波音 (BA) 2011 Q2 法說會逐字稿

Thank you for standing by.

Good day, everyone, and welcome to the Boeing Company's second-quarter 2011 earnings conference call.

Today's call is being recorded.

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

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

Scott Fitterer, the Vice President of Investor Relations for the Boeing Company.

Mr.

Fitterer, please go ahead.

Thank you and good morning.

Welcome to Boeing's second-quarter earnings call.

I'm Scott Fitterer.

With me today are Jim McNerney, Boeing's Chairman, President and Chief Executive Officer, and James Bell, Boeing's Corporate President and Chief Financial Officer.

After comments by Jim and James, we'll take your questions.

Again, in fairness to others on the call, we ask that you please limit yourself to one question.

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

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 disclaimers at the end of this Web presentation.

Now, I'll turn the call over to Jim McNerney.

Thank you Scott.

Good morning everyone.

Let me begin by addressing the current business environment followed by some thoughts on our performance during the quarter.

After that, James will walk you through our results and then we'd be glad to take your questions.

Starting with the business environment on Slide 2, the global economy continues to transition to a sustained recovery, although uncertainties remain as air transportation has been adjusting to the economic impacts of the unrest in the Middle East, rising oil prices, sovereign debt issues in Europe, and the US debt ceiling discussion and its related impacts.

Notwithstanding these uncertainties, airline industry fundamentals remain sound.

The continued strength and resiliency of the global economy is supporting growth for both passenger and freight traffic, which we expect to increase at or above long-term historical trends during 2011.

This growth is driving continued demand for both airline fleet expansion and, importantly, replacement airplanes.

Previously, we announced our plans to increase the 737 production rate from 31.5 airplanes per month to 35 in the beginning of 2012 and then to 38 per month in the second quarter of 2013.

In June, we announced plans to further increase the 737 production rate to 42 airplanes per month beginning in the first half of 2014 in order to meet the unprecedented single-aisle demand.

With over 2100 737 airplanes on order, this rate increase allows us to increase to meet our customers' requirements and opens new delivery slots for customers who want these airplanes sooner than we could otherwise provide them.

We are working closely with our supplier partners to ensure we increase the 737 rate and our other production program -- our other airplane production rates in an efficient and responsible manner.

Twin-aisle demand continues to be exceptionally strong this year with the 777 taking 70 orders to date and the 747-8 receiving five firm orders and 22 commitments so far this year.

Add to this the breakthrough capabilities of the 787 with over 820 airplanes in backlog, and it highlights the strength of our industry-leading position in the wide-body segment of the market for both passenger and freighter airplanes.

We intend to maintain this fleet as we evaluate the potential for a 787-10 to follow the -9 and eventually take steps to further improve the 777, the leading wide-body operating in the marketplace today.

In the single-aisle or narrow-body segment, the direction we're heading was made clear as part of the big order announcement last week by American Airlines, which included 100 737 NGs and a commitment by the airline for an additional 100 re-engined NGs pending launch approval of that program by our Board of Directors.

Over the past year and a half, working with our customers and industry partners, we have evaluated in rigorous detail two potential options for our next narrow-body airplane.

We were prepared to either pursue the re-engineering option that I just discussed with an entry into service around the middle of the decade, or an all-new airplane if we could get it to market in the 2019 to 2020 timeframe.

Over the past few months, we have worked hard to validate the new small airplane option, which is largely a technical and production question.

Our primary challenge became that we do not yet have a clear answer on the architecture of a production system that would incorporate new product technologies available to us and could ramp up quickly with acceptable cost and risk profiles to 50 or 60 airplanes per month by the end of the decade, which is the range of demand we anticipate in that timeframe.

Also in recent months, a broader customer view has emerged in support of the greater certainty of gaining significant incremental improvement in a re-engined 737 in the near to mid term over the more perfect solution, which may be available further down the road.

It has always been our view that if it looked like we were putting meaningful market share at risk by waiting to do a new airplane, we would re-engine instead.

That, combined with our new engine technical production assessment against leadtime for a new engine decision, led us to the judgment that we have made.

We are confident that our re-engined 737 will maintain the value proposition we have in the marketplace today, and we expect to see strong demand for this product.

It will be the most fuel-efficient airplane in its segment and have the lowest operating cost while also meeting customer needs for range, payload, standardization, reliability, and fleet compatibility.

Over the next several weeks, we will continue our work to finalize the configuration and other details in anticipation of a launch this fall, pending board Approval.

Turning to Defense, Space and Security, despite environmental pressures and constrained budgets in the US and Europe, global demand for defense products and services remains strong, particularly in the Middle East and South Asia.

This demand is driven primarily by the need to modernize current capabilities to meet existing and future threats and upgrade or replace aging equipment.

Our strategy remains to extend and grow existing programs, capture a larger sale -- a larger share, I should say, of international and services opportunities, and move aggressively into high-growth areas such as unmanned systems, cyber-security and intelligence.

While pursuing these objectives, our teams have also kept a tight focus on disciplined productive operations to ensure continued responsiveness in a tough environment.

Our portfolio of proven, reliable, and affordable systems is working to our advantage in this current defense market as evident by the recent agreement reached with the Indian Air Force for 10 C-17s and the pending order in Saudi Arabia for F-15s, Apaches, and other systems.

Continued innovation, strong execution and productivity across the vast majority of our programs and our international presence are sources of strength for all of Boeing in this current business environment.

The commercial and defense and security markets we serve remain large and are growing in the aggregate and we are making important progress on the strategies we are pursuing.

Turning to the second-quarter highlights on Slide 3, core operational performance was excellent during the quarter as both of our major businesses recorded double-digit margins.

Commercial Airplanes generated strong operating results as production and services programs continue to make productivity gains.

Increased deliveries also contributed to the positive quarter as both the 777 and 767 models transition to their previously announced higher production rates.

Our Commercial development programs are substantially complete with their flight test activities and are transitioning into the final stages of the certification process.

Barring any last-minute issues that can't be resolved for some reason, both the 787 and the 747-8 freighter are on track for first deliveries later in the third quarter.

On the 787, we're working closely with our customers to prepare for entry into service.

