General Dynamics Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 24, 2024

There are 14 speakers on the call.

Operator

Good morning, and welcome to the General Dynamics 4th Quarter and Full Year 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 over to Nicole Shelton, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Welcome to the General Dynamics 4th quarter and full year 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 contained in the company's 10 ks, 10 Q and 8 ks filings.

Speaker 1

We will also refer to certain non GAAP financial measures. For additional disclosures about these non GAAP measures, including 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. 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 will turn the call over to Phoebe.

Speaker 2

Thank you, Nicole. Good morning, everyone, and thanks for being with us. Earlier this morning, we reported earnings of $3.64 per diluted share on revenue of $11,668,000,000 operating earnings of $1,288,000,000 and net earnings of 1,000,000,000 Revenue is up $817,000,000 a strong 7.5% against the Q4 last year. Operating earnings are up $61,000,000 and earnings per share up $0.06 or 1.7%. The year ago quarter had $52,000,000 more of other net income, which helps explain the more modest earnings per share growth.

Speaker 2

In short, the quarter over quarter results compare quite favorably, particularly revenue and operating earnings. The sequential results are even better. Here we beat last quarter's revenue by $1,097,000,000 a very strong 10.4 percent, Operating earnings by $231,000,000 or 21.9 percent, net earnings by $169,000,000 or 20 0.2% and EPS by $0.60 a 19.7% improvement. As we promised that it would be, the final quarter is our strongest of the year in both revenue and earnings. In fact, revenue, Earnings per share, operating earnings and net earnings improved quarter over the previous quarter throughout the year.

Speaker 2

It was a nice steady progression of sequential improvement. For the full year, we had revenue of 42 point $3,000,000,000 up 7.3 percent and operating earnings of $4,250,000,000 up 0.8 percent and earnings per fully diluted share of $12.02 down $0.17 a 1.4% decrease mostly as a result of below the line items like other income, which was higher than the tax provision, which was lower in 2022. The Q4 in the year are $0.04 and $0.09 respectively below consensus. It is important to note that consensus during the 2 weeks before this earnings release as the sell side became aware of Gulf deliveries from public sources. This miss was exclusively because the G700 did not certify before year end.

Speaker 2

As a result, Gulfstream was enabled to deliver 15 gs700s as we in the sell side had anticipated. I will have more to say about this in my segment remarks. While we miss consensus and our own expectations for reasons beyond our control, It should not distract from an otherwise good quarter year. Let me ask Jason to provide some detail on our strong cash performance for the quarter the year, overall order activity and backlog and any other items you might like to address.

Speaker 3

Thank you, Phebe, and good morning. Order activity and backlog were a strong story for us in 2023. We finished the year with total backlog of $93,600,000,000 up $2,500,000,000 over last year. Total estimated contract value, which includes options and IDIQ contracts, was nearly $132,000,000,000 In terms of orders, the Aerospace segment led the way with a 1.2:one book to bill ratio in both the Q4 and full year, And they ended the year with total backlog of $20,500,000,000 The defense segments had a book to bill of 0.7 times in the 4th quarter and 1 to 1 for the full year. Overall, the company had a book to bill of 1.1 times for the year and all four segments were 1 to 1 or better.

Speaker 3

Turning to our cash performance. It was another strong quarter with operating cash flow of $1,200,000,000 which brings us to $4,700,000,000 of operating cash flow for the year. As discussed on previous calls, this level of cash flow was achieved on the strength of Gulfstream orders, additional payments on Combat Systems International Programs and continued strong cash performance in Technologies. After capital expenditures, our free cash flow for the year was $3,800,000,000 a cash conversion rate of 115%. This was nicely ahead of our anticipated cash flow for the year, notwithstanding the delayed certification and entry into service of the G700.

Speaker 3

Looking at capital deployment. Capital expenditures, as I noted on the last call, were higher in the Q4 at $304,000,000 which brings us to $904,000,000 for the full year. The lion share of these investments are of course in our shipyards to support the Navy's submarine and shipbuilding plan. At 2.1% of sales, full year capital expenditures were a little lower than our original expectation due to timing. So some of that naturally pushes into next year.

Speaker 3

As a result, we expect CapEx to be between 2% and 2.5% of sales next year and closer to 2% thereafter. We also paid $360,000,000 in dividends in the 4th quarter, bringing the full year to 1,400,000,000 There were no shares repurchased in the quarter, so we finished the year with 2,000,000 shares repurchased for $434,000,000 at $2.15 per share. With respect to our pension plans, we contributed $106,000,000 in 2023, which included a modest voluntary contribution to one of our commercial plans. We expect to contribute approximately $75,000,000 in 2024. After all this, we ended the year with a cash balance of $1,900,000,000 and a net debt position of $7,300,000,000 down approximately $1,900,000,000 more than 20% from last year.

