Q4 2023 Northrop Grumman Corp Earnings Call

Good day, ladies and gentlemen, and 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'll 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.

Vice President Investor Relations Mr. Ernst Please proceed.

Todd Ernst: Thanks, Josh Good morning, and welcome to Northrop Grumman's fourth quarter of 2023 conference call. This morning will refer to a presentation that's posted to our IR website.

Todd Ernst: 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 may constitute forward looking statements pursuant to safe Harbor provisions of Federal Securities laws forward looking statements involve risks and uncertainties, including those noted in today's press release.

Todd Ernst: And our SEC filings these risks and uncertainties may cause actual company results to differ materially.

Todd Ernst: Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release.

Todd Ernst: And on the call today are Kathy Warden, our chair CEO, and President and Dave Keffer, Our CFO at this time I would like to turn the call over to Kathy Kathy Thanks Todd.

Kathy J. Warden: Morning, everyone and thank you for joining us.

Kathy J. Warden: 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.

Kathy J. Warden: Our talented workforce, which is now over 100000 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.

Kathy J. Warden: 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 topline growth for Northrop Grumman.

Kathy J. Warden: Revenue increased by over 7% in 2023.

Kathy J. Warden: EMEA or more than 1 billion above the midpoint of our original 2023 guidance.

Todd Ernst: In addition, our book to Bill for the year with 114 times.

Todd Ernst: With our exceptional four year average.

Todd Ernst: As a result of this the word strength, we achieved a new record backlog, which now exceeds $84 billion and that provides a healthy foundation for our continued growth.

Todd Ernst: 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 B 21 charge.

Todd Ernst: While we are disappointed that our assessment of conditions for the low rate initial production portion of the B 21 program necessitated this charge in the quarter. We are confident in our ability to deliver on the company's forward outlook, which remains unchanged.

Todd Ernst: We're also proud of the performance of the B 21 team, which continues to execute and unparalleled aircrafts development program.

Todd Ernst: As we look forward, we will continue to execute our business strategy.

Todd Ernst: Which at its core is based on technology differentiation, a laser focus on performance and value delivery for our customers and shareholders.

Todd Ernst: To support this strategy, we are prioritizing investment in our capacity and capabilities in.

Todd Ernst: In 2023, we invested over $2 9 billion in R&D and Capex of seven 5% of sales to continue driving innovation and capacity to support our customer mission success.

Todd Ernst: 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.

Todd Ernst: So now I'll highlight a few examples of progress we've made across the portfolio that further bolster my confidence in our future.

Todd Ernst: Shortly after the close of the fourth quarter, we announced our gem 63, XL solid rocket booster helped to successfully power U L. A is Vulcan launch vehicle on its first mission.

Todd Ernst: Future Balkan mission for utilize additional 760 <unk> in support of Am a fine paper and other you will like customers, providing a significant growth opportunity for our propulsion business.

Todd Ernst: And this is an important milestone because it supports our investment to significantly ramp production capacity of gem 60, threes in the coming years.

Todd Ernst: Global demand for our weapons system increased in 2023, and we expect this trend to continue.

In this market, where both the supplier and a prime where supplier of propulsion system warheads, and fuses and canons across our highly diversified customer base and a prime contractor for predominantly air to ground missiles, including argon argon E. R. C antenna attack weapon.

Todd Ernst: Weapons systems currently represents approximately 7% of total revenue and based on the demands. 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.

Todd Ernst: And our mission systems business demand remains exceptionally strong with a 2023 book to Bill above one two times the highest of all of our segments.

Todd Ernst: As we've seen in recent years, the restricted portfolio with 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.

Todd Ernst: We are helping our customers stay ahead by developing advanced microelectronics sensors processors and secure communications.

Todd Ernst: Our product lines are enabling faster cycles of modernization positioning our customers with decision decision advantage in this rapidly advancing technology environment.

And we continue to make significant progress on the AMD phase of Sentinel, which is the next generation lambastes leg of the strategic triad.

Todd Ernst: We are achieving milestones to mature so is assigned and reduce risk, including key tests activities such as the successful static fire test for the sudden on stage two solid rocket motor for the missile earlier this month.

Todd Ernst: Last week, the Air Force submitted to Congress, a new set of cost estimates for the program, which triggered a non maturity breach.

Todd Ernst: 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.

Todd Ernst: 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 phase of the program.

Todd Ernst: We and our industry team are continuing to perform on the Emt phase in close partnership with the U S Air Force and we will work with the government to explore opportunities to reduce costs from a program with a focus on the late 2000, Twenty's and beyond when the program is expected to move into the procurement phase.

Todd Ernst: And in the fourth quarter. The B 21 entered its flight test phase. This is a major milestone for the program and achieving it within the baseline schedule as a credit to the Northrop Grumman team and our close partnership with the U S Air force over the past several years.

Todd Ernst: Following this milestone we were awarded the first hour flat in the fourth quarter and production is now underway.

Todd Ernst: 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.

Todd Ernst: As you know like all of industry, we and our suppliers have experienced cost pressure from recent global macroeconomic condition, which are significantly different from the assumptions that <unk> made when bidding. These five production lots in 2015.

Todd Ernst: During the fourth quarter of 2023, we again reviewed our estimated profitability on the <unk> phase of the program and we now believe it is probable each of the first five hour slots will be performed at a loss.

Todd Ernst: The charge is largely driven by a change in our assumptions regarding funding to mitigate the impact of micro macroeconomic disruptions on the face of the program.

Todd Ernst: And higher projected manufacturing cost that reflect recent supplier negotiations and our experienced and 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.

Todd Ernst: 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 deliver value to our shareholders over the coming decades.

Todd Ernst: Turning now to the budget environment.

Todd Ernst: Global National Security spending is increasing as the U S and allies investing capabilities to deter and defend against aggression.

Todd Ernst: Demand for our capabilities remains strong due to our differentiated portfolio and alignment to customer priorities, including the triad space and weapons and.

Todd Ernst: In the U S. Our franchise programs remain well supported by Congress and the department of Defense.

Todd Ernst: And this gives us confidence in our outlook, even in a constrained use such an environment.

Todd Ernst: We are pleased to have an NDA in place that provides continued support for defense spending and we're hopeful that Congress will enact appropriations soon.

Todd Ernst: 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.

Todd Ernst: Additionally, we are monitoring progress on supplemental funding and we see opportunities in expanding the industrial base and increasing munitions production in the pending request.

Todd Ernst: Our allies are also increasing their defense spending and we expect our alignment with their needs for aircraft weapons systems and mission systems to be an additional source of growth.

So if we look to the future we have the right portfolio and team to deliver on our long term outlook.

Todd Ernst: Our organic sales have grown at a greater than 5% annual rate since 2019, and our guidance calls for continued growth of 45% in 2024.

Todd Ernst: Segment operating margin dollars are expected to grow at roughly the same rate of sales in 2024, and our 2024 EPS guidance range of $24 45 to $24 85.

Todd Ernst: At the midpoint represents roughly 6% growth, excluding the <unk> 21 charge and 11% growth compared to our initial EPS estimates, which we provided for in 2023.

Todd Ernst: In addition, the structural building blocks to expand our margin that we outlined in last year's <unk> earnings call, including dissipating macroeconomic headwinds.

Todd Ernst: <unk> of productivity and cost savings initiatives and future favorable mix shifts remain in place.

Todd Ernst: We are laser focused on performance and discipline to drive margin expansion.

Todd Ernst: And importantly, we continue to expect our free cash flow to grow at a double digit rate over the coming years.

Todd Ernst: 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 a business is 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 and capital.

Todd Ernst: <unk> and R&D.

Todd Ernst: At the same time, we will 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.

Todd Ernst: For 2024, we expect to increase our share repurchases to at least $2 billion.

Todd Ernst: This includes a $1 billion ASR that we plan to initiate in the coming days based on our strong liquidity position with which we entered this year.

Todd Ernst: So when we take these factors sustainable topline growth with expanding margins and couple those with declining capital intensity and lower projected cash taxes, you would get a recipe for robust cash flow growth for years to come.

Dave Keffer: So now I'll turn it over to Dave to provide you more details on the segment results 2020 for guidance and the forward outlook Dave.

Dave Keffer: Thanks, Kathy and good morning, everyone. We finished the year with strong momentum, enabling us to reaffirm and build upon our favorable forward outlook.

Dave Keffer: I will start by elaborating on our 2023 results and then provide additional details on our guidance.

On the demand side, we ended 2023 with over $84 billion in backlog, a new record for our company.

Dave Keffer: All four of our segments generated a full year book to Bill ratio over one times sales.

Dave Keffer: We also continued to deliver strong top line results with Q4 sales of $10 6 billion.

Dave Keffer: Up 6% compared to the fourth quarter of 2022.

