Ladies and gentlemen, thank you for standing by and welcome to the Q4 2019 Huntington Ingalls Industries, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker today, Dwayne Blake, Vice President of Investor Relations. Please go ahead, sir.

Thanks, Josh. Good morning, and welcome to the Huntington Ingalls Industries fourth quarter 2019 earnings conference call. With us today are Mike Petters, President and Chief Executive Officer; and Chris Kastner, Executive Vice President and Chief Financial Officer.As a reminder, statements made in today’s call that are not historical fact are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities laws. Actual results may differ.Please refer to our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. Also, in the remarks today, Mike and Chris will refer to certain non-GAAP measures. Reconciliations of these metrics to the comparable GAAP measures are included in the appendix of our earnings presentation that is posted on our website.We plan to address the posted presentation slides during the call to supplement our comments. Please access our website at huntingtoningalls.com and click on the Investor Relations link to view the presentation as well as our earnings release.With that, I’ll turn the call over to our President and CEO, Mike Petters. Mike?

Thanks, Dwayne. Good morning, everyone and thanks for joining us on today’s call. 2019 was a great year for HII and I want to personally thank each of our 42,000 employees for continuing to execute their daily activities with an unwavering commitment to our core principles of safety, quality, cost and schedule.I would characterize 2019 is a year of positioning for the future. We captured major contract awards that resulted in a record backlog of $46 billion at the end of the year. We enhanced our shipbuilding facilities by bringing new projects online to improve efficiency and affordability, as we completed the fourth year of our five-year generational CapEx program. And we challenged our employees to remain focused on execution, while driving continuous improvement, innovation and creativity.Now specifically during 2019, we delivered three ships, the guided missile destroyer, USS Paul Ignatius, the National Security Cutter, Midgett and the attack submarine, USS Delaware, and we redelivered the USS Gerald R. Ford following her post shakedown availability. We were awarded an historic $15 billion contract to build two more Gerald R. Ford-class aircraft carriers as well as an $8 billion contract for the Virginia-class Block V submarines. And we successfully navigated through the second year of our shipbuilding program maturity transition and achieve shipbuilding return on sales that were in line with our expectations.We expanded our portfolio by acquiring Fulcrum in early 2019, and additional portfolio shaping activities are continuing with the pending acquisition of Hydroid that was announced last week as well as the recent decision to divest our oil and gas business. Additionally, yesterday we announced an agreement to contribute our San Diego shipyard assets to a recently formed fleet sustainment venture backed by The Carlyle Group and Stellex Capital Management. All of our 2019 activities, as well as the…

Thanks, Mike, and good morning. Today, I will review our fourth quarter and full year consolidated results and provide some additional information on how we view 2020. For more detail on the segment results, please refer to the earnings release issued this morning and posted to our website.As Mike mentioned earlier, we continued to refine our areas of strategic focus within the technical solutions division. We recently announced the acquisition of Hydroid, which we expect will close by the end of the first quarter. The total purchase price is $350 million. This represents a multiple of approximately 16 times, expected 2020 EBITDA, when adjusting for approximately $50 million of related tax benefits.Moving on our oil and gas business, UPI is now considered an asset held for sale and as reflected as such on our balance sheet. During the fourth quarter, we recorded a $35 million non-cash asset impairment charge, primarily related to goodwill associated with the valuation of UPI as we prepare to divest that business.UPI had a very good year in 2019 and they have a strong backlog moving forward. Excluding the impact of the impairment at UPI, adjusted EPS for the quarter was $4.36 and $14.01 for the full year. GAAP diluted EPS was $3.61 for the quarter and $13.26 for the full year.Turning into our consolidated fourth quarter results on Slide 4 of the presentation, revenues in the quarter of $2.4 billion increased 9.7% over fourth quarter 2018, primarily due to higher volumes in submarine construction for Virginia and Columbia class boats in Newport News, and growth in our Technical Solutions division, due primarily to the acquisitions of G2 and Fulcrum. For the quarter, G2 and Fulcrum contributed revenues of approximately $55 million.Operating income for the quarter of $186 million, decreased $27 million or 12.7% from fourth…

Thanks, Chris. 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 from the queue as possible. Josh, I’ll turn it over to you to manage the Q&A.

