General Dynamics Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 24, 2024

There are 17 speakers on the call.

Operator

Good morning, and welcome to the General Dynamics First Quarter 2024 Earnings Conference Call. All participants will be in a listen only mode. And after the speakers' remarks, there will be a question and answer session. Please note this event is being recorded. And 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' Q1 2024 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 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 Kim Correa, Chief Financial Officer. I will now turn the call over to Phebe.

Speaker 2

Thank you, Nicole. Good morning, everyone, and thanks for being with us. As you can discern from our press release, we reported earnings of 2.88 dollars per diluted share on revenue of $10,700,000,000 operating earnings of 1,036,000,000 dollars and net earnings of $799,000,000 These results compare quite favorably to the year ago quarter. Revenue is up 8.6% against the Q1 last year. Operating earnings are up 10.4%.

Speaker 2

Net earnings are up 9.5%. As a result, earnings per diluted share are up $0.24 or 9.1 percent more than the year ago quarter. The operating margin for the entire company was 9.7%, a 20 basis point improvement over the year ago quarter. Overall, these numbers represent a very strong quarter and a good start to 2024. However, we fell below our own expectations for the quarter and below analyst consensus, which is predicated at least in part on our forecast.

Speaker 2

Rather obvious explanation is that we forecast 15 to 17 G700 deliveries in the quarter, which did not happen. We received FAA certification for the G700 at the very end of the quarter too late to make any G700 deliveries. This obviously impacted revenue and earnings in the Aerospace Group in the quarter. The good news is that we now have certification and the delay in deliveries does not change our outlook for the year. Gulfstream still plans to deliver 50 to 52 G700s this year.

Speaker 2

So our aerospace forecast for the year remains unchanged. I'll give you a little more color on this later in my remarks. And other good news as you can see was strong performance across the defense portfolio. In short, we performed very well in the quarter over those things within our control. At this point, let me ask Kim Carreer, our CFO to provide details on our order activity, solid backlog and cash activity before I come back with segment observations.

Speaker 1

Thank you, Phebe, and good morning. I'll start with orders and backlog. We had a solid quarter from an orders perspective with an overall book to bill ratio of 1:one for the company. Order activity was particularly strong in the Combat Systems Group with a book to bill of 1.6:one and in the Aerospace and Technologies segment, which each had a book to bill of 1.2:one. We ended the quarter with total backlog of $93,700,000,000 up slightly from year end and up 4% from a year ago.

Speaker 1

Our total estimated contract value, which includes options and IDIQ contracts ended the quarter at approximately $134,000,000,000 up 1.5% from year end. Turning to our cash performance for the quarter. We had an expected slow start to the year, absent the delayed certification and entry into service of the G700 and continued G700 inventory build. So let's start with technologies. We continued to see strong cash performance from that group in the quarter.

Speaker 1

As anticipated, Combat Systems and Marine Systems both built working capital in the quarter based on their unique mix of contract timing versus expected payments. Finally, moving to Aerospace, the lack of G700 deliveries drove us to use cash in the quarter. As a result, our free cash flow for the quarter was a negative $437,000,000 Since all of what I described is timing related, we still have an expectation for the year of a cash conversion rate around 100%. We expect most of the negative free cash flow to reverse in the second quarter, followed by substantially improving free cash flow each of the 3rd and 4th quarters. Now to discuss our capital deployment activities.

Speaker 1

Capital expenditures were $159,000,000 or 1.5 percent of sales in the quarter. Similar to last year, you should expect capital expenditures to increase in subsequent quarters throughout the year as we anticipate spending between 2% and 2.5% of revenue on CapEx this year. Over 50% of that expected spend will be for infrastructure at our 3 shipyards as we continue to invest to support the Navy's submarine and shipbuilding plan. Also in the quarter, we paid $361,000,000 in dividends and repurchased approximately 390,000 shares of stock for $105,000,000 at just under $2.69 per share. When you add it all up, we ended the quarter with cash balance of around $1,000,000,000 and a net debt position of $8,200,000,000 Our net interest expense in the quarter was $82,000,000 compared with $91,000,000 for the same quarter last year.

