Northrop Grumman Corporation

Good day, ladies and gentlemen, and welcome to Northrop Grumman's second quarter 2024 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, and good morning, everyone, and welcome to Northrop Grumman's second quarter 2024 conference call. Before we start, 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 filing. 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 and our earnings release. And also, we will refer to a presentation that is posted on our investor relations website. On the call today are Kathy Worden, our chair, CEO, and president, and Dave Kepfer, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy?

Thanks, Todd. Good morning, everyone. Thank you for joining us. As you saw from this morning's earnings release, we delivered excellent operating results again this quarter, building on our momentum from the first quarter. Our company's ability to respond to U.S. and international customer requirements with a wide range of advanced capabilities continues to drive strong growth, with sales up 7% in the quarter and 8% year-to-date. And our team's solid program performance, along with cost management discipline, led to operating income growth of 13% in the second quarter. The combined strength of our top and bottom line operating results was the primary driver of our 19% EPS growth. And in addition, we delivered robust free cash flow, which is up over $500 million compared to the first half of last year. Based on these strong first half results and confidence in our team's ability to deliver on continued robust demand in the second half, we are increasing our 2024 revenue and EPS guidance. The breadth and depth of our portfolio is an important differentiator, particularly when coupled with the effectiveness of our strategy in aligning our resources to anticipate and deliver on our customers' needs. Given this, I'm going to take the next couple of minutes to provide important context on our portfolio. When you step back and look at the key components of our business, you'll see that 85% of our sales come from a diverse collection of technology advanced capabilities such as electronics, communications, crewed and uncrewed aircraft, space payloads, advanced weapons, command and control systems, and other product areas which are critical to global security. The capabilities we provide often as a supplier are in the nation's most advanced space, air, land, sea, and undersea platforms. In the last several years, we've been selected through dozens of competitions to develop and build differentiating technologies that will provide an advantage to the U.S. and our allies through the 2030s. The remaining 15% of our sales is comprised of two prime programs in support of the nation's strategic deterrent. Of course, that's Sentinel and B21. With each generating a high single-digit percentage of our revenue today, And we expect that balance to continue for several years. With a recent realignment of our SCS division to our defense system sector, we have four strong and differentiated segments that are more equal in size, with each having multiple avenues for profitable growth. Our business is well aligned with the U.S. National Defense Strategy. And as I've outlined, in recent years, we've won significant roles on long-term programs that address the threat environment of today and are expected to do so for the next several decades. In addition, we continue to expand our exportable product offerings, and we are developing our international partner and supplier base to position us for the growing international markets. We have also invested to increase our capacity to deliver the quantities of rocket motors, armaments, and air and missile defense capabilities needed by the U.S. and our allies to defend freedom and deter aggression around the globe. Examples of this growth include the Guided Multiple Launch Rocket System, or GMLRS, where our year-to-date revenue has grown by nearly 60%. Additionally, we were awarded over $500 million in contracts for ammunition that we will begin delivering in the third quarter. And we see additional demand for international ammunition opportunities in the coming quarters. Overall, the key takeaway is that the breadth of our portfolio, our alignment to the key priorities of the U.S. and our allies, and our role on each leg of the U.S. strategic triad provides us visibility into avenues for our business to grow, even if U.S. budget growth slows. And as we've discussed frequently over the last two years, we're not just focused on top line growth. We're taking deliberate actions to enhance profitability through digital enablement, productivity, supplier management, and cost efficiency. As we look at the remainder of this year and next, we expect solid growth across the portfolio to continue, particularly in areas such as weapons systems, advanced electronics, and aeronautics. International sales are also progressing from our pipeline to our backlog. and are expected to contribute to increased sales and profitability. Our outlook is supported by the national security spending environment. In the U.S., the fiscal year 2025 defense budget is moving through the appropriations process with recent markups by Congress. We were pleased to see the Senate Armed Services Committee increase the FY25 top line by $25 billion, and we're encouraged by continued support for investment in defense. Northrop Grumman programs broadly, and particularly the B-21 Sentinel in Columbia, which provide the basis for the U.S. strategic deterrent, continue to receive strong support, bolstering our view that we're well positioned in this budget environment. Given the importance of the triad to the nation's deterrents, I'll provide an update on two legs of the triad for which Northrop Grumman is the prime industry partner to the Department of Defense. So starting with Sentinel. Earlier this month, the DOD submitted to Congress certification of the Sentinel program as part of the non-McCurdy process. This certification validates the need for the land-based leg of the triad and continued confidence in the Sentinel weapon system for the critical role it plays in safeguarding global security. DOD and the Air Force are working to restructure the program to reflect the latest cost and schedule estimates. The majority of the cost growth is expected to occur in the production phase of the program, which is beyond the current EMD phase and outside of the future year's defense program or FIDEP. We continue to execute on our existing EMD contract, which includes the design, development, and testing of the full system. We are partnered with the Air Force on completing the design of all aspects of the system and have many of the system components already in development and test, including all three stages of the missile, command and launch subsystems for launch activation, security and systems monitoring, as well as transportation and support equipment. The progress we've made on the program is significant, and we remain committed to partnering with U.S. Air Force to identify ways to reduce the cost associated with fielding this system. Returning to the air leg of the triad, the B-21 is progressing well through the testing program. and as you know, has entered low-rate initial production. The team continues to perform exceptionally well, and we remain within our schedule and cost estimates. As we recently shared, B-21 test pilots report that the aircraft is flying like the simulator, which is another indication that our digital environment has effectively predicted the performance of the aircraft, thus reducing new discovery and risk. For these reasons and more, we continue to believe in the significant value this program will create for customers and shareholders over time. It's important to note that while the B21 program is very important, it contributes less than 10% of our total sales, and we expect that to remain the case through the decades. Assuming stable economic conditions and continued strong performance by our team, we also expect program margin dollars to grow annually from here. as we complete the EMD program and first five lots of production, move into advanced production awards on the more profitable lot six and beyond, and add modernization and sustainment revenue to the program. As you can see, our portfolio includes a compelling mix of technology-driven capabilities and franchise programs that are well aligned to the evolving needs of all of our customers. As a result, we've grown our organic revenue at greater than 5% compound annual growth over the past five years, including 5% growth projected in our increased 2024 guidance. We also continue to rapidly expand our cash flows, including generating over $1 billion of free cash in the second quarter. Based on the strength of our portfolio backlog and performance trends, we are reiterating our long-term cash flow outlook, which assumes a greater than 15% compound annual growth rate through 2026. To support growth in our business, we're maintaining our investments and capabilities across the company. We continue to target $1.8 billion in capital expenditures this year, which is around 4.5% of revenue and well above the industry average. Including R&D, we're investing approximately $3 billion in our portfolio. At the same time, we're efficiently returning capital to shareholders, including $2.3 billion in the first half of the year. In May, we increased the dividend by 10%. This is our 21st consecutive annual increase as we continue to focus on delivering competitive, sustainable dividend growth. Before I turn the call over to Dave to provide more details on our financial performance and outlook, I'd like to thank our team for another great quarter as we continue to execute on our long-term strategy. We have an outstanding portfolio, a high-performing team, and a bright outlook for the future. So with that, I'm going to turn the call over to Dave.