Lockheed Martin (LMT) Management Presents at J.P. Morgan Aviation, Transportation and Industrials Conference (Transcript)

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About: Lockheed Martin Corporation (LMT)
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Lockheed Martin (NYSE:LMT) J.P. Morgan Aviation, Transportation and Industrials Conference March 7, 2019 11:00 AM ET

Company Participants

Kenneth Possenriede - Executive Vice President and Chief Financial Officer

Greg Gardner - Vice President of Investor Relations

Conference Call Participants

Seth Seifman - J.P. Morgan

Seth Seifman

I think we are on. Okay. So good morning, everyone. Welcome back to the JPMorgan Aviation, Transportation & Industrials Conference. We are back. I'm Seth Seifman, the Aerospace defense equity research analyst here and we are honored to have Ken Possenriede from Lockheed Martin, the new CFO, here to join us, and he is going to talk with us.

So I think we are just going to have a discussion and answer some questions. Greg Gardner is here as well from Investor Relations.

And maybe just to kick it off in a very general way, Ken, if you talk a little bit about you know you are new to the position, a little bit about your background and your goals as a CFO and kind of what you see is the main challenges and opportunities facing the Company.

Kenneth Possenriede

You bet, Seth. Thanks for having me. Hey, just a quick housekeeping matter. So what you have in front of you is our Forward-Looking Statements. So statements made today that are not historical facts will be considered forward-looking statements and are made pursuant to our Safe Harbor provisions as part of the Federal Securities Law.

What I would ask everyone to do is take a look at our recently filed 10-K and you will see a list of all risks that may materially impact our future results if they came to fruition. So housekeeping is over and I will give a little background of me.

So I have been with Lockheed Martin for 30 plus years and started out as a heritage IBMer, got bought twice so ended up at Lockheed Martin. I historically, Seth, have worked in an operation probably 28 of those years and did a stint in Treasury for five years. I have worked in aeronautics. I have worked in Rotary mission systems, Space and other parts of the business. So I have got a good operational background. Did you ask priorities for this year?

Seth Seifman

Yes, maybe some of your key goals as CFO and some of the main opportunities and challenges for the Company.

Kenneth Possenriede

Sure. So I think priorities this year, you know it's a few fold. One is make sure the Company is performing on the portfolio that we have.

So if you look at some of our what I will call more mature products, make sure F-35 and our tactical weapons strike fighter programs are performing flawlessly. We have a lot of development programs, make sure that they are performing and let's get them out of development and into production.

Some of the opportunities we have, we will talk about this today. We are proud of the portfolio that we have. We think we have a very strong portfolio, sure we will talk about budgets today Federal budgets.

Generally speaking, based on the portfolio we have - generally speaking, we feel good about the direction the budgets are going, they are trending upward and we think the products we have, the services that we perform are supported by the services and in Congress.

And we also think back on the performance aspect that we do think there are some opportunities around F-35 and our missile system programs that there is some opportunity is there for us.

Challenges, I think like a lot of companies there are pieces of our business that are growing, so we are out hiring and one of the difficult things in the Aerospace and Defense market is some of these folks need security clearances. So we are focused on that to get these folks in the door, get them clear, so they can go work on our mission work.

I mentioned earlier about the development programs, we do have some development programs out there that could be a challenge. We won two classified programs, one in ADP, which is our Skunk Works for aeronautics and another one in Missiles and Fire Control.

We also have some development programs at Sikorsky, it’s the combat, search and rescue helicopter our S CH-53K and presidential helicopter. We have got F-16, we thought it was dead, the production piece of it, it’s alive and well and it's starting up now in our Greenville South Carolina operation.

And we have got some exciting starts in RMS with the Canadian surface combatants program and a new program, the homeland radar defense program out of Hawaii. So we have got processes in place that we think will manage these challenges but like all companies we have them.

Question-and-Answer Session

Q - Seth Seifman

Sure. I guess it wouldn't be a Lockheed Martin discussion if we didn’t started off maybe talking about the F-35 and it’s obviously a key issue for investors and maybe share with you a little bit the way I think about the next couple years and you could tell me may what is right and what's wrong about that.

In terms of the top-line this is a percentage of completion accountings, it’s not so much about the deliveries, it’s about the work that you are doing, and so by next year you would probably be doing work on 160 aircraft which we have thought of as kind of full rate production on a cost-to-cost basis and based on the objective of the Defense Department to get prices down, unit prices down, there is some downward pricing pressure, there is some mix changes as well.

