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Speaker 1: Bloomberg Audio Studios.
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Speaker 2: Podcasts.
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Speaker 3: Radio.
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Speaker 2: News. We're going to switch gears a little bit.
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Speaker 1: Yeah, from a one sector media to another, and that would be defense. Lockheed Martin unveiling a new missile interceptor designed to outperform its most capable Patriot variant. This, Carol, as the U.S. Army seeks to expand... its air defense capabilities against increasingly sophisticated threats like hypersonic missiles.
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Speaker 2: We have a million questions. We're going to head to Washington, D.C. for some answers and to Tim Cahill. He is president of Missiles and Fire Control at the $ 118 billion market cap defense and aerospace company. You know it well, Lockheed Martin. He joins Tim and me on this Monday. Tim, so great to have you here with us. Tell us about PAC-3 EDGE, what's new, what's significant, what our audience needs to know and understand about this.
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Speaker 3: Yeah, absolutely. And thank you for having me today. It's a pleasure. I'm here on the floor of a USA conference. There's a lot of excitement here today. And yes, we are introducing our next variant of our PAC-3 missiles. So you all know about the PAC-3 MSE. I think by now we've heard about it in Ukraine. You've heard it about in the Middle East, the most capable. air and missile defense interceptor in the world. We're now introducing the brand new generation of that, the PAC-3 Edge. And PAC-3 Edge is designed to go higher, faster, and further than PAC-3 MSE. And what it's really designed to do is to take on those threats that our military and the military of our allies are going to face here in the next 3, 5, 10 years. So it is us getting out ahead of what the threat is going to do, despite the fact that, of course, the MSC is doing an incredible job with today's current threats.
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Speaker 1: Well, Tim, the current threats today, and especially what we're learning with regard to the war in Iran and Russia's invasion of Ukraine, has to do with more rudimentary design, drones that maybe cost tens of thousands of dollars that sometimes interceptors are used to intercept. Can you sort of explain what is being used currently to intercept? defend against those types of threats versus what this is meant to defend from?
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Speaker 3: Yeah, happy to. And you're right. That isn't what PAC-3 Edge is all about. Of course, it can hit anything that flies, but that's not where we really want to use it. So what's being used today is a variety of systems. And of course, whether it be our troops in the Middle East or whether it be the Ukrainians in Europe, are using some very creative methods. And it's everything from shooting them down from the ground with rifles, to shooting them down with F-16s, to shooting them down with small missiles. And if you have to, if you have a drone coming after a very high value target, you might choose to use a higher end missile, but only because you absolutely have to. But fundamentally, what we are doing is trying to give the department and our allies a much broader range of options. And so that's why here a couple of months ago, we introduced, for example, Morpheus, a very low cost drone that flies out and essentially zaps the incoming UASs by frying their electronics. And then you come back, you charge it up, send it out and do it again, as well as smaller missiles that we put in what we call a grizzly containerized launcher, But they're much cheaper missiles, much smaller, much easier to reload, if you will. That's the kind of things that you want to put on these less expensive threats. And so effectively, it's about taking the missile or system or drone or gun or whatever it is and putting it on the appropriate or putting the appropriate effector on the appropriate threat.
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Speaker 2: What kind of production numbers are you expecting, not only with Pac-3 Edge, but also with your PAC-3 ACE. I think you've made some announcements recently. So give us an idea. Are there some updates? And kind of plays into what kind of demand flow are we seeing in an environment that is increasingly a lot of places around the world at war?
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Speaker 3: Yeah, that's a great question. And so, you know, as we've talked about and the department's talked about, we're for PAC-3 MSEs. So let's start there. We're rapidly going toward the thousands. So we're going to go to triple or quadruple the current rates. And that is going extremely well, by the way. The department has been an incredible partner with us to figure out everything that could be slowing us down and helping us go faster. So then you take PAC-3 ACE, which you mentioned, a perfect example of kind of the lower cost, but not all the way down into drone territory yet. But that one will be about two-thirds capability and about, say, one-half the cost. So the intent would be that we will produce those first in Europe, likely perhaps the Middle East. And then those are going to be, we expect to be in the thousands as well as we ramp up production. Now, then that brings us to PAC-3 Edge. What we would expect is that PAC-3 Edge would start slowly, but of course we'll work with the army to see what the right numbers are, but eventually we'll be capable of producing hundreds or thousands of PAC-3 Edges as the market demands it. So I would expect us to be producing all of these systems in very large quantities, perhaps at different phases, depending on what's needed and what the mission dictates.
