commercial Airplanes. BCA booked 398 net orders in the quarter, including 150 MAX-10s for Ryanair, 50 87s for United and 39 87s for Saudi Arabian Airlines. BCA now has over 5,100 airplanes in the backlog valued at $392 billion. BCA delivered 105 airplanes in the quarter, and revenue was $7.9 billion. That’s up 25% year-over-year driven by the higher 787 deliveries. Operating margin was minus 8.6%. We saw the impact of the lower 737 deliveries as well as expected abnormal costs and period expenses, including higher R&D spending primarily on the 777X investment. Now I’ll give a little more color on the key programs. On 737, we delivered 70 airplanes in the quarter, reflecting the impact of the recent supplier fuselage nonconformance.

Since our early September update, additional areas of the aft pressure bulkhead were identified that require further inspection and rework, which you likely read about. This additional scope impacts units that had already gone through the initial rework and will take us more time to stabilize production and deliveries. We founded the issue, understand the rework steps required and booked a nonmaterial financial impact in the quarter. Considering these latest facts, we expect October deliveries to be in line with September and now expect to deliver between 375 and 400 airplanes for the year. Performance ultimately will be dictated by the pace of a fuselage recovery. The quarter ended with approximately 250 MAX airplanes in inventory, 85 of which are being held for customers in China.

We still expect most of the MAX inventory aircraft to be delivered by the end of 2024 but more are likely to slip into 2025 tied to the fuselage recovery. To support stability, suppliers are continuing with planned rate increases and we’re selectively managing inventory levels on certain parts where prudent. We expect to complete the 737 transition to 38 per month by year-end, and we’re maintaining plans to increase to 50 per month in the 2025, 2026 time frame. On the 787 program, we had 19 deliveries in the quarter and 50 year-to-date. We still expect 70 to 80 deliveries this year. We started transitioning production to five per month in October and still plan to reach 10 per month in the 2025, 2026 time frame. We ended the quarter with 75 airplanes in inventory.

Rework is progressing nicely, and we still expect most to be delivered by the end of 2024. We booked $244 million of abnormal costs, in line with expectations. The total estimate is now $3 billion, up a bit, and we still expect to be largely done by year-end. Moving to the 777X program. Efforts are ongoing. The program timeline is unchanged, and we plan to resume production later this year. We booked $180 million of abnormal costs in the quarter, in line with expectations. The total estimate is unchanged at $1 billion, and we expect to be done this quarter. Importantly, as Dave mentioned, we recently reached an agreement with Spirit on commercial terms associated with the 737 and 787 programs. We believe this agreement is a win-win for both companies and directly promotes our goal to drive stability and support our airline customers.

Moving on to the next page, Boeing Defense and Space. BDS booked $6 billion in orders during the quarter, and the backlog now stands at $58 billion. Revenue was $5.5 billion, essentially flat year-over-year, and we delivered 28 aircraft. Operating margin was minus 16.9% in the quarter. In early September, we indicated that margins would be around minus 9%, the driver being a $482 million charge on the VC-25B fixed price development program due to higher estimated manufacturing costs related to engineering changes, labor instability, and the resolution of supplier negotiations. As we closed the books at quarter end, we saw another 8 points of margin erosion driven by first a $315 million loss tied to customer considerations and higher estimated costs to deliver a highly innovative satellite constellation contract that we signed several years ago.

And second, we had smaller, less material cost pressures across a couple programs totaling $136 million primarily driven by the MQ-25program. These are disappointing results in the quarter and year-to-date. This performance is below our expectations, and we acknowledge that we aren’t as far along in this recovery as we expected to be at this stage. I’d like to point out that the team is executing a game plan to get BDS back to the high-single digit margins by the 2025, 2026 time frame. As you can see on the right hand side of the slide, we’re driving lean manufacturing, program management rigor and cost productivity consistently across the division. We have invested in new training programs to accelerate performance on the factory floor, and we’ve deployed resources at our suppliers to support their recovery.

Perhaps most importantly, we instituted much tighter underwriting standards. As you know, part of the challenge we’re dealing with are legacy contracts that we need to get out from under. Rest assured, we haven’t signed any fixed price development contracts nor intend to. These moves are all fundamental to accelerating the recovery by the 2025, 2026 time frame. We have detailed metrics and milestones to evaluate our performance and progress across the three areas that we’ve previously highlighted. First, we have a solid core business representing about 60% of our revenue that performs in the mid to high-single digit margin range. The demand for these products is strong. In particular, volume for our missile and weapons products as well as the Apache are very robust given the current threat environment, and we need to keep executing, competing and growing these offerings.

