通用動力 (GD) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2007 General Dynamics earnings conference call.

My name is Antoine and I will be your coordinator for today.

At this time all participants are in a listen-only mode.

We will conduct a question and answer session toward the end of this conference.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Ray Lewis, Staff Vice President Investor Relations.

Please proceed, sir.

Thank you very much, Antoine.

I would like to welcome members of the investment community and the financial press that are listening in today to our second quarter call.

As always you may hear some forward-looking statements today.

I want to remind everyone that these represent our best estimates of what the future may bring, but they are subject to the risks that face any business, and I would recommend that you take a look at our 10Qs and 10Ks for a more complete description of what those risks are.

With that I would like to turn it over to Nick Chabraja, our Chairman and Chief Executive Officer.

Thanks, Ray.

I am pleased to report again a very strong quarter for General Dynamics.

Revenue earnings and margins were up solidly, whether you're engaged in comparison is compare to the second quarter of 2006 or for that matter to the first quarter of 2007.

But when compared to the second quarter of 2006, the traditional comparison, sales increased slightly over 11% to $6.6 billion, operating earnings increased slightly over 17% to $760 million.

This suggests that operating margins increased and in fact they did by 60 basis points to 11.5%.

I think 11.5% is about as high as I can remember, at least in my tour of duty.

Earnings per share from continuing operations of $1.27 were up 23.3%.

I should point out, however, our tax rate of 30% in the quarter is somewhat below our normal run rate of approximately 32.6%.

And that added something slightly less than $0.05 to the EPS number.

As a result, the growth rate net earnings is higher than the growth rate in operating earnings.

What I propose to do this morning is to review with you each of the segments.

I think I will spend more time on my guidance for each segment than I will because the quarter seems relatively straightforward, and I think the press release and attached schedules present it well.

I will just touch on it briefly, and then kind of cover what we should look at going forward.

At Gulfstream, aerospace sales increased 13.2% over the same quarter 2006, and 10.4% over the first quarter of 2007.

This revenue growth coupled with margin expansion of 90 basis points over last year resulted in operating earnings of $199 million, a 20% growth over the same period last year.

The pace of orders continued to increase resulting in a dollar denominated book-to-bill ratio of 2.5:1, giving Gulfstream a truly extraordinarily backlog, particularly so with respect to the large aircraft.

Our guidance for Gulfstream now anticipates stronger margin performance for the year, most of it attributable to productivity.

We are well under budget in labor hours in both green aircraft manufacture and assembly and the completion centers.

Stronger pricing is also present but offset somewhat by cost increases increases for material purchased components.

We believe we can hold or slightly exceed this quarter's margins of 16.5% for the rest of the year.

In fact, I wouldn't be surprised if we didn't come up with an average margin of 16.5% for the year.

Moving to the combat systems group, their sales increased 18.6% during the quarter and operating earnings increased 11%.

Margins were 11.2%, about 70 basis points behind the second quarter of 2006, and not as good as we had expected.

However, the sales increase was substantial, more substantial than we anticipated, and margins will improve in the second half of the year, particularly in the fourth quarter.

You should look for strong fourth quarter in combat systems.

They had a good order quarter, some orders on MWRAP and Stryker programs and had an increase in total backlog of $480 million.

Looking forward, stronger than anticipated revenue will be the theme for the year as well.

This year's margins will be somewhat better than last year on average, but not the 40 to 50 basis points that I predicted for you earlier.

Nevertheless, operating earnings will be much stronger on revenue growth in excess of 20% over last year.

The Marine Group had a very good quarter.

Although sales in the Marine Group were essentially flat, operating earnings grew 20 -- almost 22% on the strength of an 8.8% margin performance for the quarter.

Margins year-to-date in the Marine Group are 8.3%, which is somewhat better than our expectations and our advice to you.

Frankly, it was a great quarter for the Marine Group, but I will tell you that we cannot sustain the 8.8% margin due principally to two things: mix shift at Electric Boat, the end of SSGN program and at Bath where we're going to experience lower DDG -- DDG volume replaced by LCS and DDG-1000 engineering work -- cost plus work.