Thank you. [Operator Instructions] Our first question comes from Myles Walton with UBS. You may proceed with your question.

Thanks, good morning. I was wondering on the free cash flow for 2019 kind of where did that came out versus your expectations. And then maybe as you look at capital deployment, you didn’t really pick up the repurchase effort in the fourth quarter and wondering if that reverses significantly in 2020?

Yes. So cash in Q4 was a little bit below expectation – $50 million to $60 million below, it was only timing with some receipts primarily at Newport News, that weren’t paid. That shifted into 2020. So not really concerned about that, that is normalizing. Relative to capital deployment, we really don’t see a change. We’re going to invest in our shipyards continue to comply with our commitment relative to dividends and analyze that throughout the year. But still the 10% increase – at least a 10% increase this year and then continuous share buyback, it was pretty consistent in 2019 with previous years in share buyback, obviously in 2018, we’re pretty opportunistic, but really no change there.

But still the band aid is to return versus all cash – free cash flow to shareholders.

No. There is no change in that commitment. That commitment to 2020 definitely stands.

Okay. Thank you.

Thank you. Our next question comes from Carter Copeland with Melius Research. You may proceed with your question.

Hey, good morning, gentlemen. Two quick ones. One Mike, if you could just speak to the Hydroid acquisition and unmanned and the longer term growth opportunity, maybe in a little bit more detail how you see the competitive landscape and that part of the market evolving, I realize there’s a lot going on. But any color there would be helpful. And then just on housekeeping, Chris, I wondered if you might give us the EACs gross and net? Thanks.

Let me do that, housekeeping, first. Yes. So positive is $89 million, negative $50 million, net plus $39 million. About 90% of that was Newport News.

Awesome. Thank you.

Sure. Okay. Relative to Hydroid, we began – I guess, we identified the Navy’s potential to move towards more unmanned systems several years ago. And we recognize that while we had engineered out a lot of manpower on the Ford design, that was not what – that was not where the Navy was talking about. They were talking about unmanned vehicles in particular, and we didn’t really have a footprint there. We – you recall, we invested in a small company in Panama City that had a platform called Proteus, which was a two man or unmanned, or it was both, either or could be operated with two people or be unmanned platform that was actually in the water and being tested and being used by many customers, not just the Navy.We acquired that group and the first thing we found out was that there’s a whole set of technologies and customers and people and processes that we were not very familiar with. And so not only did we get some technology there, we got some access. And in the course of that access, we then realize that, we can bring some of our own core capability to this area that might actually accelerate the adoption of the technology as well as create a business for us.And that led to an arrangement with Boeing, who had invested in their large unmanned vehicle. They’d actually put it at sea, but they needed somebody to build it. So we could bring our manufacturing expertise to bear on that. We did that. We’ve, and in the course of that, we kind of realized that, okay, we’re starting to really get an understanding of these large unmanned undersea vehicles. But when we looked around, we saw there’s a lot of activity on the smaller…

Yes. I would also add that, that business just organically posts the transaction getting complete with in HII will grow at high single digits. So that’s the near term growth rate we see in that business. So we believe it can only get better beyond that.

That was going to be my follow-up. Thanks for the color, gents.

You bet sir.

Thank you. Our next question comes from Jon Raviv with Citi. You may proceed with your question.

Thanks very much. Good morning. On the – just following up on a cash flow question, I know, you mentioned, $50 million to $60 million rely on Newport News receipts, something in the 2020. Any other big building blocks we should think about heading into this year. CapEx come down a bit perhaps. Anything else we should keep in mind in terms of underlying cash flow?

Not really, as you’re aware, this is the last year of our major capital program and we get back down to 2.5% of sales in 2021. What you’re going to see over the near term is us start ramping our free cash such that we become a $700 million a year cash flow story. Now I can’t tell you whether that happens in 2021, 2022 or 2023, we’re going to ramp towards that. But at the end of the day, $700 million becomes the new normal for HII for free cash flow.

And just to clarify, Chris, that’s a with or without pension benefit?

That’s all in.

