Q2 2020 Huntington Ingalls Industries Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to the second quarter 2020, Huntington Ingalls Industries earnings Conference call.
At this time all participants on in listen only mode. After this because his presentation there will be a question and answer session.
To ask the question doing this session you will need to press Star then one on your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star then zero.
I'd now like to hand, the conference over to you speaker for today, Dwayne Blake Vice President Investor Relations you may begin.
Thanks.
Good morning, and welcome to the Huntington Ingalls Industries second quarter 2020 earnings Conference call.
Good day, or Mike Petters, President and Chief Executive Officer, and Chris Casner, Executive Vice President and Chief Financial Officer.
As a reminder, statements made in today's 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 SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results.
Also in their remarks today, Mike and Chris will refer to certain non-GAAP measures reconciliations of these metrics of the comparable GAAP measures are included in the appendix of our earnings presentation that is posted on our website.
We plan to address that posted presentation slides during the call to supplement our comments. Please access our website at Huntington Ingalls Dot com and click on the Investor Relations links to view the presentation as well as our earnings release with that I'll turn the call over to our President and CEO, Mike Mike. Thanks, Ralph Good morning, everyone and thanks for Joe.
Joining us on todays call.
I do hope that everyone is staying healthy unsafe during these trying times.
So I want to start by expressing my very deep appreciation and gratitude to the workforce of HR.
Since the covert 19 Pandemics started back in March our team has been on the front lines of this battle. They have balanced fighting this highly contagious virus, while at the same time using every bit of their energy focus skill and creativity to achieve key milestones on our programs and help us navigate through one of the most challenging.
Times of my 30, plus year career.
I can say without a doubt that what I have witnessed from this team over the past five months, absolutely epitomizes, our motto of hard stuff done right.
Now turning to slide three of the presentation I want to help you understand the thought process behind our approach to dealing with the cobot 19 pandemic NR shipbuilding business.
We have hired about 25000 people in the last five years in an environment, where unemployment was historically low and we have invested over a half billion dollars to train and certify those folks to execute the backlog that we've been able to capture over the last five years, which now totals 46 billion dollar.
Yes.
So as a pandemic broke our first priority was to protect this investment in the workforce. So that they would be trained ready and available to execute our record backlog as we emerged from this difficult time.
And at the outset, we decided to give our workforce the flexibility they needed to deal with the disruption in their personal lives.
Think back to what it was like across the country in the Middle of March schools were closing many companies were forced to lay off portions or in some cases all of their workforce and in some parts of the country people, we're being told the isolate.
And this backdrop created a lot of uncertainty and disruption for our workforce. So we introduced several benefit changes, including liberal leave to make it easier for our employees to stay home if they were sick or if they had schilder elder care challenges. So those absences would not count against them.
At the same time, we also had to stay in step with the CDC guidelines in orders to assure are those that could come to work that it was safe to do so this included adjustments to shift schedules to facilitate social distancing temperature screenings enhance cleaning of high touch point areas between shifts and requiring face.
Offerings by everyone entering our shipyards.
So during the second quarter attendance of our hourly production workforce at both shipyards was approximately 65% with several days during April and May around 50%.
Following the end of our Liberal leave policy in May we did see those metrics improve and during June and July attendance of our alley production workforce at both shipyards was approximately 77%.
Now cases have been increasing in our shipyards of states, we've opened up but we're now seeing a sustainable and manageable level of attendance and we continue to refine our policies to adapt to the changing circumstances.
Now the point of reference after Hurricane Katrina hit the Gulf Coast in 2005, we lost a significant portion of the experienced workforce at Ingalls with Cobot 19, we took a lot of bold and aggressive actions to make certain that this pandemic did not result in a similar outcome and I'm confident that we have made there.
Right decisions to preserve our workforce for the path ahead.
Now we have also been making significant investments over the past several years to digitize shipbuilding processes to accelerate efficiency and training of our young workforce. This investment created the infrastructure in our ship building support functions that allowed us to increase the number of people we had working remotely by a factor of.
10 in a matter of days.
Covert 19 has been an extremely disruptive factor on our business and we have been pursuing all potential avenues for recovery of our costs with our customers. Now there are indications that we may be able to recover directly related coven 19 labor costs like quarantining and other paid time off further provisions in the cares Act or.
Any subsequent legislation.
However at this point there remains no clear path for recovery of delay and disruption impact, though the customers intention still appear to be favorable.
Now turning to slide for the presentation during the quarter, we recognized a charge of $167 million driven primarily by updated cost and schedule assumptions across all of our programs.
The majority of the impact $111 million is on the block for votes of the Virginia class submarine program driven by recent costs and scheduled performance and updates to assumptions for future program performance and efficiencies, which include the impacts of cobot 19.
And let me provide some additional color for context and clarity.
Our plan called for cost and schedule improvements as we work down the learning curve on the block for boats in support of a to both per year cadence.
