Boeing Q2 2022 Earnings Call Transcript

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Provided by Quartr
July 26, 2022

There are 12 speakers on the call.

Operator

Thank you for standing by. Good day, everyone, and welcome to the Boeing Company's Second Quarter 2022 Earnings Conference Call. Today's call is being recorded. The management discussion and slide presentation, plus the analyst question and answer session are being broadcast live over the Internet. At this time, for opening remarks and introductions, I'm turning the call over to Mr.

Operator

Matt Welch, Vice President of Investor Relations for The Boeing Company. Mr. Welch, please go ahead.

Speaker 1

And I will now turn the call over to Mr. President and Chief Executive Officer and Brian West, Boeing's Executive Vice President and Chief Financial Officer. And as a reminder, you can follow today's broadcast and slide presentation through our website atboeing.com. As always, we have provided detailed financial information in our press release issued earlier today. Projections, estimates and goals we include in our discussions this morning involve risks, including those described in our SEC filings and in the forward looking statement disclaimer at the end of this web presentation.

Speaker 1

In addition, we refer you to our earnings release and presentation

Operator

And this is John with AT and T. Please continue.

Speaker 2

Okay. Sorry, we were muted. It's good to be with all of you. Thanks, Matt, for the intro. I want to start my brief comments upfront with just a revisit at the Farnborough Air Show a little over a week ago.

Speaker 2

It was important for us. It was an emotional outcoming for our company and our people. We always look a little better when we are standing next to our More than magnificent, the -ten also in flight and our investment in Wisk and its product in the important EVTOL We met with our customers. We met with suppliers, partners, the usual, except it didn't feel like the usual because it had been a while. We're proud of the orders that we collected over the course of that week, over 200 orders and commitments.

Speaker 2

And importantly, it covered the whole line, the 7 37 MAX, our 87 and the 777X. And it shows the extent to which our airlines are already our airline customers are already anticipating fleet renewal projects and their willingness to bet forward on that prospect. Needless to say, they're all as busy as they can be trying to get their own fleets up and running and the supply constraints they face dealt with. Looking at the quarter, A lot of things good happened over the quarter. We are on the verge of returning to the 87 delivery process.

Speaker 2

I won't give a date. I never have. That's up to the FAA. But we've been working closely with our customers and the regulator on those final steps. We're proud of our team.

Speaker 2

We're proud for the discipline and the detailed work they applied this over this long course. And it'll be worth it. In the end, we'll have a predictable and high quality line, and our customers will be pleased with the products and a reminder to everyone that this 87 That's out there has been working harder than it's ever worked, and it's been performing incredibly well. Turning to the MAX. Again, one airplane at a time, the fleet is performing incredibly well, oftentimes exceeding the specification and Our customers had when they originally placed their orders.

Speaker 2

And we continue to work hard on predictability of the delivery chain. And we're focused mostly on the engine supply lines and then those 2nd tier constraints that those engine suppliers are facing. And I think we've made an awful lot of progress on that front. Brian will give you sort of our best guess at how this year turns out with respect to those deliveries. But it is it's now, I think, based on a far better knowledge of what those And commitments from our supply side engine suppliers.

Speaker 2

In BDS, I I don't want to skip over the Starliner. It was important. It was an emotional up for all of us at Boeing to get back on track. We are wet dressed for the Space Launch System Rocket, the biggest rocket yet. We're looking forward to that launch.

Speaker 2

So we had a good sort of engineering coming out with respect to those achievements. And yes, we're still working through some of the challenging macro environment issues, especially with respect to our fixed price development contracts. And Brian will also walk you through that. And then finally, on the services side, Like pretty much everyone that's been reporting, it is coming back, and it's coming back in a rapid way. Our commercial service business was up 30%.

Speaker 2

It carries strong margins with it and so is a big and important contributor to our overall cash flow story. And again, the result of all of this work, a big step forward with respect to stability, we did get to Cash flow operating cash flow positive. So that puts us a little bit ahead of our internal plan, and we feel good about that. And we are still committed to be Cash flow positive for the calendar year 2022. It's underpinned by a very strong commercial market.

Speaker 2

I think you all know that. Everyone has spoke to it. A lot of supply constraints out there with respect to the operators of our airplanes, the airlines and what they've got to do to get the fleets running efficiently and build their capacity where it needs to be. But they are out there in the market trying to rebuild their fleets for the future and to meet that significant demand. And so far, we have not seen any drawback on that demand.

Speaker 2

While we understand the sort of recession fears that are growing out there, so far, it has not impacted the aviation industry or our customers. So mostly what we're focused on, and I don't think it will surprise anyone and I think I've heard it in most of my peers' reports, is the supply chain, stabilizing it, making sure that it's predictable and consistent. And for us, in particular, with respect to the commercial side of our business. It relates to engine production, engine availability so that we can predictably deliver airplanes to our customers. We think we've made an awful lot of progress on that front.

