Q2 2023 Huntington Ingalls Industries Inc Earnings Call
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I would now like to turn the call over to Kristy, Thomas Vice President of Investor Relations. Mr. Thomas You may begin.
Thank you operator, and good morning, everyone welcome to the HII second quarter 2023 earnings Conference call. Joining me today on the call are Chris Kastner, our president and CEO and Tom Bailey Executive Vice President and CFO .
As a reminder, any forward looking statements made today that are not historical fact are considered our company's estimates or expectations in our forward looking statements made pursuant to the safe Harbor provisions of Federal Securities Law.
Forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially for additional information regarding factors that could cause actual results to differ materially from expected results refer to our SEC filings.
Also in their remarks today, Chris and Tom will refer to certain non-GAAP measures reconciliations.
Reconciliations of these metrics to the comparable GAAP measures. Please see the slides that accompany this webcast, which are available on the Investor Relations website at IR Dot HII dot com with that I would like to turn the call over to our president and CEO , Chris Kastner Chris.
Thanks, Christy good morning, everyone. Thank you for joining us.
The Agi team delivered another solid quarter, our results demonstrate continued topline growth and steady operational performance.
We continue to make progress on our strategy.
Executing on our significant shipbuilding backlog and growing mission technologies.
Not only are we executing on our shipbuilding backlog. We're also delivering all domain solutions through our unique capabilities to connect the different platforms that our customers use to perform their missions.
Now, let's turn to our results on page three of the presentation topline growth was four 7% from the second quarter of 2022, resulting in second quarter revenue of $2 8 billion.
Diluted earnings per share was $3 27 for the quarter down from $4 44.
In the second quarter of 2022.
New contract awards during the quarter were approximately $2 6 billion, which resulted in backlog of approximately 47 billion at the end of the quarter.
Of which $24 billion is currently funded.
In the second quarter at Ingalls, we laid the keel for LPG 31, Pittsburgh and successfully completed builders trials for NSC 10 Calhoun.
We also successfully completed acceptance trials and deliver the first slide three Arleigh Burke destroyer DDG 125, Jack H Lucas.
We expect to launch DDG 128, Ted Stevens and LH, eight Bougainville and deliver NSC 10, and LPT 29, Richard M accrual Junior later this year.
At Newport News, we christened Virginia class attack submarine SSN 798, Massachusetts, and Redelivered, the Nimitz class aircraft carrier <unk> 73, USS George Washington.
Later this year Newport news expects to float off SSN 798, and deliver SSN 796, New Jersey.
As I previewed last quarter <unk> 79, Kennedy received a contract modification intended to optimize its construction schedule and deliver a more capable ship to the fleet earlier, which updates the expected ship delivery to 2025.
Slide four summarizes the projected shipbuilding milestones for 2023 and 2024, reflecting.
Reflecting the updates for the Cvs 79 contract modification and an update for the expected shipment of the final module, a Virginia class submarine block for SSL, <unk>, Utah, which has moved to 2024.
Admission technologies, we saw a second straight quarter of record high revenue of $645 million with sales growing seven 5% over the second quarter of 2022.
Emission technologies had multiple wins in the quarter across the business units capped off with the early third quarter when a genial a $1 4 billion contract vehicle that serves the National Security innovation network and its mission partners by enabling the transition of innovation in both speed and scale.
From the lab to the Battle space.
In addition to these accomplishments we recognize and are committed to the broader international opportunities represented by the <unk> agreement.
Which directly align with our capabilities in nuclear submarines as well as other emerging technologies as set forth in pillar two of the Orca agreement.
Turning to activities in Washington, the President's budget request for fiscal year 2024 is under consideration by Congress and is built progress through both chambers, we continue to see bipartisan support for our programs.
We are pleased that the armed services committees have shown strong support for shipbuilding to include authorizing funding for LPG 33, and multiyear procurement authorization for the next block of Virginia class submarines.
Both the authorization bills, which had been passed by the respective chambers authorized funding for the requested procurement of two Virginia class submarines, one Columbia class ballistic missile submarine and two DDG 51, Arleigh Burke destroyers.
Both house and Senate Appropriations committees include multiyear procurement authority for blocks fixed Virginia class submarines and.
And fund the procurement of two Virginia class submarines, one Columbia class ballistic missile submarine and two DDG 51, Arleigh Burke destroyers.
Senate Appropriations Bill provides advanced procurement funding.
For <unk> 33 in FY, 'twenty, four and a third DDG 51, and FY 'twenty five.