So that suggests that as we get into the early 2020s maybe there is a plateau, maybe even some pressure on the production part. On the other hand there are thoughts about raising rates higher than 160 and there is also pretty substantial [sustainment] [ph] piece that is growing briskly.

So when you roll all that together, how do you think about the growth profile for the F-35 program going into the early 2020s?

Kenneth Possenriede

You are more right than not. So you know if you look at F-35, so this year we are going to deliver 131 aircrafts, that is basically the lion's share of LRIP 11, so which means we are now starting to do long lead work on LRIP 12 and LRIP 13.

Next year we will deliver about 145 aircrafts and then we will get that up to, in around 2023 about 160, peak with the final assembly and checkout operations in Italy and Japan plus our Fort Worth operation. Think of that as roughly about 180 aircraft, give or take.

We will see that continue out into the future, out to the middle of the next decade maybe a little bit longer. And as you said, I think the thing we are focused on now is can we continue to become more efficient, look at our span time, reduce our spans to grow their capacity. And then frankly, does it make sense? We will do the trade-offs. Should we expand capacity in Fort Worth? We are not there yet, but we certainly will do the business case if that made sense.

Development program, we are basically out of the SDD or we are out of SDD. We are now doing operational tests and evaluation to get to what's called Milestone C. So we then could get into full lot production that's going well.

You talked about sustainment, so we are standing up basis. We are buying the appropriate spares and we are doing the appropriate repairs that need to be done. We are driving down costs. We are ensuring that availability is where we need it to be or where the customer needs it to be and we will start modernizing the previous lot aircraft to get to the right technology.

You will see sustainment growth continue to grow, it will probably be for the next couple of years out into the middle of the decade. Our fastest growing piece is F-35. Back on the production, we feel good about the negotiations that we are getting with our joint program office customer from a cost standpoint and from a profitability standpoint. So we do think there is some margin potential increases on production in the out years.

Seth Seifman

Alright, okay. So I mean it sounds like then when you roll all of that together between moving and maybe moving north of 160 and growing the sustainment piece, you expect the total F-35 revenue contribution to continue growing?

Kenneth Possenriede

It will continue to growing probably not as fast as you have seen in the last couple of years. So, but we should still see growth.

Seth Seifman

Alright, okay. And then within that sustainment piece, you mentioned it’s growing quickly and some of that is because the fleet is growing and some of that is because we are still relatively early in deploying the fleet. When you think strategically about Lockheed's role in that, and what you wanted to be over time. How do you see that evolving? Over what period of time do you see that evolving? What does it make the most sense for Lockheed to do to sustain this aircraft long-term? And what would be best put to other players, whether it’s your suppliers or the Government or others?

Kenneth Possenriede

Yes. So we are having that conversation now internally and with our customer, Seth. So the pieces I described basically as you know all of sustainment for F-35. There is likely pieces of this that will go back to the Government no different than on other platforms that came before the F-35 program.

I think the pieces that you will continue to see to grow is the modernization piece, which I would think based on past history and based on our skill set, the value we add would be the modernization piece.

There may be pieces of the repair of the aircraft that will go elsewhere, but it’s likely there is parts of the repair piece that will continue staying with Lockheed Martin. Our assumption today is just from a scale standpoint, it would make sense for us to continue buying spares. So we would continue to do that.

And then over time the standing up with the bases are going to diminish over time. So that probably will not be as material to sustainment as it is today. So we still think there is value in Lockheed Martin doing a sizable amount of the F-35 work with us and our partners.

Seth Seifman

And when you think about what that might be in the out years once the fleet is more fully stood up, would that still be potentially 25% of F-35 sales.

Kenneth Possenriede

Yes. I think that's a good number or potentially could be north of 25%.

Seth Seifman

Okay, great. And then you mentioned profitability on the program and I think, you guys have talked about bringing that up this year a little bit north of 10% and getting close around the margin for the aeronautics business as a whole. How much opportunity should we think about beyond that level?

Kenneth Possenriede

Right. So what we provided with guidance is taking up profit on F-35 by about 50 basis points. That's a little bit below the aeronautics margins. Looking out into the future as I described earlier, we feel good about the negotiations we concluded on LRIP 11 in terms of the cost target.

And we had an interesting twist on that program, not only did we negotiate a fixed fee, we worked with the customer to come up with a performance incentive fee to incentivize us to reduce span time on final assembly and if we are successful there and hit our costs, you could see some superior margins there.