For the year our margin expectations remain the same, something modestly in excess of 8%.

However, we now see about 2% revenue growth in the sector as opposed to being flat or modest decline.

So somewhat stronger than expected operating earnings will come for the year primarily from that revenue growth and maybe a 10 basis point improvement in margin over our prior guidance.

Lastly, information systems and technology group.

Sales grew 11.2% in IS&T.

Operating earnings for the group on the other hand were up 15.9% over the same quarter last year as a result of a 40 basis point improvement margins.

So a really good margin performance, really encouraging.

While we had very good margin performance in the quarter, but no organic growth, a little over 2% in North America offset by decline in U.K.

I expect that to turn around somewhat in the third and fourth quarters.

For the year we anticipate that IS&T's revenues will be up about 9%, largely as a result of acquisitions, and that margins will be down maybe 20 to 30 basis points.

As a result, operating earnings should be up about 5.5% over 2006.

This is -- with respect to this segment, this is all consistent with our prior guidance for IS&T.

This still remains opaque to me, and I would say of the four segments if there is a chance to outperform our guidance to you, it is here.

The others, I think we have great clarity.

A moment on the entire company, our guidance as is indicated in our press release, I see earnings from continuing operations in the range of $4.85 million to $4.90 million.

This represents an increase of approximately 16% over last year.

The increase in guidance is as a result of much better than expected margins at Gulfstream and stronger than anticipated revenue growth at both Combat Systems and Marine Systems.

We now expect sales to be in excess of $27 billion or almost 13% year-over-year growth.

I think, in short, we are well positioned to have a very good year.

I will ask Hugh Redd, our Chief Financial Officer, to provide some color on the tax provision, discontinued operations, cash performance in the quarter and for the half, and frankly, anything else that might be on his mind.

Hugh.

All right.

Thank you, Nick.

Let me start with the tax provision.

As Nick mentioned, the tax rate for the quarter was 30%, having benefited from the settlement of the audit of the 2003/2004 tax years.

As a result of that settlement, we were able to release approximately $18 million of our reserve for tax uncertainties.

That effectively cut the reserve in half.

And I mention that only to point out that we have virtually no risk to our cash flow from tax uncertainties.

With that in mind, let me address cash.

Free cash flow from operations was stronger this quarter than the second quarter of last year and year-to-date cash flow from operations is also stronger than the first six months of 2006.

Further we expect substantial cash generation in the third quarter as we expect inventory, particularly in the Marine Group, to convert to cash.

And for the year we expect free cash flow from continuing operations to meet or exceed our previous guidance.

Finally, I would like to address discontinued operations.

Discontinued operations net of tax in the second quarter of 2006 reflected a gain of approximately $220 million from a disposition of our material services business.

That gain diminishes the comparability of net income year-over-year.

I should point out in the second quarter of 2007, we included a loss of $5 million attributable to the operations of Freeman Energy.

The disposition of Freeman Energy we expect in the third quarter of this year, and we are fully reserved for this and we don't expect it to have any impact on our financial statements going forward.

Ray, that concludes my remarks.

I will turn it back to you.

Well, thank you very much.

Before I turn it over to Antoine for the Q&A, let me remind you we would request that you make one question at a time.

If you have more than one question, we'd ask you to get back into the back end of the queue, so this could give everyone a chance to make at least one question.

Antoine, with that said, could you explain to people how they can get into the queue?

(OPERATOR INSTRUCTIONS) Questions will be taken in the order received.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Cai von Rumohr with Cowen & Company.

Please proceed.

Yes.

Good strong quarter, Nick.

Could you give us some color on the exceptional book-to-bill at Gulfstream?

Where did the orders come from and does that give you any hope of raising your delivery prospects for next year?

Cai, it was the best quarter from an order intake perspective that Gulfstream has ever experienced.

I haven't fully analyzed the order book to tell you by industry or give you that kind of color, but I do know one relatively important fact about that order intake.

It was 51% international as opposed to North America, 49%.

And the growth -- every segment, every geographical segment grew in strict numbers, but from a percentage point of view, the Middle East and Africa and Latin America were the largest growers, where in the past I have been reporting to you it was Europe, which includes Russia.

