Q3 2024 General Dynamics Corp Earnings Call
Good morning, and welcome to the General Dynamics' third quarter 2024 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 the star key followed by the number one on your telephone keypad.
If you would like to withdraw your question Press Star one again.
Note. This event is being recorded.
Speaker Change: I would now like to turn the conference over to Nicole Shelton Vice President of Investor Relations. Please go ahead.
Nicole Shelton: Thank you operator, and good morning, everyone welcome to the General dynamics third quarter 2024 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 Companys 10-K 10-Q.
Nicole Shelton: You 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 our website Investor Relations Dot <unk> dot com on the <unk>.
Speaker Change: Call today, our Phebe, Novakovic, Chairman and Chief Executive Officer, and Kim Correa, Chief Financial Officer, I will now turn the call over to Phoebe.
Phebe Novakovic: Thank you Nicole good morning, everyone and thanks for being with Us.
Phebe Novakovic: Earlier. This morning, we reported earnings of $3.35 per diluted share on revenue of 11, six 7 billion operating earnings of 1.18 billion and net income of $930 million.
Phebe Novakovic: Across the company revenue increased $1 1 billion, a strong 10, 4% led by a 22% increase in our aerospace segment and a 20% increase in marine systems.
Phebe Novakovic: We enjoyed revenue increases at three of our four business segments compared to the year ago quarter only combat systems was flat.
Phebe Novakovic: This is strong growth by any reasonable standard.
Phebe Novakovic: Importantly, operating earnings of $1, one 8 billion or up $124 million or 11, 7%. Similarly, net earnings increased $94 million or 11, 2% and earnings per share are up 31 cents or 10, 2% over the year ago quarter.
When earnings are up at a greater rate than revenue on a growth environment. The business is demonstrating solid operating leverage we are doing just that.
Phebe Novakovic: On a year to date basis revenue of $34 4 billion is up $3 77 billion or 12, 3% over last year.
Phebe Novakovic: Operating earnings of $3, $3 7 billion or up 14, 1%.
Phebe Novakovic: Net earnings of 2.63 billion are up 14%, despite a higher tax rate.
Phebe Novakovic: Nevertheless, we missed street EPS consensus by a fair amount because we were able to deliver only for <unk> seven hundreds in the quarter.
Phebe Novakovic: So without further Ado, let me move right into aerospace and give you as much insight into this issue as I can and its implications for the remainder of the year.
Phebe Novakovic: At the outset, let me give you some comparative numbers that are quite good. Despite the shortfall of anticipated G. 700 delivery then I will put all of this in some reasonable context for you.
Phebe Novakovic: Aerospace had revenue of 2.48 billion and operating earnings of $305 million with a 12, 3% operating margin.
Phebe Novakovic: Revenue was $415 million more than last year's third quarter, a solid 22% increase.
Phebe Novakovic: The revenue increase was driven by the four G 700 deliveries higher service center and special missions volume and higher F. B O and MRO volume, particularly in the Asia Pacific region at Jet Aviation.
Phebe Novakovic: We delivered 28 aircrafts, including four <unk> seven hundreds this quarter.
Phebe Novakovic: This is 11 fewer G seven hundreds and we expect it to deliver we also delivered one must see 600 G 500, and Jeep to 80, and we did a year ago quarter, but deliveries of these aircraft at a reasonably steady state and the modest shortfall is a typical variance having to do the large.
Phebe Novakovic: With timing and customer convenience.
Phebe Novakovic: Operating earnings of 305 million are up 37 million or 13, 8% over the year ago quarter.
Phebe Novakovic: The 12, 3% operating margin was 90 basis points lower than the year ago quarter for a host of reasons, including inefficiencies caused by supply chain deficiencies.
Phebe Novakovic: So despite a very good quarter, we had planned to do better and sell side consensus reflected our expectations.
Phebe Novakovic: You might recall that I told you we expected to deliver 50 to 52 G. Seven hundreds this year and that the deliveries would be more or less evenly divided over the last three quarters of the year.
Phebe Novakovic: Well, we planned 15 for Q2 and delivered 11, we planned 15 to 16 inch for Q3 and delivered for <unk>.
Three weeks before the end of the quarter, we still had a reasonable belief that we would deliver at least 11 in the quarter.
Phebe Novakovic: So what happened.
Phebe Novakovic: Whenever we missed our forecast so badly it is almost always for a number of reasons that all play a part so let me identify the most important and impactful ones.
Phebe Novakovic: First due to the timing of engine certification aircraft engines arrived late to schedule.
Phebe Novakovic: We painted the aircraft before the engines arrived and then painted and install the engines. This led to a significant amount of repaint that resulted in increased cost and time spent.
Second many of the aircraft plan for deliver in this quarter have highly customized interiors first of tight intricacies there.
Phebe Novakovic: These intricacies are considered to be major changes for regulatory purposes.
Phebe Novakovic: This resulted in longer than anticipated efforts to finalize and achieve supplemental type certificates.
Phebe Novakovic: Related to this the size and complexity of the G. 700 cabins is also a long gated the customer reviews during final delivery of these planes.
Phebe Novakovic: Third and maybe most important late in the quarter and a supplier quality escape on a specific component caused the exchange has several components on each planned aircraft delivery up to 16 per aircraft the.
Phebe Novakovic: The supplier is fully cooperative and is providing components for all our needs, but this rework has increased the number of test flights necessary to obtain the final certificate of airworthiness for each aircraft.
