LMT - Lockheed Martin Corporation (LMT) Bernstein's 39th Annual Strategic Decisions Conference 2023 (Transcript)
2023-06-01 15:45:10 ET
Lockheed Martin Corporation (LMT)
Bernstein's 39th Annual Strategic Decisions Conference 2023
June 1, 2023, 10:00 AM ET
Company Participants
James Taiclet - Chairman, President and Chief Executive Officer
Jesus Malave - Chief Financial Officer
Conference Call Participants
Douglas Harned - Bernstein Research
Presentation
Douglas Harned
[Starts Abruptly] aerospace and defense analyst. And it's great to again have with us, Chairman and CEO of Lockheed Martin, Jim Taiclet, and then Jay Malave, Lockheed Martin CFO. I think you have maybe a couple things sure to open with here.
James Taiclet
The obligatory comments, but great. Good morning, everyone. Great to see everyone. Just as a reminder that this discussion will have forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual results to vary materially from those discussed herein. Just information on our risk factors included in our 10-Q and 10-K filings. So I think we're ready to go, Doug.
Question-and-Answer Session
Q - Douglas Harned
Great. Well, Jim, just to start out with, maybe you can tell us just how you're thinking about Lockheed Martin right now and what you see as the two or three biggest opportunities ahead?
James Taiclet
Sure, Doug. And one lens to look through is the Ukraine conflict and what lessons I think that our customer base, both in the US and among our allies, are taking away from that, and then how that presents opportunities for our company to try to be a pathfinder to solve some of those issues.
So the first thing I think the learning came out was that our production system is insufficiently framed to ramp up production quickly when we need it as an industry and as an enterprise, including the government and the military services. So that's one observation. The utilization rates, especially with guided munitions, is way higher than anyone was modeling or expecting.
Secondly, the ability to quickly insert digital technology that the Ukrainians have figured out how to do as the war has progressed, and they've been able to maintain their effectiveness, is another really important lesson for military services everywhere to try to take in. And I think, again, we're probably advantaged in that. We've been working on that issue for two years now, two, three years now.
And then, thirdly, the notion of the effectiveness of allied response together. So whether it's interoperability, it's sharing intelligence, it's providing production and sustainment support as an alliance versus just an individual country, I think really has come through, and the NATO alliance, specifically in this case, has really demonstrated that there are strength in numbers when you think about allies and partners.
So those are the three, I think, learnings that are key from the Ukraine conflict. Hopefully, it doesn't go on much longer as an act of war. But that's what we're learning.
First dimension of this is lined up with the first element of our key strategy, which is to drive anti-fragility into the production system for defense. And by that, I mean, how do we prepare to either absorb shocks like COVID to the production system and be able to deliver through those at rate and on time, which our industry did not do at 100% level during the COVID crisis. And then secondly, if we get asked as an industry to expand production or increase capacity quickly, are we set up to do that in a reasonable amount of time.
And so, the approaches there are – and I think things that we're advantaging ourselves by leading again is pushing for multi-year contracts, long lead time supply in advance, and making sure that we, instead of doubling production over, say, a three or four year period, we could double production over, say, a six-month period, if we ever get asked to again.
The benefit of being one of the munitions providers that is now being asked to ramp up is there's going to be revenue opportunity that comes with that, and we want to take advantage of it.
The second arena we call 21st century security in our terminology. It's joint all domain operations in the DoD terminology. That has proven to be effective in Ukraine. And what we've been trying to do at our company, and I think this is, again, an opportunity for us is, for the last two-and-a-half, three years, we've been collaborating with commercial technology and telecom leaders to work with us to accelerate the adoption of digital techniques into national defense. We've already won a program where – a program of record of defense of Guam. We're actually implementing some of these things in a real program of record for the US government. And we also got elected or selected to be the leader of the Joint Fires Network prototype for USINDOPACOM, which is again similar kind of technology fusion.
And then, the last piece of this I'll talk about as an opportunity is we have a deliberate strategy now at our company to have production and sustainment deployed globally. And that's a different approach that our industry typically takes, which is we want to sell a product to a country, they have an offset obligation they want to put on industry, and we figure out how to do that. We want to have a deliberate strategy for production, to increase our antifragility, if you will, and also sustainment, so our products can be better taken care of closer to where they might be used or where they're based.
So those are some areas where production system, digital technology, and globalization, internationalizing our operations, I think we are advantaged and we are going to lead.
