波音 (BA) 2016 Q2 法說會逐字稿

Thank you for standing by.

Good day everyone and welcome to The Boeing Company second-quarter 2016 earnings conference call.

Today's call is being recorded.

The management discussion and slide presentation, plus the analysts 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 to 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 second-quarter 2016 earnings call.

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

After management comments we will take your questions.

In fairness to others on the call we ask that you 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 www.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 will turn the call over to Dennis Muilenburg.

Thank you Troy and good morning.

My comments today will focus on our second-quarter results, the health of our business environment and our growth plans going forward.

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

Now let's move to slide 2. Our second-quarter financial results included both the continued solid underlying operating execution and strong cash flow performance of our commercial and defense businesses and a substantial impact to earnings from decisions we made on the 787 and 747 programs, and increased investment needed on the KC-46 Tanker program.

I will come back to explain each of those items in a moment, but let me say up front that we are confident that the decisions we made on 787 cost reclassification and 747 production were the right proactive ones to reduce future financial risk and strengthen our position and focus going forward.

The added investment on tanker while not insignificant, enabled completion of important testing while sustaining our view of the long-term multi-decade value this program will generate for our customers and our shareholders.

Excluding those items, both of our businesses produced double-digit margins in the quarter.

And we continued to deliver on our commitments to invest in innovation while also returning cash to shareholders.

We generated $3.2 billion of operating cash flow in the quarter, repurchased $2 billion of Boeing stock and increased our dividend per share 20% over the prior year for a payout of $691 million in the quarter.

Revenue in the second quarter increased to $24.8 billion on strong commercial airplane deliveries and growth in our services business.

We reported a core earnings per share loss of $0.44, reflecting continued solid operating performance across our production programs that partially offset the 787 cost reclassification and the 747 and tanker charges.

On the 787, program during the quarter we reached a decision point on whether to move forward and invest funds for the refurbishment and future sale of the two remaining initial flight test aircraft.

We elected not to do so and subsequently we reclassified unit cost associated with those aircraft from program inventory to R&D expense, resulting in a non-cash $847 million after-tax earnings impact.

On the 747 program we decided to reduce future production expectations and revenue assumptions to account for current and anticipated weakness in the air cargo market.

These program assumption changes drove $814 million after-tax charge on the quarter, these charges also include the write down of the remaining 747 deferred production costs which significantly de-risk the program going forward.

Despite the ongoing challenges of the air cargo market, we continue to see the 747 as a unique and significant value creator for our customers over the long term.

The $393 million after-tax charge on the KC-46 Tanker program reflects our assessment of the cost to address previously announced program schedule and technical challenges, including implementation of hardware solution to resolve the refueling boom, axial load issue identified during flight testing, delays in the certification process and concurrency between late stage development testing and initial production.

To the credit of our team working with the Air Force, the hardware solution to the boom issue worked as planned.

With the aircraft's recent success in refueling an F-16, A-10 and C-17 we have now completed all required testing to receive the Milestone C Production approval from our customers which is expected next month.

Recognizing the risks inherent in the remainder of flight test program, our team is dually focused on the work ahead, on meeting our commitments under the revised program schedule and providing our Air Force customer the best aerial refueling tanker ever built.

While we are reducing core EPS guidance for 2016 to reflect impact of these three items I just covered, we are maintaining our revenue and cash flow guidance based on the underlying strength of our business.

Greg will provide more details on that later.

Now let's look at the second-quarter operating performance for both of our businesses.

At Boeing Commercial Airplanes, second-quarter revenue increased 3% to $17.5 billion on 199 deliveries.

Notwithstanding overall solid core operating performance, the charges and costs reclassification led to an operating earnings loss in the quarter.

Key milestones in the quarter included successfully delivering the first 12 per month rate aircraft on the 787 program.

Declaring the 787-10 production ready, opening the 777X composite wing center, and completing high-altitude flight testing on the 737 MAX which continues to run ahead of schedule.

At Boeing Defense Space and Security, second-quarter revenue was $7.2 billion.

Operating margins were 8.3%, reflecting strong performance offset by a portion of the tanker charge.

Key contract awards during the quarter included an order for 12 CH-47 Chinooks for the Royal Netherlands Air Force and 24 AH-64 Apache Helicopters for the Qatar Air Force.

In summary, notwithstanding the accounting charges and the cost reclassification in the quarter, we had solid underlying operating performance, achieved critical program milestones and returned significant cash to our shareholders.

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

Our overall view of the business environment remains generally positive due to healthy industry fundamentals.

We recently updated our 20 year commercial market outlook, and based on solid traffic growth continued replacement demand we now forecast nearly $6 trillion of demand for 39,620 commercial airplanes, an increase of nearly 1,600 from last year.

Global passenger traffic continues to solidly out pace GDP.

With reporting 6% of growth, year to date.

On the cargo side market the remains sluggish.

With year-to-date freight traffic down approximately 1%.

We continue to keep a watchful eye on global market conditions for both passenger travel and cargo to ensure that supply and demand are balanced, with particular attention being paid to the wide-body segment.

While oil prices have meaningfully rebounded from lows earlier this year, our customers continue to tell us that movements in oil prices have not substantially changed their view on future fleet planning or their commitment to existing delivery schedules.

