Q4 2021 General Dynamics Corp Earnings Call
Full year, we had revenue of $38 5 billion up one 4% from 2020 net earnings of $3. Two 6 billion up two 8% and earnings per fully diluted share of $11 55 modestly better than consensus and up 55 cents.
Over 2020.
We ended the year with a total backlog of $87 6 billion and total estimated contract value of $127 5 billion are.
Our business has strengthened by significant growth in aerospace backlog to $16 3 billion I'll have more to say about that when we get to the business segment comments.
The total company book to Bill is one to one for the quarter and the year led by the powerful or the performance of Gulfstream.
Our cash performance for the quarter and the year is very strong.
The conversion rates of the quarter is 136% of net income and 104% for the year, Jason will have more fulsome comments on this subject in backlog in his remarks.
Now, let me turn to reviewing the quarter and paying some attention to quarter over quarter and sequential comparisons as well as the full year in the context of each group and provide color as appropriate.
So first aerospace aerospace revenue of $2 6 billion is up five 1% over the year ago quarter on the delivery of 39 aircraft 35 of which were large cabin.
While this was the strongest delivery quarter of the year. It fell short of our expectation by one aircraft, which has slipped into 2022.
For the full year revenue of $8. One 4 billion is up modestly from the prior year, even though we delivered 119 aircraft eight fewer aircraft than we did in 2020.
The increase was driven by higher service revenue with Gulfstream and a nice increase in revenue at jet aviation.
Fourth quarter Aerospace earnings of 354 million or down 47 million from year ago quarter, even though revenue was $125 million higher resulting in a 270 basis point reduction in operating margin. The major source of the variance of $15 million increase in net.
R&D costs driven by the certification.
On the G 708 hundred and accelerated work on the G 400.
Go quarter was also helped by a significant launch assistant payment that wasn't offset to gross R&D.
Nevertheless, aerospace operating earnings and margins are better than anticipated by consensus the same can be said for the full year result.
I should also point out that aerospace margins improved throughout the year and that was true with respect to both Gulfstream and jet aviation.
At midyear last year, we told you to expect revenue of about $8 2 billion operating margin around 12, 4% with earnings of $1 1 billion.
We finished the year with revenue of $8. One 4 billion operating earnings of one 3 billion and a 12, 7% operating margin and some we were slightly better on earnings and margin, but various close to our forecast on revenue farnell.
Far and away the most important story in the quarter for aerospace and frankly for the company was extraordinary order activity at Gulfstream.
Last quarter I told you that orders in the third quarter boarded on the spectacular this quarter they were significantly better order activity in the quarter was beyond anything we had seen since 2008 with the introduction of the G 650.
Demand it turned very good in mid February and continued through the second and third quarters was Red Hot fourth quarter. Let me give you the particulars the aerospace group in dollar denominated orders had a book to Bill of one seven to one Gulfstream alone was one eight to one.
In terms it was over two times.
Remember that these multiples are off of an increased denominator with 39 deliveries.
This translates into very significant backlog growth.
Aerospace added $1 6 billion to backlog in the quarter and $4 7 billion for the year.
As we go into the new year, the sales pipeline remains robust and sales activity is brisk.
The buildup in backlog and the pace of current demand leaves us with the rich problem, but a problem nonetheless.
Do we satisfy the demand manifest in our current backlog supplemented by continuing brisk activity, having previously turned down production.
Can the supply chain support us are we ready.
Well the answer is we will increase production in 2022, but not to where it needs to be.
Remember also that some of our increased production in 'twenty two we'll be in building G. Seven hundreds and hundreds that will not deliver in 'twenty two it pre build if you will.
As it turns out the long pole in the 10 as manufacturing wings, which we do ourselves.
Recall that we previously vertically integrated wing supply because the failures in the supply chain. So what do we need to do we need to expand our new modern wing facility and acquire another set of tools and fixtures. All of this is underway and will be in place to satisfy our needs for 'twenty three and beyond.
This leads to the question of what are the implications of this for 2022 guidance I'll address 'twenty two guidance a little later further given the robust and enduring backlog at Gulfstream. We also feel comfortable with giving you will look at what is anticipated for 'twenty three 'twenty four as well.
Finally on the new product development front, all five G 700 flight test aircraft are flying and have over 2200 flight test hours.
<unk> completed over 65% of all required testing.
Next combat systems.
Revenue in the quarter of $1 89 billion is off three 7% from the year ago quarter operating earnings of 281 million are off $28 million on a 90 basis point decrease in operating margin let.
