Q2 2022 General Dynamics Corp Earnings Call
Okay.
Good morning, and welcome to the General dynamics second quarter 2022 earnings call.
My name is breaker and I will be your event specialist today.
During the presentation you have the opportunity to ask a question.
By pressing stuff live by one on your telephone keypad.
Please note you may ask one question and one follow up at this time.
I now have the pleasure of handing the call over to our host Howard Rubel, Vice President Investor Relations. So Howard. Please go ahead.
Thank you operator, and good morning, everyone.
Welcome to the general dynamics second quarter 2022 conference call.
Any forward looking statements made today represent our estimates regarding the company's outlook. These estimates are subject to some risks and uncertainties.
Additional information regarding these factors is contained in the company's 10-K, 10-Q and 8-K filings.
We will also refer to certain non-GAAP financial measures for additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures. Please see the slides that accompany this webcast, which are available on the investor relations page of <unk>.
Our website Investor relations Dot Gd Dot com.
With that completed I would like to turn the call over to our senior Vice President and Chief Financial Officer, Jason Aiken.
Thank you Howard good morning, everyone and thanks for being with Us.
Before we get started I want to let you all know that our chairman and Chief Executive Officer, Phebe Novakovic isn't able to join US This morning.
She recently came down with Covid, but not to worry she is on the mend and doing well, but she has asked me to cover today's call.
With me is Bill Moss, our vice President and corporate controller, who will cover some of the financial particulars that I would normally address.
So with that let's get into the results.
Earlier. This morning, we reported earnings of $2 75 per diluted share on revenue of $9 2 billion operating.
Operating earnings of $978 million earnings before taxes of $923 million and net income of $766 million.
Revenue was essentially flat against the second quarter last year, but operating earnings were up $19 million earnings before taxes were up $42 million and net earnings were up $29 million.
Earnings per share were up 14.
Five 4% increase.
To be a little more granular we enjoyed revenue increases at aerospace and marine systems offset by declines at combat systems and technologies.
We also had margin improvement in three of the four segments, which led to higher operating earnings and earnings before taxes against the year ago quarter.
From a slightly different perspective, we beat consensus by <unk> <unk> per share on somewhat lower revenue, but somewhat higher operating margin than anticipated by the sell side.
This led to the modest earnings beat.
On a year to date basis revenue for all practical purposes was even with last year's first half. Similarly operating earnings were essentially flat, but earnings before taxes were up $46 million net.
Net earnings were up 51 million and EPS was up 25.
Almost 5%.
In the quarter free cash flow of $435 million was 57% of net income.
Cash flow from operating activities was 86% of net income.
This was pretty good in light of the powerful first quarter cash to that point year to date free cash flow of $2 3 billion was 151% of net earnings.
In summary, we had a solid quarter from an earnings perspective, and a year to date results give us a solid start to the year.
So let me move right into some color around the performance of the business segments have bill add color around cash backlog taxes and deployment of cash and then I'll provide updated guidance I'll try to keep my remarks brief to leave ample opportunity for questions.
First aerospace.
Aerospace had revenue of $1 9 billion operating earnings of $238 million and a 12, 7% operating margin revs.
Revenue was $245 million more than the year ago quarter, or 15, 1% largely as a result of higher service center sales at Gulfstream and higher service volume, particularly U S. B o's at jet aviation.
Operating earnings are up $43 million or 22, 1% on a 70 basis point improvement in margins.
So increased sales volume coupled with improved margins leads to very good operating leverage.
We captured improved revenue on only 22 deliveries.
We didn't deliver for <unk> 506, hundreds that were scheduled to deliver in the quarter.
They've been deferred at customer request to the third quarter awaiting removal of the FAA wind directive.
However, nine 506 hundreds in fact were delivered to customers in the quarter. So we delivered nine of the 13 that were planned in the quarter.
From an order perspective, we did very well once again.
In dollar terms aerospace had a book to bill of two to one Gulfstream.
Aircraft alone had a book to Bill of two seven to one even stronger if expressed in unit terms.
As previously discussed sales activity truly accelerated in the middle of February 2021, and continued on to the second quarter of this year the pipeline and sales activity remained strong as we enter this quarter. The Farnborough airshow was a good one for us.
From a new product perspective, the G 500, 600 continued to perform well mark.
Margins are improving on a consistent basis and quality is superb.
We're making good progress on the flight test of the software update for landing in high winds and expect a removal of the FAA directed in mid September .
Recall that last quarter, we advised you of a risk of a three to six months delay for certification of the <unk> 700 to second quarter 2023, as a result of the time consuming work on model based software validation.
As a result of the flight Sciences engineering resources, we needed to redeploy onto the work related to the <unk> 500, 600, FAA limitation on landings and high wind conditions the risk to the G 700 schedule has become a reality.
As we've previously advised this will not adversely impact our financial plan for 2022 and 2023.
We feel confident that the G 800 will follow the G 700 by about six months.
Looking forward, we plan to 123 deliveries for the year and we fully expect to do just that.
Turning to defense combat systems had revenue of $1 7 billion.
Down 12, 3% over the year ago quarter.
Revenue was impacted by Ajax at both land systems, and Eos bomb bodies at Ots and some program mix.
