波音 (BA) 2006 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 2006 year-end 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 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.

Mr. Dohnalek, please go ahead, sir.

Thank you very much.

Good morning, and welcome to Boeing's fourth quarter and full-year 2006 earnings call.

I am Dave Dohnalek, and with me today are Jim McNerney, Boeing's Chairman, President and Chief Executive Officer; and James Bell, Boeing's Chief Financial Officer.

Now, after brief comments by Jim and James, we will take your questions.

In the interest of time, we ask you to please limit yourself to one question.

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

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

Now I will turn the meeting over to Jim McNerney.

Thanks, Dave, and good morning, everyone.

Let me begin with a few comments about our 2006 performance, and then James will walk you through the numbers.

After that I will say a few words about the road ahead, and then we'll take your questions.

We made great progress in 2006 which has given us a solid foundation for even better performance in 2007 and beyond.

This was an important year for Boeing, one in which we turned a corner and positioned ourselves for what we believe promises to be a very exciting future.

We executed on our plans and significantly improved our financial performance while dealing with some tough issues which ultimately in dealing with them strengthened our company.

By focusing on both growth and productivity we were able to deliver double-digit increases in revenue and core earnings in the fourth quarter and for the full-year 2006.

We also delivered a record year in many important measures including revenue, cash flow, total backlog, and commercial airplane orders.

Our cash flow went from strong to stronger growing from 7 billion in 2005 to a record 7.5 billion in 2006.

And that's after investing in our growth programs and adding to our pension funds.

Our record total Company backlog extended to new levels reaching 250 billion as of the end of December.

This backlog growth was driven by a second consecutive record order year for our commercial airplanes business and by key defense program wins at IDS.

ECA booked 1,044 net airplane orders during the year after netting over 1,000 orders in 2005.

IDS captured the Secure Border Initiatives and the Combat Search and Rescue Helicopter program along with additional C-17's, Apaches and Chinooks for our military customers.

For two years in a row, the 737 program achieved record orders with 729 net new airplane orders in 2006 alone.

Boeing twin aisle airplanes also enjoyed great success with customers.

The triple seven continued its impressive market share performance and the 747 achieved its higher -- highest order total in 16 years.

The 787 Dreamliner continues to win in the market with 452 firm orders from 36 customers around the world since its launch.

Speaking of the 787, let me give you an update on where we are.

I will start by telling you exactly what we're telling our customers.

We expect to deliver the 787 on time with first delivery in May 2008 and in accord with our contractual commitments.

Over the course of the year in 2006 we achieved important milestones on 787 which position us well for the task ahead.

We began flying the Dream Lifter, or the large cargo freighter.

We commenced major assembly of the first 787 airplanes, and we made strides in our technology development and weight reduction programs.

Looking ahead to 2007, our key milestone targets include flight test and certification of the Dream Lifter during the next few months.

By the way, the vibration issue has been resolved on this airplane, and fixing it did not impact the overall schedule.

Secondly, flying of 787 engines on their airplane test beds in the first quarter; arrival of major assemblies in Everett, Washington, also during the first quarter; final assembly of the 787 in Everett during the second quarter; 787 rollout in July and first flight of the 787 which is targeted for the end of August.

As with most large development programs at this stage, we continue to work weight, supplier, and schedule challenges as we strive to meet our milestones.

These areas represent the bulk of our R&D spending at this point, and we're making progress on all fronts.

On weight we have identified a number of areas where we are taking weight out of the airplane.

We've redesigned numerous parts and changed some materials.

And we feel confident we'll get where we need to be.

To mitigate schedule risk, we've continued to provide engineering and manufacturing support to our partners, many of whom I have personally visited over the last twelve months.

We continue to make good strides there as well.

We continue our process of robust contingency planning which keeps us looking forward at risks we may encounter and mitigation actions we may need to implement.

We have committed resources for these plans as we need to, and retired plans no longer required.

All of the investments we have made to date and foresee making at this time are within the R&D estimates we have provided in our guidance.

To help you track our progress on the 787, we plan to update you at least twice a quarter, once during our earnings call and once by Mike Bair, our 787 program head during his quarterly call with media and investors.

Those will now be webcast by the way, and the next will be in early March.

So, while mindful of the inherent challenges and risks that lie ahead on a program like this, we are pleased nonetheless with the progress we are making on the 787 and with the airplane's performance, which we expect will exceed the overall performance levels we committed to customers when we launched.

Now, let's shift to cash deployment.

Companywide productivity improvements helped us generate cash to invest in our major growth areas.

We continued to invest in developmental programs like 787 and the 747-8, both of which will be major growth programs for this Company for a long time to come.

We also made progress on important derivative aircraft programs such as the P-8A Poseidon program and international tankers.

These programs and others like them combine the very best of our people and technology with BCA and IDS teaming to provide the right solutions for our customers.

I see more growth coming from this area where Boeing has a unique competitive advantage in the years ahead.

Our Commercial and Government Services businesses are growing organically at very attractive rates, and we took some opportunities in 2006 to enhance that organic growth and accelerate the development of our services through the acquisitions of AVO, Carmen Systems and C-Map.

We think the services area will continue to generate very attractive growth opportunities for us.

While we improve the value and performance of our business, we further enhance the value we provide to shareholders by increasing our dividend 17% and authorizing a new $3 billion share repurchase program.

We see more potential to return capital to owners through share repurchase and dividends as our financial performance improves.

2006 was a year of acceleration and business success, but is was a transition year where we faced some stuff business realities.

We succeeded in ringing some risk out of our business and better positioning ourselves for the future by making the decisions to phase out our connection service, proceed with the global legal settlement, and rationalize the launch business by completing the United Launch Alliance joint venture.

We moved decisively in these areas because it was the right thing to do for our business.

We also dealt with issues related to increased R&D on Commercial Airplane programs, as well as cost and schedule growth on the AEW&C program, including an additional charge we took for AEW&C in the fourth quarter.

Despite these challenges, the focus we maintained on improving productivity and driving growth simultaneously enabled us to deliver a strong fourth quarter and a strong year.

