Lockheed Martin Corporation (LMT) 44th Annual Aerospace/Defense & Industrials Conference (Transcript)

Lockheed Martin Corporation (NYSE:LMT) 44th Annual Aerospace/Defense & Industrials Conference Call February 16, 2023 10:00 AM ET

Company Participants

Jay Malave - Chief Financial Officer

Conference Call Participants

Cai von Rumohr - Cowen

Cai von Rumohr

I americium going to move connected and – you person heard astir nan F-35. You person nan F-35 shaper pinch us, Lockheed Martin, CFO, Jay Malave. Jay, welcome.

Jay Malave

Thank you, Cai. Great to beryllium here.

Question-and-Answer Session

Q - Cai von Rumohr

Really admit it. So alternatively than commencement connected nan F-35, let’s talk astir nan Ukraine. So that’s changed request prospects, peculiarly among nan allies, locomotion america done possibly immoderate of your overseas bid potentials that you person got?

Jay Malave

Yes, fto maine conscionable first start, I mean nan obligatory Safe Harbor. So conscionable arsenic a reminder, my comments successful this chat will apt see forward-looking statements and those statements and projections are taxable to risks and uncertainties that could alteration materially from what I talk astir today. And we person accusation successful our 10-Q and 10-K SEC filings connected consequence factors that could impact those. And truthful getting correct into your mobility there, Cai. And arsenic acold arsenic upside, we mentioned connected nan first 4th – I americium sorry, nan 4th fourth telephone backmost successful January that we saw astir $1.5 cardinal of orders successful 2022, that was related to benignant of Ukraine successful wide orders. And we saw – had a statement of show to an incremental $5 cardinal successful that ballpark of orders. For this year, we spot – of that $5 billion, you’ve sewage a statement of show to astir different $1.5 cardinal truthful far. And truthful we proceed to person – it’s a beautiful move environment. You whitethorn person seen successful nan news, Poland is different measurement passim a $10 cardinal number retired there. Not each of that goes to Lockheed Martin, possibly half of that would beryllium related to Lockheed Martin and a adjacent magnitude of that was already assumed successful our projections. But nonetheless, you proceed to spot continued request there. And truthful we are pretty excited astir being capable to present that capacity for world information requirements. But what I would opportunity is that arsenic we proceed to adhd to nan backlog, nan expertise to person connected that backlog is going to return a small spot of time. And nan logic for that is successful areas that we are seeing this request is successful areas wherever we are already ramping up. And truthful we are trying to meet that pinch nan proviso concatenation and each that type of – that environment. It’s conscionable going to return america a fewer years really – fewer years to person connected that backlog. But it’s surely much important than we had primitively anticipated a twelvemonth ago, moreover 6 months agone aliases 3 months ago.

Cai von Rumohr

So erstwhile you opportunity $5 cardinal imaginable $1.5 cardinal successful ‘23. Are you conscionable talking astir rocket and occurrence power aliases you?

Jay Malave

Yes, that is mostly each missiles and occurrence control, yes, whether it’s things for illustration HIMARS, GMLRS are nan 2 large drivers, a small spot of Javelin arsenic well, possibly moreover PAC-3 connected integrated aerial and rocket defense. So those are, I would say, nan superior drivers of that request beautiful overmuch successful MFC.

Cai von Rumohr

Right. Are you seeing much benignant of group talking astir buying things truthful that each of a abrupt successful 6 to 9 months we whitethorn spot much orders?

Jay Malave

Well, arsenic I mentioned, wherever we spot – we came into nan twelvemonth reasoning that it could beryllium again, of that $5 cardinal of imaginable statement of show upside, we came into nan twelvemonth had reasoning it could beryllium possibly $500 million. Now we are reasoning that it’s astir apt going to beryllium $1.5 cardinal successful 2023. This is orders. It will return immoderate clip to person that to sales. And truthful yes, it could spell higher than that. This Poland news could adhd to that $1.5 cardinal really successful nan backmost half of this year. And we will see. I mean that’s a beautiful complicated, I think, buying. And truthful it could gaffe into 2024 arsenic well. But yes, I mean location surely could beryllium much activity successful nan backmost half of nan year.

Cai von Rumohr

So really do we get – if you person $10 billion, you person $5 cardinal of it, if you get $1.5 cardinal this year. I mean really does – I mean does that travel complete 3 years successful orders and past 4 years of deliveries aliases really does that work?

Jay Malave

Yes. I would opportunity really, 5 years of deliveries astir apt wherever we would commencement astir apt seeing that really commencement to deed america successful astir apt 20 – precocious ‘24 into ‘25. It conscionable arsenic I mentioned, it takes immoderate time. It’s awesome to spot nan incremental demand, but these are areas wherever we were already expanding our ramp rates, our accumulation ramp rates. And truthful nan expertise to measurement it up moreover higher, it’s conscionable going to return america a small spot of clip to do that.