Operating earnings of $245 million were off against last year's quarter by seven 9% with a 70 basis point improvement in margins.
Operating margin was a strong 14, 7%.
On a sequential basis revenue was very similar to the first quarter, but operating earnings were up seven 9% or $18 million on a 110 basis point improvement in operating margin.
For the first half combat systems revenue was down 10, 2% and operating earnings were down only seven 5% on a 40 basis point improvement in margins.
And June land systems was awarded the mobile protected firepower contract. The first all new combat vehicles to the army in decades.
The initial award for L. Rip, one was $410 million for 25 vehicles.
The program of record for L. Rip is $1 $1 billion for 95 vehicles through 2026, the entire program requirement is 500 vehicles for more than $5 billion.
The program fills a critical gap in the Army's Infantry Brigade combat force and we expect to move out swiftly on the program.
The quarter was very good for combat systems from an orders perspective with a one four to one book to Bill leading to an increase in total backlog and estimated potential contract value <unk>.
Demand for our products, particularly our combat vehicles remained strong with Europe , leading the way.
International order opportunities for Abrams are particularly strong.
Yeah.
This was an impressive operating performance once again by the combat systems group and a constrained revenue environment.
Marine systems revenue of $2 six 5 billion was up $115 million over the year ago quarter. It was flat sequentially, but up year to date.
In the quarter growth was led by Columbia.
And repair work volume for the first half revenue was up $283 million or five 6%. This is very impressive continued growth.
Operating earnings were $211 million in the quarter essentially flat with the year ago quarter. As a result of a 30 basis point reduction in margin.
The margin compression was the result of the impact on electric boat of additional scheduled delays in the Virginia program from the supply chain as it struggles with recovering from Covid.
He is working closely with the navy and suppliers, including embedding operating and engineering personnel on site to restore the necessary Virginia program cadence.
Nonetheless electric boats performance remained strong and while still early in the Columbia first ship construction contract the program remains on cost and schedule.
Total backlog of almost $42 billion remains robust and is by far the largest of our operating groups.
And lastly technologies the segment had revenue of $3 billion in the quarter down $158 million from the year ago quarter or 5%.
Two thirds of the decline was attributed to mission systems largely related to their continuing struggle with a shortage of chips, which continues to plague their ability to deliver certain products.
On the other hand operating earnings of $304 million were down only $4 million or one 3% on a 40 basis point improvement in operating margin to 10, 1%.
EBITDA margin was an impressive 14, 1%, including state and local taxes, which are a 50 basis point drag on that result.
Operating performance at <unk> was particularly strong 140 basis points better than the year ago quarter.
These are industry leading margin figures.
Technologies had a good order activity in the quarter with book to Bill of one to one and good order prospects on the Horizon mission.
Mission systems had nice orders from many of their product offering, especially those impacted by the chip shortage. The pipeline remains healthy in most of our federal it lines of business as the government continues to modernize and upgrade its mission support systems <unk>.
<unk> has the opportunity to submit $35 billion in opportunities this year, including $17 billion in the third quarter, most of which represents new work.
That concludes my remarks with respect to a solid quarter and first half I'll now turn the call over to Bill for further remarks, and then I'll provide our updated guidance. Thank you Jason and good morning.
Starting with cash performance in the quarter from an operating cash flow perspective, we generated over $650 million, which following our strong first quarter performance brings us to over $2 $6 billion for the first six months of the year.
This was achieved once again on the strength of the Gulfstream Order book, an additional collections on our large international combat vehicle contract, which continues to receive payments as scheduled according to the contract restructure that occurred in 2020.
Including capital expenditures, our free cash flow was $435 million for the quarter and $2 $3 billion year to date, yielding a conversion rate of 151% year to date.
The strong performance, so far reinforces our outlook for the year of free cash flow conversion at or above 100% of net income.
And of course as a reminder, that outlook assumes current law with respect to the tax treatment of research and development expenditures is the Congress acts to differ or reverse the current capitalization requirement, we would expect free cash flow for the year at or above 110% of net income.
Looking at capital deployment capital expenditures were $224 million in the quarter or two 4% of sales that's up from last year consistent with our expectation to be around two 5% of sales for the year.
For the first six months were closer to 2% of sales the two 5% remains our full year target.
We also paid $349 million in dividends and spent approximately $800 million on the repurchase of $3 6 million shares that brings year to date repurchases to $4 9 million shares for just shy of $1 $1 billion.
The net result at the end of the second quarter was a cash balance of $2 2 billion and a net debt position of $9 3 billion.
Down more than $2 billion from this time last year.
As a result net interest expense in the quarter was $95 million down from $109 million in the second quarter of 2021.
That brings the interest expense for the first half of the year to $193 million down from $232 million for the same period in 2021.
At this point, we continue to expect our interest expense for the year to be approximately $380 million, including the assumed repayment of $1 billion of notes that mature in the fourth quarter.
The tax rate in the quarter was 17%, bringing the rate for the first half to 15, 6%.
So no change to our outlook of 16% for the full year, but of course that implies a rate in the mid 16% range for the second half of the year to arrive at that outcome.
