Boeing Company (BA) — Q4 2024 Earnings Call Transcript

Thank you and good morning. Welcome to Boeing's quarterly earnings call. I am Matt Welch, and with me today are Kelly Ortberg, 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 at Boeing.com. 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 beginning of the presentation. We also refer you to the disclosures relating to non-GAAP measures in our earnings release and presentation. Now, I will turn the call over to Kelly Ortberg.

Thanks, Matt, and thanks to everyone for joining today's call. Before I get into the fourth quarter earnings, let me first offer our thoughts and deepest condolences for the families and loved ones of those on board Jeju Air Flight 2216. We continue to support the airline and the U.S. National Transportation Safety Board as they assist the South Korean authorities in the accident investigation. Now, turning to the fourth quarter earnings. During the last call, I highlighted four areas critical to our recovery, and as the New Year begins we're making steady progress in all four areas. The first area is stabilizing the business. Following the resolution of the IAM strike, our commercial team has been executing a methodical plan to restart our factories within the framework of our safety management system. This included ensuring all manufacturing employees were current on their training and certifications prior to returning to work on the factory floor. We took time to rebalance the production line so that when we started up, we did so with a healthy production system. People are back to work and excited about the task ahead, and you can see the energy when you are on the factory floor. For the 737 MAX, we have sufficient parts inventory to enable producing at 38 a month, including fuselages which were a pacing item prior to the strike, and all three of the production lines in Renton are now cycling. In the past quarter, we completed our safety management meeting with the FAA, in which they reviewed our safety management system and our production status, including spending time on the factory floor. They reported that they saw a significant improvement, and I'm pleased that we have an agreed-upon path for rate increases beyond 38 per month. It's all about adhering to our safety management system and a stable factory as measured through agreed-upon key performance indicators or KPIs. It's early innings on the production ramp, and we need to stay disciplined on maintaining a stable production system, but early signs are encouraging. The best news is that our customers are reporting that they are encouraged by what they are seeing as they monitor our production. Progress on the 787 also continues, and we finished last year at a production rate of five per month. Like the 737, we are working to ensure the 787 production system, including the supply chain, is stable prior to making the next rate increase. An important accomplishment to stabilize the business was to shore up our balance sheet. We are committed to recovering the business while maintaining an investment-grade credit rating and delivering for our shareholders. I think the demand for our offering last year speaks volumes about the market's confidence in our recovery. We're working across the supply chain, including the sub-tiers, to ensure readiness and stability with our production rates. Notably, supplier part shortages across all of our commercial programs are within their established control limits. We have instituted dedicated sessions with suppliers to provide insights, as well as to promote two-way communication to stay aligned as we operate together as one extended production system. The second element of our recovery is to improve performance on our development programs. While the charges for the quarter in BDS are disappointing, I have had the opportunity to complete deep dive EAC reviews on all the troubled programs. We are very focused on creating stability within the EACs, so we stop this quarterly drumbeat of cost growth. This means being more proactive and clear-eyed about the risks and our estimates to complete the projects. While I know it doesn't show in this past quarter's performance, we're making progress in collaborating with our customers to actively manage the contracts to achieve better outcomes for both parties. You've seen that we've entered into an MOA with the U.S. Air Force on the T-7A program, and we're in active discussions on a second MOA on that program, all focused on improving the performance of the program. We're also in discussions with our customer on the VC-25B program to make the necessary changes to enhance performance and delivery. The U.S. Air Force has termed this as Active Management, which is a term I really like. We're focused on actively managing all of our problematic programs to improve performance for the company and our customers. While I said there's no silver bullet on these fixed-price programs, I do feel better about our ability to manage performance in 2025. On the commercial side, we continue to focus on getting the 737-7 and -10, as well as the 777X through certification. There are no updates to the timelines we’ve previously communicated on these programs. On the -7 and -10, we're still working through the testing phase, focused on finalizing the icing design solution, which we plan to include in the certification program. Working closely with the FAA, especially in light of their leadership changes, will be a key focus area for us this year. The 777X is back in flight test, and we have a good handle on fixing the thrust link issue we uncovered. Now, moving to the third area, culture change, this will be a multi-year journey, but we're already making progress. Our leaders are getting more engaged with their teams and customers. We're having frank discussions about what we need to change. In 2025, we'll be rebaselining our core values and behaviors to make our expectations perfectly clear to all our Boeing teammates. These will be incorporated into our leadership development program and become fundamental elements of our performance management system. Leadership promotions will be grounded not only in what we get done, but how we get things done. We're going to help focus the teams on what it takes to make Boeing successful and promote a culture of unity and accountability by implementing a single enterprise score for all of our annual incentive plans. As I talk with employees, there's a growing swell of excitement around restoring trust and getting their Boeing back, and they want to be a part of this turnaround. So the last area is building a new future for Boeing. While workforce reductions are always difficult, I'm pleased that we have been able to reduce layers of management and redundant overheads in our system. This will serve us well as we establish a less bureaucratic, more focused, and agile operating environment for our future. We're preparing for the road ahead by continuing to make important investments in our core business while streamlining our portfolio in areas that aren't core to us. So let me wrap up by saying that the markets we serve are robust and growing. Demand for our core commercial and defense products and services remains strong. Our backlog of more than $0.5 trillion clearly demonstrates the value of our portfolio, and we're focused on meeting our commitments and delivering safe, high-quality products to our customers. I do want to acknowledge and thank the incredibly talented employees at Boeing. Your resiliency and commitment give me confidence in our path forward. It's going to take all of us working together. Next, let me turn it over to Brian to cover the operating results, and after that, we'll be happy to take your questions. So Brian, over to you.