Dave Keffer: Full year sales were even stronger up over 7% to $39 3 billion.

Dave Keffer: We're roughly $300 million higher than our latest guidance.

Dave Keffer: These topline results were enabled not only by the strong demand environment, we're seeing among our customers, but also by our ability to ramp on new programs expand our workforce and convert our backlog into sales.

Dave Keffer: Moving to segment results, we generated sales growth in each of our businesses in 2023.

Dave Keffer: <unk> sales were up 2% for the year returning to growth earlier than previously expected.

Dave Keffer: This growth was driven by higher volume on restricted programs that more than offset declines on mature production programs.

Dave Keffer: Posted sales growth of 5% led by higher volume and the weapons and missile defense portfolio.

Dave Keffer: Mission systems sales were also up 5% driven by higher restricted sales on advanced microelectronics programs and higher volume on marine systems programs.

Dave Keffer: And our space business posted another quarter of double digit topline growth.

Dave Keffer: With sales up approximately 14% for the year.

Dave Keffer: Nearly 40% of the growth came from Sentinel and in Gi with the rest coming from our broad based portfolio.

Cathie: As Cathie described our segment margins included a charge for the B 21 program the <unk>.

Cathie: <unk> was primarily driven by the confluence of lower assumptions around macroeconomic disruption funding and higher production cost projections.

Cathie: While the full pretax charge had the effect of lowering our segment margins only $143 million has been recorded as an EAC adjustment, including a $43 million reduction to Q4 sales. The remaining was booked as a contingent liability because the majority of the lots have yet to be awarded.

Cathie: George also led to an 80 $82 million benefit in corporate unallocated expense stemming from a reduction in deferred state taxes.

Dave Keffer: Continuing with our results.

Dave Keffer: <unk> five shows a comparison of our 2023 earnings per share to the guidance we provided in October.

George: Diluted EPS includes a $2 eight unfavorable.

Todd Ernst: Unfavorable mark to market adjustment from our pension plans and a $7 68 per share impact from the B 21 charge.

Todd Ernst: Absent. These items, we would have exceeded the high end of our prior EPS guidance range by over 40.

Dave Keffer: Our 2023 Mark to market adjusted EPS also included significantly less pension income compared to 2022 and.

Todd Ernst: In total net pension costs generated a $4 <unk> per share headwind in 2023.

Dave Keffer: Next we'll take a few moments to discuss our cash flows.

Dave Keffer: As is our historical pattern, we had an outstanding quarter of cash performance in Q4, generating $1 6 billion and free cash flow for the full year, our operating cash flow was $3 9 billion.

Dave Keffer: And our free cash flow was $2 1 billion.

Dave Keffer: This result was near the high end of our guidance range and represented free cash flow growth of 30% compared to 2022.

Dave Keffer: Turning to pension results, we generated strong asset returns of roughly 11% in 2023 ahead of our long term assumptions.

Dave Keffer: The fed's discount rate declined by roughly 40 basis points to five 5%.

Todd Ernst: Netted together along with updated census data this generated a mark to market pension expense of $422 million and our GAAP results.

Dave Keffer: Slide seven in our earnings deck summarizes our pension estimates for the next three years, we continue to expect Cas recoveries to increase from current levels, providing a benefit to our cash flows but slightly less than prior projections.

Dave Keffer: And we expect a higher level of non operating Fas pension income in the coming years, driven by our strong asset returns in 2023.

Dave Keffer: In total our funded status remains superb at nearly 100% and we continue to project minimal cash pension contributions over the next several years.

Dave Keffer: Turning to 2020 for slide nine in our earnings deck includes our segment level guidance building off the strong top line results in Q4, we now expect aeronautics sales in the low 11 billion driven.

Todd Ernst: Driven by growth on B 21, and on other programs such as F 35 and E <unk>.

Todd Ernst: This is higher than our prior sales estimates for Aes.

Dave Keffer: Which reflected a flat 2023 and modest growth in 2024.

Higher B 21 sales also result in a slightly lower margin rate expectation for Aaas, which we now project in the mid 9%.

Dave Keffer: Netting out to a similar volume of margin dollars compared to prior estimates.

Dave Keffer: <unk> sales are expected to be roughly $6 billion.

Todd Ernst: Up low single digits from 2023.

Dave Keffer: As we mentioned on the Q3 call GFS has really turned the corner on growth through strong demand for weapons and missile defense capabilities.

Dave Keffer: We are optimistic in our ability to convert these opportunities into sustained growth in this business over time, which we expect to be partially offset by modest declines in the sustainment and training portions of the business.

Dave Keffer: Margins are projected to remain strong in DFS and the low 12% range.

Dave Keffer: Mission systems sales are expected in the low to mid $11 billion range for another year of mid single digit growth with margins of roughly 15%.

Dave Keffer: And that space after expanding sales that are greater than 17% CAGR. Since 2019 growth is expected to moderate in 2024 with higher segment margins.

Todd Ernst: Space sales are now expected in the mid to high <unk> $14 billion range with margins of approximately 9%.

Todd Ernst: The mid single digit growth rate in space reflects declines in a restricted program due to shifts in government priority, which are more than offset by growth in other parts of the space portfolio.

Todd Ernst: Having built a tremendous backlog in recent years space now has an opportunity to deliver strong ROI through more measured growth along with margin expansion and cash generation.

Todd Ernst: At the company level, our guidance reflects growth in sales and segment margin between 4% and 5% absent the B 21 charge consistent with the outlook. We provided on our October call, even after delivering top line upside in Q4.

Todd Ernst: We expect another solid year of bookings with a book to bill around one times.

Todd Ernst: And similar to our cadence over the last few years, we expect sales to ramp throughout the year with first quarter sales, a little less than 24% of our full year estimate.

Todd Ernst: We plan to be in the market soon for new debt issuance to take advantage of the favorable rate environment.

Dave Keffer: The proceeds from the debt issuance will also be used in part to support refinancings of $1 5 billion of notes that are coming due in January of 2025.

Dave Keffer: As well as for general corporate purposes, and share repurchases, including the $1 billion ASR, we intend to initiate in the coming days.

Dave Keffer: We have reflected this debt issuance and our interest expense guidance and we'd also expect interest income to contribute to the EPS line as it did in 2023.

Dave Keffer: We project an effective tax rate of approximately 17% in 2024 consistent with the range. We've experienced over the last few years, excluding the mark to market adjustment and other unique items.

Dave Keffer: We're coming closer to conclusions on a number of open audit and appeals processes with the IRS, which could have positive or negative effects on book and cash taxes as they are resolved over the next couple of years and our forward guidance does not include any such adjustments.

Similarly, we have not factored any potential changes to R&D tax legislation into our outlook.

And as a reminder, our interpretation of current tax law resulted in a projected five year impact from R&D amortization of approximately $2 billion.

Dave Keffer: We will continue to track these matters carefully and provide updates as they progress.

Dave Keffer: In total we expect our 2024 earnings per share to be between $24 45, and $24 85.

Dave Keffer: With approximately $148 5 million weighted shares outstanding moving.

Dave Keffer: Moving to cash we expect 2020 for free cash flow between 225 billion and $2 $2 65 billion to six 5 billion excuse me consistent with our prior outlook and as we've said before capital expenditures are expected to remain elevated in 2024 before model.

Dave Keffer: A rating in 2025 and beyond.

Dave Keffer: Slide 11 in our earnings deck provides an update to our long term free cash flow outlook to include 2026.

Dave Keffer: We continue to expect our free cash flow to grow at a double digit rate for several more years with additional growth in the second half of the decade.

Dave Keffer: This expansion will be driven by sustained growth in our business generating strong operating margin volume and converting those profits into cash.

Dave Keffer: Meanwhile, lower cash taxes, higher cash recoveries and lower levels of capital spending in the coming years provide additional structural levers to expand our cash flows at a rapid rate.

Dave Keffer: Importantly, these ranges also include the latest estimated cash impacts associated with the B 21 charge.

Dave Keffer: We expect roughly 60% of the charge to affect cash flows through 2026 with the remainder in the following years.

Dave Keffer: Longer term, we are confident we'll be able to continue to absorb the cash headwinds from B 21, while delivering excellent free cash flows in 2027 and beyond.

Dave Keffer: Closing I want to thank the entire Northrop Grumman team for their contributions to another great year.

Dave Keffer: The strength of our portfolio and visibility of franchise programs provides us the opportunity to deliver and deploy robust cash flows as we execute on our strategy and with that let's open up the call to Q&A.

Thank you, ladies and gentlemen, if you wish to ask a question. Please press star followed by one one on your Touchtone telephone again press star one to ask a question one moment for questions.

Dave Keffer: Uh huh.

Kristine Tan Liwag: Our first question comes from Kristine <unk> with Morgan Stanley You May proceed.

