Okay. Good morning. I'm Doug Harned, Bernstein's Aerospace and Defense Analyst, and I'm thrilled to have with us today, Chris Kastner, Chairman and CEO of HII. We're going to go right into Q&A here, I think.

You promoted me, so. What? Not the chairman, but I am the president and CEO.

I didn't know that.

That's okay. We've always had a split governance structure at HII. Oh, I didn't. Okay. That's the first question. That's the first question.

So anyway, let's just start. Maybe you can just give us an overview of what you're seeing now at HII, what some of the opportunities you have, some of the challenges.

So first, safe harbor rules apply here, so I'm not going to break any news. But at HII right now, we're very focused on throughput. but we have five deliveries really over the next 12 months across a number of different programs. We have LVD-30's gotta deliver, we have LVD, excuse me, DDG-129's gonna deliver, CVN-79, SSN-800, LHA-8, all those deliveries are gonna happen in the next 12 months. We're very focused on delivering the fleet for the U.S. Navy. We've set internal milestones and actually external milestones or goals around throughput. We achieved 14% last year. We expect to achieve 15% this year. We're doing that by growing our labor force and distributed shipbuilding. Both of those have to work in order to execute on our programs, but we're very, very focused on throughput and meeting the demands, really historic demands of the U.S. Navy.

Yeah, on that, right now we're looking at a budget, the Trump administration's proposals, those $1.5 trillion, we don't know exactly where that's going to go, but maybe as a starting point, given that, and there's a lot of money for shipbuilding in there, but as a starting point, maybe, can you help us understand how you're viewing that process, given that there's uncertainty and the whole way this is gonna move through progress?

Well, it's definitely complicated. As my old boss used to say, Mike Petters, who you know very well, look, this is the first step of the process. we're in the initial stages of this process very complicated when you think about reconciliation the supplemental maybe two reconciliations the great news is that our ships are in the base budget so all of our six percent revenue growth the midterm revenue growth that we're talking about that is all protected in the base budget so if that happens and as that moves through the process we're gonna be fine so so if we I mean because one of the worries we've had is that if there is no reconciliation passed and we go to October 1st then we're back at a basically down 155 billion on a CR right right but it do so right right could be I don't I don't see a threat to our programs the vast majority of them under contract already yeah we need to get block six in Columbia done but and and DDG's will happen as well and I'm comfortable with those. We already have the Amphib bundle squared away down at Ingalls. We started the frigate program down at Ingalls, which is really not even included in our 6% guide. So we're in a really good place, and the budget supports it. And if the battleship happens, the nuclear battleship and frigate happen, that's upside of the guidance.

Okay. Now, in this budget, there are big increases. I mean, you've got the increased Virginia class, Columbia class, for amphibs. Now, right now, you've already got a huge backlog.

When you move this money in, one of the struggles we've had is to figure out how to get, it goes back to your comment on throughput, how to turn that money into real volume coming out the other side right I mean how do you think about this challenge as the funding continues to rise it's all about increasing your labor force to meet that demand and then doing distributed shipbuilding historically in shipbuilding when things get great during the Reagan buildup you pushed work out of the yards so you identify the core work you need to keep and you push everything out that's happening right now we doubled our distributed shipbuilding last year. We were going to increase another 30% this year. And we're bringing on partners to help us facilitate that additional demand.

Can you elaborate on that a little bit? How do you think about the distributed shipbuilding concept? This seems fairly... 10 years ago, we wouldn't have been talking about that.

We wouldn't have because we didn't need it. We had plenty of capacity in the yards and labor in the yard.

So how do you manage that today?

And how do identify that sort of the next opportunity to expand on that well we've had challenges before we've done it incorrectly and we we were punished for it on the LPD program when it when it originated so we're very careful and disciplined and how we do it with the right QA and the right engineering to ensure that when the units come back they meet our expectations and we can just continue on building the ship so we go to partners we we do initial pilot programs with them they'll build one or two units we make sure they have sufficient capital and labor and the technical know-how to execute on it once they do that we'll expand their scope and we'll grow now it makes sense to have some core sort of shipbuilders and Gulf Copper does that for Ingalls so they can handle a lot of the capacity but you're gonna have to go to a few in order to handle all of the work that needs to get done both that Newport News and at Ingalls.