Speaker 1

The reduction in interest expense was attributed to our lower debt balances. Finally, turning to income taxes. We had a 17.5 percent effective tax rate in the quarter, right in line with our full year guidance, which reflects higher taxes on foreign earnings. Phoebe, that concludes my remarks. I'll turn it back over to you.

Speaker 2

Thanks, Kim. Now let me review the quarter in the context of the business segments and provide detailed color as appropriate. First, Aerospace. Aerospace did very well in the absence of the G700 deliveries. It had revenue of $2,100,000,000 and operating earnings of $255,000,000 with a 12.2 percent operating margin.

Speaker 2

Revenue is $192,000,000 more than last year's Q1, a 10.1% increase. To give you a little detail here, the increase was driven by an increase in new aircraft deliveries and an increase in services at both Gulfstream and Jet Aviation, partially offset by significantly lower special mission aircraft activity, which is always lumpy. The 24 deliveries in the quarter are fewer than planned, but 3 more than the year ago quarter. The mix in the quarter favored large cabin and the 650 in particular, which helped both revenue and earnings. Operating earnings of $255,000,000 are up $26,000,000 over last year's Q1, an 11.4% increase.

Speaker 2

Earnings on both new aircraft and aircraft services enjoyed good increases offset in part by lower earnings on special mission, higher G and A and net R and D. While Gulfstream will continue to experience part shortages that caused significant out of station work, which is inherently less efficient, the supply chain is clearly improving and much more predictable. As is now apparent, we plan to deliver a considerable number of GE700s in 2024. The first twenty to be delivered are fully built and deliveries have begun. By the end of this month, the next 7 to 8 will be ready.

Speaker 2

We plan to deliver these 50 to 52 planes over the quarters in relatively even numbers with improving margins quarter over quarter as we go along. The first twenty, what we call the Lot 1, carries some cost and retrofit burden that will not affect subsequent aircraft deliveries. So expect margins in the 2nd quarter to be similar to the Q1 with significant improvement in Q3 and Q4. Aerospace had a decent quarter from an orders perspective with a book to bill of 1.2:one in dollar terms. Sales activity and customer interest is evident this quarter, but concerns over persistent inflation and monetary policy in the U.

Speaker 2

S, together with concerns about conflict in the Middle East has slowed the consummation of transactions to some degree. It is also worth noting that a significant portion of the demand we see is fleet replenishment for corporations. These multi aircraft deals usually proceed at a slower pace. The G800 flight test and certification program continues to progress well. The aircraft design, manufacturing and the overall program are very mature.

Speaker 2

We continue to target certification of G800 for 9 months after the G700 certification, although I'm increasingly reluctant to give estimates about these things that are ultimately out of our control. In short, Aerospace team had a good quarter. G700 FAA certification is in the rearview mirror and we hope EASA certification is hard on its heels. And we expect nicely improving margins, particularly in the second half. Next, Combat Systems.

Speaker 2

Combat had revenue of $2,100,000,000 up almost 20% over the year ago quarter. Earnings of $282,000,000 are up 15.1%. Margins at 13.4% are down 60 basis points over the year ago quarter. It is interesting to observe that this very strong increase in revenue is in comparison to last year's Q1, which enjoyed a 5% increase over 22. We saw increased revenue performance at each of the 3 businesses.

Speaker 2

The increase came from higher volume on new international tank programs, higher artillery program volume and higher volume on corona programs and bridges. We also experienced very strong order performance. Orders in the quarter drove total backlog to $15,600,000,000 up $1,500,000,000 from this time the year ago quarter. Demand for combat systems and products continues to increase, particularly in Europe and in some lines of business in the U. S.

Speaker 2

Orders for wheeled and tracked combat vehicles are up significantly reflecting the heightened threat environment. In addition to several new combat vehicle starts, demand for Abrams also continues. We've seen tank orders from new users and a number of countries will be introducing Abrams into their combat fleets for the first time. Since Q1 last year, we have received almost $1,000,000,000 in orders from both U. S.

Speaker 2

Allies through FMS and the U. S. Army. In the U. S, we are rapidly increasing ammunition production with the opening of our Texas facility, which will increase current 1.55 millimeter ammo capacity by 83%.

