The Boeing Company's CEO Presents at Morgan Stanley Industrials & Autos Conference (Transcript)

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The Boeing Company (BA) Morgan Stanley Industrials & Autos Conference Call September 16, 2013 4:00 PM ET


Jim McNerney - Chairman, President, Chief Executive Officer


John Godyn - Morgan Stanley

John Godyn - Morgan Stanley

Thank you, everybody. We are very excited to have Boeing here for our keynote kickoff presentation. We have got Jim McNerney, who has long been the CEO of Boeing. Before that, CEO of 3M and before that a long career at GE. So we are very excited. Just as a matter of background, I cover airlines and aerospace at Morgan Stanley. I am bullish on both and we are, in particular, bullish on commercial OE. Boeing is one of our overweights. I think it is difficult to be bullish on OE without being bullish on the bellwether in the space and we are very excited to hear what Jim has to say.

Jim, take it away.

Jim McNerney

Thank you, John. Good afternoon, everybody, and thanks John. I appreciate it. It's good to be with all of you. I couldn't start a pitch like this without reminding you of the risk that are listed here and in our public offerings. But let's Start with an update of our business environment, followed by a review of our key strategies and initiatives and then we will have time for, I think, a little bit of a dialogue with John.

Strong core demand continues for our fuel-efficient and value creating commercial airline family, with nearly 800 net orders booked through August this year and a record backlog of nearly 4,800 airplanes worth $339 billion. Our backlog is well balanced across global geographic regions. Near-term deliveries remain evenly split, I should say, between airplanes to support growth and on the other hand fleet replacement. That's as our customers continue to retire older airplanes in favor of new ones that offer compelling economics and increased fuel efficiency. We are going through a big technology cycle.

Deferral requests remain well below the historical average for our company and request to accelerate deliveries continue alternatively at a rather brisk pace. Passenger traffic is healthy and has even strengthened over the past few months. While cargo market pressures continue, we see sufficient customer demand that should allow us to remain at the current planned production rate for 747-8 freighters through 2014.

Also ample sources of financing remain available for our delivery stream as the reduced fuel burn, extended range, lower maintenance cost and enhanced passenger experience contribute to the value proposition of our airplanes and provide an attractive payback for our customers' investment. With favorable passenger traffic trends and growing airline profitability, we expect our strong order performance to continue throughout 2013.

On the defense and space side of our company, while several steps remain in the fiscal 2014 budget process and that's an understatement for those of you that are spectators down there in Washington, the congressional markups appear relatively favorable to Boeing with good support thus far for our key programs. However neither the President's budget request nor the Congress' efforts reflect sequestration level spending limits yet. We remain concerned about the impact that sequestration targets will have on our customers on military readiness and the industrial base in 2014 and beyond.

Notwithstanding these uncertainties, our Defense, Space and Security portfolio is optimized for the current budget environment with reliable, proven, affordable systems and services that are being delivered on budget and on schedule. Recent and relevant examples include the early completion of the KC-46A Tanker critical design review with the U.S. Air Force and the $2 billion dollar contract we signed with U.S. Navy for 13 737 based P-8A Poseidon maritime patrol aircraft. Both achievements also illustrate the benefits of our One Boeing approach to commercial derivatives which really require the two sides of our company to work together.

Growth on the Defense, Space and Security side continues to emerge in areas that we have been targeting with investment and innovation such as commercial derivatives, space unmanned systems, intelligence, surveillance, reconnaissance and of course cyber security. This continued internal investment is strengthening our position for the long term and differentiating us from our competitors, many of whom who have scaled-back R&D in this difficult environment.

Growth in international markets also continues to help mitigate domestic market pressures and we are pursuing meaningful opportunities in the Middle East, Asia-Pacific and Latin America in particular. International business represented 23% of revenue for Boeing Defense, Space & Security during the second quarter. We remain committed to sustaining international revenues annually at about 30% for this side of our company.

Let me turn back now to some of our key strategies and initiatives, starting with the commercial airplane business. The commercial airplane market remains a highly attractive near and long-term growth opportunity that we are strategically aligned to capture. Strong customer demand for our current and future airplanes has fully affirmed our product strategy and the market-leading position it has earned us. Our forecasts show that the commercial airplane market will continue growing at a faster rate than global GDP because the increasing efficiency of airplanes and our global air transportation system is a fundamental enabler of economic expansion around the world.

