波音 (BA) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to The Boeing Company's second quarter 2008 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 Ms.

Diana Sands, Vice President of Investor Relations for The Boeing Company.

Ms.

Sands, please go ahead.

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

I'm Diana Sands, 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.

In the interest of time and in fairness to others on the call, we ask that you limit yourself to one question.

As always, we have provided detailed financial information in our press release issued earlier today.

And as a reminder, you can follow today's broadcast and slide presentation 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 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, Diana, and good morning.

Let me begin with some comments about our second quarter, and then James will walk you through our results.

After that I will say a few words about what's ahead, and then we'd be glad to take your questions.

Starting with slide two, our second quarter financial results reflected solid core business performance, although they were clearly impacted by the effects of the challenges we are working through on some of our development programs.

As previously disclosed we had had a charge on our Airborne Early Warning and Control program due to the additional time required to complete and integrate the electronic warfare ground support systems.

We regret the impact this additional delay has had on our customer, and we are disappointed we had to take another charge on this program.

We are fully committed to meeting our customer's requirements and do expect to start delivering this aircraft in the middle of 2009.

The vast majority of our defense programs continue to perform very well.

The IDS reported margins were 8% in the second quarter, but without the charge, margins were over 11%.

We expect IDS to continue performing at these levels for the remainder of the year, which allows us to maintain its operating margin guidance of approximately 10.5%.

Commercial Airplanes second quarter results were impacted by delivery mix and timing of costs associated with our services business and 787 entry into service.

Results also included cost absorption on our non-787 production programs due to the changes in the 787 delivery schedule we announced in April.

James will talk more about that in a few minutes.

While mix and expense timing will become more favorable in the second half, BCA will continue aggressively pursuing productivity improvements as part of its plan to achieve operating margins of approximately 11.5% this year, and to support the company's plan to achieve its EPS guidance of $5.70 to $5.85 per share.

Despite the cost pressures in the second quarter, we achieved double-digit earnings per share growth in our first half results.

Core production and support programs continue performing well and we have lower centralized costs.

Based on those factors and our continued productivity efforts, we are reaffirming EPS guidance for both 2008 and 2009.

Our backlog stands at a record $346 billion, more than five times total company revenue.

Commercial Airplanes continued to grow its backlog this quarter with orders exceeding deliveries by a factor of 1.5.

BCA's backlog now represents approximately eight times current annual revenues and remains diverse by region, product type, and customer.

IDS orders in the second quarter included a follow-on contract from the Republic of Korea for F-15Ks, and a significant proprietary award.

Also during the quarter, the US Government approved funding for additional C-17s.

With one of the industry's leading backlogs IDS continues to demonstrate a breadth of capabilities to meet evolving customer requirements.

IDS is also pursuing further growth opportunities through niche acquisitions.

Yesterday, we announced an agreement to acquire Insitu a pioneer in the unmanned aircraft systems market.

This agreement is an example of how we are leveraging our existing competencies into high-growth adjacent markets.

Now just a brief word on the US Air Force tanker program.

On June 18th, the government accountability office sustained our protest on this program, affirming our assertion that the selection process was fundamentally flawed.

We will work with the Defense Department and our Air Force customer to understand and best address a revised request for proposal, which we expect to see in the next few weeks.

Our commitment to this program remains high.

Taking a look at some accomplishments during the quarter, I would highlight that the P-8A program successfully completed power-on testing, and we completed a key milestone on the FCS program where we tested the maturity of network systems in a realistic environment.

Just last week we saw the 777 freighter take its first flight, further extending our leadership position in the fast growing wide body freighter market.

The 787 program made steady progress during the quarter, and is on track with the schedule announced in April.

As you know, power-on was successfully completed last month.

This was an important milestone because it validated both the design and installation of our system.

We also recently completed structural testing of the 787 horizontal stabilizer to over 150% of its limit load.

We continue to be impressed by how the structures are performing.

The tests are validating the benefit of using composite materials, which offer significant strength at greater levels than we even thought, by the way, while providing unrivaled efficiencies and lower maintenance requirements.

And just this past weekend, we successfully tested our hydraulic systems and moved the 787's control services.

We are very pleased with how these systems perform and that we've achieved another milestone on the path to first flight in the fourth quarter.

Last month I visited all the major 787 suppliers and saw for myself that our partners are making significant strides.

We are seeing a real difference in the level of parts completion that we are receiving in Everett, and we and our partners are taking steps to move us toward getting to rate production in a rational, achievable manner.

While challenges certainly remain, overall we are making good progress.

Now let me say a few words about the current business environment.

Clearly, economic conditions are tough for many of our commercial customers, with oil prices putting significant pressure on them to restructure their businesses.

We are seeing them taking the steps necessary to reduce capacity on unprofitable and inefficient routes as one element of preserving their financial health.

