Huntington Ingalls Industries, Inc. Price & Performance (HII)

On the call today are Chris Kaffner, President and Chief Executive Officer and Tom Seeley, Executive Vice President and Chief Financial Officer I will now turn the call over to Chris. Thanks, Christy. Good morning, everyone, and thank you for joining us on our fourth quarter twenty twenty four earnings call. Last year, HII employees remained steadfast in our commitment to our mission of delivering the world's most powerful ships and all domain solutions in service of the nation. I thank them for these efforts, which contributed to HII reaching critical milestones last year. We remain focused on meeting our commitments to the Navy, and all our customers. 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 twenty four months. As well as a minute to long term outlook. Over the next twenty four months, we expect to secure over $50,000,000,000 of contract [indiscernible] These contracts are being and will be negotiated with current performance and economic conditions in our estimates. They are expected to have a more balanced risk equation be predictable in cost and schedules for our customers and provide an opportunity to achieve margins more consistent with historical norms.

At the same time, are achieving key milestones on ships contracted prior to COVID. 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. By 2027, the majority of pre COVID contracts will be behind us. In addition, our focus on increasing throughput and cost reductions are expected to lead to improved operational execution across the business. With these operational initiatives and the significant demand for our products and services, we expect improved financial performance over the mid to long term. Anticipate growing to $15,000,000,000 of annual revenue by 02/1930 with associated margin expansion, opportunity and free cash flow growth. Now turning to our 2024 results. We generated sales of $11,500,000,000 and earnings per share of $13.96 All three of our divisions hit key milestones and won significant new business 2024 awards totaled $12,000,000,000 and our year end backlog was 49,000,000,000 of which $27,000,000,000 is funded Now I'll provide some highlights from each of our divisions. First, Mission Technologies had another strong year. Achieved awards of more than $12,000,000,000 in potential total contract value a 2024 book to bill of 1.339% revenue growth year over year.

This positive performance reflects Mission Technologies continued alignment with our countries and our allies' national security strategies. For example, in 2024, Mission Technologies achieved its largest win ever a $6,700,000,000 contract and technical services support for the U. S. Air Force. As well as a $3,000,000,000 LOGICS task order to provide logistics services ISR operations and next gen technology. And in Australia, Mission Technologies was awarded an initial five year contract to provide global supply chain services to the Australian Government's Department of Defense. In summary, the Mission Technologies team is executing well and we are confident in its ongoing success. Particularly given how closely its portfolio maps In 2024, at Ingalls Shipbuilding, we were awarded a $9,600,000,000 multi ship procurement contract for the construction of LPD33,34 and35 and large deck amphibious ship LHA10, which secures ANFIB production backlog well into the next decade. Also, we delivered OPD 29 USS Richard Jr. And launched LPD30 Harrisburg and we Huntington to make progress on the DDG program with six destroyers in production authenticating the kill of DDG-one 33 Sam Nunn in the fourth Finally, we completed dry dock work and undocked USS Zumwalt DDG-one thousand in December. In 2024 at Newport News Shipbuilding, in the Virginia class submarine program, we floated off SSN seven ninety eight Massachusetts delivered SSN seven ninety six USS New Jersey shipped the final module of SSN eight zero one Utah and in December we christened SSN-eight hundred Arkansas.

As for aircraft carriers, we completed dry dock work for the RCOH of CVN 74, USS John C. Stennis, and were awarded the advanced planning contract for the RCOH of CVN75 USS Harry S. Truman Also 94% of CVN-seventy nine Kennedy have been turned over to the Navy and all combat systems have been turned over to the test team. And CVN-eighty Enterprise was moved for the first time enabling construction of two aircraft carriers at once in the same dry dock. Looking ahead to 2025, at Ingalls, we expect to launch DDG-one 29 Jeremiah Denton and complete C trials for DDG-one thousand. And in Newport News, we plan to deliver SSN-seven 98, and float off SSN 800. Also, the team is focused on completing CDN-seventy nine, CVN 79 is scheduled to deliver in 2025. And the program team is evaluating options for optimizing combat capability additions and readiness for Navy workups. In 2026, we expect to deliver DDG-one 28 TED Stevens and LHA-eight Bougainville at Ingalls. And at Newport News, we expect to deliver SSN 800 and lay the keel for CBN-eighty one Dory Miller. The residual COVID related labor, productivity and supply chain challenges that we've been facing.

