Q1 2023 General Dynamics Corp Earnings Call
Good morning, and welcome to the General dynamics first quarter 2023 earnings Conference call all participants will be in listen only mode.
After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. Please note. This event is being recorded I would now like to turn the conference call over to Howard Rubel, Vice President of Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone welcome to the General dynamics first quarter 2023 earnings 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 press release and slides.
That accompany this webcast, which are available on the Investor Relations page of our website Investor Relations Dot Gd Dot com.
On the call today are phebe, Novakovic, our chairman and Chief Executive Officer, and Jason Aiken Executive Vice President Technologies, and Chief Financial Officer, with the introductions complete I'll turn the call over to Phoebe.
Thank you Howard and good morning, everyone and thanks for being with Us.
As you can discern from our press release, we reported earnings of $2.64 per diluted share on revenue of $9 9 billion operating earnings of 938 million and net earnings of $730 million.
Revenue is up $489 million or five 2% against the first quarter last year operating earnings are up $30 million and net earnings are flat against the year ago quarter.
This increase in operating earnings was offset by a $31 million increase in the tax provision.
Recall that the first quarter 2022 tax provision was only 14%.
Nevertheless earnings per share up <unk> as a result of the stronger operating earnings and a lower share count.
The operating margin for the entire company was nine 5% 20 basis points lower than a year ago quarter.
This reflected lower operating margins in aerospace in marine, which I will address in some detail later in these remarks.
Revenue was 489 million better than first quarter 'twenty to all of the defense units were up in aerospace down slightly less than 1% on fewer aircraft deliveries.
Beat consensus by <unk> <unk> per share, we have roughly $550 million more in revenue than anticipated by the sell side and lower than anticipated margins, leading to operating earnings basically consistent with expectations.
The earnings per share beat was largely attributable to below the line items.
As Jason will amplify cash from operating activities and cash after Capex was very strong.
This is particularly impressive following a very strong cash performance in 'twenty, two and not at all typical for us in the first quarter.
Obviously, we are off to a very good start from a cash perspective.
This is an important respects a strong quarter a good foundation for the year subject to some supply chain issues that I will try to eliminate as we discuss the business segments.
At this point, let me ask Jason to provide detail on our order activity solid backlog and very strong cash performance as well as commentary about the technologies group in the quarter.
Thank you Phebe and good morning.
We had a solid quarter from an orders perspective with an overall book to bill ratio of <unk> nine to one for the company.
Order activity was particularly strong in the combat systems group, which had a book to bill of one five times.
We ended the quarter with total backlog of $89 $8 billion off one 4% from the end of last year, but up 3% from a year ago.
Our total estimated contract value, which includes options and <unk> IQ contracts ended the quarter at more than $128 billion.
Turning to our cash performance for the quarter. It was another exceptional start to the year with operating cash flow of $1 $46 billion, representing 200% of net income.
This very strong cash flow was heavily loaded in the last few weeks of the quarter.
After capital expenditures, our free cash flow for the quarter was $1 $3 billion of cash conversion rate of 178%.
While we continued to enjoy strong cash performance in aerospace and technologies. The combat systems group in particular delivered outstanding free cash flow this quarter.
As expected the UK resumed payments on the Ajax program.
This coupled with the ongoing progress payments on our other large international vehicle programs drove the group's cash performance.
This is consistent with our expectation for the year of a cash conversion rate in excess of 100%.
Now turning to capital deployment capital expenditures were $161 million or one 6% of sales in the quarter.
Similar to last year, you should expect capital expenditures to increase in subsequent quarters throughout the year.
Also in the quarter, we paid $345 million in dividends and repurchased approximately 400000 shares of stock for $90 million at just over $220 per share.
We ended the quarter with a cash balance of over $2 billion and a net debt position of $8 5 billion down nearly 800 million from year end.
As a reminder, we have $750 million of debt maturing in the second quarter and we are in a position to pay that down with the cash on hand, following the receipts at the end of the first quarter.
Our net interest expense in the quarter was $91 million compared to $98 million last year benefiting from the debt repayment in the fourth quarter of 2022.
Yeah.
Finally, we had a 17% effective tax rate in the quarter consistent with our full year guidance.
Now turning to operating performance and technologies.
We're off to a solid start.
