Q4 2020 General Dynamics Corp Earnings Call
And full year 2020 earnings conference call.
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I would now like to turn the conference over to Howard Rubel, Vice President of Investor Relations. Please go ahead. Thank.
Thank you operator.
And good morning, everyone welcome to the general dynamics fourth quarter and full year 2020 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 and the Companys 10-K, 10-Q and 8-K filings.
With that complete it's my pleasure to turn the call over to our chairman and Chief Executive Officer Phebe Novakovic.
Good morning. Thank you Howard earlier today, we reported fourth quarter revenue of $10 5 billion net earnings of one day in and earnings per diluted share of $3 49.
This is in most respects a very solid quarter, even though we missed consensus by <unk> <unk>.
And I have more to say about that shortly.
And despite the adverse impact of the pandemic, we achieved most of our operational and financial calls added dramatically to our backlog and had a very good cash quarter.
The results from comparisons with prior periods, our rather straightforward and set out in our press release.
Because of the adverse impact to the economy caused by COVID-19, I'll devote less time to the quarter over quarter comparisons and spend more time on the sequential improvement.
That tells a compelling story of recovery.
I'll go through that and some detail as I give you my thoughts on the business segments.
As we indicated that it would be the final quarter is our strongest it is quite remarkable that we came out and two cents of the very strong free.
Pandemic fourth quarter 2019.
On a sequential basis suffice it to say that revenue is up 11, 1% operating earnings are up 26% net earnings are up 21% and earnings per share are up 23 per cent.
So all in all a solid quarter with good performance, even compared to the year ago quarter, but really good sequentially.
For the full year, we had revenue of 37 9 billion down from three 6% from the prior year net earnings of $3 7 billion and earnings per fully diluted shares and $11. Once again modestly below consensus.
Our business was strengthened by significant growth and the backlog to a year and record high of $89 5 billion. The same is true of total estimated contract value at $134 7 billion. The total company book to Bill was one one to one for the year led by the particularly strong.
<unk> or the performance of electric boat.
The strong order intake across the board positions the company well for 'twenty 'twenty, one and beyond.
Our cash performance for the quarter and the year was stronger than expected with a conversion rate of 91% and net income per the year.
Jason will have more fulsome comments on this subject and his remarks.
Let me review the quarter paying particular attention to sequential comparisons and the full year and the context of each group and provide some color as appropriate first aerospace.
Aerospace revenue of $2 4 billion is up 23, 3% over the third quarter on the strength of the delivery of 40 aircrafts 34 of which were large cabin.
While this was the strongest delivery quarter of the year. It fell short of our expectations by three aircrafts to and which delivered after the first of the year for reasons related to customer preference.
The third aircraft had a willing customer but was not ready for delivery by year and that runs on us.
For the full year revenue of eight point O 8 billion as of 17, 6% from the prior year net.
Nevertheless, operating earnings are still over $1 billion far and away the industry leader.
Fourth quarter operating earnings of $401 million is 41 seven per cent better than the third quarter on the strength of higher revenue.
And a 20 220 basis point improvement and operating margin. However, the shortfall against consensus for the quarter and the year is found and the three anticipated deliveries slipped into this year.
This should not in any respect diminish the outstanding performance of Gulfstream and this environment.
Furthermore, margins increased on a sequential basis throughout the year, ending at 16, 5% and the fourth quarter.
At midyear last year, we told you to expect revenue of about $8 4 billion with earnings of 1.13 billion. We finished the year with revenue of $8 1 billion and earnings.
108 billion the entire shortfall is attributable to a 127 deliveries versus our expectation of 130, all and all still within the 125 to 130 deliveries. We gave you right. After the initial shock to the economy caused by the pandemic became manifest.
On the order front activity and the quarter was very good and the pipeline remains quite active.
And to Bill at Aerospace and the fourth quarter was <unk> 96 to one dollar denominated for the year. The book to Bill was <unk> eight eight to one disorder activity was in my view quite good in the midst of a pandemic induced depression, we are off the well considered view that order activity will improve further.
And as travel restrictions are lifted and the economy begins its recovery.
Let me give you some thoughts on our product portfolio first the G. 500, G 600 unit manufacture manufacturing costs continued to decline and we are producing superb quality we.
We had 92 units of this family of aircraft and service the ear and anecdotally. The G 500, led the order book and the fourth quarter.
Net some of the analyst community have expressed concern about the continuing demand for the G 650, which first entered into service eight years ago at the end of this year, we had 436 G 650, and service and average of 54 per year.
The fix if it continues to be and demand, but not at that level I can add anecdotally that and in the fourth quarter and it was a close second to the G 500 and demand. It remains a strong competitor to anything and the air and remain a strong contributor to our revenue and earnings for the next several years.
And finally on the new product development from all five G 700, and flight test aircraft are flying and have over 1000 hours of test flights.
And we appear to be on track for entry into service and the fourth quarter 'twenty 'twenty two that will stimulate both revenue and earnings next year if.
And if you've been following our aerospace R&D spend you know that there's more to come on this subject net combat systems.
