波音 (BA) 2015 Q3 法說會逐字稿

Thank you for standing by.

Good day, everyone, and welcome to the Boeing Company's third-quarter 2015 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'm turning the call over Mr. Troy Lahr, Vice President of Investor Relations for the Boeing Company.

Mr. Lahr, please go ahead.

Thank you, and good morning.

Welcome to Boeing's third-quarter 2015 earnings call.

I'm Troy Lahr, and with me today is Dennis Muilenburg, Boeing's President and Chief Executive Officer; and Greg Smith, Boeing's Chief Financial Officer.

After management comments, we'll take your questions.

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

We have provided detailed financial information in today's press release, and you can follow the broadcast and presentation through our website at Boeing.com.

Before we begin, I need to remind you that any projections and goals in our discussions today are likely to involve risk, which is detailed in our news release, various SEC filings and the forward-looking statement disclaimer in the presentation.

In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of non-GAAP measures that we use when discussing our results and outlook.

Now I'll turn the call over to Dennis.

Thank you, Troy, and good morning.

I'll start with some comments on the quarter and our business environment.

After that, Greg will walk you through details of our financial results and outlook.

With that, let's move to slide 2. Boeing delivered strong third-quarter operating performance, with 9% revenue growth, 10.2% core operating margins, 18% growth in core earnings per share, and operating cash flow of $2.9 billion.

Given our operating performance in the quarter, we are raising 2015 guidance for revenue, core EPS and operating cash flow.

This performance and confidence in our long-term outlook continues to support our commitment to return cash to shareholders, while also making strategic investments to grow our business.

Year to date, we have returned nearly $8 billion to shareholders through share repurchase and dividends.

This remains a priority under our balanced cash deployment strategy.

Revenue at Boeing Commercial Airplanes increased 10% on record deliveries of our industry-leading product family.

During the quarter, we delivered our 325th 787.

We began final assembly and achieved power-on for the 737 MAX, completed firm configuration on the 777X.

And successfully concluded final testing and began implementing the advanced automated fuselage production technology on the 777 line, which will improve safety, quality and flow time, and insure a smooth transition to the 777X.

Boeing Defense, Space & Security grew its top line by 6% on higher revenue at Boeing Military Aircraft and Network & Space Systems.

Key contract awards during the quarter included an order from India for 22 Apache attack helicopters and 15 Chinook heavy-lift helicopters, and a contract from Japan for five B22 tilt-rotor aircraft.

We also received a contract from the US Navy for 13 additional P-8A Poseidon aircraft.

Significant defense program milestones included delivery of the first two of 12 EA-8 Growlers to the Royal Australian Air Force, and the start of flight testing of the first full-up KC-46A aerial refueling tanker.

During the last few weeks, we have successfully deployed the tanker's refueling boom and its centerline and wing refueling drogue systems multiple times over a broad range of flight conditions.

While more work remains ahead, these early accomplishments represent significant risk reduction and real progress on the flight test program.

In summary, we had another strong quarter of operating performance and cash generation.

With that, let's turn to the business environment on slide 3.

The commercial airplane business environment generally remains healthy, driven by improving airline profitability, solid air passenger traffic and meaningful replacement demand.

Air cargo traffic remains a watch item for us as the gradual market recovery continues amid modest overall global economic growth rates.

Airplane order activity and customer discussions are continuing at a moderated but historically healthy pace.

Deferral requests and cancellations remain well-below the historical average.

In the single-aisle segment, demand for our new fuel-efficient 737 MAX remains high, with cumulative orders totaling nearly 2,900 airplanes from 58 customers.

Given the strong market demand, we continued to see upward pressure on narrow-bodied production rates beyond the announced 52 per month in 2018.

However, we remain steadfast in our financial discipline as we assess the market demand for further production rate changes.

During the third quarter, we made the decision to increase the 767 production rate to 2.5 per month starting in 2017, driven by ongoing strong demand for the 767 freighter on top of the existing planned tanker production base.

This is a testament to the compelling value proposition that airplane brings to the market.

Demand also remains strong for the 777X, with a backlog of 306 aircraft from six customers.

On the 777, we have 44 orders in commitments year to date, including the two 777-300ERs announced last week for EVA Airways.

Our 777 backlog stands at 235 aircraft, with production for 2016 essentially sold out and 2017 production more than half sold.

With firm configuration of the 777X complete and our manufacturing advancements taking hold, we are now working to finalize the production plan to phase in this new technology.

We will also continue to assess 777 supply and demand to maximize airplane profitability over the transition period.

On the 787 program, EVA's decision last week to also purchase up to 24 787-10s is evidence of continued strong market demand for the Dreamliner.

The 787's backlog of nearly 800 orders fully supports our planned production rate increases to 12 per month in 2016 and 14 per month later this decade.

We have now delivered more than 330 787s, including more than 50 -9s.

Turning to Defense, Space & Security, we continued to see solid support for our major programs.

Congress has been supportive of the President's FY16 DoD and NASA budget request increases to core Boeing programs, including the P-8A Poseidon, the F-18 Super Hornet, Apache and Chinook helicopters, and the NASA space launch system.

International demand for our offerings remains strong, particularly in the Middle East and the Asia Pacific region.

During the third quarter, international customers for Defense, Space & Security represented 35% of revenue and 40% of our current backlog.

The strength of our defense and space business stems from our investments in technology and innovation that have established a portfolio of reliable, proven and affordable products and services.

We continue to invest in organic growth areas that are priorities for our customers, such as commercial derivatives, space, unmanned systems, intelligence, surveillance and reconnaissance, and the critical few future franchise programs, like Long Range Strike and the T-X trainer.

