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Boeing Co. (BA)

Q407 Earnings Call

January 30, 2008 10:30 am

Executives

Dave Dohnalek - Vice President of Investor Relations

Jim McNerney – Chairman, President, CEO

James A. Bell - Chief Financial Officer

Tom Downey - , SVP of Corporate Communications

Analysts

Steve Binder - Bear Stearns

Doug Harned – Sanford Bernstein

Howard Rubel - Jefferies & Co.

Robert Spingarn - Credit Suisse

Ronald Epstein, - Merrill Lynch

Cai von Rumohr - Cowen And Company

George Shapiro - Citigroup

Joe Campbell - Lehman Brothers

Robert Stallard - Banc Of America

Ivy Wood – Morgan Stanley

Troy Lahr - Stifel Nicolaus & Company, Inc.

Joseph Nadol - J.P. Morgan

David Strauss - UBS

Myles Walton – Oppenheimer and Company

James Gonzales - Bloomberg News

Julie Johnson - Chicago Tribune

Sebastian Svanki – Book Review (ph)

Lyn Munsford – Wall Street Journal

Operator

Welcome to the Boeing Company’s Fourth Quarter and 2007 Yearend Earnings Conference Call.

At this time for opening remarks and introductions, I am turning the call over to Mr. David Dohnalek, Vice President of Investor Relations for the Boeing Company. Mr. Dohnalek, please go ahead.

David Dohnalek

Good morning and welcome to Boeing’s Fourth Quarter and Full Year 2007 Earnings Call. I am Dave Dohnalek and with me today are Jim McNerney, Boeing’s Chairman, President and Chief Executive Officer and James Bell, Boeing’s Chief Financial Officer.

After the brief comments by Jim and James, we will take your questions and in the interest of time, we ask that you limit yourself to one question please. As always, we provide a detailed financial information in our press release issued earlier today and as a reminder, you can follow today’s broadcast and slide presentation through our website at boeing.com.

Before we begin, I need to remind you that any projections and goals we may include in our discussions this morning are likely to involve risks, which are detailed in our news release and in our various SEC filings and the forward-looking statement at the end of the web presentation. Now, I will turn the meeting over to Jim McNerney.

Jim McNerney

Let me begin with a few comments about our 2007 performance and then James will walk you through the details of our results. After that, I will say a few words about the road ahead and then we would be glad to take your questions.

2007 was a very good year for our financial performance at Boeing with our continuing focus on both growth and productivity, we achieved solid increases in revenue and another year of double digit growth in quarter earnings per share. We delivered a record year in many important measures including revenue, earnings, cash flow, total backlog and commercial airplane orders. We executed our existing production and services programs well meeting our commitments and providing valuable solutions to our customers. And all of these gives us a solid foundation for even better performance in 2008 and beyond.

To hit just a few of the highlights. Cash flow in 2007 went from strong to stronger reaching a record $9.6 billion and that is after investing in our growth programs and adding to our pension plans. Our total company backlog also grew robustly climbing to a record of $327 billion as of the end of December. Backlog growth was driven by our third consecutive record order year for our commercial airplanes business and by key defense program wins at IDS. In fact, IDS captured nine of the 11 major competitions that entered, an outstanding success rate in our industry. These wins included key orders for the tracking and data relay satellites, joint cargo, aircraft, AEWC in Korea and two important pieces of NASA’s Ares program.

Company wide productivity improvements helped us generate the cash to invest in our major growth areas such as the 787 and the 747-8. We also made progress on commercial derivative aircraft programs including the P8A Poseidon and the international tankers. These programs and others like them combine the best of our people and technology, the BCA and IDS teaming to provide the right solutions for our customers. I expect more growth to come from this area where we have a unique competitive advantage.

Among the most immediate opportunities of course is the US Air Force tanker program. While this program will not have a major impact on our near-term outlook, it is an important long-term program for us and our customer. We believe the KC767 is the best match for the Air Force’s requirement and that Boeing can uniquely deliver both the military and commercial expertise and teamwork to make it successful.

We expect our customer decision on the program this quarter.

During 2007, we also saw our commercial and government services businesses continue to grow at very attractive rates. We successfully integrated several services acquisitions during the year, which has accelerated the strong organic growth we are already delivering. We are now generating more than $10 billion of annual revenue in this area and at strong double digit operating margins. We think the services area will continue to provide very attractive growth opportunities for us.

During the year, we also further enhanced the value we provide to shareholders by increasing our dividend 14% and authorizing a new $7 billion share repurchase program. We see more potential to return capital through share repurchase and dividends as our financial performance gets even stronger.

While 2007 was a year of solid financial achievement, it was also a year where we faced some tough business challenges, most notably in our efforts to advance the 787 program into flight test and full production. Earlier this month, Scott Carson and Pat Shanahan briefed you on our new schedule for First Flight and First Delivery. While we are very disappointed about the impact our changes are having on our customers, we are committed to meeting these milestones and to establishing a flight test and delivery schedule that we and our partners can achieve.

As Pat and Scott said on the call, we expect to complete the assessments necessary to define the flight test program and delivery schedule by the end of the first quarter. We will share these details with you and provide our 2009 financial guidance when we report our first quarter results in April.

While James and I will be happy to take any additional questions you have on the 787, what Scott said earlier this month bears repeating. The fundamental technology of the 787 is sound. The challenge we face is resolving start up issues in our factory and in the supply chain as they relate to completing airplane number one in initial full rate production. We believe in both the business case and the technology of the 787 and we look forward to getting the airplane in the hands of our customers as soon as possible.

