Q1 2024 Huntington Ingalls Industries Inc Earnings Call

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the first quarter 2024 HII earnings conference call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. During the presentation, you can register to ask a question by pressing the star followed by 1 on your telephone keypad. If you change your mind, please press star followed by 2. Please be advised that today's conference is being recorded. If you need further assistance, please press star followed by zero. I would now like to hand the call over to you. Vice President of Investor Relations, Christy Thomas, Mr. Thomas, Mrs. Thomas. Please go ahead.

Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2024, H I earnings Conference call. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session. During the presentation. You can watch just to ask a question.

Operator: <unk> bought Christmas thoughtful about one on your telephone keypad. If you change your mind post close talk about a bite you.

Christie Thomas: Be advised the Dutch today's conference is being recorded if you need further assistance. Please press star followed by zero I would now like to hand, the call over to <expletive>.

Operator: Vice President of Investor Relations, Chris He told Us Mr.

Operator: Mr <unk> Mr. Thomas.

Christie Thomas: Please go ahead.

Christie Thomas: Thank you, operator, and good morning. I'd like to welcome everyone to the HII first quarter 2024 earnings conference call. Joining me today on the call are Chris Kastner, our President and CEO, and Tom Stiehle, Executive Vice President and CFO. 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. 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.

Christie Thomas: Thank you operator, and good morning, I'd like to welcome everyone to the HII first quarter 2024 earnings Conference call. Joining me today on the call are Chris Kastner, our president and CEO, and Tom Seeley Executive Vice President and CFO.

Christie Thomas: 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.com. With that, I would like to turn the call over to our President and CEO, Kris Kastner. Kris?

Christie Thomas: 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. 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.

Christie Thomas: Our results to be materially different from future results expressed or implied by these forward looking statements.

Christie Thomas: Please see our SEC filings for important factors that could cause our actual results to differ materially from expected results also.

Christie Thomas: 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 Dot HII dotcom.

Christopher D. Kastner: With that I would like to turn the call over to our President and CEO, Chris Kastner Chris.

Christopher D. Kastner: Thanks, Christie, and good morning, everyone. Today, we release quarterly results that were characterized by steady performance in shipbuilding and strong growth in mission technology. We saw record first quarter revenues, reflecting the continued strong demand from our customers for our product. As we discussed at our Investor Day in March, we remain focused on delivering the advantage to all our stakeholders, our customers, employees, shareholders, suppliers, and communities. Now, let's turn to our results.

Christopher D. Kastner: Thanks, Christy and good morning, everyone.

Christopher D. Kastner: Day, we released quarterly results they were characterized by steady performance in shipbuilding and strong growth emission technologies.

Christopher D. Kastner: We saw record first quarter revenues, reflecting the continued strong demand from our customers for our products.

Christopher D. Kastner: As we discussed at our Investor Day in March we remain focused on delivering the advantage to all our stakeholders, our customers employees shareholders suppliers and communities.

Christopher D. Kastner: Record first quarter revenue was $2.8 billion, and diluted earnings per share was $3.87 for the quarter, up from $3.23 in the first quarter of 2023. New contract awards during the quarter were $3.1 billion, which resulted in a backlog of $48.4 billion at the end of the quarter, of which $27 billion is currently funded. Turning to an update on our shipbuilding milestones, in the first quarter at Ingalls, we completed builders and acceptance trials on LPD-29 Richard M. McCool, Jr., which led to delivery of the ship last month. At Newport News, we delivered the first Columbia-class stern, Floated off SSN-798 Massachusetts, and completed acceptance trials for SSN-796 New Jersey, which also delivered in April.

Christopher D. Kastner: Now, let's turn to our results record first quarter revenue was $2 8 billion and diluted earnings per share was $3 87 for the quarter up from $3.23 in the first quarter of 2023.

Christopher D. Kastner: New contract awards during the quarter were $3 1 billion, which resulted in backlog of $48 4 billion at the end of the quarter of which $27 billion is currently funded turning to an update on our shipbuilding milestones in the first quarter at Ingalls, we completed builders and acceptance trials on LCD twenty-nine Richard.

Christopher D. Kastner: <unk> junior which led to delivery of the ship last month at Newport News, we delivered the first Columbia class Stern floated off SSN 798, Massachusetts and completed acceptance trials for SSN 796, New Jersey, which also delivered in April we were also awarded the advanced plan.

Christopher D. Kastner: We were also awarded the Advanced Planning Contract for CVN-75 USS Harry S. Truman's RCOH and undocked CVN-74 USS John C. Stennis as part of its RCOH in April. In addition, last month, we announced the first integration of an Australian company into the Newport News shipbuilding supply chain with the purchase of steel from Australian manufacturer Bisselloy Steel. The steel will be used for training and testing to enable us to begin the qualification process for the incremental steel volume required by AUKUS.

Christopher D. Kastner: <unk> contract for <unk> 75, USS Harry is Truman's, our C O H and Undocked CDN 74, USS John C. Stennis as part of its our C. O H in April. In addition last month, we announced the first integration of an Australian company into the Newport News Shipbuilding supply chain.

Christopher D. Kastner: Same with the purchase of steel from Australian manufacturer. This alloy steel the steel will be used for training and testing to enable us to begin the qualification process for the incremental steel volume required for August. This is a critical first step toward an integrated U S U K Australia.

Christopher D. Kastner: This is a critical first step toward an integrated U.S., U.K., and Australian supply chain under AUKUS. At Mission Technologies, we saw record first quarter revenue with sales of $750 million, 20% over the first quarter of 2023. In addition to very strong sales growth, Mission Technologies won strategic competitions in the quarter, including a $305 million contract to protect U.S. regional interests in the Republic of Korea; and a $74 million contract to research, analyze, and develop enhanced capabilities for vertical launching systems onboard U.S. Navy surface ships and to build a Remus 620 unmanned underwater vehicle for an international customer.

Christopher D. Kastner: Ilya and supply chain under Argus admission technologies, we saw record first quarter revenue with sales of 750 million, 20% over the first quarter of 2023. In addition to very strong sales growth mission technology is one strategic competitions in the quarter, including a 300.

Christopher D. Kastner: $5 million contract to protect U S regional interests and the Republic of Korea a.

Christopher D. Kastner: A $74 million contract to research analyze and develop enhanced capabilities for vertical launching systems onboard U S. Navy surface ships and in order to build a roomba 620 unmanned underwater vehicles for an international customer.

Christopher D. Kastner: Now, shifting to activities in Washington for a moment, we were pleased that the fiscal year 2024 budget cycle ultimately concluded in March. We saw continued bipartisan support for our programs reflected in the final Defense Appropriations Act, including funding for two Arleigh Burke-class destroyers, two Virginia-class attack submarines, and one Columbia-class ballistic submarine. Additionally, the appropriations measure provided $500 million for advanced procurement funding for LPD-33. The final appropriations bill also provided funding for the submarine industrial base and large surface combatant shipyard infrastructure and authorized the Navy to enter into a multi-year procurement contract for Virginia-class submarines.

Christopher D. Kastner: Now shifting to activities in Washington for a moment, we were pleased that the fiscal year 2020 for budget cycle. Ultimately concluded in March we saw continued bipartisan support for our programs reflected in the final defense Appropriations Act, including funding for two Arleigh Burke class destroyers.

Christopher D. Kastner: Two Virginia class attack submarines, and one Columbia class ballistic submarine. Additionally, the appropriations measure provided 500 million for advanced procurement funding for <unk> 33. The final appropriations Bill also provided funding for the submarine industrial base and large surface combatants shipyard infrastructure.

Christopher D. Kastner: And authorize the navy to enter into a multiyear procurement contract for Virginia class submarines also in March the President submitted the fiscal year 2025 budget request now under consideration by Congress. The proposed budget reflects continued investment in our shipbuilding programs requesting funding for two Arleigh Burke class.

Christopher D. Kastner: Also in March, the President submitted the fiscal year 2025 budget request, now under consideration by Congress. The proposed budget reflects continued investment in our shipbuilding programs, requesting funding for two Arleigh Burke-class surface combatants, one San Antonio-class amphibious warship, and a lead Block VI Virginia-class submarine. Additionally, the budget request funds the first year of the three-year refueling and complex overhaul of CVN 75, USS Harry S. Truman. The budget request also continues funding for investment in the submarine industrial base and research and development efforts for the next generation large surface combatants, DDGX, and nuclear submarines, SSNX.

Christopher D. Kastner: If as combatants, one San Antonio class in Fabius worship and a lead block six Virginia class submarine.

Christopher D. Kastner: Additionally, the budget request funds the first year of the three year refueling and complex overhaul of <unk> 75, USS Harry as Truman.

