Boeing Co ($BA) Q1 2025 Earnings Call

Thank you for standing by. Good day everyone and welcome to the Boeing Company's first quarter 2025 earnings conference call. At this time all participants are in a listen only mode. Please be advised that today's call is being recorded. The management discussion and slide presentation plus the analyst question and answer session are being broadcast live over the internet. To ask a question on today's call, please press start then one on your telephone. At this time I'm turning the call over to Mr. Matt Welch, vice president of investor relations for opening remarks and introductions. Mr. Welch, please go ahead.

Thank you and good morning everyone. Welcome to Boeing's quarterly earnings call. With me today are Kelly Ortberg, Boeing's president and chief executive officer. And Brian West, Boeing's executive vice president and chief financial officer. This quarter's webcast, earnings release, and presentation, which include relevant disclosures and non-GAAP reconciliations, are available on our website. Today's discussion includes forward-looking statements that are subject to risks and uncertainty, including the ones described in our SEC filings. As always, we will leave time at the end of the call for analyst questions. With that, I will turn the call over to Kelly Ortberg.

Thanks, Kelly, and good morning, everyone. Let's start with the total company financial performance for the quarter. Revenue was 19.5 billion dollars, up 18% primarily driven by higher commercial delivery volume. The core loss per share of 49 cents was a significant improvement compared to last year driven by higher commercial deliveries and improved operational performance across the business. Free cash flow was a usage of 2.3 billion dollars in the quarter reflecting higher commercial deliveries and a working capital usage that improved compared to both the prior year and quarter. Our free cash flow was better than expectations shared last month driven by volume and favorable working capital timing. These financial results reflect only tariffs enacted as of March 31st, which was not material. Turning to the next page, I'll cover BCA. BCA delivered 130 airplanes in the quarter. Revenue was $8.1 billion and operating margin was minus 6.6%. Primarily reflecting higher 737 and 777 deliveries as well as lower period costs. BCA booked 221 net orders in the quarter. 20 777-9s and 20 787-10 airplanes for Korean Air and 50 737-8 airplanes for Volga. Backlog in the quarter ended at $460 billion, which was up more than $25 billion sequentially. This includes more than 5,600 airplanes. It translates over 7 years of production and importantly, the 737 and 787 are sold firm into the next decade. Now, I'll give more color on the key programs. The 737 program delivered 105 airplanes in the quarter, including 33 in March. On production, the factory gradually increased rate during the quarter and monthly production was in the low 30s in March. Importantly, the operational KPIs continue to progress and we still expect to be in a position to go to 38 per month over the next few months. Spirit continues to improve the quality and flow of fuselages, which sets us up well for the reintegration. And the deal is expected to close around mid-year. More broadly on the master schedule, we continue to make adjustments as needed and manage supplier by supplier based on inventory levels. Over the past year, our buffer inventory has grown to promote stability across our production system. As production stabilizes and rates increase over time, we plan to deliberately return buffer inventory to more normal levels. Today, we have about 30 737-8s built prior to 2023, which is down 25 from year end and includes 25 airplanes for customers in China. We still expect to complete the rework on these airplanes and shut down the shadow factory by mid-year. On the 7 and 10, inventory levels were stable at approximately 35 airplanes and certification timelines are unchanged. On 787, we delivered 13 airplanes in the quarter, generally in line with expectations outlined on our last earnings call. The program continued to stabilize production at five per month in the quarter, and we remain intent on demonstrating stability in the production system and supply chain prior to making the next rate increase to seven over the next few months. Today, we have about 20 airplanes in inventory built prior to 2023 that required rework, down five from year end. Four of these 20 are for customers in China. Importantly, we finished the rework and shut down the shadow factory in the quarter and expect to deliver about half of the remaining airplanes this year. Finally, on the Triple 7X, the program took another important step in its certification timeline as it received approval from the FAA to expand flight testing activities. We'll continue to follow the lead of the FAA as we progress through the certification process and still expect first delivery in 2026. 777X inventory was up approximately 800 million in the quarter and will continue to grow as we move towards entering service as we previously shared. Moving on to the next page, BDS. BDS booked $4 billion in orders during the quarter and its backlog ended at $62 billion. Importantly in the quarter, BDS was selected by the US Air Force to design, build, and deliver its next-generation fighter aircraft, B-21. This order was not included in our first quarter backlog pending the completion of the source selection and evaluation review process. Revenue was $6.3 billion, down 9% on planned lower volume including the impact from commercial derivatives associated with the production restart. BDS delivered 26 aircraft in the quarter. Operating margin was plus 2.5% up 30 basis points compared to last year and reflected stabilizing operational performance in the quarter. We made important progress in 1Q and the game plan is to get BDS back to high single-digit margins over time. Our