Source: Seeking Alpha
The Boeing Company (NYSE:BA)
Q2 2014 Earnings Conference Call
July 23, 2014 10:30 AM ET
Troy Lahr – VP, IR
Jim McNerney – Chairman and CEO
Greg Smith – CFO
Ray Conner – Vice Chairman, President and CEO – Commercial Airplanes
Tom Downey – SVP, Corporate Communications
Howard Rubel – Jefferies
Carter Copeland – Barclays Capital
Doug Harned – Sanford Bernstein
John Godyn – Morgan Stanley
Cai Von Rumohr – Cowen and Company
Joe Nadol – JPMorgan
Myles Walton – Deutsche Bank
Peter Arment – Sterne Agee
David Strauss – UBS
Sam Pearlstein – Wells Fargo Securities
Jason Gursky – Citigroup
Julie Johnsson – Bloomberg News
Christopher Drew – The New York Times
Doug Cameron – Wall Street Journal
Steve Wilhelm – Puget Sound Business Journal
Stephen Trimble – Flight Global
Thank you for standing-by. Good day everyone and welcome to the Boeing Company’s Second Quarter 2014 Earnings Conference Call. Today’s call is being recorded. The management discussion and slide presentation plus the analysts and media question-and-answer sessions are being broadcast live over the Internet.
At this time, for opening remarks and introductions, I am turning the call over to Mr. Troy Lahr, Vice President of Investor Relations for the Boeing Company. Mr. Lahr, please go ahead.
Thank you and good morning. Welcome to Boeing’s second quarter 2014 earnings call. I am Troy Lahr and with me today are Jim McNerney, Boeing’s Chairman and Chief Executive Officer and Greg Smith, Boeing’s Chief Financial Officer. After comments by Jim and Greg, we will take your questions. In fairness to others on the call, we ask that you please limit yourself to one question. As always, we have provided detailed financial information in today’s press release and you can follow this broadcast and slide presentation through our Web site at boeing.com.
Before we begin, I need to remind you that any projections and goals included in our discussion this morning are likely to involve risk, which is detailed in our news release and our various SEC filings and in the forward-looking statement disclaimer at the end of this Web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of non-GAAP measures that we use when discussing our results and outlook.
Now, I will turn the call over to Jim McNerney.
Thank you, Troy and good morning. Let me begin today by acknowledging the families of loved ones of those aboard Malaysia Airlines Flight 17. All of them and everyone affected by this horrific tragedy are in our thoughts and prayers at this time. For the men and women and Boeing and others throughout our industry who are passionately committed to ensuring the safety and security of passengers and air crews, this is a particular unsettling and painful moment in the history of civil aviation. We are providing technical assistance to the investigation at the request of the NTSB which is supporting international authorities in the important work they have underway.
Turning back to the subject at hand this morning, I’ll start with some comments on the quarter and our business environment. After that Greg will walk you through details of our financial results and outlook.
Now let’s move to Slide 2. Boeing delivered strong quarter operating performance across our production programs and services businesses with solid revenue, double-digit core EPS growth and healthy cash generation. Our strong positive performance through the first half of the year has allowed us to continue returning cash to shareholders and increase guidance for our full year EPS by $0.75 which includes approximately a $0.50 tax benefit. Greg will discuss guidance in more detail in just a couple of minutes.
During the second quarter we did record a 272 million after tax charge on our fixed price U.S. Air Force tanker program engineering and manufacturing development contract. The charge was driven by higher spending needed to complete systems installation on the tanker to test that aircraft and maintain the schedule for delivering this vital capability to the war fighter. As you may recall we noted in our Investors Conference that we were beginning to see some challenges in the build and systems installation process. The increased spending is primarily related to additional engineering and systems installation rework required mainly to meet wiring specifications.
