Ladies and gentlemen, thank you for standing by and welcome to the Fourth Quarter 2023 HII Earnings Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. [Operator Instructions] I would now like to turn the call over to Christie Thomas, Vice President of Investor Relations. Ms. Thomas, you may begin.

Thank you, operator, and good morning. I'd like to welcome everyone to the HII fourth quarter 2023 earnings conference call. Joining me today on the call are our President and CEO, Chris Kastner; and Executive Vice President and CFO, Tom Stiehle. As a reminder, statements made today that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance and involve known and unknown risks uncertainties, and other factors that may cause our actual results to be materially different from future results expressed or implied by these forward-looking statements. Please see our SEC filings for important factors that could cause our actual results to differ materially from expected results. Also in their remarks today, Chris and Tom will refer to certain non-GAAP measures. For reconciliation of these metrics to the comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations website at ir.hii.com. With that, I would like to turn the call over to President and CEO, Chris Kastner. Chris?

Thanks, Christie, good morning, everyone, and thank you for joining us on our fourth quarter 2023 earnings call. 2023 was a strong year for HII. We continue to invest both in our shipyards and in [IRAD] to both expand capacity and develop new products and solutions for our customers. Our growth rate for the year of more than 7% and our free cash flow generation of almost $700 million demonstrate that we're entering a period of accelerated growth and increased free cash flow generation. In addition to record sales growth with 2023 revenues of $11.5 billion, fourth quarter revenue was especially strong across all three divisions, with 13% year-over-year growth and a record $3.2 billion of revenue. In 2023, net earnings were $681 million, 18% higher than the prior year and strong free cash flow of $692 million was 40% higher than 2022. We also had $12.5 billion of contract awards in 2023, resulting in backlog of $48 billion at year-end. At Ingalls, we delivered DDG 125 Jack H. Lucas, the first Flight III ship and NSC 10 Calhoun. Our DDG 51 team was also awarded the contracts for seven destroyers in the FY '23 multiyear procurement competition. In our amphibious ship programs, we were awarded a $1.3 billion detailed design and construction contract for LPD 32 and launched LHA 8 Bougainville, the third big deck amphibious warship in the America class. Ingalls expects to complete sea trials and deliver LPD 29, Richard M. McCool, Jr. in the first half of 2024. At Newport News, we redelivered CVN 73 USS George Washington after completing her refueling and complex overhaul and continue to progress on the test program for CVN 79 John F. Kennedy. In the Virginia-class program last year, we were awarded the long lead time material for two additional…

Thanks, Chris, and good morning. Today, I'll review our fourth quarter and full year results and also provide our outlook for 2024. For more detail on the segment results, please refer to the earnings release issued this morning and posted to our website. Beginning with our consolidated fourth quarter results on Slide 4. Our Q4 revenues of $3.2 billion increased approximately 13% compared to the same period last year. This growth was driven primarily by higher year-over-year revenue at all three segments, leading to record quarterly revenue for HII. Operating income for the quarter of $312 million increased by $207 million or 197% from the fourth quarter of 2022, and operating margin of 9.8% compared to margin of 3.7% in the prior year period, up 609 basis points. The increase in operating margin was primarily due to higher segment operating income. Net earnings in the quarter were $274 million compared to $123 million in the fourth quarter of last year, up 123%. Diluted earnings per share in the quarter was $6.90 compared to $3.07 in the fourth quarter of the previous year. Moving to our consolidated results for the full year. Revenues were a record $11.5 billion for the year, a significant increase of 7.3% from 2022. The improvement was driven by strong year-over-year growth at all three segments. Operating income for the year was $781 million and operating margin was 6.8%. This compares to operating income of $565 million and operating margin of 5.3% in 2022. The operating income growth was primarily driven by year-over-year improvement in segment operating income at all three segments. Net earnings for the year were $681 million, compared to $579 million in 2022, up 17.6% and diluted earnings per share was $17.07 compared to $14.44 in 2022, up 18.2%. For segment results on Slide…

Thanks Tom. [Operator Instructions] Operator, I will turn it over to you to manage the Q&A.

