Boeing Company (BA) — Q4 2021 Earnings Call Transcript

Thank you, John, and good morning, everyone. Welcome to Boeing’s fourth quarter 2021 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. And as a reminder, you can follow today’s broadcast and slide presentation through our website at boeing.com. As always, we have provided detailed financial information in our press release issued earlier today. Projections, estimates and goals we include in our discussions this morning 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.

Yes. Thanks, Matt. Just upfront, we’ve changed this format a bit so that I can limit my remarks upfront to some observations and thoughts on where we are in this rebuilding process. Brian will take you into more detail on the financial side. With respect to the environment, there’s no doubt Omicron has paused the industry recovery. But it has not changed the outlook for the industry recovery, such that while it might be delayed a few more months, the bookings and the customer discussions regarding fleet plans, medium and long term, are still quite robust. And we are quite confident in that outlook. 2021 I would characterize for Boeing as a rebuilding year. We came from recovery to rebuilding. And I give our team a lot of credit for making a lot of progress on that front. Number one, on the orders front and demand, particularly led by the MAX and the freighter market, I feel very good about where things are and the competitiveness of our product line with respect to that market. Supply constraints to date have not constrained us. On the other hand, I think in the medium to long-term future, it’s something we all have to plan for. I’ve always viewed the unfortunate means by which we got here and the buildup of finished goods inventory, both with respect to the MAX and the 787, as sort of a double-edged sword. I hate that we have a lot of inventory. On the other hand, it will probably serve us well in what is likely to be a robust recovery. With respect to fleet rebuilding, I would also just like to highlight the efficiency gains and maybe even more importantly, the emissions gains that our customers enjoy when they replace their current fleet with these new aircraft are significant, and the pressures are severe. So, I think that creates some additive pressure regarding fleet renewals as we move forward. And I don’t think either of those will let up. The MAX return to service, I’m quite proud of where we are on that. We have regulatory approval now in almost every jurisdiction in the world. You know that China, Indonesia, and Ethiopia all delivered prior to the end of the year. We delivered 245 airplanes in ‘21. We’ve flown safely over 800,000 flight hours, 99.3% service reliability. And we’ve now flown more post the MAX grounding than we did pre-MAX grounding. China is preparing for their MAX return to service and for delivery. And we have set up a plan that allows for that in the first quarter. But of course, they’ll take them as the government returns the current fleet to service. Our customers are moving methodically and very well with respect to that return to service. The charge we took here in the fourth quarter reflects everything we’ve learned about the rework process itself, the data required to restart deliveries, and obtain ticketing and then customer expectations regarding concessions as we move forward. With all that said, I still feel fantastic about the future of the 787 airplane for The Boeing Company. And anyway, as I think I point out every time we get together, these 787s today, the fleet in service is flying, is more utilized than any other widebody airplane. 99% of it is in service today with respect to the pre-pandemic levels. And it’s the most utilized widebody out there, 98.99% reliability. So, this is a great product line and a competitive product. And as soon as we begin delivery, we feel very good about the ultimate recovery. On BDS, we did hit a bunch of important milestones. The MQ-25, we experienced our first refueling, and we began carrier tests. The T-7A production line, which is based on significantly improved development process and engineering modeling capabilities, is off to a very good start, and the efficiency associated with that development process is being realized. And then, the tanker. The tanker today, despite the charge, again, which we don’t feel great about by any respect, but the tanker today is an incredible asset for our customer and now serves 70% of the missions that were intended in the development of the tanker. And our job is to continue to deliver the tanker and to do it more expeditiously as we move forward. The good news is our customer likes the performance of the airplane. And again, we intend to serve that need. Global Services, it is recovering like all the service businesses that surround aviation. It’s on a great path. The team is doing a terrific job. We had a small write-off regarding materials that ultimately would not be utilized in this recovery. But BGS is doing quite well and is experiencing the recovery. And then, I feel very good about the free cash flow that we generated in the fourth quarter. As everybody knows, we have been focused relentlessly on improving our free cash flow situation. It has been our number one metric. And to be able to achieve that I think is terrific news. Sustainability, it is the one issue every customer wants to talk to us about, not with respect to 2050 or 2035, but they want to make sure that we have a program in place that will support them over that time frame, and it is very important to every next order that we achieve. So, believe it or not, the competition for today’s airplanes is often built around the future plans that we have with respect to sustainability. And I love where we’re going on that and the story we have for our customers. Innovation is strong in every way. I mentioned the MQ-25, the T-7A. Future capabilities concerning the next development program, we’ve invested a lot. We continue to invest a lot. It’s more important to me that we get our development tools where they need to be, demonstrate manufacturing capability and capacity where we need to be before we call out the specs on the next new commercial airplane. So, I remain focused on that as a priority, and so far, so good. Talent, we were stable over the course of ‘21. Turnover was managed quite well and aggressively. And so, I feel good about that and our ability to hire as we move forward. But, I will also acknowledge that there are shortages out there in critical skills, and we have to be very competitive in order to get them. I’ll highlight the priorities we have. I don’t think any of them should surprise anybody. They may look boring concerning words like stability, safety, and quality management. But that is still our focus, and we’re going to be relentless about it. This is a very important year as we begin the year and then exit the year where we can predict to customers and to all of you the deliveries of our airplanes and ensure the quality is what it needs to be, et cetera. And culturally, our team is getting closer to their work than they’ve ever been. We feel good about that. And we invest. We’re investing heavily in the future capabilities of our company. So, that’s it with respect to my upfront comments. I’ll turn it over to Brian. We can go through the quarter’s performance and then have a little more time for Q&A.

