The Boeing Company
Q2 2020 Earnings Call Transcript

Published: 29 Jul 2020

[Operator:]

Good day, everyone, and welcome to The Boeing Company's Second Quarter 2020 Earnings Conference Call. Today's call is being recorded. The management discussion and slide presentation, plus the analyst question-and-answer sessions are being broadcast live over the Internet. At this time for opening remarks and introductions, I'm turning the call over to Ms. Maurita Sutedja, Vice President of Investor Relations for The Boeing Company. Ms. Sutedja, please go ahead.

[Maurita Sutedja:]

Thank you and good morning. Welcome to Boeing's second quarter 2020 earnings call. I'm Maurita Sutedja and with me today are David Calhoun, Boeing's President and Chief Executive Officer; and Greg Smith, Boeing's Executive Vice President of Enterprise Operations, Chief Financial Officer and Interim leader of Communications. After management comments, we will conduct a question-and-answer session. In fairness to others on the call, we ask that you please limit yourself to one question. As always, we have provided detailed financial information in our press release issued earlier today. And as a reminder, you can follow today's broadcast and slide presentation through our website at boeing.com. Before we begin, I need to remind you that any projections, estimates and goals we include in our discussion this morning are likely to involve risks which are detailed in our news release, in our various 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.

[David Calhoun:]

Thank you, Maurita. Good morning, everyone. I hope you are all continuing to stay safe and healthy during this crazy global pandemic that we're all living through. Before getting started, I want to recognize all of the health care professionals, the public servants, the frontline workers who are dedicated to keeping us safe and healthy day-in and day-out. On behalf of all of our Boeing Associates, thank you. I also want to thank my Boeing team-mates around the globe for everything they are doing to support each other, our business, our communities and our customers during these intensely challenging times. With that, let's turn to business and Slide 2, please. The current challenges we have are of unprecedented proportions. I think we all know that. This is true for our company, true for our industry and our society at large. In times of uncertainty, it is important, we focus first on our people and that is where I'll start today. We're working hard to strengthen our culture, support our workforce and to help our communities. The racial equity and social justice movement reminds us that we must do more to confront racism head-on. I'm proud of our Boeing team's commitment to this and the progress we've made over the years. But I recognize, we recognize, we have more work to do.

[Greg Smith:]

Great. Thanks Dave, and good morning, everyone. Let's turn to Slide 5 for our second-quarter results. Our financial results continue to be significantly impacted by COVID and the 737 MAX grounding. Second-quarter revenue of $11.8 billion, reflects lower Commercial Airplane deliveries and Commercial Service volume and an additional 737 MAX customer consideration charge of $551 million in the quarter. Earnings in the quarter were also impacted by over $2 billion of charges comprised of the BCA abnormal costs, BGS charges as a result of the COVID-19 market environment and severance costs for approximately 19,000 employees leaving the company, of which around 6,000 have left as of June 30. These reductions combined with additional hiring that continues in key areas like BDS and critical skill areas will result in approximately 10% net workforce reduction this year. These charges were partially offset by income tax benefit related to the NOL carry-back provision in the CARES Act, as well as the impact of pre-tax losses. I'll cover these charges in more detail on the subsequent slides. Let's now move to Commercial Airplanes on Slide 6. Revenue was $1.6 billion, reflecting lower Commercial Airplane deliveries due to the significant impact of COVID-19 pandemic on our customers and on our operations, including the shutdown of our commercial airplane production for several weeks in April and May. Also impacting revenue in the quarter was the $551 million increase in estimated 737 MAX customer considerations. This is compared to a $5.6 billion charge we booked in the second quarter of last year to establish the customer consideration liability. BCA second-quarter operating margins declined due to the following

[David Calhoun:]

Thanks Greg. We're definitely in an unprecedented period and a tough moment for the industry and the world. Every day I'm inspired by the resilience and the hard work of our Boeing associates, our customers and our business partners. We are and we will continue taking the right actions to navigate through this together, while maintaining focus on our priorities, living our values and driving safety, quality, operational excellence in everything we do. We're focused not just on adopting and recovering but on emerging stronger and more resilient than ever before. We believe that long-term industry fundamentals remain strong and air travel will recover. Our portfolio of products and technology is well-positioned for that recovery. Much hard work remains ahead of us, but what I've seen the Boeing team do gives me great confidence that we will adapt, we will lead and we will thrive as our industry recovers. With that, Greg and I will be happy to take your questions. And I'll turn it back to Maurita. Thank you.

