波音 (BA) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to The Boeing Company's fourth quarter and 2007 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 session, are being broadcast live over the Internet.

At this time for opening remarks and introductions, I am turning the call over to Mr.

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

Please go ahead.

Thank you very much.

Good morning and welcome to Boeing's fourth quarter and full year 2007 earnings call.

I'm Dave Dohnalek, and with me today are Jim McNerney, 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 question, please.

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

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

Now I will turn the meeting over to Jim McNerney.

Thank you, Dave, and good morning everyone.

Let me begin with a few comments about our 2007 performance ,and then James will walk you through the details of our results.

After that I'll say a few words about the road ahead and then we'd be glad to take your questions.

2007 was a very good year for financial performance at Boeing.

With our continuing focus on both growth and productivity, we achieved solid increases in revenue and another year of double-digit growth in core earnings per share.

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

We executed our existing production and services programs well, meeting our commitments and providing valuable solutions to our customers.

All of this gives us a solid foundation for even better performance in 2008 and beyond.

To hit just a few of the highlights.

Cash flow in 2007 went from strong to stronger, reaching a record $9.6 billion, and that's after investing in our growth programs and adding to our pension plan.

Our total company backlog also grew robustly, climbing to a record $327 billion as of the end of December.

Backlog growth was driven by a third consecutive record order year for our commercial airplanes business, and by key defense program wins at IDS.

In fact, IDS captured 9 of the 11 major competitions it entered; an outstanding success rate in our industry.

These wins included key orders for the tracking and data relay satellites, joint cargo aircraft, AEW&C in Korea, and two important pieces of NASA's Ares program.

Company-wide productivity improvements helped us generate the cash to invest in our major growth areas, such as the 787 and the 747-8.

We also made progress on commercial derivative aircraft programs, including the P-8A Poseidon and international tankers.

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

I expect more growth to come from this area, where we have a unique competitive advantage.

Among the most immediate opportunities of course is the U.S.

Air Force tanker program.

While this program won't have a major impact on our near-term outlook, it is an important long-term program for us and our customer.

We believe the KC-767 is the best match for the Air Force's requirements, and that Boeing can uniquely deliver both the military and commercial expertise and teamwork to make it successful.

We expect a customer decision on the program this quarter.

During 2007 we also saw our commercial and government services businesses continue to grow at very attractive rates.

We successfully integrated several services acquisitions during the year, which have accelerated the strong organic growth we are already delivering.

We are now generating more than $10 billion of annual revenue in this area, and at strong double-digit operating margins.

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

During the year, we also further enhanced the value we provide to shareholders by increasing our dividend 14%, and authorizing a new $7 billion share repurchase program.

We see more potential to return capital through share repurchase and dividends as our financial performance gets even stronger.

While 2007 was a year of solid financial achievement, it was also a year where we faced some tough business challenges, most notably in our efforts to advance the 787 program into flight test and full production.

Earlier this month, Scott Carson and Pat Shanahan briefed you on our new schedule for first flight and first delivery.

While we are very disappointed about the impact the changes are having on our customers, we are committed to meeting these milestones and to establishing a flight test and delivery schedule that we and our partners can achieve.

As Pat and Scott said on the call, we expect to complete the assessments necessary to define the flight test program and delivery schedules by the end of the first quarter.

We will share these details with you and provide our 2009 financial guidance when we report our first quarter results in April.

While James and I will be happy to take any additional questions you have on the 787, what Scott said earlier this month bears repeating.

The fundamental technology of the 787 is sound.

The challenge we face is resolving start-up issues in our factory and in the supply chain, as they relate to completing airplane number one and initial full-rate production.

We believe in both the business case and the technology of the 787, and we look forward to getting the airplane in the hands of our customers as soon as possible.

Despite the challenges we faced on some of our development programs, the focus we maintained on improving productivity and driving growth enabled us to deliver a strong fourth quarter and a strong year, and we see that momentum continuing as we move ahead.

As James will explain in a few minutes, we have raced our earnings per share guidance for 2008, and we expect significant additional EPS growth for 2009.

Next slide, please.

On balance, we still see strong global economic growth, along with our record backlog, underpinning our continued success.

Against the backdrop of some recent volatility in the U.S.

economic situation, it's important to note that only 11% of BCA's $255 billion backlog is from airlines based in the U.S.

The vast majority of our backlog is with customers outside the U.S., including fast growing regions like Asia, the Pacific Rim and the Middle East.

Our backlog has never been more diversified by region, airplane type, business model and customer.

We have only modest exposure right now to airlines in the U.S., where near-term economic growth is less certain.

In fact, last year less than 10% of BCA's revenues and less than 5% of the Boeing Company's total revenues came from airplane deliveries to U.S.

carriers.

However, with high fuel prices and aging fleets, the U.S.

carriers who have not yet responded during this replacement cycle have an acute need to do so, and we expect them to order airplanes over the next couple of years.

Notwithstanding some recent events and market volatility, we continue to forecast an extended commercial aerospace cycle driven by strong economic growth and solid traffic demand in much of the world.

