Boeing Co BA
Q1 2013 Earnings Call Transcript
Transcript Call Date 04/24/2013

Operator: Good day, everyone, and welcome to the Boeing Company's First Quarter 2013 Earnings Conference Call. Today's call is being recorded. The management's 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 to Mr. Troy Lahr, Vice President of Investor Relations for the Boeing Company. Mr. Lahr, please go ahead.

Troy Lahr - VP, IR: Thank you and good morning. Welcome to Boeing's first quarter 2013 earnings call. I am Troy Lahr and with me today are Jim McNerney, Boeing's Chairman, President, and Chief Executive Officer; and Greg Smith, Boeing's Chief Financial Officer. After comments by Jim and Greg, we'll take your questions. In fairness to others on the call, we ask that you please limit yourself to one question. As always, we have provided detailed financial information in our press release issued earlier today and as a reminder, you can follow today's broadcast and slide presentation through our website at

Before we begin, I need to remind you that any discussions and goals this morning are likely to involve risks, which are detailed in our news release, in our various SEC filings, and in the forward-looking statement disclaimer at the end of this web presentation. In addition, we refer you to the earnings release and presentation for disclosures and reconciliations of non-GAAP measures that we may use when discussing our results and outlook.

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

W. James McNerney, Jr. - Chairman, President and CEO: Thank you, Troy and good morning, everybody. Let me begin today with an update on the 787s return to flight, followed by an overview of our business environment and some thoughts on yet another strong quarter of operating performance. After that Greg will walk you through our financial results and outlook.

As you may recall January I described returning the 87 to service as our first order of business, nothing is more important than the safety of the crews and passengers who fly our airplanes and nothing rallies our team more than the challenge of resolving issues that affect our customer's ability to operate those airplanes as intended.

Over these many weeks hundreds of experts from across Boeing, our supplier partners and other outside organizations worked day and night alongside U.S. and Japanese authorities to identify the factors that could have caused the 787 batteries to fail and then to design, develop and test a comprehensive permanent fix.

Last Friday, the Federal Aviation Administration formally approved our proposed solution after carefully examining the results of a rigorous month long certification test program. In short, our battery system improvements include multiple layers of protection to prevent and isolate potential faults along with the new enclosure design to keep any battery event from affecting the airplane or even being noticed by passengers. After more than 200,000 hours of engineering work, validation by a non-advocate team of more than a dozen leading battery experts, and now with the certification by the FAA, the 787 will return to the flight with our continued high confidence in its safety, reliability and overall integrity.

Immediately upon receiving the FAA's approval last week, we began the process of installing the improved battery system on the in-service fleet, while also implementing the changes our airplanes being ready for delivery in Everett and Charleston. Thus far we have started installation on 10 fleet aircraft and 9 production airplanes. We expect to complete the bulk of fleet retrofits by mid-May. Production test flights began last week and deliveries are expected to resume in early May. And despite the three month delivery suspension our forecast remains to deliver greater than 60, 787s during 2013.

On behalf of everyone at Boeing I'd like to thank our supplier partners our outside battery experts, the FAA, NTSB, JTSB and JCAB for their determined professionalism throughout this journey. We would also like to thank our customers and their passengers for enduring this disruption and inconvenience caused by this issue. While disappointing and frustrating from the outset, the silver lining in this experience has been seeing all parties in this process working to ensure that air travel remains the safest form of transportation the world has ever known.

Furthermore, the value proposition of the 787 and its game-changing economics, fuel efficiency, lower noise and emissions, and unmatched passenger comfort has emerged fully intact, and we look forward to reconnecting airlines and their passengers to the 787's remarkable benefits in the coming days and weeks. As many of you know, in the 15 months of service prior to the major issue with the battery, initial dispatch reliability on the 787 was at par or better than the benchmark 777. We fully expect that trend to continue as we return the airplane to service. Our nearly 97 years of experience introducing newer airplanes also conditions us to expect additional, more normal, shall we say, startup issues as more airplanes enter the fleet of more carriers in the months ahead. Our approach will be to find them, address them, and ultimately ensure the 787, like every Boeing airplane before it, achieves the very high level standard for performance and reliability we promise customers at the outset of the program.

With that, let's turn to the business environment on Slide 2. Global customer demand for our fuel-efficient and value-creating commercial airplane family remained strong, a fact reinforced by a healthy first quarter net new orders total of 209 airplanes, which increased our record commercial airplane backlog to more than 4,400 airplanes or $324 billion. Our customers continue to replace older airplanes in favor of new ones that offer compelling economics and increased fuel efficiency. Request to accelerate deliveries also continue at a healthy pace. Passenger traffic trends remain healthy however we continue to see near-term pressure in the cargo market.

Softness in this segment contributed to the decision announced last week to adjust the 747 program build rate down to 1.75 airplanes a month from 2 a month beginning in early 2014. While we booked three 747 airplane orders in the quarter and received commitments for two more, the rate decision was made to more closely align production to near-term demand overall. As the only provider of very large freighters, we believe our fuel-efficient 747-8 is well positioned to benefit our customers once cargo market conditions improve.

Airline interest in our fuel-efficient 737 MAX remains significant as we now have booked almost 1,200 cumulative orders to-date. 787 backlog was further extended by 42 orders during the quarter in addition to a commitment by British Airways to exercise 18 options. We also received a commitment from Ryanair to order 175 737NGs. As a result, we now effectively have bridged production from the NG to the MAX allowing us to smoothly transition our production system later this decade.

Overall aircraft demand remains relatively balanced geographically and our backlog remains evenly split between airplanes used to support traffic growth and fleet replacement. We remain focused on balancing production schedules with this strong demand in order to minimize long-term volatility and build rates and maximize productivity and profitability.

Turning to Defense, Space & Security. During the quarter we saw congress and the administration act to avoid indiscriminate across the board budget sequestration cuts in fiscal year '13 by passing a continuing resolution that permits the defense department to more selectively allocate spending and approve multi-year contracts for programs such as in Boeing's case the Chinook and V-22.

We believe this flexibility advantages our portfolio of reliable, proven and affordable systems that are on budget and on schedule. However, we remain cautious regarding the potential for further U.S. defense budget reductions and the mid to long-term impact of continue sequestration.

