Hey, good afternoon everyone, and welcome back to the Aerospace and Defense track at the JP Morgan Industrials Conference. I'm Seth Seifman, the U.S. A&D equity analyst here, and we are very grateful to have with us L3Harris. We have with us the President of Missile Solutions and soon to be the president of a to-be-named missile solutions company, Kenneth Bedingfield. Also, he is three days in the job, I think. We have the new CFO of L3Harris here, which is Kenneth Sharp. Then I think a lot of you know Tania Hanna from Investor Relations. Thank you all for coming. We really appreciate it. I think we'll do Q&A.
I will ask a bunch of questions, but also happy to go out to the room and take questions here from the group as well.
Seth, maybe just before we get started, if I could just make a couple quick comments.
Yeah.
You know, certainly our comments today may include forward-looking statements, and those include risks and uncertainties. For more information, I would refer you to our SEC filings. You know, certainly today I'm day three into my one job as the President of Missile Solutions, certainly as we look to you know grow the business and take it public with L3Harris as the majority shareholder. Here to discuss all things L3Harris, certainly to include MSL.
Yep. Excellent. We'll probably divide the time. We've got about 35 minutes, a little bit less now, and we'll make sure that we get to all of the businesses within L3. Maybe we'll start with Missile Solutions. I know it's a focus area for investors, and it's at the top of the news as well. Maybe you could give us a sense of the timeline here. When should we expect a Form 10, if that's kind of something you can share? You know, do you expect that the new business will have segments? Will there be stuff that you'll disclose about customers who might be, you know, have a high percentage of sales?
You know, we are working diligently towards, you know, the planned IPO of the business and a number of moving parts in that. Certainly, you know, closing the announced investment from the government, for, you know, call it the anchor investor, in the IPO. Making good progress around all the, you know, regulatory requirements in terms of, you know, carve-out financials and, you know, Form S-1 and all those things. We are looking forward to a planned, you know, second half timing in terms of an IPO. Importantly, we are certainly working actively with our customers, to, you know, accelerate capacity, accelerate production of all things, relative to Missile Solutions.
You know, naturally people think about solid rocket motors, which is the biggest component, but certainly, you know, critical capability around Divert and Attitude Control System. You know, how do you precisely control a missile? As well as fuses and weapons release systems and other advanced electronics. More and more components of a missile within the newly combined MSL entity within L3Harris. Making great progress in terms of, you know, negotiations around, you know, multi-year contracts for, you know, some of the critical capabilities that we provide. As importantly, we're making great progress around our investment plans.
You know, I will remind everybody that, you know, one of the big rationales for this agreement was that we could move faster with the confidence, in terms of, you know, the government, being willing to invest. Before, all of the agreements and contracts are finalized, we'd have the confidence to go forward and invest. We are making some of those investments, whether it's, you know, facilities, CapEx, equipment, automation, but also, you know, purchase orders for materials. You know, thinking about a little bit more like a commercial model, I think, you know, appropriately risk adjusted. We are ready to grow this business. We are ready to close the investment, and we are ready to get to our planned IPO.
Excellent. The investment plan is definitely something I wanted to talk about more. Slightly different segment last year, but when it was Aerojet Rocketdyne, I think the CapEx there was $116 million. We're talking about you know decades of Aerojet Rocketdyne CapEx happening over the next four years or so. Is that the right timeframe? And then how is that gonna make the production base look different? What does building a missile in at Camden and Huntsville look like in 2030 when you guys are done with that versus the way it looks today? And what does that imply also for return on sales?
It's a great question on the CapEx and how we manage that, and I'll say a couple things. I mean, first of all, yes, we spent $100 million and change in CapEx at legacy Aerojet Rocketdyne last year. You know, if you look back to pre-acquisition, I believe as a standalone company the year before we acquired it, Aerojet Rocketdyne spent about $20 million.
Yep.
In CapEx. We significantly increased that almost immediately after acquisition, tripling, quadrupling, CapEx. Maybe as importantly, you know, as we are executing on the strategy, we had been working closely with our customer, and we've been building some facilities under what's called the Defense Production Act. We've been building out facilities for GMLRS, the Guided Multiple Launch Rocket System, as well as Javelin and Stinger, again, along with our customers. That, you know, really gives us the confidence to take those buildings and that infrastructure that we've been overseeing and using that as kind of the blueprint for some of the facilities that we'll be constructing now, whether those are some accelerated program-specific buildings.
