Good day, ladies and gentlemen, and welcome to the Q4 2018 Huntington Ingalls Industries Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will have a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. It is now my pleasure to turn the conference over to Mr. Dwayne Blake, Corporate Vice President of Investor Relations. Please proceed.

Thanks, Hayley. Good morning, and welcome to the Huntington Ingalls Industries fourth quarter 2018 earnings conference call. With us today are Mike Petters, President and Chief Executive Officer; and Chris Kastner, Executive Vice President, Business Management 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 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 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're planning 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 again today. Before we get into the details of the call, let me first thank each of our 40,000 employees for remaining steadfast to our core principles of safety, quality, cost and schedule, which helped us produce another year of solid results. I truly appreciate the efforts you put forth in each and every day. So now let me share some highlights of our fourth quarter and full-year 2018 financial results, starting on slide three of the presentation. Sales of $2.2 billion for the quarter and $8.2 billion for the full-year were both approximately 10% higher than 2017 and represent record highs for the company. Diluted EPS was $4.94 for the quarter and $19.09 for the full-year, both significantly higher than 2017. We received approximately $3.3 billion in new contract awards during the quarter, including contracts for NSC 10 and 11, which is the continuation of the stable serial production program for the Coast Guard. As a result, our backlog was approximately $23 billion at the end of the quarter, of which approximately $17 billion is funded. The 2-ship contract award for CVN 80 and 81 announced at the end of January is a significant step toward building these ships more efficiently and affordably. And this contract increases backlog by over $15 billion. It stabilizes the Newport News workforce, it enables the purchase of material and quantity, and it permits a fragile supplier base of more than 2,000 vendors in 46 states to phase their work more efficiently. In addition to this award, we have captured a significant portion of the shipbuilding contracts that were included in the FY'18 and '19 authorization and appropriations measures including the aforementioned NSC 10 and 11 and a six ship DDG contract received in…

Thanks, Mike, and good morning. Today, I will review our fourth quarter and full-year consolidated results as well as provide you with information on some items for 2019 and 2020. For more detail on the segment results, please refer to the earnings release issued this morning and posted to our website. Turning to our consolidated fourth quarter results on slide four of the presentation, revenues in the quarter of $2.2 billion, increased 10.2% over the fourth quarter of 2017, primarily due to higher volumes in aircraft carriers and navy nuclear support services in Newport News as well as higher volumes in the LPD, LHA and DDG programs at Ingalls, partially offset by lower volumes on the NSC program at Ingalls and the VCS program at Newport News. Operating income for the quarter of $213 million decreased $18 million or 7.8% from fourth quarter of 2017, and operating margin of 9.7% decreased to 189 basis points. These decreases were primarily driven by lower risk retirement and higher than anticipated cost on the VCS program. Moving onto consolidated results for the full-year on slide five, revenues were $8.2 billion for the year, an increase of 9.9% from 2017. This increase was primarily driven by higher volumes in aircraft carriers and navy nuclear support services at Newport News as well as higher volumes in amphibious assault ships at Ingalls partially offset by lower volumes in the DDG and NSC programs at Ingalls and lower volumes on the VCS program at Newport News. Operating income for the year was $951 million and operating margin was 11.6%. This compares to operating income of $881 million and operating margin of 11.8% to 2017. Higher operating income was driven by more favorable operating FAS/CAS Adjustment as well as the overall volume increases noted previously partially offset by…

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 through the queue as possible. Hayley, I will turn it over to you to manage the Q&A.

[Operator Instructions] Our first question is from Myles Walton of UBS. Your line is now open.

Hey, Mike, I was hoping you could touch on the VCS? And how much of -- of which you're experiencing as a result of moving to the new contract structure on the Block IV? It sounds like you're kind of bridging the two. And also the -- kind of the late delivery that was called at this summer, how much of that have you recovered from in these contracts? Just give us some colors that you've kind of bounded the issue, obviously, you've adjusted that EAC accordingly? But how much was the result of transition sort of Block IV? How much is a result of increase in rates? And, again, give us some assurance that you've founded the issue?

