Huntington Ingalls Industries Q4 2024 Earnings Call Transcript

AlphaStreet
Provided by AlphaStreet
February 6, 2025
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Operator

Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter 2024 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. To ask a question during the session, please press STAR followed by one on your telephone keypad. If you change your mind, please press Star followed by two. Please be advised that today's conference is being recorded. If you need further assistance, please press STAR followed by zero. I would now like to hand the call over to Christy Thomas, Vice President of Investor Relations. Mrs. Thomas, you may begin.

Christie Thomas
Vice President, Investor Relations at Huntington Ingalls Industries

Thank you Operator and good morning everyone. Welcome to the HII fourth quarter 2024 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@ir.hii.com on the call today are Chris Kastner, President and Chief Executive Officer and Tom Steeley, Executive Vice President and Chief Financial Officer. I will now turn the call over to Chris.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Thanks Christy Good morning everyone and thank you for joining us on our fourth quarter 2024 earnings call. Last year HII employees remained steadfast in their commitment to our mission of delivering the world's most powerful ships and all domain solutions in service of the nation. I thank them for these efforts which contributed to HII reaching critical milestones last year. We remain focused on meeting our commitments to the Navy and all our customers. Before I discuss the 2024 results, operational initiatives and guidance, I would like to put in context where we are and give you a perspective on the next 24 months as well as the mid to long term outlook. Over the next 24 months we expect to secure over 50 billion of contract awards. These contracts are being and will be negotiated with current performance and economic conditions. In our estimates. They are expected to have a more balanced risk equation, be predictable in cost and schedules for our customers, and provide an opportunity to achieve margins more consistent with historical norms.

At the same time, we are achieving key milestones on shifts contracted prior to Covid and as our progress continues, these contracts are becoming an increasingly smaller portion of our portfolio and less of a drag on our financial results. By 2027, the majority of pre Covid contracts will be behind us. In addition, our focus on increasing throughput and cost reductions are expected to lead to improved operational execution across the business. With these operational initiatives and the significant demand for our products and services, we expect improved financial performance over the mid to long term. We anticipate growing to 15 billion of annual revenue by 2030 with associated margin expansion opportunity and free cash flow growth. Now Turning to our 2024 results, we generated sales of 11.5 billion and earnings per share of $13.96.

All all three of our divisions hit key milestones and won significant new business. During the year 2024 awards totaled $12 billion and our year end backlog was $49 billion of which $27 billion is funded. Now I'll provide some highlights from each of our divisions. First, Mission Technologies had another strong year. It achieved awards of more than $12 billion in potential total a 2024 book to bill of 1.33 and 9% revenue growth year over year. This positive performance reflects Mission Technology's continued alignment with our country's and our allies national security strategies. For example, in 2024 Mission Technologies achieved its largest win ever, a 6.7 billion contract to provide electronic warfare, engineering and technical services support for the US Air Force as well as a $3 billion logics task order to provide logistics services, ISR operations and next gen technology. And in Australia, Mission Technologies was awarded an initial five year contract to provide global supply chain services to the Australian Government's Department of Defence. In summary, the Mission Technologies team is executing well and we are confident in its ongoing success, particularly given how closely its portfolio maps to our defense customers needs. In 2024 at Ingalls Shipbuilding we were awarded a $9.6 billion multi ship procurement contract for the construction of LPD 33, 34 and 35 and large deck amphibious ship. LHA 10 which secures and fit production backlog well into the next decade.

Also we delivered LPD 29 USS Richard M. McCool Jr. And launched LPD 30 Harrisburg and we continued to make progress on the DDG program with six destroyers in production authenticating the keel DDG133 Sam Nunn in the fourth quarter. Finally we completed dry dock work and undocked USS Zumwalt DDG1000 in December. In 2024 at Newport News Shipbuilding in the Virginia class submarine program we floated off SSN 798 Massachusetts, delivered SSN 796, USS New Jersey shipped the final module of SSN 801 Utah and in December we christened SSN 800 Arkansas. As for aircraft carriers, we completed dry dock work for the RCOH of CVN 74 USS John C. Stennis and were awarded the advanced planning contract for the RCOH of CVN 75 USS Harry S. Truman.

Also 94% of CVN 79 Kennedy compartments have been turned over to the Navy and all combat systems have been turned over to the Test team and CVN80 Enterprise was moved for the first time enabling construction of two aircraft carriers at once in the same dry dock. Looking ahead to 2025 at Ingalls we expect to launch DDG129 Jeremiah Denton and complete sea trials for DDG1000 and at Newport News we plan to deliver SSN798 and float off SSN800. Also the team is focused on completing CVN79. CVN79 is scheduled to deliver in 2025 and the program team is evaluating options for optimizing combat capability additions and readiness for navy workups.

In 2026 we expect to deliver DDG 128 Ted Stevens and LHA 8 Bougainville at Ingalls and at Newport News we expect to deliver SSN 800 and lay the keel for CBN 81 Dorie Miller in 2025. We are also doubling down on operational improvement actions to address the residual Covid related labor productivity and supply chain challenges that we have been facing. Starting with labor and enhancing throughput in 2024 we exceeded our hiring goal of over 6,000 craft personnel, but attrition remains stubbornly high. Our data shows that additional investment in wages in coordination with our Navy partner will provide needed workforce stability. These increases also allow us to attract highly skilled first class shipbuilders and the proficiency they bring. Additionally, we continue to deploy our Enterprise Operating System across all our shipbuilding programs to ensure consistency.