And the house Appropriations Bill includes language supporting a stable rate of procurement of amphibious warfare ships.
Final outcomes will depend on respective conference negotiations between the appropriations and the authorization committees.
Now moving to labor through the second quarter, we hired over 3200 craftsmen and women on a solid pace to meet our full year plan of approximately 5000.
Although we are meeting our hiring targets attrition remains high and labor is still the greatest risk to meeting our plan.
We're continuing to devote substantial effort at both shipyards in the areas of recruiting robust training and retention of our workforce in this very challenging labor environment.
In summary, the strong demand for our products and services coupled with continued progress on our strategy of executing against our backlog and growing mission technologies set the foundation for HII to continue to fulfill our mission to deliver the world's most powerful shifts and all the main solutions in service of the nation.
And now I will turn the call over to Tom for some remarks on our financial results Tom.
Thanks, Chris and good morning today I'll briefly review, our second quarter results for more detail on our segment results. Please refer to the earnings release issued this morning and posted to our website.
Beginning with our consolidated results on slide five of the presentation, our second quarter revenues of $2 8 billion increased approximately four 7% compared to the same period last year and represents a record second quarter results for HII. This increased revenue was largely attributable to growth at Newport News shipbuilding and emission technologies.
Operating income for the quarter of $156 million decreased by $35 million or 18% from the second quarter of 2022 and operating margin of five 6% compares to operating margin of seven 2% in the same period last year.
The decrease in operating income was primarily due to lower segment operating income, partially offset by more favorable operating SaaS cost adjustment and more favorable non current state income taxes compared to the prior year period.
Net earnings in the quarter were $130 million compared to $178 million in the second quarter of 2022.
Diluted earnings per share in the quarter was $3 27 compared to $4 44 in the second quarter of the previous year.
Shipbuilding results in the quarter were in line with our expectations and slightly stronger than the outlook, we provided on our first quarter call.
Segment operating income in the second quarter of 2022 benefited significantly from favorable adjustments from facilities capital and economic price adjustment clauses at both Ingalls and Newport news, making for a difficult comparison year over year as expected.
Moving on to slide six Ingalls revenues of $664 million in the quarter and increased $6 million or about 1% from the same period last year, driven primarily by higher revenues on the DDG program, partially offset by lower NSC program revenues.
Ingalls operating income of $65 million and operating margin of nine 8% in the quarter declined from last year as expected primarily due to lower favorable changes in contract estimates from facilities capital economic price adjustment clauses as well as lowest lower risk retirement on LPG 30 Harrisburg.
At Newport News revenues of $1 5 billion increased by $76 million or five 3% from the same period last year due to growth in both aircraft carrier and submarine construction revenues.
<unk> operating income in the second quarter of 2023 was $95 million, an increase of $1 million or one 1% compared to the second quarter of last year.
Operating income was largely consistent year over year as favorable Vcs program adjustments were offset by lower favorable changes in contract estimates from facilities capital and economic price adjustment clauses.
<unk> operating margin in the second quarter was seven 4% above the 7% outlook. We had previously provided for the quarter.
Our shipbuilding operating margin outlook for the full year is unchanged.
We have noted previously that our expected milestones for 2023 are concentrated in the second half of the year and largely in the fourth quarter.
Admission technologies revenues of $645 million increased $45 million or seven 5% compared to the second quarter of 2022, primarily driven by higher volumes and mission based solutions, which includes our <unk> ISR cyber and electronic warfare and live virtual and constructive training capabilities.
<unk> Technologies' operating income of $9 million compared to operating income of $25 million in the second quarter of last year.
The second quarter of 2022 included additional nonrecurring equity income of approximately $15 million for an equity method investment in a ship repair joint venture, which was sold in the second quarter of 2023.
Cash proceeds of $61 million from the sale are included in investing cash flows.
Additionally, a negative equity method adjustment of 6 million was recorded from the sale of the ship repair joint venture.
Current results for emission technologies included approximately $28 million of amortization of purchased intangible assets.
Emission technologies EBITDA margin in the second quarter was six 7%.
Turning to slide seven cash from operations was $82 million in the quarter.
Net capital expenditures was $68 million or two 4% of revenues free cash flow in the quarter was $14 million. This compares to cash from operations of $267 million net capital expenditures of $59 million or two 2% of revenues and free cash flow of $208 million in the second quarter of 2022.
