Huntington Ingalls Industries Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 12 speakers on the call.

Operator

And gentlemen, thank you for standing by, and welcome to the Second Quarter 2023 HII Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to turn the call over to Christi Thomas, Vice President of Investor Relations.

Operator

Mr. Thomas, you may begin.

Speaker 1

Thank you, operator, and good morning, everyone. Welcome to the HII Second Quarter 2023 Earnings Conference Call. Joining me today on the call are Chris Kastner, our President and CEO and Tom Steely, Executive Vice President and CFO. As a reminder, any forward looking statements made today that are not historical fact are considered our company's estimates or expectations and are forward looking statements made pursuant to the Safe Harbor provisions of federal securities law. Forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially.

Speaker 1

For additional information regarding Factors that could cause actual results to differ materially from expected results, refer to our SEC filings. Also in their remarks today, Chris and Tom We'll refer to certain non GAAP measures. For reconciliations of these metrics to the comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations website at ir. Hii.com. With that, I would like to turn the call over to our President and CEO, Chris Kastner.

Speaker 1

Chris?

Speaker 2

Thanks, Christie. Good morning, everyone. Thank you for joining us. The HI team delivered another solid quarter. Our results demonstrate continued top line growth and steady operational performance.

Speaker 2

We continue to make progress on our strategy, Executing on our significant shipbuilding backlog and growing Mission Technologies. Not only are we executing on our shipbuilding backlog, we are also delivering all domain solutions through our unique capabilities to connect the different platforms that our customers use to perform their missions. Now let's turn to our results on Page 3 of the presentation. Top line growth was 4.7% from the Q2 of 2022, resulting in 2nd quarter revenue of $2,800,000,000 Diluted earnings per share was $3.27 for the quarter, down from $4.44 in the Q2 of 2022. New contract awards during the quarter were Approximately $2,600,000,000 which resulted in backlog of approximately $47,000,000,000 at the end of the quarter, of which $24,000,000,000 is currently funded.

Speaker 2

In the Q2 at Ingalls, we laid the keel for LPD 31 Pittsburgh and successfully completed builders trials for NSC-ten Calhoun. We also successfully completed acceptance trials and delivered the 1st Slide 3, Arleigh Burke destroyer, DDG-one hundred and twenty five Jack H. Lucas. We expect to launch DDG-one hundred and twenty eight Ted Stevens NLHA-eight Bougainville and deliver NSC-ten and LPD-twenty nine, Richard M. McCool Jr.

Speaker 2

Later this year. At Newport News, we christened Virginia class attack submarine SSN 798 Massachusetts and redelivered the Nimitz class Aircraft carrier, CDN 73 USS George Washington. Later this year, Newport News expects to float off SSN 798 and deliver SSN 796 New Jersey. As I previewed last quarter, CDN 79 Kennedy Received the contract modification intended to optimize its construction schedule and deliver a more capable ship to the fleet earlier, which updates the expected ship delivery to 2025. Slide 4 summarizes the projected shipbuilding milestones for 2023 and 2024, reflecting the updates for the CVN-seventy nine contract modification and an update for the expected shipment Joel, a Virginia class submarine Block 4, SSN 801 Utah, which has moved to 2024.

Speaker 2

At Mission Technologies, We saw the 2nd straight quarter of record high revenue of $645,000,000 with sales growing 7.5% over the Q2 of 2022. Mission Technologies had multiple wins in the quarter across its business units capped off With the early Q3 win of Jeneo, a $1,400,000,000 contract vehicle that serves the National Security Innovation Network and its mission partners by enabling the transition of innovation in both speed and scale from the lab to the battlespace. In addition to these accomplishments, we recognize and are committed to the broader international Opportunities represented by the AUKUS agreement, which directly align with our capabilities in nuclear submarines as well as other emerging technologies as set Turning to activities in Washington, the President's budget request We are pleased that the Armed Services Committees have shown strong support for shipbuilding To include authorizing funding for LPD 33 and multiyear procurement authorization for the next block of Virginia class submarines, Both authorization bills, which have been passed by the respective chambers, authorize funding for the requested procurement of 2 Virginia class submarines, 1 Columbia Class Ballistic Missile Submarine and 2 DDG 51 Arleigh Burke destroyers. Both House and Senate Appropriations Committees include multiyear procurement authority for Block 6 Virginia Class Submarines And fund the procurement of 2 Virginia class submarines, 1 Columbia class ballistic missile submarine and 2 DDG 51 Arleigh Burke destroyers.