[Operator:]

Our first question will come from the line of Myles Walton with UBS. Your line is open. Myles Walton with UBS, your line is open. And our next question comes from the line of Hunter Keay with Wolfe Research. Your line is open. Please go ahead.

[Hunter Keay:]

Can you please give us some color on that path to positive free cash flow in 2021 kind of curious to know? Obviously, know your assumptions on rate, but beyond that, what are the primary drivers you need to achieve it? Thank you.

[Greg Smith:]

Yes, yes, absolutely. Well look, I'd say, first and foremost 737 return to service and driving the production and then the delivery ramp as we deliver those aircraft out of inventory that is the primary driver. Outside of that 777X getting closer to EIS and the financials associated with that. The 737 - 787 I'm sorry, cash profile does improve due to inventory unwind, and really that the deliveries are outpacing production. So we'll see the benefit of that. And then just continue to take actions on liquidity and rightsizing the company and productivity. But essentially, those are really the four biggest buckets to get you to 2021, but the single biggest driver being the 737 MAX profile.

[Operator:]

And next question comes from the line of Carter Copeland with Melius Research. Your line is open, please go ahead.

[Carter Copeland:]

Just a quick clarification and question. Greg, because of the rate changes did you have material program margin revisions downward on the 787 and the 737 and how comfortable are you about for loss - staying away from a for loss in the 787? And then just on the 606 revisions, and what you're seeing there? Can you give us a better sense of the backlog change and how much of that is related to the liquidity assessments you outlined and some of these planes returnable at this point?

[Greg Smith:]

Yes, yes let me start with on the margin front. Yes, we obviously we had adjustments on margins, program margins across the board, with the rate reductions and the revised delivery profile. Look, when you step back and look at 787 in particular at these lower rates and look at it on a unit basis. The margins obviously, don't increase, the way we had in prior with the higher rates. But they maintain to be pretty strong on a unit basis, and I would say that continues to be the fundamentals we've talked about, again, even with the lower rate, the improvement of mix and the step down by block. So - and then of course, the continued productivity. And as Dave mentioned, we're initiating the study on multiple sites. So more to come on that, but we'll continue to work. Obviously, all areas of productivity on the program and particularly with these lower rates. But again on a cash basis, on a unit basis, margins are actually hanging in there pretty well, even at these low rates. And that's really, I think a credit to the lot of work that's behind us that got done to get the program more efficient. And so, we're certainly seeing the benefits of that even at these low rates. On the 606 in the second quarter, so I think if you look at it, there was about 480 odd cancellations that were noted. About 300 of those were associated with 606. So there is a disciplined process that is outlined that we go through every quarter and assess the entire backlog by customer that the team goes through and makes that assessment. And we do that, like I said, every quarter and we'll continue to do that. And I suspect with time, at least in the near-term, we will have more adjustments on - related to 606. But again, that doesn't mean that they may not take the airplane over time. It just has to get through that criteria even though there's contracts in place, but again there are steps that we take and a thorough assessment and we adjust the backlog accordingly at that time, but it could change quarter-over-quarter. Some folks could move into the 606 and move out of it, but again we'll true it up every quarter.

[Operator:]

And our next question will come from the line of Myles Walton with UBS. Your line is open. Please go ahead.