Phebe Novakovic: So the removal and replacement of these components has impacted labor costs and schedule adversely.
Phebe Novakovic: We are nonetheless, working our way nicely through this problem with the cooperation of the vendor.
Phebe Novakovic: Finally, if that wasn't enough we lost four days of productivity as a result of the hurricane I mean, several customers who are in Savannah, working with us to accept delivery left and went home to avoid the storm.
Phebe Novakovic: So given that there is always risk and precise estimates I will describe our delivery cadence a bit later and provide some monthly forecast. So that you can monitor quarter from publicly available data.
Phebe Novakovic: Alright back to some good numerical comparisons.
Phebe Novakovic: For the year to date Aerospace revenue was up 1.63 billion an increase of 27, 7% operating earnings are up $146 million, an increase of almost 20%.
Phebe Novakovic: I recite these figures, which will reflect even more growth by the end of the year. So that we do not get lost in the third quarter delivery issue. This is still eye watering growth.
Speaker Change: So what impact should we now expect for the fourth quarter and the year given the fewer than planned G 700 deliveries in the second quarter and third quarters.
Speaker Change: You may recall that we expected to deliver 50 to 52 G. Seven hundreds this year, we now expect to deliver around 42 for the year with 27 in the fourth quarter.
Speaker Change: This number is not without risk, but there's also some opportunity to bring planes forward. The real issue here is supply chain support during this critical period.
Speaker Change: Let me give you some insight into the sequencing of the 27 planned deliveries in the quarter.
Speaker Change: We anticipate five in October.
Speaker Change: Nine in November and 13 in December recognizing there is some risk because these numbers could vary a little bit up or down through the quarter. You can as I have said followed this with fairly accurate, but not perfect publicly available data.
Speaker Change: Turning to market demand the interest level of buyers and the exploration of accelerated depreciation at year's end suggest a reasonably strong order intake in the fourth quarter and that is what we are seeing.
Speaker Change: After some slowing in the U S. During the second and third quarters, we are seeing improved interest across all models in the fourth quarter.
Speaker Change: Europe and middle East activity is quite strong, but current activity in southeast Asia, and China has slowed interestingly the overall number of prospects in all areas continues to increase.
Speaker Change: The overall number of prospects in our pipeline is at an all time high.
Speaker Change: With the most active models being the G 500 607 hundred.
Speaker Change: We have a good cross section of U S businesses in this mix.
Speaker Change: In summary, aerospace team had a very good quarter, albeit disappointing from the perspective of G 700 deliveries.
We look forward to a strong finish to the year in the fourth quarter, but will fall somewhat short of our mid year forecast.
So let's move on to the defense businesses as a collective we once again saw strong growth and good operating performance across the portfolio. Let me walk you through each segment in turn first combat systems.
Speaker Change: Combat systems had revenue of $2 2 billion for the quarter similar to a year ago.
Speaker Change: Earnings of 325 million are up eight 3% and.
Speaker Change: And margins at 14, 7% represent a 120 basis point increase over Q3 last year.
Speaker Change: Each of the businesses increased earnings with particularly strong operating leverage in munitions and customer service businesses.
Speaker Change: On a sequential basis, while revenue decreased 3% earnings rose almost 4%.
Speaker Change: Year to date revenue of $6 6 billion is up almost 12% and earnings of $920 million are up $124 million or almost 16%.
Speaker Change: <unk> saw robust order activity over $3 3 billion awarded in Q3, resulting in a book to Bill of one five to one for the quarter.
Speaker Change: Orders came from across the portfolio with notable orders in munitions in their defense vehicles for the U S Army.
Speaker Change: Overall demand remains solid across combat, particularly in our ordinance and international combat vehicle businesses.
Speaker Change: In the U S. We are increasing production of 155 millimeter ammunition projectiles as well as expanding our support to the U S army across several other areas, including final loading and assembly of artillery.
Speaker Change: Our combat systems backlog at roughly 18 billion reflects a strong demand.
Speaker Change: All in all a strong performance quarter for combat.
Speaker Change: Turning to marine systems once again, our shipbuilding group is demonstrating strong revenue growth.
Speaker Change: Marine systems revenue of $3 6 billion is up $597 million, 20% against the year ago quarter.
Speaker Change: Columbia class construction and engineering volume as well as Virginia class volume drove the growth.
Speaker Change: DDG 51 revenue also increased somewhat just to put this in some context. This 20% growth follows 15% growth in Q4 23.
Speaker Change: 7% growth in Q1 of 'twenty, four and 13% growth in Q2 of 'twenty four impressive growth by any standard.
Speaker Change: Operating earnings are 258 million up 47 million over the year ago quarter with a 20 basis point increase in operating margin.
Speaker Change: However margins continue to be adversely affected by additional delays from the submarine industrial base, partially offset by improved margin performance at Nashville.
Speaker Change: Sequentially revenue increased four 2% and earnings improved five 3% in Q3, driven by volume the D B.
Speaker Change: Year to date Marine revenue of $10 4 billion is up 14, 7%.
Speaker Change: And earnings of 735 million are up 12%.
Speaker Change: So across the business, we have seen rapid growth of revenue and earnings but stagnant margin performance.
Speaker Change: As I noted last quarter, although the supply chain is improving in places E. B continues to be severely impacted by leap deliveries for major component supplier, which has delayed schedule and is continuing to impact cost.