In the President's fiscal year '14 budget submission, we noted strong support for the majority of our core programs despite budget reductions at the top line level growth is still expected in areas we have been targeting with investment and attention, such as space, unmanned systems, intelligence, surveillance and reconnaissance and cyber security. With our expanded product offering and commercial satellites, we expect a pursue and capture growth in this market due to the compelling value our smaller satellites provide to global customers.

Last week's major win for the AH-64 Apache in the Republic of Korea is the latest in a series of key international competition results that reflect the alignment between our portfolio of products and services and international customer requirements in the current business environment. International Defense, Space & Security business represented 28% of revenue during the quarter and grew to 42% of our current backlog as we continue to expand our share in addressable international markets. To enhance our competitive position in the defense market, achieving our market-based affordability targets that maximize efficiencies and reduce infrastructure costs is a daily focus of Defense, Space & Security business, and its multi-year effort to further strengthen its competitive position in U.S. and international defense markets. That effort is also benefiting from productivity gains and cost savings achieved through our enterprise Partnering for Success initiative that we launched last fall with our major supply-chain partners. Partnering for Success, as you may recall, takes a team-oriented approach to examine opportunities across the supply chain in design, production and support to drive significant improvements in quality, flow, and efficiency that will increase productivity and lower cost for customers. It's a win-win for us and our suppliers to step up to the challenge and secure future growth in so doing by increasing customer value today.

During the quarter we also succeeded in averting a work stoppage through successful negotiations of a new four-year contract with our engineering and technical workers union in Puget Sound to support our commercial airplanes and defense programs in the region. This agreement also helps mitigate our future pension liabilities by including a defined contribution plan for all new hires.

Moving on to Slide 3. Our business and core functions performed extremely well during the quarter as we reported strong revenue, expanded operating margins, and solid operating cash flow. Revenue at commercial airplanes was $10.7 billion and operating margin grew to 11.4%, resulting from solid program execution and lower margin dilution from fewer 787 deliveries than originally planned. As an example of our continued efforts to improve productivity and efficiencies we announced the consolidation of our North American flight training operation into our existing Miami facility. We are also reducing our infrastructure primarily on the 787 as we capture efficiencies and production stabilizes.

We delivered 137 commercial airplanes and successfully executed multiple plan production increases, including increasing the 777 rate to a record 8.3 airplanes per month and raising the 737 to a record 38 airplanes per month, with the next increase to 42 per month coming in the second quarter of 2014. We also initiated the rate break to seven per month as planned in 787 Final Assembly. Production health on the 787 continues to improve and we remain on track to increase the rate to 10 per month by year-end.

On our commercial airplane development programs we have effectively completed engineering work on the 787-9. The first airplane is expected to enter Final Assembly in Everett at midyear followed by first flight in the second half of this year and first delivery in the early part of next year. The 737 MAX development also remains on track with firm configuration expected midyear and entry into service as planned in 2017.

On our twin-isle lineup with a 787-10X and 777X we continue to progress through our disciplined gated development process focusing on affordability and discussing with customer's their requirements and the technology they value. These are very attractive investments that leverage prior lessons learned and previous technology development efforts, all of which will increase shareholder value. The business case continues to strengthen for the 787-10 and the customer interest in the airplane is high due to its compelling price and value equation for both us and our customers. We continue to anticipate the potential launch the 787-10 this year. Likewise, the business case for the 777-X also continues to mature as we further evaluate options including design and production locations.

During the quarter, we selected GE as the sole source engine manufacturer for the 777-X program. New engines and an all new composite win that leverages the design and technologies of the 787 wing along with other meaningful improvements will make this airplane immensely competitive and ensure our 777 franchise remains the standard bearer in its class for years to come. We continue to target entry into service for the 777-X around the end of the decade.

Turning to the Defense business. Defense, Space & Security generated revenue of $8.1 billion in the first quarter delivering 44 aircraft and one satellite. Higher deliveries on Apache C-17 and P-8 along with growth in satellite volume contributed the healthy revenue in the quarter.

Numerous important awards were captured during the quarter, including contract at our small satellite business, as well as a contract for the integrated C4ISR targeting system that provides the Air Force, Intelligence, Surveillance and Reconnaissance capabilities and targeting in one easy-to-use lightweight handheld device.

Noteworthy milestones achieved during the quarter included the second successful test flight of the unmanned Phantom Eye, delivery of the first Indian Air Force C-17 to flight test and completion of flight testing for the India P-8I airplane. We also delivered the sixth P-8A to the U.S. Navy, which completes the first run of low rate initial production. In summary, notwithstanding 787 deliveries deferred while we work through the battery issue, operationally, we are off to a very strong start across the board for 2013, with solid revenues, earnings and cash generation. Our teams remain laser focused on continuing successful execution of the ongoing production and development programs that are important to our customers and are delivering value to our shareholders.

Now, I'll turn it over to Greg to discuss our financial results and our guidance. Greg.

Greg Smith - EVP and CFO: Thanks Jim and good morning. Let's turn to Slide 4 and we'll discuss the results for the quarter. First quarter revenue was $18.9 billion, driven by strong deliveries at both commercial airplanes and our defense business. Strong core operating margins of 9.9% in the quarter were primarily driven by solid productivity gains at both businesses and improved mix.

Core earnings per share increased 24% to $1.73 a share in the quarter on continued strong operating performance in both commercial airplane and the defense business. As anticipated, first quarter EPS included $0.19 from the 2012 research and development tax credit that was passed into law earlier this year. First quarter EPS last year included $0.11 from a favorable (court) adjustment on a satellite litigation.

Now let's discuss commercial airplanes on Slide 5. For the first quarter, our commercial airplane business reported revenue of $10.7 billion on 137 airplane deliveries and strong operating margins of 11.4%. Commercial airplane operating margin benefited from delivery mix in the quarter, lower R&D and improved performance that was partially offset by higher period cost primarily associated with the engineering and retrofit activities on the 787 battery. The strong core operating performance in the quarter was a testament to our continued focus on efficiently executing our rate increases and driving productivity.

