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The Boeing Company (NYSE:BA)

Annual Investor Conference Call

May 22, 2013 07:30 AM ET

Executives

Jim McNerney - Chairman, President and CEO

Greg Smith - CFO and EVP

Dennis Muilenburg - President and CEO of Boeing Defense, Space & Security

Ray Conner - President and CEO of Boeing Commercial Airplanes

Analyst

Unidentified Analyst

Good morning and welcome to Boeing 2013 investor conference. It’s our pleasure to be with you here in Charleston. We have assembled our leadership team to discuss the businesses, strategies and outlook with you. In turn to the next slide and we’ll go in to agenda.

Jim McNerney is going to kick off the morning session then you will hear from Greg Smith, Dennis Muilenburg, and Ray Conner. There will be time for questions after each presentation. Just please raise your hand when recognized, push the button on the microphone to ask the question, just please remember to turn off the microphone.

For the breakdown sessions we have a great line up focusing on key elements of BCA and BDS, Scott Fancher and Larry Loftis will discuss BCA development efforts in 787. Also, Bob Verbeck and Chris Raymond will discuss BDS realignment and international opportunities.

For the breakout sessions, we have pre-assigned the groups on the back of the badges so please follow those. Group A will stay here in the Grand Oaks Ballroom for both sessions, group B will be in the hearing room right around the corner.

As always need to remind you that throughout the presentation today, there may be information that is forward-looking. This information is subject to risk and uncertainty as detailed in our SEC filings.

Now, it is my pleasure to welcome Boeing's Chairman, President and Chief Executive Officer, Jim McNerney. Thank you.

Jim McNerney

Someone should tell Troy that this is not Charleston here. As Mike already told me this is Kiawah. But thank you Troy and good morning everyone. I do want to start on a little bit of a somber note by acknowledging our colleagues who are dealing with the aftermath of the goings on down in Oklahoma. You may not noticed but of company’s roughly 1,500 employees in Oklahoma city, a 130 lived immediately in or right next to Moore, the place where the tornado hit and as of last night we have tracked down all but seven. How we doing? We are on the last set. So our communication infrastructure is a mess but we have found all but seven. Our thoughts and prayers obviously are with our teammates and all the folks whose live changed on there, it was quite an event.

but with that acknowledged, I want to add my welcome to each and every one of you and thank you for joining us this week, in fact we are quite proud of what our people have accomplished here in South Carolina and we are glad that you could see it for yourself yesterday, the progress we have made as well as the strategic value that our Charleston operation brings to Boeing, it’s a big deal, took a long time but we are on the other side now.

Last year, I described our aspiration to convert the foundational strategies of this company, our strong core operating performance and unprecedented backlog into sustained business performance. The year in, year out excellence that defines the world’s top companies.

Our results for 2012 in the first quarter of 2013 demonstrate clearly the capacity of this team many of whom you are going to meet to deliver the consistent world-class performance and growth that we aspire to achieve. Just as an aside, as you all know, a CEO is never, ever happy with their company’s stock price but in a very-very quiet moment, I would have to admit that here today, the price we are at, at least partially reflects the way I would value Boeing if I were in your seats, and you were standing up here but only partially, okay. It says pause for laughter, I guess it’s early. Or my joke provider’s worst time, what happened to you? Anyway but it’s nice to see a run up and nice to see a recognition of some of the things we are getting done.

While no-more work remains to be done to achieve our full potential momentum toward the goals we have set is accelerating and our confidence in the future is increasing. As we approach our second century of aerospace leadership and that begins in 2016. 2012 was a very strong year for Boeing with increased deliveries from both of our businesses, record revenues and backlog, strong near double digit operating margins and significant operating cash flow.

At Boeing Commercial Airplanes we've restored our market share lead with more than 600 deliveries as we continue to steadily increase our production rates to match growing market demand.

In addition to five successful rate increases across our programs last year which is not an insignificant accomplishment, we achieved a major strategic milestone with the start of 787 deliveries from our new factory right here in South Carolina, which I will remind you is the first commercial airplane factory built in the United States in about 50 years. Success in standing up Boeing in South Carolina, along with other recent steps to expand our production capacity and the geographic diversity of our manufacturing and engineering footprint will help ensure continuity for our business as we scale up for the major growth that's in our future.

The four year contract agreement we reached earlier this year was unrepresented engineers and technical workers at (inaudible) will also help ensure we deliver on our growth plans in commercial airplanes. Boeing Defense, Space and Security, with its disciplined approach on program performance and portfolio of proven, reliable and affordable systems and services, also exceeded expectations in 2012, despite a difficult and uncertain business environment. Even with intense budget pressures from many of our customers and a growing field of very capable competitors, our defense business secured 44 billion in new orders in 2012, and another 5 billion in the first quarter of this year, our defense, space and security backlog has grown to $68 billion more than twice 2012 revenues and among the strongest order books in the defense industry.

We also made progress on several of our innovated new programs including the test flights of the Phantom Eye, liquid hydrogen powered unmanned spacecraft, a 469 day mission for the autonomous unmanned X-37B spacecraft and the start of work on our first international cyber security program. Leveraging the international strengths of our company has been a top priority for several years. The return on that investment in both people and resources has improved our results and expanded future opportunities. Roughly 80% of our commercial airline backlog is committed to international customers as is now 42% of backlog on the defense, space and security side - a sea change there. Here's a short video that captures the essence of our global engagement through our products, partners and customers and most importantly the spirit and hard work of Boeing folks.

[Video Presentation]

Okay I am sensing that everybody is awake now, I think we're getting there. We added the drums to help, listen, the significant achievements of our global team over the past year further strengthened our business foundation and our expectations for the remainder of 2013 and beyond are strongly positive. By staying intensely focused on disciplined execution, productivity improvements to continuously fund innovation and improved management of business and technical risks, we intend to deliver the consistent high levels of performance and value that our shareholders expect and deserve.

Next slide please.

The priorities we defined for achieving significant and sustained growth and continued global aerospace leadership in the years ahead are serving us well. Our teams have made tremendous progress on each of these imperatives over the past several years. However, the dynamics of our business environment require us to do more and do it faster. Driven by the dynamics of their business environments; our commercial and defense customers are demanding more capability and more efficiency from our products and services at less cost.

This more for less reality both requires us and quite frankly inspires us to redouble our focus on these core strategic imperatives to ensure we continue to compete and win in our markets and satisfy customer and shareholder expectations. That's what I will focus on this morning, starting with our commercial airplane strategy on slide three.

In terms I'll believe will resonate particularly well with this audience, commercial airplanes is a long term bold market opportunity. History teaches us and our forecast shows that this market will continue growing by a multiple of global GDP. Because the increasing efficiency of airplanes and our global air transportation system is a fundamental enabler of economic expansion.

Boeing's growth opportunity in this market is simply unprecedented with 34,000 new airplanes to be brought and built over the next twenty years. We are committed to capturing and increasing share of that growth and to expanding the market leading position we've earned over the last several years through superior product strategies and strong program performance.

For the 787 fleet, back in flight and new deliveries underway. Our full focus returns to our ongoing commercial airplanes priorities, the foremost among them. To convert the growth in our record backlog to cash and earnings by continuing to steadily and profitability increase production rates to deliver our 4,400 airplane backlog to customers sooner and to leverage our growing financial strength and past technology investments and sought after new additions to our product lines.

With favorable passenger traffic trends and growing airline profitability, demand remains high for our value created product family as customers continue replacing older airplanes in favor of new ones that offer more compelling, economics at increased fuel efficiency.

We expect our strong order performance to date this year to continue throughout 2013 with a book to bill ratio, we're confident we will finish above one. Our twin isle line up is unsurpassed and poised for additional growth with the customer preferred in market leading 777 and 787 franchisees as our core, a freighter family that is virtually unchallenged including the only very large freighter, the 747-8 and a healthy firm backlog of more than 1,250 wide-bodies.

Despite the challenges encountered in developing and fielding the game changing 787, we have retained the lead in innovation and the first mover’s advantage in the market. We intend to harvest those hard fought gains to further distance ourselves from our competitor in the decades ahead by applying the technologies and lessons learned from the 787 and other recent development efforts to build out the 787 family with the -9 and Dash 10X derivatives and to launch the innovative new 777X family of airplanes. Strong progress is being made on each of these efforts. The 787-9 remains on track for first flight later this year and entry into service next year. Customer interest in the 787-10X and the 777X is high and growing as we discuss the technical details and the economic advantages they offer over competing products. We continue to anticipate potential launch of both airplanes this year.

Our objective in the single-aisle market is to maintain our strong historical market share position and healthy margin performance with airplanes that continue to provide customers an efficiency and value advantage over the competition. We are doing just that by leveraging our successful 737-NG family of airplanes with the new technology and efficiency improvements in the 737 MAX. With 1315 firm orders and growing, the 737 MAX continues to capture premium value for its compelling economic advantages.

Development remains on track with firm configuration expected midyear and entry into service in 2017. Each of these game changing new derivatives of our market leading airplanes represent attractive investments that will dramatically increase customer and shareholder value while lower execution and return risk for Boeing. Hold that thought, because reducing development cost and risk is when I will come back to, in a few minutes. I will also come back to elaborate on our enterprise wide productivity initiatives.

Both of these efforts are helping us drive innovation while reducing, and I will say it again, financial and technical risk. Also in the breakout sessions in front of you today, Scott Fancher will dive deeper into how we are designing productivity and affordability into our development programs.

Now a few comments on defense, space and security; slide 4 please.

Looking across the landscape of our defense space and security markets we believe we are better positioned than current and emerging competitors to weather the storm of sequestration and other challenges while positioning Boeing for long term growth and continuing to deliver strong profitability. The strength of our product and services mix are one Boeing global reach a big deal and our persistent and endless drive on affordability underpin our confidence in our competitive position.

Our portfolio of proven, reliable, affordable, and effective systems and services has become the advantage we believed; it would be in meeting customer requirements and a lower budget but persistently high threat U.S. national security environment. As our healthy backlog and recent orders a test; strong demand remains for the majority of our core programs. The expanded global emphasis I mentioned earlier, and as you saw in the video, has allowed us to pursue and capture a disproportionate share of growing international markets by leveraging the unique Boeing advantage of country to company relationships developed through the years of global engagement on the commercial airplane side of our business.

As a result we have successfully transformed our defense, space and security business mix from 7% international sales in 2004 to 28% in the first quarter 2013 and I mentioned earlier the 42% in the backlog. We are committed to sustaining international defense sales of approximately 30%. Later Dennis will address some of the specific opportunity areas we are targeting and Chris Raymond will provide more detail in the breakout sessions.

Through our market based affordability initiative, we plan to set the industry standard for efficiency and productivity. That effort now bolstered by our partnering for success program that I’ll address in a minute has allowed us to further increase our competitive position through operating cost reductions of more than $3 billion.

Lowering our cost structure and offering our customers meaningful savings as a result has improved our top and bottom lines by securing profitable new business including multiyear contracts numerous programs such as the V-22 (inaudible). These measured and often difficult decisions have also enabled continued investment and future growth whereas other defense, space and security companies are reducing R&D spending to whole margins, our productivity efforts have both grown margins and enabled increased investments in core and growth areas including space, unmanned systems, C4ISR cyber security, and services.

The resulting realignment of our business uniquely positioned us to compete more effectively today and to benefit further once market conditions improved. Successful execution on our development programs including the KC-468 tanker is also a critical focus as we another have learned nothing is more vulnerable in times like these than underperforming programs.

Our tanker program continues to perform to plan and we intend to keep it that way. In summary, despite unprecedented market dynamics we’re making solid progress and repositioning our defense, space and security business for the future while extending and growing our current portfolio and delivering results, we expect and you expect regardless of the constraints of the business environment. Now the slide five please at enterprise productivity.

The growth we’re experiencing and the performance we’re demonstrating are a direct result of years of effort to instill continuous productivity improvement in the fabric of our company. We consistently capture 3% to 4% annual productivity gains company wide. Productivity drives revenue growth by making products and services more affordable and it enables investment in new products and services through higher earnings and cash flow.

We have applied lean plus principles throughout our factories and office areas to increase quality and reduce flow times and we’re collaborating and sharing best practices across and between our business units and core functions. Market based deportability as I mentioned is driving stiff productivity improvement at our defense business where we have captured real savings driven by targeted facilities consolidations and reductions in executive and management ranks.

Tremendous improvements continue on our core commercial airplane programs such as the 737 and 777 and we began to see strong gains on the 787 program as well which a number of you have noticed in our first quarter earnings results. We continue to target significant additional improvements in both major businesses and on all our programs. These efforts are now being coupled with our partnering for success initiative with our supply chain which I’ll now address on slide six.

With the majority of the cost of our products and services coming from the supply chain, it is imperative that our supplier partners are fully engaged to help us meet increasing customer expectations in this more for less world I described. We expect to be paid for the risk we take with our lead role in designing, developing, building, and support the world’s best aerospace products 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 improvement and total cost through an improved supply chain quality flow and efficiency ultimately to increase productivity and lower product and services cost for customers. Given the growth potential booked in our backlog and the pending new program decisions, we are offering supplier partners who step up to the challenge, a win-win opportunity to share in that growth and profit potential and earn work on future programs.