Teams throughout our Company also continue to ensure our long-term competitiveness by driving further safety, quality and productivity gains to improve program profitability and fund investment in future growth.

In summary, our team is executing on our business strategy by growing revenues, generating solid operating performance and capturing strategic new business.

Now, over to Greg for our financial results and our updated guidance.

Greg?

Thanks, Dennis.

Good morning, everybody.

Let's turn to slide 4 and we'll discuss our third-quarter results.

Third-quarter revenue increased 9% to $25.8 billion, driven by record commercial airplane deliveries.

Core operating margins of 10.2% reflect solid execution across both businesses.

Core earnings per share for the quarter increased 18% to $2.52, reflecting, again, continued strong core operating performance on production programs and within our services businesses.

Let's now discuss Commercial Airplanes on slide 5. For the third quarter, Boeing Commercial Airplanes revenue increased 10% to $17.7 billion on a record 199 airplane deliveries.

BCA operating margin of 10% reflects strong execution, offset by the impact of higher planned R&D spending and increased 787 deliveries.

Commercial Airplanes captured $13 billion of net orders during the third quarter, and backlog remains very strong at $426 billion and nearly 5,700 aircraft, equating to more than seven years of production.

Specifically on the 787, we continue to expect the program to be cash positive in the fourth quarter, and we still anticipate deferred production to decline shortly after we achieve the 12-per-month production rate later in 2016.

No change to these fundamental milestones.

We continue to see progress in the key operational performance indicators for the 787 program as we implement additional production efficiencies, while meaningfully increasing 787-9 production.

As planned, the 787-9 production rate and deliveries are now outpacing 787-8.

This is a testament to the team's detailed advanced planning and day-to-day execution to ensure smooth transition and ramp-up of the 787-9.

On the 787-8, we have continued to make progress on unit cost reduction, where we've now seen a decline of approximately 40% over the last 230 deliveries.

We've also made further progress on 787-9, where we now have had more than 30% cost reduction over the first 50 deliveries.

Driven by continued cost reductions, a healthy mix of -9s and the benefit of favorable timing on quarterly spending, the 787 deferred production increased $577 million to a now balance of $28.3 billion in the third quarter.

We continue to anticipate 787 deferred production growth to further decline in the fourth quarter.

We still have work ahead of us on the 787 as we remain focused on the solid day-to-day execution and risk mitigation, while improving the long-term productivity and cash flow going forward.

We will continue to manage the smooth ramp-up of the 787-9 production, prepare for the 12-per-month introduction, and introduce the -10, while again, driving efficiencies across all aspects of the program.

Let's now turn to slide 6 to discuss Defense, Space & Security results.

BDS reported strong rules in the quarter, with revenue increasing 6% to $8.4 billion and operating margins of 12.2% on strong performance and a favorable delivery mix.

Boeing Military Aircraft third-quarter revenue increased 15% to $4.1 billion, largely driven by F-15 contract negotiations.

Operating margins were 12.2% in the quarter, reflecting higher volumes and strong performance.

Network & Space revenue increased 5% to $2.1 billion, driven by commercial crew volume.

This segment also generated strong operating margins of 11.5% on favorable mix and productivity improvements.

Global Services & Support revenue declined to $2.2 billion, largely driven by timing of deliveries, while operating margins were strong at 12.9%.

Defense, Space & Security captured $9 billion of orders during the quarter and reported a solid backlog of $59 billion.

Let's move to cash flow now on slide 7. Operating cash flow for the third quarter was strong at $2.9 billion, driven by higher volumes and solid operating performance.

With regards to capital deployment, we paid $618 million in dividends and repurchased 11 million shares for $1.5 billion in the third quarter, as we continue to deliver on our commitment of returning cash to shareholders.

Year to date, we've returned $8 billion to shareholders through dividend and repurchased 41 million shares.

Again, this reflects our commitment and confidence in the long-term outlook for our business.

Returning cash to shareholders, along with continued investments to support future growth, remain a high priority for us.

Let's now move to cash and debt balances on slide 8. We ended the quarter with $9.9 billion of cash and marketable securities.

Our cash balance continues to provide solid liquidity and positions us well going forward.

Let's now turn to slide 9 and I'll discuss our outlook for the balance of 2015.

Based on the strong operating performance year to date, we've increased our 2015 guidance for revenue, operating margins, core earnings per share and operating cash flow.

Core earnings per share guidance for 2015 has increased $0.25, to now be between $7.95 and $8.15 a share, on continued solid execution across the business.

The Company revenue guidance has increased $500 million, to now be between $95 billion and $97 billion, on higher commercial airplane deliveries.

ECA delivery guidance has increased now 5 airplanes, to be from 755 to 760.

Defense, Space & Security operating margin guidance is increased to approximately 10%, again reflecting strong operating efficiencies across the business.

Operating cash flow has increased to approximately $9.5 billion on improved performance across the Company, as well as favorable timing of receipts and expenditures.

Furthermore, we're lowering our R&D guidance $100 million, to now be $3.4 billion for the year, to reflect timing of spending.

In the fourth quarter, we expect ECA margins to be impacted by the strong operating performance, somewhat offset by delivery mix and higher planned R&D spending on 777X, as well as additional investments in productivity initiatives.

So in summary, we generated solid revenue growth and healthy operating margins, while generating significant cash flow.

We meaningfully returned cash to shareholders and invested in our future.

And with that, I'll turn the call back over to Dennis for closing comments.

Thank you, Greg.

With three solid quarters behind us, we remain focused on disciplined execution, quality and productivity improvements, and meeting customer commitments.

Our priorities going forward are clear and consistent: the profitable ramp-up in commercial airplane production; delivering on our development programs; continuing to strengthen our defense and space business; driving productivity and performance throughout the enterprise to fund our investments and innovation; talent and technology; and importantly, providing increasing value to our customers and our shareholders.