Speaker 2

The Senate Appropriations Bill provides advanced procurement funding for LPD33 in FY24 and a third DDG 51 in FY 2025 and the House Appropriations Bill includes language supporting a stable rate of procurement of amphibious warfare ships. Final outcomes will depend on respective conference negotiations between the appropriations and the authorization committees. Now moving to labor. Through the Q2, we hired over 3,200 craftsmen and women on a solid pace to meet our full year plan of approximately 5,000. Although we are meeting our hiring targets, attrition remains high and labor is still the greatest risk to meeting our plan.

Speaker 2

We are continuing to devote substantial effort at both shipyards in the areas of recruiting, robust training and retention of our workforce in this very challenging labor environment. In summary, the strong demand for our products and services, Coupled with continued progress on our strategy of executing against our backlog and growing mission technologies sets the foundation for HII to continue to fulfill our mission to deliver the world's most powerful ships and all the main solutions in service of the nation. And now, I will turn the call over to Tom For some remarks on our financial results, Tom?

Speaker 3

Thanks, Chris, and good morning. Today, I'll briefly review our Q2 results. For more detail on the segment results, Please refer to the earnings release issued this morning and posted to our website. Beginning with our consolidated results on Slide 5 of the presentation, Our 2nd quarter revenues of $2,800,000,000 increased approximately 4.7% compared to the same period last year and represents a record 2nd quarter result for HII. This increase to revenue was largely attributable to growth at Newport News Shipbuilding and Mission Technologies.

Speaker 3

Operating income for Quarter of $156,000,000 decreased by $35,000,000 or 18% from the Q2 of 2022 and operating margin of 5.6% Net earnings in the quarter were $130,000,000 compared to $178,000,000 in the Q2 of 2022. Diluted earnings per share in the quarter was $3.27 compared to $4.44 in the Q2 of the previous year. Shipbuilding results in the quarter were in line with our expectations and slightly stronger than the outlook we provided on our first quarter Segment operating income in the Q2 of 2022 benefited significantly from favorable adjustments from Facilities Capital and Economic Price Adjustment Clauses at both Ingalls and Newport News, making for a difficult comparison year over year as expected. Moving on to Slide 6. Ingalls revenues of 6 $164,000,000 in the quarter and increased $6,000,000 or about 1% from the same period last year, driven primarily by higher revenues on the DDG program, partially offset by lower NSE program revenues.

Speaker 3

Ingalls operating income of $65,000,000 and operating margin of 9 8% in the quarter decline from last year, as expected, primarily due to lower favorable changes in contract estimates from Facilities Capital economic price adjustment clauses as well as lower risk retirement on LPD 30 Harrisburg. At Newport News, revenues of $1,500,000,000 increased by $76,000,000 or 5.3 percent from the same period last year due to growth in both aircraft Carrier and submarine construction revenues. Newport News operating income in the Q2 of 2023 was 95,000,000 an increase of $1,000,000 or 1.1 percent compared to the Q2 of last year. Operating income was largely consistent year over year as favorable VCS program adjustments were offset by lower favorable changes in contract estimates from facilities capital and economic price adjustment clauses. Shipbuilding operating margin in the 2nd quarter was 7.4%, above the 7% outlook we had previously provided for the quarter.

Speaker 3

Our shipbuilding operating margin outlook for the full year is unchanged. We have noted previously that our Effective milestones for 2023 are concentrated in the second half of the year and largely in the 4th quarter. At Mission Technologies, revenues of $645,000,000 increased $45,000,000 or 7.5% compared to the Q2 of 2022, primarily driven by higher volumes in Mission Based Solutions, which includes our C5ISR, cyber electronic warfare and live virtual and constructive training capabilities. Mission Technologies operating income of $9,000,000 compares to operating income of $25,000,000 in the Q2 of last year. The Q2 of 2022 included additional nonrecurring equity income of approximately $15,000,000 for an equity method investment in a ship repair joint venture, which was sold in the Q2 of 2023.

Speaker 3

Cash proceeds of $61,000,000 from the sale are included in investing cash flows. Additionally, a negative equity method adjustment of $6,000,000 was recorded from the sale of the Ship Repair joint venture. Current results For Mission Technologies included approximately $28,000,000 of amortization of purchased intangible assets. Mission Technologies' EBITDA margin in the 2nd quarter was 6 point Turning to Slide 7. Cash from operations was $82,000,000 in the quarter.

Speaker 3

Net capital expenditures was $68,000,000 or 2.4 percent of revenues. Free cash flow in the quarter was $14,000,000 This compares to cash from operations of 2 $67,000,000 net capital expenditures of $59,000,000 or 2.2 percent of revenues and free cash flow of $208,000,000 in Q2 of 2022. Cash contributions to our pension and other postretirement benefit plans were $11,000,000 in the quarter. 37,000 shares during the quarter at an aggregate cost of approximately $7,000,000 Year to date through the Quarter, we repurchased approximately 76,000 shares ending at aggregate cost of approximately 16,000,000 Moving on to Slide 8. Our free cash flow outlook through 2024 remains unchanged as do our capital allocation priorities.

