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Executives

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

Analysts

Rob Spingarn - Credit Suisse

The Boeing Company (BA) Credit Suisse Global Industrials Conference Call December 4, 2013 11:00 AM ET

Rob Spingarn - Credit Suisse

Okay. As folks make their way to their seats, we’re going to get started with the late morning session here and as always it’s a privilege to welcome Boeing to our conference. We alternate to some extent year-to-year between BCA and BDS and I think it’s very timely to have the defense business represented today by their President and CEO, Dennis Muilenburg, we also have Bob Verbeck who is BDS’ CFO here in the front row and we have Troy Lahr from the IR team as well and Kathleen (inaudible). So we welcome all of you. Thank you for being here. These guys aren't on mic. So if they are asked a question, we will repeat it for the webcast.

And with that Dennis thank you so much for being here with us again and I think you would have some slides.

Dennis Muilenburg

You bet. Well, thank you Rob, I appreciate the introduction and the chance to be here and good to see you all of you again. And thanks for the opportunity to talk about where we're at on the business.

I've got few charts, I'd like to share here today to give a little perspective on the environment and the market as we currently see it. Talk about, what we're doing on productivity, driving affordability, driving both top and bottom line performance, talk about our outlook, where we see some growth opportunities as well as some of the risks that we're facing into and taking action on. And then I'll be happy to take any questions you might have. So, that's kind of the sequence here.

Of course as always I've got my forward-looking statement here and you can read through that in detail, when you have the opportunity. Right our Boeing strategic focus areas, as Rob said really starting this conversation from an integrated Boeing perspective. And as we approach the market in a arguably tough environment, we're trying to do that, from what we like to call our one Boeing approach. And that is working across our Commercial Airplane sector and our Defense, Space and Security sector. These are our Boeing strategic focus areas that Jim McNerney has talked about extensively you hear the same thing from Ray Conner on the BCA side and all of these objectives play across our entire business.

I wanted to point out on that first bullet in particular as Commercial Airplanes is facing into a significant ramp up across the product line that is a shared responsibility and something that my BDS team is engaged in as well. Some cases that’s talent deployed to Commercial Airplanes and it seems like helping stand up the Charleston 787 factory, its engineering work packages, its integrated support in the field. We approach this strategy from an integrated standpoint.

Likewise, we're leveraging Commercial Airplanes technology talent and processes as we position our defense business for the future. So that’s a really important fundamental for us it gets to not only how we operate Boeing but also how we are operating with our supply chain and I will a little later about our initiative around partnering for success with our supply chain that is a single integrated efforts that expands the whole Boeing enterprise.

Now with that, just stepping down to the Defense, Space and Security business. You can see our revenue mix for the year were as forecasted previously and hadn’t have shared with all of you $31.5 billion to $32.5 billion business this year our three primary business sectors Boeing military aircraft little under half of the business global services and support about a quarter of the business and network and space the other quarter of the business.

In this environment, very, very focused on partnering with our customers you heard from C&O Admiral Greenert yesterday, you just heard from Lieutenant General Davis spending a lot of time working with our customers as they have faced some very tough budget situations here in the U.S. in particular and trying to drive affordability as viewed by our customer.

We do think there is some significant strength, unique strength in our backlog and our portfolio today. I will show you some details later but almost roughly 40% of our backlog today is outside of the U.S. which provides some robustness and no single program in our backlog is more than 10%. So again that provides some help and strength and arguably a healthy backlog from a performance standpoint as we are executing on costs and on schedule. We are very aggressively taking cost structure out of our business, we’ve taken nearly $4 billion out already over the last two to three years, we have a lot more work ahead of us yet. Our headset is we have to assume a worst case budget scenario will occur in the U.S. that sequestration will occur in full. We are designing our cost structure, so that we could stay ahead of the curve on those budget cuts and allow us to continue to invest for the future and I will talk a little bit more about that in detail. Internationally, we are continuing to expand and also investing in some key vertical areas for the future. So all in all a healthy business in a tough environment.

If you slice that revenue base by customer, you will see that the right hand side of that pi are is our core U.S. DoD customer, about half of our business and this year, we will close approaching 30% of our revenue base outside of the U.S. Again that provides some robustness for the future. About five years ago that was close to 7%, so you could see how the international mix has really taken hold in our providing strength for the future. And frankly that is another place for very much engage with Commercial Airplanes as we approach our international suppliers and partners.

