Q4 2023 Huntington Ingalls Industries Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter 2023, H II conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session.
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Kristine Liwag: I would now like to hand, the call over to Kristy, Thomas Vice President of Investor Relations. Mr. Thomas You may begin.
Kristine Liwag: Thank you operator, and good morning, I'd like to welcome everyone to the HII fourth quarter 2023 earnings Conference call. Joining me today on the call are our president and CEO, Chris Kastner Executive Vice President and CFO, Tom Sealy.
Kristine Liwag: As a reminder, statements made today that are not historical facts are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Kristine Liwag: These statements relate to future events or our future financial performance and involve known and unknown risks uncertainties and other factors that may cause our actual results to be materially different from future results expressed or implied by these forward looking statements.
Kristine Liwag: Please see our SEC filings for important factors that could cause our actual results to differ materially from expected results.
Kristine Liwag: Also in their remarks today Christian Tom will refer to certain non-GAAP measures for reconciliations of these metrics to the comparable GAAP measures. Please see the slides that accompany this webcast, which are available on our websites Investor relations page at IR Dot HII Dot com.
Kristine Liwag: With that I would like to turn the call over to our President and CEO, Chris Kastner Chris.
Christopher D. Kastner: Thanks, Christy and good morning, everyone and thank you for joining us on our fourth quarter 2023 earnings call.
Christopher D. Kastner: 2023 was a strong year for HII, we continue to invest both in our shipyards and in Iraq to both expand capacity and develop new products and solutions for our customers are.
Christopher D. Kastner: Our growth rate for the year of more than 7% and our free cash flow generation of almost 700 million demonstrate that we're entering a period of accelerated growth and increased free cash flow generation. In addition to record sales growth with 2023 revenues of $11 5 billion fourth quarter revenue was.
Christopher D. Kastner: Especially strong across all three divisions with 13% year over year growth and a record $3 2 billion of revenue.
Christopher D. Kastner: In 2023 net earnings were 681 million, 18% higher than the prior year and strong free cash flow of $692 million was 40% higher than 2022.
Christopher D. Kastner: We also had $12 5 billion of contract awards in 2023, resulting in backlog of 48 billion at year end.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter 2023 HII Earnings Conference Call. At this time, all participants are in a listen-only mode.
Christopher D. Kastner: At Ingalls, we delivered DDG 125, Jack H Lucas the first flight III ships and NSC 10, Calhoun. Our DDG 51 team was also awarded the contracts for seven destroyers in FY2023 multiyear procurement competition.
Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, please press star 4x1 on your telephone keypad. Please be advised that today's conference is being recorded. If you need further assistance, please press star zero. And I would now like to hand the call over to Christy Thomas, Vice President of Investor Relations. Mrs. Thomas, you may begin.
Christopher D. Kastner: <unk> ship programs, we were awarded a $1 3 billion detailed design and construction contract for <unk> 32, and launched LH eight Bougainville, the third big deck <unk> worship in the America class Ingalls.
Christopher D. Kastner: Ingalls expects to complete sea trials and deliver Elpida 29, Richard M accrual junior in the first half of 2024.
Christy Thomas: Thank you, operator, and good morning. I'd like to welcome everyone to the HII fourth quarter 2023 earnings conference call. Joining me today on the call are our President and CEO, Chris Kastner, and Executive Vice President and CFO, Tom Steely. As a reminder, statements made today that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Christopher D. Kastner: At Newport News, we redelivered, Cvs <unk> 73, USS George Washington, After completing a refueling and complex overhaul and continued to progress on the test program for <unk> 79, John F. Kennedy.
Christopher D. Kastner: In the Virginia Class program last year, we were awarded the long lead time material for two additional block five boats in the first two boats a block six.
Christy Thomas: These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results to be materially different from future results expressed or implied by these forward-looking statements. Please see our SEC filings for important factors that could cause our actual results to differ materially from expected results. Also, in their remarks today, Chris and Tom will refer to certain non-GAAP measures. For reconciliations of these metrics to the comparable GAAP measures, please see the slides that accompany this webcast, which are available on our website's Investor Relations page at ir.hii.gov. With that, I would like to turn the call over to our President and CEO, Kris Kastner. Thanks, Kristi. Good morning, everyone.
Christopher D. Kastner: We completed work on SSN 796, New Jersey, and expect to deliver in the first half of 2024.
Christopher D. Kastner: And SSN 798, Massachusetts is nearing float off which we anticipate in the first quarter of 2024.
Christopher D. Kastner: In addition to the 2024 milestones we've included our 2025 milestone outlook, which reflects our continued focus on execution.
Christopher D. Kastner: Regarding our workforce I'm pleased with the positive progress in hiring we hired over 6900 craft personnel in 2023 and continue to see progress early this year for 2024, we have a hiring target of approximately 6000 craft personnel.
Christopher D. Kastner: The competition for skilled labor in shipbuilding in the larger manufacturing sector continues to impact our shipyards and our supply base.
Christopher D. Kastner: And thank you for joining us on our fourth quarter 2023 earnings call. 2023 was a strong year for HII. We continue to invest both in our shipyards and in IRAD to both expand capacity and develop new products and solutions for our customers. Our growth rate for the year of more than 7% and our free cash flow generation of almost $700 million demonstrate that we're entering a period of accelerated growth and increased free cash flow generation. In addition to record sales growth with 2023 revenues of $11.5 billion, fourth quarter revenue was especially strong across all three divisions with 13% year-over-year growth and a record $3.2 billion of revenue. In 2023, net earnings were $681 million, 18% higher than the prior year, and strong free cash flow of $692 million was 40% higher than 2022. We also had $12.5 billion of contract awards in 2023, resulting in a backlog of $48 billion a year. At Ingalls, we delivered DDG-125 Jack H. Lucas, the first Flight III ship, and NSC-10 Calhoun.
Christopher D. Kastner: Our Navy partner, we will continue to invest in our team to improve worker retention and proficiency.
Christopher D. Kastner: Both within our shipyard and in the supply chain to ensure we fulfill our contractual commitments and meet our financial objectives.
Christopher D. Kastner: Admission technologies, we delivered another outstanding quarter performing ahead of plan across all business units, leading to strong revenue growth in 2023 and.
Christopher D. Kastner: In addition to the record revenue growth emission technologies booked new and Recompete contract awards with nearly $6 billion in total contract value.
Christopher D. Kastner: Also emission technologies ended the year with a robust business pipeline of 75 billion, which makes us optimistic about potential growth opportunities in 2024.
Christopher D. Kastner: Key growth drivers include support for mission readiness in artificial intelligence, cyber and electronic warfare advanced modeling and simulation LDC and <unk> ISR.
Christopher D. Kastner: Turning to activities in Washington D. C for a moment, we are pleased with the passage and enactment of the defense authorization Bill for fiscal year 2024.
Christopher D. Kastner: The FY 'twenty four NDA, a strongly supports our shipbuilding programs, including multiyear procurement authority for Virginia class block six submarines and incremental funding authority for <unk> 33.
Christopher D. Kastner: Our DDG-51 team was also awarded the contracts for seven destroyers in the FY23 multi-year procurement competition. In our amphibious ship programs, we were awarded a $1.3 billion detail design and construction contract for LPD-32 and launched LHA-8 Bougainville, the third big deck amphibious warship in the America class. Ingalls expects to complete sea trials and deliver LPD-29 Richard M. McCool, Jr., in the first half of 2024. At Newport News, we redelivered CVN 73 USS George Washington after completing her refueling and complex overhaul, and continue to progress on the test program for CVN 79 John F. Kennedy.
Christopher D. Kastner: The Defense authorization Act also includes necessary authorities to support the implementation of the August agreement looking ahead over the next five years, we expect revenue growth of more than 4% and cash generation of $3 6 billion.
Christopher D. Kastner: Our expectations are grounded on the assumption that we must deliver on our commitments to our customers also while the trajectory. It may not be linear due to the timing of ship milestones of material timing, we expect that HII will be generating approximately $15 billion annually in revenue by the end of the decade.
Christopher D. Kastner: As always fundamental to our expectations for the business is executing on our contracts and developing and providing solutions to our all domain customers. We take this responsibility very seriously and remain focused on executing our program commitments.
Christopher D. Kastner: In the Virginia class program last year, we were awarded the Longleat time material for two additional Block 5 boats and the first two boats of Block 6. We completed work on SSN 796 New Jersey and expect to deliver it in the first half of 2024, and SSN 798 Massachusetts is nearing float off, which we anticipate in the first quarter of 2024. In addition to the 2024 milestones, we've included our 2025 milestone outlook, which reflects our continued focus on execution. Regarding our workforce, I'm pleased with the positive progress in hiring. We hired over 6,900 craft personnel in 2023 and continue to see progress early this year. In 2024, we have a hiring target of approximately 6,000 craft personnel. The competition for skilled labor and shipbuilding and the larger manufacturing sector continues to impact our shipyards and our supply base. With our Navy partner, we will continue to invest in our team to improve worker retention and proficiency, both within our shipyard and in the supply chain to ensure we fulfill our contractual commitments and meet our financial objectives.
Christopher D. Kastner: So with that I will turn the call over to Tom for some remarks on our financial results and guidance Tom.
Tom Sealy: Thanks, Chris and good morning today, I'll review, our fourth quarter and full year results and also provide our outlook for 2024 for more detail on our segment results. Please refer to the earnings release issued this morning and posted to our website.
Tom Sealy: Beginning with our consolidated fourth quarter results on slide four our Q4 revenues of $3 2 billion increased approximately 13% compared to the same period last year. This growth was driven primarily by higher year over year revenue at all three segments, leading to record quarterly revenue for HII.
Tom Sealy: Operating income for the quarter of $312 million increased by $207 million or 197% from the fourth quarter of 2022, and operating margin of nine 8% compared to margin of three 7% in the prior year period up 609 basis points.
The increase in operating margin was primarily due to higher segment operating income.
Tom Sealy: Net earnings in the quarter were $274 million compared to $123 million in the fourth quarter of last year up 123% diluted earnings per share in the quarter was $6 90.
Christopher D. Kastner: Admission Technologies delivered another outstanding quarter, performing ahead of plan across all business units, leading to strong revenue growth in 2023. In addition to the record revenue growth, Mission Technologies booked new and re-compete contract awards with nearly $6 billion in total contract value. Also, Mission Technologies ended the year with a robust business pipeline of $75 billion, which makes us optimistic about potential growth opportunities in 2024. Key growth drivers include support for mission readiness in Artificial Intelligence, Cyber, and Electronic Warfare, Advanced Modeling and Simulation, LVC, and C5ISR. Turning to activities in Washington, D.C. for a moment, we are pleased with the passage and enactment of the Defense Authorization Bill for fiscal year 2024. The FY24 NDAA strongly supports our shipbuilding programs, including multi-year procurement authority for Virginia-class Block VI submarines and incremental funding authority for LPD-33. The Defense Authorization Act also includes the necessary authorities to support the implementation of the AUKUS agreement.
Tom Sealy: Compared to $3 seven in the fourth quarter of the previous year.
Tom Sealy: Moving to our consolidated results for the full year revenues were a record $11 5 billion for the year a significant increase of seven 3% from 2022, the improvement was driven by strong year over year growth at all three segments.
Tom Sealy: Operating income for the year with 781 million and operating margin was six 8%.
Tom Sealy: This compares to operating income of $565 million and operating margin of five 3% in 2020 to the.