I think we are going to in the future try to come up with the same type of schematics on the block buy and the multi-year. So there is opportunity for us to grow our margins on F-35 and frankly be above the aeronautics margins.

Seth Seifman

Excellent. And outside of the F-35, but still within the aeronautics business you mentioned reviving the F-16 in South Carolina. Can you talk about the production outlook there, what does the backlog look like, what do you think is a sustainable production rate for that program over what period of time.

Kenneth Possenriede

Sure. So if we were here two years ago, we would have been talking about delivering the last Iraq [indiscernible] aircraft, eight of them that year and we basically thought the line was finished and we did - had a nice deal come to us with Bahrain FMS contract.

We are in the throes of negotiating Slovakia, so Bahrain is 16 aircraft, Slovakia is 14 aircraft and I'm sure you saw in the press that the Bulgarians are interested in buying the aircraft as well. So we will work that so that would be additional eight aircrafts.

There are other countries out there that are interested, Indonesia, Morocco, Taiwan is interested we will see how far that goes. And then obviously the big one is India and we will be working after quite some time now.

But think of once we get up and going, the first aircraft delivery for Bahrain will be the end of 2021. And then I think in the foreseeable future, you will see us deliver about eight aircraft a year. We basically have capacity to do about 24 aircraft there. So I think we are in a good shape for a while.

Seth Seifman

Okay, excellent. And then another legacy platform is the C-130J where things have been pretty steady for quite a while around 24 aircraft per year. How do we think about the sustainability of that rate and what demand is looking out to the out years?

Kenneth Possenriede

So right now what we are working on is what is called Multiyear-2 and we will deliver 28 aircraft this year. We had a good order book here last year for C-130. We got a tranche of congressional ads and plus we got an order for six German aircrafts.

We are now working with the customer on Multiyear-3 and once that's concluded, plus a few more international orders and a few other additional add-ons, we see a path to do low to mid-20s deliveries for the next couple of years, which is a nice surprise. We didn't see that a couple of years ago.

Seth Seifman

Okay. Maybe moving onto the missiles and fire control business, which is the fastest growing segment at the Company right now. Can you talk about the level of visibility you have on growth there and maybe the sources of growth? We know some of it comes from the fact that the operational tempo has been high in recent years and there is certain amount of demand for consumables that that drives and even when the operational tempo slows down there is replenishment of stocks, but there is also a lot of advanced activity on new programs going on there. So maybe if you could break down the contributors and talk a little bit about how much growth you see going out into the 2020s?

Kenneth Possenriede

Sure. So we see a lot of demand for our missile defense work. You probably saw earlier this week we got roughly $950 million order from the Saudi Arabia customer for THAAD for the long lead and obsolescence piece. We are in the throes of negotiating with MDA to get the remaining piece of that. So we are optimistic that will happen hopefully in the not-too-distant future.

Our capital spend this year will be higher than it has been from a historical standpoint. A lot of that is going towards expanding our capacity on our munitions business, our strike weapons, tactical weapons business. We are in the throes of expanding our Hellfire production line from 7000 units a year up to 11,000.

Our Patriot, our PAC-3 capacity today is 250, we are taking that up to 500 and those respective customers have been in lockstep with us on that investment based on their demand. So we are bullish in the long-term for that to have continued growth along with our defense business.

The other twist is we have been successful in hypersonics and a lot of that is out of the missiles and fire control organization. We won a program called ARRW, which is a Air Launched Rapid Response Weapon and that's complementary to our Tactical Boost Glide program that we won with Aeronautics teams with missiles and fire control.

They also won a program called Hacksaw which is a Hypersonic Conventional Strike Weapon. And if you add all these programs up with the Space hypersonics program, we have got a backlog of $2.5 billion dollars on hypersonics that will perform on for the next couple years and then, frankly, we will see where that goes from a production standpoint.

But as you said, it’s the fastest growing portfolio with the highest margin portfolio business and it will continue to be that way in the future.

Seth Seifman

And that $2.5 billion hypersonics backlog you mentioned, should we think about that as kind of for various development efforts and then maybe three, four years out, we will see kind of what develops in terms of production in hypersonics, is that kind of approximate timeframe to think about how the market is going to evolve?

Kenneth Possenriede

I think that's right. So some of those programs I mentioned, first launch one of the program Hacksaw will be out in 2020, a couple of the other ones will be the year after that and one will be out into the 2023 time period.