Revenue in the quarter of $1 96 billion is essentially the same as a year ago quarter operating earnings of $309 million or $25 million or eight 8% ahead of the final quarter of 2019.
The strength of 140 basis point improvement in operating margin to 15, 8%.
For the full year revenue of $7 2 billion is up $216 million of $3. One per cent increase after a 12, 3% growth and 2019, despite a revenue decline and E. L F driven by Covid shutdowns and Spain earlier in 'twenty and 'twenty.
Operating earnings of one point O 4 billion are up 45 million or four five per cent increase.
By the way this performance is consistent with the initial guidance we provided earlier in the year.
And the U S Army customers, continuing its modernization, which provides steady demand for our combat vehicles and munitions businesses the.
The fourth quarter had some nice order activity, including a contract for Abrams version three with the ceiling of $4 3 billion and additional striker shore at orders with the ceiling of up to $1 2 billion.
Sorry, the U S. We're beginning to see increased demand as our NATO allies start to emerge from COVID-19 constrained activity, including over $200 million of Canadian ammunition orders and the quarter.
In short this group has had quite positive revenue growth for several years now continued its history of strong margin performance had very good order activity and has a strong pipeline of opportunity as we go forward.
Next Marine systems. This is once again, a good news story.
Marine and fourth quarter revenue of $2 9 billion is up 292 million a compelling 11, 4% increase over the year ago quarter opt.
Operating earnings of 247 million are up $48 million against a good fourth quarter and 2019 importantly, there is an 80 basis point improvement and operating margins.
The results are much the same sequentially revenue was up 452 million and earnings are up 24 million or 10, 8%.
For the full year revenue was almost 10 billion up $796 million or eight 7%.
Operating earnings for the year of 854 million or up by 69 million or eight 8%. This is the highest quarterly and full year earnings ever for the Marine group.
And our mid year guidance to you we anticipated revenue of about $9 6 billion and operating earnings of $845 million, we came and it up.
And that for both revenue and earnings.
And response to significant increased demand from our Navy customer that you can see and these results will continue to invest and each of our yards, particularly at electric boat to prepare for block five and the new Columbia ballistic missile submarine and.
So suffice it to say that we are poised to support our navy customer as they increase the size of their fleet and deliver value to our shareholders. As we work through this very large backlog and improve our return on invested capital.
Finally, the technologies group, which consists of G. D. I T and mission systems is reported together for the first time and a while you may recall, we used to report this group and then constituted as information systems and technology.
And this new reporting reflects the way we manage these businesses with group Executive Vice President, Chris Marzilli reporting to me.
We have also discovered that in this era of end to end solutions and smelting technology hardware and software are these business units increasingly go to market together seeking to provide end to end systems and support solutions.
We will however continue to provide operating transparency by providing company specific data where appropriate and Jason.
Jason a lot more to say about this in his remarks.
This is of course, the group and the defense segment that has had the most impact from COVID-19, but the most from more participation from employees and the most difficult to access and customer locations.
With all that said, let's turn to the results and commentary on the group and specific businesses.
For the quarter technologies had revenue of 3.23 billion off less than 1% sequentially.
Operating earnings of 352 million are up $38 million or 12, 1% on 120 basis point improvement and margins.
And you would expect given the environment revenue for the first full year as off $711 million or five 3% and earnings are off $100 million or seven 6%. It is while the remember that these revenue and earnings numbers exclude the satcom business that was sold and the first half.
Half of last year.
All considered the group performance showed good strength and earnings guidance from US was close.
Revenue came in at 350 million below our guidance 12.65 billion versus 13 billion.
Margins, particularly at G. D. I T were better leading our earnings forecast to be on target.
From a margin perspective G D. I T was at seven 9% up 40 basis points sequentially mission systems at 16, 2% was up 290 basis points over last quarter.
For the full year, the group's free cash flow exceeded 150% of.
Full year imputed net earnings the strongest performance within general dynamics.
G D. I T performance was even stronger it was the best quarter cash performance and its history.
The group enjoyed a tremendous order a quarter with significant wins by G. D. I T and for major programs all of which are idea IQ contract as a result under our Conservative accounting policy. These awards are found and total estimated contract value rather than and unfunded backlog.
Jason and I'll get into this more in his remarks as well.
Each quarter and the past I've tried to give you some insight about G. D. I T. Once again, let me share some thoughts.
The fourth quarter was an extension of the momentum J D. I T built throughout the year. Despite COVID-19 headwinds they remain focused on what they could control and then and otherwise turbulent year.
Supporting customers and their employees, while controlling costs and converting cash and winning new business on the new business from J D. I T. One several large deals and key technical focus areas, including.
Cyber cloud and artificial intelligence. These wins drove G. D. I tease total estimated contract value up $2 billion or 11% as compared to the third both the third quarter and year end 2019.
And he will see and our guidance G. D. I T is poised for very nice growth and 'twenty 'twenty one.
Let me now turn the call over to Jason Aiken, our CFO for additional commentary and then return with our guidance for next year Jason.
Thank you Phebe and good morning.
The first thing I'd like to address is our cash performance for the quarter and the year.
