Q3 2019 Earnings Call
Welcome to the third quarter 2019, Huntington English industries Inc. earnings Conference call.
First time, all participants are in listen only mode. After the speakers presentation, there will be a question and answer session.
Good question. During this session you will need a press star one on your telephone please be advised to today's conference is being recorded if you require any further since at least for star zero I like your hand, the conference over to your Speaker today, Dwayne Blake Vice President Investor Relations. Please go ahead Sir.
Thank you Michelle good morning, and welcome to the high singles Industries third quarter 2019 earnings conference call with US today on like that as President and Chief Executive Officer, and Chris Casner, Executive Vice President business management, and Chief Financial Officer.
Reminder, statements made on todays call that are not historical facts are considered forward looking statements that are made pursuant to the safe Harbor provisions Federal Securities law actual results may differ.
Please refer to a FCC filings for a description of some of the factors that may cause actual results.
Eric materially from anticipated.
Also in their remarks today I can Chris will refer to certain non-GAAP measures reconciliations of these metrics for the comparable GAAP measures are included in the appendix up by earnings presentation is posted on our website.
We plan to address the poster presentation slide during the call some of them at all college. Please access our website at Huntington Ingalls Dot com.
Called the Investor Relations, we view the presentation as well as army two weeks with that I'll turn the call, we'll do our president and CEO , Mike Petters like.
Thanks, Larry Good morning, everyone and thanks for joining us on the call.
Let me share some highlights from the quarter starting on slide three of the presentation sales of $2.2 billion for the quarter were approximately 6.5% hire the 2018 and diluted EPS was $3.74 New contract awards during the quarter were approximately $2 billion, resulting in backlog of up.
Approximately $39 billion at the end of the quarter of which 70.8 billion is funded.
Turning to capital deployment for a moment earlier this week, we announced that our board of directors approved a 20% increase in our quarterly dividend from 86 cents per share to a dollar three per share. We also increased our share repurchase program from the most recent authority up $2.2 billion to $3.2 billion extended.
Tom from October 2022 to October 2024.
These decisions demonstrate continued confidence in the free cash flow generation of the business that supports our path to 2020 commitment to return substantially all free cash flow to our shareholders.
Regarding activities in Washington, We are encouraged at the house and Senate, our conferencing, a national defense authorization Bill and are hopeful that a timely conference agreement will be produced for fiscal year 2020.
We're very pleased with strong support for ship building by the Senate Appropriations Committee, which included funding for surface combatant submarines have biggest warships aircraft carriers and autonomous platforms.
In particular acceleration of both LPD 31, and L.A.J. nine to fiscal year 2020, well best leverage the hot production lines and supply chains for amphibious warships, an incremental funding will permit the pentagon to efficiently balance investment for these ships across the future years defense plant.
While the government is currently operating at our continuing resolution through late November we continue to urge the Congress to pass final appropriations measures as quickly as possible.
Now, let me share a few business segment highlights from the quarter.
Goals the team achieved completion of external structural work on NFC nine stone in July and the ship was launched in early October .
Cost performance remains in line with our expectations and the ship is anticipated to be delivered late next year.
DDG 119, Delbert de Black continues to recover from the impact of the incident earlier this year and is planned to be delivered in the first half of next year.
LPD 28, Fort Lauderdale performance remains favorable in the next significant milestone for this ship as launch plan for the first half of next year.
And on L.A.J. seven Tripoli the team recently completed acceptance trials and is on track for delivery in late 2019 or early 2020.
At Newport News CVN 73, U.S., George Washington was Undocked at the end of September and moved to an outfitting birth, we're final outfitting and testing activities will be perform.
The refueling and complex overhaul is now more than 60% complete and the ship is expected to be redelivered to the Navy in late 2021.
CVN 79 Kennedy is on track for large starting with flooding the dry dock and flooding the ship last week. The team is preparing the ship for her christening ceremony on December 7th and planning for exit from the dry dock by the end of the year. We ship is approximately 67% complete and performance remains in line with our expectations.
On a submarine program SSN 791, Delaware delivered in late October and SSN 794, Montana, our first blocked for delivery remains on track to achieve the pressure whole complete milestone next month with delivery plan for the first half of 2021.
And finally, the block five contract is on track for award by the end of this year.
This is an exciting and extremely productive time for our ship building teams.
Over the past month, or so we have undock CVN 73, USS George Washington deliberate assets in 70, 91, Delaware completed acceptance trials on L.A.J. seven Tripoli started the process for launch of CVN 79, Kennedy and completed sea trials for the post shakedown availability and.