Speaker 3

Regarding 2023 Free cash flow guidance. We continue to see $400,000,000 to $450,000,000 as the most likely range. We continue to work with our customer on the timing and mechanics regarding repayment of COVID related advances, which is currently forecasted to occur in 2023. At this time, we do not have an agreement in place That would increase our free cash flow above the guidance range we have provided. I'll highlight that we continue to expect to distribute substantially all free cash to our shareholders through 2024 after planned debt repayment, which is on track.

Speaker 3

Turning to Slide 9. We are reaffirming our Our 2023 segment guidance. I will also provide some color on how we see the Q3 and the remainder of the year. Regarding the Q3, We expect shipbuilding revenue to be approximately $2,100,000,000 and shipbuilding operating margin to be consistent with the 2nd quarter's results of 7.4%. This expectation does imply meaningful improvement in the 4th quarter results, which is consistent with when we expect our most impactful shipbuilding milestones to occur.

Speaker 3

For Mission Technologies, we expect 3rd quarter revenue to be similar to the 2nd quarter results and expect 3rd quarter operating margin of approximately 2.5%. Given second quarter results and the impact of the equity method accounting adjustment I referenced earlier, we currently believe that Mission Technologies 2023 operating and EBITDA margins are likely to be closer to the low end of the guidance ranges we have provided. We expect Q3 free cash flow to be approximately $100,000,000 Again, there is no change to our guidance for the year. We expect our cash flow generation and will fall predominantly in the Q4. Our cash expectation is consistent with both our expected timing for milestones and our normal cash cadence of the calendar year.

Speaker 3

To summarize, the Q2 shipbuilding results were largely in line with the expectations we provided on our Q1 call. Newport News and Ingalls continued to hit critical shipbuilding milestones. Mission Technologies delivered impressive year over year revenue growth. The Mission Technologies team continues to capture meaningful contract wins and maintains a very robust pipeline. We have great Confidence in their future and the long term value creation opportunity.

Speaker 3

Finally, we are pleased to reaffirm our full year segment guidance as we remain focused on executing the milestones and commitments that we've laid out. With that, I'll turn the call back over to Christi to manage Q and A.

Speaker 1

Thanks, Tom. As a reminder to everyone on the call, please limit yourself to one initial question and one Operator, I will turn it over to you to manage the Q and A.

Operator

Thank you. And our first question today is from the line of Doug Harned from Bernstein. Doug, your line is now open.

Speaker 4

Thank you. Good morning. Good morning, Doug. Thanks. On Virginia class, the program right now is it's well behind the 2 per year delivery objective in Block V.

Speaker 4

I mean, do you see a path to get there? What are the obstacles here that need to be overcome to get to that rate?

Speaker 2

Yes. The largest obstacle, the largest risk on the VCS program right now is labor Meeting our labor targets. We've worked hard here in Newport News to hire. You saw in my prepared remarks, We're ahead of plan, up over 3,200 heads for the year. So that's some positive indicators.

Speaker 2

But It's true. This is a labor driven issue. And as I said, we've made good progress. We just need to continue to do that over the next couple of years.

Speaker 4

And when you look at Newport News, you're a partner with Electric Boat on Virginia class, but you're a subcontractor on Columbia class. I mean, how do those different relationships affect the way in which you work with Electric Boat on the programs?

Speaker 2

Yes. So, it's not a material difference. Obviously, you have contractual differences. But when you get down to the deck plate, those teams work very closely together. There's a relationship It's been developed over a number of years between the two teams.

Speaker 2

And when you think about the efficiency of getting the work done and potentially transferring Some work back and forth. There's obviously contractual mechanisms that need to be put in place under Columbia, that you don't need under the Virginia class, but they work very closely together.

Speaker 4

So there's no in your mind, there's no real effective difference in the way there's no sort of preferred relationship here that one works better than the other?

Speaker 2

Not really. The objective there is to get these critical assets to the fleet as soon as we can. So The team works very closely to ensure we're working on that.

Speaker 4

Okay, great. Thank you.

Speaker 5

Sure.

Operator

Our next question is from the line of Robert Spingarn of Melius Research. Robert, your line is now open. Please go ahead.

Speaker 6

Hey, good morning. Tom, just a clarification on the thank you. And Chris, then a high level one for you. But Tom, On the margins at Mission Technologies, you talked about the 1.4% but a $6,000,000 impact So was that impact built into the guidance?

Speaker 3

No, it wasn't built into It wasn't until our guidance right now. So go ahead.

Speaker 6

All right. And so this is why you're tracking to the low end. Is that how I should interpret that?

Operator

That's right.

