通用動力 (GD) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2015 General Dynamics earnings conference call.

My name is Matthew, and I will be your operator for today.

(Operator Instructions)

As a reminder this call is being recorded for replay purposes.

Now I would like to turn the call over to Ms Erin Linnihan, staff vice president of investor relations.

Please proceed

Thank you, Matthew, and good morning, everyone.

Welcome to the General Dynamics second quarter conference call.

As always any forward-looking statements made today represent our estimates regarding the Company's outlook.

These estimates are subject to some risks and uncertainties.

Additional information regarding these factors is contained in the Company's 10-K and 10-Q filings.

With that I would like to turn the call over to our Chairman and Chief Executive Officer, Phebe Novakovic.

Thank you, Erin, and good morning.

As you may have observed from our press release we enjoyed a particularly strong second quarter with revenue of $7.88 billion and net earnings of $752 million.

We recorded EPS of $2.27 per diluted share, $0.39 ahead of the earnings from continuing operations in the year ago quarter.

We were also $0.21 per share better than consensus.

Revenue of $7.88 billion is $408 million higher than the year ago quarter.

That represents year-over-year revenue growth of 5.5%.

Earnings from continuing operations of $752 million is $106 million higher on the strengths of 13.7% operating margins, a 100 basis point improvement over the year ago quarter.

I should note that our earnings include a modest gain on the sale of our commercial cyber products business in the IS&T segment.

Excluding that gain, operating margin would the 13.4%, and EPS would be $2.22, still substantially better than all comparative quarters and consensus.

Sequentially, revenue is up $98 million or 1.3%, and net earnings are up $36 million on a 50 basis point improvement in operating margins.

Let me turn briefly to the first half of 2015 compared to the first half of 2014.

Revenue was up 6.3%.

Operating earnings of $2.11 billion are up 15.6%.

Net earnings from continuing operations are up over 18%.

In short, we are off to a very good start, well ahead of our internal plan and ahead of external expectations.

That leads quite naturally to the guidance increase reflected in the press release.

I will provide some additional color on that guidance shortly.

Let me give you some perspective on the segment reporting for the quarter, and then the half, and then I will conclude with comments on the outlook for each segment for the remainder of the year and tie that into our EPS guidance.

First Aerospace.

Aerospace had a good quarter with revenue of $2.3 billion, $263 million higher than the year ago quarter and a $55 million improvement in operating earnings.

Jet aviation once again made a strong contribution with double-digit operating margins.

For the first half of 2015 compared to the first half of last year, Aerospace revenue is up $246 million or 6%.

Operating earnings are up $82 million or 10.4% on the strength of an 80 basis point improvement in operating margins.

Let me spend a moment on the business aviation marketplace.

There has been much speculation about it, and a lot of what I would call rumor intelligence or rumit.

From an order perspective Gulfstream enjoyed its best discrete second quarter since the second quarter of 2008.

The end result is an approximate $1 billion increase in the Aerospace group funded backlog with Gulfstream as the primary reason.

The US economy remains strong, particularly compared to others in the world, so it should be no surprise that North America dominated the order book in the quarter.

The sales pipeline remains steady across all models.

We see no decline in the level of interest, and a particularly encouraging return of S&P 500 companies as they seek to replenish aging fleets.

I should add that the first flight of the G-500 occurred in the quarter, and the test program is proceeding on schedule.

Next combat systems.

Combat had a great quarter.

Revenues is $1.41 billion, $57 million less than the second quarter last year; however, 110 basis point improvement in operating margins to 16.1% resulted in a modest increase in operating earnings over the year ago quarter.

All in all a very strong performance.

For the first half, revenue increased 1.8% against the first half of 2014.

Operating earnings are up $71 million or 19.8%, resulting in 230 basis point margin expansions against the first half of last year, pretty impressive.

Marine group revenue up $2 billion is higher than second quarter 2014 by $150 million or 8.1%.

Operating earnings are up $13 million or 7.5% against the year ago quarter.

Revenue is up nicely on a sequential basis, and operating earnings are constant on a 40 basis point reduction in margin.

For the first half, Marine group revenue of $3.94 billion is up $492 million against the first half of 201 4. This is a very strong 14.3% growth.