Revenue in the quarter of $3 $2 billion was up two 5% over the prior year modestly ahead of our expectations for the start of the year.
The measures implemented at mission systems to overcome what seems to be the new normal in the supply chain are taking effect, which gives us confidence about their outlook for the balance of the year.
And <unk> had their highest quarterly revenue and earnings in four years as they continue to deliver on their year over year growth trajectory.
Operating earnings of $299 million were consistent with last year, yielding a margin of nine 2%.
As we discussed in January margins will continue to be driven by the mix of service activity and hardware volume.
Backlog grew during the quarter with the group achieving a book to Bill ratio of one to one on strong order activity in it services that included some important wins not yet factored into the backlog.
This includes the Army's flight Test school training support services contract valued at $1 7 billion.
And Air Force IQ with a total potential value of $4 $5 billion between two awardees for security support services.
And a pair of <unk> contracts with the EPA with a potential value of $380 million to support the agency's environmental and climate initiatives.
In fact, <unk> booked our highest orders they've seen since the second quarter of 2019 and their pipeline remains robust with $19 billion in submitted bids awaiting customer decision and another $84 billion in qualified opportunities identified.
Now, let me turn it back to <unk> to review the other business segments.
Thanks, Jason now, let me review the quarter in the context of the other business segments and provide detailed color that's appropriate first aerospace.
Aerospace held its own in a very difficult operating environment. It had revenue of $1 9 billion and operating earnings of $229 million with a 12, 1% operating margin.
Revenue was $11 million less than last year's first quarter. Despite the delivery of four fewer aircraft.
The fewer aircraft deliveries for almost completely offset by higher ball stream services jet aviation volume and special missions work Gulfstream.
The 21 deliveries in the quarter, our three fewer than planned to $2 <unk> did not deliver because of late engine deliveries. The other plane a large cabin for an international customer didn't deliver because the simple bureaucratic registration delays and the owners country.
Importantly, this is the first quarter in which we have missed a airplane delivery as a result of supply chain issues.
Up until now we have managed to work around late to scheduled parts delivery.
Operating earnings of 229 million or 14 million behind last year's first quarter as a result of a 70 basis point degradation in operating margin.
Operating margin in the quarter was under pressure as a result of fewer new airplane deliveries a less attractive mix severe supply chain issues, some modest cost increases from suppliers and the prebuilt a G seven hundreds.
Let's take a look at some of these elements in greater detail.
The shortage of parts to schedule from the supply chain, especially from Honeywell has created significant attestation work, which is inherently less efficient.
We have a young well trained and capable workforce. They have however, never previously been exposed to attestation work. They are doing well I am pleased to report, but it had an impact.
The other impact of late to schedule parts deliveries apart from cost growth is that we cannot increase our build rate until the supply of parts is more predictable.
Good news is that there is light at the end of the tunnel.
We see the vast majority of this problem resolving early in the third quarter, but for two large suppliers, who will take a little longer to resolve.
As most of you know we plan to deliver a considerable number of G 700 in the third and fourth quarters to do that we must build them now and incur some period costs without the related revenue.
This has impacted the first quarter and will impact the second quarter that relief is in sight as deliveries commence.
Aerospace had a decent quarter from an order perspective with a book to Bill of <unk> nine to one in dollar terms and one to one in units the.
The quarter was looking quite good until the two regional bank failures in early March.
This created a pause in the market for about three weeks.
I am pleased to report that normal activity has resumed.
Strong sales activity and customer interest is evident in this quarter.
The U S has been strong and the mid east as well China.
Remains slow.
The G 700 flight test and certification program continues to progress well the aircraft design manufacturer in the overall program are very mature.
We continue to target certification of the G 700 for late summer of this year.
Gulfstream remains committed to a safe and comprehensive certification test program production.
Production of customer G. Seven hundreds is well underway and we are preparing for entry into service, we will deliver a mature high quality aircraft.
Looking forward to next quarter, we expect to deliver 26 aircraft with rapid increases in the third and fourth quarter deliveries as we have previously indicated.
In short the aerospace team did a good job under difficult circumstances.
Next combat systems combat had revenue of $1 76 billion up four 8% over the year ago quarter, earning.