Cai von Rumohr

So this is benignant of nonstop arsenic a consequence of Ukraine, but we are seeing requests from Ukraine for F-16s. Is location immoderate benignant of what I would telephone peripheral overseas request that you are seeing that different countries successful Eastern Europe are benignant of warming up to buying much F-16s aliases buying immoderate different products from you?

Jay Malave

Well, yes. I mean, truthful you person heard nan petition for F-16s successful Ukraine. Turkey has besides indicated that they would for illustration to acquisition much arsenic good arsenic upgrade nan existing fleets that they have. And truthful location is – we person mentioned successful nan past that location is imaginable statement of show to further orders of up to 300 craft aliases truthful moreover much than that. That is thing that nan process for that is – conscionable takes a small spot of while there. That’s a authorities section determination arsenic to whether aliases not a licence would beryllium granted, we really person to travel nan government’s lead connected those types of systems. And nan request we spot there. India is different 1 connected their F-21, wherever location could beryllium immoderate opportunity there. But again, it’s much of a government-to-government chat and past we autumn down that discussion.

Cai von Rumohr

Any milestones for illustration if Biden decides to nonstop immoderate Fs aliases to let friends to nonstop F-16s to Ukraine that will…

Jay Malave

Yes, I conscionable wish I tin springiness you a circumstantial day by which...

Cai von Rumohr

Not a date, but those are nan benignant of milestones that would show greater demand. So foreign, refresh my memory, it’s astir 30% of…

Jay Malave

About 30%, that’s right.

Cai von Rumohr

Any thoughts astir wherever that’s going to go? Is that percent going to beryllium moving up nan adjacent mates of years?

Jay Malave

Yes, it will grow. Absolutely, it will grow. We spot conscionable successful world that increasing complete nan adjacent 3 to 5 years by a precocious single-digit rate.

Cai von Rumohr

So it should turn arsenic a percent of nan total.

Jay Malave

Well, that’s nan maturation rate, but nan percent successful total, I don’t cognize what that will equate to, but it’s 35% positive astir apt successful position of what that intends successful position of nan absolute, but yes, that’s a definite area. Besides Europe, Australia is different one, location is important demand. We are competing presently for a programme called AIR6500, which is simply a full really Joint All-Domain bid and power type of strategy for nan Australian forces. We were successful successful defense of Guam, which is successful U.S., but it’s benignant of into Paycom. There is besides opportunities successful Japan arsenic well. And truthful it’s not conscionable Europe, location is Asia and Australia is simply a large 1 arsenic well.

Cai von Rumohr

Got it. So what astir abstraction and directed energy, you are connected carrier furniture one, I deliberation you missed retired connected nan search layer, what’s your imaginable connected these and benignant of those different LEO systems?

Jay Malave

Sure. So abstraction carrier furniture is simply a connection strategy for STA. We are correct now successful nan process of nether statement for Tranche 0 and delivering connected that. We are owed to present 10 satellites connected that and we expect those to motorboat midyear of this year. The follow-on Tranche 1 is different $42 cardinal satellites and past erstwhile we get into Tranche 2, it could beryllium moreover double of that. So a batch of opportunity location arsenic they build retired that constellation for STA carrier layer. As acold arsenic tracking, I deliberation it’s important to remember, we person nan systems successful GEO. So SBIRS OPIR, we are operating and we delivered our last outer conveyance for SBIRS, but we are besides now we person sewage 3 vehicles, abstraction vehicles for OPIR that we will beryllium delivering complete nan adjacent fewer years. And past we person collaborated pinch Raytheon Technologies connected a MEO, rocket informing and search system. And truthful we are going to beryllium competing connected that. We are excited astir that opportunity. And past erstwhile you are reasoning conscionable astir nationalist information abstraction successful general, we person sewage a number of classified programs which are beautiful substantial, which will thrust maturation successful our abstraction conception arsenic well. Obviously, you can’t talk astir those, but beautiful beardown request for those important missions and those will thrust maturation successful that segment.

Cai von Rumohr

Got it. I can’t spell without asking you astir Florida. So you person protested, I don’t cognize what you tin show us, but tin you springiness america immoderate colour successful position of for illustration what were you saying successful position of we should person had different changeable aliases we should person wanted?

Jay Malave

Yes. I deliberation it boils down to Cai is that what we saw based connected nan accusation that we had is an inconsistent exertion of nan valuation criteria, that’s simply stated. And that really is nan ground of nan protest. The GAO, Government Accountability Office, GAO will person 100 days to make an information and a proposal connected wherever you spell from there. And we don’t return these things lightly. Lockheed Martin does not protestation a batch of our grounds of protests very low. And truthful if we didn’t consciousness we had a ground for it, we would not person recovered nan protest.

Cai von Rumohr

Got it. And do you expect that it will fundamentally spell to 400 days.

Jay Malave

Yes, I deliberation it will.

Cai von Rumohr

Got it. Okay. And truthful connected nan execution side, what are you seeing successful position of proviso chain, labour readiness inflation?

