Q4 2019 Earnings Call
Huntington Ingalls industries.
Earnings Conference call at this time, all participants are in listen only mode. After the speaker presentation. There will be a question answer session asking questions. During the session you'll need to press Star 100 telephone. Please be advised the today's conference is being recorded.
Require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Dwayne Blake Vice President Investor Relations. Please go ahead Sir.
Thanks, Josh Good morning, and welcome to the Huntington Ingalls Industries fourth quarter 2019 earnings Conference call.
With us today, our Mike Petters, President and Chief Executive Officer, and Chris Caster, Executive Vice President and Chief Financial Officer.
As a reminder, statements made on todays call that are not historical facts are considered forward looking statements made pursuant to the safe Harbor provisions of Federal Securities Law actual results may differ.
Please refer to our FCC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results.
Also in the remarks today Mikey, Chris will refer to certain non-GAAP measures reconciliations of these metrics in the comparable GAAP measures are included in the appendix of our earnings presentation that was posted on our website.
We plan to address the poster presentation slides during the cold to supplement O'connor. Please access our website that Huntington Ingalls Dot com and click on the Investor relations linked to view the presentation as well as our earnings release with that I'll turn the call, which were president and CEO Mike Mike.
Thanks, Duane good morning, everyone and thanks for joining us on todays call.
2019 was a great year afraid <unk> and I want to personally thank each of our 42000 employees for continuing to execute their daily activities with an unwavering commitment to our core principles of safety quality cost and schedule.
I would characterize 29 gene as a year of positioning for the future. We captured major contract awards that resulted in a record backlog of $46 billion at the end of the year.
We enhanced our ship building facilities by bringing new projects online to improve efficiency and affordability as we completed the fourth year of our five year generational Capex program.
And we challenged our employees to remain focused on execution, while driving continuous improvement innovation and creativity.
Not specifically during 2019, we delivered three ships the guided missile destroyer U.S. as Paul Ignatius the National Security Cotter midget and the attack submarine U.S. Delaware.
And we redelivered the U.S. Gerald R. Ford following her post shakedown availability.
We were awarded an historic 15 billion dollar contract to build to more Gerald Ford class aircraft carriers as well as an 8 billion dollar contract for the Virginia class block five submarines.
And we successfully navigated through the second year of our ship building program maturity transition.
And achieve shipbuilding return on sales that were in line with our expectations.
We expanded our portfolio by acquiring fulcrum in early 2019, and additional portfolio shaping activities are continuing with the pending acquisition of high draw that was announced last week as well as the recent decision to divest our oil and gas business.
Additionally, yesterday, we announced an agreement to contribute our San Diego shipyard assets to a recently formed fleet Sustainment venture backed by the Carlyle group and still acts capital management.
All of our 2019 activities as well as the recent portfolio shaping activities were approached with three key outcomes in mine driving growth managing risk and generating strong returns.
So now let me share some additional highlights from the quarter and full year, starting on slide three of the presentation.
Sales of $2.4 billion for the quarter, an $8.9 billion for the full year were approximately 9% higher than 2018 and represent record highs for the company.
Diluted EPS was $3 and 61 for the quarter and $13 in 26 cents for the four year.
Adjusted EPS, which excludes the impact of a noncash impairment charge related to the pending sale of our oil and gas business was four hours and 36 cents for the quarter and $14 in one penny for the full year My Chris will provide more details on this charge in his comments.
New contract awards during the quarter were approximately $10 billion, including the aforementioned Vcs block five contract, resulting in backlog of approximately $46 billion at the end of the year of which $18 billion funded.
And regarding activities in Washington, we are very pleased but the house and Senate passed in the President enacted the National Defense Authorization Act as well as all 12 of preparations measures for fiscal year 2020.
These measures strongly supported ship construction repair as well as other national security imperatives, including acceleration or both LPD 31, and L.A.J. nine and approval of incremental funding.
Legislation also restored the refueling complex overhaul of CVN 75, U.S., Harry as Truman and supported investment in submarines surface combatant unmanned platforms department of energy nuclear and environmental programs and cyber defense.
Now with the release earlier this week or the President's fiscal year 2021 budget request tradeoffs were made across various accounts, including ship building to fit within the administration's budget type long topline.
Even so we're pleased to see investment for priorities, including destroyers amphibious ships Columbia class ballistic missile submarines and restoration of the CVN 75 refueling complex overhaul as well as increased integration of critical capabilities, such as unmanned underwater vehicles and see five.
SAR, we look forward once again to working with the administration and Congress in support of outcomes that best leverage our hot production lines, our supply chains, and our service expertise to deliver the ships and capabilities that our nation requires.
Now, let me share a few business segment highlights from the quarter.
At Ingalls L.A.J. seven Tripoli is essentially complete and the team is working towards delivery on the next few weeks.
LPD 28, Fort Lauderdale was approximately 70% complete and is on track for launch in the first half of this year.
DDG 119, Delbert deep black completed builders trials in December and its preparing for delivery in the first half of this year.
Let's see nine stone is progressing through final assembly and test activities and is on track for delivery later this year.
