Good day, ladies and gentlemen, and welcome to the Q2 2019 Huntington Ingalls Industries Inc. Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.I would now like to introduce your host for today’s conference Mr. Dwayne Blake, Vice President of Investor Relations. Sir, you may begin.

Thanks, Jimmy. Good morning and welcome to the Huntington Ingalls Industries' second quarter 2019 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 facts, are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities law. Actual results may differ. Please refer to our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results.Also in the remarks today, Mike and Chris will refer to certain non-GAAP measures. Reconciliations of these metrics to the comparable GAAP measures are included in the appendix of our earnings presentation that is posted on our website. We plan to address the posted presentation slides during the call to supplement our comments. Please access our website at huntingtoningalls.com and click on the Investor Relations link to view the presentation as well as our earnings release.With that, I’ll turn the call over to our President and CEO, Mike Petters. Mike?

Thanks, Dwayne. Good morning, everyone. Thanks for joining us on today’s call. So let me share some highlights from the quarter starting on Slide three of the presentation. Sales of $2.2 billion for the quarter were 8% higher than 2018 and diluted EPS was $3.7. New contract awards during the quarter were approximately $1 billion resulting in backlog of approximately $39 billion at the end of the quarter, of which $19 billion is funded. Regarding activities in Washington both the House and Senate recently passed their respective versions of the fiscal year 2020 National Defense Authorization bill and they are now posture to begin conference. We are very encouraged by the strong support for Navy shipbuilding in both measures, which enables to continue procurement of destroyers, submarines, aircraft carriers and amphibious warships. Both bills also authorized and accelerate the purchase of LPD 31 in 2020 to best leverage the high production lines and supply chains for the LPD Flight II ships.Regarding the appropriations process, we’re very pleased that a bipartisan budget agreement for fiscal years 2020 and 2021, which raised the budget cash for defense and non-defense discretionary spending passed the House last week and we await final approval of the legislation and look forward to the Senate’s markup of respective appropriations bills after the August recess, followed as quickly as possible by conference on defense and other appropriations measures, so as to minimize the need for continuing resolution.We also encouraged that the administration analysis intention to proceed with refueling and complex overhaul of CVN 75, USS Harry S. Truman. And we look forward to having that ship arrive at our Newport News shipyard in the next decade.So now, I will provide a few points of interest on our business segments. At Ingalls, the team delivered NSC 8 Midgett in…

Thanks, Mike and good morning. As I review our second quarter financial results, you may follow along with the slide presentation we posted this morning on our website. Beginning with our consolidated results on Slide four of the presentation. Our second quarter revenues of $2.2 billion increased 8.3% compared to the same period last year, primarily due to growth in our Technical Solutions division due to the acquisitions of G2 and Fulcrum and higher volumes in aircraft carriers and navy nuclear support services at Newport News.Operating income in the quarter of $175 million decreased $82 million or 31.9% from second quarter 2018 and operating margin of 8% decreased 472 basis points. These decreases were primarily driven by an unfavorable change in the operating FAS/CAS adjustment, compared to the prior year. Performance of Newport News on the VCS program and the recognition of a forward loss on a contracted at Technical Solutions.Turning to Slide five of the presentation. Cash used in operations was $44 million in the quarter and net capital expenditures were $91 million or 4.2% of revenues, compared to cash provided by operations of $239 million and $85 million of net capital expenditures in the second quarter of 2018. During the quarter, we contributed $14 million to our pension and post-retirement benefit plans, of which $4 million were discretionary contributions to our qualified plans. We also repurchased approximately 246,000 shares at a cost of $52 million and paid dividends of $0.86 per share or $36 million, bringing our quarter end cash balance to $29 million.At quarter end, we had drawn $414 million on our revolving credit facility. The lower cash generation in the quarter was simply a function of timing with some received delayed into early third quarter. As we look forward for the full year, we expect free…

Thanks, Chris. As a reminder to everyone on the call, please limit yourselves to one initial question and one follow-up, so we can get as many people through the queue as possible. Jimmy, I’ll turn it over to you to manage the Q&A.

Thank you. [Operator Instructions] Our first question comes from Myles Walton with UBS. Your line is now open.

