Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2022 HII Earnings Conference Call. I'd now like to hand over the call to Christie Thomas, Vice President of Investor Relations, Mr. Thomas, you may begin.

First quarter 2022 earnings conference call. With us today are Chris Kastner, President and Chief Executive Officer; and Tom Stiehle, Executive Vice President and Chief Financial Officer. As a reminder, statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. 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 their remarks today, Chris and Tom 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 hii.com and click on the Investor Relations link to view the presentation as well as our earnings release. With that, I will turn the call over to our President and CEO, Chris Kastner. Chris?

Thanks, Christy. Good morning everyone and thank you for joining us on today's call. Earlier this morning we reported solid performance across each of our operating divisions. With our focus on execution and growth positioning us to reaffirm our previous revenue, margin, and free cash flow guidance. Our Shipbuilding emission technologies teams continue to execute well despite basically some headwinds in the areas of human capital and supply chain disruption. Like the economy broadly we are facing challenges created by the lingering effects of COVID and its impact on the labor market, making it challenging to hire and retain employees. Moreover, our suppliers are being impacted by the same shortage of labor as well as inflation issues, which creates risk of delays in delivery of key materials for our shipbuilding programs. We are aggressively working these challenges with our suppliers and our customers. In light of both of these challenges, I'm extremely proud of the resilience and the dedication of each of our 44,000 employees to continue to focus on our mission of delivering on their customer commitments. Now, shifting to our results. Sales of $2.6 billion for the quarter were 30% higher than 2021and diluted EPS of 350 for the quarter was down from 368 in 2021. New contract awards during the quarter were approximately $2 billion, driven by the award for DDG 139. This results in backlog of $47.9 billion at the end of the quarter, of which $24.8 billion is currently funded. At Ingalls LPD 28 Fort Lauderdale completed sea trials and was delivered to the Navy. LPD 29 Richard M McCool Jr was launched and we laid keel for LPD 30 Harrisburg. On LHA program, LHA 8 Bougainville is progressing well and long-lead material procurement has begun for LHA 9. On the DDG program, DDG 123…

Thanks, Chris, and good morning. Today, I'll briefly review our first quarter results. For more detail on the segment results, please refer to the earnings release issued this morning and posted to our website. Beginning with our consolidated results on Slide 4 of the presentation our first quarter revenues of $2.6 billion increased approximately 13% compared to the same period last year. This was largely due to revenue attributable to the acquisition of a line in the third quarter of 2021. Operating income for the quarter of $130 million decreased by $9 million from the first quarter of 2021 and operating margin of 5.4% decreased 110 basis points. These decreases were largely due to lower segment operating income driven by lower risk retirement at Newport News Shipbuilding, partially offset by more favorable non-current state income taxes and operating fast cash adjustment compared to the prior year. Our effective tax rate in the quarter was approximately 20.5% compared to approximately 40.5% in the first quarter of 2021. The lower rate in the first quarter of 2021 was primarily due to divestitures during that quarter. Net earnings in the quarter were $140 million compared to $148 million in the first quarter of 2021. Diluted earnings per share in the quarter were $3.50 compared to $3.68 in the first quarter of 2021. Turning to Slide 5. Cash used by operations was $83 million in the quarter and net capital expenditures were $43 million or 1.7% of revenues, resulting in free cash flow of negative $126 million. This compares to cash from operations of $43 million and net capital expenditures of $59 million and free cash flow of negative $16 million in the first quarter of 2021. Cash contributions to our pension and other post-retirement benefit plans were $10 million in the quarter, of…

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.

Our first question goes from Robert Stallard from Vertical Research. Your line is now open. Robert. Please go ahead with your question.

Chris. I'll start off with you a bigger picture question on the FY22 request. It looks like the year maybe is changing as planned for amphibious vessels proposed into this, how do you think this could play out and what's potentially the risk to HIIs. And then secondly, numbers question perhaps for Tom you mentioned on Slide 8, the potential for margin growth in mission. I was wondering what the sort of better long-term margin could be for this division because 0.25 pretty low compared to other companies in the industry. Thank you.

