Thank you for standing by. Good day, everyone, and welcome to The Boeing Company's Second 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. Thank you and good morning. Welcome to Boeing's second quarter 2021 earnings call. I'm Maurita Sutedja. And with me today are David Calhoun, Boeing's President and Chief Executive Officer; and Dave Dohnalek, Boeing’s Interim Chief Financial Officer. And 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 involve risks, including those described in our SEC filings and in the forward-looking statements 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 David Calhoun.

Thank you, Maurita, and good morning, everyone. I hope you're all staying well as we continue through this global pandemic. And please encourage everyone you know to get the vaccine if they haven't already. With the onset of COVID-19 roughly a year-and-a-half ago, our worlds were turned upside down. As an industry, we faced it head-on and worked together every step of the way. While there is still ways to go before a full recovery, we're encouraged by the continued progress on vaccine distribution and the uptick in domestic travel. We're also looking forward to further progress on coordinated international travel policies and protocols. I've said before that we view this year as a critical inflection point, and it's proving to be just that. We're turning a corner and the recovery is gaining momentum. Throughout all of this, we are continuously learning and adapting how we operate to best serve our customers, our suppliers, our teammates, our communities, and other stakeholders. And I'm proud of how our team has remained focused on our mission. Before I go through our business update, I'd like to take a moment to recognize and thank Dave Dohnalek for serving as our Interim CFO. Dave is a proven, well-respected leader here at Boeing, and I'm grateful for his partnership as we transition. As you know, we have appointed Brian West to serve as Boeing's next CFO. It's effective August the 27. Brian is an exceptional leader with significant financial management and long-term strategic planning experience in complex global organizations across the aerospace, manufacturing, and services industries. Thanks to Greg Smith's legacy, he is inheriting a world-class finance team here at Boeing. I've worked directly with Brian previously in my professional career. He has brought operational expertise and will bring a great perspective to our business transformation journey and post-pandemic recovery as he joins the team this month. With that, let's start with an update on our business. Overall, we've made important progress in the quarter as our transformation actions began to take traction. We focused on improving performance and driving stability across all of our operations. Let's start with the 737 program, where we've made significant headway. We resumed 737 MAX deliveries in May and have continued to support our airline customers' efforts to return those fleets to service. In the second quarter, we delivered 47 737 MAX airplanes, including our first 737-8-200 delivery to Ryanair. The 737 MAX 10 also completed its first flight in June, marking an important milestone for the largest member of the 737 family. As you may recall, nine months ago, we had approximately 450 airplanes in inventory, and we were awaiting approval from the FAA to begin returning the 737 MAX to service. Fast forward to today, and the progress is noteworthy. 175 countries have now approved the resumption of 737 MAX operations. We've delivered more than 130 airplanes. Our airline customers have returned more than 190 previously grounded airplanes to revenue service. 30 airlines have returned their fleets to service, and those airlines have safely flown nearly 95,000 commercial flights, totaling more than 218,000 flight hours. Importantly, the fleet has an impressive schedule reliability rate of more than 99%. Airlines are operating over 1,000 revenue flights daily. Just last week, we added nearly 3 million 737 MAX seats into the second half of 2021 schedule operations, a testament to the value proposition the airplane family offers. As domestic traffic recovers, we believe we have started to turn a corner from an overall demand perspective. This is reinforced by five straight months of positive net commercial airplane orders, driven primarily by the 737 MAX. We are honored by the more than 280 additional orders during the quarter, including those from United Airlines and Southwest Airlines. We appreciate the trust our customers are placing in Boeing and the 737 family. These orders underscore our customers’ commitment to continued fleet modernization as well as the accelerating demand for air travel. These new 737 airplanes are designed to improve the customer experience while significantly lowering carbon emissions per seat. At the end of the quarter, we had over 3,300 aircraft in our 737 backlog. We’re currently producing 16 airplanes per month and continue to expect to gradually increase the rate to 31 a month in early 2022, with further gradual increases to correspond with market demand and supply chain capacity. We will continue to assess the production rate plan as we monitor the market environment and engage in customer discussions. As previously communicated, the timing of remaining regulatory approvals will shape our delivery plans and our production rate ramp. We continue to work with global regulators and still anticipate that the remaining regulatory approvals will occur this year, including China. As always, we will follow global regulators' lead in the steps ahead. I'd like to spend a bit of time on our business transformation efforts. As we've discussed before, our activities in this area are organized around five pillars: infrastructure, overhead and organization, supply chain health, portfolio and investment, and operational excellence. We’ve put rigor around each pillar and have detailed projects supporting each one. We are implementing these projects to create long-lasting change, which will improve our competitiveness, help us grow our cash flow, and create a foundation to enable us to return to healthy margins even at lower production rates. Many of the projects that we’re executing have been shared previously and are widely visible, such as consolidating the 787 final assembly in Charleston, optimizing our facilities’ footprint to reduce nearly 6 million square feet of real estate, and forming strategic partnerships with IT vendors accelerating our migration to the cloud. Other projects may be less visible externally, but they are improving our productivity, simplifying our operations, reducing bureaucracy, and driving first-time quality. Through our business transformation efforts over the past year, we’ve reduced billions of dollars in costs. Our objective is that the majority of the savings are long-lasting even when volume returns. At the same time, we remain focused on identifying new opportunities to further streamline how we operate. We’ve started to see the benefits of these efforts in our quarterly financial results, which Dave will go through in more detail. As discussed previously, we’ve been adjusting the size of our workforce to align with the commercial market environment reality and lower production rates. We now plan to keep our overall workforce size roughly consistent with where we are today at approximately 140,000. This will allow us to support the encouraging trends we’ve seen in the commercial market recovery, growth opportunities in our defense and government services business, and