Good day, ladies and gentlemen, and welcome to the General Dynamics Q2 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Erin Linnihan, Staff VP for Investor Relations. Please go ahead.

Thank you, Candice, and good morning, everyone. Welcome to the General Dynamics Second Quarter Conference Call. As always, 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 and 10-Q filings. With that, I would like to turn the call over to our Chairman and Chief Executive Officer, Phebe Novakovic. Phebe N. Novakovic - Chairman & Chief Executive Officer: Thank you Erin, and good morning. As you may observe from our press release, we enjoyed a very good second quarter with revenue of $7.67 billion, and net earnings of $758 million. We reported EPS of $2.44 per diluted share, $0.17 a share better than the year-ago quarter. We were also $0.13 a share better than consensus. With respect to consensus, it would appear that the self-side anticipated about $200 million more revenue, lower margins, and a somewhat higher tax rate. Compared to consensus, we had about $30 million more in operating earnings on higher margins, $10 million less in taxes, resulting in about $40 million more in net earnings. The big driver in the quarter was the operational performance. Compared to the year-ago quarter, revenue of $7.67 billion was $217 million lower. However, earnings of $758 million were up $6 million on a 30-basis point improvement in operating margin, and 140-basis point lower effective tax rate. I should note that our earnings in the year-ago quarter included a gain on the sale of our Commercial Cyber business. Excluding that gain, there is a 60-basis point improvement in operating margin. Sequentially, revenue was down $59 million, or less than 1%, and earnings from continuing operations were up $28 million on a 40-basis point improvement in operating margins, and a…

Thanks, Jason. As a quick reminder, we ask participants to ask only one question so that everyone has a chance to participate. If you have additional questions, please get back into the queue. Candice, could you please remind participants how to enter the queue?

Absolutely. And our first question comes from the line of David Strauss with UBS. Your line is now open. Phebe N. Novakovic - Chairman & Chief Executive Officer: Hi, David.

Good morning, Phebe. Thanks for taking my question. Phebe, thanks for all the color on Gulfstream, but maybe just a little bit more color on the large cabin market, and how you saw it evolve in Q2, both from a used inventory perspective, how you're competing on the G450 and G550 with the used inventory that's out there, and the G650, and then what you saw regionally? Did North America hold in there pretty well? Thank you. Phebe N. Novakovic - Chairman & Chief Executive Officer: Yeah. So I think I gave you a pretty robust response in my remarks, but let me parse this, our market, in a couple of ways. First, let's talk about the G650 pre-owned market. So I've seen some folks saying there are going to be 20, or there are 21 used airplanes in the market. We simply do not see them. If I count serial numbers, we have 14 on the market right now with one pending transaction. We have 186 in service, so that equates to 7.5% of the fleet. That is well below the 10% used to in-service ratio. So that's rather typical. And by the way, we have long anticipated the emergence of a G650 used market, so in my mind, this should be no surprise. I would also note that we have seen minimal impact with a few customers choosing the near-term availability rather than wait. So from my perspective, based on the facts and the data, we're quite comfortable that that used market is appropriate and acting in a rational and typical sort of way. So G650, so if you talk about by model, the G650 demand remains quite active. In our subs market, sub-sections of the market, the G450 and G550 are, as we anticipated during this period of transition to the G500 and G600, complicated the touch by competitors' overproduction. By the way, I might tell you that the G500 and G600, a lot of those positions are sold in 2016 and 2017. So we like how all of that is shaping up. And with respect to the geographic distribution, about 50% of the orders were North America, and I think the rest split between Mid-East, Asia-Pacific, Europe and South America, in that order. Okay?