Starting with labor and enhancing throughput, in 2024, we exceeded our hiring goal of over 6,000 craft personnel, but attrition remains stubbornly high. Our data shows that additional investment in wages in coordination with our Navy partner we'll provide needed workforce stability. These increases also allow us to attract highly skilled first class shipbuilders Additionally, we Huntington to deploy our enterprise operating system across all our Shipbuilding programs to ensure consistency. On labor and throughput, we have This acquisition increased our workforce by approximately 500 highly trained personnel. And we plan by 2027 to increase employment significantly at this site, a 480,000 square foot facility. HII 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. Similarly, we plan to increase our outsourcing by 30% in 2025 and in source contract labor to address critical skill gaps within our shipyards. As a result of these workforce strategies, we expect to achieve a 20% year over year improvement in shipbuilding production throughput Our second operational initiative is an annualized enterprise wide cost reduction target of approximately $250,000,000 per year.

Several actions have already been taken to achieve this target including the realignment of Mission Technologies segment from six business units to four and the implementation of a new payroll system at the beginning of twenty twenty five. 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. Our third operational initiative for 2025 is ensuring our new contract awards reflect the current economic and production environment. Regarding the FY 2024 Block V submarine contract agreement, negotiations are continuing we continue to be confident an agreement will be reached although we do not have certainty today on the timing of that agreement. 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 underpin our guidance and are expected to bring more predictability to our contract cost estimates delivery schedules, financial performance and guidance. In terms of our financial outlook, more specifically for 2025, we expect shipbuilding revenues between $8,900,000,000 and 9,100,000,000.0 and shipbuilding margins in the range of 5.5% to 6.5%. For Mission Technologies, we expect revenues between $2,900,000,000 and $3,100,000,000 and margins between 44.5%.

With EBITDA margins between 88.5%. It also assumes appropriate resolution on the last two VCS Block V boats the Block VI and Columbia Bill two contracts consistent with the continuing resolution anomaly language that was passed by Congress. Turning to activities in Washington for a moment. We are pleased with the passage and enactment of the Defense Authorization Act for fiscal year twenty five The FY 2025 NDAA strongly supports our shipbuilding programs. In addition to authorizing funding for three Arleigh Burke class surface combatants one Virginia class submarine and one San Antonio class amphibious warship the NDAA authorizes the refueling and overhaul CBN-seventy five additional incremental funding for the second Virginia class attack submarine in FY 2025 and continued support for Gerald R. Ford class aircraft carriers in the LHA and LPD amphibious warship bundle, The NDIA also recommends the Navy optimize aircraft carrier acquisition strategy and procure CVN 82 in FY 2028. 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 2025 appropriation bills. In summary, we continue 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. We continue our focus on executing for our key customer, the U. S. Navy, with five deliveries over the next two years. We have a line of sight for generating approximately $15,000,000,000 in annual revenue by decade's end incrementally improving operating margins over that period, will facilitate improved results for all stakeholders. So with that, I will turn the call over to Tom for some remarks on our financial results and guidance [indiscernible] Thanks, Chris, and good morning. Today, I'll review our fourth quarter and full year results. And also provide some additional color regarding outlook for 2025. 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 fourth quarter results on Slide six. Our fourth quarter revenues of $3,000,000,000 decreased approximately 5% compared to the same period last year. This decline was driven by lower year over year revenue at all three segments. Ingalls revenues of $736,000,000 decreased $64,000,000 or 8%. Compared to the fourth quarter of twenty twenty three driven primarily by lower volumes on amphibious partially offset by higher surface [indiscernible] At Newport News, revenues of $1,600,000,000 declined $77,000,000 or 4.6% from the fourth quarter twenty twenty three primarily due to lower RCOH volumes.

Unfavorable cumulative adjustments on the Virginia class and aircraft carrier construction partially offset by higher Columbia glass volumes.

In Admission Technologies fourth quarter twenty twenty four revenues of $713,000,000 decreased $32,000,000 or 4.3% from the fourth quarter of twenty twenty three. Primarily driven by lower volumes in C5ISR due to non recurring product revenue in the fourth quarter of twenty twenty three. Moving to Slide seven, segment operating income for the quarter was $103,000,000 and segment operating margin was 3.4%. This compares to $330,000,000 and 10.4% respectively in the fourth quarter of twenty twenty three. Fourth quarter twenty twenty three results included two non recurring favorable items that make for a difficult year over year comparison. The first item was a $70,500,000 sale of a court judgment at Ingalls. The second was a $49,500,000 insurance claim settlement at Mission Technologies. Ingalls operating income of 46,000,000 and margin of 6.3% compares to 169,000,000 twenty one point one percent. Respectively, in the fourth quarter of twenty twenty three. The prior year period included both the favorable sale of a court judgment that I noted as well as a surface combatant related contract incentive. Newport News fourth quarter twenty twenty four operating income of 38,000,000 and margin of 2.4% compares to $110,000,000 and 6.6% respectively in the fourth quarter of twenty twenty three.

