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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. [Operator Instructions] Please be advised that today's conference call is being recorded. [Operator Instructions]. 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 or 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 customer's top national defense priorities by delivering quality platforms, technologies, and solutions, and in parallel, winning new business leading 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 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 amphibious assault ship LHA 8 Bougainville, and lay 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

Thanks, Chris, and good morning. Today, I'll briefly review our third quarter results. For more detail on the segment results, please be 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 of a $172 million increased by $41 million or 31% from the third quarter of 2022, and operating margin of 6.1% compares to 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 a $148 million compared to a $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 to $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 $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 have previously noted, our expected shipbuilding milestones for 2023 are concentrated largely in the fourth quarter. At Mission Technologies, revenues of $685 million increased $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 $14 million in 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 a 176,000 shares as 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 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 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 of 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 an increased to Mission Technologies revenue guidance of $50 million. Additionally, we are reaffirming our shipbuilding 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 the 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 that 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. [Operator Instructions]. 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 impacts 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 some 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, like, 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 to 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 on 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 are bound 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 kind of hitting the milestones I just described, ensuring that we're getting progress and 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 need 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 [bells] (ph) and the sterns. It'll grow at an 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 a 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 to for all the new hires that you have when you expect them to reach optimal efficiency?

Yes. So, we don't provide our retention rates. We're meeting or actually beating our hiring forecast for the year. So, feel good with, where we are there. The second -- what was your second question again? I'm sorry.

How long for the new hires, for the 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. We – 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, 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, we're standing ready to support them and look forward to. But it's really from top line standpoint, it's 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, we're you 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. So, that is positive. Also, just kind of hitting on milestones right now, is adds, to the free cash flow at the end of the year, as well as we've come through the COVID repay with our customer set. We've worked ourselves 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 anyway 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 kind of 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 think, the three remaining milestones are all important for us to kind of get into the range. And, we're watching them as Chris, has a pathway on each of the three here. 796 is ready to go. I think we're just waiting for transfer that ship. 798 should float off before the end of the year. And LPD 29, we've been saying since the beginning of the year that it's just a race to, align up the final tasks, the ship to see in serve approving the ship, and then we see that whether that happens in December, the end of December or at the beginning of next year, those three are pretty significant milestones as they play out as we go forward here. I think opportunity sets on there may be a little EPA adjustment as we've seen rates high, and then just the consistent performance seen, we've seen some settling of performance over the last couple of quarters. So, I think that will play out. ‘23 is opposite on ‘22 where we started off really hot and heavy in the first couple of quarters. But, this isn't a surprise for us that Q4 was going to be a big quarter for us. And, I think we're in the lane right now to kind of we're reaffirming our guidance there on profitability for shipbuilding between [indiscernible].

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. So, I saw that, you guys --

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 they were the DDG 51 really solidifies Ingalls based 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.

Perfect.

Yes, Seth, I’ll hop on the back of that too. I'm pretty happy with what I'm seeing down at Ingalls there. 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 more most recently in 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, a labor resource and material perspective, and that's going to kind of really help them drive consistent performance in production down there. Also on top of that, we've seen a maturation of the 1000 program, the DDG 1000 program. So we put, the, first of, there's two on contract, we put the first monetization on contract earlier this year. All three of those ships will be down there over the next two to three years going through an 11 to 12 month modernization process. And that's a good base for them to employ the workforce there too. So I see, good healthiness even with the NSC program sun setting for Ingalls, to hit the 3% guided that we've had through 2023 and going forward. Yes.

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

Thank you. [Operator Instructions] 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 -- Hi there. Another shipbuilding margin question. So, thanks for some additional color on 2024, but I was wondering, are you all able to do any leveling of quarterly cadence for ‘24 at this point? Is there a skew towards either half of the year or quarter-to-quarter? Any color on that would be great.

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 kind of 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 get 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, us putting the energy into hiring, extra training, retention. The material seems like it's stabilized. It's not where we want it to be, but we have to get that improve, 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 positiveness kind of 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 some fantastic growth going on the topline. And we have some work to go do and 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, 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 been pounding the drums about for a long time. Have you all been getting any more visibility from the Navy customer about 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 in serve in, 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 go into that 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 on 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, close 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 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.