And you can see from our press release exhibits we generated just over $2.2 billion of free cash flow and the fourth quarter approximately 220% of net income.
And that resulted in a free cash flow for the year of 2.9 billion, our cash conversion rate of 91% nicely ahead of our anticipated 80 to 85 per cent of net income.
To put this in context, our cash from operations for the year of $3 $9 billion was less than $20 million shy of the highest annual operating cash flow we've ever had notwithstanding the impact of COVID-19 on our operations and 2020.
In fact, our free cash performance for the year was just short of achieving our original pre COVID-19 cash forecast, so really a remarkable outcome.
This was the result of outstanding performance across the business to close out the year, most notably in the Aerospace group, which began to draw down the inventory that we've been discussing for some time.
And to the technologies group, which continues to generate superb cash flows as phebe mentioned and this case and excess of 150% of imputed net income for the year.
And as you'll recall at this time last year, we negotiated a path forward on our large international contract and combat systems, including a revised progress payment schedule that liquidates their receivables balance over the next three years.
It was part of that agreement, we receive two payments of $500 million each last year and we receive the next progress payments earlier this month and accordance with the revised schedule. So that OWS, we will continue to unwind as we've discussed on past calls.
Of course Marine system continues with its significant facilities improvements and supportive of unprecedented growth on the horizon.
To that point, we had capital expenditures of $345 million and the fourth quarter for a full year total of nearly 1 billion were two five per cent of sales.
You may recall, we had expected our capex to peak in 2020 at roughly 3% of sales due to these shipyards and investments.
As you might expect given the impact of the pandemic, we've manage the timing of this capex spend and prudently and the result is three years 19, 'twenty and 'twenty, one at roughly 2.5% of sales.
This time and fully supports our Columbia and block five build plans and electric boat we've.
We then expect to trend back down and return to the more typical two per cent range by 2023, consistent with our previous expectations.
The net result is that we expect cash performance to continue to improve in 2021 to the 95% to 100% conversion conversion range with year over year growth and free cash flow in 2021 and beyond.
We ended the year with a cash balance of just over $2 8 billion and a net debt position of approximately $10 2 billion, reflecting a $1 $7 billion reduction and the fourth quarter.
Our net interest expense and the fourth quarter was $120 million, bringing interest expense for the full year to 477 million that compares to $110 million and $460 million and the comparable 2019 periods.
Our next scheduled debt maturities are for $2 $5 billion, and the second quarter, and 500 million and the third quarter of this year.
Due to the timing of our cash flows we may be and the commercial paper market for a transition period, but overall, we expect interest expense to drop to approximately $420 million in 'twenty and 'twenty one.
We also paid $315 million and dividends and the fourth quarter, bringing the full year to $1 2 billion and we repurchased 700000 shares of stock and the quarter, bringing us to just over 4 million shares for the year for $600 million, where $148 per share.
With respect to our pension plans, we contributed $480 million and 2020, and we expect that to decrease to approximately $360 million and 2021, the majority of that and the second half.
Turning to income taxes, we had a 15, 4% effective tax rate and the fourth quarter, resulting in a full year rate of 15, 3% consistent with our previous guidance.
Looking ahead to 2021, we expect a full year effective tax rate of around 16%.
Next I'd like to alert you to two accounting changes that we've made and the fourth quarter one related to the segment reporting and the other related to pensions.
The segment change is the one that phebe alluded to earlier and relates to our G. D I T and mission systems businesses.
As the federal ITC services and defense electronics markets have evolved in recent years, we've seen a significant increase and the customer's prioritization of these capabilities and a shift to large scale and and highly engineered solutions that require a critical mass and a broad array of technology services and hardware offerings to meet these customer demands.
And more recently the COVID-19 pandemic has only accelerated these trends with and expansion of remote connectivity and then add and sense of urgency around required technology investments.
As you've seen we've responded to these trends over the past several years to further solidify our position as a market leader in this space, including the combination of our seafood and ISR businesses to form mission systems and of course, the acquisition of CSR a to reposition G D I T and the leader in this market.
With these integrations and now complete along with some considerable portfolio shaping and realignment, we're seeing the market dynamics continue to evolve.
The two businesses share the same defense and intelligence and federal civilian and customer base and increasingly go to market together to meet these customers' needs and.
In addition, we're seeing considerable commonality and a significant complementary pull through and their core offerings.
So we will now be reporting them as one technology segment to better reflect the way we're running the business as we position them to best compete in this robust market.
To be clear, we will continue to provide transparency into the individual revenues and associated programmatic detail for each business, but of course that becomes somewhat of a mixed bag as they increasingly engage and joined pursuits.
With respect to pensions, we've adopted and accelerated method for amortizing actuarial losses for our government pension plans to better align the timing under GAAP with when the costs are allocated to contracts.
Because of these costs are recovered on our contracts. This change had no impact on our net income or cash flow.
However, you'll note some differences between captions on the balance sheet and income statement as this accounting changes flow through the financial statements and.
In particular this reduces our corporate operating earnings, which we expect to be a negative $85 million and 2021 and increases our other income which is below the line, which we expect to be approximately $90 million and 2021 the.
