Boeing 2Q earnings up; delivery forecasts down slightly

Here is Boeing’s earnings press release.

Boeing announced its second quarter earnings today.

From the conference call:

Jim McNerney:

  • The direction we are heading in single aisle program is clear with the American Airlines order for 737RE. We were prepared to pursue either re-engining option with EIS in the middle of the decade or the New Small Airplane option with a 2019-2020 EIS. The challenge we have is we do not have a clear answer to a new production architecture to ramp up new technology at rates of up to 60/mo by end of decade.
  • It became more clear in recent months that our customers wanted certainty rather than the perfect solution, and a new engine wouldn’t be there yet.
  • 737RE will be the most fuel efficient airplane in its segment and lowest cost on operating basis.
  • Will spend next few weeks finalizing design and launch in the fall, pending board approval.
  • Our commercial development programs are substantially complete and barring any problems that can’t be resolved for some reason, 787 and 748 will be delivered later in 3Q.
  • Expect certification for the 787 before the end of August.
  • Currently at 787 2/mo in Everett and going to 2.5/mo by year end. Charleston about to begin production and first rollout in 2012.

James Bell:

  • 787 accounting block will be higher than previous programs, but high demand gives confidence all costs will be profitably absorbed over time. (In other words, no forward loss–Editor).
  • The final contract of the KC-46A is not in a forward loss position despite loss on the first four tankers. This program will be profitable over time.
  • Combined delivers of 25-30 747/787 delivers (down from 25-40) will be more weighted toward 747.

McNerney:

  • This is clearly a very important year for Boeing to get new products into the hands of the customers. Working with discipline to ramp up rates.

Q&A

  • What is configuration for the 737RE? What are sales expectations, particularly the US market? Comment on AA as the launch customer not the launch operator? McNerney: The 737RE is less costly and has less risk. Over last 2-3 mos market pushed more for the RE option. We have also been somewhat more mindful of the risks of getting a massive new production system up by 2019. There were more risks as we get into it than originally anticipated. The RE is largely about the engine, the configuration will have some systemic impact on parts of the airplane but wantto minimize this. We have confidence CFM can produce the engine and see manageable risk to integrate into the airplane. The AA deal is part of the most broader part of the marketplace that wants better efficiency today than more efficiency tomorrow. Doing an all-new airplane would put market share at risk. 2018 is less a function than when we can get the airplane done and more when AA wanted the airplane. Bell: we will see R&D impact will be a lot less than with a new airplane, about 10%-15% of new airplane.
  • Will you get a premium for the 737RE? JM: There is no question we will be delivering significant productivity to the airlines, fairly conservative in the 10%-12% range, and operating cost improvements. We expect to capture a large part of this value in the pricing. Campaign-to-campaign can get in the way of that. We plan on and expect to get [additional] value.
  • How was 737RE decision made and what is the broader strategy in this market? How do you solve the we need a bigger airplane? Decision seemed to be made under duress. JM: I understand the question, but we had been studying RE for long time so not last minute but admittedly our view changed in the last three months. The RE could deliver savings and combined with the technical risk moving to the right and the market moving to the left moved the decision.
  • You’ve information USAF of overruns–you say the tanker is not in a forward loss–how does this square? JB: We look at this in the totality of the whole contract, not just the first four aircraft.
  • There’s been a lot of news on the 787 program: discuss the line stoppage, slow-down in increasing production rate, delays of 787-9 to 2014. JM: Our projections for ramp, deliveries and certification has not changed. We did take 20 day pause to rebalance the line and I view that as good news because of the visibility across the chain. It’s worse to not rebalance. We’re pretty agile now to rebalance. It will be a positive over the life of this program. A couple of places got out of sequence and didn’t meet their objectives for completion. I don’t know where the Dash-9 rumor began to push into 2014. Our ramp plans on -9 are in place. It’s going well. We have the surge line in Everett as protection. 25-30 delivery forecast for 747 and 787 is a narrowing of the projection but holding the base of the projection.
  • It seems unrealistic you will get to ramp rate given all pauses and problems. How are you going to do this? JM: The reason we feel that way is data suggests it is accomplishable. Our major supplier partners are healing up. Pauses helps the ability to get there. Another component is the modification work being done on airplanes already built. Statement of work is clearly understood. Additional engineering input is clearly going away. Is it a challenging ramp? Yes. Do we think we can do it? Yes.
  • Will you take additional commitments for 737RE before board approval? JM: Obviously the board is aware of the direction we’re taking. You never want to outrun your board in terms of getting the formal approval you need. I expect we’ll see that soon. We are working to formalize the configuration and to document the business case. We’ll keep talking to customers.
  • Why are financial terms of AA deal not a harbinger of unattractive deals? JM: Walking away from Ryanair deal last year was right thing to do. This one does. I would say the AA competition did get pretty heated as Airbus wanted to come in and get market share at AA. It was pretty aggressively priced but not irresponsibly priced from our perspective. It is very profitable for us and AA. The competitive dynamics were a little more intense there because of the early Airbus move.
  • As you think about the cost profile of the 737 program, how might narrow-body production support the rates you are talking about? JM: We haven’t made the final decision about where we’re going to produce the RE airplane. After 42/mo, we do run into some challenges at Renton. We have other options and we will study them all as we think this through. We would study Charleston, Renton and compare with another site.
  • JM: We think market share can be held in 737 class. We think there is a robust market for the re-engined airplane. The demand is there, particularly in the developing world and coming on strong in the US.
  • JM: We believe 737RE will be 2, 3, 4% better than neo depending on the mission. We have centered on an option that makes sense.
  • How do you prioritize going forward for a new airplane and the 777? You wouldn’t go so long between new airplanes and cause an engineering gap? JM: There is a balance between the risk of developing modifications and developing all now airplanes. There will still be a significant amount of engineering talent for 737RE and will probably turn more quickly to 777 modifications. We also have the 787-10 and then some degree of refurbishment of 777 which could range from small to large. We’re planning on modification being somewhat significant depending on A350-1000 final design.
  • Does the NLRB case affect your decision for where to do narrow body? JM: We remain highly confident that at the end of the day, we will prevail. It depends on how competitive Renton will be but NLRB has zero impact on this decision.
  • Surprising that you bring up doing 737RE elsewhere. Are you seriously considering doing the airplane somewhere else? Or are you just keeping options open? JM: Renton is one of the great aerospace factories in the world. Until we have sorted out the milestones associated with the ramp-up, the degree to which we have to modify the airplane, major investments required, but until we sort that out we have to keep this open. Until we study it all, obviously we have to keep it open. There is significant investment required and until we figure it out we have to sort it out.
  • Does new small airplane go off into space someplace or does it get picked up 5-10 years down the road? JM: It’s more the latter. This work done now will be very valuable, and benefit from 787 development and technologies, and somewhere down the road after we re-engine, an all-new airplane will be the right thing to do.
  • Will 737 be a RE only or NG plus RE? JM: We don’t have that question finally answered yet. There will be a time where both are transitioned.

