General Dynamics Corporation

Good morning and welcome to the General Dynamics second quarter 2024 earnings conference call. All participants will be in listen-only mode. Please note this event is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. I would now like to turn the conference over to Nicole Shelton, Vice President of Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to the General Dynamics second 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 company's 10-K, 10-Q, and 8-K filings. We will also refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations page of our website, InvestorRelations.gd.com. On the call today are Phoebe Novakovic, Chairman and Chief Executive Officer, and Kim Correa, Chief Financial Officer. I will now turn the call over to Phoebe.

Thank you, Nicole. Good morning, everyone, and thanks for being with us. Earlier this morning, we reported earnings of $3.26 per diluted share on revenue of $11.98 billion, operating earnings of $1.16 billion, and net income of $905 million. We enjoyed revenue increases at each of our four business segments compared to the year-ago quarter. Across the company, revenue increased a strong 18%, with a 51% increase in our aerospace segment and a 10% increase across our defense units. Strong growth by any standard. Importantly, operating earnings of $1.16 billion are up almost $200 million or 20.2%, demonstrating solid operating leverage. Similarly, net earnings are up 21.6% and earnings per share up 21% over the year-ago quarter. You will note we missed street EPS consensus by two cents due entirely to the slip of four G700 deliveries from the last week and the quarter to the beginning of Q3. One has since been delivered three or a minute. From a different perspective, the sequential comparisons are also quite favorable. Revenue is up $1.2 billion and operating earnings are up $120 million on steady margins. On a year-to-date basis, revenue of $22.7 billion is up $2.67 billion or 13.3% over last year's first half. Operating earnings of nearly $2.2 billion are up 15.4%. Net earnings of $1.7 billion are up 15.6% despite a higher provision for income taxes. In a few minutes, our CFO, Kim Carrillo, will provide you with free cash flow for the first half and remainder of the year. our strong continued order activity, and backlog, as well as some additional relevant financial information. But first, I will take you through each of the segments. We'll start with aerospace. Let me give you some comparative numbers that will show the front end of a tremendous growth surge for aerospace that will progress favorably throughout the year. Then I will attempt to put all of this in some reasonable perspective for you. Aerospace had revenue of $2.94 billion and operating earnings of $319 million with a 10.9% operating margin. Revenue is $987 million more than last year's second quarter, a remarkable 51% increase. The revenue increase was driven by additional new aircraft deliveries coupled with higher service revenue. We delivered 37 aircraft, including 11 newly certified G700s in the quarter. This is four fewer than we expected to deliver, but more about that in a minute. Operating earnings of $319 million are up $83 million, 35% over the year-ago quarter. The 10.9% operating margin was 120 basis points lower than the year-ago quarter. This was driven by G700 deliveries that carried more than expected costs from three things. First, retrofit. Second, attestation work related to the late arrival of parts. and three, the extended certification period. This cost burden will affect 20 Lot 1 aircraft, which includes five test aircraft that will not deliver this year. So, we are through the Lot 1 cost burden for this year within the next four deliveries. The good news is that margins on the G700 are expected to increase by 600 to 700 basis points in Lot 2 and by a similar increment in Lot 3. By the time we reach Lot 3 production and deliveries, we will have reached a steady state in terms of productivity and predictability. A few comments on predictability. You might recall that I told you we expected to deliver 50 to 52 G700s this year and that the deliveries would be more or less evenly divided over the last three quarters of the year. But we planned 15 for Q2 and delivered 11, so much for predictability. We actually had the remaining four completed and ready to go, but could not get through the pre-flight delivery testing in time. You might be surprised to learn that each G700 is flown about 30 hours of test before delivery. Two of the planes also needed a supplemental type certificate because of a very different cabin configuration. That wasn't done by the end of the quarter. All right, back to some numerical comparisons. The sequential numbers are equally impressive. Revenue is up $856 million, a strong 41% increase, and operating earnings are up $64 million, about 25%, affected by 130 basis point degradation in operating margins for the reason I just mentioned a moment ago. You will see much stronger operating margins in the third quarter, followed by even better operating margin and related earnings in the fourth quarter. Separately, we still expect to deliver 50 to 52 G700s this year. Look for about 16 in the third quarter and 23 to 25 in the fourth quarter. From an orders perspective, we had a respectable quarter at 0.9 to 1 book to bill and dollar terms. There's strong interest in a fair pipeline across the product mix. As I noted last quarter, bringing transactions to a close has elongated somewhat. as there is some caution while customers digest the impact of geopolitical events in general and the U.S. presidential election in particular. The United States remains our strongest market, but the EU is improving. The Middle East shows very strong potential, and just very recently we have seen some improvement in China. The interest level of buyers and the expiration of accelerated depreciation at the end of the year suggests a reasonably strong order intake