Q2 2023 Northrop Grumman Corp Earnings Call
Okay.
Good day, ladies and gentlemen, and welcome to Northrop Grumman's second quarter 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.
Thanks, Josh and good morning, and welcome to Northrop Grumman's second quarter 2023 conference call. We will refer to a powerpoint presentation that is posted to the IR website on the call. This morning.
Before we get started matters discussed on today's call, including guidance and outlooks for 2023 and beyond reflect the company's judgment based on information available at the time of this call may constitute forward looking statements pursuant to the safe Harbor provisions of Federal Securities laws.
Looking statements involve risks and uncertainties, including those noted in today's press release and our SEC filings.
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.
On today's call are Kathy Warden, 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.
As you saw from this morning's earnings release global demands for Northrop Grumman solutions is driving exceptional growth in the second quarter. Our sales were up 9% with solid contributions from each of our four business segments.
Our ability to hire and retain talent and improving supplier deliveries are strengthening our top line.
Our year to date sales increase of 7% and an improved outlook, we're increasing our full year sales guidance range by 400 million.
In addition, a word volume in the quarter with robust with a book to bill ratio of 114.
As a result, we're increasing our full year book to Bill projection to approximately one point out.
Our $79 million million dollar backlog continues to be more than two times, our expected 2023 sale supporting our long term growth outlook.
We delivered solid second quarter earnings per share of $5.34 and we're increasing the lower end of our full year guidance range by 20 cents.
Turning to the budget environment and starting with the U S. We're encouraged by the continued bipartisan support for National security funding to implement the administration's National Defense strategy.
Yes, why twenty-four budget in recent congressional committee, bill prioritize modernization, including areas of strength in our portfolio such as the triad the space domain information superiority and advanced weapons.
We also anticipate continued support for Ukraine and related emergency spending which would represent even further increase demand.
Global demand for our products also continues to grow as our allies increased defense spending to address evolving threats.
We are well positioned in multiple markets to meet this demand with programs such as argon I D. C. S E T D as well as munitions.
With a robust backlog and a leading growth outlook I'd like to now spend a few minutes outlining our path to margin expansion, which is a key element of our earnings and cash flow growth plan.
Our 2023 operating margin dollar guidance is in the range. We've previously provided.
This guidance implies a segment margin rate in the mid 11% range in the second half of 2023.
Having delivered a rate of 10, 9% in the first half.
We also see an opportunity to increase our year over year margin rate in 2024 and get to a 12% target in the longer term.
Achieving this margin improvement is built on three key drivers first is the stabilization of temporal macroeconomic factors that have driven higher costs and impacted our supply chain and labor efficiency.
Second is the ongoing implementation of cost management programs across the company that helped drive affordability competitiveness and performance.
And third is our business mix, which we see shifting into more international and production contracts as international demand growth and many of our current development programs mature over the next several years.
With regards to the macroeconomic factors supply chain disruptions rooted in the pandemic and the subsequent labor market tightness has created program delays and cost growth to reduce this disruption. We're buying ahead of schedule pursuing second sources, where it makes sense and placing more of our people at suppliers to fulfill.
Will it take time late material deliveries we.
We see signs of progress across our supply chain from these actions.
And we are seeing fewer new issues emerge.
We've had exceptional performance and growing our head count since the second half of 2022 and attrition rates are down to pre pandemic levels.
Our focus now is on optimizing labor efficiency, which is an important driver of profitability.
Accelerate the learning curve for our employees, we're leaning forward with innovative training programs and standardizing work instructions.
Inflation has been a challenge for our industry as well as others.
Its growth has now begun to moderate but the last 18 months of inflation and continue to have a higher base effect on our costs, especially in labor.
If you look at our year end 2021 fixed price backlog. It was largely price before we began to experience elevated levels of inflation.
However of that backlog approximately 70% will have been converted into sales by the end of this year.
And for new beds, we are factoring higher inflation expectations into our contracts. We're also working to drive additional discipline in our bid approaches, particularly on fixed price contracts to help protect against these types of dynamics in the future.
Overall, we anticipate that these macroeconomic impacts of stabilized and now have largely been incorporated into our margins or risk factors.
The second key driver of margin opportunity is cost management, which benefits both of affordability and competitiveness.
We are laser focused on overhead cost reductions a foundational element of these reductions is our implementation of digital solutions across our business, which will help to drive performance and productivity.