On labor and throughput, we have acquired the assets of an existing Advanced Metal Fabricator W International in Charleston, South Carolina. This acquisition increased our workforce by approximately 500 highly trained personnel and we plan by 2027 to increase employment significantly at this site, a 480,000 square foot facility. HII Charleston Operations is already working on aircraft carrier units for Newport News and in the next few weeks we expect to start submarine unit construction. Similarly, we plan to increase our outsourcing by 30% in 2025 and insource contract labor to address critical skill gaps within our shipyards. As a result of these workforce strategies, we expect to achieve a 20% year over year improvement in shipbuilding production throughput. Our second operational initiative is an annualized enterprise wide cost reduction target of approximately $250 million per year. Several actions have already been taken to achieve this target, including the realignment of Mission Technologies segment from six business units to four and the implementation of a new payroll system at the beginning of 2025.

Further cost efficiency plans around optimizing cost structures and decreasing overhead and service and support cost and reducing third party services are under development and are expected to be executed throughout 2025. Our third operational initiative for 2025 is ensuring our new contract awards reflect the current economic and production environment regarding the FY24 Block 5 submarine contract agreement. Negotiations are continuing and we continue to be confident that an agreement will be reached, although we do not have certainty today on the timing of that agreement. These three items meeting our throughput improvement goals, executing our cost reductions and achieving new contract awards that reflect the current economic and production environment underpin our guidance and are expected to bring more predictability to our contract cost estimates, delivery schedules, financial performance and guidance in terms of our financial outlook. More specifically for 2025 we expect shipbuilding revenues between 8.9 and 9.1 billion and shipbuilding margins in the range of 5.5 to 6.5%. For Mission Technologies, we expect revenues between 2.9 and 3.1 billion and margins between 4 and 4.5%, with EBITDA margins between 8 and 8.5%. Our free cash flow outlook for 2025 is between 300 million and 500 million. The 2025 shipbuilding margin and free Cash flow Outlook is predicated on meeting our throughput and cost reduction objectives. It also assumes appropriate resolutions.

On the last two VCS Block 5 boats, the Block 6 and Columbia Bill 2 contracts consistent with the continuing resolution anomaly language that was passed by Congress Turning to activities in Washington for a moment, we are pleased with the passage and enactment of the Defense Authorization act for fiscal year 2025. The FY25 NDAA strongly supports our shipbuilding programs. In addition to authorizing funding for three Arleigh Burke class surface combatants, one Virginia class submarine and one San Antonio class amphibious warship, the NDAA authorizes the refueling and overhaul CBN75, additional incremental funding for the second Virginia class attack submarine in FY25, and continued support for Gerald R. Ford class aircraft carriers and the LHA and LPD amphibious warship bundle.

The NDAA also recommends the Navy Optimize Aircraft Carrier Acquisition Strategy and procure CVN 82 and FY28. We applaud Congress for including anomalies in the CR that provide additional support for nuclear powered vessel programs and we look forward to Congress finalizing FY25 appropriation bills. In summary, we continue to make progress on our programs with impactful operational initiatives that we believe will lead to meaningful improvements in productivity and throughput. Demand for our products and services is strong and we continue our focus on executing for our key customer, the US Navy. With five deliveries over the next two years, we have a line of sight for generating approximately $15 billion in annual revenue by decades end with incrementally improving operating margins over that period which will facilitate improved results for all stakeholders.

So with that I will turn the call over to Tom for some remarks on our financial results and guidance.

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

Thanks Chris and good morning. Today. I'll review our fourth quarter and full year results and also provide some additional color regarding our outlook for 2025. 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 fourth quarter results on Slide 6, our fourth quarter revenues of $3 billion decreased approximately 5% compared to the same period last year. This decline was driven by lower year over year revenue at all three segments. Ingall's revenues of $736 million decreased 64 million or 8% compared to the fourth quarter of 2023, driven primarily by lower volumes on amphibious assault ships, partially offset by higher surface combatant revenues at Newport News. Revenues of $1.6 billion declined 77 million or 4.6% from the fourth quarter of 2023, primarily due to lower RCOH volumes, unfavorable cumulative adjustments on the Virginia class and aircraft carrier construction programs partially offset by higher Columbia class volumes.

At Mission Technologies fourth quarter 2024 revenues of $713 million decreased 32 million or 4.3% from the fourth quarter of 2023, primarily driven by lower volumes in C5ISR due to non recurring product revenue in the fourth quarter of 2023. Moving to slide 7, segment operating income for the quarter was 103 million and segment operating margin was 3.4%. This compares to 330 million and 10.4% respectively in the fourth quarter of 2023. Fourth quarter 2023 results included two non recurring favorable items that make for a difficult year over year comparison. The first Item was a $70.5 million sale of a court judgment at Ingalls. The second was a $49.5 million insurance claim to settlement at Mission Technologies. Engil's operating income of $46 million and margin of 6.3% compares to 169 million and 21.1% respectively in the fourth quarter of 2023. The prior year period included both the favorable sale of a court judgment that I noted as well as a surface combatant related contract incentive.