Hi, good morning. Mike, I was going to lead off with – now that the budget deal looks like it’s going to take place and clusteration is going to be race from the vernacular. Can we take a – are you ready to take a more constructive view on the growth trajectory of the shipbuilding business at this point?And I know, Chris you said in the remarks, you actually gave the sales guidance for the year, which again is obviously above that 3%, you guys have been talking about. So Mike, where are you in your heads at from a growth perspective, given now that the budget outlook seems deforming more positively?

Well, I guess, number one, we’re very, very happy that this deal has come together. We’re hopeful that Senate will take it up and it will become the framework for an appropriations process and we can minimize the impact of any C.R. As far as the shipbuilding Myles, I mean the growth is really based on the way the work flows through the business. We’re sitting here today with a $39 billion backlog. We have a Block V out there. There is a frigate competition going on. The way that all of that volume of work is going to flow through the business is still – it’s going to give us a 3% CAGAR through the next three to five years.Wherever the budget process goes that’s where that’s going to end up, I think so there may be a year or quarter, where it’s a little bit higher or lower than that, but I think that it’s – the main thing about it is that we’re locking the contracts in, and so if there is a right turn in the budget process and after 2021 then we’ve already got our work under contract. So that’s for us is the way, we’re thinking about the business and I’m not really going to change the growth rate based on the budget deal.

So just to clarify the last couple of years of 11% and now 5% obviously, above that 3% growth rate, I mean you’re expecting a pretty sharp deceleration implied?

Well, yeah, obviously with the growth over the first, this is Chris, over the first half of the year and what we look at the second half getting to a 5% growth for the year, there could be a deceleration going forward. I think that 3% is a pretty good baseline to use. Going forward, that being said, as Mike indicated with the budget deal and with the backlog in Block V hopefully get negotiated in the second half of the year. We will be going to our planning process, and if we think it’s north of that, then we could update that at the end of the year, but I think the 5% this year and then using 3% beyond that’s probably a pretty good baseline to set at this point.

All right. Got it. I’ll leave it there. Thanks.

Sure.

Thank you. And our next question comes from Carter Copeland with Melius Research. Your line is now open.

Hey. Good morning, guys.

Good morning.

Good morning, Carter.

Mike. I wondered if I could just ask a kind of overarching question about execution. Just given the importance that execution is going to have on the next couple of years, margin targets or expectations that you laid out. When you just look at the some of the lower performance you called out on VCS or some of the stuff that’s in the public domain on delays there and then the performance?And in TS, in the quarter, I just wonder if you take a step back and look at where you guys have come in terms of performance, if this is kind of a couple of one-offs before you hit your groove again or should we be – is there something systematic in some of the challenges you’ve had albeit that small – we should be mindful of? Thanks.

Carter, that’s a great question. And actually something that we’re spending some time on here. The activity of the past couple of, first of all, let’s step back historically, in my career in the shipbuilding business, we’re executing today at a level that is as high or higher than I’ve seen in my career across the business. Having said that, you’re exactly right, we have had a couple of hiccups along the way that really have been concerning to us. And as a result, we’re at a place today where we now have been able to go and because of the execution, we’ve been able to go and capture the largest backlog, we’ve ever had. The task in front of us now is to go and execute that better than we ever have done before.To that end, I’ve asked our business leaders to take another turn on execution and risk management in their business to make to ensure us and by that extension you, that we’re going to execute that backlog as well as it can be executed. And so I actually think that this is one of the greatest value opportunities for us because we have this backlog and we have an opportunity now that we have the visibility in the horizon in front of us. We actually now have the opportunity to go execute this in even more robust way than maybe we’ve seen in the past.So the first piece of business is eliminating these little refinements and hiccups that we’ve had along the way. And so that’s why the issue that we had this quarter in San Diego that’s just another indication of what you’re talking about and where we need to tighten up our performance. But I’m confident that the team will turn to that and set some records going forward.

Is there – just as a quick follow-up to that, is there any commonality in the hiccup or they each idiosyncratic?

Yes, I think each one stands on its own. I think the challenge that we’ve given ourselves is that usually these things are not new. The root cause of any particular hiccup is something that we’ve seen in the business before. So one of the things we have to do is take the places where we’re executing excellently and make sure that’s the standard for the whole business and that’s where a lot of our energy is going to be.