Redelivered U.S. as Gerald our four to the Navy all of these activities demonstrate an operating rhythm that supports achieving shipbuilding operating margins of 9% to 10% in 2020.
And regarding the Ford completion of Sea trials is another step toward completing the most complex Navy ship ever produced the manufacturing of this ship incorporated numerous new technologies and systems, including the advanced weapons elevators and these technologies performed well on the recent sea trials. This is both exciting Andrew.
Rewarding.
I have spoken directly with both Secretary Spencer and assistant Secretary Grps and we are aligned on the plan to get to ship ready for deployment as soon as possible.
We have a great team that includes new per new ship building, the Navy and other industry experts and I'm confident that our collective efforts on affordable bring superior capability to the navy and to our nation for decades to come.
And our technical solutions segment, the team performed well across the portfolio focusing on execution of existing contracts, while capturing new business awards that helps set the stage for growth.
For example.
Yes continued to provide critical support to the department of energy through multiple contracts at the Savannah River, Los Alamos and Nevada nuclear sites and is pursuing additional opportunities for growth in India, we and nuclear markets.
Along with their Boeing teammate Ts began to ramp up production XL you you V. The Navy's flagship you the program that has significant potential for long term growth.
Aside from XL you VTS is also pursuing several other critical new programs in the unmanned undersea an unmanned surface vehicle markets.
And he has also recently won a large number one a number of large multiple award contracts that provide new opportunities for growth, including a defense intelligence agency contract to provide analytic and operational support services to maintain global situational awareness of threats to our nation and our allies.
Our NAV war contract to provide a float C is our installation services and a contract to provide network architecture and cyber security services to the U.S. Air Force.
Overall technical solutions performance in the quarter was solid and a team range remains positioned to achieve low single digit topline growth and 5% to 7% margin in 2020.
In summary, I am encouraged by the Senate appropriation committees recognition of the need to leverage the high production lines and supply chain for amphibious warship and I'm very pleased with the shipbuilding results to create a path to achieve to achieving 9% to 10% shipbuilding margin in 2020 I.
I'm also very pleased with the progress being made on multiple fronts by our technical solutions segments. We are taking the right steps to position the company for the future and our team is laser focused on efficiently executing our significant backlog in order to drive long term sustainable value creation for our shareholders, our customers and our employees.
Yes.
And now I will turn the call over to Chris Casner for some remarks on the financials Chris.
Thanks, Mike and good morning, as I review, our third quarter financial results you may follow along with a slide presentation. We posted this morning on our website.
Beginning with our consolidated results on slide four the presentation, our third quarter revenues of 2.2 billion increased 6.5% compared to the same period last year, primarily due to growth in our technical solutions Division due primarily to the acquisitions at Gtwoe Infocomm.
Higher volumes and aircraft chair and submarine programs at Newport News.
Operating income in the quarter of 214 million decreased 76 million or 26.2% from third quarter 2018, and operating margin of 9.6% decreased 428 basis points.
These decreases were primarily driven by a lower operating fast Cas adjustment compared to the prior year as well as lower segment operating income.
Merely due to a $43 million benefit at Newport news related to workers compensation in the third quarter of 2018.
Partially offset by contract changes in the current period for submarines fleet support services.
Turning to slide five of the presentation cash from operations was 363 million in the quarter and net capital expenditures were 113 million or 5.1% of revenues compared to cash used in operations of 93 million or 102 million of net capital expenditures in the third quarter of 2018.
Through the third quarter net capital expenditures totaled 278 million.
We expect the capital expenditures for the full year will be approximately 5% of sales.
During the quarter, we contributed 25 million in our pension and postretirement benefit plans of wage 16 million, where discretionary contributions to our qualified plans.
We also repurchased approximately 322000 shares at a cost of 68 million and pay dividends of 86 cents per share or 35 million, bringing our quarter end cash balance to 32 million.
At quarter end, we had 264 million outstanding on our revolving credit facility.
Moving on to slide six of the presentation Ingles revenues in the quarter of 647 million decreased 47 million from the same period last year due to lower volumes on the NFC Anneli Jay programs.
It was operating income of 61 million and margin of 9.4% in the quarter were down from third quarter of 2018, mainly due to lower risk retirement on the NSC programs.
Turning to slide seven of the presentation Newport News revenues of 1.3 billion in the quarter increased 7.2% from the same period last year, mostly due to higher volumes in aircraft carrier and submarine construction.