in the second half of the year, particularly in the fourth quarter. We are pleased to have both G700 FAA and EASA certifications behind us. The aerospace comparative revenue and earnings numbers in the quarter are very good by any reasonable standard. but still behind consensus largely attributable to deliveries that did not make it to the wire. In summary, the aerospace team had a very good quarter. It is handling the rapid increase in deliveries and revenue in a methodical and disciplined fashion. We look forward to a powerful second half with increasing revenue and earnings quarter over quarter as we forecasted at the end of last quarter. Moving to the defense business 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. Combat systems had revenue of almost $2.3 billion, up 19% over the year-goal quarter, with growth at each of the three business units. Earnings of $313 million are up almost 25%, and margins at 13.7% represent a 70 basis point increase over the Q2 last year. In short, very strong operating performance from combat systems. The increased revenue came from facilities expansion and artillery work in our ammo business, coupled with increases in international tank and wheel vehicle sales and U.S. Army programs of record. Each of the businesses increased earnings nicely with particularly strong operating leverage in our international vehicle business. On a sequential basis, revenue increased 8.8% and earnings rose 11%. Year-to-date, revenue of about $4.4 billion is up 19.3%, and earnings of $595 million are up almost $100 million, or 20%. Combat saw robust order intake with over $3.4 billion awarded in Q2, resulting in a bill of 1.5 to 1 for the quarter. Orders came from across the portfolio, ranging from ammunition to main battle tanks for the U.S. Army and wheeled vehicles for an international customer. Demand remained steady, particularly for the Abrams main battle tank and international wheeled vehicles. We expect demand for ammo to continue to rise for some time to come as we rapidly increase production of artillery shells and components. All in all, a very strong growth and performance quarter for combat systems. Turning to marine systems. Once again, our shipbuilding group is demonstrating strong revenue growth. Marine systems revenue of $3.45 billion is up $394 million, almost 13% against the year-ago quarter. Columbia-class construction and engineering volume drove the growth, while Virginia-class and DDG 51 revenue also increased nicely. Operating earnings are $245 million, up $10 million over the year-ago quarter, with a 60 basis point decrease in operating margin. Margins were impacted by continued delays to EB from the submarine industrial base. partially offset by improvement in DDG 51 performance at Bath and continued steady performance at NASCO. Sequentially, revenue increased 3.7% and earnings improved 5.6% in Q2, driven by volume at EB as we saw some quarter-over-quarter improvement in supply chain deliveries to the yard and continued positive performance at NASCO. Year to date, marine revenue of $6.8 billion is up 12.1%, and earnings of $477 million are up 7%. As I noted a moment ago, although the supply chain is improving in places, EB continues to be impacted by late deliveries from the supply chain, which both delays schedule and impacts costs. Out-of-sequence work on multi-ton modules is time consuming and expensive. Our strategy, as you know, has been to increase our productivity to somewhat offset that impact. To that end, throughput, a significant measure of productivity, continues to improve. Hiring is good and attrition is lower, so all good signs. In summary, we are starting to see some momentum build in our shipyards to meet the delivery and repair requirements of our customer, the U.S. Navy. We anticipate that all of our yards are now well positioned for slow but steady incremental margin growth over time. with fewer perturbations. Finally, technologies. The group had another good quarter with revenue of nearly $3.3 billion, up 2.5% over the year-old quarter, and operating earnings of $320 million, about 13.1%, on a 90 basis point improvement margin. This nice improvement in operating performance was across both businesses. GDIT margins increased 40 basis points, Admission systems margins were up 130 basis points as they continue to recover from supply chain impacts experienced in 2023 and before. Sequentially, revenue is up $81 million or 2.5% and operating earnings are up 8.5% on a 50 basis point improvement in margin. And the story is much the same for the year to date with revenue of $6.5 billion up about 1%, and operating earnings of $615 million up 5.7% against the first six months of last year. As a result, margins for the group were up 40 basis points year-to-date to 9.4%. So, all relevant comparisons this quarter show revenue and earnings growth and a margin expansion at both businesses, positioning them well going forward. In short, GDIT is holding its industry-leading margins while consistently delivering year-over-year growth, while Mission Systems is delivering nice margin expansion as it transitions from sunsetting legacy programs. The group received $3.3 billion in orders in the quarter, bringing the total $7.2 billion for the first six months. That results in a book to bill for the group of $1.0 for the quarter and $1.1 for the year to date. Total awards for the group in the first half were up 30% compared with the first six months of 2023. This is on the strength of win rates consistently around 80% for the group and capture rates at roughly 65%, both very strong for this industry. Backlog was down slightly from the end of the first quarter due to the removal of backlog associated with an international divestiture in the quarter, but was up almost $200 million from a year ago. As importantly, the qualified pipeline remains very robust at over $120 billion. So the group is well positioned to continue its growth trajectory. Let me now turn the call over to Kim.