increased investments to strengthen engineering and drive quality and stability into our production system where the payback is large. Going forward, the pace of the commercial market recovery, trade relations with China, production rates, and our performance will be key factors of our overall employment levels. Turning to our efforts to drive stability, with every action we’re driving toward engineering excellence, production system stability, and first-time quality and delivery predictability, while holding ourselves accountable to the highest standards. We’re implementing comprehensive quality and productivity initiatives in our factories and strengthening our quality reviews within our supply chain. We conduct regular audits internally with suppliers to ensure adherence to improving processes and practices, ranging from production methods to documentation standards. As part of our process, we proactively and transparently keep the FAA fully aware of our efforts. This enhanced rigor has helped identify areas that we can improve. By identifying and correcting any issues at the source while our rates are still relatively low, we can strengthen first-time quality, eliminate traveled work, and drive stability and predictability as demand returns. These efforts have played a key role in supporting a healthy and stable rate ramp on the 737 MAX, and we’re applying this same approach to the 787. Now, specifically on the 787 program, I understand the difficulties we have caused by the inconsistency in both our production rate and our delivery cadence. The impacts are felt by our suppliers and by our customers. I also recognize these uncertainties create challenges for the investment community to forecast our performance. We are determined to address these issues and will work tirelessly to do so, just like we have and continue to do on the 737 MAX. We’re fully committed to this methodical approach to driving first-time quality and stability in our operations. The engineering teams have identified issues that we are now addressing as part of this purposeful process, and we have transparently communicated with our regulators and customers every step of the way. We’re progressing through these inspections and rework, including the additional work we shared earlier this month. We continue to engage in detailed discussions with the FAA on verification methodologies for the 787. Based on our assessment of the time required, we’re reprioritizing production resources for a few weeks to support the inspection and rework. As that work is performed, the 787 production rate is now lower than five per month and will gradually return to that rate. The exact timing of returning to a rate of five per month will depend upon our progress on production stability and delivering airplanes from inventory. Of the approximately 100 787s currently in inventory, we expect to deliver fewer than half of them this year. While this has a near-term impact on our operations, I’m confident it’s the right course of action and we will continue to take the time necessary to ensure the highest levels of quality. Although it’s been a long journey, we believe we’re closer to the end than the beginning. Let me touch on the 777/777X program before I move to other segments. The combined 777/777X production rate is two per month. We continue to see strong freighter demand, as evidenced by orders for 13 777 freighters in the quarter, providing a solid bridge to the 777X. On the 777X program, we are subjecting the airplane to a comprehensive test program designed to demonstrate its safety and reliability as well as meet all applicable requirements. We continue to communicate transparently with the FAA and other global regulators about certification. Like any development program, we learn every step of the way. We incorporate feedback from our regulators and we mature and advance our product with every conversation, every engagement, every test, every review. We continue to make progress on the previously shared schedule, including certification work with regulators and conducting Boeing flight tests. The performance data we’ve collected to date suggests the airplane is performing as we expected and to our customers’ commitments. We will be validating these results in the near future, along with continuing to work with the FAA to ensure we meet the requirements prior to beginning certification flight tests. We continue to expect that we will deliver the first 777X in late 2023, as we shared previously. Meanwhile, we continue delivering for our Defense, Space, and Services customers. Dave will go through the financials in more detail in his remarks. But as you can see from the results, both our Defense and Services businesses had strong financial performance in the quarter. Let me highlight a few accomplishments. Our Defense, Space & Security team made history as our MQ-25 test asset completed the first-ever unmanned aerial refueling of another aircraft, the F-18. We also joined the front fuselage of the first production T-7A with its aft section in less than 30 minutes, a testament to the digital advancements of the U.S. Air Force's first E-series aircraft and a demonstration of our model-based engineering and 3D design benefits. Earlier this month, the U.S. Air Force approved the KC-46A tanker for Joint Forces operational use of the centerline hose and drogue refueling system, which provides more daily operational capabilities. The KC-46A tanker is of critical importance to our customer. Moving to Space, we began stacking the core stage of NASA’s Space Launch System rocket with other Artemis 1 elements at Kennedy Space Center. And of course, we’re looking forward to the un-crewed orbital flight test of our Commercial Crew Starliner vehicle later this week. Additionally, in our Global Services business, we announced that we will be opening two new Boeing converted freighter lines in 2022. We also signed a parts agreement with Turkish Technic and received a key contract to support C-17 training from the UK Royal Air Force. In addition to program milestones, we made key progress on our sustainability, innovation, and technology efforts. Just this week, we published Boeing’s first Integrated Sustainability Report, which is an important step in our continued efforts to reinforce our environmental, social, and governance principles. Also, we recently announced that we’re collaborating with Alaska Airlines to fly an Alaska 737-9 aircraft in our ecoDemonstrator program. In fact, today, our ecoDemonstrator aircraft is at Reagan National Airport, demonstrating to key leaders many of the new technologies and improvements we’re making to enhance safety and support a more sustainable future. Earlier this month, we also announced a partnership with SkyNRG focused on advancing the availability and use of sustainable aviation fuels, or SAF, globally. As part of this commitment, we will invest in SkyNRG Americas’ first dedicated U.S. production facility for SAF to help establish SAF supply for airports and airline customers largely on the West Coast. Now let’s turn to the next slide to discuss the industry environment. Our Government Services, Defense, and Space businesses remain significant and relatively stable. While increased government spending on COVID-19 response is adding pressure to defense budgets in some countries, others are increasing spending on their security. Overall, the global defense market remains strong and we continue to see solid global demand for our major programs. The diversity of our portfolio will continue to help provide critical stability