Thank you, Dave, and good morning, everyone. 2021 was a year of recovery for our business. We’re optimistic about how we’re positioned entering into 2022 and have high confidence in the long-term strength of the company. We remain focused on solidifying our business for long-term success. The lessons we’ve learned and the changes we’ve implemented in the last two years will help us to do that. We’re driving safety, quality, and stability into every corner of our operations to enable future growth. And we made solid progress against our goals over the last three months. In particular, as Dave mentioned, we’re proceeding to get 737 MAX airplanes ready to deliver in China as early as the first quarter and follow the lead of our customers and regulators on next steps. On the 787, while we can’t predict when deliveries will restart, we have made meaningful strides in addressing many of the non-conformances we identified. We have work remaining to do, and we continue to hold detailed productive discussions with the FAA every step of the way. Looking to our financials, despite some of the near-term challenges, we generated positive free cash flow in the fourth quarter and believe free cash flow will continue to materially improve this year and into 2023. With this backdrop, we think of 2022 in three parts. First, we’ll focus on reaching key milestones so that we can resume 737 deliveries to Chinese customers and restart 787 deliveries. Then, once we achieve these important milestones, we expect to see improvement in our performance metrics, including deliveries, revenue, margin, and cash flow. And we intend to come back to you with detailed plans for the rest of the year and beyond. Finally, as we move through the second half of the year, our financial performance should start to accelerate. And we think there is a significant opportunity ahead for our company to return to sustainable growth. Net-net, we’re well positioned at the start of the year and encouraged by the hope of a return to normalcy in 2022. Before I get into the detailed financial results, I want to make a few points on the current environment. Let’s start with the demand side. In the commercial market, we continue to see an overall broadening of the recovery starting with domestic traffic, which rebounded to around 90% of pre-pandemic levels in countries such as the U.S. and Brazil. In the U.S., domestic traffic nearly fully recovered at 94% of pre-COVID levels in November. December data suggests resilient traffic despite the rapid spread of the Omicron variant, but early 2022 bookings data indicate a more visible negative impact likely extending through February. Beyond that, we expect the recovery for the spring and summer seasons. Outside of the U.S., the recovery continues broadening in Europe and South America. However, further lockdowns have stagnated recovery in China, where we have seen traffic decrease considerably. Despite some near-term volatility, we’re encouraged by airlines’ plans for the spring and summer travel seasons. On the international front, traffic has improved throughout the year from more than 85% below 2019 levels to 60% as the year ended, with a meaningful benefit from reopening of borders and lifting of travel restrictions. In particular, the transatlantic corridor showed improvement due to coordinated travel policies between the EU and the U.S. The commercial freighter market continues to be robust with 2021 cargo traffic 7% above pre-pandemic levels. We saw record freighter demand last year driven by both e-commerce growth and demand for faster, more reliable transport that airfreight can provide. And we’re seeing the same steady recovery broadly in our commercial services business as well. Given this demand recovery, our customers are increasingly focused on their medium-term flight planning and continue to prioritize fleet modernization as an enabler to reduce carbon emissions and increase operating efficiency. New airplanes we deliver will be as much as 25% to 40% more fuel efficient with commensurate reductions in emissions compared to the airplanes they replace. And as oil prices remain high, our customers are keenly aware of these benefits. Overall, our projections for the three-phase commercial market recovery remain unchanged, and we still assume pass-through traffic will return to 2019 levels in the 2023 to 2024 time frame. We continue to see domestic traffic lead the recovery, followed by intra-regional and then long-haul international routes. Long-term fundamentals that support demand for air traffic remain intact as we continue to project average traffic growth of mid-single digits over the long term. In defense and space markets, we’re seeing stable demand. We continue to monitor the federal budget process in the U.S. and see strong bipartisan support for national security, including Boeing products and services. While governments worldwide remain focused on COVID-19, security spending remains a priority given global threats. On the supply side, with our production at relatively low rates and higher-than-normal inventory levels, the supply chain is currently not a constraint. However, as we look forward to the industry recovering and future production rate increases, our supply chain remains a key watch item due to raw material and labor availability as well as logistical challenges. We regularly monitor supplier health and have risk mitigation plans in place for critical components. As we prepare for future rate production increases, we will continue to prioritize operational stability across the value stream. Long-term, the markets we serve are robust, and we remain confident in the fundamentals of our business and the growth of the industry. With