Thanks, Kelly, and good morning, everyone. Let's start with the total company financial performance for the quarter. Revenue was $15.2 billion, down 31%, primarily driven by lower commercial deliveries associated with the IAM work stoppage. The core loss per share was $5.90, primarily reflecting previously announced impacts of the IAM work stoppage and agreement, charges on certain defense programs, as well as costs associated with workforce reductions announced last year. Pre-cash flow was a usage of $4.1 billion in the quarter, in line with the expectations shared at our last earnings call. Results were impacted by lower commercial deliveries and unfavorable working capital timing, primarily driven by the IAM work stoppage. Turning to the next page, I'll cover Boeing Commercial Airplanes. BCA delivered 57 airplanes in the quarter. Revenue was $4.8 billion, and the operating margin was minus 43.9%, primarily reflecting previously announced impacts from the IAM work stoppage and agreement, including pre-tax charges of $1.1 billion on the 777X and 767 programs. Backlog in the quarter ended at $435 billion and includes more than 5,500 airplanes. Now, I'll give more color on the key programs. The 737 program delivered 36 airplanes in Q4, including a step-up to 18 in December, and as of yesterday we've delivered 33 airplanes in January with four days to go. On production, we restarted the factory in December and plan to gradually increase production rates. We expect to be in a position to go above 38 per month later in the year. All three lines in our Renton factory are cycling, and monthly production is already in the low to mid-20s for January. More broadly, on the master schedule, we continue to make adjustments as needed and manage supplier-by-supplier based on inventory levels. Over the past year, our buffer inventory has grown to promote stability across our production system. As production stabilizes and rates increase over time, we plan to deliberately return buffer inventory to more normal levels. The quarter ended with 55 737-8s built before 2023, the majority for customers in China and India, down five from Q3, with about another 10 already delivered in January. Given the impact of the strike, we now expect to shut down the shadow factory mid-year and deliver all remaining airplanes to customers within the year. On the -7 and -10, inventory levels were stable at approximately 35 airplanes, and testing on the anti-icing design solution is ongoing with certification expected to follow later in the year. On the 787 program, we delivered 15 airplanes in the quarter as we made progress on working through production recovery plans for heat exchangers and delivery delays associated with seat certifications. The program exited the year at a production rate of five per month, and we recently announced plans to expand our South Carolina operations as we prepared for anticipated future need in the commercial market. We are intent on ensuring the production system and the supply chain demonstrate stability prior to making the next increase in rates sometime this year. We ended the quarter with 25 airplanes in inventory built prior to 2023 that require rework, down five from last quarter. Our ability to finish the rework and shut down the shadow factory was also impacted by the work stoppage, and we expect to complete this work in early 2025. Finally, on 777X, as previously announced, the $900 million pre-tax charge primarily reflects higher estimated labor costs associated with finalizing the IAM Agreement and will be incurred over the next several years. Flight testing recently resumed, and we still expect first delivery in 2026 and will continue to follow the lead of the FAA as we move through certification. 777X inventory spend in 2024 finished at $2.6 billion as Q4 spending levels moderated due to the work stoppage. As noted previously, we expect the cash profile to resemble prior development programs, with a first year prior to first delivery typically being the largest use of cash driven by inventory build associated with the production ramp, which will unwind as deliveries accelerate. Moving on to Boeing Defense and Space, BDS booked $8 billion in orders during the quarter, including awards for 15 KC-46A Tankers from the U.S. Air Force and seven P-8A aircraft from the U.S. Navy, and the backlog ended at $64 billion. Revenue was $5.4 billion, down 20% year-over-year on volume and program charges, and the operating margin was minus 41.9%. BDS delivered 34 aircraft and two satellites in the quarter, including the final T-7A EMD aircraft to the U.S. Air Force. The 15% of their portfolio comprised of fixed-price development programs recorded a $1.7 billion pre-tax charge as previously announced. The fixed-price development cost pressures were driven by the KC-46A and T-7A programs, with KC-46 primarily reflecting higher estimated manufacturing costs, including the impacts of the IAM work stoppage and agreement, and T-7 driven by higher estimated production costs on contracts in 2026 and beyond. Roughly one-third of these new charges will work through the cash flows in the next few years, with the remainder spread over the coming decade. Given the fixed-price nature of these contracts, we'll continue to be transparent about impacts as we work to stabilize and mature these programs. We acknowledge that these are disappointing results. These are complicated development programs, and we remain focused on retiring risk each quarter and ultimately delivering these mission-critical capabilities to our customers. As Kelly shared, we continue to make progress in Q4, including key order and delivery milestones already noted. Importantly, the updated