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The Boeing Company (NYSE:BA)

Cowen & Company 35th Annual Aerospace/Defense & Transportation Conference Call

February 05, 2014 01:20 PM ET

Executives

Jim McNerney - Chairman and CEO

Analysts

Cai von Rumohr - Cowen & Company

[No presentation session for this event]

Question-and-Answer Session

Cai von Rumohr - Cowen & Company

Okay. If I can have your attention we are going to move on with our program and we are delighted to have Chairman, CEO of Boeing Jim McNerney, Jim welcome.

Jim McNerney

Thanks Cai.

Cai von Rumohr - Cowen & Company

So you just reported your quarter. Give us some flavor I think of commercial demand, but maybe give us a little more color on what are you seeing pricing trends by product and geography?

Jim McNerney

Well overall, good morning, good afternoon everybody. Overall demand is strong as you know Cai and it’s more than I have ever seen in my tenure in this industry, much more driven by replacement demand. In other words new technology replacing old technology as opposed to just demand for growth and that’s because the airplanes are being offered now are much, much more efficient offer much more compelling economics. And that’s what produces the strong backlogs that you are looking at. And that kind of demand tends to support price pretty reasonably because you are offering compelling economics to a customer so there is some room to share some of the benefit.

Now that doesn't mean, we don't have a competitor or two who doesn't compete like crazy on every deal which erode some of that. But I would say that prices holding more firmly across the board, because of that replacement dynamic.

Cai von Rumohr - Cowen & Company

Got it. And so what are you seeing think by geographies, I mean geography is stronger, weaker?

Jim McNerney

Well, it's hard not to sit your post Dubai and say the Middle East is ordering a lot of airplanes.

Cai von Rumohr - Cowen & Company

Right.

Jim McNerney

I mean the Middle East is extraordinary. And again it's the newer models, it's the Dubai airshows all about the 777X, where we sold 259. I mean it's incredible launch.

China. Despite all the discussion about China, as the China story over hasn't changed it is as strong as ever. We're continuing to see strong demand in China. And so, I would say Middle East and China for sure automated the other parts of Middle East, Qatar and Saudi also strong. So I think it's Middle East and Asia story, U.S. improving slightly. I would say U.S. improving slightly, Europe still to come.

Cai von Rumohr - Cowen & Company

And in terms of product?

Jim McNerney

Well, it's hard not to look at the narrow-body backlog that we and Airbus had and not say that narrow-body airplanes are in great demand. I mean there is huge backlogs. But again, I think it's characterized it more across the board than it is and it's driven by new technology. I mean the wide body order book has increased significantly driven by 787, some models of the A350 and then now there are 777X. So to me it’s more characterizes and across the board phenomenon than any dramatic difference selectively.

Cai von Rumohr - Cowen & Company

Okay. And we read in the paper about all the problems and the signs of distress in the emerging markets. Are you seeing anything in your business that kind of…

Jim McNerney

We’re seeing anything today. I mean, I think the -- and there is really two categories of emerging markets. There is emerging markets who have some very strong fundamentals, I mean, I think the parts of the Middle East and China are a little different than Venezuela and Argentina. And so we are still seeing more request to move deliveries in then to push them out, which is not to say that some currency blow up could have an impact somewhere along the line. Russia, which tends to, sometime it catches this flu, it remains strong and the demand is strong and no pertivations around change in skyline. Russia might be sort of in the middle kind of case.

Cai von Rumohr - Cowen & Company

So we’re going into the Singapore Air Show I think in mid to late March.

Jim McNerney

Yeah.

Cai von Rumohr - Cowen & Company

Any chance we could see some more announcements there?

Jim McNerney

Cai, you know I can’t talk about that, that’s our customers that can talk about that. There are no orders left after Dubai by the way. So, no I think I was saying to a couple of your attendees earlier today that Dubai, just had a show that ordered five times the number of airplanes as Paris and [London] combined the last two years. So there is a little bit of the shift going on. And I also pointed out that the limos and hotels are better in Paris, but the order book is better in Dubai.

And I think you will see some orders in the Singapore. I don’t think it will be anywhere near the magnitude of what you saw in Dubai, but that is up to customers not up to us. We are obviously in discussion with folks.

Cai von Rumohr - Cowen & Company

Okay. And I mean, I think you mentioned on the call this time, of the existing 777 in the market.

