波音 (BA) 2004 Q2 法說會逐字稿

Thank you for standing by.

Good day, everyone, and welcome to the Boeing Company second-quarter 2004 earnings results conference call.

Today's call is being recorded.

The management discussion and slide presentation plus the analysts and media question-and-answer session are being broadcast live over the internet.

At this time for opening remarks and introductions, I am now turning the conference over to Mr. David Dohnalek, Vice President of Investor Relations for the Boeing Company.

Mr. Dohnalek, please go ahead.

Thank you and welcome to the Boeing second-quarter earnings conference call.

I'm Dave Dohnalek, and with me today are Harry Stonecipher, Boeing's Chief Executive Officer, and James Bell, our Chief Financial Officer.

After brief comments from Harry and James, we will take your questions.

We ask that you limit yourself to one, single-part question.

As always, we provide a detailed financial information in our press release issued earlier today.

As a reminder, you can follow today's company broadcast through our website at boeing.com.

Now before we start, I need to remind you that any projections and goals we may include in our discussions this morning are likely to involve risks and uncertainties.

The assumptions behind our projections and the factors that could cause actual results to vary are detailed in the news release we issued earlier 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 Harry Stonecipher.

Thanks, Dave, and good morning.

Today we will be discussing our second-quarter results and I will be begin by sharing my perspective on the quarter, James will summarize the financial results and provide you with our outlook, and I will conclude by stating our priorities going forward.

We will then be happy to take your questions.

So let's get started on slide two.

We had another very good quarter as the investment we've been making in our performance continues to yield results.

Our revenue performance was anchored by growth in our defense business, as defense markets remain robust and commercial markets showed signs of recovery.

Operating earnings and margins were solid crass our defense and commercial airplane businesses, as our teams continue to focus intensely on execution.

Our businesses has, once again, generated outstanding cash flow, allowing us to continue our balanced strategy for cash deployment, including another substantial contribution to our pension plans.

During the quarter, we've continued to position the company for future success with key wins for our new 7E7 airplane and in our defense transformational programs.

With the strong performance of the Boeing team and a growing economy, our outlook is improving and we are raising our financial guidance.

Now let's move to the business units, beginning with the Integrated Defense Systems on slide three.

IDS had an excellent quarter delivering strong revenue growth and margins.

Revenue grew by 9%, driven by double-digit growth in our network systems business.

Operating margins remained excellent, reflecting continued strong performance in the aircraft and weapons systems, network systems, and support systems businesses.

IDS margins were strong, despite continuing challenges in our commercial space business.

We are focused on fixing the problems in that business, and returning the launch and orbital segment to profitability.

IDS continued its outstanding track record for winning new business with the capture of the design contract for the U.S.

Navy's Multi-mission Maritime Aircraft.

The MMA program represents a new growth platform for the company, and was won by combining the best capabilities of our commercial airplane and defense businesses to provide our customer with the most innovative and best value solution.

IDS also performed well on future combat systems programs, completing the design concept review on schedule and on budget.

The IDS team is intensely focused on performance and execution, and their results show it.

I am confident they will contribute strong revenue and earnings growth over the next several years.

Now let's turn to the second-quarter highlights from our commercial airplanes business on slide four.

Commercial Airplanes turned in another good quarter.

BCA delivered 75 airplanes and solid profitability, reflecting its ongoing focus on reducing costs and improving asset utilization.

During the quarter, BCA captured 46 gross orders, including key wins with Airt Tran Airways, China Airlines, Korean Airlines, and GOL Airlines.

BCA continues to see tremendous interest in the 7E7, finishing the quarter with accepted proposals for over 200 airplanes from customers around the world.

Airline traffic grew robustly during the quarter as the market continues to recover, and we are seeing increased interest in ordering new airplanes from many airlines.

BCA also reached several milestones during the quarter, delivering the first 777-300 extended-range airplane to Air France, and delivering the 1500 737 new generation airplane.

Commercial Airplanes has the right strategy combined with a strong record of execution and the best team in the business.

It is well positioned for profitable growth as the market recovers.

Now let's look at our other businesses on slide five.

Boeing Capital continued to implement its new strategy to support Boeing businesses and prudently manage risk with the sale of its commercial finance business to G.E.

Capital for about $2 billion.

As planned, portfolio growth for its remaining business slowed substantially, as the market environment for commercial airplanes continues to improve and alternative sources of financing began to emerge.

Looking forward, we expect BCC's growth to moderate, reflecting lower demand for Boeing financing and BCC's focus on managing the risks and preserving value.

Connexion by Boeing reached a major milestone in the second quarter with the launch of commercial service on Lufthansa.

The service has performed well in the first two months and initial customer response has been in-line with expectations.

Connexion continued to add customers, receiving an order from Korean Airlines.

Connexion also began leveraging its network and services into the maritime market by announcing a market trial with TK Shipping.

So with that review of our performance, I will now turn it over to James, who will take you through our financial summary and the outlook.

After that, I'll wrap up with some final thoughts, and then we'll get to your questions.

James?

Thank you, Harry, and good morning.

