News Archive

Analysis: For Merck, bringing cattle feed Zilmax back won’t be easy

Thu Oct 31, 2013 3:43pm EDT

(Reuters) – U.S. pharmaceutical giant Merck Co (MRK.N) faces significant challenges bringing its controversial feed additive Zilmax back to market in the United States and Canada, even after a vote of confidence from South Korea on Thursday.

South Korea plans to begin accepting meat from cattle raised with the muscle-growing supplement early next year, a senior official in the country’s food ministry said, opening the door to beef imports after a government risk assessment found the additive could be permitted at certain levels.

To resurrect the once popular drug in the United States, Merck will need to shake this summer’s controversy over animal welfare problems – and convince ranchers, feedlot customers and meatpackers that Zilmax was not to blame for some cattle that arrived at slaughter plants having difficulty walking and apparently in pain.

It could be a tough sell: On Wednesday, agricultural giant Cargill Inc CARG.UL told Reuters it would not allow Zilmax-fed beef to enter its supply chain until questions over cattle health issues have been resolved and “until Asia and other trading partners accept it in their markets.

The move by Cargill underscores how the U.S. livestock industry is being pulled in opposing directions: It needs to produce more meat for a growing global population, and it needs to assure corporate customers and an often skeptical public that the use of livestock drugs in meat production is safe.

Merck declined to comment on Cargill’s action.

In August, the New Jersey-based pharmaceutical company voluntarily suspended sales of Zilmax in the United States and Canada after Tyson Foods Inc (TSN.N) said it would stop accepting Zilmax-fed beef as it had observed some cattle arriving for slaughter in physical distress.

Merck defended its product, and launched an audit to ensure that the federally approved livestock drug was being properly used in the field and that customers were not misusing it. The company also formed an industry and academic advisory board to study the effects of Zilmax on animals.

Reuters on Tuesday reported that Merck was working toward reintroducing the product, news that appeared to catch Cargill and other companies by surprise.

JBS USA JBS.UL and Tyson Foods Inc (TSN.N) declined to comment on the matter. National Beef Packing Co NBEEF.UL did not return calls for comment.

Sources at JBS and Tyson said animal health experts at the companies remain concerned about the still unknown reasons why cattle displayed signs of distress when arriving at slaughter plants this past summer.


Although Zilmax’s $159 million in U.S. sales last year make up a small slice of Merck’s $47.3 billion in annual revenue, the problems with the additive have caught the attention of Wall Street. Merck’s chief executive officer, Kenneth C. Frazier, faced questions on Zilmax’s fate during the company’s quarterly earnings conference call on Monday.

The suspension of Zilmax in the United States and Canada took a bite out of worldwide sales of Merck’s animal health products, which has been a high-margin business. The unit’s sales fell 2 percent in the third quarter, to $800 million, and Frazier said Zilmax “was a major issue,” though he added that the fundamentals of the animal health business remain solid.

Asked by an analyst whether Merck is considering a spinoff of its animal-health unit, Frazier said the company is “sharpening our focus” on its animal health and consumer care groups.

“We are currently evaluating those businesses the way we are evaluating everything, to figure out whether those businesses produce the most value inside our portfolio or outside our portfolio,” he said.

The hurdles for Merck in reintroducing Zilmax get higher the longer the product is off the market. Competitors include Eli Lilly Co’s (LLY.N) Elanco Animal Health unit, with its Optaflexx product.

The Merck and Lilly products are part of a drug class called beta-agonists. Zilmax is based on an active ingredient called zilpaterol, while Optaflexx is based on ractopamine. Ractopamine has not been linked to any of the recent animal health concerns.

“It will be challenging for Merck to regain traction given the negative public attention Zilmax has received following the announcement from Tyson Foods,” said Alex Arfaei, equity research analyst for BMO Capital Markets. “There are other options, such as Lilly’s Optaflexx, which are less controversial.”


The debate over Zilmax comes at a time of stress in the cattle industry. Thousands of feedlots have gone out of business in recent years as drought and rising feed costs undercut their business model. The size of the national beef herd has fallen to its lowest level in 61 years, and domestic beef consumption dropped more than 8 percent from 2002 to 2011.

