Yahoo Finance

Thomas Stiehle

Thanks, Chris, and good morning. Let me start by briefly discussing our first quarter results, and then I will address our reaffirmed 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 5 of the presentation, our first-quarter revenues of approximately $2.7 billion decreased 2.5% compared to the same period last year. This decreased revenue was attributable to declines at Newport News Shipbuilding, Ingalls Shipbuilding, and Mission Technologies.
Ingalls' revenues of $637 million decreased by 2.7% compared to the first quarter of 2024, driven primarily by lower volume on amphibious assault ships. Newport News revenues of $1.4 billion decreased by 2.6% compared to the first quarter of 2024, driven primarily by lower volumes in aircraft carriers and naval nuclear support services, partially offset by higher volumes in the Columbia-class submarine program.
Mission Technology revenues of $735 million decreased by 2% compared to the first quarter of 2024, driven primarily by lower volume in C5ISR. Results for the quarter exceeded our guidance. The year-over-year decline was expected and related to non-recurring sales in the first quarter of 2024.
Moving on to slide 6, segment operating income of $171 million in the first quarter of 2025 increased less than 1% compared to the first quarter of 2024, driven by improved performance at Mission Technologies in cyber, electronic warfare in space, and uncrewed systems, which was largely offset by lower amphibious assault ship risk retirements at Ingalls.
At Newport News, segment operating income improved by $3 million, or 3.7% compared to the first quarter of 2024. Results in the quarter included unfavorable performance-related adjustments for CVN 80 Enterprise, as well as Block IV and Block V of the Virginia-class program, which were offset by contract incentives. Consolidated operating income for the quarter of $161 million increased by $7 million, or 4.5% from the first quarter of 2024, an operating margin of 5.9% in the quarter compared to 5.5% in the same period last year.
The improvement was driven by a more favorable operating fast-cast adjustment, as well as the favorable segments results I've noted. Net earnings in the quarter were $149 million, compared to $153 million in the first quarter of 2024. Diluted earnings per share in the quarter were $3.79 compared to $3.87 in the same period last year. Our contractual commitments increased by approximately $2.1 billion in the period, bringing backlog to $48 billion at the end of the quarter.
Turning to slide 7, cash used in operations was $395 million in the quarter. Net capital expenditures were $67 million, or 2.5% of revenues. Free cash flow in the quarter was negative $462 million. This was within our free cash flow guidance range for the quarter, though at the low end of the range, due to timing of incentives and normal fluctuations in program receipts and disbursements. During the quarter, we did not repurchase any shares. We did pay a cash dividend of $1.35 per share, or $53 million in aggregate.
Turning to liquidity and the balance sheet, we ended the quarter with a cash balance of $167 million and liquidity of approximately $1.5 billion. Today, we are repaying a $500 million note and plan to utilize a revolving credit facility and commercial paper program to support interim liquidity as free cash flow generation ramps through the year. This is in line with our prior expectations and was contemplated in the interest expense guidance that we had previously provided and are reiterating today.
Our capital allocation parties are unchanged. We value our investment-grade credit rating. We will continue to strategically invest in our shipyards, thoughtfully grow our dividend, and return excess cash through share repurchases.
Moving on to our outlook on slide 8, we are reiterating all elements of the 2025 guidance, and there is no change to our medium to long-term thinking in terms of growth and profitability expectations. Our guidance is predicated on achieving the operational initiatives we have laid out for 2025. As Chris noted, we are progressing on each of these items, and we expect to achieve a meaningful improvement in throughput over the course of the year.
For shipbuilding, we expect second quarter sales of approximately $2.2 billion and margins near the low end of our annual guidance range. For mission technologies, we expect second quarter sales that are relatively flat sequentially and margins of 3% to 3.5%. We expect second quarter free cash flow to be between $200 million and $300 million.
To close, I will echo Chris's positive sentiment regarding the company's mid- to long-term outlook. We've seen credible demand for critical products and services that we provide, and are heartened by the administration's clear focus on growing our domestic shipbuilding capability and supporting a strong maritime industrial base.
With that, I'll turn the call back over to Christy to manage the Q&A.