Newport News Fourth quarter 2024 operating income of 38 million and margin of 2.4% compares to 110 million and 6.6% respectively in the fourth quarter of 2023. The declines were driven by lower performance on Virginia class submarine and new carrier construction partially offset by contract incentives on the Columbia class program. Shipbuilding margin for the fourth quarter of 2024 was 3.6%. Mission Technologies fourth quarter operating income of $19 million and segment operating margin of 2.7% compares to $51 million and 6.8% respectively in the fourth quarter of 2023. The declines were primarily driven by favorable insurance claim settlement that occurred in the fourth quarter of 2023. Net earnings in the quarter were 123 million compared to 274 million in the fourth quarter of last year. Diluted earnings per share in the quarter were $3.15 compared to $6.90 in the fourth quarter of the previous year.

Moving on to Consolidated Results for 2024 On Slide 8, revenues of $11.5 billion increased 81 million or approximately 1% compared to 2023. Growth was driven primarily by higher volumes at Mission Technologies, partially offset by lower volumes at Newport News Shipbuilding. Ingalls revenues of 2.8 billion in 2024 increased 15 million or 0.5% from 2023, driven primarily by higher volumes in surface combatants, largely offset by a lower amphibious assault ship and NSE program revenues.

At Newport News 2024 revenue of 6 billion decreased by 164 million or 2.7% from 2023, primarily due to unfavorable Virginia class cumulative adjustments as well as lower volumes in aircraft carriers and nuclear support services, partially offset by higher volume on the Columbia program. At Mission Technologies 2024, revenues of 2.9 billion increased 238 million or 8.8% from 2023, primarily driven by higher volumes in cyber, electronic warfare and space as well as C5ISR contracts. Moving to Slide 9, segment operating income for the year was 573 million and segment operating margin was 5%. This compares to 842 million and 7.4% respectively in 2023. Ingalls operating income of $211 million and margin of 7.6% in 2024 compares to $362 million and 13.2% respectively in 2023. The declines were primarily driven by the sale of the court judgment in 2023 as well as lower performance on amphibious assault ships and surface combatants. Newport News 2024 operating income 246 million and margin of 4.1% compared to 379 million and 6.2% respectively in 2023.

The decreases were primarily driven by lower Virginia class and aircraft carrier performance, partially offset by Columbia class contract incentives. Shipbuilding margin for 2024 was 5.2% within the revised guidance range we provided for the year. Net cumulative adjustments for the year were negative 126 million. Newport News net cumulative adjustment was negative 154 million, partially offset by positive net cumulative adjustments at both Ingalls and mission technologies of approximately 14 million. Mission technologies 2024 operating income of 116 million and segment operating margin of 3.9% both improved from 101 million and 3.7% respectively in 2023. The improvement was driven primarily by volume and performance in cyber, electronic warfare and space contracts, stronger performance in fleet sustainment as well as higher equity income.

Again, The Mission Technologies 2023 results included a favorable $49.5 million insurance claim, so we are lapping that difficult comparison and we believe our results still show strong absolute income growth and margin expansion. Mission Technologies 2024 results included approximately 99 million of amortization to purchase intangible assets compared to approximately 109 million in 2023. Mission Technologies EBITDA margin for 2024 was 7.9%. Company net earnings in 2024 were $550 million compared to $681 million in 2023. Diluted earnings per share in 2024 were $13.96 compared to $17.07 in 2023. Turning to cash and capital deployment on slide 102024 free cash flow was 40 million, consistent with our most recent guidance and reflecting factors previously discussed. During the year, the company invested $353 million in capital expenditures or 3.1% of sales.

As we continue to prioritize higher throughput in our shipyards, we paid $206 million in dividends while ending 2024 with $831 million in cash and cash equivalents on hand and liquidity of approximately 2.5 billion. Cash contributions to our pension and other post retirement benefit plans totaled 47 million in 2024. Our pension outlook for 2025 has modestly improved from the update that we provided in November giving this increase in discount rates partially offset by 2024 asset returns that was slightly below our expectations. Actual Asset returns for 2020 forward 7.7%. Our five year pension outlook has been updated and is available in the appendix of today's presentation on slide 13.

Turning to slide 11 and our financial outlook first, we are reaffirming our medium to long term growth targets for both shipbuilding and Mission Technologies. As Chris noted, we see a clear path to 15 billion in annual revenue by the end of the decade given our robust backlog and very strong demand across the portfolio. Regarding 2025 expectations, Chris provided our operational guidance, but let me provide a bit more color on our cash flow outlook. We expect 2025 free cash flow of between 300 and 500 million. Performance on contracts entered into prior to the commencement of the COVID pandemic has impacted our ability to achieve program milestones and corresponding cash receipts. We expect this headwind will continue in 2025, which along with elevated capital expenditures and cash taxes is impacting our overall cash generation. We expect 2025 capital expenditures to be approximately 4% of sales as we continue to thoughtfully invest in increasing our shipbuilding efficiency and throughput. Additionally, we expect our 2025 cash taxes will total approximately 220 million. Regarding our expectations for the first quarter in 2025, we expect approximately $2.1 billion for shipbuilding revenues and $680 million of mission technologies revenues.