Now if we take a look at the environment, I would characterize this overall as an environment where our customers are demanding more for less. Arguably the threat, the security environment, the challenges around things like cyber security emerging threats, certainty and conflict in the Middle East, you see at news reports every day, our customers are facing a well in set of threats and challenges.

At the same time, significant financial challenges; sequestration, the defense budget, difficulties here in the U.S., our European defense budgets are down more modest growth in defense budgets in the Middle East and Asia Pacific offsetting that to a degree, really around the world of customers who need more or less. That puts the imperative on us to drive affordability. There are still within that environment a few key new starts. And you heard some examples from General Davis like long range strike, very important to the future, new opportunities that are just ramping like the new tanker. So it’s important that we execute successfully on those and that we continue to look to diversify our business in terms of growth areas like C4ISR, cyber unmanned systems and continue to expand internationally.

We are trying to be brutally realistic about this environment, technology upfront that it’s going to be tough. So I said earlier assume full sequestration happens, design our cost structure around that and if the outcome is better than that then create some upside opportunity for us. But in this environment we have to be realistic and we have to be aggressive on affordability and cost structure reductions.

Now within that environment, customer need as I said, you are continuing to expand. And I showed you a similar chart to this in the past and these are long term enduring needs by the very nature. And I’ve heard from the customers that have been here over the last couple of days in terms of global situation or awareness they need for mobility, need for advanced technology, the ability to have affordable space access space exploration is now an emerging, or reoccurring growth area for us, training, logistics, and support on a global basis. These needs are real, they are enduring and even in a tough budget environment, we’re only seeing increases here in terms of security needs alright. So it gets back to my comment about the ability to provide more for less, being able to provide advanced technology, rapidly fielding that technology and doing in a way that delivers on cost and schedule.

The market below that, if we look out over the next 10 years this is the integrated Defense, Space and Security marketplace, it’s almost a $3 trillion market globally. So despite the pressures we see in the U.S. and this assumes full sequestration still a very large market. So there are opportunities out there for growth, it requires targeted investment; it requires international expansion in some of the parameters I talked about, but it is a large healthy enduring market. So, if we do our homework, we continue to take out cost structure, this creates opportunities for us to have a stable to a incrementally growing top line and cost structure will also help us keep our bottom line healthy so we can invest in the future and meet our customer needs.

So, within that environment and market. These are some of the key strategies that we're executing on the Defense, Space and Security side at Boeing. Investing in our people and customers as foundational investment. Accelerating productivity, I'll talk a little bit more about that in a subsequent chart, but really a fundamental driver for our business. And our whole headset here is shifted from one of sort of continuous improvement model, traditional business model that says, in every year let's get 3%, 4%, 5% more efficient than we were in the previous year to a market based external view headset. And that is what in this environment as a fighter need to sell internationally, what is a commercial satellite bus need to cost, what is our services rate structure need to be to compete internationally and then drive that back into our internal cost structure. And that's causing us take much deeper, much more aggressive, much earlier affordability steps to the tune of about $4 billion already out of the business.

That's allowing us to see the business going forward, investing in core product lines that our customers need allowing us to build vertical capabilities like C4ISR, composites manufacturing capability, cyber security unmanned systems and to expand internationally. Not only to grow exports which are important part of that but to invest in global partnerships that sustain long term business. And to view is that we see a international defense business that can be for the long term 30% of our business space. We think that's sustainable. It's not just the way we've exports, it’s something we can sustain for the long run.

So let me just dive a little bit deeper on a couple of these, accelerating productivity and cost competitiveness, fundamental for our business model, I talked about market based affordability. We are attacking every single dimension of cost structure. We have taken out about 30% of our overhead costs, we are down a little over 30% on executive headcount over the last three years, management headcount down a little over 20%, taken out about 15% of our facilities and infrastructure. These are things like closing our Wichita site, closing down the C-17 line as we’ve announced. These are tough decision, frankly outcomes at this sequestered environment that we are in people are saying you are not seeing results of the sequestration where you are and showing up and things like some of these tough facility closure decisions.

Its direct costs where our total employment population is down from about 70,000 to 58,000 on the defense of Boeing and it’s also engaging with our supply chain. And I think the next big wave of opportunity here is what we call our partnering for success effort and we are still in the early stages of this but it is an effort for us to find win-win solutions with our global supply base and do it at an integrated Boeing fashion.