For example, we've built a digital ecosystem that focuses on program execution, bringing together employees customers and partners into an integrated environment. So they can seamlessly work together.
This accelerates design integration testing and deployment across programs, helping us to deliver with quality speed and efficiency.
We're increasing the number of programs that are operated in this ecosystem and today, we have over 100 active programs that are doing so.
We're also investing in and advancing the technologies and digital systems in our factories.
We're scaling across the enterprise to drive efficiencies that should benefit all of our stakeholders.
For example on the B 21, we successfully demonstrated the use of this digital thread.
Advanced manufacturing technologies to realize over 15% labor efficiencies in one area of the build and in June we launched the expansion of this approach across the whole build process.
We're extending this digital thread into our business operations to deliver further benefits across the company.
This includes how we're managing our supply chain, where we've broadly centralized procurement and we're working to leverage our purchasing power to reduce costs.
We have over 20000 suppliers and we've begun securely connecting them into our digital ecosystem over the next several years, we expect to have the majority of our supply base fully integrated this is expected to look lower supplier costs and significantly improve productivity.
The third key area of margin opportunity is our business mix.
For several years, we've had one of the highest cost plus development contract mixes in the industry, reflecting our significant early stage position on key franchise programs, which will transition to production throughout this decade.
This cough cosmetics has been increasing with our first half revenue at 55% cost plus up from about $50 50 last year.
Looking forward, we see this shifting toward more fixed price revenue rising to approximately 60% of sales by 2027 and the number of large programs in all four of our sectors transition to production.
Production program margins are typically a few points higher than development margin the mix shift can contribute meaningfully to our segment operating margin rate.
And we are making good progress on moving programs through development and into production.
This program is nearing completion of its development phase and is on track to ramp production volumes next year.
And on B 21, we successfully powered on the first flight test aircraft in the quarter.
Another important milestone in our campaign to achieve first flight and transition to production.
We also expect our international business to grow at a double digit rate over the next few years.
Improving our margin opportunity is global sales become a larger percentage of our mix in.
In the second quarter, we demonstrated our <unk> solution for eight potential international customers, reflecting growing demand for this advanced air and missile defense capability.
We also signed a memorandum of agreement with Ryan Mattel to expand capacity for up 35 center fuselage production in Europe .
We expect these three drivers to result in improved affordability, even better performance and higher margins.
When combined with the strength of our backlog and increasing global demand. These operating margin improvements should provide the foundation for strong future free cash flow growth.
Now with respect to capital deployment, we are executing a strategy that prioritizes investments to support our business plan and returns cash to shareholders.
In May we increased our dividend for the 20th consecutive year by 8%.
Year to date, we have returned $1 5 billion to shareholders and are on track to meet our goal of returning more than 100% of free cash flow this year.
Overall, the global defense budget outlook, and our alignment with customer priorities give us confidence in our growth trajectory.
We are focused on margin expansion opportunities and converting this to free cash flow growth to deliver value both for our customers and our shareholders.
So with that I'll hand, it over to Dave and he'll cover details of the second quarter financial results and updates to our full year outlook.
Thanks, Kathy and good morning, everyone. We're pleased to report another solid quarter, we remain focused on executing our strategy and believe we're well positioned to grow our top line earnings and cash flows for years to come.
The demand environment continues to be robust supported by the alignment of our portfolio with our customers' highest priority missions.
And those Cathie described we see a path to expand margins in the second half of this year and beyond as macro pressures ease and we drive efficiencies into our business as it grows and experiences mix tailwind.
Now turning to Q2 results, we generated $10 $9 billion of New awards, a higher total than we previously expected our book to Bill was 114 and was driven by restricted awards of $5 $4 billion.
This brings our year to date total to $8 $6 billion in restricted bookings looking forward. We expect a number of production awards in the second half of the year, including the first lot of B 21 L. Rip.
Moving to sales on slide four in our earnings deck, we delivered strong topline growth of 9% in the second quarter.
Building on the momentum from Q1.
As a result of our success in bringing on new employees incremental improvements in the supply chain and continued backlog strength. Our sales are growing at a higher rate and we've increased our full year guidance.
With respect to segment results all four of our businesses grew in the second quarter.
Space continues to lead the way with their second consecutive quarter of 17% sales growth as GBS D N Gi in restricted space programs continue to ramp.
In defense systems sales increased 10% on the strength of their armaments and missile defense franchises.
