波音 (BA) 2007 Q1 法說會逐字稿

Thank you for standing by.

Good day, everyone, and welcome to The Boeing Company's first quarter 2007 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 am turning the call over to Mr.

David Dohnalek, Vice President of Investor Relations for The Boeing Company.

Mr.

David Dohnalek, please go ahead.

Thank you very much.

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

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

And in the interest of time, we ask that you limit yourself to one single part question, please.

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 through our Web site at Boeing.com.

And 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.

Thank you, Dave.

And good morning, everybody.

Let me begin with some comments about our first quarter and then James will walk you through our results more specifically.

After that, I will say a few words about what is ahead for us, and then take your questions.

In summary, we are off to a good start in 2007.

We delivered solid top-line performance during the first quarter with strong double digit growth in operating income, net income, and earnings per share.

These results are in line with our expectations for the quarter, and represent good progress toward the challenging goals we have for ourselves, both this year, and beyond that.

Our businesses are delivering solid performance and they are well positioned in their markets.

Our Integrated Defense Systems business generated solid growth of double digit margins by executing well on its very large and balanced portfolio of programs.

IDS also made great progress on the business development side by notching some key wins from international customers.

And we submitted our KC-767 tanker proposal to the U.S.

Air Force also this month.

We think this tanker will do for refueling what the C-17 has done for air lift.

It will revolutionize mobility operations.

Boeing Commercial Airplanes continued to build on its strong momentum during the first quarter.

BCA efficiently increased production rate, delivered margins slightly better than we told to you expect, and continued to make progress, strengthening the BCA product line with our key development programs.

I will say more about that in just a couple of minutes.

First quarter revenue growth and margins from our business units are also on track.

We expect BCA and IDS margins to expand from their Q1 levels as we move through the year.

Consistent with the guidance levels we have given you.

As expected, lower centralized costs were responsible for the bulk of our operating income growth in the quarter.

That was driven mainly by last year's decision to exit our Connexion by Boeing business and by changes we made to our share-based plans.

These management actions were aimed at improving our profitability by reducing costs in our other and unallocated line items, which will benefit the company going forward.

Total company backlog expanded further this quarter, to another record total of $262 billion, which represents more than four times our current revenue.

Our backlog has grown 23% over the past year thanks to the strong demand for our commercial airplane products, as well as key defense program wins.

While we make progress on our financial goals and grow our record backlog, we also continue making progress on our major development programs including the 787 Dreamliner.

Scott Carson and Mike Bair gave you a detailed 787 update last month.

And as you've seen, as soon as yesterday, with the Virgin and Air Canada announcements, demand for the Dreamliner continues unabated.

We're also making progress toward our development milestones for this year and next.

Let's review just a few of those.

During the first quarter, we surpassed 500 orders for the Dreamliner, which is an unprecedented achievement by the BCA team.

We now have 544 firm orders from 44 customers, which is the highest tally ever achieved by a commercial jet program within three years of its launch.

We are now in the process of bringing the 787 to life.

Major structural elements of the first airplane are being assembled, and in some areas, we are already working parts and assemblies for airplane number five.

Fuselage sections from Japan, Italy, South Carolina, and Wichita are coming along well, as is the wing box from MHI.

Second Special 747 Freighter or Dreamlifter has taken its first flight and delivered its first components, and we have a third Dreamlifter at the mod center and a fourth one heading there.

Our engine partners are making good progress on their flying test beds.

And work on the systems side is moving ahead as we enter integration testing of these major elements.

In Everett, the upgrade of the final assembly bay is going well and we have started receiving components there.

The horizontal stabilizer arrived just very recently, and other major components will be arriving in the next few weeks.

We will roll out the first 787 out of our Everett factory on July 8, an event we will webcast so all of you can see the airplane.

As you know, we are targeting first flight in late August, which will kick off our flight test program.

We remain on track for first delivery to ANA in May of 2008.

As we said before, we are working weight, schedule, and supplier challenges as we strive to meet our milestones.

These areas represent the bulk of our R&D spending at this point and we are making strides in each area.

We are moving into the very critical final assembly and systems integration phases of our program and as you can imagine, the entire 787 team is working very hard to achieve our milestones.

So, mindful of the inherent challenges and risks that lie ahead, particularly in the latter stages of major airplane development programs, we are nonetheless pleased with the progress we're making on the 787.

We're also pleased with the airplane's performance, which we expect will exceed the overall performance levels we committed to customers when we launched this program.

We will continue to update you on the 787 as we move through our key milestones.

Scott Carson and Mike Bair will discuss the program along with the rest of BCA's business during our Annual Investor Conference in Chicago on May 23.

And we will provide another progress update in mid-June during the Paris Airshow.

So let me wrap up my opening comments by saying that we have reaffirmed our financial guidance for 2007 and 2008.

Our record backlog, increasing productivity, and the progress of our development programs have us on track to achieve our growth and productivity objectives.

So let me turn it over to James for a review of the numbers.