Operating earnings are up $35 million, 10.3% on slightly lower margins.

Margins were still a very respectable 9.5% for the first half.

Marine systems has been a compelling story for us and will continue to be so.

We have a little work to do, however, on margins in the second half.

You may recall that IS&T is the place where we expected a 5.5% contraction in revenue for the year.

Well, fortunately we are doing materially better than that.

Revenue of $2.2 billion is up $52 million or 2.4% against 2014 second quarter, but the real story is operating earnings.

They are up $49 million on a 200 basis point improvement operating margins against the year ago quarter.

As I previously noted the sale of our cyber products business provided some profit in the quarter.

On a normalized basis without that gain, margins would've been 9.7%, an increase of 100 basis points over the year ago quarter.

The story for the first half is much the same.

Revenue was up $141 million or 3.2%.

And operating earnings are up $83 million over 22% on a 160 basis point improvement.

Once again on a normalized basis operating margins would've been 9.4% a110 basis point improvement over the first half of 2014.

This is a very good news story, and as you are going to hear in a moment it will continue.

So let me provide some guidance for the year for each segment, compare this guidance to what we told you in January, and then wrap it up into our EPS guidance.

For Aerospace, our guidance to you in January was to expect revenue of approximately $9.4 billion and operating margins around 18%.

We now believe revenue will be off by about $250 million to $300 million.

On the other hand, margins are expected to be about 18.5% for the year resulting in about the same as anticipated operating earnings.

The 18.5% margin guidance for the year implies some pressure on margins in the second half, due largely to mix shift, increased R&D spending, building airplanes for use in the test program, and a planned reduction in production at Jet Aviation Basel.

To that point, we are performing the engineering work at Basel necessary to induct a full complement of airplanes into production in the first quarter of next year.

For combat systems, our previous guidance was to expect revenue similar to 2014, or about $5.7 billion with margins around 15%.

We continue to expect revenue consistent with prior guidance.

Margins, however, will be in the 40 to 50 basis point higher range resulting in higher than predicted operating earnings for the year.

In Marine systems, we previously guided to revenue growth of 2.5%, or approximately $7.5 billion and a margin rate in the 9.5% range.

We now expect revenue of approximately $7.8 billion, which translates to growth of 6.7% against last year.

Margin rates will be about 10 basis points better than previously forecast.

The higher revenue and somewhat better margins will once again result in higher operating earnings than earlier forecast.

By the way, the operating margin result will be driven by a double-digit fourth quarter.

For IS&T, we previously guided to a revenue decline of 5.5%, or about $8.7 billion of revenue and a margin rate around 9%.

It now appears that revenue will be between $9 billion to $9.1 billion, and the margin rate should be about 70 basis points better than guidance.

Once again this will result in higher than previously expected operated earnings for the year.

In summary, all of this rolls into revenue for the year of $31.7 billion to $31.8 billion, an operating margin around 13%, and a return on sales from continuing operations slightly in excess of 9%.

So, higher than previously anticipated operating earnings, a modestly lower tax rate, and a lower share count permit us to increase our EPS guidance for continuing operations to between $8.70 to $8.80.

The progression through the remainder of the year is that we will see a third quarter that is weaker than the second, and a fourth quarter the looks very much like the second quarter.

I would like to now turn the call over to our CFO, Jason Aiken.

Thank you, Phebe, and good morning.

I have got just couple of quick financial items to go over before we start the question-and-answer period.

First I will follow-up on ar point we addressed in last quarter's call, and that is the impact we are seeing from foreign currency exchange rate fluctuations.

When you compare our second-quarter results to the year ago period, our 2015 revenues and operating earnings would have been higher by $130 million and $20 million, respectively, had the exchange rates that prevailed in the second quarter 2014 remained in effect this year.

Combined with the first-quarter results, our revenues and operating earnings were reduced by $250 million and $40 million so far this year as the result of the strengthening of the dollar.

Stated another way, absent the headwind from the translation of our international business in US dollars our revenue growth in the first half would've been 8%.

Moving down the income statement, our net interest expense in the quarter was $20 million versus $24 million in the second quarter 2014.

The decline was driven largely by the repayment of $500 million of debt in January.

For 2015 we expect interest expense to be approximately $85 million.