Here is the quick-take from some of the analysts, preceding the earnings call:

Bernstein Research

Boeing reported Q2:2011 EPS of $1.25, well above our estimate of $1.02 and consensus of $0.97, on strong margin performance (operating margins were 9.3%, well above our 7.6% estimate, and consensus of 7.4%).

Boeing raised its EPS guidance for the year by $0.10 to $3.90-$4.10, up from $3.80-$4.00. The guidance increase is less than the amount of the beat in this quarter, implying a below-consensus outlook for the second half of the year.

Q2 sales came in at $16.5B, ­­in line with our estimates and consensus, but with revenues stronger in Commercial Aircraft and weaker in Defense, Space & Security than we had expected. Revenue guidance for the year remains unchanged at $68-$71B.

Commercial Airplanes reported revenues and margins well above our estimates, at $8.8B (vs our $8.3B) and 10.4% (vs our 9.4%) respectively. The company attributed the revenue and margin strength to stronger service revenues and to customer mix. Boeing lowered its guidance for full-year deliveries to 485-495, from 485-500 previously, to reflect more conservative assumptions on development programs (787, 747-8); but raised the low end of its margin guidance, which is now a range of 8.0%-8.5%, up from 7.5%-8.5% previously.

Buckingham Research

Boeing (BA – Buy, $70.16, Tgt $90) reported 2Q EPS of $1.25 compared to our/consensus $0.97/$0.98 on sales of $16.54bn vs. our/consensus $16.38/$16.47bn. BA’s operating income benefited from a non-quantified sale of property in N&SS. Sales in BCA beat our expectations ($8.8bn vs. our $8.4bn) and sales in DS&S disappointed ($7.7bn vs. our $7.9bn).

Operating margins in both BCA/DS&S of 10.4% beat our estimates for 8.3%/8.7%. FCF in the quarter of $1.25bn vastly exceeded our expectations for $250mn partly because CapEx of $350mn came in below our forecast for $550mn.BA raised FY11 guidance to $3.90-$4.10 EPS from $3.80-$4.00, raised BCA/DS&S margin guidance to 8%-8.5%/9% from 7.5%-8.5%/8.5%-9%  and lowered BCA deliveries to 485 – 495 on 25-30 787/747 deliveries vs. 25-40 deliveries prior, in line with our expectations.

