Boeing Company (BA) — Q1 2022 Earnings Call Transcript

Thank you, John, and good morning, everyone. Welcome to Boeing's First Quarter 2022 Earnings Call. I am Matt Welch, and with me today are Dave Calhoun, Boeing's President and Chief Executive Officer; and Brian West, Boeing's Executive Vice President and Chief Financial Officer. As a reminder, you can follow today's broadcast and slide presentation 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 discussion this morning involve risks, including those described in our SEC filings and in the forward-looking statement disclaimer at the end of this 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. I'm going to make a few comments upfront and then turn it over to Brian for a more detailed look at our financials in the quarter. First, I need to acknowledge that on the 21st of March, Flight 5735 of our good customer, China Eastern, unfortunately crashed and took the lives of 132 passengers and crew. These things always take our breath away, and I want to extend our thoughts and prayers from the entire Boeing company, of course, to the families and friends of those passengers. Those are always rough moments. Our technical team is, in fact, supporting both the NTSB and the CAAC, who is, of course, the lead investigator. Those are the only comments that I will make along the lines of the China Eastern accident but know that we are in the middle of that investigation. 2022, 1Q, some challenges presented themselves. Unexpectedly, Russia obviously is the big issue in the news. Inflation continues to take a hard run at pretty much everything we do. And COVID, unfortunately, didn't leave as soon as we would have liked. So the first 45 days of the quarter were impacted more than we imagined. All that said, our focus and progress remains consistent with what we shared last quarter. We still expect to accelerate our performance and the key financial metrics, namely cash flow because that is our key financial metric. That's what we've been focused on for a couple of years, and we will remain focused on. And we remain committed to the notion that we will have positive free cash flow over the course of 2022 and meaningful improvement in 2023. Everything we are doing is leading with safety, quality and ultimately driving stability for our airline customers. And we believe we're taking the right actions for the future. We have progressed on many key milestones. We'll comment on a few of them today. But we're focused on the 737 MAX and the 787 production and the return to service of those airplanes that we have built and stored in behalf of our airline customers. We feel good about all the progress we're making on that front. The commercial market recovery, I'm not going to expand significantly on that. You've heard from almost all of the US airline customers, many of the European customers. Traffic is returning, and it's returning in a pretty big way. Airplanes are being utilized at a fairly high rate. Domestic markets are the first to have recovered, and they're recovering robustly. Regional markets, second, and even long-haul traffic now is beginning to return. The only real exception in that demand scenario is China in light of their current COVID constraints. But we're hopeful and we expect that they'll come out of that and continue to expand their fleet. So that commercial market is very, very strong. And it's particularly strong for our line of airplanes, namely the MAX, 787 and the 777. And I don't want anyone to forget the 767 because it continues to play a very important role in the freighter world. I should comment on the conflict in Ukraine. I think I mentioned the last time we were together, we had 1,000 people in both Ukraine in Kyiv and in Moscow. And those two teams work pretty closely together. So it's been a bit of a gut-wrenching and emotional period for all of The Boeing Company and our associates. I'm very proud of the work that we are doing to support our team in Kyiv. We've provided $1.5 million in humanitarian assistance, but also matched all of our employee donations to those people who are helping. And then most importantly, we have Boeing families in Poland and throughout the region who have willingly accepted and opened their homes to our displaced teammates. That's a big deal, and it's been an uplift for all of us to watch that happen. We're following the lead of the US government and strictly adhering to export controls and all the restrictions. We suspended maintenance and support for Russian customers. And in the spirit of doing the right thing, we suspended titanium imports. Fortunately for us, we had a program of inventory built for quite some time ever since Crimea, such that we believe we are reasonably protected on that front. Next, I should comment on the 737 MAX specifically. It's only been a little over a year since that airplane was recertified and put back into service. We now have over 1 million flight hours. It is performing incredibly well at over 99% service reliability. Our customers are happy with it in almost every case that I'm aware of. They talk about the airplane exceeding the performance specs that we sold it on. So we feel very good about that, and we feel very good about the skyline and our ability to deliver on that. Brian will get into rate discussions in his piece on that one. But we still continue to think about this one airplane at a time, so that we can maintain that high in-service reliability rate. We're applying the same rigor to the 787, and we took a very important step just in the last week by submitting the certification paperwork and the plan to the FAA. We're proud of that work. We touched a lot of operations