The Boeing Company
Q1 2022 Earnings Call Transcript

Published: 27 Apr 2022

[Operator Thank you for standing by. Good day, everyone, and welcome to The Boeing Company's First 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. [Operator Instructions].At this time, for opening remarks and introductions, I'm turning the call over to Mr. Matt Welch, Vice President of Investor Relations for The Boeing Company. Mr. Welch, please go ahead.Matt Welch Thank you, John, and good morning, everyone. Welcome to Boeing's First Quarter 2022 Earnings Call. I am Matt Welch, and with me today are Dave Calhoun, Boeing's President and Chief Executive Officer; and Brian West, Boeing's Executive Vice President and Chief Financial Officer.As a reminder, you can follow today's broadcast and slide presentation through our website at boeing.com. As always, we have provided detailed financial information in our press release issued earlier today. Projections, estimates and goals we include in our discussion this morning involve risks, including those described in our SEC filings and in the forward-looking statement disclaimer at the end of this web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of certain non-GAAP measures.Now I will turn the call over to Dave Calhoun.Dave Calhoun Yes. Thanks, Matt. I'm going to make a few comments upfront and then turn it over to Brian for a more detailed look at our financials in the quarter. First, I need to acknowledge that on the 21st of March, Flight 5735 of our good customer, China Eastern, unfortunately crashed and took the lives of 132 passengers and crew. These things always take our breath away, and I want to extend our thoughts and prayers from the entire Boeing company, of course, to the families and friends of those passengers. Those are always rough moments.Our technical team is, in fact, supporting both the NTSB and the NTSB as it supports the CAAC, who is, of course, the lead investigator. Those are the only comments that I will make along the lines of the China Eastern accident but know that we are in the middle of that investigation.2022, 1Q, some challenges presented themselves. Unexpectedly, Russia obviously is the big issue in the news. Inflation continues to take a hard run at pretty much everything we do. And COVID, unfortunately, didn't leave as soon as we would have liked. So the -- at least the first 45 days of the quarter were impacted more than we imagined.All that said, our focus and progress remains consistent with what we shared the last quarter. We still expect to accelerate our performance and the key financial metrics, namely cash flow because that is our key financial metric. That's what we've been focused on for a couple of years, and we will remain focused on.And we remain committed to the notion that we will have positive free cash flow over the course of 2022 and meaningful improvement in 2023. Everything we are doing is leading with safety, quality and ultimately driving stability for our airline customers. And we believe we're taking the right actions for the future.We have progressed on many key milestones. We'll comment on a few of them today. But we're focused on the 37 MAX and the 787 production and the return to service of those airplanes that we have built and stored in behalf of our airline customers. We feel good about all the progress we're making on that front.The commercial market recovery, I'm not going to expand significantly on that. You've heard from almost all of the US airline customers, many of the European customers. Traffic is returning, and it's returning in a pretty big way. Airplanes are being utilized at a fairly high rate. Domestic markets are the first to have recovered, and they're recovering robustly. Regional markets, second, and even long-haul traffic now is beginning to return.The only real exception in that demand scenario is China in light of their current COVID constraints. But we're hopeful and we expect that they'll come out of that and continue to expand their fleet. So that commercial market is very, very strong. And it's particularly strong for our line of airplanes, namely the MAX, 387 and the 777. And I don't want anyone to forget the 67 because it continues to play a very important role in the freighter world.I should comment on the conflict in Ukraine. I think I mentioned the last time we were together, we had 1,000 people in both the Ukraine in Kyiv and in Moscow. And those two teams work pretty closely together. So it's been a bit of a gut-wrenching and emotional period for all of The Boeing Company and our associates.I'm very proud of the work that we are doing to support our team in Kyiv. We've provided $1.5 million in humanitarian assistance, but also matched all of our employee donations to those people who are helping. And then most importantly, we have Boeing families in Poland and throughout the region who have willingly accepted and opened their homes to our displaced teammates. That's a big deal, and it's been an uplift for all of us to watch that happen.We're following the lead of the US government and strictly adhering to export controls and all the restrictions. We suspended maintenance and support for Russian customers. And in the spirit of doing the right thing, we had suspended titanium imports. Fortunately for us, we had a program of inventory built for quite some time ever since Crimea, such that we believe we are reasonably protected on that front.Next, I should comment on the 37 MAX