core business remains solid representing approximately 60% of our revenue and performing in the mid to high single-digit margin range. Demand for these products remains very strong supported by the threat environment confronting our nation and our allies. The roughly 25% of the portfolio that's primarily comprised of fighter and satellite programs operational performance improved in the quarter which drove favorable margin trends. Lastly, on our fixed-price development programs that represent the remaining 15% of revenue, we continue to work to stabilize and mature these programs. This quarter's results reflected stabilizing operational performance and we remain focused on retiring risk each quarter and ultimately delivering these mission critical capabilities to our customers. During the quarter, the MPF 25 program successfully transported the first engineering development model aircraft to the new production facility in Illinois, where it began final assembly. The last production step before ground and flight testing begin later this year. On the T-7A, we achieved the first two EMD performance milestones outlined in the MOA that was finalized with the US Air Force in January. This continues to be an important example of how we are working with our customers to find better overall outcomes for both parties. Overall, the defense portfolio is well positioned for the future and we still expect the business to return to historical performance levels as we continue to stabilize production, execute on development programs, and transition to new contracts with tighter underwriting standards. Moving on to the next page, NDS. NDS continued to perform well, delivering very strong financial results in the quarter. The business received $5 billion in orders and the backlog ended at $22 billion. Revenue was $5.1 billion, stable year-over-year. Operating margin was 18.6% in the quarter, up 40 basis points compared to last year on favorable performance and mix with both our commercial and government businesses delivering double-digit margins. In the quarter, BDS delivered the 100th 767-300 Boeing converted freighter to SF Airlines and received a modification contract from the US Air Force to integrate electronic warfare systems for the F-15 Eagle. It remains a terrific long-term franchise focused on profitable, capital-efficient service offerings and continues to execute very well. Turn to the next page, I'll cover cash and debt. Cash and marketable securities ended at $23.7 billion, primarily reflecting the free cash flow usage in the quarter. Debt balance ended at $53.6 billion, down $300 million due to the paydown of maturing debt. And leaving 550 million of debt maturities remaining in the year. The company maintains access to $10 billion of revolving credit facilities, all of which remain undrawn. We remain committed to managing the balance sheet in a prudent manner with two main objectives. First, prioritize the investment grade rating, and second, allow the factory supply chain to stabilize. As you saw yesterday, we entered into an agreement to sell portions of our digital aviation solutions business for $10.55 billion, which is an important component of our strategy to focus on our core businesses and strengthen the balance sheet. Stepping back, let me provide some additional context on a macro backdrop before getting into the free cash flow outlook. We continue to closely monitor recent policy developments and believe that the administration understands the aerospace industry's importance to our economy broadly and US manufacturing jobs specifically, and is focused on keeping our US industrial base globally competitive in the long term. Given our position as a significant US exporter, free trade policy across commercial aerospace remains very important to us. As noted recently, on the supply side, roughly 80% of our annual commercial supply chain spend goes directly to US-based suppliers. And we'll work closely with all our suppliers to ensure continuity of supply and pursue options to mitigate cost pressures. Conversely, on the demand side, about 70% of our commercial deliveries this year are planned for customers outside the US. And importantly, the company has a large and diverse backlog of over half a trillion dollars with our key commercial programs sold out into the next decade. Specifically on China, it represents approximately 10% of our commercial backlog. And if we need to redirect supply to more stable demand, the strong market backdrop across the rest of the world still supports our planned production rate increases. Regarding free cash flow, we set a conservative plan for the year and had a strong start operationally, which we believe puts us in a position to largely offset any potential cash flow impact of China deliveries this year, as well as higher expected input costs due to tariffs. Regarding deliveries, our plan for the rest of the year was to deliver roughly 50 airplanes to customers in China. There is strong demand for these airplanes, and we are actively assessing options should we need to redirect the 41 China airplanes that are already built or currently in production. We'll continue to monitor the demand situation, and if tariff-related impacts expand beyond China, we would expect to see additional pressure. Broadly, the markets we serve continue to be significant, and our backlog of more than a half a trillion dollars demonstrates the strength of our core product portfolio. Long-term, these fundamentals underpin our confidence in managing the business with a long-term view built on safety, quality, and delivering for our customers. And before I open it up for questions, I too would like to thank Matt Welch for his partnership over almost 4 years, and we all know they weren't easy 4 years. He's a terrific Boeing leader, and we wish him all the best in his new promotion, and we welcome Eric Hill into his new IR role. With that, we'll open up the questions.

