Boeing Company (BA) — Q4 2019 Earnings Call Transcript

Thank you and good morning. Welcome to Boeing's Fourth Quarter 2019 Earnings Call. I'm Maurita Sutedja, and with me today are David Calhoun, Boeing's President and Chief Executive Officer, and Greg Smith, Boeing's Chief Financial Officer and Executive Vice President of Enterprise Performance and Strategy. Dave will start with some opening comments and then hand it over to Greg to discuss the business environment and our financial results. After management comments, we will conduct a question-and-answer session. As always, we have provided detailed financial information in our press release issued earlier today. You can follow today's broadcast and slide presentation through our website at boeing.com. Before we begin, I need to remind you that any projections, estimates, and goals we discuss today may involve risks, which are detailed in our news release, various SEC filings, and in the forward-looking statement disclaimer at the end of this web presentation. Additionally, we refer you to our earnings release and presentation for disclosures and reconciliation of certain non-GAAP measures. Now I will turn over the call to Dave Calhoun.

Thank you, Maurita. Good morning to everyone. I'll state the obvious. I've been here two and a half weeks, and this is my first earnings call as the President and CEO of the company. While I'm new to the CEO role, I am certainly not new to the company and have long admired the business, the products that we build and the people that serve the company. It's a very challenging moment for Boeing. We have a lot of work to do. But I'm confident that we'll manage this situation in the right way, and I'm optimistic about the company's future, both in terms of the markets that we serve and, maybe more importantly, the engineering and technical capabilities we bring. Before we proceed, let me just say to the families and the loved ones of those who perished in the Lion Air Flight 610 and Ethiopian Airlines Flight 302 accidents, I am truly and deeply sorry for your loss. I will repeat this many, many times in the years ahead. Their memories will drive me personally to do everything I can to make our airplanes and our industry safer, and I know I speak for all of my Boeing associates accordingly. I've been spending a lot of my first weeks meeting, connecting with, and listening to my Boeing teammates across the country. What I'm seeing and hearing is that our employees are incredibly proud to work at Boeing, but they're also hurt and disappointed that we've let our stakeholders down. Together, we're committed to getting back on our front foot, learning with humility and building on the powerful legacy they and their predecessors have created over the last century. This includes engaging with one another and our stakeholders with greater transparency, holding ourselves accountable to the highest standards of safety and quality, and incorporating an outside-in perspective on what we do and how we do it. To that end, I've also been reaching out to important external stakeholders, including our customers of our three businesses, our supply base, our supply chain, which is under stress; business partners; and finally, regulators. I look forward to engaging with many others with whom I have not yet had the opportunity to meet in the weeks and months to come. All of these conversations that I have had and I am certain the ones I will have are laced with support for our company, the important work that we do and the importance of what we do for the country. We will be transparent in everything that we do as we move forward. I want to express my personal thanks to everyone who has been our partner in this journey. We're mindful that these are challenging times for many, and we remain grateful for your support. Before going through my initial priorities for 2020, let me share a brief history of my interactions with Boeing. I've known Boeing since the year 2000 when I started with GE's aircraft engine business. We were engaged in the development of a new centerline engine for the long-range 777, capable of delivering 115,000 pounds of thrust to the airframe. That was the first of its kind. When you're on the wing, you are on the team. Given this history, the 777X first flight on Saturday not only was a major milestone and a proud moment for the company, but also has a significant meaning for me. I've watched the development of the 777 series from the very first engine to the new wingtip on the 777X and see it as a proof point of Boeing's engineering and technology prowess. Shortly after leaving GE, I returned to Boeing when Jim McNerney invited me to join the Board in 2009. As a Board member of Boeing with institutional knowledge of the business, I was able to develop my initial priorities right away in my first week. First and foremost, our primary focus continues to be returning the 737 MAX to service safely. This includes following the lead of our regulators and working with them to ensure they're satisfied completely with the airplane and our work. The FAA and the global regulatory authorities will determine the timeline for certification and return to service, and we remain fully committed to supporting this process. Our job is to ensure that every requirement is fulfilled and every question from the regulators is answered. We'll get it done, and we'll get it done the right way. As you well know, over the last year, the entire Boeing Board has been actively engaged in helping to resolve our current challenges and enhancing our governance and safety oversight. These actions included establishing a Board Safety Committee and realigning and elevating safety management and engineering organizations across the company. These organization design changes will shine bright lights on the safety process and the engineering disciplines that underlie them. As previously announced, we've also decided to temporarily suspend the 737 production beginning this month. We believe this decision is least disruptive to maintaining long-term production system and supply chain health. We will work closely with our supply chain to ensure we are ready to safely and smartly return to production. Similarly, public, customer and stakeholder confidence in the 737 MAX is critically important to us. And with that focus, we've decided to recommend simulator training combined with computer-based training for all pilots prior to return to service. Our singular priority is safety, and every decision, every action, every step we take as we move forward will be guided by it. As we mentioned last week, we're currently estimating that the ungrounding of the 737 MAX will begin mid-2020. This estimate is informed by our experience to date with the certification process. It is subject to our ongoing attempts to address known schedule risks and further developments that may arise in connection with the certification process. It also accounts for the rigorous scrutiny that regulatory authorities are rightly applying at every step of their review of the 737 MAX's flight control system and the Joint Operations Evaluation Board process, which determines pilot training requirements. It is important to emphasize that this estimate should not be interpreted as an attempt to influence or interfere with the FAA and other regulators' absolute authority to determine the timing and conditions of return to service. Very simply, accurate financial reporting requires that we provide our latest and most informed schedule. Similarly, our supply chain, in the name of transparency, requires a schedule to perform up to its standard. Moving on to rebuilding trust, which I briefly touched on earlier. We recognize that many of our stakeholders are rightly disappointed in us, and it's our job to repair these vital relationships. We'll do so through a commitment to transparency in everything we do and by meeting or exceeding expectations. We will listen, we will seek feedback and respond appropriately, urgently and respectfully. Our culture is centered around strong shared value, safety, quality and integrity. Every day, we will recommit to these and foster an inclusive environment that embraces oversight and accountability and puts these three core principles above all else. We will listen and resolve in real-time any and all employee concerns pertaining to safety or other of our shared values. We will also focus on operating with excellence. We must get back to basics: delivering safe products and services to our customers while continuously improving our quality. We will complete our work in station wherever we are and whatever we do, and we will do it to the highest standards. We are committed to do it across our Commercial, Defense, Space & Security and Services businesses. This is not relegated to just the MAX or the 737. This requires a focused approach and simplification in everything we do to ensure we deliver on what matters most with accountability. We will restore production health, both within Boeing's four walls and the industry at large. We'll keep taking steps to manage our supply chain health and maintain workforce expertise across the enterprise so that, in particular, with respect to the 737 MAX, we'll be ready to restart production, increase rate safely, smartly, and disciplined with the highest standards of quality. While doing all of these, we will not lose sight of the importance of investing in our future. Our markets are growing. Customer demand is evolving. The competition is increasing, and technology is advancing at a pace we've never seen before. Boeing must keep innovating to succeed. We'll continue to invest in our global workforce and new processes, new technologies that will help us become safer and more efficient as we define the future of aerospace. This work includes preparing for the first Starliner crewed mission, continuing to progress the 777X and the 737 MAX 10, and further growth of our global services business and full implementation of our Embraer partnership. That said, there are always some investment reprioritizing and streamlining that we can do, and we will. We'll take the time to reassess our product development strategy in a fairly methodical way. I think that's a natural course for any new incoming leader to take. We'll return to this topic in future discussions. This is not intended to delay, simply to refresh. By focusing on these priorities and unleashing our talent, I'm confident we have the right foundation to keep the business strong, to keep it healthy while navigating this very difficult moment. Before I turn it over to Greg for an update on the business environment and our performance, I want to pause and thank him for the leadership he has provided throughout this challenging time and for so ably filling the CEO role during the transition. Everybody here knows we've had a number of leadership changes over the past few months, including me. The strong teams we have supporting our leaders have provided the stability we need and paved the way for seamless transitions. But Greg has set in motion some of the changes we need to see, and he has led it with real skill. He will continue to be my partner, and we will lead the company together. I'm excited now to be working alongside him and the rest of our senior leaders. And now I'll turn it over to Greg.