acquisition approach for the T-7A is a proof point for how we are working with our customers to find better overall outcomes for both parties, and those efforts will continue as we work through other parts of the portfolio. On the 25% of the portfolio, primarily composed of fighter and satellite programs, our fighter programs again recognize losses in Q4 due to disruptions associated with the F-15 EX ramp-up and the F-18 production wind-down. We also recognize impacts across satellites and a few other legacy platforms tied to development realities as we work to refresh the capabilities of these platforms to support our customers' needs. The remaining 60% of revenues in the portfolio are generally performing in the mid to high single-digit margin range, although the P-8 commercial derivative program experienced margin compression in the fourth quarter due to the IAM work stoppage and agreement. While there’s still more work in front of us, we continue to be confident that BDS margins can improve to high single-digit levels in the medium to longer term. The demand for our defense products remains very strong, supported by the threat environment confronting our nation and our allies. We still expect the business to return to historical performance levels as we stabilize production, execute on development programs, and transition to new contracts with tighter underwriting standards. Moving on to Boeing Global Services, BGS continued to perform well, delivering record operating margins in the quarter. The business received $6 billion in orders, and the backlog ended at $21 billion. Revenue was $5.1 billion, up 6%, primarily driven by higher commercial volume. Operating margin was a record 19.5% in the quarter, up 210 basis points compared to last year, with both our commercial and government businesses delivering double-digit margins. In the quarter, BGS secured awards for C-17 sustainment, as well as a contract for F-15 Japan super interceptor upgrade and services from the U.S. Air Force. BGS is a terrific long-term franchise focused on profitable, capital-efficient service offerings and executing well with mid-single-digit revenue growth, mid-teen margins, and very high cash flow conversion. Turning to cash and debt, we ended the quarter at $26.3 billion in cash and marketable securities, primarily reflecting the successful $24 billion capital raise in October, partially offset by the free cash flow usage and debt repayment. The debt balance ended at $53.9 billion, down $3.8 billion in the quarter, driven by the early repayment of a $3.5 billion bond originally set to mature in 2025. Importantly, this prepayment de-risks our 2025 maturity profile, resulting in $800 million of debt maturities remaining in the year. The company maintains access to $10 billion of revolving credit facilities, all of which remain undrawn. We remain committed to managing the balance sheet in a prudent manner with two main objectives: first, continue to prioritize the investment-grade rating; and second, allow the factory and supply chain to reset. We will continue to evaluate opportunities to further supplement the balance sheet as we make certain portfolio decisions through the course of the year. Turning to the total financial company results for the full year, full-year revenue was $66.5 billion, down 14% year-over-year, driven by lower commercial deliveries, including impacts of the IAM work stoppage. The core loss per share was $20.38, down from the prior year, primarily on lower deliveries and commercial and defense program charges, including impacts of the IAM work stoppage and agreement. Pre-cash flow was a $14.3 billion usage for the year, down versus the prior year on commercial deliveries and unfavorable working capital timing, including the impact of the work stoppage. Stepping back, let me provide some additional context on 2025 free cash flow. 2025 will be an important year in our recovery, and while we still expect it to be a use of cash, we anticipate a significant improvement over 2024. Within 2025, we expect first-quarter free cash flow will be a usage, similar to Q4 2024, driven by continued working capital headwinds as we ramp production, as well as normal seasonality. We still expect the first half to be a use of cash, with the second half turning positive and accelerating as we exit 2025. CapEx investments stepped up last year and could increase by approximately $500 million in 2025 to support planned growth across both the commercial and defense businesses. Importantly, we expect to exit the year with real momentum in the business as we return to normal production rates. This outlook will be underwritten by a few critical factors: increasing 737 production rates through the year; moving 787 steadily towards its long-term production rates; liquidating our legacy 737 and 787 inventory and shutting down both shadow factories; strategically investing in the business, including the 777X production ramp and CapEx to support planned growth across the portfolio; improving our defense business as we continue to mature the fixed-price development programs and work to transition recently challenged programs with our renewed focus on disciplined program management and stabilizing the business; and finally, continuing to demonstrate strong performance across our services business. Broadly, the markets we serve continue to be significant, and our backlog of more than $0.5 trillion demonstrates that our product portfolio is positioned to win. Long-term, these fundamentals underpin our confidence as we continue to manage the business with a long-term view built on safety, quality, and delivering for our customers. With that, let's open it up for questions.