With shipbuilding margin near 5.5% and Mission Technologies operating margin approximately 3% Consistent with normal cash flow cadence, we expect first quarter free cash flow to be negative, representing a use of between 300 and 500 million and working as working capital continues to build through mid year before we are able to reach program milestones in contract awards. Turning for a moment to capital allocation, as we have highlighted today, we will continue to invest in our business to maintain and grow the capacity of our shipyards. Our approach to dividends and returning excess cash to shareholders remains unchanged. Our focus now, of course, is working through challenged contracts and returning free cash flow to more normalized levels.

To close my remarks, achieving the throughput cost reduction and contract award initiatives that we have outlined are critical to stabilizing shipbuilding performance in 2025 and achieving the outlook we have provided. Similar to 2024, we expect that about 70% of the shipbuilding revenue generated in 2025 will be derived from pre Covid contracts. We forecast approximately 60% of 2026 shipbuilding revenue will be derived from pre Covid contracts. Finally, we expect that in 2027, a majority of the shipbuilding revenue will be derived from contracts that reflect the current operating environment and we will set the foundation for margin improvement and returns towards historical margin levels.

With that, I'll turn the call back over to Kristi for Q and A.

Christie Thomas
Vice President, Investor Relations at Huntington Ingalls Industries

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.

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Operator

Thank you very much. If you would like to ask a question, please press STAR followed by one on your telephone keypad. Now, please ensure your device is unmuted locally. If you change your mind or your question has already been answered, please press STAR followed by two. Our first question comes from Doug Harned with Bernstein. Doug, your line is now open. Please go ahead.

Douglas S. Harned
Analyst at Sanford C. Bernstein

Very good. Good morning. Thank you.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Good morning, Doug. Sorry for the background noise. We're going through a thunderstorm outside right now. But just bear with us a little bit.

Douglas S. Harned
Analyst at Sanford C. Bernstein

Okay? I've got a snowstorm here too, so. Okay, so if I go back a few years, there was a margin outlook that had always been talked about in the 9 to 10% level. And knowing that, I mean, the CPI is hardly a good indicator for inflation for you all. But can you give us a sense? First, when you look at the margin gap that you have now, how much of that would you attribute to inflation versus other operational challenges. If you're looking back at that 9 to 10% type projected level.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Yeah, so that's a very interesting question and I don't have a specific number for you, Doug. We do have some EPA protection on our and inflation protection on our Ingalls contracts and, and limited EPA protection on material on our aircraft carrier contracts. But it's not just directly inflation that impacts you. It's a little bit more nefarious than that because you have inflation that adjusts very quickly on some products and services that can be passed along very quickly to a customer where we have long term contracts that we have to perform against the baseline that was negotiated where you really can't adjust as quickly, which leads to less experienced workforce and performance challenges. So I hate to say that, you know, I hate to not give you a number related to that, but it's a broader question than just the calculation of the inflation impact on our ship programs as related to that is in the supply chain. It's even if we have protection for it, they're just the performance of the supply chain because of inflation is not as efficient. So it's a very broad answer. I apologize for not giving you a precise answer, but inflation kind of seeps into various elements of our cost structure, not just pay people more.

Douglas S. Harned
Analyst at Sanford C. Bernstein

Well, just to follow on that, if you look outside of shipbuilding, the Pentagon has frankly not been very helpful at all in providing equitable price adjustments. And that's across many types of programs. And even though you have some, it appears you've been facing a lot of the same problem. And everyone, I think there's universal acceptance of the importance of the Virginia class, the Columbia class. But when you're negotiating new contracts now in what has been a tough funding environment, do you still see it as possible to get back to those 9 to 10% type margin levels that have been more traditional, or are we living in a different world now where you may have to sort of give in in a sense to lower financial performance?

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Well, interesting. I absolutely believe that 9% is possible moving forward. The $50 billion of contracts that we've negotiated, some of those with the bundle, the amphib bundle down in Mississippi. And we're negotiating the FY24 block five two boat contract. Now, the customer's been very receptive to understanding the current economic environment and we will get inflation protection in those new contracts. I think you saw Congress put the additional $5.7 billion in the anomaly for those FY24 boats. There's a recognition that we need to rebuild this industrial base. And there's also a recognition, I believe, that shipbuilders need to earn fair margins. And so we're taking that to the table and we're going to make sure that that happens. But I absolutely believe that 9% is something that we can achieve. And the reason I believe it, Doug, is simply because I've done it before. Down at Ingalls, we're in the exact same position. We had to negotiate performance post Katrina into the new data set of SHPs. We got that done and they had a very good run where there was predictable cost and schedule performance. Because ultimately it doesn't do anybody any favor to agree to cost estimates or schedules that are unrealistic. So we're going to make sure that that happens. I think the customer is on board with that. They want realistic achievable schedules as well. And so I firmly believe that's going to happen.

Douglas S. Harned
Analyst at Sanford C. Bernstein

Okay, very good. Thank you.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Thanks Doug.

Operator

Our next question comes from Seth Seifman with JP Morgan. Seth, your line is now open. Please go ahead.

Seth Seifman
Analyst at J.P. Morgan

Hey, thanks very much. Good morning. I wanted to ask about, in the prepared remarks, I think you talked about the guidance. What underpins the guidance I think expects for more predictability. Are you basically what contract awards are you assuming that the company will get this year in the guidance?

