Boeing Company (BA) — Q4 2023 Earnings Call Transcript

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

Thank you, Matt. Good morning everybody and thanks for joining us. While we report on our fourth quarter results today, my focus is on Alaska Airlines Flight 1282 and the actions we are taking as a company that strengthen quality and earn the confidence of our customers, the confidence of our regulators, and the flying public. Brian will cover the financials. I will keep my comments strictly to the issue at hand. I'll start upfront by apologizing again to Alaska Airlines, to their crew and to their passengers and more broadly, to all of our customers who were affected by the 737 MAX 9 grounding. The NTSB's investigation into the accident is ongoing. I have an amazing amount of confidence in the work that they do. They bring experts to the investigation. And they take all the time that's necessary to draw accurate conclusions, and we intend to be there with them. As part of that NTSB process, I cannot comment on any specific root cause or speculate on a root cause. As a participant in the process, I do believe the investigation will narrow quickly. Whatever conclusions are reached, Boeing is accountable for what happened. Whatever the specific cause of the accident might turn out to be, an event like this simply must not happen on an airplane that leaves one of our factories. We simply must be better. Our customers deserve better. I want to remind everybody what a great job the pilots and the crew at Alaska Airlines did in responding to a desperate moment. I also want to remind everybody what a terrific job the leadership at Alaska Airlines did, grounding the airplanes and ensuring safety. Alaska Airlines did exactly what companies like Boeing would hope that they do at a moment like that and that is why the airline industry is as safe as it is. We caused the problem, and we understand that. Over these last few weeks, I've had tough conversations with our customers, with our regulators, congressional leaders and more. We understand why they are angry, and we will work to earn their confidence. There is no message, no slogan that will accomplish that. It's all about real, demonstrated action and absolute transparency every step of the way. So, let's talk about those steps. Our team has worked diligently to help our customers restore their 737-9 airplanes to service. The FAA approved the detailed inspection protocol last Wednesday. And today, all 737-9 operators are safely returning their airplanes to service. More broadly, we are taking immediate and comprehensive actions to strengthen quality at Boeing and within our supply chain. We instituted additional quality controls and inspections at Boeing and at our suppliers. We issued bulletins to suppliers to strengthen the focus on conformance and reduce the risks of quality escapes. We opened our factories to 737 operators for additional direct oversight and we appointed an expert quality adviser to conduct a comprehensive and independent review of our commercial airplane quality management system, and they will remain with us for many years. Most importantly, last week, we paused 737 production for a day as more than 10,000 teammates across Renton, Seattle, and Moses Lake stopped to focus on safety and quality, and only safety and quality. This was a quality stand-down at a scale we have never done before, and we're going to keep doing them across our commercial factories. In addition to our internal actions, the FAA has announced new oversight of our 737 manufacturing. We will cooperate fully and transparently with the FAA at every turn. We respect their role as our regulator, and we will follow their direction in every step on production. Today, we're producing 737s at a rate of 38 per month and we will remain at that rate until the FAA and Boeing are satisfied with our quality and manufacturing process. This increased scrutiny, whether it comes from us, from our regulator or from third parties, will make us better. It's that simple. Over the last several years, we've taken close care not to push the system too fast. And we have never hesitated to slow down, hold production or stop deliveries to take the time we need to get things right. Nobody knows that better than our investors. As you know, we stopped delivering 787s for over a year to ensure that each conformed to our exacting specifications prior to delivery. And on the 737 line, we have regularly slowed rate breaks to support the stability of the overall production system and to correct non-conformances when identified. But this actually makes it absolutely clear we have more work to do. I know that these moments that impact delivery schedules can frustrate our customers and our investors. But quality and safety must come above all else. Our customers and our investors know that and are in there with us. On that note, as you will see, we are not issuing financial outlook for 2024 today. Now is not the time for that. We won't predict timing. We won't get ahead of our regulator. We will go slow to go fast. And we will encourage and reward employees for speaking up to slow things down if that's what is needed. We will simply focus on every next airplane and ensuring we meet all the standards that we have, all the standards that our regulator has and that our customers demand. As we go about that work, we remain confident in our recovery. Since day one, we've been focused squarely on inculcating safety and quality to everything that we do and getting back to our legacy of having engineering excellence at the center of our business. That focus and commitment is unwavering. And we will continue to strengthen our processes and our execution every step of the way. Most importantly, we will be transparent every step of the way. And with our 170,000 employees in mind, I'd like to close with a message directly to our team. We have confidence in you, and we have confidence in Boeing. We have confidence in our airplanes. I know how seriously you take your work. Our men and women on the manufacturing floor and in our engineering offices know exactly what we must do. You know your work better than anyone else on the planet. Use your voice, speak up, focus on every next detail. We will seek out and act on your feedback. We're in a challenging moment. We will earn trust back through demonstrated action and a commitment to total transparency. I'm confident in you, I'm confident in our company, and that together, we will do just that. Brian, over to you.