Kristine Tan Liwag: Hey, good morning, Kathy and Dave.

Kristine Tan Liwag: Good morning.

Kristine Tan Liwag: Hi, Kathy on the B 21, you've been very clear about the pressures on this program ultimately how much relief through the customer extend to you to offset macro pressures and Oliver portion and is there still a possibility of pizza relief.

Kathy: So kristine we've been working with the customer and as we noted those conversations continue and last year in 2023, and the Air Force disclosed that about $60 million of 1 billion and a half that Congress appropriated for inflation was allocated to the advanced procurement.

Kristine: Four one on this program, but we have yet to work through what that relief maybe in future lots. We have of course, as we said updated our assumption and through conversation and the tight budget environment, we've actually lowered those expectations for inflation.

Kristine: <unk> relief and so at this point our focus is on executing this program and finding opportunities in the performance on the program while we.

Kristine: Continue to work with the government to see if there is any inflation relief opportunity.

Kristine: Yeah.

Dave Keffer: Great thinking and I'll keep it to one today. Thank you. Thank you.

Dave Keffer: Thank you.

Dave Keffer: One moment for questions.

Dave Keffer: Our next question comes from.

Dave Keffer: Richard Safran with Seaport Global you May proceed.

Kathy: Kathy Dave Good morning.

Kathy J. Warden: So I know youre going to get a lot of questions on the B 21, but I thought I'd ask you about.

Kathy: To expand on your opening remarks about Sentinel.

Kathy: I thought you might talk a bit more about the actions you're taking to get the program back on track.

Dave Keffer: Are you seeing risk on the program right now and I guess importantly.

Dave Keffer: What you think the government's level support for the program is given given given all the headlines and what we've been seeing.

Dave Keffer: Yeah. Thanks, Brett so as the land base leg of the nuclear Triad Sentinel is a top priority for the department of defense. The requirement for the program has been validated numerous times by multiple administrations and we expect that to be the outcome of this latest review.

Brett Smith: As the Air Force has reported the non maturity cost breach on the program is largely due to cost growth in the military construction and procurement segments of the program.

Todd Ernst: We and the industry team are currently executing on the cost of AMD phase of the program at.

Todd Ernst: That's important because our design work in this space is helping the air force to better estimate the cost of those later phases and due to a number of factors of learning their cost estimates for these later phases to increase and Thats whats driving the Nunn Mccurdy breaches. The Air Force has said growth on the AMD would not.

Todd Ernst: Have triggered the breach I'll also note that theyre update captures the inflation since 2020, the last time, they did a cost estimate and we all know that there has been significantly higher inflation than what was assumed at that time.

Todd Ernst: That is what you're also seeing reflected in these latest cost estimates.

With that said, though you asked about our performance on the program and I'm really pleased.

Dave Keffer: Report on the progress that our team has made over the last three years, while we've been executing on the AMD phase.

Dave Keffer: We've on boarded thousands of engineers.

Dave Keffer: <unk> matured the system design, we've produced.

Dave Keffer: Tested critical hardware in the missile system as I've outlined.

Earlier on the call. We've also engaged in risk reduction, which is helping to inform the air force launch facility modernization and we've done all this while also doing detailed planning for the future phases of the program.

I myself have visited the missile sales actually are without one last Friday, which is part of why I've got this cold I brought back.

Dave Keffer: With the air men, who have committed themselves to this important mission. So we're all in we know how important. This is our team is partnering closely with the Air Force and we are.

You're going to help them to deliver that as a central capability for our nation.

Dave Keffer: Alright, thanks for that feel better thank you.

Thank you one moment for questions.

Dave Keffer: Our next question comes from Ron Epstein with Bank of America, You May proceed.

Dave Keffer: Yeah.

Dave Keffer: Good morning, everyone. So maybe just jumping back to B 21.

Dave Keffer: Charges like that some programs have a tendency to.

Dave Keffer: Accumulate over time, they don't tend to go the other way.

Dave Keffer: How should we think about it as we go forward I mean this is what for the first five all reps how many.

Dave Keffer: <unk> could there be.

Todd Ernst: How do we think about the bounds on this and then maybe one last thing.

Todd Ernst: Yes, there is the program NPV positive.

If it is when does it actually become NPV positive to cash flow positive so on and so forth.

Speaker Change: Peel back the onion on the program.

Speaker Change: Sure I can.

Speaker Change: Go ahead and get started with that in.

Speaker Change: See if we can address a number of questions. You raised first of all in terms of the future. We will continue to update our projections every quarter as we do with all of our large programs.

Speaker Change: But it is important to note we have a lot more information today than we did at this time last year, having completed the production and the ground test phase of the first aircraft.

Speaker Change: We also have the majority of the suppliers now under contracts with the remaining <unk>.

Speaker Change: In advanced stages of negotiations, we have our latest estimates for productivity and reasonable learning curves that we believe are appropriate based on our historical experience of course, we now have one lot under contract and we will finalize quantities over the next four lots over time as well and the economy and inflationary factors have stabilized a bit.

Speaker Change: Over the past year, and we will continue to attract those of course over time as well, but perhaps most importantly, we are still performing well on this program, which is continuing to provide a critical capability for our customers in terms of the long term NPV, we think thats. The most important things that our customers will will get great value from the aircraft we will.

Todd Ernst: Deliver them over time and that should over time also lead to value for the company and our shareholders.

Todd Ernst: Thank you.

Todd Ernst: One moment for questions.

Todd Ernst: Our next question comes from Douglas <unk> with Bernstein, you May proceed.

Todd Ernst:

Todd Ernst: Thank you and good morning.

Todd Ernst: Hi.

Todd Ernst: Wanted to go back to the Sentinel program and when.

Todd Ernst: What you've described is that.

Todd Ernst: I would say because at AMD is going well, but when you look at.

Todd Ernst: Where this is headed and what came out with the Air force commentary on the NIM Mccurdy breach.

Todd Ernst: A couple of things that I wanted to understand better they're talking about potentially a.

Todd Ernst: Two year delay.

Todd Ernst: <unk>.

Todd Ernst: Yossi.

Todd Ernst: They are also also.

Todd Ernst: <unk> talked about it a little bit but to understand how much of this breaches due to potential changes in requirements.

Todd Ernst: And things that are in a sense under your purview versus those that may be under others, including the government customer.

Todd Ernst: Yeah.

Todd Ernst: So as you note there is a delay to IOC.

Speaker Change: Even though for the Nunn mccurdy breach is the cost growth.

Todd Ernst: So oftentimes scheduled delays add cost to the program that is not the primary contributor. It is as you noted design decisions, particularly related to the command and launch with <unk>.

Speaker Change: With the Air Force has and that affects the deployment in the lunch facilities and each of them and.

Todd Ernst: And so that is what we are working to inform the air force decision process on alternatives and ways to reduce both cost and procurement and yes. Those are air force cost estimates and they include a significant amount of scope that is outside of the industry.

Todd Ernst: <unk> execution.

Todd Ernst: But nonetheless, we will help to inform the discussions if theyre ongoing during the review process.

Todd Ernst: And does the delay the delay in the timing.

Todd Ernst: Does this have much effect right now on your outlook for the overall profitability of the program.

Todd Ernst: It does not Doug.

Todd Ernst: Near term assumptions on both the ramp up the program relative to sales as well as the profitability on the program are not materially impacted.

Todd Ernst: Thank you.

Todd Ernst: One moment for questions.

Todd Ernst: Our next question comes from Sheila <unk> with Jefferies. You May proceed.

Todd Ernst: Good morning, everyone. Thank you.

Todd Ernst: Kathy or Dave maybe if you could just talk about the free cash flow guidance that you are sticking with the 15% CAGR.

Todd Ernst: Just the drivers in terms of top line working capital section 174, and the impact of the 'twenty one Dave I think you said 60% of that.

Dave: $600 million grew 26 is that right and do we think about Sentinel is a positive cash contributor.

Dave: Sure. Thanks for the question, Sheila I'm happy to dig into that.

Sheila: <unk> of the free cash flow outlook, we really think of it as one of the highlights of our report today and so happy to dig into that in more detail.

Sheila: Thank you heard correctly that 60% of the charges associated with the period through 2026 from a cash flow perspective.

Sheila: I think importantly, the strength of the broad base of other programs across the business is serving to offset those pressures and that's what we're seeing in our ability to maintain.

Dave Keffer: And build confidence in our multiyear outlook, including adding a strong 2026.

Dave Keffer: Year to that outlook that continues to double digit growth trajectory that we expect for the next several years.

Dave Keffer: We had a great finish to 2023 for free cash flow really strong working capital performance and that is enabling us to build confidence in our ability to continue to perform at similar levels going forward as a company. We've put a lot of focus on working capital efficiency on capital efficiency on driving cash.

Dave Keffer: Returns on recent investments.