that, let’s turn to the financials. Fourth quarter revenue of $14.8 billion declined 3%. And the core operating loss in the quarter was $4.5 billion, resulting in a $7.69 loss per share. We generated positive operating cash flow of over $700 million in the fourth quarter, driven by 737 deliveries and favorable receipt timing in BDS. Let’s now look to Commercial Airplanes. Commercial order activity picked up significantly in 2021 as airlines are positioning for the recovery, particularly in the narrowbody and freighter markets. In total for the year, we booked 909 gross Commercial Airplane orders, including 749 orders for the 737 MAX. We also booked a record number of orders on our freighter airplanes. And we ended the year with 11 straight months of positive net orders. We appreciate every order from our broad customer base, including United, Southwest, Alaska, UPS, and FedEx. We are also honored that Akasa, Allegiant, and 777 partners recently selected Boeing to support their future fleets. We had over 4,200 airplanes in backlog at the end of 2021, valued at $297 billion. Fourth quarter revenue was $4.8 billion, essentially flat, primarily driven by higher 737 deliveries, partially offset by lower widebody deliveries and less favorable mix. Operating losses of $4.5 billion were primarily driven by charges on the 787 program, resulting in a negative margin rate. 787 deliveries remain paused, and we had 110 airplanes in inventory at the end of the quarter. As you know, last year, we set out on a comprehensive program to ensure every 787 airplane in our production system conforms to our exacting specifications. We resolved many of the non-conformances, and we’re finalizing our work on the remaining items. We also continue to focus on fulfilling the requirements and expectations of the FAA, and we’ll follow their lead on the timing of resuming deliveries. While this effort has inevitably impacted our deliveries to customers and our near-term financial performance, we are fully confident it is the right thing to do for our future. In the fourth quarter, we determined that the activities required to resume deliveries and the rework that will be needed on each airplane in inventory will take longer than previously expected, resulting in further delays in customer delivery dates. We regret the impact these delays have had on our customers and are working closely with each of them to support their fleet planning needs. Consequently, we’re producing at very low rates, and we’ll continue to do so until deliveries resume, gradually returning to five airplanes per month over time. From a financial impact standpoint, we now anticipate 787 abnormal costs will be approximately $2 billion, which most will be incurred by the end of 2023. This estimate increased by approximately $1 billion from last quarter due to the additional rework requirements and lower production rates continuing longer than previously expected. We recorded $285 million of these abnormal costs in the fourth quarter. Additionally, we recorded a $3.5 billion noncash charge in the quarter to write down unamortized deferred production costs, primarily due to estimated customer compensation for the longer delivery delays. It is important to keep in mind that from an economic standpoint, cash margins on the 787 remain positive. While the additional costs and customer considerations will put some downward pressure on cash margins in the near term, cash margins are expected to remain positive and significantly improve over time. We remain very confident in the future success of the 787, and it remains one of our most compelling programs. Importantly, none of the issues we’re addressing have raised immediate safety of flight concerns or impacted the capabilities of the in-service fleet. We received gross orders for 21 airplanes last year, and we see a long runway ahead. We are working diligently to ensure that we are well positioned as demand recovers and accelerates in the future. Moving on to the 737 MAX program. The MAX is now approved to fly in over 185 countries. As mentioned, we continue to prepare airplanes for deliveries as early as the first quarter, subject to customer and regulatory approvals in China. We also delivered 245 737 MAX airplanes last year, and we’ve steadily ramped up production. We are now producing at 27 airplanes per month on our way to 31 per month early this year. As you look to ramp both our production rate and delivery gains this year, we will continue to monitor the impact of Omicron on resource availability. We currently have 335 737 MAX airplanes in inventory and still anticipate delivering most of these airplanes by the end of 2023. Timing and pace of deliveries to Chinese customers are also critical assumptions to our delivery outlook. 737 abnormal costs and the liability for 737 MAX customer considerations are largely behind us. We expect the majority of the remaining $2.9 billion liability to be liquidated this year with less than 10% of the total estimate left to be negotiated. On the 777X, we continue to progress through our rigorous and comprehensive test program. We have flown over 1,800 flight hours through the end of 2021. We also completed engine and airplane performance testing, and the airplane continues to perform in line with our customer commitments. Our customers recognize the compelling economics and sustainability benefits this airplane offers. We remain engaged with the FAA and other global regulators throughout this process. We’re working towards reaching Type Inspection Authorization or TIA, which is a pacing item for us to begin FAA certification flight testing. We anticipate delivery of the first airplane in late 2023. We are currently offering the freighter