The declines were driven by lower performance on Virginia class submarine and new carrier construction. Partially offset by contract incentives on the Columbia Class program.

Shipbuilding margin for the fourth quarter was 2024 was 3.6%. Mission Technologies fourth quarter operating income of 19,000,000 and segment operating margin of 2.7% compared to $51,000,000 and 6.8% respectively, in the fourth quarter of twenty twenty three. The declines were primarily driven by favorable insurance claim settlement, that occurred in the fourth quarter of twenty twenty three. Net earnings in the quarter were $123,000,000 compared to $274,000,000 in the fourth quarter of last year. Diluted earnings per share in the quarter were $3.15 compared to $6.9 in the fourth quarter of the previous year. Moving on to consolidated results for twenty twenty four and Dave. Revenues of $11,500,000,000 increased $81,000,000 or approximately 1% compared to 2023. Growth was driven primarily by higher volumes at Mission Technologies, partially offset by lower volumes at Newport News Shipbuilding. Ingalls revenues of $2,800,000,000 2024 increased $15,000,000 or 0.5% from '20 driven primarily by higher volumes in surface combatants. Largely offset by lower amphibious assault ship and NFC program revenues. [indiscernible] At Newport News twenty twenty four, revenue of $6,000,000,000 decreased by $164,000,000 or 2.7% from 2023. Primarily due to unfavorable Virginia class cumulative adjustments as well as as well as lower volumes in aircraft carriers partially offset by higher volume on the Columbia program.

Admission Technologies twenty twenty four revenues of $2,900,000,000 increased In cyber, electronic warfare and space as well as C5 ISR contracts. Moving to Slide nine, segment operating income for the year was $573,000,000 and segment operating margin was 5%. This compares to $842,000,000 and 7.4% respectively in 2023. Ingalls operating income of $211,000,000 and margin of 7.6% in 2024 compared to $362,000,000 and thirteen point two percent respectively in 2023. The declines were primarily driven by the sale of the court judgment 2023 as well as lower performance on amphibious assault ships and surface combatants. Newport News 2024 operating income $246,000,000 an at margin of 4.1% compared to $379,000,000 and 6.2% respectively in 2023. The decreases were primarily driven by lower Virginia class and aircraft carry partially offset by Columbia class contract incentives. Shipbuilding margin for twenty twenty four was 5.2%, within the revised guidance range we provided for the year. Net cumulative adjustments for the year were negative one hundred and Newport News's net cumulative adjustment negative $154,000,000 partially offset by positive net cumulative adjustments at both Ingalls and Mission Technologies. Of approximately $14,000,000 Mission Technologies 2024 operating income $116,000,000 and segment operating margin of 3.9% both improved from 101000003.7% respectively in 2023.

The improvement was driven primarily by volume and performance in cyber, electronic warfare and space contracts, stronger performance in fleet sustainment as well as higher equity income. Again, the Mission Technologies twenty twenty three results insurance claim, So we are lapping that difficult comparison and we believe our results still show strong absolute income growth and margin expansion for the year. Mission Technologies 2024 results included a approximately $99,000,000 of amortization to purchase intangible assets. Compared to approximately 109,000,000 in 2023. Mission Technologies EBITDA margin for 2024 was 7.9%. Company net earnings in 2024 were 5,000,000 compared to $681,000,000 in 2023. Diluted earnings per share in 2024 were $13.96 compared to $17.07 in 2023. Turning to cash. Capital deployment on Slide 10. 2024 free cash flow was $40,000,000 consistent with our most recent guidance and reflecting factors previously discussed. During the year, the company invested $353,000,000 in capital expenditures. 3.1% of sales, as we continue to prioritize higher throughput in our shipyard. We paid $2.00 $6,000,000 in dividends while ending 2024 with $831,000,000 in cash and cash equivalents on hand and liquidity of approximately $2,500,000,000 Cash contributions to our pension and other postretirement investment plans totaled $47,000,000 in 2024, Our pension outlook for 2025 has modestly improved from 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.