Tom Sealy: The operating income growth was primarily driven by year over year improvement in segment operating income at all three segments net earnings for the year was $681 million compared to $579 million in 2022 up 17, 6% and diluted earnings per share was <unk> $17 seven.
Tom Sealy: Compared to $14 44 in 2022 up 18, 2%.
Christopher D. Kastner: Looking ahead, over the next five years, we expect revenue growth of more than 4 percent and cash generation of $3.6 billion. Our expectations are grounded in the assumption that we must deliver on our commitments to our customers. Also, while the trajectory may not be linear due to the timing of ship milestones and material timing, we expect that HII will be generating approximately $15 billion annually in revenue by the end of the decade. As always, fundamental to our expectations for the business is executing on our contracts and developing and providing solutions to our all-domain customers. We take this responsibility very seriously and remain focused on executing our program commitment. So with that, I will turn the call over to Tom for some remarks on our financial results and guidance. Tom said,
Tom Sealy: For segment results on slide five Ingalls revenues of $2 8 billion in 2023 increased $182 million or seven 1% from 2022, driven primarily by higher volumes and surface combatants and amphibious assault ships, partially offset by lower NSC program revenues.
Tom Sealy: Ingalls operating income of $362 million and margin of 13, 2% in 2023, both improved from 2022 results driven primarily by a $75 million sale of a court judgment to recover unpaid receivables for the prior repair refurbishment and modernization of the <unk>.
Tom Sealy: Foreign built frigates, the higher volumes that I, just mentioned and a contract incentive on DDG 129, partially offset by lower risk retirement on Elpida 28, and <unk> 30 than the prior year.
Tom Steely: Thanks, Chris, and good morning. Today, I'll review our fourth quarter and full year results and also provide our outlook for 2024. For more detail on the segment results, please refer to the earnings release issued this morning and post it to our website. Beginning with our consolidated fourth-quarter results on slide four, our Q4 revenues of $3.2 billion increased approximately 13% compared to the same period last year. This growth was driven primarily by higher year-over-year revenue at all three segments, leading to record quarterly revenue for HRI. Operating income for the quarter of $312 million increased by $207 million or 197% from the fourth quarter of 2022, an operating margin of 9.8% compared to a margin of 3.7% in the prior year period, up 609 basis points. The increase in operating margin was primarily due to higher segment operating income. Net earnings in the quarter were $274 million, compared to $123 million in the fourth quarter of last year, up 123%. Diluted earnings per share in the quarter were $6.90, compared to $3.07 in the fourth quarter of the previous year.
At Newport News 2023 revenues of $6 1 billion increased by $281 million or four 8% from 2022, primarily due to higher volumes in aircraft carrier construction and engineering and submarines and partially offset by lower revenues and the <unk> program and naval nuclear.
Tom Sealy: Support services.
Tom Sealy: Newport News 2023 operating income of $379 million increased $22 million from 2022 and margin of six 2% was relatively consistent with 2022 performance the increase.
This was driven by higher volumes I, just discussed and a revenue adjustment on Cvs 73, partially offset by contract incentives on the Columbia class submarine program in 2022.
Tom Sealy: Shipbuilding margin for 2023 with eight 3%.
Tom Sealy: Admission technologies 2023 revenues of $2 7 billion increased 312 million or 13, 1% from 2022, primarily driven by higher volumes, and <unk>, ISR, and cyber and electronic warfare and space contracts.
Mission technologies 2023, operating income of $101 million and segment operating margin of three 7% both improved operating income of $63 million and segment operating margin of two 6% in 2022, driven primarily by a $49 $5 million settlement of representation.
Tom Steely: Moving to our consolidated results for the full year, revenues were a record $11.5 billion for the year, a significant increase of 7.3% from 2022. The improvement was driven by strong year-over-year growth at all three segments. Operating income for the year was $781 million, and its operating margin was 6.8%. This compares to operating income of $565 million, and an operating margin of 5.3%, in 2022. The operating income growth was primarily driven by year-over-year improvement in segment operating income at all three segments.
Tom Sealy: <unk> and warranties insurance claim relating to the acquisition of hydroid and.
Tom Sealy: The higher volumes I described partially offset by a contract loss and lower equity income due to the sale of a joint venture.
Tom Sealy: Emission technologies 2023 results included approximately $109 million of amortization of purchased intangible assets compared to approximately $120 million in 2022.
Tom Steely: Net earnings for the year were $681 million compared to $579 million in 2022, up 17.6%, and diluted earnings per share were $17.07 compared to $14.44 in 2022, up 18.2%. For segment results on Slide 5, Engel's revenues of $2.8 billion in 2023 increased $182 million, or 7.1% from 2022, driven primarily by higher volumes in surface combatants and amphibious assault ships, partially offset by lower NSE program revenues. Engel's operating income of $362 million and margin of 13.2% in 2023 both improved from 2022 results, driven primarily by a $70.5 million sale of a court judgment to recover unpaid receivables for the prior repair, refurbishment, and modernization of foreign-built frigates, the higher volumes that I just mentioned, and a contract incentive on DDG 129, partially offset by lower risk retirement on LPD 28 and LPD 30 than the prior year.
Tom Sealy: Mission technologies EBITDA margin for 2023 was eight 6%.
Tom Sealy: Turning to cash 2023 free cash flow was $692 million handily, beating the guidance due to strong year end collections as well as benefiting from the sale of the frigate court judgment and settlement of the reps and warranty insurance claims that I've highlighted.
Tom Sealy: During the year the company reduced debt by $480 million invested $278 million in capital expenditures paid $200 million in dividends and used $75 million to repurchase shares while ending 2023 with $430 million in cash on hand, and liquidity of approximately $1 9 billion.
Tom Sealy: Net capital expenditures finished the year at two 4% of revenues just under 2020 twos value of two 5%.
Tom Sealy: Cash contributions to our pension and other post retirement benefit plans totaled $44 million in 2023.
Tom Sealy: Our pension outlook for 2024 has improved from the update we provided in November given the better than expected returns to assets, partially offset by a decrease in discount rates since that time.
Tom Steely: At Newport News, 2023 revenues of $6.1 billion increased by $281 million, or 4.8% from 2022, primarily due to higher volumes in aircraft carrier construction and engineering and submarines, and partially offset by lower revenues in the RCOH program and naval nuclear support services. Newport News' 2023 operating income of $379 million increased $22 million from 2022, and its margin of 6.2% was relatively consistent with 2022 performance.
Tom Sealy: Asset returns for 2023 were 12, 3%.
Tom Sealy: Pension expectations for 2025 through 2027 have been updated and similar to the update we provided for 2024 last quarter. The SaaS benefit has increased from our last update given the more immediate recognition of the positive asset returns experienced in 2023. This is partially offset by the impact.
Tom Sealy: Of the lower discount rate. We have also provided an initial view of 2020 at expectations.
Tom Sealy: Turning to slide seven of our financial outlook for 2024, given backlog growth performance in 2023, and the strong demand for our products and services. We are now forecasting mid to long term <unk> revenue growth of four plus percent.
Tom Steely: The increase was driven by higher volumes I just discussed and a revenue adjustment on CBN 73, partially offset by contract incentives on the Columbia-class submarine program in 2022. Shipbuilding margin for 2023 was 8.3%. At Mission Technologies, 2023 revenues of $2.7 billion increased $312 million, or 13.1% from 2022, primarily driven by higher volumes in C5ISR and cyber, electronic, warfare, and space contracts. Mission Technologies' 2023 operating income of $101 million and segment operating margin of 3.7% both improved to operating income of $63 million and segment operating margin of 2.6% in 2022, driven primarily by a $49.5 million settlement of representations and warranties insurance claim Mission Technologies' 2023 results included approximately $109 million of amortization of purchased intangible assets, compared to approximately $120 million in 2022. Mission Technologies' EBITDA margin for 2023 was 8.6%.
Tom Sealy: For shipbuilding mid to long term forecast revenue growth has increased from 3% to approximately 4% although growth in 2024 will be tepid due to the outperformance in 2023.
Tom Sealy: Accordingly, we are forecasting 2020 for shipbuilding revenue between eight eight and $9 1 billion.
Tom Sealy: For 2024, we expect shipbuilding operating margin to be between seven 6% and seven 8% as we continue to target incremental margin improvement.
Tom Sealy: Emission technologies, we continue to expect approximately 5% mid to long term top line growth and again due to the 2023 outperformance driven by approximately $80 million of material timing, we expect tempered growth for FY 'twenty for forecasting revenue between $2 seven and $2 75 billion.
Tom Sealy: And we expect mission technologies' operating margins to be between 3% and three 5% and EBIT margins to be between eight and eight 5%.
In 2020 for amortization and purchase intangible assets is expected to total approximately 109 million of which $99 million is attributable to emission technologies.
Tom Sealy: We expect first quarter revenues of approximately $2 2 billion for shipbuilding and $650 million of emission technologies with shipbuilding operating margin near 7% admission technologies operating margin near two 5%.
Tom Sealy: Moving onto capital expenditures as we've discussed in prior quarters, we continue to see the long term capital expenditure rate of one 5% to 2% of general Sustainment.
Tom Sealy: In the near term given the significant demand in submarine construction, we are partnering with our navy customer to invest in expanding our shipbuilding capacity and throughput.
Tom Sealy: The investment is expected to drive Capex to approximately 5% on average for the next three years with 2024 targeted to be approximately five 3% of sales.
Tom Steely: Returning to cash, 2023 free cash flow was $692 million, handily beating the guidance due to strong year-end collections, as well as benefiting from the sale of the Frigate Court judgment and settlement of the reps and warranty insurance claims I've highlighted. During the year, the company reduced debt by $480 million, invested $278 million in capital expenditures, paid $200 million in dividends, and used $75 million to repurchase shares, while ending 2023 with $430 million in cash on hand and a liquidity of approximately $1.9 billion. Net capital expenditures finished the year at 2.4% of revenues, just under 2022's value of 2.5%.
Tom Sealy: I will note that the sustainable free cash flow levels. We've previously discussed are not expected to be impacted by this due to customer investments evidenced by the projected free cash flow growth over the next five years I will provide shortly.
Tom Sealy: Additionally, on slide seven we have provided our updated outlook for a number of other discrete items to assist with your modeling.
Moving onto slide eight we have provided an updated view of our free cash flow outlook for 2024, 600 to 700 million ending our prior five year free cash flow projection period with an estimate of $3 billion up from our prior estimate of $2 9 billion.
Tom Sealy: I'm also pleased to provide a free cash flow outlook for the next five years or for FY 'twenty four to <unk> 28 of approximate $3 6 billion I would note that these forecast do not include section 174, deferral, which if it occurs would be a tailwind to approximately $150 million to $200 million.
Tom Steely: Cash contributions to our pension and other post-retirement benefit plans totaled $44 million in 2023. Our pension outlook for 2024 has improved from the update we provided in November, given the better-than-expected returns on assets, partially offset by a decrease in discount rates since that time. Asset returns for 2023 were 12.3%. Pension expectations for 2025 through 2027 have been updated, and similar to the update we provided for 2024 last quarter, the FAS benefit has increased from our last update, given the more immediate recognition of the positive asset returns experienced in 2023. This is partially offset by the impact of the lower discount rate.
Tom Sealy: In 2024.
Tom Sealy: On slide nine we provided our capital allocation prioritization model unchanged from previous discussions, but updated for current events. We continue to remain committed to an investment grade credit rating and have reduced our leverage ratio to under two turns at the end of 2023, a year earlier than planned. In addition, we.
