Q4 2020 Huntington Ingalls Industries Inc Earnings Call
Question to ask a question. During this session you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please.
Please be advised that today's conference is being recorded.
If you need further assistance you can press star zero at any time to reach an operator I would now like to hand, the call over to Dwayne Blake Vice President of Investor Relations. Mr. Blake you may begin.
Thanks, Good morning, and welcome to the Huntington Ingalls Industries fourth quarter 2020 earnings Conference call.
With us today are Mike Petters, President and Chief Executive Officer, Inc.
Chris Kastner Executive Vice President and Chief Financial Officer.
As a reminder, statements made in today's call that are not historical facts for victory.
Forward looking statements and are made pursuant to the safe Harbor provisions of Federal Securities Law.
<unk> 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 on.
Also in their remarks today, Mike and Chris will refer to certain non-GAAP measures.
Reconciliations of these metrics for the comparable GAAP measures are included in the appendix of our earnings presentation, that's posted on our website.
Plan to address the 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 link to view the presentation as well as our earnings release.
That I will turn the call over to our President and CEO, Mike Petters Mike.
Thanks, Dwayne good morning, everyone and thanks for joining us on today's call.
Trusts that everyone is staying healthy and safe.
So before getting into the results for the quarter and the full year, let me take a few moments to reflect on last year.
2020 will be remembered as one of the most challenging business environments that we have ever had to navigate throughout the COVID-19 pandemic. We have made decisions that are focused on the safety and well being of our employees and I could not be more proud of the way our team responded to the challenges while on during the difficulties and uncertainties of the pandemic.
We demonstrated an uncompromising commitment to safety quality cost and schedule that allowed us to achieve significant milestones on our programs and continue making meaningful contributions to national security.
Specifically during 2020, we delivered three shifts the amphibious assault ship USS Tripoli.
<unk> missile destroyer USS Delbert D Black and the National Security Cutter stone.
We also Chris from Virginia class attack submarine, Montana, and we laid the keel for Massachusetts.
Now consistent with the strategy outlined during our Investor Day meeting last February we continued to invest in unmanned in autonomy capabilities, we acquired hydroid and established a strategic alliance with Kongsberg Maritime we broke ground on the unmanned system Center of excellence in Hampton and closed the year by acquiring the autonomy.
Business, our special integrated systems and industry leader in unmanned surface vessel solutions.
Now, let me share some highlights from the quarter and the full year starting on slide three of the presentation.
Sales of $2 $8 billion for the quarter and $9 4 billion for the full year were approximately $14, 5% higher than 2019, respectively and they represent record highs for the company the.
The diluted EPS was $6 15 for the quarter and $17 14.
For the full year.
New contract awards during the quarter were approximately $3 5 billion.
Resulting in backlog of approximately $46 billion at the end of the year of which approximately $20 billion is funded.
Our shifting through activities in Washington for a moment, we were very pleased that the fiscal year 2021 budget cycle ultimately concluded with the passage and enactment of defense authorization and defense appropriations measures.
Both pieces of legislation strongly supported shipbuilding, including funding and authority for an additional Virginia class submarine the bundled purchase of La <unk> nine with Elpida, 32% and 33 and long lead material for an additional DDG 51 class destroyer the.
The final bills also continued support for the dual purchase of CV, and 80 enterprise and TV and 81 doors Miller as well as the refueling and complex overhaul of Cvs 70 for USS John C. Stennis.
Regarding the fiscal year 2022 budget cycle, we look forward to working closely with the New administration and Congress to best maintain the current fleet and build the future fleet that our nation requires.
Now, let me share a few business segment highlights from the quarter at.
At Ingalls NSC nine stone was delivered on sail away from the shipyard in December the DDG program remains focused on completion of production and test activities planned for this year, including sea trials for DDG 121, Frank E Peterson Junior.
Major machinery light off events for DDG 123, Lena H Sutcliffe.
And then launch of DDG 125, Jack H Lucas for first flight III destroyer.
In addition, <unk> 28 Fort Lauderdale is on track to complete Sea trials later this year, while Elpida 29, Richard in Mccool Junior and LPT 30, Harrisburg continue to achieve their planned production milestones.
And at Newport News <unk> 79, Kennedy is approximately 78% complete and the team is aligning plans with a single phase delivery requirements, while continuing to focus on compartment completion and key propulsion plant milestones.
<unk> 73, USS George Washington is approximately 85% complete and the team remains focused on final outfitting and test activities to support re deliveries for the Navy planned for next year.
On the Vcs program, both SSN 790 for Montana, and SSN 796, New Jersey achieved key milestones this week.
Montana achieved the float off milestone and we will continue its test program activities at the Pierre.
This submarine is approximately 91% complete and still expected to deliver to the Navy in late 'twenty one.
New Jersey achieve the pressure hull complete milestone is approximately 72% complete the next significant milestone is scheduled for this submarine is float off in the second half of this year.