Okay, thank you. And then just a quick follow-up on margin cadence, can you talk a little more on the back loaded nature of this year. I know, in the last call, you mentioned that there could be some – probably what’s the comp…

Yes. Sure. The major items, the back half of the year, our delivery of NSC 9, 796 getting to pressure all complete and then bringing to life CVN 72, excuse me, CVN 73 and CVN 79 to their test program.

Thank you.

Thank you. Our next question comes from Doug Harned with Bernstein. You may proceed with your question.

Good morning. Thank you. I want to go back to, Mike, the discussion about unmanned systems. And last week, Secretary Esper talked about moving to a very different kind of 355-ship Navy in 2030, which is I think it’s pretty aggressive with smaller platforms, lower manning, including optionally manned. I asked you a while back about this, as it related to the Marine core strategy that had been laid out, but if the Navy moves aggressively in this direction, how might that affect your core programs, the larger ships and your business mix? And what’s your understanding of how the Navy is looking to proceed here?

Well, Doug, I think, this is – this continues to evolve. The Navy is trying to match up the requirements that they see out in the world that they feel like they need with the ability of the industry to support it. And so our view of that is that we need to be on the front edge of that and trying to help them evolve that.Relative to our core business though, I mean our strategy for the last three years, if you go back over the last three years, the shipbuilding accounts have been historically high, doesn’t actually talk about how high they’ve been. I mean, my whole career, they’ve been in the $14 billion to $16 billion a year, year-in and year-out. And for the last three years anyway, we’ve been just short of $25 billion, even this year that for all of the discussion over the past few days about what’s going on with the shipbuilding budget and all that sort of thing, it’s still at $20 billion.And so I think that where you’re going to see is, you’re not going to see a hard left turn here where we’re going to say, okay, we don’t need big platforms with people on them anymore and we’re going to make – we’re going to have a Navy that’s completely unmanned and think what you’re going to see is an evolution. You’re going to see the unmanned space become amplification of the presence and platforms that the Navy needs. And so I don’t know how that counting works and all that sort of thing because that becomes an interesting discussion about what actually counts as a ship and I just kind of stay out of that.I think about it more in terms of capability to provide presence for the Navy and the ability of the industry to bring technology to bear on the problems that they have. I think that the Navy is going to be moving towards more unmanned systems to amplify the platforms that they have and then see where that goes from there. And we want to be as their principal partner, we want to be right there with them and help them make that successful.

Well. When you think about growth I think of shipbuilding as a fairly predictable business because – on top line, because of the very long contracts. And you’ve talked about five-year growth rate of around 3%. But this year you gave – you’re giving revenue guidance of 3% to 5%. What factors create that range of outcomes? Is this repair work or uncertainty about the timing of milestones? I mean, how do you get that, that broader range this year in guidance?

There’s really some minor timing issues that could move it between 3% and 5% on some of our programs. It’s not really new programs drive that, although timing of some material on some of the new awards would help us out of that. But the majority of that as you indicate is already under contract.

Okay, great. Thank you.

Thank you. Our next question comes from Ron Epstein with Bank of America. You may proceed with your question.

Hey, good morning. Mike, could you give us a little more maybe background of color on the $950 million contract that you guys got in ISR work for the Tech services division, right? And that’s doing support work for the Air Force in Europe, right? So if you could give us some more background on that? And then I have a follow-on question.

Yes. So that’s – Ron, this is Chris. That’s Air Force contract, Persistent Multi-Role Operations, ISR contract that’s split over four or five years, all that revenue. And we’re really excited about it. We’ve done similar work through one of our acquisitions. So this is essentially follow-on with a different scope. I can’t really go into too much detail what they’re doing. I got to be careful on the call. But we’re really excited about that. We think it’s an important area going forward.

Okay. And then, Mike, just maybe a broader question. One of the things that’s come up in some of the conversations that we’ve had around Naval strategy. Do you – are you up to view, do you see a future, where there’s more underwater operations beyond just kind of the typical Virginia class, Columbia class, that there’s going to be a need for a broader underwater infrastructure and met this unmanned underwater play as part of potentially building out broader underwater infrastructure?