First, I'll discuss a few financial highlights for the quarter and then I'll take you through our updated guidance.

Let's begin with the summary on slide seven.

Boeing's financial results for the second quarter reflect continued, strong operating performance and the favorable impact of a tax refund.

Revenues grew to 13.1 billion, and earnings per share increased to 75 cents for the quarter, reflecting good performances across our defense and Commercial Airplane businesses.

Cash flows from the businesses remain very strong and as a result, we chose to make another $1 billion discretionary contribution to our pension plan.

After making the pension contribution, we still generated $1.4 billion of operating cash flow during the quarter.

As a result of this strong performance and improving delivery outlook for Commercial Airplanes, we are raising our guidance for both 2004 and 2005.

Turning to slide eight.

Total company revenues increased 3% to $13.1 billion in the second quarter.

Integrated Defense Systems continued to show strong growth, with revenues rising over 9%.

Growth at IDS offset a modest decline in Commercial Airplane revenues.

Company operating margins were 4.9%, up substantially from the second quarter of 2003, which included a charge in our commercial launch and satellite businesses.

Both IDS and Commercial Airplanes continue to increase productivity and improve operating efficiency.

For the quarter, the Company earned 75 cents per share, up from a loss of 24 cents per share in 2003.

We benefited from a 23 cent per-share gain due to a federal tax refund, and a two cent per-share gain from the sale of our Boeing Capital Commercial Finance portfolio, which is now reported as discontinued operations.

Turning now to slide nine.

Our core business units had another strong quarter.

Revenue growth at IDS reflected solid performance in three out of four segments, led by Network Systems, which grew 22%.

Operating margins were 9.7%, driven by continued strong performance on most defense and intelligence programs, which offset losses in our commercial satellite business.

Commercial Airplanes performed well, as operating margins grew to 6.7%.

Revenues were down slightly, reflecting a higher proportion of 737 deliveries during the period.

Ongoing [inaudible] activities across BCA's enterprise continued to drive operating margins higher, despite increased R&D investment in our new 7E7 airplane.

Moving to slide 10.

Our balance sheet liquidity remains very strong, as we ended the second quarter with a cash balance of 6.2 billion, up from 4 billion at the end of the first quarter.

The increase reflects continued strong operation -- operating cash flows from both IDS and Commercial Airplanes, and the sale of Boeing's commercial -- Boeing Capital's Commercial Finance portfolio.

Boeing's debt was flat at 5.2 billion.

Boeing's capital debt decreased to 8.5 billion at the end of the quarter.

BCC's debt-to-equity ratio rose modestly to 4.7 to 1, due to the sale of the commercial finance portfolio and the related cash dividend from BCC to the Boeing Company.

On July 26, Boeing redeemed an additional $1 billion of BCC debt, further reducing total debt levels.

The impact of this debt redemption will be reflected in our third-quarter results.

Financial strength and solid credit rating remain a priority for Boeing.

We remain at the top of our industry here, with solid, single A ratings.

So now moving to slide 11.

Boeing's cash flow was outstanding, totaling 1.4 billion for the quarter.

As I mentioned earlier, operating cash flow included another $1 billion discretionary contribution to our pension plan, which will reduce Boeing's required contributions in the next few years.

This brings the total discretionary pension contributions in the first half of 2004 to $2 billion.

In May, we announced the resumption of our share repurchase program and increased our dividends by 18%.

Since the announcement, the Boeing Company has repurchased 4.4 million shares of stock for a total of $204 million.

We will continue to pursue a balanced approach to deploying Boeing's strong cash flow.

Now turning to slide 12, and I'll discuss our outlook.

Today we are raising our guidance for both 2004 and 2005.

We expect earnings in 2004 to increase above previous guidance, principally due to the tax refund received in the second quarter.

We are raising our guidance for 2005 earnings, driven by increased airplane deliveries at Commercial Airplanes as well as lower than expected pension and retiree medical expense.

Our cash-flow guide for 2004 is unchanged, despite the second-quarter pension contribution, which had not been previously included in our guidance.

We are increasing our cash-flow guidance for 2005 due to more favorable delivery outlooks for Commercial Airplanes.

Now turning to our segment outlook.

Commercial Airplane delivery forecasts for 2004 remain at approximately 285 airplanes and has essentially sold out.

We are increasing our delivery guidance for 2005 to between 315 and 320 airplanes, as customer interest in the 737 next-generation family continues to increase.

The 2005 delivery forecast is 92% soldout at the lower end of the range.

Commercial Airplanes expects a further delivery increase in 2006, driven by generally improving marketing conditions.

Given this higher delivery outlook, Commercial Airplane revenue guidance for 2005 is increased to between $23 and $24 billion.

Commercial Airplane operating margins in 2004 remain on-track and are expected to be between 4.5% to 5.5%.

The outlook for BCA's operating margin in 2005 has been raised to greater than 5.5%.

The higher operating margins include a planned rampup in R&D for the 7E7 development.

Integrated Defense Systems' revenues for 2004 are expected to grow between $29.2 and $30.6 billion, and then increase by approximately 10% in 2005.

This guidance is driven by continued strong growth in our network systems and support systems program.