In our technical solutions business. This was another busy quarter as I mentioned earlier, we acquired the autonomy business of special integrated systems at the end of the year. This acquisition complements our current unmanned capabilities with proven autonomy sensor fusion and perception capabilities, including multi vehicle can.
Troll. These combined capabilities will help us serve our customers growing needs for unmanned undersea and surface autonomy solutions.
The other significant milestones in unmanned systems included the delivery of new Remits 100 unmanned underwater vehicles to the German Navy.
And opening of the first of two planned buildings on the 20 acre unmanned system Center of Excellence campus.
These facilities will be used to assemble haul structures for the U S. Navy's orca extra large unmanned undersea vehicle program.
Our nuclear and environmental business continues to leverage <unk> nuclear operations DNA to take advantage of opportunities within the Dod and commercial nuclear decontamination and decommissioning markets.
And finally, our defense and federal solutions business continues to receive very positive customer feedback under our persistent multi role operations contract on.
Under this contract vehicle, we provide support for U S Air Force intelligence surveillance and reconnaissance requirements in the European and the African theaters of operation.
Now as I prepare to close let me thank our more than 42000 employees for their sacrifices hard work creativity and determination during a very difficult year from the very beginning we viewed COVID-19 is a human capital crisis, and we made the decision to give our workforce the flexibility they needed to do.
Deal with the disruption in their personal lives.
This in turn allowed us to preserve the significant investment we have made over the past five years hiring training and qualifying our workforce. So that they would be available to execute our record backlog as we emerge from the pandemic.
After finishing 2020 with two consecutive strong quarters I am convinced more than ever that we have a very solid foundation and a bright future for our business. The key attributes that support. This foundation include a historic $46 billion backlog, a strong management team a well trained workforce are significantly.
<unk> and more efficient shipyards expanded unmanned capabilities and a very strong balance sheet. We entered 2021 is a stronger and more agile company with positive momentum and an enormous opportunity to leverage our historic backlog to generate strong free cash flow and create long term sustainable value for our share.
Holders, our customers and our employees now.
Now before I turn the call over to Chris let.
Let me make a few comments about his transition to the newly created role of Chief operating officer.
Chris will oversee the company's three operating divisions and work closely with the division presidents to drive execution on our historic backlog.
And I see this as the next step in the maturation of HII.
Our governance model has typically been very federated pushing as many decisions as far away from the center of the company as possible.
But what we are hearing from our customers is that they are looking for us to be able to bring different parts of our business together in order to solve their complex problems.
They actually see us more of an integrated whole than as a collection of businesses and its up to us to find ways to create value from this opportunity set by smartly collaborating across our shipbuilding a technical solutions segments.
And let me also welcome Tom Steely to the role of CFO, Tom has done a fantastic job as the CFO at Ingalls and I am confident that his strong financial and operational background make him the right choice for this position.
And now I will turn the call over to Chris for some remarks on the financials Chris.
Thanks, Mike and good morning.
Today, I will briefly review, our fourth quarter and full year results and also provide some additional information on how we view 2021 and our longer term outlook.
Beginning with our consolidated fourth quarter results on slide for the presentation.
Our fourth quarter revenue for $2 8 billion increased 14, 3%.
<unk> to the same period last year, primarily due to growth in Newport news driven by increased material volume for CV on <unk> and Cvs on 81 and higher volumes for the planning effort for the <unk> of <unk> 74.
As well as higher volume for the Columbia, and Virginia Class submarine program.
Operating income for the quarter of $305 million increased by $119 million from the fourth quarter of 2019 and operating margin of 11, 1% increased 335 basis points.
These increases were primarily driven by higher risk retirement across numerous ingalls programs.
And improved performance in technical solutions.
Primarily due to fourth quarter 2019 results that included an asset impairment related to our oil and gas business as well as a loss on our fleet support contract.
Fourth quarter 2020 results also included a more favorable operating SaaS cash adjustments.
Moving on to consolidated results for the full year on slide five.
Revenues were $9 4 billion for the year on increase of five 2% from 2019 the.
The increase was driven by growth across all segments, including higher aircraft carriers submarines and fleet support revenues at Newport News.
Higher surface combatants and amphibious assault ship revenues at Ingalls and the inclusion of hydroid in technical solutions results.
Operating income for the year was 799 million and operating margin was eight 5%.
This compares to operating income of 736 million and operating margin of eight 3% in 2019.
The increases were primarily due to a more favorable operating SaaS cash adjustment compared to 2019.
Partially offset by lower segment operating income, including the impacts of the second quarter reset to the Virginia class submarine program cost and schedule expectations.
Our effective income tax rate was 17, 8% for the quarter and 14, 1% for the full year.
This compares to 13, 4% and 19, 6% for the fourth quarter and full year 2019, respectively.
Turning to cash flow on slide six for the presentation.
And we ended the year with a cash balance of $512 million.
During the fourth quarter as previously noted we did delever by redeeming $600 million of our senior notes that were due in 2025.
As a reminder, that call premium added approximately $15 million of incremental interest expense in 2020.