for us as we move forward. Congress has kicked off the annual authorization and appropriations cycle for fiscal year 2022. The President’s budget proposal called for strategic investments in Boeing products and services from across the BDS and our BGS portfolios. The budget proposal demonstrates confidence in the capabilities of Boeing’s F-15EX and Apache, as well as key commercial derivative programs such as the KC-46 tanker and space programs like the Space Launch System, among other platforms. The FA-18 and the Chinook Block II remain critical capabilities for the warfighter, both domestically and for non-U.S. customers. We will continue to work with the administration and Congress to ensure the necessary support for these key programs are in place. In the commercial market, while near-term pressure due to COVID-19 remains, the recovery is accelerating, and many of the key long-term fundamentals remain intact. In June, we saw global departures approach 70% of 2019 levels, up from less than 60% in the first quarter. We’ve seen encouraging signs in some markets, although the recovery continues to be uneven. In the near-term, we expect the environment will remain very challenged for many of our airline customers and the industry as a whole as they adapt to this rapidly evolving travel demand. While vaccine dissemination is broadening and some travel restrictions are loosening, others are still in place, and some even tightening, which keeps significant pressure on passenger traffic. Continuing the positive momentum we saw in the first quarter, domestic traffic is leading the recovery. May domestic traffic was 24% below 2019 levels compared to 50% the quarter before. Since then, it continues to pick up in regions like the U.S. and Europe, and we anticipate continued improvement this summer. The U.S. domestic market is showing remarkable recovery with summer bookings consistent with 2019 levels, according to several airlines. TSA average daily throughput has already reached over 2 million passengers, around 80% of 2019 levels. Additionally, some regions such as Europe, India, and Latin America are seeing double-digit monthly improvements in operations as vaccine rates improve and travel restrictions begin to loosen. While a recovery in China has wavered at times due to case rates, it remains robust with operations above 80% of pre-pandemic levels. However, passenger traffic in other parts of the world, such as Southeast Asia, remains significantly lower due to travel restriction uncertainty and new variants of the virus. International operations remain extremely low and May traffic is still 85% of 2019 levels. Concerns about virus variants and limited coordination on cross-border entry protocols are still significantly hindering recovery in the international segment. Nevertheless, on average, roughly 100 aircraft per week have returned to service over the past four months, making the active fleet now approximately 80% of its previous size with single-aisle activity levels slightly above twin-aisle. Although utilization rates and load factors are increasing in some areas, they are still below historic levels, which means airlines are flying around 70% of their normal capacity at the global level. With the toughest impacts appearing to be in the rearview mirror, airlines are shifting their focus to medium-term fleet planning. The number of aircraft being retired from the active fleet is significant, with around 1,500 airplanes and growing retired or announced to be removed since the onset of the pandemic. We anticipate this trend will continue as our customers focus on replacing the oldest, least efficient airplanes with new airplanes that will be as much as 25% to 40% more fuel efficient with corresponding reductions in emissions. The freighter market continues to be strong, with cargo traffic year-to-date through May at 8% higher than 2019. Limited belly cargo capacity from passenger airplanes has resulted in more freighters flying with high load factors. In fact, 72% of air cargo is now being carried on dedicated freighters compared to 48% pre-pandemic. This demand is evidenced by orders in the quarter for 31 additional freighter airplanes and strong demand for Boeing-converted freighters. Longer-term, cargo demand will continue to be driven by global trade and GDP growth, both of which experienced improvement in the second quarter. We expect passenger traffic to return to 2019 levels in 2023 to 2024 and then a few years beyond that to return to long-term trend growth. We still see recovery in three phases: first, domestic; then regional markets such as intra-Asia, intra-Europe, intra-Americas; and finally, long-haul international routes. Therefore, we expect demand for narrow-body aircraft to recover faster, as evidenced by our year-to-date orders for 737 MAX airplanes, and demand for wide-body aircraft to remain challenged for a longer period. On the global trade environment, we welcome the agreement between the European Union and the United States that all future government support for the development or production of commercial aircraft must be provided on market terms. We will fully support the U.S. government’s efforts to enforce this agreement. We are also monitoring U.S.-China trade relations, given the importance of the China market to our economy and our industry’s recovery, as well as our near-term delivery profile and future orders, all of which influence future production rates. We remain in active discussions with our Chinese customers on their fleet planning needs and will continue to engage with leaders in both countries to urge a productive dialogue, reiterating the mutual economic benefits of a strong and prosperous aerospace industry. Ultimately, America’s leadership in aerospace, as well as the health and stability of millions of commercial aerospace jobs, rely on free and fair trade. We’re confident our leaders understand the importance of this area, not just for our business but for the overall health of our economy and competitiveness. Turning to the commercial services market. We saw improved demand in the second quarter as we rebound from the trough and as airlines prepared for the summer season. We expect this trend to continue near-term slightly ahead of our expectations. That said, we still anticipate a multi-year recovery that may be uneven. Overall, industry liquidity, which remains critical for our industry and our bridge to full recovery, has been improving. Product differentiation and versatility will also be key as airlines adapt to evolving market realities. I’m confident our product lineup is well-positioned, and we’re focused on executing to meet our customers’ needs. The impact of COVID-19 has been significant, and a number of challenges remain, but we are seeing signs of recovery. More broadly, across the economy, we’re now seeing positive indicators for economic growth. We believe bipartisan agreements on infrastructure investment can further support growth across the economy, not just for airports and highways, but also for the tens of thousands of small businesses and suppliers that contribute to industries like ours across the country. With economic activities picking up, labor availability within our supply chain is a watch item. As we position for a market recovery, we’re taking the right actions to manage liquidity and drive long-lasting change to make our business leaner, sharper, and more sustainable. We remain committed to safety, quality, and transparency, and I’m confident in our path forward. With that, let me turn it over to Dave Dohnalek.

