Q2 2023 General Dynamics Corp Earnings Call
Good morning, and welcome to the General dynamics second 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.
No Disinvent is being recorded.
I would now like to turn the conference over to Howard Rubel, Vice President of Investor Relations. Please go ahead.
Okay.
Thank you operator, and good morning, everyone welcome to the general dynamics second 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 Dag G D 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 introduction complete I turn the call over to Phoebe.
Thank you Howard and good morning, everyone and thanks for being with Us.
Before I discuss the quarter I want to take a moment to acknowledge the loss of our longtime board member and lead director Jim Crown.
Jim has a record of distinguished service on the Gd Board for over 35 years throughout that time, Jim provided guidance to more than five different management teams.
We mourn his passing and our prayers are with his family.
Earlier. This morning, we reported earnings of $2.70 per diluted share on revenue of $10 2 billion operating earnings of $962 million and net income of $744 million.
We enjoyed revenue increases at each of our four business segments. Importantly, we had a 12% revenue increase across the defense segments with a more modest four six increase at aerospace.
While revenue was up by $963 million or 10, 5% operating earnings are down $16 million and net earnings down $22 million again.
Last year's second quarter.
So he adds significant revenue increase but lower operating margin against the year ago quarter.
From a different perspective, we beat consensus by <unk> 14 per share on significantly higher revenue and modestly lower operating margin than anticipated by the sell side.
The earnings beat was exclusively operations driven.
We enjoyed very nice sequential improvement revenue was up $271 million and operating earnings are up $24 million an identical operating margins.
On a year to date basis revenue of 20 billion is up 1.45 billion or seven 8% over last year's first half operating earnings of $1 9 billion are up less than 1% of net earnings are down $22 million largely as a result of below the line items, including a <unk>.
Higher provision for income taxes.
As Jason will amplify cash from operating activities and cash after capital expenditures in the quarter continued at a very good pace.
For the first half free cash flow was 123% of net income obviously they were off to a very good start from a cash perspective.
As is clear from the press release, we also had a powerful order a quarter across the business extending our already large backlog, Jason will provide full color around that item as well.
In summary, this is from a revenue perspective, a very strong quarter and a good first half supply chain issues in past Covid labor issues have impacted operating margins, but there is relief in sight, we expect improvement as we progress.
At this point, let me ask Jason to provide some detail on our strong order activity growing backlog and very strong cash performance as well as commentary about the technologies group in the quarter.
Thank you Phebe and good morning.
<unk> had a very good quarter from an orders perspective with an overall book to Bill ratio of one two to one for the company.
Order activity was strong across the board as each segment had a book to bill of one to one or greater in the quarter. This is quite impressive in light of the strong revenue growth.
Combat systems, and aerospace did particularly well with book to bills of one four times and one three times respectively.
This led to record level backlog of $91 $4 billion at the end of the quarter up one 7% from last quarter and up four 3% from a year ago.
Our total estimated contract value, which includes options and <unk> IQ contracts ended the quarter at more than $129 billion.
Turning to our cash performance for the quarter, we generated $731 million of operating cash flow, which following our strong first quarter performance brings us to $2 2 billion for the first six months of the year.
After capital expenditures, our free cash flow was $519 million for the quarter and over $1 $8 billion, a year to date, yielding a cash conversion rate of 123% for the first half.
This conversion rate reflects continued strong cash performance in aerospace and technologies and a particularly strong start for the year for the combat systems group from payments received on our large international vehicle programs.
The year to date results are consistent with our expectation for the year of a cash conversion rate in excess of 100% now turning to capital deployment capital expenditures were $212 million or two 1% of sales in the quarter, which brings us to one 9% of sales for the first six months.
Similar to last year, you should expect capital expenditures to be higher in the second half of the year, but in line with our expectation to be just under 2.5% of sales for the year.
Also in the quarter, we paid $360 million in dividends and repurchased approximately one 4 million shares of stock for $288 million.
That brings year to date repurchases to 1.8 million shares for $378 million.