Thanks Dave and good morning everyone. Let's start off with the total company financial performance for the quarter. Revenue was $22 billion. That's up 10% year-over-year. Growth was driven by higher commercial volume and favorable mix. The core loss per share was $0.47, better than last year primarily on improved commercial volume, better mix and lower abnormal costs. They were offset by lower defense margins and higher period expenses, including R&D, which we expected. Free cash flow was $3 billion in the quarter, in line with the prior year and up sequentially from the third quarter primarily due to improved commercial deliveries and strong order activity, which shows favorable advanced payment timing, some of which was anticipated in the first quarter of 2024. Turning to the next page, I'll cover Boeing Commercial Airplanes. BCA booked 611 net orders in the quarter with 411 737s, including an order with Akasa, 98 777Xs largely an Emirates order, and 83 787s. We have over 5,600 airplanes in backlog valued at $441 billion. BCA delivered 157 airplanes in the quarter and revenue was $10.5 billion. That's up 13% driven by higher widebody deliveries and favorable mix. Operating margin was just positive at 0.4%, driven by returning to normal 737 delivery levels in the quarter, improved mix as well as lower abnormal costs associated with getting to five per month on the 787 and resuming production on the 777X. Now, I'll give more color on the key programs. On the 737, we delivered 110 airplanes in the quarter and 45 in December. The program also began FAA certification flight testing on the 737-10 in December. For the year, we delivered 396 airplanes, on the upper end of the revised guidance range we provided in October. Per the FAA announcement, we'll maintain production at 38 per month and work transparently with the FAA to complete all requirements for future increases. At the same time, we'll continue to prioritize the master schedule to avoid disruption in our supply chain. On the 737-9, we're actively supporting our customers' return to service activities. And as of today, the majority are back flying. In our factory, we have 10 -9s in production, all of which will undergo the FAA group inspection process prior to delivery. Spirit has also adopted this inspection routine in its factory. The quarter ended with about 200 MAX airplanes in inventory. It's important to think about this inventory in three buckets. First, there are 140 737-8s built prior to 2023. The vast majority are for customers in China and India. We still expect to deliver most of these airplanes by year-end as we work towards shutting down the shadow factory. In the second bucket, there are around 25 airplanes produced in 2023 that are still in WIP, given the disruptions in the second half of last year. And we expect these to deliver in 2024. And lastly, there are approximately 35 -7 to -10s that we will deliver once those airplanes are certified, the timing of which will be determined by the FAA. Moving on to the 787. We delivered 23 airplanes in the quarter, including 11 in December. For the year, we delivered 73 airplanes, within the guidance range we originally outlined for 2023. The program successfully transitioned production to five per month in the quarter and still plans to steadily work our way to 10 per month in the 2025, 2026 timeframe. We ended the quarter with approximately 60 airplanes in inventory, about 50 of which require rework, which continues to progress steadily. We still expect to deliver most of these airplanes by year-end as we finish the rework and shut down the shadow factory. We booked $77 million of abnormal costs in the quarter and have approximately $300 million left to go that will wind down by year-end, in line with our expectations. On the 777X, we resumed production in the quarter and continue to progress along the program timeline, which remains unchanged. During the quarter, the Emirates order for 90 777Xs brought the program backlog to more than 400 airplanes and also extended the accounting quantity. We continue to follow the lead of the FAA as we progress through the certification process, including working to obtain approval from the FAA to begin certification flight testing. We booked $71 million of abnormal costs in the quarter, which is now fully behind us after resuming production, in line with our expectations. Moving to the next page, Boeing Defense and Space. BDS booked $8 billion in orders during the quarter, including the Lot 10 Award from the US Air Force for 15 KC-46A Tankers. The backlog is now at $59 billion. Revenue was $6.7 billion, up 9% on the tanker award and improved volume and BDS delivered 52 aircraft and two satellites in the quarter. Operating margin was minus 1.5% in the quarter, a sequential improvement from Q3, but still we have more work to do. Q4 results were impacted by cost true-ups on three fixed-price development programs totaling $139 million as well as unfavorable performance and mix on other programs. Our game plan to get BDS back to high single-digit margins by the 2025-2026 timeframe