波音 (BA) 2003 Q2 法說會逐字稿

Good day, everyone.

Welcome to the Boeing Company's second quarter 2003 results conference call.

Today's call is being recorded.

The management discussion and slide presentation plus the analyst and media 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 Mr. Paul Kinscherff, Vice President of Investor Relations for the The Boeing Company.

Please go ahead.

Thank you.

Welcome to the Boeing second quarter 2003 earnings conference call.

You can follow our company broadcast at our web site, www.boeing.com.

If for any reason you are unable to reach us through the Internet please access our site later today when all information will be posted.

With me today are Phil Condit, Boeing Chairman and CEO;

Mike Sears, our executive vice president and CFO.

After comments by Phil and Mike we will open up for questions.

Before we start, as usual I need to remind you that any projections and goals we may include in our discussions this morning are likely to involve risks and uncertainty.

The assumptions behind our projections and the factors that could cause actual results to vary are detailed in the news release we issued this morning and in our various filings with the Securities and Exchange Commission and in the forward looking statement at the end of this web presentation.

I urge you to read them thoroughly.

At this point, I will turn the meeting over to Phil.

Thank you, Paul.

Good morning.

We're going to try a slightly different format this morning.

Rather than repeat a lot of the detail that is in the release, I will give you a brief overview and a perspective on the business, Mike will discuss briefly our financial results and updated outlook so that we can then take more time for questions.

As we announced last week we are taking significant charges in our commercial space businesses.

We are also taking actions to correct this situation.

First, as I noted last week, I have asked Dave Swain, our former Chief Technology Officer and member of the Office of the Chairman, to be the Chief Operating Officer of Integrated Defense Systems.

Second, we announced yesterday that we have reorganized what was our launch and orbital systems business unit.

The expendable launch systems portion which is now focused on the defense market will reported to George Mullner, Senior Vice President of Air Force Systems.

Boeing Satellite Systems, which is also focused on the defense market, will report to Roger Roberts, Senior Vice President of Space and Intelligence Systems.

And our Rocket Dine Power and Propulsion unit will report to Mike Mott, Senior Vice President of NASA Systems.

These changes will clarify responsibilities, focus efforts in the appropriate area, and drive for profitability.

Having taken those actions, I'm pleased to report that our other businesses delivered good, solid performance during the quarter.

As Mike will discuss, our revenues and cash flow were on track, and the company made important progress in many areas.

We're intensely focused on running healthy core businesses that deliver value to our customers and to our shareholders.

Let's look at commercial airplanes on slide 2.

BCA is performing very well in an extremely challenging market.

They have decisively addressed market realities and their results show it.

In the quarter they delivered 74 airplanes, down over 33 percent from last year's quarter, but up slightly from Q1.

BCA's operating margins of 5.4 percent on this substantially lower volume reflect an outstanding focus on operating efficiency.

BCA received 76 gross orders in Q2, including an order from Al Napon Airways for 45 737's.

Just after the quarter closed, BCA demonstrated its leadership in the low-cost market segment with an order from Airtran for up to 110 737's and 717's, and followed by Southwest Airlines exercise of options for 15 737's.

BCA continues to invest in the future.

The 777 300 DR is in now in flight test and the 777 200 long range is in its final engineering stage.

R&D Investment in transitioning from the 777 program to the 7E7 program.

Progress on the 7E7 include material selections and the start of wind tunnel testing.

BCA's backlog remains stable at $66 billion.

With the excellent progress on lean manufacturing, they are in a superb position to deliver strong performance when the market recovers.

BCA is an outstanding long-term business for Boeing.

Now let's go to integrated defense systems and slide 3.

IDS results reflect the charges and commercial space business, which overshadow the strong performance on aircraft, network centric, and support programs.

As expected, revenues increased to 6.6 billion, as network centric programs continued to grow.

Period margins were negative due to the commercial space results.

During the quarter, IDS made progress on two key programs.

They received approval to proceed with the next phase of the U.S.

Army's future combat system program.

They also received important approvals from the U.S.

Air Force on the 767 tanker program.

During the quarter, contractual backlog for IDS increased to nearly $39 billion while total backlog was up significantly to $82 billion.

With a strong portfolio of core military intelligence programs and the actions we've taken in commercial space, IDS is well positioned to deliver strong results in future periods.

Let's turn to slide 4, our other businesses.

For the quarter, Boeing capital turned in solid results and continued to prudently manage through a very difficult environment.

Connexion by Boeing reached an important milestone, signing a service agreement with Lufthansa for 88 aircraft.

Air traffic management agreed to collaborate with Europe's air traffic alliance on long-term system improvements.

And our shared services group, which we don't often mention, continued to make exceptional progress on reducing infrastructure costs for the entire company.

Now let me close with my perspective and slide 5.

I'll start with commercial airplanes.

Since we reported in the first quarter, there have been a few encouraging signs.

However, the severe downturn in commercial aviation continues to dampen demand for new airplanes, particularly for the 757.

Demand for service and support, including spares, also remain soft.

We expect a gradual market recovery to occur no earlier than '05.

Based on our latest information, we are reducing the top end of our '04 delivery range from 300 down to 290 airplanes.

BCA will continue to aggressively manage to the market realities, and they will emerge from this downturn even stronger.

Integrated Defense Systems is the lead provider of existing defense capabilities and emerging network centric systems.

They will continue to perform in these growing markets.

We're focused on restoring the profitability of our Delta IV and satellite businesses and have taken actions to do that in a very difficult market.

Now Mike will give you our financial results.

Mike?

Thank you, Phil.

Good morning, everyone.

I'll start today with some general comments on slide 7 and then move into the numbers.

As Phil noted, our earnings results from the quarter reflect the challenges in our commercial space businesses.

Our other businesses again delivered solid performance, which is reflected in our revenues and cash flow.

Revenues for the quarter came in as expected.

They reflect lower planned commercial airplane deliveries offset by growth at IDS and Boeing Capital.

We reported the loss for the quarter as a result of the charges related to Delta IV and Boeing satellite systems.

Cash flows were strong, and as previously announced, we made a discretionary contribution to our pension plans.