Okay. Thanks for the color, Mike.

You bet.

Thank you. And our next question comes from Doug Harned with Bernstein. Your line is now open.

Good morning.

Good morning.

Mike, when you talked about the budget, one the things that’s also happened in parallel, as we’ve got a new Marine. And he’s talked about a very different, I would say in his planning guidance sort of a very different structure for the emphasis force. Potentially moving away from LHAs, LPDs, LSDs and then so forth. Could you talk about your thoughts around that and where you see the evolution of the Navy going and shifts like that, I mean these things obviously take quite a while, but is there something you need to think about now, or is this something that’s really far off in the future?

Well, thanks. I guess a question we ask ourselves everyday, the world is changing, the Navy is changing in response to that and we are changing in response to the Navy. I just would point to the effort that we are putting into the unmanned space right now in support of really – primarily in support UUVs, but overall we think that the unmanned space is going to fundamentally change the Navy going forward.The intent to try to make ships more lethal from the Navy standpoint is something that we’re paying close attention to. We’re engaged with the Navy now to think about what’s the next version of the Ford-class look like, this two ship contract that we have is a great contract, but if you don’t spend time thinking about what that ship should evolve to today when it comes time to go to a new contract, you’ll be late. It will be too late to think about it then.And the same sort of thing happens with and the Marines as they rethink their way of how they plan to engage on the nation’s behalf. We plan to be right there with them and support of what they need to do. You’re right, these are not light switch changes. It’s not a course change where you’re going to go hard left or hard right turn, these things have to kind of, they have to evolve from an operational concept perspective, and then from a technology and platform perspective, and then all the way down to a training and recruiting perspective. But I think the commandant has kind of laid it out there and said, look that over the horizon the way we’ve always done business may not be the way that we need to do business in the future. And I think that’s true for everybody and we are very actively engaged in trying to support that.

Just as a follow-on in the in the priorities that the Navy has looked at, I mean readiness is, obviously been a big ones. So on the shorter end here, I mean you’ve benefited from a lot of the work you’ve been doing on the Los Angeles-class ships, which has helped revenue. When you look forward, I mean this is a short cycle part of the business. So it is an area that could give you some upside from that, I would think from that 3%, depending how it plays out. And how do you see the outlook for fleet support here and repair work going forward, given this focus on readiness? Is this an episodic event with the Los Angeles-class work or is this something we could – you expect to see continue to build?

Well, you’re right that it’s a short cycle business and the visibility that we have in that businesses, significantly limited compared to what we have in the construction business. There is no doubt that the Navy today is rethinking its overall approach to readiness and how do they get more readiness for the dollar.They’re looking at ways to be more efficient, I mean, I would point back to San Diego again, not to keep bringing that up but, that was a contract change type on the government’s part to move to a fixed price contract and our team was a little slow to respond to that. And so as they’re pursuing efficiency and the readiness space, we have to be agile enough to respond to it.The history of that space though, Doug, as you probably know is that there is a lot of variability in it and most of it gets pushed out to the private sector. So the government yards and the government activities there are a primary source of providing that readiness and when there is overflow or where there’s dynamics that go beyond that capacity it moves to the private sector, which means that the private sector fluctuates a lot more than readiness budgets in general. I know that that’s something that the Navy is trying to address and fix and they believe that addressing that issue, creating some more predictability in the private sector would then create opportunities for more efficiency. We support that, we are not through that process, I mean I think that we’re in the middle of that to try to see how that plays out.As a result, we’ve got some good submarine repair work that we’ve been doing at Newport News, but we don’t have great visibility into what’s out there and how that’s going to play out. And to the extent if that gets sorted out, it will become more predictable and we can make it a more predictable part of our business space.

Very good. Thank you.

Thank you. And our next question comes from Robert Spingarn with Credit Suisse. Your line is now open.

Good morning.

Good morning.

Mike, I wanted to ask you about the timing on some of these deliveries. So you talked about DDG 119. I think previously or you showed that you’ve move that into 2020, but also LHA 7, the Tripoli, that’s now late in the year or early next year. I wanted to ask you, what’s going on with that ship. Why is it being pushed to the right? And then, to what extent they pushed out ships into 2020 get you to your margin expectation of 9% to 10%, meaning is that a sustainable margin from 2020 on, or does it benefit from a high cluster of risk retirements from deliveries?