across our facilities, exacting specs with respect to the 787 – precisely. And that's all embedded in the certification paperwork that we presented to our FAA. And as always, we will let the FAA take the lead with respect to certification and ticketing, and we will work closely with them. They have been involved in this process from the very beginning. So there is no new news embedded in this. The 777 family I'd like to make a comment with respect to the decision we made on the 777X and the extension of its introduction until 2025. I believe we've made that decision out of a position of strength, not weakness. We've embedded every lesson that we've learned on the 737 MAX certifications, and we continue to have two of those ahead of us. We've applied all the lessons from the 787 certification, which, of course, we have just submitted and believe that we've got to give ourselves the time and freedom to get this right with the FAA and give everybody the time they need to give us the certification that will last, frankly, for decades and decades into the future. It also, by calling it out now, gives us an opportunity to create some capacity for our traditional metal wing 777 freighter, which right now is in incredibly high demand. So we will extend that airplane life and continue to meet that demand. And then finally, the 777-8 Freighter, which we introduced with Qatar, is a very big deal with respect to the long-term ramifications of the 777 family in the decades ahead. We're very proud of the 777 family in the post A380, 747 world. We think it stands on its own, and it will be one of the great contributors to shareholder value over the decades ahead. Boeing Global Services, I'm not going to get into a lot of detail other than to say we're riding that wave of a recovery with respect to fleet utilization, pretty much everywhere in the world. And so that business has enjoyed that success and has been able to stay ahead of the supply chain constraints that some are feeling. So, all things good on that front. And then on BDS, a messy quarter and we got hit where you might expect us to get hit in a supply constrained, still COVID-impacted and inflationary world. And that is on a group of fixed-price development contracts that I think you're all aware of, where we had to recognize future costs on those program economics. And so we have taken a write-off on those programs, VC-25B, the T-7A and the MQ-25. Brian will talk to you a little bit more about this. VC-25B was, by far, the biggest part of that hit. You'll recall, it was a public negotiation that happened quite some time ago. We took some risks not knowing that COVID would arise and not knowing that an inflationary environment would take hold like it has. And both of those things have impacted us fairly severely. This will ultimately accrue to two airplanes where we will continue to do our work and deliver first-rate airplanes to our government customer. As we deliver today's numbers, know that we are increasing our investment. Safety and producibility, digital transformation, autonomy and sustainable aerospace are the keynotes with respect to where those investments are going. We feel good about where that's setting us up for the future. We're progressing on our development programs. Are we frustrated with the timing? You bet. But we're progressing. And everyone is getting their feet firmly planted on the ground, both us and our counterparty and the regulators around the world. And so I have to feel good about the progress that we're making collectively, and that matters for the long term. Stability and predictability, it's coming along. It will matter in the years ahead. And above all else, our culture is built around safety, built around quality. And transparency is the word of the day with respect to how we interact with our counterparties everywhere in the world. Strong leadership team in place, I'll comment and also congratulate Leanne. Leanne has retired. She's given us over 30 years of service, never had a more diehard and more engaged leader in our company. So I want to congratulate her on that. As you know, she'll be with us until the end of the year and supporting transition activities. But also to congratulate Ted Colbert, who is a fantastic leader and proven himself in our services world and servicing. Half of his business is servicing the US military. So he is ready to go on Boeing Defense, and he'll do a fantastic job. And then Stephanie Pope in our Services business, it's a bit of an old hat. She was the CFO at our Services business when we stood it up. She did a lot of the hard work associated with that stand-up, and we treasure her as an operator, all the right instincts, and look forward to her future leading the Services business. So, we feel good about the talent transitions that have occurred. And then I'll call out before I turn it back to Brian, just the thanks to administrator Steve Dickson at the FAA. As many of you know, he has retired. He stood tall during a difficult moment for The Boeing Company and to the FAA and the recertification of the 737 MAX, amongst the other multitude of responsibilities that he's had. We respect the work that he did and ultimately, the courage that he provided in the face of what was otherwise difficult external circumstances. So congratulations to him. And then the acting administrator Billy Nolen, he can count on our full support as he now takes over. So I'm confident in the milestones that we've been meeting. And we've been focused, I think, on the right things and with respect to long-term shareholder value. That is what it's all about, and we intend to deliver on that prospect. So Brian, I'll turn it over to you.