So great quarter there, and our production rate is driven only in part by the backlog.

We have a backlog that would support a larger production rate.

We're limited in part by what -- how quickly we can ramp up productively, that is, and enjoy the kinds of returns we're getting in our facility and throughout our supply chain.

So you'll see more production from us in 2008.

I think I've already indicated that we were going to step it up a little bit.

We'll try very hard to step it up some more, but I -- we don't contemplate any increase in 2007.

We'll -- the revenue stream that you anticipated will be exactly what it is.

Were fractionals up because that number was huge?

Was that all business or fractionals?

In the order book?

Yes.

There is no fractionals in the order book.

Great.

Thank you.

Your next question comes from the line of Joe Campbell with Lehman Brothers.

Please proceed.

Good morning.

It is actually Carter Copeland.

Great quarter, Nick.

Thank you, Carter.

I wondered if we could take a second and dig into marine and the T-AKE program.

You noted in the press release that the request for equitable adjustment had been reached in Q2, and I noted that the C-Power subcommittee yesterday said they had a successful revaluation on that program.

Do you care to provide any sort of color on the -- on how that went, and where you came in relative to the $600 million request?

I am not really permitted to do that, Joe.

I've -- I mean, Carter.

I think you'll get greater clarity on that about the middle of the month as we publish with the Navy the definitive agreement.

We've entered into a memorandum of understanding that's been signed by both of the parties.

That isn't a classical settlement of the REA claim.

It is instead a restructure of the contract with respect to ships 1 to 9 and agreement on the terms of our contract for ships 10 through 14, or as many ever as the Navy seeks to buy going forward.

That enabled us to begin to report and record profit in the T-AKE program, maybe somewhat more modestly than we had anticipated in our operating plan and prior guidance, but nevertheless a happy event.

And to the extent that it is less than we might have anticipated, it is offset by strength in other areas of the business, Electric Boat, Bath, and NASSCO's repair work.

So all in all, we're coming out about where we anticipated, but your question is -- provides an interesting segway for me, Carter, and let me take advantage of your nibbling around the corner here.

There was no one-time event in this quarter that drove marine margins.

The booking rate increase in the T-AKE program of course aided them, but that will remain constant through the rest of the year with some opportunities to increase it as time goes by, given productivity and performance.

But we'll have a hell of a time sustaining this kind of an operating margin, as I might have mentioned in my earlier remarks, because of mix shift at Electric Boat and Bath, so I want to reinforce that, but thanks again, Carter.

Does it in any way change your goal that you've laid out in the past to get to 10% margins in marine by 2010?

No, no.

But what I said is where we're going to be this year is pretty much where I predicted, which was about 8.1%.

And if we get to 8.2%, I will throw the party.

And next year we'll work on improving that, and 2010, we have some possibility of being at a place where we're at two subs in the year, and if we can get there, then we have a good chance of meeting my goal.

Great.

Thank you very much, Nick.

Your next question comes from the line of George Shapiro with Citigroup.

Please proceed.

Hi.

Good morning, Nick.

Hey, George.

Rather than the usual question I asked you about, IS&T, I wanted to just look at combat systems.

The increase in growth rate that you have kind of what are you factoring in there for MWRAP, number one?

And number two, do you get any currency benefit?

You mentioned the fourth quarter be strong because of the weakness in the dollar in the European production.

Yes.

I think we get a little currency exchange goose, but not enough to get excited about.

MWRAP in the year will be a nice piece of business for us, but it is, if memory serves me right, George, north of $300 million, but south of $400 million of revenue, but we're strong across the product line.

We're strong in ordinates, we're strong on the tank, we're strong in Strykers.

It is a little bit here -- the medium caliber weapons are up.

Many of our products are up more than we had expected, and it will drive greater than expected revenue growth, as I've indicated something in excess of 20%.

Comfortably in excess of 20% might be the better term for it.

Okay.

I will get back into queue to talk about IS&T.

All right, George.

Your next question comes from the line of Steve Binder with Bear, Stearns.

Please proceed.

Yes.