Credit Suisse

* Strong earnings beat driven by margins in both segments with BCA outperforming our forecast by 231 bps and BDS by 183 bps.

* Revenues were essentially in-line and free cash flow was much better than expected at 1.3x NI.
* BCA margin of 10.4% was driven by execution, pricing and services and better customer mix.  Unit cost accounting margin of 11.7% reflect this (and improve markedly from Q1’s 5.4% as 777 rate ramp realized)

* R&D of $1.05B was in-line and still expected to decline in H2 as widebody development ramps down. BCA R&D fell 2% in the quarter to $771M.

* BDS backlog declined 6.5% to $63.7B on a book/bill of 0.8x
* BCA backlog was flattish (down -0.4%). Book/bill ($) was ~0.9x, (units) 0.6x. These figures exclude the recent AMR order from earlier this month.

* 787 and 747-8 first deliveries affirmed for later in Q3.

OUTLOOK / GUIDANCE
* Guidance rises a dime at both ends to $3.90-$4.10. Some may view this boost as light vs. the beat, but we think consensus misunderstood the earnings profile for the year. H2 will see some pressure from widebody margin dilution and the delivery of low to no margin military aircraft (AEWC & International Tanker).

* Management did lower targeted delivery range for 787 and 747-8 to 25-30 (from 25-40). We think investors will still remain skeptical of this range.

* BCA revenue guidance holds at $36-$38B as lower new widebody deliveries offset by higher services revenues. Margin target tightened to high-end of range.

Goldman Sachs

Boeing reported 2Q EPS 34% ahead of consensus, almost entirely driven by operational performance. The company only raised full-year 2011 EPS guidance by $0.10, but we expect the market to view that as classic conservatism from a company that usually is careful with guidance, particularly with 787/747-8 yet to be certified and delivered.

2Q EPS of $1.25 is well ahead of GS and consensus of $0.93. Revenue is 1% better, but operating margins on both sides of the business are significantly ahead of expectations. BCA EBIT margin of 10.4% compares to our estimate of 8.3%, and BDS EBIT margin of 10.4% compares to our estimate of 8.7%. Cash from ops of $1.6 bn was ahead of our estimate, and  appears to imply upside risk to the full-year outlook for >$2.5 bn. With regard to development programs, Boeing states “Flight testing activities on the 787 and 747-8F programs are nearing completion. First deliveries of the 787 and 747-8F are expected later in the third quarter”.

Full-year 2011 EPS guidance was raised 3% to $3.90-4.10 (compared to consensus of $4.10) from $3.80-4.00.

Analysis

This is a very strong quarter driven almost entirely by operational performance. A guidance revision that is much smaller than the 2Q beat could limit upside in the shares on the day but we think the market will view that as simple conservatism and focus more on the implied earnings power from 2Q margins, and note that shares have been weak since Paris implying the set-up was easier. Commentary around the two major development programs on the conference call will be paramount, especially given recent reports of new issues on the 787 program.

UBS

* Q2 at $1.25: BA Q2 EPS at $1.25 vs UBS at $1.00 and consensus at $0.97. Most of the upside ($0.20) on higher than forecast margins at both BCA, at 10.4% vs UBS 9.3%, and BDS, at 10.4% vs 8.8% UBS, while lower unallocated/other contributed $0.05 of beat. FCF at $1.3B, 82% of net income, as further $2B+ inventory build partially offset by higher advances and improved payables and accrued performance.

* $0.10 guidance raise on higher margin outlook: On pre R&D basis, BCA margins at 19% with roughly 22% incrementals (program basis). BA raised its EPS guidance by $0.10 to $3.90-4.10 on higher margins at both BCA and BDS. Guidance implies 2H EPS in line with 1H with BCA margins forecast at 7-8% in 2H vs nearly 9% in 1H on zero margin 787/747-8 deliveries despite what should be lower R&D. BA reduced its delivery forecast to 485-495 from 485-500 as it now forecasts 25-30 787/747-8s, down from 25-40. FCF guidance slightly higher at >500M on $300M lower CAPX forecast.

29 Comments on “Boeing 2Q earnings up; delivery forecasts down slightly

  1. It looks like Boeing is reducing deliveries in 2011 for the combined B-747-8F and B-787-8 deliveries by about 10 aircraft. That is from a high of 40 deliveries down to the new high of 30. The low end of the combined deliveries for both these airplanes remains at 25.

