Thank you for standing by. Good day everyone, and welcome to the Boeing Company's First Quarter 2021 Earnings Conference Call. Today's call is being recorded. The management discussion and slide presentation plus the analyst question-and-answer session are being broadcast live over the Internet. At this time for opening remarks and introductions, I'm turning the call over to Ms. Maurita Sutedja, Vice President of Investor Relations for the Boeing Company. Ms. Sutedja, please go ahead.

Thank you, John, and good morning. Welcome to Boeing's First Quarter 2021 Earnings Call. I'm Maurita Sutedja, and with me today are David Calhoun, Boeing's President and Chief Executive Officer; and Greg Smith, Boeing's Executive Vice President of Enterprise Operations and Chief Financial Officer. As a reminder, you can follow today's broadcast and slide presentation through our website at boeing.com. As always, we have provided detailed financial information in our press release issued earlier today. Projections, estimates, and goals we include in our discussion this morning are likely to involve risks, which are detailed in our news release in our various SEC filings and in the forward-looking statement disclaimer at the end of this web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of certain non-GAAP measures. Now I will turn the call over to Dave Calhoun.

Thank you, Maurita, and good morning everyone. I hope you're all staying safe and healthy during this global pandemic. On behalf of Boeing, I want to express our heartfelt thoughts and support for those in India dealing with the severe impacts of the recent COVID-19 surge. Reflecting on last year as COVID-19 unfolded, it's clear it has been a challenging time. However, we've witnessed unprecedented collaboration between the U.S. industry and government. Looking ahead, we view 2021 as a pivotal year for our industry, supported by public investments. Although a full recovery may take a few years, there are promising signs, such as progress in vaccine distribution and recovery in domestic travel in certain markets. We initially didn't expect vaccines to be developed and distributed this early in the pandemic. We are continually adapting our business practices and remain committed to supporting our teams, customers, and local communities. Now, about the 737 program. As you know, we've discovered electrical issues in parts of the flight deck of certain 737 MAX airplanes. We are finalizing plans with the FAA for the process required to return these airplanes to service. Once we receive FAA approval, we anticipate the work will take a few days per airplane, impacting around 100 in-service planes. Deliveries are currently on hold while we resolve these issues, leading to a lighter delivery schedule in April. We expect to catch up on deliveries throughout the year and are focused on ensuring our customers' aircraft are ready for the summer season. In recent months, we've made significant strides in safely returning the MAX to service worldwide. Since the FAA's ungrounding, over 165 countries have approved the resumption of MAX operations. We've delivered 85 MAX airplanes to customers, with 21 airlines returning their fleets to service, totaling over 26,000 flights and more than 58,000 flight hours safely flown. We also received regulatory approval for the 8-200 variant of the 737, which is important for our customer Ryanair. We expect remaining non-U.S. regulatory approvals this year, with approval in China likely in the second half. Our top priority remains assisting customers in returning their parked fleets to service, with over one-third of previously parked airplanes now flying revenue journeys. We were pleased to receive orders from Southwest Airlines, United Airlines, and Alaska Airlines, as well as an order from Dubai Aerospace Enterprise, highlighting our customers' trust in Boeing and the 737 family. These orders reflect our customers' commitment to modernizing their fleets with 737 airplanes that enhance operational efficiency, reduce emissions with improved fuel burn, and provide excellent reliability for timely operations. At the end of the quarter, we had around 3,200 airplanes in our 737 backlog. Our production currently remains low as we intend to gradually increase it to 31 per month by early 2022, responding to market demand. Turning to the 787 program, we resumed deliveries in March after extensive testing and analysis. We've delivered a total of nine 787s since restarting deliveries last month, with potentially more by the week's end. We expect to deliver the majority of the 787 aircraft currently in inventory by year’s end while monitoring market conditions closely. In March, we consolidated 787 final assembly to Boeing South Carolina, which went smoothly, and we transitioned to a low production rate of five by the quarter's end. Regarding the 777X program, we're collaborating with global regulators on various development aspects, including rigorous testing. Our team is committed to demonstrating the safety and reliability of the airplane’s design, and we're pleased with our progress. We're still aiming for the first delivery of the 777X to occur in late 2023 and are transitioning to a production rate of two per month. In addition to our commercial programs, we continue to serve our Defense, Space, and Services customers. Our Defense, Security, & Space division has made progress in several key projects, including the start of T-7A Red Hawk production and the delivery of the F-15EX. SLS rocket hot fire testing was successfully completed for NASA. We also inducted our first EA-18G Growler for modifications. We're managing the effects of COVID-19 on our programs as well, addressing challenges such as quarantine-related employee clearance constraints in the VC-25B program. As we meet these milestones, we remain committed to sustainability. We're enhancing our sustainability disclosures and plan to release our first global equity, diversity, and inclusion report as well as our first integrated sustainability report this year. We proudly announce our recognition as an ENERGY STAR Partner of the Year for sustained excellence in energy conservation practices for the eleventh consecutive year. Now let's discuss the broader industry environment. Our government services, defense, and space operations are showing stability. Increased spending on COVID-19 responses is pressuring defense budgets in some countries, while others are boosting security spending. The global defense market remains strong, supported by solid orders totaling $7 billion. In the commercial market, we observe near-term challenges due to COVID-19, but many long-term fundamentals are intact. The recovery is progressing but remains uneven. We anticipate significant challenges for our airline customers and the industry in the next six months, as COVID-19 case rates are still high in various regions and travel restrictions persist. Domestic travel is showing positive momentum, particularly in the U.S. and China, with TSA throughput in April reaching around 60% of 2019 levels, while international traffic remains significantly lower. Airlines are adapting to changing market dynamics, retiring older aircraft in favor of newer, more fuel-efficient models. The freighter market is performing well, with cargo traffic up 9% compared to 2019 levels and sustained high yields. We believe cargo demand will grow with global trade and GDP development. We expect passenger traffic to return to 2019 levels around 2023 to 2024, envisioning a phased recovery. Domestic traffic will lead, followed by regional markets, and finally long-haul international routes. Our Confident Travel Initiative aims to reassure travelers about air travel safety, utilizing science and proactive measures to minimize risks. We are also keeping an eye on global trade dynamics, particularly U.S.-China relations, as China represents a significant portion of our industry’s growth over the next decade. In the commercial services market, demand appeared stable in Q1, with clear signs of rebound as airlines prepare for summer. Managing liquidity is crucial until the market stabilizes. Despite challenges, there's liquidity available for our customers to acquire new airplanes. The long-term value of aircraft remains clear, and our product offerings are well-prepared to meet customer needs. As we face these challenges, we remain focused on the future, ensuring we have the necessary resources and investments to fulfill our customer commitments and innovate for the long term. We are advancing technology to define our next chapter, focusing on next-generation aircraft that will be more efficient and easier to maintain. We'll continue to adapt our operations and engage our supply chain, ensuring a focused and sustainable business presence as we navigate the ongoing impacts of COVID-19. Now, I'll turn it over to Greg.