Jim McNerney

Yeah.

Cai von Rumohr - Cowen & Company

But what kind of impact has the 777X had on demand for the 777 and kind of you talked a little bit about, you feel reasonably comfortable, you can kind of sell the bridge to the X, maybe talk a little bit about that?

Jim McNerney

I think, I feel very comfortable actually. I mean in the course of three years, we feel an analogist bridge on the 37 okay. We’ve got ten years to fill the 777 bridge and when you just look at the actual statistics within our company, half of that bridge it can be accounted for with current proposed acceptance or options that are already in place. The other half we are proposing on as we speak.

So and like the 737 most of our customers keep both models, okay. It’s not a matter of one class of customer wants the new airplane and another class of customer wants the old one. The economics are compelling enough that they want the blend and they need the lift within this ten year period that they will take a blend.

So I am highly confident to be honest with you, Cai. I don’t see that as a significant risk to our company.

Cai von Rumohr - Cowen & Company

And then we haven’t talked about 747-A. I mean cargo looks like it might be picking up.

Jim McNerney

There are signs of life? Yeah. I think cargo is picking up and it’s picking up in the area that the 747 Dash 8 is applicable because the large cargo segment is recovering a little quicker than the express side, which uses belly cargo or uses some smaller more flexible planes but the big stuff is recovering a little faster and that bodes well for the Dash 8, there is only one airplane that handles the big cargo and that's 747, the front loader, and everything in that, the 747 Dash 8.

So it remains a niche airplane for us, but I think cargo is the thing that will keep it going for a long time on top of a good group of intercontinental folks too.

Cai von Rumohr - Cowen & Company

Aircraft financing looks...

Jim McNerney

I think the trends that we see ECA financing or exempt type financing from our country now those down a little bit, capital markets up a little bit, bank financing holding steady. But I think it reflects a world that has a fair amount of liquidity in it. I mean as -- and we all know why. And this liquidity is following to the most attractive assets out there, which are standardized, movable, and have tree around taken a (inaudible) if people don’t pay us, so pretty attractive asset class. So we are not seeing any difficulties really in getting airplanes from (inaudible).

Cai von Rumohr - Cowen & Company

So commercial after market services not been huge, I mean it was a 12%, 15% of BCA’s volume. Is that showing any signs of life?

Jim McNerney

I think yes. As a matter of fact there is some toward the end of the year, we began to see some pulse there. And part of it is we’ve been selling a lot of these new airplanes and they are just entering the cycle of meeting some replacement parts and services. And so I think we’ll see a return to a more normal cycle over the next year or two.

Cai von Rumohr - Cowen & Company

Got it. So talk to us about 787, how is that doing I think the only delivery, what, four in January, there have been worries about Charleston how is that all going?

Jim McNerney

Yeah. The 787 is going well quite frankly. We broke the 10 a month in our factory in December. We broke the 10 a month in our supply base a couple of months before that. So and now we are delivering at 10 a month. I did notice and there were some questions from some of your attendees and other industries I went into and analysts that this adding people down in Charleston over the last couple of days to address the bottleneck we have in the mid-body assembly area which I view as not any sign of the 787 program is off the rail so we may not be able to hold 10 a month. This is what we do all the time, which is to find bottlenecks and attack on and pick some. And we have a bottleneck now as the mid-body is the part of the airplane that is most different between the Dash 8 and Dash 9 and as we are feathering the two together we ran into a production snag which were and we’ve traveled some work to Everett. And but this is something that Ray Conner and his team know how to fix. This is not about a development program struggling. You have had those struggles. Now we're in the production.

Cai von Rumohr - Cowen & Company

So, if the traveled work issues starting to obey the trials and are we kind of still in the middle of…..

Jim McNerney

Yeah. We have just traveled -- the first of the travel work is just getting to with now.

Cai von Rumohr - Cowen & Company

Okay.

Jim McNerney

And what is typical in these cases and I don't know the every detail of this case, but what’s typical on these cases, there will be a number of traveled work jobs that we just abate with every unit over the next n number of months and it will gradually go away and as we fix the problem. This is what happens on all of our programs 737, 777, 767, sometimes when we breakthrough rate, it surpluses an issue that needs some extra attention. And that's really the story here, it's nothing beyond that.