Jay Malave

Supply concatenation is still a measurement guardant and a measurement back, Cai, nan champion measurement I would picture it. And I will return possibly nan 4th fourth and nan first 4th of ‘23 arsenic an example. In nan 4th quarter, we over-delivered to our expectations successful income and really almost sewage precisely backmost to nan original guidance we person provided backmost successful January of ‘21 aliases ‘22. And portion of that was conscionable getting connected contract, but portion of it was amended proviso concatenation capacity successful nan 4th quarter. As we person looked astatine our forecast now successful nan first quarter, we saw that taking a measurement back. And truthful we person sewage immoderate calendarization unit successful nan first quarter. Part of it is programme schedules. Part of it is proviso concatenation pressures there. So we are not retired of nan woods. It’s still touch and go. And we person sewage a calendarization rumor a small spot present successful 2023. We consciousness assured for nan afloat twelvemonth guideline that we provided, but nan first 4th is going to beryllium a small spot bumpy partially owed to proviso chain.

Cai von Rumohr

Got it. And what astir inflation, what’s – are you capable to benignant of...

Jay Malave

Yes. And fto me, I conjecture break isolated ostentation into 2 areas: 1 being nan labour inflation, our soul labour and nan different 1 being successful nan proviso chain. And conscionable possibly taking a measurement back, erstwhile you look astatine our gross exposure, almost 40% of our gross vulnerability is costs plus. So that mostly conscionable flows through. The different 60% is immoderate shape of fixed price. And connected those, successful galore cases, we spell backmost to backmost pinch our suppliers. So our existent contracts connected nan worldly escalation, we person fixed value from our suppliers. So we are not really – we person sewage immoderate level of insulation against that. Where we did spot impacts successful 2022 is successful our labour inflation, because we, successful a fewer areas, connected captious accomplishment sets, we did midyear raises for either attraction aliases retention of labor and past erstwhile we did it to merit rhythm here, nan rhythm for 2023, it was higher than what we had primitively anticipated successful our guidelines contracts going guardant successful our EACs. But I would opportunity that Lockheed Martin has sewage a beautiful beardown costs simplification program. And truthful we fundamentally mitigated astir of that headwind done our costs simplification program. And I deliberation – and truthful we’ve been capable to negociate that I deliberation reasonably well. Where I spot it benignant of being much of an rumor going guardant is arsenic we look into caller awards, because now we are seeing suppliers that are unwilling to supply multiyear fixed pricing. They want immoderate type of escalation clause tied to it and rightfully so. I mean, it’s difficult to knock that type of request. And truthful nan speech we are having pinch our customer is that we are looking for that to travel through. It’s successful an area wherever we are incapable to get a contractor, a subcontractor connected a fixed value for immoderate nan logic it maybe, we are looking for nan trade-off connected our statement pinch our customer to travel done immoderate type of escalation clause. And truthful location has been speech pinch – they are receptive to it. Of course, they are going to thrust because their occupation is to thrust nan champion consequence for nan U.S. taxpayer, which is what they should beryllium doing. But ultimately, they understand that we are successful an situation wherever we’ve had worldly ostentation and worldly escalation. And we are trying to do it truthful nary 1 gets harmed.

Cai von Rumohr

Right. So if you look crossed nan industry, I mean, arsenic you are aware, Northrop’s 10-K, they indicated that nan B-21 wherever they person been telling everybody, execution was bully that they person nan imaginable aliases a nonaccomplishment of complete $1 cardinal connected 5 lots. And truthful do you person immoderate semipermanent contracts that are patient fixed wherever we should beryllium tense that this 1 mightiness travel backmost and create a problem?

Jay Malave

So yes. So I would opportunity that we do person accumulation options connected contracts wherever we person sewage a peculiar one. In nan first 4th call, we talked astir MFC’s margins wherever they were declining. They did 14.5% successful 2022, and we are astir 13.7% successful 2023. And past location is further unit location from that. That’s fundamentally owed to action – accumulation action pricing connected a classified programme that we have. And truthful we are going to spot continued unit there, which is benignant of a – it’s a known entity there. And truthful I’ve been talking astir that their margins will want to spell measurement down different 50 to 100 ground points from wherever we are successful 2023. Now we will spot what nan operation use of this incremental request is and whether aliases not that dampens that headwind and we will person to spell done that readying rhythm arsenic we do during nan summertime and we’ll person a amended consciousness for what those estimates are erstwhile we talk astir – commencement reasoning astir 2024 successful our October call. But location is surely unit there, which is owed to a accumulation programme that has a challenged pricing successful it. And we’re going from a low-margin benignant of improvement statement to fundamentally a antagonistic separator accumulation for a play of time. And truthful that’s what’s driving MFC’s margins to want to proceed to slide.

Cai von Rumohr

That’s a classified program?

Jay Malave

Classified program. And truthful we will spell done that. I mean our occupation arsenic a guidance squad is to spot what we tin do to offset that, effort to mitigate those, and that’s what we will spell done complete nan adjacent fewer months to spot what we tin do pinch that complete nan adjacent fewer years. And truthful that’s nan discourse erstwhile I’ve talked astir successful nan past and conscionable still get immoderate continued separator unit beyond ‘23. It’s really location is wherever we’re seeing it.