Certainly part of that is by having Commercial Airplanes and Boeing Defense, Space & Security doing this together, it creates leverage and negotiating power. But it’s much more than that. What we are trying to do is find ways where we can drive efficiency and help our suppliers be better businesses as well. Part of this is a two way conversation with our supply chain now giving us inputs on how do we drive improvements and how we design, how we control changed traffic so that we can up our supplier speed more efficient.

Jim McNerney, Ray Conner, myself, Greg Smith we are all working this side by side and those seem this is a integrated Boeing effort on how we engage with our supply chain. This will allow us to take substantially more cost out of our structure. So as I said about $4 billion of cost reduction today are, significantly more to come and we will be aggressively on this front start.

Now, why are we doing that, couple of things. That market base affordability effort is allowing us to achieve three key outcomes that we think are really important, first one’s cost competiveness. This is the fact that our customers must have affordable reliable solutions. We must be able to deliver new developments on cost and schedule. We are doing that on tanker. We did it on Growler. And you heard from Admiral Greenert yesterday the importance of Growler being able to put that advance technology into the hands of the war fighters in four year development program that was executed on cost and on schedule. And we need to do it in space business right. Our customers need affordable solutions and they need them rapidly and they need them consistently. This allows us to do that in a cost competitive way.

Second thing it does, it does speeds our bottom line. And we know that is really important to something that we are committed. And regardless of the uncertainty we see in top line, because of sequestration, our commitment is to hold and incrementally grow margins over the long term. We have done that over the last three years, we will continue to do that going forward. It’s a principle of having a healthy business.

And in the end that allow us to invest which is third thing, holding and growing our R&D. and we have strategically decided we are not going to cut R&D as part of our cost cutting measures. In fact we are cutting deeper elsewhere so that we can hold down to our R&D. And we think that is a really important part of driving through this business cycle and frankly something that our customers again need for the future.

And I think good evidence again of that is the C-17 line shutdown. We could have elected to try to sustain that line to invest the whole long lead, we felt it was more important to make a firm decision to close that line and hold those ones to invest for the future. We think that aligned with where our customer wants to go as well. So this is a really important principle foundation to our business and what we intend to deliver, affordability, solid margin performance and investing for the future.

Now where is that investment going, these are some of the priorities that we have for growth. We think there is significant strength in commercial derivatives. Tanker, we expect to deliver on development program. We are heard from General Davis about the importance of doing of that. We are working that in partnership with U.S. Air Force, confident we will deliver and move that program into production.

P-8, initial operating capability was just declared by the Navy during the past couple of weeks that will also now move into full rig production. Those two programs alone significant domestic ramp-up and both have potential international sales to follow. That leads to global expansion that goes beyond commercial derivatives [TACAIR] lines, rotorcraft lines commercial satellites are especially strong in the international market right now. We do see additional growth opportunities in unmanned systems, C4ISR, advanced services, especially when we can provide global services that expand our commercial and defense business, I think we are uniquely positioned to do that.

And then there are also investments we’re making in future product lines, and although there are not a lot of new starts, there are a few and we’re investing to win there. It includes things like long range strike, UCLASS, some advanced satellite programs and also prototyping for the future, flying things like our Phantom Eye, high altitude long endurance UAV, doing things like launching the 702SP small sat, which is now gaining traction in the marketplace. So this is how we intent to expand those R&D funds and doing the way that drives profitable growth for the long term aligned with our customer priorities.

As the dimension of that we're also trying to grow globally, how we do business and not only exports, but how do we sustain that global business for the long run. And again I think Boeing is uniquely positioned to do that when you look across commercial and defense sectors. The partnerships that we're establishing globally are long term partnerships. Many of you I'm sure saw the Commercial Airplane sales that were announced at the recent Dubai Air Show. You might have seen in compliments of that some industrial partnerships that were signed with Mubadala [Thulasi] and some other key players in UAE. Those are combined industrial partnerships expand commercial and defense. So our ability to establish those kind of integrated global partnerships is a mechanism for creating long term sustained business internationally in addition to exports. And that's really our context with how we're investing.

You can see some of the recent successes, but the pictures in the chart. And I think frankly the numbers speak to themselves well. As you hear across the defense industry in the U.S. a lot of desire to grow internationally, the fact is we have grown internationally. And we're now approaching 30% of our revenue outside of the U.S. and that will be sustained.