Finally, we are revising our guidance to include the updated numbers for our Delta IV and Satellite programs, as well as the civil aviation markets.

I will review this in more detail later in the presentation.

Now to the second quarter financial results on slide 8.

Revenues for the period were $12.8 billion, down 8 percent from the second quarter of last year.

This reflects a planned decrease in commercial airplane revenues of about $1.8 billion on lower delivery volume.

This was offset by revenue growth of nearly $800 million in our IDS, BCC, and other segments.

Operating losses for the quarter totaled $293 million and resulted in a net loss of 24 cents per share.

Second quarter earnings were driven by the previously announced charges of 87 cents per share.

Stock compensation expenses totaled 14 cents per share, reflecting the share price increase in the quarter.

These charges and reductions were partially offset by growth and good performance in our other businesses.

Moving to the discussion of cash on slide 9, the company generated $672 million of free cash during the quarter.

This includes $845 million of operating cash less $173 million of capital expenditures.

It includes $479 million of pension funding we made in April.

The impact of the commercial space charges and pension contribution flowed through our working capital accounts as you can see on the chart.

The cash impact of the commercial space charges is spread over the next seven years.

You can see that BCC used some cash balances to fund portfolio growth and retire debt during the quarter.

We also retired some maturing debt of the Boeing company.

Slide 10 shows our balance sheet and strong credit ratings.

We ended the quarter with a cash balance of $1.9 billion compared with $2.0 billion at the end of first quarter.

Consolidated debt decreased about $400 million during the quarter to $14.6 million.

Equity in the quarter fell slightly as the commercial space charges offset the solid profitability of our other businesses.

As you know, new accounting rules known as FIN 46 regarding the consolidation of variable interest entities go into effect at the end of the third quarter.

We are reviewing our joint ventures, such as C-launch as well as certain non-recourse customer financing and other arrangement to determine whether there is a need under the new accounting rules to either include additional items on our balance sheet or revise our disclosures.

The company will include the impact of FIN 46 in its third quarter financial results.

Implementation will not alter any existing business arrangements.

Although we have not concluded that there will be an earnings impact, should there be one, it would be recorded below the line as a one-time adjustment for the change in accounting.

Continued financial strength and solid credit ratings are a priority for Boeing.

As the press release already details operating unit results, and Phil has discussed the key drivers, I will not review each of the businesses here this morning.

Let me instead provide a pension update and then proceed directly to the outlook.

Turning to slide 11.

Since I last reviewed this with you in January, our pension plan returns have exceeded our assumed rate of return of 9 percent.

Interest rates are fallen, however, to historic lows.

Applicable interest rates have recently ranged from one-half to one percent below the 6 and a half discount rate factored into our forecast.

As you may recall, our planned measurement date is September 30.

If interest rates do not increase by then our updated discount rate for 2004 could be under 6 percent.

While our 2003 outlook is not materially affected by these changes, if current trends hold, our 2004 operating earnings could be lower and our operating cash flow could be higher.

For example, if applicable interest rates were 5 and a half percent next September, the unfavorable impact of pension expense on 2004 earnings from operations could increase from our current estimate of two to 300 million dollars to four to five hundred million dollars.

We would also expect to see non-cash balance sheet adjustments at year end.

However, should planned returns hold to current levels, our required cash contributions to the plans in 2004 could be several hundred million dollars lower than the one billion dollars currently anticipated.

Where we end up depends on what happens in the financial markets and in Washington D.C..

Congress is currently reviewing pension standards.

The situation is dynamic and we will provide you another pension update during our third quarter call.

Now let's turn to our financial outlook for 2003 and 2004 on slide 12.

Today we are updating our guidance to reflect the charges recognized in the second quarter and a narrowing of our 2004 revenue outlook.

As Phil noted, commercial aviation market remain challenging.

The airline industry downturn continues to dampen demand across all airplane types, particularly the 757.

It also continues to dampen demand for service and spare parts.

The commercial airplanes delivery forecast for 2003 remains at approximately 280 airplanes and is virtually sold out.

Deliveries in the third quarter of 2003 will be somewhat lower than in the first or second quarters before rebounding in the fourth.

We are narrowing our forecast of 2004 deliveries from between 275 and 300 airplanes to between 275 and 290 airplanes.

Approximately 90 percent is sold at the lower end of the range.

Just under three-quarters of the deliveries during the guidance period are to international customers.

Commercial airplanes revenue forecast remains approximately $22 billion in 2003.

Revenues for 2004 are now expected to be slightly less than 2003.

This reflects the narrow delivery range and continued softness in airplane spares and services.

Commercial airplanes margins outlook for 2003 is unchanged.

The GAAP margin outlook remains between 3 and 4 percent.

Excluding goodwill charges, commercial airplanes adjusted outlook remains between four and a half and five and a half percent.

There are key campaigns underway which may determine the continuation of the 757 program.

Preliminary estimates indicate that in the event of a program termination decision, a pre-tax earning charge of approximately $200 million would be recognized.

The actual amount of any charge, as well as the size and timing of related cash flows, would depend on a number of factors.

This risk is not included in current commercial airplanes margin guidance.

Commercial airplanes margin guidance for 2004 is moderated slightly to reflect the updated revenue outlook.

Commercial airplanes margins in 2004 are now expected to be in the same range as 2003.

Previous margin guidance was at least as good as 2003.

At Boeing capital, we are reducing the outlook for portfolio growth in 2003 and 2004.

Portfolio growth in 2003 has changed from plus or minus $2 billion to between one and one and a half billion dollars.

In 2004, the outlook is reduced from plus or minus $2 billion to between one and a half and $2 billion.

As a result, BCC's revenue growth outlook will moderate slightly.

BCC's outlook for return on assets is unchanged at approximately break-even in 2003 and approximately 1 percent in 2004.

BCC will continue to manage and assess its portfolio conservatively.

We are Revising Integrated Defense Systems outlook for the commercial space charges and market conditions.

IDS revenue outlook for 003 is unchanged at between 26 and $27 billion.

IDS is moderating its 2004 revenue growth outlook primarily to reflect fewer Delta IV launches.

We now 2004 revenue to increase by approximately 10 percent.

