General Dynamics Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2023

There are 14 speakers on the call.

Operator

Good morning, and welcome to the General Dynamics First Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After the speakers' remarks, there will be a question and answer session. Please note this event is being recorded. I would now like to turn the conference call over to Howard Rubel, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Welcome to the General Dynamics First Quarter 2023 Earnings Conference Call. Any forward looking statements made today represent Our estimates regarding the company's outlook. These estimates are subject to some risks and uncertainties. Additional information regarding these factors is For additional disclosures about these non GAAP measures, including the reconciliations to comparable GAAP measures, please see the press release And slides that accompany this webcast, which are available on the Investor Relations page of our website, investorrelations.gd.com.

Speaker 1

On the call today are Phebe Novakovic, our Chairman and Chief Executive Officer and Jason Aiken, Executive Vice President, Technologies and Chief Financial Officer. With the introductions complete, I turn the call over to Phoebe.

Speaker 2

Thank you, Howard. Good morning, everyone, and thanks for being with us. As you can discern from our press release, we reported earnings of $2.64 per diluted share On revenue of $9,900,000,000 operating earnings of $938,000,000 and net earnings of 730,000,000 Revenue is up $489,000,000 or 5.2 percent against the Q1 last year. Operating earnings are up $30,000,000 and net earnings are flat against the year ago quarter. This increase in operating earnings was offset By a $31,000,000 increase in the tax provision.

Speaker 2

Recall that the Q1 2022 tax provision was only 14%. Nevertheless, earnings per share are up $0.03 as a result of the stronger operating earnings and a lower share count. The operating margin for the entire company was 9.5%, twenty basis points lower than a year ago quarter. This reflected lower operating margins in Aerospace and Marine, which I will address in some detail later in these remarks. Revenue was $489,000,000 better than Q1 'twenty two.

Speaker 2

All of the defense units By $0.05 per share, we have roughly $550,000,000 more in revenue than anticipated by the sell side and lower than anticipated margins leading to operating earnings basically consistent with expectations. The earnings per share beat was largely attributable to below the line items. As Jason will amplify, Cash from operating activities and cash after CapEx was very strong. This is particularly impressive following a very Strong cash performance in 2022 and not at all typical for us in the Q1. Obviously, we are off to a very good start from a cash perspective.

Speaker 2

This is, in important respects, a strong quarter, a good foundation for the year, subject to some supply chain issues that I will try to illuminate as we discuss the business segments. At this point, let me ask Jason to provide detail on our order activity, Solid backlog and very strong cash performance as well as commentary about the Technologies Group in the quarter.

Speaker 1

Thank you, Phoebe, and good morning. We had a solid quarter from an orders perspective with an overall book to bill ratio of 0.9:one for the company. Order activity was particularly strong in the Combat Systems Group, which had a book to bill of 1.5 times. We ended the quarter with total backlog of $89,800,000,000 off 1.4% from the end of last year, but up 3% from a year ago. Our total estimated contract value, which includes options and IDIQ contracts ended the quarter at more than $128,000,000,000 Turning to our cash performance for the quarter.

Speaker 1

It was another exceptional start to the year with operating cash flow of $1,460,000,000 representing 200 percent of net income. This very strong cash flow was heavily loaded in the last few weeks of the quarter. After capital Our free cash flow for the quarter was $1,300,000,000 a cash conversion rate of 178%. While we continue to enjoy strong cash performance in Aerospace and Technologies, the Combat Systems Group in particular delivered outstanding free cash flow this quarter. As expected, the U.

Speaker 1

K. Resumed payments on the Ajax program. This, coupled with the ongoing progress payments on our other large international vehicle program, drove the group's cash performance. This is consistent with our expectation for the year of a cash conversion rate in excess of 100%. Now turning to capital deployment.