We are taking a team-oriented approach to examine opportunities up and down the supply chain and design production and support. We are applying lessons learned on past programs, sharing best practices and process expertise and where we find partners who can't or won’t step up to these challenges, we will re-complete that work or pull it back in house, if that’s what provides the most value to our customers.

We are pleased quite frankly with the response from many of our partners at this early stage and the effort is already producing real savings with more work ahead.

Finally, to slide seven, in our development initiative. De-risking the decade ahead is a theme a number of you have heard from me on previous occasions. Our development program strategy aligns with that objective while still delivering the performance and value advantages our customers expect from Boeing airplanes. These clearly are exciting times for Boeing.

Spiral technology development that leverages previous investments is a vital element of our strategy to materially reduce risk and this uniquely positions us to drive affordability into our new development programs. For example, a new composite wing on the 777X will significantly leverage composite wing experience gain on the 787-8, the -9, and the Dash 10X, this will be a fourth generation shot at a composite wing.

We are also focused on leveraging past lessons learned. The discipline gated development process implemented on the KC46 tanker, the 737 Max and the 787-9 is now being applied to the Dash 10X and 777X programs which gives us increased confidence in our development efforts on these programs. Furthermore, the consolidation of our research and technology organizations across the enterprise eliminated inefficiencies, expanded capabilities and significantly reduced overall program risk, maintaining a constant dialogue with our customers is also critical as it allows us to more efficiently deploy our resources on technologies they value and pay for and to avoid those technologies that they don’t value and won’t pay for.

To close, let me summarize by saying that we continue to make good progress on each of our strategic priorities. Our business is healthy and our people have positioned us with the future with their laser-focus on driving productivity and increased profitability allowing us to continue game changing innovations to customers and to return cash to shareholders. With that I would be delighted to take some questions. Joe, jump in, thank you.

Question-and-Answer Session

Unidentified Analyst

Thanks, Jim. Partnering for success, just looking historically Boeing has tried a many times in the past to extract more value out of the supply chain, I am just wondering if you could and you have been on the other side of it to some degree, so what’s different about this effort, what can you do differently right now given where you are, how game changing can this be for the profitability as you look over the longer term?

Jim McNerney

I think the difference Joe is, and of course this has always been an objective but it’s how we are implementing to makes the differences, let me to talk on a point of you as you eluded when ran GE aircraft engines, okay we had all kinds of engines we are selling Boeing on defense programs, commercial programs, helicopter programs. We are selling all parts of the Boeing and each battle would be with the program manager, okay. We win some; we lose some, in that though I could always figure out a way to increase margins in an environment where I separated each program from the herd in Boeing, okay. What’s difference about this one is that I am leading it. this is a corporate program and we are aggregating all our experience and all our interaction with each of our partners and GE is a good actor by the way, in this, so I'm not trying to single out GE, they've come to the party on this.

And so we have no fly lists across the company, so if a certain group is not working with us on program A, they will feel the pain on every other program, and they'll be on a corporate no fly list for next programs. They'll not be allowed to bid on new programs with Boeing. That's one point, the other point is that we now have a bigger market share we're an 80, what we're going to be mid-80s billion dollar company this year. Our footprint across aerospace is a bigger percentage than it was historically because we now have built out a big defense business and all these suppliers cut across all of these programs and so we're using corporate leverage, information and a corporate determination toward this.

Now your next question will be, well Jim aren't there some places where you're held hostage and yes there are and if we can't move the work or if we can't take it in house and you've seen us come in house a little bit, Charleston is one big in house vertical integration effort. There will be some places where vital capability, we will not you know, but most of the people have vital capability also sell other stuff to us. So if they insist on extracting more value than the risk they take deserves there'll be other places where they won't be allowed to bid. So now, I'm sounding like Darth Vader here, but we are working collaboratively, there is a big investment inside of Boeing, we realize we are part of the problem, there are investments we can make to enable them, there is information we can give them that can help them do a better job and so we're spending 10s of millions of dollars as part of this program to give them the information they need to do a better job too. Joe, you go ahead.

Unidentified analyst

Just one quick follow up, so you're in a, if you look at your development program profile you picked most of your suppliers for max, you still have a lot of the work to do over the next say 12-18 months I would imagine on 777X in particular also maybe Dash 10 for what that's worth, in terms of new suppliers. Is this a unique opportunity and what's the time frame as you look out on…?

Jim McNerney

Just given the cycles of our business, this will be 7-10 year program, okay. now some of the choices we made on the max were as a result of this program already and let me tell you, the program influenced a couple of choices, I'm not going to tell exactly which ones, which guys but absolutely in play, the discussions now on the 777 and on the Dash 10, more limited scope as you point out, they're all framed within a partnering for success aperture and we have sent out a lot of letters to folks that we told not to bother to bid on these programs. We've never done that before, and then that generally creates a dialogue and we make progress and then we remind them that don't bet against Boeing. Let's win together, let's win together.

Unidentified analyst

Jim, you talked a little bit about returning cash to shareholders and you thought a little bit about this balance between growth and what's the appropriate mix of investment, could you provide a little bit more color around, on how you see the cash profile over the next several years I mean clearly there's some demands but there's also some surplus and how you want to allocate that.

Jim McNerney

Well, I'll let Greg get more specific, and he's designed that into his pitch. I was talking to some of the folks last night, we will not hit the high water mark that we hit on R&D, out of BCA, we won't come close to that high water mark as we see the flow out on the Dash 10, on the Max, and the 777. As a matter of fact those development efforts fit together pretty well at a lower level, so R&D down, that's part of derisking the decade, we're taking technologies, hard fought, bloodied that they are, okay, we now are ahead of our competition of being able to deploy composite electronic capability etcetera into our new airplanes, cost less. We are beginning to turn the corner on the 87 a big cash opportunity and we have a plan to return significantly more cash to shareholders. Okay, now as we; burps can happen along the way in our business and so we will be more conservative than you want us to be, but we’ve got a pretty aggressive plan and we hope to implement it and R&D down less risks in our development programs which will mean less billion dollar here, billion dollar there, push out here, push out there; less risk of that happening. On top of lower R&D to begin with and so eating through the backlog with increased production rates is going to give us great flexibility and we hope to make you at least 60% happy Howard.

Unidentified Analyst

Thanks Jim you just talked about feeding through backlog and you also talked about the potable being above one again this year BCA. Given the production rate increases you laid out, it looks like you’ve really won't eat into backlog that much. So just wondering bigger picture how you are thinking about the tug of war between market share and a conservative backlog you wanted for so long given that you've now had this very-very large backlog for a long time and it doesn’t look like it's going down anytime soon.

Jim McNerney

I think if you look at our historical behavior, you will see more of a bias to production increases, little less worshiping of the backlog, a little more converting it. And I am just looking back over the last twenty years of Boeing behavior, so we will try to remain sure footed because we know that there is cycles in this business. Having said that, one of the reasons why commercial airplane growth is disconnected from GDP is that even in downturns when you can buy a plane, that pays back in 24 months on fuel alone, versus the plane you got today and that's what the 87 is all about. It's not because it’s a beautiful plastic airplane, it's because its 30% operating costs and 20% fuel and that pays back, it pays back in a hurry. So we can be a little more aggressive because we got better planes versus what's out there than we have historically had. Until we came across the 787 it was mostly a 5-7% proposition with a new airplane. That's of a much longer payback year as a result easier to differ planes if you are buying; hard to differ a 30% airplane and that's exactly what we are seeing now. We're seeing few deferrals than history; Europe is a mess, China's in the word, U.S. stumbling along, we have fewer deferrals of commercial airplanes now than the historical average. And so which goes back to the story of payback with; we're in the front end of the technology cycle right now which enables us to be a little more aggressive, yes go ahead.

Unidentified Analyst

Typically announce production rate increases, 18-20 per month in advanced; something in that window so given you are at the highest rate even on 777 and you are one breakaway on 73. You would need to decide where you are going to do there, sooner or later, which seems so what is the timing of?

Jim McNerney

Well I think the next possible rate of decision that we haven't talked about out loud is 787. Okay, and there is a bias on the 37 to go above 42 but we are being; there is no more capital involved there so we are being a little more cautious. But we are examining in great detail right now, upward bias in those two programs, haven’t made the decision, but it’s available to us. Yes, we are going to work our way this way.

Unidentified Analyst

You mentioned in your prepared remarks that your Boeing is distancing itself from its competition, I mean in commercial. If you could go into that more detail, meaning you have got 787, they have got A350. You’ve got the MAX, they have got the NEO. I mean I guess I fail to see the distancing as opposed to back and forth - back and forth - back and forth.

Jim McNerney

The way I think about it, our advantage is most pronounced in wide-body airplanes. 87 in the air, we are working on a fourth generation wing, we are going to deploy it into the 777, all before they really get the 1000 up and going, okay? We are about five years ahead of them and we are going to bracket them. We are going to have 777, 360 to 410 packs. We are going to have 87, 350 down to 250 packs. They are trying to respond with something in the middle because they know we got them that’s going to fight us both ways. So we will have them bracketed with new technology that we are five years down the learning curve ahead of them and that’s a tough position for them. So not only will we have more entrants, we will be above and below them. That’s what I mean.

Unidentified Analyst

When I think about the 777X though as you presented it, it will have a metallic too, right, aluminum-lithium or something. It’s pretty easy to imagine Airbus coming back and saying hey you know what, look at ours; it’s all composite, right? I mean how do you defend that?

Jim McNerney

Oh sure, look, let’s talk about 777X first, okay? What that airplane is compared with the 300 ER, is 35 or 40 more (inaudible) passengers. Yes, 40-50 new packs, heavier airplane, composite wing, flies farther and has a smaller engine. Think about this wing, okay. Smaller engine, heavier airplane, more packs, flies farther. So the key is, and we are going to scroll up the insides to get (inaudible), and so the key is this composite wing and some new engines.

This will be introduced a couple of years after they get the 1000 out. It will take another five, six, seven years before they can respond to this airplane. They don’t have an appetite to do a big new airplane right now, a ground up airplane. And they’d have to do a ground up airplane. We could do a derivative. They don’t have an airplane that can compete with the 777. They have A340, 300s, 500s, 600s; that’s it. So they don’t have the right plane to do the derivative even if they were down at the learning curve on composites, which they are not. We are way ahead of them, and it’s going to be fun; yes.

Unidentified Analyst

I want to go back to the cost discussion earlier. When you look at the next two to three years, and you look across overhead cost, supplier cost and so forth; where do you see the leverage there? And I am sure it’s one area specifically which is as you go to tier II, historically I felt like you have been pretty good at dealing with your tier I suppliers. But now are you taking one more step?

Jim McNerney

Totally, I mean we are getting at the tier II and tier III two ways. One is its partnering for success, is the single biggest opportunity we have got right now on our planes. We have lots of opportunities, conversion productivity, and mean plus in our factories and in our backrooms. We are working all of those things. But partnering for success is a huge opportunity and we get at the second and third tiers two ways. One is we understand what tier II and tier III content is in our partners there. And so the overall pressure we are putting on them is forcing them and you will see them, and they already are moving to their first and second tier suppliers, our third and fourth tier provider and supplier. And they are driving, that’s where the profitability is. That’s where the excess profitability is also we’re forcing them to buy consolidated Boeing buys in many cases, so we’re going to many of these guys who produced more prosaic parts across the entire supply chain and we’re cutting deals and saying, guys this is it, okay and by the way this advantage that we’ve just gotten with a Boeing deal is going to be shared between the two of us and so we’re approaching it that way.

Unidentified Analyst

And then when you look at the next two to three years both in terms of what you can get out of the supply base but also other initiative overhead, support services those sorts of things has that stepped up as well?

Jim McNerney

Yes, I mean I would say BDS okay Dennis Muilenburg; Dennis will talk a little bit about it when he comes. Dennis started with an organization of 72,000 people about 24 months ago. he’s gotten double digit thousands out of there it’s about 3 billion and it’s going higher and that doesn’t count conversion productivity, you know, operating FAT line more efficient. This is structured he’s getting out. And we’re beginning to do that at BCA right now, Ray is because we’re through some of the engineering rework we’re getting through the mod center on some of those old 787. We’re now taking what is it Ray about 2000 folks out of both production and 3000 folks out of production and engineering just because we don’t have the disruption anymore and we’re heading to the structure there because the more for less world has to be responded to by us as well as by our suppliers and we have a lot of structure. Dennis has got a head start because sequestration whacked him quicker and Ray now is getting after it now that he has more stable environment.

So, we have a big opportunity ourselves and we’re going to go after it and we haven’t over here about to get the hook one more question, this yes.

Unidentified Analyst

In terms of this 787 and the rate increases the priority to do that in Charleston versus Everett, I mean you’ve obviously got a lot of facility here to do more?

Jim McNerney

Well the whole idea is to have choice and to make a choice that when you add it all together makes the most sense. now for example, we can choose to do certain things and Everett certain things down here and the actual choice is a function of many things it’s not just can you build it here or can you build it there, it’s a function of other costs, other elements of delivery, competitiveness, continuity and there is a scenario where some of the work would be in Everett within the context of other kinds of arrangements we’d make with the people who work for us other kinds of arrangements that we’d make with our supplier, so it’s not an either or can you make it, it’s when you added all up and now that we have internal competition we’re going to get much better deals and it was a hard fought capability that we built down here but we’re now going to take advantage of it. Thanks guys talk to you soon.