Thank you. We will now begin the question and answer session. In the interest of time and to allow for broader participation, we ask that you limit yourself to one single-part question. Your first question comes from the line of Doug Harned from Bernstein. Your line is open.

Good morning. Thank you. I got to tell you, if we go back to the first Trump administration, the negotiations on subsidies across the Atlantic led effectively to a zero tariff environment for aviation. And you know, when you look at the recent tariffs announced and under consideration, I mean, we would say they'd do nothing positive for the industry. I expect if Guillaume Faury were on this call, the two of you would probably be in violent agreement on this. But you commented earlier that the administration understands the importance of the industry, but can you describe how you and others are interacting with Washington to get out of this tariff environment? And you know, what are you hearing back? What's your sense on how this might evolve in the US and even in Europe and China based on your interactions there?

Very good. Thank you. Your next question comes from the line of Miles Walton from Wolfe Research. Your line is open.

Thanks. Good morning and congrats on the move, Matt. You survived a lot. So, Brian, I think in January you were expecting deliveries in the 37 in the low 400s and maybe 80 or so on the 787. Does that framework still hold with the 50 aircraft from China not going to China specifically as Kelly mentioned?

Thanks, Miles. On the 37, yes, we still think that's the right ballpark of 400. You had a nice strong start to the year operationally and that should allow us to offset most of any delivery pressure that would come from the 25 airplanes that are already built in inventory and around six that are in production. Airplanes that we planned to deliver this year. And for the second quarter specifically, we expect to deliver in the high 20s for April and the quarter should be more or less in line with 1Q ex-China, which is in the low to mid-90s. On the 87, you're also in the right ballpark. You know, we also are having a nice start to the year and we expect to ramp to seven per month in the next few months. And China would only be a handful of airplanes impacted. So, we like the ballpark that you mentioned and for 2Q, we've already delivered five so far in April and we expect 2Q to be a bit higher than where we were at in 4Q 24 delivery. So, things going pretty well. I think what's really important is any delivery timing won't disrupt our production rate increases on these programs. And we're making really good progress operationally and we're tracking to achieve the rate milestones that Kelly mentioned in both programs in the coming months.

All right. Thank you. Your next question comes from the line of Seth Seifman from JP Morgan. Your line is open.

Hey. Thanks very much and good morning everyone and congratulations Matt. Just wanted to ask a follow-up question on tariffs on the cost side. I guess if there's anything you can say to kind of size if we're thinking about the two impacts being kind of the China impact and the cost impact, maybe sizing potentially those two impacts and then talking about the drawback process on the cost side. Do you need to maybe manage the supply chain a little bit on the cost side if there are suppliers down in the chain who, you know, can't handle this as well as some of the larger and more well-capitalized suppliers. And also how you deal with, I gather you're going to get push from certain suppliers to kind of push through tariffs that they have with different surcharges and anything you can say about that process.