Speaker 3

We have $500,000,000 of debt maturing in 2024. Our net interest expense in the 4th quarter was $78,000,000 bringing interest expense the full year to $343,000,000 That compares to $85,000,000 $364,000,000 in the respective 2022 periods. We expect interest expense in 2024 to continue to decrease to around $320,000,000 Turning to income taxes. We had an 18.1 percent effective tax rate in the 4th quarter, which brings our full year rate to 16.8%, slightly below, but generally in line with our guidance. Looking ahead to 2024, we expect the full year effective tax rate to increase to around 17.5%, reflecting higher taxes on foreign earnings.

Speaker 3

That concludes this portion of my remarks, and I'll turn it back over to Phoebe for segment comments.

Speaker 2

Thanks, Jason. First, aerospace. The story in aerospace is found in sequential and year over year improvement, continuing strong demand for Gulfstream Aircraft, the overall strength of Gulfstream service business and the continuing growth of Jet Aviation. In the quarter, Aerospace had revenue of $2,740,000,000 and earnings of 449,000,000 This represents a 12% increase in revenue and a 33% increase in earnings on a quarter over quarter basis. The sequential numbers are even stronger with the 35% increase in revenue coupled with the staggering 68% increase in operating earnings.

Speaker 2

The important point here is the dramatic increase in the delivery of in service airplanes in the quarter, 39 versus 27 in the Q3 of 2023. A strong mix favoring large aircraft, strong pricing in the backlog, better overhead absorption and supply chain response leading to less attestation work all contributed to a 16.4% margin in the quarter. For the full year, revenue of $8,620,000,000 is up only $54,000,000 from the prior year and operating earnings of $1,180,000,000 improved by $52,000,000 on a 50 basis point improvement in operating margin. Nevertheless, Aerospace revenue and earnings are less than we anticipated the quarter and the year because as I mentioned earlier, we did not receive the certification of the G700 in the Q4 and did not deliver 15 aircraft We had ready to go. That deprived us of slightly over $1,000,000,000 of revenue and close to 2 $2,000,000 in earnings.

Speaker 2

These of course are orders of magnitude figures. We were also unable during the course of the year to increase production of in service aircraft as plan because of well known supply chain issues that began to resolve in the Q4. So Where are we in our journey toward G700 certification? We are almost complete with the final technical inspection authorization. FAA function and reliability flight testing is almost done and almost all of the paperwork associated with the process has been submitted.

Speaker 2

In the meantime, we are asking customers to schedule their pre delivery inspections contemplating delivery this quarter. All that having been said, let me turn to the demand environment. The book to bill was 1.2 times in the quarter and 1.2 times For the year, backlog increased $395,000,000 sequentially $938,000,000 for the year. So aerospace demand remains strong for both aircraft and services at Gulfstream and Jet Aviation. I should add that strong order intake was interrupted for 2 to 3 week period twice during the year, once for a macroeconomic event And the second for geopolitical event.

Speaker 2

I refer to the regional bank failures earlier in the year and the conflict initiated by the Hamas on Israel and the resulted conflict in Gaza. In each case, order intake resumed after a brief pause. As we go into the New Year, the sales pipeline remains strong and sales activity is at a solid pace. Aerospace backlog is up 72 percent since the Q1 of 2021 when we first detected a measurable uptake in order activity. In summary, Aerospace results are in line with our original forecast excluding the G700 certification delay.

Speaker 2

We look forward to a significant increase in deliveries in 2024 and improved operating margin, but I'll say more about this as we get to guidance. We also expect continued growth and margin improvement at Jet Aviation to perform well in the year. Next, Combat Systems. Revenue in the quarter of $2,360,000,000 is up 8.5 percent from the year ago quarter. Operating earnings of $351,000,000 are up 5.7% on a 40 basis point decrease in operating margin, but still a very good 14.8%.

Speaker 2

The majority of the growth in the quarter was at Ordnance and Tactical Systems and European Land Systems. It was largely driven by higher and propellant volume, including programs to expand production volume, higher volume of Piranhas, Bridges and Eagles in Europe and New International Tank Programs. Not surprisingly, the sequential comparisons are even better. Revenue is up $140,000,000 or 6.3 percent and earnings are up $51,000,000 or 17% on the strength of a 130 basis point improvement in margins. From an order perspective, Combat had a very good year with a 1.1 times book to bill driven by very strong international demand for the Abrams main battle tank, growing demand on the munition side of the business and particular strength in Europe.

