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Operator: Good morning. And welcome to the General Dynamics First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode and after the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Please note this event is being recorded and I would now like to turn the conference over to Nicole Shelton, Vice President of Investor Relations. Please go ahead.

Nicole Shelton: Thank you, Operator, and good morning, everyone. Welcome to the General Dynamics first 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, our Chairman and Chief Executive Officer; and Kim Kuryea, Chief Financial Officer. I will now turn the call over to Phebe.

Phebe Novakovic: Thank you, Nicole. Good morning, everyone, and thanks for being with us. As you can discern from our press release, we reported earnings of $2.88 per diluted share on revenue of $10.7 billion, operating earnings of $1,036 million and net earnings of $799 million. These results compare quite favorably to the year ago quarter. Revenue is up 8.6% against the first quarter last year. Operating earnings are up 10.4%. Net earnings are up 9.5%. As a result, earnings per diluted share are up $0.24 or 9.1%, more than the year ago quarter. The operating margin for the entire company was 9.7%, a 20-basis-point improvement over the year ago quarter. Overall, these numbers represent a very strong quarter and a good start to 2024.

However, we fell below our own expectations for the quarter and below analyst consensus, which is predicated, at least in part, on our forecast. The rather obvious explanation is that we forecast 15 to 17 G700 deliveries in the quarter, which did not happen. We received FAA Certification for the G700 at the very end of the quarter, too late to make any G700 deliveries. This obviously impacted revenue and earnings in the Aerospace group in the quarter. The good news is that we now have certification, and the delay in deliveries does not change our outlook for the year. Gulfstream still plans to deliver 50 to 52 G700s this year, so our Aerospace forecast for the year remains unchanged. I’ll give you a little more color on this later in my remarks.

And other good news, as you can see, was strong performance across the defense portfolio. In short, we performed very well in the quarter over those things within our control. At this point, let me ask Kim Kuryea, our CFO, to provide details on our order activity, solid backlog and cash activity, before I come back with segment observations.

Kim Kuryea: Thank you, Phebe, and good morning. I’ll start with orders and backlog. We had a solid quarter from an orders perspective, with an overall book-to-bill ratio of 1 to 1 for the company. Order activity was particularly strong in the Combat Systems group, with a book-to-bill of 1.6 to 1, and in the Aerospace and Technology segments, which each had a book-to-bill of 1.2 to 1. We ended the quarter with total backlog of $93.7 billion, up slightly from year-end and up 4% from a year ago. Our total estimated contract value, which includes options and IDIQ contracts, ended the quarter at approximately $134 billion, up 1.5% from year-end. Turning to our cash performance for the quarter, we had an expected slow start to the year, absent the delayed certification and entry into service of the G700 and continued G700 inventory build.

So let’s start with Technologies. We continued to see strong cash performance from that group in the quarter. As anticipated, Combat Systems and Marine Systems both built working capital in the quarter, based on their unique mix of contract timing versus expected payments. Finally, moving to Aerospace, the lack of G700 deliveries drove us to use cash in the quarter. As a result, our free cash flow for the quarter was a negative $437 million. Since all of what I described is timing-related, we still have an expectation for the year of a cash conversion rate around 100%. We expect most of the negative free cash flow to reverse in the second quarter, followed by substantially improving free cash flow in each of the third and fourth quarters.

Now to discuss our capital deployment activities. Capital expenditures were $159 million or 1.5% of sales in the quarter. Similar to last year, you should expect capital expenditures to increase in subsequent quarters throughout the year, as we anticipate spending between 2% and 2.5% of revenue on CapEx this year. Over 50% of that expected spend will be for infrastructure at our three shipyards, as we continue to invest to support the Navy’s submarine and shipbuilding plan. Also in the quarter, we paid $361 million in dividends and repurchased approximately 390,000 shares of stock for $105 million at just under $269 per share. When you add it all up, we ended the quarter with a cash balance of around $1 billion and a net debt position of $8.2 billion.

Our net interest expense in the quarter was $82 million, compared with $91 million for the same quarter last year. The reduction in interest expense was attributed to our lower debt balances. Finally, turning to income taxes, we had a 17.5% effective tax rate in the quarter, right in line with our full year guidance, which reflects higher taxes on foreign earnings. Phebe, that concludes my remarks. I’ll turn it back over to you.

