Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2024 HII Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] 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 third quarter 2024 conference call. Matters discussed on today's call that constitute forward-looking statements, including our estimates regarding the company's outlook, involve risks and uncertainties and reflect the company's judgment based on information available at the time of this call. These risks and uncertainties may cause our actual results to differ materially. Additional information regarding these factors is contained in today's press release and the company's SEC filings. We also will 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 Stiehle, Executive Vice President and Chief Financial Officer. I will now turn the call over to Chris.

Thanks, Christie, and thank you for joining the call, everyone. Earlier today, we released our third quarter results and announced updated guidance for the year. Before I get to the results, I want to thank the 44,000 HII employees who build ships in our shipyards and who solve some of the most pressing technical challenges related to our national security within our Mission Technologies division. At HII, our mission is clear. It is to deliver the most powerful ships and all domain solutions in service of our nation, creating advantage for our customers to protect peace and freedom around the world. Now for the results. Third quarter revenue was $2.7 billion and earnings per share was $2.56, down from $3.70 a year ago. We updated our shipbuilding revenue guidance for the full year to approximately $8.8 billion and our Mission Technologies revenue guidance to a range of $2.8 billion to $2.85 billion. We also updated our 2024 shipbuilding margin guidance to 5% to 6% and revised our 2024 free cash flow guidance to zero to $100 million. I'll provide some operational milestone updates and division highlights prior to providing a more detailed discussion surrounding the quarter's performance and guidance changes. During the quarter, Newport News shipped the final module of Virginia-class submarine Utah, SSN 801 and on CVN 79 Kennedy, the ship is progressing into the test and turnover phase. 92% of compartments have been turned over to the Navy and all 19 of the ship's combat systems are turned over to the government test team. Looking ahead, float off of SSN 800, Arkansas is moved to 2025 due to a customer-driven design change that requires incorporation prior to launch. At Ingalls Shipbuilding, we received the $9.6 billion award of the multi-ship procurement of amphibious warships, which provides strong revenue…

Thanks, Chris, and good morning. Let me first start by briefly discussing our third-quarter results and then I'll address our updated outlook. For more details, please refer to the earnings release issued this morning and posted to our website. Beginning with our consolidated results on Slide 6 of the presentation, our third-quarter revenues of approximately $2.7 billion decreased 2.4% compared to the same period last year. This decreased revenue was attributable to declines at both Ingalls Shipbuilding and Newport News Shipbuilding, partially offset by growth at Mission Technologies. Operating income for the quarter of $82 million decreased by $90 million or 52.3% from the third quarter of 2023 and operating margin of 3% in the quarter compares to 6.1% in the same period last year. Decreased operating income was largely driven by declines at both Newport News and Ingalls, which I will discuss in more detail in a moment. Net earnings in the quarter were $101 million compared to $148 million in the third quarter of 2023. Diluted earnings per share in the quarter were $2.56 compared to $3.70 in the third quarter of the prior year. Our contractual commitments increased by approximately $900 million in the period, bringing backlog to $49.4 billion at the end of the quarter, while we did secure the $9.6 billion award in the court at Ingalls for four amphibious ships, including LHA 10, LPD 33, 34 and 35. We recorded just the authorized value to date, approximately $565 million in the quarter. We will see the awarded values of those ships grow over time as authorizations expand. Moving to Slide 7, Ingalls revenues of $664 million in the quarter decreased $47 million or 6.6% from the same period last year, driven primarily by lower volumes in the amphibious assault ships and the National Security…

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

[Operator Instructions] The first question is from the line of Gautam Khanna with TD Cowen. Your line is now open. Please go ahead.

Yes. Hi guys. A couple of questions.

Good morning, Khanna.

Good morning. Tom, you mentioned -- it sounded like contingent on signing these new submarine contracts was an implicit assumption that you would get a lease on existing contracts that are in the yard and so I'm curious how much of the negative cum catch-up at Newport News related to that? How that impacts the ongoing booking rate? So I mean, it sounds like you were booking with this assumption in mind already. So I'm curious like what's the incremental hit was? And what was already established, if you will? And then so I guess that's my first question. And then the second one is related to the Wells rework. Just how much of the keen catch-up relates to that? And then I'll leave it for someone else. Thanks.