Speaker 1

Capital expenditures were $161,000,000 or 1.6 percent of sales in the quarter. Similar to last year, you should expect capital expenditures to increase in subsequent quarters throughout the year. Also in the quarter, we paid 345,000,000 and repurchased approximately 400,000 shares of stock for $90,000,000 at just over $2.20 per share. We ended the quarter with a cash balance of over $2,000,000,000 and a net debt position of $8,500,000,000 down nearly $800,000,000 from year end. As a reminder, we have $750,000,000 of debt maturing in the 2nd quarter, and we're in a position to pay that down with the cash on hand following the receipt at the end of the Q1.

Speaker 1

Our net interest expense in the quarter was $91,000,000 compared to $98,000,000 last year, benefiting from the debt repayment in the Q4 of 2022. Finally, we had a 17% effective tax rate in the quarter consistent with our full year guidance. Now turning to operating performance in Technologies. We're off to a solid start. Revenue in the quarter of $3,200,000,000 was up 2.5% The measures implemented at Mission Systems to overcome what seems to be the new normal in the supply chain are taking effect, which gives us confidence about their outlook for the balance of the year.

Speaker 1

And GDIT had their highest quarterly revenue and earnings in 4 years as they continue Operating earnings of $299,000,000 were consistent with last year, yielding a margin of 9.2%. As we discussed in January, margins will continue to be driven by the mix of IT service activity and hardware volume. Backlog grew during the quarter with the group achieving a book to bill ratio of 1:1 on strong order activity in IT Services It included some important wins not yet factored into the backlog. This includes the Army's Flight Test School Training Support Services contract valued at $1,700,000,000 An Air Force IDIQ with a total potential value of $4,500,000,000 between 2 awardees for security support services And a pair of IDIQ contracts with the EPA with a potential value of $380,000,000 to support the agency's environmental and climate initiatives. In fact, GDIT booked the highest orders they've seen since the Q2 of 2019, and their pipeline remains robust With $19,000,000,000 in submitted bids awaiting customer decision and another $84,000,000,000 in qualified opportunities identified.

Speaker 1

Now let me turn it back to Phoebe to review the other business segments.

Speaker 2

Thanks, Jason. Now let me review the quarter in the Operating environment. It had revenue of $1,900,000,000 and operating earnings of $229,000,000 With a 12.1 percent operating margin, revenue was $11,000,000 less than last year's Q1 despite the delivery of 4 fewer aircraft. The fewer aircraft deliveries were almost completely offset by higher Gulfstream services, jet aviation volume and special missions work at Gulf The 21 deliveries in the quarter are 3 fewer than planned. 2 280s did not deliver because of late engine deliveries.

Speaker 2

The other plane, a large cabin for an international customer, didn't deliver because of simple bureaucratic registration delays in the owner's country. Importantly, this is the Q1 in which we have missed an airplane delivery as a result of supply chain issues. Up until now, we have managed to work around late to schedule parts deliveries. Operating earnings of $243,000,000 behind last year's Q1 as a result of a 70 basis point degradation in operating margin. Operating margin in the quarter was under pressure as a result of fewer new airplane deliveries, a less attractive mix, Severe supply chain issues, some modest cost increases from suppliers and the pre build of G700s.

Speaker 2

Let's take a look at some of these elements in greater detail. The shortage of parts to schedule from the supply chain, Specialist from Honeywell has created significant out of station work, which is inherently less efficient. We have a young, well trained and capable workforce. They have, however, never previously been exposed to out of station work. They are doing well, I am pleased to report, but it had an impact.

Speaker 2

The other impact of late To schedule parts deliveries apart from cost growth is that we cannot increase our build rate until the supply of parts is more predictable. The good news is that there is light at the end of the tunnel. We see the vast majority of this problem resolving early in the 3rd As most of you know, we plan to deliver Number of G700s in the 3rd and 4th quarters. To do that, we must build them now and incur some period costs without the related revenue. This has impacted the Q1 and will impact the Q2, but relief is in sight as deliveries commence.