Good morning.

Nick, how come you didn't buy back stock in the quarter?

Because I didn't.

You understand.

There is nothing new here.

We buy this back tactically.

We buy it on weakness, and I saw a little weakness in the quarter, but I was in a blackout period when that happened.

I am behaving the way I have always behaved.

All right.

And with respect to bookings at Gulfstream, is it fair to assume that all of the new equipment bookings came from planes in production today or is there anything with respect to future models in the bookings?

To my knowledge, Steve, we have not announced a new airplane, nor taken orders on an unannounced plane, so it is all with respect to current production.

Okay.

Just one other thing with respect to longer term large cabin deliveries, I mean you're somewhat constrained by supply chain issues where you can go as far as large cabin deliveries, but --

Even my own facilities.

Yes.

So is it 95 to 100 kind of large cabin numbers still kind of the constraint you see?

I think so.

I have never had any indication that we could produce more than 95 in our current facility without doing some things that would dramatically reduce productivity, which we're not about to do.

Okay.

Thank you.

Your next question comes from the line of Howard Rubel with Jeffreries.

Please proceed.

Thank you.

I will try to keep it to one question here with a followup.

Could we talk about IS&T, and, Nick, can you provide a little color -- I know Anteon helped the year-over-year numbers, but there was probably puts and takes with the various businesses, and also you had big wins in the quarter, and how do those play out?

Yes, we -- Howard, I will Saturday of take the back end of that compound inquiry.

We had some very nice awards in the quarter that didn't find their way into the order book within the quarter, but we expect that the third quarter will result in some nice intake, and I frankly see the IS&T business beginning to get themselves back on a growth path, and I expect revenues to grow nicely in the third and fourth quarter, and you'll be able to make a comparison.

We won't have to provide the data.

It will be there, because year-over-year comparison or quarter-over-quarter in the third and fourth ought to be a true comparison.

I love the margin performance in the quarter, particularly strong at C-4 systems, and I am greatly encouraged by their strategic posture now with the programmatic activity and [win T] and JNN and that's all solidifying nicely for them.

That having been said, they're indicating some margin softness in the third and fourth quarters, and I have no reason to believe that they're not reporting accurately to me and making accurate predictions, but as I indicated in my earlier remarks, I think there is an area of opportunity for us if we can hold the line on our margins, it would provide some kind of an upper and enable us to beat the guidance I have given.

If we can't, we're going to be right on the money.

And then just to changes for one second, the after market -- I would think with all the activity for Gulfstream and the aftermarket continues to be robust.

Are you continuing to see that strength as well, and is there anything that you see strategically that you would like to do to enhance that position?

Well, the aftermarket, Howard, is something we're cautious about, right.

We don't like getting caught long.

We have some limits -- capital limits that our people can participate in, but our participation in that market was very weak in the quarter.

I think we had no margin in the quarter, and very few sales.

I think -- excuse me, you misunderstood me.

Oh, excuse me.

I thought you were talking about preowned.

Preowned, no, no, no.

The service continues to grow steadily, and operating earnings continue to follow that growth.

It is not enormous growth, but it is nice growth.

Thank you very much.

Your next question comes from the line of Heidi Wood with Morgan Stanley.

Please proceed.

Good morning.

Nice quarter, Nick.

Thanks, Heidi.

I had a question I wanted to get an update on LCS and also get a little clarity on your strategy there, Nick.

Your competitor has a strategy to kind of gain knowledge on shore-based operations with deep water on top of LCS construction to leverage into selling small coastal ships internationally.

I am just wondering if you have a similar strategy or how you could characterize the advantages of a trimaran design in aluminum in terms of its international appeal?

Heidi, I think our strategy is real simple, get the boat in the water and get it performing, and we won't have to characterize advantages.

Test it in the water, and it will get purchased very little on the strength of what I say or the business developers and more on how it performs.

So we're fighting the tortures of the dam, just like the other guy is on the first ship of a class in a new facility, a nonfirst-tier shipyard who has the principle responsibility here.

We're about 65% through that first ship, and our entire focus is wholly unrelated to strategy.

