Huntington Ingalls Industries, Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2024 HII Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]
Thank you, operator, and good morning. I'd like to welcome everyone to the HII First Quarter 2024 Earnings Conference Call. Joining me today on the call are Chris Kastner, our President and CEO; and Tom Stiehle, Executive Vice President and CFO.
Thanks, Christie, and good morning, everyone. Today, we released quarterly results that were characterized by steady performance in shipbuilding and strong growth of Mission Technologies. We saw record first quarter revenues, reflecting the continued strong demand from our customers for our products. As we discussed at our Investor Day in March, we remain focused on delivering the advantage to all our stakeholders: Our customers, employees, shareholders, suppliers and communities.
Thanks, Chris, and good morning. Today, I'll briefly review our first quarter results. For more detail on the segment results, please refer to the earnings release issued this morning and posted to our website.
[Operator Instructions] Operator, I will turn it over to you to manage the Q&A.
[Operator Instructions] Our first question comes from Scott Deuschle from Deutsche Bank.
Chris, sorry if I missed one. Where is CVN 79? Yes, where is CVN 79 at in terms of percent complete?
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.
Okay. And then, Tom, to hit the midpoint of the shipbuilding margin guide, it looks like you'll need to do second half margins about, I guess, 150 basis points above the first half. It sounds like it's driven by better milestones. Maybe you can just walk through in a bit more detail as to where that uplift comes from.
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.
Our next question comes from Robert Spingarn from Melius Research.
Chris, just going to touch on the labor situation, but the Navy controller was saying recently that the Navy just can't simply buy its way out of programmatic challenges and delays. And I assume that has to do the delays, of course, we've talked about this a lot, are just driven by labor constraints. I was wondering if you could expand a little bit on that. And is there any possibility that maybe some subsidies to shipbuilders might relieve the situation?
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.
So it sounds like it's really then not just labor. There are these other things you can do.
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.
Okay. And then just quickly on Mission Technologies. Andy had real good sales in the first quarter here ahead of the guidance run rate. So I was just wondering if we could talk about what's expected for the rest of the year there. What drove the quarter? And then do we fade a little bit in the rest of the year? Or is that just being conservative?
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.
Our next question comes from David Strauss from Barclays.
Chris, I wanted to ask you, you've now in Q1 and Q2, you're going to knock off a lot of these milestones that were supposed to happen late last year. But at the same time, we really haven't seen any of that perceived upside come through in terms of the margins based off of what you did in ship -- for shipbuilding in Q1 and what you're forecasting for Q2. So if you could just square that, why we're not seeing some of that upside that we would think would be there would come -- that is not coming through with these milestones being completed.
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 2 deliveries in the second quarter, and there's just less opportunity. So yes, unfortunately, schedule equals cost, we've got to make our milestones.
Okay. That's helpful. And then, Tom, could you maybe -- I mean, you guided for free cash flow burn in Q2. Is it -- I mean, it seems like obviously going to be a very back-end loaded year. How should we think about the pacing of the CapEx step-up? We didn't really see it in Q1. So when do we really start to see a pickup in CapEx, and then what I would assume would be a big working capital recovery on the other side?
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.
Our next question comes from Doug Harned from Bernstein.
There has been -- and the Navy has commented on the Columbia-class issues with the work on the bow at Newport News. Can you comment on that in terms of what the status is and how that can affect your work flow on Columbia-class?
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.
Okay. Good. And then on Virginia-class, the -- you talked about the milestones this year. What I'm trying to understand is kind of where everything is in the flow in terms of eventually getting to that 2 deliveries per year level. And you had this letter come out of the House with a lot of members of Congress arguing that there should be 2 Virginia-class in the 2025 budget, the President's budget. But does that matter?
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.
Our next question comes from Ronald Epstein from Bank of America.
This is Mariana Perez Mora on for Ron today. So the first question is going to be related to Australia. As you see this first order for steel delivery from an Australian company, how should we think about, like in the near term, you benefiting from like this early investment to actually make the Australian submarine supply chain stronger?
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.
Perfect. And also in the line of AUKUS, there has been talks that South Korea would like to join this trilateral agreement. If that goes through, how do you see this impacting the potential of the program demand and even supply chain environment?