Earlier this month, we successfully concluded service-ready operational validation with our launch customer, ANA for the 787 experienced simulated day-to-day airline operations such as maintenance, servicing and flight crew operations.

We are also in the final phases of ETOPS and F&R tests for the Rolls-Royce engine and expect certification before the end of August.

We continue to work with our internal and external partners on improving the condition of assembly.

Earlier this month, we the adjusted component delivery schedules to keep the production flow in balance and minimize out-of-sequence work moving into final assembly.

We will continue to take a deliberate and disciplined approach as the program progresses through the production ramp-up plan.

We are currently operating at two per month production rate in Everett and are prepared to increase to 2.5 per month later this year.

Boeing South Carolina is progressing to plan as production on the first 787 begins this quarter in our new final assembly building.

First delivery out of Charleston is expected to take place in 2012.

The change in Corporation process on airplanes already built is also progressing well.

We are using a modification line approach and leveraging enterprise resources in both Everett and San Antonio to address the orderly and timely completion of this statement of work.

Defense, Space and Security also generated strong operating results for the quarter, delivering 29 military aircraft and one satellite.

New business efforts also advanced.

In addition to the agreement reached with India's Ministry of Defense for the 10 C-17s, the Commonwealth of Australia signed a contract to acquire their fifth C-17.

During the quarter, we signed contracts with the U.S.

Army for four additional Chinook helicopters and with the U.S.

Air Force for additional C-130 avionics modernization program kits and air crew training system devices.

The U.S.

Air Force also gained full operational status of the GPS Operational Control segment upgrade.

This keeps the GPS system operational within specified accuracy to provide secure and precise navigation around the world for military, humanitarian, and commercial applications.

In support of our repositioning strategy, our Phantom Ray unmanned aircraft completed two flights during the quarter, successfully demonstrating the airworthiness of this exciting new airborne system.

The current defense environment will continue to provide challenges, but we remain intensely focused on executing well, reducing costs, and meeting the enduring needs of our customers with a balanced portfolio of systems solutions and capabilities.

Total Company backlog at quarter end stands at $323 billion, which provides the foundation for significant future growth.

Now, over to James who will discuss the second-quarter results and our outlook.

James?

Thank you Jim and good morning.

I'll begin with our second-quarter results on Slide 4.

Revenue for the quarter was $16.5 billion, up 6% from a year ago due to higher delivery volumes and mix.

Net earnings were $1.25 per share, up 18% from last year, while operating margins were 9.3%.

This reflects the higher revenue and strong performance across all our businesses, offsetting a $0.09 per share increase in pension expense.

Now, let's move to BCA results on Slide 5.

Boeing Commercial Airplanes' second-quarter revenue was $8.8 billion, an increase of 19% from last year, reflecting higher airplane deliveries, improved mix, and continued strength in the service business.

Commercial operating margins were 10.4%, reflecting higher revenues and strong operating performance partially offset by higher [resurgent] development expense.

During the quarter, we extended the accounting quantities on three of our airplane programs.

The 747 was increased by 25 units, the 767 by 12 units, and the 777 by 50 units.

As Jim mentioned earlier, during the quarter, we announced the 737 production rate will increase to 42 airplanes a month beginning in the first half of 2014.

The financial impact of these decisions and probable outcomes of current campaigns have been assumed in the program accounting gross margins.

Overall, the financial impact was not significant in the quarter.

The benefits of volume leverage and continued productivity improvements are balanced with the competitive pricing environment and investments in tooling and production systems necessary to achieve the higher production rate.

Gross inventory for the Company now includes $16.2 billion related to the 787 work in process, supplier advances, tooling and other nonrecurring costs, an increase of approximately $1.7 billion during the quarter.

This balance includes over 35 airplanes that have rolled out of the factory to meet the strong market demand for this product.

We expect the inventory balance to continue to grow as we ramp up production, but the rate of growth will moderate as deliveries are made.

As we look forward to first deliveries of the 787, we expect to disclose the initial accounting quantity and deferred production costs next quarter.

Given the tremendous success of this product in the marketplace with over 820 airplanes in backlog, the initial accounting quantity will be substantially higher than previous new program initial quantities.

While the delays and challenges faced early on in the program has contributed to higher deferred production costs and higher initial unit costs than experienced on other programs, the significant demand for this product gives us confidence these costs will be absorbed profitably over time.

Commercial Airplanes 177 growth orders during the quarter, including 43 737s and 26 777s while 12 orders were canceled.

The commercial backlog remains strong with over 3300 airplanes valued at $262 billion.

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

Boeing Defense, Space and Security reported second-quarter revenues of $7.7 billion, down 4% from last year on lower volumes.

Operating margins were 10.4%, reflecting strong operating performance.

Boeing Military Aircraft revenues of $3.6 billion were in line with a year ago.

Operating margins were 10.6%, up from a year ago, reflecting strong operating performance, while last year's results were affected by an AEW&C charge of $46 million.

Boeing Military Aircraft also includes the Defense, Space and Security's performance results of the KC 46-A tanker program.

As we have previously stated, we won this program by offering the best integrated solution to meet the customer needs with an impressive yet responsible bid.

That included engineering and manufacturing development and production of 179 tankers over the next 17 years.

Our cost estimate has not changed since we submitted the final bill and the contract is not in a forward-loss position.

The fixed-price incentive structure of this contract clearly incentivizes us to explore ways to improve cost performance.

We continue to expect this program to be profitable over time while providing the best value for the war fighter and American taxpayers.

Network and Space Systems revenues of $2.1 billion were down from last year due to funding reduction in brigade combat team modernization and lower SBI net volume.

Operating margins were 9.5% with core operating performance in line with a year ago.

This quarter's results also included a contract adjustment due to performance at the United Launch Alliance and a gain from the sale of property.

Global Services and Support revenues of $2 billion were down slightly from last year due to (technical difficulty) defense environment.

Operating margin were 10.9%, up over last year's due to the strong performance (technical difficulty) integrated logistics.

Defense, Space and Security maintained a solid backlog of $61 billion, nearly two times annual revenues.

Now let's turn to Slide 7 and our other business.

Boeing Capital continues to perform well as it reported $62 million of pretax earning in the quarter.

The portfolio balance at quarter end was $4.4 billion, down on normal portfolio runoff and [modest] asset sales with no volume for new airplanes.