We currently expect airplane deliveries to remain robust, at least into the early part of the next decade.

hough we don't see it now, even if we encounter a more significant economic downturn in the future, I believe the industry is better positioned than in past cycles, and Boeing is even better positioned within the industry to weather any storms.

Turning to the defense side, IDS continues to provide a solid foundation from which we can grow.

While we expect budget growth in the U.S.

to moderate, we still zero bust spending for the next several years and an opportunity for Boeing to win some key growth programs.

This includes some of the best opportunities in the international defense market that we have seen in sometime.

So with the combined strong global economic growth, solid defense markets and extended commercial aerospace cycle, plus the largest backlog in history and an exceptional balance sheet, I believe we are well-positioned in this business environment.

Our commercial airplane products and services are helping the growing economies of the world build out needed infrastructure and provide business and consumers with save, efficient air travel; and our defense business is helping to meet the enduring needs of our military customers in an uncertain world.

You've 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.

Let's turn to slide 4 and go through our 2007 financial results.

We delivered strong revenue growth, double-digit gains in core earnings and another year of outstanding cash flow in 2007.

Total company revenues grew 8% to a record $66.4 billion, driven by higher commercial airplane deliveries and stable revenues in our defense business.

Reported earnings grew 84% to a record $4.1 billion, and EPS grew by a similar rate to $5.28 per share.

EPS adjusted for charges that affected 2006 results grew by an impressive 37% on strong core business performance, and operating cash flow grew to another record of $9.6 billion.

Now turning to our fourth quarter performance on slide 5.

Fourth quarter revenues were stable at $17.5 billion, as growth in commercial airplane revenues was offset by lower revenues at IDS due to lower military aircraft delivery and formation of the ULA joint venture in late 2006.

Earnings per share grew to $1.36 in the quarter and operating margins increased to 8.7%, an improvement of 210 basis points over the same period last year, driven by company-wide productivity gains.

Turning to highlights from our business segment, starting with commercial airplanes, on slide 6.

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

BCA delivered 112 airplanes in fourth quarter and 441 for the year.

Revenues grew 17% in the quarter, driven by a 9% increase in airplane deliveries and double-digit growth in airplane services.

Fourth quarter margins expanded 230 basis points to 11%, due to productivity improvements, which more than offset higher R&D spending and the absence of supplier cost-sharing payments.

For the year, BCA grew revenues by 17% on an11% increase in airplane deliveries.

Operating margins expanded to 10.7%.

BCA's backlog grew 46% to more than $255 billion on record orders, with strong performance across all aircraft types.

The 787 program is moving towards first flight around the end of the second quarter, and entry into service in early 2009.

To date we have won 857 firm orders from 56 customers.

BCA expanded its large service business in 2007, with solid organic growth complemented by the successful integration of Aviall.

Driven by its industry-leading products and services, commercial airplanes expect significant growth in airplane deliveries, revenues and earnings during the guidance period.

I'll speak more about that in a moment.

Now moving to slide 7 and our defense business.

IDS delivering doubled-digit operation margins of 11.7% for the quarter on $8.4 billion of revenue.

Margins were driven by outstanding performance in all segments.

Revenues declined during the quarter, due to the timing of aircraft delivery and the formation of ULA joint venture near the end of 2006.

For the year, IDS generated revenues of $32.1 billion, and operating margins expanded 140 basis points to 10.7%.

S results reflect strong profitability across all business segments, including capturing a 99% award fee on the EA-18G, and 100% award fee on ground-based missile defense.

IDS also added to profitability by achieving 100% of the incentive milestone criteria on the future combat systems program.

Now as Jim mentioned, IDS added to its large contractual backlog by winning the vast majority of major competitions it entered last year.

During the fourth quarter, IDS was selected for the NASA Ares 1 instrument and avionics contract, and won the tracking and data relay satellite award.

IDS also added to its international backlog by booking additional F-15 orders from the government of Singapore.

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 turning to our backlog on slide 8.

Over the past two years, our backlog has grown over 60% to a record of $327 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 our customers' vital needs.

Second, with a backlog of five times our current annual revenue, it 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, and gives us confidence in our continued expand beyond the guidance period.

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

That's our focus for 2008 and for every year beyond that.

Now let's turn to slide 9 and talk about our other businesses.

Boeing Capital delivered solid pretax income, reduced its portfolio size and continued to return significant cash dividends to Boeing.

BCC generating pretax income of $30 million for the quarter and $234 million for the year, while its portfolio declined 20%, as planned, to $6.5 billion.

BCC contributed $408 million in cash dividends to the company during 2007.

The aircraft financing markets remain healthy, and BCC is executing will on its mission to support Boeing core businesses while reducing its portfolio size and risk.

Centralized costs declined during the quarter, as the management actions we took last year to address these costs continue to bear fruit.

Let's turn to slide 10 and talk about our cash flow.

Our cash flow generation remains outstanding, with operating cash flow of $1.9 billion in the quarter and a record of $9.6 billion for the year.

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

We are 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 747-8 and international tankers.

In December we announced a 14% 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 $890 million of cash to repurchase 9.4 million shares.