We also repaid $750 million of debt that matured in may and ended the quarter with a cash balance of over $1 $1 billion that.
That brings us to a net debt position of $8 $6 billion down nearly 700 million from year end.
As a reminder, we have an additional $500 million maturing in the third quarter that we plan to repay with cash on hand.
Our net interest expense in the quarter was $89 million compared to $95 million last year.
That brings the interest expense for the first half of the year to $180 million down from 193 million for the same period in 2022.
At this point our expectation for interest expense for the year remains unchanged at approximately $360 million finally, the effective tax rate for the quarter was 16%, bringing the tax rate for the first half of 16, 5%.
There is no change to our outlook for the full year of approximately 17% but of course that implies a rate in the mid 17% range for the second half of the year.
To shape that for you we would expect the rate to be somewhat lower in the third quarter and higher than the fourth due to typical timing items.
Now turning to operating performance and technologies.
It was another solid quarter with revenue of $3 $2 billion, which is up 7% over the prior year and continues to build on the strong start to the year, we saw in the first quarter.
In fact, each business grew year over year, both in the quarter and the first half.
The measures implemented at mission systems to overcome what seems to be the new normal in the supply chain are taking effect. So we feel good about their prospects for the balance of the year.
<unk> had another solid quarter in fact, their highest second quarter revenue since before the pandemic as they continue to deliver on their steady year over year growth trajectory.
Operating earnings in the quarter were $283 million, yielding a margin of eight 8%.
As you know margins are driven by the mix of it service activity and hardware volume and in this case were further impacted by the mix of new start programs that are driving the strong growth trajectory.
Backlog grew during the quarter with the group achieving a book to Bill ratio of one one to one on solid order activity that outpaced the strong revenue growth across the business.
In fact, <unk> book, the highest first half orders they've seen since mid 2019 and their pipeline remains robust with $20 billion in submitted bids awaiting customer decision and another $81 billion in qualified opportunities identified.
Now, let me turn it back to Phebe to review the other business segments and give an update on our guidance for 2023.
Thanks, Jason now let me continue to review the quarter in the context of the other business segments and provide color as appropriate and guidance for the full year first aerospace.
Aerospace had revenue of 1.95 billion and operating earnings of $236 million with the 12, 1% operating margin revenue was 86 million more than last year's second quarter on the strength of additional new aircraft deliveries, coupled with higher Gulfstream Service Center volume partially offset.
Sat by less volume in jet Aviation's completion center.
The 24 deliveries are modestly fewer than planned and a result of supply chain issues.
The good news side of the equation supply chain conditions are improving.
We still have a significant backlog of late parts. The processes are in place to catch up deliveries are trending positive and we have greater transparency in short the suppliers are more predictable and are complying with catch up schedules.
This will help both revenue and margins as we do less out of station work.
Operating earnings of $236 million or till the end behind last year's second quarter. As a result of a 60 basis point reduction in operating margin.
Operating margin in the quarter was off largely as a result of the supply chain issues and higher R&D expense.
The shortage of parts continues to cause significant out of station work impacting efficiency.
As mentioned earlier, we see improvement here and that should help as we go through the second half.
Sequentially Aerospace had a three 2% increase in revenue and a three 1% increase in operating earnings and identical operating margins.
Moving to the demand environment Aerospace had a very good quarter with a book to Bill of one three to one in dollar terms and even higher for Gulfstream aircraft alone.
Vibrant sales activity and strong pipeline replenishment were evident in the quarter.
The U S, particularly large corporations led the way with the mid East and Asia participating to a lesser degree.
The 700 flight test and certification program continues to progress the aircraft design manufacturing and the overall program are very mature.
However, we now target certification in the fourth quarter and see no major obstacles in our path.
To give you a little more insight we will complete our FAA type inspection authorization in September . This is a fly we are required to do pursuant to FAA requirement and plan. When we are finished the FAA will fly some confirmatory of flight test to verify portions of our result.
That will be followed by a brief period of paper submission followed by FAA review.