Great. Thanks, Dave and good morning, everyone. Let's please turn to Slide 4. First quarter revenue decreased to $15.2 billion, primarily due to lower 787 deliveries and commercial services volume. This was partially offset by higher 737 deliveries and higher KC-46A Tanker revenue. Earnings in the quarter were also impacted by lower commercial airplane period costs, partially offset by lower tax benefits and higher interest expense. Income tax in the quarter primarily reflects a benefit from the impact of the pre-tax losses, largely offset by the adjustments to the valuation allowance and true-ups to the tax benefits recorded in 2020. Let's now move to commercial airplanes on Slide 5. Revenue was $4.3 billion, driven by lower 787 deliveries, partially offset by higher 737 volume. Although commercial airplanes' operating margin continued to be under pressure, they improved in the quarter due to higher 737 deliveries, lower abnormal production costs compared to the same period in the prior year and the absence of the first quarter 2020 charge related to the 737 NG pickle fork repair costs. We delivered 58 737 MAX airplanes in the first quarter. We currently have approximately 400 737 MAX aircraft built and stored in inventory. As we've previously communicated, we expect to have to remarket some of these aircraft and potentially reconfigure them. As you've seen by the recent orders, we are making good steady progress on the remarketing effort. You may also recall right before the 737 MAX return to service, we estimated that around half of the approximate 450 aircraft we had in storage would be delivered by the end of 2021, and the majority of the remaining by the end of the following year. That estimate is unchanged. Through the first quarter we have delivered 85 737 aircraft from storage, and as Dave mentioned, the recent delivery pause will impact our April deliveries. We expect delivery timing and the production rate ramp-up profile to remain dynamic given the market environment, customer discussions, and the remaining global regulatory approvals. There is no material change in our estimate for total 737 abnormal costs of $5 billion. During the first quarter, we expensed $568 million of abnormal production costs, which brought the cumulative abnormal cost expense to date to $3.1 billion. We expect the remainder of these costs to be expensed as incurred largely in 2021. Our assessment of the liability for estimated 737 MAX potential concessions and other considerations to customers as well as the expected cash impact timing did not change significantly in the first quarter from our prior assessment. Cumulatively, we've accrued a $9.3 billion liability for the estimated potential concessions and other considerations. To date, we've reduced the liability by $4.9 billion through cash payments to customers and other forms of compensation, including $1.2 billion we paid this quarter. We have settlement agreements covering approximately $2.5 billion of the remaining liability balance of $4.4 billion. Turning now to 787. As we discussed, we resumed deliveries in March. We currently have approximately 100 787 airplanes in inventory. Based on what we know today, we still anticipate that we will deliver the majority of these airplanes during 2021. We are working with our customers to facilitate deliveries and continue to monitor the international long-haul recovery as we assess our delivery plans. Our latest assessment of the financial impact related to the inspections and the delivery delays has been included in our first-quarter closing position. As we've previously disclosed, the 787 program has near breakeven gross margins due to previously announced reductions in production rates and program accounting quantity. If we are required to further reduce the accounting quantity and/or production rates or experience other factors that result in lower margins, the program could record a reach forward loss in future periods. However, on a cash basis, the 787-unit margin has held up relatively well even at lower production rates as many underlying profitability drivers remain intact. Moving now to 777X. As Dave mentioned, we still expect first delivery of the 777X to occur in late 2023 and we are making good progress on our flight test efforts. We still expect that peak use of cash for the 777X program was in 2020 and that cash flow will improve as we get closer to EIS and begin deliveries in late 2023. We anticipate the program to turn cash flow positive approximately one to two years after the first delivery. Given the significant headwinds that remain in the market, BCA margin progression will be highly dependent upon future production rates and will take time. However, we continue to take appropriate action to make foundational lasting change through our business transformation efforts in order to help offset those headwinds as much as possible. Let's now move to Defense, Space, & Security on Slide 6. First quarter revenue increased to $7.2 billion, and first-quarter operating margins increased to 5.6%, primarily driven by higher KC-46A Tanker revenue and the absence of charges related to the program in prior periods, partially offset by a pre-tax charge of $318 million on the VC-25B program which was largely due to COVID impact and performance issues at our supplier. We received $7 billion in orders in the quarter, including contracts for 27 KC-46A Tanker aircraft to the US Air Force, 11 P-8 Poseidon aircraft to the US Navy and Royal Australian Air Force, and six Bell Boeing V-22 Osprey rotorcraft to the US Navy and US Air Force holding the backlog steady at $61 billion. Let's now turn to Global Services results on Slide 7. In the first quarter, Global Services revenue declined to $3.7 billion, and operating margins decreased to 11.8%, both driven by lower commercial services volume due to COVID-19. No notable asset impairments were booked in the quarter. During the quarter, BGS won key contracts worth approximately $3 billion resulting in a backlog of approximately $20 billion. While services demand was relatively flat in comparison to fourth quarter 2020 we expect the quarterly revenue trend to improve as we support increased airline operations and more airplanes are flying as travel recovers. That said, given the dynamic environment, we can expect to see revenue trajectory vary from quarter to quarter. Despite the challenging environment, we continue to position our services business for the future and are evaluating our portfolio to ensure that we have the right solutions to help our customers and industry navigate the downturn and prepare for market recovery. These efforts are starting to take hold and positively impact our operating margin performance. Let's now turn to cash flow on Slide 8. Operating cash flow for the quarter improved to negative $3.4 billion, reflecting the timing of receipts and expenditures and higher 737 deliveries, partially offset by lower 787 deliveries and lower advance payments. Let's move now to Slide 9 to discuss our liquidity position. We continue to proactively manage our cash position and assess our liquidity through the pandemic. We ended the first quarter with strong liquidity, including $21.9 