通用動力 (GD) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the General Dynamics Q1 2015 earnings conference call.

(Operator Instructions)

As a reminder, today's conference may be recorded.

I'd now like to introduce your host for today's conference, Erin Linnihan, Staff Vice President for Investor Relations.

Ma'am, please go ahead.

Thank you, Liz, and good morning, everyone.

Welcome to the General Dynamics first 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.

Thanks, Erin.

I will keep my remarks somewhat brief, since this quarter's results are relatively straightforward.

I'll try to give you some of the more prosaic data up front, and then give you a little bit of color and insight from my perspective.

First-quarter earnings from continuing operations were $2.34 per fully diluted share, on revenues somewhat in excess of $7.7 billion; operating earnings of slightly over $1 billion; and earnings from continuing operations at $730 million.

We beat analyst consensus by $0.18.

We were also better than our previous guidance to you.

The diluted weighted average share count was 312.3 million for the quarter, compared to consensus of about 315 million, which accounts for approximately $0.02 of the out-performance.

I should note that at the same time a year ago, the diluted weighted share count was 22.4 million shares higher.

Our effective tax rate in the quarter was 29.9%, somewhat higher than anticipated; therefore almost all of the out-performance came from strong operating results, as evidenced by the operating margin at 13.6%.

With respect to cash, we had $439 million net cash provided by operating activity.

After capital expenditures, the $65 million, we had $374 million of free cash flow from operations.

The general comparisons quarter over quarter reflect, if you would imagine, this strong operating performance.

Compared to first-quarter 2015, revenue was down $60 million, less than 1%.

However, our operating earnings were up $26 million or 2.5% over the prior-year's quarter, on the strength of a 40-basis-point improvement in margin.

On a sequential basis, revenue was down $85 million, or 1.1%; but operating earnings were up $17 million on a 30-basis-point improvement in margin.

All of the foregoing is a reflection of positive operating leverage.

Finally, EPS from continuing operations was up 9.3% over the year-ago quarter, as a result of better operating earnings and lower share count, offset in part by a higher tax rate.

Let me provide some commentary and a little perspective around the results of our operating segments -- first, aerospace.

Sales were down $121 million compared to Q1 2015, about 5.7%, and down $155 million sequentially against a strong fourth quarter.

Earnings were down against the year-ago quarter by $20 million, only 4.6%, on a 30-basis-point expansion in operating margin.

Operating earnings were up $1 million sequentially on 160-basis-point improvement operating margin.

Orders to the group are typical of a first quarter.

In the quarter, the net orders were $1.3 billion, and the dollar book base booked to bill was 0.7.

This is consistent with what we saw in the first quarter of 2012 through Q1 2015.

The aerospace average bookings for the first quarter over the last five years including 2016 is $1.35 billion, a booked to bill of 0.5.

It was a quarter where the sales pipeline was replenished and strengthened, part of the normal cycle after a strong fourth quarter.

I should also note that activity has been strong in April.

We are off to a good start in aerospace, generally consistent with our guidance to you.

We had previously guided to a modest increase in revenue, a modest decline in margins, and flat operating earnings for the year.

We still believe we will be at flat operating earnings for the year, but with slightly lower revenue, and somewhat higher margins.

As a result of increased efficiency, we have been able to slip a few deliveries into next year and still come out in the same place.

Let me turn to Marine Systems.

Revenue of $2.13 billion was up $188 million, or 9.7%, compared to the year-ago quarter, and up $149 million, or 7.5% sequentially.

Operating earnings were up $4 million, or 2.1%, against the year-ago quarter, and up $20 million, or 11.6%, sequentially.

We had particularly good performance at Electric Boat.

Also at Electric Boat, the Navy announced its acquisition strategy for the $100-billion Ohio replacement program, which designates EB as the prime contractor responsible for about 80% of the construction of new subs.

The Navy also articulated a build strategy for the Virginia attack boat program during the same time frame, and we find that very wholesome.

Some of the more interesting comparisons are found at Combat Systems.

Compared to the first quarter of 2015, sales were down $90 million, or 6.6%, largely due to timing; but earnings were up $13 million, or 6.4%, on a 200-basis-point improvement in operating margins.

The 17% operating margin is second only to the third quarter of 2013 in all the group's history.

