Huntington Ingalls Industries Q1 2024 Earnings Call Transcript

It's right around 90%. It's progressing well. They're into the test program. We're actually seeing dead loads fired off malls off the ship. So that's a positive sign. So yes, they're progressing very well.

Yes. So we do have -- thanks Scott, appreciate the question. And we do have a shape of our margin, and it's backloaded in the year because of the milestones. And we guided to 7%. We came in at 6.88%, just a little light on the margin there. And then on the operating income, the sales being under Q2. But timing on that cost and labor is here, working ourselves to progressing on that front. But on the back half of the year, as we make our milestones, I do anticipate a ramp. We're guiding for Q2 to be a 7% quarter as well in shipbuilding. And then obviously the back half of the year, we'll kind of lift that up.

Yes. That's interesting. Obviously, subsidies would help. More important than that is that some of the industrial-based funding that's been appropriated in '24, where there's real line of sight on projects that are going to improve performance within the industrial base, in the supply chain, in the labor force and in capacity. So I think that, that targeted effort by the Navy and the shipbuilders to identify spaces where we can make investments and get improvements is appropriate, and the teams are working very hard to do that.

Well, there are other things you can do. But labor is the primary issue, is manufacturing labor in the United States and then shipbuilding labor in the United States. Simply the amount of labor that's necessary to build the ships, the access to labor and then the labor rates that we need to develop to be able to access more labor. We're working very hard on the apprentice schools, in workforce development with the State of Virginia and Mississippi and the community colleges. And it's really kind of a change in approach relative to ensuring that manufacturing labor is a good job and a good-paying job that people want to do coming out of high school. So I don't think it's a one size fits all sort of solution to this. But labor is, I believe, the most contributing factor. And when you think about the supply chain, it's labor in the supply chain as well. So manufacturing labor is definitely a priority that needs to be fixed for the nation, I believe.

So Rob, I'll give you some color on that. Yes, it was a strong quarter. Again, it came in at $750 million, following Q4 last year at $745 million. That we are being conservative in the guide, it's still holding it at $2.7 billion to $2.75 billion. I mean, if you do the quick math, the run rate for the remaining of the year is $650 million and holding to the guide there at the midpoint. There is opportunity, I think, for him to do better than that, but we don't want to get ahead of ourselves. It's about awards that he has in the plan this year, changing contracts that we have that we have backlog on those contracts into sales, and then him continuing his team to continue to stay on his labor plan and his hiring in that. So I do think there's some potential tailwinds on that front, but we'll just have to let the year play out. Right now, I'm really comfortable. We saw -- we finished last year at 13% growth from '23 over '22. And then the you see a quarter here where it's over 20% quarter-over-quarter. So a fantastic start to the year. And he's got -- his pipeline has grown from $60 billion to $80 billion. So the opportunity set and scope of what's in play there has grown as well. So I'm looking for a strong back half of the year here from MT, but we'll have to see how it plays out.

Yes. Well, no doubt that when you miss milestones and you extend schedules, there's going to be additional cost. So unfortunately, as we came through those amidst the end of the year and then got them done, 798, we floated off in the first quarter, we got the two deliveries in the second quarter, and there's just less opportunity. So yes, unfortunately, schedule equals cost, we've got to make our milestones. You think of the balance of the milestones in the year, they're all holding. I would say the VCS milestones for the back half of the year are going to be a challenge, but the team is committed to getting those done, and they're holding now. But that's why we give you the milestones, you can get a barometer of how we're executing.

Yes. So from a cash perspective, we came in at $274 million here. We're guiding another minus $100 million. So we'll work ourselves through that. Not uncommon, we burn cash at the beginning of the year, and not unanticipated here. Yes. So we wanted to make sure everyone's aligned with us on that front. From a capex perspective, we spent 2.6% of sales in the first quarter here. And as we get into those projects this year, we'll ramp on the back half of the year. So we held the guidance at 5.3% of capex of sales for the entire year, and you'll see that ramp as we get into the back half of the year here.