As we conducted our regular second quarter program status reviews. It became clear that the Vcs program was particularly impacted by staffing and efficiency challenges as we reprioritized work to align with our customers priorities at Newport News.
This in turn disrupted the cadence of work and significantly impacted our ability to reasonably rely on the assumptions we were using in our risk registers for both the boat learning and cost improvement.
As a result, we are resetting our risk registers to reflect the performance trends, we experienced in the quarter, including the impact of covert 19.
Note that the slide includes key milestones for our next to block for delivery boats.
I'm very proud of the team for their tireless work and uncompromising commitment to safety and quality during the ongoing pandemic going through these challenging times together will give the team in valuable insights and experiences that will help them learn grow and drive performance that meets our safety quality cost and schedule targets as we move forward.
Now, let me share some highlights from the quarter starting on slide five of the presentation.
Sales were $2.0 billion and diluted EPS was $1.30 for the quarter. These results included the aforementioned $167 million charge.
New contract awards during the quarter were approximately $3 billion, including a $1.5 billion contract for the construction of.
Pretty one resulting in backlog of approximately $46 billion at the end of the quarter of which approximately $21 billion is funded.
Our backlog is a tremendous source of visibility and stability with over 85% of expected F. why 20 to fight 24 shipbuilding revenue under contract and it's well supported by the annual congressional authorization and appropriations process to this point.
And regarding activities in Washington, We supported Cobot relief efforts by the Navy the department of Defense and Congress to help ensure liquidity of the supply base provide contractual relief and promote workforce retention.
We also continue to work with Congress in supporting consideration of the fiscal year 2021, President's budget request and we're very pleased with a strong support for shipbuilding and other national security priorities reflected by respective defense authorization bills in the house and Senate.
The houses recent passage of appropriations measures is encouraging and we have urged the Senate to complete the appropriations process as soon as possible.
And finally, we will continue to work with Congress and the administration to support additional authorities and investments that will enable our nation's economic recovery through the defense industrial base.
Now, let me share a few business segment highlights from the quarter.
At Ingalls DDG 119, Delver de Black was delivered to the Navy production was started on DDG 128, Ted Stevens the first shift for the F. why 18 multiyear contract and DG 62 Fitzgerald sailed away from the shipyard.
On the LPD program the contract for LPD 31, the second ship in the flight to class was awarded and in addition, NSC nine stone is continuing to product progress through the test program and is expected to deliver late this year.
Notably sense since the end of Q2 include the contract award for the Ddgs feed 20 option ship the eight flight three shift and the sail away of L.A.J. seven Tripoli from the shipyard.
At Newport News CVN 79, Kennedy is approximately 74% complete and the team remains focused on compartment completion and completion of our single phase delivery proposal for submission to the Navy.
CVN 73, USS George Washington is continuing to progress through its final outfitting and test phase and is approximately 78% complete the next major milestone for the ship is a startup crew move aboard later this year.
And our technical solutions business the team had to Recompete wins in two key recompete wins, including a contract award to provide analytical support services to the US Special operations Command and an award from the U.S Postal service office of Inspector General to continue providing support services to the office of the Chief Information Officer.
Sure.
TS also recently announced a major IDI Q contract award worth up to $3 billion over a 10 year period from the department of energy to provide nationwide deactivations decommissioning and removal services at X SDLP facilities across the nation.
Overall, these recent wins reaffirms HIV AIDS longstanding strategic partnerships with several of our key customers.
In addition, Ts recently completed a strategic equity investment in see machines robotics, a Boston based autonomous technology company that specializes in advanced software for unmanned surface vessels. This investment represents our commitment to advanced innovation across the unmanned systems market and our drive to form complimentary.
In partnerships in this important and growing domain.
I would like to conclude my prepared remarks by highlighting a few key attributes of our business and these attributes point to a very stable foundation, a bright future as we work our way through this undoubtedly challenging period.
We have a management team that in my estimation is the best in the business. This thoughtfulness rigor and resolve that the team has exhibited by continuing to meet programmatic milestones while dealing with the disruption from covert 19 across the business has only reinforce my view over the past five years, we have made significant.
Investment in human capital and took the right steps as cold as the Cobot 19 pandemic broke to preserve our workforce. So they would be trained ready and available to execute our record backlog as we emerge out of this difficult time.
In addition, our balance sheet is very strong as Chris will discuss we have taken a number of prudent actions recently that will lower our cost of capital and provide more than ample liquidity and we continue to see free cash flow generation accelerating over the next several years as we complete a generational capital investments in our shipyards. This.
Last year.
And finally, our backlog of $46 billion or over five times last year's revenues represents an incredible amount of work for us to execute and as a key reason, we took very aggressive action to preserve the investments we made to train and qualify our workforce over the past five years. This workforces now operate.
Turning in a significantly recapitalize more efficient shipyards with better technological tools at their disposal and is crucial to our success as we work through and accelerate out of this period of uncertainty I want to thank them for the work they've done, particularly during the ongoing pandemic.