Our growth opportunity in this market is unprecedented, with more than 35,000 new planes expected to be bought and built over the next 20 years. We are fully committed to profitably capturing an increasing share of that growth through superior value-added product innovation. Our airplane families provide the most comprehensive value in the market, derived from product strategies that are customer driven, customer focused and customer generated, in fact, touching every market segment. Our teams are intensely focused on converting the growth in our record backlog to cash and earnings, by steadily and profitably increasing production rates to deliver that backlog to customers sooner and by leveraging our growing financial strength and past technology investments and sought-after new additions to our product line.

In the twin-aisle segment, our firm backlog of nearly 1,300 airplanes illustrates our unsurpassed product line strength. With the customer preferred and market-leading 777 and 787 franchises as our core, and a freighter family that is virtually unchallenged including the only very large freighter the, 747-8, our twin-aisle portfolio is poised to drive substantial growth. Having retained the lead in innovation and the first movers advantage in this segment, we intend to harvest those hard-fought gains to further distance ourselves from our competitors in the decades ahead.

We will do so by applying the technology and lessons learned from the base 787 product and other recent development efforts to build out the 787 family with the Dash 9 and Dash 10 derivatives and to launch the innovative new 777x family of airplanes. With the strong launch of the 787-10 this summer, thank you Steve, and continued high demand for other 787 models, we are assessing future production rate increases beyond the 10 per month we are on track for later this year.

We will take a disciplined approach to any 787 production increases by first stabilizing at the 10 per month rate. Not an insignificant achievement in and of itself as many of you know. This will minimize the required investment and reduce production risk going forward. As we firm up orders and finalize our plan, we will keep you all informed.

We are making good progress on our twin-aisle development efforts including the 787-9 which is on track for first flight in the very, very near future and entry into service next year. Customer interest in the 777X also remains high and growing as we discussed the technical details and the economic advantages it offers over competing products. We continue to anticipate launch of the 777X airplane this year with two models a Dash 8X and a Dash 9X, the latter of which will be the only twin-aisle twin-engine airplane available in the 400 seat market.

In the single-aisle airplanes segment, our compelling fuel efficiency and overall value advantage over the competition will allow us to profitably grow our strong market share position while still sustaining healthy margin performance. We are doing that by leveraging our successful 737 NG family of airplanes with the new technology and efficiency improvements in the 737 MAX and by maintaining our focus on internal and supply chain productivity improvements including our partnering for success initiative. We remain on track to increase 737 production to 42 airplanes per month in the second quarter of next year.

As with every program, we continuously assess long-term customer demand and supplier capabilities. On the 737 program specifically, we are seeing upward pressure on production rates beyond what I just mentioned and are positioned to match those production rates with the demand as we see it coming. With nearly 1,500 firm orders and counting, the 737 MAX continues to capture a premium for its compelling economic advantages.

Development remains on track with firm configuration achieved in July and through our disciplined gated development process we were recently able to accelerate entry into service to the third quarter of 2017. You haven’t heard that from Boeing for a while. That’s a program moving to the left, your right. All of the exciting new single-aisle and twin-aisle derivatives I have mentioned represent attractive investments that will drive customer and shareholder value while lowering execution and return risk for Boeing. More on that in just a minute.

Moving along, for now, to the defense and space side. With products and services that are well aligned with customer interest and a persistent internal focus on affordability to weather the storm of sequestration, we believe Boeing Defense, Space & Security is advantaged relative to competitors in the current budget environment. As reflected in our backlog of more than $70 billion which ranks amongst the industry's highest, our portfolio of proven liable affordable and effective systems and services has become the advantage we believed it would be in meeting customer requirements in a lower budget but persistently high threat security environment.

That portfolio combined with our expanded One Boeing global emphasis has also allowed us to pursue and capture a disproportionate share of growing international business. A very natural advantage for our company which represented 40% of the face of defense and space backlog last quarter.

Our long-running market-based affordability initiative which is now being bolstered by the aforementioned partnering for success is setting a new standard for efficiency and productivity with a reduction of more than $3 billion in our annual cost structure. Lowering our cost structure and offering our domestic and international customers meaningful savings as a result has improved our top and bottom lines by securing profitable new business such as multiyear contracts on numerous programs including the V-22 and the Chinook.