Gross inventory for the Company included $28.8 billion related to the 787 program, an increase in the first quarter of approximately $3.3 billion driven by the planned increase in production rate on the program and fewer 787 deliveries in the quarter. Included in the work-in-process inventory are the deferred production costs. The deferred balance for the program was $17.1 billion at the end of the first quarter and includes approximately 61 airplanes still in process.

The deferred production balance is still expected to peak at slightly over $20 billion and then decline after the program achieves the planned rate of 10 per month and stabilizes at that level. Commercial Airplanes captured $15 billion of orders during the quarter and increased backlog to a record $324 billion for over 4,445 airplanes. Customer demand for our game-changing fuel efficient airplanes remains strong as illustrated by an additional 121 737 MAX orders and 42 787 orders in the quarter.

Let's turn now to Defense, Space & Security results on Slide 6. First quarter revenue for our defense business was $8.1 billion and operating margins grew to a strong 10.3% driven by improved mix and performance. International customers accounted for 28% of our defense revenue in the first quarter and we continue to drive towards our goal of 30% of revenue going forward. Focus on affordability continues as we remain committed to driving our market-based affordability efforts and are on track for further lowering our cost structure in an efforts to increase our productivity and strengthen our competitive position in this challenging environment.

Revenue of Boeing Military Aircraft was $4.1 billion in the first quarter as higher deliveries on Apache C-17 and P-8A was offset by lower F-15 volume. Operating margin of 10.5% was primarily driven by improved performance and delivery mix.

Network & Space Systems revenue of $2 billion increased 5% primarily driven by improved commercial satellite volume. Operating margin was 8% in the quarter on favorable delivery mix.

Global Services & Support had first quarter revenue of $2 billion resulting from lower volume on various logistics contracts. GS&S had healthy operating margin of 12.1% primarily driven by improved performance at our maintenance, modifications and upgrades business.

Defense, Space & Security had solid backlog of $68 billion. International business remains very strong with 42% of our current backlog representing customers outside the United States.

Turning now to Slide 7. The BCC net financing portfolio declined to $4.2 billion our normal runoff and fixed that exceeded new aircraft volume. Unallocated expenses from core operations was $170 million and was higher due to a favorable court judgment on a satellite litigation, recorded in the same period last year.

Now turning to cash flow on Slide 8. Both our Commercial and Defense business did an outstanding job on focusing on cash in the quarter. Despite fewer 787 deliveries, first quarter operating cash flow was a solid $524 million.

Moving now to cash and debt balances on Slide 9. We ended the quarter with nearly $12 billion in cash and marketable securities and timing of the 787 events limited our ability to repurchase shares in the first quarter. However, we expect to begin our repurchase plan in the second quarter and remain committed to our $1.5 billion to $2 billion of share repurchase planned for 2013.

Turning now to Slide 10 to discuss our outlook for 2013. We're reaffirming our guidance for 2013. We still expect 787 deliveries to be greater than 60 this year, with second quarter deliveries for approximately 15% to 20% of our full year deliveries. Total commercial airplane deliveries are still expected to be between 635 and 645 for the year. Revenue guidance for 2013 remains at between $82 billion and $85 billion, largely reflecting higher commercial airplane deliveries and continued challenging defense environment.

Core earnings per share guidance is unchanged at between $6.10 and $6.30 a share, representing approximately 5% growth driven by continued strong execution across both businesses. Operating cash flow guidance before pension contributions remains at greater than $8 billion, reflecting higher delivery volume and again continued strong performance. So, overall, performance was strong for the quarter as we further improved productivity at both businesses, successfully increased our planned production rates, and efficiently and effectively managed cash. We expect this strong operational performance to continue throughout the balance of 2013.

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

W. James McNerney, Jr. - Chairman, President and CEO: Thanks, Greg. With a strong first quarter behind us and implementation of the 787 battery solution well underway, we remain committed to the goals we initially set for 2013. That includes continued conversion of our record backlog into deliveries, while generating strong core operating performance that allows us to return cash to shareholders, while investing wisely in our products, technologies and people to sustain our growth in competitiveness. Our priorities going forward remain clear the profitable ramp up of production on our Commercial Airplane programs, executing on our commercial and defense development programs, driving productivity and affordability throughout the enterprise, continuing to strengthen and reposition our defense business with investments in growth areas amid further international expansion and importantly returning increasing value to both our customers and shareholders.

Now with that thought we'd be glad and happy to take your questions.

Transcript Call Date 04/24/2013

Operator: Howard Rubel, Jefferies.

Howard Rubel - Jefferies: Your operating margins were helped to some degree by the absence of 78 on the other hand pre R&D margins on commercial were up year-on-year and defense business was also very strong. Could you address Jim maybe a little bit further from your commentary what sort of goals are you setting for your operating units so that you can see this ongoing improvement?

W. James McNerney, Jr. - Chairman, President and CEO: Well, Howard, first of all, productivity and affordability is fundamental to everything we do, whether it's running a factory, whether it's running a back room or whether it's designing or building airplane. So, that has been a main theme that has – that is beginning to pay off, has paid off and we will not let up on even though we're beginning to grow significantly, led by our commercial business. So productivity is foundational. Now growth is also a piece of the margin expansion equation. We have taken up rates on 777 and 73, you are going to begin to see the rate which is on schedule and we have confidence in that scheduled and 87 begin to increase a couple of multi-years have been nailed down in our defense business, which also gives us opportunity to use volume to help drive margin expansion. I also think the other comment I make is that we are entering an era now where R&D is being used more efficiently and I think that will not stop this quarter. And so notwithstanding some development programs ahead of us, I think you may see more efficient use of research and development costs over the next period of time. So, that that would be my answer there.

Operator: Sam Pearlstein, Wells Fargo.

Sam Pearlstein - Wells Fargo: I was wondering if I could follow-up on what you just mentioned which was R&D, because you did come in relatively low in spending and R&D and given that year-over-year decline in commercial R&D, how do you get to the $3.4 billion this year. Is it driven by the potential launch of 777-X and/or 787-10 to drive that pickup over the course of the year? How should we think about it?