[Operator Instructions] Our first question today is from Myles Walton from Wolf Research. Myles, please go ahead. Your line is open.

Great. Thanks. Good morning. Maybe to start with the CapEx change, obviously, pretty material, $300 million annualized step up in run rate. A couple questions on it. One, why isn't it dropping through a higher revenue run rate in the near term, like '24? And second, why is it only a couple three-year investment? What specifically is it going towards? Thanks.

Hi, good morning, Miles. Tom here, I appreciate the question. Yes, so we mentioned here that traditionally we look at maintaining the yards to be about - 1% to 1.5% with about another point-to-point to have specific projects. As we've talked about in the recent past, we have a lot of activity that's going on in the yards, acquisitions specifically at Newport News, and driving down into the submarine program there. So, we're putting more boats on contract in on VCS in the Columbia program. And as we're working ourselves through those negotiations and schedules, we see - it necessitates additional capacity and throughput. So in conversations with our Navy partner, we've partnered on what that means. There'll be - a couple more buildings, more capacity in the yard, and its requiring investments. Just over three years, we have defined projects that, we've worked through and we've gotten approved through the Board and with the Navy. And the investment there from the Navy will pay for the majority of that. So as much as it rolls through, I'm capitalizing the projects themselves. I'll get the investments on the contracts, to help offset that. So it's a three-year run, it peaks out. The first year at 5.3%. And as I said, we've kind of given you, what the free cash flow projection is from '24 to '28 to kind of evidence that, we're still good to our thesis of the cash flow inflection to $700 million plus as we go forward. There's a shake to it, obviously, of that $3.6 billion I gave you. And obviously, it grows over time as the revenue and the incremental margin expansion comes online. And then as the CapEx falls off on years four and five. But we think it's a good business arrangement. It facilitates the growth that we're talking about. You heard in the comments, both from Chris and myself, we're raising shipbuilding from 3% to 4%. And this capital investment by both the Navy and us facilitates that growth long-term.

Miles, I'd also add that I obviously want to fact '24. These projects take a while to get implemented. But it does support the mid to long-term growth.

Okay. And Chris, just to follow-up on the longer-term projection and the capital allocation prioritization. You'll probably get into this Investor Day. But the last several years have been a lot of cash going to paydown debt. It doesn't sound like we need to do that. So are we at a point, where we can more commit to a significant majority, or not all of the free cash flow to return to shareholders over the timeframe looking forward?

Yes. I'll start. So, we fundamentally believe the greatest source of value that we can achieve as a corporation, is to focus on our operational priorities right now and delivering our ships. So, you see that in the capital investments. And then we're fairly clear on our capital allocation priorities relative to investing in our investing in our shipyards, being investment grade, progressively improving our dividends, and then providing any remainder back to shareholders. Now that being said, we're going to have optionality around M&A. We have the responsibility, to evaluate M&A projects from time-to-time. I don't see any significant holes in the portfolio right now. And operationally, I think our greatest focus needs to be on delivering our ships to our customer, because they need them. So while we're not going to commit, to providing everything, back to shareholders on this call. We need to, we're forced to have a strong balance sheet and we can do everything. So that's how we're thinking about capital allocation moving forward.

Yes, if I could piggyback on top of that. And Miles, I think you're looking at it the right way. If you look back on where we've been right in '22, we gave back to the shareholders $249 million in dividends and repos. This year, it's up to $275 million, which is 40% of free cash flow. We have to keep in mind for 2023, it was $480 million of debt paydown. So, we actually between the debt paydown and what we gave back to shareholders. It was better than 100% of the free cash flow of $692 million for 2023. And now for this year, as we're saying $500 million of dividends and repos is still another $229 million. I just paid $145 million in January. There's $84 million of on payment in May. So $229 million of debt and that concludes it, kind of going forward plus the $500 million I'm committing to again is over 100% of free cash flow going back to the shareholders this year. If you take the midpoint of the guide of $650 million, right? So it's ramping. We're giving you the commitment through 2024. We haven't told you, we're committing to pass that, but we would envision as we work off each year and the cash is there, that we'll update you accordingly.