Speaker Change: Our out of sequence work on modules wane thousands of tons is time consuming and therefore expensive sometimes up to eight times the cost of in sequence work.
Speaker Change: The operating metrics tell us that we have in fact increased our productivity to somewhat offset cost.
Speaker Change: As I noted last quarter throughput a significant measure of productivity continues to improve.
Speaker Change: And while we will continue to work on improved productivity. There is no point hering portions of the boat only to have to stop and wait increasingly extended periods of time for major components to arrive.
Speaker Change: It is not a good for the book over time north costs.
Speaker Change: Given the recent projections from the supply chain on delivery, we need to get our cadence in sync with the supply chain and take costs out of the business. If we are to hope to see incremental margin growth.
Speaker Change: At another way the supply chain is not getting better at a fast enough rate as we had hoped.
Speaker Change: Through our internal efficiency, we have now outpaced them.
Speaker Change: This is the reality of the post COVID-19 environment for many of our most important suppliers.
Finally to be clear current submarine delivery projections are not incrementally impacting since they already reflect the anticipated delays from the supply chain.
Speaker Change: We will of course carefully monitor supply chain performance and accelerate our work should their deliveries to us improve.
Speaker Change: And lastly technologies. It was another strong quarter with revenue of almost $3 $4 billion, which is up 2% over the prior year.
Speaker Change: Operating earnings in the quarter were $326 million up three 5% on a margin of nine 7%.
Speaker Change: That is a 20 basis point improvement in year over year.
Speaker Change: The year to date comparisons are similar revenue at $9 9 billion is up one 2%, but earnings of 941 million are up almost 5% on a 30 basis point improvement in operating margin.
Speaker Change: The growth for this quarter and the first nine months was driven by G. D I tease investments in their digital accelerators.
Speaker Change: Mission systems was flat year over year as they continue to transition from legacy programs to new franchises.
Speaker Change: Strong operating performance across the group more than offset the relative growth in services of G. D I T compared to hardware at mission systems.
Sequentially. The group grew two 5% spread relatively evenly over both businesses with margins steady at nine 7%.
Speaker Change: Order activity was particularly strong in the quarter with a book to Bill of one three to one that resulted in backlog at the end of the quarter of $14 $4 billion.
Speaker Change: 13, 5% from a year ago quarter.
Speaker Change: Through the first nine months the group achieved a book to Bill ratio of one two to one more than keeping pace with the strong revenue growth across the business.
Speaker Change: G D I T and mission systems have shared in the robust order activity. So far this year demonstrating the strength of this portfolio and prospects remains strong with a large qualified funnel of more than $121 billion and opportunities they are pursuing across the group.
Speaker Change: That concludes my comments about the defense businesses, Let me now turn the call over to our CFO, Ken Korea, and then we'll wrap up with our guidance for the remainder of the year.
Ken Korea: Thank you Phebe and good morning, we had a solid quarter from an orders perspective with an overall book to Bill ratio of one one for the company. This is particularly impressive with the continued strong revenue growth in the quarter combat systems and technologies led the way with book to bills of one five times at 1.3 times respectively.
Ken Korea: This order activity led to our backlog increasing to $92 $6 billion at the end of the quarter. Our total estimated contract value, which includes options and <unk> IQ contracts ended the quarter at a record level of 137 $6 billion.
Ken Korea: Moving to our cash performance. This was another good story in the quarter.
Ken Korea: Cash flow improved as anticipated over the prior two quarters, we produced $1 $4 billion of operating cash flow.
Ken Korea: All segments contributed to the results with particularly strong cash generation and technologies.
Including capital expenditures, our free cash flow was $1 $2 billion for the quarter or 131% of net income for the fourth quarter, we are expecting free cash flow to again be greater than 100% of net income, but we now expect the full year to fall short of our 100% <unk>.
Ken Korea: Version target as G 700 deliveries pushed into 2025.
Ken Korea: As a reminder, total free cash flow generation between 2020, one and 2023 was quite strong with a three year conversion rate of 107%.
Ken Korea: Looking at capital deployment capital expenditures were $201 million in the quarter or one 7% of sales.
Ken Korea: We're still targeting to be around 2% of sales for the full year given the commitments that remain.
Ken Korea: We paid $390 million in dividends and repurchased a little over 150000 shares of stock for $44 million during the quarter.
Ken Korea: We ended the quarter with a cash balance of over $2 $1 billion.
Ken Korea: That brings us to a net debt position of $7 $2 billion down over $700 million from last quarter. As a reminder, we have an additional $500 million of fixed rate notes maturing in the fourth quarter that we plan to repay with cash on hand.
Ken Korea: Net interest expense in the quarter was $82 million, bringing interest expense for the first nine months of the year to $248 million down from $265 million for the same period in 2023.
Ken Korea: Finally, the tax rate in the quarter was 16, 5%, bringing the rate for the first nine months to 17%.
Ken Korea: The rate was slightly lower than expected principally due to increased U S and foreign tax credits and benefits and other timing items.
Ken Korea: As a result for the year, we believe our full year tax rate will be closer to 17% now let me turn it back over to Phebe for some final remarks.
Phebe Novakovic: Thanks, Kim and law.
Phebe Novakovic: What are the things I have just discussed let me give you some clarity for the remainder of the year. The figures I am about to give you our all compared to our July update which will be posted along with today's guidance on our website.