Thank you. And our next question comes from Robert Spingarn of Credit Suisse. Your line is now open. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): Good morning. I wanted to switch to Marine for a moment, Phebe. You guided for us earlier, but you have a lot going on there. You've got the Block IV pricing going up, there's growth in ORP (20:33) funding. When would we start to see some real improvement in sales from all of these positives? Phebe N. Novakovic - Chairman & Chief Executive Officer: Well, we've been experiencing that improvement, but when we look at the Navy's plan to continue with the Gulfstream, or the Virginia-class deliveries, as well as other (21:00) replacement, we see that we get some real nice ignition starting in 2019, when we have long-lead delivery – how we're anticipating, based on the Navy's plan, long-lead delivery in 2019. But let's not forget, this has been a very nice, steady quarter-over-quarter performer. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): True. And how would the TAO(X) factor in, and does that impact NASSCO's margins later this year, next year, the win there? Phebe N. Novakovic - Chairman & Chief Executive Officer: So the TAO(X), let's remember that our award was for one ship, and multiple, I think with five options, subject to the request, authorization and appropriation. So those oilers are right in our wheelhouse, and we ought to be able to perform very nicely on those. And it positions us well for the 17 ships in the Navy contract. It was an unusual award, but it has – there were no surprises, and I think, from (22:06) was an unusual contracting process, but from my point of view, there were no surprises, because sort of lined up with, who does what well. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): Thank you very much.

Thank you. And our next question comes from Sam Pearlstein of Wells Fargo. Your line is now open.

Good morning. Phebe N. Novakovic - Chairman & Chief Executive Officer: Hi, Sam.

Hi. Phebe, you talked a lot about the earnings and the revenue for the year. In the past, you've talked about free cash flow conversion relative to last year. So now with a higher net income, should we still see a similar conversion? And somewhat related, we knew you were going to be eating into those international combat advances, but really, what should that advances line look like when we get to the end of the year on the balance sheet? Jason W. Aiken - Chief Financial Officer & Senior Vice President: Sam, so as I addressed in my remarks, we do continue to see full year free cash flow for this year looking similar to what we had last year, although as I said, a little bit inverted toward the second half of the year, slightly different profile than we had last year from a timing standpoint. As it relates to the advances, we'll continue to draw down on those, so you'll see that balance – you've seen it come down throughout the first half of the year, and we'll see that continue, as we continue to make progress on the production side of those contracts through the balance of the year.

But coming down at the same rate? Jason W. Aiken - Chief Financial Officer & Senior Vice President: I don't have the exact specifics on that. We can perhaps talk after the call on that. But directionally, yeah, we'll see it continue to come down.

Thank you.

Thank you. And our next question comes from Doug Harned of Bernstein. Your line is now open. Doug Stuart Harned - Sanford C. Bernstein & Co. LLC: Thank you. Good morning. Phebe N. Novakovic - Chairman & Chief Executive Officer: Hi, Doug. Doug Stuart Harned - Sanford C. Bernstein & Co. LLC: I wanted to try and understand a little bit of the margin situation at Gulfstream. I mean, the margins have been great, at around 20% level, even with declining production. So, can you talk a little bit about what's enabled you to achieve that as you're going through a transition to the new programs? You have a lower rate on the G450 and G550. And when you roll that forward, do you expect, if you have to take rate down perhaps even more on the G450 and G550, can you keep that margin level through the product transition? Phebe N. Novakovic - Chairman & Chief Executive Officer: Well, let's talk about this year, and I don't want to get into too much specificity in 2017 and 2018. But the margins are driven by – and this is true year in and year out – they're driven by our managing of costs and our cost reduction, in addition to the G650's nice contribution. So when I think about that, that and our performance on service has been quite nice through the course of the year. So I have a great deal of confidence that we can continue to maintain our profitability as we go through. We'll have to modify it somewhat, but with our profitability, going through this transition period. Doug Stuart Harned - Sanford C. Bernstein & Co. LLC: And that is – but even as you take rates down and you, in theory, would lose some operating leverage. Phebe N. Novakovic - Chairman & Chief Executive Officer: Well, we've pretty much planned in the rates on the G450. I don't see any more reductions. In fact, I don't see any more reduction on the G450. And the G550, we see very minimal changes going forward. So looks, our job is to keep earnings up as high as possible during this transition period, and manage our margins. We're going to continue to do that. I think we've demonstrated that track record the last six quarters, and we're going to continue going forward. Doug Stuart Harned - Sanford C. Bernstein & Co. LLC: Okay. Great. Thank you.