Cash contributions to our pension and other postretirement benefit plans were $11 million in the quarter.
During the second quarter, we paid dividends of $1 24 per share or $50 million in aggregate.
We also repurchased approximately 37000 shares during the quarter at an aggregate cost of approximately $7 million.
Year to date through the second quarter, we repurchased approximately 76000 shares at an aggregate cost of approximately $16 million.
Moving on to slide eight our free cash flow outlook through 2024 remains unchanged as do our capital allocation priorities.
Regarding 2023 free cash flow guidance, we continue to see $400 million to $450 million is the most likely range. We continue to work with our customer on the timing and mechanics regarding the repayment of Covid related advances, which is currently forecasted to occur in 2023.
At this time, we do not have an agreement in place that will increase our free cash flow above the guidance range, we have provided.
I'll highlight that we continue to expect to distribute substantially all free cash flow to our shareholders through 2024 after planned debt repayment, which is on track.
Turning to slide nine we are reaffirming our 2023 segment guidance.
I will also provide some color on how we see the third quarter and the remainder of the year.
Regarding the third quarter, we expect shipbuilding revenue to be approximately $2 1 billion and shipbuilding operating margin to be consistent with the second quarter's result of seven 4%.
This expectation does imply a meaningful improvement in the fourth quarter results, which is consistent with where we expect our most impactful shipbuilding milestones to occur.
Submission technologies, we expect third quarter revenue to be similar to the second quarter results and expect third quarter operating margin of approximately two 5%.
Given second quarter results and the impact of the equity method accounting adjustment I referenced earlier, we currently believe that mission Technologies' 2023, operating and EBITDA margins are likely to be closer to the low end of the guidance ranges we have provided.
We expect third quarter free cash flow to be approximately $100 million.
There is no change to our guidance for the year, we expect our cash flow generation will fall predominantly in the fourth quarter.
Our cash expectation is consistent with both our expected timing for milestones and our normal cash cadence of the calendar year to summarize the second quarter Shipbuilding results were largely in line with the expectations. We provided on our first quarter call Newport News and Ingalls continued to hit critical shipbuilding milestones emission technologies delivered impressive year over year.
Our revenue growth.
<unk> technology team continues to capture meaningful contract wins and maintains a very robust pipeline, we have great confidence in their future and the long term value creation opportunity. Finally, we are pleased to reaffirm our full year segment guidance as we remained focused on executing the milestones and commitments that we've laid out with that I'll turn the call back.
Over to Christie to manage the Q&A. Thanks.
Thanks, Tom 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 will turn it over to you to manage the Q&A.
Thank you if you would like to ask a question. Please star one on your telephone keypad to enter the queue and our first question today is from the line of Doug Harned from Bernstein. Your line is now live.
Thank you good morning.
Good morning, Doug.
Alright.
On Virginia class.
Program right now as.
Well behind the two per year delivery objective in block five.
I mean do you see a path to go.
If there are what are the obstacles here that that need to be overcome to get to that rate.
Yes.
The largest obstacle is the largest risk on the Vcs program right now is labor.
Meaning are meeting our labor targets.
We've worked hard here in Newport News.
Meyer you saw in my prepared remarks.
We're ahead of plan up over 3200.
Hedged for the year.
So thats some positive indicators, but it's really this is a labor driven.
Issue.
As I said, we've made good progress we just need to continue to do that over the next couple of years.
Okay.
When.
When you look at Newport News Europe partner with electric boat on Virginia class, but Youre, a subcontractor on Columbia class I mean, how do those different relationships affect the way in which you work with electric boat on the programs.
Yes so.
It's not a material difference obviously you have contractual differences, but when you get down to the deck plate those teams work.
Very closely together.
There is a relationship that's been developed over a number of years between the two teams and when you think about the efficiency of getting the work done to potentially transferring some work back and forth. There is obviously contractual mechanisms that need to be put in place under Colombia.
Thank you don't need under the Virginia class, but they work very closely together.
So there is no.
There is no real effect of difference in the way there is no sort of preferred relationship here that one works better than the other.
Not really not really.
The objective there is to get these critical assets to the fleet as soon as we can so the team works very closely to ensure we're working on that.
Okay, great. Thank you.
Sure.
Our next question is from the line of Robert Spingarn of Melius Research. Your line is now open. Please go ahead.
Hey, good morning, Tom just to clarify question Amit.
Thank you and Chris on a high level one for you Tom on the margins at mission technologies, you talked about the one 4% for the $6 million impact from the <unk> JV. So was that impact built into the guidance.