Thank you. Good morning.

Good morning, David.

Kelly, I wanted to ask how you viewed the restart on MAX, how that's gone. You mentioned some of the KPIs that you have with the FAA. Can you elaborate on what exactly those are? How close you are to hitting what's necessary to get to go above 30 a month? And then, Brian, can you just give us an idea of what to expect for all-in MAX and 787 deliveries in 2025? Thanks.

Yeah, David. So let me talk about the production startup on MAX. As you know, we came out of the strike and didn't actually jump right into building aircraft. We spent time training the workforce, getting them all up to speed, but also, really, as I said, balancing the line, which is very important. Starting the lineup in a stable manner is already paying dividends. We're seeing the production process come back very well, and I feel pretty good about where we are right now with the production rate. Remember that we've got a significant amount of inventory, both in airplanes and in supply parts. So I don't see any constraints right now from the supply chain in ramping up the 737 to the 38 a month rate. Notably, the work at Spirit during the strike has really paid off. That team has done a great job of improving the overall performance and quality of the fuselages, which are going to help flow through the factory. So, as I said, you know, it's early days, but I feel really good. I think our deliberate plan is going to pay dividends for us going forward.

David, a little bit on how to think about 737 deliveries for the year. We're not putting out formal guidance, it's a little too early for that. But let's just talk about a framework for the year. January is off to a very solid start, and delivery should be in the high 30s for the month. Now, keep in mind, some of these airplanes benefit from clearing the delivery center ramp that had accumulated in the November or December time frame. So there's a bit of a tailwind entering the year. We expect February will be lighter because there are fewer manufacturing days and also the timing of the factory restart. March is likely to be better than February as we begin to get more predictability. So as we've said, the first half is going to reflect our gradual, steady restart of the factory. The second half is likely going to benefit from achieving higher production rates, including the 38 per month target and possibly higher based on approval from the FAA, as Kelly mentioned. So, as we sit here today, we've got a lot of work in front of us. 2025 in some ways could look like 2023, maybe a bit better if things go our way.

Hey David, let me come back also and talk about the six KPIs that you asked about. These are KPIs that we've agreed with the FAA on what the thresholds are and where the control limits we want to operate. And these are what we've collectively determined will measure the stability of our production system. I'll quickly tell you what the six are: NOE, notice of escape hours, shortages, part shortages, employee proficiency, rework by line, travel to work at rollout, and ticketing performance. So, I will say it's a little bit early, because we have a lot of inventory yet of planes that were in process that we're going through. But early indications are that all the KPIs are looking and trending in the right direction. So, I feel so far so good, but it will be important to continue to measure these KPIs as we ramp up. We need to get to 38 and show stability at 38 with these KPIs, and we won’t go to the FAA for a rate increase if we don’t see these KPIs performing the way that we want to. I think we’ve got a disciplined approach. As I said in my remarks, I’m pleased that it’s grounded in facts and data, so there is no subjectivity here as far as what it’s going to take. But we got to perform, and Stephanie and the team are clearly focused on performing to these KPIs.

Yes, good morning Kelly and Brian. Hey Brian, maybe if you could walk us through a little bit on the free cash flow dynamics for 2025. I know you called out a few things from the moving parts, but just thinking about working capital headwinds or 777X spend or BDS losses. We’ve been estimating about a $5 billion outflow this year. I think it’s a little above the consensus of $4 billion. Anything to highlight that you could help us maybe clarify what could reduce that outflow or how are you thinking? I know you gave us the first half versus second half dynamics, but anything else that you could provide more color on? Thanks.