For the year, we repurchased 29 million shares for $2.8 billion.

We intend to remain very active in our share repurchase program.

We made excellent progress in further strengthening our pension plans in 2007.

Our plans are more than fully funded at 110% of our projected benefit obligation.

We reduced the risk profile on our pension plans by transitioning our asset allocation to less volatile asset classes.

Required cash contributions to our pension plans are expected to be modest over the next few years.

We forecast non-cash pretax expense to be approximately $800 million in 2008.

We expect pension expenses to decline again after that, with 2009 pension expense likely to be about half of the 2008 level, depending on market conditions at the end of the year.

Now let's turn to slide 11.

We have a very strong balance sheet with outstanding liquidity.

We ended 2007 with cash and liquid investment balances of $12.1 billion, which is up 30% from the same time last year.

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

Total Boeing debt dropped 14% from the same period last year, driven primarily by lower debt levels at BCC.

Financial strength and solid credit ratings are priorities for us, and we continue to enjoy the highest ratings in the industry.

Now moving to slide 12 and our financial outlook.

Today we are raising our EPS guidance for 2008 and forecasting additional EPS growth for 2009.

As previously reported, we will provide complete 2009 guidance when we report our Q1 2008 results in April.

Boeing's revenue guidance for 2008 is between $67 billion and $68 billion, reflecting the revised 787 schedule.

We are are raising our earnings per share guidance for 2008, from between $5.55 and $5.75 per share to between $5.70 and $5.85 per share, due to strong performance in our core BCA and IDS businesses.

We expect quarterly EPS to bill during the year, with the first quarter of 2008 being the lowest, at about 20% of our annual EPS guidance.

This is driven by BCA airplane deliveries and margins in the first quarter.

We expect 2009 EPS to show strong growth over 2008 levels.

We will provide those numbers, along with the entire 2009 guidance package, in April.

We expect operating cash flow to exceed $2.5 billion this year.

This is slightly below our previous estimate of $3 billion, due to the new 787 schedule.

Now turning to our segment guidance, we are reducing capital airplanes revenue guidance for 2008 by $500 million to between 34.5 and $35 billion, to reflect the new 787 schedule.

For the same reason, we are lowering our airplane delivery guidance by about 5 airplanes, to between 475 and 480 airplanes.

We are raising 2008 operating margins for commercial airplanes from approximately 11% to approximately 11.5%, reflecting continued productivity gains.

In terms of airplane orders, after three consecutive years of record orders we still expect the strong demand for our products will keep our book-to-bill ratio above 1 for 2008, resulting in further increase to our record backlog.

Our 2008 revenue guidance, our forecast for IDS is unchanged at approximately $32 billion to $33 billion, and we expect continued double-digit margins at approximately 10.5%.

We expect total R&D expense to decline more than 10% during 2008, to a range between 3.2 and $3.4 billion.

Additional segment guidance is provided in our earnings release.

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

Jim?

Thank you, James.

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

Each year I've told you about our management model, dedicated to the simultaneous pursuit of growth and productivity, and founded on the principles of leadership development.

I think our results show that we are making very good progress on this course.

Be sure we have a lot of work ahead of us, but we are in a very strong position as we move forward to address the challenges ahead.

2008 will be an exciting year.

We are forecasting even stronger financial performance across our core businesses.

We are preparing for the 787s first flight and flight test program.

We are anticipating another good year for commercial airplane orders and defense program wins.

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

With the great success we've had in winning new orders, our focus, as James said, is on executing that $327 billion backlog better than we ever have, and increasing that backlog at the same time.

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

Our fundamental goal remains unchanged - to be and to be seen as the world's strongest and best-integrated aerospace company for today and tomorrow.

Now we'll be happy to take your questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Steve Binder of Bear Stearns.

Good morning.

James, could you maybe just touch on the '08 BCA guidance as far as margins?

Obviously it's not - productivity is one of the drivers of the margin improvement.

Is it coming at all from block changes or is that is that coming simply from productivity improvement, and maybe you could address which lines that pertains to?

Yeah, it really is coming from productivity improvements across the in-production airplane productions, Steve.

We are clearly are continuing the focus on driving our productivity initiatives at BCA and we are starting to bear those fruit, and it's primarily what we are seeing off the 777 moving line, as we get into its implementation, and we continue to harvest the kind of productivity we've seen in the past going forward on the 737.

Jim, if I could just follow up with - you addressed the cycle to some degree about growth in demand across the globe, maybe just address how do you believe the so-called credit crunch we are seeing today, both in rate increases and availability of credit in the aviation industry, granted that's mainly tied to the U.S.

carriers, but certainly it's affecting the ability of some leasing companies and some lower rate airlines around the world to get financing.

How does that affect your decision on whether to raise the [3.7] rate further, number one?

And two, how does it affect you achieving you achieving your rates that you plan to get to by the 2010 timeframe?

I don't think the credit situation, while it has had an impact in parts of the capital markets, I don't think it's changed our thinking on the near-term, medium-term opportunity in front of us.