Now with that, we would be happy to take your questions.

(Operator Instructions)

Our first question comes from Doug Harned with Bernstein.

Yes, good morning.

Good morning, Doug.

I'm going to probably violate this a little bit because I wanted to get some clarity on the deferred production ramp as part of this question.

So when you look forward, you're talking about being cash positive in Q4 on the 787.

My understanding was that would be followed by a plateau in 2016, and then that would ramp down as you took rate up toward the back part of 2016.

I just want to make sure that, that is still how you're thinking about this.

And then -- ?

Yes.

That is how you're thinking about it?

That's exactly right, and that remains consistent, and we're confident in that profile.

Okay, great.

Then the second part is, when you look out toward the end of the block, when we look at this, the deferred production level suggests to us that when you get in the later portion of the block, you're going to have to have unit cash margins move above 25% for the program.

Now that's a pretty good number, and what I'd like to know first, is that correct?

And then second, how do you see the path to getting there?

Well, Doug, I won't get into the specific program-by-program margin.

But I will give you a sense of, I'll say, the few areas that are focused on -- that have been in the past and will be the path forward to continue to drive 787 profitability.

Certainly productivity, continuing to come down the learning curve internally.

You heard us talk about the progress to date on the 787-9 and the 787-8, so that's got to continue, and we've got a lot of projects in-work.

We've got to get those matured and we've got to get them cut in on line numbers.

So there is not a lack of, I'll say, focus and ideas in that area, but we've got to get them matured and get them in.

But continuing to execute as we have on the productivity.

Mix plays a big factor in here.

So our ability with a richer mix of dash-9s and -10s.

And quite frankly, as you've seen the dash-9 get entered into the production system as smooth as it is, is another, I think, indicator of that mix coming together.

And keeping in mind, this is all in our backlog, so this is delivering on the backlog.

But getting that smooth introduction and having that richer mix of dash-9s and -10s will obviously grow as you get further out in that cost base and deliver on that backlog.

The supply chain -- obviously we've got planned step down and contractual step down, but we've also got initiatives that we're working together in the Company and across the supply chain, looking for additional productivity ideas.

And keeping in mind, there's only been 300 units built here, roughly.

And a very steep ramp-up, and a lot of change in rate break.

Having -- being stable at 10, and now making that transition up to 12, this is when you look -- historically, this is where you've been really able to capture additional productivity gains.

So we're working with the supply chain on that.

And then rate.

As you know, we're going up in rate, and it will total about 40%, going up to 12 a month in 2016, and then 14 a month later in 2019/2020 timeframe.

So making good progress on getting up to rate within the supply chain, as well as getting the factories ready internally.

Again, this is delivering on the backlog, and you know the market, and so that supports these rate increases very much.

But again, that will continue to drive productivity.

And then I guess the only comment I'd make on the margins, I'd say they are similar to what we see today on our wide-body programs and what we're achieving.

So I'd say good progress to date, a lot of work ahead of us to do, teams got good plans in place, but we need to keep executing as we have.

And that will be the path going forward.

Doug, just to add a little more color to that.

As Greg said, in each of those dimensions, we have real and firm actions underway.

I can tell you for myself, Greg, Ray and the whole team, this is a very important, high-priority focus area for us.

And in each of these productivity dimensions that Greg talked about, the advantage we have here goes to the fact that we've got 800 of these aircraft, roughly, in backlog.

So this gives us the opportunity to do that long-term planning and engagement, and to drive profitability with that long-term view.

And that is what's going to drive us down the learning curve to get to those objectives that Greg mentioned.

As part of that trajectory, then presumably you still have a number of contractual step-downs in the supply chain that you're looking forward to and that you have a pretty good handle on, I guess?

We do, Doug.

And that includes the over-arching Partnering for Success umbrella that we've talked about before, that includes committed step-downs that are in the plan, and a continuing effort to drive value generation.

So our value engineering effort that we've talked about before with our supply chain network, more than a thousand ideas in the pipeline right now that we're moving from design stage to implementation stage.

So both planned and committed step-downs, as well as additional value generation beyond that.

Okay, thank you.

Our next question is from Howard Rubel with Jefferies.

Thank you very much.

Dennis, you recently extended the 787-10 with a new customer, and you've done a number of things with the 777 to enhance it as a value proposition.

Could you address a little bit the market dynamics you see because of the capabilities these new airplanes offer, and how you see the environment for both the 777 demand and also the 9 and the 10?

You bet.

Thanks, Howard.

So yes, just stepping back -- and I know there's been a lot of discussion out there about the wide-body marketplace and the prospects going forward.

And let me paint for you a market outlook there, and then hone in on those two specific airplanes in particular.

But if you take a look at the overall market, we continue to see a growing healthy marketplace.

As we said before, our current market outlook for 38,000 new airplanes over the next 20 years in total.

We continue to see strong passenger growth, independent assessments, again, of 6% year-over-year growth throughout the time period.

Cargo growth has been more moderated, and has been a bit slow to recover, as you know, but we are seeing some recovery signs there.

If you take a look at overall market characteristics, we continue to see a strong healthy marketplace, both narrow bodies and wide bodies.

If you take a look at replacement demand, it continues to be strong.

We expect about 40% of those aircraft in that market outlook to be driven by replacement demand.

As I said cancellations and referrals remain below historic levels, as well.

So the market fundamentals remain strong.

Now, when we get to the two products you mentioned, on 787, as noted, with 800 aircraft in backlog and a continuing strong market demand -- and I think EVA's decision here just in the last couple of weeks to acquire 24 787-10s is just another good sign of the value that, that product is bringing to the marketplace.

The 787 is delivering value for our customers.