Thank you, Phoebe, and good morning. I'll start with orders. We had a solid quarter from an orders perspective at $10 billion, with an overall book-to-bill ratio of 0.8 to 1 for the company. This was achieved in a quarter when revenue grew 18% over last year, and there were no significant shipbuilding contracts awarded. Aerospace had a book-to-bill of 0.9 to 1, while revenue grew over 40% sequentially with the initial deliveries of the G700. On the defense side of the business, combat systems did particularly well with a book-to-bill of 1.5 to 1, and technologies was 1 to 1. We ended the quarter with backlog of $91.3 billion, essentially even with where we were a year ago. Our total estimated contract value, which includes options and IDIQ contracts, ended the quarter at nearly $130 billion. Turning to our cash performance for the quarter, we generated $814 million of operating cash flow. After capital expenditures, our free cash flow was $613 million for the quarter, yielding a cash conversion rate of 68%. Technologies led the segments with strong cash flow generation in the quarter. When you consider the free cash flow through the first half of 2024, we are slightly positive at $176 million and about $250 million ahead of what we had planned. After the planned slow start in the first half, we expect significant second half growth. With the majority of the cash generated in the fourth quarter, we are still planning a cash conversion rate around 100% for the year. So, you may be wondering what's driving cash to be so backloaded this year. It's apparent from our balance sheet that we have been building up working capital in the first half of the year, which we expect to substantially unwind in the second half. One obvious driver of this is Gulfstream with the ramp up for the certification and deliveries of the G700. The planned G700 deliveries in the second half are significant, which will reduce working capital. Another large contributor to the growth in working capital has been Combat Systems. They have several programs that pay at delivery. Thus, we are buying material in the first half of the year that results in product deliveries and cash in the second half of the year. Combat is also subject to the timing of deposits on international programs, and the first half of the year has been a period of liquidating deposits received in prior periods. Now, turning to capital deployment. Capital expenditures were $201 million, or 1.7% of sales in the quarter. Similar to last year, you should expect capital expenditures to be somewhat higher in the second half of the year and slightly above 2% of sales when the year wraps up. Also in the quarter, we paid $389 million in dividends and repurchased approximately 119,000 shares of stock for $34 million. Through the first half, we repurchased only a modest number of shares for a total of $139 million, driven largely by our 2024 cash profile. We ended the quarter with a cash balance of approximately $1.4 billion and a net debt position of $7.9 billion, down over $300 million from last quarter. As a reminder, we have an additional $500 million of fixed-rate notes maturing into the fourth quarter that we plan to repay with cash on hand. Our net interest expense in the quarter was $84 million, compared to $89 million last year. That brings the interest expense for the first half of the year to $166 million, down from $180 million for the same period in 2023 on lower debt balances. At this point, our expectation for interest expense for the year remains unchanged at approximately $320 million. Finally, the effective tax rate in the quarter was 17%, bringing the tax rate for the first half to 17.2%. This rate is a little lower than our outlook for the full year, which remains around 17.5%. For the second half of the year, we expect the rate to be lower in the third quarter and then a bit higher in the fourth due to typical timing items. Phoebe, that concludes my remarks. I'll turn it back over to you.