We anticipate that aircraft and weapons systems programs will be stable, while commercial satellite and launch markets are expected to remain challenging during the outlook period.

Spurred by strong program performance, IDS margins are forecasted to be in the 9.3% to 9.8% range in 2004.

Margins are expected to improve slightly below 10% in 2005.

Now turning to Boeing Capital.

Our new strategy to lower portfolio growth and risk is going well.

As a result of the sale of our commercial finance portfolio, we now expect BCC's portfolio to decline approximately $2 billion in 2004, and to grow by less than $500 million in 2005.

Reflecting a smaller portfolio, revenues are now expected to be approximately $1 billion in both 2004 and 2005.

Boeing Capital's annual return on assets is now expected to be approximately .8% (PH)in 2004, reflecting the costs associated with the $1 billion debt redemption completed earlier this week, and excluding the gain from the sale of BFS.

Without the charge for debt redemption, BCC's return on assets would exceed 1%.

For 2005, Boeing Capital expects its return on assets to be greater than 1%.

Additional guidance is provided in our press release which can be found on our Boeing website.

Now, putting this all together for the total company, Boeing revenue guidance for 2004 is unchanged, at plus or minus $52 billion.

Revenues guidance for 2005 is also unchanged at between $57 and $59 billion, but now includes increased delivery for Commercial Airplanes, offset somewhat by reduced volume in BCC resulting from the sale of BFS.

We are raising our earnings per share guidance for 2004 to a range of $2.25 to $2.45 per share, reflecting the impact of the second-quarter tax refund.

For 2005, we are raising our earning guidance to between $2.35 and $2.60 per share, reflecting higher deliveries at Commercial Airplanes and a lower pension and retiree medical expense than we had previously anticipated.

Both years continue to reflect the significant year-over-year increases in [inaudible ] expense.

Guidance for 2004 and 2005 also include the impact of [noncash]share-based planned expense, which totaled approximately 36 cents per year -- per share in 2003, and is expected to grow during the guidance period.

For 2004, operating cash flow guidance remains between $3 and $3.5 billion, but now includes a total of $2 billion in pension contributions made in the first half.

We continue to assess the various options available for deploying our strong cash flow, including additional discretionary pension contributions.

Capital expenditures are expected to be approximately $1 billion in 2004.

For 2005, our operating cash flow guidance is increased to greater than $5 billion, supported by higher airplane deliveries.

Capital expenditures for 2005 are expected to be in the $1.5 billion range, which is unchanged from our previous guidance.

The growth in 2005 capital expenditures primarily reflects investment to support Connexion by Boeing and the 7E7 program.

We expect R&D expense to be between 3.25% and 3.75% of sales in 2004, growing to between 3.5% and 4% in 2005, driven by increases in 7E7 spending.

Now with that, I'll give it back to Harry for some concluding remarks.

Thank you very much, James.

Now, to wrap things up, as we've begun the year with a very strong first half and we're well-positioned in our major markets with the right strategy, great products, and a great team.

We are committed to restoring our reputation for excellence and integrity with our customers, our partners, and our employees.

And we are relentlessly focused on execution, meeting our commitments, and driving our performance to new levels.

And at this point we'd be happy to take your questions.

Thank you.

The question-and-answer session will be conducted electronically. [Operator instructions.]

We'll take our first question from Nick Fothergill, Bank of America.

Hi.

Good morning, gentlemen.

A quick question, if I may, on EBIT margins in commercial aerospace.

You already, this quarter, BCAG got 6% margins; in fact, 6.7 on a GAAP basis, and yet for the full year, you're looking at 4.5 to 5.5%.

Can you explain that, please?

Yeah.

You know, during the second half of the year, there are two things that are going to happen.

We're going to have fewer deliveries during that second half, we're also going to have the continued mix of more narrow bodies than full bodies.

And then, of course, we have the increased spending on the 7E7 development.

So we expect the margins going in the second half to somewhat moderate from those we've experienced in the first half.

And our next question will come from Steve Binder with Bear Stearns.

Good quarter.

James, were there any changes in any of the accounting quantities on the program method or any changes in cost estimates?

And also, on the unit cost method, there was a major improvement in margins.

Was there any favorable cume adjustments in that number for the quarter?

Steve, to answer your first question, we did have an accounting quantity increased on 737s; it increased 200 units.

And we had an accounting quantity increase on 717's; they went up six units to reflect orders we received during the quarter.

No, there wasn't any change in the quarter on the unit margins issues.

It's what I talked to yo about earlier.

We had a change in our cost estimates in the first quarter and we had a pretty significant unit margin because of that, because of the retroactive adjustments for that lot.

And we didn't see that in the second quarter because that's behind us.

Our next question will will come from Byron Callan with Merrill Lynch.

Yes, nice quarter, gentlemen.

Harry, [inaudible] Airbus talked about taking single air production rates up 50% by mid 2006.

You talked about this upturn, signs of an upturn you're seeing in commercial aerospace.

And is there any way we could see Boeing kind of match that same type of path or is this something that's really kind of unique to Airbus and maybe Boeing's seeing something a little different?