The value proposition is clearly a competitive advantage, both in terms of operating cost reduction, as well as the advantage on revenue and cargo volume, and residual value that it brings to the customers.

And with the production efficiencies that we're generating, we remain very bullish on 787.

And as Greg talked about, our plans to ramp up to 12 a month and then to 14 a month before the end of the decade, all supported by strong market demand and a unique value proposition of that airplane.

On the 777, we've been very focused on building out the 777 bridge, as we've talked about.

We needed to generate about 40 to 60 orders per year on the current 777 to build that bridge; year-to-date, we've got 44 orders and commitments.

So we're continuing to fill out that bridge.

In essence, the 777 line is sold out through 2016, more than half sold in 2017, and we continue with a number of serious campaigns there, all bridging to the 777X.

And as you pointed out, the 777X is bringing, again, a unique value proposition to the market.

Both today's 777 and the 777X have really no pure competitor, and bring unique value to our customers.

And 777X having just completed firm configuration, good solid signs on development program being executed on plan, and we plan to have EIS on that airplane 2020 as scheduled.

So in all cases, a strong fundamental market, the right differentiated product line -- both 787s and 777s -- and very mindful right now about building a bridge from the 777 to the 777X.

If I just may, on the 78, initially you had teething pains introducing it into the market.

Could you just for a second -- and then I'll end here -- address both the stats reliability and how you've improved that, and how that's also helped lower both airline costs and your costs?

You bet.

And we continue to see strong progress.

And you're right, we had some challenges as we introduced that airplane into our customer fleets.

And we've been very focused on reliability improvements both in the field and in the production line.

We've seen steadily improving dispatch reliability across our customer sets, and we're pleased with the progress there.

That said, more work to go, so we're not done.

And we're going to continue to drive dispatch reliability there for our customers until we achieve the objectives that we have.

So more work to go.

I will say that reliability improvements that we've delivered to date in the field, and then have back-driven into the production line have really taken hold.

And the best sign of that is with the roughly 50 dash-9s that we delivered.

As they're hitting the fleets, they're coming in at a much dispatch reliability than the original dash-8s.

So just further proof that the investments we're making are delivering value for our customers.

And we're going to stay very focused on getting to the finish line there.

Thank you.

Our next question is from Myles Walton with Deutsche Bank.

Thanks, good morning.

Good morning.

Greg, maybe one for you.

I know timing around advances is something that's generally hard to predict.

You've put out there a placeholder of $3 billion for 2015.

And year-to-date, that hasn't really contributed much.

And if you look at the fourth quarter, obviously that came through.

It's hard for me not to think you'd be running $1 billion-plus ahead of your revised guidance.

So can you help give either the offset, or if that is more or less just conservatism around not knowing when that $3 billion is going to tick?

You said it, Myles.

They certainly do move around.

I still expect it to be a positive contributor to 2015, but timing does factor in, so we should have more in the fourth quarter.

But I think stepping back from that, you can see, it's about the strength of the cash engine here, and not the reliance on the advances.

Obviously advances are important, but when you look into the core of the Company, you're seeing strong cash flow generation.

And that's the big focus area for us.

And as you said, advances, they're going to move around quarter-to-quarter, and we will have a few more here in the fourth quarter than we have in the third quarter.

Even with the tick up in the revised cash guidance for this year, the outlook is still growth into 2016 from the new level?

Yes, as you step back and you look at the long-term profile of the Company, we still see the same opportunity to have strong cash flow growth going forward.

It really plays into certainly the production rates increases that we've talked about on the 737, the 767, and as well as on the 787 over the long term.

And obviously 787 improving through that period.

So over the long term, we're confident in the long-term cash flow growth, I'll say, story that we have in place, and it's a unique one when I compare us to other industrials.

Great, thanks.

Thanks.

We'll go to Sam Pearlstein with Wells Fargo.

Good morning.

Good morning.

Dennis, you've talked about in the past being able to get mid-teens margins within the BCA business.

And I guess I'm wondering how comfortable you are still with that?

And how do things like the 777 transition and volume and actually lower commodity prices -- which should be lower escalation -- how does that play into it?

What does it take to get those kind of margins in BCA?

Sam, good morning.

Yes, we remain focused on that aspirational target.

As we've talked about before, we see margin growth in BCA as an important priority for us.

You're seeing it in the data and the results that we're producing.

The productivity actions that Greg described earlier are all part of doing that.

Part of it is productivity efficiency inside our own factories.

Another key portion of that is within our supply chain through our Partnering for Success effort.

But if we take the longer term view of what our Company can and should be, getting to that mid-teens margin range is an expectation and aspiration that we set for ourselves.

And I think that's a smart and aggressive target for the long term.

We're going to stay very focused on it.

As Greg has said, with the backlog that we have and the product line that we have, our opportunity to generate long-term cash growth and long-term margin accretion is very strong.

And we are taking the right productivity actions, both internally and externally, to do that.

And that will result in increased return to our shareholders, and it will allow us to fund and invest in our future innovation and talent.

So we are very focused on doing that, and remain steadfast on that longer-term target.

Now, regarding your question around 777, as we think about that transition, obviously a key topic for us here as the 777X will begin coming into the production system in the 2018 timeframe, leading to EIS in 2020.

As I mentioned earlier, we're building the 777 bridge with today's current product line, leveraging the fact that airplane does provide a unique value proposition in the marketplace.

We're thinking carefully through exactly how we do that transition and the timing of it.

As we've talked about before, it's important that we do that efficiently.

We're trying to pull ahead some of the technology investment in the line, like automation in the fuselage line, to de-risk that transition.

And as I mentioned earlier, we've already implemented that automation here in the 777 line on the fuselage upright build, and that's going well.