Let me point out however, that a 14, 9% margin the quarter's highly respectable.
For the full year revenue of 735 billion is up $128 million or one 8% increase after strong growth in 2019 and moderate growth in 2020.
Operating earnings for the year of 1.17 billion are up $26 million or two 5% increase.
By the way. This performance is in line with the guidance, we provided earlier in the year.
As we look forward to for the next few years, we believe that combat volume will soften somewhat in the increasingly constrained budget environment faced by the U S Army.
Our platform programs remain critical to the Army War fight, we may see some contraction in part offset by international growth and Abrams and wheeled combat vehicles.
We will continue to drive margins as we always have.
Remember that combat systems has had very good margins and much more constrained revenue environments.
In short this group has had a positive revenue growth for several years now continued its history of strong margin performance has good order activity and has a strong pipeline of opportunity as we go forward.
Next marine systems.
The Marine systems growth story continues.
Fourth quarter revenue of $2 9 billion was up less than 1% over the year ago quarter. However, revenue was up eight 8% sequentially and five 5% for the full year. Similarly operating earnings are down somewhat in the quarter, but up sequentially and for the full year one.
Again this is the highest full year of revenue and earnings ever for the Marine group.
And our initial guidance to you we anticipated revenue of about $10 3 billion operating margin of eight 3% and operating earnings of $855 million.
We came in above that for both revenue and earnings and spot on the predicted operating margin.
Our shipyards have continued to perform well overcoming most of the challenges that Covid Lee and our past first continuing to operate without ceasing throughout COVID-19 and more recently managing labor shortages part shortages supply chain disruptions and increase in commodity prices importantly on the latter.
Our long term ship building contracts provide protection from material escalation.
I'm happy to report that we are working very well with the Bath unions and workforce and together we have worked to put the past behind us and concentrate on improving schedule and performance.
As a result that has begun to see improvement on both scores.
In response to significant increased demand from our navy customer that Youll see in these results we continue to invest in each of our yards, particularly at ebay to prepare for Virginia block five and the Columbia ballistic missile submarine.
Suffice it to say that we are poised to support our navy customer as they increase the size of the fleet and deliver value to our shareholders as we work through this very large backlog.
Finally, the technologies group, but consistent <unk> emission system.
Just to remind you. This is the group in the defense segment that had had the most impact from COVID-19, with the most remote participation from employees and the most difficulty accessing customer locations, whose employees also have been working remotely.
It is also where we have the most impact from the short supply of chips and other key components emission systems.
With that said, let's turn to the results and commentary on the group and the specific businesses for.
For the quarter technologies had revenue of $2 98 billion up seven 9% from the year ago quarter.
Operating earnings however of $334 million or off only five 1% on a 30 basis point improvement in margin.
The operating margin of 11, 2% as the strongest since the formation of this group.
Revenue for the full year at $12 $46 billion is off one 5% but earnings are up.
<unk> 4 million or five 3% on a 60 basis point improvement in operating margin all considered the group performance showed good strength and earnings are in line with guidance from us.
Revenue came in at $543 million below our guidance driven by mission system challenges, we have discussed last quarter.
Offset in part by two 2% growth of G D I T.
Margins at both companies were very good enabling us to meet our earnings forecast. So very good operating leverage in a very challenging environment.
The group enjoyed a nice order quarter with significant wins in a book to bill of one to one a little bit stronger in <unk> and a little bit lower at mission systems.
Mission systems did a very good job overcoming many of their supply chain challenges is working hard to satisfy the pent up demand that was driven by a significant backup of work orders and some customer sites and by supply chain shortages.
Turning to IP are fed in civilian division had a particularly strong year in 'twenty, one and helped drive a 60 basis point improvement in margin over 2020.
And as has been the case since the acquisition <unk> cash performance was outstanding well in excess of 100% of their imputed net income.
<unk> backlog at the end of 2021 was $8 7 billion, 4% higher than year end 2020 book.
Book to Bill was one one to one on sales growth of two 2%. This is notable in light of the dollar value of G. D wins and snared in protest that went from about $800 million at the end of 2020 door whopping 6 billion at the end of 'twenty one.
While we expect these protests were resolved in our favor protest resolution timing is outside our control.
As we look into 'twenty, two we have a healthy pipeline of opportunities to pursue as customers focus on digital modernization and over $32 billion of bids largely all new work awaiting customer decisions.
