Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2025 HII Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the call over to Christie Thomas, Vice President of Investor Relations. Mrs. Thomas, you may begin.

Thank you, operator, and good morning, everyone. Welcome to the HII Second Quarter 2025 Conference Call. Matters discussed on today's call that constitute forward-looking statements, including our estimates regarding the company's outlook involve risks and uncertainties and reflect the company's judgment based on information available at the time of this call. These risks and uncertainties may cause our actual results to differ materially. Additional information regarding these factors is contained in today's press release and the company's SEC filings. We will also refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations page of our website at ir.hii.com. On the call today are Chris Kastner, President and Chief Executive Officer; and Tom Stiehle, Executive Vice President and Chief Financial Officer. I will now turn the call over to Chris.

Thanks, Christie. Good morning, everyone, and thank you for joining us on today's call. I'll start by providing a high-level summary of our financial performance, highlighting key achievements, and then I'll provide an update on our operational initiatives. Tom will discuss our quarterly results and full year 2025 outlook in more depth. This morning, we reported second quarter sales of $3.1 billion and earnings per share of $3.86, with backlog reaching $56.9 billion. Contract awards of $11.9 billion included DDG 145 and 146, LPD 33 and 2 Block V submarines with associated investments in shipbuilder wages, workforce development, infrastructure and technology insertion. Free cash flow was $730 million, and we invested $93 million in CapEx. At Newport News in the second quarter, we floated off SSN 800 Arkansas and are on track to deliver SSN 798 Massachusetts later this year. New carrier construction is also progressing. And on CVN 79 Kennedy, we are working with our customer to deliver the most complete and combat-ready ship to the Navy as early as possible and are scheduled to go to sea for our first trials toward the end of the year. CVN 80 Enterprise has received several of the late engine room components that I discussed previously, with the remaining equipment scheduled to come in over the next few months. Receipt of the remaining sequenced critical components enables progress acceleration as our shipbuilders integrate the equipment into the ship and unlock associated delayed progress. Moving to Ingalls. In the second quarter, we completed main engine light off on DDG 128 Ted Stevens, and christened DDG 129 Jeremiah Denton. And we continued to make progress on our amphib programs as we completed fuel load on LPD 30 Harrisburg and generator light off on LHA 8 Bougainville. At Mission Technologies, we had another quarter…

Thanks, Chris, and good morning. Let me start by briefly discussing our second quarter results, and then I'll address our outlook for the year. For more detail, please refer to the earnings release issued this morning and posted to our website. Beginning with our consolidated results on Slide 6 of the presentation, our second quarter revenues are approximately $3.1 billion, increased 3.5% compared to the same period last year. The higher revenue was attributable to year-over-year growth at all 3 divisions. Ingalls revenues of $724 million increased by 1.7% compared to the second quarter of 2024, driven primarily by higher volume on the guided missile destroyer program, partially offset by lower volume on the LHA and LPD programs. Newport News revenues of $1.6 billion increased by 4.4% compared to the second quarter of 2024, driven primarily by higher volumes in both Columbia and Virginia-class submarine programs, partially offset by unfavorable cumulative adjustments on aircraft carriers. Mission Technologies revenues of $791 million increased by 3.4% compared to the second quarter of 2024, driven primarily by a nonrecurring favorable resolution related to a C5ISR contract as well as higher live, virtual and constructive training volume. Excluding the impact of the noted resolution, Mission Technologies results were generally in line with our prior expectations and the guidance we provided on the first quarter call. Moving on to Slide 7. Segment operating income of $172 million and segment operating margin of 5.6% in the second quarter of 2025 were both down from prior year results, but were consistent with our expectations for the quarter. At Newport News, segment operating income was $82 million, and operating margin was 5.1% compared to $111 million and 7.2% in the second quarter of 2024. The decreases were driven by performance of the Virginia-class submarine program and aircraft carrier…

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

[Operator Instructions] Our first question comes from Doug Harned with Bernstein.

You had a big quarter for shipbuilding in Q2 revenues. And you're looking at 20% better throughput this year, you're getting -- should be getting some money from the Block V award. But your guide for shipbuilding revenue is only up 3%. I mean how should we reconcile those things?