[Myles Walton:]

Greg in the second half of 2020 should we expect the cash flow burn to be materially improved from the first half or is that excess inventory build, is going to be a continued headwind? And then just considering everything else you obviously solved the liquidity problem with the debt offering. But do you think about accelerating the balancing of the capital structure here to ensuring investment-grade ratings?

[Greg Smith:]

Yes, I think if you look at the second half, right now Myles, it's a little bit better. That's at least what we got in the forecast. As you can imagine it's dynamic, and will remain dynamic through the balance of the year. But as we look at it right now in our latest forecast, we see it being slightly better and - we’ll continue to be burning cash into early 2021. And like I said, as with the production rates that we laid out and the assumptions we made around those in our actions that will take, we can see a path to positive cash flow in 2021. And we'll continue to keep you up-to-date on that, but you should continue to expect to see negative cash flow through the balance of the year and into early 2021. On the liquidity front, I think, again, getting the $25 billion was critical and I think the fact that the market has got opened up and allowed us to get in there at the right time. And as you know, we were well oversubscribed, which I think just goes to the confidence that the market has in the long-term fundamentals of the marketplace. We don't see a need to raise any additional capital at this time. And - but we'll continue to monitor it and keep all of our options open. But as I said in my opening remarks on deployment, if we see opportunities to pay down that debt sooner or restructure that in any way, we will absolutely be doing that and we will be laser-focused on bringing that debt down and getting the balance sheet back in order.

[Operator:]

And our next question will come from the line of Seth Seifman with JPMorgan. Your line is open.

[Seth Seifman:]

Greg, I wonder if you could give us a little more color on the 737. I mean, the change in the rate from a kind of 31 by the end of 2021 to beginning of 2022 sounds like - seems like a fairly small change. It seems like your suppliers are experiencing something a little bit bigger? And so maybe what does that say about the cadence of that ramp during 2021 and how much risk is there still around that number? And maybe finally what opportunities are there may be for you to make more deals with some of your top customers to get more planes out of inventory and allow you to raise that rate?

[Greg Smith:]

Yes well, look I mean, like Dave mentioned and I think I echoed, the rate profile that we put in, and the delivery profile is really based on detailed discussions with each of our customers. That certainly has better clarity this quarter than they did last quarter, so we adjusted that accordingly. But we're in discussions with them daily and we'll continue to do that and make adjustments. When you look at the supply chain, as you know Seth, everybody is in a different state. I'll say inventory and rate based on where they were before the pandemic, in particular where we had suppliers that were not - did not have appropriate inventory levels or weren't making our master schedule. So some of those have been accelerated so, I would just tell you that each one of them is that a bit of a different place depending on how much built inventory they have, so you're going to see variation supplier-by-supplier. And we're, again, staying really engage with them daily on our plans and assumptions, and then helping them as they manage through their inventory or their ramp-up. But you're not going to see, I'll say, everybody is going to have a similar profile to what we have really due to the, like I said, the fact that everybody is sitting at a little bit different inventory level. And, of course, we're going to, as we said, priority one for us help our customers get the fleet back up, and then it's clearing the ramp, delivering the inventoried aircraft that are, as you know, built and ready to go all that taking into consideration, again, and informing the production rates that will happen in conjunction, but really predominantly follow after we deliver off the ramp. So lots of lots of moving pieces in there, but I think the most important thing is we got to stay engaged with the supplier and really get them clear line of sight and help them manage through the transition period as we get return to service and get the airplane back in the air.

[Operator:]

And our next question comes from the line of Noah Poponak with Goldman Sachs. Your line is open.

[Noah Poponak:]

Greg, maybe just following up on those fluid conversations with your customers, I mean it's a very dynamic situation, obviously, but you guys have talked about having spoken to every customer and you've identified the categories of customers that would want to take deliveries right now. I mean there was an airline this morning actually talking about accelerating because it's an opportunity to counter-cyclically invest. So I mean I guess how close are we to the whole ecosystem of you, the supply chain, your customers being on the same page? What inning are you in of revision until we feel like we aren't going to get production rate cuts anymore moving forward?

