波音 (BA) 2004 Q4 法說會逐字稿

Thank you for standing by.

Good day, everyone, and welcome to The Boeing Company's fourth quarter and full-year 2004 results conference call.

Today's call is being recorded.

The management discussion and slide presentation, plus the analyst and media question-and-answer session are being broadcast live over the Internet.

At this time for opening remarks and introductions, I am turning the call 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 fourth quarter and full-year 2004 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 by Harry and James we will take your questions.

We ask that you limit yourself to 1 single-part question.

As always, we have provided detailed financial information in our press release issued earlier today, and as a reminder you can follow today's Company broadcast through our website at boeing.com.

Now before we begin, I need to remind you that any projections and goals we may include in our discussions this morning are likely to involve risks, 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 in our various SEC filings and in the forward-looking statement at the end of this web presentation.

Now with that, I will turn the meeting over to Harry Stonecipher.

Thank you, Dave, and good morning.

Today we will be discussing our fourth quarter and full-year 2004 results.

I will begin by sharing my thoughts, and then 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 able to answer all of your questions, either in person or later.

So let's get started on slide 2.

Boeing had a good year in 2004, as our intense focus on execution delivered significantly improved results.

With defense markets strong and commercial markets recovering, we were able to deliver solid financial performance.

Our Integrated Defense Systems business led the way with strong revenue and earnings growth.

While Commercial Airplanes performed well as they recovered from the bottom of the delivery cycle and launched the new 787 airplane with tremendous customer interest.

Boeing business has once again delivered outstanding cash flow, which we used to further strengthen our pension plans, raise our dividend, reduce debt, and buy back shares, all of which are elements of our balanced approach to cash deployment.

We had 2 major disappointments during 2004, in that our Launch business remained on Air Force suspension and we did not conclude a contract for supplying tankers to the U.S.

Air Force.

However, we have taken decisive action to fix the problems identified and feel confident that we will make further progress in these areas in 2005.

Despite major distractions, our employees kept their focus on delivering value for our customers, which produced good results.

With a strong performance of the Boeing team, significant investments in our core businesses, and a large backlog, we are confident in our growth outlook.

Now let's move to the business units beginning with Integrated Defense Systems on slide 3.

IDS had a strong year in 2004, delivering double-digit revenue growth and excellent margins.

Revenues increased 11 percent driven by continued strong growth in our Network Systems and Support Systems businesses.

Operating margins reached 9.6 percent, as the Aircraft and Weapon Systems, Network Systems, and Support Systems businesses all delivered excellent profitability on a large business base.

IDS delivered excellent performance on large production programs, such as the C-17 and F-18 and made important progress on its key development programs supporting military transformation, including future combat systems and missile defense.

We were disappointed, however, by the continued cost growth in our commercial satellite business, which affected our margins in the Launch and Orbital segment.

We are aggressively addressing this problem and have seen progress in this area during the fourth quarter.

During 2004, IDS added to its large backlog by winning over $30 billion in new business, including the U.S.

Navy's Multi-mission Maritime Aircraft program, a $6 billion expansion of the future Combat Systems contract, a demonstration contract for our J-UCAS unmanned aircraft and a large order from DirecTV for 3 commercial satellites.

Despite industry uncertainty over the DoD budget outlook, IDS remains well positioned for growth with its broad portfolio of key development, production, and support programs.

The IDS team is performing very well across most of its businesses and I am confident they will continue to deliver strong financial performance going forward.

Now let's look at the highlights from Commercial Airplanes on slide 4.

BCA delivered solid performance in 2004 as its ongoing focus on reducing cost and improving asset utilization, combined with investments in ground-breaking new products continued to yield results. 2004 marked the first year that global airline traffic surpassed the previous peak levels in the year 2000, as the strong global economy drove passenger traffic up almost 10 percent.

Oil prices remain very high, but we are seeing increasing interest from many airlines to order new efficient airplanes to meet their needs for capacity growth and also improve the efficiency of using the oil that's becoming so expensive.

During 2004, BCA orders grew 14 percent to 277 airplanes.

These orders included 56 firm contracts for the new 787 airplane, which helped BCA win a 56 percent market share for twin-aisle aircraft in 2004.

Total orders and commitments for the 787 have now reached 186 as Japan Airlines, Primaris, Vietnam Airlines and Continental Airlines made commitments during the fourth quarter, and 6 Chinese airlines announced commitments just last week.

We are very pleased with the strong customer interest in the 787 airplane and our program remains on track.

BCA reached important milestones during the year with the 1,500th delivery of the 737 new generation airplane, as well as the 500th delivery of the 777.

BCA launched the 747 special freighter and began offering the 777 freighter for the first time in 2004.

BCA also began final assembly on the first 777-200 Long Range aircraft, which will be the longest range airliner when it enters service in 2006.

Driven by its industry leading 737 and 777 product lines, Commercial Airplanes expects to see significant growth in airplane deliveries, revenues, and earnings over the next 2 years.

Now let's look at our other businesses on slide 5.

Boeing Capital's pretax income doubled in 2004 as it continued to aggressively manage risk in improving markets.

During the year, BCC sold its Commercial Finance business for $2 billion as it focused on supporting the sale of Boeing products.

The proceeds of the sale, combined with strong operating cash flows, allowed BCC to retire over $2 billion in debt and pay a dividend to Boeing of over $700 million.

Connexion by Boeing reached a major milestone during 2004 as it launched commercial service on 4 airlines around the world.

Interest in the service continues to build as Connexion captured additional orders from 3 airlines for 90 airplanes, bringing the total orders, including options, to 420 airplanes.

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

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

James.

Thanks, Harry, and good morning.

I'll first discuss a few financial highlights for the fourth quarter and the full year and then take you through our updated financial outlook.

Let's begin with the financial summary on slide 7.

Boeing's financial results for 2004 reflect excellent top-line growth at IDS and strong operating performance across our businesses.

During the year, IDS revenue growth, combined with cost reductions across our core businesses helped offset increased investments in product development, higher noncash pension expense, and the charges we took in the fourth quarter for the 717 and 767 tanker programs.

Cash flow during 2004 was outstanding.