Great. Thanks, Dave. And good morning, everyone. It’s good to be reconnecting with many of you that I know from my time in Investor Relations and throughout my career at Boeing. I’m honored to be in the role of Interim CFO and to help facilitate a smooth transition for Brian. Now let’s turn to Slide 4, please. Second quarter revenue increased to $17 billion, primarily due to higher commercial deliveries and commercial services volume. Positive earnings in the quarter also benefited from lower period costs. Additionally, several non-recurring items favorably contributed to the quarter. Income tax in the quarter primarily reflects benefits from a lower valuation allowance. Now let’s turn to Commercial Airplanes on Slide 5. Revenue was $6 billion, reflecting higher commercial airplane deliveries. The improvement from the prior year was also due to a $551 million 737 MAX customer consideration impact in the second quarter of last year. Although the Commercial Airplanes operating margin continued to be under pressure, it improved in the quarter due to higher commercial airplane deliveries and lower period costs. We delivered 47 MAX airplanes in the second quarter. We currently have approximately 390 MAX aircraft built and stored in inventory. We have made significant progress in our efforts to remarket some of our inventory airplanes, and have now largely addressed that issue and put it behind us. Just prior to the 737 MAX return to service in the U.S., we estimated that around half of the approximately 450 aircraft we had in storage would be delivered by the end of 2021 and the majority of the remaining aircraft by the end of 2022. That expectation has not changed. We expect delivery timing and the production rate ramp profile to remain dynamic, given the market environment, customer discussions, and the remaining global regulatory approvals. There is no material change in our assumption for 737 abnormal costs or our assessment of the liability for estimated 737 MAX potential concessions and other considerations to customers. Turning to 787. Second quarter deliveries were light as we worked through the activities that Dave just mentioned. Our latest assessment of the financial impact of inspections, rework, temporary production rate adjustment, and delivery delays has been included in our second quarter closing position. The 787 program margin remains near breakeven. On a cash basis, these additional costs will create a headwind in the near term. However, we still expect overall unit margins to hold up relatively well. Moving now to 777X. As Dave mentioned, we still expect the first delivery of the 777X to occur in late 2023. We are making progress in our flight test activities. We still expect that the peak use of cash for the 777X program occurred in 2020 and that cash flow will improve as we get closer to EIS and begin deliveries in late 2023. We anticipate the program will turn cash flow positive approximately one to two years after first delivery. We are starting to see improvements in Commercial Airplanes' financial performance due to increasing 737 MAX deliveries and great efforts by the BCA team to manage costs through our business transformation activities. We also captured strong orders in the quarter, which is a testament to the value of our products and our customers’ focus shifting now to fleet planning. Although the Commercial recovery will take time and we still have work to do, we’re on a positive path and we remain focused on driving stability in the 787 program and across the business. Let’s now move to Defense, Space & Security on Slide 6. Second quarter revenue increased to $6.9 billion, primarily due to higher volume on the KC-46A tanker program and the P-8A program. We posted a strong operating margin of 13.9% in the second quarter. The margin increase was driven by a lack of charge on the tanker program compared to the second quarter of 2020, as well as a favorable adjustment on a non-U.S. contract. We received $4 billion in orders during the quarter, including an award for 14 Chinook helicopters for the UK Royal Air Force. We also reached an agreement with Germany for five P-8A aircraft. BDS backlog is currently valued at $59 billion. Now let’s turn to Global Services on Slide 7. In the second quarter, Global Services revenue increased to $4.1 billion and operating margin grew to 13.1%, driven by higher Commercial Services as the market continues recovering from the impact of COVID-19. Operating margin was also helped by lower asset impairments, lower severance costs, and a favorable mix of products and services. During the quarter, BGS won key contracts worth approximately $3 billion, resulting in a total backlog now of $19 billion. We saw incremental improvement in Commercial Services during the second quarter, and we expect the quarterly revenue trend to improve as we support increasing airline flight operations. That said, given the dynamic environment, we can expect to see variability in the revenue and margin trajectory from quarter to quarter at BGS. Now let’s take a look at cash flow on Slide 8. Operating cash flow for the quarter improved significantly to negative $0.5 billion, reflecting higher Commercial deliveries, higher order receipts, reduced expenditures on lower wide-body production rates, and benefits from our business transformation efforts. While we saw a cash flow benefit from order activity in the second quarter, keep in mind that we continue to expect advanced payment burn-down to be a headwind for the rest of this year and into next. Now let’s move to Slide 9 and discuss our liquidity position. We ended the second quarter with strong liquidity, including $21.3 billion of cash and marketable securities on our balance sheet and access to $14.8 billion from our bank credit facilities, which remain undrawn. Our debt balance remains stable at $63.6 billion at the end of the quarter. We expect to have lower total debt at the end of the year due to the paydown of maturing bonds and potential early paydown of our delayed draw term loan. Given the dynamic environment, we maintain vigilance in managing our cash. Thanks to actions taken throughout the business to enhance our cash balance, we believe we currently have sufficient liquidity. We remain focused on reducing our debt levels and actively managing 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. Moving to the next slide. In summary, we operate in a dynamic business environment. We’re seeing the commercial market recovery accelerating. However, it continues to be uneven across different regions, and the near-term path remains challenging. Given this backdrop, we will continue to diligently cultivate opportunities and monitor risks. Our key enablers include vaccine distribution and travel protocols, U.S.-China trade relations, remaining 737 MAX regulatory approvals, and resumption of 787 deliveries. Our financial performance in the second half of this year will largely be driven by these key enablers. On cash flow, we still expect full year 2021 to be a use of cash. Despite additional pressure from the updated 787 delivery schedule, our expectations for cash flow this year have not deteriorated due to timing of advanced payment burn-down and favorable order activity. With respect to the quarterly trajectory for the remainder of this year, we expect continued variability in cash flow quarter over quarter due to timing of deliveries as well as receipts and expenditures such as expected cash tax benefits and MAX customer settlement payments. We still expect to turn cash flow positive in 2022. The key drivers of cash flow in 2022 compared to this year include continued improvement on the 737 program due to lower customer considerations and higher delivery payments, as well as recovery in commercial services. However, advanced payments will still be a headwind in 2022. While our delivery expectations are now higher next year due to some 787 deliveries moving from this year into 2022, the related additional cash flow will be largely offset by the burn-down of advanced payments next year. To close, while focusing on safety, quality, and operational excellence, our team continues to closely examine all aspects of our business, simplify and streamline everything we do, drive stability in our operations, and make long-lasting change. I’m honored to be a part of such a strong team and look forward to our bright future. With that, I’ll turn it back to Dave Calhoun for closing comments.