So that's another way to de-risk that transition and ensure profitability through it.

There's been a lot of conversations out there about exactly what the shape of that transition might be, and we're factoring in market demand.

As I said, some uncertainty around cargo recovery.

Frankly, some uncertainty around Ex-Im Bank reauthorization.

Those are factors that could cause some customers to delay decisions around wide bodies, so we're being mindful of that.

We want to make sure we maintain a highly profitable line through the transition.

All of those factors are going into our planning right now.

Frankly, with that, we don't see any scenarios where we would come down below a seven-a-month production rate during the transition.

Important again to remind ourselves that 2016 is essentially sold out, 2017 is more than half sold out, so this transition that we're talking about is a 2017 and beyond transition.

And through all of that, we're going to drive this in a way that maximizes profitability of the line through the transition, allows us to continue to invest in the future.

And my broader comments about continued cash growth and margin accretion over the long term, all account for that 777 transition.

So that's all factored into our bigger game plan.

Thanks.

And Greg, I don't know if you can mention anything about the commodity cost and how that affects the escalation and your assumptions in the program accounting?

Did it have any effect this quarter?

No, it didn't Sam.

It didn't have much impact at all.

Thank you.

Thanks.

Our next question is from Cai von Rumohr with Cowen and Company.

Yes, thank you very much.

Could you comment whether there were any adjustments to commercial blocks or accrual rates?

And then relatedly, Dennis, you talked about moderated order strength.

Are you still looking for book-to-bill to get to 1.0 for the year?

Because it looks like you're going to have to move pretty quickly to get there.

And if so, how does the Chinese order play into that?

And what are the implications of getting there or not getting there, in terms of potential profitability, looking forward?

Thank you.

Cai, let me take the second part, and then I'll flip it to Greg for your first question.

So regarding book-to-bill for the year, again, we continue to see book-to-bill of approximately 1 for the end of the year.

As I mentioned, some hesitancy right now in the wide-body marketplace around cargo recovery and uncertainty with the Ex-Im Bank.

That's causing some customers to pause a bit on decision-making, so it's more of a timing issue, rather than a volume issue.

So we still anticipate book-to-bill to be roughly 1 by the end of the year.

Some decisions could slide into the early part of the new year.

Frankly, with about 5,700 aircraft in backlog, annual book-to-bill ratios are not that important to us.

We're continuing to generate orders pipeline, but timing quarter-to-quarter, if it happens to shift a bit with the kind of backlog we have, we remain very confident in the long-term plan.

As you mentioned, the recent announcement by our customers in China was very positive for us.

We were honored to host President Xi at our factory in Everett a couple weeks ago.

Amongst a number of agreements, that included an announcement around 300 aircraft -- 250 narrow bodies and 50 wide bodies.

Some of those are airplanes that were already in backlog but unidentified.

Others are incremental new commitments.

And we'll be working through the specific deals on those airplanes with our customers over the next many months, and we'll announce those as they come to fruition.

But that will generally create upside to our book-to-bill posture for the end of the year.

Greg you want to take the first part?

Yes, on block extensions, we extended the 737 by 200 aircraft; so one block extension there.

And then with the increased demand and outlook on the 767, we increased that as well by 34 units.

As far as change in booking rates by program, no significant changes I'd say, Cai, across the board.

Thank you very much.

You're welcome.

Our next question is from Jason Gursky with Citi.

One quick clarification question, and then the meat of one.

Dennis, you mentioned the rate of seven a month on the 777.

Would you be firing blanks in that environment?

That's the clarification question.

And then the meat of the question is one for Greg on CapEx out into the future.

Can you talk about the puts and takes that you're likely to see over the next couple of years on CapEx?

Yes, Jason, on the first question there, yes, that will be factored into the overall transition plan.

As you're well-aware, that's a very common practice for us as we transition model mixes in our high-volume lines.

As we go from 777 to 777X, where we can pull technology and implementation ahead, as we're doing with automation, we will.

That will make the transition even smoother.

In some cases, we will fire selected blanks down the production line.

That, again, will help us smooth out implementation and insure lean implementation.

Note that we'll also have some 777 flight test -- excuse me, 777X flight test aircraft that will flow through the production system in that same timeframe.

So all of that will be factored into the production profile and the transition plan.

But again, as I said, we looked through all of the options and variables here, both from a market demand standpoint, from a production efficiency standpoint.

We don't see any scenarios that would take us below a seven-a-month production rate.

And we're very confident that we can achieve that implementation, remain very profitable on that line while we do it, and successfully bring the 777X to the marketplace.

And Jason, on CapEx, we'll expect to go up slightly next year from our levels this year.

And again, that's supporting the growth in the production rates we talked about and further investments in the defense business, as well as some of the productivity initiatives.

So further implementation of the automation activity on the 737 and the 787 will also be put into play there and, again, supporting 777X, as well as the planned production rates.

And then I would say past 2016, then we start to come down and moderate from there is really, again, linked to our growth and linked to our investment profile.

Okay, that's helpful.

Thanks, guys.

Okay, you're welcome.

Thanks, Jason.

We'll go to Ron Epstein with Bank of America Merrill Lynch.

Yes, good morning, guys.

Good morning, Ron.

Quick question for you, for Greg.

When you think about balancing near-term capital returns to shareholders versus long-term value -- and in the context of this is, I'm thinking about the share buybacks.

Year-to-date, you guys bought back -- what, if I did the math right -- 41.5 million shares for about $6 billion, right?

Yes.

That implies an average cost of maybe $144 to $145 per share.

Yes.

That's within about 10% of the historical highs of the stock.

How do you think about that?

Well, we think the stock is still undervalued.

And again, I think it goes to the marketplace that Dennis talked about.

