Q4 2019 Earnings Call
<unk> Investor Relations. Please go ahead.
Thank you Melissa and good morning, everyone.
Welcome to the general dynamics fourth quarter and full year 2019 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-K and 10-Q filings.
With that concluded I would like to turn the call over to our chairman and Chief Executive Officer, BB Novakovic. Good morning, and thank you Howard. So earlier today, we reported fourth quarter revenue at 10.77 barium earnings from continuing operations of 1.02 billion and earnings.
$3.51 per fully diluted share.
As 14% improvement and EPS against the fourth quarter 2018 was the result in part of a 50 basis point improvement in operating margins the quarter over quarter earnings improvement at Aerospace was a major driver. If this result.
We enjoyed a very solid fourth quarter and a strong 2019, we achieved most of our operational and financial goals and added meaningfully to our backlog in some cases rather dramatically.
The results and comparisons with prior periods are straightforward and rather compelling I'll go through them briefly leave more time for my thoughts on the business segments, our outlook for 2020 in your questions.
I also think you'll find the press release in the highlights chart on our website wholesome and helpful.
As we've indicated the started the year the final quarter was our strongest earnings per share at 351 beat consensus by six cents revenue and operating earnings were somewhat better our provision for taxes, lower offset somewhat by a higher share count.
And higher borrowing costs. So all in all a solid quarter with good performance compared to the year ago quarter as well as the third quarter 2019.
For the full year, we had fully diluted earnings per share from continuing operations of 11 98.
Revenue of 39.35 billion was up over 2018 by 3.2 billion, an increase to each of our reporting segments.
Operating earnings of 4.6 billion were up 191 million of 4.3% over 2018.
Earnings from continuing operations of 3.5 billion, who are up 126 million or 3.8% over 2018 importantly earnings per share from continuing operations were 76 cents above 2018.
Our business was strengthened by significant growth in our backlog to a new high of 87 billion very strong order take particularly in aerospace and marine positions the company well for 2020 in belong.
Beyond.
Let me review the full year in the quarters.
On a year over year basis without reference to sequential comparisons on a sequential basis suffice it to say that we have significantly more unreal higher operating earnings higher earnings from continuing operation and higher earnings per share than in the third quarter 2019, So I'll discuss each group provide some color where.
Appropriate.
First aerospace aerospace revenue of 2.9 billion was up 226 million or 8.4% against the year ago quarter.
This increase was attributable to deliveries of the 600 and favorable mix related to the rest of the product line.
Services were stable.
Quarterly earnings are up 98 million, an increase of more than 25%.
For the full year revenue of 9.8 billion was up 1.35 billion or 16% over 2018.
Operating earnings of 1.53 billion were up 42 million on lower operating margin.
The lower operating margins were attributable to the mix as we continue the transition at Gulfstream delivering GE five hundreds and the initial GE 600 aircraft.
Pre on sales also negatively impacted margins in profit excluding the pre owned revenue on losses provide an indication of the underlying strength of the operations.
Margin on that basis were 16.1% versus 15.6 as reported.
Furthermore, margins increased on a sequential basis throughout the year at midyear last year. We told you to expect revenue of about $9.95 billion with earnings of about 1.5 to 5 billion. We finished the year with somewhat less revenue a better margin rate and somewhat higher earnings deliveries were 140.
Seven versus our forecast a 145 all in all very close to the forecast we gave you.
On the order fat activity in the quarter was stellar and the pipeline remains strong.
The book to Bill at Aerospace in the fourth quarter was 1.7 to one dollar denominated and better than that for Gulfstream alone.
Our Gulf stream airplane deliveries versus orders. It was two times on a dollar basis for the year on both a unit and dollar basis orders were 54% higher than 2018.
Backlog is up about 2 billion sequentially and for the year.
From a qualitative perspective, we were quite pleased with the customer mix and product demand all major regions experienced greater demand, including Asia Pacific The mid east and particularly Europe .
During the year, we delivered the 400 GE 650, the airplane continues to be in demand order for the aircraft were up year over year.
We continue to work with the asset unexpected 600 to be certified shortly all five of the G. 700 flight test aircraft are complete and we have begun installation of an interior on the six aircraft, we're making good progress toward first flight.
Gfive hundred and GE 600 unit manufacturing costs continued to decline and we are producing very good quality.
You should see more gfive hundred and GE 600 deliveries as the year unfolds.
Next combat.