Speaker 2

I know you've heard directly from the engine suppliers. They are making progress, and we've adjusted all of our delivery rate expectations, at least in the near term, to satisfy those constraints. A comment quickly on regulatory and geopolitical. I'll start with geopolitical China. The good news is that because of the strong demand in the marketplace, we've been able to manage our risk going forward with Back to the airplanes that we have built and are awaiting delivery, we intend to stand by our Chinese airlines, Stand by the CAAC and get those airplanes back.

Speaker 2

But the timing, which has been pushed and deferred In light of some of the COVID management issues in China and some of that geopolitical overhang, We can suffer our way through that and will. And it should not impact the cash flow positive posture that we've taken for the year. So it's a little easier to manage for us. It's no less important. And we will continue to encourage our administration to work as closely as they can with the Chinese to reopen the trade corridor with respect to aviation, a relationship we've enjoyed for over 50 years, We'll continue to support our customers.

Speaker 2

Medium- and long term, it does represent the difference between commercial airspace leadership or not, given the size and scale of the China market. And then on the regulatory front, we are working constructively with the FAA. We have our heads down. We're working towards certification by year end on the -seven and the -ten. And we believe what we're working on is, in fact, the safe option with respect to all options in a narrow body space.

Speaker 2

And so we're going to just keep plugging away. And anyway, that's enough said. As we navigate through this environment, stability is the watchword for all of us. We want to be predictable. We think that will differentiate us, and that's why we're we've got we're focused on it.

Speaker 2

We continue to increase our investment in research programs, the readiness program with Back to the next big commercial airplane, all the digital modeling tools that are required to be ready for that, we continue to invest aggressively in. And we continue to enhance those underlying digital technologies that we will bring ultimately to the services market as well. Safety, quality, transparency, these are the values, and this is what we remain focused on. So before I turn it over to Brian, The MAX, it's on track, and it's performing for customers, in many cases, exceeding expectations. We think we're through the most difficult parts of COVID-nineteen.

Speaker 2

Starliner, a pivotal and emotional test for the Boeing Company, and we feel good about it, and we're ready for the crude flight. Global Services on its way back in a big way. We feel terrific about their progress. And now we are at the detailed moment to get ready for 787 deliveries, a moment we've been waiting for, and We look and feel as though we're on the verge of doing so. So we've taken a long view.

Speaker 2

We continue to take a long view, and we do believe we're in the middle of a turnaround, and it's beginning to show itself. So with that, I'll end my opening comments and turn it over to Brian.

Speaker 3

Thank you, Dave, and good morning, everyone. This was an important quarter. We made good progress on key programs in a pretty dynamic macro environment affected by inflation, labor availability and supply chain constraints, all of which impacted both us and the industry. Despite these challenges, we improved our quarter over quarter cash performance and importantly generated positive operating cash flow. Cash was driven by higher commercial delivery volume as well as order activity and advanced payment timing.

Speaker 3

This keeps us on track to generate positive free cash flow for the year and higher cash flows in 2023. We still think about our performance in 3 parts and remain confident about the trajectory. First, as Dave mentioned, we made progress on key milestones. We're nearing a return for the 87 and are preparing airplanes for delivery. We continue to focus on 37 production stability of 31 MAXs per month, and we derisked China from our near term delivery profile.

Speaker 3

Next, as we see continued progress on these programs, we anticipate improvement in our performance metrics, including deliveries, revenue, margin and cash flow in the back half of the year. We also expect cash flow benefits from order activity and favorable receipt timing over the next two quarters. Finally, our financial performance should start to accelerate into 2023. Going forward, there is a significant opportunity for our company to return to sustainable growth, and we look forward to sharing our plans at our Investor Day on November 1 and 2nd. Before getting into the financials, I want to make a few points on the current business environment on Slide 3.

Speaker 3

Demand for commercial airplanes is strong, especially in the freighter market. We've seen cargo traffic increase from 2019 levels, largely driven by e commerce and the efficiency of airfreight. With more than 90% share of the freighter market, our lineup is well positioned to to capture continued growth. On the passenger side, traffic has recovered significantly but is still well below where it's historically relative to global GDP. As airlines are currently in the middle of the summer high season, operational and supply constraints are becoming the pacing item for air traffic growth and the markets leading the recovery.

Speaker 3

That said, the commercial traffic recovery is accelerating and passenger traffic has reached its highest point since 2019 in both North America and Europe. Domestic traffic remained relatively stable at 77% of 2019 levels as of May. While China still lags significantly, we saw some improvements in flight operations in June as travel restrictions lifted. Excluding China, domestic traffic was over 90% of 2019 levels. International traffic is gaining momentum at 64% 2019, up from just 48% in March, especially in regional markets such as intra Europe, transatlantic and U.

Speaker 3

S.-Mexico as well as notable improvements via the Middle East and in some parts of Asia. Overall, our commercial passenger market recovery expectations are in line with what we've shared previously. We still see overall passenger returning to 2019 levels in the 2023 to 2024 time frame. Taking all of this into consideration, We recently released our 2022 commercial market outlook, which forecasts a total addressable market valued at more than $3,300,000,000,000 over the next decade and demand for nearly 20,000 airplanes. The forecast closely aligns to what we laid out last year and reflects the market's continued recovery.