As most of you know we had planned to deliver considerable number of G. Seven hundreds in the third and fourth quarters that has now slipped into the fourth quarter.
We now expect to deliver 27 aircraft in the third quarter.
With a rapid increase in the fourth quarter deliveries.
In short, we are making good progress under difficult circumstances.
We expect to deliver five to six fewer aircraft than the 145, we forecast at the beginning of the year.
On the other hand, we expect more service revenue than initially anticipated I'll have more on this later in my remarks.
Next combat systems.
Combat had revenue of $1 92 billion up a stunning 15, 5% over the year ago quarter with growth in each of the business units.
Earnings of 251 million are up two 4% margins at 13% representing 170 basis point reduction.
Over the year ago quarter. So we saw powerful revenue performance, coupled with more modest operating margin.
In large part attributable to mix.
The increase in revenue came from international vehicle programs at both land systems and European Land systems O. T. S has also enjoyed higher artillery program volume.
<unk> programs to expand production capacity for the U S government.
These programs carry dilutive margins, but will result in more production at accretive margins overtime.
On a sequential basis revenue was up 168 million or nine 6% and earnings are up 6 million or two 4% on 100 basis point reduction in margin for the reasons described.
Year to date revenue is up 339 million or 10, 1% and operating earnings are up 24 million or five 1%.
We also experienced very strong order performance orders in the quarter resulted in one four to one book to Bill evidenced strong demand for munitions and domestic combat vehicles.
International programs also contributed to the strong book to Bill.
So a very exciting first half of combat.
Turning to marine systems once again, a shipbuilding group is demonstrating impressive revenue growth.
Marine systems revenue of $3 1 billion is up $408 million, a robust 15.4% against the year ago quarter, Columbia class construction and engineering volume drove the growth and to a lesser degree T E O growth.
Operating earnings of 235 million up $24 million over the year ago quarter with a 30 basis point decrement in operating margin.
We anticipate that all of our yards are now well positioned for slow, but steady incremental margin growth over time with fewer perturbations.
On a sequential basis revenue was up 67 million or two 2% and operating earnings are up 24 million or 11, 4% on a 60 basis point improvement in margin.
For the first half revenue was up 749 million or 14 five.
Percent and earnings are up 24 million or five 7%.
So a good quarter and first half.
So let me move on to give you our updated forecast for the year. 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 all of this will be posted on our website, which would be helpful.
And aerospace revenue will be down almost $200 million due to the five or six fewer aircraft deliveries offset in part by stronger service activity. So look for revenue of $10 2 billion.
We also expect margins to be down from a projected 14.6% to 14.1% implies operating earnings of $1 4 billion.
With respect to the defense businesses combat systems will have revenue of 400 to 500 million higher than previously projected due to new program starts and an increased threat environment.
So look for the total revenue of around $7 75 billion.
Margins will be down 50 basis points from 14, 7% to 14.2% on next.
All in operating earnings will be up 25 million over the previous forecast.
Marine systems revenue should be up $900 million or 1 billion on acceleration of work throughout the yards. This is a leading indicator of improving efficiency. So he will have annual revenue around 11 8 billion with an operating margin around seven 6% for the reasons I have previous.
So we've described to you.
Operating earnings for the year should be up 20 million over the previous forecast technologies revenue will be 100 to 200 million better than previous guidance, but operating margin will be 9.4% 10 basis points lower than previously forecast.
So for the group, we expect annual revenue of about $12 7 billion with operating earnings around $1 2 billion steady with prior guidance.
There is some opportunity here to capture 10 to 20 basis points of margin.
On a companywide basis, we see annual revenue higher than our initial guidance and an overall operating margin about 40 basis points lower.
So look for total revenue to be around 40 to 45 billion about $1 2 billion up from previous guidance.
Operating earnings should be down modestly from prior guidance, but below the line items and lower share count will leave our EPS guidance the same.
One final note before I conclude my comments.
Howard has informed the company that intends to retire later this year. So this will be his last earnings call.
