Okay, great. Good morning. I'm Doug Harned, a Bernstein Aerospace and Defense analyst. I am really thrilled to have with us again, Lockheed Martin. We've got with us today Frank St. John, the Chief Operating Officer of Lockheed Martin, and Jay Malave, the Chief Financial Officer. To start off with, I'm gonna hand it over to Jesus, who has a few initial words.
Yes, I'll start off with your favorite comments. Statements made today that are not historical fact are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Actual results may differ materially from those projected in the forward-looking statements. Please see Lockheed Martin's SEC filings, including our 2023 Form 10-K, for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. I'll kick it over to Frank for a couple comments.
All right. Well, good morning, everyone. It's good to be here with you today. 40th Bernstein Conference. You were telling me there's, like, 1,700 folks here. This is my first, and so I can honestly say this is the best one I've ever been to.
Great.
So, uh-
I'm glad you didn't say it was the worst one, too.
So, let me begin with just a brief introduction. Lockheed Martin is off to a really good start this year. We had some good momentum in the first quarter, and that is carrying over to the second quarter as well, and giving us pretty high confidence about our fiscal year outlook, and also increasing our confidence about accelerating growth in 2025. On the F-35 program, the flight testing of the TR-3 software is progressing, and we are getting good results out of that flight testing that are confirming and giving us confidence that we'll start delivering aircraft in the third quarter of this year. We're also building our backlog, and that is on the backs of a lot of programs of record, but also we've had some new wins that are really encouraging.
Most recently, we had the early down select on the Next Generation Interceptor program. And that's notable, not just because of the new technology and the customer capability, but also that was a first-mover program in our digital transformation efforts as a corporation. And so it validates what we've been saying about the affordability and agility that's gonna come when we develop things in a model-based enterprise with a digital thread. The last thing I'd say is, we're continuing to focus on and make progress on our 21st Century Security strategy. A recent example of that was a demonstration we just did, where we defeated an advanced cruise missile threat using a PAC-3 interceptor launched out of a Mk 70 vertical launch system under the control of Aegis Combat System. This connects some capability across our corporation.
It gives our customer something that's gonna close one of their gaps, and, it's just a demonstration of what we've been saying, that if you digitally integrate capabilities you have, you're gonna be able to rapidly deliver capability. So, with that as an opening, Doug, I'll turn it back to you, and we'll get into the questions.
Great. Thanks, Frank. You know, as you said, this is your first time here. You know, as COO, I mean, perhaps you could tell us a little bit about how you work with Jim.
Oh, boy.
... what the COO role is all about, and what you focus on.
All right. Well, the COO role is a lot about doing whatever Jim asks me to do. But mostly, that means focusing on and partnering with him on delivering strategies and plans to make 21st Century Security a reality. In the near term, that means focusing on delivering the programs that we have. F-35 is a great example, making sure that we have the subject matter experts there, making sure that we're working with the supply chain to work our way through TR-3 and any production issues that come up. It also means working to make sure we have the people, the capital, the facilities in place to support the production ramps that we have ahead of us.
And then also in the near term, it's making sure we have strategies in place that support the growth and capturing the new business ahead of us. In the longer term, what we focus on is 21st Century Security. Really, bringing commercial technology and the billions of dollars that have been invested in things like edge computing, networking, artificial intelligence, and applying that to military problems for our customers, as well as building out our supply chain, working on supply chain resiliency to include international partners. We're also working on bringing the corporation together as one Lockheed Martin, and that means not only offering things to our customer that are the best of what we have across the corporation, but also driving the culture of finding best practices and spreading those around. And then lastly, it's about that digital transformation.
It's a significant investment. It's gonna go over the next 5 or 6 years, and we're kind of flowing that through every program, every line of business, and making sure that digital tool and process capability transforms who we are going forward.
Now, to start out here, I'd like to get your thoughts on. We've seen the President's budget for 2025. You know, it's been constrained by congressional caps. You know, I think for the most part, you know, it's somewhat disappointing that we're kind of at this level where we actually are budget. We have negative budget growth in real terms right now. When you look at that budget, how does it look for Lockheed Martin?
Well, I'll make an introductory comment, and then I'll turn it over-
Yeah
... to Jay for some of the specifics. I think you're right in that it's a bit ironic that we're in a situation where we've got threats increasing at a rate that we haven't seen in decades. We've got technology increasing at a furious pace, and yet, in terms of real dollars, there's less resource. That puts the emphasis on us as prime contractors to the U.S. government to be more agile and more efficient, and be able to deliver them capability within the resource constraints. But if you look at the specifics of the budget, 2024 and 2025, there are some good things for Lockheed Martin in there, and I'll let Jay talk a little bit about the details.