Yeah, sure Peter. So, 2025 free cash flow is largely going to be consistent with what we'd said at our October earnings call, with the two adjustments that I noted, which are CapEx a little higher based on some growth programs that we're anxious to invest in, and the impact of a few hundred million based on the updated BDS charges. It's consistent with those two adjustments. Now, in terms of the profile, as we've discussed and you mentioned, the first half will be negative. The second half will be positive. It'll be a net usage in the calendar year, but importantly, positive momentum as we accelerate cash flows exiting the year that sets us up very nicely for 2026. Now, in terms of levers, the first half of the year, BCA is going to be negative driven by the working capital usage and continued investment in the 777X program. BDS is going to be negative due to the prior period charges running through, as well as normal seasonality as it pertains to customer receipts. BGS is going to be nice and steady contributing to the first half. As we go to the second half, BCA is expected to flip positive because then we'll get the benefit of the working capital as deliveries accelerate while we still invest in the 777X program. Again, it's all going to be a function of our ability to work those higher deliveries in the back half. Now, BDS is going to move positive despite a continued drag from the charges, primarily from the benefit of favorable receipt timing that's natural and seasonal in that part of the business. And then BGS, we tend to have a better second half than first half, so it's going to be a steady but growing profile for the second half. As I mentioned, the CapEx is going to be a bit higher, but for good reason, because that's all about growth. So, in terms of the numbers that you described, that's a reasonable ballpark of what we're aiming at, and we're managing all the levers and keeping you updated as we move through the course of the year.

I appreciate it. Thanks.

Hey, good morning. Hey Kelly, maybe on the fixed-price development programs within BDS, it seems like the timing to stabilize those keeps getting pushed to the right. How are you actively managing those programs, and what are you looking to change? And then Brian, related to that, you know, how do you correlate those charges? I think you mentioned one-third is now. Can you maybe size that cash outflow for 2025? Is it $3 billion related to BDS, and then $1 billion in 2026? Does the business become breakeven in 2027, and when does it become positive?

Okay Sheila, I'll go first and then ask Brian to follow up. Yeah, obviously, the quarter was disappointing here on the fixed-price development programs, but as I said in my remarks, we're very actively now working on all these programs with our customers. The U.S. Air Force is clearly working with us to find a better path forward on these programs, both for us and for them. De-risking through this active management process is different, and we still have to convert these MOAs, which are Memoranda of Agreements, to contract changes. So, we're in early stages, but the customers are working with us in that regard. And then I think, just as I said, taking a real clear look at the EACs and the estimates to complete, and making sure that we reflect the realities of the risks that we have. I'm very hopeful that we're going to see a much more stable performance here this next year. But again, we're not done with these until we're done with them. And they are fixed-price, so we've got to continue to work at this. Our team is very focused on program management discipline, making sure we're managing the tasks at hand. But, you know, there’s a lot of work yet to do, Sheila. I think we're making progress, but I certainly can't claim victory yet.

And Sheila, in terms of the cash flow, you're correct. The new charge of $1.7 billion, we characterize. About a third of that is going to be over the next three years. So it's a little bit front-end loaded, yielding a few hundred million dollars of pressure that we see in 2025 versus what we said back in October. Now, in terms of your broader question on the full weight of the charges, they are going to tend to flow through. I think BDS for 2025 from cash flow performance is going to look a little bit like 2023. And then once we get through 2025, it'll be in a much different position, because a lot of that headwind from the charge will be behind us. As for when we get exactly to breakeven or positive, it won't be this year, but I look forward to having that discussion as we move out beyond this year.

Got it. So breakeven could be possible in 2026 or maybe 2027.

Yeah, for sure.

Got it. Thank you.

Hey, yeah. Good morning, guys.

Good morning, Ron.

Kelly, could you talk about how you're thinking about Boeing's portfolio? I mean, there's been a fair amount of press about maybe some things could be up for sale, maybe not. You know, what's core? What isn't? You know, so like the way I've been thinking about it, one of the things that's been talked about is maybe selling Jefferson. But on one hand, maybe that's a good idea. But on the other hand, that puts Boeing's name in pretty much every cockpit of every airplane on the planet. And is that a bad thing? So how are you thinking about it?

Well, so first of all, Ron, we've been through the detailed portfolio review, which was one of my early tasks, and that is complete. It highlighted areas that are questionable to our core, and we go through an analysis to look at each of those areas, and we're in process in that. As I look at this, here's how I would think about it, Ron. This is not going to be a major restructuring of the Boeing Company. The core business that you see us in, and we're going to continue to be in those core areas. But there are some areas, you named one, there are areas where we can streamline the organization, or we may be better off focusing our energy elsewhere, and we'll be actioning those over the coming months and years. The only thing I would say is that as you look at those, part of that decision process is what do you do with something? In some cases, you have potential that you could sell and there are buyers, in some cases that may not be a viable approach, and we may want to just not continue with the next phase of the project or something like that. We're going through that, but I think if I give you any guidance, think of it as more pruning the portfolio, not cutting down the tree.