Newport News operating income of 109 million end margin of 8.6% in the quarter were down year over year, primarily due to a workers compensation benefit of 43 million in the same period last year.
Now the technical solutions on slide eight of the presentation.
Identical solutions revenues, a 347 million in the quarter increased 41.6% from the same period last year, mainly due to the acquisitions at Gtwoe and fulcrum, which collectively contributed 59 million of revenue in the quarter as well as growth in fleet support and oil and gas services revenues.
Technical solutions operating income of 21 million in the quarter compares to operating income of 16 million in the third quarter of 2018, primarily due to improved performance on nuclear and environmental contracts.
Turning to slide nine we've updated our 2019 and 2020 pension and postretirement benefits outlook.
Our 2019 projected Cas expense has declined by 20 million from 298 million to 278 million with no change to our projected Fas expense.
This decrease is driven primarily by an update of actuarial estimates, resulting from updated demographic and economic assumptions.
Projected 2020 total Cas expense has increased by 169 million from our initial outlook to 445 million, primarily due to lower discount rates in 2019.
Partially offset by an anticipated favorable return on assets in 2019.
Consequently, the 2020 fast Cath adjustment has also increased from the prior outlook and is now projected to be 276 million for the year.
Additionally, our expected 2020 cash contributions have increased by 79 million from our initial outlet to 252 million of which 216 million is discretionary contributions to our qualified plans.
The increase in the cash contribution is primarily due to the lower discount rates.
The 2020 projections provided on slide nine are based on data as of August Montana, including a fast discount rate of 3.23%, which has fallen by 111 basis points since our update in February and assumes 2019 asset returns of approximately 14%.
Please remember the pension related numbers are subject to year end performance and measurement criteria. We will provide updated pension estimates for 2020 and 2021 on our fourth quarter earnings call in February .
Finally, we continue to expect that our shipbuilding business will achieve approximately 8% return on sales for the full year and remain confident that margins will ramp to 9% to 10% in 2020.
That concludes my remarks, I'll turn the call back over to Dwayne for Q1 day. Thanks, Chris as reminder to everyone on the call. Please limit yourself to one initial question and one follow up so we can get as many people through the Q.
Sure ill turn it over to you to mass acuity.
Thank you and as a reminder to ask a question you just need to press star one on your telephone to withdraw your question. Please press the pound.
Our first question comes from the line of Carter Copeland with Melius Research. Your line is open. Please go ahead.
Hey, good morning, gentlemen morning Morningstar.
Mike I wondered if you could talk a little bit about BCS block five and the progress there moving towards the contract obviously the looks like the the cost per boat is a little bit higher than originally planned and I think that impacted the quantities, but I wondered if you might give us some color around.
What what that means for the the risk profile there versus what you've kind of talked about in the past any color there would be helpful. Thanks.
Yeah I think.
Good question.
For we're at the point now in the process, where we really need to go to contract and.
We we've been working very hard with our partners that a general dynamics and ER and with the Navy to fashion a contract that makes sense.
The authorization that's out there the appropriation that's out there are and where we see the challenges in the business are going to be.
And so I think we're on track for that and as we said, we're going to where we're heading to get to a contract by the end of the year.
My my personal view is that I think the authorizers have been pretty clear that.
The more submarines no matter, how many submarines we have we're going to want more and I think that the appropriators have tried to balance that with the other priorities that they have and as a result in our contract negotiations with the Navy. We've we've worked hard to make sure that we provide a good value for the contract and.
I think that we're going to create a contract here that's going to have.
That's going to be able to address all of that so.
Great and then as a a a follow up Chris I wondered if you might just give us the seeds for the quarter.
Yes sure.
Since our the Cume adjustments for the quarter gross favorable were 64 gross unfavorable were 20. So the net of 44 of that net 35% of that was Ingles 45 was Newport news and Ts was 20%.
Awesome. Thank you Sir.
Sure.
Thank you and our next question comes from the line of Doug.
Bernstein. Your line is open. Please go ahead.
Hi, there its Cai sites this study into Doug.
So Mike in the second quarter, you said you'd also business leaders to look again to execution.
Risk management, if there's any opportunities to improve on that.
Just wanted what do they found what are the challenge is where the opportunities I think previously you've talked about eliminating hiccups execution, but.
What are the most sort of structural things that you can look.
Well. Thank you. That's a good question, we we did sort of go back and do a deep dive into this and try to understand why parts of the business.
There there are pockets that were handling execution really well in there were pockets that weren't and we had some inconsistency there and so what we're doing at this point is we're we're expanding a increase and basically developing a comprehensive operating system.