Well. So first question around LHA 7, we had a very successful Builders trials on LHA 7 and the ship is in is in really good shape. Where we are is, we’re working through a couple of technical design issues that we’re working and discussing with the Navy about, are these life of the ship issues that need to be resolved before we deliver the ship, or are there issues is that we resolved, we deliver the ship and because the systems are working today is just a question of whether they will work for the life of the ship.So we’re in that sort of discussion with the Navy. They’re fairly complicated and – but we think that will come to a resolution around the end of the year and predicting whether it’s – the end of this year or the beginning of next year is, we don’t want to put any sort of extra pressure on that. We want to resolve that the right way.Relative to your second question about things moving into 2019, I mean we’ve got actually pretty significant work in 2019 before we go to 2020. The delivery of Delaware, the launch of 73. The launch of 79 in the fourth quarter is on track and that’s a big event for us. And in fact, we’re beginning the process of planning the christening ceremony before the end of the year. So that, we feel very positive about that. As we move into 2020, however, things shake out at the end of the year with LHA 7. What happens in 2020, as we get back, we start to get back to that normal blend that we’ve always talked about that’s pretty healthy.We will now have a really large backlog of new work, but we will have work now moved into the mature level where we believe we can sustain 9% to 10% range that we think is healthy for the business. We do have four deliveries at Ingalls next year, including the Fitzgerald. But I think that’s going to become a persistent drive across the business going forward.So I don’t think that we are moving things into 2020 to make 2020 feel better. The things that move into 2020 or not going to make 2020 feel better at the expense of 2021. I think we’re in a pretty good place to have a pretty sustained run in the healthy range of this business given that the work is under contract.

Okay. Well, that’s very helpful and I wasn’t really suggesting that you’re doing it deliberately, but just maybe the timing got you there. And then I also wanted to thank you all for the extra color you provided here particularly these milestones. Thank you.

Thanks. And we’re not obviously ships go when they need to go and if we can get seven done this year we will, but we will – it’s going to be done the right way. Whatever we work with the Navy, it will be ready to go and it will be done the right way and everybody can be confident that’s going to happen, but that doesn’t impact the range that we’ve been talking about. We’re confident of the 9% to 10% range. We’re confident of that given that we have the backlog and we have the teams in place to go execute it.

Okay. Thanks again.

Thank you. And our next question comes from John Raviv from Citi. Your line is now open.

Thank you and good morning.

Good morning.

On cash flow, kind of a just double partner here. And so first of all, what drives the second half pick up after pretty weak one half. And then also, where is the shortfall of this year, it seems like the 2019 message or target, if you will continue to ratchet down? You said only modest free cash flow growth that’s a limited operating growth that you assume capex is up this year. So where is that weakness confidence coming from and do we pick it up next year?

Yes. Thanks for that.

John, it’s really simply timing. Unfortunately, we had some invoices slip into Q3. Probably the largest example is, we had a $84 million delivery invoice from NSC 8 that moved from Q2 to Q3. So, it’s simply timing, obviously the back half of the year, it will be much stronger. We had some contract modes that are waiting on specifically at Newport News. So it’s unfortunate the first half of the year started as it did, but it’s simply timing. I fully expect us to recover over the back half of the year.

But can you just – Chris, can you speak more to about the 2019 target. I mean, having basically flat free cash flow year-over-year, that’s what I assume with pension tailwind this year, is a bit down. I mean, just given so bigger picture question is really – given huge backlog the budget deal in place, I think there’s a lot of moving pieces. But can you give a sense of the organic capital generation opportunity in this business going forward with and without pension, with and without working capital flow, just a level of setups, just because of 2019 numbers continue to melt down over the last six month to 18 month?

I think it’s a pretty good question, John. We did have this excellent Q4 2018, where working capital was at really the lowest level, I think we’ve ever been at. So that’s impacting it a bit. I don’t think you get back to a normalized free cash flow until 2021, when our capital program is complete and pension normalizes and we get back to mid 100% free cash flow conversion. So I think 2021 is really kind of the best place to look when we get to a more normalized level of cash flow.