Speaker 2

By the way, Combat's performance for the year significantly outperformed our expectations. 2023 revenue was up 13% against the flat forecast provided earlier in the year. Operating earnings are up $72,000,000 or 0.7% with operating margin of 13.9% for the year. In short, this group Had a wonderful quarter and a year with strong revenue growth, strong margin performance, good order activity and a strong pipeline of opportunity as we go forward. Turning to Marine.

Speaker 2

The powerful Marine Systems growth story continues. 4th quarter revenue of $3,408,000,000 is up 14.8% over the year ago quarter. Revenue was also up 13.5% sequentially and 12.9% for the year. This was driven by Columbia Class Construction and Engineering volume, KAO volume and service contracts at Bath. Operating earnings are down 8.4% over the year ago quarter on 100 and basis point reduction in operating margin attributable to EAC rate decreases at Electric Boat.

Speaker 2

These rate decreases similarly impact the sequential and annual comparison with respect to operating earnings. The EAC decreases were primarily driven by 2 factors, later than promised material to EB, which drove additional out of station work at EB and quality problems from several vendors. On the positive side, we are continuing to work with the Navy and the Congress to help further stabilize the supply chain with additional funding for work. We are also working with certain suppliers to set up process improvements where we can. EB also needs to continue to improve its productivity to help that some of the financial impacts from the supply chain.

Speaker 2

Marine Systems had a one time book to bill for the year, A good result for a group of shipyards that began the year with a total backlog of nearly $46,000,000,000 Jason will now give you some color on the Technologies Group which he has responsibility and then I'll return for our outlook for 2024.

Speaker 3

The Technologies Group had a solid quarter and a very strong year. Revenue in the quarter of $3,200,000,000 was down 3.1% compared with the prior year, while operating earnings of $305,000,000 were down 10.3% versus Q4 of 2022. For the year, however, the group's revenue of $12,900,000,000 was up 3.4% With both businesses experiencing nice growth, the results exceeded our expectations on strong demand for the group's products and services. GDIT fared particularly well with increased volume across each of its customer facing segments, defense, intel and federal civilian. Operating earnings of $1,200,000,000 were down by 2% versus the prior year on a 50 basis point contraction in operating margin to 9.3%.

Speaker 3

And that's solely a function of the revenue mix as IT services grew faster than the defense electronics portfolio. Turning back to the quarterly performance to break it down between the two businesses. GDIT's revenue was up in all four quarters compared with 2022 And they've now grown their top line in each of the past 3 years. The same is true for Mission Systems' quarterly revenue performance with the exception of the 4th quarter. If you recall, last year's Q4 saw us break through a logjam in the supply chain and deliver an unusually high number of products, listing both revenue and margins.

Speaker 3

Barring that anomaly in 2022, the group's comparisons on a quarterly and full year basis are quite favorable. With respect to order activity and backlog, the Technologies Group had a good year, notwithstanding the continuing trend of customer solicitations pushing to the right and recurring award protests. The individual businesses and the group as a whole achieved a one to one book to bill on solid revenue growth. GDIT received awards totaling $13,500,000,000 far exceeding their previous annual record set the year before. They've got another $15,000,000,000 in awards pending adjudication and just shy of $2,000,000,000 in awards under protest.

Speaker 3

Mission Systems had a great year as well with a total value of submitted bids almost triple the level they saw in 2022. Of course, many of the group's awards come in the form of IDIQ contracts with potential value that doesn't initially hit the backlog. So much of these positive results to manifest in the reported numbers over time. To that point, we ended the quarter with a total estimated contract value for the group of nearly $41,000,000,000 And the group's combined qualified pipeline exceeds $130,000,000,000 So all in all, a great year for the Technologies Group.

Speaker 2

So let me provide our operating forecast for 2024 with some color around our outlook for each business group and then the company wide roll up. In 2024, we expect aerospace revenue of about $12,000,000,000 up around 40% over 2023. Operating margin is expected to be up 130 basis points to 15%. Gulfstream deliveries will be around be materially over the 111 delivered in 2023. This is about 10 fewer deliveries than we anticipated in the multi year forecast gave you in January of 2022.

