The Boeing Company (NYSE:BA) Q4 2023 Earnings Call Transcript

The Boeing Company (NYSE:BA) Q4 2023 Earnings Call Transcript January 31, 2024

The Boeing Company beats earnings expectations. Reported EPS is $-0.47, expectations were $-0.72. BA isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. Good day everyone and welcome to The Boeing Company’s Fourth Quarter 2023 Earnings Conference Call. Today’s call is being recorded. The management discussion and the slide presentation plus the analyst question-and-answer session are being broadcast live over the Internet. [Operator Instructions] At this time, for opening remarks and introductions, I’m turning the call over to Mr. Matt Welch, Vice President of Investor Relations for The Boeing Company. Mr. Welch, please go ahead.

Matt Welch: Thank you and good morning everyone. Welcome to Boeing’s quarterly earnings call. I am Matt Welch and with me today are Dave Calhoun, Boeing’s President and Chief Executive Officer; and Brian West, Boeing’s Executive Vice President and Chief Financial Officer. As a reminder, you can follow today’s broadcast and slide presentation at boeing.com. As always, detailed financial information is included in today’s press release. Furthermore, projections, estimates and goals included in today’s discussion involve risks, including those described in our SEC filings and in the forward-looking statement disclaimer at the end of the web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of certain non-GAAP measures. Now, I will turn the call over to Dave Calhoun.

Dave Calhoun: Thank you, Matt. Good morning everybody and thanks for joining us. While we report on our fourth quarter results today, my focus is on Alaska Airlines Flight 1282 and the actions we are taking as a company that strengthen quality and earn the confidence of our customers, the confidence of our regulators, and the flying public. Brian will cover the financials. I will keep my comments strictly to the issue at hand. I’ll start upfront by apologizing again to Alaska Airlines, to their crew and to their passengers and more broadly, to all of our customers who were affected by the 737 MAX 9 grounding. The NTSB’s investigation into the accident is ongoing. I have an amazing amount of confidence in the work that they do.

They bring experts to the investigation. And they take all the time that’s necessary to draw accurate conclusions, and we intend to be there with them. As part of that NTSB process, I cannot comment on any specific root cause or speculate a root cause. As a participant in the process, I do believe the investigation will narrow quickly. Whatever conclusions are reached, Boeing is accountable for what happened. Whatever the specific cause of the accident might turn out to be, an event like this simply must not happen on an airplane that leaves one of other factories. We simply must be better. Our customers deserve better. I want to remind everybody what a great job the pilots and the crew at Alaska Airlines did in responding to a desperate moment.

I also want to remind everybody what a terrific job the leadership at Alaska Airlines did, grounding the airplanes and ensuring safety. Alaska Airlines did exactly what companies like Boeing would hope that they do at a moment like that and that is why the airline industry is as safe as it is. We caused the problem, and we understand that. Over these last few weeks, I’ve had tough conversations with our customers, with our regulators, congressional leaders and more. We understand why they are angry, and we will work to earn their confidence. There is no message, no slogan that will accomplish that. It’s all about real, demonstrated action and absolute transparency every step of the way. So, let’s talk about those steps. Our team has worked diligently to help our customers restore their 737-9 airplanes to service.

The FAA approved the detailed inspection protocol last Wednesday. And today, all 737-9 operators are safely returning their airplanes in service. More broadly, we are taking immediate and comprehensive actions to strengthen quality of Boeing and within our supply chain. We instituted additional quality controls and inspections at Boeing and at our supplier. We issued bulletins to suppliers to strengthen the focus on conformance and reducing the risks of quality escapes. We opened our factories to 737 operators for additional direct oversight and we appointed an expert quality adviser to conduct a comprehensive and independent review of our commercial airplane quality management system, and they will remain with us for many years. Most importantly, last week, we paused 737 production for the day as more than 10,000 teammates across Renton, Seattle, and Moses Lake stopped to focus on safety and quality and only safety and quality.