Great. Thanks, Dave, and good morning, everyone. 1Q certainly had a few challenges to navigate: the war in Ukraine, the updated regulatory requirements on our commercial airplane programs as well as a combination of COVID, supply chain constraints, inflation impacting, in particular, the fixed-price defense development program as Dave mentioned. Importantly, though, cash performance is on track with our expectations. The utilization in the quarter was in line with what I shared a few months ago. The trajectory throughout the rest of the year remains intact, and we continue to expect to generate positive free cash flow for the year. The business is resilient, and we're encouraged by the momentum we're seeing. We still think about this year in three parts. First, we anticipate reaching key delivery milestones. On the 787, we're on a path to restart deliveries in the near term. On the 737, we continue to work towards resuming MAX deliveries to Chinese customers. At the same time, we're resequencing our skyline to take advantage of strong customer demand for the MAX airplane and meet delivery objectives. Next, once we see progress on these programs, we anticipate improvement in our performance metrics, including deliveries, revenue, margin and cash flow. And finally, as we move through the remainder of the year, our financial performance will accelerate. And going forward, there is opportunity for our company to return to sustainable growth. This fall, we plan to host an Investor Day to share our more detailed expectations for the rest of the year and beyond. Before I get into the financials, I did want to make a few points on the current business environment on slide 3. I'll start with one of the stronger segments, freighters. The market remains quite robust with cargo traffic up 12% above 2019 levels in February largely driven by e-commerce. This continues to be one of the more reliable forms of transportation, and our lineup is perfectly positioned to take advantage of this growth for a very long time. The commercial passenger market recovery expectations are largely unchanged from what I shared last quarter even as we saw some events that added near-term pressure, including reduced passenger traffic in and around Russia. Global flight ops are at about 75% of 2019 levels as the global recovery is tempered by China and the impacts of the war in Ukraine. We still see overall passenger traffic returning to 2019 levels in the 2023 to 2024 time frame. Domestic traffic continued to lead at 78% of 2019 levels in February with China the notable exception. Ex China, domestic traffic was 84% of the 2019 levels. US carriers are providing the best window into the recovery at this point. Our customers are seeing record booking volumes and very strong forward yields for late spring and summer to the point of being able to offset sharply higher fuel prices, and they're also highlighting the return of business travel. Beyond domestic routes, we're seeing encouraging signs from intra-regional traffic in both Europe and the Americas. International traffic continues to lag at 40% of the pre-pandemic levels, but we are seeing recovery in regional markets such as intra-Europe and US, Mexico, both progressing well with significant reopening now underway across many parts of Asia. Long-haul recovery will be led by the transatlantic market this summer as well as Middle East connectors. Time and again, the market has shown its resilience driven by the essential nature of moving both people and goods around the world. And in addition to Commercial Airplanes, the expanding market recovery directly benefits our Commercial Services business. In defense and space, we continue to see stable demand. The present FY 2023 budget request reflects the important role our products and services have in ensuring our national security, including significantly increased funding for the F-15EX and support for our other critical products and services that support national security. Outside of the US, we're seeing similar solid demand as governments prioritize security, defense technology and global cooperation given evolving threats. Our operations are well-positioned to maintain continuity despite the war in Ukraine, and we see limited impacts to our business. I'll cover the financial impacts a bit later. On the supply side, we are carefully managing supply chain constraints and working through issues as they arise to ensure the stability of our production system. We've experienced some disruption to our production, such as some supplier delays and resource availability, including the impacts of COVID. And we're actively working mitigation plans to ensure continuity. The markets we serve continue to be large. Our competitive position is strong. And we're actively addressing the supply chain. And all of this gives us confidence in the fundamentals of our business and the long-term outlook as we work hard to serve our customers. With that, let's turn to the financials on slide 4. First quarter revenue of $14 billion was down 8%, and the core operating loss in the quarter was negative $1.5 billion, resulting in a $2.75 core loss per share. Operating cash flow was a usage of $3.2 billion, in line with what we expected. These results were impacted by $1.3 billion of charges at BDS, which I will discuss in more detail in a minute. Due to the war in Ukraine and associated impacts to our business, we did record about $200 million in pre-tax charges in the quarter, related to certain asset impairments. And we also reduced the backlog by 86 units and roughly $5 billion. As we review business unit financials, I'll highlight some unique challenges that we're overcoming as we drive stability and position for the future. Now, let's move to Commercial Airplanes on slide 5. First quarter revenue was $4.2 billion, down slightly. It's primarily driven by the timing of wide-body deliveries, partially offset by higher 737 deliveries. Operating losses of $0.9 billion and the resulting negative margin rate reflect abnormal costs and period expenses, including charges for impacts of the war in Ukraine and higher R&D expense as we increase our investment in the business. Turning to the 787 program, as Dave mentioned, we've met a very important milestone and submitted the cert plan to the FAA. Deliveries remained paused, and we had 115 airplanes in inventory at the end of the quarter. Importantly, we've completed the rework on the initial airplanes and are preparing them for delivery, including conducting our own check flights in advance. As always, we will work closely with the FAA on the remaining steps, and we'll follow their lead on timing of deliveries. As we stated last quarter, we're producing at very low rates, and we'll continue to do so until deliveries resume, gradually returning to five airplanes per month overtime. Notably, we're currently rolling out conforming airplanes from the factory. We did not take additional charges on the 787 program in the quarter. We did record $312 million of abnormal costs in line with expectations. And we still anticipate a total of approximately $2 billion of abnormal costs, with most being incurred by the end of 2023. Consistent with what we shared last quarter, cash margins on the 787 remain positive and are expected to improve significantly over time. We see a long runway ahead for the 787 program based on a very healthy backlog of 405 airplanes and compelling operating economics for our customers. And we're well positioned to capture future demand as the wide-body market recovers. Moving on to the 737 program, we delivered 86 737 airplanes in the quarter, including 37 in March, a slight decrease from the fourth quarter of last year, despite impacts of COVID, some supply chain delays and typical seasonality. Given some supply chain disruption and timing of taking airplanes out of storage, deliveries were slightly below our expectations and we ended the quarter with 320 MAX airplanes in inventory. However, we still anticipate delivering most of these airplanes by the end of 2023. The timing and pace of deliveries to Chinese customers and supply chain stability remain key factors to our delivery profile. We