Speaker 2

The mix will include about 50 G700 deliveries and fewer G280s as a result of the Gaza conflicts impact on our Israel based supplier. As I just noted, we anticipate a 15% operating margin for the year weaker in the first half, particularly in the second quarter and then well over 15% in the 3rd and 4th quarters. While the ramp up is slightly less than previously It is not without supply chain challenges. In combat systems at this time last year, we had anticipated revenue to be flat in 23. With a changed threat environment, we had a 13% increase in revenue.

Speaker 2

For 2024, we expect revenue to be up about 3% to 8 dollars 5,000,000,000 coupled with a 50 basis point improvement in operating margin to 14.4%. The outlook is a result of the strong order activity we saw in 2023 and the demand signals we see in Europe. To the extent that these demand signals start to convert into order activity, we could see some opportunity for additional revenue later in the year, particularly in our Armaments and Munitions business. As I noted earlier, the Marine Group has been on a remarkable growth journey. In 2023, revenue came in much revenue of about $12,800,000,000 with operating margin improvement to 7.6%, which should result in a meaningful improvement in earnings in 2024.

Speaker 2

In Technologies, 2023 revenue was stronger than anticipated in both businesses. 2024 revenue is expected to be up about 1% to $13,000,000,000 Within the group, GDIT will be up low single digits and Mission Systems will be down slightly due to a transition from legacy systems and a slow ramp up on new programs. Operating margins are expected to improve 20 basis points to about 9.5%. We see long term low single digit growth for the group and continued industry leading margins. So for 2024 company wide, we expect to see revenue of approximately $46,300,000,000 to $46,400,000,000 an increase of around 9.5%.

Speaker 2

We anticipate operating margin of 11%, up 100 basis points from 2023. All this rolls up to an EPS forecast of around $14.40 A reasonable range would be $14.35 to $14.45 On a quarterly basis, the first two quarters look a lot alike with very strong 3rd and 4th quarters. In summary, as we go into this year, we feel very good about the demand environment across all of our businesses. It has been some time since I have seen stronger demand signals and better promise of organic growth. We also have some very good opportunities across the business improve operating margins.

Speaker 2

All we must do is execute. It almost goes without saying that we'll be laser focused on operations. Nicole, back to you.

Speaker 1

Thanks, Phoebe. As a reminder, we ask participants to ask one question and one follow-up so that everyone has a chance to participate. Operator, could you please remind participants how to enter the queue?

Operator

Thank you. We'll take our first question from Myles Walton at Wolfe Research.

Speaker 4

Thanks. Good morning.

Speaker 5

Hi, Tavy. I was hoping you could touch on the 700, not a surprise. How many do you have ready for pre delivery inspection from your customers? And also relative to confidence of when the deliveries could take place, I mean, this is pretty much out of your control. The FAA It's published a few rules last week that are pending and have to go through their process.

Speaker 5

I'm just curious your confidence level for Q1 delivery versus, say, where you were in the Q4 expecting deliveries by year end? Thanks.

Speaker 2

So we have 15 airplanes ready to go and the hope is that we deliver them this quarter. The notifications that Gulfstream made earlier, I guess, this week Are in the regular order and really have no material impact on the certification process. I tried to give you as much clarity as I could And around the certification and where we are.

Speaker 5

Is there an 800 delivery assumed in the guidance for 2024?

Speaker 2

So we're not going to go into what we've assumed in for any given airplane in our guidance. So let me give you guys some perspective about this. For the last about 8 years, we've tried to give you some clarity about a process over which we have No control. And it's kind of like sticking your fingers in a light socket to predict a process that we just don't control. So I think we're gonna As we go forward about any specificity around certification timing because then we hear words like slip and miss And these planes are going to get certified, book certified on the FAA schedule.

Speaker 5

All right. Thank you.

Operator

We'll move next to Ron Epstein at Bank of America.

Speaker 6

Hey, good morning, Phoebe and Jason. Maybe just circling back on your remarks, Phoebe, around EV, but maybe more broadly just kind of the ship industrial base. The DoD has been making some big investments. Where do we where do you see Virginia class build rates ultimately getting Columbia too, because it just seems like the supply chain and maybe just also from just a capacity perspective, we're just So I mean, any thoughts on that?

Speaker 2

So let's step back a minute and talk a little bit about the Shipbuilding Industrial Base in general and the Submarine Industrial Base in particular, these are very heavily manpower driven businesses and in industry and an entire supply chain. And our manpower availability was impacted significantly as a result of COVID in two respects. First, we had a really stunning increase in the timing and the number of Retirement of seasoned workers throughout the industrial base. That coupled with the post COVID labor shortages Cause considerable perturbation in the supply chain. Those will begin to remedy.