Unidentified Analyst

Thanks Jim now we’ll move to the financial review. Please welcome Boeing’s Executive Vice President and Chief Financial Officer, Greg Smith.

Presentation

Greg Smith

Good morning everybody and thank you Jim for leading off the applause I noticed that you’re the first one to clap so thank you for that. They’re little reluctant I guess. Good morning and welcome. Move this down a little bit. Thanks for joining us today. I hope you enjoyed the tours and the display yesterday in Charleston and clearly we’re very proud of the progress that team has made and I want to thank Jack Jones and his team for organizing those tours yesterday and I hope you got a good insight into that operation and the success they’ve had as well as the potential going forward. Clearly very important element for our business going forward.

So for today what I thought I would do is focus on some key major areas that I think are key to drive in our financial performance as we execute and deliver on that growth plan that Jim just discussed.

So first I’ll talk a little bit about our successful execution on rate increases and driving and delivering on a record backlog. And then second, discuss our continued focus on productivity and reducing risk in driving affordability profitability and then harvesting that technology that Jim talked about from prior investments across the entire enterprise. And then finally I will talk about near-term and long-term cash flow drivers and how we are thinking about capital deployment in 2013 and beyond powered.

Let’s go to the next slide please. So as we discussed on the last Investor Day 2012 was absolutely foundational for our company as we transitioned out of development on the 787 and the 747 and really allowed us to capture the potential of those investments and build upon the financial strength of this company. Our Commercial Airplane business successfully executed eight production rate increases over the past 17 months including five alone on the 787 program. We further implemented the market-based affordability efforts at our Defense business reducing cost and enhancing our competitive position. And we continue to expand our international revenue and backlog by successfully leveraging the one Boeing approach, increasing our international revenues in 2012 to 54% of our total revenue and our current international backlog representing nearly 70%.

And we also continue to focus on mitigating risk on both production and development programs. So we executed that plan in 2012 and we delivered strong financial performance, retired against significant risks and created a very solid foundation for future growth. As a result in December of that strong performance of 2012 we increased our dividend and announced this commitment to resume our share repurchase program in 2013 and this is a first step and we expect both to increase as we execute to our plans going forward. Let’s move to the next slide please.

So we had a very strong first quarter and a good start to the year, the strong core operating performance and cash flow was driven by solid execution and improved productivity at both of our businesses. We continue to see strong demand in both Commercial and the Defense business and booked $20 billion in orders in the first quarter bringing our backlog to over $390 billion. We expect this strong operational performance to continue throughout the balance of 2013 as we successfully execute our planned production rate increases, further improve productivity across the entire enterprise and efficiently manage cash. Let’s go to the next slide please.

Our financial guidance for 2013 remains unchanged our outlook continues to reflect solid core operating performance in both businesses, higher volumes in commercial airplanes and the impact of the current DoD environment. We remain focused on increasing productivity and profitability across the businesses, continuing to successfully execute on our planned production rate increases and delivering on our record backlogs at the same time maintaining a disciplined ad strategic approach through our R&D investments, all key drivers to near-term and long-term financial performance. Let’s go to the slide please.

Our backlog, as Jim noted our record backlog of $390 billion is derived from the strength of our portfolio and the value our products are bringing to the marketplace. The compelling economics of our airplanes is accelerating replacement demand and positioning us as a pervert provider to support long-term market growth and represented by our current backlog of over 4,400 commercial airplanes. Our Defense business backlog remains solid driven by the portfolio of affordable, proven and reliable products and services. As Jim mentioned our one Boeing approach is paying off with international defense growing to 42% of the defense, base and security backlog for the first quarter. This is clearly a great foundation to build on and one that provides us with an opportunity to deliver significant growth and shareholder value going forward.

Let me now talk more specifically about our plans to execute and deliver on this backlog, if we go to the next slide please. As you are going to hear from Ray and Larry Loftis later in the breakout having the right tools and increased visibility through lead indicators and a steady operating rhythm in place is key to executing successful rate breaks and ultimately driving financial performance. In preparation for production rate increases we manage all aspects of the production system inside our own factory and within our integrated supply chain. We continue to have a dedicated team of over 600 people to ensure that our supply chain has the capability, the capacity, the expertise and the stability to meet our requirements. Issues are being worked and detailed mitigation plans are reviewed with program management on a daily basis and this process with proactive metrics and enhanced visibility is derived from the lessons learned on past programs and have been key enablers to our successful rate increases I referred to earlier.

There is a lot of work in front of us, we have good plans in place, we remained very focused on successful execution that will drive again strong financial performance going forward and rate readiness and rate increase being a key element to that.

Let’s now shift to the 787 program. 787 execution and profitability remains a top priority. The key to executing our deliveries and driving financial performance on this program like other programs starts with a stable production system, numerous metrics and a disciplined operating rhythm are in place to monitor and track the progress of this program on a daily basis. We are seeing improvements in travelled work and condition of assembly from our suppliers with components now arriving at essentially 100% complete. Jobs behind schedule and Everett’s final assembly are down by over 30% this year, HARP shortages are at a record low and quality and cost per job have improved. This progress has allowed us to successfully execute the production rate increases including the recent increase to seven per month and we remain on-track to increase the rate to 10 per month by year-end.

The 787-9 production is also making good progress with make sure assembling now underway and as you saw yesterday the mid-body join is moving well through the production system and as Jim noted the program is on-track for entry into service in 2014. As we have discussed, we are proactively working opportunities to offset risk and increased profitability, some of the key areas include leveraging the partner for success initiative, drive productivity and cost savings throughout our supply chain, increasing productivity through lean and other initiatives. We continue to look for opportunities to refine our assembly and fabrication methods and designs with a focus on cost and flow time reductions at our factories. We have over 245 projects currently underway with another 305 under review. And as many of you know historically once we get a production program in a stable production environment we have a track-record of being able to capture productivity and profitability and I think two great examples of that are certainly the 737 and the 777 programs.

We certainly know this is going to take time, but we remain focused on improving the financial performance of this program and clearly again a top priority for all of us. Let’s move to the next slide please.

Reducing product development cost and execution risk is key to successfully delivering on our future programs. We are optimizing our R&D investments, while aggressively managing the design and development process with the same discipline and focus on continues improvement that we apply in our production programs. Key enablers in driving this efficiency and productivity include maximizing the reuse of hard through technology investments and lessons learned to reduce development risk, at the same time minimize the volatility we have historically seen in research and development spending. And we are continuing to use a disciplined gated development process to retire risk early, drive first time quality and affordability and tightly manage work and schedule.

The effectiveness and productivity of our development efforts of being managed and measured to drive profitability, increased shareholder returns and provide unmatched value to our customers. Move to the next slide please.

Productivity, at the core of our operating earnings continue to demonstrate that we have made good progress on productivity across all areas of the business. This focus on productivity and continuous improvement is what we do on a day-to-day basis, it’s embedded in our culture and it’s a key element to how we run this business.

We established aggressive targets throughout the enterprise on an annual basis and to give you a sense of the magnitude of the productivity efforts in 2012 alone, we initiated nearly 10,000 lean productivity projects across the entire company. We have approximately 5,000 experts, enterprise wise they are focused solely on lean manufacturing and production efficiencies.

And with the majority of our costs now coming from our supply chain, we now looked to further leverage our Lean expertise within that supply chain and partnering for success will be a meaningful productivity effort that will drive real value and savings to all parties.

On the defense side, Dennis and his team continue to execute the market base affordability strategy which includes targets for every program and competitive rate structure for all service businesses. The team’s discipline and dedication has allowed us to achieve over $3 billion in cost savings to date at BDS and we continue to further reductions.

Cost reductions to date have been realized to reduction in overheads in executive positions, consolidation of our footprint, reducing supplier cost in a relentless focus on productivity across all of our factories.

At commercial airplanes, we also have detailed cost targets on our programs; we have made significant progress over the number of years using tool such as Lean+ to drive improvements in quality, cycle time, utilization and productivity and just a few examples. On the 777, we reduced the flow time by nearly 20 days down to 48 days, this is something that we clearly know how to do, we have delivered over 7500 777 airplanes and we are still making productivity gains. Another example where we were on track to produce over 42 737 airplanes per month in the same factory floor space, we produced 21.

Another, again great example of a continuous improvements culture that we have been embedded in the company in a particular at BCA on each two programs. We also continue to look for opportunities to core up functions and drive productivity improvements across the entire enterprise. Another example, 25% footprint reduction despite increasing revenue over 60% since 2003, these are the efforts of the businesses working combined with our shared services organization to optimize our footprint across the company.

Our aggressive focus on productivity will continue and we’ll strive to expand our core operating margins and over the long term this hard work will benefit us, our customers, the suppliers and our shareholders.

Let’s now turn to cash. With the strength of the backlog and the successful execution on our production rates and productivity efforts, we are positioned to generate strong operating cash going forward. This strong cash generation gives us the flexibility to deploy our cash in a balanced fashion as to returning cash to shareholders at the same time in best for future growth. First and foremost, returning cash to shareholders remains a top priority for us as we continue to execute our plans this year and begin to generate higher levels of operating cash.

Our target going forward is a payout of approximately 80% of our free cash flow in the form of dividend and share repurchase and as I mentioned earlier, we have reinstated our share purchase program and remain committed to the $1.5 billion to $2 billion repurchase for 2013. Again, this plan is the first step and we expect to increase as we execute on our productivity initiatives and production rate increases going forward.

From a dividend prospective, payouts will be indicative of our financial strength and stability and we continue to expect dividend to increase in line with our core earnings growth. While we expect minimal pension contributions through ’14. As I have stated previously plans to contribute $1.5 billion this year and we continue to proactively manage our pension funding going forward.

And we will continue to focus on investing in key technologies and programs that are going to drive future growth and profitability for this company. Overall, we continue to execute a very balanced, disciplined approach to cash management and deployment.

Next slide please. So just to summarize, this is clearly a very exciting time for us and we are in a very good position with unprecedented opportunity for our company and our stakeholders. Our focus remains on execution and productivity which are going to fuel profitability, drive cash flow and allow us to remain competitive and responsive to our customer needs and enable us to continue to drive shareholder value. With that, I'm happy to take your questions.

Question-and-Answer Session

Unidentified Analyst

You talk about growing dividends in line with earnings, what kind of an earnings growth would you like to target given the ability to reinvest in the enterprise.

Greg Smith

Well as I think as Jim talked and I allude to in my formal remarks we're obviously through partnering for success through our own internal initiatives, we're continuing to drive productivity and profitability. So I wouldn't say that there's a number out there that's on an annual basis but we have productivity targets that we establish every year and deploy in the enterprise. Jim talked about kind of 3-4%, but certainly partnering for success is a key enabler in that and again Howard I think as we as we execute on our production rate increases managed through the challenging DOD environment drive cash flow, we'll continue to readdress our dividend and our competitive position there.

Unidentified Analyst

Maybe I didn't ask it right, which I think was the case, just a follow up. You know you have part of your business clearly grows fast (Audio gap), part of your business grows faster than GDP, you seem to have found a way in the international market to insulate the defense business you talked about productivity. Why wouldn't we expect to see mid double digit EPS growth going forward.

Greg Smith

Well as I said, we are focused on driving productivity and profitability across the enterprise on an annual basis and we're going to continue to do that and I think we're certainly off to a good start as you've seen in the first quarter and we're going to deploy that, and then we'll go from there but we've got targets deep into the enterprise and across the enterprise down to program levels and that's where we're focused.

Over here, Carter.

Unidentified Analyst

Yes Greg, I wonder if you might talk about what partnering for success might mean for long term profitability and the potential impacts on margins, how do you think about the benefit you may see from that effort.

Greg Smith

Well, as Jim discussed, we kicked this off in September last year and we issued double digit targets to the supply chain varying by supplier by program, the go over, you know a time period, so it really gets to a question of how much of that we can capture and hit to the bottom line but it's certainly a big initiative, to help drive earnings growth going forward, but we got to stay focused on it and I think we're off to a good start.

Unidentified Analyst

How do you think about how much of that you give to customers, how much of that you keep for yourself, what's the calculus there?

Greg Smith

Yes, I think it's going to vary, obviously in Dennis's business it's very clear, in rates business where we're continuing to, again to try to expand margins on our program with a very clear eyed focus on driving 787 profitability to be in the top priority.

Unidentified analyst

You talked about, obviously you've got the Dash 10 on the 87 and you got the 777X, can you talk about other ways across the organization, you can harvest the 787 investment and what we can maybe look for in terms of impact from some other areas.

Greg Smith

Well, I think certainly on the 777, we're able to leverage that technology; Jim alluded to fourth generation airflow so we’ve got, we're harvesting those investments of the 787 and frankly on the 747, so I think we can certainly leverage it on the Dash 10, that's obvious. But on the 777 and in Dennis's business we're seeing opportunities where we could transfer technology. I mean John Tracey's here, our Chief Technology Officer, but when we look at technology investments and how to capitalize on those investments and leverage we do at an enterprise approach and that's something that was put in place as one of the strategic initiatives a number of years ago, and I think we've able to really benefit from that and we're going to have to, we're going to continue to leverage that as we look at future programs.

Yes, Sam.

Unidentified analyst

You talked about giving or returning 80% of your free cash back to shareholder between dividend and buyback and well that's certainly a big step up from where it's been if you continue at that rate you're never going to eat in into the 11 plus billion dollars in cash you've got on the balance sheet, so what's the scenario where we take for you to go over a 100% and start actually eating into the cash balance?