version of our 777X airplane to customers. And we’ll keep you updated as we progress on sales campaigns and conclude our launch timing evaluation. As a result of increasing freighter demand, we plan to increase the combined 777, 777X production rate from two to three per month this year and expect 2022 deliveries to be relatively in line with last year. Let’s now move to Defense, Space & Security. Fourth quarter revenue was $5.9 billion, down 14%, and operating margin was negative 4.4%. These results were primarily driven by lower volume and less favorable performance across the portfolio, including a $402 million pretax charge on the KC-46 Tanker program. The charge is primarily driven by evolving customer requirements for a remote vision system as well as factory and supply chain disruptions, including the impact of COVID. On the commercial crew program, as previously shared, we and NASA anticipate the second uncrewed orbital flight test to occur in May. We received $7 billion in orders during the quarter, including an award for modernization of Airborne Warning and Control System to the Royal Saudi Air Force. The BDS backlog increased to $60 billion. During the quarter, BDS also delivered on critical customer milestones. Overall, we remain optimistic about our defense business. Now, let’s turn to Global Services. Fourth quarter Global Services revenue was $4.3 billion, up 15%, and operating margin was 9.3%. Results were driven by higher commercial services volume and favorable mix. Earnings were impacted by a $220 million inventory impairment in the fourth quarter. We received $6 billion in orders during the quarter, taking the BGS backlog to $20 billion. We also delivered the 50th 767-300 converted freighter and announced plans to add 10 new converted freighter lines. Our services business has shown great resilience in part due to the balance of both defense and commercial offerings. Let’s move to cover the full year financials. Full year revenue of $62.3 billion improved 7% versus the prior year. The core operating loss was negative $4.1 billion, an improvement of $10.1 billion. The resulting core loss per share was $9.44, primarily driven by the charge on the 787. Operating cash flow was negative $3.4 billion, an improvement of $15 billion. The in-year cash usage was driven by 787 inventory build, 737 customer considerations, and interest payments, partially offset by commercial deliveries, order activity, favorable timing of cash receipts at BDS, and tax refunds related to the CARES Act. Now, let’s cover cash and debt. We ended the fourth quarter with strong liquidity, comprised of $16.2 billion of cash and marketable securities on the balance sheet and access to $14.7 billion across our bank credit facilities, which remain undrawn. Our debt balance decreased by $4.3 billion from the end of the third quarter to $58.1 billion, driven by the early paydown of the delayed draw term loan. We remain committed to reducing debt levels, and our investment-grade credit rating is a priority. As you look ahead, 2022 performance will be driven by the commercial market recovery, return to delivery for the 787 and 737 MAX in China, production system stability, and U.S.-China trade relations. Our efforts to stabilize our production system, including the supply chain and improve our delivery predictability remain top priorities. These activities will be paramount to our success. Looking broadly across our enterprise, we’re maintaining, in some cases, expanding key investments in our people, technology, manufacturing capabilities, and strategic partnerships. We’re advancing our development of the MAX 7, MAX 10, and 777X programs, all while continuing to invest in digital capabilities to support our next commercial airplane program. In BDS, we’re progressing on the MQ-25, T-7A, Commercial Crew, and several other key development programs. As we invest, we continue to be laser-focused on our business transformation efforts to drive quality, productivity, and cash flow. We anticipate revenue increases primarily driven by higher commercial airplane deliveries on the 737 and 787 programs. That said, revenue will be impacted by 787 customer considerations and delivering 737 airplanes that were previously remarketed. We are forecasting stable revenue in our defense business and solid growth in our services business as the commercial market continues to improve. We still expect to generate positive free cash flow in the year. The key driver remains higher 737 and 787 delivery volume. Keep in mind the working capital benefit from delivering airplanes from inventory will be partially offset by a lower advances in progress payments balance. We still anticipate a significant burn down of our advances balance this year, which we expect to be more front-end loaded in line with customer discussions. First quarter cash flow could look similar to the usage we saw in Q1 '21, driven by unfavorable receipt timing, excess advance payment burn down, resource availability due to the Omicron variant, and normal seasonality. We remain confident that our free cash flow will improve in the second quarter and will meaningfully accelerate in the back half of the year as we achieve the key delivery milestones that I previously outlined. As we look to the future, we expect 2023 cash flow will be materially higher than 2022. We look forward to sharing more details on our plan as soon as we can. In closing, the business environment remains dynamic, but we’ve made important progress. We are confident that we’re on the right path, we’re taking the right steps to drive stability and making the right investments to ensure the business is well-positioned for future growth. With that, closing comments?