Douglas Harned
I guess, to think of that in the context of – we've now got a new budget, the President's budget, at least. We don't have a real budget yet. Hopefully, by the end of the year. How are you thinking about that Biden budget as it relates to Lockheed Martin, and then this congressional process that presumably we get through this debt ceiling issue and then we flow through the usual budget discussions over time? How does that affect Lockheed Martin?
James Taiclet
I think we're in a real strong position at this point. Initially, the President's budget for, say, F-35, for example, was the 80-plus number of aircraft for the US that were in the initial president's budget, and therefore, that's the level we need. We don't need to ask for more production aircraft to fill the factory. That does fill the factory. When you add the international orders on to that, we're going to have the ability to ramp up over the next couple of years to our 156 pre-year goal.
So, on many other programs, too, there's sufficient funding in the President's budget. Again, it's not a big ask that we have to go back to Congress. So I think from the get-go, for 2024 budget, Lockheed Martin was in very good shape.
Now, there's been the political activity going on around the debt ceiling lately. Even with that, the current agreement on the table, it's not passed all the way through yet, the Senate's still got to address it, is 3% growth for two years in defense where other areas of the budget are being reduced. And I think, again, that's as good an outcome as our industry or our company could ask for at this point.
Jesus Malave
Yeah, I would agree. Besides the 35, the MFC, the munitions, very well-funded. You look across the portfolio, everything was essentially, with the presidential budget, what we'd expected and what we were baselining in our growth assumptions. If you want to pick around the edges and something that we maybe weren't as happy with, is maybe on OPIR next gen GEO, third satellite vehicle, we'd like to see that restored. But in a big picture, everything pretty much landed in the presidential budget request where we expected and needed it to be.
Douglas Harned
Yeah. And when you put all that together, I know you all had pushed back that growth trajectory a little bit. You're flat this year. But how should we think about that inflection happening, and when we can see growth come back? Certainly, 2024, we will start to see that.
Jesus Malave
Absolutely. We've mentioned multiple times that we believe that growth will resume in 2024. With the passage of time, we're more and more confident that that will take place. If you recall, Doug, our backlog at the end of December of 2022 was $150 billion, had grown in 2022 by 11%. And if you back out the Lot 15 and 16 additions to the backlog, the rest of portfolios still grew by 5%. So pretty solid growth across the portfolio that we expect to start to really feed the growth in 2024.
The orders, particularly here in the second quarter, have been solid. And we're seeing, again, particularly at MFC, those orders come in. And they're not necessarily multi year awards, but what we're getting are multiple years of requirements in there. So some of the awards that we're seeing here for fiscal year 2023 are deliveries that will take place in 2025, 2026 and they support the ramp. So, PAC-3, getting to 550 and ultimately 650. GMLRS going from 10,000 to 14,000 in 2025. HIMARS going from 60 to 96. Capacity availability in 2025 and delivering in 2026. So, everything that we're seeing is really consistent with that growth rate. It'll begin really in 2024. At Sikorsky CH-53K, the deliveries of this year, we'd expect to deliver for aircraft. That should jump to nine aircraft next year. We'll see nice growth there at RMS and particularly Sikorsky on that program. And so, everything, as I mentioned, really, the budgets are supporting that return of growth in 2024.
Douglas Harned
Your space backlogs are absolutely coming up too.
James Taiclet
Sure.
Douglas Harned
I do want to go back to F-35. Because you're a little slow on deliveries this year with Tech Refresh 3 issues. And you just said, like, in a couple of years, to be able to get to that 156 rate. With the international orders you've got and now with what appears to be a little bit more support on the US side, does that 156 look pretty solid for, say, the next sort of five years or so.
James Taiclet
I'd say it looks very solid in the near term. And the question might be, is there a need or an interest by the government to expand that production capacity. That's a separate decision, but I think we can build a factory for the next number of years with the interest in the aircraft that we have now.
Douglas Harned
Once you get to that 156, you're going to be pretty flat on the production side. But when you add on to that sustainment and modernization, what does that look like in terms of, say, overall growth rates for this program?
James Taiclet
Overall, Doug, I'd say, over the next three to five years, as you mentioned production, just to frame F-35, the entire F-35 enterprise is about $18 billion. The production element of that is about $12 billion. As you mentioned, that would be flat.
When we laid out our four pillars of growth a few years ago, we talked about F-35 sustainment growing at a 6% clip on a five year CAGR. We still expect that to take place. And for that CAGR to be at 6%, it means the growth rate is going to be a little bit higher over the next few years, and we're very comfortable with that taking place. So when you put that all together, development will be kind of flattish, maybe slight up. When you put it all together, you're looking at probably low single digit growth on the entire F-35 program.
