Huntington Ingalls Industries, Inc. Q3 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2023 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. Please be advised that today's conference call is being recorded. I would now like to turn the call over to Christie Thomas, Vice President of Investor Relations. Ms. Thomas, you may begin.

Thank you, operator, and good morning. I’d like to welcome everyone to the HII third quarter 2023 earnings conference call. Joining me today on the call are Chris Kastner, our President and CEO; and Tom Stiehle, Executive Vice President and CFO. As a reminder, statements made today that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results to be materially different from future results expressed or implied by these forward-looking statements. Please see our SEC filings for important factors that could cause our actual results to differ materially from expected results. Also in their remarks today, Chris and Tom will refer to certain non-GAAP measures. For reconciliation 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 President and CEO, Chris Kastner. Chris?

Thanks, Christie, and good morning, everyone. Today, we released quarterly results that demonstrate continued topline growth across all three of our divisions, steady operational performance, and strong free cash flow generation. Our focus on the fundamentals of the business is evidenced through our strong 5.3% year-to-date revenue growth, our outstanding 2.4 book-to-bill in the quarter at Mission Technologies, and continued shipbuilding milestone achievements. Given our year-to-date results, we are pleased to increase our 2023 revenue and free cash flow guidance, and Tom will provide more information on these increases during his remarks. Our talented workforce remains focused on executing our strategy, supporting our customers' top national defense priorities by delivering quality platforms, technologies, and solutions, and in parallel, winning new business that leads to growth opportunities. Before I get into the results, I would like to thank our HII employees at all three divisions for their dedication, innovation, and customer focus. Let's turn to our results on page three of the presentation. Topline growth increased 7.2% from the third quarter of 2022, resulting in a record third-quarter revenue of $2.8 billion. Diluted earnings per share was $3.70 for the quarter, up from $3.44 in the third quarter of 2022. New contract awards during the quarter were $5.4 billion, which resulted in a backlog of approximately $49 billion at the end of the quarter, of which $27 billion is currently funded. Shifting to an update on our shipbuilding milestones. In the third quarter at Ingalls, we launched the amphibious assault ship LHA 8 Bougainville, and laid the keel for LHA 9 Fallujah. Also, we successfully completed acceptance trials for NSC 10 Calhoun and delivered her last month. In addition, we successfully launched and christened the Flight III Arleigh Burke-class destroyer, DDG 128 Ted Stevens. Finally, LPD 29 Richard M. McCool Jr. is expected to complete acceptance trials and deliver in the fourth quarter of this year. Ingalls contract awards this quarter included a $155 million contract for the modernization of USS Zumwalt DDG 1000, and the significant award of seven of ten Flight III Arleigh Burke-class destroyers in the FY23 DDG multi-year procurement competition. At Newport News, we continue to make progress on the Virginia-class attack submarines as we laid the keel of Oklahoma, SSN 802, and we reached pressure hull complete on Arkansas SSN 800. We expect to float off SSN 798 Massachusetts and deliver SSN 796 New Jersey before the end of the year. We also continue to make progress on nuclear-powered aircraft carrier construction CVN 79 Kennedy, which is focused on compartment completion and the test program, having turned over more than 70% of the ship compartments to the navy and lighting off combat systems for integrated testing. CVN 80 Enterprise is progressing well and is approximately 25% complete. The cost for the combined buy of CVN 80 and 81 has benefited from the bundling and early procurement of the majority of the material. So much so, that over 70% of the material for CVN 81 has already been placed on order, generating significant savings over the traditional approach to ordering. However, due to major component delays from the supply chain driven primarily by COVID, and the labor and supply chain effects subsequent to COVID, delivery of CVN 80 is forecasted to be approximately 12 months late. To mitigate the delay, HII has worked with the Navy to employ innovative build techniques, which minimize the impact on CVN 81. At Mission Technologies, we saw the third straight quarter of record revenue with sales of $685 million, 15% over the third quarter of 2022. In addition to strong sales growth, Mission Technologies also won several major strategic competitions in the quarter and now has posted over $5 billion in potential total contract value bookings year-to-date. These awards resulted in a third-quarter backlog book-to-bill of 2.4 and a year-to-date backlog book-to-bill of 1.2. Significant wins in the quarter included the $1.4 billion joint network engineering and emerging operations task order, the $347 million contract for the Navy's Lionfish SUUV program, and a $244 million task order to integrate Minotaur software products into maritime platforms for the Navy, Marine Corps, and Coast Guard. Shifting to activities in Washington, the federal government began the new fiscal year under a continuing resolution, which funds government operations through November 17. We applaud Congress for including an anomaly in the CR that will allow DoD to deviate from typical restrictions and obligate funding to begin construction of the second Columbia-class nuclear submarine. We look forward to Congress proceeding as expeditiously as possible on appropriations bills. We also look forward to Congress completing their work on the fiscal year 2024 National Defense Authorization Act with the respective bills of the House and the Senate reflecting strong support for shipbuilding and other national security priorities. Final outcomes will depend on eventual conference negotiations between the appropriations and authorization committees. We are encouraged by the support of our programs thus far in the four committees of jurisdiction during the fiscal year 2024 budget cycle. Now turning to labor, we have hired nearly 5,400 craft personnel year-to-date through the third quarter, which puts us 8% ahead of our full-year plan of approximately 5,000. We have work to do to improve our retention rate and the shipbuilding teams are laser-focused on addressing this challenge. Retention and attendance and the acceleration of workforce development will remain consistent focus areas for us going forward. In summary, this was a very strong quarter, demonstrating continued focus and progress on our strategy of executing against our backlog and driving growth in Mission Technologies. We remain committed to continuing to create value for all of our stakeholders: our employees, customers, shareholders, suppliers, and communities. And now, I will turn the call over to Tom for some remarks on our financial results. Tom?