Driven by the solid momentum in our business, we raised our earnings per share guidance for 2007, and we are forecasting significant additional EPS growth for 2008.

So, we are truly raising the bar here at Boeing.

You have heard me say that we are committed to delivering financial results that match the quality of our people and our technology with our momentum and continued focus on growth and productivity we have a great opportunity to do just that.

Now, let me turn it over to James who will provide more details on our financial results and outlook.

James.

Thank you, Jim, and good morning.

We delivered double-digit revenue and core earnings growth in 2006 and generated another year of outstanding cash-flow performance.

Total Company revenues grew 15% to $61.5 billion, driven by higher Commercial Airplane deliveries and record revenue in our Defense business.

Our EPS adjusted for special items climbed 51% to $3.62 per share, and operating cash flow grew to another record of $7.5 billion.

Now turning to our fourth quarter performance on Slide 4.

Fourth quarter revenues grew 26% to $17.5 billion driven by double-digit growth in each of our core businesses.

We earned $1.29 per share in the quarter, more than double the earnings from the same period last year.

Results this quarter included a tax benefit of $0.14 per share and a net charge of $0.02 per share from discontinued business, mostly connections.

Results for the same period of 2005 included a charge of $0.16 per share related to the pension impact of the Rocketdyne sale.

So, our core EPS grew at a very healthy rate of 57%.

Now, turning to highlights from our business segment starting with the Commercial Airplanes on Slide 5.

BCA continues to profitably manage its production ramp up while achieving record orders and investing in its growth.

BCA delivered 103 airplanes in the fourth quarter and 398 for the year.

Revenues grew 37% in the quarter, driven by a 41% increase in airplane deliveries and growth in airplane services.

Fourth quarter margins grew to 8.7% due to productivity improvements which were partially offset by planned R&D spending and the absence of supplier development cost sharing payments.

For the year BCA grew by 33% on a 37% increase in airplane deliveries.

Operating margins expanded to 9.6%, and BCA's backlog grew 40% to more than $174 billion on record orders with strong performances across all aircraft types.

Now, Jim has already mentioned the progress that we've been making on the 787 program as we move towards first flight this year and entry into service in 2008.

The 747-8 program also achieved outstanding market success in 2006 by capturing major orders for both the freighter and the passenger versions, including the launch order we won last quarter from Lufthansa.

The program completed firm configuration of the freighter version, also during the fourth quarter.

BCA expanded its large service business in 2006 with solid organic growth complemented by the successful acquisitions of AVO, Carmen Systems and C-Map that Jim mentioned.

Driven by industry-leading products and services, Commercial Airplanes expects significant growth in airplane deliveries, revenue and earnings during the guidance period.

I will speak more about that in a moment.

Now let's move to Slide 6 and our Defense business.

IDS delivered double-digit revenue growth and double-digit margins in the fourth quarter, driven by higher volume across all segments of its business.

Revenue grew 18% to $9.7 billion, and operating margins were 10.6%, driven by generally strong execution across defense programs.

IDS delivered outstanding results in its production and support programs including C-17, F-15, Chinook, and the modification and upgrade programs.

We also generated very strong results in our Network and Space Systems segment, driven by performance on the Future Combat Systems and missile defense along with post-closing adjustments from the EDD sale.

For the year IDS generated record revenues of $32.4 billion on strong growth in Precision Engagement and Mobility Systems and Support Systems.

Operating margins in 2006 were 9.3%, due to good overall performance offset by charges on the AEW&C program.

Now, during the quarter we revised cost estimates for the AEW&C program resulting in a charge of $274 million.

Now, as you recall, we took a charge in the second quarter which was based on our best estimates of work and schedule at that time.

This additional charge in the fourth quarter stems from further program delays of up to six months as subsystems and software development has not matured as we had anticipated back in the second quarter.

Over the past few months we've implemented detailed plans to complete development and production of the aircraft including the complex radar and the electronic warfare systems for this program.

We're now seeing signs of these subsystems maturing.

As one example, our mission computing software is now successfully controlling the radar in flight.

We expect radar development to be completed late this year and aircraft certification to occur in mid-2008 leading to first delivery in 2009.

We're obviously disappointed by the cost growth in this program, but we are confident we're taking the right steps to fulfill our promises to our customers.

Now, as Jim mentioned IDS added to its very large contractual backlog during the quarter with wins on key programs.

IDS was selected for the U.S.

Air Force Combat Search and Rescue helicopter and won a large Chinook program with the U.S. Army.

We also won the AEW&C program in Korea and secured important C-17 contracts with the U.S.

Air Force and the Government of Australia.

During the fourth quarter we completed the United Launch Alliance joint venture and commenced operations of the new operation -- of the new organization including the first launch.

Looking ahead, despite uncertainties in the U.S.

Defense budget during the next few years, IDS is positioned to deliver modest revenue growth and excellent profitability with its well-balanced portfolio of defense programs.

Now let's take a look at our other businesses on Slide 7.

Boeing Capital grew its pretax income 25% in 2006 to a record $291 million and continued to return significant cash dividends to Boeing.

For the quarter BCC generated pretax income of $37 million, while its portfolio declined as planned to $8 billion.

The aircraft financing market remains healthy and BCC is executing well on its mission to support Boeing's core businesses while reducing its portfolio size and risk.

During the quarter we completed the planned wind down of our connection operations and took a charge of $0.03 per share as previously disclosed.

Now let's turn to cash flow on Slide 8.

Our cash flow generation remained outstanding with operating cash flow of $2.4 billion in the quarter, and a record of $7.5 billion for the year.

This performance reflected strong earnings growth, excellent working capital management, and a record volume of commercial airplane orders.

We're deploying that outstanding cash flow to grow our business while returning value to shareholders.

We've invested in organic growth programs including the 787, the 74-8, and the international tankers.

We've complemented that organic growth by completing targeted acquisitions in our service businesses.