specifically. It's only been a little over a year since that airplane was recertified and put back into service. We now have over 1 million flight hours. It is performing incredibly well at 99%-plus service reliability. Our customers are happy with it in almost every case that I'm aware of. They talk about the airplane exceeding the performance specs that we sold it on. So we feel very good about that, and we feel very good about the skyline and our ability to deliver on that. Brian will get into rate discussions in his piece on that one. But we still continue to think about this one airplane at a time, so that we can maintain that high in-service reliability rate.We're applying the same rigor to the 787, and we took a very important step just in the last week by submitting the cert paperwork and the plan to the FAA. We're proud of that work. We touched a lot of operations across our facilities, exacting spec with respect to the 87 – precisely. And that's all embedded in the cert paperwork that we presented to our FAA.And as always, we will let the FAA take the lead with respect to cert and ticketing, and we will work closely with them. They have been involved in this process from the very beginning. So there is no new news embedded in this.777 family I'd like to make a comment with respect to the decision we made on the 777X and the extension of its introduction until 2025. I believe, we've made that decision out of a position of strength, not weakness. We've embedded every lesson that we've learned on the 37 MAX certs, and we continue to have two of those ahead of us. We've applied all the lessons from the 787 cert, which, of course we have just submitted and believe that we've got to give ourselves the time and freedom to get this right with the FAA and give everybody the time they need to give us the cert that will last, frankly, for decades and decades into the future.It also, by calling it out now, gives us an opportunity to create some capacity for our traditional metal wing 777 freighter, which right now is in incredibly high demand. So we will extend that airplane life and continue to meet that demand.And then finally, the 777-8 Freighter, which we introduced with Qatar, is a very big deal with respect to the long-term ramifications of the 777 family in the decades ahead. We're very proud of the 777 family in the post A380, 747 world. We think it stands on its own, and it will be one of the great contributors to shareowner value over the decades ahead.Boeing Global Services, I'm not going to get into a lot of detail other than to say, we're riding that wave of a recovery with respect to fleet utilization, pretty much everywhere in the world. And so that business has enjoyed that success and has been able to stay ahead of the supply chain constraints that some are feeling. So all things good on that front.And then on BDS, a messy quarter and we got hit where you might expect us to get hit in a supply constrained, still COVID-impacted and inflationary world. And then that is on a group of fixed-price development contracts that I think you're all aware of, where we had to recognize future costs on those program economics. And so we have taken a write-off on those programs, VC-25B, the T-7A and the MQ-25. Brian will talk to you a little bit more about this.VC-25B was, by far, the biggest part of that hit. You'll recall, it was a public negotiation that happened quite some time ago. We took some risks not knowing that COVID would arise and not knowing that an inflationary environment would take hold like it has. And both of those things have impacted us fairly severely. This will ultimately accrue to two airplanes where we will continue to do our work and deliver first-rate airplanes to our customer in the government. As we deliver today's numbers, know that we are increasing our investment. Safety and producibility, digital transformation, autonomy and sustainable aerospace are the keynotes with respect to where those investments are going. We feel good about where that's setting us up for the future. We're progressing on our development programs. Are we frustrated with the timing? You bet. But we're progressing. And everyone is getting their feet firmly planted on the ground, both us and our counterparty and the regulators around the world. And so I have to feel good about the progress that we're making collectively and that matters for the long term.Stability and predictability, it's coming along. It will matter in the years ahead. And above all else, our culture is built around safety, built around quality. And transparency is the word of the day with respect to how we interact with our counterparties everywhere in the world.Strong leadership team in place, I'll comment and also congratulate Leanne. Leanne has retired. She's given us over 30 years of service, never had a more diehard and more engaged leader in our company. So I want to congratulate her on that. As you know, she'll be with us until the end of the year and supporting transition activities. But also to congratulate Ted Colbert, who is a fantastic leader and proven himself in our services world and servicing. Half of his business is servicing the US military. So he is ready to go on Boeing Defense, and he'll do a fantastic job.And then Stephanie Pope in our Services business, it's a bit of an old hat. She was the CFO at our Services business when we stood it up. She did a lot of the hard work associated with that stand up, and we treasure