Speaker 7

Yes. Okay. And then Chris,

Speaker 6

a very high level question, but Between shipbuilding and MT, I thought it might be interesting to hear you talk about how these two businesses Can contribute to 2 priority areas for DoD and that's JADC2 and contested logistics.

Speaker 2

That's a really good question, Pete. You almost kind of teed me up there. Interesting, The Align acquisition, they have really great AIML products and big data products that fit right into JADC2 and potential JADC2 missions. And when you think about data and big data and the speed in which data can be Understood. It fits right into the contested logistics model as well.

Speaker 2

We have a LVC enterprise That is not just training. It can sit right into a wargaming concept. Think about wargaming, you think about Oplans, you think about Oplans, You have to think about contested logistics. So we have products that can quickly be adapted to deal with those two issues. We've had high level conversations with the Navy and other customers about potential applications there.

Speaker 2

So we think we can add to those product sets. We think they're important product sets, and we'll continue to talk to the customer about it.

Speaker 6

Thanks so much.

Speaker 5

Sure.

Operator

Our next question today is from the line of Pete Skibitski from Alembic Global. Pete, your line is now open.

Speaker 8

Hey, good morning, guys.

Speaker 2

Good morning.

Speaker 8

Chris, on the hiring, can you give us the actual net hiring, your net retention numbers Kind of after attrition and maybe could you gauge a level of revenue that could be at risk if you don't meet your net goals for the balance of the year?

Speaker 2

Yes. So we don't provide net. There's a lot of things going into that equation. We have over time. We have attendance.

Speaker 2

We have attrition. We have job shop labor that could contribute to that. I will say there's potentially some upside if we're able to continue to meet our hiring growth goals and deal with attrition, over the balance of the year, but we just need to see how the year develops.

Speaker 8

Okay. Okay. And I want to ask about the Kennedy contract mod, a little under $400,000,000 on the mod. Does it raise your now that that's in place, does it raise your confidence level in terms of how your performance on that project could trend through next year and And the potential milestone opportunities for you on the project?

Speaker 2

Yes. No, the team did a really good job incorporating The PSA work into the baseline contract and assessing the schedule, and we're putting the work or integrating that work In the baseline schedule, we're confident the way that Kennedy is developing. They're meeting their compartment completion goals. Their test rate is proceeding and the plant is proceeding. So we got a lot of confidence in where the Kennady is at right now.

Speaker 8

Okay. Maybe another way of saying it, are the milestone opportunities on the Kennedy meaningful relative to other programs? Or should we not Focus so much on the Kennady.

Speaker 2

We're just going to have to see. We're going to have to Let things play out over the next 18 months, 18 to 24 months. It's a lot of critical work in front of us. But potentially, if we continue to perform well, there'll be milestone opportunities for sure.

Speaker 8

Okay. Okay. Thank you.

Speaker 2

Sure.

Operator

The next question today is from the line of Seth Seifman of JPMorgan, Seth, please go ahead. Your line is open.

Speaker 9

Okay. Thanks very much and good morning.

Speaker 3

Good morning.

Speaker 9

I wanted to ask in Mission Tech, looking at the margin there and then The contract mix is, fixed price is a relatively small portion of the mix. I think it's like 12%. And so when you think over time about the profitability that you want to see in that business and it seems to be an environment where there are more opportunities in the Fed IT Services market right now. Is that something that the business is going to try to move higher? Or is that Not really consistent with the risk profile that you want to take on.

Speaker 2

Yes. So we believe it will move higher. We're going You indicated that the majority of those contracts are cost plus that's true, I think, over 80%, which drives the margin rate a bit lower. The team there at Mission Technologies is we're focused on technology there. So there's going to be a lot of cost plus work, but They're competing very well also.

Speaker 2

And in their pipeline, there is fixed price opportunities. And we're going to Pursue those, whether those make sense and if we're successful, the mix should improve a bit and margin will improve. And Tom, do you have anything on that?

Speaker 3

Yes. So You are right there, Seth. It's 87% of cost of contracts. I would say that there is a move afoot there. I mean, we kind of realized the customer sets that we have in the portfolio, there is a move to try and as we introduce more technology, that will bring about Potential premium on pricing on that front.

Speaker 3

And then as we get away from services and more into products, that's another area too where we could see an expansion Of the margin on those jobs.

Speaker 9

Great. Thanks. And then just a Real quick follow-up, Tom. The Q3 cash flow target that you gave, What does that contemplate with regard to the advance repayment?

Speaker 3

So right now, a little color on that, right? So we got an extension on that. It Supposed to be repaid by the end of June. It was a 2 month extension. So in negotiations, the Navy is now going out and understanding how we'll transition the contract back from the The advanced product pay that was in place since 2020 don't have a negotiated settlement on that yet.