And are these often sort of traditional players in this space, or does this vary? And the reason I ask is it was such a problem through COVID when you start to see volumes come down, and you have very specialized suppliers in this industry, and if their volumes come down, they can be in some real financial trouble. Right. So are you basically working with the same base or types of people that you've worked with before and expanding the roles? Or are you able to actually bring in a broader spectrum of?

So it's both. So it's both. We're working with established partners that we've had for a long time where we can expand their capacity. But we're also bringing in new entrants that have steel experience, because what we're doing is just the upfront part of the work. and you've been to the shipyard it's just the initial unit work where you're creating units prior to them being outfitted so the capability exists you just need to be able to do the the welding that's required to get that done and have the capacity and the tooling required to get that done so it's both it's established players and bringing new entrants that already have experience we're not going to bring someone that has no experience in welding structure together into the space.

But, you know, if I think back to some of the things that Mike Petters said at one time, and it was sort of, this isn't the greatest example, but when you did the UPI acquisition. But one of his points there was that there are industries where the type of engineering and production work that you do has similarities to others and that was one of the arguments that there was some synergy there but I'm thinking the other way around right that if you're thinking of capabilities and it could be an energy in other places it's energy it's commercial shipbuilding it's oil and gas anyone who's built structure or fundamental simple structure we can go to them and see if they have the bona fides to execute and you know one of of the things that this administration, and we were here, when we were here last year, they had just announced the White House Office of Shipbuilding, they were gonna, the president talked about bringing in Korean support, which I think you have been doing some of that. And how effective is that?

Well, so our partners, HHI, Hyundai Heavy Industries, they're very disciplined as we are and how we allocate capital and whether they're going to make an investment or not so we're being very careful we need to make sure that if there is a significant investment made in the shipbuilding industry there's work on the back end so we're still in the evaluation phase with that the good news is they build ships a lot like we do in the in the defense space they've learned from us we've learned from them we've been in their shipyards so we fully understand that they've been in ours they've walked our panel line uh and and really liked it we're still looking for the right opportunity with them, but I think there is a chance that that is successful.

Is that more on the Ingalls side, I would think? It's definitely Ingalls, right. Yeah, I mean, it's kind of hard to...

Right, you don't bring the nuclear work there.

So, okay. Then, so last year, you know, you got the award for the last two Block 5 Virginia class, and in that you got a big boost, which was funding to support labor. Can you talk through a little bit about how that all works and how that's proceeded?

Actually, very well at Newport News. We adjusted the contracts for the labor. It's kind of a margin-neutral sort of adjustment. We're fortunate that the nuclear shipbuilding enterprise contributed that for us. It's been successful. Their attrition rates are better. Their labor situation is better. They met their throughput goals. They're actually ahead of their throughput goals through Q1, especially in the submarine enterprise, which is very positive. So it's worked very well.

Yeah, but this is one where I was trying to fully understand it. I thought the goal here was to be able to raise wages, wage levels. You could then attract maybe a stronger workforce through doing that. And then that would ultimately turn into higher quality, better throughput, better performance. Is that the process? Because it seems like it would be pretty early to already see results from this.

No, you see some results in better cost performance on some of the ships. Better throughput for sure because you're attracting more labor. So it is working.

So how many, you're always talking about the balancing hires versus attrition. What does that look like at Newport News now in terms of expanding the workforce?

It's positive. There still is some attrition. It's much better than it was before, but the attrition is happening in the right place. We're adding and keeping experienced shipbuilders in Newport News right now.

And then when we think about revenue, one of the things that's been difficult for us is because some of the increase in revenue at Newport News is due to the pass-through on the labor side. And so if I were to take that out at Newport News, what's your growth rate sort of X the labor?

So we haven't communicated that externally. But revenue growth is a combination of labor increase, throughput increase, but also material flowing through the system with just additional work so to watch and pay attention to to sales growth you need to pay attention to all three yeah and then more and more important than anything you need to make your ship deliveries right so if I were to guide people on how to think about hi right now from a shipbuilding standpoint is if we're getting healthier those five ship deliveries happen consistent with how I'm talking about it and they're all and they're all proceeding but they're getting into the the most difficult part, which is final test.

