Good morning everyone. See a lot of familiar faces out there. Very pleased to kick off the aerospace and defense portion of our conference with A - Jim McNerney, Chairman and CEO of the Boeing Company. Very-very pleased to have him here. It’s already staff that’s kind of off the race this year so I think a lot excitement, a lot on people’s minds so we’re looking forward to a discussion. Just before we get started, as I always do, I like to kind of take the poll of the audience and figure out who we have in the room and I want to ask a couple of the audience response questions and just put up the first one whether or not we’re currently on the start please go ahead and respond. So Jim this is where we’ll see the opportunity.

I do.

You own it as well I know. All right. So [indiscernible] owners and then question number two so we connected the stage as well general bias where the stock right now please go ahead and respond. That’s interesting. All right. So we got a lot of likers but not as many owners so probably a lot of opportunity.

Target rich environment…

Exactly, yes. Thank you for joining us. We really do having you here I want to kind of kick off the discussion and just you made some comments on the fourth quarter call regarding how you thought about the company’s position relative to where you’ve been in the prior years, you talked about completing rate ramps, refreshing the product portfolio, sealing labor agreements. There is a lot that’s being going on in the last couple of years. So when you take a step back and say what is that mean for the financial performance of the company over the coming years and what we should expect from that, I wonder if you might talk to that from a high level.

Yes, I mean I think some of the building blocks that you mentioned I mean getting the pension fixed we’ll have close to 90% of our employees on contribution based pensions 10 year agreement with our largest unions, one yet one where we don’t but the vast majority we do. Our position in wide body airplanes is very strong in terms of how our line-up compares to our competitors and yes rate has been taken up significantly a lot of that risk is behind us. And I think we are flowing a lot of the technology that we’ve developed over the last decade into the next decade which is I would characterize as a de-risk environment. I mean for example the 777X wing will be the fourth composite airfoil that we will have done as opposed to the first composite airfoil that we did on the H7 at the beginning of that program. And so we’re more sure footed in terms of deploying this technology that is making our airplanes unique we’re hedged competitively there and so I think it bodes well and I think a lot of the risk on the H7 is behind us in terms of the product development and the R&D associated with it. And now we’re dealing with the normal things we do which is distraction liability on the airplane maybe even taking rate up higher we’re already at an all-time high, 10 a month of wide body airplane has never been produced at 10 a month before. But we have plans to go to 12 and possibly higher so I think we’re in a pretty good position. So some stable more stable financially and good growth prospects on particularly the commercial side of our business.

When you think about what this means, I remember having launch of the -- couple of years ago, and we’d had a conversation about this. And it seems very relevant and a broad industrial conference when you look at how Boeing compares to other industrial companies and the level of risk that the company takes in its products and the level of return you get from that. Obviously the product decisions on 737 MAX, 777X have been a bit different than what the company has historically done. When you look out at the end of this decade or into the next decade how do you think that influences the risk adjusted return profile of the company. Are we on a path to record margins at some point and should we see expect to see the volatility of investments maybe come down. How do you think about what this company will look like?

I think it bodes well for cash generation and a lower beta on earnings within the context of growth I mean I think the lumpiness in our results come from new to the world kinds of investments that take a little longer to get done or cost little more to get finalized. And I think we’re now dealing with flowing a lot of those hard fought technologies into all of our platforms which is lower risk proposition. You’re right I mean in the lead into your question, I didn’t see in our conversation at launch that day that we were getting paid for the risk we were taking as a systems integrator and I felt that from the – because integrating these systems is more complicated than it used to be, there is lot more that goes in to integrating 7A7 that went into integrating the first 737 the software the sensing technology just the seats which are basically implied entertainment centers. So much more difficult task and so I think we begin to work with our suppliers differently where I felt that the risk we were taking was not commensurate with the return we were getting as we begin to work with them in different ways where we were trading volume for margin and deals that we get with them and giving them more visibility to a future and at the same time paying us for what the risk we are taking. So that’s a program partnering for success it will continue out over the next decade and we have a long product lifecycle I mean the programs you mentioned 737 max and the 777X and I think you mention within the context of derivative programs falling technology as supposed to another major 787 kind of development and that’s done by design because we have the technology that we can do it with and we were very cognizant of another 787, we don’t want that, in terms of the risk profile we love the airplane. But the financial characteristics were not fine.

