波音 (BA) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to The Boeing Company's first quarter 2006 earnings conference call.

Today's call is being recorded.

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

At this time for opening remarks and introductions, I'm turning the call over to Mr. David Dohnalek, Vice President of Investor Relations for The Boeing Company.

Mr. Dohnalek, please go ahead.

Thank you very much.

Good morning, and welcome to Boeing's first quarter earnings call.

I'm Dave Dohnalek, and with me today is James Bell, Boeing's Chief Financial Officer.

After James makes some comments about our performance and our outlook, we will take your questions.

In the interest of time, we ask that you limit yourself to 1 question.

And as always, we provided detailed financial information in our press release issued earlier today.

And as a reminder, you can follow today's broadcast and slide presentation on our website at boeing.com.

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

Those risks are detailed in our news release, in our various SEC filings, and in the forward-looking statement at the end of this web presentation.

Now, I'll turn the meeting over to James Bell.

Thank you, Dave, and good morning.

As Dave said, I will briefly review our first quarter results and discuss our outlook.

Then we'll take your questions.

Now, beginning this year, we have moved to a split of duties between our CEO, Jim McNerney, and myself on our earnings call.

Jill will participate in the calls at mid-year and at year-end, and other calls on a selected basis.

Of course, I will continue to be on all of Boeing quarterly earnings calls.

So let's begin by turning to the first slide.

Boeing is off to a very good start this year.

During the first quarter, we grew revenues, net income, earnings per share and cash flow at strong double-digit rates.

Productivity improvements we continue to make across the Company, and the significant increase in commercial airplane deliveries, generated the strong performance this quarter.

Our balanced cash deployment strategy continues to deliver value to customers and shareholders, by investing in our growth and returning capital to investors.

Boeing's businesses continue to be well positioned in their markets.

We expect that the Commercial Airplane business will drive strong enterprise growth over the guidance period, while our Integrated Defense business will generate excellent profitability in a moderating defense budget environment.

Our total backlog grew to a record level of of $213 billion, largely driven by the strong demand for our market-leading commercial airplane products, especially the 787 Dreamliner.

Coincidentally, today is the 2-year anniversary of the 787 launch.

The 787 has been the most successful commercial airplane launch in Boeing's history.

Today, we have 26 customers from around the globe that have placed firm orders for 350 Dreamliners.

We also continue to make good progress on the development of the 787.

As on all new airplane programs at this stage of development , we are working weight and schedule challenges, and we're making steady progress in these areas.

We remain confident that we'll meet our customer commitments.

We are on track to begin flight testing next year, followed by entry into service in 2008.

Now, last quarter we highlighted the 4 growth and productivity initiatives we are deploying Company-wide to help drive us to financial performance that matches the quality of our people and our technology.

While we're still early in this process, the implementation of those initiatives is going well.

The initiatives are the tools we will use to drive growth and productivity to new levels.

They are long term.

Combined with our focus on leadership development, they are important keys to Boeing's future performance.

Now, let's take a look at the numbers.

Next slide, please.

Our revenue grew 12% in the quarter, driven by increased deliveries of commercial airplanes.

Reported earnings per share grew 33%, reflecting both higher revenues, as well as productivity improvements across the Company.

After adjusting for special items, the core operating engine of The Boeing Company generated a 49% increase in earnings per share.

Our operations are running well and gaining momentum.

Now let's review the performance of our businesses.

Next slide.

Our Commercial Airplane business is benefiting from a product strategy that's keenly focused on our customers, and on our committment to continuous productivity improvement.

Revenues for the first quarter rose 48% and BCA's operating margins expanded to 10%, driven by a 40% jump in airplane deliveries.

We're on track to deliver about 395 airplanes this year, a 34% increase over last year's delivery totals.

These numbers reflect our success in working with our global partner network to efficiently increase production rates across the entire value chain, while at the same time, managing for profitability.

We captured 176 airplane orders during the quarter, including 54 additional firm orders for the 787.

Clearly, the 787 continues to generate outstanding customer interest.

Our success in the marketplace has enabled us to continue to add to our very large commercial airplane backlog, which has now grown to to $132 billion.

The strong order environment and the success of Boeing products in the marketplace lead us to believe that our book-to-bill ratio will exceed 1 during the guidance period, and perhaps beyond.

We achieved major milestones in the quarter, including the delivery of the 5,000th 737 airplane to Southwest Airlines.

We continue to expand the value of the next generation 737 product line by launching the more capable 700/ER model this quarter.

We also delivered the first 777-200/LR, the world's longest range commercial aircraft, to Pakistan Airlines.

Clearly, Boeing Commercial Airplanes is performing very well in a strong demand environment.

Next slide.

Strong profitability is a hallmark of our Integrated Defense Systems business, and that success continued during the first quarter.

IDS expanded its operating margins to 11.4%, even as revenues moderated in this more challenging defense budget environment.

In January, we realigned the IDS organization structure to more effectively address our customer's needs for capability-driven solutions, and to further improve execution.

This quarter, we begin reporting IDS financial results in line with that reorganization.

I'll say more about that in just a moment.

We achieved key milestones during the quarter on programs like JTRS, and Ground-based Midcourse Defense.

Our performance on other key transformational programs, such as Future Combat Systems and MMA, continues to be excellent.