It goes to the strength of the backlog, which then links right to the production rates that we have announced, that are, again, delivering on that backlog.

So it's that profile, along with the productivity expectations year-over-year.

So we obviously see a lot of value still left in this stock.

That's why we bought back $20 billion in the last three years and remain committed to that.

At the same time, we remain committed to the dividend, to ensure that we're competitive from the dividend perspective, as well as investing in the business.

That's been first and foremost for us, investing in things like 777X, like the MAX, like 787-9 and -10.

And these rate increases along with, again, efficiencies, automation, that we're putting in on 777, we're putting in on 737.

And then additional investments we're making down in Charleston to support, again, productivity and rate increases.

So that's the kind of profile we see that gives us the confidence to continue to buy back these shares, but have a balanced deployment plan to meet all of our objectives.

Great.

If I may, just a follow-on, seeing that everybody else asked about five questions.

How do you guys think about the middle-of-the-market airplane?

That's something we've been thinking about a lot, and there's been a lot of chatter about that in the industry.

How do you think about as a potential market opportunity, and what investment would be required?

We still see that as a niche market, but an important one, and we're having conversations with our customers.

We see today that, that market space is largely served by our 737 MAX 8 and 9 family, and on the upper end, by the 787.

And we think that, in large part, serves that market space.

It's important that a lot of our customers, their buying behavior and their needs, are related to families of aircraft.

And we still see in that narrow-body marketplace the MAX 8 as being right at the heart of the market, augmented with the MAX 9 to serve some of those needs that are in that more of the middle-of-the-market segment.

So for the near term, we see our current product line as being the right answer for that segment.

That said, we're continuing to have conversations with our customers.

And if we need to respond with a new airplane in that marketplace, that would be something that would be more towards the middle of the next decade.

It's not something that would dramatically affect our R&D profiles over the next four to five years.

We think those profiles are very solid, with our current development programs.

But it is something we're keeping an eye on, continuing to talk with our customers, understand their needs, and if the market demands a response, we'll be ready.

Great, thanks a lot.

Our next question is from Seth Siefman with JPMorgan.

Hi, thanks very much, and good morning.

Good morning, Seth.

To get in on the 787 a little bit more and what you expect in Q4, not to nitpick too much, but you've talked in the past about a healthy decline in the deferred growth in Q4, but now we're starting from a lower level.

So maybe just a little more color on how to think about that?

And then if you could explain a little bit about the dynamics as we head into 2016, and why it plateaus for a little while before going down at that 12-month?

Sure, we'll see a decline in deferred in the fourth quarter, I'd say, similar to the rate of decline you've seen in this quarter.

And Q3 certainly was helped by strong performance, but we did have some timing of expenditures as well.

So we had a little bit of, I'll say, favorable pick-up in the third quarter.

But again, I think when you step back and look at the overall profile or deferred to date, it's better than what we originally projected.

And then as you move into 2016, Seth, as I said, you'll start to see that turn once you hit the 12-a-month.

So the growth will moderate obviously into the fourth quarter, and then through into 2016 until you hit that rate, and then that's when we would expect it to turn.

And that turn down, again, is driven by the rate, as well as the step down on the supply chain, the contracted step-down pricing and the continued productivity.

But also that mix.

I mean, ensuring that we've got -- that dash-9 continues to come into the production system as it has.

So those are, I'd say, the key indicators or key levers as we move into 2016.

Thanks very much.

You're welcome.

Next we go to Carter Copeland with Barclays.

Good morning, Dennis and Greg.

Good morning, Carter.

Greg, I wondered if we could go back to the margins for a second.

I noted you extended the block 200 units on the 737, but no material margin increase there.

I wondered why that was?

I assume that would be all MAXs.

And then on the 777, Dennis, your comments about trying to maintain that margin rate to the extent possible.

You obviously have some pretty significant extra costs there when you transition over the surge line from the 787 to the 777.

Is it that, that cost is in the 777X block -- or it's called R&D?

How should we think about how you manage the two different programs going down the same line, because there's obviously significant costs there?

So any color would be much appreciated.

Let me -- if you're all right, I'll answer the MAX question.

Go ahead, Greg, yes.

It was a slight pick-up, Carter, but again, 200 units on a large block.

So there's a lot of moving pieces in there.

There's some investment in there for additional rate increases in productivity.

So when you net that all out -- again, not a significant change on overall booking rates for the quarter.

But positive?

Yes.

Okay.

To your second question on 777, so as you noted, the R&D investments, the CapEx investments we're making to bring 777X online, are all part of the profile that we shared with you in terms of our total R&D and CapEx investment.

Where we can pull those forward and pre-implement on the 777 line to reduce risk, like the fuselage upright build.

We are doing that.

But all of that is included in our total investment profile for 777X.

All right, thanks, guys.

You're welcome.

Our next question is from Steve Levenson with Stifel.

Thanks.

Good morning, everybody.

Good morning.

Could you please expand your comments on the upward pressure on single-aisle rates?

And can you let us know if there's any pushback from the supply chain, particularly on engines?

Yes, when you take a look at the market there, Steve, it continues to show signs of strength and growth.

What we're seeing from customers in terms of market demand, especially for the 737 MAX, continues to be a positive sign for us.

We've told you we're at 42 a month now, we're ramping to 47 a month, and 52 a month by 2018.

Those are committed plans that we have in place.

We continue to do studies on possibilities of ramping up beyond that.

As I said earlier, we're going to maintain very strict financial discipline as we do those studies, being very mindful about it.

We are still in a slightly overbooked position, in terms of our order profile for the 737.

And all of that just creates general upward pressure to production rates.

We're going to be very fiscally responsible as we consider those options.

Again, our committed plan takes us out through 2018, so we have time to consider these alternatives beyond that.