As always, we see isolated pockets of markets softness such as Russia and Brazil, however we will continue to manage our skylines to maintain production schedules and health.

New order activity is continuing at a moderate but healthy pace as indicated by the flow of announcements at Farnborough Airshow.

As a result of the compelling and enduring value proposition of our airplanes, request to change deliveries are holding well below the historical average.

Over the past 12 months deferrals, accelerations, debookings and cancellations remain at about 1% of our backlog.

We continue to expect commercial aircraft deliveries to ramp up beyond 900 aircraft per year through the end of this decade, driven by ongoing market demand and our sizable and diverse backlog.

Turning to individual airplane programs, demand remains strong for the 737 with a robust backlog of nearly 4,400 firm orders.

We remain on track to raise 737 production from the current 42 per month to 47 in 2017, followed by 52 per month in 2018 and then 57 per month in 2019.

And importantly even at the 57 per month rate, we continue to be over-sold.

Turning to the twin-aisle market, while long-term demand remains strong we have seen some hesitation in near-term demand in recent months, varying by program.

For the current generation 777 our backlog as of the end of the quarter stood at 175 airplanes.

So far in 2016 we have added 8 net new 777 orders and commitments.

For the full year we are targeting approximately 40 orders as we focus on ensuring a smooth, profitable transition to the 777X production.

Our 777 delivery slots are completely sold out for 2016 and more than 80% sold out for 2017.

For 2018 when we will begin phasing in production of the 777X test aircraft we are nearly 60% sold out at the lower plan delivery rate of approximately 5.5 per month.

We're working an active customer pipeline to fill the remaining 2017 and 2018 delivery slots, but we clearly have more work to do over the next few months to hold the current 777 production plans.

With a strong foundation of 306 orders from 6 customers, interest in demand in our new 777X remains high and the development of this next game changing wide-body remains on track.

On the 787 program, our backlog of more than 700 orders remains the foundation behind our production rate plans.

As we discussed at our investor conference, securing additional orders to solidify our end of the decade 14 per month production rate plan remains a priority.

As always, aligning supply and demand to maximize profitability will guide our decisions on 777 and 787 production plans.

On the 747 programs I mentioned earlier, air cargo market headwinds continued to pressure demand and pricing.

So far this year we've captured 4 747-8 freighter orders and continue to work a number sales campaigns to fill the 747 production skyline.

That said, this segment of the market remains challenging.

We will continue to monitor it closely while aggressively driving productivity and cost reduction to win additional orders.

On the commercial services side we continue to deliver on our strategy to grow this element of our business.

We recently announced agreements with 6 airlines from around the world to provide advanced analytics solutions to increase their efficiency in operating over 500 airplanes.

Furthermore, in the largest commercial airplane services deal in Boeing history, Norwegian committed through 2034 to GoldCare coverage for both its 737 MAX fleet, and to expanded coverage of the airline's entire 787 dreamliner fleet.

Our significant global scale and depth, intimate aircraft knowledge and our substantial installed base combined to provide a meaningful opportunity to continue growing our services and support business, including our traditional parts, mods and upgrade business, as well as expanding further into data analytics and information-based services.

Overall, the outlook for Boeing Commercial Airplanes remains positive as we continued to execute on our robust backlog, smoothly transition 737 production to the MAX and complete development of the 777X and the 787-10.

Turning to Defense Space and Security.

We continue to see solid demand for our major platforms.

Domestically, the President's budget request for FY17 advances key BDS programs and we are anticipating a period of modest growth in defense spending over the next five years.

Internationally, demand for our offerings remains healthy as well.

In particular, for rotorcraft, commercial derivatives, fighters, satellites and services.

During the second quarter, international customers represented 29% of BDS revenue, 37% of the current backlog.

The strength of our defense and space business stems from our solid portfolio of products and services.

Our investments in innovation and affordability, as well as leveraging our Boeing advantage.

We continue to focus on areas that are priorities for our customers such as commercial derivatives, rotorcraft, satellites, services, human space exploration and autonomous systems.

We are investing in future franchise programs and leveraging capabilities and technologies across the enterprise for the T-X Trainer, JSTARS recapitalization, and MQ-25A, formerly known as UCLASS, advanced weapons programs and other important opportunities.

We are also encouraged by the domestic and international opportunities for our proven, affordable and highly capable fighter aircraft.

In summary, our plans and strategies are aligned to the realities and opportunities of our markets, our teams are focused on innovation and growth and on delivering solid operating performance.

We remain confident about our position and future prospects.

Our focus is on accelerating our efforts to drive quality, safety, productivity and organizational improvements through the implementation of lean, capturing the value of quality, partnering for success and our second century design and manufacturing initiatives.

Now over to Greg for our financial results.

Thank you Dennis and good morning.

Let's turn to slide 4 and we will discuss our second-quarter results.

Second-quarter revenue increased to $24.8 billion driven by strong commercial airplane deliveries and solid defense revenue.

Core earnings per share was a loss of $0.44, impacted by the previously announced $3.23 of charges and cost reclassification.

Notwithstanding these impacts, the core business performance was solid in the quarter.