her as an operator, all the right instincts, and look forward to her future leading the Services business. So we feel good about the talent transitions that have occurred.And then I'll call out before I turn it back to Brian, just the -- thanks to administrator Steve Dickson at the FAA. As many of you know, he has retired. He stood tall during a difficult moment for The Boeing Company and to the FAA and the recertification of the 737 MAX, amongst the other multitude of responsibilities that he's had. We respect the work that he did and ultimately, the courage that he provided in the face of what was otherwise difficult external circumstance. So congratulations to him.And then the acting administrator Billy Nolen, he can count on our full support as he now takes over. So I'm confident in the milestones that we've been meeting. And we've been focused, I think, on the right things and with respect to long-term shareowner value. That is what it's all about, and we intend to deliver on that prospect.So Brian, I'll turn it over to you.Brian West Great. Thanks, Dave, and good morning, everyone. 1Q certainly had a few challenges to navigate:]

the war in Ukraine, the updated regulatory requirements on our commercial airplane programs as well as a combination of COVID, supply chain constraints, inflation, impacting, in particular, the fixed price defense development program as Dave mentioned.Importantly, though, cash performance is on track with our expectations. The utilization in the quarter was in line with what I shared a few months ago. The trajectory throughout the rest of the year remains intact, and we continue to expect to generate positive free cash flow for the year.The business is resilient, and we're encouraged by the momentum we're seeing. We still think about this year in three parts. First, we anticipate reaching key delivery milestones. On the 87, we're on a path to restart deliveries in the near term. On the 37, we continue to work towards resuming MAX deliveries to Chinese customers. At the same time, we're resequencing our skyline to take advantage of strong customer demand for the MAX airplane and meet delivery objectives.Next, once we see progress on these programs, we anticipate improvement in our performance metrics, including deliveries, revenue, margin and cash flow. And finally, as we move through the remainder of the year, our financial performance will accelerate. And going forward, there is opportunity for our company to return to sustainable growth. This fall, we plan to host an Investor Day to share our more detailed expectations for the rest of the year and beyond.Before I get into the financials, I did want to make a few points on the current business environment on slide 3. I'll start with one of the stronger segments, freighters. The market remains quite robust with cargo traffic up 12% above 2019 levels in February largely driven by e-commerce. This continues to be one of the more reliable forms of transportation, and our lineup is perfectly positioned to take advantage of this growth for a very long time.The commercial pass-through market recovery expectations are largely unchanged from what I shared last quarter even as we saw some events that added near-term pressure, including reduced pass-through traffic in and around Russia. Global flight ops are at about 75% of 2019 levels as the global recovery is tempered by China and the impacts of the war in Ukraine.We still see overall passenger traffic returning to 2019 levels in the 2023 to 2024 time frame. Domestic traffic continued to lead at 78% of 2019 levels in February with China, the notable exception. Ex China, domestic traffic was 84% of the 2019 levels. US carriers are providing the best window into the recovery at this point. Our customers are seeing record booking volumes and very strong forward yields for late spring and summer to the point of being able to offset sharply higher fuel prices, and they're also highlighting the return of business travel.Beyond domestic routes, we're seeing encouraging signs from intra-regional traffic in both Europe and the Americas. International traffic continues to lag at 40% of the pre-pandemic levels, but we are seeing recovery in regional markets such as intra-Europe and US, Mexico, both progressing well with significant reopening now underway across many parts of Asia. Long-haul recovery will be led by the transatlantic market this summer as well as Middle East connectors.Time and again, the market has shown its resilience driven by the essential nature of moving both people and goods around the world. And in addition to Commercial Airplanes, the expanding market recovery directly benefits our Commercial Services business.In defense and space, we continue to see stable demand. The present FY 2023 budget request reflects the important role our products and services have in ensuring our national security, including significantly increased funding for the F-15EX and support for our other critical products and services that support national security. Outside of the US, we're seeing similar solid demand as governments prioritize security, defense technology and global cooperation given evolving threats. Our operations are well-positioned to maintain continuity despite the war in Ukraine, and we see limited impacts to our business. I'll cover the financial impacts a bit later.On the supply side, we are carefully managing supply chain constraints and working through issues as they