It is the build up a boat, put it in the the water ask make sure it performs, and business development will take care of itself.

All right.

And we got cut out a little bit, so I apologize if it was answered on the call, but on the Gulfstream, just one fast question, that update on backlog, can you give us a breakdown of international and domestic?

I recall those have switched --

I did that already Heidi in some length in response to a question by, I think it was Cai, but I am not sure.

Yes, just --

51%, 49% international to domestic.

All right.

Great.

Thanks very much.

Your next question comes from the line of Joe Nadol with JPMorgan.

Please proceed.

Thanks.

Good morning.

Nick, this Gulfstream capacity expansion that you've been working now for a while can you provide an update on how that is progressing?

And you really haven't told us yet what you think you can do in '09 and 2010 if the market stayed strong.

We're talking 88 large cabin in '08.

You were going to try to do a little bit better.

What's -- can you the least bracket the opportunity for us in terms of top line growth assuming the market is great in the subsequent two years?

Joe, I think that's a pretty good question.

Let me review first what it is we're doing out there.

We have built a new sales and design center.

It is open.

We have built a new service center.

It is open.

It is expanded our capacity.

The old service center, which is a relatively new facility will be a new and expanded completion center as we convert it.

We are also in the process of building a new manufacturing and assembly facility.

It will be available to us in 2008, where it will begin to manufacture or build the prototypes and the test items for our next generation aircraft.

It will not be thrown into increasing production on the existing aircraft.

We will take up production as our systems and supply chain permits year-over-year, and we haven't resolved where we are 2009, 2010, but you'll also see somewhere in the landscape a new plane introduced.

Presumably that will enhance the number of aircraft that we deliver.

So there is much I can't tell you about.

And just in terms of product strategy, clearly the -- the fact you're working on a next generation aircraft is not a surprise to anyone.

You have been talking about it for a long time, but your sales -- you had an extraordinary quarter, so clearly it is not impacting what you're trying to sell today.

Is that -- is there any mix change going on or really just almost a nonevent to your current sales?

It is a nonevent to my current sales.

In fact, my current sales takes some pressure off of getting that plane in the market in a hurry.

Okay.

Thank you.

Your next question comes from the line of Robert Stallard with Banc of America.

Please proceed.

Good morning.

Good morning, Robert.

Hi, there.

First of all on Gulfstream margins, you commented in the past you thought it was unlikely that Gulfstream could move back up to margins you saw at the peak of the last cycle, but given the pricing and given the productivity you're enjoying over the last quarter, does that lead to an upward bias on your margins going forward and possibly getting back to where you were before?

Well, we're doing better.

We're moving ahead pretty smartly doing better than I anticipated, but people are talking about 20% margins that we enjoyed when we only had two aircraft, both high-end aircraft.

We now are selling six airplanes, two of them in the mid-size where we don't enjoy the higher margins, and two even in the large cabin where the margins aren't as good as the lead in the series, so I would say it is very difficult.

We will continue to improve year-over-year, little by little, but I don't see in the near term anything that would take us to 20%.

And given the strong order intake you've continued to enjoy, what's the earliest that you can get some of your most popular aircraft at Gulfstream?

The 550 is the most difficult to get and if you're a brand new customer coming in today, you're going to look to something in excess of 3 years before your aircraft would enter into service, about 3.5 years, and about 3 years on the 450 product.

But it is a pretty good backlog.

That's great.

Thank you.

Your next question comes from the line of Ronald Epstein with Merrill Lynch.

Please proceed.

Hi.

Good morning, Nick.

Good morning, Ron.

Just another follow-on question for Gulfstream.

If you look at the R&D from Q1 to Q2, what's the trend?

It is about the same, up a tad.

Let me give you a little color here.

If you could see the numbers, it would look like it is down, but we receive cash payments, launch assistant payments from some of our key suppliers and partners and we use that to reduce the number on research and development, so it is down in the quarter.

On the other hand, sales expense is way up given what you've seen in the order activity, so if we normalized all of that, we treated both of them as noise, and next quarter I don't think either will have an impact on margins, but we continue to up our R&D spend, but not so significantly that it is impacting dramatically our outcomes.