So take a look at our backlog by market. Today we're at about $70 billion of defense backlog, one of the stronger backlogs in the marketplace, you see it's well distributed across product lines from fighters to services to space, satellites rotorcraft, pretty evenly distributed across those major product lines. Again that gives us a strength for the future. I think another interesting cut of this is to slice the same data by customer set.

And that's what you see here. And again our U.S. DoD customer extremely important about 40% of our backlog, which you see international here, is now also about 40% of our backlog. That adds diversity, that adds strength and there is no one program here that’s more than 10% of the backlog. So not only it’s a number large, it’s diverse, it’s robust and it’s global. And that gives us some confidence and again arguably one of the toughest environments we’ve ever seen we think we’ve the right product mix and right customer mix for the future.

So with that our outlook. Opportunities, I covered some of those key opportunity on the left. Some of these are investing in sub segment growth markets, some of those are extending core products these are things like investing in our advance Super Hornet advance F-15, some of these are new products like long range strike and again we think some unique strength here in commercial derivatives Tanker, P-8 and so on.

On the risk side we also have to brutally realistic here. We do have some near term product line extension concerns that we’ve pacing into, C-17 good example of that that we are dealing with. And being very realistic about sequestration we cannot assume a political solution here. We would love a political solution, we are advocating for one, but in terms of running the business we are going to assume full step function sequestration and take cost structure out ahead of those budget implications. Longer term, we do have some concerns about industrial base. We are keeping a close eye on our supply chain consolidation pressures, making sure that we have healthy supply base top to bottom; and again where we can, leveraging across our commercial and defense business to help our supply base stay healthy as well.

And then underpinning all of this and then jumping to your questions, I will go back to that one Boeing approach and whether we are talking about productivity, driving affordability or how we are investing for the future and growing the business. What’s unique about our Defense, Space & Security business is we are doing it in tandem with our Commercial Airplane business. Ray Conner’s team, my team are tied at the hip as we go to global markets, we go as Boeing, as we engage in industrial partnerships, as we share technology, as we share processes, as we move talent, we are doing that seamlessly across the Boeing enterprise. It is good for our company but perhaps even more importantly, it’s good for our customers and it’s driving affordability for our customers and it’s allowing us to invest in the right products long term for our customers, whether it’s commercial or defense.

So with that Rob, I am happy to take any questions that you might have.

Question-and-Answer Session

Rob Spingarn - Credit Suisse

Well that is great. I am going to start off and take questions from the room as well. I have got a couple that we will start with. I am going to do the same Dennis that I have done with some of your peers that have already presented and start with the high level. You have already talked about that a bit and talked about full sequestration is the base point at this point that you have to think about.

In terms are schedule though as we -- as Washington continues to negotiate and debate that feels etcetera, do you think there is a chance that we don’t get a budget, we slip into a CR into and just delay everything well into the spring.

Dennis Muilenburg

Well, I certainly think there is a chance I could have from Rob, I mean our history has shown. It’s a solutions space, it’s been exercised. So the current CR through mid January and we are getting into the final stages now, is there going to be a budget deal or will there be an additional CR extension, I think CR extension is certainly possible. We are seeing some good discussion on how about coming to some kind of a budget deal that might moderate sequestration impacts over the next couple of years, perhaps put a slope into its implementation instead of a step function.

Rob Spingarn - Credit Suisse

Right.

Dennis Muilenburg

I think that would be a great answer for our customers. It fits in a really tough solution space right now over the next couple of years in particular and it would be much more executable from an industrial standpoint as well. But we can’t back on it.

Dennis Muilenburg

A CR could be the outcome, step function sequestration could very well be the outcome and we have got to prepare for that possibility.

Rob Spingarn - Credit Suisse

The other thing that we've talked about in a couple of the other sections is the sort of coincident timing of the all POM that we now essentially know exists. So this is the full sequestration version of the POM and from about 15 to 19. And then the QDR, and what drives what, in other words, what order do these things need to come in and could one delay the other?

Dennis Muilenburg

Well, the fact is all of this is being done in parallel right now. Ideally, we would get level set on this strategy and any changes to the strategy then budget and resource to that strategy. And frankly that's a challenge our Pentagon customers are facing right now that all of these things are moving in parallel and there is not clarity on what the budget level will be and can the strategy be resourced as the strategy is currently defined.

So that concurrent activity is exceptionally challenging for all of us. And so, I spend a lot of time talking with our customers in the Pentagon doing all the POM planning -- POM planning and QDR all in sequence. It’s a lot of planning loops, but in terms of the output that we can all resource to and plan to, we don’t have clarity there yet.