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Speaker 2: So not 1,000 or 2,000 a year, but you're talking tens or hundreds of thousands a year.
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Speaker 3: Is that correct? So it'll be from MSE will be in the thousands, in the low thousands. We would expect ACE to be in the thousands. EDGE could be produced in the thousands as well, if that's what the orders say. demand, if you will. Okay.
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Speaker 1: Well, given the large number of suppliers needed to make a
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single pack three, what are the biggest choke points in production that perhaps keeps you from reaching that DOD goal even sooner?
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Speaker 3: Yeah. So you might imagine that, of course, as you know, it takes every part to build a missile, so anything can hold us up. But to answer your question fairly, usually the more complex the part, the more that you are at risk of something holding it up. So solid rocket motors, important complex part, that tends to be something that we watch real careful and it's easy to get behind on. Anything in this circuitry area, advanced circuitry, for example, seekers, which are also highly complex. Those are the things that we tend to focus the most on because those are the ones that can hold us up quickly just because there's so many individual parts that have to go into them. But we're working those awful hard and working every single supplier dual sourcing at least every potential supplier to make sure that one can pick up the slack if another one doesn't. And I will tell you that our suppliers have really stepped up. They are investing as well to the tune of hundreds of millions to billions of dollars, depending on their scale. And so this is a team effort with the department. Everybody's in on driving this production up fast.
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Speaker 2: I have to tell you, whenever we talk about things like this kind of segment, we get viewers and terminal users and folks who are like, How much does this thing cost? We're all taxpayers. We're paying for this stuff. How much does, I don't know, give us an idea of this latest update, the PAC-3 Edge? What does it cost?
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Speaker 3: So I would expect PAC-3 Edge to be just a little more than an MSE, which is on the order of several million dollars is what's usually publicized. And so, you know, right now what we are doing throughout the entire pandemic portfolio, if you will, so all the munitions that we build, is we are rapidly applying high technology production to keep the costs contained and to keep them down. And so that's everything from AI and additive manufacturing through robotics and building robot cells, if you will, that individually build these things and bring these costs down. What's interesting is while you say, well, the costs are pretty high and we're keeping those costs pretty level, what's also happening is we are investing billions and billions of dollars at the same time into increasing the production and the capability. And so the U.S. government is not paying for all that, which is something that they used to do. And so all that is coming back to still a production level, high production level, and a cost that is staying fairly even.
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Speaker 2: But scaling the missiles, should that bring down the cost in the future?
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Speaker 3: You know, I think the production levels are going to bring down the cost in some senses. In other ones, what you'll do is trade that cost for investment in both future technology as well as high
production of what you're building right now. So, and again, in the end, the US government will only end up buying the recurring cost of the missile, if you will. All those billions that go into production and technology We're footing the bill for all of that. So in aggregate, the taxpayer is actually doing much better under the new policies with the department than they were before.
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Speaker 1: So apart from the U.S. government, who do you expect customers of this to be?
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Speaker 3: Well, so the customers I think right now initially will be the U.S. government, of course, for this high-tech version. Eventually, we would expect that all of the Patriot users are going to want to have Edge. And then it'll be up to us to work with the U.S. government to decide on the timing and when that would be available. But we're anticipating that this is going to be part of the global defense network, just like the MSC is today.
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Speaker 1: I'm curious about low-cost interceptors and the startups that get a lot of attention right now, the Andurils of the world, for example. They're among the companies leading the low-cost interceptor charge. Is there enough room for all to play here? Will the primes enter the market too?