billion of cash and marketable securities on our balance sheet and access to $14.8 billion from our newly increased bank credit facilities, which remain undrawn. We also continue to have access to the capital markets. Our debt balance remained stable at $63.6 billion at the end of the quarter. As part of our ongoing prudent liquidity actions, we refinanced $9.8 billion of our delayed draw term loan that was due in early 2022 and expanded our revolving credit facility by $5.3 billion. These liquidity-enhancing activities are in addition to the many actions we have discussed before, including suspending our dividend, reducing discretionary spending, matching 401(k) contributions in stock, pre-funding pension with stock, and awarding most of our employees a one-time stock grant that will vest in three years in lieu of a merit increase. These actions reflect our continued de-risking strategy and are part of our balanced approach to ensure we proactively meet future obligations. We worked hard in the past to maintain disciplined cash management, while seeking opportunities to strengthen our balance sheet, and we will continue these efforts. Once cash flow generation returns to more normal levels, reducing our debt level will be our top priority. We believe we currently have sufficient liquidity and are not planning to increase our debt levels. However, we will continue to actively manage our balance sheet. Our investment-grade credit rating is important to us, and we will continue to consider all aspects of our capital structure to strengthen our balance sheet. Let's turn now to the next slide to summarize. Our business environment remains dynamic, and while the commercial market recovery is gaining some traction and has been uneven and the path ahead is far from certain, we will continue to diligently work opportunities and monitor risk factors including vaccination pace and case rates along with passenger traffic recovery and remaining 737 MAX regulatory approvals and U.S.-China relations. As Dave mentioned, we're still awaiting 737 MAX regulatory approval from China, and the timing of it will affect our 737 delivery plan. China is an important market for our commercial airplanes and order activity from China will affect our future production rates. As we've discussed, even as our industry begins to recover, we anticipate 2021 will be another challenging year. However, based on what we know today, we still expect revenue, earnings, and operating cash to improve from 2020. Commercial deliveries will continue to be the single biggest driver across all financial metrics. Revenue improvement from 2020 to 2021 will be driven mainly by higher 737 and 787 deliveries as we plan to unwind inventory and deliver from the production lines. Consistent with what we shared last quarter, we also expect improvement to our bottom line from 2020 to 2021, primarily driven by higher commercial deliveries absent of 2020 charges, improved performance, and benefits from continued business transformation actions. These impacts will be partially offset by higher interest expense. Also bear in mind that our commercial business will continue to book significant abnormal production costs for the 737 program in 2021. Similar to our revenue and earnings trajectories, we continue to expect 2021 operating cash flow to be much improved from 2020, driven by mainly by inventory burn down associated with 737 and 787 programs. While higher deliveries will be a tailwind, the timing of advance payments and the burn down of excess advance payments along with 737 customer settlement payments and higher interest payments will continue to be headwinds. We expect the first quarter was the most challenging quarter from a cash perspective, and we expect the trend to improve for the remainder of the year as we ramp up 787 and 737 deliveries in subsequent periods. However, there could be some timing variation quarter-over-quarter, so quarterly trajectory could be uneven. As discussed, our cash flow profile is heavily dependent upon obtaining the remaining 737 MAX regulatory approvals, the commercial market recovery, and ongoing discussions with our customers on their fleet planning needs. In aggregate, we continue to expect 2021 to be a use of cash. We expect that continued improvement on the 737 MAX program due to lower customer considerations and higher delivery payments as well as recovery in commercial services will enable us to turn positive cash flow in 2022. The key watch items that I highlighted earlier will be the differentiator in our outlook trajectory. Given the dynamic environment, we continue to monitor the risks and opportunities to ensure we're well positioned for the future. Over the past year, we've been keeping you updated on our extensive business transformation effort. We're continuing to closely examine all aspects of our operations to simplify and streamline everything we do and take billions of dollars out of our operating costs, while driving our key efforts in safety, quality, and performance. We're doing this now so that we can emerge a leaner, sharper, and more resilient company as the market recovers and production rate increases in the future. We'll continue to execute a widespread set of changes over a multi-year period. I'm pleased with the strong progress we have shown in 2020, that has carried into 2021, and is gaining momentum. We expect the majority of our efforts will result in lasting change that will drive long-term productivity, future margin expansion, and cash flow generation as our market continues to recover. And as we take action, we're ensuring that every step only further drives key efforts in safety, quality, and delivering on our commitments. We have a dedicated team focused on these efforts embedded in every business unit and function to ensure we're continually improving in every aspect of our operations. This is an enduring effort that our entire leadership team is committed to driving forward in the future. And finally, as you know, last week, I shared my intent to retire from Boeing in July. I want to take a moment to thank the 140,000-great people at Boeing and all of our partners who have made my 30 years at the company so special. It has been a true honor and a privilege to work alongside all of you. I will cherish the relationships that I've been very fortunate to have here and over the years and those include all of you in the financial community that I've had the opportunity to get to know so well over the last decade and beyond. At Boeing, I've been inspired every day by the incredible technology, products, and services we bring to the world. And while it's our products and our mission to get you excited, it's the great people at Boeing that make it all possible, and it is the people that I will miss the most. Over the next few months, I will be solely focused on a smooth transition of my responsibilities and then on to the next chapter in my career. I will always be cheering on Dave and the entire Boeing team from the sidelines. I'm confident in the long-term market opportunity ahead, the Boeing Company itself, and the team behind it. So, with that, I'll turn it back over to Dave for some closing comments.