The impact of these two income statement line items is equal and offsetting so no impact to net income.
And lastly, a little color on backlog.
And the end of the year, our funded backlog total backlog and total estimated contract value.
All up compared to a year ago, and as Phebe mentioned and set record highs.
As an indication of the steady improvements since the peak of the disruption from the pandemic Aerospace book to Bill returned to one times and the quarter consistent with previous remarks on what we're seeing in terms of Gulfstream demand.
Marine systems had an outstanding quarter with a book to Bill of over four times due to the exercise of the $9 $5 billion option for the Columbia construction contract providing opportunity for further long term top and bottom line growth from marine systems.
And a little bit of color on order activity for the technologies group for the quarter.
They had a very nice quarter with some notable awards, including the final resolution on the deals program with a potential value of $4 $4 billion, even its contract and supported the U S Army and Europe.
The state Department's GSS 2.0 contract with a potential value of $3 3 billion.
And a contract with the Air force to develop a digital engineering environment.
And importantly, given the conservative approach, we take to reporting backlog the preponderance of the value associated with these contracts doesn't show up and orders or backlog at the time of award and fact, only a portion of the awards shows up even in our ITI two potential contract values.
This is quite different from the way most of the peer group approaches. This so we're spending a moment on it.
The way we book. These awards is to conservatively estimate initial near term value and the idea IQ category.
And then as the program progresses, and the customer exercises orders that value moves into the backlog and ultimately gets reported as revenue and over time incremental amounts of idea IQ value were added to that bucket is our visibility into the program evolves.
As a result over half of the group's annual orders and revenue come out of this potential contract value category.
And the headline numbers, you see and the firm backlog belie the outstanding performance and the quarter is reflected in the total estimated contract value for the group of just over $41 billion that.
That concludes my remarks, I'll turn it back over to Phebe to give you guidance for 2021 and wrap up remarks.
With that I'll turn to our expectations for 2000 and coming along so let me provide our operating for a cash initially by business group and then on a company wide rollout.
And aerospace we expect revenue to be about 8 billion essentially flat with 2020 operating margins will be about 12, 5% leading to operating earnings of $1 billion, maybe slightly more.
So what is driving this forecast and in particular, the lower margins and 'twenty 'twenty. One when revenue is similar to 'twenty and 'twenty.
And you'll recall that I told you last quarter, we will deliver 13 fewer G. Five fifties as that airplane is no longer and production.
This leaves us the 13th fewer aircraft not including the three slips from 'twenty 'twenty. So all up 10 fewer aircraft.
This reduction and revenue will be made up by a roughly 500 million dollar increase and services across jet aviation and Gulfstream at about 10% lower operating margin. There are a lot of other puts and takes but this gives you the big picture for the lower anticipated margins.
By the way, our forecasted production and delivery considers our backlog our fourth quarter orders and our take on current demand.
And fully expect 'twenty and 'twenty, two will have better revenue and earnings stimulated by the entry into service. The G 700, and the fourth quarter and improving demand across the product lines as the economy recovers.
And combat systems, we expect revenue of about seven 3 billion and increase of approximately 100 million over 'twenty and 'twenty.
We expect operating margin to be about 14, 5% and operating earnings to exceed last year by $20 million or 2%.
We look for revenue earnings and margin rate to grow quarter over quarter during the year with a particularly strong fourth quarter.
After several years of good revenue growth 'twenty 'twenty, one and 2022, we'll have modest growth growth should resume in 2023 and beyond and several developmental programs move into production.
The Marine group is expected to have revenue of approximately $10 3 billion and increase of over $300 million.
Operating margin in 2021 is anticipated to be around eight 3% driven in large part by increased work on the first two parts plus Columbia submarines, which have conservative initial booking rates.
We anticipate growth at each of the yards and the long term driver of growth here is the submarine work, which will expand significantly.
Our biggest upside opportunity and this group is to outperform the forecasted revenue line.
Yeah.
We expect revenue and the technology group of $13 2 billion and $580 million more than 2020.
This is a growth of four 5% with G. D. I T growing at a rate of seven 1% mission systems will be essentially flat with organic growth of 3% offset by the satcom divestiture.
We expect earnings of 1.25 billion about 50 million more than 'twenty 'twenty. This implies and overall margin of nine 5% with G. D. I T returning to seven per cent anymore.
So for 2021 company wide, we expect to see approximately 39 billion of revenue up over $1 billion from 'twenty and 'twenty and operating margin of 10, 5%. This all rolls up to our forecast range of $11 to 11 O five per fully diluted share on a quarterly basis.
We expect EPS to play out much like it has and prior years with Q1 about $2 20, and progressively stronger quarters thereafter.
Let me emphasize that this plan is purely from operations and assumes a 16% tax provision and assumes we buy only enough shares to hold the share count steady with year end figures, so as to avoid dilution from option exercises.
So much like last year, beating our EPS guidance must come from outperformed many operating plan and achieving a lower effective tax rate.
And the effective deployment of capital.
Should leave you with this one final thought.