All right, thank you.

Thank you. Our next question today is from Gautam Khanna from TD Cowen. Gautam, please go ahead. Your line is open.

Yes, hi, I joined a little late. So I apologize if you covered this, but could you update us on the timing of when the three milestones that's looked at Q4, will get caught up? And if there's any downstream impacts from those delays, but maybe crowding out labor, or anything else? And then if you could just talk about the milestones in 2024, are there any that are kind of late in the year Q4, weighted that could pose a similar note? Thank you.

Sure. Thanks, Gautam. The two VCS milestones, we're essentially complete with both of the operational commitments for those milestones. There were some late breaking changes on both of those boats that, needed to be implemented before we could claim victory, and finally achieve them, but we're essentially complete. The staffing has been significantly reduced, on each of the boats and it's been reallocated, to the other boats. And no material financial issue related to those at all. On LPD 29, we ran into an issue going through the test program that we need to stop and do a root cause corrective action on. We've done that. The ship went to sea this week, performed well, we think we'll deliver that here late Q1, early Q2. Now from '24 milestone impact, we're all aligned within the corporation relative to those milestones. It does put some pressure on the VCS milestones at the end of the year on 798 and 800, but we have detailed plans to achieve those and we're committed to getting those done.

Thank you. And if I could follow-up, I just wanted to make sure I understood the accounting on those three that moved out of Q4. Were there positive team catch-ups related to that in Q4 and if not, do you anticipate that in Q1 and Q2 as you recover?

No, there were no material financial issues related to those. Obviously on LPD 29, there is a bit of an opportunity lost there that, will recover when it ultimately gets delivered, but it's all included in our guidance.

Got you. Thank you so much. Appreciate it.

Sure.

Thank you. Our next question is from Seth Seifman from JPMorgan. Seth, please go ahead. Your line is open.

Okay. Thanks very much. Good morning.

Good morning, Seth.

Good morning. I guess in other your earnings calls this quarter, we've heard about various supply chain challenges on Virginia. I guess, can you speak to kind of how you feel your estimates are looking on Virginia and the amount of risk in those estimates? And then to the extent that, is there much in there that's contemplated for inflation reimbursement, because it seems that contractor expectations for inflation reimbursement have been coming down. Has that been the case for HII, or were they not there in the first place? Or is the sub-industrial base different, because it's such a priority?

Yes, so we don't have inflation protection on the VCS program at this time. The supply chain is a challenge across all of our programs, actually. We do have EPA protection of the most part at Ingalls, and we're managing supply chain risk across the portfolio. The Navy is fully aware of this. We're very transparent about it. That's why the SIB funding is so important. That's why getting three-year AP is so important. So, we could just eliminate that risk. But we evaluate our EACs every quarter and if there's risk we deal with it in that quarter. But it's not going away anytime soon. I think everyone understands that. That's why we have SIB funding being appropriated and authorized. And as soon as we can get that down into the supply chain, the better.

Okay. Okay. Thanks. And maybe just a quick follow-up on the capital deployment. If I look at the $3.6 billion over the period, think about the dividends and the 2024 debt paydown. That maybe leaves like $2.25 billion. I know the repo authorization, I think the slide says there's about $1.5 billion left. I mean, would you think that there's before, that it's possible to exceed that $1.5 billion by 2028?

Yes. And what that means is regarding like - we extended to term and time, but we can always go back and change that again. So we wouldn't read too much into the math of it. But as we said, there's $1.5 billion available, $1.5 billion by 2028. And as we move forward, we'll adjust that accordingly. So that was just more of a housekeeping issue that we cleaned up.

Okay. Thank you very much.

Sure.

Thank you. Our next question is from Scott Deuschle from Deutsche Bank. Scott, please go ahead. Your line is open.

Hi, good morning.

Hi.

Good morning.

Hi Chris, just to clarify, did the LPD 29 delivery delays have much extra cost associated with them? Or is it more just the function of some extra time and a deferral of the AC, rather than a diminishment of the AC opportunity?