Sequentially, revenue was down $251 million, and operating earnings were down only $17 million, on 160-basis-point improvement in margin.

This is a business that always has a very strong fourth quarter, largely related to contract deliveries, so this comparison is really quite wholesome.

Also in the quarter, we began to transition from engineering into low-rate production on two large international orders for Canada, the Mideast, and the UK vehicle programs.

These programs will continue to grow for the next several years.

Even given Combat's large backlog, they had nice order activity in the quarter, with a one-to-one booked to bill.

All in all, extremely strong operating performance at Combat Systems.

With respect to Information Systems and Technology, we experienced very good performance in the group.

Revenue in the quarter was down $37 million, or 1.6% against the year-ago quarter, and up $172 million sequentially.

Operating earnings of $248 million in the quarter were $31 million more than the year-ago quarter, up 14.3% on 140-basis-point improvement in margins -- once again, nice operating leverage.

On a sequential basis, operating earnings were up $18 million, or 7.8%, and margins were consistent with last quarter.

The trend here is clearly in the right direction.

I think it's important to note that IS&T backlog grew by $851 million in the quarter, and the booked to bill was 1.3 for the quarter, following the strong booked to bill of one-to-one on average for the last three years.

The last time the booked to bill was higher was in Q3 of 2008.

This represents a very wholesome win rate for these fast-cycle businesses.

We're off to a very good start to the year, somewhat ahead of our expectations.

We do not as a practice change guidance at the end of the first quarter.

It is our practice, and has been for many years to give you a full review of our expectation at the mid-point of the year.

Suffice it to say that we are ahead of the operating plan on which our guidance was based.

We will work to consolidate our improvement, and strive to continue to improve performance.

On a quarterly basis, we expect the second quarter to be weaker than the first, in the $0.05 category.

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

Thank you, Phebe, and good morning.

About a year ago, we started talking about the strengthening of the US dollar and the resulting impact that foreign exchange rates had on our reported results, especially within Combats Systems.

Remember, we're referring to the translation of our international results into US dollars, rather than any economic harm to our contracts.

This continues to be a factor in 2016, and in the first quarter, assuming stable exchange rates from the year-ago period, our revenues in the Combat segment would have declined by 2.3%, versus the 6.6% decline we reported.

For the Company as a whole, first-quarter revenue would've actually been up slightly from last year.

Moving on to a few other income statement matters, we took a charge of $13 million in discontinued operations to record the final resolution of some outstanding items related to a disposition that closed last year.

We don't expect any further activity in this area during the year.

Net interest expense in the quarter was $22 million, versus $21 million in the first quarter of 2015.

On the capital deployment front, we expended just over $1 billion on the re-purchase of 7.8 million shares in the first quarter.

When you combine our share re-purchases with our dividend payments, we spent $1.2 billion in shareholder-friendly actions during the first quarter.

That's more than three times our free cash flow from operations, and we used a little bit of that balance sheet cash to do so.

At the end of the first quarter our balance sheet remains strong, and reflects a cash balance of $1.9 billion, and a net debt position of $1.5 billion.

As Phebe mentioned, our effective tax rate was 29.9% for the quarter.

While that was slightly higher than our full-year forecast, we're still on course for a mid-29% tax rate for the full year.

Erin, that concludes my remarks.

I'll turn it 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.

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

(Operator Instructions)

Jason Gursky, Citi.

Hi, good morning.

Phebe.

Good morning, Jason.

I was wondering if you could dive a little bit -- good morning -- dive a little bit deeper on the aerospace business, as you talked about a revenue slip or a push-out, or maybe it was driven on your own volition, but some sort of slip into next year on the revenue side.

I'm wondering if you can dive a little bit deeper on that?

Then also talk about the sustainability of the margins that we saw this quarter -- obviously continued to see some expansion there.

Just wondering whether these are one-time kinds of things, or whether we're setting a new bar here for margins?

Thanks.

Let me talk a little bit about revenue, and give you some insight into how we think about revenue, and how we develop it with respect to aerospace.

We take revenue directly from the operating plan.

Revenue in aerospace is driven by a multitude of factors, as you would imagine, given the complexity of the business.