At the end of the quarter, our balance sheet reflects a net cash position and have cash in excess of debt on $619 million.

This is down by almost $400 million from the prior quarter due to our capital deployment activities, which while I will address just a minute.

Our effective tax rate was 29.1% for the quarter, slightly lower as we expected as we continue to see the benefit of higher international earnings.

For the full year we expect an effective tax rate in the low 29% range.

We continue to expect cash contributions to our pension plans for 2015 to be $185 million, and most of that funding is expected to occur in the third quarter.

A quick point of color on the cash flow statement that's included in our release.

One item you will note is cash proceeds from asset sales in the first half of just shy of $260 million.

We have mentioned from time to time some of the small-scale portfolio shaping we have been doing, and that's what you see there.

So that's primarily the divestitures of our commercial cyber business which Phebe mentioned just a few minutes ago and AxleTech which closed earlier in the year.

And on the subject of share repurchases in the quarter we purchased slightly less than 7.5 million shares for just over $1 billion.

We purchased a little more than 12 million shares in the first half for just shy of $1.7 billion.

In total when combined with dividends paid, we returned approximately $1.2 billion in the quarter and $2 billion year-to-date, well ahead of our free cash flow for the first half.

At the end of the second quarter we have $4 billion of cash on the balance sheet and are well positioned to continue to execute a 2015 capital deployment strategy.

Erin, that concludes my remarks, and I will turn the mic back over to you for the Q&A.

Thanks, Jason.

As a quick reminder, we ask participants to ask only one question so that everyone has a chance to participate.

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

Matthew, could you please remind participants how to enter the queue?

(Operator Instructions)

The first question comes from line of Ronald Epstein of Bank of America Merrill Lynch.

Please proceed.

Good morning.

Good morning.

I have a quick question on the bizjet market.

The way you characterize it sounds great, but other suppliers have said maybe not so.

So my sense is are you guys picking up share?

You have of primary competitor who is kind of wounded right now.

I'm just curious if you're picking up share in the large jet market

There has been an awful lot of discussion about purported weakness in the large cabin market, but not from us.

It's not axiomatic that the factors that are impacting others are impacting us.

We really don't think about share.

The way we conduct our business is that we look at our order book, which is robust, and our pipeline, which remain strong.

So I am not in a position to comment what others are seeing, but we are continuing to see interest across all of our product lines.

Great, and if I can just a quick follow-on.

Something you did not talk about too much in your prepared remarks is how is it go home on the Ohio class program now and the ship business?

If you can give us an update on that and how the outlook for that looks?

So, Ohio, engineering in Virginia and construction are really the two main drivers of increased revenues.

It's not what you asked, but it gives us a certain context.

Let me give you some color.

We are in the middle of the Ohio replacement design development program, and it is progressing on schedule.

We are the prime, and we are working on all of the ship arrangement, systems, components, development, [infil] systems compartment in order to support the start of the lead ship which is in 2021.

So we are going very, very well by all indicators in our engineering and design efforts.

Okay, great.

Thank you very much.

Thank you for your question.

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

Good morning.

Good morning.

Phebe, during the quarter I guess the last couple quarters we've seen some of your competitors make some moves in terms of M&A, Lockheed with Sikorsky and then Raytheon with Websense.

Can you talk about how you view M&A today?

And how you are thinking about capital deployment overall?

Thanks.

I see M&A today the way I have been seeing it There is nothing that we are looking at now.

Our capital deployment strategy is consistent with what we have been talking to you about.

In the absence of accretive and good acquisition candidates in our space we are going to continue to return cash in the form of dividends and share repurchases.

As a quick follow-up, the Gulf Stream order activity in the quarter.

Could you give us any color in terms of by product line what you sold maybe on the 650?

And what the order activity looks like on the new products, the 500 and 600?

Thanks.

We are not going to dissect to you the demand by product and by airplane.

But suffice it to say that we have good demand across our entire portfolio.

And that means our entire portfolio, and when we look at the pipeline the interest that we see in the pipeline likewise translates to demand signal across our portfolio.

Matthew, can we take the next question please?

The next question comes from line of Robert Stallard of Royal Bank of Canada.

Please go ahead.

Thanks much.