All right. Thanks, Kim. Let me move on to give you updated forecasts for the year. The figures I'm about to give you are all compared to our January forecast, which will be posted along with today's guidance on our website. In aerospace, we are sticking with our same earnings estimate, but we'll get there with higher revenue and about a 100 basis point drop in margins for all the reasons I mentioned to you a few minutes ago. We are still holding to our delivery estimate of about 160 airplanes. With respect to the defense businesses, combat will have revenue of about $200 million higher than previously projected as a result of continued demand. So look for total revenue of about $8.7 billion. Margins should be about the same. All-in operating earnings will be up $30 million over the previous forecast. Marine systems revenue should be up $1 billion in electric boat and somewhat at bath. So we will have annual revenue between $13.4 and $13.8 billion, with an operating margin around 7.4%, with operating earnings up around $45 million over the January forecast. For technologies, we are not changing our earlier guidance to you. On a company-wide basis, we see annual revenue up about $2 billion, with overall margins down about 30 basis points. So total revenue of $47.8 to $48.2 billion and operating earnings up modestly. All up, that indicates EPS guidance of $14.40 to $14.50, 5 cents over prior guidance. I will note that normally this time of year, we have solid insight into revenue and margin. In this growth environment, the upside has been difficult to predict with equal clarity. Should anything materially change in Q3, I will give you another credit guidance. That concludes my remarks and we'll be happy to take your questions.

Thank you, Phoebe. As a reminder, we ask participants to ask one question and one follow-up so that everyone has a chance to participate. Operator, could you please remind participants how to enter the queue?

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. As a reminder, we ask that you please limit yourself to one question and one follow-up to allow everyone an opportunity to ask a question. We'll go to our first question from David Strauss at Barclays.

Good morning. Thanks for taking the question.

Sure.

Phoebe, on the G700, as I understand, there are some issues that you have to fix with these pre-built airplanes. Can you just talk about what exactly the issue is, how far of the way you are through that, and whether this is still an issue in terms of airplanes that are on the line? Thanks.

Sure. So, very late in the certification process, we had a requirement to bind together some wires in the tail of the airplane. So relatively simple fix. For those airplanes that we'd already built, we took the tails off. For those that we were building, we just didn't put them on. So this is largely behind us and contributed to the cost impact on lot one. But, you know, I would note that it's extremely hard to discern anything meaningful looking from the outside in here. This is, as I said, largely behind us and we're pretty late in the process and not particularly difficult to do.

Great. And so none of these slips relate to kind of supply chain issues. It was more about just, you know, fixing this certification issue.

Right. Think about the supply chain as more a question of cost than of delivery.

Terrific. Thank you.

We'll move next to Peter Arment at Baird.

Thanks. Good morning, Phoebe. Morning. Yeah, it's really encouraging to hear about the 50 to 52 is still intact for the G700. Maybe you could just touch upon, you know, I think expectations around bookings. I know you've talked about in the past. about geopolitics and a lot of just, you know, volatility in the world. Just your thoughts on just, you know, bookings for the year. Thanks.