And so, when you talk about 6% growth, which is, I mean, I remember every earnings call, it was like with Mike, and analysts would say, no, you're gonna grow faster than that, Mike, no. He would say we're flat, we're gonna be flat. 3%, he would say 3%, maybe.

I still talk to Mike, and he has a hard time believing what we're doing, but he had a lot of confidence in us, he did a great job. But yeah, it was flat.

And you were saying four, not too long ago.

We moved to four simply because we saw it. But remember, we were dealing with $12 billion budgets, $12 to $15 billion annual budgets at the time. That's not even... And if you want to really go back to it and put it in context, we were really worried about the Columbia class, if you recall the conversations we would have. It's Columbia class we thought would be so big that it would cloud out amphibs. But what has happened is the Columbia class is happening, and it's big. There's been inflation, so everything's more expensive. And we want more NFIBs. So it just didn't happen like we expected it would. But fortunately for us, we have the capability, and we're creating the capacity to execute on all of it.

Yeah, well, when you went to say now you're growing at 6%, which is a number we haven't really thought about before. Is that, it goes back to this labor pass-through. I mean, is that 6% kind of driven somewhat by that, or is that a sustainable 6% rate? It's pretty sustainable.

It's pretty sustainable. And remember, we're starting on a year that already had wages included, right, fundamentally, in part of the year. Q3, Q4. Part of the year, right? So when you think about a CAGR, it's pretty sustainable. I don't want to go beyond kind of medium-range guidance. But for the next, you know, four to six years, it's definitely pretty solid.

At the 6% type level. And then you've just started the same type of program at Ingalls, right? So that's one where we will see probably a step up, you know, because the compare is.

Yeah, I do expect it to step up as well. We see some leading indicators in the labor front with applications that it will start to grow that workforce at Ingalls, and we definitely need it to because there's a lot of work down there. We've already started work on the frigate, which is great.

And the frigate's done over where you were doing the NSC, right?

Yeah, we have the team. A lot of the team's still in place. All the processes are still in place. Design is fixed, really on the hard part of the ship. There's some topside changes. that the Navy wants us to incorporate that we've agreed to that are really not a manufacturing challenge. So we think we'll do a great job on those first two frigates.

So back in the important news, you had, I think you were up, throughput was up 14% I think last year. I think you're talking about 15% this year. So what does that mean? I'm trying to figure out, and you and I have talked about this a million times. I'm trying to translate that into this movement from kind of 1.4 Virginia class to you, getting to that two-per-year goal collectively.

There's a lot of fixation on the two, 2.3 per year. It's a tough metric to get to, and it's not one I really like very much because we've reset the Block 5 boats to an adjusted schedule based on when we think the supply chain is going to show up. and so I know the Navy talks about the beginning of the 2030s I focus on ship deliveries I focus on ship deliveries we got two a year last year two a year the year before as a submarine enterprise we're out of the first Columbia class boat we've already delivered all of our equipment for the first Columbia class boat the second Columbia class is much more efficient and it's proceeding on a much more efficient basis than the first one So we're making progress there. So I focus on ship deliveries. And throughput is simply earned hours. It's not cost. It's not the cost to earn the hour because sometimes we have distributed shipbuilding, which is at a premium. Overtime is at a premium. So it's actually earned hours, productive hours that you have to get done.

So it's really the – and it's a labor number.

It's labor plus – Is it materials too? Plus the value of distributed shipbuilding, which comes in as material, but it's really there's an equivalent labor category there.

Okay, I see. Okay, so is this, like the 15% type number, is this something that we should expect to continue? Is your 15% this year, but is that something, a year from now, you'd be looking at a similar goal?

There will be a new number. I don't know if it's going to be 15%. We have to finish our plans this year and talk about how we want to guide for next year. But the amount of work and earned work will continue to increase.

Because at one time, you were looking for 20% last year. And 15% sounds pretty good to me. Pretty high goal. Pretty high goal.