In December we announced the 17% increase in our dividend that reflects our strong operational performance, excellent cash generation, and expectation of financial growth ahead.

During the quarter we used over $400 million of cash to repurchase 5.2 million shares, and for the year we repurchased 25 million shares for $2 billion leaving $2.4 billion available under the current repurchase authorization.

We've made excellent progress in strengthening our pension plans in 2006.

Our pension plans are now fully funded, and our required cash contributions are modest over the next few years.

As previously disclosed, shareholders equity on our balance sheet was reduced at the end of 2006 by about $6.5 billion to reflect implementation of new accounting rule FAS 158.

We expect non-cash pretax pension expense to be approximately $1.1 billion in 2007 and about $900 million in 2008.

We expect pension expense to decline sharply after that with 2009 pension expense likely to be about half of the 2008 level.

Now let's turn to Slide 9.

We have a strong balance sheet with outstanding liquidity.

We ended 2006 with cash and liquid investment balances of $9.3 billion.

Boeing's debt level continues to decline during the year as the maturing debt was not refinanced due to our strong cash position.

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

And on that front, both Moody's and Standard & Poor's upgraded Boeing's debt ratings during the year with S&P increasing their Boeing rating to an A plus during the fourth quarter.

Now, moving to Slide 10 and some additional thoughts about our record backlog.

Over the past two years our backlog has grown over 60% to a record level of $250 billion, the highest in the aerospace industry.

This is important for two reasons.

First, and most importantly, it indicates that our products and services are meeting the vital needs of our customers.

Second, it also gives us great visibility into our financial growth over the next few years and positions us to deliver significantly improved financial performance.

That is reflected in our financial guidance for both 2007 and 2008 and gives us confidence in our continued expansion beyond the guidance period.

The order totals get the lot of attention, and that's great, but executing on our record backlog is what really counts.

That's our focus for 2007 and for every year beyond that.

Now, moving to Slide 11 and our financial outlook.

Today we're raising our EPS guidance for 2007 and forecasting significantly additional EPS growth for 2008.

Boeing's revenue guidance for 2007 is between $64.5 and $65 billion reflecting completion of the ULA transaction.

Revenue guidance for 2008 is between $71 and $72 billion.

We're raising our earnings per share guidance for 2007 to between $4.55 and $4.75 per share, due to strong performance as well as additional benefits from a slightly lower tax rate.

We expect quarterly EPS to build during the year, with the first quarter of 2007 being the lowest at about 20% of the annual EPS forecast.

This is driven principally by BCA's airplane deliveries and margins in the first quarter which we expect will be very similar to what we saw in the fourth quarter of 2006.

For 2008 we expect EPS to grow more than 20% to between $5.55 and $5.75 per share, driven by higher deliveries and margins at BCA and solid margin performance at IDS.

We expect operating cash flow to exceed $4 billion in 2007 and $7 billion in 2008.

We had previously forecast a total of about $11 billion of combined cash flow for the years 2006 and 2007.

With the higher than expected $7.5 billion in cash we delivered in 2006 along with our new 2007 forecast, we have actually raised our expected cash flow for that two-year period.

This change in cash flow guidance is due to a shift in timing of BCA customer advances, IDS receipts and federal tax payments between 2006 and 2007.

Now turning to our segment guidance.

BCA airplane deliveries are forecast to grow to between 440 and 445 airplanes in 2007.

Deliveries in 2008 are expected to be approximately 515 to 520 airplanes, driven by higher production rates and the introduction of the 787 Dreamliners.

Looking further out, we expect airplane deliveries in 2009 to be higher than those in 2008.

Commercial Airplane revenue guidance for 2007 is between $32.5 and $33 billion.

And it's expected to grow to between $39 and $40 billion in 2008.

We expect 2007 operating margins for Commercial Airplanes to be above 10%, reflecting higher deliveries and continued productivity.

For 2008 we expect BCA margins will continue to expand to approximately 11%.

Now, in terms of airplane orders, we expect the strong demand for our products will keep our book-to-bill ratio above 1 for 2007, resulting in a further increase in our backlog.

Our 2007 revenue forecast for IDS is approximately $31 billion reflecting the completion of the ULA joint venture.

In 2008 IDS revenues are expected to grow to between $32 and $33 billion.

We expect IDS margins to grow to approximately 11% in 2007 and 2008, driven by strong overall program performance.

Now, additional segment guidance is provided in our earnings release.

Now, I will turn it back over to Jim who will give you some final thoughts.

Jim?

Thank you, James.

Well, this is the second time I have addressed you to discuss our year-end performance and the road ahead.

Last year I told you we had embarked on a new course based on a new management model, dedicated to the simultaneous pursuit, growth and productivity and founded on the principles of leadership development.

Our results show we are making very good progress on this new course.

I also told you last year we moved to put some of the ethics and business problems from our past, put them behind us, and we have succeeded there as well.

I personally believe that we will look back on 2006 and see it as a pivotal year in the history of the Boeing Company.

To be sure, we have a lot of work ahead of us this year and next in particular, but because of what we've done over the past year, and all the employees that have done it, we are in a very strong position as we begin that work.

2007 will be an exciting year.

We're preparing for 787's first flight.

We're anticipating another good year for commercial airplane orders.

Our deliveries will rise at a steady yet prudent rate, and our Defense business will continue growing by delivering the low-risk, cost-effective solutions our government customers want and need.

The great success we've had in winning new orders, our focus as James says, is on executing that quarter trillion dollar backlog better than we ever have before and increasing that backlog at the same time.

Our challenge is to unleash Boeing's full potential.

Although we've made some great progress, we must do more.

We will heighten our focus on growth in productivity.

We will expand our leadership development, and we will redouble our efforts to meet commitments while living the Boeing values.

We want to remain the world's strongest, best integrated aerospace company, and we want to make sure our stakeholders see us that way, too.

Now, I think we'll be glad to take any questions you've got.

Operator, we're ready for questions from analysts, please.

[OPERATOR INSTRUCTIONS]

Our first question comes from Doug Harned with Sanford Bernstein.