Tom Sealy: Finished paying off our $650 million term loan in January of 2024, which concludes our debt repayment prioritization, while securing an investment grade ratings and credit metrics.
Tom Steely: We've also provided an initial view of our 2028 expectations. Turning to slide 7 of our financial outlook for 2024, given backlog, growth performance in 2023, and the strong demand for our products and services, we are now forecasting mid- to long-term HII revenue growth of 4-plus percent. For shipbuilding, the mid- to long-term forecast revenue growth has increased from 3% to approximately 4%, although growth in 2024 will be tempered due to the outperformance in 2023. Accordingly, we are forecasting 2024 shipbuilding revenue between $8.8 and $9.1 billion.
Tom Sealy: In 2024, we expect to return approximately $500 million of free cash flow to shareholders through dividends and share repurchases. Lastly on this slide the board has approved a revision to our share repurchase program in both term and amount, resulting in available share repurchase authorization of $1 5 billion through 2020.
Tom Sealy: Eight.
Tom Sealy: To close on my remarks, the company's mainstay programs are well supported in demand and Mt's growth success continues to expand and diversify our portfolio our future is bright and within our control by executing on our current production contracts and capitalizing on the growth demand for HII products and services we've exceeded our.
Tom Sealy: 2023 financial.
Tom Sealy: Guidance metrics in terms of revenue profitability and free cash flow, while investing in our programs to facilitate growth in throughput. Additionally, we strengthened our balance sheet paying down debt and lowering our leverage ratio lastly, we fine tuned the HR investment thesis on the last page of the earnings presentation, focusing on the portfolio strength and <unk>.
Tom Steely: For 2024, we expect the shipbuilding operating margin to be between 7.6 and 7.8%, as we continue to target incremental margin improvement. For mission technologies, we continue to expect approximately 5% mid- to long-term top-line growth, and again, due to the 2023 outperformance driven by approximately $80 million of material timing, we expect tempered growth in FY24, forecasting revenue between $2.7 and $2.75 billion. And we expect mission technologies operating margins to be between 3 and 3.5%, and EBITDA margins to be between 8 and 8.5%.
Tom Sealy: <unk> ability execution and growth in free cash flow expansion, driving our current and future capital allocation commitments with that I'll turn the call back over to Christy for Q&A.
Christy: 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.
Christy: Later, I will turn it over to you to manage the Q&A.
Christy: Sure.
Speaker Change: Thank you.
Christy: A reminder, if anyone would like to ask a question. Please press star followed by one on your telephone keypad. If you would like to withdraw your question. Please press star.
Tom Steely: In 2024, amortization and purchase intangible assets are expected to total approximately $109 million, of which $99 million is attributable to mission technologies. We expect first quarter revenues of approximately $2.2 billion for shipbuilding and $650 million for mission technologies, with shipbuilding operating margin near 7% and mission technologies operating margin near 2.5%. Moving on to capital expenditures, as we've discussed in prior quarters, we continue to see the long-term capital expenditure rate of 1.5% to 2% of general sustainment. In the near term, given the significant demand for submarine construction, we are partnering with our Navy customer to invest in expanding our shipbuilding capacity and throughput. The investment is expected to drive CapEx to approximately 5% on average for the next three years, with 2024 targeted to be approximately 5.3% of sales.
Speaker Change: When preparing to ask a question. Please ensure you Amit.
Speaker Change: Let's stop followed by one to register a question.
Speaker Change: Our first question today is from Myles Walton from Wolfe Research. Please go ahead. Your line is open.
Myles Walton: Great. Thanks, good morning, maybe to start with.
Myles Walton: The Capex change, obviously pretty material $300 million.
Myles Walton: Annualized step up in run rate.
Myles Walton: A couple of questions on it one why isn't it.
Myles Walton: Offering through a higher revenue run rate in the near term like 24 and second.
Myles Walton: Why is it only.
Myles Walton: A couple of three year investment, what specifically is it going towards thanks.
Speaker Change: Hey, good morning miles stopping I appreciate the question yeah. So.
Speaker Change: Mention here that traditionally we look at.
Speaker Change: Maintaining the yards would be about one five to one one to one 5% with about another point to point and a half of specific projects as we've talked about in the recent past we have a lot of activity that's going on in the yards acquisitions, specifically at Newport News and driving down into the submarine program. There. So we're putting more boats on contract on visa.
Tom Steely: I will note that the sustainable free cash flow levels we've previously discussed are not expected to be impacted by this due to customer investment, evidenced by the projected free cash flow growth over the next five years I'll provide shortly. Additionally, on slide 7, we have provided our updated outlook for a number of other discrete items to assist with your modeling. Moving on to slide 8, we have provided an updated view of our free cash flow outlook for 2024 of $600 million to $700 million, ending our prior five-year free cash flow projection period with an estimate of $3 billion, up from our prior estimate of $2.9 billion. I'm also pleased to provide a free cash flow outlook for the next five years, or for FY24 to FY28, of approximately $3.6 billion. I would note that these forecasts do not include Section 174 deferral, which, if it occurs, would be a tailwind of approximately $150 to $200 million in 2024.
Speaker Change: Yes.
Speaker Change: MBA program and.
Speaker Change: As we working ourselves through those.
Speaker Change: As negation.
Speaker Change: Those negotiations and schedules, we see it.
It necessitates additional capacity and throughput so in conversations with a navy partner, we partnered on what that means there'll be more a couple more buildings more capacity in the yard.
Speaker Change: And it's requiring investments just over three years, we have defined projects that we've worked through when we breathe.
Speaker Change: Gotten approved through the board and with the Navy and.
Speaker Change: The investment there from the Navy will pay for the majority of that so as much as it rolls through that capital on capital.
Speaker Change: <unk>.
Speaker Change: <unk> themselves.
Speaker Change: Investments on the contracts that were to help offset that so it's a three year Ron it peaks out first yet five 3%.
Speaker Change: As I said, we've kind of given you what the free cash flow projection is from 24 to 28 to kind of evidenced that we are still good to our thesis on the cash flow inflection $2 million to $700 million plus as we go forward. This is <unk>.
Speaker Change: Two it obviously of that $3 6 billion I gave you and obviously it grows over time as the revenue and the incremental margin expansion comes online and then also the Capex falls off in years four and five.
Tom Steely: On slide 9, we've provided our capital allocation prioritization model, unchanged from previous discussions but updated for current events. We continue to remain committed to an investment-grade credit rating and have reduced our leverage ratio to under two turns at the end of 2023, a year earlier than planned. In addition, we finished paying off our $650 million term loan in January of 2024, which concludes our debt repayment prioritization while securing our investment-grade ratings and credit metrics. In 2024, we expect to return approximately $500 million of free cash flow to shareholders through dividends and share repurchases. Lastly, on this slide, the Board has approved a revision to our share repurchase program in both term and amount, resulting in an available share repurchase authorization of $1.5 billion through 2028.
Speaker Change: We think it's a good good business arrangements. It facilitates the growth that we're talking about you heard in <unk>.
Speaker Change: In the.
Speaker Change: The comments, both from Chris and myself.
Speaker Change: Raising shipbuilding from 3% to 4% and this capital investment by both the Navy and us facilitate that growth long term.
Speaker Change: I would also add that.
Speaker Change: Obviously won't impact 2000 and for these projects take a while to get implemented but it does support the mid to long term growth.
Speaker Change: Okay, and Chris just to follow up on the longer term projection in <unk>.
Speaker Change: Capital allocation prioritization, and you'll probably get into this at the Investor day, but the last several years have been a lot of cash going to pay down debt. It doesn't sound like we need to do that so are we at a point, where we can more commit to significant majority or not all of the free cash flow to return to shareholders over the timeframe.
Speaker Change: Looking forward yes.
Speaker Change: Yes.
Speaker Change: I'll start so.
Speaker Change: Fundamentally we believe the greatest source of value.
Speaker Change: That we can achieve as a corporation is to focus on.
Speaker Change: Our operational priorities right, now and and delivering our ships. So you see that and the capital investments.
Kristine Liwag: To close my remarks, the company's mainstay programs are well supported by demand, and MT's growth success continues to expand and diversify our portfolio. Our future is bright and within our control by executing on our current production contracts and capitalizing on the growing demand for HI products and services. We've exceeded our 2023 financial guidance metrics in terms of revenue, profitability, and free cash flow while investing in our programs to facilitate growth and throughput. Additionally, we've strengthened our balance sheet, paid down debt, and lowered our leverage ratio. Lastly, we fine-tuned the HI investment thesis on the last page of the earnings presentation, focusing on the portfolio's strength and visibility, execution and growth, and free cash flow expansion, driving our current and future capital allocation commitments. With that, I'll turn the call back over to Kristine for Q&A. Thanks, Tom.
Speaker Change: And then it's fairly clear on our capital allocation priorities relative to investing and are investing in our shipyards being investment grade.
Speaker Change: Progressively improving our dividends.
Speaker Change: Then providing any remainder back back to shareholders now that being said, we're going to have optionality around M&A.
Speaker Change: Have the.
Speaker Change: Responsibility to evaluate M&A projects from time to time, I don't see any significant holes in the portfolio right now and operationally I think.
Our greatest focus needs to be on delivering our shifts to our customer because they need them.
So while we're not going to commit to providing everything back to back to shareholders. On this call. We need to we're fortunate we have a strong balance sheet and we can do everything.
Speaker Change: So that's how we're thinking about capital allocation moving forward.
Speaker Change: Yes, if I could if I could piggyback on top of that kind of months I think you're looking at it the right way. If you look back on where we've been right at 22 weeks.
Kristine Liwag: 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. As a reminder, if anyone would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star flip i2 and when preparing to ask your question, please ensure that you are unmuted.
Speaker Change: We gave back to the shareholders $249 million in dividends and repos. This year is up 275 million, which is 40% of free cash flow, but we have to keep in mind for 2023, it was $480 million of debt Paydowns and we actually between the debt pay down and what we gave back to shareholders. It was better than the 100% of the free cash flow of 692% to 2023 and <unk>.
Speaker Change: For this year is we're saying $500 million of dividends and repos, there's still another $229 million just paid $1 45 in January and is 84 may now a bond payment in may So 229.
Myles Walton: Our first question today is from Miles Walton from Wolf Research. Great, thanks. Good morning.
Tom Steely: Maybe to start with the CapEx change, obviously a pretty material $300 million annualized step up in run rate. A couple questions on that. One, why isn't it dropping through a higher revenue run rate in the near term, like 24? And second, why is it only a couple three-year investment? What specifically is it going to do? Hey, good morning Miles.
Speaker Change: And that concludes it kind of going forward plus the 500 I'm committing to again is over 100% of free cash flow actually.
The shareholders. This year, if you take the midpoint of the guide of 650 right.
Tom Steely: Yes, so, you know, we've mentioned here that traditionally we look at maintaining the yards to be about one and a half to one and a half percent with about another point to point and a half of specific projects. As we've talked about in the recent past, you know, we have a lot of activity that's going on in the yards, at Dewpoint News, and driving down into the submarine program. We're putting more boats on contract in on VCS in the Columbia program, and as we're working ourselves through those negotiations and schedules, we see it necessitates additional capacity and throughput. So in conversations with our Navy partner, we've agreed on what that means. There'll be more, a couple more buildings, more capacity in the yard, and it's requiring investments.
Speaker Change: It's ramping we're giving you that commitment through 2024, we haven't told you about in the past that but we would envision as we work off each year and the cash is there.