Yeah, maybe let's start with just 2024, because we had plus some substantial plus ups. F-35s were increased, Combat Rescue Helicopter was increased, C-130 aircraft were increased, and so we, you know, we benefited from that. Even when you talk about in the context of a 3% budget increase in 2024, our backlog increased by 2x of that growth rate. So we grew from $150 billion to $160 billion in our backlog by the end of 2023. You go here into 2024 for the 2025 budget, and you look at around, you know, the portfolio and the programs, it's again that the support is still there, whether it's Sikorsky CH-53K. You know, we were just awarded, which we're honored to be on the program for the Next Generation Interceptor. Important program for us.
Things like hypersonics at, in our space segment with combat or Conventional Prompt Strike, Long-Range Hypersonic Weapon, and a number of other programs. And so in 2024, even with the 2025 top line pressure, we have a line of sight to growing the backlog yet again. And if you look at our sales guide this year, the midpoint is about 2.5%, with the high end of our guide is closer to 3.5%-4%. And so we potentially can get up to the higher end of our guide and still see our backlog grow.
And so, it just goes to the strength of the breadth of our portfolio, and what we've been doing really not only the last two years, but frankly, the last 10 years, in positioning the company to be on these key programs. And so, you know, you've always gotta keep an eye on when you're looking at 1% growth, because that's obviously not growth from a real perspective, whether or not there'll be some programs under pressure, and...
Yeah
... you've always gotta worry about cancellations and things like that. But based on what we see today, we're trending towards higher growth than we had originally anticipated for the year, and still having our backlog grow, and I think that is a testament to the portfolio that we have.
And the other thing we're seeing in the 2024 and 2025 budget is a recognition of customers on the value of multi-year procurements. So in the case of munitions, we're seeing multi-year procurements being authorized. In the case of CH-53K-
Yeah
... there's an authorization for a multi-year there, so that creates opportunity for us from a business point of view, even in the budget environment that we're in.
You think about it, and I won't necessarily call them mega trends, but macro trends, you know, you're still dealing with with some of these conflicts and the replenishment associated with those conflicts. We see that growth, and particularly in our, in our missiles and fire control portfolio, and that's gonna be our highest growth over the next 3-5 years.
Yeah.
Then you've got the whole near-peer threat, the China threat, and so that's just modernization of new technologies there to keep pace, and so we're participating on both sides of those macro trends.
Yeah, well, there's a lot in what you just said, and I want, I wanna get into a few different aspects of it, including the really good backlog growth that you've had. But first, going back to the budget, in your discussions on the Hill, I mean, are you seeing any evidence that we could see a less dysfunctional Congress than we have seen when it comes to defense budgeting? I mean, it feels like, as you say, we've got these escalating threats. There should be, if you look at history, that should lead to higher budgets, but we're not seeing it. What's the dynamic that you all see in your conversations in Congress?
Well, I would offer just a couple of thoughts. One is, the compromise that we saw working through the supplementals over the last couple of months was somewhat encouraging, that maybe there's a recognition that some things are more important than political positioning, and so that was a positive trend. We've also seen some public dialogue recently from some legislators about needing to change that cap because of the situation that we're in the world, and so there's some discussion about maybe-
Roger Wicker commented, yes.
Yes, yes, absolutely. You know, conversations about $50-$55 billion needed for defense. Counterbalancing that, though, you know, I'd say we're maybe cautiously optimistic, but counterbalancing that is we are going through an election year.
Yeah.
Things that are challenging get more challenging in that environment, and so I guess I'd say that's the kind of the summary of where we're at.
Yeah, I-
A few bright spots, but challenges ahead.
Right. It should be, and maybe there'll be kind of some recognition of that, that maybe we'll see some... We're not necessarily planning, though, for higher than what's kind of been laid out-
Yeah
... from a, you know, from a fighter perspective, let's say. And so one of the things that we're just you know, there's just gonna be, I think, some program, whether you call them truncations, whatever the case may be, retirements, to fund some of these new capabilities. So the customer within an $800 billion budget does have some wherewithal to make some of those tough choices. So we're expecting that that's probably going to occur, where you may see some retirements, and you've seen it, like A-10 aircraft and things like that.
Yeah.
And so that, you know, if there's adds, that would be, you know, really kind of upside to what the way we're planning.
As you said, I mean, you've had some really nice backlog growth.
Yes.
Now, you, if you look over the last few years, your revenue's been pretty flat.
Mm-hmm.
You know, are we seeing a turning point here, where you could get up to kind of a mid-single-digit growth rate over the next five years, say? I mean, how, how do you think about it when you look at this wave you're getting in backlog?