Despite the challenges we face on some of our development programs, the focus we maintain on improving productivity and driving growth enabled us to deliver a strong fourth quarter and a strong year and we see that momentum continuing as we move ahead. As James will explain in a few minutes, we have raised our earnings per share guidance for 2008 and we expect significant additional EPS growth for 2009.

On balance, we still see strong global economic growth along with our record backlog underpinning our continued success. Against the backdrop of some recent volatility in the US economic situation, it is important to note that only 11% of BCA’s $255 billion backlog is from airlines based in the US. The vast majority of our backlog is with the customers outside the US including fast-growing regions like Asia, the Pacific rim and the Middle East. Our backlog has never been more diversified by region, airplane type business model and customer. We have only modest exposure right now to airlines in the US where near-term economic growth is less certain. In fact, last year, less than 10% of BCA’s revenues and less than 5% of the Boeing Company’s total revenues came from airplane deliveries to US carriers. However, with high fuel prices and aging fleets, the US carriers who have not yet responded during this replacement cycle have an acute need to do so, and we expect them to order airplanes over the next couple of years.

Not withstanding some recent events in market volatility, we continue to forecast an extended commercial aerospace cycle driven by strong economic growth and solid traffic demand in much of the world. We currently expect airplane deliveries to remain robust at least into the early part of the next decade, but we do not see it now even if we encounter a more significant economic downturn in the future, I believe the industry is better positioned than in past cycles and Boeing is even better positioned within the industry to weather any storms.

Turning to the defense side. IDS continues to provide a solid foundation from which we can grow. While we expect budget growth in the US to moderate, we still see robust spending for the next several years and an opportunity for Boeing to win some key growth programs. This includes some of the best opportunities in the international defense market that we have seen in some time. So, with the combined strong, global economic growth, the solid defense markets and extended commercial aerospace cycle plus the largest backlog in history and an exceptional balance sheet, I believe we are well positioned in this business environment. Our commercial airplane products and services are helping the growing economies of the world build out needed infrastructure and provide business and consumers with safe efficient air travel and our defense business is helping to meet the enduring needs of our military customers in an uncertain world.

You have heard me say that we are committed to delivering financial results that match the quality of our people and our technology. With our momentum and continued focus on growth and productivity, we have a great opportunity to do just that.

Now, let me turn it over to James who will provide more details on our financial results and outlook.

James Bell

We delivered strong revenue growth, double digit gains in core earnings and another year of outstanding cash flow in 2007. Total company revenues grew 8% to a record $66.4 billion driven by higher commercial airplane deliveries and stable revenues in our defense business. Reported earnings grew 84% to a record $4.1 billion and EPS grew by similar rate to $5.28 per share. EPS adjusted for charges that affected 2006 results grew by an impressive 37% on strong core business performance and operating cash flow grew to another record of $9.6 billion.

Now turning to our fourth quarter performance on slide five.

Fourth quarter revenues were stable at $17.5 billion as growth and commercial airplane revenue was offset by lower revenues at IDS due to lower military aircraft delivery and formation of the ULA joint venture in late 2006. Earnings per share grew to $1.36 in the quarter. Operating margins increased to 8.7%, an improvement of 210-basis points over the same period last year driven by company-wide productivity gains.

Now, turning to highlights from our business segments starting with commercial airplanes on slide six.

BCA continues to properly manage its production ramp up while achieving record orders and invest in its growth. BCA delivered 112 airplanes in the fourth quarter and 441 for the year. Revenues grew 17% in the quarter driven by a 9% increase in airplane deliveries and double digit growth in airplane services. Fourth quarter margins expanded 230-basis points to 11% due to productivity improvements which more than offset higher R&D spending in the absence of supplier cost sharing payments.

For the year, BCA grew revenues by 17% on an 11% increase in airplane deliveries. Operating margins expanded to 10.7%. BCA’s backlog grew 46% to more than $255 billion on record orders with strong performance across all aircraft types.

The 787 Program is moving towards First Flight around the end of the second quarter and entry into service in early 2009. To date, we have won 857 firm orders from 56 customers. BCA expanded its large service business in 2007 with solid organic growth complemented by the successful integration of AVO. Driven by industry leading products and services, commercial airplanes expect significant growth in airplane deliveries, revenues, and earnings during the guidance period. I will speak more about that in a moment.

Now, moving to slide seven in our defense business.

IDS delivered doubled digit operating margins of 11.7% for the quarter on $8.4 billion of revenue. Margins were driven by outstanding performance in all segments. Revenues declined during the quarter due to the timing of aircraft delivery and the formation of ULA joint venture near the end of 2006.

For the year, IDS generated revenues of $32.1 billion in operating margins expanded 140-basis points to 10.7%. IDS results reflects strong profitability across all business segments including capturing 99% award fee on the EA-18G and 100% award fee on ground based missile defense. IDS also added to profitability by achieving a 100% of the incentive milestone criteria on the future combat systems program.

Now as Jim mentioned, IDS added to its large contractual backlog by winning the vast majority of major competitions it entered last year. During the fourth quarter, IDS was selected for the NASA Ares 1 instrument and avionics contract and won the tracking and data relay satellite award.

IDS also added to its international backlog by booking additional F15 orders from the government of Singapore.

Looking ahead, despite uncertainties in the US defense budget during the next few years, IDS is positioned to deliver modest revenue growth and excellent profitability with its well balanced portfolio of defense programs.

Now turning to our backlog on slide eight.

