Huntington Ingalls Industries Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 10 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2023 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'd now I would now like to hand the call over to Christi Thomas, Vice President of Investor Relations.

Operator

Ms. Thomas, you may begin.

Speaker 1

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 Steely, 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.

Speaker 1

Please see our SEC filings for important factors that could cause our Results to differ materially from expected results. Also in their remarks today, Chris and Tom will refer to certain non GAAP measures. For reconciliations of these metrics to the comparable GAAP measures, please see the slides that accompany this webcast, which are available on our website's Investor Relations page at ir. Hii.com. With that, I would like to turn the call over to our President and CEO, Chris Kastner.

Speaker 1

Chris?

Speaker 2

Thanks, Christy, and good morning, everyone. Today, We released quarterly results that demonstrate continued top line 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 leading to growth opportunities.

Speaker 2

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 3 of the presentation. Top line growth increased 7.2% from the Q3 of 2022, resulting in a record 3rd quarter revenue of 2,800,000,000 Diluted earnings per share was $3.70 for the quarter, up from $3.44 in the Q3 of 2022. New contract awards during the quarter were $5,400,000,000 which resulted in backlog of approximately $49,000,000,000 at the end of the quarter, of which $27,000,000,000 is currently funded. Shifting to an update on our shipbuilding milestones.

Speaker 2

In the Q3 at Ingalls, We launched amphibious assault ship LHA-eight Bougainville and laid the keel for LHA-nine Fallujah. Also, We successfully completed acceptance trials for NSE-ten Calhoun and delivered her last month. In addition, we successfully launched and christened the Flight 3 Arleigh Burke Class destroyer, DDG-128 Ted Stevens. Finally, LPD 29, Richard M. McCool Jr.

Speaker 2

Is expected to complete acceptance trials and deliver in the Q4 of this year. Ingalls contract awards this quarter included a $155,000,000 contract for the modernization of USS Zumwalt DDG 1,000 and the significant award of 7 of 10 Flight 3 Arleigh Burke Class destroyers in the FY 'twenty three DDG multiyear 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 hole 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. CDN 79 Kennedy 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.

Speaker 2

CVN-eighty Enterprise is progressing well and is approximately 25% complete. The cost for the combined buy of CVN-eighty 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 CBN 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 from COVID and the labor and supply chain effects subsequent to COVID, delivery of CVN-eighty is forecasted to be Approximately 12 months late. To mitigate the delay, HII has worked with the Navy to employ innovative build techniques, which minimized the impact of CBN eighty 1.

Speaker 2

At Mission Technologies, we saw the 3rd straight quarter of record revenue With sales of $685,000,000 15% over the Q3 of 2022. In addition to strong sales growth, Mission Technologies Also won several major strategic competitions in the quarter and now has posted over 5,000,000,000 and potential total contract value bookings year to date. These awards resulted in a 3rd quarter 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 1,400,000,000 Joint Network Engineering and Emerging Operations task order, the $347,000,000 contract for the Navy's Lionfish SUUV program and $244,000,000 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 'seventeen.

Speaker 2

While we applaud the Congress for including an anomaly in the CR that will allow DoD 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 respective conference negotiations Between the appropriations and authorization committees, we are encouraged by the support of our programs thus far in the 4 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 Q3, 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.

Speaker 2

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,

Speaker 3

Tom? Thanks, Chris, and good morning. Today, I'll briefly review our Q3 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 6 of the presentation, Our 3rd quarter revenues of $2,800,000,000 increased approximately 7.2% compared to the same period last year and represents a record This increase in revenue was largely attributable to growth at Mission Technologies and Ingalls Shipbuilding.

Speaker 3

Operating income for the quarter of $172,000,000 increased by $41,000,000 or 31% from the Q3 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 fast cash adjustment and more favorable non current state income taxes compared to the prior year period. Net earnings in the quarter were $148,000,000 compared to $138,000,000 in the Q3 2022. Diluted earnings per share in the quarter was $3.70 compared to $3.44 in the Q3 of the previous year. Moving on to Slide 7, Ingalls revenues of $711,000,000 in the quarter increased $88,000,000 or about 15% from the same period last year, driven primarily by higher volumes on amphibious assault ships and surface combatants.

Speaker 3

Ingalls operating income of $73,000,000 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 $1,450,000,000 increased 8,000,000 or 1% from the same period last year. Newport News operating income for Q3 was 90,000,000 a decrease of $12,000,000 compared to the Q3 of last year. Operating income was lower due to contract incentives earned in the Columbia class program in the Q3 of 2022, partially offset by improved performance on the Virginia class submarine program. Shipbuilding operating margin in the 3rd quarter was 7.5%, slightly ahead of the outlook we had provided for the quarter.