continue to make progress ramping our 737 production rate and are essentially at 31 airplanes per month. As we shared last quarter, 737 abnormal costs are largely behind us. The MAX customer consideration liability also continues to burn down as expected. On our development programs, we're doing everything we can to complete the certification of the MAX 7 and MAX 10 and ensure their respective first deliveries this year and next. We're working closely with the FAA on the implementation of aircraft certification, safety and accountability act legislation and expect any necessary actions to be defined later this year. As always, we will follow the lead of the regulator on the timing of certification. Moving on to the 777, 777X programs. We remain highly confident in this family of airplanes as Dave outlined. We launched the 777-8 freighter with an order from Qatar Airlines in January. As a result, we increased the accounting quantity on the program to 400 airplanes. We continue to perform 777-9 Boeing flight tests to retire technical risk with over 2,000 flight hours completed through the end of the first quarter. The airplane is performing well and our customers continue to see the value in the compelling economics and sustainability benefits this airplane offers. Based on an updated assessment of the time required to meet certification requirements, we now anticipate delivery of the first 777-9 airplane in 2025. Additionally, we're coordinating with the FAA to prioritize resources across our development programs. As we manage the company for cash flow, we're adjusting our 777-9 production rate, including a temporary pause due 2023. This move will minimize inventory, reduce the number of airplanes requiring change in corporation and avoid capitalizing costs on the balance sheet. Additionally, given the robust market for freighters, we're leveraging this production pause on the 777-9 to add 777 freighter aircraft in the 2023 to 2026 timeframe. We anticipate the 777-9 pause will result in approximately $1.5 billion of abnormal costs beginning in the second quarter of this year and continuing until production resumes. We believe this is the best allocation of resources and cash. Turning to overall demand at BCA. During the quarter, we booked 167 gross commercial airplane orders, including 134 orders for the 737 MAX. As of the end of the first quarter, we had nearly 4,200 airplanes in backlog valued at $291 billion. Let's now move to Defense, Space & Security on slide six. First quarter revenue was $5.5 billion, down 24% and operating margin was negative 17%. These results were primarily driven by lower volume and $1.3 billion in charges on fixed price development programs, including the VC-25B and the T-7A. On a normalized basis, adjusting for one-time items, revenue across our defense portfolio, including government services, was down 9%, half of which was the impact of COVID and supply chain constraints. The other half was from planned program transitions. The VC-25B program recorded a $660 million charge, primarily driven by higher supplier costs, higher cost to finalize technical requirements, and schedule delays. The T-7A Red Hawk program recorded $367 million in charges primarily driven by ongoing supplier negotiations impacted by supply chain constraints, COVID and inflationary pressures. We continue to have high confidence in the long runway ahead for the T-7A program. Similar pressures impacted other fixed price development programs, though to a lesser extent. From a cash perspective, these charges will be incurred over the next several years. We received $5 billion in orders during the quarter, including an award for six MH-47G Block II Chinook rotorcraft for U.S. Army Special Operations, and the BDS backlog remains at $60 billion. Across the portfolio, we're focused on improving performance as we transition several development programs into production. And we're making progress, but have more work to do as we position ourselves to deliver for our customers. While we recognize charges on these key programs, we remain confident in demand for these future technologies and capabilities, and our Defense and Space portfolio is well positioned for growth. Now let's turn to Global Services results on Slide 7. The Global Services team had a great quarter, particularly on our parts and distribution business due to the strength of the portfolio and broad offerings. First quarter revenue was $4.3 billion, up 15%, and operating margin was 14.6%, in line with our expectations. Results were driven by higher commercial service volume and favorable mix. We received $3 billion in orders during the quarter, including fuel-saving digital solutions contracts for Etihad Airways 787 fleet and a contract for KC-135 horizontal stabilizers from the U.S. Air Force. The BGS backlog remains at $20 billion. With commercial services revenue now back to nearly 90% of pre-pandemic levels, our service business remains well positioned for growth as the commercial market recovers and the Defense business continues to see strong support. Now let's turn to Slide 8 and cover cash and debt. We ended the first quarter with strong liquidity comprised of $12.3 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 slightly from the end of last year to $57.7 billion driven by repayment of maturing debt. Our investment-grade credit rating is a priority. We remain committed to reducing debt levels. Now, similar to what I shared last quarter, I'd like to review the key drivers of 2022 revenue and cash. In comparison to 2021, we still anticipate total company revenue to increase this year. The growth will be primarily driven by higher commercial airplane deliveries on the 737 and 787 programs and solid growth in our services business as the commercial market continues to improve. And while the overall demand outlook for the Defense business remains stable due to the revenue impacts of the charges we took in the first quarter, we're forecasting a modest decrease in revenue at BDS this year versus 2021. However, we expect 2023 to return to stable levels. On cash, we still expect to generate positive free cash flow this year. The key driver of improvement remains higher 737 and 787 delivery volume. As we described previously, the working capital benefit from delivering airplanes for inventory will be partially offset by a lower advances and progress payments balance. We still anticipate a burnout of our advance balance this year. The profile continues to be dynamic due to customer discussions and timing of deliveries. From a phasing standpoint, our first quarter cash utilization was in line with what we shared in January. 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 outlined. As we look beyond this year, we expect 2023 cash flow will be materially higher than 2022, and we look forward to sharing more details on our plan in the fall. To wrap up, our performance is tied to several key items: commercial market recovery, return to delivery for the 787 and 737 MAX in China, successful execution and certification of development programs, and production system and delivery stability. We remain acutely focused on what we can control. Most notably, we continue to focus our efforts to stabilize our production system, including the supply chain and improve our delivery predictability. And while we saw improvements in some of this first quarter, we have more work to do. And we're keenly aware that these activities will be critical to our success and are prioritizing these resources accordingly. Beyond these execution priorities immediately in front of us, we continue to invest in our people, technology, manufacturing capabilities and strategic partnerships to ensure we're well positioned for future growth. There's no doubt that the business environment is evolving. That said, we're making good progress, driving productivity and cash flow, while addressing risks as they arise. And while we do all this, we're laser-focused on safety, quality and stability. We believe these are the right actions and resource calls. And we remain confident in the strength of our business now and in the future. With that, over to Dave for closing comments.