As we complete it, the successful -- and we completed the successful negotiations of the contract conversion for Future Combat Systems.

IDS continues to deliver strong profitability over it's diverse portfolio of development, production and support programs, in an environment of moderating growth.

Next slide, please.

Now, let me say a few more words about the new IDS organization.

We have laid out for you our 3 major IDS reporting segments, along with the scope of each segment and the related 2005 revenue breakouts.

Included in our earnings release is a detailed quarter-by-quarter schedule on 2005 revenue and operating margins for your reference.

As part of our realignment, IDS financials now include revenue and income associated with our Advanced Systems business, which was previously included in Boeing's other segments.

Precision Engagement & Mobility Systems addresses the precision requirements and global mobility needs identified by the U.S.

Defense Department and key international customers.

Network and Space Systems focus on the military's intelligence, surveillance and integrated command and control requirements, along with our civil and commercial space customers.

And Support Systems, which we believe will remain a strong driver of IDS growth, addresses the military's integrated logistics, training and product support requirements.

We are offering capability-driven solutions that are clearly and directly aligned with our customer needs.

We believe this structure will allow us to better serve our customers going forward, and help us drive further productivity improvements.

Next slide.

Boeing Capital's earnings rose nearly [60%], despite a slightly smaller portfolio.

The aircraft financing market continues to improve, and BCC is executing well on it's mission to support Boeing's core business, while managing its portfolio size and risks.

BCC has reduced debt by $2.5 billion and paid dividends to Boeing exceeding $1 billion over the past 2 years.

Connexion by Boeing continues to demonstrate the potential of its satellite-based broadband service.

Connexion service is now available on more than 180 daily flights.

In addition to 500 orders and options from airline customers, we recently completed the first installations of Connexion service in the commercial shipping industry.

Now, turning to our balance sheet on slide 8.

We continue to enjoy outstanding balance sheet strength and liquidity.

We ended the first quarter with nearly $10 billion in cash and liquid investments.

That's up 17% during this quarter.

Our corporate debt levels increased slightly from year-end, recognizing the impact of some capital lease obligations.

BCC's debt remained stable.

Financial strength and solid credit ratings continued to be a priority for us.

So we're pleased that Moody upgraded its rating on Boeing and on Boeing Capital's debt last month.

Now, moving to cash flow on slide 9.

Our cash flow generation remains outstanding.

We've increased operating cash flow by 46% to $2.1 billion in the quarter, and that's after making $500 million in voluntary pension contribution.

This cash performance reflects strong earnings, another strong quarter of airplane orders, and excellent working cash management.

Also during the quarter, we repurchased 5.5 million Boeing shares, paid a 20% higher dividend, and continued to invest in our growth program, all consistent with our balanced cash deployment strategy.

Turning to slide 10 and our financial guidance.

Today we're confirming our growth outlook and our previous guidance for 2006 and 2007.

These numbers represent significant year-over-year increases and top line and bottom line performance.

Clearly, we've had a strong first quarter this year, so our bias, as it relates to 2006 guidance, is positive.

We will revisit guidance as we continue to make progress through the second quarter and update you as appropriate.

Boeing's 2006 revenue is expected to be approximately $60 billion, and between $63.5 and $64.5 billion in 2007.

Our revenue guidance for 2006 includes approximately $1 billion for business planned to be part of the pending United Launch Alliance transaction.

Upon completing that transaction, Boeing would use the F equity method of accounting for this new joint venture.

Earnings per share this year is expected to be between $3.25 and $3.45, increasing to between $4.10 to $4.30 next year.

In the second quarter this year, we expect higher expense in our other segment, as Boeing's Share Value Trust is expected to pay a significant distribution to beneficiaries due to our strong stock price performance.

This benefit is paid once every 2 years at most, and is expected to cause an additional pre-tax expense in the second quarter of approximately $80 million.

Looking at the quarters through the rest of 2006, we expect second quarter earnings per share to be the lowest of the remaining quarters, and fourth quarter to be the highest.

The Company is maintaining its operating cash flow guidance for 2006 and 2007 at greater than $5.5 billion for each year.

Detailed segment guidance is provided in our earnings release.

Now I'd like to summarize before taking your questions.

Next slide, please.

We are clearly off to a strong start this year, and we're well positioned to deliver strong growth we are forecasting for 2006 and 2007.

Throughout the organization, Boeing is relentlessly focused on delivering value to our customers and our shareholders with businesses that are leaders in their market.

We are keenly aware that our success depends on providing better value to our customers, and operating our business with the highest standards of integrity.

As we continue to do that, we will achieve the strong growth and profitability we're expecting for this year and next, and we will position ourselves as the preferred global aerospace partners for customers around the world.

Now, I'll be happy to take your questions.

Thank you. [OPERATOR INSTRUCTIONS] Howard Rubel, Jefferies.

Just to return a little bit to your outlook, James, there's also some additional items that appear to have sort of cost you in the quarter. 1 was missile -- well, satellite business and also deferred comp.

And R & D looks like it was fairly high.

Are some of these -- I mean could you elaborate a little bit on what you think those -- or how you're thinking about those for the rest of the year, especially satellite problems you continue to suffer with?

We do believe it's going to stabilize.