Great. Thanks, Dave, and good morning, everybody. As many of you know, I've had the distinct pleasure of knowing Dave for a long time. And we're extremely lucky to have him in the chair, helping us navigate through these challenging times and the path forward. I have a lot of respect for Dave and look forward to the continued partnership. And I can tell you, we are completely, 100% aligned on our priorities and the path forward for our company. Let's now move to Slide 3, and we'll discuss our overall business environment. We continue to be operating in sizable sectors that are growing and backed by strong fundamentals with a combined market opportunity of $8.7 trillion over the next 10 years. We continue to see healthy global demand for our offerings in Commercial, Defense, Space and Services. However, we are starting to see some pressure, such as in the cargo market, that we will continue to monitor going forward. In Commercial Aviation, although we've seen some moderation in passenger traffic this year, we saw growth of a solid 4.2% through November. The fundamentals remain intact. However, the impact of the coronavirus on near-term traffic growth is clearly a watch item this year. On the air cargo side, volumes have contracted due to challenging trade environment, and improvements in industrial production and global trade will be key to rebound the air traffic cargo market in 2020. We will continue to see steady utilization of global freighters while carriers are placing incremental orders to support their fleet replacement needs, but this is definitely something we're keeping a close eye on. In the narrowbody segment, although the MAX grounding has presented us with near-term challenges, the depth and breadth of our backlog affords us the time to assess and mitigate the longer-term implications. Our 737 program has a backlog of approximately 4,400 aircraft, and we continue to see these new airplanes creating capacity for growth and providing required replacement for older, less efficient aircraft. Clearly, our narrowbody delivery market share has been and will continue to be impacted by the MAX. Although we've not seen a direct impact on the value proposition of the 737 MAX in the marketplace, we will continue to monitor the market dynamics this creates. The limited production slot availability of aircraft from both Boeing and our competitor affords us ample time to double down on improving operating efficiency in order to mitigate some of these challenges the program is facing in the near term. With regards to the middle of the market aircraft, as Dave noted, we are reprioritizing and streamlining some of our investments. We've asked the team to step back and reassess our commercial product development strategy to determine what family of airplanes will be needed in the future. The team will build on the work we have done as part of the NMA design and production system analysis as we move forward. In the widebody segment, we saw solid order activity in 2019 for the 787 and 777 families. However, as we mentioned before, in the near term, the global trade environment has presented challenges for our widebody production plans, in particular, the 787 program. As part of our process, we're continually assessing the environment to determine if any further rate adjustments are required. We previously announced that we will transition the 787 production rate from 14 per month to 12 per month in late '20. As we're in the planning window of a rate decision and to reduce risk in the '21 and 2022 skyline, we've decided to further reduce the rate to 10 per month in early '21 before returning to 12 per month in 2023. We're pleased with the recent announcement of a Phase 1 deal between the U.S. and China, and we're proud that Boeing airplanes will continue to be part of this valued relationship. Progress on the trade deal is obviously very encouraging, and we will continue to work closely with our customer and await details of access to the implementation of our backlog and how this will fit into our skyline given production lead times. In the meantime, we think it's prudent to take a more measured approach to our 787 future production rates. We will continue to maintain this disciplined rate management process going forward, taking into account a host of risks and opportunities. Turning to 777X. We successfully completed the 777X first flight last week. The test fleet, which began ground testing at Everett last year, will continue its rigorous test program over the coming months to demonstrate safety and reliability. This is a comprehensive series of tests and conditions on the ground and in the air to evaluate flight controls, aerodynamic performance and cabin environmental controls, among many others. We're currently expecting first delivery of the 777-9 to be in 2021. We continue to expect the 777 delivery rate to be approximately 3 per month in 2020. Progress on the 777X will be the primary driver of future delivery rate for the combined 777, 777X program. We will take a measured approach to the 777X rate ramp, and we will look to minimize the amount of change in corporation work by managing the number of aircraft produced prior to entry into service. On the 777, as I discussed earlier, we will continually closely monitor the cargo market and carefully manage our skyline. Finally, as we previously announced, we are starting to transition the 767 production rate from 2.5 to 3 per month. At Defense, Space & Security, we continue to see solid global demand for major platforms and programs. In addition, the FY '20 enacted budget provides support for a broad range of products, including procurement of the F-15EX. Our portfolio remains well-positioned with proven world-class platforms to address current needs and innovative, capable and affordable new franchises to build the future. We are maintaining a sharp focus on our future franchise programs such as the MQ-25, the T-7A Red Hawk and the MH-139A Grey Wolf, while working to ensure strong performance on existing platforms, especially our U.S. Air Force KC-46 program and our space programs, including Commercial Crew and Space Launch Systems. Last month marked a significant milestone for the Commercial Crew program with an uncrewed orbital flight test of the CST-100 Starliner. However, as reported, this test was abbreviated due to anomalies experienced during the mission for venting the docking with the International