Q2 2024 Huntington Ingalls Industries Inc Earnings Call

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Operator: Ladies and gentlemen, thank you for standing by, and welcome to the second quarter 2024 HII earnings 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, please press star 1 on your telephone keypad. Please be advised that today's conference is being recorded. If you need further assistance, press star 0 to reach an operator. Mrs. Thomas, you may begin.

Ladies and gentlemen, thank you for standing by and welcome to the second quarter 2020 for HII earnings Conference call.

Speaker Change: 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 this session. Please press star one on your telephone keypad.

Speaker Change: Please be advised that today's conference is being recorded if you need further assistance press star zero to reach an operator.

Speaker Change: I would now like to hand, the call over to Kristy, Thomas Vice President of Investor Relations. Mr. Thomas You may begin thank.

Christie Thomas: Thank you, Operator, and good morning. I'd like to welcome everyone to the HII Second 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.

Kristy Thomas: Thank you operator, and good morning, I'd like to welcome everyone to the HII second 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.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: <unk> to differ materially from expected results.

Speaker Change: Also in their remarks today, Chris and Tom will refer to certain non-GAAP measures 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 Dot com.

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

Chris Kastner: Thanks, Christy and good morning, everyone. The HII team remains focused on executing on our programs and meeting our commitments to our customers.

Speaker Change: In the second quarter, our Shipbuilding Division delivered two ships and our mission technologies business achieved another quarter of strong performance the alignment of our products and services to the United States National Security strategy continues to provide strong visibility to our long term revenue forecast.

Chris Kastner: To start I'd like to discuss our results.

Chris Kastner: Record second quarter revenue was 3 billion up six 8% from a year ago and diluted earnings per share was $4 38 for the quarter.

Chris Kastner: Up from $3 27 in the second quarter of 2023.

Christopher Kastner: In addition to very strong revenue, Mission Technologies' trailing 12-month book-to-bill is $1.15, and its new business Opportunity Pipeline is over $83 billion. In shipbuilding, we remain focused on directing our resources toward meeting our delivery commitments to the Navy. Significant efforts continue in each of our shipyards to create labor stability, improve proficiency, and increase capacity, all aimed at meeting our throughput goals. Other milestones, including the launch of DDG-129 Jeremiah Denton and the delivery of LHA-8 Bougainville, have been adjusted based on workforce availability, the most efficient utilization of shipyard facilities, and levels of system completion to support predictable downstream execution of future milestones.

Christopher Kastner: At Newport News, in the second quarter, we delivered SSN-796 New Jersey and continue to make progress toward our remaining milestones that are planned for later this year. Now turning to labor, positive trends continue in talent acquisition as we have hired over 3,800 craft personnel a year to date, which keeps us on track to achieve our full year plan of approximately 6,000. In summary, I'm confident that the team's focus on the execution of the fundamentals in our programs positions us positively for the future, and I look forward to the second half of the year as we meet more milestones and deliver on our commitments to our customers and shareholders. Now, I will turn the call over to Tom for some remarks on our financial results. Tom?

Chris Kastner: Washington, We continue to see bipartisan support for our program is reflected in our fiscal year 2025, appropriations and authorization bills as they progress through both chambers of Congress. We are pleased that the two authorization committees have shown strong support for shipbuilding, including support for additional advanced procurement funding authority for CV and 82.

Chris Kastner: Additional funding authority to support Virginia class construction, and then multi ship procurement of amphibious ships. The Senate Authorizers also included additional funding authority for LPG fly to and DDG 51 flight III ships.

Chris Kastner: The House Appropriations Bill continues to support our major shipbuilding programs, and notably includes investment of $4 billion into the submarine industrial base.

Chris Kastner: We await Senate appropriations positions and the final outcomes will depend on eventual respective conference negotiations by the appropriations and authorization committees.

Thomas Stiehle: Thanks, Chris, and good morning. Today, I'll briefly review our second quarter results. For more detail on the segment results, please refer to the earnings release issued this morning and posted on our website. Beginning with our consolidated results on slide 6 of the presentation, our second quarter revenues of approximately $3 billion increased 6.8% compared to the same period last year and represent a record second quarter result for HII. Operating income for the quarter of $189 million increased by $33 million, or 21.2% from the second quarter of 2023.

Thomas Stiehle: An operating margin of 6.3% compares to an operating margin of 5.6% in the same period last year. Diluted earnings per share in the quarter were $4.38, compared to $3.27 in the second quarter of the prior year, representing a year-over-year growth of approximately 34%.

Speaker Change: Second quarter of the prior year, representing a year over year growth of approximately 34%.

Speaker Change: Backlog increased slightly to end the quarter at $48 5 billion up approximately $100 million from Q1's clothes.