Phebe Novakovic: In aerospace, we expect sales to be about $12 3 billion, but the 13, 2% margin.
Phebe Novakovic: We are expecting 150 versus 116 deliveries with tenant the deliveries slipping into next year. This will of course benefit next year.
Phebe Novakovic: With respect to the defense businesses combat systems and technology remain unchanged from July.
Phebe Novakovic: Marine systems revenue should be about $13 9 billion with margins of six 9% for all the reasons I previously noted.
On a company wide basis, we see annual revenue of around 48 billion and margins of around 10, 3%.
Phebe Novakovic: All up that indicates EPS guidance of approximately $14 per share about 45 cents below our previous expectation that concludes my remarks, and we will be happy to take your questions.
Speaker Change: Thank you 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.
Speaker Change: Thank you we will now begin the question and answer session. If you have dialed in and we'd like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue.
Speaker Change: I'd like to withdraw your question simply press Star one again.
Speaker Change: We ask that you. Please limit yourself to one question and one follow up to allow everyone an opportunity to ask a question.
Speaker Change: We'll take our first question from SaaS Eastman at J P. Morgan.
SaaS Eastman: Thanks, very much and good morning.
Speaker Change: Good morning, Seth.
Okay.
SaaS Eastman: Phebe I was wondering if you could talk a little bit about this.
Speaker Change: This year is kind of a.
Speaker Change: Unusual year in terms of the various things that have come up with a few 700, but as.
Speaker Change: As we think about going forward and where the profitability can go in the aerospace segment.
Speaker Change: I know it's early for 2025.
Speaker Change: But maybe even qualitatively talking about the things that are weighing on margins this year and how things can evolve.
Speaker Change: Taking into account also the the introduction.
Speaker Change: The G 800, and you kind of what the progression looks like.
Speaker Change: Yeah.
Speaker Change: So I think as we've discussed through most of this year, we still have supply chain challenges that require at Gulfstream that require attestation work.
Speaker Change: I mean, we still have late deliveries.
Speaker Change: Material the supply chain has gotten much better as evidenced by our ability to ramp up production, but they still got a ways to go and until we get that supply chain quality as well as delivery timing.
Speaker Change: <unk>.
Speaker Change: We will continue to have attestation work that however should be behind us.
Speaker Change: <unk>.
Speaker Change: You know before too terribly long, let's talk about the 700. So the 700, we've talked throughout the year about some of the margin pressures that the first lots.
Speaker Change: But when we look forward as we've talked about before we see gross margin improvement of about 600 to 700 basis points spot remains the same.
Speaker Change: You know as I look forward and I'm in the Aerospace group, we see very very strong margins going forward and we will see good good margins and in Q4, not as high as we expected because we'll have 700 slip into next year, but we'll have very nice.
Speaker Change: Margin expansion.
Speaker Change: As we go through into next year with respect to the 800, we expect it to come out of the blocks pretty pretty good and have some nice margin impacts over the course of this year. So I wouldn't say that we're pretty optimistic.
Speaker Change: Over starting about next year and into the future of the margin performance at aerospace.
Speaker Change: Great Thanks, and maybe just.
Speaker Change: Follow up on combat.
Speaker Change: With the.
Speaker Change: I understand.
Speaker Change: Growth trajectory kind of slowing down here in the second half.
Speaker Change: How much of that reflects kind of the end of the consolidation process.
Speaker Change: For.
Speaker Change: The 155 millimeter shelves and how do we think about kind of the interplay of growth and margin going forward. It would seem that the backlog here would allow this to be as we look across the industry. You know maybe one of the faster growing businesses across the industry or is that a fair assessment.
Speaker Change: Have we had this quarter indicated that some of the margin pressure from facilitation is behind us.
Speaker Change: So look if we look at our backlog and the threat environment and the performance at combat in general over time, I think we'd expect that in our market space. We will continue to grow and perform very well facilitation for increased munition production is largely.
Speaker Change: Behind Us we're moving into production, we will see increased revenue from our.
Speaker Change: From our combat vehicle business and so we do see a pretty good solid.
Speaker Change: Growth pattern as we go forward this year, we accelerated our.
Speaker Change: Growth into the first half so we expect fourth quarter to be relatively flat, but still have about five 9% growth for the group and in the year and we can we expect to see very nice growth going forward I would add this.
Speaker Change: High performing organization like combat systems variability in revenue.
Speaker Change: And margin is almost always a question of timing. So just to give you a little context on that score.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: We'll move next to Robert Stallard at vertical research partners.
Robert Stallard: Thanks, so much good morning.
Robert Stallard: First.
Robert Stallard: First of all a question of Marine Phebe, you mentioned about the supply chain issues that I was wondering if you could elaborate on why it's not improved as much as you would have hoped and also at what point does this start to negatively impact submarine schedules.
Robert Stallard: Yeah.
Well I think that it already has impact to schedule and that's been pretty well publicized by the Navy.
Robert Stallard: Until recently, we had all we had a reasonable hope and it was a reasonable set of expectations based on the indicators that the supply chain would continue to get better but.
Robert Stallard: Most recently, we've seen that in fact, that's not the case and they're not getting better at the rate at which we had hoped.
Robert Stallard: For a whole series of reasons.
Robert Stallard: And I think that and some of those have been very well documented the navy and Congress have been well aware of that so they've been pumping.