Speaker 2

Aerospace had a decent quarter from an order perspective with a book to bill of 0.9:one in dollar terms and 1:one in units. The quarter was looking quite good until the 2 regional bank failures in early March. This created a pause in the market for about 3 weeks. I am pleased to report that normal activity has resumed. Strong sales activity and customer interest is evident in this quarter.

Speaker 2

The U. S. Has been strong and the Middle East as well. China remains slow. The G700 flight test and certification program continues to progress well.

Speaker 2

The aircraft design, manufacturer and the overall program are very mature. We continue to target certification of the GS700 for late summer this year. Gulfstream remains committed to a safe and comprehensive Certification test program. Production of customer G700s is well underway and we are preparing for entry into service. Looking forward to next quarter, we expect to deliver 26 aircraft with rapid increase In the 3rd and 4th quarter deliveries as we have previously indicated.

Speaker 2

In short, the Aerospace team did a good job under difficult circumstances. Next, Combat Systems. Combat had revenue of $1,760,000,000 up 4.8% over the year ago quarter. Earnings of $245,000,000 are up 7.9%. Margins at 14% represent a 40 basis point improvement over the year ago quarter.

Speaker 2

So we saw strong operating performance coupled with a nice revenue uptick. At Land Systems, Increased revenue came from the MPF ramp up, Stryker SHORAD and new international vehicle programs for Poland and Australia. At European Land Systems, we had higher Piranha volume and OTS enjoyed higher artillery program volume. So we saw increased revenue performance at each of the businesses. Here's a little additional color on Combat Systems revenue results.

Speaker 2

Foreign exchange fluctuations negatively impacted combat's revenue in the quarter due to the strength of the dollar versus the Canadian dollar, euro and the British pound. But for the FX headwind, Combat Systems revenue growth would have been up 7.1% over the last year rather than the 4.8% we have just reported. We also experienced very strong order performance at Combat. Orders in the quarter are at their highest level in more than 8 years, evidencing a strong demand for munitions And International Combat Vehicles. There is clear upward pressure on our forecast for combat systems revenue and earnings in the year.

Speaker 2

Turning to Marine Systems. Once again, our shipbuilding units are demonstrating impressive revenue growth. As an aside, let me repeat a little recent history. The Q1 of 2020 was up 9.1% And Q1 2022 was up 6.8% over 2021. Finally, this quarter revenue Of almost $3,000,000,000 is up 12.9% over 2022.

Speaker 2

This is an impressive growth ramp by any standard. This quarter's growth was led by Columbia Class Construction and Engineering, DDG 51 Construction and some TAO volume. Operating earnings are $211,000,000 in the quarter, exactly the same as a year ago, but with a 90 basis point decrement in operating margin. The primary driver of lower margins during the quarter was a charge on the Virginia program to reflect cost pressure within our supply chain and efficiency impacts at Electric Boat as a result of late material deliveries. This was partially offset by Colombia margin improvement.

Speaker 2

Other modest margin impacts included an earnings decline at Bath Overall, earnings are what we expected, but revenue was higher, resulting in lower margins. We anticipate that this will improve as we progress through the year. As you know, we never update guidance at this time of the year. I would say, however, that our quarterly progression differs from prior years And that the Q2 will be our lowest quarter because of mix and volume across the business. Nonetheless, we look forward to very strong 3rd and 4th We will give you a comprehensive update at the end of next quarter as is our custom.

Speaker 2

This concludes my remarks with respect to what was a challenging, but in many respects rewarding quarter.

Speaker 1

Thanks, Phoebe. Operator, could you please remind participants how to enter the

Operator

Your first question comes from the line of Seth Seifman from JPMorgan. Your line is open.

Speaker 3

Thanks very much and good morning everyone. Phebe, I wonder to ask a question about marine and at the risk of asking the question that you just said that we never update guidance at this time of year. If you can just give us some color, given what we thought about revenue and margin at Marine coming in, the revenue is clearly much stronger in Q1, Margin weaker for the obvious reason of the Virginia charge. Can you help us from here in terms of how The Virginia contribution changes from Q1 going forward now that the charge is done. And it seems Colombia is maybe coming in stronger.