As I said earlier this is by far the most challenging operational environment I have experienced in my career, but I know we have the right team in place to answer the call and I'm very confident that we will emerge stronger and even more capable over the long term.
So now I will turn the call over Chris Kastner for some remarks on the financials Chris.
Thanks, Mike and good morning.
Today I will briefly review our second quarter results excuse me and also provide some comments on our updated 2020 outlook.
Beginning with our consolidated results on slide six of the presentation, our second quarter revenues of $2 billion decreased 7.4% compared to the same period last year.
Operating income decreased by 118 million to $57 million when compared to the second quarter of 2019, and operating margin decreased 519 basis points to 2.8%.
The decreases were primarily driven by unfavorable adjustments totaling 167 million, resulting from updated cost and schedule assumptions across our programs that Mike discussed earlier.
Net earnings in the quarter were 53 million compared to 128 million in the second quarter of 2019.
The decrease in net earnings for the quarter was mainly the result of lower operating income, partially offset by more favorable Fas non service pension benefit.
From a segment standpoint in goals revenues in the quarter of 622 million were unchanged from the same period last year.
Ingles operating income of 55 million and margin of 8.8% in the quarter were down from second quarter of 2019, mainly due to unfavorable adjustments, including delaying disruption from co. The 19 and lower risk retirement on the NSC program.
Partially offset by higher risk retirement on the DDG program related to the delivery of DDG 119, as well as the recognition of incentives related to capital investments for the DDG program.
Newport News revenues of $1.1 billion in the quarter decreased 12.3% from the same period last year.
Newport News operating loss of $69 million in the quarter was down from operating income was $71 million in the same period last year.
Both the revenue and operating income declines were due to unfavorable cost and schedule performance and updates to assumptions for future program performance primarily related to block for both of the Virginia class submarine program.
Technical solutions revenue in the quarter was essentially flat compared to the second quarter of 2019 will operating margin improved by 344 basis points to 2.8%.
Turning to slide seven or the presentation, we've made it a priority to strengthen our balance sheet through this period of uncertainty as I said last quarter, we issued $1 billion in new senior notes and also entered into an additional 364 day revolving credit facility with 500 million of capacity, we ended the quarter with a cash.
Cash balance of 631 million and total liquidity of 2.4 billion.
As I noted last quarter, we plan to de lever in November by calling 600 million of our senior notes due in 2025.
In the second quarter cash from operations was 201 million a net capital expenditures were 75 million or 3.7% of revenues compared to cash used in operations of 44 million and $91 million of net capital expenditures in the second quarter of 2019.
We continue to expect to generate over 500 million of free cash flow for the year.
During the second quarter, we pay dividends of one dollar and three cents per share or 42 million. Additionally, we contributed 56 million to our pension and postretirement benefit plans in the quarter of which 45 billion consisted of discretionary contributions to our qualified plans.
Moving on to slide eight we have provided an updated view of our upcoming QE program milestones.
These milestones support our updated financial outlook for 2020, which is summarized on slide nine.
For 2020, we now expect shipbuilding revenue to be between 7.6 and 7.9 billion.
And ship building operating margin to be between 5.5 and 6.5%.
In addition to updates to our assumptions for cost and skills of performance. Our ship building assumptions have an updated to reflect a single phase delivery approach for CVN 79.
The revised approach will result in an updated program schedule and we'll move risk retirement milestones to future periods consistent with that updated schedule.
For technical solutions, we expect 2020 revenue to be between 1.2, and 1.25 billion operating margin to be between two and 2.4% and EBITDA margin to be between 5.76%.
These technical solutions assumptions include results from the San Diego Shipyard through August 2020, and results from Universal Pegasus through December 2020.
For your reference we've also provided a view of our full year expectations for technical solutions that excludes San Diego shipyard, and Universal Pegasus and our outlook table.
For both revenue and operating margin, we expect fourth quarter performance to be modestly stronger than third quarter performance given the timing of milestones for the remainder of the year.
Finally, I want to provided very high level view of how we currently see 2021.
We're fortunate that fortunate to have $46 billion backlog that provides a very stable foundation for the business.
For shipbuilding, we expect revenue to be between 7.8, an 8.1 billion and operating margin to be between seven and 8%.
And for technical solutions, we expect revenue of approximately 1 billion, an EBITDA margin to be between seven and 9%.
We will come through our planning process over the back half of this year and we will provide further detail for 2021 outlook during our fourth quarter earnings call.
Now I'll turn the call back over to Dwayne for Q Annette.
Thanks, Chris as a reminder, driven one on the call. Please limit yourself to one initial question and one follow up get as many people.
Cost.
Well I'll turn it over to you to manage the acuity.
Thank you, ladies and gentlemen, as a reminder to ask the question you will need to press Star then one telephone.