[Greg Smith:]

Yes. Well, look, I think we're on the same page. However, like we said it's dynamic, especially in the near-term. So it's really important that you know our engagements happen frequently, we have a clear line of sight and understanding. So then we can make appropriate changes to delivery profiles, rates, and then in the supply chain. So what we laid out today is our best estimate based on all that input and feedback from customers. Again, in and around the globe and then managing the risk within our factories, combined with the supply chain. As both Dave and I have articulated several times, we've spent a lot of time and effort stabilizing the 737 production facility and enhancing it. And with a keen eye towards as we move up and move back into higher production rates it's going to be very smooth and methodical and we're going to certainly have the advantage of all the hard work we put in place to drive stability and not have traveled work and just ensure that, again, we have a smooth rate ramp-up that combined with informed customers - being informed by our customers. So all of that has been taken into consideration on the profile that we just laid out. And obviously, if we see that changing, we'll adjust accordingly. I think the one moving pieces in there, Noah, that certainly does have flexibility is delivery off the ramp. Those aircraft are finished, they're ready to go. We've got flexibility and the team actually has done some great work getting ahead of that and essentially modeling out and really practicing how we're going to deliver those aircraft and recognizing there is going to be some movement from tail to tail and customer to customer. So we've got that flexibility it out there that I suspect that we'll have to utilize as we deliver those finished planes. That will, in turn, inform the production rate ramp-up. So we'll continue to kind of keep both of those in mind in. And like I said, one will inform the other and we'll continue to stay engaged with the customers.

[Noah Poponak:]

Just as a quick follow-up to that, the discussion around 2021 free cash flow, it looked like you're going to have MAX inventory unwind, and then airplanes you're producing but not delivering this year also unwind next year, and those could be pretty sizable numbers were even if their aircraft business otherwise was just breakeven plus defense, plus services, you'd actually maybe have nicely positive cash flow. Is the missing piece there just - it sounds like from your earlier comments you might plan to be producing ahead of deliveries the rest of this year and then even into the beginning of next year?

[Greg Smith:]

Yes, I think that's definitely - that is going to be the case and, on the MAX, again, customer by customer, it varies. So it's not kind of a one size fits all when it comes to cash and the delivery profile of those airplanes that are going to come off the ramp. So, again, lots of moving pieces in there, but as we kind of pull it all together, just again, based on what we see today, we can see that path to positive cash flow. And like I said it - we'll continue to keep you up-to-date on that, but I think we've got between the rates in our game plan around how we're going to execute between now and then I think we have a good line of sight on that right now.

[David Calhoun:]

Greg, if I might just add something, since I've been part of most of these calls with our customers, I want to acknowledge what you said is actually a fact. We do have many calls that are on the forward-looking I want to take a big position kind of discussion. And then we have the others, of course, who are in the opposite. So that's a true story. I think from Boeing's vantage point and our posture at the moment, we're still trying to de-risk the skyline. That has been our motive. And to emphasize to everyone including our own people that we're going to move the finished goods first. That is going to be - that's our intent. If we can move it faster, great. We're still going to hold our production rates as conservative as we can, so that we can get that inventory on the move. And then when I think this virus, ever looks like it's in the rearview mirror, I think all those discussions that, of course, we do have about the forward upside point of view, I think they'll come faster rather than slower. And I'm - honestly, I think as much about the recovery and the pace up as I do sort of retrenchment and to deal with today's liquidity because I think actually that ramp-up is going to be the more important part of this puzzle going forward.

[Operator:]

And our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is open.

[Sheila Kahyaoglu:]

I wanted to ask about normalized margins in BCA in 2022 at these lower rates. Based on these rates you'll produce about 510 aircraft in 2022. The last time you were around those levels was 2011. Your commercial margins back then were closer to 10% and granted that included some service and free cash flow if we adjust for 787 was around $10 billion. So I guess I'm asking how do we think about normalized margins and free cash flow sometime in 2022?