Speaker 2

As the year goes on, we will continue to work with our Army customer to further increase ammo capacity to meet their requirements. Turning to Marine Systems. Once again, our shipbuilding units are demonstrating impressive revenue growth. Let me repeat the recent history that I gave you last year at this time respect to growth in this decade. The Q1 of 2020 was up 9.1% against Q1 of 2019.

Speaker 2

Q1 2021 was up 10.6 percent over Q1 2020. Q1 2022 was up 6.8% over Q1 'twenty one. And Q1 'twenty three was up 12.9% over Q1 'twenty two. Finally, this quarter at $3,300,000,000 is up 11.3% over Q1 2023. This is an impressive growth ramp by any standard.

Speaker 2

However, growth ramps of this character bring with them supply chain and operation issues that are challenging. This particular quarter's growth was almost exclusively Columbia cost constructions. Operating earnings are $232,000,000 in the quarter, up 10% from the year ago quarter. Operating margin is basically the same as last year's quarter. We anticipate that this will improve as we progress through the year.

Speaker 2

As we have talked about on previous calls, the story at the Marine Group is efficiently managing the growth propelled by the U. S. Navy's need for ships, particularly submarines. As a labor intensive heavy manufacturing industry, the shipbuilding industrial base was hit hard by the demographic impacts of COVID. This coupled with a number of sole source suppliers of highly complex components has made it difficult for the industrial base to keep pace with increasing demand.

Speaker 2

The significant financial investments we have made in our shipyards over the last 12 years, particularly at Electric Boat has mitigated the impact on us, but we are still hit by schedule and quality problems in the supply chain. Our job is to minimize the efficiency and schedule impacts of late material by increasing our throughput, And we are doing that each and every quarter. In Q1 alone, our productivity increased 11%, but there is more to do. Finally, the Navy's investment in the supply chain has helped and will continue to help as we move forward. For technologies, we're off to a solid start.

Speaker 2

Revenue in the quarter of $3,200,000,000 is down less than 1% from prior year, but up 2% over the Q4 last year and modestly ahead of our expectation for the start of the year. Operating earnings of $295,000,000 are consistent with last year, yielding a margin of 9.2%. As we have previously discussed, margins will continue to be driven by the mix of IT service activity and hardware volume. The group received $4,000,000,000 in orders during the quarter for a book to bill ratio of 1.2:one. Both businesses experienced strong order activity, in GDIT's case, the highest book to bill since mid-twenty 19.

Speaker 2

This led to a total backlog of $13,500,000,000 an increase of over 5% from a year ago and total estimated contract value of $42,700,000,000 The story in Technologies is one of steady growth, particularly at GDIT and increasingly at Mission Systems as they transition from legacy programs to new programs and faster growth lines of business. Both businesses have robust pipelines driven by their respective investments in different technologies. The group's continued focus on margin performance will result in sequential margin expansion throughout the year as they continue to build their backlog and grow. As you know, we never update guidance at this time of year. Apart from what I have already said about aerospace, I will stick to that custom.

Speaker 2

We do, however, confirm the guidance we gave you at the end of last quarter and we'll update it at midpoint of the year as we typically do. This concludes my remarks with respect to what was in many respects a rewarding quarter. Let me now turn the call back to Nicole to take your questions.

Speaker 1

Thank you, 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

And thank you. We will now begin the question and answer session. And your first question comes from Scott Dusziel with Deutsche Bank. Your line is open.

Speaker 3

Hey, good morning.

Speaker 2

Good morning.

Speaker 3

Kim, can you clarify the G700 delivery expectation for the Q2? Is it the 20 that are ready to go plus the 7 to 8 that will be ready at the end of this month?

Speaker 2

So let me kind of tackle that. I alluded to it in my opening statement. But we have 50 to 52 airplanes that are going to deliver in about equal amount of the 700 in the second through the 4th quarters. So think about it that way.

Speaker 1

So I think that'll help you.