You know, most of our planes are financed by non-capital market institutions that have remained in pretty good shape throughout all of this, whether it's sovereign credit, XM, the leasing companies themselves have been doing recently well.

I think in the capital markets, you've see a risk premium built-in, and some of the frothier deals aren't getting done, but we are actually seeing a little bit of a loosening up there as some paper that wasn't being sold maybe 4 or 5 months ago is now being sold again in the capital markets, albeit at a higher premium.

But I would characterize that as marginal and not yet impacting, nor do we see it impacting quite frankly, our prospects for growth.

Thank you.

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

Good morning.

On the 787, now we are looking at a delay of at least 9 months in delivery off of the original schedule.

I just wonder if you could give a perspective on, when you look at the areas that we might see higher cost and financial impact, and I classify those as customer penalties, supplier costs, or your own operational costs as time stretches out, where do you see the greatest risk financially?

This is Jim.

The business case remains sound, and obviously we are very disappointed with the delay in terms of its impact on our customers and the - but the backlog remains in place.

The profitability of the airplane could be marginally impacted, and will be marginally impacted, by the delay in terms of some increased costs in the supply chain and some possible penalties on the customer side.

But we don't see those kinds of costs having a significant impact over the huge volume base that we are fortunate to have on this airplane.

So this is a case where I think the value of the plane to our customers, as borne out by the record order book, is helping mitigate what are bound to be some costs in the meantime.

James, do you have any further comments there?

Yeah, I think, Doug, the other side of that equation is that the schedule stretch-out that we've experienced is going to allow us to work harder on finding opportunities for productivity that would also offset some of the cost we would experience as a result of the delay.

So we haven't gotten through the assessment yet to really know where things are going to fall out, but I think along with the risk there will be other opportunities that we had not foreseen previously.

So I would assume, particularly from your guidance at least in the near term and even as you go out a couple of years and looking at margin, it sounds like you are not seeing anything that really changes your economic case for the airplane, even over the next couple of years, other than a push-back?

Absolutely not.

Okay.

Thank you.

Howard Rubel of Jefferies, you may ask your question.

Thank you very much.

I want to talk for a second on the FAA certification process that you're going through on the 78.

I know you can't fly the airplane but there's a whole bunch of things that you can do in the process to get there.

Could you sort of touch on that and then, again, Jim, maybe talk about how this delay has been able to have been insulated from the core business which really showed terrific results?

Well, you're right about your observation on the cert process.

About 70% of the certification effort and documentation comes from -- doesn't have to come from the flight test program.

It can come from things we are doing today, and we've got about half of that done, and we've got a clear plan with the FAA.

So we are feeling pretty good about that.

Obviously the flight test program has its own set of risks but we are feeling pretty good about it, and we are certainly working as well with the FAA on this program as we have on any that I can remember.

Now one of my jobs, I think, is to work with Scott Carson to make sure that when you have a program that is struggling and - in terms of schedule, that you get as much focused effort on that program as you can.

You get the best leadership; and we've done a lot of that over the last months.

And we have got a best of Boeing team working on that program now, on the 87, and a lot of folks from BCA obviously and some help from IDS, depending on the task at hand.

And at the same time we have to make sure that that effort doesn't impinge on the fundamental running of the business.

The 87, while a critically important program for us, is one of 300 programs we manage here at Boeing, and we have to make sure that the leadership understands that struggles in one part of the our company don't mean distraction; rather, it means intense focus to make sure that we keep delivering the results that the total corporation is aiming for.

So that's a leadership challenge and it's all about how we work together and help lead and manage each other, and that's one of my tasks and I'm very sensitive to it.

Thank you very much.

Robert Spingarn of Credit Suisse, you may ask your question.

Just a follow up on your answer to that last question, on leadership and particularly on communication within Boeing between Seattle and Chicago, between suppliers and Seattle, how has your oversight and your involvement in 787, recognizing it's one of many programs, how has that evolved over the past 6 months or so?

Well, as is typical in big corporations like we are part of here, there are days when Scott and his team probably feel I'm too involved, and then there are days I wake up and say to myself, why aren't you more involved?

But the fact is, I think we have a pretty good balance.

I mean there's a very good team out there.

I am probably more involved now, as you can imagine.

I mean I think part of my job is to get involved when help is needed, and that's been the case on the 87 over the last few months, as we've all tried to understand together the issues, tried to understand the right way forward.

And I think it's done in the spirit of, less of oversight and administration, more in the spirit of all getting in the boat together and trying to figure out.

And so, yeah, I'm a little more deeply involved now than I was.

But that could be said about some other programs that we are trying to manage to the success we know they can have.

Would you say that you're involved to the point that you're very comfortable that your R&D guidance of 3.2 to 3.4 in '08 will not go up?

Well, look, I am comfortable with that guidance and that's why we are giving it.

But are there some risks inherent in research & development?

The answer is yes.

But I feel comfortable with that guidance, and we've been through it pretty thoroughly and Scott and his team are committed and I'm in the boat with them.

Thank you.

Ron Epstein of Merrill Lynch, you may ask your question.

Good morning, guys.