That would be the standard protocol for all of the programs that we have in the company.
And.
You know, it's a it's kind of interesting to think that you can have it you can have a structure, but then when it gets all the way the waterfront it starts to move around a little bit and so we're going to put some more disciplined starch into that and.
You know we're on track for it.
That's great and then just quick follow up.
The technical solutions.
The business is that they appear to be very diverse. So how do you feel those together and how do you manage that across a range of customers and.
This offerings.
Well, our general operating model and in the organization is that we delegate as much authority to the divisions as we as we can we want to make sure that the authority and accountability is distributed so that when the divisions are facing their customer they have the they have the authority.
To do to make the decisions they need to make to support that customer.
But with that goes the accountability to get it right.
That's the case in a in shipbuilding and that's the case in Senechal solutions to.
Regarding the operating system kind of.
In general the you can imagine this becomes a here all appear all the parameters that we need to.
Consider and and include in our opera in how we operate in support of customer and then detailing in details with a customer there would be okay that makes sense for this one that when we probably need to go do you need to go deeper on here's one that doesn't speak very well to this customer and so we have to work our way through that.
Actually the TS guys do pretty well with that right now as you can see and and so I don't think it's going to be that hard to bring that create an overarching structure for.
That's great thanks, very much but.
Thank you and our next question comes from the line of.
Your line is open. Please go ahead.
Thanks, Good morning, Hey, Mike just wondered if you could talk about some of the the post delivery liabilities that still exist on the Ford and.
And maybe at a higher level talk about warranties versus guarantees for ship building and in particular, how if at all that's changing going forward with maybe to the forget being one of the experiments.
Yes so.
That's a really complex set of questions air miles to the.
I think that most of the news has been recently around the forward and how that pertains.
There comes a point in time in these in these ships.
Where it becomes important for the navy to begin to operate I mean, if you think of the aircraft carrier is is a city a 5000 people with a with all of the functions that go on in the city, including its own airport.
There comes a point in time, where the city has to operate even if a even if there are things are still need to be done and so the so that's how you get to a delivery of the ship to let the Navy go operated in the course of that their stuff that comes up that we need to go back and work on our contract arrangements allow us to engage with.
That and pursue it that the the normal track for the delivery of a ship is the ship will deliver the Navy will go operator for a while it will come back to the shipyard for oppose shakedown availability.
In the case of a lead ship, especially the case of the Ford where you are.
Developing you a lead ship is not it's not a an incremental change in technology, it's usually three or four generations of change in technology and so as you try to accommodate and develop those new technologies and move them into a production environment.
You have to be agile and flexible on how you're going to balanced that with the need for the navy to operate ship. So so that's the way that we have proceeded across the whole range of technologies that we have out there.
Some of the some of that work will continue under the base construction contracts some of that work. If it's a complete will be then covered in a case of a warranty and some of that becomes new scope and becomes a contract change and it all just depends on the maturity of the technology and the and the item network.
Talking about.
I want to miles as Chris I Wouldnt comment specifically on the frigate because it is it is competitive but we generally don't see.
A material amount of post delivery liabilities.
On the ships at delivery there are obviously, thanks it has to be worked off a wee.
Generally always.
Include those liabilities.
Within the season within our booking rates in our contracts.
Great that makes sense and Chris maybe well have you the the cash flow walk into next year into 2020, you know, obviously I'm not asking for cash flow guidance, but the capex that trends towards the 4% range into next year and it sounds like the net effect of pension is a technically a neutral year on year those those two moving parts right.
Yeah, no thanks for that and thanks for not asking for guidance on 2020, but yes. The last high year related to capital is next year and I gave an update related to pension for 2020 as well because it was a pretty pretty significant move there in our and our updated estimate that you've got it about right and will provide an.
Update in all of those factors on our yearend call.
Okay. Thanks sure.
Thank you and our next question comes from the line of Jon Raviv.
Citi. Your line is open. Please go ahead.
Hi, Thank you Hey, Chris just following up on that cash question really include the other you're also.
This is still fair to think about 29 team being modestly above last year orders pension going to impact that can you just clarify and 2020 to 20 twentys the how you're on capital. So we should not expect Capex release next year. Thank you.
Yes, so still north in 2019 of where we finished last year, which was 512 that being said there is always plus or minus $50 million to $100 million related working capital that can show up here in the last week.
And what was the 2020 question again.
No capital yet so capital it's the 1.8 to 1.9 billion for the five years. So it's still a high level of capital in 2020, then we get back down to 2.5% of sales and 20 2021.