Let's now move to commercial airplanes on slide 5. In the second quarter our commercial airplane business reported revenue of $17.5 billion on 199 airplane deliveries.

Operating margin in the quarter were impacted by the $2.8 billion related to the 787 cost reclassification and the 747 and tanker charges.

Results were also impacted by higher planned R&D spending as we ramp up on the 777X program.

Excluding the charges and the cost reclassification, BC operating margins were solid 10.3%.

Commercial airplanes captured $11 billion in net orders during the second quarter and bought backlog remains very strong at $417 billion and nearly 5,700 aircraft, again equating to 7 years of production.

787 deferred production declined by $1 billion in the quarter driven by the cost reclassification, bringing the balance at the end of the quarter to $27.7 billion.

When normalizing for the cost reclassification, deferred was better than planned at an increase of just $33 million.

As we previously discussed, recovering the 787 deferred production over the remainder of the decade will be a significant driver of cash flows.

Our confidence in this recovery and the cash generation comes from the shifting of the delivery mix for more Dash 9s and 10s, improved pricing over the remaining 900 aircraft and supplier step down pricing, as well as internal productivity.

We continue to make progress on the 787 programming including successfully transitioning to the 12 per month rate, increasing deliveries of the 787-9, reducing production flow times and lowering unit cost while introducing the 787-10 into the production system.

Now let's turn to Defense, Space and Security results on slide 6. Second-quarter revenue, our defense business was $7.2 billion and operating margins was a 8.3% largely driven by the strong performance that was offset by the BDS $219 million pretax tanker charge.

Boeing military aircraft second-quarter revenue was $3 billion, reflecting lower plan C-17 and Chinook deliveries.

Operating margins of 5.9% reflect the impact again of the tanker charge.

Network and space systems reported revenue of $1.8 billion, operating margins of 8.5% reflecting the timing of ULA launches.

Global Services and Support revenue increased 12% to $2.4 billion, reflecting higher volume in aircraft modernization and sustainment.

Operating margins were 11.1%, reflecting program mix.

Defense Space and Security reported a solid backlog of $55 billion with now 37% of that business from customers outside of the United States.

Let's move to the next slide, please.

Operating cash flow of $3.2 billion for the second quarter was primarily driven by solid operating performance.

With regards to capital deployment as Dennis mentioned, we paid $691 million in dividends and repurchased 15 million shares for $2 billion in the second quarter, bringing our year-to-date repurchased of 44 million shares for a total of $5.5 billion, as we continue to deliver on our commitments to our shareholders.

Furthermore this reflects the ongoing confidence and a long-term outlook of our markets and our business.

We continue to anticipate completing the remaining $8.5 billion repurchase authorization over approximately next two years.

Returning cash to shareholders, along with continued investment to support future growth remains top priority for us.

Let's move now to cash and debt balances on slide 8. We ended the quarter with $9.3 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 we will discuss our outlook for 2016.

We are reaffirming our 2016 guidance for revenue, deliveries and cash flow.

Our core EPS guidance for 2016 is lowered by $2.05 per share to now be between $6.10 and $6.30, reflecting the second-quarter charges and cost reclassification totaling $3.23 that was more than offset by improved core operating performance and tax benefits.

The core operating engine continues to deliver the strong results as we remain focused on increasing production, driving productivity improvements, maximizing cash generation and efficient deployment, at the same time taking appropriate actions to de-risk our business going forward.

So with that, I will turn it back over to Dennis for some closing comments.

Thank you Greg.

As we move into the second half of 2016 and begin Boeing's second century in operation, we know we can not standstill if we are to further our industry leadership and honor the rich legacy of generations of talented, hard-working people that built this Company.

Our teams remain intensely focused on growth, disciplined execution, quality and productivity improvement and meeting our customer commitments.

Our priorities are to continue building strength on strength to deliver on our existing plans, and to stretch beyond those plans by sharpening and accelerating our pace and progress on key enterprise growth and productivity efforts.

Achieving these objectives will require a clear and consistent attention to the profitable ramp-up in commercial airplane production, continuing to strengthen our defense and space business, delivering on our development programs, driving world-class levels of productivity and performance throughout the enterprise to fund our investments in innovation and growth, and to develop and maintain the best team and talent in the industry.

All of which is to position Boeing for the next 100 years and continued market leadership, sustained top and bottom line growth, and to create increasing value for our customers, our shareholders, our employees and other stakeholders.

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

(Operator Instructions)

Cai von Rumohr, Cowen and Company

Thank you very much.

So if you back the charges out of your BCA results, they look particularly strong.

You did better on 787 deferreds.

Could you comment on any profit accrual rate changes you had?

Any block changes you had in the quarter?

And how should we think about those opportunities and the deferreds on the 87 going forward?

Cai, on 737 we did have a block extension there.

We had an increase in overall mark booking rate on program.

And also on 67 we had a block extension there.

We had a little bit better spending with regards to G&A and some other period expense, in particular fleet support.

Those were really the primary drivers in the quarter.

It's good solid performance across the programs.

On the deferred, I would say the profile on the deferred remains intact of what we talked about.