Boeing generated over $8 billion of operating cash before pension contributions, reflecting strong profitability as well as our ongoing focus on working capital management and asset utilization.

We used this strong cash flow to continue our balanced cash deployment strategy including, investing 4.4 billion in our pension plans, increasing our dividends 47 percent, and resuming our share repurchase program.

The strong financial performance further enhanced our balance sheet and we ended the year with a significant reduction in our debt-to-capital ratio.

Turning to slide 8, total Company revenues increased 4 percent to 52.5 billion in 2004, led by double-digit growth in IDS revenues, which offset a modest decline in Commercial Airplane revenues.

The Company earned $2.30 per share in 2004 and that's up from $0.89 per share in 2003, as both IDS and Commercial Airplanes continued to generate operating efficiencies through their lean manufacturing programs.

The Company generated 3.7 billion of operating cash flow after making a 4.4 billion in cash pension contributions.

The $8 billion in cash flow before pension contributions reflect significant working capital improvement at Commercial Airplanes as growth inventories fell by over 1 billion and the growing demand for airplanes strengthened customer advances.

Turning to slide 9 in the fourth quarter.

Revenues rose slightly in the fourth quarter to 13.3 billion as growth in our IDS businesses offset lower Commercial Airplane revenue on fewer fourth quarter deliveries and a higher single-aisle delivery mix.

Earnings per share fell in the fourth quarter primarily reflecting the 717 and 767 tanker charges totaling $0.44 per share, and the $0.87 per share benefit from a large tax refund in the fourth quarter of 2003.

Now moving to slide 10 in our core businesses.

IDS revenue grew 5 percent during the quarter, led by 13 percent growth in its Support Systems segment.

Operating margins were 8.9 percent as excellent performance on most defense and intelligence programs were partially offset by the 767 tanker charge.

Margins before the charge grew to 9.9 percent, up significantly from fourth quarter of 2003.

The IDS backlog totaled 87 billion at the end of 2004, providing a firm foundation for growth.

Commercial Airplane revenues declined 8 percent as deliveries fell by 4 and included a higher proportion of single-aisle airplanes.

Commercial Airplanes reported an operating loss for the quarter, reflecting the 717 and the 767 tanker charges, which offset continued improvement in operating efficiency.

Margins before the charges were a solid 6 percent.

Unit cost margins exceeded program margins during the quarter as Commercial Airplanes continued to reduce costs, particularly in current production lots.

Now moving to slide 11.

Our balance sheet and liquidity remains very strong.

We ended 2004 with cash and liquid investments balances totaling 6.1 billion, and that's up from 4.6 billion in 2003.

During the quarter, we continued our disciplined share buy-back program, repurchasing 8.1 million shares of stock for a total of $433 million.

For the year, we have repurchased 14.7 million shares totaling about 752 million.

Boeing's debt was unchanged at 4.7 billion at the end of the year, while Boeing Capital's debt fell by more than 2 billion, primarily reflecting their early redemption of debt and normal maturities.

Boeing's debt ratio improved significantly during the year, as our equity balance increased due to higher net income and improvements in the funded status of our pension plans.

Financial strength and solid credit ratings continue to be a priority for Boeing.

We remain at the top of our industry peers with solid single-A ratings.

Now moving to slide 12.

Strong cash flow continues to be a Boeing hallmark.

Boeing's operating cash flow for 2004 was 3.7 billion and included 4.4 billion in contributions to our pension plan, which reduces Boeing's required contributions going forward.

Working capital performance continues to be strong as improvements across the Company contributed significantly to our operating cash flow for 2004.

Capital expenditures rose 33 percent in 2004 as the Company invested in advanced production systems for the 787 program and supporting ongoing IDS growth.

In previous disclosures, we had noted the portion of investing cash flow that was attributable to customer financing transactions, but included with investing activities.

Beginning with the fourth quarter of 2004, we are including all customer financing activity in operating cash flow rather than investing cash flow, as we understand this to be a method of presenting cash flow currently being sought by the staff of the Securities and Exchange Commission with respect to other companies.

This change in the method of presentation has the effect of reducing 2003 operating cash flow and somewhat increasing 2004 operating cash flow.

There is no change to total cash as a result of this adjustment.

Now turning to our pension plans on slide 13.

We've made significant progress towards fully funding our pension plans in 2004.

In addition to making the large pension contributions I mentioned earlier, our pension investment earned over 13 percent during the 2004 plan year.

These factors contributed to a write-up in shareholder equity of 2.2 billion, reflecting the reversal of prior pension charges to other comprehensive income.

We now estimate the unfavorable impact of noncash pension expense on 2005 pretax earnings to be between 625 million and 650 million.

For 2006, we estimate the impact of noncash pension expense on earnings to be between $700 and $750 million.

Consistent with the significant improvement in our pension performance and funding, we expect pension expense to peak in 2006 and begin declining in 2007.

Due to our large cash contributions in 2003 and 2004, our required pension funding is less than $100 million each year in 2005 and 2006.

We will continue to evaluate discretionary contributions and expect total pension contributions to be approximately $1 billion in 2005 and 500 million in 2006.

These contributions are included in the cash flow guidance that I will discuss in a moment.

Now turning to slide 14, I'll discuss our outlook.

Today we are updating our financial guidance for 2005 and providing the first look at 2006.

Broadly speaking, we expect solid revenue and earnings growth in 2005 and 2006 driven by significant growth at Commercial Airplanes as the commercial market recovers, and continued growth at IDS supported by the unit's large backlog.

Our earning outlooks reflect strong operating performance in our core businesses, offset somewhat by the sizable increases in pension expense I discussed earlier.

At a business unit level, Commercial Airplanes delivery forecast for 2005 remains at approximately 320 airplanes and is sold out.

Deliveries in 2005 will be lowest in the first quarter, which will be similar to fourth quarter 2004 deliveries, before rising on plan production increases during the year.

Our delivery guidance for 2006 is between 375 and 385 airplanes and at 78 percent sold at the lower end of the range.

Commercial Airplanes expects a further delivery increase in 2007 driven by improving market conditions.

Commercial Airplane revenue guidance is unchanged for 2005 at approximately $24 billion.