Good morning.

Good morning.

On the 787, there have obviously have been a lot of rumors out there particularly related to suppliers, and when we were back in the last quarter you talked about the eight contingency plans, and that you were working on one of them at that time.

Could you describe where you are today?

Are you exercising more of those contingency plans, and are you still on track for the 112 deliveries that you have described for '08 and '09?

This is Jim.

I will answer the question, Doug.

The answer is the specific answer on the contingency plans is we had outlined eight, I think we had said that we had activated one, and we were prepared to activate the rest as we needed them.

The facts are, we sort of activated a couple other ones, and they had to do with work generally being done in different places or preparing for the contingency of that happening, I guess is a better way of saying it, and hiring some people and having them hot ready to go in the event that that happens.

It doesn't involve much money, it doesn't involve that many people, but it does anticipate worst case kind of scenarios for some travelled work.

We retired one of the contingency plans, the interface control data, because we made better progress on getting that systems level work done, and so we're about where we thought we'd be.

We sort of activated half of them, and ready to go, and I think your second question on the deliveries in '08 and '09 as we look at it today, we feel comfortable with that anticipation.

And when you talk about the contingency plans and some of the challenges here, do you see them more in the structures area, the systems or are they more general weight reduction type issues?

The weight reduction program is a major program that we kicked off in the second half of last year.

We're making very good progress on that.

That is a core engineering activity, and that we turned the gain up on as the plane, like all planes, started to come in a little heavy.

I am feeling pretty comfortable about the progress on that weight reduction program and getting the plane down to where we need to be to meet the commitments to our customers, so I feel good there.

I think the kinds of things I am talking about with contingency plans are having stand-by capability to make some tubes, clips and brackets in the state of Washington in case they don't show up in some of the components that have been stuffed before they get there.

I mean, it is things like that that I am talking about.

The weight reduction thing is a major effort, and I am feeling good about the progress there.

Thank you.

Our next question comes from Heidi Wood with Morgan Stanley.

Question for you, James.

As we look at your 2007 and 2008 guidance on margins at BCA, you have 100 basis point increase, and yet when you look at it, it looks like there is about a 200-basis point decline in the R&D to sales ratio at Commercial.

We're talking about a 20% year-over-year increase in commercial sales.

I know we've got head wind on the learning curve on the 787, but that's only about 8% of Commercial sales in '08, so I was wondering if you can walk us through the puts and takes on how you get to the 100-basis point rise in margins year over year?

You know, Heidi, as we go into '07, obviously we're going into a higher R&D year.

Clearly, we're still looking at seven -- triple seven moving through -- moving through to the moving line.

We think we'll get more productivity out of that, but, obviously, we're going to be conservative in '07 going forward to the 10%.

And then, obviously, as we go through '08, yes we'll have more volume again, but we will have the dilution costs by the 87 we'll start to deliver, and those margins, although will be good for a new program being introduced for the first time, it will not be at the same level as the mature programs, and so right now that's just where we see where we'll be, and then we'll keep you posted as we proceed over the next year.

Okay.

Thanks very much.

Thank you.

Our next question comes from Steve Binder of Bear Stearns.

Yes, can you maybe touch on the R&D in 2008 compared to '07, the $400 million decline you're anticipating?

I suspect most of that is BCA.

If you look at it from a program standpoint, would you say most of that decline is 787 at this juncture, and while you're touching on R&D, is there any spike anticipated in '08 for the Single R replacement program.

No for the answer to your last question.

There is no spike for that yet.

And to the first question, Steve, you're exactly right.

We expect to get through the large portion of the development program and actually start delivering the airplane in '08, and so the reduction in '08 R&D is really associated with the 87, although we still will be doing work on the 747-8.

All right.

And then, Jim, if I could just touch on ideas for a second.

Obviously your objective continues to be to retire risk on these programs and Wedgetail has been an issue that you characterized in Q2 as well as today.

UOA was a way of reducing risk.

Your strategy in commercial satellites is a way of reducing risk.

When you look at the portfolio at the end of 2006, where else do you think you need to retire risk as far as major programs today, or do you feel pretty good about the portfolio as far as performance?

Well, you never want to declare Victory with risk, and some of these programs, but I must say that I feel significantly better today than I did a year ago.

I mean, I think, you look at the issues a year ago, Thea, GMD, the FCS program always discussed, JTRS, AEW&C, and I think of those programs I just named, most of them are on pretty solid footing right now.

As a matter of fact, they were, the ones that I mentioned, were really the source of volume improvements in the fourth quarter here because of success we're having with our customers.

And AEW&C, absolutely right, we're -- we tried hard all year to get to the bottom of it, and we think we're there working with our partners on the program.

And so you never want to say it is all gone, because we do some pretty complicated things here, it is -- but I feel significantly better now than I did a year ago.

Thank you.

Our next question comes from Cai von Rumohr with Cowen & Co.

Thank you.

Like to follow up on Heidi's question.

Even if the 787 were at 0 profit given you're going to be down 150 to 200 bips in R&D, and also you're going to get a positive swing in pension, it looks like your margin before R&D is down, is that pricing?

Is it conservatism?

What is it, because basically the numbers don't add up.

We're conservative, Cai.

Okay.

Thank you.

You got me.

Thank you.

Our next question is from Troy Lahr with Stifel Nicolaus.

Thanks.

As you guys talk about working through the supply chain issues, is it kind of the same suppliers that you're concerned about or as you work through some, a couple new ones are popping up, can you just kind of help clarify that a little bit?

I assume you're talking about the 787 program?

Yes.

Yes.

I think it's tended to be a group of three or four suppliers that we have dedicated a lot of our engineering and manufacturing resources to team together with theirs to address schedule and technical risk.

Again, I think we've made good progress on them, and obviously there are flair-ups in the others from time to time that we address quickly, and as I said before, we have contingency plans.

We have stand-by engineering capability that is waiting to move quickly to help, but I think it is more that there are three or four of our teammates that are working hard together with us to retire risk, and we're making good progress with them.