Yes. No further comments. I’d like to turn it over to questions and give all our time to that. Thanks.

So maybe can you help us understand the $3.5 billion of charges tied to the 787 in addition to the abnormal cost of $2 billion through 2023? That’s up $1 billion from Q3 as you mentioned, Brian. What does this imply for the future profit and cash tied to the 787 program? How do we think about those deliveries going back up to 5 and then the timing of those deliveries restarting because some of your customers have talked about an April timeframe?

Thanks, Sheila. So, on the 787 $3.5 billion, we previously described a pretty labor-intensive rework solution on the door surrounds. And in the quarter, we determined that this rework was going to be needed to be performed on all of the airplanes in inventory. So, the abnormal cost is $1 billion higher and will mostly go through 2023 because of this higher rework cost and the production rates being lower for longer. This, in turn, has pushed our delivery timing to the right. So, more airplanes will be impacted, not just the ones in inventory. And we provided for estimated customer concessions because of these delays, which drove the $3.5 billion charge. While this hurts in the near term, we still believe it’s the right thing to do because long term, we’re going to sell a lot of these 787s for decades. So, we just got to work our way through this. In terms of getting back to 5, we got to first get cleared to deliver, and then we’re going to gradually work our way to a point we’re going to get back up to 5. We don’t have the time frame, but we think that the first step is getting the first one out the door. On the April timeframe, Dave, maybe you could comment on the customer implications on that one.

Well, the April timeframe is all I’ll say is that the customers know everything that we do. We share the same regulator. They are in our factories looking at the airplanes every day. So, they know exactly what’s going on and where it is. I don’t want to get ahead of anybody with respect to speculating the day we pick it. That’s up to the FAA, and we’re going to let them do what they have to do. Otherwise, I think Brian described this charge exactly the way it is.

Yes, thank you. To follow up on Sheila’s question, out of the $3.5 billion mentioned as noncash, how much will convert to cash? Also, what portion corresponds to the $1 billion increase? Lastly, how much is related to customer considerations, and when do you anticipate these amounts will be paid out?

Yes. Sure, Cai. So, the $1 billion increase on the abnormal cost is separate from the $3.5 billion. And in terms of the $3.5 billion, that will play out over a longer period of time, particularly as we have discussions with customers. Some of that might be accelerated in the near term, but overall, it’s going to take us time for that cash flow to go out. It will take years. As for how much is customer concessions, we’re not going to talk about all of the pieces. Trust that as we closed the quarter, we took all the estimates in terms of what we think was going to happen both for contractual and non-contractual concessions. It’s embedded into our closing position. And we feel good about that, and now we just have to work through with our customers and start delivering. In terms of the abnormal, again, that cash flow will likely go out over the next two years as most of that will be behind us as we get out of 2023.

The only other context is that, unlike in the case of the MAX, we do have an experience, unfortunately, that we can draw from in setting these estimates, and most importantly, the management of the concessions with our customers over time. So, what we’ve posted and the way we think about it is largely based on that historical experience, of course, with the MAX. So, I feel like we’ve probably bounded it pretty reasonably.

On the 737 MAX, given the lead times in the supply chain, I know that you’re evaluating the timing of further increases, but can you get much above 31 a month before the end of the year if you haven’t made that decision yet? And obviously, suppliers are thinking that you’re looking to the 40 level as you leave ‘22, maybe a little clarification there.