Our strong cash flow and 2020, and our anticipation of a 95% to 100% conversion rate and 'twenty 'twenty, one leaves us with the ability to engage and a share repurchase program. This year to enhance the EPS figures I have just given you.
We will see how that plays out I'll be more specific about this after the end of the first quarter.
Back to you and Holly.
Thanks, Phebe as a reminder, we are.
I'll ask each participant to ask one question and one follow up so that everyone has a chance to participate.
Operator could you please remind participants how to and through the queue.
Absolutely.
Your question, Please press star and one on your books.
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And John your question please per store them too.
And then just first question comes from Jon Raviv with Citi. Please go ahead.
Hey, good morning, everyone.
Hum.
Alright.
And if you could just sort of Taco Bell and I know you mentioned that you want to have this for the end of the first quarter operating loss program and further and school to working at a much better conversion rate. This year, and just sort of big picture on where free cash flow conversion goes this year and the head.
Especially if you see a big no big recovery, a bigger recovery in 2022, and then kind of what the levers are off a couple of the case for most of the year progresses with those debt returns, but also things from out of some excess as well.
Let me ask Jason to give you a little specificity there.
So John I think.
ROE level the best way to think about this is we have every expectation that we will see.
Year over year increases and our free cash flow.
As you saw we had a nice outperformance of our expectation.
And the fourth quarter to wrap up a pretty strong 2020 that set us off on this course, a little quicker than we expected a lot of that was Gulf.
Gulfstream doing a great job getting some of that inventory to start to turn on some work and some of that operating working capital.
And as Phebe alluded to <unk>, you also had an outstanding performance, though and the fourth quarter.
And I think we expect to see those trends and really continue I mean, basically the core fundamental underlying performance of each of the businesses, but then buoyed by the.
The further improvements and OWS.
The one we've talked about or alluded to briefly on the call.
The continued unwinding of the.
The unbilled receivables balance and combat systems.
And I mentioned, we did receive the third major progress payment here earlier. This month of January that's encouraging to see that continue that program continues at pace and so.
And that program unwinding.
The working down of the working capital over the next couple of years at Gulfstream and of course, the winding down and the Capex at Marine systems, we expect to see that year on year growth and free cash flow, obviously to support further capital deployment, which I'll turn it back over to phebe to address.
And we've been a real clear over the years that Lee and investing in our business.
Depending on the need and and our expected return on that invested capital.
One element of capital deployment that should be repeatable achievable.
And ever and sustainable each and every year and.
Dividend well be discussing that with our board.
Obviously debt repayment, and then share repurchase and and.
Let me just leave it at that and we have more work to do with our hard.
You can expect us to bake and stores that the capex of capital.
Thank you.
And then a question too and it comes from so somebody from where.
Please go ahead.
Okay, Thanks, very much and good morning, everyone.
I ask the question a little sheepishly, but I wanted to go back to something you said about aerospace and instead, if you've been following our R&D spending you know there's more.
More to come on this subject I like to think and I'm following it but.
And if you could speak to that and in that and a little more of a talent and.
And what that what that means.
So I feel and I agree that I gave you as much detail as I intend to hear so I don't why don't we find another question to discuss together.
Okay.
But maybe on.
The cost per then.
No, Jason and it looks like were moving.
From two.
Two nine and 2000, Twenty's and maybe about three one and 2021 can you talk about the key moving pieces, there, especially working capital and ended the year with a very.
And a very low receivables balance and sort of.
Working capital overall going to be a contributor and.
And to the extent it and continue to decline.
Yeah, I think to cut to the Chase I think you put your finger on it. It is the continued working of that old WC. It's partially receivables you saw some good movement there in the fourth quarter of last year, but that should continue as.
And as well as the inventory side of things, we will get to unloading.
These test articles.
And if they're Gulfstream over the balance of this year and into early next year, so that'll be a big help as well.
And that will continue in terms of the OWS see turn not just through the balance of this year, but it'll be a big mover in 'twenty and 'twenty, two and 2023 as well.
Okay, great. Thanks, Thanks very much.
And our next question today comes from Taiwan, and rumor with Covid.
Yes. Thanks, so much. So phebe you mentioned Q4 initial deliveries of the G 700, I think at one point it looked like G. 700 was going to be early and mid year I know a lot has happened obviously with Max and Covid. How confident are you that you can really hit.
Uh huh.
Delivery bogie and what does that assume in terms of certification.
Okay.
Bank, if we go back and and look at the record we've been pretty consistent that it would be toward the end of <unk>.
'twenty and 'twenty two and.
And and and the test program all the test point the expectation of the airplane.
Our average test program has met all of our design specification. So the program is going very very well.
And we will work with the FAA on.
Certification prior to the entry into service, but the progress of the test.
First program.
<unk> supports that and of your 2022.
But I mean, you said youre going to and expect an up year and 'twenty two how many G 701, or if the G 700 slips into 'twenty three is there's an up year or down here.
Well look our our expectations are predicated on an eight.
Recovery and the market that will drive fundamentally all of false trains and performance.