Actual asset returns for 2020 forward 7.7%, Our five year pension outlook has been updated and is available in the appendix today's presentation on Slide 13. Turning to Slide 11 and our financial outlook. First, we are reaffirming our medium to long term growth targets for both shipbuilding and mission technology. As Chris noted, we see a clear path to $15,000,000,000 annual revenue the end of the decade given our robust backlog and very strong demand across the portfolio. Regarding 2025 expectations, Chris provided our operational guidance but let me provide a bit more color on our cash flow outlook. We expect 2025 free cash flow of between $300,000,000 and $500,000,000 Performance on contracts entered into prior to the commencement of the COVID pandemic has impacted our ability to achieve program milestones corresponding cash receipts. We expect this headwind will continue in 2025, which by with elevated capital expenditures and cash taxes, is impacting our overall cash generation. We expect 2025 capital expenditures to be approximately 4% of sales. As we continue to thoughtfully invest in increasing our shipbuilding efficiency and throughput. Additionally, we expect our 2025 cash taxes will total approximately $220,000,000 Regarding our expectations for the first quarter in twenty twenty five, we expect approximately $2,100,000,000 for shipbuilding revenues and $680,000,000 of Mission Technologies revenues.

With shipbuilding margin near 5.5%, and Mission Technologies operating margin of approximately 3%. Consistent with normal cash flow cadence, we expect first quarter free cash flow to be negative representing a use of between $300,000,000 and $500,000,000 and working as working capital continues to build through mid year, before we are able to reach program milestones and contract awards. 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 Our approach to dividends returning excess cash to shareholders remains unchanged. Our focus now of cost is working through challenged contracts and returning free cash flow to more normalized levels. To close my remarks, achieving the throughput, cost reduction, and contract award initiatives that we have outlined are critical to stabilizing shipbuilding Similar to 2024, we expect that about 70% of the shipbuilding revenue generated in 2025 will be derived from pre COVID contracts. We forecast approximately 60% of 2026 shipbuilding revenue Finally, we expect that in 2027, majority of the shipping 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 and A. Thanks, Tom. As a reminder to everyone on the call, please limit yourself to one initial question and one follow so we can get as many people through the queue as possible. Operator, I will turn it over to you to manage the Q and A. Our first question comes from Doug Horned with Bernstein. Doug, your line is now open. Please go ahead.

Very good. Good morning. Thank you. Good morning, guys. Sorry for the background noise. We're going through a thunderstorm.

Outside right now, but just bear with us a little bit.

Okay. I've got a snowstorm here too.

Okay. [indiscernible] if I go back a few years, there was a a margin outlook that had always been talked about in the 9% to 10% level. And knowing that, I mean, the CPI is hardly a good indicator for inflation. For you all. But can you give us a sense first when you look at the margin gap that you have now, 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. Yes.

So that's a that's a very interesting question and I don't have a specific number for you Doug, we do have some EPA protection on our and inflation protection on our Ingalls contracts. And limited EPA protection on material aircraft carrier contracts. But it's not just directly inflation that impacts you.

It's a little bit more nefarious than that because you have inflation that adjusts very quickly on some products and services 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 you really can't adjust as quickly which leads to less experienced workforce and performance challenges. So I hate to say that I hate to not give you a number related to that, but it's a broader question than just a calculation of the inflation. Impact on our ship programs. As related to that is in the supply chain, it's even if we have protection for it, They're just the performance of the supply chain because of inflation is is not as efficient. So it's a very broad answer. I apologize for not giving you a precise answer. But inflation kind of seeps into various elements of our cost structure not just pay people more.

Just to follow on that, if you look outside of shipbuilding, I mean the Pentagon has frankly not been very helpful at all in providing equitable price adjust and that's across many types of programs. And even though you have some it appears you've been facing a lot of the same problem and everyone I think there's universal acceptance of the importance of the Virginia class, the Columbia class, But when you're negotiating new contracts now, 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 are we living in a different world now you may have to sort of give in in a sense to lower financial performance Well, yes, interesting. I absolutely believe that 9% is possible moving forward The $50,000,000,000 of contracts that we've negotiated some of those with the bundle the Amfit bundle down in in Mississippi and we're negotiating the FY 2024 Block five-two both contract now The customer has been very receptive to understanding the current economic environment. And we will get inflation protection in those new contracts. I think you saw Congress put additional $5,700,000,000 in the anomaly for those FY 2024 boats.

There's a recognition that we need to rebuild this industrial base There's also a recognition I believe that that shipbuilders need to earn fair margins. And so we're taking that to the table. 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 it, Doug, is simply because I've done it before. Down at Ingalls, we're in the exact same position. [indiscernible] negotiate performance post Katrina into the new [indiscernible] We got that done and they had a very good a very good run where there was predictable cost and schedule performance because ultimately it doesn't do anybody any favor to agree to cost estimates or 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. And so I firmly believe that's going to happen.

Okay, very good. Thank you. Thanks Doug.

Our next question comes from Seth, Seifman with JPMorgan. Seth, your line is now open. Please go ahead.

Hey, thanks very much. Good morning.