So, yes I think you will see these development programs go on for the next three, four years and then I think we have got to work with the customer based on their needs and the sense of urgency that's out there for hypersonics where that goes from production standpoint.

Seth Seifman

Okay. And you know you mentioned the additional capital that you guys are putting to work in missiles and fire control this year and even last year kind of stepped up fair significantly. How do you think about the return on capital there and elsewhere in the business in terms of the timeframe over which you look to see those returns and the level.

Kenneth Possenriede

Sure. So the example we used in missiles and fire control which is a large chunk of the increase in capital demand this year. It is an easy business case, because again you look at - our customer has given us their forecasts, they are in full support of us growing there capacity.

So high margin business makes sense and most of this is for buildings which we are going to depreciate over quite a few years. But even so, it is accretive to what we are doing. So it absolutely make sense for us to make these capital investment.

Seth Seifman

Sure that make sense and then when you think about from a return on sales perspective, the margin level, missiles and fire control around the mid-14 range now and I think you know that reflects a lot of - some of the new work that you guys have won, which is important to drive future growth. Does the pace of that new work mean there is additional pressure on that margin going forward, can it stay where it is, or do we start to see it migrate higher?

Kenneth Possenriede

I think its sustainable where it is, there are some puts and takes where some of the margins will be accretive, but you will have some development programs that will be dilutive to margin. So I think you will see a steady state return with the fastest growing business.

Seth Seifman

And looking at the Rotary and Mission System’s business, the guidance there this year is for fairly modest growth on the top-line, pretty modest profit growth and maybe you could lay out what some of the headwinds are there this year, because the business was extremely strong last year and we know there is a little bit of pressure on BLACK HAWK, but Sikorsky also has some new developing programs and in a legacy Lockheed Martin Mission Systems business in a growing budget environment there is obviously a lot of program there that might benefit. So how do we think about that walk from 2018 to 2019?

Kenneth Possenriede

Yes. So the top-line, if you look at Sikorsky, yes you are right, if you look at the BLACK HAWK the Lot-9 program relative to the previous lot, it is less units, so there is headwinds there. Also, the Romeo program is winding down, so there are some headwinds there.

Think of that is being offset by some of the training and simulation work that is done out of Orlando operation. We will counter that. And if you look at some of the other puts and takes throughout the rest of the heritage portfolio that's why you see - at the top-line year-over-year it's flattish.

We did have some nice margin expansion last year, a lot of that was due to Sikorsky. This year as I mentioned earlier, we want to see some of those development programs the CH-53K, the presidential helicopter, the combat search and rescue helicopter start pushing those out of development get them into production and hope there is some good bottom-line margin expansion there.

Seth Seifman

Alright. I think you worked on the Sikorsky acquisition to some degree.

Kenneth Possenriede

Yes, I did.

Seth Seifman

And so when you look at where you guys are on that journey now, how do you feel about where that stands?

Kenneth Possenriede

So if you look at the synergy assumptions, the cost that we tried to take out from a redundancy standpoint, integrating them into the portfolio, we are very happy, very pleased with where they are today, it pretty much is in-line with what we assumed a couple of years ago. Where we have seen and not be as successful as is frankly at the top-line and operationally bottom-line.

Some of these development programs have - they have been in development longer than we anticipated. So we are still pleased with the acquisition. It’s just some of these programs are going to move into production later than we assume, but we still think we made the right choice, we think we are the better owner.

Seth Seifman

Excellent. Okay and maybe moving to the Space business. Space is the key focus area for the Defense Department starting to think more seriously about protecting Space assets from attack. Space you guys have talked about being kind of a flattish business over the next several years. Can you talk about what's causing that to be the case in what seems like a fertile environment for Space?

Kenneth Possenriede

Right. So there has been a lot of buzz about the Space agency. Right now we haven't seen anything change from a program or record standpoint. And Space probably does have the longest gestation of cradle-to-grave from a performance standpoint before the satellites go out the door. A lot of strong [accuracy] [ph] from the customer set.

With our SBIRS program we just got the OPIR follow-on work for SBIRS, which is it’s an Overhead Persistent Infrared which will be the next generation of SBIRS work. GPS3 strong contingency, Orion strong contingency.

We are just not seeing any growth there and maybe in the future if the Space agency concept comes into fruition, we will see some of that. I did mention we did get a rather large hypersonic deal for Space, so we will see where that goes as well.