Phebe Novakovic: Thanks, Kim. Now let me review the quarter in the context of the business segments and provide detailed color as appropriate, first, Aerospace. Aerospace did very well in the absence of the G700 delivery. It had revenue of $2.1 billion and operating earnings of $255 million with a 12.2% operating margin. Revenue is $192 million more than last year’s first quarter, a 10.1% increase. To give you a little detail here, the increase was driven by an increase in new aircraft deliveries and an increase in services at both Gulfstream and Jet Aviation, partially offset by significantly lower special mission aircraft activity, which is always lumpy. The 24 deliveries in the quarter are fewer than planned, but three more than the year ago quarter.

The mix in the quarter favored large cabin and the 650 in particular, which helped both revenue and earnings. Operating earnings of $255 million are up $26 million over last year’s first quarter, an 11.4% increase. Earnings on both new aircraft and aircraft services enjoyed good increases, offset in part by lower earnings on special mission, higher G&A and net R&D. While Gulfstream will continue to experience part shortages that cause significant out-of-station work, which is inherently less efficient, the supply chain is clearly improving and much more predictable. As is now apparent, we plan to deliver a considerable number of G700s in 2024. The first 20 to be delivered are fully built and deliveries have begun. By the end of this month, the next seven to eight will be ready.

We plan to deliver these 50 to 52 planes over the quarters in relatively even numbers with improving margins quarter-over-quarter as we go along. The first 20, what we call the lot one, carries some cost and retrofit burden that will not affect subsequent aircraft deliveries. So expect margins in the second quarter to be similar to the first quarter with significant improvement in Q3 and Q4. Aerospace had a decent quarter from an orders perspective with a book-to-bill of 1.2 to 1 in dollar terms. Sales activity and customer interest is evident this quarter, but concerns over persistent inflation and monetary policy in the U.S., together with concerns about conflict in the Middle East, has slowed the consummation of transactions to some degree.

It is also worth noting that a significant portion of the demand we see is fleet replenishment for corporations. These multi-aircraft deals usually proceed at a slower pace. The G800 flight test and certification program continues to progress well. The aircraft design, manufacturing and the overall program are very mature. We continue to target certification of G800 for nine months after the G700 certification, although I’m increasingly reluctant to give estimates about these things that are ultimately out of our control. In short, the Aerospace team had a good quarter. G700 FAA certification is in the rearview mirror and we hope EASA certification is hard on its heels and we expect nicely improving margins, particularly in the second half.

Next, Combat Systems. Combat had revenue of $2.1 billion, up almost 20% over the year ago quarter. Earnings of $282 million are up 15.1%. Margins at 13.4% are down 60 basis points over the year ago quarter. It is interesting to observe that this very strong increase in revenue is in comparison to last year’s first quarter, which enjoyed a 5% increase over 2022. We saw increased revenue performance in each of the three businesses. The increase came from higher volume on new international tank programs, higher artillery program volume and higher volume on piranha programs and bridges. We also experienced very strong order performance. Orders in the quarter drove total backlog to $15.6 billion, up $1.5 billion from this time the year ago quarter.

Demand for Combat Systems and products continues to increase, particularly in Europe and in some lines of business in the U.S. Orders for wheeled and tracked combat vehicles are up significantly, reflecting the heightened threat environment. In addition to several new combat vehicle starts, demand for Abrams also continues. We’ve seen tank orders from new users and a number of countries will be introducing Abrams into their combat fleets for the first time. Since Q1 last year, we have received almost $1 billion in orders from both U.S. allies through FMS and the U.S. Army. In the U.S., we are rapidly increasing ammunition production with the opening of our Texas facility, which will increase current 155-millimeter ammo capacity by 83%. As the year goes on, we will continue to work with our Army customer to further increase ammo capacity to meet their requirements.

Turning to Marine Systems, once again, our shipbuilding units are demonstrating impressive revenue growth. Let me repeat the recent history that I gave you last year at this time with respect to growth in this decade. The first quarter of 2020 was up 9.1% against Q1 of 2019, Q1 2021 was up 10.6% over Q1 2020, Q1 2022 was up 6.8% over Q1 2021 and Q1 2023 was up 12.9% over Q1 2022. Finally, this quarter at $3.3 billion is up 11.3% over Q1 2023. This is an impressive growth ramp by any standard. However, growth ramps of this character bring with them supply chain and operation issues that are challenging. This particular quarter’s growth was almost exclusively Columbia-class construction. Operating earnings are $232 million in the quarter, up 10% from the year ago quarter.