We are talking with our customers all the time as they work through their plans, and helping them where we can.

So far, we have experienced a minimal impact on backlog with only a handful of deferrals by US carriers.

We have had no cancellations to speak of, nor have the international carriers come to us to discuss deferral plans.

Despite minimal impact on our business so far, we are concerned about the impact of energy prices on our customers, and we do expect that we could have more deferrals and some cancellations as our customers continue to wrestle with the new energy realities.

In light of that, it is important to explain how we manage our commercial delivery schedules, or Skyline.

Deferrals and cancellations are a normal part of the airplane manufacturing business.

In our production and delivery planning, we assume we'll see a certain amount of both, based on historical data and our judgment about each of the customers in our backlog, and the potential impact of things like today's energy prices.

We use these factors to determine our production rates in a disciplined manner and to balance our sales plans with delivery position availability.

Right now, the demand for fuel efficient new aircraft is still higher than what we can supply from our production plans.

This gives us the ability to a greater degree than in the past to reallocate deferred or canceled delivery positions to other customers who have been waiting for delivery slots to come available.

In addition, we continue to have unprecedented diversity in our commercial backlog, which now includes only 10% from US airlines.

If we see more deferrals or cancellations, the geographic mix should protect us from a significant downturn in any one region.

With the BCA backlog representing almost eight years of production, we also have opportunities for customers to pull deliveries forward.

Therefore, based on our current view of the environment and strong backlog position, we remain confident we will deliver the Commercial Airplanes in our guidance for 2008 and 2009, and that deliveries will be higher in 2010 due to 787 production ramping up.

Let me wrap up my opening comments by saying that we are watching the environment closely.

In particular, for things that would change our current assumptions.

But at the same time, I have confidence that our breadth and depth capabilities, continued focus on productivity, and strong backlog position put us in a stronger position than we have ever been to weather the situation if it worsens.

And longer term, commercial aviation remains a growth industry with a fundamental role in the global economy.

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

James.

Thank you, Jim, and good morning.

I'll begin with the second quarter results on slide three.

Our revenue of $17 billion was essentially flat in the quarter as higher support system volumes was offset by lower BCA, military aircraft, and network and space revenues.

Earnings per share declined 14% to $1.16 per share, with operating margins of 7.4%.

Earnings were impacted by the previously announced AEW&C charge of $0.22 per share and lower profitability at BCA, partially offset by lower unallocated costs.

Now I will discuss BCA in more detail on slide four.

Commercial airplane second quarter revenues of $8.6 billion was slightly lower than the same period last year, driven by product and customer mix as well as lower aircraft trading revenues.

While deliveries increased 11% to 126 airplanes, the mix was weighted more towards single-aisle aircraft.

Operating margins decreased to $770 million with an operating margin of 9.1%.

Earnings were impacted by the delivery mix, higher period costs required to support 787 entrance into service, and timing of expenditures in the commercial service business that supports its future growth.

BCA earnings were also affected by higher absorption of the hard to vary infrastructure costs on our current production programs due to the 787 schedule slide we announced in April.

BCA R&D was essentially flat versus the same period last year.

There were no R&D supplier cost savings payments in the second quarter of 2008 or 2007.

Commercial Airplanes still expects the total cost sharing payments this year will approximately equal last year's amount, with the remaining payments to be received in the fourth quarter.

As Jim mentioned, the BCA team is actively pursuing productivity and cost reductions to help offset the second quarter cost pressures by year end.

Their efforts include targeted infrastructure and period cost reductions, as well as additional productivity in the factories.

While we're dealing with cost pressures, demands for our airplanes remain high.

BCA captured 187 gross orders in the second quarter and 476 during the first half, which increased as backlog to another record of $275 billion.

We expect our book-to-bill ratio this year to well exceed one.

Our guidance assumes that the initial 787 deliveries in 2009 will have a 0% margin, and we will continue to assess this as we approach first delivery next year.

We're having ongoing discussions with our customers on the impact of our delays to their business plans, and we believe there's sufficient reserve in our guidance assumptions to deal with customer issues and other costs associated with the delay.

The 787 has enjoyed great sales success, with 896 orders since launch from 58 customers.

While new orders have slowed, principally due to the fact that we're quoting positions over 10 years out, we've essentially had no cancellations.

We firmly believe the 787 will deliver significant value over its life to both customers and shareholders.

Now moving to slide five in our defense business.

IDS delivered margins of 8% on revenue of $7.9 billion in the second quarter.

Strong performance across our diversified portfolio of defense programs was affected by the AEW&C charge of $248 million.

Excluding this charge, IDS had 11.2% margins.

Precision Engagement and Mobility Systems delivered 4.9% margins, including the AEW&C charge.

Excluding this charge, its margins were 12.4%, reflecting strong performance across production programs.

Network and Space delivered solid 8.5% operating margins, and Support Systems generated strong double-digit margins of 13.1%.