Seth Seifman

Excellent. Last year in the fall, we saw some news about an effort that the defense department was making to change the way it make progress payments to contractors that was subsequently pulled back and I think most people seem to think for good reason. But, the department still out meeting, I believe meeting with companies about this, there is a GAR report that I think will probably come out soon on the topic. Do you see this issue going away, do you see it sticking around to the extent that it sticks around, is there a win, win outcome for both contractors and the Government.

Kenneth Possenriede

You are right. So we are dealing with the new face, so there is Interim Director of Contract and Pricing that we are dealing with now and what you said is correct. We have had some industry conversations with them AIA wise, but also Lockheed Martin and I know other of our competitors, colleagues have gone into to see the team as well.

And what we are trying advocate is we are all for on-time deliveries, we are all for performing, let’s find a way that is win, win to exactly as you described that incentivizes us to deliver quality product on-time.

I think we are going to be talking about this for a while, but we are hopeful we will be able to get to a happy medium that's fair for the Government and fair for the industry.

Seth Seifman

Okay Excellent. You know in valuing the defense stocks, there is a number of way that investors look at that and cash flow is obviously an important part of that and so in terms of forecasting cash flow, working capital is an important component of that. And so is there a shorthand way you would say to think about working capital trends at the Company in a period where the top-line is growing like it is now either in terms of days, or percent of sales, or things to be aware of over the next two to three years?

Kenneth Possenriede

Yes. So if you look at our portfolio the fastest growing piece is our missile-defense and tactical weapons business and our F-35 part of the aeronautics portfolio. We are growing working capital and I would expect to see working capital continue to grow probably out to the 2021 time period, 2022 time period. And I think it goes back to the earlier conversation we had about F-35 deliveries.

Once you start seeing - though they will continue to grow they will grow at a slower pace. You will start seeing where that sitting is unbilled accounts receivable or inventory. You will start seeing us convert that to cash quicker than frankly earnings in that time period. And you will start to see working capital start to reduce at that time.

Seth Seifman

Okay. And in the meantime the growth there might be - so the working capital, I guess we would expect it to grow somewhat because the top-line is growing, but might grow even in excess of that in the interim.

Kenneth Possenriede

It will grow in parallel as the earnings grow, but there will be that gap between earnings and working capital up until we get to about 2020, 2022 time period.

Seth Seifman

Alright, okay. So pension is another topic that I’m sure you are going to spend a great deal of time talking about with investors, perhaps that already started today, there is always time, there is always something you need to learn about pension. But obviously one of the main drivers of your required pension contributions as market returns and so not so much because the date matters, but just to illustrate how this stuff can shift around. How would things have been different if the year ended on January 31st instead of December 31st relative to the types of contributions you talked about making for 2020 and 2021?

Kenneth Possenriede

We would obviously be in better shape, but it’s a long game. What we are assuming is a long-term rate of return of 7%. Unfortunately, we did negative 5% last year. But if you go back a year prior to that, I think it was 13%. So we are going to assume 7% long-term, discount rate of 4.25%. We are off to a great start this year, but we got a long way to go.

Seth Seifman

Alright. And the outstanding CAS prepayment balance that you guys highlighted in the 10-K, I think it’s about 8.5 billion now. How do we think about the period at which - is there a period at which CAS and contributions are more or less harmonized? Is that still the goal here? And if so, when roughly should we think about that happening?

Kenneth Possenriede

Yes. So we will not make a pension contribution this year, we will make round numbers, a $500 million of pension contribution next year. But think of the CAS recovery all the way out till 2026 we will be higher than any pension contributions we have to make. And you will see that get close to harmonized around the 2026 time period looking very close.

Seth Seifman

Okay, so still several years.

Kenneth Possenriede

We will be talking about it for a while.

Seth Seifman

Okay, very good and we saw the Company take some actions in the fourth quarter to offload some of this pension obligation. Is that foreshadowing anything else we might see in the future?

Kenneth Possenriede

Yes. So we did roughly $2.6 billion effective 41,000 retirees done in two tranches. The thing we wanted to be very careful about, wanted to ensure we over communicated not just with the street but certainly with the retirees. It appears as we sit here today a little concern by our retiree base. We have round numbers of $40 billion worth of liability.

So we are going to take this one step at a time. You know one of the deals we did was an auction, we still have to explore probably next year what we do with that, if we are going to monetize that and put sunset that plan next year.

