LMT - Lockheed Martin Corp (LMT) JPMorgan 2023 Industrials Conference Call Transcript

2023-03-16 15:30:22 ET

Lockheed Martin Corp (LMT)

JPMorgan 2023 Industrials Conference

March 16, 2023, 10:30 ET

Company Participants

Jay Malave - CFO

Conference Call Participants

Seth Seifman - JPMorgan Chase & Co.

Presentation

Seth Seifman

Good morning, everyone. Welcome back to the Aerospace Defense Track at the JPMorgan Industrials Conference. I'm Seth Seifman, the U.S. aerospace defense analyst. And we are very grateful to have Lockheed Martin with us now, and the company's CFO, Jay Malave. Jay, welcome.

Jay Malave

Thank you, Seth.

Seth Seifman

Yes, thanks for coming and for being here. I think we're going to do kind of something informal, kind of a fireside chat here. We'll talk -- we'll open it up to the audience, if people have questions in a bit. I think there's also some housekeeping we'll do right here at the outset.

Jay Malave

Okay. I'll do that. So Seth, thank you again. Thank you for having Lockheed Martin. I'm excited to be here and represent our 116,000 employees around the world. There's a lot going on. I'm sure we'll get right into it.

But before we do, just quickly on the safe harbor and the forward-looking statements. This discussion will include forward-looking statements that are subject to risks and uncertainties. We have information in our 10-K and 10-Qs. As you know, those risks and uncertainties could cause our actual results to vary materially from those that we speak about today. So in our 10-K, 10-Qs, we have information on those risk factors that you can refer to at any point in time, and that information is included in our website.

So from there, Seth, why don't we get started?

Question-and-Answer Session

Q - Seth Seifman

Cool. Excellent. Maybe -- I wanted to start off -- I thought you gave some pretty helpful remarks, maybe it was about a month ago at another conference, talking about a framework for thinking about the company in terms of 4 growth pillars, and kind of laying out the contribution from each of those pillars over the next 5 years or so.

And when you add it all up, it looks like -- it pencils out to something like 2.5% growth, 2.5% CAGR through 2028. And I guess -- I wonder sort of how you think about that and the degree to which there's upside and downside. Because when I look at U.S. government's defense spending, I know we got a request for 3% budget growth this week. And if you look in the DoD slides, it's kind of 2% thereafter. So it's sort of in line with that.

But the spending from the last 2 years of very strong budget growth has not shown up yet. And so you'd think that overall defense spending, both for U.S. and allies, is going to be growing at a faster pace than that 2.5%. And Lockheed is the biggest defense company in the West. And so how do we think about -- if Lockheed is growing 2.5%, how do we think about where all the money is going?

Jay Malave

So it's a good question, Seth. Let me maybe baseline us here. When we talked about growth, we've talked about, really starting from 2022 starting point, we delivered just slightly below $66 billion in 2022. And so when I -- when we talk about the, say, this 2.5% rate, it's in the ballpark, it's close enough. That's 5 years from that starting point to 2027.

We've talked about 4 pillars of growth that are going to drive us, first being programs of record, second being classified programs, third being hypersonics and then fourth being new program awards. And the biggest drivers will be the programs of record because some of those programs have slid to the right with supply chain issues and the like. And that will be followed by growth in our classified programs. So we'll get some contribution also from newer program starts, but it's smaller contribution as well as hypersonics.

When you take a look at where we are, if you look at 2023, we're down about 1% in the ballpark at the midpoint of our guide range at 65 5. And so when you go and just go off in '22, we'll be down a little bit here in 2023, the growth rate necessarily has to be higher in '24 through '27 to achieve that type of CAGR.

And so when you just do some quick math, you're going be -- you're going to have years that are anywhere between 3% to 4%, I think, as a starting point and a framework. We'll give a lot more color about that probably in the third quarter call in October, and we'll go through a recycle of our 5-year projections during the mid and late summer.