Yes, it's a good question, Doug. Thank you. Our throughput increase and our revenue forecast all takes into consideration wages getting incorporated in both shipyards, that's already happened in Newport News. We expect that to happen over the back half of the year at Ingalls. Outsourcing, improving which -- actually outsourcing this year should get up to 2 million hours, which is over 1 million-hour increase from last year. And then our Charleston operations also comes online and provides additional throughput. If you take all that into consideration, most of that happens in the back half of the year. And if we're able to achieve that, we should achieve -- and I'm confident we'll achieve our 20% improvement on throughput, which should lead us to our guidance estimate. You always have to take into consideration material timing when you take -- when you're doing your sales forecast. But I'm pretty comfortable that our guidance is appropriate. There's potentially some upside there if we make all our throughput commitments. If we are able to continue to hire experienced people and our attrition trends continue. But all that works together and conspire together to project towards our sales guidance.

I guess what I'm trying to understand is -- and we're looking at this situation where a lot of money is coming in to shipbuilding right now in proposed budgets, current budgets; and you're looking at the higher throughput. Just trying to figure out -- and I know that it's not easy to change shipbuilding revenues in a short period of time. But I'm just trying to understand how we get -- we kind of triangulate between the funding trajectories, the throughput and what this revenue outlook would likely be over, at least, the coming years?

Right. Well, so I'm still comfortable with the 4% growth revenue outlook, and I'm very comfortable that this shipbuilding industrial base is getting rebuilt. I think labor is being addressed through increase in salary and positioning towards more experienced people and attracting more people into the industry. I'm very confident the industrial base is expanding, led by the prime contractors that are doing that effort, including the acquisition of Charleston. So it's going to happen. The industrial base is growing. The supply chain is becoming more stable. I can't predict when that volume will show up, but it's occurring as we're moving through this year. I don't want to get ahead of ourselves from a guidance standpoint and a sales standpoint, but I'm still comfortable with the 4% growth rate and it's incumbent upon us to execute.

Our next question comes from Scott Mikus with Melius Research.

Chris and Tom, nice results. We have better clarity on the funding environment with the One Big Beautiful Bill signed, the 2026 budget also, it's very supportive. When we think about kind of the repeal of Section 174, is that 5-year cumulative free cash flow target of $3.6 billion now back on the table, but just from 2025 through 2029?

Yes, we pulled our guidance last year, and I would not say it's back on the table right now. We're raised the focus and fixated on showing that we provide guidance going forward that we can hit. Right now, we have the annual guidance you saw from my remarks upfront in the released information that we provided, that we raised that from $300 million to $500 million to $500 million to $600 million in free cash flow. But we're going to stick to an annual guidance right now. And as we get consistent and we quarter-over- quarter meeting or exceeding the guides, we'll address that in future discussions. But we don't have a 5-year guide on the table right now.

Okay. And then, Chris, the Secretary in Navy commented that it might be preferable to have Newport News and Electric Boat each build Virginias separately rather than teaming. So if the Navy were to pursue that route, just curious how much capital would you and the Navy need to invest to make that happen? And would you have enough skilled labor or optionality to outsource to support 1 Virginia by itself at Newport News?

I think it's always important to evaluate alternatives. Right now, we're happy with the teaming arrangement that we have with General Dynamics on the Virginia-class program. It would take additional capital. I don't -- and it would be a significant capital, and we've communicated that to the Navy. We would have enough skilled labor to execute on any job like that and we're talking about a time horizon that's pretty far out in front of us. So that's probably all I want to say on that. It's always good to look at options, look at alternatives, we would need additional significantly more capital to execute on that. But we'll support the Navy in these initiatives as they work through how they want to proceed.

Our next question comes from Gautam Khanna with TD Cowen. Please go ahead.

Yes. And sorry if you've covered this, I was a little late. But on CVN 79 and the timing slip to 2027, could you characterize any economic impact from that? And was there a negative EAC or could there be because of that schedule change.