Thanks, Dave. I appreciate it. As we continue to transform our business, we remain committed to quality, safety, integrity, and transparency in everything that we do and every action we take. I’m extremely proud of the resiliency and dedication of our team, and I remain confident in our future. So with that, Dave and I are happy to take your questions. Thanks.

Our first question comes from Noah Poponak with Goldman Sachs. Please go ahead.

Hi, good morning, everyone. I wanted to ask about margins given the performance in the quarter, and you talked a lot about the business transformation. Is there any way to quantify what you're gaining in the aircraft business, whether it's a structural cost out or where the MAX and 787 production rates need to be to achieve the margins they had last cycle or anything along those lines? And then, can we expect BDS and services margins to continue to march higher from the levels they achieved in this quarter? Thanks.

Yes. Noah, thanks for that question. So let's start with maybe BDS and BGS. As you know, BGS before the pandemic was sort of mid-teen margin business, and I think you saw some significant progress towards that this quarter to 13.1%. I think that will depend from quarter to quarter on mix. There's a variability in many, many programs in BGS, but I think we're seeing positive trajectory there. We see a path to getting back towards those mid-teen margins over time. In BDS, strong quarter on margins with 13.9%. Now some of that was due to, as we mentioned, a higher benefit from a non-U.S. program adjustment that benefited the quarter. Even if you sort of stripped that out, BDS performed well in the kind of low double-digit margin territory that they've been in good times without taking charges. The fact that we didn't take any significant charges in the quarter and performed well across the programs turned out very well. Back to BCA, clearly, we're still in a negative margin territory, although much better than we've been in recent quarters and compared to the same quarter last year. I think a lot there will be driven by rate. We are ramping up in the 737 MAX program at 16 per month now moving to 31 per month at the beginning of next year. We intend to go higher, driven by what we see in the market beyond early next year, and some of that, the key enablers that we just talked about, China being one are important in addition to just overall traffic trends. I think for BCA, it's going to be production rate-driven in addition to getting additional traction on the business transformation efforts we've been making to cut costs. Of course, as Dave mentioned, achieving stability, especially in the 787 program as we work through our final issues is crucial.

Yes. I'm optimistic to get to or beat our prior margins you were accustomed to with respect to BCA, the biggest part being in transformation and the leverage we can get by reducing our sort of break-even rates, and that's what we're working on. It's been quite effective. The key will be to keep it when the market turns back. So anyway, I'm looking forward to that.

So, David, it sounds like you believe you can have the margins you used to have in BCA even before you're all the way back to the production rates you had?

Well, yes. I mean, our initiatives are definitely intending to do that. We'll see when the measures come. But if you think about the dynamics with respect to that, it's all about that underlying infrastructure costs and the consolidation of a couple of plants and a few things like that. That has to give us benefit at similar rates from where we were before. So yes, the leverage is in the rates, but I feel good about where we're going to be.

Can you just quickly give us the millions of dollars of the contract adjustment in BDS?

Yes. We don't have that specific number that we're disclosing. But again, it would be, even if you strip that out, above 11% margins at BDS, which we're happy about the progress there.

Got it. Thank you.

Our next question is from the line of Myles Walton with UBS. Please go ahead.

Thanks. Good morning.

Hi, Myles.

Good morning, Daves and Maurita. Dave Calhoun, some of the order activity in the last six months would seem to be opportunistic as you're backfilling some of those guidelines from the 737 and repositioning some of those. So a lot of questions we get is, is this more just a surge of opportunism or is this really significant demand that's turning positive? Maybe you can frame it for what you expect over the next six to 12 months for order activity.

I don't view this as opportunistic either on my side or on the customer side. When you make decisions to order 270 airplanes, expand your capacity, and get aggressive in the marketplace, that is a fundamental decision. It had little to do with respect to opportunism. The good news when I evaluate the United order is they have to consider all of their routes, all of their operations, and they, as you know, solve for the lowest cost, the most efficient delivery of a passenger route. They make choices around the airplanes. The good news is they have history with both manufacturers. I liked the way our product line competed with our competitor. It was straight up, out of 270, we got 200. The models and the routes that they're intended to satisfy are optimal for United. I'm quite pleased with how that went and it was quite strategic and long-term. In the case of Southwest, it's the same. They benefit from it being in an all-Boeing fleet and we benefit from them being all-Boeing. They're doing the same thing as United. These are two very strong airlines who are staking out the future and making big strategic decisions to do so. They're extending their reach and improving their routes structures, etc. So, yes, I can't see these in any way as being opportunistic. I do think, and expect as domestic markets recover, the trend will be robust. The retirements will stay retired, and I believe most of them will, that we're going to end up in that same real estate play going forward, meaning airlines who get aggressive and have balance sheets who are strong will want to improve their route structures and grow into the market; they'll be the first ones to play.

Okay. So you would expect the backlog on the 737 MAX to continue to build even with the stronger deliveries in the second half of the year?

Yes, I do. Again, I can't predict timing, and I certainly can't predict the scale of each and every order. But I liked the way these were led, and I liked the way we competed.

Thanks.

Next question from Kristine Liwag with Morgan Stanley. Please go ahead.

Hi, good morning, Dave and Dave.