And finally, DDG 62, the U.S. US Fitzgerald completed sea trials last week and is on track for Redelivery in the first half of this year.
At Newport News CVN 79, Kennedy was christened and subsequently launched in December and has successfully transitioned into final assembly and test activities at the appear as we bring the ship systems to life shippers approximately 69% complete and performance remains in line with our expectations.
CVN 73, U.S. as George Washington has transitioned into its final outfitting and test phase the refueling a complex overhaul is approximately 68% complete and the ship is scheduled for delivery to the Navy in late 2021.
On the submarine program SSN 794, Montana achieved the pressure hall complete milestone in December and remains on track to deliver in the first half of 2021.
And that's a sense 796, New Jersey is on track to achieve the pressure all complete milestone in late 2020.
And our technical solutions segment performance remains healthy across the business.
For example, our teams continue to do a great job supporting the Air Force with training and I am sorry activities, both domestically and abroad.
Performance was strong at key department of energy sites, including Los Alamos Savannah River, and the Nevada National Security site.
More department of energy new business opportunities on the horizon.
And we continue to support Boeing as their key partner in the production of the extra large unmanned undersea vehicle and with the acquisition of hydride, we're well positioned to compete for future unmanned undersea and surface vehicles.
Yes ended the ended the year with a lot of momentum heading into 2020 and their recent portfolio shaping activities create a sharpened focus for the business, which will allow them to create innovative solutions for growing in evolving customer requirements.
In summary, I'm very excited about where we are as a company our shipbuilding programs continue to be well supported in Washington, and we have captured a record $46 billion backlog that provides unmatched stability and visibility we are creating modern recapitalize facilities to efficiently execute our contracts.
And we are seeing improving operational performance that produce shipbuilding return on sales there was right in line with our expectations in 2019.
And we have a well trained workforce that is laser focused on execution, while driving continuous improvement innovation and creativity.
In addition, our recent portfolio shaping activities create a sharpened focus in the technical solutions business and positions the team to capture growth opportunities in unmanned systems defense in federal solutions and nuclear in environmental services.
The acquisition of Hydro is particularly exciting as we combine this entity with our unmanned maritime systems business unit to form one of the leading autonomous unmanned maritime systems companies in the world.
I firmly believe that we're taking the right steps to drive growth manage risk and generate strong returns, which will in turn continue to create long term sustainable value for our shareholders, our customers and our employees.
So now I'll turn the call over to Chris cash numbers for some remarks on the financials Chris.
Thanks, Mike and good morning today, I will review, our fourth quarter and full year consolidated results and provide some additional information on how we view 2020.
For more detail on the segment results. Please refer to the earnings release issued this morning and posted to our website.
As Mike mentioned earlier, we continue to refine our areas of strategic focus within the technical solutions Division.
We recently announced the acquisition of hydride, which we expect will close by the end of the first quarter.
The total purchase price is 350 million. This represents a multiple of approximately 16 times expected 2020, EBITDA when adjusting for approximately 50 million of related tax benefits.
Moving on our oil and gas business you Pie is now considered an asset held for sale and is reflected as such our balance sheet.
During the fourth quarter, we recorded a $35 million noncash asset impairment charge primarily related to goodwill.
Associated with the valuation of U.P.I. as we prepare to divest that business.
Yeah, I had a very good year in 2019, and they have a strong backlog moving forward.
Excluding the impact of the impairment of U.P.I. adjusted EPS for the quarter was for 36 and fortino one for the full year GAAP diluted EPS was 361 for the quarter and 13 26 for the full year.
Turning to our consolidated fourth quarter results on slide four of the presentation.
It is in the quarter of 2.4 billion increased 9.7% over fourth quarter 2018, primarily due to higher volumes in submarine construction for Virginia, and Columbia class boats at Newport News and growth in our technical solutions Division due primarily to the acquisitions of GE to on fulcrum.
For the quarter due to Infocomm contributed revenues of approximately 55 million.
Operating income for the quarter of 186 million decreased 27 million or 12.7% from fourth quarter 2018, and operating margin of 7.7% decreased a 197 basis points.
These decreases were primarily driven by a less favorable operating fast kaz adjustment and an asset impairment charge related to our oil and gas business.
Moving on to consolidated results for the full year on slide five.
Revenues were 8.9 billion for the year, an increase of 8.8% from 2018.
This increase was primarily driven by higher volumes in aircraft carrier submarines, a navy nuclear support services in Newport News and growth in our technical solutions Division due primarily to the acquisitions of GE to unfold from as well as higher fleet support and oil and gas revenues.
For the year Gtwo Infocomm contributed rather revenues of approximately 201 million.
Operating income for the year was 736 million an operating margin was 8.3%.
This compares to operating income of 951 million and operating margin of 11.6% in 2018.
The decreases were primarily due to a less favorable operating fast kaz adjustment compared to 2018 and asset impairment charge related to our oil and gas business and losses on a fleet support services contract.
Well as lower risk retirement at Ingles.
These were partially offset by contract changes on submarine support services higher volume at Newport News at higher risk retirement on the CVN 73, our CFO H contract.