Operating margin is basically the same as last year’s quarter. We anticipate that this will improve as we progress through the year. As we have talked about on previous calls, the story at the Marine Group is efficiently managing the growth propelled by the U.S. Navy’s need for ships, particularly submarines. As a labor-intensive heavy manufacturing industry, the shipbuilding industrial base was hit hard by the demographic impacts of COVID. This, coupled with a number of sole-source suppliers of highly complex components, has made it difficult for the industrial base to keep pace with increasing demand. The significant financial investments we have made in our shipyards over the last 12 years, particularly at Electric Boat, has mitigated the impact on us, but we are still hit by schedule and quality problems in the supply chain.

Our job is to minimize the efficiency and schedule impacts of late material by increasing our throughput and we are doing that each and every quarter. In Q1 alone, our productivity increased 11%, but there is more to do. Finally, the Navy’s investment in the supply chain has helped and will continue to help as we move forward. For Technologies, we’re off to a solid start. Revenue in the quarter of $3.2 billion is down less than 1% from the prior year, but up 2% over the fourth quarter of last year and modestly ahead of our expectations for the start of the year. Operating earnings of $295 million are consistent with last year, yielding a margin of 9.2%. As we have previously discussed, margins will continue to be driven by the mix of IT service activity and hardware volume.

The group received $4 billion in orders during the quarter for a book-to-bill ratio of 1.2 to 1. Both businesses experienced strong order activity, in GDIT’s case the highest book-to-bill since mid-2019. This led to a total backlog of $13.5 billion, an increase of over 5% from a year ago and total estimated contract value of $42.7 billion. The story in Technologies is one of steady growth, particularly at GDIT and increasingly at mission systems as they transition from legacy programs to new programs and faster growth lines of business. Both businesses have robust pipelines driven by their respective investments in different technologies. The group’s continual focus on margin performance will result in sequential margin expansion throughout the year as they continue to build their backlog and growth.

As you know, we never update guidance at this time of year. Apart from what I have already said about Aerospace, I will stick to that custom. We do, however, confirm the guidance we gave you at the end of last quarter and will update it at midpoint of the year as we typically do. This concludes my remarks with respect to what was, in many respects, a rewarding quarter. Let me now turn the call back to Nicole to take your questions.

Nicole Shelton: 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?

Operator: And thank you. [Operator Instructions] And your first question comes from Scott Deuschle with Deutsche Bank. Your line is open.

Scott Deuschle: Hey. Good morning.

Phebe Novakovic: Good morning.

Scott Deuschle: Kim, can you clarify the G700 delivery expectation for the second quarter? Is it the 20 that are ready to go plus the seven to eight that will be ready at the end of this month?

Phebe Novakovic: So, let me kind of tackle that. I alluded to it in my opening statement. But we are — 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.

Scott Deuschle: Okay. Thank you. And then, Phebe, I was hoping you could spend a moment maybe talking about the growth that Combat Systems is currently seeing in Europe, and perhaps, how you expect that to trend over the coming quarters? Thank you.

Phebe Novakovic: 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.

Operator: And we will take our next question from Seth Seifman with JPMorgan. Your line is open.

Phebe Novakovic: Good morning, Seth.

Seth Seifman: Good morning. Thanks very much. Looking to Marine, when we think about the expectation for the profit margin for the year and kind of where we started, are there kind of visible milestones that you see through the remainder of the year that bring that number higher or kind of is it a change in mix or kind of what drives the underlying margin improvement through the year?

Phebe Novakovic: 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.

Seth Seifman: All right. Okay. Okay. Great. And then just when we think about it, I think, you mentioned some of the headwinds to demand at Gulfstream from here in terms of monetary policy, geopolitical issues. Just to kind of affirm, the expectation for 160 deliveries this year and the way that the backlog will trend through the year, the expectation is that that’s a very sustainable number with potential for that to grow in the years beyond?

Phebe Novakovic: So let me clarify a bit. There are — 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 ness — 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, we — as we’ve intimated before, we see that those deliveries increasing over time.

Operator: And we will take our next question from Robert Stallard with Vertical Research. Your line is open.