Earnings of 245 million are up seven 9% margins at 14% represent a 40 basis point improvement over the year ago quarter. So we saw a strong operating performance coupled with a nice revenue uptick.
Atlanta systems increased revenue came from the MTF ramp up Stryker sure, Ed and new international vehicle programs for Poland in Australia.
European land system, we had higher piranha volume and Ots enjoyed higher artillery program volume. So we saw increased revenue performance at each of the businesses.
Here's a little additional color on combat systems revenue results.
Foreign exchange fluctuations negatively impacted <unk> revenue in the quarter due to the strength of the dollar.
First is the Canadian dollar euro and the British pound, but for the FX headwind combat systems revenue growth would have been up seven 1% over last year, rather than the four 8% we've just reported.
We also experienced very strong order performance at combat orders in the quarter are at their highest level in more than eight years, evidenced a strong demand for munitions and international combat vehicles.
There is clear upward pressure on our forecast for combat systems revenue and earnings in the year.
Turning to marine systems once again, our shipbuilding units are demonstrating impressive revenue growth.
As an aside let me repeat a little recent history.
The first quarter of 2020 was up nine 1% against the first quarter of 19.
The first quarter 'twenty, one was up 10, 6% over 'twenty.
And first quarter 2022 was up six 8% over 21.
Finally, this quarter revenue of almost 3 billion is up 12, 9% over 2022.
This is an impressive growth ramped by any standard.
This quarter's growth was led by Columbia class construction and engineering, DDG 51, construction and some T. A L volume.
Operating earnings of $211 million in the quarter exactly the same as a year ago, but with a 90 basis point decrement in operating margin.
The primary driver of lower margins during the quarter was a charge on the Virginia program to reflect cost pressure within our supply chain and efficiency impacts at electric boat as a result of late material deliveries.
This was partially offset by Columbia margin improvement.
Other modest margin impacts included in earnings decline at Bath.
As a result of a one time pick up in the year ago quarter and cost inflation reimbursement, but does not carry profit Oh.
Overall earnings are what we expected, but revenue was higher resulting in lower margins. We anticipate that this will improve as we progress through the year.
As you know we never update guidance at this time of the year I would say, however that our quarterly progression differs from prior years and that the second quarter will be our lowest quarter because of mix and volume across the business. Nonetheless, we look forward to a very strong third and fourth quarters.
We will give you a comprehensive update at the end of next quarter as is our custom.
This concludes my remarks with respect to what was a challenging but in many respects for avoiding quarter.
Thanks, Phebe 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.
Okay.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. Your first question comes from line of Seth Sigman from Jpmorgan. Your line is open.
Thanks, very much and good morning, everyone.
Yes.
Excuse me I wonder or to ask a question about marine and at the risk of asking the question that you. Just said that are you know we never update guidance at this time of year. If you can just give us some color given what we've thought about revenue and margin at marine coming in the revenue was clearly much stronger in Q1 margin weaker for.
The obvious reason of the Virginia charge.
Can you help us from here in terms of how the Virginia contribution changes from Q1 going forward now that the charge is done.
And you know it seems Colombia is maybe coming in stronger.
And if I could tack on one follow up there's been a lot of talk about the Columbia's schedule.
Both in congressional testimony, Jr. Reports et cetera, if you can give us the latest update on how you view the schedule for Colombia.
So we think that we plan to have Q1 as are our lowest margin quarter.
And we will continue to work to that Virginia.
Is it will stabilize once we get the.
Schedule and supply chain issues resolved, but at this point in some comment on electric boat to continue to do better to offset those those costs.
So with respect to revenue, there's clearly some upside pressure there, but wasn't a whole any other additional comment for.
For the moment, so I forgot to Colombia, and I think just the Navy has clearly articulated it firmly articulated that we are ahead of the contract schedule. The contract schedule is what matters.
So let's put a little context on this we are on the Columbia, We are 16 years into the 'twenty year lead ship schedule.
I think within that context, it's indicative of the actions we have taken here before and those that we will continue to take to keep this program on schedule.
Great. Thanks very much.
Your next question comes from the line of Robert Stallard from vertical research. Your line is open.
Thanks, so much good morning.
Good morning.
Phebe I may be wrong, but it sounds like some supply chain issues in Q1 got worse. So.