Cai von Rumohr

Mainly an MFC?

Jay Malave

Right.

Cai von Rumohr

Okay. And past you’ve talked astir you and Northrop are talking astir integer translator successful your case, 1 Lockheed Martin, wherever are you successful this journey? And what effect do you deliberation this could person connected your profitability?

Jay Malave

Yes. Let maine picture our programme because it is an all-encompassing program. It is – it starts pinch engineering creation systems. So it’s embracing and proliferating integer threat and integer copy engineering. It extends to our ERP. It extends to our manufacturing execution systems, it besides extends to our quality assets guidance systems. So this is simply a wide – it’s not for illustration we’re conscionable updating an ERP system. We’re going end-to-end each nan measurement from development, each nan measurement to sustainment of life rhythm of our program, updating each of our systems. Where we’ve sewage a caput commencement complete nan past fewer years is really connected nan engineering improvement side, wherever we’ve had a programme take of nan integer thread and integer copy systems.

We’ve sewage – we ended 2022 pinch astir 112 programs that person now adopted this method of design. And nan full intent of doing that is being capable to compress creation schedules and nan efficiencies that you get from that are you get amended visibility. As you’re designing, you’re capable to spot a integer twin, what nan hardware is simply a integer replica of that hardware. So you tin understand – amended understand limitations you tin amended understand form, fresh and usability connected components that you’re designing and that should not possibly needfully eliminate, but importantly trim rework successful nan engineering rhythm and nan creation cycle. What that yet will culminate to us, for america is conscionable a much competitory company. And truthful we spot that’s going towards arsenic being a really a summons to play successful nan future. These are nan type of creation cycles that we’re going to person to run nether a tighter creation cycle, delivering a capacity earlier to our customer and doing it specified a measurement that’s affordable and it reduces consequence for some america arsenic good arsenic nan customer. And truthful it’s not needfully a separator play per se, but we will spot costs reduction, but it will make america a much competitory company.

Cai von Rumohr

And it’s predominantly, I would guess, connected newer programs other?

Jay Malave

Yes, bequest programs will person nan erstwhile merchandise life rhythm guidance systems. You can’t really disconnect those because of wherever they originated.

Cai von Rumohr

Right. Right. So – you talked of nan pillar – nan 4 pillars of growth, programs of record, hypersonics, classified caller awards. Walk america done possibly nan comparative maturation we should deliberation astir for each of those comparative trends?

Jay Malave

Yes. When you look astatine our 4 pillars of growth, it’s astir almost $20 cardinal to $18 cardinal to $19 cardinal bucket of sales. And our biggest ones location are our programs of record, conscionable to prime nan programs of grounds are astir $8.5 cardinal to $9 cardinal of that $18 cardinal to $19 cardinal of sales. We spot that increasing astatine a precocious azygous digit clip. And nan logic for that is nan request rhythm arsenic good arsenic we’ve pushed immoderate of these schedules to nan right. And truthful erstwhile you talk astir things for illustration CH-53K, PAC-3, Fleet Ballistic Missile and our abstraction business and F-35 is simply a sustainment, each of those, we consciousness very comfortable that ringing to turn because we person nan visibility to nan programs of grounds there.

And past you tack connected what we’ve seen now successful immoderate of these bequest MFC programs is going to thrust that maturation complaint to nan higher extremity of nan precocious azygous digit number. The adjacent 1 is classified. Classified again is astir an $8 cardinal portfolio for america each in. And whether it’s an arrow, whether it’s successful abstraction aliases an MFC, we spot immoderate beautiful important maturation there. It’s astir apt person to possibly successful nan mid-single-digit range. betwixt this is complete – these are 5-year CAGRs that I’m talking about. And truthful those are nan 2 biggest drivers that we will spot successful those 3 business areas really fundamentally driving that; Hypersonics is different one. We’ve talked astir that. That maturation complaint is simply a small spot little than nan different two, but that will lend to growth. And past past 1 is caller awards. In caller awards, we conscionable talked astir FLRAA assuming that, that nan determination holds, we still person next-gen interceptor is simply a large programme for us. There is FLRAA down that, which is what we expect to down prime successful 2025. And those are two. And past we person an world rocket – Integrated Air and Missile Defense System that is beautiful sizable successful nan Middle East that we expected that we tin triumph that arsenic well. So erstwhile you put those each together, that $18 cardinal – $18 cardinal to $19 cardinal portfolio of sales. We expect that to turn successful nan mid-single digit maturation – I’m sorry, precocious single-digit maturation area that will thrust america successful substance america for nan adjacent fewer years.

Cai von Rumohr

So nan world aerial rocket defense. That’s a waste of a existing instrumentality aliases a caller program?

Jay Malave

It would beryllium a caller program. New capacity for us, yes.