Thanks, Greg. Thanks for everything as you know. On behalf of the Board and the entire Boeing team, I want to thank Greg for his incredible contributions and his dedication to Boeing and its people. His remarkable leadership has made a significant and lasting impact for our company, for our customers, and for our stakeholders. Thanks to Greg's efforts, Boeing also has had the benefit of very solid teams across the function that he oversees, people I've gotten to know quite well. As we build on Greg's legacy, we're not searching for a new strategic direction. We will engage in a comprehensive and thoughtful search process for a world-class executive with the talent and skills commensurate with the high level that Greg has set. This process will encompass executives within Boeing and across the external market. We're well positioned for the future, and we will continue to transform our business to not just navigate through this pandemic but to ensure that we emerge stronger and more resilient for the long term. While there's no question that COVID-19 has had a profound impact on our industry, we view this year as a key inflection point as positive signs begin to emerge. As governments around the world accelerate vaccine distribution, people are getting back to work, and global economies are beginning to get back to business. And as they do, we are proud of our role in enabling travel to connect people, to connect businesses, and importantly to connect cultures. As we face into the challenges at hand, we remain steadfast in our commitment to quality, safety, integrity, and transparency. Through it all, I am proud of how our team continues to stay focused on our customers and their important missions, and I'm confident in our future. With that, Greg and I will be happy to take your questions. Thank you.