During the quarter, BCC reduced risk in its portfolio by facilitating the Hawaiian Airline purchase of 15 717s they previously had on operating lease.

Hawaiian has also agreed to expand their 717 fleet, leasing three additional airplanes previously operated by Mexicana.

Now let's go to Slide 8 and our cash flow.

During the quarter, we generated $1.6 billion of cash flow, reflecting strong operational performance from our production and our service programs, offset by continued investment in the development programs.

Let's go to Slide 9.

Our cash and liquidity position remains strong as we ended the quarter with $8.8 billion of cash and marketable securities.

We will continue to execute our balanced cash deployment strategy and are well-positioned to support the ramp-up on our development and production programs.

Now let's go to Slide 10 and our outlook.

Our earnings per share guidance for 2011 has increased 10% to between $3.90 and $4.10 per share, reflecting the strong core performance across our businesses.

The guidance continues to consider risks associated with our development programs and the competitive environment across both commercial and defense markets.

Revenue guidance for the year remains unchanged at between $68 billion and $71 billion.

We now expect Commercial Airplanes to deliver between 485 and 495 airplanes during the year with a combined 20 to 30 787 and 747-8 deliveries weighted more towards 747-8.

Commercial Airplane revenues remains at between $36 billion and $38 billion for the year as improved service revenues is offsetting the lower forecasted deliveries.

Commercial operating margin guidance has been increased and is now expected to be between 8% and 8.5%, reflecting the strong performance on production and service programs and the lower planned development program deliveries.

We expect Commercial operating margins during the second half to be lower than the first half, driven by dilution from the 787 and 747-8 deliveries and higher fleet-to-port costs, somewhat offset by lower research and development expense and higher volume on production programs.

Defense, Space and Security revenue has narrowed to between $31.5 billion and $32.5 billion, reflecting increased clarity around the current business environment on 2011 results.

Operating margins are expected to be approximately 9%, reflecting the strong performance and execution on production and development programs during the first half of the year.

Defense, Space and Security operating margins during the second half will be lower than the first half, driven by deliveries up AEW&Cs and international tankers with lower margins.

We continue to expect operating cash flow for the year to be greater than $2.5 billion and 2011 research and development expense to be between $3.7 billion and $3.9 billion.

Capital expenditures in 2011 are now expected to be approximately $2 billion, reduced from approximately $2.3 billion as some expenditures have shifted into 2012.

We continue to expect Other segment expense for the year to be approximately $250 million and unallocated expenses to be about $800 million.

The effective tax rate forecast for the year is unchanged at approximately 34%.

Now, with that, I'll turn it back over to Jim for some final thoughts.

Jim?

Thanks James.

This is clearly an important year for Boeing.

We remain focused on completing our development programs and getting these new and efficient products into the hands of our customers.

At the same time, we are working in a very disciplined manner to increase commercial production rates and execute our Defense, Space and Security strategy, all aimed at meeting the marketplace demands.

With a good start to the year based on our continued focus on productivity improvements, cash management, and disciplined execution, we are on track for a strong 2011 and well-positioned to deliver value to our stakeholders in the years ahead.

With all of that said, we'd now be glad to take your questions.

(Operator Instructions).

Rob Spingarn, Credit Suisse.

Good morning Jim and James.

I'd like to ask a comprehensive question on the 737 re-engine, and so it is a multiple part but I think it's important.

Knowing that you haven't launched the aircraft yet, I suspect there's still some detail framework around it in order to -- since it was the key I think to the American win.

So could you add some more color on the following items?

First, the configuration, is this an engines-only exercise to mitigate cost, and how should we think about the R&D profile and CFM's share of that profile?

Then what are your market expectations for this model, in particular for the near-term domestic competitions?

Then finally if you could clarify American's comment that it doesn't expect to receive delivery of this model until 2018, suggesting that it is not the launch operator while it may be the launch customer?

Thank you.

Let's see.

I'll start at the beginning.

As I may -- as I said in my comments, because I anticipate there may be more than one question on this, so I'll try to sweep a number of these in.

As most of you know, as I said in my remarks, we spent the better part of the last year, 18 months pushing hard on both options.

[Is] the new small airplane largely a technical and production question re-engine largely a marketplace acceptance question because the do-ability of it technically is less costly and has less risk.

I think what we've seen over the last I would say over the last two to three months, we've seen the marketplace assessment pushing more for the re-engined option.

We've also been somewhat more mindful of the risks associated with getting a massive new production system up on an all-new airplane by 2019, which doesn't suggest we couldn't do it, but there is more risk as you get deeper into it than perhaps we appreciated at the beginning of the assessment.

You combine these two things and you get to a re-engine decision.

Just to bear on one part of your question, it is largely about the engine.

The configuration that we're looking at is that there will be some systemic impact on parts of the airframe.

But I think I would characterize our strategy as to minimize those while still achieving the kinds of operating efficiency, cash on cash and performance goals that I mentioned in my talk.

I think that's one advantage of this option, quite frankly, is we do have confidence that CFM can produce the engine, and we see very manageable risk on incorporating it into and integrating it into the airframe.

So again -- and we've been studying this for a while.

This didn't occur to us a week before the American Airlines competition.

This is something -- and I would characterize the American Airlines deal as part of a much broader voice of the marketplace that is very highly valuing efficiency today versus more efficiency tomorrow.

You know the environment they are operating in and perhaps -- and we've always said that the last thing we would do is do an all-new airplane if it put a lot of market share at risk in the short and medium term, which gets to the question of would the marketplace wait for the perfect solution further down the road or not?

And so mix that all together and that's where we ended up.

You had one specific American Airlines campaign question, and I've lost it.

Is that, Jim, in the R&D profile, perhaps from James.

James, you can talk to the R&D profile, which is very manageable.

The 2018 is less a function of when we can get the airplane done and more a function of when American Airlines needed the plane.

So --

On R&D, obviously a derivative airplane is a lot less expensive, a lot less risk associated with an all-new airplane, so we will see that the R&D impact of this will be a lot less.

R&D will go down in '12, and as we've told you, I think it would've gone down in any scenario but obviously we will have a better opportunity to do a little better in '12 than we previously thought if we were doing a totally new airplane.