The charge we took on satellites was the military satellite Wideband Gapfiller, I think we talked to you about that before.

And we think that we have embedded in the EAC what it's going to take now to go ahead and perform that program under the current booking position.

On the deferred comp, clearly, we've been impacted as our stock has appreciated pretty significantly over the quarter.

We think probably that will sort of normalize, although we're hoping not too much, because our stock price going up is a good thing for us.

And in the R&D piece, Howard, as you know, last year we did have some supplier cost sharing payments that offset some of the R&D expenses, and we didn't have any reported in the first quarter.

But we do expect to get some, although they will be less than what we received last year.

But I think that will normalize what you're seeing on the spending rate going forward for R&D.

Thank you.

Cai von Rumohr, of Cowen & Co.

Yes, good quarter.

Thank you, Cai.

How can you do 10% commercial margin in the first quarter, when R&D appears to be at a peak level, when your volume is going up, your mix should be getting better, and your commercial margin for the year is not 10% or better?

Well, clearly, Cai, we had a good quarter with good productivity.

Clearly that came through.

But it also was impacted by some of the timing of some of our period expenses that we expect will hit later in the year.

Clearly, what BCA has done, both with ramping up the production -- .

Cai von Rumohr, Cowen & Co.

Cai, I know who you are.

That wasn't me.

That was the recording.

Your recording.

Can you hear us, Cai?

Can you hear me now?

I can hear you.

Okay.

Good.

So did you hear the first part of my answer?

About some of the timing of our period expenses?

Yes.

I mean, could you be a little more specific?

I mean what period expenses were low that would be going up?

Because the mix, the volume, and the R&D patterns look to be pretty compelling case for higher margins.

Well, yes.

It's just the G&A expenses that we normally would have, in terms of operating the business, they didn't hit from a timing standpoint, all that would have normally hit in first quarter, and they will catch up.

Clearly, the performance has been outstanding in BCA.

There's no question about that.

And we're optimistic that that performance will continue.

But right now, as we look at what's going to happen for the course of the year, we still believe that greater than 9.5 is what our forecast is. 9.

Excuse me, greater than 9 is what the forecast will be.

But we'll see.

But we're really pleased with where we are and what we've seen to date, particularly with what we've seen as they have been able to ramp up.

Particularly taking the whole supply chain up the increases in production, and doing that efficiently, and we're getting good profitability.

Thank you.

Heidi Wood, Morgan Stanley.

James, a question for you.

You talk about being 98% sold out for your delivery slots in '07.

And I seem to recall that around this time -- around the time this year for a year ahead, you're usually about 70% slots full for the next year.

So can you talk about what you are, in terms of percentage of slots sold out for '08?

And what you're looking for -- what you need to see to raise production rates to respond to the kind of demand that you're characterizing as fairly strong?

Heidi, as you well know, I can't talk about that outside of our guidance period.

But clearly we are very, very pleased to see at this time in the year, that we're already sold out for '07 at a 98% level.

And clearly, we're always looking at, along with our supply chain, doing studies to see what we can do to increase our rate of production.

But you know those are not near term decisions.

As you go through and do those studies, you really have to work your way through a lot of moving parts before you can make a decision there.

We have done very, very well with experiencing a lot of rate breaks and moving up the production rates over the first quarter and over the last couple of quarters, and we obviously, will keep monitoring that.

Clearly, the demand is strong.

We recognize that.

But our focus is on making sure that we can orderly increase our production ramp up, bring our supply chain along, so that we can deliver on our commitments, and deliver on our commitments with with excellent profitability.

And that's our first priority.

All right.

You weren't that active on the share repurchase front this quarter.

Can you talk a little bit about your cash deployment strategies for the rest of the year?

Do you plan on being more aggressive through the balance of the year?

Well, we plan on continuing to implement our balanced strategy.

We will buy -- continue to buy back shares.

Clearly, we have about 18 or 19 million shares to go under our current authorization.

The plan will be to go back to the Board and ask for an additional authorization.

And we will buy accordingly, as long as the stock is undervalued as it is, we will continue to have a pretty active buyback program.

All right, great.

Thanks very much.

Byron Callan, Prudential Equity Group.

What are you thinking about airplane orders for 2006?

I know that's something you don't normally give guidance on.

But I gather things are looking a little bit better now than they were in January for total order expectations.

If you have a number, I'd appreciate it.

Well, as you know, we booked 176 in the first quarter.

That's pretty good.

We do anticipate that we're going to have a -- we're going to be over a book-to-bill rate of over 1 this year and next, and perhaps further out.

It looks like the recovery is different than in the past.

Where in the past, we had the high peaks, and then they started to immediately come down.

They will be down from the '05 levels, but I think they will be higher than what our deliveries are.

And that's what I would tell you to look for.

Well, has it changed from what you were thinking in January?

Or is this just kind of marching along as you have assumed?

Well we assumed that it would be that, although it's really good to get validation in first quarter that that was a good assumption.

And so we were very pleased to see what we saw in the first quarter.

Particularly because some of these deliveries are out in the future.

And so I think it's just good validation of our product strategy, and our customers are basically saying they need to get in line, and sign up now, so they will be sure to get some of this great product in their fleet.

Thank you.

Joe Campbell, Lehman Brothers.

What a nice quarter.