All right. Thanks.

I do, I think it’s fair to say that the excellent cash we had in Q4 created a bit of a headwind for 2019 and we’ve been talking about that through the year.

Thanks, Mike. I’ll hop back in the queue.

Thank you. And our next question comes from Gautam Khanna with Cowen and Company. Your line is now open.

Thanks, guys. Good morning.

Good morning.

Good morning.

Two questions. First, I was wondering on the elision that happened, did that have any knock on productivity drag in the quarter or will it, as we move forward as you move teams to assess the damage? Just wondering what the knock on effect was in Q2, if it was, and if not? Mike, there would one on the comp?

Yes. So we have insurance to protect us against that there is an immaterial deductible that we have to deal with related to insurance, but we have insurance to protect that Gautam.

Okay. So there is no impact in terms of a cume catch up or anything of that insurance?

Other than the deductible now.

Okay. And then could you actually give us what the cume -- the profit adjustments were? How they skewed by segment?

Sure. So the growth favorable were $63 million, 40% of those were Newport News and 60% Ingalls. The unfavorable was $44 million, 50% Newport News, 30% TS and 20% Ingalls.

Okay. And just related to an earlier question about, once you get behind on the VCS program or any program. Just curious about the curve to catch up. I mean the word obviously is once we fall behind or stay behind. Just curious about your confidence on recovering and if you could just give us any color as to what gives you confident?

Yes. I mean, especially when you’re a in a serial production line like we are with the Virginia-class. If you start to have issues with schedule it does start to affect the synchronization of the line. We’ve been working pretty hard to reset that this year, given kind of where we started last year fourth quarter and we made great progress on that. This is really a Block IV issue that we’re working through to get units out of our steel fab facility and into the production.We’ve created – we’ve taken advantage of space. We’ve created some new construction sites for our teams to go work on. We’ve changed the leadership team to be more engaged in the process of taking advantage of the tools that we have. The digital tools that we have to drive productivity. And we’ve seen that, again, not a light switch kind of thing where you say you wake up one day and say everything is fixed, but we are making good progress to getting back towards the schedule that we need to have. And we’re and we’re pretty optimistic about that.Beyond that, it informs the way that we set the schedule for Block V. And so, as we are coming to get to that contract under our belt that will be factored into the Block V. So all in all, I’m optimistic about the progress that we’ve made. We still got work to do, but the team is – we got the right team in place and they’re doing the right things and we’re making the right kind of progress.

Thank you.

Thank you. And our next question comes from Ronald Epstein with Bank of America. Your line is now open.

Yes. Good morning.

Good morning.

Maybe just one big picture question. When you’re thinking about capital deployment now, how are you thinking about stuff like M&A, is there any adjacencies out there, bolt-ons that sort of thing? Are you just focused on returning capital to shareholders?

Well, we’ve – our strategy Ron for the last three or four or five years, we’ve been talking about is that we want to invest in our core business with capital projects and we’re coming towards the end of that. We’re going to return substantially all of our free cash flow to our shareholders, but we’re going to invest in ways to grow our services business. And you’ve seen us do that with some acquisitions. If you look at our Technical Solutions division today and you look at the businesses that we’re in, I really like those businesses. I think there is opportunities in the unmanned space for further expansion.I think that the DOE business in the last five years we’ve become a department of energy prime contractor and there is a significant amount of work in that space. And so how that plays, and where it goes? Those are two critical areas for us to be prosecuting. The opportunity to do – expand our footprint in cyber and Intel is always out there, as we think about where those customers are and what capabilities they need. And so we are opportunistic on this, and if we see the right opportunity, we’re going to engage and we have engaged and I expect that will continue.

Okay. And then maybe can you give us a quick update where we stand on Virginia-class, because in the quarter, it seem like you took a charge or something there?

Ron, let me add on the Virginia-class, the language in the script and then in the earnings release. The vast majority of the reduction from last year is related to the reduced booking rate in the Q4 charge that we took. So there was fine tuning in the EACs as we always do quarter-over-quarter, but nothing, nothing material that we can mention, most of that was just the reduction in the base level booking rate on the program.