Maybe I pushed him a little bit too hard, right? The good news is the submarine program is has got some traction right now yeah which is which is very positive really for national security not just our financials it's it's it's a top priority Columbia class top priority and then Virginia class right after that especially with the Virginia payload modules which are which are part of block five so that having a submarine enterprise getting some cadence is really positive but but the payload modules I mean that those those aren't yours right so that we We don't build a module, but we do integrate it.

You do the integration.

Right, all the ships that we deliver.

So once you deliver, okay, I see. So there's extra value for you, even though the module itself's up at electric power.

Well, the work, there's additional work for us to do the integration, yes. Okay, so block six. Block six.

You're gonna hear about it today or what are we about?

Yeah, it's just- Very close, right? Very, very close. We essentially are going through the approval process in the government to get those contracts done. I fully expect them to be done before the end of Q2. It's just a very large contract. It's a complicated contract. They need to go through the approval processes. And I get updated every day on it. But I still expect it to get done.

I mean, I know that so much of the challenge here, and I've talked with Tom a lot before about this, is getting past all of those sort of COVID time boats and getting, you know, where you never got, I think, you know, properly compensated for the inflation cost. And you're not alone.

Everybody else is. Everybody else. So the things, mine are very large, and they last a long time.

Yeah, yours are bigger than anybody else's.

Yeah, the two largest contracts we signed as a corporation are the 1881 contract and Block 5, which are signed in 2019.

Yeah, so, and you didn't get much help with that, right?

You know, I will say the Navy's been very fair on looking for ways to make investments to make us more productive, especially in the nuclear enterprise. So, no, we didn't get large equitable adjustments to those contracts, but they have been fair. They contributed wages for the submarine program. They have contributed MIB and SIP funding and given us incentives. So there has been an effort by the Navy and the administration to support submarines and Newport News.

And that also, I mean, that extends down into the supply chain, right?

It does. it does where you identify areas where there's problems and the mid money and the SID money go into increasing their capacity, give them technical help additional capital to be invested.

Because this is one of the things that I struggle with because the shipbuilding supply chain is so complex. It is complex. Last year I remember Phoebe made this comment. She goes, you think a bomber summer's hard, you have no idea how hard a nuclear submarine is. And so, in trying to understand that, what does the government and the Navy need to do to really facilitate getting your whole supply chain working? They're helping you with labor. are there further steps that you're looking toward that the Navy can execute on?

Yeah, well, yeah. First things first is, is we're the contract on time. So we're on long lead for block six already. We're on long lead and have continuous build authority on Columbia, which means we're going on Columbia. We just don't have the final negotiated contract yet. So the most important thing is to order the material on time. Second is identify the critical suppliers that are at risk and ensure that they don't bite you at the end. Right. And we've done that. they've expanded their castings and forging suppliers which was a real bottleneck for us and we actually buy a lot from the UK right now so it's happening is it happening fast enough you can always go faster but first things first order stuff on time don't miss that and then expect a miracle to happen and a supplier to show up 12 months early so we can make a production schedule When you look at developing this throughput metric and setting a 15% goal, what are the bottlenecks that you're thinking through?

In other words, what determines whether that's a 10%, 15%, or 20% goal?

Well, we set our plan every year based upon where every ship is and the EAC for every ship. The supplier schedules, the labor demand, how all the ships interact with each other, where they flow through the yard. and that is a complicated process. We've already started it for next year for our plan. And then you establish your throughput metric based on all those inputs coming together to say what the schedules will be and how productive the people will be when the suppliers are coming in, when they'll make the deliveries. The worst thing in the world in a shipyard is to have a crew show up at a work site and not have the material. And then it's like, okay, what's your second job? Are you ready? Can you put those people to work? or they have to sit there all day, which is just a bad place to be.

And I remember you and I saw that many years ago down at Ingalls.

We did. We did. We did, and that's a horrible place to be. So we're working really hard on that in both shipyards to make sure that everything shows up at the right time and the work packages are actually workable.

Now, so Block 6, can you describe, as you look at Block 6, how this can be a much more attractive structure for you guys than four and five were obviously negotiated at a different time.