Speaker Change: That we'll update you accordingly.
Speaker Change: Alright, thank you.
Speaker Change: Thank you.
Speaker Change: Next question today is from Tom <unk> from TD Cowen What Tom. Please go ahead. Your line is open.
Tom Sealy: Yes, Hey, I joined a little late so I apologize if you covered this but.
Tom Sealy: Could you update us on the timing of when the three milestones that slipped out of Q4 will get caught up and if theres any.
Tom Sealy: Downstream impacts from those delays, maybe crowding out labor.
Tom Steely: Just over three years, we have defined projects that we've worked through, and we've briefed. We've gotten approved through the board and with the Navy, and the investment there from the Navy will pay for the majority of that. So as much as it rolls through, I'm capital... I'll get the investments on the contracts to help offset that. So it's a three-year run.
Tom Sealy: Or anything else and then if you could just talk about.
Tom Sealy: The milestones in 2024 are there any of that or.
Tom Sealy: Kind of late in the year.
Tom Sealy: Q4 weighted that could pose a similar.
Speaker Change: Sure sure. Thanks, Scott on the two Dcs milestones where.
Speaker Change: We're essentially complete with both of the operational commitments for those milestones there were some late breaking changes on both of those boats that needed to be implemented before we.
Tom Steely: It peaks out for the first year at 5.3%. And as I said, we've kind of given you what the free cash flow projection is from 24 to 28. It's the kind of evidence that we're still good on our thesis of the cash flow inflection to 700 million plus as we go forward. There's a shape to it, obviously, of that 3.6 billion I gave you.
Speaker Change: Good claim victory and finally achieve them, but we're essentially completed the staffing is significantly reduced on on each of the boats.
Speaker Change: And and it's been reallocated to the other boats.
And no material financial issue related to those at all on El Pen 29, we ran into an issue going through the test program that we need to stop and do a root cause corrective action on we've done that ship went to see this week performed well, but we think we'll deliver that.
Tom Steely: And obviously, it grows over time as revenue and incremental margin expansion come online and then as capex falls off in years four and five. But we think it's a good business arrangement. It facilitates the growth that we're talking about.
Speaker Change: Here late Q1 early Q2 now.
Speaker Change: Now from 24 milestone impact.
Christopher D. Kastner: You heard in the comments both from Chris and myself, we're raising shipbuilding from three to 4%, and this capital investment by both the Navy and us facilitates that growth long-term. Miles, I'd also add that it obviously won't affect 24. These projects take a while to get implemented, but it does support mid- to long-term growth. Chris, just a follow-up on the longer-term projection.
Speaker Change: We're all aligned.
Speaker Change: Within the corporation relative to those milestones it does put some pressure on the vcs milestones at the end of the year on 798 and 800, but we have detailed plans to achieve those.
And we're committed to getting those done.
Speaker Change: Thank you and if I could follow up I just wanted to make sure I understood. The accounting on those three that moved out of Q4.
Christopher D. Kastner: Capital Allocation Prioritization, and you'll probably get into this at Investor Day, but the last several years have seen a lot of cash going to pay down debt. It doesn't sound like we need to do that. So are we at a point where we can more commit to a significant majority or not all of the free cash flow to return to shareholders over the time frame looking forward? Yeah, I'll start.
Speaker Change: There.
Speaker Change: Where they are positive <unk> catch ups related to them in Q4.
Speaker Change: And if not do you anticipate that in Q1 and Q2 as you recover.
Speaker Change: No no no.
Speaker Change: There are no material financial issues related related to those obviously on OLED 29, there was a bit of an opportunity lost there that will recover when it ultimately gets delivered.
Christopher D. Kastner: So we fundamentally believe the greatest source of value that we can achieve as a corporation is to focus on our operational priorities right now and deliver our ships. And you see that in the capital investments. And then we're fairly clear on our capital allocation priorities relative to investing in our shipyards, being investment grade, progressively improving our dividends, and then providing any remaining amount back to shareholders. Now, that being said, we're going to have optionality around M&A. We have the responsibility to evaluate M&A projects from time to time.
Speaker Change: It's all included in our guidance.
Speaker Change: Got it. Thank you so much I appreciate it sure.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Our next question is from Seth.
Seth: Reitman from Jpmorgan. Sir. Please go ahead your line is open.
Seth Michael Seifman: Okay. Thanks, very much good morning.
Seth Michael Seifman: Good morning.
Seth Michael Seifman: Good morning.
Seth Michael Seifman: I guess.
Seth Michael Seifman: Other earnings calls this quarter.
Seth Michael Seifman: We've heard about.
Seth Michael Seifman: Various supply chain challenges on Virginia, I guess.
Tom Steely: I don't see any significant holes in the portfolio right now, and operationally, I think our greatest focus needs to be on delivering our ships to our customers because they need them. So while we're not going to commit to providing everything back to shareholders on this call, we're fortunate we have a strong balance sheet and we can do everything. So that's how we're thinking about capital allocation moving forward. If I could piggyback on top of that, I think you're looking at it the right way. If you look back on where we've been, right, in 22 we gave back to the shareholders $249 million in dividends and repurchases. This year it's up to $275 million, which is 40% of free cash flow.
Can you just speak to kind of how you feel your estimates.
Seth Michael Seifman: Are looking.
Seth Michael Seifman: On Virginia.
Seth Michael Seifman: And the amount of risk in those estimates and then.
Seth Michael Seifman: To the extent that is there is there much in there thats contemplated for inflation reimbursement because it seems that contractor expectations for inflation reimbursement have been coming down.
Seth Michael Seifman: Has that been the case for HII.
Seth Michael Seifman: Sure.
Seth Michael Seifman: Were they not there in the first place, whereas the southern industrial base different because it's such a priority.
Speaker Change: Yes, so we don't have inflation protection on the Vcs program.
Speaker Change: At this time.
Speaker Change: Supply chain is a challenge.
Speaker Change: Across all of our programs actually we do have EPA protection.
Tom Steely: But we have to keep in mind for 2023, it was $480 million of debt paydown. So actually, between the debt paydown and what we gave back to shareholders, it was better than 100% of the free cash flow of $692 million for 2023. And now for this year, as we're saying, $500 million in dividends and repos. And there's still another $229 million. I just paid $145 million in January, and there's another $84 million bond payment in May.
Speaker Change: For the most part at Ingalls, and we're managing supply chain risk across the portfolio.
Speaker Change: The Navy is fully aware of this we're very transparent about it.
Speaker Change: Why the SIB funding is so important that's why.
Speaker Change: Why getting three year <unk> is so important.
Speaker Change: So we can just eliminate that risk.
But we evaluate our eac's every quarter and if theres risk we deal with it in that quarter, but it's not going away anytime soon I think everyone understands that that's why we have some funding being being appropriated and authorized.
Speaker Change: And as soon as we can get that down into the supply chain to better.
Tom Steely: So $229 million of debt. That concludes it, kind of going forward, plus the 500 I'm committing to, again, is over 100% of free cash flow going back to shareholders this year. If you take the midpoint of the guide at 650.
Okay. Okay. Thanks, and maybe just a quick follow up on the capital deployment.
Speaker Change: Look at the $3 6 billion over the period I think about the dividend and the 2020 for debt Paydown.
Maybe it leads like two and a quarter $1 billion.
Tom Steely: It's ramping up. We're giving you the commitment through 2024. We haven't told you a commitment to exceed that, but we would imagine as we work off each year, and the cash is there, that we'll update you accordingly. All right. Our next question today is from Gautam Khanna from TD Cowen. Gautam, please go ahead. Your line is open.
Speaker Change: I know the repo authorization I think the slides say, there's about 1 billion and a half left.
Speaker Change: Would you think that there is.
Speaker Change: Before.
Speaker Change: That is possible to exceed that 1 billion and a half.
Speaker Change: By 2028.
Speaker Change: Yes.
Speaker Change: Got it.
Speaker Change: And then if the term in time, but we can always go back and change change that again, so I wouldn't read too much into the math of it.
Gautam J. Khanna: Yes, hey, I joined a little late. So I apologize if you covered this. But could you update us on the timing of when the three milestones and split that Q4 will get caught up and if there are any downstream impacts from those delays, maybe crowding out labor, or anything else. And then could you just talk about the milestones in 2024. Are there any that are kind of late in the year?
Speaker Change: Said Theres one five available for 5 billion available right now for 2028 and as we move forward.
Speaker Change: We'll adjust that accordingly.
Speaker Change: That was more that was just more of a housekeeping issue that we cleaned up.
Speaker Change: Great. Thank you very much.
Speaker Change: Sure.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Our next question is from Scott <unk> from Deutsche Bank. Please go ahead. Your line is open.
Christopher D. Kastner: Q4 weighted, that could pose a similar problem. Sure, sure. Thanks, Gautam. The two VCS milestones were essentially complete with both of the operational commitments for those milestones.
Scott: Hey, good morning.
Scott: Alright, great.
Scott: Hey, Chris just to clarify did the Elpida 29 delivery delays, how much extra cost associated with them or is it more just a function of some extra time in the deferral of the AC rather than a diminishment of the ACF.
Christopher D. Kastner: There were some late-breaking changes on both of those boats that needed to be implemented before we could claim victory and finally achieve them, but they were essentially complete. The staffing has been significantly reduced on each of the boats, and it's been reallocated to the other boats. And no material financial issues related to those at all. On LPD-29, we ran into an issue going through the test program that we needed to stop and do a root cause corrective action on.
Scott: Hello.
Speaker Change: Tom in Shipbuilding is cost right. So we probably lost a little opportunity there its not material in nature and we will.
Tom Sealy: I will do that will take a step up if appropriate when we make final delivery but.
Speaker Change: And obviously you would have been worth more if we did it at the end of the year.
Speaker Change: Okay got it and then Tom just from a reporting perspective, why our Venezuela insurance recoveries included in operating earnings rather than below the line a lot of people are a little confused by the reporting this quarter. Thanks.
Christopher D. Kastner: We've done that. The ship went to sea this week, performed well, and we think we'll deliver it here late Q1, early Q2. Now, from a 24-milestone impact, we're all aligned within the corporation relative to those milestones. It does put some pressure on the VCS milestones at the end of the year, on 798 and 800, but we have detailed plans to achieve those, and we're committed to getting those done. Thank you. And if I could follow up, I just wanted to make sure I understood the accounting for those three that moved out of Q4. Were there positive team catch-ups related to them in Q4? And if not, do you anticipate that in Q1 and Q2 as well? No, no, there were no...
Tom Sealy: Yes, the way the accounting works on that data in Ingalls in the operating income and other income because.
Tom Sealy: Yes.
Tom Sealy: We've had that contract we incurred cost on it so it's a recovery.
Tom Sealy: Cost that we've had booked in the past we had written off so that comes back still.
Tom Sealy: Operating income it doesn't go into the revenue. So there is not a rev rec through it but.
Tom Sealy: But we do we do account for the margin and income statement and obviously, we picked up the cash on both of those are both there.
Tom Sealy: The frigate.
Tom Sealy: The reps and warranty in Q4.
Speaker Change: Okay and then Tom last question is there any kind of ramp to the slope to the free cash flow target the cumulative target over the next five years or is it fairly level.
Christopher D. Kastner: There are no material financial issues related to those. Obviously, on LPD-29, there is a bit of an opportunity loss there that we'll recover when it ultimately gets delivered, but it's all included in our guidance. Thank you so much.