Well, there's time and shipbuilding is cost, right? So, we've probably lost a little opportunity there. It's not material in nature. And we'll do that. We'll take a step up if appropriate when we make final delivery. But it obviously would have been worth more if we did it at the end of the year.

Okay. Got it. And then, Tom, just from a reporting perspective, why are Venezuela insurance recoveries included in operating loans rather than below the line? A lot of people are thinking you started reporting this quarter? Thanks.

Yes, the way that accounting works on that, it's got an angle, it's in the operating income and other income. Because we've had that contract. We incurred cost on it. So it's a recovery from cost that, we've had both in the past and we had written off. So, it comes back still as an operating income. It doesn't go into the revenue. So, there's not a rev-rank to it. But we do account for the margin and income statement. And obviously, we picked up the cash on both of those, on both the frigate and the reps and warranty in Q4

Okay. And then, Tom, last question. Is there any kind of ramp to the - or slope to the free cash flow target, the cumulative target over the next five years? Or is it fairly leveled at '24? Thank you.

No, there is a ramp to it and the shape to it. I knew when we gave that that people would want to see that, because we've been giving you the shape of the current one from 2020 to '24. But really only the back end of it. When we first announced that, we didn't provide it either. And the only reason why we're not trying to be kind of too nebulous - five years, a lot of moving parts, how it can move around. I can tell you it's not a reach number. We wouldn't put it out there. We don't feel that we can hit it. But I'm most comfortable right now. I try and manage by year. And we gave that number to show with the evidence ramp and the revenue that we talked about for 4% plus to HII across the enterprise, we see that mission technology is definitely accretive and pulling cash for us right now. Your modeling should easily be able to get to that number. But I really want to get through 2024 and then we can give you a guide on what like 2025 kind of, looks like in each year thereafter. Okay.

Thank you. That's resolved.

Thank you.

Thank you. Our next question is from David Strauss from Barclays. David, please go ahead. Your line is open.

Great. Thanks. Good morning.

Good morning, David.

Chris or Tom, I wanted to ask about the shipbuilding margin target. So, I think, you have been targeting 7% to 8% for '23 and you talked about '24 being above that. And then you had milestones slip out that, I would assume with those potential EAC adjustments that would help. So, I guess what changed in terms of the progression on the shipbuilding margin side as it relates to '24, versus what you talked about, or were thinking about before?

Yes. So, we don't want to get ahead of ourselves, right? Yes. We did talk about 7.7% to 8.0%. There's a couple of milestones that we missed at the end of the year, which causes a little bit of a drag, as you saw how we finished off. Still shipbuilding healthy with the recovery of the sale of the claim, 8.3% still kind of beat the guidance with the claim on a recurring run rate. I'm with you that it's a little bit short on that right now. And we'll pick it up kind of going forward, right? So, I'm not just going to have function up, but we'll pick up where we have on our run rate as we finish our milestones as we get credit for that. There'll be some stuff up so long the way. I think 7.6% to 7.8% is appropriate. I'm a comfortable and conservative on that right now. And I've gotten to the last couple of years and we've missed a couple of attempts right at the end of the quarter. So, I don't want us to get ahead of ourselves a little bit. Let's kind of earn each of these quarters. I think 7.6% to 7.8% is the appropriate way to kind of look at it. If we - that get the hiring and the retention and we have clean shifts through the whole year, and we make up our milestones, we could be on the upper end of that range. It's not higher, but I think for now finishing the year off at 8.3% with the claim, the bottom end of the guide right now without the claim. I think that's the right starting point with a year's worth of shipbuilding to go through 2024.

Okay. And then one last about working capital. I think for the year, at the end of the year, you came in kind of below your target. It looks like you're around 5% of sales. So how does working capital look going forward? I see some of the CapEx recovery will flow through working capital at least over the near term? Thanks.

