通用動力 (GD) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2008 General Dynamics earnings conference call.

My name is Dan, and I'll be your coordinator for today.

(Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today's call, Ms.

Amy Gilliland, staff Vice President of Investor Relations.

Please proceed.

Thank you, Dan.

Good morning, everyone.

Welcome to the General Dynamics Fourth Quarter conference call.

I want to remind listeners that, as always, any forward-looking statements made today represent our best 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 and 10-Q filings.

With that, I'd like to turn the call over to our Chairman and Chief Executive Officer, Nick Chabraja.

Thank you, Amy, and good morning.

The press release, I think, is pretty straightforward, together with the accompanying charts so I'll try to go through the prosaic information briefly for those who haven't seen the press release and spend more time giving you color on segment information, my own views about performance, and because we had an acquisition of Jet Aviation in the quarter, there's a touch of absence of transparency or at least the Gulf Stream figures are slightly obscured.

I'll try and shed some light on that for you and then give you, by segment, some forward-looking information that builds towards our guidance for the year.

With that said, I'm pleased to report that General Dynamics Corporation had yet another strong quarter completing an outstanding year from an operating point of view.

We beat consensus for the quarter and for the year (inaudible), and it's a consensus that it built during the year.

Sales in the quarter were $7.9 billion, a 4.5% growth rate over what was you might remember a very powerful Fourth Quarter in 2007.

Net earnings from continuing operations were $630 million, an increase of 9% over that same Fourth Quarter in 2007.

Earnings per share from continuing operations were $1.62 for the quarter, a 14% increase over the same quarter last year.

For the full year, sales were $29.3 billion, a 7.6% increase over 2007.

Net earnings from continuing operations were $2.48 billion, a 19.1% increase over the prior year, and full year earnings per share from continuing operations were $6.22, a 22% increase year-over-year.

This is obviously a powerful story of improved margins and operating leverage, but it is also a story about efficient conversion of earnings into cash.

Free cash flow from operations defined as net cash from continuing operations after capital contributions was $629 million for the quarter and $2.6 billion for the year.

This is a conversion rate of 100% of net earnings from continuing operations for the quarter and 106% for the full year.

It has been thus for the last five years, I think, and probably for years before that, but I don't have the data in front of me.

It is also a phenomenal backlog story by any measure.

Order intake has been strong all year and was particularly strong during the Fourth Quarter.

In fact, the order intake this quarter, which totaled $22.2 billion, is the largest during my tenure at General Dynamics.

As a result, our total backlog stands a little over $74 billion at year end.

If you add to that the value of unexercised options, which some companies include in backlog, we do not, and indefinite delivery, indefinite quantity contracts, the total estimated contract value at year end was $91 billion.

Let me now get to the segment detail and lay a little ground work for our 2009 guidance that we provided in the press release.

I'll give with Combat Systems.

The Combat Systems Group recorded sales of $2.3 billion in the quarter, down somewhat from the Fourth Quarter of 2007 due primarily to very heavy sales in 2007 of the Cougar Variant MRAP vehicle, the Chameleon IED Defeat system and the Pandur Program in the Czech Republic all of which did not recur in the Fourth Quarter of 2008.

The Czech program, which was stalled during all of 2008, I'm pleased to report is back on track for 2009.

On the other hand, margin rates for the quarter were 13.2%, 100 basis points improved over the Fourth Quarter last year due primarily to operating performance improvements in the subsystems business, the ammunition business, and several of our European product lines.

For the full year, sales were up 5.1% and operating earnings 21.3%.

This result was driven by year-over-year margin improvement of really a staggering 190 basis points.

Combat Systems generated operating earnings in excess of $1.1 billion, their first time over a billion in operating earnings.

In fact, Combat Systems was our operating earnings leader for the year.

The year-end backlog for Combat stands at $15 billion, over $12 billion of which is fully funded.

This strong backlog almost equals the two years of sales, positions Combat Systems for very strong sales growth in 2009 in a range between 20 to 25%.

You should be mindful that that increase will also be aided by the acquisition of [Axel Tech] which closed at the end of the fourth quarter.

On the other hand, margins of 13.6% in this segment are not sustainable.

We think margins in the mid 12% range are more reasonable to expect.

This will still result in a very handsome pick up in operating earnings for Combat Systems for 2009.

The Marine Group.

I am extremely proud of the performance of the Marine Group.

In the quarter, sales were $1.4 billion, a 13.3% increase over 2007.

