Northrop Grumman Corporation

Good day, ladies and gentlemen. Welcome to Northrop Grumman's fourth quarter and year-end 2023 conference call. Today's call is being recorded. My name is Josh and I will be your operator today. At this time, all participants are in a listen-only mode. I would now like to turn the call over to your host, Mr. Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed.

Thanks, Josh. Good morning and welcome to Northrop Grumman's fourth quarter 2023 conference call. This morning, we'll refer to a presentation that's posted to our IR website. Before we get started, matters discussed on today's call, including guidance and outlooks for 2024 and beyond, reflect the company's judgment based on information available at the time of this call. They constitute forelooking statements pursuant to safe harbor provisions of federal securities laws. Forelooking statements involve risks and uncertainties, including those noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. And on the call today are Kathy Worden, our chair, CEO, and president, and Dave Keffer, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy?

Thanks, Todd. Good morning, everyone, and thank you for joining us. Before discussing our 2023 results, I wanted to take a moment to thank our team for their hard work and dedication to our important mission. Our talented workforce, which is now over 100,000 strong, continues to deliver some of the most advanced technologies in the world. These capabilities are used by our customers every day to defend freedom and deter aggression around the globe. The geopolitical landscape has grown even more complex. driving continued increases in global security spending. Our strategy has positioned us well to compete and win in this growing market, which is translated into accelerating top-line growth for Northrop Grumman. Revenue increased by over 7% in 2023, ending the year more than a billion above the midpoint of our original 2023 guidance. In addition, our book to build for the year was 1.14 times, That's in line with our exceptional four-year average. As a result of this award strength, we achieved a new record backlog, which now exceeds $84 billion, and that provides a healthy foundation for our continued growth. The underlying performance of our company is strong. We generated free cash flow at the high end of our guidance range, and we comfortably exceeded our sales and EPS guidance range, absent the B21 charge. While we're disappointed that our assessment of conditions for the low rate initial production portion of the B21 program necessitated this charge in the quarter, we are confident in our ability to deliver on the company's forward outlook, which remains unchanged. We're also proud of the performance of the B21 team, which continues to execute an unparalleled aircraft development program. As we look forward, we will continue to execute our business strategy, which at its core is based on technology differentiation, a laser focus on performance, and value delivery for our customers and shareholders. To support this strategy, we are prioritizing investment in our capacity and capabilities. In 2023, we invested over $2.9 billion in R&D and CapEx. That's 7.5% of sales. to continue driving innovation and capacity to support our customer mission success. We also delivered over $2.6 billion to shareholders through dividends and share repurchases, representing a return of approximately 125% of our 2023 free cash flow. So now I'll highlight a few examples of progress we've made across the portfolio that further bolster my confidence in our future. Shortly after the close of the fourth quarter, we announced our Jim-63XL solid rocket booster helped to successfully power ULA's Vulcan launch vehicle on its first mission. Future Vulcan missions will utilize additional Jim-63XLs in support of Amazon Kuiper and other ULA customers, providing a significant growth opportunity for our propulsion business. And this is an important milestone because it supports our investment to significantly ramp production capacity of GEM-63s in the coming years. Global demand for our weapons systems increased in 2023, and we expect this trend to continue. In this market, we're both a supplier and a prime. We're a supplier of propulsion systems, warheads, fuses, and cannons across a highly diversified customer base. And a prime contractor for predominantly air-to-ground missiles, including ARGM, ARGM-ER, and Stanton attack weapons. Weapons Systems currently represents approximately 7% of total revenue, and based on the demand we're seeing, we expect this business to grow faster than the company average for the foreseeable future, with a significant portion of this expansion coming from international customers. In our Mission Systems business, demand remains exceptionally strong. with a 2023 book to bill above 1.2 times, the highest of all of our segments. As we've seen in recent years, the restricted portfolio of mission systems is a meaningful driver of growth as our customers pursue solutions that enable them to operate inside the decision loop of potential adversaries who are also advancing their computing capabilities. We are helping our customers stay ahead by developing advanced microelectronics, sensors, processors, and secure communications. Our product lines are enabling faster cycles of modernization, positioning our customers with decision advantage in this rapidly advancing technology environment. And we continue to make significant progress on the EMD phase of Sentinel, which is the next generation land-based leg of the strategic triad. We are achieving milestones to mature the design and reduce risk, including key test activities, such as the successful static fire test of the Sentinel Stage 2 solid rocket motor for the missile earlier this month. Last week, the Air Force submitted to Congress a new set of cost estimates for the program, which