Sure. Yes. Yes, we've had a lot of conversation on that working capital. And I know when we were much higher in that at 10% and 8% range that was concerned, like how could we get that down? And we were projecting that that would happen. I'm happy to report that it's kind of landed right where we thought it would be, right? So, I think we started the year off in around 6% to 6.5%. We finished the year off at 5%. The conversations we've had in the recent past, we've talked about it used to be 6% to 8% without Mission Technologies with the additional sales for Mission Technologies. It's more like 4% to 6%. And that's I had highlighted that we were coming down, you know, with COVID in the rearview mirror, production programs that we have, trying to maintain the schedules with the same type work. We would see a normalization of the working capital. And that's exactly what's played out. We've lost about a point of working capital throughout this year. And I still anticipate kind of going forward a little bit improvement in that as we go forward. So 4% to 6% is the right way to kind of look at it. We exit '23 at 5%. And I would expect in 2024 to be on about you know, a little bit lower than that between 4% to 5%. The capital incentives will help as we get the cash up front, before the cost is completely incurred. And I think that's the appropriate way to kind of model it, going forward in the 4% to 5% range in the next couple of years.

Thank you.

Thank you. Our next question today is from Pete Skibitski from Alembic Global. Pete, please go ahead. Your line is open.

Good morning, guys. Nice quarter.

Good morning.

Thank you. Tom, I think you just helped us out a little bit. But can you quantify, and sorry if I missed it, can you quantify the two one-off gains in the fourth quarter at Ingalls and Mission Technologies?

Yes, our Mission Technologies it was - the warranties and representations for the purchase of Hydroid was a settlement cash $49.5 million. And then Ingalls, we picked up from a frigate repair effort that we had in the late 90s and had cost against that. And we've been working to see how we could get a recovery on that. And we did get a settlement judgment in 2018, and then we were able to broker and sell that entity for $70.5 million. And you'll see in the K2, there's a little bit of a back end on that, too. We'll see how that plays out. But that's about all I want to say about this. It net's about $120 million gross, but obviously I pay tax on that. So net tax is the impact to the profitability and cash was $95 million.

Yes. I appreciate it. And then maybe a more top-level question, what gave you guys the confidence to raise kind of the midterm outlook despite the fact that we don't have a '24 budget appropriated yet. And then on the '24 supplemental that's out there, I think there's a lot of shipbuilding industrial base money in there. Maybe you could talk about that. And is there anything else in the supplemental that could benefit you guys?

Yes. So I'll start with that. The '24 budget is very positive for us. All our major programs are supported. LPD 33 is supported, which is really important to Ingalls. The submarine industrial base funding in the baseline budget is important. I think that's around $400 million, but the additional $3 billion in the supplemental, just further effort to improve the supply base. And there's also funds within that to improve the labor force. So getting both of those approved is really important. Now our confidence relative to the guide is just on the demand for our products. We see the demand for nominated products in shipbuilding, both in Newport News and Ingalls, but also Mission Technologies. And when we laid it out, we looked at the investments we're making and the opportunity it just makes sense. We're in a bit of an inflection point from a sales standpoint. And I actually think there's probably some tailwinds if we can get that summary industrial-based funding approved, executed and start improving throughput. Tom, do you have anything to add?

Sure. Yes. We've talked about the demand for the products and services we have. When you go around the horn down there, Ingalls just won seven destroyers with a pretty good clip on the schedule side of that with options in the future for that. We see the 30-ish ship building plan, the five-year side app. We've talked about the 17 boats that are going to happen, already to long lead for the last two on Block V and then VCS Block VI. Those advanced procurements happen. They have to get definitized. We're talking about Columbia Build II, the RCOH for 75 and then just the preponderance of work that we have, change work and then the growth at Mission Technologies. We updated our annual plan every year, obviously, it's a 10-year look. And when we really kind of look, we say mid to long that's like 5% and five to 10 years. I know the street that's too far, but at least five years, we see growth rates at least that, if not higher. And things have to break our way with timely awards. We have to get labor any of the materials have to hit. But we can just see how the programs are playing out cost, inflation, orders, backlog and things of that nature. And we think it's appropriate to raise to these levels, and there's still opportunities above and below this for additional growth.