More importantly, operating earnings increased 30.7% to $132 million.

Margins for the quarter were 9.6%.

For the full year, sales and operating earnings increased 11.3% and 23.8% respectively.

Margins for the full year were 9.4%.

During the quarter, electric boat was awarded a contract worth $13.8 billion for Block 3 of the Virginia Class Submarine.

Orders across the segment totaled $16.9 billion resulting in a backlog of $26.4 billion at year end.

This backlog supports Marine Systems continuing growth with particularly significant rates of growth in 2010 and 2011.

On a personal note, the Marine Group has grown faster, improved margins sooner, and positioned itself better than I had expected.

Sales growth in 2009 in my view should be between 5.5% and 6% with some modest improvement in margins, perhaps 30 to 40 basis points.

We will see faster growth and even better margins in 2010.

The IS&T group, Fourth Quarter sales in the IS&T area grew 6.8% over the same quarter a year ago, 75% of that growth was organic.

The other 25% supported by acquisition.

Margin rates for the quarter declined 70 basis points resulting in flat operating earnings compared to the Fourth Quarter 2007.

As most of you will recall, particularly our sell-side analysts, we had forecasted a margin decline in the Fourth Quarter due to mix shift.

Sales in earnings for the full year each grew about 4.5%.

Margin rates were slightly higher than we had expected.

We had originally guided you to a decline of 20 to 30 basis points for the year; however, margins held constant year-over-year at 10.7%.

The backlog and estimated potential contract value under IDIQ contracts grew 11.8% during the year, positioning IS&T for continued growth in 2009.

In fact, I see this segment growing about 8% next year but with margins, 30 to 40 basis points lower than 2008.

Let me pause here to summarize the defense businesses.

We have a balanced defense portfolio which is positioned well for the foreseeable future.

Sales should continue to grow at reasonable rates, with margins sustainable at levels between 2007 & 2008 performance.

I see a very solid defense business.

If I could characterize my guidance to you with respect to these three business segments, I would say it's the same as always, a touch on the conservative side and you'll perceive it that way.

Let me turn lastly to aerospace and maybe spend most of the time that I have with you on that subject.

In the context of the economy in general and the business aviation market in particular, the Fourth Quarter was very strong.

First of all, sales were $1.5 billion, an increase of 26.5% year-over-year.

Now let me help you here.

11.4% of that growth was organic or Gulf Stream growth.

As you know, we completed the acquisition of Jet Aviation during the quarter so almost two months of jets results are included.

Operating earnings were $264 million, an increase of 24.5%; however, margin rates were down 30 basis points as a result of the addition at Jet Aviation.

The margin rate from Gulf Stream alone in the quarter was 18.7%, 40 basis points better than the fourth quarter of 2007.

For the full year, sales were $5.5 billion, a 14.2% increase over 2007 and, again, 75% of that growth was organic, the rest attributable to two months of Jet Aviation.

Operating earnings were over $1 billion as margin rates expanded by 170 basis points to end at 18.5% for the total year.

I should add that Gulf Stream alone exceeded $1 billion of operating earnings for the first time and we are cautiously optimistic that they will do even better in 2009.

Deliveries were strong in the quarter with 41 green aircraft and 38 completions.

Order intake was stronger than you might expect.

In the quarter the book-to-bill ratio for new aircraft expressed in dollars was 1.13 times.

Having said that we did experience some defaults during the quarter, as a result of Gulf Stream backlog.

Gulf stream alone decreased marginally; however, the addition of just shy of three quarters of a billion of Jet Aviation backlog increased the backlog for the group.

Let's take a more detailed look at how we expect aerospace to perform in 2009 with a particular emphasis on Gulf Stream.

Let me begin this sort of [silagism] by taking a look at Gulf Stream in 2008.

We had a total of 156 green deliveries, 87 of them large cabin and 69 mid size.

This year, 2009, as a result of what I view to be a dramatic softening particularly in the mid size market and a shorter backlog in that segment, we plan to deliver approximately 30 mid size aircraft cutting production by slightly more than 50%.

I say approximately because we have not yet set the production rate for the G200 and in this segment we are particularly flexible but, as you also know, these are lower margin aircraft.

On the other hand, we plan to deliver 94 large cabin aircraft, an increase of seven of our higher margin aircraft.