Thomas Stiehle: Moving to slide 7, Ingalls revenues of $712 million in the quarter increased $48 million, or 7.2% from the same period last year, driven primarily by higher volumes in amphibious assault ships and surface combatants, partially offset by lower volumes in the National Security Cutout Program. Ingalls operating income for the quarter was $56 million, an operating margin of 7.9 percent, compared to $65 million and 9.8 percent, respectively, from the same period At Newport News, revenues of $1.5 billion were up $26 million, or 1.7%, from the same period last year.

Speaker Change: Moving to slide seven Ingalls revenues of $712 million in the quarter increased $48 million or seven 2% from the same period last year, driven primarily by higher volumes and in February the salt chips and surface combatants, partially offset by lower volumes in the National Security Cutter program.

Chris Kastner: Ingalls operating income for the quarter was $56 million and operating margin of seven 9% compared to $65 million and nine 8% respectively from the same period last year.

Chris Kastner: The decreases were primarily due to lower risk retirement on surface combatants, partially offset by a delivery contract incentive on L. P 29, Richard Nicole Junior.

Chris Kastner: At Newport News revenues of $1 5 billion were up $26 million or one 7% from the same period last year.

Thomas Stiehle: Shipbuilding operating margin in the second quarter was 7.4%, up from 6.8% in Q1 of this year. We are pleased to exceed the shipbuilding margin guidance we previously provided for the quarter, and we continue to see significant opportunity in the second half of the year for margin enhancement. Admission Technologies' revenues of $765 million increased $120 million or 18.6% compared to the second quarter of 2023, primarily due to higher volumes in C5ISR and cyber electronic warfare in space.

Thomas Stiehle: A portion of Mission Technologies' overperformance in the quarter was driven by material and work that may not reoccur on a consistent basis, and we have factored that into our guide going forward. Mission Technologies' operating income for the quarter was $36 million, and its operating margin was 4.7%, compared to $9 million and 1.4%, respectively, in the second quarter of last year. The increases were driven primarily by higher volumes, as I just mentioned, as well as stronger performance and fleet sustainment.

Thomas Stiehle: In addition, in the second quarter of 2023, we recorded a $6 million loss related to the sale of a joint venture interest, which also helped the year-over-year comparison. Additionally, second quarter results for Mission Technologies included approximately $25 million of amortization of purchased intangible assets. Mission Technologies' EBITDA margin in the second quarter was 8.5% compared to 6.7% in the second quarter of 2023 and 7.7% last quarter. Also, during the quarter, we paid dividends of $1.30 per share, or $51 million in aggregate.

Speaker Change: Perhaps the year over year comparison.

Chris Kastner: Second quarter results for emission technologies included approximately 25 million of amortization of purchased intangible assets.

Chris Kastner: Mission technology EBITDA margin in the second quarter was eight 5% compared to six 7% in the second quarter of 2023, and seven 7% last quarter.

Chris Kastner: Turning to slide eight cash used in operations was $9 million in the quarter.

Chris Kastner: Net capital expenditures were $90 million or 3% of revenues free cash flow in the quarter was negative $99 million consistent with the guidance, we provided on our first quarter call.

Chris Kastner: Cash contributions to our pension and other post retirement benefit plans were $14 million in the quarter.

Chris Kastner: Also during the quarter, we paid dividends of $1 30 per share or <unk> $51 million in aggregate we.

Chris Kastner: We also repurchased approximately 250000 shares during the quarter at a cost of approximately $65 million.

Thomas Stiehle: We also repurchased approximately 250,000 shares during the quarter at a cost of approximately $65 million. Moving to slide 9, we have summarized our expectations for the third quarter and the year. For the year, we are reaffirming our shipbuilding revenue and margin expectations, and as I previously noted, we are raising our Mission Technologies revenue guidance range. We are also updating our interest expense expectation to $95 million based on the phasing of our latest cash flow forecast.

Chris Kastner: Moving to slide nine we have summarized our expectations for the third quarter and the year.

Unknown Attendee: Thanks. Good morning.

Christopher Kastner: Chris, could we start with labor? It sounds like you're continuing to have good traction on the hiring front, but it's not clear to me if you're net net increasing your headcount to where you want to maybe just touch on attrition. Hiring goals, I guess are good, but attrition goals for the year at both shipyards. And if that's a meaningful driver for some of the milestones, what that'

Christopher Kastner: Significant progress on ensuring that we can get the people to do the work. Attrition is not materially improving, but we're thinking about it more broadly from a labor standpoint, an execution standpoint. Attrition, excuse me, attendance, and overtime both have recovered. We're performing well there. Our outsourcing programs are executing well. And industrial-based funding is being applied where it's necessary to increase the industrial base. So it's not just labor

Christopher Kastner: We need to execute on our programs independent of how well attrition is working. We'll continue to work on our attrition issues. We'll work on salary, flexibility, recruiting in the right places, but we're having to go where the labor is. We've got some interesting stuff going on in Hampton Roads where we're actually creating manufacturing footprints in areas we hadn't before to attract labor. So we're thinking about it more holistically now. It's not just labor and attrition in order to meet our throughput goals.

Unknown Attendee: Well, it's both, actually. It's in L.A.