Gregory Smith

Yes I think we got to see where we are at that time and how we are executing to the plan, what the overall environment looks like and I know it's approximately 80% so obviously that will be part of our discipline review process if we think about capital deployment so that could increase or decrease over time, but we've got a clear focus on 80 plus percent deployment and then we look at obviously internal investments whatever is required at that time. Again trying to take a very balanced approach to how we deploy the cash. Now I'll make my way over here.

Unidentified Analyst

Following up on partnering for success in Jim's comments earlier about bringing work in house, can you describe how far you take that and how you've balanced that effort with the comments around returning cash to shareholders, how are you going to balance those two things?

Greg Smith

To answer your first question, I think it will vary; it will depend on what it is, it will depend on the investment required into your point, managing the risks associated for that. So I could see that as a component by component level supplier by supplier but we'll take all that into consideration before we make that investment and bring any of those components or parts back into our facilities. What capability do we have today that we could fully utilize even further and then what we would require again full more capital and more tooling to execute on that successfully. So it's going to be a trade-off, it would be a tradeoff component by component but also stepping back and looking at our long term objectives and strategies about what we want to do versus what we think should be in the supply chain but only down to being competitive and so first and foremost, we would like to get the supply chain meeting our objectives and we think that’s good for the supply chain and it's good for us. But as Jim said, we will have to make choices and if we make those choices one maybe bringing work back into here but there will be other considerations that will be taken as well.

Unidentified Analyst

Just going back to the buyback I wanted to know about the timing a little bit, so with your 80% target that suggest your buyback maybe more than double in a couple of years. But at that point, I think you to expect your stock price to be higher. And so given the fact that you've got cash on the balance sheet and you're going to level low the investment, why not front and the buyback?

Greg Smith

Well as I said, the one slide for 2 billion is a start so we are continuing to monitor that at the same time monitoring our success in our production rate increases, the efficiencies that Dennis is capturing and we will re address it when we feel appropriate, so we're continuing to look at, it's an ongoing process where we look at, again how we're executing to our plans and if we decide to change the 1.5 to 2, we will let you know.

Unidentified Analyst

Great I think a big question of partnering for success is on the 87, can you talk about what more you need to get out of the supply chain to kind of track the cash flow breakeven by 15 on that program or do you have everything you need in terms of supplier step downs on that program?

Greg Smith

Well as you know in some of these cases, we have stepped down pricing that goes throughout the supply chain, it does vary because some of that we front loaded and just through negotiations with the supply chain, we have productivity built into some of those where we have agreements in place and then the partnering for success, some of that is over and above that.

So, really varies by supplier but you are right the priority is on the 87. And I think as Jim did talk about; I think there is tremendous opportunity here personally by working together. 5000 lean experts we got in our company, I think if we can get some of those into the supply chain help lean out, look out where the supply chain is buying their parts, where the supply chain is buying raw material and figure out how to leverage that buy with our current buy; I think it's again a tremendous opportunity and frankly I think, untapped. Now it's going to take time, but I think there is opportunity there, not everybody is going to play or be able to play. And we talked about how we will work through that. But I think at the same time we got people that have signed up to this and see the advantage of it, and we are working together. Some of this does fall back on us. So we put some investments in place to work with our suppliers whether it's on redesign, whether it’s on how we contract, whether it’s on processes and procedures; anyway we can try to streamline that where we both see benefit, we are going to capture it.

And I think we will both be healthier as a result of it. Again I think there is a lot of work to be done. I think we are focused on the right areas. We are going to continue the rhythm with the suppliers. We had them in September. We had them back here in a couple of weeks. We are going to continue that and it’s Jim is leading it from the top of the corporation and we are looking at it at an enterprise view. And again I think, our first and foremost priority on 87, but at the same time we are looking at all programs and looking where we got opportunities, and I think they are there to capture. Yes, Joe.

Unidentified Analyst

Greg you mentioned just on the cost savings and in Ray’s business, trying to drive that down to the bottom line and then Dennis’, you implied that more just sort of the customer is going to grab more of that. Just pushing back on that a little bit, I mean the margin performance in Defense has been, I think good recently, the last year so. But still at the low end of the industry, the very low end when I allocate corporate overhead at other, currently now to make it apples-to-apples and so particularly networking space to a mid-single digit (inaudible) 0:01:42.4 income. So do you have an aspiration of bringing those margins up in Defense?

Greg Smith

Well I think as we said the market based affordability $3 plus billion and we are not done. So clearly there are a lot of plans that are being put in place to further drive that and capture more productivity. It’s certainly mix comes into play when you talk about NCS and some of the other parts of the business, but I think what you are seeing in the recent results at least in the last year is the product of this effort. And we are not done. So we got a lot more work to do. And again as I said in my remarks, this is just part of our day-to-day operation. This is not an initiative and this is how we run the company, how we issue the target, how we monitor performance. You know you got out BDS today you will see market based affordability targets on every program. You go out to Jim O'Neil’s business and services; you will see service, targets, rates, and structures, for every rate that he applies. And so we are down to that level and looking at where we see further opportunities and how do we capture the more affordable and driving profitability. So by no means are we done. We are going to continue to focus on.

Unidentified Analyst

Greg, just needed a clarification, maybe the 777X, do you treat that or do you plan on treating that as a derivative program with respect to the accounting block or as a new accounting block, because there are two different ways you could look at it. As there is a benefit, if you take it now that you won’t have to pay the piper downstream, but you will be paying the piper now?

Greg Smith

I mean we haven’t gone through that yet. So it’s premature, but it certainly is a derivative program so that we will wait more to that. But as we get further along in the program and get closer to that milestone we will make that decision.

Unidentified Analyst

So the clarification on the clarification, is it a derivative program to the contracts or to the suppliers?

Greg Smith

It depends. Every contract is different.

Unidentified Analyst

Those lighter program would qualify?

Greg Smith

It depends.- obviously I have been through every single one of those contracts, but it will depend on what the component is and what they are supplying today versus what they may supply on a 777X.

Unidentified Analyst

Okay, we are going to take about a 10 minute break and we will start back at 9 o’clock. Thank you.

Okay, if everybody could come back in and take your seat, we are going to go ahead and get started in a minute here. I’ll wait for everybody to gather back up.

Okay, we are going to go ahead and get started here. Next, we are going to turn to over businesses, first you are going to hear from BDS so please welcome President of Boeing Defense, Space and Security, Dennis Muilenburg.

Presentation

Dennis Muilenburg

All right good morning. It’s good to be here with you again and I appreciate the great conversation the last night and again this morning. What I would like to do is built on the strategic imperatives that Jim talked to you about as well as the key efforts that the Greg discussed and now flow us down into our Boeing Defense Space and Security strategy.

And right upfront I want to emphasize again that one Boeing theme that you have already heard and let you know that we see that as a key differentiator for our defense space. most of our competitors around the world simply do not have that combination of commercial strength and defense strength that could be leveraged across the enterprise so that is a differentiator we will continue to apply. That first strategic imperative that Jim showed you talks about profitability ramping up the commercial airplane business and I want you to know that our BDS team and you have seen many of the leaders here, have a sense of shared ownership on that responsibility so as part of that one Boeing theme that includes deploying talents through our (inaudible) talents to assist with our development program to includes engineering support out of (inaudible) St. Louis Philadelphia, it includes aircraft modifications in San Antonio including the recent battery mod that was accomplished on the United Birds down in the San Antonio and probably no better examples than here in Charleston where more than 600 of the employees you see out in the floor in the factory comes from BDS and right across the runway, you see the world’s largest installation of C17 Charleston airports. So that One Boeing theme we believe is a key differentiator for us going forward.

Please go to my first chart please. I’d like to start just by giving you a quick review of 2012 and of course the long anticipated highlights video for the year and then I would like to proceed to our strategy going forward.

Overall, we feel very strong about our balanced portfolio and you can see on the left hand side there, the revenue pie chart from 2012 broken down by major business sector, Chris Chadwick, Roger Krone and Jim O’Neill, has been a, doing a great job of running those three businesses and we have a strong balance across them. Our backlog is as strong as it's ever been; you've heard some of the numbers earlier today including 42% of that backlog being outside of the US that gives us strength for the future. We have made good progress on market based affordability and productivity and we've exceeded the targets we discussed with you last year and we continue to raise the bar on those in a relentless fashion and I'll talk more briefly later about where we're headed on core investments in extending our product lines, but our investment strategy continues to play out and play out well, and we're also investing in our talent at the same time. You can see our first quarter performance in the lower left, strong across the board that 10.3% margin performance in the first quarter shows you some of the output of the market based affordability actions and we're going to continue to relentlessly drive performance going forward.

All right, let's go ahead to the next chart, and that one click that you saw there, the revenue pie now in the upper left broken out by customer, you see that balances well, we closed 2012, at 24% of revenue being outside the US, first quarter of '13, 28% of revenue outside the US, headed towards our 30% target.

All right, now I know you've been waiting to see this all year so I do have a highlights video to share with you, it is brief and it's impactful and what I'd like to do is to show you a bit of what we're doing for our customers around the world and this will concentrate primarily on accomplishments over the last 4-5 months. Let's go ahead and run the video please.

[Video Presentation]

All right thank you for that and again what you see there is incredible diversity of the work we do and the significance to that work but in particularly those customer, employee comments and I think that's an important foundation of the business to keep in mind.

We recognize the importance of what we do for our customers around the world, our people are absolutely committed to it and that drives the sense of excellence and how we deliver on this business and that's a foundational value in strategy that continues to be very important to us.

Now, let me talk a little bit about the environment that we faced going forward and then our strategy in response. Certainly it’s a challenging environment and you are well aware of the budget situation in the U.S.; I'll talk a little more deeply on that on the next chart. But overall, we do see budget pressures around the world, some pause in the U.S. and in Europe. On the other hand, substantial growth in the Middle East and Asia Pacific regions in particular so you are seeing a mix change around the world.

As Jim said earlier, our customers in the U.S., in particular, are expecting more or less and we've laid out our investment capabilities and strategies so that we are continuing to inject capability and technology into our products and at over time, we can indeed add capability while we take out costs in line with our customer objectives.

There are fewer new starts that makes those more critical to win; I will tell you that the tanker win recently looks better and better given the fact that there are very few new franchise starts to having those franchises in our portfolio is important. The U.S. re balance to the Asia Pacific region as stated in the National Security strategy is an important one for us and tends to play to our strength in particular in the surface air and space site.

And more broadly as we look across the industrial base, while we are working carefully with our suppliers and the partnering for success effort, we're also looking at ensuring we have small business held across the sector, as we face these budget challenges. So, a challenging environment but not a surprise to us, one that we've seen coming, and one that we've anticipated and one that we continue to stay out ahead of the curve on by taking tough affordability actions early.

We will go ahead to the next chart. The U.S. budget situation, obviously, we don’t have complete clarity yet on where the U.S. defense budget is headed but we do see some continuing sign post, sequestration was officially implemented earlier this year on March 1, we know that our customers in the DoD still need to take roughly $42 billion out of their expenses yet in this fiscal year, you see some of that showing up in affordable actions that are ongoing.

Again, those are tough actions and ones that we are staying closely aligned with our customers as they got through the strategic choices and management review that Secretary Hagel has recently announced. A bit of good news below the surface in the fiscal year '13 budget, the continuing resolutions that were passed earlier this year do give our customers the ability to prioritize where they make some of those reductions and frankly this is where execution counts.

Programs that are on cost and on schedule are the programs that are getting funded and that is showing up as an advantage to our portfolio; net-net about 1.5 billion of budget increase in our projects compared to our competitors in that fiscal year '13 CR. That included positives for programs like the F-18, some of our missile defense programs and our satellite programs.

As we look ahead to fiscal year ’14, we know the President’s budget request has been released. That request does not incorporate sequester, includes a smaller defense budget cuts and what this current sequestration law would demand and we know that those budget discussions are ongoing. It’s not clear yet how they will be resolved.

But again we do see that within the fiscal year ’14 budget as currently proposed we do see some potential gains for us. Most significantly, it includes 21 new Growler aircraft for the U.S. Navy. That is a very significant strategic move. If we think about tactical fleet structure of the future, also potential opportunities in P-8 missile defense and space.

Also on the positive side, we see full funding for the tanker program. We see full funding for long range strike, the new bomber program. And we see authorization for V-22 and Chinook multi-years.

So that said, it’s a tough environment overall. We do see some positive themes in there and its key that execution is the differentiator in this environment. We intend to continue to press on that, staying very close to our customers as these budget issues are resolved. The challenging situation on top of that is the threat spectrum continues to grow. So while the budget pressure is down in the U.S., actions in North Korea, actions in the Middle East, cyber security, growing defense investments by China and Russia; all bring some cause to the budget pressure down as we see the threat spectrum increasing. And again we are paying close attention to that in terms of future investment.

Let’s go into the next chart. So within that environmental context, if you look at the overall market, this is our served Boeing Defense, Space & Security market. It is a $2.9 trillion market over the next 10 years. It is the market that grows slowly but it’s about a 1% to 2% (OTCPK:CAGR) market. You can see on the right hand side of that mix of market opportunity, that shift internationally. Today about 28% of that market is outside the U.S. 10 years from now it will be about 35% of the market will be outside of the U.S., and we see that shift.

