Huntington Ingalls Industries, Inc. ($HII)

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 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.

Okay.

That's okay.

That's the first question.

That's the first question. Yes, you got that right.

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?

Sure. 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. We have 5 deliveries really over the next 12 months across a number of different programs. We have LPD that 30s got to deliver. We have LPD -- excuse me, DDG 129 is going to deliver, CVN 79, SSN 800, LHA 8, all those deliveries are going to happen in the next 12 months. We're very focused on delivering the fleet for the U.S. Navy. We have 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 demand, really historic demands of the U.S. Navy.

On that, right now, we're looking at a budget. The Trump administration's proposal is $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 in the whole way this is going to move through...

Right , right. 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 2 reconciliations. The great news is that our ships are in the base budget. So all of our 6% 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 going to be fine.

So if we -- I mean because one of the worries we've had is that if there is no reconciliation pass and we go to October 1, then we're back at basically down $155 billion on a CR.

Right, right, it could be. I don't see a threat to our programs. The vast majority of them are under contract already. We need to get Block VI in Columbia done. But -- and DDGs will happen as well. I'm comfortable with those. We already have the [ ante ] bundle squared away down with 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 to the guidance.

Okay. Now in this budget, there are big increases. I mean you've got 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 they turn that money into real volume coming out the other side. 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 [ rating ] 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 you think about the distributed shipbuilding concept? This seems fairly -- 10 years ago, we wouldn't have been talking about...

We wouldn't know 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 you identify sort of the next opportunity to expand on that?

Well, we've had challenges before. We've done it incorrectly, and we were punished for it on the LPD program when it originated. So we're very careful and disciplined in 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 could just continue on building the ship. So we go to partners. We do initial pilot programs with them. They'll build 1 or 2 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 going to have to go to a few in order to handle all of the work that needs to get done both at Newport News and at Ingalls.

And are these -- are these often sort of traditional players in this space? Or does this vary -- can you -- and the reason I ask is it's been -- 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. So -- are you basically working with the same base or types of people that you've worked with before in expanding the roles? Or are you able to actually bring in a broader spectrum of...

So it's both. So it's both. We are 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 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 if I think back to some of the things that Mike Petters said 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 was -- there are -- there are many -- 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. And if you're thinking of capabilities, and it could be in energy and 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 bonafides to execute.

And one of the things that this administration -- when we were here last year, they had just announced the White House Office of shipbuilding. They were going to -- 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 partner is HHI, right, Honda 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 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 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 in the Ingalls' side, I would think.

It's definitely Ingalls, right.

Yes. I mean it's kind of hard to...

Right. You don't bring the nuclear work there.

Okay. Then so last year, you got this -- the award for the last 2 Block V class. And in that, you've 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 that's kind of a margin-neutral sort of adjustment that 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 that's it. So it's worked very well.

Yes, 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. I mean I...

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.

Okay. So how many -- you're always talking about the balancing hires versus attrition? How -- 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 keeping -- 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 in 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 ex the...

So we have -- 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 sales growth, you need to pay attention to all 3. And then more important than anything, you need to make your ship deliveries, right? So if I were to guide people on how to think about HII right now from a shipbuilding standpoint, is if we're getting healthier, those 5 ship deliveries happen consistent with how I'm talking about it. And they're all proceeding, but they're getting into 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's like with Mike and analysts would say, no, you're going to grow faster than that right now...

You would say we're flat. We're going to be flat.

[ 3% ]...

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 -- he was flat.

When he was saying 4 not too long ago...

We moved to 4 simply because we saw it. But remember that we were dealing with $12 billion budget, $12 billion 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 is more expensive, and we want more amphibs. 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.

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

It's pretty sustainable. It's pretty sustainable. It's -- and remember, we're starting on a year that already had wages included, right, fundamentally 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 4 to 6 years, it's definitely pretty solid.

At the 6% type level?

Yes.

And then you're just -- you've just started the same type of program in Ingalls, right?

Yes.

So that's when we will see probably a step up...

Yes, 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 frigates then over where you were doing NFC, right?

Exactly. Right. Yes. We have the team. A lot of the team is still in place, all the process is 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 2 frigates.

And 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 how -- 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. You're getting to that 2 per year goal collective. There's a lot of...

There's a lot of fixation on the 2, [ 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 V boats to an adjusted schedule based on when we think the supply chain is going to show up. And so -- and I know the Navy talks about the 2030 -- beginning the 2030s. I focus on ship deliveries. I focus on ship deliveries. We got 2 year last year, 2 years, the year before as a submarine enterprise. We're out of the first Columbia class boat. We've delivered all of our equipment for the first Columbia class boat. The second Columbia class is much more efficient. We did -- and it's proceeding in 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. Over time is at a premium. So it's actually earned hours, productive hours that you have to get done.

Okay. So it's really the -- and it's a labor. It's -- is it...

It's labor -- it's labor plus -- 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, 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.

Okay. Because I mean at one time, you were looking for 20% last year. And 15% sounds pretty good to me.

It's pretty high goal, pretty high goal. Maybe I pushed them a little bit too hard, right?

Yes.