Speaker 3

Our shipbuilding operating margin outlook for the full year remains unchanged. And as we have previously noted, our expected shipbuilding milestones 2023 are concentrated largely in the 4th quarter. At Mission Technologies, revenues of $685,000,000 increased $90,000,000 or about 15% compared to the Q3 of 2022, primarily due to higher volumes in Mission Based Solutions driven by our C5 ISR and Cyber, Electronic Warfare and Space Programs. Mission Technologies operating income of $24,000,000 compares to operating income of $14,000,000 in the Q3 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.

Speaker 3

Current results for Mission Technologies included approximately $27,000,000 of amortization of purchased intangible assets. Mission Technologies EBITDA margin in the 3rd quarter was 8.2%. Turning to Slide 8. Cash from operations was $335,000,000 in the quarter. Net capital expenditures were $42,000,000 or 1.5 percent of revenues.

Speaker 3

Free cash flow in the quarter was $293,000,000 This compares to cash used in operations of $19,000,000 net capital expenditures of 70 $7,000,000 or 2.9 percent of revenues and free cash flow of negative $96,000,000 in the Q3 of 2022. Cash contributions to our pension and other post retirement benefit plans were $11,000,000 in the quarter. During the Q3, we paid dividends of $1.24 per share or $50,000,000 in aggregate. We also repurchased 100,000 shares during the quarter at an aggregate cost of approximately $21,000,000 Year to date through the Q3, we have repurchased 176,000 shares at an aggregate cost of approximately $37,000,000 Moving on To Slide 9, 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%.

Speaker 3

Through the end of the Q3, 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 We will provide a multiyear update of pension estimates on our 4th 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 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 $500,000,000 an increase of $75,000,000 from the prior midpoint guidance.

Speaker 3

This increase is primarily driven by the conclusion of the negotiations regarding the repayment of COVID advances as well as positive cash flow contributions from Mission Technologies. We continue to expect approximately $1,200,000,000 of free cash flow over the 2 year period of 2023 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 'twenty three free cash flow guidance, we are increasing our revenue guidance for both Shipbuilding and Mission Technologies.

Speaker 3

Given the strong Q3 revenues across all three divisions, we are increasing the midpoint of shipbuilding revenue guidance by revising a range from $8,400,000,000 to $8,600,000,000 to a range of $8,500,000,000 to $8,600,000,000 and increasing our Mission Technologies revenue guidance From approximately $2,500,000,000 to approximately $2,550,000,000 This is an increase to the midpoint of shipbuilding revenue guidance of $50,000,000 and an increased Emission Technologies revenue guidance of $50,000,000 Additionally, we are reaffirming our Shipbuilding Emission Technologies margin guidance. To summarize, we delivered strong revenue growth in the 3rd quarter and finished slightly ahead of our margin expectations for the quarter. We also delivered strong free cash flow. Mission Technologies had an impressive 3rd quarter backlog book to bill of 2.4 And year to date has the potential total contract value awards of over $5,000,000,000 in addition to a robust opportunity pipeline of $70,000,000,000

Speaker 2

Looking to

Speaker 3

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 Christi to manage Q and A.

Speaker 1

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 and A.

Operator

Thank you, Christy. Our first question today comes from Scott DeShoe from Deutsche Bank. Scott, your line

Speaker 4

is now open. Please go ahead. Hey, good morning. Good morning, Scott. Chris, what's the financial impacts from the delay on CVN-eighty?

Speaker 4

I think you said it was 12 months. And then was that delay known when you closed the books and accrued the ACs for the quarter?

Speaker 2

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.

Speaker 2

But the team is focused on it, and they're going to do their best to mitigate the impact going forward.

Speaker 4

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.

Speaker 4

So it doesn't necessarily mean you need to book negative EACs, but does it have any impact to your longer term margin trajectory on Block V? Thanks.

Speaker 2

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 And in the Block V, we should have some upside. But I wouldn't comment on our partners' accounting, but I'm very comfortable with where we're

Speaker 4

Okay, great. Thank you so much.

Speaker 2

Sure.

Operator

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

Speaker 4

question. Hi, good morning. This is actually Josh Korn on for David. 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.

Speaker 2

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 into Block V, continuing to improve in Newport News. So The story hasn't really changed quarter to quarter. Newport News continues to stabilize.

Speaker 2

Labor is good. Hiring is good. We still need to work on retention. But I'm comfortable with where we're at.

Speaker 4

Okay. Thank you.