Cai von Rumohr - Cowen & Company

Okay. The so you delivered the four in January is that a meaningful or is that just customer requirement, because there are not…

Jim McNerney

It tends to be more customers’ acceptance as opposed to -- because you have noticed that you have commented Cai on the fact we have a few planes in inventory.

Cai von Rumohr - Cowen & Company

Right.

Jim McNerney

So, sometimes those planes are waiting. Quite frankly, it's more a story of us having produce them, waiting for customers, waiting for the FAA and the customers to get through the certification process. It's -- usually I don't know the story of each of those four airplanes, but that's more often the story today than a story you would have heard a year or two ago, which is, Geez, we are struggling with keeping up with production, we've got a supply chain problem in x country, why supplier isn't delivering. Those issues, we don't it tends to be more after we’ve produced them just finish with customers, getting the final deal done.

Cai von Rumohr - Cowen & Company

You are at 10 a month in December. But I think one of the things you said is that for the Dash 9, there’ve been blanks, which means you have 10 month but you’re not really a 10 a month, when do you think it would be like a full straight 10 a month…

Jim McNerney

This year.

Cai von Rumohr - Cowen & Company

2005 the middle of the year or early on?

Jim McNerney

No, no about now.

Cai von Rumohr - Cowen & Company

Okay.

Jim McNerney

Okay. So, the blanks that we talked about last year that was feathering in the final assembly of the Dash 9 with the Dash 8 and we’re largely through that process. So, we’re now at 10 a month and….

Cai von Rumohr - Cowen & Company

So, what the delivery guide is a 110 and you’re going to do 5 or so out of change in corp, so it’s only 105. So is that a conservative number or that just gives …..

Jim McNerney

We try to give you numbers that we can do.

Cai von Rumohr - Cowen & Company

Okay. That’s good. And so partner for success.

Jim McNerney

Yes.

Cai von Rumohr - Cowen & Company

What percent of your suppliers have signed up and how are you doing on that?

Jim McNerney

Well, it’s, as you can imagine it’s a program that where roughly a third of the folks have signed up and are working with us, another third there is some discussion going on that in my opinion will produce a result. And then there is a third that in some cases helped this all goes away.

But I would largely say that most of our discussions are constructive and the reason they are, is that Boeing does represent for them the biggest volume opportunity they’ve got, okay. And I sort of link and I’m half kidding when I say don’t bet against us, but on the other hand I am half serious. We have by far in my opinion the biggest volume opportunity in the aerospace business over the next 10 or 15 years. And I think, my deal with a lot of these folks is listen, you can lock in volume with us that’s greater than you have today and as we grow share, get some vigorous, even beyond that or we can sit here at loggerheads and someone else may have that opportunity.

So it’s -- but by and large, we are having very constructive discussions. And it’s a two way street. We have volume to offer and they have efficiency they can offer, if they drive their operations as hard as I drive mine.

Cai von Rumohr - Cowen & Company

And I think in the past, some of them have complained that you don’t accept value engineering proposals, are you accepting more…

Jim McNerney

I think that’s a fair criticism, because if we’re going to be -- if we’re going to demand a lot from them, we have to be willing to put some skin in the game to help them reengineer processes. And we are trying to do a better job of that. I think that’s a -- hopefully that will not be a fair criticism a year from now.

Cai von Rumohr - Cowen & Company

Okay, so you are really trying to…

Jim McNerney

We are trying, we are allocating people, we’re giving them projects, making those projects as important as designing a flap on a wing…

Cai von Rumohr - Cowen & Company

Got it.

Jim McNerney

Which hasn’t always existed that way in our culture.

Cai von Rumohr - Cowen & Company

So, it sounds like 787 is doing better. How comfortable are you? I mean because in the third quarter you went from 20 to 25 probably on the deferred.

Jim McNerney

Yeah.

Cai von Rumohr - Cowen & Company

Everyone noticed that. So how comfortable are you as that 25 is the number and when do you feel you will be at the point to say like we really…

Jim McNerney

Well, I feel very comfortable, Cai. I mean I think the -- remember where we are in the program. We just got the 10, which was as you recall a year and half ago, that was going to be the tipping over.

Cai von Rumohr - Cowen & Company

Absolutely.

Jim McNerney

But then with our backlog just so robust and demand so strong and a new model being as what I’ve said, we decided to invest some more money to get the 12, to get the 10, the Dash 10 and then to get the 14 and that’s what you’re seeing.