And so I think that's the best place -- way to think about what our growth rate is, which I think encapsulates some of the upside that you've seen. As I mentioned, as we really reported in the fourth quarter call in January, our backlog had increased 11% to $150 billion. And yes, we did have 2 F-35 lots in there. But even if you take the F-35 growth in orders in 2022, we still had backlog growth of 5% in the rest of the portfolio. And so I think that will catch up. We will see a growth at probably slightly above these rates that you saw just released recently.

Seth Seifman

Right, okay, okay. Yes. I thought the backlog growth in 2022 was definitely notable. And there's awards coming out of the fiscal '23 budget, which didn't get passed until the very end of December. And so how do you think about order activity this year and where the backlog might end up, at the end of '23?

Jay Malave

Sure. So we -- again, we began the year at $150 billion at the end of 2022. When you look at this year with the activity that we see, we see it about flat, right around $150 billion. We've got 1 lot 17 on F-35 that, that's an option that the Joint Program Office can exercise, and we expect them to do that.

But there is potentially some upside from there. We've got a key program for an integrated air and missile defense program at MFC. And if we're successful there, then we could see incremental backlog growth this year.

Seth Seifman

Is that domestic or...

Jay Malave

It's international.

Seth Seifman

International -- okay.

Jay Malave

It is, yes. So I think a good starting point, flattish in that ballpark, slightly up, slightly down, with the variable being if we're successful in this new award, that would drive us to a higher backlog again in '23 versus '22.

Seth Seifman

I guess putting that award aside, would you still expect '23 to be a strong year in terms of MFC awards? I guess if we think about why backlog would be flat this year, I guess there were 2 F-35 lots that went into -- that went in last year, whereas this year, there's only going to be one, so that it makes it a little bit tougher.

But MFC, we think about all the -- everything that's been in budgets for tactical missiles, everything that's been in drawdown and Ukraine supplementals. At what point should we see -- I assume that MFC backlog is going to get to a record level, at some point.

Jay Malave

Yes. And sure, this year -- when you look at last year, when we talk about kind of replenishment, Ukraine-events type of demand, we had about 100 -- I'm sorry, $1.5 billion of orders last year. Coming into this year, we thought that, that would slow down a little bit, just in the contracting cycle to about $500 million. But now we see that will be -- right now, we're expecting it to be pretty similar, about $1.5 billion again.

In the January call, we talked about a total opportunity set of $6 billion. And so we'll see at least $1.5 billion of that this year. And it's possible it could be higher. We've got other international demand. What you saw released with the budget documents yesterday was really U.S. demand. It doesn't really include foreign military sales in there, and we see a lot of demand there.

So it's possible we can see some upside in MFC this year. But over the next few years, we see it -- it's a $6 billion opportunity set that we're pretty comfortable with, the line of visibility. What year they actually fall in, we'll see. But that's a key driver that's included in that growth rate.

And let me just maybe explain that a little bit. I talked about it in the January call, $6 billion of opportunity in MFC. That helps us offset should we receive an unfavorable ruling of FLRAA. And it's actually will be more than offsetting. But we just have to keep that in mind. When we talk about our growth rate over the next 5 years, we added some upside from MFC. We lost a new award expectation, which was FLRAA at that point in time. Net-net, it's positive, but it's not $6 billion. It's just, I think, all of it in incremental.

Seth Seifman

Right. And so it sounds like of that $6 billion, but potentially by the end of this year, $3 billion will be in hand in backlog. And then I imagine it's a fairly -- it's an even slower process in terms of converting that into revenue and earnings?

Jay Malave

That's right. It's going to take -- takes anywhere between 30 to 36 months to get ourselves facilitated at these higher rates. And in certain of these programs, we already were increasing our rates.

So if you take an example like PAC-3, which is missile defense. We were already going to a rate of 550 units per year at 2025. The incremental demand of $6 billion will include us on PAC-3 going up at 650, but that won't happen until 2027. So usually a number of programs, high margins, another example, you hear about that in the news, we'll deliver this year between -- and next year between 50 to 60 units in each year, and that will ramp up to 96 units in 2026. And so there's just a number of programs that just take us a little while to get up to these new rates that we're trying to get to.