Mission systems growth of 5% was driven by restricted programs in the networked information solutions business.
In Aeronautics systems returned to growth as higher volume on restricted programs outpace the headwinds on legacy programs as we have anticipated.
Turning to slide five segment margins in the second quarter were 11% keep.
Keep in mind that Q2 of last year included over $70 million or 80 basis points of benefit from a land sale and a contract related legal matter.
Most importantly margin dollars improved incrementally from Q1, largely meeting our expectations.
Program performance remained strong across the portfolio as the team does a good job in navigating the lingering disruption from the pandemic and macroeconomic factors we've been discussing.
One area of pressure, we experienced in the quarter was $36 million unfavorable adjustment.
Mrs Hesitation in logistics out post program or Halo, and our space systems sector.
Moving to earnings per share on slide six diluted EPS in the second quarter were $5 34.
This included lower net pension income of roughly $1 per share partially offset by more favorable returns on marketable securities than in the same period last year.
Slide seven highlights the nonoperational pension headwinds we experienced in Q2.
On a year over year basis, 2023 pension income will be lower for all periods when compared to 2022, but these headwinds are expected to dissipate as we look to 2024.
With respect to cash we generated strong free cash flow in the second quarter of over $600 million.
A significant increase compared to the same period last year, and which we had an outflow of $460 million.
This improvement was driven by increased billings and timing of collections across the company.
Paid roughly $360 million of cash taxes associated with section 174, and we continue to expect a full year impact of a little over $700 million.
Moving to 2023 guidance I'll start with a few updates to our sector estimates, which you can see on slide eight.
Our space business continues to deliver outstanding sales growth and bookings demonstrating the strength of its diverse portfolio of capabilities.
As a result, we're increasing sales guidance for space to the high $13 billion range.
Remember as recently as 2019 this business was generating revenue in the mid $7 billion range.
So our guidance this year reflects a fantastic four year CAGR of roughly 17%.
At defense systems based on the strength of their year to their year to date results, we're increasing our full year expectations for this business to the mid to high $5 billion range.
This represents growth in the low single digit range.
There are no changes to our revenue expectations at a S. R. M S.
With respect to margin rates, we're maintaining our expectations for a S. D S and M S and we're projecting a lower operating margin rate at space to reflect the rapid increase in new program wins and their first half results.
At the company level. This translates to an increase to our sales guidance of $400 million and a growth rate between five and 6% for the full year.
We're maintaining our expectations for segment operating income dollars.
We expect a slightly higher full year tax rate of 17% and we've reduced our projections for shares outstanding to the mid $152 million.
To reflect our latest share repurchase expectations.
Our EPS outlook continues to assume Q3 closure of the sale of the minority investment for which we increased our full year EPS guidance by 40 last quarter.
This quarter, we are increasing the lower end of our guidance range by 20.
We remain on track with our full year outlook for cash and continue to expect to grow our free cash flow to about $3 billion by 2025.
This represents a greater than 20% CAGR driven by the growth of our business and structural tailwind from cash taxes, lower capex and higher cash recoveries and.
And over the next five years, we see an opportunity to approximately double our current level of free cash flow.
Lastly, we continue to execute our balanced capital deployment plan.
This includes investments of over $2 $8 billion in R&D and Capex this year and returning excess capital to shareholders via our quarterly dividend and share repurchase plans for.
For the year, we continue to expect to return over 100% of our free cash flow to shareholders, including roughly one 5 billion in share repurchases.
We also plan to retire $1 billion of notes that mature in August and we don't have any additional bond maturities until 2025.
Overall, the Northrop Grumman team delivered a strong first half of the year.
Our business strategy is working and we're continuing to drive additional growth in sales earnings and cash with growing global demand for our portfolio of solutions and solid program performance. We're building long term value for all our stakeholders and with that let's open up the call for questions.
Thank you.
Minder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please limit yourself to one question and one follow up with.
One moment for questions.
Our first question comes from Robert Stallard with vertical research you May proceed.
Thanks, so much good morning.
Morning.
A couple of questions from me first of all Kathy Thanks for your commentary on the margin expectations for the next few years, but I was wondering as you talk about what are you expecting on the B 21 hour if is that still anticipated to be around a sort of breakeven margin in your expectations and then secondly does the end.
The F 18 to have an impact on this.