Good morning.

Good morning.

Phebe, just a point of clarification.

Did you cut your aerospace revenue forecast by $350 million versus your previous guidance?

If so, what has changed that?

Look, we reduced I think between $250 million and $300 million, and there are an awful lot of moving parts in this business that as we get halfway through the year we some get additional clarity.

It is really nothing more than across a whole line of our products and services.

It's just really moving around among quarters between fiscal years.

But the business is still growing.

I don't particularly see the reduction of the increase in estimates from 8% to 6% as particularly dispositive for any market factor.

It's simply the management of the business.

Are there any particular models that have come off more than you originally anticipated?

I know you don't like to give a lot of detail on this, but is this generally what's happened?

No.

No.

It is just as we look, we have got a whole series of moving parts in that business, including building additional airplanes for the test program.

Mix in our service business, and then the mix in any one particular quarter over the fiscal years of deliveries in large cabin and medium cabin.

So we are likely to see some medium cabin, about three or four of them move into next year.

But that is largely a question of preference on the part of the customer.

So there is nothing material here.

It's simply an update as we get halfway through the year to give you some more clarity of what we see.

Thank you, that's great.

Thank you so much.

Thanks for the question.

Your next question comes from Sam Pearlstein of Wells Fargo.

Please go ahead.

Good morning.

Good morning.

I wanted to go back on the Marine side.

Normally a fairly predictable business to go from 2% growth to 6% growth seems unusual so I'm assuming it is Ohio class.

Wouldn't that cause a negative margin shift rather than a 10 basis point increase?

I don't know if you can highlight you said they have a lot of work to do on the second half of the margin front.

What needs to happen there?

So, it is a couple of things that are driving -- a couple of programs are driving our revenue.

One is increased Virginia class construction.

Ohio engineering revenue has increased quite a bit over the last year, both of those.

And then the commercial ship construction at NASSCO is increasing as our backlog of the echo tankers and our construction cycle.

So those are the three factors that are increasing our outlook for the year.

Our margins, we just have some work to do across the portfolio.

If you think about what the history has been on blocks of submarines, block 4 is still in its early stages.

So as we continue our reengineering efforts, we expect to realize some cost savings which improved performance and margins on block 4.

That's going to be a longer-term proposition.

We have historically throughout the program have recognized higher margins as we progressed further into the construction.

So we see some long-term margin expansion opportunities there, and we are seeing some very good performance at NASSCO on their echo takers construction and on the MLP for the Navy.

And we have got some margin compression at Bath iron Works that we need to continue to work through on our DDG-1000 program, not unexpected, but also typical of a new class of ships, particularly one that is as powerful and transformational warship as DDG-1000 is.

So we have a little ways to go on that, and we are working with our Navy customer and our vendors and their vendors to get that first ship into sea trials.

So more to come.

Okay, thank you very much.

Thank you.

And next question comes from line of Robert Springarn of Credit Suisse, please go ahead.

Good morning.

Good morning.

Phebe, I was wondering if we could turn to IS&T or back to IS&T for a minute and talk about what is driving the strength there, how you look at that business over time.

And particularly on the margins, how much of this is volume driven versus cost reduction as we go forward?

There is an interesting correlation between volume increases and cost reductions.

As you may recall, we have integrated two of our previous standalone businesses and IS&T and Creative Mission Systems, and they had a particularly strong quarter across the board.

So -- and I am continuing to see good continued strength in those areas.

And I am particularly pleased with their margin improvement, which is driving the higher earnings and frankly allows them to increase their win rate.

Their cost-cutting efforts have been exemplary, and there's more to come in that business.

In our service business it's steady year-over-year, and sequentially they just need to work their margins hard which is always their challenge in their highly competitive business.

But all and all IS&T is doing extremely well and I think will continue to do well.

And our win rate is better because our performance operationally is good, and our costs are coming down increasingly.

The pace of which is increasing and cost-cutting.

So very impressive.

Yes.

And just as a second?

Follow-up maybe for Jason on the cash flow conversion for the year.

How are you thinking about that relative to a four especially now that the forecast is a bit higher from a performance standpoint?