Seth Seifman

Yes. Okay. Maybe to stay on the topic of missiles and prior control. I think you talked recently about some profitability headwinds there, potentially over the next 2 years or so, reaching maybe into the 50, 100 basis point range. And I think there was a little bit of confusion in terms of how to read that because you think that, that much margin pressure suggests potential for -- maybe there's a zero-margin program that's actually sizable enough to drive the whole segment margin down that much. Is that -- was that kind of the right takeaway for people to have about that?

Jay Malave

Yes. Let me be clear on it. It's actually negative margin for -- it's a program that's in development today. We're about 70% complete in the development cycle. It will start shifting to production. Those production lots -- the initial production lots are -- were priced at a negative margin. And so we have to deal with that for the next, say, 5 years.

What I would say -- let me take a step back on that program. This is a very large program potential to be in the range of tens of billions of dollars over the next 30 to 40 years. And so we're dealing with a situation where it's a little bit of short-term pain for a long-term gain. The development part of it was -- is cost plus. So we've got protection there.

We're pretty aggressive on the pricing on these initial lots. We'll get through that. And then we'll see in the next -- over the next 5 years. After that's done, we'll be able to reprice at positive margin, and we'll see a bump back up in margins there. And so the only thing that we have there is for the timing, we'll see that over the next 5 years, it's possible based on facts and circumstances that we may have to do a pull forward loss based on -- based on the situation.

And so because we're still in development, we don't have all the facts laid out yet. But once we do, then we'll have to make a call on whether or not it's a per year type of negative margin or if it's a big reach forward on that.

Seth Seifman

Right. Not to get too -- geek out on the accounting too much, but it would be unusual to be booking at a rate below zero, right?

Jay Malave

Yes. I mean there's just a number of factors that have to go into it. It becomes -- once you know that you have, say, a negative margin, it becomes -- and these are options. So you have to make an analysis of what is the probability of those options being exercised.

And you do it at the time -- at the point in time at which you -- it's more probable that they're going to be exercised. And so it could be -- you got a lot of different things, the performance of the program, going to it funding levels, you have to make assessments of that to really -- it really drives the judgment on the accounting.

Seth Seifman

Okay. I guess then if we put that together, the -- thinking about it at a high level, if we've got a lot of demand for tactical missiles and some of the more mature missile defense programs at the same time as some significant growth in this new program that's loss making in the early stages, is it -- as we think about your time horizon through 2027, is it possible to grow earnings in MFC?

Jay Malave

Yes, it definitely is. We may see a year where it's basically maybe flattish or so. But over that 5-year period, we will see absolute growth. It may not grow at the same rate as revenue, but it will -- absolute profitably grow.

Seth Seifman

Okay. Maybe one other question on MFC while we're on the topic, is there was a lot of discussion -- or it seems like there's been more discussion of multi-years in the budget release. Do you think about that having much impact on the business? Is it more about visibility? Is it going to help on the cost side? Kind of what should we take away from maybe that move towards using more multi-years...

Jay Malave

I think it's all of the above. It helps us with the visibility. It helps us plan. It also helps from a cost perspective and trying to drive out costs. So underlying, the visibility is there, you can facilitize because you know that demand is going to be there, and then you can drive to the lowest cost position you can with the benefit of multiyear contract.

So I think those are all benefits for the -- not just us, but the industry will benefit from it. And we saw that -- indications of that in this budget release that just came out. And so I think that the DoD has been pretty vocal about supporting multiyear contracting and we saw that support. So we're pretty excited about that.

Seth Seifman

Excellent. And just to keep on beating the drum on missiles and fire control here. I guess because it's topical, there was a second request yesterday regarding L3Harris' acquisition of Aerojet. We all know the history of Lockheed's attempt to acquire Aerojet.