James?

Thank you, Jim.

And good morning.

I will begin with the first quarter results on slide three.

Our revenue increased 8% in the quarter, driven by higher commercial airplane revenue, and growth across all defense business segments.

Our EPS grew 28% to $1.13 a share while our net income expanded 27% to $877 million.

Earnings from operations increased 36% to $1.3 billion.

Our earnings were driven by solid business performance from BCA and IDS and lower centralized costs which I will explain in more detail in a moment.

Let's start with our Business Unit review with Commercial Airplanes on slide four.

BCA continues to profitably manage its production ramp while by achieving a record backlog and investing in its growth.

BCA delivered 106 airplanes in the quarter, which along with higher service revenues drove a 7% increase in total revenue to $7.6 billion.

The delivery mix this quarter was more heavily weighted to single out airplanes, as compared to the same period last year.

Operating margins grew to $706 million, producing an operating margin of 9.3%, which is slightly better than what we told you we would do in the first quarter.

BCA's margins reflect productivity improvements across its products and services, offset by a planned increase of $258 million in R&D and the absence of supplier development cost sharing payments.

R&D spending for the quarter was on track at $788 million.

We expect BCA's R&D to begin declining in the second half of this year, which along with productivity improvements, will drive margin expansion consistent with our guidance.

Program margins exceeded unit margins this quarter, due to new customer introduction costs and pricing mix that reflects airplanes sold two to three years ago in a tougher pricing environment.

We captured 109 gross orders in the first quarter, which lifted BCA's backlog to another record of $188 billion, which is six times current BCA revenues.

As we look ahead, we continue to expect our book to bill ratio to exceed 1 this year.

Now, Jim has already talked about the tremendous success the 787 has enjoyed in the market, and the progress we're making in its development.

We also achieved important milestones on our other programs.

We completed a small acquisition for a service business, delivered the first 737-700ER to ANA and surpassed 1500 orders for the 747 program, a phenomenal accomplishment for that legendary airplane as we transition to the new 747-8 family.

So Boeing Commercial Airplanes is off to a good start again in 2007 and is performing well in a healthy market.

Now, moving to slide 5 in our Defense Business.

IDS delivered 7% revenue growth and double digit margins in the first quarter, driven by higher volume across its three segments.

Results were led by 6% revenue growth and 12.9% margins in Precision Engagement and Mobility Systems and by 17% growth and 12.6% margins in Support Systems.

Margins in our Network and Space Systems area were affected by cost adjustments this quarter, but we expect that segment will still meet its margin guidance for the year.

IDS completed major milestones during the quarter, including a successful test of the Future Combat Systems Program, and a Sea-Based Radar test of the Ground-Based Missile Defense Program.

IDS also successfully completed its critical design review of FAB-T, helping to pave the way for deliveries to begin.

We have made important progress on our other international efforts during the quarter.

Australia chose our Super Hornet fighter, we achieved the first international sales of the Chinook helicopter, and Canada chose the C-17 for its Air Force.

So summing up, IDS remains well positioned for growth and profitability with its broad portfolio of key development, production and support programs.

The IDS team is performing very well across its businesses, and is on track to achieve its growth and double digit margin goals for both 2007 and 2008.

Next slide.

Boeing Capital delivered another strong quarter, with pre-tax earnings of $73 million on revenue of $213 million.

BCC grew its earnings despite the significant planned reduction of its portfolio size last year.

Consistent with this risk reduction strategy, BCC also reduced its debt by $800 million in the first quarter.

The aircraft financing market continues to be robust, and BCC is executing well as it supports Boeing's core businesses.

I mentioned earlier that our centralized costs declined this quarter, which drove our overall margin expansion.

This large area of costs improved significantly due in part to management decisions we made last year.

The other expense category declined $59 million due to our exit from the Connexion business.

Unallocated expense also fell sharply due to lower expenses on share-based plans and deferred compensation.

Both of these declined due to higher stock appreciation in the year-ago quarter, and changes to our long-term compensation plan we implemented last year.

Noncash pension expense grew as expected to $252 million in the first quarter.

Now, we expect to realize significant savings in these areas this year, which is included in our guidance.

We expect total other expense this year to be about $150 million.

We also expect total unallocated expense to be about $1.5 billion this year, which includes about $600 million in pension expense, and $300 million of share-based plan expense.

Now, let's move on to our balance sheet on slide 7.

Our balance sheet and liquidity remain strong.

We ended the first quarter with $8.1 billion in cash, and liquid investments.

This was down from the end of last year, due in part to repaying over $800 million of BCC debt, and the repurchase of 4 million Boeing shares.

And the largely discretionary contribution of $509 million to our pension plans.

The BCC debt repayment brought our total debt down by about $800 million.

And after upgrades from Moody's and S&P last year, we continue to enjoy strong credit ratings and outstanding liquidity.

Now, moving to cash flow on slide 8, we generated $728 million of operating cash flow in the quarter.