Again, as we focus on unit cost, day by day, airplane by airplane improvement, and getting that model mix up with more Dash 9s and now the introduction of the Dash 10.

It's all about cash and so how are we improving the overall cash flow of that program.

Teams are doing a great job.

We've got certainly lots of work in front of us, but I think when you're out in the factories today you'll see some very good momentum and very good focus on overall productivity initiatives that are also obviously going to help that cash profile going forward.

So the fundamentals as far as the cash flow story on 787 remain intact.

Thank you.

You're welcome.

Jason Gursky, Citi.

Good morning everyone.

Greg, I think this one will be for you.

I wanted to talk a little bit about working capital.

There's been a lot of chatter out there in the media, even amongst some of your suppliers, that posted earnings calls this quarter.

About a lengthening payable cycle.

I was wondering if you could chat a little bit about your strategy there: how long it's been in place, how much more we have to go?

And tie that to the sustainability of cash flows: are we getting a one-time bump this year?

Or have you been working on this for a while and it's been masked?

Just want to get a sense of whether we will have some lumpy cash flow outcomes here over the next several quarters or next several years because of the deployment of a new strategy here.

Jason, I would say this is just back to fundamentals around working capital -- how we are collecting, how we are paying -- and then ultimately how we're managing our inventory.

We've got initiatives in place for each.

When it comes to payables, we have changed our frequency of pay; that we've gone from daily to twice a month.

Again, that's in line with industry practices.

At the same time, we're looking at terms across all of our contracts.

And again, looking to get those to industry standards; but ultimately we want to get those to top quartile standards.

There's no reason why we shouldn't.

Frankly a lot of our supply chain is already there.

And again, finally, on the inventory, we're looking at all aspects of the inventory across the programs.

Flow time on 787 is a great example of that.

We are going to continue that focus.

I wouldn't view it as anything special or different.

Is there enhanced focus on those elements of cash flow?

There certainly is, but that's the objective.

Get the industry standards and then beyond that, as Dennis has talked about.

What does top quartile or global industrial champion look like?

And there's no reason why we shouldn't be able to get those to those levels of efficiency.

And Jason, to the second part of your question, there.

As Greg has pointed out, this is not a one-time event or implementation.

We see this as a key element of our longer-term cash growth plan and consistent with our plans for the business to grow cash year over year.

Great, that's helpful.

Thank you guys.

You're welcome.

Seth Seifman, JPMorgan.

Thanks very much.

Good morning.

Dennis, you mentioned services on the monologue; and it also was a little bit more prominent in the release than it's been in the past.

I wonder if at some point maybe you'd consider disclosing the services contribution at Boeing Commercial?

And as a question, we talk about services, but I think it really means aftermarket more broadly, and that includes spares and parts.

So what part does that play in the strategy?

And is there investment required there to either qualify new parts yourself or to incentivize the alternative suppliers to qualify new parts?

Is that going to be meaningful at some point?

And would it have only an impact on new platforms going forward?

Or could it have an impact on existing in-production platforms?

Great question Seth.

What you're pointing out here, as we discussed at our investor conference, we see services growth broadly as one of our strongest growth areas going forward.

And that spans both commercial and defense.

It is a place where we are investing for the future and have been all along.

You're beginning to see the fruits of that investment and we're going to continue to work on that front.

That includes modifying our approach to our intellectual property and how we manage and control that.

Our proprietary parts business, and what I'll call the traditional parts and modifications businesses that leverage our OEM knowledge base.

It also includes a more significant investment in data analytics and information-based services.

You can see some of the progress on that front; I mentioned a couple in my opening comments.

But more broadly, we now have, for example, 60 airlines enrolled in subscription contracts for Boeing maintenance and engineering work that covers about 2,200 aircraft.

We have another 84 customers with about 3,800 aircraft that are benefiting from our airplane health management services.

We still see a lot of runway ahead of us in these data analytics and information-based services agreements where we can add value for customers and also add value for Boeing.

And this includes a increased focus from our senior executive team on growing services, investments both inside of Boeing and with our supply chain, as you pointed out.

And we do see this as a long-term growth area, both top line and bottom line.

In general, services is accretive to our margins and our bottom-line performance.

Thank you very much.

Rajeev Lalwani, Morgan Stanley.

Hello, gentlemen, thanks for the time.

As it relates to the 777, can you talk about your comfort from here as it relates to getting the additional 40 orders that you mentioned, as well as the point in which you will know whether or not the production cuts going in next year are sufficient?

Let me just take that one head on here.

On 777, we understand the reality of where we are at.

And as I said, in 2017, we've already announced we are going to seven per month reduction rate.

We are 80% sold out against that production rate.

In 2018, as we introduce the 777X into the line, we build test aircraft; as we've announced before, the effective delivery rate in 2018 will drop to 5.5 per month and we are 60% sold out against that profile.

So we know exactly where we are at today.

The fact is, year to date we've got net orders for 8 777s against a target of approximately 40.

So clearly we have work to do yet over the next few months to fill out that orders book.

We're working hard at a number of key campaigns.

Ray and his team are out with our customers and we are aggressively working that every day.

We do see that the value proposition of the airplane is holding up, but the wide-body market is clearly a challenging place right now.

So we've got work to do to find those additional orders.