Just kind of going back to the 787 for a minute, when we think about the compressed flight test schedule, Jim, how do you get comfortable with that?

If you compare it to previous aircraft, all the new stuff on this airplane, it seems like getting the airplane out on this new schedule is really contingent upon that flight test schedule.

And my understanding -- you mentioned in the past, "we're going to run it like an airplane," it isn't so much flying the plane but its crunching the data and dealing with the issues when they arise?

Well, I think it's not a non-aggressive flight test program.

It is a little less aggressive than the flight test program schedule we had earlier, but still aggressive.

And I think one of the silver linings of the delay is we've had more times to test systems which are critical elements of the flight test program, ensure software compatibility, and have a little more time with static and fatigue, which I think all are giving us reassurance that some of the more mundane things that can happen during a flight test program won't happen.

Which still leaves some of the fundamentals risks, but we think the program is eminently doable.

The head start we have with the FAA is helping us here.

And so I think it's one airplane type, it's not multiple airplane types.

One engine type, so - or engine configuration, I should say.

So there is less complexity in this flight test program than there is in our usual set of flight test programs.

So we are confident we can do it.

Just one follow on, if I may.

You have roughly $12 billion of cash on the balance sheet and you're deploying it for share buybacks.

What else are you thinking about?

James, why don't you grab that that one?

Well, clearly what you see is our fundamental basic deployment strategy, and obviously other things that we are looking at we couldn't talk about in any detail, but we are always looking at better ways to provide value to our shareholders with that cash, and that can include some things like you've seen in the past, particularly with the additional of Aviall and and how we can support our capabilities in our support business, and how we can look at, are we - is our strategy in terms of being horizontally versus vertically integrated, we will look at that as we always do and see if there's opportunity there to create better value than our current cash deployment strategy provides.

But we are looking at a lot of things.

Okay.

Thank you.

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

Good quarter, guys.

Your gross inventory went up $2.3 billion in the fourth quarter, and you're taken your cash flow guidance for '08 down by $500 billion -- $500 million.

Can you walk us through some of the items?

You mentioned the 787 slip, but is that offset by excess advances?

Was that exacerbated by pull forward of cash flow into the fourth quarter?

Give us a little more color, if you would.

Yeah, Cal, the inventory build is up predominantly the build up of 787 inventory, and the fact that obviously we are not going to have that run-off, and clearly that's been part of it.

What was the second part of your question, I'm sorry?

Were there any pull forwards, are there any increase - offsetting increases in excess advances?

You know, what does it assume about what you are going to pay or might not pay to suppliers?

In terms of the guidance for '08, we did have some acceleration of some payments in the 2007, it does take into consideration the fact that we are going to have some 787s that is we assume that we would deliver in '08 and get the final payments pushed out to, now, '09 and that's about it.

Now, the other thing that's going to happen is as we've seen cash before, we've had a significant contribution from our working capital performance, but we expect the inventory to continue to grow in '08 as we build out the 787 line and start building those airplanes.

So we expect the working capital to be a use of cash in '08 versus an addition to cash.

And the last one, you mentioned the excess advances were terrific last year.

Will those continue to build?

They will be more in line with the order traffic for '08, and so we don't expect them clearly to be as great as they were in the past because of the exceptional order performance we had last year.

Excellent.

Thank you very much.

George Shapiro of Citigroup, you may ask your question.

Yeah, James, if you take a look at what I would expect commercial R&D to be in '08, maybe about 2.6 of the 3.2 to 3.4, your guidance actually has the margin ex R&D down from about 19.6 recorded for '07, so around 19% in '08.

So how do you reconcile that, unless maybe my numbers are wrong, with your comment that you're expecting productivity to go up, because you would expect the margin to be higher?

Yeah, I think your math is pretty accurate and, quite frankly, it's going to be - it has in it, even as we take into consideration the increase we would want to see out of the volume, we are going to have some model mix difference that's going to impact that.

We are looking at the cost associated with setting up the fleet support activity for 787 that has an impact on that.

And so, you're right, it is going to come down a tad bit as a result of those two things.

One quick follow up.

You were saying you would have 5 lower airplane deliveries for '08 but if you really compare exactly it's 5 to 10 lower deliveries.

So was the additional 5 expectation for maybe 10 787s, or was the additional 5 reduction reflecting something lower in some other line?

No, we were just taking -- we gave you a range, that's what the guidance was, and we took the range down.

But I mean the range was down by 5 to 10 and you were saying I thought on the - on your comments that it was 5 lower because of 787s, so I was wondering what the other 5 might have been.

No, it's just a range.

Thanks very much.

Don't read anything in the comment.

Thanks.

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

Good morning.

Airbus is now - seems like firmly on the way to 40 narrow body a month, and with somewhere between 250 and 300 orders on the XWB pushing forward on that aircraft, targeted against the 777, I guess with delivery in 2015, but Boeing thus far has said narrow body only to 31 a month, apparently constrained by factory production issues, your judgments about what would be prudent in the ramp up, and perhaps some apprehension about the cycle and sustainability.