Our first question comes from Sheila Kahyaoglu with Jefferies. Please go ahead.

Thank you. Good morning, everyone, both Dave and Greg. Greg, congratulations and we look forward to your next chapter. I guess for either of you, how do we think about commercial profitability going forward and into next year? Is there a breakeven rate when we think about production or deliveries on both the MAX and the 787 as that destocking resolves itself?

Yes, Sheila. As I mentioned earlier, and I'll let Dave add his input, this is closely linked to depleting our inventory and the production rates, especially concerning the 737. Similar to our discussions about cash and revenue trajectory, earnings and margin will follow a comparable path. Furthermore, under our business transformation initiatives, we have been evaluating all areas of the business for ways to streamline operations while keeping an eye on future growth. As we indicated last year, we continue to invest significantly in the business and plan to maintain that approach. However, our focus on business transformation efforts will also support our trajectory as the market improves and we enhance our production rates in response to that. I'll let Dave provide his perspective as well.

Yes, I don't have much to add, but I want to express my confidence that as production rates start to return to what we consider normal and beyond, we should experience greater leverage than ever before due to the steps we've taken regarding fixed and readiness to serve costs. Additionally, a significant factor will be the stability we can bring back to the production lines, allowing us to increase rates in a stable manner. There is substantial productivity related to that approach. I agree with everything Greg mentioned, and I just wanted to add that.

Thank you.

And next, we'll go to the line of Doug Harned with Bernstein. Please go ahead.

Thank you. Good morning.

Good morning.

First Greg, I just want to thank you for all the work you've done with all of us over the years. It's been great, and definitely want to wish you the best in your next steps here.

Thank you very much, Doug. Time's flown by.

Yes, it's been a long time. Actually, Dave, I have a question for you that also spans a long time and your experience in the industry. If you reflect on the years, Airbus and Boeing have always been in a competition over market share, especially in the narrowbody segment. Currently, the MAX has faced limitations, yet there remains a significant market opportunity. Meanwhile, Airbus has been successfully delivering numerous neos and has a substantial backlog. In our last call, we discussed the 321XLR. Looking ahead, how significant is market share to you? Is the narrowbody figure important, and is there a specific threshold that you believe Boeing should strive to achieve?

That's a great question. I want to focus on that market. Historically, we've seen that they perform better in certain segments while we excel in other areas with the products we offer. I'm confident we can achieve our goals. However, I can't compensate for the production gap we created over the past year, and I'm not going to attempt to reclaim that lost ground. From this point forward, my aim is to maintain our rightful market share. I will also bring the rates back in the most stable way possible, pacing that carefully. I believe this approach benefits Boeing and supports our shareholders. The question now is over what period of time we want to assess this. I'm confident that over the long term, we'll return to where we need to be. I have always trusted in our product line and I think recent developments reflect that. When we consider how we're utilizing our airplanes, I believe we're in a strong position. It really is a great question, though.

If I can follow up on that, when you look at the last four months, you've been averaging just over 20 MAXs since the restart, which is clearly below your delivery capacity. What are the constraints here? Are they more related to customer willingness to take delivery or your processes for getting those airplanes out and delivered?

I'm quite confident that recovery in this country is coming, and it's likely arriving sooner than in most places, except for China. However, when examining the global situation, conditions are not as strong overall. This year is expected to be challenging for many countries, including Europe. The key question is when they anticipate recovery and whether order activity will increase in those markets as it has in the United States. I believe it will, and we will overcome those challenges, but there's uncertainty in many countries. Additionally, it's crucial to restore our aerospace trade relationship with China, as it represents a significant part of the long-term market. It is essential to regain our fair share, which has historically been around 50%, particularly with widebody activity considered. I believe we will return to that position, but it will take some time.

Great. Thank you.

And next we'll go to Seth Seifman with JPMorgan. Please go ahead.

Thanks very much, and good morning. Greg, thanks very much for all your help over the years and best of luck to you.

Yes. Thanks, Seth.

Sure. I wanted to ask about the 787 this morning. When we discuss the process moving forward, similar to Doug's question about the 37, is the delivery pace primarily influenced by customers' willingness to accept deliveries, or is it more dependent on the process changes needed for the aircraft? How much of that work is completed? Additionally, I recall that last quarter the plan was to deliver the majority of the aircraft in inventory, and now it seems to be shifted to just the majority. Should we expect to carry more 787 inventory into 2022?

Yes, let me take that, and Greg can add if he wants. You mentioned willingness, which is an important term. That isn’t the issue; rather, there are numerous logistical challenges month to month regarding getting crews in and out. This isn’t so much about U.S. policy but rather where the crews might be coming from. In all these orders, there’s not a significant reconfiguration cost associated with the 87 program. These are orders for known customers and destinations. We're not being evasive in our language. Whether we use the word vast or not, we’ll see. However, it won’t be due to a lack of willingness to accept airplanes but rather timing issues related to when crews can arrive, take delivery, and move them out. That would be my commentary. Greg, do you have anything to add?