W. James McNerney, Jr. - Chairman, President and CEO: Yeah, I would think the – the thought here would be and I would include the MAX and what you just said there, in terms of some ongoing development efforts. I think, look, if you step back for a second and look at this decade compared to the last one, we have the opportunity to harvest some hard-fought gains in our commercial airplane business and we all remember the times of fighting through the 87 development where the technologies weren't quite as mature as we'd hoped they'd be. At certain points in time we had to spend a lot of money. The 47-A cost us little bit more than we assumed it would. And we spent a lot of money in research and development. Now this decade, this team is committed to harvesting some of the learning from that decade and also harvesting some of the technology maturation that was hard-fought and we now have in hand. So I think when you look at the 777X, you look at a 10X or you look at a MAX, these are derivative programs that tend to leverage more efficiently what we know. There is not a lot of invention going on. There is a lot of creative application and use of a technological lead that we have and that leads to – and I know this is a broader answer than maybe you were looking for – but that leads to confidence that more restrained levels of R&D can continue for longer periods of time.

Operator: Robert Stallard, Royal Bank of Canada.

Rob Stallard - RBC Capital Markets: Jim you highlighted that the demand environment remains very strong and that customers are looking to accelerate deliveries. But given how many planes you now have in the backlog what real capacity or flexibility do you have to further raise rates beyond what you've currently committed to.

W. James McNerney, Jr. - Chairman, President and CEO: Well, I think that there is – demand is strong and in fact that to be honest the first piece of 2012 surprised us a little bit, it's sort of above trend I think it's between 5% and 6% on industry level. So, demand on the passenger side looked strong, we do have confidence in the ongoing trend line sort of four and five. But I think we have been ramping up production. There is more to go on the 737 I think we've given you visibility on that beyond the 38 that we just broke to. Could there be more beyond the 42, we'll have to wait and see but there is strong demand for narrow-body airplanes in the world today. I think getting to 10 a month as all of you have mentioned to me is not a free throw. On the 87 we have strong confidence levels that we're going to get there on the timing that we've suggested to you. Is there demand beyond that? There are many that think there is, but we'll go th5rough the discipline process. So, I think the middle of the wide-body which would span the 87 up to the 777 there's more room to run there and we'll adjust our rates as we see it In narrow-body. So I don't think it's over yet.

Operator: Carter Copeland, Barclays.

Carter Copeland - Barclays Capital: Greg I wondered if I could ask you to expand on a couple of accounting points since you know I can't help myself. On the program versus unit, you guys are about $900 million in the quarter but there was only one 787 delivery. So, I wanted to – first you could expand on that. And then secondly on the defer production per unit, it looks like it ticked down pretty nicely there to around 70 million a unit. I know you went through the 100 unit in the quarter and you had said that there was a good step down in cost there. So, I'm not sure if you can comment within those units if you saw even further progress from the beginning to the end. But any color you can provide there will be helpful.

Greg Smith - EVP and CFO: Sure. Well on the unit versus program, most of that is driven by 47 and then that one airplane on the 87 is our second delivery out of Charleston which as you know we had as planned longer flow and learning applied to that airplane, but as I've said in the past, looking at it from a unit versus program is going to become more challenging because of the mix of differentiation in the lineup of airplanes that were manufactured earlier coming out of EMC and airplanes coming off the line. Now to add into that you got the -9. So, you are right, I would focus more now on the deferred production growth and we are seeing improvements there on a unit basis, and I think that's a good representation of what you're seeing in the factories. Right now we're looking at about 60% on a unit basis from the first airplane line 8 to about line 100. So we're continuing to see good progress there, we are seeing that both at Charleston and in Everett, and when you kind of step back and look at kind of the key operational metrics that essentially are going to drive the financials we're seeing on the 87 right now, shortages that are at record low, travel work coming in as it is essentially at zero. So, it's really giving us the opportunity to stabilize the final production line and have it running as it was planned, and I think we're starting to see the benefits of that. We are also focused on the overall productivity and support ratios and you're seeing declines in employment around there as planned as we kind of increase our production. So overall operationally you're seeing improved results and that's translating into the growth in deferred production, but again, I would tell you, from outside in, I'd tell you to continue to focus on the deferred production growth in our production rates around that.

Carter Copeland - Barclays Capital: The 60% was the total cost or the deferred production per plane?

W. James McNerney, Jr. - Chairman, President and CEO: Total cost.

Operator: Joe Nadol, JPMorgan.

Joseph Nadol III - JPMorgan: You had a pretty strong result I thought in cash flow considering that you couldn't ship for most of the quarter on the 787 and you've got some benefits in the advances category and I guess mitigated the inventory built a little more than I thought. Just was wondering as you look forward, Greg, to the rest of the year, how you're feeling about that guidance? Is there upside there and were the items here big items that are going to reverse or help us out with the profile there a little bit the rest of the year?

Greg Smith - EVP and CFO: Yeah, look, I'd tell you first quarter was a combination of timing and improved performance. We certainly were very active in managing our cash in the first quarter and were able to pull in some advances that were frankly timed in early second quarter, but day-to-day very disciplined approach to cash management. I'm feeling comfortable, I'm feeling good about full-year guidance and obviously the profile on cash from now going forward will really be hinged on the ramp up primarily around commercial airplane deliveries and particularly around 87.

Joseph Nadol III - JPMorgan: You didn't dig into the share repurchase plan in the first quarter?

Greg Smith - EVP and CFO: Right.

Joseph Nadol III - JPMorgan: Why exactly in the 787?

Greg Smith - EVP and CFO: Just because of everything that was going on around the 787 in the battery we refrained from doing any repurchase and as I mentioned we're going to get back in here in the second quarter we're still committed to the $1.5 billion to $2 billion for the full year.

Operator: Douglas Harned, Sanford Bernstein.

Douglas Harned - Sanford Bernstein: I wanted to follow up on the 787 discussion from before, I mean based on the deferred production numbers it does look like your costs are coming down substantially. Could you comment on the trajectory going forward both in terms of roughly when you might expect to reach breakeven on a unit basis and then also what do you expect to happen Dash 9 comes in, should we expect maybe perhaps a bump backup for a little while?