I want to just direct our discussion by asking another question to audience that we can pull up question six just to see what’s most comparable, what you see the most significant investment issue for Boeing core growth margin performance capital deployment execution strategy.

Just when it feels better I worry about all four of those.

That’s why we talk about all four, I just want to make sure.

So it is everybody.

Obviously it looks like margins and growth makeup a significant portion of that, one of the things we talk about lot is cycle, obviously we have a large backlog I know you guys something that feel very comfortable but me and investment community tend to focus a lot on the simple changes in that backlog, what is the prospect of continuing growth there you expect continue to book orders in this kind of oil price environment I know last year we were very worried about growth carriers and some of those parts of the world and today is the price we’re worried about, replacement orders how you’re thinking about the cycle at this junction with oil prices where they are.

I think the over comment is that this cycle characterized by much more than prior cycles by replacement demand, in other words that’s the demand that is not tied to GDP growth I think we all have the scenario that says, slow growth globally and so you have to be able to innovate and replace current products with new products and that’s been Boeing’s strategy and that’s what the 87s all about that’s 777X is all about. Roughly half of our demand is replacement and that has the effect of muting a cycle in the sense that you’re not tied to the overall economic because the new plans they’re buying payback so quickly versus the old technology and so that’s the innovators advantage. So what we’re seeing from our customers is continues to be strong demand maybe you’ve seen some quotes that I haven’t but all the CEOs that I know who run airlines are saying oil prices effects makes no difference. We buy these 25 year assets based on an expected global view that isn’t today it’s not a $130 nor is it $50, it’s the expected value overtime. We went back and did a analysis on the -- hard demand either dollar strengthening yes or no or -- high yes or no, there is very little correlation. What really correlates is the value that we bring and we’re in the period where our airplanes bring a lot of value versus our competition.

To the extent you have the margins there, as the lot of airlines in the world, to the extent you get a handful of those who do say I’ve got smaller aircraft I can fly and I have the flexibility of push. The flip side I guess of that is beneficiary oil from a demand stand point. You’ve seen a lot of people request who up in the backlog, is that a trend you would expect to continue?

It’s still happening I mean more people want to move up in the backlog they want to be pushed back in the backlog in general. You remember the 787 program was approved at $40 oil, people forget that. So our view then remains today is that this asset which has 20 plus percent better fuel, 30 plus percent operating economics, which is an amazing step function change pace back at virtually any expected oil price that an airline executive has that's what they’re saying.

When you look at the profitability of the big programs obviously when you talking record rates, thinking about going higher, if you look at the margins that BCA, they coming out of commercial aircraft division over the last couple of quarters of elevated period expenses. Obviously 77, a little bit more cost there, when you look at fundamentally where the major programs are 37, 777, 87 what's the long term directionality or margin outlook that you see for those programs as you look at over the next three to five years?

Well, I think the margins are very strong on 37 and 777, we have close to -- we've basically executed the transition from the old model to the new model on the 737 and the margin outlook remains strong as we've done that, that's not easy to do but I think we are there. 777, I think we're not done with that kind of transition but I think it is very doable. 777 has a unique place in the marketplace, our competitor does not have a product that matches up well there. So the transition from the old to the new model I would anticipate would not only happen without a hit to production rates.

Do you think you’ll maintain a margin rate.

And also I don't want to make a margin prediction but I think it's pretty far out there but I think we have a plan to successfully mitigate margin pressure there, let's just put it in that way.

And is that primarily based on productivity efforts -- ?

It's productivity efforts for the happening today it’s the fact that we can get pricing commensurate with value because there is not a immediately ready competitive offering and the current 777 airplane is a value proposition versus what's out there not dimension the next 777, so we're at a very strong position there where as the 737 has a direct competitor and we are still able to navigate that transition without a stronger competitive environment I think the prospects are very strong and we can do the same thing on the 777, and we're off to a good start, 63 orders last year as I think you know we're trying to get between 40 and 60 a year to get the bridge done.

Switching gears because that only focus solely on commercial as we often tend to do going at this pace obviously the conversation with given the way that the present [budget] request was couple of weeks ago given what we widely expect to see and it depends on budget that the conversation has – shifted to a return to growth and it depends industry if you got certain pretty high profile programs that are in their later years of maturity and some that are in our early years like EA tanker when you look at your defense portfolio and compare it to the peer group over the next say 3 to 5 years as we return to growth, what is your expectation in terms of the relative growth you'd expect -- to generate relative to peer group?