Yeah, and so, that's very true, Doug, but maybe go back a little bit. When you think about 2023, we came into the year thinking that we would be flat, and we did, we did grow. And so we were able to, you know, when you think about Lockheed Martin, it's more of a long cycle business. But we were able to convert some of that backlog in 2023 and drive a growth rate, return to growth faster than we'd originally anticipated. You go into 2024, that growth rate, growth rate is accelerating. And then you go into 2025, we expect it to continue at least at what we see this year and, be higher, potentially. And can it be 5% in a particular year? Yeah, it definitely can be 5% based on, the backlog.
It frankly this year wants to be 5% with the backlog, but there are some kind of capacity constraints we're still kind of working through in certain programs, just supply chain performance and things like that. And so, the demand that we have, the backlog that we have, would support a 5% growth rate. Right now, we've got that moderated over the next five years. We could see 4%-5% at any given year, depending on how kind of the underlying operational cadence can catch up. And so, you know, I know we'll probably talk about ramps maybe later on-
Yeah
... in the discussion, but we're pretty focused. Right now, we're performing, for the most part, on the ramps that we'd expected. There are a few programs that are a little bit slower than we'd anticipated, and so we're just being, I think, generally conservative. But going back to your question, can we see a 5% growth rate, growth rate? Yes, we can.
Well, then, an important part of this, I would expect, is going to be international. We've seen-
Absolutely
... significantly more demand in Europe. But I would say on the other side of this, a while back we went through a huge amount of demand in the Middle East, which may not be as aggressive now. When you look around the world, and look at your international demand, sort of Europe, Middle East, Asia, how do you see it? Where are you benefiting, and what's the net impact?
So I'll, Jay, if you, if you don't mind, I'll, I'll-
Sure
... start off with that. And, so starting with Europe, obviously there's a significant ramp-up in the budgets, reflecting the, you know, decades of undercapitalization in defense capability, and especially in Eastern Europe. And the Nordics and the Baltics and anybody that, you know, is within 1,000 kilometers of Russia has now got an urgent demand for capability. And you add to that, you know, this deterrence demand, but you add to that also the aging Russian equipment that many of these countries had in their defense inventory. So things like helicopters, fixed-wing aircraft, artillery systems, all of that is aging out, needs to be recapitalized, and they're also not likely to go to Russia to get that capability. And so that's creating demand for artillery systems like HIMARS, fixed-wing aircraft, F-16, Black Hawk helicopters.
All of that is, you know, European-focused. I was in the Middle East late last year and in January. They are keenly focused on Iran as a bad actor, and we've seen this over the last couple of months. And so things like integrated air and missile defense, integrated command and control, refresh and upgrade of some of their fleets of transport aircraft and fixed-wing aircraft, are all very much front and center, and those are good opportunities for us as well. And then I just got back from a couple of weeks in Asia, talking to the Koreans and the Japanese, who are really in a bad neighborhood. North Korea is shooting missiles over Japan, kind of on a monthly basis. Japan has still got contested territory with Russia in the north, and they watch them very carefully.
Then China views Korea and Japan as kind of an impediment to what they want to do in the region. So all of those things together are creating increased budgets in those countries, increased desire for integrated air defense, long-range strike, advanced platform capability, C2. All of that is things that is the heart of our portfolio, and so, that's... That, that's a, a, a good base for us to take off from.
When, when you roll all that up, where do you see international going as a percent of Lockheed Martin sales?
Well, today we're around, I think it's 27%. If you look at from where we are today, we'd expect that our growth rate internationally to be, you know, you're talking mid- to high-single-digit over the next 5 years, which then implies the US DoD would be a little bit lower, probably growth rate consistent with what we're seeing-
Yeah
... in the top line, F-35. But that's, you know, it's gonna outpace US growth, and it's pretty much, again, not fully in the backlog, but a fair amount of this business is already in the backlog. And, you know, going back to what—like, particularly with a country like Australia, which-
Yeah
... they're buying C-130s, they're buying Black Hawks, they're buying F-35s. We're successful with them on satellite programs, military communication satellite programs, AIR6500, which is a joint all-domain command and control system. So you have just these, these build-outs that are happening and modernization happening internationally, and we're participating very much. Australia's just a great country for us. But as Frank mentioned, Japan, Europe, we're seeing very similar types of the demand environment there.
Well, what's interesting to me about what you're saying is that this seems to have changed a little bit because, you know, we always would talk about, you know, PAC-3s and THAAD-
Mm-hmm
... the range of programs that you're able to... systems and you're able to export now seems to be expanding. Is that fair?
Yeah, I would say so. You think about it. It's not only, you know, kind of getting the export licenses, but it's also our capability that we're able to really bring it to relevance internationally as well. You know, how many international satellite programs have we had in the past? Not all that many. And in Australia, we have the GPS and now the satellite communication. So it's just an expansion of our portfolio capability beyond, as you mentioned, kind of missile defense-type programs.