James, you said before that R&D on something like this is something like 10% to 15% of a new aircraft.

Is that fair?

That's probably about right, yes, about right.

Thanks very much.

Joe Nadol, JPMorgan.

Thanks, good morning everyone.

I'd like to dig into pricing a little bit on the ROE to the degree you're willing to share anything.

Airbus has said in the past that they are going to get and are getting a multimillion dollar premium for their -- for the NEO than they were for the A320 Classic.

I'm wondering if you can say and stand today and say that's part of your business model and you will demand a premium for your aircraft.

Then the second part of this is, with that in mind, as we look out beyond the next few years in the 737 but really into the middle part of the decade, how sustainable do you think those fantastic margins are just as you put together the business case?

I think there is no question that we will be delivering significant productivity to the airlines with a re-engined product.

I think the fuel efficiency is -- and this is fairly conservative -- is in the 10% to 12% range.

Operating cost improvements are also significant.

So an airline in a perfect world would be willing to pay for that.

We expect to capture a large part of the value in the pricing.

Obviously -- and that's our plan.

Obviously, the competitive element campaign to campaign can get in the way of that, and that's reality.

But that's another reason, I think, to take -- to find a sweet spot of a lot of value but with manageable financial and technical risk.

That's the approach we take.

But we expect -- we plan on and we expect to get value.

You are right, Joe, that we are at a I don't want to say high watermark, but I want to say pretty robust level now that we've been producing this plan for a long time.

I think those margins are sustainable.

Okay, thank you.

Ron Epstein, Bank of America Merrill Lynch.

Good morning Jim and James.

Sorry to keep beating on the 737 horse, but kind of back to that.

I think I understand why the 737 re-engining decision was made, but I guess it's not clear to me how it was in that timeframe.

Can you speak to what is the broader strategy for Boeing in the narrow-body market?

By doing the re-engining you presumably aren't going to do the new airplane, which was presumably going to be bigger.

So how do you solve the we need a bigger narrow-body problem with this?

It just seems like it was done kind of last-minute under duress in a campaign.

Can you speak to that?

Yes, I do understand where that question comes from.

I think -- but I do want to emphasize again that we have been studying the re-engine option to the same degree that we've been studying a new airplane option for the last year or more, so this was not something that we sidled up to at the last minute.

Admittedly, though, our view of the marketplace changed over the last three months, I would say.

As I said in the answer to the last question, I think the significant economics that we can deliver with a re-engine are more highly valued over the next five to seven years than even better economics after that point.

This is in-depth discussion with customers and one of which was American Airlines.

But believe me, that was not the only customer we talked to.

We also validated that the re-engine could deliver the kind of numbers I alluded to earlier.

You wrap that all -- that combined with not having all the answers we wanted on the production system to support an all-new airplane in hand I think that -- so the technical risk kind of moved to the right and the marketplace moved to the left, if I can phrase it that way.

That's why we made the call we did.

If I may, just one follow-on on American.

It's become clear Airbus had to use their balance sheet to close the deal with American.

I think they're going to be leasing them a bunch of airplanes.

Is Boeing Capital part of the American deal or not?

How much did you have to use the Boeing balance sheet to close the piece of the deal with American that you did?

I thinking American's announcement said that both of us played significant roles in the financing.

Obviously, we provided some lease backstop financing for this transaction.

We anticipate, though, that it's -- that as we have in most cases over the years, that we'll be able to work with partners to offload parts of it, the extent to which we have to take significant parts of it.

That's yet to be discovered but we have some -- we have a high degree of confidence there.

I can say, for us, Airbus will have to speak for themselves, but I can say for us the commitments we made are very manageable within the context of our overall financial strength.

And so we're very comfortable with it.

Thank you.

Joe Campbell, Barclays Capital.

Good morning.

It's actually Carter Copeland and Joe Campbell.

Good morning.

Just a quick question, Jim and James.

I want to revisit the comments you made about the tanker.

You said that the program was not in a forward-loss but the press reports indicate that you've informed the customer about overruns.

So if nothing changed in your estimates but you're overrunning as the press report suggests, does this mean you're always planning on overrunning, or how do we square that commentary?

I think, first and foremost, there aren't an overrun on the program.

If we were overrunning it, we would have a forward loss which we would have to take.

I think where the question gets in is between target costs and the total value of the contract.

We had always bid this contract thinking that, on the EMD phase, it would be a very low profitability or breakeven and that the profit would be generated as we started producing the tankers [the] 179.

So nothing has changed from that philosophy; nothing has changed from our bid.

I think what you're hearing is that it's the target versus the ceiling.

Now they're reporting, James, that you have informed the Air Force that you will be over ceiling.

Is that incorrect?

Ceiling being the target you're talking -- we're not going to be able to (multiple speakers)

No, over ceiling, the ceiling being the point at which the Air Force has no further responsibilities for the overruns.

No.

I think what you're referring to are the (inaudible) expenses that are absolutely allocable to the contract but are paid on a quarterly basis.

Those aren't inventory.

We have assumed that other parts of [Dennis'] business will accommodate those as those are incurred and are charged off here on a [period] expense base.

So it is the case that you've told the Air Force you're going to be over ceiling but for our purposes -- so for the Air Force purposes, you're going to lose money, but for our purposes, you're going to breakeven.

On the EMD phase only is what we're assuming today.

But the incentive nature of the contract, obviously we'll be working hard to improve that cost performance over time.

Thank you for the clarification.

Doug Harned, Sanford Bernstein.

Good morning.

I'd like to go through the 787 right now because there has been a lot of news lately, and I'd just like to understand where we are on a number of things such as there have been press reports regarding the stoppage of the line on the 787, about slowdown in your ability to take the production rate up on the airplane.

There was one about delay from the -9 to 2014.

Could you describe where these things stand right now, because there's a lot of information out there and it's very difficult to tell what's accurate and what's not.

Yes.

Listen, our projections as to the ramp certification and deliveries are the same; we have not changed any of those.

So just as a framework for the answer I'm about to give you, we did take a 20-day pause to rebalance the line, all within that guidance.

I view that as good news.

I mean, the facts are we have broad visibility across our supply chain now and when we need to take a pause to rebalance it, we know -- we do it early.