Good morning. I wanted to ask about in the prepared remarks, I think you talked about the guidance, what underpins the guidance, I think [indiscernible] Are you basically what contract awards are you assuming that the company will get this year in the guidance. Yes. The submarine contracts, the 17 boats contemplated by FLEX. The full [indiscernible] plan that you've been advocating is assumed in this sense. No, let me correct you there. It's not a It's not a full solids plant. We're negotiating FY 'twenty four two boats Huntington with the the acquisition approach that was set forth by Congress and supported by the anomaly. Block six and Columbia Build two, we're going to have to see the acquisition approach for those boats as they develop. SAWs or a derivative of SAWs is positive Anything that brings additional investment into the industrial base that accelerates shipbuilding production is positive. But we're going to take this one step at a time.

So So the guidance doesn't assume the the 17 boats get under contract?

It does. It does. It assumes FY '24, two boats and then assumes the negotiation of The Block three contracts and the Columbia Bill two contract.

Okay.

And do you I guess what gives you have you had communication with the new administration what kind of gives you confidence that that that's going to happen during this year.

Yes. So interesting. I have high confidence in FY 2022, but that will happen first part of the year. I have had limited conversations with elements of the new administration and And they've assured me that shipbuilding is one of their top priorities. And that's welcome. That makes perfect sense based upon the threat environment. So I believe we'll step right into Block six after we after we negotiate the last two Block five boats.

Okay. Okay. Thanks. I'll leave it there for now.

Sure.

Thank you very much. Our next question comes from Scott Research. Scott, your line is now open. Please go ahead.

Good morning, Chris. I want to follow-up on your answer to the question.

When I think about post Katrina, Northrop had a lot of struggles with chip building business. Before spinning it off the form HAI shipbuilding margins initially weren't that great post spin. But come 2013, there was a meaningful pickup in favor of the EAC adjustments and your stock more than doubled that year. So just curious what lessons did you learn from the late 2000s and early twenty ten that are still relevant and can be applied [indiscernible] And when do you think investors will see EACs flip from unfavorable to favorable? No, thank you. I'll start this answer, then I'll kick it over to Tom for some some timing related issues, but I have confidence 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 and ensure that you're resolute at the negotiation table and there's achievable and predictable cost and schedule estimates. When you do those negotiations. As I said previously, it doesn't do anybody to any favors to miss schedules. Or miss cost estimates. So we just need to make sure that we estimate them correctly and negotiate them correctly.

And that can be done. There's $50,000,000,000 of work that's going to be negotiated here. It's just getting through the pre COVID contract. Is what's important. So I'll let Tom talk about the timing a little bit.

Thanks, Chris. Yes, as Chris mentioned, both him and myself were down there. I spent spent ten years from 2011 through 2021. So I saw that march up and it's really about making sure one, we get good contracts that have a good cost equal agreement balance between us and our customer. We've been hit now with COVID and inflation and things of that nature. It's really closing a draw on our production lines. These long term contracts are being impacted by inflation. The number of heads experienced in the yard and the supportability of the material right now. So one is any of the new awards we get like the bundle down in Ingalls that we have, the FY twenty twenty three award for destroyers that that we received and now going forward.

The plethora of 17 boats between the VCS 105, six and Columbia Bill two. Getting balanced contracts that we have appropriate, our performance is appropriately aligned, our schedules that we see right now, our role in the investments both from ourselves Navy partner will have a positive benefit, but ensuring we have a solid program plan and we're putting good good commitments on contract. And then obviously, we've got to execute on our commitments on that front. So it's maintaining our budgets, holding schedules, making progress we weekly, monthly, quarterly. And we have a track record of doing that. Confident we have the processes and the facilities For the most part, we need more throughput, but the processes and the tools and the facilities are in place right now. It's about building out the workforce we have, strengthening and more consistent supply chain that we have against our schedules, and then us kind of hitting the mark on cost cost and schedule on a regular rhythm. That's what we did down at Ingalls.

I think we have the pieces in place and where we are short on people, the cost reduction initiatives that we have right now and we've talked about the contracts contract equity going forward here. I think we understand what's causing us a delay in our production programs. Specifically on VCS and some headwinds they have down at Ingalls on destroy 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 in the Ingalls March up post Katrina. So we don't have a specific date for you.

On when we get back to those sort of profitability estimates. But as Tom mentioned in his script, We are transitioning over the next couple of years out of these pre COVID contracts into the new contracts, And as we transition should be an uplift in profitability.

Okay. And then one quick follow-up. Midpoint of the guidance implies about $50,540,000,000 dollars of shipbuilding operating income. I'm just curious, is there any assumption baked in there for what net EACs will be for this year?