Okay, Gautam. Let me have -- this is Chris. I'll handle the first question and then I'll start in on the welds and Tom can answer it. But really in the quarter, we had two issues impacting us. We had performance and execution on the deck plate, really on these pre-COVID ships. And then we had the assumption really for the year the quarter and into the guidance actually relative to this 17 ship contract. I think it helps to get into detail a little bit on what happened in the quarter from a performance standpoint. And the largest impact was related to the Block IV submarines and you have 798 and 800 nearing some critical milestones where you're going through the test program and you're buttoning some systems up. And we just encountered rework on systems that we didn't expect and we have -- and that impacts schedule and we're having to roll through that. And that's really illustrative of what we're finding on these pre-COVID ships is there's unpredictability as you move into buttoning them up and entering into these major milestones, which creates this unpredictability going forward. On the 17-ship contract, we were making good progress, as I said in my script. And when you think about the 17 submarines, it's really a reset of the portfolio in Newport News. This is not business as usual. You can't simply just put that much work into a facility and expect it to be executed, especially in this environment that we're operating in relative to labor and the supply chain and the capacity in the industrial base. So we've been working very hard with the customer to try to get those 17 ships right. And it's a broad-based sort of a contract that we're working on that really unlocks…

Yes. So as we proceed through the investigations and eventually close that out, we'll have a finality on the financial front. We have taken an initial booking. It's not material. It's not identified in the queue. It's just for the costs that we think that could be deemed unallowable on that. So we'll get you more information as we close that out and that's all I have to say about that. On that first part, I would just add, as Chris was commenting, trying -- the reason why we wouldn't parse out between performance and the -- and the new contract innovative approach, now that's still ongoing right now. It's in negotiations. There's optionality against that and we'll have to see how that plays out. So it's just -- it's not appropriate for us to comment at this time as we're trying to work and negotiate ourselves through that without any partner.

Okay. Thank you.

Sure.

Thank you. The next question is from the line of Robert Spingarn with Melius Research. Your line is now open. Please go ahead.

Good morning. This is Scott Mikus on for Rob Spingarn.

Good morning, Scott.

Chris -- good morning. Chris, the press release and your opening remarks, you talked about innovative contracting approaches that incentivize greater investments in the workforce, facilities, and technology. Presumably, you're referring to the SAWS funding plan where the Navy wants to pull funding from boats that haven't started construction to support higher wages and infrastructure build right now. So just wondering if you could talk about your thoughts on the SAWS plan and then I have another follow-up on that as well.

Well, if the SAWS plan has kind of broadly reported, I wouldn't get into too much detail. You kind of hit the basics there. We support it. It was an excellent idea. It was a Navy initiative that we supported. I still believe it's the smartest best way to get at this issue because it unlocks such investment in the workforce, the infrastructure, and technology. We're still in discussions on alternatives with the Navy and the Congress in supporting and asking questions on alternatives. But that SAWS plan is a -- it was a very good idea that we think is still under review and potentially could be put under contract, although we don't forecast that happening over the balance of this year.

Okay. And then there was a letter from a bipartisan group of senators. It was regarding the SAWS plan, but it also mentioned that there could be a $17 billion shortfall in funding on the Virginia-class program over the next six years. I understand shipbuilding costs have increased significantly, but does a $17 billion shortfall sound remotely close to you? And do you think Congress will support plugging that shortfall?

Yes. So I'm not going to comment on the ability of Congress to obtain additional funding. The beauty of SAWS was you didn't need any more funding. So -- and I really don't think it's appropriate for me to comment on the baseline that was used for that -- for that increase. But look, the teams are working very hard to come to a contract solution on these 17 ships. We need to make sure that, that solution is equitable and reflects our current macroeconomic environment, and also enables initial investment so that we can get these critical assets to the fleet as soon as possible.

All right. Thanks for taking the question.

Sure.

Thank you. The next question is from the line of Myles Walton with Wolfe Research. Your line is now open. Please go ahead.

Yes, thanks. I was hoping you could talk and maybe give us a little bit of color on the $800 million cut to operating cash flow for the year. How much of that was specifically tied to the contract slipping out beyond this year? And how much was tied to performance? I know you didn't want to do that for the EAC, but given the size of the cash cut, I hope you can do it for this.

Yes. So let me start and Tom can step in. As you know, we really -- when we think through guidance, we risk-adjust everything. So it's really a combination of both the new contract as well as progress within the yards. So Tom, I don't know if you want to comment further on that.

