Huntington Ingalls Industries, Inc. Q1 FY2025 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2025 HII Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the call over to Christie Thomas, Vice President of Investor Relations. Mrs. Thomas, you may begin.

Thank you, operator, and good morning, everyone. Welcome to the HII first quarter 2025 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 will also 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. On the call today are Chris Kastner, President and Chief Executive Officer; and Tom Stiehle, Executive Vice President and Chief Financial Officer. I will now turn the call over to Chris.

Thanks, Christie. Good morning, everyone, and thank you for joining the call. I'll start by providing an update on our 2025 operational initiatives, which include enhancing shipbuilding throughput, reducing costs, and securing new contract awards. In the first quarter, we made progress against our goal of improving shipbuilding throughput by 20% year-over-year. Ingalls is largely on plan and their production milestones remain unchanged. Newport News is modestly behind plan. Half of this variance is driven by the atypical weather we experienced in January and February. The most significant variance in Newport News resides with CVN 80. This is directly related to the late major equipment that is to be installed in the hull of the ship. These delays directly impact the construction approach and have limited the progress we can make on the ship. Once this equipment is received from our suppliers, which is scheduled throughout the summer, we anticipate an acceleration of progress. Additionally, for both shipyards, our outsourcing efforts continue, and we expect this to ramp throughout the year to support our throughput goals. Our South Carolina production facility is online and has already completed the first carrier unit for Newport News. The team remains focused on meeting our delivery schedules and is working with the Navy to identify additional initiatives that will accelerate scheduled performance. Turning to our cost reduction efforts. Plans are in place, and we intend to reach our goal of $250 million in annualized cost reduction by year's end. We have an agreement on the Block V FY 2024 II Built contract, and we will now turn our focus to the Block VI and Columbia Build II contracts. Also, I want to highlight how our strategic focus in 2025 aligns nicely with the administration's defense priorities. On April 9th, the Trump administration released two executive orders, modernizing defense acquisitions, spurring innovation in the defense industrial base, and restoring America's maritime dominance. We are working with our customers on strengthening the industrial base and accelerating the transition of new capabilities to the warfighter. We are leaning into the use of other transaction authorities and are working with the Rapid Capabilities Office as a means to leverage new technologies. For example, in April, we delivered the first two Lionfish small uncrewed undersea vehicles to the U.S. Navy under a program that could scale to 200 vehicles. The program was developed in partnership with the U.S. Navy and Defense Innovation Unit to accelerate adoption of dual-use commercial technologies into U.S. Department of Defense programs. This quarter, we also announced that our Mission Technologies division was selected to develop an open architecture high-energy laser counter-drone system for the U.S. Army's Rapid Capabilities and Critical Technologies office. HII will develop and test a high-energy laser prototype to acquire, track, and destroy small-to-medium-sized unmanned aircraft systems. On the shipbuilding side of the business, we established an MOU with HD Hyundai Heavy Industries. The MOU provides a framework for us to jointly explore opportunities to collaborate on accelerating ship production in support of defense and commercial shipbuilding projects. Like our existing strategic relationship with U.K.-based Babcock International, we believe international partnerships are crucial to strengthening the Allied industrial base. Given our core business, these strategic relationships position us to support initiatives that may result from the Maritime executive order. Turning to the results, first quarter revenue was $2.7 billion, and earnings per share was $3.79. We ended the first quarter with a backlog of $48 billion, of which approximately $28 billion is currently funded. Now let me share a few first quarter highlights. During the quarter, at Ingalls Shipbuilding, we launched DDG 129, Jeremiah Denton, christened LPD 30, Harrisburg, and started fabrication of LPD 32 Philadelphia. At Newport News, CVN 79, Kennedy, continued catapult testing and achieved 95% of compartments turned over to the Navy. And on the Virginia-class program, we completed a major test event on the first boat of Block V, SSN 802 Oklahoma. Also at our recently acquired Newport News Charleston operations, we retained 99% of the transitioning workforce, and these new shipbuilding team members are working on submarine and carrier units to help increase throughput at Newport News. We also celebrated the graduation of 115 apprentices during the Apprentice School graduations at both shipyards. These graduates started the apprentice program during COVID, and we look forward to higher numbers of graduates in upcoming years, following the expanded enrollment we've recently experienced. Turning to Mission Technologies, in addition to delivering the initial line five small UUVs I mentioned earlier, we surpassed 700 Remus Uncrewed underwater vehicles sold and delivered to 30 countries. Key wins at Mission Technologies in the quarter, in addition to the high-energy laser weapon system, included a contract to expand shipboard and shore-based training support for the U.S. Navy and Coalition Forces, a pilot training contract to support the nation's combat-ready force, an award from the U.S. Air Force to protect systems and software, and a task order to support global air and space operations. Turning to activities in Washington for a moment, while a full-year continuing resolution for defense is unprecedented, we are pleased with the support provided for our shipbuilding programs, which supports our target of achieving more than $50 billion in awards across 2025 and 2026. The Full-Year Continuing Appropriations and Extensions Act 2025 included funding for 3 Arleigh Burke-class surface combatants, one Virginia-class submarine, one San Antonio-class amphibious ship, and the RCOH for CVN-75. I'll note that we do not expect a material impact related to tariffs. We purchased the vast majority of our material domestically. We have long-term purchase agreements in place for material that may be impacted by tariffs. In summary, I'm encouraged by the results to date and the progress our team has made against the operational initiatives we've laid out. But I also know there is significant work to be done as we continue to execute for our customers and create value for our shareholders. Our outlook is unchanged. And over the next few years, as we execute on the pre-COVID contracts and transition into the post-COVID contracts, we will continue to reduce risk and align our portfolio baselines with the current environment. I fully expect top-line growth with a forecast of $15 billion of revenue by 2030 as well as margin and free cash flow normalization in the years ahead. And now I'll turn the call over to Tom for some remarks on our financial performance.