Thanks, Chris, and good morning. Today, I'll briefly review our third quarter 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 six of the presentation, our third quarter revenues of $2.8 billion increased approximately 7.2% compared to the same period last year and represents a record third-quarter result for HII. This increased revenue was largely attributable to growth at Mission Technologies and Ingalls shipbuilding. Operating income for the quarter was $172 million, an increase of $41 million or 31% from the third quarter of 2022, and operating margin of 6.1% compares to an operating margin of 5% in the same period last year. The increase in operating income was primarily due to higher segment operating income, a more favorable operating FAS/CAS adjustment, and more favorable non-current state income taxes compared to the prior year period. Net earnings in the quarter were $148 million compared to $138 million in the third quarter of 2022. Diluted earnings per share in the quarter was $3.70 compared to $3.44 in the third quarter of the previous year. Moving on to slide seven, Ingalls revenues of $711 million in the quarter increased by $88 million or about 14% from the same period last year, driven primarily by higher volumes on amphibious assault ships and surface combatants. Ingalls operating income of $73 million and operating margin of 10.3% in the quarter increased from last year, primarily due to higher volumes I mentioned earlier and favorable changes in contract estimates compared to the prior year. At Newport News, revenues of $1.45 billion increased by $8 million or 1% from the same period last year. Newport News operating income for Q3 was $90 million, a decrease of $12 million compared to the third quarter of last year. Operating income was lower due to contract incentives earned in the Columbia-class program in the third quarter of 2022, partially offset by improved performance on the Virginia-class submarine program. Shipbuilding operating margin in the third quarter was 7.5%, slightly ahead of the outlook we had provided for the quarter. Our shipbuilding operating margin outlook for the full year remains unchanged. And as we noted previously, our expected shipbuilding milestones for 2023 are concentrated largely in the fourth quarter. At Mission Technologies, revenues of $685 million increased by $90 million or about 15% compared to the third quarter of 2022, primarily due to higher volumes in mission-based solutions driven by our C5ISR and cyber, electronic warfare, and space programs. Mission Technologies operating income of $24 million compares to operating income of $14 million in the third quarter of last year. The increase in operating income was driven primarily by the higher volumes I just mentioned, as well as improved performance in unmanned systems. Current results for Mission Technologies included approximately $27 million of amortization of purchased intangible assets. Mission Technologies EBITDA margin in the third quarter was 8.2%. Turning to slide eight, cash from operations was $335 million in the quarter. Net capital expenditures were $42 million or 1.5% of revenues. Free cash flow in the quarter was $293 million. This compares to cash used in operations of $19 million, net capital expenditures of $77 million or 2.9% of revenues, and free cash flow of negative $96 million in the third quarter of 2022. Cash contributions to our pension and other postretirement benefit plans were $11 million in the quarter. During the third quarter, we paid dividends of $1.24 per share or $50 million in aggregate. We also repurchased approximately 100,000 shares during the quarter at an aggregate cost of approximately $21 million. Year-to-date through the third quarter, we have repurchased approximately 176,000 shares at an aggregate cost of approximately $37 million. Moving on to slide nine, I'd like to provide an update on our pension sensitivities for 2024. Our forecast in early 2023 assumed asset returns of 8% and a discount rate of approximately 5.5%. Through the end of the third quarter, discount rates have increased by approximately 60 basis points and our year-to-date asset return is roughly 4.6%. Pension related numbers are subject to year-end performance and measurement criteria. We will provide a multiyear update of pension estimates on our fourth quarter earnings call in February. Also, I would like to highlight that our pension funded status remains strong and has improved year-to-date. Additionally, I will note that the cash flow impacts related to pension changes remain minimal. Moving on to slide 10. Given the strong third quarter free cash flow, we are increasing our 2023 free cash flow guidance to approximately $500 million, an increase of $75 million from the prior midpoint guidance. This increase is primarily driven by the conclusion of the negotiations regarding the payment of COVID advances, as well as positive cash flow contributions for Mission Technologies. We continue to expect approximately $1.2 billion of free cash flow over the two-year period of 2023 and 2024. I'll highlight that we continue to expect to distribute substantially all free cash flow to shareholders through 2024 after planned debt repayment, which is currently on track. Turning to slide 11, in addition to increasing our fiscal year '23 free cash flow guidance, we’re increasing our revenue guidance for both shipbuilding and Mission Technologies. Given the strong third-quarter revenues across all three divisions, we are increasing the midpoint of shipbuilding revenue guidance by revising a range from $8.4 billion to $8.6 billion to a range of $8.5 billion to $8.6 billion, and increasing our Mission Technologies revenue guidance from approximately $2.5 billion to approximately $2.55 billion. This is an increase to the midpoint of shipbuilding revenue guidance of $50 million and an increase to Mission Technologies revenue guidance of $50 million. Additionally, we are reaffirming our shipbuilding and Mission Technologies margin guidance. To summarize, we delivered strong revenue growth in the third quarter and finished slightly ahead of our margin expectations for the quarter. We also delivered strong free cash flow. Mission Technologies had an impressive third-quarter backlog book-to-bill of 2.4, and year-to-date has potential total contract value awards of over $5 billion, in addition to a robust opportunity pipeline of $70 billion. Looking to the end of the year, we are pleased to raise 2023 revenue and free cash flow guidance and reaffirm margin guidance as we continue to execute the milestones and commitments we’ve laid out. With that, I'll turn the call back over to Christie to manage Q&A.