Okay got you. Thank you and then and then just as a follow up.
Perspective on running pretty tight cash balances.
For the past few quarters, you saw some big moves in the revolver I know working capital can be a big swing item, what's being held up and when should we expect some releases how much of this is block five and when we get that release could we see some more aggressive repurchasing since repo is down year on year and older shows are flat year on year, because the carrier feel fine here, because it's sort of overall question on.
Cash balance and what it takes to relieve some of that yeah. So we're not not overly concerned with our cash box with adequate capacity.
Within our commercial paper program. So we're really comfortable where we are.
From a cash standpoint, we have line of sight on all of the invoices.
There were managing to get to year end so.
That slightly north of last year, we're pretty comfortable with of course working capital can move it.
And little bit around a little bit relative to share buyback we are actually.
Comfortable at the commitment we made in 15.
Returned substantial our free cash flow back to shareholders, we increased our dividend at least 10% annually.
And and executed a share buyback program that has us over 120, 120% return. So we're comfortable with that strategy, we're going to continue it.
And we'll just move on from here.
Thank you.
Sure.
Thank you and our next question comes from the line of bottoms.
Cowen and company. Your line is open. Please go ahead.
Good morning, Mike Chris This is Jeff Molinari on forgotten. Thanks.
Morning.
I'd like just ask about Virginia class performance.
Can you talk a little bit about how you're performing versus schedule and cost and kind of what challenges you've seen on the program or.
Where are you kind of on the learning curve.
Any color to helpful. Thanks, guys.
Yeah. That's a good question lot of complexity in that question. Some of the challenges that have come up with the Virginia class was where we expanded the production rate from a one submarine a year to two submarines year that required a requires workforce enhancement in development.
We fought through some challenges regarding sequester on the front end of that program, which.
Handicapped I think the program some we had to.
You may recall, we had.
We had to go through some personnel reductions at Newport News before we had to start back up into the program.
We also were coming out of the block it took a long time to negotiate the contract and we're probably a little little slow to buy material, which that also affected the schedule.
But what's happening in the program today, that's kind of the coming out of the block the star gun went off and I'm not sure we were at sprint speed at the very beginning.
But where we are today is were actually ramping right into that production rate.
We're seeing tremendous learning in our teams. The teams are mature we've invested in facilities to to expand their capacity and we reflected that as we've gone to negotiate the block five contracts. So.
I'm pretty comfortable with where we are on the submarine program. Today, we we went through a little bit of a tough period, there with all of those moving parts, but I think we're on the that's behind US at this point and now it's just a matter of going out and prosecuting the learning curves and a and continuing to prove on that every single day.
Thanks, Thanks for that that's very helpful to here I appreciate that.
One other quick follow up.
If you don't mind can can you walk through just switching gears will that can you walk through some kind of key upcoming risk retirement milestones in Q4, and I guess early 2020 ending on the horizon. Thanks.
For the previous milestones we provided.
In Q2.
For 2019 are all on schedule, we expect those to happen.
Over the balance of the year and will provide an update after 2020 on our year end call.
Thank you and our next question comes on line of George Shapiro with Shapiro Research. Your line is open. Please go ahead.
Oh, yes.
One for you Chris was the contract adjustment and Newport News for the US Los Angeles class is that onetime or is that part of the EA series and roughly was the magnitude maybe 20 million.
I won't comment specifically wasn't material enough to comment on in the quarter, but it was a helena.
In Q in Q3.
No, but I mean, you put in in the release I figured it must be something substantial saying it partially offset the workers comp benefit from last year.
What was enough to mentioned, but it wasn't enough to mentioned the value George.
We did adjust CAC for it.
And it will end up going forward basis. The obviously the booking rate would be better on that on that program.
Okay and then one for you Mike just a follow up on block five or so the navy's implying that they're only going to have the nine ships rather than 11 or so if you just go through I mean, it's cost I assume evidently and I know you talked about a little bit earlier in the call, but I don't think you touched on it spicier.
Typically.
Well, we were still working our way through getting that contract. So I think I want to.
Talk less about the specifics of that contract, we expect that to be done by the end of this year.
And the and the shape of that contract I think will be a will be a good balance for all of the folks that are.
Interested in involved in it.
I think that the most important thing from my standpoint is that the the early on challenges in block four we think are really behind us and we're moving ahead and that that sets up block five very well for us.
Okay. Thanks, very much you bet.
Thank you and our next question comes from the line.