Thanks, Chris, and good morning. Let me start by briefly discussing our first quarter results, and then I will address our reaffirmed outlook for the year. For more detail, please refer to the earnings release issued this morning and posted to our website. Beginning with our consolidated results on Slide 5 of the presentation. Our first quarter revenues of approximately $2.7 billion decreased 2.5% compared to the same period last year. This decreased revenue was attributable to declines at Newport News Shipbuilding, Ingalls Shipbuilding, and Mission Technologies. Ingalls revenues of $637 million decreased by 2.7% compared to the first quarter of 2024, driven primarily by lower volume on amphibious assault ships. Newport News revenues of $1.4 billion decreased by 2.6% compared to the first quarter of 2024, driven primarily by lower volumes in aircraft carriers and naval nuclear support services, partially offset by higher volumes in the Columbia-class submarine program. Mission Technology revenues of $735 million decreased by 2% compared to the first quarter of 2024 driven primarily by lower volume in C5ISR. Results for the quarter exceeded our guidance. The year-over-year decline was expected and related to nonrecurring sales in the first quarter of 2024. Moving on to Slide 6. Segment operating income of $171 million in the first quarter of 2025 increased less than 1% compared to the first quarter of 2024, driven by improved performance at Mission Technologies in cyber, electronic warfare and space, and Uncrewed Systems, which was largely offset by lower amphibious assault ship risk retirements at Ingalls. At Newport News, segment operating income improved by $3 million, or 3.7% compared to the first quarter of 2024. Results in the quarter included unfavorable performance-related adjustments for CVN-80 Enterprise as well as Block IV and Block V of the Virginia-class program, which were offset by contract incentives. Consolidated operating income for the quarter of $161 million increased by $7 million, or 4.5% from the first quarter of 2024, and operating margin of 5.9% in the quarter compares to 5.5% in the same period last year. The improvement was driven by a more favorable operating FAS/CAS adjustment as well as the favorable segment results I've noted. Net earnings in the quarter were $149 million compared to $153 million in the first quarter of 2024. Diluted earnings per share in the quarter were $3.79 compared to $3.87 in the same period last year. Our contractual commitments increased by approximately $2.1 billion in the period, bringing backlog to $48 billion at the end of the quarter. Turning to slide 7. Cash used in operations was $395 million in the quarter. Net capital expenditures were $67 million or 2.5% of revenues. Free cash flow in the quarter was negative $462 million. This was within our free cash flow guidance range for the quarter, though at the low end of the range due to timing of incentives and normal fluctuations in program receipts and disbursements. During the quarter, we did not repurchase any shares. We did pay a cash dividend of $1.35 per share or $53 million in aggregate. Turning to liquidity and the balance sheet. We ended the quarter with a cash balance of $167 million and liquidity of approximately $1.5 billion. Today, we are repaying a $500 million note and plan to utilize our revolving credit facility and commercial paper program to support interim liquidity as free cash flow generation ramps through the year. This is in line with our prior expectations and was contemplated in the interest expense guidance that we had previously provided and are reiterating today. Our capital allocation priorities are unchanged. We value our investment-grade credit rating. We will continue to strategically invest in our shipyards, thoughtfully grow our dividend and return excess cash through share repurchases. Moving on to our outlook on slide 8. We are reiterating all elements of the 2025 guidance, and there's no change to our medium to long-term thinking in terms of growth and profitability expectations. Our guidance is predicated on achieving the operational initiatives we have laid out for 2025. As Chris noted, we are progressing on each of these items, and we expect to achieve a meaningful improvement in throughput over the course of the year. For Shipbuilding, we expect second quarter sales of approximately $2.2 billion and margins near the low end of our annual guidance range. For Mission Technologies, we expect second quarter sales that are relatively flat sequentially and margins of 3% to 3.5%. We expect second quarter free cash flow to be between $200 million and $300 million. To close, I will echo Chris' positive sentiment regarding the company's mid to long-term outlook. We see incredible demand for critical products and services that we provide and are heartened by the administration's clear focus on growing our domestic shipbuilding capability and supporting a strong maritime industrial base.