Our effective income tax rate was 13.4% for the quarter and 19.6% for the full year. This compares to 3.2% and 13.9% for fourth quarter and full year 2018, respectively.
The lower tax rates in 2018 were driven by higher estimated research and development tax credits for the 2011 through 2018 tax years.
Turning to cash flow on slide six of the presentation cash from operations was $566 million in the quarter and free cash flow was 408 million.
For the full year cash from operations was 896 million in free cash flow was 460 million.
Fourth quarter capital expenditures were 158 million and for the year capital expenditures were 436 million or 4.9% of sales.
Cash contributions to our pension and postretirement benefit plans were 59 million in the year of which 21 million where discretionary contributions to our qualified plans.
Additionally, we repurchased approximately 254000 shares in the quarter any cost of 58 million, bringing the total number of shares repurchased in 2019 to approximately 1 million any cost of 214 million.
We also paid dividends of one dollar and three cents per share or 42 million in the quarter, bringing total dividends paid for the year to 149 million.
Now turning to slide seven let me provide an update on pension.
As we announced in late January we will adopt the safe Harbor methodology for Cas pension cost accounting beginning in 2021.
The transition to safe Harbor method reduces Cas pension cost volatility and improves program cost predictability.
Well the transition does create an unfavorable impact to GAAP EPS starting in 2021, it is cash flow neutral over the long term.
As you can see on the pension table provided on slide seven Cas recoveries in cash contributions become fairly well matched beginning in 2021 and moving forward.
For ease of analysis will expect our we expect to begin providing EPS adjusted for fast Kaz adjustment, starting with first quarter 2020 results.
Now let me provide you with an update on some additional 2020 items as shown on slide eight.
We expect ship building revenue to grow between three and 5% in 2020, we expect ship building return on sales to be 9% in 2020 with the majority of significant risk retirement events weighted towards the latter part of the year, resulting in shipbuilding return on sales averaging 8% for the first three quarters.
Regarding technical solutions and given the recent portfolio shaping events underway, we expect revenue to be approximately 1 billion. In 2020. This figure excludes results from you in the San Diego Shipyard and assumes the hydrate acquisition closes in the first quarter of 2020.
Also for technical solutions, we expect return on sales to be in the 5% to 7% range.
On slide eight we've also provided 2020 modeling considerations for your reference, including taxes interest expense depreciation and amortization and capital expenditures.
Finally on slide nine we've provided an updated view of anticipated major shipbuilding program milestones for 2020 and 2021.
That concludes my remarks, I'll turn the call back over to Dwayne for Q1 day.
Thanks, Chris as a reminder to everyone on the call. Please limit yourself to one initial question and one follow up so we get as many people for the Q as Pos Josh I'll turn it over to use management unit.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound Keith Please standby, we compile the kuni roster.
Our first question comes from Myles Walton.
You May proceed with your question.
Thanks, Good morning.
I was wondering on the free cash flow for for 19.
Kind of where that came out versus your expectations and then maybe as you look at capital deployment.
Given really pick up the repurchase effort in the fourth quarter and wondering if that reverses significantly in 2020.
Yes, so cash in Q4 was a little bit below expectations $50 million to $60 million below it was only timing.
Some receipts primarily at Newport News.
That weren't paid that shifted into 2020.
So not really concerned about that that that is normalizing relative to capital deployment, we really don't see a change we're going to invest in our shipyards continue to.
Now comply with our commitment relative to dividends and analyze that throughout the year, but still the 10% increase at least 10% increase this year and then continue with share buyback.
Pretty consistent in 2019 with previous years.
In share buy back obviously, an 18 were pretty opportunistic.
But really no change there.
But still the band basis or return virtually all cash free cash flow to shareholders.
No no change in that commitment that's that come into through 2020.
Definitely stance.
Thank you.
Thank you. Our next question comes from Carter Copeland.
Research you May proceed with your question.
Hey, good morning, gentlemen.
Good morning.
[music].
Two quick ones one Mike if you could just speak to the you know the hydrate acquisition and unmanned and the longer term growth opportunity, maybe a little bit more detail how you see the.
Competitive landscape in that part of the market evolving I realize is there's a lot going on but any any color. There would be helpful. And then just some housekeeping Chris I wondered if you might give us the sees a gross and net thanks, Let me do that housekeeping first yeah. So positive as 89 negative 59.
At the 39 about 90% of that was Newport news.
Okay. Thank you sure okay relative to Hydrocolloid.
We began I guess, we identified or the navy's potential to move towards more unmanned systems.
Several years ago, and and we recognize that while we had engineered engineered out a lot of manpower on the Ford design that was not what that was not where the navy was talking about they were talking about unmanned vehicles in particular, we didn't really have a footprint there.
We you recall, we invested in a in a small company in Panama City that had a platform called Proteus, which was a two man or unmanned or it was both either either or.
Could be operator, with two people or be unmanned.
Platform that was actually in the water and being tested in being used by.
Many customers not just the navy.
