Operator: Our next question comes from Cai von Rumohr with Cowen.
Cai von Rumohr: So your margin was up a little bit sequentially at Gulfstream and yet my understanding was you had some software warranty charges in the second and third quarter associated with the G500 and 600. So Were there any other — what were the reason the margins weren’t a bit better there in aerospace?
Phebe Novakovic: The margins are pretty darn good. We have performed what we had told you. And so we were pretty pleased with that. I would note that one of the headwinds is R&D. So the additional work that has been required from the airworthiness directive and the new FAA requirements as a result of the have driven increased R&D. And we’ll continue to see some of that and then that will begin to unwind. But I think those are very strong margins and better than we had anticipated in our guidance to you.
Cai von Rumohr: And Jason, the guide for Mission Systems margins is down over 200 bps from where you’ve been. Once things start to sort out, where do you see Mission Systems margins can go? Can they go back to where they were?
Jason Aiken: So I want to make sure I think you’re saying technologies as a whole because we don’t really give — or business unit specific margin guidance within the group. But given what you’re saying, I think if you look back to prior to the CSRA acquisition, when the IT services side of the business became, frankly, our largest business group and the lion’s share, the sort of two thirds, if you will, or more of the technologies group. We used to — the combined margin of those businesses used to be in the, call it, the low double digit range, it’s usually between 10% and 11% on a fairly consistent basis. Since we acquired CSRA, we’ve averaged over the past five years 9.8% margin for the group. So what we’re seeing right now is really just a shift in the moment where we’ve had GDIT come through that significant integration effort for the first couple of years followed immediately on the footsteps of that with the impacts of COVID, they’ve really embarked on a nice steady trajectory now of low single digit growth for several years now, and we expect to see that continue.
As Mission Systems in the moment is dealing with the supply chain issues that have been, I think, well addressed, their volume is down a bit. So what we’re seeing in terms of the group’s margin, aggregate margin, is really nothing more than a shift in the mix between the two. So that’s with the increased service side of the business and the lower volumes on the product and hardware side of the business. So as Mission Systems comes through this and gets back on track to a growth level, which we do expect to see happen once they come through these issues, you ought to see the margin on an aggregate basis tick back up. And by the way, that’s not — shouldn’t overlook the fact that GDIT on its own is continuing to improve and harvest its margins as it grows.
I think I said before, they had their highest margin as a business since we acquired CSRA and their highest earnings contribution to the company ever. So everything, I think, is headed in the right direction, just got to come through the supply chain issues at Mission Systems and that will help influence the mix, and we ought to see a trend back up toward the 10% level over time.
Operator: Our next question comes from Pete Skibitski with Alembic Global.
Pete Skibitski: Just following on to Ron’s question earlier on combat and that was set in the flat outlook for this year, but you talked about the international demand, and it seemed like Congress added quite a bit of money for Stryker and Abrams to the ’23 budget. So can you give us any sense of kind of the CAGR that you think is a reasonable expectation after 2023 when things begin to — or when the demand begins to actually convert for you?
Phebe Novakovic: So I think what we’re looking at now is low single digit growth. So if we see anything over time that accelerates that, we’ll certainly let you know that that’s our best planning in the moment in consultation with our customer.
Operator: Our next question comes from Sheila Kahyaoglu with Jefferies.
Sheila Kahyaoglu: Maybe overall on the defense portfolio as a whole, all three segments. When you think about it, you’re guiding the business flat on the top line perspective and EBIT as well. The budget is up 10 and you have some pretty good programs in there. How do you think about that delta and when it catches up to the budget and EBIT growth resumes?
Phebe Novakovic: So I think that’s more in ’24. One of the big issues there, as I said, is Virginia. But look, the way I look at the defense portfolio, we have an extremely strong backlog and now it’s just a question of executing, executing across that portfolio. So I’m not too worried about growth on the defense side at all nor on the aerospace side. There is one thing that I think we’re focused on, we should be focused on, and I neglected to mention this earlier. But with respect to execution, one of the things that we can do on Virginia and frankly at , in general, is to continue to improve our operating performance. That provides us more ability to cover some of the perturbations that are coming out of the supply chain. So I really think about all of this as execution. Growth comes when it comes. We’ve got the backlog to support it. And so I like the position we’re in, frankly.
Sheila Kahyaoglu: And then if I could ask one more. I don’t know if you provided it. Can you give us an update on the G700, G800 certification processes?
Phebe Novakovic: So we still expect the G700 to convert — get certified this summer. And the G800 will be about six months after that, so we don’t see any change in that. And the relationship has been going very well with the FAA. So we are continuing to look forward to finishing all the certification processes. Now that — I will tell you that is outside our complete control, a lot of this is FAA resources and their ability to focus, given all the other demands that they have on them, but so far so good.
Operator: Our next question comes from Ken Herbert with RBC.
Phebe Novakovic: I guess, we lost him.
Ken Herbert: Sorry about that. I was muted. I wanted to first ask, within Aerospace, really good growth in the services business. What’s the outlook for services growth in ’23 as part of the aerospace guide? And can you talk a little bit about investments that you’re making in that business?
Phebe Novakovic: We expect low single digit growth in our service side. And we continue to invest prudently when we see the need for more service capacity. But at the moment, we’re pretty — nothing really outstanding in that regard. You’ve got the capacity to accommodate what we see as reasonable steady growth.