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 very much, Christie. Our first question comes from Doug Harned with Bernstein. Doug, your line is now open. Please go ahead.

Good morning. Thank you.

Good morning, Doug.

We've seen now with the CR with additional money for shipbuilding, infrastructure, and then this big authorization proposal that came up on the weekend. Now, when you look at all of this, there should be more money there. But the thing that I've sort of struggled with here is how to take that money and convert it into a plan that can address what you say, on the Virginia-class U, Electric Boat and the whole infrastructure needs to happen to really get throughput up. Can you comment on where the responsibilities lie, what the Navy is actually doing so that we can have confidence that not just the money is there, but the real actions are there to change the way things have been going over the last few years?

Sure, Doug. Let me give that a shot. That's a big question. And it's not only the budget, the FY 2024 boat, the executive orders related to commercial shipbuilding, and then reconciliation. There's just a lot of tailwinds right now related to shipbuilding that we need to participate in. Now the first step in seeing what the investments are in that regard is this FY 2024 tub-boat contract. That was a product of really a couple of years of effort by the Navy and the shipbuilders to evaluate the investments that were required to get at accelerating throughput. You see that in the award of that contract. It was very thoughtfully put together. It's wage support and workforce development support. It's very targeted investments to increase the submarine build rate. So that's all very positive. And then when you look at the CIB and the MIB funding that have been applied to the supplier base, that's also very positive. And you see a buildup of the infrastructure in shipbuilding that will support the growth that we think is ahead of us. So it's really, I would think, an industry-wide, all hands-on deck effort to identify a build-out of that industrial base. Now it's not easy. It takes time. These are heavy manufacturing facilities and equipment. This is building a workforce in a challenging environment. But I think it's only positive for HII and positive for shipbuilding.

I guess the challenge here is that there's been a lot of discussion about this over the last few years. And just are there some specific things like if you start to look at what you need to get to that rate of two Virginia-class per year, what's the trajectory for this? Are there specific things that will enable you and your partner to get there?