No it wasn't built into it.
It wasn't until all right.
Right.
Okay.
Alright. So this is why you are tracking to the low end of zone.
Is that how I should interpret that.
Chris.
High level question, but between shipbuilding and empty.
I thought it might be interesting to hear you talk about how these two businesses can contribute to two prior year priority areas for Dod and Thats, Chad <unk> and contested logistics.
Oh, that's a really good question.
Question <unk> kind of.
Teed me up there interesting.
Your line acquisition, they have really great.
AI ml products and big data products that fit right into.
Chad CTO and potential <unk> emissions.
When you think about data and big data and the speed in which data can be.
Understood.
Fits right into the contest the logistics model as well we have the LDC enterprise.
That is not just training it can fit right into a war gaming concept thinking about war gaming you think about or plan to think about or plans you have to think about contested logistics. So.
We have products that.
That can quickly be adapted to deal with those those two issues, we've had high level conversations with the navy and other customers about potential applications. There. So.
Think we can we can add to those products that we think they are important product sets.
And we'll continue to talk to the customer about it.
Sure.
Thanks, so much.
Sure.
Our next question today is from the line of Pizza Kubicki from Alembic Global Your line is now.
Hey, good morning, guys.
Good morning, Chris Chris.
Chris on the hiring can you give us the actual net hiring net retention numbers kind of after attrition and maybe could you gauge the level of revenue that could be at risk. If you don't meet your net goals for the balance of the year.
Yes. So we don't provide right now there is a lot of things going into that equation. We have over time, we have attendance.
We have attrition, we have job shop labor that can contribute to that I will say theres potentially some upside if we're able to continue to meet our hiring goals and and deal with attrition over the balance of the year, but we just need to see how the how the year develops.
Okay, Okay and then.
I wanted to ask about the Kennedy contract Mod a little under $400 million Ahmad does it raise youre now that that's in place is a raise your confidence level in terms of.
How your performance on that project could trends through through next year and the potential milestone opportunities for you on the project.
Yes, I know that the team did a really good job incorporating the TSA work into the baseline contract in assessing that schedule and we're.
Putting the work are integrating that work into the into the baseline schedule. We're confident the way the kennedys developing theyre meeting their compartment completion goals there.
Their test rates proceeding in the plants proceeding so.
We've got a lot of confidence in where the Kennedys out right now.
Okay, maybe another way of saying are the are the milestone opportunities on the Kennedy meaningful relative to other programs.
Or should we not.
Focus so much on the Kennedy.
We're just we're just going to have to see where we're going to have to.
Let things play out over the next 18 months 18 to 24 months.
Critical work in front of us.
But potentially if we continue to perform well.
There'll be milestone opportunities for sure.
Okay. Okay. Thank you.
Sure.
The next question says from the line of Austin of Jpmorgan. Please go ahead your line Sir.
Okay. Thanks, Thanks very much.
<unk>.
Good morning, I wanted to ask.
Yes.
In mission Tech.
Looking at the margin there and then looking at the contract mix is.
Fixed priced as a relatively small portion of the mix I think it's like 12% and so when you think over time about the profitability that you want to see in that business and it seems to be an environment, where there are more opportunities in the <unk>.
It services market right now is that something that the business is going to try to move higher or is that not really consistent with the risk profile that you want to take on.
Yes, so we believe it will move higher we're going to.
You indicated that the majority of those contracts are cost plus that is true I think over 80% which drives.
The margin rate a bit lower.
The team there emission technologies is we're focused on technology, there, so theres going to be a lot of cost plus work, but.
They're competing very well.
Also in our pipeline there is fixed price opportunity. So we're going to pursue those weather, where those make sense and if we're successful on the mix should improve a bit and margin will improve the Tom do you have anything on that yes. So.
Alright.
87%.
Contracts I would say that there is a move like that I mean, we kind of realize the customer.
That we have in the portfolio there is a move to try it and as we introduce more technology that.
That will bring about.
Potential premium on pricing on that front and then as we get away from.
<unk> services are more into products that's not it.
Area, too, where we could see an expansion.
The margin on those shops.
Great Great. Thanks, and then just.
Real quick follow up Tom.
In Q3.
Cash flow target that you gave.
What does that contemplate with regard to the advance repayments.
Okay.
So right now a little color on that right. So we got an extension on that I was supposed to be repaid by the end of June there was a two months extension. So in negotiation for Navy is now going out and understanding.