Yes. We believe we're on a real improvement track with respect to engineering and manufacturing of our products and ultimately, the predictability of our business with respect to our commercial customers. We also believe strongly in our defense product line and the prospects for defense orders and growth in the relatively near to medium term. So, that's it. I'll turn it over to questions. Let's go.

Good morning, everyone.

Yes, hi Noah.

A lot of questions, but I guess the two most important things in the near term are when you can restart 787 deliveries and when you'll resume MAX deliveries to China. So, can you give us more specific detail on what the regulators and counterparties are still looking for? What specifically you need to do to satisfy their questions and process? And then I know you don't want to get into predicting timing on these, but you have guidance for cash flow for the year. So, just how are you thinking through what those deliveries need to look like to have that positive free cash flow?

Yes. So, why don't I grab that one? Brian can augment any way you like. Again, this is a tricky moment where I get into trouble if I predict any outcome with respect to FAA certification. What I can say because I do control it is the quality of the package that we've delivered to the FAA. And I also know that their fingerprints are all over it because they've been sort of side-by-side with us in this process. We've been getting guidance every step of the way. So, I feel very good about all of that. Our customers have been through these airplanes. And so I think we're in reasonably good shape to go through a normal order, and I do not expect this to get elongated in any significant way. And I believe our cash flow projections or confidence, if you will, with respect to the year are well suited and have enough room for the FAA to do its work and for us to answer questions in that process. So it's been a long, hard run, but I feel really good about where we are. And with respect to China, similarly, we've had no indications that there aren't going to be China deliveries in any way. As we know, we're certified to fly the airplanes. The COVID environment has put a really tough situation in place because our customers are not flying. They're down 70% in their domestic travel, and this is significant for them. So how long that goes on if it's measured in a couple of months, I still feel good about where we are with respect to deliveries. We derisked this year's delivery significantly, and we can derisk more. The market is creating 737 MAX. So I'm not concerned about our ability to derisk. I don't want to derisk because I still have faith that China can take the airplane. Anything, Brian?

Yes.

Dave, the last quarter, you talked about collecting data as you rework 787s. And it sounded like you had to collect a lot of data, it took time then you had to iterate it with the FAA. Is the package you've sent them that you described as a package, is that now sort of binary they'll either accept that package or not, or does it still remain an iterative Q&A type of process?