So that's destructive, it’s destructive for our DoD customer and it’s destructive for industry. So we need a concrete plan, we need coherence between strategy and funding, and we need the congressional side of this to come to convergence to lay in a plan that we can all go execute this.

Rob Spingarn - Credit Suisse

So, is it fair to say if we end up being rationale down there, which is a big assumption to begin with, but if we do, you really can’t get a ‘14 budget until you’ve done the programmatics in the ‘15 POM, because...

Dennis Muilenburg

Clearly, there has to be a smooth sequencing between the two years, right? So, most of what -- the work that we do for DoD is multi-year, long term in nature, right? So, we need consistency in budget lines from ‘14 to ‘15 to avoid step function stops and starts; it would be exceptionally inefficient.

So another reason for all of this -- the work to get it solved together so that we can have a smooth profile and we can do some long term planning. And you can imagine how challenging it is for the planners in the Pentagon, challenging for clients like Boeing; and I'm sure you heard the same message from some of my counterparts. As you go down to supply chain, it gets even tougher. There is a lot of these small businesses who are facing decisions that are binary on or off depending on these budget outcomes and program outcomes up here. So, we have to be very mindful about getting the closure on these soon for the sake of our industrial base health.

Rob Spingarn - Credit Suisse

Right. The other thing I wanted to talk about was there has been some recent talk in the markets on -- in our world about programs that you've already addressed, but we've got the sun setting C-17; there are some folks that [protect] air potentially in that bucket. So I want to talk a little bit about F-18 and F-15, this is good opportunity to mention, because I forgot and was I was remised to Chris Raymond this year, who is trying to sell those aircraft for you internationally et cetera. So if we could talk a little bit about how C-17, F-18 and F-15 and V-22 at a lower level multiyear, how those revenue lined and look over the next several years and then just supposed the programs that are growing against that?

Dennis Muilenburg

Yeah, great question. I'll try to do that in pieces here. So first of all C-17, we are facing to reality there. We will align that program down and shut it off by the end of 2015. We're confident, we'll execute efficiently through the end of the program. that creates top line pressure on Boeing, that's downside pressure. We are expecting that large airplane category, as we see P-8 move into forward production, as we complete development on Tanker and move it into production and we will have the first 18 tankers on the ramp by 2017. So if you look at the phasing of those on the big airplane side I would say P-8 and Tanker create more upside than C-17 as downside.

If you look broadly at rotorcraft portfolio to get to your V-22 question, we did recently signed multi-year contract five years for additional 99 V-22s. Some pressure on that buy line as you’ve seen in the budget discussions, but growing international demand that could fill up slots. So we feel confident in the stability of the V-22 line and the multi-year contract structure gives our customers the flexibility they need. In parallel to that we also just signed a five-year, multi-year on Chinook with U.S. Army, 177 Birds with options for more internationals come on line. Similarly Apache with block 3 is just moving into full rate production.

So from a fundamental rotorcraft business standpoint, look across V-22, Chinook and Apache, that’s one of the sectors that we see actually growing in the future, somewhat driven by international.

Then on [TACAIR] front obviously very important to us. The F-15 line right now is paced by international sales and with the Saudi sale, the 84 new builds we are building right now, that line is solid out through 2018-‘19 time frame. There are some other international opportunities and those are tough competitions. But for a lot of customers out there, the F-15 is still the machine of preference. You get an airplane that’s fast, carries a lot of payload, has a lot of range, advanced avionics, two seats, two engines and a known delivery schedule and cost. That combination is a solid one for a lot of international customers. And our U.S. Air Force customers continuing to invest selectively in upgrades to the F-15, things like radar upgrades.

On the F-18 side, right now the current multi-year we have with U.S. navy takes it out through the 2015 timeframe. We are hopeful for additional domestic opportunities for the F-18 line. And it's important to note that we don’t see Super Hornet and Growler as a competitor to F-35 domestically. It always intended to be a compliment. In fact if you look at the U.S. Navy's plans, and you got to look at the carrier fleet plans all the way out to the part of this planning horizon, 2035 and beyond, at 2035, two-thirds of the carrier deck is still F-18s, right?

So, we think Super Hornet and Growler in particular have a lot of domestic legs still to come. And we think if you look at where technology is headed, combination of stealth and electronic warfare, Growler is right at the very leading edge of electronic warfare. So in particular, we have some confidence there.