Speaker Change: 24, thank you.
Speaker Change: There is a ramp to it in the shape to it I knew when we gave that people would want to see that because we've been we've been giving you the shape of the apparent long term 2020 to 24, but really only in the back end of it when we first announced that we didn't provide the data and the only reason why we're not trying to be too nebulous, but its five years a lot of moving parts.
Seth Michael Seifman: I appreciate it. Thank you. Our next question is from Seth Seifman from J.P. Morgan. Seth, please go ahead; your line is open. Thanks very much. Good morning.
Seth Michael Seifman: Morning. I guess, you know, in other earnings calls this quarter, we've heard about various supply chain challenges in Virginia. I guess, you know, can you speak to kind of how you feel your estimates are looking for Virginia and the amount of risk in those estimates? And then, you know, to the extent that there is much in there that's contemplated for inflation reimbursement? Because it seems that, you know, contractor expectations for inflation reimbursement have been coming down. You know, has that been the case for HII? Or were they not there in the first place?
Speaker Change: It can move around I can tell you it's not a reach reached number we wouldn't put it out there. If we don't feel that we can hit it but I'm most comfortable right now I try and managed by year and we gave that number to show.
Speaker Change: With the evidenced ramp in the revenue that we talked about a 4% to AI across the enterprise, we see that mission technology is definitely accretive and pulling cash for us right now.
Speaker Change: Youre modeling should easily be able to get to that that number but I really wanted to get through 2024.
Speaker Change: Then.
Speaker Change: He can give you a guide on what like <unk>.
Speaker Change: 2025 kind of looks like in each year thereafter, okay.
Christopher D. Kastner: Or is the sub-industrial base different because it's such a priority? Yeah, so we don't have inflation protection on the VCS program at this time. The supply chain is a challenge across all of our programs, actually. We do have EPA protection for the most part at Ingalls, and we're managing supply chain risk across the portfolio. The Navy is fully aware of this.
Speaker Change: Thank you Mr results.
Speaker Change: Thank you.
Speaker Change: Thank you.
Our next question is from David Strauss from Barclays. David. Please go ahead. Your line is open.
David Strauss: Great. Thanks, good morning.
David Strauss: Good morning, David.
Speaker Change: Chris or Tom.
David Strauss: Tom I wanted to ask about the <unk>.
David Strauss: Building margin target I think.
Christopher D. Kastner: We're very transparent about it. That's why the SIB funding is so important. That's why getting three-year AP is so important, so we can just eliminate that risk. But we evaluate our EHCs every quarter, and if there's risk, we deal with it in that quarter. But it's not going away anytime soon. I think everyone understands that.
David Strauss: You had been targeting 778.
David Strauss: For 'twenty, three and you're talking about 24 being above that and then you had milestone slip out that I would assume with those potential EAC adjustments that would help so I guess what changed in terms of the.
David Strauss: The progression on the on the shipbuilding margin side as it relates to <unk> 24 versus what you talked about but we're thinking about before.
Seth Michael Seifman: That's why we have SIB funding being appropriated and authorized, and as soon as we can get that down into the supply chain, the better. Okay, okay. Thanks.
Speaker Change: Yes, so we don't want to get ahead of ourselves right. We did talk about 778, Oh, there's a couple of milestones that we missed at the end of the year, which causes a little bit of a drag as you saw how we finished off still shipbuilding healthy with with the recovery of the sale of the claim eight 3% still kind of beat the guidance with the claim on a recurring run rate I'm with you that it's a.
Seth Michael Seifman: And maybe just a quick follow-up on capital deployment. If I look at the $3.6 billion over the period, you know, think about the dividends and the 2024 debt paydown, that maybe leaves like, you know, $2.25 billion. I know the repo authorization, I think the slides say there's about a billion and a half left. I mean, would you think that there is before, you know, that it's possible to exceed that billion and a half? Bye, Twain.
Speaker Change: Little bit short on that right now and we will pick it up kind of going forward right. So I'm not just going to have a step function up.
Speaker Change: We'll pick up where we have on our run rates as we finish our milestones and we get credit for that there'll be some step ups along the way I think 76% to 7% is appropriate.
Speaker Change: I'm a comfortable to conservative on that right now and.
Seth Michael Seifman: Yes, I would let that be the guiding light. It will be extended for a term and time, but we can always go back and change that again. So I wouldn't read too much into the math of it, but as we said, there's $1.5 available, $1.5 billion available right now for 2028. And as we move forward, we'll adjust that accordingly. That was just more of a housekeeping issue that we cleaned up. Thank you very much.
Speaker Change: The last couple of years, we've missed a couple of tests right at the end of the quarter. So I don't want us to get ahead of ourselves a little bit let's kind of earn each of these quarters think 76% to 708 is the appropriate way to kind of look at it if we get the hiring and retention and we have shifts through the whole year and we make all our milestones we could be on the upper.
Speaker Change: End of that range, if not higher but I think for now finishing the year off at <unk> with the claim.
Seth Michael Seifman: Sure. Our next question is from... Show from Deutsche Bank, Scotland's Warhead, your line is open. Hey, good morning.
Speaker Change: The bottom end of the guide right now without the claim I think thats the right starting point with a year's worth of shipbuilding to go for 2024.
George D. Shapiro: Hi. Hey, Chris, just to clarify, did the LPD-29 delivery delays have any extra costs associated with them? Or is it more just a function of some extra time and a deferral of the AC rather than a diminishment of the, Well, time in shipbuilding is cost, right? So we probably lost a little opportunity there. It's not material in nature, and we'll take a step up, if appropriate, when we make final delivery. It obviously would have been worth more if we did it at the end of the year. Okay, got it. And then, Tom, just from a reporting perspective, why are Venezuela insurance recoveries included in operating earnings rather than below the line? A lot of people are a little confused by the reporting.
Speaker Change: Okay.
Speaker Change: And then wanted to ask about working capital.
Speaker Change: I think for the year at the end of the year you came in kind of below your.
Speaker Change: Target it looks like Youre around 5% of sales so.
How does working capital look going forward I assume some of that.
Speaker Change: Capex recovery workflow through working capital at least.
Speaker Change: Least over the near term thanks.
Speaker Change: Yeah sure Yeah, Yeah, we've had a lot of conversation on that working capital and I know when we were much higher than that at 10% and 8% range that was concerned like how could we get that down and we're projecting that that would happen I'm happy to report that it is kind of landed right, where we thought it would be right. So I think we started the year off in about six six to six 5% we.
Tom Steely: The way that accounting works on that, down at Ingalls, it's in the operating income and other income because we've had that contract, we incurred costs on it, so it's a recovery for costs that we've had booked in the past and we had written off. So it comes back still as operating income. It doesn't go into revenue, so there's not a rev-reco. But we do account for the margin in the income statement, and obviously, we picked up the cash on both of those, from both the Frigate and the Reps and Warranty Inc. Okay, and then Tom, last question. Is there any kind of ramp to or slope to the free cash flow target, the free cumulative target over the next five years? Or is it fairly level? Yeah, 24. No, there is a ramp to it and a shape to it.
Speaker Change: You have 5%.
Speaker Change: Conversations we've had in the recent past we have talked about it used to be 6% to 8% without mission technologies with the additional sales Commission technologies, it's more like 4% to 6% and I had highlighted that we were coming down.
Speaker Change: With Covid in the rear view mirror production programs that we have maintaining trying to maintain the schedules with the same type work, we would see a normalization of the working capital and that's exactly what's played out we've lost about a point of working capital throughout this year and I still anticipate kind of going forward.
Speaker Change: Improvement in that as we go forward so.
Speaker Change: Six is the right way to kind of look at it we exit 'twenty three at 5% and I would expect in 2024 and beyond.
Speaker Change: A little bit lower than that between 4% to 5% cap.
Speaker Change: Capital incentives will help as we get.
Speaker Change: The cash upfront for the cost is completely incurred and I think thats the appropriate way to kind of model it going forward in the fourth quarter to 5% range in the next couple of years.
Speaker Change: Thank you.
Speaker Change: Mhm.
Tom Steely: I knew when we gave that that people would want to see it because we've been giving you the shape of the current one from 2020 to 2024, but really only the back end of it. You know, when we first announced that, we didn't provide it either. And the only reason why I'm not trying to be kind of too nebulous, but, you know, it's five years, a lot of moving parts, how it can move around. I can tell you it's not a reachable number. We wouldn't put it out there if we didn't feel that we could hit it. But I'm most comfortable right now.
Speaker Change: Thank you.
Speaker Change: Our next question today is from Pete.
Pete: From Alembic Global. Please go ahead your line is open.
Pete: Hey, good morning, guys nice quarter good morning.
Pete: Tom I think you can just help us out a little bit but can you can you quantify I'm sorry, if I missed this can you can you quantify the two one off gains in the fourth quarter.
Pete: Those emission technologies.
Pete: Yes emission emission technologies.
Pete: The warranties and representations.
Pete: With hydroid that.
Tom Steely: So I try and manage by year. And we gave that number to show, you know, with the evidence ramp and the revenue that we talked about, four plus percent to H.I. across the enterprise, we see that mission technology is definitely creative and pulling cash for us right now. Your modeling should easily be able to get to that number. But I really want to get through 2024.
Pete: A settlement, we had $49 $5 million.
Pete: And then Ingalls, we picked up from a frigate repair effort that we had in the late nineties.
Had cost against that and we've been working to see how we could get a recovery on that and we did get a judgment settlement judgment in 2018, and then we were able to broker and sell that entity for $70 5 million and.
Pete: And Youll see in that case, it is a little bit of a backend on that too will have to see how that plays out.
Tom Steely: And then we can give you a guide to what, you know, like 2025 kind of looks like and each year thereafter. Thank you. OK. Thank you. Our next question is from David Strauss from Barclays. David, please go ahead. Your line is open.
Pete: That's about all I want to say about those two that's about $120 million gross but obviously I pay tax on that so so net taxes the impact to that.
Pete: Through the profitability and cash flows it was $95 million.
David Strauss: Great. Thanks. Good morning.
Speaker Change: Okay I appreciate it and then.
David Strauss: Morning, David. Chris, or Tom, I wanted to ask about the shipbuilding margin target. So, I think... You have been targeting 7-7 to 8 for 23, and you talked about 24 being above that, and then you had some milestones slip out that I would assume, you know, with those potential EAC adjustments, that would help. So I guess what changed in terms of the progression on the shipbuilding margin side as it relates to 24 versus what you talked about or were thinking about before? Yeah, but we don't want to get ahead of ourselves, right? Yeah, we did talk about 7.7 to 8.0.
Speaker Change: Maybe more top level question, what gave you guys the confidence to raise kind of the mid term outlook. Despite the fact that we don't have a 24 budget appropriated yet.
Then on the 24 supplemental thats out there I think there's a lot of shipbuilding industrial base money in there maybe you could talk about that in.
Speaker Change: Is there anything else in the supplemental that could benefit you guys.
Speaker Change: Yes.
Speaker Change: Yes, so I'll start with that 24 budget is very positive for us all of our major programs are supported <unk> 33 is supported which is really important.
Speaker Change: Ingalls.
Speaker Change: Submarine industrial base funding in the baseline budget is important and I think that's around $400 million, but the additional $3 billion in the supplemental just further effort to improve the supply base. So theres also.