Well, Ron, I remind you that you’re talking to a former submarine officer. So I need to kind of do my Safe Harbor on that. But the thing about the undersea environment and platforms in the undersea environment is that they are very asymmetric. There’s lots of history of a single submarine can bottle up an entire fleet in port. And the fact that you can look out across the harbor and can’t see it, gives it an advantage. And so being undersea is a multiplier just that, just the simple fact that your underwater is a multiplier for the your capability. There’s a lot of things that you can do underwater that you may not want to send a Virginia class submarine with a bunch of people on it to go do.And so being able to – on the other hand, there’s a significant amount of things underwater that you want to be able to do that you want to have a Virginia class submarine or something like that, fully man, fully capable of complying with rules of engagement and all that sort of thing. You want to be able to do that too. And so what we see is that this asymmetry that comes from being undersea is going to be something that the Navy has to find a way to take advantage of. And if you just go back, gosh, it’s getting to be close to 30 years now, but you go back and start to look at how did the unmanned aerial systems take off, right? There was a technology that was being developed and we were kind of doing this and then suddenly there was a knee in the curve where nobody could get enough of it. Everybody wanted more and there wasn’t enough capacity.…

Great. Thank you.

Thank you. Our next question comes from Robert Spingarn with Credit Suisse. You may proceed with your question.

Well, good morning. I wanted to ask you for a little more detail on shipbuilding margin both forward and also Q4 2019 from the perspective of the CVN 79? So trying to understand you book that very conservatively in the beginning of the program, I think we were looking for some kind of write-up upon launch. So Chris, can you tell us anything about CVN 79 EACs in Q4? And then maybe the other way to look at this is how does the 9% in 2020 divide between Ingalls and Newport News and what’s happening with the carrier relative to plan?

Well, I’ll comment on margin, then Mike, you can talk about CVN 79, if you like. But Q4, 79 met their milestone. We evaluated the risk and I had previously indicated that there’s a lot of risk in front of us on that ships. So it just simply wasn’t material enough – material enough of an issue to mention. But we did our very good Q4 in shipbuilding both Ingalls and Newport News actually. In 2020, I expect both Newport News and Ingalls be at 9%. I expect them both to get there.

Okay. Just on the carrier, I mean, was I wrong in thinking that the launch would release a fair amount of positive EAC or is it next year’s Q4 with the system build out milestone that you’re talking about?

Yes, I think that was our view of this is that the risk that we incurred on the Ford was really in the test program, which is kind of we’re walking into the test program now on Kennedy and we just – we’re going to be conservative about this. The Ford actually for a lead ship came together better than any lead ship I’ve ever seen. But as we tested systems, we had to work our way through a whole bunch of new technology there. So this is our next go on that. And we’re going to continue to be pretty conservative on that until we actually retire those risks. And I don’t think we ever really expected that launch would be open the floodgates on risk retirement. We just, frankly, the early launch that the program team put together was a way for us to mitigate downstream risk. And that’s, it was part of a step, but not a floodgate.

Are you on plan with 79?

We are.

Okay. Thank you.

Thank you. Our next question comes from George Shapiro with Shapiro. You may proceed with your question.

Yes. Thank you. I just wanted to follow – good morning. I just wanted to follow-up a little bit in the last question from Rob. Can you just give us the specific EACs in the quarter and then also can you explain, you mentioned that you got to pick up in margin on the Block V contract. So that assumes that the contract was more favorable than what you might’ve thought before. If you could comment on that. And then also the other benefit that you had there on the LA class ships the support services increase in margin.

Yes. So Block V in Columbus, neither one is material enough to mention the number. It’s all included in the Newport News results. I can’t get back to your first question, George. I don’t even recall it. What was the first question again?

Like, what are the EACs?

I already gave that to [indiscernible] at the beginning. It was gross favorable of 89% unfavorable of 50%, 90% of that being Newport News.

Okay. And then how about the support contract changes for the LA class that you referenced? I mean, can you be a little more specific what they were?

No. They were all embedded in Newport News performance in the quarter.

Okay. And then just one more general one, Mike. You looked in detail at the 21 budget for shipbuilding. Do you think that Congress leaves it as is? I mean, there are quite a bit of changes, right? One less destroyer, one less Virginia-class to also support Columbia.

