Q2 2024 General Dynamics Corp Earnings Call

Participants

Nicole M. Shelton; VP of IR; General Dynamics Corporation

Phebe Novakovic; Chairman of the Board, Chief Executive Officer; General Dynamics Corp

Kimberly Kuryea; Chief Financial Officer, Senior Vice President; General Dynamics Corp

David Strauss; Analyst; Barclays

Peter Arment; Analyst; Robert W. Braird & Co.. InC.

Robert Spingarn; Analyst; Melius Research

Cai von Rumohr; Analyst; TD Cowen

Jason Gursky; Analyst; Citi

George Shapiro; Analyst; Shapiro Research

Ken Herbert; Analyst; RBC Capital Markets

Doug Harned; Analyst; Bernstein Institutional Services LLC.

Myles Walton; Analyst; Wolfe Research

Scott Deuschle; Analyst; Deutsche Bank Securities Inc

Robert Stallard; Analyst; Vertical Research Partners

Seth Seifman; Analyst; J.P. Morgan Securities LLC

Ellan Paige; Analyst; Jefferies

Noah Poponak; Analyst; Goldman Sachs

Matt Akers; Analyst; Wells Fargo Securities LLC

Presentation

Operator

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. (Operator Instructions)
I would now like to turn the conference over to Nicole Shelton, Vice President, Investor Relations. Please go ahead.

Nicole M. Shelton

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.