Thank you, Joe.

I wondered if we could ask, you gave us a little bit of color about the year-over-year decline in the revenues at the consolidated IDS.

And then you've given us, of course, the breakout.

Could you tell us a little bit about maybe some more facts about what the military satellite business that was taken out meant, and Rocketdyne?

And what it is that will sort of pick up in those divisions that showed negative in Q1?

Kind of what's happening to make them pick back up to see positive growth over the course of the year?

I think this is the first negative quarter in probably, gosh, I don't know, 7 or 8 years.

Well, so let's talk about that.

Rocketdyne coming out, that surely had some impact that we'll see for the remainder.

I mean clearly, they're gone.

I don't recall exactly what the dollar values were associated with them leaving.

But some of the things -- and then of course the proprietary spending is down as a result of the restructure of the [FEA] program.

But nonetheless, the work that remains is still sizeable and we're still performing well.

We will see some growth in some of the transformational programs over the course of the year.

And then the other thing, Joe, is a lot of what you see down now is really timing of deliveries, and timing of revenue recognition milestones, performance milestones, on some of the other contracts.

So that will pick up over the course of the year.

So the things that were negative in Q1, will they be less negative in the subsequent quarters?

Yes.

Or is it more that there was an absence of positives that will pick up in the -- ?

I think it will be, they will start to diminish over the next 3 quarters as we pick up the deliveries, and catch up on the timing of those deliveries.

And then also, the revenue recognition performance milestones.

They're just timed differently this year than they were last.

Can you give us on the revenue here in the IDS, it will be affected, as you indicated, by the negotiations with Lockheed ?

This thing seems to drag on.

Is there some -- and I guess the papers are talking about a huge settlement that I guess wouldn't -- Lockheed would be neutralized if you could move forward with this.

But is there any update on how this thing is going, or any color on what's the hang up here?

Yes.

I think it's still making good progress.

Obviously, they're being careful.

They want to make sure that they cross all of the T's and dot all of the I's.

There's no question about that.

And we're working pretty closely with the government relative to the ULA approval.

And I think they have even said that they're getting closer to that, so we would anticipate that hopefully sometime in the second quarter.

Is that tied up with negotiations on the reported $750 million fine you'd pay, or is that separate?

No.

They're separate -- completely separate issues.

The ULA is only going through the FTC review basically.

And that's the Federal Trade Commission review, Joe.

And so that's a separate issue all together, as is the negotiations on Buy 3.

They're all separate.

And us trying to reach a global agreement with the government to put all of this behind us, is again, a separate activity.

So it's not that.

They're just working their way through the process.

It's taking longer than all of us probably would have liked it to have taken.

But I think they're making good progress.

And what we're doing is supporting it.

And we believe, we still feel strongly about that being the right way to go.

And we believe Lockheed still feels that way too.

And so hopefully, they will break the thing loose sometime in the near term.

And just lastly, is whatever settlement you have in your guidance, or will we have to adjust the guidance by whatever your final agreement is on putting the various complaints behind you?

There's nothing in guidance that would have to do with any global settlement.

In terms of the ULA being stood up, there's no issue there from an accounting standpoint, than what we believe will settle out on Buy 3 is in EAC.

No, but I meant back to the other issue.

If you owe the government three-quarters of a billion dollars, as Wall Street Journal says you might have to pay, should I subtract 0.7 from my cash flow guidance?

Or is that whatever it is you think will happen is in the guidance you've given us?

Yes, because we don't have -- we have been working with them, Joe.

We have no estimate of what that is, or what it would take.

And so that is not in any of our numbers today.

And by the way, contrary to what the article says, we do not have any agreement, although we are working cooperatively with the government to try to resolve this issue.

Steve Binder, Bear, Stearns.

Yes, , James, was there any block adjustments in the quarter?

And also on R&D, did I hear you correctly, that there were no variable supplier payments this quarter, such that if that's the case, should reported R&D at BCAG be pretty consistent for the balance of the year from the first quarter level?

First of all, we only had -- we added 200 to the accounting quantity size on the 737.

I think we added 1 to the 767.

And other than that, there were no other changes.

On G&A, that was correct.

We do not have any supplier sharing payments in the first quarter.

We do anticipate getting those towards the end of the year, and that we would expect the R&D guidance to be pretty much where we end the full year.

All right.

And then with respect to pricing in the commercial aircraft market today, and you look at 787, 777, , especially the 300/ER and the 737 next gen, if you are looking at deals that you have been doing here in the last 3 or 4 months, for the '08, '09 time period, depending on the model type, maybe 787s further out.

If you isolate the escalator factor, how would you characterize the pricing environment, what you have seen in the last 3 or 4 months?

Well, clearly it's a competitive environment.

But we're really pleased with the kinds of deals we're signing.

We believe we have embedded in those deals, real opportunity to create real value going forward, Steve.

So we're not having fire sales.

Oh, no.

I'm actually wondering are you starting to see better pricing than your normal escalators would show?

Well, we're seeing good pricing.

I think it's stabilizing.

And 1 of the reasons is that we have differentiated products.

And we think that we're getting good pricing, good value in the market space.

That, coupled with what we're doing from a productivity perspective, we think we're going to be able to deliver good value on this order book.