Yes. So we talked a little bit about this in Q1 and Q2 where we had a pathway to make the guide. And obviously, at that time, you could see on the balance sheet that the working capital was rising right there. We had talked about progress, progress, timing, making the major milestones up and out that we show you, the minor milestones and the incentives, both the capital and performance incentives behind the scenes. And then what we normally have, just the run-rate of unadjudicated change, change orders, REAs, and things of that nature and compositely between the recoveries, and the performance and the recoveries of those, I mean, that's how we pick up our margin and cash. So the pathway was clearly at the beginning of the year when we laid out the plan. And then in Q1 and Q2, we still had pathways from performance and from the investments that would come about with the 17 boats on that innovative contracting approach to be able to kind of hit our guide here. The backup that we've seen right now, obviously is twofold is the awards, certainly all 17 boats do not look imminent by the end of the year. I think we all know that. And then from a performance standpoint, we've been able to make progress, but not enough of the progress or the right progress and the progress timing is limiting us to be able to fill all the costs that are on the balance sheet right now. So we thought it was prudent to take the $600 million to $700 million guidance that we've had at the beginning of the year, bring that down to zero to $100 million. So again, it's a piece of the awards and that's a timing aspect. It's a piece on both the performance. Obviously, when we bring the 7.6% to 7.8% in margin for shipbuilding down to 5% to 6% this year, the less margin means less cash. There's a piece of so that's a piece of it -- there's a piece of timing where it moves from '24 to '25 and then there's just a piece of the operations here. So it's a mix of it, but we thought it was prudent after the Q2 call when we saw some headwinds on the innovative contracting approach being able to be pushed through and executed by the end of the year as well as the Q3's performance to bring down guidance on this call.

Yes. No, and I get the moving parts. I'm just hoping because obviously, the timing piece is an important question, if it's timing or if it's performance and the contract, I think we could perceive some of that is timing. And so I would just ask, is it three quarters related to the contracts? Is it that high or is it not that high?

Yes. So, Myles, I understand the question. I understand it's the split that you're asking, but the interesting thing about that 17 ships is the construct of that contract right now, we just don't know. We've been in active discussions on what it's going to look like. I am very confident they're going to order those submarines. But we just -- we just don't know the ultimate construct of that. So it's just -- it's a challenge to break that out for you.

Okay. Maybe the following question, I'll leave it is, so going into next year in terms of normalcy of cash generation of this business, what would be the framework that you'd suggest for thinking about cash generation of the business?

Well, I think it's going to be choppy for a couple of years, quite honestly, Myles. We're taking a hard look at all our expenses, our capital. We're relooking at that. But it's all going to be the indicators of cash, they are all going to be about performance and how that shifts, how that contract comes together, how we execute at the deck plate and proceed, and just how we transition into those new contracts. It's that's going to be the story from a cash flow standpoint for the next couple of years for us.

Okay. All right. Thank you.

Yes.

Thank you. The next question is from the line of Pete Skibitski with Alembic Global. Your line is now open. Please go ahead.

Yes, good morning, guys. I guess just on the Block -- and just on the Block IV charges, did the design change Did the Navy request it on the 800? Did they kind of -- did they pay you guys for that? Or did that for some of the negative EAC?

Yes. So it's both backed-up in the quarter. A part of that is the design change related to 800, there's probably some upside on that when that gets negotiated potentially. It's clearly a Class 1 change for work that needed to get done before we floated off. But that was not the only issue in the quarter for 800 and there could potentially be some upside related to that.

Okay. And then just at Ingalls, it seemed like on the last call, you guys had a feel that things were going to improve imminently at Ingalls and it seems like they're largely in zero production down there. So I'm just wondering if you can categorize or characterize, is there pretty meaningful net attrition issues at Ingalls as well? Or why are things kind of going in the wrong direction there?

Yes, I wouldn't necessarily say they're going in the wrong direction at Ingalls. They do have the same issues that everyone in manufacturing is facing relative to green labor and they're working very hard to address that. The issue with Ingalls right now is there's just less opportunity for positive adjustments. You don't see significant negative adjustments, but you don't see significant positive either. So they're fighting through the same issues as everyone in manufacturing in United States fighting through relative to green labor, fragile supply-chain, but I got a lot of confidence in Ingalls' team. They're making their milestones and they're proceeding on their programs. And that bundle contract was very positive. It's really representative of the type of contract we need going forward to reflect our current macroeconomic environment, ensuring we protect ourselves against the risk of inflation and a fragile supply chain. So yes, I got a lot of confidence in the Ingalls team.

Okay. Thank you.

Sure.

Thank you. The next question is from the line of David Strauss with Barclays. Your line is now open. Please go ahead.

Good morning. Thank you.

Good morning.

Hi, Chris, in terms of -- good morning. In terms of the submarine industrial base money, all the money that's being thrown at this, where is it going? And are you seeing any evidence that it's actually helping at this point?

Yes. So the industrial-based funding really positive developments there from Congress and the Navy to flow that money into the industrial base, it gets distributed primarily in the supply base, but we benefit from it as well. And there will be benefits related to it. The problem is it just doesn't happen very quickly. When you're talking about potentially new tooling, new buildings, it takes a while to get that stuff done and then to reap the benefits from it. So we're actually rebuilding the industrial base related to shipbuilding right now and expanding capacity both through Navy investments as well as our investments. So I think it's a very positive development. I think actually, I know there's going to be benefits that come from it. It's just we're going to have to be a bit patient.