I think Q1 to Q2 R&D and SG&A the trend is kind of up because of SG&A?

Let me look at this and I will answer more accurately.

They're essentially the same.

Q1 to Q2 were essentially the same, but the mix differed, and that was because of the esoterics that I've described to you.

It is a little bit of a conundrum.

Yes, SG&A is up in the quarter almost entirely because of sales commissions.

R&D is down almost exclusively because of launch assistance payments.

If you wash those out, the quarters are very, very similar in terms of SG&A.

Okay.

That's great.

I will get back in the queue.

Thanks.

Your next question comes from the line of Doug Harned with Sanford Bernstein.

Please proceed.

Good morning.

Continuing on Gulfstream margin, the margins you're getting this last quarter, it seems these are exceeding your expectations, and I am curious why.

Presumably you have a pretty good picture as to what pricing looks like going forward.

Yes.

What surprised you here?

Doug, as I indicated in my earlier call -- in my earlier answer, I want to reinforce this, pricing was up over the second quarter of 2006, and I knew that.

That's not a surprise to me.

That's in the plan.

Some of our costs for -- through our supply chain were up.

That's not a surprise either.

What is a surprise to me was that we beat our operating budget and beat it badly on labor hours required to build these aircraft and to complete them.

So we're running way under our learning curve, and I want to reinforce this point.

The win here, financially, is the great productivity from our workforce at Gulfstream where they're doing a terrific job.

And presumably that's the piece that will be sustainable going forward.

I think they'll continue to do very well, and we're starting to count on it now and block it into our guidance.

Right?

No good deed goes unpunished.

If we start to count on it and predict to you, we kind of know where we are and they're doing very, very well.

Okay.

Great.

Thanks.

Your next question comes from the line of Rob Spingarn with Credit Suisse.

Please proceed.

Good morning.

Good morning, Rob.

Another margin question if you will.

Sure.

Two parts to it, though.

On the aerospace side, you touched on this already a bit, but is there any catch-up here on the mid-size in the sense, you've talked about flattish SG&A, you've talked about the labor hours going down, and I understand you have different types of work on the large and mid-sized aircraft because of your partnership.

But is that gap starting to close at all?

And the second part of the question is if you can go into more detail on your disappointment in the combat margins, and what happened there, and what specifically is expected to change?

Okay.

I think we are getting better margin activity in the green aircraft on the mid-size, and some of that is attributable to pricing, and some of it is attributable to the efficiency of our partner, and I can't separate the two.

I can't discern because not all of that information is available to me, but we are doing very much better in the completion center on the 150 and the 200 product, so that is helping margin.

The gap is not narrowing much, but it is narrowing some between the products and the large aircraft.

Combat systems.

Combat systems.

we did a terrific job at land systems, no disappointment there in our earnings rate for me.

I would say the -- hey, by the way, I am not crying about 11.2% margins, right?

This is good on any relative basis.

We just expected better.

What are the issues?

OTS has a couple of acquisitions.

They're integrating them.

But they probably had a bigger impact on margins than I thought they would.

We had a little struggle with our supply chain in the small caliber weapons area where we've reduced our booking rate.

And let's see.

There was a third thing that seemed to me -- yes.

Yes, the third thing was we took some steam out of the sales of our European earnings extricating ourselves from some commercial work we had inherited, that one or two of the entities had that we didn't want.

So those three things, it wasn't just an accident that we kind of worked, and we expect the margins to improve slightly in the [third] quarter and materially in the fourth quarter, and we'll be a little bit better than we were a year ago, maybe get 10, 20 basis points better than a year ago, but not40, 50, the way I anticipated earlier, and you see the things that I I didn't anticipate.

So a bunch of short-term stuff?

Yes.

I think it is a bunch of stuff we've worked our way out of really.

Thanks.

That's very helpful.

Your next question comes from the line of Myles Walton with CIBC World Markets.

Please proceed.

Thanks.

Good quarter.

Thanks, Myles.

Hey, Nick, if you look back at GD in the early '90s, it was one of the first and smartest sell levers into a consolidation wave, as a result received top prices.