But it seems to me that most of these concerns in the narrow body have been allayed, but thus far we have not seen any comment from you on plans to at least put in place the option of going higher with the 737, nor anything about the response to the A350.

So I was wondering whether that difference of almost 100 airplanes a year on the narrow body, and the threat from the 787 were seen as serious, and will we see a response in '08?

I will take that one.

First the A350, I think the model that will compete with the long-range 777s, if the plane has the performance that Airbus thinks it can have, is the 1000, and I think that is not a 2013 airplane, I think it's more 2015, 16, I'm not sure.

It's certainly later, could be 7, 8 years from now.

So I think we have time to assess that plane, and we have time to assess what we might need to do, if anything, with the long-range 777s.

So that's one.

But not in '08?

Excuse me?

Nothing in '08?

Nothing -- in terms of, what, R&D on the 777?

Just response from you in order to get ready for whenever they are going to have their plane ready.

Well, I think my point is that we don't have to do anything in '08, if I'm getting the sense of your question.

Yeah, that's right, I was thinking - so you are going to wait until '09 or '10 to do something?

Yeah, I think we need to wait to see what the performance of the A350 might be; we are just not sure.

I know they have some design goals but I think they have - just like anybody would, us included, 7, 8 years ahead of an introduction there's a lot of unanswered questions about the performance of the airplane, and I don't think we want to put too many wheels in motion, although we are obviously thinking through some contingencies and we're doing some preliminary work in the normal course of events, but I wouldn't see a major program emerging until after this year.

787 -- 737, I should say, we have had a steady drum beat of increases there, as you noted.

I think we are about 40% higher in '07.

It's another 10% higher coming up, and we have the flexibility to go higher.

And I think though that --

You've taken the steps made - before what Boeing said was, "we can't get any higher than 31 unless we take some steps to give us" --

That's what I was addressing.

I think we do.

I think it is a matter of what - whether our customers need it and whether the business case is sound, and making sure our supply chain can catch up.

But I think - I think we would have an option of going over 31 if it was the right thing for the business to do it.

Will those decisions be made in '08?

We will be studying it hard in '08.

Thank you very much.

You're welcome.

Robert Stallard of Banc of America, you may ask your question.

Good morning.

Jim, you made some comments about the potential impacts of the economy on U.S.

airlines.

Do you think it's unlikely that U.S.

airlines will be ordering aircraft from you in 2008, and if they do when will be the earliest they can get an aircraft like the 737?

We have been in extended discussions with a couple of the major carriers who have not yet participated in this order cycle.

It wouldn't surprise me if a couple of deals with those folks came to fruition in '08.

It's hard for me to predict.

It's a decision that they have to make, and their requirements in terms of timing are being sorted out.

And we have different arrangements with each of them, too, in terms of the timing that we might be able to provide the technology to them.

But I think - I'll just say because I really don't want to get into the details of our customer discussions, but I think it's fair to say that the discussions we are having fit their business plans pretty well.

What would you say availability on a new 737 is today, for any airline?

I think it's different because in some cases we've started these discussions a long time ago.

There are things that impinge on availability and it's - it's sort of different by every airline.

Okay.

Thank you.

You're welcome.

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

Good morning.

Jim, I'm curious about your comment about another good order year for BCA.

Can you define that for us a little bit better, kind o talk about where you are seeing incremental demand coming from geographically, and perhaps where you are seeing demand maybe exhausting?

And what you're thinking also about '09 and 2010 in terms of units and book-to-bill?

Well, Heidi, we think the traffic that we've seen in prior years remains, and so we think that's where we will continue to get it.

We also believe that it's going to pick up domestically, as Jim has mentioned and we talked about before, that although the U.S.

carriers really haven't engaged heavily in the cycle, that with the higher oil prices and their needs, at least as we understand them, they'll have to get engaged soon.

So that's kind of where we would expect to see the order traffic come from this year and then going forward.

There's a lot of aging aircraft in the U.S.

that can't be operated economically and clearly can't be competitive, and allow them to create value for their shareholders if they continue to operate them in this current environment.

And that coupled with all that's going on with green and the environment, I just think that there's going to be a lot of pressure to replace old airplanes and that's what we see.

But do you see demand exhausting in the Middle East and Asia Pacific, where it's been inordinately robust the last couple of years?

I mean, does that slow down?

At some point I think it will.

We haven't seen it yet, but obviously at some point.

We are not sure exactly all that drives their needs.

We know a lot of it has - the initial has been the infrastructure but we'll see.

And one last question, a little bit off of George Shapiro's question for you, about margins in BCA for 2008, both you and Airbus have been seeing better pricing in aircraft, probably started to turn in 2006 and 2007, so doesn't that partly flow into the 2008 deliveries, and when do the bulk of the '06 and '07 planes start delivering out?

They will be out in the '09 range, we'd start, but that did not - that wasn't really what we were looking at for '08, it was really productivity.

All right.

Great.

Thanks very much.

Troy Lahr of Stifel Nicolaus, you may ask your question.

Thanks.

James, I thought you talked about aircraft service work and how it increased this year at a double-digit rate?