Thanks, Tom. As a reminder to everyone on the call, please limit yourself to one initial question and one follow-up so we can get as many people through the queue as possible. Operator, I will turn it over to you to manage the Q&A.

Thank you, Christie. Our first question today comes from Scott Deuschle from Deutsche Bank. Scott, your line is now open. Please go ahead.

Hey, good morning.

Good morning, Scott.

Chris, what's the financial impact from the delay on CVN 80? I think you said it was 12 months. And then was that delay known when you closed the books and accrued the EACs for the quarter?

Yes, approximately 12 months. And we've been holding that risk for a while on our financials. So there's no financial impact related to it. That impact is driven by some issues in the supply chain and major equipment in the bottom of the ship, but no financial impact related to it. And the team's doing their best to mitigate the impact. The good news on that is we do have some EPA protection, which mitigates it a bit. But the team's focused on it and they're going to do their best to mitigate the impact going forward.

Okay. That's great. And then I think one thing that's been maybe a bit confusing to investors is trying to understand the impacts to Huntington or the read-through when your partner books negative EACs on Block V Virginia-class boats due to supplier costs. Can you just maybe level set us on how we should interpret that? And I realize your booking rates are probably lower in there. So it doesn't necessarily mean you book need to book negative EACs, but does it have any impact on your longer term margin trajectory on Block V? Thanks.

Yes. So, we evaluate our EACs on all our programs on a quarterly basis and take appropriate adjustments up or down as we see fit. I continue to believe that there's opportunity in Block V. As we transition out of the Block IV boats and get into Block V, we should have some upside. But I wouldn't comment on our partner's accounting, but I'm very comfortable with where we're at.

Okay. Great. Thank you so much.

Sure.

Thank you, Scott. Our next question today comes from David Strauss from Barclays. David, your line is open. Please proceed with your question.

Hi. Good morning. This is actually Josh Corn, on for David.

Hi.

I wanted to ask about the outlook for shipbuilding margins in 2024 if you see any improvement and what some of the drivers might be. Thanks.