Absolutely. And really the first step of that is this FY 2024 tub-boat contract, targeted investments in workforce equipment, facilities, training that will accelerate the throughput. We have a lot of confidence that when these investments take hold, it's going to start to ramp throughput for the submarine program. And this shouldn't end here. We're going to negotiate Block 6 of the Columbia build 2 contracts. We've identified additional investments that could potentially be applied to further accelerate. So it's going to, as I said before, take a while. You just don't build a building overnight. You don't build a workforce overnight. But I absolutely think that these are the right investments to get at the build rate.

Okay. Very good. Thank you.

Thank you.

Our next question comes from David Strauss with Barclays. David, your line is now open. Please go ahead.

Hi, good morning.

Good morning.

Chris, following up on the CR money, the 242 contract that was announced yesterday seems to be a cost contract. Can you explain how this differs from our fixed price operations on the Virginia-class? What are the key differences in what this contract entails compared to previous contracts?

Yes. It's a bit of a hybrid, but I'll kick it over to Tom. He can answer that.

Yes. So it's a cost-type contract. It covers both parties, the Navy and ourselves' concerns as far as what wants to be put on contract. It's a good mix and blend between affordability and profitability. It covers the business environment that we find ourselves operating in. So it's a CTIF, and it has some constraints as far as some parameters around the outskirts of where costs can land. But we're happy that we were able to get that done. We've worked hard with the Navy, and it was approved through the government channels. And as you saw, it was awarded last night. So we're excited about that to get going on that contract.

Sure. Can you provide more detail on the shipbuilding margins? They performed better than your guidance, particularly at Newport News, while Ingalls has seen a decline. What specifically is happening, and why are you expecting a margin decrease again in Q2? Also, could you discuss the EACs for the quarter? Thanks.

We guided for 5.5 for the quarter and are pleased that we exceeded that by about 90 basis points. Ingalls reported a 7.2, and it was a pacing quarter for them. Regarding the EAC adjustments, we had 80 up and 80 down, resulting in a net of zero, meaning there were no cumulative adjustments company-wide. Currently, we are monitoring the performance in Ingalls, where we noticed some pressure on sales as we navigate through the core of those programs. From Newport News, it was a solid quarter with a margin of 6.1%. There were some pressures on CVN 80 due to delays in receiving parts, affecting the EAC schedule. Additionally, for the VCS program, we are ensuring we have enough talented personnel, and the wage element from our recent award will assist in that regard, along with managing parts supply as we aim to meet our production ramp-up goals. The new award provided incentives to help mitigate these issues. Overall, there was no net impact from EAC adjustments across the corporation.

Yes, David, this is Chris. I think you're noticing some frustration about the timing of incentives across the portfolio. I've mentioned before that we currently have more incentives in our contracts and the timing can vary. We try to provide guidance based on what we observe. If incentives occur earlier or later than expected, it may adjust our outlook slightly, but we are confident in our guidance.

From SMT perspective, we saw that they had a very strong quarter. The CEW business unit performed well against the contracts they had and the uncrewed business unit that we have there is performing well right now. So it's a couple of dollars of margin accretive on that front. The guide for Q2 that you asked about, I think we're just being conservative right now. As Chris said, there's a lot of work to do, although we're on pace on where we want to be on cost reductions and throughput and the contract awards. We've got the first increment of this one here in the spring, and then we have VCS Block VI and Columbia Bill II at the back half of the year. But I think it's just conservatism and prudence on our side that we went back to the lower end of the range.

All right. Thanks very much.

Thanks.

Our next question comes from Scott Mikus with Melius Research. Scott, your line is now open. Please go ahead.

Morning, Chris and Tom. I wanted to follow up on David's question about the two-boat Virginia contract. It was surprising to see that it was cost plus. But, obviously, there's funding in there for workforce development. Electric Boat has an ongoing labor negotiation. I think Newport News has three collective bargaining agreements expiring in 2027. So until those negotiations are wrapped up, should we expect a greater share of shipbuilding orders over the remainder of this year and next year to be more cost-plus incentive fee type structures?