Previous guidance was greater than 10 percent.

IDS 2003 GAAP margins are now expected to be between 3 and 4 percent.

The previous estimate was between 6 and 7 percent.

Adjusted IDS 2003 margins which exclude the goodwill charges only are now expected to be in the four and a half to five percent range, down from between 8 and 9 percent.

IDS launch and orbital systems margins in the second half of 2003 are now expected to be negative low single digit compared to a prior forecast of break-even.

For 2004, launch and orbital system margins are now expected to be break-even, down from low single digit.

The overall IDS 2004 margin outlook remains in the high single digit range but is moderated from the prior outlook.

Putting everything together, Boeing's revenue guidance for 2003 is unchanged at plus or minus $49 billion.

We are revising our 2003 revenue guidance from between 52 and $54 billion to plus or minus $52 billion.

We are revising the 2003 earnings per share outlook to reflect the commercial space charges.

On a GAAP basis, 2003 earnings per share guidance is now between a loss of 7 cents to a profit of 3 cents per share.

On an adjusted basis, excluding only the first quarter goodwill charges which totaled $1.02 per share, earnings are expected to range between 95 cents and $1.05 per share.

We are revising our 2004 earnings per share guidance from $2.10 to $2.30 per share, to a $1.75 to $1.95, to reflect the lower revenue outlook and lower launch and orbital systems profitability.

This outlook excludes the risk to our pension expense which I discussed earlier.

Cash flow guidance for 2003 and 2004 is unchanged.

We expect 2003 operating cash flow to be between 3 and 3 and a half billion dollars.

After deducting capital expenditures from operating cash flow, free cash flow guidance remains between 2 and 2 and a half billion dollars.

Following historical patterns, we expect our cash flow to be strongest in the fourth quarter.

In 2004, operating cash flows should be greater than 3.5 billion dollars with our free cash flow guidance holding at greater than 2.5 billion dollars.

With that, Phil, it's back to you and on to questions.

We are ready to take questions.

Thank you.

If you'd like to ask a question at this time, you may ask it by pressing the star key followed by the digit 1 on your touch tone telephone.

If you're on a speakerphone, please turn off the mute function to allow the signal to reach our equipment.

That will be star 1 if you do have a question at this time.

We go first to Joe Campbell at Lehman Brothers.

Good morning, and thanks for all the break-out.

I wondered if you could take the change in the EPS guidance which goes from 2.10 to 2.30, down to 1.75 down to 1.95, which is a change of 35 cents, and characterize the change of 35 cents according to how much is commercial change and how much is the space change and so on.

Joe, most of that change is related to the top-line guidance of 52 to 54 coming down to the 52.

As we discussed, much of that is in the commercial sector, and as you've seen, the mix of wide body and narrow bodies is shifting more toward narrow bodies, and the spares and support business is down there as well.

That account for most of that swing.

A little bit has to do with the revenue at IDS on the Delta IV side.

So, I mean, normally we wouldn't get from, you know, I mean, we kind of hoved off ten airplanes at the top of the range.

At most, that's $700 million probably, unless the mix is changing so that we're losing more big ones.

So I'm a little -- I guess, is most of the 2 billion in revenue coming out of commercial?

Because the range before included 275 to 300, and you only knocked off the top end of the range.

Yet everything went down.

Yeah, Joe, most of the revenue is associated with commercial.

You've put your finger on the mix, the bigger airplanes versus little airplanes.

We really can't -- shouldn't understate the impact of the spares and the support business at the commercial side of the house.

In this current marketplace, it's just not coming back as we had expected it to.

And if the earnings per share is going down by, you know, 35 cents on a base, you know, on a range of a little over $2, you know, sort of 15, 16 percent, why is the cash flow not changing?

We do have some pluses and minuses coming in on the cash flow side.

We do expect that the advances not coming out there is one issue that's going to come through, and we have some other that are coming through in other areas.

The negatives that are out there that you highlighted are the pension and the seven-five.

Would that be -- and you've characterized, I guess, both of those.

Are there any others that we -- I mean, are there any others that we ought to worry about?

We've --

And you didn't mention BCC, which was good this quarter, didn't have any adjustments, but which has been an issue during the course of the year.

Joe, we've worked very hard to try and get the big risks in front of us, and certainly in front of you.

Thanks very much.

I'll let some others ask questions.

Thank you very much, Joe.

And we'll go next to Joe Nadol III with J P Morgan.

Thanks.

Good morning.

I was hoping you would comment a little bit in more detail on the BCA delivery mix that you foresee and how much of your change is due to orders you didn't get versus potential deferrals.

I think, as we said earlier, the big deal here is that the big airplanes are where the decrease is.

We continue to be very successful on the 37's.

So you're seeing is revenue come down, and the change is clearly a mixed change, and then the issue that Mike mentioned around spares.

Spares volume dropped during the Iraq conflict.

It has not recovered.

We are going forward with a much lower estimate on spares, and, of course, that's a good margin business.

You had another piece in your question there, Joe.

Yeah, it was just on the Asian carrier side.

Is the mix shifting because you haven't been getting orders you might have anticipated, or is it because you've been granting deferrals to some Asian carriers?

It's order rate, not deferrals.

And I think clearly SARS did have an impact and has slowed things down.

Secondly, on the aircraft and weapons system operating margin, you had another great quarter, a little higher than what you've done in the past couple of years, according to your restated margin results.

Is that sustainable on the back half of the year?

Are there any other one-off items?

Joe, to your point, it's a pretty darn good number, so probably not sustainable at that level, but, you know it shouldn't drop very far, either.

Okay.

And then, finally, in the deferred production cost for the 777, you have a bit of a bump up in the quarter, in the supplementary stuff you put on your web from 775 to 823.

That's a pretty significant move.

Any comment on why that might have happened?

Yeah, as we tried to portray previously, the GAAP margin and the unit cost margins have been criss-crossing over the last several months, and so as that gap increases, then, that category, which is termed deferred production cost, is going to grow as a function of the difference in the two margins.

Joe, it's nothing more than the math difference between those two margin numbers that we just discussed.

Okay.

