Lockheed Martin Corporation (LMT) Earnings Call Transcript & Summary

Hello. Good afternoon, everyone. I'm Kristine Liwag, Morgan Stanley's Aerospace and Defense analyst. Very excited to host our next panel, Lockheed Martin. I'm pleased to have Jim Taiclet, Chairman and President and CEO of Lockheed; and Jay Malave, CFO. Jim, Jay, welcome. Thank you for being here.

Thank you, Kristine. It's great to be here.

Great. Before we start, the standard disclosures -- for important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representatives. And Jay, I think you've got your own ...

Of course, as do we. Statements made today that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Actual results may differ materially from those projected in the forward-looking statements. Please see Lockheed Martin's SEC filings, including our 2023 Form 10-K for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. Okay.

Wonderful. So lawyers are happy, right. We can move on to the topic. So maybe the first one is the U.S. Defense budget outlook. I mean it looks like for fiscal year '25, we're going to start off with another continuing resolution. The fiscal '25 budget is still subject to the spending caps. I mean that said, there seems to be pressure for Congress to potentially plus up the budget, but it is an election year. So a lot of moving pieces here on the budget trajectory. Can you give us an insight of how Lockheed Martin is thinking about it and if you think the election outcome changes your programs and what is there to watch?

So in the big picture, Kristine, there's been -- and I think there will continue to be bipartisan support for robust national defense, which will be reflected in the budgets, no matter how the election turns out. So we won't speculate on the outcome of the potential election results or what policies may or may not change. But what we try to position the company for is to be agile enough to adapt to changes, whatever they may be, right? So a lot of our R&D, for example, we're moving more towards, I would call them, fungible technologies and digital technologies that are going to definitely be part of the future, right? No matter what programs end up getting funded a little more, a little less. The types of technologies, we're investing more in with our Chief Engineer and CTO are AI in a big way. Secondly, autonomy and crewed-uncrewed teaming. And then thirdly, distributed cloud computing and 5G.MIL is we call it, communications because those will apply to any program result. They're all edge devices on a 5G.MIL open architecture network. So we're going to be positioned to connect whichever of our platforms are funded into that network, making them all more effective and ultimately more attractive to the customer we think. So we're trying to be more agile and flexible in this environment.

Just in terms of how we're planning, at least forward looking on our forecast, we're assuming that kind of the 1% growth that's in the fiscal responsibility act as a baseline, and that's what we're using. But if you recall, Kristine, there's been a lot of plus-ups through supplementals and things like that, which are still working their way through over the next few years. And so those will really help support the record backlog we had at the end of 2023. And this year, our expectation at the midpoint of our guidance is 5% sales growth. And we see a pretty good runway to continue growth really on the back of, yes, the U.S. may be a little bit light in just the base budget, with some of these supplemental actions. And there's still potential for those to continue in one form or another. There could be supplementals or these emergency plus subs that you've seen coming out of the Senate. The next thing I'd say is that a lot of our sales that's in our backlog is also from foreign military sales, which are not in the U.S. budget. So there's a lot of significant international demand that has helped fueling us. And we expect that growth to be higher. It's 27% of our sales today. We expect that growth rate to be higher than the base U.S. growth rate over that time. So we think there's a pretty solid demand cycle that we're living through, potentially between now and the rest of the decade, that will help be supported by really what we're seeing already in the backlog.

Great. And then following up on that international portion. I mean it seems like outside the U.S., you are seeing international budgets get accelerated at a faster clip, because also the baseline is a lot lower, right? So as you said, with Lockheed's international exposure at 27% of revenue, how high could that go? And also with what you have in the backlog and the pipeline, are these international sales higher margins?

So let me go through just the growth rate. We expect anywhere between the next 3 to 5 years to have a growth rate that could be anywhere from mid-single digit to the high end of high single digit. So a pretty good -- a pretty solid pipeline of various countries and pretty much our entire product line. If you think of our F-16 backlog of 130 aircraft in that ballpark, that's all international. There's been, as you know, I think everyone follows the F-35 sufficient or significant amount of demand in backlog on the F-35 that will keep us solid on a production rate of 156 per year over the foreseeable future. But there's other systems like our JADC2 or Joint All-Domain command and control systems, where we have a system that we're developing with the other country of Australia to provide Black Hawks, C130s and then, of course, our MFC or munitions, there's a tremendous amount of demand there. What I would say on margins is because much of those sales are going through foreign military sales, they are essentially pretty much U.S. government-type margins, because they're under the same contracting regime. I think in time, as we get into specific country requirements, you'll see a lot more direct commercial sales, and that's where the opportunity for our margins will come in. But that's probably around 3 years out, I'd say.