Yeah, I wouldn't necessarily assume that. We need to really get the wage support that's provided in the two-boat out to our workforce as quickly as we can. I'm not going to get into dates or commitments about when that happens because we do have to discuss that with our labor unions. But we believe that when we get the workforce support, the wage support to our workforce, that retention will improve and productivity will improve, and we'll be able to make our throughput and our schedule commitments. So I wouldn't necessarily think that would dictate the contract types. And we're going to evaluate the appropriate contract types based on the situation at hand when we negotiate the contracts. So we're just going to have to move ahead from here on Block VI and Columbia Build II. The hybrid approach that essentially was put in place with the two-boat contract forms an interesting basis to roll into those discussions, but we're going to have to establish those contract types as we engage with the customer and our partner.

Okay. And then the Golden Dome is also a big priority for the administration, and that's going to require a lot of equipment, especially radars and potentially the Aegis Ashore system. Lead times on radars are also very long. So has there been communication between shipbuilding and the administration about how to produce enough radars for both the Golden Dome and what the Navy needs for its shipbuilding priorities?

We have not been involved in those discussions so far, and I am not aware of any talks with the Navy or potential suppliers regarding that. Our DDG 51 program, part of the Aegis program, is progressing well. We launched the 129, and the 128 is set to undergo its first trials this year. We are making headway on our milestones. However, concerning the ships with the new radars, I don't have any information on discussions about Golden Dome and our product.

All right. Thanks for taking the question.

Sure.

Thank you very much. Our next question is from Pete Skibitski with Alembic Global. Pete, your line is now open. Please go ahead.

Good morning, everyone. Chris or Tom, I'm not sure who to direct this to, but the situation seems complex. You have nearly $50 billion in total backlog and are discussing an additional $50 billion in new awards in the near future. Is there potential for upward pressure on the 4% shipbuilding revenue growth guidance given this backdrop? Or is it still too early to assess, or is the labor situation complicated? I also assume that the 4% figure does not account for the $150 billion in potential defense additions that may be coming. I would like to hear your thoughts on this.

Yes. So the $50 billion in new awards includes the FY '24 2-boat contract, Block VI, and the Columbia second build. It also includes the ASI bundle down in Ingalls. So I wouldn't necessarily correlate it to a $50 billion add in backlog from our current backlog levels. Now, tailwinds related to the 4% absolutely could happen. I'm not going to go there from a guidance standpoint at all right now. But the tailwinds between reconciliation, the executive order, these contracts being put under contract, and the investments that are being made in the industrial base and the shipyards, there's absolutely medium-term upside related to that top line growth number. So we just need to take advantage of it, and that's what we're going to work to do over the next couple of years.

Okay. I appreciate it. Just one last one for me on Ingalls margin. It used to be kind of reliably in the double digits, and it's kind of regressed over the past 5 quarters or so. What time frame is reasonable for us to think about the current environment changing to one where positive EAC adjustments are more maybe more likely than not?

Yes. I think you nailed it, Pete. Corporate is positive easy adjustments. It's not so much that we're realizing kind of negative adjustments, but we're staying on our run rate, and we're neutral there. All 3 of those programs are in the production environment, the engineering works, the facility is up and running. We've come through the shipyard of the future, and we're facilitized. It's really just about people and parts, being able to hire enough and keep the retention. And as we go forward with that to make sure that we feed the factory to run its production environment there. So I'm comfortable with the leadership down there and that we understand those ships. I think it's just coming post-COVID and getting the sand out of the gears there and having the production flow run as fast as possible. We are down probably a couple of years and hours of experience down there. That just works itself through maybe not as cost-efficient to realize those upsides or maybe a little bit more rework from time to time, maybe a piece of late material, whether it's CFE or GFE just all conspires to maybe not have a month or 2 early in schedule or an EAC reduction that we just kind of finish on par. But I'm comfortable with where they are right now. I mean, I'd love to see upsides every quarter, but we have not seen major step backs down there. So I think they understand what's in front of them. It's the throughput we've talked about, more cost efficiency, keep the factory fed with parts. And that shipyard with that portfolio has a legacy of performance. So I think that they'll turn the corner. We haven't given you the time frame yet, and we'll keep you informed quarterly as we watch that proceed forward.