Now in the case of, if those orders do not materialize, we're going to continue to keep a close eye and our production plans and make sure that we keep supply and demand in balance.

That's the key to our future.

And we're going to make sure we make a profitable and efficient transition to the 777X.

So we're going to continue to work those campaigns hard.

We're going to work to fill out the production plans as we currently have laid them out, while being mindful of keeping supply and demand in balance.

Now all of this -- I think it's important to take a step back from all of this to look at our overall plans over the next five years.

Regardless of how that scenario plays out on 777, this is a growing business where we are going to be delivering north of the 900 airplanes a year by the end of the decade.

And we see this as a year-over-year cash growth business, spanning all of those scenarios that we're talking about.

We're going to do the right thing here -- keep wide-body supply and demand in balance.

Make sure we have the right transition to 777X.

And I think it's also worth reminding that in the long term the wide-body marketplace is still an attractive marketplace.

As you get out into the 2020s there's a large replacement cycle that's very clear to us.

So this is about efficient transition to the 777X, and the 777X is the right airplane for the future.

All within the context of a compelling growth story and year-over-year cash growth.

Makes sense.

Rob Spingarn, Credit Suisse.

Good morning.

Good morning.

This question I think could be for either of you, but going back to the Investor Day you talked about BCA margins improving double-digit next year and mid-teens toward the end of the decade, if I have that right.

And obviously, you've a lot of initiatives ongoing to get there.

I wanted to ask you -- how much of this margin improvement is negotiated or in place at this point?

And how sensitive are those targets to any downside in 777, essentially relative to what you just talked about, Dennis?

Let me just paint the broad brush on that, and I'll ask Greg to tag team on this one.

Our plans for the future remain consistent with what you described.

And that is, that we're headed towards double-digit margin in our commercial airplane business next year.

We're pleased with the performance this past quarter, but we know we still have work to do to make that sustainable.

And then in the longer-term, towards the end of the decade, headed towards that mid-teen margin aspiration.

And that's a tough, challenging target, but I think the right one for this business for the long term.

And it will drive the right behaviors and investments for the future.

And achieving those kinds of margins spans all of our internal and external work.

So it includes our internal productivity work, the relentless focus on capturing value of quality and our lean-plus efforts; it includes our development program excellence initiative -- all of the things we are to doing to drive internal productivity to incrementally pick up margins.

Things like block extensions on our programs are accretive to margins in general, as well.

And as I mentioned earlier, as we grow the services business, that also tends to be accretive to margins.

In parallel with that internal work we are also working with our supply chain; partnering for success is a key element of this.

While we've made a lot of advancements on that front we still have a lot of work to do across our supply chain.

We will continue to be relentless there as well.

Think of this as a portfolio of effort all headed in the same direction.

Dennis, if I could just interject for a second to clarify -- what, could you clarify or quantify the internal versus the external, or the supply chain versus the internal in terms of the margins themselves, the upside?

Frankly, we are looking at market-based, certainly, across the board.

So whether that is internal or external, it's all about market-based and really backing into that.

As you know, the greatest certainly percentage of our cost structure is outside.

And so we are equally focused there, but at the same time, you've heard us -- you've been in the factory recently during the investor conference.

You can see there's a relentless focus inside.

I would say no rock unturned.

We are looking for all opportunities, but just think about it as being market-based type targets that are driven through all the elements of the cost structure whether it's in home office here or out on the program.

I think as Dennis said, each of these are at different levels of maturity.

Some of these we've obviously captured some in certain aspects of the business.

But I'd say everybody is very aligned on all the elements that Dennis talked about -- this portfolio approach -- and we are all -- I'd say it's all on our scorecards in being held accountable to try to achieve the aspirational targets that have been put out here.

This is a clear and enduring during focus for us.

It's about winning -- competing and winning in the marketplace.

It's about returning value to our shareholders, and it's also about funding our future investments and our innovation.

We intend to accomplish all three objectives.

And the 777 sensitivity for this process?

As Dennis said, we've run, certainly, sensitivity analysis against the 777 bridge over that -- I'll say, short period of time between the current platform and the X. And we've taken that into consideration around our comments about cash flow continuing to grow through that period.

So we think we can do that through that period, but we've got a bunch of different scenarios, obviously, we are running through there.

But we are sticking with the plan we have and staying focused on trying to fill that bridge in particular in the near-term.

But we've got work to do.

And like Dennis said, we will match demand to production at the right time.

It's one element of the portfolio, and I don't want anyone to over-rotate on that element.

It's an important one, but there's a lot of other things going on in this Company that are either driving profitability or cash, and it's not just lying on one program having a transition rate for 18 to 24 months.

We are going to do the right thing to make sure we have an efficient transition to 777X, and all of that is enveloped by an expectation of year-over-year cash growth.

That spans all of the scenarios we've looked at.

Thank you both.

You're welcome.

Doug Harned, Bernstein.

Thank you, good morning.

Morning, Doug.

I would like to -- if we can understand a little bit more on the ramp down and deferred production for the 787.

And there are really three aspects of it I'm interested in.

One is, first, if you end up not going to 14 a month and staying at 12, what impact would that, as a rate -- what impact would that potentially have?