So we tried to give you some color around that. In the remarks, I say that we typically see in any U.S. presidential election a slowdown around the election. And I think this won't be any different. But we do expect, as I noted in my remarks, more robust fourth quarter because we've got the expiration of the accelerated depreciation, and the pipeline is quite good. And I gave you also some color around the geographical distribution there. So all in all, there's quite a bit of interest in our airplanes.

That's great to hear. Just as a quick follow-up, just... Your latest thoughts on just the G-400, is that still tracking to your kind of original plan?

It is, and we ought to fly very soon. We'll go next to Robert Spingarn at Melius Research.

Hey, good morning. Morning. Phoebe, maybe sort of a two-parter on marine research. I wanted to ask you first, you know, with the recent supplemental, there was money a little over $3 billion to help support the submarine industrial base. And you did mention last time that there were a few sole source suppliers of complex components that were causing some of the delays. So wondering if that money has gotten to them and is resolving the issue or if you had to qualify alternate sources. And then the longer term question is, you know, a decade ago or maybe a little bit longer, you know, Marine was a 10% type margin business. And given the supply chain issues, the impact to the shipbuilding workforce, you know, in the aftermath of COVID, you know, is that a realistic target at some point in the future? And what might be the timing on that? Thank you.

Sure. So, let me take each part of your question in turn. So, The Navy, working quite closely with the Congress, allocated significant funding for the industrial base, as you noted. That money has begun to flow, and it is intended for another, and it's targeted for a number of uses. One, increased throughput. Two, some facilitation, some training, increased hiring, and so It's been really critical, and we've been pushing very hard to get that money as fast as we possibly can into the supply chain to help stabilize them. And let me put it to you this way. There are some supply chain providers who are improving and improving quite nicely. We still have some challenges out there that are pretty well publicized, but we're continuing to work with the U.S. Navy on how to the extent that those can be mitigated. So we continue to see cost impacts from late deliveries of out-of-sequence work, as I noted in my remarks. But we continue to be hopeful. We are hopeful that the additional funding that we're putting into the supply chain should help stabilize over time. So with respect to your 10% margin, That certainly is our goal. I think the supply chain has to stabilize. We've got to come down our learning curves on Columbia. Virginia throughput has to increase. So we will ultimately stabilize in the marine group. And I will notice, by the way, I think you mentioned something about the workforce. We have... in the last year or so, had no difficulty in hiring at our shipyards, and our training program has been pretty robust. So we've got shipbuilders coming out of that training program with a higher than typical level of proficiency. Our retention is also much better, so that gives us some confidence in the throughput and productivity capacity of the shipyards. But Everything in shipbuilding is slow, so it's small incremental improvement over time, but I think 10% is a reasonable goal over time, and there's no way to estimate that with any precision. Not going to speculate, but it is objective.

Thank you very much.

We'll go next to Kaivon Remore at TD Cowan.

Yes, thanks so much, Phoebe. Good morning. Good morning. So the tail issue at Gulfstream, does the required rework extend beyond the first 20 units in the first block? And should we be looking for sequential build in terms of unit delivery so that I would assume then you have less first block impact in the third quarter than the second and even less or none in the fourth? And therefore, you should see a strong lift in the margins sequentially. Is that the way to look at it?

Yes. So I tried to give you a lot of color of that in my remarks. But with respect to the binding of some of those wires in the tail, that's largely behind us. And with respect to the margin trajectory, we see nice margin improvement in this quarter and then again in the fourth quarter. Think about the fourth quarter as mid to high upper teens.

Okay. And because, you know, of this rework, should we assume that the profitability on block two for the G700, that the sequential step up from one to two will be somewhat bigger than one might normally look for?

I tried to give you that in my remarks, but this is really a lot one issue.

Got it. Thank you.

Our next question comes from Jason Gursky at Citi.

Hey, good morning, everybody. Citi, I just wanted to spend a few minutes talking about the services business in aerospace and just some of the trends that you're seeing there with the fleet utilization. and what you're seeing in the competitive environment in that business as well.