Appreciate it guys.

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

Thanks. Maybe, Chris, could you start by talking a little bit about the workforce and how it trended in the first quarter? I think you probably picked up about 500 employees with W International and the press release is still talking about 44,000 employees. So was there much of a movement in net hiring? And how is attrition doing?

Yes. So, interesting. Good question, Myles. We hired 1,000 people in the first quarter, 1,000 craftsmen and women. That's directly related to the change in the strategy in both shipyards to hire more experienced personnel and improve the mix of experienced versus new hires. We think that strategy makes sense. We're going to continue to execute on that. The good news is attrition is down in both shipyards. Not materially down, not back to pre-COVID levels, but it is definitely moving in the right direction. So yes, hired 1,000, which is a bit south of where we wanted to be, but it's consistent with our strategy and attrition is a bit better in both shipyards, which is very positive.

Okay. And regarding the 35% increase in outsourcing, can you comment on where you are with respect to that and sort of how the performance quality is looking from what you're outsourcing?

Actually, the way we've executed on our outsourcing program has been very positive. We had some tough lessons learned back at Ingalls and outsourcing in the early 2000s. And we've used those lessons learned and applied them at both shipyards. So, the quality is pretty good. We do pilots in these manufacturing yards before they actually execute work at scale, and we learned through that process that they've done that. We are on schedule in both yards in outsourcing for the year, and the quality looks good. So, we're going to continue it. We need to. The industrial base is expanding. We need to take advantage of it, but we need to make sure that it's always high quality because if it's not, you have to redo it and that doesn't help us at all. So yes, it's very positive right now.

Okay. And last one on the SAS program, is there a direct benefit to the carrier programs? Or is it more of an indirect benefit with the submarines being the direct beneficiaries?

Yes. It supports the entire nuclear industrial base, and nuclear infrastructure so aircraft carriers get support in that as well.

Hi, thanks very much and good morning.

Good morning.

I wanted to when we think about kind of the direct impact of the contract that was announced last night, is there kind of a sizable cash advance associated with it? And is that part of the cash guidance for Q2? And does it enable signing the contract give you opportunity to change some of the assumptions across the different work at Newport News beyond just the two subs that were contracted?

Let me start with that. So guidance assumes execution of the Block V Build II contract that it has all year. And we assume incentives and capital incentives in all of our guidance. So, there are some incentives in Q2 related to that contract as well as other contracts. So it's all in the mix when we come through our guidance for free cash flow for Q2 as well as the end of the year. I don't know, Tom, if you want to add anything in regard to that.

You really hit it. I mean it was incorporated into the guide that we gave you for Q2. We mentioned at the very beginning of the year expectation to have both that award and then in the back half of the year, VCS Block VI and Columbia Bill II. So we're really happy we got that done here. Cash comes from margin, margin can come from operational performance, capital incentives, performance incentives. And with the new contract add, it helps out incrementally, but it was in the mix and it was in line with what we expected here. So I'm comfortable with both the guide that we've given you now for Q2 at $200 million to $300 million supports the $300 million to $500 million for the entire year with no change. We have pathways to get there. So I appreciate the question.

And regarding the booking rate aspect of that?

Well, it's all included in our guide and in our accounting. We had always assumed that this contract would be finalized this year in our accounting and guidance.

Okay. Looking at the bigger picture, you had the announcement with Hyundai during the quarter. One topic being discussed in Washington regarding ways to speed up shipbuilding is partnerships with other countries. This appears to be an initial effort based on what was shared in the press release. How do you view the potential for this to develop and how international partners could be involved?