Revenue guidance for 2006 is between 27 and 28 billion.

Commercial Airplanes' operating margin in 2005 on a program accounting basis are expected to be greater than 5.5 percent, growing to greater than 6.5 percent in 2006.

BCA's operating margins included the planned increases in R&D for the 787 development and the impact of charges related to the completion of the 717 program.

BCA's unit margins are expected to exceed program accounting margins in both 2005 and 2006 reflecting the significant growth in deliveries.

Integrated Defense Systems revenues for 2005 are expected to be approximately $32.5 billion, with further growth of approximately 7 percent in 2006.

We expect 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 market should begin to grow moderately in 2006.

IDS margins are forecasted to be approximately 9.8 percent in 2005, and approximately 10 percent in 2006.

Turning to Boeing Capital, our new strategy to lower portfolio growth and risk is going well.

As a result of continued improvement in the aircraft financing environment and the sale of our Commercial Finance portfolio, we expect BCC's portfolio to remain flat in 2005 and 2006.

Revenues are expected to be approximately 900 million each year and return on assets is expected to be approximately 1 percent in 2005 and greater than 1 percent in 2006.

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

Now putting it all together, Boeing's revenue guidance for 2005 is approximately 58 billion.

Revenue guidance for 2006 is between 62 and 63 billion.

Our earnings per share guidance for 2005 is $2.40 and $2.60 per share reflecting higher revenues and improved operating performance offset by a significant increase in noncash pension expense. 2006 earnings guidance is between $3 and $3.20 per share.

Guidance for both years include the impact of noncash share-based expense which totaled approximately $0.45 per share in 2004 and is expected to decline slightly during the guidance period.

For 2005, operating cash flow guidance remains at greater than 5 billion, including the $1 billion anticipated pension contribution and capital expenditures are expected to be approximately 1.5 billion in 2005.

For 2006, our operating cash flow guidance is greater than 5.5 billion and capital expenditures for 2006 are expected to be in the $1.7 billion range, reflecting investments to support the 787 program and growth at IDS.

We expect R&D expense to be between 2.3 and 2.5 billion in 2005, growing to be between 2.5 and 2.7 billion in 2006.

Again, reflecting increasing 787 spending.

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

Thank you, James.

The remarks will be very brief because this is all about execution.

We achieved strong performance in 2004.

We expect to deliver significant growth in 2005 and 2006.

And we are well positioned in our major markets with the right strategy, the right products, and a great team.

So it's all about execution.

We're also committed to restoring our reputation for excellence and integrity with all of our stakeholders.

And as we continue to work through some challenging issues, I'm very proud of the focus that the Boeing team has in bringing and creating value for our customers and our shareholders.

We are relentlessly focused on execution and in meeting our commitments.

We will drive our performance to new levels.

Thank you very much for your attention.

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

(Operator Instructions).

Byron Callan of Merrill Lynch, you may ask your question.

Harry, can you flush out a little more the Commercial Aircraft delivery outlook?

What are you seeing in terms of orders or pull-forward on existing delivery positions?

Is this mainly driven by 737?

Is there any geographic focus on your expectations?

Well, actually, it's driven by 37 and 777, as the 777 pull-forward is significant.

One of the things we have today in meeting an awful lot of the activity that we're seeing in the field is really the availability of interim lift, as suddenly this traffic has turned dramatically and people are now, as they do their forecast for traffic, they're finding there are big gaps in capacity, so it's kind of looking like a very good place to be right now.

But we're seeing pull-forward on 37 and 777.

Just a follow up, could you possibly offer an order outlook for 2005 excluding 7E7?

No.

Thanks.

And I'm not being flip with you.

Actually, I don't know the answer to that one, Byron, but we don't break it down that closely.

Steve Binder of Bear Stearns, you may ask your question.

Yes, good unit cost performance at DCAG in the quarter.

I was wondering, James, was there favorable cumulative lot adjustments in the quarter?

And maybe were there any block adjustments on a program basis and also supplier cautionary payments, if you can quantify that.

There's a combination of things.

It was the continued good cost performance, which you know is more pronounced than the unit accounting than it is program accounting.

We did have a block change, an addition of 50 units in the 777 and we had 2 units in the 717.

And then other than that we did have some supplier contribution in there.

I won't disclose how much, but it had some impact but not significant.

Cai Von Rumohr of SG Cowen, you may ask your question.

Yes, your investments rose from 1.3 billion in the third quarter to 2.9, so net cash clearly was up nicely if we include that.

Could you give us an update in terms of what you intend to do with it?

Are you going to keep it at that level, those investments, or kind of bring it more actively into the fold?

This is Harry, Cai.

We haven't changed our mind about what we're going to do with it.

It's kind of the balance that we've had.

The thing that you're seeing is, we finally did figure out that we don't have to keep all this ready cash on hand every day.

So Paul Kinscherff and his team have really placed it with some high quality very liquid bonds that give us a better return than we were able to get on our short-term ready cash.

So that's what you're seeing there, and it will continue to be -- we'll keep 2 to 3 billion in ready-to-operate cash, and the rest of it will go into those types of investments.

We do intend to complete our authorized stock buyback that we currently have, and I think it's about 30 million shares still outstanding that we can buy.

And then we'll probably ask for another authorization from the Board sometime later in the year.

So -- and we expect to continue to look for opportunities to enhance our position in some of our markets.

But they'll be small.

If we can find things that help IDS in some of its network-centric areas and intelligence areas, so that's kind of what's going on there.

We don't have any big plans to -- for big acquisitions.

We're simply trying to use our funds to develop products and to make acquisitions that will solidify our position in some markets.

So it's going to look an awful lot in the future like it has in the past.

Doug Harnett of Sanford Bernstein, you may ask your question.

In BCA you've made a lot of progress on cost.

I'm interested, looking forward what are your priorities right now for further cost reductions at BCA and if there are some specific objectives or targets you can discuss that would be helpful.

Well, we're not going to give targets on that, as we're continuing to try to flow lean across all of our product lines.

The dramatic change took place down on the lake, in Renton, and now then all of that is flowing into the Everett area.