Rob Thanks for the question. So as we look at the profile going forward for 'twenty. One as we've noted before we are not planning to have margin from the outlet contracts. So when I talk about our margin projections going forward. It anticipates that it will remind you we still have the risk factor associated with it.
The 21, as we look at inflationary impact.
In the quarter, we did receive notification that the Doj has allocated $60 million for B 21, Oh rep procurement due to inflationary impacts and we expect that to be awarded later this year.
But keep in mind its only applies to the one fiscal year, it's associated with FY2023 and we continue to work closely with the government on an effort to address the impacts of macroeconomic disruption with regard to your question about F 18, yes, our projections also incorporate the wind down the up 18 production line.
We have been anticipating that it is built into our plans as we think about our production profile over time that mix is being driven not just with aerospace programs like B 21 transitioning to production.
It's up 35, continuing to grow it is built on our entire portfolio. All four of our segments will see programs shifting from development to production in that timeframe and that mix shifting.
Okay. Then just a quick follow up on the Halo program could you clarify if this is a fixed price development program or if it does it has a different contractual structure. Thank you.
It is a fixed price program, we had worked with the government in a cost plus structure through the preliminary design review. So we had to a more mature design before transitioning into a fixed price contract structure and as I noted in my comments, we are being even more of that.
One is moving forward in ensuring that we work with the government to have the appropriate use of fixed price contract. We think that is supplied for commercial items or production programs with stable requirements and mature design is.
Is it turning out on the Halo program. The requirements are not as stable as we or the government anticipated and we're working with them to address that change management as we go forward.
Thank you.
One moment for questions.
Our next question comes from Richard Safran with Seaport Global Partners you May proceed.
Cathay David Todd Good morning, how are you good morning.
So UBS.
<unk> been a bit reluctant to talk about this so far but I thought I'd.
See if you'd comment on the <unk> sixth generation Fighter program since the Air Force just recently announced.
Announced the competition.
I'd like to know is if youre thinking about bidding this as a prime and I'd also like to know if you could.
If this program is considered part of your your growth strategy. So any color you could provide there would be helpful. Thanks.
Thanks threats.
Yes, before the government officially announced the program and their intend to issue. The RFP. We had been quiet we have notified the U S. Air Force that we're not planning to respond to that RFP as a prime we are responding to other bidders request for proposal.
Supplier, that's particularly in our mission systems portfolio.
And as I noted in my remarks, we are remaining disciplined in assessing the right programs to pursue and that's one where we feel we're well positioned with mature offerings and where the business deal reflects an appropriate balance of risk and reward for both the customer and the industrial base.
This decision on this program does not impact our path to sales and earnings growth at <unk>, we have a strong backlog in that sector and we have other opportunities in military aircrafts that we are pursuing.
Okay. Thank you. Thank you.
Yeah.
Thank you one moment for questions.
Our next question comes from Ron Epstein with Bank of America Merrill Lynch You May proceed.
Yeah, Hey, good morning, everybody.
I guess I have to dig down a little bit further on that.
No bid also crossover to X X or do you.
Or was that a related program or a different program. How should we think about that or is that when you wanted to be a supplier on as well.
Well I'll, just say that when I noted we have other opportunities we are pursuing.
Don't disclose at this point exactly what those are a little more information comes out on the.
Other programs, but you could assume that if we feel we're well positioned and the government is appropriately balancing risk and reward as I said that that would be a program we would pursue.
Got it got it got it got it.
Okay cool thank you Sir.
Thank you.
One moment for questions.
Our next question comes from Cristina <unk> with Morgan Stanley You May proceed.
Hey, Good morning, guys and you know maybe following back up on those two questions I mean, not bidding as a primary and guide Cathy is this.
Part of your strategy in terms of maintaining your margin growth in the next few years because you know we look at historically you guys had walked away from T. Seven you'd walk away from the tanker and avoided the winner's curse is that how to think about the strategy for this program or are there other factors in play that we.
You should consider.
Well Christine certainly your words not mine, but we do feel that discipline has served us well in the past and selecting how much risk to take and what to pursue and we've learned lessons from some of our own experience as well. So we are applying those as we think about what to bid and what not to bid.
Going forward and that is critical to us expanding our margins back to what investors expect of this company and it's.
It's the three factors I mentioned that the discipline and ensuring we have the right combination of risk reward is important and it's not just important for us to be able to meet our commitments to investors, but for the entire industrial base to remain healthy. So that we can have our industrial base that investors want to.