For your question press the pound cake.
So I wanted to ask the question.
Please standby, while the compound the kuni roster.
Our first question comes from the line of Carlin Conner coping with release research. Your line is open.
Hey, good morning, guys.
I'll take my initial and follow up and just asked two quick ones together.
One can you provide us any insight on.
Cost reimbursement.
That you may get that may or may influence some of this in the future.
Depending on what happens with that with the DSD and then secondly on.
The block for.
Negative qms.
Was there any of that that was in a not directly related to.
The disruption you've seen in the yards was it was there something idiosyncratic there that.
It's worth noting any color on that you can provide a great. Thanks.
Sure. So I think as we as you are reading in the papers all the time I think the there was authorization for some relief for.
Cobot impact that legislatively that the Pentagon has authorization for bill was never funded.
And so there is a debate right now about how do you get that funded.
And that speaks to stuff that you could say was 100% related to the virus you know the the whether it was new cleaning stations or quarantines or things like that.
What's behind that though is any sort of follow on delay and disruption our customers have told us that they want to cover that they want to find a way to cover that it's not really clear to us right now how thats going to play itself out.
Theres legislative work going on there's work with a customer going on but our our basic assumption for our report today is that while we think that theres a possibility that could happen and we're pursuing all the angles are basic assumption is it. We're we're assuming that's not not in the that's not in the numbers yet.
And so that's that's definitely in effect for us.
Secondly, Carter, you know as pretty well whenever whenever something doesnt quite go right. Our first inclination is to say hey, that's on US we didn't manage that right. We didnt have the REIT qualified person or we didnt have the.
The right instruction, I mean, getting the getting the quality in the qualified person in the sequence ride and getting instruction right.
We start in with a very clear I view say, hey look thats on US we did not get that that is that inefficiency was our issue.
And we had some of that here in this quarter, but you don't have to scratch very far behind those things and we we have those every quarter.
But you don't want to scratch very far behind those things and either there was a direct or indirect or direct impact of co good or an indirect impact of cobot or we just don't have the the degrees of freedom that we need to be able to recover from that inefficiency because of covance and so the the.
The challenges, we can isolate cost in our business that are 100% cobot related but when you move to the rest of it and say we have inefficiencies in the program performance to try to separate out how much of that as this is because we didnt have a right. The right person at the right time and this is because we had impact from virus it becomes really hard to say.
Separate all of that.
And Thats why we reported at the way we did.
Okay.
That makes immense amount of sense. Thanks, Mike.
You bet.
Thank you.
Our next question comes from the line up.
Bernstein Your line is open.
Good morning, Thank you one and.
Staying on the.
Virginia class you attributed a 95 million.
To sort of non co bid and I guess.
As you would you say Mike.
Cobot could have played a role perhaps in some of that I guess.
We haven't really seen do you kind of issues.
General dynamics.
Im just trying to understand how these use you see there that into the overall, Virginia class.
Block four program or the things that are in the sense Newport News specific.
Rather than something that's impacting.
The broader walk.
Yes.
Im going to suggest Doug that's a hard question I'm going to suggest that thats, probably a little bit more related to the uniqueness of Newport News shipbuilding.
Newport News has got.
Ill.
Wide assortment of different products and different.
Conditions are those ships and at the beginning of this process.
Working with the Navy to try to make sure we prioritize deployable ships.
And then unit deliveries that starts to move around the priorities in the business a little bit.
And so.
Thats.
When you think about deployable assets you take your thinking about the submarine repair work that we're doing youre thinking about the our COO age that we're doing we're supporting the Ford at Sea right now with weapons elevator work, we're supporting but frankly supporting naval shipyard worker around the country in some with some key.
Skills.
What happens is that you start when you when you are at less than full attendance you start moving people from one area to another and you start trying to make sure that you are focused on getting the right skills on to the right place and so I think thats unique to Newport News I think that dealing with commission ships in deployable assets is a unique.
Challenge for them in this in this environment.
Having said that I would say that.
The focus on near term milestones across the business has been pretty good.
It's the it's the tail end the opportunity to recover in the tail that is the challenge. So I don't know, Chris if you want to add anything to that.
Well.
And just to follow up then as we think forward in the past we had been looking to block for.
Ads.
As you move down the learning curve and is that matures as a good source of margin expansion.
You were looking at more this 9% to 10% raised before for next year and pull that back.
Are we as we look longer term.
I mean, you're heading into.
What I think because the more challenging part of CVN 79, the back last for me.
How are you sort of thinking about the margin trajectory at Newport News.
Last year and beyond compared to where you were before.
Well I'll start for the.
Thanks, Doug for the for the total business, we thought it was important to get some 2021 information out to you all we're still coming through.
Our plans.
For the future years I'll give a comprehensive.
Analysis of 2021, and how we see shipbuilding margins evolving, but I only see an improving from the numbers that we gave you for 2021 as we move into future periods.