Over the past two years, our backlog has grown over 60% to a record of $327 billion, the highest in the aerospace industry. This is important for two reasons, first and most importantly, it indicates that our products and services are meeting our customers vital needs; second, with the backlog of five times our current annual revenue, it gives us great visibility into our financial growth over the next few years and positions us to deliver significantly improved financial performance. That is reflected in our financial guidance and gives us confidence in our continued expansion beyond the guidance period.

The order of totals get a lot of attention and that is great, but executing on our record backlog is what really counts. That is our focus for 2008 and for every year beyond that.

Now let us turn to slide nine and talk about our other businesses.

Boeing Capital delivered solid pre-tax income, our income reduced its portfolio size and continue to return significant cash dividends to Boeing. BCC generated pre-tax income of $30 million for the quarter and $234 million for the year while its portfolio declined 20% as planned to $6.5 billion. BCC contributed $408 million in cash dividends to the company during 2007. The aircraft financing markets remained healthy and BCC is executing well on its mission to support Boeing core businesses while reducing its portfolio size and risks.

Centralized cost declined during the quarter as the management actions we took last year to address these costs continue to bear fruit.

Let us turn to slide ten and talk about our cash flow.

Our cash flow generation remains outstanding with operating cash flow of $1.9 billion in the quarter and a record of $9.6 billion for the year. This performance reflects its strong earnings growth, excellent working capital management and a record volume of commercial airplane orders. We are deploying that outstanding cash flow to grow our business while returning value to shareholders. We have invested in organic growth programs including the 787, the 747-8 and international tankers.

In December, we announced the 14% increase in our dividend that reflects our strong operational performance, excellent cash generation and expectations of financial growth ahead.

During the quarter, we used over $890 million of cash to repurchase 9.4 million shares. For the year, we repurchased 29 million shares or $2.8 million and we intend to remain very active in our share repurchase program.

We have made excellent progress in further strengthening our pension plans in 2007. Our plans are more than fully funded at 110% of our projected benefit obligation. We have reduced risk profile on our pension plans by transitioning our asset allocation to less volatile asset classes.

Required cash contributions to our pension plans are expected to be modest over the next few years.

We forecast non-cash pre-tax expense to be approximately $800 million in 2008. We expect pension expenses applying again after that with 2009 pension expense likely to be about half of the 2008 level depending on market conditions at the end of the year.

Now let us turn to slide 11.

We have a very strong balance sheet with outstanding liquidity. We ended 2007 with cash and liquid investment balances of $12.1 billion which is up 30% from the same time last year. Boeing’s debt levels continue to decline during the year as maturing debt was not refinanced due to our strong cash position.

Total Boeing debt dropped 14% from the same period last year driven primarily by lower debt levels at BCC. Financial strength and solid credit ratings are priorities for us and we continue to enjoy the highest ratings in the industry.

Now moving to slide 12 in our financial outlook.

Today, we are raising our EPS guidance for 2008 and forecast additional EPS growth for 2009. As previously reported, we will provide complete 2009 guidance when we report our Q1 2008 results in April.

Boeing’s revenue guidance for 2008 is between $67 billion and $68 billion reflecting the revised 787 schedule. We are raising our earnings per share guidance for 2008 from between $5.55 and $5.75 per share to between $5.70 and $5.85 per share due to strong performance in our core BCA and IDS businesses. We expect quarterly EPS to build during the year with the first quarter of 2008 being the lowest at about 20% of our annual EPS guidance. This is driven by BCA airplane deliveries and margins in the first quarter.

We expect 2009 EPS to show strong growth over 2008 levels. We will provide those numbers along with the entire 2009 guidance package in April.

We expect operating cash flow to exceed $2.5 billion this year. This is slightly below our previous estimate of $3 billion due to the new 787 schedule.

Now, turning to our segment guidance.

We are reducing capital airplanes revenue guidance for 2008 by $0.5 billion to between $34.5 billion and $35 billion to reflect the new 787 schedule. For the same reason, we are lowering our airplane delivery guidance by about five airplanes to between 475 and 480 airplanes. We are raising 2008 operating margins for commercial airplanes from approximately 11% to approximately 11.5% reflecting continued productivity gains.

In terms of airplane orders, after three consecutive years of record orders, we still expect a strong demand for our products will keep our book to bill ratio above one for 2008 resulting in further increase to our record backlog.

Our 2008 revenue guidance or forecast for IDs is unchanged at approximately $32 billion to $33 billion and we expect continued double digit margins at approximately 10.5%. We expect total R&D expense to decline more than 10% during 2008 to a range between $3.2 billion and $3.4 billion. Additional segment guidance is provided in our earnings release.

Now, I will turn it back over to Jim who will give you some final thoughts.

Jim McNerney

While this is the third time I have addressed you to discuss our yearend performance and the road ahead. Each year, I told you about our management model dedicated to the simultaneous pursuit of growth and productivity and founded on the principles of leadership development. I think our results show that we are making very good progress on this course.

We assure we have a lot of work ahead of us, but we are in a very strong position as we move forward to address the challenges at hand. 2008 will be an exciting year. We are forecasting even stronger financial performance across our core businesses. We are preparing for the 787’s First Flight and Flight Test Program. We are anticipating another good year for commercial airplane orders and defense program wins. Our deliveries will rise at a steady yet prudent rate and our defense business will continue growing by delivering below risk cost effective solutions our government customers need.

With the great success we have had in winning new orders, our focus as James said is on executing that $327 billion backlog better than we ever have and increasing that backlog at the same time. We will heighten our focus on growth and productivity. We will expand our leadership development and we will redouble our efforts to meet commitments while living the Boeing values.

Our fundamental goal remains unchanged to be and to be seen as the World’s strongest and best integrated aerospace company for today and tomorrow.