Great. Thank you I'll keep it to one thanks Christine.
Thank you one moment for questions.
Our next question comes from Doug garnered with Bernstein you May proceed.
Good morning, Thank you.
On them on the margin question.
When we look at history generally inflation it doesn't affect defense companies that much and we've obviously seen a very.
Difficult two years, where it rose and you've talked about this rose very quickly and <unk> had to absorb costs and fixed price contracts.
When you look forward.
You talked about.
Being able to run out some of the contracts that were price before we had the higher inflation level, but when you look at repricing contracts that go into next tranches New work do you expect that youre going to be able to get back to be able to price off of base cost level.
Can allow you to have the same kind of performance we saw in the sense in the pre Covid era.
Yes, Doug we do expect that to be the case the government will look at the actual that we have experienced and the inflationary pressures are absolutely showing up not only in labor, but material, which then provide us the basis to work with the government and negotiate off of a higher.
In the future contract.
And then clearly it sounds like Youre looking at this so over the next 12 months or so you should see this shift but clearly it also requires more money in the budget. We saw a lot of money coming in in 'twenty three budget from the Senate.
Last year, but you're expecting then the budget to also be able to cover these higher costs.
I expect that the budget will need to incorporate these higher costs to the extent that inflation exceeds the growth of the overall budget there could of course be supplemental or priorities will be.
Be made in terms of what the government will buy and we're already seeing us where the government is happening to reduce quantities on programs from their anticipated level to address the higher cost coming in based on inflation and we expect that to continue.
For the foreseeable future as these contracts come up for renewal.
Thank you one moment for questions.
Yeah.
Our next question comes from Sheila <unk> with Jefferies. You May proceed.
Good morning, guys. Thank you.
Wanted to ask about base specifically please.
Revised guidance takes into account $1 6 billion of sales growth in 2023 can you maybe bucket that's growth for us where is it coming from how much of it is GBS fee and how do we think about the margin implications of this growth given the quarter.
So a good bit of the growth has been and continues this year to come from two programs GBS ski and N G I.
We have talked about that being approximately half of the growth and the other half coming from a broad set of programs, but most notably our national security portfolio, which is about 80% of our overall revenue in the space business.
And the margin profile is similar across those businesses with early phase development being lower margin as we shift into production like we talked about earlier on the call. We'll present the opportunity for space margins to continue to expand.
But we're really pleased with the 9% that we're seeing there obviously, we're going to work to get that closer to 10.
Through the work that we're doing both on performance and in the longer term as mix shifts seen it have the potential to go even higher but when you look at 9% for a business that is absorbed that type of growth.
<unk> been able to continue to manage through the disruption of the macroeconomic environment, we feel like we're in a good place.
Thank you.
Sure.
Thank you one moment for questions.
Our next question comes from Matt Akers with Wells Fargo. You May proceed.
Hey, good morning, Thanks for the question.
I wanted to ask about and so I think there was a report during the quarter.
About maybe some schedule risks on that program.
I think it's cost plus anyway, but just your thoughts on how that program is going if there's maybe any rescue guys on that.
Yes. Thanks for the question. So this is in regards to setting more or GBS D. As many of you know it.
And there was a G. G E. O report that's focused schedule pressure, we've been talking about that in the U S. Air Force has as well as we have seen disruption in supply that has flowed through to schedule pressure on the program. We're in the process of working with the Air Force on.
Looking to optimize the schedule to see what we can pull last was obviously a shifting right and how we can maintain the initial operating capability date, which is the primary focus.
Of the government so that we can replace those missiles and silos anticipated later in the decade.
Okay. Thanks, and then if I could follow up I guess, maybe on working capital.
Dave I don't know if you could just comment on your thoughts on how that progresses in the second half.
Sure. Thanks, Matt we continue to feel really really good about our working capital status as efficient as any across the industry and particularly strong in the second quarter. We mentioned the $1 billion of improvement year over year in free cash flow that was bolstered by the strength of our.
<unk> and collections efforts during the quarter, which puts us in good stead as we think about.
Where we stand year to date compared to a year ago we.
We continue to expect.
Typical seasonal pattern with the strongest free cash flow and therefore working capital efficiency in the fourth quarter of the year.
But overall feel good about our working capital efforts.
Thank you.
One moment for questions.
Our next question comes from Peter Arment with Baird You May proceed.
