Q4 2024 Huntington Ingalls Industries Inc Earnings Call

Thomson Reuters StreetEvents
07 Feb

Participants

David Strauss; Analyst; Barclays

Scott Deuschle; Analyst; Deutsche Bank

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the fourth-quarter 2024 HII earnings conference call. (Operator Instructions)
Please be advised that today's conference is being recorded. If you need further assistance, please press star, followed by 0.
I would now like to hand the call over to Christie Thomas, Vice President of Investor relations. Mrs. Thomas, you may begin.

Thank you, operator, and good morning, everyone. Welcome to the HII 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 their 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 at ir.HII.com.
On the call today are Chris Kastner, President and Chief Executive Officer; and Tom Steely, Executive Vice President and Chief Financial Officer. I will now turn the call over to Chris.

Thanks, Christie. Good morning, everyone, and thank you for joining 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 the main 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 of 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're 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're achieving key milestones on ships 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 three of our divisions hit key milestones and one 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 contract value, a 2024 book-to-bill of 1.33%, and 9% revenue growth year over year. This positive performance reflects Mission Technologies' continued alignment with our country 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 logic task order to provide logistics services, ISR operations, and next gen technology. And in Australia, Mission Technologies was awarded an initial 5-year contract to provide global supply chain services to the Australian government's Department of Defense.
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 6 destroyers in production, authenticating the keel DDG 133 Sam Nunn in the fourth quarter. Finally, we completed dry dock work and undocked USS Zumwald DDG 1,000 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 CVN 80 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 DDG 129 Jeremiah Denton and complete sea trials for DDG 1,000. And in Newport News we plan to deliver SSN 798 and float off SSN 800.
Also, the team is focused on completing CVN 79. CVN 79 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 CVN 81 Dory 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've 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 in-source 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 emission technology segment from 6 business units to 4, and the implementation of a new payroll system at the beginning of 2025. Further cost efficiency plans around optimizing cost structures, 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 3 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 billion 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 billion and $3.1 billion and margins between 4% and 4.5% with the 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 of free cash flow outlook is predicated on meeting our throughput and cost reduction objectives. It also assumes appropriate resolution on the last two VCS Block 5 votes, and the Block 6 and Columbia built 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 CVN 75. 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 in 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 5 deliveries over the next 2 years. We have a line of sight for generating approximately $15 billion in annual revenue by decade's 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.

Thanks, Chris, and good morning. Today, I'll review our fourth-quarter and full year results, and also provide some additional color regarding 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 in 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. Ingalls revenues of $736 million decreased to $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. Admission Technologies fourth quarter of 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 of 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 settlement at Mission Technologies.
Ingalls 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 of 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% compared to $51 million and 6.8% respectively in the fourth quarter of 2023. The declines were primarily driven by favorable insurance claim settlements 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 was $3.15 compared to $6.90 in the fourth quarter of the previous year.
Moving on to consolidated results for 2024 in 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 low 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 low amphibious assault ship and NSC 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. Admission Technologies 2024 revenues of $2.9 billion increased $238 million or 8.8% from 2023, primarily driven by higher volumes in cyber, electronic warfare in 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% compares 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% with the revised -- 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 and fleet sustainment, as well as higher equity income.
Again, the Mission Technologies 2023 results included a favorable $49.5 million dollar insurance claim. So, we are laughing that difficult comparison, and we believe our results still show strong absolute income growth and marginal expansion for the year. Mission Technologies 2024 results included approximately $99 million of amortization in tangible 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 was $13.96 compared to $17.07 in 2023.
Turning to cash and capital deployment on slide10.
2024 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 pay $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 a total of $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 2024 were 7.7%. Our 5-year pension outlook has been updated and is available in the appendix of today's presentation on slide 13.
Turning to slide 11 in 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.
The shipbuilding margin near 5.5% and Mission Technologies operating margin of 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 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 Christy for Q&A.

Thanks, Tom. As a reminder to everyone on the call, please limit yourself to one initial question and one follow up so we can get as many people through the queue as possible. Operator, I will turn it over to you to manage the Q&A.

Question and Answer Session

Operator

(Operator Instructions)
Doug Harned, Bernstein.

Very good. Good morning.
Thank you.

Morning, Doug.
So sorry for the background noise. We're going through a thunderstorm outside right now, but just bear with us a little bit.

Okay, I've got a snowstorm here too, so, the.
So, if I go back a few years, there was a marginal 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 GAAP 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.

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 Engels contracts 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, 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, 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 the various elements of our cost structure, not just pay people more.

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.