Yes. So we've already taken that schedule consideration into our guidance. And that was understood when we did the financials. There was no material impact related to that. It should be noted that CVN 79 is progressing very well. There's only 90 compartments left on that ship. We're going to go to sea this year. There's just a couple of systems that are taking a little bit longer and we need to add some capability as well. So 79 is progressing very well. There's no financial -- or no material financial impact, and we're going to deliver a great ship when it gets finally delivered.

Our next question comes from David Strauss with Barclays.

This is Josh Korn on for David. I wanted to follow up on the reconciliation funding for shipbuilding. I guess, both on the shipbuilding and unmanned side, exactly how you see that flowing through to you, time line and any kind of quantification.

Yes. So we tend to look at that together with the FY '26 budget. If you look at them together, all of our programs are supported and all of that is included in our in our 4% mid- to long-term guidance relative to shipbuilding sales. So we think it's all very positive. I think the unmanned stuff is very interesting. Obviously, we have the premier uncrewed underwater vehicle program up in our Boston organization within -- in Mission Technologies. And then some very interesting programs we're evaluating, participating in from a surface standpoint. So we think that's positive as well, and that could be some tailwinds if we're successful in that regard. So we look at them together. Significant tailwinds in shipbuilding, and we're going to take advantage of them.

Okay. And then on Mission Technologies, have you had any impact or discussions around DOGE at this time?

So we're comfortable with our '25 guidance still. There has been some minor restructuring of contracts, which would potentially impact '26. We're looking for ways to offset that. As of this point, we're still comfortable with our revenue growth within Mission Technologies. But that there has been a slowing of awards and activity, although the pipeline still looks very strong at over $90 billion. So we're going to watch it. We're following it every day, and we're offsetting impacts where we can. But as of right now, we're comfortable with our guidance.

[Operator Instructions] Our next question comes from Seth Seifman of JPMorgan.

I think you mentioned earlier, Chris, the timing of the contracts -- or maybe Tom, you mentioned the timing of the contracts for Block VI and Build II could affect this year's results. Maybe if you could tell us a little bit more about that based on the margin forecast for Q3, it seems like you're expecting those results in those contracts in Q4. Are they -- do you expect them to come together? Do you think they could come separately? If you could give us an update on sort of where things stand and kind of the magnitude of that within the outlook.

Sure. I'll start, and then I'll kick it over to Tom for the details on how he's thinking about it from an outlook standpoint. We quickly repositioned from the Block V contract into Block VI and the Columbia Build II contracts, and we're actively engaged with the Navy and our partners to get that done. The good news is that we had a construct that was put together under Block V that we can follow as we move into Block VI. Now it's going to take some time. We're working at a very detailed level with them to get these docs just because they're very important. But it could slip into Q4, and we'll do them incrementally. And as Tom indicated in his in his prepared remarks, while we do expect them to be done this year and -- but we also factored it when we think through the balance of the year. So it could potentially provide some upside if it gets done or potentially a minor downside if it doesn't, based on those factors. But I'll let Tom talk about details.

Yes. In February, we had mentioned about the 3 awards we had in FY [ 2020 ] anomaly done in the springtime. Another 2 awards were planned for the back half of the year. As we mentioned, there is a factoring of opportunities and risks in how things play out, so that's why we give ranges on revenue and margin and cash. Those awards really -- we wouldn't have any cost to sales or they wouldn't overly impact the margin if they got awarded in the back half of the year. It really just is a function of incentives, any advancements on any infrastructure for capital investments. That could either provide tailwinds or headwinds. That's been factored into guidance right now. So it doesn't impact the current EACs and profitability that I have today. And the range of outcomes I see right now, we feel really comfortable with the $500 million to $600 million in free cash flow in the year. So we'll keep you informed. We do anticipate -- we're working actively with the Navy right now on those requirements and those offerings, and we'll see how the back half of the year plays out.

Okay. Okay, great. And then just a follow-up, just to understand kind of how some of the stuff works. The wage increases that you talked about for Newport News, did those go into productivity assumptions on existing contracts and thus led to some higher booking rates on contracts or at least in the mix upward pressure on booking rates for existing programs and when that comes to Ingalls, we'll see something similar? Or is that not the right way to think about it.