Speaker 3

More specifically, we anticipate demand for more than 14,000 narrow bodies or over 120 per month on average over the next 10 years. From a 20 year perspective, we project demand for more than 41,000 new airplanes, including 9 40 dedicated freighters. We are very confident in our product lineup, which is well suited to capture this long term demand, and we feel very good about last We appreciate the trust and confidence our customers are placing in us. Our services business also continues to benefit from growing commercial fleet and strong cargo markets with several Boeing converted freighter and materials management agreements recently announced. Over the next 10 years, we see a $3,300,000,000,000 service market that aligns well with our broad customer focused portfolio of offerings.

Speaker 3

In Defense and Space, we see solid long term markets, both domestically and internationally. In the United States, there's support for increased defense spending in Congress to meet the challenges of today. Internationally, many of our fellow NATO members, partners and allies have announced plans for increased spending on national defense, and we look forward to more specifics around these priorities. Turning to the supply chain. We continue to experience real constraints.

Speaker 3

We're taking action to mitigate risk in a number of areas, including engines, raw materials and semiconductors. To stabilize production and support our supply chain, we're increasing our on-site presence as suppliers, creating teams of experts to address industry wide shortages, utilizing internal fabrication for surge capacity and managing inventory safety stock levels and growing where needed. With that backdrop, let's turn to financials on Slide 4. 2nd quarter revenue of $16,700,000,000 declined 2%, and we generated 0 point $5,000,000,000 of core operating earnings. After accounting for interest expense and taxes, we had a core loss per share of $0.37 Operating cash flow was positive $100,000,000 in line with our expectations and an improvement from the same period last year.

Speaker 3

Let's move to Commercial Airplanes on Slide 5. 2nd quarter revenue was 6 $200,000,000 up 3 percent, primarily driven by higher 37 deliveries, partially offset by lower 87 deliveries. Operating losses of $200,000,000 and resulting negative margin rate reflect abnormal costs and period expenses, including higher R and D expense as we continue to invest in the business. On the 87 program, we're very close to resuming deliveries. We're readying airplanes together with our customers and have completed flight checks on the initial airplanes.

Speaker 3

As always, we will follow the lead of the to prepare them for delivery. As stated last quarter, we're producing at very low rates and will continue to do so until deliveries resume, gradually returning to 5 airplanes per month over time. Similar to the 37 program, The supply chain remains a key watch item for 87 production deliveries. We recorded $283,000,000 of 87 abnormal costs in line with expectations and we still anticipate a total of about $2,000,000,000 with most being incurred by the end of 2023. These costs are driven by rework and production rates below 5 per month.

Speaker 3

It is important to keep in mind that cash margins on the 87 remain positive and are expected to improve significantly over time. However, as we deliver the first few 87 airplanes, you may see some variability in cash payments as we compensate customers for delays. The 87 continues to be the most utilized wide body airplane due to its operational efficiency and flexibility. With over 400 airplanes in backlog, recent orders and commitments announced at Farnborough and additional demand as the commercial market recovers, we see a strong future for the A-seven program. Moving on to the 37 program.

Speaker 3

We've delivered 189 airplanes year to date, below our original expectations due to three things: supply chain disruptions, flow time of taking airplanes out of storage and timing of deliveries to Chinese customers. We don't anticipate making up of those deliveries in the back half of the year and will continue to experience monthly variability, including a late month in July. We now expect deliveries to be closer to the low 400s for 2022, short of what we discussed earlier this year as we drive stability and predictability. We ended the quarter with 290 MAX airplanes in inventory, of which roughly half are designated for customers in China. Given this uncertainty with our customers in China, we now More deliveries of airplanes from inventory to ship into 2024.

Speaker 3

Due to overall progress on MAX production, we did not book abnormal costs in the quarter. Additionally, we've reached agreement on over 95 our status is largely unchanged from what we shared last quarter. We still anticipate delivery of the first 7 seventy seven-nine airplane in 2025 and continue to coordinate with the FAA to prioritize resources across our development programs. We booked $102,000,000 of 777 abnormal costs in the 2nd quarter, in line with our expectations, and we still expect record $1,500,000,000 of these costs through 2023, while 7 seventy seven-nine production remains paused. Turning to overall demand at BCA.

Speaker 3

During the quarter, we booked 184 commercial airplane orders, including 169 orders for the 7 37 MAX. At the end of the second quarter, we had over 4,200 airplanes backlog valued at $297,000,000,000 Let's now move on to Defense, Space and Security on Slide 6. 2nd quarter revenue was $6,200,000,000 down 10% driven by lower volume and operational performance. Operating margin was 1.1% driven by approximately $400,000,000 of charges on fixed price development programs, most notably $147,000,000 on and $93,000,000 on commercial crew. This total also includes relatively small cost growth on the T-7A tanker and DC-25B with no one program impacted by more than about $50,000,000 and the drivers were largely supply chain impact and inflation.