Okay. And as a follow-up, I think to Myles' question, Tom, maybe just going after with the working capital side of things, it -- I guess you're about 9% right now on working capital. I'm guessing your guide for the full year implies something like in Q4, we get down to around 6% to 7%. Is that right? And do you still view kind of a normal level of working capital around 5%?

Yes. So I think obviously you can calculate we are in the upper 8s right now and we are going to take a couple of 100 basis points to 200 basis points out of that by the end of the year. There's a range of variability between zero and 100. I do think once we get past these ships here, the pre-COVID ships, we'll get back to a normal range of cash flow. As Chris said, that could be 12 to 18 months by the end of '24 into '25. So we’re just going to have to work ourselves through that. We're making progress. The cost is there on the balance sheet. We just have to finish these ships up and get paid. The cash will come as we make our deliveries. So it's just a function of us grinding through the current portfolio of ships.

All right. Thank you.

Thank you. The next question is from the line of Scott Deuschle with Deutsche Bank. Your line is now open.

Hi, good morning.

Good morning, Scott.

Tom, the low end of the shipbuilding margin guide seems to imply significantly more negative EACs in the fourth quarter. So I guess you see risk there. So my question is what prevents that risk from crystallizing other than getting the submarine contract? And then why not just book those negative EACs now if we're going to guide to them? Thanks.

So we gave you a range for 5% to 6% for the end-of-the year. Obviously with the actions that you have for Q1, Q2, Q3, you can kind of calculate where that lands. There's a little volume against that, but generally speaking, there's still a spread there about 300 basis-points between the low-end and the high-end, 400 basis-points between the low-end at the high-end. And it just depends on how we proceed. We have Q4 performance, right? We have making progress and milestones, making those incentives I talked about the CapEx incentives and performance incentives on that and then kind of getting paid by the end of the year. On the cash side and the margin side, we're watching the EACs and finding a footing against the ships that we have here right now. So we wanted to make sure we had an appropriate range that had all outcomes. There's upside to it too as you see, between 5% and 6%, and we'll just -- we'll see how the year proceeds as we close out. We did wash out, as we mentioned in the scripts, the investment upside that you'd get as the investment dollars flow through here for the VCS and Columbia bill too. So that's not a factor as far as the year-end close-out.

Okay. Thank you. And then, Chris, sorry if I missed it, but do you still expect to deliver CVN 79 in 2025? And is that pre-COVID ship seeing any issues or rework requirements in the testing phase like those you referenced on Block IV Virginia-class?

Yes. So no change in the milestones other than what I referenced on my script. We're absolutely impacted on all those pre-COVID shifts by additional rework and really the fragility of the supply-chain. We've talked previously about it at the kind of the variability in the supply-chain going down from an inflation and predictability standpoint. But when something breaks, when you're going through the test program, something breaks and you have to go reorder or you have to rebuild it, there's just arthritis in the system-related to getting that back, which causes schedule risk. So, yes, no change to 79 right now, but it's just going to be a challenge completing any ship that was done negotiated pre-COVID.

Thank you.

Thank you. The next question is from the line of Jason Gursky with Citi. Your line is now open. Please go ahead.

Yes. Thanks and good morning, everybody.

Good morning, Jason.

Hi, Chris. Hi, I'm just kind of curious how you go about managing the business with this much uncertainty going on the start new contracts and just kind of how you're going to go about go about managing through this? And then I can't help but wonder if slowing down here for some period of time might be helpful as you try to convert some of your green labor into more experienced labor. So I'm just kind of curious, could we wake up someday and see that we just hit the pause button, let you guys figure out how to get this work done more methodically and we kind of restart it. Is that a bad idea? I'm just trying to understand how this gets fixed.