Well, you just said it. First things first is it's a completely different economic environment, right? The inflation is different. The supply chain risk is different. The production schedules are different based on where the workforce is. The amount of work in your yard is different. So we had to take all that into consideration in establishing that contract. And we think that ultimately it will be the fair contract where we have a real chance to be successful and make our margin target. It's not overly good or overly bad. It's kind of right down the middle to reflect our current situation. I think back to late 70s, early 80s and how the shipyards performed then when they had a different economic environment. right a lot of demand a lot of inflation a fragile supply chain they did pretty well because they reset their contracts to deal with that those contracts got diluted over a long time of no growth and no inflation yeah so the the protective clauses kind of fell away because you didn't really need them and you lost them at the negotiation table or they weren't part of a competitive procurement right well now they're back yeah so it's kind of it's kind of cyclical. It just hit us at a tough time because we had some very large contracts negotiated in 2019.

Yeah, yeah. So if you think about these new ones coming in, as I'm trying to understand, well, actually, let me back up a second and go to the carriers because you did have an unfavorable adjustment in Q1. We did. So you've had a couple of these on the CVNs.

Can you talk about how that program is just going overall the different the different boats sure so seven 78 had an amazing deployment by the way and when the Navy releases the data on their sortie rate you're gonna see that emails and AG and the elevators performed amazing that's great it's an amazing it's an amazing ship and the data that comes out of there will be very very positive 79 is gonna have their second trials here in the summer and and it's essentially done sailors are operating that ship we'll get the final delivery if not this year beginning of next year 80 as you know is significantly impacted by the reduction gear and the turbine generators in the bottom of the ship we've received all of that now we've done deck over we've initiated our continued erection of the ship on 80 will be 75 erected at the end of the year they're really making hay on 80 and then 81 will lay the kill this year and we'll be right behind it so unfortunately that's a lot of bad performance behind you and a lot of inefficiency behind you if you go into newport news right now you're going to see units everywhere you're going to see units in a parking lot outside staged because they're out of space because we we're just building them getting them ready to be put in the dock yeah which is positive right you'd like to just build them and put them onto the ship and erect them but you just we couldn't because we had that space so they're They're making good progress, 81's making good progress, challenging what's been behind us, and we had a minor adjustment. We're gonna have to deal with that over the next couple of years as we clean up that production schedule on 80. It's just, we have to be careful of that, and just if we have some inefficiencies coming through a quarter, we'll have to deal with them.

Well, this carry program, I mean, there's no more complicated program probably than this.

Our COH is more complicated, so it is.

Well, okay, and then, but that's relevant here too, right? So now you've got the Ford, it's operating and performing well. Now that it's in service, does that create any sustainment revenue for you when this, when first in class is in service, and I don't know if that's material particularly.

It's probably not material. There is some sustainment revenue and engineering and planning revenue that happens at Newport News in support of aircraft carriers, but it's not significantly material now.

But when you go from 78, 79 to 80, are each of these, are they very different? Because there's obviously evolution over time. Because it just, it makes me want, you know, when you get into some of the issues on 80 and, you know, how do those crop up? I mean, are there advances that are being pushed through as you...

Major systems are the same. Radar are the same. EMOL is the same. AEG is the same. All the aircraft systems are the same. You're going to have potential analysis done for 82 to increase lethality. And they may look to backfit that into 81 or 80 if they can catch it. But when I talk about minor adjustments from time to time on 80 and 81, it's going to be around inefficiencies related to how we did the construction at the beginning of the program. And what are our assumptions relative to how we're going to complete that or continue to build the ship, and did we meet that or not? Because you really don't know. You really don't know until you, because we were so out of sequence on 80, you have to continue to work through that program.

Well, so when you put this together, we've got this holy grail of 9% to 10% type shipbuilding margins. And you look at Newport News, Block 6 should come in and be much more attractive. You've got to work through some of these, the CVN issues. Columbia class, my assumption that may be at this stage a little bit below. but how do you think about the margins and the ultimate path to get to that kind of number?