Speaker 3

So I don't know what that's going to entail. The guide assumes that there's not a payback right now on that, and we'll have to work ourselves through that as we go through here. That's a normal run rate that we expect for the quarter. It doesn't impact the guide of 4 to 4.50 that I've said for the Entire year. And I would tell you that the best way to model it and take a look at it is stick to that guidance right now.

Speaker 3

I think in another 60 days, we'll get a look see on what that The timing of it and the impact, I'll know then. We have some significant milestones in the back half of the year. So we have 3 deliveries, Two launches and one float off. Every time I have a delivery, we liquidate the contract, I get the contract price, the Navy gets the ship. Just some retentions for work that was incomplete there.

Speaker 3

So there's opportunities that's fair to work those retentions off and that's an opportunity For both margin and cash. And then, as I work myself to the back half of the year, LP 29 is not going to hit This year or next year, we're still holding that milestone as a 2023 event. But, I would take a look at cash just from now through 2024, The milestone chart that we gave you, the 5 year look, it's $1,200,000,000 over the next 17 months. And I'm still comfortable that we're on target to kind of To make those calls. Great.

Speaker 9

Cool. Thank you very much.

Operator

The next question today is from the line of Myles Walton of Wolfe Research. Please go ahead. Your line is now open.

Speaker 7

Thanks. I was hoping you could comment on 2 items. 1, the 801 module move. And I guess, does that put any pressure on the margin Guidance range for this year. And then also on LHA 8, were there any costs that you had to absorb in the quarter?

Speaker 7

Or was it minor and sort of not material.

Speaker 2

Yes. So I'll handle that and then Tom can chip in if he needs to. So 801 Had some late break and rework that pushed that module at the beginning of next year. It was a late in the year delivery. So just modest, really not a material impact.

Speaker 2

As I said to Doug previously, the team is pretty good Moving work back and forth to ensure they do that as efficiently as possible. So not a material impact on 801. On LHA 8, I think first things first, I don't want to just kind of gloss over a pretty significant The thing that we really pay attention to in the shipyards is the fire on LHA-eight. First thing you have to do is make sure everybody is safe. The team did a really good job.

Speaker 2

The first Responders made sure no one was hurt. I mean, just minor smoke inhalation, but all the shipbuilders and the Navy personnel were safe. Second thing is the limited damage. They did that really minor damage to 1 compartment, some wireways. We put a corrective action plan.

Speaker 2

I did a root cause analysis. We're working through that corrective action plan now. So the important thing is that we learn from this issue. So no real cost or schedule impact that's material on LHA-eight And the milestones for that ship remain intact.

Speaker 7

Okay. Thanks for that. And then just on the buying out of Honeywell's portion of the Savanna River JV, What's the expected outflow for your incremental portion being acquired?

Speaker 2

Yes, so it's already in, right? Yes.

Speaker 3

So we paid that right now. It's in the you can see that in the cash flow in investing. It's $24,000,000 on out, and we

Speaker 2

Thanks, Miles.

Operator

Our next question is from the line of David Strauss of Barclays. Please go ahead. Your line is open.

Speaker 10

Great. Thank you. Good morning.

Speaker 3

Good morning.

Speaker 10

Tom, good morning. Tom, can you just give us an update kind of working capital progress year to date as it's Tracking, I think you're about 8% of revenues now in net working capital. If you're tracking kind of where you would expect it year to date, Remind us again of what you're expecting at the end of the year and what you're baking into the 2024 free cash flow forecast.

Speaker 3

Yes. So I am on plan and consistent with the forecast and discussions we've had at past earnings. Preleases 8% is about right. That's where I find myself right now popping out of this quarter. I'll work myself through the back half of the year with the shipyards to get around the 6% target that we've talked about.

Speaker 3

And then there is some tailwinds as we go from 23% to 24%, Consistent with what we've had in past discussions. We used to think of before Mission Technologies, the 6% to 8% was the norm of where we think Working capital would be in the yard as Mission Technologies has grown, and we've gotten to more of a cadence between the two yards and our serial production programs. I look at it more as 4% to 6%, and we'll finish this year out on the higher end of that range. And then as we work ourselves into 2024, we'll be on the low end of that range here. Just the cadence making milestones to schedule deliveries, we settled down both in the material and the labor that we've given you Some status about and that's going to bring about some consistency and keep us in the norm range as I see in the coming years going forward.

Speaker 10

Okay, great. And then as a follow-up, in terms of the shipbuilding margin That's implied for Q4. Are you or are we potentially looking at a margin at Ingalls In a similar range to kind of what we saw in the first half of twenty twenty two when it was strongly in the double digit range. And if LPD 29, that delivery does slip. How much risk is there to the Q4 margin guide?

Speaker 10

Thanks.

