Q4 2024 Huntington Ingalls Industries Inc Earnings Call
Speaker Change: [music].
Okay.
Speaker Change: Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter of 2024, H I 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.
Ask a question during the session. Please press star followed by one on your telephone Keypad P change your mind. Please press star followed by two.
Speaker Change: Please be advised that today's conference is being recorded if you need further assistance. Please press star Zero I would now like to hand, the call over to Kristy, Thomas Vice President of Investor Relations Mr.
Speaker Change: Mr. Thomas you may begin.
Speaker Change: Okay.
Speaker Change: Thank you operator, and good morning, everyone.
Welcome to the HII fourth quarter 2024 conference call matters discussed on today's call that constitute forward looking statements, including our estimates regarding the company's outlook involve risks and uncertainties and reflect the company's judgment based on information available at the time of this call.
These risks and uncertainties may cause our actual results to differ materially.
Speaker Change: Additional information regarding these factors is contained in today's press release and the company's SEC filings. We will also refer to certain non-GAAP financial measures.
Speaker Change: Additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures. Please see the slides that accompany this webcast, which are available on the Investor Relations page of our website at IR Dot HII Dot com.
Speaker Change: On the call today are Chris Kastner, President and Chief Executive Officer.
Tom Seeley Executive Vice President and Chief Financial Officer.
Speaker Change: I will now turn the call over to Chris.
Speaker Change: Thanks, Christy good morning, everyone and thank you for joining us on our fourth quarter 2024 earnings call.
Speaker Change: Last year.
Speaker Change: Please remain steadfast in our commitment to our mission of delivering the world's most powerful ships and all domain solutions in service of the nation.
Speaker Change: For these efforts, which contributed to HII, reaching critical milestones last year.
Speaker Change: We remain focused on meeting our commitments to the Navy and all of our customers.
Speaker Change: Before I discuss the 2024 results operational initiatives and guidance I would like to put in context, where we are and give you a perspective on the next 24 months as well as the mid to long term outlook.
Speaker Change: Over the next 24 months, we expect to secure over $50 billion of contract awards.
Speaker Change: These contracts are being and will be negotiated with the current performance and economic conditions in our estimates.
Speaker Change: They are expected to have a more balanced risk equation be predictable and cost and schedules for our customers and provide an opportunity to achieve margins more consistent with historical norms.
Speaker Change: At the same time, we are achieving key milestones on shifts contracted prior to Covid.
Speaker Change: And as our progress continues these contracts are becoming an increasingly smaller portion of our portfolio and less of a drag on our financial results.
Speaker Change: By 2027, and the majority of pre Covid contracts will be behind us.
Speaker Change: In addition, our focus on increasing throughput and cost reductions are expected to lead to improved operational execution across the business.
Speaker Change: With these operational initiatives and the significant demand for our products and services, we expect improved financial performance over the mid to long term, we anticipate growing to $15 billion of annual revenue by 2030 with associated margin expansion opportunity in free cash flow growth.
Speaker Change: Now turning to our 2024 results, we generated sales of $11 5 billion and earnings per share of $13.96.
Speaker Change: All three of our divisions hit key milestones and won significant new business during the year.
Speaker Change: 2024 Awards totaled 12 billion in our year end backlog was 49 billion of which $27 billion is funded.
Speaker Change: Now I'll provide some highlights from each of our divisions.
Speaker Change: First mission technologies had another strong year. It achieved awards of more than 12 billion in potential total contract value a 2024 book to Bill of 133, and 9% revenue growth year over year.
Speaker Change: This positive performance reflects emission technologies continued alignment with our country's and our allies national security strategies.
Speaker Change: For example in 2024 mission technologies achieved its largest win ever a $6 7 billion contract to provide electronic warfare engineering and technical services support for the U S Air Force as well as a $3 billion logics task order to provide logistics services ISR operation.
Speaker Change: And next Gen technology.
And then Australia emission technologies was awarded an initial five year contract to provide global supply chain services to the Australian governments Department of defense.
Speaker Change: In summary, the mission technologies team is executing well and we are confident in its ongoing success, particularly given how closely its portfolio maps to our defense customers needs.
Speaker Change: In 2024 at Ingalls Shipbuilding, we were awarded a $9 6 billion multi ship procurement contract for the construction of <unk> 33, 34% 35, and large deck amphibious ship, let J 10, which secures and fit production backlog well into the next decade.
Speaker Change: Also we delivered LPT twenty-nine USS Richard M accrual Junior and launched LCD 30, Harrisburg, and we continued to make progress on the DDG program with six destroyers and production authenticating the keel DDG 133, Sam Nunn in the fourth quarter.
Speaker Change: Finally, we completed dry dock work and Undock USS Zoom wall DDG 1000 in December.
Speaker Change: In 2024 at Newport News Shipbuilding in the Virginia Class submarine program, we floated off SSN 798, Massachusetts delivered SSN 796, USS New Jersey shipped the final module of SSN <unk>, Utah and in December we christened SSN 800, Arkansas.
Speaker Change: As for aircraft carriers, we completed dry dock work for the our Coa to a Cvs 74, USS John C. Stennis and were awarded the advanced planning contract for the <unk> of <unk> 75, USS Harry S. Truman.
Speaker Change: Also 94% of <unk> 79, Kennedy compartments have been turned over to the Navy and all combat systems have been turned over to the test team.
Speaker Change: And Cvs 80 enterprises move for the first time, enabling construction of two aircraft carriers at once in the same dry dock.
Speaker Change: Looking ahead to 2025 at Ingalls, we expect to launch DDG 129, Jeremiah Denton and complete sea trials for DDG 1000.
Speaker Change: And our Newport News, we plan to deliver SSN 798 in Florida off SSN 800.
Speaker Change: Also the team is focused on completing Cvs 79 Cvs.
Speaker Change: <unk> hundred 79 is scheduled to deliver in 2025 and the program team is evaluating options for optimizing combat capability additions and readiness for Navy work ups.
Speaker Change: In 2026, we expect to deliver DDG 128, Ted Stevens and LH eight Bougainville at Ingalls and Newport News, we expect to deliver SSN 800, and lay the keel for CDN 81 Dorie Miller.
Speaker Change: In 2025, we are also doubling down on operational improvement actions to address the residual of Covid related labor productivity and supply chain challenges that we had been facing.