Yes, okay. Robert, I'll start with the budget, the '23 budget request and then Tom can talk about Mission Technologies margins. One thing we should always remember with the budgetary process, this is the first step of the process. So we all work through that throughout the year, all our major ship building programs were supported the one line we do have to work on is the NCIB line as you identified. We need to get LPD 32 under contracts. We need to get LHA 9 under contract. We need to work on LPD 33 and ensure that we support the Marines and the Navy and the Congress really in analyzing that program going forward. So you're right, we do need to work on the NCIB line but I'm positive as we work through this process that will get to a solution that that makes a lot of sense. From a long-term big picture perspective, I think that the budget really does support our long-term growth rate, and I'm comfortable with the 3%.

Sure, Rob, and I'll pick up the question on MT from a margin perspective, 1.5%. So we got guided 1%. So it's higher than the guidance that's coming up 2.7% last year, 2.7% last year for Q1 and 2.9% for a quarter ago in Q4. I would tell you that because of the purchase intangibles both with empty about $30 million in line specifically for 24 net return on sales metric is not, probably a good lead indicator as far as where we want to land that's why we kind of give you the EBITDA perspective from 8% to 8.5%. The quarter herewith was 7.3%, not unexpected, because we guided you from a gross perspective only at 1%. We take with the CRM or sales light and obviously the margin will follow the sales, so we're comfortable with where we stand and from a perspective of where we could go, we've told you for the year is 8% to 8.5% from an EBITDA perspective as a percent of revenue and from now going through 2024 we've highlighted that it's more appropriate to think about 8% to 10%is is a range at where MT can land. All right.

Our next question comes from Pete Skibitski from Alembic Global Advisors. Pete, your line is now open. Please go ahead with your question.

Chris also a question on the fit-up, one thing that's always a little bit hard to tell, timing-wise is just maintenance trend, ship building maintenance trend. Can you give us a sense of if you see, if you look at the fit-up, you know, should mean is be a tailwind for you guys are starting to flatten out. I just wonder what your thoughts were.

Yes, I think it's pretty flat. They're coming through the submarine kind of maintenance schedule and how they're going to proceed with LA class and Virginia-class submarines from maintenance standpoint, but we think it's pretty, pretty flat from our perspective. Lots going to go into how they execute the sign up, but we think it's pretty flat.

Okay. And then one last question kind of off-the-beaten-path, there was an export notification back in December forum for emails and Advanced Arresting Gear to France in both you guys and General Atomics were excited. Is that any kind of a meaningful or a real revenue opportunity for you guys. And I'm just curious about the timing as well on that.

Yes, not for us now, remember we don't, GA provides those system, so not for us now.

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

I think you mentioned on the last call you mentioned Chris that you guys had a lot of confidence in the hiring your ability to hire this year and you started off this call focusing especially on the tight labor market. So maybe if you could just give a little bit of color on how things are tracking there any metrics we can think about kind of, what you need to do and then kind of where the risk would be in the financial plan if to the extent that that the hiring situation gets tougher.

Sure Seth. Thanks. January and February were tough on really impacted our attendance. But in March attendance recovered and we're back to tenants levels that we're used to seeing within both of our shipyards. We've hired over 1,000 people through the end of March. We need to hire over 5,000, so a bit behind, but we're really focused on our relationships with our apprentice schools and high schools, community colleges and we expect that to ramp over the summer months graduations happened. So it's definitely a watch item. We need to, we need to hire, we need to train and we need to be productive. So still comfortable with our guidance but labor is a watch item for us as we move through the year.

All right. And just a follow-up, is it more about, I mean I would think people come in in the summer there. There's probably only so much contribution they can make in a couple of months. And so, is this, is this really more about of setting up for 2023 and then to the extent you have an idea of how you are set up for 2023 that would affect you're the risk tolerance that you have in your, in your estimates completion.