Yes. And one of the complementary strategies we've had for the last few years and really kicking it into high gear now is coproduction and cosustainment in these key allied countries, that are ordering, especially those that are ordering significant amounts of new equipment. So Poland, Germany, Australia, which was mentioned, U.K. and Japan are just some examples of where we're having instead of just offset requirements being taken care of, if you will, in those sales, we have a deliberate plan in our entire company across all of our business areas. Where do we want to do HIMARS repair and overhaul around the world to support our customer better. We want to do it in Europe. We want to do it in Asia. And then you have those alignments where you can actually bring that industrial participation that benefits Lockheed Martin way more than just a typical offset deal we do. And it encourages the purchase of our equipment because most other companies don't have the scale or the range of products that we can use. For example, we could use a GMLRS coproduction deal that's augmented an F-35 sales campaign. Most companies don't have that kind of flexibility. So these 2 things, I think, will complement each other.

Great. And Jim, I was going back to your first transcript of Lockheed Martin. So it was what the earnings call, 2Q 2020, I'm not sure if you remember. But that's when you introduced the 21st century security concept as an effort to bring relevant lessons and latest technologies from the broader tech sector to the defense industrial base. I mean, at the time, it seems like a pretty monumental task. So I guess, fast forwarding today, how much progress has been made? And what have been your biggest surprises along the journey? And how do you see the opportunities of this strategy yielding to better returns?

We made, I think, significant process and progress in a number of important areas. I think I'd like it to be faster. I'm not a patient of a person, but we're dealing with Congress government, our industry, our suppliers and the technology and telecom industry. And so to pull those pieces together, you have to have sort of a line of effort on each one. So as far as getting -- let's start with the large tech companies having an interest and a participation -- a greater participation in the Defense enterprise, I think we made really good progress there. We've got alliances working on real programs and real projects with IBM, for example, on Distributed Data Management at high 5G types of transmission levels. We've got Verizon as our partner on 5G and advanced communications. We have Intel and GlobalFoundries at the chip level, designing into their main chip lines, features that we need for National Defense now. There's others too, like for Microsoft. They're a huge partner for us in what we call distributed classified cloud, which is the only one I think in the Western world for sure. So we're bringing these great companies with all their tech and all their talent to really tangible efforts that we are partnering with them on. And we're also bringing some of our cohorts in the industry. So with Northrop Grumman, who has the Army command and control system, we have agreed to integrate that into the Joint Fires network, which is supposed to connect Army, Navy, Air Force programs altogether. So we do the Aegis for the Navy, and we also do command and control system for the Air Force. Now we can add the Army seamlessly, because we're all going to be using the same platform. And so that's the second key dimension is you line up the partnerships and not just big companies, by the way. We've got a ventures group that keeps funding startups. We have another entity that's doing alliances with midsized companies. And we're integrating products from kind of other defense tech companies into what we do and vice versa. So I do think the sort of industrial ecosystem is progressing really well. On the government side, there are 2 policy initiatives that we're suggesting. We don't control these policies, but we're suggesting that if you want more capable national defense and you want to have a much bigger tent of participation and effective participation from you name it, a startup, [indiscernible], IBM, we need 2 policy changes that probably will require congressional effort. One is, just like in the telecom industry, we have a common set of these open architecture standards. It's governed by a group called 3GPP. And the engineers from the major companies and small ones get together and choose the best technologies, choose the best APIs. They agree on what frequencies they're going to use. And that's why your phone can be purchased in L.A. and used in, say, Seoul or Munich, because everybody is using the same set of standard interfaces. We need that for the Department of Defense. It doesn't exist. So that's one policy effort, which we're making progress on. It's not over the goal line yet, but we're close. Another policy effort is the acquisition system is adequate, I'll say, for large hardware procurements, right, jet aircraft, satellite systems, submarines, but it's multiyear. It's multidimensional. It's not agile, very agile, I would say. The tech industry, the telecom industry must move at a much faster clock speed. So what we're suggesting is that Congress authorized an adjacent acquisition path for digital services that will make it easier for all those companies I talked about and us to accelerate digital tech into defense enterprise and into missions. So those are a few of the things we're making very good progress on.