Well, yeah, interesting. I absolutely believe that 9% is the is possible moving forward. The $50 billion of contracts that, we've negotiated some of those with the bundle, the AI bundle down in Mississippi, and we're going to, we're negotiating the FY24 block 52 boat contract now.
The customer has 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 votes. There's a recognition. That we need to rebuild this industrial base and there's also a recognition, I believe that the 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 Ingles, we're in the exact same position. And we had to negotiate performance post-Katrina into the new data set of ships. We got that done and they had a very good a very good run where there was predictable cost and scheduled 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 customers on board with that. They want realistic achievable schedules as well, and so I firmly believe that's going to happen.
Okay, very good.
Thank you.
Thanks.

Operator

Seth Seifman, 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.
The Expects to bring more predictability. Are you basically what contract awards are you assuming, that the company will get this year, in the guidance?

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

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

In this, no, let me correct you there. It's not a full plan. We're negotiating FY 24, 2 boats consistent with the the acquisition approach that was set forth by Congress, and supported by the anomaly.
Block 6 and Columbia Bill 2, we're going to have to see the acquisition approach for those boats as they developed. SAS or a derivative of SAS, 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.
So.

So the guidance doesn't assume the.
The 17 Both get under.

Contract.

It does. It assumes that by 242 boats and then assumes the negotiation of the blocks contracts and the Columbia Bill 2 contract, yes.

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

Yeah, so interesting. I I have high confidence in the FY 242 but that'll happen the 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 we'll step right into Block 6 after we negotiate the last two block 5 votes.

Okay. Okay. Thanks. I'll leave it there for now.

Sure.

Operator

Scott Mikus, Melius Research.

Good morning Chris. I kind of want to follow up on answer Doug's question.
When I think about post-Katrina, Northrop had a lot of struggles with the shipbuilding 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 favor of EAC adjustments and your stock more than doubled that year. So just curious what lessons that you learned from the late 2000s and early 2010s that are still relevant and could be applied today? And when do you think investors will see EACs flip from unfavorable to favorable?

No thank you. I'll start this answer and then I'll kick it over to Tom for some 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 of 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 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. Thanks, Chris.

Yeah, well, as Chris mentioned, both him and myself were down there. I spent spent 10 years from 2011 to 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 any of the new awards we get like the bundle down in Ingles that we have, the FY23 award for destroyers that that we received and now going forward. The plethora of 17 votes between the VCS 56 and Columbia Bill 2, getting balanced contracts that we have appropriate, our performance is appropriately aligned. Our schedules that we see right now are rolled in 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. 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 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, a strengthening and a more consistent supply chain that we have against our schedules, and then us kind of hitting the mark and cost cost and schedule on a regular rhythm. That's what we did down at Ingles. 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 what's causing us a delay in our production programs, specifically on VCS and some headwinds they have down at Engels on the destroyer program, and I think we're working hard to put the dollars and the pressure in the right areas to find the rhythm that we saw on the Ingels march up post Katrina. So.

We don't have a specific date for you on 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 of years, out of these pre-COVID contracts into the new contracts, and as we transition, there should be an uplift in profitability.

Okay, and then one quick follow up. The midpoint of the guidance implies about 500,540 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?

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 estimates to complete in the EAC is aligned with our. Performance that we have right now with the risks and opportunities kind of hedged against that, right? 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 ACs gets re-evaluated every 90 days and we get another set of actuals. So I'm not going to get into the specific details that we have in there, but we do expect a stabilization and an improvement as we go forward.
Okay, got it. Thanks.

For taking the question.
Sure.

Operator

Pete Skibitski, Alembic Global.

As 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 CBN 79. I wasn't sure if that, if you did get a contract change if that would impact margin one way or another. Thanks.

Yeah, so let me start and I'll let Tom chip in. Maybe let me ask 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 may be put in the ship. The program teams 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. Yeah.

So. Specifically, obviously we don't provide margin guidance for the for the following year or the out years. Obviously there is a shape and an expectation we have right here and you know as of Q3 last 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 it's the less experience.
The labor we have, the throughput, and the support of 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 are run through COVID, the older pre-COVvid contracts. Those contracts have seen increased costs. So 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 of the, 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 follow the revenue in my in my 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 rampant profitability as we work ourselves through the decade here.

But 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.

Okay, thanks for the call guys.

Operator

David Strauss, Barclays.

David Strauss

Thanks. Good morning.

Right.

David Strauss

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 I, if I miss, I apologize on the call or in your prepare remarks. What are your hiring plans, in 2025 relative to 2024?

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 they've been at a 5 to 10% rate. That's increased to 35% at the back half of the year, which is really positive. And we like, 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 Ingles where they like to hire 80%. Experienced people, so while the numbers are the same, we would, 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 quality builder or manufacturer that 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 outsource partners and I'd rather develop outsource partners and have an arms length relationship. I really don't want to vertically integrate, but this opportunity showed up and I, we got 500 world-class ship builders. With Newport News management team, managing them. So it's really, 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

Okay, thanks, and Tom, a follow up on on free cash flow and and capital deployment. In terms of your free cash flow progression beyond this year, I think about 26, 27 is as the pre-COVID work runs off, would you expect the free cash flow progression given the caps 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, pre-COVID work and then just how you're thinking about capital deployment, given the cash burn, in 11 and the debt maturity and, in, I think the beginning of Q2. Thanks.