Speaker 2

Already seen some stabilization in the labor market, those will remedy. But there's clearly learning That has to happen throughout the supply chain. I'd say with respect to capacity, at Electric Boat, We are nicely capacity sufficient capacity in the moment to deal with the demand that we have we see at the moment, but should that demand signal increase in the near term, we'll work closely with our Navy customer. I think key to this stabilization of the supply chain is improved delivery and improved quality. And that happens as new workers come down their learning curves.

Speaker 2

We benefited Electric Boat because they have a very robust training system in which our new workers come out at a higher level of proficiency, but still they need to come down their learning curves and they're doing so nicely. I think to add a little bit of perspective to that, electric boat, we increased our velocity and throughput on Virginia by about 10 This year and 24% and about 30% on Columbia. So ElectroBoat is continuing to do well. They just need to continue to improve their productivity. So we can continue to offset some of these financial impacts that we're seeing from the supply chain.

Speaker 2

But I would finally mention the Navy has been a very good partner in recognizing these challenges and working hard to get orders and certainty of demand into the supply chain and that helps the entire supply chain plan.

Speaker 6

Got it. And then maybe just one quick follow on. Are we capacitized enough to meet the demand that AUKUS would require Having an extra Virginia class every 3 years?

Speaker 2

So I think we're going to look at all of that with the Navy. But let me tell you the best thing we can do for office in the moment is get back to 2 a year production. That's one step at a time.

Operator

We'll take our next question from Jason Gursky at Citigroup.

Speaker 6

Good morning, everybody.

Speaker 7

Good morning.

Speaker 6

Good morning. I was wondering if you could talk a little bit about The G400 and how that plane seems to be performing from a market acceptance perspective and Kind of the pipeline that you're seeing for that aircraft, I'm just kind of curious how that segment of your market is shaping up there as we come into the New Year?

Speaker 2

So the plane is performing very nicely in excess of the design parameters. We see considerable interest in that end of the market. And so we are quite positive about that airplane when it enters into service.

Speaker 6

Okay, great. And then your comments on Combat and the potential for some Orders converting into revenue coming out of Europe in the second half of the year. That's not that doesn't sound like it's implied in your guidance. But I'm just kind of curious that How far into the year can we go get those orders and actually convert them into revenue?

Speaker 2

Well, it depends on what the orders are for. On faster transaction material, Like service and munitions, they can move a little more quickly. Longer lead orders on combat vehicles take a little bit longer. So we factored to the best of our ability the known demand signals and the velocity of contracting into into our plan. So the extent that there is upside, it'll be, I think, largely on the on the armament musician ammunition programs that execute at a faster rate.

Speaker 2

And to the extent that we can Speed up even further the installation of additional jigs and fixtures for productivity as well as our increased scope on delivery of munitions that should help as well. But we think we Look, in all cases, we give you a very balanced, I'd say, fifty-fifty plan with opportunities and risks, And we're quite comfortable with the estimates that we've given you at the time.

Operator

We'll go next to David Strauss at Barclays.

Speaker 8

Good morning, everyone.

Speaker 2

Hi, David.

Speaker 8

Phoebe, any thoughts on how the budget process for 2024 might actually play out here given that we're quickly approaching the potential for a sequester?

Speaker 2

So, we have factored in all known funding into our plan. And Should we see an extensive continued continuing resolution, we'll have see what impact that has on our faster transaction businesses because every CR plays out a bit differently. And To the extent that we have a sequester, then we have factored some of that, but apparent, you know, Clearly, you can't do all of it into your plan. So we'll adjust accordingly. But we are hopeful that the Congress is able to pass a critical defense bill, particularly in these times given the threat environment.

Speaker 8

Okay. Jason, I wanted to ask about free cash flow and capital deployment. Maybe help some of the big moving pieces, I mean, obviously, inventory was a big drag, but advances helped a lot. Your cash taxes have been really high. How do those all factor in, In 2024 and I assume your guidance includes nothing as usual for Cabo How should we think about that given you have very little in maturities this year?

Speaker 8

Thanks.

Speaker 3

Yes. So, when you think about free cash flow, we are anticipating to continue in the 100% conversion range in 2024 and beyond. Obviously, we outperformed that a bit in 2023, but that doesn't affect what we expect in 2024. The good news is a lot of the larger scale moving parts around cash flow are starting to settle down a little bit. We've experienced some big headwinds and then some Finding tailwinds over the past several years.