Then we have the 25% of the portfolio representing specific fighter and satellite programs that have negatively impacted margins the past several quarters. In these areas, we took on fixed price production contracts in a pre-pandemic environment with real technical innovation that we’re working our way through. We fully expect to see recovery in these areas as we improve execution, deliver next generation capabilities, and roll into new contracts with stronger underwriting disciplines that more accurately reflect the prevailing economic conditions. We expect to return to the strong performance levels that we’ve demonstrated historically on these programs as we move into the 2025, 2026 time frame. Lastly, we have our large fixed price development programs that represent the remaining 15% of the portfolio, and we continue to be focused on maturing and retiring these risks.

Specifically, on the KC-46A program, we’re stabilizing the production system. We’ve seen signs of progress and improved productivity, and as of this month, we have delivered 77 tankers to the customer. For the VC-25B, we’re now maturing through the build process, and the key milestones ahead are power on and first flight, both of which will essentially be behind us as we move through the 2025, 2026 time frame and represent a significant derisking of the program. For commercial crew, while it has been a long road, we’re preparing to execute a successful crewed flight test next year and then fulfill operational launch commitments, all of which will be completed as we exit 2025, 2026. On T-7A, we just delivered the first aircraft to the Air Force this quarter and have begun critical phases of the flight test program.

On MQ-25, we’ll get through key build and flight test milestones and transition out of the development phase as we move through the 2025, 2026 time frame. We remain very confident in the T-7A and MQ-25 investments that will deliver innovative performance to the customer with a strong long-term demand profile. So for BDS, this recovery is challenging at the moment, but we believe the actions we’re taking will begin to gain traction and then accelerate. Fast forward to that 2025, 2026 time frame, fixed price development contracts will be substantially derisked. We’ll have a healthy order book underwritten with much better economics and underwriting disciplines, and a resilient employee base and supply chain that’s executing at a much higher level.

Moving on to the next slide Boeing Global Services. BGS had another strong quarter. They received $5 billion in orders during the quarter, and the backlog sits at $18 billion. Revenue was $4.8 billion, up 9% year-over-year, primarily on favorable commercial volume and mix. Operating margins were a strong 16.3% in line with our expectations. Importantly, our commercial and government businesses continued to deliver double-digit margins. With that, we’ll turn to the next page and cover cash and debt. On cash marketable securities, we ended the quarter at $13.4 billion, and on debt, the balance remained flat at $52.3 billion. We had access to $10 billion of revolving credit facilities at the end of the quarter, all of which was undrawn. Our liquidity position is strong.

The investment grade credit rating continues to be a priority, and we’re deploying capital in line with the priorities that we’ve shared, invest in the business and pay down debt through strong cash flow generation. And flip into the last page on our outlook. The overall financial outlook for 2023 is unchanged from what we previously shared, including $3 billion to $5 billion of free cash flow generation, although the updated 737 deliveries now point more toward the low end of the free cash flow range. We also expect R&D to come in slightly above our original guide, tied to the higher 777X investments that I touched on earlier. Stepping back to address the state of the market. Commercial demand remains strong across our key programs and services.

Global passenger traffic was up nearly 30% year-on-year in August and is at 96% of pre-pandemic levels, 109% domestic and 89% international. Cargo remains healthy and August was the first month with annual cargo growth since early 2022. Defense demand is also robust, and FY2024 budget continues to be in line with our expectations. Our portfolio and capabilities are well position to support the needs of the nation and of our allies. With demand strong, we still find ourselves in a supply constrained environment and our focus continues to be on execution both within our factories and the supply chain as we steadily increase production. We’re squarely focused on a meaningful step up in operating performance, including deliveries, revenue, margins and cash flow, all of which we expect to improve as we finish out the year.

On 4Q specifically, we expect BCA margins to improve sequentially, but remain negative more in line with 2Q, and we’re still not anticipating much in terms of BDS profitability. On the tax expense side, we still expect full year tax expense of approximately $250 million. As we look into early 2024, we see a number of key milestones that give us confidence in building momentum across the business. The 737 factory should be recovered from the current non-conformance and will be stabilizing production at 38 per month with step ups as we move to 50 per month by 2025, 2026. 787 will be stabilizing production at five per month with a focus on stepping up to 10 per month by 2025, 2026. We’ll be further along in our inventory unwind with better line of sight to the elimination of the 737 and 787 dual factories.

Keep in mind that correcting non-conformances gets exponentially easier when this inventory has been delivered to our customers. BDS will be further along in recovery as I described earlier. BGS will still be generating mid-teen margins, executing on its high cash conversion, capital efficient, disciplined growth model. And all of this will underwrite our continued strong liquidity position and enable us to further delever the balance sheet early next year. With that, back over to Dave for closing comments.