Space Station. NASA is in the process of reviewing the data from our December 2019 mission, and the uncrewed mission, including docking to the space station, became part of the company's contract with NASA. And NASA's approval is required to proceed with a flight test with astronauts on board. Given this obligation, we are provisioned for another uncrewed mission, and you'll see this crew impact reflected in BDS financial results. Turning to the Services sector. The $3.1 trillion services market over the next 10 years is a significant opportunity for our company. We continue to see growth with expanded service offerings of our supply chain portfolio and our global digital solutions. The MAX grounding has had impact on BGS growth in 2019 by pushing back the timing of some service demand from our airline customers who have been impacted by the grounding. We expect much of this to be resolved over time. Given the backdrop of demand, the healthy supply chain ecosystem is critical to sustain production system stability. Some of the suppliers have had challenges with production rate changes in the past. Therefore, we are extremely engaged, especially as we navigate the current MAX grounding and production rate outlook. Suppliers' health and rate readiness will be critical as we assess production rates going forward. Let's now turn to Slide 4 for our full year results. Our financial results continue to be impacted by the 737 MAX grounding. Revenue, earnings per share and operating cash were materially reduced. Our revenue of $76.6 billion reflects the 737 MAX impacts, partially offset by higher service volume. Core earnings per share was negative $3.47 for the full year, and operating cash was a negative $2.4 billion, again, primarily due to the 737 MAX impacts. Let's now move to our quarterly results on Slide 5. During the quarter, we recorded revenue of $17.9 billion, core operating earnings per share of negative $2.33 and negative $2.2 billion of operating cash. Before we discuss segment performance, let me go over 737 MAX financials in more detail. Turning now to Slide 6. In preparation for our fourth quarter financial statements, we made certain assumptions, including timing of resumption of delivery, production rate, and ramp-up profiles. Again, let me reiterate, it is the FAA and the global regulators who will determine the timing and the conditions of return to service. We've assumed that the regulatory approval for the 737 MAX will enable deliveries to begin in mid-2020. We've also assumed that as a condition of return to service, regulators will require 737 MAX pilots to undergo a combination of computer and simulator training. We've assumed that we will resume 737 MAX aircraft production at low rates in 2020 as timing and conditions of return to service are better understood. And then we expect to gradually increase previously planned production rates over the next few years. We're also assuming that the 737 MAX airplanes produced and stored during the grounding will be delivered over several quarters, with the majority of them delivered during the first year after resumption of deliveries. Any changes to these assumptions will require us to recognize additional financial impacts. In the fourth quarter, we added $2.6 billion of program costs to the 737 program. This is primarily to reflect current assumptions regarding timing of return to service and the timing of planned production rates and reflect the additional time required to produce and complete undelivered aircraft in the accounting quantity. These additional costs will be spread across the undelivered aircraft in the accounting block of approximately 3,100 units and, therefore, reduce the 737 program margin. Adding these to the program costs brings the total cumulative program impact to $6.3 billion. In addition, the suspension of the 737 MAX production means that some costs must be recorded as abnormal production costs under U.S. GAAP. This includes costs related to our decision to maintain the 737 production infrastructure, including labor during the suspension and low rate production. As you may recall, this decision is part of our efforts to sustain the gains in the production system and supply chain quality and health made over the last several months. We currently estimate these abnormal costs to be approximately $4 billion. These costs will be expensed as incurred, primarily in 2020, and you'll see these flow through earnings as period expense starting in the first quarter. Since the portion of these costs deemed abnormal will be the largest when the production rate is zero and the rates are low, we expect expense to be front-end loaded. During the quarter, we also reassessed our estimate of potential concessions and other considerations to customers for disruptions related to the 737 MAX grounding and associated delivery delays. This reassessment included updating estimates to reflect our most recent assumptions as well as the latest information based on engagement with 737 customers. Based on our assessment, we added $2.6 billion to the recorded liability in the quarter. This brings the total cumulative impacts to $8.3 billion net of insurance. As we've mentioned, we're addressing the impact individually customer by customer. We expect any concessions or other considerations to be revised over a number of years, and we continue to see the cash impact to be more front-end loaded in the first few years but, of course, will be dependent upon individual conversations with customers. In 2019, we reduced the liability balance by $1.4 billion through cash payments but also other in-kind considerations. Looking forward, the key drivers of financial impact related to the 737 will continue to be the return to service timeline and conditions; the delivery ramp-up, which will be dependent on how fast we can deliver the aircraft once the fleet returns to service and how fast our customers can accept aircraft; the duration of the 737 production suspension and rate ramp profile; and discussions with customers regarding potential concessions and other considerations. We expect our financial results to continue to be adversely impacted until we safely return the 737 MAX to service, resume deliveries to customers and ramp up production rates. We continue to perform detailed scenario planning around return to service and production rates, including analyzing the implications on our supply