Robert Stallard: Thanks so much. Good morning.

Phebe Novakovic: Good morning.

Robert Stallard: Phebe, I was wondering if you could comment on the recently passed or soon to be signed supplemental and what implications that could have for the Combat business, but also on the submarine side, what sort of additional funding could come from the U.S. Navy? Thank you.

Phebe Novakovic: 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.

Robert Stallard: Okay. And then just secondly, I was wondering if you could give us an update on the AJAX program in the U.K.?

Phebe Novakovic: So it is proceeding extremely well through test and continue to work with that customer, but they’re very pleased with the performance of the vehicle.

Robert Stallard: Okay. That’s great. Thank you very much.

Operator: And we will take our next question from Sheila Kahyaoglu with Jefferies. Your line is open.

Sheila Kahyaoglu: Good morning, Phebe. Thanks for the…

Phebe Novakovic: Hi, Sheila.

Sheila Kahyaoglu: Thank you for the time. I wanted to ask one about Aerospace, and I’m sorry for putting you on the spot with the mental math, but last year or last quarter, you talked about the G700 profit contribution being around 25%. So when we think about the Q1 performance, it was actually really good relative to our number of 12.1% margins. It would imply you see a deceleration in the underlying business for Aerospace, just given G700 comes in at 50 units. So I guess how do we think about the mixed movement throughout the year for Aerospace?

Phebe Novakovic: 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 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. But we see the — we don’t see any real changes in the mix throughout the year and we’ll do a detailed bottom-up review in Q2. But for right now, we’re sticking with both our mix, our earnings, our margin and revenue expectations. So we’re off to a pretty good start, I’d say, and we’re very encouraged at how the outlook looks for the rest of the year.

Sheila Kahyaoglu: Can we assume that G700 is accretive to the 15% full year guidance?

Phebe Novakovic: 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, 20 or so, carries with it additional costs. We’ll see those 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.

Operator: And we will take our next question from David Strauss with Barclays. Your line is open.

David Strauss: Thanks. Good morning.

Phebe Novakovic: Good morning.

David Strauss: Phebe, so Rob’s question on the supplemental and the submarine industrial-based money. So there’s money there. There’s a lot of money in the base budget, it appears. You’re spending additional CapEx today that you’ll eventually recover through working capital, profit. How does — I mean, it’s a lot of money. I mean, how does that manifest itself in your numbers as we think about over the next couple years?

Phebe Novakovic: 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 funding is also robust for submarines. We’ve got one projected in 2025 and then it would be extremely helpful to get a full ship set of Virginias also appropriated because that, again, helps stabilize the industrial base with repeatable revenue that they can plan around.

David Strauss: Okay. Thanks for that. Last quarter, you made some more kind of positive comments regarding the potential for share repurchase to step up. Obviously, you did a little bit this quarter, but not that much. How are you thinking about that now? Did that have to do with the fact that you ended up burning cash in Q1? Just how you’re thinking about share repo and the balance sheet from here? Thanks.

Phebe Novakovic: 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 credence 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.

Operator: And we will take our next question from Noah Poponak with Goldman Sachs. Your line is open.

Noah Poponak: Hi. Good morning, everyone.

Phebe Novakovic: Good morning.

Kim Kuryea: Good morning.

Noah Poponak: Phebe, what’s the framework for the pace of G700 deliveries beyond this year compared to this year? Not asking for quarterly numbers or anything like that, but just given this year has some abnormalities compared to a recurring airplane? And then, Kim, just what’s the updated view on free cash flow and income conversion for the year?

Phebe Novakovic: Well, so let me talk about 700. We never, except I think on one or two occasions about five years, six years ago, give the future year expectations. But 700 is a very, very successful program, and it will continue to execute well. I’ll turn it over to Kim on cash.

Kim Kuryea: 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 System segment and some in the Marine System 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.

Operator: We will take our next question from Myles Walton with Wolfe Research. Your line is open.

Myles Walton: Thanks. Good morning.

Phebe Novakovic: Good morning.

Myles Walton: Phebe, could you comment on or Kim, could you comment on the margin expansion implied at Combat Systems as you move through the rest of the year? I think it has to be 80 basis points to 100 basis points on average up year-on-year for the rest of the year. And maybe underlying dynamics of, given the volume, why we didn’t see more of a drop-through margin in the first quarter.