For nearly a decade, many of the country’s 75,000 cattle feedlots have relied on weight-gain feed additives – Zilmax was often the beta-agonist of choice because it added around 30 pounds of lean meat to animals that average around 1,300 pounds when they go to slaughter.

For Optaflexx, the company says its additive can add about 20 pounds of lean meat to a beef carcass.

Today, the absence of Zilmax is being felt at slaughterhouses. Cattle carcass weights have dipped in recent weeks, and fewer animals are coming to market, a combination expected to lead to record cattle and beef prices at least through the coming year, analysts have said.

Feedlots have favored Zilmax, even though it leads to a leaner meat that is less favored in the marketplace, because weight is more important for their profitability than meat quality, said Jim Robb, director of the Colorado-based Livestock Marketing Information Center.

“The industry needs to decide where they want to be positioned,” Robb said. “Merck and some of the cattle feeders are pushing for tonnage, which is part of what they get paid for, not so much quality.”

The European Union and other key export markets have grown increasingly firm on the banning of meat raised with beta-agonists. In the end, demand from overseas could become a key factor determining Zilmax’s fate, analysts said.

Taiwan and South Korea accept imports of beef fed with ractopamine, but they are among a number of Asian countries, including China, that have not approved zilpaterol.

Taiwan’s Food and Drug Administration on Tuesday said it found zilpaterol-tainted beef in a restaurant, prompting authorities to increase checks on U.S. meat imports. Earlier this month, South Korea suspended some U.S. beef imports after detecting zilpaterol in meat supplied by a unit of JBS USA.

But with South Korea shifting its stance on accepting zilpaterol, analysts say other countries may follow.

“With exports being one of the growth areas for the next few years, it gives you some pause as to how this is going to affect that trade.” said Altin Kalo, an economist at Steiner Consulting Group.

(Reporting by P.J. Huffstutter in Chicago and Lisa Baertlein in Los Angeles; Additional reporting by Tom Polansek and Theopolis Waters in Chicago; Editing by David Greising, Tiffany Wu and Douglas Royalty)

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Oracle shareholders give Ellison’s pay a thumbs down

Thu Oct 31, 2013 3:36pm EDT

SAN FRANCISCO (Reuters) – A majority of shareholders opposed Oracle Corp Chief Executive Larry Ellison’s pay in a non-binding vote on Thursday following complaints that the world’s third-richest man makes too much as his company struggles against smaller rivals.

The vote against Oracle’s executive compensation policy adds to a similar defeat at last year’s meeting, and while it requires no changes from the company, it underscores concern among shareholders about high pay in the face of lackluster financial performance.

Challenges to the 69-year old Ellison’s pay package come as the world’s No. 2 software maker, which he co-founded four decades ago, tries to fend off smaller, aggressive companies offering software and Internet-based products at prices that often undercut Oracle. Ellison owns about 25 percent of Oracle.

A majority of shareholders voted in support of Oracle’s directors, including those on the board’s compensation committee – Bruce Chizen, George Conrades and Naomi Seligman. That vote was also non-binding.

In an initial tally, more than 1 billion votes were cast in favor of Oracle’s executive compensation and more than 2 billion were against. Oracle said figures for the votes on board members were not yet available.

Major investment advisory groups like CtW Investment Group, which advises union pension funds, had urged shareholders to vote against Oracle’s executive pay and the directors on the compensation committee.

CtW estimated that excluding Ellison’s shares, close to 85 percent of voted shares were against Oracle’s executive pay.

“The ball’s in their court,” said CtW analyst Michael Pryce-Jones. “They’ve had two consecutive years of defeats on say-on-pay and so far they’ve shown an absolute disregard for investor concerns on the issue.”

Ellison gave up an annual cash bonus of $1.2 million for fiscal 2013, which ended in May, after Oracle missed growth targets and his annual salary is a token $1. But he took home stock options value at about $77 million.

Oracle’s revenue failed to grow in fiscal 2013 and its net profit grew 3.5 percent during that time. During that 12-month period, Oracle’s stock rose 27.5 percent, compared to a 24 percent increase in the Standard Poor’s 500 index.