I think our expectations for the full year are consistent with what we have said from the beginning, a weaker or softer than typical year our priority is always to pull cash forward, so we have a pretty decent performance in the first half we had close to an 80% conversion rate free cash flow to net income.

But we had predicted before and are still looking at a softer second half as we profile a lot of the supplier payments associated with the advances that we got on some large contracts last year and the year before flowing out in the balance of the year.

So I think our expectations are essentially consistent with where we started in the year.

Thank you.

Thank you for your question.

Our next question comes from Myles Walton with Deutsche Bank.

Please go ahead.

Thank you, good morning

Hi.

Bonus points for using the word axiomatic, Phebe.

I'm sure you did not have to look it up.

No, I'm an engineer.

So the one question I have for you was on the backlog and bookings at Gulfstream in particular so other manufacturers have seen the fleet buyers come back in place orders.

How much of the strength here is fleet buying?

It sounds like it is not, but I just want to confirm that.

And also as a relates to your search for upward bias on the G-650 rates, how comfortable are you with where the supply chain can take us?

So let's first define our terms.

When we say fleet what we mean is Fortune 500 companies coming back in and replenishing their entire fleet.

So not surprisingly the preponderance of our backlog is in public and private companies and high net worth individuals.

They comprise the majority of our backlog.

I do not track what you can call fractional owners, fractional buyers.

But it is not significant, and I don't really worry about it too much.

It is a very steady backlog when we look at it.

We know these people in the backlog.

They have been here before and a lot of strength and consistency.

And the supply chain for the 650?

The supply chain for the 650, we are thinking about feathering in the 650 over additional ones and two units over time, and the supply chain can easily manage that.

We have been in discussions with them.

We are not talking about massive changes in the production rate.

But simply -- onesies and twosies -- twosies to smooth the transition period.

Okay.

Thank you.

Thank you.

The next question comes from the line of Doug Harned of Bernstein.

Please go ahead.

Good morning.

Hello Doug.

Hi, I just wanted to follow up on the 650 question.

Because as you've talked about potentially feathering in some earlier, what are you looking for as a trigger to make a decision to bring some 650s forward?

When we look at our plan for the next couple of years and get some clarity around that, then we will have the ability to ramp up -- again not in large order of magnitude numbers but in ones that are really manageable.

So will be largely our planning process that we do in the fall, and that will set the guidance we give you in the fourth quarter, first quarter of next year.

There is no catalytic trigger.

It is more internal planning.

When you think about this also in terms of margins, you had said recently that the margins had not on the 650 quite reach the level of the 550.

When you look at, how do you look at the margin trajectory now?

And how does that tie into potential changes in rate?

So the margin potential on the 650 I think we have another year to 18 months before it eclipses the 550.

So I don't really think about bringing forward 650s to boost our margins.

I'm thinking about bringing them forward to just move the entire business, so there are less perturbation as we go through our transition.

We have talked about this quite a bit.

The margin performance on the 650, we have not seen how good we can get there.

Okay, great.

Thank you.

Your next question comes from the line of Jason Gursky of Citi.

Please go ahead.

Hi, good morning.

It's actually John [Rabebar] for Jason.

I have a question about jet aviation and the planned reduction at Basel alter in the year.

I'm curious what is driving that and what you are doing to manage that?

And to what extent that is driving the lower aerospace field outlook?

That is a -- think about it this way.

We added significantly to the backlog of jet aviation both single aisle and double aisle airplane completions in the first half.

So we need to -- and we are in the process of doing the engineering work so that we can induct these airplanes in the first quarter and second quarter of next year into the production cycle.

So this is a -- when you have a -- when you have an inflow order -- orders, and the completions on these airplanes require a fair amount of high-level engineering on the front end, engineering and design.

So to integrate that -- get that engineering design done, done so that we are ready to move into the full rate production at a very efficient rate is I think judicious, and was part of our plan all along.

We need to do that in order to produce these things at a effective margin level and profitability.

The jet aviation has some impact in the second quarter as you will imagine, particularly given their double digit contribution the last few quarters.

Great, thank you.

Thank you for your question.

Your next question comes from line of George Shapiro of Shapiro's.

Please go ahead.

Yes, good morning.

Phebe, if I looked at the aerospace margin for the six months it's 19.9%, and I would venture for the second quarter if I took out maybe $75 million or $100 million of probably zero margin preowned sales they would have been north of 20%.