So on the service side, services, as we said before, will grow with the expansion of the fleet. Our objective is to get as much of the Gulfstream work as possible, and we've got the vast preponderance of it already. Services is growing this year. as is, by the way, Special Mission, which is driving a lot of the revenue increase this year. But we should see nice, steady growth over time in the service sector. And there's no real – with respect to services, there's no real difference in any of the competitive environment.

Okay, great. And then turning to technologies and maybe using a bit of your crystal ball on the pipeline and the outlook for bookings and book-to-bill there. What's the environment look like there for you all over the next, I don't know, 12, 18 months on the pipeline and the outlook for book-to-bill for the technologies business?

So we continue to see a very active pipeline. I think the available market at the moment is over $120 billion, which is pretty robust. And we've been winning our fair share, a little bit more than our fair share, so we believe that over time that will continue as it has in the last couple of years drive services growth and, frankly, admission systems as well. So I think technology is positioned for nice, steady, slow growth, which is exactly what we have promised in the past and what we're delivering.

It's a pretty steady. We'll go next to George Shapiro at Shapiro Research.

Yes, good morning. Hi, George. Phoebe, I just wanted some clarification. You had said that pretty much all the costs were incorporated, yet you delivered 11. Five you said won't be delivered until next year, but there's still four left. That's the four that you just delivered in the first week or so of the third quarter?

Yes. So the lot one consisted of about 20 or so airplanes. Five are test airplanes. They'll deliver next year. But this year, the lot one costs are going to be behind us imminently. We've delivered one of the four. And I tried to give you some color on the delivery process. And... The other three are imminent here. So I think we're in pretty good shape on that. Does that help you?

Yeah, that helps. And then just a quick follow-up on a usual question. If I look at the gross bookings versus the net bookings from your backlog, there's like a $171 million difference. Was that just forfeiture, cancellation, currency-related? Do you have any comment on that?

Nothing that I can put my finger on, to be quite honest, in the moment.

Okay. And, Jen, one last one then. Aftermarket growth in the quarter at Gulfstream?

Pretty good. Pretty robust in the service business, and we expect it to continue to grow this year, which is driving a lot of the revenue increase along with the special mission.

We'll go next to Ken Herbert at RBC.

Yeah, hi, Phoebe. Good morning. Good morning. I wanted to see if you could make some comments on combat and specifically the outlook for bookings in Europe and other regions, but also how should we think about with the orders you're booking today, the impact on the backlog and to what extent are they accretive to segment margins or how accretive could they be as some of the more recent bookings flow into the backlog of revenues?

So the bookings continue to reflect the threat environment. Both, they were driven in the quarter both by international vehicle orders and U.S. ammunition and Army programs of record. And I think we'll see As we're going forward, I'd say that combat systems is typically, as we talked about in the past, probably a mid-14% margin business, but it'll have quarter variability, sometimes up around 15%. So it's really a question of mix. In the moment, we see increased, what we call, sustainment. Think about repair and support, which tends to carry a little higher margin. And you didn't exactly ask this question, but I'll sort of answer it. As we move from the lower margin facilitation work to the higher margin throughput that's generated by the throughput on ammunition, you'll see a little bit of margin expansion there.

And just can you quantify the cash impact in the second half and the fourth quarter from the timing of some of the cash receipts on combat?

I don't think we've broken out cash for you by business group. I think Kim Pinch gave you a fair amount of color on what was going on in the third and particularly the fourth quarter of unwinding some of the pre-builds in combat.

with the deliveries of those vehicles and material. We'll go next to Doug Harnett at Bernstein.

Good morning. Thank you. Hi, Doug. Hi. You know, if we look at Gulfstream and kind of look through the current margin issues, and when you get out to 2026, you should be at a point where you've got a full portfolio of maturing aircraft, commonality. And, you know, if we go back to the days when you could get to those 18 and to 20 percent type margins, is there a way to think about the progression here? There are clearly near-term issues. You've got the G800, the 400. How do you see working through those the implication for margins? and where you would come out when you're, what I would say, in more of a normalized mode.