Great. Thanks guys.

Sure.

Thank you. Our next question is from Ron Epstein from Bank of America. Ron, please go ahead.

Hi, good morning.

Good morning, Ron.

Maybe just a follow-on - two questions, one on the supply chain and one on labor. On the labor front, how is retaining labor been? Because something we've heard across the industry, not specific to you guys, but generally across the industry, it's been tough to retain labor that companies are bringing in young mechanics, or whatever, they stick around for a year or two and then they take off. I mean how are you guys fairing on that front? And what are you doing to keep them?

Yes. Ron, thanks for that question. It's definitely been a challenge over the last couple of years citing the exact example that you brought up. And the team has a number of initiatives they've implemented over the last year to address the situation, and they center around 3 fundamental issues, really, which is flexibility for the team that we're hiring in work schedules potential time off. The craft person, man and women that we are now hiring is not fully prepared to come right into the workforce and start that kind of daily grind without having some flexibility in the work schedules. So, we have a number of pilots that we're working in that regard. We have some really interesting analytics around targeting geographies that we have better success in hiring and retaining. So, we have initiatives there. And then we have very focused incentives on critical skills. An example is machinists where you have to just pay them more to get them and keep them. So a number of initiatives, we pivot very quickly because we have such good data on what works, or what is going to work and what does work. So, we can expand upon it. But you're hitting on a fundamental issue in the industry right now in the manufacturing industry as a whole. And within defense and in shipbuilding is that the labor issue is obviously one of our major risk issues and one we're working very hard to resolve. I would also say the Navy understands it. And in the SIB funding, as I previously mentioned, there are workforce development issues as well. Getting people into the apprentice schools, because our retention rates in the apprentice schools. And established programs are significantly higher because the people that go in there are choosing that as a profession. So it's something we're well aware of. Our partners are well aware of it and the Navy is well aware of it, and we're addressing it. We've seen some rays of light as we ended the year, but you can't really trust a couple of data points. So we're going to keep working on it this year.

Got it. Got it. And then on the supply chain with the investment that the Navy is making, where does that have to be made? And where are the weaknesses in the supply chain today as you see it?

Yes. So they've done a really good job, both on the VCS program and on the DDG program, it doesn't get enough as much press, but on the DDG program as well as identifying single source or sole source vendors, in the supply chain that need investment to increase capacity because as you know, capacity had dwindled a bit in the previous 10 to 15 years. So they've done a very good job targeting those suppliers and making investments. And then there's some large critical material where there's a single source suppliers that are dealing with the same sort of labor and supply chain issues that we are. So to identify those potentially dual source them, or qualify an additional source is something that the Navy and we are looking at as well. So it's a very comprehensive review. I think it's managed very well by us and our partners. And I think it's going to get it the issue, but it doesn't turn overnight.

Got it. Got it. Thank you very much.

Thanks Ron.

Thank you. Our next question is from Noah Poponak from Goldman Sachs. Noah, please go ahead. Your line is open.

Good morning, everyone.

Good morning, Noah.

Tom, can you give us the pieces that bridge your actual full year '23 free cash versus what you had last guided it to?

So, we started the year with $450 million. We guided up to $500 million. You can - at $692 million, at completion, if you take out the two claims net tax, obviously, that's $95 million comes off the $692 million gets you to $597 million. And then the difference between the increased guide in Q3 of $500 million to $597 million, with strong collections in Q4. The team really stayed on it. We make sure that we've got a building on time and we had a clean Q4 receivables. So, it's just across the enterprise. There wasn't anything of significance to really note in that.

Okay. So if I take that final and take out the claims, I guess, call that closer to $600 million. Can you bridge me from that to staying there in '24 while CapEx is going up as much as it is? If you're - because you got revenue guidance that's up kind of 2% or 3% in a flat segment operating margin?