So all in all we expect a good year for the business.
Let me turn the call over now 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.
As you can see from our press release exhibit we generated $1 $3 billion of free cash flow in the fourth quarter or 136% of net income with strong cash performance across all four segments.
That resulted in free cash flow for the year of $3 4 billion of.
Our cash conversion rate of 104%.
That was nicely ahead of our anticipated 95% to 100% of net income and again reflective of solid performance across the company, but in particular, the strong order activity at Gulfstream.
That strong performance enabled us to continue our balanced and robust capital deployment activities.
To that point capital expenditures were $385 million in the quarter or three 7% of sales.
That's up more than 10% from the prior year and brings us to $887 million for the full year.
Of course Marine systems continues to drive the elevated capex with facilities investments in support of the unprecedented growth of the group is experiencing now and for the next decade plus.
Full year total for capital investments at two 3% of sales slightly below our original expectation of two 5%.
That's due strictly to the timing of the phasing of those projects.
While our investments to support the Navy's submarine programs with Pete we expect capital expenditures to remain somewhat elevated at about two 5% of sales in 2022 slightly higher than 2021 before returning as we forecast for some time to our more typical 2% range in 2023 and beyond.
We also paid $332 million in dividends in the fourth quarter, bringing the full year to $1 3 billion.
And we repurchased one 8 million shares of stock in the quarter, bringing us to just over 10 million shares for the year for $1 8 billion adjusted.
Just under $179 per share.
With respect to our pension plans, we contributed $135 million in 2021, and we expect that to decrease to approximately $40 million in 2022 as a result of the ARPA funding release.
As we've discussed for some time, we expect to continue to generate cash in the 100 plus percent conversion range in 2022 and beyond.
Our outlook assumes the unfavorable impact of the capitalization and amortization of research and development expenditures for tax purposes, beginning in 2022 as called for under current law.
There is proposed legislation to delay the effective date of this requirement, but we will have to wait and see if it's approved by Congress and signed into law.
Assuming there is a deferral of the R&D capitalization provision, we would expect our free cash flow to be in the 110% conversion range.
We ended the year with a cash balance of $1 $6 billion and no commercial paper outstanding, leaving us with a net debt position of $9 9 billion.
Approximately $300 million from last year and the first time, we've ended the year with net debt below 10 billion since 2018.
Our net interest expense in the fourth quarter was $93 million, bringing interest expense for the full year to $424 million.
That compares to $120 million and $477 million in the respective 2020 period.
The year over year reduction in interest expense is due to the retirement of $1 5 billion of long term debt back in May.
Our next scheduled debt maturity is a $1 billion in the fourth quarter of this year.
And based on the declining net debt balance, we expect interest expense to drop to approximately $380 million in 2022.
Turning to income taxes, we had a 15, 9% effective tax rate in the fourth quarter and for the full year consistent with our previous guidance.
Looking ahead to 2022, we expect our full year effective tax rate to remain around 16%.
The rate for 2022 is not impacted by the R&D matter I discussed earlier because of that legislation impacts cash taxes not be affective tax rate.
The 2022 rate also assumes there is no other enacted legislation impacting corporate tax rates.
From a quarterly phasing perspective, we expect the first quarter rate to be lower due to the timing of certain tax items. So the rate for the remainder of the year will naturally be higher given the full year forecast.
Order activity and backlog were once again, a strong story with a one to one ratio for the company in the fourth quarter and for the full year.
Phebe mentioned order activity in the Aerospace group led the way with a one seven times book to Bill in the quarter and one six times for the full year as a result, the group's backlog was up 40% in the past year.
Technologies recorded a book to Bill of one to one and within that group <unk> was one one times.
We finished the quarter with a total backlog of $87 6 billion and total estimated contract value, which includes options and <unk> IQ contracts of over $127 million.
That concludes my remarks, and I'll turn it back over to Phebe to give you guidance for 2022 and wrap up remarks.
Thanks, Jason and with that I'll turn to our expectations for 2022.
So let me provide our operating forecast for 'twenty two initially by business group and then a companywide rollout in.
In aerospace, we expect 2022 revenue to be around $8 4 billion up around 4% over 2021 with about 123 deliveries up from 119 last year operating margin will be around 12, 8%.
So a little color here about what is driving this forecast well anticipated deliveries are up only four units from 'twenty. One production of completed aircraft is considerably more than in 2021.
