July 26, 2017, © Leeham Co.: Boeing posted strong earnings in the second quarter, with officials seeing continued strong demand, a recovering cargo market and strong commitment to returning cash to shareholders.
Financial guidance for the year was boosted. Boeing assumes that it will go to a production rate of 14/mo for the 787 program but there is still work to do to obtain the orders.
“We continue to see healthy demand,” said Dennis Muilenburg, CEO. Cargo traffic is seeing a healthy recovery, he said. He sees less cyclicality going forward. There is more balance in demand between replacement and growth for new airplanes.
Muilenburg said there is a solid demand for increasing production rates of the 737 lines. The 777 for 2017 is sold out. The line is now in an oversold position with orders and commitments in 2018 and 90% sold out in 2019, but more work is needed to fill out production.
He said that efforts continue to support 787 production going to rate 14/mo by the end of the decade, but he did not indicate when this decision will be made.
Cost performance on the 787 program continues to improve, said Greg Smith, CFO, with further reduction in the deferred production cost.
Since 2012, Boeing repurchased more than 200m shares of stock.
Continued cash commitment to shareholder stock buyback reflects continued confidence in the long-term outlook of the company, Smith said. Boeing will return 100% of free cash flow to investors.
Questions and Answers
Dennis Muilenburg, CEO
Greg Smith, CFO.
Quotations are paraphrased.
GS: We still expect year-over-year growth in cash growth through the end of the decade. The ramp up of 737 production and 787 progress are drivers. We expect to see incremental margin improvement over the next several years.
Part of our plan for the company is to have a non-cyclical business, a stable cap-ex and R&D profile for the rest of the decade.
We have hit the peak of cap-ex spending on 777X.
DM: Extension of the accounting blocks, cost control with suppliers and overhead are elements to achieve for the target of 15% margin.
(Muilenburg did not specify which programs he referred to for the accounting block extensions. While the 787 is the high-profile accounting block program, the 737 program also could see block extensions. The 777X block won’t be announced until the first deliveries in 2020.)
GS: We’re continuing to talk with customers about the Middle of the Market aircraft. We see a potential market of 2,000 to 4,000 aircraft. We’re working through the details of the supporting business case and leverage the technology of previous programs. We’re also looking at the manufacturing process with digital tools and the life cycle.
We’re still looking at entry into service around 2024-25, so we have time to do the work. The R&D and cap-ex will feather in very nicely on the backside of the 777X.
GS: We assume we go to 14/mo on 787, but we still have some work to do.
DM: We see a lot of energy with leasing companies. This points to overall market strength. We continue to see some hesitancy in the widebody.
DM: the market supports taking the 737 line to 57/mo.
DM: We’re beginning to scratch the surface on digital aviation solutions.
DM: Targeting to hit $50bn level in Global Services over the next 5-10 years. We see much of the growth being organic investments. Acquisitions or partnerships would be complementary.