Operator: We’ll go next to Davis Strauss at Barclays.
Davis Strauss: Phoebe, any thoughts on how the budget process for ’24 might actually play out here given that we’re quickly approaching, the potential for a sequester?
Phebe Novakovic: So we have factored in all known funding into our plan and should we see an extensive and continuing resolution, we’ll have to see what impact that has on our faster transaction businesses because every CR plays out a bit differently and to the extent that we have a sequester then we have factored some of that, but apparently, clearly you can’t do all of it into your plan. So we’ll adjust accordingly, but we are hopeful that the Congress is able to pass a critical defense bill, particularly in these times given the threat environment.
Davis Strauss: Okay. Jason, I wanted to ask about free cash flow and capital deployment. Maybe help with some of the big movie pieces, obviously inventory was a big drag, but advances helped a lot. Your cash taxes have been really high. How do those all factor in, in ’24 and I assume your guidance includes nothing as usual for capital deployment. How should we think about that given you have very little in maturities this year? Thanks.
Jason Aiken: Yeah, so when you think about free cash flow, we are anticipating to continue in the 100% conversion range in ’24 and beyond. Obviously, we outperformed that a bit in 2023, but that doesn’t affect what we expect in ’24. So, the good news is a lot of the larger scale moving parts around cash flow are starting to settle down a little bit. We’ve experienced some big headwinds and then some corresponding tailwinds over the past several years, but right now if you look ahead, I think you can expect for the aerospace group a fairly steady conversion at or slightly above 100% conversion. When you think about it, we got a pretty big tailwind when they were building the significant backlog over the past few years and all the deposits were coming in.
So that more than offset any effective inventory build. So as you transition into a period where you’re starting to deliver off that inventory, but then you assume a steady one-to-one book-to-bill, you should be in a pretty regular burn rate at 100% conversion plus or minus for that business. Combat systems, on the other hand, should continue to see tailwinds as they work through some of the receivables and work in process on the international programs that we’ve made some great progress on in recent years. So that’ll continue for a couple of years. The technologies group is a steady provider, well above 100% conversion and the marine systems group, as we noted, is still finishing up some of the large capital projects. We’re coming through that now and we’ll see what the future holds as Phebe alluded to in terms of Navy investment.
But when you kind of net all those together, we’re right about 100% for the coming year. If you look at capital deployment, as you noted, there’s not a lot in terms of commitment. We’ve got $500 million in notes that mature out in November of this year. So we’ve got plenty of time to kind of see how things play out and decide what we want to do with that maturity. No rush on that decision and we’ll look at all options as we always have. I think we’ve got great opportunity for stepped up share repurchases as more, I should say, as uncertainty sort of moves out of the environment. We looked at the last half of last year, the last quarter of last year, and the significant threat of a government shutdown sort of hung over the environment and that factors into our thinking as we think about how we preserve cash and deploy capital.
So if we can get past that in March, then I think it provides a lot of optionality for us as we look ahead on the capital deployment front.
Phebe Novakovic: If you think about it, the demand signals we see and our expected growth make share repurchases increasingly compelling. Hey, one thing that Jason talked about, just mentioned tangentially, and I want to focus a little bit on and just give you guys some perspective, when we talk about a one-to-one book-to-bill in our businesses, that’s really for planning purposes. It’s not a forecast. So just keep that in mind.
Operator: We’ll move next to Sheila Kahyaoglu at Jefferies.
Sheila Kahyaoglu: Good morning, Phebe, Jason. Thank you for the time. Phebe, great color on Gulfstream. You gave some numbers around the loss of revenues and profit that slipped into ’24 from the G700, which would imply, north of 20% margins for the G700, and given you have quite a few built up already, any color you could give on profit profile of the G700 relative to maybe the G650 and the G500 and 600?
Phebe Novakovic: Hey, can you repeat the last part of your question? It was kind of coming in.
Sheila Kahyaoglu: Sure, sorry. It was more just the profit profile of the G700 relative to G650 and the G500 and G600 as it entered service, just because you gave the revenue.
Phebe Novakovic: Yeah, the G700 comes in at accretive margins, but as you all know, and many of you are quite expert in this, we’ve talked about over the years, including on this call, the margin performance at Gulfstream is driven by a host of issues and as I noted in my remarks, mix, pricing, out of station work, all impacted. So I think, again, as I mentioned earlier, the way to think about our plan is a really balanced plan. Not quite the question you asked, but I’d stick with that and I’d think about it that way. But these new airplanes are coming in at very nice margins.