Your line is open. Please go ahead.
Hey, good morning, I, just wanted to follow up a couple of carrier carrier questions guys will start with Chris.
Just on the risk retirements that you just alluded to can can you just give us a sense of if you fully reset the risk on 79, when you float the ship here in the second half.
All the potential.
The upside there happened in Q4 to some of that slip into next year.
And then I've a follow up from Mike.
That's good question, Rob I think.
I think it youre going to evaluate the risk every quarter, obviously and and as you get to launch you're going to evaluate some risk, but they're going to.
I have a lot of risk in front of them. So.
There are risk retirement milestones on 79 in 2020 as well related to the test program. So it's a Q4 issue and it's a next year issue.
Majority Q4.
I would say, there's more risk in 2020 than in 2019.
Okay, and then Mike on the 70, a on the Ford.
And with regard to shock trials.
Where do we stand on this and if there's a price if it fails a shock trial, how do you frame the potential implications for the other Ford class ships.
Well the shock Charles still part of the part of the cycle between between where we are today and where the ship would go to.
Its initial full scale deployment the.
You know the question you've answered you've asked about what happens there's there's a whole lot of data taken during a shock trial that has to be analyzed.
It's a you know it's almost you have just kind of say what kind of assumptions do you want to make I mean, it's not it's not really going to be a case of the ship passed or failed. The shock trials its really going to be on a framed by frame component by component how did the ship react to the shot and then is that okay or is there something that we're we're gonna be required to do to.
Two you know to make it better.
And that's part of the that's part of the process we've been through these before.
And and there's a pretty well understood process for getting the ship ready for the trial.
Executing the trial and then analyzing the data and recovering from the trial and getting onto deployment.
I would just point out that typically the trial is not done on the lead ship. The trial is done on the second or third ship in the class to allow the maturity to go into place.
So this is unique but that's okay, we will whatever whatever path. The navy wants to go down we're we're happy to being a partner with them and and assist them along that path.
If you do have to do one on the lead ship again. It sounds like you then might be making more changes than you normally would have to if you did in on the second chip.
Yeah, I don't I don't know how to handicap that quite frankly, you know that the changeover change the changeover change from the lead shifted the follow on ships are not usually in the whole mechanical electrical places and they're going to be more in the.
Components system places and so I I don't know I don't know how to really kind of broad brush that one.
Okay, Alright, well, thanks, you bet.
Thank you and your next question comes from the line.
Yes.
Your line is open. Please go ahead.
Good morning, guys.
Hey, Mike There was some news in the trade press that there's I think six carriers dock that Norfolk right now I don't really know the reasoning behind it but.
Maybe I can give us a sense of the carrier maintenance work that could result from that and maybe the outlook for per ship maintenance in general.
Well I I, let me start at the second one first.
The overall outlook for shipped maintenance is that there's more maintenance to be done then there is really capacity right now in the system.
And so the secretary the assistant Secretary the CNO the industry had been working hard to try to figure out how do you get more readiness per dollar because maintenance translates into readiness in terms of language. How do you get more maintenance, how do you get more readiness per dollar.
You know in the you know in the next period of time and there's been some creativity brought to maybe we contract a little bit differently.
Maybe we bundle contracts, maybe we do more planning yeah lots of those kinds of ideas that are being talked around it but you know at a working level that frankly are coming from the secretaries push for let's get this right.
And to the Navy's credit they've gone out and they looked at other industries that have large fleets and they asked them how do they do it so and we're deeply involved in that discussion with the navy on how can we support that.
Relative to the carriers are I think the carriers are part of that discussion and you know in a couple of those cases, we are assisting.
In helping get the navy, helping the navy through this its little bit of a crunch to get a shifts in a place where they can deploy we were worst ready to help them in any way we can.
Okay I appreciate it just one quick follow up on the CR I guess I think of Tech services as kind of your short cycle business and you were in November . It is tech services kind of feeling that see our at all right now in Q4 and.
How do you think about the impact overall H.I. if it if it goes into February or so.
Yeah, So we're not seeing anything yet if it moves into.
Q2 next year it could become an issue, but we're not we're not seeing any impact as of yet.
Okay. Thanks, guys sure.
Thank you and our next question comes from the liner David Strauss with Barclays. Your line is open. Please go ahead.
Thanks, Good morning, good morning.
I wanted to ask about the the 8% shipbuilding margin guidance for 2019, if I do the math there it looks like you're assuming relatively flat sequentially Q4 versus what you just put up in Q3.