We will transition the contract back from the advanced.
Prague pay that was in place since 2020.
Don't have a negotiated settlement on that yet so I don't know what thats going to entail. The guide assumes that there is not a payback right now on that and we will have to work ourselves through that.
I'll go through here.
Yes.
On a run rate that we expect for the quarter. It doesn't impact the guide of four to $4 50.
For the entire year.
And I would tell you that the best way to model it and take a look at it you stick to that guidance right now I think in another 60 days, we'll get a look see on what that negotiations entails the timing of it and the impact all know then.
Have some significant milestones in the back half of the year. So we'll have three deliveries two launches in one float off.
Every time I have a a delivery.
The contract I guess the contract price.
The shift.
Retentions for work that was incomplete there so there's opportunities to work those retention is off and thats.
Opportunities for <unk>.
Both margin and cash.
And then.
As I worked myself to the back half of the MLP 29, if I can hit this year.
We're still holding that milestone in 2023 event, but.
I would take a look at cash just from now through 2020 for the milestone chart that we gave you the five year look.
$1 2 billion over the next 17 months and I am still comfortable that we're on target to kind of make.
To make those calls.
Cool thank you very much.
Okay.
The next question today is from the line of Myles Walton of Wolfe Research. Please go ahead. Your line is now open.
Thanks.
Can you comment on two items, one the 81 module move and I guess does that put any pressure on the margin guidance range for this year.
And then also on <unk>.
Were there any costs that you had to absorb in the quarter or was it was minor.
It's not material.
Yes, I'll handle that and then Tom can chip in if he needs to sell 801.
Have some late breaking rework that pushed up module at the beginning of next year. It was a late in the year.
Delivery.
So just modest really not a material impact that as I said to Doug previously it seems pretty good at moving work back and forth to ensure they do that as efficiently as possible. So so not a not a material impact on 801.
I'll, let Jay I think I think first things first I don't want to just kind of glossed over.
Pretty significant.
Things that we like we really pay attention to in the shipyards is.
The final one I'll, let J eight.
The first thing you have to do is to make sure everybody say if the team did a really good job of first responders make sure no one was hurt.
Minor smoke inhalation blow the shipbuilders in the Navy personnel were safe.
Good thing is to limit the damage they did that really minor damage to want compartments some wire ways.
Put a corrective action plan I did a root cause analysis, we are working through that.
Corrective action plan now.
So the important thing is that we learn from learn from this issue so no real cost or cost of schedule impact that's material in allied and.
And the milestones for that that ship remain intact.
Okay. Thanks for that and then just on the buying out of Honeywell's portion of the Savannah River JV, what's the expected outflow for your incremental portion.
Being acquired.
So it's already and Brian .
So we pay that right now.
You can see that in the cash flow and investing its $24 million an hour and we expect to get additional margin and cash in the out years.
We haven't defined that.
Thank you.
Thanks, Paul.
Our next question is from the line of David Strauss of Barclays. Please go ahead. Your line is open.
Great. Thank you good morning.
Good morning.
Good morning.
Tom can you just.
Give us an update kind of working capital progress year to date is it's tracking I think there are about 8% of revenues net working capital if you are tracking.
Where you would expected year to date remind us again of what youre expecting at the end of the year and what you are baking into the 'twenty four free cash flow forecast.
Yes, so I am on plan.
Distant with the forecast and discussions we've had in past earnings.
<unk>, 8% is about right, where I find myself right now pumping out in this quarter I'll work myself through the back half of the year with the shipyards to get around the 6% target that we've talked about and then there is some tailwind as we go from 23 to 24.
Consistent with what we've had in past.
Past discussions and we used to think of before emission technologies, the 6% to 8% was the norm of where we think working capital would be in the yard as mission technologies has grown and we've gotten to more of a cadence between the two yards and our cereal.
Production programs I look at it more as 4% to 6% and we will finish this year at the higher end of that range and then as we work ourselves into 2024 and will be on the low end of that range here, just the cadence making milestone schedule.
Deliveries, we settled down both in the material and a labor that were giving us some status about and thats going to bring about some consistency and keep us in the normal range as I see in the coming years going forward.
Yeah.
Okay great.
And then as a follow up in terms of the shipbuilding margin.
That's implied for Q4.
Or are you or are we potentially looking at a margin at ingalls.
A similar range to kind of what we saw in the first half of 2022 when it was strongly in the <unk>.