chain, customer fleet and deliveries to fully understand the range of financial outcomes. We're also taking actions to prudently manage our liquidity, increase our balance sheet flexibility, manage our spending and stay laser-focused on productivity. I'll talk more about that a little later. Let's now move to Commercial Airplanes on Slide 7. Our Commercial Airplane business revenue decreased to $7.5 billion during the quarter and operating margin declined to negative 38%, both reflecting 737 deliveries and an additional $2.6 billion of estimated potential customer concessions and other considerations. BCA backlog includes 5,400 aircraft valued at $377 billion, equating to more than six years of production. Let's now move to Defense, Space & Security on Slide 8. Fourth quarter revenue decreased to $6 billion, reflecting lower volume across the portfolio as well as the impact of previously mentioned Commercial Crew charge, which affected revenue recognition on the program. BDS operating margin of 0.5% reflected a $410 million pretax charge to provision for the additional uncrewed mission for the Commercial Crew program as well as several performance items and the mix within the portfolio in the quarter. During the quarter, BDS won key contract awards worth $8 billion, and our backlog now stands at $64 billion, with 29% from outside the U.S. Let's now turn to Boeing Global Services results on Slide 9. In the fourth quarter, Global Services revenue decreased to $4.6 billion, reflecting lower commercial service volume. Year-over-year growth of 8% is lower than we expected, partially due to the impact of the 737 MAX grounding, which affected the timing of demand for some of our service offerings. BGS operating margin of 14.7% reflects a noncash charge related to retirement of the Aviall brand as we consolidate our distribution businesses under the Boeing brand as well as mix of products and services in the quarter. We were partially offset by a onetime gain on a divestiture. During the quarter, BGS won key contract awards worth approximately $6 billion, which brings its backlog now to $23 billion. Let's now turn to cash flow on Slide 10. As I mentioned, operating cash flow in the fourth quarter was a negative $2.2 billion driven by lower 737 deliveries, lower advanced payments, higher inventories and timing of receipts and expenditures. We expect continued cash flow pressure from the MAX impacting until production stabilizes. Strong operating cash flow from other parts of the business and further balance sheet levers will help provide adequate liquidity during this time. We also continue to look at all aspects of spending to ensure we have the right prioritization and sharpen our focus on operational excellence, including closely assessing the timing of noncritical expenditures. Additionally, we're accelerating key working capital initiatives to help navigate this difficult period. During the fourth quarter, we paid $1.2 billion in dividends, and our share repurchase program remains on pause. Near term, managing our liquidity and balance sheet leverage are top priorities and will continue to be until the MAX deliveries resume, we execute the 737 production rate increases and see stability in the production system. But as Dave mentioned, we will also continue to make necessary investments in the business, in our people, new technology and better processes and tools. Our debt level has been elevated during the grounding, and we are planning to immediately reduce it once our cash flow generation returns to a more normalized level. Again, we will continue to evaluate all available liquidity levers as we navigate the current challenges. Investing in our business and repaying debt will remain our cash deployment priority for the next few years. Let's now move to cash and debt balances on Slide 11. We ended the quarter with $10 billion of cash and marketable securities. We raised additional commercial paper in the quarter, increasing the debt balance to $2.6 billion and helping shore up our liquidity position as we work through the current MAX challenges. Our strategy of maintaining a strong balance sheet and providing us with substantial borrowing capacity through capital markets access of our credit facility of $9.6 billion. Additionally, we've received commitment from a syndicate of banks sufficient to enter into a $12 billion term loan facility. Based on the strong demand, the size of the facility could exceed this amount when the transaction closes in February. We are mindful of the impacts the additional debt has on our credit ratings, currently at A-, A3, but confident we have sufficient balance sheet flexibility and operational levers to navigate this challenging time. Our financials this year will continue to be negatively impacted by the MAX. Cash flow, in particular, will be more significantly impacted in 2020 than in 2019. We expect the use of cash flow in 2020 to be greater than '19, primarily due to 737 MAX advanced payments being lower in 2019 based on our latest 737 delivery assumptions. As I mentioned previously, we're increasing our customer consideration liability and expect the cash impact to be higher this year. Also, due to the additional 787 production rate reduction, as I discussed, as well as our current 777X entry into service assumptions, widebody receipts will be a headwind in 2020. Keep in mind, we'll continue to see expenditures on the 737 program despite the production suspension as we invest in the production system health to derisk our future production rate. And these investment decisions, including keeping our workforce in place and continuing to make payments to our supply chain for inventory, are examples of our focus on long-term stability but will require cash in the near term. Given these headwinds and our current assumptions on 737 MAX return to service as well as future production and delivery rates, cash flow recovery is now expected to start until 2021. We are committed to providing you with additional updates on the MAX return to service progress and production rate plans as we have more information. Once we have further clarity, we will schedule a follow-up investor and media conference call to discuss the financial implications and provide financial guidance, which will capture the puts and takes, including the impact of the most recent widebody changes. So with that, I'll turn it back over to Dave for some closing comments.