Thank you for your question. It is indeed early in a strategic relationship that is quite extensive, which will involve commercial shipbuilding and exploring the economic possibilities stemming from the executive order on commercial shipbuilding. We're assessing if an economic model can support expanding the commercial shipbuilding sector in the United States, as well as sharing best practices in defense and military shipbuilding. Both teams have visited each other's shipyards. They are an excellent shipbuilder, as are we, and there’s much we can learn from one another. The scope of this relationship is currently quite broad. When considering partnerships with allies in shipbuilding, it makes a lot of sense to expand capacity and involve the best talent to achieve our goals. At this stage, we cannot predict exactly where this will lead us, but it is part of our strategy to leverage what we perceive as a significant advantage in shipbuilding.

Very interesting. Thanks.

Our next question comes from Jason Gursky with Citigroup. Jason, your line is now open. Please go ahead.

Great. Thanks. Good morning, everybody.

Hey, Jason.

Chris, we've discussed this in various parts of today's call and in previous ones. I would like to take a step back and ask a broader question regarding the timing of the transition from pre-COVID to post-COVID chips. Can you provide any updates on changes to that timeline and any major risks and opportunities associated with it? I noticed that you announced some modest delays on the carrier side today, so I want to ensure we are all aligned on the expectations for this transition timeline.

I believe we mentioned that we aim to reach the 50% mark or exceed it by 2027. You are right to highlight the issues with CVN-80 concerning the equipment delays at the bottom of the ship. We anticipate receiving that equipment over the summer, and once it's in, we will begin to see more progress. However, there are no changes to our overall milestones. We are in a solid position, and I still anticipate that transition will remain on schedule.

Okay. Great. Christie has limited us to one follow-up question, so this may have a few parts. I'm interested in the recent reforms and executive orders and would like your thoughts on several aspects. First, regarding shipbuilding assistance and investment in the shipbuilding industrial base, what conditions might be attached? Do you need to invest before receiving funds, and could this alter your future cash flow? Additionally, you spoke about OTAs in your prepared remarks, which seems related to potential acquisition reforms of FAR and DFARS. Will these mechanisms affect the Mission Systems business more than shipbuilding? What do you anticipate as the long-term effects on the Mission Systems business in terms of risks, opportunities, and margins?

Thank you, Jason. To start, regarding the reform, executive orders, and our cash flow situation, I believe it's too soon to make any assessments. There is considerable effort underway to formulate recommendations on their implementation. The executive order outlines a number of activities we need to engage in because we believe we can contribute valuable insights to achieve the best outcomes. The team, including our government and shipbuilding teams, will be working diligently over the next 30, 60, and 90 days to clarify the implications, economics, and required investments. At this point, I don’t foresee any major cash flow drain related to this, but further details will emerge. Concerning OTAs, we view them positively. They allow for quicker progress, and we have a strong track record with them. Our uncrewed small vehicle transitioned from an OTA to a recognized program successfully, and we anticipate further benefits in this area. We are confident and will actively pursue these opportunities, particularly regarding Mission Technologies. Additionally, our initiatives with the high-energy laser for the Army are encouraging. Historically, our Mission Technologies division has excelled at integrating commercial technologies to address significant challenges faced by the Department of Defense, and we will continue this practice. We have a capable team within Mission Technologies, and as I mentioned earlier, we expect potential advantages in this direction.

Awesome. Thank you.

Our next question comes from Noah Poponak with Goldman Sachs. Noah, your line is now open. Please go ahead.

Hey, good morning, everyone.

Good morning, Noah.

Yes, it was reported in the press, and I think you mentioned there was a draft of the Maritime executive order that included the SAS language. Now that we have the executive order, it no longer includes it. I understand this is a long-cycle business, but we have an extended planning process to determine the next steps. I was interested in your thoughts on why that change occurred during the process and how likely it is that we will eventually see SAS.