Speaker 3

Okay. Thank you. And then Phebe, I was hoping you could spend a moment maybe talking about the growth that Combat Systems is currently seeing in Europe and perhaps how you expect that to trend over the coming quarters?

Speaker 2

Thank you. So the growth in Europe is clearly driven by the threat environment. We've seen increases in orders for combat wheeled and tracked vehicles and significant bridge orders. We're also seeing increased orders coming out of various countries in Europe for Abrams through the FMS process. So we see that demand signal continuing until the threat environment frankly improves.

Operator

And we will take our next question from Seth Seifman with JPMorgan. Your line is open.

Speaker 4

Good morning, Seth. Good morning. Thanks very much. Looking to Marine, when we think about the expectation for the profit margin for the year and kind of where we started, are there kind of visible milestones that you see through the remainder of the year that bring that number higher or kind of is it a change in mix or kind of what drives the underlying margin improvement through the year?

Speaker 2

So, two things. 1 is the increase in productivity at each of the shipyards, and we see that and we've been seeing that for the last few quarters. And it's also fewer disruptions from the supply chain. So those are the 2 primary factors.

Speaker 4

Right. Okay. Okay. Great. And then just when we think about I think you mentioned some of the headwinds to demand at Coldstream from here in terms of monetary policy, geopolitical issues.

Speaker 4

Just to kind of affirm, the expectation for 160 deliveries this year and the way that the backlog will trend through the year, the expectation is that that's a very sustainable number with potential for that to grow in the years beyond.

Speaker 2

So let me clarify a bit. There are I don't see concerns about inflation or monetary policy impacting demand, it really is just impacting the time from the initiation of a potential interest to the closure of an order, which is also impacted somewhat by large fleet, airplane fleet orders from corporate customers. So think about it that way, more of a timing issue with the completion of the deals and not a headwind to overall demand. So I think that's an important nuance. And we're still sticking to our delivery guidance for the year.

Speaker 2

And I think on a going forward basis, as we've intimated before, we see that those deliveries increasing over time.

Operator

And we will take our next question from Robert Stallard with Vertical Research. Your line is open.

Speaker 5

Thanks so much. Good morning.

Speaker 6

Good morning.

Speaker 5

Phebe, I was wondering if you could comment on the recently passed or soon to be signed supplemental and what implications that could have for the combat business, but also on the submarine side, what sort of additional funding could come from the U. S. Navy? Thank you.

Speaker 2

So let me take them in the inverse order. On the submarine side, the preponderance of funding in the supplemental is to help stabilize the industrial base, ensuring that we continue to drive order activity on a consistent and repeatable basis. So that is really on the submarine side. In combat, I think you can see there's a fair amount of ammo funding and we had fully anticipated that.

Speaker 5

Okay. And then just secondly, I was wondering if you could give us an update on the AJAX program in the UK?

Speaker 2

So it is proceeding extremely well through test and continue to work with that customer, but they're very pleased with the performance of the vehicle.

Speaker 5

Okay. That's great. Thank you very much.

Speaker 7

And we

Operator

will take our next question from Sheila Kahyaoglu with Jefferies. Your line is open.

Speaker 8

Good morning, Phoebe. Thank you for the time. I wanted to ask one about aerospace and I'm sorry for putting you on the spot with some mental math, but last year or last quarter, you talked about the G700 profit contribution being around 25%. So when we think about the Q1 performance, it was actually really good relative to our number of 12.1 percent margin. It would imply you see a deceleration in the underlying business for Aerospace, just given G700 comes in at 50 units.

Speaker 8

So I guess how do we think about the mix movement throughout the year for Aerospace?

Speaker 2

Well, let's talk about the first predicate in that question. I don't believe we've ever disclosed any margin on a particular airplane and we haven't there. I think we can't take and discern revenue and earnings in any given quarter as attributable to one airplane. So I think you need to think about it holistically. But we see the we don't see any real changes in the mix throughout the year.

Speaker 2

And we'll do a detailed bottom up review in Q2. But for right now, we're sticking with both our mix, our earnings, our margin and revenue expectations. So, we're off to a pretty good start, I'd say. And we're very encouraged at how the outlook looks for the rest of the year.