Operator

Sure. Thank you very much. Our next question comes from Doug Harned from Bernstein. Doug, your line is

Speaker 4

now open. Please go ahead.

Speaker 5

Good morning. Thank you.

Speaker 2

Good morning.

Speaker 5

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 You're going to have to get a lot of upside in margins in Q4 to meet your guidance, it looks like.

Speaker 3

Hey, Doug. Yes, it's Tom here. So yes, we have been Consistent throughout the year, you're saying that the shipbuilding milestones were in the back half of the year, specifically for Newport News. They have 2 large milestones there, the 796 Delivery and then the 798 float off. So that's going to be a driver on the back half of the program.

Speaker 3

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, I think as COVID becomes further and further in the rearview mirror against the Folio of contracts that we have right there, opportunity sets are bound as we finish off the ships that were impacted Starting new ships, although we start them off 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.

Speaker 2

Yes. To support that, Doug, yes, absolutely 796 Needs to get delivered. That boat is essentially complete. We just need to get 2 trials. 798 needs to float off and then 29 Needs to continue to complete their test program and get through their trial efforts.

Speaker 2

So it's going to be a race to completion on 29, but We're fine with where we are now.

Speaker 5

And then when you look at the submarines And 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?

Speaker 2

Well, Columbia Class, as you know, we only build 22% to 23% of that boat, the bowels and the sterns. It will 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 Going forward in Newport News.

Speaker 5

Okay, very good. Thank you.

Speaker 2

Thank you.

Operator

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

Speaker 6

Hey, good morning. This is Jordan Linas on for Ron. 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?

Speaker 6

And also to follow the new hires that you have, when you expect them to reach Optimal efficiency.

Speaker 2

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

Speaker 2

I'm sorry.

Speaker 6

How long for the new hires to

Speaker 7

be fully working yet?

Speaker 2

Yes. So we talk about 3 to 5 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 3 to 5 years and we can accelerate that with some of our digital tools.

Speaker 6

Got it. Okay. And then one other question too. For the AUKUS funding, the $3,000,000,000 and then also the other supplemental from the White House for 3,000,000,000 Are you guys seeing that flow through? Or do you expect it?

Speaker 6

And can you size it?

Speaker 2

Yes. We absolutely expect it eventually to flow through. We August is very important to us. We actually See that as an opening of markets, right? It's an opening of markets in the U.

Speaker 2

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 And how they think through this, that we're standing ready to support them and look forward to. But it's really from a 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 it.

Speaker 6

Great. Thank you guys so much.

Speaker 4

Sure.

Operator

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

Speaker 7

Yes. Good morning. Good 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?

Speaker 7

Because obviously you left the 2 year number the same.

Speaker 2

Yes. It was just it's just timing, George. As you know, from time to time, where You get received slowing in sooner than you expect. The team is working very hard on working capital. It's a focus for us.

Speaker 2

I'll let Tom go on the specifics.

Speaker 3

Yes. So specifically here on 2023, what we've seen is some good performance on Mission Technologies, both top line and the cash collections And how they're performing in the MBS. Yes, so that's positive. Also just kind of hitting our milestones right now It 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 a strategy and algorithm how that applies to the contract and that was a couple of dollars there too.

Speaker 3

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 5 year target, the guiding light From mid year this year through the end of next year, it's $1,200,000,000 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 'twenty three and 'twenty four. If you notice between 'twenty five and now $700 next year now $780,000,000 It's still the $1,200,000,000 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.

Speaker 3

So we maintained a $1,200,000,000 target here. Okay?

Speaker 7

Okay. And just to follow-up On the margins in the Q4 that Doug asked about, I mean specifically it looks like the 4th quarter has got to be about 9.2 Just to get to the low end of your guide. Now given the milestones in the Q4, I would assume the biggest jump in the Q4 from normal It's going to be at Newport News.

Speaker 3

I think the 3 remaining milestones are all important for us to kind of get into the range. And we're watching them, as Chris said, that the pathway on each of the 3 here. 796 is ready to go. I think we're just waiting for the Transfer that ship, 798 should float off before the end of the year. And LPD 29s, we've been saying since the beginning of

Speaker 4

the year that it's just a

Speaker 3

race To align up the final tasks, the ship to sea, in serve, approving the ship and then receded that. So whether that happens in December, the end of December or at the beginning of next year, those 3 are pretty significant milestones as they play out as we go forward here. I think opportunity sets are there maybe a little ETA adjustments as we've seen rates high and then just the consistent performance we've seen, we've seen some settling of performance over the last couple of quarters. So I think that will play out. 'twenty three is opposite on 'twenty two where we started off really hot and heavy in the 1st couple of quarters.