Okay, but nothing new?

No.

Again, as I said before, the team on the Virginia-class program right now is making some really good progress to get Block IV set up for success.

Okay. Great. Thank you very much.

Thank you. And our next question comes from Seth Seifman with JP Morgan. Your line is now open.

Thanks very much. Good morning. Definitely appreciate that it’s too early in the year to be making predictions about pension for next year or anything like that, but I guess just to give us a sense of what the sensitivities are around for the P&L, FAS/CAS and on the cash flow statement. If the year ended today, I assume you had some good asset performance which helps and then interest rates, which are negative and so how does all that shake out?

Yeah. So, Seth, thanks for that question. It took a while, before I got to a pension question, but asset returns – as you would expect and as you indicated asset returns are up over 14% through the end of Q2 and discount rate down about 70 basis points. So those are opposing forces in the calculation, unfortunately you calculate FAS/CAS and cash differently. So it’s tough to get to a real answer. I think, you’re right, it’s early in the year to do that calculation and forecast into 2020 and 2021.So I think it makes sense to wait a bit. The sensitivities are in the K, in the year-end K. So you can find them there, and try to estimate it. From a cash standpoint, CAS and cash tend to move together, so that should help out a bit when you think about it. But you’re right, it is early in the year and I indicated what the asset performance was and what the discount rate performance was, so that should help you out a bit.

Great. Thanks. And maybe just to follow up on John’s question from earlier. When we think about the cash flow outlook for the business, working capital came down considerably for a number of years. We saw a very good working capital performance as a percentage of sales, where should we think about where, just – we’ve got to make an assumption and so, on a go forward basis – can working capital be 6% of sales consistently for this business, is it more of a high single-digit number? Just in terms of thinking about where cash flow can go in the out years?

Yeah. I think that 6% performance was outstanding performance and then something closer to 8% or 9% makes a lot more sense on a run rate basis on where we tend to fall out. Remember, over the last few years we did have restructuring in the working capital, so it should definitely come down from there, but at the end of last year was kind of an outlier.

Great. Thanks very much.

Thank you. And our next question comes from George Shapiro with Shapiro Research. Your line is now open.

Hi, guys. Good morning. One for you, Chris and then one for Mike. One for you is probably a simple one. The implication of the 5% revenue growth for the year is a little under 3% in the back half, is that primarily going to be at Newport News or Ingalls or how should we look at? How it splits between the two businesses?

Yeah, I think it’s primarily Newport News.

Okay. And then for you, Mike. In general, over the last number of years, you’ve had an impeccable record of executing in a business that’s notoriously been pretty risky. And now all of a sudden, we started to see some issues crop up. What do you think has changed from those years of terrific execution, so what we’re seeing now and admittedly you would forecast, but some of this occur, but I just wanted your thoughts on that?

Yeah. Thanks, George. I mean we are putting a lot of energy into this right now, because as I said before, we are – we believe and my experience is that we’re executing at a very high level, but we are fraying on the edges, and it’s time now to go and take another turn to clean that up. And so we’ve got some new people, we got some new leadership. We are getting into executing new work. It’s not lead ship kind of work, but for instance, we had a contract type change in San Diego that we didn’t react too fast enough.Across the business today, we have pockets of superior execution. The challenge that I put in front of the team is that needs to be the standard and not just the pockets that we have. And so the team has taken a turn on how do we go and do that, and as I look across the business today, I see – I already see some evidence that, that’s going to benefit us in the future. We talked a little bit about Block IV, today. I see the things happening in Block IV to rectify and get that set up that piece of that program for success. Clearly, the launch of 79 before the end of the year. If we go back a couple of years, we were talking about a launch of 79 in the spring of 2020.We’re at a place now, where we’re going to be launching that ship here at the end of 2019 and it’s going to be the heaviest ship we have ever launched, which is an indication of how well they’ve outfitted the ship, how well the pre-outfitting has gone and how well the program management team is running. So in the main, we are executing well, but we’ve got, – you’re right, we’ve got a couple of little clean up areas. So we got to go pay attention to, and we need to make this superior execution, where we have it, we need to make that our standard and that’s the task it’s in front of us and we’re ready to go get it.