We are grateful for the excellent work that Howard has done since joining our team I hope. Many of you will join me in congratulating Howard on a job well done.
Nicole Shelton, who some of you know already will be taking over the mantle with the third quarter call.
That concludes my remarks, some of them, they're happy to take your questions.
Thank you for your kind words and friendship.
Been a pleasure and a great experience to have had the opportunity to represent general dynamics to the investment community. These nearly six years I've grown working side by side with many of the talented people are just tremendous enterprise I look forward to working with Nicole over the next few months to ensure there are proper introductions.
In a seamless transition.
There'll be time ahead to say goodbye, but today I want to say thank you.
Now, let's turn to the question and answer period of this call as a reminder, we.
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.
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 and again, we ask that you. Please limit yourself to one question and one follow up. Your first question comes from the line of Seth Sigman from J P. Morgan Your line is open.
Hey.
Very much good morning.
Congratulations Howard Thanks for everything.
Just on the on.
On the new Aerospace guidance I guess, maybe if you could walk through how you thought about the <unk>.
Set up for that and I. Appreciate that this is mainly a timing issue and that any airplanes, but don't get delivered in <unk> and 'twenty three kind of moved to 'twenty four but just kind of the way we get level set.
With 27 deliveries in the third quarter, you know, we're talking about something quite high to get to $1 40 ish for.
For the year and also I mean with 27 deliveries I assume we'll be looking at a margin in Q3, that's probably still in the 12.
And so also getting to 14, one for the year maybe.
Maybe you can talk a little bit about the.
Margin the initial margin accretion.
The new aircraft and and you know what that contribution will be to the total deliveries.
Yeah. So thank you you've you've put your finger on it and never have an issue. So what we have given you with respect to aerospace as Gulfstream to plan and the guidance that we gave you reflects their plan our January guidance just for context.
Contemplate at a very high Q4 delivery rate that rate increased with the certification delay on the 700 700, it'll be fully built and ready for delivery.
Remember too our new planes are all built in purpose built facilities, we've expanded our wing line in short we facilities for increased production.
And finally, the fact that we have.
Planes and you can see this from the increase in inventories that are awaiting parts. We now have a schedule and all of that taken together allows us to well give us the ability to deliver with respect to margin. We've got a number of higher margin airplanes.
As you would expect delivering in the fourth quarter, so that could provide significant uplift.
So we can kind of explain well how you know we're in tend to get the revenue through the deliveries and the margin is really a question of mix of the higher higher deliveries of higher margin Rader deliveries are higher margin airplane.
Great. Okay. Thank you and just a follow up real quick on on this topic.
The 27 deliveries in Q3 would be down year on year.
And so in terms of.
There's the issue of the G 700 certification, which we're all kind of looking at it and it's hard to analyze but just from the not for the non G 700 deliveries.
Is there any risk around what the what the plan was there and what are what Gulfstream expects to do.
Yeah.
So as I noted in my remarks, our supply chain is increasing its transparency improving its processes and we have reliable increasingly reliable schedules that sad, they're more than likely we anticipate more catch up in the fourth quarter, which will allow us.
To complete a number of those airplanes, but theres still impacting the third quarter deliveries.
Your next question comes from the line of Robert Stallard from vertical research. Your line is open.
Thanks, so much good morning.
Mining companies how is retiring so young.
[laughter], that's what we say.
Hey, I've got a couple of questions for you Phebe first of all on the revised aerospace guidance you mentioned that you've increased your expectations for services for the full year I'm wondering if you could square this with what we've been seeing in Biz jet flight as yesterday, which have been down year on year, and then secondly, a great too.
Our systems order quarter, but how do you expect these orders to flow through to revenue growth over the next couple of years. Thank you.
Hell are flying hours are not found but I think the way to think about our service business is we expect service to increase as the as the fleet of airplanes, new airplanes and the market increases so we expect that.
The growth and in service and we haven't seen any impact so far on any change in flying hours I said, that's mostly other people flying hours.