So domestic opportunities subject to budget deliberations, and then internationally, a lot of interest in F-18 as well. We are engaged in competitions in Canada, Denmark, Brazil, Malaysia, Middle East; arguably, half a dozen high quality competitions where F-18 is a candidate. So we’ve got some work to do there but we feel that we are making the right investments and things including the advance Super Hornet that we just flew about a month ago, that will be able to extend that line as well. And that gives us robustness in [TACAIR] and that robustness in [TACAIR] is what enables investment for the future. So we are talking about long range strike, we are talking about UCLASS, that’s a similar technology set to what we have done in our [TACAIR] investments. So it’s a long term view of not only individual platforms but future opportunities as well.

Rob Spingarn - Credit Suisse

So when you put all that together, do you will feel like you reasonably offset, so it’s net growth or…?

Dennis Muilenburg

I would put in reasonable offset. So, if we look at top-line overall for Boeing Defense Space and Security, we see it stable. There are some opportunities to grow that depending on how things go internationally. But we should see a stable top-line. And then as we've talked about, we expect bottom-line as well to stay stable.

Some uncertainty on top-line with sequestration, but our commitment is that bottom-line margins stay healthy and stable regardless of what happens to top-line.

Rob Spingarn - Credit Suisse

Okay. Do we have any questions in the room? Okay. This is maybe an odd. When you talk about some of those line items going after 2016, 2018, ‘19 in the F-15 for example, what you’ve got there? And given what's happening with Ray Conner steam out in with the 777x, is there a natural opportunity? Missouri is one the states that's in the hunt for this airplane; is there a natural opportunity to shift work force in St. Louis?

Dennis Muilenburg

Yeah. And I would say arguably, there is natural opportunity across our enterprise. So, I want to comment specifically on 77x since we’re in the middle of a site competition. And as you know, more even a dozen states are involved in that deliberate process right now, Missouri being one of those.

You will note though, over the last several years, we’ve shown the ability to move work packages where we have work force. So we are today doing engineering work packages to support commercial airplanes doing those work packages in Philadelphia, Huntsville, St. Louis. And as already announced publically 777x engineering work packages will be executed in those three sites as well. So that's a way of sharing talent and technology.

We have a lot of personnel, defense personnel that moved up to the Charleston factory help build 787. We're doing change in corporation on commercial airplanes at our San Antonia mod facility. So, our ability to move talent, technology, share facilities, resources as commercial airplanes ramps up, our ability to flexibly use the whole enterprise, is an important part of how we manage the company.

And Jim and Ray and I spend a lot of time on how do we make best use of the whole enterprise resource. And that's part of that one Boeing philosophy. And I do think that differentiates Boeing in a tough environment.

Rob Spingarn - Credit Suisse

I want to go back to something you said about the carrier fleet and the F-18 being two-thirds of the tails there, [TACAIR] 2035. When your guys do the math on the existing fleet production rates and to that outcome, what's the new build opportunity in there?

Dennis Muilenburg

Well, that's going to be ultimately decision that our U.S. Navy customers going to have to make. Some of it also touches over to our Marine Corp customers like Classic Hornets today. So if you look at the work to extend the Classic Hornets to slip and extend the current fleet, the phasing of Super Hornet ramped in additional Growlers, as you’ve probably seen the 24 Growlers in the fiscal year ‘14 budget request.

All of that time phasing, it's something our customers will have to ultimately decide. But if you look at fleet structure, we anticipate an 11 carrier fleet for the long run. And you're going to have aircraft that will be rolling off out of the current fleet that need to be replaced. Some of those we replaced with F-35 and some of those to be replaced with Supers and Growlers. And I think our customers seize an operational advantage by having a combination of those assets.

There are some missions where an F-35 is going to be a better more suitable airplane. There are other missions where Super Hornet or a Growler is a preferred airplane. And most of the analysis that's out there says those fleets in combination are much better than a single tail kid of fleet. And I think that’s the right kind of investment opportunity.

Rob Spingarn - Credit Suisse

In that vein with Growlers and Super Hornets in the installed fleet that you are going to now have here for the next 20, 30 years we are talking about, if we talk about the sustainment business, how that’s trending, what your opportunities are both on your own aircraft and on others and what the risks are with some of the -- pairing back that we have seen from DoD lately.