Speaker 3

And if I could tack on one follow-up. There's been a lot of talk about the Columbia schedule, both in congressional testimony, GAO reports, etcetera. If you can give us the latest update on how you view the schedule for Columbia.

Speaker 2

So we think that we plan to have Q1 as Our lowest margin quarter, and we'll continue to work to that. Virginia is It will stabilize once we get the schedule and supply chain issues resolved. So At this point, it's incumbent on Electric Boat to continue to do better to offset those costs. So with respect to revenue, there's Clearly, some upside pressure there, but we're going to hold any other additional comment, for the moment. So let's go to Colombia.

Speaker 2

And I think just the Navy has clearly articulated it and firmly articulated that we are ahead of the contract schedule. The contract schedule is what matters. So let's put a little context on this. We are on the Columbia. We are I think within that context, it's indicative of the

Speaker 4

Great. Thanks very much.

Operator

Your next question comes from the line of Robert Stallard from Vertical Research.

Speaker 4

Thanks so much. Good morning.

Speaker 2

Good morning.

Speaker 5

Phebe, I may be wrong, but it sounds like these Supply chain issues in Q1 got worse. So I was wondering if you could comment on that? And also what sort of mitigation plans you're putting in place to correct these problems?

Speaker 2

Specifically, are you talking about a particular group?

Speaker 5

Well, it seems like it's Aerospace and the Virginia class submarine and Marine.

Speaker 2

Yes. So with Aerospace, we have let's be clear, we have been dealing with supply chain issues for some time and we've been able to manage This quarter, we had 2 large suppliers get worse. We have, however, as I noted in my remarks, Light at the end of the tunnel by our clear visibility into through our clear visibility into the 3rd and 4th quarters where the majority of the supply chain And we're working very hard with our oil suppliers, both in terms of flyaway teams and additional production help And to also encourage them to allocate the necessary resources in order to make their Contracting schedules. So we are pretty comfortable that we can resolve these issues in the 3rd Q4, Gulfstream has done a magnificent job heretofore and even this quarter in managing through these challenges. With respect To the Virginia class program, we have been talking about the supply chain challenges for some time.

Speaker 2

And as with all heavy manufacturing and labor intensive manufacturing construction Projects. Manpower has a significant impact and the impact from the And there are ramifications from the pandemic hit that supply chain pretty hard. We're beginning to see that remedy with the help of the Navy and a lot of support. So we'll continue to work with our supply chain And all elements of that supply chain as well as our customer who is very engaged to ensure that we can get that Virginia cadence back On schedule.

Speaker 4

That's very helpful. Thank you.

Operator

Your next question comes from the line of Doug Harned from Bernstein. Your line is open.

Speaker 6

Good morning. Thank you.

Speaker 2

Hi, Doug.

Speaker 6

Sibi, on when we're looking at The situation in Europe right now, I mean, two things seem to stand out to us with respect to combat. One is, as you mentioned, the demand for munitions. But we've seen in the 2024 budget, there was actually a reduction In the budget for munitions, which we found somewhat surprising, how do you think about the trajectory there and your ability to assuming we are going to see

Speaker 2

So We have been working very closely with DoD and the Army to ensure that we increase production and move Hello. Can you hear us? Doug?

Speaker 4

Operator?

Speaker 3

Hello? He appears to have lost audio. Hello?

Speaker 4

Okay. Are we still

Speaker 2

Well, let me answer, Doug. Can the rest of the call hear us?

Operator

Yes, we are still live.

Speaker 2

Okay. So let me answer Doug's question. We've been working very closely With DoD and the Army to increase production and throughput, we've done that in a couple of ways, upgrading existing facilities, increasing The number of shifts and building new facilities with more modern equipment. So we to again accelerate Production, we have already done so and are quite confident in our ability to do even more. So we are we've been receiving adequate and completely adequate funding to execute all of this, And we are quite confident that we will move throughput much quicker and will expedite the delivery Of this critical capability to the Army.