Strong net income and noncash items were somewhat offset by the pension contribution and the planned increase in working capital caused by timing of payables and receipts and the expected BCA inventory build-up as our production ramps up.

We continued our balanced cash deployment strategy, as we invested in organic growth programs, repurchased 4 million shares for $360 million, and contributed to our pension plans as well as paying a 17% higher dividend to shareholders.

Now let's turn to our financial guidance on slide 9.

As Jim said, we're reaffirming the financial guidance for both 2007 and 2008 that we issued three months ago.

Our outlook reflects strong performance from our core businesses, increasing commercial airplane deliveries, improving margins, lower R&D in the second half of 2007 and 2008, and company-wide productivity improvements.

These numbers represent strong year-over-year growth and top and bottom line performance.

We had a strong first quarter, so our bias as it relates to 2007 guidance is positive right now.

We will revisit guidance as usual when we discuss our second quarter results in July.

You will find more details about our outlook in the earnings release we issued this morning.

Now, with that, I will turn it over to Jim for some final comments.

Thank you, James.

You can see from the outlook James just discussed that we have some ambitious goals for this year and next.

We are confident we can meet those goals.

Our businesses are executing well and all of us are focused on executing even better.

We are in healthy markets, pursuing prudent growth strategies, and seeking to boost productivity in each of our factories and our offices.

Meeting the financial commitments we make to you is as important as meeting the performance commitments we make to our customers.

We are determined to deliver on both.

We want to remain the world's strongest, best integrated aerospace company.

With that said, we would now be happy to take your questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Byron Callan of Prudential Equity Group.

Good morning, gentlemen.

Good morning.

Jim, have you been at the helm for almost two years.

Just curious, where do you think you've made the most progress with things you want to change at Boeing?

What are you most keenly focused on today and are there areas that you are disappointed with or frustrated at that you think the company can do better at?

Thanks.

Yes, sure.

Listen, this certainly was not a broken company when I took the helm a couple of years ago.

It was a company that was doing a lot of things right.

It had some good strategies in both its businesses.

I think though, we were emerging from an era of management turmoil, some uncertainty with regard to priorities.

And I thought some of the -- just to use a term -- some of the software the company needed addressing in terms of leadership development.

Management, needed to be infused with a little more accountability in some cases.

So it was more around the leadership refocus, help the company regain its confidence in itself, because the strategies were good and the products were by and large good.

Also focused a lot more on international, I would say, and some of that effort is beginning to bear fruit.

Okay.

And areas that you think you can still do better at here?

Well, I don't want to give the Bush answer, which is there's nothing we can do better, because there are a lot of things we can do better, because I think with a $260 billion plus backlog, the issue is obviously around execution.

Because the markets and our customers are accepting our technology, and the backlog represents to all of us at Boeing both a huge opportunity and a big burden to get it done properly.

So we're focused on a lot of things that you don't see, which have to do with the nuances of making sure priorities are right, making sure that people are aligned and accountable, making sure we have balanced work across the enterprise and making sure people are growing and are excited about what they're doing.

Those are the kinds of things we're focused on now.

Great.

Thank you.

You're very welcome.

The next question comes from Ron Epstein of Merrill Lynch.

Good morning.

Good morning.

Jim, I was wondering if you could share some broad thoughts on the commercial product strategy.

What I mean is -- in the past, there was a lot of talk about the replacement of the 737, and then it seems lately that maybe that discussion has moved more towards something in the wide-body market and maybe an update to the 777.

And just a quick follow-on, how is the 777 moving line going?

The moving line is going well.

I'm really proud of the leadership out at Everett and the leadership of the business there.

A moving line seems like a small thing, but it is a big cultural change and a big leadership challenge, and it changes people's lives on the floor, and people have to believe in where they're going in order to do it, and that's moving along well.

So that feels good.

As to the strategy, the two big areas that we will have to address at timing that is consistent with what customers need, and the maturation of our technology, as you pointed out -- are the, at some point, narrow-body replacement, and I think you're right, the 777 will have to be modified somewhere along the line, which comes first.

What we're doing is maturing the technologies, and listening to customers, so we're ready to go when it becomes clear which one we need to do first.

I think in terms of the triple, I think we need to see what the A350 is or isn't before we can make a judgment on whether a competitive response is needed.

But believe me when I tell you that we're spending a lot of time thinking through what response that might need to be.

Meanwhile, the 777 is probably the most successful wide-body program since the 747, and it is building a terrific franchise and we're ramping up production rates and we're trying to keep up with that and we're moving the line and all the rest of it.

So I think at the end of the day, I can't give you a point prediction on where we're going to have to respond first.

I'm focused on making sure that everybody is ready to move as the market needs it.

Okay.

Great.

Thank you.

You're welcome.

Thank you.

Our next question comes from Howard Rubel of Jefferies.

Thank you very much.

I want to go from the broad to a little bit more narrow.

Two things are notable.

One is that if you exclude the research and development spending from your operating profits, it looks like you were about 19.8% versus 17.5% year ago, Jim.

