Phebe Novakovic; Chairman of the Board, Chief Executive Officer; General Dynamics Corp
Kimberly Kuryea; Chief Financial Officer, Senior Vice President; General Dynamics Corp
Seth Seifman; Analyst; J.P. Morgan Securities
Peter Arment; Analyst; Robert W. Braird & Co.. InC.
Good morning and welcome to the General Dynamics Third Quarter 2024 earnings conference call. All participants will be in listen only mode. (Operator Instructions). Please note this event is being recorded, I would now like to turn the conference over to Nicole Shelton, Vice President, Investor Relations. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to the General Dynamics Third Quarter 2024 conference call. 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, 10-Q and 8-K filing. We will also refer to certain non-GAAP financial measures for additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures. Please see the slides that accompany this webcast, which are available on the Investor Relations page of our website, investorrelations.gd.com.
On the call today are Phebe Novakovic, Chairman and Chief Executive Officer, and Kim Kuryea, Chief Financial Officer. I will now turn the call over to Phebe.
Thank you, Nicole. Good morning, everyone, and thanks for being with us. Earlier this morning, we reported earnings of $3.35 per diluted share on revenue of $11.67 billion operating earnings of $1.18 billion and net income of $930 million across company revenue increased $1.1 billion, a strong 10.4%, led by a 22% increase in our Aerospace segment and a 20% increase in Marine Systems. We enjoyed revenue increases at three of our four business segments compared to the year-ago quarter. Only Combat Systems was flat, this is strong growth by any reasonable standard. Importantly, operating earnings of $1.18 billion are up $124 million or 11.7%. Similarly, net earnings increased $94 million or 11.2% and earnings per share up $0.31 or 10.2% over the year ago quarter. Earnings are up at a greater rate than revenue and a growth environment. The business is demonstrating solid operating leverage. We are doing just that on a year-to-date basis, revenue of $34.4 billion was up $3.77 billion or 12.3% over last year. Operating earnings of $3.37 billion are up 14.1%. Net earnings of $2.63 billion are up 14% despite higher tax rate. Nevertheless, we missed Street EPS consensus by a fair amount because were able to deliver only four G700 in the quarter. So without further delay, let me move right into aerospace and give you as much insight into this issue as I can and its implications for the remainder of the year.
At the outset, let me give you some comparative numbers that are quite good despite the shortfall of anticipated G700 deliveries then I will put all of this and some reasonable context for you. Aerospace had revenue of $2.48 billion and operating earnings of $305 million was a 12.3%. Operating margin revenue is $415 million more than last year’s third quarter, a solid 22% increase. The revenue increase was driven by the four G700 deliveries, higher service centre and special missions volume and higher FBO. and MRO. volume, particularly in the Asia Pacific region at Jet Aviation, we delivered 28 aircraft, including four G700 this quarter. This is eleven G700 that we expected to deliver. We also delivered one C600 G500 G280 than we did a year ago quarter. But deliveries of these aircraft are reasonably steady state and the modest shortfall is the typical variance having to do largely with timing and customer convenience. Operating earnings of $305 million are up $37 million or 13.8% over the year-ago quarter. The 12.3% operating margin was 90 basis points lower than the year-ago quarter for a host of reasons, including inefficiencies caused by supply chain deficiencies. So despite a very good quarter, we had planned to do better and sell side consensus reflected our expectations. You might recall that I told you we expected to deliver 50 to 52 G700 this year and the deliveries will be more or less evenly divided over the last three quarters of the year. Well, we planned 15 for Q2 and delivered 11. We planned 15 to 16 for Q3 and delivered four three weeks before the end of the quarter. We still had a reasonable belief that we would deliver at least 11 in the quarter. So what happens whenever we missed our forecast so badly, it is almost always for a number of reasons that all play a part. So let me identify the most important and impactful ones. First, due to the timing of engine certification, aircraft engines arrived late to schedule. We painted the aircraft before the end of arrived and then painted and install the engines. This led to a significant amount of repaid that resulted in increased cost and time spent. Second, many of the aircraft plan for delivering this quarter have highly customized interiors. First of tight intricacies. This intricacies are considered to be major changes for regulatory purposes. This resulted in longer than anticipated efforts to finalize and achieve Supplemental Type Certificate related to this, the size and complexity. The G700 cabinets has also elongated the customer reviews during final delivery of these plants. Third and maybe most important late in the border, a supplier quality escape on a specific component cause the exchange has several components on each plant. Aircraft delivery up to 16 per aircraft. The suppliers fully cooperative and is providing components for all our needs. But this rework has increased the number of test flights necessary to obtain the final certificate of