Under what conditions do you think a similar scenario would play out where GD might turn into more of a seller than an acquirer?

The market creates those conditions, Myles.

GD was trading at that time in the market for market cap of $100 million to $1 billion, and we sold various properties for $4.5 billion or $5 billion.

I don't know that we created so much value is we revealed it.

When the market makes a mistake, you do something else to create value, and that's what happened there.

Whether in the long run every one of those sales was what I would call a great sale, I am not so sure.

We sold Cessna for $600 million, and I would like to have it back at that price.

Fair enough.

And then maybe a quick followup.

Could you give us the book-to-bill at Gulfstream on a unit basis?

No.

I am asked not to do that.

Okay.

But it was lower than the dollar basis because it was particularly stronger in the large aircraft, I assume?

I don't know that.

It is not given to me.

They -- we were asked for competitive reasons not to publish it but once a year, and I see no reason not to honor their request.

Fair enough.

Thanks.

Good quarter.

Your next question comes from the line of David Gremmels with Thomas Weisel.

Please proceed.

Hi, this is actually Alex in for David today.

I just had a couple -- a couple questions on MWRAP.

You see $300 million or $400 million in '07.

Do you see any potential growth for that in '08?

And also in that do you see any potential for the RG-31, and getting any sizable orders once they complete their initial delivery in September?

The answer to both questions is, yes, as long as we remember to put quotes around your word potential.

That's what we have in MWRAP, a lot of potential, a market about which there is a great deal of discussion, apparently emphasis, in both the Congress and the Department of Defense, but the orders haven't kept pace.

So from our perspective it is not something we super heat here.

We'll take it as we get it, and for us it is a handsome adjacent market where we haven't participated in the past and we think that there is good potential for both of the products, the Cougar and the RG-31.

So let's see how that all unfolds, but we haven't yet given you a forecast for 2008, because we don't have complete clarity yet on 2008.

That's all kind of quick breaking stuff, isn't it?

Yes, it is.

Do you see anything -- are you really getting some good lessons learned out of the Cougar partnership in terms of preparing for JLTV.

I don't know that I have any comment on that at all.

Okay.

Fair enough.

Thank you.

Your next question is a follow-up question from the line of Steve Binder with Bear, Stearns.

Please proceed.

Nick, you touched on the operating margin, 11.5% this quarter for the Company, which I am just wondering, longer term where do you think that margin could go, rather than singling out individual business units?

Steve, I think for the year it won't be 11.5%.

Right?

If we're looking at probably for the year something along the lines of 11.2%, but we try every year to get better than we were the year before, and we'll keep doing that.

All right.

And followup on cash.

Customer deposits strong order activity was a nice pickup in the first half of the year, it's already out stripped where you were in the last couple years.

Do you have a sense on how big the number could be this year and does that provide some upside?

You touched on the fact that you still think free cash flow would be at least equal if not better, but could this be a sizable year for that reason?

No, I don't think so.

I think customer deposits were very helpful in the first half of year, but they're not of that magnitude.

I think that the bigger driver in the next quarter is going to be the release of retentions and the build-up of working capital we experienced in the Marine Group as a result of claim at Electric Boat and RREA at Bath.

So I think we're going to have a very good year from a cash perspective.

And I think Hugh said it, we expect to meet or beat our forecast of net-to-net income, and that's not in the -- very nicely in the GAAP figure, free -- or net cash from operating activities.

But what we call free cash flow is taking that figure and subtracting CapEx, and we've targeted that at 100% of net income.

I think we'll be there or better, and I think for a wide variety of reasons and you will see good performance across the board from us in cash.

Great.

Thank you.

Your next question comes from the line of David Strauss with UBS.

Please proceed.

Thanks.

Good morning, Nick.

Good morning, David.

You talked about pricing at Gulfstream being a bit of a contributor to the margins this quarter.

As you look out over -- the backlog now extends a couple of years, should we expect to see pricing be an even bigger contributor moving forward?

I think pricing continues to get better.

These prices that we enjoyed in the second quarter of 2007 were probably from transactions that were done two years ago, and I think pricing is firmed since then.