Cai von Rumohr

New capability. Okay. And truthful each told, I deliberation what are nan downers? I mean, certainly, C-130J looks for illustration it’s going level to down. F-16, which I deliberation was looking down is now moving up. Talk astir – nan other...

Jay Malave

Well, if you – yes, if you spell tally a portfolio, if you look astatine – if I commencement pinch Aero, I mean, accumulation capable 35 is really down this twelvemonth level to up adjacent year. But successful nan expansive scheme, it conscionable – it’s flat. When you deliberation astir that, accumulation is simply a $12 cardinal portfolio successful and of itself, conscionable F-35 production. So it’s a large number. As you mentioned, F-16 is growing. We – we’ve sewage a first transportation present successful nan first 4th connected nan F-16 aircraft. We will ramp that complaint up. We person astir 20 craft successful WIP today, and truthful that will proceed to turn complete nan adjacent fewer years for us. C-130, yes, erstwhile we delivered, I deliberation it was 24 past year, that will driblet to astir 20% betwixt now and 2027. So we will spot a small spot of unit there, but it’s not dropping each that significantly. And truthful Arrow will have, I think, a unchangeable portfolio to somewhat up complete nan adjacent 5 years.

MFC is wherever we’ve talked a batch astir we had ramping programs and we talked astir things for illustration PAC-3 and immoderate of these different areas of demand, whether they beryllium GMLRS JASSM aliases LRASM are different areas that we are growing. They’ll proceed to turn over. And truthful we spot a coagulated mid-single-digit maturation complaint location complete nan adjacent 5 years. RMS, yes, they had nan FLRAA we will spot what happens pinch there. But they still – Sikorsky still has enduring Hawk aliases what we would telephone it. We still deliberation location is opportunity for further deliveries and further hold of nan Black Hawk programme there. And past you’ve sewage FLRAA successful ‘25. And past location is besides world opportunities, some successful nan Black Hawk an world Black Hawk arsenic good arsenic immoderate of our X2 exertion location astatine Sikorsky. And past erstwhile you spell extracurricular of Sikorsky, this is wherever our conflict guidance systems are our associated all-domain bid and power systems are Aegis. So we spot a batch of opportunity location erstwhile we talk astir associated all-domain operations for them to supply some home and world systems and beryllium a driver of growth. We besides person immoderate caller radar systems. Jim announced successful his prepared remarks connected nan 4th fourth call, our TP measurement strategy pinch Norway. And truthful I deliberation location is beautiful bully – we consciousness beautiful bully location and benignant of possibly debased to mid-single digit there, maturation complaint astatine RMS.

And past finally, it’s space. Space is dealing pinch immoderate – location is immoderate – nan programs that we’ve had successful nan past, we’ve conscionable been fundamentally awesome programs for our SBIRS, OPRs, arsenic I mentioned before, those are going to want to inclination backmost down. Orion, moreover though we person accumulation contracts that will want to normalize arsenic well. And truthful while they person sewage coagulated maturation successful nationalist information space, they person sewage a small spot of overhang from these 2 programs. It will limit their maturation a small bit. So I’d opportunity astir apt debased azygous digits location successful that ballpark.

Cai von Rumohr

Now RMS what’s nan maturation look for illustration if you don’t triumph FLRAA? What quality does FLRAA made?

Jay Malave

Well, I mean, FLRAA, I would opportunity wherever we are correct now, fixed what we know, we’re astir apt looking astatine a debased single-digit maturation complaint without FLRAA.

Cai von Rumohr

Without FLRAA. Okay. And mid-singles, if you do get for – because basically, if you suffer FLRAA, you get nan ngo systems connected nan V-280 correct.

Jay Malave

Yes. But nan publication of waste is obscurity adjacent what nan wide – but yes, we get immoderate work, yes.

Cai von Rumohr

Right. Okay. And truthful – arsenic we look out, should we spot acceleration successful your growth, 24%, 25%, I would presume sequentially…

Jay Malave

Absolutely – you should, I’m sorry.

Cai von Rumohr

Both years. I mean…

Jay Malave

Yes, we should surely – this year, our guideline successful 2023 was for income to beryllium down astir 1% flattish to down. Well I expect america to resume maturation of 2024, correct now, I deliberation nan starting constituent for that would beryllium a debased single-digit maturation rate, and past we will spell from there. Again, we person to spell done our readying rhythm during nan summer. We will get overmuch amended visibility to each nan things that are going on, arsenic we mentioned earlier, related to benignant of Ukraine demand, Poland and spot what that means. It’s really a mobility of erstwhile those opportunities tin person into sales.

Cai von Rumohr

Right, right. So connected nan costs side, what astir hiring, hiring has been an issue. I deliberation a batch of – a number of group are talking about, well, attrition is starting to travel down. Talk to america astir benignant of your hiring?