But I think maybe more importantly for now is that Aerojet is a key supplier in missiles and fire control. And we know that, that's been an area that's kind of been struggling to keep up with demand. And so for Lockheed, kind of how do you guys view that? And how important is it to kind of get some closure on the Aerojet situation in terms of executing the way that you guys want to execute at MFC?

Jay Malave

Sure. I mean Aerojet Rocketdyne is an important supplier to us. They are in many of our programs. As you know, these programs are ramping up, so we need them to keep pace with us. Our interest essentially is that we have surety of supply and that we get fair and reasonable pricing over this period of time.

And to your point, we'd like this to get resolved one way or the other as quickly as possible, so they can focus on performance and delivery to us. And that's really -- that's paramount to us.

Seth Seifman

Okay. I guess I wanted to talk a little bit -- thinking about the other, I guess, the other pillars. Can't ask too many questions on classified, because it's classified. But does that -- that kind of what you talked about for the classified growth over the next 5 years, does that encompass sort of all the classified opportunities that are out there? Or is there anything that could potentially be incremental to that?

Jay Malave

Well, it's -- we've got about an $8 billion portfolio classified across the entire company. And we've got -- I think I've said, we've got an outlook about 5% mid-single-digit growth in that portfolio over the next 5 years. And it's really centered around Aeronautics, MFC as well as in Space.

And there are some -- we're expecting some competitive wins in that to drive that growth rate. But again, we've got pretty good visibility. We're comfortable with our positions on these programs. And I'm thinking of -- I'm not sure I can -- that I'm aware of any other types of other opportunities outside of the visibility that we have. And I'd say this $8 billion portfolio is set to grow pretty nicely over the next 5 years.

Seth Seifman

Right, okay, okay. Excellent. Maybe just so I don't monopolize the questions too much, I'll go ahead to the audience and see if there are any questions in the audience, but can also -- happy to keep firing away here. Cool. Okay. We've got a question in the back there.

Unidentified Analyst

There we go. So I wanted to ask, I know that you all have kind of loosely guided to, I think it was $4 billion in share repos this year. Can you just maybe talk a little bit about capital allocation in the context of leverage? And leverage is kind of a multi -- or was at multiyear lows. You re-leveraged balance sheet some in 2022.

Just kind of how far you could push that leverage? I know some of your peers have mid BBB or BBB ratings, you're at A ratings. What's the kind of trade-off that you think about if you all were to take on more leverage? Is that something that you could handle, is a BBB rating?

Jay Malave

Yes. So yes, we did issue debt last year, about $4 billion. We've still got a couple of billion dollars left that we're planning in 2024 that supports the $14 billion share repurchase program that we had announced at the end of last year.

Even with that, when you look at where we are just on a -- just a simple -- very simple kind of leverage to EBITDA ratio would be in the range of 1.6. So I would tell you there's still quite a bit of room there. We'd like to just really look at it year-by-year and really take a look at what our growth profile is, where we think capital deployment needs may be over time.

The beauty of it is, I think as you pointed out, honestly, is that there's a lot of optionality there. And when you look at our -- currently just -- I'll look at just, say, shareholder returns, we've got a $3 billion a year dividend, give or take, in that ballpark. That will continue to grow over the next few years. We've got $10 billion remaining in our share authorization, $4 billion this year, probably $4 billion in '24, and the remaining $2 billion in 2025.

So as we go through our strategic planning process and outlook updates, we'll take another look at what our financial forecast is, where organic growth is, and determine whether or not there needs to be any type of supplement to what we have. We'd like to keep our options open. While the Aerojet Rocketdyne transaction did not pan out for us, that doesn't mean that we're not still active out there from an M&A perspective.

And so I think it's going to be a year-to-year, beyond what we've announced for share repurchase, we'll evaluate it again this summer. We'll give a little bit more clarity in October when we do our third quarter call, we've given an out-year outlook. But I think that we do acknowledge that there's room there. And we just want to keep our options open for the moment.