Revenue in the quarter of 2 billion was 13.1% above a year ago operating earnings a $284 million were also well ahead of the final quarter 2018.
For the full year revenue of $7 billion was up 766 million a 12.3% increase.
Operating earnings of 996 million were up 34 million by the way. This performance is reasonably consistent with the guidance. We provided at mid year, we enjoyed better revenue than our forecasts and had earnings of about 1 billion similar to our outlook.
We continue to see the opportunity for further growth of the business. The F. wide 20 Army budget fully supports our programs and we continue to see significant international opportunities, particularly in Europe .
We are continuing to negotiate with Spain on a large vehicle program that provides the Spanish army with important new capabilities.
In the U.S., our army customers, modernizing which provides steady demand across our combat vehicle munitions businesses.
In short this group had quite positive revenue growth continued its history of strong margin performance and had very good order activity.
Next Marine systems. This is a really good news story Marine fourth quarter revenue of 2.57 billion was up 268 million a compelling 11.7% increase over the year ago quarter.
Operating earnings of $199 million were down 14 million against the strong fourth quarter in 2018.
For the full year revenue of 9.2 billion was up 681 million or 8%.
Operating earnings for the year of 785 million were up by 24 million or 3%. Despite a 50 basis point drop in margins.
At the midpoint of 2019, we expected revenue of about 9 billion and operating earnings of $770 million, we came in above that for both.
As you are aware, we signed the Virginia class block five contract in December . This 22 billion Dollar award provides the navy important increase in its capability and affords us the opportunity to make a fair return.
In response to the significant increased demand from our Navy customer we continue to invest in each of our yards, particularly at a E. B to prepare for block five and the new Columbia ballistic missile submarine.
In preparation for E. Bay's increased work scope on block five we constructed additional facilities upon standpoint to build the payload modules.
So suffice it to say that we are poised to support our navy customers. They increased the size of the fleet and deliver value to our shareholders as we work through this very large backlog.
Now the information technology.
I T generated revenue in the quarter of 2.0 to 4 billion and operating earnings of 172 million with an attractive 8.5.
Percent operating margin EBITDA margin was 13.1% quarter over quarter revenue was lower due to several divestitures.
Delays and award execution in the completion of mature programs in the start a new ones in other words timing in mix.
The case in point there are now 22.7 billion and awards that have been delayed compared to 10.4 billion at the end of 2018.
Our integration remains ahead of schedule both in terms of building, an integrated and unified business as well as achieving our cost synergies the benefit of both are beginning to emerge.
For the year revenue was 8.4 billion and operating earnings were 628 million with a 7.5% margin EBITDA margin rose to 12.6% in 2019 from 12% in 2018, we are encouraged by the 14.7% year over year increase in our backlog.
To 9.1 billion, but there's more work to be done.
At mid year, we'd indicated revenues of about Proximately 8.5 billion and operating earnings would be around 630 million, we were a touch lighting revenue, but operating earnings rate predicted.
Let me remind you of something about us, we never except lower margins in exchange for revenue.
Next mission systems.
Revenue in the quarter of almost 1.3 billion was up 2.5% against a year ago quarter operating earnings of 188 million were up 7 million wasn't margins up 20 basis points to 14.7%.
For the year revenue of 4.94 billion was up 211 million or 4.5% operating earnings of 683 million were up 24 million or 3.6%.
Book to the book to Bill for the year was one timers backlog of 5.4 billion.
Mission systems revenue of $494 billion was just a touch short of the approximately $5 billion in revenue is expected for this business at mid year.
Margins of 13.8% matched our expectation the big business continues to show steady profitable growth.
Mission systems offers critical high consequence C is our cyber systems that are built into platforms admissions that our customers rely on.
This has position them well as they have worked to expand those capabilities into new market segments and to new platforms.
On the this call it mid year on a companywide basis, our forecast for 2019 was despite revenue of approximately 939.2 billion operating earnings of 4.6 billion and EPS of 11 85 to 11 90 as you net as you know we wound up ahead of that.
Forecast.
Now before I address guidance I'm going ask Jason to address cash and specifically the near resolution of our issues with respect to our large international contract Canada in several other key items.
There have been some positive very positive developments with respect to these issues in the last three hey, Jason.
Thank you TV and good morning.
I wanted to cover a number of topics to provide some color with respect to our 2019 results and some context for the 2020 guidance that Phebe will give you and just a few minutes first as cash.