Dave Keffer: And that is clearly showing up in the results and the performance of all of our sectors. We're proud of their performance on cash in Q4 and in the outlooks for 'twenty four and beyond and the net effect of all of these factors is that unchanged free cash flow outlook for 2004, and five along with a strong 26.

Dave Keffer: Highlight in terms of what drives that going forward whats the underlying forces you pointed out certainly the operations of the business growth in the topline is first and foremost with an opportunity for growth at the margin rate line as well that leads to really strong margin dollar volume, which will convert into cash through the strong working.

Todd Ernst: Capital performance that we expect to continue which is essentially a stable assumption in our outlook, we're not looking for.

Todd Ernst: Significant additional efficiencies given just how strong we were at the end of 2023 and then as we noted earlier there are other structural factors that should help as well with Cas pension reimbursement growing slightly over the next few years and cash taxes projected to decline over that same period. So essentially all of those factors will lead to.

Todd Ernst: <unk>.

Todd Ernst: Free cash flow growth outlook for the next several years and beyond.

Todd Ernst: Thank you.

Todd Ernst: Thank you.

Todd Ernst: One moment for questions.

Todd Ernst: Our next question comes from Seth Sigman with Jpmorgan you May proceed.

Todd Ernst: Thanks, very much and good morning.

Seth M. Seifman: I guess, a two part question about B 21.

Seth M. Seifman: First was the.

Seth M. Seifman: $143 million EAC in the quarter is that the extent of the entire anticipated loss on on lot one.

Seth M. Seifman: And I guess, how do we think about the progression of losses on the various lots.

And then second the fact that this charge includes lots that will be in budgets in 2026, and 2027 and not come under a contract for a while and not be worked on for a while I guess, how would you assess the opportunity to meet.

Brett Smith: Maybe ultimately do a little bit better than anticipated here.

Todd Ernst: Sure I can start on that Seth I think you've read properly into the $143 million EAC adjustment with <unk>, having been awarded and the others not yet awarded that one does take the form of an EAC adjustment. So that 143 is the lot one amount we're currently projecting.

Seth M. Seifman: Future progression, while we can't get into much detail because that would involve a lot sizes in quantities and other classified details clearly the implication is that there is modest growth from one to future lots on average over time I think you're thinking of this the right way that our current projections would indicate an average of a couple of hundred.

Todd Ernst: <unk> million dollars a year of after tax impact on our on the cash line from B 21, and Thats as I referred to a few minutes ago, the headwind we've been able to.

Todd Ernst: Mitigate through strength in the rest of the business in terms of your point about opportunity to outperform that over the long term clearly it is a core focus of our team to continue to drive efficiencies in the learning curves successful outcomes of our negotiations with suppliers, we continue to engage and partner with our customer too.

Todd Ernst: Understand.

Todd Ernst: Crow economic impacts on the program and then address opportunities for.

Todd Ernst: For funding of relief as Kathy mentioned earlier and so we will continue to address all of those opportunities. This is something we will update you and the rest of the street on overtime.

Todd Ernst: Okay.

Todd Ernst: Thank you.

Todd Ernst: One moment for questions.

Todd Ernst: Our next question comes from Cai von rumor with TD Cowen You May proceed.

Todd Ernst: Thanks, so much.

Todd Ernst: Best wishes to feel better.

Todd Ernst: It sounds like you need those wishes as well.

Todd Ernst: So anyway, so you had.

Todd Ernst: Ross on the B 21 kind of it didn't look like a loss a couple of quarters ago. You had your second loss on CLO. This is clearly proving to be an environment, where on fixed price contract there is more risk.

Todd Ernst: Have you changed your strategy regarding how you bid and specifically with reference to tranche two of the tracking.

Todd Ernst: Online it's because we're.

Todd Ernst: On tranche, one and we're not.

Ross: Tranche two so have you changed your strategy in terms of how you're bidding and are there any contract.

Ross: That you bid before changing your strategy that would still have risk that we're not aware of today.

Brett Smith: Very insightful question as always guys. So when you look back to 2015 when reported in 'twenty. One we certainly have changed our view on bidding on contracts, where we did not have a mature design at the point of FID and yet we committed to fixed price options into the future and we have.

Brett Smith: To my knowledge not done that again, and we have passed on some high profile programs as a result of the.

Brett Smith: Risk balance that the customer put forward in the <unk>.

Brett Smith: RFP not meeting our standards.

Brett Smith: House.

Brett Smith: Programs like Halo, which we have certainly learned some additional lessons and are applying those as we move forward and you notes on some very recent bids we have taken a different approach.

Brett Smith: Looking at firm fixed price, where we've either declined to bid if the customer chose to go fixed price or we have offered a price in.

Brett Smith: In the case of FCA tranche, two that we thought was fair and reasonable and the customer.

Brett Smith: Decided not to further negotiate with US. These are things that are going to happen and we're going to remain disciplined we have plenty of opportunity in this company to grow we have a strong pipeline of opportunities we're pursuing and.

Brett Smith: Strong pipeline of opportunities that we believe have the right risk reward balance within the stream.

Brett Smith: Thanks, so much feel better thank you too.

Brett Smith: Thank you.

Brett Smith: One moment for questions.

Brett Smith: Our next question comes from Gavin Parsons with UBS you May proceed.

Brett Smith: Thanks, Good morning.

Brett Smith: Good morning, good morning.

Brett Smith: Maybe just following on Ron's question does the B 21 charge contemplate current conditions as they are does it have some consideration for future uncertainty in the macro or supply chain.

Brett Smith: With all of our EAC B 21 included we do our best based on what we know today to project conditions out into the future now without <unk>.

Todd Ernst: To do a longer term period of performance is.

Todd Ernst: In this case, we're looking out over.

Greater than five years, so as we get into those out years, that's a bit more speculative, but we do incorporate our expectations or changes in everything from material labor pricing productivity and learning.

Dave Keffer: Okay understood and Dave you mentioned, the IRS appeal process and the way to put a range around the possible cash impact on that.

Dave Keffer: No I'd refer you to our tax disclosures for.

Dave Keffer: More than enough detail on all of those fronts, it's tough to put a range around those things. We're looking forward to getting through those processes. As you know from those disclosures. We have a lot of open years that have yet to be resolved and looking forward to working with the IRS to come to a reasonable resolution there and we will update you on any any.

Dave Keffer: Or tax differences from current reserves as we get there.

Dave Keffer: Thank you.

Dave Keffer: One moment for questions.

Scott <unk>: Our next question comes from Scott <unk> with Deutsche Bank You May proceed.

Scott <unk>: Hey, good morning, good morning.

Dave Keffer: Dave can you give us a sense for the proportion of supplier cross costs across the five El robots have now been fixed versus what's still open to negotiation.

Dave Keffer: Sure as we noted a few moments ago, we are now.

Dave Keffer: The majority of the supplier cost that have been.

Dave Keffer: Fully negotiated across the <unk> phase.

Dave Keffer: And we're in various stages of negotiation with suppliers for the remainder so thats one area, where we have.

Dave Keffer: Learn more and progress in our process compared to where we were a year ago or even a quarter ago.

Todd Ernst: Okay, Great and then just as a follow up where does the commercial inventory come from in the space business and is that EBIT headwind, mostly gone now or is there any more of that left to come in 'twenty four thank you.

Todd Ernst: Sure. Thanks for the question, we had offsetting effects in 2024, and 2023, rather including Q4 in the commercial elements of the space business as you know those are.

Todd Ernst: Much smaller than in kind of tangential to the core national security.

Todd Ernst: Space business that we have in the case of those.

Todd Ernst: Commercial inventory write downs those were related to newer investments and product lines to address.

Todd Ernst: Burgeoning market opportunity in both the government and commercial elements of the space market, we did see some.

Todd Ernst: Some modest write downs in various quarters in 23 associated with those those are the types of things you occasionally go through as you make such new investments. So again not core to the current or future growth story of.

Todd Ernst: The space business.

Todd Ernst: Thank you.

Todd Ernst: One moment for questions.

Todd Ernst: Our next question comes from Ken Herbert with RBC Capital markets. You May proceed.

Kenneth George Herbert: Yes. Thank you good morning.

Kathy: Maybe Kathy.

Kathy: High level I wanted to follow up on your comments earlier regarding sort of the key margin drivers you outlined last year, specifically more on the cost and productivity efforts and maybe on the mix side are you seeing incrementally more opportunity now as we think about 'twenty four and how should we think about sort of the absolute opportunity on those now.

Kathy: This year versus perhaps how much more of a benefit we see in 'twenty five and beyond.

Kathy: Thanks, Ken we laid out three drivers the first of which being stabilization in macroeconomics and we're certainly seeing that in 24, which is why we see our margin rates this year.