Christie Thomas

Thanks, Tom. (Event Instructions)
Operator, I will turn it over to you to manage the Q&A.

Question and Answer Session

Operator

Thank you very much, Christie. (Operator Instructions)
Doug Harned, Bernstein.

Douglas Harned

We've seen with the CR with additional money for shipbuilding infrastructure and then this big authorization proposal that came up on the weekend. Now, when you look at all of this, there should be more money there.
But the thing that I've sort of struggled with here is how to take that money and convert it into a plan that can address what you, say, on the Virginia Class U electric boat and the whole infrastructure needs to happen to really get throughput up. Can you comment on where the responsibilities lie, what the Navy is actually doing so that we can have confidence that not just the money is there, but the real actions are there to change the way things have been going over the last few years?

Christopher Kastner

Sure, Doug. Let me give that a shot. That's a big question. And it's not only the budget, the FY24 two-boat, the executive orders related to commercial shipbuilding, and then reconciliation. There's just a lot of tailwinds right now related to shipbuilding that we need to participate in.
Now, the first step in seeing what the investments are in that regard is this FY24 two-boat contract. That was a product of really a couple years of effort by the Navy and the shipbuilders to evaluate the investments that were required to get at accelerating throughput. You see that in the award of that contract. It was very thoughtfully put together. It's a wage support and workforce development support. It's very targeted investments to increase the submarine build rate. So that's all very positive.
And then when you look at the SIB and the MIB funding that have been applied to the supplier base, that's also very positive. And you see a buildup of the infrastructure in shipbuilding that will support the growth that we think is ahead of us. So it's really, I would think, an industry-wide, all-hands-on-deck effort to identify a buildout of that industrial base.
Now, it's not easy. It takes time. These are heavy manufacturing facilities and equipment. This is building a workforce in a challenging environment, but I think it's only positive for HII and positive for shipbuilding.

Douglas Harned

But I guess the challenge here is that there's been a lot of discussion about this over the last few years. Are there some specific things, like if you start to look at what you need to get to that rate of two Virginia class per year, what's the trajectory for this? Are there specific things that will enable you and your partner to get there?

Christopher Kastner

Absolutely. And really the first step of that is this FY24 two-boat contract. Targeted investments in workforce, equipment, facilities, training that will accelerate the throughput. We have a lot of confidence that when these investments take hold, it's going to start to ramp throughput for the submarine program. And this shouldn't end here. We're going to negotiate Block VI of the Columbia Build II contracts. We've identified additional investments that could potentially be applied to further accelerate.
So it's going to, as I said before, it's going to take a while. You just don't build a building overnight. You don't build a workforce overnight. But I absolutely think that these are the right investments to get at the build rate.

Operator

David Strauss, Barclays.

David Strauss

Following up on the CR money, the FY24 two contract that was announced yesterday, it looks like it's some form of cost contract. How is that? I thought we were operating under fixed price on Virginia class. So how is that potentially different? What does that contract contemplate differently, I guess, than prior contracts?

Christopher Kastner

Yeah, it's a bit of a hybrid, but I'll kick it over to Tom. He can answer that.

Thomas Stiehle

Yeah. So it's a cost type contract. It covers both parties, the Navy and ourselves concerns as far as what wants to be put on contract. It's a good mix and blend between affordability and profitability, and it covers the business environment that we find ourselves operating in.
So it's a CPIF, and it has some constraints as far as some parameters around the outskirts of where costs can land. But we're happy that we were able to get that done. We've worked hard with the Navy, and it was approved through the government channels. And as you saw, it was awarded last night. So we're excited about that to get going on that contract.

David Strauss

Okay. And any more detail on, obviously, the shipbuilding margins in total came through better than what you had guided to. Newport News got a fair amount better. Ingalls kind of continued to step back. Can you just a little bit more detail on exactly what's going on and why you're forecasting kind of a margin step down again in Q2? And if you also want to talk about what EACs were in the quarter. Thanks.