Cash from operations was $602 million in the quarter and free cash flow was $469 million.
For the full year cash from operations was $1 1 billion and free cash flow of $757 million.
2020 free cash flow benefited significantly from the receipt of approximately $160 million of net accelerated progress payments and a deferral of approximately $130 million for the employer portion of payroll taxes in 2021 and 2022.
Cash contributions to our pension and postretirement benefit plans for $246 million in the year of which $205 million were discretionary contributions to our qualified pension plans.
During the fourth quarter, we paid dividends of $1 14 per share or <unk> $46 million, bringing total dividends paid for the year to $172 million.
Prior to pausing share repurchases in mid March we had repurchased 391000 shares at a cost of $84 million.
We did not repurchase any shares during the fourth quarter of 2020, we did re initiate repurchases earlier this year and continue to view share repurchases as an integral part of our capital allocation strategy over the long term.
On slide seven we have provided an updated five year pension outlook and on slide eight of our presentation. We have provided details on our 2021 outlook.
In that regard, we expect 2021 shipbuilding revenue to be between $8 two on $8 4 billion and shipbuilding operating margin to be between 7% and 8%.
Additionally in 2022.
We expect shipbuilding operating margin to be in the low 8% range with steady improvement in subsequent years as Newport news programs mature.
For technical solutions, we expect 2021 revenue to be approximately 1 billion, we expect operating margin to be between three and 5% and EBITDA margin to be between 7% and 9%.
With the expected year over year improvement driven by improved performance on our portfolio shaping actions following the normal cadence for technical solutions, we expect that first quarter operating and EBITDA margin will be below the low end of the annual guidance range.
Next I'd like to provide some additional context on on a long term free cash flow outlook, which you'll find on slide nine.
We expect that 2020 in 2021 will generate between $900 million and $1 billion on free cash flow cumulatively and that over the five year window from 2020 through 2024, we continue to expect to generate approximately $3 billion of free cash flow.
As indicated on slide nine our 2020 through 2020 for free cash flow forecast is supported by long term average annual revenue growth in shipbuilding of approximately 3% as.
As well as technical solutions top line growth of 4% to 5% annually combined with margin expansion in both shipbuilding in technical solutions. Additionally.
Additionally, we expect capital expenditures to decline from approximately three 5% of sales in 2021 to approximately two 5% of sales in 2022 and beyond.
And we expect continued strong working capital management.
Finally on slide 10, we have provided an updated view of anticipated major shipbuilding program milestones for 2021 and 2022.
As you can see 2022 includes more deliveries in 2021 and supports our expectation for incremental margin expansion and free cash flow generation in 2022.
Now I'll turn the call back over to Dwayne for Q&A.
Thanks, Chris.
As a reminder to everyone on the call. Please limit yourself to one initial question and one follow up so we can get as many people through the queue as possible operator, I'll turn it over to you to manage the Q&A.
We will now be standard question and answer session to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two.
Our first question today will come from John <unk> with Citi.
Thanks, and good morning.
And also congrats to lots of two crystal lithography for it so it.
Can you clarify Chris just on the 7%, 8% in 2021, how much net negative in there from from Covid type 30 tax when you mentioned net income the size that youre not expecting much in terms of reimbursement.
And then and then also there is thinking about kind of like the Inc.
Thereafter, the low weight is that assuming on reimbursements.
So yeah, just a first question on net net Covid impact yes.
Don't expect any reimbursement.
Within our guidance related to the Covid impact.
Again, I split that into two buckets, one is immaterial which is.
Cleaning sort of expense that will eventually get through and there'll be some upside to that but I don't think its material and then delay and disruption so theres really no negative.
Performance impact assumed in the 7% to 8%.
Okay.
And then just turning to capital deployment.
<unk> got a couple of things in TFS over the years, mostly smaller mostly smaller items.
For the losses, but also a year ago, you talked about expanding TFS and real focus being there lots of activity in that PFS type market.
What kind of things you're looking for in terms of capability or size and to what extent has the pandemic.
Or what your navy customers, saying or quite frankly, our stock price.
Change the math around what option you find more attractive than another when it comes to capital deployment.
Yes so.
First of all starting with where we think the opportunities are we continue to see opportunity on the unmanned space, whether that's technology capture or.
Portfolio expansion, we were just kind of keeping our eyes open on how do we how do we make sure that we've got the right footprint of capabilities on the right portfolio to go support where we think the navy might be going.
We believe that our energy business, our department of energy business and our nuclear operations business is.
Finding its stride very well and we think that there's great opportunity there, especially on environmental management.
Moving forward. So we're kind of watching that very very closely right now.
And the.
The support for for the federal government across all the rest of our solutions with cyber on it.
We have demonstrated now that we know how to run that business and so we're watching that.
That's a pretty dynamic space right now on valuations are kind of challenging and so we're still going to continue to think about what are the capability sets that we need as opposed to how big do we need to be.
And Thats kind of the way, we're thinking about it going forward, yes, Jonathan I could add I consider it really kind of a back to normalcy from a capital deployment standpoint, we're finishing our capital program.