I think that they're seeing a market that we don't see, Byron.

I'll be very surprised if it grows that much.

It is certainly growing, but we don't see that type of growth.

We'll go next to Cai von Rumohr with SG Cowen.

Yes.

Following up on the question about the unit cost margins, should we expect the accounting differences in commercial to kind of continue to go down or to remain at a relatively low level to get to the number for the year in unit cost margins?

I think we'll see the numbers start to come together and be pretty close for the second half of the year.

We don't anticipate any unusual cost growth in any of our estimates in terms of the elements of cost we're going to experience in producing those aircraft.

And we do believe we're going to continue to see the increased operating efficiency coming from better performance in both margins.

And we'll take our next question from Rob Friedman with S&P.

Oh, thank you.

My question was answered.

Thank you.

We'll move on to Jim Higgins with Dain Rauscher.

Pardon me, Jim Higgins with CSFB.

Thank you.

I noticed that Delta restructured their order with you last week, or announced the restructuring.

Was there any impact in anything they did on your 2005 delivery forecast and any financial impact at all about what they did?

No.

There is not any in either this year or in '05.

George Shapiro with Smith Barney.

Good morning.

It's James.

I just want to pursue a little bit more.

The 777 excess production actually came down 10 million this quarter, so that was a plus for the first time in several quarters.

But it's still on a per-plane basis only like .9 million, and you've got to absorb over 5 million per plane to complete the pool in the same size you have.

So do you see significant improvement in future quarters in 777 production, or are you just going to increase the pool to accommodate the difference?

In that regard -- well, first of all, thank you for the compliment -- but we think we're going to see steady production going forward and the preproduction costs on 717 will come down accordingly.

Excuse me, the 777 will come down accordingly.

Our next question comes from Peter Jacobs with Ragan MacKenzie.

Good morning, gentlemen.

Can you give us a sense of how you think the delivery mix in terms of units in the third and the fourth quarter -- I would suspect that the unit deliveries in the third quarter are going to be less than the fourth quarter.

But could you just discuss that for a moment?

And then looking at the 747 production, do you think that can hold steady into '05 from the current rate?

Yeah, the -- what we're going to see in the third quarter, we're going to see a normal seasonal reduction and it should come back and recover a bit in the fourth quarter.

But you know what we're forecasting for the year, and in our guidance, is 285 airplanes.

And we delivered approximately 155ish or so through the first half.

So you're going to see those spread out over the next two quarters, and they will be fewer in third and fourth.

And yes, we do believe that production rates are going to hold reasonably stable for the rest of the year.

And our next question will come from Joe Nadol with J.P. Morgan.

Yes, good morning.

Harry, could you provide an update on the launch business and in particular, EELV and what your outlook is for getting new contracts, I guess access to the short -- assured access to space, and going forward, as well.

Well, we're still on suspension and we're still cooperating in answering questions for the suspension and department officials.

And in due course, all those will get answered, and all of the things that concern them will get taken care of and we'll be back to business.

But for the time being, as we have no forecast on when that will end.

And our next question comes from Bob Toomey with Dain Rauscher.

Hi, good morning.

Can I follow up on the first question relating to margins in the commercial segment?

I wondered if you could address some of the issues,some of the key highlights of why your margins are doing so well.

I know it's lean, but are you making better progress in lean than you had expected?

And I can't understand why you would see margins down significantly in the second half.

Thank you.

Well, so again, the -- the margins in fact, are going along plan.

Our lean initiatives and our investments in our productivity enhancements in our initiatives are going according to our plan.

So we do believe that that's why the margins are up.

And the reason that the -- the principal reason that the margins are going to be down in the second half of the year is the increase in spending on our 7E7 new airplane program.

But we're going to continue to see the improvement and performance -- productivity improvements flow through the second half of performance.

But it will be offset by increased spending in R&D.

And our next question will and from Joe Campbell with Lehman Brothers.

Good morning.

I wondered if you could tell us you're going up from 285 to 300 and as many as 320.

Can we expect the deliveries next year to be phased relatively equal, or do you have in mind at some point during the year raising the production so that we might have the first half be more like this year and maybe the second half stepped up more?

Or are the changes that are happening to get you the higher deliveries going to happen earlier in the year and be more modest changes?

I think we're going to see -- we're going to be pretty much the same profile we've seen in the past, but we may see a little higher delivery go in the fourth quarter of next year to accommodate what we see as growing orders this year for '05.

And then of course, we're expecting a gradual increase going into '06, so we'll be ramping up to cover that, what we believe that market demand will be, Joe.

And Joe, this is Harry.

I think a good way to look at it is the rate change, obviously, just got made recently, and that's why we're telling you about it now.

And rate changes take place within lead time away for the supplier network.

So you can expect that the increase will occur in the last half of next year.

We'll take a follow-up question from Byron Callan with Merrill Lynch.

Yeah, Harry, I just want to go back to the earlier question on EELV.

This is more speculative, but there's been some debate about whether the U.S. would actually go to a single launch provider.

Is there any way to kind of shape or define the risks that could be associated if that launch provider happens not to be Boeing?