Kenneth George Herbert: Wine with lost with some opportunity for improvement as we go throughout the year, we layer on top of that cost and productivity actions that we're taking in the company and that will provide some tailwind in 'twenty four growing.

Kenneth George Herbert: <unk> into 'twenty, five and the mix shift really is a bit of a longer term proposition for us we've talked about that being a shift from cost tied to fixed price, where we expect 2023, which is really our high watermark for cost tight.

But a very gradual shift in that mix.

Todd Ernst: Fixed price with more of it coming in the latter half of this decade, and then international mix is the other where we don't expect significant international growth in 2024, but we do expect that to step up based on our pipeline and particularly the strong weapons demand outside the U S. In 2025.

Todd Ernst: That gives you a sense of what will be a tailwind to margin weight when.

Todd Ernst: Thank you.

Todd Ernst: One moment for questions.

Our next question comes from Myles Walton with Wolfe Research you May proceed.

Myles Walton: Thanks, Good morning, I was wondering.

Myles Walton: Dave or Kathy you previously talked about a $4 billion of free cash flow target in 2028, particularly doubling what you've done in 'twenty three.

Myles Walton: To make sure that's still on the table despite the.

Myles Walton: The charge absorption in that period of time, and then maybe Kathy on the margin expansion specific to aerospace.

Kathy: Is that still a 10% margin business or do we have to a glide slope down a little bit further into 'twenty five 'twenty six.

Kathy: Thanks for the questions Myles, let me kick off with the 2028 free cash flow number I. Appreciate the question on that because I think that too is core to the <unk>.

Myles Walton: Outlook going forward, yes, we are reaffirming that $4 billion target for 2028.

Myles Walton: Essentially doubling the level that we were projecting at the midpoint of our 2023 guidance, which was $2 billion of course, we exceeded that by $100 million in our final results for 2023.

Myles Walton: The drivers of that growth.

Myles Walton: Much of what we've talked about already certainly growth in the topline as Kathy just noted some of the drivers of margin rate expansion opportunity, which leads to margin dollars, having an opportunity to exceed the growth rate of our topline through 2028, and importantly, capex will moderate during that same period.

Myles Walton: So we've noted that 23% and 24 of these peak years of capital intensity that continues to be our outlook with declines in 'twenty five and beyond.

Myles Walton: And then pension and tax will serve as tailwind during that same period. So that leads you to the $4 billion number and I think if you look at the $24 five numbers, we've reiterated for our free cash outlook today and add in that 2006.

Myles Walton: Range Youll get to that same glide slope that would push you upward toward the $4 billion number by 2028. So those are the building blocks in the way we plan to get there.

Myles Walton: And Myles on margin, what we're seeing as Dave noted earlier is that with the B 21 growth being a bit stronger than we had anticipated.

Myles Walton: Wrapping up on top line. It is putting some pressure on margin rate, but margin dollars are exactly where we had anticipated.

Myles Walton: They would be coming into 2024, and our guidance. Therefore remains consistent for us on a dollar basis, even though we now are looking at more of a benign rate protection as you go out over time, it's less dependent on what happens with absorbing that lower rate.

Myles Walton: The 21 and more what happens in terms of other new programs coming into the portfolio.

The rate at which we will book those program. So we will provide you more insight into that over the coming year as we look toward 2025 and beyond.

Myles Walton: Thank you.

Myles Walton: One moment for questions.

Our next question comes from Robert Springer with Melius Research you May proceed.

Robert M. Spingarn: Hey, good morning.

Robert M. Spingarn: Kathy.

Kathy: Minutes ago, you alluded to international and I wanted to bring up I BCS because it has had some strong demand signals from international customers and thought maybe you could dig into that program a little bit give us a sense of how large it is.

Kathy: In revenue.

Kathy: In 'twenty, three or 'twenty, four and how big it might be lets say five years from now.

Kathy: Yeah.

Kathy: It certainly is an area of strength in our portfolio we've seen.

Kathy: Strong performance by the team on the U S Army program and also as we are deploying in Poland and we see follow on opportunities in Poland. As a result, we've also.

Kathy: Spoken about throughout the course of 2023 added a number of additional countries who have expressed interest in the program to the pipeline and Thats what would drive the growth that we anticipate in the 2025 timeframe. As you noted I mentioned international demand part of that as a weapon.

Todd Ernst: If that is CIBC us portfolio and then of course, we have some aircrafts in mission systems strength in the pipeline for international in 2025 as well.

Todd Ernst: The program itself is.

Todd Ernst: Yes.

Todd Ernst: It's growing at a fairly rapid rate, but off of a relatively small base above $400 million.

Todd Ernst: Annual sale and so we expect that to grow of course, but not a major contributor at the enterprise line for growth.

Todd Ernst: Thank you.

Todd Ernst: One moment for questions.

Todd Ernst: Our next question comes from George Shapiro with Shapiro Research you May proceed.

George D. Shapiro: Good morning.

George D. Shapiro: Kathy I wanted to ask.

Kathy: On the charge for the B 21.

What caused it to be bigger than the zero to $1 $2 billion range that you've kind of been reiterating since slipped since last year.

And then just specifically maybe the margin that you had said would be around 10% is now maybe 95% I know you alluded to a few minutes ago. The B 21 was growing faster, but it's got to grow a lot faster that dropped the margin by 50 basis points. So I was just wondering if you could explore that a little.

Kathy: Bit more thanks very much.

Kathy: First let me start with the first part of your question.

Myles Walton: I'll cover the second.

Myles Walton: As we noted we identified this risk last year and we throughout the year revisited it on a quarterly basis. There were two primary changes in the fourth quarter, both led us to deem it.

Probable loss as well as impacted the value of that loss first we significantly reduced our projections for funding related to macroeconomic impacts since we've talked about a couple of times already although we continue to partner with the government to address these impacts we believe it is prudent in light of the current.

Myles Walton: Budget status to reduce those assumptions and so we did that.

Dave Keffer: We've experienced growth in our cost projections, both in the internal production costs as we've continued to build aircraft as Dave talked about through our negotiations with suppliers.

Dave Keffer: <unk> learned and built that learning into the forward looking estimates that we now have in the EAC. So those were the factors.

Myles Walton: As we've talked about we did a very detailed look at the EAC in the fourth quarter and had matured and had actual data to reflect on that we did not have at an earlier point, let me follow up on the second part of your question because I do think it's an important nuance.

Todd Ernst: <unk> business was operating in the mid 10 billions in scale over the past year. It exceeded our original expectations in sales in 2023, and now is projected to exceed them, even more significantly compared to where they were a year ago. In 2024, we were talking about a flat <unk>.

Brett Smith: Three and very modest growth in 2004 built based off of that mid teens level and now we're all the way up into the low elevens and so that low elevens at a mid 9% margin rate is the same as the.

Todd Ernst: Mid to high teens at a slightly higher margin rate, we're really focused on driving the dollar volume of.

Todd Ernst: Operating margin in our aeronautics business and across our businesses that return on invested capital the growth in margin dollars and in free cash flow that results from it that is really our core focus.

Josh we have time for one more question.

Todd Ernst: Thank you.

Todd Ernst: One moment for our final question.

Todd Ernst: Our final question comes from Jason Gursky with Citi. You May proceed.

Todd Ernst: Hey, good morning, everybody.

Just a clarification question for you to start you mentioned in your prepared remarks that there were some shifting priorities from the government in the space business that was leading to the deceleration in growth I was wondering if you could.

Kathy J. Warden: Provide a little bit more color on what those shifting priorities might be and then Kathy I. Just wanted to provide you maybe a bit of an open ended question to kind of wrap all of this.

Kathy: Wrap all this together here just broadly talk about all the risks and opportunities that you see in front of you on the execution side of things you've obviously.

Kathy: We've got record backlog here.

Kathy: We know about the B 21 risk, but I'm wondering if you could just.

Kathy J. Warden: Maybe highlight them and wrap this all together.

Kathy J. Warden: Do we have a balanced risk and opportunities portfolio here, we are a little bit more overweight risks and we are opportunity and maybe just kind of.

Kathy J. Warden: Dive into a little bit of the details of what Youre seeing.

Kathy J. Warden: And maybe what you're all doing to address those issues.

Kathy J. Warden: Sure Great questions, Jason Let me go ahead and start with your original question on the.

Jason Gursky: National Security space portfolio, as we mentioned our.

Jason Gursky: Our guidance captures growth and declines in various programs across all of our portfolios very much including space in the case of space as we noted there are some.

Jason Gursky: Shifts in budget priorities, a lot of our customers are having to address budget prioritization, particularly as it relates to 2025 and beyond with that said in this particular case given that it's in the restricted domain theres not much more we can say about the mission of the program or anything like that what's important there is that our space sector and therefore comes.

Any guidance.