Chris Kastner: Yeah.

Chris Kastner: Sure.

Chris Kastner: Thanks.

Speaker Change: Thank you.

Chris Kastner: The next question is from the line of Robert Spingarn with Melius Research. Please go ahead.

Chris Kastner: Good morning. This is Scott on for Rob Spingarn.

Scott: Good morning, Scott, Tom or Tom or Chris I wanted to ask based on the guidance you need to generate about $1 billion of free cash flow in the fourth quarter. So I'm. Just wondering if you could talk about your level of visibility into that cash cash generation and then if possible can you quantify how much of the fourth quarter free cash is tied to working cap.

Speaker Change: That could move into early 'twenty five.

Christopher Kastner: Yeah, thank you for the question. I'll start, then Tom can finish it off with some details here.

Chris Kastner: Yes. Thank you for the question I'll start and then Tom can finish it off with some details here, but I hate to give the answer is timing.

Chris Kastner: Because it's just not specific enough for you all.

Speaker Change: But there is a lot of timing in the back half of the year for margin and cash.

Tom: To achieve that progress over the back half of the year, we need to make our milestones on our shifts we need to achieve.

Chris Kastner: Contract incentives and it's not just one.

Chris Kastner: <unk>.

Chris Kastner: We risk adjust all of our programs over the back half of the year to ensure that.

Christopher Kastner: But I hate to give the answer about timing because it's just not specific enough for you all. But there is a lot of timing in the back half of the year for margin and cash. In order to achieve that progress over the back half of the year, we need to meet our milestones and our shifts, we need to achieve contract incentives. And it's not just one; we risk adjust all of our programs over the back half of the year to ensure that we can make guidance and we have a line of sight to it. So yeah, it is over the back half of the year; there's some timing, there's some unwind, and working capital.

Chris Kastner: We can make guidance and we have a line of sight to it.

Thomas Stiehle: But we do have a line of sight to it. Tom? Yeah, I'll provide some more.

Thomas Stiehle: I would tell you a couple of the milestones we had at the end of 2023 that dragged into 2024, although it's only a couple of ships, LP29, the SSN796, and then the launch of 798, all just brought that work into 2024 and created just a little bit of a delay in making the kind of cost and progress and headway on the existing portfolio we have here. But the guides that we have provided zero on free cash flow for Q3, which has some variability to it.

Speaker Change: The guys that we have.

Chris Kastner: Have we provided zero on free cash flow for Q3, which has some variability to it.

Thomas Stiehle: There's a lot of activity in the milestones that you have on major milestones, smaller milestones underneath, capital incentives, you know, that capital is a little bit slower than we got. We got 5.3% for the year, it was 2.6% in Q1 and 3% for Q2. But as that comes online in the back half of the year, the progress that we want to make to close out the work packages that are in play right now will allow us to fully bill all the costs that you see on the balance sheet. You can see the contract liabilities and the ARAP in there.

Chris Kastner: There's a lot of activity.

Chris Kastner: Milestones that you have.

Chris Kastner: On major milestones smaller milestones underneath capital incentives the capital is a little bit slower than we got is you've got at five 3% for the year. It was $2 six in Q1, 3% for Q2, but as that comes online on the back half of the year.

Chris Kastner: The progress that we want to make to close out the work packages that are in play right now will allow us to fully but they'll all the costs that you see on the on the balance sheet you can see the contract liabilities in our opinion there.

Unknown Attendee: So there's some net working capital that's going to burn itself down. We finished last year at 5% of working capital at the end of 2023. We sit just under 9% right now, and I kind of foreshadowed at the beginning of the year that we were going to have this shape, and by the end of the year, because of the capital incentives we've had, we'd actually have a little bit of an advance. We'll work ourselves down to that.

Chris Kastner: Some networking capital that's going to burn it's a step down we finished last year at 5% of working capital at the end of 2023, we said just under 9% right now and I kind of foreshadowed at the beginning of the year that we were going to have this shape and by the end of the year because of the capital incentives. We've had we'd actually have a little bit of an advancement will work ourselves down to the two 2%.

Chris Kastner: 3% range and working capital and.

Chris Kastner: That's aligned with our plan, it's aligned not only with the free cash flow perspective, we gave you for six to 700 this year, but in the five year gold I told you that had some shape into two and net working capital level exiting 2024 into 2025 as far as is planned in the guidance that I gave you for $3 6 billion and kind of going forward.

Chris Kastner: I think we have.

Chris Kastner: Understand where we are.

Unknown Attendee: All right, thanks. I'll stop there. Chirp.

Unknown Attendee: Hey, good morning, guys. Nice quarter. Yeah, so I'm probably not.

Unknown Executive: We have, our estimates have not changed for 80, if that's what you're referencing, and our schedules have not changed materially either. They're making good progress on 80. They're doing some very interesting things relative to ensuring that we hold on to the schedule for 81 and how we're going to build those. But I'm not really comfortable because there's been no material change between Q1 and Q2 relative to those delivery

Chris Kastner: Relative.