This was a quality stand-down at a scale we have never done before, and we’re going to keep doing them across our commercial factories. In addition to our internal actions, the FAA has announced new oversight of our 737 manufacturing. We will cooperate fully and transparently with the FAA at every turn. We respect their role as our regulator, and we will follow their direction in every step on production. Today, we’re producing 737s at a rate of 38 per month and we will remain at that rate until the FAA and Boeing is satisfied with our quality and manufacturing process. This increased scrutiny, whether it comes from us, from our regulator or from third-parties, will make us better. It’s that simple. Over the last several years, we’ve taken close care not to push the system too fast.

And we have never hesitated to slow down, to hold production or to stop deliveries to take the time we need to get things right. Nobody knows that better than our investors. As you know, we stopped delivering 787s for over a year to ensure that each conform to our exacting specifications prior to delivery. And on the 737 line, we have regularly slowed rate breaks to support the stability of the overall production system and to correct non-conformances when identified. But this actually makes it absolutely clear we have more work to do. I know that these moments that impact delivery schedules can frustrate our customers and our investors. But quality and safety must come above all else. And our customers and our investors know that and are in there with us.

On that note, as you will see, we are not issuing financial outlook for 2024 today. Now is not the time for that. We won’t predict timing. We won’t get ahead of our regulator. We will go slow to go fast. And we will encourage and reward employees for speaking up to slow things down if that’s what’s needed. We will simply focus on every next airplane and ensuring we meet all the standards that we have, all the standards that our regulator has and that our customers demand. As we go about that work, we remain confident in our recovery. Since day one, we’ve been focused squarely on inculcating safety and quality to everything that we do and getting back to our legacy of having engineering excellence at the center of our business. That focus and commitment is unwavering.

And we will continue to strengthen our processes and our execution every step of the way. Most importantly, we will be transparent every step of the way. And with our 170,000 employees in mind, I’d like to close with a message directly to our team. We have confidence in you, and we have confidence in Boeing. We have confidence in our airplanes. I know how seriously you take your work. Our men and women on the manufacturing floor and in our engineering offices know exactly what we must do. You know your work better than anyone else on the planet. Use your voice, speak up, focus on every next detail. We will seek out and act on your feedback. We’re in a challenging moment. We will earn trust back through demonstrated action and a commitment to total transparency.

I’m confident in you, I’m confident in our company and that together, we will do just that. Brian, over to you.

Brian West: Thanks Dave and good morning everyone. Let’s start off with the total company financial performance for the quarter. Revenue was $22 billion. That’s up 10% year-over-year. Growth was driven by higher commercial volume and favorable mix. The core loss per share was $0.47, better than last year primarily on improved commercial volume, better mix and lower abnormal costs. They were offset by lower defense margins and higher period expenses, including R&D, which we expected. Free cash flow was $3 billion in the quarter, in line with the prior year and up sequentially from the third quarter primarily due to improved commercial deliveries and strong order activity, which show favorable advanced payment timing, some of which was anticipated in the first quarter of 2024.

Turning to the next page, I’ll cover Boeing Commercial Airplanes. BCA booked 611 net orders in the quarter with 411 737s, including an order with Akasa, 98 777Xs largely an Emirates order and 83 787s. We have over 5,600 airplanes in backlog valued at $441 billion. BCA delivered 157 airplanes in the quarter and revenue was $10.5 billion. That’s up 13% driven by higher widebody deliveries and favorable mix. Operating margin was just positive at 0.4%, driven by returning to normal 737 delivery levels in the quarter, improved mix as well as lower abnormal costs associated with getting to five per month on the 87 and resuming production on the 777X. Now, I’ll give more color on the key programs. On the 737, we delivered 110 airplanes in the quarter and 45 in December.