I’ll leave the supplier and the increase to Dave. I want to take the near-term production delivery MAX question head-on because it’s largely unchanged from where we were last quarter as what we expect to happen in 2022. We’ve got 335 units of inventory. And that will liquidate through the year at a quarterly rate pretty similar to what we did last quarter. And then, the production ramp, as you know, Myles, is going to go from 26 to 31 fairly soon. So, we all think that’s going to play out. Again, it’s similar to what we had thought last quarter. The one watch item that we have in the first quarter is any disruption on Omicron that might have a bit of a slower start, but we’ll work our way through that. The total profile is largely unchanged, and we’re quite confident in the demand. And maybe in terms of further rate increase supply chain, I’ll let Dave comment on that.

Just the prognosis is that we can move it up based on what everybody seems to want to believe. We are going to be very aggressive with our supply chain to get buffers at every corner so that we can do it. And then the question is, do we do it? Right now, we have fewer supply constraints than the industry simply because we’ve got this big finished goods inventory that’s going to carry us for the better part of the calendar year and then even a little into next year. So, we’ll take advantage of that, and then we’ll ask the supply chain to build buffer, both on our premise and in theirs to protect upside. That’s the way we’re thinking about it.

Can you talk about that next release, the next uptick this quarter?

Yes. No, no. I would say no, it’s not a 1Q decision for us. As I said, we will work our supply chain and work with our supply chain transparently to protect upside on rate as we get to the second half of the year, et cetera. And the minute we are ready to do it, we’ll do it. But I don’t want to get ahead of myself on that front. Certainly not now.

Just going back to 787 timing, so I just want to make sure I have this correct. So, American Airlines is up to speed. It’s an estimate, but their estimate isn’t missing an update from you that they said last week that there’s been nothing new for them in the last few months. So, today’s updates from you are marking to market additional rework, future concessions as you’ve determined them over the last few months as opposed to an additional timing delay for the restart.

Yes, I agree with what you just said.

Okay. And then, Dave, can you maybe just get a little more specific in what is left to do? It sounds like you were kind of iterating back and forth on inspection and rework, but that you’ve agreed to that. So, what’s actually left to do to resume deliveries?

We need to finish the rework on a large fleet of airplanes, which takes time. Additionally, we must update every analysis we provide to our regulator based on each rework. This creates a delay as we gather data, include it in the analysis, and submit it to the FAA when sufficient. The process requires thoroughness, and there's no way to speed it up. I can't collect data on airplanes that haven't been reworked yet, so I have to methodically go through it. I am confident in the rework programs, and we haven't encountered any new issues in the rework process. Just like building an airplane for the first time, we are refining our rework processes. I wish we could move faster, but I can't rush it. Everyone needs to take their time to learn and post the data for analysis.

Why can’t you deliver a new one clean off the line that doesn’t have any of the historical errors as opposed to waiting to rework what’s already built?

Yes. I cannot speak for my regulator as that is their decision on how we proceed, and that may determine how things unfold. However, they will inspect the aircraft thoroughly, seeking comprehensive information. We continue to share data regarding our findings within our fleet. I don’t know what else to add. I wish it were completely predictable, but it simply isn't.

Dave, in terms of MAX deliveries, can you give us an estimate of what we should think about for actual deliveries in 2022, given the rate and given the inventory liquidation you’re talking about? And then, Brian, a follow-up on free cash flow just given what you’re implying for the Q1 burn at like $4 billion to $5 billion seems like a long pause to get to free cash flow positive for the full year. I mean, are we talking about closer to low-single-digit billions and mid-single-digit billions in terms of positive free cash flow? Thanks.

In terms of free cash flow, it will be influenced by three main factors. There is the typical seasonality of the first quarter, some stability that won't be repeated, and expectations regarding excess burn down. However, we believe we have a good grasp on these factors, and we expect a better situation in the second quarter. While it may not reach the high figures being mentioned, it is expected to be in the small billions. Regarding MAX deliveries, I can refer back to the estimates we provided last quarter, which remain unchanged. If we continue to reduce inventory at the same pace as last quarter and increase production from 26 to 31, we can project a clear outlook for the year. The first quarter may be slow for two reasons: it's typically slower, and we are also dealing with challenges related to Omicron.

Somewhere around 500 deliveries, is that what we’re looking at?

Ballpark seems pretty good.

It feels somewhat unfortunate to bring up the next aircraft amidst so many immediate priorities for the company, but since you touched on it, Dave, I would appreciate your updated thoughts. You mentioned the work being done in that area, and I also wanted to frame my question in light of Airbus's recent success with some 737 customers. Specifically, I'm curious if your perspective on market share has shifted, as well as your views on where value in the aircraft comes from. Previously, you indicated that value would derive from Boeing rather than the propulsion system, which implies a significant investment for Boeing. Perhaps Brian could also share insights on how this consideration affects the balance sheet.