Last year, we produce fewer than 119 aircraft that were delivered we delivered a number of test aircraft that were either produced and completed in prior periods as well as a few demonstrators all up about 11 aircraft.
In 2022 production, we are building some G 708 hundred test articles that will not deliver this year finally, our ability to ramp up further in 'twenty. Two is limited by the wing supply issue I described earlier, which will be remedied for 'twenty three.
This leads me to a quick look at 23 and 24 in 2023, we expect to deliver 148 airplanes 25 more than in 2022 and have revenue of approximately 2 billion more than 22 with margin improvement around 200 basis points.
And 24, we expect to deliver around 170 airplanes up another 20 to driving another $1 6 billion of revenue over 23, and another 100 basis points of margin growth.
So all up over that two year near term timeframe, we expect to see $3 6 billion of revenue growth over 'twenty, two and 300 basis points of higher operating margins.
None of this is supported by heroic assumptions about continuing demand.
We assume a book to bill of around one to one during the period a notable reduction from this year's demand if demand is greater.
It will impact favorably 24, and 25 in short we fully expect aerospace to be a significant growth engine for both revenue and earnings in 2023 and 2024.
In combat systems, we expect revenue in the range of $7 $1 5 billion to $7, two 5 billion a modest reduction against 21.
We expect operating margin to be about the same at 14, 5%.
Growth should resume later in our planned period is developmental programs move into production and several anticipated international order should be received.
The Marine group is expected to have revenue of approximately $10 8 billion, a $300 million increase over 'twenty. One operating margin in 2002 is anticipated to improve to around eight 6%.
Long term driver of growth here submarine work, which will expand as the supply chain improves its efficiency and delivers module to the Groton waterfront in a more timely fashion.
Our biggest upside opportunity in this group is to increase margins in the period.
We expect revenue in technologies in the range of 12 $8 billion to $13 billion.
This is a growth of around 2.5 to four 5%, we expect operating margins around 10%.
So for 2022 companywide, we expect to see approximately $39 2 billion to 30 945 billion of revenue and an operating margin of 10, 8%. This all of those up to our forecast range of $12 to $12 15 per fully diluted share on.
On a quarterly basis, we expect EPS to play out much like it has in prior years with Q1 about $2 45, and progressively stronger quarters thereafter, let.
Let me emphasize that this forecast is purely from operations that assumes a 16% tax provision and it seems 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 outperforming the operating plan, achieving a lower effective tax rate and the effective deployment of capital.
Thanks, Steve 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.
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We take off the last question from Ron Epstein from Bank of America. Please go ahead.
Yes.
Morning.
Hi, Ron.
I know youre going to be bombarded with Gulfstream question, So I'm not going to go there I'll, let everybody else do that.
I just wanted to jump in.
How about that.
So maybe on land systems that first right.
Would you agree with everything going on with Russia with the headlines.
What does that mean for your international lab systems business, particularly in eastern Europe .
Well for some time now the eastern European demand for combat vehicles has been.
Elevated level, but I have to tell you that speculation about the considerable attention in eastern Europe and any subsequent impact on budgets is just ill-advised given the high threat environment.
So we are hopeful for a peaceful resolution.
But that is a national security issue for the U S and in Dallas.
Got it and then maybe Mike.
All of our questions.
Just talk a little bit towards chocolate sculpture.
You mentioned in your prepared remarks, you've got a little bit of a bottleneck.
<unk>.
Have you thought about outsourcing wins or does it go to the.
Is this something you guys want to keep.
Because it's.
A key part of the place.
Outsourcing instead of the other question given the problems in the supply chain on wings.
Which then drove us to internally.
Source and frankly, our wing production efficiency is is.
Not equal by any this is just simply a question of expanding our wind facility just to touch and we need another set of tools.
But we are very good at wing production. So I think that that's a capability set that reduces a lot of risk and frankly provides opportunity for the program.
The next question comes from Cai von <unk> from Cowen. Please go ahead.
Yes, thanks, so much and congratulations on the good results so.
Net R&D was up was up $50 million in the fourth quarter, what do you expect it to be up going forward.
If I look out there.
100, Bips margin uptick I haven't calculated exactly it looks like less than 10.
45% incremental margin so how come it's not better as we get out to 2024.
Yeah.
Well.
R&D is expected to be about $100 million.
For next year, but let Jason give you a little bit of color, yes, so CV roughly a $100 million increase in the.
The Gulfstream R&D for 2022, as we continue to progress as you would expect through the flight test program on the G 700, if.