So you would anticipate that to continue to grow until the delivery production rate maybe picks up a bit?

As you see the unit cost margins come back up toward the GAAP margin, that number will then begin to shrink.

Thanks a lot.

You bet.

Thanks for calling.

Next to Heidi Wood at Morgan Stanley.

A question on Boeing capital.

You've talked about the potential for that to raise about 2 billion in '03 and '04, yet you have done a fairly decent job keeping that flat.

Can you update us as to what you see as you look over the course of the second half, do you think that 2 billion still looks possible?

And also kind of talk about what you see as the order pace for commercial aircraft in the second half.

I think I recall, Phil, that in the first quarter call you sort of expected that 2003 orders would be about in line with what you saw in 2002.

Clearly the first half has been sort of weak.

I wonder if you would update us on your thinking there.

Heidi, let me start with BCC, then Phil will jump in with the orders.

We did expect plus or minus 2 billion of volume in both '03 and '04.

As we mentioned, we are shrinking both those estimates.

We now think '03 looks more one to one and a half, and '04 looks one and a half to two.

It reflects two things.

The marketplace and the great job Jim Palmer and his team are doing, doing a good job at preserving value and being very prudent about the deals that they do.

I'll talk about order a little bit.

Of course, you know, trying to forecast timing on orders is always tough.

The impact of SARS in terms of order rate is probably the big shift.

Asian carriers dropped way back on traffic.

They are seeing that traffic coming back now, but it's clearly put a dent in their requirements, and it's really going to be a question of how soon that comes back as to where we see orders go.

The fact that we've been able to sort of hold even on backlog I think is reflective of sort of where we see the order rate.

The order rate and the delivery rate being pretty close to each other.

But there will be some ups and downs in terms of timing.

Okay.

And then with respect to the staff and support you've tucked about in the past being about 10 percent of sales at BCAG, where was it in the first half, and can you give us color as to what your new assumptions are in '03 and '04?

How about if we have you and Paul do that this afternoon?

We'd have to dig through numbers.

We had told you publicly previously that in the period -- for the guidance period it would be sort of 10 to 15 percent, but I think you can see that moderating back quite a bit, particularly as we look at the '04 time frame.

And the pension headwind in BCAG, what was that in the second quarter?

I'm sorry, the pension head wind?

Yeah, at BCAG.

What was that number?

I don't have that one directly in front of me, but, Paul, was it about 60 million?

About 60 million.

You raise a good point that we should all keep in front of us.

With the swing in pensions, as we've discussed, we're starting to see a pretty significant impact on BCA margins as we're going forward now that we didn't have in previous years.

So on an apple to apple comparison, that's a burden that is now showing up to the tune of a percent or so at the BCA level.

Working off of that comment, Mike, can you talk a little bit about how much benefit do you see into '04 coming from the reduction in force that you've had over the last couple of years?

I would have thought that there would have been -- I know you've got a downtick in volume, which is expected, but do you know what kind of a benefit you get, margin-wise, from that?

Well, simply managing the fixed costs to be as variable as possible, we're going to get the big benefit by trying to run down that road.

But as we've discussed, 620 a few years ago, we're down to 300, the team has done a great job.

It gets harder every time you get down in that range.

I'll let somebody else ask questions.

Thanks very much.

We'll go next to Peter Jacobs at Reagan McKinney.

Good morning.

First of all, could you characterize or give a time frame for when you think you're going to have to make a decision on the 757 program, if you have to cut it loose?

The real key there is going to be -- and was in the words.

There are several ongoing campaigns.

Obvious if we are successful in those campaigns, that program can keep right on going.

We're running at one a month right now, so it doesn't take big orders to keep it going.

Basically a year and a half, then, given that you have about 18 in backlog?

And you're right, so we're running one a month, if you get orders, that can go further.

And if you don't, then you're going to have to make that decision.

Okay.

Secondly, the customer financing contribution of about 560 some million to the cash flow from operations, could you just remind me on what that all involves?

Yeah, that's pretty much the noncash depreciation as part of the business operations over at BCC that comes back into cash flow.

Okay.

And, lastly, with the FIN46 test in, perhaps accounting will be done in the third quarter, could you just real quick just walk through conceptually what would happen there when you perhaps have to consolidate some of these off balance sheet entity, would the charge just be reflected to the fair market value of the assets is lower than what those entities are carrying it at, or is there something else there?

I'm just wondering what are the possibilities that we could expect to see.

It's all balance sheet issues.

We're caucusing here a little bit, Peter, so I apologize.

The consensus response for this call is that it's all balance sheet issues.

We've got to go through them one at a time.

Every particular transaction has got to be gone through.

We're through almost all of them.

We just have a few more to go, and we will be done by Q3.

Would there be ongoing earnings implications or ongoing cash flow implications to any of the possibilities that you're exploring?

No.

Everyone here is shaking their head no.

That's all I have.

Thank you.

Okay, Peter.

We'll be going next to George Shapiro at Smith Barney.

Good morning.

Couple of questions.

One, Mike, I want to follow up on an earlier question in terms of the deferred production on the 777.

Effectively, you've run now four quarters where the absorption is less than what it needs to be on the 777.

I'm making the assumption you haven't changed the pool size, so how long does that go on before you've got to make a downward adjustment in the GAAP 777 margin?

George, I'm going to have to come back to the way that we're calculating that number.

We have unit cost accounting and we have GAAP accounting, and that category is simply the difference in the margin rate in accordance with the revenues that go through that particular program.

So, for example, if those rates were identical, then there would be no change in that category.

Correct.

But that category is supposed to go to zero when you complete your pool.

Right.

Effectively for awhile you've got to have the unit cost margin above the GAAP margin to get there.

So what you've done is buried in there are long-term assumptions about production rate and if those long-term assumptions change then you will have to make a change.

But right now we think they match up, and that says the production rate will go back up, and on average, that pal will close.

Correct, Phil.

And that's what -- so my question is, you know, how long can it go on before you have to change your assumptions as to when you're going to recover the production rates in the future?

Well, you're looking at the entire pool, looking at where you think the market is going.

Everything we see, that market remains very strong.