Phebe Novakovic: So, what drove margin in the first quarter were two things. Mixed as we came off of older legacy programs, particularly in the vehicle world and in the U.S. and then 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. And remember, this is a high operating leverage group, so they ought to do quite well here.

Myles Walton: Okay. And one clarification on Gulfstream’s backlog, if I could. I think that there was some adjustment downward in the backlog. Were those cancellations or 4X, maybe six large jet cancellations or thereabouts?

Phebe Novakovic: I don’t think that’s the way to look at it. Why don’t Nicole get back to you on that? But there wasn’t — we didn’t have any particular notable cancellations. So let us unpack that one with you a little later.

Myles Walton: Okay. Thanks.

Operator: We will take our next question from Ron Epstein with Bank of America. Your line is open.

Ron Epstein: Hey. Yeah. Good morning.

Phebe Novakovic: Good morning.

Ron Epstein: So, Phebe, with the increased demand on munitions and so on and so forth, what are you doing to mitigate any of the issues that could arise from growth in those markets? Just like we’ve seen in the Navy markets, given all the demand and growth, there’s been supply chain issues? Are you expecting any…

Phebe Novakovic: Yeah. 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 a priori 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.

Ron Epstein: Got it. Got it. And then maybe back to kind of the naval side of the house and the supply chain, can you give us any color on where there are actual weaknesses in the supply chain where investment has to be made?

Phebe Novakovic: So, I’d say in the large, in the single source, sole source suppliers who are by definition critical, and I think 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.

Operator: And we will take our next question from Doug Harned with Bernstein. Your line is open.

Doug Harned: Good morning. Thank you.

Phebe Novakovic: Good morning.

Doug Harned: On Marine — good morning. On Marine, the Navy recently described some shipbuilding delays really across programs and the one that really stood out was Columbia class with delays reported on the turbines and the bow. Can you give us a sense of changes you’ve seen in schedule that affect you kind of across the program base and particularly on Columbia?

Phebe Novakovic: 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 is the — 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.

Doug Harned: Well, and then also on shipbuilding, inflation has affected shipbuilding costs a lot over the last few years. We’ve seen pricing on new awards go up. And when you look forward in the budget, is there a concern that you’re basically, if you are going to — if the Navy’s budget’s really going to be able to afford the kinds of inflation increases that may come along with the continued ramp in shipbuilding?

Phebe Novakovic: Yeah. 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’s well aware of the inflation impact and I think is working hard with the whole shipbuilding industrial base to adjust some of that.

Operator: And we will take our next question from Kristine Liwag with Morgan Stanley. Your line is open.

Kristine Liwag: Hey. Good morning.

Phebe Novakovic: Good morning.

Kristine Liwag: Phebe, following up on the Marine question, in addition to the delay in the Columbia class, the DoD did request one less Virginia class for the fiscal year 2025 budget request. So, I mean, if we take all this into perspective, can you provide some context on what this means for Marine revenue growth over the next few years? And there’s a margin with a seven handle on it, is that more the new norm for this business?

Phebe Novakovic: So, let me address that in the inverse order. Margins will be improving at our shipyards. We have every expectation, all of our shipyards, NASCO, Bath and Electric Boat. One of the things that 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?

Kristine Liwag: The revenue cadence, including the just one Virginia class…

Phebe Novakovic: Yeah. So — 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. The 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 industrial base.

Kristine Liwag: Thank you, Phebe.

Operator: And we will take our next question from Ken Herbert with RBC. Your line is open.

Ken Herbert: Yeah. Hi. Good morning, Phebe and Kim.

Phebe Novakovic: Good morning.

Ken Herbert: If we look, Phebe, at your comments around timing in Gulfstream, is it still fair to assume that you should be looking at a book-to-bill at one or greater for Gulfstream in 2024?

Phebe Novakovic: 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.

Ken Herbert: Okay. Great. And just a clarification for, Kim, the comments sound like the free cash flow ramp really sort of accelerates in the second half of the year, but with all the 700 deliveries expected this quarter, free cash flow should be positive in the second quarter, correct?

Phebe Novakovic: Yes. That’s pretty much what you should assume.

Ken Herbert: Okay. Great. Thank you very much.

Operator: And we will take our next question from Robert Spingarn with Melius Research. Your line is open.