The double digit range and if LTE 29 that delivery does slip how much risk is there too.
To the to the Q4 margin guide thanks.
Sure. So we don't give specific forecast each yard, but obviously, if we can do the math here six 7% the first quarter and 7% for this quarter for Q2 for Shipbuilding, we're guiding 700 warfare Q3.
Low to upper ranges for Q4, and the 9% of shipbuilding.
Cross both yards are very comfortable with that I think I gave an answer earlier, but I'll hit on again, yet we still have three deliveries two launches one float off all in Q3 and Q4 heavily loaded in Q4 timeframe.
The deliveries themselves that are upcoming and the team we've had this year.
Retention and releases associated with that that brings.
Both margin and cash and then on the back half have some smaller incentives and some change adjudication Chi that will play out.
I think 23, it's opposite of 'twenty two we saw a very strong first half.
Pacifically as you mentioned Ingalls is in the 13% to 16% in Q1 and Q2.
Looking into the breakdown in the yards as a forecast for the back half of 2023, but I'm comfortable that back.
Back half is going to be meaningfully higher than the front half it was a pacing year.
For the first half of this year.
Yes.
And the risk around <unk> 29 slips while delivering.
So you know.
The very back half of the year here as we come through we've talked in the past.
Memories are clean our timely oil.
Thank you.
When we want with a lot of Retentions are not right now roughly 29 is progressing well.
We don't see any avenue.
Right now for five months of things today, and taking the ship to see and burning down risk back, but we'll have to see how that plays out I don't want to hopefully play my hand on that.
It's one chip in one milestone in the context of the shipbuilding here. So I don't think it will in the only hurt overly help us and.
I think the guys are appropriate right now, we still maintain the 77% to 8% shipbuilding margin.
Yes.
Thank you.
Mhm.
Our next question is from the line of course from Kona of TD. Cowen Go ahead. Please go ahead. Your line is open.
Hey, good morning, guys.
Good morning.
Hey, I was wondering remember when the fit up came out and they were different.
Schedules for various ships.
In terms of delivery dates and the like.
I'm just curious relative to the prior update I was curious if you had any better color on.
How to reconcile that with your own expectations for delivery dates over the next couple of years, Yes, I can start and then Tom can chime in.
I think its context and timing.
On those on those delivery dates and really assessment of risk there they might move a couple of months or have a different.
Representation of deliveries a couple of months, one way or the other.
But we we assess our our EAC is in our schedules on a very consistent basis, you're looking at a onetime adjustment potentially or notification to Congress.
I really think it's a context issue.
More than more than a disconnect because we've worked very closely with our customers. So that they understand where we are from a schedule standpoint, how we're assessing the schedule they have their own point of view on the schedules.
It's very reconcilable.
Okay, how much more to add on that.
On an annual annual basis.
And the budgets.
And then obviously, we take a look at to find out which gives you a five year look at the forecast on funding perspective, we reconcile.
Stan It's a cross reference of what we do anyway. It would be 13 weeks doing Acs and we make sure that you align actuals to date and estimate to complete where we are with our labor and material performance in burn and expectations of future performance and all of that gets baked into revise EAC that merit is home to an updated long range strategic plan that we have a labor.
Thanks, Sean plant and then the master construction schedules that we have at each site.
We're like.
We're locked tight with ourselves and then we have monthly reviews with our program offices into our customers. So I don't think there was any disconnect there.
Okay.
Okay.
Just if you wouldn't mind, providing the eac's that ECS by by segment and also there was some language in the release about BCS favorable variance.
Could you just give us a quick update on how that program is performing and if there was a favorable you see on that program in particular thanks.
Yes.
So.
I'll start with the Vcs performance and then Tom will talk about the net EAC is.
In the quarter. So, yes, <unk> is definitely showing some stability and some some positive momentum so as Tom said, we assessed sorry issues every quarter and.
There is nothing material to note.
There is some.
Team's working very hard the program team on Vcs to meet their milestones and meet their cost targets and really kind of a different difficult macroeconomic environment. So there is some progress there theres definitely.
Some progress progress on stability on Vcs I continue to think.
The best thing, we can do on the Vcs program is meet our commitments on the block for contract those.
<unk> and modules out and then transition into block five where we have more opportunity so with that Tom The chart right.
Favorable.
Gross favorable was $72 million unfavorable was $52 million.
Net was $20 million and that was that was made up of $17 million of ingalls or 85% and $3 million or 15% of empty.
There was no specific.
