Boeing Co Earnings Call Nuggets: 787 Productivity and Higher-Margin Airplanes

Boeing Co (NYSE:BA) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

787 Productivity

Joseph Nadol III – J.P. Morgan: I’d like to ask you about little bit more about 787 productivity and the learning curve, understanding that the Dash-9 had an impact on your result in the quarter, the introductions of the Dash-9. Is there any way to strip out just the Dash-8 to think about what’s going on there from a unit cost standpoint relative to the last couple of quarters? And then on deferred production costs, Greg I heard you say reiterate that slightly over $20 billion is where you expect it peak. It’s at $18.7 billion here at the end of Q2. If you add another $1.6 billion next quarter, you could be over that level. So any more color you can give on the profile when you think it will peak, what quarter even and we are above $20 billion years, is it $21 billion, is it $23 billion, that sort of thing?

W. James McNerney, Jr. – Chairman, President and CEO: On the unit cost progress we – to your point, we certainly had 787-9 in there and we also had an inventory buildup as we plan for – as we know getting to 10 a month by the end of the year. So, that’s what you are seeing there in the inventory buildup quarter-over-quarter. If you strip that out you would see the normal progress that we’ve seen on a unit cost basis on the Dash-8 and I think if you’ve heard me say before, if you kind of just go back to unit 8 to round unit 100 we’ve seen anywhere from 55% to 60% reduction. So, we’re continuing to see progress on a unit by unit basis as the production system stabilizes and we get ready for the next rate break. We’re also seeing improvement on the overall operational metrics around traveled, work, improvements in quality, and reductions in flow times. So, I’d say it’s progressing very well. And again, if you stripped out those unique items, you continue to see the progress there on a unit basis. With regards to deferred production balances going forward, we’re still comfortable with that peaking at slightly over $20 billion. And again, think of that as we reach 10 a month and stabilize at that level. That’s when we’ll see that turn, which roughly is about early ’15 timeframe, mid ’15 in that area. But the planned inventory buildup obviously is into support of our rates as we again prepare to go to 10 a month. But that’s kind of basically how you’ll see that profile going forward.

Joseph Nadol III – J.P. Morgan: So, clearly, deferred production build per quarter will have to slow dramatically before the peak.

Greg Smith – EVP and CFO: Don’t forget, you got increased deliveries as well. So, the increased deliveries are help offsetting the growth as we build up for rate further in the year.

Higher-Margin Airplanes

Douglas Harned – Sanford Bernstein: On your margins at BCA, so you took those up to greater than 9.5%. Presumably now you have the full bridge of the 737 NGs in your accounting block, which I would expect would be a little more press around price and you’ve got the early MAX production in there as well. Also, I would expect some more pressure on margin. So, can you talk about how you’ve kept margins up or even taken margins up here given that trajectory? And as you look forward and when this block moves out to later production of the MAX, should we expect those to be higher margin airplanes which would’ve actually helped this number?

Greg Smith – EVP and CFO: Well, to answer your first question, Doug, it’s just back to basics on improving productivity across the operations, and as you know, on the 737, they have continued to come up with ways to do that, whether it’s the horizontal wing line or other opportunities within the final assembly area, and then, Partnering for Success and working with the supply chain. So all of that in combination really kind of helping us navigate through those early blocks on the MAX and the later blocks – or later airplanes on the NGs, and that’s going to be the focus going forward. And again, it dovetails right into the Partnering for Success and the goals that we established internally on year-over-year productivity gains, working Lean Plus and working flow-time quality et cetera, but the program is obviously performing very well as it stabilized at 38 a month. We’re at record low shortages, and again, the core operating metrics are performing extremely well at those levels and getting ready to go to 42. So overall, it’s just a very solid disciplined focus on productivity on all aspects of cost.

Douglas Harned – Sanford Bernstein: But have you incorporated assumptions around Partnering for Success into this? My understanding was that you had been looking more at normal productivity improvements in that Partnering for Success was potential upside to your margin here.

Greg Smith – EVP and CFO: Yeah, that’s how we are playing it out, that’s how we’re working it. What you’re seeing up to now is the productivity gains that we see in the factories or within the supply chain, but then on top of that, working, Partnering for Success moving forward.

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