Jay Malave

Yes. I deliberation that certainly, attrition, I deliberation is, truthful far, we’re seeing immoderate indications that’s better. Hiring is still a challenge. I mean immoderate of these captious accomplishment sets that we’re looking for, peculiarly package engineering remains a situation for us, peculiarly successful nan defense situation and aerospace. And truthful we’ve been moving that and it’s, I would say, nan indications are it’s better, but it’s – we haven’t really seen, we haven’t turned a area and flooded and look astatine our headcount past year, we grew by 2,000 heads. A batch of that is successful nan captious accomplishment sets. We person request though for higher than that. And truthful we’re still – it’s a very competitory marketplace for those captious accomplishment sets, and we still haven’t seen nan labour marketplace really loosen up there?

Cai von Rumohr

But truthful if attrition is down, I did opportunity attrition is down a small bit. So if attrition is down, I cognize immoderate of nan different guys person said, well, Mike really had Parsons and they said that their costs maturation this twelvemonth is little than past twelvemonth because they had to salary to support immoderate folks. Do you deliberation nan complaint of costs maturation is fundamentally flattening retired or?

Jay Malave

I don’t know. If you deliberation astir – if you benignant of usage almost for illustration a 3% arsenic a benchmark historical, I don’t cognize that we will gaffe precisely correct backmost to 3% arsenic we deliberation astir 2024 planning. We were higher than that for our 2023 planning. And we still sewage a number of months earlier we benignant of deliberation astir what that’s really going to be. But I’m not judge that it dips correct backmost to 3 for 2024 readying – it whitethorn measurement down, but not precisely backmost to what it had been past 10 years.

Cai von Rumohr

Right, right. So F-35, you’ve had immoderate issues, nan motor problem that’s really Pratt’s problem. I mean, Tier 3 package delays. Where are you connected those? And erstwhile do they deliberation you’ll beryllium resolved? And what effect much importantly, does it person connected your revenues and your profit accrual and what benignant of risk?

Jay Malave

So for Tier 3, we surely – we’ve sewage a number of package drops that are happening complete nan adjacent fewer months into nan trial program. And truthful we person to do – we’ve done successful our doing laboratory testing. They will besides spell into formation testing. We judge that we’re still connected way for nan cut-in of TR3 capability. So that would beryllium hardware and package for nan backmost half of this twelvemonth successful Lot 15. So that’s our objective. That’s our target. We stay connected way and it’s tight. The programme itself has had, arsenic you know, has been delayed. And truthful location ever could beryllium immoderate type of learning betwixt now and then, but correct now, we’re connected track.

Cai von Rumohr

Got it. Okay. And nan motor issue, I presume that’s fundamentally Pratt’s issue. You are still building planes. So that should person comparatively small impact.

Jay Malave

Yes. I mean I deliberation that we will spot a rate travel effect this 4th because it affects our expertise to present craft to our last customer. And truthful location is simply a last costs that’s tied to craft transportation that are going to autumn extracurricular nan 4th that we will spot immoderate unit here. It’s timing successful nan twelvemonth and sound connected what we judge that they are connected way to complete their guidelines origin corporate action investigation and get america backmost connected good...

Cai von Rumohr

So, I conjecture we will perceive pinch nan fund drop, whether we get a caller motor for nan F-35 aliases whether we spell pinch a derivative, does it matter to you successful position of your financial capacity connected nan programme that 1 mightiness beryllium much difficult than nan other?

Jay Malave

Well, truthful right, you person sewage these 2 different solutions, either upgrade aliases a brand-new engine. I deliberation either require – aliases has immoderate level of consequence to them. I don’t cognize what that costs trade-off is pinch nan associated programme offsets. That’s a determination that they make because they person each that accusation and each that data. And I americium judge that they will make nan champion 1 they deliberation for nan program. What we person done is provided what we judge is basal for cooling requirements. For this caller hardware that’s being trim successful these capabilities arsenic good arsenic nan thrust requirements. And we person fixed them method information arsenic acold arsenic nan trade-offs, but ultimately, it’s their determination there. We would prefer, I deliberation to nan lowest consequence solution, truthful that you don’t person to woody pinch delays and things for illustration that. But again, it’s really nan capacity request that’s important arsenic well. And truthful I deliberation location is going to beryllium trade-offs astatine nan Joint Program Office going to person to make pinch their work customers. There again, we springiness them nan requirements and that is location telephone astatine nan extremity of nan day.

Cai von Rumohr

Right. So, I conjecture still going to 156, and you get location successful ‘25?

Jay Malave

‘25.

Cai von Rumohr

‘25. Now, I deliberation nan past clip we talked, I had been reasoning location would beryllium a pickup successful revenues, but nan – what is nan gross floor plan betwixt present and…?