Speaker Change: Starting with labor and enhancing throughput in 2024, we exceeded our hiring goal of over 6000 craft personnel, but attrition remained stubbornly high.
Speaker Change: Our data shows that additional investment in wages in coordination with our Navy partner will provide needed workforce stability.
Speaker Change: These increases also allow us to attract highly skilled first class shipbuilders and their proficiency they bring.
Speaker Change: Additionally, we continued to deploy our enterprise operating system across all our shipbuilding programs to ensure consistency.
Speaker Change: On labor and throughput we have acquired the assets of an existing advanced metal fabricator W. International in Charleston, South Carolina.
Speaker Change: This acquisition increased our workforce by approximately 500 highly trained personnel and we planned by 2027% to increase employment significantly at this side, a 480000 square foot facility.
Speaker Change: Charleston operations is already working on aircraft carrier units for Newport News and in the next few weeks, we expect to start submarine unit construction.
Speaker Change: Similarly, we plan to increase our outsourcing by 30% in 2025 and in source contract labor to address critical skill gaps within our shipyards.
Speaker Change: As a result of these workforce strategies, we expect to achieve a 20% year over year improvement in shipbuilding production throughput.
Speaker Change: Our second operational initiative is an annualized enterprise wide cost reduction target of approximately $250 million per year.
Speaker Change: Several actions have already been taken to achieve this target, including the realignment emission technologies segment from six business units to four and the implementation of a new payroll system at the beginning of 2025.
Speaker Change: Further cost efficiency plans around optimizing cost structures, decreasing overhead and service and support cost and reducing third party services are under development and are expected to be executed throughout 2025.
Speaker Change: Our third operational initiative for 2025 is ensuring our new contract awards reflect the current economic and production environment.
Speaker Change: <unk> FY 'twenty four block five submarine contract agreement negotiations are continuing and we continue to be confident that an agreement will be reached although we do not have certainty today on the timing of that agreement.
Speaker Change: These three items meeting our throughput improvement goals executing our cost reductions and achieving new contract awards that reflect the current economic and production environment underpinned our guidance and are expected to bring more predictability to our contract cost estimates delivery schedules financial performance and guidance.
Speaker Change: <unk>.
Speaker Change: In terms of our financial outlook more specifically for 2025, we expect shipbuilding revenues between $8 $99 1 billion and shipbuilding margins in the range of five 5% to six 5%.
Speaker Change: For emission technologies, we expect revenues between $2 90, and $3 1 billion and margins between four and four 5%.
Speaker Change: With EBITDA margins between eight and eight 5%.
Speaker Change: Our free cash flow outlook for 2025 is between 300 $500 million.
Speaker Change: The 2025 shipbuilding margin in the free cash flow outlook is predicated on meeting our throughput and cost reduction objectives.
Speaker Change: It also assumes appropriate resolution on the last two Vcs block III boats in the block six and Columbia build two contracts consistent with the continuing resolution anomaly language that was passed by Congress.
Speaker Change: Turning to activities in Washington for a moment, we are pleased with the passage and enactment of the defense authorization Act for fiscal year 2025.
Speaker Change: The FY 'twenty five NDAA strongly supports our shipbuilding programs. In addition to authorizing funding for three Arleigh Burke class surface combatants, one Virginia class submarine in one San Antonio class amphibious warship the NDAA authorizes the refueling overhaul of <unk> 75, additional incremental funding for the second Virgin.
Speaker Change: Any class attack submarine in FY 'twenty, five and continued support for Gerald R. Ford class aircraft carriers, and the La <unk> and LPT amphibious warship bundle.
Speaker Change: The NDA also recommends the navy optimize aircrafts care acquisition strategy and procure CVA and <unk> 82 in FY 2008.
Speaker Change: We applaud Congress for including anomalies in the CR that provide additional support for nuclear powered vessel programs and we look forward to Congress finalizing FY 'twenty five appropriation bills.
Speaker Change: In summary, we continued to make progress on our programs with impactful operational initiatives that we believe will lead to meaningful improvements in productivity and throughput demand for our products and services is strong and we continue our focus on executing for our key customer the U S. Navy with five deliveries over the next two years.
Speaker Change: We have a line of sight for generating approximately $15 billion in annual revenue by decades, and with incrementally improving operating margins over that period, which will facilitate improved results for all stakeholders.
Speaker Change: So with that I will turn the call over to Tom for some remarks on our financial results and guidance Tom. Thanks.
Tom: Thanks, Chris and good morning today, I'll review, our fourth quarter and full year results and also provide some additional color regarding our outlook for 2025.
Tom: For more detail on the segment results. Please refer to the earnings release issued this morning and posted to our website.
Tom: Beginning with our consolidated fourth quarter results on slide six our fourth quarter revenues of $3 billion decreased approximately 5% compared to the same period last year. This decline was driven by lower year over year revenue at all three segments.
Tom: Ingalls revenues of $736 million decreased $64 million or 8% compared to the fourth quarter of 2023, driven primarily by lower volumes on amphibious assault ships, partially offset by higher surface patent revenues.
Tom: At Newport News revenues of $1 6 billion declined $77 million or four 6% from the fourth quarter of 2023, primarily due to lower our CRH volumes unfavorable cumulative adjustments on the Virginia class and aircraft carrier construction programs, partially offset by higher Columbia class volumes.
Tom: That mission technologies fourth quarter 2020 for revenues of $713 million decreased $32 million or four 3% from the fourth quarter of 2023, primarily driven by lower volumes and <unk> ISR due to nonrecurring product revenue in the fourth quarter of 2023.
Tom: Moving to slide seven.
Tom: Operating income for the quarter was $103 million and segment operating margin was three 4%.
Tom: This compares to $330 million and 10, 4%, respectively in the fourth quarter of 2023.
Tom: Fourth quarter 2023 results included two nonrecurring favorable items that make for a difficult year over year comparison.
Tom: The first item was a $75 million sale of a court judgment at Ingalls.
Tom: Second was a $49 5 million insurance claim settlement admission technologies.
Tom: Ingalls operating income of $46 million and margin of six 3% compared to $169 million and 21, 1% respectively in the fourth quarter of 2023.
Tom: The prior year period included both the favorable sale of a courtyard meant that I noted as well as a surface combatant related contract incentives.
Tom: Newport News fourth quarter, 2024, operating income of $38 million and margin of two 4% compares to $110 million and six.