Phebe Novakovic

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 standards.
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'll note we mistreat EPS consensus by $0.02 due entirely to the slip before G700 deliveries from the last week in the quarter to the beginning of Q3.
One has since been delivered three are imminent. From a different perspective, the sequential comparisons are also quite favorable. Revenue is up $1.2 billion and operating earnings are up $120 million on steady margin. 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 or up 15.4%, net earnings of $1.7 billion or 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 that will progress favorably throughout the year.
Then I will attempt to put all of this in some reasonable perspective for you. Aerospace had revenue of $2.94 billion and operating earnings of $319 million with a 10.9% operating margin. Revenue of $987 million more than last year's second quarter, a remarkable 51% increase.
The revenue increase was driven by additional new aircraft deliveries, coupled with higher service revenue. We delivered 37 aircraft, including 11 newly certified G700 in the quarter. This is for fewer than we expected to deliver, but more about that in a minute.
Operating earnings of $319 million or up $83 million, 35% over the year ago quarter. The 10.9% operating margin was 120 basis points lower than the year-ago quarter. This was driven by G700 delivery, expect carrying more than expected costs from three things: First, retrofit, second, battle station work related to the late arrival of parts, and three, the extended certification period.
This cost burden will affect 20 Lot 1 aircraft, which includes five test aircraft that will not deliver this year. So we are through the Lot 1 cost burden for this year within the next four deliveries. The good news is that margins on the G700 are expected to increase by 600 basis points to 700 basis points in Lot 2 and by a similar increment in Lot 3. By the time we reach Lot 3 production and deliveries, we will have reached a steady state in terms of productivity and predictability.
A few comments on predictability. You might recall that I told you we expected to deliver 50 to 52 G700 this year and that the deliveries would be more or less evenly divided over the last three quarters of the year. But we planned 15 for Q2 and delivered 11. So much for predictability.
We actually had the remaining four completed and ready to go. I could not get through the preflight delivery testing in time. You might be surprised to learn that each G700 is flown about 30 hours of test before delivered. Two of the plans also needed a supplemental type certificate because of a very different cabin configuration. That wasn't done by the end of the quarter.
Back to some numerical comparisons. The sequential numbers are equally impressive. Revenue is up $856 million, a strong 41% increase and operating earnings are up $64 million, about 25% affected by 130 basis points degradation in operating margins for the reasons I just mentioned a moment ago.
You'll see much stronger operating margins in the third quarter, followed by even better operating margin and related earnings in the fourth quarter. Separately, we still expect to deliver 50 to 52 G700 this year. Look for about 16 in the third quarter and 23 to 25 in the fourth quarter.
From an orders perspective, we had a respectable quarter at 0.9 to 1 book-to-bill in dollar terms. There is strong interest in the fair pipeline across the product mix. As I noted last quarter, bringing transactions to close has elongated somewhat as there is some caution while customers digest the impact of geopolitical events in general and the US presidential election in particular.
United States remains our strongest market, but the EU is improving. The Middle East shows very strong potential and just very recently, we have seen some improvement in China. The interest level of buyers and the expiration of accelerated [depreciation] at the end of the year suggests a reasonably strong order intake in the second half of the year, particularly in the fourth quarter.
We are pleased to have both G700 FAA an EASA certifications behind us. The aerospace comparative revenue and earnings numbers in the quarter are very good by any reasonable standard, but still behind consensus largely attributable to deliveries that did not make it to the wire.
In summary, the aerospace team had a very good quarter. It is handling the rapid increase in deliveries and revenue on a methodical and disciplined fashion. We look forward to a powerful second half with increasing revenue and earnings quarter over quarter as we forecasted at the end of last quarter. Moving to the defense business as a collective, we once again saw strong growth and good operating performance across the portfolio. Let me walk you through each segment in turn.
First, combat systems. Combat Systems had revenue of almost $2.3 billion, up 19% over the year ago quarter, with growth at each of the three business units. Earnings of $313 million are up almost 25%. And margins at 13.7% represented a 70 basis points increase over the Q2 last year, ensured very strong operating performance from combat system.
The increased revenue came from facilities expansion and artillery work in ammo business, coupled with increases in international tank and medium wheeled vehicle sales and US Army programs of records. Each of the businesses increased earnings nicely, but particularly strong operating leverage in our international vehicle business.
On a sequential basis, revenue increased 8.8% and earnings rose 11%. Year to date, revenue of about $4.4 billion is up 19.3% and earnings of $595 million are up almost $100 million or 20%. Combat saw robust order intake with over $3.4 billion awarded in Q2, resulting in a book-to-bill of 1.5 to 1 for the quarter.
Orders came from across the portfolio, ranging from ammunition, the main battle tank for the US Army, and wheeled vehicles for an international customer. Demand remained steady, particularly for the Abrams main battle tank and international wheeled vehicles. We expect demand for ammo to continue to rise for some time to come as we rapidly increase production of artillery shells and components. All in all, a very strong growth and performance quarter for combat systems.
Turning to marine systems. Once again, our shipbuilding group is demonstrating strong revenue growth. Marine Systems revenue of $3.45 billion is up $394 million, almost 13% against the year-ago quarter. Columbia-class construction and engineering volume drove the growth while Virginia class DDG51 revenue also increased nicely.
Operating earnings are $245 million, up $10 million over the year ago quarter, with a 60 basis points decrease in operating margin. Margins were impacted by continued delays to EB from the submarine industrial base, partially offset by improvement in DDG51 performance above and continued steady performance at NASSCO.
Sequentially, revenue increased 3.7% and earnings improved 5.6% in Q2, driven by volume and EB as we saw some quarter over quarter improvements supply chain deliveries to the yard and continued positive performance at NASSCO.
Year to date, marine revenue of $6.8 billion is up 12.1% and earnings of $477 million are up 7%. As I noted a moment ago. Although the supply chain is improving in places, EB continues to be impacted by late deliveries from the supply chain, which both delays schedule and impacts costs.
Add a sequence for multi ton modules is time-consuming and expensive. Our strategy, as you know, has been to increase our productivity to somewhat offset that impact. To that end throughput, a significant measure of productivity continues to improve. Hiring is good, and attrition is lower, so all good sign.
In summary, we are starting to see some momentum build in our shipyards to meet the delivery and repair requirements of our customer, the US Navy. We anticipate that all of our yards are now well positioned for slow but steady incremental margin growth over time with fewer perturbations.
Finally, technologies. The group had another good quarter with revenue of nearly $3.3 billion, up 2.5% over the year ago quarter and operating earnings of $320 million, up 13.1% on a 90 basis points improvement in margins. This nice improvement in operating performance was across both businesses.
GDIT margins increased 40 basis points and mission systems margins were up 130 basis points as they continue to recover from supply chain impacts experienced in 2023 and before. Sequentially, revenue was up $81 million or 2.5% and operating earnings were up 8.5% on a 50 basis points improvement margin.
And the story is much the same for the year to date with revenue of $6.5 billion, up about 1% and operating earnings of $615 million, up 5.7% against the first six months of last year. As a result, margins for the group were up 40 basis points year to date to 9.4%.
So all relevant comparisons this quarter show revenue and earnings growth and margin expansion at both businesses, positioning them well going forward, ensure GDIP is holding its industry leading margins while consistently delivering year over year growth, while mission systems is delivering nice margin expansion as it transitions from sunsetting legacy programs.
The group received $3.3 billion in orders in the quarter, bringing the total $7.2 billion for the first six months. That results in a book-to-bill for the group of 1.0 for the quarter and 1.1 for the year to date.
Total awards for the group in the first half are up 30% compared with the first six months of 2023. This is on the strength of win rates, consistently around 80% for the group and capture rates at roughly 65%, both very strong for this industry.
Backlog was down slightly from the end of the first quarter due to the removal of backlog associated with an international divestiture in the quarter, but was up almost $200 million from a year ago. As importantly, the qualified pipeline remains very robust at over $120 billion. So the group is well positioned to continue its growth trajectory. Let me now turn the call over to Kim.