Thank you. And our next question comes from Howard Rubel of Jefferies. Your line is now open.

Thank you very much. First, Phebe, I have a clarification. Phebe N. Novakovic - Chairman & Chief Executive Officer: Hi, Howard.

Hi. Thank you. Sorry. I think you said G500, G600 sold in 2016 and 2017. Did you mean that you're largely sold out in 2017 and 2018? Phebe N. Novakovic - Chairman & Chief Executive Officer: Yeah. I'm sorry, if I wasn't clear on that. The G650 is sold out in its entirety through the first quarter or through 2016, and also in its entirety through 2017. So when we look at the order activity on the G500 and G600, what I'm saying is, is that our expectations for entry into service would remain the same. In that projection, we have sold an awful lot of our both of those G500s and G600s. So that positions us very well, I think.

So I'm sorry, again, so 2017 and 2018 for the G500 and G600 are largely sold. Is that how I'm hearing this? Phebe N. Novakovic - Chairman & Chief Executive Officer: Yes. We've got a lot of sales

And then just to follow this, it sounds like, though, there were some adjustments to the large cabin delivery schedule. Could you articulate where you are for this year? And I guess, you probably won't. And then maybe if you can address some elements of how you're thinking about 2017. Phebe N. Novakovic - Chairman & Chief Executive Officer: So I don't want to get into 2017 at the moment because, as you know, we provide that to you in the fourth quarter of the 2016 call by tradition. So that said, let me give you some color on where we are in the moment. First, production rates this year have not changed. So we've kept them the same as when we set this plan. Revenue is impacted in 2016 by a couple of factors; one, we have one less screen (28:12) airplane, I think it's the G280, and six fewer completions. We're moving these completions from this year into next, largely because of customer preferences on when they want to take the plane. And then we got a mix of other smaller puts and takes.

Okay. Thank you.

Thank you. And our next question comes from Jason Gursky of Citi. Your line is now open.

Hey, Phebe. Thanks for taking the question. Just a follow up on the G500 and the G600 really quickly. I think, at the launch event a few years ago you suggested that the book-to-bill, or the bookings that you take on that aircraft would be kind of barbelled. You take some at the beginning, would have a lull until you got closer to the entry into service of the aircraft. I'm wondering, if that's still the way that you're thinking about that. And at what point historically do you see the second into that barbell begin to pick up? Meaning when (29:16) we see some more orders for the G500 and G600 begin to come in relative to the entry into service? How much before entry into service do we see that to pick back up? Phebe N. Novakovic - Chairman & Chief Executive Officer: So I don't have perfect clarity about the precise timing of when orders will pick up, but it's our expectation building on the good sales we've had (29:39) that the closer these airplanes are to entry into service, our sales will pick up.

Thank you. And our next question comes from Myles Walton of Deutsche Bank. Your line is now open.

Thanks. Good morning. Phebe N. Novakovic - Chairman & Chief Executive Officer: Hi, Myles.

Phebe, can you comment on the capital deployment strategy and where your head is currently in terms of M&A? The market's gotten richer or cheaper in property, availability has gotten better or worse, and also the repurchase slowdown, is there anything to read there? Phebe N. Novakovic - Chairman & Chief Executive Officer: Yeah. So on M&A, I really don't have any update for you, but if and when we do something, we'll let you know. We'll advise you. Jason, do you want to talk through the share repurchase? Jason W. Aiken - Chief Financial Officer & Senior Vice President: Yeah. I think, Myles, for the balance, when you think about the year, our objectives, our targets for the year on deployment haven't changed. As you know, we were fairly on the active side in the first quarter of the year. And so we looked at the second quarter, and we feel like by the balance of the first half of the year we're right on track and doing exactly what we had hoped to do. We've deployed, as I said, two times our free cash flow on share repurchase and dividends. So I don't think you should see that as a signal of any directional shift for us at any time.