Speaker 3

But this isn't a surprise for us 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

Operator

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

Speaker 4

Thanks very much. Good morning. So I saw that you guys Good morning. Good morning. So you guys increased the revenue guide for shipbuilding.

Speaker 4

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.

Speaker 2

Yes, this is Chris. I'll start and then Tom can complete, if we need to here. But the award of the DDG-fifty 1 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 top line standpoint, both in shipbuilding and Mission Technologies, I don't want to get in front of it.

Speaker 2

We'll wait until 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 recompetes.

Speaker 2

They're converting New business, all in 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.

Speaker 3

I'll hop on the back of that too. Yes, Seth, I'll hop on the back of that too. I'm pretty happy with what I'm seeing down at Ingle there. NSE, we delivered NSE 10, so there's one more ship set there. We've talked about how that portfolio can sustain itself and still get 3%, three Potentially, if things break that way, on just the 3 major programs down there, we've seen that with the DDGs, the 7 DDGs on contract and now more Most recently in the August timeframe, they received 7 more there.

Speaker 3

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 really help them drive consistent performance in production Also on top of that, we've seen a maturation of the 1,000 program, the TDG 1,000 program. So we put the First of, there's 2 on contract. We put the 1st monetization on contract earlier this year. All three of those ships will be down there over the next 2 to 3 years going through an 11 to 12 month modernization process, and that's a good base for them to employ the workforce there too.

Speaker 3

So I see good healthiness even with the NSE program sun setting for Ingalls to hit the 3 That we've had through 2023, yes, and going forward, yes.

Speaker 4

Excellent. Okay. Thanks very much. I'll speak to 1 this morning.

Operator

Keypad, direct to staff. Our next question today comes from Myles Walton from Wolfe Research. Myles, your line is open. Please go ahead.

Speaker 8

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

Speaker 2

Hi, Emily.

Speaker 8

So on the 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 the Quarterly cadence for 2024 at this point, is there a skew towards either half of the year or quarter to quarter? Any color on that would be great.

Speaker 3

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 24 on at the end of this year, and 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 and see at the actuals at the end of the year.

Speaker 3

We talked about those milestones, which we anticipate to hit in Q4, but they just could trickle into Q1. If that doesn't 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 and 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 improved. The maturation of the workforce, anticipation of less rework, the rollover of 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.

Speaker 3

On the Mission Technology side, we've talked about still scaling that business. We've seen some fantastic growth that's going on the top line. And we have some work to go do on how we get our margins higher there. A little bit more on the fixed price instead of just we have about 85% in cost type. Additional technology, which should be able to have us employ IP technology, more a little bit more products and services, That should be able to put a premium on what we bid and what we achieved there.

Speaker 3

So I would expect an improvement in the margin and at the Q4 call in February, We'll give you the shape of next year.

Speaker 8

Sounds good, Tom. And then, one quick follow-up. So on the maintenance That's something that the Navy has sort of been pounding the drums about for a long time. Have you all been getting any more visibility from the Navy customer about timelines 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.

Speaker 2

Yes. So Emily, it's Chris. We don't expect real surprise pop ups from a maintenance standpoint. We expect fairly consistent Revenue from 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 1,000, which is really not maintenance.

Speaker 2

It's upgrades.

Operator

Great. Thanks, Chris.

Speaker 2

Sure.

Operator

Thank you. Our last question today comes from Gautam Khanna from TD Cowen. Gautam, your line

Speaker 4

is now open. Please go ahead.

Speaker 9

Hey, good morning guys.

Speaker 2

Good morning, Gavin. Hey, good

Speaker 9

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 Q4?

Speaker 2

Yes. So Got it. It will be a race to the finish on 29. We need to get through the final trials, get ENSERVIN, get it approved and delivered. There is some sensitivity obviously as we come through the final throws on that ship from an EAC standpoint and then a lot will And on how much work remains subsequent to delivery.

Speaker 2

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.

Speaker 9

Got you. Okay. Would you argue that the implied shipbuilding range for Q4 bounds that risk? Because it is a pretty wide margin range, obviously, Checks implied at shipbuilding.

Speaker 2

Yes, I don't want to comment on that. There's a lot of variables that go into that range, Gott. Mlpd29 is one of those variables.

Speaker 9

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

Speaker 2

Yes. So we're not going to give specifics on improvement at 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.

Speaker 2

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.

Speaker 9

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

Speaker 2

Sure. Thanks, Gala.

Operator

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

Speaker 2

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

Operator

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

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Earnings Conference Call
Huntington Ingalls Industries Q3 2023
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