A couple of areas that Jim is modest. So he didn't talk about everything that he's helped drive us, but a couple of other areas. When you look at the way we look at pursuits, and Jim has encouraged us and we are looking at it this way, is look at the entire mission requirement. What is the mission, what are the requirements? What are all the gaps? So rather than having 4 different segments, some provide systems, some provide platforms, looking at individual niches of a particular mission and just pursuing that specifically or only, what we've done is look at the entire scope of the mission requirement and figure out how we can go and shape a pursuit holistically as a one company opportunity and also as a one company solution. So that's one area. The other area that we've -- that Jim has led us in is really organizing a little bit differently. What I mean by that is that we've got the large kind of mothership called Lockheed Martin. What we've done besides Jim mentioned LM Ventures, one of the first things he did was double the amount of authorized investment funding capacity that they have. So they went from 200 to 400 capacity. The second thing that we did was development and infrastructure inside the company that enables to set up smaller C corps, that can act like smaller start-ups and be more agile. And so we strip them down. They don't have the same level of bureaucratic policy requirements that the rest of Lockheed Martin does, but they're able to move quicker and respond like a smaller company on pursuits and other business opportunities.

That's really helpful context. Speaking maybe to the tech theme. I mean, AI has profound implications for the modern data field and just modern life in general. And look, we've seen a new number of entrants in defense taking this like AI-first approach, Jim, you've established the Lockheed Martin artificial intelligence center back in 2021. How much of a game changer is AI really presenting in Defense? And how is Lockheed staying ahead of this curve? And how would you compare your progress versus these new entrants and Silicon Valley start-up type companies?

AI is going to be a significant contributor to improving our national defense capability over the next few years, but not the only one. And there's a fundamental reason for that, because the kinds of missions, the kinds of apps or services that we provide require often they require very sophisticated hardware, which is extremely difficult to build. It has to have go through significant testing and certification because you're dealing with lethal activities and lethal missions, for example. So the standard of hardware development in the Department of Defense is and should be much more rigorous on the hardware side than in, say, the telecom industry, whether we're building phones or switches for telecom traffic. The other piece of this is really important. So the hardware is critical. You have to have it to deliver the effects to create deterrents, so that your country doesn't get attacked by somebody else. That hardware itself has its own firmware. So let's use the obvious example because everybody's heard of it, F-35. F-35, TR-3, everybody knows an acronym, but it means Technology Refresh #3, and that is a hardware insertion into the airplane. So the airplane itself, the outer mold line, as we call it, how it looks, the shape, the engines, they're not changing. The only thing that's changing are 3 components: physical hardware components that we have to be very high-performing and highly cyber-secure. One is a core processor, which is just a server. So we have our own jargon for everything. I'm going to try to put it to English here for a minute. TR-3 is a server that goes on the plane that is about 10x more capable than the TR-2 server is. This is important, and I'll get to why in a minute. The second component is a data storage device, which, again, has an order of magnitude or so more storage capacity, more terabytes can be stored on the plane than before. And then thirdly is the cockpit display, which is the next pile I can tell you, is really, really critical, because the more data you have, the more confusion you can have in the cockpit. And you need to have a cockpit display that integrates and prioritizes information and present it to a pilot who is under great stress, physical stress and fear, by the way, as part of this. And so that display not only has to work, it has to be intelligent all by itself. So you get these 3 pieces of hardware. They're really important to insert into the plane, which doesn't change that much. Now, the hardware has firmware. Your phone has iOS or the Samsung equivalent that allows the phone hardware to have a software connection to apps that you then can download on it or to a cloud connection. You cannot get to the hardware unless you can integrate with the firmware. And that is why a 5G.MIL concept is so critical to this, because if there's a company out in the middle of Kansas somewhere developing an AI engine, and it doesn't connect to any of the firmware of the major platforms that are being used today and will be used tomorrow, it will have limited value and usefulness. So this standard setting and this faster accelerated acquisition path are really important to bring that Kansas start-up technology into a better display for a pilot in the F-35 to be able to prosecute a mission and launch a missile. So these are very tangible things. It gets all lost in the jargon, but that's why this is so important. And so, these are some of the issues that need to be solved, so we can get -- my goal is to marshal many segments of American industry to contribute to the missions that Jay just talked about. And that's part of the answer here.