Yeah, I'll start and then maybe I'll let Chris talk to the rates issues. We have as a sort of core principle of at least my career is, you should launch no ship before its time. And as we were heading up to launch on Delaware, our approach to a quality launch there we started to recognize that to get to where we wanted to be on that ship for a launch, there was both cost and schedule pressure. So we don't launch until we're ready. So when we -- when the launch got delayed, we had to step back and say what were the root causes of that and what is that mean to us, not just on this particular program and Delaware is the last ship of Block III. But is there something that we do account for in our risk register in Block IV. And so that process is a very -- it's a routine process that we go through in our EAC process every quarter. But also the risk management process is very, very disciplined. And so as we went through that process, we recognized that we needed to reflect that in the risk registers for Block IV. So we did both of that. We took the program adjustment for Delaware, but also adjusted Block IV. And we also accounted in the ongoing negotiations we're having for in Block V. We absolutely believe that the problem is a rather challenge that we experience is bounded. The team is -- they recognize how they got here and they recognize the approach to get through it. I feel very confident about where the submarine program at Newport News is. And I'm also pretty excited about the future of that program as we go forward. So I'm -- this is was a routine adjustment that caught us on the cusp between Block III and Block IV, and so that's why it kind of shows up the way that it does. But I'm very confident about where that program is going to go in the future.

And then, Chris, you gave us the color on the 2021 CapEx coming back towards a normalized level? What is the net CAS recovery after pension contributions look like in terms of post 2020? In a deck you're showing an uptick in the cash contributions required by the company and decline in the case of CAS. Post 2020, are those two things more or less neutralized?

Yeah. So they definitely wind down a bit. I'm not comfortable providing 2021 data at this point. Trying to get you '19 and '20 from a planning standpoint that FAS/CAS and contribution start to normalize subsequent to '20, for sure all things being equal, of course.

Thank you. Our next question comes from Doug Harned of Bernstein. Your line is now open.

I wanted to go to the Ingalls for a minute. The -- you're just -- you've been getting good margins at Ingalls and you're just in the early stages of ramping up on the Jack Lucas and the Ted Stevens. So as you get into these Flight III boats, how should we think about the margin trajectory with that transition to Flight III?

We're -- as Mike indicated on his prepared remarks, we're still comfortable returning the 9% return on sales in 2020, and the Flight III boats or Flight III ships are in that mix. So we're comfortable with how those ships are starting and we're comfortable with that 9% return on sales projection.

Yeah, I'd go little just maybe expand on that, Doug. You know, across the whole business we will be -- we're starting up now, we're adding to launch on Kennedy but we're now behind Kennedy we have two more carriers to build. We're at the very beginning of Block IV and we're negotiating the Block V contract at Newport News. We have the steady refueling business at Newport News. We're coming through the second half of a refueling and will beginning -- the beginning of the planning phase for the next refueling. At Ingalls, we have 10 destroyers now under contract to build. We are negotiating the first ship of Flight II of LPDs and we are in a place where we just signed a contract for two more NCSs, NSC 10 and 11. And then across the whole range of the business, all of our programs are -- were getting the business into the production lines that are hot. And even though there's a -- the backlog is expanding pretty dramatically. We're in a place where we feel pretty comfortable that next year we're going to back into 9% to 10% range. And that's going to be across the whole business, there would be pieces of it, that will be -- because the risk registers we won't be at that level, there would be other pieces that the risk registers are going to be in a good place and we'll be above that. So at a blended rate we believe that in very short order, even though the backlog was expanding as quickly as it is. In very short order we're going to be in that healthy 9% to 10% range and we're pretty excited about that. Whether that's going to happen exactly the way that we see it play out, you know, this is ship building. So we'll see. But I've said this is the most exciting time that I've seen in shipbuilding and this is when it gets really good now. The orders are in the book and the team can get cut close to go execute those orders.

And then talking ships little bit the you've done to acquisitions in the government IT space here recently. What we've seen in that space is a lot of consolidation and arguments by some of the larger players that you really needs scale both for cost and for the market. And so as you pull these together I mean you are well below the scale of many of these other large companies. I mean how do you think about competing at the size you're at in that space? Or do you feel what's the scale you think you would need to make that really successful?

Yes good question Doug. I think of the scale issue we don't look at it the same way. We and that may be because we just record that smart. But I think that we post that we've taken without navy customer for decades has been to understand the customer well enough to understand what capabilities they need then go invest in those capabilities so that you can become the preferred partner for that customer. In this space whether it's cybersecurity or data analytics and those kind of things when we acquired Kimball we brought on several new customers and we've gone through a pretty rigorous evaluation of what are the capabilities that those customers are going to need for where they are going to be in the future. And then we've been pretty selective about go and build that capability in our business. And both G2 and full-term are exactly that. I don't believe that you can we just successful by being made. I think you're going to have to be intimate to the customer you're going to have to be talking to them about what capabilities they need and then you've got to go her figure out how to create that capabilities so that they have it when they need. And we're excited about the approach because it helps us become more intimate with these customers over time and we become a much more interested partner. And we think that that's going to be the foundation of a very successful services business.