IDS continued to win new business by capturing the Korea F-15K follow-on contract, a significant proprietary award, and the KC-135 depot maintenance program during this quarter.

Now turning to slide six, as Jim mentioned, the current economic environment is very challenging for our airline customers.

In times like this, Boeing Capital's disciplined process to assess the adequacy of reserves, based on aircraft collateral values and customer credit-worthiness, is even more important.

During the second quarter we reported $82 million in additional reserves largely due to reduced customer credit-worthiness.

Our second quarter closing position and financial guidance takes into consideration our best estimate of required reserves for both 2008 and 2009.

As you are aware, the US credit markets have weakened considerably, which is causing financing sources to diminish within this region.

However, aircraft financing sources in other regions around the world remain solid.

90% of our commercial backlog is with customers other than the US airlines and 80% of it is eligible for Ex-Im Bank financing.

We have not financed any new airplane deliveries in the last several years and none so far in 2008.

Our guidance includes a moderate level of funding going forward to accommodate our domestic customers if necessary.

If the economy continues to weaken, our expected financing activity may increase.

Over the last several years we have strengthened our balance sheet and reduced BCC's portfolio size in the event our customers need our support.

If so, we will be prudent and disciplined when providing that support.

In our unallocated segment, expenses were down significantly due to stock price impacts on our deferred compensation and lower share base plan expense.

The strategic decision made several years ago to modify our long-term incentive program is having a positive impact on our expenses today.

The new performance award program significantly lowers volatility in our compensation expenses and the costs related to IDS are recoverable under our government contract.

As a result, much of the expense is now allocated to and recorded at the business segment, increasing their costs and decreasing the expense in the unallocated segment.

For the year, we expect other segment expenses to be around $300 million, and the unallocated segment to be approximately $1 billion.

Unallocated expenses will be higher during the second half of the year, primarily due to timing of aircraft eliminations, unallocated G&A, and insurance expenses.

Additionally, we don't expect to realize the benefits in deferred compensation expense experienced in the first half as a result of changes in stock prices.

In 2009, the other segment should be around $150 million, and the unallocated expenses approximately $700 million, down from this year's primarily due to lower unallocated pension costs.

Total pension expense is forecasted to be around $800 million in 2008 and $500 million in 2009.

2009 expense could vary, depending on interest rates and market performance as of our measurement date, which will be December 31st, 2008.

Now let's move to our cash flow on slide seven.

During the second quarter, we used $250 million of operating cash flow, reflecting planned working capital increases primarily for the 787 program as we continue to build gross inventory.

Advance payments made to suppliers are included in our inventory.

First half operating cash flow was $1.7 billion, and we continue to expect operating cash flow for the year to exceed $2.5 billion.

Balanced cash deployment remains a focus area for us.

We continue to invest in organic growth programs and return cash to our shareholders.

This quarter we repurchased approximately 11 million shares for about $900 million and paid $300 million in dividends.

We expect to use about same amount of cash in 2008 as we did in 2007 to buy back shares.

Now moving to cash and the debt balances on slide eight.

Our balance sheet and liquidity remain strong.

We ended the second quarter with $10.2 billion in cash and liquid investments.

This was down from the first quarter due to planned working capital investments, share repurchases, and dividends.

Debt balances were roughly flat from the end of the first quarter.

We expect BCC to pay down debt later this year to reduce our consolidated debt balance by year end.

Now turning to our financial guidance on slide nine.

As Jim mentioned, we are reaffirming earnings per share guidance for 2008 and 2009 with earnings per share between $5.70 and $5.85 for this year.

Approximately 60% of our second half earnings per share is expected in the fourth quarter as we're assuming more favorable delivery mix, extension of the R&D tax credit, and lower R&D spending, including supplier cost sharing payments.

In 2009, we expect earnings per share to grow approximately 20% to between $6.80 and $7 per share.

Boeing's 2008 revenue guidance is unchanged at between $67 billion and $68 billion.

Revenue for 2009 is expected to grow to between $72 billion and $73 billion.

We are forecasting operating cash flow to exceed $2.5 billion in 2008 and exceed $6 billion in 2009.

BCA delivery and revenue forecast remain unchanged.

In 2008, Commercial Airplanes expects to deliver 475 to 480 airplanes, growing to between 500 and 505 airplanes in 2009.

We expect further growth in delivery in 2010 as the 787 continues to ramp up production.

Commercial revenue is expected to be between $34.5 billion and $35 billion in 2008, and between $37 billion and $38 billion in 2009.

Commercial Airplanes margins are forecasted to be around 11.5% in 2008 and in 2009.

This reflects lower R&D costs and strong performance on production and service programs offset by margin dilution from 787 deliveries in 2009.