No, no. I think that's absolutely right on.

Okay, great. Thank you.

You're welcome.

And our next question is from Carter Copeland with Melius Research. Please go ahead.

Hi. Thanks. Good morning guys, and Greg I echo everyone else. Thank you so much for your help over the years and nothing but the best of luck in the next chapter.

Thank you very much. I appreciate it.

You only have to deal with one more geeky accounting question from me.

I could guess what it is, but I won't. I'll let you…

I want to inquire about the 87 deferred production number and any reductions related to that.

I would have had. That was my guess too.

Good. Then you have the answer ready to go. So, you have been running $400 million, $500 million a quarter up until this quarter. You talked about a rate change. Obviously, you've got the rework on the planes that are sitting there in inventory. Can you just help us understand kind of bridge between the $178 million and the kind of numbers you were running, because the rate is not all that different it doesn't seem. So, any color there I think is helpful.

No absolutely. Yes. And actually, Carter you got it right. I mean it's all those other moving pieces that are obviously unusual and didn't exist in the prior quarter. So, once we kind of get through that and get kind of to a normalized pace, you'll see deferred continue on the trajectory that we've outlined before. But near term to your point, there's a lot of moving pieces in there. They're weighing into that number that are not, I would say sitting on a normalized level, but it will once we start continuing delivery. And long-term, like I said, we will be on the same path as we've talked about before. And like I said on a …

Is it safe to say that the biggest piece is revaluation?

Pardon me?

Is it safe to say the biggest piece of that delta is the revaluation of the inventory?

Well, it's the fact that you've got so much disruption going on in the factory. That's it.

Okay.

The current challenges we face, such as rework, building inventory, and storing aircraft, will not persist as we ramp up production, as Dave mentioned, which we have already begun. Soon, we will return to a normalized rate of expenditure. Additionally, on a per-unit cash basis, our programs are performing exceptionally well at a low rate, reflecting the significant efforts made over the years to stabilize the factory, operations, and productivity initiatives. You are starting to see the benefits of this. As production stabilizes and increases, and as we deliver the inventoried aircraft, this will significantly impact cash flow for the remainder of this year and into 2022.

Okay. Thank you very much.

If I could add one thing, our pause lasted longer than anyone expected, including us. However, during that time, we focused significant energy, costs, and efforts on eliminating persistent rework loops that had been an issue for quite a while. As a result, we are now in a position to reduce rework, return to standard operations with fewer constraints, and prepare for a positive return on rate. I'm very confident that this is how things will unfold. The pause was intentional considering the amount of work we undertook.

Great. Thank you for the color, gentlemen.

Thank you.

And our next question is from Peter Arment with Baird. Please go ahead.

Yes. Thanks. Good morning, Dave, Greg.

Good morning.

Good morning.

Greg, thanks for everything like everyone else said. I appreciate it over all the years.

Thank you.

Hey, Dave this is more I guess a bigger picture question on the US-China relations, kind of the watch item comment. It seems like it's the first time you're really highlighting this under the business environment. Has something changed in terms of your timeline on what you thought when the regulator would be approving, or is this just that it's just taking longer and maybe you could just give us a little more color on that in terms of when you expect it? Thanks.

Yes, thank you. This issue has been lingering for some time, but we now have a new administration in the United States. I didn't want to approach them on their first day while they were working on their strategies regarding China, and I'm pleased to see they're addressing that. We're now at a point where the administration is concentrating on the economic recovery in the U.S. and finding their footing in terms of China relations. It’s essential for us to highlight the economic impact of trade with China, especially in the aerospace sector and commercial aviation. These implications are substantial, and I'm sure you all recognize that. We aim to encourage and advocate for both sides in this matter. We maintain strong relationships and have confirmed orders in China, but it's crucial to resume the flow of orders, and I am optimistic that will occur. This is an appropriate moment to discuss this broadly, which is why I brought it up in today’s call and during this conversation. We will ensure that our administration understands the significance of reinforcing those relationships. I believe trade benefits everyone, and I think they feel the same way. However, we need to navigate this carefully and allow them the time to understand it.

Okay, Dave, as a follow-up, does the timing matter if this extends into the middle or later part of the second half, and will that affect your rate decisions for next year? Were you referring to that earlier?

It will eventually have an impact. If we extend this situation throughout the year, it will affect the recovery of our rates, particularly the pace of that recovery rather than the rates themselves as we finish the year. Additionally, narrowbody aircraft will recover before widebody aircraft, and that's all there is to it.

Got it. Thanks so much.

Yep.

And our next question is from Myles Walton with UBS. Please go ahead.

Thanks, good morning. Greg, best wishes on the next pursuit. Thanks for all the help over the years.

Thank you.