[Greg Smith:]

Well Sheila, as I said, right now it's the pass to that point, right? And so the focus that we talked about around rightsizing the company and taking the actions are going to - they're going to feed right into that. When you look at kind of unit margin over that period by program, again, as I mentioned on one of the prior questions, we're certainly under more pressure because of the lower production rates. But as we ramp-up, and particularly on the MAX we'll see that gross margin on a unit basis come up. And then again, we'll just have to continue to manage our spend on all of our discretionary but the actions that Dave - and I'll let Dave comment here, but the actions that we're putting in place now are really focused out in that time frame to make sure we come out of this stronger, and healthier and positioned to compete and get us through this window, this period we're all faced with the pandemic and really just not leave a rock unturned as far as our cost structures in our inter-site consolidations and so on, to ensure that we preserve cash flow out in that period and then, therefore, margin. But I'll let Dave comment as well.

[David Calhoun:]

Well, I'm not sure there is much I can add to that. We're going to have these volume impacts on our program accounting et cetera, over this near-term unit margins, cash margins is our focus. We feel good about where they are. We think we can make them better, and then as volume and orders come along and we can begin to look out further. I think everything gets - not only gets back to where it was, but maybe gets better. So not much I can add to sort of the dynamics of next year's margins other than to tell you our focus is on unit cash margins and just continue to manage that as closely as we can for liquidity purposes. And then as order books fill out, we can - you'll see that impact in the accounting side of the puzzle.

[Operator:]

And our next question comes from the line of Doug Harned with Bernstein. Your line is open.

[Doug Harned:]

Greg, you were talking about the flexibility and basically with the airplanes roughly 450 MAXs that you have parked, but given a lot of the pressures that you had from customers for deferrals and cancellations. As we look at this, it probably does mean that a large number of those airplanes will go to different customers than were originally planned. So operationally, how do you go about re-configuration of these airplanes? Particularly, you've got a supply chain that would be involved here that sort of - it's in a very difficult situation. And have you assumed costs associated with re-configuration and re-marketing of these airplanes in the BCA provisions you've taken so far?

[Greg Smith:]

Yes, the short answer is, yes. We have Doug. So we've assessed all 450 and put a risk assessment against all of those aircraft. And then took a provision for that we believe we will have to either re-market or re-configure some of those aircraft. And that's something obviously, that we'll continue to monitor and update on. But we've assumed that that will take place with some of those aircraft, just again, by the discussions we've been having with our customers.

[Doug Harned:]

But just physically this could be - I mean this is different than anything that I've ever seen you had to deal with in the past in terms of scale. I mean operationally how do you think about doing that?

[Greg Smith:]

Yes well, the team - like I said, we're trying to stay ahead of these things, so anticipating this as a possibility, quite frankly some time ago. The team has gone through and got clear understanding about how would you go about doing this systematically, where would we do it, how much configuration would take place. Obviously, with the MAX as you know, it's fairly limited. You're not dealing with the wide-body so impact on the supply chain, quite frankly I don't really see it much. It's going to be more basic re-configuration and, in some cases, possibly customers take them configured as is and they reconfigure them. So I think, you're going to see a variety in how this plays out. But again, we're anticipating, we're going to do some of it and we're trying to get ahead of it. And I think getting those plans in place today, and if it's better than that great. If it isn't, we'll be ready and facilitized to be able to do it.

[Operator:]

And our next question comes from the line of Robert Stallard with Vertical Research. Your line is open.

[Robert Stallard:]

Greg, I was wondering if you could give us some more clarity on what's in your plan with regard to these 737 MAX deliveries. You said you expected to deliver most of them in the first year after re-certification or re-entry into service. But could you give us some idea of exactly what that number is and what the sort of cash impact of that would be? Thank you.