Speaker 3

But right now, if you look ahead, I think you can expect for the Aerospace Group, Fairly steady conversion at or slightly above 100% conversion. When you think about it, we had a pretty big tailwind when they were building the significant backlog over the past years and all the deposits were coming in. So that more than offset any effect of inventory build. So as you transition into a period where you're starting to deliver off that inventory. But then you assume a steady one to one book to bill, you should be in a pretty regular burn rate at 100% conversion plus or minus for that business.

Speaker 3

Combat Systems on the other hand should continue to see tailwinds as they work through some of the receivables and work in process on the international programs that we've made some great progress on in recent years. So that will continue for a couple of years. The Technologies Group is a steady provider, well above 100% conversion. And the Marine Systems Group, as we noted, is still Finishing up some of the large capital projects, we're coming through that now and we'll see what the future holds as Phoebe alluded to in terms of Navy investment. But when you kind of net all those together, we're right about 100% for the coming year.

Speaker 3

If you look at capital deployment, as you noted, There's not a lot in terms of commitment. We've got $500,000,000 in notes that mature out in November of this year. So we've got plenty of time kind of see how things play out and decide what we want to do with that maturity. No rush on that decision and we'll look at all options as we always have. I think We've got great opportunity for stepped up share repurchases as more, I should say, as uncertainty sort of moves Out of the environment, we looked at the last half of last year, the last quarter of last year and the significant threat of a government shutdown sort of hungover the environment and that factors into our thinking as we think about how we preserve cash and deploy capital.

Speaker 3

So if we can get past that in March, Then I think it provides a lot of optionality for us as we look ahead on the capital deployment front.

Speaker 2

If you think about it, the demand signals we see and our expected growth Make share repurchase is increasingly compelling. Hey, one thing that Jason talked about, Just mentioned tangentially and I want to focus a little bit on and just give you guys some perspective. When we talk about a one to one book to bill in our businesses, that's really for planning purposes. It's not a forecast. So just keep that in mind.

Operator

We'll move next to Sheila Kahyaoglu at Jefferies.

Speaker 9

Good morning, Phoebe, Jason. Thank you for the time. Good morning. Good morning. Good morning.

Speaker 9

Great color on Gulfstream. You gave some numbers around the lost The revenues and profit got slipped into 24 from the G700, which would imply north of 20% margins for the G700 and given you have quite a few built up already, any color you could give on profit profile of the G700 relative to maybe the

Speaker 2

Can you repeat the last part of your question? It was kind of coming in.

Speaker 9

Sure. Sorry. It was more just the profit profile of the G700 relative to the 650 and the 500, 600 as it entered service,

Speaker 2

Yes. The 700 comes in at accretive margins. But as you all know and many of you are quite expert in this, as We've talked about over the years, including on this fall, the margin performance at Gulfstream is driven by a host of issues. And as I noted in my remarks, mix, pricing, out of station work, all impacted. So I think, again, as I mentioned earlier, the way to think about our The way to think about our plan is a really balanced plan, not quite the question you asked, but I stick with that and I think about it that way.

Speaker 2

But these new airplanes are coming in at very nice margins.

Speaker 9

Okay. And then if I could ask one more on the defense side of the business, just given A lot of what your peers are talking about as well. And you have pretty robust demand in marine and combat, but earnings growth tends to be below revenue growth. So Just given inflation and mix, how do you think about GD's ability to continue to grow defense profit? It seems like combat is seeing some of that.

Speaker 2

Combat is seeing some of it, but I tried to give you some perspective earlier on the impacts of what happened to the Industrial Base in the Marine Group and it also impacted Gulfstream as a result of COVID. So for us, it's really a question of Operating excellence, operating excellence, we're going to focus on that very heavily. So we drive increased profitable growth. That's the value proposition that we're looking at right now.

Operator

We'll move next to Seth Seffman at JPMorgan.

Speaker 7

Okay. Thanks very much and good morning everyone.

Speaker 2

Thanks, Adam.

Speaker 7

Good morning. I wanted to start off asking about Combat And just the 3% growth guide, I guess even if we adjust for some seasonality, I might have thought that the activity levels that we're seeing here In the early what we saw in the second half of 'twenty three would lead to some really quite robust growth in the first half, perhaps even double digit. And then being at 3% would imply something like flat or down in the second half. Am I not Thinking about that cadence properly or is there some reason for the growth to really Step off or come down in the second half?

