These, CEO and Chairwoman, Phebe Novakovic. Phebe, thank you for joining us. Everyone starts with Gulfstream. Let's change. With combat. Nobody talked about it for a while, but obviously, its relevance is increasing as a result of the Russian invasion of Ukraine. You got a $3.6 billion proposed FMS tank sale to Poland. Walk us through, you know, the order prospects for vehicles and when they might impact your business. Can everybody hear me? Oh, Howard's reminding me that the administrative side of life, I have to say there's a forward-looking statement, and I said it. And the details are available, I believe, on our website. The threat environment has clearly changed, and that, plus a combination of MPF, drove last year revenue a little higher than we had anticipated. Abrams, light armored vehicles, LAVs, ammunition are all increased demand. That provides us the potential for some upside this year, depending how quickly contract execution happens. We're anticipating relatively flat sales this year, low single-digit growth next year, and then mid to low in the out years. Okay. Can you give us a little bit more, you know, is it Eastern Europe? I think on the call you mentioned around six or seven countries that were looking at vehicles. Yeah. I mean, it's a lot of Eastern Europe. You know, the closer you are to the fight, the more you feel the threat directly. They've been a little quicker to execute their contracts to meet their requirements. Austria, Switzerland, Germany, Spain, Denmark. Really a good mix of future and existing customers. I think as people look at this, you know, this area of the world has bought weapons before, and yet then we see $3.6 billion for the tank, and then we see Poland coming forward with $10 billion for HIMARS and GMLRS, et cetera. I mean, could we see a surprise here? I mean, it's very hard to sit on this side and get a sense of how big the potential could be. I mean, give us any qualitative sense of that. Well, we certainly hear from our customers that they're interested, but it takes a while... Right. From that interest to materialize into funding and then contract action, and then you ramp up production. I don't know that we have or anybody knows the maximum demand, ultimately, that will be driven as a result of this invasion. It's certainly we'll see higher percentage of GDP spending throughout NATO. Right. As well as Europe. I think there is upside. From our point of view, we'll just take it when it comes in small, incremental increases to our portfolio. The weapons area is around 25%-30% of combat. It usually does not get much attention. Not love. Yeah. It's, you know, it's been flat since 2019. Can you give us any sense as to where it might go over the next couple of years? I don't wanna speculate, but let me tell you what we do know. We have had interest and begun to see contracts materialize for increasing production in the existing capacity, and that's just increasing throughput. In order to meet the demand, there's gonna need to be investment. We're working very closely with our customer to ensure that the investment and contracting resources are available in order to meet this demand. It is a very collaborative effort with the US Army. When you say you need investment, presumably that implies a multi-year ramp. It's not just gonna be big in 2024. It's likely to be several years. That line of business, not just for us, but with that funding line of business within the defense budget, has been relatively flat to declining for some time. There is a good and valid reason for that, and that is, as the Army was upgrading and changing and modernizing several lines of munition, that funding got flattened in the moment, and then the R&D had increased. That's kinda why we have lived with this current industrial base that we have in the moment, really unchanged in the capacity to kinda deliver relatively unchanged for a number of years just because of that transition. That's all changed now. Got it. We're moving very quickly, as is the Army, to increase investment, and then we can stand up these lines and I think we will go faster than anybody anticipates. Got it. You've also got the two big foreign vehicle programs, Ajax and then Canada's international sale, that have had some problems over the years. Can you update us as to where you are on those? On Ajax, Customer has continued to reiterate their support for the vehicle, and this is a very mature vehicle that we have great confidence in. I don't wanna get ahead of current events and activities prior to their being memorialized. With respect to the large international order out of Canada, that order is beginning, the revenue on that is beginning to decline as we continue to deliver product. That will be somewhat offset by increased sustainment over time. Got it. By the way, any, the issues with respect to, payment on that contract a couple years ago have been fully resolved. Right. I believe the MOD in the UK came out with a report, I think it was in December, saying that the noise and vibration issues that you had had on Ajax were essentially resolved. I think you've talked about, you know, payments have resumed there. When should we assume, you know, basically the unbilled gets worked down on that program? I think what I have said is that we anticipate, given the maturity of the vehicle and where it is in its test program, that payments b egin to flow again. We're not gonna be real specific about that other than we anticipate this largely this quarter. Got it. You mentioned on the fourth quarter call that marine, particularly EB, has been hurt by the abnormally large retirement of experienced workers, and have you seen that trend start to abate at all? What sort of threat does it still pose to your accrual rates on Virginia and Columbia? The submarine industrial base, not unlike the defense industrial base, experienced a higher than anticipated retirement level than we had expected prior to the pandemic. That resulted in the shipbuilding industry, new shipbuilders, but also throughout the industrial base, new workers. At Electric Boat, we have a very mature training program, we've been impacted far less than certainly most in the marine industrial base. Our new shipbuilders are coming down the learning curve very quickly. That demographic change has impacted this