There's no way to do that right now and it would be presumptuous of us to believe that we could arrive at that number, Byron.

But when you look at going down the one supplier, number one, I'm not sure it will go there because one of the things that's been part of this whole program was being sure that you had access to space, and that meant always being sure that you had two options.

This really wasn't about cost when this program was established; it was about assured access to space at any time.

And if one supplier for any reason had a failure, then the other one was there.

So I'll be very surprised if it goes down to one type of launch vehicle in the first place.

And in the second place, if it should, because we're on suspension, a lot of people automatically assumes that it will be the other guy, and in fact, there's some complications there, as you know, because they're EELV vehicle, really, is powered by a Russian engine, which brings into question some other things that have to get taken care of.

And they could get taken care of.

So -- but fundamentally, I don't think it's going to happen that way.

And we'll take a follow-up question from Nick Fothergill with Banc of America.

Yes, Harry, just on launch and orbital systems as a whole, when do you expect that business to break even now and how do you expect to get there?

And a minor follow-up on future combat systems.

Do you think there's a chance that some of the communication systems elements of FCS that could actually be brought forward at all?

First question is, we expect that the orbital systems -- launch in orbital systems will look like break-even next year, and that's the plan that I reviewed very early this year.

We expect them to lose, you know, $50, $100 million next year, we expect them to break-even next year, and have a robust business that kind of doubles by the time you get to '08.

And the profitability of our plan ends up looking like the top quartile of all of our businesses in Boeing.

Future combat systems and pulling forward communications-type products, I -- my view on that is that the Chief of Staff of the Army is looking at ways to introduce enabling technologies and forced multipliers any way that he possibly can as early as he can.

And that's one of the reasons that they're going into a spiral development process.

So you may very well be right on.

Time will tell as we sort through all those opportunities.

We'll take a follow-up question from Cai Von Rumohr with S.G. Cowen.

Yes, you forecasted R&D in a range of 3.25 to 3.75% of sales, and yet commercial really has been kind of in an upward ramp over each of the last several quarters.

If you continue to model that uptick, it would look like you get to the upper end of your range or somewhat higher.

Am I missing something here?

Why aren't you at the upper end?

Yeah you are.

I think you've got to take into consideration that we're expecting, and the plan is for the IDS R&D to modulate more in the second half.

And so the rampdown of it, coupled with the ramp-up that you're seeing in 7E7s, spending in commercial aircraft is going to keep us, we believe, in our range.

And our next question is a follow-up from Steve Binder with Bear Stearns.

Does your cash forecast for 2004 assume getting deposits on orders for 200 7E7s?

The question was, does the cash forecast for 2004 assume deposits from what?

[inaudible] --7E7 -- material --

No, it's not material if that's the question.

You kind of faded out to me, but if that was your question, they're not material advances associated with the 7E7 orders in our 2004 cash forecast.

We'll go next to John Rogers with D.A. Davidson.

Good morning.

In terms of your assumptions for BCA deliveries, 315 to 320 in '05 and then climbing into '06, can you give us any specific assumptions for the models where you don't have a lot of backlog; namely, the 717, 757, and 767.

Are you assuming that you're still producing those planes --

Number one is our forecast is that the 757 line is closed.

In fact, we've made that decision, and the last airplane is being assembled as we speak.

And so the 757 is down.

We will make a decision about the 767 line probably next summer and that will depend on how many orders we have and what's going on there and where the tanker program comes out. 717, we just extended the block, and we have one way that we decide how to treat production lines and that is when people stop buying an airplane, we stop building it.

And so as long as orders are coming in, we will continue to build it.

And, of course, the production rate on the 717 is about one airplane a month.

So it's very low, and every order of a half a dozen airplanes extends the time by half a dozen months.

And so we have a number of campaigns going on and the result of those will determine the life of that program.

So all of the assumptions that we have on the different product lines, we look at on a quarterly basis and make a decision about.

Our next question will come from George Shapiro with Smith Barney.

Yes.

James, you changed your assumption on the 67 tanker, from expecting an order this year to now expecting one next year.

How does that change the assumption on the 767 tanker deliveries?

It -- well, so when you say the tanker delivery, it didn't change the assumption on the deliveries, other than if they're flying to the right.

We did have in it, because of the scheduled slide, an impact that's incorporated in the closing position on the 767 product line because, obviously, we we were originally anticipating to have those aircraft in the production this year and it appears we will not.

And so there was an impact on the 767 profit margin associated with sliding the build-up of the production out.

And our next question will come from Heidi Wood with Morgan Stanley.

Good morning.

Harry, with Airbus talking about this big number of deliveries in '06, can you talk about the kind of pricing environment that you and your team are anticipating for 2005 and '06 on the order front?

And also give us your thoughts, kind of I want to get a sense of your philosophy about the importance of Boeing's market share going forward.

Profitability is more important than market share, Heidi, and that's the way we've been running our business, and selecting the right product and building a high-quality product will win every time.

That is what the 7E7 is about.

And if you will recall, the way people thought about us going out of business last year, it's amazing, about how strong the reception is for the 7E7.

As -- there will be price competition will be fierce.