This is a total of 124 for the year but with a distinctly favorable mix shift

Our plan to deliver and produce at this rate in 2009 and probably 2010 as well with respect to the larger bodies, is supported by contract backlog of 215 in production large cabin aircraft for green delivery and an additional 31 for completion.

This is 246 backlog of in production large cabin aircraft which alone gives us over 2-1/2 years of entry into service and deliveries, at the proposed rate of production.

We work this backlog, as you might imagine, very hard in the quarter and have a high degree of confidence in its durability.

It will not be without issues as we go forward, particularly if the economic climate worsens, but at this point, we have a firm conviction that we can manage through the anticipated issues.

Of the defaults we had in the quarter, six related to the large cabin in production backlog, a relatively small percentage of the number of units under contract.

We had other buyers in the backlog who moved up to replace those who defaulted.

Some of you might observe we were a few units shy of our anticipated deliveries during the year.

That was not a result of these defaults but resulted from the implications of the strike at [Vought], our airplane wing supplier on the 450 product, so we actually had about three deliveries, in the queue that we couldn't get airplane wings for.

That fact in reality provides some upside to the potential of 94 deliveries, in 2009 but for the moment it's something we're going to hold in advance and see how the year plays out.

For the group, I think it's reasonable to expect revenue to grow by as much as 25% largely as a result of the jet aviation introduction into our line.

For the same reason, margins will be lower than 2008 for the group, perhaps the mid 16% range is the place to look.

Now let me put the defense piece together with aerospace to give you a consolidated view of 2009.

Overall, sales will grow approximately 15%, just shy of $34 billion.

Margins will be in the high, very high 11% range operating margins, maybe get to the 12%.

As a result, operating earnings will grow about 10%.

With those building blocks in mind I am expecting earnings per share from continuing operations in a range from 670 to 675, an increase of approximately 8% over a really outstanding 2008.

Let me at this point before we get to your questions ask our CFO, Hugh Redd, to fill in some additional detail, maybe make reference to the discontinued operations at Murcia in Spain before we get at your questions.

Hugh.

Thank you, Nick.

Let me start with interest expense.

For the quarter it was $24 million and $66 million for the full year.

Interest expense increased during the Fourth Quarter due to the acquisition of Jet Aviation and [Axel Tech].

Both those transactions were completed in the Fourth Quarter.

Additionally, we spent $335 million in the quarter repurchasing 5.6 million shares, so for the full year we spent $1.5 billion to repurchase 20 million shares.

During the quarter net debt increased by $2.9 billion, again as I said primarily as a result of the acquisitions.

Accordingly, we expect interest expense to increase to between $140 and $150 million in 2009.

Let me address the tax rate which, for the Fourth Quarter, was 32.1%, for the full year, 31.2%.

Given that performance and what we expect for 2009, it's reasonable to estimate to the tax rate to be between 31.5% and 32% for the full year.

Nick, I'll address discontinued operations.

During the quarter General Dynamics recorded a one-time $18 million after-tax charge in discontinued operations for which we lead to the anticipated sale of a business line in Europe, as Nick said, in Murcia, Spain in particular.

Of that amount, $11 million is attributable to the anticipated loss on the transaction and $7 million attributable to the loss on the operations.

Let me in closing say that return on invested capital increased to 18.5% which is an increase of 160 basis points year-over-year.

A return on equity increased 190 basis points to end at 21.4 for the same period for the Fourth Quarter in 2008.

Amy, that concludes my comments this morning.

Thank you, Hugh.

Before we move to the question and answer period I just want to ask participants to please ask only one question so that everyone has a chance to participate this morning.

If you have an additional question, please get back into the queue.

And Dan, with that, could you please remind participants how to enter the queue?

(Operator Instructions) Your first question comes from the line of Howard Rubel from Jefferies & Company.

Thank you very much.

Nick, I do have to ask a little bit about Gulf Stream even though it's only one part of the Company.

As you look at dealing with some of the risks beyond '09, what variables are you considering?

I'm very impressed you say the rate is you're fully sold out, but we had some unexpected cancellations.

How are you kind of gauging that risk?

Howard, I don't know they are unexpected given the state of the general economy and a particular factor that's growing in importance is the -- has really been an absence of financing for aircraft transactions.

I would say no financing that I'm aware of for pre-owned activity and while there is some struggling financing going on with respect to new aircraft, I would say there's an absence of benchmarking or uniformity with respect to underwriting standards, so it's a little difficult to understand what the banks want to do, how they want to do it, and how to put customers together with banks.