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Yeah, the submarine contracts, the 17 boats contemplated by.

Seth Seifman
Analyst at J.P. Morgan

Yeah, the full kind of plan that you've been advocating is assumed in this.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

No, let me correct you there. It's not a full size plan. We're negotiating FY24 two boats consistent with the. The acquisition approach that was set forth by Congress and supported by the Anomaly Block six and Columbia Bill two. We're going to have to see the acquisition approach for those boats as they develop saws or a derivative of SAWS is positive. Anything that brings additional investment into the industrial base. That accelerates shipbuilding production is positive, but we're going to take this one step at a time.

Seth Seifman
Analyst at J.P. Morgan

So the guidance doesn't assume the 17 boats get under contract.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

It does. It does. It assumes FY 242 boats and then assumes the negotiation of the Block 6 contract and the Columbia Bill 2 contract? Yes.

Seth Seifman
Analyst at J.P. Morgan

Okay. Okay. And do you, I guess what gives you. Have you had communications with the new administration? What kind of gives you confidence that that's going to happen during. During this year?

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Yeah. So interesting. I have high confidence in the FY24 two boats that'll happen first part of the year. I have had limited conversations with elements of the new administration and they've assured me that shipbuilding is one of their top priorities. And that's welcome. That makes perfect sense based upon the threat environment. So I believe we'll step right into Block six after we negotiate the last two Block five boats.

Seth Seifman
Analyst at J.P. Morgan

Okay. Okay, thanks. I'll leave it there for now.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Sure.

Operator

Thank you very much. Our next question comes from Scott Mickas with Melius Research. Scott, your line is now open. Please go ahead.

Scott Micus
Analyst at Melius Research

Good morning, Chris. I kind of want to follow up, answer Doug's question. When I think about post Katrina, Northrop had a lot of struggles with a chip building business before spinning it off to form HAI Shipbuilding. Margins initially weren't that great post spin, but come 2013, there was a meaningful pickup in favorable EAC adjustments and your stock more than doubled that year. So just curious, what lessons did you learn from the late 2000s and early 2010s that are still relevant and can be applied today? And when do you think investors will see EACs flip from unfavorable to favorable?

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Thank you. I'll start this answer, then I'll kick it over to Tom for some timing related issues. But I have confidence that we can get this done because I've done it before, as you said. And the key is making sure that you're very transparent and disclose current performance and ensure that you're resolute at the negotiation table. And there's achievable and predictable cost and schedule estimates when you do those negotiations. As I said previously, it doesn't do anybody any favors to miss schedules or miss cost estimates. So we just need to make sure that we estimate them correctly and negotiate them correctly and that can be done. And there's $50 billion of work that's going to be negotiated here. It's just getting through the pre Covid contracts is what's important. So I'll let Tom talk about the timing a little bit.

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

Thanks, Chris. Yeah, as Chris had mentioned, both him and myself were down there. I spent 10 years from 2011 through 2021. So I saw that march up and it's really about making sure one, we get good contracts that have a good cost equilibrium balance between us and our customer. We've been hit now with COVID and inflation and things of that nature. It's really causing a draw on our production lines. These long term contracts are being impacted by inflation, the number of heads, experience in the yard and the supportability of the material right now. So one, it's many of the new awards we get like the bundle down in Ingalls that we have, the FY23 award for destroyers that we received and now going forward, the plethora of 17 boats between VCS Block 56 and Columbia Bill. Two, you know, getting balanced contracts that we have appropriate our performance is appropriately aligned. Our schedules that we see right now, the investments both from ourselves and from our Navy partner will have a positive benefit. But ensuring we have a solid program plan and we're putting good commitments on contract and then obviously we've got to execute on our commitments on that front. So it's maintaining our budgets, holding schedules, making progress weekly, monthly, quarterly, and we have a track record of doing that. I'm confident we have the processes and the facilities for the most part. We need more throughput, but the processes and the tools and the facilities are in place right now. It's about building out the workforce. We have strengthening and more consistent supply chain that we have against our schedules and then us kind of hitting the mark on cost and schedule on a regular rhythm. That's what we did down at Ingalls. I think we have the pieces in place and where we are short on people. The cost reduction initiatives that we have right now and we've talked about the contracts, contract equity going forward here. I think we understand what's causing us a delay in our production programs, specifically on VCS and some headwinds they have down at Ingalls on the destroyer program. And I think we're working hard putting the dollars and the pressure in the right areas to find the rhythm that we saw in the Ingalls March up post Katrina.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

So we don't have a specific date for you and when we get back to those sort of profitability estimates. But as Tom mentioned in his script. We are transitioning over the next couple years out of these pre Covid contracts into the new contracts. And as we transition, there should be an uplift in profitability.

Scott Micus
Analyst at Melius Research

Okay, and then one quick follow up. The midpoint of the guidance implies about 500 more. 540 million of shipbuilding operating income. I'm just curious, is there any assumption baked in there for what net EACs will be for this year?

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

Yeah, so. Obviously we run our EAC process on a quarterly basis. We don't provide the profitability by ship or by class like that, even by division. So we are always baking in eac. The estimate to complete in the EAC is aligned with our performance that we have right now with risks and opportunities kind of hedged against that. So we know we're throwing additional investment dollars in IT and efforts and improvements of our production lines. We balance that with the risks and opportunities we see in front of us. So that sets the trajectory and how we expect to perform kind of going forward. And again, that etc estimate to complete on these EACs gets reevaluated every 90 days when we get another set of actuals. So I'm not going to get into the specific details that we have in there, but you know, we do expect a stabilization and an improvement as we go forward.