I think I would choose our position, I think the -- we have the tanker and the P-8 in place. One is just exiting low rate production and the full rate production P-8 and tanker is on track and is going well will -- already flown the base airplane end of last year. In the first of this year the militarized version will get in the air and then start delivering in '17 I think and that's going well, then I think it gets to because that will be replacing C-17 slowdown in some of the fighters, satellites and -- are doing very well, growth prospects both satellites and -- launch sort of pretty good shape. So, all of that should replace the pressure we see on C-17 going away and on fighters. On top of that there is Long-Range Strike, UCLASS and T-X all of which we have strong offerings in. I have a personal view on where we're strong in those competitions, it will play out but I think a reasonable yield of those three programs gives us some moderate growth on top of the P-8 tanker replacing C-17 pressure on fighters so that all makes sense I mean I know you know our business well so I hope anybody out there understood all that matter.

No, it adds up a very just a slow moderate growth and you feel good about your chances on the bomber?

Yes.

Very good.

But the customer decides we don't.

That's great. Just kind of shifting gears a little bit, if you go back to 787, obviously last quarter the target for deferred production cost for those who don't know the capitalized cost on that program went up a little bit but I wondered if you might expand a little bit and help us to understand what's going on in that program driving that is that more heads on the program, is it high staffing levels or is there some level of disruption or it's [indiscernible] first of all overall the amounts that that deferred product represents given the unprecedented advanced demand for this product over time that I don’t see it as an issue over time I think it’s more an issue of quarter-by-quarter timing. And I would say somewhat more than half of that quarter-by-quarter pressure relates to investments we’re making that make economic sense that have a chance to improve productivity in Charleston a chance to improve productivity in Everett spending $75 million to do that it pays back handsomely we make those investments puts a little pressure on that balance. But there is also some manning and productivity that manning in particular coming down more slowly that we’d anticipated as we ramp this program up so fast that we had to keep manning on a little bit longer than we’d anticipated but we have good plans to get that down. And the trajectory that Greg mentioned on the last call I think remains solid.

Lot of that improvement in the cost of the airplane and the profitability embedded in that forecast based on simple sort of learning curve concept is it really based more on mix than we think about shifting more to 787-9, 787-10…

It’s both, so I mean I think there will be a mix up and even in the current backlog most people have agreements that they can mix up from the -8 to the -9 to the -10 even in their base orders but certainly in their options. And I think there will be more -9s and -10s sold on this program when we look back 25 years from now and that’s all good news on a mix standpoint in terms of those airplanes create more value we get more price for that value and at the same time learning curve productivity bring some activities back in house where we can get a better return and a more surefooted control over delivery and cost.

So despite the fact so there is an adjustment in the short-term in terms of those….

It doesn’t change our view longer term.

But the profitability of the program you still see the potential for margin expansion on that program over time?

Yes absolutely.

I just want to kind of hit on the cash topics and like a considerable response obviously you’ve guided to a level of a little bit more than $6 billion in for cash flow this year obviously last year was a very strong year really outperformed our expectations and similar your own expectations. When you look at the cash generation of the company how much of last year’s performance or even the year before where you were very-very strong at the end of the year it’s just based on timing and maybe a little bit of luck and how this all works out and how much of it is just prudent in planning when you guys set out a cash flow guide or an outlook for the year when we look at this year’s guide is it similar and how you set the prior couple of years or is there anything different in the moving parts?

Our headset is I think the same every year. I mean we’re not trying to be overly conservative nor are we overly lucky in the fourth quarter every year I think we’re in a business where cash flow can be a little lumpy. The numbers are big and they can move around if you don’t get a progress payment from some countries that is what 45 of something and the progress payments switch from quarter-to-quarter and that can be a very big number. And so we have some prudence in our guidance only because not because we’re trying to be sand baggers but because we just live in a world where things move around a little bit. And then we spent all year trying to execute like hell and try to make all those come home. And last few years a lot, not all of them but a lot have come home and that’s the way we run the company.