We get rebalanced, and we're almost done with this -- the 20-day rebalance we've done now.

The only thing worse than a rebalance is to not rebalance.

You pay for it in cost and schedule in a big way later.

So we are pretty agile now to rebalance quickly, and it will be a positive over the life of this program and through the ramp that we're accomplishing because a couple of places got out of sequence and a couple of places got -- didn't meet their objectives on completed work.

That's all healing up now.

Listen, we could do it again sometime over the next year or so where we'd have to get in balance.

That's how you have to manage this kind of supply chain.

So that's -- I think we've been fairly open about this 20-day thing.

I don't know where this -9 rumor -- I guess there was -- I guess in New Zealand there was, just looking at maybe the same press that you're looking at, there was a comment that there was worry that the -9 was pushed into 2014.

I'm not sure where that came from, but our ramp plans on the -9 are in place.

It's going well.

As you know, we have the surge line in Everett as protection should we get into a stutter-step mode there.

Surge lines also there by design to protect against any hiccups in Charleston as we ramp up.

That's the whole strategy.

Right now, our projections have us in good shape.

So that's -- if you were looking for something else in answer, ask specifically, I'll see what I can do.

You have -- haven't you taken down your projection for at least for 2011, taken down the top end of your 87 and 47-8 deliveries?

Yes.

Are you seeing something that's slowing a little bit, or is this just a minor change?

I think we're 25 to 30.

I would view it -- I would characterize it as a narrowing of the projection, holding onto the base projection, but it's well within the guidance that we started the year with.

So it doesn't represent any new issues on your side, whether it's with respect to production, supplier issues, and so forth?

I think we always anticipated that we'd have some rejiggering and some rebalancing of the line.

It's just the nature of ramping up a supply chain like this.

I think the extent to which you've seen it, it was, while not specifically anticipated, it was, in general, anticipated.

Very good.

Thank you.

Howard Rubel, Jefferies.

Thank you very much.

I do want to sort of -- hi Jim and James.

Just to follow a little bit more on 78, one of the things is I would say we've died a cut -- whatever -- we've suffered a number of let's say pauses, delays, ups on the 78.

The reality is we can allow for some of these misses, but it still seems unrealistic that you're going to get to your ramp rate, given all of what I'd say these pauses.

So could you give us a little bit more color as to why you can get, Jim, to some of these higher rates?

All of these -- the airplanes are later than I think you would've thought at the beginning of the year, especially if you wanted to target towards the mid end of that range.

Listen, the reason we feel that way is the data suggests that it's accomplishable.

It's one of the components of that assessment.

The components of that assessment are the healing up and the ability to ramp further of our major supplier partners.

We are in a pause right now to get that healed up.

As I said before, that could happen again and not threaten the overall ramp rate.

It helps your ability to get there.

Another component is the modification work being done on the airplanes that are already built.

We've got a very systematic way to go about it, a factory within the factory in Everett, some help in San Antonio.

The statement of work is clearly understood.

Now that we're at the very end of the flight test program, there is -- the additional engineering input which drives some of that work is going to go away.

So, that really becomes a known statement of work, just get through it.

Is it manned adequately, resourced adequately?

We think we've answered those questions.

So is it a challenging ramp?

Yes.

Do we think we can do it?

Yes.

It's because we analyze the data and try to understand the amount of work and project that we can make it.

Jim, just related to that and then I am done, is the R&D -- the R&D spend so far is averaging closer to $4 billion for the year rather than sort of where you've -- the range you've targeted.

I would sort of think the low end of that range is probably on the highly unlikely unless there is a fairly sharp completion on both the 78 and 74 in the very near term.

Can you help me with that?

Yes, I can help you with that.

We obviously are looking to see that the certification effort is over at the end of August.

We're going to see the engineers get moved off of that program, and so we still think that, given what we see and what we know and it goes as planned, that we'll get into the guidance range in R&D.

Thank you gentlemen.

Cai von Rumohr, Cowen & Co.

Yes, thank you.

A follow-up of the 737.

You won't -- you say you need Board approval, but do you look to kind of take additional commitments for the plane before that Board approval if Delta, United, Southwest, other candidates come forward?

Secondly, I was a little surprised by your statement that R&D would be down more next year as a result of a decision to go derivative versus new, because derivative basically delivers earlier versus all new.

My assumption was you weren't going to really (multiple speakers) until late 2013.

So how come the R&D is less?

I didn't say that.

I said R&D will still come down next year.

I didn't say that --

Would it be down more (multiple speakers)

It will still come down next year.

What I did say was that the expenditure profile for the development effort now that we are looking more at a re-engine versus a new airplane will be less.

But R&D will come down about the same as we've always thought.

So basically there's no difference between the two in terms of the R&D next year.

Next year, correct.

Then the other question, you don't commit to the Board until this fall, but should we expect additional commitments between here and there as other airlines make decisions?

Yes.

Obviously, the Board is aware of the direction we are taking.

I think you never want to out-run your board, though, in terms of getting the formal approval you need.

I would expect that we would be receiving that soon.

We are working through that now, and it's just a matter of, as I mentioned, formalizing the final configuration and therefore documenting the business case and crossing all the Ts and dotting all the Is and giving the Board an absolutely thorough look at what the impact will be.

Okay, thank you.

We're going to keep talking to customers.

Heidi Wood, Morgan Stanley.

Yes, a question on the 737.

Last year, you walked away from a Ryanair deal that we all applauded you because you weren't going to do uncompetitive deals.

This year, the American [Ts and Cs] look significantly less attractive.

Can you, Jim, walk us through why the deal terms are becoming so unappealing in a time when demand for product is so high?

Help us think about why AMR isn't a harbinger of price wars, again considering United, Delta, Southwest and Ryanair.

Talk about how you retain profitability as these planes deliver.

Yes, I think the -- I don't know how much you know about the Ryanair deal.

It wouldn't surprise me if you know more than I think you do.

Having said that, walking away from the Ryanair deal last year was the right thing to do.

It didn't -- that business case did not close for us or for Ryanair, so it was one of those things that didn't make sense.

This one does.

I would say that obviously the American competition did get pretty heated as Airbus, who hadn't sold planes there in a number of years, wanted to come in and get market share and did get some market share there.