Yes, when they come out of the apprentice schools they're ready to go and if they can come out of the community colleges and the high schools where we have programs in place where there, they're learning. They're going to fill a critical role within the shipyard. Now they're not going to be first-class shipbuilders right away, but they're going to be learning, they're going to be making progress on executing, its all incumbent on our shipbuilding teams to make sure they're trained up and they've got the right mentorship and we did have very well. So yes, they're not going to be first class the shipbuilders coming out of the out of the gate, but we expect them to contribute.

Thank you. Our next question comes from Doug Harned from Bernstein. Doug, your line is now open. Please go ahead with your question.

I'd like to just spend a little bit of time on Virginia class. I mean it was identified as a margin headwind in this quarter and the Newport News. If I go back to when you had the issues back in 2020, it was the Montana, the New Jersey, the Massachusetts those I mean the Montana is deliver in New Jersey float off. Then one of the big issues then was this question of lots of new people in a complex environment needing to train them and so some of the issues you had then were attributed to that. If you look at the situation on Virginia class today where does it stand because it seems that you might run into some of these similar issues as you try and bring a lot of new people in it. So how are you looking at the Virginia class performance right now.

Yes, Doug. It's a good question and I appreciate it. Remember the issues we had previously we were in the heart of COVID right and we had a significant outs and significant labor issues with the Newport News, which drove, which drove a lot of that but what we're seeing now is it's interesting we talk about serial production line, but the VCS program is really a production line. And when you miss you miss schedule, there's a knock-on effect. So, as you know, we missed a couple of schedules at the end of the year that drifted into Q1. We've accomplished those and it's really had an impact on the future shifts and so we had to deal with that in the quarter, we reassessed our risk and you see the results in Q1. That being said, there is some stability in that workforce. Now the tendency has recovered. We're a bit short of our hiring plans, but it's not like what happened during COVID. The team is very focused on meeting their interim milestones working that offers operating system very diligently. I got a lot of confidence that there is actually some upside as we move through the next couple of years on the VCS program.

So if you look at and if going forward you're finishing the Massachusetts your own, your own boats in the Arkansas. And then you will go into block five. How do you, how do you, how should we think about kind of performance and margin trajectory as you move through those as well as the work that you're doing for the electric boat the modules for electric boat but I mean how has this risk retirement likely to move in in your thinking.

Yes. So we've, we've assessed RACs in the risk on not only block four but block five boats and reset the GACS based upon how we, how we project them to perform over the life of both of those block. So we don't necessarily give margin guidance at a program level, but I do see after resetting that risk on block five going forward there is potential for upside if we're able to meet our milestones.

Thank you very much. Our next question comes from Myles Walton from UBS. Myles, your line is now open. Please go ahead with your question.

Thanks, good morning. I wanted to ask about carriers for a second and in particular the 79 and the 73. So on the 79, I think the progress the completion metric you guys provide in the press release every quarter, it really hasn't moved in the last several quarters. And I know one of the adjustments, which were the single phase delivery but I don't think that would have played out here in the first quarter. So any reason why there wasn't progress there. And then just a comment on the 73 and if the slip to 2023 made any difference for your financials. Thanks.

So I'll take the 73one on the back of that. So right now we're still bringing that ship and trying to target for yearend completion through the EAC process. We are evaluating some risks to the schedule on that, that wasn't incorporate into the Q1 EAC share.

Yes, 79 were absolutely making progress on that ship from we're heavily into the volume part of that ship, completing compartments. If you walk through the, you walk through the base and that ship right now, you see a lot of installation of paint, which is a good place to be. When you think about an aircraft carrier attacking that volume and then starting to test program. I don't know specifically about the math around the, around the progress Christy yield fill you in, in that after the call. But they're very dedicated and making progress, really on a weekly basis on the aircraft carrier.

So no movement to the expected delivery on that vessel.

No, absolutely not.

Okay, thanks.

Thank you very much. Our next question comes from Gotham Khanna from Cowen. Gautam your line is now open. Please ask your question.