Thomas Stiehle

Yeah, sure. So hey, we got it [55] for the quarter, so we're happy with where we landed. We landed about 90 bps above that. Ingalls came in at [72], and it was a pacing quarter for them. I guess I can start with the EAC adjustments. We had 80 up and 80 down for a net of zero. So there's no breakout for you.
So there was no cumulative adjustments across the company as a net. Ingalls pacing quarter, I would say right now, we're watching how [ANFIBs] are performing. We show a little pressure on sales, on the sales front. And it's kind of working ourselves through the heart of those programs down there.
From a Newport News perspective, it was a good quarter as they came in at 6.1% on the margin side. It was a mix of some pressures that we've seen on CV and 80 that Chris talked about in his remarks, as we're waiting for parts to pop in there. It's just having a little bit of a draw on the EAC and schedule on that front.
And then the VCS program, as we're working people and parts to make sure we have enough people, talented people. The wage element of this recent award will help that. And on the parts side, just making sure we can feed that production line as that production line ramps up and wants to get to the one plus two that we've talked about earlier here. So the new award assisted with that with some incentives that helped offset that.
But as I said, overall, it was net neutral for (inaudible) adjustments across the corporation.

Christopher Kastner

Yeah, David, this is Chris. I think you're seeing a bit of frustration regarding the timing of incentives across the portfolio. I've spoken previously that we just have more incentives on our contracts now and the timing is variable at some point. So we try to guide based on what we see in front of us. And if incentives fall before or after, then it adjusts that a bit. But we're comfortable with our guidance.

Thomas Stiehle

From an [MEC] perspective, we saw that they had a very strong quarter. The CEW business unit performed well against the contracts they had. And the uncrewed business unit that we have there is performing well right now. So there's a couple of dollars of margin created on that front. The guide for Q2 that you asked about, I think we're just being conservative right now.
As Chris said, there's a lot of work to do. Although we're on pace and where we want to be on cost reductions and throughput and the contract awards, we've got the first increment of this one here in the spring. And then we have VCS Block VI and Columbia Build II at the back half of the year. But I think it's just conservatism and prudence on our side that we went back to the lower end of the range.

Operator

Scott Mikus, Melius Research.

Scott Mikus

I wanted to follow up on David's question about the two-boat Virginia contract. It was surprising to see that it was cost plus. But obviously, there's funding in there for workforce development. Electric Boat has an ongoing labor negotiation. I think Newport News has three collective bargaining agreements expiring in '27. So until those negotiations are wrapped up, should we expect a greater share of shipbuilding orders over the remainder of this year and next year to be more cost plus incentive fee type structures?

Christopher Kastner

Yeah, I wouldn't necessarily assume that. We need to really get the wage support that's provided in the two boat out to our workforce as quickly as we can. I'm not going to get into dates or commitments about when that happens because we do have to discuss that with our labor unions. But we believe that when we get the wage support to our workforce that retention will improve and productivity will improve and we'll be able to make our throughput and our schedule commitments.
So I wouldn't necessarily think that that would dictate the contract types. We're going to evaluate the appropriate contract types based on the situation at hand when we negotiate the contracts. So we're just going to have to kind of move ahead from here on Block VI and Columbia Bill II. The hybrid approach that essentially was put in place with the two-boat contract forms an interesting basis to roll into those discussions. But we're going to have to establish those contract types as we engage with the customer and our partner.

Scott Mikus

Okay, and then the Golden Dome is also a big priority for the administration and that's going to require a lot of equipment, especially radars and potentially the Aegis system. Lead times on radars are also very long. So has there been communication between shipbuilding and the administration about how to produce enough radars for both the Golden Dome and what the Navy needs for shipbuilding priorities?