Speaker 3

Sure. So we don't give specific forecasts by each yard, but obviously, we can do the math here. It's 6.7% at the Q1 and 7.4% this quarter for Q2 for shipbuilding. We're guiding 7.4% for Q3. It's in the low to upper ranges For Q4 in the 9% for shipbuilding across both yards, I'm very comfortable with that.

Speaker 3

I think I gave an Early, but I'll hit it again. We still have 3 deliveries, 2 launches, 1 float off, all in Q3 and Q4 heavily loaded in Q4 timeframe. Both the deliveries themselves that are upcoming and the 2 that we've had this year have retentions and releases associated with that that bring both margin and cash. And then on the back half of the year, I have some smaller incentives and some change adjudication to that will play out. So I think 'twenty three is opposite Of 2022, we saw a very strong first half.

Speaker 3

Specifically, as you mentioned, angles was in the 13% to 16% in Q1 and Q2. I won't get into the breakdown in the year as a forecast for the back half of twenty twenty three, but I'm comfortable that Back half is going to be meaningfully higher than the front half. It was a pacing year for the first half of this year.

Speaker 10

And the risk around if LPD 29 slips the delivery?

Speaker 3

So, it's At the very back half of the year here, as we come through, we've talked in the past whether the deliveries are clean or are they timely or do they go Around when we want with a lot of retentions or not. Right now, LPD 29 is progressing well. We're in it to win it. We don't Any avenue that is in our way right now, we still have 5 months of things to do, taking the ship to sea and burning down risk there. But we'll have to see how that plays out.

Speaker 3

I don't want to overly play my hand on that. It's one ship and one milestone in the context of the shipbuilding here. So I don't think we'll either overly hurt or overly help us. And I think the guide is appropriate right now. We still maintain the 7% to 8%

Operator

Our next question is from the line of Gautam Khanna of TD Cowen. Gautam, please go ahead. Your line is open.

Speaker 7

Hey, good morning guys.

Speaker 2

Good morning guys.

Speaker 7

Hey, I was wondering, remember when the fit up came out There were different schedules for various ships in terms of delivery dates and the like. And I'm just curious relative to the prior update. I was curious if you had any better color How to reconcile that with your own expectations for delivery dates over the next couple of years?

Speaker 2

Yes. I can start and Then Tom can chime in. I just I think it's context and timing on those delivery dates and really assessment of risk. They might move a couple of months or have a different representation of deliveries a couple of months, one way or the other. But we assess our EACs and our schedules on a very consistent basis.

Speaker 2

I mean, you're looking at a one time adjustment potentially or So I really think it's a context issue, more than a disconnect, because we work very closely with our customers so that They understand where we are from a schedule standpoint, how we're assessing the schedule. They have their own point of view on the schedules, and it's very reconcilable.

Speaker 3

Yes. I really

Speaker 7

don't have much more to add on that.

Speaker 3

On an annual basis as the NDAA and the budgets pop out and then obviously we take Look at the FIDAP, which gives you a 5 year look at the forecast on funding perspective. We reconcile where we stand. It's a cross reference of what we do anyway, every We make sure that we align actuals to date and estimate to complete, where we are with our labor and material performance and burn and expectations of future performance. And All that gets baked into a revised EAC that marries home to an updated long range strategic plan that we have, our labor Resource plan and then the master construction schedules that we have at each site. So we're locked tight With ourselves and then we have monthly reviews with our program offices into our customers.

Speaker 3

So I don't think there is any disconnect there.

Speaker 7

Okay. And just if you wouldn't mind providing the EACs, the net EACs by Segment and also there was some language in the release about VCS favorable variance. Could you just give us a quick update on how That program is performing and if there was a favorable UC on that program in particular. Thanks.

Speaker 2

So, the net EACs, I'll start with the VCS performance, and then Tom will talk about the net EACs in the quarter. So yes, VCS is definitely showing some stability and some positive momentum. So as Tom said, we assess our ESUs every quarter and there's nothing material to note. But there is some The team is working very hard, the program team on VCS to meet their milestones and meet their cost Targets in really kind of a difficult macroeconomic environment. So there is some progress there.

Speaker 2

There's definitely some progress on stability on VCS. I continue to think the best thing we can do on the VCS program is meet our commitments on the Block IV contract, get those Shifts and modules out and then transition into Block V where we have more opportunity. So with that, Tom, the

Speaker 3

Sure. Yes, right. And the Favorable, the gross favorable was $72,000,000 unfavorable was $52,000,000 The net was $20,000,000 and that was made up of 17,000,000 Ingalls or 85%, and 3,000,000 or 15% of MT. There was no specific program either favorable or unfavorable that was material. Thanks.

Speaker 7

Great.

Operator

Our next question today is from the line of George Shapiro from Shapiro Research. George, please go ahead. Your line is open.