Airplane Green and completed deliveries, service volume and mix -- which by the way, can and do move across reporting periods -- pre-owned, jet aviation services, and completions.

Some of these are harder to predict, because they have more estimating methodology embedded.

For example -- and I think it's a pretty good one -- our plan has us selling between 10 to 14 pre-owned airplanes, with revenue of $250 million at break-even margin.

It's very difficult to forecast this.

This quarter had one sale for $4 million -- a good thing, but below our revenue estimate.

On the other hand, the easiest factor to predict is Airplane Green and completion deliveries, because of the backlog with 650.

We have some other models to sell for delivery in Q4, but do not see that as a problem.

As I told you, we're striving to keep our earnings flat for the year, and that's what we think is feasible.

On the sustainability of the margins going forward?

We're sticking with -- we're going to have slightly higher margins, as I said, because we're going to keep our earnings flat, and we're going to have slightly less revenue.

I think the margin you're going to see is I noted some improvement from what I guided you to, which was about 19%.

Okay, great.

Thanks.

Ron Epstein with Bank of America Merrill Lynch.

Hi, good morning, Phebe.

Hi, Ron.

I think probably no big surprise, the question that everybody's thinking about, is what demand are you seeing on 650?

How's that going?

I think it's no secret there's been some more 650s piling up in the available-for-sale market.

Can you just give everybody your perspective on what's going on there, and how healthy that market is or not, or just some color on that?

Sure, be happy to.

What I want to do is give you some facts instead of speculation.

If you think about it as first-hand intelligence not second and third-hand conjecture.

Let me parse this in some specificity.

First, sales activity as I noted in the quarter is similar to the quarter of last year.

Our first-quarter earnings were in line with all of our other prior years.

In other words, we typically come off a strong fourth quarter.

Orders this quarter were as anticipated, seasonally light.

The pipeline, however, remains nicely active.

I would note that the US stock market fluctuations in that first quarter seemed to slow down some purchasing decisions, but our pipeline remains active.

Today we have the same competitive pressures that we've been dealing with for the last year, including over-production of large cabin planes by others.

Think about it this way -- no change on that front.

Demand for the 550 and 450 is in line with our expectations, and we continue to see interest in those planes, particularly the 550.

The 650 is sold out for the year, and the first available EIS is about 24 months out.

Remember, I think it's important to recall that the 650 has 100% market share for a market it created, and from my perspective, it would appear -- I think it's safe to assume, or what I see is that it's likely to remain in that position for the foreseeable future.

It's still a hot plane, and our demand is solid.

The number of pre-owned 650s apparently on the market is higher than in the past, but to the best of our knowledge we have not lost a single sale to pre-owned aircraft.

I've tried to parse for you how we see it from the battlefield, and give you the facts by the large-cabin airplanes that we sell.

Okay, great, thank you.

Robert Stallard with Royal Bank of Canada.

Thanks very much.

Good morning.

Good morning.

Maybe just a follow-up on Ron's question, maybe slightly more broadly.

What are you seeing out there on the aerospace side in terms of regional variances?

Is there anything that has changed in the first quarter this year, and also more broadly on the pricing of your product?

Well, orders in the first quarter were 50% US, 30% Mideast and Europe, and 21% Asia-Pacific, that goes everywhere from -- our region there is from Australia, Singapore, Hong Kong, into China.

Frankly, not a whole lot of quarterly variance on the -- where the orders are emanating from.

Pricing, we have as we noted, adjusted our prices for the 450, 550, commensurate with where they are in their life cycle.

We have not, and do not intend to adjust the 650 prices.

Any change on the G280 there?

No, it's about the same.

Okay, that's great.

Thank you.

Peter Arment with Sterne Agee CRT.

Phebe, nice quarter.

Phebe, could you give us an update on where things are on the G500 and G600 program?

I saw the announcement earlier this month on the progress, but how you view those programs transitioning into 2017 and 2018?

Thanks.

Sure.

Both airplanes, the G500 and the G600, are moving nicely through their test program.

There have been no negative surprises.

As I think you alluded to, you read that we recently joined the wing to the fuselage on the G600, and expect to fly later this year or early 2017.

From the sales perspective, the customer interest in both airplanes has been good.

As we progress through the development program, we expect the demand to increase.