We've got large solid rocket motor facilities that we're investing in to support things like, you know, Sentinel, Next-Gen Interceptor, Zeus, some classified programs, MPPD, among others, as well as, you know, facilities to support, you know, Munitions Acceleration Council programs. I think we've become very good at construction, at managing, you know, how we build the facilities, how we get the equipment in, how we get everything calibrated, how we bring it online. We'll plan to use that as the blueprint for how we kinda do this going forward. In terms of sort of the model as we look forward, you know, we absolutely believe that we will be able to automate how these systems are produced. In the past, it's been very, you know, labor-intensive.
Not only, you know, labor-intensive, but, you know, really, I guess, you know, using procedures that just aren't what you would use in a modern factory. So as-
Not as precise.
Yeah. As we look forward, a lot of automation, robotics, you know, precision application of, you know, liners and insulators and things like that. Precision, you know, ways to cast and cure the motors and that sort of thing. It'll be, you know, we think, you know, the world's most advanced factory for production of solid rocket motors ultimately. And that should yield opportunity for us to expand margins on production programs. And you know, we ought to be able to yield those margins to the investors in MSL. What I would say, 'cause I get a lot of questions around, you know, growth and margin expansion, and yes, we do expect both, but I think growth is the biggest driver of value if you look at MSL.
Will there be some margin expansion? Yes. Can production programs get to, you know, solid, you know, significantly ahead of our average margins today? Yes. We will always have kinda that healthy mix of development programs as well, and the development programs will inherently have, you know, lower margins as we work through risks. You know, today we're on a Sentinel program. We're on, you know, Next Generation Interceptor. We've got some classified programs that we're working on. We've got, you know, continued investment in hypersonics, as an example. You know, some low-cost missiles. You know, as we manage to make sure we've always got that, you know, right mix, that right life cycle of contracts, that will ultimately be the limiting factor on margin expansion.
Mm-hmm.
Not our ability to perform. I think we can perform very well on our production programs, but we never wanna become a cash cow, obviously.
Okay. With the framework that the company laid out at the L3Harris Investor Day recently was for kind of a high teens CAGR in Missile Solutions through 2028. I guess, do you feel like the supply chain is there to support that right now? Also, how much of that can you do with the existing footprint versus how much requires some of the big investments that are coming with the capital that's gonna come from DoD and from the offering?
Yeah. We're working very actively with our supply chain. You know, we didn't wait, we haven't been waiting in order to get, you know, either the investment or the contracts done. As soon as we started discussions with the Department of Defense about the Munitions Acceleration Council, we actually brought all of our suppliers into our facility, had a discussion about the investments we were planning to make, you know, seeing the demand signals that we were. We got commitments from our suppliers to, you know, do certain things to drive their ability to, you know, deliver more capacity. We've actually worked with some of our suppliers to sponsor them into Defense Production Act funding.
In some cases, we'll fund our suppliers for some of the capital that they need that would be used, you know, for our production purposes. You know, where there are suppliers, you know, there's a lot of motors, DACS, and other systems to be built. You know, we're certainly trying to de-risk the supply chain to ensure that we have multiple sources, while I think all of these suppliers will still have, you know, plenty of capacity for them to invest and for them to grow their business significantly. Very actively working the supply chain.
Look, the plan is to get motors and DACS and fuses and all of the other products that we provide into the hands of our customers as quickly as possible and at a rate and a pace ultimately that no one else can. We plan to be, you know, the world's biggest supplier of solid rocket motors and other products for missiles. You know, it's a race. It's certainly a lot of demand out there and a lot of interest in other parties to get into it. You know, we welcome competition, but at the end of the day, we produce over 100,000 motors a year today.
We think we can scale at a pace that no one else can, and ultimately we think we're able to build more motors than anybody else can, and that's what we're off to try to do.
If we think about that 100,000 today, is there a number we should have in our head, let's say six or seven years from now, of what that could be?
Well, we've talked about, you know, doubling revenue. I believe at Investor Day, we talked about doubling.
Yeah.
Doubling revenue through the end of this decade.
Right.
You know, it's not unreasonable to think about quantities following that in some linear fashion.
Right. With further growth beyond.