We acquired that group in the first thing we found out was that Theres, a whole set of technologies and customers and people and processes that we were not very familiar with.
And so not only do we get some technology there, we got some access and and in the course of that access we then.
Realize that we can bring some of our own core capability to this area that might actually accelerate the adoption of the technology as well as a.
Create a business for us.
And that led to an arrangement with Boeing who had invested in there.
A large large unmanned vehicle they'd actually put it did see but they needed somebody to build it. So we could bring our manufacturing expertise to bear on that we did that we've we've and in the course of that we kind of realized that okay. We're starting to really get an understanding of these large unmanned undersea vehicle.
Sales.
But when we looked around we saw there's a lot of activity on the smaller side and Hydralyte was a company that we noticed was.
Really really a big player in the smaller you use the space and so we we began a journey in a process with the with Kongsberg to.
Walk our way through and resulting in the acquisition. We hope we've signed the agreement and we hope to close that deal, but that gives us a footprint in basically the full range of unmanned undersea capability.
And it speaks to a larger kind of belief that I have personally is that.
I mean, the navy can have lots of things that they say they need and lots of things that they want to do but they need to do that.
When the industry can get there and provided for them. They can go a lot faster.
And so so our view is let's let's bring some of our capability our ability to build workforce our technology, our manufacturing expertise our contact information, let's bring all of that to bear in this space to accelerate the development of the unmanned space on behalf of our customer and so we think that this is.
Step in that direction.
As you say theres a lot going on in there.
And but I would say that theres a lot of folks who could talk about this scientifically what I would tell you is that if you're in the water you're learning about it and we're in the water and so we're really happy about that and we're optimistic about where this business is going to go.
Yes, I would also added that that business just organically post the transaction getting complete within Asia I will grow at high single digits.
So that's that's the near term growth rate, we see in that business. So we believe it can only get better.
On that.
I was going to be my follow up thanks for the color Jim.
You bet Sir.
Thank you. Our next question comes from Jon Raviv with City you May proceed with your question.
Thanks, very much good morning, good morning on the on the Cat Hey, just following up on a cash flow questioning I know you mentioned 50 to 60 million light on Newport News receipts looking into 2020 any other big building blocks, we should think about heading into this.
Into this year.
Capex comes down a bit perhaps.
If you keep in mind.
Underlying cash flow.
Not really adds as you're aware with is the last year of our our major capital program and we get back down to 2.5% of sales in 2021, what you're going to see over the near term is us start ramping our free cash such that.
We've become a 700 million dollar year cash flow story now I can't tell you whether that happens in 20, 122 or 23, we're going to wrap towards that.
But at the end of the day.
$700 million becomes the new normal for HIV for free cash flow.
And just to clarify, Chris that's with or without pension benefit.
That's all in.
Okay. Thank you and then just quick follow up on margin cadence.
So you talk a little more on the back loaded nature of this year I know last call you mentioned that there could be symbol.
For the other major idea with the comp.
Yes.
Sure the major items back half of the our delivery of NFC nine 796 getting to pressure all complete and then bringing to life CVN 72, excuse me CVN 73, and CVN 79 through their test program.
Thank you.
Welcome.
Thank you. Our next question comes from Doug Garnet with Bernstein. You May proceed with your question.
Good morning, Thank you good morning.
Yeah I.
I want to go back to Mike the discussion about unmanned systems and no last week Secretary ESFR talked about moving to a very different kind of a 355 ship Navy and.
2030, which is.
I think it's pretty aggressive with smaller platforms, lower manning, including optionally man.
I asked to a while back about this as it related to the Marine Corps strategy that had been laid out but if the navy moves aggressively in this direction.
How might that affect your core programs the larger ships and your business mix and what's your understanding of how the Navy is looking to proceed here.
Well, Doug I think.
This is this continues to evolve.
You know the Navy's trying to match up the their requirements that they see out in the in the world that they feel like they need Whit.
The ability of the industry to support it and so our view of that is that we need to be on the front edge of that and trying to help them evolve that.
Relative to our core business, though I mean, our strategy for the last.
Three years, you know if you go back over the last three years that shipbuilding accounts have been.
Historic historically high doesn't actually talk about how high. They then I mean that my whole career, they've been in the $14 billion to $16 billion a year year in in your out in for the last.
Three years anyway weve been.
Just short of 25.
Even this year the you know for all of the.
The discussion over the past few days about what's going on with the shipbuilding budget and all that sort of thing it's still.
At 20.
And so so I think that where you're going to see if you're not going to see a hard left turn here, we're going to say, okay, we don't need big platforms.
With people on them anymore, and we're going to make and we're going to have a navy. That's completely unmanned I think what you're going to see is an evolution you're going to see the unmanned space become amplification of the presence and platforms that the navy needs and so you know I don't know, how the accounting works and all that sort of thing because.
They you know that's a that becomes an interesting discussion about what actually counts as a ship and.
I just kind of stay out of that I think about it more in terms of capability to provide presence for the navy in that and the ability of the industry to bring technology to bear on the problems that they have.