If you normalize for that Delta margins for next year would be roughly 14% for the aerospace groups that really does kind of answered the question on incremental margins I think from our perspective otherwise.
We do continue to see as you'd expect the incremental profit from the production airplanes 500, 600 in particular continuing to be additive to the group's margin. So.
Okay.
Yes.
Okay.
It was a pretty good margins in the out years.
They are <unk>.
R&D credit.
How big are you assuming.
So as I said, we're looking without the R&D credit deferral, meaning assuming existing law.
<unk> will be in the call it 100 plus percent conversion range.
If the R&D credit is deferred.
Current law is deferred we're talking more in the 110% range. So that kind of gives you a size on what we're expecting.
The next question comes from George Shapiro from Shapiro Research. Please go ahead.
Yes.
Phoebe the four higher deliveries in 'twenty two that you spoke about are they G seven hundreds or whats the status because I knew you would.
Thought that you've delivered some G seven hundreds in the fourth quarter.
What we said I think as we expected the certification.
Uh huh.
In the fourth quarter with.
But I think the way I have as I noted in my remarks, we're going to have some pre build about the seven hundreds and eight hundreds which will deliver shortly thereafter, the seven hundreds of little shortly thereafter the certification.
A little more color on that George I mean, just to think about it obviously, we talked about FCB said fourth quarter certification in the eyes of the 700, but there's also obviously with 2021 you have 500 excuse me $5 <unk> that were delivered in the early part of the year that doesn't replicate so the incremental for you as an offset of that <expletive> .
Klein as well as the test airplanes that Phebe mentioned that we delivered last year and some demonstrators but otherwise.
Eddie increases in all of the in production models, particularly 600 500. So I think overall, if you look at in production airplanes.
<unk> hundred 5600 $502 80.
We're looking at somewhere in the 15% year over year increase in production in those models. So that should give you some color on what's driving that increase.
Okay, and then one follow up does the $211 million difference between what you have is gross orders and effectively just the net orders now are there any cancellations there, reflecting the fact that some customers are getting the planes later than they would like together.
No I don't think there was any particular driver we have I think three cancellations.
For no particular reason other than idiosyncratic customer issue.
The next question comes from Myles Walton from UBS. Please go ahead.
Thanks, Good morning, Phebe could you comment on the pricing environment for building out the backlog in and I imagine.
You're now come in pretty close to listen.
All of your older programs and maybe give us this impress.
Impression of the skyline or the lead time for the large cabin models at this point thanks.
So we've enjoyed some pricing pressure or some pricing increases.
And that's all good and wholesome.
And we're quite comfortable where prices are and our lead times are live in all production.
Aircraft.
Oh Wow.
Within the 24 are the.
18 months mall at 18 months 24 in that range.
We like to see.
Okay, Great and then 500 or 600 can you just give a color on the two differences in demand there.
One might be particularly accretive on the 600, given the assembly commonality with partners.
Yeah. So just to give you a little bit of background there.
Hundreds like the parade and orders in the fourth quarter, followed by the $6 50, and the 500.
The 600 margins are obviously quite nice and 500 are improving.
And of course 600, we've always enjoyed good for 650, we've always enjoyed good margins. So we're seeing some very nice operating margins at the gross margins at the.
At the airplane level.
The next question comes from Robert Stallard from vertical research. Please go ahead.
Thanks, so much.
Maybe to touch on some other issues I was wondering if you could maybe give us some more clarity on the supply chain at this point and some of the obstacles you would be facing across the company what are they getting any better.
So.
Let me go group by group and.
Combat, we haven't had seen any particular supply chain issues.
At Gulfstream, we manage the supply chain and I think they were benefited by a reduction in production last year. So we're quite comfortable with where they are.
We reported pretty fulsome lay on the mission systems challenges that they had that chip shortages and some other key.
A key.
Product Matan and.
And then electric boat in particular, we've seen some challenges in the <unk>.
And the submarines supply chain largely manifests in Virginia schedule variance. So it was pretty widely reported that.
But we're continuing to work with the Navy.
And to kind of shore up that supply chain. So we can get normalized.
Virginia schedules.
Okay, and then maybe a follow up to <unk> question on the Aerospace lead times I think you just said 24 months.
What you're seeing in some cases that sounds a bit longer than what we maybe hood. In recent years are you seeing any customers essentially saying that's too long.
Maybe go somewhere else to get that yet.
No.
We haven't and as I said 18 to 24.