I'd say there's good potential for higher margins along the lines that we had seen in the past, but exactly when at this point is hard to pinpoint. But I think we're pretty confident and pleased with the results long-term margin trajectory at aerospace for all the reasons that I think you quite cogently listed.

And then just changing gears, when you look at munitions, I know you're expanding capacity substantially. A lot of people look at the situation in Europe. We've got an election coming up. And when you look at the demand for munitions, if you run that out, five, six, seven years. How do you see that? Because others are, you know, Rheinmetall and others are also ramping up here. How do you see that extending over time?

Well, it's hard to look into a crystal ball much past, you know, a planning period. But we anticipate for the next couple of years increased munitions production orders as dictated by the threat environment, and we're pretty confident in that. So that's kind of how I look at it. It's awfully difficult to predict the threat environment with any kind of clarity other than pure speculation outside the next couple of years.

I was asking because as you think about this build-out, And what period of time are you looking at is kind of what I was getting at in terms of growth.

Yeah, a couple of years. If I wasn't clear on that, I apologize. Yeah, I'd say a couple of years of this. I'd say three, four years max, somewhere along those lines. And then we'll see. I think there have been some profound lessons learned about the criticality of munitions and munitions.

So I expect those to be incorporated in... You know, you let most land forces thinking.

Okay. Very good. Thank you.

We'll go next to Miles Walton at Wolf Research.

Thanks. Good morning. I was wondering, Phoebe, you increased the sales at Gulfstream, but no change in deliveries. Is that an ASP or a services-driven higher revenue base?

A couple of things, including services, as I had noticed, increase in services, and also an increase in special mission, which are kind of lumpy, as you know, and we've talked about in the past.

Got it. And then just another detailed question. Thanks for the color on the unit improvement in margins. Are the unit quantities about 20 aircraft similar to lot one, and then Secondarily, when you move to the 800, the G800, should we anticipate a similar profile of profitability, or do you think you'll be at higher profit sooner on the 800 out of the gates? Thanks.

Planning purposes is the latter, but that's probably all the clarity we've got at the moment. It all depends on the certification process, but we anticipate, I think reasonably anticipate, that They'll come out of the gate very strong.

Okay. And were the lot quantities about 20 lots? Yes.

Okay. That's typical lot quantities. We'll go next to Scott Deutschel at Deutsche Bank.

Hey, good morning. Morning. Phoebe, can you characterize the ramp up at this new munitions facility in Texas you opened up during the quarter? I guess, you know, are you likely to exit 3Q at a relatively full run rate, or is the ramp more gradual than that? Thank you.

So, we opened up the facility. The first line is running and producing as we anticipated. We are standing up lines 3 and 4. So that's a material increase in the throughput at that facility, but it's a modern facility with a very strong and good workforce. So we're pretty encouraged that we will quickly come down our learning curves and produce at or above our plan.

Great. And Kim, just to clarify your earlier comments, are you expecting working capital to be a source of cash in 3Q?

Yes, but I would say that when you look at the cash profile for the rest of the year, most of that cash does come in the fourth quarter, so most of that working capital will unwind in the fourth quarter, not the third quarter.

Okay, so modestly positive in 3Q?

Yes.

Thank you.

We'll move to our next question from Robert Stallard at Vertical Research.

Thanks so much. Good morning. Good morning. Phoebe, a couple of political questions for you. First of all, in the U.S., if the Ukraine supplemental were to be zeroed, what sort of risk could that present to GED in the future? And then second, in the U.K., change of government over here, were there any implications for Ajax or AUKUS down the line? Thank you.

Let's take that in the inverse order. Don't anticipate any particular changes in Ajax. The vehicle is performing extremely well. Uh, the UK army is pleased with it. Um, so I think that that's a standard piece of kit, um, for the UK army, um, with respect to the U S um, I think it's, you know, the Ukrainian, uh, supplemental certainly helped, uh, but was not the only source of funding for munitions. And frankly, the munitions demand is a reality independent of, I think, a lot of other things based on the lessons learned that most land forces, I believe, have incorporated at this point. So we expect that to continue.