air worthiness for each aircraft. So the removal and replacement of these components has impacted labor costs and schedule adversely. We are nonetheless working our way nicely through this problem with the cooperation with them here, if I may. If that wasn’t enough, we lost four days of productivity as a result of hurricane and lean several customers who are in Savannah, working with us to accept delivery left and went home to avoid the storm. So given that there is always risk and precise estimates, I will describe our delivery cadence of a bit later and provide some monthly forecast so that you can monitor quarter from publicly available data by back to some good numerical comparisons for the year to date, Aerospace revenue is up $1.63 billion, an increase of 27.7%. Operating earnings are up $146 million, an increase of almost 20%. I recite these figures, which will reflect even more growth by the end of the year. So the way we do not get lost in the third quarter delivery issue, this is still eye-watering growth. So what impact should we now expect for the fourth quarter and the year, given the pure than planned G700 deliveries in the second quarter and third quarters, you may recall that we expected to deliver 50 to 52 G700 this year. We now expect to deliver around 42 for the year 27 in the fourth quarter. This number is not without risk, but there’s also some opportunities to bring forward. The real issue here is supply chain support during this critical period. Let me give you some insight into the sequencing of the 27 planned deliveries in the quarter. We anticipate five in October nine in November and thirteen in December, recognizing there is some risk because these numbers could vary a little bit up or down through the quarter. You can, as I have said, follow this with fairly accurate but not perfect publicly available data. Turning to market demand, the interest level buyers and the expiration of accelerated depreciation at year’s end suggest a reasonably strong order intake in the fourth quarter, and that is what we are seeing after some slowing in the U.S. during the second and third quarters, we are seeing improved interest across all models in the fourth quarter. Europe and Middle East activity is quite strong, but current activity in Southeast Asia and China has slowed, interestingly, the overall number of prospects in all areas continues to increase the overall number of prospects and our pipeline is at an all-time high, with the most active models being G500, G600 and G700. We have a good cross-section of U.S. businesses in this mix. In summary, the aerospace team at a very good quarter, I’ll be a bit disappointing from the perspective of G700 deliveries. We look forward to a strong finish to the year in the fourth quarter, but will fall somewhat short of our midyear forecast. So let’s move on to the defense businesses. As collectively, once again saw strong growth and good operating performance across the portfolio. Let me walk you through each segment in turn. First Combat Systems combat system, we had revenue of $2.2 billion for the quarter, similar to a year ago, earnings of $325 million or up 8.3% and margins at 14.7% represents a 120 basis point increase over Q3 last year. Each of the businesses increased earnings with particularly strong operating leverage and munitions and customer service businesses. On a sequential basis, while revenue decreased 3%, earnings rose almost 4%. Year to date, revenue of $6.6 billion is up almost 12% and earnings of $920 million are up $124 million or almost 16%. Combat saw robust order activity over $3.3 billion awarded in Q3, resulting in a book-to-bill of 1.5 to 1 for the quarter. Orders came from across the portfolio with notable orders and munitions and near defense vehicles for the US Army. Overall, demand remained solid across combat, particularly in our ordinance and international combat vehicle businesses. In the U.S., we are increasing production of 155 millimeter ammunition project as well as expanding our support for the U.S. Army across several other areas, including final loading and assembling of artillery. A combat systems backlog at roughly $18 billion reflects the strong demand. All in all a strong performance quarter for combat. Turning to Marine Systems. Once again, our shipbuilding group is demonstrating strong revenue growth. Marine Systems revenue of $3.6 billion is up $597 million or 20% against the year-ago quarter. Columbia class construction and engineering volume as well as Virginia-class volume drove the growth. DDG51 revenue also increased somewhat. Just put this in some context is 20% growth follows 15% growth in Q4 23, 11% growth in Q1 of 24 and 13% growth in Q2 of 24. Impressive growth by any standard operating earnings are $258 million, up $47 million over the year-ago quarter with a 20 basis point increase in operating margin. However, margins continue to be adversely affected by additional delays from the submarine industrial base, partially offset by improved margin profile that’s at Masco. Sequentially, revenue increased 4.2% and earnings improved 5.3% in Q3, driven by volume and EBIT year to date, marine revenue of $10.4 billion, up 14.7% and earnings of $735 million, up 12%. So across the business, we have seen rapid growth of revenue and earnings, but stagnant margin performance. As I noted last quarter. Although the supply chain is improving and places, EB. continues to be severely impacted by late deliveries from major component supplier, which has delayed schedule and is continuing to