The trick here on pricing is to stay ahead of costs increases that you get in the supply chain over time, and I think we will in part.

So it will be a contributor going forward.

And looking -- a lot of attention is paid to the large cabin aircraft, but can you maybe address demand that you're seeing for the G-150?

I understand it is very strong, and what your capacity is, obviously, to complete that aircraft?

Yes.

The G-50 I think got off to a slow start, but we had a -- but it is building, and we had an absolutely sensational quarter with the G-150 orders, and if that's the beginning of a trend, we're going to have to increase production rates with our partner and handle completions, but we have the capacity to do that.

Okay.

Great.

Thanks, Nick.

I think we have the best completion operations around, and we can handle that.

Thanks.

Your next question is a follow-up question from the line of Ronald Epstein with Merrill Lynch.

Please proceed.

Hey, Nick, just a couple more stuff on the Navy business.

Can you give us an update on how the Daewoo [around JV] is going and how that stands?

We are just now beginning to build module that is are almost test modules to make a determination that we can in fact produce the ship in accordance with the design and the production paper that we've received from Daewoo.

We have a high degree of confidence that that will work, but we're out there doing that now, and assuming all is well in that test project or projects that we have ongoing, we will be -- commence construction in the third quarter, later in the third quarter.

So as best we can tell, everything is going well, and we're very anxious to get into production on those ships.

Great.

And then just one quick follow-on, if I may.

With the Virginia class going to a multi-year procurement, potentially two a year, how much momentum there is on the hill to actually do that?

Well, it looks to me like it is getting fairly broad support up on the hill.

I think three of the committees that have dealt with it have all authorized and put in money.

I think that you need to take a look at the [HAC D Mark] which is just out, but I think there is money in that for advanced procurement, and we're trying not to get ahead of the Navy on this one and support the CNO's program, but I think that the support for two a year is building quite nicely.

Great.

Thank you.

And, Antoine, I think we have time for one more question and then we need to wrap it up.

Your last question is a follow-up question from the line of Cai von Rumohr with Cowen & Company.

Please proceed.

Yes, thank you, Nick.

On the call, Cessna indicated they raised their prices 4.5% this year and are realizing about 100 to 150 bips relative to their cost increase.

Are you seeing that sort of a metric?

And secondly, is any of the goodness of this big order book in Q2 going to help next year, or was next year essentially sold out before we entered the quarter?

Dealing with the last first, next year was sold out as we -- before we entered the quarter.

This is really a -- let me split my answer.

For the big aircraft orders that we received, these are 2009, 2010 slots.

With respect to the mid-size aircraft, they helped 2008, and have an influence on the number that we'll produce.

So a little bit of each.

Terrific.

Thank you.

You had some other piece of that question, Cai, that I haven't addressed, and I will go back to it.

Okay.

Do you remember what it was you asked?

Yes.

It was that Cessna indicated they raised prices about 4.5%, and they indicated that that was about 100 to 150 basis points higher than the pressure they're seeing from raw material, hence kind of this would add 100, 150 bip to say their margins.

Yes.

I am going to answer that question a little differently.

I am going to put it in a historic context.

I am going to look backwards.

Cessna gave you an answer looking forward.

Comparing 2006 second quarter to 2007, we experienced a price strengthening or increase between 4% and 6.5%, depending on model, and I think that their guidance of about 150 basis points difference between external cost increases and those price increases is probably fair.

I can't quite discern that, but that feels right to me.

So, I won't attempt to tackle that question on a going-forward basis.

I will leave that to the salesforce and the magic that's in their pricing formulas.

But, Cai, it is only right that you were first that you should be the last question.

Thank you.

I would like to remind everyone that there will be a replay, if you came in late on the call or if you have a colleague you would like to have listen to the call.

That will begin eastern time at 2:00 PM this afternoon.

The number is 888-286-8010.

There is a pass code: 95275309.

I am Ray Lewis, Staff Vice President Investor Relations.

After a quick lunch I will be glad to take questions at 703-876-3195.

You can also talk to my colleague Amy Gilliland at 703-876-3748, and thank you all for participating today.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.