By the way, for those of you who like to speculate about Gulfstream future models, let me reassure you or assure you that there is no 600 ER.

We will be able to publish a definitive range for that plane once we're in test flight.

We have a reputation for exceeding our target, but the G600 is the G600.

I think we can take the next question, please.

Cai von Rumohr, Cowen and Company.

Yes, thank you very much.

Good numbers, Phebe.

Thank you.

Could you comment on two things?

Why was your profitability quite so good this quarter, and particularly where was R&D?

Secondly, you mentioned a couple of deliveries slipping from this year into next year.

How many slipped, and why did they slip?

Thank you.

Profitability -- and you're focused on cost -- is a quarter-by-quarter battle.

At Gulfstream, we had a couple of things.

Favorable mix, improved labor efficiency, very nice high margins at service at Gulfstream, both from the mix of service in the barn and performance.

We also had substantial improvement in G&A expense, even though R&D went up slightly.

We are benefiting from all of the cost cutting we've been doing.

We've been improving our processes, reducing waste.

We're also getting some benefit from lower material costs.

The cost initiatives we begun in 2015 to reduce overhead and indirect throughout the enterprise are paying off.

And the slips in deliveries?

Yes, the slips in delivery.

We, every year every quarter, working with our customers, can determine whether it's more convenient or preferable to take one, two, three airplanes in a given quarter, in a given year.

It's not unusual for us to move airplanes across reporting periods, or across years, even.

We typically haven't talked about it before, but I wanted to give you guys a little bit more understanding of the revenue number.

Thank you.

Sam Pearlstein, Wells Fargo.

Good morning.

Hi, Sam.

Just to ask something other than Gulfstream, can you talk a little bit about the Ohio replacement?

I guess what I'm trying to just think about is when does that start to grow for you in terms of revenues?

When do you start booking so we see it in backlog?

Really, doesn't that have a negative margin mix as you transition work from Virginia class to Ohio replacement?

How should we think about that transition?

Let me talk to you about that.

We have over the last three years been increasing our revenue and our performance on Ohio, all in the engineering and design portfolio side of our business.

Those margins are on the cost-plus work tend to be less than mature in production construction on submarines, right?

You've seen that quarter over quarter for the last several years, and that along with two per year of Virginia has driven some of the growth.

From my perspective, the engineering and design work will be stable going forward until it begins to transition down in the latter part of this decade.

While we don't have specific timelines for when we're going to build the first ship -- I think it's in the 2021 time frame -- but we're going to see some early -- likely to see if past is prologues -- some early material purchases so that we can lock in some favorable rates.

That program will really begin to ramp up really in the 2020s, and go on for some time.

The margin profile way out then is going to be driven in the first instance by how the contract is structured, and I don't know.

We don't know yet, and I think the Navy -- we're still working with the Navy on how they want to do that.

Typically in complex naval shipbuilding programs, the first ship is cost-plus, but that's the Navy's decision.

We'll have a lot more clarity about the margin performance.

Again, if past is prologues, Electric Boat has shown the proclivity and the ability to increase their profitability by reducing their costs and improving their manufacturing efficiency hull over hull.

This is a very important program for General Dynamics -- increasingly now, but very much in the future.

If I just looked at that past, do you typically do the long lead?

Is it two years ahead of the boat construction starting?

When do you start that long lead?

I think it's about two years before.

Okay, thank you.

Doug Harned, Bernstein.

Good morning.

Hi, Doug.

Hi.

I wanted to continue on marine.

The other big thing that is coming up is the competition for the TAO-205, the LXR, and the LHA-8.

When you look at that, one would naturally see NASSCO as the choice for the TAO-205.

Ingalls is the logical choice for the other two ships.

But how do you see NASSCO's position in competing for particularly the LXR.

Can you use the MLP hull form and be an effective competitor in that part of this competition?

Well, we've already submitted our bids.

I'll get myself in a really sticky wicket if I spoke to the Navy about relative competencies.

But we're -- we know how to build the TAOX, no surprise.

We've bid appropriately on that entire solicitation.

I think that's about all that I'm permitted to say.

Sorry about that.

Okay, no I --

Ask the Navy.

See what they say.

(laughter) No, I understand.

I can't even ask the Navy.

What do you see as the time frame now on how that's going to play out, that decision?