Well, so that's it, Jason, thank you for that question. And first, first of all, I don't think there's any backup related to the urgency that's required to get these ships delivered and we're doing all we can to get these ships delivered to the Navy. But you bring up a very good point related to green labor. And while we're on our hiring plan for the year, we're actually repositioning our strategy relative to hiring where we're reducing our reliance on green labor, we're just going to hire less. And we're going to focus on more experienced labor because we're just out of alignment or out of balance from an experience level right now, which leads to rework, which leads to inefficiency. And it's not good for anyone. So we're repositioning that a bit, which I don't consider that is slowing down. I consider that investing in the workforce so that you're more efficient and really aligning and that's what we're doing with our capital plans and our cost structure as well, Jason, is we're aligning those investments and that cost structure with what we think the pace of activity will be going forward. As I said previously, and it doesn't do anyone any good to have to meet your hiring plan and then not have supply-chain material there, right? So I think you bring up a good point. I think we have to be very disciplined in how we do that. I think we have to be really disciplined in how we put these ships under contract as well. We can't sign a contract and hope. We have to do that. We have to do it understanding the current macroeconomic environment, understanding of proficiency of our labor force, the fragility of the supply chain, potential for increased inflation, and all of the work that's happening within the shipyard. So you bring up a good point, we're thoughtful about it. We're thinking about it and we're making sure that we do it responsibly.

Right. Okay. I appreciate that. And then somebody has got to ask a question about Mission Technologies, right? I mean, that business continues performed well, nice growth, margin -- margins are doing well there. So maybe just talk a little bit about the next few years at Mission Tech, the pipeline that you have there, the outlook for book-to-bill, the mix that you have in the current backlog and kind of what you're chasing? And just the potential for book-to-bills, growth rates, margins, kind of just give us a share of mosaic for the next few years to think about that business. Thanks.

Sure, sure. Mission Technology is doing very well. I know they've grown at 14% year-to-date over last year, some really big wins, $11 billion of wins. The outlook for that business couldn't be better and it's broadly across their portfolio. The team just restructured their business to focus on where they think the higher-growth areas are you think about C5ISR electronic warfare unmanned or uncrewed vehicles. So they're doing very well. The pipeline is strong. The team seems to be very focused and I look forward to them performing over the next few years, consistent with the growth rates or even beyond the growth rates that we communicated at our Investor Day. So yes, very pleased with Mission Technologies. The team is executing very well. Tom, do you have anything to add on Mission Technologies?

No, I mean, just to hop on the back-end on-top of the growth rate that we've seen this year at 14% year-to-date has been 13% from '22 to '23. So I'm excited by that. The efficiency that Chris talked about from six business units to four, we're leveraging the strongest leaders here of the portfolio, the talent, we're aligning to be even more efficient on new bids there from a rate structure. So I'm excited with what they're doing there as they're honing the business. And the align acquisition was in 2021 and each year we're finding opportunity sense to either take more cost out or get some additional synergies within the division and the interfacing within shipbuilding and the opportunity set there continue to grow and how we can leverage Mission Technologies' applications and tech into how we construct and support our shipbuilding. So I'm excited about the future. We kind of set that up with a thesis of 7% to 9% growth, 8% to 10% EBITDA. I know that first year was up 4% from 2021 to 2022, but as I said, the last two years have been 13% and 14% higher than the initial hope and the projection that we gave for a 7% to 9% growth. And it's nice to see a couple of quarters here where the EBITDA margins have themselves up. A lot of cost-type contracts over that. But as we continue to mature the portfolio and the relationships with the customers and additional contracts, there'll be opportunity sets to kind of build out from just 80% to 85% cost-type into other type of contracts and delivery orders against those bottle contracts that will offer opportunity sets for higher returns as well, more products and services than just engineering solutions and studies. So I think it's going well right now and I'm excited that it brings about a new line of customer sets, different avenues of funding. We talked at Investor Day, the opportunity sets we have there to go international, commercial contracting, Australia over to England, and with the office opportunity sets in front of us too that's hitting on all cylinders for us.

Right. Okay. I appreciate that color and best of luck to the rest of the questions here.

Thanks, Jason.

Thank you. The next question is from the line of Seth Seifman with JPMorgan. Your line is now open. Please go ahead.

Hi, thanks very much, and good morning.

Good morning.

Good morning.

So I wanted to ask --good morning. You mentioned doing more outsourcing and kind of hiring less. How do we think about how that affects your returns and cost estimates when more of the work is done with outsourcing? And when we see all this money going into the submarine industrial base and some of it going into kind of our restarting small and medium-sized shipyards elsewhere, should we think about a greater percentage of the work being outsourced going forward and kind of what does that mean for margins?

Yes, I think there's going to be a greater percentage of our work outsourced going forward. There is a premium related to that. And you're seeing that, that impact in the profitability of our current portfolio. Now, I don't think it's going to be a significant impact going forward on these ships because we pretty much made most of those decisions. But we will increase the industrial base and increase outsourced partners on our future contracting activity and we make sure we protect those potential increases in those targets. That's what I mean about when I talk about ensuring that our new ships reflect the current macroeconomic environment, which means you're going to outsource more, which means it costs more. So we will outsource more. We need to expand the capacity in shipbuilding. We'll do that, but we need on these new contracts to ensure we protect ourselves.