Okay. So the full year return on capital still targeted to be 100% of net income then? Jason W. Aiken - Chief Financial Officer & Senior Vice President: That's correct.

Okay. Thanks.

Thank you. And our next question comes from Carter Copeland of Barclays. Your line is now open.

Hey. Good morning, and nice quarter. Phebe N. Novakovic - Chairman & Chief Executive Officer: Thank you, Carter.

Just a clarification and a question. I know, Phebe, you said the production plan didn't change, but I just wondered if you could clarify whether or not your cost plan changed at all. I know you had some cost reduction actions and furloughs. I didn't know if any of that changed from what you initially planned on. And then one for Jason, just on the FX front, I mean, you've called out the UK impact. I think, you've got a little bit of Swiss impact as well. What should we be thinking of in terms of forward impacts, if currencies stay where they are? Are there any transactional FX exposures that we should be aware of going forward? Thank you. Phebe N. Novakovic - Chairman & Chief Executive Officer: Yeah. So look, as I mentioned earlier, our margins at that level really aren't sustainable each and every quarter. But the G650 is contributing, and really it's cost management, cost reduction that's driving our margins. And so it's hard with perfect clarity to estimate the goodness that you can achieve until you're really in the moment. So we're continuing to manage our costs. I think we've got more way to go. And then at the same time, by the way, we've got to continue to improve the G650 and G280 operating margins, which we will do and are doing. And then we've got to ensure that the G400 and G500, or G450 and G500 maintain their profitability. And so I think that (33:05) very nice on track, particularly with respect to the latter. Jason W. Aiken - Chief Financial Officer & Senior Vice President: So Carter, with respect to your foreign exchange question, you can think about our exposure as this way, in order of magnitude, if you will. It's really Canadian dollars, euros, pounds, and then Swiss francs sort of, in terms of magnitude. But the updated guidance that Phebe walked you through earlier was actually predicated on the latest rates we have at hand projected through the balance of the year. So that is the latest look at the impact, and it's not – I wouldn't call it material through the balance of the year, but we also don't necessarily take a bet on rates moving further one way or another. So if there is a further movement in the second half, we would obviously tell you about that and it could have an upside or a downside impact to that guidance. The last thing I would say is that there's no, absolutely zero, from our perspective, transactional exposure. This is all strictly, as we've discussed before, the translation for U.S. dollar reporting. Everything from a transactional perspective is hedged in, and has been working effectively up to this point.

Great. Thank you for the color.

Thank you. And our next question comes from Ron Epstein of Bank of America Merrill Lynch. Your line is now open. Phebe N. Novakovic - Chairman & Chief Executive Officer: Hi, Ron.

Yeah. Hey. Good morning. Phebe, I was wondering if you could just give us a quick update where we stand on the Ohio-class program, in terms of what's going on actually at Electric Boat, and then what you're looking for over the next coming quarters. Phebe N. Novakovic - Chairman & Chief Executive Officer: Yeah. So if you've been following this, the Navy and Electric Boat have been active in a number of discussions. Most recently we delivered our Ohio Replacement Integrated Product and Process Development plan, and think about that as the detailed design and long lead material portion of the procurement process. So the Navy is reviewing that in the moment. I think their plan is to get back to us sometime late summer, early fall. But that's kind of their call in terms of the cadence of the timing. But that will provide, and should provide, depending when we close on that, some upside in this year. And then again, as we've talked before, this is a very strong growth engine for us over time.

Okay. Great. Thank you.