That's not necessarily the right way to think about it. We think there's going to be a direct correlation between higher wages and improved retention, which should lead to a more skilled employee and improved performance, but we don't necessarily bake those into the estimates to complete right away. We need to prove it. So we're just going to continue to execute. And if that performance does improve, then we could potentially book up there. But it's not necessarily a direct link as you indicated in your statement.

Okay. No, that's helpful to have that clarity.

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

What impact, if any, are you guys expecting on the business from the changes in R&D in the tax code? Is that pretty rough to do some stuff that you might not have done before?

Well, I'll start with the changes of the tax law, right? So obviously, that got approved on July 5, and that kind of works itself through rather than amortizing the R&D expense, it gets period expense. So there's the tailwind for that. We see about $150 million of increase, and that's why we took the free cash flow from a midpoint of $450 million now to -- from $300 million to $500 million, which was $400 million of a midpoint up to now, $550 million midpoint between $500 million and $600 million. So we'll get some favoritism on that. It's now period expense, plus you can do that retroactively since the beginning of this year. And then there's a catch-up between '22 and '24 on the amortization. So a lot of moving parts just on the tax front alone, and that's on the federal side. On the state, on the noncurrent state taxes, it actually provides a slight kind of headwind, and that's why we adjusted that for the guidance to be $15 million expense this year as opposed to being neutral. And $10 million of that $15 million will show up in Q3 in the guide that I gave you. So realistically, it provides a couple of more dollars to kind of run the business and invest in the business here. And as you see, we finished out the quarter with positive cash flow of $343 million. So going forward, as we say, we don't think $147 million, $150 million of tax benefit here, we'll have a credit or will forgo paying taxes for the rest of the year.

Got it. Got it. Got it. And then maybe just as a follow-up with -- on the unmanned undersea business that you guys have. I mean how large is that product line today? And if you could frame maybe the kind of growth you could see there?

So we haven't specifically identified how large they are externally. They're -- just not significantly material to the Mission Technologies portfolio, but we do expect outsized growth beyond the 5% growth rate. And when you look at the opportunities that are presenting themselves in the space, we have an opportunity, as I indicated in my remarks, for over 200 vehicles on that small uncrewed vehicle contracts with the Navy. And there are some upcoming competitions, both in undersea and surface that are very interesting to us that we're going to evaluate. So while it's small now, we do expect it to grow at an outsized rate within Mission Technologies. And there are some really good opportunities there that are absolutely funded within the reconciliation bill.

Our next question comes from Myles Walton with Wolfe Research.

Chris, I was wondering if you could touch on your views of AUKUS and its trajectory. It seems like it may be getting a relook but it's never quite clear as to what is and what isn't actually occurring. And then as well, if you can just touch on where you think the role of partnerships with international shipbuilders would be most impactful in a positive way to the business and to getting the output of the overall industry up?

Sure. Great. Thank you, Myles. Yes, the AUKUS is still broadly supported simply because it makes great strategic and economic sense. So there's no backup that I see within Australia, the U.K. or the United States. There is a Pentagon review going on, and I think that's healthy. They need to look at it to make sure that we're proceeding down the right path. But I fully expect it to continue to be supported across all 3 countries. From our perspective, we do have a footprint down there now. We've got a great partner in Babcock. We've got some good wins under our belt, and we're competing for some also very interesting wins that should show up over the back half of the year. So it's positive for us. We're going to continue to grow. We're going to continue to have a presence down there with our partner, and I'm still very bullish on AUKUS. From other international shipbuilders, we have taken the steps, because we saw this coming, we have developed a strategic relationship with HHI out of Korea to evaluate both defense opportunities and commercial opportunities. Could they help with investments in our current shipyards or other shipyards to increase throughput for the industrial base? Absolutely. We're going to have to see how that develops over the next couple of quarters. But I think there's -- I'm pretty bullish on that as well. They're committing dollars to increase the industrial base, which will increase throughput. So I think that's only positive and just adds to the tailwinds that we see in shipbuilding.

Okay. That's great. And then just can you touch on how many employees were hired in the quarter?