Also, an awful lot was going on with the development of the new airplane, the 787.

There are lots of tools and processes that are being developed there that we're going to be able to flow into our other product so I think you'll see that's what's happening.

Alan does have his goals of the improvement that he wants every year.

They're very aggressive, they're very good, and they've been very successful at it.

So once again, I think you're going to find the future looks a lot like the past because we've still got lots of runway.

Heidi Wood of Morgan Stanley, you may ask your question.

Thanks.

James, can you talk to us about what your ROIC targets are looking ahead in '05 and into '06?

And what other key financial metrics are you most going to be keying to in '05, things like improving inventory turns, or talk to us a little about what you see ahead.

Yes, Heidi, I can.

As you know, we are this year looking at getting more focused to drive the 150,000 people in the Boeing to having a balanced approach to our financial performance.

So what we're going to be looking at is top-line revenue growth, and I think I've talked to you about this before.

Harry has mentioned a number of times, we're trying to drive towards 7 percent net margin so we're going to be looking very, very hard at that.

We're going to continue our focus on generating cash and we're looking at sort of an aspirational target of about 10 percent of revenue, in that arena.

Lastly, we want to make sure we continue to focus our management of our infrastructure and our assets, and so we're going to be surely looking very, very hard at RONA and how that improves over time.

I know some of you wonder why RONA has been selected, because we do have some real good RONAs in some of our core business, both BCA and their customer advances, and IDS where it has low investment because of the types of contracts, but when you think about us looking at the Company in aggregate and overall we also have the BCC business where we have an asset base that's revenue creating that we intend to keep, and have it continue to create revenue.

And so from a balanced total corporate perspective, RONA is probably the best metric for to us aggregate at a total corporate level, although in the businesses they will be looking at some of the metrics you talked to, because they will add to those overall financial goals.

Robert Toomey of Daine Rauscher, you may ask your question should.

I'm wondering if you could talk a little bit about the outlook -- a little more granularity on the outlook for your defense businesses relative to the recent discussion about some slowing in the U.S. defense budget.

Thank you.

Well, certainly I think as we've discussed in the past, when peace breaks out all over, certainly defense budgets will go flat to down.

But there's also budget pressure as to what you're alluding, I believe, and that budget pressure is not a surprise to us, and we've had a plan that looked like double-digit growth, and we've moderated that opinion some, but we have a good balanced approach in our IDS area.

We have a lot of development programs, we have a lot of production programs, and most of all, we've got some nice support programs.

So we're -- we've got a 3-legged stool there that's serving us very well.

We think we have balance, but also we think we're vulnerable.

We are very large.

We're the second largest defense contractor, so I think to the extent there are defense budget cuts as we will see those.

We think the impact will be pretty minimal until we get into, oh, probably '07, but there could be some impact in '06 but we don't see it as being severe at this point in time.

But it's certainly we look at every day.

The thing that's nice is that we haven't been a plateaued business.

We're a 10 percent growth business in that area, so what you're looking at, and it's a big business, it's over $30 billion a year, so if you slow 10 percent then it says that you don't grow 10 percent, but it's still a very nice business, and the margins are great.

Harry mentioned we do have a good balance in IDS, and I think we have looked at those risks as it deals with the constraints on the budget, and they're reflected in the guidance we provided to you today.

George Shapiro of Salomon Brothers you may ask year question.

Harry, I want to pursue the delivery forecast a bit.

Last year when you gave the initial '05 guidance you said you were over 90 percent sold out, and now this year you're saying you're 78% sold out at the lower level.

If you had used 90 again your deliveries would be 330, not the 375.

So I guess the question is, where does the confidence come from when we're in an environment of high oil prices, slowing world GDP growth, and particularly much slower expected traffic growth in Asia?

Traffic is growing, George, and, by the way, high oil prices cause people to buy more efficient airplanes.

All right?

And people are traveling, and I think sometimes because we live in the United States, our view is clouded by the headlines we see every day about some of our very large airlines that clearly have some very serious problems.

They had them at $30 a barrel, and they had them at $28 a barrel, and they've got them at $40 a barrel and $50 a barrel.

So that's one issue.

There's also a big segment of the whole market that is growing very rapidly in the Middle East and even slowing in China.

It's still huge growth.

So we see Asia and Middle East as big growth areas.

So that's what gives us confidence, and we kind of dragging this thing up, and as you know our competitor sees a much higher growth rate than we do in this area.

So it's the forecast, and, by the way, we think the economy is a lot stronger than a lot of the conversation you see, and you can judge that by truck loadings, railcar loadings, shipping tonnage.

There's every signal that we look at says the thing is strong.

So I think it's just a difference of view.

We've been pretty darn good at hitting our near-term production forecasts and we feel pretty good about these 2, and as I say, they're lower than everybody else's.

Ran into a friend of yours in the elevator in my building the other day, George, and I told him I was beginning to worry about you.

He told me.

Thanks.

Does it worry you that --

Actually, I said, George is crazy, and he looked at me like -- anyway.

You know who it is.

Yes.

Okay.

Howard Rubel of Jefferies, you may ask your question.

Harry, it looks like last year you went out of your way to sort of eliminate some of the uncertainties of putting the 767 tanker and the 717 behind you.

Could you address some of the -- what we'll call still some uncertainties going forward?

For example, profitability on Connexion, some of the legal issues in Washington, and whether or not you're going to have any additional asset sales, such as Wichita or Rocketdyne?

Well, certainly we don't go too far out in our M&A area but there's enough news running around and I think everyone knows that we've been working on Wichita.

The types of asset sales that we're looking at and have been doing in the past have nothing to do with monetizing assets.

It has to do with getting the lowest unit cost.

And the way you get the lowest unit cost is to be sure that you're dealing with an area that has good broad base and high volumes.

And they can achieve higher volumes as an independent than they can as part of the Boeing Company.

So that's the deal there.

Connexion is -- Connexion looks very good to us right now and we're looking at some other areas for that, and had a great demonstration actually in the maritime area over the past 6 months.

So we fully expect that there's another leg to this market there.

Suddenly we're seeing an impact, too, on the traveler who's now beginning to ask the question about whether there is -- there's availability of broadband on the airplane.