impact costs are out of sequence. Work on modules way in thousands of tons is time consuming and therefore expensive, sometimes up to eight times the cost of in sequence work. The operating metrics tell us that we have in fact increased our productivity to somewhat offset cost. As I noted last quarter, to put a significant measure of productivity continues to improve. And while we will continue to work on improved productivity, there is no point hiring portions of the boat only to have to stop and wait increasingly extended periods of time for major components to arrive. It is not a good for the bull overtime nor costs. Given the recent projections from the supply chain on deliveries, we need to get our cadence in sync with the supply chain and take costs out of the business. If we are to hope to see incremental margin growth, put another way the supply chain is not getting better at a fast enough rate as we had hoped through our internal efficiency, we have now a pace from this is the reality of the post-COVID environment for many of our most important suppliers. Finally, to be clear, current submarine delivery projections are not incrementally impacted since they already reflect the anticipated delays from the SEC blockchain. We will, of course, carefully monitor supply chain performance and accelerate our work should their deliveries to us improve. And lastly, technologies, it was another strong quarter with revenue of almost $3.4 billion, which is up 2% over the prior year. Operating earnings in the quarter were $326 million, up 3.5% on a margin of 9.7%. That was a 20 basis points improvement year over year. The year to date comparisons are similar. Revenue at $9.9 billion is up 1.2% through earnings of $941 million are up almost 5% on a 30 basis point improvement in operating margin. The growth for this quarter in the first nine months was driven by GDIT.s investments in their digital accelerators. Mission Systems was flat year over year as they continue to transition from legacy programs to new franchises. Strong operating performance across the group more than offset the relative growth in services and GDIT. compared to hardware at Mission Systems, 2.5% spread relatively evenly over both businesses, with margin steady at 9.7%. Order activity was particularly strong in the quarter with a book-to-bill of 1.3 to 1 that resulted in backlog at the end of the quarter, $14.4 billion, up 13.5% from year ago quarter. Through the first nine months, the group achieved a book-to-bill ratio of 1.2 to 1 more than keeping pace with the strong revenue growth across the business. GDIT and Mission Systems have shared in the robust order activity so far this year, demonstrating the strength of this portfolio and prospects remain strong with a large qualified funnel of more than $120 billion and opportunities they are pursuing across the Group. That concludes my comments about the defense businesses. Let me now turn the call over to our CFO, Kim Kuryea, and then we’ll wrap up with our guidance for the remainder of the year.
Kimberly Kuryea
Thank you, Phoebe, and good morning. We had a solid quarter from an orders perspective with an overall book-to-bill ratio of 1.1 for the company. This is particularly impressive with the continued strong revenue growth in the quarter. Combat systems and technologies led the way with book-to-bill of 1.5 times and 1.3 times, respectively. This order activity led to our backlog increasing to $92.6 billion at the end of the quarter. Our total estimated contract value, which includes options and IDIQ contracts, ended the quarter at a record level of $137.6 billion. Moving to our cash performance, this was another good story in the quarter. Cash flow improved as anticipated. Over the prior two quarters, we produced $1.4 billion of operating cash flow. All segments contributed to the results with particularly strong cash generation and technologies, including capital expense senators, our free cash flow was $1.2 billion for the quarter or 131% of net income. For the fourth quarter. We are expecting free cash flow to again be greater than 100% of net income, but we now expect full year to fall short of our 100% conversion target as G700 deliveries pushed into 2025. As a reminder, total free cash flow generation between 2021 and 2023 was quite strong with a three year conversion rate of 107%. Looking at capital deployment, capital expenditures were $201 million in the quarter were 1.7% of sales. We’re still targeting to be around 2% of sales for the full year, given the commitments that remain, we paid $390 million in dividends and repurchased a little over 150,000 shares of stock for $44 million during the quarter. We ended the quarter with a cash balance of over $2.1 billion. That brings us to a net debt position of $7.2 billion, down over $700 million from last quarter. As a reminder, we have an additional $500 million of fixed rate notes maturing in the fourth quarter that we plan to repay with cash on hand. Net interest expense in the quarter was $82 million, bringing interest expense for the first nine months of the year to $248 million, down from $265 million for the same period in 2023. Finally, the tax rate in the quarter was 16.5%, bringing the rate for the first nine months to 17%. The rate was slightly lower than expected, principally due to increased U.S. and foreign tax credits and benefits and other timing items. As a result, for the year, we believe our full year tax rate will be closer to the 17%. Now let me turn it back over to Phebe for some final remarks.