Speaker 9

Yes. Tom, if you just look at the free cash flow implied in the 4th quarter at the midpoint is around $360,000,000 Of the milestones that you have listed for Ingalls in Newport for the Q4, what are the key ones that would contribute to that?

Speaker 3

So I think it's a host of it. You can run down there if you go to the slide on the milestones, but Launches and the deliveries that we've talked about, the retention releases on delivered ships, we've talked about adjudication to change, there's some minor incentives that we pick up too. So usually because of the seasonality, you do see Q4 to be very strong for us. We saw that last year with over $5,500,000,000 in Q4. So, I think the plan and the milestones are situated for us I would want to clarify too because early I think I want to make sure everyone understands what I said.

Speaker 3

The guide specific for Q3 assumes that there is a repayment for COVID right now. My comment was, since I don't know of any change with the Navy and what that could do, we're sticking to how we got it at the beginning of the year, 4 to 4.50 with the COVID repay It's going to occur this year. If and when that changes and we know how much, we'll give you some more color. I would expect that come the November call For Q3, we'll have a real good look at the milestone performance, how the rest of the year is wrapping up and we anticipate the negotiations

Operator

Our next question is from the line of Ron Epstein from Bank of America. Ron, your line is now open. Please go ahead.

Speaker 5

Hey, good morning guys. Just a couple of quick ones.

Speaker 2

Good morning.

Speaker 9

Can you speak a little

Speaker 5

bit about the DDG 51 award that was pretty gigantic? How that's going to play out? Was it a competitive bid? I'm guessing it was, right? And how you're thinking about that?

Speaker 5

But let's start with that.

Speaker 2

Yes. So DDG 51, excellent job by the Ingalls team competing for that. It was competitive. There's a Standard competitive environment between the 2 shipyards, both of which are very capable shipyards. Getting awarded 6 It's very positive.

Speaker 2

It just shows the demonstrated proficiency of that Ingalls team on executing. It's Obviously, we've delivered DDG-one hundred and twenty five already, and we're proceeding on the next Flight 3 destroyer. So really, really a positive indicator. What it does is provide a lot stability for Ingalls moving forward. That, that 6 ship by combined with LPDs and support for LPD33 and Potential bundle arrangements for LPDs and LHA moving forward provides a lot of stability for Ingalls and is very positive.

Speaker 3

Got

Speaker 5

it. Got it. And then on the Savannah River stuff, My understanding of how the accounting would work that you guys would potentially take a gain, right? I mean, I think that's how it works. Are you deferring it or did you take a gain in the quarter?

Speaker 3

No, we didn't take a gain in the quarter right now. So we've become a higher owner of the joint venture, Still a minority owner, but the higher owner of it. So as proceeds are released, it's unconsolidated, how That's recorded. So as the gains happen in the future, they'll be higher than what we've had in the past. So I expect that to play out over the next couple of years.

Speaker 9

Got it.

Speaker 5

So it wasn't like an event where you could mark to market and then you're carrying value with

Speaker 2

your Creator or whatever? No. No.

Speaker 5

Got it. Got it. And then could you speak a little bit to how it's going in terms of retention of employees and How the workforce has evolved here as we recover from kind of all the COVID disruptions?

Speaker 2

Yes. Workforce is Definitely evolving, Ron. Thanks for that question. As I said previously, hiring is better, right? The applicant rate is better, But retention is still a challenge.

Speaker 2

And what we're finding is, the days of hiring someone, training them and sending them down to the deck plate Are really over. We need to ensure that the new hires that don't come through our established programs because the apprentice school, Community colleges and high school programs are still very successful when it comes to retention. But the walk ins, we need to make sure that we Shepherd them through the process of the next 12 to 18 months of their employment to make them understand that this is a good career and there's opportunity for growth And stability. So that's really the fundamental change is the walk in applicants are just not the same as they used to be. So that's what both Ingalls and Newport News are working on.

Speaker 5

Got it. All right. Thank you very much.

Speaker 3

Sure.

Operator

And the next question is from the line of Noah Poponak of Goldman Sachs. Noah, your line is open.

Speaker 11

Hey, good morning, everyone.

Speaker 2

Hey, good morning, Noah.

Speaker 11

If I take the MT Revenue guide to be flat sequentially in the Q3. I think we'd have to be maybe down a little or flat year over year in the Q4 to Be at the 5% for the year, after being kind of 6% to 8% through the 1st 9 months of the year. So How much of that is just kind of leaving some conservatism there? How do you see the MT organic revenue growth profile from here?

Speaker 3

So, at 645, that's A record quarter that they've had followed 6.24, which was the previous record quarter, feel comfortable with it right now. I think 6.45 is a balance between There's new awards that have to occur and then get delivery orders funded and awarded for that and get heads in here. I do think there could be Some upside here, so we'll see how that plays out. We look at, Emission Technologies, they grew 4%. Last year, each of the 6 business units grew.