Yes. So I fully expect incremental improvement in shipbuilding margins as we move forward. It's all about transitioning out of the Block IV boats in Newport News and the Block V and continuing to improve in Newport News. So the story hasn't really changed quarter-to-quarter. Newport News continues to stabilize. Labor is good. Hiring is good. We still need to work on retention. But I'm comfortable with where we're at.

Okay. Thank you.

Sure.

Thanks very much. Our next question comes from Doug Harned from Bernstein. Doug, your line is now open. Please go ahead.

Good morning. Thank you.

Good morning, Doug.

On your margins, at Newport News, you talked about you met your goal of 7.4% for the quarter. But when you look at the margin improvement you're going to have to have in Q4, can you walk through what has to happen there because there you're going to have to get a lot of upside in margins in Q4 to meet your guidance, it looks like.

Hey, Doug. Yes, it's Tom here. So, yes, we have been consistent throughout the year here saying that the shipbuilding milestones were in the back half of the year, specifically for Newport News. We have two large milestones here in the 796 delivery and then the 798 float off. So, that's going to be a driver in the back half of the program. And there's a lot of focus down there. Chris has talked about the hiring and the attrition that we're doing, the extra training, the operating system that we've added down there. Think as COVID becomes further in the rearview mirror against the portfolio of contracts that we have right there. And opportunity sets abound as we finish off the ships that were impacted to start new ships. Although we saw them up at a lower level, that incremental margin improvement story exists especially at Newport News. But specifically, just on Q4, I think for the last 13 weeks of the year, it's continued performance on the ships that we have here. And hitting the milestones I just described, ensuring that we're getting progress, watching the heads we have on the programs, and keeping the rework in check.

Yes. To support that, Doug, it's absolutely 796 needs to get delivered, that boat is essentially complete, which needs to get to trials, 798 needs to float off, and then 29 needs to continue to complete their test program and get through their trial efforts. So, it's going to be a race to completion on 29, but we're fine with where we are now.

And then when you look at the submarines, in Columbia-class, becoming more and more important. I mean, how what is the, can you describe what the mix is right now in your work between Columbia-class versus Virginia-class and how you think of Columbia-class as it grows, affecting margins over time.

Well, Columbia-class, as you know, we only build 22% to 23% of that, both the bow and the sterns. It'll grow in importance at Newport News and provide a good source of growth, but how we perform on the VCS program is going to really dictate how Newport News does in the long run. The Columbia-class is important work. It's high-priority work, but it really won't dictate margin performance going forward in Newport News.

Okay. Very good. Thank you.

Thank you, Doug.

Thank you, Doug. Our next question comes from Ron Epstein from Bank of America. Ron, your line is open. Please go ahead.

Hey. Good morning. This is Jordan Lyonnais on for Ron.

Good morning.

Would you guys be able to give more color. Good morning. Would you guys give more color on the retention rates of where they are now and also for all the new hires that you have when you expect them to reach optimal efficiency?

Yes. We don't disclose our retention rates. We're meeting or actually exceeding our hiring forecast for the year, so we feel good about our position there. What was your second question again? I'm sorry.

How long for the new hires to be fully working?

Yes. So, we talk about three to five years. The interesting stuff. Some of the interesting things we have going on in Newport News is digital shipbuilding, which we think will increase the time to talent. But we generally think three to five years and we can accelerate that with some of our digital tools.

Got it. Okay. And then one other question too. For the office funding, the $3 billion and then also the other supplemental from the White House was $3 billion. Are you guys seeing that flow through, or do you expect it? Can you size it?

Yes, we absolutely expect it eventually to flow through. Office is very important to us. We actually see that as an opening of markets, right? It's an opening of markets in the U.K. and Australia. We think in the short term here, it's really not material financially, but funds could flow next year in important areas like workforce development, supply chain assessment, and infrastructure support. We're following the Navy's lead on this. They absolutely are being very methodical in how they think through this, but we're standing ready to support them. It's really from a top-line standpoint, more of a medium to long-term opportunity, but we need to make sure that we're taking the steps now to ensure that we're prepared for.

Great. Thank you guys so much.

Sure.

Thank you. Our next question comes from George Shapiro from Shapiro Research. George, your line is open. Please go ahead.

Hi. Yes. Good morning.

Morning.

Chris, I guess you increased your free cash flow for this year, but reduced it for next year. So, what was the timing that really caused that to occur? Because, obviously, you left a two-year number the same.