Jason Gursky: Counts for our latest understanding of of all the programs in that portfolio and the likely paths forward for them and I think when you look at the space guidance, you'll see a lot of value creation as they continue to grow the top line and in this case now grow margin rates alongside that with lower capital intensity starting in 2005 in particular, you'll see a lot of.

Kathy: Improvement in returns on invested capital in the space business, given how much growth they've built in their foundation over the last few years Kathy.

Kathy: Listen I really appreciate the question I wish I had another hour to discuss it with you.

Kathy: That being respectful of everybody's time, let me just simply say that I see our portfolio and the set of opportunities and risks we have a balanced and consistent with what I have seen in recent years since I stepped into this role.

Myles Walton: He has a team who has stepped up and provide a topline growth, which I believe is industry, leading at about 5% on a compound annual basis through each of the last four years. So we're projecting that again this year.

Myles Walton: We see the opportunity space is rich both domestically and internationally and the risks that we have in executing the portfolio. While the pandemic certainly made that more challenging for the last couple of years, we're turning the corner. Our overall program performance has not been stronger since I've been at the company and the <unk>.

Todd Ernst: 15 years and going so I really feel good about how this team is positioned we now have fully disclosed and taken into the P&L of the B 21 risks, which we've been talking about and feel confident that we can now go execute this program and I am proud of what the team collectively.

Todd Ernst: <unk> has accomplished across 2023 and look forward to the outlook we have in place through 2024.

Todd Ernst: So with that I just want to again, thank my colleagues at Northrop Grumman for their dedication to our country and our company I also want to thank you for joining us today and we look forward to speaking with you on our next earnings call in April.

Myles Walton: That concludes the call. Thank you.

Todd Ernst: Thank you.

Todd Ernst: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

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Todd Ernst: Good day, ladies and gentlemen, and 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.

Todd Ernst: Mr Relations Mr. Ernst Please proceed.

Todd Ernst: Thanks, Josh Good morning, and welcome to Northrop Grumman's fourth quarter of 2023 conference call. This morning will refer to a presentation that's posted to our IR website.

Todd Ernst: For 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 may constitute forward looking statements pursuant to safe Harbor provisions of Federal Securities laws forward looking statements involve risks and uncertainties, including those noted in today's press release.

Todd Ernst: Our SEC filings these risks and uncertainties may cause actual company results to differ materially.

Todd Ernst: Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release.

Todd Ernst: And on the call today 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.

Kathy J. Warden: For discussing our 2023 results I wanted to take a moment to thank our team for their hard work and dedication to our important mission.

Kathy J. Warden: Our talented workforce, which is now over 100000 strong continues to deliver some of the most advanced technologies in the world.

Kathy J. Warden: His capabilities are used by our customers every day to defend freedom and detour aggression around the globe.

Kathy: The geopolitical landscape has grown even more complex driving continued increases in global security spending our.

Kathy: Our strategy has positioned us well to compete and win in this growing market, which is translated into accelerating topline growth for Northrop Grumman.

Kathy: Revenue increased by over 7% in 2023.

Kathy: <unk> more than 1 billion above the midpoint of our original 2023 guidance.

Kathy: In addition, our book to Bill for the year with $1. One four times that's in line with our exceptional four year average.

As a result of this the word strength, we achieved a new record backlog, which now exceeds 84 billion and that provides a healthy foundation for our continued growth.

Kathy: The underlying performance of our company is strong.

Kathy: 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 B 21 charge.

Kathy: While we're disappointed that our assessment of conditions for the low rate initial production portion of the B 21 program necessitated this charge in the quarter. We are confident in our ability to deliver on the company's forward outlook, which remains unchanged.

Kathy: We're also proud of the performance of the B 21 team, which continues to execute and unparalleled aircraft development program.

Kathy: As we look forward, we will continue to execute our business strategy.

At its core is based on technology differentiation, a laser focus on performance and value delivery for our customers and shareholders.

Kathy: To support this strategy, we are prioritizing investment in our capacity and capabilities.

Kathy: In 2023, we invested over $2 9 billion in R&D and Capex.

Seven 5% of sale to continue driving innovation and capacity to support our customer mission success.

Kathy: 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.

Kathy: So now I'll highlight a few examples of progress we've made across the portfolio.

Kathy: Further bolster my confidence in our future.

Kathy: Shortly after the close of the fourth quarter, we announced our gem 63, XL solid rocket booster helped to successfully power Ull is Vulcan launch vehicle on its first mission <unk>.

Kathy: Future Balkan mission for utilize additional 760 <unk> in support of Amazon Kuyper, and other <unk> customers, providing a significant growth opportunity for our propulsion business.

Kathy: And this is an important milestone because it supports our investment to significantly ramp production capacity of <unk> 63 in the coming years.

Kathy: Global demand for our weapons system increased in 2023, and we expect this trend to continue.

Kathy: In this market, where both the supplier and a prime where supplier of propulsion system warheads, and fuses and keno across our highly diversified customer base.

Kathy: And a prime contractor for predominantly air to ground missiles, including argon argon.

Kathy: And attack weapon.

Kathy: Weapons systems currently represents approximately 7% of total revenue and based on the demands. 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.

And our mission systems business demand remains exceptionally strong with a 2023 book to Bill above one two times the highest of all of our segments.

Kathy: As we've seen in recent years, the restricted portfolio with 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 capability.

Kathy: We are helping our customers stay ahead by developing advanced microelectronic sensor processors and secure communication.

Myles Walton: Our product lines are enabling faster cycles of modernization positioning our customers with just isn't decision advantage in this rapidly advancing technology environment.

Myles Walton: And we continue to make significant progress on the AMD phase of Sentinel, which is the next generation lambastes leg of the strategic triad.

Myles Walton: We are achieving milestones to mature does assign and reduce risk, including gene has activities such as the successful static fire test at a certain stage two solid rocket motor for the missile earlier this month.

Todd Ernst: Last week, the Air Force submitted to Congress, a new set of cost estimates for the program, which triggered a non maturity breach.

Todd Ernst: 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.

Todd Ernst: 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.

Todd Ernst: We and our industry team are continuing to perform on the AMD phase in close partnership with the U S Air Force and we will work with the government to explore opportunities to reduce costs on the program with a focus on the late 2000, Twenty's and beyond when the program is expected to move into the procurement phase.

Todd Ernst: And in the fourth quarter. The B 21 entered its flight 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.

Brett Smith: Following this milestone we were awarded the first hour flat in the fourth quarter and production is now underway.

Brett Smith: 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.

Todd Ernst: As you know like all of industry, we and our suppliers have experienced cost pressure from recent global macroeconomic condition, which are significantly different from the assumptions. The team made when bidding. These five production lots in 2015.

Todd Ernst: During the fourth quarter of 2023, we again reviewed our estimated profitability on the <unk> phase of the program and we now believe it is probable each of the first five hour slots will be performed at a loss.

Todd Ernst: The charge is largely driven by a change in our assumptions regarding funding to mitigate the impact of micro macroeconomic disruptions.

Todd Ernst: Phase of the program and higher projected manufacturing cost that reflect recent supplier negotiations and our experience integrating the first aircraft.

Todd Ernst: 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.

Todd Ernst: 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 deliver value to our shareholders over the coming decades.

Todd Ernst: Turning now to the budget environment.

Todd Ernst: Global National Security spending is increasing as the U S and allies investing capabilities to deter and defend against aggression.

Todd Ernst: For our capabilities remains strong due to our differentiated portfolio and alignment to customer priorities, including the triad space and weapons.

Todd Ernst: In the U S. Our franchise programs remain well supported by Congress and the department of Defense.

Todd Ernst: And this gives us confidence in our outlook, even in a constrained use such an environment.

Todd Ernst: We are pleased to have an NDA in place that provides continued support for defense spending and we're hopeful that Congress will enact appropriations.

Todd Ernst: 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 appropriation in the March timeframe.

Dave Keffer: Additionally, we are monitoring progress on supplemental funding and we see opportunities in expanding the industrial base and increasing munitions production in the pending requests.

Myles Walton: Our allies are also increasing their defense spending and we expect our alignment with their needs for aircraft weapons systems and mission systems to be an additional source of growth.

Todd Ernst: So if we look to the future we have the right portfolio and team to deliver on our long term outlook our organic.

Todd Ernst: <unk> sales have grown at a greater than 5% annual rate since 2019, and our guidance calls for continued growth of 45% in 2024.

Todd Ernst: Segment operating margin dollars are expected to grow at roughly the same rate of sale in 2024, and our 2024 EPS guidance range of $24 45.

Todd Ernst: To $24 85.

Todd Ernst: At the midpoint represents roughly 6% growth, excluding the <unk> 21 charge and 11% growth compared to our initial EPS estimate, which we provided for in 2023.