Jay Malave

Yes. The absorbing point is erstwhile you deliberation astir deliveries, truthful this year, we are assuming that this rumor gets down us, will beryllium betwixt $147 cardinal and $153 million. It’s benignant of nan aforesaid scope that we provided for adjacent twelvemonth arsenic well. We talked astir that, I think, successful nan summer. And past we get to 156 successful 2025 there. And truthful – nan absorbing point location is, though erstwhile you spell backmost 2 years to 3 years, we were – erstwhile you deliberation to talk astir a lead time, you are talking aggregate years, 2 years to 3 years, you person to bid materials, commencement bringing it successful and each that type of stuff. We are operating nether presumption that nan programme volumes could beryllium arsenic precocious arsenic 170 aircraft. And truthful we were moving a accumulation ordering strategy and worldly ordering strategy astatine that level of demand. And arsenic we settee it backmost successful astatine 156, location is simply a level that we person to fundamentally let nan transportation schedule to drawback up to that inventory bill. And truthful you are seeing lumpiness successful income this year, our accumulation income will beryllium down astir 5% because of that phenomenon. It will beryllium level to somewhat up adjacent twelvemonth arsenic we benignant of normalize this. And truthful I deliberation complete nan adjacent fewer years, it will normalize backmost connected erstwhile we get benignant of connected way pinch this 156. But we are benignant of coming down this benignant of inventory simplification rhythm is astir apt will, and that’s what’s causing nan income lumpiness.

Cai von Rumohr

But if you person inventory pain disconnected this twelvemonth for adjacent year, does that mean that ‘25, you are benignant of – everything is backmost successful sync. And truthful arsenic nan complaint spell – transportation complaint goes up that nan income besides should prime up successful ‘25, aliases is it still…?

Jay Malave

May beryllium a small spot successful ‘24, I deliberation it will beryllium marginal. You are not – I don’t deliberation we will spot a large step-up successful income connected nan accumulation – connected F-35 production.

Cai von Rumohr

Got it. And past I deliberation we conscionable had nan F-35 preview [ph], and I deliberation you are talking astir going from 48 depots to 71. I deliberation it was by ‘26, ‘27. What benignant of a maturation does nan maturation complaint for sustainment benignant of accelerate here, flatten out, aliases really should we think?

Jay Malave

Well, it’s absorbing – that’s right. We person these things called conscionable abstracted statement is called tract activation and hardware, which is predominantly for these depots. And it’s been a small spot slower than we primitively had planned. I deliberation if you spell backmost a year, what we person said is our F-35 sustainment connected a 5-year CAGR would turn astir 6%. We still judge that to beryllium nan case. And while you do see, arsenic General Schmidt talked about, higher depot and successful stocking inventory and those types of things. At nan aforesaid time, we are besides taking costs out, truthful reducing nan costs of sustainment. And truthful you person sewage nan maturation pinch nan higher – pinch nan increasing fleet. You sewage depot requirements and partially offsetting that is you person sewage amended costs performance. And truthful we are proud of that. I mean we person sewage large targets that we person been assigned to deliver, and we judge that we are delivering our portion of those reductions. And truthful that you person sewage this counterbalancing and counterbalances it intuitively don’t say, well, should it beryllium increasing high-single digit aliases moreover 10% positive location you person sewage nan reductions associated pinch costs simplification would effort to backmost down.

Cai von Rumohr

When you talk of 6%, is that benignant of each twelvemonth is 5% to 7%, location is nary large lumpiness aliases is there?

Jay Malave

I don’t – no, I don’t spot immoderate type of immense lumpiness now.

Cai von Rumohr

Got it. And truthful I deliberation you indicated that EACs arsenic a percent of EBIT should beryllium astir 25% this year, level pinch ‘22. This ratio has been trending down complete nan past mates of years. To what grade is ostentation eating into nan cushion you person successful your accrual rates?

Jay Malave

It’s a bully question, and it goes backmost a small spot to what we said – what we were talking astir before, Cai is, connected nan materials broadside connected our existing contracts, we really haven’t seen that overmuch effect connected existing contracts. It’s really been we would person to presume aliases we put successful higher labour escalation for our soul labour into our contracts. We person been doing that complete nan past year. What I would opportunity is Lockheed Martin has a very bully costs simplification program. And we really person offset those impacts successful there. So, it’s not wherever we person needfully reduced our guidance reserve buffers. Yes, sure. That’s happened successful definite cases. But I deliberation our costs simplification capacity has helped america really offset a batch of nan headwind that we person seen. And truthful I deliberation that connected existing contracts, wherever we person performed rather well, and we person been capable to negociate this well, and I get in installments to our operations and our programs teams for being capable to do that, anticipated and woody pinch it and negociate it and thrust our costs simplification programs higher. And truthful I deliberation overall, we person been managing that. What I would opportunity is that 25% is astir apt a bully equilibrium. This is astir apt wherever we will beryllium astir that ballpark this twelvemonth successful 2023 arsenic well. And what I would opportunity astir that arsenic good is that what we are seeing is our recurring margins are increasing. And this is conscionable really much of a usability of programme life cycles. As these programs mature, you conscionable are moving astatine a higher recurring rate, conscionable benignant of telephone it much learned out. And truthful your opportunity for EAC benefits has travel down, but you are operating astatine a higher separator complaint to statesman with. And truthful arsenic you see, we do person separator pressure, but separator unit is not owed to that. Margin unit is owed to these accumulation options, I talked about. It’s much of benignant of a statement operation rumor that we person to activity throughout.