remains unchanged. Our core business remains solid, representing 60% of our revenue and performing in the mid to high single-digit margin range. The demand for these products is very strong and we need to execute, compete and grow these offerings. On the 25% of the portfolio primarily comprised of fighter and satellite programs, operational performance stabilized as we exit the year. And as a result, the fourth quarter saw improved margin trends, although still negative. We still expect to return to the strong historical performance levels as we roll out new contracts with tighter underwriting disciplines as we move into the 2025-2026 timeframe. Lastly, we have our fixed-price development programs that represent the remaining 15% of revenue. Despite the relatively modest cost impacts in the quarter, we continue to focus on maturing these programs and retiring risks quarter in, quarter out. And we made some good progress in the fourth quarter. In addition to capturing the tanker award from the US Air Force, the program delivered nine aircraft in the fourth quarter, continuing to build positive momentum in spite of the supply-related disruptions to the factory that we faced earlier last year. And on the T-7A, the first Red Hawk arrived at Edwards Air Force Base in November, formally starting the Air Force development flight test campaign for the aircraft. Overall, the defense portfolio is poised to improve. The strong demand across the customer base, the products are performing in the field, and we're confident that our efforts to drive execution and stability will return this business to performance levels that our investors recognize. Moving now to the next page, Boeing Global Services. BGS had another strong quarter. They received $6 billion in orders and the backlog is now at $20 billion. Revenue was $4.8 billion, up 6% primarily on favorable commercial volume and mix. Operating margins were a very strong 17.4%, an expansion of 350 basis points versus last year as both our commercial and government businesses were delivering double-digit margins. In the quarter, BGS opened a parts distribution center in India and received a follow-on contract to provide sustainment for the C-17. Turning now to the next page, I'll cover cash and debt. On cash and marketable securities, we ended the quarter at $16 billion. On debt, the balance remained flat at $52.3 billion and over the next few days, we'll pay down $4 billion of the $5 billion of maturities coming due this year from our available cash on hand. We continue to maintain access to $10 billion of revolving credit facilities, all of which remain undrawn. Our liquidity position remains strong. Our investment-grade credit rating continues to be a priority. And we're developing and deploying capital in line with the strategy we've shared previously: invest in the business and pay down debt. Turning to the next page, I'll cover our full year financials. Full year revenue was $77.8 billion, up 17% year-over-year. Growth was driven by improved commercial volume primarily on higher 787 deliveries. The core loss per share was $5.81, better than prior year primarily on improved commercial volume and mix as well as lower fixed price development charges in defense. Free cash flow was $4.4 billion for the year, up versus prior year primarily on higher 787 deliveries and favorable receipt timing that was partially offset by higher expenditures as we increased production rates and invested in the business. While we're postponing issuing 2024 guidance today, given our current focus, we're committed to sharing timely and transparent updates moving forward. I would like to provide some additional context on our path forward. We always knew 2024 was going to be an important year in our recovery. Based on what we know today, we expect another steady year of free cash flow, driven by the 737 production at 38 per month, ongoing execution of the 787 toward our long-term objectives, continued liquidation of our 737 and 787 inventory, and continued focus to wind down both shadow factories. Our defense business will continue to improve as we mature fixed-price programs and transition recently challenged programs with better underwriting disciplines that we've already started to see and BGS will continue to generate strong free cash flow. Longer term, we're focused on quality and stability, which will ultimately drive free cash flow. Nothing has changed on the demand front, and the backlog is strong and growing. Remember, our 2025-2026 guidance was based on achieving stability and we have to earn that by applying resources to fix our issues and demonstrate predictability one airplane at a time, side-by-side with our regulator. This team is up to the challenge, and we'll apply any and all resources to get back to deliveries that satisfy our customers and underwrite the long-term demand profile. We're still confident in the goals we laid out for 2025-2026 although it may take longer in that window than originally anticipated, and we won't rush the system. With that, I'll turn it back to Dave for closing comments.