We think it has been very successful over the last few years the dividend will be.
Increase but more modestly.
Going forward and then we're going to be very opportunistic in share buyback and then evaluate the markets and opportunities as Mike indicated.
Thank you.
Sure.
Our next question comes from Carter Copeland with Melius research.
Hey, good morning, gentlemen.
Congrats on the.
The moves.
<unk>, Chris and welcome Tom.
Thanks, Scott good morning.
Just a couple.
Could you tell us the.
The anticipated timing on the delivery of.
On New Jersey is that is that a second half 'twenty two.
Events, and then just with respect to the various programs outside of Montana, and New Jersey are there any other boats that you would consider.
Significantly below the company average margin at this point.
Yes, so alright.
You don't want to comment on individual ship margins, but new Jersey is mid to late 2022.
Okay.
And then Chris just as a clarification is always can you give us the eac's favorable and unfavorable for the quarter share pop.
Positive was 88 negative.
<unk> 42 for a net 46 over 90% of the of that net was ingalls.
Ingalls had a very good Q4 with delivery of NSC nine and then <unk> 'twenty eight 'twenty nine are performing very well down there at Ingalls.
Okay, great. Thank you for the color I'll, let somebody else ask share. Thanks.
Our next question will come from.
Myles Walton with UBS.
Thanks. Good morning, two quick ones. One is on the volume side, obviously, you re baseline them higher since since the summer for both 'twenty. What you achieved in 'twenty, one and just curious where for the upside you're seeing most pronounced and then secondly, Chris I know youre challenged youre anticipating this being able to walk people.
On in 'twenty.
One cash flow and then back up the Hill and 22 can you give us a sense.
We can add all of the other items, but give us a sense of the swing in working capital that's embedded.
Sort of in your expectation over there so let's start with the volume 881 have some material volume that showed up in 2020 that we're planning around the end of the year. So we had some upside there and then.
'twenty one.
Being confident in on labor forecast for 2021.
And working through the backlog.
From a cash standpoint, you are right and we gave you pretty much all of the information going.
From 'twenty to 'twenty, one and then 'twenty to 'twenty two actually.
So I'll start with 'twenty into 'twenty one.
Pension and the cares Act working capital.
On capital is about the same.
And then when you go into 'twenty, one to 'twenty two.
Reverses.
Pension actually is a bit of a tailwind and then you get some working capital help I don't want to sign a specific number.
But we've done.
Very well on working capital will continue to do that remember, we do have significant deliveries in 2022.
For shifts that are going to deliver so it'll be 'twenty one to 'twenty two.
Our ship deliveries, which will drive.
And then our natural lift on our top and bottom line.
Line, So I think that'll get you there.
Okay.
The logical pretty obvious when you go through the modeling.
One clarification.
Note on slide <unk>.
Talks about the advances you got for on the progress payments for it talks about the supply.
Being accelerated as well.
Was that a net.
Sure a net positive for 2020.
It's a net positive.
Okay. Thanks.
And our next question comes from Seth <unk> with J P. Morgan.
Okay.
Thanks very much on.
Good morning.
Wondering about the.
If you look at it in the growth and you talked about the sort of 3% annually over over the course of the plan and in shipbuilding and.
With the higher 2020 and at the midpoint of the 2021 guidance.
I guess is the implication that it's three ish percent in the remaining years for the plan.
Is it the implication that the.
The CAGR would be sort of 3%.
Including the sub 3% year on 'twenty one.
We think about that kind of growth forecast.
It's not only impact our total outlook.
Okay.
Think long term.
Yes, five to seven to 10 years actually.
Alright, 3% growth business in shipbuilding, it's going to be lumpy.
From year to year for long term, it's it's 3%.
Okay, even even up to 10 10 years or so.
Sure Yes.
I mean think about the backlog, we have and Navy had that we would be growing in excess of what we are now we've consistently said that for Ya.
Percent is probably the right way to think about the business.
Okay.
Debt.
The head count for the year seemed like it was about flattish if we think about that 3%.
Growth rate over kind of the long term.
How do you think about.
The head count growth over that period.
Well I think the first thing to you almost have to go back to the previous universe, we hired almost 25000 people before the pandemic.
In an environment, where there was.
As low as 3% unemployment, so we know how to create workforce. It's frankly, the probably the most significant core competency of our shipbuilding enterprises.
Getting work force created since the pandemic.
Started I guess.
In March we still hired about.
We believe and have a lot of confidence on our ability to expand our workforce, where we need to.
We're pretty good at throttling the pace of that.
And we.
And we're actually exceptional I believe.
Training that workforce so.
So I think that there will be work force expansion that debt coincides with the growth in the business, but we think that's well within our capacity to do that and frankly, we're probably we're probably ahead of many folks in the industry right now in terms of having already hired a lot of those folks. So we're on our way.
You bet.
Sure.
And our next question comes from George Shapiro.
Okay.
Yes, good morning, Chris.