Phebe Novakovic
Thanks, Kim. In light of the things I have just discussed, let me give you some clarity for the remainder of the year figures I am about to give you are all compared to our July update, which will be posted along with today’s guidance on our website. In aerospace, we expect sales to be about $12.3 billion versus 13.2% margin. We are expecting 150 versus 160 deliveries with tenant the delivery slipping into next year. This will, of course, benefit next year. With respect to the defense businesses, Combat Systems and Technology remain unchanged from July, Marine Systems revenue should be about $13.9 billion with margins of 6.9% for all the reasons I previously noted. On a company-wide basis, we see annual revenue of around $48 billion in margins of around 10.3%. All up. That indicates EPS guidance of approximately $14 per share, about $0.45 below our previous expectation. That concludes my remarks, and we will be happy to take your questions.
Nicole Shelton
Thank you, Phoebe. As a reminder, we ask participants to ask one question and one follow-up so that everyone has a chance to participate. Operator, could you please remind participants how to enter the queue?
Operator
(Operator Instructions) Seth Seifman, JPMorgan.
Seth Seifman
Thanks very much and good morning, Phebe I was wondering if you could talk a little bit about this year’s kind of some unusual year in terms of various things that have come up with G700 but as we think about going forward and you know where the profitability can go in the aerospace segment, you know that I know it’s early for 2025, but maybe even qualitatively talking about the things that are awaiting the margin this year and how things could evolve from taking into account also the introduction of the G800 and you kind of what the progression looks like.
Phebe Novakovic
So I think as we discuss through most of this year, we still have supply chain challenges that require that all stream that require out of station work. And we still have late deliveries of material. The supply chain has gotten much better as evidenced by our ability to ramp up production, but they still got a ways to go. And until we get that supply chain quality as well as some delivery timing stabilize will continue to have amortization work that, however, should be behind us, you know before too terribly long, let’s talk about the 700. So, the 700 we’ve talked throughout the year about some of the margin pressures that the first lots. But when we look forward, as we’ve talked about before, we see gross margin improvement of about 600 to 700 basis points that remains the same. You know, as I look forward in them in the aerospace group, we see very, very strong margins going forward. And we’ll see good margins in Q4, not as high as we expected because a lot of 700 slip into next year. But we’ll have very nice margin expansion as we go through into next year of is with respect to the 800 we expected to come out every day and have some nice margin impacts over the course of the year. So I would say that we’re pretty optimistic over starting about next year and into the future. Feature of the margin performance at Aerospace.
Seth Seifman
Thanks. And maybe I’m just to follow up on combat them with the, you know, understand the growth trajectory kind of slowing down here in the second half. How much of that reflects kind of the end of the facilitization process for so 155 millimeter shells? And how do we think about kind of the interplay of growth and margin going forward? It would seem that the backlog here would allow this to be as we look across the industry, maybe one of the faster growing businesses across the industry that a fair assessment and have we had this quarter indicated that some of the margin pressure from facilitation is behind us.
Phebe Novakovic
So look, if we look at our backlog and the threat environment and the performance of combat in general over time, they believe is expected in our market space. We will continue to grow and perform very well. Facilitation for increased. The initial production is largely behind us. We’re moving into production, we’ll see increased revenue from our on from our Combat Vehicle business. And so we do see a pretty good solid growth pattern. If we go forward this this year, we accelerated our growth into the first half. So expect fourth quarter to be relatively flat, but still have about 5.9% growth for the group in the year. And we can we expect to see very nice growth going forward. I would add this on a high-performing organization like Combat Systems, variability in revenue and margin is almost always a question of timing on who just to give you a little context on that score.