So what gets the margin down to 17.5% or so on average in the second half?

Or even 17% to get you to average only 18.5% for the year?

George, for years I have enjoyed your complex questions that are built on a series of assumptions.

Let me try to simplify this in the way that we think about it.

In the first half, we had a number of factors that contributed to higher margins.

One was a fairly significant settlement that we had with a supplier.

The second was some R&D tax credits, and then going forward what it would increase our R&D spend.

Jet aviation is going to have significantly lower in the half earnings and margin rate as we just discussed.

And we have got a whole lot of mix shift issues in the service, and when airplanes come into you know green delivery and final delivery.

So, there are an awful lot of moving parts.

Does that help you?

Yes, that helps some.

Also, is it fair to say that revenues in preowned were $75 million to $100 million in the quarter with probably zero profit contribution?

I don't really follow that, but that would feel about right.

But look, the way to think about this, there is nothing happening in the second half of this year that should cause concern for the underlying structure of the business.

It is simply a matter of different moving parts.

It's the mix in the business, the R&D spend as we build more airplanes into the test program.

So I think about the way to think about this realistically is that there is no underlying systemic issue here, just the normal puts and takes.

Okay, thanks very much.

Thank you.

Your next question comes from Cai von Rumohr of Cowen and Company.

Please go ahead.

Yes, Phebe, terrific numbers.

Thank you.

Can you give us a little more sense of the low quarterly in aerospace in the third and the fourth quarter?

And maybe you have two quarters here where you have beaten kind of the cautious guidance you have given us.

Maybe the specific variances in the second quarter as to why in that quarter you were so much better then you kind of indicated you might be?

Thank you.

Well, we had a wholesome mix on the service side.

Service revenue was up, and the mix was very wholesome.

And jet aviation had a terrific quarter.

So all in all, that helped drive what you might think of as our performance.

But look, I think we have tried to talk over the last few years about the futility of attempting to get and predict precise quarterly margin rates of a business that has so many different moving parts different products, different service, mix is an issue, throw jet aviation in there.

So it's -- we are comfortable that we are directionally correct.

Do we have with exact precision what third quarter margins are going to be?

They are going to be less, and they are going to be significantly less, and a little bit better in the fourth quarter.

So I think that is reflecting -- that slows down into the overall guidance we gave you in terms of progression of EPS which is a lighter third quarter compared to second and a fourth quarter that looks a lot like the second quarter and Gulfstream contributes to that.

That is very helpful.

Then on the order front you talked about the strength in the US and Fortune 500 companies.

You did not mention emerging markets.

I guess there has been some talk of weakness in China, Russia, Latin America.

Could you talk about the foreign markets?

And are you seeing overall in your aerospace business requests for push outs or deferrals?

Or requests for accelerations of planes?

Thank you so much.

Yes, so we have very carefully controlled and monitored our exposure to the emerging markets because of their great volatility.

So we are cautious, and I think you have seen that behavior in our dealing and our interchange with emerging markets.

We have some very good reliable customers in each of those markets.

But they tend to be hyperbolic in their demands.

They are in one quarter, out the next quarter.

So there really hasn't been much activity in the emerging market space for a number of quarters now.

I would add that the Mideast continues to be pretty wholesome for us.

But the real powerhouse here is North America.

And by the way it's nice not to have too much exposure to highly volatile markets.

You can get yourself boxed in a big hurry.

Thank you very much.

Thank you.

Your next question comes from the line of Howard Rubel of Jefferies, please go ahead.

Thank you very much

Hi, Howard.

Good morning, Phebe.

When you became CEO, the agenda was relatively clear, set some standards, and if we kind of look back for a moment, the numbers are pretty darn good today.

So how do you -- I mean we get the bar and the increase right now.

But when we looked at the numbers going forward they are pretty darn good.

So how do you raise the bar from here?

What are sort of some of the agenda items?

Because in some cases this year is well understood, and it's really the challenges beyond that.

So let's give a little bit of retrospective since this management team took over.

In 2013 we were inland inwardly focused on improving our operations and retiring a considerable amount of risk that we found in the Company.