Sure. So yes, widely reported on that issue. The team has come through the first-of-class issues on the bow that impacted the schedule. Those are essentially behind us now. And then there's just -- now there's volume work to get the bow complete. We're actually a bit ahead of schedule to the recovery plan. The team is very focused on it. It's really our top priority, it's the top priority of the Navy. So unfortunate that we encountered those first-of-class issues, but we think the specific issue that drove the schedule delay is behind us at this point.

Yes. So I'll tell you, there has been incremental improvement as we move through the first part of the year on improving the rate on the VCS program. It's not good enough. There needs to be additional improvement. In regard to the budget, I think the most important thing relative to the discussion on one or two boats procured in '25 is the signal it sends to the supply chain, is we need to make sure that we buy a full boat of materials, we keep the supply chain healthy so that we eliminate that risk for them. The last thing we want to do is create risk on the -- within the program. So I think we've communicated that with the customer, and the Congress, they understand it. And as you know, we're just at the beginning of the budget discussions. So ultimately, we expect it to get resolved. But it's very important that we get the supply chain under order for both of the boats.

Thanks, doug.

Yes. So that's an excellent question. This is, from an AUKUS standpoint, as I previously indicated, we view this as an opening of two markets for us. So it's a really good opportunity for us. And we think we're taking all the right steps to prepare for ultimately a pretty material impact to the corporation. This is a really critical first step because we're flexing muscles in our supply chain to qualify a vendor in Australia that will ultimately potentially be part of the supply chain. We could start -- we're starting small, but it will ultimately grow from here to make them a sovereign-ready submarine provider. So this is just the first step. I don't believe material revenue will flow from this immediately, but it's an important step to be prepared for us to support Australia.

Well obviously there would be further upside related to that. I think there are discussions about that, but I don't want to get ahead of ourselves. Let's focus on AUKUS at this point, and I'll leave those sort of discussions to the Pentagon and the Navy.

Okay. Yes. So it was $53 million up, $51 million down for net $2 million. And the makeup of that was Ingalls was positive $13 million, Newport News was the negative $12 million, and MT was $1 million.

Yes. So I'll start and then Tom can jump in. Yes, as you know, Gautam, we evaluate our EACs every quarter, and we have to take step-ups or step-backs. We do that, none more material in nature. But you saw the slip of the milestones which impacted some programs. So there were minor step-ups and step-backs throughout.

But nothing material on that...

Yes, nothing material.

I'll comment, too, here. So yes, 6.8% versus guidance of 7.0%. A year ago this quarter, it was 6.7% push so not that far off. From a Newport News perspective, again at 5.7% for the quarter. A year ago, there were 5.6%. We finished off last year at 6.2%. So slightly off of that, just working through getting that production line working, material and labor on deck plate at the same time, trying to get that rework down and keeping the production line going here. So we're fighting through it. And really not that far off the guide, so -- okay.

Yes. So we obviously assess the EACs in the first quarter, but it's a second quarter event. And it's included in our guide for the second quarter and our expectations for the second quarter.

It's aligned. It's all baked into the plan we have and the guidance that we give, yes.

So it's tough to look at the margin rates from quarter-to-quarter, and we do try and forecast so that you can land about where we think that we will be. Behind the scenes is the maturation of where we are on EACs, where the milestones are going to fall, where we see the potential risk burned out, so we've been taking the step-ups in the booking rates. And it's just the first half of the year. We've had this for a couple of years now, that the first half of the year is lighter than the back half. Obviously, the major milestones, the deliveries and the launches are back half-loaded, so we expect to see that there. I'm not surprised on where we are. A couple of tenths here or there is not a huge deal overall. And we're working through our risks and opportunities going forward here.