Dave Calhoun: Yes. Thanks, Brian. In closing, I just want to make a couple of comments and double down on the resiliency of our recovery. We’ve had no shortage of challenges this year. You all know that. Conformance items, development hurdles, external challenges within the supply chain and even logistics routes. These are not uncommon in our industry. I’ve heard from a few of you wondering if we’ve lost a step in this recovery. You might not be surprised to hear that I view it as exactly the opposite. Over the last several years, we’ve added rigor around our quality processes. We’ve worked hard to instill a culture of speaking up and transparently bringing forward any issue, no matter the size, so that we can get things right for a bright future.

As a result, we’re finding items that we need to resolve. They’re not newly created defects in the system. Instead, thanks to the culture we’re building, we identified items from the past that we now have the rigor and the focus to fix once and for all. Our shadow factories will be shut down. So this process of transparency and change can be difficult in the moment, but I’m proud of our team. I’m confident; we’ll look back on this time period as when we got things right and we set Boeing on the right course. We still have work to do, but progress is clear and our focus is long-term. We’re on the right path to restoring our operational and financial strength. And we thank you for your patience. Okay. Now, let’s turn it over to questions.

See also 20 Most Popular Scotch Whisky Brands in USA and Long Term Returns of ValueAct Capital’s Activist Targets.

Q&A Session

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

Doug Harned: Yes, good morning. Thank you. Talking about the recovery here, when we look at the 737 MAX ramp, we had thought you’d be at 38 a month production back in August, and we were looking forward to a new line that should be up and running at Everett in 2025, which looks to us that we give you capacity for well over 60 a month. But now that 38 a month rate is coming – is still to come later this year. And if I separate the bottlenecks here into three topics, sort of engines, Spirit, and everything else, engines appear fine. You’ve got a new leadership at Spirit, a new agreement. So this is not just one part, but I guess how much has your longer-term ramp outlook changed, given the Spirit issues you’ve had this year?

And if you could take those Spirit risks off the table, what bottlenecks are still out there in the everything else category for the MAX? And to put it all together, what could this ramp look like if you can avoid quality escapes like the ones we have seen this year?

Dave Calhoun: Yes, Doug, that’s the money question. We think we are synced perfectly with the constraints that we know. You talked about engine constraints. We have as clear and as transparent a relationship as we could possibly have with the GE and CFM teams. The rates that we have outlined in our guidance reflect those constraints. We all could go much higher, much faster, if it were strictly a demand question. But we have to listen hard to those constraints. So we are there. On Spirit, we really do believe that the commercial agreement and I can have Brian make a comment on; he was in the center of that negotiation. The commercial agreement gives them the resources and the breathing room they need to get ahead of our rate forecast.

And maybe even more importantly, I think the selection of Pat at exactly this moment in time to sort of get them really focused on factory performance I’m quite optimistic and quite pleased with. We’ve had just in the last 30 days as many interactions with Pat as we’ve had over the last year, even though we’ve had more than 100 people embedded at Spirit. So, all the signs are good there. I feel like we took a major step forward on relieving that particular constraint. And as you know, that is mostly a conformance constraint. I got to tell you, these fuselages, man, they have been gone over with a microscope in light of what we’ve experienced here in the last four months. So all that said, those are – you correctly articulated the constraints that we’ve had to deal with.

On the all other, we had one that has really taken aggressive steps and gotten ahead of us. And so I’m feeling better about all other than I have in quite a long time just because there was another one embedded. I’m not going to mention names. So anyway, that’s it in a nutshell, I am always tempted based on demand to tell you we can do more than 50 and get to 60 and we are physically capacitized to do it. You’re correct in that. But I can’t call it out until the supply chain constraints can make it. And they haven’t yet to get to those kinds of numbers. But we have a couple of years to work it, and we’ll continue to work it. But right now, everything we’re doing is based on the constraints we know. And that’s what we’ve outlined to the industry.

And even in these last just several months with the non-conformance issues that have sort of constrained our delivery, as we’ve said many times, we have kept our master schedule intact to get to that 38. We’re definitely building inventory in the process, and we’re paying our suppliers. So they’re not second guessing where we’re going to end up. And we think we’re going to have a little bit of buffer, particularly at the front end in light of what we’ve just experienced.

Doug Harned: And is there any point that we should be looking toward where you might have more clarity on how that whole supply chain is going to come together for this?

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

Doug Harned: Okay. Thank you.

Dave Calhoun: Yes.

Operator: Thank you. The next question is from the line of Jason Gursky with Citi. Please go ahead.

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

Thanks.