Got it. Got it. And you'd expect maybe we'll know more about this in the next 12 to 18 months, something like that?

Yeah, look, I can't really speak about individual portfolio decision areas, but as they come along, obviously, you'll see what we're doing there.

Got it. Got it. All right. Thank you.

Thanks. Good morning, still. So on the supply chain, and maybe the Spirit integration, how key is that to your ability to get to 38 and then get above 38? And then if you could just quickly touch on the 787 and the supply chain constraints you are observing there, specifically on interiors, and if heat exchangers are still the issue, and how quickly you expect those to release within the context of 2025. Thanks.

Yeah, Myles. So look, on Spirit, I don't view Spirit fuselages as a constraint right now for us to get to the 38 rate. As I mentioned in the remarks, they've done a really nice job of improving the quality of the fuselage and the flow of the fuselages. So we're in really good shape on fuselages with Spirit, which sets up a very successful integration. We've got a team of Boeing folks at Spirit working hand-in-glove with them as they improve their production processes. I think that sets us up well for the upcoming integration, which we project will happen around the middle of the year. Regarding 787 supply chain, as Brian said in his remarks, I think we're working through the heat exchangers. We still need some additional improvement there, but all the signs for improvements look good. Seats remain a challenge for us, and it's not the seats; we call it seats, but it's the monuments that go around the seats and the integration of the IFE and the certification associated with that. We still face challenges in getting through certification on some new type seats on 787. We've got a plan on that. It's really a customer-by-customer basis. One of the things we're considering for the future is to spread these new seat configurations, which we call code ones, out to allow ourselves and the regulators more time to achieve certification. These processes are complex. They're not just seats; they are complex monuments. Particularly as we move to doors, the certification process for doors is a real challenge. We've got a team focused on that, but I think it's going to continue to be a challenge for those 787 deliveries where we have a new seat configuration that needs certification. For example, we have a lot of completed airplanes for Lufthansa that are currently held up due to seats, and we're working through that. Hopefully, we'll get through that this year, and we'll have a more successful seat integration program as we ramp 787 production.

Okay. And Brian, the delivery number for 787 for this year, 75, 80, is that a doable number?

Yeah. So as we've said, we're at five per month. We want to get to seven sometime this year, and we've got, call it high teens, coming out of inventory. So when you add all that together, for sure, maybe a little bit better.

Hey, thanks for taking my question. Kelly, can you characterize the pace at which you think the business can liquidate 777X aircraft from inventory once EIS hits? And then, are you expecting the first-class cabin seats to be certified for the 777X launch customers by the time 777X itself is type certified? Or is there any risk of delay there on seating as well? Thank you.

Yeah, let me take the seating first, and then I'll ask Brian to do the liquidation. So actually, the first delivery of the 777X is also to Lufthansa, which I just mentioned. We have had seat issues and continue to have seat challenges. So I guess the good news and bad news is we’ve had seat challenges, but we do know what those challenges are for Lufthansa deliveries. The 777X interior is, in general, more complex, but that's baked into our overall certification program for the aircraft, so we have time to work through the seat certification issues. We've learned from our experience with the 787 what those issues are, and we believe we will be able to manage that for the initial deliveries.

And Scott, in terms of cash flows, as is typical with our new programs, there will be heavy cash usage in the year before EIS, which is for 2025. For 2026, when it goes into service, keep in mind the initial airplanes will be changing corporate airplanes, which are not high cash flow airplanes. Once you get through those initial deliveries, you will start to see pre-cash flows accelerate as deliveries increase. So we're going to be well-positioned once we get through EIS.

Great. Thank you.

Thanks very much and good morning.

Good morning, Seth.

I guess I wanted to follow-up on maybe two other items as we think about the cash flow this year. You talked about winding down the shadow factories, but both of them, I guess, that was something that in the past we've talked about as a key enabler of enhanced profitability. How do we think about factoring that into the cash flow improvement that we're seeing this year? And then also the financial implications and cash flow implications of spirit integration in the second half.