    Some have predicted deliveries of just 4-5 B-787s for 2011. I don’t recall anyone’s prediction of B-747-8F deliveries, maybe I just missed it, or forgot about it.

    Meanwhile, it looks like Boeing will have a good cash in hand amount of several billion USDs. This could be useful as the B-787 and B-747 R&D costs continue to wind down, and have enough cash on hand to begin the B-737NE program.

  2. KC135TopBoom :It looks like Boeing is reducing deliveries in 2011 for the combined B-747-8F and B-787-8 deliveries by about 10 aircraft. That is from a high of 40 deliveries down to the new high of 30. The low end of the combined deliveries for both these airplanes remains at 25.
    Some have predicted deliveries of just 4-5 B-787s for 2011. I don’t recall anyone’s prediction of B-747-8F deliveries, maybe I just missed it, or forgot about it.
    Meanwhile, it looks like Boeing will have a good cash in hand amount of several billion USDs. This could be useful as the B-787 and B-747 R&D costs continue to wind down, and have enough cash on hand to begin the B-737NE program.

    …and to pay a lot of compensation to B787 customers!

    • A lot of it isn’t paid in cash-rather as other “ancillary services” such as spares, etc. or discount on future planes.

  3. Funny thing is that the less 787s they deliver, the better for their margins on delivered planes. 😉

    They had previously forecast 12-20 787s I believe, and presumably 12-20 748s. My guess is they still forecast 12-20 748s, and I’ll predict that the year-end number will be <25.

    Let's see.

  4. Well, I hope that they will get some other aircraft than the first couple of units to “showcase” that they have delivered something this year.

    Anyways, this doesn’t add up to me. Why would you change the guidance from 25-40 to 25-30; which effectively leaves untouched the lower boundary of the guidance to 25 units? I don’t buy that, as it would mean that they are within their previous guidance. It just doesn’t make sense!

    My guess is that they are lowering the expectations, both by delaying a tad the forecast of the introduction of both aircraft, and lowering the maximum number of airframes. They are preemptively softening the blow.

    The nightmareliner is proving to be a dream come true for airbus! Come on boeing!

  5. Pingback: Boeing 2Q earnings up; delivery forecasts down slightly | Boeing Commercial Airplanes | Scoop.it

  6. Classic:

    “JM: We believe 737RE will be 2, 3, 4% better than neo depending on the mission.”

    What was said previously:

    “According to Seattlepi.com, Albaugh said, “Right now, the 737 from an operating-cost standpoint—cost of acquisition, cost of operation—is about 8% better than the Airbus product. Even after the re-engine we’ll be 2% better, and that’s if we do nothing on this airplane. We are going to do some things.””

    Conclusion, the 737RE will actually be worse than the 737NG. No wonder they hesitated for so long. :p

  7. McNerney is very slick with his managmenty talk. I read his answers but behind all that there is very little meaning…
    “We did take 20 day pause to rebalance the line and I view that as good news because of the visibility across the chain. It’s worse to not rebalance. We’re pretty agile now to rebalance. It will be a positive over the life of this program.”
    What exactly has he said?

    “I don’t know where the Dash-9 rumor began to push into 2014.”
    Well Jim, the info came from Boeing itself, it seems…
    “ANZ said that date has slipped to an undetermined period in 2014 that it is still in discussions with Boeing about.”
    http://www.flightglobal.com/articles/2011/07/21/359795/anz-frustrated-over-new-787-9-delay.html

    “Our commercial development programs are substantially complete and barring any problems that can’t be resolved for some reason, 787 and 748 will be delivered later in 3Q.”
    Jim, please do not use *problems*, *787* and *delivery* in the same sentence… 🙂

    “we had been studying RE for long time so not last minute but admittedly our view changed in the last three months.”
    Right, so the fact that NEO was still being dismissed during the PAS was just a PR talk?

    • I must admit… it is very distressing this position boeing has created for itself with the nightmareliner project! hopefully they will do something wise in the near term like… oh what?? re engining the 737?!

      Outsource your wings to japan!

  8. I’m totally confused by this earnings call, so many mixed messages & contridictions, does anyone within have a clue whats actually happening?

    I can’t claim were perfect on this side of the pond but we generaly sit around & discuss to ensure that it at least appears were all singing from the same hymn sheet.

  9. He says B737-RE 10-12% better than NG.
    Airbus said A320NEO ~15% better than vanilla A320.
    Both are bound to the statements of the engine people.