So with respect to the cash you’re generating with respect to sort of $8 billion of repurchases and dividends over three year time frame that would imply kind of reducing the share count and market capitalization of the company 20%-25% over that time period. Is that a deployment profile that’s sustainable while still being able to invest in whatever the next opportunity is? How do you think about the sustainability of that and are those reasonable numbers to think about….

I am not exactly sure how that equates with our guidance on 80% return to shareholders but I think it’s roughly in line I see that as very doable and consistent with R&D levels to get the new airplanes out, consistent with the CapEx required to facilitize 777 and Charleston in support of the H7 so we feel comfortable with that level if I am understanding I mean Troy can talk to you on this understanding but I think those levels are sustainable and I think the cash opportunity for this company remains strong and has an opportunity of strength.

Well, I guess at the core of the question you’ve been higher than that 80% recently obviously very strong levels of repurchases last year I think Greg said multiple times on calls that company probably has a little bit more cash than it needs to the tune of few billion dollars. So that 80% it seems clearly sustainable, is there something you see in terms of your deployment above that level as well as the balance sheet room is there that implies that it might be more than that.

I think we’ll have to make those specific decisions as we get there but I think I’ll just leave the statement highly confident on the 80% and realize that there is cash strength that could lead people to conclude there is opportunity beyond that. I see some of that same cash strength but we’ll deploy the cash we’re mindful of shareholders and as you’ve seen over the last couple of years and that has -- that won’t change.

Great, we finish up with cash. I do want to ask the last question which is number four, which is your opinion what should going to do with excess cash bolt on M&A, larger M&A repurchases dividends, -- if anybody debt pay down an internal investment, please go ahead and answer. Okay. So almost 70% despondences’ like share repurchases, so let’s play demographic and say what are the pros and cons of inorganic investment and not doing share repurchases and you’ve talked about M&A expansion into services, trying to position the portfolio for even more growth and capitalized on your position, maybe speak to the benefit that seeing a little bit more balanced and just focus slowly on share repurchases.

I mean if I can just take the picture I mean we are the largest and most broadly based aerospace company in the world as you know. So we already have the benefit of diversification classical strategic diversification. So there is no big rush for us to go feel some big hole on some strategic metrics. So basically given that our expense is already where wanted to be, my focus is on organic growth and I don’t want to buy things as -- to replace my inability to grow organically, okay. And so organic growth is going to be our first, second and third priorities. Now that doesn’t mean bolt on acquisitions that sort of compliment some of the capabilities we need and some vertical space or some services opportunity which complements the organic growth story will not be part of our plan, it is part of our plan and you’ve seen it over the last few years. But much more of an organic growth focus smaller bolt-on opportunities that complement that much less of a headset even with cash to jump into some big acquisition that gets us into a new space.

And how do you feel about the valuation we see out there because it --

It’s ridiculously high with the possible reception of my ship price. The numbers are hard to make work without significant bolt on kinds of synergies.

Very good. Something we only seem to touch on once every few years and this is something we talk about in 2009, 2010 was the euro, obviously you guys don’t have any direct exposure to change there because principle competitor does, what you see as the potential impacts on your business in terms of the risks of the pricing environment, how that influences the competitive landscape, how you’re thinking about that because it’s a big move?

I think as I mentioned earlier we’ve done some analysis over time and there is a very low -- between where the dollar is and demand for our products. And I think that because some of the same logic on oil prices is because people look at it and expect that value for an exchange rate is overtime and same, and so it’s not a point in time kind of look because when you buy an airplane a lot of the cost to buy and a lot of that cost has some of the same exchange rate characteristics. So very low -- Secondly you’d have to ask the airbus guys but I mean, according to their public statements they have a very aggressive hedging program that I think I’ve seen some statements from Tom that say [indiscernible] from the late 2008 to 2009 where they got, they were make it and got a burned a little bit. I don’t want to put words in his mouth but their aggressive hedging program is something that their public statement say they’re committed to which would give them less of an opportunity on the cost side if they’re doing it in that way.

When you think about the implications for cost I mean you take two products one principle the A330 neo which is a product that’s pretty openly based on a value position significantly cheaper than 787 and you look at the flexibility that lower euro may give airbus to sale that product even in cheaper price of your product, how much incremental pressure does that put on you guys from the cost standpoint on the 87 to get that much better?