Now we will be happy to take your questions.

Question and Answer Session

Operator

(Operator Instructions)

Our first question comes from Steve Binder of Bear Stearns, you may ask your question.

Steve Binder - Bear Stearns

Can you maybe just touch on the 08 BCA guidance as far as margins obviously is not, productivity is one of the drivers of the margin improvement, is it coming at all from block changes or is that coming simply from productivity improvement and maybe you can address which lines it pertains to.

James Bell

It really is coming from productivity improvement across the in-production airplane programs. We clearly are continuing to focus on driving our productivity initiatives in the BCA and we are starting to bear those fruit and it is primarily what we are seeing of the 777 moving line as we get into its implementation and we continue to harvest the kind of productivity we have seen in the past going forward on the 737.

Steve Binder - Bear Stearns

And if I can just follow up, you addressed the cycle to some degree that growth and demand across the globe, maybe if you can address, how do you believe the so-called credit crunch we are seeing today both in rate increases and availability of credit in the aviation industry granted that is mainly tied to the US carriers, but certainly it is affecting the ability of some leasing companies and some lower grade airlines around the world to get financing, how does that affect your decision on what the rates, the 373 rates further number one, and two, how does that affect you achieving your rates that you plan to get to by the 2010 timeframe.

Jim McNerney

I do not think the credit situation, while it has had an impact in parts of the capital markets, I do not think it has changed our thinking on the near-term, medium-term opportunity in front of us. Most of our planes are financed by non-capital market institutions that have remained in pretty good shape throughout all of this whether it is sovereign credits. The leasing companies themselves have been doing reasonably well. I think the capital markets, you have seen a risk premium built-in in some of the faultier deals are not getting done, but we are actually seeing a little bit of loosening up there as some paper that was not being sold, maybe four or five months ago is now being sold again in the capital markets albeit at a higher premium, but I would characterize that as marginal and not yet impacting nor do we see it impacting, quite frankly our prospects for growth.

Operator

Doug Harned of Sanford Bernstein, you may ask your question.

Doug Harned – Sanford Bernstein

On the 787, now, we are looking at a delay of at least nine months in delivery off of the original schedule and I am just wondering if you could give a perspective on when you look at the areas that we might see higher cost and financial impact and I classify those as customer penalties, supplier costs, for your own operational costs as time stretches out, where do you see the greatest risk financially?

Jim McNerney

The business case remains sound. Obviously, we are very disappointed with the delay in terms of its impact on our customers, but the backlog remains in place. The profitability of the airplane could be marginally impacted and will be marginally impacted by the delay in terms of some increased cost in the supply chain and some possible penalties on the customer side, but we do not see those kinds of cost having a significant impact over the huge volume base that we are fortunate to have on this airplane, so this is a case where I think the value of the plane to our customers as borne out by the record order book is helping mitigate what are bound to be some cost. In the meantime, James, do you have any further comments there.

James Bell

I think the other side of that equation is that the schedule stretch out that we have experienced is going to allow us to work harder on finding opportunities for productivity that would also offset some of the cost we would experience as a result of the delay, so we have not gotten through the assessment yet to really know where things are going to fall out, but I think, along with the risk, there will be other opportunities that we have not foresaw previously.

Doug Harned – Sanford Bernstein

So I would assume particularly from your guidance at least in the near term and even as you go out a couple of years, I am looking at margin, it sounds like you are not seeing anything that really changes your economic case for the airplane even over the next couple of years other than a push back.

Jim McNerney

Absolutely not.

Operator

Howard Rubel of Jefferies, you may ask your question.

Howard Rubel - Jefferies & Co.

I want to talk for a second on DFA certification process that you are going through on the 78, I know you cannot fly the airplane, but there is a whole bunch of things that you can do in the process to get there. Could you sort of touch on that and then again, Jim maybe talk about how this delay has been able to have been insulated from the core business which really showed terrific results.

Jim McNerney

Well, you are right about your observation on the cert process. About 70% of the certification effort documentation does not have to come from the flight test program. It can come from things we are doing today and we have got about half of that done, and we have got a clear plan with the FAA so we are feeling pretty good about that. Obviously, the flight test program has its own set of risks, but we are feeling pretty good about it and we are certainly working as well with the FAA on this program as we have on any that I can remember.

Now, one of my jobs, I think is to work with Scott Carson to make sure that when you have a program that is struggling and in terms of schedule that you get as much focused effort on that program as you can. You get the best leadership and we have done a lot of that over the last months and we have got our best of Boeing team working on that program now on the 87 and a lot of folks from BCA obviously and with some help from IDS depending on the task at hand, and at the same time, we have got to make sure that that effort does not impinge on the fundamental running of the business. I mean, the 87 while a critically important program for us is one of 300 programs we manage here at Boeing and we have got to make sure that the leadership understands that struggles are one part of our company do not mean distraction, rather it means, intense focus to make sure that we keep delivering the results that the total corporation is aiming for. So that is a leadership challenge and it is all about how we work together and help lead and manage each other and that is one of my tasks and I am very sensitive to it.

Operator

Robert Spingarn of Credit Suisse, you may ask your question.

Robert Spingarn - Credit Suisse

Just to follow up on your answer to that last question on leadership and particularly on communication within Boeing between Seattle and Chicago, between suppliers in Seattle. How has your oversight and your involvement in 787, recognizing it is one of many programs, how has that evolved over the past six months or so?