The good news is that the submarine program is -- has got some traction right now, which is very positive. Really for national security, not just our financials. It's a top priority, Columbia class, top priority and then Virginia class right after that, especially with the Virginia payload modules which are part of Block V. So having the submarine enterprise getting some cadence is really positive.

But the payload modules, I mean those aren't yours, right? So...

We don't build a module, but we do integrate it.

You do the integration...

On the ships that we deliver.

So once you deliver -- okay, I see. So there's extra value for you, even though the module itself suffered.

Well the work -- there's additional work for us to do the integration, yes.

Okay. So Block VI, you hear that today or...

Yes, 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, I'm going to talk with Tom a lot before about this, is getting past all of those sort of COVID time boats and getting -- where you never got, I think, properly compensated for the inflation. And you're not alone, everybody else is...

Everybody else thinks mine are very large, and they last a long time.

Yes, yours are bigger than anybody else is.

Yes, 2 largest contracts we signed as a corporation are the 80 and 81 contract in Block V. What you're signed in 2019.

Yes. So -- and you didn't get much help with that, right?

I will say the Navy has 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 SIB funding, so -- 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 in the MIB money and the SIB money go into increasing their capacity, give them technical help, additional capital to be invested.

Because this is one of the things that I've struggled with because the shipbuilding -- shipbuilding supply chain is so complex. I mean I...

And it's complex.

I don't know -- well, it's funny. Last year, I remember [ Phoebe ] made this comment to you guys, you think a bombers 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. I mean are there further steps that you're looking toward what the Navy can execute on?

Yes. Well, yes, first things first is award the contract on time. So we're on long lead for Block VI already. We're on long lead and have continuous build authority on Colombia, which means we're going on Colombia. 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 casting and forging suppliers, which was a real bottleneck for us, and we actually buy a lot from the U.K. right now. So it's happening. Is it happening fast enough? You can always go faster, right? 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? How do you...

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 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, right? And then it's like, okay, what's your second job foreman, right? 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 in 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.

Yes. So Block VI, can you describe -- as you look at Block VI, how this can be a much more attractive structure for you guys than IV and V were obviously negotiated at 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 a 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 the late '70s, early '80s and how those shipyards performed then when they had a different economic environment, 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. So 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. Well, now they're back. So it's kind of cyclical. It just hit us at a tough time because we had some very large contracts negotiated in 2019.

Yes, yes. So -- if you think about these new ones coming in, as I try to understand -- actually, let me back up a second and go to the carriers because you did have an unfavorable adjustment in Q1. So you've had a couple of these on the CDNs. Can you talk about how that program is just going overall in the different...

Sure. So 78 had an amazing deployment, by the way. And when the Navy releases the data on their sortie rate, you're going to see the [ e-malls ] and AAG and the elevators performed amazingly. It's an amazing ship, and the data that comes out of there will be very, very positive. 79 is going to have their second trials here in the summer, 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. We'll 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 we're out of space because we're just building them, getting them ready to be put in the dock, which is positive, right? You'd like to just build them and put them on to the ship and erect them, but you just -- we couldn't because we had that space. So they're making good progress. 81 is making good progress, challenging what's been behind us, and it's -- we had a minor adjustment. We're going to have to deal with that over the next couple of years as we as we clean up that production schedule on 80. It's just -- it's -- 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 -- the carry problem is -- like no more complicated program probably even miss.

Our COH is more complicated so...

Well, okay. And then -- but that's relevant here too, right? So now you've got the [ for ] that's operating and performing well. What now that it's in service, does that create any sustainment revenue for you when this 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, no.

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 -- when you get into some of the issues on 80 and -- how do those crop up? I mean are there advances that are being pushed through as you...

Major systems are the same, right? Radar, the same; e-mall, same; AG, same; all the aircraft system is 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 are we going to -- what were 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. When you look at Newport News, Block VI should come in, 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 -- it's really 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% 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 a 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 5 coming. So when that happens, the learning just happened. 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 be on LHA 8 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 going to be more efficient. And we have [ lapped ] that probably for 10 years.

And so -- so when you're saying Newport News, you could get to that. I mean, totally makes sense to get to that 9% to 10%. Is that -- does that come at a time when you've at least -- your work, I mean, because you still got -- you got a lot of -- Block VI work is just going to start. So do we need to wait until Block VI becomes a majority of the work to get there or...

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. It's -- you don't have to deliver everything in Newport News, both aircraft carriers and all Block V boats before you get there, right? That happens out in the earlier mid-2030s. I fully expect to get there before that.

Yes. And 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 in earlier stage, and it blends out to 9 to 10, which we saw back at a long time ago at Newport News. But then you could get -- as we saw is -- Mike always tried to dissuade me from -- double-digit margins is what you got...

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've been there, right? I saw [ Irwin ]. I saw the...

Right, right. So did I.

Yes, I know. I'm sure you did, a lot. No. But the thing that was that was so important, and it's what I kind of -- looking for here is that you could be down there and see everything is moving towards 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 -- forgetting the time, but if you're getting into sort of maturity on production on Virginia class, you move through a little way on Colombia. 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 our COHs.