As you can see from our press release exhibits we generated just over $2 billion of free cash flow in the fourth quarter reflect reflecting approximately 200% of net income.
That resulted in the cash conversion rate of 57% for the full year, obviously lower than we were striving for.
As you might infer from this result, we did not currently outstanding Irrs on our large international combat vehicle program before the end of the year.
Phebe noted the good news is that in the weeks following the end of the year through engagement with our principal customer we have laid out a new path forward that rebase lines, the program, including updated delivery schedules or revise payment plan going forward and a number of contractual terms that provide greater assurance of payment on a go forward basis.
In connection with this we received a $500 million progress payment in January and we will continue to receive scheduled progress payments on a newly established payment schedule.
This includes an additional 500 million this year and regular payments for product delivered in 2021 and beyond that will bring down the working capital balance on this program over the next three years.
This increased clarity around payments on the program gives us a greater level of assurance with respect to our expectations for free cash flows in the coming years.
To that point, we expect our free cash flow conversion for 2020 to be in the 85% to 90% range, reflecting an increase to pension contribution and the peak of our capital investments in our marine systems business to support the sizable growth that is coming in this decade and beyond as well as of the build a G 700 test articles and initial inventory.
Patients of its 2022 entry into service.
With these capital needs winding down and the liquidation of the working capital in combat systems, We expect free cash flow to exceed 100% of net income starting in 2021.
Despite the cash shortfall in 2019, we were able to retire 100% of our outstanding commercial paper balanced as anticipated.
We ended the year, where the cash balance of just over $900 million and a net debt position of $11 billion.
Our net interest expense for the fourth quarter was $110 million, bringing interest expense for the full year to 460 million.
And that compares to 112 million and $356 million for the comparable 2018 periods.
Our next scheduled debt maturity is for $2.5 billion in the second quarter of this year and we expect interest expense to dropped to 410 million in 2020 accordingly.
With our strong balance sheet and increased certainty around our international cash forecast, we now have a level of financial flexibility that we did not enjoy last year.
On the capital deployment front. In addition to repaying our commercial paper, we had capital expenditures of approximately $380 million in the fourth quarter for a full year total just shy of 1 billion were 2.5% of revenues.
You may recall that we expected 2019, capex to be closer to 3% of sales, but it came in slightly lower as we prudently manage these investments while working to resolve the international cash situation.
At $449 million Capex in 2019 for Marine systems accounted for 45% of our capital spending and was nearly four times its depreciation for the year.
We again expect marine systems to command the largest share of our capital budget in 2020, as we work toward satisfying the nation's need for its critical may will systems.
As a result of some of the 2019 investments pushing to the right. We expect our capital investments to remain elevated in 2020, similar to the 2019 level and declining thereafter.
We also paid 294 million in dividends in the fourth quarter, bringing the full year of 1.2 billion I.
I alluded to our pension contributions earlier and with respect to our pension plans, we contributed $185 million in 2019, and we expect that to increased to approximately $470 million into 2020, the majority of that in the third quarter.
Turning to income taxes, we had a 16% effective tax rate in the fourth quarter, resulting in a full year rates of 17.1 person a little better than our previous guidance attributable primarily to the funnel finalization of our 2018 tax return.
Looking ahead to 2020, we expect a full year effective tax rate of around 17.5%.
Next I'd like to alert you to an accounting change that we've made starting in 2020.
This relates to our treatment of pre owned aircraft sales in our aerospace.
As you're aware this is an immaterial activity for us with transactions that are generally breakeven or at a de minimis loss.
However, the forecasting and reporting of pre owned sales results in noneconomic perturbations in revenue and operating margins for the aerospace group the create unnecessary confusion around the group's performance as a result, we will no longer report pre owned aircraft sales going forward only the bottom line earnings impact, which is again has historically been close to breakeven.
When you consider the 2020 revenue guidance for the Aerospace group. The Phebe will provide and just a moment you should level set 2019 revenues, excluding $292 million of pre owned sales. So for comparative purposes that would bring 2019 revenue for the group to approximately $9.5 billion.
The last item I'd like to provide a little color on as our backlog.
We ended the year with a backlog at an all time high of approximately $87 billion exceeding the previous marked by more than 10 billion.
The total potential contract value, including options and idea Q value ended the year at over 126 billion, an increase of more than 22% over both the prior quarter and the end of 2018.
This is the result of very strong order activity across the board as four of our five segments posted a book to bill of one to one or greater for the quarter and the year.