arise to ensure the stability of our production system. We've experienced some disruption to our production, such as some supplier delays and resource availability, including the impacts of COVID. And we're actively working mitigation plans to ensure continuity.The markets we see -- we serve continue to be big. Our competitive position is strong. And we're actively addressing the supply chain. And all of this gives us confidence in the fundamentals of our business and the long-term outlook as we work hard to serve our customers.With that, let's turn to the financials on slide 4. First quarter revenue of $14 billion was down 8%, and the core operating loss in the quarter was negative $1.5 billion, resulting in a $2.75 core loss per share. Operating cash flow was a usage of $3.2 billion, in line with what we expected.These results were impacted by $1.3 billion of charges at BDS, which I will discuss in more detail in a minute. Due to the war in Ukraine and associated impacts to our business, we did record about $200 million in pre-tax charges in the quarter, related to certain asset impairments.And we also reduced the backlog by 86 units and roughly $5 billion. As we review business unit financials, I'll highlight some unique challenges that we're overcoming as we drive stability and position for the future.Now, let's move to Commercial Airplanes on slide 5. First quarter revenue was $4.2 billion, down slightly. It's primarily driven by the timing of wide-body deliveries, partially offset by higher 37 deliveries.Operating losses of $0.9 billion and the resulting negative margin rate reflect abnormal costs and period expenses, including charges for impacts of the war in Ukraine and higher R&D expense as we increase our investment in the business.Turning to the 87 program, as Dave mentioned, we've met a very important milestone and submitted the cert plan to the FAA. Deliveries remained paused, and we had 115 airplanes in inventory at the end of the quarter.Importantly, we've completed the rework, on the initial airplanes and are preparing them for delivery, including conducting our own check flights in advance. As always, we will work closely with the FAA on the remaining steps, and we'll follow their lead on timing of deliveries.As we stated last quarter, we're producing at very low-rates, and we'll continue to do so until deliveries resume, gradually returning to five airplanes per month overtime. Notably, we're currently rolling out conforming airplanes from the factory.We did not take additional charges on the 87 program in the quarter. We did record $312 million of abnormal costs in line with expectations. And we still anticipate a total of approximately $2 billion of abnormal with most being incurred by the end of 2023.Consistent with what we shared last quarter, cash margins on the 87 remain positive and are expected to improve significantly overtime. We see a long runway ahead for the 87 program based on a very healthy backlog of 405 airplanes and compelling operating economics for our customers. And we're well positioned to capture future demand as the wide-body market recovers.Moving on to the 37 program, we delivered 86 37 airplanes in the quarter, including 37 in March, a slight decrease from fourth quarter of last year, despite impacts of COVID, some supply chain delays and typical seasonality.Given some supply chain disruption and timing of taking airplanes out of storage, deliveries were slightly below our expectations and we ended the quarter with 320 MAX airplanes in inventory. However, we still anticipate delivering most of these airplanes by the end of 2023. The timing and pace of deliveries to Chinese customers and supply chain stability remain key factors to our delivery profile.We continue to make progress ramping our 37 [ph] production rate and are essentially at 31 airplanes per month. As we shared last quarter, 37 [ph] abnormal costs are largely behind us. The MAX customer consideration liability also continues to burn down as expected.On our development programs, we're doing everything we can to complete the certification of the MAX 7 and MAX 10 and ensure their respective first deliveries this year and next. We're working closely with the FAA on implementation of aircraft certification, safety and accountability Act Legislation and expect any necessary actions to be defined later this year. As always, we will follow the lead of regulator on the timing of certification.Moving on to the 777, 777X programs. We remain highly confident in this family of airplanes as Dave outlined. We launched the 777-8 freighter with an order from Qatar Airlines in January. And as a result, we increased the accounting quantity on the program to 400 airplanes.We continue to perform 777-9 Boeing flight test to retire technical risk with over 2,000 flight hours completed through the end of the first quarter. The airplane is performing well and our customers continue to see the value in the compelling economics and sustainability benefits this airplane offers.Based on an updated assessment of the time required to meet certification requirements, we now anticipate delivery of the first 777-9 airplane in 2025. Additionally, we're coordinating with the FAA to prioritize resources across our development programs. As we manage the company for cash flow, we're adjusting our 777-9 production rate, including a temporary pause due 2023. This move will minimize inventory, reduce the number of airplanes requiring change