Right.
F-35's always been an international program.
Yeah.
F-16 is another one that, you know, our backlog over 120-130 aircraft is all international on the F-16.
Yeah.
The C-130 backlog is got a fair amount of international as well. So it's pretty broad-based.
Yeah.
The Black Hawk, I mean, they're just around the portfolio.
Yeah.
International radar, ground-based radars, we were successful with Norway a year ago with our modernized TPY-4 platform. And so we just continue to see and offer these systems to international customers.
The more we deliver for these international customers, the more we're able to build relationships in those countries, and then that feeds demand for other capability.
You know, one of the things that Frank mentioned is really going to customers as one company, rather than offering them just a discrete program or system. And we've really probably spent the last, I want to say, 3+ years really taking an integrated approach to our sales. And we've got Michael Williamson, who's our Chief of Business Development for the corporation, and those before him, as well as Frank and Jim, really have the company just changed, and it's really making an effort to really provide integrated systems to the customer, not just one capability.
You know, F-35, so that's, you know, close to 30% of revenues, clearly critical program.
Mm-hmm.
You know, you've gotten up to the 156 for your rate, but, you know, as you mentioned, with the, you know, Tech Refresh 3 has been difficult. Can you walk us through where this all stands now? I mean, you know, I know it's been pushed out, Tech Refresh 3 is pushed out into next year. You've talked about having a sort of subset of those capabilities on earlier deliveries. Where is the program today?
So where we're at today is, from a hardware point of view, we are continuing to build aircraft at that 156 rate. Software capability, as I mentioned in my opening, we are in the process of flight testing what we're calling a combat training software build. And that will allow aircraft to be delivered and go to operational units, and begin the stand-up of bases, and pilot training, and everything that's required to lead into a combat capability that is gonna be fully delivered in the first half of next year. So from a hardware point of view, things are good and flowing. From a software point of view, we're finalizing that flight test program, and we're gonna start delivering jets in the third quarter.
I think it's important to remember, though, that TR3 is the beginning of a development and modernization process of the F-35 that's gonna go on for the next eight or 10 years. And so it's really important that we get this processing and data infrastructure correct within the aircraft, because it's the foundation for new mission capability, that is gonna extend into the 2040s and beyond.
So, you know, the completion of Tech Refresh 3 has slipped multiple times. And, you know, it's central to Block 4.
Mm-hmm.
How do we get comfortable that this is going to finally get on track, and we're not gonna see this continue to push out?
I guess I'd say right now, all I can tell you is that the flight testing is going well, and that we're very confident that we're gonna start delivering jets. And that with that TR-3 processing and software as a baseline, future integrations are just gonna have a good foundation. We're also making investments in infrastructure. I think you've seen some language in congressional language about investing in infrastructure for test aircraft, for test labs and facilities, so that we can pave the way for a smoother integration. I'd like to think we've learned our lessons on TR-3-
Mm-hmm
... and that we're gonna see this, just see this get better as time goes on.
So with this, I mean, you've continued to produce a 156, and you get paid for that.
Mm-hmm.
You get some money on delivery, right, in cash?
Correct.
But, but so that's all been fine. Is there any concern that, and I, I'd say from two standpoints, if Block 4 or Tech Refresh 3, if it continues to get delayed some, that you might have to pull that rate down? or also, we've seen in the budget, there's been a reduction in the 2025 budget, which it looks like Congress, you know, could even take some more out. you know, how does that play into your thinking on that 156 rate, given that there's a lot of international demand at the same time? So sorry, there's a lot in that question, but-
Yeah. Take it out.
You know, yeah, I think it's still to be played out, Doug. I mean, the range of outcomes... Yes, it could dip for a year or two, but it also could stay at 156. It becomes a question of where do these volumes finally land, you know? And what flexibility would our customer have with international customers to be able to move around delivery? So it's possible you can accelerate some deliveries, rebalance and really see maybe a slight change to the production rate. Depending on the timing of that, it's also possible that because we're already building aircraft, it would be delivered in future years, that our ability to make significant moves and accelerate different customer sets may have passed in certain cases.
So it's really, it's a work in progress in terms of what it would do to the rate. But I think, I think what we have to keep in mind is, even if we were to dip for a year or two, the program of record, the customer has been committed to. Over the long term, this program will, you know, we're talking a lot of aircraft. And so, I think we'll get through this. We will, we will get ourselves on the right schedule for a Block 4 incorporation and make this aircraft even better than it is today as the industry-leading aircraft in the world. So, yes, kind of, it's a little painful, you know, for the short term here. It's putting some pressure on cash.