Christopher D. Kastner: The budget request also continuous funding for investment in the submarine industrial base and research and development efforts for the next generation large surface combatants, DDG X and nuclear submarines SSN X from an operational standpoint, the access to skilled manufacturing labor coupled with our supply chain experiencing the same les.

Christopher D. Kastner: From an operational standpoint, access to skilled manufacturing labor, coupled with our supply chain experiencing the same labor challenges, continues to impact our program. In that regard, we hired over 1,700 craft personnel in the first quarter, which puts us on track to achieve our full-year plan of approximately 6,000. Also, in the first quarter, both of our shipyards held apprentice graduations, celebrating over 230 graduates across HII who are and will become leaders in their crafts.

Christopher D. Kastner: <unk> challenges continue to impact our programs in that regard we hired over 1700 craft personnel in the first quarter, which puts us on track to achieve our full year plan of approximately 6000 also in the first quarter both of our shipyards held apprentice graduations celebrating over 200.

Christopher D. Kastner: 30 graduates across Hai who.

Christopher D. Kastner: And will become the leaders in their crafts, we continue to maintain our focus on workforce retention and development and are working closely with our customers and state and local governments to solve this challenging issue.

Christopher D. Kastner: We continue to maintain our focus on workforce retention and development and are working closely with our customers and state and local governments to solve this challenging issue. We continue to use overtime, contract labor, and outsourcing to mitigate risk and strengthen the opportunity for progress and schedule stabilization. In summary, we remain focused on meeting our commitments to our customers and will continue to invest in our people and our facilities to ensure we meet the demand we forecast for our products and services. Now, I will turn the call over to Tom for some remarks on our financial results. Tom?

Tom: We continue to use over time contract labor on outsourcing to mitigate risk and strengthen the opportunity for progress and scheduled stabilization in summary, we remain focused on meeting our commitments to our customers and we will continue to invest in our people and our facilities to ensure we meet the demand we forecast for our products and services.

Christopher D. Kastner: And now I will turn the call over to Tom for some remarks on our financial results Tom. Thanks.

Thomas E. Stiehle: Thanks Chris and good morning. Today I'll briefly review our first quarter results. For more detail on the segmented results, please refer to the earnings release issued this morning and posted on our website. Beginning with our consolidated results on slide three of the presentation, our first quarter revenues of $2.8 billion increased 4.9% compared to the same period last year and represent a record first quarter result for HII. This increased revenue was attributable to growth at Mission Technologies in Ingalls.

Tom: Thanks, Chris and good morning today I'll briefly review, our first quarter results for more detail on our segment results. Please refer to the earnings release issued this morning and posted to our website.

Thomas E. Stiehle: Beginning with our consolidated results on slide three of the presentation. Our first quarter revenues of $2 8 billion increased four 9% compared to the same period last year and represent a record first quarter result for HII. This increased revenue was attributable to growth at mission technologies in Ingalls.

Thomas E. Stiehle: Operating income for the quarter of $154 million increased by $13 million, or 9.2% from the first quarter of 2023, an operating margin of 5.5% compared to an operating margin of 5.3% in the same period last year. Net earnings in the quarter were $153 million, compared to $129 million in the first quarter of 2023. Diluted earnings per share in the quarter were $3.87, compared to $3.23 in the first quarter of the previous year, and backlog increased to end the quarter at $48.4 billion.

Thomas E. Stiehle: Operating income for the quarter of $154 million increased by $13 million or nine 2% from the first quarter of 2023 and operating margin of five 5% compares to operating margin of five 3% in the same period last year.

Thomas E. Stiehle: Net earnings in the quarter were $153 million compared to $129 million in the first quarter of 2023.

Thomas E. Stiehle: Diluted earnings per share in the quarter was $3 87.

Thomas E. Stiehle: Compared to $3 23 sets in the first quarter of the previous year and backlog increased to end the quarter at $48 4 billion.

Thomas E. Stiehle: Moving to slide five, Ingalls revenues of $655 million in the quarter increased $78 million, or 14% from the same period last year, driven primarily by higher volumes of surface combatants and amphibious assault ships. Ingalls operating income of $60 million increased 9% from last year, and operating margin was 9.2% in the quarter, primarily due to the higher volumes I just mentioned. At Newport News, revenues of $1.4 billion decreased $72 million, or 5%, from the same period last year, primarily driven by lower volumes in aircraft carriers and the Virginia-class submarine program.

Thomas E. Stiehle: Moving to slide five Ingalls revenues of $655 million in the quarter increased $78 million or 14% from the same period last year, driven primarily by higher volumes and surface combatants and in February for Salt chips.

Thomas E. Stiehle: Ingalls operating income of $16 million increased 9% from last year and operating margin was nine 2% in the quarter, primarily due to the higher volumes I just mentioned.

Thomas E. Stiehle: At Newport News revenues of $1 4 billion decreased $72 million or 5% from the same period last year, primarily driven by lower volumes in aircraft carriers and the Virginia class submarine program.

Thomas E. Stiehle: Newport News operating income for Q1 was $82 million, and an operating margin of 5.7%, relatively flat with the prior year. Shipbuilding operating margin in the first quarter was 6.8%, slightly behind the outlook we provided for the quarter. Our shipbuilding revenue and operating margin outlook for the full year remains unchanged. And, as we previously noted, our expected shipbuilding milestones for 2024 are concentrated largely in the second half of the year.

Thomas E. Stiehle: Newport News operating income for Q1 was 82 million and operating margin of five 7% were relatively flat with the prior year shipbuilding operating margin in the first quarter was six 8% slightly behind the outlook, we provided for the quarter.

Thomas E. Stiehle: Our shipbuilding revenue and operating margin outlook for the full year remains unchanged and as we've previously noted our expected shipbuilding milestones for 2024 are concentrated largely in the second half of the year.

Thomas E. Stiehle: At Mission Technologies, revenues of $750 million increased $126 million, or 20% compared to the first quarter of 2023, primarily due to higher volumes in C5ISR and cyber electronic warfare in space. Mission Technologies' operating income of $28 million compares to operating income of $17 million in the first quarter of last year. The increase in operating income was driven primarily by higher volumes, as I just mentioned. First quarter results for Mission Technologies included approximately $25 million of amortization of purchased intangible assets.

Thomas E. Stiehle: At mission technologies revenues of $750 million increased $126 million or 20% compared to the first quarter of 2023, primarily due to higher volumes and <unk>, ISR and cyber and electronic warfare and space.

Thomas E. Stiehle: Emission technologies operating income of $28 million compares to operating income of $17 million in the first quarter of last year.

Thomas E. Stiehle: The increase in operating income was driven primarily by higher volumes I just mentioned.

Thomas E. Stiehle: First quarter results for emission technologies included approximately 25 million of amortization of purchased intangible assets.

Thomas E. Stiehle: Mission Technologies' EBITDA margin in the first quarter was 7.7%. Turning to slide 6, cash used in operations was $202 million in the quarter. Net capital expenditures were $72 million, or 2.6% of revenues. Free cash flow in the quarter was negative $274 million. This compares to cash used in operations of $9 million, net capital expenditures of $40 million, or 1.5% of revenues, and free cash flow of negative $49 million in the first quarter of 2023.

Thomas E. Stiehle: Mission Technology's EBIT margin in the first quarter was seven 7%.

Thomas E. Stiehle: Turning to slide six cash used in operations was $202 million in the quarter net capital expenditures were $72 million or two 6% of revenues free cash flow in the quarter was negative $274 million.

Thomas E. Stiehle: This compares to cash used in operations of $9 million net capital expenditures of $40 million or one 5% of revenues and free cash flow of negative $49 million in the first quarter of 2023.

Thomas E. Stiehle: The use of cash in the first quarter was expected and was due to the timing of collections. We reaffirm our free cash flow outlook for 2024 of $600 to $700 million and our five-year free cash flow outlook of $3.6 billion. Cash contributions to our pension and other post-retirement benefit plans were $10 million in the quarter. I would also like to note that we made the remaining $145 million debt payment on our term loan associated with the Allianz acquisition in Q1. Also, during the quarter, we paid dividends of $1.30 per share, or $51 million in aggregate. We also repurchased approximately 223,000 shares during the quarter at a cost of approximately $62 million.

Thomas E. Stiehle: Use of cash in the first quarter was expected and was due to timing of collections, we reaffirm our free cash flow outlook for 2024 of $600 million to $700 million and a five year free cash flow outlook of $3 6 billion.

Thomas E. Stiehle: Cash contributions to our pension and other postretirement benefit plans were $10 million in the quarter.