Thank you. And our next question comes from Cai von Rumohr of Cowen & Company. Your line is now open. Cai von Rumohr - Cowen & Co. LLC: Yes. Thank you very much. So Phebe, how far are the G450 and G550 sold into next year? And I think, at one point you said you'd rather take down production than take down price. How large is that period between when that backlog ends and when we might see initial deliveries of the G500? Phebe N. Novakovic - Chairman & Chief Executive Officer: So, I'm comfortable that we can manage this transition, and we are in good shape to either – we sold a fair number of the positions going into next year, particularly on the G450, and also on the G550. So the transition, the trick to the transition is, we've got to bring down the production on the G450, G550 while ramping up the production on the G500 and G600. The ease of this is somewhat benefited, or somewhat benefits, from the fact that these two sets of airplanes are built in completely different facilities. So, if you're suggesting that we have a gap, that's not an altogether bad thing, as long as we stay on schedule for our deliveries on the G500 and G600, which I see no reason why we can't at the moment, but we're in good shape for next year on the G450, G550. Got a little ways more to go, and then we'll set the production rate for the G500 and G600 as we move forward. So does that get to the essence of your question? Cai von Rumohr - Cowen & Co. LLC: That's helpful. Thanks so much.

Thank you. And our next question comes from Seth Seifman of JPMorgan. Your line is now open.

Great. Thanks very much, and good morning. I was wondering if you could tell us, maybe Jason, of the shortfall in cash flow, free cash flow, relative to net income this year, maybe in kind of qualitative terms, how much of that is related to the construction of flight test articles for G500 and G600? And do all those flight test articles go to customers, and so do all of those costs go into inventory? Jason W. Aiken - Chief Financial Officer & Senior Vice President: So the flight test articles do go into inventory, and eventually they'll go into long-term product design use or to customers. I would say, from a qualitative standpoint, the outsized impact on the cash flow differential is really more about the international program advances being drawn down. There's some impact on, not so much the flight test aircraft impacting Gulfstream so much as just inventory build toward production, but that's the minor share. The larger share really is about the international advance drawdown.

Great. Okay. Very good. Thank you.

Thank you. And our next question comes from George Shapiro of Shapiro Research. Your line is now open. Phebe N. Novakovic - Chairman & Chief Executive Officer: Hi George.

Yes. Hi, Phebe. Good morning. Phebe N. Novakovic - Chairman & Chief Executive Officer: Good morning.

I wanted to pursue, you had four used sales in Gulfstream. Could you give us the revenues and approximate earnings? And I would assume that that would have deflated the margin you reported, as high as it was. So when you go to the second half and you have higher revenues, why does the margin be somewhat less than what it was this quarter? Thanks. Jason W. Aiken - Chief Financial Officer & Senior Vice President: So George, I'll take that. The revenues for the quarter were right around $40 million, I believe, is the number for pre-owned, and as is typical, it's right around breakeven, maybe a $1 million or $2 million loss associated with those, which is pretty typical. If I understand your question, for the balance of the year we do have profiled, as we've talked about before, an expectation of additional pre-owned coming into inventory and being sold, which actually is consistent with the point Phebe made before, with a little bit of a downtick in margins, particularly in the third quarter. So I think those are consistent, unless I misunderstood your question about the balance of the year.

No. I think it's right, Jason. I just thought that, to deliver four used planes in subsequent quarters, you're probably not going to do that much, maybe you will. So I was kind of figuring the used planes would be less, so you got a little less pressure on the profit and you got higher revenues. Jason W. Aiken - Chief Financial Officer & Senior Vice President: Actually, a little bit more color on that, the planes in the quarter, there were four of them, but the mix of them, they were pretty modest in terms of revenue per unit. So that's not the assumption necessarily going forward. There are a lot of different mix in there, in terms of the inventory that we take in. Phebe N. Novakovic - Chairman & Chief Executive Officer: Yeah (40:48). So think about it this way, George. We sold four in the quarter, which you know. We took in three and have sold one, so today we have two in inventory. But remember that the margin impact can vary depending on the aircraft itself.