<unk> that for you we would expect the rate to be somewhat lower in the third quarter and higher than the fourth.
Order activity and backlog were once again, a strong story in the second quarter with a one one to one book to Bill for the company as a whole as Jason mentioned order activity in aerospace led the way with a two times book to Bill, which is the fifth consecutive quarter. The book to Bill for the group has been one.
Six times or higher as a result, aerospace backlog is up over $5 billion in the past year and increase of almost 40%.
During the quarter, we finalized negotiations on the restructure of the last of our arrangements with a fractional aircraft operator, which resulted in a roughly $300 million reduction in the aerospace backlog and a $900 million reduction in aircraft options. This action essentially clears our backlog of any exposure to frac.
<unk> customers and has no impact on our production and revenue forecast for 2022 and beyond.
On the defense side combat systems and technologies also had solid quarters with a one four times and a one times book to Bill respectively.
The increase in the combat systems backlog was particularly notable given the headwind from foreign exchange rate fluctuations of over $200 million in the quarter and $300 million year to date.
Incidental either FX fluctuations also negatively impacted <unk> revenue by $65 million in the first half of the year as the euro fell to near parity with the dollar.
We finished the quarter with a total backlog of $87 6 billion, while total potential contract value, including options and <unk> contracts was 126 billion.
That concludes my remarks, I'll turn it back over to Jason to give you an update on our guidance for 2022 and wrap up remarks.
Thanks Bill.
Let me do my best to give you an updated forecast.
The figures I'm about to give you our all compared to our January forecast, which I won't repeat there is however, a chart with respect to this that will be posted on our website, which should be helpful.
In aerospace, we expect an additional $200 million of revenue with an operating margin of around 12, 9%, which is 10 basis points higher than we previously forecast.
This will result in additional operating earnings there could be some upside here. If we can deliver out a few more planes in the year.
With respect to the defense businesses combat systems should be on the low end of our revenue range with an improvement of up to 50 basis points of operating margin. So total revenue around $7 $1 billion and.
Margin around 15%.
There is no change to marine systems revenue, but 30 basis points lower margin. So annual revenue of $10 8 billion with an operating margin around eight 3% for the reasons I previously described to you.
Technologies revenue will be in the middle of the forecasted revenue range at the same operating margin driven by <unk> with three 5% year over year growth. So.
So for the group, we expect annual revenue of around $12 9 billion.
With an operating margin around 10%.
So on a company wide basis, we see annual revenue with the higher end of our initial guidance and an overall operating margin around 10, 8%, which is unchanged. This rolls up to EPS at the high end of our previous guidance range in short, we expect only modest deviation from our initial guidance.
That concludes my remarks, and we will be pleased to take your questions.
Thank you Jason 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.
Thank you.
If you would like to ask a question. Please press star followed by one on your.
Thank you Pat.
If you change your mind, please press <unk>.
Yeah.
We have our first question from.
Well that followed.
With that research. Please go ahead, when you're ready on that.
Thanks, so much and good morning.
Morning, Rob.
Jason I'll kick it off with one for you the.
The Big question, we've been getting from folks is what the impact could be on business jet in the aerospace division from a slowdown in the global economy and I was wondering if you could give us some perspectives on how this could play out and how aerospace c's differently positioned from where it was say in 2007 2008.
Yes.
Yeah. So I think the most important point here Rob is the robust nature of the demand we've seen up to this point.
The order activity that that's resulted in an extended backlog that that provides us.
Not to mention frankly, and bill spoke to this a little bit in terms of some of the clean up in the quarter, but but the durability of the backlog that continues to just increase the quality of that order book.
As we move forward so.
Obviously, we can't predict when and what any type of slowdown will look like there's a lot of talk out in the market about.
Interest rates inflation, and the stock market recession potential and so on but.
To be completely Frank with you we have not yet seen any impact of that in terms of our order pipeline and the resulting order activity that we've seen there continues to be very strong customer demand, we're continuing to see that.
We embark here into the third quarter.
And so I think bottom line between the size of the backlog the ongoing order activity the durability of that backlog.
Which at this point is in excess of two five times, our annual sales for the group.
Notwithstanding the possibility of economic slowdown or similar conditions, we remain very confident in and steadfast in our outlook for the next couple of years that we've provided in terms of 'twenty three 'twenty four and beyond.
Okay. Thanks for that and then as a follow up you mentioned the Ajax program in the combat systems Division could you give us an update of what the situation is there and how it slides pan out from here. Thank you.
Sure. So the program is proceeding the vehicle tests are continuing and they continue to confirm frankly the vehicle performance.
You've seen to date.
With respect to some of the things that the customer has been focused on when it comes to vibration in the vehicle some concerns that emerged.
And some of the early customer trials have been addressed at this point.
And we are working right now on with the customer on securing appropriate communications gear. So I think the key here at this point is that this.
This is going to really be all about how soon approvals can move through the system as we undergo this series of deliberate tests that take time as would be the case on any new platform development program. Frankly, this is not inconsistent with experience that we would expect on any new platform development.
Like I said, we continue to work with the customer and they continue to assure us of their commitment to the program as well as over their need for this transformational capability.
So it's a it's a ongoing path forward.