Well, George, I’m going to suggest that, I’m not sure that I’ve ever seen the Congress leave any part of the administration’s budget as is. And so I think that the budget submission is a beginning of a process. It’s a long process to go from submitting the budget to appropriating the bills. And I’m not talking about just defense, I’m talking about all of the areas of the budget. So I think it’s going to – our role in this is typically to talk to – if that’s what you want, what’s the most efficient way to do it? So that’s kind of the way we work this and we’ve worked it over the years and sometimes it works out and sometimes it’s not necessarily the way we would like. But I think we’re just at the very beginning of the process right now and it’s going to play out over the next several months.

What in it would you like to have changed?

Well, I think the biggest issue is the one that we’ve been talking about here all along. And that is that you got to find a way to pay for Columbia. If you decide that you’re going to pay for Columbia inside the shipbuilding account, then it’s going to squeeze ships out unless you’re going push the budget up. And in the last three years, I think that, at the very beginning of the ramp up into Columbia at a time when our strategy was take advantage of the budget and get as much stuff under contract as you possibly can, because there’s going to come a time where you’re going to have a lot of arm wrestling over the budget. And I think we’ve done that very well and that’s how we ended up with the backlog that we have.But I think the uncertainty about how you’re going to pay for Columbia is going to show up. And I think that’s what really showed up here. The pluses and minuses were really squeezed out because you have to go pay for Columbia. And I absolutely think we have to go pay for it and I think that’s a national priority. But I just think it’s going to be, it’s the elephant in the room that has to be dealt with if you want to keep all the other programs going. So I think that’s where this ultimately goes. Each ship, certainly we’d like to see – more ships are better and they’re better not just for us, but they’re better for the whole industry. So we’ll continue to advocate for that. But that’s a way to keep the industrial base healthy and happy.

Okay. Thanks very much.

Thank you. Our next question comes from Pete Skibitski with Alembic Global. You may proceed with your question.

Hey, good morning, guys. Bit of a follow-on. Mike, how are you feeling about the outlook for big deck amphibs at Ingalls right now? I know you’ve been trying to kind of bring one of the ships forward in the Navy’s plan, Congress has helped out a little bit I think. And we’ve got the new budget. How are you feeling about that right now?

Well, I feel pretty good about it. Frankly, the Marine Core wants it, the Congress is trying to find ways to push it through. I just think it’s an example, some of the pluses and minuses. I think what you see in the budget is really the squeezing, there’s only so much air that can go into the balloon from the budget submission standpoint. So I feel pretty good about it. I think that there’s a lot of support for what the big deck amphibs can do and what they are doing out there today. And so, I remain optimistic about where that’s going to ultimately end up. There’s going to be days when we feel really good about it and days when we kind of wonder where it’s going on. But I think in total it’s going to be – we’re going to end up in a good place and a good outcome.

Okay. Got it. Just one follow-up for me. On the sale of Continental Maritime to Carlyle, I don’t think it’s a lot of revenue, maybe $100 million or so. But I thought it was always viewed as a positive to have a repair yard on the West Coast for you guys. So I’m just wondering, how you’re thinking about that now?

We contributed, just to be clear, we contributed this asset so that now we’re part of the joint venture. So our view is that the business model – let me step back. I think I’ve talked about this before. There is more demand for repair activity in the Pacific area of responsibility than there is capacity to provide it right now. But the Navy is kind of trying to work its way through a business model that’s going to allow for more efficient support for the requirements that they have.In our case, we’ve – as the business model has changed, we’ve kind of struggled with that a little bit. Our view is, we needed to restructure this business anyway. Here’s a way for us to keep our hand in that business and be able to help the Navy figure out the right way to get the business restructured and get the business – get the industry in a place where it can actually effectively support what the Navy’s doing. I mean, we’ve had cases where in a space where there is not enough capacity to meet the demand, we’ve actually had operations that have been closed.And so you have to step back and say, there’s something bigger going on here and we need to be part of that. So we need to be part of that discussion. But we also have to make sure that, we try to find a solution. And this is what we think is – working with Carlyle and Stellex and Vigor and MHI, the other assets that are there. We think this is a way for us to effectively engage and help the Navy find a solution.

Okay. So you’re not losing either from that, because of the accounting change, you’re losing the revenue for the guidance.

Correct.

Okay. Thanks guys.

You bet.

Thank you. Our next question comes from Gautam Khanna with Cowen & Co. You may proceed with your question.