And lastly, with respect to potential replacements for the 737 next gen, I know there's been a lot of ideas.

Is there any firm sense of whether BCAG down the road, would go with a single aisle configuration or a twin aisle configuration, to potentially -- potentially target that overall narrow body market?

Well, no.

We're clearly not there yet.

We will continually be working with our customers, because that's where a product development decision is going to start and end.

Trying to make sure that we're going to provide to them a product, and invest in that product, based on what they believe their needs will be going forward.

But right now, right now, Steve, we're just enjoying the success of the 737.

As I mentioned earlier, we've delivered the 5,000th aircraft.

That model is doing extremely well.

It's the most popular airplane in the world.

And so, we've got over 6,000 of them on order.

So we'd just like to deliver on that order book.

But obviously, we will continue to work closely with our customers, so that we make the right product development decisions, and we make investments according to what we think our customers want, as we've done on the 787.

And you've seen the benefit of that.

Doug Harned, Sanford Bernstein.

On defense, the Support Systems Precision Engagement in the new structure came in with very high margins for the first quarter, well above what you're guiding toward for the year.

Could you comment on on anything unusual that happened?

Yes, I think that you'll see on the first quarter normally of the year for those products where we have embedded in it our production, particularly I'm talking precision now.

On the production programs, we tend to have production lot close outs that provide better margin performance than we would be over the course of the year as we get into the normal production and delivery of our aircraft under our current multi-year contracts.

But I think that we'll see that somewhat normalize.

Now, from -- and I think that the same holds true on some of the programs we have in our support area, where, things like the Gunship, where we were able to close out a couple of lots, and we're doing -- just having a little more favorable mix of contracts in the first quarter.

And we think that will normalize over the course of the year.

And then the new structure, how long will it be before it is all in place?

In other words, people moved, functions consolidated, potentially a new customer interface set up?

We're up and operating.

We're up and operating today.

So in terms of any cost savings -- ?

No.

And overlapping functions you may have had, that sort of thing?

Well, so we're up and operating in that structure today.

But remember, we have an ongoing process of continuous productivity.

So over time, we will be looking at how those new organizations are operating, and we'll see if there's some opportunity to have them operate more efficiently, and if there's some gain to be harvested from a productivity improvement.

And we'll be working that as we work across the Corporation.

Okay, great.

George Shapiro, Citigroup.

James, can you just explain why we saw an increase in the 777 deferred production costs at this point?

You'd think it would be coming down.

And if you can just reconcile that to the extent you can, with the fact that the unit profits were above the program profits?

I guess that's probably the other programs overwhelming the 777 change, but -- ?

Yes.

You know, it's simply because in the quarter, we introduced a -- we had a lot of new customer introduction costs that drives up the unit.

And then also the customer mix of deliveries in the first quarter added to that, and it's just simply that, George.

It's not a big deal.

Okay.

And then, in the Engagement area, the revenues were slightly down from last year despite the fact that deliveries were higher.

So could you just spell out what programs in that new sector may be declined in the quarter, and as to what you might expect going forward?

Well, the deliveries were different.

I mean some of the AW&C milestones for revenue recognition, the timing of those were different quarter-over-quarter and they fell out of first quarter '06.

And we'll pick them up over the next 3 quarters.

So it's primarily in that area.

And there were some F-15 deliveries that we had that are down, that are in subsequent quarters that did not hit this quarter.

Okay.

Thanks.

Ron Epstein, Merrill Lynch.

Just following up on Steve's question about product development.

As you guys walk through more of the 787 program, what milestones should we keep an eye out for, so as outsiders looking in, we have a good idea that things are indeed on track?

Well, I think that clearly, the fact that we've gotten through firm configuration, which we did complete.

We've been able to manufacture and successfully join some of the composite barrels.

We powered up the auxiliary power unit.

We've had the engine runs at both GE and Rolls.

And then, now we've started and our supply chain has started building their plants, their factories, where they can start the fabrication of the other component parts.

So I think there's been a number that you can -- of milestones that you could look at now, and get a good sense that this development program is on track.

And then those others, particularly as our supply chain starts to stand up their factories and start to work on their detail parts, I think that would be something I would watch.

Obviously, we're preparing to go into flight testing at the end of next year, or the second quarter of next year -- excuse me, in the second half.

I'm sorry, not quarter.

Second half of next year.

So that we'll be prepared to have this thing introduced in 2008.

And we do believe we're on track to make that happen.

Okay, and then just 1 more question.

Do you guys have a back up plan if something were to happen with the relationship that The Boeing Company has with VSMPO, with regard to titanium sponge and titanium forging?

Well, clearly, 1, we do have a good agreement with them, and a good arrangement that we're working with them to really provide us access to titanium.

But they are not our only titanium supplier.

We do have others that we have agreements with, that will help us to offset that risk.

So we're pretty comfortable with where we are on titanium.

Okay, thank you.

Robert Spingarn, Credit Suisse.

James, just to follow-up from a moment ago, with regard to the777, the capitalized costs staying flat.

Was there any 200/LR in there?

I don't know specifically.

There are clearly -- well there is 200/LR in there.

I mean, but not necessarily being a new cost.

What particularly drove the fact that it went up a bit, was we had new customer introduction engineering costs that are now in that number.