These productivity initiatives, along with a favorable revenue mix, should allow Boeing Defense Space & Security to sustain healthy margins through this challenging environment while enabling continued investment in future growth. Successful execution on our development programs, including the tanker program I mentioned earlier, is another critical focus area for us. Strong program execution is paramount in the current environment and we have an increasingly strong track record in this area that we intend to build upon in order to ensure prolonged support for our programs.

In summary, despite unprecedented market dynamics, we are making solid progress in strengthening our competitiveness in the Defense, Space & Security business for the future while extending and growing our current portfolio and delivering the results we and you expect regardless of the constraint of the current business environment.

A few additional comments on our productivity strategy. The growth we are experiencing and the performance we are demonstrating are a direct result of years of effort to instill continuous productivity improvement into the fabric of our company. We consistently capture 3% to 4% annual productivity gains companywide. Productivity drives revenue growth by making products and services more affordable and it enables investments in new products and services through higher earnings and cash flow.

We have applied Lean+ principles throughout our factories and office areas to increase quality and reduce flow times. We are collaborating and sharing best practices across and between our business units and core functions. Market-based affordability, as I mentioned, is driving steep productivity improvement in our defense business where we have captured real savings driven by targeted facilities consolidations and reductions in executive and management ranks. Tremendous improvements also are continuing on our core commercial airplane programs such as the 737 and 777 and we have begun to see encouraging gains on the 787 program as well.

We also look for additional opportunities to core up functions and drive productivity improvements across the entire enterprise. An example of this is our nearly 25% total footprint reduction in the last 10 years despite revenue, and that's real estate footprint reduction, despite revenue increasing over the same period by 60%. We continue to target significant additional improvements in both major businesses and on all of our programs. These efforts are now being coupled with our partnering for success initiative with suppliers which is my next topic and I am nearing the end.

With the majority of our cost of our products and services coming from our supply chain, it is absolutely critical that our supply chain partners are fully engaged to help us meet increasing customer expectations and what I have characterized as a more for less world. We expect to be paid for the risk we take with our lead role in designing, developing, building and supporting the world's best aerospace products, he but we can't do it without the technology, capital and capabilities of our supply chain.

Partnering for success is an enterprise effort to achieve double-digit improvements in total costs through improved supply chain quality, flow and efficiency, ultimately to increase productivity and lower product and services costs for our customers. Given the growth potential booked in our backlog and with pending new program decisions in front of us we are offering supplier partners who step up to the challenge a win-win opportunity to share in that growth and a net profit potential and earn work on future programs.

We are pleased with the response from many of our partners at this early stage and the effort is already producing real savings for us but there is a lot of work in front of us. It is a long-term initiative and I would say we are in the second inning of a nine year game here.

Before closing, just a few minutes on our development program risk reduction efforts. De-risking the decade is a theme that a number of you have heard from me before on previous occasions. Our development programs strategy aligns with that objective, while still delivering the performance of value advantages our customers expect from Boeing airplanes. Spiral technology development that leverages previous investments is a vital element to our strategy to materially reduce risk and this uniquely positions us to drive affordability into our new development programs.

For example, the new wing on the 777X will be a fourth generation composite wing. We have done four of them. Designed four of them. Many of you don't think we are that far down the design curve yet but it's true. And it leverages the experience gained on the 787-8, the Dash 9 and the Dash 10. We also are leveraging past lessons learned to improve our overall development process as well. The disciplined gated development sequence successfully implemented on the KC-46 Tanker, the 737 MAX and the 787-9 is now being applied to the 787-10X and the 777X programs.

As I mentioned this process enabled the retirement of key technology risks on the 737 MAX that allowed us to accelerate the program schedule with high confidence. Furthermore, the consolidation of our research and technology organizations across the enterprise eliminated inefficiencies, expanded capabilities and significantly reduced overall new program risk. Maintaining a constant dialogue with our customers is also critical, as it allows us to more efficiently deploy our resources on technologies and capabilities they value and are willing to pay for.

In closing, with strong first-half performance and strategies that are achieving results we remain committed to the goals we initially set for 2013. Our priorities going forward remain clear. Profitably ramping up 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, providing increasing value to both our customers and our shareholders.

With all that said, thanks for the opportunity to make these remarks, and thank you very much.

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