I think that the navy's going to be moving towards more unmanned systems to amplify the platforms that they have and then and then see where that goes from there and we want to be as there as their principal partner, we want to be right, there with them and help them make that success.
Well you know when you think about growth.
I think of shipbuilding as a as a fairly predictable business because of topline because of the very long.
Well in contracts, you've you've talked about a five year growth rate of around 3%.
This year you gave you are giving revenue guidance of 3% to 5% what what factors create that range of outcomes. This repair work or uncertainty about the timing of milestones I mean, how do you get that that broader range. This year in guidance.
There is really some minor timing issues.
Decade.
Move it between three and 5% on some of our programs.
It's not really new programs drive that although timing of some material on some of the New awards would help us out of that.
But the majority of that as you as you indicate is already under contract.
Okay, great. Thank you Shirley.
Thank you are next question comes from Ron Epstein.
Bank of America, you May proceed with your question.
Hey, good morning.
Good morning.
I could you give us a little more.
Maybe back on color on the.
950 million dollar contract guys got Oh.
Our work for the Tech services Division, but and that's doing support work for the airports in Europe right. So if you could give us some are more background on that.
Yes.
Yes, so that's a Ron this is Chris that's a air force contract persist and multi roll operations <unk> SAR contract that's split over.
Four or five years all that revenue.
And we're really excited about it we done similar work.
Through one of our acquisitions. So this is essentially a follow on with different scope I can't really going to too much detail what they're doing you got to be careful on the call, but we're really excited about that we think it's an important area going forward.
Okay, and then and then Mike maybe up a broader question one of the that's come up and some of the conversations that we've had.
Around Naval strategy. You you are you have the view or do you see or or future, where there's more underwater operates.
And just kind of the typical.
Yes.
Columbia that theres going to need for a broader under water infrastructure investments and underwater play as part of simply building out.
Broader under water infrastructure.
Well run I remind you that you're talking to a former submarine officers. So I need to kind of do my safe harbor on that but.
You know the.
That's the thing about the undersea environment and platforms in the undersea environment is that they're very asymmetric you know there's lots of a.
History of a single submarine can bottle up an entire fleet import.
And the fact that you can look out across the harbor and can't see it.
Is it in and gives that an advantage and so being undersea as a is a multiplier just that just the simple fact that you're under water is a multiplier.
For the your capability.
There's a lot of things that you can do under water that you may not want to send a Virginia class submarine with a bunch of people on it to go do.
And and so being able to net on the other Han Theres a significant amount of things underwater that you want to be able to do that you want to have a virginia class submarine or something like that.
Fully man fully capable of complying with rules of engagement and all that sort of thing you want to be able to do that too.
And so what we see is that that.
You know this asymmetry that comes from being undersea is going to be something in the Navy has to find a way to take advantage of.
And if you just go back Oh gosh, it's getting to be close to 30 years now but are you go back and start to look at how did the how did the unmanned.
Aerial systems take off right. There was a there was this technology that was being developed and we were kind of doing this and then suddenly there was a knee in the curve, where nobody could get enough of it you know everybody wanted more and there wasn't enough capacity and I mean literally the curve just shot.
Almost vertical.
We've been talking in the unmanned space for probably 10 years or 15 years about when is the knee in the curve going to come for the unmanned space.
Undersea the unmanned undersea space I would say the undersea space is a much harder environment in terms of the physics of it.
And I'm not sure the knee in the curve is going to look like the the unmanned aerial vehicles space did but I believe you're starting to see now the mature maturation of technologies.
More and more folks are getting in the water and they're getting under they're getting to understand what the art of the possible is and so there whether it's a knee in the curve or if it's just an acceleration I think we're kind of getting there now and so it's really important.
For for us to be in the middle of all of that and ER and I think that a 15 years from now you could see you could see a navy that is.
Talking a lot more about what they can and want to do undersea I, just think thats, where it goes.
The final thing I'd say Ron is this is just my own personal amateur historian.
View is that a win win countries can no longer afford the full navy that they want they buy submarines because they're asymmetric for the money that you put into it so.
So I mean, I think we have history that says that I don't know that will quite play out that way here.
Because presence is important and it and presence actually keeps.
Conflict from becoming hot conflict and so I think the Navy has a great understanding of that but in marriage I think its marrying a undersea capability with the presence as a as a way for us to go.
Great. Thank you.
[music].
Thank you. Our next question comes from Robert Spingarn with Credit Suisse. You May proceed with your question.
Well good morning.
Morning.
I wanted I wanted to ask you for a little more detail on shipbuilding margin both forward and also Q4 19.
From the perspective or pick up CVN 79, so trying to understand you booked at very conservatively in the beginning in the program I think we were looking for some kind of write up.
Upon launch so Chris.
Can you tell us anything about CVN 79, you see in Q4.
And then maybe other way to look at this is how does the 9% 2020.
Divide between Ingalls, and Newport news, and what's happening with the carrier relative to plan.
Well I'll comment on margin then Mike you can.
Talk about CVN 79, if you'd like but.