So I'm wondering if you could comment on that and also what sort of mitigation plans, you're putting in place to correct. These problems.
Two specifically are you talking about a particular group while it seems like it's aerospace and the Virginia class submarine and marine.
Yeah Hell at Aerospace, we have let's let's be clear, we have been dealing with supply chain issues for some time and we've been able to manage through them. This quarter, we had two large suppliers get worse.
We have however, as I noted in my remarks, a light at the end of the tunnel by our clear visibility into throw us clear visibility into the third and fourth quarters, where the majority of the supply chain.
And <unk> said, we're working very hard with all suppliers. Both in terms of flyaway teams in additional production out and to also encourage them to two.
Allocate the necessary resources in order to make their contracting schedules. So.
So we are pretty comfortable that we can resolve these issues in the third and fourth quarter, but Gulfstream has done a magnificent job here to four and even in this quarter in managing through these challenges.
With respect to the Virginia class program, we have been talking about the supply chain challenges for some time.
And as with all.
Heavy manufacturing and labor intensive manufacturing.
Manufacturing and construction projects.
Manpower has a significant impact and the impact from the ramifications.
Ramifications from the pandemic.
Hit that supply chain pretty hard or beginning to see that remedy with the help of the Navy and a lot of sports. So we'll continue to work with.
With our supply chain and all elements of that supply chain as well as our customer who is very engaged to ensure that we can.
Get that Virginia cadence back on schedule.
That's very helpful. Thank you.
Your next question comes from the line of Doug Harned from Bernstein. Your line is open.
Good morning, Thank you.
Okay.
Phebe on the <unk>.
When we're looking at the situation in Europe , right now I mean, two things seem to stand out to us with respect to combat.
One is as you mentioned the demand for munitions.
But we have seen in the 2020 for budget there was actually a reduction in the budget for munitions, which we found somewhat surprising how do you think about the trajectory there.
And your ability to assuming we are going to see significant growth in munitions demand and your ability to ramp up production over time.
So.
We have been working very closely with D O D and the army to ensure that we increased production in and and Luo.
Hello can you hear us.
Doug.
Okay.
Operator.
Hello, you appears to have lost audio.
Okay.
Are we still let me ask let me answer Doug can the rest of the call here.
Yes, we are still lives. Okay. So let me answered Doug's question, we've been working very closely with D. O D and the army to increase production and throughput and we've done that in a couple of ways upgrading existing facilities increasing.
The number of shifts and building new facilities with more modern equipment.
To again accelerate production, we have already done so and are quite confident in our ability to do even more. So we are we've been receiving adequate and completely adequate funding to execute all of this and and we are quite confident that we will move.
Move throughput much quicker and we'll expedite the delivery of this critical capability to the army.
Your next question comes from the line of Peter Arment from Baird. Your line is open.
Yes, thanks, good morning Phebe.
Phebe, thanks for the color on Gulfstream just on the overall demand.
Kind of re strengthening in the quarter post the banks in the Middle East and certainly the U S are you are you still seeing.
Broad interest across all the models I know you had mentioned <unk> hundred 50, and particularly the last two years has been very strong.
Broad interest across all of the model.
We're doing quite well.
I want to ask another question.
Yeah sure no I appreciate that thank you.
Just staying within Gulfstream just I.
I know that youre, not going to update guidance, but.
The deliveries that missed this quarter are they expected to recover in the second quarter. How are we thinking about that or is this all kind of second half related. Thanks appreciate it.
So we will resolve we expect to resolve all of the supply chain issues and what you ought to think about is that the third quarter and fourth quarter being quite robust and I think what you're getting at is.
The deliveries that we expect to to execute for the year at about 145, we're pretty confident we can get there if we message just gonna be by a little.
Your next question comes from the line of Myles Walton from Wolfe Research. Your line is open.
Thanks, Phebe I was hoping you could talk to how you balance within marine.
Higher priority national.
At the national level of the Columbia class, which is under a lower financial risk cost plus contract.
Versus the higher financial pressure, Virginia class.
Which is under fixed price contract, but you might have to pull resources away and just how youre managing that from a financial risk perspective. Thanks.
So implicit in your and your question is is the fact that Colombia enjoys a higher national rating in terms of urgency than Virginia, we had fully contemplated that with the U S. Navy when we negotiated the most recent.