Chris Kastner: To those delivery requirements.

Chris Kastner: Okay.

Speaker Change: Got it thank you.

Chris Kastner: Sure.

Chris Kastner: Thank you.

Chris Kastner: The next question is from the line of David Strauss with Barclays. Please go ahead.

Chris Kastner: Okay.

David Strauss: Thanks, Good morning.

Ben: Good morning, Ben.

David Strauss: Hi.

Chris Kastner: Chris can you can you talk about where you are in terms of block four blocks five work and then negotiating block six on ECS.

Chris Kastner: Sure sure block four.

Chris Kastner: We're marching towards delivery on 798, we did have that minor move.

Speaker Change: On the milestone that they are making progress on the test program now.

Chris Kastner: It's a good team on its a good crews and good leadership. So I fully expect 798 will resolve at the beginning of next year 800 is making progress that milestone.

Speaker Change: As holding to float off the back half of this year and then we have one more module that we have to deliver to general dynamics and then.

Unknown Executive: Making progress on Block 5, and they'll start to fill in behind Block 4 in getting into the Integrate Delivery and Test of the Block 5 Virginia-class boats. Block 6, we're in discussions with the government relative to the negotiation of that block.

Speaker Change: Making progress on on block five and then they'll start to fill in behind.

Speaker Change: Behind block four.

Speaker Change: In those.

Speaker Change: Getting into the integrate delivery and test of the block five.

Speaker Change: Virginia Class, Virginia class boats block six were in discussions with the government relative to negotiation of that block I expect that to resolve.

Speaker Change: This year.

Unknown Executive: I expect that to resolve this year. Working closely, I think it'll be a fair deal. Dealing with this macroeconomic environment we talk about with inflation and supply chain insurance, we have all that risk protected. The good news is, we're making investments, the Navy is making investments in the industrial base in order to get at this throughput issue, and we fully expect that when we do Block 6, all of that will be wrapped into that deal, and it'll be a fair deal. So that's where we stand on Virginia class.

Speaker Change: Working closely I think there'll be a fair deal.

Speaker Change: Dealing.

Speaker Change: With this macroeconomic environment, we talked about with inflation and supply chain, ensuring we have all of that risk protected.

Speaker Change: The good news is we're making investments the Navy's making investments in the industrial base in order to get at this throughput issue and.

Speaker Change: We fully expected and when we do block six all of that will be wrapped into that deal and it will be a fair deal.

Speaker Change: So thats, where we stand on Virginia class.

Speaker Change: Well.

Speaker Change: Thanks for that.

Speaker Change: What is your revenue mix right now between block for an en bloc Bod.

Unknown Executive: Yeah, so we're at 95% plus complete on block four, and then, you know, block five, I know it's not the exact answer to your question, but we're at 95 plus percent of the contract completed on block four, and block five, we're in the mid 20% range. And we're spending, we crossed over about six quarters ago that Block 5 had higher revenue than Block 4.

Unknown Speaker: Unknown Speaker Okay, thank you. And then Tom Fulton.

Speaker Change: To get into specific targets going forward, but I will tell you that we're kind of on plan on that front relative to its implications to the five year free cash flow guidance and as we close out the year for Q3 Q4, a lot of activity has to happen and how that is going to fall with everything I rattled off four on how we're going to make the six to 700 I'd prefer to hang on to.

Speaker Change: Exact working capital guidance at the back half of the year as we set the trajectory and the targets for next year on the February call.

Speaker Change: Alright. Thank.

Speaker Change: Thank you.

Speaker Change: Thank you.

Operator: The next question is from the line of Gautam Khanna with TD Cowan. Please go ahead.

Speaker Change: The next question is from the line of Tom Cano with TB Cowen. Please go ahead.

Tom Cano: Yeah. Thanks, So I had two questions.

Tom Cano: First just on the Q4 cash flow was there.

Speaker Change: Are there any major like lumpy.

Speaker Change: Dan.

Speaker Change: That you could that that might actually move that number materially.

Speaker Change: They were to switch slip out and Relatedly do the.

Speaker Change: Delivery milestone slips have any impact on that whatsoever, and then I have a follow up.

Speaker Change: Yes.

Speaker Change: The ramp that we're going to see here between Q3 Q4 again, we can certainly got it to Europe for Q3, but that could be 1% to 200 higher it could be 50 to 100 less there just depending on everything that I said early kind of falls out, but the ramp from now where we are to Q3 and Q4.

Speaker Change: Posit thereof.

Speaker Change: Improved trade working capital between <unk> progress and closing our sales you can see how the costs and the balance sheet. So it's just getting the right progress as we make headway on schedule.

Speaker Change: To be able to build all the costs the major milestones.

Speaker Change: Add into that we've talked about is that we have a slide on the Powerpoint briefing that you can see the ones that we have to hit there on the deliveries.

Speaker Change: And then we kind of work ourselves through.