Well, it obviously gives them some tailwind, although again I go back to their public statements which has get more of their procurement in dollars and have a pretty aggressive hedging program to mute the impact of exchange going one way or the other, having said that there obviously be some opportunity and they'll have to make up their own minds but I think it's overwhelmed by the value proposition that our competitor airplanes have I mean the A330 neo the example you used is a 1970's design with new engines and our analysis shows many tens of millions of dollars of value of difference between that airplane and a model of 787 that they may sell against it. So, I think the value we bring overwhelms any sort of incremental benefit they can get on where the dollar is today and who knows where it would be tomorrow but it's -- we're not deeply concerned about that.

Before we close I want to ask about the BDS margins before we close on this kind of topic but I do want to ask another question to the audience as we talked about lot of -- gross margin, and that's question number three in your opinion through cycle EPS growth for Boeing should be above peers, in line with peers and below peers? Obviously a lot – here we go, go ahead and they goes into that much of it which we address the growth in BCA, the growth in BDS, one thing we didn't talk about and I think it's been a there we go above peers until – answer. One thing we didn't talk about but it is important because it seems like it's a big focus for the management team as profitability of BDS, obviously you take in a significant amount of cost out of that business, the numbers you sided in terms of production and annual cost are pretty sizable, how do you think about the margin profile of that business and sustainability or expandability from here especially given the mix changes you'd expect for some of the new programs as well as some of the sunsetting older program?

I think the -- you're right, the implication of your question is right [Carter], I think our view is that the defense budget in United States and which represents a challenge right now and the international opportunity which represents an opportunity, the net of which is sort of flattish that's our view of the world today and so margins is our number one priority. And so, the top line is in large part under our control in terms of how we execute our programs, if it is a big macro pressure on the top line. And we want to keep margins while maintaining our investment in research and development, that's kind of the way we're running the business right now. So, we're not going to [seed corn] but we're going to keep the margins at that low double digit place it's been and that gives us upside if the macro environment improves. Everybody in Washington seems to agree that we ought to get rid of sequestration but the dynamics of the two political parties hold each other hostage for how exactly it's done. And so that has yet to play out but I think a lot of people are betting on defense beginning to grow again, it's hard for me to predict I think it will grow again but when is a bigger question. So, I think the responsible thing to do is hold our margins, hold our investment in research and development, come hell or high water right now execute our programs well, when a couple of these new programs and off to the races.

If you look and I'm not sure the number, the year-over-year change in investment that you'd expect in BDS obviously a lot of your peers are talking about those numbers going up pretty significantly.

This is investment or CapEx and R&D.

CapEx and really company funded R&Ds I read, having to think your investment level compares to that, is it a flatter or maintaining a flat profile or is it actually going to see [pick up]?

I think it's flattish but off a higher level.

Okay.

I think trial have to clean – on this but because I don't have the competitors R&D levels in front of me maybe you do but I think our company funded number has tended to be higher than our competitors and so it's more a matter of them trying to catch up with us rather than us continuing to grow dramatically more than they are.

Okay, wanted to ask a couple product development kind of questions and the biggest one is that, there is a lot of chatter around potential 757 replacement at some point and whether or not that aircraft’s needed. Obviously we think a lot about these investments because a big investments, how do you think about that product segment, whether an investment there is needed how that might be able to be absorbed in the R&D profile of the company, how should we think about how you think -- ?

We don't think it's needed short or medium term based on discussion with our customers longer term we'll keep talking to them. But if you go back to the 757 mission 80% of that mission now is handled by the bigger longer range airlines the bigger longer range 737 for example. So there is a -- people argue a niche mission over water that’s a pretty small niche right now I don’t know how many 57s are flying right now over water but it’s not very many. Our discussions with customers has sort of seem to imply that there a slightly bigger airplane maybe needed at some point. So it wouldn’t the way to think about it is not necessarily 75 replacement but it’s where the 75 goes at the world grows and its positions change. And so it’s not very clear in our minds right now. I think at some point that that niche will clarify and it will become something above the narrow body and below the smaller wide body so I think that will be a niche that clarifies. But it hasn’t today.

So if we take it back to kind of where we started our discussion in terms of being appropriately compensated for the investment that we make it sounds like your view is that might be too much of a niche market that requirement might not want [Multiple Speakers]

That’s our view today, right. No business case would close today as we look at it which doesn’t mean pretty far into the future it might not but right now it does.