Tom: 6%, respectively in the fourth quarter of 2023 with declines were driven by lower performance on Virginia class submarine and new carrier construction, partially offset by contract incentives on the Columbia Class program.
Tom: <unk> margin for the fourth quarter of 2023, 6%.
Tom: Mission Technology's fourth quarter operating income of 19 million and segment operating margin of two 7% compared to 51 million and six 8% respectively in the fourth quarter of 2023 with.
Tom: The declines were primarily driven by favorable insurance claim settlement that occurred in the fourth quarter of 2023.
Tom: Net earnings in the quarter were $123 million compared to $274 million in the fourth quarter of last year.
Tom: Diluted earnings per share in the quarter were $3 15.
Tom: Compared to $6 90 in the fourth quarter of the previous year.
Tom: Moving on to consolidated results for 2024 and slide eight.
Tom: Revenues of $11 5 billion increased $81 million or approximately 1% compared to 2023.
Tom: Growth was driven primarily by higher volumes at Nissan technologies, partially offset by lower volumes at Newport News Shipbuilding.
Tom: Ingalls revenues of $2 8 billion in 2024 increased $15 million or half a percent from 2023, driven primarily by higher volumes and surface combatant.
Tom: Largely offset by lower amphibious assault ship and NSC program revenues.
Tom: At Newport News 2020 for revenue of 6 billion decreased by $164 million or two 7% from 2023.
Tom: Primarily due to unfavorable Virginia class cumulative adjustments as well as well as lower volumes in aircraft carriers and nuclear support services, partially offset by higher volume on the Columbia program.
Tom: Admission technologies 2024 revenues of $2 9 billion increased $238 million or eight 8% from 2023, primarily driven by higher volume and cyber and electronic warfare and space as well as <unk> ISR contracts.
Tom: Moving to slide nine the segment operating income for the year was $573 million and segment operating margin was 5%. This compares to 842 million and seven 4% respectively in 2023.
Ingalls operating income of $211 million and margin of seven 6% in 2024 compares to $362 million and 13, 2% respectively in 2023.
Tom: The declines were primarily driven by the sale of the court judgment in 2023, as well as lower performance on amphibious assault ships and surface combatant.
Tom: Newport News 2024, operating income of $246 million and margin of four 1% compared to 379 million and six 2% respectively in 2023 the.
Tom: The decreases were primarily driven by lower Virginia class and aircraft carrier performance.
Partially offset by Columbia class contract incentives.
Tom: Shipbuilding margin for 2024 was five 2% with the within the revised guidance range, we provided for the year.
Tom: Net cumulative adjustments for the year were negative $126 million Newport News is net cumulative adjustment was negative $154 million, partially offset by positive net cumulative adjustments at both Ingalls and emission technologies of approximately $14 million.
Tom: Mission Technologies' 2024, operating income of $116 million and segment operating margin of three 9%, both improved from $101 million and three 7% respectively in 2023.
Tom: The improvement was driven primarily by volume and performance in cyber and electronic warfare and space contracts stronger performance and fleet Sustainment as well as higher equity income.
Tom: Again, the mission Technologies' 2023 results included a favorable $49 5 million insurance claim.
Tom: So we are lapping that difficult comparison, and we believe our results still show strong absolute income growth and margin expansion for the year.
Tom: Michigan Technologies' 2024 results included approximately $99 million of amortization of purchase intangible assets.
Tom: <unk> to approximately $109 million in 2023.
Tom: <unk> Technologies' EBIT margin for 2024 was seven 9%.
Tom: Company net earnings in $2024 $550 million compared to $681 million in 2023.
Tom: <unk> earnings per share in 2024 was $13 96.
Tom: A $17 seven in 2023.
Tom: Turning to cash and capital deployment on Slide 10, 2020 for free cash flow was $40 million consistent with our most recent guidance and reflecting factors previously discussed.
Tom: During the year the company invested $353 million in capital expenditures or three 1% of sales as we continue to prioritize higher throughput in our shipyards.
We paid $206 million in dividends.
Tom: While ending 2024 with $831 million in cash and cash equivalents on hand, and liquidity of approximately $2 5 billion.
Tom: Cash contributions to our pension and other post retirement benefit plan totaled $47 million in 2024.
Tom: Our pension outlook for 2020 has modestly improved from the at the update that we provided in November giving this increase in discount rates, partially offset by 2024 asset returns that was slightly below our expectations.
Tom: Actual asset returns for 2020 forward seven 7%.
Tom: Our five year pension outlook has been updated and is available in the appendix of today's presentation on slide 13.
Tom: Turning to slide 11, and our financial outlook.
Tom: We are reaffirming our medium to long term growth targets for both shipbuilding emission technologies as Chris noted, we see a clear path to $15 billion in annual revenue by the end of the decade, given our robust backlog and very strong demand across the portfolio.
Tom: Regarding 2025 expectations, Chris provided our operational guidance, but let me provide a bit more color on our cash flow outlook.
Tom: We expect 2025 free cash flow of between 300 and $500 million.
Tom: Performance on contracts entered into prior to the commencement of the Covid pandemic has impacted our ability to achieve program milestones and corresponding cash receipts. We expect this headwind will continue in 2025, which along with elevated capital expenditures and cash taxes is impact our overall cash generation.
Tom: We expect 2025 capital expenditures to be approximately 4% of sales as we continue to thoughtfully invest in increasing our shipbuilding efficiency and throughput.
Tom: Additionally, we expect our 2025 cash taxes will total approximately $220 million rigs.
Tom: Regarding our expectations for the first quarter in 2025, we expect approximately $2 1 billion for shipbuilding revenues and $680 million of mission technologies revenues with shipbuilding margin EMEA, five 5% and emission technologies operating margin of approximately 3%.
Tom: Consistent with normal cash flow cadence, we expect first quarter free cash flow to be negative representing a use of between 300 $500 million and working as working capital continues to build through mid year before we are able to reach program milestones and contract awards.
Tom: Turning for a moment to capital allocation as we have highlighted today, we will continue to invest in our business to maintain and grow the capacity of our shipyards.
Tom: Our approach to dividends and returning excess cash to shareholders remains unchanged. Our focus now of course is working through challenge contracts and returning free cash flow to more normalized levels.