And the 777 area against the A-340 because we're dealing with a customer that has all kind of subsidies and support, and so we're trying to deal with it best we can.

But if we can't make a profit and we know where these deals go, we walk away from them.

We will not change that philosophy, no matter what happens, and right now we think we've got a real winning horse called the 7E7, and the airlines are telling us that and we like what's going on.

So Airbus should be very happy because they made their decision, it's called the A-380.

We're very happy, we made our decision, it's called 7E7.

So I expect they'll go sell A-380's against the 747, and we're going to sell the 7E7 against the A-330.

So I'm pretty happy with our position right now.

In terms of their forecast of up by 50% in the standard body or narrow body airplanes for '06, then they obviously have seen something in the marketplace that really has excited them and we have yet to see that.

But we continue to have a great narrow-body airplane and that the market opportunity is growing.

You can count on Boeing being there.

And our next question will come from Gary Liebowitz with Jefferies.

Thanks.

James, when you made the billion-dollar pension contribution in the first quarter, you reduced the pension expense expectations for '04 and '05.

Should we expect a similar bang for the buck with the second billion-dollar contribution?

Not in '04.

We will see a reduced pension expense in '05 and subsequent, but not in '04.

Remember, our measurement date is as of September 30 and we assumed -- and we have announced in our 10-K ending '03 that we were probably going to make the first billion-dollar contribution, so that was somewhat in our calculation going forward.

But the second one, obviously, was beyond that period, and so we won't see the impact of it until '05.

As I mentioned earlier, we're going to be looking at going into -- as we go through the second half of the year with our strong cash flow, we'll be looking at other discretionary contributions to the plan, which would also have benefits in '05.

And our next question will come from Howard Rubelle with Schwab Soundview.

Thank you.

James, if we look at other -- you've used that as a catch-all before, from everything from Connexion to changing, you know, I would say just writing off assets -- if we were to sort of look at what's going on here a little bit, are you -- do you see continued opportunities to sort of use that as an opportunity to offset some of the improvement in some of the other businesses so you're getting rid of some risk?

No, I don't think it's used as an opportunity to get rid of some of the good performance we've seen in others.

It actually has in it our Boeing technology, Connexion by Boeing.

It has some adjustments for inner company accounting, and then some of our [inaudible]cash adjustments in it.

It' not an opportunity to [inaudible] good performance.

It's really a real accounting classification in the segment in our financial statements, and the numbers there are what the numbers are based on the performance on those elements I just described.

And we'll take our next question from Rob Spingarn with Wachovia Securities.

Good morning.

Could you give us a sense of how commercial fares grew year-over-year?

And with this supply-chain initiative that you've got, what kind of size would you expect to see the business grow to on an annual basis?

Well, the fares are growing slightly and they're starting to show a pretty good indicator of the recovery.

I'm not sure exactly what the percent was, but overall, cash grew about 15% year-over-year, and in that is where our fares business is; it's a predominant piece of it.

And we're going to expect to gradually increase as we go into '05 and subsequent as the market recovers.

Our next question is a follow-up from Joe Nadol with J.P. Morgan.

Thanks.

Harry, Airbus is talking to airlines about A-330 variant to fight against your 7E7.

Do you think that's in any way holding back any airlines from committing to the aircraft, and do you think they'll go forward with it?

We're not finding any airlines holding back at all on the 7E7 and in fact, we're working very fast and furiously to meet the demand in terms of proposal acceptances and being able to get proposals in place.

So we're not finding anybody holding back waiting on an improved A-330.

We'll go next to Bob Toomey with Dain Rauscher.

Hi.

Just two quick follow-ups.

Can you comment on single aisle demand?

You said your 737's strong; where is the demand coming from?

And then I just wondered if you could clarify the term "accepted."

You mentioned 200 accepted proposals for the 7E7.

I wondered what that means.

Thank you.

Number one, an accepted proposal is one that does not go in the backlog.

We make a proposal to an airline; as they accept that proposal, subject to final negotiations, and they pay a deposit, and it's to hold positions while contracts are being negotiated.

And you notice we just finished the contract negotiation with ANA day before yesterday, I guess, and had a big celebration out in Seattle.

So that was a proposal acceptance back on April 26 and it takes about that long to negotiate contracts.

So we have proposal acceptances from over -- for over 200 airplanes and it grows every day.

So as those -- as the airlines want to announce that, that's up to them, and they will from time to time.

And we've had some others that have announced.

Three other airlines have announced that they have accepted proposals and then when we get to a contract, then that goes into the contractual backlog of the company and shows up on our website.

So that's what it means.

And 737 continues to have strength primarily in low-cost airlines, but everyone's adding a few 737's here and there.

There's been upward pressure on that product -- on that production line for several months now, and we like it.

Our next question will come from Joe Campbell with Lehman Brothers.

Of all the announcements, I personally thought that there would be more airlines stepping up, you know, beyond sort of, Blue Horizon and First Charter, or whoever, First Choice.

What do you suppose is the time table for when all the airlines that are about to do this, announced to the world that they've chosen your plane?

Oh, I think it's probably between now and the end of September, October, that time period, Joe.