Speaker 8

Can we assume the G700 is accretive to the 15% full year guidance?

Speaker 2

So think about it this way. Is ultimately going to be a very profitable program. But as I explained in my remarks, the first lot of 20 or so carries with it additional costs. We'll see those in largely in Q2. So think about Q2 as an increase in revenue of about $1,000,000,000 to $1,100,000,000 and in earnings of about $100,000,000 to $110,000,000 and then progress nicely thereafter.

Speaker 2

And again, that's all impacted by the multiplicity of factors in our Aerospace business that drive margins.

Operator

And we will take our next question from David Strauss with Barclays. Your line is open.

Speaker 9

Thanks. Good morning.

Speaker 2

Good morning.

Speaker 9

Phoebe, so Rob's question on the supplemental and the submarine industrial base money. So there's money there. There's a lot of money in the base budget appears. You're spending additional CapEx today that you'll eventually recover through working capital profit. How does I mean, it's a lot of money.

Speaker 9

I mean, how does that manifest itself in your numbers as we think about over the next couple of years?

Speaker 2

So for the supply chain support, it has minimal impact on us. It's however extremely important because the stabilization of the supply chain is critical to the resumption of full cadence on Virginia and the increased cadence on Columbia. So funding is also robust for submarines. We've got one projected in 'twenty five and then it would be extremely helpful to get a full ship set of Virginia's also appropriated because that again helps stabilize the industrial base with repeatable revenue that they can plan around.

Speaker 9

Okay. Thanks for that. Last quarter, you made some more kind of positive comments regarding the potential for share repurchase to step up. Obviously, you did a little bit this quarter, but not that much. How are you thinking about that now?

Speaker 9

Did that have to do with the fact that you ended up burning cash in Q1? Just how you're thinking about share repo and the balance sheet from here? Thanks.

Speaker 2

So the way we think about share repurchases is and this will be true going forward is really in the regular order. Recall what we were facing in Q1, and that was we're looking down the throat of a potential and at some point looked very likely government shutdown. And so I think that prudence and conservatism in the face of that kind of uncertainty is really key. But the cash performance for the remainder of the year is going to be very strong and we will act accordingly.

Operator

And we will take our next question from Noah Poponak with Goldman Sachs. Your line is open.

Speaker 7

Hi, good morning everyone.

Speaker 2

Good morning.

Speaker 7

Phebe, what's the framework for the pace of G700 deliveries beyond this year compared to this year? Not asking for quarterly numbers or anything like that, but just given this year's has some abnormalities compared to to a recurring airplane. And then Kim, just what's the updated view on free cash flow to net income conversion for the year?

Speaker 2

Well, so let me talk about $700,000,000 We never, except I think on 1 or 2 occasions about 5, 6 years ago, give the future year expectations. But 700 is a very, very successful program and it will continue to execute well. I'll turn it over to Kim on cash.

Speaker 7

On

Speaker 8

cash? Thank you, Phoebe.

Speaker 1

So with respect to cash and the expectation, we still anticipate achieving about 100% of free cash flow conversion in 2024. We had expected the Q1 to be negative even before considering the fact that we didn't deliver any G700. So we had planned for a negative free cash flow in the Q1 and that was mostly driven by some contract timing in the Combat Systems segment and some in the Marine Systems segment. But we expect that most of that negative cash will reverse in the Q2 with a stronger third quarter and then a steeper ramp in the Q4.

Operator

We will take our next question from Myles Walton with Wolfe Research. Your line is open.

Speaker 10

Thanks. Good morning. Phebe, could you comment on or Kim, could you comment on the margin expansion implied at Combat Systems as you move through the rest of the year? I think it has to be 80 to 100 basis points on average up year on year for the rest of the year. And maybe underlying dynamics of given the volume, why we didn't see more of a drop through margin in the Q1?

Speaker 2

So what drove margin in the Q1 were 2 things, mix as we came off of older legacy programs, particularly in the vehicle world and in the U. S. And then began ramping up newer programs, vehicle programs in the U. S. And then a significant amount of the revenue growth came from facilities investment, which by definition carries a lower margin than production.