Hi.

Good morning, Kristine.

Can you help us understand the drivers of free cash flow through the rest of 2021 and how we should think about the run rate of 737 MAX concession payments? Ultimately, is there a path to positive free cash flow for any of the remaining quarters of the year?

Yes, so. Kristine, I think number one, the burn-down of advanced payments, as I mentioned, is going to be lumpy, obviously dependent on the delivery schedule. We're going to see that effect in the second half of this year and also in 2022. That is a headwind. The tailwinds you see are expected higher airplane deliveries, certainly 737 MAXs, and as we work through 787 higher deliveries there too, once we complete the work and are able to deliver again. I think we’re not predicting which quarter or if this year might be cash flow positive. It will be variable. We certainly made a lot of progress from Q1 with the Q2 cash flow performance. I think the rest of the year will balance higher deliveries with some headwinds from advanced payments, but also benefits from, as Dave mentioned, continued work on the business transformation efforts and also on the expectation that we may receive a cash tax benefit sometime in the second half; could be in Q3 or Q4. So that would be a benefit to the year as well on cash. But we're not predicting Kristine, not giving guidance on a quarter cash flow level but do see some tailwinds for the rest of the year.

The underlying trajectory is good, and we're making really solid ground on that basis. So I feel good. We always have our quarterly lumps, but I do think this quarter is indicative of the underlying trend.

Thanks. If I could squeeze one more on the 737. Earlier this month, we saw news on China’s willingness to conduct flight tests. Has there been any feedback on what you need to do to get the aircraft certified?

Yes. But let's just say, the dialogue with the CAAC, first of all, remember they have a hundred airplanes on the ground in China that the airlines want to get into the air. They’ve got the Olympics coming and want to move down that path. So they have a lot of natural incentive to want to get this done. We've been working closely with them from the beginning. It's constructive. Technical issues are being resolved. For the most part, I think they're all behind us. I anticipate there will be test flights conducted in certification. As we said, we expect that we will get that before the end of this year. I'm very encouraged about the constructive nature of that progress. I hope bigger trade issues don’t get in the way. I don’t believe they will. Both sides are incentivized for this industry to move forward.

Our next question is from Doug Harned with Bernstein. Please go ahead.

Thank you. Good morning.

Good morning, Doug.

Good morning, Doug.

On the 787. The new issue that you're addressing appears to be the same type of structural non-conformity problem. You've been addressing elsewhere in the airplane since last August. Now, how do you get comfortable to know there's not a next place where this issue could come up? Because it appears to be occurring across multiple suppliers. How do you resolve that for the long term? Is it a production process problem, a quality control problem, or maybe even an over-specification of tolerances? Can you describe a little bit of what's going on here?

Yes, Doug, I appreciate the question. It outlines the heart of what we're trying to accomplish. Let me start by saying this is not the FAA getting tough on Boeing. This is Boeing getting tough on Boeing. We launched a program to inspect because we did find some issues by way of notice of escape out of our supply chain. Early on, we decided we would do a nose-to-tail inspection of all of it, tier one, tier two. We did exactly what you're describing. Our specs to type, the process controls that our suppliers need to be in place for rework operations are essential. In every case, we look for even the smallest exception to the tolerances that we've designed. We take a step to identify it, immediately talk to the FAA about it, fix it, and ensure it won't happen again. We have teams inside our suppliers working on process control development and understanding why that specification is necessary. On our side, we put disciplines in place that make it clear to those supply chains that we're not going to keep our line running if we get one that isn’t right. That’s a little bit of what's going on here. Here's the good news: If we ever add a window to get this behind us once and for all, it’s now. We're producing at the lowest rate ever. Customers are not knocking down our door to get their airplanes in light of the COVID impact on international traffic. We're very determined to see our way through this. The inspections are done right, toe to tail. So those inspections are complete. It doesn’t mean somewhere along the way, our suppliers won't raise their hand and tell us there's an escape somewhere along the way. This extensive effort is covering us. Each issue we find, we have a decision to make with respect to compliance, which is that each part and airplane are built precisely to the drawings we've created. It’s our job to rework the issue, and that's what we're going through. I view this as a courageous moment for Boeing. My hats off to our team, all of these conditions were pre-existing my leadership team. The work they're doing is preparing us for what I am confident will be a strong recovery in the international market next year. The protocols surrounding international travel should improve, and we will be able to respond to rate increases in a stable form and fashion. So I apologize to investors. The last issue wasn’t our last, but we're getting closer, and the underlying causes are getting understood and resolved.

Then is this latest issue, which seemed to be somewhat of a surprise, was that the result of just the completion of inspections, which are now done, and this one was turned up, or is there more to go here? I know there's always a tiny bit of risk, but how would you characterize that?

The inspections revealed the problem; it was part of our inspection process. This one happened to be a tier two issue, going through our supplier, then through our supplier’s supplier to find that process control that needs to be implemented correctly. And the rework we’ve done is largely on their premise. We don't have ongoing inspections from here forward. This effort is mostly complete, and I expect things to change dramatically. Most importantly, the amount of rework we’ll eliminate in our factory and the predictability of our supply chain is much better. Doug, one other comment to highlight is how important the 787 is. During this COVID period, no wide-body passenger airplane has been flown more aggressively than the 787; it’s everywhere. 90% of that fleet is active and being worked hard. So despite the low numbers related to international traffic, the 787 is the prized asset.

Okay. Thank you.

Yes.

Our next question is from Seth Seifman with JPMorgan. Please go ahead.

Thanks very much. And good morning, everyone. Dave, I was wondering if you could talk a little bit about the advanced balance you mentioned as a headwind to free cash flow in the second half, which is almost $51 billion right now. It hasn't really come down very much at all since the pandemic started. Is there a back-to-the-envelope way that you can help us think about how much that liability balance is expected to come down?