Q4, 79 met their milestone we evaluated the risk and I had previously indicated that theres a lot of risk in front of us on that ship. So it just simply wasn't material enough immaterial enough of an issue dimension, but we did a very good Q4 in ship building, both Ingalls and Newport News actually.
In 2020, I expect both Newport news and ingles be at 9% I expect them both to get there.
Okay.
And not just on the carrier I mean was I wrong in thinking that the launch would release a fair amount of positive V. C or is it next years Q4 with the system Buildout milestone that you're talking about yeah, I think that was a.
Our view of this is that the the risk that we incurred on the Ford was really in the test program, which is kind of where we're walking into the test program now on a on Kennedy and we just where you know work we're going to be.
Conservative about this before it actually for lead ship came together better than any lead ship I've ever seen but as we tested systems, we had to work our way through a whole bunch of new technology. There. So this is our next go on that and we're going to continue to be pretty conservative on that until we actually retire those risks and.
I don't think we ever really expected that launch would be a open the floodgates on risk retirement, we just.
Frankly, the early launch at the program team put together was a way for us to mitigate downstream risk and that's you know as part of a step, but but not a flood gate.
Are you on plan with 79.
We are.
Okay. Thank you.
Thank you. Your next question comes from George Shapiro with Shapiro You May proceed with your question.
[music].
Yes. Thank you.
I just wanted to follow good morning, I just wanted to follow up a little bit the last question from Rob.
Can you just give us the specific he sees in the quarter and then also can you explain you just mentioned that you got to pick up and margin on the block five contract. So that assumes that the contract was more favorable than what you might have thought before if you could comment on that and also the other benefit that you had.
There on the.
Lay class ships.
The support services increasing margin.
Yes, so block five in Columbus.
Neither one of the material enough to mentioned the number it's in a its all included in the and the Newport News results I can't get back to your first question George I don't recall at what was the first question again just on the Q.
To give that to two miles beginning it was gross favorable of 89 unfavorable 50, 90% of that being Newport news.
Okay, and then how about this support contract changes for that.
L.A. class that you referenced.
A little more specific what they were not.
There are they were all embedded in Newport news performance in the quarter.
Okay.
And then just one more general one Mike you know you looked in detail at the 21 budget for ship building do you think that Congress leads it as is I mean, there quite a bit of changes right one less destroyer, one less Virginia class all to support Colombia.
Well.
George I'm going to I'm going to suggest that.
I'm not sure that I've ever seen.
The Congress leave any part of the administration's budget as is and ER and so I think that the the budget submission is at beginning of a process. It's a long process to go from submitting the budget to appropriating the bills and you know that and that I'm not talking about just.
Defense I'm talking about all of the areas of the budget.
So I think it's going to you know our role in this is typically.
To talk to house the most if that's what you want what's the most efficient way to do it.
So that's kind of the way we we work this and we've worked at a over the years and some sometimes it works out and sometimes it's not necessarily the way we would like but.
I think we're just at the very beginning of the process right now and it's going to play out over the next over the next several months.
What it would you like to have changed.
Well I think the biggest issue is the one that we've been talking about here all along and that is that you got to find a way to pay for Colombia.
If you decide that you're going to pay for Columbia inside the Shipbuilding account, then it's going to squeeze ships out unless you're going to push the push the budget up and in the last three years I think that Oh, we at the very beginning of the ramp up into Colombia or at a time when you know.
Our strategy was to take advantage of the budget and get as much stuff under contract as you possibly can because.
There's going to come a time, where you're going to have a lot of arm wrestling over over the budget and I think we've done that very well and that's how we ended up with the with the backlog that we have but I think the uncertainty about how you're going to pay for for Colombia.
It's going to show up and it I think thats, what really showed up here the the pluses and minuses were really squeezed out because you have to go pay for Colombia, and I, absolutely think we have to go pay for it and I think thats a national priority.
But I just think it's going to be you know it's the is the elephant in the room that has to be dealt with if you want to keep all the other programs going so I think that's where this ultimately goes.
Each sheep each ship you know certainly we'd like to see more more ships are better and and and they're better not just for us, but they're better for the whole industry. So we'll continue to advocate for that that's a way to keep the industrial base how healthy unhappy.
Okay, Thanks, very much but.
Thank you. Our next question comes from Pete Skibitski with Olympic Global You May proceed with your question.
Hey, good morning, guys.
A follow on.
Mike how are you feeling about the outlook for big deck Amphibs at Ingalls right now I know you've been trying to kind of bring one of the ships forward and the Navy's plan and Congress has helped out a little bit I think we've got the new budget, but are you feeling about that right now.
Well I feel pretty good about it frankly, you know the the the Marine Corps wants it. The Congress is trying to find ways to push it through I. Just think it's an example, some of the some of the.
No pluses and minuses I think what you see in the budget is really the squeezing of there's only so much air that can go into the balloon.
From the budget submission standpoint, so I feel pretty good about it I think that there's a there's a lot of support for what the what the big deck Amphibs can do and what they are doing out there today.
And and so I'm I'm I remain optimistic about where that's going to ultimately end up you know there's going to be days when we feel really good about it in days when we kind of wonder what's going on but I think and in total it's going to be it's going to end up in a good place in a good outcome.