The other thing that I'd like to factor in is the 737 MAX development.

The fact that we've achieved power-on, on the first airplane, that final assembly is on or ahead of schedule, also gives us confidence in terms of the airplane coming together and being ready for EIS with our customers.

So both the development program progress, as well as the market demand signals, show us that narrow bodies are a very robust market for us, both short and long term.

Again, any pushbacks from suppliers?

Well, we continue to talk to our supply chain.

Certainly, it's ramping up to the degree we're ramping up is something that we have to pay attention to.

And our supply chain is letting us know where they see pressure points and where we need to work together.

Nothing that I would say is out of the ordinary.

These are normal ramp-up pressures, and we know how to do these rate ramp-ups.

We've done more than a dozen over the last few years.

We've got a few more important ones ahead of us during the next five years.

But working across the integrated supply chain and making sure they have the capacity and the capability to deliver on our needs is an important part of the equation.

That's one of the things we factor into our committed plans.

We remain very confident that our supply chain can meet our ramp-up to 52 a month on the MAX.

If we were to go beyond that, factoring in supply chain capability is a key component of that decision.

Again, we have plenty of time to make that decision with the committed plans we already have in place.

Got it.

Thank you very much.

Operator, we have time for one more question.

That will be from Rob Spingarn with Credit Suisse.

Thank you, good morning.

Good morning.

Dennis, I wanted to ask you on the buyback.

But before I get to that, just a quick question for Greg on the F-15, and then I think there was some C-17s that were pre-built but delivered in the quarter.

So Greg, the question there is, how much cash did the F-15 deal -- I think it's about a $700 million contribution to revenue.

But those two items -- how much unusual cash did those provide in the quarter?

And then Dennis, for you, given that you have pretty good visibility into what your program investment looks like over, let's say, the next half-decade with the MAX, the 777X, and it sounds like 757 replacements in the plan, but doesn't really ramp until after that.

Given that, can we expect that your buyback at the current levels should continue unabated going forward -- roughly those levels?

Greg, why don't you take that?

Yes, no impact on cash on the F-15, Rob.

And then, I'd say, very insignificant on the C-17.

Okay.

And to your go-forward question, Rob, again, as we look at priorities for cash deployment over the next several years, top priority remains organic investment.

And this is delivering on our development programs like the 777X, the MAX and the 787-10.

We're confident in that.

And as we said before, with the phasing of those programs, our R&D profile year-to-year we expect to remain consistent.

And so that should give you confidence that our R&D foundation is not going to vary significantly year-to-year.

That will be a foundational investment that's built into the plan over the next five years.

Second priority, as we said, is returning strong value to our shareholders, both in the form of dividends and share repurchase.

We expect that to continue to be a strong component of our overall cash deployment over the next many years.

And then thirdly, any targeted actions we might take in the M&A arena -- acquisition arena -- that would be a third priority in that list.

So we're going to remain very focused on those priorities.

And the fact that we expect long-term cash another will allow us to fuel both those future investments and things like share repurchase.

So Dennis, to just close the title loop on that, borrowing big M&A forward-year should really not look any different than now, from a buyback perspective, or perhaps higher, given that you're ramping?

I'm not going to give you guidance to specific numbers, Rob, but share repurchase and dividend strength over the long term will continue to be a high priority for us on cash deployment.

Okay, 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 will continue with the questions for Dennis and Greg.

If you have any questions following this part of the session, please call the Media Relations team at 312-544-2002.

Operator, we are ready for the first question.

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

We'll go Julie Johnsson with Bloomberg News.

Hi, all.

I just wanted to circle back on 777 rate, and follow up with a 747 rate question.

I just want to make sure I understand this.

Are you studying taking the rate to seven a month or planning to?

And would this be effective in 2017, or are we looking more at 2018 for the triple?

And on 747, obviously, the cargo market is not helping order activity with that plane.

Are we potentially looking at taking the rate below one a month?

Let me field the first one there, and then Greg, I'll ask you to touch on the second one.

Julie, regarding 777, as I said, we're doing our scenario planning right now that includes market demand and feedback we're hearing from our customers.

It includes the value proposition of the 777 and the 777X.

And I want to stress again that, that airplane is providing an absolutely unique value proposition in the marketplace.

It's differentiated and our customers see it.

And then also doing an efficient and profitable transition from 777 to 777X.

So those are all things that we're factoring into our plan.

We haven't finalized that plan yet.

We're working through a variety of options.

But as we look through all of those options, we don't see any scenarios that would take us below a seven-a-month production rate.

So we wanted make sure that was clear, as there's been speculation about what option range we might look at.

We see that as a floor for our planning, given all of the scenarios we're looking at.

Specific timing -- implementation is yet to be finalized.

We're working our way through those details.

Those will be decisions we'll have to make in the first part of next year.

But I'll stress again that we are sold out essentially through 2016, more than half sold out through 2017.

So what we're talking about here is a transition that's out 2017 and beyond, and we would get into the meat of that in the 2018 timeframe.

So more details to be worked through, but we remain confident that, considering all of the factors I talked about, that we'll be able to profitably go through that transition and bring the 777X to the marketplace.

Julie, on 747, as you know, this has been a challenging marketplace recently.

And we took the -- we announced taking the rate down from 1.3 to 1 a month early in 2016, so we continue to monitor that marketplace.

It is challenging right now; it is driven by the market.

It's a great airplane.

It's an airplane that sits in a class within itself, whether it's an I or a freighter, so this is certainly market dynamics.

We've got a pipeline of customers we're looking at.

But again, having said that, it's a challenging marketplace for the airplane.

So we continue to watch it, and at the same time focus on productivity within the factories and the supply chain.