Christopher Kastner

Yeah, so we have not been involved in those discussions to date. I'm unaware of any discussions with the Navy and potential suppliers for that. So I will say our DDG 51 program, Aegis program, is going well. We saw 129 go on the water. 128 will get to its first trials this year. So we're making progress on our milestones there, but relative to those ships with those new radars. But I'm unaware of any discussions relative to Golden Dome with our product.

Operator

Pete Skibitski, Alembic Global.

Pete Skibitski

I guess Chris or Tom, I'm not sure, but kind of a complicated situation. But you guys have nearly $50 billion in total backlog right now. And you're talking about an incremental $50 billion in new awards in the relative near term. How can we not think that there's upward pressure on that 4% shipbuilding revenue growth guide in this type of backdrop? Is it still just early or labor situation that confounding? And I assume the 4% doesn't include the $150 billion in defense ads. Potentially coming down the pike as well. So I just want to hear your thoughts on that.

Christopher Kastner

Yeah, so the $50 billion in new awards includes the FY24 two boat contract, Block VI, and the Columbia second build. It also includes the amphib bundle down in Ingalls. So I wouldn't necessarily correlate it to a $50 billion ad in backlog from our current backlog levels.
Now, tailwinds related to the 4% absolutely could happen. I'm not going to go there from a guidance standpoint at all right now. But the tailwinds between reconciliation, the executive order, these contracts being put under contract, the investments that are being made in the industrial base, and the shipyards, there's absolutely medium-term upside related to that top-line growth number. So we just need to take advantage of it. And that's what we're going to work to do over the next couple years.

Pete Skibitski

Okay, I appreciate it. Just one last one for me on Ingalls margin. It used to be kind of reliably in the double digits. And it's kind of regressed over the past five quarters or so. What timeframe is reasonable for us to think about, you know, the current environment changing to one where positive EAC adjustments are more, you know, maybe more likely than not?

Thomas Stiehle

Yeah, I think you nailed it there, Pete. The culprit is positive EAC adjustments. It's not so much that we're realizing kind of negative adjustments, but we're staying on our run rate and we're neutral there. You know, all three of those programs are in a production environment, the engineering works, the facilities up and running, we've come through the shipyard of the future and we've facilitated. It's really just about people and parts, being able to hire enough and keep the retention.
And as we go forward with that, to make sure that we feed the factory to run its production environment there. So I'm comfortable with the leadership down there and that we understand those ships. I think it's just coming post COVID and getting the stand out of the gears there and having the production flow run as fast as possible. We are down probably a couple of years and hours of experience down there that just works itself through maybe not as cost efficient to realize those upsides and maybe a little bit more rework from time to time.
Maybe a piece of material, whether it's CFE or GFE, just all conspires to maybe not have, you know, a month or two early in schedule or an EAC reduction that we just kind of finish on par. But I'm comfortable with where they are right now. I mean, I'd love to see upsides every quarter, but we have not seen like major setbacks down there.
So I think they understand what's in front of them. It's the throughput we talked about, more cost efficiency, keep the factory fed with parts and that shipyard, that portfolio has a legacy of performance. I think that they'll turn the corner. We haven't given you the timeframe yet and we'll keep you informed quarterly as we watch that proceed forward.

Operator

Myles Walton, Wolfe Research.

Myles Walton

Maybe Chris, could you start by talking a little bit about the workforce and how it trended in the first quarter? I think you probably picked up about 500 employees with W International and the press release is still talking about 44,000 employees. So was there much of a movement in net hiring and how's attrition doing?

Christopher Kastner

Yeah, so interesting. Good question, Myles. We hired 1,000 people in the first quarter, 1,000 craftsmen and women. That's directly related to the change in the strategy in both shipyards to hire more experienced personnel and improve the mix of experience versus new hires. We think that strategy makes sense. We're going to continue to execute on that.
The good news is attrition is down in both shipyards. Not materially down, not back to pre-COVID levels, but it is definitely moving in the right direction. So yeah, I hired 1,000, which is a bit south of where we wanted to be, but it's consistent with our strategy and attrition is a bit better in both shipyards, which is very positive.