Speaker 2

So both of those things will reverse throughout the course of the year and combat margins will increase. Our expectation is quarter over quarter. Remember, this is a high operating leverage group. So they have to do quite well here.

Speaker 10

Okay. And one clarification on Gulfstream's backlog, if I could. I think that there was some adjustment downward in the backlog. Were those cancellations or 4x maybe 6 large jet cancellations or thereabouts?

Speaker 2

I don't think that's the way to look at it. But why don't Nicole get back to you on that. But there isn't we didn't have any particular notable cancellations. So let us unpack that one with you a little later.

Speaker 10

Thanks.

Operator

We will take our next question from Ron Epstein with Bank of America. Your line is open.

Speaker 11

Hey, yes. Good morning.

Speaker 2

Good morning.

Speaker 11

So Phebe, with the increased demand on munitions and so on and so forth, what are you doing to mitigate any of the issues that could arise from growth in those markets, just like we've seen in the Navy markets, given all the demand and growth, there's been supply chain issues. Are you expecting that?

Speaker 2

Yes. So in the combat world, it's a little bit more of a robust supply chain in general that we typically have not had difficulty with typically. We know a priori the suppliers who could conceivably cause issues and we've been working with them to ensure that they can manage this growth, but we're pretty comfortable that we can execute the growth. Our focus is really on operations and execution. And those will be the 2 key drivers of the profitability in that group.

Speaker 11

Got it. And then maybe back to the kind of the naval side of the house and the supply chain. Could you give us any color on where there are actual weaknesses in the supply chain where investment has to be made?

Speaker 2

So I'd say in the large in the single source, sole source suppliers who are by definition critical. And I know the Navy has focused quite intensely on those particular products and supply chain items. And I think they've been pretty explicit about where some of that might be. And I think it's best to think about it that way. But we do believe that working with the Navy customer, the continued infusion into that supply chain will help stabilize.

Speaker 2

But they are the pacing item now for electric boat.

Operator

And we will take our next question from Doug Harned with Bernstein. Your line is open.

Speaker 6

Good morning. Thank you. Good morning. On Marine good morning. On Marine, the Navy has recently described some shipbuilding delays really across programs.

Speaker 6

And the one that really stood out was Columbia Class with the latest report on the turbines and the bow. Can you give us a sense of changes you've seen in schedule that affect you kind of across the program base and particularly on Colombia?

Speaker 2

So I think you've articulated what the Navy has said. I will tell you our throughput and productivity has been strong on Colombia. It is the it enjoys the highest national security priority. So we have done pretty well on Colombia and are increasing our throughput on Colombia. So then it's really those pacing items that are out there.

Speaker 2

And we're working with our Navy customer to see if there are additional things we can do to recover some schedule and if there are any workarounds, but this is going to

Speaker 1

be a bit of

Speaker 2

a slog for the supply chain.

Speaker 6

Well, and then also on shipbuilding, inflation has affected shipbuilding costs a lot over the last few years. We've seen pricing on new awards go up. And when you look forward in the budget, is there a concern that you're basically if you're going to if the Navy's budget is really going to be able to afford kinds of inflation increases that may come along with the continued ramp in shipbuilding?

Speaker 2

Yes. So I think you've known over the years, I tend not to comment on individual service budgeting, But inflation certainly has been a factor. And to the extent that we can increase throughput to offset some of that, we will. But the Navy is well aware of the inflation impact and I think is working hard with the whole shipbuilding industrial base to adjust some of that. Hey,

Speaker 12

good morning. Good morning.

Speaker 7

Phebe, following up on

Speaker 2

Hey, good morning. Good morning. Phebe, following up on the Marine question, in addition to the delay in the Columbia class, the DoD did request 1 less Virginia class for the fiscal year 2025 budget request. So I mean, if we take all this into perspective, can you provide some context on what this means for marine revenue growth over the next few years? And does the margin with a 7 handle on it, is that more the new norm for this business?

Speaker 2

So let me address that in the inverse order. Margins will be improving at our shipyards. We have every expectation all of our shipyards, NASSCO, Bath and Electric Boat. One of the things as we've talked frequently about is the margin impact of quality and schedule problems coming out of the supply chain. And as the supply chain stabilizes, that will help as well.