Yes, thanks, good morning Kathy.
Hum.
And Kathy Thanks for your comments on the on the on the mix and kind of the longer term outlook on.
Where that transition from cost plus to kind of fixed price mix for the company is 2023 kind of at the peak year or is it more like next year for cost plus and then just a related to kind of just your comments on working capital how do we think about the working capital profile kind of over that similar period is that like that does that become a headwind or is it an opportunity for you.
Thanks.
Thank you Peter I'll start with your mix question. Yes. This is the year to think of as the high watermark for cost type work, given where we are in the development cycle, particularly on many of our largest programs. We mentioned we've been in the 55% of sales range in terms of the cost plus mix in the first half of the year we.
Spect that to ease slightly in the second half, but it's really over the next four or five years, we will see that shift back to the other side of 50 50 and toward that 60 40 fixed price mix that we described in our prepared remarks.
So that is a meaningful opportunity for us in terms of.
Margin expansion as we.
It helped deliver those capabilities to our customers and the production phases of the programs.
Working capital longer term as I mentioned, we're really pleased with our working capital efficiency. When we think about where we finished 2022, where we project 2023, finishing as well and so we don't think of working capital as a source of a lot of upside opportunity for additional efficiency over the next five years.
Nor do we think of it as an area of expected headwind I think it'll be more neutral than that.
So when you think about what will drive that opportunity to double our current run rate of free cash flow over the next five years think of it in terms of growth in the sales volume of the business the margin rate opportunity, we've been talking about and the conversion of those margin dollars to cash flow Thats certainly the number one.
And the number one driver, but then coincident with that Youll see a decline in demand for capital expenditures were at peak levels in 'twenty, three and 'twenty four around capital intensity that will ease toward more historical levels over the next five years.
You will see some increase in our cash.
<unk> funding over the next couple of years and are in the projections, we've outlined over the last few quarters.
And then cash taxes will decline based on current tax law, particularly related to the amortization requirements for R&D.
Okay.
Thank you one moment for questions.
Our next question comes from George Shapiro with Shapiro Research you May proceed.
Yes Hello.
On the options for the B 21, I mean, you still got the same commentary in the queue.
I think the Europeans.
Expecting the first option to get called.
Called in the third quarter is that the time, yet that we would expect to see some real update on what the losses might be and if it.
Yeah.
Sit there and just provide a number for that one option and then subsequently wait till other options are exercised or what's your thinking as to how you will handle that.
Hey, George it's Dave So as we talked about on the call of the first flight test aircraft from successfully powered on in Q2, we remain on track for first flight this year.
Again that timing continues to depend on events. Some data of course over time, and we anticipate that the first <unk> contract will be awarded following first flight.
We will continue to evaluate the performance and the outlook for 'twenty, one as well as the AMD portion of the program on a quarterly basis.
And provide updates as we have them of course, those will be informed by continued progress in driving efficiencies.
Efficiencies on the program as well as.
Our understanding of that first contract law and beyond so we'll take all of that into account each quarter as we update our thinking.
Thank you one moment for questions.
Yes, we can.
Take that one.
A follow up if you don't mind.
Oh no problem.
9% or so so about half what you experienced in the first half can you provide reasons for that slowing.
Sure a few things I'd point out there obviously the growth rate for the year for space has increased with this guidance update to the low double digits now and we're really pleased with that.
The first half of the year has been closer to that 17% range. Some of what you see there is just a matter of the year over year compares were the first two quarters of the year were a bit.
Later compares than Q4 in particular, and that's frankly the case across the business. We had a tremendous Q4 for sales volume in 2022. So we anticipate that the tough compare will lead to a lighter year over year growth rate in the second half of the year across all four of our segments as we get to Q4.
But overall the sequential growth is what we'll continue to look for from space and.
And other sectors. When you look across the company <unk> got about 51% of our sales guidance in the second half 49% in the first half. So you see the demonstration of continued sequential growth.
The year over year growth rates are more a matter of those compares.
Okay. Thanks, very much Dave.
Thank you one moment for questions.
Our next question comes from Seth Sigman with Jpmorgan you May proceed.
Hey, Thanks, very much good morning.
I wanted to ask first about space.
And it seems like definitely I appreciate the detailed commentary on the overall margin outlook. It seems like space has been the business, where a lot of that margin pressure has been felt most.
Not just maybe from foreseeable things like mix, but.
Surprises that have caused the company to guide down the margin there.