Great.

Thanks.

Yes.

Thank you.

Our next question comes from Robert Spingarn of Credit Suisse.

Good morning.

Good morning.

Jim, clearly an impressive quarter, and I noticed James' comments focusing on execution at BCA and how important that's going to be in 2007.

In the past you've said that book-to-bill should exceed at Commercial 1.0 in '07, and then potentially in '08 as well, especially if the legacy carriers get back into the game.

Could you just give us your latest thoughts on these metrics and perhaps the latest color on commercial aircraft pricing?

Well, let me just say that we've already said that we think in '07 that we'll have a book-to-bill of 1 and we'll add to -- or over 1 and we'll add to the backlog.

Clearly, we think in '07 we'll start seeing some of the legacy carriers figure out what is the appropriate operating model, and we think they'll get back into the market at a little more aggressive level, but as you know, our deliveries are also increasing over this time period.

We're going to be delivering at a much higher rate in '07 and in '08, and we expect our deliveries to be higher in '09, and so to say today that we'll have orders that would continue to add in that backlog in that time frame, I think would be a little too aggressive.

Okay.

And then just on the pricing environment?

The pricing environment remains competitive but it has stabilized, and so we'll see how long that lasts, but we don't expect our competitor to continue to stumble forever.

We know he'll figure it out.

They are very, very formidable, so we don't expect to have airplanes in the market without competition over the next several years, and we'll just have to see how pricing goes based on that happening.

I think the only other thing I'd add, James, to that would be that the overall commercial market remains favorable as you look ahead.

Revenue passenger growth remains strong.

Yields or pricing that the carriers are getting, a number of price increases over the year both domestically and globally, the price of oil is high enough so that the efficiency of the newer airplanes makes a real difference but not so high that the carriers can't make money, and the continued GDP growth in parts of the world including Europe, Europe is economy is pretty good.

You look at the fundamentals that are driving the need for some of the new technology, that also looks pretty good.

I think the legacy carriers are going to get in the game here in '07 and '08.

Thank you.

Our next question is from Howard Rubel with Jefferies & Co.

Thank you very much.

Very nice numbers, gentlemen.

Thank you.

The dilemma that you sort of talked about, Jim, is that things are so good, how do you make them better, might very well be characterized with one of your challenges, and one of them is that your backlog stretches so far that, how do you keep your sales force motivated to continue to sell airplanes?

And are -- have we -- if we look at what we see in the way of rate schedules, there have to be at least one or maybe two more rate increases planned beyond what you've announced.

Is that fair?

Well, are you talking about a specific model or in general or --

I don't think you would -- love it if you would give us the specifics on the models.

In general.

There is certainly upward pressure on our rates.

And it would seem to me that there is a chance that you're at the point where you can take the 777 above a seven a month rather.

I think we have to get a little more visibility longer term before we consider -- we just raised -- we are just getting there now, and listen.

I don't want to argue with you, because your big point is right which is that with this kind of demand we are always looking at rate increases, but we always want to do them prudently, so because as you know, companies like ours get in trouble when they chase rate without the proper supply chain management.

And so you're going to see us raise rates prudently, and I think the -- I think our sales force, by the way, they have a lot to do out there as they work with airlines and work with other customers and the infrastructure that supports them to make sure we get the current technology that's moving out installed properly and supported properly, and they're not taking Wednesdays off.

Thank you.

Yes.

Thank you our next question comes from Robert Stallard of Banc of America.

Good morning, gentlemen.

Good morning.

Just to switch over to the other side of the company looking at Defense, pretty significant charge on AEW this quarter.

Are there any other programs out there that we should be concerned about, whether there has been delays or cost overrun?

I don't think so.

I think you have to keep in mind the complexity of the program, AEW&Cs, and it is the first new system for early warning and advanced warning and control that's been put in the market for a number of years.

Mostly we've been updating the existing old AEW&C aircraft.

So, clearly it has been a challenge, and I think it is probably the most challenging fixed-price development program we have today in the Company, and so when I think we've made a lot of progress on it, and I think we have our arms around it, but obviously there is always risk on something of this complexity, but I can't think of other programs that would be comparable in terms of the amount of risk associated with it.

Okay.

Thanks.

Thank you.

Next question comes from Joseph Campbell of Lehman Brothers.

Good morning.

I wanted to ask again about production rates.

You were careful in 2006 to make sure that you raised the production rates.

I can't remember your exact phrase, but it had to do with profitably ramping up rather than just ramping up, and you had a strike and gave us rather conservative numbers about the time it would take to you get whole, and you've now raised the production rates in '03 for the existing products.

You've given us a range, something like 3 a month '08 over '07, and I wondered whether we should look at the '08 rates which you've talked about as being limited still by your ability to ramp up as they were in '06, and I presume in '07 as well, or whether you now have got your production rates as what you think are prudent given the level of demand that you see out there.

Thanks very much.

Yes.

I think the short answer to your question is that we see a good fit between demand and our rates in '08.

Could we sell another airplane or two if we scrambled to ramp up another few airplanes in the year?

Maybe.

Is it worth the risk?

Absolutely not.

I think we've got clear visibility on how to raise the rates to the level that we're talking about in '08.

By the way, to do that we had to start working with many of our suppliers a year ago.

I mean this is a long-cycle activity, and as a result, to chase speculative demand with rate is not the way to run this business.

We got a good match in '08.

We're in good shape.

But it is still going to go up again in '09, so I gather that's just because the 787 is going to have a full year of higher rate production?

Yes, that is the main driver of the '08 to '09 comment we made that we would see is going up.

Sorry.

I missed that part of your question.

That's great.

Thank you very much.

You're welcome.

Thank you.

Our next question is from Byron Callan of Prudential Equity Group.

Good morning, gentlemen.

Good morning.

Jim, can we just touch base on the military aircraft program, specifically the C-17 and the F-18 E F. Are we still looking for a potential close down on C-17 the end of this decade or beginning of next or are opportunities coming up that might prevent that from happening?