Yes. So, obviously, run our EAC process on a quarterly basis. We don't provide profitability by ship or by class like that, even by division. So we always baking in EAC the estimates to complete in the EAC is aligned with our performance that we have right now. With risks and opportunities kind of hedged against that, right?

We know we're throwing additional investment dollars in it.

And efforts and improvements of our production lines. We balance that with the risks and opportunities we see in front of us. So that sets the trajectory and how we expect to perform kind of going forward. And again, that ETC estimate to complete on these AACs gets reevaluated every ninety days when we get another set of actuals. I'm not going to get into the specific details that we have in there. But we do expect a stabilization and an improvement as we go forward.

Okay. Got it. Thanks for taking the question.

Sure.

Thank you. Our next question is from Pete [indiscernible] Global. Pete, your line is now open. Please go ahead.

I guess just sticking to the shipbuilding margin questions, it sounds like maybe you'd recommend we assume sort of gradual improvements 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 'twenty seven or keeping it gradual And then, I just wonder if you could talk about the it sounds like you could potentially get a contract change on CBN seventy nine wasn't sure if that if you did get a contract change, if that would impact margin one way or another. Thanks. Yes.

So let me start and I'll let Tom chip in. Maybe let me ask let me answer the seventy nine question [indiscernible] I'll kick the margin timing question over to Tom.

Seventy nine, yes, we do expect a contract change related to some additional capabilities that may maybe put in in the ship The program team is working on that. And with the objective of getting the ship delivered with the most capability and deployed as soon as possible. The program teams are working on that and there would be a change related to that, but I don't think it's positive or negative. It's just an equitable adjustment related to the the capabilities that are added So with that, I'll send it over to Tom on the margin timing.

Yes. So specifically, obviously, we don't provide margin guidance for the for the following year or the out years. Obviously, there is a shape and an expectation we have right here. And as of Q3 last year, we missed the expectation of where we thought we were. You really got to get down to where we've been impacted. And again, it's that it's the less experienced the labor 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 So going forward, that's going to be a lift against all operations we have. Now for contracts that have run through COVID, the older pre COVID contracts, those contracts have seen increased costs. So there's limited ability to go and get additional profitability on those contracts.

As we put the new work, the $50,000,000,000 on it, obviously that didn't run through that. It's going to get the benefit of the current performance and where we stand right now.

And the opportunity is much greater to have the profitability. Bounce back. So I would say the way to model that is you follow the revenue in my remarks. I gave you the mix on how it blends out and by 2027, 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.

Always remember, we're pretty conservative when we start out ships. So I do agree it's going to It's going to increase, but I wouldn't anticipate a step change.

Okay. Thanks for the color guys. [indiscernible] Our next question is from David Strauss, with Barclays. David, your line is now open. Please go ahead.

Thanks. Good morning.

Good morning. [indiscernible] Could you maybe talk about the opportunity to buy additional shipyard capacity? I think you've made some comments recently in the press around that. Can Can you kind of size that opportunity? And if I missed that, I apologize on the call. Or in your prepared remarks. What are your hiring plans in 2025 relative to 2024?

Yes.

So we'll hire about the same amount. We've repositioned our hiring a bit, as I said in a previous earnings call, from kind of broadly hiring including entry level two hiring more experienced people. We've actually made some progress in that regard. And specifically in Newport News, we had been hiring out of the pipeline, which is really the regional development centers. These are people that have chosen shipbuilding as a career. They've been at the 5% to 10% rate. That's increased to 35% at the back half of the year, which is really positive. And we would like it to get to 60% this year and that's really thanks to the state of Virginia and the federal government for increasing the [indiscernible] regional development centers. We're also targeting additional experience down at Ingalls, where they like to hire 80%. Experienced people. So while the number is the same, we would we're repositioning it I'll repositioning a bit. Now your question about buying another shipyard, I'm really not interested in that. W International was an opportunity that came along and their quality 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.

So we have a lot of outsourced partners and I'd rather an arms like relationship I really don't want to vertically integrate but this opportunity showed up and we got 500 world class shipbuilders with Newport News management team managing them. So it was really a layup for us. It's going to increase our throughput immediately. But I have no plans to right now unless something very interesting came along, to buy additional manufacturing facilities.

Okay.

Thanks.