year's revenue on Virginia. It's partially what is contributing to relatively flat revenue in that for us in this year. For Columbia has the highest national security rating that the nation provides throughout the supply chain, that program remains ahead of contract schedule. Got it. Okay. Should we think that the trend there because the, you know, the retirement, is that continuing at that rate of the experienced workers? Yes. Has it started to abate? It has for us largely abated. Okay. We don't anticipate seeing that for a while again. Hopefully, looking forward, we should see a more normal cadence in terms of marine revenues going forward. As I say, for us, it was a little bit of a stub of the toe, but not a trip. Right. We've gotten our cadence back pretty well, but we need that entire submarine supply chain to really stabilize. Got it. That may take some time. Mission Systems, you've talked of it being down for the third year in a row, and, while GDIT sales and margins have increased for three years, can MS margins ever get back to where they were in 2021? Mission Systems was impacted by a shortage in several of their key parts. We like where they stand right now in terms of recovering, halfway through this year, but it remains a watch item. As you would expect with any very complex problem. What gives us a considerable bit of confidence in where how they're going to execute the remainder of this year is what they've done to prepare. They have increased long lead material purchases, and they have worked with customers to redesign key components that simply will not be available within reasonable lead times. We kinda like where they are right now. If we look at this business. Oh, by the way, if we go back to your one, your fundamental, the predicate of your question, this product business has always been a strong margin performer. Right. We expect that their margins will again re-improve once we get through this supply chain challenge. It sounds like, 'cause if we look at it, I mean, we're going through 2 years where it kind of would struggle a little bit more. It kinda sounds like now we're kind of at a bottoming. Hopefully things will turn at some point. We should see that their margins improve. You know, for the group margins, the change in mix from increased services in GDIT- Right lower hardware, deliveries at Mission Systems change the group margin quite naturally. You account, unlike others, you account for GDIT's margins after amortization. You don't basically take it out and say, "Here's what it is. We're really great." Theoretically, that amortization moves down, but so can the margins before amortization continue to improve? GDIT has increased its margins every year for the last four years, except during the pandemic. Right. Where they held their own, in terms of the stability of their business. Last year they had their highest margins ever. I don't think there's anything really to fix here. We're very driven on margin performance. Okay. Okay. In the third quarter, you quietly bought another service provider, Progeny, in the tech sector. That's, I think, the largest acquisition you've made since CSRA. Is this the beginning of a trend? Are there more things, you know, niches you'd like to fill in that sector? It was frankly, the only acquisition. Right and relatively small bolt-on for Mission Systems other than some service, air aviation infrastructure companies that we bought for, Jet Aviation. It's a nice bolt-on in line of business for Mission Systems, but it signifies nothing in terms of a change in our capital deployment strategy. I remember Jason, I think, made the comment that, you know, as you look at that sector, all the other folks have been quite active in terms of M&A and getting big, and I know that you made the move with CSRA to sort of reassert, you know, your leadership position. Is it getting to the point where you think, eh, maybe, you know, you might need to do something else in that sector? We have invested in key technologies and capabilities that we think differentiate our products and our offerings to our customers, and we'll continue to do so where we see an ability to fully differentiate ourselves. I'm not gonna get into M&A. Okay. Okay. No surprise. What a shock. No surprise. Finally, turning to Gulfstream. You mentioned on the fourth quarter call that R&D would start to abate toward the end of next year, and maybe I misread that. It sounds like that's a little later than you thought, you know, earlier in 2022. Has there been any change in terms of the R&D profile and maybe the cost of bringing the G700 and G800 to market? R&D will abate a bit, post the certification of the 700 and 800. It is important not to underestimate the commitment to upgrading our existing airplanes on a disciplined, methodical manner, and as the market dictates, introducing new airplanes. We'll see a slight reduction in R&D, but nothing significant. Let's remember, this investment has made Gulfstream what it is today. It would be foolhard to move away from that strategy. Right. You've got a big revenue lift, coming at Gulfstream in 2023 and 2024. You know, if the R&D basically starts to even trend down very slightly after the 700 and 800, what kind of incremental margins should we be looking for there? nothing has changed in the margin, and performance estimates, the projections that we gave you. Our multi-year projections, so we will manage this. We will come down, dedicated learning curves on dedicated lines on all aircraft. Gulfstream has always been and will continue to be a very strong margin performance, but it's all factored into sort of the estimates we gave you. Right over the years. I can't remember what you said. I believe there was sort of less margin increase in 2024, but I mean, as I've looked at it looks like, you know, once you get out to 2024, you know, all these programs really are quite mature and should be generating good profitability. If the R&D to sales tracks down, that there might be at least as much margin upside in 2024 as in 2023. Am I thinking about it incorrectly or are there additional risks? I think you are. I think this is a very sophisticated, complex, and multidimensional business when it comes to driving margins. Fundamentally, margin performance is based on operating excellence, and we have more than once