Operator
Robert Stallard, Vertical Research Partners.
Robert Stallard
Thanks so much. Good morning. First of all, a question on marine Phebe you mentioned about the supply chain issues there. I was wondering if you could elaborate on why it’s not improved as much as you would have hoped. And also what point does this start to negatively impact [some resurgence?]
Phebe Novakovic
Well, I think that it already has some impact as scheduled, and that’s been pretty well publicized by the Navy until recently, we had of we had a reasonable hope and it was reasonable set of expectations based on the indicators that the supply chain would connect to get a better but who most recently, we’ve seen that, in fact, that’s not the case and not getting better at the rate at which we had hoped for a whole series of reasons. And I think that and some of those have been very well documented. The Navy and Congress have been well aware of that. So they’ve been pumping on additional support into other parts of the supply chain and some parts are doing well, but others are continuing to struggle in. And I’d say that it was not a typical of a number of manufacturing sectors. If you go back from December 2019, the PBI. for manufacturing has increased by 25% overlay that with the demographic challenges that we have a smaller cohort of new hires and wage growth that that span and added pressure or on some of our suppliers, at the same time, you almost doubling on the throughput on arm and the demand on submarines. So those down a lot of pressure on parts of the supply chain. I think that’s well understood by our customer and the Congress. And so we’re going to get to work with them and how far we can. But in the meantime, we’re going to control. What we can control and that is in are going to adjust our pace to align with what we now see is more of, you know, predictable some supply chain schedules that have elongated will take cost out of our business and will continue to or productivity on the debt flights with an increasingly capable and skilled and experienced work, of course. So you can control what you can control. And we’re simply in the moment adjusting to what we see as the inability of supply chain to improve at the rate. That is what we had hoped. And that, frankly, I believe our customer had hoped.
Robert Stallard
But just a quick follow-up. Do you think the supply chain issues jeopardize the aspiration to move back to boots for you on the Virginia class?
Phebe Novakovic
Well, I think that in the short term there’s going to be pressure on that considerable pressure on that on how you think that’s something for us to work through with our customer and frankly, the customer to work with the supply chain. But I think it’s a well-known issue.
Operator
Myles Walton, Wolfe Research.
Myles Walton
Thanks. Good morning. Phebe if I can follow up on Rob’s question there, the implied Q4 margin mid-6 percent range for Marine is there something in the third quarter of positively offsetting them to get to the low sevens or know if there’s a positive view so you move through it? And then looking to 25 is the mid-6 percent margin the road run route, but you can for now in our business.
Phebe Novakovic
So in this quarter, we had some strong performance out of [Masco on]. We had some good performance at Electric Boat, but that’s going to in this environment. They vary, of course by quarter. So we anticipate some more supply chain impacts in the fourth quarter. And as we project next year, and I’ll give you that clarity about in our regular order in January, but it is a project next year, the ability to continue to drive incremental margins in the short term as to how fast we can take our pace down at costs and improve our productivity. So we’ll work through all that with the shipyard and give you a sense of what we’re seeing and in margins, I’d say they are going to be kind of lumpy probably through next year and maybe even beyond.
Myles Walton
Okay. And then one clarification I know it’s super granular near term or apologize in advance, but in October to date, have you gotten more than one G700 out the door?
Phebe Novakovic
Yes, I think we have I think I’ve given you some pretty good clarity of what we expect for October. That pretty much on schedule, November and December I gave you that such clarity is what I’m trying to be as transparent with you all so that you can better understand where we anticipate. And as you well know, you can follow some of that with the publicly available data.
Operator
David Strauss, Barclays.
David Strauss
Thanks. Good morning. Phebe following up on the items you highlighted in terms of what’s impacting the G700 under deliveries. I guess just to clarify you his roles from an engine perspective, or they are the high end. Is that part of the issue? And then you on the interior side, this view, this is kind of a temporary issue was, or could it linger just given the much larger cow manure? And I would assume a lot more in the way influx of the on the interior, so on a on a go-forward basis.
Phebe Novakovic
Yes. So, we control the interiors. So, we are very comfortable in our projections on how we work both interior. So, I don’t I’m not worried or even concerned about our interiors engines on station have improved on. So that is definitely a benefit. And I tried to give you some colour around that particular issue in my remarks. But there’s improve.