Yeah, sure. Let me take a stab at that one. So, as you know, we've got two shadow factories. The 737 has largely been in Moses Lake. The 787 has been the joint verification work in Everett. There is a lot of labor to rework these airplanes. For the 787, we expect that work to be done in the early part of this year. We won't deliver all the airplanes this year, because we need to fit some customer fleet planning, so that'll bleed over into next year. However, the factory itself and the labor associated with that will wind down early this year, and labor has already begun shifting to first-run production. On the 737, likewise, in Moses Lake, we’ve started to transition labor to Renton. We expect to shut that shadow factory down by mid-year. The corresponding deliveries will tail off towards the end of this year. This has been a long journey, and we look forward to it. It's already factored into the numbers I discussed in terms of how cash flows are moving this year. Overall, the long-term benefit will be margin improvement at BCA, because we won't have these two very expensive shadow factories operational anymore. That will be something that will be realized as we look forward to 2026 and beyond. Regarding Spirit integration, as Kelly said, we're eager to close that deal. We aren't specifying the financial impact until it's finalized. The good news is that we're on pace, and it remains strategically important, with the team holding up well as we ramp up production.

Thank you very much.

Hey, good morning, everyone.

Morning, Noah.

Hi, Noah.

What is it about the T-7A specifically that keeps having so much cost creep? I guess, Kelly, as you look at this portfolio, everything in defense is complex, and I appreciate the amount of work that goes into these, but I think there's been some investor confusion around the dollar size relative to the perceived complexity of these programs. So, what is causing the cost creep and how do you fix it? You mentioned the updated acquisition approach on that program specifically. Can you detail that a little bit further?

Yeah, so the fundamental on T-7 is a fixed-price development combined with a large fixed-price production. We did not have our supply chains back-to-back in the fixed-price production. It's much larger than what you typically see, because very rarely do you encounter a fixed-price development combined with multi-year fixed-price production. We’ve been burned on that on the tanker program, and it’s clearly been a challenge for us on T-7A. Therefore, we've taken our medicine, and we're not going to handle it that way again. Now, specific to the MOA, what we're doing is implementing changes. The Air Force is requesting some additional test aircraft, which will help us eliminate concurrency. By concurrency, I mean that we’ve been building production airplanes while we’re also testing and certifying the design. That’s a disaster, because anytime you make a change based on testing, it has to ripple back through the production process, either in-process or for complete airplanes. So, the major milestone with the MOA-1 that we have with the Air Force is designed to help us get more aircraft into the testing program and eliminate concurrency risk moving forward. It’s not entirely good news from an EAC write-up, but it will certainly mitigate risks we’ve been facing on the program. As for MOA-2, which we are currently discussing, it also involves some adjustments regarding equipment purchased by us versus equipment purchased directly by the Air Force, which will assist them in their logistic support plans but also help mitigate our escalation risk associated with those commodity sets. This is the type of coordination that we need to enhance our efforts with the customer, but the fundamental goal is to avoid fixed-price development without a corresponding back-to-back supply chain.

I appreciate learning that lesson and not doing it again, but if you have to live with the decisions that were made on the existing programs until the end of those programs, how do you have confidence in the cash flow improvement in the segment that you mentioned here?

Well, we do an estimate at completion and look at the estimate to complete. So much of the charges we're taking are not current overruns but are anticipated charges for increased costs from our supply chain. We are working to get the supply chain back-to-back in fixed-price contracts right now. Our goal is to have that completely accomplished. As we do this, we are recognizing the cost increases from the supply chain, which is why I'm confident. We're getting closer to having everything back-to-back. This should alleviate that large risk going forward, but obviously, it results in significant charges now as we work through that.

And our objective has always been to get the 15% of the portfolio that’s wrapped up in these fixed-price development programs, including T-7, to not be a drag, to just be neutral, to leave a zero profit and not consume cash. The rest of the portfolio, and if we manage the 25% fighter and satellite programs effectively, then legacy products should perform as they should. The remaining 60% of the portfolio that is performing well should allow us to achieve high single-digit margins within BDS, exactly as they should, even if the 50% of the portfolio doesn’t contribute significantly, and that’s acceptable because, long term, outside of the planning period currently in front of us, there are development programs like the Tanker, MQ, and T-7 that offer longer-term market demand, particularly internationally, that could provide better outcomes. That’s not something we are depending on, but those are some of the reasons why we remain engaged in these programs, aiming to deliver valuable capabilities to the customers who urgently need them.

I appreciate all that detail. Thank you.

Yep.

Good morning. Thank you. You know, it sounds like you are in a very good position right now to get to the 38 a month level, given that you're already in the 20s on the MAX. But historically, upward rate breaks have been pretty challenging. When you look beyond the 38 a month to 42 and subsequent rate breaks, how are you thinking about what you need to get done to ensure that you have the right team in place to make those rate breaks happen, given that a lot of people have left over the past five years or so?