Myles Walton

Okay. And regarding the 35% increase in outsourcing, can you comment on where you are with respect to that and sort of how the performance quality is looking from what you're outsourcing?

Christopher Kastner

Actually, the way we've executed on our outsourcing program has been very positive. We have some tough lessons learned back at Ingalls in outsourcing in the early 2000s, and we've used those lessons learned and applied them in both shipyards.
So the quality is pretty good. We do pilots in these manufacturing yards before they actually execute work at scale, and we learn through that process. They've done that. We are on schedule in both yards in outsourcing for the year, and the quality looks good.
So we're going to continue it. We need to. The industrial base is expanding. We need to take advantage of it, but we need to make sure that it's always high quality, because if it's not, you have to redo it, and that doesn't help us at all. So yeah, it's very positive right now.

Myles Walton

Okay. And the last one, on the SAWS program, is there a direct benefit to the carrier programs, or is it more of an indirect benefit with the submarines being the direct beneficiaries?

Christopher Kastner

Yeah, it supports the entire nuclear industrial base and nuclear infrastructure. So aircraft carriers get support in that as well.

Operator

Seth Seifman, JPMorgan.

Seth Seifman

hen we think about the direct impact of the contract that was announced last night, is there kind of a sizable cash advance associated with it, and is that part of the cash guidance for Q2, and does it enable signing the contract, give you opportunity to change some of the assumptions across the different work at Newport News beyond just the two subs that were contracted?

Christopher Kastner

Let me start with that. So guidance assumes execution of the Block V two boat contract it has all year, and we assume incentives and capital incentives in all of our guidance. So there are some incentives in Q2 related to that contract as well as other contracts. So it's all in the mix when we come through our guidance for pre-cash flow for Q2 as well as the end of the year. I'd love, Tom, if you want to add anything in regard to that.

Thomas Stiehle

I mean, it was incorporated into the guide that we gave you for Q2. We mentioned at the very beginning of the year expectation to have both that award and then in the back half of the year, BCS Block VI and Columbia Bill II. So we're really happy we got that done here.
Cash comes from margin and margin can come from operational performance, capital incentives, performance incentives. With the new contract ad, it helps out incrementally, but it was in the mix and it was in line with what we expected here. So I'm comfortable with both the guide that we've given you now for Q2 at [$200 million to $300 million], supports the [$300 million to $500 million] for the entire year with no change. We have pathways to get there. So I appreciate the question.

Seth Seifman

Okay. And on the assumed, on the booking rate part of that?

Christopher Kastner

Well, it's all included in our guide and in our accounting. So it's, we had always assumed this contract was going to get done this year in all of our, in our accounting and in our guidance.

Seth Seifman

Okay. And then just a little bit bigger picture, you know, you have this announcement with, I think with Hyundai during the quarter and, you know, one of the, you know, one of the topics that some people in Washington are discussing in terms of ways to accelerate shipbuilding is through partnership with other countries. This seems like a pretty early effort based on what was in the press release, but, you know, how do you think about where that could go and where international partners might actually be able to fit in?

Christopher Kastner

Yeah, thank you for that question. Yeah, it is early on in a strategic relationship that's very broad in nature, and it's going to apply to commercial shipbuilding and potentially taking advantage of the economic situation arising out of the executive order on commercial shipbuilding to see if there's an economic model that makes sense for expanding the commercial shipbuilding base in the United States, and then best practices in defense and military shipbuilding.
We've been in their shipyard, they've been in our shipyard, they're a great shipbuilder, we're a great shipbuilder, and we can learn from each other. So it's very broad in its nature right now. I think it's, when you think about having allies participate in shipbuilding, that only makes sense.
An expansion of the capacity only makes sense, and bringing the best people to the table to execute against this is only the right thing to do. So we don't know where it's exactly going to take us at this point. It's in the initial talks, but we need, it's part of taking advantage of what we see as a pretty significant tailwind in shipbuilding.