in corporation and avoid capitalizing costs on the balance sheet.Additionally, given the robust market for freighters, we're leveraging this production pause on the 777-9 to add 777 freighter aircraft in the 2023 to 2026 timeframe. We anticipate the 777-9 pause will result in approximately $1.5 billion of abnormal costs beginning in the second quarter of this year and continuing until production resumes. We believe this is the best allocation of resources and cash.Turning to overall demand at BCA. During the quarter, we booked 167 gross commercial airplane orders, including 134 orders for the 37 MAX. As of the end of the first quarter, we had nearly 4,200 airplanes in backlog valued at $291 billion.Let's now move to Defense, Space & Security on slide six. First quarter revenue was $5.5 billion, down 24% and operating margin was negative 17%. These results were primarily driven by lower volume and $1.3 billion in charges on fixed price development programs, including the VC-25B and the T-7A.On a normalized basis, adjusting for onetime items, revenue across our defense portfolio, including government services, was down 9%, half of which was the impact of COVID and supply chain constraints. The other half was from planned program transitions.The VC-25B program recorded a $660 million charge, primarily driven by higher supplier costs, higher cost to finalize technical requirements and schedule delays. The T-7A Red Hawk program recorded $367 million in charges primarily driven by ongoing supplier negotiations impacted by supply chain constraints, COVID and inflationary pressures. We continue to have high confidence in the long runway ahead for the T-7A program. Similar pressures impacted other fixed price development programs, though to a lesser extent.From a cash perspective, these charges will be incurred over the next several years. We received $5 billion in orders during the quarter, including an award for six MH-47G Block II Chinook rotorcraft for U.S. Army Special Operations, and the BDS backlog remains at $60 billion. Across the portfolio, we're focused on improving performance as we transition several development programs into production. And we're making progress, but have more work to do as we position ourselves to deliver for our customers.While we recognize charges on these key programs, we remain confident in demand for these future technologies and capabilities, and our Defense and Space portfolio is well positioned for growth.Now let's turn to Global Services results on Slide 7. The Global Services team had a great quarter, particularly on our parts and distribution business due to the strength of the portfolio and broad offerings. First quarter revenue was $4.3 billion, up 15%, and operating margin was 14.6%, in line with our expectations. Results were driven by higher commercial service volume and favorable mix.We received $3 billion in orders during the quarter, including a fuel saving digital solutions contracts for Etihad Airways 87 fleet and a contract for KC-135 horizontal stabilizers from the U.S. Air Force. The BGS backlog remains at $20 billion.With commercial services revenue now back to nearly 90% of pre-pandemic levels, our service business remains well positioned for growth as the commercial market recovers and the Defense business continues to see strong support.Now let's turn to Slide 8 and cover cash and debt. We ended the first quarter with strong liquidity comprised of $12.3 billion of cash and marketable securities on the balance sheet and access to $14.7 billion across our bank credit facilities, which remain undrawn.Our debt balance decreased slightly from the end of the last year to $57.7 billion driven by repayment of maturing debt. Our investment-grade credit rating is a priority. We remain committed to reducing debt levels.Now similar to what I shared last quarter, I'd like to review the key drivers of 2022 revenue and cash. In comparison to 2021, we still anticipate total company revenue to increase this year. The growth will be primarily driven by higher commercial airplane deliveries on the 37 and 87 programs and solid growth in our services business as the commercial market continues to improve.And while the overall demand outlook for the Defense business remains stable due to the revenue impacts of the charges we took in the first quarter, we're forecasting a modest decrease in revenue at BDS this year versus 2021. However, we expect 2023 to return to stable levels.On cash, we still expect to generate positive free cash flow this year. The key driver of improvement remains higher 37 and 87 delivery volume. As we described previously, the working capital benefit from delivering airplanes for inventory will be partially offset by a lower advances and progress payments balance. We still anticipate a burn down of our advance balance this year. The profile continues to be dynamic due to customer discussions and timing of deliveries.From a phasing standpoint, our first quarter cash utilization was in line with what we shared in January. We remain confident that our free cash flow will improve in the second quarter and will make meaningful -- and will meaningfully accelerate in the back half of the year as we achieve the key delivery milestones that I outlined.As we look beyond this year, we expect 2023 cash flow will be materially higher than 2022 and we look forward to sharing more details on our plan in the fall.To wrap-up, our performance is tied to several key items