Yes, Seth, thank you for the question. We have a robust pipeline regarding airplane developments with the MAX derivatives and the 777X, which I believe will stand out in the marketplace as it replaces not just the 747 but also the 380 over time. I am optimistic about that. If we attract interest for a freighter version, we will pursue that decisively. We have a strong product family and development pipeline ahead. This should not be overlooked. Additionally, the long-term, larger program for us is the integrated product team, where we will reform the development process. Those experienced in our industry recognize that significant variables affecting our financial performance often stem from development process shortfalls. My goal is to leverage new tools available, such as digital modeling, to enhance the original design and refine manufacturing processes at scale, which ultimately improves serviceability. This is where the key innovation will occur. We are committed to this initiative, deploying much of our top talent to support it. I look forward to updating everyone on our progress. Although it may not be thrilling since it won’t fly, I believe it is the most critical endeavor we can undertake, and we remain wholly focused on it. Regarding the competitiveness of our product portfolio, I feel confident. I won’t assess any recent deal as a loss. It’s essential to consider the overall landscape of the past few years. Some of our competitors have aircraft that outperform ours in specific applications, and vice versa. Our customers excel at recognizing these differences when making their choices. I apologize if I sound repetitive, but we believe we are prioritizing correctly. There will be a next airplane, and I do acknowledge that the propulsion system may not contribute as much value to the next generation, whether ours or theirs, as it historically has. This means that the airframe must provide more value to make it an appealing option for our customers. I eagerly anticipate that future moment, and we are doing our utmost to prepare for it.

And on the balance sheet side of it, for us, over time, one priority is to take leverage down, but also a priority is to make sure we’re going to be ready to invest in that next airplane at the right moment. We do various scenario plannings, and we think we’ve got options and things to make all that happen. But again, that’s a little bit of a longer look, but nothing would suggest we wouldn’t want to be investors for the right airplane.

Just maybe following up on that previous question. When you look at the market share dynamic in the narrowbody market, and the charges that have been taken on 787 and 737 and T-7 and the tanker and MQ-25, why was this the right time to put $0.5 billion into Wisk?

Ron, I appreciate the question. This is definitely the right time to put $0.5 billion into Wisk. Number one, it’s a very innovative product and a very innovative product team. I didn’t create it. Our partners did at Kitty Hawk. I couldn’t be prouder of the work they’re doing. The world wants autonomy and the world wants electric. This is going to be our application of those two technologies and to put it into real service by way of certification. So, everything about this program we like, technically innovative, and it will serve a niche we don’t serve today. And that’s really not necessarily why you do it if you don’t think there’s a long-term avenue for both autonomy and electric and a lot to learn in the process. So, again, I view this as a high priority. It does not compete for the discussion we just had with respect to the next large commercial airplane by way of financial resources. We’ll have plenty of financial resources and wherewithal to do both and then some. But I am enthusiastic about our Wisk investment in the airplane and the experience to date. It’s incredibly innovative.

And Ron, one thing to note. So, we’ve made this commitment to the investors, but that cash is going to happen over time. And it’s capped in any given quarter. So, we’re not really going to see it disrupt anything in the near term.

There’s a lot to be learned and applied, yes.

Dave, you’ve talked a lot about China and how important it is from the demand side. But, if you look at the other side of this, you’ve got a lot of content in China, like the Tianjin Composite Center structures from SAMC. Given the heavy border restrictions and lockdowns there, aside from the political things that keep getting talked about, how are you managing that part of your supply chain and any potential risks there?

Yes. Our team does not see any near-term or medium-term risks in that area, and performance has been outstanding. While I won’t rule out the possibility of significant disruptions occurring, if they happen, we would face other challenges as well. Therefore, it's not our top concern. The current performance is quite strong, and we have options available, although implementing them may take some time. Overall, I believe we are in a decent position.

Can you highlight where you see the biggest constraints as you try to ramp up from a supply chain perspective?

Today, it’s going to go back to the old engine questions and castings and forgings. That has already constrained our outlook. And I think as I mentioned the last time we were all together, I wish we could have done increase rates even faster than we had acknowledged, but it has always been a supply constraint that has done that. And it’s mostly forgings and castings and mostly through our engine suppliers. So, that is what it is. I do think they are under control and being managed effectively and that the supply side of this is that everybody has put their cushions in place to be able to take care of it. The only other medium term, I haven’t been asked, maybe I will, I won’t call it short term, but medium-term question, of course, is titanium. And as long as the geopolitical situation stays tame, no problem. If it doesn’t, we’re protected for quite a while, but not forever.