Walk of Virginia that was in concert timing wise with the Colombian negotiation. So we're working with the navy to ensure that the language that we had incorporated into the Virginia contract.
To accommodate any such impacts on Virginia from Columbia prioritization could be addressed in the Navy has been working very closely with us. So we were mindful of that and have been for some time.
And so I think this is a clarification to the current financials reflect that assumption playing out or.
Would there be a.
Equitable relief in the future if they agree with the position I'm not going to speculate on how this will be.
Addressed ultimately with our customer but this.
This is more of a future issue rather than in the moment issue that was not the primary driver of the quarter.
Your next question comes from the line of George Shapiro from Shapiro Research. Your line is open.
Yes, good morning Phebe.
Hi, George.
If you hadn't had the.
Loss of three weeks from the bank failures I assume then that the book to Bill would have been above one in the first quarter and is that likely to continue then in the second quarter were you, saying we are seeing significant strength now.
So our plan going before March 10th was that in fact, we had anticipated a book to Bill for book to Bill of one to one on at that point higher deliveries.
So on a on a going forward basis, that's our working assumption that we will continue to see one to one end and at the moment, we see no reason why that can't be achieved.
Okay. So the delivery expectations for next year would still be the same as what you had laid out before we are holding to what we gave you in terms of out year expectations for.
Aerospace.
Your next question comes from the line of Louie Dipalma from William Blair. Your line is open.
Phebe, Jason and Howard Good morning, Ronnie.
Yeah, the lead Columbia, approximately one third complete now yes.
Yes.
Great and as a follow up you referenced supply chain headwinds with Virginia, and aerospace as the supply chain for mission systems improving at all.
Yes, absolutely as we saw good trajectory and gaining some traction in the quarter Thats part of the reason why volume was up nicely in the quarter.
They seem to be on a good path to overcoming that bottleneck in their system. So it gives us confidence for for the.
Opportunities they have in the second half of the year.
Your next question comes from the line of Cristina <unk> from Morgan Stanley . Your line is open.
Hey, good morning, everyone one interesting.
Phebe, you know per new plans unveiled last month under the August packed it looks like Australia could buy up to five Virginia class submarines potentially in their early twenties thirties. So with a backlog now of 17, Virginia is delivering through 2032, how are you thinking about this opportunity and what's the production capacity.
City required to meet this demand.
So we are working with our navy customer to clarify timing and capacity and throughput, but at the moment, we have no particular insight not really deferring to the navy on an Argus and the timing and specificity of their long range planning.
And if I could sneak another one maybe switching to combat look it seems like the army is pushing significantly to ramp artillery production, particularly the $1 55 millimeter shells and planning to double a monthly production to about 24 per month by year end and then.
And then increasing production six times over the next five years.
How are you thinking about this opportunity and again do you see.
What do you need to do in order to meet this demand should it materialize and are you seeing the orders come through.
We have seen the orders come through annually.
Do not yet have out your clarity on the exact timing of the additional production, but we will see additional production.
And cause is because of the priority of the 155 I think you know the nation has learned a lot about 155 artillery shells.
So we've done a lot to increase production already and we are quite confident that we can go even faster.
Your next question comes from the line of Matt Akers from Wells Fargo. Your line is open.
Hey, good morning.
Wanted to ask kind of a high level question.
Pilots for Bill just on the commercial side.
Those kind of stocking with pilots and crews has been a kind of a pacing item here. What's your sense for business Jets are your customers kind of better off in that respect or could that be a bottleneck with Asia as well.
Well I think during the height of Covid there was so much disruption at all labor markets.
That we may have seen some issue then but frankly it didn't impact us we're not seeing anything at the moment that is impacting our ability to fly our customers ability to fly a frankly flying hours.
Okay. Thanks.
Your next question comes from the line of David Strauss from Barclays. Your line is open.
Okay.
Good morning, Thank you.
David.
V.
The the G 700 in the search there is software validation that the pacing I am still and if so how far of the way through that are you.
No it is not and.
And we are.
Sure.
In pretty good shape here with respect to our certification and look this is an extremely mature safe and sophisticated aircraft. So we're working very closely with the FAA.