Tom: To close my remarks, achieving the throughput the cost reduction and contract award initiatives that we have that we have outlined are critical to stabilizing shipbuilding performance in 2025 and achieving the outlook we have provided.
Tom: Similar to 2024, we expect that about 70% of the shipbuilding revenue generated in 2025 will be derived from pre COVID-19 contracts, we forecast approximately 60% of 2026 shipbuilding revenue will be derived from pre COVID-19 contracts. Finally, we expect that in 2027, a majority of the ship.
Christy: <unk> revenue will be derived from contracts that reflect the current operating environment and we will set the foundation for margin improvement and returns towards historical margin levels with that I'll turn the call back over to Christy for Q&A.
Christy: Thanks, Tom as a reminder to everyone on the call. Please limit yourself to one initial question and one follow up.
Speaker Change: As many people through the queue as possible operator, I will turn it over to you to manage the Q&A.
Speaker Change: Thank you very much if you would like to ask a question. Please press star two.
Speaker Change: Go ahead by one on your telephone keypad now please ensure your devices.
Speaker Change: If you change your mind. Your question has already been answered Please press star two.
Speaker Change: Our first question comes from Doug Harned.
Speaker Change: Ed.
Speaker Change: Bernstein. Your line is now open. Please go ahead.
Speaker Change: Very good morning, Thank you.
Speaker Change: Good morning, guys. So sorry for the background noise, we're going through a thunderstorm.
Speaker Change: Outside right now, but just bear with us a little bit.
Speaker Change: Okay, I've got a snowstorm here too so.
Speaker Change: Okay.
Speaker Change: So.
Speaker Change: If I go back a few years there was.
Speaker Change: And your outlook there has always been talked about in the 9% to 10% level.
Speaker Change: Knowing that I mean, the CPI is hardly a good indicator for inflation for you for you all but can you give us a sense first when you look at the margin gap that you have now.
Speaker Change: How much of that would you attribute to inflation versus other operational challenges, if you're looking back at that 9% to 10% type projected level.
Speaker Change: Yes.
Speaker Change: That's a very interesting question and I don't have a specific number for you.
Speaker Change: Doug we do have some EPA protection on our and inflation protection on our Ingalls contracts and limited EPA protection on material on our aircraft carrier contracts.
Speaker Change: But it's not just.
Speaker Change: Directly inflation.
Speaker Change: That impacts you.
Speaker Change: Born of various in that because you have.
Speaker Change: Inflation that adjust very quickly on some products and services.
Speaker Change: That can be passed along very quickly to a customer where we have long term contracts that we have to perform against the baseline that was negotiated where you really can't adjust.
Speaker Change: As quickly.
Speaker Change: Which leads to less experienced workforce and performance challenges so.
Speaker Change: I hate to say that I hate to not give you a number related to that but.
Speaker Change: It's a broader question just the calculation of the inflation.
Speaker Change: Impact.
Speaker Change: On our ship programs as it related to that is in the supply chain. It's even if we have protection for it.
Speaker Change: They are just.
Speaker Change: The performance of the supply chain because of inflation is is not as efficient.
Speaker Change: So.
Speaker Change: It's a very broad answer I apologize for not giving you a precise answer.
Speaker Change: But inflation.
Speaker Change: Seeps into various elements of our cost structure, not just pay people more.
Speaker Change: Well.
Speaker Change: Just to follow on that if you look outside of shipbuilding. The Pentagon has frankly not been very helpful at all and providing equitable price adjustments and that's across many types of programs.
Speaker Change: And even though you have some.
Speaker Change: You've been facing a lot of the same problem and everyone. I think there is universal acceptance of the importance of the Virginia class the Columbia class.
Speaker Change: When you are negotiating new contracts now in what has been a tough funding environment do you still see it as possible to get back to those 9% to 10% type margin levels that have been more traditional or are we living in a different world now where you may have to.
Speaker Change: So to give in a sense.
Speaker Change: Two lower financial performance.
Speaker Change: Yeah interesting I, absolutely believe that 9%.
Speaker Change: Is the.
Speaker Change: Possible moving forward the $50 billion of contracts that.
Speaker Change: We've negotiated some of those with the bundle the handset bundle down in Mississippi, and we're again we're in.
Speaker Change: Negotiating the FY 'twenty four block five to both contract now.
Speaker Change: The customer has been very.
Speaker Change: Receptive to understanding.
Speaker Change: The current economic environment.
Speaker Change: And we will get inflation protection.
Speaker Change: In those in those new contracts I think you saw Congress put the additional $5 7 billion.
Speaker Change: And the anomaly for those FY 'twenty for both so there is a recognition that we need to rebuild this industrial base and there is also a recognition I believe that that's shipbuilders need to earn fair margins.
Speaker Change: And so we're taking that to the table.
Speaker Change: And we're going to make sure that that happens, but I absolutely believe that 9% is something that we can achieve and the reason I believe that Doug is simply because I've done it before down at Ingalls. We are in the exact same position and we had to negotiate.
Speaker Change: <unk> close Katrina into the into the new <unk>.
Speaker Change: Dataset of ships, we got that done and they had a very good.
Speaker Change: A very good Ron where there was predictable cost and schedule performance because ultimately it doesn't do anybody any favor to agree to cost estimates are schedules that are unrealistic. So we're going to make sure that that happens I think the customers on board with that they want realistic achievable schedules as well.
Speaker Change: And so I firmly believe that's going to happen.
Speaker Change: Okay very good thank you.
Doug: Thanks, Doug.
Speaker Change: Our next question comes from Seth Schiffman with J P. Morgan Seth Your line is now open. Please go ahead.
Seth Schiffman: Thanks, very much good morning.
Seth Schiffman: Good morning wanted to ask about in the prepared remarks I think.
Seth Schiffman: You talked about.
Seth Schiffman: The guidance, what underpins the guidance I think.
Seth Schiffman:
Seth Schiffman: Yes.
Seth Schiffman: <unk>.
Seth Schiffman: We expect to bring more predictability are you basically what contract awards are you assuming that.
Seth Schiffman: The company will get this year in the guidance.
Seth Schiffman: Yes.
Marine contracts for 2017.
Seth Schiffman: <unk> contemplate.
Seth Schiffman: Yes.
Seth Schiffman: Yes.
Seth Schiffman: Okay.
Seth Schiffman: Yes, the Florida kind.
Seth Schiffman: Kind of plan that you have been advocating is assumed in this.
