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28 Apr 2021 - Boeing Earnings Q1 2021 Call Transcript - 737 Items

I have taken the following extracts relating to the Boeing 737 program, from the first quarter earnings call which included management discussion and slide presentation plus the analyst question-and-answer session.

David Calhoun — President and Chief Executive Officer

So let me start with an update on the business on the next chart. Starting with the 737 program. As all of you know, we have identified electrical issues in certain locations in the flight deck of select 737 MAX airplanes. We are finalizing the plans and documentation with the FAA to outline the process required for operators to return their airplanes to service. Upon approval by the FAA, we expect the work to take a few days per airplane.

Approximately, 100 in-service airplanes are impacted, we will complete this same work on airplanes in our inventory. We have also paused deliveries while we address these issues, which will make our April deliveries very light. At this time, we expect to catch up on deliveries over the balance of the year. We recognize and regret the impact this has had on our customers’ operations and are focused on ensuring that their airplanes are ready for the summer season.

More broadly in the last several months, we’ve made important progress in safely returning the MAX to service worldwide. Since the FAAs ungrounding late last year, more than 165 countries have now approved the resumption of MAX operations. We’ve delivered more 85 MAX airplanes to customers, 21 airlines have returned their fleets to service and we’ve safely flown more than 26,000 commercial flights, totaling more than 58,000 flight hours.

We also recently received regulatory approval for the 8-200 variant of the 737 an important aircraft for our valued customer Ryanair. We now assume that the remaining non-US regulatory approvals will occur this year. With approval in China, most likely now in the second half of the year. As always, we will continue to work with global regulators and follow their lead in the steps ahead.

Our first priority remains assisting our customers with returning their parked fleet to service, more than one-third of the previously parked fleet is now flying revenue generating flights. We’re also honored and encouraged by the orders from Southwest Airlines, United Airlines and Alaska Airlines in the quarter, along with in order last week from Dubai Aerospace Enterprise and the trust our customers are placing in Boeing and in the 737 family.

These orders underscore our customers’ commitment to continued modernization of their fleets. With 737 airplanes that enable operational efficiencies such as improved fuel burn, which reduces carbon emissions, quieter engines that benefit the communities they serve, and excellent dispatch reliability to support on time operations. At the end of the quarter, we had approximately 3,200 aircraft in our 737 backlog.

We’re currently producing at a low rate and expect to gradually increase the rate to 31 per month in early 2022 with further gradual increases corresponding with market demand. We will continue to assess the production rate plan as we monitor the market environment and engaging customer discussions, the timing of remaining regulatory approvals will also determine our delivery plans and shape our production ramp-up. We will continue to communicate transparently with our supply chain to ensure readiness and stability.

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Greg Smith — Executive Vice President and Enterprise Operations Chief Financial Officer

Let’s now move to commercial airplanes on Slide 5. Revenue was $4.3 billion, driven by lower 787 deliveries, partially offset by higher 737 volume. Although, commercial airplanes operating margin continued to be under pressure, they performed in the quarter — they improved in the quarter — excuse me, due to higher 737 deliveries, lower abnormal production costs compared to the same period in prior year and the absence of the first quarter 2020 charge related to the 737 NG pickle fork repair costs. We delivered 58, 737 MAX airplanes in the first quarter. We currently have approximately 400, 737 MAX aircraft built and stored in inventory. As we previously communicated, we expect to have to remarket some of these aircraft and potentially reconfigure them. As you’ve seen by the recent orders, we’re making good, steady progress on the remarketing effort.

You may also recall right before the 737 MAX return to service, we estimated that around half of the approximate 450 aircraft we had in storage would be delivered by the end of ’21 and the majority of the remaining by the end of the following year, that estimate is unchanged. Through the first quarter, we have delivered 85, 737 aircraft from storage and as Dave mentioned, the recent delivery pause will impact our April deliveries.

We expect delivery timing and the production rate ramp up profile remain dynamic given the market environment, customer discussions and the remaining global regulatory approvals. There is no material change in our estimated for total 737 abnormal costs of $5 billion. During the first quarter, we expensed $568 million of abnormal production costs, which brought the cumulative abnormal cost expense to date to $3.1 billion. We expect the remainder of these costs to be expensed as incurred largely in 2021.