Yes, it's probably not crucial how it didn't make it into the final executive order. Those documents are drafts that undergo review with various government segments, and ultimately, it was left out. Do I believe SAS will come to fruition in the future? SAS introduced a lot of innovative concepts and accelerated investment in shipyards to enhance submarine production. However, our current focus is on the Block V contract, the Block VI contract, and Columbia Bill 2, and we're collaborating with our customer to finalize those agreements. The positive aspect of SAS is that it outlined in detail the necessary investments we needed to succeed, which are evident in the Block V contract. As we proceed with Block VI and Columbia Bill 2, those investments should appear there as well. While SAS is a term we use, the required investments must be made to achieve the desired build rate. So, SAS is currently just a term that may or may not come to pass in the future, but the necessary investments must occur to reach the build rate.

Okay. Chris, how much have you been able to raise wages in recent periods to get the attrition improvement that you referenced? And how much more do you have to raise wages to make much more significant strides on that front?

So I think the attrition improvement has really been a result of the targeted hiring of more experienced labor. We have addressed wages very tactically, both at Ingalls and Newport News, but we do have labor arrangements, so we haven't been able to do broad labor adjustments. But I think the attrition improvement is more directly related to our hiring strategies to focus on more experienced people.

Okay. And then lastly, Tom, can you just give us the very specifics on why both the Shipbuilding and the MT margin are down a decent amount sequentially in the second quarter?

Yes. So as we said earlier, just the guide that we're giving is on the conservative side. We saw from MT crew and uncrewed and CEW do well for the quarters as they booked up and they closed out some projects. We don't want to get ahead of ourselves. And then from a Shipbuilding side, I think we're just being conservative. We have some risk to burn down through the year and the initiatives that we've talked about more progress and the cost reductions, I want to see them kind of play out. We do have plans in place for that to occur. But with the risk and variability, we're just staying and guiding closer to the low end of the range there. I'm still comfortable with the guide that we have from 5.5% to 6.5%. It was a good first quarter out of the gate, and we'll adjust kind of going forward as we see successive quarters do well.

Okay. Thank you.

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

Hey. Good morning guys. Maybe going back to a couple of questions we've heard before, maybe Doug's earlier. And what has to happen in the shipyards to really update the manufacturing process, right? I mean when you look at how the Koreans do it and their commercial operations, it seems like there's more automation, they build ships differently. I mean realistically, how much of that can be deployed in our military shipyards to improve throughput in the whole nine yards?

Yeah. I like the distinction you're making between the commercial manufacturing process and the defense process. They are different. When you're getting at a rate on fairly simple ships to build that aren't as dense, it's just a different process. So what's it going to take? Fortunately, we've been doing this work for a while now, identifying what's it going to take to increase the submarine throughput, and it's going to show up on that FY 2024 two-boat contract. These are targeted investments to create capacity and increase the efficiency in how the ships and how the manufacturing works through the process. We've been working very hard at it. We know where the constraints are. And once they get implemented, I'm very confident that things are going to improve.

I mean is it more automation? I mean are there things like that that you can do, to take out variability or...

It's more about streamlining. There is some automation that can take place to begin at the front end of the process. We have AI pilots going on in both shipyards where we can be more efficient in analysis of scheduling per se or quality. But this is more about efficiency of the manufacturing process and eliminating roadblocks or ensuring that your critical path is squared away. It's not real automation when you get to the back half of the process. This is all about throughput and efficiency.

Got it. Got it. And then maybe just one more, what are you seeing in terms of demand for your unmanned product for the autonomous stuff?

We are experiencing strong growth in the uncrewed sector, with a backlog of a couple of hundred units. This year, we expect significant progress in the small uncrewed underwater vehicle market. Demand continues to improve for both the main product and its derivatives, both in the domestic and international markets, leading to very positive developments in the uncrewed space.

Got it. All right. Thank you.

Sure.

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. Kastner, for any closing remarks.

Thanks again for your interest and participation today. I look forward to providing updates as we progress throughout the year.

Thank you very much, everyone, for joining. That concludes today's call. You may now disconnect your lines.