Speaker 3

All of this will be outlined in the Q. We also saw these same pressures across a few of the mature programs. While this performance was disappointing, we're making progress narrowing our development risk profile and remain confident over the long term. We received $2,000,000,000 in orders during the quarter and BDS backlog was $55,000,000,000 Additionally, The Chinook helicopter has been selected to bring heavy lift capability to the German military. We also achieved important milestones across the portfolio.

Speaker 3

NASA's Space Launch System completed the wet dress rehearsal and the KC-forty 6A tanker is now certified to refuel 97% of the military's air refuelable fleet. Let's now turn to Global Services results on Slide 7. The Global Services team celebrated its 5th anniversary this month and continues to perform well, especially in our Parts and Commercial Training businesses. We're encouraged by the overall momentum. 2nd quarter revenue was $4,300,000,000 up 6% and operating margin was 16.9%.

Speaker 3

Results were driven by higher commercial services volume now nearly back to pre pandemic levels and favorable mix. We also discontinued an engine distribution agreement in the quarter, which will impact our government service revenue profile going forward. We received $4,000,000,000 in orders during the quarter, including a contract for Air Lift Flight Dispatch Services for the U. S. Air Force and a contract for avionics upgrades and cybersecurity support for the U.

Speaker 3

S. Navy. The BGS backlog is $19,000,000,000 With strong support for our defense business and our highly valued commercial capabilities, our services business is poised for growth as the commercial market continues to recover. Now let's turn to Slide 8 to cover cash and debt. We ended the Q2 with strong liquidity comprised of $11,400,000,000 of cash and marketable securities on the balance sheet and access to $14,700,000,000 across our bank credit facilities, which remain undrawn.

Speaker 3

Our debt balance decreased slightly from the end of last quarter to $57,200,000,000 driven by repayment of maturing debt. Our investment grade credit rating is a priority and we remain committed to reducing debt levels through strong cash flow generation over time. As far as the rest of the year is concerned, we still anticipate 2022 total company revenue to be higher than last year, primarily driven by higher commercial airplane deliveries on the 37 and 87 programs and growth in our services business, partially offset by lower defense revenue. Looking into 2023, we expect total company revenue growth from this year. BCA revenues plan to be higher again on 37 and A7 deliveries.

Speaker 3

The demand outlook for the defense business remains steady, and we expect 2023 revenue to be better than 2022 as the business stabilizes. While we forecast BGS revenue to continue to grow next Turning to cash. We still expect to generate positive free cash flow this year, and the key drivers of second half improvement, our higher 3.7 and 8.7 delivery volume, orders and advance payments, BDS receipts as well as favorable expenditure timing. As we look to 2023, we still expect cash flow will be higher than 2022, and we plan to share more details in November. Overall, our performance is tied to several key items: supply chain, production system and delivery stability 37 and 87 delivery ramp, successful execution and certification of development programs, the commercial market recovery and the macroeconomic environment.

Speaker 3

While our progress depends on some factors beyond our control, we'll remain focused on our own performance and taking the right actions to drive stability and predictability and growth in the future. Taking a step back, this business and our team have come a long way over the last few years. We've seen our fair share challenges and more hurdles still remain, but we're making progress. Demand for our product is strong, we're investing in our future and our people are demonstrating exceptional commitment. With that, over to Dave for closing comments.

Speaker 2

Yes. I'll keep them brief. We do believe we're in the middle of a momentum shift. We're all anxious and looking forward to delivery of our important airplane, the 787. Again, a reminder of how well it is performing in the field and therefore, its delivery stream is critically important to our customers.

Speaker 2

So I'll leave it with that and turn it over to Q and A. Yes.

Speaker 1

Thanks, Dave. Before we start the Q and A, as I noted at the beginning of this call, we have provided and detailed financial information in our press release issued earlier today. Projections, estimates and goals we include in our Please also refer to those materials for reconciliation of certain non GAAP measures. With that, as Dave said, we are now prepared to take your questions.

Operator

Our first question comes from Doug Harned with Bernstein. Please go ahead.

Speaker 4

Thank you. Good morning.

Speaker 3

Good morning, Doug. Good morning,

Speaker 4

Paul. When you look to this year and are looking at positive free cash flow for the year, it Appears to really depend heavily on 2 things, the delivery restart of the 787 and the Deliveries for the ramp in deliveries for the MAX, which you're not saying you're going to get to the low 400s on this. If you look at those two parts, I mean the 787, could you describe on that one what gives you confidence now that you are so close? We've heard things before, Optimism about a near restart, but this appears to be much more imminent now, I would guess, even though I know you're not going And predict the FAA's timing. So that's on the 787.

Speaker 4

And then when you go over to the MAX, you've taken that number down into the low 400s. Can you talk about what you need out of that MAX profile to be on this positive cash flow Timeframe timing. And then, what's the split between stored and new production? So a lot of things there, but all in that positive free cash flow objective.

Speaker 2

Yes, Doug. So why don't I start with 8, Kevin, predictability. So like we said and like you acknowledge, we can't give you a date. But what we do track is all the work. Any issues that the wealth teams have wrestled with over this time.