Last year, Oracle’s pay for top executives won support from just 41 percent of votes cast.

Oracle said its executive compensation is aimed at driving financial performance and the company’s long-term stock price.

“Our existing executive compensation program achieves an appropriate balance between encouraging our senior executives to take actions that are consistent with our business strategy … and discouraging executives from taking inappropriate or unnecessary risks,” Chairman Jeffrey Henley said after the vote.

CtW has complained that Oracle’s executive pay far exceeds technology peers like International Business Machines Corp and Cisco Systems Inc.

Institutional Shareholder Services, the largest advisor for institutional investors, had also recommended a vote against the company’s executive pay and eight of Oracle’s 11 board members, saying board members failed to effectively oversee management in areas like executive pay.

Rival proxy advisor Glass, Lewis Co has also recommended votes “against” Oracle’s executive pay and “withhold” votes against five directors.

Over the past 12 months, Oracle’s stock has gained 9 percent compared to the SP 500’s rise of 25 percent.

On Thursday, Oracle’s stock was up 0.45 percent at $33.68.

(Reporting by Noel Randewich; Editing by Jeffrey Benkoe, Kenneth Barry and Richard Chang)

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Bombardier profit dips as plane deliveries, orders fall

Thu Oct 31, 2013 3:12pm EDT

TORONTO (Reuters) – Canadian plane and train maker Bombardier Inc (BBDb.TO) reported a 15 percent fall in net profit on Thursday, pressured by fewer aircraft orders and deliveries in the third quarter and contract issues in its train unit.

Montreal-based Bombardier also did not release any flight test data for its brand-new CSeries aircraft or offer an update on whether the plane will meet its ambitious schedule of going into commercial service by next September.

After the test plane’s inaugural flight about a month and a half ago, it has only flown three more times, raising questions over whether the testing phase is on track.

Results fell short of forecasts and sent shares sliding more than 8 percent on the Toronto Stock Exchange.

Cameron Doerksen, an analyst with National Bank Financial, lowered his rating to “sector perform” from “outperform” on Thursday with the view that the stock has limited upside over the next one or two quarters.

“While the weaker aircraft deliveries were mostly anticipated, we are clearly disappointed by the margin performance in transportation,” Doerksen said in a client note.

“We believe that Bombardier will receive new orders for the CSeries as the flight test program progresses … however, if no new orders are announced in the coming months, we suspect that the market will become more skeptical of the program.”

Bombardier hopes the CSeries aircraft family can catapult it into the low end of a market now dominated by Boeing Co (BA.N) and Airbus (EAD.PA). The first test plane was unveiled in March and took flight for the first time in September after months of delays.

But firm orders for the CSeries are moderate so far at 177 as potential buyers wait for flight test results to validate the company’s claims about the new jetliner’s fuel efficiency and cost savings potential.

There are currently 403 total orders and commitments with 15 customers and operators. Chief Executive Officer Pierre Beaudoin was confident Bombardier would meet its 300 firm order target by the time the first jet is put into commercial use.

Executives also reassured analysts and media on Thursday the program was progressing according to schedule.

“(The test plane) didn’t stay on the ground longer than anticipated,” Beaudoin said in a conference call, adding that ground tests and software updates were scheduled during the plane’s downtime.

“Every manufacturer schedules it in a different way. We had decided to do a first flight and to do an update period and that’s what we have done … that will happen all through the flight program.”

The second of five test planes is expected to take flight in the coming weeks, with the remainder following shortly after, the company said.

Still, analysts are skeptical the first customer can begin operating a CSeries plane 12 months after its maiden flight. Bombardier said it was evaluating the entry-into-service (EIS) schedule and will provide an update in the next few months.

“This slow pace of flight testing – although in line with Bombardier’s internal schedule apparently – reinforces our view that entry-into-service will be pushed to Q1/15,” said Doerksen.


For the third quarter ended September 30, Bombardier’s net profit fell to $147 million, or 8 cents per share, from $172 million, or 9 cents per share a year earlier.

Adjusted earnings per share were unchanged at 9 cents.