Kimberly Kuryea

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

Phebe Novakovic

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 estimates, but we'll get there with higher revenue and about a 100 basis points 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, 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 electric boat and somewhat above. So we will have annual revenue between $13.4 million 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 million 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 correct guidance.
That concludes my remarks and we'll be happy to take your questions.

Question and Answer Session

Nicole M. 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

(Operator Instructions) David Strauss, Barclays.

David Strauss

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

Phebe Novakovic

Sure. So very late in the certification process, we had a requirement to bind to gather some wires in the tail of the airplane. So relatively simple fix for those airplanes that we'd already built, we took the tails off for those that we were building we just didn't put them on.
So this is largely behind us and contributed to the -- a bit to the cost impact on Lot 1. 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.

David Strauss

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

Phebe Novakovic

Right. Thinking about the supply chain is more a question of cost then of deliveries.

David Strauss

Terrific. Thank you

Operator

Peter Arment, Baird.

Peter Arment

Thanks there. Good morning Phebe.

Phebe Novakovic

Good morning.

Peter Arment

Yeah, 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.

Phebe Novakovic

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

Peter Arment

It's great to hear. Just as a quick follow-up, just your latest thoughts on just the D400, is that still tracking to your kind of original plan?

Phebe Novakovic

It is and we are to fly very soon.

Operator

Robert Spingarn, Melius Research.

Robert Spingarn

Hey, good morning.

Phebe Novakovic

Morning.

Robert Spingarn

Phebe, maybe on 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, our marine was a 10% type margin business. And given the supply chain issues the impact -- the shipbuilding workforce in the aftermath of COVID. Is that a realistic target some point the future? And what might be the timing on that? Thank you.

Phebe Novakovic

Sure. So the -- 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 bases you noted, that money has begun to flow and it is intended for another, and it's targeted for a number of uses.
One, increased throughput, two some facilitation, some training, increased hiring and that 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.
We -- 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 US 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 see 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 at -- 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.

Robert Spingarn

Thank you very much.

Operator

Cai von Rumohr, TD Cowen.

Cai von Rumohr

Yes, thanks so much, Phebe.
Good morning.
Good morning. So the tail issue at Gulfstream, does that -- 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 non in the fourth and therefore, you should see a strong lift in the margins sequentially. Is that the way to look at it?

Phebe Novakovic

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

Cai von Rumohr

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

Phebe Novakovic

I tried to give you that in my remarks, but this was really a Lot 1 issue.

Cai von Rumohr

Got it. Thank you.

Operator

Jason Gursky, Citi.