Okay. No, that's a good answer. And one quick one, Combat margin is usually the biggest in the fourth quarter, and yet your guidance is implying that second half won't be as good as the first half. So if you had a little explanation on that. Phebe N. Novakovic - Chairman & Chief Executive Officer: Yeah. So we are in the third quarter and more importantly, in the fourth quarter beginning to move from our – as the domestic land forces contract, some of those begin to taper down, we are increasing our international production. So we've got – that's really the margin pressure. It's simply a question of mix. As long as operating performance is good, these guys have done very well, but they've got to come down their learning curves, right?

Right. Okay. Thanks very much. Very good.

Thank you. And our next question comes from Hunter Keay of Wolfe Research. Your line is now open.

Good morning. Thank you. Phebe N. Novakovic - Chairman & Chief Executive Officer: Hi.

Hey. Phebe, can you give us any color on the customer mix or geography on all those mid cabins in the quarter that you sold? And was that order activity in line with your expectation on a dollar-based book-to-bill basis, or would you say you're slightly surprised with the upside? And sort of to that, can you talk about how wait times on the mids change in the quarter? Thank you. Phebe N. Novakovic - Chairman & Chief Executive Officer: So if I understand your question properly, our sales on the G280 were a little different, or a little better than we had anticipated. And I think that's just reflecting the strength of the North American market. So with respect to wait times, and let me give you this opportunity or take this opportunity to give you a little bit of color on the wait times, on the G650 and G650ER, we're about 24 months; G550 and G450, nine months to 12 months, no change; G280, nine months to 12 months; and the G150, we've got onesies and twosies left to sell there. So the first available there is a year from now.

Okay. Thanks. So on the G280, better than expected, that wasn't just timing, that was actually just – maybe you just won a few more awards that could have gone either way. Phebe N. Novakovic - Chairman & Chief Executive Officer: Yeah.

Okay. Phebe N. Novakovic - Chairman & Chief Executive Officer: I think that, that's right. And it wasn't – that's always the case. We understand our customers' needs, but the order in which they want to execute the placement of their fleet will kind of depend on their imminent needs for the mission that a particular airplane serves. So the good news is, they're selling well, the G280s, but it does impact book-to-bill.

Sure. Thank you.

Candice, I think we have time for one more question.

Thank you. And our final question comes from the line of Pete Skibitski of Drexel Hamilton. Your line is now open.

Yeah, Phebe, I guess, I'll ask you one on the Navy subs program. I'm wondering how you think about – there seems to be some emerging chatter from the Democrats about the affordability of nuclear triad recapitalization. And I know you have some potential CapEx bills to pay as you think about what the rates are going to be. So how do you decide out of your CapEx profile there at Marine, given kind of the sizable bills the Navy is going to have to pay, and if they can pay those bills or not? Phebe N. Novakovic - Chairman & Chief Executive Officer: Well, there is often chatter when we – and this has been true from the last time that we recapitalized our nuclear fleet, about the affordability of it. But this is really a national policy issue, and to the extent that the United States wants to maintain a nuclear deterrent, they've got to build this submarine. So that's number one. And that's my view. And I think that that's supported by many people in the government on both the Executive and the Congressional side. So I wouldn't say that Democratic – some chatter in the system suggest walking away from this requirement. So I think in terms of – the Navy has budgeted here a revenue flow to us that we can easily accommodate the CapEx and the other improvements that we have going forward in terms of the ability to build these. I might also tell you that we've been spending CapEx over the last few years to position ourselves, particularly at the Quonset Point, on the Ohio replacement. So we work very carefully with our Navy customer to determine what they need, what we need, the funding allocation, who's responsible for what, and we're certainly not going to get caught long.

Do you think ultimately you keep the Virginia rate at two per year? Phebe N. Novakovic - Chairman & Chief Executive Officer: Well, that's the plan. In fact, we like that plan.

I hear you. Okay. Great. Thank you. Phebe N. Novakovic - Chairman & Chief Executive Officer: Thanks.

Thank you, everyone, for joining our call today. If you have additional questions, Erin can be reached at 703-876-3583. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Have a great day, everyone.