Robert Spingarn: Hi. Good morning.

Phebe Novakovic: Good morning.

Robert Spingarn: Phebe, you said recently that even though the Aerospace supply chain is improving, your ramp this year could challenge that improvement. I was wondering if you could elaborate on that a little bit?

Phebe Novakovic: 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.

Robert Spingarn: Okay. And then also, I think you commented, you had good bookings in Aerospace in the quarter, reflecting strong demand. But I think you’ve said, the U.S. has been very strong. How is aircraft demand elsewhere in the world?

Phebe Novakovic: 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.

Robert Spingarn: Thank you.

Operator: And we will take our next question from Peter Arment with Baird. Your line is open.

Peter Arment: Thanks. Good morning, Phebe and Kim.

Phebe Novakovic: Good morning.

Peter Arment: Hey, Phebe. Phebe, the Army wants to reach 100,000 155-millimeter shells by, I think, October 2025. Can you update us on how your ramp is going? You discussed that that supply chain is a little more robust.

Phebe Novakovic: Yeah. 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.

Peter Arment: Yeah. Thanks for that. And then just if you could make any comments on the G280 program, just given the conflict that’s going on in the Middle East?

Phebe Novakovic: So, we had anticipated the impacts on the 280 in our guidance to you, 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.

Peter Arment: Appreciate the call. Thanks, Phebe.

Operator: We will take our next question from Cai von Rumohr with TD Cowen. Your line is open.

Cai von Rumohr: Yes. Thank you, Phebe, and good quarter.

Phebe Novakovic: Thanks, Cai.

Cai von Rumohr: So, could you update us on the status of the G400? How’s 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?

Phebe Novakovic: 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 dates, but so I’m kind of out of the detailed predicting mode. But I will say the program is doing extremely well and it will fly in the third quarter and I think we’ll be flying a pretty mature airplane.

Cai von Rumohr: 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?

Phebe Novakovic: 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 surprises here. Steady as she goes.

Cai von Rumohr: Okay. Thank you.

Operator: And we will take our next question from Jason Gursky with Citigroup. Your line is open.

Jason Gursky: Good morning, everybody.

Phebe Novakovic: Good morning.

Jason Gursky: Phebe, I wanted to just quickly go back to your comments on Aerospace and what I guess you’d describe as an elongation of your sales cycle. But you could just talk a little bit about the overall size of the pipeline and how that is evolving. I understand things are taking longer to close, but I’d also be kind of curious to know whether there are an increasing number of people that are interested?

Phebe Novakovic: 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.

Jason Gursky: Okay. Great. So good metrics going on there, it sounds like. Then just really quickly, maybe this is a question targeted at Technologies, but I’d love to get some updated thoughts from you on artificial intelligence, AI, the adoption that you’re seeing with your customers, how you see this kind of playing out and affecting your business and maybe this, as I suggest, focused on Technologies.

Phebe Novakovic: Yeah. 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 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’s some governance challenges around that, but the more sophisticated we get in our ability to tailor AI solutions, I think, the more comfortable our customer becomes and will ultimately drive some increased revenue. I haven’t seen too much of that yet, because there are — I think the government is not unlike other industries where its adoption is people are careful and they think properly so. And I would argue that would be true across the entirety of our business. Abby, I think, we have, sorry, okay, I think, we have time for just one more question.

Operator: Thank you. Our final question today comes from Gavin Parsons with UBS. Your line is open.

Gavin Parsons: Thanks. Good morning.

Phebe Novakovic: Good morning.

Gavin Parsons: Phebe, you highlighted the stronger second half Aerospace margins, that’s a more normal volume and G700 production. Is that more of an appropriate starting point for 2025 than the full year 15%?

Phebe Novakovic: Nice try. So, look, yeah, 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 in our regular order. We kind of keep our discipline, as you well know, around updating guidance and I think that that’s appropriate.

Gavin Parsons: Yeah. Appreciate that detail. And then just in terms of the 100% cash conversion for the year, what’s the opportunity to exceed that, given last year you were well above and you built a lot of G700 inventory?

Phebe Novakovic: 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.

Gavin Parsons: Thank you.

Phebe Novakovic: 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.

Operator: And, ladies and gentlemen, this concludes today’s call and we thank you for your participation. You may now disconnect.