    BTW: the B737-RE looks much better than the NG.

    • VV said that the a320 (specially the a321) would need bigger wings to fulfil its promises/mission. He seems to be quite in the know and spot on past decisions in the widebody marke (although completely off in the recent narrowbody market changes).

      I am quite disconcerted over the fact that (in paper) a320 and 737ng wings look quite alike in wingspan and area! Could they be that different aerodinamically to make them uneven in a re engine scenario??

  10. Andreas said;
    “Conclusion, the 737RE will actually be worse than the 737NG.”

    Only in your mind.

    Schorsch :He says B737-RE 10-12% better than NG.Airbus said A320NEO ~15% better than vanilla A320.Both are bound to the statements of the engine people.
    BTW: the B737-RE looks much better than the NG.

    Correct.

    In other words, after both the A-320NEO and the B-737NE are in service they should essentially have parity, or near parity, like they do now. So 2018-2020 will about like 2008-2010 did as far as comparting the A-320NEO/CLASSIC to the B-737NE/NG

    • Correct.
      In other words, after both the A-320NEO and the B-737NE are in service they should essentially have parity, or near parity, like they do now. So 2018-2020 will about like 2008-2010 did as far as comparting the A-320NEO/CLASSIC to the B-737NE/NG

      A lot of it will depend on the choice of fan choice for the 737RE — a small fan (to avoid new landing gear) will be substantially less efficient than the large fan on the A320neo.

    • Well no, not just in my mind, but in the statements of Boeing. Previously an umimproved NG was to beat the NEO by 2%. Now the RE will beat the NEO by (drumroll!) 2%. It follows that an improved NG with another five years of product improvements would be better than the RE. Or that Boeing is talking bollocks. Take your pick.

      • I agree, this tit for tat claim & counter claim is nothing new but to randomly apply the odd couple of percentage points just for the sake of doing so does no favours & to suggest these will apply to a RE programe that isn’t even on paper is as you so diplomatically point out, complete bollocks.

  11. If there parity now between the A320 and 737NG, Airbus might as well leave the sharklets of and use the smaller LEAP fan Boeing is planning. There still will be parity.

    Its good to have McNerney, he always has it right.

  12. I also said ‘near parity’. We don’t know what CFMI has told Boeing about the efficency of the LEAP with a 66″-70″ fan. But would Boeing even consider such an option for the B-737NE unless there was some confidence from CFMI?

    • A very pertinent question there. I believe you meant it to be rhetorical but I believe it is not so cut and dried.

  13. JM “I don’t know where the Dash-9 rumor began to push into 2014. Our ramp plans on -9 are in place. It’s going well. ”

    Aside from UKAir’s brilliant riposte to this rather ill-advised statement about the “rumour”, is there anybody else who is comparing this to his other great “disconnect” a bit over 2 years ago (something to the effect that the 787 will fly by the end of June 2009 being promised at the Paris Air Show)? What are the ramp plans for the -9? It’s going well with respect to what?

  14. KC135TopBoom :
    I also said ‘near parity’. We don’t know what CFMI has told Boeing about the efficency of the LEAP with a 66″-70″ fan. But would Boeing even consider such an option for the B-737NE unless there was some confidence from CFMI?

    What we know for certain in that CFM INCREASED the diameter from 76″ to 78″ to be more competitive with the GTF and win the AirAsia competition.
    I would like to hear an explanation as to how a 12″ DECREASE will be wielding the same efficiency…

  15. It has to be because the 737RE will be at least on par with the A320NEO. That’s a given.

    (don’t ask me why..)

  16. KC135TopBoom :
    I also said ‘near parity’. We don’t know what CFMI has told Boeing about the efficency of the LEAP with a 66″-70″ fan. But would Boeing even consider such an option for the B-737NE unless there was some confidence from CFMI?

    What we know for certain in that CFM INCREASED the diameter from 76″ to 78″ to be more competitive with the GTF and win the AirAsia competition.
    I would like to hear an explanation as to how a 12″ DECREASE will be wielding the same efficiency…

    keesje :
    It has to be because the 737RE will be at least on par with the A320NEO. That’s a given.
    (don’t ask me why..)

    Wasn’t the 737NG supposed to be 2% BETTER than the neo?
    What’s the point of the 737RE then?

  17. This is quite disturbing…
    I keep having continuous visions of “mike the headless chicken” with a boeing logo painted on its feathers…

    Sadly, boeing seems to be what we call in business intelligence a headless chicken company. Carrying on by pure inertia… but little brains.

    Very sad. Thankfully, the newer players will make the others step up. Bless them!

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