Todd Ernst: In addition, the structural building blocks to expand our margin that we outlined in last year's Q2 earnings call, including dissipating macroeconomic headwind implementation of productivity and cost savings initiatives and future favorable mix shifts remain in place.

We are laser focused on performance and discipline to drive margin expansion.

Todd Ernst: 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.

Todd Ernst: With our business is 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 and capital.

Todd Ernst: <unk> and R&D.

At the same time, we will 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.

Todd Ernst: And we ended the year with a remaining authorization of $3 6 billion.

Todd Ernst: For 2024, we expect to increase our share repurchases to at least $2 billion.

Todd Ernst: This includes a $1 billion ASR that we plan to initiate in the coming days based on our strong liquidity position with which we entered this year.

Todd Ernst: So when we take these factors sustainable topline growth with expanding margins and coupled with declining capital intensity and lower projected cash taxes.

Myles Walton: Got a recipe for robust cash flow growth for years to come.

Dave: So now I'll turn it over to Dave to provide you more details on the segment results 2020 for guidance and the forward outlook Dave.

Thanks, Kathy and good morning, everyone. We finished the year with strong momentum, enabling us to reaffirm and build upon our favorable forward outlook.

I'll start by elaborating on our 2023 results and then provide additional details on our guidance.

Dave Keffer: On the demand side, we ended 2023 with over $84 billion in backlog, a new record for our company.

Dave: All four of our segments generated a full year book to bill ratio over one time sales.

Dave: We also continued to deliver strong top line results with Q4 sales of $10 6 billion up.

Dave: Up 6% compared to the fourth quarter of 2022.

Dave: Full year sales were even stronger up over 7% at $39 3 billion.

Dave: We're roughly $300 million higher than our latest guidance.

Dave: These topline results were enabled not only by the strong demand environment, we're seeing among our customers.

Dave: But also by our ability to ramp on new programs expand our workforce and convert our backlog into sales.

Moving to segment results, we generated sales growth in each of our businesses in 2023.

Dave: Aeronautics sales were up 2% for the year returning to growth earlier than previously expected.

Dave: <unk> growth was driven by higher volume on restricted programs that more than offset declines in mature production programs.

Dave: <unk> posted sales growth of 5% led by higher volume in the weapons and missile defense portfolio.

Dave: Mission systems sales were also up 5% driven by higher restricted sales on advanced microelectronics programs.

Dave: And higher volume on marine systems programs.

Dave: And our space business posted another quarter of double digit topline growth with sales up approximately 14% for the year.

Dave: Nearly 40% of the growth came from Sentinel and in Gi with the rest coming from our broad based portfolio.

As Cathie described our segment margins included a charge for the B 21 program.

Dave: The charge was primarily driven by the confluence of lower assumptions around macroeconomic disruption funding and higher production cost projections.

Dave: While the full pretax charge had the effect of lowering our segment margins only $143 million has been recorded as an EAC adjustment, including a $43 million reduction to Q4 sales. The remaining was booked as a contingent liability because the majority of the lots have yet to be awarded.

Dave: George also led to an 80 $82 million benefit in corporate unallocated expense stemming from a reduction in deferred state taxes.

George D. Shapiro: Continuing with our results.

Myles Walton: <unk> five shows a comparison of our 2023 earnings per share to the guidance we provided in October.

Myles Walton: Diluted EPS includes a $2 eight unfavorable.

Myles Walton: Unfavorable mark to market adjustment from our pension plans and a $7 68 per share impact from the B 21 charge.

Absent. These items, we would have exceeded the high end of our prior EPS guidance range by over 40.

Myles Walton: Our 2023 Mark to market adjusted EPS also included significantly less pension income compared to 2022 and.

Myles Walton: In total net pension costs generated a $4 <unk> per share headwind in 2023.

Myles Walton: Next we'll take a few moments to discuss our cash flows.

As is our historical pattern, we had an outstanding quarter of cash performance in Q4, generating $1 6 billion and free cash flow for the full year, our operating cash flow was $3 9 billion.

Myles Walton: And our free cash flow was $2 1 billion.

Myles Walton: This result was near the high end of our guidance range and represented free cash flow growth of 30% compared to 2022.

Turning to pension results, we generated strong asset returns of roughly 11% in 2023 ahead of our long term assumptions the.

Myles Walton: The Fas discount rate declined by roughly 40 basis points to five 5%.

Myles Walton: Netted together along with updated census data this generated a mark to market pension expense of $422 million and our GAAP results.

Myles Walton: Slide seven in our earnings deck summarizes our pension estimates for the next three years, we continue to expect Cas recoveries to increase from current levels, providing a benefit to our cash flows but slightly less than prior projections.

And we expect a higher level of non operating Fas pension income in the coming years, driven by our strong asset returns in 2023.

Myles Walton: In total our funded status remains superb at nearly 100% and we continue to project minimal cash pension contributions over the next several years.

Myles Walton: Turning to 2020 for slide nine in our earnings deck includes our segment level guidance building off the strong top line results in Q4, we now expect aeronautics sales in the low 11 billions.

Brett Smith: Driven by growth on B 21, and on other programs such as F 35 and <unk>.

Brett Smith: This is higher than our prior sales estimates for.

Brett Smith: Yes.

Brett Smith: Which reflected a flat 2023 and modest growth in 2024.

Brett Smith: Higher B 21 sales also result in a slightly lower margin rate expectation for Aaas, which we now project in the mid 9% netting out to a similar volume of margin dollars compared to prior estimates.

Myles Walton: <unk> sales are expected to be roughly $6 billion.

Myles Walton: Up low single digits from 2023.

Myles Walton: As we mentioned on the Q3 call GFS has really turned the corner on growth through strong demand for weapons and missile defense capabilities.

We are optimistic in our ability to convert these opportunities into sustained growth in this business over time, which we expect to be partially offset by modest declines in the sustainment and training portions of the business.

Myles Walton: Margins are projected to remain strong in DFS and the low 12% range.

Myles Walton: Mission systems sales are expected in the low to mid $11 billion range for another year of mid single digit growth with margins of roughly 15%.

Myles Walton: And then space after expanding sales at a greater than 17% CAGR. Since 2019 growth is expected to moderate in 2024 with higher segment margins.

Myles Walton: Space sales are now expected in the mid to high <unk> $14 billion range with margins of approximately 9%.

Myles Walton: The mid single digit growth rate in space reflects declines in a restricted program due to shifts in government priority, which are more than offset by growth in other parts of the space portfolio.

Myles Walton: Having built a tremendous backlog in recent years space now has an opportunity to deliver strong ROI through more measured growth along with margin expansion and cash generation.

Myles Walton: At the company level, our guidance reflects growth in sales and segment margin between 4% and 5% absent the B 21 charge consistent with the outlook. We provided on our October call, even after delivering top line upside in Q4.

Myles Walton: We expect another solid year of bookings with a book to bill around one times.

Myles Walton: And similar to our cadence over the last few years, we expect sales to ramp throughout the year with first quarter sales, a little less than 24% of our full year estimate.

Myles Walton: We plan to be in the market soon for new debt issuance to take advantage of the favorable rate environment.

The proceeds from the debt issuance will also be used in part to support refinancings of $1 $5 billion of notes that are coming due in January of 2025, as well as for general corporate purposes, and share repurchases, including the $1 billion ASR, we intend to initiate in the coming days.

We have reflected this debt issuance and our interest expense guidance and we'd also expect interest income to contribute to the EPS line as it did in 2023.

Myles Walton: We project an effective tax rate of approximately 17% in 2024 consistent with the range. We've experienced over the last few years, excluding the mark to market adjustment and other unique items.

Myles Walton: We're coming closer to conclusions on a number of open audit and appeals processes with the IRS, which could have positive or negative effects on book and cash taxes as they are resolved over the next couple of years and our forward guidance does not include any such adjustments.

Myles Walton: Similarly, we have not factored any potential changes to R&D tax legislation into our outlook.

Myles Walton: And as a reminder, our interpretation of current tax law resulted in a projected five year impact from R&D amortization of approximately $2 billion.

Myles Walton: We will continue to track these matters carefully and provide updates as they progress.

Myles Walton: In total we expect our 2024 earnings per share to be between $24 45, and $24 85.

Myles Walton: Approximately 148 5 million weighted shares outstanding moving.

Myles Walton: Moving to cash we expect 2020 for free cash flow between 225 billion and $2 265 billion to six 5 billion excuse me consistent with our prior outlook and as we've said before capital expenditures are expected to remain elevated in 2024 before modern.

Myles Walton: <unk> in 2025 and beyond.

Myles Walton: Slide 11 in our earnings deck provides an update to our long term free cash flow outlook to include 2026.

We continue to expect our free cash flow to grow at a double digit rate for several more years with additional growth in the second half of the decade.

Myles Walton: This expansion will be driven by sustained growth in our business generating strong operating margin volume and converting those profits into cash.