It's putting some pressure on profitability as we watch our booking rate and all that type of stuff. But, you know, we're talking about getting through this over the next year or so, and then getting ourselves back on track towards delivering to the full program of record. And so there's been no change there, and I think the long-term demand is gonna continue to be the foundation of Lockheed Martin for, for many years to come.
You know, one other thing here, it's not—I mean, directly—it's not your problem, but there have been... You know, we've seen real delays in engine deliveries. Now, that's obviously a separate contract.
Mm-hmm.
Yeah.
Is there any point where delays in engines impacts your work and production?
So where we're at today, we've got enough engines in inventory to stay ahead of the production build rate. And so, we're not seeing that impact now or projecting that to be an impact in the near future. We do work that, obviously, very closely with the customer to make sure that that doesn't become an issue. We do have other supplier challenges that are, I guess I would say, pacing the rate, and so we're looking at the processors, we're looking at the other-
Yeah
... TR-3 hardware elements, because those are, those are new hardware configurations that have to ramp up and be at full production rate to support this year and years going forward. So, we're keeping a close eye on that, but the engines-
Yeah
... haven't been as big an issue.
When you put, excuse me, when you put this together, you've also got an outlook with substantial sustainment revenues-
Mm-hmm
... mods. You know, how should we think about assuming Tech Refresh 3 goes kind of on the plan where we're talking about here, how should we think about F-35 revenue growth when it's all in over the next, say, five years?
Yeah. I think over the next five years, it will continue to grow. And the way I would look at it in the total portfolio of 35, is probably in the low single-digit range. It will be led by sustainment growth. That's gonna be mid to high single-digit growth. Production, it'll probably grow a little bit, but just because of the timing of hardware, because, you know, we're percentage completion type of revenue recognition. So it moves around on the production side. Development is fairly kind of stable at around $2 billion a year, and that'll continue, I think, because of the Block 4 incorporations and continued modernization that we have. So when you take a step back, you've got an $18 billion revenue program.
$4 billion of that is sustainment, and that will grow at a very strong rate, and that'll really carry the rest of the $18 billion that we have in, on F-35.
And that sustainment growth, on one hand, as the fleet grows, you have more-
Correct
... sustainment need. But on the other hand, I mean, you've been, you know, tasked with getting your flight hour costs down at the same time.
Right.
How do those two things balance out so that it leads to net revenue growth?
Yeah, I would just, I guess, start by saying that, we've been on that path of reducing our cost for a long time. Over the last 7 or 8 years, cost per flying hour is down about 60%, cost per tail per year is down about 30%. And so between ourselves and the customer, we've been working pretty diligently to manage that down. And we're pleased with those results, but we're obviously not satisfied. We've got a lot of work to do to continue to hit the targets that the customer's given us. In terms of how that is gonna kind of fold into, revenue or whatever, I guess, I'll let you take that one.
Yeah, I mean, the improvements that we continue to work with our customer to deliver is factored into that mid- to high single-digit-
Yeah
... growth rate. If you left it just on volume alone, you'd be high to double digit type of growth rate, but for the efficiencies that we're gonna continue to drive. And we're fully behind and fully committed with the customer to deliver improved readiness and improved maintenance costs, operating costs.
So, if we switch over, you know, F-16, we've seen this resurgence in demand there. Can you talk about what we are, you know, where some of those opportunities are, obviously international, and what you see as the potential growth in F-16 revenues?
Yeah, Jay, you wanna talk about it?
Well, you know, there, in terms of the, you know, Turkey is a big one, 40 new aircraft that was announced. We have to kind of work through that with the customer, get it on contract. But there are other countries like Thailand and other countries in Asia that are providing conditional opportunity to add to the backlog and keep that program going. And so we continue to see decent demand there. There have been some countries also in Europe that have indicated interest there. We'll see a spike in sales over the next few years. It'll level off when you're talking, say, 2027, 2028, because we're gonna get to a full rate production, which is in the 20-ish range per year, sometime in the mid-next year.
So we'll once we hit our full rate production rate, it'll start to level off. But we still have got, you know, we still got some nice runway there.
Then also on the aeronautics side, if we go to the sort of future world here, how do you think about NGAD? As an opportunity.
NGAD is obviously pretty highly classified, so we can't say very much about it. There is increasing budget available for NGAD, and so that, whenever we see good budget associated with the program that's got capabilities that are aligned with us, it presents an opportunity for us, but that's about all we can say.
Yeah, I just think about our, you know, fifth-generation capability, both F-22 and F-35, and we've been working—you know, those are kind of foundational programs, and working on improved technology from there. So as, as wherever the customer takes, kind of sixth gen type of programs, whether it's stealth technology, mission system integration, all those type of things, kind of converge sensors, all those technologies are things that we've been working on over the past five to ten years to put—to get us ready for, you know, just eventuality.