Operator

Your next question comes from the line of Peter Arment from Baird. Your line is open.

Speaker 4

Yes. Thanks. Good morning, Phebe. Phebe, thanks for the color on Gulfstream. Just On the overall demand, kind of re strengthening in the quarter post the banks in the Middle East and certainly the U.

Speaker 4

S, Are you still seeing kind of broad interest across all the models? I know you had mentioned G650, particularly in the last like 2 years, has been very strong. Thanks.

Speaker 2

Broad interest across all the models. We're doing quite well. You want to ask another question?

Speaker 4

Yes, sure. No, I appreciate that. Thank you. Just staying within Gulfstream, I know that you're not going to update kind of guidance, but the deliveries that you missed this quarter, are they expected to Recover in the second quarter, how are we thinking about that? Or is this all kind of second half related?

Speaker 4

Thanks. Appreciate it.

Speaker 2

So we will resolve we expect to resolve all of the supply chain issues and what you ought to think about is the 3rd quarter And 4th quarter being quite robust. And I think what you're getting at is sort of the deliveries that we expect to Execute for the year at about $145,000,000 We're pretty confident we can get there. If we miss, it's just going to be by a little.

Operator

Your next question comes from the line of Myles Walton from Wolfe Research. Your line is open.

Speaker 4

Thanks. Phebe, I was hoping you could talk to how you balance within marine the higher priority national At the national level of the Columbia class, which is under a lower financial risk cost plus contract versus the higher financial pressure Virginia class, which is under fixed price contract, but you might have to pull resources away and Just how you're managing that from a financial risk perspective? Thanks.

Speaker 2

So implicit in your question is the fact That Columbia enjoys a higher national rating in terms of urgency than Virginia. We had fully contemplated that with the U. S. Navy when we negotiated the most recent Block of Virginia's that was in concert timing wise with the Columbia negotiations. So we're working with the Navy To ensure that the language that we had incorporated into the Virginia contract To accommodate any such impacts on Virginia from a Columbia prioritization could be addressed, and the Navy has been working very closely with us.

Speaker 2

So we were mindful of that and have been for some time.

Speaker 4

And so I guess just as a clarification, Phoebe, did the current financials reflect that Assumption playing out or would there be a sort of equitable relief in the future if they agree with the position? I'm not

Speaker 2

going to speculate on how this will be addressed ultimately with our customer, but this is more of a future issue rather than in the moment issue. That was not the primary driver of the quarter.

Operator

Your next question comes from the line of George Shapiro from Shapiro Research. Your line is open.

Speaker 1

Yes. Good morning, Phoebe.

Speaker 2

Hi, George.

Speaker 1

If you hadn't had the Loss of 3 weeks from the bank failures, I assume then the book to bill would have been above 1 in the Q1. And Is that likely to continue then in the Q2 where you're saying we are seeing significant strength now?

Speaker 2

So our plan going Before March 10th was that in fact we had anticipated a book to bill full book to bill of 1 to 1 On at that point, higher, deliveries. So on a going forward basis, it's our working assumption that we will continue to Siwan, Dwan and at the moment we see no reason why that can't be achieved.

Speaker 1

Okay. So the delivery expectations for Next year would still be the same as what you had laid out before?

Speaker 2

We are holding to what we gave you in terms of out year expectations For Aerospace.

Operator

Your next question comes from the line of Louie DiPalma from William Blair. Your line is open.

Speaker 7

Phoebe, Jason and Howard, good morning.

Speaker 2

Good morning.

Speaker 7

Is the LEED Columbia approximately 1 third complete now?

Speaker 2

Yes.

Speaker 7

Great. And as a follow-up, you referenced supply chain headwinds with Virginia and Aerospace, is the supply chain for Mission Systems improving at all?