Jim McNerney

As is typical in big corporations like what we are part of here, there are days when Scott and his team probably feel I am too involved and then there are days I wake up and say to myself, ‘why are you not more involved?’ But the fact is I think, we have a pretty good balance. I mean there is a very good team out there. I am probably more involved now, as you can imagine. I mean I think part of my job is to get involved when help is needed. And that has been the case on the 87 over the last few months as we have all tried to understand together the issues. I try to understand the right way forward and I think it is done in the spirit of less of oversight and administration, more in the spirit of all getting in the boat together, trying to figure it out. So, yes, I am a little more deeply involved now than I was, but that could be said about some other programs that we are trying to manage to the success we know they can have.

Robert Spingarn - Credit Suisse

Would you say that you are involved to the point that you are very comfortable that your R&D guidance of 3.2 to 3.4 in ’08 will not go up?

Jim McNerney

Well look, I am comfortable with that guidance and that is why we are giving it. But, are there some risks inherent in research and development? The answer is yes, but I feel comfortable with that guidance and we have been through it pretty thoroughly and Scott and his team are committed and I am in the boat with them.

Operator

Ron Epstein of Merrill Lynch, you may ask your question.

Ronald Epstein, - Merrill Lynch

Just kind of going back to the 787 for a minute, when we think about the compressed flight test schedule, Jim, how do we get comfortable with that? You know, if you compare it to previous aircraft, all the new stuff on this airplane, it seems like getting the airplane out on this new schedule is really contingent upon that Flight Test schedule. You mentioned in the past, we are going to run it like an airline. It is not so much as flying the plane but it is crunching the data in dealing with the issues when they arise.

Jim McNerney

Yes well I think, it is a non-aggressive Flight Test program. It is a little less aggressive than the Flight Test program schedule we had earlier, but still aggressive and I think one of the silver linings of the delay is we have had more time to test systems, which are critical elements to the Flight Test program, ensure software compatibility and have a little more time with static and fatigue, which I think all are giving us reassurance that some of the more mundane things that can happen during a Flight Test program would not happen, which still leaves us some of the fundamental risks. But we think the program is eminently doable, the head start we have got with the FAA is helping us here and so, I think it is one airplane type, it is not multiple airplane types, one-engine type, or engine configuration I should say. So, I think there is less complexity in this Flight Test program than there is in our usual set of Flight Test programs. So, we are confident we can do it.

Ronald Epstein, - Merrill Lynch

And then one follow up, if I may, you have got roughly $12 billion of cash on the balance sheet and you are deploying it for share buybacks. What else are you thinking about?

James Bell

Well clearly, what you see is our fundamental basic deployment strategy and obviously other things that we are looking at, we could not talk about in any detail, but we are always looking at better ways to provide value to our share holders with that cash and that can include some things like you have seen in the past, particularly with the addition of AVO and how we can support our capabilities in our support business and how we could look at our strategy in terms of being horizontally versus vertically integrated. We look at that as we always do and see if there is opportunity there to create better value than current cash deployment strategy will provide, but we are looking at a lot of things.

Operator

Cai von Rumohr of Cowen And Company, you may ask your question.

Cai von Rumohr - Cowen And Company

Your course inventory went up $2.3 billion in the Fourth Quarter and you have taken your cash flow guidance for 08 down by $500 million. Can you walk us through some of the items? I mean you mentioned the 787’s, but is that offset by excess advances, was that exacerbated by pull forward of cash flow into the Fourth Quarter. Give us a little more color if you would.

James Bell

Cai, the inventory buildup is predominantly the buildup of 787 inventory and the fact that obviously we are not going to have that runoff and clearly that has been part of it. What was the second part of your question, I am sorry.

Cai von Rumohr - Cowen And Company

Were there any pull forwards, are there any offsetting increases in excess advances, you know, what does this assume about what you are going to pay or might not pay the suppliers?

James Bell

In terms of the guidance for 08, we did have some acceleration of some payments into 2007. It does take into consideration the fact that we are going to have some 787s that we assume that we would deliver in 08 and get the final payment pushed out to 09 and that is about it.

Now, the other thing that is going to happen is, as we have seen cash before we have had a significant contribution from our working capital performance. We will expect the inventory to continue to grow in 08 as we build out the 787 line and start building those airplanes. So, we expect the working capital to be a use of cash in 08 versus an addition to cash.

Cai von Rumohr - Cowen And Company

And the last one, you have mentioned the excess advances were terrific last year. Will those continue to build?

James Bell

As of today, they will be more in line with the order traffic for 08 and so, we do not expect them clearly to be as great as they were in the past because of the exceptional order performance we had last year, Cai.

Operator

George Shapiro of Citigroup, you may ask your question.

George Shapiro – Citigroup

James, if you take a look at what I would expect, commercial R&D to be in 08 maybe about 2/6 of the 3.2 to 3.4, your guidance actually has the margin X-R&D down from about 19/6 reported for 07, so around 19% in 08. So how do you reconcile that, unless maybe my numbers are wrong, with your comment that you are expecting productivity to go up because you would expect the margin to be higher?

James Bell

Yes, I think your math is pretty accurate and quite frankly it is going to be. We take into consideration that the increase we would want to see out of the volume. We are going to have some model to make a difference that is going to impact that. We are looking at the cost associated with setting up complete support activity for 787 that has an impact on that. And so, you are right. It is going to come down a tad bit of the results of those two things.

George Shapiro - Citigroup

And then one quick follow up, you were saying you had five lower airplane deliveries for 08, but if you really compare exactly, it is five to ten lowered deliveries. So, with the additional five expectations for maybe ten 787s or with the addition of five reduction reflecting something lower in some other line.

James Bell

We gave you a range, that is what the guidance was and we took the range down.