Greg Smith - EVP and CFO: Yeah, I mean well, certainly we're planning on continuing to reduce the unit cost on the airplane going forward and we've got good productivity plans in place ourselves within the supply chain and we're assuming that we execute to those. I think as the Dash 9, certainly if you look at it as Carter was indicating on it unit versus program we're going to see disruption there. But again I think the deferred production growth is the best way to look at it. As far as the breakeven goes as I said we're going to peak at just over $20 billion once we hit 10 and stabilize and that's when we'll turn the corner on a unit basis. But Doug, very focused on this obviously, every element of cost whether it's in ours factories or within the supply chain remains a big priority for us to continue to drive productivity on this airplane.

Douglas Harned - Sanford Bernstein: If I can, when you say stabilizing at 10, when you look further, given the uniqueness of this airplane, is there a timeframe when you are considering what timeframe would it be when you might consider even going higher in rate?

Greg Smith - EVP and CFO: Well, I think once we get to 10 and stabilize and feel good about where we are and all of the operational metrics that are in – all within the right bandwidth, that’s the timeframe where we will be making a decision to – and obviously the capital and whatever investments are required in the continued demand will all be taken into consideration when we and if we decide to take the rate up.

Operator: Noah Poponak, Goldman Sachs.

Noah Poponak - Goldman Sachs: Just want to follow-up on 787 as well, can you maybe sort of walk us through what your process was to get comfort that the implementation of the battery fix won't be disruptive to all of the positive comments you are making here on your metrics on cost and on deferred production. It seems like you have your arms around it, but it's obviously fairly unique, you have never done it before, you have to retrofit the active fleet, retrofit aircraft on a tarmac, put it into the manufacturing process. Maybe a little bit more color on how you are comfortable with that, not really changing things significantly.

W. James McNerney, Jr. - Chairman, President and CEO: No, I think as mods go in the end with the fixed defined and the implementation in hand, this is not a big one. This is two batteries in two locations on the airplane that the locations don't have to change much, there is some different interface to the electrical system, which is not rocket science. I guess I would say and there is the enclosure around the battery which fits into the space that already exists, and then there's the exhaust system, which is designed again to easily retrofit. So this is days, not weeks. It's a standardized fix that we've already implemented on a couple of our airplanes and a couple of our customers' airplanes already, and so we have a pretty high confidence level that we can be through the majority of this in a few weeks, mid-May out in the field and into our production line, and it's not a long pull in any tent. It's not a gating item on any (perk) chart. So, the straightforwardness of the fix itself, the fact that it doesn't represent a gating item in any of the production or design gives us confidence that this won't disrupt anything other than the schedule that we've laid out.

Operator: Cai von Rumohr, Cowen & Company.

Cai von Rumohr - Cowen & Company: So, Jim, you mentioned expecting to launch the -10 this year. What will it take to launch, because doesn’t look like you have a whole lot of delivery slots open at a rate of 10 a month? What do you need to see in terms of customers and do you also have to make a decision to go to 12 a month to be able to deliver it in a reasonable timeframe?

W. James McNerney, Jr. - Chairman, President and CEO: Well, as usual, Cai, you're asking the right question. I think obviously the stability at 10, the supply chain's capacity to do the 10 with possible higher rates, if that's what the marketplace supports, are the key questions. The cost of doing this airplane and the technical risk of doing it is not high. There is some capital – there would be some capital involved probably. But I think we're feeling very good about all of those issues, okay. So, we just want to get through what we're getting through right now. We want to feel good about the production environment that we feel increasingly confident in and when that all comes together and I'd anticipate sooner rather than later we're going to be making a call here.

Cai von Rumohr - Cowen & Company: So I mean I assume what's the earliest you could deliver it?

Greg Smith - EVP and CFO: Well, we'd have to sort through that because if it did require taking up rate that would add a little more time into it. But it's -- again we'd have to define that and we're working through that right now. I would say the one thing that we don't lack forward the Dash 10 is demand. Customers want this airplane and so we're being pushed to get this airplane out. This is more us being disciplined about feeling comfortable with the business case and about the stability of the manufacturing environment overall before we add something else to it, sooner rather than later.

Operator: Robert Spingarn, Credit Suisse.

Robert Spingarn - Credit Suisse: Greg I'd like to stick with the 787 learning curve since it's just such a key component to your cash flow story and I wanted to ask for clarification and then just a couple of more points on this. But when you were answering Carter's question you mentioned 60% I wanted to be clear on what you were talking about there, are you talking about 60% reduction from the first from line number eight in terms of cash cost?

Greg Smith - EVP and CFO: That's unit cost of line number 8 versus unit cost of line number 100.

Robert Spingarn - Credit Suisse: So, with that then imply something like $160 million cost on $100 million down from $400 million on 8?

Greg Smith - EVP and CFO: I haven't gotten into specific cost on the airplane for obvious reasons, nut I'd tell you from a unit cost perspective, we are continuing to come down the learning curve and we expect to do that going forward. and again as I mentioned, it's not just within our own factories, it's within our supply chain. I mean just to give you an example, I was out last week lead airplane, they have got metrics in place, hours per job, what it is today, what it is on the next airplane, what it needs to be next week, what it needs to be by the end of the year. So, they are aware of what they need to do to come down the learning curve and again I think as the production system stabilizes, they are starting to flush out the efficient fees and we are assuming they would be able to do that as we continue to deliver more airplanes.

Robert Spingarn - Credit Suisse: On that note, can I ask you if the future step down to the future improvements in the learning curve, cause this was a very significant one of course in Q1. Are these tied to step downs that are negotiated as the rates bump up, in other words do we see another big move with 7 and then another big move with 10. And it's not tied to that?

Greg Smith - EVP and CFO: Internally I'd say pretty traditional learning curve with objectives to meet that curve and then within the supply chain I think as I talked before it's differed by supplier by supplier depending on what was negotiated. So, in some cases you do have step down pricing at a specific unit. On other cases you have more of – I'll say kind of a traditional curve, but it differs supplier by supplier as we kind of work through discussions with them. So, you won't see what I'd say a traditional learning when you look at an overall basis as you have on other programs, but again it's obviously a very big focus item for us and the team is very committed to continuing to look at efficiencies, and again, whether it's us or supply chain, once any airplane program gets to rate and stabilizes, we've been able to prove that we've been able to flush out inefficiencies and come down the curve even further. And frankly, I think the 737 is a great example of that where that airplane's been in production a long time and there's still opportunities that we've been able to capture and efficiencies, and we're going to continue that discipline on the 87. So lot of work to do, good plans I think in place, but a very committed focus in team to continue down that curve on a unit-by-unit basis.