But 'twenty for us is only in a handful of cases.
<unk>.
But.
We haven't had any.
Customers say well I'll go elsewhere, because we are in the backlog I'm Gonna go elsewhere cancel my order.
Because I want my airplane faster.
And frankly, we're ramping up production to accommodate that demand.
The backlog and what we see is as as nice solid demand going forward.
So we're quite comfortable where we are and our lead times.
The next question comes from Robert Spingarn from Melius Research. Please go ahead.
Hi, good morning.
Good morning.
Maybe sticking with supply chain and labor can you frame the risk to entry into service for the three new aircraft programs 700, 800, and the 400 and how we should think about potential slippage or whether you've got that.
Covered at this point.
Well with respect to.
Labor, while we've seen some wage increases in engineering force at Gulfstream, but we have covered those if some increasing prices to offset that but we don't see any labor issues with respect to the delivery of these airplanes.
And as I say the supply chain, it's been pretty stable here.
So not yet.
As labor affecting or clearances affecting technologies at all is it limiting growth.
Yes.
So David.
Particularly in the tech industry any company, that's got large exposure to tech care expert says has certainly had their challenges in mobility, but I will say <unk> is holding up very nicely attrition as a pre pandemic level.
So we're holding our own but very mindful. This is a valuable workforce.
And coveted by many.
Okay. Thank you.
The next question is from Doug Harned from Bernstein. Please go ahead.
Good morning, Thank you.
Oh, yes.
The Gulfstream can you describe to a pretty high class problem here in terms of demand.
When you get out to 2023 and 2024, though you have a you have a pretty diverse.
Set of programs at that point, how do you look at this in terms of both your operations and the supply chain just to manage that complexity.
So one thing that Gulfstream on so many things that Gulfstream has been quite good at is managing its operations and having very strong operating leverage and we have brought the supply chain along with us. So all of our estimates that we're giving you fully accounting for what we.
Expect the supply chain to be able to manage as well as our own operation. So we're quite comfortable that we do not have an operating challenge.
So no you are not really seeing any additional issues with this mix when you get out in that time frame now.
Okay.
The next question comes from Sheila <unk> from Jefferies. Please go ahead.
Good morning, guys. Thank you.
Maybe I'll take that I show in 24 months I'll wait right.
Hi.
Talked about Aero because it is a lot of the ETF expansion would happen between 'twenty, one and 24. So you have been so generous with your comments, but I can't quite square away Aerospace margins for 2022, and I was wondering if you could help a little bit with that.
Pricing should be a tailwind and I think mix improved from 21.
500, 600 going up the curve and I think you previously talked about the G 700, being accretive to margins right away for maybe can you talk about what's changed and how do we think about that improvement into 'twenty, three and 'twenty four and I know you've already guided but if you could square away a little bit more.
Yes, I mean, I think you've got a lot of the basic building blocks, we probably have to compare spreadsheet to see what's driving the ultimate outcome. I think the single biggest issue is probably the period to period fluctuation in our net R&D expenditures right between supporting the <unk>.
Development programs and the net offsets that we get from time to time from suppliers.
As I mentioned before we've got about $100 million increase in R&D.
22 relative to 'twenty, one so that if you normalize for that you're up from 12 point $12 seven and.
In 2021% to 14% in 2022.
There is other puts and takes within that as you know pricing is a little better.
Improvements along the manufacturing lines for 500, 600 continue to get better growth in service business, obviously, which continues.
Year over year, while at good margins does come at margins that are in an aggregate dilutive to the overall group margin and certainly to new aircraft production margins.
And so that's really the story I think in terms of the puts and takes going into 2022 I think.
We can get into your.
Details for your question, maybe after the fact on 'twenty three 'twenty four but I think 200 basis points improvement in 'twenty, three and another 100 basis point in 'twenty for that that kind of gives you that trajectory that we've talked about for some time about returning to the mid to high teens margins for the group when you combine that with the pretty significant topline growth that Phebe described I think it's a pretty.
It's a pretty compelling story.
Can I just ask a follow up on the R&D, obviously it peaks for G 700 this year.
When do we see that for the 408 hundred.
So obviously the 800 comes into play shortly after the 700. So you should kind of expect to see that following a similar pattern I think we said the 400 enter service in 2025.
<unk>.
Keep in mind. The 400 is an airplane that benefited significantly from commonality with the 500 600 and the way those those airplanes were designed.
And engineered so won't necessarily excuse much of a blip associated with that but.