Yes. Thanks Brian. We're addressing you from Renton, home of the 737 MAX family. We're living in the here and now, and we're working with all of our people and I couldn't be more impressed with their commitment, dedication and the comprehensive nature around which they will look at this. Boeing will get better. I am confident in that. We will address everything that needs to be learned from the accident, and we'll move forward. So, thanks. Happy to take your questions.

Yes. good morning Dave and Brian.

Hi Peter.

Dave, thanks for the initial opening color on the MAX situation and the steps being taken. So, I guess just to follow on that, Dave, I wanted to ask you about where you assess you are in kind of the recovery of the MAX program when we think about what has been a successful transition to rate 38 and some of the progress in stabilizing the supply chain. And you've commenced deliveries to China and I know we're not talking about 2025-2026 targets, but directionally, there's been a lot of improvement since last fall and since your Investor Day when you laid out this long-term outlook. Thanks.

Yes, I appreciate that, Peter. One statistic I track closely is the number of -9s that have been returned to service, which is currently at 129 and is progressing quickly based on the inspection protocols agreed upon with the FAA. I'm proud of our progress, though there is one significant exception regarding the escape. As the NTSB investigation moves forward, I believe we'll gain valuable insights that will help us improve our quality systems. We will be closely monitoring the door plug from the moment a door arrives in Wichita through all positions here and adding inspections at every stage. This process is under strict control, with support from the FAA and our customers. Our next step is to apply these insights across our supply chain, and we’ve begun medium- and long-term efforts to ensure this happens. I believe that quality systems can always improve, and during moments like this, it's essential to examine everything closely. We plan to take the time necessary to do this properly, and I appreciate the FAA's decision to pause, as it allows us to focus on getting it right. I wish I had recognized the need for a pause earlier, but we've consistently taken breaks when needed. Although I've likely taken more pauses in the last three years than in the decade prior, this approach is how we improve. Additionally, we've faced some shortages that have required us to halt production temporarily. Our buffer inventory isn't as robust as we want due to supply chain challenges, but we will run our master schedule according to our previous plans, and the parts and buffer inventories we receive will help stabilize production moving forward. I feel optimistic about our situation and our aircraft certifications. I've noted the mutual respect between the FAA and Boeing, which gives me confidence for the future. Overall, I believe this moment could actually accelerate our recovery rather than delay it.

And just initial progress on China? Thanks.

Yes. So, Peter, as we've talked many, many, many times, we have stood by our customers in China day in, day out. They have been flying MAXs now for the better part of the year. They are performing extremely well. And we'd always hoped and expected they would begin to take deliveries. And I think everybody has noticed that those deliveries have started. So, we are just going to stay diligent, stay with each and every one of them and make sure our Chinese customers get what they've ordered and paid for.

Morning Dave and Brian. Maybe if you could update us on how you're thinking about the MAX 10 and the MAX 7 certification timing, just given MAX 7 exemption being withdrawn. What does it mean for the 10? And how does that phase in as you think about ramping production to 50 a month and the profit profile of the MAX side if there's no MAX 7 or 10?