Scott Micus
Analyst at Melius Research

Okay, got it. Thanks for taking the question.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Sure.

Operator

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

Pete Skibitski
Analyst at Alembic Global Advisors

I guess just sticking to the shipbuilding margin questions. It sounds like maybe you'd recommend we assume sort of gradual improvements on shipbuilding margin through kind of to the end of the decade, maybe hitting that 9% mark. And I don't know if we should think about a step change, improvement in 27 or just keeping it gradual. And then I just wonder if you could talk about the. It sounds like you could potentially get a contract change on CBN79. I wasn't sure if that if he did get a contract change, if that would impact margin one way or another. Thanks.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Yeah, so let me, let me start and I'll let Tom chipped in. Maybe Let me answer the 79 question first and then I'll kick the margin timing question over to Tom. 79. Yes, we do expect a contract change related to some additional capabilities that may be put in the ship. The program team's working on that and with the objective of getting the ship delivered with the most capability and deployed as soon as possible. The program teams are working on that and there would be a change related to that. But I don't think it's positive or negative. It's just an equitable adjustment related to the capabilities that are added. So with that I'll send it over to Tom on the margin timing.

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

Yeah, so specifically, obviously we don't provide margin guidance for the following year or the out years. Obviously there is a shape and an expectation we have right here. And as of Q3 last year we missed the expectation of where we thought we were. You really got to get down to where we've been impacted. And again, it's that the less experienced the labor we have, the throughput and the support of the supply chain, we see areas and we have initiatives to kind of improve all of that. So going forward, that's going to be a lift against all operations we have now for contracts that have run through Covid, you know, the older pre Covid contracts, those contracts have seen increased costs. So there's. There's limited ability to go and get additional profitability on those contracts. As we put the new work, the $50 billion on here, obviously that didn't run through that. It's going to get the benefit of the current performance and where we stand right now. And the opportunity is much greater to have the profitability bounce back. So I would say the way to model that is you find. Follow the revenue. In my remarks, I gave you the mix and how it blends out. And by 2027, the majority of the work will be post Covid work. And I do expect a ramp in profitability as we work ourselves through the decade here.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Always remember we're pretty conservative when we start out ships. So I do agree it's going to increase, but I wouldn't anticipate a step change.

Pete Skibitski
Analyst at Alembic Global Advisors

Okay, thanks for the call, guys. Yeah.

Operator

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

David Strauss
Analyst at Barclays

Thanks. Good morning. Hey, Chris, could you maybe talk about the opportunity to buy additional shipyard capacity? I think you've made some comments recently in the press around that. Can you kind of size that opportunity? And if I miss, I apologize on the call or in your prepared remarks. What are your hiring plans in 2025 relative to 2024?

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Yeah, so we'll hire about the same amount. We've repositioned our hiring a bit, as I said in a previous earnings call, from kind of broadly hiring, including entry level, to hiring more experienced people. We've actually made some progress in that regard. And specifically in Newport News, we had been hiring out of the pipeline, which is really the regional development centers. These are people that have chosen shipbuilding as a career. They've been to the 5 to 10% rate. That's increased to 35% at the back half of the year, which is really positive. And we would like it to get to 60% this year. And that's really thanks to the state of Virginia and the federal government for increasing the funding for those regional development centers. We're also targeting additional experience down at Ingalls, where they'd like to hire 80% experienced people. So while the number's the same, we're repositioning it. Repositioning a bit. Now, your question about buying another shipyard, I'm really not interested in that. W International was an opportunity that came along, and they're a quality builder or manufacturer that has been in the shipbuilding industry. And we were concerned they were going to move out of the shipbuilding industry. And that is a problem. So we have a lot of outsourced partners and I'd rather develop outsourced partners and have an arm's length relationship. I really don't want to vertically integrate. But this opportunity showed up and we got 500 world class shipbuilders with Newport News management team managing them. So it was really a layup for us. It's going to increase our throughput immediately, but I have no plans to right now unless something very interesting came along to buy additional manufacturing facilities.

David Strauss
Analyst at Barclays

Okay, thanks. And Tom, a follow up on free cash flow and capital deployment in terms of your free cash flow progression beyond this year, think about 26, 27 as the pre Covid work runs off, would you expect a free cash flow progression given the capex and working capital investments you've had to make here, would you expect that free cash flow progression back to normal to maybe be faster relative to kind of what we're going to see in terms of the runoff of the pre Covid work and then just how you're thinking about capital deployment given the cash burn in Q1 and the debt maturity in I think the beginning of Q2? Thanks.