Continuing to make progress and we expect to see ourselves to the other side of this.
Testing and trials periods and enough and onward and upward with the program.
Thank you we now have a question on the line from Seth Sigman of Jpmorgan. Please go ahead when you're ready.
Thanks very much.
Good morning.
Good morning.
Good morning.
Just to start off I'm sure you've gotten this question a bunch of times, but.
With regard to moving forward on <unk> 500, 600 at the landing restriction it sounds like Youre still on track to have that lifted this quarter and just any color you can give on what gives you the confidence there given.
At Gulfstream I think has done all this work, but you are dependent on the FAA to to do their work.
Now you kind of summed it up nicely there Seth. The fact is we have the software fix for this issue completed its been developed it has been tested it has been flown and so we have great confidence.
In the efficacy of that software fix.
And we are currently working with the FAA Gulfstream and the FAA work FAA working concurrently toward.
The initiative to get this airworthiness directive resolved the program plan for that is to complete by or before mid September to your point, we are in part dependent on the resources of the FAA to make that happen.
They have been very good about this they are committing the resources that we think are necessary and the teams are working together and right now everything seems to be right on track for a resolution of this by the end of the third quarter.
Great. Thanks, and then just as a follow up.
In aerospace.
Might be kind of a crude measure, but just looking at the revenue per aircraft in the quarter. It looks pretty strong, but obviously, we don't necessarily have all the information about mix in price and stuff like that can you tell us what the service growth.
Was to help us hone in on that and then you mentioned a fractional settlement did that have any impact on the on the revenue in the quarter or any other.
Backlog mechanics.
Affect our revenue.
Yes, so on the service side, we did see very strong growth in the quarter. That's continuing a trend that we've seen since we've been emerging from from the pandemic.
Both including sort of flight hour ramp up as activity in flight activity picks up around the world as well as <unk> activity at our jet aviation.
Particularly on the U S side, So I think we had.
Somewhere in excess of a 35% growth year over year in the quarter and service activity and it's frankly that service activity that is driving the upside to the revenue.
And the outlook for for the Aerospace group for the year as I mentioned earlier, we're still expecting our 123 aircraft deliveries for the year. So.
A couple of hundred million dollars of additional revenue for the year is coming from that service side of the business and I know you referenced the cleanup, we mentioned to the backlog, but I sort of missed the latter part of your question do you mind repeating what you were getting out there I'm sorry Seth.
And that will be isn't already dropped off the line.
Perhaps you were getting at whether any of the cleanup and the backlog has affected any of the revenue or other aspects of the aerospace outlook and the fact is no. We're in good shape there.
The clean up as I mentioned I think as Bill mentioned in the remarks was related to an ongoing negotiation, we have with our really last sizeable fractional customer in that backlog.
And we've come to a settlement with that customer remove some of the airplanes and and expired some of the options there and none of that activity has any impact on the outlook for the business. So all forecast remain intact.
Great. Thank you.
Operator know if we have our next question on <unk>.
We now have our next question from David Strauss of Barclays. Your line is open David.
Thanks, Good morning.
Good morning, David.
Jason when we were when we were.
Now on the Gulf stream back in June I think.
You talked the.
So all through talked about being about 70% of the way through.
This software validation tests on the 700 can you just give us an update exactly where that where that stands today.
Yes, I don't have an exact number on the update of 70% obviously the progress on that software validation has been.
<unk> slowed somewhat by the fact that we've had to divert common resources in terms of those flight Sciences engineers over to the fix on the 506 hundred so that as I mentioned before is really what's.
Sort of affirming our risk on the slip into 700 entry into service. So there's been some modest progress there, but but call. It in that 70 plus percent range remains where we are at this point as soon as we get through that.
Our worthiness directive resolution, we will get those resources back on that program.
And moving forward to that updated state.
Yeah.
Okay, and then as a follow up can you update us on.
Supply chain.
Any any constraints, you're kind of seeing on the Gulfstream side of things I think.
When we were down there it was discussed about some shortages on the engine side.
How do you feel about.
The overall supply chain at Gulfstream and your ability to hit that 123 delivery number for the full year.
Yes, so as you referenced supply chain definitely not to sugar coat. It is it's an ongoing issue for the industry.
It's no surprise or no secret that I think the commercial aerospace industry has had a fragile supply chain, even before COVID-19 hit so it's probably no surprise that that's only been exacerbated and I'd say, it's a daily battle.
But that said I think there is no team, but I'd rather have tackle this issue than the Gulfstream team down there they have people embedded throughout the supply chain actively managing these issues with our partners to.
To help them meet our commitments to our customers and so I think while there can be issues from supplier to supplier and it's an active management activity that's going on.
It is important to consider.
The impact of any part or sub system or so on to the overall tack time of the airplane production process and ultimately the delivery schedule. So.
Just because let's say a particular part may be.
Missing its due on dock date doesn't necessarily mean that that's going to impact overall completion of the airplane or delivery of the customer between work around that our team has and other efforts to keep the overall aircraft flow moving we don't see any impact.