You guided to $7 9 billion for shipbuilding revenues in Q3, and obviously in wound up.
Now a lot higher than that in a business that's pretty predictable can you tell us what happened to give you that much stronger growth than what you expected.
Thanks George.
As I mentioned previously.
<unk> had some material.
Let's do right around the end of the year and accelerated into 2020. So unfortunately, we can be a bit lumpy at times.
Pretty good at forecasting our labor and our labor demand and now.
And we're going to end up from a labor standpoint of our material.
On catch you on debt you've got large alright.
Items and.
<unk> delivered towards the end of the year.
And it's just just showed up in December.
Which had a higher than our expectations.
Okay, and then one for you Mike.
The Senate just approved here.
<unk> fix for the Deputy Secretary on and she has been kind of outspoken and not being a big fan of carriers.
Can you just give us your color as how you think digital shake out and with the New administration.
Well I think.
Leading George is a great question and we could probably talk about this all day, but I think.
We're starting from a place where the previous administration.
Looking at what's going on in the World and had come to the conclusion that the navy needed some priority in terms of budget allocation and resources.
If anything I think what's going on in the world probably since the election.
Probably just reinforces that view.
New players will look at that differently than they might have a different set of priorities, but at the end of the day. Our principal role here is to support the Navy on whatever it is that they need to go.
To deal and support our National security. So that's what we'll do.
Particularly around aircraft carriers I think.
The value of the carrier and the capability of the carrier is is well understood by everybody in the industry and we'll see how that all plays out but.
We like the work that we're doing and we're very proud of the shifts that we're producing.
<unk> is a tremendous ship right now, where it's where it's been providing training support and demonstrating all the new technologies.
I believe the Navy could tell you that it's been at sea as much as any other ship in the Navy last year.
And so I think I think the carriers in a good place right now relative to how the Navy is thinking about what they need for our national security needs going forward.
But that doesn't mean anything about the rest of our portfolio.
We really have strong offerings and strong parts of our portfolio that supports a broad range of navy requirements, whether it's sub range our amphimacer destroyers.
If the navy is going to be a priority in our national security posture going forward, then we're going to be right in there with them.
Okay, Thanks, very much debt.
<unk>.
Yes.
Our next question comes from Doug Harned with Barings.
Paul.
Thank you and good morning.
Morning, Tom.
At Ingalls.
Youre right on the transition to flight three on the DDG and flight to when the Ltvs can.
Can you describe the differences when Youre DDG 125, LTV 30.
Should we expect any pressure on performance as you move to these new ships.
Yes, I think it's a good question, Doug, but the whole point of the way the Navy work with us to make those transitions has been to try to do that as gracefully as possible.
Yes, DDG $125.
It's the first flight III ships, but they have been they've been actually incrementally inserting flight III technologies into the shifts ahead of that and so trying to make that as as graceful as possible.
Yes, I think we will pay big dividends.
And as far as the LTE LTE East coast and go on to fly to theirs.
Just the fact that we're doing LPT slide two as it is a.
Punctuation on that statement that they made a graceful instead of go on often doing a whole new class design and starting all over.
You're just basically took the LTV flight one and then you re scoped it to do fly to and that's definitely in our wheelhouse and so we feel pretty good about both of those.
We actually think it was very thoughtful on the Navy's part to do it that way with the and with the <unk> that was the Navy and the Marine Corps that did that.
And we think thats the advantage of debt that's the Navy's understanding of taking advantage of.
Serial production.
As opposed to go on back to the blackboard and starting all over and trying to.
Redesign from the ground up and both of those cases, you kind of get significantly improved capability.
At significantly reduced for significantly better affordability.
Lot faster timeframe.
I think that's the way that's the wave of the future and.
In some ways, it's a throwback for the past because thats, how we used to do it so.
I think we're going to be fine there.
And then just staying on operations if you.
Look at Newport News and if we go back early in the year win.
You faced challenges on the Montana on New Jersey, Massachusetts, you you talked a lot about the complexity of the operations at Newport News <unk> got a lot going on there.
Over the course of the year can you talk about how you address those issues and where do things stand right now as you look forward.
Dan.
I'm not sure I know where to start I would just start maybe I'll start with.
The pandemic itself really put us in a place in both of our shipyards to rethink the way that we do.
Not just crisis management for management overall, and we started thinking through how to leadership teams.
Rallied a team to support priorities, how do we allocate resources to the things that need to be done.
And.
I mean.
A lot of us have messed around with us soccer on when the kids are young everybody all the kids Chase for ball, what the shipyards have have really gotten very good at is making sure that folks quite a physician stay on their lanes focus on what's in front of them meet their milestones.
And drive through the gates that we have set up in front of them and I have to say that.
The pandemic has brought that to.
A much clearer focus for us because we had we had to do that with people.
So I'm actually very excited about.
The way ahead because of the fact that this team is now well tested over the last year.
Doing exactly the kinds of things that we need to get done to support this broad array of programs that we have.
So you can see the Virginia class is pretty on track now after.
After the challenges from last year.