So small victories, and it's still, as I said in the past, school is still out on whether this thing goes full blast like we thought that it would back before 9/11.

But we're pretty comfortable with where we are right now.

We're encouraged by what we see, but we're fully prepared to deal with it if it doesn't turn out that way.

We dealt with, as you pointed out, the 717, pretty much the same way we did on the 57 and every other time that a production line comes to a halt.

When people stop buying it, we stop it.

And it was -- there may be a few more orders coming in as we start to shut down, but for the time being we were within lead time of our supply network, and so Alan and his gang made the decision, and we supported it, and here we are.

The tanker situation is -- it got to the point where as when all of the information flying around from OMB and from the DoD, DoD and OMB is that data is beginning to go around and how they might go forward and when they might go forward started to look so far away, then it becomes very prudent to take the appropriate accounting action, and that's what we did.

I think there will still be a tanker program at some point, and what it will be and how it goes forward will depend upon what the U.S.

Air Force wants to do about it.

So we're fully prepared to charge up that hill in any direction they want to go, and they'll define the requirements for what size, where they want it to go and how, and we have a full line of products we're able to offer them anything they want.

Joe Campbell of Lehman Brothers, you may ask your question.

Good morning.

I wanted to ask about research and development and the other segment that lost 535.

The R&D is going up in the guidance between '05 and '06 by a couple hundred million dollars at the bottom of the range and what's mentioned is the 787.

I wondered if we should assume that more or less all $200 million is in the Commercial Airplane business, or whether maybe some of the other where we had Connexion and other expenditures might be going down so that we might be having improvements in other that would cause the R&D to go more than up for the 787.

And then is there room in here to launch the 747-X, or would you to have revise the R&D numbers up if you chose to launch the new 747-X?

The numbers won't change if we decide to do the 747-X, as you call it.

We have room within our -- you don't accelerate that fast, and we have plenty of room in our R&D, and we don't necessarily just tie it to a program.

We changed over to give dollars rather than percentages, and I said, they know how to multiply, but everybody seems to feel better if we do that.

So we're fairly comfortable right there, Joe, and --.

And, Joe, in that other segment there is Connexion and we do have some costs that are associated with our shared service organization, but as Harry said, the line doesn't have to go up for us to -- in the near term, for us to deal with 747.

Nick Fothergill, Banc of America, you may ask your question.

Yes, Harry, how much of the 18 percent growth that you're now showing in the delivery forecast in '06 and '05, how much of that is actually pulled forward.

Secondly, I wanted to ask a quick question on Launch and Orbital System.

You've shown some progress, as you said, in fourth quarter, and just really how long is it going to take before you feel you can fix that and turn it to profit?

Oh, I think it's going to take through '05, because it will make progress every quarter, and it will -- the guys think that business looks like a break-even in '05.

Time will tell whether it's a little loss or a little gain or where it settles out.

But it's tough, we've got some big jobs in there that are giving some difficulty in the assembly inspection, test area, so we'll continue to work on that, but that will be fine.

In terms of pull-forwards, I don't know that I even have enough clarity for you there other than the demand and the skyline starting to fill in and we're starting to make production rate increases.

And so whether they're pulled forward, with all the scheduling and rescheduling that went on there's lots of shifting around of airplanes between customers.

Through the manufacturers, I might say, not necessarily between themselves, but through the manufacturers and the leasing companies as everybody's trying to get the capacity where the airlines that are operating well need it.

Joe Nadol of J.P.

Morgan, you may ask your question.

Harry, just looking at your 767 backlog, about half of it is the Japanese customers you already have for the 787, the other half is pretty much unidentified customers, so I'm wondering, if tanker does not happen this year or next year, at what point do you have to make a firm decision, like you did on the 717, to shut the line down?

Probably mid-year this year, depends on how many orders get added to it, but we've always, and we've said a number of times, that we'll make a decision on the line rate and when it stops probably mid-year, because should we make that decision we might exact -- might, in fact, accelerate the build rate to finish out the line.

Also, as lines come to an end, as we get some other orders from it.

As a matter of fact, I wish we had about 30 767s somewhere right now that we could apply in some interim lift cases where we need them.

But it's that kind of time period, Joe, that we'll be looking at it, the May,June time period would be my judgment.

David Strauss of UBS Warburg, you may ask your question.

Could you talk about your delivery mix for '05 and '06 relative to '04 when you did about 79 percent narrow body?

And then could you also comment if your guidance assumes anything as far as your financing exposure relative to the 717?

So let me talk about your -- answer your first question, the mix will stay about the same as you see in '04 for '05 and '06, and right now, as you know, after 9/11, all the assets took a pretty big hit, then we saw those bottom out in terms of the appraisal and their associated residual values, and we'll just to have wait and see.

Right now we haven't taken a reserve against that yet.

We'll wait until the appraisal books come out, but what we do know is that all of them are in revenue services.

The customers are really delighted with them, and they're providing good value for them as they're put into that service, so we'll have to wait and see.

Jared Muroff of Prudential, you may ask your question.

Thank you.

Just looking at some of your guidance on the IDS business, I think in the third quarter you were looking for double-digit growth in terms of revenue, and it looks like now you're looking somewhere around 7 percent, it also looks like some of the margin guidance in Aircraft and Weapon System maybe came down a couple of percent.

It had been 14.5, 15 percent in '04, and it's looking at 12.5 percent in '05 and '06.

I'm just wondering if you could give some color on what some of the factors there may have been.

You did towards the high end of your guidance in revenues on IDS in '04.

I'm just wondering if you can give us some more color as to what may have changed over the last several months.

I think the type of thing you're seeing, exactly what we were talking about earlier in answer to a question, that there's pressure on the defense budget, and as pressure came on the defense budget people start shifting a little bit, so that's our guys' judgment about what it will be this year.

And an awful lot of the contracts are in place, but as our customers have to start matching up with the budget authority that they're going to get, then you're going to see some slips and slides and so that's kind of our judgment about it.

And so it is down from the double digits that we were talking about, and it's high single digit sort of a thing.