Speaker 1

Yes, it absolutely is. We saw good trajectory and Gaining some traction in the quarter. That's part of the reason why volume was up nicely in the quarter, and they seem to be on a good path to overcoming that bottleneck in their system. So Gives us confidence for the opportunities we have in the second half of the year.

Operator

Your next question comes from the line of Kristine Louwag From Morgan Stanley, your line is open.

Speaker 8

Hey, good morning, everyone.

Speaker 2

Good morning, Christine.

Speaker 8

Phebe, per new plan unveiled last month under the August pact. It looks like Australia could buy up to 5 Virginia class submarines potentially in the early 2030s. So with the backlog now of 2017 Virginia's delivering through 2,032, how are you thinking about this opportunity? And what's the production capacity required to meet this demand?

Speaker 2

So we are working with our Navy customer to clarify timing And capacity and throughput. But at the moment, we have no particular insight, not really deferring to the Navy

Speaker 8

And if I could sneak another one, maybe pushing to combat. Look, it seems like the Army is pushing significantly to ramp artillery production, particularly the 155 millimeter shells and planning to double monthly production to about 24 per month by year end And then increasing production 6 times over the next 5 years. How are you thinking about this opportunity? And again, Do you see, what do you need to do in order to meet this demand? Should it materialize?

Speaker 8

And are you seeing the orders come through?

Speaker 2

We have seen the orders come through, and we do not yet have out year clarity on the exact timing The additional production, but we will see additional production. And because of the priority of the 155, I think the nation has learned a lot about 155 artillery shells. So we've done a lot to increase production already, And we are quite confident that we can go even faster.

Operator

Your next question comes from the line of Matt Akers from Wells Fargo. Your line is open.

Speaker 4

Hey, good morning. I wanted to ask kind of A high level question on pilots for business jets. And then on the commercial side, lack of kind of staffing like pilots and crews has been Kind of a pacing item, what's your sense for Business Jet? Are your customers kind of better off in that respect? Or could that potentially be a bottleneck for Business Jet as well?

Speaker 2

Well, I think during the height of COVID, there was so much disruption in all labor markets That we may have seen some issue then, but frankly, it didn't impact us. We're not seeing anything at the moment that is impacting Our ability to fly, our customers' ability to fly, frankly, flying hours.

Speaker 4

Okay. Thanks.

Operator

Your next question comes from the line of David Strauss from Barclays. Your line is open.

Speaker 9

Good morning. Thank you.

Speaker 2

Hi, David.

Speaker 9

Hey, Phoebe. The G700 In the cert there, is software validation the pacing item still? And if So how far the way through that are you?

Speaker 2

No, it is not. And we are in pretty good shape here with respect to our certification. And look, this is an Extremely mature, safe and sophisticated aircraft. So we're working very closely with the FAA To ensure that they've got the proper resources here to execute the certification, but it is coming.

Speaker 9

Okay. Quick follow-up. Jason, you mentioned the resumption of the Ajax payments. Can you update us on Kind of the schedule for the liquidation there, how you expect that to play out and also on the Canada program? Thanks.

Speaker 1

Yes. So obviously, it was a positive development to see the payments resume here in the Q1 as we expected. The path forward with the customer is an ongoing discussion. We worked through the revised schedule for the program, But some of the other particulars around milestone payments and progress on that schedule are still In the works, so it would be probably remiss of me to get out ahead of that. In terms of the Canadian program, things are continuing to That customer for the past 3 plus years has paid on time as per that schedule we negotiated.

Speaker 1

And so A couple more payments to come this year and then really what you can think about it is, the entire arrears that we were dealing with some 2, 3 years ago, we'll have been paid down and we'll be in a normal program, cadence and schedule at that point, so by the end of this year.

Operator

Your next question comes from the line of Ken Herbert from RBC Capital Markets. Your line is open.

Speaker 6

Yes. Hi, good morning, Phoebe. Hi. I just wanted to see if we could put a finer point on the Aerospace margins in the second quarter With supply chain issues and other timing around the certification and pre build, is it Our Q2 margins expected to be similar to Q1 or was Q1 expected to be the trough for the year?