Greg, thanks. Thanks to everyone on the other end of this line. I want you to know I'm as excited as I can be about taking on this challenge. I wish the moment was different, but we can get through this moment and we will get through this moment. I'm confident in this airplane. The MAX is a sound airplane. We believe we're going to deliver the safest airplane in the sky, and we're committed to do just that and I know our regulator is as well. So with that, and again, open this line up to questions. And I want to thank Greg for the last time since now we're partners. But at any rate, he has really stood tall in this big transition process, and I appreciate it.

Thanks, Dave.

Thanks.

Thanks, gentlemen. Can you hear me?

Yes, we can, Carter.

We can.

Could you elaborate on your brief comment regarding monitoring the market dynamics for the MAX and maintaining its value proposition? Specifically, are you referring to aircraft that have been sold or those that remain unsold? Additionally, what is your level of confidence that MAX pricing will not be significantly affected by your observations in the long term? Please expand on that for us.

Yes. No, Carter, look, I think first go to the backlog. And we've got 4,400 aircraft in backlog, and this has been a very challenging time obviously for our customers, but folks want the airplane. And the value proposition the airplane brings into the market is unchanged. So look, we're in a grounded period, and we realize the strain that's put on the customers. So we're monitoring that closely. But the value proposition of the franchise still remains intact. And like I said, Dave said, the focus right now, safely get this thing back in the air, and we're going to do it one airplane at a time, as Dave has said, and ensure that we have this production system stable as we move up and delivering on our commitments to our customers.

Yes. In the first couple of weeks, when I've talked with most of our large customers, they get to tell me whatever they want. They do still believe in the value proposition of this airplane. They believe in everything about the airplane, and it means a lot, but I've heard it firsthand.

Dave, you're coming to the table with a decade of experience seeing the company from the inside. And I just wonder how you've been able to step outside of that familiarity, take an orthogonal view, kind of a different view of what went wrong and reorient everything so that this isn't maybe just changing tone and/or repairing relationships. But maybe it is, or if there's something more needed, how you've been able to step out of that familiarity role.