About 2,400, more experienced. And I didn't specifically talk about retention, but we've seen month-over-month improvement in our retention and attrition metrics. And since we implemented the wage adjustment of Newport News, there's been a very good trend for the first few weeks from an attrition standpoint. Now we're not going to claim victory yet because it's just a few data points. But our initial assumptions seem to be proving out positively, and we think that's a really good sign for the future.

Our next question comes from Noah Poponak with Goldman Sachs.

I guess it feels like there's a little bit of a chasm between the very significant change in funding and treatment of your business and the Navy overall by the government in the budgets, and what you're doing here with guidance and sort of your tone on the pace of improvement. Recognizing it's a very long-cycle business and a lot of these things will take time, I'm trying to sort out how much of that is it just will take time and 2025 and 2026, still have the pre-COVID contracts, and it's not until beyond that, that we see significant improvement in revenue growth and margin versus I'm wondering if -- does the Block VI, Block II (sic) [ Build II ] waiting for that award this year, make this year just -- is that a very binary thing where you can't really call for much improvement this year until you know that's in this year and not sliding into early '26?

Yes. I think your first assumption is correct, Noah. I think you've got it. It does take time. We have pre-COVID contracts we're working through. We've assessed the Block VI and Build II contracts and factored them into the indicated final. So if it happens, things could potentially get a bit better. If it doesn't, it could be maybe slightly worse. But we're comfortable with how we factored that. So I think you've got it right, it just takes time. We need to get through these pre-COVID contracts. But the tailwinds are real. The demand is real. The actions we're taking to expand the industrial base are happening. The maritime industrial base funding that have been flowed to the supply chain have absolutely improved the supply chain. The technology investments that are taking place with AI with C3 AI and the Newport News shipyard is going to yield positive results. So it's going to happen. We just need to come through these pre-COVID ships to transition to the other side.

Okay. Chris, can you give us a sense for the split -- on the labor front, the split between the need to improve new hiring versus the need to improve attrition? Because I would think the former would take a while and have a long learning curve or as I would think the latter would maybe flow to the business much more quickly?

It's interesting. They work together as you would expect. If we can hire more experienced people that are going to stay, then your efficiency is going to get better very quickly. And you can afford to not hire as many people because you're not losing as many. So it's directly related, and they move together. And if we're successful in hiring then our attrition should get better as well.

Okay. And then just, Tom, in the cash flow buildup, the $150 million approximately of cash tax tailwind, does that recur for a while? Or does it get smaller beyond '25? And then on CapEx, how long are you in the 3.5% to 4% of sales range before that starts to come down and become a tailwind?

Yes. So on the taxes right now, we gave the guide for this year. Still have some tailwinds out years, too, we're working ourselves through that. It's a bit complicated because, one, is the timing on the Fed side since it was enacted. We kind of understand that. The state, obviously, it's different states, how they enact it, when they enact it. We're working ourselves through the math of that. So we haven't guided anything for '26 and on. There are some dollar savings in those years as well. And we'll provide more guidance on the back half of this year on that front. All right. Your part 2 was?

CapEx.

CapEx. So the CapEx, we finished 2.5% in Q1, 3% in Q2. We're 2.8% through the first half of the year. We guided 4%. Haven't provided guidance after this year. I know last year, when we thought we were going to put all the subs on contract immediately, it was about 5% for 3 years. I do envision it to be elevated over the normal, what we term medium to long term of 2.5%. I do envision us being higher than that in the next couple of years, but we haven't provided a specific number. That will be a function as we come through the Columbia Build II in the VCS Block VI, timing and pace, the number of boats and the level of infrastructure and investment that goes into the Newport News yard, will dictate. But I'm comfortable like we have in the recent past, we'll continue to get participation -- meaningful participation from our Navy customer as we invest for more throughput and higher revenues in Newport News.

Thank you. I am not showing any further questions at this time. I would now like to hand the call back over to Mr. Kastner for any closing remarks.

Sure. Thanks for joining the call today and your interest in HII. We are focused on building on these results and driving value for all of our stakeholders. We look forward to providing further updates as we progress throughout the year. Thank you.

Thank you very much. That concludes today's conference call. You may now disconnect.