Just want to make sure how we should think about that.
Yes, I mean, I think we had to reset the risk register in in Q2, but now that it's been reset the milestones that we've set for ourselves the pace that we have.
Not just on the.
On the first shift for the second shift, but all the way through the class I think.
We're meeting all those milestones in.
And we're meeting them with with some gusto an eye on.
I'm pretty happy about that.
Okay, great. Thank you.
Our next question comes from peak Covid <unk>.
<unk> with Alembic global.
Hey, good morning, guys nice quarter.
Hey, Mike on the creation of the COO role was there any particular existing programs or future programs that kind of drove the need to create that role if so I'd love to understand which ones.
You talked about it kind of at the beginning in terms of integration and I just thought about.
The pie in the Sky if they go towards this kind of light aircraft carrier model for distributed firepower.
Maybe that would be a key integration project in terms of Newport news with a nuclear and the Big day.
Mississippi, So I just wanted to get your thoughts.
It's an interesting question I'm not sure I can say that it was one particular item.
What we were seeing and what we're hearing from our customers is.
This is this capability in this part of your business is something that we could use in this part of your business.
Whether it was.
Whether it was the way we were buying material for technology that we were looking at additive manufacturing maybe some artificial intelligence.
Our information management systems.
Those kinds of things.
It's sort of it's more like the.
There were several of those that when they added together it just made it made more sense for us too.
Start thinking about it in terms of an integration and not and not as.
Straight up.
Customer directly facing that.
Particular customers.
And I actually kind of been leaning towards this for the past couple of years as we've kind of evolved. So this was not a I woke up one morning, and we just need to go do this this has been something that we've been kicking around because we've had great success with the with the governance that said.
Push push on delegate as much authority and accountability as far away from the center of the organization as you can.
And that creates business units that are very focused on their particular customers.
What we're seeing though is that our customers are starting to they're starting to become a little bit more integrated and the problems. They are facing are becoming more complex and so as a result, we need to bring a more integrated approach to to to solving that.
And I look forward to having Chris in that role because I think it's going to be we were doing some of it but we were probably missing some of it and so I think debt.
I'm looking forward to seeing us capture more of that opportunity.
Great. Thanks, guys.
Net.
Our next question comes from Noah <unk> with Goldman Sachs.
Hi, good morning, everybody good morning.
Hey, Chris could you.
Just itemize and quantify.
Everything on the cash flow statement that was.
Non recurring in nature or a pull forward in 2020.
And then also the reversal of them in 'twenty, one just to get level set on that.
Yes, so in my script I called out.
On the two main things, which was the progress payments, which I think was about 160, and then 130 for the cares Act payroll tax those.
The two main things on the balance sheet.
And do those completely reverse in 'twenty, one or is it partially 'twenty, one and partially to 'twenty two well, we're estimating that the progress payments reverse in 'twenty, one, but obviously only have free versus for the payroll tax.
Half of 'twenty, one 'twenty two yes, yes.
Okay.
And then in the in the slides you itemized.
Continued strong working capital management can.
Can you give us a sense or quantify how much positive change in working capital Youre looking to extract.
Over the next few years.
Yes, I don't want to give a specific number for that.
I'll point, you to the deliveries that start to show up in 2022.
And that'll get us around.
The low end of our range or potentially even better than some years from a working capital standpoint.
And on the deliveries in 2022.
From Frontloaded, backloaded or fairly evenly spread through the year pretty tricky balance 'twenty, one and 'twenty eight.
Should happen.
Right at the beginning of 'twenty, two actually and on 73 is more.
Q2 ish and 90 six's on later in the year.
Okay and Mike.
Just kind of bigger picture on longer term.
What is a realistic.
Percentage of the United States Navy that is unmanned and autonomous.
Down the road and.
How are you thinking through.
Different competitive landscape.
In that versus ma'am.
Yes. The first question I don't I don't know how to answer that because we can answer that in terms of numbers of platforms.
You cannot you could answer that in terms of.
<unk> and <unk>.
Regions that you can.
Handle from an unmatched so theres sort of a mission kind of.
So I'm not exactly sure how to answer that directly.
The way, we think about it is really about the capability set where the technology is what are the kinds of things that we think are going to be useful and on applicable to the two submission of the Navy and.
At this point if you if you kind of look at the time line.
I think if you go back to before we acquired the Columbia Group down in Panama City, our presence in the unmanned space. The Huntington Ingalls presence in the unmanned space was zero. We were closed we were cold iron in that space, we started with acquiring a little bit of capability on a little bit of technology.
We got to know the customers, we got to understand who they were and what they were trying to get done and fast forward to where we are today.
We have strong offerings in every size and capacity and capability in the unmanned undersea space today.
That includes the work that hydroid does.
That includes the work that we're doing in support of Boeing on the on the Orca program.
And we've done that in say five or six years.
That shows that the business itself is accelerating and that shows our commitment to it. So we're going to remain committed to it we think that the unmanned undersea space is conceptually ahead, it's it's a challenging space, but from a con ops perspective, I think it's conceptually ahead of the surface the unmanned.