And on the F-18 there have been press reports about people like Australia looking at a buy because of slips in the joint Strike Fighter, some chatter about the Navy looking at a larger buy.

Can you comment on the outlook for that airplane, too?

Thank you.

Yes.

I think you're right on the C-17.

I think we're -- we will have to get some additional orders this year for us not to face into a beginning of a wind down by the end of this decade, and the -- that's the way it is.

Now, we -- this time last year we were saying the same thing, a number of international orders, a new order from our government, and we're working hard right now to duplicate that effort this year, but it will be up to largely our government.

As to the F-18 number of international orders you named two of them, and as JSF pushes out a little bit, I think there may be an opportunity for a buy for our government, but standing by there, but we have orders that sustain ourselves well into the next decade, so we're -- I don't want to say more relaxed about it, but we have a little more time to work that one.

Thank you.

Thank you.

Our next question comes from Ron Epstein of Merrill Lynch.

Good morning.

Good morning.

Looking through the numbers you guys reported, there was a bump-up in the deferred production costs in the quarter related to triple seven.

Can you give us more color on that?

Essentially, what you saw is a deferred production costs grew about $146 million or so, and it was driven by really three things.

Some of the rate disruption as we move the triple seven to the movie line and increase the rate.

Some of it was driven by the fact that we had the accounting quantity extension of another 50 units which lowers the average amortized cost coming out of that pool, and then the final was the new customer introductions as we signed on new customers we have additional engineering costs associated with that, and that goes into that bucket.

Okay.

One follow-on if I may.

This quarter we saw few of the major helicopter producers kind of blow up, Sikorsky and Bell, what experience are you having in the Boeing helicopter business and how is the supply chain in that business?

Strong demand, strong flow of new and a significant re-up this year on the Apache program, also, a fair amount of sustainment work as we rework helicopters that are in use and a robust supply chain to support all that activity, so we're both on the Chinook and the Apache side.

And, obviously, strong new program on Chinook with the CSARS.

Thank you.

Our next question is from George Shapiro of Citigroup.

Good morning.

Good morning, George.

James, if you looked at the margin in commercial ex R&D, it was 18.2 in Q4 down from 18.8 in Q3 despite revenues up $1 billion dollars.

It looks like the major difference was in kind of mix was more 777, so given what you're just saying to the last question, we assume the 777 margin was lower and caused that, or is there something else?

Obviously, AVIOL contributed a little bit, but I can't think that's a big deal.

And we had no supplier payment in the fourth quarter, and we did have in the third.

Okay.

That was in the R&D side of course, George.

But I thought even with supplier payments it was still down somewhat.

About the same.

Thank you.

Our next question comes from David Gremmels of Thomas Weisel.

Thanks.

Good morning.

There was a -- this post closing adjustment in network and space, can you quantify that, and unless it was very large which I assume it wasn't, if you adjust IDS margins for that Wedgetail,charge, looks like they're as high as they've been for some time.

I'm just wondering if there were any favorable adjustments or contract closeouts in the quarter of any magnitude on the IDS side?

Yes.

We did have a couple.

We settled our buy three negotiations on the Delta program, and that resulted in some improved one-time margin.

We also had a catch-up related to performance on the Future Combat Systems programs where we -- because of performance and more stability of that contract we upped our accrual rate on the award fee, so those two things are the catch-up of those were sort of one-time events you won't see in the run rate going forward although the run rate going forward will be a little higher, but just not as high as you saw.

Thank you.

Our next question is from Joe Nadol of J.P. Morgan.

Good morning, everyone.

Good morning.

My question on IDS as well.

The sales in the quarter were very strong.

I think we expected that in precision, but in network and space they really were material uptick and we haven't seen that before in prior years from a seasonal standpoint.

I just wondering what was going on there?

So it really came in about four buckets.

We had higher volume on our proprietary programs, particularly in the supply chain, and you know these are huge cost-type development programs, so that volume flows in through revenue.

We had the similar occasion on the future contracts, Future Combat Systems, along with the profit pick up that I mentioned earlier.

The same on GMD where we had about $200 million increase in the supplier contribution on the program in the year, and then the final piece of that was out of the settlement of the buy-three on Delta four we were able to pick up some revenue on costs that had been in inventory, that because of the contract and the way our infrastructure costs would then be reimbursed we were able to retroactively pick up revenue there.

Those are just one-timers that we don't expect to see from a run rate perspective.

Were there any similar one timers in support?

We did have a little extra support work particularly on the gun ship and some of the mod work, but it was not very significant.

That's mostly performance and growth.

Thank you.

Our next question is from David Strauss of UBS.

Good morning.

Thanks.

Jim, can you talk about where you are as far as decision making process and talks with your suppliers as far as a 787 second line?

The good news is with don't have to make that decision right now although it is a question we're going to have to increasingly ask.

Of course there are hypothetical discussions that go on.

It doesn't always crystallize around a second line, it crystallizes around how to handle more demand, but I think it is a question, I think, that over this year we will be asking ourselves, and by the way, our suppliers are delighted to have that discussion with us.

And one quick follow-up if I may.

You talked about 110 roughly deliveries -- 787 deliveries in '08 and '09.

Can you give us a rough order in mind as to what you're looking for in '08?

Roughly a third of it is in '08 as it ramps up.

I think we're talking about the twelve-month period there, and a third of it just given the ramp-up math.

Okay.

Thank you.

Yes.

Thank you.

Our next question comes from Myles Walton of CIBC world markets.

Thanks.

Good morning.

Good morning.

Looking at the Precision Engagements guidance for '07, '08 on the revenue side, backlog looked like it was up 15% year over year, but the outlook for sales looks like a decline in sales projection and some of the recent contract wins look like they are going to set you off pretty well.

Can you just give me a little color on some of the moving parts in there?

Well, it is basically timing on the backlog, and what you see in Precision Engagement, we had a lot more deliveries particularly on the F-15 and the Apache this year.

Those will level off in '07.

We won't have that same situation, and then the backlog piece of it is just the timing of when we'll deliver of those units.