Dave, I wanted to go with a high-level question here now that you’ve been in the seat for a while, recognizing that you’ve spent most of this time putting out fires. But when we discuss the Boeing investment thesis after a decade of fairly extreme swings in performance, we’re often asked, particularly by investors that are returning to the story after an absence, how the culture is changing at Boeing. So, how should investors think of you and your team as agents of change? And in what ways are you improving the culture of Boeing?

Yes. I mean, that’s the million-dollar question, and I appreciate you asking it. And that’s what we work on every day all day. I think investors, those same investors, what frustrates them is the unpredictability of our performance in light of those few instances that caused severe pressure on our company. I will be the first to admit that they were not events caused by the outside world, but unfortunately, missteps inside. So, we’re doing, I think, what they would want us to do. Our culture is focused on getting as close to our work as we possibly can from the very top of the company through the engineering ranks all the way down through all the support functions that ultimately have to help mechanics on the line stay disciplined, create standard work that’s predictable, repeatable, etc., safety and quality systems that are reinculcated in every way I can think of into every nook and cranny of the company. And that is literally what we have been working on. So, I appreciate the question. I think we’re getting much better. In fact, we’re getting really good at it. I think someday, we’ll all point to it as a real advantage for The Boeing Company. But I know where we’re coming from. Again, I do appreciate the company. Sometimes, our vision and our priorities look boring to people. But when you stop and think of where we came from, I’m proud of this team for rallying around exactly that.

Hey Dave, maybe just to put a finer point on China MAX kind of deliveries resuming. You sound pretty confident that this could be a first quarter event. So, what do we specifically need to see from the Chinese regulator? It sounds like they’re doing some test flights over there already. What should we be looking for?

Yes. Thank you. Yes. It’s again, I don’t think this is necessarily in the geopolitical realm as much as it is in the needs of the customers and operations inside of China. What I will say is it has been perfectly predictable and methodical way in which they’ve returned their fleet to service. They went through the cert process. They reauthorized the airplane to fly. The airlines are warming up the airplanes they already have. As you said, they’re taking test flights in a very methodical, intelligent way. They are beginning to notify us around when they intend to bring it into revenue service. That all has to happen with the airplanes they own. Deliveries, in my view, will commence. It is quiet, methodical, and as effective way as it has been to date. There’s nothing we’re involved in that would suggest otherwise. So anyway, I do feel confident only because of every tea leave I’ve been able to watch here. They’re following through on, frankly, every commitment they’ve made.

Brian, thank you for providing the puts and takes on free cash flow for 2022. But could you quantify some of these pieces for the year and the key variables they depend on? I mean, ultimately, the questions I’m getting is, is 2022 free cash flow a smidge over zero, or is it closer to something like $5 billion?

Yes. It’s not a smidge over zero. I promise you that. And we’re not going to be as descriptive as you might want. However, as we deliver on these milestones and start to improve the volume from the 737, 787, we know we are going to have accelerated cash flows. As I mentioned, first quarter, we know it’s going to be usage, but we do expect that there will be a relatively sharp acceleration in the back half of the year as we begin to liquidate this inventory. As we exit the year, we’re going to be moving to a more normalized state and then have a meaningful acceleration of cash flow in 2023. What number of billions, too close to call, but it’s more than zero, I promise you.

Operator, we have time for one last call or one last question.

I just wanted to see if we could put a finer point on the 787 and where you are with production today and the inventory drawdown. It looks like you’re producing at a lower rate, perhaps one or lower a month than the two you were coming out of the third quarter. And obviously, the uptick to five sounds maybe a little more cautious than before. Can you just comment on build rates on the 787? And then, what the free cash guide implies in terms of the inventory reduction this year?

Let me just start with the rate. There’s not going to be a finer point other than to reemphasize our priorities, which is we don’t like carrying a bunch of inventory. That’s for sure. We will run our rate as low as we can while we burn our inventory as fast as we can I think is the way to think about it. And then, as the order books fill up and the market gets very active, and I happen to believe it will, then we’re going to sort of monitor production rates to make sure we stay ahead of that delivery cycle. So, again, I can’t give you a finer point on exactly when and how. I will suggest we have a clear priority, which is to burn down that inventory first. Brian, anything you want to add?

And there is an assumption that we’re going to have some liquidation of inventory for sure on the 787. Stay tuned for the specifics.

Yes. I appreciate it, everyone.