It's just with the quantity of 777s delivered in the quarter being double last year, that increment seems pretty large.

Well, but still, keep in mind that there are also with customer mix in those deliveries.

Right.

And just separately, you've talked about a book-to-bill north of 1.0 during the guidance period through '07.

To what extent does that contemplate activity from the North American market, particularly the legacy guys?

Not a lot yet.

I mean, we ultimately hope they will come back sooner than later.

They're starting to work through some of their financial difficulty.

And clearly, we're trying to help where we can.

But probably in the 2007 range or later, they will come back.

But I just don't have a good handle on when they will come back.

We're not necessarily contemplating them.

Obviously, we're trying to help and work with them, so that they can get back in sooner.

But clearly, we have strong demand from other market segments that help us to believe that that's going to happen, whether they get back or not during the guidance period.

Okay.

And then you just mentioned the sort of the ebb and flow of the quarters from an EPS perspective for the remainder of the year.

Should we be thinking flatish production on commercial aircraft, 100 per quarter?

Or will we see a traditional dip in the third quarter?

No.

I think you should be thinking going out, that it will be rather flat, pretty consistent quarter-over-quarter.

Thank you very much.

David Strauss, UBS.

James, could you talk about what impact a potential Alcoa strike could have on the business, and what precautions you have taken?

As well as maybe what you're seeing out of some of your suppliers?

Well, I think we have tried to be sure that we have multiple sources, and we'll work pretty closely with our supply chain, and see what we need to do in order to deal with it.

But, obviously, it's a challenge.

But we always have contingencies.

So I think we would be able to see our way through it.

Okay.

Thanks.

And on the tax, tax rate side, could you talk about the tax during the quarter and what you're assuming on the R&D tax credit side?

Well, I'll just say this.

That if you took out what we had, relative to some tax settlements and what one would call windfalls in terms of the tax side, we would probably be back up to close to 31% as an effective tax rate.

And that's what we're assuming going forward for this year.

And it's probably around 33% for a tax rate next year.

And that's all up, including whatever credits we got from R&D.

Okay, and last one.

On the working capital side, could you just update us there what you have baked into your operating cash flow guidance for the year?

Obviously, working capital was pretty good in the quarter.

Yes.

We expect it to moderate a bit.

But we expect to continue to work our working capital hard.

Work our total assets hard.

As you know, our performance score is based on how well we deliver economic profit for the Corporation.

And one of the levers there are assets and working capital, as well.

So we have a lot of focus across the Corporation, because that's not only the score for our executives, it's also the score for our salaried employees.

So all of our folks are focused on working assets, so we'll work working capital as part of that.

Okay, thank you.

Joe Nadol, JPMorgan.

I was wondering if you could -- you've already given us a little bit of color on the supply chain and how things went well in the quarter.

And now you're up to your sort of 100 aircraft per quarter delivery rate, it would seem that you have a pretty good handle on things.

I was wondering if you could give a little bit more color on, I guess if there are any necks of the toothpaste tube, where are they?

And how you feel about it, relative to maybe 3 months ago or 6 months ago.

Well, clearly, that remains a watch item for us, and we're going to -- we work it hard every day.

We have our teams both from BCA and IDS really working very, very closely with the supply chain to make sure that we're able to get what we need, when we need it.

And so that's why, as we talk about raising production rates, why it's a long-term, well thought through, disciplined process, that we have to integrate with our supply chain.

So clearly, we're feeling, I think relatively more comfortable as we see progress, particularly on the 787 with our supply chain.

Clearly, that has not been without it's challenges.

And we've been able to work closely with our suppliers to offset any of the issues we've seen to date, and we will continue doing that going forward.

But overall, we're feeling pretty comfortable about it.

That's not to say that the supply chain isn't a watch item for us.

It's not to say that there are no risks in it.

But I think the way we're working together in an integrated fashion, is allowing us to have a high degree of confidence that it's not going to cause us an issue as we work our way and harvest this up cycle.

You had some minor issues in Q4 on some of your raw material contracts.

And any update on that?

More clarity?

How much visibility do you have over the next year and a half on that specific part of your supply chain?

Well clearly, raw materials are going up.

I mean the costs are going up.

We have long term contracts, that's going to protect us in the near term.

But in some cases, we may have to look at some of those and see how we work with our supply chain to get to the right costs and we'll have to embed that in the pricing going forward.

And clearly, we'll have to make sure we have the right productivity initiatives in place to offset any of that growth, because our plan, going forward, is to clearly continue to invest in new product development, making sure that we expand our margins.

And everything we know today are in the numbers we're sharing with you.

But we'll continue to work that going forward.

Okay, thank you.

Myles Walton, CIBC.

I know March was just 1 month, and it's always a challenge to use 1 data point.

But I think it's 29 737s and 8 777s in that month.

The strongest you've seen in quite some time.

I'm just wondering, how much of that performance should we read into as just timing that carried from other months, versus actual surge capacity you have in the business?

I think it should be looked at as timing.

That we've done it over the quarter, and they may have all delivered then.

But I wouldn't be looking at we have that kind of -- or be assuming that we have that kind of surge capacity.

And then a quick 1 on the reconciliation of guidance.

I think going into the quarter we're looking for maybe a deferred tax charge.

Is that going to materialize, or -- ?