I hop on the back end of that to you a bit. I wouldn't want you to like take away that we're going to significantly reduce hiring. The hiring, the training, working on retention. The backdrop that we've given you is that there's going to be additional growth in shipbuilding, right, from 3% to 4%. So there needs to be more volume and capacity, right? It's not out-of-the inability just for us to hire enough, but because of the top-line growing. So we'll be outsourcing what makes sense. And compared to maybe the inefficiency of some things we do inside we don't have the capacity to do it, all that goes into the business construct as we outsource. We'll in-source. There's teams that we can have pop into the yard, painters and welders at times on ships that they can pop in here for a month or a couple of quarters and help out as well. And again, if there's maybe a slight premium, a lot of times you don't pay like the benefit end of that. And then coming in here to offset the inefficiency we have of maybe schedule growth of the inefficiencies of the inexperience, some of the inexperience that we have in here. And all that's rolled into the EAC right here. So I see that as nothing but positive. Also, there's opportunity sets for us to do other things like operating centers, manufacturing operating centers. And that's in the mix. We're always kind of studying that. So we're not flat-footed here. We've kind of talked over the last two or three years since COVID about hiring and we were successful at that. We see the attrition is a draw here and now we're kind of pivoting to like, hey, the answer to that is more training, more relationships, and engagement with our new hires. And then where we need to supplement that, that's where we either outsource, insource, or look at other operating centers that we can team with, team acquire, things of that nature. So I mean, all that's in play on how we're trying to manage the business as we see going forward.

All right. Okay. And then maybe then to follow-up, you mentioned kind of that 3% to 4% annual shipbuilding growth. That target, I think was also based on the investments that you guys thought you were making with the elevated CapEx over three years. Now this year for sure, and it seems like maybe going forward, the capital plan is much lighter without the kind of capacity and productivity that would come from that capital spending. Is it still appropriate to be thinking about that sort of 3% to 4% top-line over the next few years?

Yes. Sure, absolutely, right? I wouldn't want anyone to see the signal of the CapEx has reduced for this year. We had guided 5% for the next three years from '24, '25, and '26 with '24 being 5.3%. So we prudently kind of hedged that back and we're managing accordingly because we want to see is it going to be an incremental approach or are we still going to do something more globally like an omnibus approach for the 17 boats that we have. But none of that work has moved out. Every year we replan our 10-year annual operating plan and none of that work has moved out of the plant. So the business, the value equation that we have, the specific skills and the opportunity sets we have with the growing Navy requirement, one of the 30-year shipbuilding plan, the five-year flight up, all that's in place here. As Chris said, we're trying to make sure that we marry the business environment and the headwinds that we see with both the labor needs and the supply-chain availability. We're trying to fairy home to fair and equitable contracts going forward that protects -- finds the right balance between affordability and profitability. So that has not changed the value equation of HII. It does mean that for the remaining part of this year, as we're trying to get rid of a little bit of the cloudiness and how that's going to play out and see the footing on performance take hold in Q4 and going forward. We throttled back just from a CapEx and cash position to be prudent in the short term. But medium to long-term, really nothing changes from what we envisioned and what we walked the industry and street through at Investor Day, right. That was a medium to long-term. We talked about three to five for medium and five to 10 years, the thesis of HII investment, and what -- how we see the business playing out has not changed at all.

Great. Thanks very much.

Thanks.

Thank you.

Thank you. The next question is from the line of Ron Epstein with Bank of America. Your line is now open. Please go ahead

Hi, good morning, guys.

Good morning.

I think we've been kind of through this, but I'm still trying to get my head around back at the Investor Day when you guys gave your outlook, how could you not see this coming?

Yes. So it's a good question, Ron. You talked about Investor Day, it was kind of a broad look at the -- at the business and a medium to long-term take on growth rates and where we saw performance was going, and consistent with Investor Day, we said we had to get through these pre-COVID contracts. And our assumptions of how we were going to get through them were just a little bit too optimistic. So we're having to deal with it. We have a very good accounting process where we roll through our EACs every quarter and we have to -- we have to take an issue if it shows up. So it's not grossly inconsistent with the challenges we knew we had on these -- on these contracts that were negotiated pre-COVID. We're just going to have to get through them and transition to these new contracts that reflect our current environment.

Got it. Got it. And then how should we think about margins into next year? I mean, can you talk about that?

Yes. So they're going to be -- we're not going to provide guidance until the end of January on that. And it's going to be a reflection of how we execute over the next couple of months, our expectations of execution for the balance of the year, those risk and opportunities. And then what we think that 17-ship submarine contract looks like, whether it gets awarded together, whether it gets awarded separately in the FY '24 votes, what that construct looks like and what the incentives are, look like on that. So we'll give -- we'll give that -- that information out in -- for guidance in 2025 in January. And those are the factors that will influence it. Tom, I don't know if you have anything you want to add to that.