Jason Gursky

Hey, good morning, everybody. Phebe, just wanted to spend a few minutes talking about those services business at 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.

Phebe Novakovic

So on the service side, services, as we said before, will grow with the expansion of the fleet. Our objective is to get as much of the Gulfstream work possible and we've got the vast preponderance of that already.
Services is growing this year. And as is, by the way, a 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 will with respect to services, there's no real difference in any of the competitive environment.

Jason Gursky

Okay. Great. And then turning to technologies and maybe even 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 12, 18 months on the pipeline and the outlook for book-to-bill for the technologies business.

Phebe Novakovic

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

Operator

George Shapiro, Shapiro Research.

George Shapiro

Good morning.

Phebe Novakovic

Hi, George.

George Shapiro

Phebe, I just wanted to get some clarification. You'd said that the pretty much all the costs were incorporated yet you delivered 11, 5 you said will won't be delivered until next year, but there's still 4 left to go because that's the 4 that you just delivered in the first week or so of the second of the third quarter.

Phebe Novakovic

Yeah, so the Lot 1 consisted of about 20 or so airplanes. Our fiber test airplanes will deliver next year. But this year, the Lot 1 costs are going to be behind us imminently. We've delivered one of the four. I mean, I tried to give you some color on the delivery process and the other three are imminent here. So I think we're in pretty good shape on that. Is that helped you.

George Shapiro

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

Phebe Novakovic

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

George Shapiro

Okay. And just one last one the.

Phebe Novakovic

Sure.

George Shapiro

Aftermarket growth in the quarter, it's at Gulfstream.

Phebe Novakovic

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

Operator

Ken Herbert, RBC.

Ken Herbert

Yeah, hi, Phebe, good morning.

Phebe Novakovic

Good morning.

Ken Herbert

I wanted to see if you can make some comments on combat and specifically the outlook for bookings in Europe, Japan and other regions but also, how should we think about with the orders you're booking today, the impact on the backlog? And 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 and revenues?

Phebe Novakovic

So the bookings continue to reflect the threat environment, both that they were driven in the quarter, both by international vehicle orders and US ammunition and army programs of record. And I think we'll see as we've going forward, I'd say that combat systems is typically as we've 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 I didn't exactly ask this question, but I'll also to answer it as we move from the lower margin facilitization work to that higher margin throughput on -- that's generated like a throughput on ammunition, you'll see it, little bit of a margin expansion there.

Ken Herbert

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

Phebe Novakovic

I think we've broken out cash for you by business group, I think Kim tend to give you a fair amount of color on in third and particularly the fourth quarter of unwinding some of the pre-builds in combat with deliveries of the vehicles and materials.

Operator

Doug Harned, Bernstein.

Doug Harned

Good morning, thank you.

Phebe Novakovic

Hi, Doug.

Doug Harned

Hi. 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% and to 20% type margins. Is there a way to think about the progression here? They're 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 in more of a normalized mode?

Phebe Novakovic

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

Doug Harned

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 in rynanmetal and others are also ramping up here? How do you see that extending over time?

Phebe Novakovic

Well, it's hard to look into a crystal ball much past planning period that we've we anticipate for the next couple of years increase 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 from outside the next couple of years.

Doug Harned

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

Phebe Novakovic

Yeah, couple of years, I wasn't clear on that. I apologize. Yeah, I would say a couple of years of this. I would say three, four years max somewhere along those lines. And then we'll see, I think there have been some profound lessons learned from about the criticality of munitions, ammunition. So I expect those to be incorporated in a year like most land forces thinking.

Doug Harned

Okay. Very good. Thank you.

Operator

Myles Walton, Wolfe Research.

Myles Walton

Thanks, good morning. I was wondering Phebe, you increase the sales at Gulfstream, but no change in deliveries. Is that an ASP for a services driven higher revenue base?

Phebe Novakovic

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, we've talked about in the past.

