General Dynamics Corporation — 2024 Q1

So let me kind of tackle that. I alluded to it in my opening statement. But we're -- we have 50 to 52 airplanes that are going to deliver in about equal amounts of the 700 in the second through the fourth quarters. So think about it that way. So I think that will help you.

So the growth in Europe is clearly driven by the threat environment. We've seen increases in orders for combat, wheeled and tracked vehicles and significant bridge orders. We're also seeing increased orders coming out of various countries in Europe for Abrams through the FMS process. So we see that demand signal continuing until the threat environment, frankly, improves.

So two things. One is the increase in productivity at each of the shipyards, and we see that and we've been seeing that for the last few quarters. And it's also fewer disruptions from the supply chain. So those are the two primary factors.

So let me clarify a bit. I don't see concerns about inflation or monetary policy impacting demand. It really is just impacting the time from the initiation of a potential interest to the closure of an order, which is also impacted somewhat by large fleet -- airplane fleet orders from corporate customers. So think about it that way, more of a timing issue with the completion of the deals and not a headwind to overall demand. So I think that's an important nuance. And we're still sticking to our delivery guidance for the year. And I think on a going-forward basis, as we've intimated before, we see that those deliveries increasing over time.

So let me take them in the inverse order. On the submarine side, the preponderance of the funding in the supplemental is to help stabilize the industrial base, ensuring that we continue to drive order activity on a consistent and repeatable basis. So that is really on the submarine side. In combat, I think you can see there's a fair amount of ammo funding, and we had fully anticipated that.

So it is proceeding extremely well through test, continue to work with that customer, but they are very pleased with the performance of the vehicle.

Well, let's talk about the first predicate in that question. I don't believe we've ever disclosed any margin on a particular airplane, and we haven't there. I think we can't -- it can't take and discern revenue and earnings in any given quarter as attributable to one airplane. So I think you need to think about it holistically.

So think about it this way. This is ultimately going to be a very profitable program. But as I explained in my remarks, the first lot of 20 or so carries with it additional cost. We'll see those in -- largely in Q2. So think about Q2 as an increase in revenue of about $1 billion to $1.1 billion and in earnings of about $100 million to $110 million, and then progress nicely thereafter. And again, that's all impacted by the multiplicity of factors in our Aerospace business that drive margins.

So for the supply chain support, it has minimal impact on us. It's, however, extremely important because the stabilization of the supply chain is critical to the resumption of full cadence on Virginia and the increased cadence on Columbia.

So the way we think about share repurchases, and this will be true going forward, is really in the regular order. Recall what we were facing in Q1. And that was we're looking down the throat of a potential, and at some point looked very likely, government shutdown. And so I think that prudence and conservatism in the face of that kind of uncertainty is really key. But the cash performance for the remainder of the year is going to be very strong, and we will act accordingly.

Well, so let me talk about 700. We never, except I think, on 1 or 2 occasions about 5, 6 years ago, give the future year expectations. But 700 is a very, very successful program, and it will continue to execute well.

On cash. Thank you, Phebe. So with respect to cash and the expectation, we still anticipate achieving about 100% of free cash flow conversion in 2024. We had expected the first quarter to be negative even before considering the fact that we didn't deliver any G700. So we had planned for a negative free cash flow in the first quarter, and that was mostly driven by some contract timing in the Combat Systems segment and some in the Marine Systems segment. But we expect that most of that negative cash will reverse in the second quarter with a stronger third quarter and then a steeper ramp in the fourth quarter.

So what drove margin in the first quarter were two things: mix as we came off of older legacy programs, particularly in the vehicle world and in the U.S. and then -- and began ramping up newer programs, vehicle programs in the U.S.; and then a significant amount of the revenue growth came from facilities investment which, by definition, carries a lower margin than production. So both of those things will reverse throughout the course of the year, and combat margins will increase. Our expectation is quarter-over-quarter. Remember, this is a high operating leverage group. So they ought to do quite well here.

I don't think that's the way to look at it. But why don't Nicole get back to you on that? But we didn't have any particular notable cancellations. So let us unpack that one with you a little later.

Yes. So in the combat world, it's a little bit more of a robust supply chain in general that we typically have not had difficulty with, typically. We know our priority. The suppliers who could conceivably cause issues, and we've been working with them to ensure that they can manage this growth. But we're pretty comfortable that we can execute the growth. Our focus is really on operations and execution. And those will be the two key drivers of the profitability in that group.

So I'd say in the large -- in the single-source, sole-source suppliers who are, by definition, critical. And the Navy has focused quite intensely on those particular products and supply chain items. And I think they've been pretty explicit about where some of that might be. And I think it's best to think about it that way. But we do believe that working with the Navy customer, the continued infusion into that supply chain will help stabilize. But they are the pacing item now for Electric Boat.