It was pretty aggressively priced but not irresponsibly priced from our standpoint.

Airbus can speak for themselves.

What I can tell you is that this is a very profitable deal for us and for American, so it's one of these good deals for both sides.

So I'm not uncomfortable with the pricing level there, but I think the competitive dynamics were a little more intense there because of the early Airbus move.

Great, thanks very much.

Ken Herbert, Wedbush Securities.

Good morning.

Thank you.

Just again a follow on question on the 737.

You've talked about narrow-body rates now a few times getting up to the 50 to 60 range.

As you think about the cost profile of this program, how should we think about understanding, considering some of the limitations up in Renton, how narrow-body production may evolve to potentially support obviously some of your -- maintain some of the margin while at the same time looking at the kind of rates you've thrown out there for the next five to ten years?

Yes.

We haven't made the final decision where we're going to produce the re-engine airplane.

Your question implies, though, that after the 42 a month, we do run into some challenges if Renton were the choice, some capital expenditures there to increase it.

But we have other options and we're going to study them all as we think it through, but demand could easily be that high in the time frame we're talking about.

The good news is we have options.

Great.

So it's fair to say that you've got options, obviously.

To what extent could potentially South Carolina step in and meet some of that -- meet some of the demand for you?

Well, it would depend as we studied it how competitive they could be as compared to a Renton or compared to another site.

I think we would study it all and come up with a decision that makes the most sense for our customers and the Company.

Great, thank you very much.

Rob Stallard, RBC Capital Markets.

Thanks so much.

Good morning.

Jim, we've obviously had a lot of talk about the re-engining.

But I was wondering if you could give us an idea of what you think the demand environment is there out there for this aircraft, what sort of level of launch orders we could be expecting over the next 6 to 12 months, and whether you think your current market share can now be held at this level.

We believe our current market share can be held.

We think there is robust demand for the re-engined airplane.

I mean I think the operating economics, we're in a bit of a sweet spot with the engine with GE and Snecma in the sense that some of the technology insertion plans they have peaks at a good time in terms of engine performance.

Given our strategy to incorporate the new technology efficiently yet minimize the systemic impact in other parts of the airplane, I think it presents kind of a low-risk, low-capital way to access this market growth as opposed to a much longer cycle, much more expensive, new small airplane.

But the demand is there, I'm convinced of it, particularly in the developing world as well as coming on strong in the United States.

Thank you.

David Strauss, UBS.

Good morning.

Jim, following on that question, you talked about the re-engined airplane, some of the operating economics, kind of in absolute terms.

Can you talk about what kind of operating economics you think this airplane will have relative to the Neo?

I think you've spoken in the past that you actually think that on a cash operating cost per seat basis that the NG actually still has better economics than the NEO.

As a follow-up question, can you give us a time frame when you expect to make a decision on the exact fan size that's going to go on -- that you put under the wing of a re-engined airplane?

Yes, I think as to the first part of your question, let me just get into the end zone quickly.

Based on the data we've got and the customer data we've got, we believe our re-engined airplane will be -- have roughly the same margin of capability over the Neo as our current airplane has over the current A330, which is sort of a 2%, 3%, 4% depending on the mission, depending on the model cash-on-cash gap.

So we plan on, based on all we know now, of retaining that gap is one way to think about it.

The fan size, we have studied a number of options on the fan size very thoroughly.

We've also studied some elements of core configuration too.

So trust me when I tell you that this has not gone unstudied.

We are centering now, the two teams, on a favorite configuration that we've been working on.

It would be premature to mention right now what it is until we get -- until we've got the approval and customers know specifically about it.

But I think we are in pretty good shape there.

We have centered on an option that makes sense to us.

Noah Poponak, Goldman Sachs.

Good morning everybody.

I want to ask a multi-part question on margins.

So first, in the quarter, was there anything one-time in either BCA or [BAS]?

Secondly, the BCA new full-year guidance implies you do 8 even in the back half versus 10 for in the second quarter.

You mentioned conservatism around 78 and -8.

In the past, you've actually quantified specific contingency.

If you have that, that's identifiable and quantifiable, I would love to hear that.

Then as we look longer-term beyond '11, James, when you think about the mix of ramping your profitable legacy programs, the R&D tail end and then the offset of the dilution from 78 and -8, can you speak to the degree of margin expansion you think you can achieve at BCA in the next couple of years?

On your first part of your question, the one-timer on -- that we had in the quarter really related to BDS.

It was the -- what I had mentioned earlier, the sale of property and then also we had a closeout of the operating contract at ULA and gave them the more favorable performance.

So I think when you take that out, you're about the run rate we see them going for.

With BD -- BCA, it's more driven by a number of things.

First of all, we're going to have a pretty significant impact to margins associated with the dilution as we start delivering 787s and 747-8s.

That will be somewhat offset by reduced R&D, but we will also have an increase in the fleet support effort associated with that, so those two will balance.

So, you are going to see margins in the second half of the year mitigate in BCA, and I think we'll come in at our total year at what you see at the guidance range.

Going forth, as we see ramp-up on all of these programs, what we think is going to happen, particularly on the current production programs and their level of maturity, what we'd like to see happen is to sustain the kind of profitability we have today.

As Jim just talked about, we are -- we do have pricing pressure that we are assuming in the margins today.

We talked about that earlier, that there is going to be some pricing pressure and we understand that.

So the plan would be, going forward, is to sustain the margins.

Obviously we'll have less R&D next year, but we will still have some in-service costs associated with fleet support with the 87, and then we'll start up on the new development program on re-engine.

So we're going to get to -- we'll have to figure out next year what our operating R&D rate is going forward.

We'll give you that update once we know it, but I think, if you look at the gross margins on our program, the strategy is to sustain them, not to expect that we're going to have a significant amount of increase except for obviously the development programs, but as they ramp up, we would expect better margin performance from them.

Can I ask you to specifically quantify the BDS items in the quarter, and then also the fleet support and what it is in '11 and what you think it is in '12?

I think I did quantify -- or I didn't quantify, just told you what it was.

It was about $40 million for about both.

And fleet support we don't specify.

We will tell you what the total is.

We don't specify by program.

Operator, we have time for one more analyst question.

Sam Pearlstein, Wells Fargo.