Revenue dipped marginally to $4.1 billion from $4.2 billion.

Analysts had expected earnings of 10 cents per share and revenue of $4.56 billion, according to Thomson Reuters I/B/E/S.

The world’s fourth-largest planemaker said it delivered 45 aircraft during the quarter, down from 57 a year earlier. Net orders fell to 26 aircraft, from 83.

The backlog in the aerospace division was $32.9 billion as of September 30, unchanged from December 31.

“In aerospace, results were in line with our guidance, but the low order intake and overall market conditions were a disappointment,” Beaudoin said.

Aerospace revenue fell 13 percent to $2 billion.

Bombardier, the world’s largest trainmaker, said revenue in that division rose nearly 11 percent to $2.1 billion.

The order backlog in the transportation unit was $32.6 billion as of September 30, up marginally from December 31.

The transportation division’s margins were affected by execution issues in a few large contracts.

Executives said new guidance would be provided in the fourth quarter.

Shares of Bombardier, which also announced that Google Inc (GOOG.O) Chief Financial Officer Patrick Pichette would join the board, were down 8.5 percent at C$4.83 in mid afternoon trading on Thursday.

Brazil’s Embraer SA (EMBR3.SA), the world’s third-largest commercial planemaker and Bombardier’s closest rival, reported a 10 percent fall in quarterly profit on Thursday.

(Additional reporting by Swetha Gopinath in Bangalore; Editing by Jeffrey Hodgson, Matthew Lewis and Chris Reese)

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Insolvent German DIY chain Praktiker attracts second bid-sources

Thu Oct 31, 2013 3:03pm EDT

FRANKFURT (Reuters) – Insolvent German home improvement retailer Praktiker (PRAG.DE) has attracted a second offer for its stores, this time for more of the shops, two people familiar with the situation said.

The bid comes as talks over the acquisition of Praktiker’s upmarket unit Max Bahr by rival Hellweg are already approaching a final stage.

The new bid comes from Praktiker’s own management with the backing of a group of funds and would see 175 Praktiker and Max Bahr stores being taken over, the sources said.

The insolvency administrator has doubts over the viability of the plan, said two other people familiar with the situation.

“Until now, the administrator is not looking into this option”, one of these people said.

The funds would provide fresh equity and become majority holders of Praktiker and existing debt would be swapped for equity, the people familiar with the proposal added.

“More jobs could be saved and existing creditors would be better off”, one of the sources familiar with the plan said.

Praktiker, a household name in Europe’s biggest economy, is being sold off piecemeal after the administrator failed to find a buyer for the whole group.

Originally Praktiker operated 315 stores in Germany and another 99 abroad as well as another 132 outlets under the Max Bahr brand.

Hellweg has teamed up with former Max Bahr chief Dirk Moehrle and is in advanced talks to buy 73 Max Bahr stores for more than 100 million euros ($136 million).

However, Hellweg has struggled to line up financing for the transaction and trade credit insurance, which is vital to keep the business afloat. Hellweg is hoping to strike a deal by early next week, one of the people familiar with the situation said.

The administrator declined to comment, while Hellweg and Praktiker were not immediately available for comment.

($1=0.7356 euros)

(Reporting by Arno Schuetze and Alexander Hübner; Editing by Greg Mahlich)

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U.S. October auto sales expected to show 12 percent rise

Thu Oct 31, 2013 2:01pm EDT

DETROIT (Reuters) – U.S. auto sales to be reported on Friday are expected to be up 12 percent from a year ago as the federal government shutdown did not greatly impact consumer purchases.

Analysts forecast that the largest automakers in terms of U.S. sales will have double-digit percentage sales increases, with the possible exception of sales leader General Motors Co (GM.N).

Pickup truck sales are expected to again show double-digit gains, but the pace may be slower than in recent months before the usual end-of-year flurry of truck buying, analysts said.

On a seasonally adjusted annualized basis, October sales will be 15.4 million, according to the average of 44 analysts polled by Thomson Reuters. That annualized rate would up about 12 percent from the previous October’s new-vehicle sales.

The 16-day shutdown of most of the federal government did not keep sales down, several analysts said, including Alec Gutierrez of Kelley Blue Book.