Speaker Change: Both incentives and cat.

Speaker Change: Program contract incentives and then.

Speaker Change: Capital incentives and then the new awards kind of contribute that rise in lift on the back half of the year two so it's all of it.

Unknown Executive: Missing one milestone here is not going to drive the preponderance of the lift that we see kind of going forward. But we'll keep you informed, and we'll give you an update on the November call and part two of your question. Great, thank you.

Speaker Change: Missing one milestone here there is not going to drive the preponderance of the lift that we see kind of going forward.

Speaker Change: But we'll keep you informed.

Speaker Change: Give you an update on the November call.

Speaker Change: And the part two of your question Great. Thank you Chris I was just wondering whats your appetite for acquisitions at this point.

Unknown Attendee: Great, thank you. And Chris, I was just wondering, what's your appetite for acquisitions at this point?

Operator: The next question is from the line of Jason Gursky with Citi.

Unknown Attendee: Okay. Good morning, everybody. Can you hear me?

Speaker Change: For a minute and just talk a little bit about.

Speaker Change: The 1.15 when you.

Speaker Change: Can execute on that backlog.

Speaker Change: <unk> that you have available.

Speaker Change: To you what that means for growth rates beyond two.

Speaker Change: 2024, we're obviously off to a really solid start here in the first half of this year.

Speaker Change: Just kind of curious how this growth rate settles out over the next couple of years.

Speaker Change: Yes, so thanks, Jason we're still comfortable with a 5% growth rate emission technologies.

Speaker Change: A bit of a conservative guide we've increased it for the year and beyond that if we can execute on the $83 billion pipeline.

Speaker Change: Book to Bill continues to.

Speaker Change: B.

Speaker Change: Very good it could be north of that.

Speaker Change: And it's really quite broad based across the business that each one of those business areas is executing very well I would like to point out that.

Speaker Change: There's a lot of interesting things going on emission technologies.

Speaker Change: This is the first time.

Speaker Change: The Navy is going to deploy a Virginia class submarine with launch and recovery all autonomously.

Speaker Change: Ramius vehicle.

Speaker Change: And it's not just an exercise that's full deployment of CLO Moray, it's a great. It's a great product and it demonstrates the kind of the man in autonomous unmanned teaming.

Speaker Change: That we really think about provides a lot of value.

Speaker Change: For our customer.

Speaker Change: So if they continue to execute like this they continue to execute on that backlog.

Speaker Change: And they take advantage of that pipeline.

Speaker Change: It could be north of that but we don't want to get a we don't want to get too far over our skis, we're going to be relatively conservative as you would expect for us to be but I'm very encouraged.

Speaker Change: By how mission technologies is developing.

Unknown Attendee: Okay, great. That's helpful. I appreciate that.

Speaker Change: Okay, Great. That's helpful. I appreciate that and then secondarily just on labor productivity in the shipyards I know you talked a little bit earlier during the Q&A session about attrition rates and hiring and all that kind of stuff. The good stuff, which is which is great but I think.

Unknown Attendee: And then, secondarily, just on labor productivity in the shipyards. I know you talked a little bit earlier during the Q&A session about attrition rates and hiring and all that kind of stuff. Yeah.

Unknown Attendee: The good stuff, which is great, but I think probably just as important, maybe, to those numbers is, you know, kind of the learning curve of the employees. And I'm wondering if you have the ability, maybe just from a big picture perspective, to talk about labor productivity where you are today relative to maybe where you were pre-pandemic. Just wondering if we're still, you know, down relative to pre-pandemic levels from a labor productivity perspective and kind of what you would expect over the next couple of years and maybe when we can return to pre-pandemic productivity. Thanks. Yeah, great. So it's a great, great question, Jason. So productivity is increased.

Speaker Change: Probably just as important to those numbers.

Speaker Change: The learning curve.

Brian: The employees Brian.

Speaker Change: And I'm wondering if you have the ability maybe just from a big picture perspective to talk about labor productivity, where you are today relative to maybe where you were pre pandemic.

Speaker Change: Just wondering if we're still.

Speaker Change: Down relative to pre pandemic levels from a labor productivity perspective, and kind of what you would expect over the next couple of years and maybe we can return back to kind of pre pandemic.

Speaker Change: Productivity.

Christopher Kastner: Yeah, great. So it's a great, great question, Jason. So productivity is not as it was before the pandemic. There's no getting around that.

Speaker Change: Okay.

Speaker Change: Great.

Speaker Change: Great Great question, Jason So productivity is not as it was before the pandemic theirs.

Speaker Change: No getting around that and it's really related to the experience level of the team.

Christopher Kastner: And it's related to the experience level of the team. Now, do I expect it? Do I expect it to improve? Absolutely. And both teams in Ingalls and Newport News are making investments to ensure that happens. And the sub, the SIB investments that you see coming out of the Navy are focused on that as well. It's not just infrastructure. It's targeted at the proficiency of the workforce as well.