To the delivery outlook that we have for the year. Obviously these types of activities aren't optimal we want to get this corrected frankly for the benefit of the entire ecosystem, but we continue to have great confidence in the team at Gulfstream to get through the challenge and they'll and they'll meet their aircraft delivery forecast for the year.
Yes.
Thanks very much.
Sure.
Yeah.
Thank you for that we now have the next question from Ron.
Think of America. Please go ahead, when you're ready Ron.
Yes. Thank you good morning, everyone.
So Julien Roch.
Question for you on <unk>.
And then kind of maybe going back to the supply chain, but.
Focus on a little bit more on so.
So it seems like Youre Gulfstream you guys are managing.
The constraints well, we've heard from some of the engine producers castings, and forgings and things are tight and they're managing through that.
But it seems like you've got a lot more flexibility in your commercial business than you do in your defense business.
One of the themes it seems have emerged from this quarter.
Is that because of the way defense contracting is done we.
To hear a shortages of ABB and see is there is there anything you guys can do about chip shortages buying inventory ahead or are you just so constrained, but the kind of the materials management acquisition rules that you can't do that because it seems like defense is just sort of fundamentally this sort of just in time business.
But we're in sort of a just in today's world If you get the gist.
So my question.
Yeah, No. It's a great question, Ron and I'll kind of break that down into two aspects of our business sort of the short short term side in the long term side and the piece that we're <unk>.
Being a bigger issue and on the short term side and you referred to the chip shortage, it's really that the mission systems piece that we've talked about for some time now and.
And again, that's because these are quick turn orders there are product driven they're dependent on these chips and you got to get them out the door and obviously these are highly engineered high end design engineering type products. So to your point the specifications are quite specific.
That said number one I think the team is doing a tremendous job trying to develop workarounds. They are out their ordering parts in advance where they can.
It's tough to get your spot in line because this is an issue affecting not just the industry, but the broader economy, but theyre doing their best they can on that front.
They are also working to change designs modify designs, except alternate parts, where they can.
And be as nimble as they can on that front, but that obviously take some time I think importantly for that side of the business. This is just a timing issue.
We have seen here if you take for example, the second quarter and the.
Product it wasn't able to ship at the end of the quarter. We've seen the vast majority of that actually gets shipped in the first month of the third quarter. So that is flowing through it doesn't mean, we're out of the woods. Yet I think this is going to be something that's going to bug us for the balance of the year and maybe spillover a little into next year.
But the fact is we've seen some of the strongest order activity from the customer in this area. So I think this is just a timing thing will come through it in the order demand is there so that this will continue.
On into the balance of this year and beyond so that's sort of on the short term side of the business. The other big supply chain side that we're seeing frankly is a little bit different it's on frankly, the longest term longest.
Leg side of the business and that's in the shipbuilding side and.
And really there it's less about.
Parts of material availability, it's about the availability of labor.
The price and availability of skilled labor and so we're seeing that.
Really hit the supply chain for us and for US It's focused primarily on the Virginia class program. When you think of Nasco out on the West Coast and frankly, the Columbia program at electric boat those are all.
Hitting this in stride, but on the Virginia program the supply chain has stumbled a little bit more and when you think about it we have been working hard even prior to COVID-19 to ramp up our resources on those programs to support two per year, Virginia as well as the addition of Colombia, and we're making pretty good headwind on that.
And then and then Covid hit and you take two steps back instead of or at least a pause instead of needing to take two steps forward. So when you think about shipbuilding in the nature of that business a shock like that to the system can hit it quickly, but it just takes time for it to recover and so that's what we're seeing on the Virginia program as the supply chain is struggling to catch back up.
<unk>.
And sort of hit that that cadence that they need to be on but again like Gulfstream like mission systems Electric boat has got all the resources that we can bring to bear and all of the sense of urgency to apply to that supply chain.
And once we can get that scheduled right I think we'll be back on track, but in the meantime that schedule extension brings cost and that cost brings an impact to margins and that's what's affecting our outlook for that business. So I'm trying to give you a complete an answer as I can on the supply chain as it hits the defense side. So that's sort of both ends of the spectrum from my perspective.
Yeah got it thanks, and then maybe just one quick follow up on combat with all the awards that have been coming in and the activity in Europe when would you expect.
That to flow through the business is that a 'twenty three kind of thing.
When we would expect to see that kind of at least on the topline.
Yes. Good question I wanted to take a step back and maybe give a little clarity on what we've seen through the first half of this year and then what that means for where we're going obviously in the first half of the year were down Notionally, a little bit more than you would expect given our full year outlook I think we're about 10% down year to date.
If you do some quick check and Youll see that.
That's really a function of is that last year, our revenue per quarter was essentially consistent throughout the year first quarter second quarter third quarter, which is really in contrast to the tried and true annual cycle that we see in combat systems and we're frankly once again seeing this year, which is a sequential ladder. If you will lowest in the first quarter rising to the fourth.
Quarter, so that created a little unusual headwind in terms of the year over year comparisons, but but we are still based on the way the second half plays out.
Still expecting to be at the low end of our revenue forecast. So what does that imply that implies about a three 5% growth in the second half versus.
Versus the second half of last year, and I think thats eminently achievable by that group.