Can you just touch on that it would seem like you've got more opportunity from a milestone perspective, given kind of what came through in October and so what's out there to potentially do better than that.
David This is Chris and we look at everything out there, 8% still makes a lot to a sense to us that being said we'll.
Well assess all the milestones will assess all the AC in Q4.
And.
Adjust accordingly, but we're still comfortable that 8%.
Okay, and Mike did I hear on on Montana did that did that slipped versus what you had said previously I thought we were looking at 2020 on that but I think on your prepared remarks, you said first half of 2021 now.
Yes, yeah yeah.
Okay. So did slip.
Yes, that's right I mean, we've got a pressure whole complete a this quarter.
And then it.
Mike indicated it it will slip.
Okay.
And then last one for me I think Thats fair since you talked about before Chris the.
You had said 2021, we can think about free cash flow pretty close to 100% conversion is that.
That's still or is that still a good place to think about I guess, particularly now looking at what what CASM lease during 2020 I know, we're not talking about 2021 here, but just.
Your prior comment on 21 free cash flow commercial.
I think that's fair, David I think Thats, a good way to think about it all the factors that has been somewhat.
Nonrecurring in nature are winding down here with capital and the net pension.
Oh slowing down a little bit and becoming normalize that optimal and and stabilizing working capital you would think.
That a 1.0 cash conversion is what we should what we should achieve that being said you know into last year 100, 150 million received in the last week, which was great for everyone.
But it was a it was an unexpected benefited 18 that now that we then.
Crawling out of the 19 over the last last three quarters to achieve good cash the cash or this year.
Okay. Thanks, guys.
Thank you and our next question comes from the line of Josh Sullivan with Seaport Global Your line is open. Please go ahead.
Hi, Good morning morning morning.
What his thoughts on the upcoming force structure assessment at this point potentially looking a little more distributed architecture you see opportunities. There just wondering what are some the puts and takes your thinking about.
Wow, you know I.
There was a four structure assessment on four years ago that we could see the we could actually see ahead of that assessment, we could see that operating tempo of the navy was higher than the.
Structure that the Navy had to support it and we anticipated that there would be some expansion. We're now at a place where there've been a lot of new ships put under contract.
And I think that the opportunity now is.
As were building up this capacity in the industry.
Do we have the opportunity kind of everything through the where can we working where can we create new new future capability.
And [noise] I know that I know that maybe leadership has been thinking really hard about that I think them. The Marine Corps has been thinking really hard about that weren't <unk>. We're engaged in those discussions and we stand by to to assist in any way that we can in ways that makes sense I think there is a.
There is a very strong recognition in the Navy that you just can't go and and make a hard left turn or hard right turn because the navy is so dependent upon its industry for its capacity and I think maybe leadership has a very mature understanding of that and so.
So we think that there the.
You know sitting here today with a with a record backlog of production for the next few years. It is the time for us to think about what's the next phase of shipbuilding look like.
What do those what are those ships going to look like what are the amphibs going to look like what are the carriers looked like and a and I think thats going to be a very a very positive discussion for the nation and I think the industry at least for HR ice part we stand ready to help go make that happen.
Got it I appreciate that.
And then just with regard to some of the automation efforts, you're standing up the Newport yard can you walk us through some of the milestones.
See that benefit rolling in going forward.
Well, we're using them now this this is not a oh role than implementation. We're using these products on CVN CVN 80, now and we're very.
Pleased with.
How there how they're being utilized in the results were seeing a that being said they were a we we assume some of those savings in 18 81 contract. So.
We're very pleased with how its going we.
We look at how they are being developed and how they're being implemented on a very recurring basis or so so we look forward to implementing on 80 81 and actually on the Columbia class as well.
Okay. Appreciate it thank you.
Yeah.
Thank you and our next question comes from the line up.
With Goldman Sachs. Your line is open. Please go ahead.
Hey, good morning, everybody.
Chris just coming back to the question previously on the implied fourth quarter shipbuilding margin being flat sequentially to get to the for the year.
Does that almost entirely reflect you know just still not knowing precisely when the 79 launch milestone occurs or does it more reflect that.
There's more risk relief.
Cume catch up on that on that item staggered about you know the next several quarters.
Then maybe our perception is of a big one on launch.
I think that's a great question no one and it's the latter right. There's a you absolutely retire risk in Q4, when you get to launch, but every shipbuilder knows that a lot of risk happens to the test program. So I think your latter perception is probably the better.
Okay that makes sense.
The.