Hi. Good morning. This is Jeff Molinari on for Gautam today. Thanks for taking my questions. So just some cleanups, all the questions had been answered already. So TS sales has guided to be $1 billion, few more moving pieces than normal. What are you kind of assuming for annualized sales, even margins for Hydroid and the businesses to be divested or excluded because of the JV? Three moving pieces if you could just kind of size those for us, it’d be helpful. Thanks.

Yes. So we haven’t provided that and we think given the $1 billion of sales and 5% to 7% return on sales, I should probably get you there from a modeling standpoint. But we haven’t provided that data as of yet.

Okay. Fair enough. And then on the margins, we talked about shipbuilding margins kind of 8% through the first three quarters and then bumping up substantially in Q4. How do you think about that momentum continuing into 2021 at that level?

Well, I think that, if you look at this business quarter-by-quarter, you’re bound to have good surprises and maybe not so good. But I think that what we know is that and our experience here is that over the long haul, this business executes – the shipbuilding industry executes at around 9%. So I think over the long haul, that’s where we are. And our ambition is to execute our backlog that you see out there at that level or better. And so that’s kind of the way we’re seeing this. The driver that we’re seeing for this specific year is still a little bit of the hangover of the maturation of the backlog.And we’ve gone through a couple of years where we’ve had a heavy weighted portfolio towards brand new work. We just added two more carriers and a whole another set of submarines into that mix. And it takes a little while to start to accumulate the milestones that we need to get them up. But we think that we’re pretty sustainable here over the long haul.

Okay. Thanks. Thanks for the color guys.

Thank you. Our next question comes from Seth Seifman with JPMorgan. You may proceed with your question.

Thanks very much and good morning.

Good morning.

So Mike, I wonder if you could talk a little bit about the frigate and are you still expecting an award this July? And kind of how you’re thinking about the positioning there and how that could ultimately fit in with the kind of work in Ingall?

Well, the bids are in and we put our best foot forward. We have invested in some facilities and we have a very robust execution plan to be able to build that platform. And we’re just standing by to help the Navy decide what they want to do. Now the competition is tough, I’ll say that. But we’re still expecting award in the first half of the year.

Okay. And then maybe a real quick follow up. Chris, the working capital still pretty low as a percentage of sales about 6% and if you had the $50 million of receipts in the fourth quarter, probably even would have been down slightly a percentage of sales year-on-year. Is that a maintainable level of working capital that sort of 6%? So the business grows, working capital dollars maybe up slightly but not significantly.

It’ll move around a bit from time to time, but I think 6% is a really good target for shipbuilding.

Great. Thank you very much.

Thank you. Our next question comes from David Strauss with Barclays. You may proceed with your question.

Thanks. Good morning.

Good morning.

So I think previously you had talked about 9% to 10% margin range for shipbuilding in 2020. Is 10% not doable anymore? And in 2020 is 10% still kind of an aspirational target looking further out.

David, this is Chris. It was simply coming to our plan and seeing how the programs were going to unfold in 2020 and the risk retirement potential there, which allowed us to arrive at the 9%. We’re going to have quarters that are better than 9% and worse than 9%. We always challenge the organization to do better. But I think the best way to think about it is 9% moving forward.

Okay. And then probably another one for you, Chris. The $700 million in free cash flow, you talked about getting to. Can you – I guess, building off of what you did in 2019 at $460 million, I know you’ve got CapEx coming down over the course of the next couple of years, probably helps by about $200 million. But it looks like, pension, CAS less contribution is about equivalent kind of headwind. So what takes us from $460 million to $700 million?

Well, it’s growth, right? We’re going to grow. Margin is improving as well. So you couple that with the reduced capital expenditures and pension normalizing and reaching milestones on ships, you get to $700 million. It’s going to naturally float up to $700 million of free cash over the next two years.

Okay. Thanks.

Sure.

Thank you. Our next question comes from Joseph DeNardi with Stifel. You may proceed with your question.

Yes. Good morning Mike, just on the margin profile of the business going forward. I get that that there’s a cost plus component of your business that that’s probably greater than some of your peers. But if you look out over the next several years, it’s more of the production, the fixed price side of the business that will be growing. And so, longer term, why is it that a margin tailwind potentially such that maybe the margin profile can go from 9% to 10% to 10% to 12% at some point? Thank you.