Our total IDS financial guidance remain unchanged with revenue of $32 billion to $33 billion in 2008, growing to between $33.5 billion and $34.5 billion in 2009.

IDS operating margins are expected to be approximately 10.5% in 2008, expanding to greater than 10.5% in 2009.

We expect total company R&D expense to be between $3.6 billion and $3.8 billion in 2008.

In 2009, R&D will decline over 13% to a range of $3.1 billion to $3.3 billion.

Additional guidance information is provided in our earnings release.

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

Jim.

Thank you, James.

While we faced some challenges this quarter that affected our financial results, I believe we will deliver on our financial commitments for this year and grow earnings per share another 20% in 2009.

The vast majority of our programs continue to execute very well, which is enabling us to methodically work through our development program challenges while delivering our financial commitments.

While mindful of the risks at hand, we are in a good position to weather the current economic volatility, given the size and strength of our backlog, coupled with our strong financial position.

In summary, I believe our outlook remains strong as we continue to focus on our customers, drive growth and productivity, and aim towards being the strongest, best, and best integrated aerospace company in the world for today and tomorrow.

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

(OPERATOR INSTRUCTIONS) Our first question comes from Ron Epstein of Merrill Lynch.

Good morning.

Good morning.

Just want to talk a little about the commercial revenues.

I think I was a bit surprised, and probably some other investors, with the weakness in the quarter in those revenues.

When you kind of look at the aircraft that you delivered and the customers that you delivered to, I think you delivered ten 737s to Continental, nine to ILFC, nine to Southwest -- the weakness we saw in the quarter, is the weakness an indication of a trend?

Or was it truly just a weak customer mix in terms of pricing in the quarter?

It's not a trend.

I won't say it's weak customer mix.

I would say that it is different in the customer mix that we expect to see in the second half, Ron, where we think the pricing will be a little better on those delivered airplanes.

Then also we had a difference in the mix in terms of we had more single-aisle and fewer wide bodies delivered this quarter that also impacted the revenue.

Again, that's timing.

Okay, great.

One follow-on, if I may.

Continental changed their outlook with regard to refunds and predelivery deposits.

They were expecting $8 million this year.

Now they're expecting $71 million.

That would be $66 million additional they're getting back from you guys in predelivery deposits.

Are we going to see that from other airlines that have ordered the 787?

I don't think you're going to see it from us.

I don't know what you'll see from -- That's news to me that we are going to be refunding any deposits to Continental.

Thank you.

Our next question comes from Gary Liebowitz of Wachovia Securities.

Good morning.

Question about the financing reserves that you took in the quarter.

If oil prices were to remain high, how likely is it that we are going to see additional charges given that BCC's $6 billion portfolio consists almost entirely of out-of-production planes and predominantly with US carriers?

Well, Gary that is obviously something we're watching very closely, as Jim mentioned.

When we talk about watching the external factors that affect our customers, that does include BCC.

Right now, we think we're pretty well reserved if they sort of stabilize where they are now.

Obviously if they got worse, and we saw some of those customers going into, say, bankruptcy, we might have additional issues relative to the reserve position there.

But what we know today, it would appear we're adequately reserved.

Okay.

Related follow-up, if I may.

I think back at the investor conference, you said you'd anticipate BCC having to finance any new deliveries prior to 2010.

It sounds like your thinking on that has changed in the last couple months.

Clearly we haven't done any in the last several years and we haven't done any yet this year.

Obviously we have assumed that there could be some minor support provided the latter part of the years starting next year, and we'll continue to monitor that as circumstances change.

But again, I also said at the conference that should that need arise, we'll be doing it in a very prudent and very disciplined manner, so we'll have to see how that turns out.

Thank you.

Our next question comes from Howard Rubel of Jefferies.

Thank you very much, Mr.

McNerney.

You talk about sustained focus on productivity and improvement in execution, yet these results fall short of that.

Could you reconcile the two?

Then just related to that, a lot of the initiatives that you talk about, at least you hint at that you can do in the short term to help you make the numbers seem hard to understand given the long-term nature of the business, and just the way in which the accounting system works and recognizes a lot of your costs.

Let me try it this way.

The two -- actually three major headwinds we faced this quarter, two of which were development programs, 87 push-out, and the AEW&C charge -- I think the way we're trying to run the company is having an ongoing productivity program that assumes that when we have stumbles in innovation, which those two represent, that we can largely cover it with a strong productivity program, which we do have here.

And were it not for a strong productivity program, we would not be able to reaffirm guidance this year.

So I think that's the philosophy behind it.

Both IDS and BCA have got well funded, well resourced programs -- for example, the productivity program in Everett, the moving line, a number of similar programs in St.

Louis and southern California and in Philadelphia.

So when we have these disappointments on the development side, we're ready to cover them.

Now, obviously, we're very disappointed with the development program issues that we're facing, and we are working very hard to minimize those, and I would say we're closer to the end than the beginning of working through a number of those legacy development programs that have caused us some pain.