Douglas Harned
Now, one of the things that at least has appeared challenging to us on the sustainment side is we typically think of sustainment kind of growing with the size of the fleet, which obviously is growing. But also you've got to still bring that cost per flight hour down. How should we think of the trade-off between reducing that cost per flight hour and increasing activity…?
James Taiclet
Yes. That was all contemplated when we came up with the 6% annual CAGR. So we knew that we'd just do delivery more aircraft, utilization of more flight hours, that the activity itself, the core activity would be higher than the 6% rate, but that was going to be partially offset by the lower cost per hour we've been driving, just as a reminder, since 2015. We've reduced the cost by 50%. And so, we're still driving to another 35% over the next few years on that program. So we're committed and I think on a good path to deliver to the Joint Program Office's goals for sustainment costs, at least what Lockheed Martin contributes to that. But even with those reductions, we'll see some nice growth there.
Douglas Harned
And that's still heading to that 25k number. Is that right?
James Taiclet
Yeah.
Douglas Harned
Okay. Then NGAD, I know we can't talk about details of the program. But maybe you could tell us a little bit about how you're thinking about your positioning for that.
James Taiclet
From an investment perspective, I can't speak to that. We can't speak to the details of the actual program. Although there's a couple of concepts on the potential nature of the program. One is, essentially, the role of the aircraft is air dominance, it's right in the name. So it's an air to air fighter meant to defeat enemy aircraft. And as an ex-fighter pilot myself, the way to design to that mission is to be able to shoot down the enemy aircraft before it even knows you're there. So if that's the mission, how are we going to accomplish it?
Well, first of all, you need a high performance stealth aircraft. But on the other hand, there's a notion that we might be able to have crewed/uncrewed teaming with the primary aircraft to improve your ability to do that mission and survive. So crewed/uncrewed teaming also means you're going to have to have 21st century security capabilities of autonomy, AI, 5G level conduct, multi-classification data distribution, and multi-path cloud connection at a broadband pace and broadband rate. So, these are all technologies that we're working on.
So first off, our Skunk Works operation is famous for stealth. Stealth is one of the key attributes of winning air to air, a modern air to air combat situation because if you can't be seen on the enemy airplanes radar until you're close enough for your missile to fire and hit it, that's how you win. So stealth, both the shape of the aircraft, the outer mold line of the aircraft and its design, and the coatings that go into that, the surface coatings and the infrared coatings on the engine inlet and tailpipe, are really, really critical. We invest a lot, and we have the main operations, Skunk Works, that can deliver on those technologies.
Secondly, you want to have the missile technology that will fly the farthest with the most accuracy, and the strongest electronic warfare countermeasures to being deflected, if you will. And our MFC business invests heavily in that technology.
And then, the last point I'll make is around this 21st century security. We're again bringing in that we think the best-of-breed performers are in all those technologies that are more digital. So the 5G, distributed cloud, autonomy, et cetera, so that we can accelerate those digital technologies into capabilities like crewed/uncrewed teaming.
So we can talk about where our management attention and our investment focuses are. And that can give you a sense of, gee, how competitive could we be at Lockheed Martin and how serious are we about an NGAD concept?
Douglas Harned
The award for the aircraft portion is supposed to be 2024 sometime. I think that's what the Air Force said two weeks ago. But the other aspects of this system, a lot of those, I would assume, will come later in terms of awards.
James Taiclet
Potentially. They haven't commented on timing of, I guess you'd call it, peripheral vehicles on the NGAD concept. But you're also going to have to have a command and control system, you're going to have to have a comm system. It'll have to be integrated and cyber-secure. There's going to be a lot of aspects to NGAD that will come along, but we don't know exactly the timing of it.
Douglas Harned
Yes. And presumably, almost all of those are things that you would be looking at.
James Taiclet
From a technology front, of course. Yeah. So we are very good at those technologies and we continue to invest in those.
Douglas Harned
Now I'm going to lower technology, F-16. So F-16. has seen sort of a resurgence here, can you can you comment a little bit about what that trajectory is likely to look like in terms of number of export aircraft?
Jesus Malave
Well, just kind of based on where we are today, Doug, we've delivered one aircraft to Bahrain, we've got a backlog of 127 aircraft, there's another 20 or so behind it that we expect to come into the backlog by the end of the year.
Right now, we'll deliver, say, anywhere between five, six, seven aircraft this year. From a production rate standpoint, we expect to get to about three per month by the end of 2024, and then to four – our steady state production rate of four by the end of 2025.