Great. That's really helpful color, Jim. And now speaking to the F-35, which is about 1/4 of Lockheed Martin's revenues. So I mean you started delivering again after -- in July after a year-long pause. But it looks like the government withholding about $5 million in cash payment until the TR-3 combat capability is qualified and delivered. So first, can you talk about what's left there to do to get the full capability of the TR-3? And what's the outlook for cash and revenue for the program?

No, I'll take the first half of that in lateral to Jay for the second part of the outcomes. There's one other part of 21st century security that's really important, which is elevating the relation, the effectiveness of the relationship between government and industry, right? F-35, TR-3 deliveries is a good example of where we should go to. Typically, in the acquisition system, there are acquisition professionals that write contracts and they monitor those contracts compliance by industry. In this case, by Lockheed Martin. And when -- typically, when industry is late or over budget, there are penalties for that. And those penalties are related to the contract. What we also need to add is what is the operational field. I look at everything from -- an aircraft squadron commander in Germany or Japan that needs to create a deterrent effect with his squadron or her squadron, what do they need from -- ultimately from industry, but through that acquisition system. And the case of the F-35, when the TR-3 hardware and software got delayed, there was still a better answer than just parking the planes on the ramp, which was the initial position of the government. We're not paying for those planes until they are 100% ready based on this contract. The reality of the technical and industrial progress that we could make and the time that was put in the contract was not completed. And you can blame whoever you want, it doesn't matter. The industrial reality of the situation is, on that date, those planes have not been fully through the test and certification program to make them deliverable by the contract. However, they were at a state in the test program where they were flyable, right? You wouldn't send that plane to the Taiwan straight and an air battle, but you would send it to the squadron in Japan and let the pilot start flying it and getting used to it, flying together, doing tactics, all planes fly differently, the cockpit displays -- the more time the pilots and the units have on the aircraft in training, the better they will be when it's fully combat capable. So instead of parking on our ramp in Fort Worth and sitting there, which they were, we've agreed with the Air Force first and then the joint program office together, take deliveries with the released one of software that allows pilots and maintenance people and your organizations to get ready to go to war, because the longer they don't have them, the longer that time line is going to be. And they agreed to that. That was a better outcome for the enterprise. It was a better outcome for Admiral Aquilino, who was the commander at that time. And we will then work through release 1 and then release 2 over the next year or so. Jay, you want to kind of pick up on that?

Yes, just in terms of -- just on the software in August, we provided -- or delivered another software release, that was consistent with the schedule that we had committed to there. We've got another release that we expect in 2025 that will take -- that would be part of the transition from training capability to a full combat capability. And so there will be some updates as well until it gets to final capability, but we expect that to occur -- or targeting for that to occur next year in 2025. As far as the -- yes, it is an initial withhold of $5 million to start but it does reduce with the completion or upon the completion of different milestones. And we expect to complete some of those milestones this year. So the full year impact this year from that, it's -- I won't give you the exact number, but it's -- the way that the investors should look at it is we gave a guidance range of $6 billion to $6.3 billion of free cash flow. The impact is within that $300 million, is the way to look at it. And so when you think about future year benefits, you're talking about something that's less than $300 million that will cycle over the next 18 to 24 months is the way to think about it.

Great. And with this with F-35, can you also talk about Lot 18, Where are you in the progress of discussion for Lot 18? When do you expect the resolution and any terms you want to share?