Speaker 2

I think you may need to think about the 2nd quarter being our lowest quarter, and then with a very steep and executable ramp up in 3, 3rd and 4th quarter. I tried to give you guys an awful lot of color in the remarks about the puts and takes on all the margins On the margins with respect to Aerospace, but we'll get through the 2nd quarter. And frankly, these first two quarters are aberrational In terms of Gulfstream margins, and then we ought to see nice pickup in 3rd Q4.

Speaker 6

Okay. And then just as a follow-up, just considering the roughly 100 aircraft implied in the guidance for the second half Deliveries and the supply chain issues, are you having at this point to maybe look at second sources or is there anything else you're doing now? Obviously, it's very late in the game, but To maybe improve or further de risk the supply chain beyond just the execution?

Speaker 2

So we've been doing that for some time. As you all know, the supply chain on the aerospace side has been taxed For quite a bit of time, so they were not taking any new actions that we haven't already executed. We're just ramping up some of those actions As we in the Q1 and then as we go into the second. But we have, as I said, earlier, very clear line of sight Into the 3rd and 4th quarters and the majority of these suppliers fully anticipate getting better and we'll work with the remaining ones To ensure they've got the resources to execute the contract.

Operator

Your next question comes from the line of Ron Epstein from Bank of America. Your line is

Speaker 4

open. Hey, good morning.

Speaker 2

Hi, Ron.

Speaker 4

How are

Speaker 10

you? Maybe just a quick question, Maybe 2. What is the synergy so far from merging the 2 businesses in kind of Mission Tech? How's that going?

Speaker 1

So keep in mind, Ram, when we talk about merging those businesses, they still remain 2 independent and standalone Operating units within our model, so not really anything to think about from a cost synergy perspective. I think the way to think about that is more Of a revenue synergy point of view in that what we talked about is those two businesses are seeing a real Convergence on a number of fronts within their markets, what their customers are interested in procuring in terms of end to end solutions that include The IT service side, software solutions as well as hardware, as well as where their competitors are going in the market, to address those demands. So Bringing those two businesses together has put us on a good footing to address that market and those demands and that's what we're seeing and you're seeing that in The positive order performance in the quarter and book to bill, capture rates, win rates and so on, so all that gives us Good confidence in terms of the trajectory of the outlook that we see for each of those businesses.

Speaker 10

Got it. Got it. And then maybe just one quick follow on. How much of the free cash flow in the quarter can be attributed to AJAX?

Speaker 2

Yes. So we have factored the net of payments To the supply chain, which has been very patient through this whole period into our estimates for the year.

Speaker 1

Yes. So I want to make sure I understood your question correctly. It was a roughly £480,000,000 payment that was received. And to Phebe's point that The net impact of that to us after paying out supply chain elements on the program, all of that factored into the outlook that we have for the year. So that 105 ish percent conversion rate for the year that we talked about is now intact and All that much more certain based on the activity in the Q1.

Operator

Your next question comes from the line of Pete Skibitski from Alembic Global. Your line is

Speaker 11

open. Hey, good morning, Phebe and Jason and Howard.

Speaker 2

Good morning.

Speaker 11

Hey, guys, the issues on the Virginia Supply chain, it seems like it's been a little bit of a black box. So just I was wondering if I can get more detail. Does it relate to multiple suppliers? And Can you give us a sense of what parts are involved? And then are we feeling good that as the mix Just to the Block 5s that margins will improve there.

Speaker 2

So it's multiple suppliers, Some large and some small. And we have, again, continued to work with the Navy to address The challenges that they all have faced and even though you have different size Businesses, many of them have been confronted with the same labor dysfunctions that we saw coming out of COVID. The Navy has been providing, as well as the Congress, been providing funding to address some of the challenges within the Submarine Industrial Base and we're hopeful that over time that will resolve and we'll continue to see, I believe, improvement As we get into Block V and the supply chain stabilizes, but we've got a ways to go there. And I think importantly, and this is the way we certainly think about it, electric boat just has to get better faster To overcome any unexpected additional future supply chain challenges that may hit us. So we're not going to get into listing parts.