Our next question comes from Carter Copeland of Melius Research.

Just two quick ones probably both for Chris. One just explaining on Myles question and your answer Mike it sounds like we should be thinking to block four booking rate on DCS is lower exit the various and whatnot if you can just confirm that for us? And then secondly on the cash flow were there any working capital elements of significance that represented a pull forward of some good guys into Q4 2018 versus 2019? Anything we should be aware of?

Yes so I'll handle the last one first. So we did have a good Q4 and working capital both receivables and payables. Grad paid early on some stuff that we weren't really expecting its testament to the team that was working cash over the year to ensure that we maximize it so that we did have a positive working capital quarter for sure. And Mike you want to handle the DCS but we don't specifically give bookings in the program.

I mean this was a, I would say for the sides for this size of the program for block 4 this is a relatively small adjustment for that.

Okay Chris if you could help us quantify how should we think big some of that good news in Q4 on the cash flow was?

Yes you can think between $100 million to $150 million right at the end of the year that came in because of the team is working very, very hard at it.

Our next question comes from Rob Spingarn of Credit Suisse.

Following on but what Carter just as you, given the word on forward Chris can you talk a little bit about the trend from this year to next year beyond pension and CapEx? How should we think about the various puts and takes into 2019? And then separately if you could give us the growth in that EIS adjustments in the segment?

So I'll give you gross and net first. Positive of 62 and negative of 50. Ingalls was a positive 30 and Newport News was a negative 18. From a free cash standpoint what I intended to do this year on this call was give you all the various factors that influence cash flow at HII the nonrecurring type of items. So depreciation amortization capital net pension cash and then everything else is just working capital and that's timing related. And as you know as you saw in Q4 you may have seen be a bit lumpy. So hopefully I've given you more information where you can understand how cash flow within a corporation.

But over the years should we expect it to be similar 2019 from 2018. In other words you have another you works some of that strong Q4 in the early part of 2019 and then you catch up at the end of the year?

We're going to work very hard to ensure that happens.

Our next question comes from Jon Raviv of Citi.

Sorry to keep on this cash flow question but maybe just a little more specific. I think at the beginning of the year you've talked about having specific headwind and tailwinds in the 2019 that sort of implied $750 million of cash free cash in 2019? Pension moved through in the year such that on the last call some of that cash went away. Ratings at all levels of the level of free cash flow you expect to be able to say in that maybe next couple of years CapEx in the side pension?

Yes Jonathan I appreciate the question. And as you know we don't provide that residential what I tried to do is give you all the components that make up cash flow. I really would rather not give you directional and my thoughts relative to how it's going to be prepared to 2018. But I think you can probably get there with the information that I provided.

Okay and then I have a follow-up in terms of the sustainability. Mike you have talked about for a while your business being flattish and up 3% and now up 10%. To what extent is this new level in 2018 almost a base of which you claim or given all the backlog that you've been able to build or you were to some risk that started going down and again at some point kind of even at not that risk adjusted normalized you talked about previously?

And Jonathan I apologize i did not hear you very well. I think the question was about growth. This is Chris and Mike can chime in subsequent that we are still confident with 3% CAGR 2017 through '22. obviously we had pretty good 2018. But we don't really don't expect that to continue obviously because of Los Angeles submarine work will finish this year. And then tailwind 2020 potentially. So we're feel still comfortable with that sort of growth rates for those years in shipbuilding.

Lead back and I would just go and find out that what what's actually going to happen have beyond the persistent 3% growth in shipbuilding is that backlog is going to put us in a place where we're going to be able to talk about not just five years but 10 years. And we'll be able to talk to a pretty persistent growth rate across a decade that's going to be for a work we have under contract that is buy and large immune to some of the winds that might blow politically. So that gives us a lot of confidence in terms of the foundation of our business with our core customer we think that puts us in a very unique spot.

Our next question comes from George Shapiro of Shapiro Research.

Chris if I heard you right you had a $20 million negative adjustment from the DCS. If I exclude that in Newport would have been about 6%. Is that what we should expect for the quarter's this year or is that on the low side?

Well that's getting on a run rate sort of margin for a return on sales for Newport News in the quarter. Obviously there will be opportunities for step ups as we achieve milestones at both ship yards. So well it is run rate that's not how we think about return on sales within the year.