But looking beyond that to your point, there's a tremendous amount of activity in this market obviously as I mentioned before the <unk> Award is a big one for us that's a whole new additive space in the Infantry Brigade combat structure there.
And there is tremendous demand signals internationally as you mentioned, obviously, we're working towards.
The tank opportunity in Poland.
Other international tank opportunities as I mentioned before.
And then you alluded to sort of demand generally internationally and everybody has kind of the suspicion that everything going on in eastern Europe is going to lead to significant growth for <unk>.
On the defense side, and certainly we are seeing those demand signals I think the key thing that we all have to keep in mind here is to keep in check our expectations with respect to timing.
The demand signals are there we are having regular dialogue and ongoing conversation with those customers about that interest, but it just takes time for interest to turn into budgets to turn into appropriations to turn into contracts that turned into revenue. So I think it's all consistent with our long term outlet outlook that by 2024 and beyond we ought to see.
Nice uptick trajectory.
And combat systems, and we're still talking low to low to mid single digit growth, but we ought to see an inflection point to growth out in that period and all of that is supportive of this but in the meantime, I'd just reiterate our emphasis that than that.
The focus in the story for combat systems is a margin one and you've seen how well once again. This group can perform on the margin side and be a really good cyclical no matter whats happening on the top line.
Thank you.
Next question comes from.
Spin Hahn with Melius research. Your line is open all of that.
Hey, good morning.
Good morning, Jason I, just wanted to go back to labor and talk across all all the businesses, where you stand where obviously you said shipbuilding is a tough one so maybe thats the.
The most challenging area, but when you look across the businesses what is the labor and talent acquisition situation.
Yes, you you touched on it Rob the shipbuilding side has been the toughest one we've seen that in Maine, we have seen that all over sort of the new England not shipyards as we've tried to ramp up and frankly those are the two shipyards at ABB and Bath.
We have the most opportunity to ramp up and so.
You got it it's not like a lot of other industries, where youre hearing things about remote work and the ability to pull people from all over the country and all over the world you've got to get shipbuilders in those states and in those regions to do that work and so that's what presents the challenge. The good news is we as I mentioned well before Covid, we had been ramping up and anticipating ramp up and so we've had a lot of.
<unk> put in place as well as great partnerships at the state and local levels.
To get the kind of trade schools, and apprenticeships and so on to make that happen. So I think the resources are in place. We've just got to keep our flow moving through those those processes keep our training capabilities up and running and we can catch back up with this it's just going to take time and again that just sort of the nature of shipbuilding and it's a challenge that those teams are up to.
When you look on the other end of the spectrum I think it's all about <unk> and obviously they are in a hyper competitive market for Hyperscale talent.
That only gets more competitive all the time I think the.
<unk>, leading position they have in their markets.
The strong culture, they have and continue to build.
With that workforce.
And the opportunities that they provide their workforce within the company.
Continue to I think put them in a good position to compete in.
Keep and grow that talent.
I'm not going to sugarcoat it though it is a war for talent every day and we just it's our job to keep up with that and punch above our weight and continue to retain and drawing in the kind of talent they need to do that work and as that business grows. So those are kind of the two ends of the spectrum I think the other area that we monitor it closely as at Gulfstream, obviously with the growth. They have you need people to do that.
I think no.
Not to underestimate the challenge that they have but I think they've done a really good job of keeping up with it and I don't see that as being as high in nail an item for Gulfstream in the moment, but it's nothing that we can take our eye off the ball and they've got a they've got to keep at it but I think they are up to that challenge as well.
Okay, and then just as a follow up going specifically to electric boat and the focus on getting Columbia ramped up in the labor situation. You just talked about there have we seen any work packages move between electric boat in Newport News in order to manage volumes and address labor shortages either for you or for.
Them.
So Rob I hate to give you this answer but thats the kind of thing I don't think I should probably get into too greater detail, where obviously worked very closely with them as our teaming partner on Virginia as well as our subcontractor on Colombia, and it's a three part conversation between us Newport and the Navy to make sure that we're doing everything we can to support that customer and the <unk>.
With that they need and I think that's the most important message is we're going to do everything we can to support that customer and we're working together as a team to do that in both sides I think have a mutuality around that that's very important and very supportive.
Okay fair enough thanks, guys.
Sure.
Thank you.
Now has the next question on the same lines from Doug Hotness of Bernstein. Please go ahead, when you're ready.
Hi, good morning, Thank you.
Hey, good morning, So I wanted to.
I wanted to see if you could give us a little bit of a picture on the mix of Gulfstream orders in.
In particular, the <unk> hundred 50 has.
<unk> tended longer then I. Thank you all for expected strong demand can you give us a sense of what the mix is and then also how youre looking at.
<unk> hundred 50 production over time.
Yes, Youre absolutely right the <unk> hundred 50 <unk>.
Activity continues to be robust.
Frankly beyond even what we think perhaps conservatively expected.
I think we've said a couple of times now in the past and it continues to be the case that the announcement of the <unk> 700, and the G 800 have absolutely for our market and our customers' clarified.
Where we are with this family excuse me family of aircraft and it clarifies what the $650 in terms of an opportunity for those customers. So.
That airplane I think continues to have legs to it.