And that would indicate to me that there is some real change in the way you're addressing productivity and profitability.

Where do you take it from here?

And as we look out, this could imply maybe as much as 15% operating margins in commercial.

Is that a fair way to think about it?

Let me -- James, why don't you tackle the specific question, and I will come to the forward-looking part of the question.

First of all, Howard, your math is impeccable.

Not bad at all.

And I think you are seeing, the fact that we are really starting to harvest a lot of benefit, not only from Lean, but our other productivity initiatives that we implemented a year ago.

And we would expect there is more opportunity as we get the volume from our higher production rates and the lower order traffic.

And as Jim mentioned earlier, as we have the opportunity to convert this record level backlog and convert that to value -- so we will continue to be working that, to see how we get these pre-R&D margins up.

And I think you said it, James.

We're going to continue to face into a competitive environment, though.

And I mean every dollar of improvement that we get may not flow to the bottom line.

Because we have customers that need to be productive and we have competitors that aren't going to sit still, and let us take easily as much of the market forever as we're taking now.

So how that exactly gets expressed in terms of progress toward a 15% operating margin or whatever target will unfold, but we're determined to be ready to make any necessary competitive responses, any kinds of investments we need to make in customers, and grow our margins as we move along.

Thank you.

You're welcome.

Thank you, our next question comes from Steve Binder of Bear Stearns.

Yes, good morning.

Just want to follow up on Howard's question -- because James, you touched on the difference between unit and program in your introductory comments and you did touch on pricing on the unit cost side, that it is reflecting deliveries at a less favorable pricing than you would see under program method.

I'm just wondering if the reason for that increase, and the pre-R&D margin to 19.8 from the low 18% range in the fourth quarter of '06 -- is that really just cost system revisions or is it also reflecting a better pricing environment that is built into your blocks?

It is both.

I would tell you, it is productivity, and better pricing going forward.

What you're seeing in the unit margins, and the impact of that is -- two or three years ago, we really were faced with a much more competitive pricing environment.

And also faced with trying to have pricing that bridged us to new markets, particularly for the 747-8.

And also we saw a more robust market in this time period for the 777 two or three years ago and we needed to make sure we got there, along with the single out.

So I think you're seeing a combination of both -- the better pricing as it stabilizes today, and then also our productivity efforts.

All right.

And then as a follow-up, Northrop put in their 10-Q filing yesterday that they were informed by you back in April of this year that you might have to incur liquidated damages because of delays on the Wedgetail program and they might have to take a charge as much as $40 million.

I am just wondering -- do you feel like any damages are fully reflected in your EAC so there wouldn't be another charge required?

Absolutely.

We obviously knew before March of last year we were having technical issues on the program and we assumed that as a result of that.

And worst case scenario, we would have to absorb some liquidated damages, and they have been in our EAC in our closing position since then.

Okay.

Thank you.

Thank you.

Our next question comes from Heidi Wood of Morgan Stanley.

Good morning.

Good morning, Heidi.

James and Jim, I just want to harken on the margin outlook for Commercial and make sure I've got the right puzzle pieces as we think this through.

As we look at your guidance in '07 versus '08, you're talking about a 20% uptick in volume, and over a 13% decline in overall R&D.

Which means that commercial R&D is going down more, and yet only a 10% increase in BCA margins year-over-year.

So again just what are some of the key assumptions that would help offset that mix of productivity and mix and R&D tail wind?

Are you talking going forward, Heidi?

Yes.

I'm just trying to think what keeps us from thinking about the 15% margins by '09, 2010.

Principally what is going to keep us from that by 2010 is the fact that we're going to have dilution from the 787 margins -- obviously the beginning of a new program.

And although it will start out more profitable than any new program, any new product introduced at least in our history, it will still dilute the margins that we're experiencing on our mature programs.

And so clearly, through the '10 time frame, that is going to have an impact, particularly since we expect to deliver over 100 airplanes in the first two years and then that will grow in the third year.

And that more than overpowers the increase in volume and decrease in R&D?

I won't say that it more than overpowers it.

I'm just saying to you that we're going to have that dilutive impact and we will have to wait and see as we get closer if we're able to get more productivity as we ramp up on the 87, because that dilution is real.

And remember, just what we've been talking about, 18 or 19% in these years for pre-R&D margins on our mature programs -- obviously it is going to take us some time to get to that same level on the 787.

Okay.

Great.

And then as a follow-up, again for both you and Jim, how do you guys think about R&D going forward?

It has traditionally been cyclical in the past.

Is it going to continue to be so?

And if so, when do you see it troughing and what is the right level?

And Jim, of course, if we look at what you did in your 3M days with R&D, you've clearly helped the organizations in the past focus on refining their R&D.

How do you think about it at Boeing?

Well, as I mentioned in my earlier comments, Heidi, I think R&D expenditures are difficult to precisely predict at this point.

I mean I think you are right, I mean the R&D associated with 787 would be winding down later this year.