You kind of hit it. It's just going to be a function of the performance and then these new contract awards that we have going forward. So I think it's premature right now for us to kind of guide that. I mean, we give you a range to get out of this year and then we'll give you a perspective kind of going forward. We understand what's impacting us. We're throwing a lot of horsepower, internal investment on labor front and on the supply chain. I mentioned to your question on the Investor Day, I mentioned about you had to work off the existing ships, the ships that have been during COVID and post-COVID the last three, four years now. I know a lot of people say, hey, COVID is behind us, but the contract value that we brought in here was pre-COVID, and then with the loss of hedge and the experience and the fragility of the supply chain, I mean, the impacts are still real today, whether it's impacting the ship at the deck plate parts and labor, or it's just a cumulative effect of higher costs over the performance of the ships and boats as they ran through the three or four years of three years of COVID 9% plus inflation for a couple of years and now tightening of the labor market. Those are real impacts that we're kind of living each day. So if you recall, I broke that down. Hey, we got every year, we get rid of a couple of boats and ships that went through that. We start some new boats and ships and then it's about the equity of the new contracts that we bring home with additional backstops on clauses, more alignment on program schedules, and then the cost returns that we see would get cranked into the new bids and we'd find that overlap between affordability and profitability on the new awards. And there's a transition period of that -- the new portfolio replacing the existing portfolio we have here, but I think that's the color we have.

Yes. And then maybe just one more question. I mean, and tell me if I'm just oversimplifying this, but it -- when you look at the commercial airlines as an example, they had a pilot shortage until they paid the pilots a lot more, and then the shortage went away. I mean, is it as simple in the yard just paying the shipbuilders more, and you'll get more talented people with more experience? And is there a way to work with the Navy to do that?

Yes. That's what we're -- we are working with the Navy to do that now. We've worked with them on some interesting projects relative to increasing the labor and we're seeing some promising results for that. So Ron, you're bringing up a good point. It's something we're working very closely with the Navy to address on a 17-ship submarine contract. We've done it at Ingalls already in some areas and we're seeing some positive results. So it is an oversimplification, but we think that is one lever you can pull to improve retention, improve performance, and improve predictability.

Yes, it makes sense. All right. Thank you.

Sure.

Thank you. The next question is from the line of Robert Stallard with Vertical Research. Your line is now open. Please go ahead.

Thanks so much. Good morning.

Good morning.

Chris, I don't want to belabor this 17-ship issue, but I was wondering if you could elaborate on what the potential sticking points are here. Is it very basically that the cost per unit has gone up significantly versus what the Navy is prepared to pay, or had budgeted, or that you were trying to get sort of recompense on the older pre-COVID contracts? And what exactly is the issue here?

Yes. So fundamentally, the budgets that were established for those boats was a few years ago and it didn't really have the -- our current environment baked into the budget scenario. So that creates a risk, just that creates a risk in getting those under contract. But it also doesn't -- if we were to just kind of go business-as-usual to put those under contract, it doesn't address the significant investment that's required to meet the critical need for these submarine schedules. And so whenever you do something that's somewhat innovative and create an asset that can be used for investment, it just takes longer to get that approved. We still think it's the right approach. So it's a combination of both of the things you mentioned, which the budget was not enough, but it also doesn't unlock all the investment that we need to make in the industrial base to meet our contract schedules. So it's a little bit of a budgeting challenge, but also how do we attack this issue kind of holistically so we can accelerate submarine production.

Right. And then just a quick one for Tom. Mission Technologies in Q4, it looks like things stepped down. Is there a reason for that?

Yes. We're being conservative right now on the way that plays out. A piece of the performance that we see here is timing. So -- and but we're still -- if you notice, we're raising the guide both on the top line and the bottom line at Mission Technologies. So there's no issue or problem there. We just let it play out. They've met or exceeded where we thought they landed each quarter and I'm feeling positive about that. But there's still another two-plus months to kind of play out here and I'm looking forward to providing some good news in February.

Okay. Thanks, Tom.

Thank you. The next question is from the line of Doug Harned with Bernstein. Your line is now open. Please go ahead.

Hi guys, this is Mike McCormick on for Doug.

Hi, Mike.

Just a quick question on labor. I know that you talked about sort of the outsourcing and hiring goals, but can you just touch on attrition in the quarter? I know last quarter kind of said not really improving, but an update there would be helpful. And then I have a quick follow-up.