Make no mistake about it the 800 is the replacement for the $6 50, and as the 800 comes into service, we will work the 650 out.
There may be some modest overlap as we as we feather in from one to the other but I think what this outsized demand on the 650 does is it gives us a lot of Optionality gives us opportunity. If this demand environment continues.
With respect to our outlooks for 'twenty three in 2024, we'll have to see how that plays out. It's also giving us the optionality to deal with some of these issues we've talked about with the certification process is the 700 slips.
We're not we're not backtracking on our commitments to the.
Delivery units the revenue and the earnings forecast that we've given for 'twenty, two 'twenty, three and 'twenty four and frankly, the 650 demand is helping with that as well as the demand environment in general and to that point you kind of asked about the whole portfolio and I think there is some question and speculation out there among the community.
This airworthiness directive and what that might mean for the 506 hundred and I would tell you again, we delivered the vast majority of the airplanes that we intended to do this quarter, we expect that to be resolved by the end of the third quarter and when you look at the order activity in the second quarter I think the 500 600 represented about half the order activity that we had so there's no signs of slowing down there are <unk>.
Customers understand what this little bump in the road is and so those those platforms continue to be very well supported so across the board and I didn't even mention the <unk> hundred 80 that continues to have great order demand I think the mid cabin space has really picked up in the aftermath of Covid, So really across the board and the portfolio, we see broad based demand.
Our airplanes.
And then just as a follow up switching over to technologies I mean, I know there's been you've had challenges with award protests in.
So there have been some difficulties, but this is something where we've been looking for growth for a long time and if you look out over the next few years I mean, how are you thinking about technologies in.
Terms of a growth trajectory trajectory, because we just haven't really seen it yet.
So obviously this is a conversation we've been in for some time now and I think if you look back we had low single digit growth last year, we're expecting modestly better growth this year and as I reiterated earlier, our updated outlook for the year is spot on in the middle of our revenue forecast range. We gave back in January .
Obviously, we're off to a little bit of a slower start to the year, but I would say a little bit of a slower start and that's largely attributable to mission systems I won't reiterate those issues, but we do believe that that is a timing issue for us.
<unk> is flat for the first half, but we absolutely have a clear line of sight to growth for them in the second half and so look I mean, what gives us confidence in this outlook I think the way we look at it is not any one particular win or loss or one program or another it's really about all of the key what I.
Think about it as leading indicator date.
Data or statistics that are around a business that is made up of thousands of contracts.
Across the portfolio.
You are talking about order activity when in capture rates on new as well as Recompete business book to Bill backlog potential contract value, so on and so forth and all of those metrics for us continue.
To support an outlook for this business of low to mid single digit growth.
I mean, you look at <unk> for example, they had awards in the first half that were valued at about $7 billion.
And that's significantly higher than the first half of last year and the vast majority of that represents new work.
Obviously this can be frustrating I think for you all and sometimes it is for us given the the particularly lumpy aspect of this business when it comes to the protest and delayed award adjudication process. So it can come in fits and starts.
But we remain bullish on this and we think Bottomline, we're talking about a low to mid single digit growth outlook and frankly as I think about it you may have noticed a couple of weeks after the quarter.
We had that announcement of the Air Force European support contracts, some 900 plus million dollars opportunity if that had happened a couple of weeks earlier being kind of a completely different conversation around the book to bill for for the technology group in the quarter. So that's just a one off example, but it speaks to the point that while timing can be frustrating and lumpy.
And the pipeline can be a challenge to get through it doesn't change our long term outlook for this business.
Thank you, we now have pizza oven.
Please go ahead when you're ready.
Sure.
Thanks, Good morning, Jason.
Good morning, maybe we could get your updated thoughts on we've seen the markups from defense budget and working their way through the Senate and house.
How does that.
Impacting some of your defense business and then obviously.
There's been a focus on combat in technologies. So the kind of returning to growth and just kind of any color you can provide there that'd be helpful.
Yes, I think the two the two things that I'd point out. It's obviously still very early in that process, but bottom line. As you would expect shipbuilding remains extremely well supported you can see the numbers there and so that I think is just continues to be supportive of our an underpinning of our outlook for the ongoing $4 million to $500 million a year growth.
In the marine systems business so.
<unk>.
All positive there I think the greater area of maybe anxiety and speculation around combat systems and the army budgets.
We'll see where that goes this is obviously something that ebbs and flows and has a lot higher beta in terms of an army budget on an annual basis and then on the Navy strategic side, but the fact is we can't ignore the fact that there is significant amount of support among the Congress for increasing defense budgets. So.
Abrams and Stryker those continue to be.
Very critical assets in the and the army infrastructure and we think there is continued support for those and so while there's a lot of chatter around are those going to decline and what's going to happen, let's just see how it plays out I think I think we'll have to stay tuned and see.
Okay, and just as a quick follow up your thoughts on just any impact if we have a.
King resolution. Obviously this is not you guys have managed through a lot of continuing resolutions. So just thoughts on.
Any impact there.
Yes, I don't I don't see any real high anxiety in the moment, it's obviously something to your point that we've learned to work with and work around its certainly not desirable by any stretch of imagination, but it's almost become part of our annual reality.