Seth Schiffman: No. Let me correct you there it's not a it's not a focus all sales plan, we're negotiating FY 'twenty for.
Seth Schiffman: <unk> consistent with the.
Seth Schiffman: The acquisition approach that was set forth by Congress.
Seth Schiffman: And supported by the anomaly blocks.
Block six and Columbia, Bill too, we're going to have to.
Seth Schiffman: See the acquisition approach for those boats as that develops.
Seth Schiffman: Sauce or a derivative of Sars.
Speaker Change: Is is is.
Speaker Change: As positive anything that brings additional investment into the industrial base that accelerates shipbuilding production.
Speaker Change: It's positive, but we're going to take this one step at a time.
Speaker Change: So.
Speaker Change: So the.
Speaker Change: Guidance doesn't assume that.
Speaker Change: 2017.
Speaker Change: Well, let's get under contract it does.
Speaker Change: It does it assumes FY 2004, two boats and that assumes the negotiation of.
Speaker Change: The block and remain on track on the Columbia deal to contract yes.
Speaker Change: Okay, Okay, and do you I guess what gives you have you had communications with the New administration.
Speaker Change: What kind of gives you confidence that.
Speaker Change: That thats going to happen during during this year.
Speaker Change: Yes, so interesting I have high confidence in the FY 2014, both subtle happened first part of the year.
I have had limited conversations with.
Speaker Change: Elements of the New administration, and David shared me that shipbuilding as one of their top priorities.
Speaker Change: And Thats welcome that makes perfect sense based upon the threat environment.
Speaker Change: So.
Speaker Change: I believe we'll step right into block six after we.
Speaker Change: After we negotiate the last two block five boats.
Speaker Change: Okay. Okay. Thanks.
Speaker Change: I'll leave it there for now.
Speaker Change: Sure.
Speaker Change: Yeah.
Thank you very much. Our next question comes from Scott Nicholas with Melius Research. Your line is now open. Please go ahead.
Speaker Change: Good morning, Chris I kind of want to follow the answer your question.
Speaker Change: When I think about post Katrina Northrop had a lot of struggles with the shipbuilding business before spending and off the farm Hai shipbuilding margins.
Speaker Change: Initially werent that great post spin, but come 2013, there was a meaningful pickup in favorable EAC adjustments in your stock more than doubled that year.
Speaker Change: Just curious Brad lessons did you learn from the late two thousands and early 2010 that are still relevant and can be applied today and when do you think investors will see eac's flipped from unfavorable to favorable.
Speaker Change: Thank you all start to SaaS, and then I'll kick it over to Tom for some.
Speaker Change: Some timing related issues, but I have confidence.
Speaker Change: That we can get this done because I've done it before as you said and the key is making sure that you're very transparent and disclose current performance.
Speaker Change: And ensure that youre resolute at the negotiation table.
Speaker Change: And there is achievable and predictable cost and schedule estimates.
Speaker Change: When you do those negotiations as I said previously it doesn't do anybody any favours to Ms schedules are mis cost estimates so.
Speaker Change: We just need to make sure that we estimate them correctly and negotiate them correctly.
Speaker Change: And that can be done and there is $50 billion of work thats going to be negotiated here.
Speaker Change: Just getting through the pre COVID-19 contracts is what's important so I'll, let Tom talk about the timing a little bit sure. Thanks, Chris Yeah, Chris mentioned, both him and myself were down there I spent.
Tom: 10 years from 2011 and 2021, so I saw that March up and it's really about making sure. One we get we get good contracts that have a good cost equilibrium balance between us and our customer we've been hit with Covid and inflation and things of that nature.
Tom: Really causing a draw on our production lines as long term contracts are being impacted by inflation.
Tom: The number has experienced in the yard and the support I believe the material right now.
Tom: Any of the New awards, we get like the bundled down in Ingalls that we have the FY2023 award for destroyers.
Tom: <unk> now going forward.
Tom: Leather.
Tom: 17 bulge between the Vcs block five six in Colombia, they will to getting balanced contracts that we have appropriate outperformance is a perfectly aligned.
Tom: Schedules that we see right now all rolled in at the investments both from ourselves and from our JV partner will have a positive benefit, but ensuring we have a solid program plan and we're putting good.
Tom: Good commitments on contract and then obviously, we've got to execute on our commitments on that front. So it's.
Tom: Maintaining our budgets holding holding schedules, making progress weekly monthly quarterly.
Have a track record of doing that.
Tom: We have the processes and the facilities for the most part we need more throughput.
Tom: Processes and tools and facilities are in place right now.
Tom: About building out the workforce, we have a strengthening in more consistent supply chain that we have against our schedules.
Tom: And then us kind of hitting the mark and causes costs and schedule on a regular regular rhythm that's what we did down at Ingalls.
Tom: I think we have the pieces in place and where we are short on people.
Tom: The cost reduction initiatives that we have right now and we've talked about the contracts contract equity going forward here.
Tom: We understand what's what's causing us a delay in our production programs, specifically and vcs and some headwinds they have down at Ingalls on the destroyer program and I think we're working hard putting the dollars and the pressure in the right areas.
To find the rhythm that we saw on the Ingalls March up post Katrina. So we don't have a specific date for you.
Tom: And when we get back to those.
Tom: Sort of profitability estimates, but as Tom mentioned in his script.
Tom: We are transitioning over the next couple of years.
Tom: Out of these pre COVID-19 contracts into the new contracts and as we transition there should be an uplift in profitability.
Speaker Change: Okay, and then one quick follow up the midpoint of the guidance implies about a 500.
Tom: $540 million of shipbuilding operating income.
Tom: I'm just curious is there any assumption baked in there for what net eac's will be with us.
Tom: This year.
Tom: Yes, so obviously, we run our EAC process on a quarterly basis, we don't provide the profitability by ship or by class like that even by division.
Tom: We are always baking in.
The estimates to complete an EAC is aligned with our performance that we have right now with risks and opportunities kind of hedged against that so we know with hiring additional investment dollars and efforts and improvements of our production lines.
Tom: I'll start with the risks and opportunities we see in front of us. So that's the trajectory and how we expect to perform kind of going forward and again that <unk> estimate to complete on Eac's gets reevaluated every 90 days when we get another set of actuals, so I'm not going to get into the specific details that we haven't yet, but we do expect a stabilization and improvement as we go forward.