“The expectations were that car buyers would wait on the sidelines, but because of pent-up demand and credit availability, car sales are expected to increase 7 percent from last month.”

Kelly Blue Book is calling for a year-on-year increase in sales of 12 percent for the industry.

Crossover vehicles will show an increase of 26.5 percent, Kelley Blue Book said. Top sellers in the crossover segment of the auto industry so far this year are Honda CR-V, Ford Escape, Chevrolet Equinox and Toyota RAV4.

Buckingham Research said Ford’s high level of incentives on the F-150 pickup trucks pressured GM’s Chevrolet Silverado and GMC Sierra pickup truck sales.

Ford bumped up incentive spending 24 percent in October from a year ago, according to industry research firm, while GM raised incentives only 1.5 percent. Toyota’s incentive spending rose 8.5 percent, while Honda incentives fell 23 percent.

While Chrysler’s incentive spending fell 3 percent, it was still the industry leader in per-vehicle spending of over $3,000, according to Edmunds.

Elaine Kwel, analyst with Jefferies, said that lower gasoline prices will help boost sales of larger vehicles, which are in general more profitable for automakers. According to the AAA travel group, the average U.S. price for regular gasoline was $3.28 per gallon on Thursday, down 3 percent from a month ago and down 7 percent from a year ago.

Industry research firms Kelly Blue Book, and each offered estimates of October sales performances of the top automakers in U.S. sales.

Edmunds said General Motors Co (GM.N) sales rose 10 percent; Ford Motor Co (F.N), up 15.5 percent; Toyota Motor Corp (7203.T), up 15 percent; Chrysler Group LLC, up 11 percent; and Honda Motor Co (7267.T), up 13 percent., which was more bullish in its industry forecast of a 14-percent gain over last October, showed GM at a 9 percent increase, Ford up 19 percent, Toyota up 13.5 percent, Chrysler up 19 percent and Honda up 16 percent.

Kelly Blue Book estimated gains for the top five automakers in U.S. sales, with GM up 8 percent, Ford up 14 percent, Toyota up 16 percent, Chrysler up 12.5 percent, and Honda up 12 percent.

(Reporting by Bernie Woodall; Editing by Bob Burgdorfer)

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Pimco’s Gross urges ‘privileged 1 percent’ to pay more tax

Thu Oct 31, 2013 1:59pm EDT

NEW YORK (Reuters) – Bill Gross, manager of the world’s largest bond fund, urged fellow members of the “privileged 1 percent,” earning the highest incomes, to support higher U.S. taxes on carried interest and capital gains to help the economy.

Gross, co-founder and co-chief investment officer of Pacific Investment Management Co., said in his latest investment outlook letter on Thursday that the super wealthy “should be paddling right alongside and willing to support higher taxes on carried interest, and certainly capital gains readjusted to existing marginal income tax rates.”

Carried interest refers to a large portion of the investment gains realized by private equity managers and executives at some venture capital firms, real estate and hedge funds.

The gains are taxed at a top rate of 20 percent instead of the nearly 40 percent top rate on ordinary income paid by the highest earners.

Easy credit policies have also allowed the rich to make billions of dollars, Gross said.

Gross, who oversees roughly $2 trillion in assets, noted that billionaires Warren Buffett and Stanley Druckenmiller, founder of Duquesne Capital Management and one of the best performing hedge fund managers of the past three decades, have advocated similar proposals.

“The era of taxing ‘capital’ at lower rates than ‘labor’ should now end,” Gross said.

Gross, who acknowledged he was among the 1 percent, noted he is writing investment letters that “‘dis’ the success that provided me the soapbox in the first place.” He said that increasing taxes could improve the U.S. competitive position compared with Germany and Canada.

“Instead of approaching the tax reform argument from the standpoint of what an enormous percentage of the overall income taxes the top 1 percent pay, consider how much of the national income you’ve been privileged to make,” Gross added.

Gross, whose $250 billion Pimco Total Return Fund is the world’s largest mutual fund, said that developed economies function best when income inequality is minimal.

