Conference Call.

Today's call is being recorded.

The management discussion and slide presentation, plus the analyst and media question-and-answer

sessions are being broadcast live over the internet.

At this time, for opening remarks and introductions, I am turning the call over to Miss Maurita

Sutedja, VP of IR for The Boeing Company.

Miss Sutedja, please go ahead.

Thank you and good morning.

Welcome to Boeing's second quarter 2018 earnings call.

I am Maurita Sutedja, and with me today is Dennis Muilenburg, Boeing's Chairman, President

and CEO and Greg Smith, Boeing's CFO and EVP of Enterprise Performance and Strategy.

After management comments, we will take your questions.

(Operator Instructions) We have provided detailed financial information in today's press release

and you can follow the broadcast and presentation through our website at boeing.com.

Before we begin, I need to remind you that any projections and goals in our discussion

today are likely to involve risks, which is detailed in our news release, various SEC

filings and the forward-looking statement disclaimer in the presentation.

In addition, we refer you to our earnings release and presentation for disclosures and

reconciliation of non-GAAP measures that we use when discussing our results and outlook.

Now, I will turn the call over to Dennis Muilenburg.

Thank you, Maurita, and good morning.

Let me begin today with a brief overview of our second quarter operating performance followed

by an update on the business environment and our expectations going forward.

After that, Greg will walk you through the details of our financial results and outlook.

With that, let's move to slide 2.

Thanks to the dedicated efforts of employees throughout our Company, Boeing delivered strong

second quarter 2018 financial results that included higher revenue and earnings and strong

operating cash flow, driven by solid execution across the Company.

During the quarter, we generated $4.7 billion of operating cash and repurchased $3.0 billion

of Boeing stock.

We also paid $1.0 billion in dividends, reflecting a 20% increase in dividends per share from

last year.

We continue to deliver on our commitments returning cash to shareholders, while investing

in our people, innovation and future growth.

Revenue in the second quarter was $24.3 billion, reflecting higher volume of commercial deliveries

and favorable mix, along with services and defense contract volume.

Core earnings per share of $3.33 was driven by strong performance across the businesses,

volume and mix, and lower tax rate, partially offset by a write-off due to the previously

announced Spirit litigation outcome and cost growth on the KC-46A Tanker program, which

I'll address shortly.

For the full year, we're raising guidance for revenue to reflect higher volume at BDS

and BGS.

Additionally, we're adjusting BCA and BDS segment operating margin guidance.

Greg will discuss these in more detail in his section.

Before we delve into the second quarter operating performance for our businesses, let me spend

a minute on the KC-46 Tanker program.

We continue to make steady progress towards final certification for the KC-46 Tanker and

recently completed all flight tests required to deliver the first aircraft, which is expected

to be in October of this year as now agreed upon with the US Air Force.

This is a significant milestone for us and our customer, representing the combination

of three years of testing and over 3,300 flight hours.

However, the program did see additional cost growth in the quarter at $334 million after-tax,

primarily due to higher estimated cost of incorporating changes into six flight tests

and two early build aircraft, as well as additional costs as we progress through the late-stage

testing in certification process.

Regarding these flight test and early build aircraft, as flight testing to support the

first delivery was completed, and final configuration of each aircraft has been defined, the plan

to complete manufacturing of these eight aircraft is now clear and firmed up.

While there's still a lot of work ahead of us, we now have a very clear line of sight

what is needed to deliver these highly mission-capable aircraft to our customer.

We remain confident in the long-term value of this franchise, a program that is going

to have a production run measured in hundreds of airplanes and decades of follow-on support

and training.

With that, now let's look at Commercial Airplanes.

For the quarter, Commercial Airplanes generated revenue of $14.5 billion, reflecting 194 deliveries

with operating margins of 11.4%.

Continued healthy sales activity contributed to 239 net new airplane orders or $16 billion

during the quarter, including 91 widebody orders adding to our robust backlog that stands

at nearly 5,900 airplanes and is worth $416 billion.