Our assessment of the liability for estimated 737 MAX potential concessions and other considerations to customers as well as the expected cash impact timing did not change significantly in the first quarter from our prior assessment. Cumulatively, we’ve accrued a $9.3 billion liability for the estimated potential concessions and other considerations. To date, we’ve reduced the liability by $4.9 billion through cash payments to customers and other forms of compensation, including $1.2 billion we paid this quarter. We have settlement agreements covering approximately $2.5 billion of the remaining liability balance of $4.4 billion.

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As Dave mentioned, we’re still awaiting 737 MAX regulatory approval from China and the timing of it will affect our 737 delivery plan. China is an important market for our commercial airplanes and order activity from China will affect our future production rates. As we’ve discussed, even as our industry begins to recover, we anticipate ’21 will be another challenging year. However, based on what we know today, we still expect revenue earnings and operating cash to improve from 2020. Commercial deliveries will continue to be the single biggest driver across all financial metrics.

Revenue improvement from 2020 to 2021 will be driven mainly by higher 737 and 787 deliveries as we plan to unwind inventory and deliver from the production lines. Consistent with what we shared last quarter, we also expect improvement to our bottom line from 2020 to ’21, primarily driven by higher commercial deliveries, absent of 2020 charges, improved performance and benefits from continued business transformation actions. These impacts will be partially offset by higher interest expense. Also bear in mind that our commercial business will continue to book significant abnormal production costs for the 737 program in ’21.

Similar to our revenue and earnings trajectories, we continue to expect 2021 operating cash flow to be much improved from 2020, driven by — mainly by inventory burn down associated with 737 and 787 programs. While higher deliveries will be a tailwind the timing of advanced payments in the burn down of access advanced payments, along with 737 customer settlement payments and higher interest payments will continue to be headwinds.

We expect the first quarter was the most challenging quarter from a cash perspective and we expect the trend improve for the remainder of the year as we ramp up 787 and 737 deliveries in subsequent periods. However, there could be some timing variation quarter-over-quarter, so quarterly trajectory could be uneven. As discussed our cash flow profile is heavily dependent upon obtaining the remaining 737 MAX regulatory approvals that commercial market recovery and ongoing discussions with our customers on their fleet planning needs.

In aggregate, we continue to expect 2021 to be a use of cash. We expect that continued improvement on the 737 MAX program due to lower customer considerations and higher delivery payments as well as recovery in commercial services will enable us to turn positive cash flow in 2022. The key watch items that I highlighted earlier will be the differentiator in our outlook trajectory. Given the dynamic environment, we continue to monitor the risks and opportunities to ensure we’re well positioned for the future. Over the past year, we’ve been keeping you updated on our extensive business transformation effort. We’re continuing to closely examine all aspects of our operations to simplify and streamline everything we do and take billions of dollars out of our operating costs while driving our key efforts in safety, quality and performance.

Question from Doug Harned — Bernstein — Analyst

Dave, I have a question for you that also goes over a long time. I think in you’re involved in the industry. If you think back over the years, Airbus and Boeing historically have always had kind of an ongoing battle about market share. They talk about it against see each other, that sort of thing. And it’s been particularly true on narrow bodies. So when you look at the situation today, the MAX obviously has been held back, there is still a large market for it. But Airbus has been delivering a lot of NEOs, they have a big backlog. On the last call, we talked a little bit about 321XLR. So when you look forward now, how important is market share? Do you think about that, is that number for narrow bodies important and is there something that through a level that you would want to make sure that Boeing is at?

Answer from David Calhoun — President and Chief Executive Officer

Yeah. It’s a great question. I want to be it — I want to split that market, let’s put it that way. That’s way it’s played out, historically, they do better in some segments of that market, we do better in other parts of that market with respect to the products that we field. And I’m confident we can get there. What I will say about this is, I can’t make up for the production gap that we created on our own right for that entire year. I can’t make up for that. And so I’m not going to try to — I’m not going to try to regain that ground, and simply from this point forward going to try to hold our own with respect to what I think is our rightful share.

I will also bring the rates back in the most stable fashion, I can conceivably bring them, so I will pace that and I think that is good for Boeing, I think that is really good for shareholders. So it’s all a question over what period of time do you want to measure it. I’m confident that over a longer period of time, we’ll get back to where we need to get to and I’m confident in the product line, but always have been and they continue to be. And I think some of the recent activity suggests that. When you look at the applications that we’re actually putting our airplanes to work for, I think we’re in a pretty decent place. So it’s a great question.

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