We will still have spending on the 74-8.

And then the timing gets a little less certain, as we have to respond to the 777 and the narrow-body replacement.

I would say that it should come down, and I don't see anything that is going to drive it back up in the guidance period, but we will have significant programs to spend on over time.

I mean when you get out beyond our guidance period now, the narrow body will be a major program.

It is hard to predict exactly what we will or won't be doing to the 777.

So I think that the key point is, that we will have created economic room to respond properly to those competitive environments, through the productivity initiatives we're driving, through some of the volume efficiencies that you pointed out -- and we will be ready.

And exactly how that will express itself in terms of margins is hard to predict right now.

But this company will be ready to make those expenditures to the degree they need to be made.

Okay.

Great.

Thanks very much.

Thank you.

Our next question comes from Joe Nadol of J.P.

Morgan.

Thanks, good morning.

Good morning.

Could you just give a little more color on I guess two areas.

Pricing -- and you have spoke an little bit about it already, but the Euro is hitting new highs.

It has to be helping your pricing power, vis-a-vis your competitor.

And then secondly, raw material inflation, which took a bit of a hiatus second half of last year, but has really picked up again in the early part of this year.

How do you see these two trends affecting your margin outlook for beyond your guidance period?

Well, Joe, I will take that.

I think what we've said to you, and what we're seeing continuing today is that pricing clearly has stabilized.

And it is at a level that is better than it was two or three years ago.

So we expect that to continue as the market responds favorably to our product offerings.

As it relates to raw materials, they are included in our guidance number.

Everything that we know and we've seen about the run-up in costs and raw materials, we have included it into our assumptions for program accounting purposes and it is included in our guidance.

It is stabilized for a minute.

We will just have to wait and see how it goes, how it plays out, and that is why we will continue to work the productivity side of the house hard -- in anticipation that if it does grow, we will be able to deal with it, and if it doesn't grow, we will just have better performance.

James, you used the word stabilized with reference to pricing.

I'm wondering just given what is going on with the currencies right now if it may not be time to use a bit more of a favorable word.

Are you not quite there yet?

Well, stabilize is a good word.

I like it.

Okay.

Thank you.

Thank you.

Our next question comes from Joe Campbell of Lehman Brothers.

Good morning.

Good morning, Joe.

We were all pleased to see a good and quiet no special things going on in the various defense businesses.

And I wanted to ask you -- you've done some acquisitions on the commercial side, and I wondered whether you're now comfortable enough with the defense side so that rather than these -- I mean maybe anything is bolt-on at the size of the Boeing Defense enterprise, but whether or not you would be willing to consider what I will call major defense acquisitions.

I don't mean mega mergers.

I think they are probably over, but lots of people have lots of money.

We can see the defense budget going on, but kind of slowing down, and there may be some opportunities to do larger things.

And I wondered if there were, whether it would be conceptually within the framework of what, Jim, you're thinking of for the whole corporation.

Yes, I think you're right, at this stage, in cycles past, the defense business, there has been some consolidation.

And I also tend to agree with you that major opportunities to do that, has been done in the past, may not be there at the same scale.

But having said that -- look, we like our position, with IDS.

It is a good business.

And it is well managed.

Do we have to go do deals?

No.

But do I see opportunities there and does Jim Albaugh see opportunities there?

Yes.

I think we are in the flow.

And on deals we're looking at them regularly, and it would not surprise me if we didn't strengthen our business with adding some vertical capability, or some bolt-on capability, to bolster an already strong business.

And it is not -- we're now at that point in the cycle where some of these opportunities may pop up.

And just because we didn't make a whole bunch last year -- we made a couple -- it doesn't mean we're not going to make more this year.

We will be opportunistic about it.

But your headset is how we feel.

Terrific.

Thank you very much.

Thank you.

Our next question comes from Cai von Rumohr of Cowen and Company.

Yes, thanks a lot.

If I go back to the Commercial margin issue, your R&D at Commercial was 10.4% of sales.

Even if you come in at the absolute tippy top of your R&D estimate, $3.4 billion, I mean it's got to be down at least $200 million, $250 million.

And unless the program accounting margins go down -- pre-R&D go down from that 19.8%, it is hard for me to see how the margins for the year won't be above 11%.

Well, I think I got your question there, Cai.

Look, I think -- is there opportunity to expand our margins?

Yes.

Are there other things we're wrestling with to make sure that they're put in the box before we revise anything?

Yes.

But the opportunity to continue to improve our margins in BCA certainly lies in front of us, and the headset of Scott Carson and his team supported by me and James is to do just that.

And Cai, we do feel comfortable we will hit our guidance at greater than 10.

Okay.

And then just a follow-up -- the mix, you mentioned narrow body heavy in the mix.

As the mix shifts toward more twin aisles over the year, and the volume goes up, should that program accounting margin before R&D tend stable to move up?

Yes.

Thank you.

Thank you, our next question comes from Robert Spingarn of Credit Suisse.