I'm told that it will be some time this year.

For the selection?

But I don't have any more clarity whether it's third or fourth quarter.

Okay, that's great.

Thank you.

David Strauss, UBS.

Thanks, good morning.

A couple questions on Gulfstream.

I think your large-cabin delivery guidance for 2016 was 104.

Can you tell us what it is now with some of the push-out?

Is the plan still to hold Gulfstream EBIT flat beyond 2016?

Thanks.

I'm not going to give you the 2017 guidance.

What I told you is we're going to do 2016 at flat EBIT, and that looks very possible from our perspective.

We're moving one large-cabin airplane from this year to next, and a couple of mid-cabins.

Phebe, can you explain the large gap between green large-cabin deliveries in the quarter and completed?

I don't think I've ever seen that large of a gap.

Oh, it's all timing, and it's the druthers of the customers on what they want in terms of outfitting on their airplanes and any special configurations.

There's nothing there that's particularly anomalous, simply timing.

All right, thank you.

Thanks.

Robert Spingarn, Credit Suisse.

Good morning.

Hi.

Hi, so maybe we'll switch to IS&T for a minute.

I wanted to ask you about two things there.

Just on this big IDIQ on JTRS for the hand-held.

Three of you participating there competing.

I wanted to ask you how you think about that in terms of orders for the contract, how that might impact IS&T sales and margins going forward?

Then separately, this stretch of WIN-T and how that might affect things?

Thanks.

Sure.

As it was reported in the press, we were down-selected along with two others, for what is essentially a $12.7 billion, five-year hunting license.

The way we're thinking about it in the moment is we deliver the next-generation radio hardware in this quarter for evaluation, and then full-rate production follows that, conceivably this quarter and next.

One thing I think that's interesting to note is we've got the only radio that's a proven MUOS-capable terminal.

That ought to, from my perspective, be bit of a competitive advantage.

With these IDIQ programs, you've got to handicap what you see as your win rate.

We typically have been very successful in our win rates, but again it will be highly competitive.

We're just going to have to work our way through it.

This is a -- Mission Systems, where this resides, is a high operating leverage business.

I would expect them to perform nicely on those IDIQ contracts if they win.

WIN-T has slipped more than a skater on the ice.

We are in Increment 2. It's in full-rate production.

It's going to be fielded to the next -- I think to an active brigade combat team and National Guard units over the next eight, nine years.

It's already in the field and successfully supporting down-range missions.

From a financial perspective it's performing very nicely.

It's up to our customer on what the pace of deployments will be.

But heretofore, we've managed -- because of our intimacy with the customer -- we've managed to accommodate their desires nicely, and I would expect that to continue.

Phebe, net-net it sounds like the JTRS is a positive relative to what you're thinking might've been when you initially provided 2016 guidance.

Therefore, is it fair to assume that you'll bake that in when we hear from you next on this?

Yes, if in fact they start to issue the IDIQ purchase orders within this year.

That's part of what I don't know, right?

It could be a 2017 thing?

It could be, but I don't know.

Okay, thank you.

Okay.

Carter Copeland, Barclays.

Hi.

Good morning Phebe, Jason.

Phebe, I wondered if you could talk to the booking strength in IS&T, and maybe even the margin strength in IS&T -- difference between IT and mission?

Give us some color on that, and where some of that strength is coming from?

Let's talk about this in two parts.

Our Mission Systems is still benefiting from the cost synergies we achieved by combining two of our businesses.

They're also -- and by the way, that's why I was interested in that combination.

The business unit guys were saying and oh by the way, in addition to cost savings we're going to see some marketing synergies, and I said yes, good, great.

Well, it turns out they were right.

They have won more than their fair share.

That's reflected in no small measure in that 1.3 booked to bill.

Their performance, operating performance, is really terrific.

Now this margin rate in the moment is a bit high going forward.

While I'm not ready to update guidance, this group should be a double-digit earner in the near future.

We've got additional opportunities for margin improvement in efficiencies and performance.

Margin performance in this group on the Mission Systems side is heavily driven by the product mix.

On the IT side, again this is a very competitive business with terrific cash flow.

As I always like to tell everybody, great return on invested capital.

They are very disciplined when they go into the market.