Okay. Thanks so much.

Our next question comes from Seth Seifman at J.P. Morgan.

Good morning. One quick specific one on Gulfstream. The out-of-station work you talked about due to late supplier deliveries, is that behind us now as well?

The supply chain has improved, but it is not completely healed yet. So I suspect we'll continue to have some out-of-station work.

And then more broadly, the comment you made at the end of the prepared remarks about potentially revisiting the guidance with the Q3 earnings, is that because of uncertainty in any particular area or just kind of broadly across the businesses?

I think that in this growth environment, revenue has been harder for us to predict. And just the input of... contract executions and the impact of contract executions. So that's why we have a little less clarity than we typically do at this point. This revenue is a bit harder for us to identify with the kind of certainty that we typically can.

Okay. Very good. Thanks very much.

Our next question comes from Ellen Page at Jefferies. Good morning. Thanks for the question.

Just starting on the G700, you mentioned Block 3 was at a steady state margin. How do we think about that relative to the G650 with that kind of peak margin?

You know, I don't have that exact comparison, but these are going to be very healthy margins, as you can imagine, on these airplanes.

Okay. Thank you. And then just moving to marine, as we think about the high growth this year, how do we think about that continuing into 2025? Or should we assume?

So this is, we continue to see a strong growth profile for the marine group for the foreseeable future. In fact, for some time to come, driven by, as I noted before, the threat environment. So growth is continuing. Some years it'll be a higher rate of growth than others, but it is a growth trajectory.

Thank you. I'll leave it there. And next we'll move to Noah Popanak at Goldman Sachs.

Hi, good morning, everyone. Morning.

Phoebe, I guess if I look at the funded backlog at Gulfstream, it's It's been relatively flattish over the last year, year and a half. I know you have overall good demand for the new products, but how are you thinking about matching supply to demand as you're going to ramp deliveries here? Do you have visibility that the orders will keep pace with that? Do you have any concern about taking the revenue run rate above the order rate?

So I think we've got a very balanced plan through this year, and the way we think about the market, certainly the pipeline supports that and has supported it. There's an awful lot of interest in these new airplanes. So I think we've planned accordingly, and I think as I tried to give you some color in the remarks, the pipeline remains strong, and that's the best indicator of near-term future

Okay.

How far out into the future does the pipeline go in terms of your level of visibility and confidence and what the order flow will look like?

Well, it doesn't stand to reason that the further out you go in the future, the less your confidence is. That's actually, I think, a truism. But for what we can see, we like what we see in the pipeline.

Okay. And, Kim, did you – I apologize if I missed it. Did you provide a new free cash flow to net income conversion goal for the year? And then I guess just any comment on how to think about that next year if there are some abnormalities this year that reverse next year?

So in terms of for this year, we're still targeting the conversion rate of approaching 100%. You know, obviously a lot of that cash is going to come in the fourth quarter of this year based on our profile this year. And honestly, we are still in the planning process for next year, so we're not at the point that we're ready to give any cash flow guidance for next year.

Okay, thank you.

So, Audra, I think we have time for just one more question.

Thank you. That question comes from Matt Akers at Wells Fargo.

Yay, good morning. Thanks for the question. There was a fire at the Camden, Arkansas facility. Can you guys comment if that was material at all and if that is back online at this point?

Well, that was a tragedy for the individual, the family, and for us. From a business perspective, it's a very small line.

Got it. Thanks. And I guess it's a good comment on maybe the outlook at NASCO, you know, just between the repair work and I think you guys recently won the sub tender work there, just kind of how you see the outlook for that yard.

So NASCO learning and performance on the TAO, the oiler, is going quite well. We're delivering the seventh of the eight class ESB. And repair continues to be pretty strong as the demand from the U.S. Navy is increasing.

Great. Well, thank you, everyone, for joining our call today. As a reminder, please refer to the General Dynamics website for the second quarter earnings release and highlights presentation. If you have any additional questions, I can be reached at 703-876-3152.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.