There's certainly been – you see things in the news about the F-16. It's very relevant. Our team in aeronautics likes to refer to the Block 70 aircraft as a 4.5 generation of fighter aircraft. And we believe that to be the case. And so, there's certainly demand. You've heard, I think, Turkey and other countries. We have to follow our customers' lead, State Department and so on from a policy standpoint, but we're ready to add to that backlog and deliver. We think that there's definitely some lags behind it. But we just have to work through the process.
Douglas Harned
Now in prior years, the F-16 had been a very attractive program from a margin standpoint for exports. Do you expect it again to be attractive? Is it a sort of direct – some direct sales where you're going to be able to get some high margins?
Jesus Malave
Yeah. Currently, we're under an IDIQ. So these are FMS. And so, you probably are going to see a little bit different margin profile. Plus the fact that because we moved operations from Fort Worth to Greenville, it's like starting up a brand new production line. And that's taken a little bit longer than we expected, and it's had a cost impact. So our early contracts would probably be under some pressure. And I think we'll see – once we get to a steady state of production rate, we'll see the profitability improve. And it'll be a reasonable profitability, I would say.
Douglas Harned
I want to just kind of go back a little bit to the budget and Ukraine. So, when you look at the impact of the extra money that has come in, supplemental funding that's come in related to Ukraine. Can you talk about how that's benefited Lockheed Martin? I think of this as complicated because you've got some things where we've spent money on Ukraine and things will have to be replenished. Other things are sort of direct sales to Ukraine. And then there's a third category, which is just general concerns in Europe with more spending that's coming out of this conflict. So when you when you think of this for Lockheed Martin, how should we look at the – like, what you're getting right now and how the next couple years might be different than they would have been before?
Jesus Malave
Yeah. I guess what I'll do is compare to when Jim and John Mollard had laid out the four pillars of growth back in 2020, I think it was, or 2021. It's certainly changed. The MFC element, the programs of record element of that, whether it's GMLRS, whether it's HIMARS, whether it's PAC-3, the growth expectations are substantially greater than they were then. So between over a five year period, say from 2022 to 2027, you're looking at probably added revenues in the range of $6 billion over that period of time. And it's probably another tale, once you get beyond 2027, of potential another $4 billion, you're talking $10 billion over probably a 10 year period. So pretty substantial.
A lot of that, as you mentioned, Doug, is replenishment. There are other elements to it. We've had a lot of discussions with Poland. Poland is a great partner, a great customer, who's looking for capability as well as in-country production capability as well. And so, those are all things that I think just are adding to our growth outlook.
Having said that, I do have to say that it's more than offset the impact we had from the FLRAA loss. Over that same period of time, over a five year period, we were looking at $4 billion. So, net-net, it's positive, say, $2 billion. And then once you get beyond 2027, there's another $4 billion there. So it's been a significant step change really in our growth outlook. No question.
Douglas Harned
If we go back two or three years ago, that was a period where missiles budgets were coming down, we'd gone through a very high demand period, and this budget started to come down. And now they're up. And your backlogs have been starting to turn the corner as well. But when you look at this, also you've been able to, in the past – because you had a lot of export sales here, you've been able to get these 14% plus type margins before, how are you thinking about Missiles and Fire Control margins now?
Jesus Malave
Well, there's multiple facets to the MFC margin question story. The first one, and I've talked about this I think in a few quarters now, as far as – we've got a classified program that essentially has negative margin to it. And so, that puts pressure on our margins for the next five years. This is the first year. We're seeing it. Our expectation for their margins this year around 13.5%. There's going to want to be additional pressure on that from that program.
Having said that, the upside that we talked about should provide a mix benefit with those legacy margins that should provide some lift. We need to work through the math over the next few months, determine what that is net-net. But that's provided at least some buffer and some mitigation to what we're seeing in that classified program.
I can't say for certain that MFC can stay flat. They still probably want to trend down. But what the goal is at the total enterprise level is to hold us flat. This year, our guide for margin is 11.2%. And our goal is to sustain 11.2% at a total enterprise level, which means the rest of the portfolio will have to see some expansion if MFC wants to continue to come down.
The legacy products, you're going to see them in the range of the legacy margins that you've seen there.
Douglas Harned
Okay. So, that one program is really the biggest issue here right now. But what about on the supply chain side? Has that been a major issue in Missiles and Fire Control?
Jesus Malave
Yeah, we've seen some impacts there on some of our programs. I won't get to specific kind of components, but there's been issues both in small, medium and mid and large types of suppliers for various reasons. Part of it is COVID and part of it is loss of employees and replenishing employees that don't have the same level of proficiency. So it just needs a learning curve they'll need to work up through.