David Strauss
Okay, and quick follow-up the [ROCm] motor announcement with a partnership with Lockheed in the quarter can you just give some color around that and how that might materialize over the next couple of years in terms of numbers, thanks.
Phebe Novakovic
Yes, and we’ll make some investment over the next couple of years and then I think that and I don’t have an exact start date of the tip of my tongue, but a lot of the number of motors will be driven by overall by the demand for the [rock] itself. But we’re pretty comfortable that this is well within our capability set, and we’ll work through that come with our partner.
Operator
Peter Arment, Braird.
Peter Arment
Good morning Phebe. Maybe just to focus on combat. You guys read really strong growth, you know, through the first three quarters of the year and your obviously your profit margins reflect a lot of really good execution. Just how are you thinking about just kind of, you know, the long-term visibility, you’re you know, how big of a business, you know, do you see in terms of the booking’s environment? You mentioned Middle East in Europe on maybe just describe how you see visibility or combat.
Phebe Novakovic
So, our book-to-bill and backlog support nice growth beyond unfortunate trend environment also continues to drive demand. And we see our pipeline is pretty robust, both domestically and outside the United States. How at least for the foreseeable future feature on we’ve seen nice steady growth in combat. And just what are your margins right away with good margin performance.
Peter Arment
Yes, my follow-up is on the margin front. I mean almost 14%, you know, for the first nine months, I mean, is there opportunities to further enhance margins I know the you know, some somewhat material mix was a factor, but you’ve got a lot of growth. A lot of interest income was actually this business can generate.
Phebe Novakovic
So historically, this when we’ve talked about this before on previous calls, over the years, this tends to be a 14.5% margin in business. Given some margin variability quarter to quarter, again, largely driven by mix, and I suspect that will continue in that range. Again, some margins for the better could we make long term incremental structural improvement in that? I don’t see that at the moment, but there’s always opportunity for will continue to pursue this. So, this is it has always been a very high operating leverage company. So, and groups the company, the three of them. So, I think we’ll continue to see both nice growth and good earnings expansion.
Operator
Ron Epstein, Bank of America.
Ron Epstein
[Good morning So if we look at the supergene ore from the shipyards broken, I know that’s been an issue. Then if we look to the loan assistance business has grown, do you worry about the sport tumor? And I guess broadly, we would hope the supply chain munitions business in the business and better grown in Marine Systems during better the supply chain and the shipyards.]
Phebe Novakovic
So I think it’s a function of stage on type of material that we use in combat systems versus the scope size and of the material and inputs we use both had some at some marine group and particularly submarines and Gulfstream mean Gulfstream supply chain got part abated by a lot of factors that have been well reported some. But I think it’s really a question of just the types of materials we use and the overall demand even outside of the combat, particularly vehicle business, that tends to be a more robust supply chain on component parts, given that there’s other uses for a lot of that material, the inputs for aerospace for Gulfstream and the Marine group for one-of-a-kind replicated anywhere else in an industry. So, I think that that explains why we had fewer issues that we will have some issues with supply on combat, but those are largely behind us and I think that tried to give you some colour on why that is.
Ron Epstein
[And then we move over to follow on certain routes or elements with others. Looking at the moment. So when we look to marine used to supply chain split, you the huge boom. And I think we all have a good understanding of Arrow where the inventory concerns, what in the room who issue, I mean, what Cunard component or are you just kind of broadening to understand the Bluebird Neurogen where our suppliers not support the Bears, whatever.]
Phebe Novakovic
While we have a number of smaller parts, certain remained they get produced by single source suppliers and often small ones that remain on a better than it remains initial. I think it’s a large component part. And I think the Navy is as reported on some of that, that tend to be highly complex costs have risen significantly, and you’ve got the green workforce and a lot of these areas. So those are while it’s a large group, I think that’s all I’m about the most power I’m going to give you on where some The challenges are because how many has been kind of explicit in some instances about that. And I think that’s just have a better place to be.
Operator
Ken Herbert, RBC Capital Markets.
Ken Herbert
Yes, good morning. Thanks for taking the question first three weeks on services within aerospace issue, you had nice growth here again, you should have [ReaShure that will flow] through sort of a much higher run rate to think about for the services business within this and maybe if you could talk about how do we would at this point, the businesses relative to your relative to the aircraft side within the segment?