Speaker 2

And we are approaching closure on all of that, The number of documents, the number of analyses, the number of sign offs has progressed at a fairly rapid rate here toward the close. So we see that documentation phase, which has been a lion's share of the phase, as closing relatively soon. And then therefore, the readiness of airplanes, which we have been working on at exactly the same moments simultaneously, has also been in shape to the point where customers are climbing around the airplanes and making certain that they are also ready for delivery and acceptance. So All that's coming together. And yes, the FAA remains in control, but there's just enough workload on sort of both fronts, readiness of the airplane and the documentation and certification requirement that we just feel like we're on the verge and are reasonably confident in that front.

Speaker 2

So That's why I feel different this time. And I will acknowledge, Doug, that we have felt like it was near term in previous periods, But not with the same level of due diligence that I feel now. On the MAX Delivery front, let me turn it over to Brian. He's got all the numbers.

Speaker 3

Yes. So thanks, Doug. So the low 400s, We think the balance of the year will satisfy the cash flow requirements to do their fair share of that total picture. So We think that's pretty well aligned in terms of what's come out of inventory versus the production line. Our biggest objective on both fronts is to do both in a stable manner.

Speaker 3

And as you can see from our numbers, we've been doing about 10 ish out of storage this last quarter. We continue to get a little bit better on that front. So that's something that we're going to work hard on as we turn the corner of the second half of the year, so both are very important in doing both in a stable predictable banner gets to that low 400s for the year. I will also indicate there's 3 really other important levers of the cash flows in the back half as a bridge from the first half. You mentioned the big 2, the 37 and the 87 deliveries, but there's also going to be favorability timing from BDS receipts that will work to our favor.

Speaker 3

There will be favorability of expense timing that will accrue to us and there will be higher order activity in advanced payments, particularly driven by the 777 adjustments that we made last quarter. Remember, we added metal wing capacity and the launch of the 777X freighter version, And all of those benefits are going to manifest themselves in helping the cash trajectory in the second half versus the first half. So Those are the big pieces that we think about.

Operator

Next, we'll go to Rob Spingarn with Melius Research.

Speaker 5

Dave, you opened with the supply chain and the troubles there. And I have a specific supply chain question and something more general on rates. Given your engine background from GE, how do we solve this casting shortfall that's now plagued the industry twice In recent years, both now and I want to say around 2018, is this a short term cyclical issue or is there a greater Structural problems. So that's the first question. The second question, Brian touched on 23 and the significance of the MAX and the 87 ramp, I wanted to see if you could boundary the MAX production rate on the low and high end, perhaps with the trajectory, perhaps with and without China.

Speaker 2

So let me discuss the engine related. It is a very important issue to be resolved, and it is not yet resolved. That structural casting part of the puzzle, you may recall 2 or 3 meetings ago at this, I acknowledge that would eventually be the issue, and of course, it is. So that capacity is limited. It's not just about money, it's It's one of the toughest components inside the supply chain to ultimately get to a qualified status as well as just the sheer physical capacity to do it.

Speaker 2

So I do think we all have to moderate our rates to make sure that we are ahead of that. And I do think the work that we've done unfortunately, our choice not to move up to 38% here As soon as we had originally predicted, it's honestly based on that constraint. But I do believe we're at a state now where at 31, We're comfortable the industry can get there and maybe have already gotten there. And then we're going to watch as they qualify more capacity going forward to make before we pull those rates up. So is it medium and long term?

Speaker 2

Somehow, some way, that constraint, in my view, in the next 3 to 5 years has to get solved itself. Some investment has to get made and capacity has to expand for the engine suppliers to keep up with what I believe will be continued robust demand. So it may not be a satisfactory answer, but I that is the reality of the world I've lived in for the last 20 years. So and then with respect to the other parts of the question, I'll flip it over to Brian again.

Speaker 3

Yes. For production rate, I wouldn't worry about China. As Dave is we've continually talked about, We enjoy a pretty robust demand market. And the China delivery and when that happens It's separate from our ability to move rate given the other demand in the marketplace. So I think I separate those 2.

Speaker 3

It's not a pacing item.

Speaker 5

What does the trajectory look like? For MAX production, so Dave just talked about 38. Do we know when that's going to happen?

Speaker 2

No, I'll answer that. The answer is I don't know when that will happen. Stability at 31 and then Confidence that engine suppliers will have their castings in order and can predict steady delivery at 38. That will then initiate us to say now it's 38. I don't want to get ahead of ourselves.

Speaker 2

Stability for me is still job 1, and that's what we'll stay focused on. I think it will be better next year, yes, but I don't know exactly when and I don't want to get ahead of myself.

Operator

Next, we'll go to Sheila Kahyaoglu with Jefferies. Please go ahead.

Speaker 6

Hey, good morning, Dave and Brian. Maybe if we could talk about commercial profitability. If we strip out the abnormal costs on the 87 as well as the 777, You're at 2.3% operating margins in the quarter with an average of 33 MAXs produced or delivered. So how do we think about how margins come back as maybe the 787 comes in, the supply chain pressures alleviate. How should we look on for the step up of commercial operating margins.