The issues at hand are well defined and understood which in no way mitigates our disappointment in having to take this charge, but the actions we have taken to keep us on path to the next major program milestone which is to begin test line fully provisioned tanker aircraft in the first part of next year. With a long-term potential market for the KC-46 tanker of up to 400 airplanes worth $80 billion, it remains a franchise program for Boeing. And we expect to realize strong returns over decades of production and in service support.
With that said let’s discuss our core operating performance during the quarter. Revenue at Boeing Commercial Airplanes was $14.3 billion and operating margins increased to 10.8% a result of both the higher volume and a favorable delivery mix. We delivered 181 commercial airplanes in the second quarter including 37 87-Dreamliners and we added net new orders of 264 airplanes. So far in July we have booked another 282 orders including those announced by customers at the Farnborough International Airshow bringing our current net order total to 783 for the year already a book-to-bill greater than 1.
Boeing Defense Space and Security reported revenue in the second quarter of 7.7 billion. During the period BDS captured numerous key contract awards including a $1.9 billion order of 44 U.S. Navy and Royal Australian Air Force E/A 18 and F/A 18 aircraft, a $700 million order for five years of AEW&C in service support from the Royal Australian Air Force and a $200 million order for our 9th 702MP Intelsat satellite. Significant program milestones included a successful missile defense system intercept test delivery of both the 4th P-8A, P-8I to India and the 100th P-18G to the U.S. Navy.
With that let’s turn to the business environment on Slide 3. Global demand remains high for the superior fuel efficiency and economics provided by our family of commercial airplanes as recognized in the order totals I’ve mentioned earlier. Global passenger traffic trends continue to be healthy and air cargo traffic is still gradually improving. In addition to growth driven demand we continue to experience and foresee sustained high replacement demand where newer more efficient airplanes offer compelling economics and a rapid return on investment compared to keeping older less efficient airplanes in service.
Combining growth and replacement needs over the next 20 years we forecast global demand for nearly 37,000 commercial airplanes a 4% increase over the last year’s forecast. Deferral requests from customers are still running well below at historically average while request to accelerate deliveries remain brisk. This ongoing strong demand coupled with our already sizable and diverse backlog of more than 5,200 airplanes reinforces our planned production rates and outlook for sustained growth in the years ahead.
In the Twin-Aisle segment we continue to see healthy demand for both the 777 and the 777X which continue to out sell the competition by a wide margin giving us confidence in our ability to transition between the two airplanes. As part of our focus on that transition we are looking to maximize production efficiencies with existing best practices from other programs as well as advanced new manufacturing technologies. For example last week we unveiled a new robotic system for building 777 Fuselages this automated approach will increase first time quality reduce build times and improve work place safety for our employees.
On the 787 program we achieved major milestones with certification of 330 minute ETOPS and the on schedule certification in first delivery of the 787-9 to Air New Zealand. Development of the 787-10 also is progressing to plan with the first delivery in 2018. In the Single-Aisle segment demand for our new fuel efficient 737 MAX remains high with cumulative orders exceeding 2,100 airplanes from 43 customers, the production bridge from today’s 737 to the MAX remains solid with the first MAX delivery in 2017.
Turning to Defense, Space & security, we continue to see solid support for our major programs in the FY15 budget process. We are encouraged by the actions taken in both the house and senate appropriations committees with regard to additional P-8s, Apaches and EA-18G aircraft. International Defense, Space & security business represented nearly 30% of BDS revenues during the quarter and remains at approximately 35% of the BDS backlog as we continue to leverage our unique One Boeing global advantage.
Our investments in technology and innovation for organic growth continue in areas such as commercial derivatives, space, unmanned systems, intelligent surveillance and reconnaissance, cyber security and the few but critical future large-scale programs identified as priorities by our customers like Long Range Strike, UCLASS and the T-X Trainer. The relative strength of our Defense, Space & Security business stems from a portfolio that is reliable, proven and affordable and is being delivered on budget and on schedule. We remain intensely focused on driving further efficiency, quality and productivity gains to improve program profitability and fund investment and future growth.