Despite the environmental pressures that we are all hearing about there in the U.S., this is a solid stable slowly growing market, more international exposure over time, $2.9 trillion market. This is a solid market in a place where we intend to take share and continue to grow.

Go ahead for the next chart. In addition to that market enduring customer needs. As I said the threat spectrum continues to grow, our customers have growing demands. The need for global C4ISR, situational awareness, reconnaissance and intelligence information, the almost insatiable demand for commercial satellite bandwidth, all placed into this market; we see global C4ISR as something that will outpace the general market in place to our strength.

Forced projection and anti-access capability, this will feed into helicopter lines, fighter aircraft, long range strike mobility with U.S. Ship to the Asia Pacific region. Our U.S customer faces that tyranny of distance. That will put more emphasis on mobility assets, C-17s, tankers, maritime surveillance capability.

As you go to the bottom line on this chart, force protection; growing needs for missile defense capability both strategic and regional missile defense capability. Affordable space access both for satellite placement and for human space exploration. And on the critical infrastructure and homeland security side, a growing need for cyber security defenses.

So again, even though the environment is challenging, the customer needs are clear. They endure and we are investing to play to these strong customer needs.

Going to the next chart. Now let me talk a bit about our strategy going forward and these strategic objectives are very consistent with what you saw last year. We have continued to hone these. These are very crisply aligned to the strategic imperatives that Jim shared with you earlier, and the objectives that Greg shared with you.

And I will also say that as we approach these objectives, we are doing it hand-in-hand with Ray and other BCA business. And again, we see great leverage here with a One Boeing approach. What I would like to do is just briefly step through these five strategic objectives just to go into one level of detail on each. So if you could go to the next chart, on productivity and cost competitiveness, you heard a lot about market based affordability. This is a different way of doing business, something that we implemented, started three years ago.

Today, we have taken out a little over $3 billion in annual run rate cost structure. And we’re not done. We’re continuing to raise the bar; we’re continuing to find opportunities. This is creating our capacity to invest in the future as well. Every single one of our programs and sites has clear market base affordability target, these are things like what is a F-18 need to cost to extend the domestic product line, what is a satellite bus need to cost to compete in the international marketplace, what is our services rate structure need to be to compete then ever more competitive services environment, those are understood, they’re owned at the floor level and our employees are after those market-based affordability targets.

We’ve consolidated footprint announcements like closing our Wichita facility. Tough decisions but the right things to do, more than 10% consolidation in our facility’s footprint partnering for success you’ve heard it from Jim and Greg. You’ll hear it from Ray. This is an extremely important initiative for us. We’re already seeing dividends in terms of reduced supplier cost and improved supplier health. So this is again something we’re really trying to approach from a partnering perspective but when we negotiate and create leverage across the Boeing enterprise instead of program-by-program it makes a huge difference. And this will be the next, I think, frontier of our market-based affordability effort as we continue to raise the bar.

On our overhead and executives, we’ve reduced our overall executive team by a little more than 30% over the last two years. Again those have been tough decisions but we’ve gotten out ahead of curve that’s making us lean and mean going forward. And across our production line you’re seeing improvements at first time quality and productivity. So all of this together we’ve made some great progress, we have more work to do. And you can count on the fact, we’ll be absolutely relentless on this front because not only is it allowing us to increase margins which is obviously important to all of us here, it’s also making us more competitive more affordable for our customers. So we’re winning more. And it’s creating our investment capacity. And our people understand the connection between productivity here and our ability to invest in growth. And we’re now building more prototypes of new systems than we ever had and we’re able to self-fund that with market-based affordability.

Next chart take a look at two objectives two to five around execution. As I mentioned earlier, programs that are performing are ones that will be funded. We’re driving to sustain and build out and extend our current platform lines and you see some examples there on the right those are a bit difficult to see but just give you feel for what we’re doing here in our fighter lines. These are investments to extend things like Silent Eagle, advanced Super Hornet, the Growler those investments are already paying off. And the Rotorcraft during the multi years for V-22 and Chinook, international opportunities for V-22, investment is in a patchy block 3, commercial derivatives P-8 and derivatives there tanker and expansion of tanker to the international marketplace.

A family of commercial derivatives based on 737 and 767 airplanes that is a truly unique product line to Boeing. New opportunities in space, the space launched system a new franchise that is now underway in Roger’s business. Satellite investments over the last three years, we’ve launched three new satellite families 702MP midsized power business, the 702SP small sat and just recently announced the launch of Phantom Phoenix or even smaller satellite lines. This is headed to where our customers are headed in terms of networking smaller satellite and disaggregating the satellite networks. And missile defense continues to be a growing area for us. So in each of these major portfolio lines we’re extending those lines. Each of those has services components as well and Jim O’Neill performance-based logistics model continues to run strongly especially with our international customers.

We’re also investing to win those few new franchises. I mentioned tanker and P-8 as examples of ones that we’ve already won. We’re also investing to win long range strike UCLASS, T-X and the next generation of satellite products. Our capacity to invest is enhanced by market based affordability and we need to deliver on our development programs. And as Jim said earlier, tanker continues to executive.

We will hit critical design review right on schedule here in the third quarter coming up. We have hit a 100% of the program milestones today we’ll hit first flight in early 2015; we’ll deliver the first 18 tankers by 2017. This is a program that’s a 179 aircraft program of record, we believe the opportunity domestic and international go significantly beyond that, we can execute on the development program which we will.

Alright next chart, the third objective is around building selective vertical capabilities again you heard this from Jim and Greg as well. These are targeted areas that we have talked about before they include areas like complex composites manufacturing there was a question earlier about leverage across the enterprise. You can bet the investment that we have made in complex composites manufacturing and commercial airplanes is also paying dividends over on the Defense and Space side. Likewise, we are making investments that will enhance our commercial products.

Complex composites manufacturing is an area we want to have deep vertical capacity, areas like C4ISR, cyber security, unmanned systems, selected services areas. We are investing to build out verticals not only for the value of the vertical business itself and there is certainly some value there, but also to augment and enhance our platform businesses and where platforms and verticals come together that’s the unique space where we think we can differentiate Boeing.

Examples of that include significant investments in next-generation prototypes for unmanned systems. You see some of those pictures on the chart here; those have led to recent wins with a Marine Corps, the STUAS competition with the new integrator UAV. Flying our new Phantom Eye liquid hydrogen powered UAV for high altitude long endurance missions. And the domain here for unmanned systems for the future is not just in the air but it stretches into space with the X-37 and it also stretches down into the undersea domain. So this is a place where we expect to invest and win for the future.

Darryl Davis and our Phantom Works team Darryl is here with us as well is really on the leading edge of these investments and working it across the enterprise and leveraging all of the technology investment that John Tracy and our core technology team are making so that we are maximizing the bank for the buck on R&D investment.

Let’s go to the next chart, we afford for the five areas growing globally. Again you have heard this is a key part of our strategy, our strategy here is working. We have tremendous installed base platforms around the world, a combination of presence built by both commercial airplanes, defense, space and security and our Boeing International office with precedence in targeted countries. That installed base and presence creates huge leverage for us.

Additionally, when it comes to defense sales around the world, many of our customers very interested in building up their own aerospace capacities indigenously, offset projects, industrial participation. Our ability as a company to partner with those customers to bring commercial work and defense and space work is unique. And that is differentiating us in these competitions.

Just to give you an example just over the last couple of months the announcement by Australia that they will procure another 12 new Growler aircraft along with that announcement they said the Super Hornet and Growler will be part of their tactical air fleet now through 2030 and that is a very significant step for our Australian customer. In Korea, the Apache was selected for the Attack Helicopter competition. And just over the last two weeks Intelsat announced the decision to acquire four additional Epic satellites out of our 702MP line. And last week ViaSat announced who were the winner of their competition, in this case a 702HP large bird satellite.

So our strategy here is working, we told you previously we had set a target of 25% of our revenue base, we have raised that to 30% based on solid performance; first quarter of this year, 28% of our revenue outside the U.S., 42% of our backlog outside the U.S. as you heard from Jim and Greg. So this is about continuing to leverage Big Boeing around the world.

And let’s go to my last set of five go ahead. All of this underpinned with our investment and our people and our customers. We take this very seriously our Long Range People Plan is an important part of our business strategy. And we have had to go through some tough downsizing over the last two years but we have done that in a way that has kept the team engaged, motivated and focused on the future. We are continuing to invest in future talent, bringing in the best talent from colleges, internship programs, rotation programs to build that talent base, sharing talent across BCA and BDS; we think that is a big leverage point unique to our company for the future. And initiatives to bring veterans into the workforce, that’s a positive for our customers and a positive for our talent base.

We are also investing in our customers in terms of simulation modeling capability, using our virtual world center to help them envision the future and help them make some of the tough decisions that need to be made within a constrained budget and the prototype in work associated with that I think has been very effective.

So that is our five-pronged strategy again aligned with the overall corporate strategy that Jim and Greg showed you and we believe that’s working.

We go ahead to the next chart. One of the evidences that its working is our backlog, if you look at by market again $68 billion of backlog. It is a well distributed backlog. This is part of what gives us confidence, the fact that its across our product lines, its across services and platforms, it includes a significant growing chunk of commercial derivatives and it applies both in air and space. And if you give it one click here, you can see that same pie now broken out by customer and here you can see the visual, all of our core U.S. customer both classified and unclassified about half of our backlog, 42% of our backlog distributed around the world. That gives us a very strong portfolio mix for the future. One example of why we believe our strategy is working and also gives us an opportunity to continue to drive profitability going forward.

Let’s go to the next chart. So our outlook then, we do see opportunities out there despite the tough environment, you can see some of the areas that I talked about, C4ISR unmanned space future franchise opportunities. We also cognized in other risks, no question it’s a tough environment, we have got some product line extensions that we need to achieve. We have to deal with the real world effects of sequestration and long-term what will the U.S. defense budget profile look like in particular. But these risk are not surprises to us, it’s one that we have seen coming, we have prepared our sales form, we will continue to stay ahead of those risks and mitigate those risks through market-based portability actions and create our capacity to invest in those opportunities on the left hand side of the chart.

Go ahead, all of that again underpin with a One Boeing approach and I just want to put stamp this year at the end; this is really key to us in terms of succeeding on our strategy in a unique differentiation point for Boeing. It applies to grow, I talked about international growth opportunities, talent sharing, how we invest and leverage investment across the enterprise, it also applies to productivity in terms of Lean implementation, partnering for success, how we leverage our supply base, how we drive efficiencies and share lessons learned across the enterprise. No other company that competes in the defense space and security sector can claim this is kind of One Boeing synergy. Our ability to leverage and cost leverage with commercial airplanes is very significant. And partnering for success is a great example of how we are doing that. Many of the supplier meetings that we have had the meetings where Jim, Greg, Ray and myself have all been sitting together in the room with our suppliers, talking about expectations. That is unique to Boeing.

Right, let’s go and bring up my last chart and I will be happy to take any questions you might have. So to summarize, a challenging environment, we recognize it, we are realistic about it, we dealt with it. Despite the tough environment the market endures, $2.9 trillion market, our customer needs are growing. We are well positioned for the future. We have the right portfolio. We have strong backlog. We have the strategy that’s working and we will continue be relentless on executing that strategy and we believe that does position us for good long term growth and profitability. So with that I am happy to take any questions you might have. Yes Doug?

Question-and-Answer Session

Unidentified Analyst

If you look at the evaluation of the programs in BDS, you have gone from some situations where you have some very attractive high margin programs and I point the FCS, the early days of GMD, F22, C17. Now you have seen margins come in a little bit and you are headed into the period that’s seems more oriented around development programs and I would say once that look fairly challenging with respect to margin. If you take your margin expectations for this year and you have rolled out forward, can you maintain those or even expand them and how would that work?

Dennis Muilenburg

Yes Doug, great question. I would say that mix change that you alluded to, we are coming into the next phase of that so you are right earlier in the last decade we had some high margin development programs, that have since ended. But if you look at the mix we have today, we have largely retired risks on fixed price developments to deliver the AWT in Australia and Korea for example, it’s a good example. We still obviously have Tanker but my confidence level in being able to execute tanker is very high and we're about 33% of the way through that development program now.

If you look through the rest of the portfolio, although we may not have a few key programs with very high margins, we now have more production programs with good solid double digit margin. So I feel stronger about the portfolio today in terms of distribution of margin capability. As we look forward, we're seeing top line pressure coming from Sequester and other sources, our expectation is that we're going to be able to hold and incrementally grow margins through that time period. And the reason we're able to do that is because of these market-based affordability actions. You've seen that in the data, over the last year, year and a half. We expect that to continue to play out, that machine, that flywheel is working now. And we committed as a team that whatever happens to top line, we're going to be able to hold and incrementally grow margins, that's really important. Obviously in expectation for our shareholders, it's an expectation our customers have in terms of getting more for less. But it's also our investment line for the future, our ability to prototype and win the next generation franchises.

So, as Jim said, in the defense business we are holding and incrementally growing R&D. And we expect to do that and do the same on margins regardless of what happens top line. That is, that's our headset and I believe we have the mechanism in place to do that.

Unidentified analyst

And you, if you look at networking space systems specifically which has been one of the more challenging margin areas, there's been a huge evolution in the portfolio there, when you look forward on that can you say a lot of the same things with respect to margin.