Yes because you had mentioned I thought I got it right that net adjustments in Newport remind us 2018. So roughly taking out the 2018 you kind of get this is the underlying base rate for Newport News? And then as a question of what you can do on EAC adjustments et cetera?

I think that's there George.

Okay and then for Mike. The 3% sales growth you've talked about in the past had that assumed all of the business that you know seem to be getting the two Ford carriers and stuff? Or is there incremental from the business you got?

Yes I think that when we first talked about the 3% the two carrier contract for instance was being talked about but not I think was uncertain. The destroyer piece was uncertain at that point. I think where we are now as that we're very confident about the 3% because of the work that we've captured. There are some things out there that frankly we'd like to see that could help this move along more. If you can do for instance if you can do a two ship by for Aircraft Carriers you can do also do ship by for LHAs. We've got figure out a way to get the LHA program back in phase because it's out of phase right now. And we got to do that as very efficiently as we can from a shipbuilding perspective we've got a LHA seven and LHA 8. But LHA nine and LHA 10 are out there and they are not in phase. So we've got to get to those in phase. So that remains to be seen. We're negotiating the first contract of flight two LPDs. The best way to build the flight two LPS would be to move to a multiyear contract. So we need to go do that. So those are things out there that would enhance our view the frigate program is out there and that will enhance our view. So while we saw defied around the 3% because of the work that we've done we're still out there doing more of this to try to be as efficient as we can.

And then just one quick follow-up, so given how much higher than 3% the growth was this year I mean what caused that? There were unique items in there that you didn't foresee? Or if you can explain a little further?

Yes George that was driven by the LA class submarine availabilities the three boats that we had in Newport News in 2018.

Our next question comes from Krishna Sinha of Vertical Research Partners.

I think in late December you want a sub safe contract for $875 million. And then I think recently you also have the opportunity for something like $400 million on option period 3 for some MTV ships work for the Chief of Naval operations. Can you just talk about how those revenues flow through over the and over what time period you're going to see those revenues?

I'm not entirely sure the awards you're referencing I apologize. But all of the all the awards we had in the fourth quarter and the perspective that Mike previously gave relative to the growth rate.

So are you seeing any incremental sort of opportunity for maintenance or MRO work. I know that sort of ad hoc and it comes on and off. But any not on the LA class particularly but any other work that you're seeing coming down the pipe that could be incremental to the growth rate?

Well I think that there is a bigger strategic issue around how is the Navy going to try to do maintenance going forward. There's been a challenge in terms of their readiness they they've talked about. And as they moved the resources towards more readiness, they've also been talking with the whole industry about how do we do that more strategically. We're certainly engaged in our discussion with the Navy but it's very premature at this point to try to talk about what impact that might have on our particular business. The LA class is actually an example of sort of the dynamics of that space in terms of those were pop-ups that we were available that we were able to do. But right now we can't forecast what after that. So and I think that sort of the challenge of that space historically has been the unpredictability of it and the volatility of it. So I think that the discussion is going on between the government and the industry right now. So how do we do this on a more efficient way which would drive out some of the volatility. And if we can do that then we can start to project that into our into our look ahead. But we're really not able to do that right now.

And then just one maybe one final one on free cash flow, everybody's kind of harping on this. But I'm just curious from your perspective pension obviously is a noisy's sort of metric and it's going to harmonize at some point. If we just exclude the pension if we normalize CapEx. What's the sort of underlying free cash flow that we can expect from this business on a go-forward basis. Like what's normalized free cash flow look like for this business?

Yes so I apologize again but we don't provide guidance. What I've tried to do is give you all the variables that impact cash. And addition to that we provide top line and where we think we're going to be from a return on sales standpoint and what the tax rates going to be. So I think based on the information I provided you can get to a fairly consistent or number that you can count on. Obviously working capital moves around a little bit in that it can be lumpy at times. But with I think with the information I provided you can arrive at a fairly reasonable number.

Our next question comes from Ron Epstein of Bank of America.

A couple of quick questions. Back to the revenue growth question. I think everybody's kind of scratching up that one. Largely because it seems with the business you've won and the business you could win that 3% number just seems really low right? I mean that how could you possibly not hit that? I mean I guess the question is how could you possibly not do better than that? That's the first question.

Well the answer Ron this is Chris. And I consistently said if things go perfectly it could be better but you have there are constraints within a shipyard. There's only so many boats you can build at the same time. So it's not as if we get these orders and they provide for immediate sales growth. What they do provide for is amazing stability within our business space. So it's not as if it immediately show up in sales and margin.