And let me just add I think that in general a trajectory at Newport news today compared to what it was four months ago.
Is going to be a little bit that's going to take a little bit longer to get there and I think it's two parts of it one as.
You know how is blocked for going to play itself out too is.
We havent negotiated the single phase delivery on 79, yet.
As Chris mentioned in his remarks, that's going to push milestones that we were.
We were looking at for this year in the beginning of next year.
It's going to push those milestones out so.
So the trajectory is going to be a little bit flatter.
My my overall view of what's going to happen at Newport News is there going to hit home runs its just going to its just going to take them a little bit longer to get there because of the because of the kind of work mix. They have right now.
Okay. Thank you. Thank you.
Thank you.
Our next question comes from the line of Myles Walton.
Your line.
Thanks.
Mike a quarter like this kind of stands out.
Hundreds in was more exposed to.
An abnormality externality in the market.
I just wonder.
Versus peers and I, just wonder as you talk to your customer.
Can you point out something like this or something like a trainer.
Pick the externalities that.
You see more exposed to the not why doesn't this enter the discussion about what profitability should look like for the seemingly idiosyncratic risk that you carry in such a long cycle business.
I think thats, a really good question and it's certainly a topic of conversation that we have with a with the customer.
I would suggest we probably have that conversation with them weekly if not daily.
You know the the other side of that miles and I'm I'm just going to tell you. How the conversation goes is that the other side of it is it's there's $45 billion a backlog.
And there's there's revenue for there's revenue for this business that we can see into the next decade and so there's a there is a.
A lower risk around the stuff that is under contract than the other stuff that they're working so this is all part of the contract negotiations and and.
You know I'm not sure that we actually had pandemic in our risk registers. When we entered our last round of contract negotiations. It will certainly influenced the way that we think about negotiations going forward.
But you know it's it's a it is a bit of the conversation.
No.
And Chris if if the Grand settlements were to come out how much of the.
But identified cost that you had in the in the press release would be reversed is it the $61 million of discrete items is larger than that unique visibility on yes. We will no doubt. The 61 is discreetly identify this delay in disruption that we estimated against our programs, but it's very difficult.
So to estimate the impact on the balance of the negative adjustments no doubt.
It is included in there, but it's very difficult estimated at this point.
Yes.
Okay I'll leave it to thank you.
Thank you.
Our next question comes along with Robin Citi. Your line is open.
Okay.
Thank you. Thank you. So I guess, another 2021 numbers will be asking about 2022 now.
But.
Thank you for that color, but let me Mike you mentioned in your opening remarks that you do expect free cash flow to continue to grow here I mean, Chris you reiterated 500 million at least this year.
You talk about the multiyear targeted letting the previously communicated on the 3 billion through 2024, and how you pay attention and.
Hi, maybe pension in that in that context.
Yes, Okay. John. This this is this is Chris I think there's a lot of moving parts and cash right now we have line of sight.
On 2020, where we're comfortable.
With the.
A bit over 500 million.
But with the cares act and the.
Shipbuilding schedules moving a bit in a single phase delivery.
I think it's a bit early to talk about 21 of the on from a free cash standpoint, where it will give you a comprehensive look at that.
At year end in February.
Okay. I mean can you talk about some of the moving pieces that we should be little more specifics on someone's willing pieces that the target I think you've previously talked about.
So so what are some of the big swing items that could be shifting here just because it's a cumulative target that captures several years and theoretically captures a lot of the mid year to year volatility typically see.
Sure Cures Act, obviously is is timing.
Timing related capital and pension seem to be <unk>.
Assistant working capital will move between the years, but I don't see much impact there and then obviously less profitability.
This year in Nashville impact us a bit, but thats really the moving parts at this point so to give you a good timing.
And a cumulative number I just wait till we ended the year.
Well he wanted to thank you.
[music].
Thank you.
Our next question comes from the line of Robyn. Thank all with credit Suisse. Your line is open.
Hi, good morning.
Good morning.
This could be either for Mike or for Chris, but what's the framework you will apply to your capital allocation decision, making thinking about.
The money put into the yards and 1.8 billion in the.
And just the latest returns on the business ex co bit they just arent necessarily what you want them to be.
Consistent compared to peers.
Particularly when I come when I compare this to your cost of capital. So just curious on the high level framework you apply the decision making both in terms of internal investments and then also really M&A as well.
We're all start Robin then.
Chris can chime in and correct me.
I'm going to take you back and remind you from the very beginning that the capital investment that we made.
Was a generational capital investment we described it that way from the very beginning we we eggs actually started down the path and said this is not going to create.
New sales and it's not going to necessarily improve any current program performance, it's going to be a generational reset of how the business is going to be operating for the next 25 or 25 to maybe even 50 years.
What happened is that as we made that investment a created confidence in our customer.
That they could as they saw requirements for more ships. They say they basically came back and said we need to go buy more ships and so the last three years. The order book has filled up.