So I think you've articulated what the Navy has said. I will tell you, our throughput and productivity has been strong on Columbia. It enjoys the highest national security priority. So we have done pretty well on Columbia and are increasing our throughput on Columbia. So then it's really those pacing items that are out there. And we're working with our Navy customer to see if there are additional things we can do to recover some schedule and if there are any workarounds. But this is going to be a bit of a slog for the supply chain.

Yes. So I think you've known over the years, I tend not to comment on individual service budgeting. But inflation certainly has been a factor. And to the extent that we can increase throughput to offset some of that, we will. But the Navy is well aware of the inflation impact and I think is working hard with the whole shipbuilding industrial base to adjust some of that.

So let me address that in the inverse order. Margins will be improving at our shipyards. We have every expectation all of our shipyards, NASSCO, Bath and Electric Boat. One of the things, as we've talked frequently about, is the margin impact of quality and schedule problems coming out of the supply chain. And as the supply chain stabilizes, that will help as well. And what was your first part of your question?

Yes. Okay. So it has no impact in the short term for Electric Boat because we've got plenty of work in front of us. It could have an impact in the outer years outside of our planning horizon. But critical here is, in fact, the additional ship set of funding. We have long lead material on Virginia. That is very important to the supply chain. And to the extent that we can ensure that we get a full second Virginia ship set so that we're buying it to a year, I think, is very important for the overall health of the industrial -- submarine and industrial base.

So it's a good planning assumption. It is how we are thinking about our internal planning. But let's see how we do as we start to significantly ramp up production and deliveries. So -- but as I said, that's a good planning assumption.

Yes. That's pretty much what you should assume.

So we still have -- look, it's definitely improving. Quality is improving and schedule reliability is improving. But make no mistake, we still have a lot of out-of-station work. And that impacts the profitability and margin on airplanes that are experiencing that. So we definitely see improvement. We are optimistic that they can keep pace, but it's not without its margin challenges.

So there's no real change, I think, from the previous quarters, U.S. corporations, private and public, high-net-worth individuals, both U.S. and outside the U.S. So no real changes, no real surprises. Sort of the typical customer base that we see is I think the way you should think about it.

Yes. So our ramp there is more about increasing the facilities that we have. And as I noted in my remarks, the opening of our Texas facility, which we worked very, very hard to expedite and frankly did it in almost record time, was very important because it increased the throughput and the productivity of the number of shells by 83%. So we're on track with the Army to get where we need to be, and our objective is to move even faster. And so far, we have been. But the Army has been a critical and extremely important partner here in what is really a national security imperative.

So we had anticipated the impacts on the 280 in our guidance too, but I will tell you that they are doing quite well and are slightly ahead of our schedule. We're still sticking to our deliveries, but I think it's notable that they're managing pretty well in this tough environment.

Good quarter.

Thanks, Cai.

So could you update us on the status of the G400? How is it doing? And is it fair to assume that it might have a gap of approximately 12 months between its certification and that of the G800?

I think I said last quarter, I'm done predicting process over which we have little control. We've tried in the past to give you indicators of our internal -- or actually, our internal -- our dates. So I'm kind of out of the detailed predicting mode. I will say the program is doing extremely well. And it's -- it will fly in the third quarter, and I think we'll be flying a pretty mature airplane.

Excellent. And then your R&D was up a fair amount in the first quarter. Could you give us some color of the pattern of the R&D at Gulfstream this year and looking forward? How should we think about that?

Well, pretty much steady as she goes, particularly this year. We've got a number of, as you know, programs in the certification process. And so I'd see that at least through this year is pretty consistent. No real surprise this year, steady as she goes.

So the pipeline remains robust. And I look to that as encouraging, a good sign. It's been that way for a while. People want our airplanes, and that's driving demand.

Yes. So we have been investing in AI to support our customers, and particularly at GDIT and somewhat at Mission Systems. And I would say that there, we're working closely with our customers. They define what the art of the possible is for them in AI. And as you all know, there are some government -- governance challenges around that. But the more sophisticated we get and our ability to tailor AI solutions, I think the more comfortable our customer becomes and will ultimately drive some increased revenue.

Nice try. So look, yes, I think once you get through the first lot, our performance from a margin standpoint will continue to improve. And you'll see that, third quarter will be significantly better than second quarter, and fourth quarter will be even better still. But we will update you on our regular order. We kind of keep our discipline, as you well know, around updating guidance, and I think that, that's appropriate.

I think right now, we're just focused. Given the steep ramp in the second half of the year, we're really focusing on trying to hit that mark at this point in time.

And we should get there.

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