The program also began FAA certification flight testing on the 737-10 in December. For the year, we delivered 396 airplanes, on the upper end of the revised guidance range we provided in October. Per the FAA announcement, we’ll maintain production at 38 per month and work transparently with the FAA to complete all requirements for future increases. At the same time, we’ll continue to prioritize the master schedule to avoid disruption in our supply chain. On the 737-9, we’re actively supporting our customers’ return to service activities. And as of today, the majority are back flying. In our factory, we have 10 -9s in production, all of which will undergo the FAA group inspection process prior to delivery. Spirit has also adopted this inspection routine in its factory.

The quarter ended with about 200 MAX airplanes in inventory. It’s important to think about this inventory in three buckets. First, there are 140 737-8s built prior to 2023. The vast majority are for customers in China and India. We still expect to deliver most of these airplanes by year-end as we work towards shutting down the shadow factory. In the second bucket, there are around 25 airplanes produced in 2023 that are still in WIP, given the disruptions in the second half of last year. And we expect these to deliver in 2024. And lastly, there are approximately 35 -7 to -10s that we will deliver once those airplanes are certified, the timing of which will be determined by the FAA. Moving on to the 787. We delivered 23 airplanes in the quarter, including 11 in December.

For the year, we delivered 73 airplanes, within the guidance range we originally outlined for 2023. The program successfully transitioned production to five per month in the quarter and still plan to steadily work our way to 10 per month in the 2025, 2026 timeframe. We ended the quarter with approximately 60 airplanes in inventory, about 50 of which require rework, which continues to progress steadily. We still expect to deliver most of these airplanes by year-end as we finish the rework and shut down the shadow factory. We booked $77 million of abnormal costs in the quarter and have approximately $300 million left to go that will wind down by year-end, in line with our expectations. On the 777X, we resumed production in the quarter and continue to progress along the program timeline, which remains unchanged.

During the quarter, the Emirates order for 90 777Xs brought the program backlog to more than 400 airplanes and also extended the accounting quantity. We continue to follow the lead of the FAA as we progress through the certification process, including working to obtain approval from the FAA to begin certification flight testing. We booked $71 million of abnormal costs in the quarter, which is now fully behind us after resuming production, in line with our expectations. Moving to the next page, Boeing Defense and Space. BDS booked $8 billion in orders during the quarter, including the Lot 10 Award from the US Air Force for 15 KC-46A Tankers. The backlog is now at $59 billion. Revenue was $6.7 billion, up 9% on the tanker award and improved volume and BDS delivered 52 aircraft and two satellites in the quarter.

Operating margin was minus 1.5% in the quarter, a sequential improvement from 3Q, but still we have more work to do. 4Q results were impacted by cost true-ups on three fixed-price development programs totaling $139 million as well as unfavorable performance and mix on other programs. Our game plan to get BDS back to high single-digit margins by the 2025-2026 timeframe remains unchanged. Our core business remains solid, representing 60% of our revenue and performing in the mid to high single-digit margin range. The demand for these products is very strong and we need to execute, compete and grow these offerings. On the 25% of the portfolio primarily comprised of fighter and satellite programs, operational performance stabilized as we exit the year.

And as a result, the fourth quarter saw improved margin trends, although still negative. We still expect to return to the strong historical performance levels as we roll out new contracts with tighter underwriting disciplines as we move into the 2025-2026 timeframe. Lastly, we have our fixed-price development programs that represent the remaining 15% of revenue. Despite the relatively modest cost trips [ph] in the quarter, we continue to focus on maturing these programs and retiring risks quarter in, quarter out. And we made some good progress in the fourth quarter. In addition to capturing the tanker award from the US Air Force, the program delivered nine aircraft in the fourth quarter, continuing to build positive momentum in spite of the supply-related disruptions to the factory that we faced earlier last year.