Dennis Muilenburg

We can and admittedly we've had some challenging areas in the past and as you know that the retirement of some previously higher profitability programs like FCS and GMD, Roger and the team have really done a great job of rationalizing that business again, getting ahead of it with market-based affordability. We're now seeing profitability grow. I'd say one of the brightest spots in that business right now is the satellite business, where we’ve been able to introduce new product lines, we have a very strong family of products that are winning in the market place and we're seeing growing profitability in the satellite business.

I would also say that the space exploration business with the new space launch system program with NASA, that also has some great opportunities for the future in terms of business base and bottom line performance. So we are, we're headed in the right direction in networking space as well.

Unidentified analyst

Can you talk specifically about one program which is the C-17 and where you are, how far out that backlog goes and what's the order prospect for being able to keep that line open and can you affordably do it below ten a year.

Dennis Muilenburg

You bet. It’s your last question first, we went from 15 a year down to 10 year over the last two years. You have to give real credit to our team in Long Beach for being able to do that without disruption and actually maintaining profitability on that program. We think 10 a year is about the right, long-term, sustained production rate, much below that begins to create undue pressure in our supply chain. We'll continue to look at options there but our preference is to hold at a 10 a year production rate.

Right now we have firm backlogs that will deliver through the third quarter of 14, we're working a number of other international opportunities, we do see continued interest around the world both in our installed C-17 base as well as the new potential customers. India is obviously important to us with 10 on order plus six options in their current contract. Several customers in the Middle East are indicating interest. So our target is to continue to extend that line, we have a very disciplined quarter-by-quarter process, where we evaluate line extension and keeping our supply chain healthy. And we're committed that wherever we end up on that program, sometime out in the future if we do have to roll that production line down and close it out, that will be done in a financially responsible way.

But today when we look at international opportunities we can see extending that line for another year or two beyond the current committed backlog and we’re just going to continue to work those extensions in a disciplined way.

Unidentified analyst

And what's the lead time as to when you would have to make a decision, so if you didn't get future orders, it was going to end in the third quarter of 14, when do you have to make that decision to actually.

Dennis Muilenburg

It's actually, every quarter we go through that decision process. So it’s not one where we'll wait for a year and then take another look at it, it's a continuous quarter-by-quarter process. And what we're trying to do with that is again stay ahead of lead time in our supply chain. That lead time varies significantly depending on which component of the airplane we're talking about, okay. Byron.

Unidentified Analyst

And Dennis the other major program again an extension on be the F-18, and I wonder if you can just address two issues, if you look at the campaigns, international campaigns over the next two to three years, can you quantify the number of F-18s that maybe involved for Canada, Qatar, Denmark, other countries. And then can you also just address the cost per flight hour of F-18 versus some of the other aircraft out there particularly the F35A.

Dennis Muilenburg

Two great questions (Byron). First of all on F-18 opportunities, obviously that's a very strong line for us today, the current booked firm backlog again takes that line through '15.So we've got a couple of years of very strong production ahead of us. We see opportunities both domestic and international for F-18. Internationally, a number of competitions underway we are in play in Brazil, 36 aircraft a number of interested countries in the Middle East including Qatar, UAE; those are measured in dozens of aircraft, Malaysia is looking at 18, you heard Australia's announcement for 12 Growlers. We still think there is an opportunity for additional Super Hornets in Australia. And we will stay very close to our customers there. We think F-18 can also play in other Asia Pacific customers downstream. So you can see an opportunity there for dozens and dozens of F-18s internationally.

Domestically, it's also very important to think about as you look to the poor structure in the future, the U.S. Navy is currently thinking through its (inaudible) today's baseline is that through 2035, the carrier fleet will have two squadrons of Super Hornets, Growlers, two squadrons of F-35. That's the current base line. Alternatives are being considered, if you were to look at a 31 squadron mix for example, that could produce a significant number of additional of F-18s.

So, I don’t want to get out ahead of our customer there but we are providing them that kind of data. I can tell you that when you look at the combination of capability and costs that the F-18 provides, it is unmatched. And I know some like to talk about generations of players fourth, fifth and sixth generation, that’s a convenient marketing term. But in the fighter business we don’t develop generations of airplanes, we don't wait 20 years to inject technology.

The fact is that electronic technology is moving so fast; its annual upgrade, so our ability to inject technology in F-18 and F-15 is keeping them on the very leading edge of technology and doing it affordably. And so if you look at the F-18 line today, this year's airplanes have more capability than last year and they cost less.

Right, in this environment that's a really tough combination to be. Specifically on support cost, so support costs on F-18, $16,000 an hour, total flight hour cost. Compare that to the public numbers that you have seen for some alternatives that range anywhere from 28,000 to 32,000 and that's one airplane that hasn’t actually been introduced into the fleet yet.

All right, so we know what an F-18 costs, we know exactly when it can be delivered, we know exactly how much it will cost when it's in the field and we know how to inject technology year-over-year. That gives us some confidence for that one.

Unidentified Analyst

And if you can talk on both development efforts you put on within BDS and your R&D as a percent of sales runs significantly higher than your peers in the space; that’s (inaudible) percent rest of the peers are 1.5 to 2.5. Is that an apples-to-apples comparison; number one. Number two, it sounds that as a percent of sales if you are growing development effort than shrinking top line. Is there a pay off at some point where that actually become margin enhancing or is it the other way?

Dennis Muilenburg

I can't really tell you if its complete apples-to-apples and it’s everybody's disclosure (inaudible) maybe a touch different and I frankly don’t have perfect insight as to how our competitors do it. There are some areas where we are investing more R&D in that spent and intentional part of our strategy, we've been trying to prototype new systems and in the defense budget downturn in the U.S. invest for the next up turn and get ahead of that. And again our market based affordability actions are allowing us to do that, whereas in some cases we have competitors who are cutting R&D as a way to get to market-based affordability.

Our preference is to go deeper elsewhere and preserve our R&D. And you are right, over the long term that should show up and win. It should allow us to sustain and incrementally grow top line and not allow it to shrink, it should allow us to expand internationally, some of that investment is allowing us bring new products international customers like the Silent Eagle as an example. And overtime that investment is also allowing us to grow profitability at the bottom line. So, that's a balancing act that we are doing, we are staying of it on portability actions, investing for the next upturn but investing in a responsible way, so we get the right products and we can continue to grow bottom line performance in parallel with increasing R&D. And we are trying to maintain that really disciplined. I will go over here to this side. Go ahead.

Unidentified Analyst

Talking about your ability to ramp up services in pursuing it even though that it’s very price competitive, in terms of diluting the overall margins, how do you balance that? Are there any need to moving international opportunities in terms of outsourcing that kind of offset that?

Dennis Muilenburg

Good question, first of all I will challenge a little bit of the question there, that if you look at our services business you saw in the first quarter result, those were our highest margin business. So if you look at Jim O’Neil’s global service business and support business rather 12% margin business. Now there are some subsectors there that are highly competitive, single digit margin items, but what we see is that our customers in particular see value in performance based logistics. This is outcome based services that leverage our installed platform base in OEM knowledge.

This is the place where we can return improved readiness, lower support cost to our customer and it is better business for Boeing. This is one of those win-a-win spaces in the services business. And that’s really been our emphasis and I think somewhat unique to our services strategy is performance based logistics. Some pressure on that domestically where there are some desires to insource and maintain depot infrastructure in the U.S. But I would argue that with the defense budget pressure you may see some re-balancing of insourcing and outsourcing in the U.S. Outside the U.S. most of our international customers don’t have the infrastructure to support their aircraft and typically they will buy product with long term support contracts, performance based logistics.

The Chinook fleet in the UK, terrific example of that where we get paid to make sure there is certain number of available aircraft for our UK customer. Good business for them, good business for us. That said, one way we are going to continue to maintain margins in the services business. We are very disappointed about which service business we pursue and we are pursuing the high value added performance based logistics in particularly.

Unidentified Analyst

Can you just talk a little bit about the contracting environment for the international demand, terms and conditions and makeshift is obviously going towards international, what implications does that have from margins for the overall business going forward?

Dennis Muilenburg

The large majority of our international business is foreign military sales in which we in effect sell to the U.S. government. U.S. government sells to the other government, 80% to 90% of our international business is in bad category that tends to be solid to accretive margin business because it builds on existing production lines. It leverages existing production contracts in the U.S. That’s a very positive business force. The remainder of that international business on the commercial side tends to be dominated by commercial satellites and Roger and his team has done a great job of negotiating terms and conditions there that are incentive-based new models like hosted payload kind of models where our customers are getting more bank for the buck and we are also getting incentive opportunities beyond just delivering a satellite but also tapping into the downstream service delivery. So overall if you look at international business in total, it tends to be as more accretive to our margins and so that shift to international tends to be positive for us.

Unidentified Analyst

And then just a quick follow up on the international. What would derail demand in your view, for anything going on internationally?

Dennis Muilenburg

I am sorry, didn’t hear.

Unidentified Analyst

What could potentially derail demand; you’re seeing a lot of demand. What could potentially derail it?

Dennis Muilenburg

Well, it’s exogenous events could occur but the fundamentals here are really somewhat based on economic growth. So you see Middle East and Asia Pacific and Brazil, this is as economic growth is occurring, their desire to invest in aerospace and defense is growing. It tends to be a high value job generator, the aerospace and defense business. So that’s part of what you see driving in those regions. And then there is also a threat based or concern based drive here. Frankly China’s investment, significantly growing defense investment is giving some of our customers in that area a pose; at least causing them to build up their own capabilities in places like Australia, India, Singapore, Korea, Japan. So those two factors are strong underpinning factors. I don’t see big shifts occurring there, incremental but not big shifts. Take one from this side of the room over here, yes.

Unidentified Analyst

Dennis, with this ’13 budget down double digits from ’12, clearly eluting to what ’14 is look like for revenues, how much better do you think your domestic business can do then what the budget would imply for everybody?

Dennis Muilenburg

Well let me just give you an example and again we don’t have full detail here on how the cuts will play it individual program levels but as I said earlier its executive matters in this environment so just give you one data point if you look Boeing’s top 20 programs defense programs on average those have seen 4% reduction in budget in the fiscal year ’13 compared to a composite 15%, so we’re seeing a difference of 9% to 10% in budget reductions now recognized those reductions against what was a growing budget, so those are cuts those are less growth.

And so that’s what we’re tending to see we’re seeing a difference in the level of budget pressure on our programs because of execution and if you look at the top 10 executing program undergone you’ll see six of the top ten are Boeing programs. So, we intend to continue to differentiate based on execution we believe that will play into the budget process. Tim Keating and his team are working hard to make sure people on the hill will understand the value of the portfolio that we bring there.

Unidentified Analyst

So you think you could really do 700 or so basis points better than what’s going to happen to the budget overall on domestic side I mean historically once support that but future can always be somewhat different.

Dennis Muilenburg

Yes, I’m not going to give you specific numbers there but we expect to take share we expect to outperform our competitors domestically and we expect to significantly outperform internationally.

Unidentified Analyst

And then the 20 the goal for international what’s assumed in there as far as how much domestic will come down?

Dennis Muilenburg

Well that percentage numbers that was given you from 25% to 30% those assume a stable to slightly growing top line so we’re not getting there by decreasing domestic top line, right, this is true growth but we expect our domestic performance to be roughly flat roughly stable and to that international growth and over the composite of that you should see stable to incrementally growing top line and as we said (inaudible) continuing to add at the bottom line as well and we’re quite right through this environment.

Unidentified Analyst

All right thank you Dennis. Next we have BCA so please welcome President of Boeing Commercial Airplanes, Ray Conner.

Presentation

Ray Conner

Okay you know I’ve been down here probably 20 to 30 times over the course of 2008 and on. I’ve never been to this place and I’ve never played golf here. So that does show you how focused we are on execution. You know you guys all went to the plant yesterday, right, everybody went through facility and everything, I think it is really a truly remarkable story down here in Charleston and I know we tend to focus on final assembly and delivery in the fact that we turned the swamp now some people would say it’s a marsh land but when you pull an alligator out of there that’s a size of D3 CAT bulldozer I think that’s more of swamp than it is a marsh land. But that is amazing that we’ve been able to put final assembling and delivery facility in there of the most technologically advanced airplane of the world of the 787 phenomenal.

But I think the real story here in Charleston and thing that I hope you guys walked away with is the fact that we’re at seven per month in the mid and (inaudible) and that place is starting to really hump and that’s the key to the overall success because this got to feed final assembling and delivery in Charleston and it’s got to feed final assembly and delivery in Everett. And when you think about the progress you’ve made there, it’s been a huge benefit for Boeing especially as worked to increase capacity and faster growth throughout the company.

You know overall BCA continues to improve from both a growth and a market leadership standpoint these are same things that Jim talked about earlier in the presentation in order to accelerate that growth and profitability we’re focused on four key enablers and that’s increasing those production rates and executing on those, its increased production system efficiency and productivity it is driving our non-recurring and the recurring cost because you are doing both at the same time on these development efforts. And that’s one of the big benefits that we are trying to drive with our lessons learned that Jim and Greg alluded to earlier.

And then we are also spending a lot of time focused on expanding our services and support offerings which we see as a huge opportunity going down in the future.