Some of it is an element where we've upgraded systems, these weapons systems. And so, it's a new iteration of it and the ramp up to meet our requirements, just taking a little bit slower in that supply chain than originally anticipated. That may have happened without regard to COVID impact. Those things are just too complicated and they're difficult.
And so, we're dealing with multiple facets of supply chain pressures. But I think that we've gotten some stability, I'd say, over the past six months or so. And we're generally tracking to what we expected when we laid out the financial guide this year and operationally.
Douglas Harned
As far as rocket motors, Aerojet Rocketdyne, they're a big supplier to you. Has that been an issue? There's been a lot of public commentary around some of the challenges they've had.
Jesus Malave
They've struggled with some of the ramp rates that we need to be at, sure. GMLRS is one that we've been challenged a little bit there. But what I can say is that they did receive some funding for incremental CapEx and facility improvement and equipment improvement. And I know that they're focused on it. We're their largest customer. And so, we're confident we'll get there. It's a question of timing.
Douglas Harned
Yeah. Still on the Army, I thought it was – we all saw the PAC-3 success at taking out a Russian hypersonic missile. Can you talk about both hypersonics and hypersonic defense and how you're pursuing that right now?
James Taiclet
Sure. Hypersonics is an incredibly challenging technology on one hand, and it's also not a single definition of product – end product. Hypersonic missiles already exist. Any ballistic missile will achieve hypersonic speeds which simply is the Mach 3 plus.
The interesting thing about a ballistic missile is it's trackable because it's a parabolic arc. And therefore, you can have NGI, for example, next generation interceptor, because you can predict, even as fast as it's going, which could be Mach 8 or 9, you can predict the path of a ballistic missile and make an intercept on it.
True hypersonic missiles and the characterization that we're talking about it means they can maneuver at the end of their flight path, which makes them incredibly difficult to intercept. It's questionable as to the maneuverability level of the Kinzhal missile that we shot down. But at least we know we can hit it. So we will continue to do the move, countermove development of understanding how hypersonic missiles can be maneuverable and what we need to do to intercept them. So that's the hypersonic defense.
On hypersonic strike side, we have a number of programs already in process with a number of the US Armed Services – Air Force, Navy and Army – to produce hypersonic strike missiles.
The most advanced of the programs that's going into production is called Conventional Prompt Strike. And this is a situation where the Army and Navy will utilize the same vehicle, but have launchers, one for the ground and one for ships and submarines that we'll be developing for them. That's pretty far along. There's a couple more flight tests to go into development program. And we anticipate, although it's no guarantee, that that will go into production.
We also have an air-launched, boost-glide missile, similar technology, if you will, to the boost-glide on the CPS missile, but it can be launched from an aircraft. And we've demonstrated that in tests. It's called ARRW. The Air Force is deciding whether they want to go that route or just go with an air breathing hypersonic air launch missile, which we're also developing for the Navy, for example.
So all of these are in play right now. We're not exactly sure what the government's going to decide to do in all these areas, Doug. But we're participating really actively in developing technology and actually fielding systems that can do all these things.
Douglas Harned
If we were to think of the revenues across these hypersonic programs today and where they might be in five years, what are we looking at here?
Jesus Malave
Today, on the hypersonic strike, you're talking in the range of $1.5 million. The growth rate isn't a huge number over the next five years. Back to Jim's point, it's a question of where the customer wants to focus and at what volume levels they're going to want to purchase that. So, it's still really an unknown for us. But I think back to Jim's point, the fact that we're positioned, whether it's boost-glide or air breather, we'll participate whatever that growth rate actually is, ultimately.
On the defense side, we'll see in terms of what our capabilities are. We've got the PAC-3, we've got THAAD, we're working on next gen interceptor, all of these systems, in what type of role they may play in hypersonic defense, still TBD. But we're pretty well positioned there as well.
NGI, want to go back into the four pillars of growth. Next Gen interceptor was one of those pillars of growth that we're assuming in our new awards. And we're expecting a downselect in 2025.
Douglas Harned
And one other technology here that I know you've been pretty active in has been directed energy. And that may even, if I believe some of the leaks even on NGAD, may be an important thing. Is this significant in terms of when you look at your revenue trajectory over the next five years? How important is that?