In terms of margins on some of the aircraft programs, they were very good margins in '04 because it was the end of some multi-year contracts, and those contract close-outs produced some extra margins that were reserved as we go through.

We generally have that when we get close-outs of big contracts, if we perform them well.

And so happens that the ones where those happened we performed them very well and so we got full value.

Don't have any of those in the plan for '05.

Byron Callan of Merrill Lynch, you may ask your question.

Harry, again, just on the defense side, anything new or different in the way you're thinking about the business?

Lockheed had mentioned, for example, on their call, an interest in pursuing more operations and maintenance-type contracts, I mean, do you guys think about changing the game plan in any way, shape, or form, given some of the changes that seem to be at work more broadly in the defense outlook?

No, we've been on that game plan for a long time.

In fact, that whole operations and maintenance area has been one of the biggest growth areas we've had.

When I say one of the biggest ones, that's one of the things about the whole tanker program, as we analyze those and people saw great visions of disaster if we didn't get a tanker.

Remember we're one of the guys that maintained all the KC-135s that have maintenance costs going up 18 percent a year right now, and we're the guys that are reskinning wings and replacing struts and doing all that stuff, ourselves and the Air Force, it's a split deal as they do with their own bases for organic support, but we think -- we think that's one of the balances we have, Byron.

As I mentioned a while ago, we're not just tied to -- we have some huge programs, and we're proud of them, and many of them are non-platform programs, because the whole area of space and intelligence has been a good growth area for us.

The network centric area like future combat systems where we don't build any platforms of anything.

Then we have the other balance of just what you're saying, in really the sustainment programs that we have for the services.

So we agree with Lockheed.

We think that's a good place to be and we're there and we're going to continue to pursue it.

Steve Binder of Bear Stearns, you may ask your question.

Harry, the 747, you're offering the 777-200 Long Range freighter, which should be a pretty good product in the freighter market, the special conversion program has been a fairly hot product at least a lot of interest in converting 747 combi's and passenger planes.

Then you've got the launch, potential launch of the 747 advanced plane.

What's your time frame?

You're working off backlog currently, couple years left of backlog.

What's your time frame on when you make a decision on whether you stay with the 747 program or not?

Is that an '06 decision?

Obviously, you're trying to sell the advanced, and the likes of that program is contingent on whether it's successful or not.

What would you say is the time frame?

I think it's '05 definitely, Steve.

What we have is the guys, employment area design, they're always working away and they came forward with several things, and more recently Alan and the team came in and we've got a number of customers who wanted to know what we could do with a better 747, and so the fellows did some work, came around with a pretty good looking airplane and so we gave them authority to go out and test the market and see if there's a way to bridge from where we are to this airplane.

And so I think it's kind of a mid-year decision sort of a thing for whether we're going to have another model of the 747.

And it's kind of the middle of the year as to where we start thinking about what the termination of the 747 production line would be, if it needs to terminate.

Cai Von Rumohr of SG Cowen, you may is your question.

Yes, could you give us a little more color on 2006?

Looking at the revenues, it looks like more of the, you know, the uptick is in 737s.

You've got a good uptick in volume.

The R&D isn't going up that much.

How come those margins aren't going up more than 100 basis points?

Well, because, as I mentioned to you earlier in my remarks, Cai, the noncash pension expense is growing pretty dramatically and that's going to have a pretty significant impact on our '06 earnings.

And we do flow those out to the business units.

Heidi Wood of Morgan Stanley, you may ask your question.

Ms. Wood, please ask your question.

Harry, a bit of a devil's advocate question for you.

I continue to be puzzled why you choose as a lead horse on this tanker competition the 767 when it's the oldest technology between the 330, Airbus's 350, and now the 787.

If we were to presume just for a moment for the sake of discussion, if we were to take out forward field landing requirements, do you still think 767 is superior to 787 in terms of maintainability, range, and transport capacity?

Well, the thing that you want to get in a tanker is you want something that fits the requirements.

That's how the 767 was chosen in the first place.

So when somebody writes the requirements, and that was my comment a while ago, we have a range of airplanes to match any kind of requirement they want to write.

And so the main thing that everybody needs to concentrate on is what do they want for a tanker.

And so it's the A300 or A330 came forward as a possibility, and we said, gee, you want a bigger tanker, we can give you a bigger tanker.

You want a really bigger tanker, we can give you a really bigger tanker.

But I think it's just confusing the situation.

As soon as somebody decides what the requirements are, then we will have an airplane there.

Right now, it looks like the best value in a tanker is the 767 tanker.

And so we're still right there, and something changes to change that we'll change, too.

We will be competitive, we will be there, no matter what the requirements are.

Operator, we have time for one more question.

Our last question comes from George Shapiro of Salomon Brothers.

Sir, you may ask your question.

Harry, just to follow up on deliveries, if you do what you say and Airbus does by '06 the industry will deliver nearly 800 airplanes, which would already stack up as one of the best delivery years for the industry.

How high would you think peak deliveries would get, then, this cycle?

Well, the last cycle, George, they got up over 900.

In fact, they got to about 960, 970, as I recall.

You probably have the numbers there in front of you.

'99 was like 920.

So I think that's a top, all right, in my judgment, but there's -- it also gets around as to who's buying the airplanes and what size they are.

Sometimes we count airplanes, and you really have to count seats, and see what the segmentation is of the seats that are going into the marketplace.

And when you have people like JetBlue and Southwest and AirTran and Ryan Air, and you know the whole list, who fundamentally are buying 150 to 190-seat airplanes, then that's a lot different than buying the big airplanes.

And those happen to be the people who are making money, and they're taking deliveries, you know, of 2 or 3 or 4 airplanes a month each.

So you think we get a lot above 900 deliveries in this cycle?

When you say "a lot," no, I don't think a lot at all.

I think the 900, 920, 950 something like that is probably the top.

And that will probably -- we'll probably go down the road and we'll be running along at that rate, and never see the downturn again, and so we'll go through the same thing we do every cycle, of rescheduling airplanes.

Happens every time.

Okay.

That completes the analyst question-and-answer session.

For members of the media, if you have a question, please press the star key followed by the digit 1 on your touch-tone phone.