Thomas E. Stiehle: I would also like to note that we made the remaining $145 million debt payment on our term loan associated with the <unk> acquisition in Q1.

Thomas E. Stiehle: Also during the quarter, we paid dividends of $1 30 per share or $51 million in aggregate.

Thomas E. Stiehle: We also repurchased approximately 223000 shares during the quarter at a cost of approximately $62 million.

Thomas E. Stiehle: To summarize, we delivered strong year-over-year revenue growth in the first quarter driven by Mission Technologies and Ingalls, and expect Newport News volumes to ramp up throughout the remainder of the year. In addition to its very strong sales, Mission continued to win new contracts and has a robust opportunity pipeline that has grown now to $80 billion. We're off to a solid start for the year in revenues and operating income, and, as typical, we expect free cash flow to ramp up throughout the year.

Thomas E. Stiehle: To summarize we delivered strong year over year revenue growth in the first quarter driven by mission technologies in Ingalls and expect Newport news volumes to ramp up throughout the remainder of the year.

Thomas E. Stiehle: In addition to its very strong sales emission technologies continue to win new contracts and has a robust opportunity pipeline that has grown now to $80 billion we.

Thomas E. Stiehle: We are off to a solid start for the year in revenues and operating income and as typical we expect free cash flow to ramp up throughout the year looking.

Thomas E. Stiehle: Looking forward, we are confident in reaffirming our 2024 outlook and our five-year free cash flow outlook of $3.6 billion. Before I end my remarks, I'd like to thank you again for attending and for watching the webcast of our Invest Today on March 20th. Chris and I and the HIE leadership team appreciated the opportunity to showcase the details of our strategy, investment thesis, and financial plans. With that, I'll turn the call back over to Christie to manage the Q&A. Thanks, Thomas.

Thomas E. Stiehle: Looking forward, we are confident in reaffirming our 2020 for outlook and our five year free cash flow outlook of $3 6 billion.

Thomas E. Stiehle: Before I end my remarks, I'd like to thank you again for attending and for watching the webcast of our Investor day on March 20th, Chris and I and the AI leadership team appreciated the opportunity to showcase the details of our strategy investment thesis and financial plans with that I'll turn the call back over to Christie to manage Q&A.

Christie Thomas: Thanks, Tom. As a reminder to everyone on the call, please limit yourself to one initial question and one follow-up so we can get as many people through the queue as possible. Operator, I will turn it over to you to manage the Q&A.

Christie Thomas: 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.

Christie Thomas: Operator, I will turn it over to you to manage the Q&A.

Operator: Thank you, Chrissy. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If you change your mind, please press star followed by 2. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Scott Deuschle from Deutsche Bank.

Christie Thomas: Thank you Tracy.

Speaker Change: I would like to ask a question. Please press star followed by one on the telephone keypad. If you change your line. Please press star followed by two <unk>.

Operator: To ask a question. Please ensure your devices unlimited locally.

Scott Deuschle: Our first question comes from Scott <unk> from Deutsche Bank.

Scott Deuschle: Hey, good morning. Hey, Chris, sorry if I missed it. Where is CVN 79? Yeah, where is CVN 79 in terms of percent complete?

Scott Deuschle: Hey, good morning, Hey, Chris Sorry, if I missed Morningstar is Cvs 79, Yeah, we're a Cvs 79 out in terms of percent complete.

Christopher D. Kastner: It's right around 90%. It's progressing well. They're into the test program. We're actually seeing dead loads fired off emails off the ship, so that's a positive sign. So yeah, they're progressing very well.

Scott Deuschle: Alright.

Chris: Right around 90%, it's progressing well the end of the test program, we're actually seeing that loads.

Christopher D. Kastner: Fired all the malls.

Christopher D. Kastner: Off the ships, so thats a positive sign for the other progressing very well.

Christopher D. Kastner: Sure.

Thomas E. Stiehle: Okay, and then Tom, to hit the midpoint of the shipbuilding margin guide, it looks like you'll need to do second half margins about, I guess, 150 basis points above the first half. It sounds like it's driven by better milestones. Maybe you can just walk through in a bit more detail as to where that uplift comes from. Thank you. Yeah, so we do have, thanks Scott. I appreciate the question.

Speaker Change: Okay, and then Tom to hit the mid point of the Shipbuilding margin guide it looks like Youll need to do second half margins about I guess, the 150 basis points above the first half.

Tom: It sounds like it was driven by better milestones, maybe you can just walk through in a bit more detail as to where that uplift uplift comes from thank you.

Thomas E. Stiehle: We do have a shape for our margin, and it's backloaded in the year because of the milestones. We got it to 7%. We came in at 6% here, just a little light on the margin there, and then on the operating income with the sales being under 2.2%. Timing on that, cost, and labor are here, working ourselves through progressing on that front. On the back half of the year, as we make our milestones, I do anticipate a ramp. We're guiding for Q2 to be a 7% quarter as well in shipbuilding, and then obviously, the back half of the year, we'll kind of live with that.

Tom: Yes, so we do have thanks, Scott I appreciate the question and we do have a shape of our margin.

Thomas E. Stiehle: Back loaded in the year because of the milestones and we got it to 7%. We came in at six eight here just a little light on on the margin there.

Thomas E. Stiehle: And then on the operating income.

Thomas E. Stiehle: But the sales being under two to timing on that.

Thomas E. Stiehle: Cost and labor is here working ourselves through progress on that front, but on the back half of the yes, we make our milestones I do anticipate a ramp we're guiding for Q2 to be a 7% quarter as well and then obviously the back half what kind of lift that up.

Speaker Change: Alright, thank you.

Thomas E. Stiehle: Uh-huh.

Thomas E. Stiehle: Okay.

Unknown Speaker: Our next question comes from Robert Spingarn from Miliers Research.

Thomas E. Stiehle: Our next question comes from Robert Spingarn from Williams Research.

Robert Michael Spingarn: Hey, good morning.

Christopher D. Kastner: Unknown Speaker, Rob, you know, Chris may just touch on the labor situation, but the Navy controller was saying recently that the Navy just can't simply buy its way out of programmatic challenges and delays. And I assume that has to do, you know, the delays, of course, we've talked about this a lot are just driven by labor constraints. And I was wondering if you could expand a little bit on that. And is there any possibility that maybe some subsidies to shipbuilders might relieve the situation?

Robert Michael Spingarn: Good morning, Rob or Chris.

Unknown Speaker: Chris.

Robert Michael Spingarn: This is going to touch on the labor situation, but the Navy controller, we're saying recently.

Christopher D. Kastner: But the Navy just can't simply by its way out of programmatic challenges and delays and I assume that has to do the delays of course, we've talked about this a lot are just driven by.

Christopher D. Kastner: Labor constraints and I was wondering if you could expand a little bit on that and is there any possibility that that may be some subsidies to ship builders might relieve the situation.

Speaker Change: Yes, that's interesting.

Christopher D. Kastner: Yeah, that's interesting; obviously, subsidies would help. But more important than that is the summary industrial funding that's been appropriated in 24, where there's real line of sight on projects that are going to improve performance within the industrial base in the supply chain, in the labor force, and in capacity. So I think that the targeted effort by the Navy and the shipbuilders to identify spaces where we can make investments and get improvements is appropriate. The teams are working very hard to do that.

Christopher D. Kastner: Obviously subsidies would help more important than that is the submarine industrial base funding thats been.

Christopher D. Kastner: Appropriated and 24.

Christopher D. Kastner: There's real line of sight on projects that are going to improve performance within the industrial base and the supply chain.

Christopher D. Kastner: And the Labor force.

Christopher D. Kastner: And then capacity so I think that targeted effort by the Navy and the shipbuilders to identify.

Christopher D. Kastner: Spaces, where we can make investments to get improvements as is appropriate that teams are working very hard to do that.

Christopher D. Kastner: So it sounds like it's really not just labor; there are these other things you can do.

Christopher D. Kastner: So it sounds like it's really then not just labor there. These others other things you can do.

Christopher D. Kastner: There are other things you can do, but labor is the primary issue, manufacturing labor in the United States and then shipbuilding labor in the United States. Simply the amount of labor that's necessary to build the ships, the access to labor, and then the labor rates that we need to develop to be able to access more labor. We're working very hard on apprentice schools for workforce development with the state of Virginia and Mississippi and community colleges.

Christopher D. Kastner: There are other things you can do but labor is.

Christopher D. Kastner: The primary issue is manufacturing labor in the United States, and then shipbuilding labor in the United States.

Christopher D. Kastner: Simply.

Christopher D. Kastner: The amount of labor that is necessary to build to build the shifts the access to labor and then the labor rates that.