Couple on productivity obviously a year ago this time one of the big focuses of a lot of the suppliers we’ve heard from at this conference was partnering for success and that initiative we haven’t heard as much about it lately and not sure why but I think it tell us what any near in there in terms of that or whether it even has a defined set of innings or this is a cultural change…

Yes, I am the one who began the inning vocabulary but look there is no -- you make a good point there really is no end to it. We’re well into it now. It’s favorably impacting our financials I think you’ve seen that. There is a lot of value to keep harvesting as we find the right places with our suppliers where the amount of business we can bring them has taken into account as we negotiate and work together, pays them well for their value but also compensates us for the risk we take and the volume we bring them. And so we’ll always be working that I mean I think we have a current round of discussion that started a couple of years ago and we’re sort of 40% of the way through those I mean there is a backlog of that discussion. And guess what’s going to happen when that ends. Four to five years, six years from now we’re just going to do it again and we’ll just keep working it. And it’s more of a headset based on the strategic realization that you pointed out which is that as the systems integrator, we were taking in my view more risk than we were getting compensated before. And I think I don’t think that dynamic is going to change. Large scale systems integration is a tougher business than it was 20 years ago and to be successful at it we’re committed to being successful at it. I think there are fewer-fewer people that can do it we’re one of them and we just wanted to be a good business for us for our customers and our shareholders.

So to that end something you mentioned at the Investor Day last May as sort of new initiative with this value or quality initiative which was about improving first class deals and all the savings associated with that we haven’t heard much about that in the last ….

We’ve been working at I mean that’s all about if you look at any process say a manufacturing process and if you had a roll throughput yield of 100 in other words you did it perfectly. What is that number and so I want to change the headset of the company from 7%-8% better every year to as this number out there if you did it well that’s like a 60% opportunity. So how many years will take you do that and get them focused on that kind of vision rather than the improvement sort of the step beyond continuous improvement and then a couple of places it’s really made a difference in our company. But it’s still in the risk of studying this up again early innings on that one but it’s catching fire in our company.

But it sounds like you could have a material impact on the margins over the next 10 years?

It does, well part of it goes to margin, part of it goes to the pricing, part of it goes to R&D, you know how it works. I just want to make sure that Boeing controls its own destiny with its productivity. I mean our productivity number each year is slightly bigger than our R&D number and I want to make sure it stays that way I don’t want to have to depend on anybody else for our organic growth other than us.

So we’re running little bit low on time but I do want to ask a question, it’s sort of lot about Boeing’s first 100 years as a company we’re coming up on that here in a year’s time. And as you think about all of the changes we’ve seen over the last five years under your 10 year and beyond by five years and you think about the future leaders of this company and the notifications for them, can you speak to what sort of underlying trajectories have changed or actually occurring at Boeing and what those will mean for your predecessors when you enter the next century of --

Obviously the underlying productivity culture that funds are on growth, that’s a fundamental way of looking at the company I think that was a bit of the change from the way that company have been run before but that’s a good foundation I think that can built on. I think the commercial airplanes product line up is strong particularly in wide bodies I think the developments are derivative developments not from scratch, risky completely new to the world and yet still bring a lot of value versus our competition. So I think there is a pretty good line up. I think we have a culture of leadership development in the company that has produced people that you know -- that will come after me. So I think there is a pretty good I mean -- you nearly end of your career to sort of declare everything perfect. But we spend a decade trying to get the business fundamentals of this company as strong as the technical and product fundaments and so. That will be the balance that has to be maintained by whoever comes after.

It’s great not to put you on this bottom. Not applying anything about resignation or anything --

It’s the company that’s a 100 years old just to make sure that everything got that out look great, don’t worry about that.

I do want to ask one last question because this is always fun when it’s number five, in your opinion what multiple of 2015 earning should Boeing shares trade? I don’t expect anyone to answer number one, 2012-13, 2013-15, 2015-16, higher in 21 you remember those day?

Yes, I do.

Right, so 16 to 18 which is just about where the side trades, so definitely an optimistic tone about the company’s direction and making it better than where you found it and hopefully -- higher next year but we really appreciate you joining us. We appreciate you all joining us and Jim thank you very much for you time.

Thank you.