Speaker 2

And what was your first part of your question? The revenue cadence including the just one Virginia College option

Speaker 1

if it's for 'twenty one.

Speaker 2

Okay. So it has no impact in the short term for electric boat because we've got plenty of work in front of us. It could have an impact in the outer years, outside of our planning horizon. But critical here is in fact the additional ship set of funding. We have long lead material on Virginia that is very important to the supply chain.

Speaker 2

And to the extent that we can ensure that we get a full second Virginia ship set so that we're buying it to a year, I think it's very important for the overall health of the industrial submarine industrial base.

Speaker 8

Thank you, Phebe.

Operator

And we will take our next question from Ken Herbert with RBC. Your line is open.

Speaker 7

Yes. Hi, good morning, Phoebe and Kim.

Speaker 2

Good morning.

Speaker 7

If we look, Phoebe, at your comments around timing in Gulfstream, is it still fair to assume that you should be looking at a book to bill at 1 or greater for Gulfstream in 2024?

Speaker 2

So it's a good planning assumption. It is how we are thinking about our internal planning, but let's see how we do as we start to significantly ramp up production and deliveries. So, but as I said, that's our good planning assumption.

Speaker 7

Okay, great. And just a clarification for Kim, the comments sound like the free cash flow ramp really sort of accelerates in the second half of the year. But with all the 700 deliveries expected this quarter, free cash flow should be positive in the Q2, correct?

Speaker 1

Yes. That's pretty much what you should assume.

Speaker 7

Okay, great. Thank you very much.

Operator

And we will take our next question from Robert Spingarn with Melius Research. Your line is open.

Speaker 13

Hi, good morning.

Speaker 2

Good morning.

Speaker 13

Phebe, you said recently that with the even though the aerospace supply chain is improving, your ramp this year could challenge that improvement. I was wondering if you could elaborate on that a little bit.

Speaker 2

So we still have look, it's definitely improving. Quality is improving and schedule reliability is improving. But make no mistake, we still have a lot of out of station work. And that impacts the profitability and margin on airplanes that are experiencing that. So we definitely see improvement.

Speaker 2

We are optimistic that they can keep pace, but it's not without its margin challenges.

Speaker 13

Okay. And then also I think you commented, you had good bookings in Aerospace in the quarter reflecting strong demand. But I think you've said, the U. S. Has been very strong.

Speaker 13

How is aircraft demand elsewhere in the world?

Speaker 2

So there's no real change, I think, from the previous quarters, U. S. Corporations, private and public, high net worth individuals both U. S. And outside the U.

Speaker 2

S. So no real changes, no real surprises. So that the typical customer base that we see is I think the way you should think about it.

Speaker 7

Thank you.

Operator

And we will take our next question from Peter Arment with Baird. Your line is open.

Speaker 12

Thanks. Good morning, Phebe and Kim.

Speaker 2

Good morning.

Speaker 12

Phoebe, the Army wants to reach 100,000 155 shells by, think October 2025. Can you update us on how your ramp is going? You've discussed that that supply chain is a little more robust.

Speaker 2

Yes. So our ramp there is more about increasing the facilities that we have. And I noted in my remarks, the opening of our Texas facility, which we worked very, very hard to expedite and frankly did it in almost record time was very important because it increased the throughput and the productivity of the number of shells by 83%. So we're on track with the Army to get where we need to be and our objective is to move even faster and so far we have been. But the Army has been a critical and extremely important partner here and what is really a national security imperative.

Speaker 12

Yes. Thanks for that. And then just if you could make any comments on the GTU two eighty program just given the conflict that's going on in the Middle

Speaker 2

East? So we had anticipated the impacts on the 280s in our guidance to you, but I will tell you that they are doing quite well and are slightly ahead of our schedule. We're still sticking to our deliveries, but I think it's notable that they're managing pretty well in this tough environment.

Speaker 12

Appreciate the color. Thanks, Phoebe. We will

Operator

take our next question from Cai von Rumohr with TD Cowen. Your line is open.