Christopher D. Kastner: We need to develop to be able to.

Christopher D. Kastner: Access more labor, we're working very hard on the apprentice school.

Christopher D. Kastner: And workforce development with the state of Virginia.

Christopher D. Kastner: Mississippi in the community colleges.

Christopher D. Kastner: It's really a change in approach relative to ensuring that manufacturing labor is a good job and a good-paying job that people want to do coming out of high school. I don't think it's a one-size-fits-all solution to this, but labor is, I believe, the most contributing factor. When you think about the supply chain, it's labor in the supply chain as well. Manufacturing labor is definitely a priority that needs to be fixed for the nation, I believe.

Christopher D. Kastner: It's really kind of a change in approach.

Christopher D. Kastner: Relative to ensuring that the manufacturing labor.

Christopher D. Kastner: Good job on a good paying job that people want to do coming out of high school. So I don't think it's a one size fits all sort of solution to this but labor is.

Christopher D. Kastner: I believe the most contributing factor in when you think about the supply chain, it's labor in the supply chain as well.

Christopher D. Kastner: So manufacturing labor is definitely a priority that needs to be fixed for the nation I believe.

Thomas E. Stiehle: Okay, and then just quickly on mission technologies. Andy had real good sales in the first quarter here, ahead of the guidance run rate. So I was just wondering if we could talk about what's expected for the rest of the year there. What drove the quarter? And then do we fade a little bit in the rest of the year? Or is that just being conservative?

Christopher D. Kastner: Okay and then just.

Christopher D. Kastner: Quickly on mission technologies.

Thomas E. Stiehle: Andy had real good sales in the first quarter here.

Thomas E. Stiehle: Ahead of the guidance run rate. So I was just wondering if we could talk about what's expected for the rest of the year there what drove the quarter and then do we fade a little bit in the rest of the year or is that just being conservative.

Thomas E. Stiehle: So, Rob, I'll give you some color on that. Yeah, it was a strong quarter again here. It came in at $7.50, following Q4 last year at $7.45. We are being conservative in the guide. We're still holding it at $2.70, $2.75. I mean, if you do the quick math, the run rate for the remaining of the year is $6.50, and we're holding to the guide there at the midpoint. There is an opportunity, I think, for him to do better than that, but we don't want to get ahead of ourselves.

Andy: So Rob I'll give you some color on that yes, it was a strong quarter.

Thomas E. Stiehle: Quarter again came in at 750. Following Q4 last year of 745 that we are being conservative and the guys are still holding at two seven to $2 75, and if you do the quick math that the run rate for the remaining of the year at $6 50, and holding holding to the guy there at the midpoint there is opportunity I think for him to <unk>.

Thomas E. Stiehle: Do better than that but we don't want to get ahead of ourselves It's about awards.

Thomas E. Stiehle: It's about awards that he has in the plan this year, changing contracts that we have that we have backlogged on those contracts into sales, and then him continuing his team to continue to stay on his labor plan and his hiring in that. So I do think there's some potential. Transcribed by https://otter.ai, Unknown Speaker, Unknown Transcript, Page PAGE of NUMPAGES www.verbalink.com Page PAGE of NUMPAGES

Thomas E. Stiehle: He has in the plan this year changing contracts that we have that we have backlog on those contracts into sales and then him continuing his team to continue to stay on his labor plan in his hiring in that so.

Thomas E. Stiehle: I do think.

Thomas E. Stiehle: Some potential.

Thomas E. Stiehle: Tailwind on that front, but we'll just have to let the year play out right now I'm really comfortable we saw finished last year at 13% growth from $23 22.

Thomas E. Stiehle: You see a quarter here, where it's over.

Thomas E. Stiehle: 20%.

Thomas E. Stiehle: Quarter over quarter, so fantastic start to the year.

Thomas E. Stiehle: Scott.

Thomas E. Stiehle: His pipeline has grown from 60 billion to $80 billion. So the opportunity set in the scope of what's in play there has grown as well so I'm looking for.

Thomas E. Stiehle: A strong back half of the year here from empty, but we'll have to see how it plays out.

Unknown Speaker: Okay, thanks so much.

Speaker Change: Okay. Thanks, so much.

David Egon Strauss: Our next question comes from David Strauss from Barclays.

Unknown Speaker: Our next question comes from David <unk> from Barclays.

David Egon Strauss: Thanks. Good morning, everyone. Morning, Chris. I wanted to ask you, you know, in Q1 and Q2, you're going to knock off a lot of these milestones that were supposed to happen late last year, but at the same time, we really haven't seen any of that perceived upside come through in terms of the margins based off of what you did in Shipbuilding Q1 and what you're forecasting for Q2. So if you could just square that, why aren't we seeing some of that upside that we would think would be there coming through with these milestones being completed? Yeah, well, no doubt about that.

David Egon Strauss: Thanks, Good morning, everyone.

David Egon Strauss: Good morning.

David Egon Strauss: Okay.

David Egon Strauss: Chris I wanted to ask you.

David Egon Strauss: Now in Q1, and Q2 Youre going to knock off a lot of these milestones that were supposed to happen late last year.

David Egon Strauss: But at the same time, we really haven't seen any of that perceived upside come through in terms of the margins based off of what you did.

David Egon Strauss: And chip for shipbuilding in Q1, and what Youre forecasting for Q2. So if you could just square that why we're not seeing some of that upside that we would think would.

David Egon Strauss: Would be there would not.

David Egon Strauss: Not coming through with these milestones being completed.

Christopher D. Kastner: Yeah, well, no doubt that when you miss milestones and you extend schedules, there's going to be additional costs. So, unfortunately, as we came through those, missed the end of the year and then got them done, $7.98 we floated off in the first quarter, we got to two deliveries in the second quarter, there was just less opportunity.

Speaker Change: Doubt when you Miss milestones and you extend schedules theres going to be additional cost.

Christopher D. Kastner: So unfortunately as we came through those missed the end of the year and then got them done.

Christopher D. Kastner: <unk> hundred 90 day, we pulled it off in the first quarter, we got the two deliveries in the second quarter and Theres just less opportunity.

Christopher D. Kastner: So, yeah, unfortunately, schedule equals cost; we've got to make our milestones. But when you think of the balance of the milestones in the year, they're all holding. I would say the VCS milestones of the back half of the year are going to be a challenge, but the team is committed to getting those done, and they're holding now. But that's why we give you the milestones; you can get a barometer of how we're actually doing.

Christopher D. Kastner: So, yes, unfortunately schedule equals costs, we've got to make our milestones.

David Egon Strauss: Okay, thanks. That's very helpful.

Christopher D. Kastner: You think of the balance of the milestones in the year there are holding.

Christopher D. Kastner: I would say the vcs milestone to the back half of the year going to be.

David Egon Strauss: Going to be a challenge, but the team is committed to getting those done and they're holding now.

David Egon Strauss: But that's why we give you the milestones you can give a good barometer of how we're executing.

Thomas E. Stiehle: And then Tom, could you maybe, I mean, you guys for, you know, a free cash flow burn in Q2. Is it I mean, it seems like, obviously, gonna be a very back end loaded year. How should we think about the pacing of the, you know, capex step up? We didn't we didn't really see it in Q1. So when do we really start to see a pickup in capex? And then, what I would assume, would be a big, you know, working capital recovery on the other side?

David Egon Strauss: Okay.

David Egon Strauss: That's helpful.

Speaker Change: And then Tom could you maybe I mean, you guide for.

Thomas E. Stiehle: Free cash flow burn in Q2.

Thomas E. Stiehle: Is it I mean, it seems like obviously can be a very backend loaded year, how should we think about the pacing of the.

Thomas E. Stiehle: Capex step up we didn't we didn't really see it in Q1, so when do we really start to see a pick up in Capex and then what I would assume would be a big one.

Thomas E. Stiehle: Working capital recovery on the other side.

Thomas E. Stiehle: Yeah, so from a cash perspective, you know, we came in at $274 here, and we're guiding another minus $100. So we'll work ourselves through that. Not uncommon, we burn cash at the beginning of the year, and it's not unanticipated here. So we wanted to make sure everyone's aligned with us on that front. From a CapEx perspective, we spent 2.6% of sales in the first quarter here. And as we get into those projects this year, we'll ramp them up in the back half of the year. And you'll see that ramp as we get into the back half.

Tom: Yes, so from a cash perspective.

Thomas E. Stiehle: I'm in at $2 74 here, we're getting.

David Egon Strauss: Okay, thank you.

Thomas E. Stiehle: Now the minus 100, and so we'll work ourselves through that not uncommon, we burn cash at the beginning of the year and not unanticipated here. So we wanted to make sure everyone's aligned with us on that front from a capex percent Capex perspective, we spent $2 6% of sales in the first quarter here as we get into those projects. This year, we'll ramp on the back.