It is not.

And we mentioned on the fourth quarter call, that we thought that it would not , occur, and we adjusted guidance for it.

Okay, thanks.

Operator, we have time for 1 more question from analysts.

Thank you.

Robert Toomey, GT Reilly Advisors.

I'm just wondering, James, with respect to the progress you've made on improving your productivity, clearly, it's really starting to show through in your margins.

Do you believe that, based on what you know now, the potential for margins on the 787 could be higher than your other products?

And in addition to that, there has been some talk about the duration of this cycle being longer.

You said earlier, this is a different sort of a cycle.

Can you just comment on how long you see this commercial cycle extending?

Could it go out beyond '08 or '09?

Thank you.

Well clearly, the way we're building the 787 is different than the way we built other product.

And so we're pretty comfortable with the business case on that product.

That we're going to deliver good margins.

As to whether it will ultimately be higher than the margins on other airplanes, that is yet to be seen.

But I think the thing that is clear, is we're expecting to deliver a tremendous amount of value to our shareholders, as it relates to the 787 program.

What was the second part of that question?

Just the duration of the cycle.

Well clearly, what typically you'd see in the cycle, is a peak order year.

And then that orders, for the next several years, would drop off pretty dramatically.

And although we've seen a moderation of orders this year, particularly given the 176 orders we got in the first quarter, it does look like that they will level off and stabilize, is what we're thinking over the next couple of years, at least.

And so that's somewhat of a different experience than we've had in the past.

And then when you couple with that, that the traditional domestic customers -- or domestic carriers and the European carriers are not back in the market at a significant level yet, gives us some early indication that this cycle really may go longer, and may be a little more protracted and be a little different.

Maybe the peak is not as high as it would have been.

You know, we peaked at over 1,000 orders last year.

Now, we don't anticipate that this year.

But we do anticipate getting more orders than deliveries, and we anticipate that over the guidance period, and perhaps it will be a little longer.

And will have to see when the domestic -- the domestic carriers and the European and traditional carriers there, get back into the marketplace.

Thank you.

Operator, we can move to the media portion, please.

Thank you.

That completes the analyst question-and-answer session. [OPERATOR INSTRUCTIONS] I will now return you to The Boeing Company for introductory remarks by Mr. Tom Downey, Vice President of Corporate Communications.

Mr. Downey, please go ahead.

Thank you.

We'll continue with our questions for James.

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

Operator?

We're ready for the first question, and in the interest of time, we ask that you limit everyone to just 1 question.

Lynn Lunsford, Wall Street Journal.

This is just kind of a housekeeping kind of question, but when was the last time commercial airplanes had a 10% profit margin?

You know, we were just trying to figure that out ourselves, and I'm really not sure.

I'm not sure that they have, but maybe way back in the early 90s.

I just don't know.

But I'm sure glad they got it now.

Okay, thanks.

Our next question come from Stanley Holmes of BusinessWeek.

Could you be more specific on some of the challenges you see with the 787, in terms of production and putting the plane together?

Where do you see the biggest challenges to date?

And you can just start with that.

Well, Stanley, I guess I don't see that we have a whole lot of major issues on this program yet to date.

But obviously, where the challenges will be, is in our supply chain as some of our global partners are trying to do this for the first time.

And so that's what we're monitoring very, very closely, and making sure we're there.

We're having them in our shop to make sure they know how to do the processes that are necessary to make the material, and actually to perform the operations to develop the major components that they're responsible for.

So our team, our technical team in BCA, is working very, very closely with the supply chain to make sure that they can get that done.

And so I wouldn't necessarily call those challenges, as I would say that we've gone through and looked at this development program.

We've identified where the risks would be relative to the way we're building the aircraft, and we are making sure that we have the right processes in place to work through those and mitigate them so they don't materialize.

Okay so that's -- what about on the cost side?

There seems to be some issues and concerns about costs from suppliers.

And where would you assess your supplier's and Boeing's ability to maintain the entire cost of building a 787 within the parameters that you set out early in the program?

Well, I've got to tell you, as I go through and look at the program, and I've been through a lot of development programs, because I grew up on the government side of the house.

So you always are worried about the unexpected things happening that would drive you overrun your budget.

But we are well downstream on this development program.

We're well within the budget, well within the business case, and it really does look good.

And so, Stanley, all I can tell you is that right now, this looks like the best run development program I've ever seen.

And -- but it is a development program.

So clearly, we are mindful of that, and making sure that we have the right resources embedded in our business case to help if something should happen.

And so right now, that something hasn't happened, and we'll just have to wait and see.

Okay.

Thanks a lot, James.

Molly McMillin, Wichita Eagle.

My question is kind of 2 part.

First, I wanted to talk about the Wichita plant, just a minute, and see what do you think is -- that you guys see as the footprint here for Wichita, say in the next 3 years, 5 years, or 10 years?

What's your big plan?

Well, it's the market that's going to drive the footprint in Wichita.

And it's -- we've got to get the kind of work that we would put there into Wichita.

And so far, as you know with what's going on on the Integrated Defense side of the business, we're actually experiencing some layoffs.

And that's because we don't have the work.

But we're actively seeking new business that would, should we capture it, I think some work would come Wichita's way.

But we'll have to wait and see how that works out.