Well, let me maybe answer that question a little differently because I get a lot of media attention around the idea that I'm somehow an insider. What if I change that a little bit? What if I told you I simply had a front row seat to everything you saw? And so all the things I read and see and hear, make no mistake, they all have an impact, they have an effect, and I get a front row seat. And ultimately, our Board took action as a result of it. And now I'm the one sitting in the operating seat. So I don't want it to be lost on anybody. I know we've got things to work on and changes to make. I treasure my relationship across the industry with customers and with regulators and others. And when they tell me something, I believe them. I always fault to believing them. And so the work we have to do internally to restore all those confidences and, yes, modify our culture, you can bet I'm working on it. I don't think I see it any differently than you probably do. I might put a nuance here and there, but I think I know the job at hand and that's exactly what I'm going to do. I got to restore trust, confidence and faith in The Boeing Company.

And from that orthogonal view, do you think there is a deficiency in competitive narrowbody offering in the market?

Yes, I don't have concerns about the MAX's performance based on customer feedback. We remain committed to the airplane development business and will consider future developments. Just to clarify, my decision not to commit to the NMA right now doesn't reflect a lack of interest in new airplanes. We will pursue new projects, but I don't see significant gaps in our current narrowbody fleet. I'm focused on listening to customers and market needs. It's been over two years since we initiated this discussion, and I'll seek fresh insights with our new commercial airplane leader before sharing updates. However, at this moment, our priority is to ensure the MAX is performing well, and I have confidence in the product.

Could you provide some insight into the culture of the company? How do you plan to change the culture in such a large organization, especially considering that some areas of the workforce may feel demoralized due to recent events? This is a topic that has been on my mind, and since you have been closely involved in the Board's observations, I'm curious about how we ended up in this situation.

That's a big question. Yes. So first of all, let's go back to what happened. So the MCAS design failed to deal with a boundary condition in an environment we should have known something about. The regulators made the same mistake. There are engineering disciplines that you can and should apply to that question that I think can get fixed relatively quickly. I don't think culture contributed to that miss. I think simply disciplines did. The question with respect to training recommendations and the horrible IMs that people would like to think all of Boeing writes were relegated to a relatively small group of folks, but it wasn't detected. The system didn't apparently listen or watch for things like that, and it didn't react appropriately. And I have to do everything in my power to make sure going forward that it does. Listening starts with leadership, and it starts with me. And I think we need to do more of it. And then slowly, steadily, you change culture. People want to believe in that, and they will. They are all good engineers. They all follow disciplined processes. And let's not mistake this plane, this 777X tested more technology, tested our patience, tested our disciplines in every way you can think of. And we did it successfully on that first flight, and we will move it through a certification process that will be more rigorous than history has ever seen. And we'll get to that finish line, and we'll fly it. And if you looked at that product and sat near or in or flew in it, you'd be impressed with everything about Boeing, I promise you. So this thing isn't entirely broken. Leaders have a massive role to play in setting culture, setting the stage for how to fix a culture. And I have to demonstrate that one step at a time, every inch of the way. I don't have to convince anybody that safety is in the best interest of every stakeholder, including investors. It is. It's perfectly obvious to everyone. So I have no convincing to do on that front. I will have no competing priorities as we step forward. And so I hate to reduce it to things that's simple, but I think that's what it's all about.

We talked about clearly a lot of challenges with the MAX grounding, the 787 rate cut and 777 potential delays. I guess, how do we think about the longer-term implications of what the Commercial Airplane segment looks like in 2022, whether that's market dynamics, touching on Carter's question, impact of charges and some of that offset by manufacturing processes at Boeing? If you could maybe talk about what 2022 looks like.

Yes. Yes. Well, I think on the widebody side, we talked about kind of where we see the rate profiles today. And I think, as we said, we think it's prudent, considering the outlook and some of the global, I'll say, trade dynamics and the timing associated with taking a trade deal to a point of actually a delivery in a skyline, we still got some steps to work our way through. So I think we're being prudent here and looking at the marketplace in that time and moderating those rates. Now having said all that, there's still great demand for the widebody franchises, and you see that in the backlog and you see that in the market outlook. So I think the potential there going forward continues to be strong. On the narrowbody, in 2022 under these assumptions we talked about, you're certainly getting back up in rate, but all these investments we've been making during this time of grounding, Sheila, and I think if you saw the line today versus what you saw even a year ago, there's been tremendous activity put in place in tools and processes to have stability for the long term. That ultimately is going to help the overall franchise, our predictability on delivering to our customers on time and a healthier supply chain as a result of it. So that's been a huge level of effort today. But let's face it, that's a long-term play, but it's a really critical one to get in place during this time. So we have that stability and predictability, again, on our delivery profile and then ultimately on our financials. And then during this, we mentioned, we're still making investments. And we're making investments in the productivity as well as on the R&D side. So we're being prudent about it, and we're sharpening the pencils. But that, again, is really focusing on the long-term franchise that we have and the potential franchises to come.