We are at a relatively low production rate on 777, but I don't think, from anything we've seen, that we would anticipate a change there.

Okay.

A different one, maybe more for you, Phil, I mean, you have 18 757s in backlog, but Continental clearly wants to defer 11 of those, and I think Northwest has got another four.

So does that suggest that sometime by the middle of next year you would have to drop that -- I mean, shut down that production line?

How are you going to handle that issue?

Well, that's exactly the place we are, is we're trying to understand what the long-term market of the 757 is and what the order picture is, and, obviously, if you don't have airplanes to build, we are not going to build them months back.

So we're going to make that decision.

But it will depend on a number of other campaigns as to whether we make that or not.

And one last one.

It would seem that the pressure on '05 deliveries has got to be on the downside.

I mean, next year Southwest gets 42, almost 15 percent of the production, and Continental is getting plains next year and doesn't want any in '05, and both those airlines get less deliveries in '05 than '04.

So at this point would you provide some color on the deliveries in '05?

I wouldn't build on U.S. airlines.

Remember, 75 percent of our deliveries next year go to non-U.S. carriers.

Probably the biggest and most important question is how fast do the Asian airlines recover from SARS.

Right now European airlines appear to be coming back out of the impact of Iraq.

You've got to take that whole global picture, and everything we're seeing says we'll be up slightly in '05.

Okay.

Thanks.

And we'll go next to Cai Von Rumohr at S G Cowen.

Yes, for the commercial unit cost margin, it looks like it went up 90 basis points from the first quarter, to 4.3 percent.

Was that a function really of mix in the quarter and kind of, you know, and specific customers, or was that really performance related, and where can we expect that to go in the second half?

The answer to you is both.

It is, in fact, from specific customers, a mix, as well as some improved performance, and the expectation for the year is as we presented to you before.

This is Paul.

It will move around a little bit with the relative quarterly volume.

Right, so the third quarter clearly moves down.

What about, the R & D I was surprised that it remains level.

When should we expect it, un, in commercial to start to ramp up for the 7E7, and could you provide us any guidance?

It looks like it's kind of headed for about 700ish, 750 for this year.

Where could it be in commercial for next year?

So what you're seeing there is some roll-off from the previous 777 and 747 work that was done, as they complete that effort, and to start to pick up on the 7 E. So you can expect to see modest increase in '04 as we work through the plan, which is authority to offer at the end of this year and authority to proceed based on the customer take-up rate sometime close to the end of next year.

Therefore, if it's only modest in '04, should we expect to the move up very sharply in '05?

I'm going back to your model, Ky, which is one that we're not pursuing this time around, the two primary pieces we spoke of before, a different business model approach with supplier partners and significant improvement in efficiency of design and development.

So when you say significantly go up, I don't think the old paradigm of developing an airplane is going to apply to the 7 E here.

Could you give us a range as to if you launch the thing early next year we could look for R & D to be in '05, rough range for commercial?

We will be better prepared to talk to you next year as the configuration fully defines and as we get through the authority to offer.

767 tanker, any thoughts on when it might get through Congress?

And, you know, given that, my understanding is you would start to deliver some planes to -- from BCA to the military business late next year.

What sort of -- how is that factored into your assumptions for '04 in terms of cost absorption?

We have in there the assumption that the program will go ahead, and I believe that it will.

It is a commercial program, so we are absorbing costs as we go today on design and will as we go forward until we move those into the delivery and lease program.

So that is in our projection.

To remind you, Ky, the first Italian would go in '05, we begin air force and Japanese deliveries in '06.

Got it.

You've mentioned mix as an issue for 2004.

Has that resulted in changes in specific block assumptions and accrual rates, and if so could you give us any color?

Obviously, I assume you've taken the 757 down.

Could you give us some more specifics on mix, like are you assuming the 757 is going at one a month, or what are you assuming for '04 in terms of mix?

We're fairly stable on production rates right where we are right now.

And that means that the '47 is at about one a month, and the '57 is at about one a month.

And, Ky, let me double-check with the team, we have no block changes except for the 71, where we've extended it two units, from 140 to 142.

Thank you very much.

Okay, Ky.

Thanks very much.

Next to Steve Binder at Bear Sterns.

You touched on the 757.

I thought we would switch gears to 717 as far as timetables.

Airtran has announced that they're taking some more 71's, and I know you've renegotiated Midwest's order to set that out to the 2006 timeframe as far as deliveries are concerned.

Talk has been that Delta and some European airlines are looking at the 717.

Two things.

One, if you had to terminate the program sometime in 2004, 2005 time frame, what would be the level of the charge.

And two, what is the timetable?

You talked about the 757 in '04.

What would be the timetable on the 17?

First off, we've been pretty aggressive and pretty conservative on 717 block, and so we're actually running to a block size that matches firm orders.

So we're not carrying a big production block ahead of us.

There is interest in that kind of an airplane.

We clearly have more running room there than we do on 57's, so we're not in any sort of near-term decision mode on 17.

But you do have supplier termination costs, right, that you would incur?

Right, and right now -- we'll sort of view that as we go, but we continue to make progress, make sales and keep going.

And I want to just tackle George's comment before about the Continental revision and the Southwest accelerating some positions and exercising some option in '04.

When you look at '05, Delta is still taking 21 planes.

At least, that's what is in their schedule now, and Southwest will definitely come down, and Continental I think has zeroed out their '05 position.

What is your expectations to get a slight uptick in '05 versus '04?

Where is that growth coming from?

When you look at the U.S. airlines, I doubt American accelerates positions in '05 and, you know, it doesn't seem like -- it's going to be tough for North America collectively to be flat to up in '05, versus '04, so you must be expecting growth elsewhere?

Where is that growth?

You mentioned Asia before, but is that really going to be enough to offset any decline in North America?

Based on everything we're looking at right now, the answer is yes.

Should third, on the margins you've previously been saying, because if you look, you know, Mike or Phil, you know, the profit revision at the EBITDA line is like $400 million to get the 35 cents in '04, and I know this question' s been asked already on a couple billion dollars of sales variance, you kind of suggested that BCA was most of the shortfall in the earnings in '04, but you were saying previously just at least -- margins being at least as good in '0 4, now you're saying even.