Tom Steely: There's a couple of milestones that we missed at the end of the year, which caused a little bit of a drag, as you saw how we finished off. Still shipbuilding healthy with the recovery of the sale of the claim. 8.3% still kind of beat the guidance with the claim. On a recurring run rate, I'm with you that it's a little bit short on that right now.
Speaker Change: Funds within that to improve the labor force so getting both of those approved is really important now our confidence relative to the guide is just on the demand for our products, we see the demand for non wood products in shipbuilding, both the Newport News and Ingalls, but also emission technologies and when we laid it out we looked at the investments were made.
Tom Steely: And we'll pick it up kind of going forward, right? So I'm not just gonna have a step function up, but we'll pick up where we are on our run rates as we finish our milestones, and we get credit for that. There'll be some step-ups along the way. I think 7.6 to 7.8 is appropriate.
Speaker Change: And the opportunity it just makes sense, we're in a in a bit of an inflection point from a sales standpoint, and I actually think there's probably some tailwind.
Tom Steely: It's, I'm comfortable being conservative on that right now. And, you know, I've guided the last couple of years, and we've missed a couple of 10s right at the end of the quarter. So I don't want us to get ahead of ourselves a little bit. Let's kind of earn each of these quarters. I think 7.6 to 7.8 is the appropriate way to kind of look at it.
Speaker Change: We can get that submarine industrial base funding approved executed and start improving throughput.
Speaker Change: Tom you have anything to add sure yes, we've talked about the demand for the products and services. We have when you go around the horn down there Ingalls just one seven destroyers with a pretty good clip on the schedule side of that with with options in the future for that we see the 30 year Shipbuilding plan that we've talked about the 17 boats that are going to happen.
Tom Steely: If we get the hiring and the retention right and we have clean shifts through the whole year and we meet our milestones, we could be on the upper end of that range, not higher. But I think for now, finishing the year off at, you know, 8.3 with the claim, the bottom end of the guide right now without the claim, I think that's the right starting point with, you know, a year's worth of shipbuilding to go for 2020. Okay.
Speaker Change: Already two long lead for the last two in block five and Vcs block six dose fast procurements happen they have to get definitive we're talking about Colombia Bill too.
Speaker Change: <unk> for 75.
Speaker Change: And then just the <unk>.
Speaker Change: <unk> work that we have changed work and then the growth at mission technology as we update our annual plan.
David Strauss: And then one asked about working capital. You know, I think for the year, at the end of the year, you came in kind of below your, your target looks like you're around 5% of sales. So how does working capital look going forward? I see some of the, you know, the CapEx recovery will flow through working capital at least, at least over the near term. Thanks.
Speaker Change: Every year, obviously, it's a 10 year look and when we really kind of look we say mid to long that's like five to 705 to 10 years I know the street, that's too far related but at least five years, we see growth rates at least that if not higher and I think you have to break our way with timely awards, we have to get the labor any of the materials have to hit but we can just see how the programs are playing out.
Speaker Change: Cost inflation.
Speaker Change: Inflation orders backlog and things of that nature, and we think it's appropriate to.
Tom Steely: Sure, yeah. We've had a lot of conversations about that working capital, and I know when we were much higher than that, at 10% and 8% range, there was concern like how could we get that down, and we were projecting that that would happen. I'm happy to report that it's kind of landed right where we thought it would be, right?
Speaker Change: Reis to these these levels and there is still there is still opportunities above and below this.
Speaker Change: For for.
Speaker Change: For additional growth.
Speaker Change: Great. Thanks, guys.
Speaker Change: Sure.
Tom Steely: So I think we started the year off at around 6% to 6.5%. And we finished the year at 5%. The conversations we've had in the recent past, we talked about it used to be 6% to 8% without mission technologies. Now, with the additional sales for mission technologies, it's more like 4% to 6%. And I had highlighted that we were coming down with COVID in the rearview mirror, production programs that we have, trying to maintain the schedules with the same type of work, we would see a normalization of the working capital. And that's exactly what happened.
Speaker Change: Thank you.
Speaker Change: Our next question is from Ron Epstein from Bank of America. Please go ahead. Your line is open.
Ronald Jay Epstein: Hey, good morning.
Ronald Jay Epstein: Yes Ross.
Ronald Jay Epstein: A follow on on the.
Ronald Jay Epstein: Two questions one on the supply chain and one on labor.
Ronald Jay Epstein: On the labor front house, retaining labor because something we've heard across the industry not specific to you guys, but generally across the industry, it's been tough too.
Ronald Jay Epstein: Labor companies are bringing in.
Tom Steely: We've lost about a point of working capital throughout this year, and I still anticipate kind of a little bit of improvement as we go forward. So 4% to 6% is the right way to kind of look at it. We exit 23% at 5%, and I would expect in 2024 to be a little bit lower than that, between 4% to 5%.
Ronald Jay Epstein: Young mechanics or whatever.
Ronald Jay Epstein: They stick around for a year or two and then major jobs.
Ronald Jay Epstein: How are you guys bearing on that front and what are you doing to queue.
Speaker Change: Yeah, Hey, Ron Thanks for that question, it's definitely been a challenge over the last couple of years, citing the exact example that.
Ronald Jay Epstein: That you brought up and the team has a number of initiatives <unk> implemented over the last year.
Ronald Jay Epstein: To address the situation.
Ronald Jay Epstein: They center around three fundamental issues really which is flexibility for.
Tom Steely: The capital incentives will help as we get the cash up front before the cost is completely incurred. And I think that's the appropriate way to kind of model it going forward in the 4% to 5% range over the next couple of years. Thank you. Our next question today is from Pete Skibitski from Alembic Global. Pete, please go ahead. Your line is open.
Ronald Jay Epstein: The team that were hiring.
Ronald Jay Epstein: And work schedules potential time off.
Ronald Jay Epstein: The craft.
Ronald Jay Epstein: Craft person man and woman.
Ronald Jay Epstein: That we are now hiring is not fully prepared to come right into the workforce and start that kind of a daily grind without under without having some flexibility in their work schedules. So we have a number of pilots that we're working.
Pete Skibitski: Hey, good morning, guys. Nice quarter. Good morning.
Pete Skibitski: Tom, I think you just helped us out a little bit, but can you quantify, and sorry if I missed it, can you quantify the two one-off games in the fourth quarter at Ingalls and Mission Technologies? Yes, Emission Technologies. It was the warranties and representations for the purchase of Hydroid. That was a settlement we had for $49.5 million. And then Ingalls, we picked him up from a frigate repair effort that we had in the late 1990s. And we've been working to see how we can get a recovery on that. We did get a settlement judgment in 2018, and then we were able to broker and sell that entity for $70.5 million. Yeah, I appreciate it. And then
Ronald Jay Epstein: In that regard.
Ronald Jay Epstein: I have some really interesting analytics around targeting geographies that.
Ronald Jay Epstein: We have better success in hiring and retaining.
Ronald Jay Epstein: So we have initiatives there.
Ronald Jay Epstein: And then we have a very focused incentives on critical skills.
Ronald Jay Epstein: An example is machinists.
Ronald Jay Epstein: Where you have to just paying more to get them and keep them.
Ronald Jay Epstein: So a number of initiatives, we pivoted very quickly because we have such good data on.
Ronald Jay Epstein: What works or what what is going to work and what.
Ronald Jay Epstein: What does work so we can expand upon it but you're hitting on a fundamental issue in the industry right now and the manufacturing industry as a whole and within defense and in shipbuilding is that the labor issue is obviously one of our major risk issues and we're working very hard to resolve I would also.
Tom Steely: Maybe a more top-level question, what gave you guys the confidence to raise the midterm outlook despite the fact that we don't have a 24 budget appropriated yet? And then on the 24 supplemental that's out there, I think there's a lot of shipbuilding industry-based money in there. Maybe you could talk about that, and is there anything else in the supplemental that could benefit you guys? Yeah, so I'll start with that. The 24 budget is very positive for us. All our major programs are supported.
Ronald Jay Epstein: Say the Navy understands it and in the SIB funding as I previously mentioned there are workforce development issues as well getting people into the apprentice schools, because our retention rates and the apprentice schools and established programs are significantly higher because the people that go in there are choosing that as a profession.
Christopher D. Kastner: LPD 33 is supported, which is really important to Ingalls. The submarine industrial base funding in the baseline budget is important. I think that's around $400 million, but the additional $3 billion in the supplemental just furthers the effort to improve the supply base. And there's also funds within that to improve the labor force. So getting both of those approved is really important.
Ronald Jay Epstein: So it's something we're well aware of our partners are well aware of it and the Navy is well aware of it and we're addressing it we've seen some some rays of light.
Ronald Jay Epstein: As we entered the year, but you can't really trust a couple of data points. So we're going to keep keep working on it this year.
Speaker Change: Got it got it and then on the supply chain with the investment that the Navy is making where does that have to be made and where are the weaknesses in the supply chain today is we see it.
Christopher D. Kastner: Now, our confidence relative to the guide is just based on the demand for our products. We see demand for not only our products in shipbuilding, both in Newport News and in Ingalls, but also in mission technologies. And when we laid it out and looked at the investments we're making and the opportunity, it just makes sense. We're in a bit of an inflection point from a sales standpoint. And I actually think there's probably some tailwinds if we can get that submarine industrial base funding approved, executed, and start improving throughput. Tony, anything to add?
Speaker Change: Yes, so they've done a really good job both on the Vcs program and on the DDG program. It doesn't get enough as much press, but on the DDG program as well as identifying single source or sole source vendors in the supply chain that need need investment to increase capacity.
Speaker Change: As you know capacity add dwindled a bit.
Speaker Change: In the previous 10 to 15 years, so they've done a very good job targeting those those suppliers and making investments.
Speaker Change: And then there are some large large critical critical material.
Tom Steely: Sure, yeah. You know, we've talked about the demand for the product. We have, you know, when you go around the horn down there, you know, Ingalls just won seven destroyers with a pretty good clip on the schedule side of that, with options in the future for that. We see the 30-year shipbuilding plan, the five-year FIDAP. We've talked about the 17 boats that are going to happen, already two long lead times for the last two in Block 5, and then VCS Block 6, those advanced procurements have to get defined.
Whether it's single source.
Speaker Change: Suppliers that are dealing with the same sort of labor and supply chain issues that we are sort of identify those potentially dual source them are qualifying additional source is something that the navy and we are looking at as well. So it's a very comprehensive review I think it's managed very well.
Speaker Change: By by US and our partners and I think it's going to get at the issue, but it doesn't turn overnight.
Speaker Change: Got it got it thank you very much.
Speaker Change: Thanks, Rob.
Speaker Change: Thank you our next.
Speaker Change: Next question is from Noah <unk> from Goldman.
Tom Steely: We're talking about Columbia Bill 2, the RCOH for 75, and then just the preponderance of work that we have, change work, and then growth admission technologies. We update our annual plan, you know, every year, obviously. It's a 10-year look, and when we really kind of look, we say mid to long. That's like five to seven, five to ten years. I know the street. That's too far, really, but at least five years.
Noah: Goldman Sachs. Please go ahead your line is open.
Noah: Hey, good morning, everyone.
Noah: Good morning, all.
Noah: Tom can you give us the pieces that bridge your actual full year 23 free cash versus.
Noah: What you heard last guided it too.
Tom Sealy: So we started the afore to $4 50, we guided up to 500, you can at $6 90 to completion.
Tom Steely: We see growth rates at least that, if not higher. Now, things have to break our way with timely awards. We have to get to labor, and the materials have to hit, but we can just see how the programs are playing out, cost, inflation, orders, backlog, and things of that nature, and we think it's appropriate to raise these levels, and there's still opportunities above and below this for... Great. Thanks, guys. Short...