So given that sort of macro environment that we're all very much aware of and the problems of the banks, one would anticipate some unsettling issues in the backlog and we work them real hard in the quarter to identify them to try and get them to closure to default those people who weren't going to go forward.

As a result, we took into income in the quarter, this is a little bit on the transparency side that I want to give you, a little bit in excess of $20 million of you might say liquidated damages or non-returnable deposits, and we sought to offset that by taking a reserve on the pre-owned activity which you can see in the charts that we had published, we only have, I think, three or four aircraft in pre-owned and it's hard to attribute that to those aircraft.

We've done it, but there's not an active market so it's very hard to get comparables to say we can identify this with that, very hard to do, but we have a fairly tidy reserve.

We also, on the good news side, Howard, we went into last quarter having 22 inputs for the year 2009 into pre-owned.

That is commitments on a fair market value basis to take airplanes in.

As we work the backlog and as people have asked for various concessions, we in turn have extracted concessions.

Those inputs for the year 2009 are now down to 12, so we're very pleased about that as we eliminate exposure in the pre-owned area.

An area that we can't, that's opaque to us right now.

We can't tell how it's going to turn.

And just sort of, you've all of a sudden got I'll call it a marketing headwind with everybody in Congress talking about business jets being a bad and evil thing.

What about the jobs that all of your workers do and all of the productivity related to the airplane, how are the people at Gulf Stream dealing with this?

Well you might have noticed, Howard, that there was language in an early version of a House Bill suggesting that anyone who took TARP money would have to sell their aircraft.

Well, the aerospace workers of the United States, one of our few manufacturing segments that got positive balance of trade wrote to their congressman and you didn't see that in the Bill.

It went quietly away, so we're trying to educate the country, the Congress, and the administration on the importance of this segment to the economy where it is one of the few balance of trade positives that we have and is going very very well.

At Gulf Stream itself, we are working very hard to take $40 million out of our cost structure and that's not taking heads out of Savannah where we need them, where our production is going up, but it's taking $30 million out of indirect and another $10 million in our continuous improvement lean Six Sigma process, so if we can get all of that, we provided some further downside protection, so we're going to go right into the year and keep working that backlog and we'll see what happens, but right now, as I said we're cautiously optimistic.

Thank you very much.

Your next question comes from the line of Carter Copeland from Barclays Capital.

Please proceed.

Good morning, Nick.

Good morning, Carter, how are you?

I'm fantastic.

Thank you for asking.

I wondered if you could clarify a little bit more on the process of these defaults and the liquidated damages or uncollected deposits.

How exactly that works.

Presumably you have someone move and then someone exercises a move-up privilege to take the airplane and then how does it -- where does the deposit go and the airplane go and how does the collection of liquidated damages work?

Any color there would be useful.

All right, I'll help you but it is hard to generalize about a process that is unique to each individual contract, but as people in the backlog indicate that they'vere having trouble, we try to ascertain whether it's a problem that we can work through with them and get them to the place where they can take their aircraft with maybe in a different time span and if we conclude that we really can't and they are in default of their obligations under the contract, we send a cure notice, as the law requires.

If there's no response to the cure notice or if they are unable and we do our damndest to help them if we can, then we default them and we keep the non-returnable deposit.

At that point we begin working on, and if not sooner, looking at eligible buyers in the backlog who would like to move up and there are plenty and they have move-up provisions in their agreements.

So in the quarter we were able to replace, I think, all of the parties who defaulted and cover those positions.

As we go forward, Carter, with that process in mind, to the extent that more of these appear in 2009 and 2010, and if the economic circumstances continue I would expect to get some, you will see lumpier earnings from Gulf Stream because they may not be able to cover in every quarter because by the very nature of these things you get some of them in the last month of the quarter, so I'm expecting good annual performance but uneven, less predictable than it was this year, but we'll watch that very carefully and try and alert you to it.

I hope that addresses your question, frankly.

No, it does.

I'm just wondering, is there a concern at some point that you won't have a ready customer to move up for an airplane?

It sounds like the answer to that is no.

Well, look.

You can always worry about that.

I sure don't want to take it for granted but so far folks have been willing to move up.

I mean they've been demanding their airplanes.

They've been dissatisfied with where they were in the queue, and we've also had circumstances where we haven't defaulted people but where they wanted concessions and we rearrange them in the queue.

We found someone to take their place and they in turn took the other person's place, and these are all kind of work outs and some of the customers need them and some of them don't at all.