But all of this fits over time within the profile of our of our ongoing commitment to R&D and roughly 2% of sales for R&D again, it can fluctuate from quarter to quarter and year to year, but but that's how you ought to see it play out.
The next question is from Pizza Aman from Baird. Please go ahead.
Hi, Yes, good morning Phebe Jason.
Yes.
I Wonder if you could ask you a question about marine.
How are they doing in terms of battling kind of the labor shortages out there I know yesterday talked about.
The shortage of welders, maybe what you could give some commentary how youre seeing that.
So we have worked for many years with our state and local governments to provide some pretty robust training programs that are still up and running.
We are hiring.
This year at an accelerated rate over what we had anticipated largely because of the backlog.
In terms of hiring and Covid. Obviously constrained. This is these are hiring levels for 'twenty two at levels, we have seen before and executed before so the question is all about the efficiency of your training programs and we're pretty comfortable that once we get.
These people in the door.
We can get them trained and have them go new.
New shipbuilders.
Learning curves, obviously as they get more proficient becomes that trends.
But we factored all of that in our thinking.
I appreciate that and just as a follow up just on just on aerospace at.
It sounds like the customer base continues to expand how would you kind of characterize it is it a lot of the corporate center renewing or are you seeing just a.
A complete expansion during this kind of post.
Post Covid period.
So I'll give you a little bit of additional color on that demand was quite good in the United States.
And also increased throughout the rest of the world. We saw as we had begun to see earlier a return to the fortune 500, as well as private companies as well as smaller companies.
Hello.
It's pretty robust across the.
Portfolio on the kinds of.
Both individuals that we see but also companies that we see.
I don't see any structural change here, if that's kind of what you're poking at.
In terms of new and next question.
Go ahead I'm sorry.
I apologize. The next question comes from Seth Schiffman from J P. Morgan. Please go ahead.
Okay, Thanks, very much and good.
Good morning.
Maybe if I could dig in for a couple of more aerospace details.
Are there any comments you could give about the.
Services assumptions underlying the guidance and also the <unk>.
Capex impact and timing.
Timing of completion of the additional wind capacity.
So did al answer doesn't mean very harder.
Almost negligible capex. So this is just simply a timing of a timing issue or expanding an existing building somewhat and getting in place the tool.
Tools and fixtures to effectuate the increased production on the service side.
We expect 22 to see some nice service growth that at Gulfstream as well.
Jet aviation should have a nice.
And Ics as well and we expect the service volume quite naturally to grow with the expanding fleet and we have a.
And we have included those assumptions on a going forward basis.
Great. Thanks, and just as a follow up definitely heard earlier and appreciate the commentary about the.
The multi year outlook being conservative I guess.
Any other sort of.
Support you can get to that characterization.
It'd be great. If we look at I guess, if the backlog remained stable at about 16 billion looking at like one three times coverage out in 2024, and if that's kind of what you're aiming for and.
Any other color that kind of gives you confidence in the conservatism of the outlook.
Yes, so think about it this way.
Wanted to.
To explain is that.
The guidance, we're giving you for 23 and 24 was based on a one to one book to Bill clearly, if it's better than that.
Will increase production accordingly, but for planning purposes, that's what we have assumed and I think that's prudent planning.
The next question comes from David.
Go ahead David.
The next question comes from David Strauss from Barclays. Please go ahead.
Phebe can you hear me.
Yep.
Claire.
So you gave us a little bit of a longer term outlook on Gulfstream wondering about marine in combat I think marine you'd previously said expect kind of $4 million to $500 million in incremental revenue in a year.
Last year, you were at the high end of that this year your.
Forecasting a little bit below that so maybe if you could update us there on kind of the longer term thinking.
You had said kind of low growth over the next couple of years now youre talking about a decline. So so what's the longer term view I guess on combat and how much could the.
Fiscal 'twenty, two budget that still yet to be decided but it looks pretty good for you guys how that might influence things.
So let's talk about marine.
Have for some time said that we expected revenue growth in the four to 500.
Million dollar range, we still expect that.
Next year is a little bit later or 300 million dollar increase and that's largely just workload timing.
When I go to combat.
So I think what we are anticipating.
Some decrease in pressure on the army budget.
Pretty well.
In 2003 in particular, so we're we're pretty early on and in the budget.
For that fiscal year, we don't have full OMB.
But I think that the pressures on the army budget had been very well articulated and while we expect that ultimately the funding levels are.
Platform programs.