Favorable unfavorable that was material.
<unk>.
Great.
Okay.
Our next question stays from the line of George Shapiro from Shapiro Research. Please go ahead your line's open.
Yes, Tom if you just look at the free cash flow implied in the fourth quarter at the midpoint is around $360 million.
The milestones that you have listed for Ingalls and Newport for the fourth quarter, what are the key ones that would contribute to that.
So I think it's a host of it.
You can run down if you go to the slide on the milestones.
The launches and the deliveries that we've talked about that retention releases on delivered ships.
We've talked about.
Communication of change, there's some minor incentives that we pick up too so usually because of the seasonality you do see Q4 to be very strong for us we saw that last year with over $1 billion. In Q4. So I think the plan and the milestones are situated for us to generate that same type of results.
This year.
I'd want to clarify took its early I think.
To make sure everyone understands what I said the guidance specific guidance specifics for Q3.
<unk> assumes that there is a repayment for Covid right now my comment was since I don't know of any change with the Navy and what that could do we are sticking to how we guided at the beginning of the year four to $4 50 with the Kobe repay.
Going to occur this year, if and when that changes and we know how much we will give you some more color I would expect that come the November coffer for Q3 will have.
Real good look at the milestone performance how the rest of the year is wrapping up and I would anticipate the negotiations with the Navy is behind US and then give you more color on that.
Okay. Thanks very much.
Thanks George.
Our next question is from the line of Ron Epstein from Bank of America. Your line is now live. Please go ahead.
Okay. Good.
Hey, guys just a couple of quick ones.
Could you speak a little bit about the DDG 51 Award.
Gigantic.
How thats going to play out.
Was it a competitive bid I'm guessing it was right.
How youre thinking about that let's start with that.
Yes, so DDG 51.
Excellent job by the by the Ingalls team competing for that it was competitive theres a standard competitive the competitive environment between the two shipyards both of which are very very capable shipyard.
Getting awarded six is very positive to shows.
The demonstrated proficiency that ingalls team on executing.
Obvious we've delivered DDG 125 already and were proceeding on the next flight III destroyers, so really really a positive indicator what it does is provide a lot of stability for.
For Ingalls moving forward that step.
<unk> shipped by combined with Elpida and support for <unk> 33 in potential bundled arrangements.
For <unk> and <unk> moving forward provides a lot of stability for Ingalls.
And it's very positive.
Got it got it and then.
On the Savannah River stuff my understanding of how the accounting would work.
With potentially take a gain right now, but I think that's how it works are you deferring it or did you took a gain in the quarter.
No we didn't take a gain in the quarter right now so we become a higher <unk>.
Owner of.
Current venture still a.
A minority owner, but higher owner of it so as proceeds are released.
Yes.
On consolidated.
That's recorded gains happen in the future there will be higher than what we've had in the past. So I expect that to play out over the next the next couple of years.
So it wasn't like that where you could mark to market.
Carrying value.
No.
Got it got it and then could you just speak a little bit too.
It's growing in terms of.
Retention of employees and how their workforces involved here as we recover from kind of all the COVID-19 disruptions.
Yes, Workforces definitely.
Ron Thanks, Thanks for that question as I've said previously hiring is better right the applicant.
Right is better but retention is still a challenge and what we're finding is.
The days of hiring someone training them and sending them down to the deck plate are really over we need to ensure that the.
The new hires that don't come through our established programs because the apprentice school.
Can we get a call just a high school programs are still very successful when it comes to retention, but the walk ins.
Need to make sure that we shepherd them through the process over the next two.
To 18 months of their employment to make them understand that this is a good career and there is opportunity for growth and stability. So that's really the fundamental change is is the walk in applicants are just not the same as they used to be so that's what both ingalls and Newport, Newport news or working on.
Got it alright, thank you very much.
Sure.
Okay.
Yes.
And the next question is from the line of Noah.
Goldman Sachs Noah Your line is open.
Hey, good morning, everyone.
Hey, good morning.
If I take the empty.
Our revenue guidance to be flat sequentially in the third quarter.
I think we would have to be maybe down a little or flat year over year in the fourth quarter to be at 5% for the year.
After being kind of six to eight through the first nine months of the year. So.
How much of that is just kind of leaving some conservatism there.
How do you see them to organic revenue growth profile from here.
So.
At $6 45.
A record quarter that they've had followed $6 24, which was the previous record quarter feel comfortable with it right now I think $6 45.
Balanced between.