Absolutely. Yeah. We think there's solid growth, well, you know, for many years to come.
Okay. Well, when you're at the conference next year, we can make it all about Missile Solutions.
All right. Sounds good.
For now, I'm just gonna ask one more, and then we'll pivot. Just understanding the cash flows around some of these large contracts, you know, we've seen framework agreements between Lockheed and Raytheon and the department. I don't know if yours will be directly with the department or if it will be through the primes. The impact of this on near-term cash flow seems relatively neutral in terms of what contractors are expecting. Is that something, you know, should we think about that meaning that at some point later on in the contract performance period, the cash conversion will be lower because a lot of cash came in sort of upfront to support the ramp-up?
You know, from my perspective, I mean, first of all, you know, most of our contracts today are with the missile primes. In terms of the framework agreements, you know, signed at that level, I would refer you to, you know, to their disclosures and their comments. You know, there was, I think, a release or there was a webcast that was held between Jim Taiclet at Lockheed and-
Yeah.
Secretary Duffy at the Department of War, which you know you could reference for some more information as well. We're working our frameworks. Ultimately wanna turn those frameworks into multi-year contracts that we can begin to execute on. We're in negotiations with the appropriate parties to get to where we need to be. From a cash perspective, what I would say is I think there's a recognition that on these multi-year contracts. First of all, the multi-year contracts are very helpful and supportive for the investments that need to be made to capacitize for this acceleration. New factories, new equipment, new automation tools, that sort of thing.
There's a recognition that, you know, as we're all making that, you know, multi-billion dollar investment, that, you know, the cash flow needs to be favorable enough that the business case, you know, will close. As we continue to, you know, expand and grow this business, I don't see it as, you know, a lull or a drop in our free cash flow as we look out past 2028. You know, we're certainly working to make sure that we get, you know, cash that offsets the capital as much as possible.
Certainly thinking about it at the overall LHX level and, you know, how can LHX pull all the levers to, you know, to manage the additional CapEx slug that we're pushing through in 2027, 2028, and maybe a little bit of 2029. LHX is pulling all the levers, you know, not just MSL.
Yeah.
It's gonna be a strong cash story over the long term. You know, as we continue to grow the business, we'll continue to do this all over again. These multi-year production contracts tend to have milestone payments. You know, we're gonna work to accelerate our deliveries because the customer needs the product. As you accelerate deliveries, we expect to have positive payment milestones tied to that. Team's performing, you know, very well and we continue to expect to do that, and that'll drive solid cash flow.
Okay. Excellent. Let's turn to aircraft missionization because that's emerged as a key growth driver for the business. I think if we were having this conversation a few years ago, maybe we'd be worried maybe this mission was moving to space, and you know, you didn't need aircraft performing this ISR mission anymore and now you're looking at a $20 billion pipeline in this area. So can you talk about the growth opportunity there, maybe some of the duration of the growth opportunity there, and you know, do you see this being in outside of Missile Solutions being kind of the biggest growth driver for the company?
Yeah, look, I think the ISR team has done a fantastic job. You know, it's a great team based down in Greenville and Waco, Texas for the most part, and they've been performing well on their programs. You know, a few years back, they had some challenges, and they've come through that. You know, I think we have a history of modifying business jets for militarized missions. You know, there's a really good model there for lower cost per flight hour. You can fly a bit higher. You can see more. You know, there's a lot of missions you can do from space, but there are some missions that you want to or need to do from lower altitudes.
They've been doing great at establishing baseline performance and then working with customers to get you know confidence in their ability to deliver on cost and schedule for some of these key missions. They've you know signed an over $2 billion agreement with Republic of Korea to deliver advanced early warning aircraft and you know off and executing on that contract. I think other countries are looking at that and saying "Wow, that's a pretty attractive asset." We've now signed up another customer for that in the first quarter. A NATO ally has made the decision to procure, and we see other opportunities. You mentioned a big pipeline there. Great work by that team.
You know, it's certainly a competitive field as well. There are international competitors as well as another, you know, U.S.-based competitor of larger, you know, ISR platforms. We feel very good about how we're positioned.