In an interview on cable television network CNBC on Wednesday, Gross said that he and his wife, Sue, have pledged to give away all of their money before they die, which he referred to as an “Andrew Carnegie” pledge.

“Carnegie said that a wealthy person dies disgraced if they go to their maker with one penny, and so Sue and I are well on our way,” Gross said.

Gross also laid blame on the Federal Reserve for contributing to the imbalances in income growth.

He characterized the Fed’s easy money policies since late 2008 as a massive $1 trillion share buyback program nearly every year that has driven investment in risk assets and stocks rather than in “productive plant and equipment.”

The Fed is currently buying $85 billion in Treasuries and agency mortgage securities per month. The Fed has held interest rates near zero since late 2008 and has quadrupled the size of its balance sheet to more than $3.7 trillion through three rounds of bond buying.

Gross said, “Long-term growth for each company, and for all countries, depends not on balance sheet alchemy and financial wizardry, but investment and the ultimate demand for a company’s

or a country’s products.”

In a post to Pimco’s Twitter account on October 24, Gross criticized billionaire Carl Icahn’s effort to have Apple commence a $150 billion share buyback, saying, “Icahn should leave #Apple alone spend more time like Bill Gates. If #Icahn’s so smart, use it to help people not yourself.”

The following day, Gross said, “By the way, I should spend more TIME like Bill Gates too – we all should. He and Melinda are great paragons.”

(Reporting by Sam Forgione; Editing by Theodore d’Afflisio and Kenneth Barry)

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Toyota plans to launch large hybrid SUVs in 2016: Nikkei

Thu Oct 31, 2013 1:57pm EDT

(Reuters) – Toyota Motor Corp (7203.T) plans to roll out hybrid versions of its large sport utility vehicles from 2016 to prepare for tougher environmental regulations, the Nikkei reported, quoting sources.

The automaker intends to develop hybrid systems capable of powering such big vehicles, the newspaper reported.

Toyota plans to add a hybrid version of the Land Cruiser SUV to the line-up and introduce such versions of its international multipurpose vehicles, such as the Fortuner, designed for emerging markets, the business daily reported.

Toyota, which debuted its first mass-produced hybrid car, the Prius, in 1997, now offers about 20 hybrid models, mostly passenger cars, according to the Nikkei.

The company has sold more than 5 million hybrid cars globally so far, the newspaper said.

Toyota’s hybrid cars such as the Crown are 20-30 percent more fuel-efficient than non-hybrid models, the Nikkei said.

Improving mileage has become a key issue for automakers as the United States and other countries tighten environmental rules, the newspaper said.

(Reporting by Rohit T. K. in Bangalore; Editing by Kirti Pandey)

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Activist fund TCI backs EADS boss as defense cuts loom

Thu Oct 31, 2013 1:55pm EDT

LONDON (Reuters) – The head of hedge fund TCI said he is backing the boss of aerospace giant EADS (EAD.PA) in his “aggressive” approach to slash costs and grow profit, and expects management to announce further cuts in its defense unit soon.

Chris Cooper-Hohn, whose TCI owns more than 1 percent of EADS’ share capital, said he believes EADS is set to benefit as its management focuses on commercial aircraft production and shields the firm from undue meddling from government shareholders in France and Germany.

“We believe the company is in the process of doubling and then tripling its profitability,” Cooper-Hohn told an audience at the Ira Sohn conference in London on Thursday.

Cooper-Hohn, an aggressive activist investor with a record of successfully taking on high-profile executives, said EADS had a $1 trillion backlog of orders, would improve margins as its pricing power strengthened, and was in a better position to cut costs now negative political influences had been neutralized.

“Governments are just about the worst owners of companies you can imagine,” he said.

EADS announced in July it would combine its defense and space subsidiaries and rename the group after its Airbus aircraft making brand, starting from January 1. The restructuring is due to be completed by July 2014.

The company is planning to cut jobs and costs in its defense division, German newspaper Sueddeutsche Zeitung quoted CEO Thomas Enders as saying earlier this week.

Earlier this year, TCI demanded that Enders sell EADS’ stake in fighter jet maker Dassault Aviation (AVMD.PA), saying it was a “poor use of capital”.