I was wondering if you could refresh us on how your contracts adjust for higher input costs. So whether it be steel, whether it what have you everything like you mentioned at the outset, is moving up in price. How do you recover those, what does that do to margins, is just a pass-through where it actually dampens margins, just if you could walk through the mechanics there. Thanks.

Sure. It's Tom here. Good morning. Yes. So from an inflation perspective break, I know your question is focused on the existing contracts and how that it, I'll hit that but also now we're watching inflation as it applies to our new bids so it's like a two-part answer here but, from the mechanics that we have on how that fits as we spoke about this other earnings calls. And it really starts with our understanding of what we're buying, and how we contract for with these contracts being anywhere from 48 years long. Long-lead contracts upfront with an understanding of the material and the bill of materials. We have a very disciplined and dedicated process to make sure that we have live quotes and bids. And we go hand in glove making sure the quotes have the procurement side and ourselves locked into the contract value from a starting standpoint. So while we have a clear understanding of what we buy and at the onset of these contracts. We have a good bid from our suppliers. We do run into, from time to time as we move forward, we have the contracts awarded things purchased after that and on up commodity buys and we did see increases from time to time on raw materials and commodities. I will tell you that when we have a long lead phase of the contract, it operates almost like a cost-type contract and rolling those actions into the construction. The eventuality of the construction awarded that bit, so that's helpful. Another piece of that is when you look at, you'll see in queue, we have braked out across the three divisions. The percentage of cost type versus fixed-price contracts but from an high from entirely perspective, it's about 50-48 fixed price and cost.…

And just the mechanics if you would mind on if the fact you have an EPA and together, is that just an increased revenue and cost and therefore, a document to profit margin.

The back-end of your question. So with all that as the backdrop the mechanics of that obviously we go through our disciplined quarterly EAC process, I mean, we're getting a cost weekly a multi-program to do and then obviously our quarterly EAC process, so we can see how the material is trending both against the existing orders that we have and material requirements in any proper requirements. We'll evaluate that whether the EAC is improving or were degrading and-or the associated risks that we thought were going to be retired for the quarter and the rest of the remaining scope on those contracts that will get incorporated into EAC, if there is an increase obviously there'll be an increase in costs will run that for our, profit tables and it all revise the booking rate accordingly. So all that gets factored in by ship by ship across the program and then it kind of rolls up into our adjustments that you see here. I guess the portfolio.

I'd also add that if there is EPA protection, it's an increase in sales without the resultant impact on margin. So that does provide us additional protection and that's in our EAC process as well every quarter.

Our next question comes from Robert Springer from Melius Research. Robert your line is now open. Please go ahead with your question.

Thank you, Good morning. Chris covering questions sort of higher level. A lot of talk about upside to defense spending from Europe. And while the export opportunity probably great for the shipbuilding side, what kinds of products and services from MT do you think will interest European countries.

Yes, that's a really good question, we think about it a lot. Unmanned we've sold internationally, about 30% of our unmanned sales have historically been international to NATO countries in nature. And then you think about ISR surveillance, big data platforms, cyber, Intel, all of that as part of mission technologies get some traction internationally. So we work on that, we're very tactical in how we do that we make sure of the opportunity is valid but all those are opportunities in Europe and actually any NATO country actually.

Okay. And then on the domestic side, the Navy leadership has been talking about priorities as follows top priorities Columbia class then readiness modernization and lethality improvements and then third capacity. So knowing that the commitment to Colombia is rock solid and capacity is really a function of the budget's, future budgets. How do we think about HII's access to the middle part, the readiness in the modernization part and then again, how does that tie with MT.

Yes. So interesting readiness and modernization in MT is very interesting tools related to big data and data analytics that absolutely support that. So it definitely helps provide tools and access for our customer to improve their readiness. So I actually, thank you for that question. It's very interesting thing we're working on with our customer. It's all upside. Right, but it will just give our customer additional capabilities. So, thanks for that.

Chris, do you see any timing or any visibility on when these things start to come through.