Every airline has a reason and a decision point at which they want to make announcements and how they want to do it, and that's always been the case.

Operator, we have time for one more question, please.

Thank you.

Our next question will come from George Shapiro with Smith Barney.

Harry, overall, how do you rationalize that a lot of the demand for the 37's are coming from low-cost carriers that continues to report weakening profit margins in this environment of recovery?

I mean, how does that all resolve itself in your eyes?

In my eyes, it all resolves itself around being able to pass on cost or reduce pass-on cost, and this is particularly has to do with fuel prices, I think, Howard.

And of course, weakening is the term, okay?

They are not losing money; they are making money and they are taking market share from full-service carriers.

So they have growth.

They're serving the market and the reason they're buying airplanes is that they have to serve the markets that they have chosen to be in.

And, you know, as Air Tran is starting to switch over to 737's, which connects every city pair in North America for them, so that's a move for them from 717's into 737's.

There's a big order, and so that's what you're seeing.

And it's not just 737's, by the way; the same is true on the A-320 lines, as you see they're dedicated airlines that are continuing to buy.

Most recently, I think Jet Blue announced some orders, so it's serving the market .

That completes the question-and-answer session for our analysts.

For members of the media, I will now turn you to the Boeing Company for introductory remarks from Mr. Todd Hullin, Senior Vice President of Communications.

Mr. Hullin, please go ahead.

Thank you.

We will continue with the media questions for Harry and James.

If you have any questions after the session ends, please call our media relations team at 312-544-2002.

We are ready for the first question and in the interest of time, I'll ask every to limit to just one question.

[Operator instructions.] Our first question will come from [Dale Hassler with Bloomberg News.]

Hi, Harry.

I wanted to know in the next year or two, any particularly big military contracts, opportunities that you're seeing?

There's always big ones in the works and, certainly, I think there are big contracts that will show up, probably in the [UCAV] area and transformational area continuing.

Probably some others will show up in what I'll call network-centric or even the security area, so there are some opportunities out there.

Thank you.

And our next question will come from David Bauermaster with Seattle Times.

Good morning.

On the 737 production, I was wondering if the anticipated uptick in production is related to deals that you've already announced or if it's an expectation of large deals in the works right now, such as Air Asia, for instance, has a large campaign going on.

Well, as I think James pointed out in his presentation, as we're over 90% -- 92% soldout through '05, in '05 -- and so those orders are on the books and that's going ahead.

Okay, thanks.

And our next question will come from Molly McMillan with the Wichita Eagle.

Hi, good morning.

I was curious on wanting an update on how the potential sale activity in Wichita is going on?

Will there be some kind of a decision by year end, or --

I would think there would be a decision, one way or the other, by year end.

Currently, interested parties have been visiting the location and going through their due diligence, so we don't want to drag this thing on forever.

We need to make a decision so everybody can get on with their life.

Could there be more than one buyer?

Two or three or --

I don't understand the question.

Amplify it for me --

I'm sorry.

Could there be, instead of like selling it to one specific buyer, maybe breaking it up and selling it to two or more buyers?

I don't think we'll break it up.

There may be people that come together as partners, you know, but that's their business.

Okay.

You want to remember that as part this deal, we want to be sure that there's the right kind of relationships between whoever it is and the communities and the employees.

And also, then, a relationship with us because we're going to guarantee a supplier contract and they're going to guarantee a lower cost.

So we expect whoever it is we will have an ongoing relationship with and we expect that the employee base and the communities will.

Okay.

Thank you.

Uh-huh.

Once again, as a reminder to our audience, that is star-one on your touchtone phone to signal for a question.

And we'll take our next question from Ken Vandruff with Wichita Business Journal.

Yes, good morning.

Mr. Stonecipher, referring back to the Wichita sale, the MMA contract, with the plan of doing the military conversions of the 737 on the line, does that impact how the commercial business would be sold compared with the military business?

Well, as you know, we have no plans to sell the military business at all in Wichita and I think we've made that clear as there was never a plan to sell the military side of it.

There's the thing that happens with the MMA, and I pointed out to a number of Boeing Wichita employees back at the Leadership Center recently, this win probably extends the fuselage line there in Wichita for 20 years and the 737 line in Renton for 20 years, because this is a very long-term, very, very good contract.

So I think it makes the property more attractive to everybody in terms of an assured base there that's going to go on, and we're going to continue to build fuselage in Wichita, Kansas, on the commercial line.

Does that answer your question?

Well, I had been told that the whoever -- if the Boeing Wichita plant commercial side were sold, that they wouldn't be doing -- this new owner would not be doing any military work.

So I was wondering if the fuselage work, if that complicated the potential sale?

Not at all because the MMA is based on a commercial 737 aircraft.

So the fuselage will get built in Wichita, get shipped to Seattle, just like it does now, and get put in a 737 with a 737 wing, which will be modified, and on and on.

So I don't see the difference.

Thank you.

And maybe I just don't understand the question.

I was worried that there might be some conflicts with any defense or military hardware that needed to be installed on the fuselage line.

Not that I'm aware of, and I think we'll be building the fuselage right there in Wichita.