So we get, you're getting competing pressures here, some very desperately want to move up and others would like some concessions and we're doing our hardest to be customer friendly while at the same time protecting Gulf Stream and our shareholders' interest in the outcome.

But I should tell you that my view of the current backlog is that it's very, very strong.

That's very helpful, Nick.

Thank you very much.

(Operator INstructions) Your next question comes from the line of Cai von Rumohr from Cowen & Co.

Please proceed.

Yes, Nick, terrific quarter.

Cai, they have more trouble with your name than they have with mine.

Could you give us some color on the business trends at Jet given the sharp decline in departures in the US of biz jets and, also, what your 2009 kind of numbers for Gulf Stream assume regarding additional trade-in losses, if any you think you might have to incur?

Yes, Cai, I'll pick the last part first because it's the easiest.

We don't have any assumptions with respect to that.

We're calling it even Steven apart from the reserve we have.

What we're working on hardest now is to reduce our exposure and we've done a pretty good job of that, and I think we'll have some continuing success doing that.

So the fewer you have in inventory obviously the less risk you have there, but it is a risk to us because the guidance I've given you assumes we don't experience further erosion.

On balance, Cai, I would say that the defense guidance I gave you is on the conservative side as it always is.

Gulf Stream I think is a realistic cut at it.

There may be more risk than opportunity.

I've identified the opportunity, but whatever shortfall we have there I think first we can adjust to and be nimble about but, second, I expect the defense guys to cover as Gulf Stream has covered them in prior years.

They stand ready to do what they would be asked to do if we have some trouble with Gulf Stream.

Jet Aviation, you asked about that.

Really hard to tell from we didn't have them two full months.

The revenues are about what we expected.

They are just shy of $200 million.

Given -- here we have a currency exposure.

The dollar strengthened against the Swiss franc so it's a tad shy of what we expected but not as a result of operations, as a result of translation.

We're booking this obviously very conservatively right now until we get our arms around it and understand what we have but the volume of completions and so fourth is as we anticipated it.

The issue here isn't going to be volume.

It's going to be getting our arms around operations and introducing operational excellence to a business that has a pretty good book of business.

To the same effect, Cai, I'm answering these questions kind of fully because I want all of the transparency I can get out there about this business.

Our service business, the Gulf Stream service centers and the General Dynamics services businesses grew from a volume point of view 8% to 9% in the year, so we had a pretty good year despite the climate and that was consistently through the Fourth Quarter.

So, so far so good and we'll see how it goes with Jet but the big piece of the puzzle is Gulf Stream and I think we're holding on very well.

It looks good to me for 2009, 2010 as well.

Terrific.

Thank you very much.

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

Please proceed.

Good morning.

I hate to continue on Gulf Stream but I have another question on it.

When you talked about reducing the number of mid sized deliveries in '09, if you went back six months ago, this is a very different perspective, and I know in the past you've talked a lot about the greater resilience of the large cabin backlog than the mid sized, but could you describe over that time the characteristics of the customers, the nature of the discussions you've had and how they've differed between the mid size customers and the large cabin which you clearly see as a strong situation?

Doug, I'm not sure I can pars that for you.

You have to be mindful of the fact that those discussions are being conducted at about five management level, six removed from me, but in the second half, the demand for mid size began to erode much faster than the order intake on the larger cabin aircraft did, and when we got to I think about mid November and we had a real ongoing crisis with respect to bank financing, the order activity there got very very quiet and we had shorter backlogs in that area than we did for the large cabin so we did what was prudent.

We talked to our major supplier, IAI, and began to adjust rates and we've adjusted them several times and we've got it down to a number that we think is manageable and doable, give or take a few, but I don't know that I could characterize all of the discussions or divide the customers by type and I don't even think that would be fair to them for me to undertake that.

What I'm getting at is what's made you comfortable that the large cabin situation is different given that it's clearly changed quite a bit on the mid size from what you all thought six months back.

Yes, I think while the order activity slowed in the third and fourth quarter, we continue to get orders at a greater rate than we do in the mid size.

The backlog is significantly larger and we were having fewer problems in that backlog with respect to those clients, so I think all in all it's not difficult to come to the conclusion that we can do better in the large cabin aircraft and that we will do better and we're not doing something here that's defying gravity.

We're stepping up production consistent with our prior plan because the backlog and the orders received even in the second half supports that production rate.