Jesus Malave
It's not a huge number. It's under a billion dollars today. What we did over the past six months actually is consolidated operationally. It was under each of our different business areas. We consolidated management responsibility for that under our RMS, Rotor Emission Systems, earlier this year. And we certainly see it – and we're developing – you're talking 50 kilowatt all the way up to 500 kilowatt type of systems. And we're under contract both on technology development, but we've got HELIOS that actually delivered one to the Navy. And so, there's a number of opportunities that are in play. That could be a substantial – it's not really baked into our forward look, but it could be substantial growth factor for us. Absolutely.
Douglas Harned
Now, going over to space, space is the area where we've seen by far the most growth in the budget, multiple years of 20% plus. And when we think of your space business, it's so large, which is a good thing, but it's also that largeness comes with a lot of large legacy programs that have kind of come down. Just recently, we've seen those backlogs start to turn up for you. And so, can you talk about how we should see this sort of transition from legacy space programs over to some of the new programs that you're involved in, realizing some of this is classified and may be difficult.
Jesus Malave
Okay. So, let me be take our space segment. It's $11 billion business and maybe break it up a little bit. We've got our national security space, which is slightly above half of that. And then it's generally equally split between our strategic missile defense. That's where, as Jim mentioned, hypersonics, next gen interceptor and our fleet ballistic missile programs are in that. And then the remainder is our civil commercial space business, predominantly Orion.
National security space, if you look at our performance last year, you're exactly right, Doug. So we've been a longstanding prime on SBIRS and OPIR, next gen GEO, which are – geo-orbit, missile tracking, defense type systems, warning systems, long program, exquisite type programs, which has been our legacy over time, those are cycling down. If you exclude the impact of that cycle down last year, national security space business was up 9%. So we're participating in these new kind of, call it, proliferated constellations that are out there, whether it's classified. As you may know, we're on the transport layer for communication satellite in LEO. And there's a number of other things where we've partnered with Raytheon on a Missile Track Custody program to bid on in MEO. And so, there's so many new things happening there.
The team has done a nice job of really pivoting from being the legacy exquisite player to being more of this low cost provider of proliferated systems. And so, we've developed a midsize bus deal on 400. We've partnered with Terran Orbital to provide a small size bus, which is the bus that we're using on the SDA transport layer, the communication satellite system, and a number of other systems that are in classified.
So I think that our team has done a really, really nice job of pivoting. What you would normally expect a slow, exquisite type organization, legacy organization to have been. So our legacy is really not getting in the way of this pivot that you're seeing really in intelligence agencies and Defense Department as well.
The only thing I'd say is that the team is really focused on just being a – I want to call it a merchant supplier, but making that available to the industry. We're providing solar arrays to Terran orbital on other programs that they're on. So, here we're a merchant supplier. In the civil commercial space, we are a player with Blue Origin on sustaining lunar development. That was just awarded to them a few weeks ago. We're on that team, multi-year program for Lockheed, multi-billion dollar program for Lockheed Martin. And again, we're a supplier to Blue Origin on that.
So I think as you're seeing the industry pivot and transition, we've really rearchitected our internal processes to able to react to that. And we're seeing that.
James Taiclet
Yeah. There's a lot of agility in our space business. Many don't anticipate that coming from us as a company, but it's happening.
And the other thing that we're doing across all of Lockheed Martin is, while the divisions, if you will, or business areas, as we call them, are the loci of hiring people, building factories, producing products, and services, we are also cutting horizontally across all those business areas from a mission perspective. And so, we're going to include, as a company, in our solution sets, more space assets and conducting missions.
So for example, this NGAD mission, we want to find the enemy aircraft before, again, they even know that we're here, we can have space based sensors, whether they're low or mid or even geosynchronous orbit, feed into the data path that can give us the early earning that then allows the aircraft radar to focus on a certain part of the sky and get that signal first. So we'll be utilizing our space business, not only in the traditional ways and the newer ways of low orbit, many vehicle redundancy, but also in ways that really no other of our peer group can do because they're not involved in all the missions that we're involved in. So, we're going to include space as not as this sort of separate arena, it's going to be part and parcel of the things that we do all the way through to MFC, for example.
Another example of their pivot is international. They've been essentially US intelligence, DoD, they were down selected for Australia military communication satellite program called Joint Program 9102, which is a – it's another leap for them. They partnered with our RMS. There's a strong presence in Australia to go win that program. So again, it's just a lot of change there for the positive and really moving at the speed at which we're seeing industry change.
Douglas Harned
Yeah. Traditionally, you've had very little international work out there.
James Taiclet
Right.
Douglas Harned
Is that…?
James Taiclet
It's not the only one. There's other countries behind that as well. So, yeah, there's a pipeline there.