What is it about the portfolio in space, that's driving that now and how do you assess the risk from here is space till the sector, where there is maybe the most margin risk due to continued work on fixed price development programs like Halo and maybe exposure to the SDA tranches, which I think are also.
Fixed price development work.
Do you see that now.
So overall the space business is performing very well, we certainly have pockets in certain programs that we are focused on continuing to improve the discipline around how we're managing.
Those efforts along with the customer.
And so I don't see space.
Materially different than any other segment of our business in terms of risk profile aside from mix certainly there is more risk in development programs and that's why we generally have lower margin rates coming out of development, but our space is transition programs to later stage development and production.
Their performance is solid it's the rest of the business and we expect that to continue.
Great and maybe just as a quick follow up in <unk>, but perhaps futile attempt to bring out a little bit more information about about the <unk> strategy.
I believe the collaborative combat aircraft portion of Vanguard as a separate solicitation or are you planning to pursue that.
It is a separate solicitation and were looking at it closely.
Thank you one moment for questions.
Yeah.
Our next question comes from Myles Walton with Wolfe Research you May proceed.
Thanks, Good morning, Kathy you mentioned margin expansion in 'twenty, four, but obviously the margins for 2003 and the guidance is actually come down so I'm just wondering.
Could you put a quantum to the margin expansion, you're looking for in 2000 and for us to just get back to where prior 23 was and then maybe for Dave just a clarification. The 10-Q mentioned the $100 million gain in the third quarter that isn't in your guidance I wouldn't imagine just yet is that correct.
So I'll start and then turn it to Dave.
I think about margin profile, we do expect the second half of this year to be stronger than the first half and based on our guide you can expect us to see that progress that we have largely from macroeconomic disruption dissipating at through the year to continue into 2024 the mix shifts.
I spoke of it it's more gradual I talked about that shift towards 60% fixed price in 2027. So you could think of that as a progression through 2024.
Those later years and so we're not going to guide today around 2024 will provide just some.
More specifics as the year progresses, and certainly at the beginning of the year next year, but you could think of it as a steady progression of improvement not a dramatic change from where we've been performing this year.
And I could touch on the $100 million gain you referenced.
Just an approximation of course until that closes we do expect.
That sale of an international minority investment to close in Q3, and that's the item for which we have increased our guidance range by <unk> 40 <unk>.
Last quarter, so that is incorporated into our guidance.
We see that in the 40 range of.
Benefit to the company. So we're pleased.
To have that approaching and look forward to the <unk> session.
Cash inflow from it as well.
Okay. Thank you.
Thank you one moment for questions.
Our next question comes from David Strauss with Barclays. You May proceed.
Good morning, Thank you.
Morning.
Kathy so your.
The growth rates accelerated a little bit faster in 'twenty three than you had initially anticipated as we think about 'twenty four with <unk>.
He is returning to growth and I assume space growth slowing a little bit.
Would you expect.
Top line growth in a similar range or is it possible that we could still see an acceleration next year.
Overall for the company as a whole thanks.
Right. So yeah, we're really pleased with the progress that we've seen this year, our sales guidance, increasing at space <unk> and our other two sectors continuing to see.
Progression towards their growth objectives as well as we think about this year a good portion of that growth is the strong backlog that we've developed and continued when a competitive bid part of it too though is what we've been talking about with the phenomena of having some.
Apply our delivery delayed last year and it's starting to come in this year, having ramped our headcount significantly in the latter part of last year and early part of this year this contributing to growth rate those elements.
Wouldn't think of it the continued it with a bit of a bow wave that we've now seen come into this year, but the growth based on backlog performance and new wins, we do expect to continue into next year and expect to see another year of healthy growth in 2024, and the other point Ed.
That is to your point David around the segment level view, we do expect the growth to be more balanced going forward with opportunities for growth in each of the four sectors. As we demonstrated in this period in Q2, you see the growth in our defense systems business, having recovered really nicely over the last couple of quarters there.
<unk> opportunities really across all four of the segments to drive growth.
Greg a quick.
Quick follow up on the <unk>, how big is that still for you today and when would you expect that to completely run off.
Sure.
Consistent with the commentary from our prime on the program, we do anticipate that production will.
Wind down over the next couple of years and for Us.
1% or less of sales and therefore not.