Cai von Rumohr - Cowen & Company

Okay.

Jim McNerney

Now that that’s -- and these are very low risk investments. I mean this is adding a station in a final production line in Charleston. It is tooling for the Dash 10 which is simply adding a 20 foot suction to the airplane. It is very low. So my point is that these costs that are in that estimate, the $25 million are very predictable as it goes in our business. I mean massive new developments; these are fit and finish investments and extremely attractive economic opportunity. I mean we’re now able to pull in the backlog a little bit so we can off our positions and we’ve got a totally new airplane the Dash 10 which could end up in the opinion of some being the best selling airplane in the entire family, all for a very small investment that we’re making now.

Cai von Rumohr - Cowen & Company

So, it still looks like about the end of this year is when you get to the 25?

Jim McNerney

Well, I think that’s what we said.

Cai von Rumohr - Cowen & Company

Right.

Jim McNerney

And I think end of this year, beginning of next year and I have no elaboration. But if you’re asking me, am I confident in that, my answer is I am.

Cai von Rumohr - Cowen & Company

Got it. So you’ve announced the first delivery of the 787-10 in 2018, I mean what would it take, I mean if you to do it earlier I mean is that something…

Jim McNerney

The Dash 10?

Cai von Rumohr - Cowen & Company

The Dash 10.

Jim McNerney

Well look, we’ve launched it on that timing, so it’ll be a little disingenuous to move it in too much. But look, both the MAX and the Dash 10, the bias in our schedules is to move the -- is that they move to the left. Okay? You saw us move the MAX to the left. And we did in fact get religion from the 787 development experience. And our programs are a lot more disciplined, there is a lot more vigor put into thoughts around schedule and we are not trying to do as much. We are trying to harvest things as opposed to create something all new at this stage. And fortunately we are in a position where we a technological lead that harvesting a lot of stuff that we -- the hard for our gains as the 787 technology, we can now flow in a low risk kind of way. And so we are about to determine not only to do them on-time, on schedule but maybe even a little better than schedule. So it’s possible but we have no predictions.

Cai von Rumohr - Cowen & Company

How is the MAX doing?

Jim McNerney

MAX doing very well.

Cai von Rumohr - Cowen & Company

On schedule, you’re comfortable?

Jim McNerney

The schedule is good, the performance of the airplane is a little better than we thought. And versus our competition, it retains the margin that we had NG versus the A330 which are the important numbers. But the development is going well and obviously the long pole and that is the engine. And the benchmark in the GE guys looks very good. And as I mentioned before, six months ago or so, we actually moved the program to left in terms of delivery. So that speaks to some of the confidence that we’ve got.

Cai von Rumohr - Cowen & Company

So 777X, you have launched it, how should we think about the general profile of your investments in R&D and when you are going to pick the suppliers?

Jim McNerney

Well, we’re in the process of picking suppliers now and that’s embedded in our partnering for success program Cai, as you see. I mean you know this echo system well enough to see some of that. And the R&D profile, we are never going to go back as long as I'm around to the days of big anthills of R&D stacked on top of each other. Matter of fact, a lot of the scheduling, the timing of the Dash 10 that you asked about, the timing of the MAX, the 777 out beyond that is mindful of managing R&D risk, okay? In other words, we need -- we never want to be in a position where we need the same engineer for both the 747-8 development and as 787-8 development which is what we ran into as you recall.

And so, we're very mindful of managing that risk as well as the overall risk of developing the airplane technically. And so, I think it's characterized by never going back to that high watermark or anywhere near it. And it's characterized more by sort of a steady stream of R&D investment as it doesn't changes dramatically as opposed to waxing and waning peaks and valleys.

Cai von Rumohr - Cowen & Company

Got it. So, I guess one client came up to me and he said well maybe ask Jim that I guess Puget Sound paper had some comment that the workers were kind of doing a work slowdown or something. Are you seeing -- is that -- that's nothing I've heard about before?

Jim McNerney

No, I mean there is as I’ve said and answered to questions like this before, we've had some tensions with our workforce out there. We now have this unbelievable 10 year opportunity now where -- in a strike, when we have a strike for 6 weeks…

Cai von Rumohr - Cowen & Company

No, no I’ve got that.

