During Boeing Co.'s (BA, Financial) second-quarter earnings call, President and CEO Dave Calhoun and Chief Financial Officer Brian West expressed optimism about the company's financial performance and the path to recovery. Despite ongoing challenges, both executives highlighted positive developments and outlined their plans for improving earnings. Boeing faced a barrage of questions from analysts eager to understand the company's financial performance and future outlook. The call, which took place on July 26,saw analysts from various firms seeking clarity on key issues affecting the aerospace giant.
Boeing's CEO and CFO optimistic about earnings recovery
West began by discussing the company's total financial performance. He reported that second-quarter revenue reached $19.8 billion, marking an 18% year-over-year increase. This growth was primarily driven by higher commercial volume, including increased deliveries of the 787 aircraft. However, the core operating margin remained at -2%, and the core loss per share was 82 cents. West attributed these figures to expected abnormal costs, period expenses and losses on three fixed price development programs in the defense business.
Despite these challenges, West emphasized the positive aspects of Boeing's financials. He highlighted the significant improvement in free cash flow, which reached $2.6 billion, driven by higher commercial deliveries and favorable receipt timing. West also mentioned that the strong order activity resulted in over $2 billion of favorable advanced payment timing, which was expected to occur in the third quarter.
Progress in commercial airplanes
Moving on to commercial airplanes, West discussed the progress made in the quarter. The business booked 460 net orders, including significant orders from Air India, Riyadh Air and Ryanair (RYAAY, Financial). The backlog now stands at over 4,800 airplanes valued at $363 billion. Although the operating margin for the segment remained negative at -4.3%, West noted it was a sequential improvement from the first quarter. He attributed the negative margin to expected abnormal costs, period expenses and higher research and development spending. He assured investors that the company was making steady progress in addressing operational challenges and would focus on stability as it aimed to increase production on key programs.
Defense and space segment
In the defense and space segment, West acknowledged the operating margin remained at -8.5%, primarily due to three fixed-price development programs. However, he expressed confidence in the portfolio's strong demand and the company's ability to return to high single-digit margins by 2025-26.
Overall, both Calhoun and West remained optimistic about Boeing's future. They highlighted the strong demand across key programs and services, with commercial demand remaining robust and defense demand continuing to progress as expected. They acknowledged the supply-constrained environment, but assured investors that the company was focused on execution and steadily increasing production.
Analysts seek clarity on Boeing's financial performance and future outlook
Sheila Kahyaoglu from Jefferies kicked off the question and answer session, inquiring about Boeing's commercial airplanes operating loss of $383 million in the quarter. She sought to understand the factors that would drive a turnaround and when the operating margins would turn positive. She specifically mentioned production rates, abnormal cost concessions and pricing as potential drivers. West responded to Kahyaoglu's question, acknowledging the negative operating margins but expressing confidence in sequential improvement. He highlighted that the third quarter would still see some negativity, but expected positive margins by the end of the year or early next year. West attributed this optimism to factors such as rate ramp, the resolution of abnormal costs and a favorable pricing environment.
Cai von Rumohr from Cowen followed up on Kahyaoglu's question, expressing concern about Boeing Defense, Space & Security programs' underperformance. He questioned the impact of fixed-price contracts and whether any contracts would reach their end, allowing for better pricing going forward. Boeing's CEO acknowledged the challenges posed by the fixed-price contracts, but expressed confidence in overcoming them. He assured analysts that the products delivered would perform as expected or even better.
Queries on 737 deliveries and 787 program
Myles Walton from Wolfe Research asked about Boeing's expected improvement in 737 deliveries for the second half of the year. West confirmed they expect the second half to be better and that they are always striving to sequentially improve. However, he did not provide specific details on the factors contributing to the expected improvement.
Seth Seifman from JPMorgan focused on the 787 program and asked about potential supply chain issues. Calhoun mentioned the supply chain is getting better and more stable, indicating there have been improvements in coordination. However, he did not provide specific details on any potential supply chain issues.
Seifman also sought insights into delivery expectations for the following year. West stated that it is not the right time to discuss delivery numbers for the next year. He emphasized the importance of sequential improvement and expressed confidence in the 787 program, mentioning the team is steadily working toward production rate increases.
David Strauss from Barclays raised concerns about slow 787 deliveries in July and rumors of new issues affecting the program. Calhoun did not directly address the rumors of new issues. However, he mentioned the 787 program is on the right path and that the team is steadily increasing production rates. He expressed confidence in reaching the delivery guidance for the year and highlighted the progress being made in the program.
Calhoun concluded the earnings call by reiterating their commitment to meaningful operating performance improvement, including deliveries, revenue, margins and cash flow. He emphasized that despite the challenges, Boeing is heading in the right direction and expects operational and financial performance to continue accelerating, aligning with the plan laid out in its Investor Day last November. With a target of $10 billion of free cash flow in 2025-26, Boeing's leadership expressed confidence in the company's ability to recover and thrive in the coming years.
My take
Boeing's second-quarter earnings call provided valuable insights into its financial performance and future outlook. Analysts sought answers to pressing questions, and the company's executives provided reassurance, highlighting their confidence in overcoming challenges and delivering positive results in the coming months.
The analysts' response was somewhat negative. In the past week, three analysts have lowered their estimates for 2023, but their estimates for 2024 have remained relatively unchanged. This aligns with my opinion of the call. No significant new information was disclosed, either positive or negative, but Boeing needs to increase production and become profitable again. When we consider the six analyst downward revisions in the last 30 days, it is clear that Boeing is not a value stock and should only be considered by those willing to take on substantial risk in their portfolio.