Good morning, everyone.

James, if I could ask, go back to Boeing Capital, and the numbers outperformed our expectations and I think they're running ahead of your 1% return guidance for the year.

And I suspect that in addition to the normal continued business operation, you have a favorable lending environment and perhaps there is some reserve reversals in there.

Could you talk about the composition of the earnings at BCC, and how we should think about the trend going forward this year?

Because it seems like your guidance may be a bit conservative.

Well, that's a mouthful.

But let me just talk about what is happening in BCC and what is happening in that whole industry.

We are seeing the residual values of our portfolio really strengthening.

So yes, there were some of that where we had seen in prior years on some of the models within the portfolio the values had continued to decline, and now they're starting to come back, and that's what we're seeing across the board as we get the new appraisals.

So that is really shoring up, in terms of the value of the portfolio, and that's being reflected in the performance.

So it could turn out to be -- if that continues, the market stays as robust as it has been -- that we would see better performance than we show.

Right now, it is too soon to make that call, Ron, but we will stay tuned.

But the thing about BCC that really is great is the fact that they're doing an outstanding job in supporting delivery of our Boeing products out of our core businesses and that they are really focused on developing and structuring the deals in a manner that most of those products are being financed if not all of them are being financed in the third party markets and that's really the focus.

And then managing the risks.

Thanks for the detail.

Thank you.

Our next question comes from Doug Harned of Sanford Bernstein.

Hi, good morning.

Good morning.

Jim, when you talk about management accountability before as being one of the important things that you focused on, I think of the reorganization and IDS, the new management processes that have been put in place there as a very important element of that.

In the earnings release today, you referred to some adjustments on some satellite programs.

And what I'm interested in is -- first, what programs were those?

And is this something that is about -- you're still under way, and working through the processes within IDS, or are these isolated incidents that you normally see in the course of doing business in complex defense programs?

Let me make a general comment in answer to your question, and then James will handle the details of the satellite question.

Listen, we have phased in, specifically at IDS, into a fair amount of risk over the last year and a half, and called it as we saw it, and did not try to bury the issues, tried to get them out and deal with them.

And I think we've worked through a lot of that, and you've seen the results of some of that which haven't always been pretty.

But the team took a clean look at it, along the way, and I'm convinced that Jim Albaugh has built a new sense of accountability and a new rhythm of evaluation and getting things done -- whether they're positive or minus, or negative, but facing into them candidly.

And more of that is behind us than in front of us, in terms of the installed base we're working on, but these are very, very difficult programs, as you know.

And so it is not inconceivable that we're from time to time going to have lots of small adjustments to these things, as we face into the technical risk, or customer changes and requirements, but I think we're making good progress there.

But James, on the satellites, you can go ahead.

Up until this quarter, we had about nine straight quarters on satellite programs where we operated within the (inaudible) outstanding performance on these types of programs, which really are many bright development programs in a lot of respects.

Now, the one that we specifically called out in this release was an adjustment to the [Blue Sky] satellite that was lost on the failure of the Sea Launch.

And it is the difference between what we had previously thought we would get in insurance proceeds and what we now think, and so that is the specific adjustment we called out.

Thank you.

Our next question comes from Robert Stallard of Banc of America.

Good morning.

Jim, in the past, you talked about how far sold out the 787 is, and I think you said 2012 or 2013.

I was wondering if you could update us on the status of that.

And also for the 777 and 737, how far those are sold out as well.

The 78 is now end of '13, '14, is where we are in terms of quoting any kind of a sizable order in general.

There is some exceptions to that.

But it is about there.

737, I think we're out to about '11.

And with the 777 you were asking about?

Yes.

I think that is on comparable timing.

Let me just check on that.

I will get a good answer.

I don't have the specific time on the triple.

These very distant dates -- is that leading to allies encouraging you to raise rates more aggressively than you would like.

Yes, we have been encouraged to raise rates, but I have a fundamental belief which is that the best customer service is to deliver on your promises.

And so to raise rates and then later not be able to deliver, because the supply chain was not with you, the planning was not done properly, is a lesson that this industry teaches itself every decade or so.

And I'm bound and determined not to learn that lesson that way while in this job.

So we want to raise rates because our customers do need airplanes.

And we, as you noticed, were raising rates and we're doing it prudently and we are going to keep looking at raising rates because we do want to satisfy these customers.

But it will be done when we can do them.

Our next question comes from Troy Lahr of Stifel Nicolaus.

Thanks.

If you guys take a look at your commercial satellite business -- I think you guys are planning to expand into smaller satellites, really stretching the 702 satellite down a little bit into maybe seven to eight kilowatts.

Is that based on customers really asking for you guys to do this?

Or is this a sweet spot in the market you guys are trying to target now?

And how from an investment standpoint would that change anything?

It is because we're getting interest from customers that we're looking at it.

But we're not going to get down to too small of a satellite, because those satellites are commoditized, which we don't want to play in that market.