Sure. So on Lot 18 the negotiation is progressing. It was important that we got through the settlement agreement on Lot 15 to 17, which we did. And so we've moved on and pivoted now to the Lot 18, 19 negotiation. We're in a process right now, the customer validating our cost, our profile. So that includes supplier costs, which they reviewed thoroughly. And look, we're dealing with issues like lingering inflation as well as extended lead times and the impacts of those. So we have to go through that, get comfortable with that and make sure the data supports what we provided to them. And so that's part of it as well as kind of labor costs and things like that. There are key terms that still are yet to be negotiated as well. I'm not going to negotiate in public, but suffice it to say there are open items that need to be completed. As a result, given where we are in negotiation, we don't expect to be completed by the end of this quarter. And that will cause an impact in the quarter up to about $500 million in sales and potentially about $500 million of cash flow in the quarter, because we essentially have reached the max of the funding. So funding has been pretty much been exhausted under -- for Lot 18. So we're working with our Joint Program Office partners as well as with congressional constituents, so that we can get some funding in so that we don't really disrupt the production system. Because if you think about where we are just in a normal course of activity, where we are fully funded on a program on a run rate basis, we're investing any multiple billions of dollars in the production system and it basically prefunding to make sure the production plan -- production system stays on track. So in a case where you run out of funding, not only are the way carrying what we typically will carry, but there's also going to be some additional because we're not receiving any funding. So it's important that -- we've been working with the congressional constituents to see what we can do to get. So as I mentioned, to get some of that advanced funding in reprogrammed or reallocated, so that we can keep the production system on track. And so this will affect the entire F-35 enterprise, not just Lockheed Martin. And the last thing we want to do is really disrupt the production system. But like -- what -- it's important to remember that we're talking about is timing. Upon completion or consummation of a contract and firming up the contract, definitizing the contract, then you potentially immediately recognize those sales because you've incurred a lot of costs to date. So it's a question of timing and finalizing the contract.

Great. And maybe going back to 2Q, I mean you came off a very strong 2Q '24 performance. And it seems like the improvement in the supply chain is allowing you to execute faster on the backlog. I mean which now stands at $158 billion, that's a pretty chunky backlog. Where are you seeing some of these supply chain improvements? Are there pockets of challenges that remain? And could you see a scenario where revenues higher if some of these results faster than expected?

Yes. It's certainly that versus where we came into the year and where we came out in the second quarter, supply chain performance as well as the total enterprise performance, would've we include Lockheed Martin operations as well, have performed better than we expected coming in. When you think about just the sales profile, the midpoint of our guidance in January is about 2.4%. And then in July, we revised that up to 5%. So certainly, we've seen some improvement. What I would say is that we haven't seen any lead times compress. Lead times are still elongated. So schedule, and I'd say where customers are meeting the current requirements. But as you know, in many of our systems, we're still ramping up. And so the -- it's a question that still can they meet that continued increased demand that we see over the next 3 to 5 years. But for where we are right now, we've seen them keep up. The one thing that we still have to keep an eye on is quality. There are still certain pockets where the quality is not the same, even though the delivery and on-time delivery has gotten better. Quality is still suffering in certain cases.

Are there particular areas you want to call out?

Well, I'd say not particularly. I mean when you look at in our platform businesses, we've seen things like structural elements have gotten better from a performance and delivery standpoint. But then there's other elements of the airframes of the platforms have gotten a little bit worse or haven't gotten better. We talk about and you often hear about solid rocket motors. It's still an area where we're relying on increases there in delivery rates, and we're still a little bit lower than we would like to be. But again, in the grand scheme of things, I would say things are trending in the right way overall.

Great. And maybe moving to free cash flow. You've suggested you're looking at $1 billion pension contribution next year and maybe some additional pension headwinds beyond 2025. But at the same time, you still plan to grow free cash flow. Can you talk about the levers to offset just pension headwind? And are they enough to hit your mid-single-digit growth expectation in free cash flow per share target next year?