Sheila, thanks for that question. I'm going to just give a little bit of a moment on why we made that decision on the time-limited exemption. I'll let Brian help quantify it. I visited Capitol Hill for a lot of reasons. My biggest one is to own the problem, be transparent and convey that to all of our workforce so that they know we're willing to do that. And then we can all be honest, clear with each other every step of the way in this process and so I'm glad I made the visit. I was not expecting when I met with Senator Duckworth, the conversation that we had. You know she's a pilot and a decorated pilot. She listened to everything I had to say. We didn't have a debate about the safety of the 7 and the 7 in its certification work was moving along at a pretty steady pace. She had a way different argument for me, and it was right. She said, you want to introduce this new airplane, a derivative, yes, but a new airplane. And nine months from now, you'll have an engineered solution to it, to this issue. And why is that the right call? In my view, it was a sound, principled position to take. I went home for the weekend, I talked to our customer, and you know who that is, unbelievably constructive, and this is the right thing to do for aviation. So, that is really how it happened, and it was that simple. But the passion and the argument that Senator Duckworth presented to me, I'm so glad I heard. Anyway, that's what happened. The MAX 7 will have to move until we get that engineered fix in place. And then I'll let Brian sort of quantify the, okay, now what.

Yes, and on the 7, the work at hand, we will design an engineering solution. We're applying the resources. Our view is that that could be within a year. But on the 7, remember, while it's a very, very important customer, the number of deliveries you're talking about is relatively small. As I mentioned, we've got 35 of -7 and -10 in inventory at the end of the quarter. There are a handful of 10s. They're mostly 7. So, we'll sort that out as the process works in that airplane for the FAA gets certified. On your question on the -10, I prefer not to get into what ifs. It is a great airplane. Customers love it, and there's great demand for it, and it will get certified at some point when the FAA decides.

Okay. Thank you.

Thanks. Brian, you mentioned that 2024 is expected to be another steady year for free cash flow. In your follow-up descriptions, you highlighted several potential upsides for year-on-year performance. Can you clarify if "steady" implies growth in free cash flow and share some of the offsets to the upsides? Thank you.

Yes. Thanks Myles. So, I did describe some of the key ones. Obviously, BCA volume is up, BDS less of a drag, BGS steady. There's a big investment in there that I probably should have called out now that you're asking is the 777X investment. That's important, and that's big. And also, we got a plan for making sure that we stay laser-focused on our supply based on the master schedule. We don't want them to take their foot off what they're doing. And if that means we got to hold more inventory, so be it. It's important because at this moment, it will allow us to have any of our suppliers that might have been at the live meet, short of the line, they get a chance to catch up. So, all of that in the mix are levers that we got to deal with as we move into the year. And in terms of what steady means, our belief we stand here today, the bottom end will look a lot like it did last year and maybe a little bit of growth over that. And once we know more, we'll put more specificity around it, and we'll give normal guidance when adequate, when appropriate.

Hey, thanks very much and good morning.

Good morning Seth.

Brian, you talked a couple of times about the shadow factories and the path towards winding them down over the next year and change. Is there any way to quantify how you think about what the cost of the shadow factories was in 2023 or what you expect it to be in 2024?

Yes, thank you. You won't see the impact in 2024 because we still need to process that work. By the time we exit, it will mostly be behind us. As we consider our expectations for BCA profitability in the future, we've consistently mentioned a return to normal. Much of that productivity will depend not only on the potential volume, which I can't elaborate on right now, but also on the absence of resources tied to the shadow factories. While we won’t specify exact figures, this is a significant factor as we evaluate the historical profitability of BCA and our projected improvements.

Maybe I'll just add and refresh everybody's memory because we've talked about it a couple of times. In our shadow factories, we put more hours into those airplanes than we do to produce them in the first place. So, anyway, that's a metric I know everybody understands.

Great. And maybe if I could sneak in one more: the advances, it was a nice tailwind in 2023. How do you think about that in 2024?

Right now, we plan for, obviously, not to be quite what it was in 2023. That's factored into my comments. The good news is that we still have a pretty robust demand environment. Our commercial teams are working hard to chase every next order. So, we're not counting on a big one, but we know that our teams can go win campaigns.