Second, if on the 787 -- you've talked about the advantage of the Dash 9; you've got better pricing and the cost ultimately can come down to be comparable to the Dash 8. And what time frame would we expect to see those costs -- Dash 9 costs -- become similar on a unit basis to the Dash 8?

And the third one on these is, on the 787-10, what kind of disruption would we expect, given the high degree of commonality between the Dash 9 and the Dash 10 when it goes into service?

Sorry, it's three parts, but all related to deferred.

I think I got them all Doug, and if not, I'm sure you will tell me.

First one: if you looked at a -- obviously we are not at the point of making any different rate decisions or assumptions than what we've got in place.

But as Dennis said, we've got work to do to fill out to the 14.

As you know, that's an end-of-the-decade implementation.

If you were to assume holding 12, it pushes that deferred curve out about 6 months.

So not a significant impact.

When you look at Dash 8 and Dash 9, --you saw it when you were out here.

I'd say the design improvements that were taken off the 8 and put onto the 9, now that we are ramping up -- we are about 10 a month on the Dash 9 -- you're really seeing those come together in the factory.

And so unit cost now is about in line on Dash 9 versus Dash 8. The team, again, has done a great job, lots of work in front of us.

But the fact is, over 125 units, and they are now at the same level of Dash 8. I think gives you a good sense of the design for manufacturing implementation that's taken place on that airplane.

And, listen -- there is still a lot of ideas in the hopper.

Some of those will mature; some of them won't.

They are not slowing down; and Mark Jenks and his team are doing a terrific job looking for more opportunities.

Disruption from 9 to 10 -- I think you said it: it's not as big of an impact certainly as it is from the 8 to the 9. That was by design.

So that is in the production system today.

So we certainly have provision for some longer flow times on those initial Dash 10 units.

Similar methodology that we did from the 8 to the 9. Again, as far as producing that airplane and a risk associated with that, it's a very different risk profile than it was from the 8 to the 9. So again, credit to the team on really focused on commonality in the production system to minimize that disruption as we enter it into the production.

Real manufacturing commonality that's north of 95%.

And Doug, as you know, we've already begun major assembly work into the 787 line on the Dash 10.

So that manufacturing commonality is holding up as we're going through implementation.

And just to be clear on the rate change -- the 12 to 14 -- what is the lead time that you need to pull the trigger to decide you're going up to 14 at a certain date?

Doug let me give you a little bit of a feel for that.

Right now we are sold out through 2018.

If you look at the skyline on 787.

We have a few open positions in 2019 that we're working.

We're largely focused on filling out the 2020 production skyline.

That will give you feel for the timeframe that we are looking at.

As Greg said this is a toward the end-of-the-decade implementation.

So you can back off from that a couple of years.

We haven't pinned down a specific decision point yet because we're going to keep a close eye on the market.

The signals from our customers.

We've got time to do our due diligence here.

Again, our principle here is to keep wide-body supply and demand in balance.

We are confident in the 787 program across that span of scenarios and we're going to continue to work campaigns to fill out to the 14 a month rate step up, and we will evaluate timelines and decisions around that.

But you can be very confident that whatever we decide, we're going to keep supply and demand in balance; we're going to do it efficiently and productively; and all of this again is enveloped by our expectation of a year-over-year cash growth business.

It spans all of the scenarios we talked about on both 777 and 787.

Okay, great.

Thank you.

You're welcome.

Ron Epstein, Bank of America Merrill Lynch.

Good morning guys.

I guess a question for both of you to see if we're thinking about this right.

Does the roughly $1 billion of deferred that was moved pretax to R&D -- does that imply, if you take that $1 billion and divide it by what is left on the block that the profitability per airplane goes up by about $1 million on a program basis?

And then, the second part of that question is, when do you expect the program on a unit basis to be cash-flow breakeven for 78?

We broke even late last year.

On a unit basis?

Yes, so obviously as we move forward with the supplier step down -- contractual step down pricing -- we improved productivity.

But even more, as I mentioned at the investor conference, around the mix is a big play in here going forward.

So getting these Dash 9s into the production that we have -- and you heard me talk about the unit cost recently and where they are getting that Dash 10 in, they're obviously big drivers of cash flow going forward.

The program margin did go up slightly in the quarter overall.

It's still very low single-digits.

Just curious -- Greg, is it about $1 million per plane?

Are we thinking about a right?

Or is it essentially $1 billion divided by 900, what's left in the block?

I'm not really completely following your math there, Ron, but I would just tell you we took $1 billion out, obviously, and put it into R&D, so obviously research and development went up and the overall program margin went up slightly as a result of that move.

But again, these are obviously two aircraft that we've been heavily utilized in flight test and we made the right decision because it was the time to start spending Company funds to modify those airplanes.

And a limited marketplace for them.

So we made that decision and re-classed them.

It was absolutely the right thing to do.

Okay.

Thank you so much.

Carter Copeland, Barclays.

Morning, gentlemen.

Just a clarification on that last answer, Greg, and a quick question.

But you said the unit breakeven last year -- do you mean cash breakeven on the program last year?

Yes.