Dennis Muilenburg

Yeah, our Global Services & Support segment continues to be one of the strongest segment. So as you saw, about a quarter of our business, top-line is incrementally growing, relatively flat in this environment as you would expect, bottom-line very healthy, it’s one of our best performing businesses in terms of bottom-line margin, a much of that is driven by the fact that our international customers are seeking long-term support solutions. And when we can put in place those long-term solutions, they are getting better availability, better affordability, and it’s better business for Boeing because we can do long-term supply chain planning. That’s a trend that we expect to continue to see in that business.

Some top-line pressure there as we look at sequestration. And so you heard from our customers talking about readiness impacts, forward structure impacts, we see that reflect in our business as spares inventories start to dwindle and come down; as readiness goes, it does play into our business that creates some pressure on the upside, again international expansion. And most of our international customers are pursuing these performance based logistic structures that are again good business for us and good business for them.

Much of that is on Boeing OEM platforms as you right pointed out, but we are also expanding into non-Boeing platforms, have some good progress there on things like A-10 reviewing program, where we just signed a contract for additional 56 wing sets for the U.S. Air Force. We are also modifying the F-16 to be the QF-16, the dwelling replacement for the QF-4 just wrapping up that development that will move into production. So, we are also working mods and upgrades to non-Boeing aircraft in addition to our core OEM business.

So, going forward, I still see that core OEM business is being that the primary driver of the business and in particular performance based logistics and training.

Rob Spingarn - Credit Suisse

Okay. Tony, in the corner.

Unidentified Speaker

Yeah, Tony.

Unidentified Analyst

Dennis, a short while ago, we heard General Davis basically encouraging industry to push back in contract negotiations and to offer up alternative -- alternatives to what aspects maybe, the customer maybe calling for. Can you relate to that message and is that something that BDS is pushing down to its negotiators?

Dennis Muilenburg

Yeah, Tony, it is. And I [applaud] General Davis and our Air Force customer, frankly our whole DoD customer set is -- that is really the mindset right now. And why do we drive affordability, let’s have robust discussions upfront on requirements, let’s make sure they’re really well understood, where requirements drive cost, let’s make sure those cost drivers are known, and then arrive at a neutrally affordable set of requirements and lock it down and don’t change it.

And I think you heard that from General Davis really in fact I think I still see him sitting back here on tanker, right?

We went -- we had a really good robust discussion on requirements, understanding the requirements and locking them down. And we are well into the development program now. We just completed critical design review, we got first three airplanes in build and we have received zero class 1 contract changes in the Air Force, no requirement changes, right. So that's a different world. And what that does is it ensures our customers going to get what he needs, in terms of mission capability and it provides stability for our team and supply chain, so we can execute and deliver on cost and schedule.

So I think tanker is a good model for that philosophy, and we’re seeing that same kind of dialogue happening now on future programs.

Rob Spingarn - Credit Suisse

We have one up here.

Unidentified Analyst

I just have a question on the cost savings. The $4 billion, as you mentioned you achieved to date, I am curious if you could give us some sense of a portion that’s more structural saving versus more cyclical. And as you think forward in terms of additional cost savings, is the mix between structural and cyclical savings change at all? And I ask this in the context of if we get a different scenario in sequestration versus the baseline assumption, should we assume sort of a linear trend line between your top-line and then the cost savings you may not pursue at the function of the sequestration not being as severe?

Dennis Muilenburg

So the answer to first part of your question is primarily structural, right. What we’re looking for is long-term structural cost change, so overhead structures, process improvements, facility closures, supply chain engagement. Difficult for me to give you percentage but it’s the large majority of those 4 billion of savings or structural savings. Some you can put in a cyclical category, when it comes to direct cost employment trends, right. If we see particular programs ramp up or down, we might need some additional direct engineering to execute those programs. And that could vary depending on program level outcomes from sequestration. But our real focus is on structural cost reduction that can be sustained for the long run. And that gives us confidence to your second question that regardless of how top-line varies as sequester impacts roll down, long term cost structure changes give us confidence on being able to hold margins. And that's again something where we want to be in balance between holding and growing margins and holding and growing R&D.

And I think we've got that balance just about right but by focusing on long term structural change, give the ability to actually plan it that way.

Unidentified Analyst

And the other question, it says my interpretation (inaudible) by and get this right. But there are some slots in the order book F-18 come 2016 and beyond. And question I have is based on sort of typical timing, when we do have secure orders to ensure that those slots are filled and if not then you’re really going to fill the production cost.