Yeah, sure. So, I think I'll start with the supply chain input costs and then I'll get to the China piece. On the supply chain side, the net annual impact of higher tariffs on input costs is manageable and within our plan. It's less than $500 million annually. And here's how to think about some of the pieces in addition to what Kelly described. You know, we have elevated inventory levels that are all pre-tariff. Aluminum and steel are typically 1 to 2% of the average cost of the airplane, which is virtually all US sourced. And with higher inventory levels and hedging strategies, that 1 to 2% is even lower in the current environment. We do bulk buys on behalf of our supply chain partners, and those could be subject to some price increases as tariffs move higher that we can't pass along, but that's a very small amount of money, nothing to worry about. You know, as Kelly said, we do have this duty drawback opportunity to get to that net, you know, a few hundred million dollars. And I would point out that we have a global trade and supply chain team that have decades of experience with tariffs and duty recovery. And when you're one of the world's biggest exporters, we really have a good handle on this. So we feel confident in some of the ways that we've been describing this. I'd also say that keep in mind that over time, any input-related costs will work its way through to price escalators, so should mostly neutralize over time. And then in addition to what Kelly said about the suppliers, as you know, many are on fixed-price life-of-program contracts where the importer of record does pay the tariff. And as Kelly said, we're doing everything we can to help them through this situation. As it pertains to China specifically, you know, we talk about 50 or so airplanes, that's, you know, it could be north of a billion dollars, but as I said, it's all contemplated within a conservative plan that we put together, so we feel pretty good.

Great. Thank you. Your next question comes from the line of Scott Deuschle from Deutsche Bank. Your line is open.

Hey, good morning. Brian, on the last call, you seemed to reference that the free cash flow usage for the year would be somewhere in the four to five billion dollar range. I guess can you give an update on how you're thinking about that specific range as well as some further characterization of the free cash flow cadence as we move through the year. Thank you.

Sure, thanks Scott. Let me start with the second quarter. So we expect the second quarter to be roughly in line with the first quarter usage. And as we've said, we expect the second half free cash flow to turn positive and then accelerate as we exit the year driven by a few really important levers. The 737 production ramp to 38 per month and even potentially higher as we exit the year. Higher 737 delivery volume. We've got the 787 production ramp to seven per month and also potentially higher as we exit the year. We have the higher 787 delivery volume and we have customer receipts that will be favorable. And those are offset by a couple things. Higher investment levels including the 777X and the potential impact of both China and this net impact from higher input costs from tariffs that we've discussed. So in terms of the range that you mentioned, you know, we're not going to adjust that full year range right now. We're good with where it's at. We had a really good start to the year. We need to execute on the production rate increases and we need more clarity on China and tariffs more broadly. So give us a little bit of time to see how things play out. The good news is that as Kelly said, we deliberately built the year to account for some unknowns. We're still comfortable with the plan that we've outlined.

Appreciate it. Thank you. Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Your line is open.

Good morning Kelly, Brian, and Greg. Thank you so much. So maybe just on that last thought, you know, assuming the skyline is largely intact outside of China and there's no demand impact with tariffs. How are we thinking about production rate ramps outside of 2025 with the 37 and the 87 rates? And how you're watching the biggest risks in the supply chain in the master schedule and how that correlates to cash flow expectations as you continue to benefit from volume ramps, but also on-time delivery?

And on the supply chain side, you know, as I mentioned, we have a lot of inventory. Enough inventory that is there for us to achieve the rates that Kelly's mentioning and we've got really good alignment with our key suppliers. Fuselages, engines, everything looks pretty good. Yeah, we have to get through some discrete moments around this tariff and ensuring the continuity of delivery which we'll work through as Kelly mentioned, but as we look a little further out, good alignment, plenty of inventory, feel pretty confident about supply chain side of it.