And Tom, a follow-up on on free cash flow and capital deployment. In terms of your free cash flow progression beyond this year, I think about $26,000,000 $27,000,000 as the pre till the work runs off. Would you expect the free cash flow progression given the CapEx and working capital investments you've had to make here? Would you expect that free cash flow progression back to normal to maybe be faster relative to kind of what we're going to see in terms of the runoff of the pre COVID work? And then just how you're thinking about capital deployment given the cash burn in Q1. And the debt maturity in, I think, the beginning of Q2? Yes. So I would expect as we work through, as Chris said, chop in the water for next twelve to eighteen months, the cash flow would ramp up and we would get back to more normalized levels as we work ourselves through the pre COVID contracts that we have here. You can time that as well as with the margin, the cash flow will follow that. In the out year. So that's how that works. From the capital deployment, there's no change. Still using the same process and the model that we have here.

We'll continue to have a we'll invest in the yards, we'll have a capital We'll have a dividend that we have annually here and any excess free cash flow, which we've been doing since 02/2009 will go back to the shareholders.

As that materializes. So So no change in that policy right now. We did not provide any guidance for share buybacks in 2025. And if something changes in that front, we'll update you on a quarterly earnings.

I would add, it's an interesting question on on projecting free cash flow right now. And I've spoken of this previously. I don't know if it's been picked up, but The incentive laden nature of contracts that are being let [indiscernible] lend itself to be difficult to project free free cash flow timing. It's always been a challenge for us to project free cash flow timing because of the lumpy the limited amount of projects, large invoices can move across the period But with these large incentives and the timing of these incentives and some of them not even being negotiated yet, it makes it a bit of a challenge we're going to continue to be lumpy going forward, but I agree with Tom 100% it should incrementally improve over the long term. Thanks very much. Sure.

Our next question comes from Deutschler with Deutsche Bank. Scott, your line is now open. Please go ahead.

Thanks. Tom, were the Virginia class negative ACs on the block IV boats, the Block V boats or both?

A mix of both.

Okay. And I think the Block five boats are post COVID boats. Why should we only be focused on the pre COVID ship? They were negotiated in 2019. Those were negotiated in 2019.

Yes, they win in 2019, yes.

Okay.

I think Chris, would the contract change on CVN 79 result in the change in delivery timeline for that ship?

Potentially, we're working through that with the customer right now.

Okay.

Can you remind me why the ship was originally delayed from 2020 I may cause it to go into 2025.

So sorry for the confusion. There's actually a couple changes, large changes that took place on CBN 79. The first one was related to [indiscernible] some significant combat system work that the Navy asked us to do I think what you're referring to to is moving PSA into the baseline work. That was the schedule change previously. Where we were going to deliver it, do a significant amount of PSA work, and then get it deployed. They moved that into the baseline, which caused a schedule change. This is additional capability that they've they've developed based on CBN-seventy eight's performance 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 ship when it gets deployed.

Okay.

Did you book a negative EAC on CVN 79 this quarter?

It wasn't material.

Yes, I think there's a modest negative adjustment Okay. Thanks guys. I'll leave it there.

Sure.

Our next question comes from Myles Walton with Wolfe Research. Myles, your line is now open. Please go ahead.

Thanks. Good morning. I was curious on the Good morning, Myles. Building margin the shipping margin guidance for 255.5% to 6.5% in the first quarter, you're already at 5.5 But I think the full year is predicated on material increases in throughput and cost reduction as well as the contract award assumptions. 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 Yes.

So all of that is included in the guide. Right? The new ships, meeting our throughput and our cost reduction initiatives the timing of the new ships and incentive assumption on those new ships. So it's kind of all in the mix.

And then we do have a bit of a it's a bit of a conservative guide related to to make it a bit a bit conservative. So it's all in the mix. I'd like to say I could time it out for you. We'll give you the information every quarter on how we think the next quarter is going to be. But all of that factors into the guide.

I guess the way I was Huntington is first quarter, you obviously wouldn't have the contracts, you wouldn't have a lot of these costs improvements. So that 5.5% is that low end pretty much reflective of your of your current situation ignoring the improvements you're talking about on throughput and cost improvement. I think that's probably fair. We're working hard to get that contract done. Hey, Myles, it's Tom.

We give the quarter guide, so we're really close to that and that's how we see it's going to play out. Obviously, there's a timing of the new contract award. There's the list that we expect to get from the initiatives that we have on the objectives page, the operational objectives page. Then there's just the run rate opportunities and risk that we see performance, the CCIs and SPIs. Most closest to the slide here. So I mean it's in the mix there. Obviously it's on the bottom end of the range here. Beginning of the year, but there'll be bait hopefully, there'll be bait against the contract awards. The initiatives we have. And then as the programs mature Going forward, we could realize the medium or the top end of that range.

Okay.

And then Chris, maybe a higher level question. This move towards outsourcing, obviously there's benefits to that. You could maybe control your cost or have a little bit more visibility on cost, but control in particular.

How do you weigh that? And a move to increase it as much as you're talking about 35%. I don't know what the base level is, so there could be material number or could be immaterial number.