Unidentified Analyst

[Indiscernible].

Jay Malave

We have not. I mean I think that -- the question was, do we have any type of leverage target that we're shooting towards? And we really have not. It's really going to be, I think, more as we see the needs. It's clear, the opportunity set is there. And if we find that we should be using it, whether it's M&A or incremental share repurchase, that's something that we'll evaluate. But we haven't really set out any type of leverage target. We're keeping our flexibility.

Unidentified Analyst

Good morning. Thank you. Transitioning to the Lockheed venture side of your business. Chris Moran and his team have built up a $400 million portfolio. They have some great deals there. How do you see the investments that they have made on behalf of the company factoring into current and future business opportunities, especially as it relates to margin expansion and some of the things that you're doing or seek to do?

Jay Malave

Yes. Great question. Thank you for it. And Chris Moran is doing a great job with that portfolio. As you mentioned, we've got about a $400 million portfolio. And they're out there looking.

We've got -- the way that we approach it is we've got 14 technology road maps, so where we see defense spending trends, where we see the requirements are going to be. And so Chris, what he does is focus on early technology companies that are aligned to those 14 technology road maps that we have.

And so when you look at it, things like AI, things like autonomy, 5G.MIL, so it's those types of early-stage technologies that will help us accelerate our capability. And that's the lens by which we do it. It's more focused on those requirements versus our financial return.

Now by the way, he's got excellent financial returns. There's no question about it. But it's really focused on accelerating our technology capability in the context of 21st century security as we see it. And that's his approach. And that's -- we're going to continue with that approach. He's got -- we allocate plenty of monies available for him to continue to invest.

And as I mentioned, he's doing an excellent job. He's got a great portfolio, and they're helping our business. And I'll give you an example. One of the companies that we invested was Terran Orbital. They provide the buses on our -- our satellite buses on our SDA transport layer program. And so it's that type of company that we're looking for that will add to our capability and help us win new programs.

Seth Seifman

Great. I'm going to use the prior question about capital deployment to pivot back to the topic of cash flow. And when we think about the cash flow drivers through this kind of 5-year window, you've got top line growth, it sounds like maybe stable-ish margins, or some segments where there's pressure. I don't know if it's net-net, if there's opportunity for margin expansion or if it's more likely that we'll see earnings grow a little bit less than sales.

Jay Malave

Yes, let me frame it. I mean I think 2020, but -- the 2023 guide that we provided is a good example. When we came into the -- when we started to give an initial look in October, we talked about 20 to 30 basis points of margin headwind, part of that was because we're starting to see some of that this year at MFC, where we ultimately landed was 10.

So we were effective in being able to beat that back and almost keep it flat. So what I can tell you here is that there's continued downward pressure on it. But our job as a management team is to continue to try to mitigate that. And so what I -- at this moment, my obligation is to tell you what I see. I as a member of management got to work it to a better answer. And so right now, there's downward pressure. And our job as a management team is to drive it to a flattish type of outlook for the next 5 years.

Seth Seifman

Right, okay. Okay. And then the other big muscle mover in terms of operating cash flow you see over the next few years is pension, thinking about it on a net basis. And so right now, it's all inflows this year's 1.7-ish of inflows and no contribution. I think the inflows, I think you told us that even out to 2025, that's still about $1.5 billion on the inflow side.

But it's the -- in terms of driving cash from ops, it's the net number that's going to be important. And so as we think about out to 2025 and then maybe even further in this period, the net pension cash that's $1.7 billion this year, how do we think about where that goes?

Jay Malave

So if you look at -- so if you just look at CAS recovery, so you're right, $1.7 billion set in 2023, that declines to about $1.5 billion in 2025. In addition, given the returns that we saw in 2022, that's forced a contribution in 2025 right now, anywhere between $500 million to $1 billion is what we've got for our placeholder.