Speaker 14

Yes. Thank you, Phoebe, and good quarter.

Speaker 2

Thanks, Cai.

Speaker 14

So could you update us on the status of the G400? How is it doing? And is it fair to assume that it might have a gap of

Speaker 2

I think I said last quarter, I'm done predicting process over which we have little control. We've tried in the past to give you indicators of our internal or actually our internal, our dates. But, so I'm kind of out of the detailed predicting mode. I will say the program is doing extremely well and it's, it will fly in the Q3 and I think we'll be flying a pretty mature airplane.

Speaker 14

Excellent. And then your R and D was up a fair amount in the first quarter. Could you give us some color of the pattern of the R and D at Gulfstream this year and looking forward, how should we think about that?

Speaker 2

Well, pretty much steady as she goes, particularly this year. We've got a number of, as you know, programs in the certification process. And so I'd see that, at least through this year is pretty consistent. No real surprise this year, steady as she goes.

Speaker 14

Okay. Thank you.

Operator

And we will take our next question from Jason Gursky with Citigroup. Your line is open.

Speaker 15

Hey, good morning, everybody. Hi, Jamie. Hey, Jamie. I wanted to just quickly go back to your comments on aerospace and what I guess I could describe as an elongation of your sales cycle. Maybe you could just talk a little bit about the overall size of the pipeline and how that is evolving.

Speaker 15

I understand things are taking longer to close, but I'd also be kind of curious to know whether there are an increasing number of people that are interested.

Speaker 2

So the pipeline remains robust, and I look to that as encouraging, a good sign. It's been that way for a while. People want our airplanes and that's driving demand.

Speaker 15

Okay, great. So good metrics going on there, it sounds like. Then just really quickly on maybe this is a question targeted at Technologies, but I'd love to get some updated thoughts from you on artificial intelligence AI, the adoption that you're seeing with your customers, How you see this kind of playing out and affecting your business? And then maybe this is, as I suggest, focused on technologies.

Speaker 2

Yes. So we have been investing in AI to support our customers, and particularly at GDIT and somewhat at Mission Systems. And I would say that they're, we're working closely with our customers. They define what the art of the possible is for them in AI. And as you all know, there's some government governance challenges around that.

Speaker 2

But the more sophisticated we get in our ability to tailor AI solutions, I think the more comfortable our customer becomes and will ultimately drive some increased revenue. Haven't seen too much of that yet because I think the government is not like unlike other industries where its adoption is people are careful and they think properly so. And I would argue that would be true across the entirety of our business.

Speaker 8

Yes. Abby, I think we have sorry, I was just going to say,

Speaker 1

I think we have time for just one more question.

Operator

Thank you. Our final question today comes from Gavin Parsons with UBS. Your line is open.

Speaker 15

Thanks. Good morning.

Speaker 2

Good morning.

Speaker 16

Phebe, you highlighted the stronger second half Aerospace margins, that's a more normal volume and G700 production. Is that more of an appropriate starting point for 2025 than the full year 15%?

Speaker 2

Nice try. So look, yes, I think once you get through the first lot, our performance from a margin standpoint will continue to improve and you'll see that Q3 will be significantly better than Q2 and Q4 will be even better still, but we will update you in our regular order. We kind of keep our discipline as you well know around updating guidance and I think that that's appropriate.

Speaker 16

Yes, appreciate that detail. And then just in terms of the 100% cash conversion for the year, what's the opportunity to exceed that given last year you were well above and you built a

Speaker 7

lot of G700 inventory?

Speaker 1

I think right now we're just focused given the steep ramp in the second half of the year. We're really focusing on trying to hit that mark at this point in time.

Speaker 7

Thank you.

Speaker 2

And we should get there.

Speaker 1

Great. Well, thank you everyone for joining our call today. As a reminder, please refer

Speaker 2

to the General Dynamics website for

Speaker 1

the Q1 earnings release and highlights presentation. If you have additional questions, I can be reached at 703-876-3152.

Operator

And ladies and gentlemen, this concludes today's call and we thank you for your participation. You may now disconnect.

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Earnings Conference Call
General Dynamics Q1 2024
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