It's a mix of the milestones that we have, incentives, all the aspects that we have and burning down risk. So all that plays out. I will tell you from a margin perspective, if you look over the last three years, right, whether it's shipbuilding at 7.7%, 7.7%, last year it was 8.3%. Even when you take the claim out, that we had that recovery, it was 7.5%. From a Newport News perspective, which is the preponderance of where the risk is right now, we were 6.2%, 6.1%, 6.2%. So that margin rate has been stable. What we're talking about is a lift here kind of going forward. And as long as we stay on pace, the tempo of hiring, material and the cost efficiency, as we've said in the past, we expect that incrementally to improve annually here. So we'll keep you informed. Right now, 6.8% versus 7.0% is pretty much on top of what we thought we'd expect, and we're guiding to 7% right now, yes. So the back half of the year, George, will be a lift.

Yes. So it's the working capital, it's timing, it's trade working capital between the billings and the receipts, the AR and the AP that we have right now. We have the cost in hand. At times, it's either making the progress or being able to bill, working ourselves through incentives for collections as well as progress restrictions that we have. So a little bit higher than we guided to at minus $200 million here and minus $400 million for Q2. Not uncommon, like in 2022, where we ran the first three quarters in a deficit in cash, and then we came back strong in Q4. So we're watching that closely, and I think we're on plan right now going forward.

No, '25 has not shifted, and all the milestones are important. It is critical on the VCS program, that they meet their commitments because it is an assembly line and you need to roll crews to the next boat. So yes, those VCS milestones are important.

Yes. So thanks, Myles. Workforce is a significant issue. We think we've solved the hiring part of that issue. We've hired over 1,700 in the quarter to our commitment of -- or to our goal of 6,000, and we're working very hard on attrition. There are some pilot projects that we have within each of the organizations, each of the shipyards, relative to attrition surrounding pay, where you recruit from and flexibility. Those are starting to yield some fruit, but not enough where I can really take it to the bank. So some positive indicators, but not good enough yet and we're going to continue to work on it. From a supply chain standpoint, we are being impacted by some major equipment within a number of our programs. The overall supply chain is definitely more stable than it was a couple of years ago and even 12 months ago, but some of our major suppliers are impacting the erection of our ships, and we're working hard to resolve that with those subcontractors.

No. Let's say two to five.

I think both years kind of near or pretty closely expectations, both from where we were on the margin side and the cash that's going to follow that. So it is a year where there's more milestones in the back half. It will be highly dependent that we get those done. Last year, the three events kind of slipped right from Q4 into Q1 and essentially at the very beginning of Q2. So we had talked about staying attentive to us making our schedules. two, three, four months slip, although we don't like that, it's not huge.

And I think the milestones we have right now, we have plans in place to make it by the end of the year, but there's risk on a couple of them. So we'll just have to see how that plays out here. I think it's going to -- near is a very similar profile year as 2023. As far as your comments about kind of missing, last year, we guided in the upper 7s. We finished 8.375%. I tell you, the year before that, it was a couple of ticks off, too, a couple of tenths. So I think the guide is realistic, we have a plan in place to hit it, and it's just about execution here now with eight months to go in this year.

Yes. So we did buy back $62 million in the first quarter. We talked about a target of $300 million by the end of the year. So you can do the math on that. That will -- that should ramp up as we go through the back half of the year. We follow a very disciplined buying grid. We have algorithms against that where we see value. So we'll continue to employ that process. It has served us well. We reiterated our targets, so I don't see a change in that going forward right now.

And then from a minimum on the cash balance, it's not per se a minimum. From time to time, we will dig into our revolver or our commercial paper. So that's not uncommon, we've seen that in the past here. And as we're into the seasonality of Q1 in the first half of the year, being cash users, that's not a concern or a problem right now. So there isn't like a threshold or a minimum balance of cash that we have that would tie to being opportunistic and seeing value in the repo. So they're kind of independent.

Yes. We don't publish our target there. It's definitely not back at pre-COVID levels, so we still need to improve our performance from a retention standpoint.

Okay. Thank you, everyone, for your interest in HII, and we will continue to focus on the fundamentals of our business in support of our customers. Have a good afternoon.