Okay got it just one follow for me on.
On the sale of Continental Maritime to Carlyle I think it's a lot of revenue, maybe 100 million or so but I thought it was always viewed as a positive to have a repair yard on the west coast for you guys.
So I'm just wondering how you're thinking about that now.
Well I mean, it you know we contributed just to be clear. We contributed this asset so that now were part of the joint venture.
So our view is that the business model.
Let me step back I think I've talked about this before.
There is more demand for repair activity in the Pacific area of responsibility than there is capacity to provide at right now, but the navy the Navy's kind of trying to work its way through an a business model that's going to allow for more efficient.
Support for the requirements that they have.
In our case Weve as the business model has changed we've kind of struggle with that a little bit. Our view is we needed to restructure this business anyway, here's a way for us to keep our our are a hand in that business and be able to help the navy figure out the right way to get the business or restructured and get the business get the.
Industry in a place where it can actually.
Effectively support what the Navy's doing I mean, we've we've had cases were in a in us in a space, where there is not enough capacity to do that to meet the demand. We've actually had operations that have been closed and so you have to step back and say, there's something bigger going on here and we need to be part of that so we need to be part of that discuss.
And but we also have to make sure that we try to find a solution and this is what we think as a working with Carlyle and stellarex and and vigor and MH either the other assets that are there. We think this is a way for us to effectively engage and help the navy find a solution.
So you're not losing all the EBIT from that it's just because of the accounting change you're losing the revenue from the guidance correct.
Okay. Thanks, guys.
You bet.
Thank you. Your next question comes from gotten let's I'm kind of town. You May proceed with your question.
Hi, Good morning. This is Jeff Molinari on forgotten today hijacking, Michael Thanks, taking my questions.
So just some cleanup saw the questions have been answered already.
Yes sales was guided to be 1 billion.
A few more moving pieces than normal.
What are what are you kind of assuming for annualized sales EBIT margins for hydro it and the businesses to be divested or excluded because of the JV just those through three moving pieces. If you could just kind of size those for us if helpful. Thanks.
Yes, so we haven't provided that and we think given a billion dollars of sales of 5% to 7% return on sales I should probably gets you there from a modeling standpoint, but we haven't provided that data as of yet.
Okay Fair enough and then on the margins, we talked about shipbuilding margins kind of 8% through the first three quarters and then.
Bumping up substantially in Q4.
How do you think about that momentum continuing into 2021.
At that level.
Well I think that you know if you if you look at this business quarter by quarter, you're bound to have a.
Hi, good surprises and and maybe maybe not so good but I think that what we know is that a and our experience here is that over the long haul.
This business executes the shipbuilding industry execute set around 9%. So I think over the long haul, that's where we are and a and our ambition is to execute our backlog that you see out there at that level or better and so that's kind of the way we're seeing this the driver that.
We're seeing for this specific year.
It's still a little bit of the hang over of the maturation of the backlog and you know we've gone through a couple of years, where we've had a heavy weighted portfolio towards brand new work.
We just added.
Two more carriers and ER and a whole another set of submarines into that into that mix and you know it takes a little while the start to accumulate the milestones that we need to get them up but we think that we're pretty sustainable here over the long haul.
Okay. Thanks, Thanks for the color guys.
Okay.
Thank you. Our next question comes from Seth Seifman with JP Morgan You May proceed with your question.
Thanks, very much and good morning, I'm wondering though.
I Wonder if you could talk a little bit about the frigate and are you still expecting an award. This July and you know kind of how you're thinking about the positioning there and how that could ultimately fit in with the.
The current work and a angle.
Well I mean, the bids are in and we've we've put our best foot forward we.
We have invested in some facilities and we have a very robust execution plan to be able to build that platform.
And you know, we're just standing by to.
Help the Navy decide what they want to do now the competition is tough I'll say that.
And but weeks, we're still expecting award in the first half of the year.
Okay. Okay, and then maybe real quick follow up a Chris the working capital still.
Pretty low as a percentage of sales about a 6% and if you had the 50 million of receipts in the fourth quarter or probably even would've been down slightly.
As a percentage of sales year on year is that is that maintainable level and working capital that sort of 6%. So the business grows working capital dollars, maybe up slightly but you know not significantly.
Will move around a bit from time to time, but I think 6% as a it's a really good target for ship building.
Great. Thank you very much.
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Thank you. Our next question comes from David Strauss with Barclays. You May proceed with your question.
Thanks, Good morning.
So I think.
Previously you had talked about 9% to 10% margin range for Shipbuilding. Then in 2020 is is 10% not yeah, not doable anymore and in 2020.
And is 10% still kind of an aspirational target looking looking further out.
David This is Chris it was simply coming through our plant and seeing how the programs we're going to to unfold in 2020 in the risk retirement potential there, which are which allowed us to arrive at a 9% we're going to have quarters that are.
Better than 9%.
And and worse than 9%.
We always.
Challenged the organization to do better.
But I think the best way to think about it is 9% moving forward.