Speaker 2

Yes. So in the short term, it will

Speaker 3

be a little bumpy as we start to roll out The 87s and continue to get confidence on our stability in the 37s. But over time, when we get to a point where both are Stable and operating where we expect them to, the margin rates are going to go up. I can't predict the number. I won't predict the number, But they are going to get better and better because we are going to be more predictably in a stable fashion to be able to deliver on both fronts. Anyway.

Speaker 6

Okay. All right. Thank you very much.

Operator

And next, we'll go to Noah Poponak with Goldman Sachs. Please go ahead.

Speaker 7

Hi, good morning everyone.

Speaker 3

Hi Noah. Good morning Noah.

Speaker 7

I'm just going to circle back to this MAX delivery discussion because it's a bit confusing. If I discussion because it's a bit confusing. If I depending on how you define low 400, if I Subtract the first half from that and divide by 6, it suggests the delivery pace would slow compared to what you did in June. And that's with a higher production rate. So the invent suggests the inventory unwind is slowing.

Speaker 7

So why would that happen? And then just on this underlying rate, I mean, any supplier we talk to says they're Kind of ready to go and just waiting for direction from you that they're not getting. The leasing companies are saying there's a narrow body shortage. You have Is your answer to Rob's question that it's just purely forgings and castings and otherwise you'd be higher? It's a little hard to square the circle on all of those inputs.

Speaker 2

Before Brian gets in the It's never about any supplier. It's about 1 or 2 that surprise you one way or the other. And With respect to medium or longer term rate increases or changes, yes, it does actually get down to that engine supplier, and it does get down to those So we have to be confident that they are ready and that we can count on those deliveries. So Anyway, that is the world we live in now.

Speaker 3

June, we're proud of the 43 that we're able to deliver. I want to caution everyone, as you remember, April was 28, May was 29. I just indicated that July is going to be a little light. So I don't want us to get ahead of ourselves in terms of taking the June rate and extrapolating it. That would be a mistake.

Speaker 3

Month in and month out, We're aiming at stability around 31. Some months might be a little lower, some months might be a little higher. When we look at the whole balance to go And the things we're watching, we feel comfortable in that low 400 number. Hopefully, it will be better, but that's right now what we're squaring to.

Speaker 7

How much lead time do you feel like you need to give the broader supply chain to break to that next higher rate whenever that is?

Speaker 2

Well, first of all, we're doing our very best to be transparent, and we are Always informing them that when we get close, how much lead time? I don't know, 3 or 4 months. If it's a formal designation, but I think they're all like you said, I think a lot are prepared to get to those higher rates. But we need a few specific ones to be ready to get to those higher rates. And I sorry to keep coming back to that, That's really where it is.

Speaker 2

I think we have our eye squarely focused on the constraint that matters the most. And as that plays out, You'll probably know as fast as I do and then we'll let that go to the rest of the market. I think the rest of the market will respond quickly.

Speaker 7

Okay, helpful. Thank you. I appreciate it.

Speaker 3

Yes. Thanks, Noah.

Operator

And next we'll go to David Strauss with Barclays. Please go ahead.

Speaker 8

Thanks. Good morning, everyone.

Speaker 3

Good morning, David.

Speaker 8

Dave, Brian, wanted to see if you Could you tell us how many roughly sorry, 787 deliveries you're assuming for the rest of the year because it's pretty hard to kind of bridge the deposit free cash flow for the year without assuming a fair amount of 7 deliveries in the last 5 months. That's my first question. And then the second question, you've talked about a meaningful improvement in free cash flow in 'twenty three. I just want to see if you could put some bounds around that. Are we talking a couple $1,000,000,000 or are we talking the consensus right now is showing a $7,000,000,000 improvement in free cash flow next year.

Speaker 8

I want to see if that's within the realm of reason. Thanks.

Speaker 3

Yes, sure. So your last question, can't wait for November to be able to give you more detail around that And we'll wait until November. And then on your question on the 87 number, we're not going to give a number on that front. We want to get to 1. And we're really excited to get to 1 as fast as we can.

Speaker 3

And once that plays out, we'll get more visibility. But it's a little too early to quantify that. Clearly, we've got an expectation that we're going to liquidate some 87s over the course of the second half, but I'm just a little cautious to stick a number out there.

Speaker 8

All right. Quick follow-up. Dave, the IG audit that's going on with the FAA and The change in leadership there, you don't think that potentially holds up the 87 at all?

Speaker 2

I do not. I do not. And I've also asked that question many times. So I think we're in a good place. Again, I'm going to follow-up just quickly with Brian's comment.

Speaker 2

We're not playing a game. We are working as hard as we can to get stability in a tough environment. We chose that November meeting as a moment to sort of say, okay, where are we on stability? What is the framework for cash flow over the course of the next year? We're looking forward to that day and that meeting.

Speaker 2

And I think at that moment in time, a lot of these Variables will have resolved themselves, and we can give you a much clearer view of what the future looks like.