Thank you.

Uh-huh.

And our next question will come from Chris Stikowitz with Reuters.

Good morning.

Can you hear me?

Certainly.

Okay.

I'm wondering on the plans to increase production, right now, I guess the book-to-bill ratio is still weak and that would suggest that maybe the backlog is going to come down a little further unless we get some significant orders uptick in the coming months.

Is that something that you're expecting?

Well, when you say order, we always expect orders.

But the book-to-bill ratio is changing in the wrong direction.

You're exactly right.

But we pretty well described what we think the production rate is going to be over this year and next year and continuing to go up in '06.

So that would give rise to the fact that there has to be increasing orders in order to meet that bill rate.

So we don't see any big surge in orders.

There are no big orders out there waiting to come hitting the beach, because there's good growth in the economy, good growth in travel, but we don't see huge orders coming.

Thank you.

And our next question will come from Paul Neyhan with The Seattle Post Intelligencer.

Just one question.

The increase in 2005 production, was that reflected in the 3,000 hiring announcement, was it two weeks ago?

Yes, that is correct.

Okay.

That's it.

We'll take our next question come Kathy Fiwegger with Reuters.

Harry, good morning.

Obviously, you've seen that [Mike Sears] is scheduled to plead guilty on August 11th, and I know you want to get this behind the company.

Do you think that's going to be the end of the story there, the end of the chapter, or could it potentially be something, you know, to go on from that point?

Oh, I think it's the end -- I think it's the end of that story.

And, you know, you said I've seen it, no, actually, I haven't seen it, because I saw a report last week that it was going to happen last week sometime.

So we don't have any knowledge of when it's going to happen, but whenever it happens, it will close a chapter that we're anxious to have closed.

And so we expect that it will get here sooner or later and we're anxious for that to happen.

In the meantime, as we're making sure that we're concentrating on executing the business at hand, as we're cooperating with all of the U.S.

Attorney people involved in the process, and we expect our legal department to do that and the rest of us are running the business.

And our next question will come from Stanley Holmes with Business Week.

Hi, Harry.

A question on the 92 bilateral.

Uh-huh.

And is it your position that Airbus is -- the violation is from 1992 forward -- in terms of using subsidies unnecessarily or violating the actual language of the agreement.

Or are you including sort of some of the programs that where they use subsidies, like on the A-300, A-310, which were pre-'92?

No, no.

You know, I don't see any reason to go backwards at all, Stanley.

The thing we're saying is, look, the '92 agreement came into place, we all supported it, and we all supported that and we think it was the right thing.

McDonnell Douglas supported it, Boeing supported it, Airbus supported it, and it came into being.

What we're saying is, it's time it ended.

They don't need the subsidy anymore, okay, and it goes on and on and on.

And so we're saying enough is enough.

And as you're aware, they say they made more money than we do, they say their margins are better than ours are, as they say and they are, they're taking more orders than we are, their production rate is higher than ours.

So why in the world do they need subsidies?

And, you know, right now, they've chosen to build an A-380,which we think is a mistake.

They think it's the right thing.

Unfortunately -- or fortunately for them, unfortunately for us -- if they're wrong, you know, their taxpayers pay.

We've made a decision on the 7E7.

If we're wrong, our shareholders pay, and so that's the difference.

And all we're saying is that, hey, this is not about retroactivity.

This is saying, here we sit on July 28th of 2004, it's time that agreement stopped.

When you say that they have a competitive advantage, my understanding from airlines is that when all things are equal in an airplane campaign, that there seems to be at least a 5 to 10% difference in price versus, like, let's say the 737 and A-320, and the price advantage going to Airbus.

And airline executives tell me they can quite figure out where that advantage comes from.

Is that what you essentially believe, as well?

Well, the advantage comes from the fact that they don't have any requirement to make money, you know?

And they're getting -- you know,they only got $3.7 billion the day that they had decided to build the A-380.

I describe it this way: the decision is kind of like a switch.

It says we're going to build an airplane, you flip the switch, the trucks run to the treasury, so the countries involved, you pick up the gold and come back home with it.

Does that sound -- you get the picture?

Yeah.

Very clearly.

And that's what's happening to us.

And you say, well, okay, that's in the front end and that's one piece, and it is, but it's a big piece.

It's a huge piece.

Okay.

Thank you.

Thank you.

We have time for one more question.

And that final question will come from Chris Stikowtz with Reuters.

The increase in the EPS forecast for 2004, about 20 cents if I'm reading this correctly, is less than the one-time gain that you're reporting this quarter.

And I'm wondering, does that suggest that there's some defect in growth in the second half or is there something else going on there?

No, we just rounded it -- the tax refund was about 23 cents, we just rounded it down.

There is nothing else to be implied in that number.

And remember, we have a range, and so we raised both the bottom and the top of that range by the 20 cents.

Okay, thanks .

Thank you.

That will conclude today's question-and-answer session.

I'd like to turn it back to our speakers for any additional questions and closing remarks.

We have no other questions.

Thank you very much.

Appreciate your joining us.

Thank you for your participation.

You may disconnect at this time.