Speaker 3

We see quarter over quarter, it's 7.5%. Sequentially, it grew over 5% right now. So I think north of 5% is the right way to kind Take a look at that. We'll see how that plays out. They're on a good string right now of awards, and they're working hard to kind of fill the seats of billet of funded seats that they have.

Speaker 3

So it's going to be a function of awards and labor as we go forward. But, I'm feeling good about The pipeline I have there, although the book to bill is low right now, I think there's that's going to come on in the back half of the year. We'll see that pop up. There's still a plethora of awards for Q3 and Q4 that we're keeping a close eye on here right now. I think that business Starting to really play out and justify the acquisition of Alliant, as we see, a sales ramp that's happening.

Speaker 2

Yes. So no, I could add that, not to Jumped into the early wins in Q3, but on a total contract value, not just awarded, We're almost at $4,000,000,000 of awards for this year, which is really a record for Alliant Mission Technologies together is kind of unprecedented. That team is really doing very well And we'll create a lot of stability into the future and potential growth for Mission Technologies.

Speaker 11

Okay. Appreciate that. And Tom, the 7.7% to 8% for the full year shipbuilding margin, it's a Relatively tight range, but if I keep it flat sequentially in the Q3, To get to the low end of the full year, the Q4 would need to be close to 9, and to get to the high end, it would need to be close to 10.5. Can you speak to where in that range you see I know the milestones need to occur and every milestone is different, but Where in that range do you more likely see the 4Q shipbuilding margin falling?

Speaker 3

Yes, I think we're splitting hairs right now. I mean, you can see that there A lot of milestones out there, things and then there's incentives and adjudication of change to that occur. LPD 29 is a piece of it, although it's early, it's not a big swinger, but it does contribute to the margin and the end results. I wouldn't want to get too precise. I mean, 7,780 is pretty precise right there.

Speaker 3

But I do in fact, When you run the math, we said 6,700,000,000, 7,400,000,000 for Q2, another 7,400,000,000 about for Q3. We'll be in the 9s for Q4 is the math of it. And I feel comfortable with what's on our plate, the performance I see today. The avenue I speak daily and weekly with the CFOs Down in the yard, so I know what's in front of them and what has to get done both from a performance end of it and then what has to get done on the contract side. And we're very much in place

Speaker 11

Got it. And then just one other item, Back to that attrition question, Chris. Has that has the rate of attrition slowed through the year? I know that's another kind of specific question, but it seems like a Pretty important element into your total labor equation.

Speaker 2

So it's definitely lower than it was coming out of COVID. It's been pretty consistent this year. I haven't seen a lot of slowing In attrition this year, it's still the walk in, early career people That just really aren't prepared for the rigors of shipbuilding. It's a challenging job, and we're just working very hard to get them prepared to understand the real benefits of being a shipbuilder.

Speaker 11

Okay. Thanks guys. Appreciate

Speaker 4

it. Sure.

Operator

Our next question is from the line of Pete Skibitski of Alembic Global. Pete, your line is now open.

Speaker 8

Yes. Chris, I don't think we've talked about this, but the Navy, I think, is working up the strategy for the Nimitz retirement. And then there's an RFI out there. Can you talk about if you think HII will have a role on that, Maybe the timing and the potential sizing of that, just your thoughts on that overall?

Speaker 2

Yes. So we will absolutely have a role in it. There's a lot of planning going on within the Navy and Newport News on integration of RCOHs and retirements. We obviously did. The enterprise, uniquely qualified to do it.

Speaker 2

And so it's really Kind of in advanced planning, actually, because it's kind of a dance between the RCOHs and then finishing the shifts and doing the D and D. So absolutely, it doesn't Change my perspective about the long term growth rate of the business. It's integrated into the forecasting, and Newport News will probably do that work.

Speaker 8

Okay. But maybe we should think like a mid decade to slightly after mid decade before it starts?

Speaker 2

I hate to give you a specific time, but it's integrated over the next 10 to 15 years to 20 years actually.

Speaker 8

I see. Okay. Thank you.

Speaker 2

It's all in the mix. It's all in the mix, Pete, when you think about their plan and how they how we forecast the long term growth rate of the business. Got

Speaker 9

it.

Speaker 1

Thank you.

Operator

I'm not showing any further questions at this time. So I'd now like to hand the call back over to Mr. Casner for any closing remarks.

Speaker 2

Yes. Thank you for joining us today. We appreciate your interest in HII and look forward to continuing to engage with you all going forward.

Operator

That does conclude today's conference call. You may now

Powered by Quartr
Earnings Conference Call
Huntington Ingalls Industries Q2 2023
00:00 / 00:00