Yes. So I had mentioned in my comments upfront that this active and significant Navy participation in that. So I don't want to get too much into the details, but we're both contributing to it. But that's helping offset that increase there. So the guide of $600 million to $700 million, we took that down a little bit from where I left you last quarter as we exceeded this year, a little bit of timing, too, was in there on the collections. So a little overachievement in 2023, a little back off from where I left you last time at $700 million, now it's $600 million but I would not be alarmed, because of the higher CapEx in '24, '25 over '26. That it's going to be a major draw on the free cash flow from the discussions we've had in the past. That's been a little bit of guiding light. We definitely want to support our customer perform in existing contracts. Much of the work we're talking about for the new CapEx is on the new requirements that are coming. And as we broke with that relationship and how we make that happen, we're going to ensure that we kind of keep everything in lockstep. We got to be ships out to get cleaner and sooner, high-quality value. And on our side, we still have to be able to kind of run the business here and have good working capital. So all that's in the mix. And I would not be concerned on the 5.3% against the cash flow projections that we've given you. Again, that's why we gave you - again you probably won't see that too often a five-year projection going forward. But we wanted to settle everyone out there that, all that's been factored in, as we run the business and we manage our cash.

So how will we actually...

I'm sorry, go ahead. Go ahead.

Well, I'm just wondering like if there's a Navy participation will we see - will not all of that actually be recorded in CapEx? Or will it flow to your CapEx and come back in your rates in your operating margin? Or how will we actually see that in your financials?

So when we do our CapEx, obviously, our costs, we get incentivized to go do that. So it comes on the contract in the form of capital incentives, additional margin and cash that flows through there. That helps offset by additional cost of okay. I would comment just earlier to your question, as you try to kind of normalize the $692 million out to like $597 million as I said, when you pull up the two claims. It's the ramp that we've been talking about. If you go back to '21 it's $449 million and '22 at $494 million And now we've got the claims. Now it's ramped to $597 million and then we're at $600 million to $700 million. We've talked about a $700 million number in 2024 and just a little bit, its range bound now, because we exceeded in 2023. And now the $3.6 billion, the average of that is $720 million, and that's got to shape to it, obviously. It's going to be smaller upfront as the revenue incremental margin grows in the out uses going to be large in the back. I think that's appropriate right now. It's not a stretch number. It's a - it's conservative. It's a reasonable number. We have risk to kind of go work off. And I think that has both risks and opportunities associated with them. So I'd leave you with that.

So the piece that goes through CapEx that's supported by the Navy that we'll just see that in future margins as it flows through your rates? Is that right?

Yes. Margins and cash, yes.

Okay. And then I guess, I just -- so for '24, with the margin guidance flattish year-over-year, I still struggle to see where that $300 million is coming from?

So on the margin side, first, is the timing of when that happens, right? So you get that on contract and you've got to do the work, and there's a percentage of completion you take. So there's a lag on the margin side. And on the cash side, we try to make sure that we try and stay neutral so that we're not impacted as an incurring costs that high of 5.3% of CapEx, but that gets offset on the payment schedule of the CapEx, right? So the margin is not running exactly with the cash. But on our side, we're trying to keep it neutral here. So it's not going to impact our projections that we've given.

Yes. It's part of the total ship P&L, Noah.

Okay. Okay. All right. I appreciate that. Thanks so much.

Sure Noah

Thanks for the question.

Thank you. Our next question is from George Shapiro from Shapiro Research. George, please go ahead. Your line is open.

Yes. I wanted to ask your actual ship revenues were like almost $300 million higher than what you -- the high end of the guide that you provided on the November call. So just wondering why, given that, to me, this is a fairly predictable business? And I have a different question, too.

Yes, sure, sure. So from the MT side, we saw a nice rush at the end of the year of some receivables. I mentioned in my notes, it's about $80 million. So that was a big pickup. On the shipbuilding side, just the timing of material on how that floating here, the majority of the overage and where we felt we would land was on the material side. We have some outsourcing going on as well. So those costs flow through opportunistic that they landed in 2023 here. But we guided $86 million to $88 million, we came about $100 million over that and you kind of normalize that. It was good growth there. You saw it in shipbuilding better than 5%, 5.5% in shipbuilding. Ingall's up in the 7s and Newport News at 4.8%. But it was a sharing between all three divisions that just exceeded. It was a nice run at the end of the year on the revenue side.