But I guess what’s caused that to change because for number of years, you must have always had some potential issues, but they didn’t seem to surface themselves till now?

It’s almost on a case-by-case basis, but if I were to step back and say, what’s the kind of the macro thing is. As our programs have expanded, we’ve had new people put into places of leadership and we haven’t supportive them very well. And whereas – if you go back six, seven, eight years ago, we may have had some pretty senior leaders in places that they knew all the ins and outs of the business. And so that’s the challenge is. How do we take someone who is going to be walking into a program for the first time and make sure that they have a structure of support for success around them that will set the standard for where we’re going. And I don’t think that we will been as tight on that over the last couple of years, as we should have been, but that’s certainly something that we can put our arms around and fix in pretty short order.

Thanks very much. Very helpful.

Thank you. Our next question comes from David Strauss with Barclays. Your line is now open.

Thanks. The free cash flow guidance or help you gave us implies, obviously a lot of cash coming in the second half of the year. Chris, what do you plan to do with that? Would you delever some from having levered up in the first half of the year or should we expect most of that going towards a step up buyback?

Yeah. So we’ll stay with our commitment to return substantially all of our free cash flow through 2020 back to shareholders, I do expect that it will be out of the revolver so some deleverage make sense, but our commitment to return substantially are free cash flow to shareholders remains. We think it’s a good strategy. We’re going to keep to it.

Okay. And then Mike just going back to this ramp to 9% to 10% shipbuilding margins in 2020. Are there specific programs or milestones that are really stand out here and being able to achieve that then we can monitor or watch for?

Yeah. I think the milestones that we’ve laid out already are the ones to pay attention to obviously, getting 79 launch this year is a big deal for us. And then getting Delaware out and getting the VCS program back on track for next year is also going to be pretty important. The 119 while we’ve talked about the financial impact in the insurance of 119, the resetting of the production line in the destroyers were that we had obviously hadn’t planned for the rework we’ve had to do there.Getting that back into sequence and getting that back in the face, so the purpose of the destroyer line doesn’t get impacted by that, is the work that Ingalls is on right now that will set us up for success in 2020. So I think the milestones that you have in front of us. The things that we need to get done here between now and the end of the year set us up very well for next year.

Thanks very much.

Thank you. Our next question comes from Josh Sullivan with Seaport Global. Your line is now open.

Hi. Good morning. Question relating to the execution threat and then you touched on it, but these technology efficiency initiatives you’re working on, shipbuilding would appear to be an area that could benefit. Can you detail any early success with these initiatives or maybe how any pilot programs are progressing?

We have lots of pilot programs going on across the business, and I’m a little reluctant to put any sort of particular number there because any number you put in it you extrapolate across the volume of the business and it becomes eye watering. But we are very excited about the ability to bring digital technology, digital work instructions, visual build tools to a workforce that is younger than we’ve had in a while that is used to working with these kinds of tools, who are empowered to talk about how they think things could go better and a leadership team that is engaged and looking for ways to do things better.And we are seeing improvements in both cost and schedule in the pilots and we’re seeing that in both yards. And so we are – we’ve made significant capital investment over the last five years that we talked about that in a generational improvement. The fact of the matter is we’re seeing benefits from those capital investments today in terms of efficiencies. And that’s – all of that goes into given us the confidence that the business is going to accelerate into the normal range of where the business should be by next year. So that’s kind of – I think that’s about all I would really want to say about it. We have a fairly young workforce at Newport News today.And I remember the days 10 years ago when we had some tough contracts, but a very young workforce at Ingalls. And in three years, Ingalls workforce went from being the youngest in the industry after Katrina caused a major change in disruption at workforce. Three years later, they were still the youngest in the industry, but they were the most experienced because they deliver 10 ships. I think that sort of success is sitting in front of Newport News today in terms of – they’ve got work under contract, they’ve got a young leadership team, they’ve got a young workforce and they are engaging in very constructive and productive ways and it just creates excitement every time I walk through the yard.

Appreciate that. And then just switching gears, is there any update on the Columbia program progress. What are the major gating factors of the program. Is there anything in the supply chain or design side that remains a hurdle at this point?