Myles Walton

Okay, got it. And then to another detail question, thanks for the color on the unit improvement in margins. Are the unit quantities about 20 aircraft, similar to Lot 1? And then secondarily, when you move to the 800, the D800, should we anticipate a similar profile and profitability or do you think you'll be at higher profit sooner on the 800 out of the gates? Thanks.

Phebe Novakovic

Our 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.

Myles Walton

Okay. And where the Lot quantities about (inaudible)

Phebe Novakovic

Yes, typical Lot quantities.

Operator

Scott Deuschle, Deutsche Bank.

Scott Deuschle

Hey, good morning.

Phebe Novakovic

Morning.

Scott Deuschle

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 through value at a relatively full run rate or is the ramp more gradual from that? Thank you.

Phebe Novakovic

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

Scott Deuschle

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

Kimberly Kuryea

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.

Scott Deuschle

Okay. So modestly positive in 3Q?

Kimberly Kuryea

Yes.

Scott Deuschle

Thank you.

Operator

Robert Stallard, Vertical Research.

Robert Stallard

Thanks, so much. Good morning.

Phebe Novakovic

Morning.

Robert Stallard

Phebe, a couple of critical questions for you. First of all, from the US if the Ukraine supplemental worked zero, what sort of risks that present to GD in the future.
And then second in the UK, a change of government over here, whether there's any implications for Ajax or (inaudible) thank you.

Phebe Novakovic

Take that in the inverse order. Don't anticipate any particular changes in Ajax vehicle is performing extremely well. The UK Army is pleased with it. So I think that's a standard piece of kit for the UK Army.
With respect to the US 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.

Robert Stallard

Okay. Thanks so much.

Operator

Seth Seifman, JPMorgan.

Seth Seifman

Good morning.

Phebe Novakovic

Morning.

Seth Seifman

One quick quite a specific one on Gulfstream, the attestation work you talked about due to delayed supplier deliveries. Is that behind us now as well?

Phebe Novakovic

I'd say supply chain has improved, but it is not completely healed yet. So I suspect we'll continue to have some attestation work.

Seth Seifman

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 business?

Phebe Novakovic

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

Seth Seifman

Okay, very good. Thanks very much.

Operator

Ellan Paige, Jefferies.

Ellan Paige

Good morning. Thanks for the question. Just starting on the G700, you mentioned Lot 3 was at a steady-state margin. How do we think about that relative to G650? When it was that kind of peak margin?

Phebe Novakovic

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

Ellan Paige

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?

Phebe Novakovic

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, a threat environment. So growth is continuing. Some years it will be a higher rate of growth than others, but it is a growth trajectory.

Ellan Paige

Thank you. I'll leave it there.

Operator

Noah Poponak, Goldman Sachs.

Noah Poponak

Hi, good morning, everyone.

Phebe Novakovic

Morning.

Noah Poponak

Mining, Phoebe, I guess if I look at the funded backlog at Gulfstream, it's been relatively flattish over the last kind of 1 year and 1.5 year. 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?

Phebe Novakovic

So I think we've got a very balanced plan through this year and the way we see -- 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.

Noah Poponak

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?

Phebe Novakovic

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

Noah Poponak

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 reverses next year.

Kimberly Kuryea

So in terms of for the 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.

Noah Poponak

Okay. Thank you.

Kimberly Kuryea

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

Operator

Matt Akers, Wells Fargo.

Matt Akers

Hey, good morning. Thanks for the question.

Phebe Novakovic

Morning.

Matt Akers

There was a fire at the Camden Arkansas facility. Can you just comment if that was material at all and if that it's back on line at this time?

Phebe Novakovic

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

Matt Akers

Got it. Thanks. And I guess if you could comment on the outlook at NAASCO just between repair work, I think you guys recently won those sub tender work there, just kind of how you see the outlook for that yard?

Phebe Novakovic

So NAASCO learning and performance on the TAA, the oiler are going quite well for delivering the seven of the eight class ESB and repair continues to be pretty strong as the demand from the US Navy is increasing.

Matt Akers

Okay. Thank you.

Nicole M. Shelton

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 7038763152.

Operator

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