Robert Spingarn - Credit Suisse: Greg, just on 737, since you brought it up. Jim talked about bridging the two models with the Ryanair order. How should we think about pricing during that period of time and margins on the aircraft and then the mix of production? Will you overlap or make something of a clean break between the two in that timeframe?

Greg Smith - EVP and CFO: It will be gradual. Part of the production plan there is to, as you phase out NG, ramping out MAX at the same time, so there's some capital that we've invested there to really do that seamlessly, and have the MAX running down and being proved out on one line as the NG line continues to be at peak rate and then we'll make the full transition. So I think they've got a very good discipline, well thought out manufacturing plan well in advance of going into final assembly obviously. As far as pricing, I'd say it's pretty much in line and is playing out within our expectations. As I've said before, certainly when you have end-of-line or you have airplanes that are first launch customer and so on versus some more attractive pricing in that regard, but overall I think it's coming in within our expectations. And the teams doing a great job executing rates, I mean we're at record rate there with record low shortages, single-digit over time and a very good plan in place to get to 42.

Operator: Jason Gursky, Citi.

Jason Gursky - Citi: Congratulations on dealing with the battery issue, it's done in a very nice way I thought. A quick clarification for Greg on the 787 you suggested that when it stabilizes things will get a lot better. Can you just clarify exactly how long it takes to stabilize the rate? Then Jim, can you talk a little bit about what's going on in services generally speaking what your approaches to services going forward as far as growth is concerned, obviously you've seen some really nice margin performance in services particularly on the military side here recently, can you just offer a little bit of color as to generally what's going on in services, why the good performance and what the outlook looks like there?

Greg Smith - EVP and CFO: I think on make sure I answer your question on the unit costs, but as we peak and then that's when we'll start to become positive on a unit costs basis again as it stabilize. So, that's usually about a year, year and a half once we hit 10, that's the plan right now, but based on everything else you heard me say today we're continuing to try to pull that to the left the best we can, but essentially that's kind of a timeframe that you'd be looking at on a unit basis.

W. James McNerney, Jr. - Chairman, President and CEO: On your question on services I think overall in both side of our business we see it as a growth opportunity. I think if there was a theme since we are leveraging the largest install base in aerospace in both our defense and commercial business. There is an asset that many others don't have. But on top of that footprint I think there is a theme of injecting more technology and more IT into the services we are adding, and so I'd say those two themes plus the theme of sort of packaged multi-year commitments where we are guaranteeing some performance with technology and the reason we can do that against some known income streamed us and the reason we think we can do that more effectively than others is again because we know the technology involve better than anyone else. And so I think these deals more IT particularly on the logistics side and more technology from mods and modifications, I think that all spells a major growth opportunity, we just keep our feet underneath ourselves and make the right combo of acquisitions and internal investments and it seems to be going well as you noted.

Operator: Peter Arment, Sterne, Agee.

Peter Arment - Sterne, Agee: Jim, I guess talking about 787 going back to when days of Global Aeronautica used to be the long pole. And it sounds like South Carolina things are progressing quite well and you are also announcing a big investment there. I think earlier this month you made an announcement about $1 billion investment. Can you give us just some more color about what you're seeing down there and the opportunity and what kind of flexibility that's going to build in for you given all these projects you have got planned?

W. James McNerney, Jr. - Chairman, President and CEO: Peter, we see South Carolina as exceeding expectations in terms of its performance to date. Greenfield operations in this industry are not easy, and I give credit to the entire Boeing team plus the team in Everett that went out of their way to help make South Carolina a success story early on. So all the metrics there are good in terms of production rates and efficiencies and cost and productivity. And as you pointed out, we are going to deepen our engagement down there. I mean South Carolina and we have put together a deal that offers incentives to us, but asks us to perform against those incentives in terms of investments and new jobs over, I believe, it's an 8-year period, and we're excited about that, because I think Boeing overall is stronger and can handle the growth that we see in front of us. We see tremendous growth in front of us for the next couple of decades and we're going to need a number of places from which we can draw talent and use capital, so we're very pleased that South Carolina is moving along as well as it is.

Operator: Thank you. And that completes the analyst question-and-answer session. I will now return you to the Boeing Company for introductory remarks by Mr. Tom Downey, Senior Vice President of Corporate Communications. Mr. Downey, please go ahead.

Thomas J. Downey - SVP, Communications: Thank you. We will continue with the questions for Jim and Greg. If you have any questions after the session ends, please call our Media Relations team at 312-544-2002. Operator, we're ready for the first question, and in the interest of time, we ask that you limit everyone to just one question please.

Operator: Al Scott, Reuters.

Alwyn Scott - Reuters: I know you didn't reveal a number, but I know we're all interested in and wondered if you could talk more about the cost of the 787 fix and how that will be handled in accounting? I understand it's amortized over an accounting block of 1,100 planes, just a little more detail about that and what you think it cost Boeing overall, even though it's not hitting the income statement, that would be great?

W. James McNerney, Jr. - Chairman, President and CEO: I'll ask Greg to answer that question for you.

Greg Smith - EVP and CFO: Well, it wasn't – the majority of it wasn't reflected in our Q1 results and that was cost – period costs and particularly around R&D and around our root cause investigation redesign, the testing of that and then also our estimated cost of incurring the repair for our customers fleet going forward. So, that's what was primarily reflected there. And as far as the cost base as you referred to in the 1,100 units there was a slight increase there for the additional retrofit on the undelivered airplanes throughout the balance of the cost base.

Alwyn Scott - Reuters: Can you give numbers, and R&D went down so…?

Greg Smith - EVP and CFO: Well, we managed to absorb this. So, it was really a matter of priorities and we re-shifted our priorities and our people onto this effort from other efforts. And this is a One Boeing effort, so it was people from NBCA and BDS and our engineering and technology areas and so on so.