Speaker Change: Two claims.
Speaker Change: Net tax obviously, that's $95 million comes off the 692 gets you to 597 and then the difference between the increased guide in Q3 of 500 to 597 with a strong strong collections in Q4, the team really stayed on it and we make sure that.
Speaker Change: We've got a built in on time, and we had a clean clean Q4.
Ronald Jay Epstein: Thank you. Our next question is from Ron Epstein from Bank of America. Ron, please go ahead, your line is open. Hey, good morning.
Speaker Change: Receivable, okay, just across across the enterprise there wasn't anything of significance to really note in there.
Speaker Change: Okay.
So if I take that final and take out the claims.
Ronald Jay Epstein: Yeah, a lot to ask, but maybe just a follow-up on the, and I have two questions. One on the supply chain and one on labor. On the labor front, how's retaining labor been? Because, you know, something we've heard across the industry, not specific to you guys, but, you know, generally across the industry, it's been tough to retain labor that, you know, companies are bringing in, you know, young mechanics or whatever. They stick around for a year or two, and then they take off.
Speaker Change: Paul I guess call back closer to 600.
Speaker Change: Can you Bridge me too.
Paul: Two standing there in 24, while Capex is going up as.
Paul: As much as it is.
Paul: If you go because you've got the revenue guidance, that's up kind of 2% to 3% and a flat segment operating margin.
Paul: Yes, So I had mentioned in my in my comments upfront that this active and significant navy participation and that is I don't want to get too much into the details, but we're both contributing to it.
Paul: But that's helping offset that increase there so.
Paul: The guide for <unk>.
Christopher D. Kastner: How are you guys faring on that front? And what are you doing? Yeah, hey, Ron, thanks for that question. It's definitely been a challenge over the last couple of years, citing the exact example that you brought up. And the team has a number of initiatives they've implemented over the last year to address the situation. And they center around three fundamental issues, really, which is flexibility for the team that we're hiring in work schedules and potential time off. The craft, the craft person, the man and woman that we are now hiring is not fully prepared to come right into the workforce and start that kind of daily grind without under without having some flexibility in their work schedules.
Paul: 700, we took that down a little bit from where I left it last quarter as we as we exceeded this year a little bit of timing too is in there on the collections.
Paul: A little over achievement in 2023, a little back off from where I left you last time at 700 now it's a six to 700, but I would not be alarmed because of the higher capex in 2000, and 425 or 26% that it's going to be a major draw on the free cash flow from the discussions we've had in the past that's been a little bit of.
Paul: Guiding light, we definitely want to support our customer perform in existing contracts.
Paul: The work, we're talking about for the new Capex is on the new requirements that are coming in as we broke out that relationship and how we make that happen.
Speaker Change: Got it.
Speaker Change: Sure that would kind of keep everything in lockstep.
Christopher D. Kastner: So we've got a number of pilots that we're working on in that regard. We have some really interesting analytics around targeting geographies that we have better success in hiring and retaining. So we have initiatives there. And then we have very focused incentives on critical skills. An example is machinists, where you have to just pay them more to get them and keep them.
Speaker Change: Got it can be ships that he had cleaner sooner high quality value and on our side, we still have to be able to kind of run the business here has been working capital. So all of that's in the mix.
Speaker Change: I would not be concerned on the five 3% against the cash flow projections that we've given you again, that's why we gave you.
Speaker Change: Probably won't see that too often a five year projection going forward.
Speaker Change: Wanted to settle everyone out there that all of that's been factored in as we run the business.
Speaker Change: And we manage our cash.
Speaker Change: So how will we.
Christopher D. Kastner: So a number of initiatives, we pivot very quickly because we have such good data on what works or what is going to work and what does work, so we can expand upon it. But you're hitting on a fundamental issue in the industry right now, in the manufacturing industry as a whole, and within defense and in shipbuilding, that the labor issue is, you know, obviously one of our major risk issues and one we're working very hard to resolve. I would also say that the Navy understands it. And in SID funding, as I previously mentioned, there are workforce development issues as well. Getting people into the apprentice schools because our retention rates in the apprentice schools and established programs are significantly higher because the people that go into there are choosing that as a profession.
Speaker Change: If I could I forgot.
Speaker Change: Yeah, I'm, sorry, I got it.
Speaker Change: Well I'm just wondering if theres a navy participation.
Speaker Change: Will we see will not all of that actually would be recorded in capex or will it flow to your capex and come back in your rates and your operating margin or how will we actually see that in your financials.
Speaker Change: So when we do our Capex, obviously, our cost we get incentivized to go do that it comes on the contract in the form of capital incentives additional margin in cash at close to that.
Speaker Change: And that helps offset by additional costs.
Speaker Change: I would comment just earlier to your question as you try to kind of normalize the $6 92 at like $5 97, as I said when you pull out those two claims.
Christopher D. Kastner: So it's something we're well aware of. Our partners are well aware of it, and the Navy is well aware of it. And we're addressing it. We've seen some rays of light as we entered the year, but you can't really trust a couple of data points. So we're going to keep working on it this year. Got it, got it. And then on the supply chain, with the investment that the Navy is making, where does that have to be made? I mean, where are they in the supply chain today, as you see it?
Speaker Change: The ramp that we've been talking about if you go back to 21 at 400.
Speaker Change: <unk> 49, and $22 94, and now even about the claims that was ramped to $5 97 and now we're at six.
Speaker Change: 6% to 700, we've talked about 700 number in 2024, just a little bit there is range bound now because we exceeded 2023 and now the $3 6 billion. The average of that 720, and thats kind of shape to it obviously is going to be smaller upfront as the revenue incremental margin growth in the out years, it's going to be largely in the back.
Speaker Change: Thats appropriate right now, it's not a stretch number.
Christopher D. Kastner: Yeah, so they've done a really good job, both on the VCS program and on the DDG program, which doesn't get as much press, but on the DDG program as well, as identifying single source or sole source vendors in the supply chain that need investment to increase capacity. Because, as you know, capacity had dwindled a bit in the previous 10 to 15 years. So they've done a very good job targeting those suppliers and making investments. And then there's some large critical material, whether single-source suppliers that are dealing with the same sort of labor and supply chain issues that we are. So to identify those and potentially dual source them or qualify an additional source is something that the Navy and we are looking at as well.
Speaker Change: It's conservative to reasonable number we have risks to kind of go work off and I think that has both risks and opportunities associated with it. So I'd leave you with that.
Speaker Change: So the piece that goes through Capex, that's supported by the Navy that we'll just see that in future margins as it flows through your rates.
Speaker Change: Is that right yes.
Speaker Change: Margins in cash yes.
Speaker Change: Okay, and then I guess I was just so for 'twenty four with the margin guidance flattish year over year.
Speaker Change: I still struggle to see where that $300 million is coming from.
Christopher D. Kastner: So it's a very comprehensive review. I think it's been managed very well by us and our partners, and I think it's going to get at the issue, but it doesn't solve it overnight. Got it, got it. Thank you very much.
Speaker Change: So from the margin side versus the timing of it and when that happens right. So you get that on contract and you've got to go do the work and as a percentage of completion. It takes theres a lag on the margin side and on the cash side, we try and make sure that we try and stay neutral so that we're not impacted us incurring costs that high of five 3% of Capex.
Ronald Jay Epstein: Thanks, Ron. Thank you. Our next question is from Noah Poppenack from Goldman Sachs. Noah, please go ahead.
Noah Poppenack: Hey, good morning, everyone. Good morning, all. Tom, can you give us the pieces that bridge your actual full year 23 free cash versus what you had last guided it to? So, we started the year at 400, 450; we got it up to 500. You can, you know, at 692, at completion, if you take out the two claims, obviously, that's 95 million, comes off the 692, gets you to 597. And then, the difference between, you know, the increased guide in Q3 of 500 to 597 with some strong collections in Q4. The team really stayed on it, we made sure that... We've got our bills in on time, and we had a clean Q4. It's just across the enterprise. There wasn't anything of significance to really note.
Speaker Change: That gets offset on the on the payment the payment schedule of the Capex right. So the margins that we're running exactly with the cash but on our side, we're trying to keep it neutral here. So it's not going to impact our projections that we've given that's part of the total ship P&L.
Speaker Change: Okay.
Speaker Change: Okay, Alright I appreciate.
Speaker Change: Appreciate that thanks, so much.
Speaker Change: Sure sure no. Thanks for the question.
Speaker Change: Thank you.
Our next question is from George Shapiro from Shapiro Research George. Please go ahead. Your line is open.
George D. Shapiro: Yes, I wanted to ask.
George D. Shapiro: Your actual ship revenues were like almost $300 million higher than the high end of the guide that you provided on our November call. So just wondering why given it to me. This is a fairly predictable business and then I have a different question too.
Tom Steely: Okay. So if I take that final and take out the claim, I guess I'll call that closer to 600.
Noah Poppenack: Can you bridge me from that to staying there in 24 while CapEx is going up? As much as it is, if you're young, because you got revenue guidance that's up, you know, kind of two or 3% in a flat segment operating market? Yeah, so I mentioned in my comments up front that this, you know, active and insignificant, I don't want to get too much into the details, but we're both contributing to it, but that's helping offset that increase. So the guide for 6 to 700, we took that down a little bit from where I left it last quarter. As we exceeded this year, a little bit of timing, too, was in there on the collection. So a little overachievement in 2023, a little back off from where I left you last time at 700.
Speaker Change: Yes sure sure so.
Speaker Change: The MTA side, you saw a nice rush at the end of the year of some some receivables I mentioned in my notes is about $80 million. So that was a.
Speaker Change: A big pickup on the shipbuilding side, just the timing of material.
Speaker Change: How that flow to handle the majority of the overage in where we thought we would land.
Speaker Change: It was on the material side, we have some outsourcing going on as well so as those costs flow through.
Speaker Change: Opportunistic that they landed in 2023 hit but we got an 86 to 88, we came about $100 million off of that.
Speaker Change: You kind of normalize that it was good growth in shipbuilding better than 5% five 5% in shipbuilding.
Tom Steely: Now it's a six to 700, but I would not be alarmed because of the higher CapEx in 24, 25, or 26, or that it's gonna be a major draw on the free cashflow from the discussions we've had in the past. That's been a little bit of a guiding light. We definitely wanna support our customer and perform an existing contract.
Speaker Change: On.
Speaker Change: Ingalls up into <unk> and <unk>.
Speaker Change: Newport News at four 8%, but it was a sharing between all three divisions that just exceeded it was a nice run at the end of the year on the revenue side that Georgia Youre familiar with.
Speaker Change: Material timing you could miss by a month to two months from time to time that just came in at the end of the year now Unfortunately impacts the guide for next year right. So you had to we had to include that but.
Tom Steely: Much of the work we're talking about for the new CapEx is on the new requirements that are coming. And as we broker that relationship and how we make that happen, we're gonna. Make sure that we kind of keep everything in lockstep, and we wanted to let everyone out there know that all that's been factored in as we run the business, and we manage our cast. So, how will we actually physically be at... Well, I'm just wondering, like, if there's a Navy participation.
Speaker Change: It's just timing.
Okay and then the other one probably for Tom If you had a $49 million benefit in mission systems from Hydroid implies the rest of the business made $2 million now you alluded to some charges that some of the other businesses there, but if you could just.