I mean, Jim, just a follow-up.

It's a 200 basis point slip in commercial, and some of that should have been recognized at that time you moved the 787 schedule.

And so I'm struggling a little bit to understand how we're going to get such strong performance in the back half of the year.

Can you be a little bit more specific either in terms of quantifying it or lay out some of the initiatives?

Let me just say one thing, then, James, you can -- I mean, roughly half of the running rate issue that I think you're alluding to here is timing, maybe a little more than half, is related to timing of revenues and costs, but there are significant productivity program efforts that are underway now that we're not just dreaming up now -- that are underway now, that we are counting on as we have counted on before.

James, you want to talk about the booking?

Howard, I just wanted to also say, we're talking about approximately $200 million short in earnings overall.

About half of that is related to the timing and some of the product mix we experienced, so we'll pick that up when we deliver those airplanes during the second half.

The other part, though, partially is also timing of expenses.

We'd expect the expenses in CAS to be lower in the second half than they were in the first, in terms of those expenses incurred to provide infrastructure to support their future growth requirement.

And then we'll start seeing, as we gain more experience, more benefit out of some of the productivity initiatives that have been in place, like the 777 moving line, as we get more clarity around the benefit of that, and it continues to smooth out.

And we expect to see more benefit there.

And we have asked the BCA team, and they've accepted the challenge and they're committed to going out to see what we can do to reduce some of the other costs in the infrastructure to moderate those, as the base has diminished somewhat with the slide of 787.

But we believe it's doable.

Thank you very much.

Thank you, it's helpful.

Our next question comes from David Strauss of UBS.

Good morning.

Thanks.

Good morning.

Jim and James, can you give us some color on where you are with 787 supplier and customer negotiations, how much progress you've made in the quarter?

And on the customer side, are you seeing airline customers opt for cash in terms of damages, or are they looking for additional lift to make up the gap?

Well, first of all, the -- every customer is different in terms of both the contractual obligations we may have with them or they may have with us, and every customer's situation is different relative to the things that can be brought to bear to resolve the discussion.

So it's very hard to generalize.

We have gone through customer by customer.

We do have a view of the costs in cash that it will take to resolve it.

It is in our guidance.

The majority of it is resolved within the 87 program, but there are some resolutions that impact current numbers, and that's all taken into account in our guidance.

Also with the suppliers, our supplier partners -- as I said, I went out and visited all of them last month, and I have a great deal of confidence in their business progress.

And while every financial discussion is not yet complete, most are well along.

And again, they're the typical issues around scope, timing, execution that we have on every program, and we're getting those resolved, and the supplier discussions are probably ahead of the customer discussions in terms of resolution.

But again, we've tried to capture all of the projected resolutions which we can quantify in total, roughly, in a conservative way.

Okay.

And as a follow-up, on the 787, what's left until the plane is completely assembled at this point and when do you actually expect the plane to be completely assembled?

Well, the plane will be flying in the fourth quarter, as you know.

We are on or slightly ahead of both the assembly and the testing.

The structural assembly of the plane is largely complete.

There are some systems installations that have yet to be done, but the electronic infrastructure and backbone, the structures itself, as evidenced by the power-on test going very well, and the hydraulics and control service test going very well.

You need a largely assembled airplane to accomplish all those things.

So it's a matter of getting the final systems in, and then doing some ground testing and then flight testing.

And we're on schedule.

Thanks very much.

You're welcome.

Our next question comes from Joe Nadol of JPMorgan.

Good morning.

Good morning.

James, on the program accounting versus unit accounting margins in the quarter, big picture, trying to understand if there are -- if there were any changes to your -- either pricing or volume assumptions in the out years that might have impacted what you recognized this quarter?

Because program accounting earnings came down sequentially a lot more than unit accounting did.

There was only an addition of 200 to the 737 accounting quantity and 25 to 747.

That was the -- what impacted it.

I think what you're seeing is the gap is closing.

The impact was really what we talked about earlier, and that again is the mix of customer and product that were delivered in the quarter that would affect that difference, but that's all it is.

At what point would we expect to see the lines cross?

Because program accounting, in theory, is a smoothed version of earnings.

Unit should be more volatile -- in good times unit earnings should be higher than program.

How do we think about --

What you'll see over the course of this year is that gap is going to narrow, and we think narrow pretty significantly.

It's hard to say when it will really cross, because if we get new customer introductions, we get other things that add to the costs that we would inventory, because the subsequent delivered units would benefit from it.

That could extend it, Joe, but what I would say to look for is that as we go through the course of this year, the gap will definitely narrow.

And there are no changes in terms of your narrow body pricing assumptions?

No.

Thank you.

Our next question comes from Robert Spingarn of Credit Suisse.