Even the IR at Raytheon was helpful. The question for Dave or Greg is one of the pushbacks I receive, which I think is actually fair, that Boeing maybe shouldn't be cutting as much structural cost. Instead, there might be a need to invest in innovation, program execution, and supply chain health. In the last call, a lot of comments focused on the structural cost actions. I'm curious how you would respond to the notion that structural costs might actually need to be incorporated into the system, given that program execution has not been perfect.

I completely disagree with that perspective. It’s quite impressive, considering the challenges we face, that we have managed to maintain all our critical research investments. We have continued all ongoing development programs, which are significant, and we have allocated additional resources to these programs, as indicated by the accounting adjustments made at the end of last year. This shows that we have invested more time and costs into these initiatives rather than cutting back. I am very confident in our approach. We have eliminated a lot of duplicated efforts, particularly in overlapping technology development between our BDS and commercial sectors. Overall, I am optimistic about our future, and the level of investment we are making in our research and development sets us apart from our competitors, which I feel very positive about. That is the key benchmark for us. Now, I’ll pass it over to Greg.

Yes, I completely agree. It's important to recognize that we have invested over $60 billion in the last decade in crucial technologies and programs within our factory and space. We haven’t held back on investments at all. Even last year, during the pandemic, we continued to invest in the right areas of our business. In some instances, like with the 737 line, we increased our investments to ensure stability moving forward, as Dave pointed out. This will benefit not just our company but also the entire industry and our partners. We have reallocated funds, added investments, and adjusted our approach because we are focused on the long-term vision. We're identifying areas where we face constraints or duplication of effort, and we’re challenging ourselves to be best-in-class at all levels, including program management. Our goal is to eliminate those constraints without losing sight of the future. By making these adjustments, we expect to achieve greater stability as the 737 production rate increases, similar to our other programs. There’s a lot happening now, and much more to come, but I can assure you we're focused on the future, prioritizing our workforce and suppliers, and fostering stability for the benefit of the entire industry.

Thanks for the color.

You’re welcome.

Our next question is from David Strauss with Barclays. Please go ahead.

Thank you. Greg, let me echo what everyone else said. Congrats on a good job particularly in these last couple of years.

Thanks, David.

I want to ask on 787, the 100 or so aircraft that are parked today, what proportion of those have actually had the fixes implemented? And how long does it take to make the fixes to an individual airplane? And just so we're all on the same page here, you're implying that you think you can deliver 100-plus aircraft over the next three quarters.

Yes. I will begin, and Dave can certainly add to this. Regarding the number of aircraft, we are addressing them one at a time, by tail number. This approach is in line with our delivery plan. Therefore, not all aircraft will be reworked simultaneously; that is not the process we are following. However, progress is evident in the increased deliveries to date. Although you can measure the required rework in days, we are dedicated to taking the necessary time to complete the work according to our specifications. The improvement is noticeable with each aircraft, as our teams are gaining experience and efficiency in the rework process. We expect the overall cycle time to enhance. Currently, we have a detailed schedule arranged by tail number, month, and customer that aims to ensure the delivery of most of the 100 inventoried aircraft by the end of the year. As Dave mentioned, there may be flexibility in customer assignments, but we are actively managing the process and maintaining close communication with our customers regarding delivery timelines. This strategy aligns with our rework efforts, stabilizing the ramp, and fulfilling final deliveries. Dave, would you like to add anything?

This is primarily about the movement of airplanes from one position to another rather than the work being done on them. This month, we expect to have probably 10 or 12 airplanes moving, showcasing our capacity. We'll maintain that rate for as long as possible, depending on our customers and their capability to receive deliveries. The main challenge lies in the logistics of managing customers as they come and go, and how we transport the planes. The work itself is progressing well and is becoming more efficient each day, so we are in a good situation regarding that.

Thanks. And Greg, you had mentioned sequential free cash flow improvement through the year. Would you expect by the fourth quarter that you're free cash flow positive?

Yes. What I meant to convey is that the first quarter was the most challenging. There will be fluctuations month-over-month and quarter-over-quarter, so it will be somewhat unpredictable. However, it aligns with the earlier comment about the delivery profile not being linear. While we've detailed this, it won't follow the same pattern each month or quarter, so all these factors will come into play. Everyone is working very hard to fulfill our commitments to customers, ensure that the aircraft are properly reworked, and continue with deliveries, especially for the 737. This effort should lead to an improved situation by the end of the year. I do expect some inconsistencies between the second and third quarters, but I anticipate a better trajectory in the fourth quarter.

Great. Appreciate the comments.

Yes, you are welcome.

And our next question is from Ron Epstein with Bank of America. Please go ahead.

Yes. Good morning guys. Greg, I echo everybody else's comments. It's been a pleasure working with you over the years both at Raytheon and at Boeing. So, thank you for that.

Likewise.

Best of luck with what's going on. Dave, a question for you. So, I just want to follow up on Myles' question. You've talked a lot about business transformation. What's the end state? And ultimately, how does engineering fit into that vision? Because to be fair, 73 had issues, 78 had issues, 777X has issues, 747-8 had issues, KC-46 has issues, Air Force One now has issues, and the Starliner has issues. So, how does business transformation fix that?