As Phebe noted the aerospace group had a very strong quarter with a book to Bill of 1.7 times on revenue growth of almost 8.5% [noise].
This was the result of the second highest order quarter for the group ever and its highest in over 10 years.
That brings the full year book to Bill to 1.2 times on revenue growth of 16%.
Combat systems had a solid book to Bill of 0.8 times on revenue growth of over 12% for the year, though they were negatively impacted by foreign exchange rate fluctuations that reduced the backlog balanced by $300 million versus the end of 2018.
Gee idea mission systems continued to have strong steady order activity each with a one to one book to bill in the fourth quarter and that brings mission systems to one to one for the year and Judy I T to 1.1 to one for the full year.
This march five consecutive years that each of these businesses have had a book to bill of one to one or greater.
I would remind you that for both of these segments. The I'd like you value, which we don't report in orders or backlog generates roughly half of their respective annual sales.
Permission systems. This value was almost seven and a half billion at the end of the year and for GDP. It reached 19 billion.
This conservative approach of excluding this contract value from our reported order activity makes a direct comparison with some of their industry peers somewhat less meaningful.
And finally marine systems had an outstanding year with a book to Bill of over eight times in the quarter and approximately three times for the year.
As we've discussed in the past. This group has large long term contracts to provide clear visibility to revenue growth well into the future.
To put a finer point on it each of the shipyards in the group has from backlog at the end of 2019 that run through the mid to latter part of this decade, providing significant opportunity for both topline and bottom line growth.
That concludes my remarks, and I'll turn it back over to feed to give you guidance for 2020 and wrap up promoter.
Thanks, Jason So let me provide our operating forecasts for 2020 initially by business Group and then a company wide rollout.
In aerospace expect 2020 revenues to be about 10 billion without Prem sales up from 29 teen operating margin will be about 15.7% to 15.8%.
Revenue will be much stronger in the second half as little margin rate operating margin will accelerate through the year summer 2019, starting in the 14% range and ending around 18% by the fourth quarter.
We are seeing 5% revenue growth in 2020 in between 40 to 45 million of improved earnings.
In combat, we expect revenue of about 7.3 billion and approximately 300 million dollar increase over 2019, we expect operating margins to be about 14.3% here again look for both revenue earnings and margin rate to grow quarter over quarter during the year with a particularly strong fourth quarter.
We continue to seek a solid growth had the business with orders for the Abrams and solid demand for the strike or our Stryker vehicles and munitions like last year, we see domestic volumes rising faster than our international business, Although a few international opportunities could tip that balance.
The Marine group is expected to have revenue of approximately 9.85 billion an increase of almost 700 million over 2019 operating margin and 2020 is anticipated to be about 8.6%.
We anticipate growth in each of our yard for long term driver of growth here is the submarine work, which is expanding exponentially.
Our business Biz biggest opportunity in this group is to outperform the forecasted margin rate.
We expect I T revenue in 2019 of about do you think.
Expect IP revenue of approximately 8.45 billion consistent with 2019.
With margins in the 7.6% range results in a modest increase in operating earnings.
We expect mission systems revenue in 2020 of about 5.1 billion, an increase of approximately 140 million, we anticipate operating margins about 14.1% again building throughout the year.
So for 2020 companywide, we expect to see slightly more than 40.7 billion of revenue up 4% over 2019, an operating margin of 11.9% this almost well roles to a forecast at $12.35 to $12 and 60.
Cents per fully diluted share.
On a quarterly basis, we expect dps to play out much like it did in 2019 with Q1 about $2.60 and progressively stronger quarters thereafter.
Let me emphasize that this plan is purely from operation It assumes a 17.5% tax provision.
And assumes we buy only enough shares to hold the share count constant with year end figure so as to devote avoid dilution from option exercises.
So much like last year of beating our EPS guidance must come from outperforming the operating plan, achieving a lower effective tax rate and the effective deployment of capital.
It should leave you with this final thought the near imminent resolution of our large international contract and attendant cash issues, including the current receipt of funds provides enormous clarity and reliability.
This coupled with our strong balance sheet leaves us with greater flexibility for capital deployment than we've had in the recent past we intend to utilize it to create value for our shareholders.
Thanks, Thanks PB.
As a reminder.
Yes participants to ask one question and one follow up.
So will there so.
Would you please remind the participants how to enter the Q now please.