James, your guidance implies that BCA margin at the back end of the year in the second half, has to be in the low 12s, maybe 12.5% in order to hit that 11.5% for the full year.

You talked about reimbursed R&D, et cetera, but you're guiding to 11.5% for next year.

So do we have a decline in margin from the back end of '08 into '09?

Is that attributable to some 787 next year?

How should we think about that, and the carry of this infrastructure absorption for the next several quarters until those aircraft are actually delivered?

You're right, we are expecting that they are going to deliver higher margins in the second quarter and it's in the range of the second half, in the range that you mention, and that is going to be driven by the lower R&D costs, including subcontractor contributions.

But it's also going to be -- the timing of some of the expenses will be down again.

The annual -- what we thought from a cost standpoint, will hold for the year.

Now, as we go into '09, we're -- we will be better prepared, and we would expect to see good performance, but that good performance will be impacted by the dilution of delivering the 787 that we'll start delivering in 2009.

So that will dilute the margin picture, and that's why we're saying we're going to hold 11.5% year-over-year.

James or Jim, how do you think about that R&D profile as we get into the out years, when we have to consider potentially a 777 refresh or the next gen platform?

Obviously at Farnborough, GE talked about a new engine ready 2016 and that sort of thing.

You're spending on the commercial side around $2.9 billion.

We expect that to trend down over time.

Where do you think you'll trough on R&D and when?

Well, this is Jim.

Obviously we're projecting some of the R&D coming down off the current program spends on the 87 and the -8.

That's going to begin to come down significantly in the second half of this year.

We see it continuing into next year.

Although we are going to sustain some level of investment in R&D against the two things you mentioned.

And the 777, either a refresh or a renovation, based on what we see with our customers, and what we see that the A350-1000 is or isn't, and we'll have plenty of time to look at.

I think its delivery is in the '15 to '16 timeframe.

And then obviously stay positioned to mature the technologies associated with the narrow body -- those are the two things we have to do.

So when the actual program ramp-up of those happen is to be determined, but we don't see the big ramp-up happening within our guidance right now.

Sounds like it might not even be by 2010, and so what is a 9% R&D against commercial revenues could have by then?

Well, listen, marketplaces change, competitive environments change, customer requirements change, and when we get to '10 guidance, we'll discuss that the best way we know how.

Thanks very much.

Our next question comes from Doug Harned of Sanford Bernstein.

Good morning.

I wanted to go back to the BCA margins.

You've talked about in Q2 you had some period expenses, then you had overhead absorption.

Can you dimension how much is each, give an idea of where the real impact was?

And then when you look at going forward the next two quarters, does the overhead absorption issue, this added cost, does that stay with you at the same levels it did in Q2?

So it's about half and half if you look at the timing versus the addressed spending, and some of the increased spending, remember, is also timing based, in that we expect lower spending particularly in CAS in the next quarter.

Now, the infrastructure absorption issue -- the BCA team is committed to go and look at what they can do to reduce that during the second half of the year without doing something that will reduce capability needed again in 2009 as we get the 787 program on track from a production support perspective.

But that's how I would look at it, it's about half and half.

We absolutely believe we have great plans in place with opportunities to correct the cost growth that we experienced in the first half in the second half.

If I went back to Q1, and your guidance at that time, and as you looked ahead at that point in time, did you expect to have this level of overhead absorption to deal with?

No.

We did not.

We did have an estimate in there which we obviously underestimated the disruption that would be caused relative to these costs being allocated to programs, and so we trued it up in second quarter.

So you're saying that the productivity improvement effort that you're doing now has to step up a little more than you had expected back then to get to the same margin level?

We think we have to continue to drive good productivity.

If it stepped up a little more than the current levels, I wouldn't be disappointed.

Let's put it that way.

Great, thanks.

As a reminder, in the interest of time we are asking that you limit yourself to one single-part question.

Our next question comes from Myles Walton of Oppenheimer.

Good morning.

Quick question for you on R&D into '09, your guidance reflecting a $500 million to $600 million type decline.

Is that entirely within commercial or is there also some anticipated decline on defense as maybe the international tanker winds down?

No, it's primarily in commercial, and it's primarily representing as we complete and finalize the design effort on the 747-8 freighter.

The R&D is already starting to come down on 787 from prior year levels.

And then within the IDS portion that -- where R&D is being spent this year, I guess on some ramped up spending on tanker -- I'm surprised precision engagement and mobility systems R&D so far this year looks pretty reasonable.

Is all of the spend that was anticipated on the tanker in the back half or have you been able to pull off the program without that uptick you were talking about?

I guess it was late last year.

I don't think that we had much in there for tanker -- for the international tankers, other than -- and it's been pretty much at the levels we predicted.

And so I think what you're seeing, in IDS we're performing to the levels we thought we would.

Now there's nothing in there for US Air Force tankers.