I will now return you to The Boeing Company for introductory remarks by Mr. Tod Hullin, Senior Vice President of Communications.

Mr. Holland, please go ahead.

Thank you.

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

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

Operator, we are ready for the first question.

In the interest of time I ask everybody to limit themselves to just 1 question.

Darrell Hassler of Bloomberg News, you may ask your question.

Mr. Hassler, please ask your question.

Depress your mute button, please.

Sorry about that.

Harry, I wanted to know if you would be able to confirm that Boeing is talking with United Technologies regarding Rocketdyne and if there were any other asset sales that you're interested in?

No, I wouldn't be able to confirm that because we tend not to talk about those kinds of things, as we look at all of our assets from time to time about what we might or might not do with them and whether they need to be part of the Company or not.

Dominic Gates of Seattle Times, you may ask your question.

Hello, Harry.

How are you, Dominic?

Hi.

A little point of information.

When did the Board give authority to offer the 747 advanced?

We haven't even asked for it.

Oh, I thought you had said you had given authority to offer it to --.

I've given it authority to go out and test the market.

Okay?

And it's the same way we did -- in fact, if you go back and look at the same language we did on the 787, we gave them authority to go out and offer subject to Board approval, or to go out really.

And the stage they are in is they're trying to determine what the market acceptance is of this airplane that they've designed and done some design work on and see if there's enough market interest there to warrant going ahead with it.

So there would still be a Board approval later?

Oh, yes, absolutely.

If you were on the other call, I think that's kind of mid-year sort of a decision.

So, Alan and his gang are trying to figure out what they want to do as we did have a good review of the airplane.

I think they got a great airplane and I said, you know, yes, you want to go see if the interest is there, go see.

So that's what we're doing.

If we had as many Board meetings as the press reports, we'd hardly have time to go do the job, but the Board meetings come on a regular basis, and when we need a special one, we get them, but that's pretty rare.

We tend to have 6 or 7 a year.

Kevin Done of Financial Times, you may ask your question.

How early in the next decade do you think that Boeing will need to come up with a new single-aisle family to replace the 737?

We've done a lot of thinking about that over the years and generally it's the marketplace that decides when that needs to happen.

Wichita Eagle, Molly McMillan, you may ask your question.

Hi, Harry.

Hi.

How are you?

Good.

How are you?

Very well.

My question is I keep hearing that an announcement may be imminent on what you're going to decide to do with the Wichita commercial operations.

And I wanted to find out when you're expecting to make an announcement, will it be this week, or the next few days, or when?

And is it looking like you're going to get a deal done?

And what's been holding it up?

The last time you and I talked I really expected it would be, we kind of said by the end of the year, certainly by the end of January, and we didn't make that.

Fundamentally, there's some tough, tough negotiations that have to go on, and they are, and, as every time I -- the latest thing we see it says it will be a couple weeks, looks like.

But once you get to that point there's a lot to be done because we're determined that our employees and the communities and everybody are involved in this thing so there will be a big negotiation with the represented employees, if there is a deal.

Now, we are at the point, and I think it took a faster speed-up when they came to review with me about a month and a half ago, I guess, and I said, look, I'm at my point of indifference here.

If we can't get the deal we want, we're not going to do it, period.

So Wichita performs very well, and we think it will perform just fine in the future, and so if it performs with The Boeing Company, that's fine with me.

If we can't get the deal we want, that's what will happen.

But I went a little further than your question, but fundamentally it's the order of, oh, 10 to 20 days would be my guess.

I get all these reports, but it's -- the guys are working hard.

Mike Mecham of Aviation Week, you may ask your question.

Harry, I'd like you to see if you can't extend the thought you just had with the analyst about trying to count forecast by seats.

Can you do that for this year and next year?

The guys over in Alan's marketing area do it all the time.

That's the way we used to always do it.

You take the RPM curve, you try to judge what size airplanes are in what size markets and how many seats are in them and that's the way you satisfy the RPM curve.

So, you know, if you say that everybody's going to fly on an A380 that's a different answer than it is if they all fly only commuters.

So getting that mix right and when people get all excited and everybody likes to talk about big airplanes, ours and theirs, but when you come right down to it, the best selling airplanes and the ones you spend the most time selling and marketing and everything, are called 737s and A320s families thereof.

So that's where all the quantities of airplanes are.

So, yes, you have to do that all the time.

I used to do when it I was in the engine business, and the guys in Alan's shop do it all the time.

Christopher Hope of Daily Telegraph, you may ask your question.

Hi, Harry.

How are you?

Good.

Quick question.

Have you decided when you're going to retire yet and who might succeed you?

Come on, Harry.

You guys have got 1 question now.

It used to be when I'm going to buy BAE Systems, now it's when am I going to retire.

Everybody is trying to get rid of me.

Actually, I gave the Board the answer that said I was willing to stay at least until the annual meeting of '06.

I gave them that about half a year or a year ago.

And we have a succession plan in process that we went through in October, and so I'm going to be around for awhile, but if they find somebody they like to run this job better then I'm ready to leave tomorrow if they want me to.

Quick question.

When do you think Boeing will ever take Airbus annual deliveries?

When do I think they'll overtake them?

When do you think Boeing will overhaul Airbus?

I don't have an estimate of that, but it's probably a couple years away.

Peter Pae of L.A.

Times, you may ask your question.

Hi, Harry.

How are you, Peter?

Could you tell me a little bit about the 747 advanced?

Do you have a basic outline of how big it would be, number of seats, and what kind of reaction you've had so far?

Yes, I do, and the guys are out there talking privately with different customers that we have about it, and, of course, they will have some input on that.

But, no, we've gone far enough, we know what the airplane looks like, what it's capable of, what the fuel burn is, where it's going and why.

Can't share the details with us or at least the basic outlines of it?

No, we're not releasing anything at this point.

In fact, the release that got out, we were going to quietly go do our marketing work there, and, of course, that took about 3 days before it was in the press.

But let's let the guys do their work a little bit because we'll just get people's heart beating faster than it should beat.

Lynn Lunsford of Wall Street Journal, you may ask your question.