So we'll incrementally improve next year. I'm comfortable with our guidance this year. It's going to continue to improve. It's all truly predicated upon getting those ship deliveries done and transitioning those people into the higher margin ships. So I think both shipyards should be at 9 to 10 percent and maybe even north of that if they're executing well based on these new contracts. But again, 9 to 10 is how we forecast the healthy shipyard margin. But both of them, and it's all transitioning out of the ships that are lower margin into the higher ships. And I can't stress enough the value you get from going through a ship delivery. We're going to have people that are going through ship deliveries for the first time. And we've got five coming. So when that happens, the learning just happens. You wouldn't believe the DDGs at Ingalls right now just stacked up and you've been to Ingalls before but you can see it you can you can be on LHA eight right now and look across the yard and see just stacks of DDG 51s and if you can finish your milestone and just walk next door and do the exact same job with the exact same team you're gonna be more efficient and we've we've we have lacked that probably for 10 years.

And so when you're saying Newport News, you could get to that, I mean, it totally makes sense, get to that 9% to 10%. Does that come at a time when you've at least, your work, I mean, because you've still got a lot of, Block 6 work is just going to start.

Just going to start, right.

So do we need to wait until Block 6 becomes a majority of the work to get there?

I can't really predict it at this point. I mean, I've obviously got plans on when I think it's going to happen, but there's a lot of variables that go into that. You don't have to deliver everything in Newport News, both aircraft carriers and all Block 5 boats, before you get there. That happens out in the early or mid-2030s. I fully expect to get there before then.

Yeah, I mean, as I think about this, I mean, the margin is always this combination of some double-digit margins on fixed-price production programs. Then you've always got development at an earlier stage, and it blends out to 9 to 10, which we saw back a long time ago at Newport News. But then you could get, as we saw, and as Mike always tried to dissuade me from, double-digit margins when you got at Eagles.

You were the one that came out. You were the first, your price target when we came out at 40. You were the one that believed, right? You had the highest price target, and you were proven true.

I'd been there.

Right, right.

I saw Irwin. I saw the, you know. So did I. Yeah, I know. I'm sure you did a lot. But the thing that was so important, and it's what I kind of am looking for here, is that you could be down there and see everything is moving toward mature ships. People know how to build them. They're biased toward fixed price mature ships. And then you could suddenly find yourself in double-digit margins. As much as Mike wanted to say, don't assume that. But you did. And I would think at Newport News, if you look at the mix there, And if you can get, and forgetting the time, but if you're getting into sort of maturity on production on Virginia class, you move through a little ways on Columbia. CVN, I have a very hard time understanding how that works.

But the RCOH is cost type contract where there's a significant amount of growth work that happens on that ship. We should perform well on RCOHs.

Yeah, okay.

Can you perform above what, you know, can you get margins above? I'm not going to comment specifically on what their margin rates are, but it's a cost-type ship where you make an assumption about how much growth work you're going to have. If it changes, you get consideration for that. So you should do well on RCOHs.

So it's helpful to get you to your target, basically. Yes, okay. So going over to Ingalls, this is one where we were just talking about it being, which it looks like a pretty mature set of programs today.

Yeah, they are. They really are.

And what holds you back from getting that kind of 10% plus level margin there?

It's simply, it's the same story. It's less impactful down at Ingalls. There's less, I guess, less beta down at Ingalls because they've had a track record of executing on those programs fairly well and they don't have a new ship program in there either. So they negotiated that last DDG contract and a couple LPDs prior to COVID, right? So two ago, right? So they have to come through those, and they need to get into the new DDGs. They need to get into the Amphib bundle. And when they do that and when they execute on those deliveries, it's going to step back up.

And that's a big volume of work, right?

It's a lot of work. The DDG work is a lot of work.

And so, assuming that those DDG contracts are good for you guys now, then, I mean, this has all the potential, I would think, to revisit those days of a bias toward fixed price, mature contracts at a higher volume.

Well, they are. And higher margins. These are all fixed price incentive contracts with fair margins that we have a chance to be successful at.

And the FFX, can you just sort of dimension how large that will be in terms of your work down there?

The first two, they're about $800 to $1 billion program from a price standpoint. The first two are sole source to us, and we think we're going to do a great job building It's a little murky when you think about the acquisition profile subsequent to that. I think there'll be more than one builder. that's what the Navy has said and so that that acquisition profile we're not really comfortable with yet but we think if we do the first two very well we have a great chance to build a lot of frigates yeah yeah and it's a it's a ship we know how to build we got it was very predictable a really good team it's not a lot of content in the shipyard it's got a very predictable build schedule we're very comfortable that we know what that ship costs and how long it takes to build it well it seemed like this was just a natural for you after MSC I mean we thought yeah I'm not going to comment on the award of that contract yeah to the other company but very very rarely do you get someone say can you help us and build a new ship right it's usually very competitive process. And we're fortunate we had a ship design that was very buildable.

