Tom Stiehle: It’s a mix of the milestones that we have, incentives, all the aspects that we have in burning down risk, so all that plays out. I will tell you from a margin perspective, if you look over the last 3 years, right, whether it’s shipbuilding at 7.7%, last year was 8.3%, even when you take the claim out that we had that recovery it was 7.5%. From a Newport News perspective, which is the preponderance of where the risk is right now. We were 6.2%, 6.1%, 6.2%. So, that margin rate has been stable. What we are talking about is a lift here kind of going forward. And as long as we stay on pace, the tempo of hiring, material and the cost efficiency as we have said in the past, we expect that incrementally to improve annually here. So, we will keep you informed right now. 6.8% versus 7.0% was pretty much on top of what we thought we would expect and we are guiding to 7% right now, yes. So, the back half of the year, right, will be a lift.
George Shapiro: Okay. And a follow-up, a different question on the working capital, I mean receivables were up like $253 million contracts, assets up $124 million in the quarter. That was well above last year’s first quarter. So, can you just kind of talk as to what caused it?
Tom Stiehle: Yes. So, it’s the working capital, it’s timing, it’s trade working capital between the billings and the receipts, the AR and the AP that we have right now. We have the cost in hand, at times, it’s either making the progress or being able to bill, working ourselves through incentives for collections as well as progress restrictions that we have. So, a little bit higher than we guided to at minus $200 million here and minus $400 million for Q2. Not uncommon like in 2022, where we ran the first three quarters in a deficit in cash, and then we came back strong in Q4. So, we are watching that closely. And I think we are on plan right now going forward.
George Shapiro: Okay. Thanks very much Tom.
Operator: Our next question comes from Myles Walton from Wolfe Research.
Myles Walton: Thanks. Good morning. I was wondering if I could ask a question first on the milestones as it relates to – I know you don’t size them individually, but there is not a milestone chart in the slide deck. So, I just was going to refresh the Massachusetts, is that the most important milestone for this year for Newport News and also any of the 25 milestones you had in the deck last time, have those shifted at all?
Chris Kastner: No, 25 has not shifted, and all the milestones are important. It is critical on the VCS program that they meet their commitments because it is an assembly line, and you need to roll crews to the next boat. So, yes, those VCS milestones are important.
Myles Walton: Okay. And then on the supply chain, I guess some of the testimony emerging, was talking about merchant suppliers of propulsion systems for ships. And I am curious, Chris, if you just give us a little baseline of where you are in terms of the whack-a-mole game here of containing issues? And is it supplier component? Is it workforce? And I know you are going to say all of them, but maybe you can just give a little bit more color as the Navy Secretary was willing to offer up Northrop as a source of issues is a little bit of an incremental step in the direction of emerging of where the supply chain constraints might be.
Chris Kastner: Yes. So, thanks Myles. Workforce is a significant issue. We think we have solved the hiring part of that issue. We have hired over 1,700 in the quarter to our commitment of – or to our goal of 6,000, and we are working very hard on attrition. There are some pilot projects that we have within each of the organizations, each of the shipyards relative to attrition surrounding pay, where you recruit from and flexibility. Those are starting to yield some fruit, but not enough where I can really take it to the bank. So, some positive indicators, but not good enough yet and we are going to continue to work on it. From a supply chain standpoint, we are being impacted by some major equipment within a number of our programs.
The overall supply chain is definitely more stable than it was a couple of years ago and even 12 months ago, but some of our major suppliers are impacting the erection of our ships, and we are working hard to resolve that with those subcontractors.
Myles Walton: Okay. Is it concentrated to just a couple, or is this really widespread?
Chris Kastner: Let’s say, two to five.
Myles Walton: Okay. Alright. Thanks so much.
Chris Kastner: Sure Myles.
Operator: Our last question comes from Noah Poponak from Goldman Sachs.
Noah Poponak: Hey. Good morning everyone.
Chris Kastner: Hey Noah.
Noah Poponak: Tom, you have referenced with the shipbuilding margin kind of being essentially flat year-over-year and close to the guide in the quarter. But – and I understand and appreciate all of that and how it can move around quarter-to-quarter. But I guess last year, the full year did come in below the original full year outlook and you have cited the movement of milestones out of the end of the year into the beginning of this year. I guess maybe could you frame it as your level of visibility into the back half milestones this year compared to what you saw when you sat there at this time last year?
Tom Stiehle: I think both years kind of near or pretty closely expectations, both from where we were on the margin side and the cash that’s going to follow that. So, it is a year where there is more milestones in the back half. It will be highly dependent that we get those done. Last year, the three events kind of slipped right from Q4 into Q1 and essentially at the very beginning of Q2. So, we had talked about saying attendance to us making our schedules. Two months, three months, four months slip, although we don’t like that, it’s not huge. And I think the milestones we have right now, we have plans in place to make it by the end of the year, but there is risk on a couple of them. So, we will just have to see how that plays out here.
I think it’s going to – near is a very similar profile year as 2023. As far as your comments about kind of missing last year, we guided in the upper-7s, we finished 8.3, 7.5. I tell you the year before that, it was a couple of ticks off to a couple of tens. So, I think the guide is realistic. We have a plan in place to hit it. And it’s just about execution here now with eight months to go in this year.
Noah Poponak: Okay. Makes sense. And how should we think about the pacing of the buyback through the year? And I guess also, what’s the minimum cash balance, just given the shape of the free cash flow through the year?
Tom Stiehle: Yes. So, we did buy back 62 million in the first quarter. We talked about a target of 300 million by the end of the year. So, you can do the math on that. That will – that should ramp up as we go through the back half of the year. We follow a very disciplined buying grid. We have algorithms against that where we see value. So, we will continue to employ that process. It has served us well. We reiterated our targets. So, I don’t see a change in that going forward right now. And then from a minimum on the cash balance, it’s not per se a minimum from time-to-time, we will dig into our revolver or our commercial paper, so that’s not uncommon. We have seen that in the past here. And as we are into the seasonality of Q1 in the first half of the year, being cash users, that’s not a concern or problem right now.
So, there isn’t like a threshold or a minimum balance of cash that we have that were tied to being opportunistic in seeing value in the repo. So, they are kind of independent.
Noah Poponak: Got it. And Chris, you have touched on labor and attrition here. I think at the Investor Day, you quantified that attrition improved around 20% last year. It sounds like that continues to get better. I don’t know if there are any numbers you can put around how much better that needs to get to be kind of fully normal or stable or what you have seen year-to-date?
Chris Kastner: Yes. We don’t publish our target there. It’s definitely not back at pre-COVID levels. So, we still need to improve our performance from a retention standpoint.
Noah Poponak: Okay. Alright. Thanks very much. Appreciate it.
Chris Kastner: Thanks.
Operator: I am not showing any further questions at this time. I would now like to hand over to Mr. Kastner for any closing remarks.
Chris Kastner: Okay. Thank you everyone for your interest in HII and we will continue to focus on the fundamentals of our business and support of our customers. Have a good afternoon.
Operator: And this concludes today’s conference call. You may now disconnect your lines.