Yeah, so I would expect, 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, 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 year, so that's how that works. In the capital deployment, there's no change, we're still using the same process and 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 we'll have a dividend that that we have annually here and any ex access free cash flow which we've been doing since 201 will go back to the shareholders as that 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 we'll update you on on a quarterly earning.

I would add it's 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 itself to be difficult to project pre cash flow timing. It's always been a challenge for us to project free cash flow timing. Because of the lumpy, the limited amount of projects, large invoices can move across the period, but with these large incentives and the timing of these 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.
Thanks very much.
Sure.

Operator

Scott Deuschle, Deutsche Bank.

Scott Deuschle

Thanks, Tom, were the Virginia class negative EACs on the block 4 boats, the block 5 boats, or both?

A mix of a mix of both.

Scott Deuschle

Okay, and I think the block 5 boats are post-COVID boats, so why should we only be focused on the pre-COVID they were.

Negotiated in 2019, those were negotiated in 2019.

Yeah, they went in 2019, yeah.

Scott Deuschle

Okay.
I think Chris, would the contract change on CVN 79 result in a change in the delivery timeline for that ship?

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

Scott Deuschle

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, yeah, no, so sorry for the confusion. There's actually a couple changes, large changes that took place on CVN 79. The first one was related to some significant combat system work that the Navy asked us to do. I think the what you what you're referring to 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.
They've developed based on CVN 78's performance, and deployment. And so you always want to get that, as you learn, this is the 2nd ship of the class, as you learn, you want to make sure that all the capabilities are in that ship when it gets deployed.

Scott Deuschle

Okay, and did you book a negative VAC on CVN 79 this quarter?

It wasn't.

Material. Yeah, I think there's a modest negative adjustment.

Scott Deuschle

Okay, thanks guys, I'll leave it there.

Operator

Sure.
Myles Walton, Wolfe Research.

Thanks. Good morning. I was curious on the shipbuilding margin guidance for 25, 5.5 to 6.5 in the first quarter you're already at 5.5, 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 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.

Yeah, so all of that is included in the in the guide, right? The new ships, meeting our throughput and our cost reduction initiatives, the timing of the new ships and 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 conservative. So, it's all in the mix. I, 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.

I I guess the way I was going at this 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 you know the the improvements you're talking about on throughput and cost improvement.

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

Hey, it's, we get the court to 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 the timing of the new contract award there's the list that we expect to get from the initiatives that we have on the objectives stage, the operational objectives page, but then there's just the the run rate opportunities to risk that. See performance CTIs and SPIs most 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 at the beginning of the year, but they'll be by hopefully they'll be bye against the contract awards, the initiatives we have, and then as the programs mature going forward, we could realize the medium of the top end of that range.

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 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 it could be a material number or it could be a material number.

Yeah, it's a material number and the good news is we're outsourcing with 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 fair, it's a risk that we understand and we mitigate because we've done it before.

I would add on on the back of that like an acquisition like like International are bringing it in-house with Newport News people leadership processes through 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 insource to 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.

Okay all right thank you.

Thanks.

Operator

Ron Epstein, Bank of America.

Hey, good morning. This is Jordan onerran.

Hey good morning Jordan.

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 HII and mission tech specifically to, is there any impact from doge?

Okay, yeah, so first, what changed is I previously spoke about it's not only hiring, we've refocused that to 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 ship builders and will assist in retention as well. .
Dodge is, 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 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.
Great, thank you.
Thank you.

Operator

Gautam Khanna, TD Cowen.

Hey, good morning, guys.

Morning.

So I have two questions. One, On previously you guys have 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 reli could be invoiced upon signing that and then I had a follow up.

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.

Because 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 the signing, so is it about 500 million and can you ballpark it for us?

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. But we're still in discussions with the with the government on that contract, and we need to negotiate that really holistically, so I'd rather not give you specifics on the cash impact.

I, I'll probably just like a little color there because I think as you reference back to the Q3 call, your question kind of get your head around, hey, that was that me back half of the year that the omnibus approach the 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, and the industry still believes that's a very efficient way to get the most ships on contract built fastest. Right now, as the CR just has an anomaly in there for the 1st 2 of the 17 votes, and we're working very closely with our 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 of ALL17, which it would impact additional contracts, or is it just two boats for FY 24, 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, right, and 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 bearing 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.
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.

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 it's 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.

All right, fair enough. Thank you guys.

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. Kastner for any closing remarks.

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.

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