So the Trump-class destroyer. Battleship.

Trump-class battleship.

I can't call it destroyer?

Well, it's a battleship. It's a nuclear battleship, actually. So it's been identified as a nuclear battleship. Newport News is engaging with the Navy on how that's going to proceed and how that design is going to proceed and how they would build that in Newport News because they're really the only place that can build it.

So it has to be there.

It has to be there based on the size and because it's nuclear, it has to be in Newport News.

And so what's the trajectory for this?

Well, so it's just starting. Right, we're in the initial stages of discussions with the Navy on the plans for that. You saw it in the 30-year, the shipbuilding plan and the quandaries. But we need to get to the design, understand what the design is and engage in that with the Navy. And then think about how we'd integrate it into the shipyard if we were to build it there, when we built it there. So it's just in the initial stages, it's not in our guidance, but I think it's positive and it's broadly supported in the government.

Yeah, I mean, I've heard a lot of controversial comments about it.

I listened to comments by the president, the CNO, the SEC NAV. All of those are very positive on the nuclear battleship, so that's who I'm going with.

Okay.

That's who I'm going with.

But what I would ask is, do you invest ahead of this, or do you need to know more?

I don't need to make significant investment ahead of this. Okay, yeah, all right. And if I do, we'll be very disciplined in how we do it.

Okay, yeah. So on mission technologies, and we've discussed this in the past, but maybe you can just help us understand a little more about what holds that whole business together. Because they're different things.

Well, think about the acquisitions that pulled together mission technology. There's really three major acquisitions. Hydroid, which is really the largest unmanned vehicle provider, unmanned underwater vehicle provider in the world, made that acquisition. SIS, which was a very good unmanned surface provider, SIS, in Virginia Beach. And then Alliant, which is technology. And Alliant has always been an R&D house, a lot of cost type contracts, electronic warfare, C4ISR training, really good cyber capability for cybercom. And that pulled it all together. so we had nuclear into that mix which is really bullish on nuclear right now a lot of opportunity a lot of projects that were that were pursuing and competing on that I think I have a good chance to win on those and generate some revenue and commercial nuclear actually where we actually build part of the structure so that that's very interesting but unmanned is probably the most interesting thing right now when you look at the budget yeah and what happened in reconciliation what happened in this year's budget I think we are nearing that inflection point in unmanned where it's going to be more tangible part of the Navy fleet they're gonna buy more product and they're gonna get it out there and see how it works we're fortunate we made the investments ahead of this not only in the in in in the companies that can build a product but our Odyssey autonomy suite is a combination of the SIS autonomy suite and the Hydroid autonomy suite. We combine them into Odyssey. Open architecture like the Navy wants, built the Navy standards. We've got world-class partners like Shield AI that we can plug right into it to compete. And there are a lot of opportunities that we're competing on in the unmanned space. Obviously, we've got a large contract for small underwater vehicles, but there's both international and domestic competitions in the unmanned surface space so we think we've made the right investments we think we're in a great place to compete now it's low barriers to entry a lot of competitors but I I'm I put us up against anyone and I actually think because of our background and we understand how manned unmanned teaming has to happen yeah and We understand the Minotaur technology, which is on PH, relative to mission management, but the battlefield management of the assets on the battlefield, we understand that as well. The frigate's gonna have a module in it to control unmanned boats. There's UK initiatives around the armor program where their frigate, which Babcock builds, that we have a relationship with, is gonna potentially team with the Romulus family vehicle that we provide to expand their presence and their reach in the North Sea. So we're all over this in support of the Navy's edge fleet. And so I think there's real opportunity there. And we're entering this kind of what we talk about as an inflection point potentially in unmanned in support of the Navy.

Yeah, and it is also a complicated market to sort through because there's so many different types of plays here.