No, I think unmanned can happen very quickly, the award of small is very important provides us additional opportunity to sell that internationally. The other stuff, we'll just have to see, but I don't see a short-term sort of upside related to it.

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

Good morning. Hey Chris. So I think it was on the last call you talked about the discussions with the Navy in terms of additional investment in the shipyards, and how that was potentially going to be split and what it meant potentially for the expected CapEx drawdown. Can you just update us on where things stand there.

Yes, we're still working on it. I think you saw in the three budget additional funding allocated to capital and support of infrastructure in the supply base, we're in discussions with the Navy on that now. And we'll just, we'll just continue to discuss that with them in order to make the investments to support their critical the critical program.

Okay. And Tom, on the, on the working capital side, I think networking capital represents sales that you guys calculate was around 10% this quarter. I think that's the highest we've seen in a while even kind of adjusting for typical seasonality. Can you just talk about the working capital trend through the course of this year and again kind of what you're baking into that free cash flow forecast for '23 and '24 from a working capital perspective. Thanks.

Sure, David. Yes. So it was 10%. So, and that's just upfront is just the timing on the, on the working capital that we have. It's both the timing on the receipts for the accounts receivable and the collections, the payments for the accounts payable. We anticipated it would be high on the front end here right now, a little bit of a draw, as we talked about these milestones of kind of just stretch a little bit on the VCS program. And as we work through the back half of the year, I see that that coming down. We will finish the 2020 year at higher than we were in 2021, but then it's to come back and break our way into 2023.

Okay. What are you targeting from a net working capital as a percent of sales in '23 and '24 specifically.

So we don't give guidance specifically on that, but we are talking about a normal range, our expectations is that 6% to 8%. This 10% is heart of deliberate higher on that range, but not unexpected. We saw in the quarter playing out and then the impact that that we've discussed here. I would tell you that would get back more into that range and into '23. 2023 is a help on cash. And then for '24 about neutral. 2023 and 2024, we've talked about more ship milestones and deliveries in the out years and that's helps to facilitate that working capital coming down from 10% and be more to that 6% to 8% range.

Thank you very much. And our next question comes from George Shapiro from Shapiro Research. George, your line is now open. Please go ahead with your question.

Yes, Tom I was wondering if you could just provide what the EA's net EACs were in the quarter by division.

Sure. Yes, on the net EAC George was were $45 million and the split of that was 90% Ingalls and 10% Mission Technologies.

Say that again. I missed the last sentence.

Yes, it was 107 favorable, 62 unfavorable for net of 45.

Okay. And then, you had said that the LPD 28 was a major help in the quarter. Is that a singled out number in the queue or no.

You will see that for a $17 million adjustment. Yes. And also, it was a clean DDG-50 or delivery that we had in Q1 we usually get after both deliveries in the following quarter. We'll do a hot wash. The remaining work and this sometimes some profitability. It will happen in the next quarter. So that's been pulled into this quarter too, that kind of factored in in somewhat opening remarks of the 7% shipbuilding expectation in Q2 as we pull that margin into the Q1 time frame.

Yes. And then if the second quarter is 7%, it would imply that the third and the fourth quarter has got to average at least as good as the first quarter, if not a little better. So if you had this one-time major benefit in the first quarter, what is the benefits you get in the Q3 or Q4 to get that margin better than 8.3% to have the year at 8% to 8.1%.

All right. So we have several milestones on the back half of the year as we continue through the construction process on the LPD program. Milestones that we have know shifts and as we bring people back on board sales will rise with a margin perspective in this some efficiency gains on that. So we still feel comfortable with the 8.1%. We kind of highlighted at the beginning on the February call that it would be right upfront and both the sales and the margin will come in on the back half of the year.

Okay, thanks very much.

Thank you very much. I'm not showing any further questions at this time, I'd now like to hand the call back over to Mr. Kastner for any closing remarks.

Thank you again for joining us on today's call and your interest in HII is appreciated. We welcome your continued engagement and feedback. We'll see you out there.