So if I could on a follow-up, you mentioned tax rates being lower than previously guided in '07.

Could you give us the outlook for '07 and '08 taxes?

It is going to be around 35% will be about the tax rate we would expect to see in the next couple of years.

Okay.

Great.

Thanks.

Thank you.

Next question comes from Joe San Pietro of Wachovia.

Good morning.

Good morning.

Three buckets of questions with regard to the 787.

One, the first is with regard to supplier bottlenecks, second would be with regard to out of sequence work, and the third would be potential costs pushback from your suppliers.

Jim, could you give us some color as to what Boeing is doing to get Mitsubishi and Alenia back on track as they seem to be -- you mentioned four, but they seem to be the two at the forefront of bottlenecks, and then question about the out of sequence work.

Well, what we're doing with Mitsubishi and Alenia specifically is adding a lot of our resources to supplement theirs to get them through the knot hole, and both are making some good progress.

I mean it is an "Oh, my God" exercise as you know, to build airplanes, but I think part of the task is to recognize you have a problem early and to over resource the issue and to keep a culture of cooperation and moving forward with you and your partner.

And I think in both -- I was just in Japan the other day meeting with the Mitsubishi guys, and they're very proud of the progress they've made, and so I think we're not totally out of the woods yet, but the progress is good, and the prognosis is good there.

On the travelled work, as you know, some work did travel from some of the major assemblies in Japan to South Carolina, identified it early, it's resourced both FHI and MHI have people there to add some of the innards that didn't get added in Japan, but again this was a contingency plan that we had in place months ago knowing that there was a risk of that, and so we've activated that, and what was the third part of your question there?

He may be gone.

Operator, we have time for one more question now from analysts.

Thank you.

Our final question is from J.B.

Groh of D.A. Davidson.

Got the last one in.

Could you maybe talk -- I know you don't like to give delivery guidance by model, but could you talk does the mix shift change substantially in '07 and '08 than what we've seen in 2006?

Not -- the mix I don't think.

Both are coming up.

BCA, yes.

I am talking about --

Not in '07, obviously.

In '08 in the mix you start having the introduction of the 87 and more wide bodies.

Okay.

Great.

And then this RFP for the KCX just posted, is there a significant amount of incremental work in redoing that proposal or is it a matter of knocking the dust off?

Well, we have to study the requirements to make sure we thoroughly understand the -- which technical options we will provide both overall and for all of the subsystems, but by in large we feel pretty well positioned with prior investments we've made and some of the tankers we're building for the international market.

We have a portfolio of capability that we think can be deployed against this RFP competitively, and we'll wait and see the specifics of the requirement to decide exactly which option we're going to take.

I mean at this juncture you don't see it being a different platform than 767?

Got to study it, but it's headed in that direction.

Gotcha.

Thanks for your time.

Operator, we're ready to shift to questions from media, 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, Senior Vice President of Corporate Communications.

Mr. Downey, please go ahead.

Thank you.

We will continue with the questions for Jim and James.

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

Operator, we are ready for the first question, and please, in the interest of time, we ask that you limit everyone to just one question.

Thank you.

Our first question is from Peter Pae of Los Angeles times.

Good morning, folks.

Good morning, Peter.

Can you give us an outlook on defense spending, and secondly, I needed to find out what the progress was on the satellite systems business particularly with the quality issues, whether they have been resolved.

Defense spending -- this is Jim.

Defense spending, we anticipate will moderate over the guidance period.

Therefore we don't see a big kicker for us or anyone else over the next few years, so sort of mid-to low single digits is our planning assumption.

The second part of your question was --

Satellite systems.

Let me handle that, Peter.

This will be the eighth quarter in a row where the satellite business has performed well and actually generated a small, but actually we're delighted to have a profit coming out of that business.

We have a couple of satellite deliveries that are expected this year that I think would really get us beyond some of the satellite contracts that we have acquired when we bought the business, and those are the ones we have the most trouble with in terms of producing and doing the work.

They were pretty much fixed-price development contracts, so we feel pretty good with where the satellite business is now in the new contracts they have won subsequent to acquisition.

They really are performing well on.

Thank you.

Thank you.

Our next question is from Lynn Lunsford of Wall Street Journal.

Good morning.

Good morning, Lynn.

I am trying to -- this is sort of a larger philosophical kind of question, but over the last several weeks the Boeing stock has been pretty volatile, and it seems like -- several days ago whenever one of the analysts came out and declared the top of the order peak that is started going down.

I guess the question is, is by focusing on book-to-bill and the order peak, are people keeping their eye on the wrong ball?

Is there something else that investors should look at when watching how Boeing performs?

Well, I think, obviously,y book-to-bill is a factor to consider when you're looking at any company, but I think when you're looking at a backlog the size and the diversity and the balance that we've got across the Company, the backlog is many, many multiples of the yearly revenue of our Company.

I think looking at the backlog and our progress on executing against it, when it is as big as it is, is probably a better measure of -- in terms of visibility that you want to project, particularly when you've got a -- the biggest part of the backlog, Commercial Airplanes, with a cycle that doesn't look like it is slowing down right now.

We talked about the legacy carriers in '07 and '08 getting back into the game, and so I think you add it all up, and I think I would pay a little more attention to the backlog right now than book-to-bill.

If the backlog were a lot smaller, I think book-to-bill would be a more relevant -- something you would worry about a little bit more.

Just a quick follow-up to that.

Sure.

You said also that one of the key things with this ramp-up is, can you raise your rates and maintain increasing profitability.

Are you pleased with where that's going so far?

Yes.

The short answer is yes, I am pleased with where that's going so far.

We have had a number of rate increases, and there is some here in the planning period that we have discussed, and I think Scott Carson and Jim Jamison and the team there are bound and determined to do this in a disciplined way, and I am certainly philosophically aligned with that.

And so the steady increase in margin expansion that you're seeing combined with the on-time delivery of our planned rate increases with suppliers who are committed to working with us, is working so far, and we're just going to keep doing it that way.