Good morning.

I did want to ask a question somewhat related to the 737 but more broadly, which is how you think about the prioritization going forward and a 777 refresh, and even the thought of a new single-aisle airplane?

Just because my thought was part of the appeal of a 737 new plane was that you would not go so long in between all new aircraft developments and run into the problems you've had on the 787, given that gap from the 777.

If you do a re-engining forward, doesn't it mean the next all-new airplane could potentially be ten years away once again?

I think the -- you're right.

There is a balance between the risk associated with various developments, which tends to favor modification and higher-risk developments, all new airplanes, which tend to engage more of your workforce.

We are very mindful of that.

I think where the re-engine leaves us is, first, we have to execute that.

That is -- I characterize it as lower risk, but none of these things are low, low risk.

So there's going to be a significant amount of engineering talent.

GE (inaudible) (technical difficulty) in here to get that done properly.

We will probably turn more quickly to some significant modification on the 777, which will involve a lot of engagement of our workforce.

I would say the two projects after the re-engine that we have to sort out would be the -10 on the 787, which is a further stretch of that airplane, and then some degree of refurbishment, as I just said, on the 777, which could range from a small to large if -- and we're sort of waiting to see what the A350-1000 is or isn't to make that judgment.

I think you always want to plan conservatively, so we're planning on the modification being somewhat significant.

Those kinds of modifications are almost the same as new airplanes in terms of the kind of people you need to employ and the scope of the work.

Then there will be, obviously as we get into the next decade, the choice on the all-new narrow-body versus an all-new wide-body and -- but there'll be a lot of work in the meantime to keep our folks busy.

Does that mean that the R&D profile doesn't fall over the next, say, 5-plus years as much as it might have under the prior thinking?

I think the -- our take is that, at least in our minds, and are mindful that we haven't given you guidance, okay?

So I'm sort in -- except the directional guidance over the next year or so.

But our R&D profile has not changed significantly based on the reprioritization of the re-engine versus the NSA.

There are plenty of things for our people to do, and I think the net impact would be the upfronting of some wide-body work and pushing out of some narrow-body work, given that we're doing a smaller scope project versus a bigger scope project on the NSA.

I think that -- and so therefore -- and plus there is some advanced work.

You mentioned the 787 and the struggles we had with that development.

That was as much about not getting technology that we wanted to inject into the next airplane matured properly as it was about some issues on supply-chain execution.

So, we're going to be doing more work on technical maturation, just fundamental work.

When you add that all up, our LRBP hasn't changed in terms of R&D.

Thank you.

Ladies and gentlemen, that completes the analyst question-and-answer session.

(Operator Instructions).

I'll 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 have a few remaining minutes for questions for Jim and James with the media.

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

Operator, we are ready for the first question.

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

Josh Freed, Associated Press.

Good morning.

Can you say to what extent the NLRB proceedings are a factor or affect your thinking in deciding where to do additional narrow-body production down the road?

I think the NLRB case, we remain highly confident that, at the end of the day, that we will win this case.

That's obviously a legal judgment.

It will take a lot of twists and turns and it will probably have to get in, in the worst case, get into the federal courts for that judgment to be made.

So given that confidence that we are doing the right thing not only for our Company but within the law, we're -- we're continuing to invest there.

We're continuing to hire new people as we grow our Company and as we grow exports for this country and provide employment.

We're going to do that in South Carolina.

Depending upon how it goes, we'll have to see how competitive the factory is.

We're going to invest to make it as competitive as we can and -- but I'm -- I think it's fair to say that just getting the 87 done over the next few years is a big challenge and we are going to succeed.

But over the next few years, I don't want to dilute the effort down there with other new airplanes right away.

So it could be an option down the road on re-engine, but it's not at the top of the list right now.

Okay, so does -- how about in terms of the impact of the preceding on the decision itself?

Is that something that is sort of keeping your options open as a means?

Zero.

Zero, okay.

Zero impact.

Sorry, I answered the wrong -- I answered it rather eloquently but I answered the wrong question, yes.

It was a great answer.

It was just fine.

Thank you so much.

Zero is the answer.

Susanna Ray, Bloomberg News.

Hi Jim.

I have two questions.

I hope that's okay.

First of all, I'm wondering if you can elaborate a bit on what the impact of the 787 production (inaudible) management decision because I did note for example that the most recent production (inaudible) decision was made at about the same time frame as when you (inaudible) plane.

Then my second question in that 747 certification, I know the 87, you said the end of August, and I'm wondering if that's true for the 47 as well, if they are still neck and neck, or if the (inaudible) pulled ahead and if so why that is.

No, they are both neck and neck.

Both by the end of August is what the current data says.

As to your first one, I think you said -- you may be on a cell phone so I -- there really is no connection between the 787 supply chain ramp-up and our 737 production ramp program.

So the -- any (multiple speakers) --

No, the re-engining decision.

No connection, no connection.

Different marketplaces, different products.

Our decision, as I have mentioned, was based on, on the 737 was based on a combination of technical and marketplace assessments and had nothing to do with the 787 in our minds.

Okay, thank you.

Dominic Gates, Seattle Times.

Good morning.

Hi.

I have a question for Jim.

I'm just a little surprised to hear you opening up this option.

You need to produce 50 to 60, or you hope to produce 50 to 60 narrow-bodies by the end of the decade per month.

And so you're now talking about possibly not doing the re-engine in Renton.

That just seems such a surprising thing to bring up.

You've got your most efficient line of all your aircraft programs.

You've actually got a third line which does have the complication of that being an ITAR line, but it seems like, in Renton, you do have all the options you could possibly want to make that airplane there.

So are you seriously considering doing the re-engine somewhere else, like Charleston doesn't even do metal airplanes, or are you just -- is this a matter of wanting to keep your options open?

What's the effect on the morale on your Renton workforce when you raise this what I would have to call a specter of putting work elsewhere?

Listen.

Renton is one of the great aerospace factories in the world, okay, so obviously the idea of putting a lot of work -- a lot of narrow-bodies there is very attractive.

I think the spirit in which I was answering the question was until we have sorted out the milestones associated with the ramp-up, the degree to which we have to modify the airplane, there would be major investments in Renton beyond the currently planned production rates.