David Egon Strauss: Half of the year so.

David Egon Strauss: The guidance at five 3% of Capex sales for the entire and Youll see that ramp as we get into the back half of the year here.

Speaker Change: Okay. Thank you.

David Egon Strauss: Mhm.

Douglas Stuart Harned: Our next question comes from Doug Harned of Bernstein.

David Egon Strauss: Our next question comes from Doug Koenig from Bernstein.

Douglas Stuart Harned: Good morning. Thank you. Unknown Speaker, unknown to all, the Navy has commented on Columbia class issues with the work on the bow at Newport News. Can you comment on that in terms of what the status is and how that can affect your work flow on Columbia class?

Douglas Stuart Harned: Good morning, Thank you.

Douglas Stuart Harned: Good morning, Doug.

Douglas Stuart Harned: There has been.

Douglas Stuart Harned: <unk> has commented on the Columbia classes issues with the work on the bow at Newport News can.

Douglas Stuart Harned: Can you comment on that in terms of what the status is and how that kind of affect your work flow on Columbia class.

Christopher D. Kastner: Sure. So, yeah, I widely reported on that issue. The team has come through the first-of-class issues on the bow that impacted the schedule. Those are essentially behind us now, and then there's just – now there's volume work to get the bow complete. We're actually a bit ahead of schedule with the recovery plan. The team is very focused on it. It's really our top priority as it's the top priority of the Navy.

Speaker Change: Sure so widely reported.

Speaker Change: On that issue the team has come through the first of class issues on the bell that impacted the schedule.

Christopher D. Kastner: Those are essentially behind US now and then Theres just now theres volume work to get to the Bell complete.

Christopher D. Kastner: Maybe a bit ahead of schedule to the recovery plan.

Christopher D. Kastner: The team is very focused on it it's really our top priority as it is the top priority of the Navy.

Christopher D. Kastner: So unfortunate.

Christopher D. Kastner: Encountered those first of class issues, but we think the specific issue that drove the scheduled delay is behind us at this point.

Christopher D. Kastner: Okay.

Douglas Stuart Harned: Okay, well, good. And then on to Virginia class. You talked about the milestones this year; what I'm trying to understand is kind of where everything is in the flow in terms of eventually getting to that, you know, two deliveries per year level. You had this letter come out of the house with a lot of members of Congress. I'm arguing that there should be two Virginia classes in the 2025 budget, the President's budget. But does that matter?

Speaker Change: Okay. Good.

Christopher D. Kastner: Then on Virginia class.

Douglas Stuart Harned: <unk>.

Douglas Stuart Harned: You talked about the milestones this year, what I'm trying to understand is where everything is in the flow in terms of eventually getting to that.

Douglas Stuart Harned: Two two deliveries per year level.

Douglas Stuart Harned: You had this letter come out of the house with a lot of members of Congress.

Douglas Stuart Harned: Arguing that there should be too.

Douglas Stuart Harned: Two Virginia class and the 2025 budget President's budget, but does that does that matter in other words, what I'm trying to understand is getting to two looks so difficult right now does it matter to have a second one in the 2020 budget.

Christopher D. Kastner: In other words, what I'm trying to understand is getting to two looks so difficult right now. Does it matter to have a second one in the 2025 budget? And where do you stand on that pathway to get to two when you look at the milestones ahead here?

Christopher D. Kastner: And where do you stand on that pathway to get to.

Christopher D. Kastner: When you look at the milestones ahead here.

Christopher D. Kastner: There has been incremental improvement as we move through the first part of the year on improving the rate on the VCS program, but it's not good enough.

Christopher D. Kastner: Yeah. So I'll tell you there has been incremental improvement as we move through the first part of the year on.

Christopher D. Kastner: Improving the rate on the Vcs program, it's not good enough there needs to be additional improvement on regard to the budget I think the most important thing relative to the discussion on one or two.

Christopher D. Kastner: There needs to be additional improvement. With regard to the budget, I think the most important thing relative to the discussion about one or two boats procured in 2025 is to show the importance of the supply chain. We need to make sure that we buy a full boat of material so we keep the supply chain healthy so that we eliminate that risk for them. The last thing we want to do is create risk within the program.

Christopher D. Kastner: Procured in 25 is a signal of a sense of the supply chain as we need to make sure that we.

Christopher D. Kastner: We buy a full boat of materials. So we keep the supply chain healthy.

Christopher D. Kastner: So that we eliminate that risk for them. The last thing we want to do is create risk on the within the program.

Christopher D. Kastner: I think we've communicated that with the customer and Congress. They understand it. As you know, we're just at the beginning of the budget discussion. Ultimately, we expect it to get resolved. It's very important that we get the supply chain under order for both of the boats.

Christopher D. Kastner: So I think I think we've communicated that with the customer and the Congress they understand it.

Christopher D. Kastner: And as you know, we're just at the beginning of the budget discussions so ultimately.

Christopher D. Kastner: We expect it to get resolved, but it's very important that we get the supply chain under order for both of the both of the boats.

Douglas Stuart Harned: Okay, very good. Thank you.

Speaker Change: Okay very good thank you.

Speaker Change: Thanks, Doug.

Ronald Jay Epstein: Our next question comes from Ronald Epstein from Bank of America.

Douglas Stuart Harned: Our next question comes from Ronald Epstein from Bank of America.

Unknown Attendee: Good morning, everyone. This is Mariana Perez-Mora with RUN today.

Ronald Jay Epstein: Good morning, everyone. This is Maggie on operators what else are run today.

Unknown Attendee: Morning. So the first question is gonna be related to Australia. As you see this first order for a steel delivery from an Australian company, how should we think about the near term? Are you benefiting from this early investment to actually make the Australian submarine supply chain stronger?

Unknown Attendee: Good morning. Good morning. The first question is going to be related to Australia.

Unknown Attendee: As you see the service order for steel delivery from Australia Company, how should we think about like in the near term.

Unknown Attendee: Are you benefiting from early investment to actually make the Australian submarine supply chain stronger.

Christopher D. Kastner: Yeah, so that's an excellent question. From an AUKUS standpoint, as I previously indicated, we view this as the opening of two markets for us. So it's a really good opportunity for us, and we think we've taken all the right steps to prepare for some, ultimately, pretty material impact on the corporation. This is a really critical first step because we're flexing muscles in our supply chain to qualify a vendor in Australia that will ultimately potentially be part of the supply chain.

Speaker Change: Yes, that's an excellent question this is.

Unknown Attendee: From an office standpoint, as I previously indicated we view this as opening of two markets for us.

Christopher D. Kastner: It's a really good opportunity for us and we think <unk> taken all the right steps to prepare for ultimately.

Christopher D. Kastner: Pretty material impact to the corporation. This is a really critical first step because we're flexing muscles in our supply chain.

Christopher D. Kastner: To qualify a vendor in Australia that will ultimately potentially be part of the supply chain.

Christopher D. Kastner: We could start, we're starting small, but it'll ultimately grow from here to make them a sovereign ready submarine provider. So this is just the first step. I don't believe material revenue will flow from this immediately, but it's an important step to be prepared for us to support Australia.

Christopher D. Kastner: We could start we're starting small but it will ultimately grow from here to make them a sovereign ready submarine provider. So this is just the first step I don't believe material revenue will flow from this immediately but it is an important step to be prepared for us to support Australia.

Christopher D. Kastner: Perfect, and also in the line of AUKUS, there have been talks that South Korea would like to join these trilateral agreements. If that goes through, how do you think that will go? This impacting the potential of the program demand and even Well, obviously, there would be further upside related to that. I think there are discussions about that, but I don't want to get ahead of ourselves. Let's focus on AUKUS at this point, and I'll leave those sorts of discussions to the Pentagon and the Navy.

Speaker Change: Perfect and also in the line of Argos There has been talks that South Korea, you'd like to join this trilateral agreement if that goes through how do you see this impacting the potential of the program demand uneven supply chain environment. So obviously there'll be further upside related to that I think there are.

Christopher D. Kastner: Our discussions about that but I don't want to get ahead of ourselves, let's let's focus on <unk> at this point and I'll leave those sort of discussions to to the Pentagon and the Navy.

Speaker Change: Thank you so much.

Christopher D. Kastner: Yeah.

Gautam J. Khanna: Our next question comes from Gautam Khanna from TD Cohen.

Christopher D. Kastner: Our next question comes from Tim Connor from TD Cohen.

Gautam J. Khanna: Yeah.

Gautam J. Khanna: Hey guys, I was wondering if you could A, give us the EACs by segment in the quarter.