Once you get outside of that, we'll see CAS come down a little bit from there. Once you get to 2027, maybe it's in the kind of the $1.3 billion range. But these things, they bounce around, as you know. We were expecting that to come down significantly quicker by 2025 just a year ago. And so it's very sensitive to what we see for asset returns.

And so -- but based on our visibility today, by the time we get to '25, it will come down to $1.5 billion from a recovery standpoint. And then it will probably come down a little bit further, another couple of hundred million dollars up to 2027.

And so the big one, I think, would be in 2025, not only do we see it coming down by , but then we've got a contribution as well. And by that time, we see opportunity with income growth as well as working capital opportunity. And if you look at -- in 2022, our -- when you look at, say, our inventory, our contract assets, which is unbilled receivables or inventory, net of advances, our days went up by 8.

And so our management challenge was to bring that back down, and so we can offset this pension headwind and still deliver -- our goal is still to deliver for absolute free cash flow growth, maybe not at the same rate as sales growth but still some growth in absolute free cash flow. But at the same time, when you couple that with our share repurchase program, drive something like a mid-single-digit free cash flow per share growth over this midterm.

Seth Seifman

And are the contributions likely to be recurring? Or is it likely to be 2025 and done?

Jay Malave

I think right now, my visibility is to '25 and done. But again, it's pretty volatile.

Seth Seifman

Yes. I would imagine there'll be every year, depends on interest rates. And it's not like there's not a lot going on in interest rates these days. So I'm sure things will change.

Okay. The other ingredient, I guess, moving from cash from ops down to free cash flow is CapEx. And I think it's up close to 3%-ish now. And if we look back, I guess, the transformation of the business with the Sikorsky acquisition, it's usually been in the low 2s, maybe mid-2s. The business is growing, but it's not growing a ton. And so are we in a period where things have become more capital intensive?

Jay Malave

Let me just kind of maybe reconcile a little bit. If you look at this year in '23, our CapEx plan is $2.95 billion. We see that holding steady in '24 and '25 as well. So we'll be elevated.

A major reason for that is our investment in 1LMX, so our systems modernization. And just to be clear, it's more than just digital engineering. It's digital engineering, it's our ERPs, it's our manufacturing execution system, it's our HR systems, and it's our business development system. So everything is being modernized over the next 7 years.

That is about over $400 million a year over the next 3 years of investment. When you adjust for that, you take the core business, it's about $1.5 billion, you're into that $2.3 billion range or so there, and we do have requirements on new programs.

And you can't -- in many of these new programs, because of a difference in technology, you can't use existing facilities for -- particularly for test capability. So you have either special test equipment or test facilities that require their new, dedicated type of investments. And so that's another reason it's driving us up over this period of time.

But as we get to 2027 or so, that will start to moderate. And again, we'll be -- it will come down to at least around the depreciation. So it will come back down to kind of some of the levels that we would expect it to be, that we've seen in the history.

Seth Seifman

Okay, excellent. So there's -- we're getting close to 10 minutes left. We haven't talked about F-35 yet, which it seems unusual to go this long without some F-35 discussion. So maybe we'll ask now.

There was, I think, a pretty nice request earlier this week, 83 for the U.S. budget. And when we think about the recent lot sizes, it looks like lot -- I think lot 16 was in the 125 to 130 range. I think lot 17 to get to 399 or 398 in the whole EOQ is probably in that similar range. And now starting off with 83 for the U.S., if that's where we end up, you add in 50-plus on the front side, it seems like maybe those lot sizes are going to move up a little bit.

Jay Malave

Well, what I would say is that with the demand that we've got internationally, that is kind of in this -- within -- starting with an 8 handle is where we think -- where we need U.S. to be, U.S. DoD. And so -- to enable 156 per year. And so the 83 is right exactly where we need it to be to get us to 2026 lot 18 around 156, including foreign military sales. And that's what we see for the foreseeable future.