Hey, good morning everybody. Brian, just maybe a quick clarification or maybe, Dave, and then a question on defense. The clarification on the rate 38 a month, you guys still firing some blanks so that the number that you're actually producing is a little bit less than that? Just kind of curious what rate 38 means. And then on defense, Brian, you've historically broken things down into that 60, 25, 15 bucket. You talked a little bit about the 25% bucket and the 15% bucket in your remarks. So, I was wondering if you can just comment on the 60%, the remaining part of the portfolio and how that's performing and where maybe margins are in that slug of business at this point? Thanks.

Sure, I'll take the first one. Yes, we've cycled to 38 per month. We said that. Keep in mind, it always takes time for that to equate to deliveries, but we're not firing blanks. On your question on the 60% of the portfolio in BDS, look, they've consistently quarter in, quarter out has still been able to deliver some very good performance on some products that the customers need. And you know the laundry list that we talked about, things like Apache and all that sort of stuff, missiles and weapons, things that are needed right now in this environment that we live in. And they're performing well and they're in that mid to high single-digit margin rate. And when we step back, if we think about going from where BDS is with margins, two things have to happen. That 25% that's wrapped around fighters and satellites has to get better. We expect it to get better and look a lot like it used to. So, then you've got 85% of your portfolio clicking at stable, consistent mid- to high single-digit rates. And we know we can get there. And then you've got this 15% of the portfolio on fixed-price development programs that we expect to be less of a drag as we retire risk over time. And we expect that to play out.

Good morning. Thank you.

Hi Doug.

Hi. I want to discuss the certification of the MAX 7 and MAX 10. Looking ahead, considering the uncertainty regarding the timing of their certifications and the mix of customer demand, which has been greater than your current capacity due to supply chain challenges, do you still perceive your production line as fully utilized? This is because there could be adjustments between producing the -7s, 8s, 9s, and 10s. Additionally, what operational challenges, if any, arise when you need to maintain flexibility in the variants you are manufacturing?

Doug, I think the situation is manageable. If there is a delay, we will have advance notice; it won't come as a last-minute surprise. Currently, the progress on the 7 and the 10 is going reasonably well. The FAA hasn't removed anyone from the process, and we haven't either, so they are making genuine progress. We were nearing the finish line before we withdrew the time-limited exemption. I'm not going to propose a date for the FAA, but they are working tirelessly on it. They understand how to distinguish the issues we're facing in our factory from the certification efforts. I believe we will have ample time and will manage our product mix effectively. Any significant changes will be communicated early, both to you and to us, and I think we can handle it.

So, is it fair to say that the supply chain ramp is probably still the governing constraint on your production ramp, not things like mix here?

Yes. While I prefer not to pause my customers, this pause can be beneficial for us in many ways. The supply chain will continue to operate according to the master schedule. Having some buffers established and allowing more stressed suppliers to catch up is advantageous. Therefore, important progress can still be made despite this temporary pause.

Very good. Thank you.

Thanks Doug.

Good morning. How are you? I have a two-part question, if that's alright. First, could you provide some details on the 787? You mentioned the rate and what's happening in that area; we receive inquiries about that. I'll return with the second part shortly.

Yes. So, on the 787, there's nothing new on the 787. The team is doing a very nice job. We'll produce at the five per month rate as we described. We expect to steadily increase those rates over time and liquidate a lot of inventory, a lot of inventory. And we'll give more dimensions around the specifics in line with normal guidance, but the program is doing just fine and the backlog is big.

Yes, that's been doing great. The second question is a bit more complex. I'm trying to understand how we reached this point. If we look back to the start of the MAX issue, wasn't the 737 production line the most closely monitored in the industry? What led us to the current situation? While updating the quality system is certainly a positive development, why was this necessary at this moment? I'm having trouble grasping that.

Well, Ron, it should never happen. So, the question about now is not so relevant. It should never and can never happen. I am incredibly proud of the work that our people do on the 737 line. I think it has steadily progressed. Quality numbers have gotten better. But when you have an escape and then when everybody concludes exactly what happened in that escape, it lights another fire. So, you take another step forward with respect to all things quality. And you make certain that whatever it was that created that opportunity for failure in the sky or in flight can never happen again. And that has already happened, and then we'll learn from everything. So, yes, I think I understand your underlying context for the question, but I probably take exception to that premise.