With respect to combat in.
The world as they come in a less safe place and that's reflected in increased demand both internationally and in the United States. So we expect the this year to be considerably higher than last year.
And we'll give you clarity around 2020 for in in January but as you may recall, we had anticipated flat to down growth in this business segment clearly that trajectory has changed we won't be able to quantity, we can't quantify it right now, but we'll give you more clarity on that.
That's great. Thank you very much.
Your next question comes from the line of David Strauss from Barclays. Your line is open.
Thanks, Good morning, Hi.
Hi, David.
Good morning, Phebe, so I'm.
Back on the G 700.
Would you expect to make up the missed deliveries.
This year would you expect them to make those up next year. So does the I think what was 170 go higher in terms of what are you expecting for deliveries next year.
Well, we'll get into next year next year, but the deliveries.
Or lower or five to six deliveries that will deliver this year and not seven hundreds.
So it's other airplanes.
Okay got it.
And then as a follow up quick follow combat systems.
You mentioned this during the prepared remarks the <unk>.
The lower margins in the quarter and then it looks like you're you're forecasting a bit of a snapback in the second half of the year, but still a fair amount lower than when you were initially forecasting can you just give a little more detail on the.
On the mix and how that's impacting things.
So mix in essence.
It is comprised of two elements one is the capacity expansion, which I noted carries lower margin and then it's really the transition from more mature programs to newer programs end and those margins will improve as we come down our learning curves.
Yeah.
Your next question comes from the line of Cai von rumor from TD Cowen Your line is open.
Terrific. Thanks, so much so and Howard let me say you've been.
Terrific to work with them.
Wish you all the best Thank you.
So.
Hum.
How many.
Seven hundreds are you assuming.
In the fourth quarter, and what kind of margin for error is there in terms of timing.
We will deliver 19 G seven hundreds and where I can tell you margins will be accretive.
Thanks Ray.
Never give any margins by airplane.
No.
And next I didn't mean.
How much time wise.
A cushion you have.
The schedule is the certification slips.
Hum do you mean, the schedule for the 700 certification.
Yes, I mean is your best guess that you sort of saw it in the middle of November and December Middle of December which could impact the number of planes you get out. So what we've told you is our best estimate right now of the certification process.
Clearly if it comes very late in the year, well deliver airplanes, but we won't necessarily be able to deliver all of them that will bleed over into the best first quarter G. D has ever had in its history.
But we're not anticipating that at the moment. So I don't have real good clarity because we don't know yet with the precision on when in the fourth quarter.
But our best estimate and what we're planning for right now is that we will be able to have sufficient time to deliver these airplanes.
Remember they're built.
A pilot training will start and.
That will help significantly with deliveries.
Got it and with all of these deliveries deliveries in the fourth quarter, maybe Jason.
Jason can you give us some color in terms of the cash flow profile I mean, do we have just a momentous.
Uh huh.
Fourth quarter cash and is there any upside to the 105%.
The way I think you need to think about that Kai is when it comes to Gulfstream.
<unk>.
Have a a sequence of progress payments that occurs from the time of the initial order through delivery and entry into service. So the vast majority of the cash receipts associated with.
An aircraft order in aircraft delivery or our in house before the actual airplane is delivered so while there is obviously an implied set of progress payments final delivery payments would occur at that point when those aircraft enter into service, it's not it's not an outsized level.
Of cash one way or the other so.
Your issue is you've got an ongoing sequence and series of progress payments associated with all of the orders and the order book and with a significant order volume that we've had over the past two two and a half years that is sort of a machine. That's just churning those progress payments over time as we continue to make progress on each of those airplane builds as well as the.
<unk> process.
Your next question comes from the line of Myles Walton from Wolfe Research. Your line is open.
Thanks, Good morning, and congratulations.
Congratulations on retirement and Howard I'll Miss you.
In terms of the outlook for.