Phebe Novakovic
So, we have long said that services are going to grow at a rate of that fleet expansion. And think about it this way, we gathered we will garner between $85 million in 19 plus percent of our Gulfstream service. And so, as we’ve seen expand service expands its impact on overall margin. This tends to be rather lumpy on, but it is in some instances and some quarters, it’s about even so it’s certainly not any large dilution impact and hasn’t been for some time. So, this is a nice, steady growth business.
Ken Herbert
Okay. And on the [requirement to use group,] I guess we’ve told deliveries are trending in this month and you’re confident you feel good about that risk getting retired or is there anything but sounds like there’s clearly still some caution into the bar chart for the year, but you feel good about that particular supplier and giving back on schedule.
Phebe Novakovic
Yes, they have. They’re working very cooperatively with us, but I think it is emblematic or at least descriptive of the fact that we don’t have all of these risk behind us and that were slipping airplanes into next year. So I’ve tried to give you my best estimate, both on cadence and timing on and off of what we see pet, um, for the remainder of this year. And then as I said, some of these airplanes will go into next year, but we’ve worked well with the supplier industry and the scope on. So that is not that is not any particular long-term issue, nor is it a complete anomaly on just in terms of the type of thing that happened here, so just fixing that and the regular order, it was a timing problem, but not a systemic one to think about it that way.
Operator
Doug Harned, Bernstein.
Doug Harned
Good morning. Thank you. Going back When you look at the supply chain issues there and to lose them in the programs, how do you think over the route Virginia-class in Colombia plus separately, how you prioritize work, or you are using this Susan’s to prioritize one over the other?
Phebe Novakovic
Well, that is now at how fast the national security decision dictated by the Navy. So, Columbia has across the entirety of the industrial base priority. And it has been since inception show. Yes. So, by definition, Virginia gets some just behind in terms of priority Columbia. And that has ramifications for Virginia is well understood by our customer, particularly in an environment in which some supply chain material is constrained at Columbia against style. First of a pick again, given its national security imperative, will be given the importance of these programs, not just remove the bird food overall the suites. Great.
Doug Harned
You know, I mean, you got the money in the supplemental for supporting those two buildings industrial base. But when you work with your customer, how is that helping or the subsequent steps that can be taken within the budget to help build this industrial-based seller?
Phebe Novakovic
So, the Navy and the Congress have recognized that there are portions of the industrial base that need help. And that’s what you that’s what we see. Some shipbuilding and submarine industrial base funding is intended to address both expanding the capacity and shoring up the capacity. There has been significant cost growth, as I noted earlier, across on manufacturing business, in particular and by extension into the into the submarine industrial base. So costs are increasing fact of life costs or economic realities and funding is going to have to go from adjust to these fundamental changes in inputs, and that will need to happen over time.
Operator
Gautam Khanna, TD Cowen.
Gautam Khanna
Yes, thank you. Good morning. Morning. So just to follow up on Marine, no, Velcade, you go to you in negotiations with the Navy on the Columbia Glo Fiber goes. I think it’s kind of 12 Virginia-class broke out of service. What sort of your expectation is for the timing of when those contracts good agreed to? And is there any cash or margin implications once those are assigned to cut to what’s in the yard? Now we keep talking about that.
Phebe Novakovic
our cash now Tom margin impact happens over time and begin to execute those programs. I don’t have a good sense of timing. I expect that the FY24 on ships that are not yet under contract at the next few months, but I don’t have a good sense of timing for some for the remainder of that. Negotiations on Block fixed contract on Block six are built to of Columbia. It’s going to be hard to get those contracts under those ships under contract, given that we’ve had some kind of genome cost and increases in input, frankly, throughout the economy. But as I noted earlier, manufacturing and keep the eye sight and those costs have increased for input. So we’re going to have to work that with our customer and Congress.
Gautam Khanna
Just as a follow up. I guess what I’m asking is there any expectation that there would be what we provided for, you know, higher labor inflation going, so that was experienced on boats that are already in production, has a part of that negotiation?
Phebe Novakovic
Well, a part of that negotiation on I wouldn’t link it necessarily those negotiations, but we are constantly in negotiations with our current with our customer on a whole on any number of contracting actions. And now there is no different were also I have entitlements in our contracts for which we will seek remedy. So there’s some there’s a lot of ongoing discussions with our customer about these costs, the fact of life cost increases and labor cost increases. And now some of that plus the remedy to which were entitled arms with a customer.