They win their fair share.

I say disciplined.

We're careful that we don't pursue contracts down rat holes, where we don't think we can get a decent return.

In terms of their pipeline, do you expect to continue to see win rates like this?

Obviously the market is as you stated pretty competitive, but clearly you've seen this trend for a while now.

It's very difficult to project win rates in such a short-cycle business.

I've been pleased with how they've done.

They've got more performance opportunity, cost-cutting opportunity, as they would quarter in, quarter out.

The combination of performance and cost efficiency, dedication to schedule, adherence to schedule -- schedule's not a guideline, right -- those are the things that make you win.

These businesses are firing on all cylinders.

I'm pretty pleased.

Great.

Thanks for the color, Phebe.

Howard Rubel, Jefferies.

Hi, Howard.

Good morning, Phebe.

Thank you.

To go to Combat Systems for a moment, it's always lumpy when we see adds to the backlog.

But keeping it stable at this point seems pretty good, given the large contracts you're working on.

Could you address what you're seeing in terms of incremental interest internationally?

As you and I've talked about on this call before, the world remains a dangerous place, and that Russian bear is roaring.

We've got considerable interest in places that you might think.

Just to give you a little bit of color on some of the contracts that we just put into backlog, the Swiss Army is purchasing 4x4 combat vehicles.

That went in I think this quarter for about $400 million, so that was good.

The Czech Republic is on the map, as is the Spanish 8x8 technology program.

Our land system is in good position on that on that program.

Then we continue to see demand signals coming out of the Mideast.

Iraqi tanks, Kuwait, and in other parts of the Mideast, where there's some really hot wars going on.

The pipeline looks good internationally.

If you look at the Army budget, they are beginning to re-capitalize.

That's pretty wholesome in and of itself.

Again, as in the IS&T case, our ability to perform contract, keep our costs down, will be the key to again winning more than our fair share.

Oh, by the way, our armaments business is doing quite nicely, as well.

That doesn't surprise me.

A little bit related to profitability, just to go to Marine for a second, the numbers were really good.

Could you address maybe in some way how you are doing on Zumwalt and some of the other programs, just in terms of capability?

They seem to be surprising a little bit on the bottom line.

Let me give you some clarity on this program.

Operationally, the ship is performing quite nicely.

It's been out on two sea trials, and we like what we see -- and more importantly, our customer seems to.

But let me remind everybody of a couple of things.

First, we are not the integrator prime on this ship, the Navy is.

I really don't have any insight into the program beyond our shipyard.

I think that's the first thing to consider.

The second thing is our share of the $22.4 billion program is less than about a quarter.

Again, that gives you some perspective.

The Navy reported some cost growth to the Congress over the last 12 months, and I don't have visibility into that number.

I do know -- what I do know is that has VAS has experienced some cost growth, primarily on the first-of-class ship, which was a cost-plus boat.

That's not a surprise given the complexity of this ship.

We continue to work closely with the Navy to ensure that we're delivering the ship that they want and they need operationally, and we minimize or reduce risk, manage the risk on the second two ships.

The 51 programs are running in tandem with 1000.

We've seen some impacts, as we started up a co-line on the 51s.

By the way, this flight of 51s is materially different, upgraded than the former flight.

We're confident that we can work through these.

We know these ships.

Again, we're working with the Navy on schedule and costs, so that we can ensure we get them what they need with the profitability that we require.

Thank you very much, Phebe.

Thank you.

Seth Seifman, JPMorgan.

Thanks very much, and good morning.

Good morning.

I'll ask the capital deployment question this morning.

Basically, obviously there's not really anything to quarrel with in $1 billion of share re-purchase in the quarter.

But it's not the first time that you bought back $1 billion.

Given the underlying objective of the re-purchase program to be opportunistic -- you obviously had some opportunities in the first quarter -- how do we think about share re-purchases going forward?

Would you characterize what you did in the quarter as opportunistic?

Yes.

We believe that the stock was undervalued, so we went in and bought.

We'll continue to do that in instances where we think the market has mis-priced our stock.

But that's our view, and we've been consistent about that strategy.

I think that's not a particularly big change.

Right.

Any color about the level of re-purchase that is going forward?

Well, because we're opportunistic, I'm going to have to see.