Well, we believe based on all of our interactions with the FAA and our own engineering unit members and others that we have sufficient data to make our case and recertify or certify this airplane in accordance. So we have a reasonably high level of confidence in that, and I don't expect any significant sort of banter around that. But I can't be absolute about it. We're going to go through the process. I just know that there's been a lot of involvement on both sides and a lot of working together in this process and get into the package we've submitted.

Okay. Thank you.

Thanks. Good morning. Brian, I know you noted that you would expect free cash flow to improve here in the second quarter. I wanted to see if that meant positive or you still think you're negative? And how you're thinking about the capital structure from here? I think you've talked about in the past that you need $10 billion to run the business, you're down to $12 billion if you burn further cash in the quarter. I mean, are you willing to take on additional leverage at this point, or would you look to potentially an equity raise? Thanks.

Yes, I'll address that question. We don't see any immediate need for such measures in the near or midterm. We are confident in our liquidity and balance sheet. As we continue to make progress in accelerating cash flows, our risk profile will evolve, and we'll update you on that as we reach certain milestones. Right now, we don't find it necessary to tap lines of credit, incur more debt, or pursue options along those lines. Regarding cash flow for the year, the second quarter will be an improvement over the first quarter, which is fairly clear, and we expect to see even more acceleration in the second half. I won't provide a specific number for the second quarter, but I can say it will be better. Overall, we anticipate generating cash flow for the entire year, and everything appears to be on track as we discussed last quarter, with various factors considered. Overall, we feel confident about our trajectory for this year.

So is $10 billion still the right number that you need in terms of cash to run the business, or is it lower than that?

I think, recency effect, it seems like it's in that 10 to 12, but it's too hard to tell right now, given it's a dynamic world. We're very comfortable where we stand right now. And as we start to put points on the board with delivery and execution, all of that will be a rich discussion that we can't wait to have with you.

Yes. Good morning, Dave and Brian. Dave, I wonder if I could just come back to kind of Noah's questions on the 787. Just you have 115 aircraft in inventory, and it sounds like you now are producing aircraft off the line and conforming to your latest spec. What's left to be done within that 115? And like the other stored aircraft, when we think about MAX, should we think about most of these aircraft will be delivered through 2023, or does it stretch out beyond that? Thanks.

I will take that question. Regarding the 115 aircraft in inventory for the 787, as we mentioned, the abnormal cost should be largely resolved by the end of 2023, which also aligns with the liquidation of that inventory. Nothing has changed in that regard. In fact, we feel somewhat more confident as we begin to evaluate clean airplanes. For the 737, we have 320 in inventory at the end of the quarter. We dislike that the number is that high, but the positive aspect is that we will be able to satisfy the strong market demand. This inventory situation is expected to resolve over the course of this year and next, and that remains unchanged.

Thanks, so much. Good morning.

Good morning, Rob.

The question I have is on the 737 MAX rate. You mentioned you're pretty much at 31 a month here. What are your plans going forward? And what is your confidence that the supply chain could match any further rate increases, especially what's going on with your competitor? Thank you.

Yes. So we always think about this in two ways. One is that inventory opportunity I just described, and we've got to work on getting those delivered. And then, of course, the production rate that we're essentially at 31 a month. Our biggest job right now is to stabilize around that rate. The teams are working hard. They deal with supply constraints that pop up every now and then, but we got to be stable around 31 and then anything else is going to be a future decision that we're not prepared to take because we just want to get confidence in what's right in front of us. The good news is that there's plenty of demand that we can fulfill. And while we're watching the supply chain very closely, we feel good about where that particular program stacks up.

That’s great. Thank you.

Yeah. Thanks very much. Good morning. Just following up on 737, I think, Brian, you spoke last quarter about looking to deliver about 500 aircraft, and you talked about being on plan. So is that still your target for this year? And how does the kind of evolving situation in China affect that, if at all? And then second, on Rob's question on the production rate for 737. How does the MAX 10 certification question factor into that?

So we derisk China, just to put that one aside, as Dave mentioned. The first quarter deliveries were a little light versus what we expected. And we probably won't get quite all the way there in the calendar year count, but that's just timing. Like I said, we've got plenty of finished goods inventory. We've got the rate where we want it. So we may not quite get there. But again, the momentum month in, month out has gotten better. And we feel confident that if you don't quite get there this year, it's just going to be timing to the next, which we're perfectly comfortable with. And again, that's been all factored into our cash flow updated look and still believe that we will be cash flow positive in the year. As it pertains to the MAX 10, right now, it's all the energy and focus is on certification. And really that one won't disrupt our near-term projections.

Okay. Thanks very much.