But we're pretty much counting on and the 700 and and if it slips and it would be by a quarter or so but I don't believe that that's the case at the moment and so what we do is and work with RFA teammate and make the best estimates that we can and so on we believe this is going to enter into service and we're not going to get into that.
The number of production and deliveries by by model. We never have are not going to but that airplane is coming and it comes with nice margin performance and good cash.
So expectation and I think it's reasonable given all the fact patterns, we have and evidence at the moment and if it changes of course, we'll let you know, but we have nothing to believe at the moment that it will change.
Thanks, so much.
And our next question today comes from Robert Stallard with vertical research. Please go ahead.
Thanks, so much good morning.
And.
Phebe you mentioned that this needs.
And even some commentary around the G 650 and.
And the market demand for this aircraft I'm wondering if you could give us some idea of what the sort of slot and availability is full and his plane looking out over the next 12 months or two years and whether you're seeing any sign of the G 700 cannibalizing the market.
So the first day as I've noted continued and the math and a powerful airplane and there was nothing close to it and that's the market.
We are not going to get into open Ah slide please.
Never really done that with any specificity and are not going to start now just suffice it to say, we don't build strength and white tails.
But look we've talked about this a couple times and and just to refresh.
The 700, and then 650 have materially different missions and there are different price points and the customers well understand that distinction and I think the terrible to think about to amplify that point.
Is that when we announced the 700 650 and demand increased because of the clarity provided and that and and that market space.
So that one day.
And theyre not subtractive.
And we believe that that pattern, well and will continue given the differentiation between the two airplanes.
That help you.
And just as a follow up on the GEC because you did bring the right then.
Modestly and do you see that now is a sustainable rate over the next three years or could you actually had higher again.
Well, we're comfortable with the rate that we're looking at at the moment.
Hum look you have seen us sufficiently agile to adjust I don't.
I don't expect that at the moment, they still have very good demand a rate supports that demand and the demand supports that rate and we anticipate a nice steady.
The order book and production schedule.
And or the time to come so we're really pleased with that airplane.
Okay. Thanks, so much.
And our next question today comes from David Strauss with Barclays. Please go ahead.
Good morning.
Good morning.
Phebe just wanted to touch on the on marine and the growth that you're forecasting there I think you said, there's there's potential upside but out of the gate. It looks like your forecasts and about 3% top line growth I know, it's on a tough comp can you just.
Talk about where the potential upside could come from how much Colombia is accounting for of that growth and would you expect marines grocery too to reaccelerate once we get beyond 2021.
So that growth and.
Can be on any given year a bit lumpy, but the trajectory is there.
Supported by that backlog I think this year and in 'twenty and 'twenty I think Colombia accounted for 50 per cent of that growth.
But the way to think about this and critically approximately from a trajectory perspective, and as we're looking between $400 million to $500 million of growth are.
And then that will continue to accelerate as we.
Pull through more production so in the momentum 'twenty 'twenty, one as I alluded to and in my remarks.
And the opportunity there is for increased revenue and that happens and the shipyards by increased throughput.
Paul work and depending on the work cadence schedule for planning the availability so that is in that moment.
And if any upside comes to growth and and.
And and.
And 2021 and it'll be based on that but you are quite right and we.
That comparison bases off for this year is that awful and very very strong growth, but there's nothing to suggest that there's any particular issue here simply just the timing and the mix.
Right.
And the four to 500 million that you just referenced is that the annual revenue increase that you're expecting out of Columbia per year for the next couple of years and now the whole group.
Okay got it and then.
And on combat can you maybe split it out kind of what you're seeing on the U S side versus Europe and are you, having any any issues in Europe, given some of the shutdowns and we've seen over there.
Well, let's talk about.
Let's talk about the U S.
Our and <unk>.
We've talked about we are the premier systems integrator for.
Combat system platform from the United States.
And all of our.
Key.
Franchise programs are in and the process of modernization.
Upgrading.
And we anticipate that to go forward.
If you think about army modernization.
It comes in two flavors, one is upgrading and critical or fighting vehicles and equipment.
To meet the modern battlefield and and if you think about that the stryker of today and the Abrams of today.
And are in all respects different than their predecessors. They look the same but in all respects.
These are increasingly lethal increasingly capable agile.
Platforms and that gives them relevant to the war fight today and the war fighting day envisioned and the joined forces combat scenarios.
The U S. Military so those modernization upgrades will continue and then the second category of Army modernization is in there.
And you start programs and.
I've got a number of them as we look out into the horizon and again, you know given our capability set given our proven long term delivery and really deliver things on time and.
At cost and that puts us in very good stead, along with the technology investments, we've been making over the last 456 years.
We are producing some really powerful platforms that will be critical to the future fight.
So I feel good about that on top of and the U S. Our ordinance and armaments business.
Continues to grow they are critical some components on almost every major.
Weapons missile system and the U S.
So these are very very strong high leverage deep backlog deep customer intimacy programs and the United States. When you look outside the United States, we are continuing to see growth and we've got the Ajax program.
That has just begun its testing so we've got quite a wet and a waste flow there and when and when you think about our European land systems, just to give you a little perspective.