Douglas Harned
So how should we think of this? If we were only looking at alignment with the DoD budget in space, we would expect everybody'd space businesses to be growing at these very high rates. Everybody's not growing 25% a year.
James Taiclet
Right.
Douglas Harned
So how should we think going forward about what space can grow at since it looks like you're now just coming out of some of this legacy roll off?
James Taiclet
Yeah, those legacy roll offs are just going to still be with us for next number of years, up to five years. As I mentioned, SBIRs, next gen GEO, and then Orion, those are three big programs that are going to continue to cycle down. It will put a drag on the growth rate. I would expect that pivot to a higher growth rate. And so, you're probably looking in the range over this period of – CAGR in the range of kind of low single digit. Post 2027, that's when we should see a ramp up and higher growth rate.
Douglas Harned
And AEHF, that's kind of gone by now. Right?
James Taiclet
Yeah, it's cycling down.
Douglas Harned
Yeah, yeah. Then RMS FLRAA, I know that was a disappointment. But I guess two things on it. One is you bid pretty aggressively on that. And there's been some discussion around this, but when you think of bidding on future programs, I'd even put NGAD in there, how do you think of investing? In a sense, Boeing has done this very aggressively on a few programs that has not worked out very well. So how do you think about positioning in the future for wins?
James Taiclet
Let me just speak of the FLRAA approach for one minute and then turn over to Jay for how our process works on bid and proposal in general. So the FLRAA competition really had two different product proposals from the two bidders, from Bell Textron – was basically a fixed wing aircraft with an ability to tilt the rotor and vertically takeoff and land versus the Sikorsky prospect which is a true rotorcraft, it's a helicopter. So you have a fixed wing aircraft and a helicopter. Those are two different products. And their cost bases are also different. So that fixed wing aircraft with the flight and performance parameters it offered is a more expensive machine. Inherently more expensive machine. So to compare the two numbers that have been kind of tossed around out in the public sphere isn't the right way to look at it.
We bid with an ROI that we thought was within our investment criteria at Lockheed Martin on the helicopter offering in the FLRAA competition.
So just setting those things up. The Army decided they really wanted more of a fixed wing performing vehicle for their evolving mission in the Pacific, I think is really the reference point. And that was their choice. We didn't necessarily bid to dive to the bottom on our bid – our bid was a different vehicle.
With that, let me just turn over to Jay on our process.
Jesus Malave
Yeah, just a little bit of follow on and to put a little bit more detail around that. We go through these, and as you'd expect in defense, you've got these position to win, price to win types of analyses. And in many cases, not all the cases, you know what the evaluation criteria the customer is going to evaluate an RFP on. And so, you make a technical assessment on where you are relative to what you think your competitor is, or competitors are, and then determine what is an appropriate price point associated with that.
Specifically, as we went through FLRAA, to Jim's point, there was just an element of different technologies. We also had the benefit of our using our 1LMX. So, our digital thread tools were going to be fully utilized on this development program. So it had not been a traditional development program. And so, that also would have brought in a lower cost relative to development programs in the past for us. And then, sure, there was an element of a strategic pricing as well. Back to Jim's point, the economics worked. And so, that's the first threshold, the economics work.
I think that we went through it, I think, in a regimented way. Ultimately, some of the assumptions that we made relative to where the competition was going to be were off when you're talking about a gap of that magnitude. But what you do is you take from that, you learn in the spirit of continuous improvement, you build that into your database, and you use that for future bid and proposal activity.
Our process is pretty, I think, well defined. I think it's pretty disciplined. We'll continue that. I don't think you should expect a Lockheed Martin is just going to be an aggressive bidder. I don't think that would be an appropriate characterization of our approach to bid proposals. And I think the process in and of itself will be disciplined. It won't be at the detriment of current shareholders, for longer term shareholders. It's a balanced approach.
Douglas Harned
Okay. That's very helpful to clarify that. When you look at RMS now, though, you had hoped that you would win this program. You've got CH-53K, which is growing, Black Hawk coming down some, how do you think of the kind of the industrial base there going forward sort of post the FLRAA loss?
Alex Russo
Yeah, there's a FLRAA competition coming up next. So that's usually the assault aircraft, meaning take troops, move them somewhere and land them. This aircraft will be more reconnaissance and attack. So smaller aircraft, the X2 technology with the counterrotating main rotors also is going to be our offering for this kind of competition. And we expect that is the right technology for maneuverability, for really low flying terrain masking, if you will, missions. So we think we have the right aircraft for the missions here as well. We expect that we'll be successful in that bid if the proposal process stays on track and on time. So we have that opportunity to refill the factory.