Yes, thank you. During their call, General Dynamics mentioned that the G700 may experience a delay in certification due to additional software validation required by the FAA, which was unforeseen at the start of the process. They also alluded to the MAX as an issue. Are you observing that the FAA is becoming more consistent with their requirements, or are they stable yet still asking for more data? How does this impact your confidence in certifying the MAX 10 by the end of the year?

Yeah, let me take that one. It's a very tricky question. And I don't want to speak for our counterparty in any way. Part of our 777X move out into 2025 was to incorporate exactly whatever observations that you took account of to incorporate all the learnings we've had from our cert programs, the original MAX, the 787, now the -7 and then the -10. So we keep trying to incorporate all our learnings, and it is definitely a more rigorous process that we're all going through. Everything has to be completed. Every 'I' has to be dotted, and every 'T' has to be crossed. And now we're all getting used to it. So on the subject of whether that's a mature process or not, boy, I hope so. And I believe we're all better off for it. I don't like all the difficulties we've had to go through to get here, but so far, so good. And I know, I think the FAA has enough rigor in what they're doing. But with every next cert, I think we're all going to learn that it's just going to take a little longer. It's going to be a little more thorough than it's ever been.

Thank you.

Yeah.

Hi, good morning. Just following with this theme, Dave, we've already covered this today. A lot of the problems and the issues Boeing's facing are on these development programs or this unusual recertification process that you're doing on 787 and had to do on the MAX. Is the common denominator here the FAA, or is it engineers? Do you have enough engineering resources? Brian mentioned allocating resources with the FAA. So is there a shortfall there? And how do you solve it?

I haven't encountered a situation where we haven't been adequately resourced for our programs. The challenges have typically revolved around timelines, which we review weekly. Those timelines are influenced by the detailed discussions we have with the FAA regarding necessary data and documentation for our development assurance program. The issue has never been a lack of engineers for development or technical work. While additional focus and resources on programs are always beneficial, they haven't been the limiting factor thus far, and I don't foresee that changing. The recent reallocation of resources for the 777X will significantly benefit our traditional metal wing 777 operations by allowing us to increase production amidst the current demand. This reallocation will yield the most advantage in the certification programs.

And if the MAX 10 slips beyond year-end and then you need the new flight crew alerting system, do you assume you'll get the waiver, or does this put the program at risk? I mean, if you can't get the 10 done without substantial more cost and looking at the order book, do you just leave that market for the next airplane?

It's a great question. I hope I never get there. First and foremost, with respect to the original legislation, there was a lengthy window put in there based on historic certification timetables that would have provided for the seven and 10 easily. So these things have taken longer. The intent of that legislation was never to stop the derivative product line with respect to the MAX. So I believe our chances are good with respect to getting legislative relief. It doesn't mean we'll get them. And if we don't, it's a problem. On the other hand, demand for the MAX is substantial. And we have other airplanes and substitution that we could implement. And that decision has to get made sometime between now and the end of the year. Don't feel the need to do it now. I'm still pretty focused and our company is pretty focused on getting the MAX 10 certified and in our customers' hands. They love everything about the airplane. That's doing incredibly well on the development program itself. So it's a good question. It's the right question, and we have to make sure our decisioning and thought process is ahead of where we think things end up at the end of the year.

Thank you.

Yes.

Good morning, everyone. Returning to the engineering topic, Dave, when you assess the company, do you believe there is a need to restructure the engineering organization? What is truly happening in that area? It’s challenging for me to identify a program that you haven’t incurred costs on. The numerous issues you've faced compared to some of your peers, whether in defense or commercial sectors, seem to indicate that Boeing is experiencing more difficulties than others. What accounts for this situation, and how can you mitigate these challenges for future programs, as they will need to progress?

Yes. So Ron, I want to start by hoping that you haven't overlooked the recent restructuring of our engineering organization. It was the first thing I addressed. However, I want to clarify that I don't attribute all of our issues and write-offs to shortcomings in engineering. We restructured engineering to enhance our safety management system, allowing people to voice concerns and highlight engineering disciplines appropriately. This has been effective and beneficial, as we have gained valuable insights from the transfer of ideas between BDS and BCA. Our hiring and retention programs are quite successful, although it hasn't been easy. When we examine the write-offs we've incurred, particularly this quarter, the fixed-price development contracts that contributed to these write-offs were established before the COVID-19 pandemic and prior to the current inflationary challenges. Therefore, I do not attribute these to engineering issues. Similarly, I do not see our certification challenges and timelines as stemming from engineering shortfalls. Our airplanes are performing exceptionally well. The 777X recently showcased in Dubai and Singapore received positive feedback, meeting all specified requirements. However, the process of engaging with our certification regulators globally has evolved; it must now be thorough and effective, which differs from previous experiences. Thus, I don't fully accept the premise of your question. Nonetheless, it's important to acknowledge that we have restructured and are enhancing our engineering capabilities, which I believe are strong and will become even stronger.