Only class services contract change item that you called out in the release is it in the net 44 positive cume catch or is it suffered from Matt It as it then.
Yes, and is it is it more than 10 million or less than 10 million.
And we don't give a specific number no I'm sorry.
Okay thought I would try that anyway.
On on the cash flow statement.
The projection or your statement, though 2019 free cash will grow year over year versus 18 is that true.
Excluding the grant proceeds just since those are up so much year over year no. That's all that's all in the calculation.
Is it not up excluding the grant proceeds.
Yeah, I don't want to get into specifics on the cash flow statement on the call, but it's all in.
I'll grab proceeds are in last year and this year relative to net free cash flow in 18 and 19.
Okay.
And then lastly, there on the cost saving it if you could maybe update on your how you see the working capital opportunity we've talked in the past about you know a lot of successes there over the last several years I'm just still we're still trying to hone in on how much is left so maybe where you'll see that.
During 2019, and what you can do with it in 2020.
I think the 5% to 7% working capital percent. The sales is a good place to be.
And if we can achieve that going forward I think we'll be operating very well.
So I should think of that is more kind of stabilizing in terms of a year over year rate of change going forward correct. Yeah. That's it that's a great way to to think about it of course, you got faces a programs to kick in from time to time, but I think the 5% to 7%. It's a good way to think about it on a sustained basis going forward.
Alright, okay. Thanks, so much sure.
Thank you and our next question comes from the line of John .
With Citi. Your line is open.
Hey, thanks, so much for the for the follow up here.
Mike I just wanted to get some perspective on T.S. inorganic appetite evolved and making some moves over the past few years still see an opportunity to build out some of the capabilities and our customers and or scale in that business and if so.
What kind of areas you understand what size and how do you see that impacting your growth profile and much improved.
Yes, a lot in that question you know, we we planted a lot of seeds over in the Ts area to see what sprouts and right now we're very very pleased with the ways that de OE business is is moving ahead since.
Weve since we separated the deal he business from ship building.
We have a we've we've been we've been on the team for winning three contracts and we're a prime contractor now for Deo equaling a prime at Los Alamos. So we thought and we think that theres more opportunity there to take advantage of our of our environmental skills, and our and our nuclear operations skills and so that's it that's a pretty important area to us.
Our customer in the in the Navy is very interested in the unmanned space.
Particularly I think they unmanned undersea space is a little bit more mature than the unplanned surface space, but in both of those cases, we see that that's where our customers going.
That's our principal partnership for this business and so we're trying to find the best way to to.
Support our customer on that.
Make sure that we have the capabilities that we think are that the navy's going to need for us to have a going forward.
And ER and so were we continue to work to strengthen that part of our business.
We we have always a for the last at least for the last 20. Some years, we've been supporting the fleet around the world.
And as we built some more capability. There. We have also built some capability to support the the air force in the army a whether it's in a training or modeling and simulation or other kinds of operational things, we find that to be a really really good business and Ah we continue to pursue.
Those opportunities.
And and all of that all of every one of those areas is has that has a need for capability and and in a cyber.
And even intelligence and we've built some capability even the last 12 months, we've enhanced our capability. There. So we're we're always in a constant review of what are the capabilities. We have what are the capabilities that our customers needs.
Is there a gap and do we do we find the right way to pursue that graph that gap.
Scale is an interesting discussion because I don't think we want to pursue being big for the sake of being big.
On the other hand, sometimes a local scale can actually be something that creates more flexibility for a particular customer. So that's that's kind of how we're thinking about it.
You know and so we we are pretty active in evaluating a our GAAP sent in valuating opportunities to close those gaps.
And trying to be as creative as we can.
We would also say that valuations are pretty high at this point and so sometimes the best thing for us to do is to.
Let it go.
And so you know we continue to have that as an option on our table. So we're not in a place where we're trying to to acquire everything that moves a we're very deliberate and very disciplined about what we do and were and we believe that our approach continues to build a great value in the company.
Thanks for the extensive answer Mike you bet.
Thank you and I'm showing no further questions at this time and I would like to turn the conference back over to Mike Petters for any further remarks.
Well I'd like to wrap things up by letting you know that we're in the process of finalizing the arrangements for an investor day meeting to share our views and outlook for the business.
This event will be held in New York City and will include a reception on the evening of February 17th and a management presentation on February 18, So stay tuned for additional details in the coming months. Thanks again for joining us on todays call. We really appreciate your time and interest and we look forward to seeing you soon.
Ladies and gentlemen. This concludes today's conference call. Thank you for participation you may now disconnect.
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