I guess I was referring to when you raised the guidance from [$2.8 billion to $3 billion] to [$3.2 billion to $3.4 billion] you said 50% of the changes --

There was a little piece in there associated with international tankers, and that's behind us.

Okay.

But the bulk of it was driven by 747 and increased spending on the 87.

Thank you.

Our next question comes from Joe Campbell of Lehman Brothers.

Yes, good morning.

Good morning, Joe.

Let's go back to our favorite margin target on BCA but I'm still struggling a bit to understand --

Joe, we can't hear you.

Okay.

Can you hear me better now?

Yes.

I'm trying to understand what was going on still -- I know you've told us two or three times on BCA what these margins were.

So I'm trying to understand why the disruptions in the 787 aren't just allocated to the 787, and why they're spilling over to the production programs.

Or is it simply a difference that you assumed you would be able to charge stuff to 87 because of thoughts that you would deliver the planes that are not now happening.

I wonder if you could also say something about the aftermarket.

Many of the suppliers are saying that the aftermarket is weak, and I wondered whether you could say something about how Aviall and the rest of the affiliated BCA companies' outlook has changed or not.

I'll take your first question and Jim will take your second.

But essentially on the 787 issue is we planned on the old schedule to have more 787 work in house this year than now the actuality with the slide of the schedule is actually showing up.

So the costs that we're talking about, the hard to vary infrastructure costs, are constant.

It only can be allocated for the work that's in house.

So that's why we're seeing a shift of the 787 program onto the other production programs because that's the work that's currently in-house.

Is that clear?

Yes.

So I guess it means that the overhead went up and you were expecting it to be covered by 787.

So I'm surprised why the overhead --

The infrastructure costs remain constant.

What we assumed is we'd have more 787 work in house than we did after the schedule slide, so less of that constant cost was allocated to 787 and more of it was allocated to the production programs and 787 program -- would have been allocated to the 787 program accounting and inventory.

The remaining -- since the 787 work did not show up, that differential went to the production programs and flowed through to earnings.

Thank you, got it.

Jim?

On the services, it is true, Joe, we are seeing a moderation in the spares rates, and that makes sense as people are taking out older, inefficient aircraft which tend to have slightly higher maintenance rates.

Some of the mod work is slowing a bit, too, as planes are staying in service, not being modified to freighter configuration for example because of A380, 87 delays.

Having said that, the other parts of our business are doing well, and the guys are achieving their business plan, although they're breathing a little harder than they were a quarter ago.

But they are still expected to make their business plans that you have in the '08 and '09 guidance?

A lot of other people are moderating their '09 business plans, and you haven't changed anything.

No, we're not -- listen, we're not changing our overall guidance which obviously has puts and takes in it.

Obviously, the services -- BCA business is a watch item for us.

Despite some softening, they're doing well.

I think as we put together the specific plan for that specific piece of the business, we'll have to see what the environment and the competitive situation looks like.

And so -- but there are other places where we have less pressure and other places we have upside, and that's what gives us the confidence to give you the guidance.

But this -- to your earlier point, we have seen a softening in spares and conversions.

We're dealing with it.

And we'll just have to monitor the situation.

Thank you very much.

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

Yes, to maybe understand a little bit better the BCA costs, if infrastructure costs were shifted from the 87 to other programs, does that mean that the other programs profit accrual rates have gone down, and if not, why not?

And secondly, you mention period costs in the second quarter -- those presumably are costs expensed as incurred.

How big were they in the second quarter and how big are they likely to be for the entire year?

Thank you.

Okay.

On your first question, on the infrastructure costs -- the infrastructure costs, as I said earlier, were constant and then they're just allocated on the basis in-house.

What was the second half of that question?

It was, does it affect production?

The first part of the question --

What it is, is that the profit rates on the production programs before allocation of those costs would have remained constant.

Then they would have taken up a bigger absorption of those costs through the allocation process since the work was there.

True, but if that happens their accrual rate goes down.

Exactly.

The accrual rate was --

How come?

Their accrual rate was impacted this quarter as a result of the allocation of those costs.

Right.

But, I mean, presumably program is through the end of the program.

So if you have lower program accrual rates in this quarter, presumably you're looking forward and that continues.

If so, given the guidance hasn't really gone down that much, why not?

Because we plan on dealing with the increased costs we experienced in the second quarter in the second half of the year.

Okay.

And then the period costs that you mentioned that are expensed as incurred, how big approximately were they in the second quarter, and how big would they be for the year?

Yes, I mean, so you're just talking the delta.

It would be half of about the $200 million difference we saw in what we anticipated the earning rates to be versus what they were.

Thank you.

Our next question comes from George Shapiro of Citigroup.

Good morning.

Good morning, George.

James, is part of the issue with the allocation happening this quarter because this was the quarter that the 787 was supposed to be initially delivered?