Well we are today is that we're on the back end of the capital investment and we have a backlog that is historically high.
I wish I could say I was smart enough to say that investing in that capital is going to create that backlog I was not that smart, but it sure worked out.
Now we have a recapitalized facilities.
And we have in the investment we've made in workforce sets us up to go execute the backlog.
The returns that were seeing here.
So far I'd say, the jury's still out the quite frankly the.
We've had to reset the workforce over the last five years, we're on the front end up several major with the backlog run the front end of several major big programs.
We have we had three carriers under contract for construction right now it's been 30 year since we've had that situation in Newport News.
Ingles continues to.
Compete successfully in the destroyer program and the Navy continues to move forward with amphibious programs and then and the Coast Guard program seemed goes very well and the investment that we've made in the shipyard in the future and Pascagoula has been.
Has been very effective in driving efficiency into the programs. So so I think that.
I'd say that the jury's still out on the returns.
But I, but I am excited about where we're going to go because I do think that.
Kind of narrowly around Cove at first.
We had we had about 10 days from the time, we stood up our crisis team till we had our first case.
We absolutely did not have mature set of protocols. When we started you now and we started down the path trying stuff and some stuff work in some stuff didn't work and we backed out of things and we tried new stuff.
Let me give you a sense of where we are today.
Today, we are we've had we've had as many cases in our CNR business in the last two and a half weeks as we had in all the time before that.
Yeah, we're operating in a very sustainable way with of mature set of protocols, it's allowing us now to be able to predict the business going forward and and beyond that we have a workforce has been through this particular event as a common behavior.
It will be that will be a unifying.
Uh huh.
Is that our cataclysmic cata CAD catalyst for them.
For the remainder their careers and I think that now they're moving into and we've even seen there they're ingenuity to take advantage of the capital investment take advantage of the technology investment and accelerate the opportunity to do better on that so.
It's been a rough it's been a rough three months, but man, we have learned a lot and weve accelerate a lot of opportunity here to transform the business and I'm I'm very excited about that I'm I'm really interested and really really excited to be leading a chance to to go after that those returns that you're talking about on capital.
Yes, as all at raw, we use all the appropriate measures to measure capital or capital deployment decisions, but I'd also point to some investments we've made over the first part of the year on the unmanned space and in hydrogen see machines user very important feature the navy on the future day tie.
So we're very we're pleased with those investments are those the type investments were looking looking for in the future.
Okay well.
You guys, both make good points and Mike I understand that's a fair point that its.
You know expanded the backlog.
But and again beyond coal did not factoring that in but longer term you are the returns the same as they've been with that larger backlog is this still a 9% to 10% shipbuilding business.
Yeah, why not I mean, I think it's actually could be yes, 99% to 10%. The question is when you're going to get there and that's going to be driven by some of the contracting things that we're doing around 79 and the activity around cares act and that sort of thing, but it's also going to be driven by you know how.
It is how to how do we come through the pandemic can accelerate out the other side of it.
Whenever wherever the other side of it as but yeah, it's definitely a 9% to 10% business.
Okay. Thank you.
Okay.
Thank you.
Our next question comes from Atlanta, Ron Epstein with Bank of America. Your line is open.
Good morning does.
So Mike I think probably census from the terminal for questions.
You reiterated this 9% to 10% business, but we had to stumble here on the Virginia class you got the big backlog, how can the outside community feel comfortable that you will execute on that backlog.
After this number right.
Probably is probably pretty palpable questions that are being asked I mean, how can investors feel comfortable that you'll.
Execute on that backlog.
You know, it's it's a show me story, Ron I mean at our view of it is that we know we got to go do we built the team to go do it we've made the investments we need to make go do it it's going to be just the rhythm of actually executing over and over again.
I've been through this before.
You know I haven't had been through the pandemic before but.
I think I mentioned in my remarks comment on the back end of Katrina, where.
When we started a katrina we did not have really.
The cohesive workforce.
We have today across the business and in fact I used to say that at the beginning of 2008 and Katrina, we had the youngest workforce in the industry at angles.
And in three years, they delivered 10 ships and three years later, they were still the youngest workforce at angles, but they had been the there were the most experienced workforce in the industry and that is serve them very well over the last decade.
I think thats, where I thought Thats, where Newport news was any way before the pandemic and what I see in a pandemic is this young workforces is accelerating the transformation of the business I can't tell you anymore. Then you got to we put milestones out there we're going to go achieve those milestones and you're going to track the performance.
That's probably the better best thing I can say.
As we go through the next quarter or two or three.
As outsiders looking what signposts or be look for when when what's the next thing that folks. Okay. Yes, they are really doing it.
We'd be looking for.
Ron that's a good question. The this is Chris so specifically on the Vcs program.
The story is going to be told by 794 and 796.
So the float off of 794 over the back half of the year here.
And then pressure whole complete.