As we evaluate the customer requirements, market opportunity we see tremendous, tremendous future for us BCA sustained long-term growth and we firmly believe that we are strategically positioned with the right set of products and services to deliver unmatched I mean unmatched value to the market for many, many years to come and we are continuing as everybody has kind of reiterated the build on this productivity as we both design and build our airplanes.

Now let’s talk about the performance of foreign commercial airplanes over the last quarter. Clearly, the battery situation on the 787 posed a significant challenge for us. But I would say that our team responded in a way that was really phenomenal. Some people would say we did three years of work in three months and I would agree with that they responded in a way that was incredible. Our customers appreciated that all the while. We continue to make progress on all of our operations and on all of the programs. And as we worked our way through the battery solution, I think the thing that stood out for me and for a lot of people was the way our customers stood by us, which I think is a huge statement with respect to the confidence that they have in the 787. The confidence that they have in the performance that is going to bring to them but it also is a testament to the relationships that we have been able to develop with these customers over the course of these last several years.

And this is still a very much a people business and I will tell you that that goes a long, long way having been in the sales side for many, many years it is a huge, huge deal when you have these string relationships with our customers.

Now let’s step back and look at 2012, 2012 was a truly a phenomenal year both operationally and financially for BCA. We recaptured the number one position both in the market and we successfully ramped-up production across all our programs. In that same high level of performance that we had in 2012 carried into the first quarter of this year with revenues of this year, with revenues of $10.7 billion and we increased growth in our operating margins to 11.4% we executed on all of the rate increases including the 787. So while the battery issue was going on we were still increasing rates across the 787 as well. And parallel to increasing rates, we improved the productivity throughout the production system both internally and externally with our supply chain and all that resulted in higher margins compared to this time last year.

Demand for the products and services continues to grow and as evident in our backlog which reached a new record in the first quarter after cashing in additional 209 airplanes valued $15 billion bringing in the BCAs total backlog to a record $324 billion. Momentum on the development programs continues to intensify as the products become more tangible both in design, and configuration, and capability, and the backbone of doing that and this is where Scott Fancher and his team are coming to play is the discipline that we have put in place associated with the gated development process. And the result of that is that every development program is on-track both from a performance and the schedule standpoint services. And support organization continues to be a main staple for BCA. Our customers have come to expect the world class support in services that we provide on a seven day a week basis 24 hours a day and with the reputation that we have and the performance that we have been able to achieve, we’ve differentiated ourselves in the marketplace both from the standpoint as I said but also the new offerings that we have been able to come up that really truly bring value to our customers.

BCA by design is a newly organized and we’ll get into that little more later under three core components of the product life cycle, product development, production and then services and I think this is what, has been given us the ability to execute on a much greater fashion than what we have previously and I am very, very pleased with how that’s being going. Obviously, more work to be done within BCA. We’ve got lot on our plate but I think that we have solid path forward and I think the performance over the last year and a half in terms of reflects the capability and the capacity that we have to deliver on our future promises. Next chart please.

One of the biggest assets we have is clearly our people; extremely talented and battle-tested. I would say battle-tested is probably one of the core competences that we have right now is that we are battle-tested, both from the workforce standpoint, management standpoint and executive standpoint. Most of them from the executive standpoint right now than anything else, and also getting our labor agreements in place all the way through 2016 I think is a big benefit for us and we can build on that momentum. What I wanted to do now is continuing the tradition of showing a video and but I want you look for in here is the enthusiasm of our team and that is something that we are going to build on as we move forward here into the next several years of real and strong execution so let’s just play the video if we could.

[Audio and Video presentation]

How many of you guys have flown on American's 300 ER, anybody? Well that's not good. It's a great, it's a terrific configuration, incredibly comfortable, 300 ER is by far and I think they're going to make huge gains with that product, as we move forward.

Let me talk quickly about the business environment I'm going to move through these next few charts pretty quickly because I think Jim touched on a lot of this stuff, but clearly it continues to be a challenging environment for our customers and the result that the airlines are going to be making fleet decisions that based on the need for more fuel efficient and airplanes with beneficial operating economics and I think that's where we really have the tremendous advantage.

Keep in mind fuel pricing, which was 20% not too long ago, of the airlines cost is now 40% to 50% in many cases of an airlines' cost. So it's a big-big deal as Jim alluded to on this fuel efficiency piece and that's the place where we really focused our efforts over the course of the next several years in terms of our product development and the (87) was the start of that. Due to the increasing pressure on cost yields, airlines are now shifting their focus towards their core businesses and that's carrying passengers and as a result of that you're starting to see an awful lot more offloading or outsourcing of engineering and maintenance and this is going to continue on, right now we're about 55% of the airlines are outsourcing their engineering maintenance and I think that that's going to continue to rise as things move on here which are going to provide a tremendous opportunity not only for the OEMs but all of the services providers going forward.

Obviously financing's a big deal, is there going to be enough financing available to support all these airplanes that are going to be delivering and we do our analysis, we don't see any issues there, tremendous amount of financing capacity and we forecast there's going to be sufficient liquidity in the capital market to support the near term deliveries.

And as a way of adapting to the business realities we're seeing increasing number of consolidations, mergers and different types of strategic relationships, you know you see Delta taking a position in Gol, Delta taking a position in Air Mexico, look at what Etihad has done with Jet and Air Berlin and Aer Lingus and some of these other things.

I think those trends are going to continue and how do you, how they do you know benefit from them, how do you get the strategic benefits associated with that, you know that remains to be seen, but they're setting, resetting the stage for a lot of different things as we move forward and of course we're going to have to respond to that in a different way too, and while the passenger demand continues to increase at 5% you know the airlines are still kind of catching up dealing with the higher fuel prices and looking for any revenue opportunity they can get.

But the operating economics of the airplane continue to be one of the biggest levers that they have right now to pull on. And that's why we become such an important factor. That’s why the MAX was so important to South West.

South West looking at all the different levers that they needed to pull; the airplane became one of the number one things they wanted to work on. So that's why they brought (inaudible) to MAX. Overall, airlines continue to operate in a very challenging business environment where products that provide the most efficiency will continue to be the products of choice and we believe that we have those.

Okay let's take a look at the market real quick. Huge market, Jim talked about it both from airplane standpoint and from a services standpoint; 1.5 trillion on airplanes over the next 20 years, nearly half the demand is replacement and the other half being growth, replacement being driven by a lot of it out of North America, a lot of it out of Europe; replacement everywhere frankly for more fuel efficiency in operating economics.

But the growth that's coming from Asia, China, Middle East, Latin America and a lot more LCC's are starting to pop up around the world and that's another big opportunity as we move forward. Unfortunately, air cargo is down and has been down and I think that you could see that with our most recent announcement on the 747. But we forecast that the demand is going to come back to a more long term growth forecast in 2014.

So we see that market starting to fit back up again here over the course of time. Now some people last night were saying well is the traffic going on, they shipped and because of the additional capacity? No, it's just in general the whole air traffic cargo market is down, or the cargo market in general is down.

Same percentage is still going on in airplanes as it has before, it's just a smaller amount, but we think that's going to come back. And naturally services and support will continue to grow with increasing deliveries, but as you look at that outsourcing that's taking place, that's going to grow pretty significantly as well, and we see a $2.4 trillion market for services. So when you combine the two between airplanes and services, we're looking at $6.9 trillion, a tremendous growth opportunity for BCA, as we look forward into the next 20 years.

Now let's look at the backlog, record backlogs, 4400 airplanes, $324 billion; we have carefully managed to backlog for size and breadth and diversity particularly after 2001 where we ended up taking the production lines down because we were so concentrated in North America. Now we have a really nice diversity of where regional diversity as well as the product diversity and business plan in terms of the airline diversity.

And overall, I think our portfolio is as healthy as it could possibly be; flipped between worldwide fleet growth and replacement demand. And despite of the economic uncertainties, we’re not seeing any slow down or increase in cancellations. Jim talked about it (inaudible).

If we're deferring or pushing things out, it’s primarily because we are trying to do that because we overbooked or something like that when we're working with customers moving out. But our cancellations are well below historic leverage.

So the backlog looks very solid and I think we've got a lot of comments and the strength of the backlog and our analysis continues to indicate that capacity is aligned with demand. And if it wasn't, our pricing and our lease rates would be coming down and on our products, they are holding their value, I think further demonstrating the effectiveness of our skyline management.

Next slide please. Our strategy to capture this opportunity continues to be what we have done successfully for more than 95 years now as the leader in Aviation technology, deliver the most efficient and comprehensive set of world class products and services to our customers while pursuing increased share in both the single aisle and the twin aisle markets.

And deliver these products with a highly efficient production system that is flexible enough to respond to that dynamic market conditions while remaining relentless in our pursuit of productivity, quality throughout the value stream, and continue to foster that growth and benefits of a defined development organization.

I think that’s the really big thing here as we move forward. One that’s very disciplined and aligned around the vast knowledge and lessons, where not only from the lessons learned from that, but lessons learned from Dennis’s business, lessons learned from other manufacturers across the industry in general.

And when we think about executing that strategy we recognize that we needed to do something different with BCA’s business in terms of organization structure. So we made an organization structure, the next chart please, that try to respond to this incredible market demand that we have out there.

When you look at the production commitments that we had, the potential of having five different development programs, operating simultaneously at different phases, we needed to then do something different, plus we wanted to grow the services organization and that’s why we split into three distinct functions; airplane programs led by Pat Shanahan, airplane development led by Scott Fancher, and services and support led by Lou Mancini.

This new structure provides a more focused alignment on the specific functions. At the same time it better enables them to work together more closely and efficiently. I think we are already seeing a lot of the benefits in value and efficiency through this new structure. The airplane program is focused on rate execution supply chain optimization and driving cost down through the lean and productivity improvements.

Airplane development brings together and aligns all of the development programs and studies. Typically we would do that together up to a certain point and then we would break them off and have these separate programs.

Today, Scott Fancher and the whole development team sit together. This is where we share lessons learned. We apply reusable engineering and we are going to drive a lot more benefit in terms of our R&D spend throughout this process, probably one of the bigger changes that we have made structurally and organizationally at BTA over the course of the last 15 years.

And then obviously previous services and we look at when we are working on our development stuff, we are continuing to look at the product life cycle. And as we work through the design and the opportunities that we see, we are setting ourselves up, for more expansion of our services and support business as we move forward.

And we clearly see the services and support as having a strong potential revenue stream throughout the lifecycle of the airplane. Those three things I think are in terms of that organization change are going to drive a lot of benefit into BCA.

Now I am going to spend a little bit of time on this because, I think there was a lot of questions that came out of this. Let’s take a look at this chart. Our strategy from a product standpoint is always to provide a full array of passengers. We go from a 137 seats all the way up to 460 seats. And our plan is to go at 15%, 10% to 15% seating increments between them.

Now, you, this is probably the first time you have seen the 777 family which has the 8X and the 9X. Now the 8X, the key here and we talked a lot about the A350-1000 and the A350-900. The 8X really is the one that matches up with the A350-1000. The 9X, that’s about the size of a 777-300ER today, it’s the 8X, but it’s going to fly a lot further and it is going to carry those passengers a lot more efficiently.

777X is going to be 20% better than a 300ER today which is the best performing airplane in the wide-body market, today in that size. (87) obviously is more efficient from a fuel burn in cost per seat basis. We are going to be 20% better on fuel efficiency, and we are going to be 15% better on a per seat operating cost basis in the 300ER.

The 9X is going to be 40 to 50 seats more than a current 300ER and we’ll have equal range as that airplane today the 8X will have will have more range than the 300ER today, but we have 777X family of 8 and 9 that will grow up against the A350-1000, and the 9X would be kind of sitting there by itself.

On the 787, with the 10X, that’s going to fill out that 787 family 8, 9, and 10. The 10X does about 90% of all of the missions flown today by a 777-200ER, and it does significantly better. It is 25% better than the operating cost basis per seat in A330-100, 25% better. It does all of the missions of an A330 does all of the missions of A340-300.

So when you look at the replacement cycle the 10X kind of fits in that sweet spot. If you want to open routes with the Dash 8 that would be the one you’d want to do you want to go to a longer range higher capacity Dash 9 if you want to go regional with medium long hall and you go to the 10X with superior operating economics over everybody.

And the MAX, the MAX today is 8% better on a per seat spaces than the NEO. The MAX is 13% better on a fuel efficiency basis then the NG, which is already a highly efficient airplane and as Jim said we have over 1300 airplanes sold from today and that is growing. From a product standpoint this line up is about as good as it’s going to get.

I mean, I think when I look at it and I don’t have the (inaudible) in relationship to Airbus but we’ve got them box on the A350 at the top and we’ve got them box at the bottom with the 787. So we feel pretty strongly that we’ve got a terrific line up of products for the future so now this going to be about getting them launched and moving on.

We’re in much more detailed conservations with the customers today on the 777X. And I think if we haven’t had the battery situation on the 10X, we would have probably gotten there a lot sooner in terms of the launch, but it’s difficult for somebody to go forward and hey I want to go buy a 10X when the airplane is on the ground. So again, I think we have a great line of products and we’re going to be executing those products in the near term.

Now, with this great line up, we have to produce them, and productivity remains one of the foundational elements of what we do. And overtime we’ve been able to gradually increase our rates as a result of the culture of continuous improvement and we have done that overtime. Productivity readiness, (lean) plus initiatives in our factory office and our supplier factory enabled BCA to implement new opportunities for efficiency.