So were you expecting before a margin improvements of over 100 basis points in '04 internally?

We're not going to go down that specific, Steve, but, in fact, the spares business and the mix business does drive the kind of numbers we went through with that top line reduction.

All right.

Last, Phil, on the 7E7, I'm just wondering, we've talked before about launching this plane and how you might launch it, I guess on fewer customers, but I'm just looking around the globe today, these North American carriers don't seem to be in any rush to order planes right now, right?

And the Japanese carriers, I get the sense with JAL, they're low on cash right now, and those are the two markets that seem to be the most likely launch customers for such a plane.

What's a chance that this project just slips to the right as far as actually launching the plane?

My best guess right now is that we will find an appropriate set of launch customers.

I would agree with your view.

I think it's unlikely that that is a North American carrier.

But I will tell you, there's enough interest that I'm not -- I'm not particularly worried about that subject.

But we're going to get there and see.

I think it will happen.

But can I just ask you this.

Do you think you could launch that plane without -- launch the 7E7 without a Japanese or North American carrier ordering that plane initially?

I don't think I'm going to get specific on that, because now you're going to start pinning me down to a whole bunch of detail.

I think that there is interest that is good enough that we can generate a launch.

Okay.

Thank you.

Thanks, Steve.

And we'll go next to Howard Rubel of Soundview Technology Group.

Thank you very much.

A number of things.

Howard, we cannot hear you.

Is that better, Paul?

A little bit.

Scream at us.

I'll try this, and if that doesn't work.

There you go.

Well, thank you very much.

First, you took your average headcount at commercial down by, looks like 11 to 12 percent on a year-over-year basis as we go into '04.

Could you address a little bit of the productivity issues?

Because you're essentially keeping your outlook for volume flat, even if we adjust for mix a little bit.

One of the things we've said is that we are making real progress on lean.

And I think this is an evidence of that.

It is why I have such confidence that as the market does return, we will be dramatically more efficient.

Productivity looks like it's 6 to 8 percent.

Is that kind of fair?

That's kind of fair.

Second thing, very minor item, if we go to the 777 pool, isn't it also affected by the fact that you have a mix change with the larger aircraft?

I think it will be specific to what happened in the quarter, Howard.

Long term, I agree, but depending on what you deliver and who you deliver to, of course, will impact the period margins, which will impact the period deferred production.

Right.

So you're essentially, your notion is correct.

If we talk just for a moment about what happened in terms of reorganizing IDS although bit, how are you -- I mean, what else have you done to make sure that the problem that occurred at -- you know, with respect to the Delta IV, other than using a Senator Rudman, really ensures that the rest of the business units aren't affected in some way, and, in fact, you've been and rescrubbed your forecast.

Can you address a little bit of that?

There has been in the past what I call optimism at IDS which has proven to be excessive.

There are two different things mixed up there together.

Let me make sure we're clear.

On sort of the basic issue that you raised, the other thing that we have done is put together a group, small group, under Mike that has the responsibility of making sure we've got a good grasp on the financials and the future financials and that we know exactly where we are.

So we have made that change, and we are proceeding down that path.

On the other side, which is the investigation on EELV that I believe will be drawing to a close here relatively soon, that is where we've hired Senator Rudman to look at our program to make sure that we have in place an ethics program and all of what we need to assure that we don't get violations of the integrity and procurement going forward.

We'll do a stand-down in IDS on July 30th, with all employees to address that issue, so there can be no question at all.

We're going to make sure we review our hiring practices carefully.

But we're going to take a number of actions which will address that specific EELV case.

Last, thank you for that.

And last, if you would just talk for a moment about some of the other categories.

I mean, unallocated was a fairly large swing, and "Other" also was a fairly large swing.

I don't know whether Mike or Paul would like to address that, versus the first quarter.

Can we do that with you this afternoon?

Fine.

Thanks very much for your help.

Should there's nothing unusual, Howard.

Should next to Byron Callan at Merrill Lynch

Good morning, gentlemen.

Good morning.

Phil, you mentioned you had seen some encouraging signs.

Is this just kind of the generic pick up in traffic, our can you relate that to any more evidence that's specific to Boeing and conversations that Boeing may be having with customers about commercial aircraft?

It is, and I tried to say that a bit carefully.

It is more on the generic side.

It is looking at traffic data around the world, and in particular looking at the rebound that began in the middle of June in the Asian carriers and watching traffic come back in Asia.

That's probably the biggest single one.

Not a lot of bright signs in North America at this point other than in the low-cost carriers.

Second, I guess, two for Mike, you mentioned $200 million on 757 if that program were terminated.

I assume most of that is noncash.

50/50ish.

Pick a middle point there, Byron.

And I'm a bit surprised on the spares decline.

I thought, given the pick up in traffic, that might also to pick up, but you look at the inventory of parked airplanes, and that really has not come down.

Was there some other change in your assumptions that got worked into the spares outlook for this year and next?

It's the data of the current run rate that's affecting where we are right now.

It has not picked up.

Now, at some point, I think we all believe it will, but it has not, and it doesn't show any particular signs of moving.

And I think, Phil, the other point that you and I have talked about a lot, in the current marketplace, the airlines themselves are trying to get as efficient and cash conservative as they can.

So, you know, they're doing everything they can to not go out and be buying spares, even though they are starting to fly a little bit.

Last, even with the revised forecast, you guys are still generating a boat load of cash this year and next, and I just wonder if you could again review your sense of use of priorities in that cash flow.

I think pretty clearly we are.

We are being very conservative at this point.

Obviously when you're at this point in a market, you've got to be.

As we get more comfortable going forward, I think then we will make decisions on use of that cash, be it on a change in dividend or share buy-back.

I do not see at this point any heavy use of cash on the acquisition side, although I believe we will look at and probably make some small acquisitions.

And, you know, Byron, the bit of uncertainty on the pension side, a bit of uncertainty potentially on how fast we end up ramping up 7E.

It's prudent right nor for us to have a reasonable cash balance, so that's probably where we're going to start and see how things shake out next year as to where we start to put that cash.

Understood.