Speaker 2

No, I wouldn't look at anything macro with respect to that. In a quickly growing environment, Contracts tend to come in a little bit more lumpier. And so this is simply a question of timing. I think we see mid to upper single digits over and towards the higher upper single digits over our planned period. But we've given you the plan that given the faster execution of contracting that we saw last year, We may have a bit of a slowdown in the 1st couple of quarters and then acceleration as the year goes on, But the demand is there.

Speaker 7

Sure, sure. Okay, excellent. And then On Aerospace, I guess it's probably about 2 years ago that you gave us kind of a multiyear look At the Aerospace business and the expectations there as the demand started to gather, since then a bunch of stuff has happened, I think Demand has probably been a little stronger than expected. We've also seen some supply chain issues, some certification push outs. As we think about sort of A multi year outlook for aerospace in terms of deliveries and profitability.

Speaker 7

Is that something you can update at this time?

Speaker 2

Yes. So, we're going to deliver 160 airplanes that's in our plan this year. I will say that 25 will be more deliveries and 26 even more deliveries. But at this point, Given the issues that you mentioned, it's we're not going to be any more granular than that. We owe you additional fidelity as time goes on.

Operator

Our next question comes from Noah Poponak at Goldman Sachs.

Speaker 10

Hey, good morning, everyone.

Speaker 2

Good morning.

Speaker 10

Phebe, maybe just following on that, but a little bit bigger picture. I was curious to hear you talk about How you're managing supply versus demand in this pretty unique business jet market? Because If you go to $12,000,000,000 in revenue, that's run rating $3,000,000,000 a quarter. And based on the change in backlog, I know that's imperfect, but directionally, The order rate had made it to $3,000,000,000 a quarter, but it's now slowed a little bit and we're trying to figure out where this market settles out. And so you want to get customers airplanes and you want to grow, but

Speaker 4

I know you also want

Speaker 10

to maintain backlog and that you're more focused on pricing and margins than units. And so if you're going to 12 and then as you just said to Seth, you're going to go higher, I guess you'd be burning backlog. So how do you think about managing that multiyear supply versus demand in that market?

Speaker 2

Well, I don't see us particularly burning Backlog, given the robust backlog we have and given the robust pipeline that we have, we're off to a good start this year. So I don't see anything that particularly drives a unhealthy burn through the backlog. We see we have believed for some time and it is turning out to be the case that New clean sheet airplanes drive incremental demand and we're certainly seeing that. We don't see much of an abatement in that.

Speaker 10

Okay. So it sounds like you potentially expect the That quarterly order rate to pick back up moving forward as your new airplanes are more entrenched in the market?

Speaker 2

Well, look, our order rate has been quite healthy and quite wholesome, and we would expect additional orders supported by the pipeline to come in this year. So we're not going to give you any real granularity around orders per quarter, but We see nice demand, continuing interest and a very solid pipeline. To me, those are the sort of foundational elements that we rely on for looking on a going forward basis, looking at what production can ultimately be.

Operator

We'll move next to Cai von Rumohr at TD Cowen.

Speaker 11

Yes. Thank you very much, Ceevan. Good numbers. So Gulfstream, 2 issues. First, you mentioned the Hamas attack and the impact on the G280, maybe tell me the status of that and what that means in terms of your ability to get deliveries?

Speaker 11

And secondly, I think the bigger question is, by my quick math, it looks like Your guidance for 2024 implies an 18% incremental margin at Gulfstream, which seems low given the good margins you should be getting on the G700.

Speaker 2

Right. So look, let's agree that we're not we shouldn't in any given moment, infer something from an implied margin. I think as you know, probably better than most that The margin performance in any given quarter is driven by a myriad of factors that we have gone over multiple times. And I think in this environment where we are encouraged by the supply chain, but we've got more ways to go. We think that we have given you a very, very balanced plan and I really stick to that plan.

Speaker 2

That's how I think about it. With respect to the 280, we have properly adjusted our plan to deal with the realities of what they are facing there. They are continuing to perform with retirees and management. And as I say, we factored all of that into our expectations for the year.

Speaker 11

So is that I mean, I still don't quite understand the 18% margin. Is that Sort of a P and L drag, the fact that there's they can't get enough for the timing.

Speaker 2

I wouldn't say it's a P and L drag. It's just a reality of the multiplicity of factors that are impacting us. 24 is a pivotal year. We saw significant improvement in the supply chain during the course of the year that frankly allowed us to increase production in the latter half of the year. If you recall, we were delivering between 24 25 aircraft and we delivered 39 in the Q4.