Speaker Change: Now do I expect it do I expect it to improve absolutely and both teams and Ingalls and Newport news or.

Speaker Change: Making investments to ensure it does and the.

Speaker Change: The specific investments that you see coming out of the Navy are focused on that as well, it's not just infrastructure.

Christopher Kastner: So I do expect it to improve. We're investing against it. We've done it before. We've seen it before, and I expect it to continue to improve as we stabilize moving forward.

Speaker Change: It's targeted at.

Speaker Change: The proficiency of the workforce as well so I do expect it to improve we're investing against it we've done it before we've seen it before and I expect it to continue to improve as we stabilize.

Speaker Change: Moving forward.

Speaker Change: Great. Thanks.

Speaker Change: Sure.

Speaker Change: The next question is from the line of Seth Sigman with Jpmorgan. Please go ahead Sir.

Unknown Attendee: Okay, thanks.

Seth Sigman: Okay, Thanks, very much and good morning.

Wonder: Good morning Wonder.

Wonder: Good morning.

Speaker Change: The slides I think you talk about reduction year on year and in Virginia, our profitability.

Speaker Change: Should we attribute that to what's happening on on Massachusetts or was there a reduction in expected profitability on block five.

Speaker Change: Yes, so I think thats, probably a a compare issue related to last year.

Speaker Change: There is no material issue that we can note related to that is kind of broadly across.

Speaker Change: Across the blocks, we assess ruc's every quarter, we have to make an adjustment, we do that plus or minus so it's not anything individually material there.

Speaker Change: Okay, and I think you mentioned earlier about the carrier so with both the carrier and Virginia block five there werent.

Wonder: Meaningful changes to that to.

Speaker Change: The estimated profitability.

Speaker Change: No not material enough to note, but we as I said, we assess our issues every quarter when we make those adjustments.

Wonder: Dictated by our evaluation in that quarter.

Speaker Change: Right, Okay, Okay, great and then just.

Speaker Change: For Ingalls I guess should we expect profitability there too.

Speaker Change: Okay.

Speaker Change: <unk> seen typically kind of solidly double digit margin.

Speaker Change: Our angle.

Speaker Change: Is that something kind of going forward that English there'll be kind of at the high end.

Speaker Change: Kind of shipyard margins.

Speaker Change: Yes, So we don't guide by shipyard, but I fully expect Ingalls to.

Speaker Change: Continue to execute on our programs.

Speaker Change: Very well, but yes, we don't provide guidance bye bye.

Speaker Change: By our shipyards.

Speaker Change: Okay, Okay, great. Thanks very much.

Speaker Change: Sure sure.

Speaker Change: Thank you.

Speaker Change: The next question is from the line of George Shapiro with Shapiro Research. Please go ahead.

Unknown Attendee: Thanks very much. And good morning.

George Shapiro: Yes, good morning.

Unknown Attendee: I wonder, in the slides, I think you talk about a reduction year on year in Virginia sub profitability. Should we attribute that to what's happening in Massachusetts? Or was there a reduction in expected profitability on block five?

George Shapiro: Good morning.

Unknown Executive: to the estimated profit.

George Shapiro: Tom I wanted to pursue a little bit of free cash flow needs for the fourth quarter. I mean, obviously, we can all do the arithmetic $9 73 to 1 billion 73, now if I look back that's nearly twice what you've ever done before the last highest year in the last five with $539 million.

Speaker Change: For the fourth quarter of 18.

Speaker Change: In addition, you've never had three quarters in a row.

Speaker Change: No quarter generated positive cash flow. So my question is what has changed in the last five years sometimes of.

Unknown Executive: Is that something kind of going forward that Ingalls can still be kind of at the high end of, you know, kind of good shipyard margins?

Speaker Change: Contracts that you have or what to suggest such a dramatic swing this year from what we've seen before.

Thomas Stiehle: Yeah, so we don't guide by shipyard, but I fully expect Ingalls to continue to execute on their programs very well. But yeah, we don't provide guidance by by our shipyard. Okay, great.

Speaker Change: Yes. So I think we have got a couple of quarters that were negative. So we can catch up offline on that George.

Unknown Attendee: Yes, good morning. Good morning.

Speaker Change: This is an odd year I would tell you it's not.

Speaker Change: It's back loaded one two is I would tell you that pre COVID-19 as we're executing these contracts right now we have seen a draw in the schedules over the last three or four years and that just changes the construct.

Speaker Change: As we get progress and collect costs and what we're allowed to bill it creates a little bit of a journey, we still manage it annually and as you know.

Speaker Change: <unk> been pretty good at providing a five year target back in 19, providing a guidance annually for each of the years and we've met or exceeded that so I mean, we're in the lane right now we've actually increased that to $3 billion to 100.

Speaker Change: We've given our next five years, a 20% more so we have pretty good visibility into the portfolio.

Speaker Change: Relatively.

Speaker Change: I'm sorry.

Speaker Change: Yes.