Year-to-date, we have captured over 900 net new orders and commitments.

The 737 MAX program marked it's one year anniversary of entering revenue flight service in the

quarter and its production ramp-up continued.

To date, we have delivered 162 MAXs, with 52 of them delivered in the quarter.

As for the 777X program, in the quarter we moved the first two test airplanes into the

low-rate initial production line in the main factory.

We also began the systems testing for this exciting development program.

We'll remain on track for first 777X delivery in 2020.

Now, over to Defense, Space & Security.

BDS reported second quarter revenue of $5.6 billion, reflecting the Kuwait F/A-18 production

contract award and higher weapons volume with operating margins of 9.3%.

The $7 billion of new orders booked by BDS during the quarter demonstrates the value

we bring to our customers across their defense, space & security portfolio.

These orders included finalization of the production contract for 28 F/A-18 Super Hornets

to Kuwait, an additional order for 18 F/A-18 Super Hornets for the US Navy and three P-8

Poseidon aircraft for the US Navy, as well as a multi-year contract for 58 V-22 Osprey

aircraft.

Key milestones for BDS included induction of the first F/A-18 aircraft into the Service

Life Modification program, two successful tests for the US Air Force's Minuteman III,

and production of the 100th P-8 aircraft.

On the commercial satellite side, we successfully completed the O3b mPOWER preliminary design

review with SES.

Turning to Global Services, our integrated services business completed its first full

year of operation at the end of the quarter.

BGS reported second quarter revenue of $4.1 billion with operating margins of 14.7%, reflecting

higher volume along with product and services mix.

During the quarter, BGS won new business totaling approximately $4 billion that demonstrates

the value that we bring to our broad range of commercial and government customers.

These included in an F/A-18 depot maintenance contract for the US Navy and Marine Corps,

a Global Fleet Care contract for Primera Air's 737 fleet, and performance-based logistics

contracts to support the Netherlands rotorcraft fleet.

These orders highlight the strength of our One Boeing offerings.

Additionally, BGS delivered its first 737 Boeing converted freighter in the quarter.

As part of our growth strategy of complementing organic investments with selective strategic

acquisitions, in May, we announced our agreement to acquire KLX a major provider of aviation

parts and services.

By combining the talent and product offerings of our ABL business and KLX, we will provide

a one-stop shop that will benefit our supply chain and our customers in a meaningful way.

Also in the quarter, we announced a proposed partnership with Safran to jointly design,

build and service auxiliary power units.

This move will strengthen Boeing's vertical capabilities as we continue to expand our

services portfolio and make strategic investments that accelerate our growth plans.

In summary, we delivered another quarter of strong operating performance, captured noteworthy

additions to our large and diverse backlog, returned significant cash to shareholders

and complemented our organic growth with planned, strategic inorganic investments.

With that, let's turn to the business environment on slide 3.

We continue to see healthy global demand in our commercial, defense space, and services

markets.

We've recently revised the size of these growing markets upward to $8.1 trillion over the next

10 years.

In the commercial airplanes market, airlines continue to report robust profits and strong

passenger traffic outpacing global GDP.

Passenger traffic in 2018 grew 6.8% through May.

Meanwhile, cargo traffic maintained its strong momentum, growing by 5.3% in 2018 through

May, as we see trade and industrial production growing in all regions.

Our global customers continue to recognize the compelling value proposition that our

new, more fuel-efficient product family brings to the market as reflected in the healthy

new order intake we've seen year-to-date.

We continue to see the trend of diverse and balanced demand from a geographical perspective,

as well as across the spectrum of airline business models.

The changing nature of travel with the expansion of network city pairs and rising middle-class

population in emerging markets, have fundamentally expanded traffic patterns and underpinned

sustained growth.

There also is more balanced demand between fleet growth and replacement of older aircraft

and we're seeing more consistent stable customer purchasing patterns.

We believe the evolution and key market dynamics in the aggregate is driving greater stability

and far less cyclicality for our industry.