I think until these things get into a six seven month plus type of situation. That's when it really starts to affect our shorter cycle business on the technology side, perhaps in the munitions side, but but beyond that we really don't see a significant impact at this point again, it's unfortunate we don't like it but we've learned to try to operate around it.
Thank you.
I would now.
The next question from Sheila.
From Jefferies. Please go ahead, when you're ready.
Hi, Good morning, Thank you for the time.
Good morning, good morning, Sheila.
I wanted to maybe ask that shorter term question as a follow up on that.
Technology.
It was down 3% in the first half and up 10% growth in the second half implied with the guidance.
Judy I think seems to be doing well like nearly back can you maybe bridge us on how you think about hygiene getting back growing in that second half timing of funding because a lot of the peers that maybe.
Shorter term.
Yeah, you've touched on the key issues, but I think.
The biggest piece of it is what I mentioned before is that we're already seeing here in the third quarter, our ability to catch back up on some of that delayed product shipments from the second quarter, we really got.
The bald up there towards the end of the second quarter and that that hampered the revenue for.
For the first half, but we look I don't want to I don't want to sugarcoat. The challenges mission systems is not out of the woods. So.
They're going to fight and scrap their way, but they are seeing their way towards.
Workarounds on that supply chain side, and I have a good deal of confidence that they can they can get there.
On the <unk> side. It is frustrating environment in terms of the slow pace of the outlays and frankly, we've seen that a bit on both emission systems and <unk> side.
But I think.
The hill that they have to climb in the second half is not as high and I think we've got reasonable line of sight in terms of the work Thats in the books.
And they just got to go execute on that should get them. There in the second half they've just got a little bit of go get to get in the second half so I feel even greater confidence on the <unk> side.
Okay. Thank you and then I just wanted to ask the cleanup on aerospace when we think about the 123 delivery side how much does that include.
And then given the raise was on service how much of the services business is in the backlog.
So I don't necessarily get into detailed order.
Backlog and order cancellations on the on the on an aircraft by aircraft basis, I apologize I'm going to have to punt on that one but on the service side.
Typically don't have much in the way of service activity in the backlog, we have a very modest amount in the aerospace unfunded backlog category that is related to longer term maintenance arrangements that we have with some.
Larger customers, but the.
Service activity across the board at jet Aviation and Gulfstream is really a book and bill basis on a quarterly and annual basis, so sort of a one to one typically there.
Operator, we'll just take one more question.
Thank you.
We have the last question from Cai von <unk> of Cowen.
You May proceed with your question.
Yes, thanks, so much so orders at Gulfstream four.
For aircraft you mentioned about half in the quarter was for the 500 600, you mentioned that the 650 is doing well.
Is the 800, because that's been introduced relatively lately now have a new competitor in the market that looks like they match you in range with four versus three sections. So.
<unk> hundred doing.
The demand for that aircraft is quite.
Solid Kai it's doing well every quarter booking orders I think.
Between the fact that the 650 is still taking orders and the fact that the eyes for the 800.
Still a good ways out we're not expecting a massive surge in orders as we start to move closer to that transition you might expect it to pick up and shift more from the <unk> 50 of the 800, but right now I'd tell you. It's just good solid order activity that is very much supportive of our.
Timing and our expectations for that airplane.
Terrific and could be could goodness and a little bit more color in terms of the order potential for combat you mentioned Europe is strong you mentioned Abrams how about the rest of your vehicles, how about the munitions business.
So the rest of the vehicles you have to think about our.
Our European land systems business, they have an extremely large installed base.
Wheeled and tracked combat vehicles, but on the one hand have a replacement cycle with them that offers some opportunity in the out years.
Well as it provides.
<unk> for those who are trying to <unk>.
Bring up their level of defense spending.
To do so in a way that aligns with their allies and if their allies are operating in fighting one particular platform or another.
That's an incentive for those who are starting to spend up more to achieve commonality with those allies. So we think that puts us in good stead for these opportunities that are coming out of threats in Europe .
Across the board, though it would be a little more specific a lot of a lot of this stuff is is either in the backlog or on the horizon. When you think about the Spanish <unk> vehicle, you've got again the potential or the.
I shouldn't say the potential.
And pending order for tanks out of Poland.
Talking with Romania.
Switzerland.
All of those are sort of bread and butter countries are all looking at increased spending on a variety of platforms. So.
That plus just sort of this again generic.
Increased level of indicated interest across Europe , particularly eastern Europe , I think it provides tremendous potential opportunity. It's just too early to try and count any of that and anticipate exactly when or what that looks like timing in Europe , often can be a challenge. So it would probably be a bit of a fool's errand for me to try and get too specific around that.
But we do see a good robust environment is supportive of combat Youre welcome.
And break.
Operator, I think we are we are.
We're done with the question and answer period.
And I, thank everybody for joining the call today and as a reminder.
Please refer to the general dynamics website for the second quarter earnings release, and our highlights presentation, which will contain our earnings outlook. If you have any additional questions I can be reached at 703 870 63117.
You can now indicated calls over please.
Thank you that does conclude today's call. Thank you all again for joining you may now disconnect your line.
Uh huh.