Okay. Excellent. Another growth driver for the company in the SMS segment is space, obviously. You know, L3 has been central to the development of missile tracking and missile warning satellites and that technology. Can you talk about the path forward there? You know, we know that part of the business has grown. The latest award for tracking layer Tranche 3 kind of ensures the next leg of growth. As some of this work kind of intersects with what's happening at Golden Dome and all the resources that are available for that, what are the next stages of your work in missile warning and missile tracking?
Yeah, it's really interesting. Agree with you. Space, all things space are, you know, definitely a growth area for us at L3Harris. Missile defense, you know, missile warning, missile tracking is a big visible part of that. We do have a large classified portfolio as well that's got, I think, a solid growth trajectory. If you look at missile defense, you know, just as an example, five years ago, we had no satellites in this area. Quite frankly, we were a weather payload provider. The team did a great job in figuring out how to turn a very capable weather payload into an optical sensor for missile warning, missile defense, and, you know, add some algorithms and software and ultimately become a prime through SDA Tranche 0.
We're the only company that's then won, you know, Tranche 1, 2, and 3, and we look forward to continuing to support that customer. We also were on a program called HBTSS, Hypersonic and Ballistic Tracking Space Sensor, I think it was.
Very good.
Which is now called, what is it? MDT-3. Thank you, Tony. We look forward to, you know, hopefully a successful opportunity and bid on MDT-3, to you know, continue to provide the defense that our country needs for hypersonic threats. Certainly a lot of capability that we have there, you know, displayed in the previous HBTSS program. Space certainly is a significant growth opportunity for us. I think that business will continue to win and continue to improve its operating margins.
You know, when you move into a new area, there are some growing pains and, you know, we've talked about some, you know, negative EAC adjustments on some restricted space programs and the fact that, you know, SDA, as we became a prime, you know, would incrementally see margin improvement from Tranche 0 to 1 to 2 to 3 and we're seeing that. You know, we think that SMS will have the ability to continue to expand its margins as it sees still, you know, pretty solid, high single-digit% growth.
Right, right. I guess if we thought about being able to, as the capability matures in space and as the ISR business grows with you know, with maybe a little bit more of an international mix, those two factors can be key drivers of margin expansion in SMS.
Yeah, I think that will help. That certainly will help as well. You know, for international, it you know certainly has a higher margin expectation. Some of these big programs, obviously, you know, there's risk, and you wanna be careful.
Yes.
You know, think about that risk as you start to book.
Mm-hmm.
Your profit on that, you know, burn down risk as you move through the schedule, and then have the ability to increase your profitability over time. You know, we'll be careful as we work on these, you know, multi-billion, multi-year estimates at completion and programs. I think there's, you know, a huge opportunity for that segment.
Yeah. Okay. We're like 25 minutes in. We haven't spoken about radios yet, but still an important topic within the company. Can you talk about maybe the relative size of the international and the domestic radio business and the growth trajectory for each of those?
Yeah. From the size of the business, you know, what I would say is that, you know, the factory in Rochester that's where we build the radios is able to modulate, you know, they're awfully close, the domestic radios and the internationals, and they're able to modulate the factory pretty quick to deliver, you know, U.S. Army, domestic, largely, radios or international radios for our allies. The size of it, what I'll say is that, you know, as the Department of Defense has put, and the Army have put some priority around NGC2, you know, we've seen some budget move from radio acquisition to NG, Next Generation Command and Control.
We're certainly in the mix on that and seeing that as a growth driver for us. That's resulted in, you know, some slowdown of the radio acquisition and modernization for the Army, and we've been able to deliver more international radios.
Mm-hmm.
... while keeping, you know, quantities steady and growing a bit. It's been a great model for us. You know, that's a business that can get an order for a customer, and oftentimes turn that around in the same month, if not the same quarter. You know, a business that knows how to scale quickly and get capability in the hands of the customer. We often get questions about that business and the international demand, and what I'll say is, you know, we have, we believe, the world's most capable radios, in particular resilience, low probability of intercept, and low probability of detection. That we believe that capability is really what drives that continuing international demand. International customers will prioritize capability over politics in our experience.
Yeah. I think we've probably seen that over the past year. I guess when you think about NGC 2, what does it mean for the domestic radio business, in that, you know, is there still an intention to purchase radios, and I think of NGC 2 as almost like this kind of architecture. I assume there's still an intention to purchase radios, and if so, I assume also that that hasn't changed. Is it about figuring out how to, you know, exactly what radios they need and how to fit them into this new architecture? Is it about something different? Yeah, I guess how is the Army communications portfolio changing as a result of NGC 2?