Speaker 8

Thanks very much.

Operator

Yes. And next question is from Seth Seifman with JPMorgan. Please go ahead.

Speaker 9

Thanks very much and good morning. I guess, Brian, when we look at the advance balance of $52,000,000,000 I think it's higher than it was at

Speaker 1

the end

Speaker 9

of 2018 when rates were significantly higher. And it Sounds like you're telling us that that balance is going to be even higher still, but perhaps significantly, by December 31. Does that ever come down at some point? How do we kind of think about where that goes from here? And Dave, when you say having some visibility on some of these big questions at the November meeting, Does that include potentially MAX deliveries into China?

Speaker 3

So that Balance did come down this quarter, and we do expect it to come down. It will be the excess PDP burn down that will come down. But it gets offset by the benefit of incoming PDPs and order receipts, and we love that, Right. There's still a lever of our business that accrues to us. And the more we do that, the more we've got airplanes going to and commitments and orders to our customers.

Speaker 3

So but overall, the trajectory will have to fall quarter in quarter out. It's hard to peg Because of that accretive offset.

Speaker 9

But if you had in your model at some point like a requirement that this had to that there had to be some kind of $10 plus 1,000,000,000 reduction in this balance at some point over time. Is that just an incorrect understanding of how this all works?

Speaker 3

Well, I'm not going to comment on $10,000,000,000 I do know that there has to be the burn down of the excess And that will happen over time. And we do our best to try to isolate that in terms of our projections. On the other hand, the benefits of order volume is something that we benefit from as well. So it has been flattish over the last several quarters. It's been taking small chunks down, and we expect it to continue to come down.

Speaker 3

But I can't call it order of magnitude of a $10,000,000,000 drop The way you're suggesting. There's just too many dynamics in there, and I'm reluctant to make those kind of statements.

Speaker 2

And then with respect to China in November, I will give you the update. You will probably be as up to speed every week between now and then as I am because it does require a bit of a thawing and geopolitical break between China and the U. S. So at any rate, in the meantime, we do deliver airplanes occasionally to China based on pure need, And those are mostly wide bodies and mostly cargo.

Operator

Next, we'll go to Cai von Rumohr with Cowen. Please go ahead.

Speaker 10

Yes. Thank you so much. So It looks like you produced on average 20 fourseven-37s in the second quarter. How comfortable are you that you can kind of sustain an average of 31 per month because I know that you pause when you have to even though the indicated line rate is 31. And secondly, if you can, should we estimate your production plus taking 10 or 12 out of inventory to kind of get to what we assume for rate in the second half?

Speaker 3

So I'll take the second part of that. I think that Reliably month in month out, we'll aim at 31. Anywhere from 8, 10, 12 is the range on liquidity from inventory. It could be in that kind of mix, and that gets you to the Low 400s for the total year is the way I would think about it. I don't think the pieces go much below 8 on the coming from inventory, and I Probably don't think we'd do better than 12 in any given month, but we will modulate between that and the production rates as we go into the back half of the year.

Speaker 2

And again, the average of 31 with respect to production is a clear objective of ours. Anything short of that will be disappointing. Our real objective though is to make that a stable rate each of the months, and we're not there yet. So Be careful to extrapolate any 1 month.

Speaker 10

And you've made the point that demand is so strong. What will you have to see to make the decision to raise the rate from $31 per month.

Speaker 2

I'm going to get back to earlier questions. If I thought I had an engine supply, I'd do it today. Yesterday.

Operator

And next we go to the line of Christine LeWag with Morgan Stanley. Please go ahead.

Speaker 6

Thanks. Good morning, guys.

Speaker 2

Good morning. Good morning.

Speaker 6

Dave, on the supply chain, how much will your mitigating actions Cost in terms of higher labor costs or investments for internal fabrication or maybe even working capital for buffer stock. And also as a follow-up on the NGEN discussion earlier, what can you do to encourage investment casting suppliers to invest?

Speaker 2

Well, that's well, I've been trying to encourage them for a very, very long time. Honestly, I think it's going to be, as is always the case, They're going to increase their margins. My guess is it will be considerable. I don't know all their contract timings and all their relationships with our Engine suppliers, but you know how hard they're going to be working. And when those margins get to a point where everyone believes it's worth reinvesting a significant amount of money, that's what they'll do.

Speaker 2

And I suspect that day will come, and I will encourage the industry in that way. And they're going to have to believe in our demand forecast, which So far, I think we've been highly credible with respect to the long term demand forecast for airplanes. So on the on all those readiness Questions and investments. We are you're right to ask the question because we've said to everybody, if you're in pursuit of predictability, then you have to invest in all those buffer stocks and you have to stay ahead of this curve in every way that we possibly can. And I'd say it's marginally more investment intensive, but not enough to honestly make that big a difference for us going forward, especially when you compare it to our investment in finished goods inventory, which right now is a bit of an all time high.