Aerospace orders could you just comment phebe, what youre seeing for the rest of the year. Obviously, the second quarter was probably helped a little bit because of the anomaly you mentioned that in March around the banking crisis and then also if you can comment on churn in the backlog I think your net your net book to Bill was a you know a couple of hundred.
Million lighter than your gross book to Bill So maybe just talk about any cancellations.
Yeah Hello.
The demand in the second quarter was at the same level as the demand in the first quarter. It felt very very similar.
As you've quite rightly note, we had a three week hiatus coincident with the you know the banking many banking crisis.
The demand levels have remained about the same and as we enter Q.
Q3, we have a very strong pipeline and and so far activities quite good in Q3.
We had six defaults in the quarter.
But nothing that is.
Notable to us.
And the backlog is holding up very very well.
Okay, great. Thanks, so much.
Your next question comes from the line of Jason Gursky from Citigroup. Your line is open.
Hey, good morning, Congrats Howard and I look forward to getting some postcards from our distant places.
Hum.
Yes.
Just sticking with Gulfstream for one last question for your.
On the pipeline and kind of what you see from a bottom up perspective could you give us a little flavor from a geographic perspective, and customer type Hills high net worth doing versus corporate.
We are beginning to see some green shoots in geographies outside the United States.
Yeah. So.
The United States with strong has been strong, particularly with the fortune five hundreds I would say that high net worth it's about the same and the mid east is is pretty good as it is Asia, but it's really the fortune 500 et cetera.
Really driving the demand.
Is there a long established customers as well as new Fortune 500 customers.
Okay, Great and then.
Jason over to you on technologies.
Looks like you've got a robust pipeline of opportunities.
In front of you.
Can you talk a little bit about mix.
We had some some margin degradation here in the quarter I'm just kind of curious as you look out at the pipeline do you see anything.
That would suggest we're going to see a departure in any.
Either higher or lower from a margin perspective as you bid on this work and bring it in.
Yes, I think bottomline the answer the short answer to that is no. We don't see any fundamental change as we've talked about.
Youre going to see some level of.
Aggregate margin perturbation between the two businesses.
It services side being somewhat lower.
Obviously than the than the hardware side I think in this quarter, we saw it a little more pronounced because as we're seeing this turn for the group to a stronger growth level a lot of that is driven by not only new starts, but it's actually replacement contracts or I should say.
Re competes that we've won so you had in the prior year the trailing off of very mature level are legacy contracts that were closing out at higher margin rates as compared to the entry level margin rates. We're seeing now so that's sort of the driver of the year over year Delta that youre seeing but.
Barring any major structural shifts between the the percentage contributions of the.
Services versus defense hardware parts of the business. We continue to expect this to be a low double digit margin business over time.
Yes.
Your next question comes from the line of Rob <unk> from Bank of America. Your line is open.
Okay.
Yes, good morning.
His remarks, Howard you will be missed and it's been a pleasure working with you.
So quickly.
Couple of questions on technologies, what should we be looking for them and sometimes the contracts there aren't.
Obvious on the horizon so Jason.
Should we be looking for all four in the second half of the year potential things you guys could win.
Ron its always tough in this business to point to a singular event or contract that is going to drive the overall business. As you know, it's a wide portfolio of literally thousands of contracts I think.
The thing I would tell you is.
When you look at.
Oh.
Mission systems on the one hand, they are really seeing strong support in there what I would call their navy platform support businesses.
Whether it's the strategic side or the mission computing side.
We're also seeing really great support in their cyber portfolio. So those are two areas I would expect to see continued growth in particular out of that business.
When you look at <unk>, they're seeing strength in all three of their customer segments. The defense of the intelligence community and defensive side, So really good across the board support and <unk>.
And I think if I could point to any one thing in particular on that side of the portfolio. We've talked for the past few weeks couple of months about some selective technology investments they've been making to accelerate their growth and we're seeing that really start to take hold.
And of course, we're talking about things like artificial intelligence machine learning hybrid clouds Zero Trust and so on.