Yes. Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before Preston keys to withdraw your question. Please press Star then too.
As another reminder, please limit yourself to one question and one follow up at this time, we will pause momentarily to assemble our roster.
The first question today comes from Ronald Epstein of Bank of America Merrill Lynch. Please go ahead.
Good morning.
Hi, Ron.
Just following up on your your final comment there that you have more flexibility around capital deployment.
It was a bit of a teaser.
Do you think it I mean, what buying back shares what what are you thinking about that.
So we'll deal with our short term debt and ER and then we will buy back shares appropriately.
Okay and anything else I mean are you thinking about other things to do in the portfolio, meaning I mean, we've seen a flurry of M&A in the space. So I mean is there and we don't comment on M&A nice try right [laughter] right all right. Thank you guys.
Your next question comes from David Strauss of Barclays. Please go ahead.
Thanks, Good morning, Hi, David.
TV on the on the Gulf stream or I guess revenue forecast or can you help us a bid maybe at a high level in terms of some of them moving a you're moving pieces there what you're expecting for total aircraft deliveries kind of the ramp down on the on the 650.
So expect about 150.
Aircraft deliveries this year and consistent with our.
Our expressed plan to you all sometime ago Lee will ramp down the 650 deliveries as we increase the 500 600 delivery.
So that.
That mix and and cadence around that mixes anticipating a isn't is playing out as anticipated.
And you do you expect more of the 650 ramp down to occur in 20, or 21, I think before you've been talking about more and more of that hit coming in 20 versus 21.
Largely in 20, but we'll continue to ramp according to really the demand. We've we are ramping that to a point, where we have demand and and delivery and an equilibrium and I'm quite comfortable that we'll get there.
But for pretty clearly there was very clear to me that pick that up in 2020 650 deliveries will.
As anticipated.
Decrease.
Your next question today comes from Robert Stallard of vertical research. Please go ahead.
Thanks, so much good morning.
Morning.
Oh Gee I TCV it looks to me know the organic revenue growth is being a little bit, but I want somebody other payers in the industry been able to achieve and that's why it's continuing 2020 now is this a consequence of these award delays or is it something to do with just the time it takes to integrate CSR ray or something else and when would you expect this ER.
Revenue growth rates pick up.
So I try to be pretty it was pretty explicit in my remarks around that but just to reiterate.
There were three fundamental factors first we experienced significant delays and the execution of awards the velocity of execution slowed considerably in the number of War awards potential awards caught and and is that a purgatory increased dramatically second.
And don't forget this we exited two lines of business last year.
And third we had several mature programs and and we lost one or two recompetes, both of which reduced near term volume that will be replaced over time by our new wins. So think of this latter category mix and timing.
So is it safe to say no.
To your second.
A year ago second.
A question, we had anticipated that 2019 from 2020 would show some growth that growth has now moved to the right 2020 lawn and expecting mid single digit growth.
Again, driven by making Alabama.
Execution and velocity at the contract awards.
Okay. Thanks, so much.
[noise] next question comes from Doug Harned It has burned.
Hi.
Thank you good morning.
I bet.
Hi can you.
He goes through a little bit on the block five Virginia class because.
This is obviously a bigger bode it's very important the what are the differences that you see between block five in block for and how should we expect that to flow through to financial performance over the next several years.
[noise] so [noise].
You quite accurately pointed out that block five it is a represents a considerable increase and capability for the U.S. Navy and a considerable increase in our workload given that the.
Edition of the new capabilities is executed entirely by us.
And so as we think about from block for the block five Oh, we continue to come down our learning curve and ER and we are our sequencing are all of these now bill around the first delivery of Colombia.
Which is.
Oh, well start work it ended this year so.
I think that with respect to block five <unk>, our job is simply to execute block five affectively and and as I said in my remarks, you know the key here, it's just increasing our margin.
Really improving our ship over ship capabilities.
So we've got block five and very good shape, a along with our navy customer and and.
But then to work on it and we'll continue that execution for the next several years.
And then you talked about the investment you're having to make capex for both the block five in Colombia class, but when you think about the trajectory for that investment it's not just facilities, but it's also labor.
And when you look at planning for this.
How do you see the trajectory for your costs and for reimbursement by the customers you work to build up here.
So let's take that into fault.
First our customer is well aware of the imperative that we face and they have worked closely with us to better match the investment with the return which is wholesome for every one.