Tom: Okay got it thanks for taking my question.
Tom: Sure.
Tom: Yes.
Speaker Change: Thank you. Our next question is from Pete Dubicki with Alembic Olympic Global Pete. Your line is now open. Please go ahead.
Tom: Yes.
Speaker Change: I guess, just sticking to the shipbuilding margin questions.
Speaker Change: Sounds like maybe you would recommend we assume sort of a gradual improvement on shipbuilding margin through kind of to the end of the decade, maybe hitting that 9% Mark and I don't know if we should think about a step change improvement in 27 or just keeping it gradual and then.
Speaker Change: I was wondering if you could talk about it sounds like you could potentially get a contract change on CBS 79, I wasn't sure if that if you did get a contract change if that would impact margin one way or another.
Speaker Change: Yes, So let me.
Speaker Change: Let me start and I'll, let Tom.
Speaker Change: Tom Chip, maybe let me ask let me answer the 79 question first and then I'll I'll kick the margin timing question over to Tom.
Speaker Change: 79, yes, we do.
Expect a contract change related to some additional capabilities that may.
Speaker Change: Maybe put it in the ship.
Speaker Change: The program team is working on that.
Speaker Change: With the objective of getting the.
Speaker Change: The ship delivered with the most capability.
Speaker Change: And deployed as soon as possible.
Speaker Change: The program teams are working on that and there would be a change related to that but I don't think its positive or negative is just and equitable adjustment related to the capabilities that are at it. So so with that I'll turn it over to Tom on the margin timing, yes. So specifically, obviously, we don't provide margin guidance for the following year or the out years. Obviously, there is a shape in an expectation we have.
Speaker Change: Here.
Speaker Change: As of Q3 last year last year, we missed the expectation and where we felt we were.
Speaker Change: You really got it gets down to where we've been impacted and again it's that.
Speaker Change: The less experienced.
Speaker Change: The late but we have the throughput and the support of supply chain, we see areas and we have initiatives to kind of improve all of that so going forward thats going to be a lift against all operations. We have now for contracts that have run through COVID-19 the older pre COVID-19 contracts.
Speaker Change: Contracts have seen increased costs. So there's limited ability to go and get additional profitability on those contracts as we put.
Speaker Change: The new work that <unk> 50 billion.
Speaker Change: That didnt run through that it's going to get the benefit of.
Speaker Change: The current performance and where we stand right now and the opportunity is much greater.
Speaker Change: The profitability.
Speaker Change: Bounce back so I would say the way to model that as you followed the revenue and Mike My remarks, I gave you the mix and how it blends out in by 2027.
Speaker Change: The majority of the work will be post Covid work and I do expect a ramp in profitability as we work ourselves through the decade here.
Speaker Change: Always remember, we're pretty conservative when we start out ships. So I do agree it's going to.
Speaker Change: It's going to increase but I wouldnt anticipate a step change.
Speaker Change: Okay. Thanks for the color guys.
Speaker Change: Yes.
Speaker Change: Our next question is from David Strauss with Barclays. David Your line is now open. Please go ahead.
Speaker Change: Yeah.
David Strauss: Thanks, Good morning.
Speaker Change: Good morning.
Speaker Change: Hey, Chris.
Speaker Change: Could you maybe talk about the opportunity to buy additional shipyard capacity I think you've made some comments in saying that.
Speaker Change: Press around that.
Speaker Change: And of size that opportunity and if.
Speaker Change: If I missed that I apologize on the call or in your prepared remarks, what are your hiring plans.
Speaker Change: 2025 relative to point going forward.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: Well higher about the same amount we've repositioned.
Speaker Change: Our hiring a bit as I said in our previous earnings call from.
Speaker Change: Kind of broadly hiring including entry level to.
Speaker Change: Hiring more experienced people, we've actually made some progress in that regard.
Speaker Change: Specifically in Newport News we.
Speaker Change: We have been hiring out of the pipeline, which is really the original development centers. These are people that have chosen shipbuilding as a career.
Speaker Change: 5% to 10% rate that's increased to 35% at the back half of the year, which is really positive.
Speaker Change: We like we would like it to get to 60%.
Speaker Change: This year and Thats really thanks to the state of Virginia, and the federal government for increasing the funding for those.
Speaker Change: Regional development centers, we're also targeting additional experienced down at Ingalls, where they like to hire 80%.
Speaker Change: Experienced people so while the numbers are the same we would we're repositioning it.
Speaker Change: Our repositioning a bit now your question about buying another shipyard I'm really not interested in that W. International was in.
Speaker Change: An opportunity that came along and there are quality.
Speaker Change: Builder or manufacturer that has been in the shipbuilding industry and we were concerned they were going to move out of the shipbuilding industry and that is a problem.
Speaker Change: So we have a lot of outsource partners.
Speaker Change: I'd rather.
Speaker Change: Develop outsource partners and have an orange like relationship I really don't want to vertically integrate but this opportunity showed up we got 500 World class shipbuilders.
Speaker Change: Newport News management team.
Speaker Change: Managing them. So that's really what's really a lay up for us it is going to increase our throughput immediately but I have no plans to right now unless something very interesting came along.
Speaker Change: To buy additional manufacturing facilities.
Tom Chip: Okay, Thanks and Tom.
Speaker Change: A follow up on.
Speaker Change: On free cash flow and capital deployment.
Speaker Change: In terms of your free cash flow progression beyond this year I think about 'twenty six 'twenty seven is the pre <unk>.
Speaker Change: Would you expect the free cash flow progression give them capex and working capital investments you've had to make here would you expect that free cash flow progression back to normal maybe faster relative to kind of what we're going to see in terms of the run off of the pre pre Covid work and then just how you're thinking about <unk>.
Speaker Change: Deployment, given the cash burn.
Speaker Change: Q1, and the debt maturity and I think that the games you too. Thanks.
Speaker Change: Yes, so I would expect as we work through as Chris said the chop in the water for the next 12 to 18 months the cash flow what would wrap up.
Speaker Change: Get back to more normalized levels as we work ourselves through the pre COVID-19 contracts that we have here and you can time that as well as with the margin and the cash flow will follow that in the out years. So that's how that works from a capital deployment. There is no change we're still using the same process in the model that we have here.
Speaker Change: Continue to have a well invest in the <unk> will have a capital.
Speaker Change: We'll have a dividend.