proved that. We're pretty comfortable in the estimates that we gave you. Got it. like others, you know, you've seen delivery slips, not big ones, but little ones due to supply chain issues. Is that situation starting to stabilize? you're a brilliant analyst, but I'm gonna pick a nit with you. Oh on a word. It has never been unstable. I think as you think about where we are headed, I suspect that we don't really see any challenges. Supply chain has been an issue. It has been an issue for the last few years, but Gulfstream has done a superb job managing its supply chain, including embedding people within the supply chain to meet our throughput. Just to give you some perspective, we had three airplanes slip from last year into this year. two were because of customer preference. Right. one was because we were not ready. Right. Not supply chain. Okay. All three have already delivered. They delivered last month. It is a challenge managing this supply chain, but Gulfstream has done very well. No, no, you have. I think that partially where I'm going with this is that, when you have challenges to overcome, sometimes work gets done out of sequence, and it gets done, but it's not quite as profitable as if everything is flowing smoothly. Are we at a point where things are starting to flow more smoothly, where the challenges of supply chain are abating? I'd say that supply chain challenges remain pretty much the way they are. Gulfstream has been very good in optimizing those margin, optimizing its operational workflow. Of course, there's more work to do here. Got it. We do not see that impacting, again, our long-term estimates. Okay. One of the big questions really that people ask about, you know, Gulfstream biz jets overall is, you know, are we gonna go into a cycle? Customer buying habits patterns seem to be changing since the pandemic. Again, more high net worth individuals, more first-time buyers. Maybe characterize what you've seen at Gulfstream in terms of changes, if any, in the buying patterns, and, you know, what do they suggest about cyclicality? I know that your sector of the business has much less cyclicality than others, but how should we think about this issue? When the demand picked up post-pandemic in the first quarter of 2021, we saw a few more high net worth individuals and a few more new buyers. I do not see any systemic change. I cannot discern any real change in customer buying habits or patterns. We just have more of the same of every category of customer. Looking forward on Gulfstream demand, the pipeline is good. Our sales activity is good. We can anticipate and do a one-one book-to-bill for this year, given the duration and strength of our backlog. I think it's really important to remember that our 2023 and 2024 estimates about production levels and delivery levels are independent of current demand. They are based entirely and solely on our strong, durable backlog. Even were there a macroeconomic perturbation, the next few years are solid for us. Got it. One of the things that others have mentioned is that, you know, over the past year, there have been more first-time buyers, people who have not owned a biz jet before, and some of that's being stimulated, you know, by the fractionals. Are you know, selling more to the fractionals or using them more or, how should we think about that at all? I think it's an assumption and not necessarily provable that incremental first-time buyers would be driven by fractional use, but it's certainly a, a possibility. For us, I mean, that's just on the theoretical basis of this. For us, fractionals are an extremely small part of our business. We have never been able to align our business models and our interests with theirs, and that's been true for a long, long time. By definition, they're very, very small part of our business and our backlog. Got it. you've talked about cash flow conversion this year, 105% if Ajax payments resume and Gulfstream book bill holds at one. Do you think those two assumptions are real? Are you at all concerned about those assumptions? Well, I think in a year of execution, you're always mindful of all the elements that contribute to cash. We're very comfortable with our estimate for the year. Got it. By the way, you should s ee for the foreseeable future, we do expect to have very efficient cash conversion rates, as I said, for the foreseeable future. If I go back to history, I think I can remember years when because you have businesses with higher margins than others, that you've had fairly greater consistency than others in being at about 100%, not every year, but just over time. So as we look to 2024, I assume the Ajax unbilleds will start to come down. Section 174 impact eases, CapEx presumably comes down. Any offsets that would prevent cash conversion from staying, you know, at or above 100%? Not that we see. We're largely through our investment period, so we expect to see that efficient conversion of cash rate, and we're quite comfortable we can meet that. It tends to be something that we consider a competitive advantage, and a key to driving value creation is focusing on cash. It's all that matters at the end of the day. Right. Right. I mean, so is there a chance you could be going back the next couple of years to kind of the 100% type of... I mean, it sounds like next year you could be, you know, in that... I think- that middle I think you'll continue to see us perform at that level. Got it. The other big question people ask is, what happens with the cash? Your balance sheet's been getting better. How do you think about the deployment? We've always been very opportunistic about capital deployment. As we see opportunities arise that make sense to us, we execute accordingly. Just to step back, and I think maybe undergirding your question is when we look strategically across our business, we like the positioning of our four groups. They're strong, they're well-positioned in their respective margins, We do not have a strategic compulsion for any major changes in that regard. We'll continue our opportunistic capital deployment where we think we can... We'll execute along the, you know, basic principle that where we can get the largest return on that investment. Got it. I mean, Nick wants your predecessor bought Gulfstream, which got you into a new area. It, you know. Is there any