Cai von Rumohr

Got it. So, rate travel conversion is expected to easiness beneath 100% this year. When do you deliberation you tin get to backmost complete 100%?

Jay Malave

When you look astatine our rate travel complete nan adjacent fewer years, our extremity is going to beryllium to summation our absolute rate travel and proceed to trim our stock count, truthful we tin present a coagulated free rate travel per stock maturation rate. Over nan adjacent fewer years, we will person immoderate rate travel pressures. Our CapEx is still successful excess of depreciation complete nan adjacent fewer years. We person sewage imaginable pension publication successful 2025. So, we person to flooded immoderate of those headwinds to still present absolute free rate travel growth, and that’s our goal. I americium not judge betwixt now and 2025, that I tin show you that we will get correct backmost to nett income, but our extremity is to really proceed to turn it is wherever we are.

Cai von Rumohr

And truthful 1 of nan issues of rate travel has been Section 174, and you person taken a different tack, I deliberation connected R&D, wherever fundamentally you person not truthful paid connected R&D and costs connected cost-plus contracts. So, erstwhile does – and though Northrop and RTX have, really should we deliberation astir does nan IRS benignant of say, Lockheed, you sewage to pay, aliases really does that get resolved?

Jay Malave

It’s a awesome question. Let maine conscionable possibly explicate nan ground of our position for a infinitesimal and past get into what we expect could happen. We position this arsenic fundamentally a costs of equipment sold. And it’s a costs of delivering nan gross to a peculiar customer. We are providing engineering packages aliases creation to an extremity customer. And truthful we don’t position that arsenic R&D. We position it arsenic costs of sales. And that provides a definite level of symmetry to nan R&D taxation credit, which is viewed arsenic successful nan aforesaid nonstop way. We don’t return those types of costs and return in installments for those erstwhile we are calculating for in installments purposes. We person nary consequence because our customer is really base that consequence of nan development. We besides person – while you do a use and you get immoderate type of knowhow benefit, that use tin beryllium transferred to immoderate different third-party because nan customer owns it arsenic well. And truthful we position that that’s a sound ground for nan position that we person taken. We person had aggregate rule firms validate our position. They work together pinch us. And truthful it’s not thing for illustration we conscionable decided we are going to return a position and conscionable works a flag. I deliberation it was very thoughtful, very good researched and we person a sound ground for it. As acold arsenic wherever nan IRS is, we judge that location could beryllium immoderate guidance, wide guidance that goes retired sometime this year. But we are not judge that they will specifically reside this issue. And truthful it could linger beyond this year, we will see. We person asked them if they had immoderate thoughts of providing guidance. And we conscionable haven’t seen it. They person sewage a batch of priorities that they are moving through. And I deliberation truthful that what we whitethorn spot conscionable wide guidance related to this 174 issue, not needfully specifically addressing this rumor that we are dealing with.

Cai von Rumohr

Got it. So, successful position of rate deployment, you person been fierce successful banal repurchase nan past mates of years. Any thoughts looking forward, those priorities alteration astatine all?

Jay Malave

Well, we still person $10 cardinal remaining successful our stock repurchase authorization. We expect $4 cardinal this year. Right now, our readying presumption would beryllium $4 cardinal successful 2024 and past $2 cardinal successful 2025. And if you deliberation astir that, that’s – erstwhile you adhd some ‘23 and ‘24, that’s astir $7 cardinal successful each twelvemonth of deployment betwixt that and nan dividend, which exceeds our free rate travel estimates successful some years. And truthful I deliberation we person sewage a beautiful robust and beautiful patient superior deployment scheme complete nan adjacent 2 years. We will proceed to reevaluate it. When we came retired pinch our stock repurchase programme successful nan 3rd quarter, we went done conscionable our readying rhythm during nan summer. We will do that again this summer. And I will beryllium down pinch Chairman, person a discussion, supply him a recommendation, coming thing to our Board, and we will spell from there.

Cai von Rumohr

Got it. So, this has been terrific. Any last thoughts that we should support successful mind arsenic investors deliberation astir Lockheed Martin?

Jay Malave

This is simply a beautiful broad discussion. Kind of really admit your time.

Cai von Rumohr

It has been a terrific job.

Jay Malave

Thank you and it’s been a awesome dialogue. And arsenic I mentioned, we are beautiful laser-focused connected returning and resuming maturation successful 2024. And we are making judge that we tin thrust our free rate flow. As we conscionable mentioned, to growth, proceed to return down nan stock count and supply an adequate, and what you deliberation is simply a reasonable free rate travel maturation complete nan adjacent fewer years. And betwixt that and our industry-leading dividend, beautiful bully for america to return arsenic we really commencement to re-crank nan flywheel connected growth.

Cai von Rumohr

Excellent.

Jay Malave

I admit everyone’s time.

Cai von Rumohr

That was perfect.

Jay Malave

Thank you.