Over the long term, we remain highly confident in our commercial market outlook, which now

forecast demand for nearly 43,000 new airplanes over the next 20 years, up from our previous

outlook of approximately 41,000 airplanes.

This is comprised of more than 31,000 aircraft in the narrowbody market and approximately

9.000 aircraft in the widebody market.

These deliveries, of which 44% will be driven by replacement demand, will double the size

of the global fleet.

This long-term demand, combined with healthy market conditions and robust backlog, provides

a solid foundation for our planned production rates.

Turning to our product segments, starting with the narrowbody.

Our production rate of 52 per month, starting June of this year and planned increased to

57 in 2019, is based on our backlog of nearly 4,700 aircraft and a production skyline that

is sold out into early next decade.

We continue to assess the upward pressure on the 737 production rate.

In the widebody segment, we have seen steady orders for the 787 and 777 airplanes and have

high confidence in a meaningful increase in widebody replacement demand early next decade.

For the current generation 777, we received 19 net new orders in the quarter, bringing

the backlog to 96 aircraft.

The renewed strength in the air cargo sector has provided support for the 777 bridge as

highlighted by recent orders, which included incremental freighters for FedEx and DHL.

Additionally, earlier this month, we finalized Qatar Airways order for five 777 freighters

and received a letter of intent for 29 777 freighters from Volga-Dnepr and CargoLogicHolding.

As we transition production to the 777X, we expect 777 deliveries of approximately 3.5

per month in 2018 and 2019, as previously announced.

As you can see from the recent activities, we continue to make good progress on the 777

bridge.

And while we still have some work to do in filling the remaining 777 production slots,

in particular for 2020 and beyond based on our progress of capturing new orders and commitments,

managing the skyline and working new campaigns, we continue to believe the rate plan we've

put in place establishes a floor for the program and supports our production bridge from the

current 777 to the 777X.

As we look forward to the 777X, we have a strong foundation of 340 orders and commitments

that support our plan for ramping up production and delivery of this new aircraft.

We also captured 59 orders for the 787 Dreamliner family in the quarter, a solid platform for

long-term production.

With more than 650 firm orders in our backlog, our plan to increase Dreamliner production

to 14 airplanes a month in 2019 is well supported.

We continue to see repeat orders for the 787 Dreamliner, including from Qantas, Bank of

China Aviation and United.

These repeat orders, coupled with continuing attraction from new carriers, such as Bamboo

Airways, recent commitment for 20 787s, highlight the strong market preference for 787 and its

superior value.

Turning to our 747 and 767 programs, with our unmatched freighter product lines, we're

well positioned to capture the increased cargo demand.

During the quarter, FedEx announced an order for 12 incremental 767 freighters.

This further supports our 767 production rate increase from 2.5 per month to 3 per month

in 2020.

We remain focused on the strong, long-term aerospace industry fundamentals as highlighted

by the continued strength of traffic.

It's important to have this in perspective as we navigate through global trade discussions.

As a global company with operations around the world, supporting commercial and government

customers in more than a 150 countries, Boeing maintained strong relationships with our customers,

suppliers and other key stakeholders around the world.

We will continue to engage with leaders in these countries to urge a productive dialog

to resolve trade differences, highlighting the mutual economic benefits of a strong and

prosperous aerospace industry.

Turning to Defense, Space & Security.

We continue to see solid demand for our major platforms and programs.

The final appropriation bill for fiscal year 2018 US federal budget funded our key programs

across our fixed wing, rotorcraft and commercial derivative aircraft and our missile, space

and satellite products.

Boeing continues to see strong support for our key products in fiscal year 2019 President's

budget and in Congress, including increased procurement of one 110 F/A-18 Super Hornets

across the future year defense plan and support for a fourth multi-year procurement for the

F/A-18, and increases for various programs in our weapons and rotorcraft portfolios.

The BDS portfolio is well positioned with mature world-class platforms to address current

needs.