With respect to the essence of none of your question ramping up on on growth in our workforce. So we started this about eight years ago working in public private partnerships with Rhode Island, and Connecticut to begin to train.
The kinds of of our workers that we need it and in large numbers as that coupled with our internal training program. We have demonstrated over the last four years Oh, we have brought new ship builders into the yard at a higher initial capabilities and then they continued to learn.
So the Navy is fully supported our efforts with respect to expanding over a course and and the need to to spring training up and some skills that frankly in the country. It atrophied, when you think about plumbing and and.
Hi, fitting and electricians and Welders brothers are critical and key capability a number of those in in the U.S. [noise].
Training programs throughout the United States head to head atrophied, a bit and NR world up in New England. We are rebuilding those at a very rapid rate. So.
We have a were very comfortable at that we can meet our expectations for growth.
Thank you. Our next question comes from Cai von Rumohr of Cowen and company. Please go ahead.
Yes. Thank you very much so at one point Phebe you were talking about the Ci 500, 600 coming down the learning curve and becoming more profitable as we move out in time and I think you suggested in 2021 directionally margins should be up as that.
Plus a ways to mix shift away from the 650 is not still a trend that you thought you look for.
Yes, so trend that we look for and that we are experiencing as you would expect her that from the operating discipline.
And the price discipline and the cost discipline that we have.
We continue to see learning and nice learning on each and every one of these aircraft coming down the line.
Got to offset the reduction in part is offset the reduction in 650 delivery.
This yeah, we it clearly articulated the plan several years ago, and we've been right on sequence on it.
I think theres nothing new there in terms of the strategy and the execution around BOP strategy.
Terrific and then Jason quickly for you you talked of conversion going to 100 for Sun 2021 can you give us some color in terms of how much does pension contribution come down as if at all how much does capex come down and what kind of a benefit do you get from a inventory.
The liquidation on the 506 hundred Bucks.
Sure. So when you think about the capital investment we have like I said earlier, we had expected about 3% of sales in 2019. It ended up at about 2.5% you should expect to see that's in a similar range call. It 2.5% in 2020 because of the elements of that that we pushed to the right.
That will step down starting in 2021, so that by call. It 2023, we'll be back to the typical more historic typical 2% range that we've been in a pension contributions on the other hand or as I mentioned elevated at 400 plus million in 2020, it'll stay elevated for another year.
Or so maybe your and then come back down from there so a little bit of a surgeon pension contribution and then returning back down to a lower level [noise].
And then I think in terms of the working capital. The biggest single thing that you should expect is we ended the year with.
Somewhere close to the neighborhood of $2.9 billion of Unbilled receivables contracts and process. If you will on the large international combat vehicle program that will step down to the point that that working capital is.
Essentially liquidated by the end of call it 2023.
That along with the 500 600 as you mentioned those test articles.
We'll be sold here in 2020 in 2021, respectively. So those will be a benefit and as a result, the aggregate the outcome of that as we expect to actually see free cash flow in 21 and beyond call. It 2020, 122, even 23 actually in excess of 100% of in excess of 100% in it.
Income so we'll start to recapture some of that shortfall that we've had over the past couple of years.
Your next question comes from Joseph Denardi Stifel. Please go ahead.
Hey, good morning, TV high.
If we go back a four or five years I think there was a debate as to how the Navy would would afford Colombian in Virginia and.
We've decided to going to fill still both simultaneously went when does that actually get locked in do you see any political risk to that that that decision gets revisited whether to feather in Colombia, and policemen, Virginia or is that risk gone at this point. Thank you.
[noise], so Hank Hank about.
Long term demand for a given product line.
Driven by the war fighters needs and with respect to <unk>.
Classes of our something there are there's real warfighter demand on Virginia, and then on Columbia that as a national program and it can't wait.
So the nation's season decision makers and both the executive branch and on Capitol Hill see the imperative.
To fund and Wholesomely fun, both of those programs and.
As we sit here today, we see it pretty good surety I'm very good surety on a going forward basis.
The stability of that backlog and the reliability of increasing backlog and suddenly for quite some time to calm you know think think about the submarine business ship building in general, but the submarine business in particular.
As executing slowly over time I'm relatively slowly over time, given the complexity of building nuclear submarine.
That in the is offset.
In terms of predictability of backlog. These are very secure platforms because they're in demand.
They are in current demand and they will be in future demand there are certain imperative.
Your next question comes from Noah Poponak Goldman Sachs. Please go ahead.