Jim McNerney

It cost us a couple of billion dollars, okay.

Cai von Rumohr - Cowen & Company

Yes, now I got that.

Jim McNerney

Okay. So, if you we want cash, don't have a strike okay, which is what we've got for the next 10 years. And, but look, there are still some hard feelings. I don't know of this quote you talked about. But I think like we always have before, we’re going to get through this. The teams will come together. And I think it’s going to be more characterized by a cooperative environment between the union and management as opposed to a not cooperative environment. And so I am feeling good about it.

Cai von Rumohr - Cowen & Company

So, I guess you’ve observed that your margins tend to peak out at 10% and we have all the suppliers who use your IP who are 15% to 22%. So you have -- I mean you’d like to improve the profitability, is that realistic?

Jim McNerney

Yes. I mean look, we want healthy suppliers, because they add a tremendous amount of value to our company. Having said that, Cai, and my sense is this is where you’re going, the relationship between risk and reward I think is out of kilter in some places. We’re taking more risk for less reward and since I have volume to trade for that because we’re taking share everywhere, that’s the deal. And so yes, I think there is upside to that margin in part because of partnering for success, in part because our products, we now have an incredibly strong product line versus our competition, particularly in wide bodies. And so there is a real business opportunity to drive volume.

Cai von Rumohr - Cowen & Company

So, I mean it looks to me that if you look kind of at your business versus history, for the first time we have stable, moderate volume gains, we have a maturing mix, we have a headcount that’s stable to declining, as you said we won’t have, we had five IAM strikes since 1977, all of them really disruptive. It looks like better than it’s ever looked. How do you feel about productivity and the potential for margins?

Jim McNerney

Well, I think -- look, I think margin expansion will be driven by our partnering for success and our own productivity, there are some in the wide body area some customization opportunities on pricing as well, okay. But price is something you should go get and not always depend on. Productivity is something you should depend on when you’re running a company, okay? And that’s we are really focused on, our productivity and our suppliers’ productivity.

And in the stable environment where we’re not taking big risk on development programs, the MAX program is beyond the risky part of that in my opinion. The Dash 10 is a low risk program. The 777X has -- this will be the fourth time we’ve done a composite wing, so we know how to do composite wings now. And so, we’ve got this opportunity, low risk development, so we won’t have big surprises there. We are on the frontage of partnering for success with our suppliers and we have always driven internal productivity and in the most stable environment we get more of it.

Cai von Rumohr - Cowen & Company

Got it.

Jim McNerney

We get more of it. It’s this disruptions in reengineering which just kills still productivity drive. So I see upside to the current margins we have got and I think Ray does too.

Cai von Rumohr - Cowen & Company

Terrific. So turning to defense, we got this budget agreement fiscal ‘15 request should be coming. What does all that mean for your business?

Jim McNerney

Well, the big picture is sequestration was avoided for two years, okay? Sequestration has not gone away, all right? Sequestration is basically a flattening out of the defense budget. But -- so for the next two years, there is sort of a lifeline thrown to the industry. We did well with that extra money that was part of the Murray-Ryan deal.

Now, we’ll have another checkpoint as you get to the end of next year. So do you go back to sequestration or is there another sort of moderating deal between Republicans and Democratic? I can’t predict that. So what do you have to assume when you run a defense business is that it’s going to be the worst case and get your cost in line, which we’ve been aggressively working, which is, don’t take too much risk on new programs, because in this kind of budget environment they’re not going to survive so your focus on keeping your old ones alive and delivering on time and cost effective. And you assume that you’re going to have a flattish business with some upside in international sales which we’ve proven we can do. And so upside international sales, assume downside with the way you manage your costs, and deliver on your programs and don’t take more risks than you have to on new programs, and get the Tanker done.

Cai von Rumohr - Cowen & Company

Right. As you look at this year, next year; what are the key new business capture objectives you have?

Jim McNerney

Well, there will be -- you’re on the defense side, right?

Cai von Rumohr - Cowen & Company

Right.

Jim McNerney

Yeah. We’re in good shape obviously. There is going to be really four big ones in our aerospace side of defense, two of which we’ve already won, Tanker and then SLS, the new launch system; the Mars and beyond, the big one, the biggest launch system ever done.