So that is certainly the goal and the internal target that we've set for the company. And if you think about what we're looking at, just take the -- talk about the pluses, the tailwinds that we have is that we continue to expect cash-based net income growth. And so we'll see some tailwind from growth there. We'll also see a reduction in the headwind related to the R&D tax capitalization, so that's starting to come down over time. . The biggest opportunity that we have is sitting in our working capital. And while we have, I would say, very strong working capital performance relative to the industry, we're still lagging the performance that we're able to demonstrate about 3 or 4 years ago. And so if you look at today, we're about 40 days in average working capital days, which is pretty good. But there's opportunity to improve that in various areas of the business, particularly in things like contract assets, where we have about a $13 billion balance. So kind of you think about contract that's just another way of kind of cycle accumulated inventory. And there's just opportunities for efficiency in that area more specifically. And so that is an area that we've targeted really by not only our 4 segments, but the lines of business within their segments. And each of them have an opportunity set that we're going after with a particular program. You think about what we do. We put together programs. We have schedules, we're putting these initiatives on the same type of program schedule to drive out benefits. The question is for us is the timing. And so if you think about it, for us, it's about 1 day working capital of about $200 million of free cash flow. It's taking out -- that requires just a few going to do 1 for 1, $1 billion, it would be 5 days. We can -- I think that we do have a path to be able to do 5 days, but I'm not sure we can do it all in 1 year, is really what we're working with. And so as we go through that, we're finalizing our plans now, what do we think is reasonable to achieve? Can we get there in 2025? To the extent that we find that that's a bridge too far. Then we look at inorganic means, which is use of the balance sheet. We've got a very strong balance sheet. Our debt levels are $19 billion. Our gross EBITDA ratio is about 1.9. So it's possible that if we can't get all the way there organically, that we could issue some debt and really take multiple years off the table as far as pension headwind. So either way, or it can be a mix of the 2, we've got, I think, a pretty good plan to deal with the pension headwinds.

Great. And in the interest of time, I'll add one last question, if I could. Jim, Jay, I mean, what are key opportunities that you're most excited about? And what is in your watch items? What keeps you up at night?

So I'll speak to the opportunities and let the CFO talk about nightmares. But the opportunities are, we've created this strategy. It's a 3-prong strategy that all exclusive in 21st century security. One is increasing resilience and scalability of the defense production system because between COVID and Ukraine, we learned that it was insufficient. We, as a company, our teammate suppliers, as you've heard, and the government are all working together to drive that forward and international governments are, too. So that's good. I think that's a positive thing and optimistic future. The second piece of the strategy is this 21st Century security acceleration of digital technology into the Defense enterprise. It's starting to get real traction and uniform military services and actual contracts that we're now getting. We now have the first, it's small, but the first true subscription based, not a contract-based traditional but a subscription-based AI services agreement with the United States Air Force. So using our Lockheed Martin AI Center as the provider, they're using our AI engines, our AI databases, our AI governance oversight as a service. And that's kind of a breakthrough. Another kind of breakthrough example is, we can do autonomy right now with real aircraft that fly and are combat ready to fly. F-16, fully automated, flown sector of the Air Force Senate, Black Hawk helicopter. Sadly, there was a helicopter crash, I think, 2 days ago in Israel. And 2 personnel were killed in the crash. They were -- the mission they were trying to do, which is a really important aspect of this, was an air evacuation of an injured soldier in a dangerous place. Very stressful again, whether you're getting shot at or not or worried about it. It's the pilots are going in and their crew with a manned helicopter. We've shown we can do that mission with an unmanned helicopter fully autonomous. And guess what, if it does get shot down and you need to send another one at least, the personnel in the helicopter weren't lost, right? That's a mission that can be elevated very quickly with a product we can already put on a Black Hawk. So now the goal is how do we get a government procurement office to say that's important, and I'm willing to fund that. So I'm very optimistic about this in general. Thirdly, and we're a little bit newer start on this, is globalizing or internationalizing the defense production sustainment system. So it takes away some of the fragility, because we have operations in multiple countries, and it gets the activities closer to the theoretical area where the issues might come, the combat might be Asia and Europe, largely in the Middle East. And then thirdly, it brings more allies to our equipment as we already talked about. So I'm optimistic, maybe generally as a person, but on all 3 of those dimensions, and then we got to work our way through the details to get there like certain program legacy contracts that are just going to continue to hurt for a little while, while we move forward.

I'll go really quickly. I know we're out of time. But for me, it's really focusing on having Lockheed Martin execute to its potential and making sure, at the same time, that we free up the capacity to make the investments to enable the strategy that Jim mentioned today. So it's twofold and making sure I'm looking around the corner to identify and mitigate risk to either one, executing to the level of results that you would expect us to deliver, at the same time, nothing gets in the way to us to create investment capacity as well as the human resource capacity to be able to deliver on our strategy in the future.

Well, wonderful. Well, thank you very much, Jim. Thank you very much, Jay. This concludes our presentation with Lockheed Martin.

Thank you, Kristine.