George Shapiro - Citigroup

Yes, but I mean the range was down by five to ten and you were saying, I thought on your comments that it was five lower because of 787, so I was just wondering what the other five might have been?

James Bell

No it is just the range. Do not read anything in the comment.

Operator

Joe Campbell of Lehman Brothers, you may ask your question.

Joe Campbell - Lehman Brothers

Good morning, our aircrafts seems like firmly on the weight of 40 narrow-body a month and with somewhere between 250 and 300 on the FWB pushing forward on that aircraft, targeted against the 777, I guess with delivery in 2013 but Boeing thus far has narrow-body only to 31 a month, apparently constrained by factory production issues, your judgment for that, what would be prudent in the ramp up and perhaps some apprehension about the cycle and the sustainability. But it seems to me that most of these concerns on the narrow-body have been delayed but thus far, we have not seen any comments from you on plans to at least put in place the option of going higher with the 737 nor anything about the response to the A-350. So I was just wondering, whether that difference above, almost a hundred airplanes a year on the narrow-body and the stretch from the 787 were seen as serious and we will be seeing response in 08.

Jim McNerney

I will take that one. First the A-350, I think that the model that will compete for the long-range 777’s if the plane has the performance that AirBus thinks it can have is the 1000 and I think that that is not a 2013 airplane, I think it is more 2015 or 2016, I am not sure. It is certainly later, it could be seven or eight years from now. So, I think we have time to assess that plane and we have time to assess what we might need to do if anything with the long-range 777s. So that is one.

Joe Campbell - Lehman Brothers

Nothing in ’08?

Jim McNerney

In terms of what our R&D on the 777?

Joe Campbell - Lehman Brothers

With this response from you, in order to get ready for whenever they are going to have their plane ready.

Jim McNerney

Well I think my point is that we do not have to do anything in 08, if I am getting the sense of your question.

Joe Campbell - Lehman Brothers

Yes that is right, I was thinking, so you are going to wait until 09 or 10 to do something.

Jim McNerney

Well yes. I think we need to see what the performance of the A-350 might be. We are not just sure. I know they have designed goals, but I think they have, just like anybody would, us included, seven or eight years ahead of an introduction. There are a lot of unanswered questions about the performance of the airplane and I do not think we want to put too many wheels in motion although we are obviously thinking through some contingencies and we are doing some preliminary work in the normal course of events, but I would not see a major program emerging until after this year.

The 737, we have had a steady drum beat that increases there. As you noted, I think we are about 40% higher in 07. It is another 10% higher coming up. And we have the flexibility to go higher.

Joe Campbell - Lehman Brothers

So you have taken the steps made before what Boeing said was, ‘We cannot get any higher than 31 unless we take some steps to give us the flight—‘

Jim McNerney

That is what I was addressing. I mean, I think we do. I think it is a matter of whether our customers need it and whether the business case is sound and making sure our supply chain can catch up, but I think we would have an option of going over 31 if that was the right thing for the business to do it.

Joe Campbell - Lehman Brothers

Will those decisions be made in 08?

Jim McNerney

We will be studying it hard in ’08.

Operator

Robert Stallard of Banc of America, you may ask your question.

Robert Stallard - Banc Of America

Jim, you made some comments about the potential impact of the economy on the US airlines. Do you think it is unlikely that US airlines will be ordering aircraft from you in 2008? And if they do, when will be the earliest, like in an aircraft like the 737?

Jim McNerney

We have been in extended discussions with a couple of the major carriers who have not yet participated in this order cycle. It would not surprise me if a couple of deals with those folks came to fruition in 08. It is hard for me to project it is a decision that they have to make.

And their requirements in terms of timing are being sorted out and we have different arrangements with each of them too in terms of the timing that we might be able to provide the technology to them, but I think, I will just say, because I really do not want to get into the details of our customer discussions, but I think it is fair to say that the discussions we are having fit their business plans pretty well.

Robert Stallard - Banc Of America

Or would you say availability on the new 737s today for any airline?

Jim McNerney

Well, I think it is different because in some cases we have started these discussions a long time ago, there are things that impinge on availability and it is sort of different by every airline.

Operator

Ivy Wood of Morgan Stanley, you may ask your question.

Ivy Wood – Morgan Stanley

I am curious about your comment about another good order year for BCA, can you define that for us a little bit better. Kind of talk about where you are seeing incremental demand coming from geographically and perhaps where you are seeing demand may be exhausting and what you are thinking also about 09 and 2010 in terms of units and book to bill.

James Bell

Well, we think the traffic that we have seen in prior years remain and so we think that is where we will continue to get it. We also believe that it is going to pick up domestically as Jim has mentioned and we have talked about before that although the US carriers really have it engaged heavily in the cycle that with the higher oil prices and their needs at least we understand them. They will have to get engaged soon. That is kind of where we would expect to see the order traffic come from this year and then going forward. I mean, there is a lot of aging aircraft in the US that cannot be operated economically and clearly can be competitive and allow them to create value for their shareholders if they continue to operate them in this current environment. And then that coupled with all that is going on with green and the environment, I just think that there is going to be a lot of pressure to replace old airplanes and that is what we see.

Ivy Wood – Morgan Stanley

But do you see demand exhausting in the Middle East and Asia Pacific where it has been inordinately robust in the last couple of years. I mean, does that slow down?

James Bell

At some point, I think it will. We have not seen it yet, but obviously at some point we are not sure exactly all that drives their needs, we know a lot of it. An issue had been the infrastructure, but we will see.