Well, I'll remind everybody that the A380, the A350, the A330, the A3...

We're not talking about Airbus. We're talking about Boeing.

I want to remind everyone that there have been challenges. These programs are large and complex. While I can't guarantee that we'll fix everything, I do believe we will significantly improve. The work we've done to align our engineering functions has been embraced by everyone in the company, and they feel positive about it. We've made advancements in our safety management system related to engineering, allowing us to utilize new data and process it more quickly for decision-making. We are also reinvesting in our fundamental design practices to promote the disciplines necessary for continuous improvement, and everyone is committed to this effort with real investments being made. I feel very optimistic about our direction. However, it’s important to acknowledge that there may still be issues that arise during flight tests that need resolution. It's inherent to our industry to tackle large projects effectively. I'm confident in the significance of our transformation efforts and in our production stability, which is closely linked to engineering. We've taken decisive actions this year to address problems immediately, as seen in the 87 example in Q1. The fit and finish issues with fuselage joints were persistent and challenging, and we deployed our engineering expertise to resolve them, implementing new process controls and communication with our suppliers to avoid surprises and eliminate unnecessary rework. There’s a lot more to discuss, but I believe the positive signs are becoming increasingly clear to both you and our customers.

On the next product, would we expect to see it go smoother?

Yes. Yes, and I expect the next product to get differentiated probably in a significant way on the basis of the way it's engineered and built and less dependent on the propulsion package that goes with it.

And next we go to Jon Raviv with Citi. Please go ahead.

Good afternoon. Thank you very much and best of luck Greg kind of obviously on the next endeavor.

Thank you.

But one related question here looking at the balance sheet, I mean, when we look at net leverage, you're over three times levered versus your peak EBITDA, and appreciate that number climbs as you continue to consume cash. So, how is the company prepared for, you know god forbid another crisis given this position and your commitment to the IG rating? I realize you've issued some stocks for pension and 401(k), but how are you evaluating it here? I know it's a different conversation versus $100 ago, but here we are in the mid-200s depending on the day. So how are you thinking about that dynamic at this point?

Yes. I believe our approach hasn't changed since the beginning. We are continuously exploring options and considering their potential second and third order effects. As you mentioned, the sequence and timing of these decisions can be important. The main point to note is that we will regularly assess our capital structure, strategy, and the long-term health of our balance sheet. We will keep all options available and under consideration. Our perspective is not limited to a basic scenario; we are actively exploring possibilities and determining which actions to take and when, as well as understanding the consequences of those actions. As I mentioned earlier, currently, we do not see a need for additional liquidity. However, as evidenced by how we've managed our bank line and expanded our credit facility, we are ensuring we have everything in place should the need arise. If we find ourselves in that situation, we will be ready to act.

Thanks very much for fitting me in.

Yes. You’re welcome.

Operator, we have time for one more question.

Thank you. And that will be from Hunter Keay with Wolfe Research. Please go ahead.

Thank you so much for getting on. Greg, let me be the last one to say congratulations. It's been a pleasure.

Yes. Likewise, Hunter. Thanks.

Dave, I'd love for you to continue on the comment that you made to Ron at the end there about what's next and how it's less dependent on the propulsion package. Can you just continue to elaborate on what you're about to say please? What is this going to involve from a product perspective, but also from a manufacturing perspective? What are you guys thinking about?

Yes. So, there's a lot that goes into this, but I think it's important that everyone understand. Most often when a new airplane is developed by either side, it is usually developed around a propulsion package that offers 15% to 20% improvement with respect to efficiency versus the one it's displacing. That's the way it's happened over a long period of time. I don't believe the next generation of engine can deliver that kind of performance. And then therefore, whatever cost efficiency ultimately and whatever performance advantages are derived from the next airplane in my view are going to come from the way it's engineered and the way it's manufactured all with a focus on a lower cost per seat when we get it out to the marketplace, and yes, a more sustainable package with respect to the environment. So that's what we all have to be focused on. I like the pressure that puts on the manufacturers. That means the technologies we deploy are our technologies. We've done an awful lot of fantastic work in our defense programs with respect to using engineering modeling and then manufacturing processes that tap that engineering modeling directly, create parts that can be assembled in one motion with great efficiency. Secondly, we've invested as you know in composites in our platforms for a very, very long time. The learning curves associated with getting efficient at composite development are significant. I believe Boeing has a huge advantage on that front, and so how we bring that engineering modeling, the composite development work that we've done over these years, and then quick, simple assembly like we've demonstrated with the trainer airplane and other defense programs, we have to do it at scale and we have to prove to ourselves we can do it at scale. But in my view, those are going to be the advantages to that next airplane that gets developed, and I just love where Boeing is positioned on that front when the time comes. Thank you.

All right. That completes the Boeing Company's first quarter 2021 earnings conference call. Thank you all for joining.