You know, as I look at that, I'm less concerned about our workforce to achieve that. I think we're in good shape. Once we get to these higher rate breaks, the most important thing is that we have supply chain readiness and maturity. One of the things we're doing right now, because we've forecasted rates that the supply chain has built to, and we have not met those rates, is to ensure supply chain members aren't making independent decisions on readiness for these future production rates. We're closely coordinating this with suppliers at various management levels, including the CEO level, to ensure they are investing in their supply chain capabilities. If they aren’t, we talk through solutions to ensure we won’t be at a point where we're ready to elevate our rates and our supply chain stability isn't there. These KPIs I discussed earlier will remain critical for each rate increase. So, we won’t make a rate increase if we don’t see the production system demonstrating stability through these metrics. We need to keep working that angle. But I’m not too worried about the staffing levels for production resources. It’s largely about ensuring supply chain capability for growth.

And Doug, the other good news is that the facilitation is in place. We're cycling at three lines in Renton, as Kelly mentioned, and we’ve got that fourth line in Everett, which will provide a lot of flexibility for us as we consider those rate breaks. It’s not just labor, parts, supply chain, etc.; the infrastructure is also ready, and we feel confident since the demand is beneficial.

Very good. Thank you.

Hey, good morning. Brian, one for you and then just a quick one for Kelly as well. Brian, for you, BCA margins, you took some charges this quarter on the programs that were in forward loss positions. I suspect, though, that we'll see impacts on the margins for some of your more profitable programs as well, given all those costs. I’m just curious, what does the margin cadence look like for BCA over the next six to eight quarters as you're ramping in production? When do we get the chance to flip to the positive range on margins? And then what are the long-term implications of these cost increases coming out of the labor strike on the financial model and what BCA margins are projected to look like once you're at those targeted production rates?

Yeah, let me address that briefly. The portfolio review reaffirmed our confidence in the long-term demand for air travel.

As we consider 2025, BCA margins will be negative but will gradually improve. They will be less negative over time as we move forward. Once we exit the year, we're expecting BCA subsidiaries to stabilize and improve in 2026. For the longer-term profile, keep in mind that the IAM agreement did exert some pressure, but that cost accounts for less than 5% of the airplane. Now, it’s a bit of a strain, but I’ll point out the massive productivity benefit we will gain from removing these two shadow factories and the accompanying rate ramp should naturally increase productivity. So, while it will require some adjustments, it doesn’t negatively impact our long-term margin expectations from the BCA.

Okay, thanks.

Thanks, guys. Good morning.

Morning.

I just wanted to follow up on that BCA margin question a little bit with regard to the price side of that, the price-cost mix. How much does the MAX 10 starting to contribute help drive the margin up? How significantly do you expect escalators or realized price increases over the coming years to affect margins? And then a quick clarification on inventory: just how much cash is tied up in both completed aircraft and WIP? Thank you.

In terms of the BCA profile, we naturally have a backlog that includes embedded escalation, which remains unchanged and beneficial to us. Furthermore, our supply contracts are largely signed until the end of this decade, so that doesn't disrupt either the near- or medium-term outlook. As we look forward, I will say we expect any inflation pressures to be counteracted by ongoing productivity improvements. We believe we can effectively manage that mix. More insights will come as we get through this year and return to a more stable state. Critically, nothing indicates any significant disruption to our long-term margin outlook for BCA. Some benefits, as you noted, both from the 737-10 and the 787-10 should positively impact us, along with the consolidation at Charleston that we've discussed previously, which we continue to feel good about as we work towards reaching normal production rates. As for inventory, we currently have $87.5 billion tied up in inventory across the company. This level is too high, though it's been an investment in stability, and we are firmly committed to leveraging this investment to ensure our factories operate at optimal capacity. There will come a time when those inventories will begin to liquidate, which we aim for, leading to increased productivity alongside better cash flow.

Well, thanks, Gavin. And Lois, we have time for one final question.

Yeah, thanks for the detail on the call. I just wanted to put a finer point on when you expect to be at 38 a month in terms of deliveries on the 737, and when realistically you could get to 42. I know you mentioned this year, but could you refine that timeline a little more specifically?

You know what? I'm not putting a time frame on it, either externally or internally. We're going to move to that rate when the KPIs indicate we should, and we’ll see how that plays out. Like I said, things look encouraging so far, and we have a lot of work to do. We’ll make those rate increases as soon as we’ve achieved approval for rate 38, and we hope to progress to the next rate of 42, hopefully by the end of this year. We’ll provide exact dates once we're more confident about our KPIs and how they're trending.

Yes. Thank you.

As part of why we're not providing guidance yet, I think we have a little more work to do to ensure the system is stable before I feel confident providing guidance that we can reasonably meet. More to come as we mature; things are off to a good start, but we have a lot of work yet to do.