Yes. It's just timing, George. As you know, from time to time, you're going to get receipts flowing sooner than you expect. The team's working very hard on working capital. It's a focus for us. I'll let Tom go into specifics.

Yes. So specifically here on 2023, what we've seen is some good performance on Mission Technologies, both topline and the cash collections, and how they're performing in the MBSS. That is positive. Hitting on milestones right now adds to the free cash flow at the end of the year, as well as we've come through the COVID repayments with our customer set. We've worked through strategy and algorithm, how that applies to the contract. And that was a couple of dollars there too. So, that's the confidence in the lift that we went from the midpoint of 425 to 500 for this year. As I've been pretty consistent on our five-year target, the guiding light from mid-year this year through the end of next year is $1.2 billion. So, we brought this year up to 75. A piece of that, as I said, is the retentions with the COVID. So, that was just timing between '23 and '24. If you notice between $5 and now $700 next year now from $780, it's still the $1.2 billion. I think there's tailwinds against that as we finish out this year and opportunity sets going forward, but we didn't want to get ahead of ourselves. So we maintained a $1.2 billion target here. Okay.

Okay. And just to follow-up on the margins in the fourth quarter that Doug had asked about, I mean, specifically, it looks like the fourth quarter's got to be about 9.2% just to get to the low-end of your guide. Now, given the milestones in the fourth quarter, I would assume the biggest jump in the fourth quarter from normal is going to be at Newport News.

I believe the three remaining milestones are crucial for us to reach our targets. We are monitoring them closely, as Chris has a clear plan for each. The 796 is prepared for action, and we are just waiting for the ship transfer. The 798 is expected to launch before the end of the year. As for the LPD 29, we have mentioned since the start of the year that we are racing to align the final tasks, including the ship’s approval and readiness, which could happen either in December or early next year. These three milestones are quite significant as they develop. Unlike 2022, where we started strong in the first two quarters, we anticipated that Q4 would be a significant quarter for us. Currently, we are on track to reaffirm our profitability guidance for shipbuilding.

Okay. Thank you very much.

Thanks, George.

Thank you, George. Our next question today comes from Seth Seifman from JP Morgan. Seth, your line is open. Please go ahead.

Thanks very much. Good morning. I noticed that you all have been doing quite well.

Morning.

Morning. So, you guys increased the revenue guide for shipbuilding. And I wonder if you could talk maybe a little bit more over time about the opportunity for growth at Ingalls with the, especially with the latest multi-years on the DDG, how that growth profile kind of looks now maybe versus several months ago and to the extent to which that can maybe be helpful for the margin mix.

Yes, this is Chris. I'll start and then Tom can complete, if we need to here, but the DDG 51 really solidifies Ingalls' base for the next few years and creates a very stable business down at Ingalls. And we don't give growth rates by division. But what we're seeing is a bit of an inflection point from a topline standpoint, both in shipbuilding and Mission Technologies, I don't want to get in front of it. We'll wait till the end of the year before we can communicate that. But, well, I think we're in a pretty good place. Growth has shown up in shipbuilding. It's driven by the supply chain and stabilization of labor. And then Mission Technologies is just winning stuff. They're converting their re-competes, they're converting new business, all end markets that we think are very strong. So yes, it’s a bit of an inflection point. We're going to talk a lot more about that after we get to the end of the year because we want to close the year strong. But we feel pretty positive about growth going forward.

Yes, I'll hop on the back of that too. I'm pretty happy with what I'm seeing down at Ingalls. You know, NSC, we delivered NSC 10, so there's one more ship set there. We've talked about how that portfolio can sustain itself and still get 3%, 3% plus potentially if things break their way on just the three major programs down there. We've seen that with the DDGs, the seven DDGs on contract, and now most recently in the August timeframe, they received the seven more there. So, they know what they're building over the next decade. They can line that up from a planning, labor resource and material perspective, and that's going to really help them drive consistent performance in production down there. So I see good healthiness even with the NSC program sun setting for Ingalls, to hit the 3% guidance that we've had through 2023 and going forward.

Excellent. Okay, thanks very much. I'll stick to one this morning.

Thank you. Our next question today comes from Myles Walton from Wolfe Research. Myles, your line is open. Please go ahead.

Good morning. This is actually Emily on for Myles. Hi, everyone.

Hi, Emily.