We do have to have technology differentiate us, but we think there is some more room for expansion of market, even with that, and what we've been looking at lately.

And I don't think it will affect the investment very significantly at all.

Our next question comes from George Shapiro of Citigroup.

Yes, good morning.

Good morning, George.

I wanted to pursue the R&D a little bit.

You got $1 billion roughly in the first quarter, probably the same in the second quarter.

And then you say it comes down in the second half.

Which means just by the arithmetic it's got to come down to average 700 each quarter and 200 of that is military so it has to come down commercial at 500.

And then next year, you basically are going to be at the same run rate as the second half of this year.

I would think that next year it would come down more, after you make the initial deliveries of the plane.

So two questions.

What is the confidence that you can actually have that kind of profile?

Or is the profile that I'm laying out wrong?

And then why wouldn't it come down after you make the first delivery next year?

George, I think the R&D is coming down, but remember, we also have the 747-8, we have other development programs that are under way in BCA.

But I think you got it about right.

It will come down at those levels and then that run rate would include the development that we're doing both -- that will remain both in BCA and IDS.

Thank you.

Our next question comes from David Strauss of UBS.

Next question comes from David Strauss of UBS.

Sir, if you could unmute your line.

Okay.

We will go to our next question, Robert Toomey of E.K.

Riley Investments.

Hi, good morning.

Good morning.

There has been a lot of news lately about China entering the commercial jet market, and I am wondering if you could make some comment on your observations on what China may be doing here in the near term -- near term I guess in your industry is the next five years.

And then also if you could make a comment on your assessment of the health of your major customer, the airline industry.

Thank you.

Yes, I think, there is no doubt that the Chinese will be some day in the commercial airplane business.

There is lots of speculation on how long it will take them.

It will probably take them a considerable period of time to get there.

But they have a large internal market.

They have technical capability.

And they have the resources to do it.

So I think whether it is 10 years or 20 years, I think we will see somebody, probably in the narrow body segment, from China competing there.

Listen, it is a huge market for us.

We have many partnerships over there.

I'm one of these people who believes that partnering with people who are potentially competitors is not necessarily a bad thing.

So I think we will have a headset of both competing with them and partnering locally because we benefit from it as a company -- it strengthens our company.

And they will find us a tough competitor if they -- and they would expect to.

Close to probably 10 to 12% of our sales over the last few years have been in China.

That will moderate a bit as other parts of the world get back in the game.

But they will continue to be major customers and they have shown preference for our products.

And we continue to think they will for a pretty long period of time.

Operator, that will conclude the analyst Q&A portion of the program.

And now we would like to shift over to the media Q&A.

Thank you.

(OPERATOR INSTRUCTIONS) I will now return you to The Boeing Company for introductory remarks by Mr.

Tom Downey, Senior Vice President, Communications.

Mr.

Downey, please go ahead.

Thank you.

We will continue with 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're ready for the first question.

And in the interest of time, we ask that you limit everyone to just one question.

Thank you.

Our first question comes from James Wallace of Seattle PI Newspaper.

Jim, I would like to follow up on your answer to one of the analysts on whether a 777 replacement might come before a 737 replacement.

Are you talking about a potentially all new airplane?

Or tweaking the 777?

Or perhaps adding one more model to the mix?

I think we don't know, but I think the best guess would be some kind of a modification to the airplane.

And obviously, we really don't know, though, until we see what the A350 is.

I mean if the A350 presents a legitimate competitive threat to certain parts of the 777 line, we would respond.

And in all likelihood, it would be some kind of a modification, because we're not really due to fully replace that plane for many years out.

But having said that, we want to be ready to do what the market needs.

Thank you.

Sure.

Thank you, our next question comes from Peter Pae of L.A.

Times.

Good morning.

Good morning.

Could you guys explain a little bit what you mean by sold out?

Does that mean you're not taking any more orders until, let's say 2013 for the A7 and -- what was the other year for the 737?

Yeah, I think when people, when some of the questioners use the word sold out, it really reflected extending lead times or getting farther out than average.

And on most of our products right now, they are -- we've just come off of two of the highest order years in our history, two of the highest order years in the industry's history for that matter, and that leaves us extended farther out with deliveries than we averagely are.

And so we're not sold out.

We just have positions that are a little further out that are available, and we're aggressively selling them, we're aggressively competing to fill those elements of our skyline.

And there are people buying them.

Terrific.

Thank you.

Thank you.

Our next question comes from Stanley Holmes of BusinessWeek.

Good morning, Jim.

Good morning, Stanley.

Hey, I wanted to just ask you, or actually follow up on the contingency funds that you had set aside for the 787.

Yes.

Could you -- I just wanted you to let us know how many, again, you've triggered?

And have you triggered any more since the last time you talked about those funds, and using them -- setting aside those funds for some of the production issues?

No, I think we're roughly in the same place we were the last time we chatted with you.

We've got contingency efforts in place for wiring, for tubes, for travel to work, other forms of traveled work.