I mean, Northrop Grumman and Boeing have talked a little bit about, you know, not being interested, perhaps in the main platform, because which it appears, could be due to contract structure and risk. I mean, how do you think about-- and Jim's talked a lot about this, about the concerns over fixed-price contracts, and how do you think about this program in terms of... Obviously, we can't talk about any specifics on it-
Right.
But how does the contract itself and exposure?
So without specifically talking about NGAD, I'll talk generally about what we're seeing contracting-wise. Seven, eight years ago, there was a lot of large franchise programs that came through that were fixed-price development and/or fixed-price options for early production prior to completing development. And a lot of those programs have not delivered the capability that the customer was looking for. And so what we've seen over the last couple of years is a, I guess, I'd say, a recognition that if you're gonna develop something that's high tech and takes a like a step function and capability for the customer, that a cost-type arrangement is probably the best arrangement to do that work in. And so we've seen over the last couple of years, more and more of these large development programs be cost type.
And so we're, I guess I'd say, pleased to see that change in contracting, and it's good for us, and it's gonna help us deliver capability.
Switch out of classified, because it's easier.
Yeah, thank you.
So, if we go over to Missiles and Fire Control, and there's some classified in there, too. But, first thing you talk about, I mean, you're, I think, benefiting a lot here from renewed demand in Europe. Can you talk about the kind of key programs here and what that can mean for growth in this business?
Yeah, I'll tick through some of the programs and then I'll let Jay put the financial angle on it. Almost everything in the missiles and fire control portfolio is increasing its rate of production over the next couple of years. So Javelin, primarily driven out of Eastern European demand. PAC-3, going from several years ago, we were at about 300-350 a year. Now, we've got contract to take that capacity to 650 a year. Guided MLRS, several years ago, about 6,000 or 7,000, now 10,000, going to 14,000. Programs like JASSM and LRASM, again, going from the 300s to now 700 on the way to 1,100.
So every one of these missile systems, as well as the launcher systems like HIMARS, we've doubled effectively the capability of HIMARS in terms of production. So all of those programs are on the upswing, and the backlog is such that they're gonna stay at those high rates of production for a few years. So it's very favorable. Jay, how does that flow down financially?
Yeah, and they all, you know, occur at different times. So you have, say, Javelin, for example, kind of gets to the 4,000 rate in 2026. PAC-3 is getting to 550 next year, and then getting to 650 by 2027. So when you layer in all these, these rate increases and the timing of that, we continue. If you look at, you take this year as an example, 2024, MFC was about $11.50 billion in sales. Their guide is around $12 billion, so that's $750 million of growth. That's the type of growth per year that we're seeing over the next three to five years, $750 million per year, compounded each year. And so, you know, the, the backlog is strong.
You know, I think as Frank mentioned in his opening remarks, we're there, the Congress had opened up multi-year contracting, particularly for munitions. And so, we see the demand there, and we see the growth rate pretty high. To your point, the augmentation of just the legacy programs, call it. And I really wouldn't call them legacy programs because there are a lot of them are improvements. But the classified program, we've talked a lot about margins, but that is also driving the sales growth as well. And so taking that together, new capabilities, and that MFC is a perfect example of participating in both of these trends that I mentioned before. You got this replenishment demand in accordance with these conflicts.
And then you've got these, near-peer threat increases in technology, and MFC's got both, the classified program as well as the existing programs, and that's gonna drive it to be our highest grower for the next 3-5.
And, and, uh-
And-
And I was just gonna say, a couple of things about the MFC product set, too, is the MFC team has always developed products with the idea to be able to improve them over time. And so, as Jay said, we're benefiting from demand for, say, JASSM capability today, but at the same time, there's a pretty active development program that's developing the future JASSM and LRASM for the near-peer conflict. MLRS over time became Guided MLRS, and now we're starting the initial production of the Extended Range Guided MLRS, which almost doubles the range capability of that. So the MFC team has been very strategic about the way they've architected and designed their systems to facilitate that long-term growth and capability growth.
The other thing is that when you're ramping up like this, a lot of the burden and challenge falls on supply chain, and the MFC team is probably leading the corporation in terms of their ability to engage and work directly with suppliers, in fact, sometimes even putting our subject matter experts in their facilities to make sure that those production ramps happen and stay on track, and that every detail within the supply chain is happening at pace to keep up with what we're trying to do at the prime contract level.
Yeah, MFC, you think about them, for us, internally, we view them as the really the model, call it, for higher volume manufacturing, not only really between, in, within Lockheed Martin, but in the industry as a whole. Just a very, very strong performer. They were impacted, as Frank mentioned, by some pretty severe supply chain issues, and they... I mean, they deployed not only their own engineering teams, but actually hourly factory workers to help our suppliers get back on track, and again, they've been the model for the rest of the corporation.