Thanks a lot.

We'll go next to Chris Mecray at Deutsch Bank.

I'm thinking about Asia, and from what we've heard from the carriers over there the sum total SARS impact seems to be basically a year's worth of traffic growth.

That, at some point, obviously needs to get reflected in expected deliveries, and there have been indications that you've been discussing with them how to address that.

Can you square that for me with basically the assumption that they could drive the growth in '05?

Are we basically likely to see some adjustments in '04 and then up side in '05, or how should we look at that?

Again, we right now see things relatively flat.

I don't see a strong -- any kind of strong growth in '05.

And, you know, part of the question revolves around do you get back on your long-term trend line or have you, in fact, offset the traffic line on a more permanent basis.

Our judgment is in Asia, relative to SARS, they will get back on their long-term trend line, so that while you'have a downturn for now, it will come back, and you have not lost -- you have not lost a year's sales over the long term.

In North America, I think there's actually been a shift in the long-term trend line, and we're assuming that in our projections.

Okay.

So in '05 you don't necessarily need upside in Asia to get a flat year, flat to up year?

Right.

I think you could see, you know, a little positive there and a little positive in Europe and a couple of other places.

Net at the current kind of production rates that allows us to be in the flat kind of area.

Okay.

And just separately in BCA, nice bump-up in margin in 2Q versus 1Q.

Can we attribute most of that to head counted, or headcount plus lean?

Is there any way to delve into that a little, just give us a sense for any major changes that took place, plant closures or --

Yeah, the biggest thing you're looking at there is that the delivery rate -- you know, our production rates are flat.

We delivered relatively fewer airplanes in the first quarter, more in the second quarter, so you have the advantage of where the period costs arrived and where the period deliveries occurred, matched up with continuing effort on lean and productivity.

Okay.

We've got time for one more question, David.

And we'll go to Sam Pearlstein at Jeffries & Company.

Good morning.

Can you talk about the pension contribution that you made this year into next year, what the after-tax portion of that is?

Go ahead, Paul.

The after-tax is roughly 330.

You get full tax effect on it.

When do we see the tax benefit?

Would that have shown up now or is that --

The tax benefit is contemplated in our pre cash flow outlook, because it's all there in the operating cash flow.

Then, you know, another question just on the military aircraft, in your assumptions, do you see a resolution to some of the countries like Malaysia, F-18's, or Singapore, F-15's in any of your assumptions in military?

Those are certainly areas of pursuit for our international sales.

Both are relatively modest in terms of size but they're certainly part of the overall campaign mix.

Key goals and key wins are all (inaudible.) They're all included, yes.

Just to make that clear, we factor each one of those.

So there is a probability of going, P-go, [ph] and a problem around of winning.

But will that campaign culminate in a decision and will we win, and we put that in on every single one as we try to make our estimate for where we'll be.

Okay.

And then there was something -- I guess it was on a web site a little while ago, about a 747 advance.

Have you made decisions with respect to additional enhancements on the 747, or is this something that's still out there and up for decision?

No, we have not made any decisions on any future derivative on 47.

Then the last question is just, on the depreciation that you show on your cash flow, why would that have jumped up 50 million from the first quarter, given that your capital spending is still well below your depreciation, amortization?

What you're seeing driving there is the BCC depreciation of assets as they have some additional volume.

Okay.

Thank you very much.

Okay.

David?

Thank you.

That completes the analyst question-and-answer session.

For members of the media, I will now return you to the Boeing company for introductory remarks by Mr. Larry McCracken, Vice President of Communications.

Please go ahead.

Thank you.

We will take the media questions, those that we don't get to, we want to remind you that our media line is 312-544-2002.

I will turn it back to Phil and Mike for media questions.

So we're ready to goon questions.

If you'd like to ask a question at this time, please press star 1 on your touch tone telephone.

Again that, will be star one if you have a question.

And we'll go to Melissa Allison at Chicago Tribune.

Hi.

I was wondering if you could walk me through the steps of the launch of the 7E7.

I understand that the board has to approve two things, but I've not understood exactly what they are and when you expect them.

We'll do that.

There are two discrete events that occur with the board of directors.

The first one is, the authorization to make offers to airlines.

So before we can go out and actually offer the airplane, the board has to approve.

The second is the authorization to proceed with the program.

And that is based on orders from airlines that give us sufficient confidence that the program will be a financial success that we are willing to commit company resources and then go.

It's the second one that really commits the resources.

Is that the launch?

That's the launch.

And when are you expecting these?

When are you hoping?

Our best guess is that we will address the authority to offer late this year and that the year 2004 is the year to work with airlines.

When the actual launch would come would depend on airlines, particular airlines.

It could come in the middle of the year, or it could come as late as the end of the year.

Anything further?

Yeah, I'm sorry.

I was typing.

I have a question about the 757.

Why is it not as popular with your customers as some of the others?

I'm sorry, I'm new to it, and I don't understand why that one, of all of your programs, is --

The biggest reason -- there are two fundamental reasons.

One of them is that the 737 family has grown up in size, so that the 737-900 is actually getting relatively close to the 757 in size.

The other is that there is an anticipation in the market that we will go ahead with a middle of the market airplane, 7E7, that would replace that airplane.

The combination of those two clearly are putting pressure on it.

In a market that is very poor overall.

I see.

And I have another really silly question.

For your 2005 gradual recovery, do you count deliveries, orders, revenues, what, when you talk about recovery?

Deliveries.

What matters is deliveries and when they occur, and what we're looking at is a relatively modest recovery that could begin to occur in '05.

Thank you.

You bet.

We'll go to Molly McMillan with Wichita Eagle.

Good morning.

My question has to also do with the 7E7 and what -- it seems to be, from an outsider's view, that Wichita is putting things in place to prepare for some 7E7 work and I'm wondering, what do you see?

What's the outlook here for Wichita?

Are we going to get some work, or when is the decision going to be made if one has not already been made?

One has not been made.

The program is currently looking at a whole range of issues on how to best develop that program, what is is supplier base will be, where assembly will be.

Obviously, Wichita is in that mix as a valued part of the Boeing system.