At the beginning of next year those the next major milestones on those boats and we're going to provide you information on every.
Quarterly release until we get those down to give you progress against those.
Okay all right. Thank you.
Yeah.
Thank you.
Our next question comes from the line of George Shapiro.
Research.
Good morning.
I wanted to say.
I just wanted to pursue.
The margins that are imply here. So if you took out the charges from Newport News.
Or any of them back the.
The core margin is like 3.5%.
Normally that's been running it benefited about 6%. So is this 3.5% the normal margin week that should expect going forward because its calibrated for the adjustments on Virginia class as well as the Kennedy.
No no ones and so we don't we don't give ship margins by by Division were.
Between seven and 8% for the last.
Q3 in Q4 for the balance here in shipbuilding.
Consistent with how we guided for ship building for the year.
Okay, and then on the other hand, if you looked it if I assume the balance of the 56 million.
On favorable adjustments and I guess.
Is that new pool is at Ingalls the margin at Ingalls would have been extraordinarily high like 60% or so it seems kind of out of the norm or maybe not all the charges go there. If you could explain why the implication as you get such a high margin now let me give you the.
Kind of a comprehensive look at the Cume adjustments, Okay Georges.
Unfavorable of once 67 favorable a 56 for a net of 111.
Of that net negative 126 as Newport news.
Angles as positive 13 at Ts is positive too.
Okay.
Okay.
Okay, well when can walk you through that after the call as well George.
Okay, and then maybe just one for.
It more general one so the revenue guidance that you imply for shifts for next year you have to lowering this year.
Is that just reflecting the schedule delay over several years or so why wouldnt otherwise why would the revenues be somewhat better next year than what's your guide so.
Simply projecting the schedules for the ships out into next year, but wanted to provide an anchor out there for you all to do your modeling will provide an update to that at the year end.
Okay. Okay. Thanks very much.
George Barrett.
Thank you. Our next question comes from the line itself.
With JP Morgan your line is open.
Great. Thanks, very much and good morning.
Morning.
Oh little bit on the profitability.
Heading into next year.
I think the the guidance implies kind of.
Mid to high seven and ship building for the remainder of 2020.
You talked about seven to eight for for next year, when when we think about the moving pieces.
What kind of prevents any margin expansion next year, and what's kind of pushing out a milestone on on the carrier that might allow you to.
Deliver some some of that margin expansion.
Yes, we wanted to provide an anchor for next year. She could do your modeling as it is that just told George were coming through that single phase delivery on 79.
And when we will.
Adjust our plants based upon that found negotiated settlement in the schedules that result from it.
So right now the best outlook, we have is while I provided in my script and want to provide and the outlook.
If that changes I'll definitely let you will know.
Okay. Thanks, and then just as a follow up could you remind us the.
The period of time remaining on that you expect to be working on the block for both that this.
100, a little under $11 million negative adjustment.
Applies to your expected profits over.
What's the period of time on that so hopefully.
Sure.
Delivery is 800.
It it's three to four at least three to four years out we will follow up without okay. Okay. So.
Okay.
Great. Thank you very much sure.
Thank you. Our next question comes from the line of Gautam Khanna Cowen Your line is open.
Hey, Thanks, good morning, good morning.
Two questions I guess, the first is a follow up to one of the earlier ones.
On the Vcs plus four so recall a couple of years ago in Q4.
There was a negative cume catch up.
And I just want to make sure that was is there any way to disaggregate the current acute catch.
As to whether you know I have just like what was the realism.
Implied in the.
As of Q1 accrual rate versus Q2 was there a lot of productivity that was baked in and it was always going to be.
A bit of the spreads to get there I'm just trying to figure out like how much of this is residuals from what.
Where the issues earlier, a couple of years back in Q4.
Well versus just cove it disruptions.
Well, that's a largely kind of three Austin gross yeah. Yeah. That's that's a hard answer go hard question.
The one to answer I will tell you that it's a very disciplined process, we use every quarter to assess or he AC and as Mike indicated in his script. When we came through the Dcs CAC. It just became apparent that we needed to reset.
Our risk registers and reset.
Our expectations for that program.
So it's kind of a challenging answer relative to the way you asked the question.
But.
This adjustment in this quarter's a product of any AC processes.
Very disciplined and that we need to follow on a quarterly basis and similar to.
What we use on all of our shipbuilding programs.
And we do it every quarter it Eric you know and review the review at the end of first quarter did not indicate.
That there was a there.
There was an issue.
Right and this is Mike I think last quarter, you had made a comment that you thought you might be able to catch stuff up later in the year is the only difference that workforce.
And tias and et cetera that.
I'm, just trying to isolate for the variables that.
Because of explains the difference one quarter. The next obviously coal that has lasted longer.
But I.
Yes.
I think its a.
I don't remember the specific comment I would say that we know a lot more about it today than we did a.
At the end of April beginning in May when we had that call.