I want to add my thoughts. I appreciate every aspect of our product portfolio, both widebody and narrowbody. The trade deal is very significant. If it plays out as I envision and our Chinese customers return, allowing us to restore the positive relationships we’ve maintained, that would be a substantial boost. Additionally, the industry has faced limitations due to supply chain issues. I believe that certain steps taken by Boeing during this pause are addressing some of the readiness challenges we’ve encountered. I think the supply chain will start to improve, and we won't face the same constraints moving forward as we have up to now. I'm speaking for the entire industry, not just our company. So I am feeling optimistic from several perspectives, and I believe these are the key factors.

The one thing I'm certain, Dave, is that a decade ago, we could not have predicted we'd be having this conversation. The thing I'd like to look at is the challenges you're looking at BCA. And in the short term, as you said, you're spending time with regulators and customers to support MAX certification. And then over the course of the year, you've also got to deliver on the restart operationally of the MAX, improve efficiency on the 787 as rate comes down, progress on the 777X, and then as you talked about, decide on how Boeing is going to look at what it does next. And I would think you wouldn't want to wait too long to see how you want to compete against Airbus in the back half of the decade. So with all of this on your plate, new leaders across BCA, so how are you prioritizing your time? And when we get to the end of the year, what would you consider a successful outcome on sort of short-, medium- and long-term issues there?

Thank you for the question. I recall examining this situation all the way back in 2000. The outcome hasn’t significantly changed, except for the MAX pickup. We are in a prolonged cycle, and making the right decisions is much more critical than making them quickly. The MAX has to be my main focus this year because it is vital from many perspectives. Our institution's economics heavily depend on it. Rebuilding relationships with our customers and regulators during the MAX’s return is also crucial, as we will always rely on those connections. Regarding new airplane development, I believe no one will be more engaged in that process than I will. I aim to ensure we create the perfect airplane for the current market and reevaluate what that entails. The past two and a half years have been challenging and have tested demand across all airplane types, forcing us to learn from those experiences. However, I am prepared to advance in this area. I believe I have more tools than ever to establish a competitive edge in the next airplane. Nevertheless, I want to clarify that although my main focus will be on the MAX this year, which I will discuss extensively, it does not mean I will initiate other projects. It is a necessity for us to restore our confidence and move forward effectively. So, expect to hear mainly about the MAX from me, but please do not misunderstand this focus.

And if I can, when you look at this year, certainly, financially, this will be a rough year. But when you put all this together, do you have goals you're thinking of and how this should translate into financial goals in 2021 or 2022? Or is it too early to think that way? How do you treat that?

Yes, it's too early to think that way. While I might have some ideas in my mind, I'm going to listen to many people before making any decisions. I want to ensure that all the necessary investments to strengthen our engineering function are in place, allow everyone to regain their confidence, and restore belief in the safety of every airplane that Boeing produces. I don't want to rush to any conclusions right now. My focus is on getting through this moment, rebuilding our confidence, and then we'll establish projections from there.

I wanted to discuss the supply chain and your approach to it during this call. Greg, you mentioned that some of the $4 billion is intended to support the supply chain during the halt. Overall, how are you managing this? It doesn't seem like you're advising everyone to stop operations. Which groups are not being told to halt? How much financial support do you plan to provide to the supply chain or do you believe is necessary during this time?

Yes. No, David, I would tell you, it's a one-on-one engagement, and not just them but their suppliers. And so I'll say kind of tiered-down suppliers and understanding the impact that this is having on them and then what levers do we all have in order to help get them through this. And again, with the objective that we're playing a long game, and we want them to come out of this healthier, quite frankly. So each one of them is a little bit different about how we're working and how we're engaging and what type of assistance is needed. Everybody, as you know, has been at a little bit of a different level of production through this. So there's different levels of inventory. So I would tell you, if you went around supplier by supplier, you're going to get a variation of what their build rate is or where they are in inventory. But the engagement with them, I would say, has been very good by our supply chain folks in keeping them informed and trying to get ahead of this and again, making smart decisions and assisting where we can assist. So yes, we've got some provisioning in here to help them, and we'll continue to do that, again, with the long-term objective. We need them to be healthy. We want them to be healthy, and we're playing this for the long term. So even some of these productivity things that we've talked about on the 737, the supply chain team has taken those into the supply chain that, again, ultimately will make them healthier, more stable, more predictable, which is going to be key to our production rates going forward.

I might just add, their rate in return in these early months will be ahead of ours, and that's by design simply because we want the protection in our factories so that we never travel work. That's actually an important discipline that we will reinstall with our MAX line. And they will be the beneficiary of that as they, as I said, accelerate at a faster rate.

Can I ask for clarification, Dave? I think you mentioned that you expect certification and deliveries to resume in the middle of the year. Is that correct, and will there be some sort of delay between certification and the resumption of deliveries?