Okay.

Good morning, Dave and Brian. Thanks so much. Dave, you've alluded to MAX demand being good several times on this call, but also, you're not at 31 a month on the delivery rate there yet. So how could we think about going above 31 a month? It doesn't seem like you need the MAX 10 to start to get above it, but do you need China to get above it, or do we stabilize at that level?

We don't need the 10. Believe me, the demand is there. And we delivered 37 MAXs last month in the month of March, and we're working our way towards momentum. So we feel pretty good that the trick for us is to stay focused on that production rate of 31 a month and make it stable and dependable and reliable. We derisked the China piece. The -10 isn't contemplated in the near-term. So if we just execute at that level, we feel pretty good.

Okay. Cool. And then on commercial profitability, if we exclude the abnormal costs, there was still a loss. So how do we think about that program getting to breakeven and how 787 is maybe impacting it?

I would say, the 787 from a cash margin standpoint, they're still positive. They're down, obviously. But the future, it's going to get significantly better once the deliveries start rolling. So i.e., that program is perfectly fine. And of course, the 737 is strong. We might have some mix in there around any given quarter. And of course, we had a couple of charges related to abnormal period costs and things like Ukraine, but those are kind of isolated. I think going forward, as we get deliveries going on 787 and 737, those cash margins will accrue and accrete. And then the 787, some of the moves we're making, we feel pretty good about getting the freighter going to fill the factory and satisfy demand. So overall, we think that BCA margins are headed in the right direction, and they're going to follow deliveries.

Okay. Thank you.

Good morning. Thank you.

Hi, Doug.

I want to switch over to defense. David, as you said, the defense programs that you all are talking about this quarter, they were a bit of fixed price development contracts. And some were very aggressive even to the point of known below-cost bids as investments. And some of those problems, we're now seeing them coming home. So I mean, these were done well before you came on as CEO, but how do you look at the BDS bidding process going forward? And then also are the cost overruns on these programs completely due to higher input costs, or are there other execution issues at work here?

That's a great question, Doug. I have a different approach to fixed price development, and I hope to avoid contributing to any issues in that area. However, we are where we are. As a member of the Board when we initiated the T-7 and MQ-25 programs, I can confirm that we anticipated investing a significant amount of our resources into those airframes from the outset. Despite the development costs being higher than we expected, I believe they will prove to be good investments. Once we complete these projects and fulfill our contracts, the aircraft will remain relevant and tied to significant programs involving many units. I am confident that both aircraft will successfully support our military. I still strongly believe in the future potential of real aircraft generating real profits for Boeing. Regarding Air Force One, I see it as a very unique situation with specific negotiations and risks that Boeing perhaps should have avoided. Nevertheless, we are committed to delivering excellent aircraft while acknowledging the associated costs. In terms of inputs, most of the inefficiencies are linked to COVID, particularly in the defense sector where, when a production line is disrupted or workers are unavailable, there aren’t many cleared individuals to fill in. This situation is even more challenging for the VC-25B due to the extremely high clearance requirements. We've faced challenges in several areas, and I hope to never contribute to issues like the one you mentioned.

Very good. Thank you.

Thanks.

John, we have time for one more question.

Thanks. Good morning. Dave, regarding your initial performance goals, I believe you had seven set when you started. After today's updates, it seems you might only meet a couple of them. I'm trying to understand how we should assess your performance and whether Boeing's expectations for itself are realistic. Have you adjusted your goals to reflect a more achievable standard, especially considering that things can go sideways? Perhaps we should introduce more margin into our success metrics.

That's a significant question, and I'm happy to address it. As you know, my transition into this role was quite rapid, and I embraced the objectives that were already established for each program within the company. I made it clear to the Board that I would not link my compensation to my actions with The Boeing Company; instead, I would focus on doing what is right. I aim to manage these programs in the manner I believe is best. If I encounter opportunities for improvement that might impact my ability to meet delivery targets, I will address those. I have consistently worked to manage expectations as best as I can. There are certain unpredictable factors that can be frustrating for everyone involved, and I understand that. However, our approach is to keep striving for improvement and to return to a stable cash flow for both you and us. I am confident in our capability to achieve this, as well as in the team's ability to deliver results. I'm not looking to adjust expectations significantly, aside from considering the timing and real-world challenges related to how regulators handle certification. These challenges are genuine, and the process is more comprehensive than it has been in the past, which, in the long run, will benefit Boeing. Each of these programs has a long lifespan, and I take that into account in everything I do at Boeing. I believe the Board recognizes this, and I trust they will judge my performance accordingly, regardless of how well the compensation plans align.

Thanks for taking the question, Dave.

Thanks.

And that concludes our first quarter 2022 earnings call.