Noah Poppenack: Will we see, will not all of that actually be recorded in CapEx, or will it flow to your CapEx and come back in your rate, in your operating margin, or how will we actually see that in your So, you know, when we do our CapEx, our costs, we get incentivized to go do that, so it comes on the contract in the form of capital incentives, additional margin in cash that flows through. That helps offset my additional cost of doing so. I would comment just earlier on your question, as you tried to kind of normalize the $692 out to like $597, as they said when you pull up those two claims, it's the ramp that we've been talking about. If you go back to $21 at $449 and $22 at $494, and now we've got the claims, it's ramped up to $597. And now we're at $699.
Speaker Change: Some more information on that.
Speaker Change: Yes, that's right a piece of that is timing on how that program is just play out in the mix and execution on that we did have one job over there that we just took a slight step back it wasn't material you won't find it in the K that because it's not at that threshold. This couple of million dollars on that but.
Speaker Change: Not a lot of dollars when you break down that kind of business to begin with and then when you take a small charge and then the timing of performance on how we book Thanks.
Speaker Change: Came out to be a light quarter, there, but overall.
Speaker Change: Overall with.
Speaker Change: Claim eight 6% EBITDA <unk> III seven you could normalize that out.
Speaker Change: On the bottom end of the guide that we gave you <unk> five at the beginning of the EBITDA, but as we had mentioned throughout the year.
Speaker Change: The joint venture that.
That we sold off we picked up cash, but we lost some equity and we've been we've been kind of mentioning about a charge on a manufacturing effort that we have over there. So I think that's behind US right now kind of going forward.
Tom Steely: So, it's a little bit different. It's a little bit different. It's a little bit different. It's a little bit different. It's a little bit different.
Speaker Change: I am still very satisfied with the numbers that empty kind of put up across the board for revenue.
Noah Poppenack: We've talked about a 700 number in 2024, just a little bit, but it's range-bound now because, Now the $3.6 billion, you know, the average of that is $7.20, and that's got a shape to it, obviously. It's going to be smaller up front. As the revenue incremental margin grows in the out-users, it's going to be larger in the back. I think that's appropriate right now.
Speaker Change: <unk> and cash.
Speaker Change: Tom If you could just provide the EAC for each of the sectors.
Speaker Change: In the quarter.
Tom Sealy: Sure so for the corner it was $111 million of favor favorite Melanie $43 million of unfavorable net of $68 million was made up of about 50% that net was 50% in ingalls about 35% of Newport news about 15% and empty just for everyone on the call Youll see it in the K.
Does the whole year, it was $309 million gross gross favorability for the whole year $191 million gross unfavorable with a net of $118 million and that breaks out to be about 75% Ingalls, 15% empty and 10% Newport News I appreciate the question.
Tom Steely: It's not a stretched number. It's a conservative to reasonable number. We have risks to kind of work off. And I think that has, you know, both risks and opportunities. I'd leave you with that.
Noah Poppenack: The piece that goes through CAPEX that's supported by the Navy, we'll just see that in future margins as it flows through your rates, is that right? Yeah. Pogers & Cash. Okay, and then I guess I just, so for 24 with the margin guidance flattish year over year. I still struggle to see where that $300 million is coming from. So on the margin side, first is the timing of when that happens, right? to get that on contract, and you gotta go do the work, and there's a percentage of completion you take. So there's a lag on the margin side.
Okay. Thanks very much.
Speaker Change: Yes George.
Speaker Change: Okay.
Speaker Change: Thank you we will now be taking our last question from Scott Marquez from Melius Research Scott. Please go ahead. Your line is open.
Scott Marquez: Good morning.
Scott Marquez: Good morning, Scott I wanted to ask as it is any of the customer funded investments over the next three years is any of that contingent on the supplemental package, making its way through Congress.
Tom Steely: And on the cash side, we try and make sure that we try and stay neutral so that we're not impacted as I'm incurring costs that high of 5.3% of cap act, that gets offset on the payment schedule of the CapEx, right? So the module's not running exactly with cash. But on our side, we're trying to keep it neutral here, so it's not gonna impact our projection. Yeah, it's part of the whole ship, you know, Noah.
Speaker Change: That's a good question.
Speaker Change: <unk>.
Speaker Change: And I don't have that in front of me.
Scott Marquez: That's a really good question I don't have that in front of me I know.
Scott Marquez: Part of it is I think a part of it is but I can't quantify it for you so will we.
Speaker Change: We'll get that information for you Scott.
Scott Marquez: Okay got it and then thinking about the shipbuilding revenue growth rate.
Scott Marquez: For a long time talked about labor being the governor on output there. So how much can these investments improve throughput in the shipyard.
Noah Poppenack: Okay. Okay. All right. I appreciate that. Thanks. Sure, sure enough. Thanks. Our next question is from George Shapiro from Shapiro Research. George, please go ahead.
Scott Marquez: If retention rates don't improve materially.
Scott Marquez: We will have to be both.
Scott Marquez: And we when we do our our projections, we risk adjust them.
George D. Shapiro: Oh yes, I wanted to ask... Your actual ship revenues were like almost $300 million higher than the high end of the guide that you provided on the November call. So I'm just wondering why, given that, to me, this is a fairly predictable business. And I have a different question, too. Thanks. Yeah, sure, sure.
Scott Marquez: It's not assuming that everything works out perfectly. So it has to be both we have to improve our retention rates, we have to improve the <unk>.
Scott Marquez: Supply chain and we have to.
Scott Marquez: Improved capacity and if we do that then throughput will significantly increase but youre absolutely correct. We have to we have to be successful in both.
Tom Steely: So from the MT side, we saw a nice rush at the end of the year for some receivables. I mentioned in my notes that it was about $80 million, so that was a big pickup. On the shipbuilding side, just the timing of material and how that flowed in here, the majority of the overage and where we thought we would land was on the material side.
Scott Marquez: Kind of supplement that too.
We're building that out.
Scott Marquez: How we hire how we train how we retain we're not standing flat footed, but I know that.
Scott Marquez: The yards themselves have active plans on either outsourcing or contract labor using additional overtime crew that we do have working.
Tom Steely: We have some outsourcing going on as well, so if those costs flow through, you know, opportunistically, that they landed in 2023 here. But we got an 86 to 88, and we came about $100 million off of that. And, you know, you kind of normalize that.
Scott Marquez: Three full shifts where.
Scott Marquez: A critical path.
Scott Marquez: There's styles that we have to try and offset that in the near term you can't run that five or 10 years. If you see that we see the demand. We are building out organically that would be able to do things in the yards, but.
Tom Steely: It was good growth there. You saw it in shipbuilding, better than 5 percent, 5.5 percent in shipbuilding. You know, it angled up in the sevens, and Newport News at 4.8 percent.
Scott Marquez: Right now there are dials and opportunity sets for additional labor outside the yard that we're employing right now.
Speaker Change: Okay got it thank you.
Speaker Change: Thanks.
Speaker Change: Thank you.
Tom Steely: But it was a share between all three divisions that just exceeded. It was a nice run at the end of the year there on revenue. George, you're familiar with material timing, you can miss by a month to two months from time to time, it just came in at the end of the year, now, unfortunately, it impacts the guide for the next year, right, so we had to include that, but it was just timing. And then, probably for Tom, if you had a $49 million benefit in mission systems from Hydroid, I mean, it implies the rest of the business made Now you alluded to some charges that some of the other businesses there have, but if you could just provide some more information on that. Yeah, that's right. A piece of that was timing on how the programs just played out in a mix, in execution on that. We did have one job over there that we just took a slight step back. It wasn't material.
Mr. Kessler: This is all the time, we have for the Q&A session. Today, I would now like to hand back over to Mr. Kessler for any closing remarks.
Kessler: Yes, Thank you and thank you for joining the call today I'm very proud of our team's strong performance last year and I'm confident that we will continue to create value for our shareholders. This year I would also like to remind you that we are hosting an investor day on March 20th and look forward to seeing many of you then.
Speaker Change: Have a good afternoon.
Speaker Change: Thank you everyone for joining today's call you may now disconnect your lines and have a lovely day.
Speaker Change: Yeah.
Speaker Change: [music].
Speaker Change: Yes.
Tom Steely: You won't find it in the K there because it's not at the threshold. There are a couple million dollars in that, but not a lot of dollars when you break down that kind of business to begin with. And then when you take a small charge and the timing of performance as we book things, it came out to be a light quarter there. But overall, with the claim, 8.6% EBITDA, and the RAS at 3.7%, you can normalize that out. You would be a little bit on the bottom end of the guide that we gave you, 8 to 8.5% at the beginning of the year for EBITDA.
[music].
Speaker Change: Yes.
Tom Steely: But, as we have mentioned throughout the year, there was the joint venture that we sold off. We picked up cash, but we lost some equity. We've been kind of mentioning a charge on a manufacturing effort that we have over there. So I think that's behind us right now, and we're kind of going forward. And I'm still very satisfied with the numbers that MT kind of put up across the board for revenue, margin, and cash. Ed, Tom, if you could just provide the EACs for each of the sectors for the quarter, that would be great. Sure, so for the quarter, it was $111 million of favorability, $43 million of unfavorability, a net of $68 million, was made up of about 50%, that net was 50% in Ingalls, about 35% in Newport News, about 15% in MT, and just for everyone on the call, you'll see in the K, which does the whole year, was $309 million gross favorability for the whole year, $191 Okay, thanks very much.
George D. Shapiro: Thank you. We will now be taking our last question from Scott Mikes from Melius Research. Scott, please go ahead; your line is open. Good morning. Good morning, Scott.
Scott Mikes: Is any of the customer-funded investments over the next three years contingent on the supplemental package making its way through? That's a good question, and I don't have that in front of me. That's a really good question. I don't know the answer to that. I know part of it, I think a part of it is, but I couldn't quantify it for you.
Christopher D. Kastner: So we'll get that information for you, Scott. Okay, got it. And then thinking about the shipbuilding revenue growth rate, we talked a long time about labor being the governor of output. So how much can these investments improve output and the shipyard if retention rates don't improve here? Well, it has to be both, right?
Christopher D. Kastner: And when we do our projections, we risk adjusting them. It's not assuming that everything works out perfectly. So it has to be both.
Christopher D. Kastner: We have to improve our retention rates. We have to improve the supply chain, and we have to improve capacity. And if we do that, then throughput will significantly increase. But you're absolutely correct.
Christopher D. Kastner: We have to be successful in both. Scott, I'd supplement that too, you know, as we're building that out, how we hire, how we train, how we retain. We're not standing flat-footed, but I know that the yards themselves have active plans for either outsourcing or contract labor, using additional overtime with the crew that we do have, working the three full shifts where there's a critical path, but there are costs that we have to try and offset that in the near term. You can't run that for five or 10 years.
Christopher D. Kastner: If we see the demand, we're building out organically that we'll be able to do things in the yards, but right now, there are dials and opportunity sets for additional labor outside the yard that we're employing. Okay. Thanks. Thank you. This is all the time we have for the Q&A session today, so I would now like to hand back over to Mr. Chris Kastner for any closing remarks. And thank you for joining the call today. I'm very proud of our team's strong performance last year. And I'm confident that we will continue to create value for our shareholders this year. I would also like to remind you that we're hosting an Investor Day on March 20. And I look forward to seeing many of you then.
Christopher D. Kastner: Have a good afternoon. Thank you. Thank you. Thank you everyone for joining today's call, you may now disconnect your lines and have, ?? ?? ??