Could you maybe talk a little bit about what was driving that and do you expect that growth rate to continue at a double-digit rate next year into 2007 - or into 2008?

This is Jim, I'll take that one.

We do have good momentum.

The base business there is obviously spares and some routine work, but more and more we are getting our technology into play.

The drivers are conversions.

There's a lot of passenger to freighter conversions.

That business is continuing to grow.

And also modification kind of work.

and then supply chain work, where increasingly our customers are looking to folks like us to manage their supply chain for them more productively on an outsourced basis.

So those tend to be the drivers and we - and we see it going.

And I would say on the productivity side, we are beginning to share infrastructure across the two sides of our services businesses, the defensive and commercial side, that can give us a little more productivity and best practices and things like that.

We are beginning to leverage all of Boeing to improve that over all businesses.

But the double-digit growth rate, that should continue?

Yes.

There's - low double digits is the plan.

Thanks, guys.

Joe Nadol of JP Morgan, you may ask your question.

Thanks, good morning.

Jim, my question is on the 747-8 passenger variant.

Just wondering what your outlook is perhaps for this year for demand.

You have the one order from Lufthansa so far, and the development program, how you characterize that as progressing?

And then stepping back after that, what's your commitment to the aircraft if your order outlook doesn't meet expectations?

Well, our - we've got, I don't have the numbers right here in front of me, somewhere between 100 to 115 orders for the two airplanes; we have got about 27 or 28 on the pack side; DLH with 20, as you pointed out; and then we have some other small orders.

So the majority remains freighters, which has been extremely well-received in the marketplace.

We have about ten discussions going on right now with folks for the Packs version.

So we anticipate success here, we don't anticipate failure.

So none of our plans include an off-ramp here.

All of our plans include making this a success, and it wouldn't surprise me in '08 if you saw a few of those customers shake lose and we all felt a little differently about it a year from now.

Can you characterize the difference, or the incremental investment required to do the passenger in addition to the freighter?

Even very qualitatively, and maybe the commonality between the two aircraft?

Yeah, I mean as you can imagine there is a lot of commonality in the structure and the systems but there is some -- without divulging the details of it, there's enough unique investment on both sides of the models so that you pay attention, but I think the overall - the overall characterization would be tremendous synergy that affords you the opportunity to do both.

Thank you.

David Strauss of UBS, you may ask your question.

Good morning, thank you.

Looking at your BCAG revenue forecast for '08, you are forecasting about 40 additional deliveries, yet you are only forecasting about $1 billion, $1.5 billion additional revenues, and you already talked about double-digit growth in services, so it just seems that that revenue forecast would be a little bit light, given that and given what I assume is better pricing coming through in '08?

I think it's about right the way we've done it and the - you are going to see the bulk of the better pricing come through in '09, and there's some product mix in there that would differentiate what we did relative to revenue.

Okay.

And then on the 787, can you just comment on the status of where you are with the supplier negotiations, I guess where you were before the announcement of the latest delay and are we back to square one here or how progress is going there?

Well, I mean we are going through a process right now of adjusting the schedule and as we mentioned at the end of the first quarter, we'll talk about the new schedule.

It obviously needs the cooperation and committment of our supply base, who are cooperating and who are committed, given the tremendous market success of this airplane.

But there are discussions going on because there is a new schedule, and there is shifts in cash flows and pain that has to be borne, but I would characterize those discussions as constructive and heading toward a conclusion which we'll report on at the end of the quarter.

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

Myles Walton of Oppenheimer & Co., you may ask your question.

Thanks, good morning.

I guess this is kind of a follow-up to that last question.

What kind of guidance are you giving in the interim three months to the supply chain, such that you'll hopefully dissuade them from making some independent decisions that could potentially exacerbate the delay, as far as their procurement of raw material goes?

I'm sorry, which guidance are you talking about there?

Production on the 787, obviously over the next three months you are establishing a new production plan.

They are making their own production decisions.

Yes.

How are you communicating with them in an effort to make sure that line of communication is open?

I see.

In all of our supplier partners we've got between 50 and 130 Boeing employees working hand-in-hand, minute-by-minute, hour-by-hour, 24/7.

So transparency on each other's issues is not our problem here; it's getting resolution.

We are working very closely with our suppliers, and they have their people in our facilities.

So it's a pretty seamless operation right now, as we all work hard to revolve the issues.

In the interim, they are shipping to the original plan?

On the first - on the airplanes that lead up through the flight test program, yes, and then we are sorting out the supply chain after that.

Okay.

Thank you.

You're welcome.

Operator, we will now turn to the questions from media, please.

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 now for Jim and James.

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

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

Thank you.

One moment, please.

James Gonzalez of Bloomberg News, you may ask your question.

First question I had, you mentioned the amount of Boeing employees that are out in facilities and working overtime.

I was wondering if you guys have gotten any feedback from FIA or the machinists' union inquiring further on what the status of the program is, and any kind of feedback from them on the working conditions, and what - the overtime hours that they are having to put in?

Well, the - our unions, our union partnerships have been extremely supportive here.

We are all trying to focus on the success of this airplane and the success of the company, so I would characterize it as overall very supportive in general.