To ensure that they've got the proper resources here to execute the AR certification, but it is coming.
Okay, a quick follow up Jason you mentioned, the resumption of the Ajax payments can you update us on kind of the schedule for for the liquidation there how you expect that to play out and also on the on the Canada program. Thanks.
Yeah. So.
Obviously it was a.
Positive development to see the payments resume here in the first quarter as we expected.
The path forward with the customer is an ongoing discussion we worked through the revised schedule for the program.
But.
Some of the other particulars around milestone.
Payments in <unk>.
Progress on that schedule is still in.
In the work so it would be.
Probably remiss of me to get out ahead of that in terms of the Canadian program.
Things are continuing to proceed well that customer for the past three plus years is paid on time as per that schedule.
Negotiated and so a couple more payments to come this year and then really you can think about it is.
The entire arrears that we were dealing with some two three years ago will have been paid down and we'll be in a normal program cadence and schedule.
Point, so by the end of this year.
Your next question comes from the line of Ken Herbert from RBC Capital markets. Your line is open.
Yes, hi, good morning Phebe.
I just wanted to see if you wanted to see if we could put a finer point on on the aerospace margins in the second quarter with supply chain issues in another.
Timing around the certification and prebuilt is it.
Our second quarter margins expected to be similar to first quarter or was first quarter expected to be the trough for the year.
I think you might need to think about the second quarter being our lowest quarter and then with the very steep and executable ramp up in the third.
Fourth quarter that I tried to give you guys an awful lot of color in the remarks about the puts and takes on all the margins on the margins with respect to aerospace, but we will get through the second quarter and frankly. These first two quarters are aberrational in terms of Gulfstream margins and then we are.
To see a nice pick up in third and fourth quarter.
Okay, and then just as a follow up just considering the roughly 100 aircrafts.
The guidance for the second half deliveries in the supply chain issues are you having at this point to maybe look at second sources or is there anything else Youre doing now obviously, it's really the game but.
Two to maybe improve or do you further derisk the supply chain beyond beyond just the execution.
So we've been doing that for some time as you all know the supply chain on the aerospace side has been has been taxed for quite a bit of time. So they are not taking any new actions that we have and already executed and we're just ramping up some of those actions as we in the first quarter and then as we go into the second.
But we have as I said earlier, a very clear line of sight into the third and fourth quarters and the majority of all of the suppliers I'm fully anticipate getting better and then we will work with the remaining ones to ensure they've got the resources to execute the contract.
Your next question comes from the line of Ron Epstein from Bank of America. Your line is open.
Good morning.
John .
How are you.
Maybe.
Quick question.
Maybe two.
What are the synergies so far from merging the two businesses.
Got it mission Tech.
How has that gone.
So keep in mind, Ron when we talk about merging those businesses. They still remain two independent stand alone operating units within our model. So not really anything to think about from a cost synergy perspective, I think the way to think about that is more of a of a revenue synergy.
Point of view in that.
<unk> talked about is.
Those two businesses are seeing a real convergence on a number of fronts within their markets. What their customers are interested in procuring in terms of end to end.
Solutions that include.
The service side software solutions as well as hardware.
As well as where they are competitors are going in the market to address those demands so bringing those two businesses together has put us on a good footing to address that market and those demands and that's what we're seeing and you're seeing that in the the positive order performance in the quarter.
And book to Bill capture rates win rates and so on so all of that gives us good confidence in terms of the trajectory of the outlook that we see for each of those businesses.
Got it got it and then just maybe just one quick follow on.
Much of the free cash from a quarter can be attributed to <unk>.
[laughter].
So we have factored the net of payments to to the supply chain, which has been very patient through this whole period into our estimates for the year yes.
So I want to make sure I understood. Your question correctly. It was a roughly 480 million pound payment that was received and to <unk> point that.
The net impact of that to us after paying out supply chain elements on the program all of that's factored into the outlook that we have for the year. So that 105 ish percent conversion rate for the year that we talked about is now intact and all that much more certain based on the activity in the first quarter.
Your next question comes from the line of Pete Skibinski from Alembic Global Your line is open.
Good morning, Phebe, Jason and Howard.
Hey, guys the issues on the Virginia supply chain. It seems like it's been a little bit of a black box.