And that's really starting to bear fruit, we've seen already several hundred million dollars' worth of award wins as well as organic growth on existing contracts is resulting directly from those investments they've got some $7 billion in change in post the middle <unk>.
Submissions that are awaiting award decisions.
And they've got another 20, plus I think between 2000 $25 billion of opportunities in the pipeline that are directly tied to those targeted investments. So I think some really intelligent.
<unk> capital allocation over there at <unk> to try and drive that growth and we'd expect to see the results of that continue in the second half of the year and beyond.
Okay, Great and then maybe one follow on for me when we think about Aero when things start to normalize or supply chain kind of gets back to a normal cadence and all of that what should we be thinking about broadly is like a realistic margin target.
We're thinking in the higher teens.
When we get on a steady state with with upside potential.
Your next question comes from the line of Louie Dipalma from William Blair. Your line is open.
Okay.
Phebe, Jason and Howard Good morning morning morning.
And our and thank you for yard deep Aerospace defense expertise in your current position and your former position.
Sell side Youre high standards raised the level of those around you.
For for battery.
Uh huh.
Sure.
Jason.
For the the Army's CHF six 8 billion dollar recompete that should be announced.
Thank very soon.
Gd mission.
Solutions and teaming with G. D. I T. Do you feel these synergistic joint bid between <unk> and mission will become more common and a significant strategic advantage or you and and could it help return overall technologies segment too.
Mid single digit growth over the long term.
So again bottom line answer you kind of hit the nail on the head there we absolutely expect the synergistic.
Benefits of these two businesses working together.
To be to our benefit over the long run.
The predicate for all that is that what we've seen both in the customer demand environment. What they are requiring in terms of end to end solutions, including both software services and hardware elements of what we provide we're seeing.
The peer group migrate that way with some of their M&A.
M&A activities that you've seen in the market and so we believe that is the <unk>.
Pieces that we'll see play out.
You noted CHF six we're obviously.
Participating in and anticipating that that kind of a resolution to that competition.
We've seen that program migrate over time from one that was traditionally.
Very much focused on.
High end customized ruggedized hardened type defense hardware to one that is a combination of that type of capability as well as a more traditional sort of off the shelf catalog type product and so we believe that having the attributes of both <unk> and mission systems involved in that program would be the best suited to serve our customer there. So that's just one good.
Example of it but absolutely we see that over time and as far as long term growth rates, we'll have to see where this leads right now we continue to track low to mid single digit, but we will see if we can't get some juice out of that over time.
Great. Thanks, everyone.
And your next question comes from the line of Sheila <unk> from Jefferies. Your line is open.
Good morning.
Thank you.
Howard exactly what believes that and then some thank you for being such a great colleague and a T shirt.
That's around us that thank you.
Phebe, Jason whatsoever on the defense business.
When you look at your 2023 guidance defense growth up solidly.
For the year versus the 9% growth you did in the first half.
But this is not necessarily leading to operating leverage with margin contraction of 40 bps and operating profit. So how do you think about the return to operating margin expansion either on a total company level or a segment basis. It seems like technologies is more temporary combat next maybe continues for some time.
So so technologies and combat or simply a question of mix.
And I suspect combat will quickly return to its normal operating leverage.
The Marine group has significant at.
Supply chain challenges that have impacted our for the Virginia class in particular, that's going to take some time to resolve them talk about that in a little bit more detail.
So as I noted we expect slow.
Florida.
Margin growth in the Marine group.
Perhaps an occasional perturbation that by quarter.
But slow steady improvement overtime.
Great. Thank you.
And your next question comes from the line of Ken Herbert from RBC Capital markets. Your line is open.
Yes, hi, good morning, everybody and congratulations Howard.
Hey, Phebe I, just wanted to dig into marine again, a little deeper the full year guide implies a pretty significant deceleration of growth into the back half of the year too.
Two questions really first you know as we go back six months you were you were talking about a much more conservative outlook for the topline in marine and clearly.
Any comments on really what's changed because the first half is it's really been much stronger than expected. But then also as you think about the remainder of the year, what will drive the significant step down and how much conservatism does the marine outlook reflect in terms of the growth.