I do think that we said.
We were going to be work and near term milestones milestones.
Given the attendance we are going to be working near term milestones at the at the expense of long term ones.
And we thought our suppliers are going to be doing the same thing and so.
We're kind of working our way through that now, but I'll go back to where we stand today, we have oh, we have a pretty predictable sustainable.
Understanding of the effort that we have in the protocols. We haven't placement. So we can we can now start to predict how the business is going to go forward.
I would not tell you that we're going to make up all the milestones from Q2 by the end of the year I don't think thats going to happen.
And some of those things may take a quite a bit longer to makeup so.
We'll have to just see.
Yeah I appreciate it's a very disciplined question to answer precise in Paris just separately.
Long term you'd given the size your guide on free cash flow.
What's the back into that time period, I think it was approaching 700 million.
Any revision to that view based on what's happened today.
Yes, as I said previously we need to come through.
Come through our planning process prior to updating that but the essential factors that made up that guidance haven't changed the backlogs their profitability it will take longer to get to 9% as as Mike indicated capitals. The same pension is the same.
At this point and we will provide updates if we need to but.
Yes, Theres no reason to change it at this point and I'll provide a comprehensive update at the end of the year.
Thanks, guys.
Thank you.
Our next question comes from the line of David Strauss Barclays. Your line is open.
Hey, good morning, guys, if thats the money going on for David.
Can you comment on the free cash flow guidance maintain the guidance for the year, even though it sounds like Capex is maybe a little bit higher and shipbuilding outlook.
Little bit West is talking about what maybe the positive offsets weather.
Yes, So cures act.
Absolutely helps us with the deferral the payroll tax.
Thats a positive the than 80 customers have done an outstanding job.
Of ensuring that we get paid through this entire process. So we've been paid on time.
And we've been making our milestones right we delivered deliver 119 delivered 62.
Nick and most of our milestones so I'm pretty comfortable with where we are from a cash flow standpoint this year.
Okay. Thanks, and then I guess, just going back to Virginia class.
What's the mix of block four versus by the working on now and is this.
Negative cume catch incorporate anything for block five or or is it all bought four and sort of how do you think about the risk.
But it's all block four were very comfortable with where we on block five right now we just started that program.
And we're very conservative when we start off a block.
Right.
Okay. Thanks, guys.
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Thank you.
Your next question comes from Milan of Joseph Denardi with Stifel. Your line is open.
Hey, good morning, I promised asking on margin question, but my first one will be on margins of.
Mike or Chris do you have visibility into getting back to nine to 10 for ships and.
Best case can you get there in 2022 or is it beyond that and does does going to single phase on CVN accelerate getting back there or or delay it.
Well, we have to come through the negotiation of CVN 79 to determine what that impact will ultimately be and I hate to be broken record, but there are a lot of moving parts right now.
Well, we're confident we're going to get there we just need to finish our planning process before we can give you a better guide at this time.
Okay, Okay, and then Mike Mike you all talked at the Investor day around capital deployment and building out your services Division with the focus I think on on nuclear services assets is that still your mindset as covance.
Kind of delayed capital deployment via M&A at all and How's the pipeline of opportunities look thank you.
Yes so.
Were we completed the the hydro at acquisition after that factored all of this started.
And we just made an investment in see machines for some autonomy in the unmanned space we.
We're very comfortable with where we are in unmanned and where we need to go and we have we have a view as to how to proceed there.
And ER and so the market is really the issue in terms of how things are getting valued today.
But that's a that's kind of you know it's just the environment. We're in on the deal we signed the the energy side. It's the same thing as I mentioned that we are we continue to increase our presence as a prime to the department of energy.
We continue to increase our presence across all of the the deal you sites and so were we we have line of sight there on things that our customers looking for capabilities that they need and we have thoughts as to how to go and provide that.
In the.
In the.
The remaining pieces that government services piece I'm, you know I think where we have to go there is because that's where valuations are really kind of hard to pin down I think we have to go there is a demonstrate that we can execute in that business and then be.
Understand the niches in that business were.
Specific capabilities will make a big difference for our customers and proceed down that path. So that's where we're thinking about it we're not changing that were maybe refining it a little bit given the current environment that we're in.
But we remain committed to it one of the things that we have.
We are kind of live in the dream on right now is that.
We are in a place where we are very heavily centered on manufacturing the the nonmanufacturing part of our business the services part of our business.
Actually did pretty well you know and is doing okay. During this pandemic so.
The challenges that we've had in manufacturing haven't really replicated to the any extent on the services side and that just validates our idea that we have to continue to try to diversify the business.
So.
Thank you.
Thank you.
At this time I would like to turn the call back over to management for closing remarks.
Well I want to thank everybody for joining us today.
I hope that you and your families continue to stay safe and healthy and as always we do appreciate your time and we look forward to speaking with you again real soon.
Thank you.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect everyone have a wonderful day.
Right.
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