Gautam J. Khanna: Hey, guys I was wondering if you got it.

Gautam J. Khanna: Hey, give us the eac's by segment in the quarter.

Gautam J. Khanna: I have a follow up.

Thomas E. Stiehle: Okay, yeah, so it was 53 up, 51 down for net 2, and the makeup of that was Ingalls was positive 13, input news was negative 12, and MT was 1.

Gautam J. Khanna: Okay. Yes. So it was 53 up 50 went out for net to the makeup of that was Ingalls was positive 13, Newport News was the negative 12 and MTN was one.

Thomas E. Stiehle: Okay.

Thomas E. Stiehle: I'm at NNS; the margins were a little light of our expectations. I'm just curious. Any step backs in productivity or labor to speak of broadly at NNS or elsewhere?

Speaker Change: And then as the margins were a little light of our expectations I'm just curious.

Thomas E. Stiehle: Any step backs in productivity or labor to speak of broadly mnf's or elsewhere.

Thomas E. Stiehle: Yes, I'll start, then Tom. Tom can jump in. Yeah, as you know, Gautam, we evaluate our EACs every quarter. And if we have to take step-ups or step backs, we do that.

Thomas E. Stiehle: Yeah.

Thomas E. Stiehle: None were material in nature, but you saw the slip of the model.

Speaker Change: Yes, so I'll start and then Tom Tom can jump in as you know Gautam, we valued our EAC is every quarter and we have to take a step.

Thomas E. Stiehle: Step ups or step back we do that in a more material in nature, but you saw a slip of the milestones which impacted.

Thomas E. Stiehle: Some programs.

Thomas E. Stiehle: So there were minor step ups and step backs.

Unknown Speaker: https://www.youtube.com.uk

Speaker Change: Throughout but nothing material nothing material I'll comment too here, so yes, six to eight versus the guide of six seven.

Unknown Speaker: Seven.

Unknown Speaker: A year ago. This quarter. It was 667 pushed it building so not that far off from a Newport news perspective again at $5 seven for the quarter.

Unknown Speaker: Got it with five six finished off last year at six two so slightly off of that.

Unknown Speaker: Just working through getting that production line working material and labor on deck plate at the same time.

Speaker Change: Trying to get that rework down keeping production line going here so.

Speaker Change: We're fighting through it and.

Unknown Speaker: Really not that far off the guide so.

Unknown Speaker: Okay.

Thomas E. Stiehle: Yep. And then just lastly, on LPD 29, was that EAC taken in the first quarter, or was delivery actually in the second quarter, and therefore it's more of a second quarter?

Unknown Speaker: And then just lastly on Elpida 29 was that.

Thomas E. Stiehle: The EAC taken in the first quarter or was the delivery actually in the second quarter and therefore.

Tom: It's more of a second quarter event.

Thomas E. Stiehle: So we obviously assessed the EACs in the first quarter, but it's a second quarter event, and it's included in our guidance for the second quarter and our expectations for the second quarter.

Tom: Yeah. So we obviously assess the Acs in the first quarter, but it's the second quarter of that.

Thomas E. Stiehle: And it is included in our guide for the second quarter and our expectations for the second quarter.

Gautam J. Khanna: Perfect. Thanks a lot, guys.

Speaker Change: Perfect. Thanks, a lot guys.

Speaker Change: Sure sure.

Seth Michael Seifman: Our next question comes from Seth Seifman of JP Morgan.

Speaker Change: Our next question comes from Seth Thanks, Brian Zachman from J P. Morgan.

Seth Michael Seifman: Thanks very much. And good morning.

Seth Michael Seifman: Thank you very much.

Seth Michael Seifman: Morning.

Seth Michael Seifman: Tom.

Seth Michael Seifman: First a quick clarification.

Seth Michael Seifman: I think you mentioned the Capex really stepping up in the second half.

Seth Michael Seifman: Along with the cash generation.

Seth Michael Seifman: I assume you're also expecting a step up in the Navy.

Seth Michael Seifman: Navy support for.

Seth Michael Seifman: For that Capex in the second half.

Thomas E. Stiehle: Um, Tom, just first, a quick clarification. I know you mentioned the CapEx really stepping up in the second half, along with the cash generation. So I assume you're also expecting a step up in the maybe support for that CapEx in the second half as well?

Seth Michael Seifman: It's aligned its all baked into the plan we have in the guidance that we gave yes.

Thomas E. Stiehle: It's aligned. It's all baked into the plan we have and the guidance that we give. Yeah.

Speaker Change: Right Okay. Okay.

Thomas E. Stiehle: And then just on the margin rate in the shipyard.

Thomas E. Stiehle: Q1.

Thomas E. Stiehle: Similar to last year.

Thomas E. Stiehle: Slightly higher.

Thomas E. Stiehle: Q2, though around 7% if we look at the Q1 margin rates kind of theme, but probably at the lower end of what you might expect for each of the yard and so.

Thomas E. Stiehle: We'd normally expect some sequential improvement in each of the art maybe to something like above six.

Seth Michael Seifman: Okay, okay. And then just on the margin rates in the shipyards, you know, Q1, similar to last year, slightly higher. Q2, though, around 7%. If we look at the Q1 margin rates, it seems probably at the lower end of what you might expect for each of the yards. And so, you know, we'd normally expect some sequential improvement in each of the yards, maybe just something like above 6% at Newport and, you know, I mean, Ingalls is often in the double digits.

Thomas E. Stiehle: Newport and <unk>.

Seth Michael Seifman: I mean ingalls is often in the double digits.

Seth Michael Seifman: Is there something to be aware of that.

Seth Michael Seifman: Weighing on margins in the second quarter or.

Seth Michael Seifman: I know you mentioned, one milestone, but maybe a lack of overall milestone.

Seth Michael Seifman: That's driving the 7% for the second quarter.

Seth Michael Seifman: Is there something to be aware of that's weighing on margins in the second quarter? Or is it, I know, you mentioned one milestone, but maybe a lack of overall milestones that's driving the 7% for the second quarter? So, you know, it's tough.

Seth Michael Seifman: So it's.

Seth Michael Seifman: It's tough to look at the margin rates from quarter to quarter, and we do try and forecast. So that you can land about where we think that we will be behind the scenes is the maturation of where we are where the milestones. We've got a fall where we see the potential referred to as what we can take the step ups in the booking rates and.

Thomas E. Stiehle: to look at the margin rates from quarter to quarter, and we do try and forecast them for you so that you can land about where we think that we will be. Behind the scenes, we are maturing where we are on EACs, where the milestones are gonna fall, where we see the potential risk burndowns, where we can take steps up in the booking rates. And, you know, it's just the first half of the year. We've had this for a couple of years now. The first half of the year is lighter than the second half.

Thomas E. Stiehle: Just the first half of the year. We've had this for a couple of years now the first half of the year is lighter than the back half obviously the.

Thomas E. Stiehle: Obviously, the major milestones, the deliveries, and the launches are back half-loaded. So we expect to see that there. I'm not surprised at where we are. You know, a couple attempts here or there is not a huge deal overall. And, you know, we're working through our risks and opportunities going forward.

Thomas E. Stiehle: The major milestones the deliveries and the launches are back half loaded so we expect to see that there.

Thomas E. Stiehle: Im not surprised on where we are.

Thomas E. Stiehle: A couple of tenths here or there is not a huge deal overall.

Thomas E. Stiehle: We're working through our risks and opportunities going forward here.

Thomas E. Stiehle: Yes.

Speaker Change: Great. Thank you very much.

George D. Shapiro: Our next question comes from George Shapiro from Shapiro Research.

Thomas E. Stiehle: Our next question comes from George Shapiro from Sugar Research.

George D. Shapiro: Yes, good morning. Just following up a little bit on Seth's comment, but trying to get into some more detail. To get to the low end of your 7-6 margin guide for shipbuilding for the year would imply something like 8-3 or 8-4 in second half margins, which would imply an incremental 70 to 75 million dollars in profit. Are the milestones that you're projecting for the second half going to give us all that?

George D. Shapiro: Yes.

George D. Shapiro: Good morning, just following up a little bit.

George D. Shapiro: Yes.

George D. Shapiro: Comment, but trying to get into some more detail to get to the low end of your seven 6%.

George D. Shapiro: Margin guide for shipbuilding for the year would imply something like 83 or eight four in second half margins, which would imply an incremental $70 million to $75 million.

George D. Shapiro: <unk>.

George D. Shapiro: Are the milestones that you're projecting for the second half going to give us all of that 70% to 75 million or is there something else.