Operator
Gavin Parsons, UBS.
Gavin Parsons
Good morning, Phebe crucial builders to do so in hundreds of inventory this year and maybe some of the inventory again, mixture to help us with what the inventory.
Phebe Novakovic
A lot of inventory help me with what you mean by out of inventory. They are back at a rate of 715 in Victoria of 700 that are from some stage of production, but just picking them up there with you or I guess can you help us with the underlying production group? Yes. So I tried to be a path as explicit as I could be for the remainder of the year. Some of the airplane go into next year that will help next year. And then we’ll give you what does a lot of clarity around what next year looks like in our ordinary course, when you get will give you our guidance in January, right on the airplane is performing very well. But we still, as I’ve noted in our own frequently, we still got out of station work that needs to get behind us.
Gavin Parsons
Okay. I’ll throw one more from I don’t know. This is just an accounting question, but you can call out of the older that cost onto interiors component replacement on G700 how does the 600 to 700 basis point margin step-up remain intact?
Phebe Novakovic
Well, that will happen and I don’t have exact clarity on when those gross margin improvements will happen. But I think relatively soon and over the course of potentially the next year, we have to see some really nice margin expansion. We are seeing it in the fourth quarter right off the bat, and I can expect to see that margin expansion continue throughout next year and beyond.
Operator
Jason Gursky, Citi.
Jason Gursky
Hello there. Good morning, everybody. Phebe I was hoping if you could just step back for a minute and maybe talk a little bit about the things that you’re most excited about where you’re kind of spending the most amount of your time as it relates to technology investments in terms of the business development pipeline from for core technologies business in the across the defense businesses as a whole?
Phebe Novakovic
Yes. So I would say that we need to continue to capitalize on the come on the very strong growth profile we see going forward in the Marine group. We spend an awful lot of time on improving our own capability within our own shipyards. I think the technologies group in general is shown nice growth and they have positioned themselves in faster currency, then they’re highly competitive businesses. So we’re pretty excited about we see there. And then I think Combat Systems performance continues to be strong and how we then translate demand into revenue in the out years and continued strong operating performance we’ve had there’s sort of where we focus our time group. There’s a lot to build. And you know, there’s a lot to be excited about in terms of performance of the Company.
Jason Gursky
And then maybe this is, of course, when we get him involved as well. But just philosophically how you guys or Peru, are you all excuse me or approaching the balance sheet and the capital structure and leverage of just going to come the growth of the future of the company where you want to operate?
Phebe Novakovic
Yes. Well, obviously, we have a very strong balance sheet were recently upgraded in terms of our credit rating, and we have some debt repayments coming due that we expect to pay on schedule and will consistently look at where we stand. But we feel pretty good about where we stand right now.
Jason Gursky
Right. But I’m just sort of like where you want to keep your leverage under its terms of leverage there. Just kind of curious, are you how you’re thinking about?
Phebe Novakovic
Yes. I don’t think, you know, at this point in time, I think we’re continuing to work the growth environment that we’re in and determining in terms of where the cash is going to have come out for 2025, especially and I think it’s a matter of time in terms of taking a look at where we stand.
Nicole Shelton
So, operator, I think we have time for one more question.
Operator
Scott Deuschle, Deutsche Bank.
Scott Deuschle
Hey, good morning, Phebe, just to clarify your response to David’s question earlier, due to the certifications are getting this year on those highly customized interiors for G700, do those de-risk this as an item for from being a constraint next year?
Phebe Novakovic
Yes. I mean, these are the first ones out of the block on. So we don’t see that as a constraining out next year.
Scott Deuschle
Okay, great. This Combat Systems, how many products that are approved for export on the direct commercial sale basis? Then are you seeing much traction for DCF sales either in terms of the bookings you put up recently a combat or terms of orders that are in the pipeline.
Phebe Novakovic
Not adding United States, but out of our European business? Yes, those tend to be direct sales, and that’s been true for 25 years. And the demand for those products in Europe and even Eastern and Western Europe remains very strong.
Nicole Shelton
Thank you, everyone, for joining our call today. As a reminder, please refer to the General Dynamics website for the third quarter earnings release and highlights presentation. If you have additional questions I can be reached at 7038763152.
Operator
And this concludes today’s conference call. Thank you for your participation. You may now disconnect.