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

Yeah. So I would expect, you know, as we work through, as Chris said, the chop in the water for the next 12 to 18 months, the cash flow would ramp up, you know, and we would get back to more normalized levels as we work ourselves through the pre Covid contracts that we have here. And you can time that as well as with the margin. The cash flow will follow that in the out year. So that's how that works. And the capital deployment, there's no change. We're still using the same process and the model that we have here. We'll continue to have a. We'll invest in the yards, we'll have a capital, we'll have a dividend that we have annually here and any excess free cash flow which we've been doing since 2011 will go back to the shareholders as that materializes. So no change in that policy right now. We did not provide any guidance for share buybacks in 2025 and if something changes in that front, we'll update you on a quarterly earnings.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

I would add it's an interesting question on projecting free cash flow right now and I've spoken of this previously, I don't know if it's been picked up, but the incentive laden nature of some of these contracts that are being let really lend it itself to be difficult to project frequency free cash flow timing. It's always been a challenge for us to project free cash flow timing because of the lumpy, you know, the limited amount of projects, large invoices can move across the period. But with these large incentives and the timing of the incentives and some of them not even being negotiated yet, it makes it a bit of a challenge. So we're going to continue to be lumpy going forward, but I agree with Tom 100%. It should incrementally improve over the long term.

David Strauss
Analyst at Barclays

Thanks very much. Sure.

Operator

Our next question comes from Scott Deutschland with Deutsche Bank. Scott, your line is now open. Please go ahead.

Scott Deuschle
Analyst at Deutsche Bank Aktiengesellschaft

Thanks. Tom, Were the Virginia Class negative EACs on the block four votes. The block five votes or both?

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

A mix of both. Okay. And I think the block 5 votes are post Covid votes. So why should we only be focused on the pre Covid ship?

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

They were negotiated in 2019. Those were negotiated in 2019.

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

They were in 2019, yeah.

Scott Deuschle
Analyst at Deutsche Bank Aktiengesellschaft

Okay. And then, Chris, would the contract change on CVN79 result in the change in the delivery timeline for that ship?

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Potentially. We're working through that with the customer right now.

Scott Deuschle
Analyst at Deutsche Bank Aktiengesellschaft

Okay. Can you remind me why the ship was originally delayed from 2024 to 2025? I thought it was something similar to what you're now saying may cause it to go into. Well, there's a --?

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Yeah. No, so sorry for the confusion. There's actually a couple changes, large changes that took place on CDN79. The first one was related to some significant combat system work that the Navy asked us to do. I think what you're referring to is moving PSA into the baseline work. That was the schedule change previously where we were going to deliver it, do a significant amount of PSA work and then get it deployed. They moved that into the baseline, which caused a schedule change. This is additional capability that they've developed based on CDN78's performance in deployment. And so you always want to get that. As you learn, this is the second ship of the class. As you learn, you want to make sure that all the capabilities are in that shift when it gets deployed.

Scott Deuschle
Analyst at Deutsche Bank Aktiengesellschaft

Okay. And did you book a negative EAC on CDN 79 this quarter?

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

It wasn't material.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Yeah, I think there's a modest negative adjustment. Okay, thanks, guys. I'll leave it there.

Operator

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

Myles Walton
Analyst at Wolfe Research

Thanks. Good morning. I was curious on the morning, Miles. The shipbuilding margin guidance for 25, five and a half to six and a half in the first quarter. You're already at five. But I think the full year is predicated on material increases in throughput and cost reduction as well as the contract award assumptions. So the question is, how much are you assuming is going to happen in the booking rate versus when those things happen, the margins will progress higher.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Yeah. So all of that is included in the guide. Right. The new ships meeting our throughput and our cost reduction initiatives, the timing of the new ships, an incentive assumption on those new ships. So it's kind of all in the mix. And then we do have a bit of a, it's a bit of a conservative guide related to. We've just been had a couple quarters of negative adjustments here. So we thought it was prudent to, to make it a bit, a bit conservative. So it's all in the mix. I'd like to say I could time it out for you. We'll give you the information every quarter on how we think the next quarter is going to be. But all of that factors into the guide.

Myles Walton
Analyst at Wolfe Research

I guess the way I was going at it is first quarter you obviously wouldn't have the contract, you wouldn't have a lot of these cost improvements. So that 5.5% is that low end pretty much reflective of your, of your current situation. Ignoring the improvements you're talking about in throughput and cost improvement.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

I think that's probably fair. But we're working hard to get that contract done.

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

Hey Miles, it's Tom. You know, we give the court a guide, so we're really close to that and that's how we see it's going to play out. I mean, obviously there's a timing of the new contract award, there's the list that we expect to get from the initiatives that we have on the objectives page, the operational objectives page. But then there's just the run rate opportunities and risk that we see performance CPIs and SBIs most closest to the slide here. So I mean it's in the mix there. Obviously it's on the bottom end of the range here because it's the beginning of the year. But there'll be, hopefully there'll be be against the contract awards, the initiatives we have. And then as the programs mature going forward, we could realize the medium at the top end of that range.

Myles Walton
Analyst at Wolfe Research

Okay. And then Chris, maybe a higher level question. This move towards outsourcing. Obviously there's benefits to that. You could maybe control your cost or have a little bit more visibility on cost, but you're relinquishing some control and quality control in particular. How do you weigh that? And a move to increase it as much as you're talking about 35%. I don't know what the base level is. So that could be a material number. It could be an immaterial number.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Yeah, it's a material number. And the good news is we're outsourcing with partners that we already do outsource work with. So we're very familiar with them. We don't do this lightly. We do pilot projects so that the partners can demonstrate their cost and schedule and quality capability before we do it. So it's a good question. Because we've been burned by outsourcing before. I think a lot of people in the industry have, and we just need to make sure we do it right. So it's a risk that we understand and we mitigate because we've done it before.