TCI recently emerged as the second largest shareholder in Britain’s newly-privatized Royal Mail (RMG.L). Cooper-Hohn said he was a big believer in privatized companies because of the “transformation” possible once it is free of government control.

On Thursday he also predicted strong growth at Australian rail freight company Aurizon (AZJ.AX), which TCI has owned since its bought into its 2010 privatization.

(Reporting by Tommy Wilkes; editing by David Evans)

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Boeing to raise 737 production to 47/month by 2017

Thu Oct 31, 2013 1:15pm EDT

(Reuters) – Boeing Co (BA.N) said it would increase production of its workhorse 737 aircraft to 47 planes per month by 2017 from 38 now, a surprise move that analysts said boded well for the company, its suppliers and airlines.

Boeing had already announced plans to increase production to 42 per month in the first half of 2014, matching current output by rival Airbus SA (EAD.PA) of its competing A320 jet family.

With the new target, Boeing would enter territory that Airbus isn’t attempting. The output, from the same footprint at Boeing’s 737 factory in Renton, Washington, will not only boost Boeing’s cash pile, it will give the company more delivery slots to sell to airlines who want new, fuel-efficient planes sooner.

“This is a big, bold, but very strategic move by Boeing,” that follows recent competitive wins by Airbus that likely have been “more heavily price-driven than in the past,” said Russell Solomon, an analyst at Moody’s Investors Service in New York.

He said Boeing can also be aggressive on price and now can talk with customers about new orders “with the very pointed message that they won’t have to wait as long to get their greatly desired new equipment if they buy Boeing vs. the other guy.”

Because of the high volume and relatively low production costs, the 737 and A320 are often seen as cash cows, and play a big role in funding development of larger and technically more challenging aircraft like the Boeing 787 Dreamliner or the Airbus A350.

Boeing’s rate increase was more ambitious than some forecasts. Carter Copeland, analyst at Barclays in New York, said he had penciled in Boeing building 46 737s a month around 2018. “I definitely didn’t expect an announcement on it so soon,” he said.

Just last week, Boeing said it would lift production of its 787 wide-body jet to 12 per month by 2016 and 14 per month by 2020 , up from a target of 10 a month by the end of 2013.

While Copeland said he didn’t have major concerns about the 737 supply chain keeping up with higher rates, he said producing so many of the current 737s and the 737 MAX “would seem somewhat challenging on the surface.”

He added, “I’m sure the supply chain is quite pleased as the 737 is a profit leader for essentially everyone who’s on it.”

Boeing Commercial Airplanes Vice President Beverly Wyse said in a statement that the higher rate would “lay a solid foundation as we bridge into production on the 737 MAX.” [ID:nPn780Z50]

The company has 3,400 orders for 737 aircraft, including about 1,500 next-generation MAX models.

The 737 MAX will have new engines and other changes to make it about 14 percent more fuel efficient than current models.

Boeing said the first delivery of the 737 MAX is on track for the third quarter of 2017.

In contrast to the Boeing target, the chief executive of Airbus this week reiterated plans to hold its production rate of competing A320-family aircraft steady at 42 per month, saying the European company had some concerns about the fragility of the supply chain [ID:nL5N0IJ3S4].

Rob Stallard, an analyst at RBC Capital Markets, said Boeing’s move “might give Airbus reason to accelerate” its production beyond the 42 a month.

Airbus’ output for narrow-body jets is based on an 11.5-month production calendar, implying average capacity for 483 aircraft like the single-aisle A320 a year.

Boeing is based on a 12 month production schedule, though the company traditionally closes for the week between Christmas and New Year.

Stallard said the new Boeing target was “incrementally positive” because speculation about rate increases in the latter half of the decade may had have “fully baked in the ramp, and suggests that the current up-cycle continues to have legs.”

He added that any rate ramp carries risk.

Airbus and Boeing both see demand for over $2 trillion worth of such aircraft over the next 20 years.

(Reporting by Alwyn Scott, Rohit T. K. in Bangalore and Tim Hepher in Paris; Editing by Maju Samuel and Andrew Hay)

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