Robert Stallard: Additional support into.
Robert Stallard: Parts of the supply chain.
Robert Stallard: And some parts are doing well, but others are continuing to struggle.
Robert Stallard: And I'd say that it was not atypical of a number of manufacturing sector.
Robert Stallard: Sectors.
Robert Stallard: If you go back from December 2019, the PPI for manufacturing has increased by 25%.
Robert Stallard: Overlay that with the demographic challenges that we've had with the smaller cohort of new hires.
Robert Stallard: And wage growth that that's been an added pressure on on some of our suppliers at the same time, you're almost quintuplet.
Robert Stallard: The throughput on and the demand on submarines, so theres been a lot of pressure.
Parts of the supply chain I think that's well understood by our customer and the Congress and so we're going to continue to to work with them and and how far we can but in the meantime, we're going to control what we can control.
Robert Stallard: And and that is you know, we're going to adjust our pace to align with what we now see is more.
Robert Stallard: Predictable.
Robert Stallard: Supply chain schedules that are elongated will take cost out of our business and we will continue to work productivity on the desk plates with an increasingly capable and skilled and experienced workforce. So you can control what you can control and we're simply in the moment adjusting.
Robert Stallard: To what we see as and ability of our supply chain to improve at the rate that it would be you had hoped and that frankly I believe our customer had hoped.
Speaker Change: Just as a quick follow up do.
Speaker Change: Do you think the supply chain issues jeopardize the aspiration to move back to two boats on the Virginia class.
Well I think that in the short term.
Speaker Change: There's going to be pressure on that considerable pressure on that so I think that's something for us to work through with our customer and frankly, the customer to work with the supply chain.
But I think it's a it's a well known issue.
Speaker Change: We'll go next to Myles Walton at Wolfe Research.
Speaker Change: Thanks, Good morning, maybe if I could follow on.
Myles Walton: On Rob's question, there the implied fourth quarter margin.
Myles Walton: Mid 6% range for marine.
Myles Walton: Is there something in the third quarter positively offsetting them to get to the low Sevens am I don't know if there's a positive EAC you might have taken and then looking to 25 is the mid 6% margin the right run rate.
Myles Walton: But you are looking for now in that business.
Myles Walton: So this quarter, we had some strong performance out of nasco.
Myles Walton:
We had some good.
Myles Walton: Good performance at electric boat.
Myles Walton: But that's going to in this environment vary quarter by quarter. So we anticipate some more supply chain impacts in the fourth quarter.
And as we project next year and I'll give you that clarity about in in our regular order and in January but as you project next year the ability to continue to drive incremental margins in the short term is just how fast we can take or pay style at cost and improve our productivity.
Myles Walton: So we'll work through all that with the shipyard and give you a sense of of what we're seeing and in margins I'd say they are going to be kind of lumpy.
Myles Walton:
Myles Walton: Probably through next year and maybe even beyond.
Speaker Change: And then one clarification I know, it's super granular in near term so I apologize in advance but in October to date have you gotten more than one seven out of the door.
Speaker Change: Yeah, I think I was yes, we have and I think I've given you some pretty good clarity of what respect expect for October.
Speaker Change: That sounds pretty much on schedule and November.
Speaker Change: November and December I can give you that clarity is what I'm trying to be as transparent with you. All so that you can.
Speaker Change: Better understand where we anticipate and.
Speaker Change: As you all know you can follow some of that with the publicly available data, which is directionally correct.
Speaker Change: We'll go next to David Strauss at Barclays.
Speaker Change: Yeah.
Thanks, Good morning.
Speaker Change: Good morning, David.
Speaker Change: You'd be calling upon.
Speaker Change: On the <unk>.
Speaker Change: Adam you highlighted in terms of what's impacting the G 700 deliveries I guess just to clarify his roles from an engine perspective are they are they behind is that part of the issue and then on the interior side you just view this as kind of a temporary issue.
Speaker Change: Or could it linger just given a much larger cabin year and I would assume a lot more in the way of complexity on the insurer side on a on a go forward basis, yeah. So we control the interiors. So we're very comfortable on our projections on on how we.
Speaker Change: Work those interior, so I don't I'm, not worried or even concerned about our our interiors engines on station have improved so that is definitely a benefit and I tried to give you some color around that particular issue in my remarks.
But theres improve okay.
Speaker Change: Okay, and a quick follow up.
Speaker Change: It's all rocker motor announcement with our partnership with Lockheed.
Speaker Change: In the quarter can you just give some color around that.
Speaker Change: How that might materialize over the next couple of years in terms of numbers. Thanks.
Speaker Change: Yes.
Speaker Change: Well make some investment over the next couple of years.
Speaker Change: And and then I think that and I don't have an exact start date off the tip of my tongue.
Speaker Change: But a lot of the number or the number of of motors will be driven by overall by the demand for the wrath of itself.
But we're pretty comfortable that this is well within our capability set and we'll work through that with our partner.
Speaker Change: Thank you very much.
Speaker Change: Well move next to Peter Arment at Baird.
Speaker Change: Hey, good morning, good morning.
Peter Arment: Maybe just to focus on combat you guys have had really strong growth through the first three quarters of the year in your obviously your profit margins reflect a lot of really good execution. Just how are you thinking about just kind of you know the.
Speaker Change: The long term visibility here, you know how big of a business.