We understand in the absence of M&A, and given the investments that we're making in our growth businesses, I think it's a reasonable shareholder-friendly action to take.

Frankly, never forget it's all about the shareholders.

Yes, absolutely.

Thank you.

Myles Walton, Deutsche Bank.

Thanks, good morning.

Good morning.

Can I ask a question on cash flow?

I know last year 1Q is a tougher comp, and most of the advanced burn was in the second half of last year.

But the improvement in conversion from here on out through the rest of the year, should we expect that to pick up the pace?

Do you think conversion will actually be better than last year before you get to full conversion in 2017?

I think the way we think about that -- and I think we signaled this before -- is that we expect the free cash flow profile this year to look similar to last year.

As you mentioned, it was a particularly tough comp from the first quarter last year, which far out-stripped our expectations, and out-stripped really a typical Q1 profile.

First quarter is usually a slightly softer cash performance, and frankly sometimes in the past has even been negative.

On balance, I think you just look at the year as similar to last year.

It will fluctuate a little bit on the timing of some of the remaining progress payments and out-flows on the international programs.

Okay.

Then Phebe, thanks for the color on the 650.

I'm curious, is there a level where you think the pre-owned stock becomes more of an obstacle to you selling aircraft, or pricing, or maintaining the price?

Well, let me be clear, we're not going to drop the 650 price or the 450, 550 based on the used.

We don't compete that way.

But let's talk about that used market.

It's not a homogeneous market.

It's highly differentiated by model type.

Let's think about it in two respects.

You've got the 450/550 used market that is mature.

It's established.

It has demonstrated factors that influence its behavior.

We watched it now for well over a decade.

The 650 is an immature developing market.

Let me parse -- if it would help a little bit, let me walk through both of those markets.

With respect to the 450/550, we did lose some G550s to the used inventory, because there were a lot of them, the late models, that were available.

There still are to some degree, but this is an active market, a very active market, and so it has pretty good throughput.

I think in the last 12 months we sold -- the market sold used G550s.

This is a market with predictable and understandable transition rates and activity rates and conversions.

I hear less about the 450 used market, because I think the 450 is attractively priced.

The bigger problem for those models, frankly, is that some customers are waiting for the G500 and G600.

Now the same has not been true to this point for the G650.

I'm not aware of losing a single G650 new airplane order to a used airplane.

I would also comment that as I noted before, this pre-owned market is a developing market.

For example, it's not clear how many dedicated sellers we have.

Some folks have been in there for three years and not lowered the price, and there's not been a transaction there for some time.

The early 650s, the early models and numbers that were available to sellers or are available, are attractive at favorable prices above the original sale price.

Those were the earlier on, but we have got to see how that market develops.

By the way, we're very happy to help buyers in the used market get into our airplanes.

One of these days the market will be determined, but so far it's just too speculative to assert outcomes.

Okay.

You're comfortable with the continuing to grow and pricing won't enter the discussion, but you're sold out for the next 24 months, so that's the landscape as we see it right now?

Very wholesome.

Okay, thanks.

Liz, I think we have time for one more question.

Hunter Keay, Wolfe Research.

Hi, thanks for getting me on.

I appreciate it.

Good morning.

Good morning.

Phebe, you talked about the difference in time between green deliveries and completions as it relates to customer preference.

I'm wondering if that implies maybe a shift away from fleet sales and more to individual purchases?

Maybe I'm just reading too much into it.

Can you confirm that one way or the other?

Can you also talk about generally how you think about margins versus fleet sales to the individual one-off purchases?

Thanks very much.

Okay.

I wouldn't read too much into the timing difference between green deliveries and completed.

There's really nothing there.

With respect to fleet and individual, let's talk about fleet.

Fleet can be a fair number of aircraft going into a corporation to replenish their -- and refresh their active fleet.

There's another series of fleet buyers that are fractional.

We have very little exposure to fractional markets.

Then there's another set of fleet buyers that buy for their airlines.

That's a little bit different, as well.

Again, we don't have too many of those.

We're very careful on our pricing, very careful.

Don't think about those as materially different.

Obviously you get some volume discount, but we have a pretty strict pricing discipline, okay?

Got it.

Thanks a lot for the time.

Thank you for joining our call today.

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