[Greg Smith:]

Yes, no like I think we've been consistent to say, hey look, we want to get those airplanes delivered and that's the majority of them in the first year. So there'll be airplanes that are outside that first year, but the majority will take place in the first year. Rob, this is just based on discussions we're having with customers in sequencing those airplanes out. And we'll continue to focus on again, relieving the inventory off the ramp, which then again, that informs the production rate. So we got to focus there, first and then ramp up production and clear the ramp. So we can complete the airplanes coming out of production. So it moves around certainly, month-to-month quarter-to-quarter, but again, majority will remain in the first year, and then we'll see some of that trailing off over time, just again, based on customer preference.

[Robert Stallard:]

Just a quick follow-up because that would seem to imply a very large number of aircraft deliveries in the next almost 12 months when obviously airline conditions are very weak, are most of these going to replacement is that the best way to look at this?

[Greg Smith:]

Yes, certainly I mean, they've got the fleet plans in place. And so again, what informs it is our discussions with them around quantity, and around timing and sequencing. So it - all of that's informing kind of how we front-load this thing. But look, Robbie, could it move here and there from month-to-month and from quantity of airplane outside this profile. Sure it could, but as we see it today, we see the majority of those, again, informed by the customer. We certainly have the ability and we're capacitized to deliver them, and as you know they are completed aircraft. So, the cycle time from turn that airplane on and getting into the hands of the customer is pretty short. So we've got that, again that flexibility in our favor here and we'll adapt accordingly based on the needs of the customer.

[Maurita Sutedja:]

Operator, we have time for one more question.

[Operator:]

And our last question will come from the line of Cai von Rumohr with Cowen and Company. Your line is open.

[Cai von Rumohr:]

So a follow-up to Rob's question so, if you're going to ramp to 31 a month going until 2022, you've got to be building close to 200 planes or more in 2021. And if you deliver 400 plus planes the inventory goes down by 200, but you still have 250, 300 of lot of planes. And we're only seeing it makes sense to go to 31 if you felt your skyline called for delivering more 737s in 2022 than in 2021, is that correct?

[Greg Smith:]

Well Cai, I'd say look, the production rate increases, Dave said it, I said it, it's going to be slow and gradual on the production side building up to 31 in that timeframe. In conjunction with that will be the delivery again off the ramp, and that will really inform the production rate, but it's a very gradual slow rate build-up to that 31 and that could adjust based on how we deliver off the ramp or any further information we gather from the customers. Again, the supply chain, we have the inventory clearly on hand, as you've seen. And so, if we could go up quicker, we certainly assess that, but - and I'll let Dave weigh in here, but stability is going to be job one. It's ensuring that we move up methodically and stabilized, not have travel work, first-time quality. We'll do an assessment then we'll move up to the next rate. And then, again, we'll be informed of how quickly we are clearing the inventory off the ramp. I don't know, Dave, if you had any more to add on the production side.

[David Calhoun:]

Yes, I don't really have anything more to add, other than again, think about our posture in the middle of next year if in fact, things are beginning to return, customers are beginning to see the virus in the rearview mirror, vaccines are being discussed and described. I really believe that the toughest part of our puzzle as I said, going forward is going to be then returning to rates that satisfy what I think will be a reasonably robust return to the market. So that's part of our math here, but what Greg said holds, for most of the year, next year, the governor on rate is going to be the pace at which we sell that finished goods inventory.

[Cai von Rumohr:]

But as you look today, does it look 2022 you will deliver more than 2021 without getting into the numbers?

[Greg Smith:]

Yes.

[David Calhoun:]

I sure hope so.

[Cai von Rumohr:]

Okay. Thank you.

[David Calhoun:]

That's the plan, Cai.

[Cai von Rumohr:]

Thank you.

[Operator:]

Thank you.

[Maurita Sutedja:]

Thank you. So that completes The Boeing Company's second quarter 2020 earnings conference call. Thank you all for joining.