So we're close to eclipsing deferred production flipping over, but when do you -- that's obviously at one end of the line, when you've got stuff coming off the line is when you'd get to see unit versus program.

When should we expect that to flow from the deferred production all the way out to where we see it in the cash and unit?

Later this year.

Later this year.

Okay.

And I wanted to ask about the 737 margin increase that you referenced, associated with the block extension.

I know you had taken a rate adjustment downward associated with escalation in the past.

Is this a reversal of that?

And does it get it back to -- have you recaptured that downward amount that you had before?

There's actually was still escalation pressure in the quarter across all of the programs.

Not as much as prior quarters, but there was; and then the balance of that was offset by improved productivity and mix.

Those are really the big drivers in there.

Just volume in there.

And with respect to escalation -- I know it operates with a lag, and you've seen the oil price come back up as a positive impact on that index.

When does that make its way through the lag of the escalation formula?

I'm hoping very soon.

But, again, we saw it minimize this quarter, and we will have to wait until the publications come out for third quarter.

But you're right -- the fundamentals are heading in the right direction.

So we should start to see this as a bit more of a tailwind versus a headwind.

Great.

Thank you gentlemen.

You're welcome.

Howard Rubel, Jefferies.

Thank you very much.

It's a two-part question related to some of the things you are doing internally.

Greg or Dennis, you indicated the MAX EIS had accelerated, so that -- and I think Norwegian even used a May date, which is pretty notable.

Could you just address two things?

One is, what are we going to do -- what are you doing with the benefit of this acceleration, improved process?

And how much of it is being used to either accelerate deliveries or do other things with the MAX?

And then also you commented on G&A being better and I suspect it's probably due to, I will call it, the 787 performance hitting some of the standards that you've aspired to.

So could you maybe put it together in an answer that talks about some of the other things you are doing to, outside of just production, to make the Boeing Company and its customers better?

You bet.

Howard, I will take the first part and then ask Greg to take the second part.

On the MAX, as you've noted, we have the opportunity to accelerate EIS, and we originally planned third quarter of 2017.

We now have publicly talked about that as first half of 2017.

I won't be specific to individual customers as we have a number of discussions ongoing.

But we have opportunities to accelerate into the first half of the year.

What you should read through that is that the MAX development program is going very well.

And running on cost and ahead of schedule.

We've got all four test aircraft in the air, more than 300 hours on the airplanes, and the performance is looking solid and the development program is clean.

And more broadly, to get to your underlying question, I think this is a good example of how we can and should perform coming out of our development program excellence initiative.

This is about understanding statement of work clearly upfront, managing that statement of work, keeping it balanced, doing the right systems engineering work, working with our supply chain.

This is about disciplined innovation.

We are going to bring a product to the marketplace that has a great value add for our customers and do it in a way that is disciplined and on cost and schedule.

That formula that we've put in place now with our development program excellence initiative -- we know it works.

And we've taken the lessons learned from MAX and we are cross-deploying those now into programs like the 787-10, the 777X, and into our future defense development programs.

Our objective here is very clear, and that is to have disciplined effective development programs that perform on cost and schedule that allows us to do reliable R&D planning and allows us to make best use of our innovation investments.

So it's a good signpost for us, Howard.

I think clearly a step in the right direction and we're going to leverage lessons learned from MAX across the whole enterprise.

Greg, you want to hit the second?

Howard, with regards to the non-production, it's the same approach.

We're really trying to look at just even functional costs across the enterprise, and looking at what is market-based affordability.

What's best-in-class look like for an industrial Company?

And challenging ourselves and where we are, versus where they are, and trying to learn from some best practices and then trying to implement them.

Now some of this is still in the planning stage.

Certainly not all of it is implemented, so I would not run with any of it.

But that's the framework, and that's the operating around it, but it's all about how do we compete in the marketplace no matter what marketplace we are in, across the portfolio?

How do we generate cash in order to invest in our future as we have?

And then deliver value to the shareholders?

Those are the, I'll say the framework, that's around the approach, but it goes back to my comment about no rock left unturned.

So whether it's a functional cost that are supporting a program or program-specific, everybody has an affordability target.

Again, different levels of maturity; some are making more progress than others.

But the focus and the operating rhythm is all around that.

So I just want to make sure I understand, then -- is some of this that you saw in this most recent quarter going to translate into either permanently lower G&A?

Or also a little bit better R&D profile for the back half of the year?

I think the R&D profile will be similar to what we outlined.

I don't see that changing.

On the G&A -- quarter over quarter, as you know you're going to see it move around a little bit.

Some of that certainly is sustainable and some of that is just timing.

Thank you.

You're welcome.

Operator, we have time for one more analyst question.

Sam Pearlstein, Wells Fargo.

Greg, I was going to ask you, we've seen a lot of, in terms of the interest rate move this year; and I know you don't include pension in the core earnings.

But can you talk about required contributions, or how to think about pension contributions over the next several years?

And how that may be changing in terms of with lower interest rates.

Certainly, something, Sam, we're watching.

Obviously with the transition that we made from the defined benefit, defined contribution, that certainly helps us going forward when it comes to pension contributions.

But we are certainly monitoring the interest rate environment.

This year is obviously minimal.

As I see it today there will be contributions required next year.