And then just one other question for you, was the deliveries being revised for this year, do you still - this is for James, because I remember you had said that you thought that '08 would be the year to surpass Airbus on deliveries.

Do you think that's still the case?

I don't think I ever said that, that it would be the year we would, and I won't know that until we get through the year and deliver them.

We've given you our guidance, and I'm not sure what their delivery guidance is for '08.

I think there have been some analyst projections that said that '08 would be the cross-over year, but quite frankly I don't think we ever characterized it one way or the other.

Julie Johnson of the Chicago Tribune, you may ask your question.

Hi, guys.

Good morning.

I was just wondering if you could just give us a little better idea of what you mean when you say you expect a good order year for BCA?

Are we talking about maintaining similar levels to '07 or '06 or are we looking at a slight drop-off?

Well, I think we are characterizing it as taking more orders than airplanes we built.

And so it's not clear to me, nor do I think it's clear to Scott Carson, that we will have as many orders in '08 as we did in '07.

It would be lovely if we did, but that was an all-time record year that was on top of another all-time record year in '06.

So I would anticipate not quite that robust.

Okay.

And then just a quick follow-up on the 787 supply chain, could you just give us a little bit of color on how you plan to drive greater efficiency through the production process?

And could that potentially mean dropping underperforming partners?

Well, I think obviously the whole concept here, when we get through the start-up, is to have an extremely efficient production process, where multiple organizations or are each focusing on their piece and through the repetition become very good at driving down their own learning curves, and when you add them all up it's better than if we were all doing it, that's the concept.

What was the second part of your question there?

I was wondering if potentially you --

Oh, dropping suppliers, sorry.

Yeah, yeah.

By and large we have absolutely no plans to drop any suppliers.

I think we - when we qualified our partners early on, we did it with our eyes wide open and they did it with their eyes wide open.

We've each put a lot of investment in it.

Now, I think from time to time we shift work around, we restructure relationships the way work flows in order to capitalize on things that emerge as strengths or things that emerge as weaknesses, but I would characterize it more as fit and finish in that way than ever thinking about dropping a supplier, except in some extreme circumstance, but we don't see that here.

Okay, great.

Thanks.

You're welcome.

Sebastian [Synkey] of [PLU Review], you may ask your question.

Good morning, Sebastian Synkey here.

I would like to ask another question on the 787 production partners, please.

Has Boeing any intention to maybe invest financially or organizationally in your production partners, in order to strengthen them and maybe help them through the dire times when they don't get the money back in time?

And if you would today have to decide about a 737 further on, would you do the very same production set up or would there be something different, given the experience you have made until today?

Thank you.

Two very good questions.

I mean I think the form of financial support that we might contemplate in extreme circumstances would be more jointly carrying inventory or material, if we put an undue hardship on somebody, rather than investing in their own facilities.

But it's -- we have a good feeling about the way we are approaching this airplane, despite the start-up difficulties.

Would we do it exactly the same?

We might do it a little bit differently but the overall strategy would be the same.

I think we now have learning about the relative strengths between ourselves and our partners, and I think we might draw some lines in different places, but we wouldn't change the concept.

Thank you.

Lynn [Linford] of The Wall Street Journal, you may ask your question.

Jim, this is kind of just a high level question here, but in the last several months it seems that your issues with having to push out the schedule on the 787 have been kind of a result of this voyage of discovery you've been on.

How do you feel right now about - you know, are you at a point now where you can see to the bottom of the barrel to know that you don't have any more surprises coming up, or when do you expect to be to that point?

Well, I think the - I think it's true, Lynn, that the projections we made earlier when we didn't have much experience with all the work, the travel to our facilities, unanticipated, where we didn't have robust enough contingency plans when you look backwards, it is true that we missed some projections.

Now we are a lot closer today to completing the first airplane, now that we've properly staffed the effort, we now more fully understand the requirements as they came in from our partners, and work that we thought they were going to do, and just by virtue of being closer to the end than to the beginning.

And having had experience with working with the engineering drawings of our partners, having now rounded up the supply chain, a lot of the original supply chain issues have gone away as we've gotten our arms around inventory that was going to travel to other places and things like that.

So I think just by virtue of having the experience of getting deep into the first airplane, and seeing the end of it, gives us more confidence in our projections.

It's not much more complicated than that.

Okay.

Thanks.

And just one other thing is, do you anticipate as a result of some of the things you're seeing here that you might ramp up a little more slowly than you initially expected, so that when you do actually start getting into the production airplanes it won't be at a super aggressive rate?

It will be more gradual?

Well, that question has to be answered over the next couple of months, Lynn, but the - we are very mindful of committing to a ramp that we can execute.

We are also very mindful that we've already disappointed some of our customers in terms of when we are getting them the technology that they - that they have faith in us to deliver.

So that tension I think will produce a realistic but aggressive ramp.

Okay.

Thank you.

You're welcome.

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 further questions please call our Media Relations team at (312) 544-2002.

Thank you.

This concludes today's call.

Thank you for participating.

All parties may disconnect at this time.