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 speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. 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 Phebe Novakovic, Chairman and Chief Executive Officer; and Kim Kuryea, Chief Financial Officer. I will now turn the call over to Phebe.

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 $0.02 due entirely to the slip of 4 G700 deliveries from the last week in the quarter to the beginning Q3. One has since been delivered, three are imminent. From a different perspective, the sequential comparisons are also quite favorable. Revenue was 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 Kuryea, 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…

Thank you, Phebe, 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 0.8:1 for the company. This was achieved in the quarter when revenue grew 18% over last year, and there were no significant shipbuilding contracts awarded. Aerospace had a book-to-bill of 0.9:1, 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 1.5:1, and Technologies was 1:1. 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…

All right. Thanks, Kim. Let me move on to give you updated forecast 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. Margin 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 of Electric Boat and somewhat at Bath. So we will have annual revenue between $13.4 billion 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 billion to $48.2 billion, and operating earnings up modestly. All up, that indicates EPS guidance of $14.40 to $14.50, $0.05 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, 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?

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. We'll go to our first question from David Strauss at Barclays.

Good morning. Thanks for taking my question. Phebe, on the G700, as I understand, there are some issues that you have to fix with these prebuilt 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 had 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 a bit to the cost impact on lot one. But 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 was pretty late in the process. And not particularly difficult to do.

Great. And so none of the slips relate to kind of supply chain issues? It was more about just fixing the certification issue?

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

Terrific. Thank you.

We'll move next to Peter Arment at Baird.

Thanks. Good morning, Phebe.

Good morning.

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

So we tried to give you some color around that. In the remarks, I'd 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, a 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 G400. Is that still tracking to meet 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.

Good morning.

Phebe, maybe sort of a two-parter on Marine. I wanted to ask you, first, 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, a decade ago or maybe a little bit longer, Marine was a 10% type margin business. And given the supply chain issues, the impact to the shipbuilding workforce in the aftermath of COVID, 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 facilitization, 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 Cai von Rumohr at TD Cowen.

Yes. Thanks so much, Phebe.

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 a sequential build in terms of unit deliveries, 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 margin sequentially. Is that the way to look at it?

Yes. So I tried to give you a lot of color on 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 of this rework, should we assume that the profitability on Block 2 for the G700 that the sequential step-up from 1 to 2 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 1 issue.

Got it. Thank you.

Our next question comes from Jason Gursky at Citi.

Hey, good morning everybody. Phebe, 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 worked as possible, and we've got the vast preponderance of that 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, it's pretty robust. And we've been winning our fair share and 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, at Mission Systems as well. So I think technology is positioned for a nice steady slow growth, which is exactly what we have promised in the past and what we're delivering. So pretty steady.

We'll go next to George Shapiro at Shapiro Research.

Yes. Good morning.

Hi, George.

Phebe, I just wanted some clarification. You had said that the 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. Is that the four that you just delivered in the first week or so of the second -- of the third quarter?

Yes. So the Lot 1 consisted of about 20 or so airplanes. All five are test airplanes, they'll deliver next year. But this year, the Lot 1 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 imminent here. So I think we're in pretty good shape on that. Does that help you?

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

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

Okay. And one last one and aftermarket growth in the quarter at Gulfstream?

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

We'll go next to Ken Herbert at RBC.

Yes, hi, Phebe. 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 that 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 will 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 facilitization work to the higher-margin throughput on -- that's generated like 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 tends to give you a fair amount of color on what was going on in the third and particularly the fourth quarter of unwinding some of the prebuilds in Combat with the deliveries of those vehicles and material.

We'll go next to Doug Harned at Bernstein.

Good morning. Thank you.

Hi, Doug.

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 if we go back to the days when you could get to those 18% to 20%-type margins, is there a way to think about the progression here? There are clearly near-term issues. You've got the G800 to 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, 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, it's hard to pinpoint. But I think we're pretty confident and pleased with long-term margin trajectory at Aerospace for all the reasons that I think you quite potently 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 -- 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 a planning period. But we anticipate for the next couple of years, increased munitions 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 for what period of time are you looking at is kind of what I was getting at in terms of growth?

Yes, a couple of years. I wasn't clear on that. I apologize. Yes, 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, ammunition. So I expect those to be incorporated in force is thinking.

Okay. Very good. Thank you.

We'll go next to Myles Walton at Wolfe Research.

Thanks. Good morning. I was wondering, Phebe, 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.

Okay. 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 is Lot 1? 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 and reasonably anticipate that they'll come out of the gate very strong.

Okay. And where that lost quantity is about [indiscernible]?

Yes.

Okay, thanks.

It's typical lot quantities.

We'll go next to Scott Deuschle at Deutsche Bank.

Hey, good morning.

Good morning.

Phebe, can you characterize the ramp-up of this new munitions facility in Texas you opened up during the quarter? I guess, are you likely to exit 3Q at a relatively full run rate? Or is the ramp more gradual from 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 of 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.

Phebe, a couple of physical questions for you. First of all, on the U.S., if the Ukraine supplemental were to be 0, what sort of risk could that present to GD in the future? And then second, in the U.K., a change of government over here, whether there's any implications for AJAX down the line? Thank you.

I will take that in the inverse order. Don't anticipate any particular changes in AJAX. The vehicle is performing extremely well. The U.K. Army is pleased with it. So I think that, that's a standard piece of kit for the U.K. Army. With respect to the U.S., I think it's -- the Ukrainian supplemental certainly helped, 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 JPMorgan.

Good morning.

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.

Okay. Okay. 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 execution. So that's why we have a little less clarity than we typically do at this point, as 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? When would that kind of peak margin?

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 will 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 Poponak at Goldman Sachs.

Good morning everyone.

Good morning.

Phebe, I guess if I look at the funded backlog at Gulfstream, it's been relatively flattish over the last kind of year, 1.5 years. 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 growth.

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

It doesn't stand to reason that the further out you go in the future, the less your confidence is? It's actually, I think a truism. But for what we can see, we're -- 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%. 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 Adra [ph], I think we have time for just one more question.

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

Hey, good morning. Thanks for the question.

Good morning.

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 if you could comment on maybe the outlook at NASSCO? Just between the repair work and you guys recently won the sub tender work there, just kind of how you see the outlook for that yard?

So NASSCO learning and performance on the T-AO, the oiler is going quite well. We're delivering the seventh of the A-class ESB, and repair continues to be pretty strong as the demand from the U.S. Navy is increasing.

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.