One quick one here, do you have any sense of when you will be able to get the suspension with the Air Force dealt with?

I don't have any sense other than the fact that nothing's going to happen until after the Sears sentencing, in my opinion, and that's getting here pretty close right now.

Because, as when the Darlene sentencing took place there were surprises that came bouncing out on the table, and all of those have been run to ground, I reckon, and nothing's been found that we didn't know before, so I'm not sure that anybody has the courage, nor should they, to do anything until after the sentencing hearing for Mike Sears is concluded.

Then the officials will also look at all the investigations that have been done into the previous allegations.

And it's my judgment that all of the investigation has been done that needed to be done, and so I would expect it will be a short period of time after the Sears sentencing.

That's the best judgment I have and it's purely judgment.

I don't have any information.

Don Lang of Inside Defense, you may ask your question.

When you were talking about the 767 earlier with the analyst and looking at maybe making a decision on the line rate by the middle of this year.

Could you sort of flesh out a little bit about how you'd go about making that decision?

Well, fundamentally, you look at when the order's end, because this is something, it's not just about our lines, if it's our line we can kind of stop and stand on one foot and let it go, but there's a big supplier network that you have to deal with.

So when you get within lead time, the suppliers' lead time, then you have to make the judgment to either shut it down or build white tails, and we don't build white tails.

Wichita Business Journal, you may ask your question, Ken Vandruff.

Good morning, Harry.

Following up on Molly's question about Boeing Wichita, you had made a reference to 10 to 20 days.

Is that 10 to 20 days after the negotiations conclude or 10 to 20 days from now we'll hear something?

10 to 20 days from now.

I think they're either going to get finished or we're just going to say wait a minute, let's give this thing up and get back to business.

They're either going to get finished with it, the guys that are doing the work have assured me that things are on track and they are going to get it finished, so that's kind of the time frame they've given me.

And then after that, there will be government filings, there will be all kinds of filings, there's lots of conversations that need to take place with all of our constituents, and those will take place in an orderly fashion.

Dominic Gates of Seattle Times, you may ask your question.

Harry, just wanted to get back for a couple questions on the tanker.

You reasserted your opinion that in the end there will be a tanker deal, but I seem to sense a slight shift.

Do you think it will be a 767 tanker?

Well, I still do.

My conversation a while ago was that everybody keeps throwing these "What ifs", you know, and the what ifs are, if someone wants a bigger tanker than the 767, we've certainly got airplanes that can do that for you, no question about it.

But the thing that you're trying to do, and that was the big study that was done, was it came out 767 size.

We could have, in the last round, we didn't offer the 767 just because it was the 767.

We offered it because it matched the requirements.

If the 777 had been the thing that matched the requirements, we would have offered the 777.

If it was the 37 we would have, or the 47.

So the whole sizing thing and the name of the airplane that we chose came about because of the requirements, not because we were out there trying to sell 767s.

Chris Frank of KAKE Television you may ask your question.

Yes, can you say what price range that Wichita is being offered at?

What is the stumbling block that keeps it from going forward?

Well, I'm not going to go into that.

Okay?

Michael Harrison of Independent News, you may ask your question.

Good morning, gentlemen.

Harry, I think you said recently that Boeing would build whatever aircraft its customers wants to buy.

Yes.

If it's proven or demonstrated that there is a market for a very large commercial aircraft of 500-plus seats, is that a market, then, that you would still consider going into?

If it's big enough, yes.

We've always maintained that.

The thing is that we have a different view than Airbus of how big the big airplane market is.

And, you know, we studied this together, we studied it individually, as McDonald Douglas, and as Boeing, and as Airbus, and all 3 together and then 2 together, and quite frankly, we never could get a market forecast that made any sense to build an airplane, so we're still at that point.

The thing I've said is that the day that somebody convinces us, and we convince ourselves, that we need a 550 or a 600-seat airplane or a 1,000-seat airplane, then we know how to design big airplanes, we have the money to do it.

In fact, earlier, if you were listening, you know, we've got cash, and we know how to spend it, and so -- and we love to spend it on new products where we can get a return.

So there's no question about that.

This is just simply a difference in view about what the market is.

We still think the market is point to point, right there in the middle.

Airbus must have some little clue that it might be there or they wouldn't be talking about an A350.

Christopher Hope, Daily Telegraph, you may ask your question.

I want to get back in again on the USA, you're talking about Launch 8, do you have any more comment on that?

Are we going fast enough or is someone dragging their feet?

Number 1, Launch 8 is stopped, there was an agreement there between the negotiators, the USTR and Mr. Mandelson of the EU, and so it's sitting there and Launch 8 is stopped, and that's what we wanted in the first place, so we'll see where it goes.

How long will it drag on before we get any resolution?

I have no idea.

I really don't, and it's --.

Mike Mecham, Aviation Week, you may ask your question.

Harry, have you seen any indication -- you were talking about single-aisle aircraft being the backbone of both your and the competition's business.

Is there any feedback that show the hits to tourism et cetera, in south and southeast Asia because of the Tsunami will dampen any of your forecasts this year or hit the markets down in there?

None whatsoever.

Actually some of the biggest markets are really, you know, India is growing.

They have a forecast of 25 percent a year, and almost anyone you talk in to India think it's much higher than that.

And there's a lot of traffic between India and the Middle East, if you look at traffic into, out of the UAE, Qatar, those areas, there's big usage in those areas of Indian workers and they go back and forth, so you find that even in some of those areas they're building big traffic rights into India.

So it's an absolute disaster in the area over there, but I don't see anything that's causing it to dampen.

We have time for one more question.

Our last question comes from Molly McMillan, Wichita Eagle.

I just wanted to clarify, so you do think that there is going to be a sale, that it is going to get done and completed and all that?

I have to think that, Molly, because all the guys sitting around me right here would choke me to death if I think otherwise, because those people are working really hard to try and bring it together.

There's no indication at all that there won't be.

Any indication that -- would there be a downturn in employment or -- in a sale, or what may happen there?

I don't have any indication of that at all, none whatsoever.

That concludes our earnings call.

For the members of the media if you have additional questions please contact our media team at 312-544-2002.

Thank you very much.