Speaker Change: We have annual here.
Speaker Change: And any excess free cash flow, which we've been doing since 2009 will go back to the shareholders.
Speaker Change: As that as that materializes. So so no change in that policy right now did not provide any guidance for share buybacks.
Speaker Change: 25, and if something changes on that front, we'll update you on our quarterly earnings.
I would add its a interesting question on our projected free cash flow right now.
Speaker Change: And I've spoken to this previously I don't know if its been picked up but.
Speaker Change: The incentive laden nature of <unk>.
Speaker Change: Some of these contracts.
Speaker Change: That are being let really lend it.
Speaker Change: To be difficult to project.
Speaker Change: Free cash flow timing, it's always been a challenge for us to project free cash flow timing.
Speaker Change: Because of the lumpy to the limited amount of projects large invoices can move.
Speaker Change: Cross the period.
Speaker Change: But with these large incentives and the timing of these centers and some of them not even been negotiated yet it makes it a bit of a challenge. So we're going to continue to be lumpy going forward, but I agree with Tom.
Speaker Change: 100% of should it should incrementally improve over the long term.
Speaker Change: Thanks very much.
Speaker Change: Sure.
Speaker Change: Our next question comes from Scott Doyle.
Speaker Change: <unk> with Deutsche Bank. Your line is now open. Please go ahead.
Speaker Change: Thanks, Tom for the Virginia class negative EAC is on the block four boats the block five boats or both.
Speaker Change: A mix of a mix of both.
Speaker Change: Okay, and I think the block five boats or post COVID-19 boats.
Speaker Change: Why should we only be focused on the pre.
Speaker Change: Negotiated in 2019.
Speaker Change: Up.
Speaker Change: Those were negotiated in 2019.
Speaker Change: They were in 2009.
Speaker Change: Okay.
Speaker Change: I think Chris what the contract change on CV at 79 result in the change in the delivery timeline for that ship.
Speaker Change: Potentially we're working through that with the customer right now.
Speaker Change: Okay can you remind me why the ship was originally delayed from 2024 to 2025 I thought it was something similar to what you are now saying may cause it to go into some of those.
Speaker Change: Yes, no so sorry for the confusion there.
Speaker Change: There's actually a couple.
Speaker Change: As large changes that took place on CV and 79 in the first one was related to.
Speaker Change: Some significant combat system work that the Navy asked us to do.
Speaker Change: I think what youre, referring to is moving PSA ended the baseline work.
Speaker Change: That was the schedule change previously were.
Speaker Change: We were going to deliver it to a significant amount of TSA work.
Speaker Change: And then they'll get it deployed they moved that into the baseline which caused a scheduled change this was additional capability that Dave.
Speaker Change: They have developed based on <unk>.
Speaker Change: <unk> performance in.
Speaker Change: In deployment and so you always want to get that as you learn this is the second ship of the class as you learn you want to make sure that all the capabilities are in that shift when it gets deployed.
Speaker Change: Okay and did you book a negative EAC on CDN 79 this quarter.
Speaker Change: Yeah.
Speaker Change: It wasn't material, yes, I think there was a modest negative adjustment.
Speaker Change: Okay. Thanks, guys I'll leave it there.
Speaker Change: Sure.
Speaker Change: Our next question comes from Myles Walton with Wolfe Research. Your line is now open. Please go ahead.
Speaker Change: Thanks. Good morning, I was curious on the morning, Myles holding margin the shipbuilding margin guidance for 25.
Speaker Change: I'm not going to have to six and a half in the first quarter Youre already at five and a half, but I think the full year is predicated on.
Speaker Change: Increases in throughput and cost reduction as well as the contract award assumptions.
Speaker Change: So the question is how much are you assuming is going to happen in the booking rate versus when those things happen the margins will progress higher.
Speaker Change: Yes. So all of that is included in the.
Speaker Change: In the guide right the new ships.
Speaker Change: Meeting our <unk>.
Speaker Change: Throughput and our cost reduction initiatives, the timing of the new shifts in incentive assumption.
Speaker Change: On those new ships, so it's kind of all in the mix.
Speaker Change: And then.
Speaker Change: We do have a bit of a it's a bit of a conservative guide related to.
Speaker Change: We've just been I had a couple of quarters of negative adjustments here. So we thought it was prudent to.
Speaker Change: To make it a bit a bit conservative so.
Speaker Change: It's all in the mix.
Speaker Change: I'd like to say I could time it.
Speaker Change: Al for you, we'll give you the information every quarter on how we take the next quarter is going to be.
Speaker Change: But all of that factors into the guide.
Speaker Change: I guess the way I was going on is the first quarter. You. Obviously wouldn't have the contracts you wouldn't have a lot of these cost improvements so that five 5%.
Speaker Change: Does that low end pretty much reflective of your of your current situation.
Speaker Change: Ignoring the improvements youre talking about throughput and cost improvements.
Speaker Change: I think that's probably fair.
Speaker Change: But we're working hard to get that contract on that.
Speaker Change: Hey, Myles this is Tom.
Speaker Change: We give the quarter guide so we're really close to that and that's how we see its going to play out I mean, obviously, there's a timing of a new contract award is the lift that we expect to get from the initiatives that we have on the objective stage aspirational objectives space, but then there's just the run rate opportunities and risks that we see performance.
Speaker Change: <unk> Spi.
Speaker Change: Most classes to a slightly yourself.
Speaker Change: In the mix there obviously, it's on the bottom end of the range here at the beginning of the year, but there'll be bite hopefully there'll be valued against the contract awards.
Speaker Change: The initiatives, we have and then as the programs.
Speaker Change: Programs mature.
Speaker Change: Going forward, we can realize the medium at the top end of that range.
Speaker Change: Okay and then.
Speaker Change: Chris maybe a higher level question. This move towards outsourcing obviously, there's benefits to that you could maybe you control your cost or have a little bit more visibility on costs, but you're relinquishing some control and quality control in particular, yes, how do you weigh that and a move to increase it as much as youre talking about 35% I don't know what the base level.
Speaker Change: So it could be a material number it could be an immaterial number.
Speaker Change: Yes, it's a material number and the good news is.
Speaker Change: We are outsourcing with with partners that we already do outsource work with.
Speaker Change: So we're very familiar with them we don't.
Speaker Change: We don't do this lightly we do pilot projects so that the <unk>.