Yes, thanks, Seth. That’s going to be lumpy from quarter to quarter, and obviously depending on the delivery schedule, which we’ve discussed will vary. We also saw orders come in, right? Deliveries are happening while orders are coming in. This means we see adding and subtracting at the same time. The bottom line is we still see these PDPs or advances as a headwind through the second half of this year and into next. It's a headwind we think we will more than overcome because we predict cash flow to be positive in 2022. But just so it’s not off your radar, this will continue to be with us for the next several quarters as we work through deliveries out of inventory and apply advanced payments case by case, customer by customer. It’s really hard to predict or give guidance there, but net-net, again, we expect to be cash flow positive for 2022 with tailwinds more than offsetting that headwind.

Okay. Thanks very much. I'll stick to one.

Thank you.

Next, we will go to Rob Spingarn with Credit Suisse. Please go ahead.

Hi, good morning.

Good morning, Rob.

Good morning, Rob.

Just a clarification first, Dave Calhoun, for you. Do you need to do any rework on delivered 787s? That's the first question. The second question on R&D is it's down about half of the second quarter 2019 levels. So when does that trough and when might you expect to start investing in R&D again, growing headcount there, and what will be the focus of that incremental investment?

Yes, I’ll start with the underlying premise on R&D. My view is that we are fully funded on the important R&D efforts that will support BCA broadly. I want to separate that from development funding, which is the ongoing certification work associated with the MAX 10, 777X, and I hope in the relatively near term a freighter version of that airplane. We have been busy on the development front and spending a fair amount of money on that. I don't expect that number to significantly go up in the relatively near term, not because we won't take on new projects, just because. The next comment I would make on the research front and the likely technologies that will surround that next airplane is it’s not going to be dramatically different with one exception: everything sustainability. That next airplane will have to meet some serious sustainability tests. I do think that sustainable aviation fuels will be a significant part of that, and our propulsion suppliers with respect to their packages have been working on that push. It’s going to be a fight between sustainability propulsion packages and meeting that specification. For Boeing, it’s about making this the most efficient airplane possible. Our investments in the underlying modeling technologies that have to be deployed, applying the digital thread we have in our defense programs to the commercial programs, is critically important. It will shorten the cycle on development and improve productivity on the program itself. Our production system will be quite different as we prepare for development. We have active programs on the modeling and production system to be ready for that moment. I’m confident that our R&D budgets align with the needs of our BCA business.

Okay. And then just on that 787, any retrofit needed?

Oh yes, I’m sorry. That’s a determination that has to be made with the FAA. The safety margins on the structural elements of our airplanes are substantial. It’s not exactly an easy set of analyses to go through. Our teams have made attempts at it and they go through the FAA in great detail. So I don’t really know the answer right now. The ideal for all of us is to incorporate it into the ongoing maintenance schedules of the airlines. That’s our hope and desire, and I’m going to leave it to the FAA and our conclusions on that front.

Okay. Thank you, Dave.

Yes.

And next we'll go to Rob Stallard with Vertical Research. Please go ahead.

Thanks so much and good morning.

Good morning, Rob.

Good morning, Rob.

I can't really keep track of the number of times you mentioned China on the call, but this is clearly a very important issue. Now, Dave Calhoun, you said that you expected certification by the end of the year. Is that effective the drop-dead date, that if we’re sitting here on the 31 of December and you haven't got certification, then you'd have to then cut the, say, the 737 RAM, for example, and maybe push out the recovery on the 787? Or is it actually an earlier day because you need to give notice to your suppliers?

Yes, it’s a great question. If we get to the end of the year and, importantly, we’re not very close to certification, we will have to consider actions with respect to what the future rate ramp looks like. So yes, your premise is right.

So that still gives suppliers enough notice to effectively double production in that timeframe?

Yes, but we put some margin into that. We may need to take some risks ourselves concerning their readiness and production rates and inventory we might accumulate. That’s on us. We understand that, but yes, we’ll have to give them notice.

That's great. Thank you very much.

Yes.

Our next question is from Sheila Kahyaoglu with Jefferies. Please go ahead.

Thank you. Good morning guys. Just a follow-up on Bob's point since we're on the Max. Can you talk about the ramp to 31 a month production in the beginning of 2022 from 16 today? Burning down half of the inventory of aircraft at the beginning of the year implies 165 deliveries, and assuming a 16 per month production rate through year-end, that implies a delivery rate of 44. So how do we think about that visibility on a regional basis? What kind of assumptions did you make on China and other regions? And then also just on that last point you made, Dave, on profitability, what does that mean for BCA profitability and when might you hit breakeven?

Well, I can't throw a dart and be that precise with respect to the day we are at profitability. But we have a real rate ramp scheduled for the remainder of our year on the subject of deliveries, not so much production. I think we get as high as 50 as we exit the year. That begins to make a big dent, and I'm confident we can do that. We have de-risked our year largely for China, which becomes next year's risk with respect to delivery. We will run that play and that ramp as hard as we can. We have signals with respect to where China is well before that. If we have to make adjustments, we will. We're prepared for the delivery rate. I think we're close to what we've already demonstrated. I think we delivered over 30 in June. We've got big teams; they know how to do it, the FAA has granted us our authorities, and we're running full speed. The performance of the airplane has been fantastic.

Thank you.

Yes.

And our next question from Ron Epstein with Bank of America, please go ahead.

Hi Dave, how are you?

Hi, Ron. Good.

Just maybe a question on the engineering front. There has been some press that we've seen some engineering ranks sitting out at Boeing. How do you think about that, particularly at the more senior level, some of the senior technical fellows moving on? Are you worried about a bit of a brain drain in the engineering ranks at Boeing, and how are you addressing that?