We did all about so 2014 and continuing into this year was about building that backlog taking the lower cost structure we had invested in and the cost reductions that we have made along with our strong operating discipline, and increasing our backlogs very significantly, and that worked.

And we are not done.

You know you can never take your eye off of operations.

Without solid operating performance, everything else becomes a ephemeral.

So we continue to focus on taking costs out there and we continue to improve reengineering efforts are not done, and we -- so we take that low cost basis and given the backlog, we are poised for growth this year, next year, and through my current planning horizon.

Our defense companies are growing.

We have talked about the transition at in aerospace, but fundamentally these defense companies across the board are, the backlog of combat and marine and IS&T has continued to grow.

So now it is about growing earnings, about growing EPS based on increases in revenue.

And then it's our productivity.

So I think you're going to see more of the same.

Focus on the core, blocking and tackling, might not be the sexiest thing but it makes all the difference in performance.

I don't think you're going to get too many complaints.

You talked about or Jason talked about the strength of the dollar.

But that is the strength of your European operations that now become lower cost on the international market.

And we did see a recent order of I think it was out of Denmark, but could you talk for a moment about how that integration has worked?

And what kind of aperture that has opened up in terms of opportunities both of there, and you do a little bit of IS&T also and how that is being pulled through please?

So when we looked ex-US and ex North America our efforts in the UK and in our European land systems have been exemplary.

And they really are sort of the parable that describes what the journey that General Dynamics have been on.

We -- take ELS, for example.

We always knew that we were going to have to invest in that business, because when we purchased it, it had access infrastructure.

So we made that investment, and their cost structure and their wrap right now is at highly competitive levels.

That with the competency of that management team, they are really performing.

And all of our expectations were realized because they did what they needed to do, and we supported them in that.

So they have increasingly won every bit that they have bid in.

And the Denmark's win was significant for them.

It's a replacement of the MM13 [plead] about $500 million we have been in Denmark for a while, but it was European Land Systems, both their design excellence, their operating performance and their understanding of that very important customer that allow them to execute and when.

In the UK, that has really been out of the Phoenix, right?

And out of the ashes rose the Phoenix.

We had to dismantle that entire business and turn it over to Land Systems to run the SB program so the guys who knew how to build combat vehicles actually were building the combat vehicles, and we turned over the remaining IS&T businesses to mission systems, and both have done a superb job of taking costs out, increasing their competitiveness.

So I think you may just have heard, I think it was earlier this week, maybe then last week, the UK government announced another $630 million service and support contract for the FC program.

You don't get that unless you demonstrate your performance with very affordable cost structures for which you can support the needs of your customer.

So that to me as I said it is a parable of what can go right when you do what you need to do.

Thank you.

Matthew a think we have time for won more question.

Thank you.

Your next question is from the line of Carter Copeland of Barclays, please proceed.

Good morning, Phebe and great (multiple speakers).

Hello

Are you doing.

I noted Myles like the word axiomatic, but I like the phrase purported weakness, I thought that was quite concrete.

It helps to have been a liberal arts major.

I do know the English language, and I know quite specifically.

I like it.

I wondered if you might expand a little bit on the brief comment you made around DDG-1000 and the work you have there.

Is your plan and the rates, the booking rates there dependent on holding schedule?

Or is there the potential for rework of significance there?

Any color you can give us about what remains to be done there in terms of milestones and where the program stands?

The next major milestone for the first ship the [cost plus] is going to see trials.

And the Navy, we have worked very, very closely with.

They have by the way retrained the integration responsibility for this class of ships.

So we have worked very closely with them to work schedule and production so that we minimized any rework which is particularly challenging on a first of class ship.

But we're not seeing enormous amounts of rework this is simply integrating, building and integrating a significantly.

-- this is a huge, huge warship with an array of new technologies.

So that is some of the challenge.

That said, the fleet is anxious to get it because of its clear war fighting capabilities.

So this is a three class -- three ship class, and our close relationship with the Navy has been important in all of us working together to get this war fighting battle start out to the fleet.

Okay.

Thank you for joining us on the call today.

If you have additional questions I can be reached at 703-876-3583.

Have a great day.

Thank you for joining today's conference, ladies and gentlemen.

This concludes the presentation.

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