Huntington Ingalls Industries, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2024 HII earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, please press star followed by one on your telephone keypad. Please be advised that today's conference is being recorded. If you need further assistance, please press star zero to reach an operator. I would now like to hand the call over to Christy Thomas, Vice President of Investor Relations.

Mrs. Thomas, you may begin. Thank you, operator, and good morning, everyone. Welcome to the HII Third Quarter 2024 Conference Call. Matters discussed on today's call that constitute forward-looking statements, including our estimates regarding the company's outlook, involve risks and uncertainties, and reflect the company's judgment based on information available at the time of this call. These risks and uncertainties may cause our actual results to differ materially. Additional information regarding these factors is contained in today's press release and the company's SEC filings. We also will refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the slides that accompany this webcast which are available on the investor relations page of our website at ir.hii.com. On the call today are Chris Kastner, 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, and thank you for joining the call, everyone. Earlier today, we released our third quarter results and announced the updated guidance for the year. Before I get to the results, I want to thank the 44,000 HII employees who build ships in our shipyards and who solve some of the most pressing technical challenges related to our national security within our mission technologies division. At HII, our mission is clear. It is to deliver the most powerful ships and all domain solutions in service of our nation, creating advantage for our customers to protect peace and freedom around the world. Now for the results. Third quarter revenue was $2.7 billion and earnings per share was $2.56 down from $3.70 a year ago. We updated our shipbuilding revenue guidance for the full year to approximately $8.8 billion and our mission technologies revenue guidance to a range of $2.8 to $2.85 billion. We also updated our 2024 shipbuilding margin guidance to 5% to 6%. and revised our 2024 free cash flow guidance to zero to 100 million. I'll provide some operational milestone updates and division highlights prior to providing more detailed discussions surrounding the quarter's performance and guidance changes. During the quarter, Newport News shipped the final module of Virginia-class submarine Utah, SSN 801. And on CVN 79 Kennedy, the ship is progressing into the test and turnover phase. 92% of compartments have been turned over to the Navy, and all 19 of the ship's combat systems are turned over to the government test team. Looking ahead, float off of SSN 800 Arkansas is moved to 2025 due to a customer-driven design change that requires incorporation prior to launch. At Ingalls Shipbuilding, we received the $9.6 billion award of the multi-ship procurement of amphibious warships which provides strong revenue visibility for years to come. Combining this with a series of milestone achievements in the quarter and early October, including the launch of LPD-30 Harrisburg, the loadout of three of four hypersonic missile tubes into the DDG-1000 Zumwalt structure, and Aegis Light-Off on DDG-128 Ted Stevens, the second Ingalls Flight 3 destroyer, some solid progress is being made at Ingalls. Our results also reflect strong performance at Mission Technologies, with 14% revenue growth year-to-date over 2023 and a third quarter funded book-to-bill of 2.2. Mission Technologies had several significant contract wins in the third quarter, totaling $11 billion of potential contract value, including a $6.7 billion contract to provide electronic warfare engineering and technical services support to the U.S. Air Force. The single award, indefinite delivery, indefinite quantity contract is the largest ever awarded HI's Mission Technologies Division. We were also awarded a $3 billion federal government single award task order for national security services and new and emerging technology, a $458 million contract to modernize US government comms and IT networks, and a $209 million contract to support US Air Force weapons systems development, and sustainment. We ended the third quarter with backlog of $49.4 billion, of which approximately $28 billion is currently funded. Further, to results and guidance changes, two issues have impacted our expectations for the year. First, based on constructive discussions with our Navy partner, we expected to reach an agreement for Virginia-class Block 5 and Block 6 and Columbia-class submarines in the second half of 2024. Starting this fall, some uncertainty emerged about the timing of that agreement. Where we're confident an agreement will be reached and discussions continue, we have updated our profitability and cash flow assumptions based on the uncertain timing and structure of that award. We continue to pursue innovative contracting approaches that incentivize greater investments in our workforce, facilities, and technology. These investments are critical to the goal of yielding accelerated program schedules, that meet the urgent needs of the Navy. Second, our assumptions of performance improvement and risk reduction have not been achieved. This is due to late critical material deliveries and reduced experience levels within our teams, both in production touch labor and supervision. The combination of material delivery delays and inexperience leads to labor inefficiency, and in some cases to rework, which affects program schedules. Late supply chain material has necessitated a renewed look at our labor plans and