And on the T-7A, the first Red Hawk arrived at Edwards Air Force Base in November, formally starting the Air Force development flight test campaign for the aircraft. Overall, the defense portfolio is poised to improve. The strong demand across the customer base, the products are performing in the field, and we’re confident that our efforts to drive execution and stability will return this business to performance levels that our investors recognize. Moving now to the next page, Boeing Global Services. BGS had another strong quarter. They received $6 billion in orders and the backlog is now at $20 billion. Revenue was $4.8 billion, up 6% primarily on favorable commercial volume and mix. Operating margins were a very strong 17.4%, an expansion of 350 basis points versus last year as both our commercial and government businesses were delivering double-digit margins.

In the quarter, BGS opened a parts distribution center in India and received a follow-on contract to provide sustainment for the C-17. Turning now to the next page, I’ll cover cash and debt. On cash and marketable securities, we ended the quarter at $16 billion. On debt, the balance remained flat at $52.3 billion and over the next few days, we’ll pay down $4 billion of the $5 billion of maturities coming due this year from our available cash on hand. We continue to maintain access to $10 billion of revolving credit facilities, all of which remain undrawn. Our liquidity position remains strong. Our investment-grade credit rating continues to be a priority. And we’re developing — deploying capital in line with the portage [ph] we’ve shared previously: invest in the business and pay down debt.

Turning to the next page, I’ll cover our full year financials. Full year revenue was $77.8 billion, up 17% year-over-year. Growth was driven by improved commercial volume primarily on higher 787 deliveries. The core loss per share was $5.81, better than prior year primarily on improved commercial volume and mix as well as lower fixed price development charges in defense. Free cash flow was $4.4 billion for the year, up versus prior year primarily on higher 787 deliveries and favorable receipt timing that was partially offset by higher expenditures as we increase production rates and invest in the business. While we’re postponing issuing 2024 guidance today, given our current focus, we’re committed to sharing timely and transparent updates moving forward.

I would like to provide some additional context on our path forward. We always knew 2024 was going to be an important year in our recovery. Based on what we know today, we expect another steady year of free cash flow, driven by the 737 production at 38 per month, ongoing execution of the 787 toward our long-term objectives, continued liquidation of our 737 and 787 inventory, and continued focus to wind down both shadow factories. Our defense business will continue to improve as we mature fixed-price programs and transition recently challenged programs with better underwriting disciplines that we’ve already started to see and BGS will continue to generate strong free cash flow. Longer term, we’re focused on quality and stability, which will ultimately drive free cash flow.

Nothing has changed on the demand front, and the backlog is strong and growing. Remember, our 2025-2026 guidance was based on achieving stability and we have to earn that by applying resources to fix our issues and demonstrate predictability one airplane at a time, side-by-side with our regulator. This team is up to the challenge, and we’ll apply any and all resources to get back to deliveries that satisfy our customers and underwrite the long-term demand profile. We’re still confident in the goals we laid out for 2025-2026 although it may take longer in that window than originally anticipated, and we won’t rush the system. With that, I’ll turn it back to Dave for closing comments.

Dave Calhoun: Yes. Thanks Brian. We’re addressing you from Renton, home of 737 MAX family. We’re living in the here and now, and we’re working with all of our people and I couldn’t be more impressed with their commitment, dedication and the comprehensive nature around which they will look at this. Boeing will get better. I am confident in that. We will address everything that needs to be learned from the accident, and we’ll move forward. So, thanks. Happy to take your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question is from the line of Peter Arment. Please go ahead.

Peter Arment: Yes. good morning Dave and Brian.

Dave Calhoun: Hi Peter.

Peter Arment: Dave, thanks for the initial opening color on the MAX situation and the steps being taken. So, I guess just to follow on that, Dave, I wanted to ask you about where you assess you are in kind of the recovery of the MAX program when we think about what has been a successful transition to rate 38 and some of the progress in stabilizing the supply chain. And you’ve commenced deliveries to China and I know we’re not talking about 2025-2026 targets, but directionally, there’s been a lot of improvement since last fall and since your Investor Day when you laid out this long-term outlook. Thanks.