The two that are hanging out there are the carrier-based unmanned, UCLASS, so called UCLASS. And then there will likely be a competition for long range strike, which will be a new bomber type vehicle. And those -- and then there will be a trainer, which is a smaller business opportunity. But there is really many, many [fuel] programs, we’ve already won two of the big ones and so we need to win another two and we are going after it.

Cai von Rumohr - Cowen & Company

Got it. So we have Andrew Shapiro here who used to be probably now at State, negotiated the Saudi deal kind of talking about it’s a riskier business, but the big guys like Boeing kind of know international and that there is really a lot of potential sales out there. Talk to us about some of the potentials there, how big is it, how big can it be as a percentage?

Jim McNerney

Well, it’s about -- it’s almost 40% -- well, it’s probably about 32% of our backlog I forgot the

Cai von Rumohr - Cowen & Company

37% of the backlog…

Jim McNerney

Yeah. And it can be a little higher, Cai to be honest with you. The real strengths internationally that the Boeing Company has first and foremost, because we are the biggest company in aerospace, we have a lot of industrial cooperation and technology arrangements in all countries around the world and those are leverageable. Many of them are on the commercial side and those are all leverageable when you get into a country in a competition. That’s a big advantage.

The other thing is just the investment we have in people, the company-to-country relationship. But Hilos, Apaches and Chinooks fighters, particularly in the Middle East, Qatar, UAE, you saw that UAE is going to re-compete, they couldn't reach near the Europeans. And so there is some fighter competitions ongoing around the world.

C-17 remains an opportunity. Even though we've announced that we’ll be closing the line in a couple of years, there is still -- we saw the opportunity to serve that market. And so there is some big, there are some satellites.

Cai von Rumohr - Cowen & Company

So, one of the things you mentioned….

Jim McNerney

40% is not a crazy number.

Cai von Rumohr - Cowen & Company

One of things you mentioned was Asia and Maritime Security that it defined including surveillance. Do you see a lot of potential for the P-8s?

Jim McNerney

Yes, I do. I should have mentioned that, Cai. Thanks for reminding me. I mean P-8s have already been sold to India. There is a couple of other countries where lots of water around them out there, just to leave it with that that are interested in this machine. So, it's P-8 is a big opportunity.

Cai von Rumohr - Cowen & Company

Your margins are 9% to 10%, could those move up?

Jim McNerney

I think we are planning a flattish business up a little because of the international. We have an internal plan to improve margins. But it's a tough business, it's a tough business. Whether we ever guide to that, we'll have to see.

Cai von Rumohr - Cowen & Company

Got it. So your free cash flow guide, $3.7 billion, you did a little over $6 billion last year was lower than most of us expected. Could you provide maybe some more color on the year-to-year decline? And what will it take to get a healthy rebound in 2015, ‘16?

Jim McNerney

Yeah, I mean I think there were some one-time things that Greg talked about and I don't remember the numbers precisely. So, I'm not going to try to. There were some things that hurt the year-over-year comparison. That really don’t go to the [heart] of your question. I mean I think it gets back to the discussion we’re having before. Here is the scorecard. This year we’re taking upgrade on the 737. We will have that for half year this year and for full year next year.

I view this deferred production balance on the 87. This guidance we gave you, which really portrays a very -- sort of flattening out in ‘15 if you do the math and then a drop, pretty good one starting in ‘16. I think if that configuration holds, plus the 37 we’re going up on rate on the 67 as well. I think if that configuration holds, year-over-year cash has to improve.

Cai von Rumohr - Cowen & Company

Moving forward?

Jim McNerney

Yeah.

Cai von Rumohr - Cowen & Company

Got it. And so maybe give us a little more color on the relative priorities for cash deployment among stock repurchase dividends M&A?

Jim McNerney

Well I think, listen I know my answer always frustrates the hell out of everybody in this room, but, I mean why we think about it is, we grow this company organically. We don’t grow this company through acquisition, we do bolt-on. We refuse to do acquisitions that only demonstrate our inability to grow ourselves. So, organic growth and investment and pursuit of that is by far the number one priority.

The number two priority is everybody in this room and as you’ve seen a pretty balanced approach we took up the dividend 50%, we’ve announced a larger buyback program. You will see -- we intent to aggressively implement both those programs. And then after that bolt-on small acquisitions that make our ability to grow ourselves organically just sort of enhance it, makes sense. That’s the way we think about it.