Speaker 2

And I will also we haven't talked about it. I just mentioned to everybody that While none of us like how we got here, if you are faced with a bunch of supply constraints as a market over the next couple of years, Having over 400 airplanes that are finished at your fingertips, and yes, they're hard to get out and get ready and back into the marketplace, is a pretty good buffer in and of itself and allows us to exercise a little extra discipline on the stability front as we begin to march up that curve over the next 18 months. So anyway, I don't want that to get lost as a buffer overall.

Speaker 6

Thanks, Dave.

Operator

Yes. And next we go to the line of Rich Safran with Seaport Research Partners. Please go ahead.

Speaker 2

Dave, Brian, Matt, good morning. Good morning. I'd like to shift the topic to defense for just a minute. Your comments about stable global demand. Could you also comment on international demand in general for defense equipment?

Speaker 2

And maybe in your answer also comment about additional demand for your tanker programs, the 46 and MQ25. And the reason why I'm asking this is, I believe both these programs had quite aspirations for international sales. So I thought maybe You'd comment on that as well. Yes. No, I appreciate the question.

Speaker 2

And we've been bullish Sean, on international opportunities, I am more bullish now than I was when I even began, and I was Again, I was optimistic there. And it is because of the world we see in front of us. It does take a couple of years to take The threats that are out there that manifest themselves into real orders and sort of long commitments. And I but I suspect that's the way this world will turn here in the next couple of years. We had some early shore indications from those Closest to the conflict, our Chinook victory here came faster than maybe we would imagine.

Speaker 2

Why? Because our customer is Right next to the front. So I am optimistic on the program specifically that you called out. They might be on the leading edge of that demand curve. But it's not going to happen in the next 6 months, and it's not going to it'll take us probably a year to get to where That demand begins to manifest into real orders.

Operator

And we'll go to George Shapiro with Shapiro Research. Please go ahead.

Speaker 11

Thanks for the time. Dave, I'm trying to figure out where all this strong demand is coming from because the way I look at it, air show orders were the weakest since 2,009 for Both you and Airbus, you were better obviously, but still weaker since 2016. If domestic traffic returns to 2019 in 2023, then the same number of planes should be needed. Yet unless retirements really pick up to a level never before We've seen at 5% of the fleet versus the current 1.3, there's going to be 2,000 more planes than needed out there. So if you can kind of just reconcile where all the demand is coming from.

Speaker 2

Well, there are awful lot of irons in the fire. And like you, I try to compare and contrast how many irons in the fire now versus where they were, certainly in the COVID period, But even in that prior 'nineteen world, there's just a lot of irons in the fire, and there's already a concern about Supply constraints. So you know what that mix ends up doing. And then I will just add to that puzzle. You know the sustainability constraints.

Speaker 2

And while you may be skeptical and maybe I am, too, about renewal or Taking airplanes out of service, I think that day is on us, and I think that's going to be real in the years ahead. You'd be surprised How many of the orders, particularly in the mature markets like Europe, etcetera, where that is the discussion more than any other, which is we I will point, if you don't mind, to a Tool we introduced at the show called Cascade, which is a measure of emissions for every airplane every day for everybody. And it's meant to be an open tool for the industry to use, think about policy changes and all those things that are going to incent the renewal of fleets and the improvement on this front. That tool is a tool that we'll show you in our November meeting, And it's one I hope you'll use because I do think that changes the that rate of retirement in a pretty big way.

Speaker 11

Yes, because I mean you really got to get a level we've never seen before to get these 2,000 planes out. And I mean if I even just look at Delta and your recent order with Delta, they're not taking the MAX 10 till 2025. Right now, they've got 65. It happens that they're over 25 years old.

Speaker 2

Yes. No, exactly. But those 25 year olds, I believe the pressure on this will not subside. It will grow and policies will get written. I think Our trick here, honestly speaking for the industry for a moment, and as you get familiar with the tool that I'm referring to and think about this, Our trick is to make sure that policy with respect to the environmental and sustainability performance of the aviation fleet does not get so far ahead of the industry that it stopped the music.

Speaker 2

We've seen that happen in the energy world a little bit. I don't want to see that happen in the aviation world. So That's why this tool is important to us. Incent the retirement of some of the old, less efficient airplanes. And yes, that's good for us and good for the industry, but also educate the policymakers so they don't get so far ahead That it begins to constrain the industry's growth.

Speaker 11

And how do you think increasing recession concerns affect this? You would think there'd be less retirements then.

Speaker 2

Well, so far, I'm not sure I can draw the correlation all the way to retirement, but I This general recession thing so far hasn't impacted our aviation industry. Will it at some moment? Maybe. Price elasticity has been remarkable as I look at things. And demand for air travel, I think, has been prioritized fundamentally to a higher slot in the consumers' list of priorities.

Speaker 2

So Anyway, I'm not smart enough to draw a perfect line between one and the other, but I believe that the retirement world is going to changed in a pretty big way.

Speaker 11

Okay. Thanks very much for the color.

Speaker 2

Yes. Thank you.

Speaker 1

All right. Thank you everyone for joining us this morning. This completes our Q2 2022 earnings call.

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Earnings Conference Call
Boeing Q2 2022
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