Alwyn Scott - Reuters: And the additional retrofit how did that affect the accounting block?

Greg Smith - EVP and CFO: Yeah, it's minimal within the accounting block.

Alwyn Scott - Reuters: 1,100 up to?

Greg Smith - EVP and CFO: It's 1100 unit, on a unit basis over 1100 but it's minimal.

Operator: Jon Ostrower, Wall Street Journal.

Jon Ostrower - Wall Street Journal: Question about the decision to the production profile for 777-X, you talked about different competing production locations, can you kind of talk about the considerations of there as you see it. And also the 787 learning curve, looking at a 60% reduction from airplane 8 to airplane 100 with 92 airplanes of learning in that process. Can you talk about how that compares to 777 and just doing a rough calculation of the numbers, it seems it indicate that it's actually higher than on 85% learning curve that would seem to indicate that it's actually cost isn't coming out as fast as it was 777. Can you kind of talk about those two factors?

W. James McNerney, Jr. - Chairman, President and CEO: Jon I'll give you the answer on 777 and then I'll let Greg handle the learning curve question. I think we have figured out by and large what airplane to build. We think we know and as you know because you know as well, the composite wing are modified fuselage new engines. And so the question there is – the question then becomes and we are sort of in the middle of the assessment now, where to assemble it and where to build the major components. And we are in the middle of that process. I mean obviously Everett is doing one heck of a job right now, building the current 777 model. And so it would obviously be an attractive place to consider for the assembly, for the next 777 model, the composite wing, we have to think through as in the case of assembly where we do that. But we're sort of in the middle of that and I think over the next few months we'll be in a position to talk in a more granular way about what makes the most sense for our customers and for the Company. Greg?

Greg Smith - EVP and CFO: Yeah, with regards to the learning curve, yeah, (indiscernible) 60 per slope there from Unit 8 to 100 if you compare that to 777. Some of that obviously is just the upfront disruption, but over time the learning curve assumptions will be very similar to what we've seen on the 777. So it's really just kind of those upfront units that really differentiate that curve.

Jon Ostrower - Wall Street Journal: How you're seeing the 787 curve now? How is it kind of (working with those) first hundred airplanes? I mean obviously there was a lot of disruption in terms of the rework and all that. Are you seeing – as you kind of got stabilized from airplane 66 to 92, how is that curve looking as far as cost reduction goes?

Greg Smith - EVP and CFO: Yeah, I'd say we're coming down the curve as we had planned to, whether it's in final assembly or within Charleston. So I think the teams are tracking well to the plan we put in place there. And certainly as we've eliminated any disruption and we're seeing components coming in with no open work, again, it really allows the production system to operate as it was designed and stabilize and therefore be able to come down the curve further, and we expect it going forward throughout the block. So, again, I think we're making good progress. Lot of work in front of us, but the teams are focused and dedicated to it, and we've got to stay on it.

Operator: Christopher Drew, The New York Times.

Christopher Drew - The New York Times: Jim, could you step back a second and perhaps reflect a bit on why it's so hard to make a new plan these days when I think more broadly not just 87 but the F-35 some of the Airbus (playing) and whether with all those difficulties are now going to lead to this a narrow a little more caution with the harvesting of the technologies rather than big new planes for quite a while?

W. James McNerney, Jr. - Chairman, President and CEO: Well I think I – one thing I've learned in this industry is not to comment on another guys' airplane. So, if you don't mid I'll resist any Lockheed Martin or Airbus. I'm impressed enough with how hard it is to manage what I've got to manage. I would say though there is a theme here. If you look back in the 100 years that we've been in business, we go through eras where we get excited by new technologies because of the performance it can bring to our customers, whether it's cloth to aluminum, whether it's sort of quilted aluminum to the smooth aluminum and then there are just technological shifts that have gone on and as you make the first bite at that apple you tend to be on the bleeding edge for a while as you've heard me characterize, and I think that was the case with the 787. We should have been – that's not an excuse we should have been more disciplined about the way we went about that and it has given us and I think to your point, it now has given us a number of a suite of technologies that we now can deploy now that they were matured in bleeding edge fashion over last eight years, I think the next decade or two allows us to mature these mature technologies into a number of applications and each and every one of the commercial applications that I talked about today, whether it's the 737, 787 or the 777 new derivatives are all going to be step function improvements much more than a normal derivative, even though the cost and work will be roughly the same as new derivative. But the reason they will provide more benefit is because of all of the investments and all of the leading edge work we did over last decade. So, it's I think we maybe in an era where we can absorb somewhat less risk and still deliver a lot of performance. 30 years from now, will there be some new technology that we will all wrestle with, probably. Hopefully will there be enough people in Boeing that are here today that will remember the lessons learned from the 87, I hope so. I'm old, I will be on a beach somewhere then. Anyway that’s kind of the answer.

Operator: Andrew Parker, Financial Times.

Andrew Parker - Financial Times: Can I just take you back to the 787 and the cost of the grounding episode. Can you just spell out please what you estimate the cost of the fixed that you got to prove along from the FAA, what that is going to cost Boeing. And also can you speak to airlines have been talking about compensation, can you give sort of disruption of a schedules etcetera. Can you give any sort of sense of the quantum you expect in terms of compensation that you may have to pay?

Greg Smith - EVP and CFO: I'll start with the cost. As I mentioned earlier, the cost that were incurred in the first quarter were around the root cause investigation, the redesign and the testing of the components. And then an estimate of what we think is going to cost to repair the balance of the customers fleet, that was predominantly what was reflected in the first quarter. I'll let Jim talk about…

Andrew Parker - Financial Times: Forgive me if I'm interrupting. Can you spell out what that cost is then that's gone through your Q1 earnings statement?

Greg Smith - EVP and CFO: We haven't talked specific on the numbers, but it's minor in comparison to the overall results. And again, we were able to absorb that are by reallocating resources and expertise on to this. So, again, what you saw in the results for Q1, we were able to absorb that and that's in those margins, and at the same time able to hold our full year guidance based on that.

Andrew Parker - Financial Times: And to your point about as well as the testing of the fixed and so on. You said that it also reflects some of the cost of actually doing the work on the 50 planes that you so far delivered. Does it include the cost of fixing all of these 50 or just some of them?