You know, there have been some reports around the war in Ukraine about Russian jamming capabilities being able to basically cause a reduction in performance on a you know, some of your products and others. You know, when you see things like that, clearly, you're very strongly positioned to do whatever is needed with respect to missiles, but does this, in a sense, add to demand? Because you've got to be able to address issues like that when they come up, or does it go the other way, where people go, "Well, maybe I don't need this product anymore if the Russians can take it out?
So I would say, just to start with, anytime you get into the issue of countermeasures and counter-countermeasures, the conversations pretty quickly get classified. We do have requirements for overcoming those kinds of things built into the system, and as I mentioned earlier, the MFC folks have been very good about developing their systems with the idea that they can be modified. So we're working with our customer to make adjustments to address the threats-
Yeah
... and learning from those experiences. But we don't see it as any kind of long-term effect on the prospects for those franchises.
Okay. Now, MFC's historically been able to deliver margins above 14%. Right now, you do have this large classified program, which I expect is gonna be a very high growth program when it matures. But that's weighing on margins. How should we think about the margin trajectory over the next few years, given that you have this headwind?
Yeah, if you look at this year, you know, we're obviously, you know, impacted. I mean, this is probably the most significant year that we'll look at in our just relative to the guidance that we've provided. You know, kind of maybe just size it, the impact of the losses we'll record this year is about $325 million in MFC alone for that program. And so, you know, it'll continue to have that impact annually for the next few years. Not at that rate, maybe closer to, like, $250 million or so per year, getting out of 2024.
But, you know, MFC, if you strip that out, this year they're north of 14% for the rest of the portfolio, and we expect them to continue, the rest of the portfolio, to continue to just moderate growth over that period of time. And so, as these losses abate, they'll return. We're very comfortable dealing with them being a 14% plus ROS business going forward.
Okay. If we jump over to space. Now, I mean, this, until really until this year, this has been the highest growth part of the DoD budget. We've seen that space budget flattening out this year. You, you have not had quite the growth that some of your peers have had, and I would... I, I believe that is due to a lot of legacy program revenue. You've got growth on some new, like, SDA-type programs-
Mm-hmm
... but it, you've got kind of things going both ways here.
Mm-hmm. That's right.
We've recently seen some pickup here-
Mm-hmm
... you know, even if I put NGI aside. Can you talk about where you see space headed, and when we should really start to see this growth coming up?
Yeah, so if you look at space, and those who may be just starting, we talked about this at, you know, the first quarter call, they've got a backlog of over $30 billion. So, you know, think about a $11 billion revenue segment, an excellent line of sight to continued growth there. To your point, yes, there are some legacy programs that just where they are in their life cycle, we'll start seeing just declines. And so we're talking about things like SBIRS, OPIR, and the Orion program, really the three which have been significant contributors for 10 years to Lockheed Martin. And so given their life cycle, they will—they're just gonna cause a growth drag.
So when you put it all together, you're probably looking at, like I say, a 3% growth rate over the next five years-
and if I can jump, is that those three programs, but there—are there also some legacy classified programs-
Yes
... that are in that same trajectory we can't talk about?
Yeah. I mean, they've been successful in some other classified programs as well. So I would say that their classified programs are well-positioned and to continue to grow.
Okay.
And so, those are really the
Okay
... those three programs are really the most significant impacts that-
Okay
... that we're seeing. And I know we don't like to do that, but we've kind of, we were kind of kidding around with Frank earlier, like, if you look at our revenue, X all the bad stuff. But, you know, if, if you take those three programs out, you're talking about a 6%-7% growth rate for an $11 billion segment, which I think is pretty solid, and I think is, is really evidence that they are participating in this growth, this really this recapitalization of the space architecture that we're seeing. You're seeing this, this, this, really combination and integration with intelligence community and defense community capabilities, bringing those together and having them be better integrated.
Robert Lightfoot, who's the president of our space segment, reacted to that throughout last year and really combined the business to be more to make it really consistent with the way the customer is approaching procurements. So that, you know, because now you're seeing this merging of these capabilities between these two what used to be very discrete sets of buying entities. And so, you know, SDA's, the SDA programs is a great example. These are small satellites in LEO. And, you know, we didn't participate in the Tracking Layer. We're now participating in the Tracking Layer in the second tranche. We've been successful on the Transport Layer on three tranches there.