And then maybe I don't if this asked or not but I'll ask it again if it was I mean when we think margins on the two carriers how should we think about that as we go from CVN 80 to 81?

Well I think certainly we've got a contract here that's going to carry us out to 2032. So we have a pretty large this register at this point. And as we with all of the advantages come us along are historic and very disciplined process for making sure that we don't retire the risk before we've actually retired it. Now what happens here is that as you are going through the first ship it's really going to be the third ship in the class. And so you're going to be able to take advantage of what's you've learned from the first 2. And you'll have opportunities where you're at high risk on the first ship and you'll decide that maybe that's not a risk on the second ship. So there'll be a progression just like it is on any other program it's just going to be a 13-year curve as supposed to a 8-year curve or a 5-year curve that we have on other programs.

Got you. Got you. And then maybe just one more for you just quick one. On the CapEx outlook in 2021 how many summary instances are resumed are being built?

That's the current program of records. I think the question around submarines is it as the industry has been expanding itself to be able to handle the two submarine per year delivery rate in Virginia-class as well as support the Columbia program. Discussions about future submarines and adding more submarines to the budget I mean that's been a very loud discussion and we stand ready to support that. But the capital that sort of things if you just going to add one or two ships to the budget along the way and kind of option them in. They're not really won't require substantially more capital. That would just be putting them back into our production line and working them through the process. If the nation were to decide that they wanted to go some other build rate. We're we wanted to go to a three Virginia-class stream extreme be and go to a three Virginia-class per year build rate confirm with the Columbia-class program. Then that would probably require another thought on capital. But we are not seeing that being the discussion today and so we feel pretty comfortable with the capital investments that we've made on the BCS program. And even if they add a ship here or a ship there we think that that will be that we're in we're well positioned to support that.

Our next question comes from Douglas Harned of JPMorgan.

So the new to the stock so I apologize for this pretty basic. But just thinking about that shipyard margin this year coming in at around 8.6 and getting kind of on way into the 9% to 10% range in 2020. And thinking about the moving pieces there And you're very much above the range at Ingalls. And so that implies I guess better significantly better margins on the carrier even as you look at it after you've signed the contract for 2. And improving margins on the Virginia not being offset too much by the absence of that Los Angeles cross work. Is that the right way to think about the margin moments that allow you to bring of the Newport News margin?

I think the way to think about this and welcome to the stock. I think the way to think about our ship building businesses is that brand new programs are going to be booked very conservatively because we just we have too many scars where we've gotten out in front of our head lights. And so we went to be conservative in new programs. Very mature programs we can where we understand where the risk is we will be more aggressive. Where we are right now is that we have a tremendous amount of new work at Newport News. And so as a result we're being pretty conservative at Newport News. And on the other hand at Ingalls we've got some pretty mature programs there. And we're hot production lines. So we're in a place where we can be more aggressive. Both teams are executing exceptionally well and we we're of the work that they are doing and the positioning that they are making to accelerate into the next decade. And that's across all of our programs. And so our view is that the healthy blended business of shipbuilding ought to be a mix of very mature product lines with the significant volume of new work and then that blended that puts you in a 9% to 10% range. We've been very consistent about that since we left we still believe that to be the case. And we expect that even with all of the new work that we're taking in Newport News in the next we've taken it on and in the across the rest of this year. We expect that our blended rate next year is going to be in 9% to 10% range we're pretty comfortable with that. So we're excited about where this positions us because it does put us in the healthy place for the next five to 10 years.

Great. And then I'd say here is a quick follow-up for Chris just even we few take out the $150 million of cash that kind of pulled into the fourth quarter it still implies on the positive working capital contribution to cash flow in 2019. Just want to make sure A that's correct? And kind of like what's driving and given that we've got this growth underway? And at some point does that become more, more of a neutral or headwind on the working capital front since you're growing?

Yes so I we do have good terms with our customers so working capital doesn't as we grow working capital does not increase that much. So it's all about timing with working capital with us and what happens around the end of the month. So you're correct relative to the pull forward. And we'll just see how 2019 goes.

Our next question comes from [indiscernible].

Couple of questions. You mentioned the 7% to 9% margin range this year. Can you remind us of how many ship you have this year I think it's 5? And how that compares last year? Just obviously you guys are conservative but typically we've seen margins kind of move up on upon delivery. Is there anything different about the programs you're delivering on this year relative to history. I'd appreciate some color.

So we have five ship deliveries we have Delaware and then for angles two DDGs LHA seven and NSC-8. So it's going to be normal course of when we evaluate over risk registers when those ships delivers and if we have an opportunity we'll book some additional margin.