Thomas E. Stiehle: It's a mix of the milestones that we have, incentives, all the aspects that we have in our burning down risk. So all that plays out.

Speaker Change: It's a mix, it's a mix of the milestones that we have incentives.

Thomas E. Stiehle: All the aspects that we have enough on brining down risk.

Thomas E. Stiehle: So all of that plays out I will tell you from a margin perspective, if you look over the last three years right, whether it's shipbuilding at 7777 last year was eight three even when you take the claim out that we have that recovery. It was 75 from a Newport news perspective, which is the preponderance of where the risk is right now where we're six to 662. So that margin rate has been stable when we're talking about.

Thomas E. Stiehle: You know, I will tell you from a margin perspective, if you look over the last three years, right, whether it's shipbuilding at 7, 7, 7, 7, last year was 8, 3, even we take the claim out that we had that recovery, it was 7, 5. From a Newport News perspective, which is the preponderance of where the risk is right now, we were 6, 2, 6, 1, 6, 2. So that margin rate has been stable.

Thomas E. Stiehle: What we're talking about is a list here kind of going forward. And as long as we stay on pace, the tempo of hiring staff and the cost efficiency, as we've said in the past, we expect that to improve incrementally annually here. So we'll keep you informed right now. 6.8% versus 7.0% was pretty much on top of what we thought we'd expect, and we're guiding to 7% right now. Yes, so the second half of the year, George, will be a lift.

Thomas E. Stiehle: As a lift here kind of going forward and as long as we stay on pace the tempo of.

Thomas E. Stiehle: Hiring material and cost efficiency as we've said in the past, we expect that incrementally to improve annually here. So we'll keep you informed right now.

Thomas E. Stiehle: Six to eight versus seven hours pretty much on top of what we felt we would expect and we're guiding to 7% right now yes for the back half of the year George will be a lift.

George D. Shapiro: Okay, and follow up with different questions on working capital. I mean, receivables were up like 253 million contracts, and assets were up 124 million and a quarter. That was well above last year's first quarter. So can you just kind of talk as to what caused it?

Speaker Change: Okay, and then follow up with different question on.

Speaker Change: Working capital I mean, we.

George D. Shapiro: <unk> were up like 253 million contracts.

George D. Shapiro: Assets up $124 million in a quarter that was well above last year's first quarter. So can you just kind of talk as to what caused it.

Thomas E. Stiehle: Yeah, so it's working capitalist timing, it's trading working capital between the billings and the receipts, the AR and the AP that we have right now. We have the cost in hand, at times it's either making progress or being able to bill, working ourselves through incentives for collections, as well as progress restrictions that we have. So it's a little bit higher than we got it to at minus 200 here and minus 100 for Q2.

Speaker Change: Yes. So it is the working capital timing trade working capital between the billings and the receipts.

Thomas E. Stiehle: That we have right now.

Thomas E. Stiehle: Have the cost in hand at times, it's making the progress being able to bill working ourselves through incentives for collections as well as progress restrictions that we have.

Thomas E. Stiehle: A little bit higher than we guided to at minus minus 200 here.

Thomas E. Stiehle: Not uncommon, like in 2022, we ran the first three quarters in a deficit in cash, and then we came back strong. We're watching that closely, and I think we're on plan right now, kind of going forward.

Thomas E. Stiehle: Minus 100 for Q2 not uncommon like in 2022 were in the first three quarters.

Thomas E. Stiehle: Deficit in cash and then we came back strong in Q4 or so.

Thomas E. Stiehle: We're watching that closely and.

Thomas E. Stiehle: I think we're on plan right now.

Thomas E. Stiehle: Going forward.

George D. Shapiro: Okay, thanks very much, Tom.

Speaker Change: Okay. Thanks, very much Tom.

Thomas E. Stiehle: Mhm.

Myles Alexander Walton: Our next question comes from Myles Walton from Wolf Research.

George D. Shapiro: Our next question comes from Myles Walton from Wolfe Research.

Myles Alexander Walton: Okay.

Myles Alexander Walton: Thanks. Good morning.

Myles Alexander Walton: Thanks, Good morning.

Myles Alexander Walton: Was wondering if I could ask a question first on the milestones as it relates to our new <unk>.

Myles Alexander Walton: Guys them individually, but.

Myles Alexander Walton: Theres not a milestone chart in this slide deck. So just was going to refresh the Massachusetts is that the most important milestone for for this year for Newport News and also in EBIT 25 milestones you had in the deck last time those shifted at all.

Myles Alexander Walton: Now 25 is not not shifted in all of the milestones are important it is critical on the Vcs program.

Myles Alexander Walton: Meet their commitment.

Myles Alexander Walton: It is an assembly line and you need to roll you need to roll crews to the next to the next boats. So yeah. Those those vcs milestones are important.

Myles Alexander Walton: Yes.

Myles Alexander Walton: Okay.

Myles Alexander Walton: And then on the supply chain.

Myles Alexander Walton: Some of the testimony emerging talking about merchant suppliers of propulsion systems for ships.

Myles Alexander Walton: I'm curious, Chris if you just give us a little baseline of.

Myles Alexander Walton: Sure.

Myles Alexander Walton: You are in terms of the.

Myles Alexander Walton: The whack a mole game here.

Myles Alexander Walton: Containing issues and is it supplier component as it were.

Myles Alexander Walton: Of course, I know youre going to say all of them.

Myles Alexander Walton: You can just give a little bit more color as.

Myles Alexander Walton: As the Navy.

Myles Alexander Walton: Secretary was willing to offer up north.

Myles Alexander Walton: A source of issues Hum.

Myles Alexander Walton: It's a little bit of an incremental step in the direction of emerging of where the supply chain constraints might be.

Myles Alexander Walton: Yes, so thanks miles.

Myles Alexander Walton: It forces.

Myles Alexander Walton: Significant issue.

Myles Alexander Walton: <unk>.

Myles Alexander Walton: Solve the hiring part of that issue were hired over 1700 in the quarter to our commitment of our to our goal of 6000.

Myles Alexander Walton: And we're working very hard on attrition there are some pilot projects that we have within each of the organizations each of the shipyards relative to attrition.

Myles Alexander Walton: Surrounding PE, where you recruit from and flexibility.

Myles Alexander Walton: Those are starting to yield some fruit, but not enough where I can really take it to the banks. So some some positive indicators, but not good enough yet.

Myles Alexander Walton: And we're going to continue to work on it from a supply chain standpoint, we are being impacted by some major equipment.

Myles Alexander Walton: Within a number of our programs.

Myles Alexander Walton: The overall supply chain is definitely more stable than it was a couple of years ago, and even even 12 months ago, but but some of our major suppliers are impacting the <unk>.

Myles Alexander Walton: Direction of our ships and we're working hard to resolve that with those subcontractors.

Myles Alexander Walton: Okay is it concentrated to just a couple or is this really widespread.

Myles Alexander Walton: Let's say two to five.

Myles Alexander Walton: Okay Alright.

Myles Alexander Walton: Thanks, so much.

Myles Alexander Walton: Sure.

Myles Alexander Walton: I was wondering if we could ask a question first on the milestones as it relates to I know you don't size them individually, but there's not a milestone chart in this slide deck. So just wanted to refresh the Massachusetts one. Is that the most important milestone for this year for Newport News and also any of the 25 milestones you had in the deck last time, have those shifted at all?

Myles Alexander Walton: Our last question comes from Noah <unk> from Goldman Sachs.

Speaker Change: Hey, good morning, everyone.

Christopher D. Kastner: No, 25 is not shifted, and all the milestones are important. It is critical for the VCS program that they meet their commitments because it is an assembly line, and you need to roll crews to the next boat. So yeah, those VCS milestones are important.

Myles Alexander Walton: Okay.

Myles Alexander Walton: Okay.

Myles Alexander Walton: And then on the supply chain, I guess some of the testimony emerging is talking about merchant suppliers of propulsion systems for ships. And I'm curious, Chris, if you could just give us a little baseline of where you are in terms of the whack-a-mole game here of containing issues. Is it supplier components? Is it the workforce? And I know you're going to say all of them, but maybe you can just give a little bit more color as the Navy secretary was willing to offer up Northrop as a source of issues. It's a little bit of an incremental step in the direction of identifying where the supply chain constraints might be.

Myles Alexander Walton: Tom you've referenced with the shipbuilding margin.

Christopher D. Kastner: Being.

Christopher D. Kastner: Thanks, Myles. The workforce is a significant issue. We think we've solved the hiring part of that issue. We hired over 1,700 in the quarter to our goal of 6,000, and we're working very hard on attrition. There are some pilot projects that we have within each of the organizations, each of the shipyards, relative to attrition surrounding pay, where you recruit from, and flexibility. Those are starting to bear fruit, but not enough where I can really take it to the bank.