It's because, George, we expected to have more 787 work in our shop this quarter than it turns out we did because of the schedule slide.

It wasn't just because of deliveries.

It's more about the amount of work on the 787 program that we originally anticipated having in the shop.

Okay.

And then if you go forward, James, why wouldn't -- I assume that you'll probably wind up being short of your margin in commercial aircraft, but you will be better on unallocated because you only have $130 million through six months, and you're saying it will be $1 billion for the year.

Well, we think we're going to make our plan in Commercial Airplanes, but if we don't, we'll still make our earnings per share expectation, and the guidance we provided you.

Okay.

One last one.

The cash flow started to be impacted with the working capital build for the 787 this quarter.

How big do you expect that working capital build gets before we get to first delivery?

I don't know, George.

I don't have that offhand, but what I do know is that we will make our cash guidance of greater than $2.5 billion this year, and we're expecting that to grow to $6 billion in '09.

I just don't know the specifics on the build on 787.

And one last one.

I can't forget.

777 deferred amortization actually came down in the quarter despite the weaker margin.

Do I assume, then, that more of the infrastructure allocation was to the 737, or did you just lower the margin sufficiently on the 777 per Cai's question?

No, the infrastructure cost allocation has nothing to do with that.

What I would say is more associated with that is that we didn't have the other cost that adds more volatility as to whether the -- those deferred production costs would go up or down.

In other words, we didn't have any customer entries this year that were significant, or this quarter, so I think what you've seen is the normal allocation process is starting to take holding again, and we would expect that to continue going forward.

Okay, thanks very much.

Operator, we have time for one more analyst question, please.

Thank you.

Our next question comes from Troy Lahr of Stifel Nicolaus.

Thanks.

When you guys talk about 2010 deliveries up due to 787, does that mean legacy programs are going to be flat and all the growth is coming from 787?

Really, how are you thinking about the supply and demand balance and what your supply chain can keep up with versus airline demand for new aircraft, specifically 737 line?

Yes, I mean, I think since we don't offer specific guidance on rates in '10 until the beginning of '09, we were just isolating the 87 as a known factor that will for sure be an upper based on our current schedule, and isolating that as something that would drive it higher.

And I guess the assumption behind it is that everything else would stay the same, but that's something we'll work through before we give our final guidance.

How are you balancing kind of supply chain with what the supply chain can keep up with versus demand?

If you look at the 737, how many you have in backlog?

Where do you stand on that?

Are you more concerned with the supply chain or more concerned with customer demand on the 737 line?

I think we have unprecedented customer demand on the 37, and the -- and we also have got a well established supply chain for a program that has been in place for many, many years.

So while there are certainly challenges day to day on the supply chain, we feel comfortable that the -- that the unprecedented demand of that airplane can be met with a robust supply chain.

Okay.

Thanks, guys.

You're welcome.

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 Communication.

Mr.

Downey, Please go ahead.

Thank you.

We will continue with the questions for Jim and James.

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

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

Thank you.

Our first question comes from Susanna Ray of Bloomberg News.

Hi there.

I'm just a little bit confused about what exactly you have on hand to bail out customers if needed.

I wondered if you could clarify that for me.

Could you ask the question in a different way?

I just heard a lot about having reserves to help outside customers if necessary, and I'm a little bit confused about how much you have, what that entails, all of that.

I just wondered --

Let me be clear.

The reserves are for the existing customers we have where either the residual value of that hardware goes down, or their credit-worthiness worsens.

That is not -- if you're talking about how much capacity we have to help our customers to take delivery of products going forward, that's something we'll have to evaluate on a case-by-case basis, and we do know we have quite a bit of capacity in our balance sheet.

But it depends on the customer and the market factors that will decide what we do.

And I think that captures the BCC part of your question, and I think in terms of the 87 customers, our anticipated resolution with them is encompassed in our cash guidance and our earnings guidance, which as you know, shows significant growth in both cases.

Great.

Thank you.

Our next question comes from Paul Marion of Crane's Chicago Business.

Hi, gentlemen.

Wanted to ask a question about your satellite business.

The transformational satellite contract is up for decision soon, but Boeing recently won a contract to study the implications of delaying that program or cutting it back.

Are you confident and anxious to get that going, or do you think it could benefit from some further study?

This is Jim.

Our customer is studying the program and the timing of the RFP and the configuration of the RFP.

They have asked us to contribute to that discussion.

And so I think while we anticipate the RFP later this year, I think the ongoing discussions could modify that, although we're hopeful that it will continue forward as originally discussed.

But I think there's the normal discussion back and forth on a big and complicated program as they think through exactly how they want to bid the program.

Thanks.

Operator, seeing as there are no more questions in the queue, that will complete our call for today.

Again, for members of the media, if you have any follow-up questions, please call our media relations team at 312-544-2002.

This concludes today's presentation.

Thank you for your participation.