Greg Smith - EVP and CFO: No, it includes our estimated cost of what we think it's going to take to do all 50 airplanes.

Andrew Parker - Financial Times: Right. And forgive me, can you give us a specific number then on this cost?

Greg Smith - EVP and CFO: No.

Andrew Parker - Financial Times: Right. Okay. And to the point about compensation please.

W. James McNerney, Jr. - Chairman, President and CEO: I'll take a swing at that one Andrew. I think as you know, there are no contractual obligations there, but having said that, there are a few places where we'll work with our customers to ensure and there's a variety of ways we can work with them to ensure that the disruption doesn't hurt their results and their operation more than it needs to, and that will be in a different way with every customer.

Andrew Parker - Financial Times: Right. And could I just follow up with one final thing. And forgive me because you may have addressed this earlier, but when do you expect the 787 program to reach breakeven on the unit basis at least.

W. James McNerney, Jr. - Chairman, President and CEO: It's when we reach when we peak on our deferred production and basically peak at rate in about a year, year and a half from that time period is when we on a unit basis we will break the curve versus program accounting.

Andrew Parker - Financial Times: Sorry, the timeline on which on a unit basis you were breakeven is, just in the terms of when that is.

W. James McNerney, Jr. - Chairman, President and CEO: About two years from now.

Andrew Parker - Financial Times: About two years from now?

W. James McNerney, Jr. - Chairman, President and CEO: Right.

Operator: Tom Black, Bloomberg.

Thomas Black - Bloomberg: Could you discuss a little bit about the give and takes on the 777-X that is under discussion right now that economics versus range, the new components versus compatibility?

W. James McNerney, Jr. - Chairman, President and CEO: I think it will be a derivative airplane a significant derivative airplane. The two new key technologies will be a composite wing which will be a fourth generation composite wing for us. So, this is an example of a game changing technology that we now have good experience with and now have matured. And the second will be new engines on the airplane. And our discussions with customers have said that the range and efficiency that this engine wing combination will produce is significant in their minds and that there will be a splitting of value between us and our customers that works for both of us, those are the discussions we are having right now. We have a lot of confidence about the execute-ability of this plane and the pricing we think we can get that will benefit both us and our customers. So, we are pretty far down that evaluation and we are excited about what we see.

Thomas Black - Bloomberg: You talked about some step function improvements that came from the learning on the 787?

W. James McNerney, Jr. - Chairman, President and CEO: Yes.

Thomas Black - Bloomberg: Will that be applied somewhat to the 777, you have more – for example you have more electrical components on them versus some of the blade of the engines that you use now?

W. James McNerney, Jr. - Chairman, President and CEO: Yes. I think the biggest of those things would be the wing. A composite wings are incredibly efficient as compared to aluminum wings, not only in the way – not only in the aerodynamic but in the weight of them. And that plus the engines are producing over 90% of the value of this airplane, let me just leave it that way. And the composite wing, the bigger the composite wing gets, the more efficient it becomes. And this is a big composite wing.

Thomas Black - Bloomberg: And if I could just on the economic versus range some airlines want more range others want more economic…

W. James McNerney, Jr. - Chairman, President and CEO: I think the market segment that this is going into in general launches much range as it can get. And so we will have two models that have different capacities. So, thick roots versus thinner roots, but range is something that within reason they are going to pay for. And that’s what the wing producers and that’s what the wing produces and that's what the new engines produce.

Thomas Black - Bloomberg: Are there any numbers you can throw out there?

W. James McNerney, Jr. - Chairman, President and CEO: No, we're not ready to announce the specifics on that yet, but it will be significant improvements in the most metrics that you would associate with the new airplane.

Operator: Steve Wilhelm, Puget Sound.

Steve Wilhelm - Puget Sound: Just in terms of the 777, could you say a little more about the timing of the offer and also what that will mean in terms of the (747-I)?

W. James McNerney, Jr. - Chairman, President and CEO: I think first of all we see those two airplanes addressing different market segments. So I think – and the 777 market segment is a bigger one than the (47-I), but we don't see the 777X introduction cannibalizing significantly the 47-8 which was implication of your question. So I think we see two market segments there, and I think the timing is up to the approval of the Board of Directors, but it wouldn’t be a shock if this was settled before the end of the year.

Operator: Josh Freed, Associated Press.

Joshua Freed - Associated Press: One last question on the 787 cost. Can you give any kind of ballpark parameter around the per unit cost of the fix for the ones that are out in the fleet, and obviously that number then won't include all of the work that went into developing the fix, but can you help us think about what it cost to actually install the thing on planes that are out there now?

Greg Smith - EVP and CFO: Yeah, again, I would say it was not significant. You saw in in the first quarter results. So the margins you saw for BCA absorb that, and again not significant when you look at the overall program over 1,100 units, very, very small. Because if you think about it, you had to put a battery on those airplanes, you're putting a different configuration here. So it's rather minimal on a unit-by-unit basis as you look over the 1,100 units.

Joshua Freed - Associated Press: And what's the current 787 inventory and what's it going to be in May when the deliveries restart?

Greg Smith - EVP and CFO: Well the 787 inventory is going to continue to grow as we build up for ramping up production and then that will be offset by the increase in delivery. So we expect it to grow. It's planned to grow as we increase – again, as we increase rate and then some of that will be offset by the increase in deliveries. But this quarter, I think, total program was about $28.8 billion.

Joshua Freed - Associated Press: What I meant was how many airplanes do you have that have been built but not delivered now and how many will you have in May when those deliveries then resume?

Greg Smith - EVP and CFO: Well we've got 25 airplanes that are on the ramp today that are completed out of final; five in Charleston, 20 in Everett that are essentially waiting for the battery to be swapped out, so those airplanes obviously once we get through the retrofit, we'll get them into our normal test flight schedule and customer delivery and they're all assumed in our delivery profile through the balance of the year.

Thomas J. Downey - SVP, Communications: Operator, that concludes our earnings call. Again, for members of the media, if you have further questions or we didn't get to your question, please give our Media Relations team a call at 312-544-2002. Thank you.