Thank you. Now that you've waived the exemption on the engine anti-icing and are in the process of designing the new system, you mentioned it would take about a year. Have you made any progress in accelerating that timeline? Is there a possibility to speed it up further? I assume this will be the critical factor in how soon the FAA can certify the MAX 7 and 10.

I believe your statement is accurate. Since we made this decision only a few days ago, we will allocate more engineers to this project. We plan to increase our efforts and can expedite the process. The nine months I mentioned to Senator Duckworth was based on my previous understanding of the project prior to this decision. So, yes, we will enhance resources and increase any necessary testing. We will do everything possible to keep the FAA informed about that specific aspect of the program. That reflects our current position, and you are right; that is the key factor we should all be monitoring.

Terrific. Thank you. And then another quick one. With the supply chain running at the master schedule but you're delivering not quite as many, should we think about a fairly large build in the inventory account here in the next couple of quarters until you get beyond that?

Yes, there's two things, Cai, that are going to be things we have to deal with in cash flow. One is going to be the 777X investment I discussed as well as what you just described. And that's contemplated in my description of what we thought the bottom would look like. And then we just got to go run the play and work through what's in front of us. But more work ahead, and we'll describe it more specifically as we move through the year.

Hey Lois, we have time for one more question.

Hey, good morning everyone.

Hey Noah.

Hi Noah.

Might go over one if I'm last. But Brian, recognizing that there's some limitation here in how you can discuss it, but maybe just trying to talk out MAX units this year with assumptions of not breaking to higher rates. You made it a point to say you're at 38. I know that rate final assembly, where the entire supply chain is, is always a different number. But if I just simply said 31 for six months and 38 for six months, that's in the low 400s and then you unwind five to 10 of inventory a month. I can kind of get somewhere near 500 or just decent growth from 2023. Is that just a reasonable starting point as we wait to learn more from the FAA?

Noah, I understand your question. Those are the inputs I described, but I need to avoid being specific out of respect for the FAA process. It's not the right time for that. We have work ahead of us, and I assure you that we will provide more details when it's appropriate. For now, we need to wait and see regarding those numbers, as providing specifics isn't suitable at this moment.

Yes, fair enough. Fair enough. Are you willing and able to speak to just updating what the cap is these days on the monthly inventory unwind and how China plays into that?

I don't know we think about a cap. We've got the shadow factories that have been working for quite a while. And they know the routines, and they've been pretty steadily on both the 737 and the 787, consistently meeting month in, month out liquidation targets and expectations for customers. So, I don't think there's any kind of cap. We're just focused on we know exactly the piles of inventory. It's 140 on the 737 that I described. It's 50 on the 787 that have to get the rework. And we're just going to move through this year with real focus in order to be in a position where we start shutting these shadow factories down. And then we're just going to run that play as hard as we can.

Okay. And is China officially fully 100% taking deliveries? We see it in the press. We see the reading of the tail number of websites. But can you just declare that, that's just fully officially on at this point?

One at a time, and yes.

Okay. Brian, could you provide an update on the defense margin? It’s not where we want it yet, but it's improved sequentially. Can you outline how that might evolve throughout 2024? Also, what was the final defense cash burn in 2023, so we can plan for 2024?

Yes, the cash burn figures we reported a year ago showed that the operating cash flows for the BDS division were significantly worse than we anticipated. However, we believe this year will be an improvement. While BDS underperformed, BGS and BCA have shown better results, somewhat offsetting the negative impact. Regarding margins, we expect them to improve over time, especially as we concentrate on the 25% of our portfolio that is highly targeted. We are taking several actions to enhance performance. My main focus is on ensuring the team executes effectively between now and 2025-2026 to restore margins to the high single-digit range, which is how we define our defense margins. It's important to note that we need to add two points to that figure, reflecting what we account for in our Global Services division on the defense side. Essentially, we aim for a double-digit external view of defense margins, as we believe it represents a solid business opportunity.

Right. okay.

You squeezed in three.

We got in and we got them all in. got the rest in. Thanks so much for the time. I appreciate it.

Thanks Noah. Thanks everyone.

Thanks everybody.