Different acquisition approaches, different investment approaches as well because you have to build these things and demonstrate them before they buy them, right? And now, fortunately, they're not a billion-dollar ship, right? These are low-dollar, not low-dollar value, but less-dollar value, $20 million to $40 million sort of products when you think about 150-foot surface vehicles. But that's an investment that they're going to have to do. But it's worth it when you think about how the Navy is evolving with their hedge fleet.

I mean, so the session before was the Andrel. And they're in this market, too. And they'll, I'm sure as you've heard, and there are others like Sironic and other places, and that they'll all talk about their speed to market, speed of development. And there's also, I would call it a favorable view inside the Pentagon today of new entrants, whether or not they are, whether or not they can do the job, there's a real openness to that. Like, how do you look at your positions here, and not against these new entrants, but also L3 Harris, a lot of people.

Yeah, low barriers to entry, and as you recall, I was on Global Hawk for Northrop, so we thought thought we were gonna dominate the UAV space, right? But it was just too expensive and the entrance, GA came in with their product and did very well. And there's a lot of other UAVs that came into the market and did niche sort of missions. I think this will develop in a similar fashion, but there are large quantities of surface vehicles that are gonna be bought. So the beauty of our position is we've had a bit of a head start, right? Especially in the unmanned undersea. and we have some very large contracts we've been working very hard on our autonomy for a long time and we built it knowing that we needed to plug in new commercial tech into it and we're doing that right now the other the other issue is you get to demonstrate it it's not marketing we're out on the water so we well first of all I welcome Saronic and roll all the commercial tech bringing Seeing young, smart people in the industry as an American, I like. That's positive. But I need to be given a fair chance to win. And so when you're going to a demonstration, there's nothing more fair than that. There's a clear criteria on how you need to execute. If you execute, then you can win. So all I want is a chance to compete, and I think I have that.

And are there certain segments within the unmanned undersea that are particularly well-suited for you?

Well, unmanned undersea, I think all of it is well-suited for us because we've been doing it for so long. Unmanned surface is a little different, right? And it's a pretty open market right now. Very small boats, I'm not really sure if that's suited for us, although we did just deliver some relatively small boats to the Marines a couple months ago that are working great with the Odyssey software on it. But again, we're going to have to evaluate each opportunity. I think you have to choose because they're going to settle up on a size, I think, and you want to be swimming towards that right size.

And if we look... you know, it's a hot area, but if we look, but the revenue dollars are relatively small today. But with high quantities, it can start to add up. And that's what I was gonna get at. Well, you know, in five years, how large could you see this business being?

I don't necessarily want to project that, but I do think there's interesting models, not only in how you sell them, but how you monetize it.

Yeah.

Right, with the software. So if you're able to sell these and sell the software potentially independently and get recurring revenue streams on the software, and we think we have very good software in this space, that's interesting. So, yes, there are small dollar values for each asset, and I don't really want to project how big it's going to get, although I think if you just look at the budget, you're going to see it's going to get bigger, and we'll get a piece of that. But I do think there's just great opportunity, both top line and bottom line.

Okay, so overall you've guided to free cash flow of 500 to 600 million this year. You know, what things should we be looking for to see? Could you be the high end of that? Well, what will determine why you've come out in that range?

Make the ship deliveries. Yeah, it's the five. We need to get Block 6 and Columbia done which will contribute to free cash flow in a year. But we need to make our ship deliveries. They're not all five of them this year. We need 800 done this year, and we need LPD 30 done this year. So we need to make our throughput commitment because our building clauses are based on earning the hours. Deliver our ships, get Block 6 in Columbia done, and then we'll be fine.

Okay. I'm just curious. There have been some concepts in the past that we haven't seen actually come to fruition. It's like LXR was going to be like the next LPD, but LPDs just keep on going.

Well, it's a great ship. A lot of room on that ship, a lot of ability to upgrade it based on technology. I think they'll always evaluate different alternatives, but they think that the LPD, the large deck in the LHAs and the Mute concept for the Marines, I think has got a lot of legs and it's done a very good job. So why mess with something that's doing very well for you?

Okay, well, Chris, great. It's great to see you hear that. Yeah, we're out of time.

Oh, are we? Well, thanks, Doug.

Thanks a lot.

Yeah, appreciate it.