Okay, and then are probably another one for you Chris the ER. This 700 million in free cash flow you talked about getting too.
Can you I guess building off of what you did in 19 at 460 million I know, you've got Capex coming down over the course. The next couple of years, probably helps but about 200 million, but it looks like pension yellow cabs less contributions about equivalent or kind of headwind. So so what takes us from four six.
Indeed, a 700.
Well its growth right, we're going to grow margin is improving as well. So you couple that with the reduce capital expenditures and pension normalizing.
And reaching milestones on ships you get to $700 million.
It's going to naturally float up to $700 million of free cash over the next few years.
Okay. Thanks shirt.
Thank you. Our next question comes from Joseph Denardi with Stifel. You May proceed with your question.
Hey, good morning, I'm wondering Mike just on the the margin profile the business going forward I get that.
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Cost plus component of your business that that's probably greater than than some of your peers, but if you look out over the next several years that.
It's more of their production in the fixed right side of the business that that will be growing and so longer term why is that a margin tailwind potentially such that.
Maybe the margin profile can go from nine to 10 to 10 to 12 that some thank you.
Well I mean, I wish I could say that you are right.
But the the fact is that the whole blend that ends up and if you go down we've we've gone back and looked at this every which way you can look at it.
You end up and you end up in a place where no matter no matter where are you are the first thing you want to do as you want to know that you're actually executing well.
You know and that's where the the whole discussion around 9% to 10% came from was you're executing well if you're in that range and you have a good mix of new programs and mature programs.
If you're out of that range high that means that you're probably over weighted on mature programs and if you're out of that range low you're either not executing well or you have out you're out of your out of balance with new programs. So that's kind of where it came from and a and right now you know with a 46 billion.
Dollars backlog are ours, we're kinda on the heavy end on new programs.
We've gone through a couple of years, where we've been maturing programs, but you know we just added $27 billion to the backlog last year. So so we're going to we're going to continue to work our risk through that but the other side of it is that if you just go and look at the entire industry over the last.
I don't know 10, or 15 years the industry just tends to operate at 9% and that's you know takes into account of mature programs, a new programs and everything else and so we aspire to 10%.
We push our teams to that level and and Ah that's our ambition, but I think in terms of the way to think about our businesses. This is a 9% business with a $46 billion backlog that plays out over the next a 10 or 12 years.
Okay. That's helpful could you maybe quantify just given submarine growth.
Where you're transitioning from cost to fit.
What the what the mix looks like you see it five years from now in terms of cost versus <unk>.
As a whole thank you.
The way to think about that is the DRC wage contracts are the cost plus contracts moving forward. So I don't have a specific percentage, but that's really the majority of the cost plus work in our base.
Okay. Thank you sure.
Thank you. Our last question comes from no popping up with Goldman Sachs. You May proceed with your question.
Hey, good morning, everyone.
Turning now.
Hey, Chris just wanted to try the the walk from today's free cash to 700 million again, because it sounded as if I heard your answer to David's question correctly.
It's really really comes down to just growth in those segments, but with capex and pension largely offsetting but if it's a $9 billion business growing top line three to four with margins in those Ono flat. That's only kinda you know 2020 5 million Bucks a share of free cash flow growth.
Her year.
Should I is there something in grant proceeds that have been large for your recently or something else outside of the segments or is it just more when you said it could be 20 120 to 23 that it's likely to the back end of that when you've had time to compound the segments.
Yes, so there's some compounding there, but it's also timing of the milestones and how that works through working capital.
Look at our plans and all our ships going through our plans over the next three years.
It gets to $700 million that really becomes the new normal.
So I think I think you've essentially got it right now.
Okay.
And then when you've stated that.
You know now pointing to to nine as a ship building margin versus the prior comments of nine to 10.
You stated that that's really just kind of honing in on the specific plan as you as you've moved into 2020 itself.
Can you help us with the.
Specific things that changed in the plan, what what specific ship inputs are different versus what you thought previously.
No. There's really it was really nothing specific that I would that I would draw upon no. There is just going to each each ship laying that out over the next few years and looking at the risk retirement opportunities and the risk on those ships at 9% was the best way to look at it.
Okay. So I should say, it's more of just moving to a bottoms up.
Ship by ship plan versus a prior sort of directional what the business.
It was capable of type of.
Framework.
And some of it is the fact that we the previous plan had these the a lot of these contracts we didnt have.
And so it is working through it is working through the large volume of contracting as that comes into our plan now.
And how is that going to play out with our teams and our execution and all that so.
We just felt like it's really important to kind of clarify that.
I see.
Okay. Thanks, so much nextel.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Mr. putters for any further remarks.
Okay, well, thanks for joining us I want to remind you that you can still sign up to participate in our Investor Day meeting next week via webcast. It's a Tuesday morning at on the 18, starting at eight o'clock. So just go to our website at Huntington Ingalls Dot com click on the Investor Relations page and falling.
Investor Day linked to register we're excited about the chance to meet with you all and a and share a lot more detail.
What we think the next five years will bring so we appreciate you joining us on todays call and we look forward to see any soon.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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