We're obviously operating in an environment, particularly on the defense side of the business, where the budget is really constrained, and there's a lot of requirements that are competing for very scarce dollar.

And so what that means is, the Wichita site has to really be able to be productive and add value, and allow us to be competitive.

And so I think we're working all of those issues to make that happen, and if we get the work, obviously we'd put some there.

On the commercial side of the house, [inaudible] we have quite a bit of work there.

And we think that will be going for the foreseeable future.

Okay.

What about -- what kind of work are you guys looking at trying to grab for Wichita?

Well clearly, we have to look at the tankers in the past, and we have our international tanker work, some of the work being there.

We've just gotten the request for interest for the U.S. tanker, so we'll have to work our way through that.

But it's principally modification-type work that would be in that, that we'd put in that shop.

So it would have to be work, where we have to do a lot of mods on airplanes, and that's generally where we think it's the right kind of work to put in Wichita.

And so we have to get those kind of contracts that would allow us to have some of that be deployed there.

On the tanker, are you all -- I mean, at 1 point you guys were talking about, instead of doing the modifications after the fact, if you guys got the tanker contract, rather than fly them to Wichita and then do the modifications, put those down the line as you're going to do the MMA.

Is that -- has there been a decision made on that which way you guys are going to propose?

No, there has not.

I mean, we don't know yet what the requirements are.

We just got the request for interest from the government.

It just got released on Tuesday.

We're working our way through it.

So it's too early, just premature for us to understand yet, how we would propose on that.

Okay.

Thank you.

Peter Pae, LA Times.

If I was an airline and I ordered a 787 today, when can I expect a delivery?

I think we're sold out in the first few years, so it would be in the what? '10 maybe.

Or in the 2010, 2011?

And follow-up to that, considering that this is a new way of developing, or making the aircraft, how difficult would it be to ramp up production?

What kind of challenges would you have?

Well, a ramp up is complex and difficult, whether it's a new model or an old model.

But we're always studying that.

We have a global supply chain that has to be taken into consideration.

And they're not sitting around just waiting for us to up production.

They do have other work, and other requirements.

So we would have to work our way through in an integrated fashion.

But it is a very complex, detailed study that has to take place, and generally, once you get through that, the implementation of it is in the future.

It's not something that you can turn on immediately.

Okay.

Thanks.

James Gunsalus, Bloomberg News.

The RFI out for the tanker, 1 of the big things that jumped out there was the subsidiary disclosure request by the Air Force.

Do you see that being any kind of advantage in your bid?

Did you say subsidiary or did you say subsidy?

I'm sorry.

If I said subsidiary, I meant to say subsidy.

It's too early for us to say, and I haven't seen it.

Our people just got it.

So I really can't comment on that.

Okay.

And just to follow-up for the settlement story that was in the Journal.

What are you guys doing in anticipation of that in terms of reserves?

Is there anything you can share with us on that?

There's nothing to reserve.

We really -- that was just a news article.

We are all working cooperatively with the U.S.

Government to try to resolve it.

But there's no probability of any of this happening, and there's nothing we can estimate if it did happen, what the ultimate cost would be.

So, clearly we don't meet the accounting rules.

We have put a disclosure, though, in our filings that says if we were to be able to settle this, it could be meaningful, just so that we cover ourselves.

But we just have no idea at this stage how that is going to conclude.

Given the nature of this settlement or what's being negotiated, it doesn't meet accounting rules for reserves?

That's correct.

Okay, thanks.

Kevin Done, Financial Times.

Just wondering if you could give us a sense of what the production lifetime outlook is now for the 767?

And also, what is the sort of timing that one is expecting for an eventual order for refueling tankers from the U.S.

Government ?

Thank you.

All I can tell you is what's been in the paper.

They just released the request for information to the supply chain on Tuesday.

And I think the timing that they have is that they would release an RF -- a proposal some time at the end of the year.

And we just don't know what's going to happen.

It could be late '07, or it could fly it out.

It is the U.S.

Government, so they could fly it out as they work their way through whatever the funding constraints are.

So I can't predict that.

The 767, I think we still have a few orders yet to produce.

And I don't know the exact date, but sometimes towards the end of the year, we'll be taking a look at it.

Thank you very much.

Operator, we have time for 1 more question.

John Liang, InsideDefense.com.

On the C-17 program, how long can you keep -- do you think you can keep the line open with the 7 aircraft that are in the unfunded list, as well as your current international orders?

Well, our current contract runs out in '08.

Obviously, if we got 7 more plus an order, an international order, it could run a little longer.

But we're hopeful that we'll continue to work with our customers, and we'll be able to work with Congress.

Because Congress has basically -- has called for procurement up to 222 aircraft, and we'll see what we can do to work it.

So, it's good to know that they have 7 that they're working on near term.

And it's good to know that Australia is interested 4, because that will help us to extend the line.

And we'll keep working with the Air Force and with Congress to make sure that we keep the line open as long as they want it open,as evidenced by new orders.

So just to make sure, just hypothetically, if you only had this, what you have right now, how far would that take you through?

Well, the contract would end in '08.

Okay, thank you very much.

That concludes our earnings call.

Again, for members of the media, if you have further questions, please call our Media Relations team at 312-544 -2002.

Thank you.