If conditions develop as a result of further deterioration in the American economy, and internationally because this is a global issue right now, we would change that production rate and we have the ability to reset it quarterly, and we do what we needed to do, but right now I'm giving you the cleanest outlook I can give you and it's unrelated to gloom and doom.

It's unrelated to data, other than the internal data here and the strength our view of the strength of the backlog.

Should that backlog deteriorate, you'll hear about it from us and we'll change our production.

Very good.

Thank you.

Your next question comes from the line of Myles Walton from Oppenheimer & Company.

Please proceed, sir.

Thanks, good morning.

Good quarter.

Nick, I was hoping you could give us some color maybe on succession planning with respect to Jay coming in in the June time frame and what he is specifically working on to kind of get him up to speed and also kind of how you think that transition will happen and kind of some mechanics involved.

Yes.

Before the time Jay takes over, he will had nine months with us.

The first three of those months I would say, in general, he spent working with staff, my staff, the Senior Vice Presidents and those who report to them, understanding fully the headquarters function and its purpose in how it would support him and how it supports me currently and how he might shift that to suit his own management styles and ability.

Since then, we've changed his focus over in to operations and he's been working with the Executive Vice Presidents on operating issues, but even in the first three months, he spent a lot of time with me at Gulf Stream getting deep into their issues.

On a weekly basis, for example, Joel Lombardo and Larry Flynn, Senior Vice President of Sales at Gulf Stream and Dan Clare, the Chief Financial Officer, have a meeting with me either by telephone or in person that Jay attends and we go through every contract in backlog where these people are and what's changed since the week before and who is saying what about what and what can we do to help them, so he is keenly familiar with the Gulf Stream situation and will know how to handle all of that.

He understands the business model, and I think by the time I collect my pension check and walk out the door, Jay is ready to go and we have an extreme amount of confidence about it and, by the way, we're not, in my defense, I'm not leaving this Company in disarray.

This is a powerful, well oiled machine and it will continue to be so and the succession is appropriate, and Jay will be supported by very senior, very experienced Senior Vice Presidents, staff officers, and group executives who have been in their position for long periods of time, and really outstanding business unit president, so I couldn't think of a company that's better to turn over to a new leader.

That sounds good, and just a follow-up, so the time line still is pretty much unchanged and you are still looking to stay on for the similar amount as non-executive chairman?

I will stay as a non-executive Chairman.

My duties will be a little broader maybe than typical non-executive chairman, not only will worry about the interface with the Board but I'll be here to give Jay some help with respect to capital deployment, will be my principal activity.

All right, great.

Thank you.

Your next question comes from the line of Robert Stallard from [McQuary].

Please proceed.

Good afternoon.

Good afternoon, Rob.

Just quickly on the defense budget side, it still remains an element of uncertainty about what the new administration is going to do with regard to defense spending.

What's your latest thinking on what the plan is going to be and if any of your programs could be at risk?

Rob, I guess we're going to get kind of a quick take on that, or so the administration says, some time in February but they won't deliver a budget until probably April.

I can't imagine based on the rumblings I've heard or the situation in the economy that they are going to be looking to cut in production programs.

It's just in conceivable to me.

The stimulus leverage for manufacturing is greater than anything throughout the economy so I just can't imagine when they are out looking for stimulus and put fresh money into things that are stimulus that they would take away from existing production programs that is beyond what was in the budget that they inherited.

So we're feeling very comfortable about our programs, but we'll have to wait and see.

Okay, thanks very much.

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

Please proceed.

Good afternoon, Nick.

Good afternoon, Rob.

Another non-aerospace question, if I may.

You may.

Ship building, not planes but we'll talk about ships.

Could you talk a little bit about the DDG1000 and the idea of two ships at bath with maybe a trade off of DDG51's to the other guy, and then also comment perhaps on your commercial ships program, the health of the customer and the delivery schedule there?

Commercial ships, we're doing spectacularly.

The first ship went to sea or first of class went to sea in January, a little bit ahead of contract delivery schedule.

For first in class it was damn near perfect, within budget.

We recorded profit on it.

Second ships 80% complete.

The customer loves the ships.

The issue for us is to sell the slots six through nine.

The existing customer has the right to those slots right now.

We have plenty of remarketing opportunities there but we have to await their decision which is to be forthcoming soon, and if they take them they can have them.

If they don't, we'll move on with those ships but it's a hell of a program for us.

DDG1000, I don't really to say on that subject.