Operator

Jason Gursky, Citigroup

Jason Gursky

Chris, we've talked about this kind of in bits and pieces throughout the call today, and I think in prior calls, but I'd like to just ask kind of a step back, bigger picture question about the timing of the transition from pre-COVID to post-COVID ships, and maybe give you an opportunity to kind of update us on any changes to the timing and maybe the major risks and opportunities in that timeline.
So I think you announced today some modest delays on the carrier side. So I just want to make sure we're kind of re-baselined here on the expectations on timing of that transition.

Christopher Kastner

And I think we said that 50% was going to, we're going to hit the 50% mark or beyond 50% mark in '27, that's correct. You're correct to pick up on the issues with CBN 80 related to the equipment that's late in the bottom of the ship.
We expect to get that over the summer, and then when that gets in, we'll start to make more progress. But there's no change in the balance of our milestones. We're in a pretty good place there, so I still expect that transition to be on schedule.

Jason Gursky

Okay, great. And then I think Christie's restricting us to one follow-up question, so this might be like a couple, three parts here. I'm just kind of curious on all the reform in the executive orders that have been coming our way, to get your thoughts on a couple of different things.
First on shipbuilding assistance and investment that might go into the shipbuilding industrial base, kind of what strings might be attached to it, and do you need to invest ahead of getting funds, and does that change the potential cashflow profile ahead for you? And then you mentioned OTAs in your prepared remarks, and I think it's kind of tied up in the potential for acquisition reform, acquisition reform of FAR and DFARs specifically.
So I'm kind of curious, is that something that is going to impact, those kinds of mechanisms will impact the mission systems business more than shipbuilding per se? And what do you think is the long-term impact on the mission systems business from a risk in opportunities and margins? Thanks.

Christopher Kastner

Thanks, Jason. So first things first, the reform executive orders and cashflow profile, look, I think it's too early for that right now. There's a lot of work going into making recommendations on how those are rolled out. If you read the executive order, significant amount of activity that we need to participate in quite actually, because we think we can add a lot of, provide a lot of input to them, so we can kind of get it the right answer.
But so yeah, a lot of work by the team, the government team in the shipbuilding office over the next 30, 60, 90 days to further define what those mean, what the economics mean, what the investments mean. And we'll know more, but I don't see a definitely a cashflow drain by us related to that at this point, but more to come.
On the OTAs, those are only positive, things happen faster in an OTA environment. We're pretty good at them. We are uncrewed, small uncrewed vehicle was an OTA that was converted to a program of record and very positively.
So we only see upside related to that. We're comfortable with it. We're going to lean into it. So there's potential upside within mission technologies related to that activities and the rapid capability office sort of activities with our high energy laser that we're providing for the Army is also positive. So I think you have to lean into this stuff.
Historically, our mission technologies division has been very good at applying commercial technologies to some of the biggest problems that the DoD has. We're going to continue to do that. We have a team that can do that within mission technologies. So as I said before, we're going to lean into it and I see potential upside related to it.

Operator

Noah Poponak, Goldman Sachs.

Noah Poponak

It was reported in the press and I think you discussed that there was a draft of the maritime executive order that included a There was a draft of the maritime executive order that included the SAWS language. And then, you know, we now have the executive order. It doesn't include it. And, you know, we have kind of a, I mean, I know it's a very long cycle business, but I put a long planning process to sort out where to go from here. I was curious what your sense is for why that changed in the process and how likely or unlikely it is that you eventually see SAWS.

Christopher Kastner

Yeah, so that's probably not important to how it did not end up in the final executive order. I'm sure that's why there are drafts that go through review with the different elements of the government and ultimately it wasn't included.
Do I think SAWS will happen in the future? Look, SAWS did a lot of really interesting things. It was very innovative. It accelerated investment into the shipyards to get at the submarine production rate. But right now our baseline is the Block V contract, the Block VI contract, and Columbia Bill II. And we're working with our customer to March 4 to get those under contract.
Now, the really good part about SAWS is it identified in detail the investments we thought we needed to get this done. You see those investments show up in the Block V contract. And as we move through Block VI and Columbia Bill II, they should show up there as well.
So SAWS called another name, but the investments are required. The team knows it. They put those investments together as a team. So we need to make sure that we continue to make those investments to get to the build rate. So SAWS is something that is a name at this point that could or could not happen in the future, but the investments have to happen in order to get to the build rate.