Yeah. For our work – our work is on track. We’re supporting General Dynamics in that program. Our capital projects that we put in place to support that and create the efficiencies that we need to capture are on track and we’re already, we’re actually using some of those facilities for work in the Virginia-class program and we’re capturing efficiencies there. So from our standpoint, the program is essentially on track. We’re getting to the point where it’s going to be gets – where lead ships get really interesting. Can the design stay in front of the construction, I think we got a really good schedule. I think our partners at Electric Boat have got a really good schedule and really good leg up on that, but it’s time to go perform.

Got it. Thank you.

Thank you. And our next question comes from a follow up from Robert Spingarn with Credit Suisse. Your line is now open.

Yeah. Thanks for taking this follow-up. I was just wondering, are the public Navy yards able to service the Ford-class carriers. I was reading somewhere that they weren’t outfitted to be able to accommodate this class. I just wasn’t sure, if that was the case and if this might present different sustainment opportunity versus the Nimitz?

I think it’s a good question, Rob, there are clearly differences between Ford and Nimitz the power requirements, those kinds of things, but I think those are all things that can be addressed, and will be addressed by the government shipyards. And so I don’t really see a major fundamental change in the way that the Ford-class is going to be supported from the industry. It’s a little bit early on that, but we’re – I know that everybody knows what you have to do to get a shipyard ready to receive the Ford. Remember the haul is the same, and so those physical things like peers and docks, those kinds of things don’t need to change much but some of that some of the support things we’ll just have to be upgraded and that’s just a matter of doing it and they will be able to do it.

Just on this topic have you seen this opportunity anywhere else across the fleet, whether we’re talking about surface ships or submarines?

In terms of trying to expand the –

The service opportunities in other words, yeah, where maybe the Navy itself is changing the scope of what it does, which creates opportunity for you and your peers?

Well, I think I’ve said before, the Navy has taken a hard turn on, how do you do readiness in a more efficient way, and that’s being led from the secretary’s office. I mean it is really, we’ve talked about readiness in my career for a long time. This is a no kidding effort to go get it sorted out. And they’ve had some success in the aviation community that they’re looking to translate into the ship repair business. My perspective on it and I think that they’re working hard to try to figure this out, is that the history is, that a lot of variability in that space has been pushed to the private sector. And they’re looking to try to create more predictability there.Predictability from a standpoint of scope, predictability from a standpoint of price performance and contract type and considering bundling contracts and things like that, all of those are good ideas and all of those things need to play out. And I think we’re on the front end of that to see whether we can actually create more efficiency there. We certainly want to participate in that and so far, we’ve kind of got our toe in the water with the Virginia-class support. And we’ll see what other opportunities it presents. So little early for us to try to predict how that’s all going to shake out.

Thanks, Mike.

Thank you. And our next question comes from Noah Poponak with Goldman Sachs. Your line is now open.

Hey. Good morning, everyone. I wondered if a month into the third quarter, you had a sense for how the net cumulative catch-ups at Ingalls were shaping up for 3Q, even if just kind of broad strokes directionally versus more like 1Q or more like 2Q? And then my second question is on the working capital on the cash flow statement topic. Could you just tell us what you’re assuming either back half or full year for change in working capital in your statement of where you expect the cash flows to shake out for the year?

Yeah. So, thanks. No, I absolutely think the risk retirement events are more tailored towards Q4. So I won’t give Ingalls or Newport News separately. It’s absolutely position to sequentially get better, Q2, Q3 and Q4, such that Q4 will be better. For the working capital standpoint, we don’t have a specific target. I guess you could probably do the math, relative to the just north of where we finished last year, but that’s where we are thinking will end up at this point.

All right. Thank you.

Okay.

Thank you. And I’m showing no further questions in the queue at this time, I’d like to turn the call back to Mike Petters, CEO for any closing remarks.

Well, I just want to thank everybody for joining us on the call today. As you can see across the business things are, we’re executing pretty well and we have the opportunity to execute somewhat even better and milestones for the rest of the year and shipbuilding set us up very well for where the shipbuilding business needs to be next year, and our Technical Solutions division is performing, all of those Technical Solutions division is performing well across the board and those are businesses that we really value and like to be in. So thanks for being with us. And we look forward to see your around the street.

Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude your program. And you may all disconnect. Everyone, have a great day.