Ivy Wood – Morgan Stanley

And one last question, a little bit off of George Shapiro’s question for you about margins in BCA for 2008, both you and AirBus have been seeing better pricing in aircraft probably started to turn in 2006 and 2007 so does that not partly slow into the 2008 deliveries and when do the bulk of the 06 and 07 plan start delivering out?

James Bell

They will be out in the 09 range. We would start, but that was not really what we were really at for 08. It was really productivity.

Operator

Troy Lahr of Stifel Nicolaus, you may ask your question.

Troy Lahr - Stifel Nicolaus & Company, Inc.

James, I thought you talked about aircraft service work and how it increased this year at a double digit rate, can you maybe talk a little bit about what was driving that and do you expect that growth rate to continue at a double digit pace next year end of 2008?

Jim McNerney

We do have good momentum. The base business there is obviously sparse and some routine work, but more and more we are getting our technology into play. The drivers are convergence. There is a lot of passenger to freighter convergence. That business is continuing to grow and also some modification kind of work and then, supply chain work where increasingly, our customers are looking for folks like us to manage their supply chain for them more productively on an outsourced basis, so those tend to be drivers and we see it going and I would say on the productivity side, we are beginning to share infrastructure across the two sides of our services businesses, the defense and commercial side that can give us a little more productivity and best practices and things like that. We are beginning to leverage all of Boeing to improve that overall business.

Troy Lahr - Stifel Nicolaus & Company, Inc.

But the double digit growth rate, that should continue?

Jim McNerney

Yes, low double digits is the plan.

Operator

Joe Nadol of J.P. Morgan, you may ask your question.

Joseph Nadol - J.P. Morgan

My question is on the 747-8 passenger variant. Just wondering what your outlook is perhaps for this year for demand. You have the one order from Lufthansa so far and also the development program. How do you characterize that as progressing and then stepping back after that, what is your commitment to the aircraft if your order outlook does not meet expectations?

Jim McNerney

I do not have the numbers right here in front of me, somewhere between a hundred and hundred fifteen orders for the two airplanes. We have got about 27 or 28 on the PAX side. DLH with 20 as you pointed out and then we have some other small orders, so the majority remains freighters which are an extremely well received in the marketplace. We have got about ten discussions going on right now with folks for the PAX version. So we anticipate success here. We do not anticipate failure. And so none of our plans include an offer up here. All of our plans include making this a success and it would not surprise me in 08 if you saw a few of those customers shake loose and we all felt a little differently about it a year from now.

Joseph Nadol - J.P. Morgan

Can you characterize the difference or the incremental and definite requirement to do, the passenger in addition to the freighter very qualitatively and maybe the commonality between the two aircraft.

Jim McNerney

As you can imagine, there is a lot of commonality in the structure in the systems, without divulging the details of it, I mean, there is enough unique investment on both sides of the model so that you pay attention, but I think the overall characterization would be tremendous energy that affords you the opportunity to do both.

Operator

David Strauss of UBS, you may ask your question.

David Strauss - UBS

Looking at your BCAG revenue forecast for 08, you are forecasting about 40 additional deliveries, yet you are only forecasting about a billion, a billion and a half additional revenues. You have already talked about double digit growth in services, so it just seems that that revenue forecast would be a little bit light given what I assume is better pricing coming through in 08.

James Bell

I think it is about right the way we have done it and you are going to see the bulk of the better pricing come through at 09 and then there are some product mix in there that would differentiate what we did relative to revenue.

David Strauss - UBS

And then, on 777, can you just comment on the status where you are with supplier negotiations, I guess, where you were before the announcement of the latest delay and are we back to square one here. How progress is going there?

Jim McNerney

Well, we are going through a process right now of adjusting the schedule and as we mentioned at the end of the first quarter, we will talk about the new schedule. It obviously needs the cooperation and commitment of our supply base who are cooperating and who are committed given the tremendous market success of this airplane, but there are discussions going on because there is a new schedule and there are shifts in cash flows and pain that has to be borne, but I would characterize those discussions as constructive and heading toward a conclusion which we will report on at the end of the quarter.

Operator

Myles Walton of Oppenheimer and Company, you may ask your question.

Myles Walton – Oppenheimer and Company

I guess this is kind of a follow up to that last question, what kind of guidance are you giving in the interim three months to the supply chain such that you will hopefully dissuade them from making some independent decisions that could potentially exacerbate the delay as far as their procurement of raw material goes?

Jim McNerney

Which guidance are you talking about there?

Myles Walton – Oppenheimer and Company

Production on the 787, obviously with the next three months, you are establishing a new production plan. They are making their own production decisions. How are you communicating with them in an effort to make sure that the line of communication is open.

Jim McNerney

In all of our supplier partners, we have got between 50 and 130 Boeing employees working hand in hand, minute by minute, hour by hour 24/7, so transparency on each other’s issues is not our problem here. It is getting resolution. We are working very closely with our suppliers and they have their people in our facilities and so, it is a pretty seamless operation right now as we all work hard to resolve the issues.

Myles Walton – Oppenheimer and Company

And on the interim there is shipping for the original plan?

Jim McNerney

Yes well, on the airplanes that lead up to the flight-test program, yes. And then we are sorting out the supply chain after that.

Dave Dohnalek

Operator, we will now turn to the questions for media please.

Operator

That completes the analyst question and answer session.

(Operator instructions)

I will now return you to the Boeing Company for introductory remarks by Mr. Tom Downey, Senior Vice President of Corporate Communications. Mr. Downey please go ahead.

Tom Downey

Thank you, we will continue with the questions now for Jim and James.

If you have any questions after the session ends, please call our media relations team at 312-544-2002. Operator we are ready for the first question and in the interest of time we ask that you limit everyone to just one question please.