And we'll likely take another look at the rate here early next year and see where we are on orders and backlog, and move forward from there.

But right now, the plan is to hold at 1 a month

Our next question is from Doug Cameron with the Wall Street Journal.

Good morning, everyone.

I know you must be pretty exhausted at that defense question at the end of the analyst call, but hopefully you'll indulge me.

Given the amount of portfolio-shaping that's going on amongst the [prime's night], Dennis, how comfortable are you with the shape of the BDS right now, particularly on military aircraft and space?

And are you comfortable with that regardless of what happens with some big upcoming contest?

Yes, Doug, we are.

And as I said before, we have a strong, robust, healthy defense business.

It's a tough marketplace, and we've acknowledged that.

We're dealing with the realities of sequestration in the US defense budget, somewhat offset by what we've seen as international defense growth, especially in the Middle East and the Asia Pacific regions.

But our defense business overall is a healthy portfolio.

We like the program structures we have, we're growing internationally and we're investing for the long run.

That marketplace is somewhat muted, so we expect that business to be relatively flat to slight growth, top line.

In parallel with that, we're continuing to drive bottom-line performance, and you saw it in the results here with a 12.2% margin quarter in our defense business.

So that's a robust, important part of our portfolio.

We have differentiated product lines on things like commercial derivatives, the P-8 and the tanker, which present us with opportunities for longer-term growth and leverage -- the one Boeing value, if you will, across commercial and defense sectors.

We're continuing to invest in future product lines around human space exploration, satellites.

We're investing in unmanned systems and ISR capabilities.

And importantly, we are investing for some critical franchise programs for the future.

You alluded to that, but programs like long-range strike, the new TX trainer, are important.

And one of the reasons we continue to drive productivity is so we can invest in those future product lines.

And we don't see a need to significantly change the structure of our defense business.

We're going to stay very focused on executing the business, investing organically, and where we can make targeted acquisitions to round out our portfolio, we'll continue to do that.

Our next question is from Dominic Gates with the Seattle Times.

Good morning, Dennis and Greg.

Good morning, Dominic.

I just want to clarify a couple of things about the 777 rate question.

The EIS for 777X is 2020, but presumably that's going to ramp up over several years.

So the first question about the bridge is, how far beyond 2020 are you still having to fill a bridge for the current 777 model?

And then secondly, you gave us some reassurance that the floor for the production rate in the bridge is seven a month, but you also mentioned firing blanks in that.

Can you give us some idea, like, how many blanks are we talking about?

If it was one a month, that's very different from one or two a year.

So give us some guidance there?

Dominic, to the first part of your question, when you look at the duration of the bridge, you're right.

777X EIS is in 2020.

As we said, the bridge we're trying to build with the current 777 is roughly a five-year bridge, so it takes us to that same timeframe.

The depth of that bridge is most significant in the 2018-2019 timeframe.

So we're very focused on filling that out, and we need about 40 to 60 aircraft per year over that five years to fill that bridge.

So that effort continues to press ahead.

Now when you think about the transition and production rate, the fact that we'll fire some selective blanks through the line, that is not a high-volume decision, to your point.

This is something that we'll do selectively as we bring lean implementation online and the new production rate.

We haven't finalized exactly how many that will be, but those are incrementals, not a sustained activity.

And then also mindful that we will have 777X flight test aircraft -- typical numbers of flight test aircraft, principally in the 2018/2019 timeframe -- that will be within that production line as well.

So both of those are being factored into the profile.

Our next question is from Alan Scott with Reuters.

Hi, can you hear me?

Yes.

Okay.

So I wanted to come back to the 787, Dennis, and ask -- and also Greg -- how far do you think you can keep increasing the deferred production costs?

Are we nearing the upper limit of what you can reasonably defer without taking a charge?

And if we're nearing that, how do you think about whether you need to increase the accounting block or at what point you may need to take a reach-forward loss?

On the deferred, I would say, Alan, that the profile hasn't changed, the key milestones haven't changed.

The growth will start to moderate again in the fourth quarter.

And as I've indicated, once we hit 12 a month, that's when the deferred will start to turn.

I'd say all the key contributors to that unit cost, the mix, and again, getting to the 12 a month, which again, we're making good progress in that area.

So those are all of the key items, I'll say, contributors to that.

But the funnel of milestones in the profile of that has not changed from what we discussed probably a year and a half ago.

Operator, we have time for one final media question.

That will be from Mike [Almedinberg] with Crain's Chicago Business.

Hi, good morning.

Dennis or Greg, Delta Airlines has continued to push this idea that there's a bubble in the wide-body aircraft market.

They compared that segment to the pre-recession real estate market.

Any comment on this take from Delta?

Yes, Mike.

I'll go back to my earlier comments about our broader look at the wide-body market.

We continue to see a very healthy overall marketplace, both narrow bodies and wide bodies.

As I said, traffic growth is sustained, replacement demand is sustained, deferrals, cancellations, below historic levels.

We recognize some of the comments that have come out recently, and believe you're referencing the note around $10 million 777s that might be available.

I'll say, just based on our understanding of the marketplace and what we understand from our customers, that number is of the wrong order of magnitude.

And frankly, the value of the 777 is holding up very well in the marketplace.

It is a unique airplane; in that 365-seat category, there is no competing aircraft out there.

It's a unique value proposition for our customers.

So the values are holding up well in the marketplace.

We are mindful that the cargo market has been a bit slow to return.

We're mindful of the fact that lack of Ex-Im Bank reauthorization is creating some uncertainty and some delays in customer decisions, and so we're considering that.

But if you step back from it, the overall health of the marketplace and the unique value proposition of our airplanes is very clear, and we remain confident in that.

That concludes our earnings call.

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

Thank you.