With every retirement of a seasoned veteran in Boeing in engineering, there's always a, oh my gosh, what’s going to happen, because they carry an awful lot of knowledge. So I accept that as a norm. On the other hand, those very same people work hard to train the best engineers that the aerospace industry will ever see. When moments like this happen, where we have a few more retirements, mostly just natural, voluntary actions on their part, it’s good for them and good relation to us. The folks they've trained all these years step up in amazing ways. They are impressive and they are good. In many ways, there are always two sides to that coin. I love what I’m seeing with an incredibly qualified and highly motivated group of younger engineers who studied under these folks. I promise you, these folks who left will never forget to return those kids’ phone calls. Life goes on. I continue to improve. I have been traveling the engineering function across The Boeing Company in some of the highest profile projects; the most amazing technologies I’ve ever seen. I don't ever come away unimpressed. I really don't worry about it. I do worry about input, meaning we are now in a ruthless competition with everybody, not just in the aerospace industry, which is getting bigger, but also all of the folks in the cyber and Silicon Valley world. But I like our chances. We've got a great mission, and most engineers start their career based on the mission of the company. We've got a pretty good one, and we try to attach them to that.

So, just as a logical follow-up, what are you doing to recruit the best? I mean, there's a lot of choices out there, like you highlighted. In fact, there are even a lot of startups now in aerospace, which is an interesting time. How are you getting the best folks to come to Boeing?

Big internships, we have a lot of them, and we never slowed them down during COVID. I personally participate in discussions with many of the interns. This virtual world allows you to do that. It’s all about the mission; most of these engineers want to make a difference. They want to go to deep space. They want to help protect their country. These are meaningful things. So, we try to attach them to our mission and vision, and then we try to give them the best set of assignments they can get. We move them around, do things Boeing can do because of our big footprint. Some of them just want to delve deeper into a particular technology where we are a world leader. Those are easy for us to recruit because they want to go deeper. We’re active on this, and I’m personally active on it, confident in what Boeing brings to them.

Hey good morning, gentlemen.

Good morning, Carter.

Good morning.

Just a question on the 787. I know you had been pretty close based on the previous disclosures to forward loss on the program, just given where that stood. And given that you’ve now taken the delivery rates lower, I was kind of surprised you didn't actually tip that line. Was that related to the efficiency you talked about earlier, Dave, in terms of the backend? Just any color you could help us on how you guys avoided that despite the lower production would be helpful. Thanks.

Yes, Carter, thanks for the question. Certainly, there are additional costs associated with the rework, production rate adjustment, delivery timing, etc., but there also are offsets that have enabled us to maintain a positive margin there. It’s still near zero, but we have work to do to enhance it. We examine this very carefully each quarter with our auditors. So, we have additional benefits from the cost side offsetting enough so that we don’t find ourselves in a forward loss position. Our objective is to keep moving north in higher margins and to achieve stability.

We have not made any unrealistic forward assumptions concerning productivity. We don’t do that.

Great. Thank you for the color, gentlemen.

Yes, thanks, Carter.

Our next question is from Richard Safran with Seaport Global. Please go ahead.

Everybody, good morning. How are you?

Good, Rich, how are you?

Excellent. So, Dave I wanted to know if you could expand on your opening remarks about freight and your strategy there? Your comments about current freight demand, I would think drive an improvement in your long-term outlook and wondering if that's the case. Am I correct that there are new emission standards coming that might impact the 737 and 777 freighters? I was wondering if you could comment on how you are going to address and meet those standards. Finally, Airbus is talking about a 350 freighter; any plans to address this threat? Dave, I'm just trying to get to your overall product strategy here for freighters.

Yes, I am quite confident in the freighter market. I think some secular things have happened that will continue to make that a critical market. We are significant in that market and maintain long-standing customer relationships. In the next couple of years, prior to the ICAO standards being implemented, I’m confident it will drive additional demand for the 767 and the 777. We need to develop a new ICAO-compliant freighter version opportunity. I see the 777X as the logical place to do that. As I said, without suggesting we’ve already launched or that there’s a plan by the day that might be our next program. I am confident and interested in that avenue. Moreover, there are exemptions that exist within the ICAO language that have to be accommodated by our U.S. Government in some way, shape, or form to allow for a transition strategy to that type of opportunity, which is ICAO compliant. You may or may not recall that when the 767 goes into a FedEx or UPS opportunity, this displaces aircraft that are 40% less efficient and 40% less environmentally friendly. There’s a transition strategy that should be implemented to help us in that. We need to step forward on an airplane itself. Yes, I’m most interested.

Operator, we have time for one more analyst question.

Certainly. And that will be from Cai von Rumohr with Cowen. Please go ahead.

Yes, thanks so much for squeezing me in. So, Dave, I was a little surprised by your comment on expecting China approval by year-end. While I get it that the airlines wanted that you are making progress with testing, nothing in China happens without political okay. Everything I read says that the situation has declined. The question is, are you seeing any specific signs either from the Chinese government through your contact or from the U.S. Government that would give you confidence to make a projection that you expect to see those the approval by year-end? Thank you.

Yes, let me just state the obvious. I don't want to imply that anything is risk-free on this front. It’s not; it never will be, especially as it relates to China relations, which are real. We’ve seen all the strains as well. The advantages and needs on both sides with respect to the need for the equipment, again, 100 airplanes on the ground, and an economy that has recovered from COVID the fastest. Additionally, an economy preparing for the Olympics and substantial traffic to and from in the domestic market are strong pressures. There’s nothing preventing this trade from happening. There's no written constraint; you can't do it. Both our government and the Chinese government understand the importance of our industry, and I have confidence they understand the economic implications. We’re going to stay the course and support free trade between the two players, both of whom see the economic benefits. There’s a corridor for trade that works closely together.

Thank you.

Yes.

All right, that completes The Boeing Company’s second quarter 2021 earnings conference call. And thank you all for joining.