We've got a contract for the first boat, Northrop has a contract for the second boat.

The third boat is 50% funded by the Congress.

I think the Department of Navy is searching for ways in which they can most efficiently produce those three boats but I don't want to engage in any speculation about who might do what to whom on this, and at the end of the day for us, this is in the noise.

It's not going to have a material impact on our plan.

Okay, going back to the commercial ships, those slots six through nine, what's the timing on those?

They become available if US shipping doesn't exercise their options, they become available in the spring.

Their ships for delivery in the out years , let's see if I could tell you, I don't even

But it's far enough out?

It's far enough out that it isn't a problem for us.

It's not in our current planning horizon.

They would be probably 2012 delivery ships or the first of them would be.

Okay.

Thanks very much, Nick.

We're delivering about one every nine months is what you'll see so you can kind of figure it out yourself.

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

Please proceed.

Good morning, Nick.

Good morning, David.

The book-to-bill at Gulf Stream on new airplanes, can you just give us a sense of who exactly in this environment is buying airplanes, maybe geographically and customer type?

No, I'm not going to do that, David.

It's fairly diverse as it has always been, and the backlog for the year was 52% international, 48% North American, about the same as usual.

There were folks who could make the deposit and sign the contract in good conscience and we were pleased with it.

And then on pricing, how are you addressing pricing on new aircraft given that there are on the large cabin side a fair amount of relatively new/used aircraft out there I think at prices are probably 20% to 25% lower than what a new airplane has been priced at.

David, I don't know how you get your pricing information.

If you have a transaction that actually occurred let me know about it.

But our pricing on new aircraft continues hold strong.

We're getting price increases.

That's not true, by the way, of the mid cabin, the mid size aircraft.

There is a softening of the price point, but with respect to new air craft there still remains a backlog that we can't satisfy fast enough.

Now there will be people who really don't want the aircraft and they will put it on the market in an effort to get relief out in the marketplace, but I haven't seen those transactions close and your (inaudible) that they're at lower prices, materially lower, none of that evidence has crossed my desk.

I was just referring to listed prices.

I agree there haven't been any transactions.

And the Gulf Stream guys are listing them high.

They are trying to make money on the flip.

I don't see they are getting it, but I don't see any relief frankly for those in the back of the queue who would like to move up and get it cheap, otherwise they would be doing it.

I think they dream about it and I think some of you guys stimulate that kind of discussion, but I haven't seen it happening.

Okay.

Thanks, Nick.

I think we have time for one more question.

Your final question comes from the line of Ron Epstein from Banc of America Securities.

Please proceed, sir.

Good morning, Nick.

Good morning, Ron.

Just wanted to again walk away from aerospace for a minute, why don't we talk about the defense stuff.

As we look into 2009, what are some of the programs on the horizon that we should keep an eye on that could be opportunities for you in the upcoming year?

I think there's a lot of them, take a look at MRAP light or MRAP ATV I think is the appropriate initials that would present a lot of upside to us.

Watch the renegotiation of the Czech program which is upside to us in our plan both as the cash and earnings, keep an eye on the Saudi program which is in some respects baked into our plan but provides some opportunity as well because there are many segments to that.

Let me point you another one where we tend to ignore it for planning purposes because it's a little hard to put your finger on, all things for Iraq, for the government of Iraq, some of which now before our Congress.

We haven't included that in our plan because we just can't get our arms around it.

So I mean, I could go on like that for quite some time.

I think the point is when I say in my guidance to you has been conservative, is that we have more opportunity than risk, I think, on the defense side.

Will all of those opportunities materialize?

Probably not, but I think they'vere stronger than the downside, so we think that guidance is okay.

It's reliable guidance but, sure, you put your finger on it there's a lot of upside.

Somebody was asking about the DDG1000.

We won't get in to any kind of deals on that unless we think there's upside in them for us.

Sure, and maybe one follow on to Rob's question.

On the commercial ships, how is the execution going on that now with the JV?

Perfect.

Absolutely flat out perfect.

It couldn't be better.

We are beating our budgets right from the get go, right from the first ship.

We have never had a first in class that performed as well as DC-1, never ever in any program.

So it's been absolutely mind blowing.

Super.

Thanks.

This ends the Q&A session at this time.

I would now like to turn the call over to Amy Gilliland for closing remarks.

I want to thank everyone for joining the call today.

If you have additional questions, I can be reached at 703-876-3748.

Thanks and have a great day.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.