Yes, we haven't seen market improvement in attrition. That's why we're kind of repositioning the way we're hiring and focusing on less entry-level and more experienced labor because they tend to -- they tend to stay. So, yes, no meaningful change in attrition.

Okay. Thank you. And then just on CVN 79, I guess as we get through to 80 and 81, any comments on how we should think about sort of the margin profile, should we expect margin expansion on these ships there too? Just any color on that would be helpful too.

Yes, I'm sorry, Mike, I have a bit of a trouble understanding what your question is, but I think it was margin profile on aircraft carriers. And we don't give margin by program. So it's just not something we do, but I do -- I'm still very confident as a 9% to 10% business, we just need to transition out of these pre-COVID contracts.

Okay. Thank you.

Thanks

Thank you. The next question is from the line of Noah Poponak with Goldman Sachs. Your line is now open. Please go ahead.

Hi, good morning.

Good morning, Noah.

Hi, thanks. Can you frame the timing at which you will no longer have pre-pandemic contracts flowing through your financials?

And so it transitions out. I think between 24% and 28%, about 50% to 60% of the work is pre-COVID. And just depending on the pace and tempo of the new awards, you saw we got the -- we got -- if I break down the new awards post-COVID FY '23 on the destroyers, you saw Ingalls just picked up the bundle in Q3. We're talking about the 17 boats here for the last two on FY '24 Block V on VCS, the next 10 boats for Block VI and then the Columbia Bill II, and then CVN 75 RCOH, we're already on contract for a long lead on that and that comes in here from a construction standpoint, I believe at the end of '25-26. So it's two, three, four years out as it starts to meaningfully ramp and we switch over in a couple of years that there'll be more of post-COVID awarded jobs than there are pre-COVID here. So that's in the '27-28 time-frame where we swing over.

Okay.

With more post than pre.

Yes, okay. Okay. And Tom, I guess just on the on -- you had a multi-year free cash flow framework for a while and talked about kind of normalized recurring annual levels. Is there any new way you're framing the recurring annualized number? I guess it's a little surprising you pulled that because you're showing you can toggle the CapEx by a not insignificant amount and you've referenced timing, although I guess if it's a multi-year window where the margins are just structurally lower from pre-pandemic contracts, then maybe not. So I don't know if there's any additional color you can provide on how you're thinking about the beyond '24 free cash?

Yes, I can. I can. We did think about that, but if you think about the five-year guide and here we are at the first of the five years and we've got the $600 million to $700 million to zero to $100 million. So you can easily do the quick math and just say, hey, the all 36 is now like a $3 billion area. But it's so close-up front of the five-year run here. We really want to kind of get out of this year with actuals, see what's happening on the new omnibus incremental innovative contracting approach, see how that takes hold, the timing and the pace, and the investments on that. And we just thought it was better to take it off the table right now and we'll evaluate when we feel good enough that we give you a number that we can hang on right now. So we could have adjusted it and then it could either be higher than that or less than that depending on the pace and tempo of the awards and performance. So we're going to hold that back. I mean, we hold our guide knee, and dear, at times, you've been on the call with us for many years. We talk about our ability to meet or exceed our guide. We were on a good run there from a cash -- since we started this cash-flow perspective back at end of 2019 from '20 to '24, each guide we met or exceeded. And of course, we're missing it kind of big-time here this year. And we thought it was just more prudent for us to take a break, understand what we have here, see how the contracting landscape plays out over the next six to 12 months, and then we can revisit that in the future.

Okay.

I would say to my early comments that I still think -- yes, I would say to my earlier comments that still the HII value -- investment value has not changed, right, the 30-year shipbuilding plan, the five-year 5F, our backlog, it's a pace and tempo piece on performance and throughput on the existing work and then it's the modification -- the new awards, as Chris said, is it business-as-usual or as we kind of look for additional investments in labor and capacity and throughput and our supply chain, which needs dollars, which will assist us as far as I mentioned in Q1 and Q2 calls, those new contract awards bring equity in terms of margin and cash for investments and they facilitate unlocking the value of the existing contracts that we have the funds that are on there. So it's a fairly decent swinger on changing the trajectory of performance, capacity, and throughput and the recovery and the improvement going forward and we just have to see how that plays out over the next couple of quarters.

Okay. I appreciate it. Thank you.

Thanks, Noah.

Thank you. I am 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.

Sure, thank you. To wrap it up today, I'd like to summarize that we remain focused on optimizing our operations, improving our cost structure in shipbuilding performance, and driving higher throughput. We believe the actions we're taking will enable us to stabilize performance as we continue to work through these ships. Thanks again for your interest and participation today.

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