Dave Calhoun: Yes, Peter, I appreciate that. By the way, one stat which I was just handed, which I track all the time is the number of our -9s that have been returned into service. We’re at 129, and that is progressing at a very quick rate based on the inspection protocols that are FAA and we all agreed with. I am very proud of the progress that we’ve made, and I feel great about it, of course, with one exception, and it’s too big an exception, which is the escape. I also know that as the NTSB investigation narrows and concludes, and I do believe that will happen in relatively short order, all the learning that can be extracted from it and all the learning that can be extracted from all those inspections of all those airplanes flying day in and day out, that will inform us on what improvements we can make on our quality systems.

First and foremost, we will run the door plug literally from the second a door is received at Wichita through their lines, all 12 positions, through our 11 positions here. Inspections will be added at every turn. It is on lockdown, and we’ve had help from our FAA. We’ve had help from our customers, et cetera. So, that’s sort of step two. The next one is how do you take all of that learning and apply it through all the supply chain lines. And we have some medium- and long-term efforts just beginning to make sure that we do that. My confidence comes from quality systems always can get better. And when you have a moment like this, you take everything. You literally look at everything, and we’re all keenly aware of everything. So, we’re going to run that play as hard as we can, and we’re going to take the time to do it and the FAA — I’m sort of glad they called out a pause because that’s a good excuse to just take our time, do it right and I wish I had called that out in the first day, but maybe I would have.

We’ve been good at taking pauses. I’ve probably taken more pauses in the last three years, and I’ll apologize to all our investors now, than have been taken in 10 years before it. But this is what we do, and it’s how we get better. And I also say, Peter, as you know, one of the nagging issues that we’ve been facing have been shortages here and there, where we have to pause our line. Buffer inventory is not quite as robust as we’d like them to be based on supply chain weaknesses. We will run our master schedule in accordance with the plans that preceded this. And each and every part we receive and all the buffer inventories that we get will stabilize production here on out, less traveled work in our line, all things good come from that. So, I feel really good about it.

And I also have confidence in our airplanes that will be certified. I like the respect that the FAA and Boeing are showing one another. Again, maybe too long a diatribe, but there are lots of reasons for why I’m feeling good. And in some ways, this moment will accelerate recovery, not delay it.

Peter Arment: And just initial progress on China? Thanks.

Dave Calhoun: Yes. So, Peter, as we’ve talked many, many, many times, we have stood by our customers in China day in, day out. They have been flying MAXs now for the better part of the year. They are performing extremely well. And we’d always hoped and expected they would begin to take deliveries. And I think everybody has noticed that those deliveries have started. So, we are just going to stay diligent, stay with each and every one of them and make sure our Chinese customers get what they’ve ordered and paid for.

Peter Arment: Thanks so much Dave.

Operator: Thank you. The next question is from the line of Sheila Kahyaoglu from Jefferies. Please go ahead.

Sheila Kahyaoglu: Morning Dave and Brian. Maybe if you could update us on how you’re thinking about the MAX 10 and the MAX 7 certification timing, just given MAX 7 exemption being withdrawn. What does it mean for the 10? And how does that phase in as you think about ramping production to 50 a month and the profit profile of the MAX side if there’s no MAX 7 or 10?

Dave Calhoun: Sheila, thanks for that question. I’m going to just give a little bit of a moment on why we made that decision on the time-limited exemption. I’ll let Brian help quantify it. I visited Capitol Hill for a lot of reasons. My biggest one is to own the problem, be transparent and convey that to all of our workforce so that they know we’re willing to do that. And then we can all be honest, clear with each other every step of the way in this process and so I’m glad I made the visit. I was not expecting when I met with Senator Duckworth, the conversation that we had. You know she’s a pilot and a decorated pilot. She listened to everything I had to say. We didn’t have a debate about the safety of the 7 and the 7 in its certification work was moving along at a pretty steady pace.