Okay Chris you also I mean cash flow question has been announced many, many times. But obviously when we look out to in the past you've talked about her Avondale recovery being sort of a nonrecurring plus in 2018 and then maybe it bleeds into 2019. Could you refresh our understanding of whether that's behind us now and what it was in terms of actual dollar value last year 2018?

Sure. Avondale is behind is now. We've recovered that. I think that was $15 million that went into AR from an inventory related to Avondale. But we did get you the information. So that is absolutely behind us we saw in the facility the restructuring is fully and that's covered.

Okay. So just putting it all together ex working capital dynamic in Q4 just wanted to be clear because that I think there's some confusion. It's looks like the cash flow the things you've identified is about $200 million may a little bit $220 million year-to-year plus between the sling and the mismatching cash pension versus contribution the CAS recovery versus contribution. The increase in tax rate and the slight increase in CapEx year-to-year in 2019. Is that fair something in the $220 million range ex working capital changes?

Yes I'll not going to comment on where I think it's going. I've given you all the information would on the tax rate we have not that's book tax, the cash tax will that will settle out 2019 or '20 when we get agreement with the IRS. So I'm being punished by giving too information here unfortunately. So I tried to give you all the factors that influence cash flow. You saw what happens in working capital in 2018 and that potential effect that can add for 2019. And I think there's enough information for you to derive a reasonable estimate for 2019 and 2020.

Last one for me on CVN 79 give you as sort of any kind of commentary on EICs in the quarter? And whether that was a source of any variance either way.

Nothing material. We're pleased with how 79 is progressing.

Right. yes we've been as we've been program team set up a target for launching this ship earlier and moving the launch into 2019 from 2020. They've been pretty steady and persistent at achieving the things they need to achieve get done. We're encouraged by that packet and it's been holding the line for quite a while now. So that program is coming together. And I think even more importantly now with more two behind it becomes a really important key foundation for the future of the business.

Our next question comes from David Strauss from Barclays.

Following up on that in terms of the Kenny launch. So it safe to assume or I guess you guys are assuming that the launch doesn't occur in 2019 and in your margin guidance 7% and 9% margins? And how big of a swing factor is that in terms of margins in 2019 as to whether that occurs or not?

Yes we don't give specific projections of what we think that might be. We have to execute it a then evaluated. As not necessarily even without the launch we believe we can get to 9% to 10% return on sales range for next year. There's a lot of things going on in 2020.

Okay. Question on CAS recovery it seem like on the last call I don't think you were on it Chris. but seems Like they were tempering an idea that CAS will drop off. You focus a pretty big CAS drop off from 2019 and 2018. And it sounded like in the prior call you were potentially talking about another big drop off in 2020 but that number we're seeing here is that our result of the performance in 2018 or how do we think about CAS recovery levels longer term?

Yes I'll give you 2019 and '20. '21 it does come down a bit and that a little less than we thought in '20 driven by discount rates and asset returns. But you should see beyond '20 metering down a bit along with FAS and contributions.

Our next question comes from Joseph DeNardi of Stifel.

Just a quick one for Chris. Does the you have for the block five for CVN effective program accounting for 79 in anyway?

No.

Okay. And then Mike you've talked about how healthy shipyard the 9% or 10% margin on average I think maybe I'm coming up with the on average part of that. But you're obviously little bit below that now. I'm wondering if you have kind of line of sight into when margins could be better than that just based on a lot of it being the block 5 as this CVN can go from kind of a dilutive margin to non accretive margin four or five years whether you actually have line of sight into a few-year period remarks can actually be better than average?

Yes. I would, interesting question. Frankly my view is that if we get too far above the 10% range what that will indicate is that we're not backfilling the work. And so while it would feel really good because you got a really good number. It's not exactly the healthiest place for you to be. And so our intent our focus will be getting the risk registered retire. So we can optimize the return on these programs. If we see that we have a different outlook at that point we will. But more importantly we're going to be working hard to try to continue to backfill the work so we keep that were added late in the healthy range.

And it's a time I'm showing no further questions. I would like to turn it over to Mike Petters, President and CEO for any closing comments.

Well we thank you all for your interest in the business. We continue to focus on execution and the work that's happening across the full range of our business. We appreciate your interest and your time today and we look forward to seeing you in the future. Thank you.

Ladies and gentlemen thank you for participating in today's conference. This test as of the program and you may now disconnect. Everyone have a great day.