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.
Our next question comes from Gautam Khanna from TD Cowen.
I was wondering if you could give us the EACs by segment in the quarter? Then I have a follow-up.
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.
Okay. At NNS, the margins were a little light of our expectation. I'm just curious, any stepbacks in productivity or labor to speak of broadly at NNS or elsewhere?
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 [indiscernible], 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. And then just lastly, on LPD 29, was that EAC taken in the first quarter? Or was the delivery actually in the second quarter, and therefore it's more of a second quarter event?
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.
Our next question comes from Seth Seifman from JPMorgan.
Tom, just first a quick clarification. I know you mentioned the CapEx really stepping up in the second half along with the cash generation. So I assume you're also expecting a step-up in the Navy support for that CapEx in the second half-plus.
It's aligned. It's all baked into the plan we have and the guidance that we give, yes.
Right. Okay. Okay. And then just on the margin rates in the shipyards, Q1, similar to last year, slightly higher. Q2 though, around 7%. Like if we look at the Q1 margin rates, kind of seems probably at the lower end of what you might expect for each of the yards. And so would normally expect some sequential improvement in each of the yards, maybe to something like above 6% at Newport, and I mean, Ingalls is often in the double digits. Is there something to be aware of that weighing on margins in the second quarter? Or is it -- I know you mentioned one milestone, but maybe a lack of overall milestones that's driving the 7% for the second quarter?
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.
Our next question comes from George Shapiro from Shapiro Research.
Yes. Just following up a little bit on Seth's comment, but trying to get into some more detail. To get to the low end of your 7.6% margin guide for shipbuilding for the year would imply something like 8.3% or 8.4% in second half margins, which would imply an incremental $70 million to $75 million in profit. Are the milestones that you're projecting for the second half going to give us all that $70 million to $75 million? Or is there something else?
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 3 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%.
Okay. And a follow-up, a different question on the working capital. I mean, receivables were up like $253 million, contracts assets up $124 million in the quarter. That was well above last year's first quarter. So can you just kind of talk as to what caused it?
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.
Our next question comes from Myles Walton from Wolfe Research.
I was wondering if I could ask a question first on the milestones as it relates to -- I know you don't size them individually, but there's not a milestone chart in the slide deck, so I just was looking to refresh. The Massachusetts, is that the most important milestone for this year for Newport News? And also any of the '25 milestones you had in the deck last time, have those shifted at all?
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.
Okay. And then on the supply chain, I guess, some of the testimony emerging, I was talking about merchant suppliers of propulsion systems for ships. And I'm curious, Chris, if you just give us a little baseline of where you are in terms of the whack-a-mole game here of containing issues? And is it supplier component? Is it workforce? And I know you're going to say all of them. But maybe you can just give a little bit more color as the Navy Secretary was willing to offer up Northrop as a source of issues is a little bit of an incremental step in the direction of emerging of where the supply chain constraints might be.
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.
Okay. Is it concentrated to just a couple? Or is this really widespread?
No. Let's say 2 to 5.
Our last question comes from Noah Poponak from Goldman Sachs.
Tom, you've referenced with the shipbuilding margin kind of being essentially flat year-over-year and have close to the guide in the quarter. But -- and I understand and appreciate all that and how it can move around quarter-to-quarter. But I guess, last year, the full year did come in below the original full year outlook, and you've cited the movement of milestones out of the end of the year into the beginning of this year. I guess, maybe could you frame it as your level of visibility into the back half milestones this year compared to what you saw when you sat there at this time last year?
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 3 events kind of slipped right from Q4 into Q1 and essentially at the very beginning of Q2.
Okay. Makes sense. And how should we think about the pacing of the buyback through the year? And I guess also, what's the minimum cash balance, just given the shape of the free cash flow through the 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.
Got it. And Chris, you've touched on labor and attrition here. I think at the Investor Day, you quantified that attrition improved around 20% last year. It sounds like that continues to get better. I don't know if there are any numbers you can put around how much better that needs to get to be kind of fully normal or stable, or what you've seen year-to-date?
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.
I am not showing any further questions. At this time, I would now like to hand over to Mr. Kastner for any closing remarks.
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.
And this concludes today's conference call. You may now disconnect your lines.