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

I would add on the back of that, like an acquisition like W International are bringing it in house with Newport News people. Leadership processes throughput, a proven workforce that's there that was up and running. There's work going on down there right now. And having 500 heads ready and moving forward operationally is a big plus there. So we're doing it really smartly. We're ensuring who we in source or outsource, putting the bumpers around to make sure we get the performance and expectations. And we anticipate that we'll be able to execute that work and be a significant piece of the lift that we talk about. About 20% more earned through put.

Myles Walton
Analyst at Wolfe Research

All right, thank you.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Thanks.

Operator

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

Jordan
Analyst at Bank of America

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

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Good morning, Jordan

Jordan
Analyst at Bank of America

Initiative. Good morning. On the initiatives that you guys are working on for hiring, what's changed versus what you guys have been doing for the past couple of years? And also to how do you think HAI and MissionTech specifically, too. Is there any impact from Doge?

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Okay, yeah. So first, what changed? As I previously spoke about, it's not only hiring. We've refocused that to target more experienced shipbuilders. Wages are going to help that the anomaly has workforce development support. And so that will help that process to hire more experienced shipbuilders and will assist in retention as well. Doge is, you know, it's the new administration. It's good that one of their top priorities is shipbuilding. We're all for reduced regulation. So we'll work with that team to ensure that we have the appropriate level of regulations. And trust me, no one wants less cost and better delivery schedules than I do. So we welcome the initiatives that could be put in place and we would participate in that going forward.

Jordan
Analyst at Bank of America

Great. Thank you.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Thank you.

Operator

Our next question comes from Gautam Tanner with PD Cohen. Gautam, your line is now open. Please go ahead.

Gautam Khanna
Analyst at Cowen and Company

Hey, good morning, guys.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Good morning, Gautam.

Gautam Khanna
Analyst at Cowen and Company

Got him. So I have two questions. One on previously, you guys had thought about a cash inflow associated with signing the 17 submarine contracts. I think it was a release of contract assets or receivables. Is that still true? And if you could quantify how much would be. Could be invoiced upon.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Yeah, there is some cash upside to executing those contracts. We risk adjust all of that and we. So we haven't broken that out. Got them, but that's included in our guide. And there's a. There will be some cash receipts related to that.

Gautam Khanna
Analyst at Cowen and Company

If I recall a quarter ago, a lot of the free cash reduction was in the guidance for 2024. Was that those contracts moving out to signing? So is it about 500 million? And can you ballpark it for us?

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

I'd really rather not got them at this point. There's a lot of moving parts in the cash guide, as Tom mentioned previously, but yeah, I'd really rather not ballpark that. We're still in discussions with the. With the government on that contract. We need to negotiate that really holistically. So I'd rather not give you specifics on the cash impact.

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

I'll probably just like a little color there. Because I think as you reference Back to the Q3 call, your question's kind of getting your head around, hey, that was the back half of the year that the omnibus approach for 17 subs being put on contract was a pathway for us to still make our guide last year. Right. And we had the early question on saws right now. So although that's viable and that's still out there, the industry still believes that's a very efficient way to get the most ships on contract built fastest. Right now, as you know, the CR just has an anomaly in there for the first two of the 17 boats. And we're working very closely with a Navy partner to get those on contract near term. So the difference between where we were, say, last quarter and this quarter is just the contracting approach, the mechanisms. Is it an omnibus at all 17, which it would impact additional contracts, or is it just two boats for FY24, an incremental approach, maybe saw still an opportunity set behind it, but it brings us a little bit of uncertainty of what was the cash perspective and outlook back in Q3 versus how we're going forward here. All these boats will get on contract. Right. We'll find a good risk equilibrium between us and our Navy partner, a balance between affordability and profitability, and we'll ensure that the deal on our side obviously meets the requirements and the expectations of our customer. While being true to narrowing home a contract that we can go execute the cost and the schedule, it's aligned with our profitability expectations. I hope that provides a little bit more insight as far as how that relates to cash cost.

Gautam Khanna
Analyst at Cowen and Company

Thanks, Tom. And just one last one. In President Trump's first term, we all remember the whole FSA discussion going to more unmanned, lighter ships. Is there any movement afoot? Have you heard anything from the new administration about their inclinations to revisit some of the recommendations back then?

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Not yet, but it's early. The leadership is still getting confirmed. We support, obviously with our unmanned business. We support both. We think there's a high, low argument and actually a fact that is going to have to be executed. But no, we've not had those conversations with the new administration yet because they just aren't there yet.

Gautam Khanna
Analyst at Cowen and Company

All right, fair enough. Thank you, guys.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

Thanks, Gavin.

Operator

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. Tastner for any closing remarks.

Christopher D. Kastner
President And Chief Executive Officer at Huntington Ingalls Industries

All right. Thank you for joining the call today. I appreciate everyone's participation. Thank you.

Operator

That does conclude today's conference call. You may now disconnect.

Corporate Executives
  • Christie Thomas
    Vice President, Investor Relations
  • Christopher D. Kastner
    President And Chief Executive Officer
  • Thomas E. Stiehle
    Executive Vice President And Chief Financial Officer
Analysts

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