Two dramatically impactful to the overall company topline, it's incorporated into our thinking about opportunities for growth in sales over the next couple of years as are the other moving pieces, we've talked about throughout the call today.
Thank you one moment for questions.
Our next question comes from Jason Gursky with Citigroup you May proceed.
Yes, good morning, everybody.
Audio has been a little choppy. This morning, so I apologize if you've already commented on this but the <unk>.
Could you meet it early in your prepared remarks Cathy about.
The backlog that you had at the end of 'twenty one.
Where you are going to sit as you exit this year, having delivered about 70% of that backlog.
Kind of curious the remaining 30%.
Two in front of you.
What how big is the B 21 program.
And the remainder of that.
30% that you've got to still deliver on.
So the remainder of backlog and B 21 is relatively small because what's in backlog is the AMD program completion production has yet to be awarded so lots we've been talking about we expect to get the first lot of production on contract later this year.
But of course it.
Is priced and so that is the contractual commitments, but we have not yet awarded us with not showing up in backlog programs that are a significant amount of that backlog our program like Sentinel a sizable program that was awarded in 'twenty one.
D or 2021.
And it's going to carry forward for several more years as part of that AMD program in backlog and there are several others that none.
Rise to that level, but I will remind you that Sentinel program, it's a cost plus program.
So to that point, among the fixed price programs, where we talked about the.
70% of that 2021 backlog having been.
<unk> transitioned into sales by the end of this year there are no.
Huge individual drivers of the remainder of the remaining 30% if you will and that will gradually.
Ill translate into sales over the next few years.
So a gradual wind down of the remaining 30% based on the metrics we described earlier.
Okay great.
Then I am sorry to beat a dead horse here on the space margins, but I did find your comment Kathy interesting about the potential for the business to operate above 10%. I think you said you want to drive it to 10, but there will be opportunities for us potentially to go above that.
Metric at some point in the future I'm, just kind of curious as to whether.
That is key.
Comment.
The broad portfolio of your space programs.
When I historically think of.
Spacecraft and space based assets.
I tend to think of lower margin rates for that kind of work historically, because it's been a lot of.
Cost plus kind of work.
So I'm wondering if this is a comment about the broad portfolio and would include assets that are going to be operating up in space.
Is that comment if that is true is it because you've got more fixed price work going on there than has historically been the case.
Yes, so as you think about the transition that the space market has undergone.
Where we had.
New large and exquisite assets those were largely developed under cost plus and then transition to production, but in low quantity now we're seeing a much less dollars go into development and then transition into production of higher quantity. So that mix will be different in terms of.
Development versus production in the market as a whole. In addition, when you think about our portfolio and what's in our space segment. It includes things like solid rocket motors.
Particularly large solid rocket motors. It includes programs like setting all that will transition into production.
Programs like hyper that we've talked about so as those transitions happen again, specifically now to our portfolio not just the market in general for space, we've seen mix shifts that will be tailwind to margin over time.
And Josh we have time for one more question.
Thank you one moment for our last question.
And our last question comes from Rob Springer with believes research you May proceed.
Hey, good morning.
Cathy just sticking with that a little bit in time as to the prime versus merchant supplier discussion we had in the beginning on Aeronautics when you think about the shift at least in satellites from geos to meals and leos.
These highly proliferated constellations.
And the significance of SDA in that part of the market and their desire from fixed price contracts is it better at least in that kind of work to be on the supplier side at some point.
Would you consider that.
We consider it with each opportunity just as I discussed in our thought process around military aircraft and we don't have a blanket we will do this and we won't do that we think about each opportunity in terms of its risk profile the maturity of our designs and offerings at the time that we're being asked to bid also ways.
Heavily into our thinking about that decision and so in the case of the space Development Agency. We are executing on several programs for them today and performing quite well. So we have chosen wisely and been disciplined in how we have taken on that work and we'll continue to do that.
The beauty of our portfolio as we've talked about before is we can choose to prime but if we don't see the right.
Mix of risk reward, we can also choose to be a supplier and still bring the capability forward that the government needs and expects from us.
Thank you.
Great.
Well I think that's about all we have time for so thank you to each of you for joining our call. Today I also again want to extend my appreciation to the Northrop Grumman team for their continued strong performance and contribution to global security I Hope that all of you enjoy the remainder of your summer and I look forward to seeing you throughout.
Summer and talking to you again in October take care.
Thank you ladies and gentlemen, this concludes today's conference call. Thank you for your participation.
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