Noah Poponak

Okay. Chris, how much have you been able to raise wages in recent periods to get the attrition improvement that you referenced? And how much more do you have to raise wages to make much more significant strides on that front?

Christopher Kastner

So I think the attrition improvement has really been a result of the targeted hiring of more experienced labor. We have addressed wages very tactically, very tactically, both at Ingalls and Newport News, but we do have labor arrangements, so we haven't been able to do broad labor adjustments. But I think the attrition improvement is more directly related to our hiring strategies to focus on more experienced people.

Noah Poponak

Okay. And then lastly, Tom, can you just give us the very specifics on why both the shipbuilding and the MT margin are down a decent amount sequentially in the second quarter?

Thomas Stiehle

Yeah. So as we said earlier, just the guy that we're giving is on the conservative side. We saw from MT, crew and uncrewed and CEW do well for the quarters as they booked up and they closed out some projects. We don't want to get ahead of ourselves.
And then from a shipbuilding side, I think we're just being conservative. We have some risks to burn down through the year, and the initiatives that we've talked about, more progress and the cost reductions, I want to see them kind of play out.
We do have plans in place for that to occur, but with risk and variability, we're just staying and guiding close to the low end of the range there. I'm still comfortable with the guy that we have from [5.5 to 6.5]. It was a good first quarter out of the gate, and we'll adjust kind of going forward as we see successive quarters do well.

Operator

Ron Epstein, Bank of America.

Ron Epstein

I'm going back to a couple of questions we've heard before, maybe Doug's earlier. What has to happen in the shipyards to really update the manufacturing process? I mean, when you look at how the Koreans do it, and their commercial operations, it seems like there's more automation, they build ships differently. I mean, realistically, how much of that can be deployed in our military shipyards to improve throughput, the whole nine yards?

Christopher Kastner

Yeah, I like the distinction you're making between the commercial manufacturing process and the defense process. They are different. When you're getting at a rate on fairly simple ships to build that aren't as dense, it's just a different process.
So what's it going to take? Fortunately, we've been doing this work for a while now, identifying what's it going to take to increase the submarine throughput. And it's going to show up on that FY24 two-boat contract.
These are targeted investments to create capacity and increase the efficiency on how the ships and how the manufacturing works through the process. We've been working very hard at it. We know where the constraints are. Once they get implemented, I'm very confident that things are going to improve.

Ron Epstein

And, I mean, is it more automation? I mean, are there things like that that you can do to take out variability?

Christopher Kastner

It's more about streamlining. There's some automation that could take place at the front end of the process. We have AI pilots going on in both shipyards where we can be more efficient in analysis of scheduling, per se, or quality. But this is more about efficiency of the manufacturing process and eliminating roadblocks or ensuring that your critical path is squared away. It's not real automation when you get to the back half of the process. This is all about throughput and efficiency and throughput.

Ron Epstein

Got it. And then, maybe just one more. What do you think in terms of demand for your unmanned product, for the autonomous stuff?

Christopher Kastner

Yeah. So really good in the uncrewed space. As I said in my remarks, we have really a couple hundred in backlog. We could have significant ramp this year executing on that small uncrewed underwater vehicle space. So demand's only improving in the underwater uncrewed space, not only for that product, but derivatives of that product, both domestically and internationally. So some very positive developments in the uncrewed space.

Operator

Thank you very much. I'm not showing any further questions at this time. I would now like to hand the call back over to Mr. Kestner for any closing remarks.

Christopher Kastner

Thanks again for your interest and participation today. I look forward to providing updates as we progress throughout the year.