In parallel to that, we're already proposing modernization of Black Hawk using, again, Newtonian technology upgrades we can give through a very reliable legacy platform, but also these digital technologies. And so, again, if you look at what are the helicopter missions that are often performed, some of them are fairly unsung or less known. One is air evacuation, right? So when you have an injured soldier and you've saw these in Vietnam movies where the helicopter comes in, lands in this battlespace where all this directed fire is coming at you and pick up the injured soldiers and take them back, that's a really, really dangerous mission. Right? And it's one that has to be done often in conflict. Well, we've demonstrated that the Black Hawk can perform that mission on an unmanned basis. You don't have to put pilots at risk to do the air evac mission in a hot landing zone. Similarly, if you're just resupplying ammunition or other goods to frontline forces, you can also do that autonomously. And so, we can solve mission issues with digital technology that – in this case, not just a new aircraft offering, but to bolster a legacy aircraft. And our goal is every platform we have use these digital technologies to make it more attractive to do important missions for our customer. And that can be a Black Hawk or that can be some sort of NGAD development in the future. These digital technologies will actually make our platforms more attractive sooner, we think, than our competitors' offerings could be.
Douglas Harned
So, we have a little time left here. But I'd like to turn it over to your outlook for free cash flow. If you look over the next three to four years, how are you thinking about?
Jesus Malave
So this year, our guide is $6.2 billion for free cash flow. When you look at it with some of the investments that we're still making, our CapEx is still elevated this year and over the next few years. Our goal would generally be a probably a low-single digit growth in absolute free cash flow is a target. And when you couple that with our share repurchase program, a mid-single digit and growth in free cash flow per share. And then when you tack on our, say, 2.5% dividend yield or so, assuming you can use that for shareholder return, you can get yourself to a 7% to 8% total shareholder return over that period of time. And so, that's the way I think we're looking at it.
We do have some things we want to work through. We expect there could be some pension contributions anywhere between $500 million to $1 billion in 2025. So, we have to manage through that.
But what we see opportunities is in working capital. While we do have, I think, relative to the rest of the industry, good working capital performance, relative to historical performance at Lockheed Martin has deteriorated. So we have an opportunity to bring that back to what we've historically performed to, and that will provide us some cash flow lift to offset any type of pension headwinds.
Douglas Harned
Well, I think to wrap up here, maybe, Jim, could you just tell us what you personally – what you're going to be focused on over the next 12 to 18 months?
James Taiclet
So the focus areas for me are those three strategic initiatives, right? How do we have a more resilient, reliable defense production system. And that includes meeting with congressional leaders and others to say, here are some policies and processes that if government were to change or modify or upgrade or update those, industry could be more responsive to you. So, again, the multi-year procurements, the kinds of things where we get some antifragility funding, so to speak, to qualify second sources or to have overseas plants that we can actually utilize, if there's a big escalation of demand. So that arena I'm personally involved in.
Secondly is this digital acceleration into the defense enterprise. We're actually really getting traction. I mentioned this Joint Fires network, for example, where we've actually got commercial companies contributing to a defense enterprise solution using their IP and their people. And I want to get access to as much of that as we can and be a bridge as Lockheed Martin to bring that into our customer base.
One of the big areas to do that will be to establish a standards body like 3GPP has in telecom that gets the industry together with the customer base and says, okay, here are the APIs and the interface standards and the protocols and frequencies we're going to use as an industry to deliver upgraded services and products and have that convening body take place.
My view is that the US government needs to be the convener, but industry needs to be the contributor and the architect of this future system. So that's something, again, I'm personally involved in.
And on the international side, I think it's really critical for us to really globalize our company, like we did with American Tower. We've got a great business model. We had it then. It was very domestic. We ended up taking it all around the world. I think we need to do more of that at Lockheed Martin. We've got great technology. We've got production expertise that we can cite in different places to make our products more attractive to those international customers, sustain them better in their territory and sustain the US, which has deployed its equipment in those territories. So again really internationalizing the company and driving production and sustainment offshore in a way that really helps the US government too is another place I'm actually personally involved in.
Douglas Harned
Well, very good. Well, Jim and Jay, thank you very much for being here.
James Taiclet
Welcome, Doug. Thanks
Jesus Malave
Appreciate it.
For further details see:
Lockheed Martin Corporation (LMT) Bernstein's 39th Annual Strategic Decisions Conference 2023 (Transcript)