There's new awards that happened.
And then you get.
Okay delivery orders funded and awarded for that.
And here I do think there could be some upside here. So we'll see how that plays out when you look at our emission technologies. They grew 4% last year each of the six business units grew we see quarter over quarter at seven 5% sequentially. It grew over 5% right now so I think north of 5% is the right way to kind of take a look.
That we'll see how that plays out.
Rich stream right now of awards and working hard to kind of failed.
The seats of pellets are funded.
So it's going to be a function of awards in labor as we go forward, but I am feeling I'm feeling good about.
The pipeline to have there.
Although the book to Bill is low right now I think.
That's going to come on in the back half of the year, we will see that pop up.
Still a plethora of awards for Q3, and Q4 that we're keeping a close eye on hand, right now I think that business is starting to really play out and justify the acquisition of alliance.
As we see sales ramp that happening, yes, so no I could I could add that.
Jumped in.
The early wins in Q3, but on a total contract value not just awarded.
We're almost at $4 billion of awards for this year, which is really a record.
Four.
Ally emission technologies together, it's kind of an unprecedented that team is really doing very well and will create a lot of stability into the future and potential growth for emission technologies.
Okay I appreciate that.
Sure Tom.
707 to eight for the full year shipbuilding margin.
Relatively tight range, but.
If I keep it flat sequentially in the third quarter.
To get to the low end of the full year, the fourth quarter would need to be close to nine and to get to the high end it would need to be close to 10 and a half.
Can you speak to where in that range.
I know the milestones need to occur in every milestone is different but.
Where you are in that range to more likely see the <unk> shipbuilding margin falling.
Yes, I think were split in hazard pay right now I mean, you can see that there are a lot of milestones out there.
Things and then there's incentives and adjudication of change to that occur LPT, 29th a piece of it. Although we said earlier, it's not a big swinger, but it does contribute to the margin.
The end result.
I wouldn't want to get too precise I mean 707 to eight hours pretty precise right there.
But I do expect that.
You run the math, we said 6700, 74th with Q2, another 700 for about for Q3.
We'll be in the nines for Q4 is the math of it and I feel comfortable with what's on our plate the performance I see today.
Avenue.
<unk> daily and weekly with the CFO is down in the yard so I know what's in front of them and what has to get done both from a performance out of it and then what has to get done on the contract side and.
We're very much in place.
<unk> finished up in that range.
Got it.
And then just one other item.
Back to that attrition question Chris.
Is that is the rate of attrition slowed through the year I know that's another kind of specific question, but it seems like a pretty important.
Element into your total.
Labor.
Equation.
So it's definitely lower than it was coming out of Covid.
It's been pretty consistent this year I don't I haven't seen a lot of slowing in it.
Tricia and this year, it's still.
It's still the work in.
Early career people that just really arent prepared for the rigors of shipbuilding, it's a challenging job and we're just working very hard to to get them prepared.
To understand the real benefits of Dana shipbuilder.
Okay.
Guys I appreciate it.
Sure.
Our next question is from it onto Pizza Kubicki of Alembic Global Your line is now open.
Yes, Chris I think we've talked about this but.
The Navy I think he is working on the strategy for the Nimitz retirement, there's an RFP out there can you talk about.
If you think I'll have a role on that.
Maybe the timing.
Potential sizing of that just your thoughts on that overall.
Yes, so we will absolutely have a rolling it.
There's a lot of planning going on within the Navy in Newport News on integration of our <unk> and retirements.
We obviously did the enterprise.
Uniquely qualified to do it.
And so it's really kind of an advanced planning.
Actually because it's kind of a dance between the <unk> and the.
And then finishing the shifts in doing the D and D. So.
Absolutely it doesn't change my perspective about the long term growth rate of the business, it's integrated into the forecasting and.
Newport News will probably do that work.
Okay, well, maybe we should have like a mid decade to slightly after mid decade before it starts.
I hate to give you a specific time, but.
It's integrated over the next.
10 to 15 years.
20 years actually.
I see okay. Thank you.
It's all in the mix, it's all in the mix when you think about their plan and how they how we forecast our long term growth rate of the business.
Got it.
Okay.
Thank you I'm not showing any further questions at this time, so I'd now like to hand, the call back over to Mr. <unk> for any closing remarks.
Yes. Thank you for joining us today, we appreciate your interest in HII and look forward to continuing to engage with you all going forward.
Yes.
That does concludes today's conference call you may now disconnect your line.