When will the announcement be made, or when will you make those decisions?

Those decisions will occur over the next probably six months, but, of course, that will go back to that previous comment.

Until we actually launch the program, all you've done is made a decision that that's where we'll be if you do launch.

I believe it will, but that final decision is launch the program.

Okay.

Thank you.

You bet.

Thanks, Molly.

We'll go to Darrell Ashland at Bloomberg News.

Mike, I wanted to know if you could hopefully briefly be able to walk me through why you expect the pension contributions may be a little lower next year than the million dollars?

The pension contribution could be lower if, in fact, the assets outperform the assumptions we have in the forecast.

So when you all get the capital marketplace moving up and the Dow is getting up there, it will exceed our plan, and therefore we won't have to put as much in.

Simple enough.

Thanks.

You bet.

And we'll go next to Chris Stickowitz at Reuters.

Good morning.

I wonder if you folks could talk about exchange rates, and in particular the weak dollar against the euro.

Is that giving you any improvement in the current numbers?

Do you expect any in the future numbers?

We're hearing some anecdotal reports that maybe Airbus is having a little trouble -- incurring competition because of the weakness in the dollar.

Should let me start by saying that when everybody anticipated the float of the euro, the numbers that they used were between one and 1.2.

That was the expected position.

It opened right around 1.15 and then proceeded to get very weak.

It has now rebounded back to where everybody thought it would be, so I don't think this is a weak dollar issue.

I think it was a weak euro issue, and it's now back to where I would expect it to be.

Second, from our standpoint, our costs are, with all of our suppliers, international as well as U.S., our costs are denominated in dollars.

Our labor costs are in dollars, and aircraft on a global scale are sold in dollars.

So obviously in that sense, exchange rate doesn't affect us directly.

However, since Airbus has a lot of its cost in euros, a stronger euro clearly makes their cost higher, and it gives us an advantage in the marketplace.

And is that something that you will see some kind of tangible evidence of as you go forward?

In other words, win more orders as a result of that?

No, you certainly won't see more orders.

The orders are driven by the market and demand in the market.

It means that in a competitive environment, from an overall cost standpoint, we're more competitive.

Okay.

Thanks.

And we'll go to James Wallace at Seattle PI.

One follow-up question on 757 and the Continental orders.

Right now continental has almost all the backlog after this year and you are in talks with Continental.

Would you anticipate that if you don't get new 757 orders that you might make a deal with Continental but they don't have to take those airplanes in '04 and '05 so that you might actually end production next year?

That's a combination of what happens in the market and those discussions with Continental.

Your facts are clearly correct.

Continental is a big piece of the existing backlog.

If they don't want the airplanes, then that will affect the decision.

So that is part of the -- that's one of the variables now, whether they take those planes or not?

Yes.

Thank you.

We'll go to Laurie Ranson at Aviation Daily.

Just a couple of clarification questions.

You said it would be a 200 million charge if you eliminated the 757 program?

It could be as -- in that order, yes.

Until you actually make the decision, when you make it, and then go negotiate with suppliers, you won't know the actual number.

And could you explain a little more detail about the 777 production deferrals?

Real quick and dirty, because you price commercial airplanes flat, and early in your production cycle, they cost more than they do at the end, you have this category called deferred production pricing -- costs, excuse me.

Deferred production cost.

We are well beyond that, and now that category is simply the difference between the unit cost margin and the GAAP margin, and that number reflects that margin and how much revenue is going through the 777 line.

The GAAP margin is reflective of what we believe the average cost and average revenue will be over the authorized block of production.

Okay.

Thank you.

You bet.

We'll go to Francine Knolls, Chicago Sun Times.

Good morning everyone.

I've got a question regarding the 757 program also.

If you decide to eliminate that what would the impact be on employment?

I don't think any of us here have that number well enough to define for you, Francine.

And I just want to make sure I'm clear.

A decision on that, is that expected next year?

I want to make a different kind of a statement.

One of the things that we are clearly trying to do is make sure that there aren't any surprises to the marketplace in general.

Since there is a risk that that is a decision that we will have to make, we wanted to put it out.

We have not made that decision.

It will occur when it needs to occur, and that may not happen at all, depending on whether or not we're successful in current campaigns.

But we felt it was important that we make that known to people, that it could happen.

And, I'm sorry, why aren't you able to come up with an estimate on employment impact?

Because it will factor into what all of the other productions lines are doing at that time, and, you know, if you've got a slight increase somewhere else, you could easily use up the people that are currently working the 57.

Thank you.

We'll take one more.

And we'll take our final question from Dominic Gates at the Seattle Times.

Actually had two questions.

Some of the problems at BCA and the numbers are coming from the mix of airplanes, a shift in the mix.

Can you talk about when that mix might shift back with the increase in the discount carriers flying the smaller plains planes, do you see the mix shifting back?

How temporary is that shift?

I think overall it is a relatively permanent shift.

One of the things that we believe, based on all the data we're looking at, is a strong preference for point-to-point operations.

What we actually are seeing is the average size of aircraft on a global basis going down slightly.

What that means, then, is more smaller airplanes, fewer big airplanes.

It is, to be very candid, why we are not doing a super jumbo airplane.

We do not think that market supports a very large airplane, because we think this shift toward smaller aircraft is permanent.

Is that going to have a large impact on BCA revenue as we go forward, then?

The simple answer is that the price of a seat, whether it comes in a big package or a small package, is about the same.

So what really drives it is traffic demand, and, therefore, number of seats generated, and from our standpoint, we don't care whether that comes in smaller packages or bigger packages over the long run.

We believe that the bias is towards smaller.

If I could just put in my second question, the 717 program, obviously you're expecting those four members of the star alliance may order, but if that doesn't happen, how does the 717 survive?

The story is exactly the same.

If people don't order an airplane, you don't build it.

We obviously believe that there is a market for that airplane.

There are a number of places where sales are possible.

But if it should happen that nobody orders an airplane, that's when you make a decision on its long-term viability.

That will wrap it up.

We thank you for being with us.

Remind you that the media line is open at 312-544-2002.

Thank you very much.

Thank you for your participation in today's conference, and you may disconnect at this time.