Thank you. Your next question comes from the line of Scott Mikus from Melius Research. Your line is open.

Good morning. Kelly, congrats on the F-47 win. I have a quick question there. There was a comment from the administration about the EMD phase being cost plus, but there were some competitively priced options for LRIP. So I'm just wondering, are those options fixed price? Do they have inflation escalators built into them? How should we be thinking about the risk from those options?

All right, thanks for taking the question. Your next question comes from the line of David Strauss from Barclays. Your line is open.

Good morning. Hey Kelly. Could you maybe dig in a little bit more on the status of the six KPIs, specifically the progress you're seeing there I guess maybe three months ago both on the MAX and 787 I think you had highlighted there was one on the 787 that was kind of out of line a little bit. If you could just touch on that and then how you've gone about mitigating risk around the Gen 10 pound, the fire there and how do you feel like you've got that kind of captured in the guidance as well. Thanks.

Your next question comes from the line of Noah Poponak from Goldman Sachs. Your line is open.

Hey, good morning everyone. Kelly, how did you reduce traveled work by 50% in a few months? And how did you have a positive defense margin despite the tanker news in the quarter? And really the bigger picture question there is, you know, were some of these improvements inevitable with time or how much have you changed specifically since you've come on board with the blocking and tackling of the operating performance of the business? You've laid out how you're going to turn the battleship, but curious if you could talk about the shorter term, simpler blocking and tackling improvements you've made and I thought maybe those would be two that would be helpful to hear more about.

Okay. I appreciate all the detail and Matt, congrats on the promotion and thanks for all the help over the years.

Your next question comes from the line of Peter Arment from Baird. Your line is open.

Yeah, thanks. Hi, Kelly and Brian. Congrats, Matt. Hey Kelly, I guess maybe just to wrap up a little bit on there's a lot of questions around the rate breaks, but when you get to 38 and obviously the FAA is reviewing the KPIs with you, how do we think about that when you're moving beyond, you know, rate 42 or rate 47? Is that something you're doing in concert with the FAA? I know you mentioned the shield that you're looking for stability first on all those. Is it just keeping them in the loop or are they more involved in the process? Appreciate it.

Thanks for all the call. Appreciate it. Your next question comes from the line of Robert Stallard from Vertical Research. Your line is open.

Thanks so much. Good morning. And congrats Matt on the move. Quick question on the sale you announced yesterday. Brian, is there anything you can give us some idea of what the impact could be on future EBIT and free cash flow dilution as this exits the business and what you expect your net cash proceeds to be after tax from the sale. Thank you.

Thanks Rob. So on the margin question, this is not going to disrupt our long-term view is to be in the mid double-digit margins for the business. It's just not very big impact. So not worried about that at all and the service business will continue to perform and grow in the mid single digits revenue and deliver nice mid-teens margins. That will be consistent. This has nothing to do with that. In terms of the deal itself, there's not a lot of leakage on this. So you can think about it being 10 billion net. So it's going to be close to the full purchase price and then I'd also add that the way this deal got done is that it's all cash. So, it's important to know that we're not going to take any risk between signing and closing which I think is good for the company and good to get this behind us.

Okay, thanks so much. And Rob, we have time for one final question. Certainly, your final question comes from the line of Richard Safran from Seaport Research Partners. Your line is open.

Thanks. Kelly, Brian, good morning. Matt, congrats. You know, I think you guys have talked several times about your portfolio shaping. I thought maybe you'd update us on where the Jeppesen sale leaves you as you look forward. Is there anything else that you're considering on any other items on the list? And on Jeppesen specifically, you know, I think it's a pretty important digital asset. So, I was just wondering how you think about where to set the perimeter of the deal. I was wondering if you kept what you needed to ensure you have a strong digital capability going forward. Thanks.

Well, thanks very much. Thanks, Rich. And that concludes the Boeing Company's first quarter 2025 earnings conference call. Thank you for joining.