Well, I mean, I wish I could say that you were right. But the fact is that the whole blend ends up and if you go now and we’ve gone back and looked at this every which way you can look at it. You end up in a place where no matter where you are. The first thing you want to do is, you want to know that you’re actually executing well. And that’s where the whole discussion around 9% to 10% came from was, you’re executing well, if you’re in that range and you have a good mix of new programs and mature programs. If you’re out of that range high, that means that you’re probably overweighted on mature programs. And if you’re out of that range low, you’re either not executing well or you’re out of balance with new programs.So that’s kind of where it came from. And right now, with a $46 billion backlog, our work kind of on the heavy end on new programs. We’ve gone through a couple of years where we’ve been maturing programs, but we just added $20-some-billion to the backlog last year. So we’re going to continue to work our risk through that. But the other side of it is, that if you just go and look at the entire industry over the last, I don’t know, 10 or 15 years, the industry just tends to operate at 9%. And that’s takes in account of mature programs and new programs and everything else. And so we aspire to 10%. We push our teams to that level and that’s our ambition. But I think in terms of the way to think about our businesses, this is a 9% business with a $46 billion backlog that plays out over the next 10 or 12 years.

Okay. That’s helpful. Could you maybe quantify, just given submarine growth and carrier transitioning from cost to fix. What the mix looks like as you see it five years from now in terms of costs versus fixed as a whole. Thank you.

The way to think about that is the RCOH contracts are the cost plus contracts moving forward. So I don’t have a specific percentage, but that’s really the majority of the cost plus work in our base.

Okay. Thank you.

Sure.

Thank you. Our last question comes from Noah Poponak with Goldman Sachs. You may proceed with your question.

Hey, good morning, everyone.

Good morning.

Chris, just wanted to try the walk from today’s free cash to $700 million, again, because it sounded, if I heard your answer to David’s question correctly, it really comes down to just growth in the segments but with CapEx and pension largely offsetting. But if it’s a $9 billion business growing top line, 3% to 4% with margins in the zone of flat, that’s only kind of $20 million, $25 million share of free cash flow growth per year. Should I – is there something in grant proceeds that have been large for you recently or something else outside of the segments? Or is it just more when you said it could be 2021, 2022, 2023 that it’s likely to the backend of that when you’ve had time to compound the segments?

Yes. So there’s some compounding there. But it’s also the timing of the milestones and how that works through working capital. When you look at our plans and all our ships going through our plans over the next three years it gets to $700 million and that really becomes the new normal. So I think you’ve essentially got it right, Noah.

Okay. And then when you’ve stated that now pointing to 9% as a shipbuilding margin versus the prior comments of 9% to 10%. You stated that, that’s really just kind of honing in on the specific plan as you’ve moved into 2020 itself? Can you help us with the specific things that changed in the plan? What specific ship inputs are different versus what you thought previously?

No, there’s really nothing specific that I would drop on Noah there. It’s just going through each ship, laying them out over the next few years and looking at the risk retirement opportunities and the risk on those ships that 9% was the best way to look at it.

Okay. So it’s more of just moving to a bottoms up ship by ship plan versus a prior sort of directional what the business is capable of type of framework.

And some of it is the fact that we, the previous plan had these – a lot of these contracts we didn’t have. So it is working through the large volume of contracting as it comes into our plan now. And how is that going to play out with our teams and our execution and all of that. So we just felt like it’s really important to kind of clarify that.

I see. Okay. Thanks so much.

Thanks, Noah.

Thank you. And I’m not showing any further questions at this time. I would now like to turn the call back over to Mr. Petters for any further remarks.

Okay. Well, thanks for joining us. I want to remind you that you can still sign up to participate in our Investor Day meeting next week via webcast. It’s Tuesday morning on the 18th starting at 8 o’clock. So just go to our website at huntingtoningalls.com. Click on the Investor Relations page and follow the Investor Day link to register. We’re excited about the chance to meet with you all and share a lot more detail, what we think the next five years will bring. So we appreciate you joining us on today’s call. And we look forward to seeing you soon.

Thank you, ladies and gentlemen. This concludes today’s conference call. Thank you for participating. You may now disconnect.