Cai von Rumohr - Cowen & Company

So it looks like, you look at your company one of the opportunities at some point will be higher profits on the 787. What will it take to get you at a point where you could raise that profit accrual rate and kind of interrupt? What’s the earliest timeframe…

Jim McNerney

Yeah, it’s improving today as we speak. I mean one of the negatives in 2014 in cash is that we are paying cash taxes on the 787. And I thought that there would have been loud cheering in this room when that actually came to test. So, it is gradually approving. We obviously have targets, partnering for success is a big part of that. Pricing for some forms of customization a big part of that and the Dash 10 is a big part of that. The Dash 9, Dash 10 mix is a real pricing opportunity for us which will improve margins.

So it’s a balance of price and productivity in the plan. And we have a pretty -- it will not surprise you to know that we are aggressively measuring it quarter-by-quarter going after margin approval on the program.

Cai von Rumohr - Cowen & Company

You mentioned customization opportunities?

Jim McNerney

Yes.

Cai von Rumohr - Cowen & Company

What’s that?

Jim McNerney

That’s delivering things of value to an airline or a customer that is beyond the base airplane, it’s still like we would sell a 737. 777 I should say. We may have left some opportunities on the table in terms of customizing interiors, customizing entertainment, seating environments.

Cai von Rumohr - Cowen & Company

What percent of the sales like....

Jim McNerney

Well, it’s in a tight margin business, it can make a difference.

Cai von Rumohr - Cowen & Company

I guess what I was asking is, what percent of let’s say the customers have models with -- is it like 10%, 20% or rough percentage?

Jim McNerney

Well, it’s more than we thought, and here is why. There are lot of the folks who operate 777s are also buying 787s, and that's the game they play. I mean you look at Qatar, you look at Emirates, you even look at some of the European airlines who have tend to be the most [pardon] how they are having a respond to, Emirates, Qatar. And you are seeing a lot more attention to [internet] environments and flight entertainment environments the way things are decorated around the airplane and those things are pricing and margin opportunities for Boeing.

Cai von Rumohr - Cowen & Company

Interesting. So as you look this year, next year, what are the key opportunities, I always ask this.

Jim McNerney

Sure.

Cai von Rumohr - Cowen & Company

What are those key things that worry you most about?

Jim McNerney

Well I think, quite frankly the decade out in front of us, Cai looks more stable to me than any decade that I have done in this industry. So I think it’s more character for Boeing I am talking about. So it’s more characterize by a strong market stability in our production environments only executing derivatives, so not taking big development risk, which enables us to drive productivity and partnering for success on a more sustainable basis. And we've -- you’ve noticed we've made some leadership changes trying to get more people big leadership roles in our company.

And so, -- and the customers are accepting what we are doing. I mean the 259 777X is at the Dubai Airshow is not only a huge multiple of (inaudible) in Paris, but it is the biggest launch in aviation history even discounting for inflation or whatever you would want to do with that number to make it seem smaller.

Cai von Rumohr - Cowen & Company

And the risk side?

Jim McNerney

Well, on the risk side, look if the world blows up tomorrow, I mean there is some -- there is always the risk of that, but it’s I think a complete abandonment of a commitment to defense and security. I mean if sequestration are worse because the political environment produces an answer that says we want to change our role in the world. That I don’t think it’s a big risk, but it’s a risk. So that translates to as the market for defenses.

Now that’s why I want to assume a tough business environment so we have something any -- I mean close to that happens I don’t have a big gap in my plans I already got -- I am already conservatively positioned. That’s a risk.

I think the other risk I would have identified is production stability, labor stability, but I think we got that one addressed. That’s why that deal was so important both for our workers and for the company. That took a lot of risk, financial and customer delivery risk. And so, it gets down to a greater percentage of our risk being the ability to produce and deliver as opposed to create. And that's a better place to be.

And so I'm feeling, if you've been in this job for the last nine years, you've seen all kinds of risks, you’ve lived through them all and you'd rather be in this position than where I was nine years ago, believe me.

Cai von Rumohr - Cowen & Company

Absolutely. Thank you.

Jim McNerney

Thanks Cai. It's wonderful to see you to.

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Source: Boeing's CEO Presents at Cowen & Company 35th Annual Aerospace/Defense & Transportation Conference (Transcript)
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