So on a ship, I have another shipbuilding margin question. Thanks for providing some additional insights on 2024. However, I was curious if you can provide any information on leveling the quarterly cadence for 2024 at this time. Is there a tendency towards either half of the year or between quarters? Any information on that would be appreciated.

Yes. So I think it's just a little premature. Obviously, we have some tentative plans right now. We work ourselves through the final planning process for ‘24 and on at the end of this year. We bring that to our internal management and Board here. Once we get that solidified, I'd really like to take a look to see at the actuals at the end of the year, we've talked about those milestones, which we anticipate to hit in Q4, but they just trickle into Q1. If that does, it would change the shape. So I wouldn't want to get ahead of myself. But, we still maintain the same thesis here of expectation of incremental margin improvement. We think; I mentioned earlier with COVID getting further behind us, we’re putting energy into hiring, extra training, and retention. The material seems like it's stabilized. It's not where we want it to be, but we have to improve that, with the maturation of the workforce, anticipation of less rework, the roll over or the portfolio of the existing ships that have increased EACs and scheduled extensions. There's a lot of positivity going into the follow on years here. And I would anticipate that to grow for shipbuilding. On the Mission Technology side, we've talked about still scaling that business. We've seen fantastic growth on the topline. And we have some work to do in how we get our margins higher there, a little bit more on the fixed price instead of just at 85% in cost type, additional technology, which should be able to have us deploy IP technology, more products, and a little bit more products and services. That should be able to put a premium on what we bid and what we achieve there. So, I would expect improvement in the margin and at the Q4 call in February, we'll give you the shape of next year.

Sounds good, Tom. And then, one quick follow-up. So on the maintenance side, that's something that the Navy has been pounding the drums about for a long time. Have you all been getting any more visibility from the Navy customer about the timeline for maintenance? We know pretty well about the carrier cycle, but anything on the submarine side, I know those sometimes pop up, and it's a good surprise, but it's hard to plan specifically and then also on the surface side.

Yeah. So, Emily, this is Chris. We don't expect real surprise pop-ups from a maintenance standpoint. We expect fairly consistent revenue for maintenance at Newport News. At Ingalls, we'll be opportunistic if we see stuff that we could potentially participate in. But right now, it's not in their forecast other than the work we're doing on DDG 1000, which is really not maintenance. It's upgrades.

Great. Thanks, Chris.

Sure.

Thank you. Our last question today comes from Gautam Khanna from TD Cowen. Gautam, your line is now open. Please go ahead.

Hey. Good morning, guys.

Good morning, Gautam.

Hey. Quick question. On LPD 29, I just curious your confidence level on that getting delivered this quarter. Is it a very late in the quarter kind of skew? And just how, if you could give us some framework on what the EAC sensitivity is to that in the fourth quarter?

Yes. So Gautam, it'll be a race to the finish on 29. We need to get through the final trials, get it approved, and delivered. There's some sensitivity, obviously, as we come through the final throws on that ship from an EAC standpoint. And then a lot will depend on how much work remains subsequent to delivery. I don't have a specific range for you, but we tend to, as you know, we tend to risk-adjust our opportunities as we flow towards the end of the year and LPD 29 is right in the middle of that risk profile.

Gotcha. Okay. So would you argue that the implied shipbuilding range for Q4 bounds that risk? Because it is a pretty wide margin range, obviously, that’s implied shipbuilding.

Yes. I don't want to comment on that. There's a lot of variables that go into that range, Gautam. LPD 29 is one of those variables.

Okay. And just wanted to get your sense on given all the labor challenges that you guys have faced over the last couple of years, what is kind of an appropriate margin increase rate shipbuilding next year? Like, what would be a good scenario or a realistic scenario? I mean, are we talking like 10, 20 basis points? Are we talking a more significant step up next year in shipbuilding?

Yes. So we're not going to give specifics on improvement in 2024. We'll give that on our year-end call. But I do continue to expect improvement. I just think it's a bit premature. Let's get through the end of the year, see how we close-up strong, and then we'll give you information on the year-end call.

All right. Thank you very much, guys. Appreciate it.

Sure. Thanks, Gautam.

Thank you. There are no further questions at this time. So, I'd now hand the call back over to Mr. Kastner for any closing remarks.

Sure. Thanks for joining us on the call. Before we wrap up, I'd like to note that we'll be hosting Investor Day on March 20th in New York. So, be on the lookout for more information. Thanks again for your interest in HII and joining us on today's call.

That concludes today's conference for everybody. Thanks very much for joining. You may now disconnect your lines. Have a great rest of your day.