So growth in the quarter was driven by improved increased volume on Colombia.
And on the oiler program as well as additional throughput.
Throughout each one of those yards, which is often a precursor to better margin performance and finally, just the revenue came in faster than we had anticipated really across the board and that that will drive our our expectations.
With respect to the margin performance.
We have.
Columbia is doing very well, we've got nice performance on the oiler.
We see some deck plate improvements of Bath, but that has yet to translate into.
Into financial performance.
Electric boat needs to continue to get better to offset them.
Likely additional supply chain challenges as the Virginia supply chain.
To improve and with respect to that supply chain, we see improvements in some very nice improvement in some area, but that supply chain was hit hard.
By Covid and I think a little bit of explanation. There is helpful. Covid impacted that supply chain, Virginia supply chain in particular.
And a couple of ways.
Obviously, the impact of Covid itself, the workforce disruption than we had the large demographic changeover and finally.
Virginia was impacted by the Colombia prioritization all of that.
Made it difficult for that supply chain to begin to get back on cadence theyre getting better, but we got a while to go before they hit their two a year or more cadence.
Your next question comes from the line of Peter Arment from Baird. Your line is open.
Hey, Thank you good morning, Phebe and Jason Great Congrats Howard.
Hey, Phebe within combat munis munitions kind of is kind of viewed as a potential source of upside volume and thanks for all the color on the segment, but how should we be thinking about the munitions growth profile. I mean, it's about finished last year about 27% of your mix do you expect that mix to continue to grow and any comments on the supply chain. There is my fault.
Blow up just because I know theres been.
Talk about challenges there thanks.
Hum.
The supply chain in the combat group has been.
Less of an issue I suspect that.
Is it at least for the foreseeable future the munitions.
Portion of the business will remain about the same as we see uplift in all of our all three businesses will see O T. S. At about that same level, we've already created increased munitions.
<unk> and working with the federal government and the Army and OSD in particular, we have a very detailed plan to further increase capacity.
I'll allow us then to increase production very rapidly and move to the left diminishing availability to meet the United States needs and frankly that external needs as well.
Thanks Steven.
Operator, we'll just take one more question please.
And our final question for today comes from the line of George Shapiro from Shapiro Research. Your line is open.
Good morning, and congratulations Howard I Didnt cigarette outlets you, but we've known each other a lot of years.
No.
George Silver 40, just.
County.
That's right.
Phebe.
On the default that you mentioned can you just.
<unk> mentioned, what kind of customers. They they might have been and I assume you keep the downpayments that might've been made on the aircraft that they order.
So I think you know we have very strong terms and conditions that you forfeit.
Some of your value in the airplane when you cancel I don't actually know the contest of the of the default.
Nothing that was of no.
Note our interests otherwise I'd know it.
Okay and Jason.
The Unbilled receivables was actually up like $100 million sequentially. So does that mean, you didn't get any payments.
From the U.
The expected customers.
In the quarter and how much would you expect the rest of the year to come in.
Actually George we did receive additional payments on schedule as per.
The plan that was set forth several years ago, and I'm actually happy to tell you that at this point and maybe this terminates this line of dialogue for the foreseeable future.
Arrears that you all may remember for many years ago and that Canadian International program is now effectively been paid down and we're down to what I would call a normal run rate of operating working capital in that program. So I'm pleased to report that we've passed through that phase.
In terms of what we expect to receive for the balance of the year. There are some more progress payments to come in but I don't I don't have that quantified off the top of my head.
So I mean, you had kind of given what the specifics were around that in the Q.
Q.
We'll follow up on that.
Yeah.
Operator that balance the call.
And.
For those that are interested in connecting later will have follow up questions.
Please don't hesitate to call me. Thank you for joining our call today.
As a reminder, please refer to the general dynamics website for the second quarter earnings release, and highlights presentation and as I said, if you have any additional questions I can be reached 703 8763117.
<unk>.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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