Hi, good morning, everyone.
Hey, you know.
TV I wondered if you could just expand on what you're seeing in the in the overall business jet and Gulfstream demand environment, because on one hand, some of the leading indicator data there has looked a little tougher, but obviously you've got your new product set and had a really strong bookings in the quarter. So just kind of curious to hear we are seeing and.
Was the book to Bill excluding a the G 700 also above one imageworks.
So the answer to your question the latter question yes.
If he were up and following S and you have for some time, you'll know that that our basic predicate for this business is that new product and truly new product clean sheet airplanes, all wheel drive demand.
And that predicated worn out I'm not surprisingly in my mind, so our new products are generating demand and are expected new product in the 700 <unk> generating demand.
So.
Think about the experience of of of Oems in this market as really idiosyncratic to the product offerings staff.
So what our experience in this market is that we have enjoyed nice steady demand year over year.
That demand is increased just a new products, our announced and enter into service.
And in addition, so much of selling airplanes is predictability of delivery and reliability of the airplane and the ability to service.
All of that drives demand and we are I think arguably without question.
The best in class.
With respect to all of those key factors.
So we are we're quite comfortable with our positioning and and the fourth quarter was good and they have pipeline is active.
And then just on the margins in this segment.
I.
I think the company has said that the 2021 rate of expansion should be faster than the 20 rate of expansion and I think you've even so getting back into the high teens 21, maybe 22 do I have that wrote does that still hold in terms of the trajectory from here.
The trajectory does hold nimble and this a year and in the high teens margin, but then Oh, Hey, this is a complex business about the moving parts. So you know margins tend to be somewhat variable quarter over quarter, largely driven by mix.
But again the basis the the basic thesis around the introduction of these airplanes and profitability and the realization of does that profitability remains today. The same if it was.
Your next question comes from George Shapiro with Shapiro Research. Please go ahead.
Yes, good morning.
Maybe it doesn't look like the 650 deliveries really came down much if anything in 19 is so are the declines in 20, reflecting just lower backlog in 650 today than a year ago or what's really driving to six sticky decline.
650 backlog has his and not decline we've seen a nice increase look you know that the delivery is quarter over quarter of these airplanes is often driven by customers. So we had.
About three six hundreds that her various outside the United States regulatory.
Issues or delayed will move into this their delivery is expected for this for this quarter and and the six said we have some six fiftys that customers want it earlier. So we took a few of those so this is a and were able to execute I satisfy the customer need.
So.
Fixed 50 has done extremely well.
You know not insignificantly as we talked about in the in this call him the third quarter, they're a lot of demand.
Demand signals and and demand catalysts for the 650 <unk>.
The introduction of the 700 clarified it and frankly as we told you what does it increase 650 demand.
So and by the way the you know this airplane Oh, there's about 400 of them and in service and ER and some of them are coming out of warranty and there's a natural replacement cycle. So we continue to see nice demand for the 650.
So so why bring down the deliveries if the backlog is up on a must be missing something here because ultimately over time, you want to fully match that backlog with see with a deliveries and if you recall we entered this transition period with an extraordinarily long and I argued that time it too long.
Wait time.
And we have we have equalize that wait time to order to wait time [noise].
Significantly during this transition period, and we'll get back to that regular cadence, but our outlook. Our 650 order book and what we've got in backlog fully supports our going forward and 650 production estimates that's what you really want to see.
The order book is enough to satisfy here.
Your 650 delivery.
Operator on this upcoming question will be our last.
So last question today comes from Seth Seifman JP Morgan. Please go ahead.
Okay. Thanks, very much good morning.
Good morning, I guess.
Phebe you mentioned a in marine systems that are there was opportunity in operating margin are there specific milestones. The that you would point to potentially coming up this year and if so you know what and a and when are they.
So there are multiple milestones in any given year and and they are tied to all too.
Seemingly large number of internal.
Milestones and milestones till our our navy customer.
But that's not the only thing that drug. So so we will see some of those as we always do in any given year, but really our our ability to drive margins is all about the cost control.
And and performance and we continued to drive hard on both.
This is a very high performing shipyard.
Thank you very much.
Thank you very much.
And thank you all for joining our call today.
As a reminder.
The general dynamics website for the fourth quarter earnings release.
And our highlights presentation, which will be available at the conclusion of this call. If you have any additional questions I can be reached 7.3876.
3117.
Alyssa.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.