Until we sort that all out, we can't confirm where we're going to put it precisely.

But would putting it in Renton be a good option?

Yes.

Would you say it's -- all your supply-chain conversions in Renton, you've got complete fuselages coming into Renton.

To put it somewhere else means having Wichita send it wherever.

It seems like more investment to do it elsewhere.

Would you think that Renton is the most likely place?

Well, listen.

I think, until we study it all, obviously Renton is -- has a strong case.

But again, Dominic, there is significant investment beyond the -- that we'd have to make someplace beyond the current rates that we're contemplating.

Until we understand exactly what the plan will be and at what rate we have to build it, it's -- I think we have to study that and figure it out.

Okay, thanks.

Molly McMillin, The Wichita Eagle.

Good morning.

I just had a quick question.

I'm wondering are you seeing any continuing problems on the 787 as far as structural problems on the wing box or anyplace like that?

There's kind of a rumor and I just wanted to check it out.

That's a fair question.

We are seeing no structural issues.

I think the issues that we're working through have to do with the assembly of the airplane and the manufacturing of it.

We're going through that in a very rigorous and disciplined way to get to where we need to get to.

But structural, there were largely through flight test and through static test which surfaces -- which is designed to surface looks kinds of issues.

We're getting to the very end of that, and there is no major or minor structural issues that I know of.

Okay, thank you.

Jeremy Lemer, The Financial Times.

Hi there.

You mentioned the 20-day pause that you've taken on the 787 and you mentioned there was some slack in the schedule.

How many more pauses do you think you're able to accommodate within the existing ramp schedule for the 787 without having to push back any parts of that schedule?

How did your suppliers respond to those -- that pause?

Were they left holding some inventory that you haven't paid them for yet?

What was the impact there?

I think those that needed the time reacted very favorably to it.

Those that were ready to go did -- that's why we went to a planned pause, so that people could manage their inventory as well as they could.

But it's -- I don't know that there will be more positives.

I think one of the judgments you make with a pause is that you are, in effect, accelerating the schedule when compared with the case of not doing the pause.

Okay?

So it's not as simple as adding 20 days to whatever schedule you're on.

It's a matter of getting rid of significantly more risk by adding 20 days, and it's -- we are getting closer to having the balance we need.

Thanks.

Glenn Farley, KING Television.

How you all doing this morning?

So to go back on some of the analyst questions about the new small airplane, you've done all this work to it, a considerable amount of work from my understanding, not just by what you said today but what we've heard from the engineering team and others over the last year or so.

So essentially what happens to it?

Does it just go off into space someplace, or is it a real viable option to be picked up maybe five or ten years down the road?

Yes, it's more of the latter.

I think a lot of the work which was developmental work -- I'm mean we're not -- you know, we weren't to the point of bending metal or forming composite or anything like that.

It was mostly advanced kind of work.

That work will be very valuable when -- and will be updated based on experience we've got with the 787 because a lot of the technologies came out of the 787 development.

There'll be at -- that's often the way it works in the aerospace world.

It's -- it will be re-looked at in advance and somewhere down the road after we re-engine, an all-new airplane will become the right thing to do.

We'll be better off at that point because we've done the work we've done over the last year and a half than we would be had we not done it.

Thanks.

Jon Ostrower, Flight Global.

Good morning gentlemen.

Can you speak to your credibility and the Company's credibility on the current 787 delivery projections?

Over the last several years, we've really seen the forecasts that are really quite divergent from reality.

(inaudible) CFO said last week that he expects the first -9 an undefined point in 2014.

What kind of assurances are you giving your stakeholders about your latest plan?

Well, I think it's -- the way I look at it is the closer we get to the end of certification, the better we get the production system in alignment, the better we are able to predict and reaffirm its -- the schedules.

Are there some risks?

Yes.

This is not an easy business to always get precisely correct, as you have noted from time to time.

So -- but the -9, just to refresh, the -9, our guidance is end of '13.

That's a delivery.

Air New Zealand is one of the very first customers to get the -9 and it takes a while to induct these things into service, so I don't know whether there's a disconnect between when we deliver it and the time he takes to get it into the fleet or not.

I don't know what he meant by that.

But we have not changed our schedule.

In terms of the 737, Airbus is offering their two new engine choices as options.

Is the LEAP-X going to be an option for the 737 or are you expecting a full production changeover?

I'm sorry, are you saying -- are you asking whether we're going to have two options on the airplane?

No, is the customer selection for -- to go with the re-engined 737, is that going to be a full switch-over in production or are you expecting that choice as an option in (multiple speakers) and also in conjunction with today's next-generation 737?

That's one of the things we have to sort out as we go through the timing of the requirement of our customers.

It will be obviously an option and we'll dovetail it into the schedule as it makes sense, both us and our customers.

But we don't have that question finally answered yet.

Thanks.

Operator, we have time for one last question this morning.

Ted Reed, TheStreet.

I have questions about the American order.

The first one is there's been a suggestion in some corners in Wall Street that American's financial situation is precarious, so I assume we can take your deal with American as showing strong confidence in American's financial future.

Secondly, more importantly, Gerard Arpey has said on several occasions that the deal, the favorable deal with you and Airbus, was enabled partially because American didn't file bankruptcy like its competitors did.

He said our track record certainly had an influence on Boeing and Airbus.

Can you speak to this?

Did it have an influence and in what way did it influence the deal?

Thank you.

Yes, sure.

Yes, we have confidence in American Airlines.

It's one of this country's and one of the world's great airlines.

But they have been managing a difficult financial equation, but they have been doing it well.

And so I think our confidence in them is high, but also the confidence in our own hardware is high.

So in the event of some delays or in the event of some financial turbulence with American, we will work with them, but we also have confidence that, if for some reason they don't need the airplanes, that we'll find places to put them.

I don't want to speak for them in terms of how they enable their financial equation.

All I know is that we're working with them in a way that is also mindful of our financial situation, and we're doing things that we think can help a good customer but not in any way impair a very strong balance sheet that we have.

[Does] not filing bankruptcy make them seem more reliable?

It certainly speaks to the strength and focus of that management team.

I give them high marks for managing through a tough time and keeping the team with them.

Thank you.

That concludes our earnings call.

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

Thank you.