Dennis Muilenburg

Typically on most of our airplane production programs, you see one and half to two year kind of lead times. So it's important that during the next year, we get some decisions around F-18. Again weight points here will be what comes out of the final fiscal year ‘14 budget solution and the 24 Growlers that are in that budget line, in the proposed budget line, outcome for the fiscal year ‘15 budget; international competitions, several of those that I mentioned could get decided here in the next year. But generally, we kind of look out about year and half to two years in terms of long lead one day.

Rob Spingarn - Credit Suisse

And just quickly on the $4 billion, on that topic, how much of that -- a lot of that was internal but how much of it goes into the make or buy decision, how much of that is shifted into the supply chain?

Dennis Muilenburg

Of the $4 billion we've taken out so far, the majority of that has been internal, as you pointed out. A fair percentage of it has to come from our partnering for success initiative that we launched a little over a year ago. But we expect that to be the next wave of cost savings in addition to the $4 billion. Now we're going to continue to work internal cost structure as we should. But we have a lot more of the partnering for success work ahead of us that we have behind us. And that’s what you will see in the next wave of cost reduction. And again, we want to do that in a way that’s good for Boeing and good for our supply business.

Rob Spingarn - Credit Suisse

Two more quick ones, first just briefly on LRS, I know there is not a lot you can say since really last quarter, since you were here last quarter now we know about your teaming arrangement, if you can speak to that a little bit and the reasons behind that? And then I have a high level separate question.

Dennis Muilenburg

Yeah. Well, as you pointed out, I can’t say too much about right, so we did announce that we have teamed with Lockheed to pursue long range strike. We feel positive about that arrangement. And we are very focused again on how do we deliver capability to the U.S. Air Force customer, how do we leverage the investments they have already made and are making and a commitment to deliver that on a very aggressive affordability target, if we do it on schedule. And we think we understand how to do that, how to bring advance capability in on cost and schedule. And that’s what we are going to do. And it’s very important program to Boeing as it is to our Lockheed Martin team mates. We know it’s important to the Air Force, so we’ll deal with that level of seriousness.

Rob Spingarn - Credit Suisse

Okay. And as a final question, this is high level and may seem like an odd thing to ask about in this budget environment, but I wanted to ask about 6th Gen. So, we know, we’ve all focused very closely on 5th Gen [TACAIR] for a while here, we know who has got it, big debate on how many will get built. And so good to have -- it could be a long program, maybe numbers differ. Does this give you the opportunity to get a leg up on 6th Gen for when it eventually happens? That’s part one, while the other guys focusing on whose production program and one of the other guys I should say. And to what extent should we think about manned versus unmanned on 6th Gen or some kind of mix?

Dennis Muilenburg

Well, first Rob, I would just say the generation terminology, I think can kind of confuse the dialogue here. And I know fifth generation terminology been a popular way to describe the current state and it’s a fair descriptor. But and frankly, I think it leaves us a little short in terms of how we develop airplanes and inject technology. We don’t do things in generations, we don’t wait 10, 20 years to inject the next technology cycle. So as we think about the future and what is beyond F-35, we think the next wave is where we go with, I will say broader stealth capability, and you have a stealthy airplane that’s also high performance airplane and look more broadly to the electromagnetic spectrum. So, it’s electronic warfare, electronic attack.

It maybe doesn’t come across this way but the Growler and we know that it has an underlying F-18 air frame, the electronics on the Growler are the newest electronics on the block. That was a development program that we started 2006, 2007 timeframe is now delivered and operational. That is the most current electronic warfare technology in the portfolio.

So when you think about sixth gen, if you want to use that terminology, I would suggest instead we think about how do we rapidly inject technology on a more consistent basis, how do we keep our forces on the leading edge of technology in a way that manages cost and schedule, get rid of concurrency and long-term programs, focus more on manageable technology that’s on the leading edge delivered on cost and schedule. So that is what we are thinking about, that is what we’re driving into advanced Super Hornet, Growler advanced F-15 and for some customers, that is the right answer. It’s what we are driving into things like long range strike and what might happen after F-35 on the [TACAIR] side, and it’s what we are driving into our unmanned product lines including things like UCLASS.

And I think that kind of idea of designing an open architecture, platforms with growth, reliable technology injunction that's always current and be able to deliver it on cost and schedule. That's the business model for the future.

Rob Spingarn - Credit Suisse

With that I’d like to thank you all for being here. We appreciate your time.

Dennis Muilenburg

All right. Thanks Rob. I appreciate it. Thank you.

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