And the over 7000 and service lab type vehicles that come out of have come out of our European business that installed base is enormous and it's an enormous competitive advantage. Some of those systems are older and they needed to be needed to be upgraded.
And we continue to see and demand out of out of multiple parts of Europe. So we expect E L F to grow.
And Oh, the world hasn't gotten any safer.
And that are and.
The reality of the threat environment draw.
Drives the demand.
So I hope that gives you a little bit of color here.
Thanks, very much food.
And on average person who comes from George Shapiro with Shapiro Research. Please go ahead.
Yes, good morning.
Alright.
Phebe I noticed when you call out point and 96 book to Bill that's a gross number so it looks like they were like $244 million of cancellations and a quarter if you could.
Specify what they actually were.
So look we still have a very low.
The default rate.
Really not meaningful.
Either and the moment for us or going forward. So we're are not going to give you a model by model I can tell you nothing from particularly surprised us.
And.
It signifies force at the moment.
And nothing on a going forward basis.
That helps.
Not as much as I line I'm sure.
[laughter] apart that backlog and you're not gonna and each.
Each other too long that Ain't happening.
And I can figure, but I figured I'd ask it anyway.
And then my other question is the sequential backlog and technologies dropped like 6% and this sector continued to disappoint again and revenues as you as you mentioned, so what's really going on there I mean.
And then we've been saying this for quite a while it is still up.
We had anticipated going into 'twenty and 'twenty that we would see the growth that we had expected.
Covid derail that a bit.
But as we do our planning and thank for hardware line.
Manage COVID-19 going forward and the advance of Covid.
At some point and the year, we see that growth and supported by that backlog.
And again I think Jason gave you a very fulsome explanation of how we treat our backlog and we do that differently than anybody else.
And I think we sometimes get penalized for it.
But.
We have the backlog to support the growth that we're anticipating.
And George George just to add another five point and I alluded to this a little earlier, but I want to make sure. It's clear this business in particular I think is the most relevant to pay attention to that total potential and contract value versus the strictly the traditional firm funded backlog and the reason is I think I mentioned this.
Earlier, this business year in and year out, 50% or more and in fact, I think and 2020 was 60% of their annual orders and revenue value comes out of that bucket of value that we articulate as.
<unk> slash options potential contract value, so that's very different and the.
Lots of the pure play platform businesses that have the traditional contracting firm backlog and so on and so I don't think it can be overlooked and in fact, it should be emphasized and should be the focal point of analysis on where that value is coming from into TV point was supportive of our expectations of growth for that business.
But even Jason on that basis, it was still down.
Down somewhat sequentially, if I looked at the total number that you gave so there's pieces of that Theres mission systems, and <unk> and their <unk> was actually up I believe not only 10 or 11% between you and me.
And again to reiterate what I discussed earlier, when we get these large programs and think of deals as an example, with the potential for $4 billion program not even a small fraction of that went into even at idea IQ bucket. So major resolution of a significant headline award so youre not.
Yet seeing manifest in the backlog or even and the idea IQ bucket, but will over time support the fundamental underpinnings of the growth that we're alluding to.
So a pretty conservative approach to it, but we think appropriate and youll see measured out over time as those programs progress.
Your next question comes from Doug Harned Bernstein and coming soon.
Thank you and good morning.
Yes.
Hi.
And the G D I T and mission systems mean once upon a time they were together.
And you split them up.
And now they're coming back again.
You talk a little bit about the evolution of your thinking about these businesses.
And I know earlier you talked about.
These integrated integrated systems, where they can work together and perhaps you could highlight some of the programs that are opportunities for you.
And that kind of work.
So we have a lucky would expect us to remain agile to changing trends and the marketplace and what we were and what we were observing is that while our services business and the eye.
And even the older incarnation of mission systems work closely together across a number of of.
Of.
Programs increasingly and the last three years, we're seeing more and more of that.
They're working together on beds, they're submitting bids together.
And and that what Ive liked about that these are two separate businesses managed separately they understand each other the guys who at mission systems know how to run their their their product portfolio and the.
And the Guy that G D I T and know how to manage their Iot services business and I think those areas of expertise that's very important to keep them separate from us from a management point of view.
To have them come together to work more seamlessly. We believe this reporting structure helped but and no. Other respect subtly changing anything so we have a howard can give you a pretty definitive less.
And Jason can give you a few and just say the indicative kinds of programs we're looking at.
It's gonna come across it and if we get into this and too much detail sounding like a bunch of alphabet soup just based on the nature of these these businesses but.
Suffice it to say it is and increasing portfolio of opportunities, where theyre going to market together.
<unk> work on areas like supercomputing, which they're doing four for Noah.
Broader based and the Enterprise network services for example, like what they're working on for the FAA.
We're going ground based strategic deterrent.
And so on and so forth as well as a number of items reclassified customers NSA.
They've got work for the Air Force.
Again, the list could go on and on if I named the programs it wouldn't necessarily mean anything because their own code names, but but it is and increasing portfolio, where they are getting pull through overlap and it and commonality and these offerings.
Okay, and then also one more thing that gets into the details here on programs. If we go back to combat and Phebe you talked about the trajectory here and.