Okay.

Thank you.

Thank you, Lynn.

Thank you.

Our next question comes from Kevin Done of Financial Times.

Hello.

Wondering if you can tell me whether you have been putting Boeing's engineering resources into all four of the three Japanese heavies and Alenia.

And perhaps, also, if you could give us some sense of what's going on in the workshops with airlines on the 737 replacement, what are the airlines demanding in performance improvement, and what's the thinking in those workshops on when the aircraft might come into the market?

I had a little trouble hearing you because of the transmission, but I think the question centered on 737 replacement.

Yes, that was the second one.

Okay.

The first one was about the working with the heavies and Alenia?

Yes.

You're coming through a lot clearer.

I apologize.

Can you ask the question quickly one more time.

Yes, indeed.

I was wondering if you could confirm that you're putting Boeing resources into all four of those suppliers, the three Japanese heavies and Alenia?

Yes.

The answer is yes.

Okay.

And in the 737 replacement workshops with the airlines, what are the airlines demanding in sort of performance improvement, and what's the thinking on when the new aircraft could be coming into the market?

I think both Boeing and the airlines are looking for a step function improvement in the fundamentals, and those relate to things like range and fuel burn and overall productivity and passenger comfort.

I think there is no clear definition of what that airplane could look like or the timing of it.

You can see that there is huge demand for our current technology, and when we're able to deliver technology that can open up that step function improvement versus our current airplane, I think then we'll begin to center on specifics of what the airplane would look like, but we're not there yet.

Okay.

Thank you.

Thank you.

Thank you.

Our next question is from Paul Marion of Crain's Chicago Business.

Good morning.

Good morning.

I was wondering if you could comment on the attention that global warming, the impact of aviation on global warming that we've seen in Europe lately, and whether that's going to play out to be a potential negative or positive for Boeing?

Well, it is a concern that we share, obviously.

We want to play a role in improving the footprint that our airplanes have on the environment.

The -- even though if you look at the numbers, aircraft transportation has a relatively small impact when compared to emissions from other things from power plants and cars and a lot of other things.

Nonetheless I think we have to be just as sensitive as anyone, and a lot of our forward-reaching technology is focused on that, particularly with our engine partners where steady improvements in emissions and noise are a part of our long-term plan and have been part of it, so a concern, we're addressing it, and we'll keep addressing it.

Thanks.

Thank you.

Our next question is from Dominique Gates of Seattle Times.

Good morning.

Good morning, Dominique.

I would like to go back to the 787 supply chain and the various glitches there.

Two parts.

You said three or four partners are having some difficulties.

Are those all structures people or are the systems partners working and are you having to help any of them out as well.

And then second part, with regard to the structures work that travelled from Japan to South Carolina, could you talk about how that, the new business model for the 787 may, perhaps, be creating a much more complicated situation than in the past.

Where if work had travelled Boeing would just have done it in Everett.

Now you've got global aeronatica having to cope with work traveling to them, and so are they asking for more money as a result, and are you in effect having to renegotiate contracts with the Japanese and global aeronatica as a result of work traveling that way?

Your first question, Dominique, the three or four partners we've been working with over the last few months have -- it has centered on the structures side of the business as we're trying to share learning across all of them and us to make sure we get it right, and there has been a lot of cooperation going there.

As to the travelled work question, I see it a little differently.

I think because the fundamental work is spread out a little bit, because there is an interim step in South Carolina on the way to Seattle, there is a little more flex in the system to handle travelled work, quite frankly, than in the days where everything showed up in Washington and there was a huge geographically centered "Oh my God" that where the number of people and the amount of work all came together at one time, and there is a little more opportunity the way we're doing it now to handle it within a more flexible environment.

As to the last part of your question, as you know, many of the contracts -- most of the contracts with our supplier partners do leave room for accommodation when more or less work happens than was anticipated, and there are often times robust discussions with our -- and this has happened in every airplane program we've ever had, robust discussions with these partners as to price and the amount of the end result of the financial accommodation, and, yes, we're having those discussions, and occasionally they last more than a minute.

The systems partners are going strong?

Yes.

I think, quite frankly, we're happy with the systems.

There are some that are a little behind schedule, others that are ahead of schedule, but most of the work has centered on the structures side in terms of our cooperative effort, and we've had people with the systems people, too, to make sure that the application is being done right and that as we look toward the final integration.

But it is -- we're by-in-large happy with the systems people.

Thanks.

Thank you.

Our final question comes from Molly McMillan of Wichita Eagle.

Hi.

Good morning.

My question has to do with Boeing in Wichita and we talked earlier about the KCX finishing center coming to Wichita, and I have two questions along that line.

One is it was announced that that center would employ 300 to 500 people, but it was unclear if those are sustaining jobs, part new jobs and part sustaining jobs.

And the other question was what new work might be out there on the horizon that could maybe come in here?

What's the status?

First of all, we have to win the tanker.

Sure.

But we do exactly the role that Wichita plays, we know it will play a major role, we know it will be on the finishing side and as Jim Albaugh and others talked about recently out there.

Exactly how many jobs and precisely exactly what work, I don't think we're in a position to define right now.

But the capability we have out there is highly valued and will play a large role in executing this program if we can win it.

And we've got to win it first.

Sure.

And then what other work might be out on the horizon or are there some things you guys working on and what might that be that could come into Wichita?

I think the big one is the tanker.

That is the big one, and as you know, there has been some shuffling of programs that have impacted Wichita over the last year or two, and we're just trying to settle down and execute that suite of programs that we've got there now, focus on the tanker, and we'll always look to Wichita as a place where we can bring high-value work.

And I think I would leave it at that for right now.

Okay.

And, Spirit, how are they doing on the 787?

Are you pleased with their progress?

Yes.

I mean I think Spirit, you're referring to Spirit, I presume.

Correct.

Yes.

Spirit is doing a good job, and I think the cooperative cultures and the people know each other, and I think they're doing a very difficult part of the airplane, and pleased with their progress.

Okay.

Thank you.

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.