triggered a non-McCurdy breach. This, in turn, launches a review of the program by the Department of Defense, which we expect to be ongoing for the next several months. It's important to note that the cost growth is primarily driven by estimates for the command and launch facility build out, which is part of the military construction and procurement phases of the program. We and our industry team are continuing to perform on the EMD phase in close partnership with the US Air Force. And we'll work with the government to explore opportunities to reduce costs on the program with a focus on the late 2020s and beyond when the program is expected to move into the procurement phase. And in the fourth quarter, the B-21 entered its life test phase. This is a major milestone for the program. And achieving it within the baseline schedule is a credit to the Northrop Grumman team and our close partnership with the U.S. Air Force over the past several years. Following this milestone, we were awarded the first hour plot in the fourth quarter, and production is now underway. Let me take a few moments to provide a little more detail on the B-21 charge. the possibility of which we started talking with you about at this time last year. As you know, like all of industry, we and our suppliers have experienced cost pressure from recent global macroeconomic conditions, which are significantly different from the assumptions the team made when bidding these five production lots in 2015. During the fourth quarter of 2023, we again reviewed our estimated profitability on the Elbert phase of the program. And we now believe it is probable each of the first five LWRT lots will be performed at a loss. The charge is largely driven by a change in our assumptions regarding funding to mitigate the impact of macroeconomic disruptions on the LWRT phase of the program and higher projected manufacturing costs that reflect recent supplier negotiations and our experience in completing the first aircraft. The after-tax cash impact related to these updates will be spread over a number of years. Importantly, we have absorbed this effect and we have not changed our outlook for free cash flow growth over the next several years. This is a game-changing capability that will be of great value to our nation and we are focused on executing the program in a way that also delivers value to our shareholders over the coming decades. Turning now to the budget environment. Global national security spending is increasing as the U.S. and allies invest in capabilities to deter and defend against aggression. Demand for our capabilities remains strong due to our differentiated portfolio and alignment to customer priorities, including the triad, space, and weapons. In the U.S., our franchise programs remain well supported by Congress and the Department of Defense, and this gives us confidence in our outlook even in a constrained U.S. budget environment. We are pleased to have an NDAA in place that provides continued support for defense spending, and we're hopeful that Congress will enact appropriations soon. Our guidance assumes we will not have a shutdown or a full-year CR, and we're encouraged by the progress we've seen so far towards passing appropriations in the March timeframe. Additionally, we are monitoring progress on supplemental funding, and we see opportunities in expanding the industrial base and increasing munitions production in this pending request. Our allies are also increasing their defense spending, and we expect our alignment with their needs for aircraft, weapon systems, and mission systems to be an additional force of growth. So as we look to the future, we have the right portfolio and team to deliver on our long-term outlook. Our organic sales have grown at a greater than 5% annual rate since 2019, And our guidance calls for continued growth of 4% to 5% in 2024. Segment operating margin dollars are expected to grow at roughly the same rate as sales in 2024. And our 2024 EPS guidance range of $24.45 to $24.85 at the midpoint represents roughly 6% growth, excluding the B-21 charge, and 11% growth compared to our initial EPS estimates, which we provided in 2023. In addition, the structural building blocks to expand our margins that we outlined in last year's 2Q earnings call, including dissipating macroeconomic headwinds, implementation of productivity and cost savings initiatives, and future favorable mix shifts remain in place. We are laser focused on performance, and bid discipline to drive margin expansion. And importantly, we continue to expect our free cash flow to grow at a double digit rate over the coming years. We are reaffirming our 2024 and 2025 free cash flow outlook, and we've also introduced a 2026 outlook of 3.3 billion at the midpoint. With the businesses generating significant cash flow, we have considerable flexibility in deploying capital, to generate value for customers and shareholders. Our top priority remains investing to support our business strategy, and we expect to invest over 7% of sales again in 2024 in capital expenditures and R&D. At the same time, we'll continue to provide strong capital returns to our shareholders. Last month, our board of directors increased our share repurchase authorization by an additional $2.5 billion. and we ended the year with a remaining authorization of $3.6 billion. For 2024, we expect to increase our share repurchases to at least $2 billion. This includes a $1 billion ASR that we plan to initiate in the coming days, based on the strong liquidity position with which we entered this year. So when we take these factors, sustainable top line growth with expanding margins, and couple those with declining capital intensity and lower projected cash taxes, you get a recipe for robust cash flow growth for years to come. So now I'll turn it over to Dave to provide you more details on the segment results, 2024 guidance, and the forward outlook. Dave?