We're appreciative and grateful for, frankly, the DoD putting us at that 83. That gives the certainty to production, and keeps stability in the production, the continuity. And that will help us to perform and deliver to the requirements that the services need.

Seth Seifman

And when we think about reconciling those numbers and lot sizes that are below 156 versus the goal of continuing to deliver 156, is that -- I mean, I think there were couple of hundred million -- I'm sorry, a couple of hundred aircraft still in the backlog.

Jay Malave

That's right.

Seth Seifman

And so there's aircraft still in backlog that can fill the gap. If the lot size is 130 or 135, there's 20 aircraft in the backlog, and you could do that for several years.

Jay Malave

That's exactly right. When you take the backlog, the backlog fully supports our expectations that we've laid out last year was 147 to 153 in '23, 147 to 153 in '24, and then 156 forward starting '25. And the backlog fully supports the deliveries of that -- that delivery profile. And so again, the 83 was right in the wheelhouse of what we were expecting it to be and what we needed it to be to hold that production level.

Seth Seifman

While we're on the topic of the budget releases, is there anything else you'd highlight in terms of something that was surprising to you guys?

Jay Malave

Not surprising, it was more aligned with what we were expecting. When we talked in the context of the MFC upside, what we saw here was very consistent with that upside. And so we saw not only the volume of demand for -- on the domestic side for replenishment, but also the language around multiyear contracting. And so that is, I think, very helpful as well as we talked about before.

Also capability, continued RDT&E expenditure on capability development, things like hypersonics, is important. And also just further development capability on platforms like the F-35. As you know, we talked a little bit about lot 4. There's still development activities that are going on with upgrading these platforms that we deliver to them. And so those were, I think, well-funded as well.

And so you look around and you look at our space businesses were, I think, well-funded. And in RMS, CH-53K, well-funded and so with Black Hawk, pretty much where we thought it would be. And so really no surprises from what we've been saying and pretty aligned with the framework that we've laid out from a growth perspective.

Seth Seifman

Do you see opportunity maybe for the Congress to add some C-130s? And if not, that's accounted for in sort of the framework that you have kind of pressure on C-130 production?

Jay Malave

Yes. I mean I'd say yes to both. I mean we pretty much have a pretty decent backlog out to 2027. I mean there's probably some opportunity for some incremental U.S. as well as some international demand that we've seen. But overall, for the next 5 years, I think we're pretty well positioned on the C-130.

Seth Seifman

Okay. Look out into the audience and see if we have any questions. But we can also -- can keep asking here. And I think you mentioned CH-53K. So I wanted to ask about Sikorsky because I think there's I think some concern out there about without FLRAA and with the Black Hawk kind of declining, what the outlook is for Sikorsky. I guess when I look at it, I kind of see growth on CH-53K. I see some decline on Black Hawk, but it's not going away, and there's a pretty big installed base out there.

There are some other smaller programs, whether it's presidential or search and rescue that put some pressure. But I mean, I would imagine that by the end of your window here, that Sikorsky with CH-53K can still be bigger than it is now from a revenue perspective?

Jay Malave

I agree. When you look at where we are in CH-53K, between now and 2027, the revenues will double. So that will be the big driver of the program. Sure, as you mentioned, Black Hawk cycles down, combat rescue helicopters cycles down, presidential cycles down, all those programs cycle down.

But we -- the CH-53K will really offset that. And we could see -- we will see and expect to see some slight growth, but certainly some growth. And I think the upside from there would be if we're successful at FLRAA, then that can grow further, right?

Seth Seifman

And what's the opportunity? Because obviously, CH-53K is still a relatively young program. What's the opportunity for margin expansion there? Because I imagine replacing Black Hawk with CH-53K is somewhat dilutive. But there's probably also opportunities to expand the CH-53K margin?

Jay Malave

Yes. I mean you're working down the learning curve. Some of that has to be shared with the customer, of course. But I think that there's a path there to drive it to double-digit margins over the long term. And again, it's a great program, good long-term program, and it will be a source of revenue and cash flows for quite some time for us.