Flattening periods probably growth in 2023.
And where do you see the growth coming from you mentioned some things, but if you had to say you know this is why I'm confident in 2023 growth whether it be from some specific U S programs would it be.
Could it be other international one of the things that get you most confident on that that's.
Longer term trajectory.
So look we've got I think longer term, we're looking at additional striker configurations. If you think about the Stryker is very versatile.
Very versatile platform and we've seen the army and working with us find innovative and increasingly.
More fight a critical variance of Stryker, So we have the shore at and I'll, let somebody else.
Sure AD system coming.
We are we are looking and electronic warfare.
Medical and there's a whole series of other increasingly some of them sensitive Stryker missions.
And I think too is the strikers have.
And.
They are for gays have increased their numbers by about maybe four 5%.
So each brigade.
Wanted to get over time more strikers and these various configurations. So that's important.
Continuing its modernization and then we.
And believe we have additional out year international opportunities.
And for Fms.
So.
We see some growth in Canada, and Morocco, Poland, Czech Republic, and so all of that contributes that's all of them and you asked all of that continues.
Now to our our assumption about gross.
Gross and net portfolio.
Outside the United States that tried to give you some context about the large embedded fleet and they need to upgrade that fleet.
And that along with the Spanish program and we.
<unk>.
May see some additional vehicles under that Spanish program, it's too soon to call that but we are really assuming that but those are the elements that we are and by the way there are new programs developmental program.
That.
From that.
And that are out from competition, and we like where are we and and and those are level to say one thing about it M. P F.
When you develop a small 12 prototypes for testing.
Testing and evaluation and I believe we are the only ones to do so even within the Covid environment.
Discipline will do for Ya disciplined product excellence and manufacturing.
Operating excellence so.
That is that is day.
Flying that we see and our future.
Operator.
This is Mr. <unk>, we have time for one last question and.
And.
Ill turn it back to you to do that and then.
Final instructions, thank you absolutely share.
Final question comes from Ron ups, we would do it.
Sure.
Mr upstream and your line is open Sir.
Sorry about that I was on mute.
Good morning.
Hi, Jason.
So.
And just maybe a bigger picture question.
And when we listen to the earnings calls of the group every company tells and stuff they are well positioned relative to the defense budget and I'm.
And you're not but my question is this.
But the budget flattens with the change in administration and the deficit and so on and so forth where do you expect to see some pressure and the budget.
Dodge that.
It seems like you are but like what would you not want to be.
And then.
Well, let me tell you and I've never seen anybody else's portfolio, but a couple of observations and my experience with that.
Antidote for budget reductions are well performing well supported programs.
Of record we have all of those.
Almost every single one of our programs are on schedule.
Or below cost.
That is that is one of budgeteers get their knives out those are almost always the last fall.
So that's I think a long term perspective to look assets, but look if you look at the U S Navy.
Submarine.
And it's top priority and the collapse in particular.
And and and why is that it's because submarines remain a singular and competitive advantage at critical competitive advantage for the United States.
With near peer competitors and per competitors. So I am quite confident that given my belief that the defense budget is is is driven by the threat.
Our key key elements of the of our Marine group.
Will be nicely supported we believe that the navy will continue to need destroyers.
The DDG 51, as this is proving to be a very versatile program platform that can take additional missions and.
And then with our auxiliary yard at it masked though.
And with the exception of the nuclear power and carriers and nuclear submarines. All these navy fleets need gas.
And the gas needs to get there safely fastly and and pumped efficiently and that's our new oiler program.
So with respect to the Army I gave you a little bit against the call a little bit of color before but the army and quite clear and even in a constrained budget.
They will maintain their their modernization priorities they have been both privately and publicly quite articulate about that.
And then in terms of the shorter cycle businesses.
And the old days when you are dialing for dollars and it's a budgetary, though the day O&M accounts and start cutting.
And I T budgets, that's not possible anymore.
And I T systems are critical to the mission of these agencies, whether that's with N D O D or outside D O D.
So that is a source of funds is increasingly less likely and I think frankly insulated given the criticality of I T.
And then within to the to the wall to wall.
Right and D O D and to other missions and then within our mission systems can now theres, a beauty to having a diverse portfolio of long franchise programs and I will tell you.
And that was quite sick care and many of those franchise programs because they are and in some cases unique.
And in some cases tied to high growth nationally critical areas just think against submarines.
So I think it's the height of hubris to assume that any organization is immune.
Hum.
Constraints and budget.
But performance matters criticality to the war fight matters, and when I look across our portfolio and I'm pretty comfortable that.
We are in very good stead.
Thank you I'd like to turn the call back over to Mr. Rubel from final remarks. Thank.
Thank you everybody for joining us today and as a reminder.
On our website <unk> dot com youll find a V.
And backend.
Back on our press release, and and with that deck Youll also find the.
Data for the from our outlook for 'twenty 'twenty, one and you have any additional questions and I'll be I can be reached 700, 387, and 6311 and seven thank you again.
And thank you Sir This concludes today's conference call and we thank you all for attending today's presentation and the.
Your line and have a wonderful day.
Yeah.