Surface space.
We do have a contract to work with the Navy in that area as do several other companies.
But we're going to continue to invest in the autonomy and build the capability and frankly I think this is going to be one of those where it is.
Bit of a self fulfilling prophecy.
As we demonstrate more capability.
Capacity in this space, it's going to become as we Huntington Ingalls and as we the industry demonstrate that it's going to become a bigger and bigger part of the Navy's plan.
What is the limit of that I don't know where does it go I don't know but.
That's the mission in front of US right now is to is to mature that.
Okay.
Also to add debt unlike our man.
Platforms and unmanned, especially.
On that on their C. It opens up international markets for us.
And there is significant.
On international.
For customers that are interested in those products for that.
That's also very interesting for us.
Growth.
Okay.
Okay.
Thanks, so much I appreciate it. Thank you thanks al.
Our next question comes from Richard Safran with Seaport Global.
Okay.
Good morning, everybody. Thank you good morning.
Mike This may be a bit of a question for you considering you were just referencing it.
On the chatter about the Navy looking for smaller on conventional carrier.
I seem to remember reading about the same idea back in the early days of the Nimitz.
What I wanted to know from you is if you could comment if you think this is a serious proposal by the navy or maybe an idea that's possibly being floated in reaction to some early.
Issues that you had.
<unk> the Ford class.
Well I think first of all I think.
Given maybe some credit they're always looking for ways to accomplish there.
Mission.
In turn there's always looking at trying to figure out ways to do that on a more affordable way.
And so and so the question of once once we decided.
50 years ago, almost 60 years ago now to to create a nuclear powered aircraft carrier you always had to kind of compete that always was in a competition with the conventional carrier in terms of affordability and.
On the one hand, the budget folks can look at it and say well, it's cheaper to build a ship without reactors in it.
But on the other hand, you look at the set of capabilities that debt that.
Brings to the carrier and over the last several decades. This analysis has been done Youre right. It was done back when Nimitz happened. It was it was done frankly, when enterprise was done and it's been it's done all the time.
But what it comes down to essentially and kind of.
Again this is a conversation go on for a week, but what it usually comes down to is that can you can you get 80% of the capability for 80% of the cost and the answer is almost always no.
Because it turns out that we do.
The cheapest thing that we do in the carrier business is billed volume.
And so if you want to take if you want to take a carrier Thats 100000 tons and you want to drop it to pick a number 60 or 70000 tons and you want to take the reactors off of it you just completely change the capability set.
And youre still going to spend a lot of money build on that 60000 ton ships. So.
So I think that it's a serious look I think every look is serious we stand ready to support the navy on whatever their mission is on wherever they need to go and we're very proud of the Ford.
And I would tell you that as a lead ship for the Ford cost. The forward cost was too high we made significant capital investments to drive that cost down inside the shipyard on we've taken.
15% of the man hours out of the out of the Kennedy in between forward on Kennedy and.
And we streamlined supply chain and so we're taking cost out of that ship. The next two ships were bought on a single contract on the Navy advertise debt not.
Including our savings, but all of their savings when they bought it smarter they say $4 billion. So as before it becomes more affordable that makes that comparison even tougher.
Having said that if the navy chooses to go down that path and they think that's the way that's the way that they can meet their mission requirements most affordably.
Or their partner and we will we're going to support them all the way.
Thanks for that and just one other strategic question for you.
The focus on Huntington is always very large low production rate high value added content chips on that.
<unk> systems, however, generally have much lower value added content, but I'm thinking higher production rates. So just kind of curious if you could comment about what that says.
About long term margins at Ts versus traditional shipbuilding.
Yes.
Well, Okay, let me.
Let me start Mike if you want to add.
The long term margins in Ts will.
We will fill it up we're at 3% to 5% return on sales now we'd like to think about it as EBITDA as a percentage of sales because we have intangibles.
Flowing through the income statement there.
But we.
We do think there is opportunity in unmanned from a margin standpoint, especially with international content.
Traditionally you earn more.
On the international product. So yes, we do think there's opportunity there, but remember <unk> is a blended margin story.
So we think that 3% to 5%.
Return on sales right now is the right way to think about it but it could grow from here and I would just.
Two points first debt.
You touched on.
Key issue is that.
We are keeping the unmanned business separate from shipbuilding for exactly almost exactly the reason that you said the unmanned customers are very different than the shipbuilding customers and so.
We want to have customer facing organizations that.
Respond appropriately and so that's been very that's been very successful for every business inside of TFS, including unmanned when we created TFS. We've we've seen significant improvement in terms of being able to respond to customers and understand what their capabilities are by getting that either acquiring that business or getting it out of <unk>.
Building.
The second thing is that I would argue that the <unk> story.
It is about margin, but it's also about growth.
The unmanned area for growth is going to be pretty significant.
Pick your pick your multiple but over the next five years I think that what we're spending in unmanned today as a nation is going to be small compared to what we're spending five years from now and so that's that's at least as much relative on to unmanned thats as much.