So just I was wondering if I can get more details does it relate to multiple suppliers and could you give us a sense of what parts are involved.
And then are.
How are we feeling good that as the mix shifts to the block five is that margins will improve there.
Yeah.
So it's multiple suppliers.
Some large and some small M and yeah again continue to work with the Navy to address you know the challenges that that they all have faced and even though you know you have different size businesses. Many of them have been confronted with the same lag.
<unk> dysfunction that we saw coming out of Covid.
The Navy has been providing and as well as the pongratz and providing funding to address some of the challenges within our industrial submarine industrial base and we're hopeful that over time that will resolve and we'll continue to see I believe improvement.
As we get into block five and this and the supply chain stabilizes, but we've got a ways to go there.
And I think importantly, and this is the way, we certainly think about it.
It just has to get better and faster to overcome any unexpected additional teachers to supply chain challenges that may hit us.
But we're not going to get into is listing parts. These are this is an enormous supply chain.
You can imagine with thousands of suppliers all over the nation.
Okay, that's fair and kind of one follow up maybe how is the how are you judging the.
The pace of hiring in the labor risk kind of through the midterm MTB just given the kind of the huge increases in volume.
Acquired there.
So again coming out of Covid I think we all felt a little bit of the labor constraint, but one of the reasons that we saw increased revenue in this quarter was extremely strong throughput coming out of Quanta point as a result of robust hiring that they are executed and the training of those workers. So that they hit the ground running and we're able to.
Have additional executed additional throughput up at constant so we consider that a good bellwether for our ability to continue to hire to meet our needs.
Your next question comes from the line of Robert Spingarn from Melius Research. Your line is open.
Hi, good morning, everybody good morning.
BB combat has been discussed throughout the call, but just a couple quick things would you is it fair to assume that the book to Bill will continue to be above one for this year and beyond just given the strength and then the second part of this is as armaments munitions sales grow will they be margin accretive.
Alluded to the overall segment.
So.
When you look at historically combat orders they tend to be pretty lumpy.
I think the important way to think about it is the underlying predicate exist I'd say it is an increasingly insecure and threat driven environment and that will drive additional Florida when that.
When those execute we'll be a little bit lumpy, but we have we expect to see continued demand, including on the munitions side, but.
But we have planned and.
For our plan. This year, we've executed we've anticipated margins that are pretty consistent with what they've been doing it's just executing.
Operating making sure that we've got operating leverage including on these new facilities that we're putting in place but recall. This is a group that has extremely strong operating leverage and based on their efficiency.
And blocking and tackling on the shop floor. So we'll expect to see margins continue.
And operator.
We will take this one last question. Please and then we'll wrap up the call.
Certainly your final question comes from the line of Cai von rumor from TD Cowen Your line is open.
Yes. Thank you so much so phebe I'm still a little confused about your statement that Q2 earnings should be the lowest because pretty clearly it looks like marine should be better absent of ECL charge.
Combat usually is a little better.
<unk> T is stable and you've highlighted aerospace, but the volume is going to be higher than it was in the first quarter margins given where the volume was actually looked pretty good in the first quarter. So it would seem to imply a pretty steep drop off in margins could you give us some color in terms of.
What is creating that situation and is that something we should be worried about will continue in the third and fourth quarter.
Taghavi pretty clear that.
We do not anticipate any at Gulfstream the margin performance in these two first quarters are replicating in third and fourth quarter. In fact, we see a fairly strong ramp to increase margins. These margins are aberrational and we do expect some additional perturbations on the supply chain in out of state.
<unk> worked with Boston as well as mix issues.
With respect to marine systems and material timing between first and second quarters, and then technologies. It's transitioned from mature programs that are winding down and being replaced by some follow on new starts so and each one of these groups we are seeing a convergence.
So in the quarter, particularly.
The lower margins and lower earnings and sales on me typically see yeah, usually have a steady build through the year. This is rather as I said aberrational, but we'll get through this and importantly, we don't see these issues.
Bleeding into the third and fourth quarter, we anticipate a very strong third and fourth quarter and that is unchanged.
Thank you very much.
Yeah.
Thank you.
For joining our call today and as a reminder, please refer to the general dynamics website for the first quarter earnings release and highlights presentation.
You have additional questions I can be reached at 703 8763117.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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