These break down into three teams that we hope won't have a lot of work to do.

But if they need to, they are ready to go.

And we're training them, and standing them up.

And as we replan some work, as pieces come into Charleston and then to Seattle, these guys will be ready to go.

And we think -- I'm always asking the question, so is Scott, are these teams ready?

Are there enough of them in a worst case scenario?

And we feel very comfortable with where we are.

So the specific answer to your question is, there are three teams ready to go.

We've retired one team, actually, that we got in place to make sure we had any extra composite work that needed to move around, but it turned out we didn't need that.

All of the partners did their composite work that they promised they could do.

So that team has sort of gone mute.

Okay.

So you have retired a composite team.

And then you have three teams that are for wiring, tubes, and traveled work?

Those are the ones that are still set up ready to go if you need them?

Yes, wiring, and then the tubes, clips, brackets, those kinds of things.

All right.

Okay.

And then some other traveled work that we would have to plan.

And that, as you know, in these kinds of things, Stanley, those teams would need to be in place for the first usually 20 airplanes or so, just as it winds down and all of the work settles into where it is going to be.

And finally, how are the Italians doing?

And why were they a little slower than some of the others?

What were their issues?

And I'm assuming that they're pretty much on track.

Is that correct?

Yeah, I mean I think -- in a word, they're doing better.

I think the transition from prototype to production was not easy for any of our partners, and it may have taken them a little longer.

But they're now flowing the work so we're feeling better about it.

Still challenges in front of us, still Boeing people working with them.

But I would say we're feeling incrementally better there.

Thank you.

Our next question comes from Lynn Lunsford, Wall Street Journal.

Good morning, Jim.

Good morning, Lynn.

This is kind of a follow-up on that -- if, looking at the 87 program clearly, there is a whole bunch of folks here sitting on the sidelines waiting for Boeing to stand up and say oops.

And so far, you keep reiterating that you're on track and on schedule.

What is probably the single biggest challenge that you still have to meet?

Is it making sure that all of the systems come together?

I mean where, if you just had to handicap your biggest hurdle yet.

What would it be?

Well, I think obviously, the systems integration at this stage in the program becomes very important.

And things can happen that require re-work, re-looping work, and that represents an unknown.

So far, that is going well.

But it represents a risk.

I think when you add it all up, Lynn, whether the airplane flies, at or around the time that our milestone says it should, will be the time when everything comes together.

And if we hit that milestone on or within a reasonable time around our target there, and EIS is not threatened, then I think we are -- I think you could look at that and say we're in good shape.

Now the next risk is what you find out in flight tests, and there could be some unknowns there as well.

But as we sit here today, we think it is going to come together.

We think we will be flying.

Thank you.

Our next question comes from Doug Cameron, Financial Times.

Hi, good morning, everyone.

Good morning.

Jim, you're obviously involved in a whole plethora of environmental initiatives.

Obviously yesterday's announcement with Virgin is only one of many with the oil companies, et cetera.

I was just wondering if you could give some color on, how can I put it, overall uncertainty as to what Kayo might do or individual countries might do going forward -- how that uncertainty plays into design programs going forward, such as a next generation narrow body?

How does what may play out in the environmental space impact your next design decisions?

I think no matter what we see out there, and you're right, it is a little more country by country than we would like to see it, we would prefer to see global standards, and we are working with I-K and others.

We are very much in that mix, trying to advocate for global standards, and we would prefer our customers to see global standards.

Now, the facts are political situations around the world being what they are, we're likely to see a patchwork of global and local standards.

And what we do know is no matter what we face, though, that continually improving the environmental footprint of our airplanes with each generation, each modification, is going to give our customers a better chance to fit into that environment.

787, anywhere from a 20 to 40% improvement in key metrics on the environmental footprint.

We would have similar objectives for the next narrow body and similar objectives for that day when we get around to the successor of the 777.

And so we're very focused on that.

And we appreciate the partnership of Virgin and others as we push toward those industry goals.

Thank you.

Our next question comes from Dominic Gates, Seattle Times.

Good morning, Jim.

Good morning, Dominic.

Actually, I have another environmental question, which is I wondered how you react to this notion that is growing in places in the world that flying is sinful.

Dominic, you cut out.

I didn't hear the last part of your question.

I'm sorry.

Some environmental groups are pushing the notion that flying is sinful.

What do you make of that?

Well, obviously, I have a more balanced position on the subject.

Listen, I think in every endeavor in mankind, there has to be a balance between getting things done and economic development, as well as treating the environment properly, and I leave it to our customers and their customers to -- and the politicians that represent them, to figure out what that balance is.

In the meantime, I want to keep our team focused on reducing the the environmental footprint of our products, so that when people do make those judgments, they will have a little less to worry about on the cost side of the environment from Boeing products.

Operator, seeing as there are no further questions in the queue, that will conclude our earnings call.

Again, for members of the media, if you have additional questions, please contact our media relations team, at 312-544-2002.