An important part of the story as it is about the margin.
Thanks, very much for that does terrific you bet.
Our next question comes from Robert Spingarn with Credit Suisse.
Hey, good morning, I wanted to follow up on what you just talked about on <unk>.
Just go on to slide nine a couple of comments here I don't know Mike. If this is you or Chris.
On the unmanned side. If this is going to grow and the spending is going to rise might we not see.
Capex.
Not dropped to two five per cent of sales.
Maybe magnitude doesn't compare to the core shipbuilding business, but wanted to ask about that as unmanned grows and then also your comment about the.
Shipbuilding margin in the low 8% range with steady improvement subsequently I just wanted to marry that to what you just talked about with the carrier deal.
Double contracted carriers should we not see the kind of volatility I think you were just suggesting this that we've seen on 79.
Let me try the first one Mike.
<unk>.
Yes that was.
We've already from a capital standpoint on unmanned we've made a significant investment we think for the center of excellence. So we don't see any additional capital investment.
At this time.
In the unmanned space.
So if you want to talk about it and I'll just add.
It does depend on the rate of growth in the unmanned space I mean, we stand ready to make investment if we need to but there's nothing there that we see right now.
Relative to the carrier business.
Absolutely the two carrier ship contract was by far the most most effective way on most affordable way to buy the ships and it does bring a chance for it to be.
On a much more predictable going forward.
It is a pretty heavy.
Contract to have on the on the beginning side of your business, which is.
You know well, how we are very conservative at the beginning of our programs.
And these ships. These two ships the second one doesn't deliver until 2032.
But I think it's I think it's going to play out very well for us and could.
Definitely go a lot better even better it will certainly be better than what happened on forward and will be even better.
I believe than what we've seen so far on 79.
Okay. Thank you Mike Thanks, Chris.
Debt.
Our next question comes from Joseph de Nardi with Stifel.
Good morning, Mike.
Chris you've got the 79 contract modification done can you just talk a little bit on what that means is because it's lower risk.
Or does the risk just get pushed to the right or is it neither and then does the low 8%.
Margins at Newport assume improvement on carrier or is that just primarily on Virginia class.
Yes so.
It absolutely.
Pushes the delivery excuse me the test program to the right and when you do that Youre moving our risk registers to the right.
And it delays the margin expectations for Cvs on 79.
I don't want to make any specific comments on programs contribution to the low 8%, but youll see a general lift.
And Newport News.
Across all of our programs actually.
They have stabilized this year and into next year.
Okay. That's helpful and then Mike in response to Rich's question, you mentioned that the Navy get $4 billion in savings from the block, but can you talk a little bit about kind of what your shareholders get from that why isn't what they get the potential for higher margins in the future. If you all can execute.
Effectively and then can you talk about the degree to which that block by insurers more serial production and less.
And maybe technology or requirements change shift to shift if at all thank you.
Yes, so I'd.
I'd say first of all a $4 billion for the Navy number.
And while it's sometimes hard to remember we are only a part of the total carrier cost.
There's also there's a.
Significant government furnished equipment set that goes on on.
On the ships, including the reactors.
And the radars on all that sort of stuff and so when the Navy added it all up it was the savings associated with with our contract, which we took from the.
The efficiencies of learning curve and labor.
And the efficiencies of.
<unk>.
Economic order quantities and the supply chain.
And we believe that we believe that those are pretty well understood.
And Thats, what drove our piece of that contract.
So.
<unk>.
And now you are what are the shareholders get from that they get.
They get.
Our work force that's not building the last carrier, they're moving from one to the next and so youre not having to go retrain them and get all of that sort of stuff. So it allows for.
Over time, better better performance on the program and that's where we're headed.
Better performance in 19 or in 2020 or 2021, because thats the very beginning of the program, but we see these as they mature they are going to become very important to us.
Okay. Thank you you bet.
Net.
Our next question comes from Gautam Khanna with Cowen.
Hi, This is Scott on for Jonathan.
Scott.
In a similar vein to Roberts question, just looking at the Capex.
Is the two 5% number.
The right way to look at the long term capex number for the business or is that more on just.
FY 'twenty to 'twenty for type number and is the longer term capex is more of a three 4%.
I think we've made significant capital investment over the last few years Thats about $2 billion.
We've invested in both shipyards.
That's about complete so I think that that two 5% last for quite a while actually now as Mike indicated if we see opportunities to invest for future programs.
We could potentially do that but for our current backlog, we're pretty comfortable where we're at for a pretty long time.
Okay. That's the only question I had thank you alright. Thanks.
At this time on not showing any further cross selling for and I would like to turn the call back over to Mr. Petters for any closing remarks.
Well. Thank you all for joining US today, we really appreciate your interest in what we're doing.
And appreciate the work that you all do we hope that everyone out there we'll continue to stay safe in this dynamic environment and we look forward to that time, when we can all get back together again and hope everybody has a great day. Thank you.
Yes.
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