Speaker 2

That makes us pretty optimistic that we can continue to increased production, but we are cautious about the ability of the supply chain to Keep up. All indicators are that they're doing quite well. But it, this is one step at a time and there's more risk.

Operator

We'll move next to George Shapiro at Shapiro Research.

Speaker 8

Yes, good morning.

Speaker 2

Hi, George.

Speaker 12

Hi, Phebe. Just following up a bit on Cai's question. I mean, the incremental margin was like 38% here in this Q4, which is pretty Extraordinary. So, I mean, what changes to really knock that down to the point that to Kai's comment?

Speaker 2

Hey, you guys are reverse engineering incremental margins and it's almost impossible to deal with in the Complexity of this business, I would infer nothing from it. Let's talk about the underlying capabilities. Gulf has a lot of operating leverage. They've always been a good since we acquired them at GD years ago, they have been strong operating performers with very good margin performance and gross margins coming out of their operations. That won't change.

Speaker 2

But the mix of business, the level of any given quarters, Timing around supply chain and its impact on attestation work and mix of service, Jet Aviation, all of those things are contributing. So there is nothing systemic other than those issues that To know and they are temporary and we will work through the supply chain issues. But there's nothing systemic that should concern you about where we stand on Gulfstream and its ability to increase margins, earnings and revenue over time here.

Speaker 12

And one for you, Jason. The unbilled receivables were down like $450,000,000 in the quarter. Is that just Ajax catching up?

Speaker 3

It's a little bit Ajax and it's a little bit of the ongoing payments on our other large international program at combat systems. Those are the 2 big pieces. Yes, George.

Operator

We'll take our next question from Robert Spingarn at Melius Research.

Speaker 13

Hey, good morning.

Speaker 2

Good morning.

Speaker 13

Phoebe, the Marine Guide implies about 340,000,000 In sales growth and in the past, you've talked about Columbia driving $400,000,000 to $500,000,000 of growth per year. So could an economic price adjustment for Virginia class be a meaningful source of sales and operating income for marine in 2024?

Speaker 2

Well, EPA adjustments can always be A good source of income. Look, I think the way that we've always talked about the marine growth being somewhat lumpy, $300,000,000 to $500,000,000 in any given year. But in the next 2 years, we expect between 6 $100,000,000 $1,000,000,000 in per annum growth. So the growth is there. It just comes in at a on a lumpier basis Then you might then one might want, but it is there.

Speaker 2

And So with respect to Virginia and any EPA adjustments, we're continuing to work with the Navy. We had contemplated the impact of Columbia prioritization has had the Navy on Virginia and that's just work in progress as we work through all the particulars with the Navy. But We think we've given you a pretty good indicator of this year's revenue And we'll adjust it accordingly if anything changes on the upside.

Speaker 13

So just to be clear, there's nothing in there for an adjustment yet?

Speaker 2

No. I think it's premature to put numbers in before you've got an agreement with your customers.

Speaker 3

Fair enough. Thank you.

Speaker 1

And Audra, I think we have time for just one more question.

Operator

Thank you. We'll take that question from Peter Arment at Baird.

Speaker 4

Yes, thanks. Good morning, Phoebe and Jason. Hey, Phoebe, maybe just to add on and just speak on marine. Just you've given us a lot of details on what some of the pressures were. But We've seen throughout the industry, the Defense Production Act has been used to kind of improve some capacity at Rocket Motors and Munitions.

Speaker 4

Is there an opportunity? I mean, I know the Navy is a really good partner and customer. Is there an opportunity for to get some relief and free up some additional resources for you at

Speaker 6

the yards?

Speaker 2

So we have been pretty well resourced by the Navy and for many, many years in anticipation of From the Navy is stabilization of on time delivery and quality coming out of the out of the supply chain. So I think that, as we go through this year, I'm sure there'll be additional opportunities for us to work with the Navy and find some ability to relieve those pain points that remain in the supply chain.

Speaker 4

Appreciate the color. Thanks, Phoebe.

Speaker 2

Hey. And listen, before I we leave, I just wanted this is for many of you may know, this is Jason's last earnings call. And I wanted to thank him for his excellent years of service As a CFO, he will be missed, but his work will continue at Technologies. So I'm sure all of you will join me in congratulating Jason on a superb CFO job well done over the years.

Speaker 1

Okay. Well, thank you all for joining our call today. As a reminder, please refer to the General Dynamics website for the Q4 earnings release and highlights presentation.

Operator

And this concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
General Dynamics Q4 2023
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