Speaker Change: In terms of the bookings environment, you mentioned middle East and Europe.
Speaker Change: Maybe just describe I think Wow, how are you seeing visibility a combo.
Speaker Change: So our book to Bill and backlog supports nice growth.
Speaker Change: Unfortunate threat environment also continues to drive demand and we see our pipeline is pretty robust both domestically and outside the United States. So at least for the foreseeable future, we see nice steady growth in combat.
Speaker Change: And just let me know your margin right away with good margin performance. Yes, then my follow up is on the margin front I mean.
Speaker Change: Almost 14% for the first nine months I mean is there are opportunities to.
Speaker Change: Further enhance margins I know there are some some limits here and mix is a factor, but you've got a lot of growth.
Speaker Change: A lot of us are just focus.
Speaker Change: What actually this business can generate.
Speaker Change: So historically this when we've talked about this before on previous calls over the years just tends to be a 14, 5% margin business.
Given some margin variability quarter to quarter again, largely driven by mix and I suspect that will continue in that range again, some margins will get better because we make long term incremental structural improvement in that.
Speaker Change: I don't see that at the moment, but theres always opportunity. So we'll continue to pursue this as I said. This is it's always been a very high operating leverage company, so and groups of the company. The three of them. So I think we'll continue to see both nice growth and good earnings expansion.
Speaker Change: We'll take our next question from Ron Epstein of Bank of America.
Speaker Change: Yes.
Hey, guys. Good morning, a funding round.
Speaker Change: No.
Speaker Change: That's exactly what it says.
Speaker Change: Hum.
Speaker Change: We look at the supply chain for when shipyards.
Speaker Change: And I know that's been an issue.
Speaker Change: And then we looked at it.
Our systems business units growing do.
Speaker Change: Do you worry about the supply chain, there and I guess broadly.
Speaker Change: Hum munitions business as the businesses that are growing.
Speaker Change: And systems.
Speaker Change: Better.
Speaker Change: Supply chain at the shipyards.
Speaker Change: So I think it's and it's a function of the.
Speaker Change: Type of material that we use in combat systems versus the scope size and of the material and inputs, we use both that at Merck.
Speaker Change: Marine group, and particularly submarines and Gulfstream and Gulfstream supply chain got per debated by a lot of of all factors.
Speaker Change: Mezz that have been well reported but I think it's really a question of just the types of materials, we use and the overall demand even outside of the combat.
Speaker Change: Particularly vehicle business that tends to be a more robust supply chain.
Speaker Change: On component parts given that there's other uses for a lot of that material.
Speaker Change: Materials.
Speaker Change: Inputs for for aerospace and for Gulfstream, and and the Marine group or.
Speaker Change: One of a kind of a not replicate anywhere else and.
Speaker Change: And industry.
Speaker Change: So I think that that explains why we've had fewer issues. So we had some issues with supply.
Speaker Change: At combat, but those are largely behind us and I think that you tried to give you some color on why that is.
Speaker Change: And then maybe as a follow on that the.
Marine.
Speaker Change: Alright.
Speaker Change:
Speaker Change: When we look at Marine you say supply chain.
Speaker Change: Questions, a huge thing and I think we all have a good understanding an era, where the really tight points are.
Speaker Change: What didn't marine.
Speaker Change: I mean, what.
Speaker Change: What kind of component.
Speaker Change: Kind of broadly want to understand if you Peel back the onion.
Speaker Change: Where are your suppliers not support it.
Speaker Change: Darren.
Speaker Change: It is.
Speaker Change: Well, we have a number of smaller parts remained who they get produced by single source suppliers and often small ones that remain.
Speaker Change: A bit of an ever being an issue I think it's a large component parts that and I think the Navy is as reported on some of that that tend to be highly complex cost.
Speaker Change: Significantly and you've got green workforce and a lot of these areas. So those are all.
Speaker Change: It's a large group that's all of them about the most color I'm going to give you on on where some of the challenges are because the navy has been kind of explicit in some instances about that and I think that's just a better place to be.
Speaker Change: We will go next to Ken Herbert at RBC capital markets.
Ken Herbert: Yes, hi, good morning, Thanks for taking the question.
Speaker Change: Good morning.
Speaker Change: First phebe.
Ken Herbert: On the services within Aerospace you had nice growth here again, you sort of reset it looks like it is.
Ken Herbert: Sort of a much higher level I know you've added capacity is this a good run rate to think about for the services business within this and maybe if you could talk about how dilutive. This part of the business is relative to.
Ken Herbert: Relative to the aircraft side within the segment.
Speaker Change: So we have long said that service. This is going to grow at the rate of stack fleet expansion and think about it. This way we gathered we garner between 80 590 plus percent of all Gulfstream service and so as I've seen it expand service expands.
Speaker Change: Its impact on overall margins tends to be rather lumpy, but it is in some.
Speaker Change: Instances in some quarters, it's about even so it's certainly not any large dilution impact.
Speaker Change: And it hasnt been for some time. So this is a nice steady growth business.
Speaker Change: Okay and on the quality escape I guess with total deliveries are trending in this month and your confidence you feel good about.
Speaker Change: Is that risk of getting retired or is there anything it sounds like there is clearly still some caution into the back half of the year, but do you feel good about that particular supplier and getting back on schedule.
Speaker Change: Yeah, so they're working very cooperatively cooperatively with us but.