Myles Walton: Meanwhile, lower cash taxes, higher Cas recoveries and lower levels of capital spending in the coming years provide additional structural levers to expand our cash flows at a rapid rate.

Myles Walton: Importantly, these ranges also include the latest estimated cash impacts associated with the B 21 charge.

Myles Walton: We expect roughly 60% of the charge to affect cash flows through 2026 with the remainder in the following years.

Myles Walton: Longer term, we are confident we'll be able to continue to absorb the cash headwinds from B 21, while delivering excellent free cash flows in 2027 and beyond.

Myles Walton: In closing I want to thank the entire Northrop Grumman team for their contributions to another great year with.

Myles Walton: The strength of our portfolio and visibility of franchise programs provides us the opportunity to deliver and deploy robust cash flows as we execute on our strategy and with that let's open up the call to Q&A.

Myles Walton: Thank you, ladies and gentlemen, if you wish to ask a question. Please press star followed by one one on your Touchtone telephone again press star one to ask a question one moment for questions.

Myles Walton: Yes.

Myles Walton: Uh huh.

Kristine Tan Liwag: Our first question comes from Kristine <unk> with Morgan Stanley You May proceed.

Kristine Tan Liwag: Hey, good morning, Kathy and Dave.

Kristine Tan Liwag: Good morning.

Kathy: Hi, Kathy on the B 21, you've been very clear about the pressures in this program.

Kathy: Ultimately how much relief to the customer extend to you to offset macro pressures on that Oliver portion and is there still a possibility of pizza relief.

Kathy: So kristine we've been working with the customer and as we noted those conversations continue and last year in 2023, and the Air force disclosed that about $60 million of $1 billion of half the Congress appropriated for inflation was allocated to the advanced procurement.

Four one on this program.

Kristine: But we have yet to work through what that relief Navy in future lots. We have of course, as we said updated our assumption.

Kristine: Through conversation and the tight budget environment, we've actually lowered those expectations for inflation relief and so at this point our focus is on executing this program and finding opportunities.

Todd Ernst: The performance on the program.

While we continue to work with the government to see if there is any inflation relief opportunity.

Todd Ernst: Great. Thank you and I'll keep it to one today. Thank you. Thank you.

Todd Ernst: Thank you.

Todd Ernst: One moment for questions.

Our next question comes from.

Todd Ernst: Richard Safran with Seaport Global you May proceed.

Dave Keffer: Cathay, Dave good morning.

Richard T. Safran: So I know youre going to get a lot of questions on the B 21, but I thought I'd ask you about.

Richard T. Safran: To expand on your opening remarks about Sentinel.

Dave Keffer: I thought you might talk a bit more about the actions you're taking to get the program back on track.

How are you seeing risk on the program right now and I guess importantly.

Dave Keffer: What you think the government's level of support for the program is given given given all the headlines and what we've been seeing.

Brett Smith: Yeah. Thanks, Brett so as the land base leg of the nuclear Triad Sentinel is a top priority for the department of defense. The requirement for the program has been validated numerous time by multiple administrations and we expect that to be the outcome of this latest review.

Brett Smith: As the Air Force has reported the nonrecurring cost rates on the program is largely due to cost growth in the military construction and procurement segments of the program and we and the industry team are currently executing on the cost of AMD phase of the program.

Todd Ernst: That's important because our design work in this space is helping the air force to better estimate the cost of those later phases and due to a number of factors of learning their cost estimates for these later phases of increase and Thats whats driving the non maturity breaches. The Air Force has said growth on the AMD would not.

Brett Smith: <unk> have triggered the breach I'll also note that their update captures the inflation since 2020. The last time, they did a cost estimate and we all know that there has been significantly higher inflation than what was assumed at that time. So some of that is what you're also seeing reflected in these latest cost estimates.

Todd Ernst: I mean with that said, though you asked about our performance on the program and I'm really pleased.

Todd Ernst: Report on the progress that our team has made over the last three years, while we've been executing on the AMD phase we've on boarded thousands of engineers.

Todd Ernst: We've matured the system design, we've produced and tested critical hardware the missile system as I've outlined earlier on the call. We've also engaged in risk reduction, which is helping to inform the air force launch facility modernization and we've done all this while also doing detailed planning for.

The future phases of the program.

Myles Walton: I myself have visited the missile sales actually are without one last Friday, which is part of why it got the cold I brought back.

Brett Smith: I met with the air men, who have committed themselves to this important mission. So we're all in we know how important. This is our team is partnering closely with the air Force and where you.

Todd Ernst: Can I help them to deliver that as a central capability for our nation.

Todd Ernst: Alright, thanks for that feel better.

Todd Ernst: Yes.

Todd Ernst: Thank you one moment for questions.

Todd Ernst: Our next question comes from Ron Epstein with Bank of America, You May proceed.

Yeah, Hey.

Todd Ernst: Good morning, everyone. So maybe just jumping back to B 21.

Todd Ernst: Charges like that some programs have a tendency to.

Todd Ernst: Accumulate over time, they don't tend to go the other way.

Todd Ernst: How should we think about it as we go forward I mean this is what for the first five all reps, how many reps could there be.

Todd Ernst: How do we think about the bounds on this and then maybe one last thing.

Todd Ernst: Yes, there is the program NPV positive.

Todd Ernst: If it is when does it actually become NPV positive to cash flow positive so on and so forth.

Speaker Change: Peel back the onion on the program.

Speaker Change: Sure I can.

Speaker Change: Go ahead, and get started with that and see.

Speaker Change: See if we can address a number of questions. You raised first of all in terms of the future will continue to update our projections every quarter as we do with all of our large programs.

Speaker Change: But it's important to note we have a lot more information today than we did at this time last year, having completed the production and the ground test phase of the first aircraft.

Speaker Change: We also have the majority of the suppliers now under contracts with the remaining <unk>.

Speaker Change: In advanced stages of negotiations, we have our latest estimates for productivity and reasonable learning curves that we believe are appropriate based on our historical experience of course, we now have one lot under contract and we will finalize quantities over the next four lots over time as well and the economy and inflationary factors have stabilized a bit.

Speaker Change: Over the past year, and we will continue to attract those of course over time as well, but perhaps most importantly, we are still performing well on this program, which is continuing to provide a critical capability for our customers in terms of the long term NPV, we think thats. The most important things that our customers will will get great value from the aircraft we will.

Speaker Change: Deliver them over time and that should over time also lead to value for the company and our shareholders.

Speaker Change: Thank you.

Speaker Change: One moment for questions.

Speaker Change: Our next question comes from Douglas <unk> with Bernstein, you May proceed.

Speaker Change:

Speaker Change: Thank you good morning.

Speaker Change: Hi.

Speaker Change: Wanted to go back to the Sentinel program and when.

Speaker Change: What you've described is that.

I would say because that AMD is going well, but when you look at.

Speaker Change: Where this is headed and what came out with the air force commentary on the non maturity breach.

A couple of things that I wanted to understand better they're talking about potentially a.

Two year delay.

Speaker Change: <unk>.

Speaker Change: Yossi.

Speaker Change: Theyre also also.

Speaker Change: <unk> talked about it a little bit but to understand how much of this breaches due to potential changes in requirements.

Todd Ernst: And things that are in a sense under your purview versus those that may be under others, including the government customer.

Todd Ernst: Yeah.

Todd Ernst: So as you note there is a delay to Iot.

Speaker Change: Even though for the Nunn mccurdy breach is the cost growth.

Speaker Change: So oftentimes scheduled delays add cost to the program that is not the primary contributor. It is as you noted design decisions, particularly related to the command and launch requirements that the air Force has and that affects the deployment in the lunch facilities in each of them.

Speaker Change: And so that is what we are working to inform the air force decision process on alternatives and ways to reduce both cost and procurement.

Speaker Change: Yes, those are air force cost estimates and they include a significant amount of scope that is outside of the industry teams execution.

Myles Walton: Nonetheless, we will help to inform the discussions if there are ongoing during this review process.

Myles Walton: And does the delay the delay in the timing.

Myles Walton: Does this have much effect right now on your outlook for the overall profitability of the program.

Myles Walton: It does not Doug our near term assumptions on both the ramp up the program relative to sales as well as the profitability on the program are not materially impacted.

Myles Walton: Thank you.

Myles Walton: One moment for questions.

Myles Walton: Our next question comes from Sheila <unk> with Jefferies. You May proceed.

Myles Walton: Good morning, everyone. Thank you.

Myles Walton: Kathy or Dave maybe if you could just talk about the free cash flow guidance that youre sticking with the 15% CAGR.

Myles Walton: Just the drivers in terms of top line working capital section 174, and the impact of the 'twenty one Dave I think you said 60% of that.

Dave Keffer: $600 million as of June 26.