Yes. Okay. Can you perform above what -- 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. You have the changes you get consideration for that. So you should do well in RCOHs.

So it's helpful to get you to your target basically, yes?

Yes.

Okay. So going over to Ingalls, this is one where we're just talking about -- which it looks like a pretty mature set of programs today.

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 the last DDG contract and a couple of LPDs prior to COVID, right? So 2 ago, right? So they have to come to those and they need to get into the new DDGs, they needed 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 CDG contracts are success -- 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 higher volume.

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

In the [ FFX ], can you just sort of dimension how large that will be in terms of your work on there?

The first 2 -- they're about $800 million to $1 billion program price -- from a price standpoint. The first 2 are sole sourced to us, and we think we're going to do a great job building those. 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 acquisition profile, we're not really comfortable with yet. But we think if we do the first 2 very well, we have a great chance to build a lot of frigates. And 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 cost and how long it takes to build it.

And it seemed like this was just a natural for you after NSC. I mean...

We thought -- yes, I'm not going to comment on the award of that contract to the company. But very rarely do you get someone say, "Can you help us and build a new ship, right? It's usually a very competitive process. And we're fortunate we had a ship design that was very buildable.

Yes. 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.

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 quantity. 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 integrate it into the shipyard if we were to build it there, when we build 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.

Okay. Yes. I mean I've heard a lot of controversial comments about it, but...

I listened to comments by the President, the CNO, the second half, all of those are very positive on the nuclear battleship. So that's where I'm going with. That's who I'm going with.

Okay. 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. Yes. All right.

And if I do, we'll be very disciplined in how we do it.

Okay. Yes. So on Mission Technologies, -- and we've discussed this in the past. So maybe you can just help us understand a little more about what holds that whole business together? Because they are different...

Well think about the acquisitions that pull together Mission Technologies. There's really 3 major acquisitions. Hydroid, which is really the largest unmanned vehicle provider -- on an underwater vehicle provider in the world, made that acquisition. SIS, which is -- 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 cyber com. 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 we're pursuing and competing on that, I think I have a good chance to win in those and generate some revenue in commercial nuclear actually where we actually build part of the structure. So that's very interesting. But unmanned is probably the most interesting thing right now. When you look at the budget 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 going to buy more product, and they're going to get it out there and see how it works. We're fortunate we made the investments ahead of this, not only 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 Ones built to Navy standards. We've got world-class partners like ShieldAI 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 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 put us up against anyone, and I actually think because of our background and we understand how manned unmanned team has to happen, 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 is going to have a module in it to control unmanned boats. There's U.K. initiatives around the armor program or their frigate, which [ Babcock ] builds that we have a relationship with, it's going to team with potentially team with the [ Romulus ] family vehicle that we provide to expand their presence in 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 demand in support of the Navy.

Yes, it's it is also a complicated market to sort through because there are 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 don't -- they're not $1 billion ship, right? These are low dollar -- not low dollar value, but less dollar value of $20 million to $40 million sort of products when you think about the 150-foot surface vehicles. But that's an investment 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 [ Anduril ]. And they're in this market, too. And they'll -- I'm sure as you've heard, there are others like [ Saronic ], 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 -- or not, they can do the job. There's a real openness to that. Like how do you look at your positions here and that -- and against these new entrants, but also [ L3 Harris ], a lot of people.

Yes, low barriers to entry. And as you recall, I was on [ Global Hawk North ] -- so we thought we were going to dominate the UAV space, right? But it was just too expensive in 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, did niche sort of missions. I think this will develop in a similar fashion, but there are large quantities of surface vehicles that are going to 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 issue is you get to demonstrate it. It's not marketing with out on the water. So we will -- first of all, I welcome [ Saronic, Anduril ], all the commercial tech, bringing 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, which -- 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 that's -- 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. And 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 of months ago that are working great with the obviously, software on it. But again, we're going 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 -- it's a hot area, but if we look -- the revenue dollars are relatively small today.

But with high quantities, you can start to add up.

And that's what I was going to get at. Well, in 5 years, how large could you see this business being?

Yes. 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, right, with the software. So if you are able to sell these and sell the software potentially independently and get recurring revenue streams on the software, and we think we have a 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, great opportunity, both top line and bottom line.

Okay. So like overall, you've guided to free cash flow of $500 million to $600 million this year, what things could -- should we be looking for to see could you be the high end of that? What will determine why you've come out in that range?

Make the ship deliveries. We need to get Block VI in Colombia done, which will contribute to free cash flow in the year. But we need to make our ship deliveries. They're not all 5 of them in this year, revenue at 800 done this year, and we need 30 -- LPD 30 done this year. So we need to make our throughput commitment because our billing clauses are based on earning the hours, deliver our ships, get Block VI in Colombia done, and then we'll be fine.

Okay. And just curious, there have been some concepts in the past that we haven't seen it actually come to fruition. I'm just -- it's like LXR was going to be like the next -- 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 the LPD, the large deck and the LHAs and the new concept for the marine, I think it's 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.

Yes. Okay. Well, Chris, it's great to see you here, but we're out of time.

Okay. Great. Well, thanks, Doug.

Thanks a lot.

Yes, appreciate it. Thank you.