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Speaker 3: Well, it probably is for a while and we'll see since the numbers increase every single day, it seems. But there is a lot of demand out there in the world. This is absolutely true. I think if we can build a nice, mix of low cost and the higher capable systems, that's probably the right thing to go into a conflict with. And frankly, that's the way to deter your potential adversaries these days, to have that entire myth. So I think that for a while, there's going to be enough there. I think that the trade-off is going to be Remember, nothing comes for free. And so when you reduce the cost, you reduce capability. So finding the sweet spot where it's affordable, but it's also fully capable. It also can withstand the launch environment. It can withstand whatever the... adversary throws at you, that's important too. And so that's why we've come up with things like PAC three A's, which we think are a nice sweet spot that provide both.
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Speaker 1: Well, how would you just, just for our viewers and listeners who, who might not follow this very closely, how would you distinguish low cost versus sort of higher cost where the primes play right now versus where the startups play right now? How would you distinguish that from a cost perspective and from a capabilities perspective?
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Speaker 3: Yeah, that's great. The, um, And it is hard. So it's not just for those who don't follow it every day. This is a debate that we have all the time. I think it's the easiest way to do this is to match kind of two things. The value of the thing that somebody is throwing against you, because you prefer not to have a massive economic mismatch. So they throw something cheap, you throw something expensive. The other thing is what is that item protecting, right? So if you're protecting a lot of lives, a lot of very expensive hardware, um, command posts, things like that. You want to have something really, really good protecting that. So you want the capability and you're not so worried about paying a bit extra for that. Well, by the way, if you're the adversary trying to destroy that, you're throwing something pretty capable at it as well, because it's a lot of value to destroy that particular target. If on the other hand, you're talking about something that is a drone that's flying with a very small explosive, that's only going to do a little bit of damage. you don't want to go put expensive systems on that. You want to knock that down with something cheaper. What's important, I think, is that we innovate and make sure that both the U.S. and their allies have that entire mix of defensive systems that can counter that entire mix of offensive systems. And that is the one thing that changes, that has changed, I should say, that spectrum has broadened over the last few years.
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Speaker 2: You know, one thing I want to ask you, Tim, we spend so much time here at Bloomberg talking about innovation disruption. We talk, obviously, as you would expect, and you even mentioned artificial intelligence, but this stuff is happening so fast. And we have seen warfare and how wars are fought change increasingly faster as well. What do you think an investing audience needs to understand about what's going on in defense right now?
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Speaker 3: Yeah, I think, well, it's really clear that the power of artificial intelligence is incredible, and we are using it really throughout our industry, and we'll continue to do that. And for exactly the same reasons that you're talking about. The first of all, you can reduce the development and production cycles very, very fast by using that kind of technology. You can discover what issues you have far before you might've discovered them before, make corrections in your design, simulate things like you could never simulate before. All of that contributes to faster cycle, faster delivery of technology. And then when you get into things like the actual production, Things like AI additive manufacturing, it allows you to quickly produce things, quickly discover where your defects are, because that's the thing that gets you is a defect that follows you down the chain and you don't find it until later on. What you want to do is find it the instant that it's created. So things like AI could do that for you. They can look at a part and instantly tell you the tiniest, tiniest flaw that you have in that part and you go fix it right now. And then you combine that with robotic systems that can actually make the repair instantly Now you have magic. And so everywhere you see AI showing up in the commercial world in your daily lives, there's an application somewhere within the defense industry, and it's helping us go faster. And we are investing, all of us are investing tremendously in these capabilities.
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Speaker 1: Hey, Tim, just in the last 30 seconds that we have with you, we started off by talking about the differences with the new PAC-3 Edge. What about the next iteration? of the PAC-3 very briefly, what will it focus on?
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Speaker 2: I just got this done.
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Speaker 3: I know, but you know, of course, we're always working on the next one. In fact, 10 years ago, when I had the job of building these particularly, we were starting to work on this. So everything is going to happen just in the same kind of path, I think. Things are going to get faster, further, higher, more responsive, more AI. The systems are going to recognize when they're trying to be tricked by an adversary. I think you're just going to see this happening faster and faster. The systems are going to be more adaptable. They'll probably look about the same, long and pointy, but the actual intelligence in them is incredible, and it's getting more so every day.
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Speaker 2: All right, Tim Cahill, thank you so much. President of Missiles and Fire Control at Lockheed Martin joining us from Washington, D.C.