delivery schedules. This alignment of labor and material from the supply chain is critical to mitigating program costs. It bears repeating that nearly all the ships currently under construction were negotiated prior to COVID. These ship contracts, which provide long-term revenue visibility, did not anticipate in their cost targets and risk-limiting clauses the significant disruption of our workforce and supply chain or the subsequent inflation experienced by us and the broader economy. They did not anticipate the significant loss of shipbuilding experience in our yards through early retirements and the training requirements of new shipbuilders. As I said, the terms of these contracts are still governing the majority of the work underway now at Newport News. Let me be clear, delays and cost increases on these ships are unacceptable to me, my team, and all of us at HII. Looking ahead, we continue to take decisive actions to focus on the fundamentals of shipbuilding to ensure that we finish these ships, get them delivered to the Navy, and transition to ships negotiated in the context of our current economic reality. Further, regarding actions to improve performance, I'll focus on three points, starting with workforce. I want to emphasize we have thousands of highly skilled and committed shipbuilders and their example and mentorship are invaluable as we develop a new generation of manufacturing talent to execute on our backlog and the demand ahead of us. We are making significant investments in craft proficiency training and in leadership development so that our deck plate executes safely, efficiently, and with first-time quality. Our innovative craft learning centers, virtual and augmented reality training cells, and form and support strategies are helping to accelerate learning within the teams. In partnership with the Submarine Industrial Base, the Hampton Roads Regional Training Pipeline has grown its capacity, allowing Newport News Shipbuilding to hire 30% of craft new hires from a pre-hire training pipeline, up from only 5% two years ago. also at Newport News, remain focused on deploying and maturing a common operating system across all programs to improve execution. In trades where we first piloted this, we have seen meaningful throughput improvement by enabling our frontline leaders to spend more time on the deck plate with their people and by standardizing and simplifying how they put their teams to work every day. We are also investing in data analytics and pilot projects utilizing AI to find faster solutions to material delivery delays and mitigate their impacts to ship assembly schedules. Scaling the operating system across all production areas is our best near-term opportunity to improve throughput while we pursue long-term structural improvements to our infrastructure, supply base, and workforce. Second, supply chain and supplier development. We are working with the Navy, fueled by submarine industrial base funding, to improve supply chain performance. With the goal of helping to accelerate throughput in the shipyards, we are also investing in new centralized manufacturing centers of excellence for high-risk items to improve cost and schedule predictability for these build sequence critical parts. Third, capacity. We are outsourcing additional work to new suppliers, which helps to rebuild the industrial base. and takes the work to where there is additional workforce and investing in new industry 4.0 technologies, including additive manufacturing and digital engineering. As an example, we're outsourcing over 1 million hours in 2024 and plan to increase that by over 30% in 2025. We are committed to growing the manufacturing ecosystem necessary to build these ships. Additionally, we're reviewing costs across all three divisions to remain competitive and meet our cost objectives. This enterprise-wide review includes a thorough evaluation of our overhead costs and support costs to ensure that each element supports our customer requirements. We're evaluating capital in a similar fashion and ensuring we focus our capital on improving throughput. While our previous cash flow forecast included a capital expenditure target at 5% of sales from 2024 through 2026, We have reduced our plan spent for 2024 and we are thoroughly evaluating our 2025 and 2026 capital plans to reflect the uncertainty of the timing and structure of the future contracting activity. Turning to Washington, while the government operates under a continuing resolution into December, we continue to engage with the Navy on the most appropriate path forward on the submarine contracts. As demonstrated with the recent multi-ship procurement award for amphibious ships, HII has a record of reaching equitable agreement on this type of contract that delivers sustainable returns for the company and savings to the customer. In closing, before I turn the call over to Tom, I want to emphasize these primary points. First, we are confident we are focused on the right things, on the fundamentals to execute on our current backlog. And once we transition to these post-COVID contracts, cost and schedule performance and predictability will improve. Second, on the outstanding contract awards and shipbuilding, we expect agreement at a fair cost and schedule that reflects our current operating environment. And we will continue to work with the Navy until we get this complete. Finally, the long-term value equation for HII has not changed. There's unprecedented demand for our products and services. We remain confident in our mid- to long-term guidance of 9% to 10% shipbuilding margins, and we firmly believe the actions we are taking will enable us to stabilize performance as we continue to work through these ships. And now, Tom. Thanks, Chris, and good morning.