Speaker Change: And I think it's.
Speaker Change: Emblematic or at least descriptive of the fact that we don't have all of these risk behind us and that we're slipping airplanes into next year. So I've tried to give you my best estimate both on cadence and timing.
Speaker Change: And on what we see but.
Speaker Change: For the remainder of this year and then as I said some of these airplanes will go into next year, but we've worked well with the supplier understand the scope. So that does not that is not any particular long term issue nor is it a complete anomaly I'm just in terms of the type of thing that happened.
Speaker Change: Here.
Speaker Change: So, let's just fixing that in the regular order.
Speaker Change: It was a timing problem, but not a systemic one think about it that way.
Okay. Thank you.
Speaker Change: We'll go next to Doug Harned at Bernstein.
Speaker Change: Good morning, Thank you.
Speaker Change: Hum.
Going back to our marine at electric boat.
Doug Harned: When you look at the supply chain issues, there and the delays in the programs. How do you think of the Virginia class and Columbia class.
Speaker Change: Separately, how do you prioritize work.
Speaker Change: Are you, making decisions to prioritize one over the other.
Speaker Change: Well that is it now at the National Security decision dictated by the Navy. So Colombia has across the entirety of the industrial base priority and it has been since inception.
Speaker Change: So.
Speaker Change: Yeah.
Speaker Change: Yeah, so by definition.
Speaker Change: Virginia gets.
Speaker Change: Is behind in terms of priority, Colombia, and that has ramifications for Virginia is well understood by our customer.
Speaker Change: Particularly in a environment in which supply chain material is constrained M Columbia against the first of the Pik.
Speaker Change: Again, given its national security imperative.
Speaker Change: Given the importance of these programs not just for the Navy but.
Speaker Change: Overall the sense.
Speaker Change: Yes.
Speaker Change: No I mean, you got the money.
Speaker Change: In the supplemental for who are supporting the shipbuilding industrial base, but when you work with your customer.
How how is that helping.
Subsequent steps that can be taken within the budget to help build this industrial base.
Speaker Change: So.
Speaker Change: The Navy and the Congress have recognized that there are portions of the industrial base that need help and that's what that's what the.
Speaker Change: Shipbuilding.
Speaker Change: And submarine industrial.
Speaker Change: Industrial base funding is intended to address both expanding the capacity and shoring up the capacity.
Speaker Change: There hasn't been significant cost growth as I noted earlier across manufacturing business in particular and by extension.
Speaker Change: Into the into the submarine industrial base. So costs are increasing fact of life cos or economic realities and and the funding is going to have to adjust judy's fundamental changes.
Speaker Change: In inputs.
Speaker Change: And that will need to happen over time.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Well move next to go Tom corner at T D Cowen.
Speaker Change: Yes. Thank you good morning.
Speaker Change: Yeah.
Tom Corner: So just to follow up on Marine I know.
Tom Corner: You guys are in negotiations with the Navy on the Columbia class. The five of those and I think it's kind of a 12, Virginia class book I'm just curious.
Tom Corner: What's sort of your expectation is for the timing of when.
Tom Corner: Those contracts get agreed to and is there any cash or margin implications once those are assigned to.
Tom Corner: So what's in the yard now and.
Tom Corner: Just if you could talk about that.
Speaker Change: So cash now.
Speaker Change: Margin impact happens over time as we begin to execute those programs I don't have a good sense of timing.
Speaker Change: I expect that the FY 'twenty for ships that are not yet under contract will happen maybe in the next few months, but I don't have a good sense of timing for.
Speaker Change: For the remainder of.
Speaker Change: There are negotiations on block fixed contract on block six and build two of Colombia.
Speaker Change: It's going to be hard to get those contracts under a lot of ships under contract.
Given that we've had the kind of you know.
Speaker Change: Cost increases.
Speaker Change: And inputs.
Speaker Change: And frankly throughout the economy, but as I noted earlier manufacturing keeps me eyesight and those costs have increased.
Speaker Change: Or input so we're going to have to work that with our customer in Congress.
Speaker Change: And just as a follow up I guess, what I'm asking is is there any expectation that there would be really provided for you know higher labor inflation.
Speaker Change: But everyone's experience on boats that are already in production is perhaps part of that negotiation.
Speaker Change: Yeah.
Speaker Change: Well I don't know if part of that negotiation.
Speaker Change: I wouldn't link it necessarily those negotiations, but we are constantly in and negotiation with our with our customer on a whole on any number of contracting actions and and now is no different. We're also I have entitlements and our contracts for which we will seek remedy.
Speaker Change: So there's theres a lot of ongoing discussions with our customer about these costs. These fact of life cost increases and.
Speaker Change: And labor.
Speaker Change: Cost increases and.
That plus the remedy to which we're entitled we're going to continue to work both of those issues with our customer.
Yeah.
Speaker Change: We'll take our next question from Gavin Parsons at UBS.
Speaker Change: Thanks, Good morning.
Speaker Change: Good morning.
Speaker Change: CB gerstel deliver some do seven hundreds out of inventory this year and maybe some out of inventory again next year can you help us with what the under a lot of inventory help me with what you mean by out of inventory and Greg I mean, we don't have a 700 and then Victoria seven hundreds of veterans from some.
Speaker Change: Stage of production, but.
Speaker Change: Just just picking them up there with you.
Speaker Change: Or I guess can you help us with the underlying production route.