Operator

James Gonzales of Bloomberg News, you may ask your question.

James Gonzales - Bloomberg News

You mentioned that the amount of Boeing employees are out in the facilities and working overtime, I was wondering if you guys have got any feedback from STIA or the machine expedient, I am inquiring further on what the status of the program is and any kind of feedback from them on the working conditions and what the overtime hours that they are having to put in?

Jim McNerney

Our union partnerships have been extremely supportive here. We are all trying to focus on the success of this airplane and the success with the company. So I would characterize it as, overall, very supportive in general.

James Gonzales - Bloomberg News

And just one other question for you, with the deliveries being revised for this year, this is for James because I remember that you taught that 08 would be the year to surpass Airbus on deliveries. Do you think that is still the case?

James Bell

I do not think I ever said that. That it would be the year we would and I would know that until we get through the year and deliver them. We are giving you our guidance and I am not sure what their delivery guidance is for 08.

Jim McNerney

I think there had been some analyst projections that said that 08 would be the crossover year but quite frankly, I do not think we ever characterize it one way or the other.

Operator

Julie Johnson of Chicago Tribune, you may ask your question.

Julie Johnson - Chicago Tribune

I was just wondering if you could just give us a better idea of what you mean when you say you expect a good order year for BCA. Are we talking about maintaining similar levels of 07 or 06, or are we looking at a slight drop-off?

Jim McNerney

Well, we are characterizing it as taking more orders than airplanes we build. It is not clear to me nor do I think it is clear to Scott Carson that we will have as many orders in 08 as we did in 07. It would be lovely if we did, but that was an all-time record here that was on top of another all-time record year in 06, so I would anticipate not quite that robust.

Julie Johnson - Chicago Tribune

Okay and just a quick follow up on the 787 supply chain, could you just give us a little bit of color on how you plan to drive greater efficiency through the production process and could that potentially mean dropping under performing partners?

Jim McNerney

Well, I think obviously the whole concept here, when we get through the startup is to have an extremely efficient production process where multiple organizations are each focusing on their piece and through the repetition become very good at a drive down their own learning curves and when you add them all up, it is better that we were all doing it, that is the concept. What was the second part of your question there?

Julie Johnson - Chicago Tribune

I was just wondering if potentially you—

Jim McNerney

By enlarge, we have absolutely no plans to drop any suppliers. When we qualified our partners early on, we did it with our eyes wide open and they did it with their eyes wide open. We have each put a lot of investment into it, now I think from time to time, we shift work around. We restructure relationships the way the work flows in order to capitalize on things that emerge as strengths, or things that emerge as weaknesses, but I would characterize it more as fit and finish and that way than ever thinking about dropping the supplier except in some extreme circumstance, but we do not see that here.

Operator

Sebastian Svanki (ph) of Book Review, you may ask your question.

Sebastian Svanki – Book Review

I would like to ask another question on the 787 production partners, please. Has Boeing any intention to maybe invest financially or organizationally in your production partners in order to strengthen them and maybe help them through the dire times when they do not get the money back in time, and if you would today have to decide about like a 737 follow on, would you do the very same production set up or would there be something different given the experience you have made until today?

Jim McNerney

Two very good questions. I mean, I think the form of financial support that we might contemplate in extreme circumstances would be more jointly carrying inventory or material together if we put an undue hardship on somebody, rather than investing in their own facilities, but we have a good feeling about the way we are approaching this airplane despite the startup difficulties, would we do it exactly the same? We might do it a little bit differently, but the overall strategy would be the same. I think we now have learning about the relative strengths between ourselves and our partners and I think we might draw some lines in different places, but we would not change the concept.

Operator

Lyn Munsford of Wall Street Journal, you may ask your question.

Lyn Munsford – Wall Street Journal

This is kind of just a high level question here, but in the last several months, it seems that your issues with having to push off the schedule on the 787 have been kind of the result of this voyage of discovery you have been on, how do you feel right now, are you at a point now where you can see to the bottom of the barrel to know that you do not have any more surprises coming up or when do you expect to be at that point?

Jim McNerny

I think it is true that the projections we made earlier when we did not have much experience with all the work that traveled to our facilities unanticipated where we did not have robust enough contingency plans when you look backwards. It is true that we missed some projections. Now, we are a lot closer today to completing the first airplane now that we have properly staffed the effort, we now more fully understand the requirements as they came in from our partners and work that we thought they were going to do. And just by virtue of being closer to the end than to the beginning and having had experience with working with the engineering drawings of our partners, having now rounded up the supply chain, a lot of the original supply chain issues have gone away as we have gotten our arms around inventory that was going to travel to other places and things like that, so I think just by virtue of having the experience of getting deep into the first airplane and seeing the end of it gives us more confidence in our projections. It is not much more complicated than that.

Lyn Munsford – Wall Street Journal

Okay, thanks and just one other thing is, do you anticipate as a result of some of the things you are seeing here that you might ramp up a little more slowly than you initially expected so that, when you do actually start getting into the production of airplanes, it would not be at a super aggressive rate and it will be more gradual?

Jim McNerney

Well, that question has to be answered over the next couple of months Lyn. We are very mindful of committing to a ramp that we can execute. We are also very mindful that we have already disappointed some of our customers in terms of when we are getting them the technology that they have faith in us to deliver. So, that tension, I think will produce a realistic but aggressive ramp.

Tom Downey

Operator is saying that there are no further questions in the queue. That will conclude our earning’s call.

Again, for members of the media, if you have further questions, please call our media relations team at (312) 544-2002. Thank you.

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