Speaker Change: There was some feedback here.

Speaker Change: It is a relatively mature portfolio that's going on that we have here. So we have line of sight as far as what we have to build program plan.

Speaker Change: The expected cost and then all of that rolls in once we come through on a quarterly a season to the guidance of free cash flow going forward here. It is back loaded and as I commented earlier I did a comparison you can you can take a peek at the queue there.

Speaker Change: What's driving that a little bit more capex that we've seen last few years has been two 6% to 4% of sales respectively in already.

Speaker Change: The second quarter of last year, that's going to ramp.

Speaker Change: In the back half of the year, but this capital incentives back.

Speaker Change: Come along with that as we continue to make progress the cost that you can see that's on the books in the balance sheet there.

Speaker Change: We plan to liquidate that.

Speaker Change: And really drive that working capital Thats going to be the catalyst the working capital coming down milestones and deliveries and additional awards as well as on contract performance and capital incentives are going to drive the back half of the year. The guide of 3% was probably on the conservative side, we didn't want to say it could be one or $200 million higher.

Speaker Change: <unk> $50 million to $100 million less and we didn't want to provide a number that we leaned into for Q3.

Speaker Change: Events, and Criterias and milestones that we see have to happen are right in that end of September October and November timeframe. So we guided conservatively, which does make the Q4 look like it's a larger lift and it may be as it plays out.

Speaker Change: Okay, just one comment.

Speaker Change: I said, what I meant to say if I didn't say it properly and the cash flow was there hasnt been if you look at quarter by quarter. There's been no time in the last five years.

Unknown Attendee: Tom, I wanted to discuss a little bit the free cash flow needs for the fourth quarter. I mean, obviously, we can all do the arithmetic, $973 to $1,073,000. Now, if I look back, that's nearly twice what you've ever done before. The highest-ever year in the last five was $539,000,000 in the fourth quarter of 2018. In addition, you've never had three quarters in a row where no quarter generated positive cash flow. So my question is, what has changed in the last five years in terms of the contracts that you have or what to suggest such a dramatic swing this year from what we've seen before?

Speaker Change: One quarter Hasnt had at least positive cash flow of the three there has been several quarters, whereas two two of the negative but not but not zero in the third.

Thomas Stiehle: Yeah, so I think we have had a couple of quarters that were negative. So we can catch up offline on that, George.

Thomas Stiehle: But yeah, this isn't an odd year, I would tell you, it's back, it's backloaded. One, two, is that pre COVID, as we're executing these contracts right now, we have seen a drawdown in the schedules over the last three or four years. And that just changes the construct of how, you know, as we get progress and collect costs and what we're allowed to bill. It creates a little bit of a drawback; we still manage it annually.

Thomas Stiehle: And as you know, we've been pretty good at providing a five-year tariff back in 19, providing guidance annually for each of the years, and we've met or exceeded that. So I mean, we're in the lane right now; we've actually increased that to nine to 3 billion. So it's another 100 billion added; we've given the next five years at 20% more. So we have pretty good visibility into the portfolio. Yeah, it's a relatively small, I'm sorry.

Speaker Change: A follow up I had was.

Speaker Change: Emission technologies the guide for the second quarter with like $6 50, you did $7 50, which is.

Unknown Attendee: Okay, just one comment. What I meant to say, if I didn't say it properly, on cash flow, there hasn't been, if you look quarter by quarter, there's been no time in the last five years where one quarter hasn't had at least a positive cash flow of the three. There have been several quarters where two, two have been negative, but not zero in the third. A follow-up question I had was, in mission technologies, the guide for the second quarter was like 650; you did 750, which is 765, which was similar to the first quarter, and you mentioned material, and that may drop down in the third quarter. Can you just be a little clearer as to kind of what actually drove it in the materials comment?

Speaker Change: 765, which was similar to the first quarter and you had mentioned a material and that may drop down in the third quarter can you just be a little clearer as kind of what actually drove it in the materials comment that you made.

Speaker Change: So all of the material comment that I said in my opening statements that that was more applicable to Q1. So there was some sales that we had.

Speaker Change: We don't envision to be on a recurring basis were not included in the Q2 other guy kind of going forward. The Q2 revenue that we had the emission technologies was driven by strong performance in <unk> ISR UWS and.

Speaker Change: And we believe that will continue going forward, we have normalized out for the book of business on contract right. Now. So we know what contracts, we have and we are executing and we see the how we load that out and we have a clear sight on expectations of the revenues for the last two quarters as well as there is some there's still awards happen every month and there is even though we are in the back half of the year.

Speaker Change: Yeah.

Speaker Change: There's several tens of millions of dollars of potential sales that happened on awards.

Speaker Change: We have to execute our plan that we have an existing contracts on those awards has to play out and we've got it rightfully probably on the conservative side.

Speaker Change: Where we stand the run rate of admission technologies between the first two quarters at $750 765 ish.