And so, when you take a look at Lockheed Martin's capability, we've been able to transition from being an exquisite satellite provider to being a more of a low-cost, small satellite provider. And we'll participate in these architectures, proliferated architectures, as they mature and as they grow. But you know, I could say the beauty of that model is that, you know, the way that exquisites are, their design lives are anywhere between, say, 10-15 years. On the smaller satellites, their design lives are anywhere between 5-7 years. So the beauty of participating in these programs is they're gonna, the recapitalization cycle is gonna be a lot quicker than you see. So this is gonna be a recurring revenue stream for us, and again, I think we're well positioned.
These small satellites are also kind of participating in classified as well. And so, you know, again, kind of sales growth outside of bad stuff, at the end of the day, we've got a pretty good growth rate there.
Yeah. And, the missile side of the space business has got very strong portfolio as well. So hypersonic capabilities, very solid and growing. NGI, gonna be growing over the next couple of years, and then eventually headed into production. And then Fleet Ballistic Missile is on the verge of a significant recapitalization as well, and so that piece of the portfolio is very healthy and, and growing also.
I want to, I wanna jump quickly, because we're gonna run out of time, over to Rotary and Mission Systems. And, and so one question: So you didn't win FLRAA. FARA got canceled. Now, what does that mean for Black Hawk? I mean, in the... You know, in a sense, can this be a kind of an attractive situation, even though it didn't work out like you wanted it to?
Right. So what we're envisioning for Black Hawk is two things. One is another multi-year to follow multi-year ten, because Black Hawk is gonna be in the fleet for many, many years. And in fact, Black Hawk can do about 80% of the mission set that the Army needs for medevac and SOF and all these different things. So it's a very capable platform in the long run. The technology that was developed on FLRAA and FARA, we're gonna migrate that into Black Hawk and create a modernized Black Hawk platform. So things like new engines, new open system architecture, cockpit, new mission systems, autonomy, the ability to work with and command unmanned vehicles, all of that is on a technology roadmap for Black Hawk.
And so, we actually think that's gonna give it a second life, and extend that franchise. Elsewhere in Sikorsky, we're also seeing some near-term growth as we ramp up the Romeo platform, the Seahawk platform.
Yeah.
And then over, you know, 5-7 years, CH-53K is gonna continue to grow, and that multi-year authorization that Congress just pushed through is pretty significant as well. Jay, you want to put a point on how that looks financially?
Yeah, you know, Sikorsky, what I would say is, yes, you know, we're disappointed with how those landed, but they're just a stable business. And so we'll still see a slight growth rate between now and 2028. It'll actually grow over the next few years as they continue to ramp up on CH-53K and deliver on the Romeo model. We've just got some deliveries that spike, and it'll come back down a little bit, but between 2024 and 2028, it'll still, the revenue base will still be higher there. And so in spite of those losses there, they've got a stable business. As Frank mentioned-
RMS.
Yeah, and RMS. So RMS in total, even with Sikorsky, kind of a slight growth between now and 2028, will still grow anywhere between 3%-4%.
Yeah, because the other-
Right.
Yeah.
We've got our Integrated Warfare and Sensor Systems business, which has our ground-based radars and general radar business, which is very well positioned.
Yeah.
We'll see growth there. Also, some command and control wins in that line of business as well. Our C6ISR is where our AIR6500 program is, and so command, joint, all domain command and controls will drive growth there in that business. And then our Training and Logistics Systems business is poised for growth, too. As we just mentioned, Frank mentioned, we had won a Canadian training program, or that was announced yesterday with the Prime, and so we're participating in that program. So all those other three lines of business within RMS will drive our growth rate, much higher growth rate than what we're seeing at Sikorsky, and keep that kind of, you know, 3%-4%. So it's...
I think the RMS business is well-positioned, and, you know, even though Sikorsky is the largest, we still see growth in the entire segment.
Well, we're gonna have to wrap up here, but, I'm gonna ask just one quick question.
Sure.
Pull all this together, maybe this is for you, Jay. Can you just comment on how you see free cash flow over the next few years and your plans to deploy that?
Yeah, you know, our cash flow target for the short term is to grow absolute free cash flow at a low single-digit rate, and then augment that with share repurchase to get us a mid-single digit free cash flow per share growth over the next few years. The biggest headwind we have right now is we've got some pension contributions over the next few years that we have to deal with. We're trying to work through that through really two ways of managing it. One is organically, through better working capital performance, and we see a lot of opportunity there, particularly in our unbilled asset balances, which you're talking anywhere between $12 billion-$13 billion asset. So there's plenty of opportunity in there.
The second would be the use, potential use of the balance sheet to just issue some debt and take that pension off the table. And so, you know, the beauty of Lockheed Martin is we've got, I think, some the appropriate levers to deal with that pension headwind, where we can deliver on this cash flow commitment.
Great. Well, thank you very much for being here.
It's a pleasure. Thank you for having us.
Thank you, Doug. Appreciate it.