They'll be again in the hundreds of millions -- not more than that.

And see that in the year following; but, again, we will have to see where interest rates fall and we will make the required contribution.

But we'd run that at various levels.

Again, because of the pension turnover, I don't see it obviously at that headwind that I would have normally seen as far as required contribution if we were stuck with a DB plan for the next five years.

Great.

Thank you.

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

(Operator Instructions)

I will now returning 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 now.

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

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

Julie Johnson, Bloomberg

Hello, everybody.

Dennis, a quick question -- could you just step back and sort of spell out your expectations for 747 following this latest reset?

Do you see a future for this program beyond Air Force One?

Julie, as we announced the decision we made here, it takes into consideration a sluggish cargo market and our projections for our future production rates.

And the decision, in essence, that we made was to maintain our current production rate of half an airplane per month that we're implementing this year.

And to extend that out into the future, rather than assuming we would ramp back up to one a month in 2019.

That's the fundamental assumption change here and it reflects what we see in the cargo market.

Now we still see a cargo or freighter aircraft replacement cycle out in that 2019, 2020 timeframe.

We have a number of ongoing customer discussions in the cargo marketplace in addition to the two Air Force One airplanes that you referenced.

So a number of very viable campaigns underway to fill to that half a month production rate.

That said, we still have our work cut out for us.

Cargo is a tough market right now.

I will say that the decisions we made on 747 put that program on a much more solid footing for the future; it's aligned with the marketplace.

As noted, we also wrote off any remaining deferred production inventory, so we've significantly de-risked that program from a financial standpoint for the future and we're going to continue to work to fill out the skyline.

Jon Ostrower, Wall Street Journal.

Good morning guys.

Good morning.

Question about this change in supplier chain frequency.

You talked about the need to be more competitive, aligned with how your suppliers are paying their own suppliers.

Ultimately, what is the goal here?

What are you trying to be more competitive on?

GKN and Rockwell Collins, two of your closest suppliers that have most notably has been held up as your greatest example of how you want to be partnering for success as part of your cost-cutting.

Now they're out there really upset that they're missing their bottom line targets in the quarter.

I want to understand what exactly you're trying to accomplish by doing this, beyond just an industry norm practice, when you've got your closest suppliers who very rarely air public grievances, calling you guys out.

Jon, I guess I would start with, obviously we are in a competitive environment.

It all starts with market-based affordability and how does that then impact your business?

As I indicated, when it comes to working capital, we are looking at where we are on different measures around working capital and where everybody else is in this industry.

And certainly the two suppliers you called out are great suppliers to us and we have been working with them over the last year on transitioning to a more, I will say, industry standard around payments.

And we were paying daily.

Millions of transactions, and we were paying daily -- that's not an industry-standard.

We're going to twice a month.

And then, we're looking at terms -- again, to be competitive, manage our working capital efficiently, and allowing us to invest in our future that ultimately everybody will benefit from, from our customers down to our suppliers.

These are important partners but we've got to face into the environment that we're in and be efficient across the board.

And as you know, under partnering for success, this is also us reaching back in the supply chain, taking best practices that we have encountered in other parts of our business or supply chain, and sharing those with the supply chain to ultimately make them better.

So I would say it's across the board, and again it's all about being a market-based and facing into those realities -- and frankly, in this case, just getting the industry standards.

Al Scott, Reuters.

Good morning.

Dennis, you mentioned the slow in wide-body sales and keeping an eye on rates to maintain balance.

And it seems like there's a bit more emphasis there on that rate adjustment possibility.

Given your pledge really not to cut prices to win orders, is the one-to-one book-to-bill ratio now really an aspirational goal?

If not, what are you doing to improve sales?

Hey Al -- first of all, more broadly we're still targeting a book to bill of one-to-one for the year.

And again, we don't get too encumbered with the exact timing of those orders.

It's very clear that this year's order cycle is more favorable on the narrow bodies.

And so if you're looking at numbers of aircraft, we expect the predominance of that orders flow this year to be in the narrow-bodies arena.

That all said, we are going to continue to work hard to fill out the wide-body skylines as well.

We don't need to make drastic changes to pricing in order to capture market share.

We're not going to be driven to just get market share for market share's sake.

I will say in the wide-body marketplace, even though we are seeing some hesitation in buying, there's a value proposition of our airplanes is holding up well.

This is all about a look ahead to efficiently managing our production skyline and keeping supply and demand in balance.

And clearly we've got more work to do on the wide-body front while narrow-body orders are trending to be very healthy and continuing to be healthy this year.

So that's our headset.

As normal we do a lot of scenario planning around this.

And different assumptions around wide-body orders and what that future skyline will look like.

As you heard earlier, our commitment is to make the decisions that allow us to make the transition on the 777 efficient and productive.

And we will do that.

Operator we have time for one last question if there is anyone remaining in the queue.

Benjamin Zhang, Business Insider.

Good morning, gentlemen.

I just wanted to do step back and talk about the 787 program.

I was wondering if you guys could give us some update on the remaining terrible teens inventory of the early build aircraft.

How many do you guys have left, and what are your plans for them?

They are all sold.

So they will deliver here over the next couple of years.

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.