Yes, we anticipate a timeframe around the middle of the year. However, as we mentioned, it will be a gradual and careful ramp-up. Our primary focus, once the grounding is resolved, will be to begin releasing the grounded aircraft and methodically increasing production while ensuring stability at each step. Once we achieve stability, we will proceed with our next steps. That's our priority and the associated timeframe. Currently, we are considering starting the production line before the grounding is officially lifted as a way to mitigate risks. During that time, we will assess our confidence in the grounding being lifted, and then we will gradually reintroduce resources into the program, keeping in mind that the lines are currently idle. We'll begin cautiously and ensure stability before fully engaging the crews again. We will make final decisions as we approach the return to service, but that is our plan as it stands today.

And if the question relates to this certificates by airplane, which, of course, is going to be a new and very, I think, tightly run process, of course, that involves us and the FAA. And I think we've provided for plenty of room for that process to unfold methodically and not with too much pressure on it. So that's important in the way we've laid out our time line.

In the context of cash being a bigger use in '20 versus '19, certainly understand the moving pieces in BCA, can you talk about perhaps some of the cash generation and the state of the businesses outside of Boeing Commercial, which I think is still a relevant topic here?

Yes, on BDS, it is slightly lower than last year primarily due to timing related to receipt and award schedules. Other than that, the core operating performance is mostly consistent. However, we do expect some challenges this year. For BGS, we anticipate some headwinds too, but they are less significant than those for BDS, again largely due to timing. Overall, the performance and the conversion of earnings to cash remain steady compared to 2019. However, the main differences in cash flow will come from BCA.

I wanted to ask about the supply and demand for the 787 and the impact on margins given the recent changes. Do you have insight into whether the order pace will increase to around mid-100s per year? Even at the current production rates of 10 or 12 per month, you're still producing over 100, but the order rate has been below 100. I understand China is a factor, but I'm unsure if China plans to order enough widebodies to fill that gap in a sustainable way. Also, Greg, regarding margins, you mentioned being able to continue increasing the cash margin, albeit at a slower pace when comparing 12 to 14. Is that still the case at a rate of 10?

Yes, yes. Obviously, not at the same, I'll say, slope as it was, but we still continue to see improved cash margin over the profile for all the reasons we've discussed before between supply chain, mix and our own productivity. That story is unchanged. But again, the amount of growth over that period has moderated obviously under these lower rates. On the supply-demand, China is a big deal. Don't mistake it. It's a big deal, and that's a big play in these production rates. Outside of that, as you've seen, when we've been going head-to-head with the 787, we've been winning the marketplace. The airplane continues to bring great economics into the field. And the long-term market outlook continues. When you look at the 20-year forecast, there's still a lot of widebodies and more replacement in there. And the 787 family, I think, is extremely well-suited to address that market. And I'd say the one that is probably underserved at this point is the 787-10. I think as we see that replacement market, I'll say coming more within our skyline, I think we're going to continue to see more demand for the -10. It's just an incredible value proposition and machine for our customers, especially considering what is going to be replacing in the market. So China, big watch item. Outside of that, do we have work to do on the skyline? Absolutely. And we're going to play that out one campaign at a time. And we'll continue to monitor, again, our lead times and make whatever adjustments are needed. But as we see it today, we think this is a prudent thing to do, and we have good confidence in the 10 to go into 12 a month.

Do you expect the China 787 order to come out of Phase 1 specifically? Or do we need to get past Phase 1?

I don't know at this point. We understand that airplanes are certainly a significant part of the trade deal with China. We will discuss those details when we have more clarity between the government and our customers, and we're actively engaged with them. Once we gain clarity on this matter, we will share that information. However, right now, we don't have a clear model.

There's no reason to believe it has to wait for Phase 2.

I understand that the FAA is the ultimate decision-maker here. You’ve made that very clear. However, would you be willing to share your accounting assumptions for the MAX production rate ramp six and twelve months after recertification? Additionally, how can you feel comfortable potentially resuming production before certification, considering the uncertainty we’ve experienced over the last few months?

Yes, I'll clarify our strategy moving forward. It's not simply about restarting the production line. We plan to gradually bring back our crews, but we need to have a higher level of confidence in the exact timeframe for returning to service because we want to avoid producing more airplanes than we can store. Currently, the production line is inactive, which will require time to ramp up. However, once we complete the certification flight, it will serve as a significant milestone that will enhance our confidence in the gradual reintroduction of production. Regarding future rate increases, we need to focus on getting back on track and starting to deliver, taking one step at a time, or as Dave has mentioned, one airplane at a time. We will maintain our work in progress to ensure stability, particularly within the supply chain. Our next rate increase will be carefully considered, and while we've made some assumptions, we will approach this gradually. We are committed to ensuring institutional stability not only within our company but also with all suppliers, leading to a more predictable production schedule and reliable delivery for our customers. We'll keep you updated on our rate plans, and provide more clarity as we finalize our guidance and the supporting factors.

I just will reiterate because I think it does matter. That philosophy, one at a time, is reflected in what we have built into this set of financials and our expectations. So I hope we can go one at a time at a rate that exceeds those expectations, but we're not going to think about it that way. We're simply going to get to every next airplane.

That concludes our question-and-answer session. Thank you for joining the call.