Will be sufficient and relatively stable, we will see some.
Rather dramatic drop offs in O&M funded accounts like maintenance for example, so we're factoring all of that into that.
<unk> increased army Pasha.
We're factoring all of that into our estimate for it.
Between one and 3% lower growth this year, but we anticipate growth returning.
There's a number of these international orders come in.
And a couple of years as well as Nuomi start.
So I think we have given you a balanced and realistic view of combat.
Okay and a quick follow up what are you assuming for the CR. This year in terms of whats what you baked into your defense guidance.
So.
So this particular C are given our portfolio in the prior year funding levels.
We don't see.
A material impact at all almost nothing.
The next question comes from David Strauss from Barclays. Please go ahead.
You already got it. Thank you you've already got David.
How do you go for it.
Good morning.
My apologies, we have Matt Akers from Wells Fargo. Please go ahead.
Hi, guys. Thanks for the question.
There was some commentary around the budget discussions about but that should go away.
Three a year on Virginia class.
How feasible that is sort of what what further investments required or what kind of timeframe that might be possible.
So we've been talking to.
Our navy customer and clearly some investments would be required but I think two at the moment, we need to get the supply chain stabilized on the.
Two of your cadence.
Before we actually think about really ramping up to three it is doable just need some some time for that supply chain to adjust from the ravages of Covid.
Great. Thanks, and I guess, a couple detail within the cash flow.
Outlook for 'twenty two with.
Can you say, how big the the impact of the prebuilt is that you discuss our Gulfstream, but then also.
Could you just update it what's the latest on the large international receivable and without meaningful impact for 2022.
Yes, I think on the on the Gulfstream side, while we are.
Steve You mentioned the ramp up on the 700 and the prebuilt on the 800, that's not a material impact that we see in terms of the headwind Gulfstream ought to be a nice producer of cash again. This year, obviously not quite to the extent as last year. We as we mentioned, we so long on the inventory in particular in the test airplanes. So it wont have quite the trajectory it did last year, but it will.
There will be a nice contributor on cash so don't see that as a headwind.
The international side, the international Canadian wheeled vehicle program, we've talked about for some time remains on track that program is in a great position. Both in terms of the performance of the vehicle and the performance of the.
The production line and we continue to receive payments as scheduled for the renegotiated.
Extension of that contract that occurred back in 2020, so all in a good place in that regard.
Operator, we will take one last question. Please go ahead.
Thank you. So our final question comes from Richard Safran from Seaport Global. Please go ahead.
Hi, Good morning, Phebe, Jason and Howard how are you doing.
So our core.
<unk>.
He was impressed by the $32 billion comment that you made.
What percent of that is adjudicated in 'twenty two is it all of it and would you be able to tell me how much of that is re competes and I ask because I'm assuming that the re competes come with a bit of a harder win probability.
Those are in largely new work.
And the $32 billion and and they have now.
<unk> customer adjudicate that as they get to it.
But I think we've recognized as well that not only is it the customer decision cycle, but it's also.
Environment of.
Rapid tests that affect the timing of any of these days.
These wins.
And there are significant.
Yes, and just as a.
Very quick follow up here, Jason I heard your opening comments about.
About what you were going to do with that.
I wanted to know just to be clear.
Your fourth quarter maturities is that the extent of debt reduction this year and if you would longer term could you just tell me what youre your overall.
Our debt reduction target as and when you think you might be able to get there.
Yes, the 1 billion that matures in November of this year as the only maturity. This year, so you've got that right in.
In terms of the longer term, we will obviously play that out as it goes we've been we've indicated that we have a reasonable debt ladder out over the next several years that offers us the opportunity to continue to step down the debt and call. It $1 billion to 1 billion and a half increments over time that said, we've never indicated we were going to go back to the essentially zero net debt.
We had before the CSR acquisition, so somewhere in that period with flexibility remaining open will decide where the right point is to settle out on that and frankly, if there is an overarching sort of guiding light that we have around that it's continuing to target.
Try to sustain a mid a credit rating and obviously, there's a lot of factors that go into that but that that's really sort of the.
The company that we have around around that trajectory.
Well. Thank you all for joining our call today.
And as a reminder, please refer to our website for the fourth quarter earnings release, and our highlights presentation, which will now include <unk>.
Our outlook if you have any additional questions I can be reached 703 870 63117.
Thank you Katy.
Thank you all for joining this now concludes today's call you may now disconnect your lines.
Okay.