thought, you know, because it looks like your current areas, you don't need anything to make them stronger. Would you consider a fifth leg to the stool? We've gotten that question for about 22 years. Right ... because we have managed Gulfstream extremely well. Right. In fact, we have added considerable value over the years. Gulfstream was almost a unicorn. It's extremely hard to find something that a defense, a product that a defense company could add so much value to over time other than a Gulfstream. I, as I say, I think we're quite comfortable. We have thought very creatively about is there anything else out there? In 20 years, we haven't found it. I think, which would say probably the cash goes to shareholders. I mean, 100% going to shareholders is likely in the future. Well, You've made an enormous leap of faith there. I think what we will do is continue to invest in our business to support our customers, as we always have. Just at lower levels than the last few years where we had significant strategic investments across our portfolios. We will look very carefully at our dividend. We have maintained a strong dividend over the years, and we'll be opportunistic about everything else that we consider. When you say opportunistic, you usually bought shares, you know, when people weren't looking, so to speak. You've never considered an ASR. Would you consider an ASR at any point, or is that something you're less likely to? Just as a matter of principle, I prefer having control. Okay. I don't wanna bid against myself in the market. Okay. It's tended to keep us away from ASRs. I think shareholders might like it in the moment, but I don't think that that is necessarily ensures the best possible return. Terrific. Well, this has been great. If we sort of to wrap up, if we look at, you know, your growth this year and next year, what are the key risks and opportunities? Like, obviously, I think we've talked about some of the opportunities, like combat maybe is gonna be doing better. As we go around the horn, maybe, you know, help us understand what could go better and also what are the things that, you know, maybe, you know, create a little more worry. It is important to have your radar on constantly looking for both the risks that are known and that typically in for a defense and aerospace company, is could be operational risks or right now it's the supply chain. The supply chain in both aerospace and defense. We need to continue to work that, and so far we have. It is a real issue, and we've talked about it with respect to shipbuilding in particular. We continue to work that. It's the unknown unknowns. You know, you can walk through life having a healthy level of paranoia, but sometimes it's the things that sometimes hit you that you had not fully anticipated, like a pandemic. A worldwide pandemic could have, you know, contemplated that, and the impact that that had and the responses of various nations on, you know, worldwide economies. The key in any of those instances is just a management philosophy, is to act quickly, agilely, correctly, and adjust to whatever environment. I think this leadership team has done a very good job doing that over time. I think in the moment, it's supply chain. I think demand is constant and as best that we can tell. We'll just continue to work those things that we know. As I say, it is largely supply chain. You mentioned that. Last night we had a dinner with a couple of the, Mackenzie Eaglen and others to talk about what's happening with, you know, the federal government and funding the budget, et cetera, et cetera. I follow the services area, there's been a lot of concern about not enough contracting officers and kind of erratic flows, among some of your competitors in terms of the book-to-bill. How do you think, you mentioned the demand side's okay, but what kind of concerns or issues should we think about for your business in terms of, you know, the budget and where you stand? The federal government, and the Defense Department was not immune, suffered the same kind of labor market perturbation that the rest of the economy saw. They need to recover that. That will help with contract velocity for sure. I think that should that get worse, that would clearly impact all of us. As best I can tell from talking to the acquisition community and of our various customers, as well as the Office of Secretary of Defense, that for them, their some of their hiring challenges seem to be getting a little bit better. I don't anticipate that getting worse. We have factored in the long delays and execution of contracting into our projections. What about the Republicans versus the Democrats and the defense hawks versus the budget hawks? Look, you know, I've learned over these many, many years of watching the defense budget that all that matters at the end of the day is what comes out in the bill. It's less about party than it is about national security and threat. Irrespective of party, when the threat increases, the Congress has responded. I don't see that basic operating principle of our government fundamentally changing despite whatever, you know, drama there may be, or concerns, or antipathy or, you know, the far left and the far right becoming increasingly extreme. Right. We still have a strong middle, that rallies in defense of the nation. Terrific. This has been great. Any final thought, you know, we should think about GD in the coming years? I think over the past few years, we have invested in our portfolio, in R&D for our customers. That has helped our competitive advantage, and particularly with respect to meeting the needs of our customers increased demands. We've put considerable CapEx into the shipyards to support the nation's need for more surface assets as well as submarines. I think that that's important. You know, there is a covenant that we have with our customer to adequately and properly fund the elements of, you know, capital as well as R&D to ensure that we are able to provide for their needs and their requirements and the demand signals. We also have to execute well, and we have had a long history of executing better than most, if not everyone, in our respective markets. That operating discipline is critical to driving real value for our customers as well as our shareholders. Terrific. Thank you very much. Good to be here.