Seth Seifman

And then the remainder of MFC, which -- or sorry, the remainder of Rotary and Mission systems, I feel like is very diversified. And so there's not often a lot of focus on it. Do you think about that as being a business that should be sort of in line with maybe overall budget growth or overall company growth rate because it's so diversified? Or are there 1 or 2 drivers there that we should really take note of?

Jay Malave

Yes. I think it will grow with -- I think, either. I mean if you look at that -- the balance of that portfolio, we have a very strong radar business. That's where also we have our Aegis Navy platform business. So air and missile defense for the Navy, for vessels, the Aegis platform is on just about every vessel that we have out there. And so that will continue to be a source.

We also have -- that is where a lot of our joint all-domain command and control type systems are in development, where we're doing Defense of Guam, we're the lead integrator for Defense of Guam, which we mentioned on the fourth quarter call, a $500 million award there.

And they're also competing for the Australian program, which we call AIR6500, which is a joint all-domain type of program. And so they're well positioned there to continue to grow. As I mentioned the radar business is very good. Jim in his prepared remarks on the fourth quarter call talked about the TPY program, when their TPY-4 program went in Norway. And so they've developed a really nice modular approach to ground-based radar systems, both mobile and fixed, which is going to be a source of growth for them as well.

And so between that and the JADC2, there's also -- we've got cyber in there. But I'd say the JADC2-type systems, the radar systems which will be the primary driver. We've got the MK 48, so we've got torpedoes running through there as well. A good undersea business and classified programs. So it's -- to your point, it's a varied portfolio, but other elements that will drive growth for those segments as well.

Seth Seifman

Okay. I feel like I wouldn't be totally doing my job if I didn't ask about supply chain. And so maybe if you can give us the latest and greatest. It sounds like from across the industry, I think there was some hope that, obviously, not everything was fixed in Q4 across the whole industry. But it seemed like maybe things had stabilized or started to show some improvement. But it feels like challenges are kind of persisting into this year. That's something that you mentioned in particular with regard to Q1.

So maybe if you could just give us the latest update on supply chain, what are the long poles in the tent there, and how you think about those headwinds abating?

Jay Malave

Yes, when you look at Q4, we overdrove our sales from our guide by 750. About half of that was related to supply chain performance better than expected at the time. And we had poured through the information of data to determine whether or not we -- did we turn the corner? Do we see a step change in performance? The on-time delivery didn't really improve. We also looked at earned value metrics, did we make progress in schedule performance? We really didn't see any improvement there as well.

And so as I mentioned on the call, what we did see though was the ability to deliver at a higher level of requirement. And so at least we were encouraged by that. But some of the upside that we saw, I think may have been just some timing. is at the end of the year, kind of, unfortunately, Aerospace and Defense suffers from that. And so we saw probably some first quarter sales that did point into the fourth quarter, but it came out of the first quarter. So I think we're probably dealing with a little bit of kind of WIP replenishment here in first quarter, which is causing a little bit of a slower start than we otherwise would have expected, and we're seeing that.

So you look at our sales linear, if you look at linear -- first of all, it's always lower because the way we are -- we just have 12 weeks in the first quarter, 13 weeks in the third and -- second and the third, and then 14 weeks in the fourth. So it's always going to be a lower -- the lowest quarter of the year for sales. And when you do the math, it would tell you should be around 15, 15 1. And we're just -- we're slightly below that because of what we've seen here. So I wouldn't say that we've taken a significant step back, but we just haven't seen market improvement either.

Seth Seifman

Okay. Okay. Well, with that, I think we're just on time here. So we'll wrap it up. But Jay, thanks very much for being here. Really appreciate it.

Jay Malave

Thank you, Seth. Appreciate being here, and I appreciate representing the 116,000 employees of Lockheed Martin. Thank you.

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Lockheed Martin Corp (LMT) JPMorgan 2023 Industrials Conference Call Transcript