Speaker 2

This is an enormous supply chain. You can imagine with thousands of suppliers all over the nation.

Speaker 11

That's fair. And can I one follow-up, Phoebe? How are you judging the pace of hiring and the labor risk Kind of through the midterm at EB, just given the kind of the huge increases in volume that are required there.

Speaker 2

So again, coming out of COVID, I think we all felt a little bit of the labor constraint. But one of the reasons that we saw increased revenue in this quarter was Extremely strong throughput coming out of Quonset Point is a result of robust hiring that they have executed And the training of those workers so that they hit the ground running and we're able to have additional execute additional throughput Up at Quonset, so we consider that a good bellwether for our ability to continue to hire to meet our needs.

Operator

Your next question comes from the line of Robert Spingarn from Melius Research. Your line is open.

Speaker 12

Hi, good morning, everybody.

Speaker 2

Good morning.

Speaker 12

Phoebe, combat has been discussed throughout the call, but just a couple of quick things. Would you is it fair to assume that the book to bill will continue to be above 1 for this year and beyond just given the strength? And then the second part of this is as Armament and Munitions sales grow, will they be margin accretive or dilutive to the overall segment?

Speaker 9

So

Speaker 2

we when you look at historically, combat orders, they tend to be pretty lumpy. I think the important way to think about it is the underlying predicate exists. It is an increasingly Insecure and threat driven environment and that will drive additional orders. When those execute will be a little bit lumpy, but we have we expect to see continued demand, including On the munition side, but we have planned for our plan this year, We've anticipated margins that are pretty consistent with what they've been doing. It's just executing, operating, ensuring that we've got operating leverage, Including on these new facilities that we're putting in place.

Speaker 2

But recall, this is a group that has extremely strong operating leverage and based on their efficiency And blocking and tackling on the shop floor. So we'll expect to see margins continue.

Speaker 1

And operator, we'll take this one last question, please, and then we'll wrap up the call.

Operator

Certainly, your final question comes from the line of Cai von Rumohr from TD Cowen. Your line is open.

Speaker 13

Yes. Thank you so much. So Phebe, I'm still a little confused about your statement that Q2 earnings Should be the lowest because pretty clearly it looks like Marine should be better absent the VCN charge. Combat usually is a little better. GDIT is stable, and you've highlighted Aerospace, but the volume is going to be higher than it was in the Q1.

Speaker 13

Margins, Given where the volume was, actually looked pretty good in the Q1. So it would seem to imply a pretty steep Drop off in margins, could you give us some color in terms of what is creating that situation? And is that something we should be worried about We'll continue in the 3rd Q4.

Speaker 2

I tried to be pretty clear that We do not anticipate any at Gulfstream, the margin performance in these 2 first quarters replicating in 3rd and 4th Expect some additional perturbations on the supply chain and attestation work at Gulfstream as well as mix issues. With respect to Marine Systems, it's Material timing between 1st and second quarters and in Technologies, it's transition from mature programs that are winding down and being replaced by And follow on new starts. So in each one of these groups, we are seeing a convergence of In the quarter, particularly lower margins and lower earnings and sales than we typically see. We usually have a steady build through the year. This is rather, as I said, aberrational, but we'll get through this.

Speaker 2

And importantly, we don't see these issues Leading into 3rd Q4, we anticipate a very strong 3rd Q4 and that is unchanged.

Speaker 13

Thank you very

Speaker 1

much. Thank you,

Speaker 4

for joining our call today.

Speaker 1

And as a reminder, Please refer to the General Dynamics website for the Q1 earnings release and highlights presentation. If you have additional questions, I can be reached

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
General Dynamics Q1 2023
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