Speaker Change: $15 15 on an annual basis over $3 billion, we've considerably taken at the beginning of the year guys. Since you, 7% to $7 50 up to two 750 to $2. So let's see how it plays out we don't want to get ahead of ourselves Chris made a comment earlier about the growth. We saw some good growth for 'twenty, one to 'twenty two at 4% from 22 to 23 at $12.

Speaker Change: 7% and now both Q1 and Q2, respectively has seen 20% and 18% growth, but we don't want to overly guy here, obviously, we've got to get the people in when those contracts and continue some good performance, but I'm feeling really strong about the alliant acquisition the business proposition that we set.

Speaker Change: <unk> would be $200 million of cash generated which it is and I feel really good about the portfolio of contracts, we have in that pipeline growing.

Speaker Change: So just one last one so why guide to only $6 50 in the third quarter.

Speaker Change: Well, let's say, we have a lot of work to do going forward here, we don't want to over guide in Mis and it's still a function of a couple of awards that will have a minor impact on the revenue for the rest of the year here.

Unknown Attendee: Okay, thanks very much. We're all the same color.

Speaker Change: Okay. Thanks, very much for all the color.

Speaker Change: All right Sir.

Speaker Change: Thank you.

Operator: The next question is from the line of Jordan Leone with Bank of America. The line is now open. Please go ahead.

Jordan <unk>: The next question is from the line of Jordan <unk> with Bank of America.

Thomas Stiehle: Thanks. On CapEx, the sequential uptick that you guys had, is there a percentage or a portion of that that you could give color on that you'd expect to get back from the Navy's CapEx incentives?

Speaker Change: Line is now open. Please go ahead.

Jordan <unk>: Hey, good morning.

Jordan <unk>: Good morning, Jordan.

Speaker Change: On Capex the sequential uptick for you guys.

Speaker Change: A percentage or a portion of that that you could give color on that you would expect to get back from the Navy Capex incentives.

Speaker Change: Yeah.

Speaker Change: Yeah.

Thomas Stiehle: We always invest with our partner, with the Navy on this, and, you know, depending on what the CapEx is, and the timing, and the value equation, what that adds, and the desire to get in the yard, whether it's for operational here, or Navy sales, and things of that nature. There's a mix there of investment. We don't get into that. I mean, that's just part of the business case. I will tell you that any capital projects that we do add value, we get a return on that capital, and it goes into the business construct and how we choose which projects we bid on, we approve, and we execute here. So I'd leave it at that. It was 2.6% in Q1, and 3% in Q2. The guide's still 5.3% for this year, with a 5% CapEx over the next three years.

Speaker Change: We always.

Speaker Change: Invest with our partner with the Navy on this end.

Speaker Change: Depending on what the Capex is in the timing and value equation, what that adds and the designment getting in the yard whether it's for operational here or.

Speaker Change: Our Navy sales and things of that nature, there's a there's a mix there of investment we don't get into that I mean, thats just part of the business case, and I will tell you that any capital projects that we do add value.

Speaker Change: We get a return on that on that.

Speaker Change: On our capital and it goes into the business cost structure, and how we choose which projects. We did we approve and we executed.

Speaker Change: Leave it at that it was $2 six in Q1, 3% in Q2's, guys still five three for this year with a 5% capex over the next three years.

Unknown Attendee: Okay, and then also to the contract that Deloitte one that's for Navy shipbuilding. Do you have any sense of the scope for it? Or why? Like Mission TAC wasn't picked, or you guys in general?

Speaker Change: Got it Okay, and then also too.

Speaker Change: The contract that Deloitte, one that's for Navy shipbuilding.

Speaker Change: Any sense of the scope.

Speaker Change: Yes.

Speaker Change: Like mission Tech wasn't picks or are you guys in general.

Speaker Change: I can't I can't necessarily hear the question.

Speaker Change: Theres some feedback can you repeat that.

Speaker Change: Yes.

Speaker Change: $2 4 billion.

Speaker Change: Maybe contract for.

Speaker Change: Yes.

Speaker Change: It seems like in each of our contracts on.

Speaker Change: Ladies shipbuilding data yet.

Speaker Change: Yes, I think they are supporting their <unk>.

Speaker Change: Identification allocation of.

Speaker Change: Investments to support.

Speaker Change: Were they should make investments.

Speaker Change: So yes, we were okay.

Speaker Change: We were not we were not involved in that contracting process.

Speaker Change: Okay got it thank you so much.

Speaker Change: Sure.

Speaker Change: Yes.

Speaker Change: Thank you.

Speaker Change: I am not showing any further questions at this time I would now like to hand, the call back over to Mr. Cashman for any closing remarks.

Mr. Cashman: Thanks, everybody for joining today before we go I'd like to extend my thanks to the entire ACI team for their continued focus and we look forward to speaking with you on our next earnings call. Thank you.

Speaker Change: Okay.

Speaker Change: That does conclude today's conference call you may now disconnect.

Speaker Change: Okay.

Speaker Change: Yeah.