00:00Wayne, I do want to start with this munitions story because the questions about America's
00:04stockpile of air defense interceptors continues to come up. My dad was sending me this article
00:08over the weekend and he was talking about it from the journal. The U.S. races to accomplish
00:13Iran mission before munitions run out. You and the team separately had a note out over
00:18the weekend about how the U.S. strikes heightened replenishment demand for precision munitions,
00:22naval firepower and air power. The U.S. is the biggest and best funded military in the
00:27world. How and why are we concerned about air defense interceptors running out?
00:34You know, one of the biggest things here I also want to say is I think that our team also
00:38looks
00:39at it and says, OK, there's going to be plenty of munitions as well as interceptors for this
00:43specific conflict. I think the real risk is actually how ready do you want to be for a
00:48potential contingency in 2027 and beyond, you know, if it's a China-Taiwan situation or anything
00:54else like that. So the longer that this war goes on right now is going to be those increased
01:00munitions. They're the same types of munitions that you would actually want to use in a conflict
01:04in the Indo-Pacific as well. So I think that's one of the biggest pieces. But like you were saying
01:08earlier, right now Lockheed, RTX, Northrop all are sitting at the center of this air missile defense
01:14and strike capability that's underscored by the U.S.-Israel campaign and Iran. That is one of the biggest
01:20pieces that's pushing it right now. But the way that they're going to fight this with a long-range
01:25weapon system, a lot of those are going to be some same things that would be used in a China
01:29scenario.
01:30So when you look at those replenishment numbers, it's because the rate that we end up firing these
01:35as well as the amount that we've given to Ukraine over the past four years, you put all those together,
01:39it has taken a hit to the stockpiles. But I don't believe for one second that the U.S.
01:45military is sitting here going, oh, we're about to run out. I think they have operation plans that
01:50are put in place to say in these types of contingencies, this is what we think it would
01:54actually be. And then they make sure that they have those available. But they keep those classified
01:59for a reason so that nobody truly knows, because obviously it would show vulnerability if they were
02:04really low. Well, just from a manufacturing perspective, how long does it take to actually
02:07build a single interceptor that we're speaking about? How much do they cost? What are the resources
02:13that go into it? Can't you just call, can't the U.S. government just call RTX or Lockheed or whoever
02:18the contractor is and say. I believe Amazon has them on their site. Yeah, we want more of these
02:22and we're willing to pay. No, absolutely. And I think that's one of the biggest things that people
02:28don't quite understand when it comes to production capacity for these types of, especially the top
02:34tier weapon systems. The PAC-3 interceptors from Lockheed, Lockheed last year, we did 550 to 600 total
02:40throughout the course of that year. Then you look at how many were actually spent in Ukraine in that
02:45year, we're actually in a negative. It's one of the reasons why Lockheed got a $9.8 billion
02:50seven-year deal to ramp up that production to try and reach 2x to 4x capacity within these years,
02:58right? RTX, the same type of thing. They're looking at a lot of money that came out of reconciliation
03:02bill and others for the SM-6s and the SM-2s, which are some of the Aegis naval capabilities that
03:09you're
03:09seeing a lot in the news as well. So ramping up that production, even if you threw $20 billion
03:14at them right now, it's still going to take quite a bit of time for them to ramp up production
03:19lines,
03:19be able to do that, as well as the supply chain that goes into all those unique components that
03:24are put into it. Does this continue? I mean, what kind of visibility do we have on all these names
03:29and these contracts? What kind of visibility does it give on the sector? Because we saw
03:32the group overall, if you lump aerospace and defense, quite a rally in last year's trade.
03:38But what kind of visibility, Wayne, do we have on all of these names? And it feels like the world
03:42is
03:42arming itself again. It absolutely is. It is. And so U.S. defense primes are leading the way,
03:49obviously, on that. Based off of just industrial capacity, they also run the top of the line. So
03:55you look at F-35 and the F-22, the reason why those have gone so well right now is
04:00due to their
04:00stealth technology. So right now, if you're looking at Europe trying to actually arm with a
04:05sixth generation fighter, they're probably running about 10 years behind to be able to do that. That
04:09doesn't help them with Russia. It doesn't help them with NATO defense as they can increase their
04:14defense spending. So they're probably going to turn around and look more at F-35 as a stopgap solution
04:20while they continue to try and develop that. So Ryan Mittal and some of the other European
04:26defense primes that are over there, they are obviously getting a pretty good lion's share of
04:30what's going on with Europe. But everybody is trying to figure out how they can actually arm
04:35with enough air defense capability is number one. Long range capability, number two. And then they've
04:40got to figure out a way to have enough ground security, right? So you are looking at those ground
04:45vehicles as well. It's just an area right now where it depends on each of those countries what
04:50they need, and that's where they're going with it. As you know, sometimes it's for deterrence,
04:54sometimes it's for actual action, which is what we had over the weekend. I keep thinking of the
04:57trade-off guns versus butter. And so if we have a government that is aggressively or governments
05:02around the world that are aggressively building up their defense, what's lost in terms of civilian
05:06programs? Or what don't we have money for? And we continue to see our deficit grow. So I'm just
05:13wondering how you guys are thinking about that. What's the trade-off here for Americans?
05:19On the U.S. side, that's definitely one of the reasons why when President Trump was pushing for
05:23a $1.5 trillion top-line budget in 2027, looking at trying to be able to do that,
05:30we don't think that's something that's necessarily something that's obviously going to pass and
05:36something that no matter how much he tries to push for it, we're probably not going to see because
05:40it's going to give away to some of the social programs. We don't think it's going to actually
05:44pass through Congress in that way. It would probably be something that may be congressional
05:48plus-up for specific capabilities to include munitions like we're talking about right now,
05:54if they're concerned about additional ramp-up that you might see to be able to do that.
05:58The other countries, especially in Europe, you're seeing some closer, if you look at Poland,
06:03they only have a 57% debt to GDP, so they have money to spend. Germany does a good job
06:09of that,
06:09and that's one of the reasons why you're seeing so much defense spend there. The further left you
06:13go, the more restrictive and where they're actually topped out in reaching 100% or above 100%
06:18and taking on that debt. So it's making it so that they are more restrictive in terms of what they
06:24can buy and where they're probably looking more on their allies to be able to provide them with support.
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