Christopher D. Kastner: Essentially flat year over year and close to the guide in the quarter.

Christopher D. Kastner: But.

Myles: I understand and I appreciate all of that and how it can move around quarter to quarter, but I.

Christopher D. Kastner: So, some positive indicators, but not good enough yet. And we're going to continue to work on it. From a supply chain standpoint, we are being impacted by some major equipment within a number of our programs. The overall supply chain is definitely more stable than it was a couple years ago and even 12 months ago, but some of our major suppliers are impacting the erection of our ships, and we're working hard to resolve that with those subcontractors.

Christopher D. Kastner: And I guess last year, the full year did come in below the original full year outlook.

Myles Alexander Walton: Is it concentrated to just a couple, or is this really wide? You know, let's say two to five.

Christopher D. Kastner: You know, let's say two to five.

Christopher D. Kastner: And you've cited the movement of milestones.

Christopher D. Kastner: Out of the end of the year into the beginning of this year I guess.

Noah Poponak: Our last question comes from Noah Poponak of Goldman Sachs.

Speaker Change: Maybe could you frame it as your level of visibility into the back half milestones this year compared to what you saw when you sat there at this time last year.

Thomas E. Stiehle: Unknown Speaker Tom, you've referenced the shipbuilding margin, kind of being, essentially flat year over year and close to the guide in the quarter. But and I understand and appreciate all that, and you know how it can move around quarter to quarter, but I guess last year the full year did come in below the original full year outlook. And you've cited the movement of milestones out of the end of the year into the beginning of this year. Maybe, could you frame it as your level of visibility into the back half of the milestones this year compared to what you saw when you sat there at this time last year?

Noah Poponak: I think both of us.

Noah Poponak: In Europe pretty closely expectations, both from where we were.

Tom: On the margin side and the cash that is going to follow that so it is a year, where there's more milestones in the back half it will be highly dependent that we get those done last year. The three events kind of slipped right from Q4 into Q1 and essentially the very beginning of Q2. So we had talked about staying attentive to us making our schedules.

Speaker Change: 234 months slip, although we don't like that it is not huge.

Thomas E. Stiehle: Both years kind of mirror pretty closely expectations, both from where we were on the margin side and the cash that's going to follow that. So it is a year where there are more milestones in the back half, and it will be highly dependent on whether we get those done. You know, last year, the three events kind of slipped right from Q4 into Q1, and essentially, into the very beginning of Q2. So we had talked about staying attentive to us making our schedules, you know, two, three, four months slip, although we don't like that. And I think the milestones we have right now, we have plans in place to make it by the end of the year, but there's a risk on a couple of them, so we'll just have to see how that plays out here.

Tom: And I think the milestones we have right now we have plans in place to make it by the end of the year, but this risk on a couple of them. So we'll just have to see how that plays out here.

Thomas E. Stiehle: I think it's going to, it mirrors a very similar profile year as 2022. As far as your comments about kind of missing last year, we got it, you know, in the upper sevens, we finished eight, three, seven, five. I tell you, the year before that was a couple of ticks off to a couple of 10. So I think the guy is realistic. We have a plan in place to hit it. And it's just about execution now with, you know, eight months to go.

Thomas E. Stiehle: It's going to.

Thomas E. Stiehle: There is a very similar profile at year two.

Thomas E. Stiehle: 2023.

Thomas E. Stiehle: As far as your comments about kind of missing last year, we guided.

Thomas E. Stiehle: In the upper 7% we finished <unk>.

Thomas E. Stiehle: A 75 I'll tell you the year before that was a couple of ticks off to a couple of tenths. So.

Thomas E. Stiehle: I think the guy is realistic.

Thomas E. Stiehle: We have a plan in place to hit it and it's just about execution.

Thomas E. Stiehle: Eight months ago and this year.

Thomas E. Stiehle: Okay.

Speaker Change: Makes sense.

Noah Poponak: How should we think about the pacing of the buyback through the year? And I guess also what's the minimum cash balance, just given the shape of the free cash flow through the year?

Thomas E. Stiehle: And.

Thomas E. Stiehle: How should we be thinking about the pacing of the buyback.

Noah Poponak: Through the year and I guess also what's the <unk>.

Speaker Change: A minimum cash balance.

Noah Poponak: <unk>.

Noah Poponak: Given the shape of the free cash flow through the year.

Thomas E. Stiehle: Yeah, so we we did buy back 62 million in the first quarter, we talked about a target of 300 million by the end of the year. , Dr. David Harned, Myles Walton, George Shapiro, Robert Spingarn, Dr. Peter Stiehle, Unknown Attendee, Unknown Shareholder, Scott Deuschle, Noah Poponak, Christopher Kastner, David Strauss, Thomas Stiehle, Unknown Attendee, Unknown Shareholder, Scott Deuschle, Robert Spingarn, Christopher Kastner, Dr. Peter Stiehle, Unknown Attendee, Unknown Shareholder, Scott Deuschle, Unknown, And then from a minimum on the cash balance, it's not, per se, a minimum from time to time. We will dig into our revolver or our commercial paper.

Speaker Change: Yes, so we did buy back $62 million in the first quarter, we talked about a target of 300 million by the end of the year. So you can you can do the math on that that will that should should ramp up as we go through the back half of the year, we follow a very.

Thomas E. Stiehle: Disciplined buying grid, we have algorithms against that what we see value. So we will continue to employ that process. It has served us well, we reiterated our targets. So I don't see a change in that going forward right now.

Thomas E. Stiehle: And then from a minimum on the cash balance that's not per se a minimum from time to time, we will dig into our revolver or our commercial paper, so thats not uncommon and we've seen that in the past here and as we were into the seasonality of Q1 in the first half of the year being cash users that's not.

Thomas E. Stiehle: So that's not uncommon. We've seen that in the past here. And as we're into the seasonality of Q1, the first half of the year, being cash users, that's not a concern or problem right now. So there isn't like a threshold or minimum balance of cash that they have that would tie to being opportunistic and seeing value in the repo.

Thomas E. Stiehle: Concern a problem right now so.

Thomas E. Stiehle: There isn't like a threshold or minimum.

Thomas E. Stiehle: Balance of cash that they have that were tied to being opportunistic and seeing value in the repo.

Thomas E. Stiehle: They're kind of indefinitely.

Speaker Change: Got it.

Noah Poponak: And, and Chris, you've touched on labor and attrition here. I think at investor day, you quantified that attrition improved around 20% last year. Sounds like that continues to get better. I don't know if there are any numbers you can put around, you know, how much better that needs to get to be kind of fully normal or stable or, or what you've seen year to date.

Thomas E. Stiehle: And Chris.

Thomas E. Stiehle: You've touched on labor and attrition here I think at the Investor Day, you quantified the attrition improved around 20% last year.

Noah Poponak: Sounds like that's continued to get better.

Noah Poponak: Don't know if there are any numbers you can put around how much better that needs to get to be kind of fully normal or stable or.

Noah Poponak: What you've seen year to date.

Christopher D. Kastner: Yeah, we don't, you know, publish our target there. It's definitely not back at pre-COVID levels. So we still need to improve our performance from a retention standpoint.

Unknown Speaker: Unknown Speaker Yeah, we

Speaker Change: Yes, we don't yes.

Noah Poponak: Publish our target there, it's definitely not back at pre Covid levels.

Unknown Speaker: So we still need to improve our our performance from a retention standpoint.

Noah Poponak: Okay. All right. Thanks very much. I appreciate it.

Speaker Change: Okay Alright.

Speaker Change: Alright, thanks very much appreciate it.

Unknown Speaker: Thanks.

Christopher D. Kastner: I am not showing any further questions at this time. I would now like to hand over to Mr. Kastner for any closing remarks. Okay.

Speaker Change: I am not surely any further questions at this time I would now like to hand over to Mr. Kessler for any closing remarks.

Christopher D. Kastner: Okay, thank you everyone for your interest in HII. And we will continue to focus on the fundamentals of our business in support of our customers.

Kastner: Okay. Thank you everyone for your interest in HII, and we will continue to focus on the fundamentals of our business in support of our customers have a good afternoon.

Christopher D. Kastner: Yes.

Operator: And this concludes today's conference call. You may now disconnect your line.

Operator: Have a good afternoon. And this concludes today's conference call. You may now disconnect your lines.

Christopher D. Kastner: And this concludes today's conference call you may now disconnect your lines.

Operator: Yeah.

Operator: [music].

Operator: Yeah.

Operator: [music].

Operator: Okay.

Operator: Yes.

Operator: Sure.