Yeah. Look, as much as I love all things radio frequency.
Yeah.
You know, I don't claim to be a, an RF engineer. Tony's an engineer. Maybe he can come answer the question.
Yeah.
You know, here's the way to think about it. There are a couple contracts out there to really define the architecture. You know, we are certainly involved in what is the transport layer within that architecture gonna be, you know, across, you know, multiple layers, you know, applications and that sort of thing. As a part of that transport layer, we certainly expect to be delivering radios and other hardware, whether that's, you know, modems, data links, you know, things like that. Yeah, we absolutely expect to continue to deliver hardware under an NGC2 architecture. In the meantime, we'll certainly continue to deliver radios that are needed today.
You know, I think as you look at the battlefield today, it certainly continues to be contested and quite frankly, more and more contested. I think that the customer is therefore you know, appropriately you know, running some you know, demonstrations to see how these products handle complicated RF environments like jamming and other challenges that adversaries will bring to the table. You know, as we do that, we see that our products continue to perform exceedingly well in those environments and others I think are challenged.
Yeah. Okay, okay. When we think about the path, top line path that you laid out for the CSD segment last month, what role did the tactical radios play in that? Was there an assumption of kind of growth in line with the segment or above the segment, below the segment?
You know, we don't necessarily break down the guidance below the segment level. If I think about tactical radios which is, you know, the single biggest piece of that business, I would say roughly growing in line with the segment, you know, mid-single digit growth.
Okay, okay. Maybe let's take a quick pause here, look out into the audience and see if anyone has any questions or I'll also continue to ask. I guess one of the things I was wondering about, you know, we see kind of a differing defense landscape here in terms of what the department's looking for from contractors. We see a more dynamic defense industrial base emerging. How does L3Harris think about M&A in that environment?
Well, first of all, you know, this, we believe, is an environment that we thrive in. You know, we talk about being the trusted disruptor in the defense industry, and I think this is where, you know, we differentiate. If you think about, you know, the primes that have, you know, the capacity and the ability to deliver, you know, you know, the best technology and capability, and you have the new entrants who have, you know, different ways to do things, you know, faster moving, but they don't have the capacity to deliver, you know, at a scale that's needed. We believe we sit pretty squarely in the middle. We understand kinda that legacy prime business. We have an installed base.
We can also, you know, move a bit faster and partner with some of the new entrants to bring that capacity and capability at scale that others can't do or can't do fast enough, depending on who you're looking at. In terms of M&A, I mean, right now we're very focused on, you know, trying to drive to the planned IPO of MSL. In the meantime, you know, we do have an active strategy and M&A team that evaluates, you know, what's going on. Our leverage ratio is relatively low. We're in the sub three, let's say. You know, we certainly have opportunity.
You know, in the future, you know, MSL will certainly, you know, with its whatever its valuation ends up being, will have its own, you know, set of opportunities to evaluate as well. You know, we're looking at it. We pretty firmly believe our portfolio is very well aligned to areas of customer need. We don't feel the need to do anything unless it's value creating. If you think about our portfolio and its alignment, you know, certainly Missile Solutions, we've talked about, you know, high double-digit growth. Communications and Spectrum Dominance, you know, important business. You know, you've gotta be able to communicate on the battlefield. Space, you know, strong grower. ISR is kind of the key components of our alignment to areas of customer need.
Yeah. Okay, okay. Excellent. We're pretty close to time here. I guess, maybe just to round out on that last point, when we think about your internal R&D then, are those areas that you just talked about, would those be the primary destinations as far as the company's IRAD dollars?
Absolutely. Yeah, we are. You know, we've always been a heavy allocator of our resources to R&D, and I think what we're doing today is placing fewer big bets on things that we have, you know, that we believe in, that we think are, you know, critical for our customers and where we can provide game-changing capabilities. We're not just trying to peanut butter spread across the business. You know, we're picking big bets and making them, and we expect that to continue to drive to an outsized growth where, you know, we think if we're not the fastest grower in the industry, we're certainly among them.
Excellent. Okay. With that, we are at time. Ken, thanks very much for being here. We really appreciate it.
All right. Fantastic. Thanks, Seth.
Thank you.