George, you're familiar with material timing, you can miss by a month to 2 months from time to time. It just came in at the end of the year. Now unfortunately, it impacts the guide for the next year, right? So you had to -- we had to include that. But it was just timing.

Okay. And then the other one probably for Tom, if you had a $49 million benefit in Mission Systems from Hydroid I mean, it implies the rest of the business made $2 million. Now you alluded to some charges at some of the other businesses there. But if you could just provide some more information on that?

Yes, that's right. A piece of that's timing on how the program is just playing out in the mix and execution on that. We did have one job over there that we just took a slight step back. It wasn't material. You won't find it in the K. I guess it's not at the threshold, there's a couple of million dollars on that. But not a lot of dollars when you break down that kind of business to begin with. And then when you take a small charge and then the timing of performance on how we book things, it came out to be a light quarter there. But overall, with the claim, 8.6% EBITDA, the RCOH 3.7%, you can normalize that out. It'll be a little bit on the bottom end of the guide that we gave you, 8 to 8.5 at the beginning of the year the EBITDA. But as we had mentioned throughout the year, there was the joint venture that we sold off, we picked up cash, but we lost some equity. And we've been kind of mentioning about a charge on a manufacturing effort that we have over this I think that's behind us right now kind of going forward. And I'm still very satisfied with the numbers that MC kind of put up across the board for revenue, margin and cash.

And Tom, if you could just provide the EAC for each of the sectors in the quarter?

Sure. So for the quarter, that was $111 million of favorability, $43 million of unfavourability, a net of $68 million was made up of about 50% Ingall's. That net was 50% in Ingalls, about 35% of Newport News, about 15% in MT just for everyone on the call, you'll see in the K, which does the whole year, was $309 million growth, gross favorability for the whole year, $191 million gross unfavorable with a net of $118 million. And that breaks out to be about 75% Ingall's and 15% MT and 10% Newport News. I appreciate the question.

Okay. Thanks very much.

Sure, George.

We will now be taking our last question from Scott Mikus from Melius Research. Scott, please go ahead. Your line is open.

I wanted to ask, is any of the customer-funded investments over the next 3 years? Is any of that contingent on the supplemental package making its way through Congress?

That's a good question, and I don't have that in front of me. That's a really good question. I don't have that in front of me. I know part of it -- I think a part of it is, but I couldn't quantify it for you. So we'll get that information for you, Scott.

Okay. Got it. And then thinking about the shipbuilding revenue growth rate, you've for a long time, talked about labor being the governor on output there. So how much can these investments improve throughput in the shipyard if retention rates don't improve materially?

Well, it has to be both, right? And we -- when we do our projections, we risk adjust them. It's not assuming that everything works out perfectly. So it has to be both. We have to improve our retention rates. We have to improve out of the supply chain, and we have to improve capacity. And if we do that, then throughput will significantly increase. But you're absolutely correct. We have to be successful in both.

Scott, I'd supplement that, too, that as we're building that out, how we hire, how we train, how we've retained we're not standing flat for it, but I know that the yards themselves have active plans on either outsourcing or contract labor, using additional overtime crew that we do have, working the three full shifts where there's a critical path. But there's dials that we have to try and offset that in the near term. You can't run that five or 10 years if you see - we see the demand we're building out organically that we'll be able to do things in the yards. But right now, there are dials and opportunity sets for additional labor outside the yard that we're employing right now.

Okay. Got it. Thank you.

Thanks.

Thank you. This is all the time we have for the Q&A session today. So I would now like to hand back over to Mr. Chris Kastner for any closing remarks.

Yes. Thank you, and thank you for joining the call today. I'm very proud of our team's strong performance last year, and I'm confident that we will continue to create value for our shareholders this year. I would also like to remind you that we are hosting an Investor Day on March 20 and look forward to seeing many of you then. Have a good afternoon.

Thank you, everyone, for joining today's call. You may now disconnect your lines, and have a lovely day.