Speaker Change: Yes, so I tried to be as tough as explicit as I could be for the remainder of the year. Some of these airplanes will go into next year that'll help next year and then we'll give you what that was.
Speaker Change: Lot of clarity around what our next year looks like in our ordinary course, when you get we give you our guidance in January.
Speaker Change: The airplane is performing very well.
Speaker Change: But we still as I've noted you know frequently we still got a station work that needs to get behind us.
Speaker Change: Okay I'll try one more.
Speaker Change: If this is just an accounting question, but.
Speaker Change: You called out all the elevated costs don't paint interiors component replacement onto 700, how does the.
Speaker Change: 600 to 700 basis point margin step up remain intact.
Speaker Change: Well that will happen I don't have exact clarity on when those gross margin improvements.
Speaker Change: Improvements will happen, but I think relatively soon and over the course of potentially the next year, we ought to see some really nice margin expansion, we're seeing it in the fourth quarter right off the bat.
Speaker Change: And and I can expect to see that margin expansion continued throughout next year and beyond.
Speaker Change: We'll go next to Jason Gursky at Citi.
Speaker Change: Yeah.
Speaker Change: Hello, there good morning, everybody money.
Jason Gursky: Money, maybe it was I was wondering if you could just step back for a minute and maybe talk a little bit about the things that you're most excited about and where you're kind of spending.
Jason Gursky: The amount of your time as it relates to technology investments and the business development pipeline.
Jason Gursky: And technologies as well.
Jason Gursky: And across the defense business as a whole yeah.
So I would say that we need to continue to capitalize on the.
Jason Gursky: On the very strong growth profile, we see going forward in the Marine group.
Jason Gursky: We spend an awful lot of time on on improving our own capability within our own shipyards.
Jason Gursky: I think the technologies group and.
Jason Gursky: In general has shown nice growth and they have positioned themselves in and fast occurrence than they're highly competitive businesses. So we're pretty excited about what we see there and then I think combat systems.
Jason Gursky: Performance continues to be strong and how we then translate a demand into revenue in the out years and continued the strong operating performance. We've had there is sort of where we focus our time.
Speaker Change: Right, there's a lot to be moved.
Speaker Change: You know theres a lot to be excited about in terms of performance of the company.
Speaker Change: Yeah understood. Okay, no that's helpful to understand the prioritization.
Speaker Change: And then.
Speaker Change: This is of course, where we could keep involved as well, but I'm just kind of philosophically. How you guys are all excuse me, we're approaching the balance sheet and the capital structure.
Speaker Change: And leverage I'm, just kind of as we think about the future of the company, where you want to operate.
Speaker Change: Yes, well, obviously, we have a very strong balance sheet. We were recently upgraded in terms of our credit rating and we have some debt repayments coming due that we expect to pay on schedule and we will consistently look at where we stand, but we feel pretty good about where we stand right now.
Speaker Change: Right.
Speaker Change: Philosophically you want to keep your leverage under six turns of leverage I'm, just kind of curious how you're thinking about.
Speaker Change: Yeah, I don't think you know at this point in time I think we're continuing to work the growth environment that we're in and and determining you know in terms of where the cash is going to.
Speaker Change: Come out for 2025, especially and I think it's a matter of time in terms of taking a look at where we stand.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: So Andre I think we have time for one more question.
Speaker Change: Okay.
Speaker Change: Thank you, we'll take that question from Scott Deutschland at Deutsche Bank.
Scott Deutschland: Hey, good morning, Phebe just to clarify your response to Davids question earlier.
Scott Deutschland: Did the certifications are getting this year on those highly customized interiors for two 700 did those derisk. This is an item for from being a constraint next year.
Yes, I mean these are the first ones out of the block. So we don't see that as a constraining item next year.
Unknown Executive: Thank you. Great question.
Okay, great after that the question.
Unknown Executive: The combat systems have many products that are approved for export on a direct commercial sale basis. And then, are you seeing much traction for DCS sales, either in terms of the bookings you put up recently at Combat or in terms of orders thrown in the pipeline?
Scott Deutschland: It.
This combat systems have many products that are approved for export on a direct commercial sale basis, and then are you seeing much traction four dcs sales either.
Speaker Change: In terms of the bookings you've put up recently, a combat or in terms of orders there in the pipeline, but not out of the United States backed out of our European businesses, Yes, those tend to be direct sales and that's been true for 25 years.
Unknown Executive: Not out of the United States, but out of our European businesses, yes, those tend to be direct sales.
Unknown Executive: And that's been true for 25 years. And the demand for those products in Europe, even Eastern and Western Europe, remains very strong.
Speaker Change: And the demand for those products in Europe, and even eastern and.
Speaker Change: Western Europe remains very very strong.
Thank you.
Unknown Executive: Well, thank you everyone for joining our call today. As a reminder, please refer to the General Dynamics website for the third quarter earnings release and highlights presentation.
Speaker Change: Great well. Thank you everyone for joining our call today as a reminder, please refer to the general dynamics website for the third quarter earnings release and highlights presentation. If you have additional questions I can be reached at 700 38763152.
Unknown Executive: If you have additional questions, I can be reached at 703-876-3152.
Unknown Executive: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Speaker Change: And this concludes today's conference call. Thank you for your participation you may now disconnect.
Speaker Change: Okay.
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Speaker Change: Yeah.