And we will look overtime and see if it makes sense to chip away and do other pieces of it, it obviously because of its size can't be done and one fell swoop, so we will still be talking about this for a while.

The question is are there incremental pieces that we could continue to move to an insurance company who is obviously better at this than we are.

Seth Seifman

Okay, great. And then when we - just to round out the pension point. How do you think about what's sustainable or normalized cash flow is for Lockheed given right now we have an outside contribution from CAS recoveries this year, but that will start to come down in 2020 and 2021. You guys have talked about generating at least $7 billion of operating cash in each of 2020 and 2021, but you have got top-line growth and we have got pension and working capital dynamics. How do you think about where the opportunity is to do better than $7 million and then also that question of what you think about is the sustainable kind of normalized cash flow for the Company?

Kenneth Possenriede

Sure. So, yes you are right, we have provided guidance of $7 billion in 2020 and $7 billion in 2021, we actually see our CAS recoveries staying pretty consistent out to probably 2023 then we will start coming down.

And I think the earlier conversation we had with F-35, once you start getting out into that time period what we see is our back on the unbilled AR, it will start to come down and start hopefully offsetting that reduction in CAS recoveries.

I mean the other things we will look at it goes back to the focus items. Look at margin expansion out in that time period which would obviously generate cash, either other things from a bid and proposal standpoint that we can do that can help shape accelerating some cash flow.

International customers getting advances and other working capital initiatives that we can do to help offset that reduction that will start beyond 2023.

Seth Seifman

Okay. I guess the big event next week we will get the budget released first step and might probably be a very long and if the recent past is any indication of painful process. But I guess what are you looking for next week and what do you think might be some of the big if any surprises we might see in the 20 budget request.

Kenneth Possenriede

Yes. Assuming it comes next week and your spot on I think we will be talking about this for quite some time. I think the interesting piece will be is, let’s see what the investment accounts say.

We are like anybody else we are going to be very focused on where that is and try to work from an advocacy standpoint with the right folks to make sure the programs, we believe in that should be fully funded or funded appropriately, we will make sure we work that.

But again, if you go around the horn and we have $130 billion of backlog, unless there is a major crisis, which we are hoping does not happen, we feel pretty good about our portfolio where we are and where it's going and if this thing runs its normal course which will be chaos unfortunately, we feel pretty good about where things are going to land.

Seth Seifman

Excellent. We have got about two minutes left, so I definitely want to open it up and see if there any questions from the room.

Unidentified Analyst

Hey thanks very much. So I just wanted to ask about cash flow and capital allocation for 2018 and I guess correct me where I’m wrong here. I think you are guide to greater $7.4 billion in cash flow from operations and $1.5 billion CapEx, so it gives us call it $5.9 billion free cash and you have got $2.5 billion in dividend another $1 billion in repose. It leaves you call it $2.5 billion in unallocated free cash flow. How should we think about, how you are going to use that money?

Kenneth Possenriede

So right now we are planning, we have a bond that matures in the fourth quarter of this year, we are planning on retiring that. We have got some time yet to determine whether we are going to do that or refi it, but right now the assumption is we are going to retire that.

The end of last year - we ended the year with $600 million of commercial paper and again just from our internal assumptions we are assuming that we are going to retire that as well. Good problem to have, if we need to continue staying in CP we will, but those are our plans right now. And then we will opportunistically look at share reposes if that makes sense.

Unidentified Analyst

And then just to follow on that, you brought your leverage down pretty significantly since you completed the Sikorsky acquisition a couple years ago. I think your ratings have been moved to positive at couple agencies. So you have had the potential to get back to an A ratings. I guess how do we think about the balance sheet and the appropriate level of leverage and how you kind of balance that against any interest in M&A or anything like that?

Kenneth Possenriede

Yes. We are not obviously going to stop and upgrade, you are right there could be some likelihood we do get one. We are comfortable right now trading at the ratings we have today and if we get an upgrade that is great.

I think if you look at our balance sheet, we are sitting with $14 billion of debt on the balance sheet end of last year, we are very comfortable with that amount of debt load and if there was anything out there that makes sense to us, we would utilize our balance sheet.

And if we get it, it would be a compelling reason why we did it and we certainly would go to the rating agencies to justify why we did that and why it made sense from a synergy standpoint, we were the better owner and progress, do it.

Seth Seifman

Excellent. And with that we have had the clock run down here. So we are out of time. But Ken thank you so much for joining us. We really appreciate it.

Kenneth Possenriede

Thank you, Seth.