Speaker Change: Partners can demonstrate their cost and schedule and quality capability before we do it.
Speaker Change: So it's a good question because.
Speaker Change: We've been burned by outsourcing before I think a lot of people in the industry have and we just need to make sure we do it right. So.
Speaker Change: It's a fair it's a risk that we understand and we mitigate because we've done it before.
Speaker Change: Add on the back of that like an acquisition like.
Speaker Change: International bringing it in house with Newport News people leadership processes.
Speaker Change: <unk> workforce was up and running.
Speaker Change: There's work going on down there right now.
Speaker Change: Having 500 heads ready and moving forward.
Speaker Change: <unk> is a big plus there so we're doing it really smartly.
Speaker Change: <unk>, who we the in source to outsource putting the bump is around to make sure we get the performance and expectations and we.
Speaker Change: We anticipate that we'll be able to execute that work and be a significant piece of the lift that we talked about about 20% more earn throughput.
Speaker Change: Okay alright, thank you.
Speaker Change: Thanks.
Speaker Change: Our next question is from Ron Epstein with Bank of America, Rob Here. Ron Your line is now open. Please go ahead.
Jordan: Hey, Good morning, this is Jordan on for Ron.
Speaker Change: Good morning, Jordan initiatives. Good morning on the initiatives that you guys are working on for hiring.
Speaker Change: Whats changed versus what you guys have been doing for.
Speaker Change: For the past couple of years.
Speaker Change: Also two how do you think <unk> mission.
Speaker Change: Mission Tech specifically too.
Speaker Change: Is there any impact from dose.
Speaker Change: Okay. Yeah. So first what changed as I previously spoke about it's not only hiring we've refocused that.
Speaker Change: To target.
Speaker Change: More experienced.
Speaker Change: Shipbuilders wages are going to help that.
Speaker Change: The anomaly has workforce development support.
Speaker Change: And so that will help that.
Speaker Change: That process to hire more experienced shipbuilders and will assist in and retention as well.
George: George as the New administration.
Speaker Change: It's good.
George: One of their top priorities of shipbuilding.
George: We're all for reduced regulation.
George: So we'll work with that that team to ensure that we have the appropriate level of regulations and we're and Trust me no one wants less.
George: Less cost and better delivery schedules than I do.
George: So we welcome.
George: The initiatives that could be put in place and we would participate in that.
George: Going forward.
George: Great. Thank you.
George: Thank you.
George: Our next question comes from Gautam Khanna with PD Cowen Go ahead, Tim. Your line is now open. Please go ahead.
Gautam Khanna: Hey, good morning, guys.
Speaker Change: Good morning Gautam.
George: Sure.
George: So I have two questions one.
George: Previously you guys have thought about our cash.
George: Inflow associated with signing the 17 submarine contracts I think it was a release of contract assets into receivables.
George: Is that still true and if you could quantify how.
George: How much would be.
George: Be invoiced upon signing another follow up.
George: Yes. There is there is some cash upside to executing those contracts.
George: We risk adjust all of that and we so we haven't broken that out got them.
George: But.
George: That's included in our guide and theirs.
There will be some cash receipts related to that.
George: I recall a quarter ago, a lot of the free cash reduction was.
George: And the guidance for 2024 was that.
George: Those contracts moving out.
Speaker Change: So is it about $500 million can you ballpark it for us.
Speaker Change: I'd really rather not got them at this point, there's a lot of moving parts in the cash guide as Tom mentioned previously, but I'd really rather not ballpark that.
Speaker Change: Still in discussions with the.
Speaker Change: With the government on that contract.
Speaker Change: We need to negotiate that.
Speaker Change: Really holistically, so I'd, rather not give you specifics on the cash impact.
Speaker Change: I'd just like a little color there because I think as you reference back to the Q3 call your questions kind of getting your head around that.
Speaker Change: The back half of year that.
Speaker Change: The omnibus approach for <unk> subs being put on contract was a pathway for us to still make our guide last year right and we had the early question on sales right now so although that's viable and thats still out there in the industry with simple datasets, a very efficient way to get the most shifts on contract built fastest right now as you know.
Speaker Change: <unk> has an anomaly and after the first two of the 17 votes and we're working very closely with the Navy partner to get those on contract near term. So the difference between where we were say last quarter and this quarter is just the contracting approach the mechanisms isn't omnibus. It all 2017, which it would impact additional contracts or is it just too boats.
Speaker Change: FY 'twenty for an incremental approach maybe saw its still an opportunity set behind it but it brings us a little bit of uncertainty of what was the cash perspective and outlook back in Q3 versus how we're going forward here. All these parts will get on contract we will find a good risk equilibrium between us and our navy partner right and a balance between affordability.
Speaker Change: The profitability and we will ensure that the deal on our side, obviously meets the requirements and the expectations of our customer while being true to bearing home a contract that we can go execute the cost and the schedule is in line with our profitability expectations.
Speaker Change: I hope that provides a little bit more insight as far as.
Speaker Change: How that relates to cash.
Tom Chip: Thanks, Tom and just one last one.
Speaker Change: President Trump's first term.
Speaker Change: I'll remember the whole FSA.
Speaker Change: Sachin go.
Speaker Change: Oh into more unmanned.
Speaker Change: Lighter.
Speaker Change: Sure.
Speaker Change: Any movement of foot have you heard anything from the new administration.
Speaker Change: About their inclination to revisit.
Speaker Change: Some of the recommendations back then.
Speaker Change: Yeah.
Speaker Change: Not.
Speaker Change: Not yet, but it's early the leadership is still getting.
Speaker Change: Getting confirmed.
We support obviously with our unmanned business, we support both we think Theres a high low argument.
And actually a fact that it's going to have to be executed.
Speaker Change: But no we have not had those conversations with the.
Speaker Change: The new administration, yet because they just aren't there yet.
Speaker Change: Alright fair enough. Thank you guys.
Kevin: Thanks, Kevin.
Kevin: Thank you very much.
Speaker Change: I'm not showing any further questions at this time I would now like to hand, the call back over to Mr. <unk>.
Kevin: <unk> for any closing remarks.
Speaker Change: Alright, Thank you for joining the call today I appreciate everyone's participation.
Kevin: <unk>.
Kevin: That does conclude today's conference call you may now disconnect.
Kevin: Yeah.
Kevin: Yeah.
[music].
Kevin: Yeah.