Across all our programs, we’re working actively to reduce flow, increase quality, and reduce our footprint. I think the 737 line is the most prominent example of what we have been able to do. Think about this, 1999, we did 24 airplanes per month, in 2006 we did 28. Today we’re at 38. 737, which is an increase of 37% since 1999 and we’re going to ramp to 42 in mid-2014 and we’re going to do all in the same footprint as we were back in 1999. And the flow time continues to shrink our cost to quality shrinks and the forth space shrinks as well.

777; I ran the 777 program in 2003 and I thought for sure we’d be captured 7 per month max. That’s all we could ever do. Now, Larry Loftis, where is he at, this guy figured out how to get it up to 8.3. He put in place the largest integrated moving line in the world and drove the 777 to 8.3 a month, and is performing unbelievably well and it gets better and better every day.

The flow times have increased significantly and I think we are in terrific shape from the productivity and operations standpoint on that program. 787; yes we have had some pretty tough years on the 787 to say the least, but I think now we are turning the quarter seven a month I would say we have turned the corner. Our supply chain which was once a major issue for us is healthy, successfully executing seven per month and now starting to ramp out in the ramp-up in the their Tier 1 twos and threes in terms of going to 10 per month later in the year. Shortages are an all-time low and travelled work is pretty minimal.

Over the last year we have reduced our cost per job and effort by 39% and in Charleston 45%, pretty good progress in a very short period of time. Now let’s just talk quickly about the 787. And Larry is going to have a breakup session. So he will get into a lot of detail about this, but I think what I will do is just kind of go over the kind of the key highlights. Retrofits in the fleet, we are over 90% done and we should be completed by next week.

Our customers including Ethiopian, Qatar, Air India One and now United have all resumed service and the airplanes are performing well and then the Japanese will probably come back up here with scheduled service. They have been flying the airplanes a lot, but with schedules service here at the beginning, excuse me beginning of June.

We have delivered two airplanes out of Everett recently we have got ticket on a number of others. So our guidance is unchanged for more than 60 streamliners by the end of 2013 and the production system continues to get healthier and more productive.

On May 9th we rolled out our seven per month airplane and we are on-track to break the 10 per month by the end of the year. Our partnering for success initiative, we are working very closely with our suppliers and I think that’s gone pretty well. Obviously we would like to accelerate that more and we even put a substructure in place in the organization, in Larry’s organization, led Kim Pastega who used to run the 767 program.

She has a staff of engineers and other support people to accelerate those changes into the supply chain as quickly as possible and help drive that productivity. And we are already starting to see the improvements in there because the suppliers are meeting their schedule they are hitting their learning curves and again it is about accelerating the cost reduction while we are improving the quality.

Boeing South Carolina I think as you saw yesterday right on-track seven per month is in that breaking rate in the final assembly with the ultimate schedule because the three is potentially higher as we go. The 787-9; now I didn’t talk about that, but when you were out there you saw the 787-9 being incorporated into production system.

That is a big deal of bringing that and a major derivative like a 787-9 into the production system and is going very, very well. Larry will talk on that a little bit more as well. So all-in-all, I think the 787 is moving in the right direction for sure as we kick the rates up and then we bring the dash nine in place and then we look to launch the 10x here later in the year.

Great momentum at BCA and value tested team, driving a lot of productivity gains and we are well positioned to transform this backlog into cash. We have taken all the lessons learned and these were painful lessons I have to say, but we have implemented them into the development process and we are keeping our sites on our services opportunities and that business is growing overtime and we continue to ensure that we have the right team and we are executing the strategy.

And I think we do have the right team and we are executing and we are set to take off here in the next couple of years. And I am confident that we are going to get that done.

Now with that I am looking forward to your questions so feel free. Joe?

Question-And-Answer Session

Unidentified Analyst

Ray.

Ray Conner

Yes.

Unidentified Analyst

The 777x, so you and I think Jim both talked about boxing in Air Bus. I see what you are certainly saying with the 87 and (dash-9X), it seems like the (dash-8X), I think you have said its 15% improvement over 300 ER. Airbus is talking about much bigger numbers for the (dash-1000) over the 300 ER.

Ray Conner

I look forward to having that discussion.

Unidentified Analyst

So can you say, can you stand here today and say that (multiple speakers)

Ray Conner

I find it hard to, well we are now (inaudible) something different. I know that’s been accounted but we carry more passion, we fly further than that airplane and I think our operating costs are at least on par with what we think they can do, gets to 300ER.

Unidentified Analyst

Have you done, between the two models that 8 and the 9, have you gotten to the point yet where you can say which is going to come into service first and what the breakdown long run will be between the two?

Ray Conner

Hard to know right know. I think, we are having a lot of more detailed discussion and I think the first one would probably be based on the conversations that we had with our customers would be more focused on the 9 first. And then it would be 8 coming after that, but Scott can talk to that little bit more in the breakout session but that’s what the conversation, we are really kind of focused as with the customers.

One thing I would say is that, we have been talking to the customers now for over a year on this airplane. These aircrafts are really (quite defined) right now and we know exactly what they are. They know their performance and we are just tweaking things as we move forward. There has been a lot more detailed discussion probably than you guys realize with our customers on that.

Unidentified Analyst

Ray, you talk a lot of partnering for success and lowering sort of the cost of Boeing, but part of what happens is you have big supplier overlap with Airbus. So how do you make sure that some of this lower cost doesn’t end up helping your competition?

Ray Conner

If they get more efficient Howard, and it benefits us in general, I think that’s okay. We work with everybody, we just make sure that we are getting the benefit and they are not getting more. It’s good for suppliers to be healthy. That is an absolutely imperative but them for not to be healthy, put us at risk too which is both Airbus and ourselves. I don’t have any problem with what we are doing in terms of making them much more efficient across the board.

Unidentified Analyst

But there has to be somewhere in that you can differentiate your profitability?

Ray Conner

Yes, I mean we are going to drive it to our contracts, absolutely Howard. We know exactly it takes, we are in the suppliers (stake). We know exactly what their resources are; we know exactly the things that they needed do to against our products. And sometimes Airbus may take a different approach but I think we know what we need to do in each one. And I would say we are talking about the (87); we are so early in that technology, its, we have a huge opportunity to improve this thing, it is by far and away I mean we made such a huge step both from the structural standpoint, from the system standpoint.

So I think that there is so much that we can do to improve this of particularly on (87), just by learning and the start-stop, start-stop that we had tough, now we are in a good pace, high rates and if we can focus our resources which we are on this I think we have got, this is a great timing as we move forward. And then we are looking at new, we did a lot of things in the (dash-9) to improve efficiency in terms of the production build too.

A lot of changes that we did there were about efficiency and production efficiency not only for ourselves but also for our suppliers. And we look to do the same thing when we look at the (dash-10) as well. But the (dash-10) is really coming off of the (dash-9), but those efficiencies will carry over to (dash-10).

Unidentified Analyst

Back to the 777X, so this airplane is largely defined? You guys launched British Airways I mean may be back to Joe’s point I mean.

Ray Conner

I don’t think we did.

Unidentified Analyst

Okay, explain.

Ray Conner

I don't know perhaps but we were early. We weren’t completely defined at the timings that they were making their decision. I think Willy has been pretty clear. If you go back and read some of the public comments, even with the Dash 1000, he said I feel strong opportunity for the 777F in our fleet. When you look at Iberia and you look at BA, they have airplanes; the 1000 could replace some of the A340s into Iberia.

They still have a very, very big 747 fleet that they need to replace and I think Willy would tell you that he's still very, very interested in the 777F. My only point is that game is not over yet. That's yet to be defined and yet to be won and our intention is to win.

Unidentified Analyst

I'm going to follow on if I may; you mentioned that the Max is 8% better than Neo. So again, why did American go with split 5? Why has that the Neo sold so many planes? I mean apples-to-apples.

Ray Conner

Fair question. If you recall the timing of the Max, the Neo (inaudible) defined the Neo. We were still thinking about going with a new small airplane up to that point. But it was clear that our customers, they didn’t want to wait that long for the new efficiency. So we always had a re-engine as part of the option and then we brought that forward with the American deal as an option.

But American had a huge number of replacements that they had with no single supplier was going to be able to do all those airplanes in the timeframe that they wanted to replace their fleet (inaudible) absolutely. But we got half of it, we got a lot of wide bodies in there, and the Neo I think got a little bit of jump on frankly and we're still playing a little bit catch up, I still like the quality of our back log a lot.

Unidentified Analyst

And the one last one, you mentioned that the new small plane, is that still somewhere on the table or?

Ray Conner

It’s down the road. I mean we're always looking at our product development opportunities. Who would have thought you'd be able to get 13% better efficiency over an already tremendous product in the NG. I mean the NG, overtime we have improved that airplane, the airplanes are rolling off the factory today, are almost 3% better than the airplanes have rolled off 10 years ago.

So we have continually improved this product as we move forward and now we're going to be 13% better than that airplane. You have a machine that's going to last for quite a while, gives us time to go look at the new small airplanes. Gives us time to go think about where do you start in terms of the right size, what's the right size to start with? You go higher in terms of seat capacity or you stay in that mean of the market where the (dash-8) is or do you step it up a bit?

Lot of things that we can talk about, so we'll need to go address the live bodies first and then we'll talk about what the (inaudible) effect.

Unidentified Analyst

Thanks Ray, so you've talked about services quite a bit. Just wanted to follow up, you've got Boeing proprietary parts and you've got Aviall. Just two questions, where outside of those two do you really see significant opportunity, I mean real meaningful opportunity and how do services stack up in terms of your overall opportunities in terms of capital deployment?

Ray Conner

Capital deployment is not too large, but we kind of break it into three things. You have parts, Aviall proprietary parts, you have fleet management with our maintenance and support activities (mod) those kinds of things and then you have what we call the digital airline which is about driving efficiency through some of the new products that we have brought into the market place that tie into the airplanes capability to be more predictive, to be able to drive the efficiency both from a scheduling and from a maintenance standpoint back into the airlines.

And this have increased successful from an overall and then how do we integrate those into our product offering up front on the sales costs system bring those to bear and creative revenue stream in addition to the airplane sale. We're just now starting to bring those early; those kinds of combined service offerings into our sales campaign. And we are actually starting to see some benefit from doing that.

George?

Unidentified Analyst

Yes two questions; one just a bit of a comment on the loss of the (line air) competition with airbus?

Ray Conner

Well I don’t know if that was a competition so much but airbus had a lot of early positions available, that's one. Two; if you go back, read the article about it, they've been wanting a maintenance facility for quite some time to do work, and the FA would not give them a ticket to do that. Looks like they’re going to get a ticket from the Europeans, the other thing was there was a ban that had been put in place on them flying to Europe which impacted Australia, a growth opportunity for them as well and that has been lifted it too. Question is, they are going to have 600 airplanes on order?

That's a lot of airplanes, that's the size of South West. We will see how that works out but we didn’t have those early deliveries sufficient they obviously wanted, very desperately. So we will see them, we didn’t have some of the other things if they brought to market in terms of pricing and some of that other stuff.

Unidentified Analyst

Okay and then one different one, for you to go up to a higher rate on the H7, what's the gating factors that you're looking at now?

Ray Conner

With the what factor?

Unidentified Analyst

The limiting factors are-in terms of being able to go above 10?

Ray Conner

It is primarily up stream, I think everybody would have to make a capital investment to do that. Nobody has thought of the idea of doing that. So we're still on the study phase but that's clearly something that we could do.

Unidentified Analyst

I mean don't you really have to do that to be able to also reasonable delivery slots on the dash 10?

Ray Conner

That's something that we're looking at George let's get to that second launch and then we can talk about that.

Unidentified Analyst

Again on services that you mentioned the trend we've seen with more and more outsourcing airlines but putting more engineering maintenance work out. Another trend that's happened is that I would say more customers, you were saying the airbus customers are unhappy with spares pricing and how escalation is continuing at a pretty high rate. You've looked at more than ten years trying to expand the services business, I mean is something happening now, that gives you more of an opportunity than you had in the past and can you do anything about this, if you would spare us the escalation by many of your suppliers?

Ray Conner

Sure I mean we're working with our suppliers on that. It's all part of the things that we've talked about with our partnering perspective and how do we bring things to the market place more effectively. There is a lot more opportunity because the airlines are more willing to talk about moving out on the engineering and maintenance side too.

It's with something that they weren't as open to do and what we're doing now is creating different relationships around the world to be able to help us in doing that, so we’re just really starting to get going on that and bring those offerings to the market place.

Unidentified Analyst

Do you see the pressure when people are looking at buying the next airplane from you, and thinking about what this long tail is going to be, with this price increases, I mean in terms of spares and stuff.

Ray Conner

Well, each one of those handle little bit differently. We look at it as part of an airplane deal. So we will bring some of those into the airplane deal only when we get into that. Some of that’s driven, some of those are non-Boeing proprietary, and are driven by our supply chain. And so then we will work with the supplier directly to help us in that respect.

Operator

Okay, thank you Ray, we are going to move to the breakout sessions. We wills start about 10 minutes, again please follow the assignments on the back of your badges. Group A is going to be in this room. Group B is going to be with Raymond Conner. Also after the breakout sessions we will have box lunches for you to grab as you make the way to the shuttle and then we have your photos outside from the tours you had today. So we will see shortly in the breakout sessions. Thank you.

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