Yes, it's a material number. And the good news is we're outsourcing with with partners that we already do outsource work with. So we're very familiar with them. We don't We don't do this lightly We do pilot projects so that the partners can demonstrate their cost and schedule and quality capability before we do it. So it's a good question because 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 It's a fair it's a risk. That we understand and we mitigate because we've done it before. I would add on the back of that like an acquisition like W International bringing it in house with Newport News people leadership processes throughput, a proven workforce that's there that was up and running. There's work going on that down there right now and it's having 500 heads ready and moving forward operationally is a big plus there. So we're doing it really smartly. We're ensuring who we the insource to outsourced putting the bumpers around make sure we get the performance and expectations And anticipate that we'll be able to execute that work.

And be a significant piece of the lift that we talk about, about 20% more earned Okay.

All right. Thank you.

Thanks.

Our next question is from Ron Epstein Epstein with Bank of America. Ron, your line is now open. Please go ahead. Hey, good morning. This is Jordan on for Ron.

Hey, good morning, Jordan.

Initiatives good morning.

On the initiatives that you guys are working on for hiring, what's changed versus what you guys have been doing? For the past couple of years?

And also to how do you think HII and MissionTec specifically too Is there any impact from Doge?

Okay. Yes. So first, what changes? I previously spoke about it's not only hiring, we've refocused that to target more experience. Shipbuilders. Wages are going to help that. The anomaly has workforce development support And so that will help that that process to hire more experienced shipbuilders and will assist in in retention as well. Doge is the new administration. It's good. That the of their top priorities is shipbuilding. We're all for reduced regulation. So, we'll work with that that team to ensure that we have the appropriate level of regulations and trust me, no one wants less cost and better delivery schedules than I do.

So we welcome the initiatives that could be put in place and we would participate in that. Going forward.

Great. Thank you.

Thank you.

Our next question comes from Gautam Hanna with TD Cohen. Guatam, your line is now open. Please go ahead.

Hey, good morning, guys.

Good morning, guys.

Was So have two questions. One, Previously, you guys have thought about a cash inflow associated with signing the 17 submarine contracts I think it was a release of contract assets or receivables. Is that still true? And if you could quantify how how much would be could be invoiced upon signing that? And then I had a follow-up.

Yes. There is some cash upside to executing those contracts. We risk adjust all of that and we so we haven't broken that out, got them? That's included in our guide. And there's there will be some cash receipts related to that.

And if I recall a quarter ago, a lot of the free cash reduction was in the guidance for 2024 was that those contracts moving out to sign in. So is it about $500,000,000 and can you ballpark it for us? [indiscernible] I'd really rather not Gautam at this point. There's a lot of moving parts in the cash guide, as Tom mentioned previously. But, yes, I'd really rather not ballpark that. But we're still in discussions with the with the government on that contract. We need to negotiate that really holistically. So I'd rather not give you specifics on the cash impact. I'll provide just like a little color there because I think as you referenced back to the Q3 call, your question is kind of getting your head around, hey, that near the back half of the year that the omnibus approach to 17 sub being put on contract was a pathway for us to still make our guide last year, right?

And we had the early question on SAWS right now. So although that's viable and that's still out there, the industry has said that's a very efficient way to get the most ships on contract built fastest, right?

Right now, as you know, the CR just has anomaly in there for the first two of the 17 boats. And we're working very closely with our Navy partner 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, it is an omnibus of all seven seventeen, which it would impact additional contracts? Or is it just two boats for FY 2024 and incremental approach, maybe you saw 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 boats will get on contract. Right? We'll find a good risky equilibrium between us and our Navy partner, right? A balance between affordability and profitability. And we'll ensure that the deal on our side obviously meets the requirements and the expectations of our customer, while being true to barring Humber contract that we can go execute the cost and the schedule, it's in line with our profitability I hope that provides a little bit more insight as far as how that relates to cash flow. Thanks, Tom. And just one last one. In We all remember the whole FSA going to more unmanned, lighter ships, is there any movement afoot? Have you heard anything from new administration about their inclinations to revisit some of the recommendations back then [indiscernible] Not yet, but it's early.

The leadership is still getting getting confirmed We support obviously with our unmanned business. We support both. We think there's a high low argument actually a fact that is going to have to be executed But no, we've not had those conversations with the new administration yet because they just aren't there yet.

All right. Fair enough. Thank you, guys. [indiscernible] Thank you very much. I'm not showing any further questions at this time. I would now like to hand the call back over to Mr. Tess for any closing remarks.

All right. Thank you for joining the call today. I appreciate everyone's Thank you.

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